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Why Kroger Is Optimistic About 2020

By Demitri Kalogeropoulos - Mar 12, 2020 at 6:55AM

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The latest earnings report confirmed the supermarket chain is aiming for a third straight year of accelerating sales growth.

Kroger (KR 1.71%) this past week had mostly positive news to give investors about its business. The supermarket chain's turnaround effort is gaining steam, and that success is finally showing up in key operating and financial metrics such as sales growth and cash flow. Executives paired that encouraging news with an optimistic outlook for 2020 that calls for a third consecutive acceleration of sales gains.

In a conference call with investors, CEO Rodney McMullen and his team dove into a few key reasons they're so confident in Kroger's outlook in a competitive and dynamic retailing environment. Below are a few highlights from that earnings call.

Ending the year on a strong note

"While first quarter results came in below our identical sales guidance range, the balance of the year came in at the top end of our guidance, at 2.25%." -- CFO Gary Millerchip

Kroger recovered from a weak start to the year to achieve its original 2019 growth outlook. The 2% comparable-store sales uptick in the last quarter was a particularly bright spot since it pushed the grocery chain above Target and even with rival Walmart after having significantly trailed each of these retailers for several quarters. 

A grocery cart in an empty aisle

Image source: Getty Images.

Kroger credited several factors for helping lift the business over the last nine months, including investments in the fresh produce segment and the popularity of in-store brands such as Simply Truth. That franchise is easily the leading natural organic brand in the country, management said, with annual sales passing $2.5 billion in 2019.

Gaining efficiency

"We demonstrated financial discipline by balancing investments in our customers, associates and the development of our seamless ecosystem with significant cost savings." -- Millerchip

There was no shortage of areas that needed more resources this past year, including rising wages and increased spending on e-commerce shopping and fulfillment platforms. Yet Kroger still managed to protect profitability and keep operating income steady at $3 billion. The major driver here was the $1 billion in cost cuts that management implemented in 2019. The good news is they see room for a further $1 billion of savings in 2020.

These wins have added lots of financial flexibility, which management used mainly to pay down debt while increasing direct returns to shareholders in the form of resumed stock repurchase spending.

Expanding the competitive moat

"Our confidence that we can deliver even stronger [total shareholder returns] in the future is guided by our strong free cash flow and sustainable net earnings growth." -- McMullen

Kroger is predicting steady operating profit in 2020 along with another modest acceleration in its core growth metric. Executives said they've so far seen no reason to change that broader outlook in response to novel coronavirus outbreak concerns, either with respect to consumer demand or its supply chain. Investors can follow comps rates, especially in comparison to peer Walmart, to judge whether Kroger is close to ending its multiyear market share slide.

The 2020 cash flow metric will show whether the chain is getting a good return on all of its latest growth investments. Further improvements in these financial trends would add weight to management's claim that they've got the right operating strategy in place for attracting demand and generating healthy long-term shareholder returns.

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