Quotes of the Day

Investors dumped shares of Kroger Co. on Tuesday, and selling continued on Wednesday, after the supermarket giant posted third-quarter results that fell significantly short of Wall Street's expectations. Kroger shook up investors when it posted an unexpected loss of $874.9 million, or $1.35 a share, and warned that it didn't expect a significant improvement in its business until the second half of 2010.

Tuesday's plunge was especially sharp, with the stock falling 12%, making it the day's worst-performing stock. Kroger's doom-and-gloom forecast is also causing investors to have jitters about rivals, such as Supervalu and Safeway, whose shares fell 9% and 7%, respectively, on Tuesday. Even shares of Walmart, Whole Foods and Costco did not go unscathed, slipping as well.

"The operating environment has proven to be more difficult than we expected," said David Dillon, Kroger's chairman and chief executive, during a conference call on Tuesday. "We came up short." He cited deflation, cautious shoppers and a surge in competition in explaining the company's weaker-than-anticipated results. Price wars and promotional activity escalated as "more of our competitors expanded to more of the markets we serve," he said. At the same time, customers were buying down and spending less, he added.

Although Kroger gained market share, its bottom line took a hit. "We certainly sold more units, but at much lower retail prices," said Dillon. Prices fell particularly hard on meat, dairy and produce, he said. When charges (related to the writedown of the company's Ralphs division in Southern California) are excluded, Kroger posted earnings of 27 cents a share, which were still far below analysts' consensus estimate of 37 cents a share and the year-ago earnings of 39 cents. Dillon expects business to remain dismal through the first half of 2010, and ratcheted down guidance for fiscal 2009 by 30 cents a share, to a range of $1.60 to $1.70 a share.

"The environment is clearly different from what we have experienced before ... I've not ever seen anything like this," he said. "It's a new game."

Investors were rattled. "Everyone knew the third quarter was going to be quite difficult, with deflation being severe and unemployment going up, but what caught people by surprise was that the fourth quarter isn't settling down," says Scott Mushkin, a managing director at Jefferies & Co. "That was a pretty big shock."

"Kroger's disappointing third-quarter earnings and outlook clearly indicate that the secular challenges facing the supermarket industry continue to intensify," said Credit Suisse analyst Edward Kelly, in a note.

Grocery retailers — Supervalu and Kroger in particular — began slashing prices in the spring in an effort to lure cash-conscious shoppers into their stores, says Mushkin. "People have been trading down aggressively — from sirloin steak to hamburger — which affects grocery sales," he says, and many consumers are actively price-shopping for individual items.

Mushkin believes the sector's recovery ultimately hinges on jobs. "We need the unemployment rate to start falling," he says. "You can't have people shopping at four different stores [to get the best price for a single item] — they need to get back to work and convenience needs to trump price" for grocery retailers to see a significant rebound.

• Janet Morrissey