TAMPA, Fla. -- As the Sunshine State's competitive thermometer continues to heat up, Kash n' Karry here plans to reverse a negative sales trend with a spate of capital projects for the new fiscal year.
The 100-store chain has budgeted $30 million for capital expenses in 1997, nearly the same amount as in fiscal 1996, which ended July 28, company executives said in a conference call with financial analysts. However, the 1997 plan has a broader range of priorities -- including new store openings, remodels and expansions plus extensive technology improvements -- whereas the 1996 effort hinged primarily on store remodels, noted Ronald E. Johnson, chairman, president and chief executive officer.
"We are planning to open two new stores in 1997," Johnson said. "We have four major expansions that are under way right now that will be completed in 1997 and another four major remodels that will take place during the year."
The produce department will continue to be the crux of Kash n' Karry's remodeling and expansion efforts, especially since the year-old "Kash n' Karry, Your Destination for Fresh" program has been well-received by consumers, said Johnson. The chain launched the program last September to refashion itself as a fresh foods specialist, and it heavily promoted the department during the first six months of fiscal 1996. As a result, perishables margins and distribution have steadily climbed above 1995 totals, company executives said.
"We will also come on-line with a debit/credit-card system after the first of the year," Johnson said, adding that technology efforts also include delivery system updates. "Right now, we have a manual back-door receiving system in place. We will come on-line in 1997 with electronic [direct-store delivery] receiving."
Kash n' Karry is bolstering its store base and operations amid a flood of expected store openings and expansions by rival Florida operators, namely Winn-Dixie Stores, Jacksonville, Fla.; Publix Super Markets, Lakeland, Fla.; Albertson's, Boise, Idaho, and Wal-Mart Stores, Bentonville, Ark., Johnson noted.
"[This year] is going to be an extremely competitive year for Kash n' Karry," he said. "We just completed a total company analysis on all the competitive openings that will occur in 1997. There will be 1.5 million square feet of new space coming into the market in the next 12 to 18 months."
Kash n' Karry expects its 1997 capital projects to help it compete more effectively -- chiefly against Winn-Dixie and Publix -- as well as turn around the slack results of the last two quarters, company officials said.
Despite first-half gains, Kash n' Karry posted sales declines of 5% and 3.9%, respectively, for 1996's third and fourth quarters. Same-store sales slipped 5.6% in the third quarter and 4.4% in the fourth quarter, but remodeled stores have made strides, the company said. Year-end 1996 sales dipped 0.4% to $1.02 billion, with same-store sales down 0.9%.
Richard D. Coleman, senior vice president and chief financial officer, said quarterly sales were squeezed by a number of factors, including the following:
Publix' move to lower prices on 500 items during Kash n' Karry's fourth quarter. (A Publix spokeswoman told SN last week that no price changes were announced but said competitive pricing is not new to the chain.)
Winn-Dixie's and Publix' rollout of debit- and credit-card acceptance systems. With all the major chains in the market offering such services, Kash n' Karry felt the pinch because it was not yet on-line, Coleman said.
A decrease in customer traffic while Kash n' Karry renovated certain store locations.
Kash n' Karry's relaxation of some fresh food promotions to focus on margin returns. "In the third quarter, we made a decision that [promotions] were a little too expensive for us. We needed to cut back on the promotional activity," Coleman said. "So we sacrificed sales performance for additional margin dollars."
Though Kash n' Karry's negative sales trend is likely to carry over into 1997's first half, Johnson and Coleman noted that they expect an uptick in the second half, when additional sales and operational efficiencies from capital projects come to fruition.
"Overall, I would say [fiscal] 1996 was a very good year for us in what we were able to accomplish," Johnson said. "We will continue to have negative comps for the first two quarters. But as we head into the last two quarters of the year, we should see a significant change in what happens to our sales trends. We believe that where our shortfalls are in sales, we will be able to maintain our focus on our margins and our controllable expenses. And our cash flow performance will not drop below where it was last year."
Financial analysts told SN that Kash n' Karry has made considerable progress since emerging from Chapter 11 bankruptcy protection in 1995 and the planned capital projects are likely to fuel higher earnings, margins and sales for fiscal 1997.
"The company has made tremendous strides in the last year ever since they have emerged from bankruptcy. Their earnings have returned to what they had been prior to the bankruptcy and are now exceeding those earnings," said Ken Bann, senior vice president of Lehman Bros., New York. "As they roll out better perishable offerings to more of their stores, it is reasonable that we will see better same-store sales in the second half."
Another New York analyst said, "Kash n' Karry is doing the right thing. Their stores are very underinvested in. There is a way for Kash n' Karry to stand out in the market, especially in the area of perishables. They are looking for ways to do that. They are going to start with their strengths, which is produce, and then try to expand that."
In other matters, Kash n' Karry officials said they were still looking at various options involving their capital structure and how to speed their capital plan while providing returns to shareholders. The subject of debt restructuring surfaced after talks for Food Lion, Salisbury, N.C., to acquire Kash n' Karry broke off in August, according to officials. No time frame has been set for capital restructuring, Johnson said.
Also, Kash n' Karry has ended its supply arrangement with Gooding's Supermarkets, a 17-store upscale chain based in Apopka, Fla. The two chains signed a five-year supply agreement in November 1995 but mutually decided to end it.