CINCINNATI — The benefits of recent changes to The Kroger Co.’s business model as part of a multiyear transformation plan were accelerated by the onset of the COVID-19 pandemic. A recent marketing focus on fresh food, for example, is taking on greater relevance as shoppers stock up in the produce and meat departments to prepare more home-cooked meals, said W. Rodney McMullen, chairman and chief executive officer.
“Fresh will continue to be an important driver of sales for Kroger, as demonstrated by our fresh departments, including meat, seafood and produce, generating strong identical sales in the quarter,” he said during a June 18 earnings call.
Significant investments in technology have enabled Kroger to sustain a remarkable surge in demand for pickup and delivery services, McMullen said. The company has 2,000 pickup locations and 2,400 delivery locations and recently began testing a grocery pickup-only location in Cincinnati.
“These investments were especially timely as customer adoption of pickup and delivery grew significantly during the pandemic,” McMullen said. “All of this contributed to a 92% sales growth in digital channels in the first quarter. In April and May, the sales grew in the top triple digits.”
Net earnings attributable to the Kroger Co. in the first quarter ended May 23 were $1.21 billion, equal to $1.53 per share on the common stock, up 57% from $772 million, or 95¢ per share, in the prior-year period. Unprecedented demand for products across grocery and fresh departments and a mark-to-market gain on the company’s investment in technology company Ocado was met with higher operating, general and administrative expenses, including a $236 million contribution to multi-employer pension plans.
Sales totaled $41.55 billion, up 12% from $37.25 billion the year before.
Excluding fuel and adjustment items, identical sales grew 19% in the quarter. Kroger’s store brands grew more than 21% during the quarter, driven by strength in the Simple Truth plant-based platform, McMullen said.
Kroger has responded in numerous ways to the pandemic, investing more than $830 million since March in enhanced safety protocols and extra pay to associates on the front lines. The company also implemented a dairy rescue support program for farmers who lost business due to restaurant closings.
“We operate 17 dairies around the country and are uniquely positioned to offer our processing capabilities,” McMullen said. “Manufacturing and dairy procurement teams rapidly scaled a program to rescue surplus milk, donated by Kroger’s dairy cooperative suppliers and processed by Kroger operated dairies, and directed it to food banks and families in need.”
The company is leveraging its internal shopper data capabilities to understand how purchasing patterns will evolve in the months ahead. A key insight is consumers likely will continue to eat at home more often, even as restrictions are lifted nationwide.
“Our customers still tell us they plan to eat more meals at home than before,” said Gary Millerchip, chief financial officer. “When talking to customers about when their children return to schools, we still have a significantly higher percentage of families telling us they plan to make breakfast for the kids to take to school and lunch for the kids to take to school. All of those things in terms of what customers are telling us, we would expect there’ll be more meals eaten at home or prepared at home that obviously will help support growth as well.”
Management is not reaffirming or providing new full-year guidance due to the uncertainty created by the COVID-19 pandemic but expects to exceed the outlook shared in its previous business update for identical sales excluding fuel and adjusted earnings per share, Millerchip said.
“In the first few weeks of the second quarter, we are starting to see some changes in demand, with sales growth becoming more balanced across the store as state restrictions have started to ease,” Millerchip said. “Customers remain focused on health and safety and are still stocking up, but to a lesser degree than during the shutdowns. We are also starting to see a return to some splurge and impulse buying. Customers are still cooking more at home, even with the easing restrictions and identical sales so far in the second quarter are trending in the mid-teens. We do expect sales to continue to taper as the quarter progresses.”
Despite exceeding analysts’ estimates for the quarterly performance, shares of Kroger trading on the New York Stock Exchange were down as much as 6% June 18 from the previous close of $32.81.