Dive Brief:

• Kroger reported a same-store sales decline of 0.2% in its first quarter earnings report. This marks the second straight quarter of same-store sales declines for the company, but an improvement over the 0.7% decline last quarter.
• The grocer’s revenues dropped 22% compared to the same quarter last year, from $696 million to $545 million, while sales increased 4.9%, to $36.3 billion.
• CEO Rodney McMullen said same-store sales are expected to accelerate as the year goes on. "We are driving our strategy of lowering costs to reinvest in ways that provide the right value to our customers,” he noted in the earnings release. “We're pleased that identical supermarket sales in the last nine weeks of the first quarter were positive, and that has continued in the second quarter to date."

Dive Insight:

Kroger’s same-store sales decline was the second straight quarterly decline for the company following a 13-year run of gains. But crucially, the 0.2% decline was an improvement over last year’s Q4, indicating that deflation is easing and the company’s merchandising strategy and service expansions are gaining traction.

At the same time, Kroger’s 22% profit drop indicates the toll that competition is taking on the retailer. As analysts have noted in the past, more and more grocers are catching up to Kroger’s data-focused retailing model. Walmart, meanwhile, just reported its best same-store sales performance in grocery in three years, and is taking aim at Kroger with new price cuts.

To stay ahead of these competitors — as well as fast-growing discounters Aldi and Lidl, Kroger has tightened up its pricing while also expanding its services. The Cincinnati-based retailer recently cut prices on more than 3,000 store items in its Columbus division, and has nixed programs like senior discounts in favor of price reductions. Kroger has also expanded capital-intensive services like its ClickList e-commerce platform, which is now available in hundreds of company stores.

In a research note, Moody’s vice president Mickey Chadha said he expects to see revenue pressure on Kroger increase as Walmart, Aldi and Lidl continue to disrupt the industry.

“We expect the pricing environment to get more competitive in 2017 as value discounters like Aldi expand, players like Lidl enter the market and Walmart flexes its pricing muscle to gain market share,” he wrote.

Even with competition increasing, many expect Kroger to deliver improving financial results in the quarters ahead. The company’s size gives it significant purchasing and expansion efficiencies. It recently benefited from the closing of regional grocers like Marsh. There, Kroger snapped up 11 stores in a crucial Midwestern market for the company.

Put plainly, Kroger is a forward-thinking retailer that is well diversified. In addition to a ClickList platform that’s beating many competitors to become the all-important first service to market, the company is leveraging a variety of formats; piloting cutting-edge in-store technology; and increasing its sales of local products, meal kits and other trendy items. 

Kroger's disappointing quarter pulled the grocer's stock down $5.26, or 17.4%, to $25.02 per share. Shares in other supermarket operators also declined including Sprouts, down 8%; Whole Foods, declining 6.3%; Supervalu dropping 4.8%; and Ingles slipping 4.7%.