Kroger cites PL as contributor to 3Q profit - private label sales up - Brief Article - Statistical Data Included

DSN Retailing Today, Oct 22, 2001 by Mike Duff

CINCINNATI -- Those wondering about what's next for Kroger can count on this Ohio-based retailer to build on its strengths, even as it deals with the challenges offered by a soft economy. In a conference call to review second quarter sales, Joseph Pilcher, chairman and ceo, said the company plans to look at new growth opportunities for its Food4Less format, maintain its pharmacy expansion, emphasize natural foods and continue squeezing its debt-to-EBITDA ratio.

During the quarter, Kroger added 325 new products to its lineup, and private label has been an important initiative for the company. While the impact of private label can seem double edged on paper, Pilcher said, the bottom line effect is what's most important. "Corporate brands have a dampening affect on top-line sales, but they increase gross profit dollars by about 10%," he said.

In tough economic times, private label is an element with the right chemistry. So is a value-oriented store format. Food4Less, the company's "price impact" format, is a key concept in its portfolio, Pilcher said. Kroger is looking to expand Food4Less beyond Southern California and Las Vegas, the two areas where the company currently operates the banner. Kroger owns the Food4Less format, but licenses it to Fleming in certain markets. Fleming currently operates stores and has market rights in northern and central California, Utah and Arizona. Fleming also operates one Food4Less store in Wisconsin. Kroger is, therefore, somewhat limited in where it can grow the concept.

Both Kroger and Fleming have stated that the price impact operations have been doing well and would be grown. Kroger's Food4Less division currently operates 109 stores. In addition to the Food4Less units in Southern California and Las Vegas, it operates stores under the FoodsCo. banner in northern California. The division has opened six Food4Less stores this year, the latest being a 50,000-sq.-ft. Ralph's conversion in Chula Vista, Calif.

Like many Food4Less stores serving neighborhoods with large Mexican-American populations, the Chula Vista unit features a "Carnaceria" -style meat department. The division also opened a FoodCo. unit in Fresno, Calif., in 2001. In addition, it converted the five price-impact stores it operates in Las Vegas to Food4Less from the PriceRite banner. A sixth Food4Less unit in Las Vegas is under development. "We love Food4Less," Pilcher said. "It's a powerful concept. We see great growth opportunities there."

Natural foods are going "gangbusters," Pilcher said, and Kroger responded by expanding natural food operations, including produce, where organics have been added. Pharmacy is growing faster than other Kroger divisions and continues a positive sales trend, despite the industrywide pharmacist shortage--a problem Kroger has been able to take in stride through innovative hiring and staffing practices.

Pilcher noted Kroger executives were less than happy about its sales in the second quarter. A weak economy led to reduced purchasing in critical areas, such as floral and jewelry. Kroger is the world's largest retail florist, Pilcher stated, and operates 420 fine jewelry stores.

Looking forward, forecasting becomes difficult. In gift-related categories, such as jewelry and floral, Kroger is budgeting for a slow holiday season and a soft fourth quarter, said Rodney McMullen, executive vp of strategy, planning and finance, even as it positions itself to get the most out of the available opportunity. "Beyond that, we have no idea," he said.

Kroger's Fred Meyer division, conversely, hasn't been especially hurt by the softening economy, nor has the company Much of Fred Meyer's sales are on everyday, rather than extraordinary, purchases. "Fortunately, Fred Meyer doesn't rely on high-ticket items," Pilcher said. Neither has the company taken undue damage. "If you look at the company as a whole, only about 5% of sales is represented by general merchandise categories," he said. "The impact at this point is modest."

In the second quarter, Kroger posted earnings of $255.7 million, or $0.32 per diluted share, excluding costs related to a merger and one-time expenses, for the period ended Aug. 18 vs. $208 million, or $0.25 per share, in the year-earlier period. Merger and one-time costs were $11.2 million in this year's quarter as compared with $9.8 million in the quarter last year.

Sales advanced 4.2% to $11.5 billion. Food store sales gained 4.5%. Comp food store sales, including relocations and expansions, rose 1.6%, and identical food store sales rose 0.8%.

During the quarter, Kroger opened, expanded, relocated or acquired 38 food stores. Overall square footage increased 4.0% over 2000. Including acquisitions, capital expenditures totaled $540 million. Kroger repurchased 7.0 million shares of common stock in the quarter at an average price of $25.30 per share, for an investment of approximately $180 million. Since January 2000, Kroger has invested approximately $1.1 billion to buy back approximately 47.5 million shares.