You've got to give a little to get a lot in return. Such is the case with Kroger (NYSE: KR), the supermarket chain that's been a bright spot in an otherwise dismal economy.
The grocery store chain reported a strong third-quarter top line with sales rising 9% and comps growing 7.8% (with fuel). Excluding a $15.9 million charge from the damage caused by Hurricane Ike, profit growth was flat year over year. But thanks to share repurchases, earnings per share clocked in at $0.39, ahead of both analyst expectations and last year's showing.
Where the give-and-get comes in, and where Kroger's strength lies, is in the robust performance of Kroger's private-label products. According to the Food Marketing Institute, 60% of consumers are now buying some in-store brands, and they are becoming an important component of sales at other grocery chains like Safeway (NYSE: SWY) and SUPERVALU (NYSE: SVU).
This is promising for Kroger, given that its private-label business is one of the most extensive in the industry. The company saw the industry trend further develop during the quarter, as its shopper-card data revealed that 14% of its customers traded down for corporate-branded items. Similar to the effect of Wal-Mart's (NYSE: WMT) identity as a low-cost leader, Kroger's cheaper in-house brand has likely helped the company surge ahead in this recession.
Still, investors sent the stock down 7% yesterday as management's improved earnings guidance outlook still didn't meet analyst expectations. At current levels, Kroger is trading close to where it was at the beginning of the year. Yet the supermarket chain has galvanized its leadership position in an industry that is generally seen as recession-resistant.
Consumer-goods companies like Kraft (NYSE: KFT), General Mills (NYSE: GIS), and HJ Heinz (NYSE: HNZ) used the increases in commodity costs earlier in the year to raise their prices. While Kroger experienced an increase in product costs as well -- around 6% this quarter -- it has elected not to fully pass them along to the consumer. It's willing to take a hit to gain customer loyalty. And as we saw with the same-store sales gains, consumers seem to be responding well to this strategy.
I expect the company to control costs better next quarter, which will hopefully help bolster profits. But more importantly for next quarter, I think Kroger's willingness to give a little more to consumers means investors will end up getting more down the road.
Irv, more supermarket Foolishness in Aisle Five:
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