Kroger profit rises 3.4 percent on sales growth

By: AP
By: AP

CINCINNATI (AP) -- Kroger Co., the nation's largest traditional grocery chain, said Tuesday that its second-quarter profit rose 3.4 percent as a slowing economy prompted people to eat at home more often and try more store brands. The results sent the stock up 5 percent.

Kroger has added to frequent-customer incentives for store discounts and cheaper gas at its own stations, along with offering more store-brand items and prepared meals for people trading down in price and cutting back on eating out. The company said sales were strong for its deli, bakery and prepared foods, and that store-label items accounted for a record 26 percent of its grocery sales.

"In this economy, customers are much more willing to try a private label item, and we're seeing signs that this is happening more and more as the year progresses," David B. Dillon, Kroger's chairman and CEO, told investors in a conference call.

For the three months ended Aug. 16, Kroger earned $276.5 million, or 42 cents per share, up from $267.3 million, or 38 cents per share, a year earlier. Kroger reported second-quarter revenue of $18.1 billion, up nearly 12 percent.

Analysts surveyed by Thomson Reuters had expected earnings of 41 cents per share on revenue of $17.63 billion.

The company said sales at stores open at least five quarters, considered a key indicator of a retailer's strength, rose 4.7 percent excluding fuel, and 9.7 percent including fuel sales for the quarter.

Dillon said Kroger's three-tier store-brand food offerings, which include a low-price "Value" line, help amid continued price increases for produce and other foods. Kroger has recently added foods from three-minute microwave pizzas to higher-end organic meats, giving it more than 14,400 store-brand offerings.

Kroger also uses a variety of store formats, from no-frills, discount stores to sprawling suburban "marketplaces," and Dillon said the company was seeing sales jumping in the low-price stores. He said the company also is benefiting from being able to better cater to customers' tastes with data accumulated from use of its loyalty cards.

"While customer behavior continues to change, we believe there's an opportunity for Kroger to gain share in this environment," Dillon said.

Goldman Sachs analyst John Heinbockel described Kroger as "a calm port in a storm" amid current U.S. consumer weakness.

"A very impressive performance compared with virtually any other retailer," he said in a note to clients.

Kroger shares rose $1.40, or 5.3 percent, to $27.99, near the center of their 52-week range of $23.39 to $30.99.

For the first half of fiscal 2008, Kroger earned $662.5 million, or $1 per share, up 9.7 percent over $603.8 million, or 85 cents per share, last year. Total sales were up 11.7 percent, to $41.2 billion, and identical-store sales, excluding fuel, rose 5.3 percent.

Kroger confirmed its fiscal year 2008 earnings guidance of $1.85 to $1.90 per share. Analysts are expecting $1.92 a share for the year.

The company said it's too soon to assess the impact of Hurricane Ike and its remnants on second-half results. The storm disrupted Kroger operations in Texas and several inland states including Ohio, causing wind damage and power outages that forced some stores and plants to shut down temporarily and lose outage-spoiled food, the company said in a regulatory filing Tuesday.

Cincinnati-based Kroger operates 2,474 supermarkets and multi-department stores in 31 states, under two dozen local banners that include Ralphs, Fred Meyer, Food 4 Less, Fry's, King Soopers, Smith's, Dillons, QFC and City Market.

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