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UPDATE 3-Kroger says 'loyal' customers helped it beat views
* 'Loyal households' increased, shopped more-COO
* Kept full-year EPS view due to uncertain economy
* Shares up 2.1 pct due to margin improvement-analyst (Adds COO comment, details from analyst call)
By Emily Stephenson
CHICAGO, Sept 14 (Reuters) - Kroger Co (KR.N) beat analysts' quarterly earnings estimates by focusing on service to keep its current customers instead of slashing prices to attract new ones, the largest U.S. supermarket chain said on Tuesday.
The number of "loyal households," which Kroger calculates based on total purchase size and how often they shop at its stores, rose during the quarter, Chief Operating Officer Rodney McMullen said.
Those customers also shopped more as the company targeted coupons to frequent shoppers and improved its customer service, he said.
The company, which operates stores under the Kroger, Ralphs, King Soopers, Fry's and Food 4 Less banners, reported a 2.7 percent rise in sales at "identical" stores -- those open without expansion or relocation for five full quarters.
"We believe this outcome is a reflection of ... our loyal customers and not cherry-pickers who simply shop various outlets based on the lowest available price," McMullen said on a conference call with analysts.
Cincinnati-based Kroger's gross margin decreased 12 basis points during the quarter after falling 71 basis points during the previous period, said Jefferies & Co analyst Scott Mushkin.
He said the slower decline showed investors that the business is resilient despite tough price competition from rivals that include Wal-Mart Stores Inc (WMT.N) and Supervalu Inc (SVU.N).
"I think that Kroger is able to do well in a tough environment, but the environment remains very difficult," Mushkin said. "It's still a good beat where most supermarkets are blowing up left, right and center."
Kroger's results came as the Commerce Department reported that in August, U.S. retail sales posted their largest gain in five months. [ID:nN14247794]
Net profit for Kroger rose to $261.6 million, or 41 cents a share, in the second quarter ended on Aug. 14 from $254.4 million, or 39 cents per share, a year earlier.
Analysts on average were expecting 36 cents a share, according to Thomson Reuters I/B/E/S.
Despite the earnings beat, Kroger stood by its previous forecast for fiscal-year earnings of $1.60 to $1.80 per share. Analysts expect $1.74.
Officials on the call cited the competitive market, but said they expected aggressive promotions to ease in the back half of the year.
McMullen said Kroger had seen more cost deflation than expected, which investors sometimes see as a negative business indicator.
Sales, including fuel, increased 6 percent to $18.8 billion, beating the analysts' average estimate of $18.7 billion. Excluding gasoline, sales rose 3.3 percent.
Kroger shares were up 2.1 percent at $21.49 in afternoon trading. (Reporting by Emily Stephenson, editing by Dave Zimmerman, Maureen Bavdek and Lisa Von Ahn)
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