The second half of 2003 was not pretty in terms of the industry's financial results, and the first half of this year isn't likely to win any beauty contests either, industry analysts told SN.
Of the top 10 publicly traded chains, two experienced overall sales declines for the period approximating the last six months of calendar 2003; six experienced negative comparable-store sales in at least one of the two quarters; and six experienced declines in operating profits, including two with negative income, according to published reports and SN data.
It wasn't just the impact of the 20-week strike-lockout in Southern California that depressed results from October through December and on through the first quarter of this year, analysts told SN, but the general malaise hanging over the economy -- a condition most said they don't expect to disappear anytime soon.
The most optimistic assessment was offered by Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, who said consumers continued to exercise caution in their spending during the second half of 2003 -- a behavior pattern evident since mid-2001, he noted. However, Cerankosky said he believes Kroger's strong fourth-quarter performance "across a wide swath of the U.S. means we could see a pickup in the economy during the first half of this year, with customers spending more and trending up in what they purchase."
According to Cerankosky, the Southern California strike-lockout made it tough to assess second-half results "because of the way the chains reported their numbers." However, he said he expects Kroger, Albertsons and Safeway to win back over the next few months almost 100% of the business they lost, "though they will still be fighting among themselves for each other's customers."
Mark Wiltamuth, an analyst with Morgan Stanley, New York, also told SN it's difficult to make any definitive analysis of last year's second-half results "because even looking at the chains' numbers excluding the strike, those are only estimates. So it's not clear what was actually happening."
Wiltamuth said he expects the hangover from the labor dispute to affect results through the first half of this year. "Second-half numbers were all stepped on because of the impact of the strike, and the numbers for the first half are going to be impacted further by price reductions in Southern California," he explained.
Jonathan Ziegler, principal in PUPS Investment Management, Santa Barbara, Calif., offered a similar assessment. "The strike was devastating to Kroger, Safeway and Albertsons, particularly in the fourth quarter, and there was nothing in the third quarter to salvage or offset those results.
"Even if you back out the strike impact, the numbers were still not exuberant for anyone because of the negative pressures from benefit costs, which sparked the strike-lockout, the lack of inflation, and the industry's ongoing loss of market share to Wal-Mart," Ziegler said. "And the first half of this year looks like more of the same, with the chains in Southern California having to sacrifice margin to win back business, which will make it potentially difficult to judge their financial performance accurately."
Gary Giblen, senior vice president and director of research at C L King Associates, New York, said the second half of 2003 started with great expectations "that a combination of increased consumer spending, a return of food inflation, and an easing-up of pricing by Wal-Mart would provide a miracle cure for the industry's doldrums. But none of those expectations came true."
Giblen said he expects little to change in the first half of this year. "Despite some cautious optimism by a handful of analysts, very few are as aggressively optimistic now as they were going into the second half of last year, and those analysts will prove to be incorrect. I believe 2004 as a whole will be another horrible year for the industry."
Looking at second-half results, the 10 chains individually produced the following numbers and analyst insights:
KROGER CO., Cincinnati, whose sales jumped 4.2% to $25.2 billion in the second half; comparable-store sales fell 0.6% in the third quarter, but rose 1.2% in the fourth, and operating income fell 86.1% to $179 million.
Kroger, which operates approximately 16% of its store base in Southern California, locked out employees for only the first two weeks of the Southern California strike-lockout, but suffered a drop in business nevertheless during the subsequent months. Excluding the impact of the strike and of fuel sales, the company said comps rose 0.4% in the third quarter and 1.3% in the fourth.
Giblen said he attributed a large portion of Kroger's overall sales increases to fuel and pharmacy.
Cerankosky said topline results benefitted from Kroger's decision two years ago to invest in gross margins, which helped sales and hurt operating profits during the second half. "Kroger also had more than its fair share of weak competition in some markets, such as Columbus, after Big Bear exited, and it took advantage of those opportunities [to boost sales] during the half," he said.
According to Wiltamuth, "Kroger had a very uneven performance during the strike because its Ralphs stores were picketed early on, and then the pickets were pulled. But the sales it got during the lockout didn't necessarily flow to the bottom line because of its agreement to share the strike costs with Safeway and Albertsons, and that levelled the playing field among the three chains in the labor dispute."
SAFEWAY, Pleasanton, Calif., with second-half sales up 3.1% to $18.8 billion; comps up 0.8% in the third quarter and down 0.4% in the fourth; and operating income down nearly 142% to $104.4 million. With approximately 17% of its store base in Southern California, fourth-quarter comps excluding the strike rose 1.1%.
