Kroger projects momentum for same-store sales, improved profit for 2020

The Kroger Co. updated its investors Tuesday on how its Restock Kroger framework is repositioning the company to create value for shareholders, customers and associates. The retailer held its Investor Conference at the New York Stock Exchange.

Under its two-year-old Restock Kroger program, the company has been focusing on private label brand growth and merchandising, rearranging store layouts and expanding services such as home delivery and self-checkouts.

Kroger also announced the company’s Board of Directors has approved a $1 billion share repurchase program, replacing the existing authorization that has approximately $546 million remaining. 

“Restock Kroger sets Kroger up for a stronger future,” said Rodney McMullen, Kroger's chairman and CEO, in a statement released before Tuesday's conference. “Momentum is returning to our core grocery business as a result of our customer obsession and renewed intensity around operational excellence, plus the asset-light, margin-rich alternative profit streams that enrich our core supermarket business. We look forward to sharing how these come together at Kroger to create a path to consistently strong and attractive total shareholder return.” 

Kroger reconfirmed its 2019 guidance on identical sales, adjusted operating profit, adjusted earnings per diluted share and alternative profit streams. The company also set financial targets for 2020.

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“Kroger's value creation model is strong and durable,” said Gary Millerchip, Kroger's chief financial officer. “We are pleased to see identical-store sales momentum is building and we expect this trend to continue into 2020 and beyond. We are also delivering adjusted earnings per diluted share growth for our shareholders through the Restock Kroger timeframe, supported by a disciplined approach to returning cash to investors."

McMullen (left) added, “We are confident that Restock Kroger is the right strategic framework for business growth in 2019 and 2020, and to position Kroger for long-term growth in the future. We believe that the food industry is special and big enough for different models to coexist — and Kroger’s model will be one of them because, at Kroger, we are uniquely good at food.”

Kroger says it expects its financial model to deliver improving adjusted operating profit performance over time and continue to generate strong free cash flow. The company expects this to translate into a consistently strong and attractive total shareholder return through sustained net earnings growth and by returning cash to shareholders, via share repurchases and a growing dividend over time. Maintaining a strong investment grade balance sheet is a key component of Kroger's financial model, the retailer said.

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The company defines free cash flow as operating cash flow (before company-sponsored pension contributions), less capital expenditures, and excluding the cash tax effect of the sale of strategic assets.

Kroger reduced net total debt by $1.3 billion over the last four quarters. Kroger’s net total debt to adjusted EBITDA ratio is 2.46, compared to 2.59 a year ago. The company's net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50. 

Earlier this year, Kroger increased the dividend by 14%, from 56 cents to 64 cents per year, marking the 13th consecutive year of dividend increases. The company’s quarterly dividend has grown at a double-digit compound annual growth rate since it was reinstated in 2006. The company continues to expect, subject to board approval, an increasing dividend over time.

Projections for 2020 and beyond

In 2020, Kroger anticipates identical sales growth, excluding fuel, to be greater than 2.25%. The retailer also said it expects its alternative profit businesses to grow incremental operating profit in the range of $125 to $150 million.

Kroger is targeting total shareholder return of between 8% and 11% beyond 2020, the company said. This will be driven by 3% to 5% growth from improved earnings, and growth in the company's free cash flow payout rate through a combination of share repurchases and dividends. This range excludes any potential change in its price-to-earnings multiple, and the optionality for additional growth beyond 2020 created through strategic partnerships.