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How Has Deflation Affected Kroger’s Comps This Fiscal Year?

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Feb. 23 2017, Updated 2:35 p.m. ET

Talking about Kroger’s falling comps

Kroger’s (KR) same-store sales have witnessed a slowdown recently. Its sales comps have fallen continuously in the last five quarters. Its comps plunged from 5.4% in fiscal 3Q16 to 2.4% in fiscal 1Q17 and 0.1% in fiscal 3Q17. In fact, fiscal 3Q17 was one of the slowest comps quarters for the company.

The primary driver of this persistent fall in comps has been unceasing food deflation.

“Deflation has not only persisted but has increased with overall deflation excluding pharmacy growing from 1.3% in the second quarter to 1.5% in the third quarter,” said Michael Schlotman, executive vice president and chief financial officer of Kroger.

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How has deflation impacted comps?

Food prices fell throughout 2016, making it the first year since 1967 to witness annual deflation in food prices. According to the United States Department of Agriculture, food items such as eggs, beef and veal, and pork recorded falls of 21%, 6.3%, and 4.1%, respectively, in their 2016 prices.

Falling food prices resulted in a promotional environment for grocers as they passed lower food prices on to customers to gain market share. Grocers eventually entered into a price deflation war.

Will comps remain in positive territory?

Kroger’s management is looking for its comps (excluding fuel) to remain positive in fiscal 4Q17. For fiscal 2017, its comps are likely to range between 1.4% and 1.8%. Even for the next year, the company isn’t expecting its comps to enter negative territory.

In comparison, many other players in the food retail space have failed to beat persistent and rising deflation. For instance, premium organic food player Whole Foods Market (WFM), which reported its results in early February, has recorded six consecutive quarters of negative same-store sales.

Those looking to invest in Kroger through ETFs could choose to invest in the First Trust Consumer Staples AlphaDEX ETF (FXG). KR has a weight of ~2.4% in FXG.

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