Slowing inflation is dragging on Kroger sales, even as consumers still feel a pinch
Good news for consumers could be bad news for Kroger.
As prices that shoppers pay for groceries stabilize or fall, the supermarket operator’s sales are sagging.
On Friday, the company posted fiscal second-quarter sales that missed Wall Street’s expectations. The company stuck with its full-year outlook, but said the slowing rate of inflation will mean less revenue.
Here’s how the grocer did in the three-month period that ended Aug. 12 compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:
- Earnings per share: 96 cents adjusted vs. 91 cents expected
- Revenue: $33.85 billion vs. $34.13 billion expected
The company posted a net loss of $180 million, or 25 cents per share, compared with a gain of $731 million, or $1 per share, in the year-ago period.
One factor was the company’s settlement of the majority of claims that it fueled the opioid crisis. The company agreed to pay $1.2 billion to U.S. states, local governments and Native American tribes to settle the majority of claims that it fueled the epidemic. Its quarter included a $1.4 billion charge, translating to a $1.54 loss per share, for that settlement.
Net sales fell from $34.64 billion in the year-ago period.
For retailers, inflation has been a mixed bag. On the one hand, it has contributed to higher overall sales as shoppers pay more for many items that they buy.
Yet it has hurt the volume of merchandise sold, as customers think twice about buying — especially when it comes to adding discretionary purchases to their shopping carts. Target and Walmart, in particular, have spoken about customers buying food and essentials, but less of the other stuff, at their big-box stores.
At Kroger locations, the slowdown in discretionary merchandise has been less of a factor since everyday items like groceries dominate the shelves. But it has created risk that customers could turn to retailers known for lower food prices, such as Walmart, Aldi or Dollar General. Kroger is made up of about two dozen grocery chains, including Fred Meyer, Ralphs and King Soopers, along with its namesake stores.
Home Depot has also seen the strange dynamic play out as inflation cools. Lumber prices, which shot up in price about two years ago, have come down and made its overall sales look lower. Yet it has also felt the pinch from consumers buying fewer big-ticket items like appliances as they are forced to spend more for basics like food and housing.
In the fiscal second quarter, Kroger’s identical sales without fuel grew by 1%, slightly lower than the 1.2% gain expected by analysts, according to StreetAccount. The industry metric takes out factors like store openings and closures.
Kroger reaffirmed its full-year guidance, saying it expects identical sales excluding fuel to range between 1% and 2%. That includes the impact of ending an agreement with Express Scripts, a pharmacy benefit management company. It said adjusted net earnings are expected to range between $4.45 and $4.60 per share, including the benefit from having an extra week in the year.
Even though Kroger did not change its outlook, Chief Financial Officer Gary Millerchip said the company expects identical sales will be at the low end of its annual range, and slightly negative in the back half of the year when excluding fuel.
In an earnings release, he said the grocer expects inflation to “continue to decelerate” and expects a tougher backdrop for consumers in the months ahead.
The prices that consumers pay for food at home aren’t rising as much as they were before, but were still up 3.6% year over year in July, according to consumer price index data from the U.S. Bureau of Labor Statistics.
Compared to pre-pandemic, food at home prices are up significantly — a jump of 25% when comparing January 2019 to July of this year.
Kroger CEO Rodney McMullen said on an earnings call that slowing inflation could lift sales in another way. He said as inflation slows, the grocer is “beginning to see some volume improvement.” And, he said, consumer packaged goods companies have become more willing to work with Kroger on pricing to keep their sales going.
McMullen added that the grocer has seen shoppers who feel squeezed by high inflation, reduced government benefits and rising interest rates. He said the company has tried to cater to budget-minded customers with lower-priced items from its own brands, personalized discounts, fuel rewards and weekly specials.
Some customers are buying smaller boxes of an item, choosing the cheapest option on the shelf or putting less in their shopping carts, he said.
“We expect these broader economic headwinds to continue pressuring customer spending in the second half of the year,” he said. “While the environment is difficult, we are never satisfied with sales, and we are focused on driving more units in the back half of the year.”
Kroger put up strong online gains in the quarter, with digital sales rising 12% year over year. It has expanded to new markets, including Florida, by opening giant warehouses to fulfill online orders.
Kroger joined the list of retailers that cited organized retail crime as a factor that’s hurting their businesses.
On the company’s earnings call, Millerchip said shrink, the industry term used for items lost because of damage, stealing or other factors, increased in the quarter because of theft. He said Kroger has stepped up security and added new tech to try to fight crime, but said Kroger expects the theft trends “will continue to be a challenge for the remainder of the year.”
The company is in the middle of an effort to close a deal to buy grocery rival Albertsons for $24.6 billion. On Friday, Kroger announced the latest step to get the deal done. It said the combined companies have struck a deal to divest more than 400 stores and eight distribution centers to C&S Wholesale Grocers, a company that operates Grand Union and Piggly Wiggly grocery stores.
McMullen said the approximately $1.9 billion deal will keep the company on track to complete the merger with Albertsons early next year. The grocery merger is also getting scrutiny from antitrust officials in Washington, D.C.