CINCINNATI - While the best quarterly sales results in more than 15 years validated ongoing strategic initiatives at Kroger here, officials of the retailer last week were focused on the future.
Kroger will increasingly tailor its combination stores to match their customer spending trends while tinkering with price and multi-department store formats "trying to create the growth vehicle looking out three to five years," according to Rodney McMullen, Kroger's vice chairman, speaking with analysts in a conference call last week.
McMullen acknowledged that increased capital expenses - around $50 million during the fiscal first quarter that ended May 20 - were devoted mainly to development of alternative formats such as the multi-department Marketplace store, currently in Arizona, Utah and Columbus, Ohio, under development in Cincinnati and headed toward "a few other markets," he said.
The company in the meantime is proceeding to make changes in selection and marketing at individual stores based upon the purchasing behavior of each store's customers. Kroger officials recently explained these changes involve designating its various supermarkets as "upscale," "mainstream" and "value" based on customer purchase behavior, and merchandising and marketing them accordingly during renovations or expansions.
"In years past, our stores were very different from one another, but increasingly what you will see is the differences will be more driven by the differences in our customers more so than differences in geography," David Dillon, chairman and chief executive officer, explained to analysts in the conference call. These strategies are "only beginning to be played out, but I think you'll see that to be an increasingly important factor for us," he said.
Analysts said the changes, though gradual, indicate an effort on Kroger's part to better centralize its operations and create consistency among its various divisions.
"They're heading down a path of more central control than before - which is a good thing," Perry Caicco, an analyst for CIBC World Markets, Toronto, told SN. "They've also been putting more power and attention behind new store formats."
Successful execution of an ongoing strategy to reduce prices and improve store service and cleanliness drove robust sales during the quarter, the company said.
Overall sales jumped 8.2%, and identical-store sales, excluding fuel, gained 5.7% - Kroger's best quarterly sales increase since the fourth quarter of 1990, according to Andrew Wolf, an analyst at BB&T Capital Markets, Richmond, Va. Gross margins, excluding the impact of fuel, were down slightly, indicating Kroger has continued to invest in price.
"There's nothing inherently wrong with margins being down," Wolf told SN. "You can have gross margins down somewhat if sales are good, because gross profit dollars are up more than operating costs and that gives you leverage. A slight decrease in gross margin is not a high price to pay for sales productivity."
Dillon said Kroger experienced sales increases in "all divisions and all departments," including grocery, produce, natural food and fuel. Opening price-point items also saw sales increases, which Dillon attributed not only to higher gas prices impacting shopping decisions, but also to better selection and quality of such goods in Kroger stores.
The strong sales prompted Kroger to increase its expectations for non-fuel identical-store sales growth to 4.5% for the full year from earlier estimates of 3.5%.
Kroger earned $306.4 million, or 42 cents a share, on overall sales of $19.4 billion during the quarter. Earnings increased by 4.1% despite the effects of 3 cents per share set aside for legal reserves and 2 cents per share for stock options. Earnings were in line with analyst estimates.
Kroger reserved 3 cents per share - or around $35 million before taxes - for the federal lawsuit against Ralphs, which alleges managers at Ralphs rehired locked-out workers who used false names and Social Security numbers during the 2003-04 labor dispute in Southern California. The reserve "represents our best estimate of the company's exposure in connection with these legal proceedings," McMullen said.
The trial is set to begin Aug. 15 in Los Angeles.
Kroger reported gross margins were down 0.61% to 24.55% of sales compared with the same period a year ago, noting the vast majority was due to rising gasoline prices. Price investments were funded mainly through improvements in shrink, advertising and warehousing expenses.
Operating costs as a percentage of sales fell slightly to 18.17%, as Kroger invested $450 million in capital projects during the quarter, funding 16 new, expanded or relocated stores, 39 remodels and 36 closures, including the previously announced exit of the Northern California market under the Cala/Bell and Ralphs banners.
Dillon said Kroger was "obligated" to look at opportunities created by Albertsons stores recently slated for closure by their new owner, Cerberus Capital. But he said the stores overlapping Kroger's trade area - 15%-20% of the announced closures - were low-volume stores whose closure would not have a meaningful impact.
