On Sept. 12, The Kroger Co. reported results for its second quarter ended Aug. 17 and provided a Restock Kroger progress update on the Cincinnati-based company’s three-year transformation plan.
Total company sales were $28.2 billion in the second quarter, compared to $28 billion for the same period last year. Excluding fuel, dispositions and merger transactions, sales grew 2.5 percent.
Gross margin was 21.9 percent of sales for the second quarter. The FIFO gross margin rate, excluding fuel, decrease of 29 basis points was primarily driven by industry-wide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business. Gross profit excluding fuel and retail pharmacy saw 12 basis points of gross margin investment.
LIFO charge for the quarter was $30 million, compared to $12 million for the same period last year, driven by higher than expected inflation in dry grocery, pharmacy and dairy.
The operating, general and administrative rate decrease of 14 basis points is due to execution of Restock Kroger initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions.
During the quarter, Kroger accepted a substantial offer to sell an unused warehouse that had been on the market for some time. Kroger used this gain as an opportunity to contribute a similar amount into the UFCW company pension plan, helping stabilize associates’ future benefits. The net impact of these transactions to EPS growth was neutral.
Kroger Chairman and CEO Rodney McMullen said, “The Restock Kroger framework is designed to reposition our core business by 2020 while continuing to deliver for shareholders. We are pleased with the improvement of trends in our supermarket business in the second quarter. Guided by our customer obsession, Kroger delivered our best identical sales, without fuel, result since the launch of our transformation plan. FIFO gross margin, without fuel and pharmacy, was stable in our supermarket business. Gross margin headwinds in pharmacy were offset by strong fuel performance during the quarter. We continue to reduce costs and are on track to deliver $100 million in incremental operating profit through alternative profit stream growth. We delivered strong free cash flow and are now within our targeted net total debt to adjusted EBITDA range.
“Kroger is laser-focused on executing against our 2019 plans and realizing our vision of serving America through food inspiration and uplift,” McMullen added.
2Q Restock Kroger highlights
Redefine the Grocery Customer Experience:
- Our Brands sales were up 3.1 percent vs. prior year. Kroger also launched 203 new Our Brands items;
- Expanded to 1,780 pickup locations and 2,225 delivery locations, covering more 95 percent of Kroger households;
- Launched Simple Truth Plant Based, a collection of fresh meatless burger patties and other products to appeal to growing number of customers exploring meat and dairy alternatives; and
- Announced first agency of record, DDB New York, to develop a refreshed, stronger brand identity to drive trips and traffic.
Partner for Customer Value
- 84.51 announced the launch of Stratum, a breakthrough analytics solution that combines rich customer behavior insights with retail performance measures;
- Kroger Precision Marketing increased engagement to more than 300 consumer packaged goods companies;
- Announced expansion of Walgreens exploratory pilot into Knoxville, Tennessee; and
- Named the location of an additional Kroger-Ocado customer fulfillment center in Georgia.
- The Kroger Co. has had record employee retention in one of the tightest labor markets in years;
- The retailer was recognized on Way Up’s Top 100 Corporate Internship list for second consecutive year for providing students exposure to various careers; and
- Feed Your Future, industry-leading education assistance program, continues to build momentum. Since inception of the program last year, the company has distributed 3,000 awards, totaling $5.1 million in education assistance.
Live Kroger’s Purpose
- Published annual Environmental, Social and Governance (ESG) report, available at sustainability.kroger.com;
- Reduced food waste footprint in supermarkets by 9 percent last year, marking another measurable action to create a more sustainable future; and
- Announced inaugural cohort of the Innovation Fund, a program of The Kroger Co. Zero Hunger | Zero Waste Foundation.
The company will host its 2019 Investor Conference in New York City on Nov. 5.
Moody’s VP Mickey Chadha commented on the results: “Kroger’s second quarter results demonstrate progress under its Restock Kroger program, with digital sales increasing 31 percent and identical store sales excluding fuel increasing 2.2 percent. Although gross margin was lower than last year’s second quarter, it was better than expected. Also encouraging is that alternative profit streams are gaining momentum, with the company on track to deliver incremental $100 million operating profit contribution from these sources in 2019. Kroger’s private label unit penetration also continues to grow and increased 3.1 percent.”
Chadha added, “We continue to expect 2019 to be a transition year for Kroger with returns on its investments in the Restock Kroger plan starting to accelerate in 2020. More importantly, the company is right sizing its capital structure to conform to its profitability levels as the business environment remains very competitive. It reduced net total debt by $1.3 billion in the last four quarters, bringing its net debt to EBITDA ratio down to 2.46x from 2.83x and we expect the company to continue to focus on improving its leverage ratio this fiscal year.”