Kroger Co. (KR) growth tamed by deflation

Kroger Co. (KR) growth tamed by deflation
Posted at 9:41 AM, Dec 01, 2016
and last updated 2016-12-01 10:43:30-05

CINCINNATI - The Kroger Co. told investors Thursday to expect slower sales growth and smaller profits for the next six to nine months as it steers its way through a period of falling food prices.

But it also said deflationary trends impacting the entire grocery industry haven’t kept the company from gaining market share and attracting new customers.

“I am proud of our associates for continuing to connect with our customers in a difficult operating environment,” Kroger CEO Rodney McMullen said in a press release to announce third-quarter earnings. “Deflation persisted as we expected during the quarter. We are firmly focused on our long-term strategy of improving our connection with customers and associates, and continue working on process changes to lower costs.”

RELATED: See how deflation is impacting Cincinnati

Kroger reported a $391 million profit on revenue of $26.6 billion for the three months ending Nov. 5. Net sales were up 5.9 percent but profits were down 8.6 percent compared to last year. Revenue exceeded the expectations of Wall Street analysts and Kroger’s earnings per share of 41 cents matched expectations.

The company also continued its industry-leading streak of identical-store sales growth, but just barely. The closely watched metric grew by just a tenth of a percent, giving Kroger its 52nd consecutive quarter of growth.

The company also revised its full-year guidance for 2016, telling investors to expect “slightly positive” growth in identical-store sales next quarter and full-year earnings per share between $2.03 and $2.08. Three months ago, Kroger said profits of up to $2.13 were possible.

Kroger also warned that deflation will continue to be a problem in the first half of 2017. As a result, it expects profit growth to fall below its long-term growth goal of 8 to 11 percent. And it said labor talks “will be challenging” this year as it negotiates new contracts for store employees in Atlanta, Michigan and North Carolina.

“We expect the operating environment in the first half of 2017 to be similar to today,” the company advised in its earnings release. “The second half of 2017 should show improvement.”

Deflation is taking a bite out of earnings for many grocery operators, restaurants and agricultural companies. So, investors were watching Kroger to see what impact it’s having on an industry giant.

Shares dropped about 3 percent to $31.20 in pre-market trading, but recovered quickly after the stock market opened. Shares were up 12 cents to $32.42 by mid-morning.