Kroger Finds Big Business in Gasoline

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Kroger Finds Big Business in Gasoline

CINCINNATI -- High gasoline prices at the pump in 2005 boosted revenue at Cincinnati-based Kroger Co. last year and should bring surging revenue in 2006, too, CEO David B. Dillon told shareholders at the company's annual meeting Thursday, one day after CSNews Online reported that the company posted strong first-quarter results.

According to the Cincinnati Enquirer, Kroger, which operates about 600 fuel centers at grocery stores and another 600 centers at company-owned convenience stores, plans to open some new ones in 2006 that could be as near as three blocks from existing stores, Dillon said.

Kroger projected in 2004 that sales at supermarkets open at least a year, excluding fuel, would grow by 2 percent in 2005. Instead, sales grew by 3.5 percent.

Earnings were projected at $1.21 per diluted share at the beginning of the fiscal year but ended the year at $1.31 per diluted share.

"If we own the real estate and we have the space, we are putting gas stations in as fast as we can," Dillon said. "Our customers like the convenience."

Several off-site fuel centers, which will be managed by the nearby grocery store, have been approved for the region, he said in the report.

The annual meeting marked the first time in 18 years that shareholders were offered a quarterly dividend -- 6.5 cents a share, payable to shareholders of record as of Aug. 15. The company announced in March it would resume its dividend.

Looking to fiscal 2006, Kroger expects to increase earnings per share by 6 percent to 8 percent and is planning for sales growth at supermarkets open at least a year to exceed 4 percent, perhaps hitting 4.5 percent for the full year.

The company had earnings in 2005 of $958 million compared with a $104 million loss in 2004 and a loss of 14 cent per diluted share.

B. Craig Hutson, the Chicago-based senior bond analyst for Gimme Credit, an independent corporate bond research firm based in New York City, said higher gas prices bring more shoppers to Kroger because most stores are closer to highly populated markets than competitors such as Wal-Mart.

"Consumers usually have to drive less distance to get to a Kroger store," he told the Enquirer. "People have to eat. When there are high gas prices, what goes away first is eating out.

"That means more people are eating in, and that is good for supermarkets."

According to BigResearch, a Columbus, Ohio-based consumer behavior and research firm, higher gasoline prices also mean more Americans are paying attention to coupons and buying cheaper private-label brands.

A report from BigResearch on Thursday found that 23 percent of households with incomes higher than $50,000 are using coupons more often, and 38 percent are shopping closer to home to save money on fuel. One in five buys private brands more often.

Kroger, which owns 42 food or product manufacturing plants, gets about 24 percent of its revenues from its private brands, Dillon said. That is about $14.5 billion.

Expect that number to grow in 2006, Hutson said in the report.

"Companies like Kroger earn a higher profit margin on those private-label products," he said. "It creates a greater level of brand loyalty. If you like the Private Selection chocolate chip cookies, well, you might like the Private Selection lunch meat, and you can't buy either at the Wal-Marts of the world."