Q4 2019 Earnings Call
[music].
Good morning, and welcome to the Kroger Company fourth quarter 2019 earnings Conference call.
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Please note this event is being recorded.
I would now let's turn the conference over to Rebecca Managing Director Investor Relations. Please go ahead.
Thank you Barry.
Morning, and thank you for joining us.
Before we begin I want to remind you that today's discussion will include forward looking statement.
Want to caution you that such statements are predictions and actual events or results could differ materially.
Hey detailed discussion at the many factors that we believe they have a material effect on our business on an ongoing basis is contained in our FCC filings.
Kroger, saying no obligation to update that information.
Both our fourth quarter press release, and our prepared remarks from this conference call will be available on our website at <unk> IR Dot Kroger Dot com.
After our prepared remark, we look forward to taking your question.
In order to cover a broad range of topics as many of you as we can we ask that you. Please limit yourself to one question and one follow up question if necessary.
I will now turn the call over to Kroger's, Chairman and Chief Executive Officer broadening the smaller.
Thank you are about good good morning, everyone and thank you for joining us.
With me to review Kroger's fourth quarter, and 2019 fiscal year results as Chief Financial Officer, Gary Miller Chip.
We were pleased with our 2019 results and improving trends in our supermarket business.
As a result of our customer obsession and renewed intensity around operational excellence, we delivered on our commitments for identical cells without fuel adjusted FIFO operating profit.
Cost savings and delivered over $100 million, an incremental operating profit through alternative profit streams in 2018.
For the full year 2019, we delivered on the total shareholder return or TSR model that we outlined at our Investor day, and our position to deliver on our TSR model of the future.
Where you're using the power of Kroger stable and growing supermarket business to create meaningful incremental operating profit.
Through the alternative profit stream businesses.
Positioning our business for long term growth the generates consistently attractive total shareholder returns.
We continue to generate strong and durable free cash flow as reflected by the fact that the company is reduced by $1.1 billion over the prior four quarters.
And continues to increase the dividend to create value for shareholders.
In total reread, we returned $951 million to shareholders in 2019.
Our confidence that we can deliver even stronger TSR and the future is guided by our strong free cash flow and sustainable net earnings growth.
By executing against the restart Kroger framework, we're repositioning our business by widening and deepening our competitive most.
The four main areas of restock Kroger framework redefined the customer experience partner to create value develop talent and live our purpose continue to be a top strategic priority for us.
We're continuing to enhance the customer connection with investments in our competitive moat. Some today.
Which our product freshness and quality, our brands and personalized rewards.
And our competitive mode of tomorrow, the seamless ecosystem, we are building.
Fresh continues to be an important driver of cells for Kroger.
Our fresh departments drive trips loyalty and gross margin.
Again, our produce departments strong identical sales for the quarter demonstrated how how our store teams are focused on improving everyday execution in ways that are highly relevant to our customers.
Our fresh for every one campaign has been well received and is driving significant improvements in marketing effectiveness.
It is also driving more trips tour seamless ecosystem in store and online.
Our brands achieved its best year ever.
Exceeding 23.1 billion in cells.
We introduced 758, new our brand items in 2018.
Which helped drive strong year over year sales lift across our portfolio brands.
Since its launch in 2013 simple truth has become the leading natural and organic brand in the country.
With annual sales exceeding two and a half billion dollars in 2018.
After identifying plant based foods as a key food trends well before 2019, we introduced a simple truth plant based collection in 2019.
And that launch is off to a strong start.
The simple truth brand expanded into plant based meets with the merge grind and patties in January.
And then only one month these products ranked third in the category for the entire fourth quarter.
Our private selection brand eclipsed $2 billion and sells for the first time.
The Kroger brand exceeded 13.7 billion in cells.
Capitalizing on product development around key customer trends like go global and regional flavors.
Kroger continues to invest in digital as we build a seamless ecosystem that combines the best of the physical store experience with the digital customer experience for customers.
This is where customers are increasingly going to meet their needs.
We know our customers value the greater convenience. This provides and our data shows it's an essential component of driving overall loyalty.
Digitally engaged customers not only drive growth through our digital motel modalities. They also helped drive brick and mortars sales growth and share of wallet as well.
Providing our customers with the ability to have anything anywhere any time from Kroger sets us apart from a large segment of our competitors and we will drive loyalty.
As well as our long term growth and margin expansion.
Our approach to partnerships the simple, but not simplistic.
We think they were best when the two of US can do things together that neither of us could have done alone.
We're roughly a year away from our first fully functional customer fulfillment center with a condo in Monroe, Ohio.
These facilities will accelerate our ability to provide customers with a seamless experience.
In a much more cost effective way.
We continue to be excited about the partnership.
