Kroger Co Sales Growth Falls Victim to Lower Grocery Prices

By Markets Fool.com

Kroger (NYSE: KR) managed to keep its impressive sales growth streak alive last quarter -- but only by the smallest of margins. Thanks to a quickly deteriorating pricing environment, the grocery store chain's growth rate fell for the third straight quarter as management lowered its full-year outlook.

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Here's how the headline results stacked up against the prior year:

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Revenue

$26.6 million

$25.5 million

4%

Net income

$383 million

$433 million

(12%)

Earnings per share

$0.40

$0.44

(9%)

Data source: Kroger financial filings.

What happened this quarter?

Kroger's comparable-store sales growth slipped to 1.7% from 2.4% year-over-year. Until nine months ago, the company was enjoying gains that were consistently above 5%.

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Data source: Kroger financial filings.

Here are some other highlights from the quarter:

  • Kroger's positive comps (its 51st consecutive uptick) implies the company has fought to a near stalemate against its chief competitor, Wal-Mart. The retailing giant posted roughly the same growth pace for its fiscal quarter. Kroger has been snatching market share from Wal-Mart and other rivals for 10 straight years.
  • Overall sales growth, which was boosted by a growing store base, was just above 7% after excluding the negative effect of falling fuel prices.
  • The 12% decline in reported earnings was a result of an unusual pension charge. Absent that expense, net income rose 5% to $454 million.
  • Gross profit margin held steady at 22% of sales.
  • Operating margin improved slightly.
  • Net profit margin fell from 1.7% to 1.4% of sales.
  • Kroger rolled out its online grocery ordering services to nearly 400 locations.
  • The company's debt-to-adjusted-earnings ratio worsened slightly from 2.1 to 2.

What management had to say

CEO Rodney McMullen sought to put the sales slowdown into perspective for investors by emphasizing the bigger picture. "We are focused on long-term performance over a three-to-five year horizon," he said in a press release.

While the industry is reeling from broadly falling prices on staples like eggs, dairy, and meats, Kroger still managed to inch toward its major goals, according to management. "Execution of our 'customer first' strategy in a deflationary environment helped deliver growth in identical store sales, units and market share," McMullen said.

Looking ahead, executives sounded optimistic about the prospects for the business. "We have the right strategy, the right people, and the financial flexibility to execute our strategy, which allows us to continue investing in our associates and our business and growing market share," McMullen said. "By staying on our strategy, we create long-term value for our shareholders."

Looking forward

For the first time in several years, Kroger lowered its sales growth outlook. The company now sees comps of between 1% and 2%, compared to the 3% it had projected in June. That would mark a significant deceleration from the 6% jump that the retailer posted last year. The unfavorable pricing environment also led the company to push back its spending plans for the year so that it can maintain financial flexibility.

Image source: Getty Images.

As for earnings, it is unlikely that Kroger will manage anything like the 20% profit jump that shareholders enjoyed in 2015. In fact, McMullen and his team now expect just a 4% uptick to $2.15 per share.

That's all due to a surprisingly sharp drop in grocery prices, though, that's outside of the retailer's control.

When that lets up, Kroger should return to its long-term target-growth pace that aims for roughly 10% annual gains, in addition to a growing dividend payment. In the meantime, it will focus on maximizing sales volume in stores to keep market share rising while expanding its online-ordering infrastructure.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.