This summary is based on the third quarter fiscal 2008 earnings call conducted by The Kroger Co. (KR) on December 9, 2008.
Management:
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Chief Executive Officer: David B. Dillon
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Vice Chairman: W. Rodney McMullen
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President and Chief Operating Officer: Don W. McGeorge
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Chief Financial Officer: J. Michael Schlotman
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Investor Relations: Carin Fike
Key Investors Issues
- The firm reported total sales of $17.6 billion, an increase of 9%.
- Net earnings totaled $237.7 million or 36 cents a share, down 6% from $253.8 million, or 37 cents per diluted share in 2007,
- The firm repurchased 3.1 million shares of stock at an average price of $27.89 per share.
Year to Date Highlights:
- Total sales increased 10.9% to $58.7 billion over the same period last year.
- Net earnings were $900.2 million, or $1.36 per diluted share, up from $857.6 million, or $1.22 per diluted share in 2007.
Third Quarter Highlights
The firm reported total sales of $17.6 billion, an increase of 9.0% over the same period last year as identical supermarket sales increased 5.6% without fuel and 7.8% with fuel compared with the same quarter last year.
- Net earnings totaled $237.7 million, or 36 cents a share, down from $253.8 million, or 37 cents per diluted share due to a pre-tax charge of $25 million, or 3 cents a share, related to property damage and the disruption of the business caused by Hurricane Ike.
- Including Kroger’s retail fuel operations, FIFO gross margin was 23.30% of sales, a decline of 8 basis points compared to the third quarter last year.
The Company recorded a $68.8 million LIFO charge, an increase of $28.8 million over the prior year, primarily reflecting the effect of rising food inflation on merchandise inventory valuation.
- Capital investment, excluding acquisitions, totaled $603.9 million compared to $555.3 million in 2007 and included 14 new, expanded, or relocated stores and 55 remodels.
- Total debt was $8.0 billion, an increase of $553.0 million from a year ago.
- The firm repurchased 3.1 million shares of stock at an average price of $27.89 per share for a total investment of $86.6 million.
Operational Highlights:
- Identical supermarket sales rose 5.6%, without fuel, reflecting the strength of the customer-focused strategy that was developed six years and continue to sharpen today.
- Identical sales growth was positive across all departments and all supermarket divisions, with slowness in sales of discretionary general merchandise and jewelry.
- Kroger''s focus on low prices, quality products, and providing a convenient one-stop solution for their daily needs continues to resonate with customers and drive sales.
- Trends include a growing interest in private-label products and prepared foods as consumers choose to prepare and eat more meals at home and a sharper focus on price from all customers and all segments.
The firm saw accelerated growth in the corporate-brand penetration, both in terms of grocery sales dollars and units.
- The proprietary loyalty card data indicates approximately 14% of customers are trading over in the purest sense by simply buying the same for less by switching to one of the corporate brands in any of the three tiers on offer.
- Sushi bars, hot soup, sandwich counters, and refrigerated soups and entrees are all doing well as a result of a shift in consumer behavior.
Effect of Hurricane Ike on Earnings:
- Results included a pre-tax charge of $25.0 million, or approximately 3 cents per diluted share, related to property damage and the disruption of the business caused by Hurricane Ike this past September.
- The $25.0 million figure represents Kroger''s retention under its property insurance and business interruption coverage.
- Ike and its remnants disrupted operations in Texas and several inland states, including parts of Indiana, Kentucky, and Ohio, causing property damage, extended power outages, and fuel supply issues in several additional markets.
- While the firm did incur some expenses, it also realized some benefits as customers restocked their households after the hurricane.
Financial Strategy:
- The firm did see exceptionally strong margins in the fuel business reflecting typical margin experience when wholesale fuel costs declined, as they did throughout the quarter.
- Kroger has aligned its cash flow priorities to leverage its financial strength and support an appropriate level of liquidity necessary under current economic conditions.
- It is now allocating cash flows primarily to capital investments, debt reduction, and dividend payments and is on track to invest $2.0 billion to $2.2 billion in capital projects for fiscal 2008.
- The company’s $2.5 billion committed 5-year credit facility maturing November 2011 continues to be available and it also maintains uncommitted money market lines totaling $75.0 million.
