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Kroger’s Margins and the Restock Kroger Initiative

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Mar. 13 2018, Updated 7:32 a.m. ET

Accelerating investments with tax savings

As we saw in the previous part, Kroger’s (KR) fiscal 4Q18 gross margin fell 30 basis points, driven by higher investments in its Restock Kroger initiative and price investments.

Management said during the fiscal 4Q18 earnings call that it will continue to make price investments to drive same-store sales growth. It also plans to accelerate spending under its Restock Kroger plan using the tax savings it will generate from the recent tax reforms.

“We are taking advantage of the lower federal taxes under the Tax Cuts and Jobs Act to pull investments forward to 2018, so we can move even faster on Restock Kroger than originally anticipated,” said Mike Schlotman, Kroger’s CFO (chief financial officer).

The company expects to generate $6.5 billion of free cash flow and $400 million of incremental operating margin under the Restock Kroger plan over the next three years.

As part of this initiative, Kroger sold its convenience store business to EG Group for ~$2.2 billion on February 6, 2018. The company plans to use the sale proceeds for share repurchases and repayment of debt.

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Margins to contract in the next fiscal year

Kroger management said it expects margin pressure in the next fiscal year as the company continues to invest in the Restock Kroger initiative. It will also plan its future investments during the next fiscal year. However, the benefits may not be visible over the next two years.

“You should expect gross margin to decline somewhat in 2018,” Schlotman said during the earnings call.

The company’s earnings guidance came in below analysts’ expectations, driving the stock down. We’ll look at that in more detail in the next part.

Investors looking for exposure to Kroger through ETFs can invest in the First Trust Consumer Staples AlphaDEX ETF (FXG), which invests 3.4% of its portfolio in the company.

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