Kroger Comps Rise, Margins Dip in Q3

The Kroger Co.’s sales results for its fiscal third quarter—which included comps that beat expectations and overall revenues that did not—indicated competition has continued to increase amid an industrywide pandemic sales windfall.

The Cincinnati-based supermarket giant said sales for the period ending Nov. 11 totaled $29.7 billion—just short of analyst estimates of $30.3 billion for the period. Non-fuel same-store sales were up by 10.9% vs. a 9.3% estimate. Gross margins as a percent of sales dipped by 2 basis points to 23% of sales, which the retailer said was primarily driven by price investments and mix changes, offset by sourcing efficiencies, sales leverage and growth in alternative profit streams.

Digital sales grew by 108% in the quarter as Kroger expanded pickup to 2,213 locations and is providing delivery from 2,468 locations, now covering more than 98% of Kroger households.

Kroger’s gross margin rate improved during its first and second quarters this year, mainly behind benefits of soaring sales like shrink reduction.

Net earnings for the period of $631 million increased by 139.9%, and adjusted earnings per share of 71 cents beat analyst expectation of 66 cents.

“We delivered strong results in the third quarter. Customers are at the center of everything we do and sales remain elevated as we continue to enhance our competitive moats: fresh, our brands, data and personalization, and seamless,” CEO Rodney McMullen said in a release. “We are executing against our strategy even during the pandemic and continue to grow market share.

“The strong underlying momentum in our core supermarket business and acceleration in the growth of our alternative profit business demonstrates we are successfully transforming our business model to deliver consistently strong and attractive total shareholder return in 2020 and beyond.”

Kroger said it anticipated demand for food-at-home would remain strong in the current fourth quarter, prompting the company to raise fiscal year guidance expectations. It now expects total identical sales without fuel to be about 14% and adjusted EPS growth of 50% to 53%, a range of $3.30 to 3.35 per share.

While updating second quarter results in September, Kroger forecast comps of “more than 13%” and $3.20 to $3.30 per share for the fiscal year.

“Looking toward 2021, we believe that our performance will be stronger than we would have expected prior to the pandemic when viewed as a two-year stacked result for identical sales without fuel growth and as a compounded growth rate over 2020 and 2021 for adjusted earnings per share growth,” Chief Financial Officer Gary Millerchip said.

Kroger will address analyst questions later this morning.

Kroger said it has invested nearly $1.3 billion to reward associates and to protect them and customers through dozens of safety measures since March.

Kroger said it has partnered with the federal government and dozens of state health departments in preparation of distribution of a COVID-19 vaccine. During the quarter, it launched FDA-authorized rapid antibody tests across its pharmacies and The Little Clinic locations. The company added that its Kroger Health division has conducted more than 250,000 COVID-19 tests since April.

During the quarter, Kroger reached agreement with 20 local unions of the United Food and Commercial Workers on a revised retirement benefit plan to replace an underfunded multi-employer plan. Unions ratified that agreement in the current fourth quarter.

Kroger said it also “proactively” secured an additional 5,000 truckloads of inventory and increased distribution capacity reserves by 20% within supply chain to minimize potential supply disruptions during the quarter.

The company said it launched the largest number of new private label products ever, including 50 plant-based items under its Simple Truth brand.