Investors cheered the latest earnings news out of Kroger (KR 0.76%). Sure, the supermarket leader's sales fell. But those declines were modest, even compared to soaring pantry-stocking demand a year earlier.
In a conference call with Wall Street analysts, CEO Rodney McMullen and his team made the case that this performance implies fundamentally stronger growth ahead than shareholders had seen before COVID-19 struck in early 2020. Let's take a closer look at that bullish prediction.
Meeting changing shopper demands
The proliferation of vaccines and reopening of restaurants has had a big impact on how shoppers are behaving. People aren't consolidating trips, for example, and are switching back to more frequent visits with lower average spending.
But Kroger is still seeing strong demand in both its in-store and online selling channels. That's partly thanks to improvements the company made to its fresh produce categories. But it also reflects a sustained new interest in cooking at home, executives said. "A remarkable 92% of people [we surveyed] say they enjoy cooking the same or more than they did pre-COVID," McMullen said. Kroger's challenge is to keep meeting those shifting demands through the final phases of the pandemic.
Boosting efficiency in e-commerce
Kroger is a bit behind peers like Target and Walmart when it comes to the digital selling channel. But it continues to close the performance gap. E-commerce sales rose 16% this quarter on top of last year's 92% surge.
Those sales are becoming more profitable, too, thanks to quicker packing times and higher average order values. These successes imply that Kroger might soon start seeing a fundamental lift to its core profit margin, although not as big a spike as Target has seen in the past year. The first-quarter results, CFO Gary Millerchip said, "provide further proof points of [the] momentum we have created in our business model."
A clearer path toward double-digit growth
Kroger gave its outlook a modest boost on both sales and profits. That increase makes it likely that revenue will rise by about 11% on a two-year basis, which smooths out the short-term swings caused by the pandemic. For context, the chain had been growing comparable-store sales by just 2% before the pandemic struck and was struggling to hold market share against Walmart's renewed push into fresh produce.
Kroger is entering the post-COVID selling environment with several valuable assets it didn't have back in 2019. But the most important one is its bigger base of engaged shoppers. If the chain can convince these consumers to stick with the business, either through online shopping or in-store visits, then there's every reason to expect faster sales growth and rising profit margins ahead.
Shareholder returns would be impressive in that scenario, and indeed Kroger is already telegraphing higher stock buyback spending. Its dividend yield is already among the highest in its cohort.
Those direct returns might be enough to satisfy investors as they wait for confirmation that Kroger's 2020 growth wins weren't just a temporary benefit brought on by pantry-stocking demand. But a few more quarters will have to pass before we know if management is on the right track with its optimistic earnings hopes.