SLOW, STEADY GROWTH CALLED BEST FOR RETAILERS

MARK TOSH

MINNEAPOLIS -- The U.S. supermarket companies with the strongest earnings prospects are those taking a slow, steady approach to growth, according to Brooks O'Neil, a securities analyst at Piper Jaffray here.

Chains that have tried to grow too much, too fast are not likely to perform as well financially in the near term, O'Neil said.

Piper Jaffray was the host of a recent investor conference that featured a number of leading U.S. supermarket retailers and distributors.

"I think those companies that are focusing on a modest amount of new-store construction are doing well right now," O'Neil said following the conference. Companies that manage their earnings internally -- either by upgrading existing stores or lowering expenses -- will have a much easier time than those companies that have been trying to rapidly expand their store base, he said.

"It is my personal theory that the world does not need a lot of new grocery stores, or at least America doesn't," O'Neil said. "Therefore, the investors that have a fixation on new-store growth are missing the point."

Megafoods Stores and Smith's Food & Drug Centers, O'Neil said, have been struggling to maintain their earnings as they aggressively add stores. A better option, according to O'Neil, would be to remodel existing stores, which he said is a relatively low-investment, high-return proposition.

Another industry trend recognized at the Piper Jaffray conference was the lack of food-price inflation, O'Neil said. "Although people had expected some modest pickup in inflation, that does not appear to have materialized," he said.

Following are O'Neil's comments on companies that made presentations at the conference.

Albertson's Boise, Idaho

Albertson's is an extremely efficient and well-run company, O'Neil said, and it continues to do well with a reasonable store-growth plan and continuous efforts to control operating expenses. O'Neil also suggested that Albertson's is perhaps the best-positioned of any of the traditional supermarket operators to stand up to the rollout of supercenters, partially as a result of the buying clout derived from its $10 billion in annual sales.

Carr Gottstein Foods Anchorage, Alaska

The 21-store supermarket chain is struggling to battle a tremendous amount of new square footage -- about 1.4 million -- opened by competitors in its market. "The near-term outlook is quite uncertain in terms of earnings," O'Neil said.

"I think they are doing extremely well, given what's happened up there, but it's just a very difficult [operating] environment."

Fleming Cos. Oklahoma City

As a "turnaround situation," O'Neil said, Fleming is extremely attractive. He sees the acquisition of Scrivner, which was the third-largest U.S. food distributor, as a tremendous opportunity for Fleming. But Fleming executives are realistic about the company's problems and are making a major effort to improve the way they run their business.

Food Lion Salisbury, N.C.

Food Lion is one of the most attractive stocks out there, according to O'Neil. It has had three consecutive positive quarters. It's likely that earnings are going to be very strong, at least on a comparative basis, in the third and fourth quarters, O'Neil added. Food Lion is stepping up its remodeling program, which is seen as a good decision and carries a low risk in terms of rate of return. Between 100 and 120 stores are scheduled to be redone next year.

Megafoods Stores Mesa, Ariz.

Megafoods must turn things around quickly in San Antonio while it performs satisfactorily in its core Arizona and California markets. Megafoods, in two separate deals, acquired 36 stores in San Antonio last year. The company has invested heavily in those stores and needs to begin getting some payback, O'Neil said.

Quality Food Centers Bellevue, Wash.

This company is becoming more exciting to O'Neil. The big issue with QFC was how it would grow. Now, it has stepped up its expansion, in part with a recent five-store acquisition, and there could be more to come. The third-quarter results may be flat to slightly up, but the fourth quarter should

be quite strong, he said.

Safeway Oakland, Calif.

Strong earnings momentum should carry forward in 1994, O'Neil said. Safeway, the nation's third-largest food retailer, has reported solid earnings gains that have exceeded expectations in each of the last six quarters.

Smith's Food & Drug Centers Salt Lake City

The company forecasts improved results in the third quarter. Smith's is continually moving closer to the "critical mass" it needs in California -- where it operates 31 stores -- and it is showing stronger results in Utah. Following last year's price reduction program, O'Neil said second-quarter results were better than expected.

Supervalu Minneapolis

First-half results were flat for this food distribution and retailing company, but this was not unexpected and the outlook is positive for the second half of the year. The retail side of Supervalu's business generated a 100% increase in operating income in the second quarter, O'Neil said.

Stock Advice

Food Lion, Safeway and Smith's Food & Drug Centers received the best marks of the food distributors that made presentations at the Piper conference.

How Piper Jaffray rates the stocks of conference participants

Qtr. Sales Qtr. Sales

(mil.) Change (mil.) Change

Albertson's $2,910 7% $78.8 6% Buy

Carr Gottstein 133 2% 1.1 -- Mkt. Perf.

Fleming 4,030 -- 24.4 -35% Buy

Food Lion 1,821 4% 34.8 13% Strong Buy

Megafoods 150 64% (2.8) -- Underperf.

Quality Food 127 6% 6.4 -3% Buy

Safeway 3,610 2% 51.5 43% Strong Buy

Smith's Food & Drug 748 6% 11.9 -15% Strong Buy