FRED MEYER PLANS TO PARE ITS CAPITAL EXPENDITURES

DAVID ORGEL

PORTLAND, Ore. -- Fred Meyer's gains in implementing key capital projects will enable major reductions in capital expenditures over the next few years, executives said here at the chain's annual meeting.

The supercenter operator also expects continued falloffs in costs, partly resulting from efficiency gains, executives said. Furthermore, the chain is managing to reduce its format size while retaining a similar breadth of product.

Financial analysts told SN that Fred Meyer's capital expenditure reductions won't detract from the chain's store-opening plans. They also said the company is making use of category management to pare assortments that are too vulnerable to category killers and is beefing up selections of other items.

The capital expenditures drop follows the completion of the last major project to expand distribution capabilities. The company opened its new 600,000-square-foot distribution center in Puyallup, Wash.

"With the distribution expansion now behind us and our remodel plans being brought more current over the past few years, we anticipate spending significantly less for capital projects over the next three years than during the 1993 through 1995 period," Ken Thrasher, chief financial officer, told shareholders.

Thrasher noted that Fred Meyer accelerated its investments in information systems and distribution capabilities from 1993 through 1995, posting 1995 capital spending of $236 million after subtracting land sales and the cost of stores financed by leases.

"Capital spending will drop in 1996 to about $120 million, net of land sales and lease financing," Thrasher said. "In both 1997 and 1998, we plan to continue carefully managing our growth and focusing on debt reduction. Our growth plans currently call for building five new stores in 1997 and four in 1998."

Thrasher said there will be continued opportunities to reduce costs as a percentage of sales.

"Sales promotion costs will continue to go down as a percent of sales as we continue building new stores and complete major remodels in existing markets," he said. "We plan to continue reducing corporate administrative costs as a percent of sales, especially as we finalize the project to update our management information systems capabilities. We expect to reduce occupancy expenses further as we continue to build smaller stores, negotiate higher tenant rentals and renegotiate lower rentals on older store leases."

Fred Meyer, which is experimenting with various formats, is continuing to find ways to shrink its store box.

"Because of improvements in our distribution capabilities and our management information systems, we are finding more ways to reduce in-store inventories while continuing to stock the same vast selection of 225,000 different products under one roof in stores that are smaller and easier to shop," Robert Miller, chairman and chief executive officer, told an audience of shareholders.

"We can now build stores averaging around 150,000 square feet that offer customers essentially the same number of items we were giving them five years ago in stores of up to 190,000 square feet. The smaller stores give us more opportunities to find good sites. They cost less to build and operate, generate higher returns on investments and are easier to shop."

By the end of 1996, the company will have opened a total of five new full-size one-stop-shopping stores, including one opened in March in Tillamook, Ore., using a new smaller store design of 127,000 square feet.

Fred Meyer operates 106 large one-stop-shopping stores in six Western states, 98 with full-line food departments. The company also operates smaller specialty stores, including jewelry stores. The number of specialty stores will rise to 211 in 14 states after a jewelry-store acquisition nearing completion is closed. As reported, the chain's first quarter net income surged 206.3% to $9.4 million on an 11.2% sales rise, figures that show continued rebound from the effects of a long strike in 1994, analysts said.

Jonathan Ziegler, an analyst at Salomon Bros.' San Francisco office, said category-killer stores have been cutting into Fred Meyer's lumber and plywood business, so Fred Meyer is replanogramming stores. Category management will help take stockkeeping units out of general merchandise, he said.

"They are focusing on 145,000 square feet as opposed to 165,000 square feet," he said. "That will help them expand to smaller markets."

Don Spindel, an analyst with A.G. Edwards, St. Louis, said that while smaller stores aren't the major thrust of Fred Meyer's expansion, "they are evaluating it in terms of return on investment."

He noted that the chain appears to be "back on track based on first-quarter results."

Bonnie Zwickel, an analyst with CS First Boston, New York, said the tweaking of store size represents a major long-term focus. She noted that the chain is reducing certain items that compete with category killers and increasing others.

"Over time, they are constantly monitoring and updating their prototype," she said. "This is the latest version. They've downsized lumber offerings and adjusted mixes."