Kroger reduces net debt, favors debt reduction over share buybacks

By Jennifer Lanning Drey

Portland, Ore., June 23 - Kroger Co. reduced net debt by $243 million in the 12 months ended May 23 and remains biased toward debt reduction over share buybacks, Rodney McMullen, Kroger's vice chairman, said Tuesday during the company's first-quarter earnings conference call.

"We believe that this is the right approach in the current environment to maintain an appropriate level of liquidity and allow financial flexibility to take advantage of any opportunities," McMullen said.

The company's priority is to continue to reduce its leverage ratio, which it believes to be more important than the total debt figure.

On a rolling four-quarter basis, Kroger's net-debt-to-EBITDA ratio was 1.78 at May 23, down from a ratio of 1.95 on the same date in 2008. Net total debt was $7.4 billion at the end of the first quarter.

Chief executive officer David Dillon said he is comfortable with Kroger's ability to access the capital markets when needed but hopes to improve its credit metrics before renegotiating its credit facility that matures in November 2011.

In addition to reducing leverage, Kroger believes it is important for the company to allocate cash flow toward keeping its store base current, McMullen said.

Capital investments, excluding acquisitions, made during the quarter were $654 million and included 10 new, relocated or expanded stores and 37 store remodels.

The company also continues to look for potential acquisition targets but hasn't seen anything recently where pricing makes sense.

Fuel price hurts sales

Kroger's first-quarter sales, including fuel, were $22.8 billion, compared with sales of $23.1 billion for the same period in 2008. The company noted that during the current-year period, the average retail price for a gallon of gas sold at its fuel outlets was 41% lower than in the prior-year first quarter.

Identical supermarket sales, excluding fuel, increased 3.1% in the current-year period.

"Kroger established good momentum in the first quarter," Dillon said of the results.

"We are focused on maintaining this momentum throughout the year and investing in what we offer customers and adapting along the way to their changing needs."

First-quarter net earnings were $435.1 million, compared with net earnings of $386.0 million in the same period last year.

Kroger is a Cincinnati-based supermarket and department store operator.

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