Kroger unveils Albertsons merger divestiture deal with C&S in Q2 report

The Kroger Co. posted decreased net sales and an identical sales uptick for its fiscal 2023 second quarter, with the bottom line taking a hit from a $1.4 billion national settlement for overprescription of opioid painkillers.

Also on Friday, Kroger and Albertsons Cos. unveiled a $1.9 billion deal to sell 413 stores, eight distribution centers, two offices and five private brands to C&S Wholesale Grocers. The asset sale, covering stores and facilities in 17 states and the District of Columbia, reflects divestitures to help Kroger and Albertsons gain regulatory approval for their planned $24.6 billion merger.

For the quarter ended Aug. 12, Kroger reported net sales totaled $33.85 billion, down 2.3% from $34.64 billion a year earlier. That came atop a 9.3% increase in the fiscal 2022 quarter. Excluding gasoline, sales edged up 1.1% year over year, the Cincinnati-based food and drug retailer said.

Identical sales without fuel inched up 1% in Q2 and built on a 5.8% gain from a year ago, for 6.8% growth on a two-year stack. Excluding lost pharmacy sales from the contract termination with pharmacy benefit manager Express Scripts, ID sales without fuel would have risen 2.6% in the quarter, according to Kroger.

Among ID sales highlights, Kroger said digital sales climbed 12% year over year, above an 8% increase in the 2022 quarter. The company noted that delivery sales jumped 24%, lifted by delivery solutions including the Kroger Boost subscription program and its Ocado-automated customer fulfillment centers. Digitally engaged households also rose by about 1.2 million from a year ago, and the retailer saw a 29% increase in digital coupon downloads. And on the operations side, Kroger said strong execution in pickup improved cost-to-serve and lifted fill rates by 500 basis points.

Related:Would C&S provide a Kroger-Albertsons merger solution?

Kroger’s Q2 sales reflect lower levels of food price inflation. Month to month, the food-at-home Consumer Price Index edged up 0.3% in July after no gain in June and a 0.1% uptick in May, which followed two months of decreases, according to the U.S. Bureau of Labor Statistics. Annually, the food-at-home index was up 3.6% in July, continuing decreases thus far in 2023 from 4.7% in June, 5.8% in May, 7.1% in April, 8.4% in March, 10.2% in February and 11.3% in January.

In the 2023 first quarter, Kroger tallied year-over-year gains of 1.3% in net sales (3.5% excluding fuel) and 3.5% in identical sales excluding fuel. The company’s first-half 2023 sales came in at $79.01 billion, dipping 0.3% from $79.24 billion in the prior-year period. ID sales for the half were up 2.4% versus a 4.8% year-ago gain.

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“The strength and diversity of Kroger’s business model is delivering consistent results in what remains a challenged environment,” Kroger Chairman and CEO Rodney McMullen said in a statement. “By investing in price and providing more personalized offers, we are helping customers stretch their budgets and manage the ongoing effects of reduced government benefits, inflation and higher interest rates. Kroger is funding these investments by collaborating with vendors to deliver exceptional value, managing costs and growing alternative profit businesses.”

During the second quarter, Kroger expanded its End-to-End Fresh Produce initiative to 1,940 certified stores, up from 1,738 stores as of Q1 and from 1,219 stores as of Q2 2022. The retailer noted that the certified stores drive higher ID sales excluding fuel. Also, the Our Brands private-label portfolio added 233 new products, including expansion of the Smart Way value-focused line.

“We are growing households as our associates are providing a full, fresh and friendly shopping experience across our seamless ecosystem,” McMullen added. “While we expect the environment to remain challenged going forward, we are committed to delivering exceptional value for our customers and investing in our associates, and by doing so, we expect to generate attractive returns for shareholders.”     

Related:Kroger tallies Q1 sales gains

Merger update: Kroger-Albertsons asset sale to C&S

The divestiture deal with Keene, New Hampshire-based C&S includes sale of Kroger’s QFC banner in the Pacific Northwest and Mariano’s brand in the Midwest and Albertsons’ Carrs stores in the West, as well as exclusive licensing rights to the Albertsons brand name in Arizona, California, Colorado and Wyoming. Kroger and Albertsons still expect their merger to close in early 2024.

“Following the announcement of our proposed merger with Albertsons Cos., we embarked on a robust and thoughtful process to identify a well-capitalized buyer who will operate as a fierce competitor and ensure divested stores and their associates will continue serving their communities in the ways they do today. C&S achieves all these objectives,” McMullen commented.

In announcing their merger last fall, Kroger and Albertsons estimated they would need to divest 100 to 375 stores to gain regulatory clearance for the transaction. Their agreement, in which Kroger is acquiring Albertsons, also includes a ceiling of 650 store divestitures.

Remaining locations under the banners of stores being divested to C&S will be renamed to retained Kroger or Albertsons Cos. banners post-merger, Kroger and Albertsons said. Also following the merger transaction, Kroger plans to divest the acquired Albertsons brands Debi Lilly Design, Primo Taglio, Open Nature, ReadyMeals and Waterfront Bistro. 

Kroger takes Q2 loss from opioid settlement charge

On the earnings side for the 2023 second-quarter, Kroger recorded a net loss (attributable to the company) of $180 million, or 25 cents per diluted share, compared with net income of $731 million, or $1.01 per diluted share, a year ago.

The bottom-line results reflect the $1.4 billion charge from a nationwide opioid settlement framework, to be paid over 11 years, that Kroger announced on Friday. Under the agreement in principle, Kroger will pay up to $1.2 billion to states and subdivisions and $36 million to Native American tribes in funding for abatement efforts and about $177 million to cover attorneys’ fees and costs (to be paid over six years). Initial payments would begin in December 2023, and the Q2 charge negatively impacts earnings per diluted share of $1.54 on a GAAP basis.

Adjusted net earnings (attributable to Kroger) were $699 million, or 96 cents per diluted share, versus $661 million, or 90 cents per diluted share, in the prior-year period, Kroger said. Analysts, on average, had projected adjusted EPS of 91 cents, with estimates ranging from 82 cents to 94 cents, according to Refinitiv.

Kroger reaffirmed its fiscal 2023 sales and earnings guidance, including adjusted EPS of $4.45 to $4.60 and ID sales growth of 2.5% to 3.5% excluding fuel and the impact of the Express Scripts contract termination.

Before Kroger’s Q2 report, Wall Street’s consensus estimate was for fiscal 2023 adjusted EPS of $4.51, with projections running from $4.42 to $4.570, according to Refinitiv.

“Kroger's second-quarter results demonstrate the resiliency of our value creation model. While industrywide disinflation continues to impact food at home sales, our team is doing an excellent job managing the effect on our business,” Chief Financial Officer Gary Millerchip stated. “Looking forward, we believe inflation will continue to decelerate, and the environment will remain challenging for consumers.

"We therefore expect identical sales without fuel will be at the low end of our full-year guidance range and slightly negative in the second half of the year," according to Millerchip. "This outlook includes an approximately 150 basis points negative impact due to the termination of our agreement with Express Scripts. As demonstrated by our year-to-date results, we believe we have the flexibility within our business model to navigate this environment and remain on track to deliver our 2023 adjusted FIFO operating profit and adjusted net earnings per diluted share guidance.”