Stater Bros. Sees 200% Rise in Profit

ELLIOT ZWIEBACH

COLTON, Calif. — Stater Bros. Markets here said reduced promotional investment during the year-end holidays helped the chain triple its net income for the first fiscal quarter.

Looking ahead, the company will focus on building sales volume while keeping expenses in check, said Jack Brown, chairman, president and chief executive officer, in a conference call discussing the company's earnings last week.

“We're always looking at cost-cutting,” he said, “but we'll probably reach more for volume to generate another point or two in sales.”

The 13-week first quarter, which ended Dec. 24, saw net income increase 200% to $9.9 million and sales climb 4.3% to $904.1 million.

With the quarter ending the day before Christmas, there was one more selling day in this year's first quarter than in the first quarter of the preceding year, which added $12.1 million in sales. Adjusting for the extra day, the company said same-store sales rose 1.4%.

Phil Smith, executive vice president, finance, and chief financial officer, told SN the increase in earnings stemmed from an increase of 61 basis points in gross margin; a decline in selling, general and administrative expenses, offset by a rise in option expenses; and an increase in depreciation because of capital spending in prior years.

He said gross profit margin during the quarter rose to 26.76% of sales from 26.15% in the first quarter of 2006 as a result of reductions in promotional spending during the year-end holidays, “and we believe our marketing initiatives will allow us to maintain those margin levels going forward.”

Asked about the labor contract Stater Bros. negotiated with the United Food and Commercial Workers union (see Page 10), Brown said the chain accepted the union's offer to engage in early contract discussions, which led it to sign an agreement even before negotiations began between the UFCW and Albertsons, Ralphs and Vons.

“When we signed the last agreement early on three years ago, the three chains felt they did all the heavy lifting and we took all the benefits, and they were not happy. Now we went first again, and they're not excited, but we had to make our decisions to protect investors, market share, our workforce and the communities we serve.”

George Frahm, group senior vice president, human resources, said Stater Bros. doesn't expect labor costs under the new contract to rise significantly “because we expect productivity to increase as much as 10%, which will cover any differences.”

Regarding the entry of British retailer Tesco's Fresh & Easy Neighborhood Market format into the California market later this year, Brown said it “will be interesting to watch, though we will not stand idly by on the sidelines.”

He said he anticipates the stores will be “a cross between Trader Joe's and Bristol Farms, with maybe a little of Smart & Final thrown in.”