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Kroger Marketplace store The Kroger Co.
Chairman and CEO Rodney McMullen said Kroger is seeing "improving trends in our supermarket business."

Kroger cites sales boost from Our Brands, digital in fiscal 2019 report

CEO Rodney McMullen says flexible distribution network key to omnichannel plan

The Kroger Co. notched gains in total and identical-store sales, fueled in part by strong performances in private label and digital, as it edged past Wall Street’s earnings projection for its fiscal 2019 fourth quarter.

Kroger said Thursday the quarter also includes an impairment charge from the planned closing of 35 stores across its retail network in 2020 and a noncash charge of $174 million related to the bankruptcy of Lucky’s Market, in which it held an undisclosed equity interest.

For the full year, Cincinnati-based Kroger hit analysts’ earnings-per-share estimate and saw identical-store sales rise, despite virtually flat sales overall.

Rodney McMullen-Kroger CEORodney McMullen (Photo courtesy of Kroger)

"We are pleased with our 2019 results and improving trends in our supermarket business,” Chairman and CEO Rodney McMullen said in a statement.

“We delivered on our commitments for ID sales without fuel, adjusted FIFO operating profit and cost savings, in addition to generating over $100 million of incremental operating profit through alternative profit streams in 2019. We also delivered strong adjusted free cash flow during the year, consistent with the total shareholder return model outlined at our Investor Day.”

Our Brands cited as sales driver

Sales for the fourth quarter ended Feb. 1 came in at $28.89 billion, up 2.1% from $28.29 billion a year earlier. Kroger said growth was 2.3% excluding fuel and dispositions. Identical-store sales without fuel rose 2% year over year. Digital sales surged 22% from a year ago.

Meanwhile, fiscal 2019 sales inched up 0.4% to $122.29 billion from $121.85 billion in 2018. The 2019 sales gain was 2.3% excluding fuel, dispositions and merger transactions, according to Kroger. Identical-store sales rose 2% for the year, while digital sales jumped 29%.

Kroger noted that its Our Brands private-label portfolio turned in its “best year ever,” with sales topping $23.1 billion in sales.

During 2019, the supermarket giant added 39 plant-based products to its private-brand roster, while the Private Selection label exceeded the $2 billion mark in sales, becoming the company’s third brand to reach that level.

The Kroger Co.Kroger Simple Truth Plant-Based display

Kroger expanded the Simple Truth brand into plant-based meats in January, and in only one month, the products ranked third in the category for the entire fourth quarter, McMullen said.

“We introduced 758 new Our Brand items in 2019, which helped drive strong year-over-year sales lift across our portfolio of brands. Since its launch in 2013, Simple Truth has become the leading natural and organic brand in the country, with annual sales exceeding $2.5 billion in 2019,” McMullen told analysts in a conference call on Thursday.

“Our Private Selection brand eclipsed $2 billion dollars in sales for the first time,” he said. “The Kroger brand exceeded $13.7 billion in sales, capitalizing on product development around key customer trends like global and regional flavors.”

Flexibility seen as linchpin for online grocery fulfillment

The year also saw Kroger further extend its reach in online grocery. The retailer said it finished 2019 with 1,989 pickup sites and 2,385 delivery locations, covering 97% of the households in its market areas.

“Kroger continues to invest in digital as we build a seamless ecosystem that combines the best of the physical store experience with the digital customer experience for our customers. This is where customers are increasingly going to meet their needs. We know our customers value the greater convenience this provides, and our data shows it’s an essential component of driving overall loyalty. Digitally engaged customers not only drive growth through our digital modalities, they also help drive brick-and-mortar sales growth and share of wallet as well,” McMullen explained in the call. “Providing our customers with the ability to have anything, anywhere, anytime from Kroger sets us apart from a large segment of our competitors and will drive loyalty as well as our long-term growth and margin expansion.”

He said Kroger is “roughly a year away” from the opening of the first automated fulfillment center, in Monroe, Ohio, under its partnership with U.K.-based online grocery Ocado. Plans call for the companies to build 20 customer fulfillment centers in the United States over the next several years.

“These facilities will accelerate our ability to provide customers with a seamless experience in a much more cost-effective way. We continue to be excited about the partnership,” according to McMullen. “As we’ve shared previously, we believe Ocado’s value is as a partner is not just on its current capabilities but also how quickly the company is able to innovate and serve rapidly changing consumer markets.”

The Kroger Co.Ocado robot-closeup

"We are designing a flexible distribution network, combining disaggregated demand and proximity of our stores, medium-sized facilities and large facilities."

He added that Kroger also isn’t locked into a centralized fulfillment strategy, the model used by the Ocado customer fulfillment centers (CFCs).

“We continue to roll out our plan, and you should not assume just large facilities. We are designing a flexible distribution network, combining disaggregated demand and proximity of our stores, medium-sized facilities and large facilities,” McMullen said. “Our network will flex as demand matures, and the optionality will allow us to fulfill same-day or next-day delivery or pickup and the customer or store replenishment.”

Q4 gain at bottom line, 2020 outlook reaffirmed

On the earnings side, 2019 fourth-quarter net income attributable to Kroger totaled $327 million, or 40 cents per diluted share, compared with $259 million, or 32 cents per diluted share, a year ago. Kroger said $52 million of transformation costs during the quarter, including the store-closings impairment charge, negatively impacted earnings by 4 cents per share, while the charge for the Lucky’s bankruptcy and deconsolidation from Kroger’s financial statement had an impact of 16 cents per share.

Adjusted net income was $462 million, or 57 cents per diluted share, versus $390 million, or 48 cents per diluted share, a year earlier, Kroger reported. On average, analysts had forecast adjusted EPS of 55, with estimates ranging from a low of 52 cents to a high of 59 cents, according to Refinitiv/Thomson Reuters.

Overall fiscal 2019 net earnings attributable to Kroger were $1.66 billion, or $2.04 per diluted share, compared with $3.11 billion, or $3.76 per diluted share, in 2018. Prior-year net income includes a $1.36 billion gain from the sale of the Turkey Hill dairy business. Kroger said fiscal 2019 net earnings reflect negative impacts of 28 cents per diluted share from Lucky’s and 13 cents for pension plan withdrawal liabilities, among other items.

On an adjusted basis, fiscal 2019 net income was $1.79 billion, or $2.19 per diluted share, versus nearly $1.75 billion, or $2.11 per diluted share, for 2018, Kroger said. Analysts’ consensus estimate was for adjusted EPS of $2.19, with projections running from $2.14 to $2.24.

Also during 2019, Kroger cut its net total debt by $1.14 billion to about $13.95 billion, a nearly 8% reduction.

McMullen noted that Kroger remains on track with Restock Kroger, its strategic plan to redefine the company’s business and the customer experience.

“The way that we delivered the year is consistent with our long-term financial model and sets us up to connect with customers in a deeper way. Restock Kroger is the right strategic framework to position the company for sustainable growth in the future, continue to improve the core business and deliver strong total shareholder return,” he stated. “This transformational foundation supports our competitive moats today — fresh, Our Brands and personalization — as well as building a seamless ecosystem of the future.”

Looking ahead to fiscal 2020, Kroger upheld its previous guidance. The company projects adjusted EPS of $2.30 to $2.40 and identical-store sales growth exceeding 2.25%. Kroger noted that the store closings and Lucky’s charges won’t affect adjusted net earnings for 2020, and that its outlook doesn’t include any potential impact from the coronavirus outbreak.

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