Kroger’s Recovery Is in Slow Checkout Line; Loss Widens

Kroger Co., the nation’s largest grocer, said Tuesday that its fiscal fourth-quarter loss widened as it wrote down the value of its Ralphs and Food 4 Less chains, which continued to struggle in the wake of last year’s California strike and lockout.

The company offered deep discounts to lure shoppers back to Ralphs, and that hurt profit margins. As for Food 4 Less, which wasn’t part of the Central and Southern California labor dispute, it hasn’t been able to retain the business it gained during the strike and lockout.

The results disappointed Wall Street. Shares of Cincinnati-based Kroger fell 5%, or 87 cents, to $16.85 on the New York Stock Exchange.

Kroger’s net loss was $675.9 million, or 93 cents a share, in the quarter that ended Jan. 29, compared with a $337.4-million loss, or 45 cents, a year earlier. The recent quarter’s loss included a charge of $884 million, or $1.21 a share, to write down the value of the Ralphs and Food 4 Less chains, which Kroger acquired in 1999 as part of its $8-billion purchase of Fred Meyer Inc.

Quarterly sales rose 5% to $13.7 billion.

Without the write-down, Kroger would have earned as much as 28 cents a share but less than the 35-cent average expected by analysts surveyed by Thomson First Call.

“The recovery in Southern California has been slow,” said Kroger Chairman and Chief Executive David B. Dillon in a conference call with analysts. “We are not back to pre-strike levels.”

Southern California is the biggest market for Ralphs, which has 282 stores here.

Ralphs hasn’t been able to attract all the customers it lost to rivals such as Trader Joe’s, Costco Wholesale Corp. and Stater Bros. Holdings Inc. during the 4 1/2 -month-long strike and lockout. In fact, Dillon said, Kroger recently lost its position as the market leader in Riverside and San Diego counties.

Still, analysts said Kroger, which operates 2,532 stores in 32 states, had been more effective at drawing customers back into its stores than had either Albertsons Inc. or Safeway Inc.’s Vons and Pavilions chains.

“They are maintaining share and actually growing share in some cases. I think they are on the front end of a recovery,” said Jason Whitmer of FTN Midwest Securities, which rates the stock a “buy.”

Identical-store sales -- sales at stores open for at least five quarters -- increased 0.8% in the fiscal fourth quarter, excluding fuel sales. Those stores not affected by the labor dispute saw identical-store sales rise 1.9%.

“If you look at their sales, they are not miles away from where they were when the strike started,” said Mark Husson, an analyst at HSBC Securities in New York, which doesn’t issue ratings on stocks. “If the strike never happened, they would probably be about 2% or 3% ahead [in sales] of where they are today.”

But these robust sales came at a cost, the company acknowledged, as heavy discounting reduced Kroger’s quarterly gross profit margin to 25% from 26.4%.

“We were more aggressive on pricing than we had planned,” said Rodney McMullen, Kroger’s vice chairman. “We are not happy with these results.” Kroger wants to rely less on costly promotions this year, he said.

Analysts blamed some Kroger division managers, saying they were quick to offer deep discounts to boost sales -- and their own bonuses.

Kroger is changing its incentive plan for top managers this year, Dillon said, so it will be more focused on overall profitability rather than sales.

This year Kroger expects earnings to exceed $1.16 a share, compared with a net loss of 17 cents in fiscal 2004.

“We know the challenges we face in Southern California and have a strong plan in place to address it,” Dillon said.