Kroger Tumbles After Food Deflation Brings Dimmer OutlookBy
Wal-Mart, Whole Foods, Sprouts follow Kroger’s shares downward
Price war has been ravaging U.S. grocery-store industry
Kroger Co.’s struggles with food deflation and growing competition are sparking pessimism across the industry.
The largest U.S. grocery-store chain touched its lowest level in almost three years Thursday, leading declines among peers after slashing its earnings forecast and posting a second straight quarter of declining same-store sales. Shares of Whole Foods Market Inc. followed Kroger’s downward, while Wal-Mart Stores Inc. and Sprouts Farmers Market Inc. also posted declines outpacing the S&P 500.
Lower food prices, while a boon to consumers, have brought headaches to grocery stores. The situation has led Wal-Mart, which generates more than half of its revenue from groceries, and other retailers to offer steeper discounts to boost customer traffic. The resulting price war has weighed on profit margins and added to competition in an industry known for razor-thin margins.
This competition is expected to intensify even more as the German discount chain Lidl opens its first 10 U.S. stores on Thursday. Known for low prices on its private label products, Lidl is already battle-hardened from its fight with fellow low-cost German grocer Aldi across Europe. It arrives in the U.S. as discount-hungry shoppers warm to private-label products, which have also become a focus for conventional retailers including Wal-Mart and Kroger.
Kroger’s results indicate that fierce competition could weigh on results even as deflation eases, according to Mickey Chadha, an analyst at Moody’s Investor Service.
“We expect the pricing environment to get more competitive as value discounters like Aldi expand, players like Lidl enter the market and Wal-Mart flexes its pricing muscle to gain market share,” he said.
Aldi operates about 1,600 stores in the U.S. and is remodeling hundreds of locations while it expands organic offerings and improves its produce and meat selection. Lidl, meanwhile, is touting the wine selection at its new stores to lure shoppers unfamiliar with the brand.
Kroger is raising starting wages in some markets and adding labor hours to improve customer service as it tries to fend off rivals, Chief Executive Officer Rodney McMullen said on a conference call following the quarterly release. It’s also investing in lower prices and taking proactive measures in markets competition is growing, he added.
Shares of Kroger fell as much as 19 percent to $24.54 in New York, the lowest since August 2014. Even before the latest tumble, they had dropped 12 percent this year.
Whole Foods’ slump of as much as 6.9 percent was the most since September, while Sprouts declined the most since November. Wal-Mart fell as much as 2.7 percent, also the most since November. The S&P 500 dropped as much as 0.8 percent on Thursday.
Kroger’s said same-store sales excluding fuel fell 0.2 percent in the quarter ending May 20 -- slightly better than the 0.7 percent drop projected by analysts, according to Consensus Metrix. But its lower forecast signaled the chain has a bleak view of the rest of the year.
Cincinnati-based Kroger, which operates almost 2,800 supermarkets, now expects earnings of $2 to $2.05 a share this year, excluding some items. It had previously projected a range with a ceiling of $2.25. The company cited rising health-care and pension costs as pressuring results.
Kroger’s profit of 58 cents a share while excluding certain items matched analysts’ estimates. Revenue increased 4.9 percent to $36.3 billion.
“Every once in a while you go through cycles where you have to adjust the metrics inside the company,” McMullen said on the conference call.