(Reuters) - Kroger Co (KR.N), the biggest U.S. supermarket operator, on Thursday slashed its full-year earnings forecast as inventory accounting charges and labor costs rise amid an intensifying price war.
Kroger shares closed sharply lower, off 18.9 percent at $24.56, a level unseen since the summer of 2014, and pulled the entire sector down.
Food retailing is changing rapidly in the United States. Kroger and other traditional supermarket operators increasingly are battling rivals with lower cost, non-union workforces.
Wal-Mart Stores Inc (WMT.N), Kroger’s biggest U.S. rival, is redoubling efforts to lower prices. German discount supermarket chain Lidl will make its U.S. debut this summer and has vowed to undercut rivals, including Aldi.
Elsewhere, Amazon.com (AMZN.O) is expanding its grocery delivery service. And, Blue Apron and other meal kit sellers are nibbling away at the business by sending ready-to-cook food directly to consumers.
Kroger, which is looking for ways to cut costs as it selectively raises wages to retain workers, said talks with labor unions would be “challenging” this year as it aims to maintain “competitive cost structures.”
“We will not lose on price,” Kroger Chief Executive Rodney McMullen said in a statement.
The retailer, owner of supermarket chains such as Ralphs and Harris Teeter, now expects adjusted earnings of $2.00 to $2.05 per share for the year ending January 2018, down from the $2.21 to $2.25 previously forecast.
Kroger estimated a charge related to inventory valuation accounting of $80 million, significantly higher than its initial estimate of $25 million. The change comes as food costs, which had been falling, begin to rise.
Analysts say the company is in for tough year.
“We expect the pricing environment to get more competitive in 2017 ... causing Kroger’s profits to remain pressured,” Moody’s Vice President Mickey Chadha said in an email.
Kroger’s forecast revision overshadowed better-than-expected first-quarter same-store sales.
Excluding fuel, sales at Kroger’s stores open for at least a year dipped 0.2 percent in the company’s first quarter, ended May 20. That was less than the 0.7 percent drop analysts expected, according to Consensus Metrix.
Net earnings attributable to Kroger fell by more than half to $303 million, or 32 cents per share, in the quarter.
The company recorded charges totaling $243 million related to pension plan withdrawal liabilities and voluntary retirement of employees.
Excluding items, the company earned 58 cents per share.
Sales climbed 4.9 percent to $36.29 billion.
Additional reporting by Sruthi Ramakrishnan in Bengaluru; Editing by Sai Sachin Ravikumar