Supermarket chain Kroger (KR 28.48, -3.25, -10.24%) slips to
seven-week lows on Thursday in reaction to this morning’s second quarter sales
miss and guidance that was only reaffirmed.
Essentially, you could call Kroger’s second quarter sales an in-line result, albeit at the low end of what the Street was expecting for the quarter. Q2 net sales came in at $27.87 bln, up about 1.0% compared to last year on slightly worse than expected identical sales, ex-fuel, of 1.6%.
Adjusted earnings per share (EPS) for Q2 came in ahead of market expectations at $0.41/share as gross margins of 21.3% were essentially in-line. Excluding fuel and the LIFO charge, gross margin decreased 36 basis points from the same period last year. Kroger noted that its shrink rate continued to improve during the quarter. The gross margin rate achieved reflects the company's price investments, rising transportation costs, and growth of the specialty pharmacy business.
As these results perhaps make evident, it appears that Kroger’s “Restock” program isn’t quite adhering to plan, at least as of yet. Announced at the company’s 2017 Investor Conference last October, the “Restock Kroger” plan laid out a capital investment-fueled series of initiatives designed to “redefine the food and grocery customer experience in America” in order to create shareholder value and to generate $400 mln in incremental operating margin by 2020 and $4 bln in FCF. Sales which disappointed the Street and essentially in-line ID sales means that customers aren’t taking to the revamp as quickly as Kroger management would have liked. What’s more, the fact that Kroger management held steady on 2018 guidance can be construed as a negative.
As to the guidance, Kroger held firm on its previous guidance for ID sales between 2.0-2.5% in 2018, ex-fuel. Management also still sees net EPS in the range of $2.00-2.15 per diluted share for 2018.
Management also gave commentary on the conference call that the company is on track to generate the free cash flow and the incremental FIFO operating profit that it previous committed to in Restock Kroger through 2020. The company also commented on the health of the dividend, offering that it continues to expect an increasing dividend over time. In parting, management offered that the company’s financial results continue to be pressured by its inefficient health care and pension costs, which some of its competitors do not face. Management stated that it is continuing to evaluate the use of cash flow as, over the last four quarters, the company has used cash to an incremental $1.1 bln pre-tax to the company's sponsored pension plans and $467 mln pre-tax to satisfy withdrawal obligation to the Central State's pension fund.
As customers are increasingly being drawn to other grocery shopping venues – like Amazon’s Fresh and Whole Foods – Kroger is having a tougher time convincing people to shop within its confines. The problem is being exacerbated by changing shelf and product distribution with Kroger’s “Restock” program. Put plainly, Kroger’s stock move today is evidence that investors are keeping management on short leash as shares fell through the 50-day simple moving average (29.95) in the premarket session, though they currently sit modestly off lows of -10.8%.
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