Although Safeway was the strike target, the impact of the labor dispute on overall results during the fourth quarter was actually less than had been anticipated, Wiltamuth said, "but the key fundamentals were still ugly, with negative same-store sales and gross margins down."
According to Cerankosky, Safeway's fourth-quarter comps and operating income for the half were negatively impacted by the strike and by the inclusion of Dominick's after four quarters as a discontinued operation after the company was unable to sell the Chicago-based chain.
Giblen said Safeway's core food business is down, but the inclusion of Dominick's -- combined with the lift from fuel and pharmacy sales -- helped propel topline results while hurting operating income during the half.
ALBERTSONS, Boise, Idaho, whose sales dropped 1.8% to $17.5 billion; comps declined 0.8% in the third quarter and 6.5% in the fourth; and operating income fell 29.9% to $568 million. With 11% of its supermarket store base in Southern California, comps were up 0.7% in the third quarter and 1.2% in the fourth, excluding the impact of the strike.
According to Wiltamuth, "Total sales growth at Albertsons had been positive till the fourth quarter, when the impact of the strike-lockout kicked in."
Besides the negative impact of the labor dispute, Albertsons' comps were hurt by a tough comparison with the year-ago numbers, which still included results of divisions in Tennessee and Texas that Albertsons subsequently divested, Cerankosky pointed out.
Giblen said Albertsons' results benefitted from inclusion of its freestanding Osco and Sav-on drug stores and in-store pharmacies. "Although the company has invested in a variety of programs, it was still in a transition mode waiting for those investments to pay off, and it's operating in a tough industry environment," he pointed out.
AHOLD USA RETAIL, Braintree, Mass., whose sales rose 2.2% to $12.4 billion during the half, while comps fell 1.1% in the second quarter and increased 0.6% in the third, and operating income dropped 17.7% to $580 million.
Didier Rabattu, a London-based analyst with Deutsche Bank, New York, said U.S. retail sales came in below expectations, while Pascale Nachtergaele, an analyst with Delta Lloyd Securities, Antwerp, Belgium, said Stop & Shop and Giant Food of Carlisle, Pa., generated strong results during the half, while other Ahold retail divisions were facing "a tremendous amount of price pressure," primarily from Wal-Mart, including Tops in upstate New York, Giant Food of Landover, Md., and Bruno's in Alabama -- which the company subsequently announced would be sold, along with its Bi-Lo chain in South Carolina.
According to Nachtergaele, operating performance produced "a bad surprise," reflecting a decline in operating margin of 21 basis points (to 3.8%) during the third quarter "[that] was mainly due to increased promotional activities, particularly at Giant-Landover and Tops."
DELHAIZE AMERICA, Salisbury, N.C., a division of Delhaize Group, Brussels, Belgium, which saw sales rise 8% to $8.1 billion during the second half; comps jump 1% in the third quarter and 0.6% in the fourth; and operating income increase 3.1% to $388.2 million.
Rabattu said the progress management is making in cost savings has allowed it to invest in pricing at Food Lion, enabling its stores to compete more effectively without undermining profitability.
Nachtergaele said the pickup in sales was due to increased volume at Food Lion and Kash n' Karry and the integration of 43 Harvey's stores in November, with comp sales at Kash n' Karry turning positive by the end of the third quarter, she added. Nevertheless, the company announced plans to close or sell its Kash n' Karry stores in eastern and central Florida while keeping the core locations in western Florida and rebannering them as Sweetbay.
She said the increase in operating income was generated by the stronger sales trend, a better focus on meat and perishables, and cost reductions, which offset price investments.
Giblen noted the addition of executives from Hannaford to Food Lion has helped that company improve its operations in perishables while maintaining its strong everyday-low-price image.
WINN-DIXIE STORES, Jacksonville, Fla., whose sales dropped 5.9% to $6.2 billion in the half, with negative same-store sales of 6.6% in the first quarter and 6.8% in the second, and an operating loss of 169% to $115.1 million.
"Right now, Winn-Dixie is simply lost, and the results reflect that," Ziegler told SN. "Its stores are right in the path of Wal-Mart, so it's particularly vulnerable, and by changing its merchandising so often, it's not sending a clear message to customers.
"I see no reason why Winn-Dixie can't survive and flourish, but it's got to have a focus on fresh and on pricing. Frank Lazaran [Winn-Dixie's president and chief executive officer] really has a challenge there because Al Rowland [his predecessor] took out a lot of fresh departments that were not generating much traffic, and then tried going head-to-head with Wal-Mart."
