U.S. News

Kroger Profit Hit by Labor Charge, Shares Lower


Kroger, the nation's largest traditional supermarket chain, said Tuesday first-quarter profit jumped 10 percent but was slowed by labor unrest. Its shares sank more than 5 percent in trading Tuesday.

For the three months ended May 26, earnings rose to $336.6 million, or 47 cents per share, from $306.4 million, or 42 cents per share, a year earlier. Sales rose 7 percent to $20.73 billion, from $19.42 billion.

Kroger , which still faces a tense labor situation in southern California, said its first-quarter earnings included charges of about 2 cents per share related to labor unrest at a distribution center near Louisville. Some 700 workers walked off the job for about two days in April during a dispute with two companies that operate the center for Kroger.

First-quarter 2006 results included a one-time legal expense of 3 cents per share.

Analysts surveyed by Thomson Financial predicted earnings of 48 cents per share on sales of $20.4 billion. Analysts typically exclude one-time items in their forecasts.

Sales at stores open at least a year, considered a key indicator of a retailer's success, were up 6 percent in the quarter. Not counting fuel sales, same-store sales rose 5.2 percent.

The company said rising costs for such items as dairy and produce hurt profit margins.

David B. Dillon, Kroger's chairman and chief executive, said the company delayed some price hikes for competitive reasons.

"We did deliberately slow some things down," Dillon told analysts in a conference call. "We intend to remain very competitive and focus on what our customers want."

Kroger, which competes for grocery sales against nonunion Wal-Mart, also is negotiating new contracts with union workers in Seattle and Toledo, Ohio.

In southern California, grocery workers this week voted to authorize a strike by their union if stalled negotiations with Ralphs and two other chains fail. A labor standoff there four years ago disrupted business for several months at Ralphs stores.

Dillon said the company had contingency plans in the event of a strike and noted that Kroger reached an agreement over the weekend with union workers in Texas and previously with workers in Michigan.

In a note last week, UBS analyst Neil Currie warned of the strike risk in southern California.

Kroger announced Tuesday that its board had approved a new $1 billion stock buyback. The company has emphasized better customer service, store improvements, wider selections and loyalty programs as well as price cuts in an increasingly fragmented retail food industry.

However, Kroger officials said a work stoppage could result in the stock buyback being reduced.

Also Tuesday, the company confirmed its fiscal year 2007 earnings guidance of $1.60 to $1.65 per share.

Kroger stock recently reached a 52-week high of $31.94, after trading as low as $20.10 nearly one year ago.

Kroger operates 2,458 supermarkets and multi-department stores in 31 states, under two dozen local banners that include Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith's, Fry's, Dillons, QFC and City Market. Kroger announced last week that it will buy 20 Farmer Jack stores in the Detroit area from The Great Atlantic & Pacific Tea Company, after an April announcement it was buying 18 Scott's Food & Pharmacy stores in northeast Indiana from Supervalu.