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Kroger: Taking Time to Evaluate Delivery Investments

Thomas Paulson
Sep 9, 2022
Kroger: Taking Time to Evaluate Delivery Investments

Key Kroger Metrics

Kroger reported good comparable-store sales growth of +5.8%, which was “propelled by [its] Leading with Fresh and Accelerating with Digital strategy" with its brands outperforming. Based on the results, Kroger increased its sales and earnings guidance for the year with the 2H22 comparable store sales outlook being in the same +5%-6% range.

  • Trailing-twelve-month sales per square foot increased QoQ $9 to $699. (For reference Publix is $830 and Alberston’s is $606.) Kroger CEO Rodney McMullen shared, “Our fuel rewards program continues to resonate with customers as more than 600,000 incremental households engaged with our fuel rewards program this quarter compared to last year. And our fuel reward redemption rates were also up significantly.” (The impact on fuel rewards and stations as effective drivers of trips and market share is a topic that we have frequently wrote about. We are now exploring how EV fast chargers may be utilized in a similar fashion.)
  • Profitability was supported by holding gross margin, “reflect[ing] our ability to effectively manage product cost inflation through strong sourcing practices while helping customers manage their budgets and keeping prices competitive.” However, higher incentive pay due to the above plan sales, higher wage costs, and strategic investments lowered the overall rate.
  • TTM EBITDA and free cash flow were $7.4B and $4.5B, respectively, versus $5.3B and $2.2B last year. Both metrics are highly likely to each be at least $450M higher by this point next year and potentially more depending on the incremental CFC investments that we talk about below.
  • Digital sales increased +8% and delivery increased +34% driven by Kroger Boost (its delivery program that launched nationwide) and growth in and at its customer fulfillment centers (CFCs). During the quarter its Romulus, Michigan CFC opened to serve households in Michigan, Northern Ohio, and Indiana. Additionally, a new CFC was announced for the Denver Metro area (300K square feet and 400 jobs). Six CFCs are now operational and seven are in construction. Spoke facilities (cross-docks) are in Louisville, Nashville, Chicago, Austin, Birmingham, Oklahoma City, and San Antonio.
  • While the investments in digital, delivery, and CFCs have been high and the overall commentary constructive about way consumers are engaging with these investments, CFO Gary Millerchip noted that the company is, “taking a step back certainly to figure out what is the overall market digital growth is likely to look like this year because [McMullen] mentioned during his prepared comments that we're building a seamless ecosystem for the customer and what we're seeing in customers are moving between the channels and making the decisions of where they shop. Ultimately, we want to make sure the customer will go to Kroger and they're choosing to shop through the store or pickup or delivery, whatever works for them. And we certainly have certain assumptions around how we thought the digital market will grow this year, and we've sort of taken a step back as we look at the back half of the year and really sort of assess how we think the market overall is growing". To us that suggests that there may be some uncertainty about their plans for the consumer’s continued adoption of delivery and they may pause the expansion in the near future and give the current markets time to season and mature so that they have a more updated understanding of the ROI.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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