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    McMullen: ‘Strong and Balanced’ Q2 for Kroger

    Grocer boosts financial outlook based on latest performance

    By Jim Dudlicek, EnsembleIQ

    It appears that Kroger can do no wrong, as the company rolled through its Q2 to mark 43 consecutive quarters of same-store sales growth.

    So confident is the Cincinnati-based grocery giant that it has revised up its guidance for the year, based on its Q2 results, described as “strong and balanced” by CEO Rodney McMullen.

    “While many of its competitors cut back full-year guidance on the back of poor Q1 results, Kroger actually raised its outlook for the year,” said Kelly Tackett, U.S. research director at Planet Retail. “To say that we expect more of the same from the leading U.S. grocer in Q2 doesn’t in itself seem newsworthy, but given the headwinds facing all grocery retailers, a 43rd consecutive gain in comparable store sales is in fact quite remarkable.”

    Total sales increased 11.6 percent to $25.3 billion in Q2 compared to $22.7 billion for the same period last year. Total sales, excluding fuel, increased 12.4 percent in Q2 over the year-ago period.  Kroger reported net earnings of $347 million, or 70 cents per diluted share, and identical supermarket sales growth, without fuel, of 4.8 percent in Q2.  Net earnings in the same period last year were $317 million, or 60 cents per diluted share.

    Connecting with Customers

    “We are winning with customers because we offer a full range of advantages including a great overall shopping experience, excellent customer service, a complete assortment of both national and corporate brand products, and everyday low prices and promotional offerings,” McMullen said. “As we improve our connection with customers, we are also executing our growth plan and delivering on our key performance indicators – all of which is fueling strong financial results for shareholders.”

    This is the second consecutive quarter that includes merger partner Harris Teeter in Kroger’s statement of operations.  Kroger took on debt to finance the merger, and has not yet realized a full year of Harris Teeter EBITDA. This has caused a significant increase in the company’s net total debt to adjusted EBITDA ratio.  Kroger’s net total debt is $11.2 billion, an increase of $3.5 billion from a year ago, including debt related to the Harris Teeter transaction and Kroger’s share repurchase activity. 

    “We are particularly encouraged by signs that this traditionally slow and methodical mover has adopted a more proactive and agile approach,” Tackett said. “With competitive pressures assailing the traditional grocery channel from all sides, Kroger’s recent acquisitions are positioning it well not only to protect its market share but also to expand it in some areas.”

    Tackett has long viewed the Harris Teeter acquisition as “a smart strategic move toward Kroger’s goal of being a truly national grocery chain. In the near term, though, the ramped-up presence in the south-east also provides a route to steal further market share from Walmart.”

    Tackett added: “Additionally, the Vitacost deal shores up Kroger’s healthy-living play and its nascent e-commerce capabilities, both of which should help insulate it from Amazon’s incursions into the grocery space.”

    President and COO Mike Ellis called the Vitacost deal “a compelling transaction” because of its potential for transformation and growth. “We believe Kroger is uniquely positioned to blend the art of retailing and deep customer insights with a superb online experience,” Ellis said. “Vitacost’s people and extensive e-commerce platform, coupled with Kroger’s customer insights and loyal customer base, will be a powerful combination that we can leverage to create new levels of personalization and convenience for our customers.  We intend to build on Vitacost’s robust technology platform and integrate it with our existing digital footprint to do just that.” 

    Revised Guidance

    Based on Q2 results, the company raised and narrowed its adjusted net earnings per diluted share guidance to a range of $3.22 to $3.28 for fiscal 2014. The previous guidance was $3.19 to $3.27 per diluted share. The company’s long-term net earnings per diluted share growth rate guidance remains 8 to 11 percent, plus a growing dividend. 

    Kroger raised its same-store growth guidance, excluding fuel, to 3.5 to 4.25 percent for fiscal 2014 up from 3 to 4 percent.

     “We are accelerating core business growth and investing to create unique competitive positioning for today and the future,” McMullen said. “We are well on our way to achieving a 13 to 15 percent net-earnings-per-diluted-share growth rate, including net accretion to earnings from the Harris Teeter merger, plus the dividend for fiscal 2014.”

    Kroger employs more than 375,000 associates who serve customers in 2,638 supermarkets and multidepartment stores in 34 states and the District of Columbia under two dozen local banner names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith’s. 



    By Jim Dudlicek, EnsembleIQ
    • About Jim Dudlicek As editorial director of Progressive Grocer, Jim Dudlicek oversees daily operations of the magazine, spearheads its signature features, produces PG’s monthly Trend Alert newsletter on center store issues, moderates its regular webcast series, and writes and comments about a wide range of grocery issues. A food industry journalist since 2002, Jim came to PG in June 2010 after covering the dairy industry for 7½ years, during which time he served as chief editor of Dairy Field and Dairy Foods magazines. A graduate of Marquette University, Jim is fascinated by how truly progressive grocers inspire consumers to enjoy food, transforming the industry from mere merchants into educators that can take the most basic of all necessities and turn it into something profound and life-enhancing. Follow him at www.twitter.com/JimDudlicek

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