Kroger Profit Falls on Costs, Blackout

CINCINNATI -- Kroger Co. has reported a sharp drop in quarterly profit as it battles higher operating costs and competition led by Wal-Mart Stores, Inc.

Kroger also cut its outlook for the full year, saying that results would be near the low end of its estimated earnings range or could fall below the range.

The nation's top-ranked grocery chain, whose business was also hit by the August power blackout, said profit for the fiscal second quarter ended Aug. 16 fell to $190.4 million, or 25 cents a share, from $264.0 million, or 33 cents a share, a year ago.

The company said its latest results included an after-tax charge of 5 cents per share to resolve disputes related to energy supply arrangements with Dynegy Inc., and a 1 cent expense related to the August blackout, which was the largest in North American history.

According to Reuters Research, the Cincinnati-based supermarket chain was expected to post, on average, a profit of 32 cents a share.

Total sales for the second quarter of fiscal 2003 increased 3.6 percent to $12.4 billion. Total food-store sales rose 3.3 percent, while same food-store sales, including fuel, declined 0.1 percent. Identical food-store sales, excluding fuel, decreased 0.9 percent. Comparable food-store sales, which include relocations and expansions, increased 0.5 percent for the quarter while comparable food-store sales, excluding fuel, declined 0.4 percent.

"We were encouraged by our sales performance in the second quarter, especially in the light of intense competition, continued economic uncertainty and the strength of our identical food-store sales in the year-ago period," said David B. Dillon, Kroger's c.e.o. "In addition, Kroger's associates did a great job of managing costs in the second quarter in the face of challenging health care, pension and energy costs."

During the second quarter of 2003, Kroger opened, expanded, relocated, or acquired 36 food stores. Total food-store square footage increased 3.9 percent over the prior year, including acquisitions. Capital expenditures for the quarter totaled $449 million. Kroger now expects capital investment for the full year to be $1.9 billion, excluding acquisitions and the buyout of a synthetic lease.

"We remain committed to achieving earnings per diluted share of $1.50 or better, but the current environment remains very challenging," Dillon said. "The strategic growth plan is the right approach to grow our market share by reducing the price gap with discount operators and widening our price advantage over traditional competitors in many markets. We have achieved $458 million in cost savings through the end of the second quarter. We expect to exceed our original goal of $500 million in savings by the end of 2003."
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