Supermarkets May Not Be So Super Investor Place

Supermarkets May Not Be So Super Investor Place

Kroger (KR) has announced its fourth-quarter and full-year 2009 results, and excluding gasoline sales, the company's sales at identical stores increased by 1.2%. EPS fell from $0.53 in the year-ago quarter to 39 cents in the 2009 fourth quarter. Analysts had been looking for 34 cents.

Full-year figures are less inspiring. The company reported EPS for the year of $1.71, excluding items that cost shareholders $1.10/share. That figure is somewhat better than the anticipated $1.66 EPS, but compared with 2008's full-year EPS of $1.91 excluding items, Kroger is not pointed in the right direction.

And the company made that clear in its announcement, when it offered 2010 EPS guidance of $1.60-$1.80, where the consensus has been 2010 EPS of $1.79. Previous guidance had been $1.60-$1.70, so while the change looks positive, it's being interpreted as a downturn.

Kroger's statement on prospects for 2010 note that the company's results depend to some extent on "inflation or deflation in product and operating costs." In other words, if prices go up Kroger could lose, and if prices go down the company could also lose. Not a pretty position to be in.

Other supermarket stocks are in roughly the same position. Safeway (SWY) is also predicting that 2010 results could be lower than expected, even though identical-stores sales gained 1% this year. In 2008, Safeway identical-stores sales were down 2.5%.

Grocery stores face the same issues as other retailers. Cautious consumers looking for the lowest prices force stores to accept lower margins in the hope that traffic and market share will increase.

Competition from club and warehouse stores like Costco Wholesale (COST) and BJ's Wholesale Club Inc. (BJ) push on grocery margins from one direction. The other end of the squeeze play comes from Wal-Mart Stores Inc. (WMT), which has grown to become the country's largest grocery store chain. Wal-Mart can afford to price grocery items aggressively in its Supercenter stores, at the same time that it moves more goods through its Sam's Club stores, where margins are better.

Neither Safeway nor Kroger has stores in developing nations like Brazil and China where where growth is much higher than in the U.S. International players like Wal-Mart have a big advantage here..