Kroger beats the Street in Q2 despite identical, digital sales declines

Lapping last year’s pandemic-driven gains, The Kroger Co. saw sales excluding fuel dip in its fiscal 2021 second quarter but topped Wall Street’s earnings-per-share forecast.

For the quarter ended Aug. 14, sales totaled $31.68 billion, up 3.9% from $30.49 billion a year earlier, when Cincinnati-based Kroger said Friday. Excluding gasoline, which has seen higher pricing in recent months, sales declined 0.4% year over year. Sales in the fiscal 2020 quarter rose 8.2% overall and were up 13.9% without fuel, which had deflated pricing at the time.

First-half 2021 sales came in at $72.98 billion, up 1.3% from $72.04 billion in the prior-year period.

Identical sales excluding fuel in the 2021 second quarter fell 0.6% from a year ago, when Kroger notched a 14.6% gain. However, the company noted that identical sales sans fuel were up 14% on a two-year stack.

Digital sales declined 13% in the 2021 quarter but remain elevated, up 114% on a two-year basis, including a 127% jump in the 2020 quarter, Kroger said.

“Our strategic focus on leading with fresh and accelerating with digital continues to build momentum across our businesses. As we’ve operated through the pandemic, we’ve recognized the structural shifts in our customer’s eating and cooking habits. Customers are responding favorably to our value proposition and are enjoying the convenience of our seamless offerings,” Chairman and CEO Rodney McMullen told analysts in a conference call on Friday.

Related:Kroger rolls out the ‘Fresh Cart’ as part of logo

“Early in the quarter, customers visited stores more frequently and many shifted from online to in-store. This highlights the relevance and convenience of our easily accessible footprint,” he explained. “Toward the end of the quarter, as COVID-19 cases increased in many geographies, customers began shifting back to our digital solutions. This further demonstrates the strength of our seamless ecosystem. Customers can choose how they want to shop. Our job is to be available in every channel so the customer does not have to compromise.”

'Regardless of how they choose to shop, customers are eating more food at home,' Kroger Chairman and CEO Rodney McMullen said.

The food-at-home surge triggered by COVID-19 has continued, according to McMullen, even as more consumers have begun dining out since the emergence of vaccines.

“Regardless of how they choose to shop, customers are eating more food at home because it’s more affordable, convenient and healthier than other options,” he said. “While some food-at-home trends may be transitory, our research suggests those I highlighted are structural and Kroger is uniquely positioned to address them. Through our assortment of fresh products, world-class digital platforms and innovative meal solutions, we will continue to elevate our position as a food authority so that when customers think food, they think Kroger.”

Related:Kroger to serve up restaurant meals on demand in ghost kitchen partnership

During the second quarter, Kroger recorded positive identical sales in produce and floral, deli and bakery, even as the company cycled elevated sales a year ago, McMullen noted, adding that private label also is bolstering Kroger’s food-at-home positioning. The company’s “Our Brands” portfolio added 142 new products during the quarter, including big-pack items and more Simple Truth Plant Based offerings.

“Our research shows how much our customers love ‘Our Brands.’ Sales for both Simple Truth and Private Selection brands were strong, as food-at-home trends remain sticky,” he said. “We continue to innovate within fresh. For example, our expanded partnerships with ghost kitchens allow us to offer customers freshly prepared, on-demand restaurant food. This is especially relevant at a time when many customers are looking for inspiration, and 70% of our customers say convenience is important when cooking.”

Kroger tallied positive identical sales in produce and floral, deli and bakery in Q2 on top of big gains a year ago.

Chief Financial Officer Gary Millerchip called Kroger’s digital platform “a key strength in our model” and pointed out that the supermarket giant has achieved triple-digit e-commerce sales growth since 2019.

“We remain on track with our plans to double our digital business by 2023 and would expect continued investments in the customer experience, scaling of new fulfillment centers and several new innovations — which we will announce throughout the year — to drive future growth,” Millerchip said in the call. “As shared last quarter, we would not expect future digital growth to be linear, especially as we cycle COVID in 2021. During the quarter, we also made further progress in improving digital profitability as we achieved a record low for the time taken to pick a digital order in-store and continue to see growth in the media revenue generated on digital transactions.”

On the e-commerce front, Kroger has doubled its household penetration since 2019, boosting the number of brick-and-mortar customers engaging with its digital solutions, McMullen reported. That includes more than 340,000 new digital customers in the second quarter. The company finished the second quarter with 2,239 pickup sites and 2,546 delivery locations, covering 98% of the households in its market area.

“We continue to expand capacity across our footprint, and we reduced wait times for Kroger Pickup,” he said. “As we look ahead, our seamless ecosystem will remain a competitive advantage as we offer what customers need and want in a way that fits into their life, whether it’s shopping in our stores, picking it up at our stores, or getting it delivered or shipped directly to their homes.”

In 2022 and 2023, Kroger expects to open six more customer fulfillment centers to fill online grocery orders, adding to the two now open in Ohio (above) and Florida.

Kroger has opened its first two Ocado automated customer fulfillment centers (CFCs) in Monroe, Ohio, and Groveland, Fla. The Florida CFC enables the retailer, through its Kroger Delivery service, to reach consumers via e-commerce in a market where it has no brick-and-mortar stores. So far,Kroger has announced 10 CFCs of up to 20 envisioned through its partnership with United Kingdom-based Ocado, and McMullen said Kroger is on track to open six CFCs — aka “sheds” — in 2022 and 2023.

“We continue to enhance our seamless ecosystem,” he said. “We currently have two customer fulfillment centers open, which are expanding our capabilities in Ohio and allowing us to expand into new geographies within Florida. We are happy with the performance thus far and are energized by the volume and growth in both sheds. In Ohio, our focus has been on involving the customer proposition to maximize opportunities alongside our existing digital solutions. In Florida, we launched Delivery Savings Pass, offering customers unlimited deliveries for just $79 per year. We continue to see incredible Net Promoter Scores, and our customers tell us they love our friendly, professionally trained drivers and their refrigerated delivery vans that bring the freshest food directly to their doorsteps.”

At the bottom line, Kroger reported 2021 second-quarter net income of $467 million, or 61 cents per diluted share, compared with $819 million, or $1.03 per diluted share, a year earlier. Excluding $143 million in pension plan withdrawal, investment loss, business transformation and other costs, adjusted net earnings came in at $610 million, or 80 cents per diluted share, versus $581 million, or 73 cents per diluted share, in the prior-year period.

Analysts, on average, had projected adjusted earnings per share of 64 cents, with estimates ranging from 55 cents to 75, according to Refinitiv.

Looking ahead, Kroger lifted its EPS and identical-sales projection for fiscal 2021. The company now estimates adjusted EPS of $3.25 to $3.35, up from its previous estimate of $2.95 to $3.10. Identical sales are now expected to decline 1% to 1.5% ( 12.6% to 13.1% on a two-year stack), compared with the earlier outlook of a 2.5% to 4% decrease ( 10.1% to 11.6% on a two-year stack).

“Driven by momentum in our results and sustained trends in food-at-home, we are raising our full-year guidance. We have also narrowed the range of our guidance as we are further into the year and the trends in our business and the broader food-at-home market become clearer,” Millerchip said in the call.

Analysts’ consensus forecast is for 2021 adjusted EPS of $3.06, with projections running from $2.27 to $3.25, according to Refinitiv.