Kroger Reports Second Quarter 2019 Results

Cincinnati / OH. (tkc) The Kroger Company reported its second quarter 2019 results that ended on August 17, 2019. Identical Sales without fuel grew 2.2 percent and digital sales grew 31 percent.

Comments from Chairman and CEO Rodney McMullen

«The Restock Kroger framework is designed to reposition our core business by 2020 while continuing to deliver for shareholders. We are pleased with the improvement of trends in our supermarket business in the second quarter. Guided by our customer obsession, Kroger delivered our best identical sales, without fuel, result since the launch of our transformation plan. FIFO gross margin, without fuel and pharmacy, was stable in our supermarket business. Gross margin headwinds in pharmacy were offset by strong fuel performance during the quarter. We continue to reduce costs and are on track to deliver USD 100 million in incremental operating profit through alternative profit stream growth. We delivered strong free cash flow and are now within our targeted net total debt to adjusted Ebitda range. Kroger is laser-focused on executing against our 2019 plans and realizing our vision of serving America through food inspiration and uplift.»

Financial Results

(USD in millions – except EPS)	Q2/2019	Q2/2018
ID Sales	2.2 percent	1.6 percent
EPS	USD 0.37	USD 0.62
Adjusted EPS	USD 0.44	USD 0.41
Operating Profit	USD 559	USD 549
Adjusted FIFO Operating Profit	USD 626	USD 566
FIFO Gross Margin Rate(*)	Decreased 29 basis points
OG+A Rate*	Decreased 14 basis points
(*)without fuel and adjustment items, if applicable

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Total company sales were USD 28.2 billion in the second quarter, compared to USD 28.0 billion for the same period last year. Excluding fuel, dispositions and merger transactions, sales grew 2.5 percent.

Gross margin was 21.9 percent of sales for the second quarter. The FIFO gross margin rate, excluding fuel, decrease of 29 basis points was primarily driven by industry-wide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business. Gross profit excluding fuel and retail pharmacy saw 12 basis points of gross margin investment.

LIFO charge for the quarter was USD 30 million, compared to USD 12 million for the same period last year, driven by higher than expected inflation in dry grocery, pharmacy and dairy.

The Operating, General + Administrative rate decrease of 14 basis points is due to execution of Restock Kroger initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions.

During the quarter, Kroger accepted a substantial offer to sell an unused warehouse that had been on the market for some time. Kroger used this gain as an opportunity to contribute a similar amount into the UFCW company pension plan, helping stabilize associates’ future benefits. The net impact of these transactions to EPS growth was neutral.

Financial Strategy

Kroger’s financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its cash flow to achieve these goals.

Consistent with its financial strategy, Kroger reduced net total debt by USD 1.3 billion over the last four quarters. Kroger’s net total debt to adjusted Ebitda ratio is 2.46, compared to 2.59 a year ago. The company’s net total debt to adjusted Ebitda ratio target range is 2.30 to 2.50.

Earlier this year, Kroger increased the dividend by 14 percent, marking the 13th consecutive year of dividend increases.