Price Image Boosts Q1 At Kroger

Kroger Co. last week said it expects results for the year to beat its prior projections after posting a strong first quarter giving it momentum analysts said should enable the company to maintain its position of strength through the economic downturn and beyond. Kroger is better positioned than at any time [in years] to generate decent earnings growth in the face of an economic downturn,

CINCINNATI — Kroger Co. here last week said it expects results for the year to beat its prior projections after posting a strong first quarter — giving it momentum analysts said should enable the company to maintain its position of strength through the economic downturn and beyond.

“Kroger is better positioned than at any time [in years] to generate decent earnings growth in the face of an economic downturn,” said Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va. “While product cost pressures may be easing, similarly robust results for other operators [are unlikely], since Kroger's strong price perception is driving market share.”

Net income for the quarter rose 14.7% to $386 million, with per-share earnings hitting a record of 58 cents — ahead of consensus estimates of 55 cents — while sales totaled $23.1 billion, up 11.5% and beating the consensus of a 7.7% increase. Identical-supermarket sales, excluding fuel, rose 5.8%, and were up 9.2% including fuel.

Kroger raised its financial guidance for the year, projecting earnings gains of 9% to 12% over the $1.69 per share in the prior fiscal year by raising the low end of its earnings guidance by 2 cents, to $1.85 per share from $1.83, while maintaining the high end at $1.90.

David Dillon, chairman and chief executive officer, said the increase will be driven by strong identical-store sales; a slight improvement in non-fuel operating margin; and fewer shares outstanding.

The company said identical sales gains, excluding fuel, will increase in the range of 4% to 5.5%, compared with projections of 3% to 5% it issued in mid-March.

John Heinbockel, an analyst with Goldman Sachs, New York, said the chain's sales momentum was impressive: “At 5.8%, the ID accelerated 50 basis points from the fourth quarter, and it remains one of the strongest in retail.

“In addition, Kroger has now put up 10 consecutive quarters of IDs between 5% and 6%, which shows amazing consistency — particularly without the benefit of significant square-footage growth. Simply put, the company is chewing up significant market share.”

Meredith Adler, an analyst with Lehman Brothers, New York, told SN that the results were striking because of the pace of acceleration of same-store sales growth, which was “the highest for the past seven quarters.”

“Inflation helped, but sales would still have accelerated, and Kroger did it without much impact on the bottom line, which is also very positive,” she said.

Adler said she credits the strong results to a multi-year process to improve the overall value equation for shoppers.

“I don't believe it's because of the economy — Kroger would still do well, or better, if the economy were better,” she said. “Kroger is always looking for the right way to give customers a great deal. It is very creative, methodical and scientific, and never haphazard, and it is flexible enough to shift from one program to another if another program is better.”

Karen Short, an analyst with FBR Capital Markets, New York, said the chain's first-quarter results “prove that Kroger can successfully mitigate, and excel, in a challenging consumer and commodity-cost environment while continuing to gain share, reduce prices and expand private-label penetration.”

Dillon said during a conference call with analysts that first-quarter results illustrated the underlying strength of Kroger's long-term business model, “[which] continues to balance investments in our customers' overall shopping experience with current economic conditions, including inflationary costs.”

Dillon characterized the rate of inflation — 3.5% at Kroger — as moderate, “[though] if you read the press, you would think inflation in food products was off the chart,” he said.

“One reason for that [perception] is, we've had a 20-year period where we've had basically no inflation, zero — some items half a point up or down, but really zero. But now that we've had a year or two of low-level moderate inflation, people are writing a lot about it.”

Dillon said sales of corporate brands are up, led by Private Selections, Kroger's top-tier private-label line. “Private Selections is our fastest-growing brand, and based on first-quarter trends, it will be a $1 billion brand for Kroger this year,” he indicated.

Corporate-brand sales are not necessarily being driven by the downturn in the economy, he pointed out.

“We've heard a lot of discussion in the trade that the economy may be driving people to buy more private label, and while I'm certain there's a certain degree of that going on, we actually think most of our improved results are because of the focus we've had on that area for several years,” Dillon said.

“When we dissect our data, we see that our very best customers are buying both more Kroger brands and more national brands, and we believe the way to read that is that there is a shift from restaurants and other places to buy more food in our stores and a shift to preparing more food at home, and we think new product introductions in categories like Private Selections have helped contribute to that.”

Rodney McMullen, vice chairman, said corporate brands have increased their penetration in 12 of the last 15 quarters. During the first quarter, corporate-brand share in the grocery department rose 1.4% in terms of retail dollars, “and if you look at it in units, it's improved 0.33%,” he added.

“Obviously, a 0.33% share change in one quarter is very strong, though the dollars are a little more than the units because of inflation in several of the categories,” he explained.

Dillon said government stimulus checks “had no material effect on sales or earnings for the quarter.”

Q1RESULTS
Qtr Ended 5/24/08 5/26/07
Sales $23.1B $20.7B
Change +11.5%
Comp-store +5.9%*
Net Income $386.0M $336.6M
Change +14.7%
Inc./Share 58 cents 47 cents
* COMPARABLE-SUPERMARKET SALES, EXCLUDING FUEL; IDENTICAL-SUPERMARKET SALES, EXCLUDING FUEL, WERE UP 5.8%.