UPDATE 3-Kroger posts higher 3rd-qtr profit, raises forecast

Thu Nov 29, 2012 5:05pm EST

* Third-quarter net income up more than 60 percent

* Total sales top analysts' estimate

* Food inflation flattened more than expected

By Lisa Baertlein

Nov 29 (Reuters) - No. 1 U.S. supermarket operator Kroger Co reported better-than-expected quarterly profit on Thursday as easing food prices prompted more shopper purchases and raised its full-year earnings forecast.

Shares of Kroger closed up 4.7 percent at $26.25 on the New York Stock Exchange.

Muted food price increases, due in part to more promotions by food companies, prompted a rise in traffic and sparked the biggest quarterly increase in Kroger's unit movement - a measure of total items sold by grocery stores - since the second quarter of 2010.

"Customers continued to visit our stores more frequently and buy more on a monthly basis. Customers also purchased more items on each trip, a welcome change from what we've seen for the last several quarters," Rodney McMullen, Kroger's president and chief operating officer, told analysts on a conference call.

Executives at Kroger - which is known for trying to hold down prices - said the trend in the latest quarter suggested shoppers have a bit more money to spend or are a little less tentative about spending.

Analysts said Kroger put up healthy numbers in the latest quarter but they remain cautious on the major grocers, - Kroger, Safeway Inc and Supervalu Inc, over the longer term.

"They're good on the surface, but I would be reticent to say that this is the new trend on a sustainable basis," Susquehanna Financial Group grocery analyst Bob Summers said of Kroger's results, which were bolstered by share buybacks, cost reductions, gasoline sales and other items that are not core to its grocery business.

"We still believe that over time, more conventional retailers like Kroger, Safeway and Supervalu will lose share of food sales" to retailers ranging from big-box discounters to dollar stores, J.P. Morgan analyst Ken Goldman said in a client note.

PROFIT RISES, SOME FOOD PRICES FALL

The Cincinnati-based grocer, which operates the Kroger, Ralphs, Smith's and Food 4 Less chains, said net income jumped almost 62 percent to $316.5 million, or 60 cents per share, for the third quarter that ended Nov. 3.

Excluding benefits from a settlement with credit card companies and a reduction in its obligation to fund a union pension fund, Kroger earned 46 cents a share in the latest quarter, topping analysts' average estimate by 3 cents per share, according to Thomson Reuters I/B/E/S.

Total sales, including fuel, increased about 6 percent to $21.81 billion, besting analysts' estimate of $21.65 billion.

Charges also were down in the latest quarter.

Operating, general and administrative costs plus rent and depreciation, excluding retail fuel operations and the two adjustment items, declined 21 basis points as a percent of sales.

Kroger's LIFO (last-in, first-out) inventory accounting charge was $15.5 million in the latest quarter, versus $61.6 million a year earlier, due to easing inflation.

Executives estimated the rate of inflation declined to 1.4 percent, excluding fuel. They reported inflation in every store department, except produce and seafood. Both of those were deflationary.

The impact of the worst U.S. drought in more than half a century appears to have been muted this year but is expected to send food costs higher in 2013.

The company - whose rivals also include discounter Wal-Mart Stores Inc and Target Corp - raised its full-year earnings outlook, excluding the two special items, to a range of $2.44 to $2.46 per share. It had forecast $2.35 to $2.42.

In 2013, Kroger plans to build, expand or relocate 50 supermarkets, compared with 40 expected this year, McMullen said.

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