Kroger Earnings Hit by Food Price Deflation

The supermarket chain's CEO says it is in the middle of a deflationary cycle "right now and it's not fun."
Matthew HellerDecember 1, 2016
Kroger Earnings Hit by Food Price Deflation

Kroger on Thursday reported a drop in third-quarter earnings, citing a “difficult operating environment” caused by lower food prices.

The largest U.S. supermarket chain recorded net earnings of $391 million, or 41 cents per share, matching the Wall Street estimate but two cents below the prior-year period. Revenue rose 5.9% over the prior-year period to $26.6 billion, narrowly beating analysts’ expectations.

Excluding fuel, same-store sales grew 0.1%, compared to 5.4% a year ago.

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As Forbes reports, food retailers have been hit for much of this year by deflation, with the price of beef, pork and chicken dropping as much as 18% compared to year-ago levels. The U.S. Department of Agriculture has warned that 2016 could be the first year since 1967 that retail food prices reflect annual deflation.

Kroger CEO Rodney McMullen said the company was operating in a difficult environment and deflation “persisted as we expected” during the third quarter.

“In previous instances, deflation lasted from three to five quarters in a row. We’re in the middle of the cycle right now and it’s not fun,” he said during an earnings call.

“A silver lining is that it reveals to us how we can run our business better. It is really tough when you’re in it, but we’ll be in a position to benefit from the changes we’re making today once we’re out of this cycle,” he added.

According to Reuters, deflation has also been fueled by “intense competition among retailers as big grocery sellers such as Wal-Mart Stores Inc. aggressively cut prices to attract customers.” Kroger CFO Mike Schlotman noted that overall deflation excluding pharmacy grew from 1.3% in the second quarter to 1.5% in the third quarter.

Economists see deflation continuing into 2017. For fiscal 2016, Kroger now expects earnings to be between $2.10 and $2.15, down from the previous range of $2.10 to $2.20.

“The company needs to accelerate its identical store sales growth. During a period of deflation and competitive pressures, this will prove difficult,” RBC analyst William Kirk said in a research note.

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