Investors had high expectations heading into Kroger's (KR 1.92%) final quarterly report of 2020. The supermarket chain had seen a huge lift from the pandemic while even managing to improve its market share position against rivals like Walmart (WMT 2.13%).
Its detailed results showed continued good news in these areas, although Kroger warned that sales will likely decline in 2021 after soaring this past year.
Let's dive right in.
Sales growth landed at 11%, or roughly even with the prior quarter's expansion rate. That result outpaced the 9% increase that Walmart notched in its U.S. stores over the holidays, allowing Kroger to boost sales by 14% on the year compared to Walmart's 9% increase.
The result matched with the short-term outlook that executives issued in early December. It also translated into a bigger share of grocery shoppers' spending, according to management. "Kroger continued to grow market share during the quarter," CEO Rodney McMullen said in a press release.
Earnings and cash flow
Kroger took a one-time charge to shore up its pension plan, and that move generated an operating loss. But strip out that expense, and the chain's finances were stellar. Gross profit margin held steady at 23% of sales and adjusted operating profit jumped to nearly $4 billion from $2.3 billion in 2019.
Cash flow surged so that Kroger was left flush with resources even after spending on stock buybacks and making that new pension commitment. Overall, the chain's debt-to-earnings ratio plunged to 1.75 times, compared to its target range of between 2.3 and 2.5. That gap means Kroger has lots of flexibility to spend aggressively on store upgrades or on additional acquisitions over the next few years.
Kroger predicted that comparable-store sales will turn negative in 2020, falling by between 3% and 5% following last year's 14% spike. It's more useful to look at the two-year growth period given the disruption caused by the pandemic, though.
That metric implies an average annual sales increase of between 9% and 11% through 2020 and 2021. "We are accelerating the momentum in our business," CFO Gary Millerchip said, noting that the two-year window "more accurately measures this underlying momentum."
On that two-year basis, Kroger sees total shareholder returns that far exceed the long-term goal that management has issued of between 8% and 11%. While that's good news for investors, the better news is that the consumer staples chain is on a stronger competitive footing today after struggling with falling market share in 2019 and 2018.
Its biggest challenge in the next year is to find ways to extend those gains by pouring cash into its stores and supporting popular corporate brands like Simple Truth. Management's massive cash holdings and flexible debt profile will easily fund those initiatives. Those assets might also allow for the supermarket giant to boost direct cash returns and consider game-changing acquisitions like its $2.5 billion purchase of Harris Teeter in 2013.