Kroger Shares Fall on Profit Drop -- 3rd Update

By Heather Haddon Features Dow Jones Newswires

Kroger Co.'s profit fell sharply as the nation's largest supermarket chain slashed prices and invested in technology to keep up with rising competition among grocers.

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The Cincinnati-based company said sales turned positive in its second quarter ended Aug. 12 and affirmed its profit view for the year. But Kroger's decision to suspend long-term earnings guidance spooked investors, and offered another sign of the grocery industry's volatile outlook. Kroger shares fell nearly 10% on Friday.

Kroger Chief Executive Rodney McMullen on Friday said the company could no longer stand by its promise of earnings-per-share growth of at least 8% while also making "the right business decisions for the long term." He said Kroger needs to invest in online ordering capabilities rather than maximizing profit.

He said the volume of goods moving through Kroger stores is still strong, a positive sign for a company that, as the world's third-biggest retailer, is seen as a barometer for the broader economy.

Kroger's 0.7% increase in same-store sales in the quarter beat expectations and reversed two consecutive quarters of declines in the key metric for retailers. A record period of falling food prices that sparked a discounting war on staples like milk and eggs hit Kroger hard. Before that downturn, Kroger's same-store sales grew in every quarter for 13 years.

Kroger executives said prices rose overall in the second quarter for the first time since 2015, a lift that could benefit other grocers. But any transition to higher prices faces "one of the toughest time for an operator," said Chief Financial Officer Mike Schlotman, particularly given today's price competition. Wal-Mart Stores Inc. is investing billions of dollars to lower prices, and European deep discounters are expanding their network of U.S. stores. Prices for eggs and milk are still falling nationally.

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Grocers have also seen profits squeezed because of more spending by competitors on ads and promotions. On Friday, Target Corp. published a blog post touting price cuts on food staples such as milk and cereal.

Since Amazon.com Inc.'s takeover of Whole Foods went through last week, the e-commerce giant has slashed prices on such staples at the natural grocer's stores nationwide. Amazon has also stocked Whole Foods store-brand products, another potential headwind for Kroger given the increasing importance of natural and organic goods in its sales.

Food retailer and distributor stocks have tumbled since Amazon announced the takeover in June. Kroger's shares have fared worse than average. The grocer's stock is down 39% this year compared with a 24% loss for S&P food retailers, including the steep decline Friday after Kroger's earnings update. The S&P's Food and Staples Retailing index was up roughly 2% Friday.

Mr. McMullen said Kroger hasn't been affected by the merger because many of Kroger's prices are lower than those at Whole Foods even after Amazon took over. "A shiny new penny always gets a lot of publicity," he said.

Still, the challenges facing Kroger are significant. It has reduced the number of new stores it plans to build and used the savings to keep prices low and invest in its online-ordering offerings. Kroger said Friday it will slash $600 million in capital spending over two years.

The Houston area is Kroger's third-biggest market with 115 stores, and the fallout from Hurricane Harvey is expected to affect the retailer's performance in the third quarter. All of Kroger's Houston stores and its warehouse are back up and running, executives said.

Kroger's profit of $353 million in its fiscal second quarter was down 8% from a year earlier, while adjusted net earnings per share plunged by 18%. The company confirmed full-year earnings guidance of $1.74 to $1.79 a share.

Write to Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

September 08, 2017 16:28 ET (20:28 GMT)