Kroger's stock jumps 6% after profit beat though CEO says more affluent customer now also wary on spending

By Ciara Linnane

Customers are buying lower-priced meat cuts, are overall buying less and focusing squarely on essentials

Kroger Co.'s stock jumped 6% Thursday, after the grocery chain beat profit estimates for the second quarter and raised the low end of full-year same-store sales guidance, offsetting quarterly sales that fell slightly short of estimates.

On a call with analysts, Chief Executive Rodney McMullen outlined the change in consumer behavior that's starting to emerge among its more affluent customers, who are joining its low-income customers in seeking value.

"The reduction of excess savings built up during the pandemic, higher interest rates and the effect of inflation are pressuring customers' ability to spend," he said, according to a FactSet transcript. "This is especially true for our most budget-conscious customers, as we've been seeing for a while now, but we're now seeing other customer segments beginning to make changes as well."

The executive said customers are buying lower-priced meat cuts, are overall buying less and focusing squarely on essentials. Many are stocking up at the start of a month and then tapering spending after that. Consumers are also eating more at home and less at restaurants.

"In response, we are supporting our customers by keeping prices low through promotions, including loyalty discounts, personalized offers and fuel rewards," said McMullen.

The company (KR) had net income of $466 million, or 64 cents a share, for the quarter, after a loss of $180 million, or 25 cents a share, in the year-earlier period.

Adjusted for one-time items, EPs came to 93 cents, ahead of the 91-cent FactSet consensus.

Sales rose to $33.912 billion from $33.853 billion a year ago, and were just below the $34.089 billion FactSet consensus. Same-store sales excluding fuel rose 1.2%, while FactSet was expecting a 1.1% rise.

McMullen said the company is still committed to closing its planned merger with Albertsons Cos. Inc. (ACI), which has faced regulatory pushback.

"We are committed to closing this merger because bringing Kroger and Albertsons together will provide meaningful and measurable benefits-lower prices, secure jobs and expanded access to fresh, affordable food-for customers, associates, and communities across the country," he said in prepared remarks.

For more: Kroger's CEO insists shoppers would see lower prices after Albertson's merger

Kroger has expanded its range of Our Brands private label brand products. More than 90% of its customer households purchased Our Brand products in the period, he said.

Gross margin was 22.6% of sales for the quarter, up from 22.4% in the first quarter. Digital sales rose 11%, driven by an increase in households and traffic. Delivery rose 17% while pickup sales rose 10%.

The company is still expecting full-year adjusted EPS to range from $4.30 to $4.50, but it now expects same-store sales excluding fuel to range from 0.75% to 1.75%, compared with prior guidance of 0.25% to 1.75%.

"Our solid sales results through the first two quarters of the year give us the confidence to raise the low end of our full-year identical sales without fuel guidance by 50 basis points," Interim Chief Financial Officer Todd Foley said in prepared remarks.

Kroger also raised its capex guidance for the full year to a range of $3.6 billion to $3.8 billion, from prior guidance of $3.4 billion to $3.6 billion. The additional funding will be used for major and minor store projects, said Foley.

The stock has gained 12.7% in the year to date, while the S&P 500 has gained 16.4%.

-Ciara Linnane

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09-12-24 1229ET

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