Kroger Co. dropped its goal to expand its operating profit by $400 million by 2020, signaling that the grocer's turnaround plan may be proving less fruitful than initially planned.
Kroger Chairman and CEO William Rodney McMullen told analysts Sept. 12 that the grocer is rescinding the target. The company will provide an update on its Restock Kroger turnaround program, as well as its long-term financial targets at an investor day in November, McMullen said.
"Transformation is incredibly difficult, and that's the journey we are on with Restock Kroger," McMullen said on a call just after the retailer reported second quarter results that beat expectations.
So far in 2019, Kroger has faced obstacles including a slow-than-expected increase in comparable sales and a declining gross margin within its pharmacy business, the CEO added. He said executives would provide more detail on the turnaround plan and Kroger's broader business at the November meeting.
Kroger first introduced Restock Kroger and the $400 million target in October 2017. The program, now at its scheduled midway point, was meant to cut costs at the Cincinnati-based grocer as well as bolster its digital prowess, from expanding delivery options to incorporating more data into stocking and store layout decisions.
The company still expects its operating profit growth to continue in 2020 over its 2019 guidance as well as add $100 million to its operating profit through alternative profit streams, including advertising and basic consumer financial services, by the end of its 2019 fiscal year, McMullen added.
Shares of Kroger were 3% lower at $24.81 in late morning trading. The company reported results before U.S. markets opened Sept. 12.
Kroger has seen progress in some areas. In stores that have offered the grocer's in-house pickup and delivery services for at least two years, Kroger reported "less of a financial headwind" for the second quarter, Kroger Senior Vice President and CFO Gary Millerchip told analysts Sept. 12. He added: "We're really starting to see the maturation of that business."
Kroger has invested in its grocery pickup and delivery services in recent years as rivals, including Amazon.com Inc.'s Whole Foods Market Inc., have grown their own delivery options. Separately on Sept. 12, Walmart Inc. said it is looking to expand its grocery delivery membership program to over 1,400 stores across the U.S. later this fall.
Kroger's services are accessible to 95% of its customers, CEO McMullen said Sept. 12. The owner of Harris Teeter and Ralphs also plans to build up to 20 automated warehouses to fill grocery orders with British grocer Ocado Group PLC. The companies broke ground on their second center in July.
Kroger has yet to open any of the facilities, McMullen confirmed. The company expects that individual warehouses could take between two and three years to become profitable, though he cautioned that the timeline varies based on where in the U.S. the facility is located.
"Obviously, until you get a facility open, you don't know whether those assumptions are correct," he said.
