For the first half of 1996, the major supermarket operators registered substantial gains in sales and earnings from a year ago -- a trend expected to continue through the balance of this year, securities analysts told SN.
A survey of financial results among the top 20 chains with equity or public debt, for the period approximating the first six months of 1996, showed the following:
Sales climbed an average of 3.6%, compared with an average increase of 2.3% in the first half of 1995.
Same-store sales rose an average of 1.8% for the most recently reported quarter, compared with a 1.2% gain a year ago.
Operating income jumped 21.2% in the six-month period, compared with a gain of about 11% in the first half a year ago -- an increase that analysts attributed to a variety of special, unsustainable circumstances, including recoveries from strikes, bankruptcies or other forms of restructuring. The general improvement in financial results involved no magic, just the industry's ability to better respond to consumer demand, according to Gary Giblen, managing director for Smith Barney, New York.
"The single most important factor generating the strong increases in sales and gross margins was consumer acceptance of private label and the industry's ongoing marketing and merchandising efforts in that area," Giblen said. "And the strong same-store sales gains at most companies reflected the ability of the chains to take share away from smaller operators while maintaining operating expense ratios."
Giblen added that he expects second-half results to be "more of the same, with more companies getting into meal solutions and capturing increased business."
However, he said he doubts that inflation will be much of a factor. "People were saying at the beginning of the year that inflation would spike up, but it hasn't happened," he explained. "That's because manufacturers, as well as retailers, have been forced to hold the line on price increases -- despite increases in some ingredient costs -- because of the popularity of private label and because consumers are not as accepting of price increases as they used to be."
According to Chuck Cerankosky, an analyst with Hancock Institutional Equity Services, Cleveland, the supermarket industry as a whole did "pretty darn well" during the first half. "The low rate of inflation at the shelf meant no one got sticker shock when they walked into the store, which enabled consumer confidence to grow stronger," he said. "And the economy was healthy enough to encourage people to trade up, which generated good volume on the selling line and expanded margin on the bottom line."
Looking at the industry's second-half prospects, Cerankosky said he expects results to be similar to those in the first half. "The economy is probably slowing down a little bit. But the labor market is tight and consumer confidence is high. And that bodes well for what people will be putting into their carts," he explained.
He said he sees "a little bit" of inflation coming. "The factors that could push it are already out there on the horizon, including some farm commodity price increases. But the resistance by consumers against higher product costs is still strong, and the industry has proven it can make money in that kind of environment."
The industry experienced "a warming up in top-line growth" from food inflation of approximately 2% during the half -- a circumstance unlikely to be repeated during the second half, noted Jonathan Ziegler, an analyst with the San Francisco office of Salomon Bros., New York.
"With Winn-Dixie reporting disappointing results and lowering thousands of prices and with Albertson's indicating its earnings will be sluggish during the second half, any possibility of higher inflation in the back half of the year has eroded as those two massive chains become more price-aggressive," Ziegler said. "And sales results will be lucky to keep up with those of the first half."
According to Debra Levin, an analyst with Morgan Stanley, New York, first-half earnings came in "better than expected because the industry's step-up in capital expenditures began to pay off and companies were doing a good job capturing efficiencies."
She said she expects most supermarket companies to continue to do well during the second half -- with the exception of Albertson's, Boise, Idaho, which has already said its second-half results will be flat.
"But overall, most chains have figured out how to build efficient new stores and to realize quicker returns from those investments," Levin added.
The top two winners on the sales line during the first half were Hannaford Bros., Scarborough, Maine, up 15.1%, and Ahold USA, Atlanta, up 14.9%. Smith's Food & Drug Centers, Salt Lake City, down 8.8%, and Pathmark Stores, Woodbridge, N.J., down 4.8%, experienced the biggest sales declines.
Regarding same-store sales, the top two chains were Vons Cos., Arcadia, Calif., up 7.1%, and Food Lion, Salisbury, N.C., up 6.7%. The biggest decreases were posted by Penn Traffic Co., Syracuse, N.Y., down 3.6%, and Smith's, down 0.9%.
