On the conference call, it management seemed to take a forest through the trees approach. Investing in employees, continued investment in digital, and investing in price were among the company’s highlighted points to driving growth into the future.
From the top, Kroger reported Q4 revenue growth of 12.4% to about $31.03 billion with a 90% increase in digital sales. Sales growth was modestly offset by a 12% increase in Merchandise costs to about $24.2 billion in the period and a nearly 33% increase in operating costs to about $5.9 billion. The byproduct of an increasing grocery market (Amazon's (AMZN 1553.80, +8.80, +0.6%) Whole Foods, Walmart (WMT 87.65, +0.43, +0.5%) and Aldi's recent entry into Kohl's (KSS 62.72, -2.46, -3.8%) department stores), costs are likely to be in focus going forward as management attempts to balance investment with market share. Q4 identical supermarket sales, without fuel, were 1.5% and 0.7% on the year. Earnings of $0.63 per share were in-line with market expectations, impacted by about $0.36-0.37 by tax savings.
Management highlighted gross margins of 21.9%, a 31 basis point decline in the quarter and a 19 basis point dip for the year. The company softened the gross margin result decline on the call, suggesting that these declines were “fairly normal” for the company.
In-line guidance also moves shares lower today; the company guided 2018 EPS between $1.95-2.15 on identical supermarket sales growth, excluding fuel, to range from 1.5-2.0%. The company also commented on the conference call that it expects gross margins to decline “somewhat” in 2018.
Further down the road, Kroger expects to generate $400 million of incremental operating margins from 2018 to 2020. Kroger also expects capital investments, excluding mergers, acquisitions and purchases of leased facilities to be about $3 billion on a tax rate of about 22%. In a general sense, management stated that tax savings will be reinvested into its Restock Kroger initiative, at the same time it hopes to expand its digital shopping experience.