Kroger’s 1.6% comparative stores sales were in line with third-quarter guidance, but now set the retailer up for a big task in Q4 to hit its comp guidance for fiscal year 2018. Kroger still anticipates that second-half sales will be in line with first-half sales. Gross margin came in below analysts’ expectations due to price investments, transportation costs, and growth of the low-margin specialty pharmacy business. Operating, general, and administrative expenses were an unexpected upside, decreasing 20 basis points in the quarter. This improvement came from reduced store associate turnover and greater in-store efficiencies, such as stronger adoption of self-scan checkout.
Progress against Restock Kroger
The retailer gave updates highlighting different aspects of the Restock Kroger plan.
Partner for customer value: Kroger continued to emphasize that its business plan is changing. “Kroger is transforming [its] business model,” said CEO Rodney McMullen. “We’re moving from a traditional grocer to a growth company with both a strong customer ecosystem that offers anything, anytime, anywhere, and asset-light, high-margin alternative partnerships and services.” Kroger highlighted aspects of its alternative revenue-generating portfolio, including Kroger Personal Finance and Kroger Precision Marketing. Kroger Personal Finance is on track to have the most profitable year ever, and Kroger Precision Marketing’s boosted search product is delivering results two to three times the industry standard, teeing up future growth.
Redefine the customer experience: Digital continues to drive Kroger’s sales and reach. The retailer’s digital business grew more than 60% in Q3. With 90% of Kroger households now having access to pickup or delivery services and Kroger Ship rolled out to all supermarket divisions, Kroger expects to slow capex investment in this space in 2019. Viewing digital as a key way to grow both the top and bottom line, Kroger will shift focus to maximize its newly built capabilities.
While Kroger still has work to do both in Q4 and in hitting the 2020 Restock Kroger numbers, it has more than demonstrated its commitment to the Restock Kroger plan and to growing through nontraditional avenues. Kroger said it was confident that it would deliver on its Q4 numbers, noting that the EPS guidance was abnormally wide for no other reason than the fluctuation in fuel prices. While it is reasonable to have some skepticism that Kroger’s core business will pick up in Q4, Kroger has clearly set itself up for longer-term growth. Now we have to see how soon that growth happens.
For more information, please contact:
Tory Gundelach, Vice President