Kroger Crushes Q3 2021

This past week Kroger surprised ‘the street’ with results that far surpassed expectations. Kroger’s CEO Rodney McMullen said on the investor call that new cooking skills & bigger holiday gatherings are lifting grocery sales.

While analysts have largely bet that habits would reverse this year and people would eagerly return to dining out Kroger’s CEO disagrees and called consumers’ penchant to eat at home a “structural” change as opposed to a temporary one.

If trends continue, according to CNBC, the country’s largest supermarket operator is on pace for its best yearly performance on Wall Street since 2014.

Q3 Financial Highlights:

Sales: $31.86B (+7.2% YOY) – beat expectations of $31.23
ID Sales: +3.1% (+14% 2 year stack) – beat expectations of 0.9%
Digital Sales: -4.7% (+103% 2-year stack)
EPS: $0.78 (+9.9% YOY) – beat expectations of $0.66
Alternative profit business delivered record third quarter operating profit

Key Takeaways:

Shopper Trends

Customers are demonstrating more “back to normal” behaviors and these trends are becoming “structural, and not temporary
They are eating more food at home because “it is more affordable, convenient, and healthier than other options plus you can do it as a family.”
Americans have gained new cooking skills and are having larger holiday gatherings, which means they need more groceries.

Our Brands (private brand)

Cost savings & premiumization are driving consumers to buy private brands
Home Chef became the newest billion-dollar brand
Our Brands launched 216 new items during the quarter
Plans to launch several innovative and unique products focused on helping customers enjoy the holiday season
Announced plans, with Kipster Farms, to bring the world’s first carbon-neutral, cage-free eggs to retail shelves under the Simple Truth brand
A new leader of Our Brands was announced

National Brands

National brand SKUs at Kroger have continued to decrease as the pandemic and supply chain disruptions have dragged on. Meanwhile, the company’s own brands have continued to grow SKUs and sales.

"Some of the national players have not reintroduced as much variety as they offered before COVID, so we have introduced some of that variety in our owned brands," 
- CEO Rodney McMullen

Associates

Hired 64,000 new associates during the third quarter
Average hourly wage will be greater than $16 by the end of 2021.
405,000 associates have completed diversity and inclusion training

“Our agility, and the commitment from our amazing associates, is allowing us to navigate current labor and supply chain conditions and provide the freshest food at affordable prices across our store and digital ecosystem.”
- CEO Rodney McMullen.

Challenges

Inflation could be a headwind – Challenges are ahead for Kroger next year, according to Edward Kelly, a retail analyst for Wells Fargo Securities. He said some of the lift in Kroger’s sales is coming from inflated prices.
Inflation is having an impact on Kroger customers, with 82% of consumers saying they are feeling the impact of inflation and one in four consumers saying they are not confident in their finances right now.

"We are leveraging our data and personalization to enable our customers to stretch their food dollars, we are delivering value with personalized promotions, big packs and dynamic holiday offerings. Our brands also offer our customers flexibility within their spending without compromising thanks to the wide variety of incredibly high quality and innovative products at various price points."
- CEO Rodney McMullen.

Kroger made a number of big moves in Q3:

Corporate

eCommerce

Our Brands

Partnerships

Alternative Profit

RetailWit Take: The “street” & analysts evaluate retailers primarily on the financials (which is a backward indicator of success) & models built off of those numbers and supplement that with a subjective evaluation of what was said. This is all great and an important part of predicting where retailers are going. Yet, we believe what was said in investor calls & press releases throughout a quarter as well as the trends of topics over time can better inform predicted future success so we ran the past 4 earnings transcripts though our proprietary solution that evaluates investor call transcripts and it shows some interesting insights into what Kroger’s thinking is.

Note: the bars are proportionate, i.e. what % of the conversation was about these topics. Also, these topics are not all inclusive, the tool just chooses the most important trending topics.

Over the past several years there have been three cornerstones to every Kroger earnings call: Customers, Associates and Corporate Strategy.

Starting left to right:

Associates & Employees: This topic returned almost to Q4 2020 levels when we were all in the throws of COVID lockdown and their associates were receiving highly deserved ‘hero pay’. Kroger, even before COVID and despite some stumbles along the way understand that their Associates are the front line to their customers and the better trained, paid & rewarded they are, the higher retention they will have which both drives customer satisfaction as well as a decrease in turnover costs. This quarter Kroger spoke of both significant hiring needs & initiatives but also about investment in employee benefits and new programs on diversity and inclusion. While not all the way to bright with investment in employees it is heading the right direction. It is never a bad strategy to invest in associates or customers.

As Richard Branson said, ” If you look after your staff they’ll look after your customers. it is that simple.”

“Our agility, and the commitment from our amazing associates, is allowing us to navigate current labor and supply chain conditions and provide the freshest food at affordable prices across our store and digital ecosystem.”
- CEO Rodney McMullen.

Corporate, Leadership & Strategy – Q3 saw a rather large spike in this being a majority of the conversation; this includes topics like corporate strategy, internal initiatives & the leadership team vs external forces impacting their business like COVID, competition or the economy. This demonstrates confidence in themselves vs looking external to explain their business situation.

Shopper & Customer – “Customer First” has been the foundation of Kroger’s strategy for almost 20 years and while supplementary strategies, schemes & solutions have come and gone, Kroger continues to ‘put the customer central in every decision.’

As Kevin Coupe put it,  "an overarching strategy on which Kroger (and every retailer) needs to focus – being on the consumer’s side. Whether creating eat-at-home offerings that appeal on nutritional or economic grounds (or both), or keeping prices in check in segments where it matters, that appears to be what Kroger is doing. It is all about defining – and continuing to redefine – “essential” for tumultuous times."

Historically there has been a 4th topic covered, ‘data and insights’, which seems to be returning to the conversation which is a really good thing as data & analytics is an area of competitive advantage at Kroger but also one that the rest of the industry is quickly catching up on. A couple other ‘pops’ to call out are ‘merchandising’ and ‘supply chain’ – neither of which are surprising with the global supply chain challenges and with the return to in store shopping.

Last word: it is also very important to look at these topic trends relative to competition, which we have – so stay tuned as we begin to compare and contrast other retailers.