Supermarket operator Kroger Co posted lower-then-expected quarterly profit and trimmed its full-year forecast as it cuts prices to lure customers, sending its shares down 8.2 percent.

The Cincinnati-based company, which operates stores under its own name as well as Ralphs, King Soopers, Fry's and Food 4 Less, is considered the best-performing U.S. grocery operator.

But executives said the double whammy of intensifying price wars and sharp retail price declines for staples like produce and dairy gnawed at profitability during the second quarter.

Sudden deflation in a highly competitive market can lead to retail prices and product costs that drop quickly, creating lower margins, Chief Operating Officer Rodney McMullen told analysts on a conference call.

Grocery stores, including those owned by Kroger, have been lowering prices as they compete with Wal-Mart Stores Inc , the largest seller of groceries in the United States.

Shares of industry peer Safeway Inc fell 4.4 percent after the Kroger report on Tuesday, while Supervalu Inc was down 2.6 percent. Walmart shares slipped 0.5 percent.

Kroger, and rivals like warehouse store Costco Wholesale Corp , are cutting already comparatively low prices to lure budget-oriented customers, sacrificing short-term results for long-term loyalty gains.

We remain confident in our strategy. The number of loyal households we serve and the number of items they are buying in our stores grew during the quarter, Kroger Chairman and Chief Executive David Dillon said in a statement.

J.P. Morgan analyst Charles Grom said in a client note, This strategy is the right one to adopt during times like these ... but can be painful to shareholders along the way.


Kroger's net income fell to $254.4 million, or 39 cents per share, in the second quarter, ended August 15, from $276.5 million, or 42 cents per share, a year earlier.

For the year, the company now expects earnings of $1.90 to $2.00 a share, down from its previous forecast of $2.00 to $2.05. Analysts' average forecast is $2.04, according to Reuters Estimates.

Total sales at Kroger, which also runs the Littman and Barclay jewelry chains, fell 2.2 percent to $18.1 billion, weighed down by the lower price of the gasoline it sells.

Excluding fuel, sales rose 3.5 percent.

Identical supermarket sales, which Kroger defines as supermarkets that have been open without expansion or relocation for five full quarters, were up 2.6 percent excluding fuel.

This is a solid increase, particularly considering changes in customer behavior and significant deflation in produce and dairy, Dillon said. Company data suggests customers are switching more of their purchasing to Kroger, he said.

(Reporting by Lisa Baertlein in Los Angeles and Brad Dorfman in Chicago; editing by John Wallace)