SAN BERNARDINO, Calif. — Stater Bros. Markets said last week customer counts rose by nearly 1 million during the second quarter that ended March 27 as the company maintained lower margins so it could promote value pricing as part of its 75th anniversary marketing program.
Each weekly ad features a half-page of items priced at 75 cents, “which has resulted in a slight increase in basket count, reversing a trend of the past 16 months,” Jack Brown, chairman and chief executive officer, told analysts during a conference call. “We've gone to all the major manufacturers, and many of the smaller ones, and told them we need products to retail at 75 cents without going below cost, and that has enabled us to offer tremendous values to our customers. A price of 75 cents is real magic, and it has stimulated traffic in the stores.”
Stater also made a conscious decision to keep margins low to maintain and build its customer counts “and to make sure they spend more with us than with the competition.”
Phil Smith, executive vice president and chief financial officer, said margins for the quarter were 26.84%, compared with 26.70% a year ago; and 26.70% for the half, compared with 26.23% a year ago.
Brown said Stater is reflecting manufacturer price increases slowly. “Our customers understand when they look at retail prices that Stater is dragging its feet on raising prices,” he pointed out.
To keep prices down, some chains are offering different grades of produce, Brown pointed out. “But we won't trade off on our standards to offer a smaller apple at a lower price. Our plan is to remain consistent at as low a price as we can put out there.”
Net income rose 47% to $8.8 million for the 13-week quarter and fell 20.8% to $10 million for the half; however, excluding an after-tax gain in 2010 of $5.6 million from the sale of the company's dairy assets, net income would have been up 41.8%.
Sales rose 3% to $913.4 million for the quarter and 0.2% to $1.8 billion for the half, while comparable-store sales climbed 3.2% for the quarter — the first increase in five quarters — and 0.4% for the 26-week half.
Brown said the sales gains came in spite of the addition over the past year of expanded food departments at 22 Wal-Marts, three Wal-Mart supercenters and 46 Targets within a five-mile radius of a Stater Bros. store. “Each Wal-Mart conversion is equivalent to 2.5 supermarket openings, yet our stores were able to absorb all that increased competition.
“We analyzed all they did and determined what we do best, which is perishables. We also think our people make a difference. While you can argue about the quality of meat or produce, no one denies Stater has the best people — most of whom are generally in a good mood.”
Stater anticipates 13 more Target conversions and one more Wal-Mart supercenter conversion this year, “but we're determined not to give up any volume, and so far, we haven't.”
Regarding labor negotiations, Brown said Stater is negotiating its own contract with the United Food and Commercial Workers Union, separate from the contract the three major chains in Southern California are negotiating, Brown explained. He said he expects to settle with the union after the major chains do — “probably in late summer.”
Brown said Stater will replace two 24,000-square-foot stores in Hesperia and Lake Elsinore, Calif. — whose leases are expiring next year — with the 44,000-square-foot Albertsons locations it acquired last month, Brown said.
The company will make “significant investments” in converting the acquired stores, he added — “gutting them and keeping just the floor and ceiling, in order to give our customers the equivalent of a brand-new store.