Growth Slowdown Hits Kroger Shares

Kroger's stock tanked after the company released a lower guidance for sales growth next year.

By Xuanyan Ouyang

Kroger Co. turned in year-end earnings that modestly topped analyst forecasts, but the grocery chain’s shares took a tumble after officials warned that sales growth will slow in the coming year.

In the 2015 fourth quarter ended January 30, the Cincinnati-based grocer’s net earnings rose 7.9 percent to $559 million, or 57 cents per diluted share, from $518 million, or 52 cents per diluted share in the year-ago period.

Sales inched up 3.8 percent to $26.17 billion from $25.21 billion in last year’s quarter — landing slightly below the $26.29 billion estimate of analysts polled by Yahoo Finance.

Kroger’s earnings per share landed three cents above the 54 cents that analysts had been expecting.

But investors chose to focus on the company’s “comparable-store sales,” which were softer than the company’s earlier guidance. Same-store sales, or “comparable store sales,” is a widely used retail-industry yardstick that measures sales at stores open at least twelve months.

Kroger’s comparable store sales (excluding fuel sales and the contribution of its recently acquired Roundy’s segment) rose by 3.9 percent. That rate was modestly lower than the 4.0 percent- 4.5 percent growth rate Kroger had previously said it expected.

Kroger’s 4th-Quarter Earnings

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Kroger’s sales growth slowed down, disappointing investors. (Xuanyan Ouyang/MEDILL)

Reaction from the market was brutal. In New York Stock Exchange trading, Kroger shares closed down $2.85, or 7 percent, at $37.80.

“The stock is down mainly on lower-than-expected same-store sales and quarter-to-date sales performance,” said Ajay Jain, an analyst at Pivotal Research Group in an email. “Investors are primarily concerned over the impact of deflationary pressures on sales and earnings.”

Recent deflationary trends are hurting the grocery sector, including Kroger. With the drop-off of oil price and oversupply of food production, food prices are also under pressure. The easing prices are good news for customers, but not supermarkets, which are already facing fierce food pricing competition from industry rivals, and from huge chains like Wal-Mart and Costco, which sell groceries along with their other products.

“Even with the potential for deflationary impact on comps (which we think will be limited to 50-100 bps,” said Jain. “gross margins should benefit from the current deflationary cycle, with input costs declining at a much higher rate than retail inflation. ”

Full year 2015 EPS was $2.06, closely beat analysts estimate of $2.05 surveyed by Yahoo Finance, but 40 percent down from $3.44 per diluted share in 2014.

The management of the company pointed out the pressure of higher insurance and pension costs influenced the fourth-quarter results.

Based on those items’ impact on Kroger’s fourth quarter results, Jain said he predicts the company’s next quarter earnings will be better.

“We’re also not sure that the investors fully appreciate that while last year’s 4Q results were exceptionally strong,” said Jain. “Earnings would have significantly higher had not Kroger reinvested excess profitability into the multi-employer pension plan and the Kroger foundation. ”

Kroger estimated that same-store sales growth will reach a range of 2.5 percent to 3.5 percent for 2016, in part because of the lower inflation and the Roundy acquisition. For full-year fiscal 2015, same-store sales rose by a heftier 5.0 percent.

Photo at top: Kroger’s stock tanked after the company released a lower guidance for sales growth next year. (Xuanyan Ouayng/MEDILL)