A Super Market for Kroger

Higher food and gasoline prices are boosting Kroger's (NYSE: KR  ) top line. The grocer reported its first-quarter sales were up 11.5% from a year ago. Same-store figures increased only moderately less at 9.2%, or 5.8% excluding fuel. Earnings for the quarter grew to $386 million, or $0.58 per share, from $336.6 million and $0.47 per share one year ago. This is growth of 14.7% and 23.4%, respectively, on fewer shares outstanding.

Consumers are certainly mindful of higher prices, and Kroger is being aggressive in pricing and promotion to grow sales. It was an early promoter of stimulus-check deals, offering a 10% discount on gift-card purchases. The company also launched discount programs for purchases of gasoline and generic drugs.

In past quarters, this strategy noticeably affected profit margins. Anyone can boost sales by giving products away, so margins remain the key measure for Kroger. In the first quarter, gross and operating margins were again lower compared with last year, falling by 78 and 2 basis points to 22.92% and 3.31%, respectively. However, excluding gasoline and costs from last year's labor problems, gross margin slipped only 5 basis points and operating margin rose by 2 basis points.

Kroger seems to have confidence in its ability to stabilize these margins. The company upped its previous guidance for fiscal 2008 and now sees sales growth of 4% to 5.5% and earnings growth of 9% to 12%. Accordingly, Kroger raised the lower end of its earnings-per-share guidance to $1.85 from $1.83, with the top end remaining at $1.90 EPS for the year.

Management characterizes recent food inflation as only "moderate." However, because it went such a long time with little or no price increase, it realizes consumers are reacting and changing their behaviors.

It's likely that large supermarket retailers like Kroger, SUPERVALU (NYSE: SVU  ) , and Safeway (NYSE: SWY  ) , as well as the major discounters, are picking up a bigger share of the market, if the market is defined to include restaurants and convenience stores. People are eating more meals at home and better planning their shopping trips.

Private-label offerings are another way Kroger helps its customers handle higher food costs. Typically, private labels are more profitable for retailers than national brands, and Kroger owns and manufactures many of its own products, allowing it to better control supply and profitability. The company carries three different private labels, and its upscale line, Private Selection, has been a key part of this strategy and is expected to produce more than $1 billion in sales this year.

Kroger has been aggressive in an environment where it can pay big long-term benefits. If it can stabilize or even slightly reinflate its profit margins, its increasing top line will continue to drive nice growth in profits.

For more Foolishness:

Fool contributor Steven Renaldi does not own any of the stocks mentioned. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 672505, ~/Articles/ArticleHandler.aspx, 10/24/2016 5:14:29 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
KR $30.76 Down -0.16 -0.52%
Kroger CAPS Rating: ****
SVU $4.50 Up +0.04 +0.90%
SuperValu CAPS Rating: **
SWY.DL $0.00 Down +0.00 +0.00%
Safeway CAPS Rating: **