Kroger had record earnings per share in Q2 and increased identical sales in every store department and operating division. Due to its strong Q2 result and its recent share repurchases, Kroger is raising its earnings per share guidance for fiscal year 2012.
Kroger was able to reduce OG&A expenses by 59 basis points in Q2 through productivity improvements, such as using new technology in its pharmacy to reduce customer wait times and enhance the customer experience.
In Q2, Kroger's loyal household growth grew faster that total household growth. It had positive identical sales for both loyal households and total households, although the growth was stronger for loyal households.
The customer trend is the same as the last several quarters: customers shop more frequently, buy less per shopping trip, and purchase more on a monthly basis.
Tonnage increased in Q2 from the prior year as Kroger continued to gain market share, benefited from lower inflation, sent more targeted mailings, and had easier comparisons from earlier flat quarters. Product cost inflation, roughly 2.2 percent, flattened faster than expected. Every department had inflation except produce and seafood, which had deflation. Kroger does not expect the drought to impact inflation for the rest of the year. It will probably cause proteins to temporarily decrease before increasing next year. Mill and milk prices will probably increase next year.
Kroger has reduced average customer wait time in checkout lines to 30 seconds versus 4 minutes several years in the past.
Kroger recently partnered with Murray's Cheese Shops, which are present in 51 locations. Kroger's associates have opportunity to be trained to become Murray's Cheese masters.
In Q2, Kroger brands represented 26.3 percent of all grocery store sales dollars. Grocery department corporate brand units sold were up 33.5 percent versus last year and the corporate brand is gaining share over time. Kroger will soon be offering a new line of Private Selection single-serve coffee pods. It also recently added a number of new varieties of yogurt to its corporate brand.
Pharmacy trends were slightly lower from last year, due primarily to shifts to generics. The shift to generics had a negative impact on gross margins for pharmacies.
Financials
Identical supermarket sales increased by 3.6 percent in Q2. Identical fuel sales also increased. Kroger expects identical supermarket sales, excluding fuel, for fiscal year 2012 to increase by 3 to 3.5 percent.
FIFO gross margin was 20.63 percent of sales in Q2, a decrease of 43 basis points when retail fuel operations are excluded. Excluding fuel, operating margins were 3 basis points lower than last year, but 8 points higher than Q1.
Kroger's fuel outlets earned approximately $.164 per gallon versus $.174 last year.
Earnings per share in Q2 were $.51 versus $4.6 last year. Kroger is raising its guidance for fiscal year EPS to be in the range of $2.35 to $2.42.
During the quarter, Kroger purchased 23.7 million shares for $525 million. It has approximately $476 million remaining in its share repurchase program.
The earnings call transcript can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/853831-the-kroger-management-discusses-q2-2012-results-earnings-call-transcript?part=single
Copyright 2012 Jaygo's Earnings Conference Call Summaries
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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