The Kroger Co. (KR) reported a 20% dip in earnings in the third quarter due to higher costs and expenses as well as adjustment related to change in the market value of its investment in Ocado securities. The bottom line exceeded analysts’ expectations while the top line missed consensus estimates. Following this, the stock inched down 2.20% in the premarket session.
Net income fell 20% to $317 million and earnings declined 11% to $0.39 per share. However, adjusted earnings increased by 9.1% to $0.48 per share.
Sales were $27.67 billion, down 0.3% from the previous year quarter. Excluding fuel, the convenience store business unit divestiture and the Home Chef merger, total sales grew 1.7%. Identical sales, excluding fuel, increased 1.6%.
Looking ahead into the full year 2018, the company lowered its GAAP earnings guidance to the range of $3.80 to $3.95 per share from the prior range of $3.88 to $4.03 per share. This is due to the adjustment for Kroger’s investment in Ocado shares and does not reflect any future changes in the market value of Ocado shares. On an adjusted basis, Kroger maintained its operating earnings outlook in the range of $2.00 to $2.15 per share.
The company also reconfirmed its identical sales guidance, excluding fuel, for the remainder of the year. Kroger expects second-half results to be similar to first-half results. Capital investments, excluding mergers, acquisitions, and purchases of leased facilities, are anticipated to be about $3 billion in 2018.
For the third quarter, gross margin excluding fuel and the LIFO charge decreased 91 basis points from the same period last year but was higher than the 2018 second quarter. Kroger’s shrink rate continued to improve during the third quarter. The gross margin rate reflects the timing and size of price investments, rising transportation costs, and the growth of the specialty pharmacy business.
Kroger’s financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its cash flow to achieve these goals.
Shares of Kroger ended Tuesday’s regular session down 3.76% at $28.64 on the NYSE. The stock has risen over 4% in the year so far and over 9% in the past year.