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Kroger Will Exit Lucky’s As ‘Restock’ Program Brings Results

Kroger transformation

The Kroger Co.’s third quarter fiscal 2019 results reflect the strength of its Restock Kroger program and the Cincinnati-based company’s success with digital sales, which soared 21 percent. Kroger Chairman and CEO Rodney McMullen said in a news release that the 2.5 percent increase in identical store sales the company experienced proves the power of its “Restock Kroger” program. He called it the “right framework to reposition our business to create value for all of our stakeholders, both today and in the future.

“Kroger’s customer obsession and focus on operational excellence continued to generate positive results in the third quarter,” McMullen said. “Identical sales were the strongest since we started Restock Kroger and (the) gross margin rate, excluding fuel and pharmacy, improved slightly in the quarter. At the same time, we continued to reduce costs as a percentage of sales.”

Kroger is using its supermarket business to build incremental operating profit through alternative revenue stream businesses. McMullen said that “adds up to a business built for long-term growth that generates consistently attractive total shareholder returns.”

He also said that the company has used its “strong and durable free cash flow” to reduce its debt by $1.5 billion over the prior four quarters.

Divesting, reducing debt

Kroger has decided to divest its interest in Boulder, Colorado-based Lucky’s Market, which will result in a non-cash impairment charge of $238 million in the third quarter; the portion of this charge attributable to Kroger is $131 million.

The company reduced net total debt by $1.5 billion over the last four quarters, leaving its net total debt to adjusted EBITDA ratio at 2.50 vs. 2.72 a year ago. That is in line with its target range of 2.30 to 2.50. As a result, Kroger plans to initiate share repurchases in the fourth quarter under its $1 billion board authorization.

Meanwhile, total company sales were $28.0 billion in the third quarter, compared to $27.8 billion for the same period last year. Excluding fuel and dispositions, sales grew 2.7 percent.

Gross margin was 22.1 percent of sales for the third quarter. The FIFO gross margin rate excluding fuel decreased 24 basis points, primarily driven by industry-wide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business. Gross margin rate excluding fuel and pharmacy improved slightly.

LIFO charge for the quarter was $23 million, compared to $12 million for the same period last year, driven by higher inflation in dry grocery, pharmacy and dairy.

Other highlights of Kroger’s third quarter, which ended on Nov. 9, include:

  • The launch of a new logo and “Fresh for Everyone” campaign.
  • An increase of 3.4 percent in own brand sales vs. the prior year, as well as the introduction of 231 new private label items, including the Simple Truth Plant Based collection that features meatless burger patties.
  • Covering more than 96 percent of Kroger households as it expanded its online shopping offering to now include 1,915 pickup locations and a total of 2,326 delivery locations. Kroger also launched a seamless ship option.
  • Expanded availability of longer-lasting avocados with a plant-based coating developed by Apeel Sciences to reduce food waste, and the introduction of two new produce categories: Apeel asparagus and Apeel limes.
  • Announcing the location of a new Kroger-Ocado customer fulfillment location in Wisconsin.
  • Partnering with Europe’s Infarm to introduce the first in-store living produce farms in America in Seattle-area QFC stores.
  • An average hourly wage that now totals more than $20 with benefits factored in and a record employee retention rate.

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