UPDATE 5-Kroger fuels supermarket sector price war jitters

* Q3 EPS 32 cents, matches Wall Street’s view

* Revenue, including fuel, up 5.9 percent

* Narrows full-year EPS view to $1.65 to $1.78

* Shares fall more than 8 percent
(Adds details on grocery price changes; updates share
activity)

By Lisa Baertlein

NEW YORK, Dec 2 (BestGrowthStock) – Kroger Co (KR.N: ) cut some
prices in its latest quarter, fueling worries that the slow
U.S. economic recovery will cause another flare-up in the
supermarket industry’s intense and profit-denting price war.

The largest and top-performing mainstream U.S. grocery
chain also forecast full-year earnings that could miss Wall
Street’s estimates, and shares fell more than 8 percent.

A decline in Kroger’s supermarket selling gross margin
stoked concerns that grocers may again be slashing prices to
lure customers who are still recovering from the recession.

Supermarket selling gross margin is a measure of how
competitively a grocer prices the products it sells. The 13
basis point decline in Kroger’s latest quarter suggested that
the grocery chain was pricing more competitively.

“Their margins were not as good as in the past. This is one
of the factors that contributed to the sharp drop in the
stock,” said TD Ameritrade chief derivatives strategist Joe
Kinahan.

Kroger also narrowed its full-year profit forecast to a
range of $1.65 to $1.78 per share, versus $1.60 to $1.80 a
share previously. Analysts on average forecast $1.78 a share,
according to Thomson Reuters I/B/E/S.

Supermarkets need some price inflation to support healthy
profit growth and a broad-based rise in grocery prices has yet
to materialize.

Kroger, which has been outpacing rivals like Safeway Inc
(SWY.N: ) and Supervalu Inc (SVU.N: ), has made continuous efforts
to keep its every day prices low and downplayed the selling
gross margin decline. CEO and Chairman David Dillon said the
industry’s “intense” competition was not getting worse.

Executives said Kroger had been passing on higher costs for
select name-brand grocery items and fresh foods like meat and
produce. Nevertheless, they said overall prices for packaged
food and other items in the center of the store have been
falling, largely due to increased promotional spending by
national brand suppliers.

Analysts doubt that all grocers and food makers will be
able to pass on higher costs for things like dairy, grains,
sugar and cocoa to cautious shoppers who are still grappling
with high U.S. unemployment.

Beyond that, Supervalu in October said it was preparing a
new round of price cuts to win back lost customers, which the
markets interpreted as raising the risk for a renewed price
war. [ID:nN19113545]

“The economic recovery is slower and weaker than we
anticipated it would be at this point in the year. Job growth
remains elusive and fuel prices have risen,” Dillon said on a
conference call with analysts.

Weak employment and higher gas prices are affecting
consumer confidence and grocery budgets, Dillon said, adding
that Kroger would manage its business with the expectation that
economic conditions would remain challenging through next
fiscal year.

Kroger shares were down 8.4 percent, or $2.02, at $21.84 in
afternoon trading on the New York Stock exchange. Safeway and
Supervalu had declines of 5.5 percent and 1.3 percent,
respectively.

PROFIT MATCHES

Kroger, whose stores include Kroger, Ralphs, King Soopers,
Fry’s and Food 4 Less, said net profit for the third quarter
that ended Nov. 6, was $202.2 million, or 32 cents per share,
matching what analysts polled by Thomson Reuters I/B/E/S had
expected.

A year earlier, Kroger reported a net loss of $874.9
million, or $1.35 per share, primarily due to charges resulting
from a goodwill write-down.

Cincinnati-based Kroger’s total sales, including fuel,
increased 5.9 percent to $18.7 billion, ahead of the $18.5
billion analysts had expected.

Closely watched identical supermarket sales, without fuel,
increased 2.4 percent. Kroger’s identical-store sales include
supermarkets open without expansion or relocation for five full
quarters.

Kroger also narrowed its 2010 forecast for identical
supermarket sales growth, excluding fuel, to between 2.5
percent and 3 percent from a prior range of 2 percent to 3
percent.

The company reduced this year’s capital spending budget to
$1.8 billion to $2 billion, versus $1.9 billion to $2.1 billion
previously. In a separate statement, it gave an outlook for
pension plan expenses. [ID:nWNAB6406]
(Additional reporting by Doris Frankel in Chicago, editing by
Gerald E. McCormick, Maureen Bavdek, Dave Zimmerman)

UPDATE 5-Kroger fuels supermarket sector price war jitters