CINCINNATI — Kroger Co. here said last week a pickup in sales in February indicates a modest strengthening of consumer confidence.
“Through the holidays and immediately following the holidays, the consumer was more cautious,” said David B. Dillon, chairman and chief executive officer, in a conference call discussing year-end results. “But in February we saw a modest improvement, which I would attribute to some regaining of confidence by consumers in how they were approaching spending.”
Kroger is seeing an increase in traffic and in average sale, Dillon said, though the increase in average sale per transaction is actually at a lower rate than what the company has been experiencing, he noted.
“We are seeing loyalty-card users shop more often, even though the number of items they may buy in any one trip is not increasing. So although we seemed to pick up a bit in sales in February, it gives me the feeling the consumer is not quite as cautious as we saw in December, but perhaps more cautious than they were throughout 2008.”
Dillon noted that 27% of Kroger's grocery sales in the fourth quarter, which ended Jan. 31, came from private brands, with grocery unit sales of Kroger brands reaching a record high of 35% of total grocery units.
Industry analysts responded to those results with confidence that Kroger's ongoing prospects for sales increases — driven by its strong private-label program and its strong value offering — make it the best-positioned conventional chain in the current environment.
“We are confident Kroger will continue to be the success story in the supermarket industry, providing very stable earnings in this very tough economic environment and then driving strong earnings growth once the economy normalizes,” said Meredith Adler, an analyst with Barclays Capital, New York.
Adler also predicted “a continued rationalization of the market, with truly weak retailers like Bruno's closing stores and stronger ones like Supervalu pruning their store bases.”
Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., was also very upbeat about Kroger.
“The macro environment will remain inhospitable in 2009, which makes Kroger's consumer proposition more relevant than that of its rivals,” he explained.
Wolf also noted that Kroger was able to increase its market share against Wal-Mart Supercenters by 86 basis points during 2008. “Among large conventional operators, only the ‘big three’ private chains — Publix, H-E-B and Wegmans — can boast similarly robust results vs. Wal-Mart,” he said.
According to Karen Short, an analyst with Friedman Billings, Ramsey & Co., New York, Kroger's strong year-end performance helped its stock recover some of the weakness it had experienced so far this year.
“Kroger is by far the strongest food retailer in the public universe, [though] we can envision a scenario where the stock remains range-bound in the near term, given the lack of near-term catalysts,” she said. “Over time, however, Kroger will prove the skeptics wrong, and the stock will gradually work as the company continues to execute in the current environment.”
For the quarter, Kroger said net income rose 8.1% to $349.2 million, while sales rose 0.1% to $17.3 billion. Identical-store sales, excluding fuel, increased 3.8% — with several departments beating that average, Dillon said, including grocery, meat, deli/bakery, pharmacy and nutrition, whose gains were offset by continued slow sales in discretionary general merchandise.
For the year, net income climbed 5.8% to $1.3 billion, with sales rising 8.2% to $76 billion, and IDs, excluding fuel, up 5%.
W. Rodney McMullen, vice chairman of the board, told investors Kroger expects the economic challenges of 2008 to persist throughout 2009 “and perhaps further as unemployment rises in many parts of the country.”
Kroger expects earnings of $2 to $2.05 per share and ID sales gains for the year in the range of 3%-4%, excluding fuel. “Five weeks into 2009 our ID sales trend is within this guidance range,” he noted.
Capital spending in 2009 will decline slightly, to a range of $1.9 billion to $2.1 billion, compared with $2.15 billion in 2008.
