KROGER OPERATING NET EXCEEDS EXPECTATIONS

MARK TOSH

CINCINNATI -- Kroger Co. here last week reported better-than-expected earnings and cash flow for the first quarter. It marked the second consecutive quarter Kroger, the nation's largest supermarket operator, significantly exceeded Wall Street's expectations.

In the quarter ended March 26, Kroger said earnings before an extraordinary item increased 88.8% to $55.7 million, or 46 cents per share. The extraordinary item of $8.3 million was related to early debt retirement.

Securities analysts' estimates for the first quarter were in the 40-cents-per-share range. In last year's fourth quarter, Kroger's operating earnings of 71 cents per share topped Wall Street's estimates by as much as 11 cents per share.

On a cash-flow basis, Kroger's 8.9% first-quarter increase exceeded expectations for a "mid-single-digit" improvement, Joe Amato, a high-yield analyst at Kidder Peabody & Co., New York, said. "It was a very strong quarter," he said.

Joseph A. Pichler, Kroger's chairman and chief executive officer, said "extraordinary bad weather in the early weeks of 1994" and the timing of the Easter holiday boosted sales and contributed to the company's overall stronger performance.

"The significance of Kroger's first quarter is that this increased business translated into strong bottom-line results for the company," Pichler said.

Pichler, however, said the company expected competitive pressure to increase through the remainder of 1994 as additional supercenters and other similar formats roll out at an increased pace in Kroger markets.

By year-end, Kroger expects 12% of its sales base will be in direct competition with supercenters operated by Wal-Mart, Bentonville, Ark., or Kmart, Troy, Mich. About 4% of Kroger's sales base competed with supercenters at the end of 1993.

The 12% estimate, which is based upon a total of between 102 and 105 Wal-Mart and Kmart supercenters in operation, does not include Kroger stores in competition with other large-format operators such as Meijer, Grand Rapids, Mich.

Meijer, a nonunion operator of 200,000-square-foot combination stores similar to supercenters,

expects to enter the Indiana market area this year with about eight new stores.

As part of its effort to prepare for Meijer's expansion, Kroger recently agreed to a 15-month contract extension with clerks in the Indiana market area. The contract, which was signed in January, has virtually the same terms as the previous deal, Paul Bernish, a Kroger spokesman, said.

The basic strategy of the contract extension is that it allows Kroger time to assess Meijer's impact in Indiana and then address the issue with the labor unions, Bernish said. Kroger, which was hit by a 67-day strike at 70 Michigan stores in 1992, has "an open dialogue" with the United Food and Commercial Workers union about the impact of nonunion competition in its market areas when it is appropriate, he said.

Meijer also is expected to enter the Cincinnati market in the future, where Kroger's union contract expires later this year.

Observers said Kroger's contract extension in Indiana is the ideal strategy for maintaining labor peace during the crucial first few months of Meijer store openings.

"If Kroger knows what its cost base is and knows how many dollars it has in to fight with, then it can make a much better attempt at fending off the nonunion entrants in the key first few months of their openings," said Mark Husson, a securities analyst at J.P. Morgan Securities, New York.

"Kroger can get out there and take the fight to them," he said.

Husson also said Kroger's first-quarter results were helped by continued growth in private-label sales. Gross margins improved 56 basis points to 24.01% of sales, he said.

Kroger said sales totaled $5.33 billion in the 12-week first quarter, an increase of 3%. Same-store sales rose 2.3%, which the company attributed to the weather-related factors.

On a comparable basis, or after adjusting for sales to Hook-SupeRx, the timing of the Easter holiday and divestiture of 15 stores in San Antonio, the first-quarter sales increase would have been more than 5%, Husson said. Kroger recently sold its 25% holding in Hook-SupeRx to Revco.

Cash flow -- or earnings before interest, taxes, depreciation and extraordinary items -- rose 8.9% in the quarter to $237.5 million.

1ST-QUARTER RESULTS

Qtr. Ended 3/26/94 3/27/93

Sales $5.33 billion $5.17 billion

Change 3%

Same-store 2.3%

Net Income $47.4 million ($138.8 million)

Inc/Share 40 cents ($1.17)