Kroger's (KR 1.03%) stock recently set a new high after the company posted surprisingly strong third-quarter earnings results. The supermarket chain grew sales and profits at a faster pace than management had forecast, and it raised its 2015 outlook for the third straight time this year.
Image source: Kroger.
CEO Rodney McMullen and his executive team held a conference call with investors that aimed to put those results into perspective. Here are five key points that Kroger's management made in that presentation.
Accelerating sales growth
"We are very pleased with our 5.4% identical supermarket sales growth in the third quarter. It reflects the underlying strength of our core business and our associates' growing connection with customers," said McMullen.
Kroger's 5.4% sales boost marked the 48th consecutive quarter -- equating to 12 straight years -- of positive comps. That's an impressive streak, but what's more impressive is how much of the growth is coming at the expense of rivals.
Quarterly comps growth excluding fuel. Data source: Kroger financial filings.
By comparison, Wal-Mart (WMT 0.10%), one of its biggest competitors, managed comps growth of just 1.5% in the third quarter. And in contrast to Kroger's epic 48-quarter streak, Wal-Mart's Q3 marked just its fifth consecutive quarter of growth in U.S. stores.
Kroger last year gained share from Wal-Mart in nearly all of its biggest markets. And the latest string of hefty comps suggests that the outperformance is continuing through 2015.
Improving operating margin
"We exceeded our goal to slightly expand FIFO operating margin, without fuel, on a rolling four quarters basis," said McMullen
Kroger's profitability improved sharply, with operating earnings jumping to 3.1% of sales from 2.6% last year. Management credited strong sales growth for powering that improvement, but also disciplined spending. Yet investors shouldn't expect profits to keep expanding at an accelerating pace. "This is not a 'new normal' for operating margin expansion," Chief Financial Officer Mike Schlotman said, "but rather a demonstration of our diligence in how and when we invest."
Winning high-end customers
"Simple Truth continues to grow at an astonishing rate, setting a record high for total sales in the third quarter, while continuing to establish all-time weekly sales records throughout the quarter," said Schlotman.
The retailer's Simple Truth brand, which offers natural and organic products, has been its most successful corporate franchise yet -- surging to over $1 billion of annual sales less than two years after launching.
Image source: Whole Foods.
Simple Truth has helped Kroger post growth at the high end of the grocery market, a segment that used to belong almost entirely to Whole Foods (WFM). The organic grocer last quarter posted declining comps that were pressured by "increasing competition," management said.
Since Kroger operates at a lower-cost profile, it can afford to apply intense price competition to the organic industry. And that's a big reason why Whole Foods is planning to make and aggressively invest in a smaller, more efficient store format beginning next year. For Kroger's part, it continues to target that market, most recently through a new corporate brand called HemisFares.
Aggressive spending on the business
"Capital investments ... totaled $832 million for the third quarter, compared to $681 million for the same period last year," said Schlotman.
Management is prioritizing investments in the business right now, ramping up capital spending on things like opening new stores and adding online ordering and delivery. Total spending is projected to jump to $3.3 billion this year, up from $2.8 billion last year and $2.3 billion in 2013.
That means lower share repurchase spending -- which is running at half the pace of last year -- but executives say they "see a strong pipeline of high quality projects, and are encouraged by the results from our new stores."
Strong fourth-quarter guidance
"For the fourth quarter, we expect identical supermarket sales growth, excluding fuel, of 4% to 4.5%. That implies an annual guidance range of approximately 5% to 5.25%," said Schlotman.
Kroger raised its full-year sales growth outlook for the third time this year. Comps should come in as high as 5.25%, more than a full percentage point above management's initial 2015 forecast.
The retailer is achieving that market-thumping growth by winning shoppers at both ends of the industry. Value-conscious customers are being drawn mostly from Wal-Mart, while Kroger grabs premium-minded shoppers from Whole Foods and other high-end grocers.
"Our job is to understand and deliver for our diverse set of customers so they can save where they want to save, or splurge where they want to splurge," McMullen said.
