Tuesday, March 06, 2001

Kroger to restate earnings

Irregularities at Ralphs offset good 4th quarter

By Cliff Peale
The Cincinnati Enquirer

        News Monday of a solid fourth quarter for Kroger Co. was tempered by accounting irregularities at a Southern California unit that will force Kroger to restate earnings for the past two years.

        The Cincinnati-based supermarket giant said deceptive practices — started at Ralphs Grocery before Kroger bought the chain — would add 2 cents a share to 1998 earnings, take 2 cents a share off 1999 earnings and subtract 1 cent a share for each of the first 2 quarters of fiscal year 2000, which ended Feb. 3.

        Executives at Ralphs, who have been replaced, spread revenue among smaller bank accounts to ensure that it could meet budget targets in future quarters, and hid the practice from auditors, Kroger said.

        The accounts were smaller than those generally examined by auditors, the company said.

        “What you had was a select group of folks collaborating together and making multiple entries to hide stuff,” Rodney McMullen, Kroger's executive vice president, said in a conference call with Wall Street analysts Monday.

        For investors, customers and employees, the announcement does not change Kroger's long-term sales outlook or cash-flow strength, Kroger chairman and chief executive officer Joseph Pichler said.

        Tony Howard, an analyst who studies Kroger stock for Hilliard-Lyons in Louisville, said the quarterly earnings for Kroger were good.

        The low amount of the restatement was not as both ersome as the fact that the irregularities at Ralphs escaped detection, he said.

        “It's kind of sad they had to announce them together,” Mr. Howard said. “We viewed it as quite positive.”

        The company, which operates about 2,350 supermarkets in the country, showed similar confidence by announcing new authorization to buy back $1 billion of its own stock. In the just-completed fiscal year, Kroger bought $541 million of its stock and also retired about $476 million of its own debt.

        Mr. Pichler said slower sales of jewelry and general merchandise at the Fred Meyer Stores unit in the Pacific Northwest were offset by strong grocery-store performance.

        Although it will not report final 2000 results until next week, Kroger's 2000 earnings will increase 18 percent to $1.31 a share, before extraordinary items and after adjusting for an extra week, the company predicted.

        Sales for the year increased 6 percent, again after adjusting for the extra week.

        Mr. Pichler also said:

        • Kroger remains comfortable with its previously announced goal of increasing earnings per share 16 percent to 18 percent a year, at least for the next two years.

        • The company has reached its goal of $380 million in “synergy savings” from its 1999 merger with Fred Meyer Inc., and has identified about a dozen more ways to drive sales and reduce expenses. Ralphs was included in the Fred Meyer purchase.

        Many of the questions from analysts Monday dealt with the restatement of earnings and the problems at Ralphs.

        A Ralphs executive alerted Kroger to the problems in September, just before an internal audit was to begin, Mr. Pichler said. Kroger hired an outside law firm, which reported its findings to Kroger's board of directors last week.

        “It would've been caught by our internal audit,” Mr. Pichler said.

        Kroger has replaced the chief financial officer at Ralphs with Steve McMillan, a veteran of its Texas-based southwest division.

        In a separate announcement, Kroger also appointed James Hallsey to president of its Smith's Food & Drug Stores unit in Salt Lake City.


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