Kroger's Latest Earnings Don't Change Weak Operating Story

The supermarket chain continues to trail industry peers in the race to satisfy consumers' multichannel shopping desires.

Demitrios Kalogeropoulos
Demitrios Kalogeropoulos
Jun 20, 2019 at 10:52AM
Consumer Goods

Kroger (NYSE:KR) investors weren't expecting great news from the retailer's first-quarter earnings report. Its fiscal 2018 results were underwhelming, after all, and showed no signs of an impending market-share rebound.

Its latest report (out Thursday) extended those disappointing trends into a new fiscal year that, at best, is on track to be another transition period for the supermarket chain's business.

Here's a look at how the Q1 results stacked up against the prior year:

 Metric

Q1 2018

Q1 2019

Change (YOY)

Revenue

$37.7 billion

$37.3 billion

(1%)

Net income

$2 billion

$772 million

(62%)

Earnings per share

$2.37

$0.95

(60%)

Data source: Kroger's financial filings. YOY = year over year.

What happened this quarter?

Kroger's sales only inched higher, which left it trailing major retailing peers like Walmart (NYSE:WMT) even as its spending initiatives kept a lid on earnings growth. Profits fell modestly after accounting for the sale of its convenience store business in 2018.

A grocery cart moving through an aisle.

Image source: Getty Images.

Highlights of the quarter include:

  • Sales rose 1.5% after adjusting for the sale of its convenience store segment. Adding in Kroger's alternative revenue streams, that figure landed at around 2%. Walmart, in contrast, recently posted its fourth straight quarter of over 3% comparable-store sales gains.
  • Gross profit margin held steady at 22% of sales, indicating modest success at passing along higher prices.
  • Operating profit declined to $957 million after adjusting for one-time events, compared to $1.02 billion a year ago. This result stacked up poorly against Walmart and Target (NYSE:TGT), which recently reported robust bottom-line profitability growth.
  • Kroger made progress on its transformation initiatives, including by expanding home delivery and pickup offerings to nearly all of its customer base.

What management had to say

Executives expressed confidence that the company's rebound plan, which management calls "Restock Kroger," is on track. "We are building momentum in the second year of Restock Kroger," CEO Rodney McMullen stated in a press release, "which is off to a solid start."

"It all starts with our customer obsession, which is why Kroger is assembling a platform to deliver anything, anytime, anywhere," McMullen said. Management highlighted improving operating profit results and healthy free cash flow as two of the most direct payoffs from the turnaround strategy to date.


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Looking forward

McMullen and his team confirmed their full-year outlook and still see comps rising by about 2% as profits are pressured by investments in areas like pricing, store remodels, and the online selling infrastructure. That steady and conservative outlook contrasts with what peers have said about the industry recently. Walmart predicts comps gains of around 3% this year, with robust growth in its grocery segment. Target, meanwhile, claimed that it will generate strong market-share gains across every major selling category this year after it began 2019 with a 5% comps spike.

Kroger's prediction implies modest market-share losses in the context of these reports and the significant customer-traffic growth that most of the industry is seeing today. Investors are looking forward to the retailer's capital spending initiatives boosting results, just as they have for peers in recent years. Yet there's scant evidence to date that Kroger can close the widening gap with its rivals, which have better managed the shift toward a multichannel selling environment over the past several quarters.