Sales Wane, But Still Strong in Kroger Q3

The Kroger Co. is raising its guidance for the full year despite a deceleration in sales during the third quarter.

America's largest grocery chain raised its full-year outlook, saying there is little evidence that consumers will stop packing stores and eating at home anytime soon as they look to reduce their exposure to the COVID-19 virus.

"As a result of our continued strong performance, market share growth and the expectation of sustained trends in food at home consumption for the remainder of our fiscal year, we are raising our full year 2020 guidance," CFO Gary Millerchip said during an earnings call. "Looking toward 2021, we believe that our performance will be stronger than we would have expected prior to the pandemic when viewed as a two-year stacked result for identical sales without fuel growth and as a compounded growth rate over 2020 and 2021 for adjusted earnings per share growth."

Kroger now anticipates full-year adjusted EPS will total $3.30 to $3.35, and the retailer sees same-store sales rising about 14%.

Still, some of the company's gains from the pandemic appear to be waning.

Kroger said it earned 71 cents a share on revenue that rose 6.3% year over year to $29.72 billion in the third quarter ended Nov. 7, compared to $30.5 billion in second quarter. Same-store sales without fuel in third quarter rose 10.9%, a deceleration from second quarter's14.6% comp. Digital sales jumped 108% during third quarter, but again decelerated from the second quarter, when they increased 127%. Despite the decelerations, there's no question that Kroger's financial performance continues to be impressive.

"We delivered strong results in the third quarter," said CEO Rodney McMullen. "Customers are at the center of everything we do and sales remain elevated as we continue to enhance our competitive moats — Fresh, Our Brands, Data & Personalization and Seamless. We are executing against our strategy even during the pandemic and continue to grow market share."

Kroger said in its third quarter report that it has spent $1.3 billion since March on safety measures and compensation for front-line workers. Now the company is getting ready to pour another $962 million to shift 33,000 employees to a new pension plan. Kroger said it will take the charge in the fourth quarter, approximately 98 cents per diluted share on a GAAP basis, after employees ratified an agreement with 20 local unions. The change means 33,000 Kroger employees at 14 of its divisions will be withdrawn from the UFCW International Union-Industry Pension Fund and move to the UFCW and Employer's Variable Annuity Pension Plan.

Millerchip said in a release that the agreement “improves the security and stability of future benefits for our associates and modernizes our retirement benefits offering."

During the third quarter, adjusted operating profit at Kroger rose 33% to $871 million. Gross margin was 23% of sales. The FIFO gross margin rate, excluding fuel, decreased 2 basis points compared to the same period last year. This decrease was primarily driven by price investments and mix changes, offset by sourcing efficiencies, sales leverage and growth in alternative profit streams. The LIFO charge was $23 million for both the third quarters of 2020 and 2019.

The Operating, General & Administrative rate decreased 30 basis points, excluding fuel and adjustment items, due to sales leverage and execution of Restock Kroger initiatives, partially offset by continued COVID-19 related investments to protect the health and safety of associates, customers and communities and increased incentive costs.

During the quarter, Kroger repurchased $304 million of shares under its $1 billion board authorization announced on Sept. 11. Year to date, Kroger has repurchased $989 million of shares. Earlier this year, Kroger increased the dividend by 13%, marking the 14th consecutive year of dividend increases.

"The strong underlying momentum in our core supermarket business and acceleration in the growth of our alternative profit business demonstrates we are successfully transforming our business model to deliver consistently strong and attractive total shareholder return in 2020 and beyond," McMullen added.

Cincinnati-based Kroger employs nearly half a million associates who serve 9 million-plus customers daily through a seamless digital shopping experience and 2,757 retail food stores under a variety of banner names. The company is No. 3 on The PG 100, Progressive Grocer’s 2020 list of the top food retailers in the United States.