FINANCE

Kroger’s Q2 earnings beat Street; digital sales surge

BY CSA STAFF

Kroger Co. reported second-quarter earnings that beat expectations amid surging digital sales as its grocery delivery service continues to gain momentum.

Net income totaled $297 million, or 37 cents per share, in the quarter ended, down from $508 million, or 62 cents per share, last year. Adjusted earnings per share of 44 cents beat the Street estimate of 41 cents.

Sales edged up to $28.17 billion from $28.01 billion, missing estimates of $28.38 billion.

Same-store sales without fuel were up 2.2%, beating estimates. Digital sales increased 31% amid Kroger’s ongoing investments in its Ship, Pickup and grocery delivery business. During the second quarter, the grocer expanded to 1,780 Pickup locations and 2,225 delivery locations, covering 95% of its households.

In comments, analyst Neil Saunders said Kroger’s commitment to digital has resulted in solid levels of online sales growth which. But he cautioned that the profitability of online grocery is questionable.

“Even Kroger’s most automated model, which it is developing in partnership with Ocado, is not proven to deliver solid profitability,” said Saunders, managing director, GlobalData Retail. “This argument particularly applies to established markets where Kroger is simply transferring spend once made in stores to the digital ecosystem, which ultimately erodes margins.”

Kroger chairman and CEO Rodney McMullen stated that chain was pleased with the improvement of trends in its supermarket business in the second quarter.

“Guided by our customer obsession, Kroger delivered our best identical sales, without fuel, result since the launch of our transformation plan,” he said. “FIFO gross margin, without fuel and pharmacy, was stable in our supermarket business. We continue to reduce costs and are on track to deliver $100 million in incremental operating profit through alternative profit stream growth.”

Investors were rattled on the company’s earnings call when McMullen said the chain would not reconfirm at this time its three-year forecast to generate $400 million in incremental profit.

“In November we will give detailed 2020 annual guidance,” he said. “I do want to highlight that we expect to deliver FIFO operating profit growth in 2020 over 2019 confirmed guidance.”

Kroger maintained its 2019 guidance for same-store sales growth of 2.0% to 2.25% and adjusted earnings per share of $2.15 to $2.25.

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