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Kroger Co. asks investors to change their view of the company

Analysts slow to embrace Kroger's tech potential
Posted: 12:17 PM, Dec 06, 2018
Updated: 2018-12-06 17:17:00Z

CINCINNATI - The Kroger Co. is trying to convince investors that it’s turning into a high-tech growth company, but Wall Street analysts remain focused on traditional brick-and-mortar measures of the company’s performance.

In a conference call to discuss third-quarter earnings, analysts asked only a few questions about Kroger’s 60 percent digital sales growth in the three months ended Nov. 10. Instead, they quizzed company officials on operating costs, same-store sales and profit margins from the sale of fuel.

Investors seemed to like the answers. Kroger’s stock price, which was down nearly three percent at the start of the call, rose to $28.73 a share by mid-day. That’s up 0.3 percent from Tuesday’s close, a remarkable feat on a day when virtually every market indicator is falling.

“As you look at now through 2020, you should expect to see us reducing costs,” Kroger CEO Rodney McMullen told one analyst who raised concerns about the company’s ability to boost profits. “Our operations team is doing a great job working with our stores and our technology team on some innovation ideas to improve processes and take costs out.”

Kroger reported a $317 million third-quarter profit Thursday on total sales of $27.7 billion. Its earnings per share of $0.39 was 5 cents better than analysts were expecting but same-store sales growth fell just shy of expectations. Kroger tracks sales excluding fuel at identical stores, meaning locations that have been open without major modifications for at least a year.

Kroger told investors to expect 1.8 percent growth in that metric this year, but its third-quarter growth was only 1.6 percent, half a percentage point lower than analysts were forecasting.

In its press release, Kroger emphasized rapid growth in its online revenue, including record profitability in its Kroger Personal Finance division and 150 percent sales growth from its Kroger Precision Marketing unit, which allows advertisers to influence search results to show their products in Kroger shopping apps.

It also highlighted new investments in business partnerships with Walgreen’s and Ocado, which provide new ways for consumers to find Kroger merchandise outside its traditional grocery stories.

“Kroger is transforming our business model,” McMullen said in the release. “We’re moving from a traditional grocer to a growth company with both a strong customer ecosystem that offers anything, anytime, anywhere, and asset-light, high-margin alternative partnerships and services.”