As we've shared previously we believe ocado its value as a partner is not just on its current capabilities.
But also how quickly the company is able to innovate and serve rapidly changing consumer market.
We continue to rollout our plan and you should not assume just large facilities.
We're designing a flexible distribution network, combining this aggregated demand and proximity of our stores medium sized facilities enlarged facilities.
Our network will flex as demand matures and the Optionality will allow us to fulfill same day or next day delivery or pick up.
And that customer or store replenishment.
As America's Grocer, we continue to invest in our associates as part of Restock Kroger and has made significant investments in our associate wages.
The investment investments Kroger is making in human capital is putting more money in our associates product pockets today.
Our investments in associate wages has increased krogers average hourly rate the $15 an hour in 2019.
And with our comprehensive benefits factored in our average hourly rate is over $20 benefits that many of our competitors don't offer.
We are working hard to ensure that we have the right talent teams and structure.
In the right focus areas in our core supermarket business.
And our alternative profit businesses.
Our focus is on developing training and promoting internal talent.
While at the same time higher hiring season to food industry executives to drive our retail supermarket business.
In addition to investing in America American workers and communities Kroger's also leading the effort and hunger and the places we call home.
And eliminate all waste across the company through our award winning zero hunger zero waste social impact plan.
We made this bold commitment rooted in our purpose because we fundamentally believe that customers associates and investors are increasingly just choosing where to shop work for and invest in companies that are purpose, driven and are actively making the world a better place.
And these waves restock Kroger is the right framework to reposition our business to create value for all of our stakeholders, both today and in the future.
Our focus on the strategic drivers is expanding kroger's competitive modes and will drive total shareholder return in 2020 and beyond.
And now I will turn it over the Gary for more details in the quarter financials Gary.
Thanks, Rodney and good morning, everyone.
I'd like it started I'd like to remind you at the key themes, we shed during our Investor day.
I'm model is built upon a strong enjoyable base driven by our retail supermarkets fuel and health and wellness businesses.
It begins with a customer and I've session with increasing customer loyalty.
Our intensified focus on execution on continued improvements in the value and experienced we deliver for our customers drive increased identical sales about fuel costs I stole and digital ecosystem.
To drive sustainable sales growth, we continue to invest in areas of the business that are important to our customers. This includes ongoing investments in talent price digital and store experience with an even greater emphasis on a competitive moves fresh I Browns and personalization plus the may we are in the process.
The building a seamless ecosystem.
We also committed to be very deliberate in balancing these investments with disciplined execution of cost savings the simplify our business.
Our full year 2019 results demonstrated clear progress towards delivering on this model and generating consistently strong and attractive total shareholder returns.
Denticles sales without fuel grew 2% in 2019.
While first quarter results came in below identical sales guidance range the balance of the yeah came in at the top end about guidance at 2.25%.
Adjusted five type operating profit to $3 billion came in at the top end about guidance range and demonstrated the strength of our multi faceted business model with industrywide retail pharmacy gross margin headwinds offset by strong feel results.
We demonstrated financial discipline by balancing investments in our customers associates and the development and I've seen this ecosystem with significant cost savings.
This was evidenced by our improvement in energy in a range of 29 basis points more than offsetting our investment in gross margin rate is 23 basis points during 2019.
We achieved over $1 billion of cost savings in 2019 on top of the $1 billion savings in 2018.
We also have clear line of sight to $1 billion of incremental savings in Twentytwenty.
These savings are being achieved through improved productivity and automation.
Elimination of waste improved sourcing of goods to sale and because not every sale.
The administrative efficiencies.
We also achieved over $100 million incremental operating profit Trimble essentially profit streams in 2019 and delivered five five net operating profit growth within after 8% to 5% target range Chad at Investor Day.
Adjusted earnings per share came in at $2, a 19 cents the middle of that guidance range.
Finally, we generated strong adjusted free cash flow, which we have used to pay down debt and bring our leverage ratio. Two we didn't catch all get range items reintroduced share repurchasing in the fourth quarter.
Now I'd like to provide commentary on Craig's fourth quarter results.
We delivered fourth quarter adjusted EPS of 57 cents per diluted share of 18.8%.
LIFO charge for the quarter was $36 million compared to a LIFO credits of $10 million for the same period last year.
This increase was driven by higher inflation in dry grocery pharmacy and diary.
I corporate tax rate for the fourth quarter was 18.2% compared to 20.8% for the same period last year.
This decrease resulted from an increase in tax deductions.
Adjusted FIFO operating profit for the fourth quarter was $758 million up 20.7% compared to $628 million in the fourth quarter in 2018.
Kroger and post identical sales without fuel of 2% during the full of quartet.
