Kroger Profits Slip

Cincinnati Enquirer – March 12, 2008 –

Food-price inflation drove down Cincinnati-based Kroger Co.'s profit for 2007 by 16 percent, or $322.9 million, the company reported Tuesday.

Kroger, a grocery and general merchandise retailer with 2,486 grocery stores, delivered earnings per share for the fourth quarter of 48 cents, compared with 54 cents per share in 2006.

Price inflation impacted inventory and hit results with a non-cash charge of 5 cents a share, which was 2 cents lower than the company had predicted at the end of the third quarter.

The company also said its fourth-quarter profit margin was about 0.23 percent less when compared with last year's fourth quarter. The lower profit margin drove more competitive pricing, which led to more customers and higher sales.

"Despite a growing number of competitors, Kroger has increased its market share," said David B. Dillon, Kroger chief executive, during a mid-morning conference call.

Some discretionary spending categories such as jewelry and home furnishings were weak, he said. Discretionary spending remained weak in January.

Kroger shares closed Tuesday up 2.7 percent or 68 cents at $26.

The company predicted 2008 earnings per diluted share of $1.83 to $1.90 - a range that is at the low end of analysts' expectations - based on a number of things:

• Customers are spurning restaurants for grocery stores' ready-to-eat meals.

• As name-brand consumer packaged goods raise prices, that drives shoppers to Kroger's roster of private brands created at the company's 42 plants.

• Kroger increased market share in most of the 44 markets where the company has nine or more stores.

Dillon said the company remodeled 200 stores in 2007 with 102 supermarkets opened or expanded, reflecting a capital budget of $2.1 billion.

"Those remodels are producing results above our expectations," Dillon said.

Dillon also offered a company analysis that he said showed Kroger captured more consumer dollars in 2007 in 44 markets where it has more than nine stores and competes with Wal-Mart, as well as independent and smaller grocers. It did not break out those geographic markets.

Kroger's share of the grocery dollar increased in 37 of those 44 major markets, declined in six and remained unchanged in one, he said.

The market share increase was slight - about 0.65 percent, he acknowledged, but he said what was important was the trend.

"Both Wal-Mart and Kroger are taking share from other sources," he said.

Kroger competes against a total of 1,340 supercenters - an increase of 78 over last year. Supercenters have achieved at least a No. 3 market share position in 36 of Kroger's major markets.

Kroger's overall market share in these 36 markets rose 0.95 percent during 2007, increased in 31 of those 36 major markets, declined in four and remained unchanged in one.

Of those supercenters, Wal-Mart owned the vast majority, Dillon said, about 1,065.

Dillon said those market-share calculations looked at food sales from all retail outlets where customers can purchase products Kroger sells, including supercenters and other non-traditional formats such as dollar stores, drug stores, and warehouse clubs. But he stopped short of saying Kroger is taking market share from global giant Wal-Mart.

Americans dining out less last year because of rising gas prices may have hurt restaurants, but it helped the top line of the Kroger income statement.

"I'm on fixed income, I don't eat out much at restaurants anymore at all," said retiree Robert L. Blakeslee, 70, a Sycamore Township resident who was headed into a remodeled store on Hunt Road in Blue Ash on Tuesday afternoon to check out ready-to-eat meals for his evening dinner.

"With fuel prices what they are, people are much more likely to eat at home."

A report from ShopLocal.com, a Chicago-based company that tracks online as well as in-store shopping patterns, found that its index linked to grocery shopping patterns rose by 34 percent in February 2008 compared to the year before.

"The index definitely reflects the economy with more people eating at home," said Marcy Dockery, spokeswoman for ShopLocal.

Click here to see the article.