As competition in the grocery space intensifies in the U.S., Kroger has been taking aggressive steps to refresh its business. But those steps backfired on the retailer in the latest quarter.
Kroger shares tumbled more than 9 percent Thursday morning as the retailer reported quarterly sales that disappointed analysts and investors. The company said recent investments in its stores and online weighed on results, but the pain should lessen as the year drags on.
Sales at Kroger stores open for at least 12 months, excluding fuel, climbed just 1.6 percent during the quarter ended Aug. 18, coming up short of the 1.9 percent growth Wall Street had anticipated, based on a poll of analysts by Thomson Reuters.
That's also against a backdrop of strong consumer confidence in the U.S. and record-low unemployment, with many shoppers expected to open up their wallets more through this holiday season. Retailers including Walmart, Target and Macy's all reported solid earnings results for the latest quarter, and many retail companies are hiking their profit outlooks for the full year.
Kroger, which owns its namesake chain and Fred Meyer, Ralphs and Roundy's, continues to sacrifice profit as it makes investments to bulk up its e-commerce platform. That effort includes buying meal-kit company Home Chef and partnering with logistics tech firm Ocado for online delivery.
Kroger shares tumbled when Amazon announced it was going to acquire Whole Foods. Kroger has since sold off its convenience store business to U.K.'s EG Group, vowing to pay down debt and focus on its supermarkets.
Kroger's management team said on an earnings conference call Thursday morning that its efforts to rearrange store layouts and move brands around on the shelves, focusing on its own labels, took a toll on same-store sales during the second quarter. But CEO Rodney McMullen said that was to be expected.
"This effect is not a surprise to us," McMullen said about sales not meeting analysts' forecast. "We expect the headwinds from space optimization during the first half of 2018 to become a tailwind late in the third quarter."
Kroger said net income climbed to $508 million, or 62 cents per share, in the second quarter ended Aug. 18, from $353 million, or 39 cents a share, one year ago. Excluding one-time items, Kroger earned 41 cents, while analysts were calling for earnings of 38 cents a share.
Revenue climbed to $27.87 billion from $27.60 billion a year ago, falling short of the $27.95 billion that analysts were expecting.
"All in all, this was not the print the bulls were hoping for," J.P. Morgan analyst Ken Goldman said in a note to investors.
Kroger shares have risen about 5 percent this year, bringing the retailer's market cap to roughly $23 billion. The stock was trading Thursday morning around $28.83, down from a 52-week high of $32.74.