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 new technology to keep up with rising competition among grocers.

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The Cincinnati-based company also saw sales turn positive in its second quarter ended Aug. 12 and affirmed its financial guidance on profit for the year.

Kroger shares sank 8% Friday in premarket trading before recovering slightly.

A small 0.7% increase in same-store sales beat analyst 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.

Food retailer and distributor stocks have also tumbled this summer since Amazon.com Inc. said it was buying Whole Foods. Kroger's shares have fared worse than average. The grocer's stock was down 36% this year compared with a 16% loss for S&P food retailers.

Kroger has reduced the building of new stores to put that money into keeping the prices of food low, and said Friday that it was slashing $600 million in capital spending across two years.

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Since the merger went through last week, Amazon has slashed prices on staples at Whole Foods stores nationwide, including items such as eggs and bananas that can drive grocery store trips. The e-commerce giant has started stocking Whole Foods store-brand products, another potential headwind to Kroger given the increasing importance of natural and organic goods in its sales.

Kroger stores have less overlap with Whole Foods locations that are concentrated in cities and affluent suburbs, but analysts still expect the cheaper prices to stoke competition among retailers.

Kroger's profit during the period was down 8% from a year earlier. It confirmed full-year guidance of $1.74 to $1.79 of earnings per share.

The company reported $27.6 billion in revenue during the second quarter, and a $353 million profit.

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. Executives are expected to discuss the storm during the grocer's earnings call Friday morning.

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

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.

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 volatile outlook facing the grocery industry. Kroger shares fell nearly 10% on Friday.

Kroger Chief Executive Rodney McMullen said the company could no longer guarantee its long-promised earnings-per-share growth rate 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 the 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.

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.

Mr. McMullen said Kroger hasn't been affected by the merger because Kroger's prices are often 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 headwinds facing Kroger are significant. Kroger 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 the 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

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.

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.

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)