The Kroger Co. upped the momentum in its fiscal 2022 second quarter with strong net and identical sales growth and adjusted earnings per share that beat Wall Street’s high-end estimate.
Also on Friday, Cincinnati-based Kroger unveiled a new own-brand line called Smart Way, aimed at budget-conscious shoppers grappling with still-high grocery prices.
For the quarter ended Aug. 13, sales came in at $34.64 billion, up 9.3% from $31.68 billion a year earlier, Kroger reported. Backing out gasoline, which has seen elevated but relaxed pricing in recent months, sales rose 5.2% year over year. That compared with a net sales gain of 3.9% (and a 0.4% decrease excluding fuel) in the fiscal 2021 quarter.
Targeted at value-conscious customers, the new Smart Way brand includes food and nonfood, and 150 items are now in stores. (Photo courtesy of Kroger)
Identical sales excluding fuel climbed 5.8% in the 2022 second quarter from a year ago, when Kroger saw a 0.6% decrease.
In the 2022 first quarter, Kroger tallied year-over-year gains of 8% in net sales (3.8% excluding fuel) and 4.1% in identical sales excluding fuel. The company’s first-half 2022 sales came in at $79.24 billion, up 8.6% from $72.98 billion in the prior-year period.
“Kroger delivered strong second-quarter results propelled by our ‘Leading with Fresh and Accelerating with Digital’ strategy,” Kroger Chairman and CEO Rodney McMullen said in a statement.
“Our consistent performance underscores the resiliency and flexibility of our business model, which enables Kroger to thrive in many different operating environments. We are applying technology and innovation to improve freshness, grow Our Brands [private label] and create a seamless shopping experience so our customers can get what they want, when and how they want it, with zero compromise on quality, selection and affordability,” McMullen explained. “We will continue to focus on providing affordable, fresh food to our customers, investing in wages and the associate experience, and creating Zero Hunger | Zero Waste communities because when we do those things well, we deliver attractive and sustainable shareholder returns.”
Among Q2 highlights, Our Brands ID sales grew 10.2%, and Kroger added 170 new and seasonal items to its private-label lineup.
That includes the new Smart Way label, described as an “opening price point” brand. About 150 Smart Way products are now on shelves nationwide — including food, beverages and household staples — and more items are due to roll out to stores this fall, Kroger reported.
“As our customers face an ongoing inflationary environment, we know they are looking to stretch their dollars further than ever before,” stated Stuart Aitken, senior vice president and chief merchant and marketing officer at Kroger. “Smart Way is an exciting, eye-pleasing product line that will be easy for customers to find. By adding a simplified opening price point brand strategy to Our Brands portfolio, we will further cater to every customer, every time.”
Kroger noted that Smart Way consolidates 16 legacy private labels into one, easily identified value-focused brand in the Our Brands portfolio, which also includes such labels as Kroger, Simple Truth, Private Selection, Home Chef and Heritage Farm, among others.
“We are confident Smart Way will have something for everyone. From canned vegetables and bread to juices and staples, this new product line features the products families need to put an even more affordable meal on their table,” commented Juan De Paoli, vice president of Our Brands at Kroger.
In the second quarter, digital sales rose 8% on a comparable basis following year-over-year declines of 6.3% in Q1 and 13% in Q2 2021. Kroger said that in the 2022 second quarter it also saw delivery sales rise 34% — driven by the Kroger Boost membership plan and Ocado-automated customer fulfillment centers — and the company improved pickup cost-to-serve and order-fill rates. And on the personalization front, the retailer introduced new substitution science in Kroger Pickup that lifted customer acceptance rates on recommended substitutions by 800 basis points.
Fresh foods efforts in Q2 included Kroger certifying another 864 stores under its End-to-End Fresh Produce program. That followed the certification of 355 stores in Q1.
At the bottom line, Kroger posted 2022 second-quarter net income of $731 million, or $1.00 per diluted share, compared with $467 million, or 61 cents per diluted share, a year earlier. Excluding adjustments for investment gains and the Home Chef contingent consideration, adjusted net earnings were $661 million, or 90 cents per diluted share, versus $610 million, or 80 cents per diluted share, in the prior-year period.
Analysts, on average, had forecast adjusted EPS of 77 cents, with projections ranging from 68 cents to 84 cents, according to Refinitiv.
“Our second-quarter results provide another proof point that Kroger has the right go-to-market strategy,” according to Chief Financial Officer Gary Millerchip. “Our consistent execution of this strategy is building momentum in our business which, combined with sustained food-at-home trends, gives us the confidence to raise our full-year guidance. We now expect identical sales without fuel to be in the range of 4% to 4.5% [growth] and adjusted net earnings per diluted share in the range of $3.95 to $4.05.”
Kroger previously estimated fiscal 2022 ID sales excluding fuel to rise 2.5% to 3.5% and adjusted EPS to come in at $3.85 to $3.95. Before Kroger’s Q2 report, Wall Street’s consensus forecast was for fiscal 2022 adjusted EPS of $3.91, with estimates running from $3.78 to $4.00, according to Refinitiv.
“Our business model has proven to be resilient in a variety of operating and economic environments,” Millerchip added, “and we remain confident in our ability to deliver attractive and sustainable total shareholder returns of 8% to 11% over time.”
CFRA Research analyst Arun Sundaram noted that elevated grocery and gas prices have given Kroger a lift, yet that benefit is likely to dissipate over time.
“The operating environment will likely get much tougher as food inflation moderates and fuel margins normalize, while wage pressures likely continue,” Sundaram wrote in a research note on Friday. “Second-quarter adjusted EPS of 90 cents (+13% year over year) beat by 7 cents, driven by identical sales growth (excluding fuel) of 5.8% versus 4.6% consensus, product sourcing benefits, and uncharacteristically high fuel margins (62 cents/gallon versus 39 cents/gallon a year ago),” he said, describing Kroger’s “recent outperformance as unsustainable.”
Sundaram observed, “Fuel margins will likely normalize over time, while Kroger’s major top-line benefit over the last several quarters (i.e. higher food prices) will likely fade as comps get tougher and promotional activity increases. We see wage pressures continuing in fiscal 2024, which along with weaker identical sales growth will likely lead to weaker operating margins next year.”