Falling food prices eat into Kroger’s profit
Chain’s third-quarter earnings down 8.6%
Sagging food prices continued to weigh on the nation’s largest supermarket chain Kroger, which said 2016 profits will fall toward the lower end of expectations.
Kroger is the parent company of Milwaukee-based Roundy’s and its Wisconsin brands Pick ’n Save, Copps and Metro Market. The company is the grocery market share leader in Wisconsin.
Kroger reported a $391 million profit for the third quarter — an 8.6% drop from the same period last year.
Total sales rose 5.9% to $26.6 billion during the quarter ended Nov. 5, reflecting Kroger’s acquisition of Roundy’s in December 2015. Same-store sales excluding fuel barely rose 0.1%.
In the comparable 2015 period, the Cincinnati-based chain posted a $428 million profit on sales of $25.1 billion.
Kroger’s 41 cents of earnings per diluted share met Wall Street expectations, while sales outperformed slightly. Analysts expected Kroger to report a $390 million profit before onetime items on sales of $26.3 billion, according to Bloomberg.
The grocer said falling food prices continued to impact financial results. Kroger CEO Rodney McMullen told analysts on a Thursday conference call this was the third deflationary cycle in the past 30 years. He said previous cycles have hit Kroger’s results for three to five financial quarters.
“We’re in the middle of this cycle and it’s not fun,” McMullen told analysts, adding the company was “firmly focused” on the long-term strategy of courting customers and processing changes to lower costs. “We don’t change our strategy based on quarterly swings in results.”
Some food staples that have slipped nationwide from a year ago: iceberg lettuce has dropped 23.8% to 95 cents per pound; peanut butter, down 9.3% to $2.50 per 16-ounce jar; bacon is down 8.9% to $5.38 per pound; frozen concentrate orange juice, down 7.4% to $2.55 per 12-ounce can; ground beef is down 6.6% to $5.69 per pound; pork chops are down 6.3% to $3.63 per pound; white bread is down 5.3% to $1.34 per loaf; and a gallon of milk has slipped 1.4% to $3.29, according to the U.S. Bureau of Labor Statistics.
In an industry where profit margins are fairly thin, falling food prices are a challenge because the number of dollars that are coming in falls as fixed costs involved in selling food — labor, distribution, etc. — stay the same or even increase.
Looking ahead, Kroger said it expects slightly positive identical supermarket sales growth excluding fuel.
Kroger narrowed its net earnings guidance range to $2.03 to $2.08 per diluted share for 2016 from the previous range of $2.03 to $2.13. The numbers suggest the company expects to earn a $1.9 billion to $2 billion annual profit.