Even as its revenues rose, its same-supermarket sales increased, and it raised full-year guidance, Kroger (NYSE: KR) saw its shares stumble because third-quarter profits were helped only by a significantly smaller tax expense and a forecast that was still below analyst expectations.
Same-store sales rose 7.7%, if you include the effect that gasoline sales play in the numbers, or 5.7% excluding them. The lower margins on fuel sales continued to depress gross margins, which have been slowly but steadily contracting.
Of course, any company in the food industry these days is feeling its margins squeeze due to the steep hike in wholesale food prices. Dairy costs have been dumping on Kraft (NYSE: KFT), and corn prices continue to rise as more and more ethanol-based fuels are produced. Kroger has been absorbing many of these increased costs, but it won't be long before they are forced to raise prices, because the chain can't keep taking on such increases.
Also, Kroger and other chain grocers like SUPERVALU (NYSE: SVU) and Safeway (NYSE: SWY) are seeing pressure from large discount chains that carry groceries, such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT).
Despite the slimming margins, Kroger managed to grow its bottom line 23% by repurchasing 16.5 million shares, earning $0.37 per share compared with $0.30 last year. Profits were also boosted by the 36% reduction in tax expense the company reported this time around.
Kroger didn't identify the factors that reduced the tax bite this quarter, but it's safe to assume that had it not enjoyed the largesse, profits would have been more constrained. Using the same 37% rate it reported last year, earnings would have been only $0.31 a share -- an increase from last year, yes, but still below analyst expectations. It may have been this fact, combined with the low guidance, that sank the share price today.
The raised but "lower" guidance reflects management's assumption that comps will continue in the 5% range, excluding fuel sales, with an inventory charge substantially higher than previously estimated.
While the economy presents a tough face for consumers, Kroger's push to offer gift cards may not offer as much value as its share price. I stated yesterday that I had trouble seeing the company have much upswing potential at its current valuation, but with the company repurchasing shares at $26, just about what they are selling for now, today's decline could present a good buying opportunity for investors.
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