ECONOMY MUTES PROFIT OUTLOOKS

Several food retailers lowered their earnings forecasts last week, citing the weak economy and increasing competition from both traditional and alternative formats.Fleming Cos., Dallas, on Tuesday reduced its earnings outlook based on the pending sales of its stores, in addition to economic and competitive factors (see story, Page 1). Rival Supervalu, Minneapolis, also lowered its near-term earnings

Several food retailers lowered their earnings forecasts last week, citing the weak economy and increasing competition from both traditional and alternative formats.

Fleming Cos., Dallas, on Tuesday reduced its earnings outlook based on the pending sales of its stores, in addition to economic and competitive factors (see story, Page 1). Rival Supervalu, Minneapolis, also lowered its near-term earnings outlook on Tuesday, followed on Thursday by earnings-forecast reductions from Nash Finch, also based in Minneapolis, and Delhaize Group, Brussels, Belgium. (Delhaize Group generates most of its revenues from the Food Lion, Hannaford Bros., and Kash n' Karry chains in the United States.) Those warnings came in the wake of Cincinnati-based Kroger Co.'s reduced-earnings outlook for the year, which it reported the previous week.

Some analysts pin the blame primarily on the cutback in consumer spending, saying that shoppers kept a tighter grip on their purse strings during the summer months than many retailers had expected them to. In addition, several retailers also have been reporting significant price deflation, which is putting even more pressure on sales and margins.

"When you've got deflation and the consumer just shopping to shopping lists, not buying impulse items at all, your sales are going to be sluggish," said Mark Husson, analyst, Merrill Lynch, New York. "It makes it particularly hard to leverage your fixed-cost base."

Jason Whitmer, analyst, Midwest Research, Cleveland, said a confluence of factors have smothered sales growth among food retailers, including competition, although he agreed with Husson that Wal-Mart is not the primary culprit.

"You've got lower price points, consumers trading down, channel leakage, deflation, and all of these are kind of contributing to a weaker-than-expected top line, and that's where it impacts everybody," he said. "There are multiple pressures on the top line, which will cycle into the need for gross margin reinvestment, which will lead to weaker sales."

Delhaize cited the "economic softness and aggressive competition" in the Southeast as affecting both its Food Lion and Kash n' Karry chains. The company said it expects same-store sales growth in the United States this year to be 0.5% to 1% lower than last year, when same-store sales increased 1.4%.

As a result, the company said it now expects cash earnings per share to decline 24% to 29% vs. last year's results, assuming current exchange rates. Delhaize previously had revised its earnings-growth prediction down to flat for the year, assuming constant currency exchange rates.

"We will continue our ongoing process to improve our operations to generate consistent sales and earnings growth in the future, especially at Food Lion and Kash n' Karry," said Pierre-Olivier Beckers, president and chief executive officer, Delhaize Group, in a prepared statement.

Supervalu, parent of the Sav-a-Lot and other retail banners, said last week it has lowered its earnings expectation for the quarter ended Sept. 7 to 42 to 44 cents per share from earlier forecasts of 48 to 53 cents.

During a conference call with analysts, Jeff Noddle, Supervalu's chairman and CEO, attributed the earnings shortfall to "the reluctant economy," which hurt both retail and wholesale income, and to "timing delays of cost-reduction benefits," particularly in the company's distribution segment.

Although comparable-store sales declined 0.8% in the quarter, Noddle noted that customer traffic was steady. "We have not seen a falloff in customer count," he said. "In this more promotional environment, we are seeing people do a little more cherry-picking, and they have reduced their average purchase a little bit."

Husson noted that the economy seems to be hitting the low-price operators and traditional players alike.

"Food Lion's prices are the same as Wal-Mart's, and Sav-a-Lot's are 15% lower, so you can't say that Sav-a-Lot is being affected by Wal-Mart unless you say people are trading up to Wal-Mart, which would be an obscure and absolutely weird conclusion to come to," he said. "So, it must just be that people are spending less money on food."

Nash Finch said its projected shortfall came primarily from the weak economy and from its own poor promotional execution.

"This is not about Wal-Mart," said Ron Marshall, chief executive officer, in a conference call with analysts. "What this is about is a difficult economic environment and poor [retail] execution."

The company said it expected earnings per share for the third quarter ending Oct. 5 to be 58 to 62 cents, down from previous projections of 68 to 70 cents. Full-year earnings are now expected to be $2.32 to $2.41 per share, down from previous estimates of $2.50 to $2.55 per share.