Futu Securities app learned that after Kroger (KR.US) announced its second quarter results as of August 17th, which exceeded Wall Street's expectations, it raised the lower end of its annual sales forecast. The company has successfully attracted customers looking to save money by offering fresh grocery items at lower prices. The financial report shows that Kroger's adjusted EPS for the second quarter was $0.93, exceeding analysts' expectations of $0.91. Revenue reached $33.91 billion, slightly below the general expectation of $34.08 billion. However, excluding fuel sales, revenue increased by 1.3% year-on-year.

The growth in digital sales and customer visits drove Kroger's non-fuel comparable store sales to increase by 1.2%. The company reported that digital sales increased by 11%, and e-commerce household sales grew by 14%.

The company's gross margin (excluding fuel) increased by 42 basis points compared to last year, attributed to favorable product mix and lower waste. However, operating expenses increased due to investments in employee wages and higher incentive plan costs.

Kroger CEO Rodney McMullen stated: 'We delivered strong results in the second quarter, demonstrating the strength and resilience of our model. We expanded the number of households and increased customer visits by offering personalized promotions with affordable pricing and high-quality products.'

Looking ahead, Kroger has raised the lower end of its full-year non-fuel sales forecast to between 0.75% and 1.75%, compared to the previously predicted growth rate of 0.25% to 1.75%. It also reaffirms its 2024 fiscal year EPS forecast of $4.30 to $4.50, consistent with analysts' expectations of $4.43.

As of the time of writing, Kroger's stock price rose by 3.42% in pre-market trading. Although the increase is lower than the S&P 500 index, the stock has already accumulated a 13% increase year-to-date.

Food inflation has cooled down, benefiting grocers such as Kroger.

According to reports, after reaching the highest level in 40 years in 2022, the inflation rate for food and groceries has now fallen to historically low single-digit range. Despite this, food prices are still under political scrutiny, with Vice President Kamala Harris calling for the federal government to ban food and grocery price fraud.

With prices of everyday food like apples and potatoes decreasing compared to the same period last year, the market competition has become even more intense. Restaurants are introducing affordable meal deals to attract customers, while food companies are increasing promotional activities and launching limited-edition products to compete for market share. However, consumers are increasingly inclined to cook at home, a shift that has benefited grocers like Kroger. At the same time, this trend poses a challenge for restaurants and fast food chains, including McDonald's and Burger King under Restaurant Brands.

As a result, Kroger's performance remains stable because of the strong spending power of American consumers, who prioritize spending on food and staples. In addition, many retailers have reported that shoppers are seeking bargains and opting for lower-cost products while selectively purchasing newer, good-value discretionary goods.

This consumer trend has helped retailers focused on essential goods, such as Walmart and Target, while damaging retailers selling high-priced items, such as Home Depot.

Kroger's acquisition of Albertsons presents a challenge.

In order to remain competitive with large rivals like Walmart, Kroger has lowered prices on food and groceries and offered promotions to attract budget-conscious consumers. Its performance is similar to that of Walmart and Target, as these companies have raised their annual profit expectations due to Americans flocking to their stores to purchase affordable essentials.

Additionally, Kroger is defending its proposed $24.6 billion acquisition of Albertsons in court, with executives believing that this acquisition will give the companies a nationwide footprint and enable them to compete more effectively with rivals like Walmart, Amazon, and Costco. McMillon stated in a statement that the food industry will remain competitive after the proposed transaction is completed.

It is reported that since the end of August, the U.S. Federal Trade Commission, together with several states, has filed a lawsuit in Portland, Oregon, trying to stop the trade between Kroger and Albertsons, stating that this would mean consumers would need to pay higher prices, and the bargaining power of grocery store union workers would decrease.

"As the preliminary injunction hearing of the Federal Trade Commission nears its end, we are confident in the facts and our position. The food industry has always been fiercely competitive and will remain so after this merger," said Rodney McMullen, CEO of Kroger.

Kroger's Differentiated Competition with Dollar Stores and Walmart

It is worth mentioning that the two major dollar store retail giants, Dollar Tree (DLTR.US) and Dollar General (DG.US) in the United States, have faced performance challenges. Dollar Tree announced a 20% significant downward revision in full-year profit expectations, attributed to the "enormous pressure" faced by its main customer base, the middle and low-income consumers. This news led to a 20% single-day plunge in its stock price. Similarly, Dollar General's second-quarter performance fell below expectations and significantly lowered its full-year performance guidance, causing its stock price to plummet by 30%, marking its largest single-day decline in history.

In the past few years, with the widening wealth gap and shrinking middle class in the U.S., the number of poor people has continued to increase, providing rapid expansion opportunities for retailers with a dollar store model, making Dollar Tree and Dollar General the fastest growing discount retailers in the United States, and their stock prices have also continued to rise. However, due to the unrestrained expansion strategy of dollar stores, coupled with intensified price competition from large chain stores such as Walmart, the performance of these dollar stores has started to decline.

How is Kroger different from these dollar stores and 'Walmarts'?

It is understood that Kroger is a large chain supermarket in the United States, mainly selling food and groceries, while also providing non-food items such as housewares and personal care products. Kroger is known for its rich product line, competitive prices, and high-quality fresh food, positioning itself in the mid-priced market, while also emphasizing customer experience and service quality.

Compared to dollar stores, Kroger has a more diverse range of products and a wider price range. Compared to retailers like Walmart that provide a one-stop shopping experience, Kroger focuses more on the food and grocery field, providing professional service and a more diverse selection of fresh food.

Overall, Kroger, as a traditional food and grocery retailer, focuses its core business on the sales of food and related groceries. It stands in sharp contrast to dollar stores and large-scale retailers such as Walmart and Target in terms of product variety, price competitiveness, and customer service.