Kroger 4Q profit down 27 percent, sales rise with gasoline amid competition for shoppers

Kroger 4Q profit falls 27 percent; margins shrink

CINCINNATI — The Kroger Co. is sacrificing some profits to court financially strapped shoppers who are buying more groceries at lower prices, counting on them to keep coming back when better economic days finally arrive.

The nation’s largest traditional grocery chain Tuesday reported earnings fell 27 percent in its fourth quarter, while sales rose 7 percent with help from gasoline sales that were boosted by discount incentives for regular customers.

Kroger says its attracting more frequent shoppers who are buying more items, helping it do better than most competitors while performing below its own levels of recent years.

David B. Dillon, Kroger’s chairman and CEO, told investors on a conference call that he views those as healthy signs that will mean better financial results “as the world improves.”

Kroger reported fourth-quarter profit of $255.4 million, or 39 cents per share, down from $349.2 million or 53 cents, a year ago. Sales were $18.6 billion. Analysts surveyed by Thomson Reuters expected 34 cents per share on $17.73 billion of revenue.

The grocer offered a cautious forecast for 2010, saying the economy remains uncertain but that it expects better growth in the year’s second half. Kroger expects earnings in a range of $1.60 to $1.80 per share.

Analysts polled forecast an average $1.80 per share for the year ahead, on sales of $78.6 billion. Kroger stock fell 55 cents, or 2.4 percent, to close at $22.35.

Kroger said sales at stores open at least 15 months, a key retail gauge, rose only 1.2 percent without fuel sales in the fourth quarter, but still one of the few recent grocery retailer reports to show growth.

“Kroger actually has been putting up pretty resilient numbers. It’s been outpacing its peers,” said Michelle Chang, Morningstar grocery analyst.

“It’s remarkably simple — margin can buy traffic and vice versa — and for the moment it seems Kroger has established the right balance,” Janney Capital Markets analyst Jonathan Feeney wrote in a client note.

Supermarkets typically have thin profit margins but make it up by selling in volume. Though Kroger’s profit margin was just 1.4 percent, it’s doing better than some competitors. For example, both Safeway Inc. and Great Atlantic & Pacific Tea Co. Inc. lost money in their most recent quarters, though Safeway’s loss was partly a result of noncash charges.

“We’ve seen margin compressions across the board,” Chang said, citing food deflation and competition. “All operators are lowering prices to drive traffic, and they’re taking a hit.”

Shoppers such as Barbara Stokes of Greensboro, N.C., seek out the bargains each week. She has cut her weekly grocery bills by 50 to 70 percent over the past three years by methodically compiling coupons and monitoring sales at Kroger and regional competitors Food Lion, Harris Teeter and Lowes Foods.

“I go wherever the best deals are,” she said. And when she sees good discounts, she stockpiles, such as a recent Kroger special of chicken breasts for a $1.88 a pound. She bought 15 packages, putting most in the freezer.

“That will keep me in chicken breasts for a long time,” she said.

With intense competition driving down prices and sending some shoppers to warehouse club chains such as Costco Wholesale Corp, Kroger has stepped up promotions and incentives.

“Once started, customers begin to see it as who you are and your personality and why they shop with you,” said Dillon. “And to pull that away would be problematic.”

Kroger expanded discounts at its gas stations for regular customers, who get at least 10 cents off a gallon for every $100 in grocery store purchases. In most markets, they can accumulate the discounts, so a shopper totaling $500 in groceries in a month could get 50 cents off a gallon.

Kroger sells fuel at about a third of its nearly 2,500 grocery stores and is trying out a link of its customer loyalty discounts with Shell Oil stations in five markets in California, Ohio and Tennessee to expand its fuel reach.