CINCINNATI -- For the third consecutive quarter, Kroger Co. here has surprised Wall Street with better-than-expected financial results.
Kroger, the nation's largest supermarket operator, last week said its operating earnings more than doubled to $70 million, or 57 cents per share, in the second quarter ended June 18. Operating earnings totaled $29.6 million, or 27 cents per share, in the year-ago period.
On Wall Street, securities analysts who follow the company had estimated Kroger would report operating earnings of about 50 cents per share.
Joseph A. Pichler, chairman and chief executive officer, said the company's second-quarter performance reflected across-the-board improvements in operating efficiencies, the favorable impact of technology and strong merchandising programs tailored to individual markets.
"In the highly competitive environment of food retailing, Kroger is succeeding by controlling distribution and logistics costs and through the implementation of new technologies," he said. "At the same time, our localized merchandising strategies are using the full strengths of Kroger's combination food and drug stores and our strong private brands to maintain our market leadership position."
totaled $67.3 million in this year's 12-week quarter. In last year's second quarter, Kroger reported net income of $27.5 million, which included a one-time charge of $15 million to cover the closing and sale of its San Antonio division and an extraordinary charge of $2.1 million for debt retirement.
Debra Levin, a securities analyst at Morgan Stanley, New York, said an improved gross-margin rate "was the real difference" in Kroger's results. Overall, Kroger management has been "doing a great job," she said. Gross margins improved almost 80 basis points in the quarter to 24.34% of sales. Levin attributed the improved gross margins to Kroger's focus on distribution and buying of product. "They are just more focused on buying better through aggregating the purchases of various divisions, by buying private label better and it's starting to come through in the numbers," she said.
Chuck Cerankosky, a securities analyst at Hancock Institutional Equity Services, Cleveland, said Kroger's results exceeded his operating earnings estimate of 54 cents per share.
"The company has been very conservative in describing its own success against a wide variety of formats and competitors," he said. "Yet their game plan has been very successful."
Kroger also is beginning "to get a handle" on its operating expense ratio, which has been growing faster than sales in the recent past, Cerankosky said. "Employee costs, that is wages and benefits, were down as a percentage of sales vs. a year ago," he said. "Therein lies the progress, but there is still more work that has to be done there."
In a separate announcement last week, Kroger said it had agreed to a new seven-year $1.75 billion revolving credit agreement that it will use to cut interest expense and increase capital spending to accelerate expansion.
Cerankosky said he believes Kroger is "poised to add a fair amount of new square footage in its existing markets," which he said may include acquiring existing stores.