Kroger Earnings Analysis: The Bill for Digital Comes Due

In January our text analytics platform highlighted the disruption in the grocery sector, namely the increasing cost to stay relevant as digital-first competitors scale and e-commerce giants invest more in the business. That bill appears to be coming due for Kroger, which reported disappointing results and guidance on this morning's earnings call.  

For our Deception Spotlight subscribers, risk to the Kroger outlook was also highlighted on February 12. Contact us if interested in learning more about our Deception Spotlight coverage.

Please note: This in no way represents investment advice. All transcript text provided by S&P Global Market Intelligence.

High Level Takeaway: Lowest Sentiment in Six Quarters

At Amenity Analytics, we don't believe that the score alone tells the whole story, but it is one chapter of the story. In the case of Kroger, that chapter was the most negative in six quarters, registering an Amenity Score of 16 vs an average of 39 over the prior four quarters:

Company View: Kroger

What Drove Negativity? Digital Growth Costs + Fending Off Core Competition

As we often find to be the case, Amenity’s deceptive language analysis shines a light on the key pain points facing the company. For Kroger, that includes competition in the core business and the cost to be relevant in digital:

  • Kroger (3/7/19):

"I want to reiterate again that the first year of a 3-year plan is difficult to land in the first year."

"I don’t know if I’ll grade the environment to rational or irrational. This is a competitive industry. It’s always been a competitive industry, and we’ve always built the business plan assuming it’s going to be a little bit more competitive versus less competitive."

"But if you look at the digital investments we’ve made along with the other investments we’ve made in the fourth quarter, I talked about the new warehouses that we opened up to support our digital business – if you look at that all in the core, yes the core declined. I won’t go into a specific number, but it really is how you slice and dice all of this."

Competitive Concerns Validated by Optimistic Tone in the Sector

As a category, grocery is not often considered a high growth business. So when e-commerce giants and digital-forward upstarts alike sound this positive, it is not surprising that Kroger is feeling the pinch:

  • Hello Fresh (3/6/19):

"So far, it’s very healthy. So obviously, still early in the year, but as regards to Q1, on all levels on plan and, therefore, in line with the guidance that we have provided here. From a top line perspective, you should more expect us to be probably towards the top end of the range."

  • Target (3/8/19):

"We’ve seen 6 quarters of positive comps in Food and Beverage, which translated into market share gains in 2018."

  • Sprouts Farmers Market (2/21/19):

"I would say that home delivery for us, as Bard mentioned, today is not margin-dilutive simply because of providing the tailwind to comp and then the small pickup in gross margin that we see with that customer today."

  • Walmart (2/19/19):

"Our strong mid-single digit comp growth in grocery led to the best 2-year stack in 9 years."

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Transcript text provided by S&P Global Market Intelligence.

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