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Sep 13, 2021
Kroger’s shares fell nearly eight percent on Friday after the grocer reported that second quarter gross margins were lower than expected due to higher food prices, theft and supply chain costs.
On the bright side, the supermarket chain has raised its annual profit forecast, with sales exceeding expectations. Same-store sales fell 0.6% from the 14.6% gain triggered by the pandemic a year ago. CEO Rodney McMullen told analysts, “Home eating trends remain persistent. “
Gross margins, however, were down 60 basis points from the 2020 quarter and 120 basis points from the first quarter.
The chain’s higher shrinkage, which reflects about a quarter of the margin impact, is believed to be due to organized crime.
The chain said it lost another quarter of its margin due to the same increase in warehouse and transportation costs faced by other retailers. Kroger is securing the increased shipping capacity and increasing warehouse retention programs to offset these expected cost pressures that are expected to be temporary. Supply chain spending is expected to remain high in the second half of the year.
Finally, Kroger saw a rise in inflation in some categories during the second half of the quarter. Officials reiterated that they expect inflation for the full year to be higher than initially envisioned in its business plan for 2021. For the second half of the year, inflation is expected to decline. between 2% and 3%.
“We continue to invest in pricing where we think it makes sense,†said CFO Gary Millerchip. “Sometimes it can be in areas where we see inflation, sometimes it can be where we invest because we think it is the right thing to do to retain our long term customers and others. places through our personalization strategies. “
In a note, JP Morgan analyst Ken Goldman said he believed the price elasticity was moderate enough for Kroger to raise prices more broadly to offset various cost pressures.
Mr McMullen said Kroger has proven that he can operate successfully in “low or negative inflation and high inflation”, with the ideal rate being between three and four percent. He said: “So far the costs are mostly passed on in an organized fashion.”
DISCUSSION QUESTIONS: How much room does Kroger have in the current climate to raise prices to offset cost pressures? What advice do you have for driving unusually high operating costs?
“It’s not about how much he should raise prices, but understanding which items he should raise prices in and which he should continue to invest in.”
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