Several departments outperformed and how supermarket business, including produce key beverage categories pharmacy and natural foods.
The underlying trends in the business was strong.
I'm back in December identical sales were consistent with the quarterly performance.
As expected January isn't January was negatively impacted as we lapped incremental snapple is in the market in January 2019, and we experienced milder weather this year.
February bounced back nicely and performed in line with our expectations and slightly ahead of the trend in the third quarter on November and December.
As a reminder, we do expect snap to positively impact the first quarter twentytwenty as we'd like to 15 basis point headwind from prior year.
We expect identical sales and twentytwenty to improve over 29 team as we drive increased customer loyalty to refresh our brands personalization and seamless.
Digital contributed approximately 75 basis points two identical sales without fuel.
Hi, good pickup and delivery continue to grow at a faster pace than our overall digital growth.
During the 2019 holiday season, we offered a limited time free pick a promotion in select markets.
Customers responded positively to the promotion and we were pleased with a full of course, a digital sales growth of 22%.
Gross margin was 22.1% to sales for the full quota the FIFO gross margin rate, excluding fuel increased six basis points.
This increase resulted from improvements in cost of goods accelerated alternative profit streams and cycling of investments in the fourth quarter of 2018, partially offset by investments in price and personalization continued industrywide lower gross margin racing pharmacy and growth in the specialty pharmacy business.
Our associates continues to do an impressive job managing shrink which improved in the fourth quarter compared to last year. This represents a 10th consecutive quarter of year over year shrink rate improvement.
While retail pharmacy gross margin continued to be a headwind in the fourth quarter retail pharmacy remains an important pocket our strategy and continues to generate good returns and strong customer loyalty.
I would you in a cost as a REIT to sales excluding fuel what an adjustment items decreased 79 basis points in the quarter.
Part of this was due to cycling of investments in OGE unite made in the fourth quarter of 2018, plus broad based improvements in restart probably that savings initiatives.
We were pleased with our ability to deliver energy in any improvement above the level of gross margin investment as a REIT to sales in 2019, and we expect that balance to continue in twentytwenty.
Fuel was an important part of our strategy to drive customer engagement.
Our loyal customers received hundreds of millions of dollars in fuel rewards in 2019 in the form of price discounts at the pump.
The average retail price to fuel was $2.58 this quarter versus 2034 cents in the same quarter last year.
Our sense pick Allen fuel margin in the fourth quarter was 33 cents compared to 34 cents in the same quarter last year.
Fuel is a great example of Kroger sourcing teams continuing to improve buying practices. This allowed us to achieve improvement to fuel cost of goods in the fourth quarter.
Alternative profit streams contributed an incremental operating profit of more than $100 million in 2019.
Media and Craig a personal finance continue to do the primary drivers of growth.
Brands continue to invest in creditor precision marketing because we twice the loop between media exposure and still and digital sales to make brand advertising more addressable actionable and accountable.
An annual survey by the path to purchase Institute gave a strong ratings for effective targeting measurement sales growth and ROI.
Most recently, we became the first retail media platform to be awarded platinum certification by the trustworthy Accountability group for meeting guidelines to improve transparency on prevent AD fraud malware and piracy.
We're committed to being the most transparent meet your organization I'm, making the entire digital media ecosystem, a safe and effective investment for CPG brands.
I was wrong you mentioned, we continue to invest in our associates as a key part of restock Kroger in a variety of ways, including investments in wages training and development.
We ratified new labor agreements with the U.S. CW covering associates in Memphis during the fourth quarter.
We are currently negotiating with the U.S.C. diff, what do you have contracts covering store associates in Las Vegas and Houston.
Looking ahead, we have several major negotiations in twentytwenty, including contracts with U.S. CW for store associates in Dallas fit for less associates in Southern California on Fries associates in Arizona.
Our objective and every negotiation is to find a fat and reasonable balance between competitive costs and compensation packages that provide solid wages good quality affordable health care I'm retirement benefits for our associates.
We strive to make our April benefit package relevant to today's associates.
Our financial results continue to be pressured by health care pension costs, which some of that competitors do not face we continue to communicate with our local unions and the international unions, which represent many of our associates on the importance of growing our business in a profitable way, which will help us create more jobs and career opportunities and enhance job security fire sale.
She is.
We continue to generate strong free cash flow I'm, not being very disciplined in how we deploy it to deliver strong and attractive type of shareholder returns. We are committed to investing in the business to drive profitable growth maintain our current investment grade debt rating on return excess free cash to invest as via share repurchases.
The growing dividend.
2019, Kroger, which used on net total debt by $1.1 billion, bringing on net total debt to adjusted EBITDA within our target range. We also returned $496 million to shareholders in dividends and repurchased $400 million of shares in the full quota of 2019 under our 1 billion dollar board authorized.
