Kroger (KR) CEO sees improved consumer spending in Q2 results

Dillon: Discretionary spending on the rise

CINCINNATI - Kroger Co. shares were up more than 3 percent Thursday on news that the nation’s largest grocery chain expects stronger sales growth than previously projected.

In a conference call with Wall Street analysts, CEO David Dillon credited the company’s “customer first” operating strategies but also pointed to signs that U.S. consumers are moving beyond bread-and-butter buying.

“It is still quite fragile but it continues to improve and those signs of improvement are many,” Dillon said. “There’s lots of categories and items and areas that you would say are more kind of discretionary items that people buy more of today than they were before, areas like apparel and cosmetics and toys and greeting cards, Starbucks, sushi, all those areas, natural foods, Boar's Head Cheese, prepared meals, all of those are doing really well and growing at a good pace.”

Kroger isn’t the first local company to notice the trend toward splurge spending. Macy’s Inc. Chief Financial Officer Karen Hoguet told analysts in August that it suffered weaker sales in the second quarter because “consumers seem to be choosing to make purchases in non-department store categories such as cars, housing and home improvement.”

Kroger met Wall Street expectations with a second quarter profit of $317 million, or 60 cents per share. It also increased by a full percentage point with its guidance on identical-store sales growth. The company now expects revenue from stores open at least a year to grow by up to 3.5 percent in the 2014 fiscal year.

Kroger shares surged more than 3 percent in morning trades, reaching $38.85 by noon, up $1.18 from Wednesday’s close.

Kroger executives cited a variety of factors in its decision to lift sales projections for the full year, including a continuing increase in “loyal households” who are visiting Kroger stores more often and spending more on a monthly basis.

Another growth driver is produce. Chief Operating Officer Rodney McMullen said the introduction of new organic products and locally-grown produce is resonating with customers.

“Our produce team has done a great job connecting with local suppliers,” he said. “We’ve significantly increased the amount of local produce that we have and we’re doing a better job telling the customers about it.”

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