Kroger, shrugging off tough economy, posts respectable second-quarter gains

CINCINNATI The Kroger Co. shrugged off a tough economic climate to post healthy sales increases in its second quarter ended Aug. 16.

Despite a faltering economy, Kroger churned up sales of $18.1 billion for the three-month period, marking an increase of 11.9 percent over last year’s second quarter. Same-store supermarket sales were up 9.7 percent when fuel-center sales were factored in, but even without the contribution of the company’s 737 on-site gas stations, same-store revenues rose a healthy 4.7 percent over prior-year levels.

Second-quarter net income edged up 3.4 percent for the supermarket and pharmacy giant, to $276.5 million.

Kroger chairman and chief executive David Dillon characterized the gains as “strong,” and credited the renewed attention on service through Kroger’s “Customer 1st” strategy.

“We continue to generate cash flow to sustain our strong capital program and reduce outstanding shares. At the same time, we are investing in improving our customers’ overall shopping experience,” said Dillon. “Our ability to balance these objectives is fundamental to our success, particularly in today’s challenging economic environment.”

Also helping to drive the gains: a favorable comparison with last year’s results, which included pre-opening and transition costs associated with Kroger’s purchase of two regional chains, Scott’s and Farmer Jack. “The current year rate benefited from the absence of these costs,” noted the company. “The current year rate also benefited from strong sales leverage and lower incentive compensation, which offset inflationary pressures in several areas.”

For fiscal year 2008, Kroger said it expects “a flat to slightly improved operating margin.”

Nevertheless, Dillon issued a cautionary note as the company rides out an uncertain economy, potential union disputes in some areas of the country, and the aftermath of Hurricane Ike and other big storms. “We know market conditions will continue to be a challenge and we believe our strategy works well in good times and bad,” he said. “Kroger’s team and our overall strategy clearly stand out in the current environment.”

Kroger said Ike and its remnants disrupted operations in Texas and several inland states, particularly Indiana, Kentucky and Ohio. “The financial impact of the hurricane will not be significant enough to cause Kroger to alter its strategy,” the company reported. However, noted Kroger, “The final result of the damage and disruption from the storm” could further weigh on results.

Kroger, which this year is celebrating its 125th year in business, operates 2,476 supermarkets in 31 states—more than 2,200 of which contain pharmacies and 737 of which include fuel stations—in 31 states. Among its retail banners: Kroger, Ralphs, Fred Meyer, Food 4 Less, Fry’s, King Soopers, Smith’s, Dillons, QFC and City Market. Kroger also operates 779 convenience stores and 393 jewelry stores.

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