Kroger Co. posted better-than-expected third-quarter earnings early Thursday, but the supermarket chain offered cautious guidance for the full year, citing continued near-term economic pressures and food-at-home disinflation.
The Cincinnati-based company, which has been selling stores and making concessions to get its planned merger with Albertsons Cos. Inc.
ACI,
over the line, said its customers are showing signs of the pressure from higher interest rates, reduced savings and fewer government benefits, even as inflation is decelerating.
“Customers are still adjusting to the impacts from eight consecutive quarters of broad and significant inflation,” Chief Executive Rodney McMullen told analysts on the company’s earnings call, according to a FactSet transcript.
The company is seeing more high-income customers looking for value, while the more budget-conscious are under significant spending pressure, he said.
In-store displays highlighting bargains for staples have proved popular, he said. “Customers purchasing these offer items are making more trips and buying more units,” he said.
The company’s health division saw strong demand for vaccinations, which helped offset the negative impact on margins from continued strong demand for GLP-1 drugs, the new class of weight-loss drugs developed by Eli Lilly & Co. and Novo Nordisk.
However, “for now, we have not seen any major macro shifts in customer eating habits or spending behaviors,” he said.
The company posted net income of $646 million, or 88 cents a share, for the quarter, up from $398 million, or 55 cents a share, in the year-earlier period. Adjusted per-share earnings came to 95 cents, ahead of the 91-cent FactSet consensus.
Sales fell to $33.957 billion from $34.198 billion a year ago, while FactSet was expected $33.903 billion.
Same-store sales excluding fuel fell 0.6% to match the FactSet consensus.
Kroger tweaked its full-year guidance and now expects same-store sales excluding fuel to be up 0.6% to 1.0%, while FactSet expects a 1.0% rise.
It expects adjusted EPS to range from $4.50 to $4.60, which compares with prior guidance of $4.45 to $4.60 and a FactSet consensus of $4.51.
The guidance includes the effect of convey Scripts, said Chief Financial Officer Gary Millerchip on the call.
Kroger terminated a pharmacy provider agreement with convey Scripts, a Cigna Corp. subsidiary, on Jan. 1.
McMullen said the company believes it has met the criteria set by the Federal Trade Commission to allow it to close the merger with Albertsons in early 2024 as expected.
Analyst Bill Kirk and Roth MKM noted that the guidance implies lower same-store sales for the fourth quarter.
“Disinflation, possible deflation, and potential increased competition remain issues,” he wrote in a note to clients. “We also have concerns with the announced divestiture package (too small and viability of stores under buyer).”
Kirk has a neutral rating on the stock.
The stock
KR,
rose 2.2% to make it slightly profitable in the year to date, while the S&P 500
SPX,
has gained 18.5%.
