Kroger Beats Sales, Profits Expectation in Q3

The Kroger Co.’s third-quarter sales and earnings exceeded expectations, with officials framing the performance as a promising start for the newly launched Restock initiative.

The Cincinnati-based grocer’s stock price rose 6% Thursday following the report, which also included a favorable update on possible buyer interest in Kroger’s convenience store division and relatively brighter early outlook for the fourth quarter and 2018 fiscal year. Kroger’s sales gains, while beating expectations, were not as robust as some competitors reporting over a similar period, including Wal-Mart Stores and Costco.

For the quarter ended Nov. 4, total sales increased 4.5% to $27.7 billion. Same-store sales, excluding fuel, increased by 1.1%, and net income of $397 million was up by 1.4% from last year. Earnings per share of 44 cents exceeded Wall Street expectation by 4 cents, while the comp figure was ahead of company guidance calling for 0.5% to 1% comp growth.

Kroger said its fourth-quarter comp figure would also likely exceed 1.1%.

Gross margin was 22.4% of sales for the third quarter, a 30-basis point improvement helped in part by higher fuel margins and progress in lowering its costs of goods. Kroger continued making price investments in the quarter, officials said, but lower costs and a better sales mix—including what CFO Mike Schlotman termed “terrific” meat, produce and natural/organic sales—offset the impact of lower shelf prices.

Related:Kroger and Harris Teeter to Merge

CEO Rodney McMullen in a conference call said the results gave indication that the “Restock” plan—a three-year, $9 billion initiative launched in October designed to “redefine how America eats,” behind investments in store experience, service and technology—was already helping to generate improvements.

McMullen highlighted efforts toward a “seamless” shopping experience where customers can engage with Kroger in the manner they prefer, mainly by providing growing options for its ClickList click-and-collect option or delivery along with store trips, noting that customers who shop Kroger in a variety of ways tend spend more per week than those who don’t.

“Our hypothesis has always been that our customers want to have options for how they engage with us. This hypothesis shaped our strategy, and we’ve been executing that strategy by accelerating Kroger’s digital and ecommerce efforts for the last several years,” McMullen said. “We know that our customers have already decided they love ClickList, which is why we continue to rapidly expand that offering. By year’s end, we’ll be serving customers at more than 1,000 click-and-collect locations. Our third-quarter digital revenue growth was 109%, driven by ClickList.”

Although ClickList helped comps during the quarter, it remains a money-loser for the company. Schlotman told analysts he expects it would be three to five years before the company’s profits would be indifferent to the seamless experience it is currently expanding for them.

In other matters, Schlotman said “interest was high” in Kroger’s $4 billion convenience store division, which the company revealed a month ago that it may sell with an eye toward helping to fund its Restock initiatives.