RETAIL

Following are analysts' comments on each of the top 10 public chains for the first half of the calendar year:

on, amortization, or EBITDA, increasing 8.8% and identical store sales up 1.9% and 0.8 in the first quarter and second quarter, respectively.

Giblen calls Kroger the rock of Gibraltar. Other analysts expressed similar sentiments as Kroger turned in solid numbers.

"Kroger produced steady, solid results, but the second quarter showed some deceleration on comp store sales which drew our attention," said Giblen.

"They had a very good first half, and the top line was as expected," said Cerankosky. "Fred Meyer is on track or ahead of schedule as Kroger integrates it into the entire corporation. The company is doing a good job of managing the margin expansion available from integration of acquired stores and it is still maintaining top-line growth."

Despite a softening in second-quarter sales, Levin said, "they've met earnings expectations so I think their operations have performed extremely well in a rather tough competitive environment. Kroger has gotten increasingly better at best practices. They have taken the best ideas from both Fred Meyer and the historically core Kroger division, and they are executing those ideas well throughout the company."

One example, noted Levin, is private label, which the company embraced early on. "They've taken the best from Fred Meyer, using the Ralphs' Private Selection programs, and they're putting that throughout the operation." Kroger also has been at the forefront in self-checkout, she said. Now, according to Levin, they are about to roll self-checkout into their West Coast divisions.

"It was a good, steady performance in what was a difficult environment with lots of new capacity coming on, including a lot of supercenter performance," said Husson.

"I am excited about these guys increasing their sales in pharmacy, general and seasonal merchandise, private label and natural foods, all higher-margin categories," said Weinswig. "That is allowing them to leverage top line growth to get the bottom line."

The challenge going forward, say analysts, will be what other operators will also face, a sluggish economy.

"At this point Kroger is going to have to manage its merchandise mix across its many markets and formats to meet earnings expectations," said Cerankosky.

"They need to be more promotional-minded," noted Murphy.

In selective markets, Giblen expects some intensified promotional activity. However, he doesn't believe the industry is headed into pricing wars as some are predicting.

ALBERTSON'S, Boise, Idaho, with first half sales up 3.7%, operating income falling 4.7% and identical store sales up 1% and 1.5% in the first and second quarter, respectively.

First half performance reflected the consequences of Albertson's American Stores acquisition; however, analysts said they are encouraged by top management changes and the direction in which the company is headed to turn earnings around.

"Coming off of multiple years of underperformance, the good thing about Albertson's is that things aren't getting any worse and with new management things could get quite significantly better," said Husson.

"We like what we hear from Larry Johnston [chairman, CEO]. His plans are good and he has basically stopped the bleeding in parts of the business that were doing terribly. He sold some really underperforming stores and applied liposuction to the head office and divisional structure to get some of the fat out of the business. Now he has got to chop off bits of the business that stand no chance. That hasn't really gone under the knife yet, and we are waiting to see which divisions he gets rid of,"

Husson stated.

The first half "represented a nice progression from prior periods," said Murphy, who believes it is too early to call exactly where Albertson's is in its turnaround. "Our biggest surprise is that new management says it can get its arms around expenses and re-invest. That is something we will be watching," he added.

"We are starting to see operating improvement since Larry Johnston was brought on board," said Weinswig. "With the combination of Felicia Thornton [CFO] and Peter Lynch [president], you've got a real strong management team. Everyone is happy they are cutting unproductive stores that don't meet their hurdle rate. There was some indication at an analyst meeting that they might consider leaving entire markets, which is a positive."

Describing Abertson's as in a state of "suspended animation," Giblen also agreed Albertson's should be exiting whole market areas.

According to Cerankosky, "Albertson's big challenge and opportunity is to integrate and incorporate all the recent changes at the company beginning with management changes through to the merchandising strategies and shift to closing certain stores. They need to settle down to what is the new Albertson's overall leadership strategy."

He noted that Albertson's strength is in its Jewel Osco combo stores in Chicago that focuses on promotion merchandising. "They have a lot of best practices to be taken from that market [Jewel Osco-Chicago] and put into other markets where Albertson's isn't strong," he said.

Weinswig sees real leverage for Albertson's in its pharmacy. "They do 17% of their sales from pharmacy because of their 800-plus freestanding drug stores."

She also noted that they have a real ad campaign focus, which is their fresh campaign. "Their fresh campaign differentiates them from their competitors and they are lowering prices to keep in line with the rest of the market," she said.

AHOLD USA, Chantilly, Va., with sales rising 40%, operating income increasing 31.1% and comparable-store sales up 3.3% and 5.5% in the first and second quarter, respectively.

The Netherlands-based food retailer continues to grow its U.S. operation through acquisitions. Analysts view its branching out into food service as a big benefit to its performance.

"Ahold sales jumped because of acquisition in food service which has proved to be a significant benefit for them," said Levin.

"The transition has gone smoothly. The synergies are coming through and they are finding more add-on acquisitions all the time with the recent announcement of Alliant Foodservice. That transaction won't take place till next year but it's a very complimentary acquisition," she added. At the same time, Levin said of Ahold's U.S. retail operations, "same store sales have been very strong. They are benefiting from marketing and loyalty card programs and their investment in the store base that they've made over the last several years."

Said Husson, "Comparable store sales are the best in large-cap food retailing. That is in large part due to [Ahold's] Stop & Shop and Giant of Landover which should perform very well. Even Bi-Lo, which is a smaller discount-orientated food retailer in the heart of Wal-Mart country, has got nice strong comp store sales."

Moving into the second half, the challenge for Ahold as well as others will be to continue the momentum, said Levin. "With a softer economic environment, consumers can tighten their belts even though everyone has to eat. Also, the competition doesn't get any less. All that means it will be tougher on Ahold's margins and their ability to get the same store sales increases," she said.

"They've had growth by acquisition. But they are in the same boat as everybody else is in terms of achieving organic growth in the U.S. It certainly is a challenge," noted Giblen.

SAFEWAY, Pleasanton, Calif., with sales increasing 7.9%, operating income rising 11.6% and identical store sales up 3.6% and 1.1% in the first and second quarter, respectively.

Even though Safeway faced tough comparisons to last year because of gains from property disposals and an overfunded pension fund, the company pulled out earnings and met analysts' expectations. For many, Safeway continues to be a star in food retailing. However, Safeway is beginning to experience softening sales and trading down in its markets, according to analysts.

While Safeway continues to be a star in the industry, said Giblen, "comp store sales were disappointing in the second quarter and that continued in the third quarter. They have the best prospects to achieve internal comp store sales growth, but it has been slower in coming than initially thought. It shows how difficult the industry conditions are short term."

"Safeway is up against a very tough year compared to last year," said Husson.

"Last year, sales growth was enormous but Safeway had other income from property profits of some disposals and also from gains you get from a big overfunded pension fund. So up against artificially high numbers last year to produce 15% earnings per share growth this year, it has been a huge performance for Safeway," he added. "No one thought they could do it and they have. That shows you there is lot of stuff going on still at Safeway."

"We think Safeway is continuing to do amazing things in area of margin expansion," said Cerankosky. "The company continues to benefit from regional acquisitions -- Dominick's and Randall's. It would be no surprise if they announced another regional acquisition within the next few quarters," he added.

Said Weinswig, "They have a good focus on hunting cost of goods sold. Through shrink, private label and supply chain, management is extremely focused on bottom line and they are hitting the numbers. Averaging, in aggregate over two years, we're seeing 5% identical store sales -- that's industry-leading. It's pretty impressive."

However, Levin noted that