Kroger’s Net Income Surges 12%

Kroger Co., parent of the Ralphs and Food 4 Less chains, said fiscal first-quarter profit swelled 12% as discounting led to a sales boost in Southern California, its largest market.

The Cincinnati-based grocer, the nation’s largest, said net income climbed to $294.3 million, or 40 cents a share, from $262.8 million, or 35 cents, a year earlier. Analysts surveyed by Thomson First Call had expected 34 cents a share.

Sales rose 6.2% to $17.9 billion in the quarter ended May 21.

The news sent the company’s shares up $1.76, or 10%, to $19.45, a 52-week closing high.

Kroger has been waging a price war to lure customers back into its 199 Southern California Ralphs stores after the 4 1/2 - month-long supermarket strike and lockout in Southern and Central California that ended in February 2004.

The discounting had depressed profit in four of Kroger’s last five quarters, said Jason Whitmer, an analyst with FTN Midwest Securities in Cleveland. But now, he said, that investment is paying off in increased traffic and larger purchases.

“When you have better pricing, people come into the store more often and buy more when they are there,” Whitmer said.

Kroger said its identical-store sales, or revenue from locations open at least five quarters, increased 2.4%, excluding fuel sales. In Southern California, sales at Ralphs and Food 4 Less stores rose 1.3%.

It was the fourth straight quarter of sales gains for Kroger, which owns 2,524 stores, and the largest quarterly improvement since 1997, said analyst Robert Campagnino of Prudential Equity Group in New York.

In a conference call with analysts, Kroger Chief Executive David Dillon said, “We are pleased with our progress in Southern California, particularly in light of the significant challenges we have faced. We are seeing solid improvement.”

The company raised its earnings estimate for the year to $1.24 a share from $1.21.

Gross profit margin declined to 25.19% of sales from 25.95% a year earlier. The company indicated that margins would improve this year, particularly in Southern California, as it moved away from some price cuts.

“Kroger had been firmly committed, almost painfully committed, to giving customers what they want -- reasonable prices,” analyst Whitmer said. “Now that sales are responding, they can pull back a little,” he said, and focus more on improving things such as customer service.

Kroger, Albertsons Inc. and Vons parent Safeway Inc. are still dealing with fallout from the California strike and lockout. An antitrust lawsuit filed by Atty. Gen. Bill Lockyer over the companies’ $148-million profit-sharing pact during the labor dispute is proceeding in federal court. Kroger declined to comment on the suit.

Of the three chains, analysts say, Kroger appears best poised to compete with Wal-Mart Stores Inc. as the giant retailer continues to siphon grocery sales as it enters more markets.

Albertsons said June 7 that fiscal first-quarter profit almost tripled to $100 million, or 27 cents a share, on sales that rose 16%. However, those numbers compare with a period in which the chain was still being picketed.

Safeway is expected to report next month that second-quarter earnings fell 15%, to 30 cents a share, according to analysts polled by Thomson First Call.

“Kroger is winning the battle,” Whitmer said. “It’s doing well in really tough markets.”