Grocery chain Kroger’s 2Q net income, revenue rise as customer loyalty moves pay off

Grocery chain’s 2Q net income, revenue rise

CINCINNATI — Sales and profits are up, and so is Kroger Co.’s optimism, as the nation’s largest traditional grocer sees more households regularly shopping at its stores.

Kroger leaders were upbeat Tuesday about sales trends, while cautioning that economic uncertainty and price competition — while more “rational” than during the worst of the recession — remain.

Price-cutting battles with retail giant Wal-Mart Stores Inc. and other chains have combined with budget-tightening by households to shrink grocery profits in the past two years.

But Kroger said it draws shoppers with better service and pleasant stores, an ever-expanding lineup of lower-priced store brands and deli foods and a targeted rewards program.

W. Rodney McMullen, Kroger’s president and chief operating officer, said the company’s long-term sales growth comes from regular customers, “not cherry pickers” who store-hop in search of the lowest prices each week.

“During the course of the month, loyal households visited our stores more frequently and purchased more items from us than they did this time last year. This is a very important trend,” he said on a conference call with investors.

JPMorgan analyst Charles Grom said in a client note that Kroger’s results got help from a lower tax rate and low interest costs, but “strong underlying sales trends” are building momentum for the company.

Kroger took some profit hits during the recession — second-quarter earnings a year ago fell 8 percent from 2008’s quarter — to keep adding customers.

“I think what they’ve done over the past few quarters in sacrificing some profit margins to maintain customer loyalty is starting to pay off,” said Alan B. Lancz, an investment adviser in Toledo, Ohio. “I think that bodes well for what we were hoping for over the next few years.”

The analyst said Kroger’s loyal customer base should help sales keep rising in an improving economy but also provide a hedge if the economy worsens.

Kroger reported net income of $261.6 million, or 41 cents a share. That’s up 2.8 percent from $254.4 million, or 39 cents a year ago. Revenue rose 6 percent to $18.8 billion, after $17.7 billion last year; excluding fuel sales, revenue rose 3.3 percent.

Analysts surveyed by Thomson Reuters expected 36 cents a share and $18.7 billion in revenue.

Kroger shares finished trading Tuesday up 22 cents, or 1 percent, at $21.26. They’ve traded from $19.08 to $24.80 in the past 52 weeks.

The company said sales at stores open at least 15 months, a key retail measure, rose 2.7 percent, excluding fuel. That was at the higher end of the company’s target of 2 percent to 3 percent this year, and Kroger officials are seeing similar sales trends in the current quarter.

Kroger also reiterated its earnings guidance for the year of $1.60 to $1.80 per share, saying it hoped to reach the high end of that range. Analysts project $1.74 per share.

Several analysts asked Kroger officials why they didn’t raise their guidance based on the solid results they were reporting.

Chairman and CEO David B. Dillon said he was “bullish” and “very optimistic,” but the company was considering the economy and continuing price competition.

Kroger has 2,468 grocery stores in 31 states under two dozen local banners that include Ralphs, Fred Meyer, Food 4 Less, Fry’s, King Soopers, Smith’s, Dillons, QFC and City Market.