Inflation, higher fuel prices to drive 2011 grocer gains

CINCINNATI — Kroger on Thursday beat analysts’ quarterly consensus, posting 46 cents in earnings per share (adjusted for a goodwill impairment charge) that exceeded consensus by 2 cents EPS, with a higher-than-expected identical-store sales lift of 3.8% (excluding fuel).

Same-store sales were particularly strong across natural food, bakery and deli/meat, Kroger chairman and CEO David Dillon told analysts during a conference call. “We were particularly pleased by sales growth in our drug and merchandise departments,” Dillon said.

For fiscal year 2011, Kroger anticipated identical-supermarket sales growth, excluding fuel, of approximately 3% to 4%. Full-year net earnings are expected to range from $1.80 to $1.92 per diluted share. Those projects skew conservative, company executives noted, because of the present “fragile” economy.

“Economy recovery continues to be slower ... than expected,” Dillon said. “And we expect this to persist.” Rising food prices — the grocer projected 1% inflation — could represent a significant drag on consumer discretionary spending, as could potential summertime gas prices of higher than $4 per gallon.

There’s a silver lining in all of this for grocers, however, Dillon noted. Inflation during a recession period would benefit Kroger’s brand, whether that inflation is restricted to brand offerings or not. However, inflation across certain categories, such as milk and perishables, is not a positive, Dillon said.

And any significant increase in gas prices is a similar boon. “The convenience of having gasoline is actually a big plus,” Dillon noted, pointing to the more than 1,000 fuel depots located across the chain’s supermarket footprint. When gas prices are high, consumers drive shorter distances and consolidate trips.

Dillon suggested Kroger will benefit further by its customer segmentation analyses — upscale consumes currently are more confident and are spending more; lower household-income demographics, however, are still challenged. “We try to address that in what we offer [with] our pricing; what we do in our ads; what we do in our stores,” Dillon said.

Total sales for the quarter ended Jan. 29, including fuel, were up 7.4% to $19.9 billion. Excluding fuel sales, total sales increased 4.2% over the same period last year. Net earnings for the fourth quarter totaled $278.8 million, or 44 cents per diluted share. At the end of the fourth quarter, net total debt was $7.3 billion, a decrease of $243.5 million from a year ago.

On a rolling four-quarters basis, Kroger's net total debt to EBITDA ratio, adjusted for the impairment charges in fiscal 2010 and 2009, was 1.89, compared with 1.97 during the same period last year.

For fiscal year 2010, total sales increased 7.1% to $82.2 billion. Excluding fuel sales, total sales increased 3.4% over the prior year. Identical-supermarket sales, without fuel, increased 2.8% in fiscal year 2010, compared with the prior fiscal year. Net earnings for fiscal year 2010 were $1.12 billion, or $1.74 per diluted share.