Kroger Rattles Nerves in Grocery Section -- WSJ

By Annie Gasparro Features Dow Jones Newswires

Chain's profit warning points to unrelenting pressure on industry; its shares fall 19%

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Pressure on U.S. grocers increased on Thursday after a lower earnings forecast from Kroger Co. sent shares in the nation's biggest supermarket chain down 19%.

Kroger said that sales at longstanding stores fell for the second straight quarter and that increasing competition will hurt earnings for the year. Kroger's shares took their steepest one-day drop in more than 17 years on the news. Shares of other big food retailers also fell.

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 buying more of their groceries outside of traditional supermarkets. Online merchants, discounters and meal-kit delivery services are all grabbing 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.

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Sales have continued to slacken. In the first quarter, food and beverage sales at brick-and-mortar stores in the U.S. were off nearly $3 billion, or 2.5%, from a year earlier, market research firm Nielsen says. Grocery-store visits rose just 0.5% over the past year.

Some grocery sellers are making gains. 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.

Germany-based chain Lidl is opening its first 10 stores in the U.S. this week. At a store opening in Wilson, N.C., on Thursday, 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. also is selling fresh groceries in some cities and recently launched two grocery pickup locations in Seattle.

"This 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 Market Inc. 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. 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. by sales, triggered a selloff on Thursday across the food-retail sector. Shares of Whole Foods fell nearly 7%, while Wal-Mart and Costco Wholesale Corp. shed about 1%. Target's shares were off by more than 4%.

Kroger's stock had already dropped 12% this year through Wednesday, hurt by a quarterly sales decline that broke a 13-year streak of quarterly growth. Thursday's share-price tumble to $24.56 erased another $5 billion in Kroger's market value.

The Cincinnati-based company, which operates Ralphs, Fred Meyer and other chains in addition to its flagship Kroger stores, said on Thursday that same-store sales excluding fuel fell 0.2% in Kroger's fiscal first quarter, which ended May 20. That compares with a 2.4% rise in the same quarter a year earlier.

Same-store sales could still grow by as much as 1% this year, Kroger forecast. Executives noted that same-store sales were positive in the last nine weeks of its fiscal 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, the company 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 16, 2017 02:47 ET (06:47 GMT)