Kroger Co. will likely show some bruises from an ongoing price war with Wal-Mart Stores Inc. when the supermarket operator reports fiscal first-quarter earnings Thursday.
The key question will be how deep and lasting the bumps will be in order for Kroger to defend its market share. Analysts expect Kroger to continue to face pressure on gross margins this quarter, the result of a round of price cuts over the last year that it has yet to cycle.
The back-half of the year, however, looks better for Kroger as efforts to hold onto loyal customers through previous price cuts pay off.
The wild card comes from the shadow of the world's largest retailer, Wal-Mart. Kroger and other grocers are facing renewed heat from Wal-Mart's latest "Rollback" campaign, which focuses on cutting prices on grocery items. Leading up to Memorial Day, for instance, Wal-Mart heavily advertised a deal for 40-ounce bottles of H.J. Heinz Co. ketchup for $1, down from $2.42.
A recent J.P. Morgan pricing survey of supermarkets in Virginia found Wal-Mart's average price of 31 items fell 3.5% since the end of April, most among the supermarkets measured. That includes Kroger, which cut the average price 2.1%.
Analysts are eager to hear how Kroger has fared as competition ratcheted up, and how the company plans to react. Indications of a need for further price cuts to keep up with Wal-Mart could put more pressure on Kroger. A Kroger spokeswoman didn't return a call seeking comment.
"With the mega-retailer using a very aggressive pricing strategy to turn around its sagging top-line performance, we're keeping an eye on Kroger to see if the company follows Wal-Mart's lead," J.P. Morgan's food retail analyst Charles Grom said.
Kroger is expected to post per-share earnings of 54 cents, according to the latest Thomson Reuters survey, down from 66 cents a year earlier. Revenue is seen rising 6% to a little more than $24 billion, buoyed by higher gasoline prices.
Analyst estimates for identical-store sales, excluding fuel, vary. Hapoalim Securities sees the key metric up just 1% while Jefferies & Co. estimates a 2.5% increase.
Kroger is seen as the best-positioned national grocery chain to withstand Wal-Mart, given that it took steps years ago to offer lower prices. Kroger also invested in service, like making sure customers can move through checkout lines quickly during peak hours, that has built up customer loyalty.
Other analysts see Wal-Mart's price-cutting campaign as an effort to hang onto customers as the economy improves, as evidenced by television ads, rather than broadly lowering the bar on prices.
Wal-Mart's latest price cuts are "designed to drive traffic but not create a price war," BB&T Capital Markets analyst Andrew Wolf said.
wsj.com