Kroger, the nation's largest supermarket chain and owner of QFC and Fred Meyer stores, said yesterday that lower prices and improving customer...

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CINCINNATI — Kroger, the nation’s largest supermarket chain and owner of QFC and Fred Meyer stores, said yesterday that lower prices and improving customer service helped drive first-quarter earnings up 12 percent against strong competition from Wal-Mart and other grocers.

The results beat Wall Street estimates, and Kroger raised its earnings outlook for the year. Kroger shares rose 10 percent, or $1.76, yesterday to close at $19.45, above the stock’s previous 52-week high of $18.36.

Kroger said it earned $294.3 million, or 40 cents per share, in the quarter ended May 21, compared with $262.8 million, or 35 cents per share, a year ago. Sales increased 6 percent to $17.9 billion, compared with $16.9 billion in 2004.

Analysts surveyed by Thomson Financial expected earnings of 34 cents a share.

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Kroger Chairman David Dillon said that the company, which reported a fourth-quarter loss of $675.9 million in March, recorded strong sales at its food stores, fuel centers, convenience and jewelry stores.

And the Cincinnati-based company said business has improved in Southern California, where it has offered discounts to win back customers lost in a strike and lockout that ended in February 2004.

Company’s efforts

In a conference call with analysts, Dillon stressed the company’s effort to improve customer service.

He pointed to efforts to speed up checkouts — including making sure cashiers have the tools and information needed to process orders quickly and enough baggers during peak hours — as an example of improvements.

Data from Kroger shopping cards — 40 percent of U.S. households now have at least one card — have helped the company determine what customers want while providing discounts, he said.

“Our emphasis on placing the customer first generated increased customer traffic and higher average transaction size in identical supermarkets in the first quarter,” he said.

Analyst Jason Whitmer with FTN Midwest Research in Cleveland said that Kroger did better than he expected for the quarter.

“We’ve been saying that it will be a good year for Kroger, which has the right idea in lowering its cost structure to lower pricing and drive more business,” he said.

Defending turf

Kroger is defending its turf against new players such as Wal-Mart, and customers seem to be rewarding them with more loyalty, he said.

“They are trying to give customers what they are looking for, which is great food at reasonable prices in a good shopping experience,” he said.

Whitmer said the logical response for Kroger against competitors is to find their weaknesses and exploit them.

“By focusing on quality of service and convenient shopping, Kroger can differentiate itself from competitors with long checkout lines and big parking lots,” he said.

On the strength of its first-quarter performance, Kroger raised its earnings estimate for fiscal 2005 to more than $1.24 per share, an increase of 3 cents over its earlier estimates.

Analysts on average are predicting full-year earnings of $1.23 per share.

The company operates 2,532 supermarkets and multidepartment stores in 32 states under the names Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smiths, Frys, Frys Marketplace, Dillons, QFC and City Market. Kroger also operates 795 convenience stores, 436 jewelry stores, 536 supermarket fuel centers and 42 food-processing plants.