CINCINNATI -- Kroger here said last week its investment in gross margin to boost sales has been slower than originally planned, and will continue to be more gradual than abrupt as the company moves forward.
"We are pleased that Kroger continues to grow identical food store sales, but there is more to be done," David Dillon, chief executive officer, told industry analysts during a conference call. "We are implementing sales plans [in various divisions] in a careful manner, and our target for identical food store sales in 2004, excluding fuel, continues to be higher than what we achieved in the fourth quarter of 2003."
Analysts interviewed last week by SN differed on the significance of the slower pace of Kroger's investment in gross margins to generate sales.
Jason Whitmer, an analyst with Midwest Research, Cleveland, said Kroger has always been more conservative than some of its competitors in its spending and fiscal strategy, "and no one is looking for any deviation from the trend because it's in Kroger's nature to be prudent."
Edouard Aubin, an analyst with Deutsche Bank Securities, New York, said he does not anticipate any change in Kroger's pricing philosophy. "Kroger will have to make price investments in 2004 because 80% of Wal-Mart's new supercenters will be in Kroger market areas," he pointed out.
However, Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said Kroger's apparent decision to slow down promotional investments comes as a reaction to similar moves by Albertsons and Safeway -- moves that resulted in boosts to those chains' stock prices.
"Kroger is changing its strategy from trying to get sales traction to trying to get earnings traction after seeing that Albertsons and Safeway shares rose when those companies decided to defend earnings over sales, and Kroger management was probably miffed that the market had reacted so favorably to those moves.
"Since Kroger made its announcement [earlier in the week], its stock price has gone up more than $1, so clearly Kroger is pulling in the reins on its promotional budget to get better earnings," Wolf said.
Same-store sales rose 2.4% during last year's fourth quarter, in contrast with the results achieved in the first quarter ended May 22, which produced same-store sales that were up 1.3% including fuel, and 0.3% excluding fuel. Excluding the chain's Southern California stores, which were impacted by the end of the 141-day strike-lockout there, same-store sales were up 1.6% including fuel, and 0.5% excluding fuel during the quarter.
Dillon said the reason for the slow sales growth "is pretty simple -- we've been slower in implementing some of our plans because we want to move carefully and because we want to reduce the likelihood of over-investing by spending promotional money that doesn't really produce a long-term benefit.
"Remember, we're after profitable, sustainable sales growth, so we want it to come more gently and not suddenly. We could go out and get the kind of sales we want tomorrow if we didn't have any requirements in terms of pre-cash flow gross profit. But we're trying to do this in a balanced way, so the slowness was really [a result of] our effort to be more careful. This is intended to be a more gradual, rather than an abrupt, change."
Total sales for the first quarter rose 3.9% to $16.9 billion, while net income fell 25.2% to $262.8 million. Kroger said earnings were impacted by the final stages of and recovery from the strike-lockout, which reduced net income by $71.6 million, or 10 cents per share.
Don McGeorge, president and chief operating officer, said the number of associates in Southern California who did not return to work after the labor dispute was higher than expected, "which gives us an opportunity to benefit sooner than we expected [from the two-tier pay system] in terms of the ability to hire under the new agreement."
The analysts told SN they are encouraged by Kroger's indications that labor costs in California will come down as more new employees are hired under the new labor contract.
"We now have similar indications from all three major chains that labor costs will be down within a couple of years," Aubin told SN. "That's significant, even if sales are flat."
