Kroger makes growth look easy again

Kroger CEO Rodney McMullen declared 2014 an outstanding year and it is easy to see why after the nation’s leading supermarket operator again surpassed performance expectations.

Kroger’s identical store sales increased 6%, excluding fuel, in the fourth quarter ended Jan. 31, while total sales including the benefit of acquired Harris Teeter stores increased 12.9% to $25.2 billion. Net income increased 27.5% to $518 million, or $1.04 a share, compared to $406 million, or 81 cents a share the prior year. Earnings per share exceeded analysts’ consensus estimate by 14 cents.

"2014 was an outstanding year by all measures. Kroger captured more share of the massive food market, delivered on our commitments and invested to grow our business,” Kroger Chairman and CEO Rodney McMullen. “While improved fuel margins contributed to our results in the second half of the year, our core operating performance without fuel shows that our associates are improving our relationship with customers in ways that grow loyalty and generate strong shareholder returns.”

Look for more of the same from the company this year if it delivers on guidance shared with investors. The operator of 2,625 stores said it believes identical store sales excluding fuel will increase between 3% and 4%. The increased productivity of selling space is expected to translate to profits advancing to a range of $3.80 to $3.90, compared to full year 2014 adjusted earnings per share of $3.52.

Kroger also said it will spend between $3 billion and $3.3 billion on capital investments in 2015. The company did not elaborate on the composition of its spending across typical uses such as new stores, remodels and supply chain and information systems, but did indicate it has a great pipeline of high quality projects to drive long term gross square footage growth between 2% and 2.5%.

Another area of growth is natural and organic products. During a conference call with investors the company touted the success of its Simple Truth brand and alluded to future possibilities.

Kroger COO Mike Ellis said Simple Truth has been the company’s most successful brand launch ever and last year annual sales from nearly 2,700 items reached $1.2 billion.

We have a great base of products that will continue to expand,” Ellis said of Simple Truth.

Thanks to the growth of Simple Truth, store brands accounted for 28.2% of units sold at Kroger last year, the highest level the company has seen in seven years, according to Ellis.

Another area of growth for the company in 2015 is likely to be increased penetration of the “click and collect,” service. Harris Teeter stores began offering the service 10 years ago and Kroger said it has learned a lot about how to do it right since acquiring the company last year. Click and collect is available at 160 Harris Teeter stores currently, but only one Kroger test store in Cincinnati.

The growth is exciting and customers love the service. It is a big part of our strategy going forward,” Ellis said