CINCINNATI — Inertia is a death sentence in modern retail. Yet the new endeavors needed to attract and retain customers require capital investment and offer no guarantee of success. During the third quarter of fiscal 2019, The Kroger Co. saw upside from some endeavors and had to take write downs on another. The combination led to weak results just short of Wall Street expectations.
Kroger’s net income for the quarter ended Nov. 9 totaled $263 million, equal to $0.32 per share on the common stock. The results compared unfavorably to the third quarter of fiscal 2018 when the retailer earned $317 million, or $0.39 per share.
Quarterly sales rose slightly to $27,974 million from $27,831 million.
A significant item that pressured results was a $238 million impairment charge following the divestment of Kroger’s interest in Lucky’s Market, a Colorado-based retail chain. Kroger invested in the business in 2016.
“As part of a portfolio review, we made the decision to evaluate strategic alternatives in relation to our investment in Lucky’s Market,” said Gary Millerchip, chief financial officer, during a Dec. 5 conference call with securities analysts. “We do believe that there’s still a role for the small format store. I think it’s certainly proven. So, we still believe and continue to look for opportunities. And obviously, our Walgreens pilot continues to provide an opportunity to learn how to continue to build a strategy that has a small format presence in there.”
On the positive side, Millerchip said identical sales without fuel rose 2.5 percent during the quarter.
“Several supermarket departments outperformed the company, including produce, key beverage categories, pharmacy and natural foods,” he said.
Digital sales grew 21 percent during the quarter, said William Rodney McMullen, chairman and CEO.
“We expect our digital sales growth to moderate year-over-year primarily due to the cycling of Home Chef and as a result of our disciplined focus on growing the Ship customer,” he said. “We have expanded our digital coverage to reach 96 percent of our customers. This means that 96 percent of our customers who shop Kroger in a brick-and-mortar store can also shop with us for pickup or delivery.”
In stores, McMullen said an area of focus and improvement is prepared foods.
“Prepared foods would be an area that we see people continuing to trade up for, and it's an area where we’ve focused a lot of attention on how do we get better,” he said. “We view it as a huge opportunity to improve from where we are. And it’s one of those things where we’re just at the beginning part of that journey but certainly see customers very willing to pick up dinner at Kroger.”
Management is guiding earnings per share in the range of $2.30 to $2.40 in fiscal 2020 and for operating profit to fall between $3 billion to $3.1 billion.