Kroger caps off fiscal year with earnings miss

The Kroger Co. fell short of Wall Street’s earnings projections and turned in lackluster sales results for its 2018 fourth quarter and fiscal year.

Chairman and CEO Rodney McMullen (pictured), however, called 2018 an “investment year” for Kroger, as the supermarket giant saw digital sales and own-brand volume surge and made strides in strategic efforts to expand online grocery, alternative profit streams and cost savings from process improvements.

Kroger said Thursday that for the fourth quarter ended Feb. 2, GAAP net income totaled $259 million, or 32 cents per diluted share, compared with $854 million, or 96 cents per diluted share, a year earlier. The decrease reflects the impact of an extra week and a $922 million federal tax reform benefit in the prior-year period, as well as a mark-to-market gain on Ocado securities in the 2018 quarter, a specialty pharmacy goodwill impairment in the 2017 quarter and pension plan modifications in both quarters, among other items.

On an adjusted basis, net earnings were $390 million, or 48 cents per diluted share, for the 2018 fourth quarter versus $483 million, or 54 cents per diluted share, a year ago, Kroger said. The adjustment includes the exclusion of the added week in the 2017 quarter.

Analysts, on average, projected adjusted earnings per share of 52 cents, with estimates ranging from a low of 45 cents to a high of 61 cents, according to Refinitiv/Thomson Reuters.

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Cincinnati-based Kroger tallied fourth-quarter sales of $28.09 billion, down 9.5% from $31.03 billion in year-ago period. The decline reflects the impact of Kroger’s sale of its convenience store business and acquisition of Home Chef, as well as the extra week in the 2017 quarter. Excluding those items and fuel, total sales were up 1.6%, according to Kroger. Identical-store sales without fuel rose 1.9%.

Gross margin came in at 22% of sales for the fourth quarter. Kroger noted that, excluding fuel, the extra week and a LIFO credit, gross margin dropped 93 basis points year over year, stemming mainly from changes in mix and supply-chain and price investments. Incentive pay and staffing of digital initiatives accounted for a 39-basis-point rise in operating, general and administrative costs as a rate of sales (excluding fuel, the added week and other adjustments), the company reported.

Kroger said digital sales jumped 58% in fiscal 2018.

"Kroger solidly delivered on what we set out to do in 2018, which was an investment year that laid the groundwork for us to achieve our 2020 Restock Kroger targets including financials. We reached our FIFO operating profit goal and finished the year with sales and business momentum. We have a clear path to achieve $400 million in incremental FIFO operating profit growth and $6.5 billion in cumulative Restock cash flow by the end of 2020,” McMullen said in a statement.

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Digital sales jumped 58% in fiscal 2018, during which time Kroger expanded online grocery delivery and/or pickup service to 91% of households in its trade areas. The Our Brands private label program grew to 30.5% unit share in the fourth quarter, marking its “best year ever,” the company said. Kroger also topped $1 billion in savings via improved processes and surpassed what it called “ambitious” operating profit targets for its media and personal finance businesses. Partnerships with Microsoft, Nuro, Ocado and Walgreens and the Home Chef acquisition are expected to bring more customer value going forward, Kroger added.

"Kroger has the winning combination of local presence plus a digital ecosystem enhanced by strategic partnerships enabling us to offer our customers anything, anytime, anywhere,” according to McMullen. “We are transforming from grocer to growth company by deploying our assets to serve even more customers and create margin-rich alternative profit streams. We are well-positioned to deliver on our Restock Kroger vision to serve America through food inspiration and uplift."

For the full 2018 fiscal year, GAAP net income was $3.11 billion, or $3.76 per diluted share, compared with $1.91 billion, or $2.09 per diluted share, in fiscal 2017.

Including adjustments (pension plan, voluntary retirement, pharmacy goodwill impairment, income tax benefit, Ocado securities gain and convenience store divestiture) and excluding the 53rd week, net earnings totaled $1.75 billion, or $2.11 per diluted share, versus $1.78 billion, or $1.95 per diluted share, a year earlier.

Kroger noted that adjusted earnings per share (diluted) for the year came in slightly ahead of its expectations because of the “solid early execution” of Restock Kroger, including process changes that resulted in sustainable cost controls and higher-margin alternative profit streams.

Wall Street’s consensus forecast was for adjusted earnings per share (EPS) of $2.16, with projections running from a low of $2.08 to a high of $2.25, Refinitiv/Thomson Reuters reported.

At the top line, fiscal 2018 sales dipped 1.2% to $121.16 billion from $122.66 billion in 2017. Excluding fuel, the 53rd week, the convenience store divestiture and Home Chef purchase, sales were up 2% year over year, according to Kroger. Identical-store sales edged up 1.8%, compared with a 0.9% gain the year before.

Gross margin was 21.7% of sales in 2018 and declined 55 basis points from a year ago excluding fuel, the 53rd week, and a LIFO charge and credit, Kroger said.

On Thursday, Kroger issued fiscal 2019 EPS guidance of $2.15 to $2.25 per diluted share, with identical sales growth excluding fuel projected at 2% to 2.25%. Capital expenditures are estimated at $3 to $3.2 billion, excluding mergers, acquisitions and purchases of leased facilities.

Analysts’ average estimate, before Kroger released its 2019 guidance, was for adjusted EPS of $2.26, with projections ranging from $2.07 to $2.39.

Kroger finished fiscal 2018 with 2,764 retail food stores, compared with 2,800 a year ago. The stores operate under more than two dozen banners, including Kroger, Ralphs, Dillons, Smith’s, King Soopers, Fry’s, QFC, City Market, Owen’s, Jay C, Pay Less, Baker’s, Gerbes, Harris Teeter, Pick ‘n Save, Copps, Metro Market, Mariano’s, Fred Meyer, Food 4 Less and Foods Co. Formats include supermarkets, marketplace stores, multidepartment stores and price-impact warehouse stores.