It took almost two years, but investors are finally starting to see results from Kroger‘s (NYSE: KR) turnaround plan. The grocery store chain this past week announced a small but meaningful sales growth acceleration while posting higher profitability.
The results weren’t good enough to convince management to raise their 2019 outlook, as peers like Walmart (NYSE: WMT) and Target (NYSE: TGT) have done this year. But CEO Rodney McMullen and his team said in an earnings call that the numbers demonstrate that better days are coming for the business. Let’s look at a few highlights from that presentation to investors.
The rebound plan is working
While we’re always continually driving for improvements, there are several examples in our second quarter results that reflect the disciplined focus of “Restock Kroger” [rebound] blueprint is paying off.
Kroger managed 2.2% higher sales at existing locations, compared to 1.5% in the prior quarter. That result trailed the 3% boost that chief rival Walmart posted, but it still represented Kroger’s fastest expansion pace since it started its turnaround initiative in early 2018.
Executives highlighted a few other metrics that point to gathering operating momentum, too, including customer satisfaction levels, profitability, and robust volumes for in-store brands like Simple Truth.
More cash returns are on the way
We remain committed to our target [leverage range] and as we start to operate consistently within that range, we will explore options for returning additional capital to shareholders.
— CFO Gary Millerchip
Kroger has made significant progress at paying down the debt it took on to fund major purchases like Harris Teeter and e-commerce specialist Vitacost. Thanks to a $1.3 billion reduction in those liabilities, plus rising earnings, the consumer staples giant’s leverage has now dropped to below the top end of the range that management is comfortable holding.
Executives apparently don’t see more large acquisitions on the way, but instead say they’re likely to boost direct capital returns in the future through stock buybacks and more dividend increases like the recent 14% spike that marked Kroger’s 13th consecutive year of dividend hikes.
Over the course of a three-year plan in today’s retail environment, there are lots of puts and takes. That said, I want to reiterate that Kroger is committed to…operating profit growth in 2020 over 2019 confirmed guidance.
Executives plan to present a detailed rundown of how well their 3-year rebound strategy is working when Kroger holds its annual investor day in early November. Until then, the company’s high-level outlook still predicts stable profits this year and a return to earnings growth and accelerating sales gains in 2020.
The fact that sales growth is still set to land at around 2% this year when Walmart is seeing 3% boosts and Target is growing at a 5% annual clip still implies modest market-share losses for the country’s biggest supermarket chain. However, management believes this performance gap will close in the coming quarters as customers start noticing all the upgrades Kroger has been making to its shopping experience.
“There is always a lag,” McMullen said, “between improving the customer experience and when the customer will reward us.” That prediction puts the focus on comparable-store sales, which are inching higher but still have room to grow before Kroger can claim an end to its multiyear market-share slide.
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