What Really Drove Kroger’s Fiscal 3Q18 Earnings Beat?
Kroger’s strong earnings beat
Kroger’s (KR) fiscal 3Q18 EPS (earnings per share) improved 7.3% YoY (year-over-year), compared with the analyst expectation of a 2.4% YoY decline. The beat was driven by better-than-expected sales comps (comparable same-store sales) and gross margin improvements.
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Kroger’s EPS increased for the first time this year. Its profits per share had plunged 17% in each of the first two quarters of the current fiscal year, but the management reaffirmed its earnings guidance for fiscal 2018. It expects fiscal 2018 adjusted EPS to lie in the $2.00–$2.05 range. At the midpoint, this reflects a 4.5% decline over its fiscal 2017 earnings.
For the next year, the management has projected that its adjusted EPS will remain flat or increase marginally over its fiscal 2018 earnings. Same-store sales are likely to come out stronger than they were in fiscal 2018.
Kroger’s gross margin finally sees growth in 3Q18
Kroger’s gross margin recorded an improvement of 30 basis points (excluding fuel, ModernHEALTH, and LIFO charges) in fiscal 3Q18, after deteriorating for four consecutive quarters. Its fiscal 3Q18 gross margin stood at 22.4% of sales.
While the grocery giant continued to make price investments to tackle competition, lower cost of goods and a better sales mix drove the margins higher. The improvement in margins in the current quarter was particularly impressive as it coincided with Amazon’s price cuts at Whole Foods and helps quell concerns and rising pessimism that Amazon.com (AMZN) and Wal-Mart Stores (WMT) will become the bane of traditional grocers.
Pivotal Research Group analyst Ajay Jain stated: “Based on the wall of worry over Amazon, Walmart and Aldi, fundamental concerns over Kroger’s competitive position proved to be overblown.”
Meanwhile, Kroger’s endeavors to become a more convenient and customer-oriented grocery provider have helped the company attract more customers. The company is now looking forward to competing with other players, not only in prices but also in services and efficiency.