Kroger (KR 0.56%) recently announced third-quarter results that did little to change the growth picture for investors. The supermarket chain's rebound strategy is producing faster sales gains, yet it continues to lose ground to rivals such as Walmart (WMT -0.65%), which have found more success in their multichannel retailing investments.
Kroger's executive team discussed that turnaround plan and the competitive landscape during a conference call with investors. Below are a few highlights from that presentation.
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Gaining momentum
Kroger reported identical sales without fuel of 2.5% during the third quarter, marking our strongest quarter since we launched Restock Kroger. -- CFO Gary Millerchip
Kroger's sales growth sped up slightly to just under 3%. That success was powered by strong demand in the produce department, in Kroger's store-brand franchises, and in the chain's digital segment that includes online orders for pick up and delivery. That e-commerce channel accounted for nearly a full percentage point of the retailer's sales gains.
Kroger's growth wasn't as strong as Walmart's or Target's, though, suggesting it is still losing market share almost two years into its turnaround strategy. But management is happy that sales gains are improving. "Underlying trends were very robust," Millerchip said.
Adding efficiency
We remain on track to achieve over $1 billion of cost savings in 2019 on top of a $1 billion savings achieved last year. -- Millerchip
The consumer staples specialist announced a slight drop in gross profit margin, which management said was tied to the pharmacy business. The decline was less severe than a year ago, though, and Kroger is expecting that moderating trend to continue into the fourth quarter.
Meanwhile, the company achieved lower selling expenses thanks to better efficiency at stores and a cost cut program that is on pace to slash $3 billion from its annual expense burden by 2020. The savings are coming from reduced waste and from improvements Kroger has made to the supply chain. These wins are lifting cash flow and profitability metrics, right in line with the financial forecasts management updated in early 2019.
Looking ahead
This year we provided guidance for 2020 several months early [and] we remain confident in the 2020 guidance that we shared last month. -- Millerchip
Kroger is still aiming to achieve comparable-store sales gains of about 2% for the full year, or a bit below the 3% Walmart is seeing. The company's 2020 outlook confidently predicts that growth will accelerate for a second straight year, too.
The main takeaway is that the supermarket giant's operating trends continue to trail peers, and investors are only seeing hints of improving earnings power today. Yet management believes the business is still on the right track, and they point to metrics like free cash flow and direct shareholder returns as support for their claim that the rebound plan is working, albeit slowly.
"Restock Kroger is the right framework to reposition our business to create value for all our stakeholders," McMullen said, "both today and in the future." That reference to future quarters highlights the fact that investors will likely have to wait until at least late 2020 before seeing Kroger begin stealing back market share from its major grocery store rivals.
