Mixed Q2 Results Sink Kroger Stock

Resets dampen comps, margins dip on price cuts
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Officials of Kroger Co. Thursday faced mild interrogation by analysts puzzled over the company’s outlook for the second half of its fiscal year, coming off a second quarter in which earnings were slightly better, but sales slightly lower, than the market had expected.

For the second quarter, which ended Aug. 18, the Cincinnati-based retailer said sales improved by 1% overall to $27.9 billion and that non-fuel identical store sales increased by 1.6%. Net earnings totaled $508 million or 62 cents per share; adjusted for an increase in the value of Ocado shares, EPS came in at 41 cents, or four cents above analyst estimates. However, analysts expected slightly higher overall revenues and comps.

Reconciling those trends with fiscal year guidance – which maintained an outlook of 2% to 2.5% for comp sales – occupied analysts in a conference call discussing the results and evidently showed in investor sentiment, with Kroger stock down 9% early Thursday.

CEO Rodney McMullen said shelf resets ongoing at some 600 stores negatively affected ID sales in the quarter but indicated Kroger’s sales will produce favorable results when the work is complete late this quarter .

The “space optimization” program is reallocating space in stores to make room for more items customers want and reduce out of stocks, but disruption during the process is negatively affecting baskets and traffic, McMullen said. Further, excluding the effect on the ongoing resets, Kroger would have comped by more than 2% in the quarter, he said.

Margins dipped by 36 basis points to 21.3% of sales, reflecting higher fuel costs, growth of the low-margin specialty pharmacy business and ongoing price investments, mainly around lower opening price points for private label items, CFO Mike Schlotman reported.

Officials touted “solid progress” for a number of initiatives behind its Restock program, including launches during the quarter of a direct-to-consumer business called Kroger Ship, expansion of Instacart service and a new deal to sell its Simple Truth brands to shoppers in China through  Alibaba's Tmall. Digital sales improved by more than 50% in the quarter.

“Every one of these announcements is both a culmination and a new beginning,” McMullen told analysts. “They are the culmination of long, focused, strategic work by our teams, and they are the new beginning of exciting innovations and growth platforms for the future.”



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