Kroger has posted an uplift in sales for the second quarter, but an analyst believes the company is running out of steam and struggling to generate meaningful growth.

The company’s overall sales for the quarter remained flat at $33.9 billion compared to the prior-year period. This was mainly dragged down by lower fuel prices which are reducing revenue within the gas station part of the business.

Excluding fuel, sales increased 1.3 per cent year on year, and identical sales also rose 1.2 per cent.

According to GlobalData MD Neil Saunders, the results give the overall impression of a company that has run out of steam. 

“As much as this is a step up, the numbers remain anemic and underline that Kroger is still struggling to generate meaningful volume growth across its business,” he added.

The analyst attributed this partly to the continued constrained consumers, especially in lower- and middle-income cohorts, which led to people either trading down to cheaper products or restricting what they put in their basket. 

A more serious problem is the defections of customers to other retailers such as Walmart and Aldi, Saunders stated. “Fortunately, not all the defections represent a total abandonment of the chain… This provides Kroger with the possibility of winning back some spend once economic conditions improve for these households,” he added.

Meanwhile, Saunders believes the company is having a better time with its higher income customers, who are less impacted by inflation and are indulging themselves in premium ranges and products. This, along with a higher own-label penetration, helped the retailer swing to an operating profit of $815 million from last year’s loss of $479 million.

In addition, Kroger has made good improvements in digital sales with a 11 per cent increase, thanks to better online customer experience, reduced wait times and enhanced order accuracy.

Given the mixed results, Saunders stressed the importance of Korger’s merger with Albertsons as it is a way of finding more profit growth and giving investors a temporarily upbeat narrative.

“Whether this is allowed now rests on the hearing in progress but, whatever the outcome, we believe Kroger needs to focus more on its own business to drive underlying growth,” the analyst elaborated.

For the full year, the company expects identical sales without fuel to increase 0.75-1.75 per cent. Adjusted operating profit is forecast to be in the range of $4.6-4.8 billion.

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