Kroger lowers full-year guidance

by Keith Nunes
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Kroger cited competitive pressures and a 'changing' market.
 
CINCINNATI — The Kroger Co.’s first-quarter earnings plummeted compared to the same period of the previous year. The retailer earned $303 million, equal to $0.33 per share on the common stock, for the period ended May 20, which represented a significant decline compared with the same period of the previous year when the company earned $696 million, equal to $0.72 per share.

Sales during the first quarter rose to $36,285 million compared with sales of $34,604 million during the previous year.

“As we all know, there is a lot of change in the food retail industry, both in terms of the operating environment and the competitive landscape,” said W. Rodney McMullen, chairman and CEO, during a June 15 conference call with securities analysts. “The best thing that we can do is to stay on the offense by continuing to focus on our customers, what they want and need today and what we anticipate they will want and need tomorrow, and executing our strategy. We continue to manage our business for the long term and to deliver earnings growth on a 3- to 5-year time horizon."

Kroger store visits per household were flat in the first quarter while basket size and price per unit were down, said J. Michael Schlotman, CFO.

“Loyal households grew 3.2 percent compared to last year’s first quarter and our loyal households had positive ID (identical store) sales growth in the first quarter,” he said.

Exacerbating the retailer’s quarterly performance was a macroeconomic transition from deflation to inflation, and the company efforts to stay competitive by offering “hot features” on milk and eggs in certain markets.

“These two, plus the incremental investments in hours and wages, are the primary factors causing us to lower our guidance for the year,” Schlotman said. “Our GAAP net earnings per diluted share guidance for 53 weeks is now $1.74 to $1.79. Our adjusted net earnings guidance range is $2 to $2.05. The previous adjusted net earnings guidance range was $2.21 to $2.25.”

Schlotman added that Kroger lowered the price of its milk and eggs in certain markets in response to competition from other retailers.

“…You never know when somebody in select markets is going to run some hot feature and you have to make independent decisions as those features hit the street,” he said. “… When those kinds of ads stay there for a little bit longer, particularly when it’s two important commodities like milk and eggs, ultimately, we’re going to react and not allow our customers to think they have to go somewhere else to get the best value for those kinds of products.”

Several analysts participating in the conference call noted that the competitive pressure the Kroger Co. is currently facing is only going to increase as Amazon continues to expand into consumables, Wal-Stores, Inc., continues to focus on price, and hard discount retailers like Aldi and Lidl grow in the US market. With that kind of backdrop, the analysts wanted to know how Kroger would continue to remain competitive.

“It's really making sure that we’re using the advantages we have,” McMullen said. “Obviously, the data that we have, our average customer only has to drive a mile to get to one of our stores. So, it’s using that personalization to connect with the customer directly on a one-on-one basis and having where they can engage with us anyway they want to.

“So, if they want to pick up their groceries, if they want it delivered or if they want to shop and go the old-fashioned way, for lack of a better word. We continue to add services. And all of those services are part of the model in terms of making it an easy place to stop.”

One category where Kroger plans to continue to invest is in prepared meals. McMullen said the category continues to grow nicely compared to a year ago and is one of the retailer’s strongest departments.

Further strengthening the company’s position may be the introduction of Kroger branded Prep + Pared Meal Kits in certain Cincinnati stores.

“We can hardly keep them on the shelves …,” McMullen said. “What we’re finding is the quality of that meal is the same as going to a restaurant and getting a meal, but people like to prepare something at home, and they find it easy and they love the variety that we offer. So, a lot of the price comparisons is what the price is versus going to a restaurant, but being able to do it at home. And when it takes you 20 minutes; it's just as fast as picking it up at Kroger's than it is going to a restaurant and going through all that hassle when you're at a restaurant.”

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