By Patricia Sellers
August 14, 2008

Wal-Mart’s

better-than-expected earnings, announced Thursday morning, has hardly goosed the stock. The stock is up 1% today in an overall rising market. Perhaps there was too much hope riding on the bellweather for the health of the middle American consumer. Even as Wal-Mart management increased its full-year profit forecast to $3.43 to $3.50 per share, the Wall Street’s consensus, at $3.49 per share, was already in that range. So the world’s largest company hardly boosted confidence for the upcoming back-to-school and holiday shopping seasons.

While all eyes have been on Wal-Mart, I’ve noticed that another big retailer has been performing above expectations: Kroger

. In fact, Kroger shares, at $30, have risen 9% in the past three months, outperforming Wal-Mart, Safeway

and Costco

. Citigroup reiterated its “buy” rating this week, saying “We believe Kroger is best positioned vs. other supermarket competitors in the current weak environment.”

Meanwhile, Morgan Stanley likes Kroger because of its “value proposition” — referring to the value of the shares and of the goods in the supermarket aisles. A recent pricing survey in six major U.S. markets — Chicago, Dallas, Los Angeles, Denver, Baltimore, and Fairfield, Conn. — showed Kroger No. 1 among conventional supermarket chains in terms of lowest everyday prices (which of course was Wal-Mart founder Sam Walton’s mantra.) Like Wal-Mart, Kroger uses private label to gain a major edge on pricing. And even though Kroger’s prices don’t match Wal-Mart’s, Kroger’s private-label discount was generally 38-48% below its national-brand options, according to the Morgan Stanley survey. (Other chains, meanwhile, sell private-label products at prices 16-35% below the big-name brands.) Kroger can afford such aggressive pricing because it’s more than a retailer: It manufactures almost half the private-label groceries it sells, allowing it to cut out a level of distribution.

So who’s the absolute lowest pricer out there? Costco. And the highest, according to the Morgan Stanley survey? Safeway. Clearly, that’s one reason Safeway reported disappointing results last quarter and reduced its full-year sales forecast.

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