Nation.
I'm, sorry, Investor day, we committed to continue to apply a rigorous and disciplined approach to capital management and we are focused on ensuring that capital projects that had a strong returns.
Consistent with our approach in 2019, the majority of our investments in Twentytwenty will be allocated to driving profitable sales growth improving productivity and building out our supply chain and seamless ecosystem.
We also committed to effectively manage Apple phone you assets to improve ROI see over time.
As part of our review process and the full quota, we recognize any impairment charge relating to the plan, placing a 35 stores across the footprint in twentytwenty.
This is reflected in the $52 million of transformation costs recognized during the full quota.
As we've shared with you previously Kroger made the decision to divest our interest in lucky's market in the third quarter of 2019, and we took the appropriate impairment charge based on the information available at that time.
Subsequently the decision was made by Lucky as markets to file for bankruptcy in January which led us to 40 right off the value of our investment on Deconsolidate lucky's market from a consolidated financial statements.
So this resulted in a noncash charge of $174 million in the fourth quarter.
Grogan maintains liabilities associated with certain property related guarantees that will result in kroger, making payments to settle these overtime.
These items I've never effect on net earnings per diluted share or adjusted free cash flow guidance to twentytwenty.
Turning now to guidance to Twentytwenty building on I'm momentum in 2019, we continue to expect identical sales without fuel of greater than 2.25%.
We also continue to expect adjusted FIFO operating profit of 3 billion to $3.1 billion Ams adjusted net earnings per diluted share to range between 2030 cents at $2 a 40 cents.
Looking at the cadence of EPS growth in Twentytwenty, we expect the first quarter to be below our annual EPS growth range of 5% to 10% as we cycle real estate gains in the first quarter of 2019.
Overall I'm encouraged with momentum created in 2019, which provides a solid platform from which to deliver on our commitments in twentytwenty.
Now I'll tell you talked about me.
Thanks, Gary before we invite your questions I'd like to say a few words about the Corona virus.
From a financial standpoint, it is too early to tell the effect on our business. It is not included in our guidance and while it is obviously very early for this per public health event in the United States, we're not seeing anything so far that would cause us to change our guidance.
From a business prepared the standpoint, we have established and internal task force that is activated our pandemic preparedness plan with a focus on our customers associates and supply chain.
We generally believed that we have limited supply chain exposure in China is the majority of the products we source this domestic.
We certainly feel for those in America and around the world who have been affected.
The health and wellbeing of our associates, our customers and our communities is kroger's top priority.
Always being there for our communities is part of our heritage and especially in times of uncertainty.
We believe everyone deserves to have access to affordable fresh food.
Returning now to our business results I want to stress that restock Kroger is the right strategic framework to deliver both on our 2020 guidance and disposition Kroger for sustainable growth and total shareholder return.
Now we look forward to your questions.
We will now begin the question and answer session.
To ask a question you need press Star then one on your Touchtone phone.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Our first question comes from Robby Ohmes with Bank of America Global Research. Please go ahead.
Oh, Thanks for taking my question good morning Accordingly.
Couple of quick ones first just on Clicklist with the the kind of fee waiver and the response to that and maybe some color you know what happens after you put the feedback in.
And also what are your sort of intermediate term thoughts on.
Keeping a fee versus you know getting rid of it like some of your competitors seem to have that that would be one and then just on two other quick ones just the pharmacy expectations for 2020 in the fuel profit.
Assumptions in your guidance for 2020, maybe just give us some color. So we can think about those things in our modeling. Thanks. Thanks Robbie.
It is Gary mentioned, you know when you look at the.
Digital promotional offer on the waived fee overall, we're happy with what we learn we did engage with some new customers.
It's important to remember that this was a test among many many tests that we continue to do and overall, what we're focused on is really how to create a seamless experience.
In terms of going forward.
I wouldn't be comfortable sharing our exact plans because obviously that will share tell our customers are competitors excuse me.
You know what we're planning to do.
And like the customer behavior was consistent with what we expected they were happy and the result, since then I've been consistent with what we expected it is as well and overall I think it's always important to remember what we're really trying to do is build up a seamless experience and what we find is the better job.
We do on creating that seamless experience creates a deeper and deeper loyalties strategy.
Terms of pharmacy expectations and fuel Gary I'll, let you answer both of those Joel Thanks Robbie.
Thanks for the question Robby. So yes, you think about that the model Twentytwenty I'll make or if I back out little bit to some of the things that we talked about at Investor day, we very much to look at the overall customer eco system across our food and grocery business at retail pharmacy business and also the fuel business as an overall, how do we manage those multifaceted parts of the model.
