Kroger cycles prior-year pandemic sales gains in first quarter

Despite flat net sales and decreased identical sales, The Kroger Co. topped Wall Street’s per-share earnings forecast for its fiscal 2021 first quarter and raised its full-year guidance.

Kroger said Thursday that for the quarter ended May 22, net sales totaled $41.3 billion, down 0.6% from $41.55 billion a year earlier, when the Cincinnati-based grocer posted an 11.5% gain fueled by pandemic-driven consumer demand. Identical sales excluding gasoline declined 4.1% in the 2021 quarter versus a 19% jump a year ago.

In spite of the tough year-over-year comparison, sales remain elevated since the COVID-19 outbreak, Kroger noted. Identical sales for the 2021 first quarter were up 14.9% on a two-year stacked basis, excluding fuel, the company reported.

Similarly, digital sales rose 16% in the 2021 quarter but were up 108% on a two-year basis, including a 92% increase in the 2020 quarter, Kroger said.

“While the COVID-19 health crisis has not ended, this is the first quarter where we saw significant signs of recovery and the beginning of a return to what we are hopeful will be a new normal,” Chairman and CEO Rodney McMullen told analysts in a conference call Thursday morning.

“Our first-quarter results demonstrate that Kroger is even better-positioned today to connect with our customers than we were before the pandemic because of our relentless focus on ‘Leading with Fresh’ and ‘Accelerating with Digital’ for our customers. I’m incredibly proud of our amazing associates who continue to be there for our customers, communities and each other,” McMullen said. “Because of our associates’ commitment, Kroger’s first-quarter identical sales without fuel grew ahead of our internal expectations. Digital sales grew triple digits since the beginning of 2019. We saw strong growth in alternative profits and significant progress with our cost savings initiatives. All of this gives us confidence to raise guidance for the year and announce a new $1 billion share buyback program.”

Related:Kroger launches e-commerce delivery in Florida

In discussing first-quarter results, CEO Rodney McMullen said Kroger's

During the quarter, Kroger’s Our Brands private-label portfolio added 253 new items, including seasonal fresh produce and summer cooking products. The retailer also said it’s pushing ahead with its fresh food expansion program, which includes the Go Fresh & Local Supplier Accelerator to identify new local and regional suppliers and a “digital farmers market” pilot that connects local farmers and businesses to customers seeking fresh products.

“Fresh is incredibly important to our customers,” McMullen said. “Our produce fresh score metrics continue to improve, and we are testing and learning through end-to-end fresh initiatives to consistently improve the experience and deliver even more value to our customers.”

Related:Kroger looks to hire 10,000 more workers

Also in the first quarter, Kroger expanded to 2,233 online grocery pickup locations and 2,488 delivery locations, which the company said covers 98% of households in its market area. Pickup capacity grew 15% as the retailer focused on adding high-demand time slots.

“We are building on the momentum of 2020 within our seamless ecosystem through expanded capacity, improved customer experience and continuous innovation,” according to McMullen. “During the first quarter, we expanded [pickup] capacity by 15% to support our continued sales growth. Our teams worked together to improve in-stock fill rates and further reduce wait time at carside, both enhancing the customer experience. To date, we have over 2 million time slots available per week to serve our customers the fresh food and essential products they want when they want it.”

Kroger now has Ocado-powered automated warehouses for fulfilling online grocery orders in Monroe, Ohio (above), and Groveland, Fla., with the latter marking a new market area for the grocer.

Kroger, too, made big strides in its omnichannel strategy with the opening of first two Ocado automated customer fulfillment centers (CFCs) in Monroe, Ohio, and Groveland, Fla. The Florida CFC enables the grocer, through its Kroger Delivery service, to use e-commerce to reach consumers in a market where it has no physical stores.

“We continue to expand our seamless ecosystem through our new customer fulfillment centers powered by Ocado. We opened our first facility in Ohio in March and, at the beginning of June, launched Kroger Delivery in Florida. Launching in a new geography is incredibly exciting and the milestone moment in our history. Our Kroger Delivery team is ready to bring fresh, affordable food and a consistent customer experience directly to the doors of our customers,” McMullen explained.

“In addition to Ocado CFC, a spoke [facility] in Tampa and Jacksonville are also now open. The hub-and-spoke model allows us to extend the range of our CFCs, allowing us to serve more customers incredible products directly to their door,” he said. “And we are just getting started. We are thrilled to report that [Net Promoter] scores are among the highest in the digital retail, and we continue to be pleased with our fill rates and our on-time delivery metrics.”

At the bottom line, Kroger posted first-quarter net earnings of $140 million, or 18 cents per diluted share, compared with $1.21 billion, or $1.52 per diluted share, a year ago. Excluding $778 million in pension plan withdrawal, investment loss, business transformation and other costs, adjusted net earnings came in at $918 million, or $1.91 per diluted share, versus $972 million, or $1.22 per diluted share, in the prior-year period.

Analysts, on average, had projected adjusted earnings per share of $1.01, with estimates ranging from 77 cents to $1.34, according to Refinitiv.

"Two key drivers of long-term digital profitability are the cost to fill a digital order and the retail media revenue generated from a digital transaction." — Gary Millerchip, Kroger CFO

“Alternative profits achieved record profit growth during the quarter, led by exceptional growth in Retail Media. Personal Finance also delivered double-digit profit growth with strong performance across several key product areas,” Chief Financial Officer Gary Millerchip said in the analyst call. “Based on our performance in the first quarter, we now expect alternative profit growth to be towards the top end of our goal of $100 million to $150 million of incremental profit in 2021.”

The Retail Media arm also will be pivotal in improving e-commerce margin, Millerchip noted. “Two key drivers of long-term digital profitability are the cost to fill a digital order and the Retail Media revenue generated from a digital transaction. In the first quarter, we reduced the amount of time taken to pick additional order by 5% and increased media revenue per digital basket by 33%,” he said.

Looking ahead, Kroger lifted its EPS and identical-sales projection for fiscal 2021. The company now forecasts adjusted EPS of $2.95 to $3.10, up from its previous estimate of $2.75 to $2.95. Identical sales also are now expected to decline 2.5% to 4% ( 10.1% to 11.6% on a two-year stack), compared with the earlier outlook of a 3% to 5% decrease ( 9.1% to 11.1% on a two-year stack).

Analysts’ consensus forecast is for 2021 adjusted EPS of $2.85, with projections running from $2.64 to $3.51, according to Refinitiv.

McMullen said he expects the food-at-home trend powered by the pandemic to continue as incidence of COVID-19 recedes, but the burst in online grocery purchases reflects chaned consumer behavior in food shopping.

“Our customers are in a time of transition. During the quarter, we began to see some pre-pandemic habits resume. For example, smaller holiday gatherings are likely to fade as more than half of our shoppers believe holidays will return to normal by 4th of July,” he said. “We are also seeing customers shop more frequently as COVID restrictions ease. Importantly, we saw a continuation of several pandemic trends. This includes heightened digital engagement across demographics, expanded consumption in key fresh areas like meat, produce and natural Foods, and trading up to more premium products.

“New trends are emerging as well as customers settle into new routines. In our recent survey of our customers, a remarkable 92% of the people say they enjoy cooking the same or more than they did pre-COVID. And as people’s busy social lives pick up, more customers are looking for convenience in cooking options,” McMullen added. “We continue to utilize our data to understand those behaviors that are more permanent in nature. Whether customer habits are returning, hardening or emerging, we will continue to meet the customer where they are and use our data science expertise to be where they are going.”