Kroger Q3 Sales Up 9%; Hurricane Hits Profits

With a healthy 9 percent sales increase and robust same store sales, The Kroger Co. posted another solid quarter, albeit with a slight earnings decline relating to charges from property damage and store shutdowns courtesy of Hurricane Ike.

Kroger's total sales rose 9 percent to $17.6 billion in the third quarter ended Nov. 8, vs. the same period last year. Same-store supermarket sales increased 5.6 percent without fuel, and 8 percent counting fuel.

David B. Dillon, Kroger's chairman and c.e.o., sounded a familiar, and quite justified, refrain, noting how the company consistent customer-centric policies continue to pay off.

"Kroger's sales continue to be strong in this tough economy," Dillon said. "We know our customers are increasingly feeling pressured in today's environment. Kroger's focus on low prices, quality products and providing a convenient, one-stop solution for their daily needs is resonating with our customers. Our associates continue to build customer loyalty through our Customer 1st strategy, which allows us to create a solid return for our shareholders even as the economy presents new challenges."

Affects from Hurricane Ike caused a profit decline, on a $16 million after-tax charge related to Kroger's $25 million insurance deductible for disruption and damage, vs. the corresponding 2007 period that included a one-time, $40 million tax benefit and other unusual items that in the aggregate lifted earnings per share by 2-to-3 cents.

Excluding the one-time items on both periods, Kroger said its earnings per share would have increased by more than 10 percent.

All told, Kroger's third quarter net earnings were $238 million, or 36 cents per share; excluding the charge from Hurricane Ike, its net earnings were $254 million, or 39 cents vs. $254 million, or 37 cents in the same period last year.

Citing Kroger's solid balance sheet, Dillon said the company's financial fortitude has been a competitive edge for several years, and is even more so in the current challenging economic climate.

"Kroger's strong financial position gives us the flexibility to continue investments in our successful Customer 1st strategy and store base, that will create value for our shareholders in the future while delivering near-term financial results."

Dillon said Kroger is using cash flow to leverage its robust financials and support an appropriate level of liquidity. Currently, cash flow is being allocated primarily to capital investments, debt reduction and dividend payments, he said.

Kroger's capital expenditures purse, excluding acquisitions, totaled $604 million for the third quarter, vs. $555 million in the prior year. Capital projects during the third quarter included 14 new, expanded, or relocated stores and 55 remodels. The company expects to open, expand or relocate approximately 60 stores and complete between 165 and 180 store remodels during fiscal 2008.

Total debt was $8 billion, an increase of $553.0 million from a year ago. On a rolling four-quarter basis, Kroger's net total debt to EBITDA ratio was 1.96 compared with 2.02 during the same period last year. Kroger expects continued improvement in its leverage metrics.

During the third quarter, Kroger repurchased 3.1 million shares of stock at an average price of $27.89 per share for a total investment of $86.6 million. At the end of the quarter, $492.8 million remained under the $1 billion stock repurchase program announced in January 2008.

During the first three quarters of fiscal 2008, the company's sales increased 11 percent to $59 billion over the same period last year, while YTD same-store supermarket sales, excluding fuel, increased 5 percent.

As for its same-store supermarket sales guidance for fiscal 2008, Kroger expects to see full-year sales growth of 4.5 percent to 5.5 percent, excluding fuel.

The company also raised its fiscal 2008 earnings per share guidance and said it expects full-year earnings of $1.88 to $1.91 per diluted share, excluding the $0.03 per diluted share charge related to Hurricane Ike - equivalent of an annual growth rate of 11 percent to 13 percent over fiscal 2007 earnings of $1.69 per diluted share and implies a fourth quarter earnings range of $0.49 to $0.52 per diluted share.

Kroger operates 2,477 supermarkets and multi-department stores in 31 states under two-dozen local banners.
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