FRED MEYER SHOWS SIGNS OF RECOVERY

JENNIFER L. BALJKO

PORTLAND, Ore. -- Lower distribution costs, improved food and nonfood sales and an aggressive marketing program are driving a rebound at Fred Meyer Inc. here, whose earnings had been crippled by a 1994 strike.

In the 16-week first quarter ended May 25, net income surged 206.3% to $9.4 million (33 cents a share) from $3.1 million (11 cents a share) a year ago, the supercenter chain reported. Sales jumped 11.2% to $1.04 billion from $935.4 million. Same-store sales rose 5.1% vs. a 4.9% drop a year ago.

Food sales as a percentage of total quarterly sales inched up to 42.8% from 42% a year before; the percentage for nonfood sales dipped to 57.2% from 58%. Same-store food sales rose 6.4% vs. a 2% decline in last year's quarter; same-store nonfood sales were 4.2% vs. a 6.9% drop.

The first-quarter results signify a turnaround for Fred Meyer, according to Suzanne McGrath, managing director of Piper Jaffray here. "They are definitely on the rebound. I think they might return to prestrike figures this year -- but if not this year, definitely in fiscal 1998," she said.

In 1994, an 88-day retail clerk's strike drained Fred Meyer's earnings and same-store sales. Although the strike also involved Safeway and Albertson's, pickets were set up only at 26 Fred Meyer stores -- leading many customers to shop at competitors. "[The strike] was just a killer for Fred Meyer. Once consumers change traffic patterns, they don't come back instantly," McGrath said. "They have started a very aggressive marketing effort to get people back."

Before the strike, Fred Meyer's earnings for the year ended in January 1994 were $2.50 per share, McGrath said. Earnings slipped to 25 cents per share in January 1995 and climbed to $1.07 per share in January 1996. Although the year-end January 1997 average estimate among analysts is $1.86 per share, McGrath said her firm projects Fred Meyer's earnings to reach $2.45 per share.

"Strong sales in food and pharmacy, along with improved garden and apparel sales, helped fuel this year's earnings growth," as did format changes in the electronics and home improvement categories, according to Robert G. Miller, Fred Meyer chairman and chief executive officer.

"Gross margins as a percent of sales increased due primarily to the improved mix of nonfood sales, stronger food margins and lower distribution and delivery costs as a percent of sales. Expenses as a percent of sales decreased in 1996's first quarter, generally reflecting the impact of lower store labor costs, corporate overhead expenses and advertising costs as a percent of sales."

The openings of a food distribution center in Puyallup, Wash., in 1995 and a retail distribution center in Chehalis, Wash., in 1994 have helped Fred Meyer reduce markdowns, manage inventory better and boost gross margins, said Rob Boley, a spokesman.

McGrath said the improved results also are due to the chain's P.A.C.E. (Please All Customers Everyday) marketing campaign, everyday-low-price effort, well-stocked stores and one-stop shopping concept.

In the first quarter, Fred Meyer opened a new store in Tillamook, Ore., and remodeled one in Portland. It opened two more stores in the second quarter and plans two more later this year in Oregon and Idaho.