The Ratings Game: Smoothies and salads: Kroger says these 4 items account for 28% of its produce sales


Kroger Co.

says 70% of customers choose their grocer based on the quality of fresh products, and there are four items that stand out: bananas, berries, tomatoes and bagged salads.

According to  Stuart Aitken, Kroger’s chief merchant and marketing officer, these items account for 28% of the company’s produce sales.

“When we deliver even higher quality and freshness in these areas we will earn even more customer loyalty and additional sales,” he said, according to a FactSet transcript.

Aitken also said that chicken will be big, with chicken sales expected to reach $1 billion in the next two years.

Aitken was one of the executives who spoke at Kroger’s investor day event this week, which outlined the company’s plan for growth in 2021 and beyond.

Read: ‘Frugality will continue to reign’: Eager to save hundreds of dollars, Americans flock to one type of product

Kroger reiterated its full-year 2021 guidance for an adjusted identical sales decline of 3% to 5% and earnings per share of $2.75 to $2.95. The FactSet consensus is for an identical sales decline of 4% and EPS of $2.80.

Shareholder return is expected to be 8% to 11% with net earnings growth of 3% to 5% through a number of strategies, including fresh food sales increases, accelerating digital sales, which the company says is now a growth engine, and wider competitive moats, such as continued innovation in its private label Our Brands.

Kroger says its brands are a $26 billion business with Simple Truth, which is focused on items across the frozen, produce and dairy sections, and more, ringing up $3 billion in sales last year.

Home Chef, which includes ready-to-cook and ready-to-heat meals, will be the next billion-dollar brand, the company says. A pilot that is coming soon will build on this business.

Kroger says digital sales doubled in 2020 to reach more than $10 billion, and aims to double digital sales by 2023. For them, digital includes all of the components that make the shopping process seamless for the customer. Its Ocado partnership will also expand.

See: Online grocer Ocado dismisses Amazon as a ‘very small competitor’ ahead of first Kroger warehouse launch

“By leading with fresh and accelerating with digital we will grow our share of wallet by leading with fresh food,” said Rodney McMullen, chief executive of Kroger, during the event.

In 2020, Kroger said it had 1.3 billion customer interactions across digital channels. Overall sales in 2020 grew by $14.4 billion. Total sales for the year were $132.5 billion.

COVID-19 drove a surge in online grocery, with competitor Albertsons Cos. Inc.

 announcing Tuesday that it has partnered with Google


on a number of digital initiatives.

“Kroger detailed its strategy, and it’s beautiful in its simplicity: fresh and digital,” wrote MKM Partners’ Bill Kirk in a note.

“Fresh food is a differentiator in ways that traditional packaged food is not, and Kroger’s digital audience is an asset that many retailers, particularly those who rely more heavily on third-party platforms, can not replicate.”

Also: ‘Plexiglass will stay up for a while’: Shoppers remain anxious about COVID but head back to stores

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And MKM is confident about the steps the company is taking to further its digital business.

“We believe the exclusive partnership with Ocado could be fruitful (especially in conjunction with Walgreens), increasing the reach and the value of Kroger’s captive online marketplace,” the note said.

“Where most retailers use third-party services for e-commerce options, Kroger has its own audience on that can be better monetized, personalized, and weaponized.”

Still MKM maintained its neutral stock rating. MKM has a fair value estimate of $35 on Kroger shares.

“[T]he legacy stores, comprising the vast majority of consolidated profitability still do not excite,” the note said.

UBS analysts are also cautious, maintaining their neutral rating and $35 price target.

“From here, Kroger now needs to demonstrate that it can accomplish these goals. In the past, it has set ambitious goals only to fall short such as the plan it laid out in 2017 calling for $400 million of incremental operating profits within three years. Ultimately, it needed to pull back from this.”

Even after laying out its plans, analysts wonder what impact vaccinations and the end of the pandemic will have on the business.

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“Its growing alternative profit streams and cost savings initiatives are expected to act as tailwinds in the coming year, but the big question still remains to what degree sales will moderate in a more normalized environment.”

JPMorgan has similar questions, particularly about sales expectations for 2% to 4% growth, which Kroger executives discussed during the event.

“There are strengths in fresh and digital, for sure, but are they enough to consistently power 2% to 4% comps? We are not certain,” analysts said.

“[W]hat is so different about Kroger’s fresh offering than in the past and relative to conventional competitors that also have strong offerings (e.g., Albertsons). Nor do we think Kroger’s strategic moats are so different from large competitors, which have also become more sophisticated with digital engagement and targeted ads (though, to be fair, we do not have full visibility here). “

JPMorgan rates Kroger stock neutral.

Kroger shares have gained 13.8% over the past year while the S&P 500 index

is up 59.1% for the period.

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