Grocery retailing giant Kroger (KR -0.67%) reported third-quarter earnings on Thursday, Dec 5, that demonstrated a mix of progress and obstacles. Notably, its adjusted earnings per share rose to $0.98, topping analyst consensus estimates of $0.97, despite a 1.2% decline in overall sales to $33.6 billion, which missed expectations. This sales drop was attributed to the divestment of its Specialty Pharmacy operations and decreased fuel sales.
Despite these challenges, the quarter exhibited solid growth in same-store sales and a slight boost in gross margin, suggesting a relatively positive period overall.
| Metric | Q3 2024 | Analysts' Estimate | Q3 2023 | Change (YOY) |
|---|---|---|---|---|
| Adjusted EPS | $0.98 | $0.97 | $0.95 | 3.2% |
| Total sales | $33.63 billion | $34.19 billion | $33.96 billion | (1.2%) |
| Same-store sales (excluding fuel) | 2.3% | 1.8% | (0.6%) | 2.9 pps |
| Adj. FIFO operating profit | $1.02 billion | N/A | $1.02 billion | (0.5%) |
| Net income | $618 million | N/A | $646 million | (4.3%) |
Source: Kroger. Note: Analyst consensus estimates for the quarter provided by FactSet. YOY = Year over year. Adjusted FIFO operating profit refers to a company's operating profit calculated as if they used the First-In, First-Out (FIFO) inventory method.
Kroger's Business Overview
Kroger is a major player in the U.S. grocery sector, operating 2,722 stores under multiple brand labels across 35 states. Its strategy relies on extensive market reach, private label products under "Our Brands," and a strong digital presence.
In recent months, the company has focused on expanding its private label offerings, enhancing digital shopping capabilities, and considering strategic mergers. Success hinges on maintaining competitive pricing, enhancing customer loyalty, and expanding its digital footprint.
Notable Quarterly Developments
During the quarter, Kroger saw a slight drop in overall sales but indicated strong performance in certain areas. "Our Brands," the company's own product line, outperformed traditional grocery items. This demonstrates Kroger's success in offering exclusive products.
Digital sales grew by 11%, spearheaded by improved service offerings such as customer order batching and pickup efficiency. Delivery sales increased by 18%, driven by customer fulfillment centers -- central hubs for managing online grocery orders.
Kroger's gross margin improved by 51 basis points excluding fuel, facilitated by the strategic exit from its lower-margin Specialty Pharmacy segment. While this supported margins, rising incentives under Operating, General, and Administrative costs by 22 basis points applied pressure.
The anticipated merger with Albertsons remains a focal point. Though promising, especially for achieving cost savings and expanded market locations, it poses regulatory and operational risks. Kroger continues to navigate these complexities with an eye on potential benefits.
Looking Ahead
Kroger management updated its guidance for the full year, projecting between 1.2% and 1.5% growth in same-store sales without fuel (compared with prior guidance of 0.75% to 1.75%). Adjusted EPS targets are set between $4.35 and $4.45. The management reiterates its expectation for robust free cash flow and plans to sustain capital expenditures.
Investors should watch for the completion of the Albertsons merger, as it could transform market positioning and revenue dynamics. Additionally, the emphasis on expanding digital operations and growing private label sales is expected to support future earnings.
