Kroger Profit Decreases 25%

Kroger Co., the nation’s largest grocery chain, posted a 25% drop in second-quarter profit and warned that it might not meet its yearly sales target as it struggled to regain business lost during Southern California’s grocery strike.

The Cincinnati-based chain’s earnings performance fell short of analysts’ expectations, sending the company’s shares down 4.3% for the day, closing at $15.98, off 72 cents, on the New York Stock Exchange. Kroger’s shares have fallen 14% this year.

Net income for the quarter ended Aug. 14 declined to $142.4 million, or 19 cents a share, from $190.4 million or 25 cents, a year earlier. Analysts surveyed by Thomson First Call expected Kroger to earn 27 cents a share.

Kroger Chief Executive Dave Dillon estimated that the company’s efforts to recapture sales at its Ralphs stores in Southern California through heavier discounting, cut earnings an additional $23.4 million, or 3 cents a share in the quarter. But the discounting also reduced Kroger’s gross margins and commodity prices increased.

Kroger’s quarterly net income was also reduced $15.3 million, or 2 cents a share, because of debt charges.

Overall, Kroger’s sales in the second quarter climbed 5% to $13 billion, up from $12.4 billion.

“They have to invest more than they thought, and are not getting the sales response they thought they would get,” said Gary Giblen, an analyst with CL King & Associates.

“The company over-invested in pricing,” said Robert Campagnino of Prudential Equity Group in a report.

Kroger, Albertsons Inc. and Vons parent Safeway Inc., have all seen their bottom lines suffer from the lingering effects of the 4 1/2-month-long strike, which ended Feb. 29 when a new contract was ratified by the United Food and Commercial Workers union.

The supermarkets are beginning labor negotiations with grocery workers in Northern California, where the union contract covering 30,000 workers expired Sept. 11.

Kroger said its identical-store sales, or sales at stores open at least a year, increased 1.1% in the quarter, excluding fuel sales and Southern California’s strike-affected stores. Including the strike area, identical-store sales rose 0.6%.

Dillon said the firm was still struggling to balance cutting prices to drive sales with maintaining gross margins. And he warned that with increasing competition from discounters such as Wal-Mart Stores Inc., Costco Wholesale Corp. and its supermarket rivals, it would be challenging for Kroger to increase identical-store sales 1.3% this year as promised.

“This is the worst condition the supermarket industry has ever been in, and it’s getting far worse,” Giblen said.