Kroger profit hit by labor charge

CHICAGO (Reuters) - Kroger Co. (KR.N), the largest U.S. grocery chain, posted a weaker-than-expected increase in quarterly profit on Tuesday due to a work stoppage at a distribution center, and its shares slid as much as 7 percent.

Kroger also maintained its earnings forecast for the year and stepped up its share repurchase plans as it keeps an eye on price increases, rivals and consolidation.

"The Kroger productivity loop story remains firmly intact," Goldman Sachs analyst John Heinbockel wrote in a research note. He rates the shares "neutral."

Profit rose 9.9 percent to $336.6 million, or 47 cents per share, in the fiscal first quarter ended May 26, from $306.4 million, or 42 cents per share, a year earlier.

Analysts, on average, expected Cincinnati-based Kroger, which runs grocery stores and Littman and Barclay jewelers, to earn 48 cents per share, according to Reuters Estimates.

Charges stemming from a labor issue at a Louisville, Kentucky, distribution center reduced earnings by about 2 cents per share. While the labor issue, which involved moving work to third parties, has been resolved, Kroger is in the midst of labor contract talks in Southern California, Seattle and Toledo. Other contracts will come up for renewal later this year.

Kroger is one of three grocers facing a potential strike in Southern California, where a five-month work stoppage cost grocers more than $1 billion in lost sales in 2003-2004. Workers there have voted to give their union the power to call a strike if contract talks with Kroger, Supervalu Inc. (SVU.N) and Safeway Inc. (SWY.N) fail.

If there were a work stoppage somewhere it would lead to less free cash flow, which could affect how much the company can spend on share repurchases, Chief Financial Officer Mike Schlotman said during a conference call.

Executives also said that they have seen inflationary pressure, particularly in dairy and produce, and estimated product cost inflation was 2 percent for the quarter, excluding fuel. In some cases, Kroger chose not to pass the full extent of the price increases onto consumers due to competitive pressure.

Kroger shares were down 5.7 percent to $27.96 in afternoon trading on the New York Stock Exchange, after falling as low as

$27.51.

SALES RISE, BUYBACKS PLANNED

Kroger still expects to earn $1.60 to $1.65 per share this fiscal year, while analysts, on average, expect it to earn $1.65 per share.

First-quarter sales rose 6.7 percent to $20.73 billion, topping analysts' average forecast of $20.32 billion.

Sales at identical supermarkets, or those open for at least five quarters, rose 6 percent including gasoline sales and 5.2 percent excluding them. Kroger now expects such sales to rise 3.5 percent to 5 percent this year, excluding gasoline. It previously targeted 3 percent to 5 percent growth.

The company announced a $1 billion stock repurchase program, replacing a $500 million buyback announced in May 2006. Kroger spent $132.1 million to repurchase 4.7 million shares during the first quarter.

Kroger said it has reduced its net total debt to EBITDA ratio from 2.8 to 1.8 since January 2000.

Standard & Poor's Ratings Services revised its outlook on Kroger to positive from stable, citing the company's continued same-store sales growth and lower debt levels.

The company said it now plans to use free cash flow to repurchase shares and pay dividends, while keeping a solid investment-grade rating.

Kroger said it wants flexibility to grow as the industry continues to be competitive and consolidation continues.

Last week, it agreed to buy 20 Michigan grocery stores from Great Atlantic & Pacific Tea Co. Inc. (GAP.N) as part of a strategy of mainly looking for smaller deals in markets where it already operates.

Kroger has been able to withstand pressure from rivals such as Wal-Mart Stores Inc. (WMT.N), dollar stores, drugstores and natural-food chains such as Whole Foods Market Inc. (WFMI.O) by remodeling its stores, improving customer service, cutting some prices and promoting items such as fresher produce.

(Reporting by Jessica Wohl)