Kroger (KR) has been getting absolutely slammed today following earnings. In this column we present the main results which you need to know then offer our thoughts.

The stock is getting killed as performance was not up to snuff. Let us briefly review the results of this much anticipated quarter.

Total sales increased 12.4% to $31.0 billion in the fourth quarter compared to $27.6 billion for the same period last year. Total sales, excluding fuel and the 53rd week, increased 2.7% in the fourth quarter over the same period last year.

Gross margin was 21.9% of sales for the fourth quarter. Excluding fuel, the 53rd week and the LIFO credit and charge, gross margin decreased 31 basis points from the same period last year.

Net earnings for the fourth quarter totaled $854 million, or $0.96 per diluted share. Adjusted net earnings for the fourth quarter totaled $562 million, or $0.63 per diluted share Net earnings in the same period last year were $506 million, or $0.53 per diluted share.

For the year, Total sales increased 6.4% to $122.7 billion in 2017 compared to $115.3 billion in 2016.  Excluding fuel, the 53rd week and the Modern Health merger, total sales increased 2.2% in 2017 compared to 2016.

Gross margin was 22.0% of sales in 2017.  Excluding fuel, the 53rd week, the Modern Health merger and the LIFO charge and credit, gross margin decreased 19 basis points compared to 2016.

Net earnings for 2017 totaled $1.9 billion, or $2.09 per diluted share. Adjusted net earnings totaled $1.9 billion, or $2.04 per diluted share. Net earnings in 2016 were $2.0 billion, or $2.05 per diluted share.  Excluding the 2016 restructuring of certain multi-employer pension obligations, adjusted net earnings in 2016 were $2.0 billion, or $2.12 per diluted share.

 

In our opinion, Kroger is attempting to undergo an entire rebranding in an effort to change the grocery shopping trip from a chore, into an experience. Several new initiatives are underway that we believe will have minimal impacts on overall revenues on their own but will serve to bring traffic into the stores and increase the likelihood of additional purchases, which will drive same store sales higher in our estimation.

 

One such initiative is the in-store concept restaurant Kitchen 1883. Make no mistake, moving into another highly competitive, tight margin business is a risk, and the sole location has only been open about a month. The new restaurant is a full-service restaurant, unlike some of the other stop-and-go, takeout, counter style offerings seen in other grocery markets across the country. The idea is not to make a lot of money from the restaurant. Sure, it wants to be profitable, but the goal is to help bring foot traffic into the store and to change the experience by offering this dining setting. If it works, then expect more of these restaurants.

Digital revenues are another area where the company needs to focus. In the present quarter, digital revenue was up 109%, driven by its ClickList offering. However, the real impact from Amazon’s competition stems from the ability to shop from home. Kroger must continue to grow revenue from this source by investing in user friendly, seamless shopping experiences from home. Thus far, a doubling of revenue is a good start. The “Restock Kroger” plan is the comprehensive strategic plan for the rest of the decade to make targeted investments to redefine the customer experience.

However, it is not working, as looking ahead, Kroger expects FY19 identical-store sales growth of +1.5% to +2.0% and EPS of $1.95 to $2.15 vs. $2.10 consensus.

 

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