Kroger finds inspiration in deflation

by Monica Watrous
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Simple Truth Kombucha
Kroger's Simple Truth organic kombucha has been popular as more customers focus on digestive health.

CINCINNATI — Lower food prices and heightened competition hampered financial performance for the Kroger Co. in the third quarter. Net earnings attributable to the Cincinnati-based company in the three months ended Nov. 5 declined to $391 million, equal to 41c per share on the common stock, from $428 million, or 44c per share, in the year-ago period. Sales, meanwhile, increased to $26,557 million, up 5.9% from $25,075 million. Identical supermarket sales, without fuel, rose 0.1% in the quarter. The results prompted the retailer to narrow its net earnings guidance on the lower end of its previously stated range.

Rodney McMullen, Kroger
Rodney McMullen, chairman and c.e.o. of the Kroger Co.

“As expected, deflation persisted during the third quarter, and as we’ve said before, transition periods create a difficult operating environment,” said Rodney McMullen, chairman and chief executive officer of the Kroger Co., during a Dec. 1 earnings call with financial analysts to discuss third-quarter financial performance. “This is the third time we’ve had deflation in 30 years, and in previous instances deflation lasted from three to five quarters in a row. We are in the middle of the cycle right now, and it’s not fun.”

Despite the challenges, Mr. McMullen said, Kroger’s tonnage and market share improved in the quarter, and the company remains focused on executing its long-term strategies.

Kroger Natural Foods section
Natural, organic and health and wellness remain top trends and areas of priority for Kroger.

“We don’t change our strategy based on quarterly swings and results,” he said. “We remain committed to delivering on our long-term earnings per share growth rate target of 8% to 11%, plus an increasing dividend on a three- to five-year time horizon. We will continue to try to win every customer meal by driving our strategy and reacting appropriately to the environment.”

Natural, organic and health and wellness remain top trends and areas of priority for Kroger.

“Our natural and organic sales continue to outpace total sales growth,” Mr. McMullen said. “Simple Truth continues its strong double-digit growth. Simple Truth organic kombucha is very popular as more customers focus on digestive health. We’ve also recently launched a 24-pack Simple Truth vapor distilled water with electrolytes. It’s priced fantastically. It’s a great product, and it’s selling really well.”

Simple Truth vapor distilled water with electrolytes
Kroger recently launched a 24-pack Simple Truth vapor distilled water with electrolytes.

Also notching comparatively strong growth during the quarter were Kroger’s produce, fresh prepared and deli packages departments, Mr. McMullen said.

“A few on-trend examples are protein snacks, such as Private Selection and Simple Truth Paninos, which are imported cured meats wrapped around a creamy cheese, as well as hand crafted and real sugar sodas,” he said.

A another bright spot during the difficult period for Kroger was the company’s earnings growth, which has outpaced its peers over the past 5 years and past 10 years, Mr. McMullen said.

 

Kroger Private Label handcrafted soda
Kroger's on-trend products include Private Selection hand crafted and real sugar sodas.

“And we still see incredible growth potential as we look forward,” he said. “We can clearly identify where we have $100 billion-plus in market share growth opportunities in our existing markets alone.

“But good enough today won’t be good enough tomorrow. That is why we’re both embracing change and accelerating change.”

For the nine-month period, net earnings attributable to Kroger were $1,469 million, equal to $1.54 per share, which compared with $1,480 million, or $1.52 per share, in the same period of the prior year. Sales for the year-to-date period were $87,726 million, up from $83,665 million. 
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