8-K: Kroger Announces Mixed Q4 Results and Provides 2024 Guidance

Kroger reported a slight decrease in identical sales without fuel for the fourth quarter of 2023, while highlighting growth in digital sales and increased customer loyalty.

Summary

• Kroger's fourth quarter identical sales without fuel decreased by 0.8%, but when adjusted for the termination of the Express Scripts agreement, sales would have increased by 0.1%.
• The company's full-year identical sales without fuel increased by 0.9%, or 2.3% when adjusted for the Express Scripts termination.
• Fourth quarter operating profit was $1.194 billion, with an adjusted FIFO operating profit of $1.307 billion, including a $187 million benefit from the 53rd week.
• Full-year operating profit was $3.1 billion, with an adjusted FIFO operating profit of $5.0 billion, also including a $187 million benefit from the 53rd week.
• Kroger's digital sales grew by more than 10% in the fourth quarter, excluding the 53rd week, and delivery sales increased by 24% for the year.
• The company increased associate wages, resulting in an average hourly wage of nearly $19 and a rate of nearly $25 with comprehensive benefits, a 33% increase in the last five years.
• Kroger achieved a net total debt to adjusted EBITDA ratio of 1.33, excluding the 53rd week.
• For 2024, Kroger projects identical sales without fuel to increase between 0.25% and 1.75%, adjusted FIFO operating profit between $4.6 and $4.8 billion, and adjusted free cash flow between $2.5 and $2.7 billion.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the company's growth in digital sales, focus on customer value, and strong free cash flow. However, the decrease in identical sales and the risks associated with the proposed merger and economic conditions temper the overall outlook.

Positives

• Kroger achieved strong adjusted free cash flow, leading to a healthy debt to EBITDA ratio.
• Digital sales experienced significant growth, indicating a successful shift towards online retail.
• The company increased associate wages, demonstrating a commitment to its workforce.
• Kroger is investing in its business to drive long-term sustainable growth.
• The company is focused on lowering prices and offering more ways to save for customers.
• Kroger is growing loyal households and increasing customer visits.
• The company is expanding its Our Brands product line and innovating with new products.
• Kroger is recognized as a responsible company and is investing in food recovery initiatives.

Negatives

• Identical sales without fuel decreased by 0.8% in the fourth quarter, indicating a potential slowdown in core retail sales.
• The OG&A rate increased by 40 basis points in the fourth quarter, driven by investments in associate wages and other expenses.
• The company is facing increased price investments and higher shrink, impacting gross margin.
• Kroger has paused its share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.

Risks

• The proposed merger with Albertsons faces regulatory hurdles and potential litigation.
• Kroger's ability to achieve its financial goals may be affected by the opioid litigation settlement.
• The company is exposed to risks related to labor negotiations, potential work stoppages, and changes in the labor market.
• Economic conditions, including inflation and potential recession, could impact consumer spending and Kroger's performance.
• Kroger faces competition from existing and new competitors, which could affect pricing and promotional activities.
• The company is exposed to risks related to cyber-attacks and data security breaches.
• Kroger's ability to retain pharmacy sales from third-party payors is a risk factor.
• The company's adjusted effective tax rate may differ from the expected rate due to changes in tax laws.

Future Outlook

Kroger expects to continue its momentum in 2024 by delivering value for customers, investing in associates, and generating attractive and sustainable shareholder returns. The company projects identical sales without fuel to increase between 0.25% and 1.75%, adjusted FIFO operating profit between $4.6 and $4.8 billion, and adjusted free cash flow between $2.5 and $2.7 billion for 2024.

Management Comments

• Kroger achieved strong 2023 results, in line with our long-term growth model and built upon three consecutive years of historic growth.
• As customers manage macroeconomic pressures, we are lowering prices and offering even more ways to save with personalized promotions and rewards.
• We expect to continue our momentum in 2024 by delivering value for customers, investing in associates and generating attractive and sustainable shareholder returns.
• Kroger's 2023 results provide another proof point of the strength and resilience of our value creation model, which supported another year of strong free cash flow and net earnings growth.
• In 2024, we expect to grow revenue by delivering value for customers and enhancing our seamless shopping experience.

Industry Context

Kroger's results reflect the ongoing challenges and opportunities in the grocery retail industry, including the shift towards digital sales, the need to manage costs and pricing pressures, and the importance of customer loyalty. The company's focus on fresh products and digital innovation aligns with broader industry trends.

Comparison to Industry Standards

• Kroger's identical sales growth of 0.9% for the full year is below the 5.6% growth in the previous year, indicating a slowdown in sales growth.
• The company's digital sales growth of 10% is strong, but it is important to compare this to other retailers such as Walmart and Amazon to assess its competitive position.
• Kroger's net total debt to adjusted EBITDA ratio of 1.33 is relatively low, indicating a healthy financial position compared to some competitors with higher leverage.
• The company's adjusted free cash flow of $3.215 billion is a positive sign, but it is important to compare this to other retailers to assess its cash generation capabilities.
• Kroger's 2024 guidance for identical sales growth of 0.25% to 1.75% is modest, suggesting a cautious outlook for the year.

Legal Proceedings

• Kroger is facing risks relating to or arising from its proposed nationwide opioid litigation settlement.
• The company is involved in pending litigation challenging the proposed merger with Albertsons.

Stakeholder Impact

• Shareholders can expect continued dividends and potential long-term growth.
• Employees will benefit from increased wages and career development opportunities.
• Customers will benefit from lower prices, personalized promotions, and a seamless shopping experience.
• Suppliers may be impacted by Kroger's sourcing benefits and supply chain cost management.
• Creditors will be impacted by Kroger's debt management and financial performance.

Next Steps

• Kroger will continue to focus on its strategic pillars of fresh, our brands, personalization, and seamless.
• The company will continue to invest in its business to drive long-term sustainable net earnings growth.
• Kroger will continue to pay its quarterly dividend and expects this to increase over time, subject to board approval.
• The company will continue to execute its cost savings initiatives.
• Kroger will continue to monitor the progress of the proposed merger with Albertsons.

Key Dates

Keywords

Kroger, Retail, Supermarket, Grocery, Sales, Digital Sales, EBITDA, Operating Profit, EPS, Free Cash Flow, Merger, Albertsons, Pharmacy, Debt, Guidance