Kroger’s (KR, Financial) reported better-than-expected fourth quarter earnings, only to see its shares fall after the earnings report. The Ohio-based supermarket chain’s identical store sales fell 0.7%, while analysts were expecting 0.1% increase.
In my earlier article titled “Looking at Kroger Ahead of March 2 Earnings Call,” I detailed why identical store sales will be key for Kroger’s stock price, which has been under intense downward pressure for the last twelve months.
Kroger’s sales actually increased in 2016, and during fourth quarter as well.
“Total sales increased 5.5% to $27.6 billion in the fourth quarter compared to $26.2 billion for the same period last year. Total sales increased 5.0% to $115.3 billion in 2016 compared to $109.8 billion in 2015," Kroger's fourth quarter press release said.Â
Under current market conditions, any big box store that is posting positive sales numbers would have seen its shares rise and rise, but Kroger has lost more than 20% of its valuation in the last 12 months. The main factor of the loss of market capitalisation is the downward trend in identical store sales -- and not to forget the fact that the sales increase was more due to Kroger’s mergers with Roundy’s and ModernHealth than any organic expansion.
Identical store sales during the fourth quarter (excluding fuel centers) declined by 0.7%, and increased by 1% for full fiscal 2016. Kroger is one of the very few companies that had a huge track record of positive same store sales in the industry. It’s very rare to find a company of this size to post 53 consecutive quarters of same stores sales increase, but that’s what Kroger had done. But the deflationary environment coupled with intense competition in the market saw Kroger’s same store sales steadily coming down during the last four quarters.
The further same store sales came down, the lower they dragged the stock price along with them. Kroger’s steady increase in sales numbers became immaterial because, if same store sales keep declining, sales will eventually follow. That's the reason why, despite beating analyst estimates on the top line as well as the bottom line, Kroger’s stock price kept inching lower after fourth quarter results came out.
There was little hope that identical store sales would recover during the holiday season as inflation returned, but fourth quarter numbers proved that the weakness still persists. Kroger expects flat to 1% growth in 2017, which means the company does not expect the recovery process to be short and swift, which will continue to keep the stock price under severe pressure.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
