Kroger Results Disappoint, Especially Compared to Walmart and Target

(Bloomberg) -- Kroger Co. tumbled the most in six months after the supermarket chain missed analysts’ sales estimates and margins continued to narrow in the company’s fiscal second quarter.

Key Takeaways

  • Kroger’s lackluster results contrast with rivals Walmart Inc. and Target Corp., who raised their 2018 expectations.
  • Comparable-store sales rose 1.6 percent when excluding gasoline sales. That’s below the estimate of 1.8 percent from Consensus Metrix.
  • A strong consumer environment has put wind at retailers’ backs, with Target and Dollar General CEOs both saying conditions are the best they’ve seen in more than a decade. As a result, investors have punished companies that haven’t been able to take advantage of the favorable climate.
  • Kroger’s online sales rose more than 50 percent. The company has expanded home-delivery and curbside pickup options, while also inking deals with meal-kit maker Home Chef and U.K. online grocer Ocado. The idea is to bolster its defenses against Inc. and other rivals.
  • Kroger’s investments have weighed on profitability, and its gross margins continued to contract.
  • Grocery chains have been pressured by relentless competition -- especially as German discounters Aldi and Lidl expand in the U.S.

Market Reaction
  • Kroger shares fell as much as 10 percent, the biggest intraday drop since March 8, and were down 9.5 percent to $28.71 at 9:41 a.m. in New York. The stock gained 16 percent this year through Wednesday’s close.

Kroger Results Disappoint, Especially Compared to Walmart and Target

Results and outlook:
  • 2Q sales $27.87 billion, estimate $28.06 billion (range $27.35 billion to $29.39 billion) (Bloomberg data)
  • Sees FY Identical-store sales excluding fuel +2% to +2.5%
  • Sees FY EPS $3.88 to $4.03
  • 2Q adjusted EPS 41c, estimate 38c (range 34c to 45c) (BD)
  • 2Q EPS 62c
  • 2Q Identical-store sales excluding fuel +1.6%, estimate +1.8% (Consensus Metrix, average of 16 estimates)
  • 2Q FIFO gross margin +21.3%, estimate +21.4% (BD)
  • Maintains Yr Adj EPS View $2.00-$2.15
  • KR: Investments in Space Optimization to Be Tailwind in Late 3Q
  • Kroger says on track to generate the free cash flow and incremental FIFO operating profit that we committed to in Restock Kroger for 2018-2020, and to deliver on our long-term vision to serve America through food inspiration and uplift

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