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Kroger Earnings: What to Watch

By Demitri Kalogeropoulos - Feb 28, 2021 at 1:00PM

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The supermarket giant will issue its first 2021 outlook in just a few days.

Kroger (KR 1.26%) is about to answer some big questions for investors. The supermarket giant will soon announce its final quarterly results for fiscal 2020 to wrap up what was a year of record growth as demand for food and other staples surged during the pandemic.

CEO Rodney McMullen and his team might have optimistic comments to make about the short-term growth outlook, too. Yet the earnings picture isn't as bright.

Let's take a closer look at what investors can expect to see in Kroger's announcement on March 4.

A full grocery cart.

Image source: Getty Images.

The market share question

Kroger's last report covered the selling period that ran through early November, and the chain showed strengthening operating results in that time. Sure, growth slowed to 11% from 15%. But Kroger gained ground against Walmart (WMT 1.48%), its main competitor in most markets.

The supermarket giant set a higher bar this time around, saying its sales sped up in the core U.S. market through the holiday season. We'll learn this week whether Kroger notched a similar boost. The company is targeting 14% growth for the full year.

If it meets that goal, look for management to credit popular in-store brands like Simple Truth, along with the booming e-commerce division. Wins in these areas might allow Kroger to return to market share growth in 2020 after slipping in the prior year.

Profits and cash

Kroger's earnings have been soaring as its supply and manufacturing platforms gained efficiency from surging demand volumes. Operating profit reached $2.9 billion over the first three quarters of 2020, equating to 2.9% of sales. This is compared to to $1.7 billion and a 1.8% margin a year earlier.

WMT Operating Margin (TTM) Chart

WMT Operating Margin (TTM) data by YCharts

Look for more good news on this score. Kroger is aiming to add another $1 billion to profits in the fourth quarter, pushing operating income to just above $4 billion for the year compared to $2.3 billion in 2019 and $2.6 billion in 2018. Free cash flow will likely surge, too, landing at $3 billion compared to $1.7 billion last year.

The cost outlook

Walmart soured the mood in the consumer staples industry in mid-February when it projected several years of elevated costs ahead. The retailer said earnings will likely be flat in 2021 while capital upgrade projects eat into cash flow. The good news is that Walmart believes it can achieve fundamentally higher sales growth with help from these investments.

Kroger's outlook might hit the same notes this week. The chain should have a good shot at achieving modest sales growth in 2021 following last year's record spike. But the big question is whether management is as conservative on its cash flow and earnings outlook as Walmart was earlier in the month.

If it is, then investors shouldn't expect big dividend increases or aggressive stock repurchase spending despite the 50% earnings surge this past year. That would be a temporary slump, though, which would give Kroger more room to protect its bigger selling footprint. As a result, shareholders shouldn't take a weak earnings outlook as a bad sign on Thursday. Instead, it might just mean Kroger is laying the groundwork for faster sales growth and increasing earnings over the long term.

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Stocks Mentioned

The Kroger Co. Stock Quote
The Kroger Co.
KR
$52.80 (1.26%) $0.66
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$127.87 (1.48%) $1.87

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