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Many leading supermarket chains achieved good results during the second half, particularly companies that had already been showing upward momentum.A survey of the top 20 supermarket chains with publicly traded equity or debt showed that sales increased an average of 6%, same-store sales for the fourth quarter rose an average of 1.7%, and operating income climbed an average of 6.7%%.These positive

Many leading supermarket chains achieved good results during the second half, particularly companies that had already been showing upward momentum.

A survey of the top 20 supermarket chains with publicly traded equity or debt showed that sales increased an average of 6%, same-store sales for the fourth quarter rose an average of 1.7%, and operating income climbed an average of 6.7%%.

These positive results were driven by factors including store upgrades, concentrated cost-cutting efforts and gross margin pressures, according to securities analysts contacted by SN. Other positive factors were strong private-label offerings and frequent-shopper programs.

The financial gains were particularly evident among chains that reported good results during the first six months of the year. For companies that struggled during the first six months, the second half brought more of the same results. Data for this survey were compiled by SN and Salomon Bros., New York.

Chains such as Kroger Co., American Stores Co. and Food Lion, which have consistently achieved increases, continued their successful streaks. But companies such as Grand Union Co. and Pathmark Stores, which had been challenged in recent years, were still unable to show consistent gains.

Because of the high level of consolidation in the supermarket industry, this year's top 20 list differs somewhat from last year's list. Bruno's was bought out by the investment firm Kohlberg Kravis Roberts & Co., and Yucaipa Cos. merged Food 4 Less with Ralphs Grocery Co. As a result, those chains didn't disclose full financial results, which is necessary for inclusion on the top 20 list.

In place of Bruno's, Ralphs and Food 4 Less, three new retailers made their way onto SN's top 20 list. They are Dominick's Finer Foods, Harris Teeter and Weis Markets.

Among top gainers in same-store sales, both Harris Teeter and Vons Cos. recorded 4.6% increases for the most recent quarter. The highest same-store sales figure -- a 5.6% gain -- was reported by Winn-Dixie Stores.

Indeed, 14 of the companies on SN's list recorded same-store sales increases in the most recent quarter. That compares with gains at only 12 of the 20 chains in the year-ago quarter.

Among the companies reporting decreases were Smith's Food & Drug Centers (-2.9%) and Grand Union Co. (-1.3%). Penn Traffic Co. recorded a same-store sales decrease of 0.9% and Pathmark Stores recorded a decrease of 0.4%.

Net sales during the second half rose at 16 of the companies. Last year, 14 chains showed sales increases. Winn-Dixie and Ahold showed the greatest improvements at 13.1% and 13.9%, respectively. Pathmark and Grand Union said sales were flat with the year-ago period and A&P said sales decreased 2.1%.

Thirteen companies reported that operating profit increased, down from 15 companies last year. Among the top gainers were A&P with a 39.4% increase and Ahold with a 24.4% increase.

"In 1995 and the second half, you had a situation where the good did better and the bad did worse and a few [chains were in the middle]," said Gary Giblen, managing director at Smith Barney, New York.

In situations where they stumbled, strong operators needed to pick themselves back up before they were bested by a competitor that was better and faster, Giblen noted. For example, although Albertson's faltered in the first half of the year when sales did not reach expectations, it managed to recover by the end of the fourth quarter. And in southern California, Vons acted quickly to pick up customers that migrated from Ralphs and Food 4 Less amid the confusion associated with the merger.

"[When competing against] these lean and mean companies with a low cost structure, you have to have the ability to jump-start your results faster," Giblen explained. "The extension of that idea is that if you do slip, the market is less forgiving."

In spite of the rapid rate of change in the industry, Giblen said, the business environment for supermarket operators is relatively calm. Problems such as labor issues and price wars that had troubled the industry in past years were not present this time around.

Debra Levin, an analyst with Morgan Stanley, New York, said same-store sales were generally strong. She attributed increases in the Northeast to the snowstorms that hit the area last winter. More than 40% of the supermarket companies she covers benefited from the storms, including Food Lion and Giant Food.

"There was an overall slight pickup in sales. Most companies' earnings were coming in line with expectations, although there were a few exceptions on either side of it," she said.

Analysts predicted that many of the most dramatic changes through the end of the century will take place in the Northeast. The acquisition of Stop & Shop Cos. by Royal Ahold, the Dutch-based parent of Ahold USA, is expected to be one of the most influential factors in those changes.