And I think as you look at our performance in 2019 as I've said in some of the prepared comments, we feel like it's a really good demonstration of how we were managing that model, where really the pharmacy headwinds that we saw in 2020 2019 were fully offset by the fuel benefits that we saw and then the the instead of foundational I food and grocery.
The business was was pretty strict stable within that environment I would say that in as we look tools twentytwenty will be managing the business and a very similar way I. When you think about our overall guidance to twentytwenty, where essentially expecting that ecosystem to be relatively stable overall and alternative profit will drive us towards the operating profit growth that we found check for the.
Full year within that guidance, we do expect that I pharmacy, we will continue to have some headwinds nothing to the extent that we saw in 2019, we think the the gross margin structural challenges will continue and twentytwenty, but as a team has done a great job and continuing to look for opportunities to take out costs.
So why that add value for the customer our associates and looking for ways to improve our cost of goods, where we have control over those items and so we would expect just to see less of a headwind dose, albeit still somewhat of a headwind from pharmacy and Twentytwenty I. We would also expect fuel obviously too I went to start to normalize and so probably something.
Thing of a headwind there within the overall model and really the way that we cycle those I will be through the strength of continuing to improve our I'd sales in the coal on the billion dollars of cost savings that I talked about overall within the model. So overall, we think about it very much as all those moving parts, creating a relatively stable coal business from an operating profit point of view.
And Twentytwenty and alternative profits driving the growth in yet.
Series last point on the incremental profit from alternative profit is important part thing to remember as well and we you know as we shared in our guidance, we expect it the range somewhere between 125 and 150 million.
That's very helpful. Thanks, so much guys. Thanks Robbie.
Your next question is from Ken Goldman with JP Morgan. Please go ahead.
Hi, Good morning, Thank you I'm wondering.
Two from me.
First.
I wanted to I know, it's way too early to for you guys just sort of quantify the corona virus impact, but they won't stop you from trying to ask I. I. Appreciate you know I would appreciate any help you can give can you at least directionally talk about whether it's been a benefit so far in the last couple of weeks I mean Campbell soup yesterday.
Talked about.
How they are experiencing better or worse in the last week or so from some their customers.
We've certainly read about stock outs of water and so forth at least Directionally do you think it's been somewhat of a help so far or is it really just way too early to say for sure.
Personally and Oh, what Gary if he disagrees I just think it's way too early to say for sure.
And you know the key thing as we as I mentioned before as we want to make sure. We're there.
For our communities are customers and our associates.
And the the comments that Campbell's and and others have said certainly we would see an increase in volume in certain categories.
And if you think about a its you know a lot of the basics and things that people would need to be able to keep and maintain their health and those things, but its oh you know so early in the process in the United States and the only pattern that we would have any idea on how to look at it would.
China, because there is the most fours developed in terms of going through the the impacts.
And you know are all of our teams our stores or supply chain team our procurement folks are.
You know incredibly focused on making sure that we stay and stock on those critical items in partnering with Cpgs and our own so supply chain.
To replenish that I don't know Gary anything you'd want to add to that yeah. I was completely agree with your comment relative I think it's it's really too early for us to really have a sense of how customers overall behavior will change and what the impact will be as the situation. Obviously evolves in the U.S. market I guess just to build on a couple of points can with that the data points that we.
We do see today as I mentioned in the prepared comments on February was generally in line with what we've expected for the period.
First month, if you like if I knew you asset we didnt see anything dramatically different from what we would have expected during that time period certainly the trend is improve dive a slightly into what we saw during Q3 I'm than November December. So we would love to see that after January was a I'm on that we knew would be a tough want to cycle.
As Rob you mentioned and the last few days I think you see more about the in response to the the meet your activity and some of the advice out there in the market of custom is starting to spend more on things like water on hand, sanitizer and so a paper and then some of that maybe that the Boston is in seats that you might expect just.
Based on the guidance, that's being given to consumers in the market. So there's certainly been heightened activity in that regard, but how that plays out and how it impacts your April shape at the white customers are behaving shop, I think it's really it's really that your but nothing in the last few days I would say does anything different than we would have seen this is what we expect it and how that plays out our longer period of time is really.
I think impossible to tell.
Totally understand I appreciate that can I ask a very quick follow up depreciation and amortization I seem to be a little bit higher than most people were looking for this quarter. Gary can you help us understand that or think about how to model that for 2020, what numbers do you have in your internal models, Yeah show up and thank you for that question, yes, It say it.
As an area I can buy we saw some lumpiness Jordan. They yeah part of that is to do with the fact that as we've been dynamic changing our capital allocation. The average life at some of the investments that we make in technology look different from some of the traditional investments that we would have made in a traditional store remodel or a new store.
Right now, we still investing in those areas, but that makes it certainly I changing over time.
