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CINCINNATI -- It looks like a good start for The Kroger Co. this year. The number two food retailer in the nation reported strong first quarter performance on both the sales and earnings fronts yesterday, with net income gaining 12 percent to $294.3 million from $262.8 million a year earlier, and sales rising 6.2 percent to $17.95 billion from $16.9 billion in last year's first quarter.
The better-than-expected results, which saw same store supermarket sales increasing 3.8 percent with fuel and 2.4 percent without fuel, prompted the nation's largest grocery chain to raise its fiscal 2005 earnings target to at least $1.24 a share, 3 cents ahead of its prior outlook and a penny greater than Wall Street analysts' consensus. The results also prompted investors to push the stock up to a new 52-week high, and buoyed stock prices for the supermarket sector in general over the course of the day. Yahoo's grocery stock index put the sector up 3.86% at the market's close.
David B. Dillon, Kroger chairman and c.e.o., attributed his company's first quarter success to a sharp focus on the consumer. "Kroger's associates are focused on providing our customers with high levels of service, selection and value. That was the key to our performance in the first quarter," Dillon said in a statement. "We're targeting the areas of our business that our customers have told us are most important to them. Whether it's speeding up the checkout process, making sure our stores have the right products in stock, or rewarding our best customers with special savings, we're committed to making sure that every decision we make positively influences the way our customers feel about Kroger."
Dillon said Kroger's emphasis on placing the "customer first" generated increased customer traffic and higher average transaction size in identical supermarkets. Excluding fuel and strike-affected stores, identical store sales have shown sequential improvement for eight of the past nine quarters.
Other highlights of Kroger's first quarter:
-- FIFO gross margin was 25.19 percent of sales, a reduction of 82 basis points from the first quarter of 2004. Excluding the effect of fuel, FIFO gross margin declined 40 basis points -- in line with Kroger's expectations -- as the company continued to invest in lower prices for customers.
-- Operating, general and administrative (OG&A) costs declined 62 basis points to 18.39 percent of sales. Excluding fuel, OG&A declined 29 basis points. OG&A at the supermarket divisions, excluding Ralphs and the effect of fuel, fell nine basis points.
-- Capital investment totaled $400.6 million, compared to $456.7 million a year ago.
-- Kroger repurchased 9.5 million shares of stock at an average price of $16.06 for a total investment of $153 million. There is approximately $208 million remaining under the $500 million stock buyback announced last September. Since January 2000, Kroger has invested $2.9 billion to repurchase 150.3 million shares --equivalent to approximately 17 percent of the company. Kroger continues to buy back stock.
-- Total debt was $7.5 billion, a reduction of $508.7 million from a year ago.
As Kroger continues to rebuild its business in southern California, same store supermarket sales, without fuel, at both Ralphs and Food 4 Less were positive in the first quarter, on a combined basis increasing 1.3 percent over the prior-year period.
Earnings before interest, taxes, depreciation and amortization (EBITDA) at Ralphs and Food 4 Less were in line with Kroger's expectations. Dillon said the company is pleased with its progress in southern California, "particularly in light of the significant challenges we have faced. Our Ralphs and Food 4 Less associates are embracing the plan and are delivering against our strategy. We're seeing solid improvement." Indeed, recovery in the SoCal market was instrumental in the varey favorable comparison to the previous year's quarter.
Dillon continued: "We're off to a good start in 2005. Across the organization, our associates are working together to deliver the best possible shopping experience to our customers every day. Yet we also recognize that a lot of work remains. In this competitive environment, we must do an even better job of understanding and delivering what our customers need so that we can drive profitable sales growth and create the value that our shareholders expect from their investments."
At the end of the first quarter, Kroger operated (either directly or through its subsidiaries) 2,524 supermarkets and multi-department stores in 32 states under two dozen local banners including Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith's and Smith's Marketplace, Fry's and Fry's Marketplace, Dillons, QFC and City Market. Kroger also operated (either directly or through subsidiaries, franchise agreements, or operating agreements) 793 convenience stores, 432 fine jewelry stores, 552 supermarket fuel centers and 42 food processing plants.