Investors haven't found much to celebrate in Kroger's (NYSE:KR) results this year. Sales held flat for most of 2017, after all, and profits are dropping due to rising competition from physical and online rivals.
There was a break from that dynamic this past week, though, as the supermarket chain's stock jumped following third-quarter earnings results that pointed to a mounting recovery for the business.
CEO Rodney McMullen and his management team held a conference call with Wall Street analysts following that report, and here are five of the main points they sought to get across in that discussion.
Improving demand at stores
Our core business was strong in third quarter. We are very pleased with our [comparable-store] sales exceeding 1%.
-- CFO Mike Schlotman
Kroger's 1.1% comps increase marked its third consecutive quarter of modestly accelerating growth, which management attributed to strong demand for produce and meat, along with continued double-digit gains in its organic and natural foods business. That pace kept the grocery chain behind its chief rival Wal-Mart (NYSE:WMT) and its latest 2.7% comps improvement. However, Kroger executives believe they gained market share during the quarter.
Digital sales growth
Everything we're seeing in our data and in customer behavior tells us Kroger's transition to seamless [shopping between in-store and online channels] is working.
Digital sales more than doubled as Kroger's online ordering and delivery services expanded. Customers can now receive home delivery from about 300 of its locations and they'll be able to pick up orders from over 1,000 of its stores by the end of the year. Wal-Mart is also pouring resources into achieving the same goal of building a robust digital channel to go along with its network of physical locations.
We recognize that in order to be there for our customers today and -- more importantly -- to be where they are going in the future, we need to make investments more aggressively and faster than ever before.
Management isn't backing down from its promise to spend heavily on its growth initiatives, including price cuts. That helps explain why Kroger's bottom-line profit margin has dipped to 1.2% of sales from 1.7% over the past nine-month period. Yet the retailer is also ramping up its capital investments and expects to allocate $3 billion toward the business in each of the next three years. McMullen and this team hope to offset much of this spending with cost cuts and efficiency gains.
Our goal is to continue generating shareholder value even as we make strategic investments to grow our business.
Even with the added spending planned for 2018 through 2020, Kroger believes it can produce decent financial gains during this period. Specifically, management is targeting an additional $400 million of operating profit over that time and expects to generate $4 billion of free cash flow. Thus, while net income is likely to fall below Kroger's previous long-term goal of between 8% and 11%, its finances should improve in other areas.
We are growing in a fragmented market. Kroger has more data than any of our competitors... [and] we have incredibly convenient locations and platforms for pickup and delivery within one-to-two miles of our customers. We have a leadership team that combines deep experience with creative new talent. We have the scale to win with more than 60 million households shopping with us annually.
McMullen said a healthy start to the holiday season has put Kroger on pace to deliver its fourth straight quarter of accelerating comps gains in Q4. Looking further ahead, executives are bullish about their chances to capitalize on their leading grocery market share by expanding into prepared foods and attacking the home delivery opportunity. These niches could effectively double the addressable market to $1.5 trillion.
Winning in that bigger pond starts with Kroger securing the loyalty of its current shopper base of 60 million households. This quarter's improving market share and comps numbers show encouraging progress toward that goal.