Kroger Posts Soft Sales Growth and Falling Profitability

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Kroger (NYSE:KR) announced third-quarter results this week that showed encouraging progress along the supermarket chain’s growth initiatives, especially in the key digital sales channel. However, the retailer continued to struggle with weak market-share results despite aggressive pricing and ramped-up spending.

Here’s a look at how the latest results stacked up against the prior-year period: 

 Metric

Q3 2018

Q3 2017

Change (YOY)

Revenue

$28 billion

$28 billion

1.7%

Net income

$317 million

$397 million

(20%)

Earnings per share

$0.39

$0.44

(11%)

Data source: Kroger’s financial filings. YOY = year over year.

What happened this quarter?

Kroger achieved steady sales growth that kept it on track to meet its modest expansion plans for the year. The boost came at a steep price in terms of profit margins, though, and it also trailed the pace of key rivals like Walmart (NYSE:WMT).

A customer shops for groceries.

Image source: Getty Images.

Highlights of the quarter include:

  • Comparable-store sales, or sales at existing locations, rose 1.6% to mark no improvement over the prior-quarter’s results. Walmart grew at about double that pace, which implies more market share gains for the retailing titan in the grocery segment.
  • E-commerce sales were up a healthy 60%, compared to 50% last quarter as the company expanded its online shopping and home delivery offerings.
  • Gross profit margin fell as a result of price cuts and rising transportation costs.
  • Selling expenses fell slightly as a percentage of sales, but not by enough to offset the worsening gross profitably. As a result, operating profit fell to $647 million, or 2.3% of sales from $747 million, or 2.7% of sales, a year ago. Walmart’s profitability is declining, too, but its operating margin is roughly double Kroger’s today.

What management had to say

Kroger executives highlighted a few strides that the company made in its transformation initiatives that are aimed at better positioning the chain for a multichannel retailing environment. These included double-digit growth in the digital customer base and record sales for its in-store brands like Simple Truth. “Kroger is transforming our business model,” CEO Rodney McMullen said in a press release. “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,” he continued.

Management noted that the company found room to direct resources toward important areas like price cuts, which should result in a “virtuous cycle” of accelerating growth supporting greater price leadership. “We are strengthening the Kroger ecosystem by reducing costs and investing the savings in our associates, technology, and price to grow units, traffic, and [market] share,” McMullen said.

Looking forward

Kroger affirmed its full-year outlook on both the top and bottom lines, meaning sales should continue to inch higher at the roughly 2% pace shareholders have seen for the past six months. That would reflect modest customer traffic wins, both in stores and online, but it also trails the 3% gain that Walmart is targeting for the year. Meanwhile, Kroger’s spending initiatives are pushing profitability lower, and it’s not yet clear when investors can expect that metric to stabilize, or to start delivering sales growth that’s closer to that of more successful grocery peers like Walmart and Costco.  

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.