The largest gains in operating income were recorded by Fred Meyer Inc., Portland, Ore., up 49.9%, and Grand Union, Wayne, N.J., up 34.3%. Penn Traffic, down 37.6%, and Bruno's, Birmingham, Ala., down 24.8%, experienced the biggest declines.
Examining some of the winning and losing companies individually, analysts had these comments:
HANNAFORD BROS. generated sales gains of 15.1% due to its "very aggressive expansion" in the Southeast, Levin said. A 3.3% increase in same-store sales was due primarily to gains in the Northeast, and despite a drag resulting from competitive openings in the Southeast, she noted.
According to Cerankosky, Hannaford's gains in same-store sales resulted from incremental increases in the Northeast plus a healthier economy there, "whereas the Southeast is more competitive and there's some cannibalization going on as Hannaford opens new stores in areas where it's just achieving a foothold."
Hannaford's modest gain of 1% in operating income, Giblen said, stemmed from its rapid expansion in the Southeast, "which is adding interest expense that decreases earnings. But the chain's goal is to push for expansion to the total sacrifice of earnings."
AHOLD USA, with a sales gain of 14.9%, got a big boost from its acquisition of Mayfair Super Markets, Elizabeth, N.J., earlier this year. (The acquisition of Stop & Shop Cos., Quincy, Mass., did not become effective until the end of the second quarter).
Also contributing to Ahold's strong sales results, Giblen said, was "the long-awaited improvement" at the former Red Food Stores -- a Chattanooga, Tenn.-based chain acquired in 1994 that was subsequently converted to the Bi-Lo banner.
"By its own admission, Ahold made some serious errors in converting those stores," Giblen said. "But it's now fixed a lot of those problems and has gotten a bounce from the depressed sales levels there."
Strong returns at Giant Food, Carlisle, Pa., and the former Red Food unit contributed significantly to the same-store sales gain of 2%, he said, noting that those results were squeezed by poor results at Ahold's Finast stores in Ohio and the Bi-Lo stores as a whole in the South.
VONS COS. saw sales rise 8.1% and same-store sales jump 7.1% "because of the outstanding job the chain is doing using a powerful promotional and merchandising message in a market where Ralphs is going through a disruptive reorganization and the economy is getting better," Cerankosky said.
Ziegler said Vons' same-store sales gains resulted from the ongoing success of previously implemented programs, including promotions tied to Vons Club loyalty cards, better front-end service and sharper pricing as well as general improvements in the southern California economy.
FOOD LION -- with sales up 10.5% and same-store sales up 6.7% -- is in the midst of a turnaround that includes expanding its store size to be more competitive in perishables, service and assortment; putting more emphasis on private label, and offering sharper promotions instead of relying solely on everyday low pricing, Giblen said.
According to Ziegler, "Food Lion is clearly making inroads with its merchandising initiatives, which include deli and bakery promotions." Levin also said better merchandising is driving Food Lion's results, along with loyalty cards and the chain's ongoing tie-ins with NASCAR stock-car racing.
FRED MEYER saw operating income rise 49.9% for the half -- a result of a slowdown in the rash of competitive openings by nonfood operators, which had plagued the company for several years, plus a reflection of its ongoing recovery from a strike in late 1994, Giblen said.
Fred Meyer also is benefiting from an improving Northwest economy, with same-store sales rising 2.9% overall but up 7% on the food side of the stores, Ziegler said.
GRAND UNION experienced a 34.3% surge in operating income "due to weak comparisons in the prior year, especially in the fourth quarter, when it entered Chapter 11," Bob Lupo, a high-yield analyst with BA Securities, Chicago, pointed out.
"However, it did a lot of things correctly during the first part of the year, including lowering its operating costs, outsourcing some of its distribution functions and completing an employee buyback," Lupo said.
Grand Union also obtained a $100 million equity infusion "that puts it in position to spend heavily on store remodels while at the same time trying to improve its merchandising image," according to Howard Goldberg, a high-yield analyst with Smith Barney.
SMITH'S FOOD & DRUG CENTERS saw sales drop 8.8% and same-store sales fall 0.9% after its withdrawal from southern California and the accompanying closure or sale of 34 units there.
