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Kroger Is Hoarding Cash (for Now)

By Demitri Kalogeropoulos – Updated Jun 23, 2020 at 11:01AM

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The supermarket chain is taking a cautious approach to the next few months.

Kroger (KR 0.31%) recently revealed some operating metrics that shocked investors, even considering the soaring demand in the wider supermarket industry through the early phases of the COVID-19 pandemic. Revenue jumped and profitability improved despite extra costs associated with maintaining a healthy sales environment for shoppers and employees.

In a conference call, CEO Rodney McMullen sought to tamper investors' expectations around the potential for sales growth of more than 20% to continue for much longer. Yet the broader takeaways from the quarter were positive. Let's look at some highlights.

A woman shops for groceries while wearing a mask.

Image source: Getty Images.

The winning formula

"Our brands had a great quarter and grew 21.1%, driven by significant growth across our three largest brands," McMullen said. "Having identified plant-based foods as a key trend well before 2019, the Simple Truth plant-based platform continues to deliver strong growth, growing over 32% in the first quarter."

The digital sales channel was a standout performer for rival Walmart (WMT 0.96%), whose e-commerce sales rose 74% in the fiscal first quarter. Kroger notched a similarly strong result as revenue jumped 92% online.

The chain's in-store brand sales were even better news since growth there supports enduring market-share gains. Kroger said corporate brands as a group jumped 21%, led by a 32% spike in the health-food focused Simple Truth franchise.

Shifting customer priorities

"Customers remain focused on health and safety and are still stocking up, but to a lesser degree than during the shutdowns," CFO Gary Millerchip said.

Kroger revealed monthly sales data that provided more context than the 19% overall quarterly growth figure that management posted in its earnings report. To start, comparable-stores sales in February were rising at just above the 2.25% rate the company had initially predicted before the pandemic scrambled growth trends.

Revenue then jumped at an unprecedented 30% in March when stay-at-home orders began. Sales trends stayed elevated at 20% in both April and May. Executives also noted a similar shift around different spending priorities that Walmart noted, with shelf-stable groceries and cleaning supplies selling out early before demand moved toward more splurge and impulse buying.

Looking out to 2020

"Customers are still cooking more at home even with the easing restrictions, and identical sales so far in the second quarter are trending in the mid-teens," Millerchip said. "We do expect sales to continue to taper as the quarter progresses."

Kroger didn't see enough stability to venture a detailed projection for the rest of the year, but management did provide some context to its prediction that sales growth will land somewhere above its initial 2.25% outlook.

As the restaurant industry reopens and states relax their stay-at-home recommendations, Kroger's traffic growth has slowed, with comps trending in the mid-teen percentage range in early June. Executives said they're expecting that number to continue declining through the quarter, although it's anyone's guess where demand trends will settle during the next phases of the pandemic and beyond.

The good news for investors is that Kroger has plenty of resources to respond to whatever selling conditions prevail over the next few quarters. Its net debt ratio dived to 1.8 times adjusted earnings from 2.5 last year. That mark is well below management's long-term liability target.

Yet Kroger is keeping most of that extra cash on hand for unforeseen opportunities or challenges. "Given the uncertainties that remain related to COVID-19 and the outlook for the remainder of 2020, we believe it's prudent to maintain financial flexibility in the short term," Millerchip said.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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