Kroger's Revised Sales Forecast Reflects Consumer Caution
Kroger, a prominent player in the grocery retail sector, recently disclosed its financial outcomes for the third quarter, revealing a mixed performance that saw its stock decline. The company surpassed analyst projections for adjusted earnings per share, yet its overall sales figure did not meet market expectations. This development has led Kroger to narrow its sales outlook for the fiscal year, a decision influenced by heightened competition and a noticeable shift in consumer spending habits, as customers exhibit greater prudence with their finances.
The third-quarter report showed adjusted earnings per share reaching $1.05, slightly above the consensus estimate of $1.03. However, the company's total sales for the quarter amounted to $33.859 billion, falling short of the anticipated $34.155 billion. A significant factor impacting the company's financial results was an operating loss of $1.54 billion, primarily attributed to a substantial $2.6 billion charge related to impairments within its automated fulfillment network. This charge underscores the challenges Kroger faces in its e-commerce expansion efforts.
Despite these setbacks, Kroger reported a 2.6% increase in identical sales, excluding fuel, and a robust 17% growth in e-commerce sales. CEO Ron Sargent expressed confidence in the e-commerce sector's performance, noting that a strategic review has been completed, with expectations for the online business to achieve profitability by 2026. The gross margin saw a modest improvement, rising to 22.8% from 22.4% in the previous year, partly due to the sale of Kroger Specialty Pharmacy, better performance of proprietary brands, and reduced supply chain costs.
The company's LIFO charge for the quarter increased significantly to $44 million, compared to $4 million in the same period last year. Concurrently, the FIFO gross margin rate improved by 49 basis points, with 25 basis points directly benefiting from the sale of the specialty pharmacy. In terms of capital allocation, Kroger concluded a $5 billion accelerated share repurchase program in the third quarter of fiscal year 2025 and is now engaged in open-market buybacks under a remaining $2.5 billion authorization, slated for completion by the end of fiscal 2025.
Looking ahead, CFO David Kennerley announced a revised identical sales guidance, without fuel, to a range of 2.8% to 3.0%, a reduction from the earlier projection of 2.7% to 3.4%. This adjustment reflects the ongoing trend of consumers tightening their belts, impacting purchasing decisions. Conversely, Kroger has slightly raised its fiscal 2025 adjusted earnings outlook to $4.75 to $4.80 per share, up from the prior range of $4.70 to $4.80, aligning closely with analyst estimates. Following these announcements, Kroger's shares experienced a decline of 4.08%, trading at $63.50.
The grocery giant is navigating a complex retail environment characterized by changing consumer behaviors and competitive pressures. While its e-commerce division shows promise for future profitability, the immediate financial performance reflects the broader economic landscape influencing household spending. Kroger's strategic adjustments in its sales forecast and operational focus aim to stabilize its market position and adapt to the evolving demands of its customer base.