Highlights From Kroger's (KR) Q1 Conference Call: Growth in Meat, Pharmacy, Deli/Bakery & Grocery - Reaffirms FY EPS

June 23, 2009 2:48 PM EDT

This morning, Kroger (NYSE: KR) reported Q1 EPS of $0.66, 5 cents better than the analyst estimate of $0.61. Revenue for the quarter was $22.8 billion, versus the consensus of $23.28 billion. Shares are up almost 1% today.

Highlights From KR's Q1 Conference Call:

• Same store sales rose 3.1%, ex-fuel.
  
• (CEO) Total sales for Q1 were $22.8 billion compared to $23.1 billion for the same period last year. That comparison may look a bit unusual and it reflects the year-over-year decline in retail fuel prices.
  
• As a point of reference during the Q1 of the current year, the average retail price for a gallon of gas sold at Kroger's fuel outlets was 41% lower than it was during the corresponding quarter last year. When you include fuel sales Kroger's total sales increase 3.9% over the prior year. Identical supermarket sales without fuel increased 3.1%.
  
• Several departments posted identical sales growth above the company average including meat, pharmacy, deli/Bakery and grocery. Strong sales in these areas were tempered by continued slowness in sales of discretionary general merchandise as well as deflation in produce.
  
• Some of the other metrics we look at include customer traffic, unit sales growth and perhaps tonnage and corporate brand share. In each of these areas we saw positive trends in the quarter.
  
• Our full-year earnings expect for fiscal 2009 remains $2 to $2.05 per diluted share. (Consensus is $2.03)
  
• Again, based on a number of variables from a global perspective, we do not expect to have the benefit of lower diesel costs for the REMAINDER of the year.
  
• We expect customers spending patterns to continue to reflect their uncertainty.
  
• (Vice Chairman) Kroger has 3 nonwholly-owned investments, nonHUBE USA, clinic and wireless. Excluding both our retail fuel operations as well as the affect that these investments have on our OG&A, Kroger's first quarter OG&A rate declined 14 basis points as a percent of sales.
  
• Kroger's first quarter operating margin, excluding our retail operations expanded 20 basis points.
  
• Capital investments excluding acquisitions totaled 654 million for Q1 compared to 637 million in the prior year. We did not invest in acquisitions in the first quarter of this year compared to $80 million invested in the same period last year.
  
• We continue to project fiscal 2009 capital spending of 1.9 to 2.1 billion excluding acquisitions. Net total debt was 7.4 billion, a decrease of 243 million from a year ago.
  
• On the labor front, we've had some progress to report. Earlier this year, we successfully completed contract negotiations in Roanoke, Virginia, and Las Vegas. Last week, our Smith's Associates in New Mexico ratified a new agreement.
  
• (Q&A) First, can you talk about Kroger's tech strategy and the strategy for gaining market share? Do you expect any real estate tunes to open up for consolidation in you mentioned that valuations are still too high. Do you think those have come down yet? (A) I would say we see it as we have seen it before. We have a lot of good opportunities that we have seen in the end markets that we have seen.
  Those are episodic as they become available. Always interested in those. Bigger ones are also available out there. There's lots of opportunity but prices are still a little steep and we tend to be cautious in wanting to be careful to pick something that's a good fit for us. Rodney, do you want to add
  anything? (A): No. I would completely agree, and we continue to look at several things, but from a pricing standpoint, we haven't found anything that really makes sense.
  
• And then also, can you talk a little bit about the competitive environment? It seems like it's still pretty stiff out there. It seems like a number of grociers are doing things in terms of price cut promotions to drive traffic. Maybe talk about what you guys are doing and also what you're doing with your loyalty card, any new initiatives there? (A): Sure. Well, competitive environment, as always, I think,probably our standard description is it's a very competitive environment out there and you're right. In a number of markets people are reaching out for sales. We feel pretty good about our situation. In fact, if you think about-- let's think about the sales we just reported. The identical sales growth without fuel at 3.1%. Sometimes that number is a great indication of where we are. Sometimes it's actually too good of an indication of where we are. That is, it overstates the fact and other times it's the reverse. In this case, I think there are a number of factors that suggest that the 3.1 actually is a--is not as good an indicator of where we are, that we actually did better than what that number shows. We talked about some of those, but if you think about the competitive environment and how that plays out, our tonnage and units were up. Our pharmacy scripts are up. Our gasoline gallons are up. Our Kroger brand sales were up strongly. We're seeing, you know, some wild numbers that will tend to cause these numbers to get a little skewed like the inflation and deflation we described particularly in milk where our units were up strongly but the dollars are down because the deflation in milk as an example. We, of course, sustained the impact of discretionary GM, but from the customer point of view, we're seeing behavior that based on the economy that is pretty similar to what we have seen in the past. And one of the reasons we're comfortable in describing this continuing is if you look at our second quarter so far through four weeks, we're about the same level of identical sales without fuel as what we were running in the quarter we just finished. That continues to give us confidence that while the consumer is uncertain and that uncertainty seems to be continuing, it does not seem to be getting worse but at the same time it doesn't look like it's materially improving. I realize that doesn't get exactly to the competitive question, to me, the way for to us answer that is how we are we doing and how are we
  feeling where we're connecting with our customers what are we seeing in our sales, and as you can tell, I'm actually more bullish even than the 3.1% ought to imply and in these circumstances, 3.1's pretty darn good.

The Kroger Co., together with its subsidiaries, operates as a food retailer in the United States.

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