CINCINNATI -- Kroger here said last week it plans to launch an aggressive program to build sales, an effort that will be paid for in part by laying off 1,500 clerical and management employees, mostly in the next year.
During a conference call with analysts to discuss financial results for the third quarter and nine months ended Nov. 10, Joseph A. Pichler, chairman and chief executive officer, said, "We deeply regret having to announce staff-reduction plans, especially at this time of year.
"However, economic conditions make it necessary to implement these actions quickly to maintain Kroger's long-term competitive advantage."
In the conference call, Pichler and other company executives explained the company's four-part initiative to build sales, decrease operating and administrative expenses, further leverage of economies of scale, and reinvest money to continue building sales.
Noting that the company's merger integration with Fred Meyer Inc., the Portland, Ore.-based retailer Kroger acquired in 1999, is now over and the merger's benefits have been realized, Pichler said the company's new goal will be to build same-store sales an annual 2% to 3% above inflation.
Such growth is expected translate into a 10% to 12% annual increase in earnings per share in fiscal 2002 and 2003, he explained, rising to 13% to 15% by 2004.
This forecast "assumes the economy and competitive situation will not improve in the next two years," Pichler added.
Pichler said he was "not going to share details" of how Kroger would accomplish such sales growth, but he did explain how the company expects to pay for it -- through a $500 million reduction in operating and administrative expenses, much of that reduction coming through layoffs. The company said it will take a pretax charge of $85 million to $100 million, mostly in the fourth quarter, to reflect severance and other costs.
During the conference call, Pichler said Kroger would be folding the operations of one division into those of two adjacent divisions, but he declined to give details of the move until the affected employees were notified.
Shortly after the call, the company said its Nashville division, which operates 85 stores in Tennessee, Kentucky and Alabama, would be closed, with 55 stores joining the Louisville, Ky., division, which will be renamed the Mid-South division, and the remaining stores joining the Atlanta division.
Pichler said further centralization of merchandising and procurement in the Cincinnati area should produce greater economies of scale for the company.
Also, he emphasized that Kroger plans to reinvest in its retail business to increase sales and market share.
Analysts told SN Kroger's move was necessary, but they differed about its chances of success.
Mark Husson, an equity analyst for Merrill Lynch, New York, said, "You can't spend $500 million without somebody noticing. Kroger is going to drive down costs, accept lower gross margins, give customers what they want and kill the competition."
In contrast, Neil Currie, food and drug retail analyst at UBS Warburg, New York, sounded a more skeptical note. He said Kroger's initiative is "a sensible move," but companies in the past "have spent money without getting sales growth."
The analysts also offered different views of how Kroger is likely to go about building sales.
Currie said he believed Kroger would largely go the route of "reducing pricing and promoting aggressively."
However, Husson said he thought the company would take a more direct approach. "They are not going to fly over America dropping $20 bills from an airplane," he said. "They are going to target dollars to the customers, markets and competitors they need to focus on."
Also during the call, Pichler confirmed reports that the company will during the next year open three to five Food 4 Less stores in the Chicago area, a market it does not currently serve.
In the 13-week quarter, Kroger sales rose 3.8% to $11.4 billion, and comparable-store sales were up 1.8%.
But net income declined 34.3% to $133.1 million, the result of $201 million in onetime costs. Earnings per share were 16 cents, compared with 24 cents in last year's third quarter.
During the call, Pichler explained that $10 million of those costs were merger-related, primarily for systems conversions; $110 million related to asset impairments and store closings, mostly for underperforming northern California units that Kroger bought two years ago from Albertson's; and $81 million related to energy contracts in California. Without the onetime expenses, the company said its income for the quarter would have increased 11.8% to $258.6.
