Cincinnati, Ohio-based Kroger Co, the largest grocer in the US with around 2,000 outlets, yesterday [Tuesday] reported that total sales in its 12-week Q4, ended 2 February 2002, had fallen 4.4%.
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Adjusting for the extra week in the Q4 2000, Q4 sales climbed 3% to reach US$12.1bn. On the same basis, total food store sales rose 3.4%. Comparable food store sales, which include relocations and expansions, rose 0.3%, while identical food store sales declined 0.3%. Both figures include sales at supermarket fuel centers.
EBITDA for the Q4 2001 totalled US$1.02bn, an increase of 5.8% from a year ago after adjusting for the extra week.
“Kroger’s Q4 earnings results were achieved through strong corporate brand sales and a focus on productivity programs as total sales continued to be affected by the weak economy and competitive pressures,” said Joseph A. Pichler, chairman and CEO.
“We expect that identical store sales will begin to show modest improvement in the first quarter of fiscal 2002 as a result of the strategic growth plan that we announced on 11 December 2001.”
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By GlobalDataDuring the Q4 of 2001, Kroger opened, expanded, relocated or acquired 29 food stores. For the full year, food store square footage increased 4.5%. Including acquisitions, capital expenditures for the quarter totalled US$458m.
Net working capital totalled US$648m, an increase of US$142m, year on year, reflecting an improvement of US$175m in net working capital as compared to the Q4 of 1999. Pichler said Kroger remains committed to achieving its goal of reducing net working capital by US$500m from the benchmark set in the Q3 of 1999.
Net total debt was US$8.5bn, and Kroger invested US$732m in share repurchases during 2001. Net total debt improved to 2.27 times EBITDA, as compared to 2.34 times in the Q4 of 2000. This represents Kroger’s lowest net total debt-to-EBITDA ratio since the merger with Fred Meyer in 1999. The vompany continues to improve toward the goal of net total debt equal to 2 times EBITDA.
During the Q4 of 2001, Kroger incurred US$18.4m pre-tax in one-time, merger-related expenses, primarily for systems conversions. For the year, merger-related costs totalled US$55.8m, well below original projections of US$70-US$80m. At the beginning of fiscal 2001, Kroger estimated that total merger-related costs for fiscal 2001 and 2002 would be in the range of US$90-US$100m pre-tax. Of the remaining US$34.2-US$44.2m, Kroger expects US$20-US$30m to be incurred in 2002.
Pichler said that Kroger’s success in converting most of the scheduled divisions to enterprise systems, on schedule and below budget, has prompted the Company to consider converting Fred Meyer Stores as well. The conversion would take place primarily in fiscal 2003, with related expenses incurred that year. However, Pichler said the Fred Meyer conversion would not change Kroger’s year-ago estimate of US$90-US$100m for all merger-related expenses.
Separately, last December Kroger estimated that severance and other costs related to the strategic growth plan would be in the range of US$85-US$100m pre-tax. The company now believes that the total cost will be in the US$75-US$90m range, a reduction of US$10m from Kroger’s original estimate. In the Q4 of 2001, Kroger incurred a charge of US$37.5m, primarily for severance. Expenses in 2002 related to the strategic growth plan are expected to be US$37.5-US$52.5m.
For the FY 2001, Kroger reported earnings of US$1.48 per diluted share, before one-time items. On this basis, these results represent an increase of 13% over fiscal 2000, after adjusting for the 53rd week a year ago. Including one-time items and merger-related costs, earnings per diluted share for fiscal 2001 were US$1.26. Sales for fiscal 2001 totalled US$50.1bn, an increase of 4.2% over fiscal 2000 after adjusting for the extra week. EBITDA totaled US$3.7bn for fiscal 2001, an increase of 7.9% over fiscal 2000, on the same basis.
Pichler stated that Kroger expects to achieve identical sales growth of 2-3% above product cost inflation over the next two years. He said that implementation of Kroger’s strategic growth plan is proceeding on schedule. The consolidation of the Nashville division office and distribution center into Louisville and Atlanta is on schedule. The centralization of additional merchandising and procurement functions, which is expected to reduce product costs, is moving forward as planned.
Kroger expects that approximately two-thirds of the projected US$500m reduction in annual administrative and operating costs will be achieved by the end of fiscal 2002.
Looking ahead, Pichler reiterated Kroger’s annual earnings per share growth target of 10-12%, for fiscal 2002 and 2003. As previously announced, adjustments to goodwill required by new FASB rules will improve fiscal 2002 EPS by an additional 11 cents. Longer-term, Kroger has established a sustainable EPS growth target of 13-15% per year beginning in fiscal 2004.
