Kroger Q1 Profits Up 15 Percent

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Kroger Q1 Profits Up 15 Percent

The Kroger Co. ought to be selling more Teflon products, as the impacts of price inflation and the economic downturn just don't seem to be sticking.

The leading grocer's first quarter results released yesterday are strong evidence that Kroger is doing the right things in this climate. Buoyed by strong store brand sales, aggressive pricing strategies, and an expanded s generic drug and discounted gas program to lure price-conscious shoppers, Kroger posted a 15 percent gain in net income in the quarter, and raised its sales and profits outlook for the full year.

"Customers are responding to offers that really hit home with them," said David B. Dillon, Kroger's chairman and chief executive, on conference call with analysts. Dillon suggested the grocer is likely benefiting from customers defecting from small independent grocers squeezed in the economic vise; and from restaurants as more people eat meals at home.

Dillon added during the call that his company's economic stimulus check rebate program had no material effect on earnings or sales in the quarter. He also projected private label will become a $1 billion business this fiscal year for Kroger.

The Cincinnati-based grocer's better-than-expected first quarter performance spurred a leap in its stock price, with shares closing at $27.82, up 7 percent.

Net earnings in the period ended May 24 reached $386 million, or 58 cents per share vs. last year's $336.6 million, or 47 cents. Kroger's total sales also grew a healthy 11.5 percent to $23.1 billion in the quarter, while same-store supermarket sales increased 9.2 percent, counting retail fuel operations; and 5.8 percent without.

"Our strategy positions us well to deliver consistent results and make investments for our future," said Dillon, claiming that price reductions, expanded generic drug and gas discount programs are helping Kroger customers save $1 billion annually.

On the heels of its strong first quarter performance, the company raised its same store sales and earnings forecast for fiscal 2008. It now expects sales growth of 4 percent to 5.5 percent, excluding fuel, for fiscal 2008 vs. its previous guidance of 3 percent to 5 percent.

On the heels of posting 10 consecutive quarters of same store sales growth of 5 percent to 6 percent, Dillon said, "We are off to a strong start in fiscal 2008. Kroger's performance during the quarter demonstrates the resiliency of our 'Customer 1st' strategy. Our associates are connecting well with customers as our strategy continues to drive industry-leading identical sales growth and create shareholder value."

The grocer's capital investment purse, excluding acquisitions, totaled $636.7 million vs. $555.8 million in the prior year. First quarter 2008 capital projects included 17 new, expanded, or relocated stores and 36 remodels.

The company said it is now on track to open, expand or relocate 70 to 80 stores and complete between 175 and 200 store remodels during fiscal 2008.

The updated earnings guidance reflects 9 percent to 12 percent growth over fiscal 2007 earnings of $1.69 per diluted share. Shareholder return is further enhanced by Kroger's dividend yield of more than 1 percent.

"The underlying strength of Kroger's long-term business model is illustrated by our solid first quarter results and updated guidance," said Dillon. "We continue to balance investments in our customers' overall shopping experience with current economic conditions, including inflationary costs."

Kroger operates nearly 2,475 stores in 31 states and 723 gas stations under a number of regional banners.