Shares of Kroger Co. slid seven percent last Thursday after the company indicated that lower-priced dairy, meat and seafood products were causing its overall sales growth to slow. Michael Schlotman, CFO and EVP, was prompted to explain to analysts in detail that food deflation wasn't "fundamentally a bad thing."
Same-store sales, which exclude fuel, are expected to grow between 2.5 to 3.5 percent in 2016, down from 5.5 percent seen in 2015.
Identical store sales in the fourth quarter were also slightly worse than forecast, although part of the blame was placed on a shift of the Super Bowl into February and fewer snowstorms this year versus last year.
The share drop came despite earnings in the quarter coming in above Wall Street's consensus targets. The core business in 2016 is also still expected to expand in line with its long-term EPS growth rate of eight to 11 percent.
On a conference call, Mr. Schlotman noted that real growth, or identical supermarket sales less inflation, was up over six percent in the fourth quarter and said a "deeper dive" is required to understand how price movements help and hurt earnings.
For instance, while meat saw deflation of about five percent, the decline made the category affordable for more customers, driving higher volumes and gross profits. Milk was also a drag on identical stores sales last year but generated "good profit" overall for the company.
On the other hand, produce saw inflation of nearly six percent in the quarter but Mr. Schlotman said that wasn't "a good thing" as it pointed to issues around shortages and poor quality.
CEO Rodney McMullen added that inflation is expected to be lower in the early part of the year and higher in the later part.
"When you look back over the past several years, we've had periods of high and low inflation," said Mr. McMullen. "And we've shown that regardless of the environment, we consistently do our job to manage through it and maintain relative pricing."
- Kroger Reports Fourth Quarter and Full Year 2015 Results - Kroger
- The Kroger (KR) W. Rodney McMullen on Q4 2015 Results (Earnings Call Transcript) - Seeking Alpha
- Kroger stock tumbles amid slowing sales - The Cincinnati Enquirer
- Kroger execs: Low inflation a mixed blessing - Supermarket News