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Kroger Sees the Supermarket Bounce Extending Into 2021

By Demitri Kalogeropoulos – Sep 14, 2020 at 12:00PM

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Investors should see better returns from this growing business through the next fiscal year.

Growth is slowing as COVID-19 restrictions ease, but Kroger (KR -2.08%) is still seeing a sustained lift to its business these days. Last week, the supermarket giant posted a second straight quarter of double-digit sales gains and soaring profits. Management has seen enough data to confidently predict a ballpark estimate for the wider fiscal year that includes some head-turning predictions on sales and adjusted earnings.

More on those headline forecasts in a moment, but first let's dive into the latest operating results.

A man shops for beer.

Image source: Getty Images.

Still winning share

Kroger's reporting calendar doesn't match up directly with its biggest rivals, but its latest growth numbers do suggest continued market share gains. Sales growth through mid-August landed at 15% to mark just a modest slowdown from last quarter's 19% spike. Walmart, its biggest competitor, announced a 9% boost in its last earnings report. Costco comps are running higher by about 14% in recent weeks.

Kroger's growth translated into over $2 billion in additional sales year over year, which implies millions of new loyal shoppers across its physical and online selling channels. "We delivered extremely strong results in the second quarter," CEO Rodney McMullen said in a press release.

Bottom-line boost

The good news trickled down to the bottom line, too, with gross profit margin holding steady at 29% of sales and operating margin jumping to 2.7% of sales compared to 2% a year ago. The combination of these positive trends pushed adjusted earnings per share higher by 66%.

Cash trends were even more impressive. Operating cash flow jumped to $5.4 billion over the last six months compared to $3.3 billion a year earlier. After paying down debt, issuing dividends, and repurchasing shares, Kroger still had enough resources left to push cash on hand to nearly $3 billion versus $630 million last year.

Looking ahead

Management didn't signal a change to its cautious cash-hoarding approach. Meanwhile, the company's debt fell to 1.7 times adjusted earnings, or well below its target range of between 2.2 and 2.5. That gap suggests Kroger might become more aggressive with investments into the business, capital returns, or new acquisitions in the coming quarters.

In the meantime, McMullen and his team believe they have enough visibility into the second half of 2020 to reinstate their short-term outlook. Sales are expected to rise by at least 13% compared to management's pre-pandemic target of around 2.5%. Adjusted free cash flow will be near $3 billion, and adjusted earnings will jump by between 45% and 50%.

CFO Gary Millerchip drew a direct line from Kroger's improved operating trends to those surging financial metrics. "As a result of our strong performance in the first half, the expectation of sustained trends in food at home consumption and our confidence in our ability to execute," he said in a press release, "we are updating our full year 2020 guidance."

Management went on to say that these gains will likely extend at least into early 2021, which means investors can safely boost their expectations in categories including sales growth, earnings, and capital returns for next year as well.

Demitri Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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