Speaker event today
We are hosting a call with a plant based food buyer for a 250 store grocery chain at 11AM ET today. We are looking for more insights into the competitive dynamics of the fast growing sector.
For event details (includes video and materials link) CLICK HERE.
KR Q2 results, removing from Long Bias
Kroger reported FQ2 EPS of $.73, significantly above consensus estimates of $.54. Upside was driven by stronger sales with ID sales up 14.6%, 4% above consensus expectations. June and July were up mid-teens. During the final month identical store (ID) sales were up 12.5% as supplemental unemployment checks ended. Q3 to date is still up DD%. Digital sales grew an impressive 127% (surpassing WMT’s growth rate) and contributed 4.4% to ID sales. Management said digital sales were profitable on an incremental basis, without explaining what costs it was measured against. Kroger also pegs the current inflation rate to be slightly above 2% compared to the base model of 0.5-1%. Gross margin expanded 5bps with price investments and negative mix. OG&A leveraged 60bps despite the higher costs from COVID-19.
Management guided the year to $3.20-3.30 vs. consensus of $2.92. We are still modeling EPS above guidance and consensus, driven by higher ID sales and slightly higher margins. That may not be enough for shares to continue to outperform from here as investor concerns will increase about decelerating sales growth, increased promotions and difficult comparisons.
We are removing Kroger from our Long Bias list, despite the accelerated pace of share repurchase we expect in the 2H. Accelerating inflation is not a favorable environment for Kroger shares. Kroger does not have the store growth component to offset the COVID-19 benefit in 2021. Gross margin expansion of only 5bps when IDs sales are up double digits concerns us when sales decelerate further. While we applaud the company’s partnership with Ocado and its online investments, we believe the investments will be headwinds for margins in the near term during the investment phase. The valuation is undemanding and our concerns are not unique, so we would look to a time when the market’s expectations differ from ours to add Kroger back to our position monitor.
Amazon takes another step in grocery (SFM)
Amazon finally opened a second Amazon Go store last week and announced a co-location of an Amazon Fresh grocery within a Kohl’s store. Since sending shockwaves through the grocery industry when it acquired Whole Foods, Amazon has since made slow, deliberate steps in the industry that mask the internal investments and innovation. Fresh produce was a challenge for the first Amazon Go store, which offers a scan-free and cashier free shopping experience. In a WSJ interview this weekend Jeff Mackey, CEO of Whole Foods, said, “If we had to make the decision all over again, would we make this decision? The answer is yes, because Amazon has been a great partner. They’ve helped us evolve; they’ve helped us get better at technology, delivery.” When the Amazon Go stores figure out fresh produce and the technology we believe it will be spread across the Whole Foods chain. That would be a very difficult investment for conventional grocers to match.
CDC says indoor dining is the riskiest (SYY)
The Centers for Disease Control and Prevention (CDC) said last week that dining out is one of the riskiest possible activities during the coronavirus pandemic. The CDC cited the lack of using face masks while people are eating and drinking. People who tested positive were about twice as likely than those who tested negative to say they had dined at a restaurant. People who tested positive but could not identify a specific occasion when they were exposed to the virus were also more likely to have visited a bar or coffee shop. Every state currently allows indoor dine-in with restrictions, but some counties like in California and New York City have separate restrictions. Raising indoor capacity constraints from current levels likely has limited benefits for restaurants when the CDC is saying dining out is one of the riskiest activities. We may see the week over week improvement that Sysco reported at a conference this past week stagnate as the sales improvement in states that have reopened indoor dining recently begin to wane as we have seen in states that reopened much earlier as seen in the chart below.
