CINCINNATI - The Kroger Co. exceeded Wall Street expectations Thursday with a $506 million profit on $27.6 billion in revenue.
But it also ended 13-year streak of same-store sales growth.
It was an epic run for the Cincinnati-based grocery chain. For 52 straight quarters, Kroger increased identical-store sales excluding fuel. But its fourth-quarter results included a decline of 0.7 percent in that key metric, a sign that deflation is still impacting Kroger results.
“We are lowering costs to invest those savings in our people, our business, and technology,” CEO Rodney McMullen said in a Kroger press release. “This approach will enable us to deliver on our long-term net earnings per diluted share growth rate target of 8-11%, plus an increasing dividend, as it has in the past.”
McMullen stressed that Kroger is selling more merchandise on a tonnage basis and gaining in market share, as it digests recent acquisitions of the Roundy’s grocery chain and the specialty-pharmacy company, ModernHEALTH. Total sales in the fourth quarter increased 5.5 percent over last year. Its sales performance was $290 million better than analysts were expecting, while its profit of 53 cents per share exceeded expectations by a penny.
This prompted Kroger shares to rise almost 2 percent in pre-market trading Thursday. But that trend quickly reversed itself: Kroger shares were down more than 3 percent to $31.00 by mid-morning.
Kroger sees little improvement ahead for same-store sales growth. It told analysts to expect growth of up to 1 percent in that category, while earnings will improve to a range of $2.21 to $2.25 per share, compared to $2.01 in the 2017 fiscal year.
Chief Financial Officer Mike Schlotman said “deflation was the primary driver” behind Kroger’s decline in identical-store sales.
“Inflation-adjusted ID sales were positive for the quarter,” Schlotman told analysts in a mid-morning conference call. But Kroger also was a victim of its own success in expanding, remodeling and relocating existing stores to boost revenue and profits.
“Over the last four quarters, we relocated or expanded 35 strong performing stores taking them out of our identical supermarket sales calculation,” Schlotman said. “This cost about a 70 basis point headwind to ID sales in the fourth quarter.”
McMullen was asked repeatedly whether increased competition had an impact on Kroger’s sales performance. He said Kroger is seeing pockets of increased competition, but he still sees plenty of opportunities to grow market share and revenue in the years ahead.
“We’ve always felt that the next five years are going to be more competitive than the last five,” McMullen said. “Only the strong survive.”