Back in June, analysts were getting ready to write Kroger's (NYSE: KR) obituary. Shares of the supermarket giant fell 26% over a two-day span after the company first reported a dismal earnings report and then got whacked by news that Amazon.com (NASDAQ: AMZN) was buying Whole Foods Market.
The news sent shockwaves across the grocery industry, but Kroger, as the nation's largest traditional supermarket operator, seemed to have the most to lose given Amazon's reputation for cutthroat competition and slashing prices. However, Kroger's third-quarter earnings report shows the company is back on track, despite Amazon implementing significant discounts when it took over Whole Foods back in August.
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Solid numbers
Kroger posted a comparable sales increase of 1.1% as overall revenue ticked up 4.4% to $27.75 billion, or 3% excluding fuel, beating estimates at $27.46 billion. Gross margin increased 30 basis points to 22.4%, and earnings per share improved from $0.41 to $0.44, ahead of expectations at $0.40.
Additionally, the company gained market share and saw digital revenue more than double, increasing 109%, due to strength in ClickList, its online grocery pickup program. Management also projected comparable sales growth of at least 1.1% growth in the fourth quarter.
CEO Rodney McMullen said the company had its best Black Friday ever for general merchandise, and touted results from its Restock Kroger initiative, a turnaround plan based on data optimization, private-label brands, and improving the digital experience, among other strategies.
In addition to the strong quarter, Kroger's performance also dispelled the myth that traditional grocery operators are going to get crushed by Amazon now that it's taken over Whole Foods.
A small fish in a big pond
It's clear why the market is so fearful of the combination of Amazon and Whole Foods. Amazon has a reputation for decimating brick-and-mortar competition in retail sectors like books and electronics as it sacrifices profit for market share and uses its Prime loyalty program to provide unmatched convenience.
However, when it comes to groceries, the reality is much different. Prior to the merger, both Amazon and Whole Foods were struggling in that category. Despite launching Amazon Fresh ten years ago, the e-commerce giant had failed to gain significant traction in the $800-billion industry, while Whole Foods had posted seven straight quarters of comparable sales declines as rivals like Kroger and Costco Wholesale (NASDAQ: COST) launched their own private-label organic products, undermining Whole Foods' core strength. Kroger, for example, grew its Simple Truth organic line into a $1-billion brand in just two years.