Kroger Q3 Up, but Wall St. Wants More

CINCINNATI -- The Kroger Co. here posted a 9.8 percent increase in total sales, to $16 billion, for during the quarter ended Nov. 10, but the performance left Wall Street underwhelmed because of a drop in profit margins for fuel.

The nation's largest traditional food retailer reported a 7.7 percent same store sales gain with fuel, and 5.7 percent without, still healthy by just about any supermarket standard. It was the 10th consecutive quarter of identical supermarket sales increases, excluding fuel, in excess of 3 percent for the grocer.

Net earnings for the third quarter were $253.8 million, or 37 cents per share vs. $214.7 million, or 30 cents in the same period last year.

Kroger acknowledged its results were offset by lower fuel margins and an acceleration of certain shelf pricing and/or pricing initiatives that are part of its Customer 1st strategy.

Kroger shares fell $1.87, or 6.6 percent, in trading yesterday, and closed at $26.47.

During a conference call with investors, David B. Dillon, Kroger chairman and c.e.o. praised his company's performance. "Our quarterly and year-to-date performance is a great example of the strategy we have been discussing ... for some time: a sustainable, sales-driven plan that allows us to invest cost savings into initiatives that are meaningful to our customers," he said. "We continue to execute our strategy well in every area of our business."

Dillon further noted that the company's performance "was a direct result of our associates' efforts to focus on our customers. Our business model positions us well to serve the diverse needs of our customers."

During the third quarter, Kroger's capital investment expenditures totaled $555 million, excluding acquisitions, vs. $415 million a year ago. Kroger repurchased 16.5 million shares of stock at an average price of $26.77 for a total investment of $442.1 million. At the end of the third quarter, $201.6 million remained under the $1 billion stock repurchase program announced in June 2007.

Looking beyond fiscal 2007, the company said it expects same store supermarket sales growth in the 3 percent to 5 percent range with a slightly improving operating margin, excluding the effect of retail fuel operations.

Having successfully wrapped up a series of labor agreements with unions representing associates in key regions across the country during the quarter in Cincinnati, West Virginia, southern California (Food-For-Less) and a central Ohio warehouse, Kroger in 2008 will negotiate contracts covering store associates in Columbus, Indianapolis, Las Vegas, Louisville, Nashville, Phoenix, and Portland.

The operator said it anticipates supermarket square footage growth of 2 percent in fiscal 2007, and investments of $1.9 billion to $2.1 billion in capital projects this year, excluding acquisitions.

W. Rodney McMullen, Kroger's vice chairman, told investors that in terms of capital allocation, "Our emphasis remains on store remodels and we are very satisfied with their performance. Our customers tell us they appreciate them as well, both in terms of their comments and the sales performance.

McMullen said Kroger had completed 155 remodels in the first three quarters of the year. That compared to 112 remodels during the same period last year.

Kroger operates 2,487 supermarkets and multi-department stores in 31 states under two dozen local banners.
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