Kroger Shares Slide as Grocer Is Battered by Price Fight -- 3rd Update

By Annie Gasparro Features Dow Jones Newswires

Traditional U.S. grocers came under fresh pressure on Thursday after the biggest one, Kroger Co., said intensifying competition would further cut into earnings this year.

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Kroger's shares fell 18%, on track for their steepest one-day drop in more than 17 years, as the company reported lower sales at longstanding stores for the second straight quarter and cut its earnings outlook. Shares in other big food retailers also fell on the news.

It was the latest blow to big grocers battling volatile food prices on one front and stiffer competition on another.

"The change right now in what the customer wants has never been faster," Kroger Chief Executive Rodney McMullen said in an interview.

Consumers are shopping for more of their groceries outside of traditional supermarkets. Online merchants, discounters and meal-kit delivery services are all cutting into grocers' market share. At the same time, a global commodity glut has pulled down prices for many staple foods over the past 18 months, putting pressure on many retailers to lower prices.

Sales have continued to slacken. Food and beverage sales at brick-and-mortar stores in the U.S. were down nearly $3 billion in the first quarter from a year earlier, market research firm Nielsen says. Grocery-store visits ticked up just 0.5% over the past year.

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Meanwhile, more people are shopping at discounters and online retailers. Trips to deep-discount chains are up 2.9% over the past year, Nielsen says, and online grocery orders have risen 6.8%.

"The economic model of the traditional grocery store is incredibly challenged," said Wolfe Research analyst Scott Mushkin.

German-based chain Lidl is opening its first 10 stores in the U.S. this week. At Thursday's opening of a store in Wilson, N.C., a line of more than 100 people snaked around the block ahead of time, an industry analyst reported. Rival German chain Aldi, which has operated in the U.S. for decades, plans to invest $5 billion over the next five years to open nearly 900 stores and remodel hundreds more.

Amazon.com Inc. is also selling fresh groceries in some cities and recently launched two grocery pickup locations in Seattle.

"The is the most disruption the grocery industry has seen in the last half-century," said David Ciancio, a former Kroger executive and a strategist at consumer-data company dunnhumby. "More customers are concerned about price and value, and that has a material impact on profitability."

Whole Foods is under pressure to reverse a nearly two-year decline in same-store sales that has halved the specialty-food chain's share price. Wal-Mart Stores Inc., the largest U.S. food seller, is cutting prices to keep up with competition from Amazon.com. Target Corp.'s food-and-beverage comparable sales continued to fall in the latest quarter, even after the chain replaced its grocery chief earlier this year.

Some grocers may need to merge to keep up, said Mr. McMullen, Kroger's CEO. "We would expect there would be consolidation in the industry."

Kroger will continue to cut prices to retain customers, he said, and strive to improve customer service in part by paying higher wages. That will add to pressure on Kroger's bottom line.

"The best thing that we can do is to stay on the offense," he said.

The downbeat outlook from Kroger, the largest traditional grocery chain in the U.S., triggered a selloff on Thursday across the food-retail sector. Shares in Whole Foods fell more than 6%, while Wal-Mart and Costco Wholesale Corp. shed more than 1.5%. Target's shares were off by 3.5%.

Kroger's stock had already dropped 12% this year through Wednesday after sales declined in the first quarter, breaking a 13-year streak of quarterly sales growth. Thursday's tumble sapped another $5 billion from Kroger's market value.

The Cincinnati-based company, which operates Ralphs, Fred Meyer and other chains in addition to its flagship Kroger stores, said same-store sales excluding fuel fell 0.2% in Kroger's first quarter, compared with a 2.4% rise in the same quarter a year earlier.

Same-store sales will still grow up to 1% this year, Kroger forecast. Executives noted that same-store sales were positive in the last nine weeks of the first quarter and in the second quarter so far.

Kroger expects annual adjusted earnings of between $2 to $2.05 a diluted share in 2017, compared with its previous estimate of $2.21 to $2.25. In all, Kroger reported a first-quarter profit of $303 million and revenue of $36.29 billion.

Austen Hufford contributed to this article

Write to Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

June 15, 2017 15:49 ET (19:49 GMT)