While some of its rivals are posting their best growth numbers in years, Kroger (KR) has yet to join in the retailing industry's rebound. The supermarket chain recently announced fiscal first-quarter results that trailed management's full-year outlook. And, unlike with peers such as Walmart (WMT 0.07%) and Target (TGT 1.17%), Kroger's updated forecast for 2019 remains conservative.
In a conference call with investors, CEO Rodney McMullen and his team added detail to that 2019 outlook and explained what's been working -- and what hasn't -- with their rebound strategy over the last few months. Let's look at a few highlights from that presentation.
1. The year started out soft
We had a few headwinds during the first quarter, including sales, which we know must be stronger. We also experienced pharmacy gross margin pressure similar to others in the industry.
-- CFO Gary Millerchip
Executives admitted that revenue growth isn't where it needs to be. Comparable-store sales rose by just 1.5%, which trailed Walmart's 3% spike and Target's 5% increase. The figure also came up short of the 2% goal that Kroger had issued for the full 2019 year. Broadly speaking, these numbers suggest continued market share losses to the biggest national retailing competitors.
Management didn't call out any specific reasons for the shortfall, but instead focused its comments on the many initiatives it has in place to improve the customer shopping experience. Focusing on consumers through strategies like faster home delivery and lower prices, Kroger says, is the surest path toward sustainably faster sales growth.
2. Efforts to change are working
We know that our customers love our brands, and that they are hungry for innovative new products that they can only get by coming to and shopping with Kroger.
On the positive side of the ledger, Kroger noted continued success with its in-store brands, which now account for about 30% of sales volumes and are a source of strong revenue growth. Other important wins in the period included a 42% increase in e-commerce, which is tracking at over $5 billion of annual sales.
Management also highlighted its efforts to diversify into other revenue streams, like personal finance, advertising, and data licensing. Together, these bets are on track to contribute an extra $100 million to operating profit this year, executives estimate.
3. Getting back to even isn't enough
We recognize that getting into our [comparable-store] sales guidance range will require an acceleration of sales throughout the rest of our fiscal year. We are diligently working to improve performance and build on the positive sales trend momentum we are seeing thus far in our second quarter.
The good news is that the first few weeks of the second quarter are showing faster growth, with sales accelerating toward their 2019 outlook of between 2% and 2.25%. Hitting that target would be an encouraging step in executives' long-term rebound plan.
Yet peers including Walmart, Costco, and Target have all announced robust customer traffic gains and improving profitability in recent weeks. In each of these cases, the company has cited the grocery niche as being supportive of its market-beating growth rates.
In other words, Kroger is still losing ground to rivals across the grocery sales landscape today. Until the retailer can demonstrate that it is at least matching the growth in the wider industry, investors should resist buying into its rebound predictions.