🏪 Do Kroger’s Q2 Results Instill Confidence?
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🏪 Kroger: The Ecstasy Or The Agony?
The largest supermarket operator in the US - Kroger Co. (KR), beat analyst estimates for Q2. However, there was a reduction in profitability on account of pilferage, wastage, and discounts. Yes, theft! The company did raise the full-year outlook. However, shareholders weren't convinced. (Tweet This)
The Eclipsing Of Essential Services
Kroger is the largest supermarket operator in the US under different banners, including, among others, Baker's, City Market, Fred Meyer, and Harris Teeter. The company’s footprint spans 2.8K stores across 35 states in the country.
Kroger’s Q2 numbers exceeded analyst expectations as shoppers stocked up on groceries. This even as same-store sales fell 0.6%, a vast improvement over the 4.1% fall that Q1 witnessed.
Key Stats From Q2:
Revenue: $31.68B Vs $30.68B expected
EPS: $0.80 Vs 0.64 expected
Since demand distortion was a common theme across many industries in 2020, many companies have provided a two-year stacked comparison: adding the growth rates of the past two years together and comparing with that of 2019, a normal business year.
For 2021, Kroger expects a stacked growth of ~12.8%. EPS guidance too has been raised from $2.92 to $3.20.
During the pandemic, supermarkets were some of the few businesses kept open as they were considered essential services. Still, they were never in the limelight as the frenzy was all about Big Pharma and Big Tech.
Only now have investors warmed up to grocery stores. In response, Kroger shares are up 33% YTD compared to 8% growth in all of 2020. However, the company is facing certain challenges which impacted its bottom line in Q2.
All-Round Cost Pressures
Kroger also sells its own private-labeled packaged food products in its stores, which use ingredients such as wheat, meat, and edible oils. Kroger has been reeling under the weight of an increase in input prices. As a result, profits nose-dived from $819M in Q2 last year to $467M now.
While most other retailers have managed to pass on the high input prices to consumers, Kroger remains hesitant. There are those who say customers are getting used to higher prices everywhere and that Kroger should follow suit.
Kroger hasn’t bitten that bullet yet. However, there’s another bullet that Kroger is desperate to dodge. Theft.
The retail industry as a whole is hurting from losses attributable to shoplifting, theft by store workers, and organized retail crime. Exactly how much are we talking about?
$61.7B in 2019, to be precise, which itself rose 20% compared to 2018. Just to put that number into perspective, if that were a company's revenue, it would be ranked 53rd in this year’s Fortune 500 list!
Kroger signed a deal with Irish AI firm Everseen last September to use its technology to combat pilferage at the point-of-sale in its stores. Add to this, increase in transportation and warehousing costs, and the downward pressure on profits continues unabated.
The management has its task cut out. The shareholders, on the other hand, are bouncing between ecstasy and agony. Revenue growth Vs. steep fall in profit. Share price performance YTD Vs. rising prices that may dampen demand. The incessant tussle between mind and heart continues.
KR ended at $42.67, down 7.5%. The stock is up 32.8% this year.
Company Snapshot 📈
KR $42.67 -3.46 (7.50%)
Analyst Ratings (26 Analysts) BUY 23% HOLD 54% SELL 23%
Blow: Apple must ease App Store rules, US judge orders (AAPL -3.31%)
Buyback: Facebook to buy $100M worth of unpaid invoices from 30K small businesses owned by women and minorities (FB +0.18%)
Problems: Virgin Galactic sees delays to space mission with Italian Air Force (SPCE -2.02%)
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