Investors had high expectations heading into Kroger's (KR 1.44%) fourth-quarter earnings report, and they weren't disappointed. The supermarket giant's stock jumped following the announcement to reach a new all-time high even as many of its peers in the S&P 500 are down for the year.
Let's look at a few reasons behind the growing optimism that Wall Street has for this consumer staples business.
Closing the gap
For the past year or so, Kroger has trailed Walmart (WMT -0.25%), its main competitor, in several key growth metrics. But that gap is closing right now. Comparable-store sales were up 14.3% on a two-year basis, which is only slightly below the industry leader's 15% boost.
Kroger found similar success, compared to Walmart, in attracting loyal shoppers through investing in its produce and prepared foods. Those wins imply that the business may be ready to win back some of the market share it lost in recent years as it built up its multi-channel selling platform and invested in the fresh food section.
In a recent press release, CEO Rodney McMullen said, "Our strategy of leading with fresh and accelerating with digital propelled Kroger to record performance in 2021."
Kroger's impressive profitability demonstrated the value of its integrated sourcing platform. In-store brands constitute a large portion of sales, and the chain produces key products of its own without relying on third-party suppliers.
That setup helped insulate Kroger from supply chain and pricing issues that pinched smaller grocery store rivals. "We continue to deploy a wide array of tools [to fight inflation]," McMullen explained in a conference call with Wall Street analysts, "including our owned and operated fleet."
That fleet helped Kroger achieve a slightly higher gross profit margin this quarter despite soaring costs in areas like labor and transportation. Adjusted operating profit landed at $1 billion compared to $840 million a year ago. The company celebrated having cut a further $1 billion from its annual expense burden, too.
The best news came out of Kroger's official 2022 outlook. This forecast calls for comps to rise by 2% to 3%, putting it right in the running with Walmart, which recently projected a 3% boost in its U.S. business this year.
The outlook is just as bright for financial metrics like cash flow and earnings. Kroger believes it can generate over $4.2 billion of operating profit in 2022 compared to $3.5 billion last year. Free cash flow will cross $2 billion.
Put all these trends together, and Kroger seems well positioned to meet management's long-term goal of generating annual shareholder returns in the range of 8% to 11% after factoring in the dividend payment.
That's great news for investors. Shareholders should be even happier to learn that Kroger can keep producing these returns without suffering from a significant growth hangover in fiscal 2022.