Kroger shares plummet after profit warning

CINCINNATI - Kroger Co. shares plunged nearly 19 percent Thursday after the company warned investors it would a generate smaller profit this year.

Kroger's stock price closed at $24.56, down $5.72, after the company reduced its full-year earnings guidance to between $2 and $2.05 per share. The company previously said it would achieve a full-year earnings per share between $2.21 and $2.25.

Kroger's first-quarter earnings report is a sign that price competition is intensifying in the grocery industry, as online rivals like Amazon and WalMart battle each other for digital market share and European rivals Aldi and Lidl embark on U.S. expansion plans.

"We remain focused on our strategy," CEO Rodney McMullen said in a press release. "Customers tell us they want to connect with us in multiple ways with the help of friendly associates to easily provide meals to their families at prices that enable them to stretch their budgets. We are committed to providing that experience and we will not lose on price."

Kroger earned a $303 million profit on sales of $36.3 billion. One of its most closely watched metrics, identical-store sales, declined 0.2 percent. That's the second straight quarter of declining sales at stores that have been open and not remodeled for five straight quarters.

"We are driving our strategy of lowering costs to reinvest in ways that provide the right value to our customers," McMullen said. "We're pleased that identical supermarket sales in the last nine weeks of the first quarter were positive and that has continued in the second quarter to date."

Kroger executives tried to reassure investors during its conference call with analysts, explaining how prepared meal kits – now being tested in Cincinnati – will differentiate its stores from price-centric rivals.

Kroger Chief Financial Officer Mike Schlotman explained that at least some of its identical store sales dip was caused by “hot promotions” that can’t be sustained over time.

“We have also made some incremental investments in price in certain markets that had very hot features on milk and eggs,” Schlotman said. “While this affects gross margin in the short term, it is less expensive than regaining a customer's loyalty later on.”

JP Morgan analyst Ken Goldman was skeptical.

“Why was it surprising,” he said, “to see these hot promotional prices on milk and eggs? Should that not have been sort of expected given that the environment has changed?”

Barclay’s analyst Karen Short asked if Kroger should have considered a broader range in its earnings guidance, to prevent another earnings miss that could hammer share prices in the future.

“If I look at your revised guidance, I still would say this seems pretty optimistic,” she said, “especially given the competitive landscape has only really just begun to heat up.”

Investors seemed to be siding with the skeptics. Kroger shares opened at $26.66, down about 12 percent from yesterday’s close. The stock dropped another 7.5 percent to $24.66 in the first 90 minutes of trading.

 

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