Kroger reports strong Q2, reaffirms full-year 2023 guidance
On Sept. 8., Kroger reported its second quarter 2023 results, reaffirmed its 2023 guidance and updated investors on how leading with fresh and accelerating with digital continues to position Kroger for long-term sustainable growth.
"The strength and diversity of Kroger's business model is delivering consistent results in what remains a challenged environment. By investing in price and providing more personalized offers, we are helping customers stretch their budgets and manage the ongoing effects of reduced government benefits, inflation and higher interest rates. Kroger is funding these investments by collaborating with vendors to deliver exceptional value, managing costs and growing alternative profit businesses,” said Rodney McMullen, chairman and CEO of Kroger.
McMullen continued, “We are growing households as our associates are providing a full, fresh and friendly shopping experience across our seamless ecosystem. While we expect the environment to remain challenged going forward, we are committed to delivering exceptional value for our customers and investing in our associates, and by doing so, we expect to generate attractive returns for shareholders."
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Kroger’s total company sales were $33.9 billion in the second quarter, compared to $34.6 billion for the same period last year. Excluding fuel, sales increased 1.1% compared to last year's period.
The retailer’s gross margin was 21.8% of sales for the quarter. The FIFO gross margin rate, excluding fuel, increased 35 basis points compared to last year's period. This increase in rate was achieved while also investing in price to maintain a competitive price position and deliver greater value for its customers, Kroger said. The improvement in the FIFO gross margin rate, excluding fuel, was primarily attributable to Our Brands performance, lower supply chain costs, sourcing benefits and the effect of Kroger’s terminated agreement with Express Scripts. The improvement was partially offset by higher shrink and increased promotional price investments, Kroger said.
Kroger also reported a 12% hike in its digital sales, as well as an increase in total and loyal customer households.
Included in Kroger's results this quarter was a $1.4 billion charge related to a nationwide opioid settlement framework. The timing of the settlement payments will be over 11 years, most of which are tax-deductible, Kroger noted. This settlement and the payment terms will not affect Kroger's ability to complete its proposed merger with Albertsons and the company still expects to reduce its net total debt to adjusted EBITDA ratio to 2.50 within 18–24 months post-close.
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Kroger reaffirmed its full-year 2023 guidance: Identical sales without fuel of 1%–2%, with underlying growth of 2.5%–3.5% after adjusting for the effect of Express Scripts; Adjusted net earnings per diluted share of $4.45–$4.60, including an estimated benefit from the 53rd week of approximately 15 cents; adjusted FIFO operating profit of $5 – $5.2 billion; and adjusted free cash flow of $2.5–$2.7 billion.
"Kroger's second quarter results demonstrate the resiliency of our value creation model. While industry-wide disinflation continues to impact food at home sales, our team is doing an excellent job managing the effect on our business,” said Gary Millerchip, chief financial officer of Kroger. “Looking forward, we believe inflation will continue to decelerate and the environment will remain challenging for consumers. We therefore expect identical sales without fuel will be at the low end of our full-year guidance range and slightly negative in the second half of the year. This outlook includes an approximately 150 basis points negative impact due to the termination of our agreement with Express Scripts.”
Millerchip continued, “As demonstrated by our year-to-date results, we believe we have the flexibility within our business model to navigate this environment and remain on track to deliver our 2023 adjusted FIFO operating profit and adjusted net earnings per diluted share guidance."