Online Push Hurts Kroger's Margins -- WSJ
December 07 2018 - 3:02AM
Dow Jones News
By Heather Haddon
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 7, 2018).
Kroger Co.'s profit margin is getting pinched as the grocer
ramps up investments to compete in the cutthroat U.S. grocery
market.
The Cincinnati company is working to expand beyond its
traditional business of selling groceries in stores to compete with
Amazon.com Inc. and others. Kroger has struck six deals this year
to boost sales online and elsewhere, such as in Kroger-branded
locations in select Walgreens Boots Alliance Inc. pharmacies.
"It will allow us to grow and grow over time," Kroger chief
executive Rodney McMullen said of its partnerships in an interview
on Thursday.
Digital sales grew more than 60% in Kroger's latest quarter as
the company added more online-order pickup locations and as
customers ordered its newly acquired Home Chef meal kits, the
company said.
But investors are watching how Kroger's efforts pressure
profits. The nation's largest supermarket chain by stores and sales
on Thursday reported a net profit of $317 million, or 39 cents a
share, compared with $397 million, or 44 cents a share, a year ago.
Overall sales declined slightly to $27.7 billion in the
third-quarter ending in November.
Kroger's shares were up 2% Thursday.
The company posted same-store sales of 1.6% for the quarter,
excluding fuel, on par with analyst expectations.
Kroger started selling a new line of clothing this year, and
struck a deal with the hedge fund owners of the defunct Toys "R" Us
brand to carry branded toys and other merchandise.
The company is trying to transform its business while also
keeping its prices competitive with rivals such as Walmart Inc.
Executives said that they sacrificed profit to drive down prices
this year, and that they are marketing more of their own low-priced
store-brand products.
Kroger is also aiming to earn more from sales outside its core
business, including pitching shopping data and promotions to
suppliers. The company said its marketing business grew during the
quarter as well.
The strategy has some skeptics. "These profit streams remain
largely unproven," UBS wrote in a recent note about Kroger to
investors.
Kroger executives said higher transportation costs and
investment ate into margins in the third quarter. Executives said
they would pay for their investments by driving down the cost of
goods and being more efficient.
Kroger's reported adjusted earnings of $394 million, or 48 cents
per diluted share, when accounting for its investment in the Ocado
Group PLC online grocery firm. The British company's shares have
doubled in value this year, with a partnership agreement struck
with Kroger this year contributing to much of the lift.
The company lowered its net earnings guidance for the year to
$3.80 to $3.95 per diluted share from $3.88 to $4.03 previously. It
maintained its adjusted operating profits of $2.00 to $2.15 for the
year.
Write to Heather Haddon at heather.haddon@wsj.com
(END) Dow Jones Newswires
December 07, 2018 02:47 ET (07:47 GMT)
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