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    Labor Woes Keep Kroger's Q1 Profits Short of Expectations

    CINCINNATI -- Charges incurred from labor disputes kept The Kroger Co. here from meeting analysts expectations for profits in the leading supermarket operator's first quarter, end May 26.

    CINCINNATI -- Charges incurred from labor disputes kept The Kroger Co. here from meeting analysts expectations for profits in the leading supermarket operator's first quarter, end May 26.

    Net earnings in the quarter totaled $336.6 million or $0.47 per share, up 9.9 percent from $306.4 million, or 42 cents a share a year ago. Analysts on average were expecting earnings of 48 cents per share, according to Reuters. The company's share price dropped almost 7 percent by the end of trading yesterday.

    Kroger posted a 6.7 percent increase in quarterly sales to $20.7 billion, and a 6 percent gain in same store sales with fuel and 5.2 percent without fuel, good for a 10 percent rise in profits.

    The latest results included charges related to a lingering labor dispute at its Louisville, Ky., distribution center that cut its earnings by 2 cents a share. Year-ago results were cut by a legal expense of three cents a share.

    Also looming in the background is the threat of a strike in Southern California that would affect Kroger-owned stores as well as other retailers' units. During a conference call, Kroger's c.f.o. Mike Schlotman said a strike could put a strain on cash flow, which in turn could hinder a plan for share for share repurchases.

    Kroger officials also mentioned factors such as price inflation in dairy and produce, to the tune of 2 percent for the quarter, excluding fuel. In some cases, Kroger said, it elected not to pass the full extent of the price increases onto consumers because of pressure from competitors.

    Meanwhile, the chain said it would stand fast with a focus on consumer-centric retailing.

    "Our associates continue to strengthen our connection with shoppers, building customer loyalty and generating strong identical sales growth," said David B. Dillon, Kroger chairman/c.e.o. "This is a key driver of our objective to increase earnings and generate shareholder value."

    Among other first quarter highlights, Kroger said it has reduced its net total debt to EBITDA ratio from 2.8 to 1.8 since January 2000; and added it plans to use free cash flow to repurchase shares and pay dividends while maintaining a solid investment grade rating.

    Kroger also unveiled a new $1 billion stock repurchase program, which it said reflects confidence in its "Customer 1st" strategic plan and its belief that its shares represent an attractive investment opportunity.

    The company also raised the lower end of its expected range for fiscal 2007 same supermarket sales growth, excluding fuel sales, to 3.5-5 percent from a previous 3-5 percent range.

    "Looking beyond 2007, we believe our Customer 1st strategy will allow us to grow identical supermarket sales in the 3 to 5 percent range with a slightly improving operating margin, excluding fuel sales," said Dillon. "Our ability to improve our customers' loyalty, combined with the dividend and stock repurchase program, will create ongoing value for our shareholders," he said, adding that the company is well positioned to continue increasing its market share, "which is a fundamental part of our growth strategy."

    Excluding fuel, Kroger's first quarter results mark the fifteenth consecutive quarter Kroger has reported positive identical supermarket sales and the eighth consecutive quarter Kroger has reported identical supermarket sales in excess of 3 percent.

    Kroger has more than 2,477 supermarkets in 31 states, including its flagship chain, Ralphs, Fred Meyer, Smith's, Fry's and Dillons.

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