KROGER FINDS NUMBERS AT RALPHS NOT QUITE RIGHT

MARTIN SCHNEIDER

CINCINNATI -- Kroger Co. here last week said it will restate earnings "by minor amounts" as a result of improper accounting practices at Ralphs Grocery Co., Compton, Calif., which Kroger acquired in May 1999 as part of its merger with Fred Meyer.

The accounting discrepancies were discovered through an anonymous tip before an internal audit by Kroger, according to the company. The restated earnings total an increase of two cents per share in fiscal 1998, a decrease of two cents per share in fiscal 1999, and a decrease of one cent per share in both the first and second quarters of 2000, Kroger said.

The company said it believes the improper accounting began more than one year before the company acquired the chain. Since the improper accounting practices were intentional, Kroger must report the changes, though minimal, in earnings for the periods reflected by the accounting imbalances, the company said.

Joseph Pichler, chairman and chief executive officer of Kroger, said during a conference call last week the improper accounting practices amounted to certain executives making multiple entries in ledgers to adjust the books to meet earnings expectations.

Pichler also said those responsible for the discrepancies are no longer with the company. Ralphs said last week it has named Steve McMillan, a senior Kroger executive, vice president and chief financial officer.

"We are obviously disappointed at these accounting issues at Ralphs, but we are confident that they have been fully resolved," Pichler said.

Analysts following the industry said the earnings restatement will not have much of a negative effect on Kroger's future growth.

Jonathan Ziegler, San Francisco-based managing director, Deutsche Banc Alex. Brown, New York, told SN that he was surprised that the company would draw so much attention to themselves and was disappointed by the facts, but was also pleased that Kroger was very forthright in dealing with the problem.

"The way that they handled this makes me confident that they have an effective screen in place to catch these types of problems. And it also wasn't easy to acquire a multi-chain company like Fred Meyer. That merger went amazingly smooth. All in all, I'm not expecting another shoe to drop," Ziegler said.

"Most people see this as a non-event," Meredith Adler, analyst with Lehman Brothers, New York, told SN. "It really shouldn't affect the company save for the base for growth dropping slightly. The problem pre-dated them, and they dealt with it appropriately. But we have brought our estimates down four cents."

The company also released preliminary results for the fourth quarter and fiscal year ended Feb. 3. The company said it will release final results for the quarter and year March 15.

For the year, Kroger said it expects earnings to increase 21% to $1.34 per share on total sales of $49 billion, an 8% percent increase.

For the quarter, earnings per diluted share rose 30% to 48 cents on sales of $12.7 billion, an increase of 12.9%. Food store sales increased 5.1%, and comparable-food store sales rose 1.9%.