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Competition Key to Kroger's Troubles

The recession caught up with Kroger in the third quarter to the extent that it changed the format of its latest conference call to spin what happened to analysts.

Mostly what happened to Kroger was competition.

In introducing the company's third quarter conference call for the period ended Nov. 7, as transcribed by SeekingAlpha, Carin Fike, director of investor relations, said to analysts:

We recognize that the third quarter results we reported earlier today differ significantly from the outlook we shared with you when we reported Kroger's second quarter results in September. For that reason, we are modifying the structure of today's call from our typical format. Today our prepared remarks will address the factors that caused our third quarter results to differ from our internal projections. We aim to provide you with a better understanding of our current business environment and our plans going forward.
In the third quarter, Kroger identical supermarket sales, those in stores open at least a year excluding remodels and relocations, gained 1.3% without fuel revenues included compared with the same period last year. Kroger reduced its full year guidance for identical store sales from a gain in the three to four percent range to a gain of two to two and a half percent when it announced its third quarter results.

Total sales in the third quarter, including fuel, were $17.7 billion compared with $17.6 billion for the period a year earlier, a gain of less then one percent. Excluding fuel, total sales increased a bit more than two percent.

Kroger posted a net loss for the third quarter of $874.9 million, or $1.35 per diluted share. The loss reflected a non-cash asset impairment charge regarding a goodwill write-down at its Ralph's supermarket chain in Southern California, one that has been experiencing intense competition. Excluding the charge, net earnings for the quarter would have been $176.7 million, or 27 cent per diluted share, versus $237.7 million, or 36 cents per diluted share, a year before.

Almost immediately after Fike spoke, David Dillon, Kroger's CEO then spelled out the vexations afflicting Kroger, saying:

The operating environment has proven to be more difficult than we expected, and our performance during the quarter clearly reflects it. We came up short in several aspects of our performance. We have deflation in sales, making expense leverage difficult, a sharply more competitive environment that is now widespread, and cautious consumers.
Deflation was tough, Dillon said, and significantly affected Kroger's performance. He estimated that deflation as experienced by Kroger to be just under one percent. Last year, the company estimated that inflation would be at six percent, which, in essence meant a seven percent shift in price momentum, he said. The explanation, as regards Kroger not living up to its recent estimates, seems simplistic, though. After all, the assumptions that Kroger had going into the third quarter last year certainly weren't the same as it had heading into the same period this year.

Another problem with Kroger's explanation for its poor showing -- earnings per share in the quarter came in about 10 cents below analyst average estimate -- is that its competitors have been equally susceptible to commodity price deterioration. Sure, the company might have been off on its estimates, but the problems it experienced were not isolated from competitive factors, although Kroger seemed to cast them that way. If competitors weren't pushing hard on price, Kroger could take its time responding to lower commodity prices and even enjoy a temporary boost in profits while doing so. Given those considerations, it seems evident that competitive pressure really is the critical factor to consider when evaluating what Kroger is going through right now.

More on Kroger and the competition in a following post.

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