Ralphs parent Kroger wins investor fans as rivals struggle

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From Times staff writer Jerry Hirsch:

Whenever the economy slumps, investors look for stocks of companies that should be able to maintain decent earnings growth in tough times.

Supermarkets usually are on that short list: Consumers might cut spending on luxury foods and trade down to house brands, but they still have to eat. And preparing a home meal costs about a third of what a similar meal would cost in a restaurant.

But as the economic outlook has darkened this year, stocks of many major grocers have failed to live up to their recession-proof image.

Shares of Safeway Inc., the Pleasanton, Calif.-based parent of Vons and Pavilions, were down 38% year to date through Wednesday, nearly as bad as the 39% drop in the Standard & Poor’s 500 index.

Albertsons owner SuperValu Inc. of Eden Prairie, Minn., has plunged 60% this year. And onetime Wall Street darling Whole Foods Market Inc. has been among the industry’s worst performers, off 71%.

Kroger Co., the Cincinnati-based owner of Ralphs and Food 4 Less, has been the exception: Its shares are up 0.4% on the year, a big accomplishment given what has happened to the market overall.

Kroger’s fans on Wall Street say it is succeeding where rivals are stumbling, specifically in projecting a ‘value’ image to shoppers (a transition only now underway at its Ralphs unit).

In a report on Tuesday, Jefferies & Co. analyst Scott Mushkin said Kroger was winning market share with ‘superior pricing, a best-in-class private label program and new merchandising flare.’

Kroger, which has nearly 2,500 stores in 31 states, last week reaffirmed its 2008 earnings forecast, citing strong sales that the company said had picked up steam in the previous four weeks -- coinciding with the panic in financial markets. Over the last eight weeks, same-store sales were up more 5% from a year ago, excluding gasoline sales, the company said.

Safeway, by contrast, said its same-store sales in the quarter ended Sept. 6 were up just 0.5% excluding gasoline. The company has maintained profit growth through cost-cutting and efficiency gains, but such measures will only take you so far. At some point it has to sell more stuff.

Safeway Chief Executive Steve Burd acknowledged as much in the latest earnings report. ‘During the third quarter we took action to provide our customers with better everyday values,’ he said. The payoff so far: same-store sales growth has risen above 1.5% in the current quarter compared with a year ago, the company says.

SuperValu, meanwhile, reported a drop of 1.3% in same-store sales last quarter, a dismal showing particularly compared with Kroger’s results.

As for Austin, Texas-based Whole Foods, the stock’s plunge this year reflects the company’s position ‘on the wrong end of the value proposition for this recession,’ said Andrew Wolf, an analyst at BB&T Capital Markets in Richmond, Va.

The chain carries a perception of high prices, and its strategy of being a ‘destination’ store hurts its prospects as consumers cut back on driving.

As recession fears have deepened in recent weeks, Whole Foods’ stock has crumbled further. On Wednesday the share price sank 9.7% to $11.82, the lowest since 2001.