As that normalizes out we would be looking at a range of a 3% to 5% as a sort of an annualized increase in depreciation to kinda give you a more of a big picture perspective on how to think about Twentytwenty. If that's helpful.
Thanks, so much.
Thanks, Ken.
The next question is from Rupesh Parikh with Oppenheimer. Please go ahead.
Good morning, and thanks for taking my questions. Good morning, guys wanted to go back to the common Friday, you made about ocado and the flexibility to just have to not just assume large facilities. If you can just talk more about the flex. What are you guys have to I guess that different facility size and it just how you guys are thinking about that flexibility going forward. Yeah. You know you know as we've talked about before we really do.
We believe it'll end up being a combination of our physical stores.
<unk> sheds that are small medium and large size the ones that we've announced so far had been all a large size, but over time Ocado continues to.
It's been significant money in R&D and continues to push so we would expect it will be a combination of.
ER store based model.
Smaller type facilities and bigger type regional facilities, and Ocado will be a critical partner in that overall ecosystem.
I am.
<unk> allow it by having those combined it will also allow us to have the best cost of goods coming into the.
Various sheds and using the total assets that we have today.
So we feel really good about the up the pieces of the puzzle that we're putting together and we really think the cuss and it will support the ability to do both same day and next day and what we find his customer in some cases customers like same day, some things they like next day.
But and we're excited.
We're really looking forward to the facility in Monroe opening and the second facility in Florida will open soon after that.
Great and then just one follow up question. So you I guess you out the closing of 35 stores, but it's the right way to think of the gains going forward or just maybe just walk us through I guess the rationale for the store closures.
Sure. Thanks for the question you know, it's I think I've talked a little bit of asset at the Investor day in many different pad comments, what we're really focused on is.
Taking a step back and making sure that they think about how is that the overall portfolio of assets are performing how do we make show aware really setting ourselves up in making the right investments to accelerate and grow the business, but also looking where we have opportunities to.
Optimize the portfolio and to drive obviously ROI see over a period of time I would say that this is very much I sort of a standalone review that we've taken a step back and said look at stores were and the average to give you. Some context surrounded the average store age. It's about 28 years old. So these in many cases older stalls that geographically.
Spread across the country said on sort of because they cannot markets, but he's focused on is very much more about looking at Apple folio and ready, making sure that as we see by the customers going where we invest that dollars to Verde drive and support that customers and how we continue to evolve the whole ecosystem that that Rodney referred to in his opening comments, just making sure that were.
I really being disciplined and investing where we see the future growth in the business and Dan. So it's one of those things that just as positive as we manage the business on a look for ways to continue to improve and optimize a where we're looking to be right to liberty, making those decisions.
Great. Thank you for all the color. Thank you.
The next question is some Kelly bania would be ammo capital markets. Please go ahead.
Hi, good morning, Thanks for taking my questions.
I don't want to talk about I know I'm, just alternative profits and.
Really where trade promotion dollars ended up pretty year, and we see in your conversations the CPG just curious if you're finding that there is not any cannibalization. So our plan for cannibalization says this matures.
And just just updated thoughts there.
I'll talk a broadly and then I'll, let Gary get into the specifics.
It's one of the reasons that we partner on the media side of the Cpgs and you know one of the things that we have a very open and transparent relationship but going both ways. So we would we don't want to spend money on media.
At the CPG isn't getting a return for it and that was the reason why we thought it was so important.
To get the a.
Platinum certification from the trustworthy Accountability group is that we want to make sure that when we invest.
The CPG money that we're able to show that they get a return for it and by making sure that people are getting return that's the best protection that make sure that they're just not moving trade dollars over and we tell the cpgs that doesn't do us any good if you just move the trade dollars over what we're trying to do this provide something that you can.
Good in the marketplace from immediate standpoint.
We're getting great.
Feedback from the CP Jeez, we have incredibly high retention rate and many cpgs continue to expand.
The the amount of money they spend with us.
Gary let you get a little bit more into some of the detail Joel Thanks, Rodney and obviously it would agree with everything you said that I think one of the key things that the team is focused on is really working collaboratively across ashwin akins team that need to that the media group and then joke recyclers team that leads on merchandising capabilities to make sure that we really are managing all of them.
Moving pieces together and I would say, we feel very good around how those relationships are working to make sure that we're capturing a the dollars and ready helping support that CPG partners to grow that business effectively through the work that we're doing the merchandising group and also through the alternative profit streams with the media business.
Wouldn't say that we see anything that's causing us to believe that that's the latest is being managed that they are very much discrete buckets that a generally being allocated to particular activities and we feel very positive about the progress that we're making that on how we see <unk> I would probably characterize is how we see choking cost of goods.
