Grocers’ Costs Stack Up

Southern California supermarkets are losing millions of dollars in sales each day because of the strike and could take a hit in quarterly earnings if the walkout persists, analysts said Tuesday.

The grocery chains also are threatened with expenses that can’t yet be quantified, chief among them the cost of spoiled produce and other perishables that go unsold. And sales of seasonal merchandise for Halloween could suffer if the strike lasts through much of October and shoppers honor picket lines and buy holiday goods elsewhere.

“The financial impact is going to be significant,” said Edouard Aubin, an analyst at Deutsche Bank in New York.

Aubin and some other analysts said it was too early to calculate losses or adjust sales and earnings forecasts for the three chains: Kroger Co., parent of Ralphs and the nation’s largest supermarket company; Albertsons Inc.; and Safeway Inc., which operates the Vons and Pavilions stores.

But Lisa Cartwright of brokerage Smith Barney estimated that if the strike dragged on for 20 days it would shave $20 million to $40 million from each company’s quarterly earnings. A 40-day strike could about double the financial impact, she estimated, with the greatest dollar hit taken by Kroger.

“We could see a hit to earnings [per share] for these three companies in the range of 5 to 15 cents, for the quarter that the strike occurs in, if the strike lasts between 20 and 40 days,” Cartwright said.

Kroger had been expected to earn $1.53 a share this year, Albertson’s $1.71 a share and Safeway $2.09 a share, based on analysts’ consensus estimates as tracked by Thomson First Call.

The strike involves about 70,000 members of the United Food and Commercial Workers union at 859 markets in Southern and Central California.

It began Saturday when union members launched a strike against Safeway’s stores. Workers at Ralphs and Albertsons stores, who share a union pact with Safeway employees, then were locked out of their stores.

The supermarket chains declined to comment on the financial effect of the strike. Details could emerge Thursday when Safeway executives hold a conference call with analysts to discuss the chain’s third-quarter financial results.

The companies hope to gain a new contract that contains long-term savings in workers’ wage and benefits costs. Facing heightened competition from nonunion food retailers such as Wal-Mart Stores Inc., the chains contend that they need lower labor costs to stay competitive.

“Kroger, Safeway and Albertsons are looking at this strike, and its cost, as an investment in improving future profitability,” analyst Charles Cerankosky of McDonald Investments Inc. said in a report Monday.

There is a cost, as prior strikes illustrate.

In 2000, for instance, a 47-day strike by distribution workers at Safeway disrupted shipments to its Northern California stores and slashed pretax earnings that year by about $114 million, or 13 cents a share.

Amid the current strike, the grocery chains’ shares haven’t dropped much this week, despite the lost sales. Cartwright, echoing Cerankosky, said that’s partly because investors are “looking through the strike and concluding that these companies are going to come out with some type of concessions from the union,” lowering their long-term operating expenses.

Kroger shares closed Tuesday at $19.10, down 16 cents. Safeway shares rose 50 cents to $24.08 and shares of Albertsons slipped 11 cents to $20.70. All trade on the New York Stock Exchange. Kroger stock is up 24% this year, Safeway is up 3% and Albertsons is down 7%.

Bob Toomey, an analyst with brokerage firm RBC Dain Rauscher Inc., said that so far during the strike, investors have the right idea.

“I have found that strikes rarely have a permanent long-term impact on the companies’ finances or their stocks,” he said.

--- UNPUBLISHED NOTE ---

On February 12, 2004 the United Food and Commercial Workers Union, which had stated repeatedly that 70,000 workers were involved in the supermarket labor dispute in Central and Southern California, said that the number of people on strike or locked out was actually 59,000. A union spokeswoman, Barbara Maynard, said that 70,000 UFCW members were, in fact, covered by the labor contract with supermarkets that expired last year. But 11,000 of them worked for Stater Bros. Holdings Inc., Arden Group Inc.’s Gelson’s and other regional grocery companies and were still on the job. (See: “UFCW Revises Number of Workers in Labor Dispute,” Los Angeles Times, February 13, 2004, Business C-11)

--- END NOTE ---