Customer still economy-sensitive, Kroger suggests with positive Q2

CINCINNATI — Trips are up, but baskets are down, Kroger reported Friday morning, along with positive second-quarter results. Gas sales also are up with the decline in fuel prices, which is an item Kroger continues to use as a stickiness factor with its loyalty card program.

"Easing fuel prices in Q2 should enhance the profitability of Kroger's fuel business — higher fuel margins and lower interchange fees — and help the company cycle its most difficult comparison of the year," noted Credit Suisse analyst Ed Kelly. "While the stock has meaningfully outperformed its peers and the market so far this year, and investors have begun to reward the company for its differentiated performance, we believe its solid fundamental momentum, attractive valuation and defensiveness/lower volatility continue to make the stock an attractive investment."

Kroger has been focusing on driving its loyalty household growth rate, which "grew at a faster rate than total household growth, which is also up for the quarter," Rodney McMullen, Kroger COO, told analysts Friday morning. Loyalty households, which represent greater profitability at the expense of local competitors, are defined by a combination of visits and how much a consumer spends, along with research on where those customers are shopping beyond Kroger.

Kroger reported total sales, including fuel, were up 11.5% to $20.9 billion in the second quarter ended Aug. 13. Identical supermarket sales, without fuel, increased 5.3% in the second quarter over the same period last year. This marks 31 consecutive quarters of identical supermarket sales increases for Kroger.

“We are pleased with Kroger’s strong performance this quarter, which we believe is the outcome of our consistent approach to managing the business and executing our Customer 1st strategy,” stated David Dillon, Kroger’s chairman and CEO. “Our ongoing investments in the four keys — our people, products, prices and the shopping experience — continued to enhance our connection with customers and drive positive identical sales growth.”

At the end of the conference call, Dillon noted that Kroger and all employees would remember the 10th anniversary of 9/11 at precisely 8:46 a.m. on Sunday morning with a moment of silence. Dillon shared that one of his store managers, Tim Dowdell, whose brother Kevin was one of 343 emergency services personnel to sacrifice their lives that day, "displays the [American] flag at his store prominently every day, and I love that."