And how it flows through to the gross margin I would say, it's one of the reasons that we called it acting in the quarter earnings release of you know, we certainly continue to invest in price and personalization frac customers, but the combination of cost of goods benefits and alternative profit streams.
Only all set back in terms of the impact on gross margin and hobbies and why we were able to see a solid performance on gross margin trend quota.
Okay. That's that's very helpful and maybe just since we were on gross margin a little bit maybe just another question on on pharmacy, So sounds like the headwind there should moderate a little bit from last year as they look into 2020, but what is that what does your long term expectation there.
This is you know ever go away or is this kind of the new norm.
I think certainly, but I I our assumption the model is that we expect I continue to see pressure in certain parts of the way. The pharmacy business is structured AFE focus is already making sure that way continue to improve our operation in a way that in shows that in addition to all the great things that I pharmacy based businesses for us today around.
Driving overall customer loyalty and delivering a great experience in the store for customers that we continue to evolve the way we think about the business model I mentioned some of the things Im one of the earlier comments around how we're taking cost out of the model where that makes sense and doesn't create value for our associates working in that part of the business offers customers a way.
Launch the number of new services like the the crisis pharmacy program and that allows us to be obviously, they've got more value for the customer customer I'm, sorry, but also we had a influence more of the dynamics of how the profitability books in the marketplace and two active ready I've done in a more value for customers through that.
Program, and then I think that the third piece that we talked a little bit it back to the other thing kind of previous cold days, we truly believe that the power of our data on the April relationship we have with a customer.
Potentially opens up opportunities to develop new revenue streams in connecting food to how we deliver eye health and wellness services in the store so thinking about the trend towards food as Madison and how can we connect those relationships even more clearly to help our customers live I need more health anywhere they want to do that but also to connect into that the health care system and and helping.
To take out some of the cost and complexity and not model and generate new revenue streams that we are actively testing where food is actually written a under a prescription and helping people are live healthier.
When you look at all of that together, we continue to have a great script count growth as well, we really think it's our pharmacy teams and their connections.
With the patients that's creating that deeper relationship and as Gary mentioned when you look at the overall ecosystem.
Half of health care costs can be affected by the way people eat and we really believe with our data we have the right to help people eat better.
Thank you thanks.
The next question is from Edward Kelly with Wells Fargo. Please go ahead.
Hi, good afternoon, guys and I'm.
Solid quarter I My question around I'm on my My real question for you is if you know running if we take a step back and just to assess the last year and the evolution of the state of the business your business your stocks going from $30 to $20 back to $30.
This quarter was in the corner right FIFO EBIT, even if you back out the one time you know the benefits of one time lapse was up right. Despite.
A few lap.
But you had some tough quarters in core grocery I guess have you finally turned the corner here you know what level of confidence do you have just kind of curious as to your big picture thoughts on sort of like the last year, how things have evolved and your confidence level on the business than where it is right now.
Thanks, Ed if you look at overall anyway, as we mentioned before a if you look at the momentum during the year, we felt really good about the progress a momentum during the year.
And that's in terms of identical sales and if you look at the operational execution.
I think Mike in the whole team.
Really have done a great job on those areas, where we're really taking care of the customer we continue to aggressively invest in the seamless experience.
And if you look at the alternative profit it continues to come a as we expected it would.
So you know that's but when you look at all those things together is what gave us confidence.
Continue to support the guidance, we gave in November on EPS of $2 in 30 to $2.40. We expect the business to continue to generate good cash strong free cash flow while at the same time continuing to aggressively invest.
Capital and the seamless experience so.
When you look at all those things together as you know the last two or three years, we've been working hard on transforming our fundamental business model and we feel like we've made significant progress on that and continue to invest in the future from a digital experience. So.
We're excited about where we are we're even more excited about where we're headed.
Okay and I just wanted to ask your question about you share repo and expectations for.
2020.
Especially Q1, I mean Q1, two big cash flow quarter seems like share repos back on historically, you bought a lot of stock in Q1.
Just thoughts on on how we should be thinking about that in coming years remodeling.
Yeah. Thanks, the question that.
So obviously I mentioned a little bit around this in the prepared comments, we committed that as we continue to see strong free cash flow generation, which is a core part of our total shareholder return model. We are committed to continuing to add to buy back stock as part of the the model as you know we had a billion dollar authorization from the board.
And as long as we continue to deliver on the at the performance of the business that we expect and generate strong free cash by that we've guided to during the year, while also maintaining a debt to EBITDA ratio within that target range to support our commitment to an investment grade rating, we would expect to be continuing to add to buy back stock within.
