CINCINNATI -- Continuing to cite its service and price initiatives, Kroger here maintained strong sales momentum in its fiscal third quarter, posting identical-store sales increases of 6.6% (3.7% excluding fuel).
Overall sales at Kroger were up 9.1% to $14 billion during the period ended Nov. 5. Earnings of $185.4 million, or 25 cents per diluted share, increased 29.9% from the same period last year.
"Those are very good sales numbers, and significant in that they said half of the same-store sales increase resulted from more transactions and greater customer counts, rather than just larger basket sizes and higher prices," said Andrew Wolf, an analyst for BB&T Capital Markets, Richmond, Va. "That's a true gain in market share."
While sales grew in all divisions, Kroger's performance in Southern California was a "disappointment," said David Dillon, Kroger's chief executive officer. Kroger's Ralphs and Food 4 Less divisions there showed a 2.9% sales increase but have not recovered from strike effects as quickly as Kroger officials hoped.
"We believe there are more sales and operating profit opportunities than what we achieved" in Southern California, Dillon told analysts in a conference call, adding that gross margins were holding back profits there, "primarily because of the [product] mix and other things we're working on."
With the future of Albertsons of prime interest, Kroger officials during the conference call declined invitations to discuss potential acquisitions and antitrust regulations. But Dillon noted that recent announcements of sales or strategic-alternative pursuits by retailers Marsh Supermarkets, Fresh Brands and Foodarama Supermarkets are part of an ongoing trend.
"I think it's just a sign of the times and a continuation in a long stream of announcements like this," Dillon said. "It becomes harder and harder for the smaller operators to make it work unless they have a particular niche that's unique for them or their markets and they can make it win.
"I am not forecasting that every smaller operator is going to disappear. But I do mean that many of them have decided that the market and landscape that made them successful has changed, and their ability to continue to be as successful as they once were has changed."
In a research note last week, John Heinbockel, an analyst for Goldman Sachs, New York, said Kroger was unlikely to be a bidder for all of Albertsons, but could pick up former Albertsons sites in places like Texas, Arizona and Colorado, where it already operates stores.
Dillon said consumer research surveys performed every quarter helped guide Kroger's various divisions and benchmark the company against its competitors. But he declined to cite specific information the company gleaned from such surveys.
"Doing things like customer service surveys might seem like fluff, but that's retailing: three yards and a cloud of dust," Wolf said. "Kroger is doing a good job investing costs savings into price and service."
Kroger's gross margin as a percent of sales during the quarter was 24.48%, a decline of 62 basis points compared with the third quarter of 2004, but down just six basis points excluding fuel.
"They had very strong comparable-store sales and the net gross margin to drive those sales is getting smaller and smaller and smaller," said Mark Husson, an analyst for HSBC Capital markets, New York. "In other words, their price spreads are about right. That's allowing them to protect and grow market share despite the fact that probably half the Wal-Mart Supercenters open up against a Kroger."