Kroger (KR, Financial) matched Wall Street expectations on earnings while doing slightly better on revenue when it reported second-quarter earnings last week. But the market remained unimpressed with Kroger’s same-store sales (excluding fuel) of 0.7% as profits dropped by 8% during the period.
"Through innovation, Kroger is redefining the food and grocery customer experience based on our core strengths. Our second-quarter results demonstrate the progress we've made. We returned to positive identical supermarket sales growth in the second quarter.
"We had strong growth in both loyal and total households. Traffic is up, unit movement is up, market share is up, and our customers' price perception is excellent and continues to improve. We have and always will put the customer first in all we do." –CEO Rodney McMullen
Kroger’s stock has remained under extreme pressure since the time Amazon (AMZN, Financial) announced its Whole Foods Market (WFM, Financial) acquisition. Amazon is known to cut costs, and its grand entry into the grocery market was bound to put additional pressure on pricing, eating into the margins of already struggling grocers. That concern played out during the second quarter for Kroger as the company cut its own prices to support sales growth.
Amazon completed the Whole Foods acquisition on Aug. 28 and started off by cutting prices across a wide range of products. Once Amazon hits volume it will continue to drive prices as low as it can as it focuses more on top-line growth and less on bottom-line profits.
The U.S. grocery market is estimated to be worth more than $600 billion,Ă‚ but as a mature market, it can only grow by a few percentage points in the best of times. And the deflationary environment that has persisted since 2015 has made things even more difficult for large grocers like Kroger.
The prospect of sustained competition in the future and price wars leading to lower margins has put Kroger’s stock under tremendous pressure, forcing it to lose nearly 50% of its value from the highs of 2015. The stock has been on a steady downward trend, and the second-quarter results didn’t give much reason for investors to change their perceptions of Kroger.
The good news for Kroger is that the second quarter showed investors the company can achieve sales growth in a difficult environment. The company now expects identical store sales excluding fuel to increase 0.5% to 1% during the second half of the current fiscal. But Kroger will need at least a few consecutive quarters of stellar results to get investor confidence back, because competition with a resurgent Walmart (WMT, Financial) and an aggressive Amazon is just not going to be easy.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
