Kroger's discount push lifts profits

CHICAGO (Reuters) - Kroger Co KR.N, the largest U.S. grocery chain, posted better-than-expected quarterly profit on Tuesday, helped by an emphasis on lower prices, gasoline discounts and other efforts to appeal to cash-strapped consumers.

A variety of Kroger branded foods is arranged on a shopping cart at a King Soopers grocery store in Broomfield, Colorado June 26, 2007. REUTERS/Rick Wilking

The company also raised its sales forecast and the lower end of its earnings forecast for the full year, and its shares rose as much as 9.6 percent.

The company, which has also rolled out a $4-per-prescription generic drugs program and offered shoppers a bonus for cashing tax rebate checks at its stores, said its latest research shows its customers are most concerned about soaring food and gasoline costs.

Sales of Kroger’s store brands also increased in the quarter, a sign that consumers are looking for lower-priced products.

“We did see solid growth in Kroger corporate brand share in the first quarter,” said David Dillon, chief executive officer, during a conference call with analysts.

Kroger posted a fiscal first-quarter profit of $386.0 million, or 58 cents per share, up from $336.6 million, or 47 cents per share, a year earlier.

Identical-store sales -- stores open for at least five full quarters and which have not been moved or expanded -- were up 5.8 percent, excluding gasoline sales.

“Kroger has now put up 10 consecutive quarters of (identical-store sales increases) between 5 percent and 6 percent, amazing consistency,” said Goldman Sachs analyst John Heinbockel in a research note. He also pointed out that the increases came without Kroger significantly increasing its store base. “Simply put, the company is chewing up meaningful market share.”

Total sales for the company, which operates Kroger, Fred Meyer and Ralphs grocery stores as well as the Littman and Barclay jewelry chains, rose 11.5 percent to $23.11 billion.

Analysts’ average forecast was for earnings of 55 cents per share on revenue of $22.27 billion, according to Reuters Estimates.

During the quarter, Kroger allowed customers to exchange their tax refund or tax rebate checks for a Kroger gift card with an extra $30, $60 or $120 added to it. Under the program, a customer could exchange a $600 rebate check for a $660 Kroger gift card.

Kroger said it did not see a material impact on sales and earnings during the quarter from the rebate program.

On the cost side, Kroger said it saw a 3.5 percent increase in product costs, excluding fuel. Kroger called this increase “moderate” and said it is generally able to pass those costs on to consumers.

Kroger on Tuesday raised its forecast for identical-store sales for the full year. It now expects a rise of 4 percent to 5.5 percent excluding gasoline, compared with a prior forecast of 3 percent to 5 percent.

It raised the lower end of its full-year earnings forecast to $1.85 per share from $1.83. The top of the range remains $1.90 a share. Analysts’ average forecast is $1.89.

Kroger shares were up $1.80 at $27.79 in midday trading on the New York Stock Exchange after trading as high as $28.50 earlier in the day.

Additional reporting by Lisa Baertlein; Editing by Brian Moss and Maureen Bavdek