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Kroger Co. sees $1 billion benefit from tax reform

Kroger shares down 17 percent since Tuesday
Posted at 9:32 AM, Mar 08, 2018
and last updated 2018-03-08 12:49:42-05

CINCINNATI - The Kroger Co. posted an $853 million profit on revenue of $31 billion in the fourth quarter, a performance that was mightily assisted by a nearly $1 billion benefit from tax reform.

Kroger’s adjusted net earnings per share of 63 cents was in line with analyst expectations, while its revenue was about $200 million better than expected. But the company fell far short of expectations in another closely watched metric – identical store sales excluding fuel. Wall Street expected 4.8 percent growth while the company delivered 2.7 percent growth in the fourth quarter.

Kroger shares declined 12 percent to $23.10 in mid-day trades. This, after a 5 percent drop Wednesday due to uncertainty about the impact of new growth initiatives by Kroger rivals, including Walmart and Target.

Despite those concerns, Kroger grew total sales 6.4 percent to $122.7 billion in 2017 and told investors to expect 2018 net earnings of up to $2.15 per share, which is in line with the consensus estimates of Wall Street analysts.

"The Tax Cuts and Jobs Act is a catalyst that is enabling us to accelerate investments in Restock Kroger,” said CEO Rodney McMullen in a press release, referring to the company’s multi-faceted growth strategy that includes new investments in technology and new-product initiatives.

“We are taking a balanced approach to ensure tax reform benefits our associates, customers and shareholders,” McMullen said. “What we've previously said is that sharing the benefits with our associates and customers will create a more sustainable and stronger business model for the future.”

Kroger Chief Financial Officer Mike Schlotman told analysts Thursday that the company will get an annual benefit from tax reform of "somewhere around $400 million." It plans to reinvest about a third of its annual tax savings in growth initiatives, while another third will go to employees and the remainder will “fall to the bottom line for our shareholders.”

The company recognized a $957 million benefit from tax reform in the fourth quarter, which included a one-time “re-measurement of deferred tax liabilities” and the impact of a reduced tax rate for the last few weeks of the 2017 fiscal year.

Schlotman told CNBC this morning that Kroger’s falling stock price could be the result of investor assumptions that more than a third of its tax savings would flow to the bottom line.

“I know there were some analysts out there that put way more than that in their initial estimates for our next fiscal year and I’m sure that’s causing a little bit of consternation as they look at the numbers,” he said.