On September 10, The Kroger Co. reported strong sales and earnings in its second quarter ended August 14. While identical store sales dipped slightly from the comparable period last year (during the height of the pandemic), the Cincinnati-based merchant’s comp revenue actually increased by 14 percent when measuring that number on a two-year stack basis. And operating profit actually grew on a direct comparison basis to Q2 2020.
Kroger’s earnings in its second quarter were $839 million (vs. $820 million in last year’s second quarter). Total company sales were $31.7 billion in the second quarter, compared to $30.5 billion for the same period last year. Excluding fuel, sales decreased 0.4 percent compared to the same period last year.
According to Kroger CEO Rodney McMullen: “Our strategic focus on leading with fresh and accelerating with digital continues to build momentum across our business. Kroger’s seamless ecosystem is working. This was evident during the quarter as we saw customers seamlessly shift between channels, and we continued to see strong digital engagement. Customers are eating more food at home because it is more affordable, convenient, and healthier than other options.
“Our associates continue to support our customers and our communities through the pandemic by delivering a full, fresh, and friendly experience every day. We are committed to our environmental, social, and governance strategy to advance positive outcomes for people and our planet and create more resilient global systems, driven by our Zero Hunger/Zero Waste social and environmental impact plan. We are leveraging technology, innovation, and our competitive moats to deliver against the initiatives outlined at our 2021 investor day, and we remain confident in our ability to deliver total shareholder returns of 8 percent to 11 percent over time.”
In the analysts’ conference call following the financial release, McMullen addressed several relevant matters. He noted that he is pleased with Kroger’s continued digital growth (now a $10 billion business) and pointed to the early success the company is having with its new Florida entry in which it is working with Ocado to operate e-commerce fulfillment centers (Kroger does not operate any physical stores in the Sunshine State). Currently it has two Ocado “sheds” open (the other is in Monroe, OH close to its Cincinnati headquarters). Six other e-commerce-driven fulfillment depots will open in 2022 and 2023.
On the subject of inflation and supply chain pressures, McMullen explained that both issues are of concern, but termed them “transitory,” adding that out-of-stocks have been somewhat mitigated by the control that Kroger maintains in owning its own manufacturing facilities which produce many of its own brand products.
McMullen also said that Kroger experienced stronger identical store revenue towards the end of Q2 that has continued into Q3 (which began on August 15), adding that ID sales are now comparatively positive.
One particular trend that the veteran chief executive was encouraged by is that internal data indicated that those online shoppers who have reduced their digital spending have often switched to return to shop at its stores (Kroger’s digital sales declined 13 percent in Q2 but increased 114 percent when viewed on a 2-year stacked basis).
In addressing 2021 guidance, CFO Gary Millerchip stated: “Kroger’s strong execution resulted in identical sales above our internal expectations for the second quarter, and we continued to remove costs from the business. Driven by the momentum in our results and sustained food at home trends, we are raising our full-year guidance. We now expect our two-year identical sales stack to be in the range of 12.6 percent to 13.1 percent. We expect our adjusted net earnings per diluted share to be in the range of $3.25 to $3.35. We are emerging stronger through the pandemic and are confident in our ability to deliver sustainable earnings growth and total shareholder return.”
During the analysts’ conference call, Millerchip also reflected on some current Kroger issues. He, too, acknowledged the current supply chain challenges facing the industry to which labor shortages are contributing. He noted that while Kroger faces the same labor issues as others, the British-born CFO believes that the company has done a good job of increasing wages and benefits to its associates which has helped maintain its employee base while attracting additional new hires. He said Kroger will invest $350 million in hourly wage increases this year. As far as price increases increase are concerned, Millerchip said that Kroger will continue to pass those along to its customers.
Millerchip was especially excited about the progress of Kroger’s digital growth. While implying that that sector is not yet showing black ink, he said that recent investments and trends have given the company good momentum on its journey to profitability. Those investments and trends include the progress of its e-commerce fulfillment centers (with Ocado), a significant increase in digital ad revenue and greater efficiency in its warehouse picking of digital orders. He noted that Kroger’s goal of doubling its e-commerce business by 2023 is on track.
Kroger also said that its gross margin was 21.4 percent of sales for the second quarter. The FIFO gross margin rate, excluding fuel, decreased 60 basis points compared to the same period last year. This decrease is primarily related to continued price investments, and higher shrink and supply chain costs, partially offset by sourcing benefits and growth in the alternative profit business.
The nation’s largest pure-play supermarket noted that its ability to generate free cash flow continues to be strong and it remains committed to investing in the business to drive long-term sustainable net earnings growth, maintaining its current investment grade debt rating, and returning excess free cash flow to shareholders via share repurchase and a growing dividend over time.
In recapping its achievements and highlights over the 13-week period, Kroger noted these accomplishments:
- Introduced a new brand icon (logo), bringing together the Kroger Family of Companies under one unifying visual and reinforcing its brand promise: Fresh for Everyone
- Kroger’s own brands launched 142 new items during the quarter, including Big Pack items and further expansion of industry leading Simple Truth Plant Based line
- Announced collaboration with ghost kitchen partner Kitchen United to create a new service that provides customers on-demand meal pickup and delivery restaurant delivery.
- Announced inaugural Go Fresh & Local Supplier Accelerator cohort, launching innovative locally and regionally sourced products to stores across the country
- Introduced collaboration with solutions firm Knapp to modernize and expand the Great Lakes distribution center, to help drive efficiency improvements for regional store replenishment and faster delivery of fresh food for customers
- Accelerated its digital platform
- Introduced Kroger Delivery Savings Pass in Florida, offering customers unlimited delivery for $79 annually
- Launched sushi delivery pilot with DoorDash in three geographies • Expanded pilot with Google Maps to improve grocery pickup experience for associates and customers
- Expanded to 2,239 pickup locations and 2,546 delivery locations, covering 98 percent of Kroger households
- Launched FEED app which provides associates easy access to company communication and resources.
Kroger also noted that during Q2 it increased its average hourly wage to more than $16 and with comprehensive benefits added, will be approaching $21 by the end of 2021.
In Kroger news affecting the Mid-Atlantic, the retailer announced that it has ratified a new collective bargaining agreement between the company and the United Food and Commercial Workers Union, Local 400. Kroger said it will invest $27 million in wage increases and benefits during the three-year term of the new pact.
“We are pleased we could reach this agreement to support our Richmond/Hampton Roads area associates and our company. Under the terms of the new agreement, associates will receive significant pay increases, affordable and comprehensive health care, and continued investment in their pension fund,” said Lori Raya, president of the Kroger Mid-Atlantic Division, who joined the retailer during its second quarter.
“The new agreement comes after thoughtful and productive work by both the company and the union bargaining committees. We thank our associates for ratifying the agreement and for the excellent service they provide for our customers every day.”
The new labor deal covers more than 2,900 associates working at 21 stores in Richmond, Hampton Roads, and Tidewater in eastern Virginia.