Kroger Co. reported stronger than expected quarterly profit and reiterated a forecast for higher sales this year. However, officials with the largest U.S. grocery chain said the retail environment remains challenging amid a weak economy and stiff price competition.
“Customers are uneasy in this economy,” David Dillon, Kroger’s chief executive officer, said during a conference call following the Cincinnati-based company’s second-quarter results.
“The variability of (consumer) spending behavior continues to reflect their concerns about the job market, living and health care costs,” Dillon said.
Grocery deflation hasn’t moderated this year as expected, Kroger said. The company has about 2,468 stores in 31 states and 784 convenience stores.
While costs rose for perishable products such as meat, milk and fresh produce, that was offset by deflation in many other grocery categories. Excluding milk, Kroger’s grocery department had product cost deflation of about 1.6 percent during the second quarter, company officials estimated, compared with 1.8 percent in the first quarter.
“Earlier this year, we expected grocery deflation to moderate, but it hasn’t, largely due to increased promotional spending from vendors,” said Rodney McMullen, Kroger chief operating officer.
Kroger’s results underscore the ongoing difficult competitive landscape for traditional U.S. grocers as unemployment hovers near a 27-year high and large discounters such as Wal-Mart, aggressively go after market share in food retailing. Questions also persist whether consumers will balk at increasingly expensive meat.
“The competitive environment remains challenging,” Dillon said. “During the quarter, we saw significant and aggressive promotional pricing at several competitors.” He didn’t name any specific companies.
Still, Kroger, whose retail outlets include Dillons, Food 4 Less, Fred Meyer and King Soopers, posted a 2.8 percent gain in net income during the quarter as sales rose.
Kroger’s identical-store sales excluding fuel rose 2.7 percent, to $14.95 billion, in the three months ending Aug. 14, the company’s fiscal 2010 second quarter. Identical stores have been open without remodeling or relocation for at least five full quarters.
For all of 2010, sales at identical supermarkets are expected to increase 2 percent to 3 percent, Kroger said, repeating a projection the company initially made in March.
“Our sales have remained solid in the face of competitive and economic challenges because of the strong credibility we have with our customers,” Dillon said. “Our customers tell us that while price is important, it is not the only factor that influences their shopping decisions.”
Net income during the second quarter rose to $261.6 million, or 41 cents a share, from $254.4 million, or 39 cents, during the same period in 2009. The results topped analyst expectations by about 5 cents, according to Thomson Reuters I/B/E/S.
In early afternoon trading today, Kroger shares rose 49 cents, or 2.3 percent, to $21.53, up almost 5 percent this year.
Beef and pork prices rose this year after a surge in feed costs two years ago prompted livestock producers cut herds. That’s pushed supermarket prices for some cuts, such as bacon, to all-time highs.
In July, the Consumer Price Index for beef, pork, poultry, fish and eggs rose 0.3 percent from June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics said last month. That was the seventh consecutive monthly increase.