Kroger ‘generated strong momentum’ in 2020 fiscal year, CEO Rodney McMullen says

The Kroger Co. bolstered its market share in fiscal 2020 with double-digit identical-sales gains and triple-digit e-commerce sales growth in the fourth quarter and full year, besting Wall Street’s earnings estimates for both periods.

For the quarter ended Jan. 30, sales came in at $30.73 billion, up 6.4% from $28.89 billion a year earlier, Kroger said Thursday. Excluding fuel and dispositions, sales rose 10.7%. Identical sales climbed 10.6% in the quarter, backing out fuel and adjustment items, the Cincinnati-based supermarket giant reported.

During fiscal 2020, Kroger added $10 billion to its top line. Sales totaled $132.5 billion, rising 8.4% from $122.29 billion in 2019. That growth was 14.2% excluding fuel sales and dispositions, the company said. Identical sales excluding gas and adjustments advanced 14.1% year over year.

Kroger customers continued to consolidate shopping trips and spend more per transaction during the year.

The double-digit ID sales growth in the fourth quarter and full year compares with 2% gains for both periods in fiscal 2019.

“2020 was the final year of our three-year transformational plan, Restock Kroger, during which we made strategic investments and changes to our business model to better serve our customers. We focused on widening and deepening our competitive moats, which includes Seamless, Personalization, Fresh and Our Brands. As a result, we generated strong momentum and successfully repositioned our company to serve our customers in new and exciting ways,” Kroger Chairman and CEO Rodney McMullen told analysts in a conference call on Thursday.

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“Kroger delivered strong results during our fourth quarter and full-year 2020. We continue to gain market share, and full-year results were above the guidance we shared with you last quarter,” McMullen said. “Identical sales without fuel were 14.1% for the year, as customers continued to consolidate trips and spend more per transaction. We grew digital sales by triple digits in 2020, enabled by our team’s ability to pivot quickly and effectively in the first stage of the pandemic to ensure that we were meeting our customers’ demand for safe, low-touch and touchless shopping modalities. Our strong performance in digital is also a testament to the proactive investments we made over the last several years in our network, which positioned Kroger to respond with agility during this crisis and critical time.”

E-commerce on the upswing

Digital sales jumped by 118% in the 2020 fourth quarter and by 116% for the full year, with online grocery delivery service providing a notable boost. As of the year’s end, Kroger had 2,223 pickup sites and 2,472 delivery locations, covering 98% of the households in its market areas.

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“Pickup and delivery continued to grow during the quarter, and we are seeing more and more new customers engaging in our Seamless ecosystem. Our overall digital sales grew 118%, including delivery sales growth of 249% during the quarter,” according to McMullen. “When customers engage in both our in-store and online modalities, we see a 98% retention rate within our ecosystem, highlighting how sticky our customer engagement is. During the quarter, we also saw further improvement in digital profitability, as we continued to improve cost efficiency, sales mix and retail media.”

Kroger also reached a milestone in its omnichannel strategy: the first online order processed through an Ocado-powered customer fulfillment center (CFC). The first of the automated CFCs, a 335,000-square-foot facility in Monroe, Ohio, is slated to become operational in early 2021. So far, Kroger has announced locations for 10 CFCs as part of the partnership unveiled with United Kingdom-based Ocado in May 2018, which calls for 20 of the facilities to be opened in the United States.

“Yesterday, we completed the inaugural order through our first Ocado ‘shed’ in Ohio. This marks the soft opening of the facility, and we look forward to our grand opening in early April,” McMullen said in the call. “We continue to be excited about the elevated experience that this will bring to our customers in the tristate area and across the country as we continue to open additional facilities.”

Rapid growth in digital business has enabled Kroger to better target shoppers via personalized interactions, McMullen noted. During 2020, the retailer saw online customer interactions surge 30% to more than 1.3 billion across its digital properties. Annually, 60 million households shop with Kroger either in-store or digitally.

The first Ocado automated fulfillment center processed its first online grocery order on Wednesday under a soft opening.

“Our significant reach allows us to meaningfully personalize the customer experience,” McMullen explained. “In 2020, we presented nearly 11 billion personalized recommendations per week — that’s right, 11 billion recommendations personalized each week. When you look at that over the year, that’s more than half a trillion personalized offers for customers during 2020.”

Fresh, Our Brands spur food-at-home market share

Kroger’s efforts to boost its share of food-at-home spending, which has soared amid the COVID-19 pandemic, also are being fueled by a strong performance in fresh foods and private label, McMullen reported.

“As more customers are spending more time at home, our produce and floral departments outperformed total company. Customers are focused on eating healthier, as evidenced by the increased engagement in our Simple Truth [natural and organic] brands, which grew 18% during the quarter,” he said. “We also saw customers trading up and buying higher-quality premium products like luxury wine and Murray’s cheese, which also outperformed the total company. As customers look for food inspiration, we continue to develop innovative products to meet their needs, including ready-to-heat and ready-to-eat foods. We have seen significant growth in deli, bakery and meal solution, and Home Chef finished the year with record sales, capturing additional share of stomach from restaurants and grocery retailers.”

