KR Kroger Co

By Heather Haddon 

Kroger Co. delivered stronger than expected earnings and sales, sending its stock up 10% as investors welcomed evidence that the grocer is growing even as it overhauls operations to compete with Amazon.com Inc. and discounters.

The largest U.S. supermarket chain by stores and sales reported revenue of $37.5 billion in the quarter ending in May, up from $36.3 billion the prior year. Earnings per share on an adjusted basis more than doubled, to 73 cents per share on $626 million in earnings from 32 cents per share on $303 million in the year prior.

Kroger has been overhauling its operations to face rising competition in food retail, particularly as Amazon rolls out food delivery and discounts at the Whole Foods chain it bought last year.

European discount chains Aldi and Lidl are also expanding in the U.S., putting pressure on established supermarkets to keep prices low. Kroger is cutting prices on some groceries to keep customers loyal.

"We've been aggressively working to transform our business and accelerate where we are going," Kroger Chief Executive Rodney McMullen said in an interview.

Mr. McMullen said the company would continue to invest in technology while working with suppliers to keep costs down.

Cincinnati-based Kroger said last month that it was t aking a roughly $250 million stake in British online grocer Ocado Group PLC to run its automated warehouses and process online orders. That will help bolster the deliveries that Kroger offers through third-party providers and in-store pickup points it is introducing for online orders. Walmart Inc. is also expanding delivery and in-store pickups to compete with Amazon.

Kroger executives said Thursday that digital sales grew 66% during the company's first quarter. They said they hope eventually to offer digital orders across the country, even in regions such as the Northeast, where Kroger doesn't operate stores.

Kroger also said last month that it was buying Home Chef and would sell that company's meal kits in its stores. That is part of a broader culling of the products sold at nearly 2,800 Kroger stores to emphasize better-selling products and store-brand goods.

Some analysts believed the big changes on Kroger's shelves could weigh on sales if customers struggle to find familiar goods. Kroger said Thursday that the changes would dampen sales until later this year.

"It actually takes our associates and our customers a while to actually find things in the store," Chief Financial Officer Mike Schlotman said at an investor conference last month.

Mr. McMullen said Thursday that the restocking program was "off to a fantastic start" and that it contributed to the company's strong performance this quarter. Executives said cost savings also helped. Shares in several other food retailers also rose early Thursday. Kroger's percentage jump was on track to be the stock's biggest one-day gain since March 2009, with its stocks trading around $28.60.

"Clearly these results are much better than expected," Barclays wrote to investors. "The real question in our view is whether Kroger can demonstrate stability."

To pay for these investments, Kroger and its competitor are opening fewer new stores. The company last week said it would sell all 14 Kroger stores in the Raleigh-Durham area of North Carolina in August. Lidl and Aldi and specialty regional supermarkets such as Publix Super Markets Inc. have expanded rapidly there.

"We have not been able to grow our business the way we would like in this market," said Kroger division President Jerry Clontz.

Kroger also sold its chain of convenience stores for $2.15 billion in April. The sale contributed to the $2 billion in total profit Kroger made in the recent quarter.

Write to Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

June 21, 2018 13:05 ET (17:05 GMT)

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