Kroger's Profit Squeezed by Investments to Transform Business

0

Kroger Co. has struck six deals this year to boost sales online and elsewhere in an effort to expand beyond traditional grocery stores.

Kroger Co. has struck six deals this year to boost sales online and elsewhere in an effort to expand beyond traditional grocery stores.


Photo:

Erik S. Lesser/EPA-EFE/REX/Shutterstock

Kroger
Co.’s


KR 3.21%

profit margin is getting pinched as the grocer ramps up investments to compete in the cutthroat U.S. grocery market.

The Cincinnati company is working to expand beyond its traditional business of selling groceries in stores to compete with

Amazon.com
Inc.


AMZN 1.85%

and others. Kroger has struck six deals this year to boost sales online and elsewhere, such as in Kroger-branded locations in select Walgreens Boots Alliance Inc. pharmacies.

“It will allow us to grow and grow over time,” Kroger chief executive Rodney McMullen said of its partnerships in an interview on Thursday.

Digital sales grew more than 60% in Kroger’s latest quarter as the company added more online-order pickup locations and as customers ordered its newly acquired Home Chef meal kits, the company said.

But investors are watching how Kroger’s efforts pressure profits. The nation’s largest supermarket chain by stores and sales on Thursday reported a net profit of $317 million, or 39 cents a share, compared with $397 million, or 44 cents a share, a year ago. Overall sales declined slightly to $27.7 billion in the third-quarter ending in November.

Kroger’s shares were up 2% Thursday.

The company posted same-store sales of 1.6% for the quarter, excluding fuel, on par with analyst expectations.

Kroger started selling a new line of clothing this year, and struck a deal with the hedge fund owners of the defunct Toys “R” Us brand to carry branded toys and other merchandise.

The company is trying to transform its business while also keeping its prices competitive with rivals such as

Walmart
Inc.

Executives said that they sacrificed profit to drive down prices this year, and that they are marketing more of their own low-priced store-brand products.

Kroger is also aiming to earn more from sales outside its core business, including pitching shopping data and promotions to suppliers. The company said its marketing business grew during the quarter as well.

The strategy has some skeptics. “These profit streams remain largely unproven,”

UBS

wrote in a recent note about Kroger to investors.

Kroger executives said higher transportation costs and investment ate into margins in the third quarter. Executives said they would pay for their investments by driving down the cost of goods and being more efficient.

Kroger’s reported adjusted earnings of $394 million, or 48 cents per diluted share, when accounting for its investment in the Ocado Group PLC online grocery firm. The British company’s shares have doubled in value this year, with a partnership agreement struck with Kroger this year contributing to much of the lift.

The company 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.

Write to Heather Haddon at heather.haddon@wsj.com