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CINCINNATI - The Kroger Co.'s second-quarter profits declined 25 percent amid warnings that the nation's leading grocer may miss a key 2004 sales target because of the lingering effects of a Southern California labor dispute that ended in February.
Kroger's second-quarter earnings fell almost $50 million from a year ago, while its earnings per share of 19 cents for the quarter ended Aug. 14 fell short of the 27 cents projected by Wall Street analysts. Yesterday Kroger's stock dropped 80 cents, or nearly 5 percent, to $15.90 on the New York Stock Exchange.
Net earnings for the quarter were $142.4 million, reduced by $15.3 million, or two cents per share, as a result of Kroger's electing to pay off debt early for $750 million in financial notes due to be redeemed next March. That move will help the retailer reduce its interest expense by two cents per share this fiscal year.
Total sales for the second quarter increased 5.1 percent to $13.0 billion, according to the company, which said identical food sales, including fuel, increased 2.1 percent and, excluding fuel, increased 0.6 percent. Excluding the Ralphs and Food 4 Less stores affected by the labor dispute, identical food sales, including fuel, increased 2.8 percent and, excluding fuel, increased 1.1 percent.
Noting that cutthroat competition will make it challenging for the company to reach its target 1.3 percent sales increase at stores open at least a year, David Dillon, Kroger's chairman and c.e.o., said he expects improved identical food sales for the remainder of the year, as compared with the 1.1 percent growth in the second quarter.
Commenting on the post-strike environment in southern California, Mr. Dillon said: "The marketplace remains very competitive. Ralphs is focused on improving identical food-store sales to prestrike levels. Based on current conditions in the market, we believe our efforts to return sales and earnings to prestrike levels will continue for the foreseeable future. Ralphs is executing the plan to rebuild our business."
For the quarter ended Aug. 14, Kroger paid a $24.7 million fee to pay off the company's $750 million, 7.375 percent bond due in March. The company also trimmed long-term debt to $7.29 billion from $8.0 billion.
The labor strike against Kroger, Safeway, and Albertsons, Inc. was estimated to cost the chains more than $1.5 billion in sales, while over 70,000 workers at more than 850 stores were estimated to have been affected.
For the first six months, Kroger earned $405.3 million, or 54 cents per share, on sales of $29.9 billion. A year ago the company earned $541.9 million, or 71 cents per share, on sales of $28.6 billion.
During the quarter Kroger opened, expanded, relocated, or acquired 24 food stores, and closed 21 stores, while capital expenditures totaled $416.3 million. Also in the quarter, total debt was $7.6 billion, a decrease of $615 million as compared with the second quarter of 2003.
Dillon said Kroger's cash flow enabled the company to continue executing its "'financial triple play' of debt reduction, stock repurchase, and strong capital investment." Noting Kroger's strategy to use one-third of cash flow for debt reduction and two-thirds for stock repurchase or payment of a cash dividend, Dillon said that in accordance with this policy, Kroger expects cash flow for the year to support, at a minimum, the $168 million in stock repurchases made year to date and allow for debt reduction. "Kroger's financial strength provides us with the resources necessary to continue building the company's business for the future," he said.
With 2,530 stores in 32 states operating under the Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith's, Fry's, Fry's Marketplace, Dillons, QFC, and City Market banners, Kroger's stable now includes 792 convenience stores, 439 jewelry stores, 502 supermarket fuel centers, and 42 food processing plants.