Kroger Faces a Tough Crowd - The Wall Street Journal

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By Jinjoo Lee

June 18, 2020 2:18 pm ET

Only Kroger seems excited about its own sales performance last quarter. Investors could show a little more enthusiasm.

The grocery chain saw an impressive uplift in revenue excluding fuel, growing it by 19.1% in the quarter ended May 23 from a year earlier. Total sales exceeded analyst expectations by 2.1%, and digital sales grew by a remarkable 92%. Earnings per share also came in 9% higher than expectations.

Still, its share price dropped almost 6% by midday—leaving its once-impressive year-to-date gain below 8%. Investors still seem skeptical about Kroger’s long-term growth story, which has lagged due to slow e-commerce adoption and heavy competition. And analysts seem to doubt that its pandemic-driven bounce can last much longer: The consensus estimate for the current quarter compiled by FactSet calls for a total sales increase of 2.5% compared with the previous year—a slower growth rate than in the quarter before the pandemic.

But there are good reasons to believe this time could be different. The company’s commentary on the earnings call Thursday morning seems to suggest its pandemic uplift is stickier than what analysts believe: So far, same-store sales in the current quarter have grown at a midteens percentage pace year over year, though Kroger expects that to moderate as the quarter progresses. And based on data from previous recessions and from its conversations with customers, Kroger thinks the economic downturn will shift more consumer behavior toward eating at home. New customer acquisition seems promising: Of the sales surge seen last quarter, around a fourth to a third was driven by new customers.

A Kroger Co. grocery store in Louisville, Ky., April 26. Analysts seem to doubt that... — A Kroger Co. grocery store in Louisville, Ky., April 26. Analysts seem to doubt that the company’s pandemic-driven bounce can last much longer.
Photo: Stacie Scott/Bloomberg News

Despite delivering impressive growth, digital remains a small percentage of sales for Kroger, accounting for 6.5% to 7% of the total, its chief executive said on the earnings call. Kroger has been playing catch-up on that front. As of last year, its investments hadn’t yielded substantial gains. Its digital investments should be worth it in the long run, though. When a customer first switches to online shopping, it typically takes three to four years before that customer’s profitability is the same as when that customer shops in the physical store, according to Kroger. The good news is that when the shift does happen, the customer starts devoting a higher share of total household spending to the grocer.

Kroger’s ratio of price to trailing 12-month sales remains at 0.19, more or less in line with its five-year average despite a stronger outlook. That is a steep discount in comparison to competitors such as Ahold Delhaize and Costco, which by the same metric are valued more than double and quadruple Kroger’s number, respectively.

Whatever investors think of Kroger’s strategy, outside forces alone—including overall shifts to eating at home and higher e-commerce adoption—should be enough to serve as a tailwind. Skeptical investors have left its shares a relative bargain.