Kroger Stock Drops in Wake of Earnings Call, Whole Foods Sale

Meagan McGinnes

The competition within the grocery world is relentless, especially during a time when heavy-hitters are further barreling into the food industry. Amazon, of course, threw down a $14 million gauntlet on Friday with the announcement that it was looking to acquire Whole Foods Market.

Of course, that big noise drowned out the previous day’s slow strangling sound of Kroger investors swallowing their own pain.

During the Cincinnati-based retailer’s Q1 earnings call on Thursday, June 15, Kroger CEO Rodney McMullen said earnings would be about nine percent lower than initially forecast due to new investments in pricing and service, as well as margin pressure.

The retailer’s stock price plunged 19 percent on Thursday as a result of the struggles, then fell another 13 percent Friday once the Whole Foods deal was done. Shares slowly began rebounding late Monday morning.

“There is a lot of change in the food retail industry – both in terms of the operating environment and competitive landscape,” McMullen said on the earning’s call. “The best thing that we can do is to stay on the offense by continuing to focus on our customers – what they want and need today and what we anticipate they will want and need tomorrow – and executing our strategy.”

During the company’s earnings call, Kroger explained the sales drop, saying it sacrificed its margins this quarter in order to invest in itself and better compete in the changing retail landscape. The company said a majority of the margin drops resulted from a few one-time charges, but also due to continued spending on initiatives like price cuts and promotions. Those aren’t going away, however: the company has “no intention of giving up the momentum,” according to McMullen. Last month, the chain announced price cuts on more than 3,000 store items in its Columbus, Ohio, division.

“We built our business model assuming that gross margins will go down,” Michael Schlotman, Kroger’s executive vice president and CFO, added. “Every once in awhile you run through cycles where you have to step back and adjust many of the metrics inside the company. We feel that we’ve done a good job of reacting sensibly and proactively to the environment around us from a labor standpoint, from a price investment standpoint and what makes sense to grow the business for the long-term.”

Kroger will also boost investments in its e-commerce initiatives. In the first quarter, Kroger reported more than 30 percent growth in new digital customers and a more than 30 percent increase in digital visits. The retailer also reportedly saw faster growth in mobile compared to last year.

“We are making meaningful investments in our digital and online growth. We believe that customers of the future will want to shop with us for anything, anytime and anywhere,” McMullen said.

To keep customers interactive in this online space, Kroger is delivering personalized products through its MyMagazine website and flyer offering recipes and other content based on a household’s shopping behavior and interest. The retailer is also hoping to connect with consumers by scaling its recently tested prepared meal kit offering and improving customers service.

“We are investing in our people. We are improving customer service by both increasing labor hours in certain areas and increasing starting wages in certain markets,” McMullen said. “Taken together, these steps will improve the customer experience and improve retention. I share these examples to demonstrate that we are laser-focused on providing our customers with the right value proposition.”

Kroger’s earnings call came a day before the food industry was rattled with the news of Amazon’s acquisition of Whole Foods. The retailer battle has long been intense, with a constant press for innovation, better margins and higher sales. Yet more competitors keep emerging and jumping in skirmish. Walmart is now one of the nation’s leading grocers as it continues to onboard natural and innovative brands into its more conventional space. Even European supermarket giants Aldi and Lidl are a threat after recently announcing aggressive plans to scale their presence in the U.S.

Regardless of the landscape, McMullen said Kroger will continue to stay true to its main commitments.

“This is our Customer First Promise – our commitment to provide friendly service, fresh foods, and low prices, every day,” he said. “And this is what we will continue to do, regardless of the external factors, because it’s what our customers deserve and what we know ultimately that delivers shareholder value.”

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