KR Faces Risk of an Earnings Decline in 2010

Analysts at Morgan Stanley maintain their “equal weight” rating on Kroger Co (NYSE: KR).

Kroger has reported its Q3 results short of the consensus, with a 31% YoY decline in earnings. The company has also reduced its 2009 guidance, indicating that its Q4 results would also miss consensus expectations. Morgan Stanley believes that price competition in the grocery industry would extend into 2010 and delay any industry recovery.

KR’s gross margins have been contracting consistently over the past three quarters due to price discounting. Most major grocers have cut prices in response to Wal-Mart’s plans of widening its price lead over other grocers, the analysts say. Therefore, Kroger’s earnings are at risk of a decline in 2010.