Yesterday, shares of Kroger Co. (KR) slid 7.5% to close at $20.46 after the company reported lower-than-expected second-quarter results amid a crumbling economy, plagued by rising unemployment and waning consumer discretionary spending.

Kroger’s quarterly earnings of 39 cents a share missed the Zacks Consensus Estimate of 43 cents. It was also a 7.1% year-on-year drop from the 42 cents per share reported in the prior-year quarter. Net profit fell 8% to $254.4 million.

Operating profit slipped 8.6% to $499.1 million due to higher operating, general and administrative expenses (up 2.8%) and depreciation and amortization charges (up 6.1%), partially offset by lower merchandise costs (down 2.9%) and rent (down 0.5%).

The leading US grocery chain experienced a sharp decline in prices of items like dairy products. Moreover, the intensifying price war among grocery stores to lure budget-constrained consumers compelled Kroger to cut prices, hurting its quarterly sales and margins.

Total revenue, including fuel center sales, fell 2% to $17,735.4 million, but rose 3.5% sans fuel. Excluding fuel center sales, comparable supermarket sales climbed 3% to $14,815.8 million, whereas identical supermarket sales (stores that are open without expansion or relocation for five full quarters) grew 2.6% to $14,341.2 million.

Including fuel center sales, comparable supermarket sales slid 1.3% to $16,408.2 million. Identical supermarket sales dipped 1.6% to $15,867.3 million.

Kroger reiterated its identical supermarket sales (sans fuel) growth of 3% to 4% for fiscal 2009. However, the company trimmed its full-year earnings guidance to a range of $1.90 to $2 a share, down from its prior view of $2 to $2.05 a share.

Kroger’s conservative outlook underlines the raging competition among grocery stores which have been lowering prices and offering deals to consumers, as they vie with the nation’s largest retailer Wal-Mart Stores (WMT).

Retailers worldwide are feeling the pinch of the slowdown triggered by the worst economic crisis since the Great Depression. Heavy job losses have transformed the way consumers used to shop. Cash-strapped consumers are now prioritizing their purchases, trading one national brand for a cheaper brand.

Kroger ended the quarter with cash and cash equivalents of $997.1 million, and long-term debt of $7,539 million, representing debt-to-capitalization ratio of 56.5%.

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