Kroger (NYSE: KR) just closed the books on what normally would be considered a solid fiscal year. The grocery giant met the growth goals it issued at the start of 2018 while slashing costs and taking concrete steps toward a new multichannel selling posture.
2018 wasn't a normal year, though, with peers like Target (NYSE: TGT) and Walmart (NYSE: WMT) achieving some of the best growth metrics they've seen in almost a decade while projecting positive momentum into 2019. Kroger, on the other hand, is struggling to recapture market share.
CEO Rodney McMullen and his executive team explained the major drivers behind Kroger's latest results, along with a detailed outlook for 2019, in a conference call with analysts. Below are a few highlights from that discussion.
A marathon, not a sprint
"Restock Kroger" is the name management applies to its three-year rebound strategy, which aims to reposition the company for faster growth and better earnings as the retailing industry shifts toward digital ordering. Executives highlighted the behind-the-scenes successes in 2018, which was the first full year of that strategy.
The biggest win was in costs, as the company shed $1 billion from its expense burden. Kroger also expanded its digital offerings so that about 91% of its customer base now has access to grocery pickup or home delivery. The retailer sped its sales gains up, but only to a 1.9% pace. Walmart, its biggest competitor, accelerated growth to nearly double that rate, and Target's comps were even better. Thus, Kroger appears to have missed a step in what amounted to a great year for most major retailers.
Better positioned for growth
Kroger's sales growth and profitability metrics didn't improve as much as investors had hoped, given the strength in the industry. Yet executives said some of that slump came from store remodels that were more disruptive than management had hoped. These disruptions have been resolved, though, and the initiative should begin lifting, rather than lowering, growth in the quarters to come.
The chain also made progress in its new business lines, including its personal finance products, which all beat their beat their profit expectations for the year. McMullen and his team think these initiatives will help lift the company's overall profitability in future years.
Targets for 2019 and 2020
Kroger affirmed its long-term financial rebound outlook that calls for significant improvements in cash flow and operating profit by 2020. The core retailing business should stay stuck at around a 2% growth pace, however, at a time when peers are calling for more robust gains.
Given that slower growth, and the weak operating results in the most recent quarter, several Wall Street analysts questioned executives about their optimism that they can hit their financial objectives by next year. The company's financial hits in 2018, including on price cuts, set Kroger up for better growth ahead even if that's not yet showing up in the chain's performance, they explained.
By sending the stock lower, though, investors chose to take a more cautious view of the business. That approach appears warranted, at least until Kroger can start demonstrating stabilizing market share in its core retailing business.
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