While its overall third-quarter earnings released last week were down slightly due to an inventory charge, Kroger Co. managed to beat Wall Street's expectations and raise its full-year forecast. Even so, officials on the company's conference call with analysts admitted that inflation in the economy has had a more negative effect than expected.
Facing higher food prices and a wobbly economy, consumers are buying fewer items and switching to smaller packages and store brand items, Kroger officials said. With costs rising six percent for the quarter on food and other items in its stores (excluding fuel), the company said it was able to increase its penny profit per item in the grocery category. Tonnage, however — the total amount of goods sold — was down slightly.
Kroger's same-store sales grew an impressive five percent (excluding fuel), its 32nd straight comp increase. Reports lauded the supermarket giant for its increasing emphasis on low prices and loyalty programs. Its expansion of private label, which increased to 35 percent of the grocery department units sold versus 34 percent in the third quarter of 2010, appears to have worked as consumers are looking for cheaper items.
In the Q&A session, David Dillon, chairman and CEO of Kroger said that it helps that pricing overall is largely "rational," although several other publicly-held grocers are seeing notable declines in tonnage amid increased sales.
"It does help that the sales are positive for nearly every retailer, and even those that aren't, they're close to positive," Mr. Dillon said. "And that helps because that helps make ends meet. It helps you pay the bills. And as long as you can pay the bills, then you can continue to work down the path of rational operating behavior, which is what I think we have."
With basic commodities such as corn and wheat still well above the five-year moving average, Kroger said price stabilization would not likely arrive until at least the back half of 2012. Still, Mr. Dillon said the biggest impediment is the economy.
"I think that's the biggest unknown is what that economy is going to look like. And so far, it's going to stay soft for quite a while."
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