'Moderate' Inflation Good for Kroger, CEO Says

About six years ago, Kroger decided to take Wal-Mart head-on -- lowering prices, offering discounts and emphasizing its store brands.

That effort is paying off, as shown by the first-quarter results it released Tuesday. Kroger's earnings, at 58 cents a share, bested analysts' forecasts by 3 cents.

Inflation has boosted Kroger's costs, but it has also brought more people into the stores, looking for bargains. "As we have said several times, we believe that a moderate level of food inflation is a positive for our business," said CEO David Dillon during a conference call with investors.

Kroger, he said, has been able to pass along a good chunk of its higher costs along to customers. Some of them were lured to the stores by Kroger's many incentives â€" discounts on gasoline at the stores that sell it, a 10 percent discount for shoppers who trade in their tax-rebate checks, and other lures.

But mainly, price-conscious customers are drawn to Kroger's comparatively lower prices, particularly on its store brands. Indeed, Dillon said the incentives didn't have much material effect during the quarter.

Dillon characterized inflation during the quarter as "moderate." If things get worse, Kroger's results may suffer in the near future. But the chain will still be well-positioned to weather the storm.