Officials from The Kroger Co. withdrew incremental operating profit expectations underpinning its ongoing Restock initiative, acknowledging that its sales growth had been slower than anticipated and that profits have been adversely affected by industrywide pharmacy pressures.
Kroger announced Restock nearly two years ago, saying the $900 million, three-year plan to transform the customer experience in stores, reduce costs and develop new capabilities and alternative revenue streams would result in incremental operating profits of $400 million by 2020. In an earnings call this week, CEO Rodney McMullen withdrew that expectation and said officials would address in further detail where it missed the mark in an investor conference scheduled for Nov. 5 in New York.
The withdrawal of the Restock profit target came as little surprise to analysts, who have grown increasingly skeptical given Kroger’s performance over the first half of three-year period. Company officials this week emphasized that operating profits in 2020 would be higher than its confirmed $2.9 billion to $3 billion 2019 guidance range but left more specific detail for the November conference.
“I’ve said it many times before. Transformation is incredibly difficult, and that’s the journey we are on with Restock Kroger,” McMullen said in a conference call. “As we reflect on this journey, we want to be transparent about what went according to plan and what didn't go as anticipated. Some things are coming to fruition as we expected, but just later than we thought, such as identical sales momentum. Some things were unanticipated, such as the lower gross-profit margin in the pharmacy business that the entire industry is experiencing.”
While expectations were tempered for the longer term, officials highlighted that nonfuel comparable-store sales in the second quarter of 2.2% were the company’s highest since Restock began and for the first time within range of its fiscal-year goals. For the period, which ended Aug. 17, Kroger posted sales of $28.2 billion. Operating profits were $559 million. Gross margins dipped by 29 basis points—primarily due to lower profits in pharmacy—to 21.9% of sales in the quarter, but gross margins were stable in the supermarket business.
Adjusted earnings per share of 44 cents exceeded analyst expectations, although total revenues came in slightly below consensus.
Kroger said digital sales grew by 31% in the quarter, and private brand sales improved by 3.1%.