Can Kroger offset its margin headwinds?
Shares of Kroger fell nearly eight percent on Friday after the grocer reported that gross margins in the second quarter came in lower than expected due to higher food prices, theft and supply chain costs.
On the positive side, the supermarket chain raised full-year earnings guidance as its sales topped expectations. Same-store sales dipped 0.6 percent against the pandemic-fueled 14.6 percent gain a year ago. CEO Rodney McMullen told analysts, “Food-at-home trends remain sticky.”
Gross margins were down 60 basis points from the 2020 quarter, however, and 120 basis points versus the first quarter.
The higher shrink experienced by the chain, which reflects about a quarter of the margin impact, is believed to be driven by organized crime.
The chain said it lost another quarter of its margin due to the same increased warehouse and transportation costs facing other retailers. Kroger is securing increased shipping capacity and augmenting retention programs at warehouses to offset these cost pressures that are expected to be temporary. Supply chain expenses are expected to remain elevated in the second half of the year.
Finally, Kroger saw higher inflation in some categories in the second half of the quarter. Officials reiterated they expect inflation for the full year to be higher than originally contemplated in its 2021 business plan. For the second half, inflation is expected to range between two percent and three percent.
“We are continuing to invest in price where we think it makes sense,” said CFO Gary Millerchip. “Sometimes that might be in areas where we’re seeing inflation, sometimes it might be where we’re investing because we believe it’s the right thing to do to grow customer long term loyalty and other places through our personalization strategies.”
In a note, J.P. Morgan analyst Ken Goldman said he believes price elasticity is moderate enough for Kroger to raise prices more broadly to offset the varied cost pressures.
Mr. McMullen said Kroger has proven it can operate successfully in “low or negative inflation and high inflation” with the ideal rate being between three to four percent. He said, “So far, costs are being passed through in an organized way for the most part.”
- Kroger Reports Strong Second Quarter Results and Raises Full-Year 2021 Guidance – Kroger
- The Kroger Co (KR) Q2 2021 Earnings Call Transcript – AlphaStreet
- Kroger Reports Second Quarter 2020 Results and Updates Full-Year 2020 Guidance – Kroger
- Kroger gets hit by higher costs, theft — even as shoppers fill up grocery carts – CNBC
- Shipping woes, discounts bite into Kroger’s margins, shares fall – Reuters
- Will American consumers push back against higher grocery prices? – RetailWire
DISCUSSION QUESTIONS: How much room does Kroger have in the current climate to raise prices to offset cost pressures? What advice do you have around passing through unusually high operating costs?