Kroger divests Lucky's Market, expands better-for-you private label line
Kroger also fell short of Wall Street's earnings projection in fiscal 2019's third quarter.
December 6, 2019
Despite continued comparable-store sales momentum, The Kroger Co. posted virtually flat overall sales in the fiscal 2019 third quarter and fell short of Wall Street’s earnings projection.
Kroger also said Thursday that, after a portfolio review, it has decided to divest its stake in specialty grocer Lucky’s Market. In April 2016, Kroger announced a strategic partnership with the Colorado-based natural and organic supermarket chain that included an undisclosed equity interest.
“The amount of investment that it would take for Lucky's to be a meaningful contributor to Kroger overall and the efforts that it would take, we just didn't think it created a good return for the investments that were needed to be made relative to that,” Kroger Chairman and CEO Rodney McMullen said Thursday in a conference call with analysts. “So it was really driven by narrowing our focus and the additional requirements to make it something that would be meaningful to Kroger.”
The decision on Lucky’s Market came amid Kroger’s Investor Day event in November, Kroger Chief Financial Officer Gary Millerchip said during the call.
“During our investor conference last month, we committed to continue to be disciplined in prioritizing capital allocation to improve return on invested capital and create sustainable shareholder return,” he said. “As part of a portfolio review, we made the decision to evaluate strategic alternatives in relation to our investment in Lucky's Market. As a result of this review, the company has decided to divest its interest in Lucky's Market.”
For the quarter ended Nov. 9, Kroger totaled sales of $27.97 billion, up 0.5% from $27.83 billion a year earlier. Excluding the impact of fuel and dispositions, sales increased 2.7%, the Cincinnati-based retailer noted.
Identical-store sales excluding fuel rose 2.5% year over year, more than double the gain in the 2018 quarter.
Gross margin came in at 22.1% of sales for the quarter. Kroger said the FIFO gross margin rate excluding fuel declined 24 basis points, mainly from industrywide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business. Excluding fuel and pharmacy, the gross margin rate improved slightly, the company added. The LIFO charge for the quarter was $23 million, compared to $12 million for the same period last year, driven by higher inflation in dry grocery, pharmacy and dairy.
“We are growing our supermarket business by focusing on three levers to drive identical sales: fresh, power brands, and data and personalization. And we continue to build a seamless ecosystem that is available, relevant and accessible for our customers. All of this combined to generate positive results in the third quarter,” McMullen told analysts in the call.
“We continued to grow identical sales, reduce costs and deliver strong free cash flow. We had a broad-based identical-sales improvement. Fifteen of our divisions had increasing supermarket identical sales without fuel compared to the second quarter,” he said. “We delivered a slightly improved FIFO gross margin, excluding fuel and pharmacy. Headwinds in pharmacy were offset by strong fuel performance during the quarter. We are on track to deliver $100 million in incremental operating profit through alternative profit stream growth.”
Among results in grocery, produce “led the way” during the quarter, according to McMullen. “In addition, we launched our ‘Fresh for Everyone’ brand transformation campaign, and the initial feedback from both our customers and our associates is very positive,” he said.
Kroger reported a 3.4% year-over-year sales increase for private label, which the company calls Our Brands. During the quarter, the retailer launched 231 new Our Brands items, including a plant-based meat and food line under its Simple Truth brand.