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posted: 9/7/2012 11:43 AM

Kroger profit dips as costs rise

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Associated Press

NEW YORK -- The Kroger Co. said Friday that its profit dipped slightly in the second quarter, as the nation's largest traditional grocer faced higher expenses and an increased tax rate.

The Cincinnati-based company said a key sales figure rose during the period as its loyalty program helped attract shoppers. But merchandise costs -- which includes advertising, warehouse and transportation expenses -- also rose 4.3 percent.

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Like other supermarkets, Kroger has been paying more to stock its shelves as a result of rising commodity costs. The company has tried to offset the impact by introducing more store-brand items, which lessens its need to stock up on brand-name products.

Kroger is also fighting to hang onto shoppers as it faces intensifying competition from big-box retailers, drugstores and specialty grocers. To hang onto customers, Kroger's loyalty program offers customers discounts based on their past purchases.

Rodney McMullen, Kroger's president and chief operating officer, noted that the company is also working to improve other parts of the shopping experience.

For example, he said the company has whittled the checkout wait time to an average about 30 seconds. In the past, McMullen said the average wait time was as long as 4 minutes.

The efforts seem to be paying off, with sales at supermarkets open at least a year up 3.6 percent, when excluding fuel. The metric is a key gauge of health because it excludes the impact of newly opened and closed locations.

In the current quarter so far, CEO Dave Dillon the figure is "gently down" in part because of a result of shoppers switching to generics on some prescription drugs.

For the full year, the company expects the figure to rise 3 percent to 3.5 percent.

Despite the efforts, Kroger is also facing higher costs. Its tax rate in the latest quarter rose to 34.5 percent, from 27.6 percent a year ago. In the third and fourth quarters, it expects the rate to be about 36 percent.

The company's stock fell 57 cents, or 2.5 percent, to $22.53 in midday trading. Its stock has still risen 7 percent since hitting a 52-week low of $20.98 in late July. Kroger traded as high as $24.83 in January.

For the three months ended Aug. 11, the company reported net income of $279.1 million, or 51 cents per share. That's down from $280.8 million, or 46 cents per share, a year ago when there were more outstanding shares.

Revenue, including fuel, climbed 3.9 percent to $21.73 billion.

Analysts expected earnings of 49 cents per share on revenue of $21.89 billion.

Kroger now anticipates fiscal 2012 earnings of $2.35 to $2.42 per share, up from $2.33 to $2.40 per share.

Analysts predict $2.38 per share.

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