Kroger (KR -0.91%) posted quarterly results this week that reflected the most difficult operating environment for the supermarket chain in over a decade. Sales growth slipped into negative territory, profitability shrank, and the company lowered its earnings forecast to well below its long-term targets.

More on that profit projection in a moment. But first, here's how the headline results stacked up against the prior-year period:

Metric Q1 2017 Q1 2016 Change (YOY)
Revenue  $36.3 billion  $34.6 billion 4.9% 
Net income  $303 million $696 million  (56%)
Earnings per share  $0.32 $0.71  (55%)

Data source: Kroger financial filings. YOY = year over year.

What happened this quarter?

Kroger's comparable-store sales growth ticked lower to mark the first time in over 50 quarters that this key metric was negative.

A man shopping for groceries.

Image source: Getty Images.

Here are the highlights from the quarter:

  • Kroger's 0.2% comps decline showed a return to a trend of sales growth deceleration that's been pinching results for over a year. Comps rose by 1% in the prior quarter and were above 5% as recently as the third quarter of 2015.
  • Overall sales rose thanks to increased fuel prices and the extra revenue from its recent acquisition of ModernHealth.
  • Gross profit margin fell by less than a percentage point to 22.2% of sales.
  • Due to rising operating expenses and inventory charges, operating profit was cut nearly in half, with margin falling to 1.7% of sales from 3.5% a year ago.
  • Kroger's bottom-line profitability dropped to below 1% from 2% last year.

What management had to say

In his prepared remarks, CEO Rodney McMullen didn't stress the deflation that's been pushing sales growth figures lower across the industry. Instead, executives hinted at a brutal competitive environment that's forcing retailers to offer deep price cuts to maintain market share.

Customers are demanding "prices that enable them to stretch their budgets," McMullen said in a press release. "We are committed to delivering that experience," he continued, "and we will not lose on price." 

As for revenue trends, executives were encouraged to see comps returning to positive territory later in the quarter and holding that momentum into the current quarter.

Looking forward

Kroger is hunting for ways to cut costs so it can keep its prices low without sacrificing profits at the same painful pace shareholders witnessed this quarter. The good news is the company still targets overall positive comps of just below 1% for the full year. Its major growth initiatives, including heavy promotion of corporate brands, increased fuel sales, and an expanded Simple Truth organic franchise, remain in place.  

However, profits will be far lower than management had expected, as Kroger pushed its 2017 adjusted earnings target down to a range of $2 to $2.05 per share. The prior forecast had called for between $2.21 and $2.25 per share of profit.

The new outlook promises a rare earnings slump for Kroger in 2017 despite the fact that the fiscal year includes an extra week of operating results. Its long-term goals target profit growth of 8% to 11%, and the retailer outperformed this mark by a wide margin in each of the last two years.

Management is willing to take a step back in 2017, though, as it meets the challenge of intense price-cutting by rivals with its own promotions. While painful to the bottom line, that strategy offers the company its best shot at producing its 13th consecutive year of market-share gains.