CINCINNATI—Kroger Co. reported Tuesday its third-quarter profit jumped 18 percent on strong sales but margins at the nation’s largest traditional grocery chain were hurt by what it sells outside stores—gasoline.
Shares slid more than 5 percent after Kroger reported a drop in fuel margins in its third fiscal quarter and only slightly raised its earnings outlook for the full year.
Kroger earned $253.8 million, or 37 cents per share, for the quarter ended Nov. 10, up from $214.7 million, or 30 cents per share, in the year-ago period. The results include a tax benefit of some $40 million, offset largely by lower margins from operations at its 678 supermarket fuel centers and spending on customer initiatives.
Kroger executives told analysts in a conference call that fluctuations in the gas business are common and that the company remains focused on building its business.
Costs of gasoline “change not only every day, but every minute, and that kind of volatility just produces differences in margin,” David B. Dillon, Kroger’s chairman and chief executive, told analysts in a conference call. “It’s the most price-competitive item that we would sell.”
However, Kroger said while grocery product costs increased 3 percent in the quarter, it passed those increased costs along to consumers with higher prices in its stores. Kroger executives also think the grocery business benefits from higher gas costs because people reduce trips.
Revenue jumped 10 percent to $16.14 billion from $14.7 billion in the same quarter last year.
Sales at stores open at least five quarters, considered a key indicator of a retailer’s strength, rose 7.7 percent in the quarter including fuel, 5.7 percent excluding fuel.
Analysts polled by Thomson Financial predicted a profit of 35 cents per share before one-time items on revenue of $15.66 billion.
Kroger, which owns the King Soopers and City Market chains in Colorado, said it now expects its full-year earnings to slightly exceed it previous guidance of $1.64 to $1.67 a share. Wall Street is expecting earnings of $1.71 per share.
Kroger shares fell $1.87, or 6.6 percent, to close at $26.47 Tuesday. They have traded between $22.76 and $31.94 over the past year.
“We are encouraged by the strong same store sales trends and the overall health of the ex-fuel margins, but fuel has been one of the drivers to sales growth, and it needs to be considered when evaluating the arc of (Kroger) earnings,” Morgan Stanley analyst Mark Wiltamuth said in a note to clients.
Kroger credited customer service and loyalty-building efforts for its earnings growth.
“Our strategy continues to deliver earnings growth in a variety of economic and competitive conditions, which underscores the core strength of Kroger’s business model,” Dillon said.
Dillon said Kroger expects slightly expanding operating margins, low double-digit earnings per share growth and identical-store sales growth of 5 percent, excluding fuel sales, for the year.
Kroger has stepped up store remodeling, and technology and training to improve customer service.
Kroger averted a strike during the quarter with a final-hour settlement with the union representing nearly 11,000 workers in its home Cincinnati region, continuing a series of new contracts without a work stoppage in a pivotal labor year for the company.
Kroger operates 2,487 supermarkets and multi-department stores in 31 states under two dozen local banners, including Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith’s, Fry’s, Dillons, QFC and City Market.
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