A cautious US grocer Kroger has said it expects to benefit from an improved competitive environment in the second half of 2010.
Despite growing same-store sales during 2009, Kroger today (9 March) posted a steep fall in net earnings during the year.
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The company said a number of trends – beginning in the third quarter and continuing for the remainder of the year – had dented profits.
Kroger indicated that an increasingly competitive promotional landscape in US food retail and food deflation had impacted margins, which dropped 214 basis points in the final quarter of the year.
Speaking to analysts on a conference call, Kroger CEO and chairman David Dillon said that while the company still expected to feel some headwinds from these factors going into the first and second quarters of 2010, by the third quarter conditions are expected to improve.
“We anticipate our first quarter 2010 results will be below the first quarter of 2009, the second quarter will be comparable and we will see solid growth in back half,” Dillon predicted.
This, he suggested, would allow the company to move towards its long-term model of growing EBITDA in-line with, or slightly ahead of, sales in the second half.
“It still is our objective to invest what we can save, but not to invest more than we can save… I really continue to see 2009 as an anomaly… In an economy like that we just aren’t going to see that happen. Whether you’ll see it in 2010 is up to lost of factors – but won’t see in the first or second quarters,” he predicted.
While the competitive environment remains “aggressive” around price in the US, it has seen “some stabilisation”, Dillon commented.
Dillon said that Kroger would continue to invest in lowering prices next year. However, he stressed that the company remained focused on delivering every day low prices rather than discounting.
“A lot of our investments are in every day price points and promotions – which is different from being promotional. But some of the programmes, once you get them started and you get customers liking them, to take them away actually runs the risk of derailing the process you started,” he said. “We believe it would be a long term mistake to change course.”
In addition, Dillon said Kroger will invest heavily in remodelling stores and other infrastructure projects, which are expected to generate cost savings and drive sales growth.
Dillon said food deflation was also placing pressure on the retailer’s gross margins. But, again, he predicted that this trend would ease in the back half of next year.
Finally, Dillon said that Kroger expected to benefit from an improvement in the general economic picture in the second half, as the US sees economic conditions improve once again.
