Supermarket chain Kroger (NYSE: KR) is set to report its third-quarter results before market opens on Thursday. After the company reported worse-than-expected second-quarter sales growth in September, investors will be watching closely to see whether the company's efforts to invigorate its business are paying off.
Kroger has been rolling out key changes to its business as part of a plan it's calling Restock Kroger. The plan represents a range of initiatives, including efforts to make better use of customer data, enhance digital experiences, better optimize store space, and expand private-label brands. Will Kroger's third-quarter results start showing the fruit of these efforts?
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When Kroger reports its third-quarter results, here are several areas for investors to check on.
Consolidated sales growth
Sales in Kroger's second quarter of its fiscal 2018 increased just 1% year over year. Excluding fuel, the company's divestment of its convenience store business, and the impact of its acquisition of Home Chef, sales were up 1.8%. This growth was down significantly from Kroger's 3.4% increase in net sales in Q1, or 2.3% when excluding fuel and the effect of Kroger's recently sold convenience-store business.
For Kroger's third quarter, investors should expect another period of challenging sales growth. After all, management has said that investments in its Restock Kroger program, particularly related to the company's space optimization rollout at its stores, would be headwinds before they would be tailwinds. Furthermore, management specifically said it didn't expect its space optimization investments to be tailwinds until late in Q3.
Digital sales growth
One key catalyst for Kroger's business recently has been its digital sales growth. Kroger's digital sales were up 50% year over year in Q2.
With management indicating in its second-quarter earnings call that Kroger continues to invest aggressively in its digital business, investors should look for similar growth in digital sales in Q3.
Kroger's digital sales growth is particularly important, as management has said that digitally connected customers spend more money with the company than those who aren't digitally connected.
Private-label brands' performance
Another important catalyst investors should check on when Kroger reports its third-quarter results is its private-label brands. In Q2, private-label brands accounted for 28.2% of unit sales and 26.5% of sales dollars -- a level that management said was a record for a second quarter. Strong performance from the company's private-label brands was helped by a 15% year-over-year increase in sales from the company's popular Simple Truth and Simple Truth Organic lines during the period.
Given that the expansion of private-label brands is one of the priorities of the company's Restock Kroger plan, investors should look for similarly strong growth in Kroger's private-label brands in Q3.
As management noted in its second-quarter earnings call, the company's Restock Kroger plan "is just getting started." The company's third quarter may give investors a better idea of whether these efforts are working.
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