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Is Kroger on its way to becoming a national grocery chain?

CEO: Kroger wants to be the nation's grocer
Posted at 9:19 AM, Jun 21, 2018
and last updated 2018-06-21 14:24:31-04

CINCINNATI - The Kroger Co. exceeded analyst expectations with a $2 billion profit on revenue of $37.5 billion, as new investments in technology, meal kits and home delivery accelerated sales growth.

“Restock Kroger is off to a fantastic start,” Kroger CEO Rodney McMullen said in a press release, referring to a strategic initiative announced last October.

In a conference call with analysts, McMullen said Kroger aims to become a national grocery chain through its new partnerships with Britain’s online grocery provider Ocado and Home Chef, a Chicago-based meal kits maker.

“We believe the future of retail will include both physical and digital customer experiences,” he said. “Everything we are doing today will enhance our ability to provide everyone in America with convenience of shopping for anything, anytime, anywhere.”

When an analyst asked McMullen to clarify whether "reaching all of America" meant entering densely populated markets in the northeast where it doesn't currently have stores, McMullen said, "That is our vision and our aspiration."

Kroger Chief Financial Officer Mike Schlotman said the company is moving “as fast as possible” to open its first three fulfillment centers with Ocado. He said the companies are analyzing how much territory each facility can cover and when it’s best for grocery deliveries to come from a store or an automated warehouse.

“What we're really trying to do is to make sure that we have an overall infrastructure for digital that can support whether it's 5 percent of share or 30 percent of share,” Schlotman said. “If it ends up being 30 percent  … you'll have more sheds and they'll be used to take pressure off of a store.”

Kroger’s stock price jumped more than 10 percent to $28.85 in pre-market trading as investors reacted to the company's first-quarter revenue, which exceeded Wall Street expectations by $320 million. The stock gave back some of those early gains, but traded above $28 for most of the day, up about 8 percent from yesterday's close. Kroger’s earnings per share of $0.73, excluding unusual items, was 10 cents better than expected.

Kroger also delivered 1.4 percent growth in identical-store sales excluding fuel, its fourth straight quarter of positive numbers for that important metric.

Thursday’s rally means Kroger’s stock price is approaching its highest level since the June swoon of 2017, when the company had just disappointed investors by ending a 13-year streak of positive ID store sales growth and Amazon Inc. announced the purchase of Whole Foods.

Kroger shares, which opened 2017 above $33, dropped to $20 as investors questioned whether the traditional grocery chain could compete against the online titan.

But Kroger responded with new investments in its digital capabilities and expanded curbside pickup and home delivery to more than 1,000 stores. It also made new investments in meal kits and its own branded products.

Those investments are now paying dividends, as Kroger’s first-quarter numbers included 66 percent growth in digital spending by its customers. Kroger’s private-label brands achieved their “highest ever retail dollar share,” driven by double digit growth in Simple Truth and Simple Truth Organic products.

The growing digital business has prompted Kroger to change the way it reports identical store sales, as it explains here:

When calculating identical sales to be more inclusive of company business units – including Kroger Specialty Pharmacy and ship-to-home solutions – Kroger's identical sales, without fuel, were 1.9% in the first quarter. The company intends to use this calculation going forward as a more appropriate measure to track Kroger's performance as it redefines the grocery customer experience, and to be more comparable with how peers report.