KROGER SAYS SYNERGY GOALS AHEAD OF SCHEDULE

ELLIOT ZWIEBACH

CINCINNATI -- Kroger Co. here said last week it is on the verge of reaching its synergy savings goal of $380 million a full year ahead of schedule.

The company said combined synergy savings from its 1999 merger with Fred Meyer Inc. rose $36 million during the first quarter ended May 26 to an annual run rate of $366 million -- "well on the way toward achieving and exceeding the combined synergy savings goal by the end of fiscal 2001," Joseph A. Pichler, chairman and chief executive officer, said.

Rodney McMullen, executive vice president, said the increased synergies in the quarter followed the conversion of information and accounting systems at Seattle-based QFC "on budget and on time," plus the conversion of two Fred Meyer manufacturing plants to Kroger's enterprise system and accounting functions during the quarter.

Pichler and McMullen made their remarks during a conference call with securities analysts following the release of financial results for the 16-week first quarter, which showed sales increasing 5.4% to $15.1 billion; identical food-store sales up 1.9%; net income rising 15.9% to $313.5 million, excluding merger-related and one-time expenses; and operating cash flow jumping 8.1% to a record $1.05 billion.

Pichler said earnings growth was driven by several factors, including the additional post-merger synergies; strong expense controls; continued growth in corporate-brand sales; improvements in warehousing and transportation expense; and outstanding performance at manufacturing plants.

He said corporate-brands are accounting for 26% of grocery dollars and 32% of grocery units in Kroger's Eastern segment and 20% in the Western segment -- up from 16% to 18% at the time of the merger.

In other conference-call highlights:

Kroger is considering expansion of various formats -- including Fred Meyer department stores, Fred Meyer Marketplace combination stores and Food 4 Less price-impact stores -- beyond their existing markets but not until next year at the earliest, Pichler said. "We've only operated the Fred Meyer Marketplace stores in Phoenix for eight months, so we haven't gone through a full seasonal cycle, and we will know more after Christmas and a full year of operation," he explained. "But we're not prepared to talk about possible locations for any format expansions, though we've allocated significant capital to move them into new markets in 2002."

The company is initiating a variety of conservation measures to keep the impact of utility-cost increases to a minimum, particularly in California, McMullen said, including installing new energy-efficient lighting in most stores and reducing lighting levels in others and auditing air-conditioners, refrigeration and other store equipment "to make them operate as efficiently as possible."

Kroger will expand square footage by 4% to 4.5% this year, including the pending acquisition of 15 Harris Teeter stores in Atlanta, Pichler said.