CINCINNATI -- Kroger here last week said its sales trends were improving, its cost-cutting initiatives were on track, and it has begun channeling the proceeds from those efficiencies into targeted price reductions.
In a conference call discussing its first-quarter earnings last week, Joseph A. Pichler, chairman and chief executive, cheered analysts with his projection that second-quarter, same-store supermarket sales would exceed the 0.6% increase the company reported in the first quarter, based on strong results from the first four weeks of the second quarter.
Through the first quarter, Pichler said Kroger had eliminated $125 million in costs from its system, part of a plan announced in December to reduce costs by $500 million through store-level labor savings, reductions in administrative costs, shrink reduction and other initiatives. As of June 1, Pichler said Kroger had eliminated about 1,400 positions in the company, out of the total 1,500 planned.
The cost-cutting moves appear to be working, as the company reported an improvement in operating, general and administrative expenses for the quarter of 28 basis points, to 18.46% of sales, despite increases in medical costs and credit card fees.
The company also has completed much of its effort to centralize procurement, Pichler said. About 80 of the company's top buyers and category managers for meat, produce and health and beauty care have been relocated here to a central buying center, and another 20 are expected to join them.
The strategies are allowing Kroger to drive sales by offering more competitive prices in certain markets, according to Pichler.
"Kroger is reducing prices in targeted areas, rather than across the board," he said.
When asked by an analyst whether Kroger had been able to address his previously stated concern about the price gap between discount superstores and Kroger's supermarkets, Pichler replied, "I think we've made some progress."
Meredith Adler, analyst, Lehman, Bros., New York, said she thought the report was a positive one for Kroger.
"I think one of the highlights of what they talked about was that the gross margin appeared to be holding up pretty well, even as they take efforts to drive sales and market share," she said.
She also said she thought company officials were "being conservative" in maintaining their earnings-growth estimates of 10% to 12% for the year.
"I think they're trying to be cautious," she said. "They don't want to overpromise."
Pichler also said Kroger was still on track to introduce the Food 4 Less concept in Chicago, with three to five units planned this year and an expectation of "similar numbers going forward."
Also, Pichler said the company had converted 16 stores to the Marketplace format and noted that he was "pleased with the results."
Overall, the company's bottom line in the first quarter was hampered by restructuring costs and one-time charges totaling $11.1 million before taxes and the adoption of new accounting procedures under FASB 142, which resulted in a pretax write-down of goodwill in the company's jewelry division of $26.4 million.
Including those items, net income for the 16-week first quarter, which ended May 25, totaled $361.9 million, or 45 cents per share, vs. $303.4 million, or 36 cents per share, in the year-ago quarter. Sales totaled $15.67 billion, up 3.7% over year-ago sales of $15.1 billion.