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Kroger Is Still Fighting an Uphill Battle

By Demitri Kalogeropoulos - Dec 10, 2019 at 7:01AM

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The supermarket chain is seeing faster growth that still trails that of rivals such as Walmart.

Kroger (KR 1.57%) stock has been pressured this year as the supermarket chain lost ground to major rivals such as Walmart (WMT 1.97%). Yet the retailer's rebound strategy started to show signs of success in the second quarter, which investors were hoping to see carried over into the second half of its fiscal year.

On Thursday, Kroger did show more progress along that turnaround plan. But its operating trends still look weak compared to those of Walmart and other major national retailers.

A grocery cart in an empty grocery aisle

Image source: Getty Images.

Sales gains

Comparable-store sales sped up for the second consecutive quarter and again reached the highest point since Kroger started its rebound initiative over two years ago. The 2.9% comps boost was a welcome improvement over the prior quarter's 2.2% increase. Yet it wasn't enough to close the gap between Kroger and its consumer staples peers. Walmart boosted comps by over 3% this past quarter, and Target (NYSE: TGT) enjoyed a 4.5% increase.

Executives were still happy to see progress in winning more customer traffic, and they highlighted successes such as growth in Kroger's popular in-store brand franchises. The chain has also expanded its pickup and home delivery offerings to its entire selling base. "Kroger's customer obsession and focus on operational excellence," CEO Rodney McMullen said in a press release, "continued to generate positive results in the third quarter." 

Capital returns

Kroger took a significant charge related to its investment in Lucky's Market, but its financial position still improved with help from cost cuts and new profit streams. In fact, the stronger cash-flow profile has allowed management to lower its debt burden by $1.5 billion in just the past year.

Investors saw a direct benefit from that cash surge when Kroger in late June raised its dividend 14%. The company announced another positive payoff in this past week's report by resuming its stock repurchase spending following a pause through the first half of 2019. "Kroger continues to generate strong and durable free cash flow," McMullen said, which is being used both to invest in the business and boost shareholder returns.

Looking ahead

Kroger affirmed all of its core growth and profit targets and still sees comps rising by about 2% this year and accelerating to at least 2.25% in 2020, even as operating margins improve. These predictions amount to several years of strengthening demand and financial trends that nevertheless pale in comparison to major retailing peers. Walmart and Target are each seeing some of their fastest growth in a decade, after all, and are crediting fast fulfillment offerings for pushing profitability higher than management could have hoped just a year ago.

In contrast, Kroger shareholders have a trade-off to accept in seeing the retailer slowly improve its market position while promising more cash returns in the form of dividends and stock repurchases. The supermarket chain is building similar multichannel retailing assets to the ones that have helped Walmart and Target supercharge their growth outlooks. But so far, investors aren't seeing much of a positive impact from those moves, either in terms of sales gains or profitability.

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Stocks Mentioned

The Kroger Co. Stock Quote
The Kroger Co.
KR
$52.96 (1.57%) $0.82
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$128.48 (1.97%) $2.48

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