Recession taxes Giant's profits

Donald Saltz

April 03, 1992|By Donald Saltz

Sales are slightly better, profits are down sharply and growth of the company is relatively slow. That's Giant Food today, after a year of economic recession and stiffened competition among the food retailers.

Giant's report in midweek was its most disappointing in years. Annual profits fell by almost $32 million, more than 25 percent. Sales forged ahead just over 4 percent for the year. The severest blow, though, was the final period -- 17 weeks instead of the usual 13 weeks -- in which profits tumbled 38 percent even though turnover rose nearly 9 percent, thanks to an extra week in this year's reporting period.

Giant Food, with its 154 supermarkets, and drugstores in more than two-thirds of them, is the dominant food retailer in the Baltimore-Washington area. The company has about a quarter of the food business in and around Baltimore and almost half in the Washington area.

Innovation has always been a Giant standby, but there are signs now that hustling competitors are out-innovating the Landover-based food retailer. In the past, Giant pioneered checkout scanning and for several years has run its successful "Apple for the Students" program for schools. But competition has forced Giant to take additional steps, including double coupons, Superdeals and other promotional sales. Rival Safeway has instituted Shopper's Club (lower prices for members), and it plans soon to accept credit cards in payment for food. Other competitors are hitting away on price specials that in these times of spending consciousness are winning customers.

Giant management blames its profit decline on the recession. For one thing, competition intensified. For another, consumers cut back on their purchases of higher-profit gourmet foods. And, while price-cutting boosted sales at its 108 drug units, earnings were adversely affected.

Giant's slower store growth is definitely recession-related, as new real estate development declined drastically, although last year Giant did open stores for the first time in Calvert and Carroll Counties. Something not usually considered: The recession-induced lower interest rates cut into Giant's earnings from its cash investments by about $3.8 million.

Giant's share price for months has hovered around 23 to 24 giving the stock a price-earnings ratio of about 16. That compares to P/Es of 17 for A&P but only 12 for Safeway.

An easing-off of the recession may not restore the food retailer's former profit levels. Competitive pressures appear to be permanent and will tend to hold down prices and maintain high costs for special programs such as double coupons.

Investment alternative

Folks who want income to replace earnings from bank and savings and loan certificates of deposit do not quickly turn to the stock market as a source for that income. Stocks carry the risk of going down in price, and not many of them have high dividend returns. The usual move is to buy shares of mutual bond funds.

However, it makes sense to invest part of one's income-oriented savings in shares of companies that pay a healthy dividend but tend to increase the payout consistently. Electric and gas utilities, telephone and food companies and real estate trusts fill the bill, but sometimes sharper dividend increases are made by drug and home product companies. Bristol-Myers Squibb and Warner-Lambert, for example, provide fair current yields of about 3.6 and 3.2 percent, respectively, but ones that are enhanced with regular annual boosts.

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