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Supermarket chain's shares drop 10% on disappointing sales growth; debt widens
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 (September 14, 2018).
Kroger Co.'s sales grew less than expected and the grocer said it would sacrifice profit to continue investing in online ordering and other services to compete with Amazon.com Inc. and Walmart Inc.
The largest U.S. supermarket chain by stores and sales has invested in online offerings as well as popular store brands and natural goods at its supermarkets to help boost traffic. Kroger is also lowering prices and overhauling the layout of its stores. Digital sales grew by more 50% in the second quarter, Kroger said.
"We are making those investments and they are substantial and significant," Kroger Chief Executive Rodney McMullen said in an interview regarding competing digitally. The company expected its same-store sales to be weaker during the quarter as it overhauls its stores to prioritize brands its data shows sell best, he said.
Investors remain skeptical that those efforts are enough to stave off the threat from Walmart, Amazon and others. Kroger on Thursday reported revenue of $27.9 billion in the quarter ending in August, up slightly from $27.6 billion the prior year. Analysts had projected sales of $28 billion. Same-store sales excluding fuel rose 1.6% in the quarter, compared with the 1.8% analysts expected.
Kroger's shares fell roughly 10% on Thursday, the largest one-day drop since a March earnings report when Kroger also said it would prioritize longer-term investments over immediate profit.
The Cincinnati-based company is one of the last big retailers to report earnings from a second quarter marked by robust consumer spending.
Walmart, Target Corp., Home Depot Inc. and Nordstrom Inc. all reported strong sales for the quarter. Online sales also helped boost retailers.
Grocery purchases drove traffic at Walmart and Target. That has fueled more competition for traditional grocers such as Kroger.
Kroger has invested in online selling strategies to compete. The chain has introduced an online shipping service to compete with Amazon, and is selling products abroad for the first time through an e-commerce site in China owned by Alibaba Group Holding Ltd.
"We're making dramatic investments to reshape the future of the company, " said Kroger Chief Financial Officer Mike Schlotman.
Those investments are boosting Kroger's debt. The grocer reported net total debt of $14.5 billion on Thursday, up $939 million from that quarter a year ago.
Moody's Vice President Mickey Chadha said pricing pressure and online investments appeared likely to continue weighing on Kroger's financials over the next year.
Kroger said it was committed to reducing leverage. Executives said they would reduce costs to adjust for rising expenses including higher credit-card fees. A Kroger division stopped taking Visa Inc. credit cards at some California stores and gas stations in August because of the payment company's fees.
"We're prepared to expand nonacceptance to other banners if that's what it takes to get a level playing field," Mr. Schlotman said.
For the second quarter, earnings on an adjusted basis were 41 cents a share, or $336 million, beating analyst expectations of 38 cents a share. The grocer reported adjusted earnings of 39 cents a share, or $353 million, in the prior year.
Kroger reported earnings of $508 million, or 62 cents a share, including proceeds from the sale of its convenience stores and an increase in the share price of Ocado Group PLC, a British online grocer that Kroger invested in this year to run automated delivery warehouses and process digital orders.
Ocado's shares have nearly doubled since Kroger announced its stake in the company.
The company raised its annual earnings guidance to $3.88 to $4.03 per adjusted share, from $3.64 to $3.79 earlier, to reflect the strength of that investment. It kept its full-year adjusted earnings guidance at $2 to $2.15 a share.
Write to Heather Haddon at email@example.com
(END) Dow Jones Newswires
September 14, 2018 02:47 ET (06:47 GMT)
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