15 SepKR Review after 8.5% Drop Today

Changing shopping habits and aggressive discounting by competitors led Kroger Co. to change its pricing strategies on the fly, contributing to disappointing fiscal second-quarter earnings.
The U.S. supermarket operator also cut its fiscal 2009 earnings guidance, as sharply falling prices in areas like produce and dairy also contributed to weak sales and margins in the second quarter. Still, it maintained full-year revenue guidance, projecting a sales increase of 3% to 4% at stores open five full quarters.

Today, Kroger (KR)  is blaming the changing shopping habits and aggressive discounting by competitors.

Kroger Co. shot from the hip and reduced prices at many of its outlets. This was a contributing factor leading to a disappointing fiscal second-quarter earnings. However, Excluding fuel, sales actually rose 3.5 percent!

KR also cut its fiscal 2009 earnings guidance blaming sharply falling prices in produce and dairy in the second quarter. KR maintained full-year revenue guidance, projecting a sales increase of 3% to 4% at stores open five full quarters.

Kroger’s net income fell to $254.4 million, or 39 cents per share, in the second quarter, ended August 15, from $276.5 million, or 42 cents per share, a year earlier.

For the year, the company now expects earnings of $1.90 to $2.00 a share, down from its previous forecast of $2.00 to $2.05. Analysts’ average forecast is $2.04, according to Reuters Estimates.

Kroger, and competitors are cutting prices to lure budget-oriented customers. “We remain confident in our strategy. The number of loyal households we serve and the number of items they are buying in our stores grew during the quarter,” Kroger Chairman and Chief Executive David Dillon said in a statement.

J.P. Morgan analyst Charles Grom said in a client note, “This strategy is the right one to adopt during times like these … but can be painful to shareholders along the way.”

I agree with JP, but I think the payoff will be felt sooner than later. I’m holding on to my 1/2 KR position.

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