Kroger's data, market share back bullish forecast: CEO

Wed Oct 17, 2012 3:49pm EDT

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(Reuters) - Kroger Co (KR.N), the No. 2 U.S. grocery seller for decades, wants to shake its stock out of the doldrums and said its market share gains and strong research into shopper behavior support its aggressive new earnings growth projections.

Years of investments aimed at understanding customers and keeping prices low have helped the operator of supermarkets such as Ralphs, Fred Meyer, Smith's and Food 4 Less deliver quarter after quarter of same-store sales gains and generous dividend payments.

"Our performance has gotten to the point where we feel very confident that we can grow on that foundation," Chief Executive David Dillon told Reuters in an interview on Wednesday. "We have for too long not pushed ourselves for growth and not been intentional about growth and not said publicly what we are trying to achieve."

Kroger on Tuesday set a new long-term earnings per share growth target of 8 to 11 percent - a healthy increase over its previous 6 to 8 percent growth projection.

That appears to finally have gotten the Wall Street attention sought by the company, which analyst Scott Mushkin had recently dubbed "the Rodney Dangerfield of retailing" - an allusion to the comedian's catchphrase "I don't get no respect."

Despite years of industry-leading results, shares in Cincinnati-based Kroger largely have traded between $20 to $24 since 2009. They broke out of that range on Tuesday, gaining more than 4 percent on Kroger's new earnings per share growth forecast. The rise extended into Wednesday to around $25, a level untouched since July last year.

Kroger for years has outpaced rival supermarket owners Safeway Inc (SWY.N) and Supervalu Inc (SVU.N) and held its own against Wal-Mart Stores Inc (WMT.N) - the No. 1 U.S. grocery seller - despite a lackluster economic recovery that has restrained consumer spending and put the squeeze on many supermarket operators.

Kroger has done that with the help of capital investment of around $2 billion annually - something other strapped retailers struggle to match. Now, Kroger plans to add $200,000 a year to that spending.

But it will take time for increased capital spending and better use of customer data to translate into stronger profit growth. So, in the near term Kroger expects to get up to half of the 8 to 11 percent earnings per share growth from share buybacks.

When the increased capital investment takes hold, "the reliance on share repurchase to drive earnings per share will go down to a quarter or a third of the earnings per share growth," Chief Financial Officer Mike Schlotman told Reuters.

Kroger already boasts some of the industry's lowest grocery prices. Rivals also are racing to catch up with the company's customer data prowess. Kroger partners with data analysis firm Dunnhumby to customize promotions and increase shopper loyalty.

What investors likely won't see is an uptick in the growth of its identical-store sales - a measure used to gauge the performance of supermarket operators.

"You should think about our ID sales in the future to be similar to where we are," Schlotman said.

That means the company will have to stay ahead of rival food sellers such as Wal-Mart, Safeway and Target Corp (TGT.N) when it comes to keeping prices competitive and turning shopper data into profit-boosting projects.

Kroger also plans to extend its market share gains by expanding in existing markets where it sees opportunities.

Executives declined to say which markets Kroger is targeting for such efforts, but they said the company used a small acquisition, store remodels and other projects to bolster its market share in Fort Wayne, Indiana.

Large acquisitions, if any, would be further out, said Dillon, who declined to comment on rumors that Kroger may be interested in buying Chicago's Jewel-Osco chain from struggling rival Supervalu.

"We have occasionally made big purchases. They have worked best for us when it's a well-run business and that business has something to contribute to Kroger's success besides just the business itself," Dillon said.

(Additional reporting Jessica Wohl, Phil Wahba, Dhanya Skariachan and Ed Tobin in New York and Brad Dorfman in Chicago)

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