Will The Kroger Co. Earnings Grow at Whole Foods' Expense?
On Thursday, Kroger will release its quarterly report, and shareholders have been excited about the prospects for the grocery chain to keep growing. Even as natural and organic specialist Whole Foods Market has suffered some short-term setbacks, Kroger is moving forward with its own initiatives to stay ahead of Safeway and other conventional-grocery peers by emphasizing higher-margin offerings of its own.
Traditionally, the grocery business has had some of the lowest margins of any retail niche, and Kroger has had to work hard to squeeze out whatever profits it could in the cutthroat industry by using acquisitions to grow its overall size. But what Whole Foods proved to the industry was that grocery-store chains could add value with higher-margin products, and Kroger has learned that lesson well by taking advantage of rising demand for healthier food with organic offerings of its own. Let's take an early look at what's been happening with Kroger over the past quarter and what we're likely to see in its report.
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Can Kroger earnings grow past Whole Foods?
Investors have gotten a bit more optimistic about Kroger earnings in recent months, boosting their April-quarter estimates by a penny per share and making modest increases to their projections for next fiscal year as well. The stock has shared that enthusiasm, rising 7% since mid-March.
Kroger's fiscal fourth-quarter earnings report included record results for earnings per share, with growth of 13% coming in part from a 4.3% rise in same-store sales in the quarter. Although overall revenue declined, the drop was a result of a calendar quirk that put an extra week in the previous year's quarter. Kroger did a good job of containing costs and boosting profits, with increases in gross margin and reductions in overhead costs helping Kroger do better than investors had expected.
One disappointment, though, came early in the quarter, when private-equity firm Cerberus announced a plan to buy Safeway. Kroger had been looking at a possible Safeway asset acquisition, with particular interest in Safeway's e-commerce business, which includes both home delivery and online ordering. As online retailers start to invade the grocery space, Kroger had hoped to use those assets to its advantage, but even without them, Kroger will likely follow the same strategy on its own going forward. The company's recent purchase of digital-coupon marketer YOU Technology is just one aspect of its growing emphasis on having a digital presence.
But the success of Kroger's long-term strategy really lies in its ability to outcompete Whole Foods, and so far, it has done a good job of disrupting the organic specialist's business model. By offering organic food at lower prices, Kroger has drawn some potential customers away from Whole Foods. That in turn has forced Whole Foods to offer discounts of its own in order to keep its customer base. Yet even though Kroger undercuts Whole Foods on price, it still makes enough from organic sales both in its ordinary stores and in its Fresh Fare Market concept to represent a solid growth opportunity compared to conventional food products.
Still, Kroger will need to keep innovating. Other companies are also looking at boosting their organic and natural-food offerings, and their efforts will require Kroger to balance competitive prices against maintaining margins. In response, Kroger has used other efforts to drive growth, including a big expansion in its gas-station network to encourage repeat visits among shoppers.
In the Kroger earnings report, watch to see how well the company is able to integrate its recent Harris Teeter acquisition and keep its overall profits healthy. With a gap in Whole Foods Market's armor, Kroger has an opportunity to make a lasting impression on the entire industry.
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The article Will The Kroger Co. Earnings Grow at Whole Foods' Expense? originally appeared on Fool.com.John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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