How Lower Food Prices are Eating at Kroger, Supervalu and Sprouts Farmers Market

Photographer: Daniel Acker/Bloomberg
Photographer: Daniel Acker/Bloomberg

In recent months, quick service restaurants and casual dining chains have been been complaining that deflation in the grocery aisles has kept customers from dining out. In theory, this should be good for grocers: fewer people eating out should mean more people eating in, on food they purchased from their local supermarket. And yet, shares of Kroger, Supervalu and Sprouts Farmers are trading at or near their 52-week lows thanks to the very thing that’s been plaguing the restaurant sector: the falling price of beef, pork and other food commodities.

Over the past week, Kroger, Sprouts Farmers Market and Supervalu have all lowered their fiscal outlooks, each as a result of either “deflation” or a “challenging” operating environment.

“As a result of continued deflation, Kroger lowered its net earnings guidance range to $2.03 to $2.13 per diluted share for 2016,” the company said Friday. Excluding one-time items, Kroger is forecasting full-year earnings per share in the $2.10 to $2.20 range, down from prior guidance of $2.19 to $2.28 per share.

On Thursday, Supervalu announced that because its second quarter business performance has been softer than anticipated, it now expects full-year adjusted EBITDA will fall 5% compared to last year. Prior guidance had called for just an 1.5% decline.

“The second quarter performance of the company’s retail segment has been impacted to a greater than anticipated degree by competitive openings and a challenging sales and operating environment for its stores,” Supervalu said Thursday, noting that it expects its retail segment and Save-A-Lot segment to post second quarter same-store sales that are lower than what was reported in the first quarter. “The second quarter performance of the Company’s Save-A-Lot segment has been impacted by deeper levels of deflation as well as lower levels of SNAP (supplemental nutrition assistance program) benefits compared to the first quarter,” the company said.

And on Wednesday, shares of Sprouts Farmers Market plunged a whopping 13.6% on the grocer’s announcement that it is no longer forecasting 3% to 4% third quarter comparable store sales growth; instead, Sprouts is predicting that its comps will be flat. Full-year comp growth was slashed to a 1.5% to 2.5% range from prior guidance of 3.5% to 4.5%, and the full-year earnings per share forecast was cut from a range of 92- to 94-cents per share to a range of 83- to 86 cents per share.

“The prolonged deflationary environment, competitive landscape and industry dynamics have prompted heavy promotions across the industry, adversely impacting retail deflation and traffic generation,” Sprouts said.

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SOURCE: Forbes
Maggie McGrath