'Perfect Retail Storm' in Weis' Q1

SUNBURY, Pa. — Wholesale food price inflation and consumers made cautious by the economy combined to reduce profits at Weis Markets during the first quarter that ended March 29, officials of the retailer here said.

“The first quarter was the perfect retail storm with a combination of factors significantly impacting our gross margins,” Norman S. Rich, chief executive officer of Weis, said in a statement.

The retailer posted a 32.1% decline in net income to $9.1 million, or 34 cents per share, during the 13-week quarter, on a sales increase of 4.2%, to $595.7 million, compared with the same period last year.

Rich said that wholesale costs increased faster than retail shelf prices as Weis maintained aggressive pricing and promotional programs.

John Heinbockel, an analyst at Goldman Sachs, New York, had expected Weis would generate 55 cents per share during the quarter. In a written report following the earnings release, Heinbockel slashed his annual per-share earnings estimates from $1.90 to $1.65 and reduced his one-year price target to $30 per share, adding “this could prove optimistic.” He reiterated a “sell” rating on Weis' stock, which was trading near 52-week lows last week.

Weis' struggles illustrate that the current operating environment could prove rough for regional supermarket chains, which cannot benefit from advantages of geographic diversity, buying power, private-label programs and other business lines in the same way larger competitors can, Heinbockel said. “The current operating environment is not equal for all supermarket operators.”

According to Rich, food commodity cost increases continued to roll in faster than Weis' customers would pay for them. Those shoppers have become cautious spenders in light of high gasoline costs and an uncertain economy, said Rich, adding that Weis was continuing to run aggressive price promotions to stimulate sales.

Comparable-store sales increased by 3.9% during the quarter, but income before taxes fell 36.6% to $13 million. Earnings were also impacted by diesel fuel cost increases of 35.4% and higher health insurance costs, Weis said.

The company late last month said it would bump up capital spending in fiscal 2008, with 19 store projects in various stages of completion.