Kroger Loses a Step Against Walmart

Kroger (NYSE: KR) is in the early stages of a recovery strategy that aims to put the retailer back on a path to robust sales and profit growth. The supermarket chain this week announced earnings results that showed encouraging progress toward that goal. However, the latest numbers also suggest that a full recovery will take time -- and even then, it might not deliver the level of growth some investors have been expecting.

Here's a look at how the big-picture results stacked up against the prior-year period:

What happened this quarter?

Kroger posted a modest growth uptick that nevertheless fell short of what many investors were hoping to see given the accelerating gains that rivals like Walmart (NYSE: WMT) and Target have enjoyed lately. Earnings trends improved slightly, too, as cost cuts helped offset pricing promotions aimed at protecting market share.

Highlights of the quarter include:

  • Comparable-store sales, or sales at existing locations, rose 1.6%. While that marked a slight increase compared to the prior quarter, it was far less than Walmart's 4.5% increase and the 6.5% gain that Target posted. Walmart credited its grocery section for delivering much of its rebound, and it appears some of this growth came at Kroger's expense.
  • E-commerce sales rose 50% to mark a slowdown from the prior quarter's 66% spike.
  • Gross profit margin dipped, which the company blamed on price cuts and rising transportation costs.
  • Selling expenses grew slightly as investments into the business offset savings from cost cuts.
  • Kroger's operating profit stopped at $549 million, or 2% of sales, compared to $684 million, or 2.5% of sales, in the prior year.
  • Reduced taxes and an accounting gain from an equity investment combined to push net income higher by 44%, while a lower share count resulted in per-share earnings growth of 62%.

What management had to say

Executives noted solid progress in the first few quarters under the rebound plan they call "Restock Kroger," which involves a shift toward multichannel retailing while cutting costs and keeping prices competitive. "Kroger customers have more ways than ever to engage with us seamlessly through our recently launched Kroger Ship, expanded availability of Instacart, successful ClickList offering, and selling Simple Truth [brand] in China," CEO Rodney McMullen said in a press release.

"We feel good about our net earnings and [comparable-store] sales results in the second quarter," McMullen continued. Referring to its spending strategies, Kroger executives said they "expect our investments in space optimization during the first half of 2018 to become a tailwind late in the third quarter."

Looking forward

Kroger's optimism about the current quarter wasn't enough to power a growth upgrade. Instead, the supermarket giant affirmed a full-year target that calls for sales to rise by between 2% and 2.5% in 2018.

That would mark a modest acceleration over last year's result, but it still suggests market share struggles. After all, Walmart raised its growth forecast to 3% from 2% following its latest quarterly results thanks mainly to robust customer traffic gains. Kroger, on the other hand, is falling a bit behind its main rival despite its aggressive pricing posture.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.