Even before the acquisition agreement, Stop & Shop made known its desire to enter the New York metro market and succeeded in penetrating Long Island with its purchase of Melmarkets/Foodtown, Garden City, N.Y.

Analysts contacted by SN marked several trends during the past two quarters that affected the chains' performances.

A number of retailers spent the past six months or longer investing in their store bases by building new stores, remodeling outdated ones or a combination of the two, according to analysts. Dominick's, Winn-Dixie, Hannaford Bros., Weis Markets and Giant Food all made significant improvements in their store bases, which as a rule contributed positively to sales and earnings.

Dominick's continues to see success with its perishables-oriented format, said Bob Lupo, managing director of B.A. Securities, Chicago. Store openings are taking place in the Chicago metro area and are proceeding south within the state. Lupo credited Robert Mariano, the chain's president and chief executive officer, with being "a good merchant [and] a very savvy operator."

Jack Russo, a research analyst with A.G. Edwards & Sons, St. Louis, praised Winn-Dixie's store upgrade program. "They have all the perimeter departments and one-stop-shopping needs, [such as] deli, bakery, enhanced produce and meat sections. I think it's really helping their top line and the productivity in the front end," he said.

The program's expenses have impacted earnings in the previous two or three quarters, but Russo added that "that should be reversing itself over the next three or four quarters."

Hannaford is expanding its presence in the Southeast. Its intention to build a distribution center in the region "will help the company become more profitable faster," said Chuck Cerankosky, an analyst with Hancock Institutional Equity Services, Cleveland.

Weis Markets grew its top line partly through the rollout of its superstore format, according to Gary Shafer, an analyst specialist with Value Line, New York. He noted that the chain has been more aggressive in its new store plans because of the influence of its president, Norman Rich, who assumed his title in August 1994.

Earnings at Giant Food increased only slightly because the chain is investing in new stores, said Gary Vineberg, a retail analyst at Merrill Lynch, New York. "Giant is rolling out a fairly large number of large stores in new markets, and those stores are not expected to be profitable for some time. And that'll put pressure on earnings but they're building a long-term growth story," he explained.

Pathmark put money into its stores in the hope that it will be able to bring up earnings, said Lupo of B.A. Securities. "The Pathmark 2000 format is a good one. They have a reasonable shot at improving results," he said.

Although it is adding and remodeling stores, A&P concentrated its efforts on store closures, shuttering 124 stores over the last 12 months. The closures will bring about "a modest downsizing in net sales," but A&P will "be a stronger company because they'll have a consolidated store base that will allow them to be more competitive," Lupo said.

Despite an effort by most major chains to control costs, Kroger and Safeway have concentrated on cost-cutting.

Safeway's announcement that it intends to cut about 200 positions in its Canadian operations over the next six months was a positive move, said Levin of Morgan Stanley. She estimated that the cuts could translate into savings of $5 million in 1997.

Cerankosky of Hancock Institutional noted that Safeway continues to cut costs in its domestic operations as well.

"Safeway has been improving its cost structure, [thereby] helping to increase same-store sales and becoming a more formidable competitor," Cerankosky said.

Kroger has cut costs as well by reducing selling, general and administrative costs as a percentage of sales, thus increasing margins, Cerankosky said.

Stop & Shop and Albertson's, two chains that observers said had "stumbled" over the six-month period, were both concerned with pricing pressures.

Last summer Stop & Shop undertook a series of promotional activities aimed at countering competitive threats. Inevitably, those activities had a negative impact on results. Cerankosky said he expects "a slow recovery to normalized margins in their traditional trading areas."

Because of the acquisition of the Melmarkets and Purity Supreme chains last year, Stop & Shop's earnings should accelerate through this fiscal year, Cerankosky said.

At Albertson's, sales and same-store sales are rising as new stores begin to contribute, but margins are shrinking. "They picked up the pace with same-store sales and at the same time grew operating margins nicely. That puts them in a good position to continue the sales growth next year," Cerankosky said.

Gross margins will be down because Albertson's "will be using targeted promotions and a strong value message to customers to drive individual store sales levels up," he added.

Two chains -- Vons and Fred Meyer Inc. -- were labeled as pleasant surprises by securities analysts because both reported higher-than-expected second-half results.

