Kroger (KR -6.50%) last week posted surprisingly high second-quarter results that were powered by strong market share gains. The grocer beat almost all national food retailers as it extended its comparable-store sales growth streak to an awesome 47 straight quarters.
After the earnings announcement, CEO Rodney McMullen held a conference call with Wall Street analysts to put the results in greater context. Here are five key points from that presentation.
Reason for optimism
While customers continue to feel optimistic about the economy throughout the second quarter, they also continue to tell us they want to spend less [...] they want retailers to help them save money with sales and coupons. -- McMullen
All of Kroger's regions and supermarket departments logged comparable-store sales growth in the quarter, led by a double-digit improvement in the organic and natural foods section. Overall comps were 5.3%, which marked the second straight quarter of slowing growth. Yet that result was still far above the 1% that rivals Wal-Mart and Whole Foods managed.
Investing in corporate brands
Our multi-tiered corporate brands portfolio has always been a powerful differentiator for Kroger. Simple Truth continues to see explosive growth. Private selection remains a vibrant billion dollar brand that is growing in the double digits and developing unique offerings in many categories. -- McMullen
Kroger's store brands represent 25% of sales and are a growing competitive advantage for the grocer. That success has a lot to do with the blockbuster launch of organic and natural foods brand Simple Truth, which just surged past $1 billion of annual sales less than two years from launch.
Simple Truth is Kroger's most successful brand ever, and it's helping the company put pressure on upscale grocers like Whole Foods. Management is hoping to build on that success with HemisFares, a new high-end brand composed of international foods that's set to launch this month.
Capital returns vs. capital spending
Our long-term financial strategy continues to be to repurchase shares, give an increasing dividend, fund increasing capital investments and to maintain our current investment-grade debt rating. -- Chief financial officer Michael Schlotman
Management aims to send excess cash back to shareholders -- but only after meeting the needs of the business. This year, spending is tilting toward capital investments and away from straight cash returns: Kroger will spend as much as $3.3 billion investing in growth in 2015, because "we see a strong pipeline of high quality projects and we continue to be encouraged by the results from our new stores." The trade-off is lower stock repurchase spending, which is running at half the pace of last year through the past two quarters.
We are keeping our commitments to our bondholders and shareholders while delivering value to our customers and increasing opportunities for our associates. -- Schlotman
Kroger's debt level held constant at $11 billion. However, since earnings are up sharply this year, its debt leverage ratio dove from 2.32 times profit to 2.02 times. That level is important because it frees management up to pursue pricey new acquisitions like the recent $2 billion Harris Teeter buy.
Based on our strong year-to-date performance, we raised our identical supermarket sales growth guidance excluding fuel to a range of 4% to 5% for 2015. The prior guidance was 3.5% to 4.5%. We also raised our net earnings per diluted share guidance to a range of $1.92 to $1.98 for fiscal 2015. -- Schlotman
For the second time this year, management had to boost their 2015 sales outlook. Kroger started off expecting 3.5% growth, then raised it to 4%, and is now targeting 4.5% gains. Executives' profit forecast also got a boost, rising to as high as $1.98 per share. That guidance is above management's long-term goal of delivering between 8% and 11% annual profit gains, which is yet another piece of evidence that Kroger's operations are on a robust upswing right now.