030628 Kroger Earnings Lower

New York - Kroger Co. reported lower quarterly profit, excluding a year-ago charge, as the largest U.S. supermarket chain cut prices to compete with Wal-Mart Stores Inc.

Cincinnati-based Kroger also warned that earnings for the rest of the fiscal year may fall short of Wall Street estimates because tough competition is forcing it to keep prices down.

Kroger reported earnings of $351.5 million, or 46 cents per diluted share, for the fiscal first quarter ended May 24. Analysts on average had forecast 45 cents, according to research firm Thomson First Call.

In the year-earlier quarter the company earned $321.7 million, or 40 cents per share, including a $66.4 million restructuring charge but before an accounting change that reduced earnings by $16.5 million.

Lehman Brothers analyst Meredith Adler said Kroger, whose shares were up nearly 5 percent, had a much better quarter than she expected, partly because sales reflected a spike in gasoline prices during the war in Iraq. Kroger operates gas stations, convenience stores and jewelry stores as well as grocery stores.

"I think they also are working very hard to take market share. They've got a plan, and they seem to be getting some benefit from that plan," Adler said.

Analyst Neil Currie of investment bank UBS said he was surprised at the rise in Kroger's stock price.

He said key financial metrics are declining "and the company still has difficulty growing sales without gross margin investment."

"It's possibly the better performer of the three major supermarkets but ... certainly it's not a growing company," Currie said.

Kroger remains the nation's No. 1 grocery chain, ahead of Albertsons Inc. and Safeway Inc., but its annual sales are a distant second to the grocery sales of Wal-Mart, which dominates the $680 billion U.S. grocery business.

Discounters like Wal-Mart have moved aggressively into the grocery business, cutting prices and forcing grocery chains to do the same.

During the first quarter, Kroger put 23 new food stores on the map. In the month of May alone, Wal- Mart opened 24 new supercenters, which have full grocery sections, and it has plans for 210 new or converted supercenters this fiscal year.

Kroger said first-quarter sales increased 3.8 percent to $16.3 billion.

Food-store sales rose 3.5 percent. But sales at food stores open at least a year fell 0.1 percent including gasoline sales, and fell 1.1 percent excluding gasoline sales.

Per-share profit got a boost as Kroger bought back 9.6 million shares of its common stock in the quarter. Since January 2000, it has bought back 111.3 million shares.

Kroger said it now expects earnings for the full fiscal year of $1.55 to $1.63 per share, raising the possibility that results could fall short of analysts' average forecast of $1.62. Kroger previously forecast $1.63 per share.

"They were hoping the competitive environment would ease and prices would go up, because costs are going up for everybody, but that's not happening," Adler said.

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