Kroger Co. Posts a Fourth-Quarter Sales Growth Slowdown

Supermarket giant Kroger (NYSE: KR) posted fourth-quarter earnings results on March 3 that extended its impressive streak of market-beating growth. However, the company suffered a surprising slowdown in comparable-store sales gains.

Here's how the headline results stacked up against the prior year:

Data source: Kroger financial filings.

What happened this quarter?
Sales at existing locations, or comps, improved by 3.9% and marked Kroger's 49th straight quarter of gains by that metric. While that was enough to trounce rivals like Wal-Mart (NYSE: WMT) and its 1% Q4 uptick, and Whole Foods (NASDAQ: WFM) and its negative 2% comps, it was still Kroger's worst result in well over a year:

Comps excluding fuel. Data source: Kroger financial filings.

Here are some other highlights from the quarter and fiscal year:

• Gross margin held steady at 23% of sales.
• Expenses grew at the same pace as revenue, which held net profit steady at 2.1% of sales after it had improved over the prior nine months. By comparison, in the last fiscal year Whole Foods managed a 3.5% net margin and Wal-Mart's was 3.1%.
• The 8% EPS rise marks a slowdown from last quarter's 19% jump.
• Debt declined as a percentage of earnings to 2.08% from 2.14%, leaving Kroger in a flexible position to consider further mergers or acquisitions like 2013's Harris Teeter or the recent Roundy's purchase.
• Capital investments rose to $3.3 billion compared to $2.8 billion in 2014.
• Kroger delivered $1.1 billion to shareholders last year through stock buybacks and dividends, down from $1.6 billion in 2014.

 What management had to say

Image source: Whole Foods.

"2015 was an outstanding year for Kroger," CEO Rodney McMullen said in a press release. "We delivered on our performance targets, grew market share, created 9,000 new jobs, supported our communities, and continued to expand our use of technology to drive growth."

Regarding the worsening profit trend, executives said it was driven by higher "healthcare and pension costs, as well as chargebacks related to EMV credit card transition." And remember, the company had warned investors not to count on its prior profitability improvements to continue indefinitely. "This is not a 'new normal' for operating margin expansion," Chief Financial Officer Mike Schlotman said in December.

Looking forward
Kroger's initial 2016 outlook calls for comps growth of 3% at the midpoint of guidance, not far from the 3.5% it originally forecast for 2015 -- but down significantly from the 5% it actually booked last year. The slowdown will be driven in part by grocery price deflation and by the integration of the Roundy's business and its 151 stores, executives said.

Wall Street seemed to zero in on the comps slowdown and sent Kroger's shares lower immediately following the Q4 release. Yet a 4% sales jump is still among the strongest in the industry, and it's even more impressive when you consider that it followed a 6% comps bounce in the prior-year period.

Kroger might not be growing as fast as it was earlier in the year, but it is still looks well positioned to deliver on management's long-term goal of producing between 8% and 11% earnings gains along with a steadily rising dividend.