NEW YORK -- After two years of operating in a difficult environment, major supermarket chains began to turn the corner toward improved sales and earnings in the latter half of fiscal 1993, especially the fourth quarter.
Sales, while still sluggish, increased at half of the major chains in the second half. On a comparable basis, seven of the 10 largest companies reported sales gains in the third and fourth quarters, compared with the same period of 1992, according to an SN analysis of supermarket companies reporting quarterly financial results.
Same-store sales rose in the fourth quarter at six of the eight largest chains reporting same-store results. (As reported in SN's analysis of first-half results, four of the same eight chains achieved same-store sales gains in the second quarter.) Operating profits increased in the second half at five of the 10 largest chains, the same number that achieved increases in the first half.
Evidence of a turnaround was
perhaps most apparent on the bottom line, where companies such as Kroger Co., Cincinnati; American Stores Co., Salt Lake City, and Safeway, Oakland, Calif., surprised Wall Street securities analysts with better-than-expected fourth-quarter earnings.
Kroger, Safeway and American Stores' stock hit 52-week highs shortly after fourth-quarter results were released.
The positive-earnings surprises "underscored improving trends throughout the industry," Ed Comeau, a securities analyst at Lehman Bros., New York, wrote in a recent report.
"Most food retailers have managed their business quite well during a difficult two-year period and are in a much stronger position than prior to the slowdown," he said. "I expect the pressure caused by food deflation over the past two years will begin to ease, and with a little help from a strengthening economy, food chains should begin to generate stronger earnings growth."
Gary Giblen, a securities analyst at PaineWebber, New York, was even more bullish about the fourth quarter, which he called a "watershed for the industry." Giblen said fourth-quarter results show that the fundamentals are present for even better growth this year.
"What we saw in the fourth quarter was very heartening for the industry," he said. "You had not only expense reduction but real sales growth and a real pickup in same-store sales for most companies."
Jonathan Ziegler, a securities analyst at Salomon Bros., New York, also called fourth-quarter earnings of Fred Meyer Inc., Portland, Ore., and Vons Cos., Arcadia, Calif., positive surprises, which he attributed to their cost-cutting efforts.
"Sales seemed to come in pretty much as expected," he said. "Savings is really generated out of cutting costs, and it's making these businesses more productive."
Debra Levin, a securities analyst at Morgan Stanley, New York, said although sales trends picked up slightly in the fourth quarter, only a few companies achieved dramatically better-than-expected earnings in the quarter.
"It wasn't an across-the-board [improvement]," she said. In addition to Safeway, American Stores and Kroger, Albertson's results also were a bit better than expected, Levin said.
A slight amount of food inflation and small improvements in the economy have helped benefit the supermarkets' operating environment into 1994, Levin said.
"Also, I think companies have gotten much better at managing their expenses," she said. "It's universal now that most companies do not expect inflation to bail them out."
The largest second-half sales increases were reported by Albertson's, Boise, Idaho (9.9%), and Food Lion, Salisbury, N.C. (6.3%). Kroger, Safeway and Pathmark Stores, Woodbridge, N.J., would show second-half sales increases if the results are adjusted to compare continuing operations and an equal number of weeks in both periods.
American Stores; A&P, Montvale, N.J.; and Vons Cos. reported sales declines in last year's second half. A&P, however, reported the best same-store sales result of the leading 20 retailers, with a 3.8% gain excluding stores closed by a strike in Canada. Vons and American Stores both reported stronger same-store sales in the fourth quarter than they had achieved in the three previous quarters of 1993.
Even companies that reported flat sales in the second half noticed improving trends. American Stores reported a 0.2% decline for overall sales in the second half, which marked an improvement compared with the 2.8% decrease in the first half of last year.
Victor L. Lund, president and chief executive officer of American Stores, said the company began to see a generally improved sales trend in most of its markets in the fourth quarter.
"We are particularly pleased with the improvement we're seeing in the Midwest and in Philadelphia," he told securities analysts at a recent presentation here.
In southern California, where American's Lucky Stores division rolled out a price-cutting program early in 1993, the same-store sales results in the fourth quarter were the best achieved there since the second quarter of 1990, American said.
Other operators in southern California continued to feel the effects of the ongoing recession. Ralphs Grocery Co., Compton, Calif.; Food 4 Less, La Habra, Calif., and Vons all reported lower total sales and same-store sales in the second half. Ralphs and Food 4 Less, however, benefited from cost-cutting efforts and increased their cash flow in the second half.
Byron Allumbaugh, chairman and CEO of Ralphs, said both the continuing recession in southern California and competitors' store openings have contributed to the same-store sales declines.
Despite these factors, Allumbaugh said, Ralphs achieved its cash-flow goal in 1993. Cash flow -- or earnings before interest, taxes, depreciation, amortization and other charges -- rose 2.1% in the second half, according to preliminary results. This was achieved through expense reductions, cost controls and margin increases where allowed by competitive conditions, Allumbaugh said in a statement listing preliminary fourth-quarter results.
Giblen of PaineWebber said he believes a number of factors contributed to the improved results in the fourth quarter: increases in food inflation and consumer spending, the growing popularity of private label and lower operating expenses.
The big story, however, was that warehouse clubs receded as a competitive threat to supermarkets, Giblen said. With club packs and other adjustments, supermarkets have figured out how to compete with clubs.
"I think it's interesting that the club industry does not acknowledge that the supermarket industry responded skillfully," he said. "They blame [the sales loss] on a whole list of other circumstances."
Giblen said cost-cutting alone won't help a supermarket operator improve earnings. "Vic Lund at American Stores has a saying. 'You can't save your way to prosperity,' " he said.
The chains that were the most successful last year, such as American and Safeway, made fundamental re-engineering-type changes in their cost structure, he said.
"Safeway said, 'Instead of doing the same activities with fewer people, how can we actually change the work that's done to do things better and smarter?' " Giblen said. "Safeway and American really took costs out of their structure and then they used that to drive sales. They reinvested the savings in better service and better pricing."
The lack of food-price inflation was one of the factors cited most often as contributing to the weak supermarket sales results throughout 1993. Food prices in supermarkets increased under 1% last year.
Lund of American Stores said he does not expect food-price inflation to rise much above that level for much of 1994.
"Everything I read says 3% [food-price inflation] for this year, but we're not seeing it yet," he told analysts late last month. "I suspect that probably toward the mid to latter part of the year we might get to that 3% number. But I don't think as a weighted average for the year it will be 3%."
Six-Month Results for the Top 20
The financial results for the following 20 retailers were taken from the two most recent quarterly reports for each company. Due to differences in the number of weeks included in each company's second-half results, the order of the companies varies from SN's annual ranking of retailers by sales volume. Companies that do not file financial reports were not included.
