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The Kroger Co. (KR): A Resilient Grocery Giant Navigating Economic Headwinds
Published on September 24, 2024 | Ticker: KR

The Kroger Co. (NYSE: KR) is a leading American retail corporation that operates a vast network of supermarkets and multi-department stores across 35 states, totaling over 2,700 locations. As one of the world's largest food retailers, Kroger has demonstrated remarkable resilience in navigating the challenging economic landscape, delivering solid financial results and positioning itself for long-term sustainable growth.

Financials

In the fiscal year 2023, Kroger reported annual revenue of $150,039,000,000, a testament to the company's scale and market dominance. The company's net income for the year reached $2,164,000,000, showcasing its ability to generate substantial profitability. Kroger's strong financial performance is further evidenced by its robust annual operating cash flow of $6,876,000,000 and impressive free cash flow of $2,972,000,000, providing the company with ample liquidity to fund its strategic initiatives and enhance shareholder value.

First Quarter 2024 Performance

Kroger's first quarter of fiscal year 2024 was marked by solid performance, with the company reporting a 0.2% increase in total sales to $45,269,000,000, compared to the same period in the previous year. This growth was driven by a 0.6% increase in sales without fuel, reflecting the strength of Kroger's core grocery business. The company's identical sales, excluding fuel, grew by 0.5% in the first quarter, indicating that Kroger is effectively navigating the evolving consumer landscape.

One of the key highlights of Kroger's first quarter performance was the better-than-expected results in its Grocery business, which helped the company manage the challenges faced in its Fuel and Health & Wellness segments. The company's commitment to providing exceptional value and a unique omnichannel experience, combined with strong store execution, led to growth in households and an increase in customer visits.

Gross Margin and Expenses

Kroger's gross margin rate for the first quarter of 2024 was 22.41%, a slight increase from the 22.33% reported in the same period of the previous year. This improvement was driven by favorable product mix, a decreased LIFO charge, and the company's ability to effectively manage product costs through strong sourcing practices, partially offset by lower pharmacy margins and increased promotional price investments.

The company's operating, general, and administrative (OG&A) expenses, as a percentage of sales, increased to 16.80% in the first quarter of 2024, compared to 16.37% in the same period of the previous year. This increase was primarily due to planned investments in associates, increased incentive plan costs, and merger-related costs, partially offset by continued execution of cost-saving initiatives.

Operating Profit and Earnings

Kroger's adjusted FIFO operating profit, which excludes the impact of the LIFO charge and certain one-time adjustments, was $1,499,000,000 in the first quarter of 2024, a decrease of 10.2% compared to the same period in the previous year. This decline was driven by increased OG&A expenses, a decrease in fuel operating profit, and a lower FIFO gross margin rate.

The company's adjusted net earnings attributable to The Kroger Co. per diluted share for the first quarter of 2024 was $1.43, a decrease of 5.3% compared to the same period in the previous year. This decline was primarily due to decreased FIFO operating profit, excluding fuel, and decreased fuel earnings, partially offset by a decreased LIFO charge, lower interest expense, and lower income tax expense.

Liquidity

Kroger's balance sheet remains strong, with the company's net debt to adjusted EBITDA ratio at the end of the first quarter of 2024 standing at 1.25, below the company's target range of 2.3 to 2.5. This financial flexibility allows Kroger to continue investing in the business, growing through strategic initiatives, and returning capital to shareholders.

Outlook

Looking ahead, Kroger has reaffirmed its full-year guidance, reflecting the positive momentum in its business and the company's ability to navigate the more cautious consumer environment. The company expects to see improvement in its FIFO gross margin rate and OG&A rate beyond the first quarter results, driven by the continued execution of its margin expansion initiatives and the expected recovery in its Pharmacy business.

Business Overview

Kroger's diverse business model, which includes its core grocery operations, alternative profit businesses, and health and wellness segment, provides the company with multiple avenues for growth and profitability. The company's focus on enhancing its four strategic pillars – Fresh, Our Brands, Personalization, and Seamless – is enabling it to deliver a compelling customer experience and drive loyalty across its customer base.

The company's ongoing investments in technology, digital capabilities, and its Kroger Delivery network are also expected to contribute to its long-term success. Kroger's commitment to its associates and its focus on providing an inclusive and supportive work environment have been recognized, with the company earning a top score on the Disability Equality Index for the fifth consecutive year.

Conclusion

Despite the challenges posed by the current economic environment, Kroger's resilient business model, strong financial position, and strategic initiatives position the company well to continue delivering value to its shareholders. As the company navigates the evolving retail landscape, investors can expect Kroger to leverage its scale, operational expertise, and customer-centric approach to drive sustainable growth and maintain its position as a leading player in the grocery industry.

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