TOP CHAINS' RESULTS RISE IN 2ND HALF

As the national economy continues to improve, supermarket chains continue to achieve better operating results, according to an SN survey.Those results were driven by a recovery from the recession in most parts of the country, a strengthening in private-label business, inflation in some commodity prices and restructuring efforts by various chains."The second-half results follow logically from those

As the national economy continues to improve, supermarket chains continue to achieve better operating results, according to an SN survey.

Those results were driven by a recovery from the recession in most parts of the country, a strengthening in private-label business, inflation in some commodity prices and restructuring efforts by various chains.

"The second-half results follow logically from those of the first half, when the industry began emerging from the funk that lasted from mid-1991 to late 1993," Gary Giblen, managing director of Smith Barney, New York, told SN.

"We saw the beginning of that breakout in the fourth quarter of 1993, and it was confirmed by results in the first half of 1994 and now by the gains of the second half."

Sales and operating profits from the nation's 20 largest publicly held chains showed stronger gains during the second half of 1994 than they did a year earlier, the survey indicated.

Sales among the top 20 chains for the half rose 4.4% over 1993's second-half results, with 14 of the 20 companies showing improvements. This compared with improvements at only 10 of the 20 chains during the second half of 1993.

Same-store sales rose at 12 of the 20 chains during the half, compared with increases at only 10 companies during the same period a year earlier.

Operating profits among the 20 companies rose 10.8% during the half over the same period of

1993, with 15 chains showing gains, compared with gains by only 12 in the prior year.

"The second half wasn't bad, and most companies experienced stable performances and did reasonably well," said Ed Comeau, a securities analyst with Lehman Bros., New York.

"We saw some growth in the economy; there was price inflation in some commodity prices following the flooding in the Midwest, and it looked as though there might be some food inflation during the second half, but that didn't happen."

Comeau said several chains that are on the recovery track or are engaged in restructuring -- including American Stores, Safeway, Vons Cos., Food Lion and Winn-Dixie Stores -- "continued to show steady improvement."

He also noted that companies whose fiscal years ended in December (including Safeway, Kroger and Hannaford) finished on the stronger side than those whose years ended in January or February (including Penn Traffic, Stop & Shop and A&P). Comeau said this was due to weak comparisons with early 1994, when inclement weather in the Northeast and Midwest tended to boost results.

According to Debra Levin, an analyst with Morgan Stanley, New York, most of the industry's recent gains can be attributed to improvements in efficiencies and investments in technology, "and those gains should continue to accelerate."

Jonathan Ziegler, an analyst with Salomon Bros., New York, expressed similar thoughts. "The application of technology and systems, senior management's focus on productivity and logistics, and the refinement of in-store operations have continued to generate better returns," he said.

"Another major contributor is pricing sanity. With retailers recognizing that labor costs ratchet up at an annual rate of 2.5% to 3%, the battles for market share are taking a back seat to corporate profitability."

According to Giblen, stronger second-half results were generated by increased private-label business, a rational competitive environment and the benign impact of supercenters.

"Private label continues to increase as a percentage of sales, which gives supermarkets a lot of leverage in negotiating with branded companies," he said. "And for companies like Kroger and Safeway, which have their own manufacturing operations, private-label gains double the benefits.

"And some chains like Vons and Food Lion, which have traditionally underplayed private label, are beginning to catch up, with resulting gains in their operating results."

Rather than pursuing all-out price wars, retailers are moderating their efforts, Giblen said -- even in hotly contested markets like Atlanta, where the entry of Publix Super Markets, Lakeland, Fla., has had a relatively small impact on Winn-Dixie, Kroger and Bruno's, he pointed out.

Supercenters have had only a moderate impact as well, Giblen added. "In fact, Kroger has shown ongoing improvements in areas where it competes with supercenters because it's learned it doesn't have to give away the store to compete," he pointed out.

Chuck Cerankosky, an analyst with Hancock Institutional Equity Services, Cleveland, said the industry "is well along in its recovery from the trough it's been in.

"Some companies that started to recover earlier are showing stronger results, while others are having a tougher time, which is typical of an industry that's consolidating," Cerankosky said.

On a sales basis, the biggest gainers during the second half were two chains that made major acquisitions: Hannaford Bros. Co, Scarborough, Maine, whose sales rose 18% in the second half following its acquisition of Wilson's Supermarkets, Wilmington, N.C.; and Ahold USA, Parsippany, N.J., whose sales increased 15.3% following its purchase of Red Food Stores, Chattanooga, Tenn.

Among other big gainers during the half, Stop & Shop Cos., Quincy, Mass., saw sales rise 5.1% -- due in large part to an increase of nearly 10% in square footage, analysts told SN; Winn-Dixie Stores, Jacksonville, Fla., with a 4.8% sales increase; and Smith's Food & Drug Centers, Salt Lake City, with sales up 4.7%.

According to Ziegler, Winn-Dixie's sales gains for the half were the result of "significant headway" in modernizing its store base and its chainwide emphasis on everyday low pricing, which have helped it overcome the competitive pressures in Atlanta.

Sales at Smith's are benefiting from the low-price program it adopted in Utah in advance of the opening of food departments at existing Fred Meyer stores in Salt Lake City, Ziegler added.

