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Kroger Touts New Revenue Streams in Q3 Results

Sales, comps and earnings were in expected ranges while investments cut into margins, officials said
Kroger storefront
Photograph courtesy of Kroger

Kroger’s sales and earnings both came in within expected ranges during its fiscal third quarter, although profit margins took at a hit as investments behind its Restock transformation continued.

In reviewing the results, the Cincinnati-based retailer highlighted promising fruits of that transformation, noting that digital sales improved by more than 60% in the quarter. Alternative revenue streams, such as Precision Marketing—which sells targeted advertising on Kroger digital properties—improved revenue by 150%, while its Personal Finance credit card and gift card businesses posted record profits, officials said.

These businesses—built behind Kroger’s store traffic and bolstered through its analytics arm—are helping to transform Kroger from a supermarket retailer to a growth company, CEO Rodney McMullen told analysts during a conference call discussing results. “Successful long-term businesses constantly explore new directions and adjacencies to grow their top line,” he said.

McMullen said Kroger is on track to ramp up profitability of these businesses from a compound annual rate of 16% over the past four years to 28% growth per year in 2019 and 2020.

Digital sales grew behind expansion of click-and-collect and delivery capability and its Kroger Ship replenishment business, which is now serving all areas in which Kroger operates stores.

“We’re aggressively investing to build digital platforms because they give our customers the ability to have anything, anytime, anywhere from Kroger, and because they are a catalyst to grow our business and build margins in the future,” McMullen said.

Overall, Kroger’s sales dipped 0.3% to $27.7 billion and nonfuel identical store sales improved by 1.6% in the quarter, which ended Nov. 10. The comp figure reflected slight gains in trips and ticket sizes, with categories such as deli, natural foods and seafood seeing strong increases. “The economy still feels good for the consumer,” McMullen said. “They are buying things like wine. And anything that makes they’re lives easier, they are aggressively buying.”

Operating net earnings were $394 million, or 48 cents per diluted share, which was above Wall Street consensus of 44 cents. Sales and comps were largely in line with expectations of Kroger and analysts. Kroger adjusted its fiscal year outlook to account for its investment in shares of Ocado as part of their exclusive partnership to build robotic e-commerce facilities in the U.S.

Gross margin as a percent of sales was down by 90 basis points from last year’s third quarter to 21.6% of sales, due mainly to price investments and rising freight costs, officials said.

 

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