PORTLAND, Ore.—Supermarket operator Kroger Co. proved that bigger isn’t always better Thursday in reporting that it gained shoppers and market share in the first quarter despite aggressive competition from Wal-Mart Stores Inc.
Kroger, which is the nation’s largest traditional grocery store operator with chains including King Soopers and City Market, said its net income fell 14 percent for the quarter due to increased costs. But the results beat expectations, the company affirmed its full-year guidance and its shares rose sharply in trading.
“Kroger continues to perform well as the economy struggles to recover,” CEO Dave Dillon said.
The company said it earned $373.7 million, or 58 cents per share, for the quarter that ended May 22. That beat the average forecast for earnings of 54 cents per share from analysts surveyed by Thomson Reuters.
Net income was $435.1 million, or 67 cents per share, in the same quarter last year.
Revenue rose 9 percent to $24.76 billion, helped by gasoline sales. Excluding gas, revenue rose 3 percent.
Investors were closely watching Kroger’s performance as competition in the grocery industry escalates.
Supermarket chains, discounters and others have been fighting fiercely for shoppers since consumers began eating at home more often to save money more than a year ago. Shoppers also became much more focused on price, which led stores to offer aggressive promotions and discounts.
Wal-Mart, which sells more groceries in the U.S. than any competitor including Kroger, took things up a notch in May when it rolled out attention-grabbing offers like $1 ketchup bottles and sub-$4 cases of Coke. Wal-Mart gets about half of its revenue from groceries.
But Kroger said many shoppers are basing decision on more than price and it has invested heavily in improving its stores and other elements of the shopping experience for customers, while keeping its prices competitive.
In turn, Kroger said, more shoppers visited its stores during the quarter and its regular customers were buying more.
“It cannot be just about price.” Dillon told investors. “If it is just about price, that really is Wal-Mart’s game and not our game, so we don’t focus just on that.”
Sales at stores open at least a year, considered a critical indicator for retailers, grew 2.4 percent across all Kroger’s regions for the quarter. This measure, which did not include fuel sales, strips away the impact of stores opening or closing.
J.P. Morgan analyst said the pressure from Wal-Mart is weighing on most grocers, calling Kroger “the best house on a bad block.” He said the company’s respectable sales give comfort that the grocer is holding its ground, and he said early traffic trends in its stores for the second quarter bode well.
However, Kroger said shoppers are still facing financial pressure and it is seeing mixed trends in consumer confidence depending on the region or type of shopper.
Sales of discretionary items like flowers and high-end wine improved. Meanwhile, Kroger saw more week-to-week swings in sales as shoppers living paycheck-to-paycheck or relying on food stamps ran short.
“Their world a little different, so the consumer confidence in some of the upscale customers is stronger than the consumer confidence in some of the people who are more price-sensitive, and that affects their behavior,” Dillon said.
The company said it expects competition, rising commodity costs and the slow and inconsistent pace of the economic recovery to continue to challenge business.
But Kroger maintained its forecast for full-year profit of $1.60 to $1.80 per share. Analysts expect $1.72 per share for fiscal 2010.
It expects revenue in supermarkets open at least five quarters to rise 2 percent to 3 percent for fiscal 2010.
Shares of Kroger rose 70 cents, more than 3 percent, to $20.78 in early afternoon trading.
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AP Retail Writer Mae Anderson contributed to this report from New York.
