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Kroger Beats Earnings Goal in Q1 Despite Light Comps

Retailer maintains its long-term ambitions
Kroger Storefront
Photograph: Shutterstock

The Kroger Co., whose CEO acknowledged it had “work cut out for it” after a disappointing end of to its fiscal year, started its new year by slightly exceeding earnings estimates in the first quarter, even if comp-store growth lagged.

The Cincinnati-based grocery giant said sales for the period, which ended May 25, totaled $37.3 billion, a 2% increase when adjusted for divested assets. Nonfuel identical store sales of 1.5% were somewhat lower than anticipated due in part to what CEO Rodney McMullen called a “lull” following the Easter holiday, and exacerbated in part by a change in SNAP disbursements and weather conditions that may have cost sales around Mother’s Day.

“We know we can do better in [same-store] sales,” he said in a conference call, adding that in the early weeks of the current second quarter, same-store sales were trending toward the company’s expectations of 2% to 2.25% for the fiscal year.

However, McMullen cast the period as a successful one for the company and maintained it was on track to meet the financial goals of its ongoing Restock initiative. To that end, the company shared it was expecting to realize $100 million in operating profits from alternative revenue streams during the year, through personal finance, media, data and partnerships.

Earnings for the first quarter totaled $772 million and adjusted earnings per share of 73 cents exceeded consensus estimates by a penny. Gross margin of 22.2% of sales was down 40 basis points from the same period last year, mainly reflecting trends in gross-profit margins in pharmacy.

“We are building momentum in the second year of Restock Kroger, which is off to a solid start,” McMullen said in a statement. “The entire company is focused on redefining the grocery customer experience, improved upon by exciting partnerships that will create value. … We are confident in our ability to deliver on our plans for the year and our long-term vision to serve America through food inspiration and uplift.”

During the call with analysts, McMullen said comps were improving as the company begins to realize benefits of Restock-related store resets that were a drag on sales while they were proceeding a year ago. He said better execution and service in stores; better use of data targeting customers expectations; and doing a better job of “telling customers our story" would also help comps. Price investment won’t be as intense as it was a year ago, when Kroger devoted a portion of its tax benefits to accelerate planned pricing actions.

Kroger's digital sales in the period improved by 42%. The company realized about $5 billion in digital sales last year and is on track to achieve about $9 billion, McMullen said, noting that 93% of the customers who shop in a brick-and-mortar Kroger store can now also shop for pickup or delivery.

“By the end of this year, everyone in America will have the ability through our modalities to shop with Kroger whether they decide to come into a store, use our pickup or delivery services, or Ship. Our efforts are positioning Kroger to be the leading omnichannel retailer in the food industry,” he added.

Other quarterly highlights included a strong contribution from trendy new private label products like artisan jerky and Unicorn swirl ice cream under its Private Selections label that produced about $225 million in incremental quarterly sales.

 

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