"However, Fred Meyer did not open with significantly lower prices than its rivals, nor did it run hot promotions common to new players," Ziegler pointed out.

At the low end of sales performers for the half was American Stores, Salt Lake City, which registered a sales drop of 3.4% following the sale of Star Market Co., Cambridge, Mass., and 45 Acme Markets store in Pennsylvania and New York.

Also at the low end were Grand Union Co., Wayne, N.J., and Pathmark Stores, Woodbridge, N.J., which both saw sales decline by 1.5% during the half.

On a same-store sales basis, Safeway, Oakland, Calif., showed the strongest comparisons, up 5.2%, followed by Food Lion, Salisbury, N.C., up 4%.

Levin said Safeway's same-store comparisons are improving "because of the tremendous job the company has done focusing on pricing, improving customer service and continuing a strong store remodeling program over the past several years."

Food Lion is benefiting from

an increased focus on in-store merchandising, "and it's still gaining back some of the business it lost following a negative report on ABC-TV's 'PrimeTime Live' several years ago," Levin added.

According to Cerankosky, companies that have shown steady same-store sales growth -- like Kroger Co., Cincinnati, up 2.5% for the half, and Albertson's, Boise, Idaho, up 2% -- continued to follow that consistent pattern.

He also said Vons Cos., Arcadia, Calif. -- "a former underachiever that is leaving that label behind" -- saw same-store sales grow to 0.4% for the second half, compared with a decline of 11.1% a year ago.

"Vons made a number of changes in its merchandising strategy that emphasized better customer values, at the same time it lowered its cost structure," Cerankosky explained. "The result should be an improvement in profitability at the same time it grows its customer base."

The poorest same-store sales comparisons during the half were registered by Food 4 Less Supermarkets, La Habra, Calif., down 3.5%; Grand Union, down 3.2%, and Ralphs Grocery Co., Compton, Calif., down 3.1%.

Food 4 Less and Ralphs -- both operating in southern California, where the recession continues to frustrate operators -- are expected to merge, while Grand Union is working its way through a Chapter 11 bankruptcy filing.

On the basis of operating profits, the biggest gains were exhibited by Food Lion, up 43.9%; Smith's, up 27.3%, and Bruno's, up 23.4%.

Giblen said chains that have had problems -- including Food Lion and Smith's -- have been able to rebound from the depressed levels at which they were operating, resulting in above-average gains in operating income.

According to Levin, "Food Lion is coming off a depressed base because it invested a substantial amount of money in 1993 to turn the company around after the 'PrimeTime Live' report, and those expenses a year earlier helped strengthen the 1994 comparisons."

The company with the biggest operating profit decline during the half was Fred Meyer, Portland, Ore., which saw profits fall 43.8% following an 88-day strike that affected 26 stores and various distribution facilities.

Six-Month Results for the Top 20

The financial results for the following 20 retailers were taken from the two most recent quarterly reports for each company. Due to differences in the number of weeks included in each company's second-half results, the order of the companies varies from SN's annual ranking of companies by sales volume. Companies that do not file financial reports were not included.

SAME

STORE

OPERATING SALES

SALES IN % PROFIT IN % CHANGE REPORT

COMPANY BILLIONS CHANGE MILLIONS CHANGE (4TH Q) PERIOD

1 Kroger $12.2 +3.0 $392.4 +3.4 +2.5 6/20- 12/31

2 American Stores 9.1 -3.4 348.5 -5.8 +0.2 7/30-

1/28

3 Safeway 8.5 +3.2 348.0 +23.2 +5.2 6/19-

12/31

4 Winn-Dixie 6.1 +4.8 175.5 +4.8 +2.7 6/30-

1/11

5 Albertson's 6.0 +3.7 411.7 +13.8 +2.0 8/5-

2/2

6 A&P 4.7 +0.2 53.8 -- -2.2 9/11-

2/25

7 Food Lion 4.3 +2.5 188.6 +43.9 +4.2 6/19-

1/31

8 Ahold USA 3.6 +15.2 92.3 +23.2 na 7/17-

12/31

9 Vons 2.7 -0.5 100.8 -1.0 +0.4 6/20-

1/1

10 Pathmark 2.1 -1.4 101.1 +25.0 +0.4 7/31-

1/28

11 Giant Food 2.0 +4.0 104.4 +6.1 +1.5 8/14-

2/25

12 Stop & Shop 1.8 +5.1 106.4 +16.1 +4.0 8/14-

1/28

13 Penn Traffic 1.7 +3.6 87.0 +10.7 -0.4 7/31-

1/28

14 Fred Meyer 1.5 +0.5 38.7 -43.8 -2.5 8/14-

1/28

15 Smith's 1.5 +4.7 72.7 +27.3 +2.3 7/3-

12/31

16 Bruno's 1.4 +2.0 41.3 +23.4 +1.6 7/13-

12/31

17 Food 4 Less 1.4 -0.8 69.9 +1.2 -3.5 6/26-

1/7

18 Ralphs 1.2 -0.1 103.5 -1.0 -3.1 4/25-

10/9

19 Hannaford 1.2 +18.0 71.3 +16.6 +3.0 7/31-

1/8

20 Grand Union 1.1 -1.5 64.9 -21 -3.2 7/24-

1/7