Disinflation impacts Kroger’s 3rd quarter sales

The Kroger Co. saw both net and identical sales dip in its fiscal 2023 third quarter, in part due to the cycling of inflation-lifted results a year ago, while adjusted earnings per share topped Wall Street’s forecast.

For the quarter ended Nov. 4, net sales totaled $33.96 billion, down 0.7% from $34.2 billion a year earlier, Kroger said Thursday. That came on top of a 7.3% increase in the fiscal 2022 third quarter. Excluding fuel, sales declined 0.5% year over year, the Cincinnati-based supermarket giant reported.

Identical sales without fuel ticked down 0.6% for Q3 atop a 6.9% gain from a year ago, translating into 6.3% growth on a two-year stack. Backing out lost pharmacy sales from the terminated contract with pharmacy benefit manager Express Scripts, ID sales without fuel would have edged up 1% in the quarter, according to Kroger.

“Kroger’s third-quarter results highlight the strength and diversity of our business model in a challenged operating environment, as strong fuel performance and growth in our alternative profit businesses supported continued adjusted net earnings per diluted share growth,” Chairman and CEO Rodney McMullen told analysts in a conference call on Thursday. (Call transcript provided by AlphaSense.) “As consumer spending tightens, we are focused on providing customers with exceptional value by maintaining our long-term commitment to lower-prices, personalized promotions and rewards. We are growing households and increasing loyalty, positioning Kroger for sustainable future growth.”

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Lower inflation reviving unit sales

Kroger’s Q3 sales performance reflects decreased food price inflation versus a year ago. Annually, the food-at-home Consumer Price Index was up 2.1% in October, continuing receding levels during the quarter from 2.4% in September and 3% in August. Those figures compare to food-at-home inflation of 12.4% in October, 13% in September and 13.5% in August of 2022.

“Our overall sales continued to be affected by industrywide disinflation. Inflation ending quarter three in the low single digits, approximately 270 basis points lower than the second quarter. Towards the end of the quarter, we saw inflation decline at a slower pace, but we would expect this trend to continue in the fourth quarter with inflation remaining positive at the year-end,” Chief Financial Officer Gary Millerchip said in the call.

“Encouragingly, units have shown signs of improvement as inflation has decelerated, and we have sequentially improved units for four straight quarters,” he noted. “However, unit growth rates have lagged the rate of inflation decline, had it not improved at the pace we would have expected. As a team, we are laser-focused on returning to unit growth and expect improvement in volumes to continue for the balance of the year.”

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Also during the third quarter, Kroger expanded its End-to-End Fresh Produce initiative to 2.053 certified stores, up from 1,940 stores as of Q2, 1,738 stores as of Q1 and from 1,252 stores as of Q3 2022. The retailer has noted that the certified stores drive higher ID sales excluding fuel. Through the program, Kroger leverages data, science and partner collaboration to sharpen produce distribution, reduce the time from farm to table and ensure supply-chain stakeholders are working together to lower the age of product, minimize dwell time in the distribution network and maintain the cold chain.

Digital sales continue to surge

Kroger’s e-commerce sales climbed 11% in the third quarter, building on a 10% uptick in the 2022 quarter and continuing strong gains of 12% in Q2 and 15% in Q1 of 2023.

“Our digital business delivered a strong third quarter, with double-digit growth in both our pickup and delivery businesses,” McMullen said. “Multiple tailwinds are driving our sales momentum, including growth in both households and visits. Our new two-hour pickup service available in more than one-third of our stores also contributed to our success in the quarter.”

Related:Kroger caters to Hispanic food shoppers with Mercado brand

Delivery sales swelled by 20%—atop a 34% year-ago gain—and were driven in part by Kroger Boost online memberships and Kroger Delivery service from Ocado-automated fulfillment centers, the retailer said.

“Digital offers have increased compared to last year, and our personalization capabilities have resulted in even more significant increase in redemptions, driving loyalty and increasing digitally engaged households this quarter by 13%,” McMullen explained. “Digitally engaged households are incredibly valuable to our model, as they are more loyal, spend nearly three times more with us and accelerate growth in our alternative profit businesses.”

Bottom-line improvement, adjusted outlook

After a Q2 decrease in GAAP net income, Kroger reported 2023 third-quarter net earnings (attributable to the company) of $646 million, or 88 cents per diluted share, compared with $398 million, or 55 cents per diluted share, a year ago.

Excluding $73 million in merger-related costs and a $21 million investment gain, adjusted net earnings were $698 million, or 95 cents per diluted share, versus $643 million, or 88 cents per diluted share, in the prior-year period.

Analysts, on average, had projected adjusted EPS of 91 cents, with estimates ranging from 87 cents to $1.00, according to Refinitiv.

“We achieved adjusted earnings-per-share growth of 8% this quarter, while also providing greater value for our customers, higher wages for our associates and investing in strategic initiatives that will support future growth,” said Millerchip. “This was made possible by our teams delivering strong performances across our margin-expansion initiatives, fuel, alternative-profit businesses, and health and wellness.
Our year-to-date results keep us on track to achieve adjusted earnings-per-share growth in 2023, building on record results over the prior three years.”

Kroger narrowed its fiscal 2023 earnings guidance and trimmed its sales outlook. Adjusted EPS is now forecast at $4.50 to $4.60—including an estimated 15-cent benefit from the 53rd fiscal—compared with $4.45 to $4.60 previously. ID sales growth without fuel is pegged sales at 0.6% to 1%, with underlying growth of 2.1% to 2.5% after adjusting for the Express Scripts impact, versus the previous guidance of 2.5% to 3.5% excluding fuel and the effect of Express Scripts.

Before Kroger’s Q3 report, Wall Street’s consensus estimate was for fiscal 2023 adjusted EPS of $4.52, with projections running from $4.39 to $4.65, according to Refinitiv.

“Volume or unit sales were slightly negative but have improved for four consecutive quarters, a trend that we expect will continue in fiscal year 2025,” CFRA Research analyst Arun Sundaram wrote in a research note on Thursday. “However, the downside is that we’ll likely see even more disinflation in the coming quarters and potentially even food deflation at some point next year. Another headwind will likely be lower fuel margins, as fuel margins have been unusually strong throughout fiscal year 2024. Kroger’s digital business continues to see strong growth (up 11% year over year, five consecutive quarters of double-digit growth), which is fueling its advertising business.”