Kroger (KR +0.61%) this week posted earnings results for its fiscal second quarter. And besides a slight beat on both the top and bottom lines, there weren't many surprises in the announcement. Instead, shareholders saw more of the market-beating sales and profit growth that they've been enjoying for the last few quarters.
With that in mind, let's take a closer look at the health of Kroger's business, courtesy of a few key quotes from management's conference call with analysts.
1. Consumer confidence is rising, but shoppers are still cautious
CEO Rodney McMullen. Source: Kroger
"We continue to see positive indicators in customer shopping behavior both through what our customers tell us and what their actual shopping behavior says. Kroger's data suggests some greater confidence in the economy and less caution in spending consistent with what we saw in the first quarter. Even so, confidence in the economy and the economic recovery is not pervasive across the board. Many of our customers are still struggling and we continue to pursue our strategy of connecting meaningfully with all customers wherever they are in the economic spectrum." --CEO Rodney McMullen.
As it did in the prior three-month period, Kroger succeeded this past quarter in outgrowing the industry. The grocer's 5% comparable-store sales growth trounced Wal-Mart's and Target's flat growth and was only slightly behind Costco 7% bounce. Kroger investors should be happy to know that Kroger is gaining market share, and that its customer base is slowly venturing back toward more discretionary products.
2. Organic isn't a niche category anymore
In response to an analyst's question about the percentage of customers who are buying organic products, McMullen said, "It would be well over half our customers. That [percentage] continues to increase."
Growth in the organic category is helping Kroger in a number of ways. For one, its giving a lift to comparable-store sales as those products see greater demand growth than the rest of the store. Kroger's organic store brand, for example, grew at a double digit pace this quarter. Profitability is another way that those products help the business. Organic groceries command a higher margin, which is helping Kroger as it deals with commodity inflation and a customer base that is still often focused on value.
3. Kroger is preparing to take advantage of e-commerce growth
In addition to organics, e-commerce is a major growth avenue for grocers. But it's one that Kroger hasn't really capitalized on to date. That should change quickly, though, with the company's recent acquisitions of Vitacost, the Web-based retailer, and Harris Teeter, which has a successful online-ordering system that Kroger could roll out to its own stores. Here's what a Kroger executive had to say about the Vitacost acquisition, in particular, which closed this past quarter:
"This is a compelling transaction because of the incredible potential for transformation and growth. We believe Kroger is uniquely positioned to blend the art of retailing and deep customer insights with a superb online experience. Vitacost people and extensive e-commerce platform coupled with Kroger's customer insights and loyal customer base will really be a powerful combination that we can leverage to create new levels of personalization and convenience for our customers. We intend to build on Vitacost's robust technology platform and integrate it with our existing digital footprint to do just that."
4. The Harris Teeter acquisition is going to plan
"Integration with Harris Teeter is going exactly the way we would hope and we continue to learn from each other in ways to improve our customers' experiences." --Rodney McMullen
The main reason for Kroger's $2 billion purchase of Harris Teeter last year was to gain a quick foothold in a bunch of fast-growing college-town and vacation markets. But another benefit of buying out a former rival is that both management teams get the opportunity to share best practices for the first time. That's happening with Kroger and Harris Teeter at the moment, and the gains are flowing in both directions. For example, Harris Teeter is set to expand its store footprint at a faster pace than before, now that it has access to more resources. And Kroger is nearly ready to apply Teeter's online-ordering system to many of its own locations.
5. Debt is high, but we're still flexible
Kroger took on some serious debt to fund that Harris Teeter purchase. In fact, net debt now stands at $11.2 billion, as compared to $3.5 billion a year ago. Still, while management is focused on getting Kroger's debt/earnings ratio down, shareholders should be glad to know that the team remains open to other big purchases.
"If it's the right set of assets with the right growth opportunity like Harris Teeter was with all the new markets, I don't think we would be precluded from continuing to participate in industry consolidation." --Chief Financial Officer Mike Schlotman
