Reporting an identical sales increase excluding fuel of 11% to $29.72b in the third quarter ending Nov. 7, Kroger beat analyst predictions that its sales would taper significantly in Q3 compared to the 15% spike it saw in Q2 and that it would bring in only a mid-single digit increase akin to its main competitor Walmart.
Investor fears the retailer would see a growth slowdown in the quarter were further ameliorated by Kroger’s digital sales, which jumped 108% in the quarter and is now incrementally profitable, and its market share gains, which CEO Rodney McMullen attributed in part to its Restock Kroger initiative that kicked off in 2017.
The initiative, which includes improving customer experience, partnering with outside entities to increase customer value, developing talent and living the retailer’s purpose, was derided by some analysts during its first two years when quarterly results lagged. Naysayers criticized the company for investing heavily in new customer fulfillment centers, accelerating store refreshes and introducing too many new products too fast.
But the company’s most recent earnings suggest the investment was worth it – and worth the wait.
“The investments we are making in our business are allowing us to deliver strong results today and, importantly, are also setting us up to deliver sustained growth in the future,” CFO Gary Millerchip told investors Dec. 2 during the company’s Q3 earnings call.
For example, he noted, Kroger’s investment in e-commerce and an enhanced digital experience is driving consumer loyalty and significantly larger baskets.
“When customers engage with both our physical stores and digital channels, they visit more frequently and, on average, spend twice as much as those who shop in-store only,” he said. “The vast majority of our digital customers are shopping in-store as well as online. And we are, therefore, confident that the seamless experience we are building across our store and digital ecosystem position us well for a continued growth in a post-COVID world.”
He added that Kroger also has lowered the cost to fulfill a pickup order and accelerated digital advertising revenue to further improve digital profitability by leveraging its personalization tools to increase basket size, improve sales mix and further reduce fulfillment costs.
McMullen added that the retailer’s gains in ecommerce were also possible thanks to “early investments” that “laid the foundation, including over 2,200 pickup locations and over 2,450 delivery locations, which allowed us to capture the increased customer demand for e-commerce offering during the pandemic we have today, reaching 98% of our customers with a seamless customer experience around in-store shopping, pickup, delivery and ship-to-home modalities.”
New products, premium offerings inspire shoppers
The retailer also drove sales and consumer loyalty in Q3 by inspiring shoppers who are suffering from cooking fatigue and are interested in both easy solutions and trading up to more premium products for a better at-home experience, McMullen said.
“We are fulfilling our customers’ growing demand for premium products as they seek joy and elevated experiences. We’re merchandising in new ways to both meet that demand and inspire our customers to trade up to items like premium jumbo blueberries … and larger-sized packages of strawberries, raspberries and grapes,” he said.
He also noted that Home Chef’s culinary innovation is “inspiring customers with new oven-ready entrees and sides, flat bread, pizzas, salads and sandwiches.”
New product launches also helped the retailer gain market share, especially around its private selection, which grew over 17% in the quarter, and Simple Truth, which climbed 15%.
“These are incredible numbers and demonstrate that while many competitors offer private label products, Kroger’s unique approach to our brands is a differentiator in a competitive mode,” McMullen added.
These advancements, combined with other elements of the Restock Kroger initiative, ultimately allowed Kroger to raise its guidance for the remainder of 2020 so that it now expects total identical sales without fuel to be around 14% for the year. This translates to an earnings per share growth of about 50% to 53% and adjusted free cash flow of $2.8b to $3.1b.
McMullen added, “Looking forward to 2021, we believe that our performance will be stronger than we would have expected prior to the pandemic when viewed as a two-year stacked result for identical sales without fuel growth and as a compound growth rate over 2020 and 2021 for adjusted earnings-per-share growth.”
Ultimately, he added, “we remain confident in our business model and our ability to achieve consistently attractive total shareholder returns.”