Kroger's 13-year winning sales streak ends

Kroger reported a $2 billion profit for 2016 – a 3.1 percent increase from the previous year.

Total sales rose 5 percent to $ 115.3 billion, reflecting the acquisition of Milwaukee-based Roundy's in December 2015.

Identical-store sales excluding fuel rose 1 percent during the fiscal year ended Jan. 28, but actually declined 0.7 percent in the fourth quarter – snapping a 13-year winning streak of market share growth. Kroger's razor-thin 0.1 percent gain in its third quarter was its 52nd consecutive quarter of identical store sales increases.

Kroger considers identical-store sales without fuel a critical performance measure because it strips out increases in sales from newly built or expanded stores. Supermarkets that fall into the "identical" category have been open without major changes for at least five full quarters.

Kroger's stock dropped as low as $30.26 a share, down 5.6 percent, in Thursday trading before partially rebounding. Shares closed at $30.67, down 4.3 percent.

The Cincinnati-based supermarket chain battled food price deflation through 2016, which depressed sales.

Kroger's 53 cents of earnings per diluted share during the fourth quarter matched Wall Street expectations, while sales exceeded forecasts. Analysts expected Kroger to report a $505 million profit before one-time items on sales of $27.4 billion, according to Zacks.

CEO Rodney McMullen said Kroger would cut costs make the grocer more competitive. The company said it is wrapping up a voluntary retirement offer to 2,000 non-store workers previously announced in December, adding 1,300 are ultimately expected to accept it.

"Some times are just more challenging than others, and last year certainly did not end the way we expected at the start," McMullen told analysts on a Thursday conference call. "We are obviously disappointed with our identical supermarket sales number in the fourth quarter."

Looking ahead, Kroger expects the operating environment in the first half of 2017 to be similar to the second half of 2016, but to improve later in 2017. The company said it expects identical-store sales excluding fuel to be flat to increasing as much as a modest 1 percent.

The company also predicted its earnings per share would range between $2.21 to $2.25 – indicating the company expects to turn a $2.1 billion profit excluding one-time items.

During the conference call with analysts, chief financial officer Mike Schlotman said the sales metric took a hit due sagging food prices – had deflation not been a factor, Kroger would have increases identical sales. He also the metric was skewed by Kroger's capital plan – the company relocated or expanded 35 strong-performing stores, taking them out of our identical supermarket sales calculation.

"Looking at ID sales, deflation was the primary driver of our negative results for the quarter," Schlotman said.

Kroger also showcased its aggressive rollout of ClickList and a similar service, the supermarket's buy-online-pickup-at-the-store service, to 420 new stores for a total of 640 stores nationwide.

"We could stop all of these investments, given the headwinds our industry is facing. That might make our results look better today, but we are playing for the long term," McMullen told analysts.

Kroger said it would spend less money in 2017 on building new stores and renovating existing ones. The company expects capital investments, excluding mergers, acquisitions and purchases of leased facilities, to be in the $3.2 to $3.5 billion range for 2017, compared with the $3.6 billion spent in 2016.

The company noted it hired 12,000 workers last year for a total of 443,000 employees at nearly 2,800 stores in 35 states.