GLP-1 drugs and other constraints in Kroger's pharmacies are crimping profits

By Ciara Linnane and Bill Peters

Grocery retailer's CEO says wealthier shoppers have helped bump sales higher

Grocery-store chain Kroger Co. on Thursday reported better-than-expected first-quarter results, helped in part by more enthusiasm from wealthier shoppers, but executives warned that difficulties in the company's pharmacies would hit second-quarter profits.

Management said that it now expects adjusted earnings per share to fall in the second quarter, as pressures on profits in its pharmacy business continue. Availability issues around GLP-1 drugs - along with efforts to meet demand and still make sales - and unexpected "regulatory restrictions" around other medications that pushed costs higher weighed on margins, the company said.

Popular weight-loss drugs like Ozempic and Wegovy are examples of GLP-1 drugs. The drugs are also used to treat diabetes.

While Kroger (KR) stuck with its financial outlook for the year, shares were down 2.5% in afternoon trading.

The Cincinnati-based company - which, along with its namesake stores, runs Ralphs, Fred Meyer and King Soopers chains, among others - had net income of $947 million, or $1.29 a share, for the first quarter. That was down from $962 million, or $1.32 a share, in the year-earlier period.

Adjusted for one-time items, earnings per share came to $1.43, ahead of the $1.35 FactSet consensus.

Sales rose to $45.269 billion from $45.165 billion a year ago, also ahead of the $44.867 billion FactSet consensus.

Same-store sales excluding gas were up 0.5%, while FactSet was expecting a 0.1% rise.

Kroger backed its full-year guidance for same-store sales excluding fuel to rise 0.25% to 1.75% and for earnings per share of $4.30 to $4.50. The FactSet consensus is for same-store sales to rise 1.1% and for earnings per share of $4.44.

Kroger in March said it would sell its specialty pharmacy business, which is separate from other pharmacies run by the chain and serves patients with chronic illnesses. Pharmacies elsewhere have shuttered, other reports have noted, as Amazon.com Inc. (AMZN) tries to sell more drugs itself and lawsuits related to the opioid crisis take their toll.

Kroger reported the results as shoppers continue to navigate higher food prices, particularly in restaurants, forcing them to seek out bargains and restricting what they can spend elsewhere. The Federal Trade Commission in March sued to block Kroger's planned merger with Albertsons Cos. (ACI), saying it would reduce competition, raise grocery prices and hurt workers. Several states joined the FTC's suit.

Kroger Chief Executive Rodney McMullen on Thursday said the company benefited from the strength of its grocery business, which he attributed to its affordable prices and personalized promotions. He also said that as prices rise less aggressively, shopper sentiment should keep improving as well.

"We improved our share of wallet with premium customers who are deepening their loyalty, spending more in our fresh departments and enjoying more premium products such as Private Selection," McMullen said on Kroger's earnings call. "Within our most budget-conscious households, we are starting to see positive momentum."

He added that amid the jump in prices at restaurants, which have passed on the effects of higher wages and food costs to their own customers, Kroger had a "significant" opportunity to offer "restaurant-quality meals" at a lower price.

Within its digital businesses, the company is trying to improve delivery times and reduce errors in orders. Its retail media business - which allows other brands to advertise online - is also growing.

Kroger is now planning to continue to pay a quarterly dividend and expects that to increase over time, but it has paused its share-buyback program to prioritize deleveraging following its proposed merger with Albertsons.

Kroger has said it remains committed to the deal. On Tuesday, BMO Capital's Kelly Bania turned bullish on the company and said she believes either a deal or no deal would be positive for the company.

For more: Kroger's stock upgraded, as an Albertsons deal or no deal would be a good thing

Kroger's stock has gained 10.5% in the year to date, while the S&P 500 has gained 14.6%.

-Ciara Linnane -Bill Peters

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06-20-24 1331ET

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