The Kroger Co. tallied a nearly 15% gain in identical sales for its fiscal 2020 second quarter, with adjusted earnings per share hitting the high end of Wall Street’s forecast.
For the quarter ended Aug. 15, sales climbed 8.2% to $30.49 billion from $28.17 billion a year earlier, Kroger said Friday. The Cincinnati-based supermarket giant noted that sales were up 13.9% excluding fuel.
Identical sales excluding fuel surged 14.6% year over year, compared with a 2.2% uptick in the fiscal 2019 quarter.
“Despite the pandemic-related challenges, we delivered extremely strong results in the second quarter. Customers are at the center of everything we do, and as a result, we are growing market share. Kroger’s strong digital business is a key contributor to this growth, as the investments made to expand our digital ecosystem are resonating with customers,” Chairman and CEO Rodney McMullen told analysts in a conference call on Friday. “Our results continue to show that Kroger is a trusted brand and our customers choose to shop with us because they value the product quality and freshness, convenience and digital offerings that we provide.”
Kroger’s second-quarter performance “turned out much better than we previously expected,” according to Chief Financial Officer Gary Millerchip.
“This was due to several factors, including stronger sales results and disciplined balance between cost savings and new investments, while also managing cost inflation volatility in key fresh categories,” he explained in the call. “Additionally, fuel performed better than predicted, and we were very pleased with our alternative profit results, which rebounded from COVID-19 impacts more quickly than anticipated.”
Identical sales momentum continued from the first quarter into the second quarter, as growth excluding fuel trended in the mid-teens for June and July, Millerchip reported. “During our final period of the quarter, which runs from mid-July to mid-August, identical sales without fuel were [up by] 12.5%, as we saw a reduced government stimulus in SNAP funding and lower back-to-school activity.”
McMullen cited fresh foods and its private-label portfolio, which Kroger calls “Our Brands,” as sales catalysts in the quarter as more consumers continue to eat at home during the pandemic.
“Customers across the country are still staying home and cooking at home, and that is now part of their new routine. This makes our leadership position in fresh an even more important sales driver for Kroger. Customers rank our fresh department higher than all of our big-box competitors, and our fresh departments generated strong identical sales in the second quarter and gained market share,” he said.
Our Brands are a “key competitive note for Kroger,” McMullen pointed out. “We continue to meet the diverse needs of our customers with significant growth across the three largest brands. Our customers are eating more at home, and we are seeing some customer segments trade up to the larger pack sizes, as well as more premium-quality foods and natural and organic foods. Our larger-size big pack platform is up well over 50%. Private Selection is up over 17%, and Simple Truth is up over 20% in the second quarter.”
Digital sales soared 127% during the second quarter, which McMullen said reflects Kroger’s investments to create a seamless omnichannel shopping experience for customers.
“Even before the pandemic, our digital business had become a tailwind. The pandemic certainly has accelerated customer preference for seamless offerings. Our customers are increasingly turning to our e-commerce solutions for their groceries and household essential needs,” he said. “Many of our customers are ordering groceries online for the first time as a result of COVID-19, and the majority of them tell us they plan to continue to do so in the future.”
Kroger now has more than 2,400 online grocery delivery locations and 2,100-plus pickup sites, giving the retailer access to 98% of shoppers in its market area via brick-and-mortar stores and digital channels.
“These investments were especially timely, as customer adoption of pickup and delivery has grown significantly during the pandemic,” McMullen said. “Kroger’s digital ecosystem continues to expand, and customers are increasingly engaging with us. For example, [Kroger meal kit brand] Home Chef is growing incredibly fast, no doubt accelerated by the food-at-home trend that we believe is a structural change. We also announced that Kroger will expand an extended shipped-home assortment through a marketplace offering of third-party sellers. We will continue to expand our ecosystem over time.”
Millerchip noted that digital sales contributed 4.4% of the identical sales growth (excluding fuel) in the quarter and made profitability inroads.
“New customer engagement and our pickup and delivery services continue to grow, and we continue to invest in the customer experience. This included offering fee-free pickup to provide more value for our customers in ways that are most relevant at this time,” he said. “Our digital sales growth was profitable on an incremental basis, and we were pleased with the progress we made to improve profitability by reducing the cost to fulfill a pickup order during the quarter. We see a clear path to further improve digital profitability by leveraging our personalization tools to improve sales mix, continuing to reduce cost to fulfill an order via process improvements and automation, and accelerating growth in media revenue generated from digital sales.”
At the bottom line, Kroger posted second-quarter net income of $819 million, or $1.03 per diluted share, compared with $297 million, or 37 cents per diluted share, a year ago. On an adjusted basis, net earnings came in at $581 million, or 73 cents per diluted share, versus $357 million, or 44 cents per diluted share, in the prior-year period. The adjustment primarily excludes a $278 million mark-to-market gain on investments.
Analysts, on average, had projected Kroger’s adjusted EPS at 55 cents for the quarter, with estimates ranging from a low of 47 cents to a high of 73 cents, according to Refinitiv/Thomson Reuters.
For the fiscal 2020 first half, Kroger totaled sales of $72.04 billion, up 10.1% from $65.42 billion a year earlier. Identical sales jumped 17.1% excluding fuel, compared with a 1.8% increase in the year-ago period.
First-half 2020 net earnings came in at $2.03 billion, or $2.55 per diluted share, compared with $1.07 billion, or $1.31 per diluted share, in the 2019 period. Adjusted net income was $1.55 billion, or $1.95 per diluted share, versus $943 million, or $1.16 per diluted share, a year before.
Looking ahead to the full fiscal year, Kroger forecasts EPS of $3.20 to $3.30 and identical sales growth of more than 13%.
“As a result of our strong performance in the first half of the year, the expectation of sustaining trends in food-at-home consumption and confidence in our ability to execute against Restock Kroger strategy, we’re updating our full-year 2020 guidance. For the full year 2020, we expect total identical sales without fuel to exceed 13% and we expect to achieve adjusted EPS growth of approximately 45% to 50%,” Millerchip told analysts.
“We are providing a wider range on guidance than we would normally provide at this point in the year to account for the variety of outcomes that could materialize as a result of the pandemic,” he said. “In the second half of 2020, we expect identical sales excluding fuel to continue at elevated levels, although tapering from the level we experienced so far this year. Our guidance contemplates continued investments in the customer and ongoing COVID-19-related costs to protect the safety of our customers and associates, balanced with continued execution of cost-savings initiatives and growth in alternative profits. We expect fuel profitability will be a headwind for the remainder of 2020.”
Analysts’ consensus estimate is for Kroger to achieve adjusted EPS of $2.90 for fiscal 2020, with projections running from a low of $2.70 to a high of $3.35, according to Refinitiv/Thomson Reuters.
“Six months into the pandemic, while there is still much we cannot predict, we have a greater clarity in many areas across the business,” said McMullen.
“We have learned and continue to learn a lot while keeping our stores and supply chain open,” he added, “and serving America during the pandemic.”
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