While Kroger (NYSE:KR) missed analyst estimates when it reported fiscal third-quarter results earlier this month, there's still a lot to like about the company's overall trajectory. The supermarket's same-store sales growth is currently on pace to accelerate for a second year in a row. Even more, Kroger guided for yet another acceleration in full-year same-store sales growth in fiscal 2020. Management's three-year transformation plan is beginning to pay off.
Digital is growing nicely
Key to Kroger's growth has been its thriving digital business. Fiscal 2019 digital sales are on pace to grow around 30% year over year to more than $5 billion. In the company's fiscal third quarter, specifically, digital sales were up 21% year over year.
While this is a deceleration from 31% growth in fiscal Q2, management said this moderation was primarily because the company is up against a tough comparison to sales from its 2018 acquisition of meal-kit company Home Chef, which offers e-commerce delivery. Looking beyond this headwind for Kroger's year-over-year comparison in digital, "we're seeing ... customer engagement through Kroger pick up and delivery continues to be very strong and very consistent in the underlying results ... beyond that headline number," said Kroger CFO Gary Millerchip in the fiscal third-quarter earnings call.
The company has invested heavily in expanding its digital footprint. CEO Rodney McMullen said its grocery items are now available for digital orders -- including both pick up and delivery -- for 96% of its customers.
"We continue to invest in digital platforms, as this is where the customers are increasingly going to meet many of their needs," added McMullen.
Kroger's food-first strategy is working
While digital initiatives have been key to Kroger's same-store sales growth, another key driver is more traditional: a focus on delivering quality food. This "food-first" strategy, as management calls it, includes initiatives in maintaining a wide selection of quality fresh produce and investments in best-in-class private label brands. The initiatives, management believes, will drive near-term sales and long-term customer loyalty.
So far, this food-first strategy seems to be working. "Our produce department led the way in sales for the quarter, demonstrating how our store teams are focused on improving every day execution in ways that are highly relevant to our customers," said McMullen. In addition, he said its fresh products are driving customer trips, loyalty, and gross margin. Furthermore, Kroger said its private label brands are winning taste tests against competitors' private label products and against leading national brands. Overall private-label sales were up 3.4% year over year in fiscal Q3, outpacing the company's consolidated sales growth of 2.7% when adjusted to exclude fuel and business dispositions.
With these key drivers still going strong for Kroger, it's no surprise the company is guiding for same-store sales growth greater than 2.25% in fiscal 2020 -- an acceleration from the 2% to 2.25% same-store sales growth it currently expects in fiscal 2019.