What happened
Kroger (KR -0.39%) shareholders underperformed the market this week, with the stock falling 10% through trading on Thursday compared to a 3% drop in the S&P 500, according to data provided by S&P Global Market Intelligence.
The decline wasn't due to anything Kroger said about its business, but instead came from discouraging news from a few of its retailing competitors.
Image source: Getty Images.
So what
Walmart and Target each reported earnings this week, and those announcements together painted a mixed picture about consumer spending.
Walmart, Kroger's main competitor, said that customer traffic is holding up so far in 2022, but that costs are eating away at profitability. Target also noted strong traffic while warning about rising costs and a tilt in demand away from some higher priced products.
The fear for investors is that these pressures will eventually show up in Kroger's operating results, mainly through declining profitability and reduced average spending per shopping trip. Rapidly shifting consumer preferences also raise the risk that the chain will have to mark down products due to excess inventory.
Profit margins have been rising for the supermarket giant in recent quarters but will likely fall if it is forced to sacrifice short-term earnings to keep inventory moving through its system, as its peers are doing.
Now what
Kroger's last earnings report, in early March, showed that the company was dealing well with inflation through the end of fiscal 2021. We'll get our first look at the 2022 performance in the chain's mid-June update.
That announcement might reveal worsening earnings trends for the consumer staples giant. Investors should stay focused on the long-term outlook for Kroger, which has successfully navigated a wide range of selling conditions, including recessions, in the past.
