Kroger’s Q2 Net Down; Same-Store Supermarket Sales Up 2.6 %

The Kroger Co.’s second-quarter earnings slid 8 percent, prompting the company to cut its full-year profit expectations as a result of a sluggish economy and unprecedented changes in customer behavior that company executives said wwould likely linger for the foreseeable future.

Total sales declined 2 percent to $17.7 billion for the Cincinnati-based grocer as a result of sharply lower fuel prices in the second quarter of fiscal 2009 ended Aug. 15, 2009 vs. the same period last year, when fuel prices soared past $4 per gallon. On the bright side, Kroger’s same-store supermarket sales, excluding fuel, increased nearly 3 percent to $15 billion while total sales excluding fuel were up 3.5 percent.

In a conference call with investors yesterday, Kroger CEO Dave Dillon called the favorable supermarket same-store stores “a solid increase, particularly considering changes in customer behavior and significant deflation in produce and dairy. In fact, our product cost inflation estimate, excluding fuel, dropped to a -0.2 percent from the positive 3.6 percent we estimated in the first quarter.”

The same-store supermarket sales increase also “signals that more customers are turning to Kroger to consolidate purchases, driving the exceptional unit growth we saw in the quarter,” said Dillon, noting that the second-quarter period ID sales results “do not fully reflect the strength of our business,” which includes higher customer loyalty rates and more frequent numbers of shopping trips to where fewer items are purchased. “Yet in the course of a month, these households are buying more total items from Kroger than they were a year ago, which indicates that they are consolidating more of their total spend with us,” Dillon explained.

As for the 8 percent net decline, Kroger tabbed $254 million in earnings, or 39 cents per share, vs. $277 million, or 42 cents, in the same period in 2008, while operating profit fell 9 percent to $499 million, due to higher operating and administrative expenses, among others factors. Not surprisingly, Wall Street winced at Kroger’s more difficult-than-expected Q2 performance after expecting to see the retailer’s earnings grow to 44 cents per share -- hence the 8.5 percent price decline in morning trading.

“We remain confident in our strategy,” said Dillon, which he maintained is “generating and will continue to generate long-term value for our shareholders.”

Looking ahead to the rest of the year, Kroger confirmed full-year same-store supermarket sales guidance of 3 percent to 4 percent without fuel for fiscal 2009, which assumes product costs for the remainder of the fiscal year are consistent with, or slightly lower than, the second half of fiscal 2008. The company, meanwhile, updated its 2009 earnings per share guidance, in anticipation of continued changes in customer behavior and an uncertain operating environment, to $1.90 to $2 per diluted share.
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