At Vons, "Larry Del Santo's management team did a fine job of taking advantage of opportunities he had in southern California, with the competition being in a certain amount of disarray and doing it against a tough economy, and some problems the old team created, such as a high-price image. Those [problems] have clearly been put behind them," Cerankosky said.

Jonathan Ziegler, an analyst at Salomon Bros., New York, said he upgraded his rating on Fred Meyer from hold to buy after the chain released fourth-quarter results. He attributed at least part of Fred Meyer's improvement to the healthy economy in the Pacific Northwest.

"I've always thought Fred Meyer was an unbelievably strong food operator. But with that kind of economy I really believe traffic can translate itself into higher food sales and they could pick up some really strong sales on the general merchandise side," Ziegler said.

Three industry hot buttons -- re-engineering, frequent- shopper programs and private label -- were cited by analysts as the factors behind several chains' increases.

Re-engineering was not spotlighted as much as in previous years, despite the ongoing Delta Project at American Stores.

"It's a multi-aspect project [that touches components ranging] from its 28 distribution centers to resource allocation, centralized buying, labor standards, labor scheduling, using synergies of the three divisions -- the Eastern division, the Western division and the drug stores division -- to affect cost savings in running the business. That's what's really going to drive this entire company," Ziegler said.

Several companies, including Penn Traffic and Grand Union, had fallen on hard times in past quarters and were unable to pull themselves up by the end of the half. Penn Traffic was hit by competitive pressures in upstate New York and Pennsylvania. Grand Union still appears to be struggling, although it officially emerged from Chapter 11 bankruptcy protection last June.

Ziegler attributed the depressed results at Smith's Food & Drug to the major structural changes it is undergoing. He said the chain's decisions to exit the California market and to bolster its position in Arizona through the purchase of the Smitty's Super Valu stores were good moves.

Six-Month Results for 20 Leading Retailers

The financial results for the following 20 retailers were taken from the two most recent quarterly reports for each company. Because of differences in the number of weeks in each company's second-half results, the order of the companies varies from SN's annual ranking of companies by sales volume. Only companies filing public documents were included. This information was compiled by SN and Salomon Bros., New York.





1.Kroger Co. $12.9 + 5.7% $429 + 9.3% + 1.6% 6/16 - 12/28

2.American Stores $9.5 + 4.4% $407 + 16.8% + 2.3% 7/30 - 2/3

3.Safeway $9 + 5.9% $408 + 17.2% + 4.7% 6/18 - 12/30

4.Winn-Dixie $6.9 + 13.1% $197 + 12.3% + 5.6% 6/29 - 1/10

5.Albertson's $6.4 + 6.7% $442 + 7.4% +1.9% 8/2 - 2/1

6.A&P $4.6 - 2.1% $75 + 39.4% + 0.3% 9/10 - 2/24

7.Food Lion $4.4 + 2.3% $193.2 + 2.4% + 1.3% 6/18 - 12/28

8.Ahold USA $4.1 +13.9% $114.8 +24.4% N/A 7/17 - 12/31

9.Vons Cos. $2.8 + 3.7% $109.1 + 8.2% + 4.6% 6/19 - 12/31

10.Giant Food $2.2 + 10% $161.3 +1.8% + 2.4% 8/13 - 2/24

11.Pathmark $2.1 FLAT $142.2 + 40.7% - 0.4% 7/30 - 2/3

12.Stop & Shop $2 + 11.1% $98.5 - 7.4% + 3% 8/13 - 1/27

13.Penn Traffic $1.8 +5.9% $27.8 - 68% - 0.9% 7/30 - 2/3

14.Fred Meyer $1.7 + 13.3% $47.1 + 21.7% + 3.9% 8/13 - 2/3

15.Smith's $1.6 + 6.7% $69.7 - 4.1% -2.9% 7/2 - 12/30

16.Hannaford Bros. $1.3 + 8.3% $69.2 + 2.9% + 2.6% 7/2 - 12/30

17.Grand Union $1.1 FLAT $64.1 - 1.2% - 1.3% 7/23 - 1/6

18.Dominick's $1.1 N/A $57.5 N/A + 1.2% 8/1 - 1/20

19.Harris Teeter $0.908 + 7.3% $22.1 + 12.2% + 4.6% 7/3 - 12/31

20.Weis Markets $0.841 +4.3% N/A N/A N/A 7/2 - 12/30