The country's largest supermarket operator, Kroger (NYSE:KR), reported disappointing second-quarter earnings this morning. The ongoing fierce competition from the likes of discounter Wal-Mart (NYSE:WMT) and warehouse club Costco (NASDAQ:COST) (which is a Motley Fool Stock Advisor holding) combined with rising labor costs to hurt results. According to the company, the outlook for the remainder of the year doesn't look much better, either.

Kroger earned $190 million for the period ended August 16th, down 28% from $264 million in the prior quarter. Per diluted share, that's $0.25 versus $0.33. Excluding charges in both quarters, Kroger earned $0.31 compared to $0.34.

Total sales for Kroger grew 3.6% to $12.4 billion. Comparable food-store sales, excluding fuel, dropped 0.4%. Identical food-store sales (not counting expansions and relocations), excluding fuel, declined 0.9%.

Operating costs expanded to 19.4% of sales, up from 18.6% in last year's Q2. Higher health care, pension, and other employee costs are affecting Kroger and other food retailers more than they are Wal-Mart, because of the discount giant's non-unionized work force.

As if Wal-Mart's muscle with suppliers for the lowest possible inventory costs wasn't enough to contend with, the labor situation is something else supermarkets are forced to address. The skinny net margins inherent in this industry don't leave much room for maneuvering, unfortunately.

Kroger reduced its full-year earnings estimate from $1.55-$1.63 to $1.50-$1.58, saying that the first set of projections didn't include certain charges. The company also said that it will likely achieve earnings in the low end of this range, and could possibly earn as little as $1.45 a share for the year.

Though Kroger is the industry leader, and has been consistently paying down its debt and buying back shares, investors weren't thrilled with what they saw today. Shares were off around 7% in late morning trading.