Kroger's $3 billion splurge hits profit outlook, shares slide

(Reuters) - Kroger Co projected annual profit below Wall Street estimates on Thursday, as the grocer spends billions of dollars on modernizing its stores and delivery to compete better with Walmart and Amazon.

Its shares slid 12.4 percent in morning trade after the retailer also reported a 10 percent fall in fourth-quarter revenue and lower-than-expected earnings for the first time since October 2017.

Kroger has been ramping up spending at its mainstay grocery business to overhaul store layout and improve online sales and doorstep delivery.

Indeed, costs to open new warehouses and launch an in-house delivery service hurt profits in the fourth quarter, Kroger Chief Financial Officer Michael Schlotman told CNBC in an interview.

Additionally, Kroger has launched deliveries in self-driving vehicles as part of a pilot Arizona project, teamed up with Microsoft to introduce shelves that play video and started using automated robot warehouses for delivery.

Such moves are expected to help Kroger better compete with the likes of Amazon, which is looking to expand in the food business according to media reports.

The Cincinnati-based grocer, which also runs gas stations, plans to invest between $3 billion and $3.2 billion this year, excluding acquisitions, compared with the $3 billion it spent last year.

The rising costs resulted in its full-year earnings forecast of between $2.15 and $2.25 per share falling short of Wall Street expectations of $2.26.

Still, Schlotman sounded optimistic in the interview.

“Eleven million people a day come through our stores on average, they live within two miles of one of ours stores,” he said. “We do a good a job than anybody else of getting products close to their house.”

Fourth-quarter net income plunged to $259 million from $854 million a year earlier. Excluding one-time items, the company earned 48 cents per share, below analysts’ estimates of 52 cents.

Revenue fell to $28.09 billion, missing estimates of $28.38 billion, mainly due to higher gas prices that discouraged customers from buying fuel.

(This story corrects to Chief Financial Officer from Chief Executive Officer in the fourth paragraph).

Reporting by Nivedita Balu in Bengaluru; Editing by Sai Sachin Ravikumar