Kroger Recaptures Momentum—and the Market

The Kroger Co. closed out a volatile fiscal year on a high note, with fourth-quarter financial results hitting or exceeding expectations and with officials confident they could continue to navigate what’s been a rocky path to reinvention.

For the quarter ending Feb. 1, the Cincinnati-based retailer reported sales of $28.9 billion, an increase of 2.3%, excluding fuel and adjusted for dispositions; same-store sales increase of 2%, excluding fuel; and adjusted earnings per share of 57 cents. Revenues and comps met Wall Street expectations, and the company’s guidance and earnings beat estimates by a penny. Gross margin as a percent of sales was 22.1%, an increase of 6 basis points and also ahead of analyst expectations.

Those results cycled a disappointing fourth-quarter performance a year ago that triggered a loss of confidence in the retailer’s ongoing Restock initiative, eventually leading to a reset of its financial ambitions, but essentially doubling down on its goals supported by a new “Fresh for Everyone” marketing campaign. Officials this week noted Kroger was delivering on those revised expectations behind renewed sales momentum and execution in stores, strength in private brand and digital sales, and progress in areas such as alternative revenue generation steams that were supporting profits—all goals of the Restock program. These are “widening and deepening competitive moats” for the company, CEO Rodney McMullen said in a presentation.

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Kroger’s stock—which had been beaten down for much of last year and more recently gaining momentum behind, among other things, new investment from Berkshire Hathaway—shot up by nearly 9% following the news, which sparked a new 52-week high.

“We felt really good about the progress and momentum during the year … in terms of identical sales. And if you look at the operational execution, I think [Chief Operating Officer] Mike [Donnelly] and the whole team really have done a great job on those areas; we’re really taking care of the customer," McMullen said. "We continue to aggressively invest in the seamless experience. And if you look at the alternative profit, it continues to come as we expected it would."

“So when you look at all those things together, the last two or three years,” McMullen continued, “we’ve been working hard on transforming our fundamental business model, and we feel like we’ve made significant progress on that. And we continue to invest in the future from a digital experience. So we’re excited about where we are. We’re even more excited about where we’re headed.”

Private Brand Strength, CPG Marketing

Company officials highlighted $23 billion in private brand sales this year, led by its core Kroger brand, which did $13.7 billion in sales. The retailer’s natural/organic Simple Truth label generated more than $2.5 billion, and its premium Private Selection exceeded $2 billion in sales for the first time. Simple Truth, McMullen said, was the country’s largest natural/organic brand. The company introduced 758 new private brand items last year, including trend-right selections in plant-based foods. Simple Truth Emerge, a new plant-based fresh meat brand, was introduced in January and already is the third-leading product in the category, McMullen noted.

At the same time, McMullen said Kroger is capturing more trade dollars from consumer brands who are partnering with Kroger on media and merchandising initiatives, a key alternative profit generator. McMullen cast this as a win-win partnership. “We tell the CPGs it doesn’t do us any good if you just move the trade dollars over. What we’re trying to do is provide something that you can’t get in the marketplace from a media standpoint. We’re getting great feedback from the CPGs. We have incredibly high retention rate. And many CPGs continue to expand the amount of money they spend with us,” he said. 

Digital Sales Rise on Fee Cut Promotion

Kroger’s temporary suspension of fees for online pickup orders announced late last year as a means to help launch its new brand—and respond to the accelerating speed and price reductions of competitors in the e-grocery space—helped digital sales to grow by 22% in the quarter, but officials were coy as to answering the “fee vs. free” question going forward.

Emphasizing its goal wasn’t to arrive at a price for a service but to lower its own costs and support a “seamless” experience for customers, McMullen said Kroger was anticipating the opening of its Monroeville, Ohio, e-commerce fulfillment center built in partnership with Ocado in about a year, with a second Ocado facility in Florida set to open soon after.

McMullen said those warehouses would serve as nodes in a “flexible” system that would also use stores and other regional facilities to support e-commerce at a lower cost. “You should not assume just large facilities,” he said. “We are designing a flexible distribution network, combining this aggregated demand and proximity of our stores, medium-sized facilities and large facilities. Our network will flex as demand matures, and the optionality will allow us to fulfill same-day or next-day delivery or pickup.”

In other matters, Chief Financial Officer Gary Millerchip, in response to a question, said it was “way too early” to determine the degree to which customer shopping patterns could change due to the coronavirus, although he acknowledged higher sales volumes in certain goods categories such as water, paper products and soups.

McMullen said the company has established a task force that has activated a pandemic preparedness plan, with a focus on our customers, associates and supply chain. “We generally believe that we have limited supply-chain exposure in China, as the majority of the products we source is domestic. We certainly feel for those in America and around the world who have been affected. The health and well-being of our associates, our customers and our communities is Kroger’s top priority. Always being there for our communities is part of our heritage, and especially in times of uncertainty," he said.