Kroger: Customer First strategy contributes to 34 consecutive quarters of positive IDs

CINCINNATI — Kroger on Thursday posted its 34th consecutive quarter of positive identical-supermarket sales, vetting the company's approach to competing in the food industry not as a traditional food retailer, but as a retailer that happens to sell its customers a lot of food.

"Identical-store sales are the most visible indicator of a retailer's relevancy to its customers," David Dillon, Kroger chairman and CEO, told analysts Thursday morning. "Customers [are] coming from a much broader base than just food retailers," he said. When Kroger analyzes its top competitors market by market, the top two or three competitors are not grocers, Dillon said.

"Despite a difficult competitive and consumer environment for conventional grocers, Kroger continues to perform well, as [its] Customer First strategy continues to resonate," noted Deutsche Bank research analyst Charles Grom in a research note published Wednesday. Kroger's 34th consecutive quarter of same-store sales growth reflects Kroger's key advantages, Grom added, including lower prices, a loyalty card program that uses learnings from consumer research firm dunnhumbyUSA, an extensive store-brand portfolio and a strong financial management structure.

"By focusing on customers, we're defining the business that we're in by how the customers think about it," Dillon said, and it's that perspective that's helping to drive sustainable growth through a tough economy. "It's almost a classic business school case study that shows how you define your market and how you think of yourselves will define who you become."

For example, one of the businesses Kroger has emphasized is its retail pharmacy, which has been realizing identical-sales growth in the double-digits. Mike Schlotman, CFO and SVP of Kroger, credited half of that sales growth to captured Express Script prescriptions from Walgreens, and the other half to improved pharmacy performance. "Even without Express Scripts, pharmacy had a very strong identical-sales growth," Dillon said.

Pharmacy same-store sales will decrease going forward due to the large generic wave going through 2012, but that won't impact overall same-store sales, Schlotman noted. Kroger continues to expect identical-supermarket sales growth, excluding fuel, of 3% to 3.5%. In accordance with Kroger's original guidance, this includes the expected negative effect on sales from prescription drugs coming off patent.

Kroger sales were up 5.8% to $29.1 billion for the first quarter ended May 19, the grocer reported Thursday. Total sales, excluding fuel, increased 4.3% over the same period last year. Identical-supermarket sales, without fuel, increased 4.2% in the first quarter over the same period last year.

Based on the strong results in the first quarter, the company increased its earnings per share guidance to $2.33 to $2.40 per diluted share for fiscal 2012. The original guidance was $2.28 to $2.38 per diluted share. “Kroger’s solid first-quarter performance demonstrates that our Customer First strategy continues to resonate with customers,” Dillon said.

Separately, the company today announced that the board authorized a new $1 billion share repurchase program that replaces the prior authorization, which was exhausted on June 12.

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