After crushing it in its first quarter with better-than-expected sales and earnings per share, Kroger (NYSE: KR) failed to impress when it reported its second-quarter results last week. Weaker-than-expected sales growth for the grocer apparently spooked some investors as the stock slid about 10% after the report was released.
While Kroger’s year-over-year sales growth rate did decelerate meaningfully in Q2 compared Q1, commentary from management during the company’s second-quarter earnings call implies the market may be overreacting. Here’s management’s explanation for its sales growth challenges during the quarter, along with one other key takeaway from Kroger’s conference call.
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About Kroger’s weaker-than-expected same-store sales growth
One of the disappointments in the second quarter was Kroger’s growth in same-store sales, which management often refers to as identical sales. Same-store sales were up 1.6% year over year during the quarter when excluding fuel. This was not only below a consensus analyst estimate for growth of 1.9%, but it was below the 1.9% growth Kroger posted in its first quarter.
While the figure may have surprised investors, management expected it, explained Kroger CFO Mike Schlotman:
It’s true that management did warn in its first-quarter earnings call that its space optimization strategies wouldn’t morph into a tailwind until late Q3.
In Kroger’s second-quarter press release, CEO Rodney McMullen even said the company feels good about its same-store sales growth during the quarter, reiterating that the grocer is on track with its full-year expectations for the metric.
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Private-label brands continue to outperform
McMullen remains bullish on the company’s efforts with its own brands:
Management was especially optimistic about its Simple Truth brand, which recently achieved annualized sales of $2 billion and has become Kroger’s second-largest brand in its stores. Indeed, McMullen said he believes Kroger’s Simple Truth brand stands apart from competing brands:
Simple Truth is now the largest natural and organic brand in America, according to Kroger.
Looking ahead, management’s view for full-year same-store sales growth and adjusted earnings per share is unchanged from the outlook Kroger provided in its first-quarter update. Management expects 2018 same-store sales to increase between 2% and 2.5% year over year, and full-year adjusted earnings per share to come in between $2 and $2.15.
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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
