Kroger Q3 profit falls

The Kroger Co.’s income fell in the third quarter as it continues to invest in online and offline initiatives to shore up — and transform — its business.

Kroger’s total sales decreased 0.3% to $27.67 billion, just above estimates, amid disruptions as the company continues to revamp stores to allow more shelf space to best-selling products. Excluding fuel, the convenience store business unit divestiture and the merger with Home Chef, total sales increased 1.7% in the quarter over the same period last year. Same-store sales, excluding fuel, rose 1.6%. Digital sales grew over 60%.

Neil Saunders, managing director, GlobalData Retail, commented that, given the unfavorable metrics around online, Kroger needs to counterbalance its digital efforts with growth strategies in other, more profitable parts of the business.

“In our view, online grocery has yet to prove itself as a viable business model,” Saunders explained. “Even in the U.K. - where the market is far more advanced and where the higher population density is more favorable to distribution - online has not been particularly helpful to the bottom line. If anything, it has eroded profits and put margins under severe pressure.” For more analysis, click here.

Net income fell to $317 million, or 39 cents per share, in the quarter ended Nov. 10, from $397 million, or 44 cents per share, in the year-ago period. It reported adjusted earnings of $394 million, or 48 cents per diluted share, when accounting for its investment in online U.K. grocery retailer Ocada Group, above the 44 cents a share analysts had estimated.

Kroger has launched a number of initiatives in recent months, including, most recently, a pilot with Walgreens to sell grocery items in the drug store chain’s stores. In November, it announced that it would open its first customer fulfillment center, with the automated facility leveraging digital and robotic capabilities, will be the first project that it is collaborating on with Ocado.

“Kroger is transforming our business model,” said Kroger chairman and CEO Rodney McMullin. “We're moving from a traditional grocer to a growth company with both a strong customer ecosystem that offers anything, anytime, anywhere, and asset-light, high-margin alternative partnerships and services. We are strengthening the Kroger ecosystem by reducing costs and investing the savings in our associates, technology, and price to grow units, traffic and share. Leveraging our store, logistics and data assets in turn creates incremental new profit streams, which then further redefines the customer experience. In this way, our new growth model will be a virtuous cycle.

Kroger lowered its net earnings guidance for the year to $3.80 to $3.95 per diluted share from $3.88 to $4.03 previously. It maintained its adjusted operating profits of $2.00 to $2.15 for the year.