The Kroger Company (KR -0.51%) just beat earnings expectations and once again raised its full-year guidance. That's good news for the biggest grocery chain in the U.S., which serves 11 million customers daily.
Despite high inflation and supply chain inefficiencies, this innovative grocery giant continues to deliver strong financial results. Let's take a look at what makes Kroger so resilient during uncertain economic times.
A seamless digital experience
Kroger has adapted well to changes in its customers' shopping behaviors in recent years, from the onset of the pandemic through the current inflationary period. Driven by its strategy of "leading with fresh and accelerating with digital," Kroger aims to deliver a seamless digital shopping experience and build customer loyalty through the freshness of its products.
The company has also continued to expand the Kroger Delivery Network, and delivery sales increased 34% year over year. Bolstering these efforts, Kroger opened new delivery fulfillment centers in Michigan, Ohio, and Indiana, and announced a new facility to be opened in Colorado.
To complement its digital efforts, Kroger launched the Boost membership program during the second quarter, which provides members with free grocery delivery, double fuel points, and other exclusive offers. Customers can choose between two tiers of membership for either $59 or $99 per year and place their orders through Kroger's website or app. According to CEO Rodney McMullen, the Boost program is "already showing promising results including an increase in overall household spend among members."
The company set a digital coupon record during the second quarter, with an all-time high 750 million digital offers downloaded -- representing nearly $1 billion in savings for its customers.
Image source: Kroger.
Prevailing challenges
High inflation and supply chain woes have echoed throughout the retail industry in recent months, and each company tackles these challenges in its own way. Kroger's unique approach utilizes data science to improve the supply chain by minimizing inefficiencies in its distribution network.
For example, the company was able to reduce fuel costs in the second quarter by using data science to maximize trucking capacities. In another improvement, Kroger reduced the amount of time its cold products linger in transit, curtailing waste and preserving freshness.
In spite of its efforts, Kroger incurred a $148 million LIFO charge in Q2, more than three times the charge incurred in the same period last year. Used for tax reporting purposes, a LIFO credit (or charge) refers to the value of inventory (last in, first out) a company has on hand. Kroger cited heightened levels of grocery inflation as the main driver of its high LIFO charge.
Optimism for the future
Undeterred by the challenging environment, Kroger continues to perform. In its earnings release last week, the company posted a 5.2% sales increase, which is significant yearly growth considering the inflationary backdrop. Sales in Kroger-branded products grew 10.2% year over year, digital sales grew 8%, and -- most notably -- delivery sales grew 34%.
Kroger also reported adjusted earnings per share of $0.90, a 13% increase year over year and beyond the company's own expectations. Cost control, margin management, and increased fuel sales all contributed to the impressive results.
Optimistic in its ability to carve out more market share through digital initiatives, Kroger just raised its quarterly dividend by 24% and also marked the company's 16th straight year of dividend increases. Kroger also repurchased $309 million worth of shares in the second quarter, raising the annual buyback tally up to $975 million.
Last but not least, in a show of confidence, Kroger just raised its full-year sales guidance by 7% to 10% above 2021, the second time this year management has raised the guidance figure. The company believes that its positive momentum will carry into the second half of 2022, led by digital sales.
Looking forward, CFO Gary Millerchip feels the company can deliver "sustainable total shareholder returns of 8% to 11% over time." Although certain challenges might be here to stay, the current dip in Kroger likely won't last long. This consumer staples stock is one to buy and hold for the long haul.
