After crushing it in its first quarter with better-than-expected sales and earnings per share, Kroger (NYSE:KR) failed to impress when it reported its second-quarter results last week. Weaker-than-expected sales growth for the grocer apparently spooked some investors as the stock slid about 10% after the report was released.
While Kroger's year-over-year sales growth rate did decelerate meaningfully in Q2 compared Q1, commentary from management during the company's second-quarter earnings call implies the market may be overreacting. Here's management's explanation for its sales growth challenges during the quarter, along with one other key takeaway from Kroger's conference call.
About Kroger's weaker-than-expected same-store sales growth
One of the disappointments in the second quarter was Kroger's growth in same-store sales, which management often refers to as identical sales. Same-store sales were up 1.6% year over year during the quarter when excluding fuel. This was not only below a consensus analyst estimate for growth of 1.9%, but it was below the 1.9% growth Kroger posted in its first quarter.
While the figure may have surprised investors, management expected it, explained Kroger CFO Mike Schlotman:
We noted in June that pull forward investments in Restock Kroger that began in the last four weeks of the quarter and continued space optimization rollout would be headwinds to [identical] sales in the second quarter. So, this effect is not a surprise to us. We expect the headwinds from space optimization during the first half of 2018 to become a tailwind late in the third quarter.
It's true that management did warn in its first-quarter earnings call that its space optimization strategies wouldn't morph into a tailwind until late Q3.
In Kroger's second-quarter press release, CEO Rodney McMullen even said the company feels good about its same-store sales growth during the quarter, reiterating that the grocer is on track with its full-year expectations for the metric.
Private-label brands continue to outperform
McMullen remains bullish on the company's efforts with its own brands:
In the second quarter, our brands made up 28.2% of unit sales and 26.5% of sales dollars, both of which are record results for a second quarter. Our brands continue to outpace Kroger's identical sales growth, led by more than a 15% growth in our popular Simple Truth and Simple Truth Organic lines during the second quarter.
Management was especially optimistic about its Simple Truth brand, which recently achieved annualized sales of $2 billion and has become Kroger's second-largest brand in its stores. Indeed, McMullen said he believes Kroger's Simple Truth brand stands apart from competing brands:
Simple Truth really doesn't have a comparable brand in the market at all and to the degree that -- obviously, there's a lot of smaller natural and organic brands, but [they] would compete against one piece of our overall brand, not the overall brand.
Simple Truth is now the largest natural and organic brand in America, according to Kroger.
Looking ahead, management's view for full-year same-store sales growth and adjusted earnings per share is unchanged from the outlook Kroger provided in its first-quarter update. Management expects 2018 same-store sales to increase between 2% and 2.5% year over year, and full-year adjusted earnings per share to come in between $2 and $2.15.