Heading into Kroger's (KR 0.44%) third-quarter earnings report, investors were mostly concerned about an impending growth slowdown. The supermarket giant had enjoyed record sales growth during the early days of the pandemic, but that increase in demand can't last forever. When it recedes, the worry has been that Kroger will return to its sub-par 2% annual revenue uptick it was achieving before COVID-19 disrupted the industry.
Kroger did its best to calm those worries on Thursday. The grocery chain notched surprisingly strong sales growth that implied market share gains against peers like Walmart (WMT +0.33%). Kroger also lifted its outlook for the key holiday shopping season ahead.
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Winning share
Walmart set a high bar in its mid-November sales update. Kroger's main competitor said its grocery department grew in the mid-single digits this past quarter, which is about where most investors predicted Kroger would land. Yet the grocery specialist notched an 11% increase to mark just a modest slowdown from the prior quarter's 15% spike.
Kroger got much of its gains from its digital segment, with e-commerce volume rising 108% compared to Walmart's 80% jump. But it was mainly other competitive advantages, such as its corporate brands like Simple Truth and its fresh produce department, that allowed it to grow market share even as the wider industry expanded. "We delivered strong results in the third quarter," CEO Rodney McMullen said in a press release.
Cash flow updates
The extra investments Kroger is making in areas like its home delivery platform didn't crimp profits, either. Instead, gross profit margin held steady and operating profit expanded so that operating earnings reached $792 million, or 2.7% of sales, compared to $254 million, or 0.9% of sales a year ago. Through the first nine months of the year, that key profitability metric has jumped by a full percentage point to 2.9% of sales.
That gushing cash flow is freeing Kroger up to boost investments in its growth initiatives while raising direct returns to shareholders. It has spent nearly $1 billion repurchasing shares in 2020 and recently increased its dividend payout by 13%.
Looking ahead
CFO Gary Millerchip cited market share growth and persistently elevated demand for consumer staples as he laid out management's reasons for increasing its 2020 outlook. Kroger now believes comps will rise by about 14% compared to last quarter's target of at least 13%. The annual earnings growth outlook got a similarly modest boost to between 50% and 53%.
These upgrades don't mean that Kroger won't eventually suffer from a growth hangover following 2020's record volume spike. But they do confirm positive momentum through the start of the holiday shopping season. The best news for investors is that Kroger appears to be winning back some of the market share it lost to rivals like Walmart over the last two years.
It might have taken the supermarket chain a bit longer to make its successful pivot to multichannel retailing. But that move is finally showing up in its operating results and helping put Kroger back near the top of the grocery industry.
