Investors were treated to mostly good news in Kroger's (KR +0.66%) second-quarter earnings report. The supermarket chain's latest operating metrics showed market share gains and surging profits.
Executives don't see the demand boost ending anytime soon, either. In fact, CEO Rodney McMullen and his team said in a conference call with Wall Street analysts that investors can expect to see unusually strong financial results at least into early 2021.
Let's look at a few highlights from management's Q2 presentation.
Beating market share growth targets
The quarter turned out much better than we previously expected.
-- CFO Gary Millerchip
Kroger's expansion pace stayed elevated, with comparable-store sales gains landing at 15% compared to 19% in the previous quarter. That boost likely translated into continued modest market share improvements against rivals like Walmart and it surpassed management's internal forecast.
Image source: Getty Images.
Still, there's a clear slowdown happening as consumers respond to reopening local economies, especially in the restaurant industry. Comps were up just 12.5% in the final weeks of the quarter, Kroger said, thanks to reduced government financial support.
Getting more profitable
We were pleased with the overall pass-through rate achieved from the elevated sales in the quarter which including the impact of digital growth and incremental costs associated with COVID-19, was approximately 10%.
-- Millerchip
Kroger notched some significant financial wins this quarter, with gross profit margin edging higher and operating income surging to 2.7% of sales from 2% a year ago. That success was mainly due to the booming demand, but the consumer staples chain also managed to cut costs overall despite increased spending on COVID-19 health and safety measures.
That flexibility is giving executives lots of confidence heading toward a new fiscal year. "Despite the pandemic-related challenges," McMullen said, "we delivered extremely strong results in the second quarter."
Good indications suggest more of the same
When we talk to our customers, they tell us they plan to continue to prepare and eat more meals at home.
-- McMullen
Kroger isn't worried about the growth slowdown in recent weeks, since shopper volume suggests elevated demand well into the next fiscal year. Customers are expecting to eat more meals at home, according to the grocer's research, even after the pandemic threat fades.
As for the recession, which could pressure the supermarket industry into next year, Kroger believes its business will outperform thanks to its product portfolio that spans the value chain. "This is one of the unique capabilities of the Kroger ecosystem," McMullen said, "we can deliver for both customers on a budget and customers who are trading up to premium products and/or larger sizes."
The result of that positioning is that executives feel confident that the company will outgrow rivals and produce impressive cash flow and earnings at least into early next year. "Kroger's performance in both 2020 and 2021 will be even stronger than previously anticipated," McMullen said as he outlined plans for sales growth of at least 13% this fiscal year compared to the chain's initial forecast of 2.5% gains.
