SMITH'S ADJUSTS TO CALIFORNIA

Smith's Food & Drug Centers expects its California stores eventually to increase overall profitability. One key to achieving success in California is by adding more stores to leverage operating costs there, according to Robert D. Bolinder, executive vice president.

ivision to 31 stores as of June. Three additional California stores are planned as part of Smith's 12-store 1994 expansion.

Smith's, Salt Lake City, operated 133 stores as of April. The chain expects to spend $150 million in each of the next two years on capital expenditures. It spent a record $322 million in 1993.

Bolinder said the economic recession in California, which he said is probably the worst in the nation, has kept Smith's sales below expectations and delayed profitability there. Still, he said Smith's is not discouraged by its progress there.

"We were convinced that there was an opportunity for more stores in that [California] market, and that ultimately the good operators will find that a good prosperous market again," he said. "Out of the 31 stores, we have two or three that are pretty weak, that we still need to do some special work on. But overall the response has been quite good, despite the fact that we're dealing with a completely different consumer base in various areas."

Smith's decision to reduce its prototype store size -- from 75,000 square feet to a range between 54,000 and 66,000 square feet -- also should make it easier for Smith's to become profitable in California. And it opens up sites in smaller cities and areas that Smith's passed over initially, Bolinder said.

In Utah, another of Smith's key operating areas, same-store sales have rebounded to positive levels following a major cost-cutting initiative launched last summer and the subsequent aggressive competitive responses, Bolinder said. (Smith's lowered prices on 10,000 items at its 34 Utah stores.)

"We've seen recent moderation of pricing pressures in this key market," Bolinder said.

Matthew Tezak, senior vice president and chief financial officer, said Smith's net income, which declined 33% in the first quarter, "probably won't show any increases until the third quarter." By that time, Smith's will have cycled through a number of its operational challenges.

Three factors have pressured earnings, Tezak said: the opening of new stores in California, the Utah pricing program and the effect of new-store openings by competitors.

At store level, private-label sales at Smith's have increased to about 20% of Smith's total sales.