'Our produce and floral departments outperformed total company,' Kroger CEO Rodney McMullen said.

Our Brands, Kroger’s private-label portfolio, topped $26.2 billion in sales with 13.6% growth for 2020, marking its “best year ever,” according to McMullen. The five-year-old Simple Truth brand surpassed $1 billion in sales.

“We saw a 20% growth in our premium culinary brand, Private Selection, as more people continue cooking at home and elevating their meals,” he said. “Our Simple Truth plant-based platform launched 53 new items in 2020. One of the key launches for the year was Simple Truth oat milk ice cream. This line has brought new customers to the category, and sales are continuing to outpace projections. Over 1.4 million new households have purchased from the Simple Truth plant-based platform this year, as we hold high standards for the taste and experience of our plant-based products, just like the rest of Our Brands portfolio. Our trial rate has continued to grow, and our repeat rate has continued to strengthen.”

Other highlights for fiscal 2020 included cost savings of more than $1 billion for the third straight year and $150 million in operating profit from alternative businesses, including retail media, financial services, CPG data analytics and partnerships.

“Alternative profit continues to be a significant growth driver in our model and contributed $150 million of incremental operating profit, on top of the $100 million of incremental profit in 2019,” Chief Financial Officer Gary Millerchip said in the analyst call. “Retail media fueled this acceleration, and we continue to see significant opportunity for additional growth in the future. Importantly, this progress with cost savings and growth of retail media also allowed us to improve the profitability of our digital model in 2020, as we reduced the cost to fulfill a digital order and grew media revenue from digital sales.”

Q4, full-year adjusted EPS beats the Street

At the bottom line, Kroger reported a fiscal 2020 fourth-quarter net loss (attributable to the company) of $77 million, or 10 cents per share, compared with net earnings of $327 million, or 40 cents per diluted share, a year ago. For the full year, net income (attributable to Kroger) totaled $2.56 billion, or $3.27 per diluted share, versus $1.66 billion, or $2.04 per diluted share, in fiscal 2019.

Kroger noted that 2020 fourth-quarter and fiscal year earnings results reflect a $989 million pretax charge related to United Food & Commercial Workers union pension commitments and other adjustment items, which negatively impacted quarterly and full-year earnings per share (EPS) by 91 cents and 20 cents, respectively. On an adjusted basis, Kroger posted net income of $630 million, or 81 cents per diluted, for the fourth quarter and $2.74 billion, or $3.47 for fiscal 2020, compared with 2019 adjusted results of $462 million (57 cents diluted EPS) in the fourth quarter and $1.79 billion ($2.19 diluted EPS) for the full year.

Analysts, on average, had forecast Kroger’s fiscal 2020 fourth-quarter adjusted EPS at 69 cents, with estimates running from 62 cents to 73 cents, according to Refinitiv. The full-year consensus projection was for adjusted EPS of $3.36, with a range of $3.31 to $3.40.

For fiscal 2021, Kroger projects adjusted EPS of $2.75 to $2.95 and a 3% to 5% decline in identical sales (excluding fuel), which will cycle big gains recorded in 2020 from surging consumer demand triggered by the coronavirus crisis. Analysts forecast 2021 adjusted EPS at $2.69 on average, with estimates ranging from $2.48 to $2.85, according to Refinitiv.

“Looking towards 2021, we are providing specific guidance to help you better understand how we see the business today. Due to the uncertainty surrounding trends in the food and home market as COVID vaccines roll out, we are sharing a wider range than we typically would, and we will be transparent in sharing more as the year unfolds,” Millerchip told analysts in the call. “Our insight suggests there are a number of consumer changes that have occurred during the pandemic that will prove to be more structural and lasting, which combined with our strong execution and flexible financial model, give us confidence we will be able to manage through the current unknowns.”

To date, Kroger Health has administered more than 665,000 COVID-19 vaccines, including more than 38,000 for associates. “Because vaccine availability and eligibility continues to vary by jurisdiction,” McMullen said, “we are advocating at the local, state and federal level and calling for our associates and frontline grocery workers broadly to be included in the earliest vaccine phase possible.”

CFRA analyst Arun Sundaram noted Kroger's above-expectations performance for the quarter and fiscal year but issued a cautious outlook for 2021. "While today's results were encouraging, we think there is downside risk to guidance, especially given several labor union contract negotiations are set to take place this year and the Democrats are pushing for a $15 starting wage," Sundaram wrote in a research note on Thursday. "Digital profitability, sales deleverage, negative sales mix and lingering COVID-19 costs are also expected to be headwinds."

*Editor's Note: Article updated with analyst comment.