Kroger Co. (KR) is preparing to go head-to-head with Wal-Mart Stores Inc. (WMT), as the supermarket operator plans to invest $200 million more each year on expansion in existing and new markets, with a focus on building a different type of grocery store that will sell everything from asparagus to sweaters.
At its annual investor meeting Tuesday in New York, Kroger also announced plans to buy back more of its stock, and it raised its expectations for long-term profit growth.
Shares were up 4.1% at $24.40 in recent trading Tuesday.
Kroger, one of the nation's largest grocery store networks, has outpaced competitors, such as Safeway Inc. (SWY) and Supervalu Inc. (SVU), by marking down its prices to become value-oriented, even before the recession started, and expanding its store-branded line of products to lure budget shoppers.
But like its peers, Kroger is grappling with intense competition, as dollar stores, drugstores and mass-market retailers like Wal-Mart expand their grocery departments, while specialty and organic shops like Whole Foods Market Inc. (WFM) gain traction.
The changing landscape has called into question the future of America's largest grocery chains.
Kroger said its efforts to evolve with the changing marketplace--such as its new store designs, mobile phone application and loyalty program--will help it stay relevant and steal market share from its conventional competitors.
"We are finding more and more opportunities to expand our stores and build new stores ... And there is tremendous opportunity to grow market share as we improve our customer experience while our competitors aren't," President and Chief Operating Officer Rodney McMullen said at the meeting.
Kroger said Wal-Mart is its biggest competitor in most markets, leading it to test the new format that, called Kroger Marketplace, which looks more like a mass retailer than a grocery store.
Kroger hopes by adding clothing lines and other non traditional items it will increase the amount of money its customers spend, generating a higher profit margin for the store.
"We are already producing high returns in those stores," Mr. McMullen said.
But analysts questioned how Kroger will compete with the behemoth Wal-Mart, which hosted its annual investor day last week where it announced plans to build smaller-format stores to help it expand to new markets.
"Even when the biggest competitor is a good, solid competitor," Mr. McMullen said, without naming names. "We can still have a good return on our assets. Just because they do well doesn't mean we can't do well. It's not mutually exclusive."
Kroger said throughout the next two to three years, it will mainly be filling in its presence in markets where it already operates, but will likely enter one or two new ones with the broader Marketplace format.
Chief Executive Officer Dave Dillon said Kroger has been improving as a business over the past few years, but that its stock price hasn't reflected such because the grocery-store operator wasn't growing in a way that delivers shareholder value.
As a result, Kroger announced Tuesday its board approved a $500 million stock-buyback program, and it now expects long-term per-share earnings growth of 8% to 11%, compared with its earlier view for growth of 6% to 8%.
The latest buyback program replaces an earlier one that had about $340 million remaining.
Kroger, which affirmed its guidance for the current fiscal year, last month reported its fiscal second-quarter earnings were flat as revenue growth was offset by higher expenses.
-Tess Stynes contributed to this article.
Source: Argentine Beef Packers S.A.
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