Kroger Q3 Profit Jumps Nearly 30%

Kroger Co. (KR), the largest U.S. grocer, Tuesday said quarterly profit rose nearly 30 percent as results continued to improve at stores in Southern California, and said holiday sales started off strong.

Kroger and other grocers were hit hard by a five-month strike in Southern California that ended in February 2004, and it took several quarters for sales to bounce back.

While results at Kroger's Ralphs and Food 4 Less stores in Southern California improved in the latest quarter, the pace of recovery in the area is slower than the company would like.

Shares of Kroger, which also operates stores under banners such as Fred Meyer and King Soopers, slipped 5 cents to $20.18 on the New York Stock Exchange.

Rival Albertsons Inc. (ABS) and smaller grocers recently put themselves up for sale as the industry continues to face tough price competition from Wal-Mart Stores Inc. (WMT), the largest U.S. seller of food. Kroger and others are working on improving customer service and offering a wider variety of food to keep shoppers at traditional grocers.

Market sentiment toward the sector has shown signs of improvement recently. On Monday, Morgan Stanley raised its view on the food and drug retail industry to "attractive" from "in-line," citing a better outlook for grocers.

Kroger's profit rose to $185.4 million, or 25 cents per share, in the fiscal third quarter ended Nov. 5, from $142.7 million, or 19 cents per share, a year earlier.

Analysts, on average, expected Cincinnati-based Kroger to earn 25 cents per share, according to Reuters Estimates.

The results reflected benefits of a class-action credit card settlement and the reversal of a tax contingency, offset by hurricane-related expenses, an increase in some legal reserves, and a write-down to fair market value of assets held for sale. The company said those items, taken together, had little effect on earnings per diluted share.

Revenue rose 9.1 percent to $14.02 billion, topping analysts' average forecast of $13.6 billion.

Identical supermarket sales -- sales at stores open without expansion or relocation for five quarters and not scheduled to be closed -- rose 6.6 percent including sales of fuel, and 3.7 percent excluding fuel. Identical supermarket sales growth was the highest since the 1999 merger with Fred Meyer, Kroger said.

In Southern California, identical supermarket sales excluding fuel were up 2.9 percent.

On Monday, Kroger said a union ratified a four-year contract covering 6,800 clerks at 88 stores in the Dallas area.

Labor is a major issue for traditional grocers, most of which are unionized, while Wal-Mart is not. In Southern California, Kroger and its competitors cited intense competition from Wal-Mart as they pushed hard for concessions on health care and other benefits.

Kroger expects operating margins in Southern California to improve slightly next year but said the incremental improvement in 2006 should be less than in 2005. Kroger expects operating margins in the rest of the company to remain steady.

The company also expects earnings to be reduced by 4 cents to 6 cents per share when it begins expensing stock options in 2006.

Kroger's shares trade at a lower valuation than those of Albertsons, whose stock jumped after it announced that it was considering a sale. Kroger trades at about 14 times next year's estimated earnings, while Albertsons trades at a multiple of 17.4, according to Reuters data.

Albertsons is not the only grocer in play. Smaller rival Marsh Supermarkets Inc. is also considering a sale, while Foodarama Supermarkets Inc., which operates ShopRite stores in central New Jersey, has an offer to be taken private by its founder and others.