Kroger, the largest U.S. grocer, Tuesday posted a greater-than-expected 28% increase in quarterly profit and raised its full-year forecast, sending its shares up nearly 7%.
The company said it had been able to pass on higher product costs to customers, which helped lift gross margin to 23.94% from 23.47%. Food companies and other manufacturers have been increasing prices on a range of products due to soaring ingredient and raw material costs.
"A lot of people were worried that inflation would take a bite out of their margins, but it looks like they were able to pass substantially all of the inflation through," said Morningstar analyst Mitchell Corwin.
Kroger said earnings rose to $267.3 million, or 38 cents a share, in the second quarter that ended Aug. 18 from $209 million, or 29 cents a share, a year earlier.
Analysts on average had forecast profit of 34 cents a share, according to Reuters Estimates. Sales rose 6.6 percent to $16.1 billion, while analysts had forecast $16 billion. Sales at stores open at least five quarters increased 5.1%, excluding fuel sales.
Kroger has been improving customer service, remodeling stores and promoting items like fresh produce as it has battled pressure from rivals ranging from Wal-Mart Stores , warehouse clubs, drugstores, dollar stores and natural foods chains such as Whole Foods Market .
For the year, Kroger raised its earnings forecast to a range of $1.64 to $1.67 a share from a prior outlook of $1.60 to $1.65. Analysts on average forecast $1.66, according to Reuters Estimates.
Kroger shares rose almost 7% in early New York Stock Exchange trading. The stock is up about 25 percent this year, compared with a 4.4% increase for the Standard & Poor's 500 index.