Kroger’s profit hurt by price cuts, sending shares lower

Business


Kroger‘s profit slid 7.8 percent in the second quarter, as the supermarket chain has been forced to trim prices more boldly amid growing competition in the space.

Shares of Kroger were falling around 7 percent in premarket hours Friday on the news.

Here’s what Kroger reported compared to what Wall Street was expecting, based on a Thomson Reuters survey of analysts:

  • Earnings of 39 cents a share compared with a forecast profit of 39 cents per share.
  • Revenue was $27.6 billion versus an estimate of $27.5 billion.
  • Same-store sales excluding fuel climbed 0.7 percent, better than the expected 0.4 percent growth, according to FactSet.

“Our second quarter results demonstrate the progress we’ve made,” CEO Rodney McMullen said in a statement.

“We had strong growth in both loyal and total households,” he added. “Traffic is up, unit movement is up, market share is up, and our customers’ price perception is excellent and continues to improve.”

Net income fell to $353 million, or 39 cents per share, from $383 million, or 40 cents per share, one year ago. Excluding one-time charges, Kroger’s earnings-per-share came in at 47 cents in the second-quarter of 2016.

Total sales climbed 3.9 percent, to $27.60 billion.

Same-supermarket sales, excluding Kroger’s fuel centers, climbed 0.7 percent in the second quarter. This comes in 1 percentage point less than Kroger’s comps during the same time in 2016.

“We appreciate how hard it is for a company of Kroger’s scale to engineer even a modest rise in same-store numbers,” GlobalData Retail Managing Director Neil Saunders wrote in a note to clients.

“The principle weapon of choice [for Kroger] has been to invest in price cuts, something that has impacted gross margins,” Saunders added. “In our view, this is a necessary evil, and we believe that Kroger is right to maintain its competitiveness and dominance in the sector.”

Looking ahead, Cincinnati-based Kroger has reaffirmed its outlook for the remainder of the year. But the retailer said on Friday that those expectations don’t include any impact from hurricanes Harvey and Irma.

In June, and just a day before Amazon unveiled the Whole Foods deal, Kroger cut its full-year adjusted earnings outlook to a range of $2 to $2.05 per share, down from its previous guidance of $2.21 to $2.25. The chain had cast blame on deflation in food prices and increased competition.

Kroger meantime expects same-supermarket sales growth, excluding fuel, of 0.5 to 1 percent for the remainder of the fiscal year.

“As our business continues to improve, we remain committed to delivering on our guidance in 2017 and believe we have the ability to grow identical supermarket sales and market share in 2018,” CEO McMullen said.

Kroger on Friday said it will continue to provide annual guidance, “in this dynamic operating environment,” but the supermarket chain will no longer report any outlook past that, like it had been doing since 2012.

“We are better off giving annual guidance,” Kroger CFO Michael Schlotman told CNBC’s “Squawk Box” Friday morning. “We don’t want to make a bad decision today to try to hit something over a 3-year period.”

Schlotman added that Kroger feels particularly confident about its digital sales, which climbed more than 120 percent for the period. The chain has been growing its own, online grocery order platform, called ClickList, which boosted those results.

Notably, Kroger has now reduced its 2017 and 2018 planned capital investments by a total of $600 million in an attempt to maintain its current investment grade debt rating, the company said.

Kroger — more than any of America’s supermarket chains — has taken a beating ever since June 16, the day that Amazon announced its plans to acquire Whole Foods.

Shortly after the news was publicized, Kroger CEO Rodney McMullen told CNBC he thought Whole Foods was a “good fit” for Amazon. “Amazon wanted to do something from the physical asset standpoint,” McMullen added. “We are trying to take care of customers.”

Now that its deal is complete, Amazon has started lowering prices on produce and other items at Whole Foods’ stores, promising “more to come.” In turn, Kroger has suffered even more, especially with big-box retailers Target and Wal-Mart upping the ante on their own grocery offerings.

Just this week, Wal-Mart announced it has opened its 1,000th online grocery pickup location, right in Amazon’s backyard of Seattle. Meantime, Kroger has been working with grocery delivery service Instacart to deliver items more quickly to shoppers.

As of Thursday’s close, Kroger has seen its stock fall near 35 percent this year.

Kroger will hold its annual investor conference on Oct. 11 in New York.



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