Kroger Q1 Indicates Strength

CINCINNATI — Although unruly swings in commodity prices and general consumer uncertainty played havoc with the numbers, officials of Kroger Co. here were bullish on first-quarter financial results the retailer posted last week.

Net earnings of $435.1 million were slightly higher, and comparable-store sales of 3.1% a bit lower, than analysts expected for the period, which ended May 23. But company officials spent considerable time in a conference call explaining why the latter figure understated Kroger's performance — and why analysts shouldn't make too much of the former.

“Sometimes [a] number is a great indication of where we are. Sometimes it's actually too good of an indication of where we are, because it overstates the fact,” David Dillon, Kroger's chairman and chief executive officer, said of the chain's 3.1% non-fuel identical-store sales growth, which was at the low end of its own guidance. “In this case … I think there are a number of factors that suggest 3.1% is not a good indicator, that we actually did better than that shows.”

Dillon cited increases in tonnage, pharmacy prescriptions, shopping trips, gasoline sales and private-brand sales as evidence of a strong performance. However, a steep drop in the price of fuel, along with deflation in categories like milk and produce, and an increase in private-brand penetration brought overall sales down. Consumers are shopping cautiously, eschewing discretionary items, choosing lower-priced store brands and buying less per trip, Dillon acknowledged, but they are doing so increasingly at Kroger.

Kroger said private brands comprised 26% of sales and 35% of sales volume in the first quarter. But increased sales of those items caused a 0.7% decline in comps.

“Average sale was actually down a little bit in the quarter, but transaction count was up strongly,” Dillon said. “What we see happening is customers coming in more but buying less than they were. Customers are buying what they need, when they need it, to make sure that their dollars stretch further to the end of the month or the pay period.

“It gives you a misleading feeling that we're selling less to people, but in fact, people are consolidating more of their purchases at Kroger,” he continued. “We're selling more to many households than we were before.”

Commodity deflation at the same time helped boost profits, the company said, by lowering Kroger's own costs for distribution and manufacturing. This helped profits exceed analyst estimates by 5 cents per share, although Kroger said it was unlikely the benefits would last all year and did not subsequently increase its yearly earnings guidance.

“We had a lot of tailwind in the quarter,” Dillon said. “We think the rest of the year is going to be a bit harder if you look at the comparison to the previous year.”

Neil Currie, an analyst at UBS Warburg, New York, in an interview with SN said the results were “obviously strong,” especially in light of rapid changes among prices and consumer sentiment.

“I'm sure they would like a little less volatility,” Currie said. “The issue is how to cope with prices when they're on the way up, and also on the way down, and in recent times there has been a lot of that.”

Dillon said the retailer showed positive non-fuel identical-store sales in all but one market area. The ID trends — which Dillon said included stronger-than-average comps among the meat, pharmacy, deli/bakery and grocery departments — have continued through the first weeks of the second quarter, he added.

Some analysts said they detected a note of caution in Dillon's comments. Karen Short, an analyst for Friedman, Billings, Ramsey & Co., New York, said the tone can be attributed to higher costs for diesel fuel and commodities.

Q1
RESULTS