Kroger Profit Misses Estimates Amid Price Cuts

Kroger Co. (KR), the top U.S. grocer, Tuesday posted a 29 percent rise in quarterly profit due to cost controls, but price cuts to lure shoppers caused earnings to miss Wall Street estimates and shares fell.

Even though an increased pace of promotions helped Kroger posts its best sales growth in five years at its existing stores, the top line gains came at the expense of gross margins, analysts said.

Kroger, based in Cincinnati, said its profit grew to $142.7 million, or 19 cents a share, in the fiscal third quarter ended Nov. 6, from $110.2 million, or 15 cents a share, a year earlier.

But the results fell short of Wall Street's forecasts as the grocer was expected to earn 23 cents a share, according to the average of analysts polled by Reuters Estimates.

Kroger along with rivals Albertsons Inc. (ABS) and Safeway Inc. (SWY), have been grappling with the after-effects of a strike that hurt business in Southern California about a year go.

During the five-month work stoppage, all three supermarket chains saw customers defecting to other food retailers, stunting sales growth.

To regain shoppers, the supermarkets have been slashing prices, a step that weighs on gross margins even as it boosts sales.

"There's a lot of competition for a stagnant dollar. Disposable income trends are not good right now," said BB&T Capital Markets analyst Andrew Wolf. In that environment, "if an operator's seeking to protect market share, it's going to come at the expense of earnings."

Rising wholesale gasoline prices also squeezed profits on gasoline sales, the company said in a conference call.

Jason Whitmer, an analyst at FTN Midwest Research (search) said the earnings miss showed that Kroger was seeing no stabilization in operating margins and may need to quicken the pace of cost cuts.

"The costs savings have to swallow up the margin investments for this company to see some improvement," said Whitmer, who has a "neutral" rating on Kroger shares.

He said he was pleased with the sales improvement, but "unless Kroger moves the needle for earnings, I think investors would be disappointed."

Kroger said quarterly sales rose 5.9 percent to $12.9 billion. Its identical store sales, which excludes new or replacement supermarkets, rose 1.8 percent before the effect of fuel sales, the company's strongest showing in such sales in five years, according to Whitmer.

The gain in identical store sales marked a sequential improvement from the second-quarter when such sales grew only by 0.6 percent.

David Dillon, Kroger chairman and chief executive officer, said the company's focus on improving customer service, as well as promotions, contributed to the sales gain.

"The improved identical sales performance in the third quarter versus the second quarter continues to move us toward our goal," Dillon said in a conference call.

"But based on year-to-date performance, it will be a challenge to achieve the company's previously announced identical food store sales target of 1.3 percent for the full year, which of course excludes fuel and stores affected by the labor disputes," Dillon added.

In morning trading, Kroger shares were down 18 cents, or 1.1 percent, at $15.82, but above their earlier low of $15.54.