Kroger Bullish on 2012

CINCINNATI — It wasn’t so bad after all for Kroger Co., which last week posted financial results that bucked some recent industry trends while forecasting a rosy new year.

“As we look to [fiscal] 2012 we expect the external environment to be a little better than 2011,” David Dillon, chief executive officer, told analysts in a conference call discussing fourth-quarter financial results and the company’s outlook. “All of the data we’re seeing suggests the overall economy and customer sentiment are improving. Both give us reason to be optimistic about the year ahead.”

Kroger’s sales results for the fourth quarter, which ended Jan. 28, also provided some reason to be optimistic. Sales improved 7.7% to $21.4 billion, with identical store sales excluding fuel increasing by 4.9%.

Analysts, citing lackluster sales from peers including Safeway and Winn-Dixie Stores, as well as some recent remarks from manufacturers, suggested shoppers abandoned the supermarket for other channels of trade during the fourth quarter. According to Dillon, Kroger avoided such defections by focusing on the customer, and not the channel.

“Our objective is to solve what the customer needs solved, and not to solve maybe what is a traditional supermarket equation,” Dillon said. “I would agree we have not suffered the same channel changes that others have, but we’ve had to live with the same channel changes that others have had to live with. We’ve just had to address it in a different way.”

Kroger posted a quarterly loss of $306.9 million related mainly to its previously announced pension consolidation. For the fiscal year, sales increased 10.2% to $90.4 billion and identical sales excluding fuel increased by 4.9%. Excluding the pension consolidation, net earnings of $1.2 billion were up 9.1%.

Kroger cited Nielsen Homescan data suggesting the company gained market share in 13 markets during 2011 and lost share in six markets, while Kroger’s overall share in its markets increased by 50 basis points.

Kroger’s 2012 forecast contemplates identical-store sales gains of 3% to 3.5% excluding fuel, noting that customer sentiment and the economy are showing signs of improvement for most shoppers. The forecast anticipates that sales will suffer — but profits may increase — as several prescription drugs come off patent during the course of the year. Inflation, which Kroger estimated at more than 5% during fiscal 2011 — will moderate.

“When you first think about 3% to 3.5% [comps] it could initially give you a feeling that we’re not very optimistic about the year, but don’t think that at all,” Dillon said. “In fact, it’s just the opposite. …  I want to make sure you see that we feel pretty optimistic about what this future looks like. It certainly includes our view that the economy is going to improve. It also includes our view that the customer’s world is improving, and it includes our view that inflation will moderate a bit later into the year.”

Although Dillon said that Kroger’s lower-income customers continue to be under pressure, he called out improvements in categories including natural foods, organic produce, sushi and floral indicating a sense of optimism among shoppers. “We’re seeing a little broader customer recovery than we’ve seen before,” he said.