Kroger's plan to conquer America pays off
Kroger's strategy to win America's evolving grocery market delivered stronger than expected earnings and sales growth in the first quarter thanks to booming digital sales.
The company's "Restock Kroger" program, a plan it announced in late 2017 to invest in technology and other areas, appears to be paying off. For the first quarter ended May 26, Kroger said online sales surged 66% over the previous quarter. Although it's difficult to determine the strength of that number since Kroger doesn't disclose how it computes digital sales, there's no denying that Kroger's digital moves are helping the retailer gain ground in the online grocery space.
The news comes nearly a month after the nation's largest grocery chain announced an exclusive partnership with leading U.K. online grocer Ocado that could result in the development of up to 20 automated warehouses over the next three years.
Kroger and Ocado have said they are working to identify the first three sites in 2018 for development of new, automated warehouse facilities in the U.S., and will identify up to a total of 20 over the first three years of the agreement. Kroger said the partnership with Ocado, a recognized pure-play e-commerce leader with annual sales of $2 billion in the U.K.’s highly developed grocery market, will accelerate its creation of a seamless shopping experience for America's families.
Kroger also made another big digital move in May with its purchase of meal-kit company Home Chef for $200 million.
"Restock Kroger is off to a fantastic start. Everything we do supports our customers engaging seamlessly with Kroger," said Chairman and CEO Rodney McMullen. "Kroger is creating the future of retail by innovating our core business and adding exciting partnerships like Ocado and our planned merger with Home Chef. We are on track to generate the free cash flow and incremental FIFO operating profit that we committed to in Restock Kroger. We are confident in our ability to deliver on our plans for the year and our long-term vision to serve America through food inspiration and uplift."
In a conference call with analysts on Thursday, McMullen said Kroger aims to become a national grocery chain through its new partnerships with Ocado and Home Chef.
“We believe the future of retail will include both physical and digital customer experiences,” he said. “Everything we are doing today will enhance our ability to provide everyone in America with convenience of shopping for anything, anytime, anywhere."
When an analyst asked McMullen to clarify whether "reaching all of America" meant entering densely populated markets in the Northeast where it doesn't currently have stores, McMullen said, "That is our vision and our aspiration."
For the first quarter, the company reported that same store sales excluding fuel increased 1.4 percent. Kroger also reported revenue of $37.5 billion in the quarter, up from $36.3 billion the prior year. Earnings per share on an adjusted basis more than doubled, to 73 cents per share on $626 million in earnings from 32 cents per share on $303 million in the year prior.
Profits rose to $2 billion during the quarter when including the sale of Kroger’s convenience stores (Kroger sold nearly 800 of its convenience stores to British gas station operator EG Group for $2.15 billion). Excluding its $1.8 billion profit from the sale of its business, Kroger netted a $626 million profit. Wall Street analysts had forecast Kroger would generate $560 million in profits before one-time items and notch $37 billion in sales for the quarter. Last year, Kroger reported a $303 million profit on $36.3 billion in sales for the same quarter.
Kroger shares soared Thursday on the strong fiscal report. Shares rose more than 9 percent, putting it on pace for its best day since Mar. 10, 2009.
Looking ahead, Kroger raised the low end of its net earnings guidance for the fiscal year from a range of $3.59 to $3.79 per diluted share to a range of $3.64 to $3.79.
Last week, Kroger announced that it will exit the Raleigh-Durham, N.C., market, closing 14 locations by Aug. 14.
In its first quarter report, the company outlined some highlights of its Restock Kroger plan:
Redefining the Grocery Customer Experience
- Grew digital sales 66% in the first quarter
- Achieved highest-ever dollar share in the history of Our Brands, driven by double-digit growth in Simple Truth and Simple Truth Organic
- Announced location of second Kitchen 1883 restaurant
- Opened new Culinary Innovation Center
- Hosted second Natural Foods Innovation Summit
Partnering for Customer Value
- Announced partnership with online grocery supermarket Ocado to serve America's families anything, anytime, anywhere
- Entered into merger agreement with Home Chef to revolutionize mealtime
- Expanded partnership with Instacart to increase customer delivery coverage area
- Completed sale of convenience store business unit for $2.15 billion
- Announced new offerings to enhance Kroger Precision Marketing powered by 84.51°, which connects advertisers with digitally-engaged customers at the point of purchase and creates alternative revenue for Kroger by monetizing six billion annual digital interactions on owned properties
- Announced new and enhanced long-term associate benefits following the Tax Cuts and Jobs Act, including an industry-leading education assistance program called Feed Your Future, accelerated investments in store associate wages, a more generous 401(k) benefit, and enriched associate discount and support programs
- Kroger Technology named to Computerworld's Top 100 Best Places to Work in IT
- Progressive Grocer magazine recognized 59 associates as "Top Women in Grocery", since 2007, Kroger has had a total of 441 "Top Women" honorees
- Joined Catalyst in spotlighting 'workplaces that work for women' on International Women's Day
Live Kroger's Purpose
- Announced 2017 Zero Hunger | Zero Waste progress, including 325 million meals donated and 77% waste diversion from landfill for the year
- Drove nearly three times customer engagement in Kroger's annual Sustainability Lives Here event in stores during Earth Month through Zero Hunger | Zero Waste and sustainable products & practices
- Named a 2018 ENERGY STAR Partner of the Year Award by the U.S. Environmental Protection Agency and U.S. Department of Energy
- Announced comprehensive commitment to help combat the nationwide opioid epidemic, including hosting drug take-back events at more than 100 Kroger Family of Pharmacies locations on April 28 in partnership with the U.S. Drug Enforcement Administration
- Donated $1 million to USO to support veterans, active duty military and their families as part of annual Honoring Our Heroes campaign
Kroger operates 2,800 retail food stores under various banner names, employing nearly half a million associates.