When a steady performer like a well-run supermarket chain says the future looks too murky to predict, investors don’t stick around to learn more.

Kroger ’s KR 1.33% fiscal second quarter results were reasonably good. Sales of $26.6 billion topped analyst expectations, and earnings of 39 cents a share matched forecasts, though they were down from last year. Same-store sales excluding fuel were up 0.7% from a year ago, after two straight quarters in the red. Digital sales more than doubled from a year earlier, albeit from a low base.

The largest U.S. grocer by store count also affirmed its full year profit guidance. That is as far as it would go, which reignited every fear among investors about Amazon and aggressive European chains thrashing the industry. Kroger shares fell 7.5% on Friday, and are now down nearly 40% so far this year.

Kroger pulled its long term guidance of 8% to 11% per-share earnings growth and an increasing dividend, due to a “dynamic operating environment.” The price pressure is already happening. Gross margin fell 30 basis points from a year ago to 21.7%. The net profit margin was 1.3% in the quarter, which doesn’t leave much room for increased competition.

Kroger is cutting capital spending by $600 million over the next two years. That will bolster the chances of maintaining an investment grade credit rating, but that might come at the expense of shareholder returns.

Kroger trades at less than 11 times this year’s profit forecast. But stock prices weigh cash flows over a longer time horizon, which are now very much in question.

Give the supermarket chain credit for being honest about the outlook. That honesty validated fears that Amazon and Europeans Lidl and Aldi will combine to hammer profits in what was once a low-risk industry. The other problem with Kroger’s assessment is that it will linger for some time over the company making it hard for investors to know when, if ever, it is safe to go back in.

The big risk is that supermarkets go the way of apparel retailers, most of which have declined steadily as shoppers shift their spending online. When shares of a successful company fall this much there is a temptation to buy but with Kroger’s outlook that is a temptation to be avoided.

Write to Charley Grant at [email protected]



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