By Heather Haddon
Kroger Co.'s stock dropped 12% on Thursday as the grocer's investment in online operations to compete with Walmart Inc., Amazon.com Inc. and other retailers cut into profit and disappointed investors looking for higher share buybacks and dividends.
The largest U.S. supermarket chain is struggling to invest in online operations and introduce new products at its 2,800 stores while also generating enough profit to keep investors happy.
Kroger reported a fourth-quarter profit of $854 million, up from $506 million a year earlier. But gross margins were down in the quarter from a year earlier, a disappointment after rising in the preceding three-month period as the Cincinnati-based grocer cracked down on costs. Telsey Advisory Group said tougher competition from big retailers and discounters was hurting Kroger.
"External pressures continue to weigh on the fundamentals," Telsey wrote to investors, "particularly the heightened competition from Walmart, Amazon-Whole Foods, Aldi, Lidl, and others."
Chief Executive Rodney McMullen said investments in online ordering were critical to Kroger's future, and would take two or three years to bear fruit. "We are incredibly focused on the customer of the future," Mr. McMullen said in an interview. The company said it expects to be more profitable in its 2019 or 2020 fiscal years.
Mr. McMullen said Kroger's shares were hurt on Thursday by unfounded analyst expectations that the company would spend the windfall from federal tax changes on improving profitability. Instead, he said, Kroger will devote some $400 million in savings under the new law to shareholder dividends and better wages and benefits.
Rupesh Parikh, an analyst at Oppenheimer, said that was indeed a surprise to many shareholders looking for Kroger to buy back shares or pay dividends to shareholders. "We believe some in the market assumed minimal reinvestment," he said.
The steep drop in Kroger's stock was its largest since June, when the company reported weak sales early last year. Kroger shares fell further that month when Amazon said the next day that it was buying Whole Foods Market. "We think the share price decline makes sense and reflects a much more realistic assessment of Kroger," Mr. Parikh said.
Other grocers have also disappointed investors after making heavy investments in new products and means of reaching customers that are weighing down their businesses. Walmart's shares surged earlier this year on expectations for its online sales potential, then tumbled last month after that business grew less than expected. Target Corp. on Tuesday reported heavy spending had hurt profits more than expected. And Dollar Tree Inc. on Wednesday missed earnings and sales expectations at comparable stores.
Shares in Supervalu Inc. and Sprouts Farmers Markets Inc. fell some 3% on Thursday, while Weis Markets Inc. fell nearly 5%. General retailers were mixed, with Target and Costco Wholesale Corp. down around 2% and Walmart up 0.6%.
Like many retailers, Kroger has seen commodity prices, freight costs and wages cut into its bottom line recently. Merchandising costs rose 13% in the fourth quarter and operating costs jumped 33%, while total sales rose 12%. Same-store sales excluding fuel grew 1.5%, slightly ahead of the consensus forecast from analysts of 1.4% growth.
Mr. McMullen said the company was urging suppliers to cut costs and deliver products on time.
For the current year Kroger expects per-share earnings of $1.95 to $2.15 on same-store sales growth of 1.5% to 2%. Excluding the impact of the new federal tax legislation and other items, earnings rose 19% to 63 cents a share.
Imani Moise contributed to this article.
Write to Heather Haddon at email@example.com