December 2, 2010
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of grocery chain Kroger (NYSE: KR ) fell as much as 11% earlier today before rebounding slightly after the company reported third-quarter results.
So what: Kroger's profits were right in line with analysts' expectations, but the company fell short on gross margins and in its fourth-quarter guidance. Kroger reduced fourth-quarter top-line earnings estimates and reported a drop of 13 basis points in gross margins, blaming both on a consumer who still isn't willing to spend without reservations.
Now what: The real enemy here is rapidly rising commodity prices. Kroger has the choice of either passing those increasing dry-goods costs onto customers or continuing to discount products to reward the loyal customers. It appears Kroger has chosen the latter. Margins at grocery stores are usually razor thin to begin with, so Kroger's unwillingness to pass along these price hikes to customers could lead to more downward pressure on margins and profits.
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