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Kroger Earnings Increase 29% but Miss Forecasts

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Times Staff Writer

Kroger Co., the nation’s largest grocer, said its third-quarter profit jumped 29%, but the results fell short of analysts’ expectations as it continued to trim prices to compete with discounters and grocery rivals.

Cincinnati-based Kroger, which operates Ralphs and Food 4 Less stores in Southern California, said it earned $142.7 million, or 19 cents a share, for the quarter ended Nov. 6, up from $110.2 million, or 15 cents, a year earlier. Analysts surveyed by Thomson First Call expected the company to earn 23 cents.

Sales rose 6% to $12.9 billion from $12.1 billion last year, besting Wall Street’s projections. Although the company’s strategy of cutting prices to lure more customers boosted overall sales, it also hurt Kroger’s gross profit margin, which narrowed to 25.16% in the latest quarter from 25.83% a year earlier.

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“The overall gross-margin picture is still more negative than the positives coming from [increased] sales and cost cutting,” said Jason Whitmer, an analyst with FTN Midwest Research, who has a neutral rating on Kroger’s stock.

Kroger, Albertsons Inc. and Vons parent Safeway Inc. have been rolling out bigger discounts to win back customers after last winter’s lengthy grocery strike and lockout in Southern California.

The supermarkets won concessions on salaries for new hires and healthcare costs, but Kroger officials declined to discuss the specific cost savings it is achieving through its new labor contract.

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Comparable-store sales in the third quarter at Ralphs and Food 4 Less in Southern California were still 1% below those of pre-strike levels in the third quarter of 2002, Kroger Chief Executive David B. Dillon said in a conference call with analysts.

Although sales at Ralphs have improved from the second quarter, Kroger doesn’t expect the chain to recover all its lost customers and sales in 2005. “In Southern California, we still have a lot of work to do,” Dillon said.

Indeed, with sales depressed and some underperforming stores closing, the company said it might have to write down the value of its Ralphs stores next quarter.

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Third-quarter sales at all Kroger-owned stores open at least five quarters increased 1.8%, excluding gasoline sales. But Ralphs and Food 4 Less stores in Southern California accounted for just 0.1% of this increase, the company said.

Merrill Lynch analyst Monica Aggarwal, who rates Kroger a buy, was pleased with the 1.8% increase; she had expected its same-store sales to rise just 0.3%.

Kroger’s sales improvement is “significantly higher and the best among its major peers,” despite having the most supermarkets that compete with Wal-Mart Stores Inc., Aggarwal said in a report Tuesday.

However, Kroger warned that it would be hard to meet its identical-store sales goals for the full fiscal year.

“Kroger has made considerable progress in a number of key areas during 2004,” Dillon said. “But there is still much work to be done. We will continue to focus on becoming more competitive in every aspect of our business.”

Shares of Kroger rose 23 cents to $16.23 on the New York Stock Exchange.

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