Kroger boosts profit outlook as essentials focus pays off

Kroger Co (KR.N) raised its profit expectations for the year on Thursday, the latest retailer to defy the inflation-driven slump gripping Corporate America by focusing on essentials.

Major retailers including Walmart (WMT.N) and Target (TGT.N) have in recent weeks sounded alarm bells over the toll inflation is taking on U.S. shoppers, stoking fears the economy could be heading into recession.

But with people prioritizing spending on groceries and necessities – a shift typical during downturns – dollar stores, Costco Wholesale Corp (COST.O) and Kroger have weathered the inflation storm relatively well.

Kroger lifted its 2022 forecast for earnings per share by 10 cents to between $3.85 and $3.95, above market estimates of $3.85, according to Refinitiv data. First-quarter profit of $1.45 per share was also 15 cents more than expectations.

Same-store sales of its private-label brands increased 6.3% in the quarter, as consumers snubbed branded juice and prepared meals for cheaper store-owned counterparts.

“Customers are aggressively starting to buy our (private-label) brands, Chief Executive Rodney McMullen said, adding that more than 90% of customers bought a product from a store-owned brand.

“When the economy is tight, our brands always gain share.”

Overall same-store sales excluding fuel increased 4.1%, slightly lagging estimates of 4.2%, due to weak sales of general merchandise such as apparel, home furnishings and toys.

After a 1% decline in gross margins to 21.6%, Kroger said it expects margins to remain under pressure this year as supply chain expenses and discounting offset the benefits from its plan to reduce $1 billion in costs through automation and technology.

The company forecast 2022 same-store sales growth between 2.5% and 3.5%, largely below expectations of 3.2%.

“Overall, the results were fine, but for a stock where many are hiding out in this inflationary environment, we do not believe it was strong enough,” Citi analyst Paul Lejuez wrote in a note.