KROGER SEES LITTLE IMPACT FROM 'TOUGH' ENVIRONMENT

JON SPRINGER

CINCINNATI -- Kroger Co. here said last week the company was on-target with sales and earnings goals for the year and that the competitive pressures cited by rivals Albertson's and Supervalu in their third-quarter results have had less impact at Kroger.

In a conference call discussing Kroger's results for the third quarter, ended Nov. 4, Joseph A. Pichler, Kroger's chairman and chief executive officer, said, "I think the competitive environment has been tough for six or seven years, but it's possible that it affects different companies in different regions in different ways. It might lead some companies to say it's been tougher and other companies to say it's business as usual. For our company, it's business as usual."

For the quarter, sales rose 6.1% to $11.0 billion, comparable-store sales gained 1.9%, and net income increased 17% to $231.4 million, or 28 cents a share, up 24 cents. EBITDA totaled $757 million, an increase of 10.2%. Gross profit margin, excluding one-time expenses and a LIFO charge, increased to 26.58%.

Pichler said Kroger and its customers have thus far exhibited little evidence of an economic slowdown, but that the company has historically performed well in such times. He said it was too early to determine a slowdown, or to gauge its effects.

"Kroger has been invariant to macroeconomic swings of the food side, but I can recall that in early stages of a downturn our company actually improved some, since people ate fewer meals away from home," Pichler said. "It's still too early to tell whether there will be a non-food slippage. We still had strong sales in the quarter."

Jonathan Ziegler, a San Francisco-based managing director for Deutsche Banc Alex. Brown, New York, told SN that Kroger delivered "almost exactly what was expected," save for some slight differences between some analysts' projections of gross profit margins and Kroger's actual results.

"There was almost nothing to talk about," Ziegler said. "They were right in line with where they said they would be."

Pichler said Kroger made progress on a number of fronts during the third quarter, including:

Launching a premium private-label line called Private Selections.

More than 300 "Private Selections" premium private-label SKUs rolled out to Kroger stores across the country in early October, Pichler said. Priced between premium brands and Kroger's other private-label brands, Private Selections will appeal to discerning, value-conscious shoppers and will increase Kroger's gross profit margins, said Pichler. The new label may slow same-store sales growth but generates greater profits, he added.

"The increase in private labels has a dampening effect on sales, but enhances our gross profit dollars," he said. "We're delighted to trade off some top-line growth for a 10% increase in gross profit dollars."

Converting former Fred Meyer stores in Arizona to the Fry's Marketplace banner.

Kroger completed the conversion of former Fred Meyer Marketplace stores in Arizona to Fry's Marketplace in early November. Pichler said the Marketplace stores -- which are larger than Kroger's grocery stores and carry expanded general merchandise such as toys and electronics -- are a potential model for rollouts in other parts of the country. "It's too early to say when and where we'll take this concept, but we are very happy with the results so far," he said.

Beginning to see benefits from its membership in the newly formed business-to-business groups GlobalNetXchange and TradingProduce.com.

The GlobalNetXChange is proving to be a more versatile and efficient tool than electronic data interchange, said Rodney McMullen, Kroger's executive vice president of strategy, planning and finance. Kroger has already conducted 21 reverse auctions through the site and McMullen said that over time, the GNX has the potential to reduce supply chain expenses for Kroger and its suppliers.

"The biggest advantage over EDI is that GNX is more versatile, with the ability to share more information and conduct business more frequently -- you could do it live if you wanted," he said. "EDI is not as interactive." McMullen added that Kroger has also begun sourcing perishables through TradingProduce.com, a move that could also reduce expenses.

Elsewhere, Pichler said:

Kroger is exceeding its synergy saving goals of the Fred Meyer acquisition, with $294 million of a projected $381 million in savings already realized.

Kroger operated 2,343 food stores, 787 convenience stores and 396 jewelry stores at the end of the third quarter. It opened or expanded 35 stores during the quarter and closed 24 stores. Square footage is up 4.8% for the year.

Kroger is in the process of consolidating four technology platforms into two as part of its Fred Meyer integration. Smith's Food & Drug switch to common Kroger systems is nearly complete, after which Kroger will work on switching QFC early in 2001.

Kroger had opened 96 new pharmacies as of the third quarter. Pharmacies, which will drive identical store growth, are expected to provide $6 billion in sales in three years.

Kroger operated 57 fuel centers at its stores by the end of the quarter, with plans for 75 by year-end. Kroger expects to open between 150 and 175 fuel centers by year-end 2001.

Pichler said he was "comfortable" with earnings-per-share projections of 16% to 18% per year through 2002.