Kroger's (KR 1.15%) plan to reinvigorate same-store sales growth showed more progress in the supermarket giant's fiscal second quarter. Total sales rose from $28 billion in the year-ago quarter to $28.2 billion. When excluding the impact of fuel, dispositions, and merger transactions, sales were up 2.5%. More importantly, same-store sales rose 2.2% year over year -- and that was on top of a 1.6% rise in the year-ago quarter.
Kroger saw some notable bottom-line momentum as well. Non-GAAP (adjusted) earnings per share for the consumer staples company rose a nice 7%.
But all of these figures capture only a small piece of the story Kroger investors should be following. Here's a closer look into the company's performance, including why management refrained from reconfirming a key operating profit target.
Image source: Kroger.
Pulling back on a key 2020 target
About two and a half years into its three-year transformation plan, called Restock Kroger, management has significant vision into how well the initiative is going. While many aspects of Restock Kroger are on track, Kroger CEO Rodney McMullen told investors during the company's fiscal second-quarter earnings call that the company was "not reconfirming" its expectation for $400 million in incremental operating profit from the initiative for the three-year period ending in 2020.
Explaining Kroger's decision to no longer reconfirm this target, McMullen said its pharmacy business has lagged expectations -- but "that's happened to everybody in the industry," he noted. An area of underperformance that is more specific to the company is identical sales, McMullen explained.
"Obviously, identical sales ... are making progress, but it's taken longer than what we expected."
The CEO said Kroger will provide detailed 2020 annual guidance in November.
Competition is in line with expectations
When asked whether increased competition was part of the reason for the company's worsened outlook for incremental operating profit from its Restock Kroger plan, McMullen asserted this wasn't an issue -- at least not when it comes to its grocery business.
"[W]hen you look at the competitive environment overall, I would say it's pretty similar to what we thought [it would be when we laid out our expectations for Restock Kroger]," he said.
But McMullen did admit that the competitive environment for its pharmacy business has exceeded his expectations.
Progress in digital
The company's digital sales continue to be a strong point for Kroger. Digital sales rose 31% year over year in Q2. Even more, McMullen said Kroger's digital business isn't weighing on costs as much as it was in previous quarters:
Importantly, we are starting to see improving operating profit trends in our digital business. Our digital business is becoming less of a headwind, which is an important inflection point as we continue to invest in new capabilities to support our transition ... However, I do want to note this is still a significant investment for the company.
Later in the call, Kroger CFO Gary Millerchip explained that the improved operating trends in digital are the result of both higher digital sales and the fact that the company now has lower start-up costs and investments in digital.
