Kroger Boosts Profit Outlook After Q3 Growth

Regarding the fiscal cliff: "We think we are in a great position in any of the possible outcomes we can imagine.” — David Dillon, chairman and CEO, Kroger

CINCINNATI — Kroger Co. [2] here said last week that it expects its robust performance to continue as it upped its earnings guidance for the year and said it is prepared for whatever turns the economy might take.

Asked by an analyst if the company was prepared for a sharp economic downturn due to the potential of a so-called “fiscal cliff,” Kroger said it has spent years building its reputation as a strong provider of value and that it believes its customers will continue to view it as their best shopping alternative.

“We think we are in a great position in any of the possible outcomes we can imagine,” said David Dillon [3], chairman and chief executive officer, in a conference call with analysts. “We think that our customers are going to trust us and continue to stay with us.”

He added that the uncertainty surrounding the economy as Congress and President Obama debate spending cuts and tax increases “serves the public really poorly.”

David Dillon [3]

“We think that there’s a lot everyone can do if they make up their mind that they’re going to approach this in a responsible way,” he said, noting that the media also contributes to the public anxiety.

In assessing the current economic situation, Dillon said the economy is “slowly improving, but value customers are still struggling.”

In the third quarter, he said consumer concern over fuel and energy costs lessened as gas prices declined.

“Overall, consumer confidence is up, but it remains fragile,” Dillon said.

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Kroger posted net income of $316.5 million in the quarter, which included some one-time benefits from the settlement of a lawsuit with Visa and MasterCard and a reduction in contributions to a consolidated union pension fund.

Excluding those gains, net income would have been $242.4 million, up about 23.7% over year-ago levels.

Gaining Market Share

The company also said it recorded its highest increase in tonnage sales in more than two years, which it said was an indication that it continued to gain market share.

Total sales in the quarter, including fuel, increased 5.9% over year-ago levels, to $21.8 billion. Identical supermarket sales, excluding fuel, grew 3.2%. Kroger said the rate of product-cost inflation “continued to flatten” in the quarter, to about 1.4% excluding fuel. Inflation hit every department except seafood and produce, which both had deflation.

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Kroger raised its diluted earnings per share guidance, excluding the two adjustment items in the fourth quarter, to $2.44 to $2.46 for the full year, up from the previous guidance range of $2.35 to $2.42.

In the fourth quarter, the company expects ex-fuel ID sales growth of 3% to 3.5%.

Scott Mushkin, an analyst with Jefferies & Co., New York, said that while profits exceeded forecasts, EBIT margins were pressured in the third quarter.

“Our expectation is that the EBIT margin will improve slowly over the next 12-18 months as Kroger leverages some of the significant share gains it is seeing,” he said.

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