COLTON, Calif. - Stater Bros. Holdings said last week a decision to participate in "an arm-wrestling match" over price between two competitors earlier this year resulted in a decline in net earnings for the third quarter that ended June 25, although earnings for the year to date and sales for the quarter and 39-week period increased.
Jack Brown, chairman and chief executive officer, told bondholders in a conference call that Stater's margins were affected during the first eight weeks of the quarter when Vons, the Southern California division of Safeway, stopped offering weekly double coupons "with the promise to pass the savings on, which required them to lower prices to justify that decision," after which Ralphs, the local division of Kroger Co., began stressing its ongoing double-coupon program more aggressively "and featuring key items to compete with what Vons was doing.
"At Stater, we decided we were not going to let our customers be compromised over pricing issues, so we met the other two chains price for price, which cost us 1-1.25 points in margin," Brown explained. "Then Vons came back with triple coupons to regain coupon customers it had lost to Ralphs. But by the last five weeks of the quarter, everything was back to normal, including our margins."
Net income fell 21.9% to $5.7 million for the 13-week quarter, but rose 8.5% to $15.3 million for the year to date. Sales rose 5.4% to $885.9 million for the quarter and 3.7% to $2.6 billion for the 39 weeks. Same-store sales, excluding the shift in the Easter holiday, were up 2.3% for the quarter and 1% for the year to date.
Gross profit margins fell 163 basis points to 25.93% during the quarter, compared with 27.56% a year ago, Phil Smith, chief financial officer and chief accounting officer, told bondholders; for the year to date, margins were 26.33%, about even with last year's 26.44%, he pointed out.
Margins were also impacted by increased product costs in some Center Store categories, Smith added, "and to be competitive, we chose not to pass those increases on. However, those promotions have come off a bit and are now more in line."
To counter the product cost increases, Smith said Stater concentrated on shrink control and marketing efficiencies.
Brown said Stater expects to move into its new offices in San Bernardino in the spring and to begin shipping product out of its new distribution center there by next fall.
He said the Southern California economy remains "fairly strong," although higher gas prices have forced some customers to trade down. "The only expenses a family can really control is what it spends on groceries, and we've noticed more purchases of larger sizes and products like Hamburger Helper, so we've shifted our merchandising to those areas. Our customer counts are even but we've had to remerchandise to bigger packs to give customers the values they're looking for."