Kroger Management Ditches Profit Target and Market Is Spooked

Matthew Boyle, Bloomberg News

(Bloomberg) -- Kroger Co. abruptly tumbled during its second-quarter earnings call after Chief Executive Officer Rodney McMullen said the chain won’t reconfirm at this time its three-year forecast to generate $400 million in incremental profit.

Same-store sales excluding fuel rose 2.2% last quarter, beating projections compiled by Consensus Metrix and growing from last year’s pace. Still, the lack of reaffirmed profit guidance left shareholders on edge.
Additionally, Kroger had said previously that third quarter earnings would be slightly higher than the year-ago quarter. It now expects earnings for that period to be flat due to pressures on its pharmacy business. It was able to keep full-year earnings guidance unchanged, however, as it sees fourth quarter profits as being better than it had earlier anticipated.

Key Insights

The rapid pace of change in the grocery sector may be making forecasting harder. Kroger, the nation’s biggest traditional supermarket chain, is working to fend off challenges from discounters like Walmart Inc., Germany’s Aldi and even Dollar General Corp., which is expanding its selection of fresh and frozen food. Traditional grocers like Kroger captured half of dollars spent on food and everyday staples in 2006, according to Inmar Analytics, but that’s now down to 44%.
Aldi in particular has been a thorn in Kroger’s side as American consumers embrace the European import’s no-frills concept. Nearly one-third of Kroger’s stores are within five miles of an Aldi, according to Morgan Stanley analyst Simeon Gutman, who estimates that Aldi will add more revenue this year than Kroger will, despite being one-fifth of its size. Kroger investors are cautiously monitoring Aldi’s inroads in the U.S.
Still, Kroger is pursuing a range of initiatives to fend off rivals and keep shoppers happy. It recently introduced its own line of meatless burgers, and it’s also selling meal kits and other goods inside some Walgreens drugstores. Online sales in particular have been a bright spot for Kroger, and digital revenue increased 31% last quarter. But online fulfillment costs can erode profit margins, which contracted in the quarter.

Market Reaction

Kroger shares fell as much as 6.8% during the call, before paring some of the losses. Before Thursday, the stock had declined 7% this year, compared with the 20% increase for the benchmark S&P 500 Index.

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