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CINCINNATI - Beating analysts' expectations, fourth quarter and full year results released yesterday by The Kroger Co. here proved that its efforts to heighten the shopping experience with improved selection, enhanced customer service, discounts, and better store conditions are paying off handily.
"Kroger delivered consistently strong results during 2006, exceeding our original guidance for both identical supermarket sales and earnings per share," said Kroger's chairman and chief executive David B. Dillon yesterday. "These results and the gains we have made in market share throughout the year indicate that Kroger continues to compete effectively in this challenging environment. Our associates' commitment to our plan will continue to enable us to deliver the service and value our customers expect."
The leading supermarket chain said that during the fourth quarter, ended February 3, 2007, it tabbed a 14.5 percent gain of $16.9 billion, up 5.7 percent after adjusting for an extra week, and a 5.6 percent same store sales increase including fuel.
Quarterly earnings, meanwhile, rose to $384.8 million, or 54 cents per share, up from $282.1 million, or 39 cents per diluted share in the fourth quarter of 2005.
For the full 2006 fiscal year, total sales increased 9.2 percent to $66.1 billion. After adjusting for the extra week in fiscal 2006, total sales increased 7 percent over fiscal 2005, while same store sales increased 6.4 percent with fuel and 5.6 percent without fuel based on a 53-week period in both years.
Net earnings for fiscal 2006 amassed $1.11 billion, or $1.54 per diluted share. Kroger's fiscal 2006 summary included a 53rd week that benefited the year by an estimated $0.07 per diluted share, as well as $0.03 of expense per diluted share for legal reserves recorded in the first quarter vs. 2005 net earnings of $958 million, or $1.31 per diluted share.
In a conference call with analysts, Dillon said while the company's quarterly progress was largely in line with expectations, "five or six things" worked especially well together that produced "an incredibly strong quarter." In addition to solid same store sales gains, better-than estimated gross margins, and depreciation, Kroger also made strides with its natural and organic offerings.
When asked about changes and opportunities for improvement at the midpoint of Kroger's five-year strategic plan, Dillon said while the company didn't get quite as much accomplished as it originally anticipated, it anticipates "strong future sales growth opportunities" by remaining focused on staying "meaningful to our customers....and making sure that the stores we offer are relevant" to each individual market.
Dillon said customer loyalty and data from its loyalty program analysis partner dunnhumby will continue to play an increasingly important role in Kroger's game plan, as will managing perishable shrink in meat and produce. "Shrink in fourth quarter showed improvements vs. the year before in perishables," he said, noting, "there's still good room for improvement," particularly as it relates to establishing the root causes of shrink.
"If incremental shrink in produce was in organics, that's one thing," but if it is stemming from traditional categories, he added, "that's quite another." To that end, Dillon said Kroger will seek to better identify "where to expand and where to contract to benefit sales."
Further, while the first, second and fourth quarters of 2006 presented significant deflationary conditions that hampered fresh meat category sales, Kroger caught especially strong seafood sales, Dillon noted.
Dillon further credited Kroger's workforce for contributing significantly to its strong fourth quarter results, which he said demonstrates "that our associates understand the importance of offering customers improved service, product quality and selection, and value. Our performance last year is the result of the hard work and dedication of our associates."
Kroger has a $1.9 billion to $2.1 billion capital expenditures purse to work with this year for its larger, faster growth markets, while it plans to grow supermarket square footage by 2 percent before acquisitions and operational closings
When asked whether acquisitions were on the drawing board, Dillon said it's "not for lack of trying," but rather price differentials between what is available and what Kroger is willing to spend. "We continue to see a lot of things out there," but in the interim, will continue focusing on "helping grow our market share in some markets" via expansions and major remodels, he said.
In his year-end review, Dillon said Kroger gained share in 36 of its 44 major markets, based on internal company estimates. Kroger increased share in 26 of 32 major markets in which it competes directly with Wal-Mart Supercenters. Its share declined in five and was unchanged in one. Dillon said Wal-Mart added 125 Supercenters, giving it 1,000 units in Kroger's major markets.
During the analyst call, Dillon refrained from commenting on what is expected to be challenging labor negotiations the grocer has ahead with unionized employees in Southern California, Cincinnati, Detroit, Houston, Memphis, Toledo, Seattle and West Virginia this year.