Kroger says storm hits 3Q earnings, sees slower 4Q

CINCINNATI (AP) - Grocery chain Kroger Co. reported Tuesday that its third-quarter profit fell 6 percent, mainly because of damages and disruption from Hurricane Ike, and that it expects slow holiday spending to hurt fourth-quarter results.

Shares in the nation's largest traditional grocery store chain plunged nearly 10 percent after Kroger lifted its earnings guidance for the full year, but offered fourth-quarter projections below analysts' expectations. It also forecast slower same-store sales growth for 2009.

"Clearly, as an economy, things have gotten a little worse across the country, and I think you can see that in some elements of our business, too," Chairman and CEO David B. Dillon said in a conference call with investors. "Bottom line for us is that when the economy is bad, people are still going to eat, and somebody is going to do well, and we're really committed to it being us."

Kroger has managed to boost sales during the recession, as people cut restaurant spending and buy more store brands and store-prepared meals to take home. Third-quarter revenue rose 9 percent to $17.6 billion. Identical-supermarket sales rose 5.6 percent in the quarter without fuel sales and 7.8 percent with them.

Those sales, for stores open at least five quarters, are considered a key gauge of retail strength. Kroger said sales were strong for its deli, bakery and other store-prepared foods, and that its corporate brand sales continue to rise, accounting for more than a fourth of grocery sales. The Cincinnati-based company said it earned $237.7 million, or 36 cents per share, in the quarter, down from $253.8 million, or 37 cents per share, a year earlier.

The company said results were hurt by an after-tax charge of $15.9 million, or 3 cents per share, related to its $25 million insurance deductible for Ike. The storm damaged stores, forced some to shut down temporarily and caused outage-spoiled food in September, particularly in Texas and inland states as far away as Ohio that suffered severe wind storms. Otherwise, Kroger said earnings would have been $253.6 million, or 39 cents per share.

Analysts polled by Thomson Reuters had predicted earnings of 38 cents per share on revenue of $17.4 billion. The company said it expects full-year earnings of $1.88 to $1.91 per share, excluding the 3-cent share charge from Ike. The previous guidance was for $1.85 to $1.90, excluding Ike effects.

Earnings for 2007 were $1.69 per share. Analysts are projecting earnings of $1.91 a share. But Kroger now says it expects fourth-quarter earnings of 49 to 52 cents per share, saying that range "considers the cautious mind-set of many consumers this holiday season."

Analysts were projecting 53 cents for the quarter. Dillon said Kroger is seeing slower sales in non-grocery merchandise, such as the jewelry some Kroger stores offer. "Fourth quarter is an important time for that. That would be one of the reasons for leaving a little breathing room on those numbers," Dillon told investors.

Looking ahead to 2009, Kroger expects identical sales store growth to slow, to a 3-5 percent range, which Dillon said reflects uncertainty about the overall U.S. economy. Kroger shares fell $2.66 to $24.65, in morning trading. They have traded in a range of $22.30 to $30.99 in the past year. Goldman Sachs analyst John Heinbockel called the drop Tuesday an overreaction in a note to clients.

"We would place more weight on the business' healthy momentum, especially the top-line, than forward guidance, particularly from a habitually cautious company in the midst of the most substantial consumer slowdown in decades," Heinbockel wrote.

For the first nine months of its fiscal year, Kroger said it earned $900.2 million, or $1.36 per share, up from $857.6 million, or $1.22 per share, a year earlier. Total sales increased 10.9 percent to $58.7 billion. Kroger operates 2,477 supermarkets and multi-department stores in 31 states, under two dozen local banners that include Ralphs, Fred Meyer, Food 4 Less, Fry's, King Soopers, Smith's, Dillons, QFC and City Market.

 (Copyright 2008 by The Associated Press. All Rights Reserved.)