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 Amazon.com 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.

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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