FINANCE

Kroger’s winning ways continue in Q2

BY Michael Johnsen

Cincinnati — For almost 12 years, Kroger has reported same-store sales growth every quarter. And they did it again Friday.

The supermarket giant reported net earnings of $433 million, or $0.44 per diluted share, and identical supermarket sales growth, without fuel, of 5.3% in the second quarter of fiscal 2015.

“We are pleased with our second quarter performance. Our core food business continued its strong performance and we benefitted from fuel margins that expanded throughout the quarter,” said Kroger chairman and CEO Rodney McMullen.

The chief noted that that the company is working toward achieving its 48th consecutive quarter of positive identical supermarket sales growth, excluding fuel, three months from now.

“We are investing to grow our business for the future while delivering on our promises today,” McMullen said. “For example, our stores are hiring to fill 20,000 new, permanent jobs and we are expanding our digital and ecommerce offerings. Our confidence in Kroger has never been stronger.”

As a result of lower retail fuel prices, Kroger total sales increased 0.9% to $25.5 billion in the second quarter compared to $25.3 billion for the same period last year. Total sales, excluding fuel, increased 5.7% in the second quarter over the same period last year, the company reported.

Based on its strong year-to-date results, Kroger raised its net earnings per diluted share guidance to a range of $1.92 to $1.98 for fiscal 2015. The previous guidance was $1.90 to $1.95 per diluted share. This range exceeds the company's long-term net earnings per diluted share growth rate guidance of 8% to 11%, plus a growing dividend.

Kroger raised its identical supermarket sales growth guidance, excluding fuel, to a range of 4% to 5% for fiscal 2015. The previous guidance was 3.5% to 4.5%.

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OPERATIONS

After 20 years, Target ends ties with major apparel supplier

BY Mike Troy

New York — As Target Corp. continues its transformation under CEO Brian Cornell, news came out that the retailer is not renewing its contract with licensed apparel company Cherokee.

Dependent on Target for 43% of its revenue, Cherokee Global Brand saw its market value obliterated after it disclosed Target would not renew the decades-old relationship.

Publicly held Cherokee, bills itself as a marketer and manager of a portfolio of fashion and lifestyle brands including Cherokee, Carole Little, Tony Hawk, Liz Lange, Everyday California and Sideout. It has license agreements with best-in-class retailers and manufacturers covering in more than 40 countries. In reality, however, the company’s business was far less diverse than implied by the boilerplate language the firm uses to describe itself.

In 2014, licensed revenues from the sale of the Cherokee brand at Target accounted for roughly 43% of the company’s total revenues. The reliance on Target was even more dramatic in 2013 and 2012 when the retailer accounted for 53% and 57% of Cherokee’s revenues, respectively.

In regulatory filings, Cherokee warned that replacing royalty payments from Target would be a significant challenge and termination of its agreement, set to expire Jan. 21, 2017, would have a material adverse effect on revenues and cash flow.

What exactly a “material adverse effect” looks like became apparent the morning of Sept. 11, after late the prior day company disclosed that Target had in fact terminated is agreement in conjunction with the release of weak second quarter results. Shares of the company tumbled and roughly 30% of its market capitalization vanished. The huge sell off should serve as a cautionary tale for any supplier reliant on a single retailer for a disproportionate amount of their revenue, especially one prone dramatic strategic changes that accompany a change in senior leadership like Target had last year when Brian Cornell was named chairman and CEO last year.

“Moving forward, Cherokee Global Brands is in a strong position to enter into new platform partnerships that will expand Cherokee's presence in the U.S.," said Henry Stupp, Cherokee’s CEO. "Large-scale retailers and wholesalers have frequently expressed interest in the Cherokee brand based on its multi-category relevance and high consumer awareness. In the end, though, consumers make brands successful, and we know that Cherokee has a unique connection with many millions of consumers in the U.S. and around the globe."

Despite some progress in reducing its reliance on Target the past three years, the diversification hasn’t happened fast enough. The company’s second quarter revenues fell 3% to $8.5 million and net income declined to $1.9 million, or 22 cents a share, compared to $2.3 million, 27 cents a share, the prior year.

"Cherokee Global Brands continues to focus on the development of our global brands, creating value for our licensing partners and generating strong financial returns for our shareholders," Stupp said.

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News

Apple Pay has a new competitor

BY CSA STAFF

Apple Pay has a new rival, and it’s a formidable one.

In its second take on mobile payments, Google is officially releasing its Android Pay digital payment solution to users of Android devices in the U.S.

In a Sept 10 posting on the official Android blog, Google said Android Pay will allow users to pay for purchases via their Android phones at more than 1 million locations in the U.S., as well as store gift cards, loyalty cards and special offers. It will start rolling out gradually during the next few days, and is compatible with NFC-enabled Android devices running KitKat 4.4 or higher.

As an NFC-based digital payment/wallet solution, Android Pay operates similarly to Apple Pay. Users tap and pay at NFC-enabled checkout terminals. Security is provided by tokens that replace consumer credit card numbers with virtual numbers during the transaction. Consumers will receive an immediate transaction confirmation on their device, and like Apple Pay will be able to remotely reset passwords or wipe their personal information. Recent transactions will also be available for reference.

Android Pay will support credit and debit cards from the four major payment networks: American Express, Discover, MasterCard and Visa. Issuing banks and credit unions currently include American Express, Bank of America, Discover, Navy Federal Credit Union, PNC, Regions Bank, USAA, and U.S. Bank. Citi and Wells Fargo will be available in the next few days, and Google promises Capital One is coming soon, with other issuing banks to follow.

Participating retailers include GameStop, Macy’s, Staples, Office Depot/OfficeMax, Rite Aid, Walgreens, Whole Foods and Toys “R” Us, to name a few. Currently only in-store POS transactions are supported, but mobile payment via app, as well as loyalty card and special offer redemption, will be offered in the future.

Users of the existing Google Wallet app will have it automatically shifted to Android Pay. Google Wallet will still be offered as a means of making payments among friends and family.

For new users, Android Pay will be available for download on Google Play in the next few days, and will come preinstalled on new NFC-enabled Android phones from AT&T, T-Mobile, and Verizon Wireless. Sprint customers will be able to download Apple Pay manually.

With Samsung Pay due for U.S. launch at the end of the month and Android Pay finally a reality, mobile payment may finally start experiencing the growth experts have been predicting since Apple Pay launched a year ago. It is rare for any market to have three leaders, so if mobile payment does take off, at least one of these companies may not enjoy the ride.

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