Despite cutting prices to compete in a market made more competitive by Amazon.com Inc.'s purchase of Whole Foods Market Inc., Kroger Co. grew its profit margin during its fiscal third quarter, surprising analysts who had expected the grocer's gross margin to shrink.
For the quarter ended Nov. 4, Kroger reported that its gross margin increased 30 basis points over the year-ago period, excluding the impact of fuel sales, an inventory-related charge and a pharmacy acquisition. The profit margin growth followed a contraction of 5 basis points during the same quarter for the company's 2016 fiscal year, and many analysts had predicted that margin at Kroger would shrink for the quarter as the company trimmed prices on its groceries.
Instead, those price cuts were more than offset by the lower prices that Kroger paid suppliers for its products, as well as improving sales of natural and store-brand groceries, both of which tend to have higher profit margin than other products the chain stocks.
"We have become significantly more diligent on lowering our cost of goods in negotiations with our vendors," CFO and Executive Vice President J. Michael Schlotman told analysts during a call to explain third-quarter results.
In recent months, U.S. grocers have seen the wholesale prices they pay for items increase at a faster rate than the prices their customers pay, according to data compiled by the U.S. Bureau of Labor Statistics. Those two dynamics threaten to limit profit margin at grocers already trying to keep prices low in order to compete with Whole Foods, which has cut prices on a range of items since Amazon completed its purchase of the chain in August.
Kroger indicated at its investor day in October that it plans to lower prices on a range of items over the next three years, a message that executives reiterated during the Nov. 30 call. At the conference, the company said that it plans to offset lower prices through improved use of store space and increased digital offerings.
"We have been and will continue to invest in price, and we have a lot of plans in place to figure out ways to pay for that," Schlotman told analysts.
The better-than-expected margin came with net income and revenue figures that also beat analyst expectations, marking a bright quarter for one of the U.S.'s largest grocers by revenue. Shares of the chain, which operates about 2,793 stores under a variety of banners, have slid roughly 29% since the beginning of 2017, according to S&P Global Market Intelligence.
Shares of the Cincinnati-based grocer rose 8.4% to $26.43 in afternoon trading Nov. 30. The company reported its third-quarter results before the market opened.
