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Kroger Plunges After Grocery Chain Scraps Long-Term Forecast

Published on Sep 10 2017 10:39 AM in Retail tagged: Trending Posts / Amazon / USA / Kroger

Kroger Plunges After Grocery Chain Scraps Long-Term Forecast

Kroger Co. shares plunged after the supermarket chain abandoned its practice of offering long-term guidance, a sign it’s grappling with fierce competition in a grocery industry rattled by Amazon.com Inc.’s acquisition of Whole Foods.

The decision to stop giving further-out forecasts spooked investors concerned about an increasingly cutthroat grocery industry, said Jennifer Bartashus, an analyst at Bloomberg Intelligence.

Pessimism

“It’s a sign of pessimism about the industry,” she said. “There’s a lot of uncertainty about the impact of the Amazon-Whole Foods deal and the impact of Wal-Mart’s strategy -- right now, it’s highly competitive.”

The cloudy horizon overshadowed growth of comparable-store sales and the end of a historic bout of food deflation -- developments that helped Kroger post revenue that exceeded estimates. The company also reaffirmed its outlook for 2017 performance.

“In this dynamic operating environment, we will continue to provide annual guidance as we have done for many years but will no longer provide longer-term guidance,” Chief Executive Officer Rodney McMullen said. He said Kroger experienced higher traffic and “strong growth” in the quarter.

The shares fell as much as 10 percent to $20.41 in New York on Friday. The stock had already slipped 34 percent this year through Thursday’s close.

Uphill Fight

Investors see Kroger facing an uphill battle against Amazon, which is known for relentlessly pursuing market share without regard for profits. The outlook for groceries, already a low-margin business, is further complicated by the recent arrival from Europe of low-cost competitors Aldi and Lidl.

On the day the Whole Foods deal was announced in June, Kroger lost more than $2 billion in market value as investors bet Amazon will ravage the grocery industry with its supply-chain prowess and margin-crushing retail tactics. Even before the Whole Foods deal hurt grocery stocks, Kroger had posted two straight quarters of declining same-store sales.

Kroger had previously cut its profit forecast for the year, citing rising health-care and pension costs. It has said it is raising starting wages in some markets and adding labor hours to improve customer service, while further slashing prices.

Kroger spent years lowering prices and focusing on fresh produce and technology upgrades to fend off Wal-Mart Stores Inc., which generates more than half of its revenue from groceries.

Same-store sales excluding fuel rose 0.7 percent, exceeding the 0.4 percent estimate from Consensus Metrix. Kroger reaffirmed its forecast for growth of 0.5 percent to 1 percent in that measure for the rest of the year. Revenue of $27.6 billion exceeded analyst estimates of $27.5 billion.

Food deflation, while a boon to consumers, has also eaten into grocers’ profits. After the longest run of falling prices in 60 years, food costs finally rose in July.

Price Competition

Even with deflation easing, “the intensely competitive pricing environment makes it very difficult to pass price increases to customers,” Mickey Chadha, an analyst at Moody’s Corp., said in a note.

“We expect the pricing environment to remain very competitive in 2017 as value discounters like Aldi expand, players like Lidl enter the market, Wal-Mart flexes its pricing muscle and Amazon continues to lower pricing at Whole Foods,” he said.

News by Bloomberg, edited by ESM. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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