CINCINNATI -- Based on its assessment that its new stores have been successful against all forms of competition, Kroger Co. here said last week it will raise capital spending from previously announced levels.
The company said it will increase capital spending by $158 million over the next three years. The disclosure came in the chain's report of financial results for the 12-week first quarter, in which net income after an extraordinary item rose 24.7% to $59.1 million, sales jumped 2.6% to $5.5 billion and same-store sales increased 1.1%. Kroger originally said it planned to spend approximately $1.8 billion over the next three years -- $600 million this year and a similar amount in each of the next two years -- on new stores and investments in technology
and logistical systems. However, it has decided to raise spending over the three-year period by 8.8% to approximately $1.96 billion, with most of the extra money being allocated in 1996 and 1997. The additional money will come from funds generated by increased cash flow, the company said. Joseph A. Pichler, chairman and chief executive officer, said the combination stores Kroger opened in 1993 and 1994 as part of its accelerated expansion program "are proving to be an ideal format against every kind of competitive strategy." He said those stores are "already producing returns greater than we originally projected." Kroger has been facing a record number of competitive openings in many markets and goes head-to-head with supercenters more than any other chain, according to analysts.
Debra Levin, a securities analyst with Morgan Stanley, New York, said Kroger's expansion plans before the announcement of additional funding had called for a square footage increase of 5% to 6% a year through 1997 -- a percentage likely to increase, she said, though she wasn't sure how much of the extra money would be spent on new stores and how much on technology. "Kroger has been trending upward in its cap-ex since its leveraging in 1988, when it dramatically cut back capital spending," she noted. Over the last few years Kroger has significantly increased its capital budget, spending $241 million in 1992, $376 million in 1993 and $534 million in 1994. The $600 million it had planned to spend this year -- prior to last week's announcement -- put its cap-ex budget at about 2.5% of sales, identical to the industry average, Ed Comeau, an analyst with Lehman Bros., New York, told SN. According to Comeau, Kroger has chosen to invest cash flow in new stores and its infrastructure rather than to pay down debt. "It's not simply that Kroger is trying to make up for its lack of spending in the years after its financial restructuring," he said. "Apparently, Kroger sees a lot of opportunity to grow its business rather than choosing to balance cash flow between additional spending and debt repayment. "It obviously believes the returns are better from opening additional stores than paying down debt," he said.
Regarding the effectiveness of Kroger's new stores against all forms of competition, Comeau said that the returns on its stores are good "because they are not doing anything experimental -- they are simply powerful vehicles in a tried-and-true format." According to Levin, Kroger's first-quarter results were slightly ahead of expectations. "Operating margins continue to improve as Kroger invests in distribution and technology and as new stores mature," she explained. Kroger said its first-quarter operating earnings increased 15.8% to a record $64.5 million before an extraordinary item of $5.3 million for early retirement of debt. Operating cash flow increased 8.1% to a record $256.9 million. The company said total food store sales -- exclusive of convenience stores and manufacturing volume -- increased 4% over the prior year's first quarter. It also noted that same-store sales in February and March increased 2% following a decline of 0.5% in January -- a result, Kroger officials explained, of adverse comparisons with the year-ago quarter, when sales were affected by severe winter weather. Pichler said first-quarter results reflected the consistency of Kroger's performance over the past two years. "Kroger's strategy of growth through existing assets, new-store development and implementation of technology and logistics is producing consistently strong results quarter after quarter," he noted. "Since the first quarter of 1993, we have steadily improved both our operating performance and our marketplace position despite a record number of competitive openings in many of our markets." Pichler also said Kroger's retail divisions, convenience stores and manufacturing units are benefiting from increased productivity and declining costs as new technologies and logistical applications come onstream. Kroger operates 1,301 stores. During the quarter it opened, acquired or expanded 15 food stores and completed seven remodels.
