Commentary

Kroger Takes A Hit On Wall Street As It Restocks For The Future

Nobody's saying it will be easy, or cheap, to try to beat Amazon at its own game online, or to undercut the myriad of grocers who are slashing prices in the aisles -- least of all Kroger CEO Rodney McMullen.

“Business transformations are hard,” McMullen told analysts on a Q4 2018 earnings call transcribed by Seeking Alpha yesterday, “but I want to emphasize we are on track to deliver our Restock Kroger commitments.” 

The fact that its profit ($259 million) was down 69% from last year’s $854 million jarred Wall Street, however.

“Kroger shares tumbled … amid the company’s battles with Amazon and Walmart for grocery pickup and delivery supremacy. Kroger shares dropped as low as $24.45 -- down $3.99 or 14%. Shares closed Thursday at $25.61, down 10%,” reports Alexander Coolidge for the Cincinnati Enquirer, Kroger’s hometown newspaper.

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“The nation’s largest supermarket chain is waging a war on two fronts: cutting food prices at the same time it spends heavily in digital strategies designed to compete for customers who increasingly want to skip the trip to the store,” he adds. 

Not that there wasn’t good news. 

“Digital sales jumped 58% in fiscal 2018, during which time Kroger expanded online grocery delivery and/or pickup service to 91% of households in its trade areas,” Russell Redman reports for Supermarket News.

“The Our Brands private label program grew to 30.5% unit share in the fourth quarter, marking its ‘best year ever,’ the company said. Kroger also topped $1 billion in savings via improved processes and surpassed what it called ‘ambitious’ operating profit targets for its media and personal finance businesses. Partnerships with Microsoft, Nuro, Ocado and Walgreens and the Home Chef acquisition are expected to bring more customer value going forward, Kroger added,” Redman writes.

“Kroger, which also operates Ralphs, Harris Teeter and other stores, said it now offers grocery delivery at more than 2,000 stores and grocery pickup at 1,600 locations. That’s more than rival Walmart on delivery, but fewer than the 2,100 Walmart stores that offer grocery pickup,” according to an AP story in the Seattle Times.

“Kroger’s investments in its online operations include taking a stake in U.K. robotics grocer Ocado Group PLC. Ocado is building its first U.S. network of automated warehouses for Kroger. The U.S. supermarket chain said Thursday it had invested $589 million in Ocado and Home Chef, a meal-kit company, in its most recent fiscal year,” Heather Haddon writes for the Wall Street Journal.

“Kroger has pledged to generate $400 million in operating profit by next fiscal year, in part by diversifying its sources of revenue. The grocer is pushing into financial services, selling its consumer data to suppliers and selling more ads to target shoppers,” Haddon adds.

Bloomberg’s Sarah Halzack trains a skeptical eye on the concept. 

“Kroger has outlined a plan to derive more profit from what it calls ‘alternative’ sources, meaning from businesses like advertising that offer fatter margins than selling milk and produce. This is, in theory, a decent idea, and comes at a time when Walmart Inc. is also trying to fortify its advertising business. But this kind of work isn’t Kroger’s core competency. So I have some caution about how successful it will be at steering these efforts. Kroger stated in its Thursday press release that it is changing ‘from grocer to growth company.’ For now, though, it hasn’t clearly demonstrated it can achieve that lofty goal,” Halzack writes.

“Mickey Chadha, analyst at Moody’s, said in a note that Kroger’s investments ‘continue to pressure margins in the near to medium term as it makes the necessary investments for future growth,’” Alistair Gray writes for Financial Times.

“He also noted the grocer’s leverage was at ‘elevated’ levels. Net debt to earnings before interest, tax, depreciation and amortization stood at 2.83 times by the end of the quarter, above the company’s target of no more than 2.5 times,” Gray adds.

Kroger “isn’t the only grocery chain struggling to make e-commerce work,” as Amelia Lucas points out for CNBC.com. “Ever since Amazon acquired Whole Foods in August 2017, grocers have been forced to step up their tech investments to avoid losing customers to the e-commerce giant.”

“We're embracing this idea of omnichannel, but no one understands how we're going to make any money, Wolfe Research analyst Scott Mushkin told Kelly Evans on CNBC’s 'The Exchange,'” Lucas reports. 

“The challenge we have, and it’s a huge, huge challenge, is Amazon is re-defining the consumables industry,” Mushkin said.

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