Kroger full-year profit outlook weighs on shares

LOS ANGELES Tue Mar 9, 2010 2:31pm EST

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LOS ANGELES (Reuters) - Kroger Co (KR.N) the largest and best-performing U.S. grocery chain, issued an updated full-year profit forecast that could miss Wall Street's view, sending shares off 2.3 percent.

Kroger raised the upper limit of its profit forecast for the current fiscal year to $1.80 per share from $1.70, while keeping the low end at $1.60. Analysts on average were expecting $1.79, according to Thomson Reuters I/B/E/S.

The operator of stores under its own name as well as the Ralphs, King Soopers, Fry's and Food 4 Less brands warned on Tuesday that uncertainty about the economy and its operating costs had caused it to be cautious.

It also posted a fourth-quarter profit that topped expectations, despite contracting margins.

Some analysts said they are concerned that Kroger is not reaping the expected benefits of stealing market share from rivals.

To that end, Jefferies & Co analyst Scott Mushkin said Kroger's earnings before interest, taxes, depreciation and amortization have grown less than sales in every year since fiscal 2007 -- a trend that predated the weak U.S. economy.

"Right now it's a little bit tough to be a shareholder because something seems a little off," Mushkin said.

PRICE WAR EASING

Results from Kroger came as the company and rivals like Safeway Inc (SWY.N) and Supervalu Inc (SVU.N) are moving away from their bruising battle to offer the lowest prices.

Kroger executives said the competitive environment remains "aggressive" but is stabilizing.

The Cincinnati-based company said its net profit for the fourth quarter ended January 30 fell 27 percent to $255.4 million, or 39 cents per share, topping analysts call for a profit of 34 cents per share, according to Thomson Reuters I/B/E/S.

Net income for the full year was 11 cents per share after third-quarter asset impairment charges and $1.71 per share excluding items.

Sales at Kroger, which also runs the Littman and Barclay jewelry chains, rose 7.2 percent to $18.55 billion, beating analysts' expectations of $17.73 billion. Excluding fuel, sales rose 2 percent.

Identical-store sales excluding fuel were up 1.2 percent for the quarter "but came at a tremendous cost," Hapoalim Securities analyst Ajay Jain said in a client note.

Kroger's identical-store sales include supermarkets open without expansion or relocation for five full quarters.

Supermarket margins on non-fuel items fell 1.3 percentage points due to higher healthcare and labor costs and credit card fees, the company said.

"The economic recovery continues to be sluggish and unemployment levels remain high, suppressing consumer spending," Kroger Chief Executive David Dillon said on a conference call with analysts.

Kroger executives said they expect results to improve in the latter half of this year and they are seeing some improvement in discretionary spending on jewelry, flowers and items at its in-store cafes.

The company's fiscal 2010 profit outlook includes identical-store sales growth of 2 to 3 percent without fuel.

"Five weeks into fiscal 2010, our identical sales trend is slightly ahead of the guidance range we have outlined," Chief Financial Officer Mike Schlotman said.

Kroger shares were down 2.3 percent at $22.38 on the New York Stock Exchange in afternoon trading.

(Additional reporting by Phil Wahba in New York; Editing by Gerald E. McCormick and Lisa Von Ahn)

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