Kroger (NYSE: KR) will announce its third-quarter earnings results before the market opens on Thursday, Nov. 30. Investors haven't found much to be excited about in the supermarket chain's latest performance, given that sales growth is near zero while the earnings outlook has worsened significantly.
Kroger has an opportunity to show progress toward reversing those unfortunate trends next week. Let's look at the key metrics that will show whether that rebound is getting closer -- or moving further away.
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Market share fights
Kroger returned to growth last quarter, but only by the smallest of margins. In fact, comparable-store sales inched higher by less than 1% following two consecutive quarters of declines.
The good news is that the company continued its 12-year streak of improving market share, and it also sold a higher volume of merchandise during the quarter. However, price deflation and increased competition have pushed Kroger's growth rate far below the 5% or better that shareholders enjoyed through late 2015.
Wal-Mart Stores (NYSE: WMT) is a major competitor and so Kroger's results will likely be judged in part against the retailing giant's performance. Wal-Mart recently posted 2.7% higher comps in its U.S. stores to mark a solid improvement over the prior quarter's 1.8% increase. If Kroger doesn't manage a similar growth uptick, then it's likely the company is struggling to expand its market share position for the first time since 2005.
Paying the price
Kroger will probably hit the comps guidance that management issued in early September of between 0.5% and 1%. Given the high level of deflation that's impacting the industry, that result would mean healthy customer traffic and significant growth in sales volume.
However, Wall Street could still punish the stock depending on the level of price-cutting the company needed to achieve that sales gain. After all, CEO Rodney McMullen and his team warned investors that Kroger will always opt for lower profitability when forced to choose between market share losses and lower earnings. "We have no intention of giving up the momentum we've gained on low prices," he said in July.
Shareholders are watching that strategy pinch results lately, as net profit margin dropped to 1% of sales over the past six months from 1.8% in the prior-year period. The declines have been large enough that management stepped away from their long-term guidance that aimed for earnings growth of between 8% and 11% each year. Instead, McMullen is limiting forecasts to the current fiscal year, and in 2017 executives expect profits to decline to between $1.74 and $1.79 per share from $2.05 per share in 2016.
Finally, Kroger will update investors on its major growth initiatives that include e-commerce, ready-to-eat food, and organic grocery products. Beyond that, acquisitions remain an attractive expansion channel, but the retailer's options are becoming more limited on this front given all the cash that's been spent on recent purchases like Harris Teeter, Vitacost, and ModernHealth. With earnings declining, and dept levels already elevated, it might be a while before Kroger considers another large-scale buyout.
Ultimately, Kroger's long-term operating health will depend on its ability to give customers plenty of good reasons to frequent its stores. The retailer is succeeding in that goal today even though executives have had to sacrifice profitability to get there. It isn't clear how long they'll have to engage in that strategy, but it's a safe bet that Kroger's earnings stay depressed until comps growth speeds back up into solidly positive territory.
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