Kroger (KR 1.80%) recently posted second-quarter earnings numbers that, while keeping the retailer on track to meet management's full-year targets, disappointed investors. The supermarket giant's sales growth trends didn't accelerate meaningfully, as they have for rivals like Walmart. And Kroger also announced lower profitability due to cutting prices and spending heavily on its e-commerce business.
Following the results, CEO Rodney McMullen and his team held a conference call with analysts to put those trends into perspective. Below are a few highlights for investors from that presentation.
Image source: Getty Images.
Pricing moves temporarily hurt sales
We accelerated several planned "Restock Kroger" investments starting in the first quarter and continuing during the second quarter. These included investments in price, especially in support of our [in-store] brands, and in space optimization.
-- CFO Mike Scholtman
Comparable-store sales growth held steady at below 2%, which was an unwelcome surprise for investors. After all, Walmart and Target had each recently posted sharp growth upticks, with comps ranging between 4% and 6%.
Kroger executives blamed pricing and shelf space moves for creating a headwind to growth during the quarter. They said they weren't surprised by the negative shift, though, and they're confident that it will turn positive over the next few quarters.
Bright spots
Part of our price investments was to support our brands, especially to reduce starting price points. The improvement in unit movement in the quarter demonstrates these investments are resonating with customers. We intend to continue investing in price to drive unit growth while also delivering on the bottom line for our shareholders.
-- Schlotman
Kroger notched a few key wins during the quarter, including a 50% spike in digital sales as its home delivery options rolled out to a bigger proportion of its products and its store portfolio. Sales volumes were healthy, too, as customers responded positively to the lower pricing. That's a trade-off that management is happy to make right now, just as they have been since the chain started emphasizing value pricing over a decade ago.
Company brands are a major advantage
Our [in-store] brands continue to resonate with customers, both in stores and online. Since our August launch of Kroger Ship, 41 of the top 50 items sold are [in-store] brands, and four of the top five items on ClickList are [in-store] brands. In the center of the store, premium [in-store] brands including Private Selection, HemisFares and Abound grew double digits during the second quarter.
-- McMullen
Executives see their private label brands as a key pillar of their growth strategy going forward, and there was plenty of support for that outlook in these results. In-store brands accounted for a record 27% of sales during the quarter, for example, and were responsible for much of the company's overall comp gains. Kroger is aiming to capitalize on this advantage by marketing these exclusive brands heavily in its digital sales channel and by extending their reach into new international markets.
Clarity is coming
You can see our vision coming into focus in several of the exciting announcements we've made over the last couple of months. And ... we're not done. As we share more of these very intentional puzzle pieces with you in the months and years ahead, a very clear picture will emerge.
-- McMullen
Kroger left its sales growth targets unchanged at roughly 2%, and that stability was a disappointment for investors who had hoped to see the retailer follow Walmart and Target by lifting its 2018 outlook.
Executives sought to assure shareholders that, while gains will be modest this year, their growth strategies are succeeding at making Kroger a more able multichannel retailer. "Everything we are doing is intended to create a truly seamless shopping experience," McMullen said, and management hopes that those improvements will eventually deliver more robust growth both in stores and online.
