Kroger’s top-line numbers missed industry expectations. Q4 sales decreased 9.5% to $28.1 billion year over year while fiscal year 2018 sales decreased 1.2% to $121.1 billion. Excluding fuel, the 53rd week in fiscal 2017, the convenience store business divestiture, and the Home Chef merger, total sales increased 1.6% in Q4 and 2% for the full year. Identical-store sales without fuel were positive, increasing 1.9% in Q4 and 1.8% for the year. Still, these results fell short of Kroger’s initial guidance of 2% to 2.5% identical-sales growth in 2018.

Despite the missed earnings projections and soft Q4 and fiscal year 2018 sales, Kroger still made investments and progress in 2018 that set it up with a more relevant and effective business for 2019 and beyond. Key highlights included a 58% increase in digital sales, own brands’ best year ever (with 30.5% unit share in Q4), new partnerships, expanded online grocery capabilities, and further development of alternative profit streams to offset costs associated with Kroger’s evolving business.

Kroger also highlighted some key milestones related to its Restock Kroger plan from the year:

Redefining the grocery customer experience: Kroger took numerous steps to redefine the grocery customer experience. It expanded pickup or delivery to reach 91% of Kroger households. Kroger also introduced new financial services, such as Kroger Pay and the Kroger Rewards debit card. These new services add to the larger ecosystem Kroger is working to create by building additional shopper touchpoints and stickiness throughout the business. Going forward, Kroger must guarantee a seamless experience across these platforms to encourage shopper trial and conversion.

Partnering for customer value: This was a big area for Kroger in 2018. Kroger expanded its nationwide retail rollout of Home Chef meal kits, piloted a connected store experience with Microsoft, activated a driverless grocery delivery service via Nuro, announced two additional Ocado fulfillment locations, and expanded pickup at certain Walgreens locations. These developments are positive because they allow Kroger to expand beyond being just a brick-and-mortar grocery business. That said, the retailer will still need to ensure that it is not distracted from its core business (selling groceries) that funds the innovation it is testing.

Looking Ahead

Kroger still has its work cut out for itself to hit its 2020 Restock Kroger number. Still, 2018 marked a real inflection point where the retailer demonstrated its ability to innovate, test and learn, and go out of its comfort zone to find new growth areas and shopper connections. This mentality will define winning businesses going forward, and Kroger will continue to work at finding a new balance between profit and growth to drive its success in 2019 and beyond. The question is whether Kroger’s new mentality will drive its results fast enough to satisfy investors.

For more information, please contact:

Elley Symmes, Senior Analyst

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