Grocer Kroger Cautiously Upbeat, Says Q4 Profit Up

DAN SEWELL | AP Business Writer

CINCINNATI (AP) – The nation's largest traditional grocery chain says more households are buying most of their groceries at its stores while stretching out their spending over more trips as they face higher food and gas prices.

Kroger Co. on Thursday reported that its fourth-quarter profits and sales jumped, as the company saw increased customer loyalty and gained on the competition in most of its markets. Kroger's leaders saw other trends they found encouraging:

  • higher deli and bakery sales; more shoppers buying meals to take home instead of going to restaurants;
  • higher sales of specialty items, which tend to be pricier, including natural foods, Starbucks coffee and Boar's Head meats;
  • rebounding revenue in the drug and general merchandise department, where sales softened during the recession.

"We are encouraged by several improving customer and economic trends, which we hope signal the beginning of a return to a more normal operating environment," CEO and Chairman David B. Dillon told investors on a conference call.

The grocer said shoppers are paying more at checkout as its food and dairy prices rise, and they made more trips to the store in the fourth quarter, though each transaction was worth less than a year earlier.

"We believe a lot of that is budgeting," said Rodney McMullen, Kroger's president. "People are not buying as much when they shop each time, but are shopping more frequently."

Kroger also announced Thursday that its board authorized a $1 billion stock repurchase plan, a move that usually increases the value of remaining shares. In addition to Kroger stores, the company operates regional brands such as Ralphs, Fred Meyer, Food 4 Less, King Soopers, Dillons and Fry's.

Kroger was cautiously optimistic for the current year, saying rising fuel and food costs are likely to take a bite out of household budgets. It expects to earn $1.80 to $1.92 per share, compared with an average forecast for $1.92 per share from analysts.

Dillon said the year ahead is looking better, but the company considers the economic recovery "fragile" because of continued high unemployment rates and unprecedented food stamp use.

Shoppers such as Barbara Stokes of Greenville, N.C., are concerned about increasing prices.

"Everything's going up," said Stokes, who looks for bargains and shares tips on her clippergirlssavingspot blog. "We eat a lot of chicken and the chicken breast that used to be $1.77 a pound on sale is $1.97; milk, except when it's on sale, is going up 5 to 10 cents. Pet foods are up – a bag of Gravy Train that was $7.99 is $8.49 a bag."

She splits her shopping among a couple regional chains and Kroger, where she likes the "mega sales," when 10 featured products are discounted and shoppers get a $5 rebate for buying 10 mix-and-match items.

Kroger's other incentives intended to encourage repeat customers include discounts good only for loyalty card users, special coupons and fuel price breaks that start at 10 cents a gallon.

In its annual competition report Thursday, Kroger said its share rose in 13 of 19 of its markets, declined in four and was flat in two. Kroger said its grocery sales rose overall in the 17 markets where it competes with the supercenters of Wal-Mart Stores Inc., the No. 1 seller of U.S. groceries.

McMullen said the gains were particularly important because Kroger faces a widening range of competitors, including warehouse club stores, dollar stores and other retailers offering grocery items alongside general merchandise.

The Cincinnati-based company said its fourth-quarter net income was $278.8 million, or 44 cents per share, compared with $255.4 million, or 39 cents per share, a year earlier, a 9.2 percent increase.

Kroger's quarterly revenue rose 7.4 percent to $19.9 billion, including fuel sales. Analysts surveyed by FactSet expected Kroger to earn 44 cents per share on $19.4 billion in revenue. Kroger said a charge reflecting the declining value of a small group of stores cut earnings 2 cents per share.

The company's stock closed up 50 cents, or 2.2 percent, at 23.02. It has traded from $19.08 to $24.14 in the last 52 weeks.

Kroger, which sells gas at more than 1,000 Kroger-branded stations, said total sales rose 7.1 percent for the year, to $82.2 billion. Excluding fuel, its annual revenue rose 3.4 percent.

Kroger has 2,458 grocery stores in 31 states.

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