Morning Note: Market news and an update from Kroger.
Market News
US equity markets were mixed last night – S&P 500 (+0.4%); Nasdaq (-0.2%) – leaving the S&P up 9% on the month, one of its best Novembers on record. However, overall sentiment remained cautious ahead of Jerome Powell’s remarks later today. This morning in Asia, markets failed to keep pace: Nikkei 225 (-0.2%); Hang Seng (-1.0%); Shanghai Composite (+0.1%). The FTSE 100 is currently trading 0.7% higher at 7,495, driven by strength in the mining sector.
US Treasuries sold off – the 10-year currently yields 4.33% – following the release of inflation figures. Core Personal Consumption Expenditures (PCE) – the Federal reserve’s preferred inflation metric – fell to 3.5% in October, in line with market expectations and down from 3.7% in September and its lowest level since April 2021. The dollar fell and gold remained form at $2,040 an ounce.
The UK’s 10-year Gilt yield rebounded towards the 4.2% mark, rising from a near six-month low of 4.05% recorded on 29 November as investors assessed the implications of hawkish remarks from UK policymakers alongside signs of a potential ease in inflationary pressures. Governor Bailey emphasised on Wednesday that the central bank was committed to taking necessary measures to bring inflation down to its 2% target. The day before, Deputy Governor Ramsden hinted at the possibility of adopting a “restrictive” approach in Britain's monetary policy over an extended period to steer inflation back to the central bank’s targeted 2%. Sterling currently trades at $1.2638 and €1.1598.
The oil price suffered a bout of volatility yesterday, falling from $84 a barrel to $79, before recovering to $81. The market is sceptical over the voluntary output cuts by OPEC+ producers for the first quarter next year. While the cartel collectively agreed to an additional 1m barrel-a-day output reduction, individual members will announce their specific cuts. It was also announced that Brazil will join the ‘club’ next year.
Source: Bloomberg
Company News
Last night, Kroger released third quarter results and nudged down its guidance for the full year sales. In response the shares rose by 1%.
Kroger is one of the largest retailers in the US with annual sales of almost $140bn. The group operates more than 2,700 grocery retail stores, more than 1,600 of which have fuel centres, and around 2,250 pharmacies. The group also offers personalised, order online, pick-up at the store services at most of its supermarkets and operates 33 food manufacturing plants. Kroger has invested heavily in its online business, notably through a partnership agreement with Ocado. The group’s long-term goal is to achieve increasing sales, while delivering a slightly expanded operating margin, and growth in total shareholder returns (TSR) of between 8% and 11%.
The company is currently in the process of merging with Albertsons to create a company with 4,996 stores, 66 distribution centres, 52 manufacturing plants, 3,972 pharmacies and 2,015 fuel centres. A more resilient business model is expected to deliver TSR well above Kroger’s standalone model of 8%-11% during the first four years post close. The deal is expected complete in early 2024 and to deliver $1bn of annual run-rate synergies within the first four years.
In a challenged operating environment, strong fuel performance and growth in the group’s alternative profit businesses supported good profit growth.
The key measure of the group’s top-line performance is ‘identical supermarket sales’, which are defined as sales from supermarkets that have been open without expansion or relocation for five full quarters. During the latest quarter to 4 November 2023, identical supermarket sales, without fuel, fell by 0.6%. Underlying identical sales increased by 1.0%. Digital sales grew by 11%. Total sales (which include new stores) fell from $34.2bn to $34.0bn, in line with the $33.9bn expected.
The group remains focused on cost efficiency and is on track achieve annual savings of $1bn for the sixth consecutive year. The gross margin, excluding fuel, increased by three basis points to 22.0%, primarily attributable to own brand performance, sourcing benefits, and the effect of the terminated agreement with Express Scripts, partially offset by higher shrink and advertising costs, and increased price investments. Adjusted operating net EPS grew from 88c to 95c, ahead of the 91c expected.
The group’s financial strategy is to use its strong free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. Net total debt to adjusted EBITDA stands at 1.4x on a 52-week basis, well below the target range of 2.30x to 2.50x. The group has a progressive dividend, with the payout raised from 26c to 29c this quarter. Kroger has paused its share repurchase program to prioritise de-leveraging following the proposed merger with Albertsons.
The group has lowered its full-year guidance for identical sales growth without fuel from 1.0%-2.0% to 0.6%-1.0%, with underlying growth of 2.1%-2.5% after adjusting for the effect of Express Script. Adjusted EPS is now expected to be in the range of $4.50 to $4.60 (vs. $4.45-$4.60 previously). The company still expects adjusted free cash flow of between $2.5bn and $2.7bn.
Source: Bloomberg