According to Giblen, Winn-Dixie is "a deeply troubled company in an inevitable decline. It picked off all the low-hanging fruit a couple of years ago when it cut costs and got a lift from its frequent shopper program, but now it's down to the nitty-gritty, and it's just not competitive on day-to-day merchandise, vs. upper-end competitors like Publix or price operators like Food Lion and Wal-Mart."
A&P, Montvale, N.J., whose sales increased 5.8% to $4.9 billion for the half, with comps up 1.1% in the second quarter and 1.2% in the third, and an operating loss of 41.5% to $50.6 million.
Giblen said A&P's operating loss "is ballooning out of control" as the chain takes deep price cuts, "which have produced only minimal lifts in sales, but at the cost of gross margin investment." Overall comps have been aided by the Canadian exchange rate, with U.S. comps somewhat weaker, he added, "but the comps are still not strong enough to leverage the chain's operating expenses, which are going up because of its efforts to reposition its Farmer Jack stores [in Detroit]."
PATHMARK STORES, Carteret, N.J., whose sales rose 0.5% to $2 billion in the second half; comps increased 0.7% in the third quarter and 1.6% in the fourth; and operating income went up 11.9% to $54.5 million.
"Pathmark has been a shining star in the retail firmament, finishing the year with a great quarter and fairly favorable trends," Ziegler said. "There's been a lot of management focus on reducing costs and driving sales, and it's an easier company to manage because it's in a geographic region where the span of control is not as diverse and where management is familiar with every store.
"Pathmark has really been able to control operating costs well, and it's been able to bring down the number of workers' comp cases by focusing on safety issues. It's also focused on expenses other than benefits, and that's helped offset increases in health and welfare costs."
Giblen said Pathmark's second-half results were enhanced "by the revitalization of the business under its new management. It has grown from negative to flat to solid comps at the same time it's reduced shrink and managed promotions so they're not excessive, which has helped improve operating income."
WHOLE FOODS MARKET, Austin, Texas, with second-half sales up 19.6% to $1.9 billion; comps up 8.8% in the fourth quarter and 14.7% in the first; and operating income up 25.8% to $105.9 million. Excluding Whole Foods' 19 Southern California locations, comparable-store sales were up 12.8% in the first quarter, which encompassed the first three months of the labor dispute.
"Whole Foods has done an excellent job differentiating its product offering, and despite consumer cautiousness, it's been able to attract consumers dedicated to a quality shopping experience," Cerankosky said. "In addition, it has a young, fresh store base in many new markets that is helping drive its strong results."
According to Giblen, Whole Foods has been enjoying the industry's best results for several years "because it operates a better mousetrap. It operates in what used to be considered the natural foods niche, but it's turned it into a high-quality supermarket, which shows you don't have to be a low-price leader -- that you can succeed by building value into a store."
STATER BROS. MARKETS, Colton, Calif., with sales climbing 27.6% to $1.7 billion for the half; comps up 3.7% in the third quarter and a whopping 49.3% in the fourth; and operating income increasing 245.4% to $83.7 million in the half.
Stater's financial results shot up during the half when it opted not to bargain with the union in tandem with the three national chains, but agreed to sign whatever settlement might ultimately be reached, thus enabling it to operate at full strength during the 20-week strike-lockout.
"So its gains were certainly very pronounced during the labor dispute," Giblen said, "but it also operates very good stores with very good prices, and it was already benefitting in the pre-strike environment from an increase in pricing at Safeway's Vons stores. Stater has become the low-price leader in Southern California, and the demise of Lucky [after that chain was acquired by Albertsons in 1999], combined with Safeway's meltdown, has created an excellent opportunity for Stater," Giblen said.
Top 10 Publicly Traded Supermarket Chains
Below are financial results for the 10 largest supermarket chains with public equity or debt. Although reporting dates vary, the chart represents sales, operating income and comparable-store sales for the two quarters most closely paralleling the last six months of calendar 2003, encompassing the third and fourth quarters for Kroger, Safeway, Albertsons, Delhaize America and Pathmark; the first and second quarters for Winn-Dixie; the second and third quarters for Ahold USA Retail and A&P; and the fourth and first quarters for Whole Foods and Stater Bros. Markets.
Company: Sales (in billions); % Change; Operating Profit (in millions); % Change; 3Q comps; 4Q comps; Reporting Period