Lupo said the sales decline stemmed from the closure of the California stores and the loss of $675 million in revenues there, while the same-store sales decline was due to new management "that took its eyes off the ball while the company was being restructured. But I anticipate same-store sales will be better going forward."
Levin said Smith's also is struggling in most of its markets, particularly in Arizona. PATHMARK STORES has been "listless and moving sideways for quite some time," resulting in a sales dropoff of 4.8%, Goldberg said. "But the appointment of Jim Donald [from Safeway as chairman, president and chief executive officer] may be what's needed to take Pathmark to the next level and enable it to achieve its potential."
PENN TRAFFIC CO. -- with operating income dropping 37.6%, sales down 4.2% and a same-store sales decline of 3.6% -- has yet to show signs of stability from an ongoing turnaround situation, Goldberg noted.
"It's been a difficult first half following a difficult 1995, with heavy short-term costs as it tries to strengthen its image with more service and perishables," he told SN. "But sales have continued to fall behind the industry average, and profits have dropped 20% per quarter over the last two periods."
According to Lupo, competitive activity has depressed Penn Traffic's sales, while the company's response to that activity has depressed margins. "And Penn Traffic is still fighting an uphill battle," he said, in all three of its marketing areas:
Top Performers
Following are firms showing the best percentage change results in sales, operating net and same-store sales in the half year.
Sales:
Hannaford Bros. +15.1%
Ahold USA +14.9%
Fred Meyer Inc. +10.6%
Operating Income:
Fred Meyer Inc. +49.9%
Grand Union +34.3%
Dominick's +25.2%
Finer Foods
Same-Store Sales:
Vons Cos. +7.1%
Food Lion +6.7%
Safeway +4.5%
Top 20 Countdown
Here are the financial results for the top 20 supermarket chains with public debt or equity or public debt. The chart represents sales and operating income for the two most recently reported quarters through Oct. 6, plus same-store sales for the most recent quarter only. The information was compiled by SN and Smith Barney, New York.
Sales in % Change Operating Net % Change Same-Store Reporting
Billions in Millions Sales Change Period (Latest Quarter)
1Kroger Co. $11.6 +4.6% $393.0 +0.1% +0.9% 12/31-6/15
2American Stores $9.2 +3.9% $344.5 +14.9% +2.9% 2/4-8/3
3Safeway $7.9 +4.0% $413.9 +21.2% +4.5% 4/23-9/7
4Albertson's $6.8 +10.0% $408.6 +13.9% +2.7% 2/2-8/1
5Winn-Dixie $6.0 +3.1% $130.7 +5.15% +1.1% 4/4-9/18
6A&P $5.4 -1.0% $87.3 +13.7 0.0% 2/25-9/7
7Ahold USA $4.9 +14.9% $126.4 +17.9% +2.0% 1/1-7/14
8Food Lion $4.2 +10.5% $200.5 +22.0% +6.7% 3/24-9/7
Ralphs
9Grocery Co. $2.47 -1.4% $162.7 +4.7% +2.4% 3/25-10/6
10Vons Cos. $2.46 +8.1% $98.4 +15.8% +7.1% 1/6-6/16
11Pathmark Stores $2.0 -4.8% $70.0 -18.3% +0.8% 2/4-8/3
12Fred Meyer Inc. $1.9 +10.6% $62.0 +49.9% +2.9% 2/4-8/17
13Giant Food $1.8 +2.6% $83.1 +19.7% +0.4% 2/25-8/27
14Penn Traffic Co. $1.7 -4.2% $41.7 -37.6% -3.6% 2/4-8/3
15Bruno's $1.5 +1.4% $9.0 -24.8% +0.6 1/27-7/27
16Hannaford Bros. $1.4 +15.1% $67.3 1.0% +3.3% 12/31-6/29
17Smith's Food &
Drug Centers $1.38 -8.8% $50.2 -17.7% -0.9% 12/31-6/29
18 Dominick's
Finer Foods $1.3 +1.0% $45.4 +25.2% +1.1% 1/21-8/3
19Grand Union a $1.2 +0.2% $74.7 +34.3% +1.0% 1/7-7/20
20Harris Teeter $0.9 +7.0% $25.3 +14.5% +2.6% 1/1-7/1