That the overall authorization that we have I would say that said that the way that were approaching it is very much in a in a structured right. You know went up specifically trying to tighten the Bakken in some ways much more based on to a great approach to how we determine and look at the intrinsic value of the stock and and then we'll put a grid in place to.
Make sure that over time as our opportunities to add to buyback we will be will certainly be executing on that plan throughout the year.
Great. Thanks, guys. Thanks, Ed.
Your next question is from Christopher Mandeville with Jefferies. Please go ahead.
Hey, good morning, I'm wondering I guess as it relates to some of the expense control measures found within me stock can you flesh those out a little bit more specifically.
You know how much of this is related to possibly some head count reduction that the store level or even some reduction in store hours for that matter anymore I bring it up because that we happened hearing certain region tempting and.
Some layoffs at the assistant store manager level, and there's been some reductions in hours of operation. So maybe you could just going I'm talking about that a little bit and then to what extent.
Maybe some of those reductions are being offset by wage increases that you're you're pointing 40 or so.
Sure. Thanks, Chris Yes, though as we mentioned in some of the prepared comments you know that the quota for result, obviously and did include some cycling of increased investment that we made in Q4 2018 and so.
Some of that is certainly expectation I know, we guided to to that as part of what we shed and they Ah yes expectations. When we shed what we felt the cadence will look like flat 2019.
We've already seeing the improvements across a broad wave of activity across restock, Craig I listed out many of them in the prepared comments, whether it's some of the biggest areas would be in goes not for resale as example, where sourcing products better and where managing to really make sure that were finding opportunities to be more.
Efficient in the way that would buying and I'm joining the dots across all the different pieces of procurement across the organization I'm certainly were leveraging technology and automation to make sure that were taking work away where it doesn't add value for the custom at good example that might be in cleaning where its its something that can be done more efficiently.
And allow our assays just a ready focus on serving the customer and doing what the customer ready values and then of course, we did announce last quarter that we did make some structural changes to ready simplify the work and how divisional offices to make sure that were again, putting our associates and talent closer to the customer in these key still a management roles and at the same.
Time, reducing cheap occasioning works that we can make decisions more quickly and respond and said the customer more effectively so I feel very good about it's a it's a good balance across the the way that were managing the cost base I'm certainly as we look at the performance of I still is one of the things that building on maybe probably is going to last question that was.
Asked around confidence in the model, where it was very excited about as we see asked stores continue to execute at a high level and continuing to deliver improvements in the fresh experienced a friendly experience an app in stock position on how we don't every home probably the pickup. So we're very focused on making sure astellas all are in a good place to be able to deliver on the experience that we know ACA.
He is looking for and some of those are the reasons why we feel confident because we're guiding to a higher I'd sales in and Twentytwenty because of the great work App store. So she is doing and delivering frac estimates.
Okay, and then just my follow up maybe a little bit too early but in the areas, where we've seen some of the natural organic not named Lucky shutter and then.
Oh, no he's pulling people out of the Midwest have you realize any benefits already or maybe you could you talk about how youre planning to be positioned to capitalize on this year being up for grabs thanks, yeah. Thanks, Chris.
If you look at natural and organic you know it continues to be one of the highest growing areas and we really think.
Something that over the years, our teams have done a great job on continuing to make sure. We have them. Most recent product things on trend. The example that I talked about in the prepared remarks, and simple truth implant based so for US we're incredibly excited about natural organic it's grown above the company average for.
Several years and we would expect it to continue to do that.
Anytime a mark to market share becomes available we're going to fight for making sure that we get our fair share plus some and we certainly feel good about what we're getting and will continue to focus on taking care of our customers.
Yes, when our associates are able to take care of the customers it turns out really well.
Thanks next question. The next question is from Simeon Gutman with Morgan Stanley. Please go ahead.
Thanks, Good morning, everyone, Hey, Rodney you mentioned on the free pick up that you were pleased with some of the customer satisfaction. I think can you can you tell us was it a reasonable assumption or did you assume that your business would accelerate offering offering that that feature and was that the case.
Your overall business grow because of it.
Yes.
It did pick up and as I mentioned, we did get us some new customers overall, it was kind of what we expected it to be and you know we did it. So we can continue to learn and I think the thing. That's important is at any point in time, we'll probably have 20 or 30 different types of tests going on and the key will be identiv.
To find those test when you put them together that create something that's not easily do that it can competitor can duplicate and really create something new for the customer.
One of the things it's always our strengths is our incredible stress on fresh product.
And our customers tell us that relative to our big traditional competitors, we scored very well and we think things like that in the service at our associates provide is equally as important.
Yeah, and I guess just checking on someone decides it looks like it's still being offered I think you may have mentioned you view not going to divulge if that's your strategy and just and just tied to it.
Ocado broadly and I guess, it's early but you're still to you still haven't opened the first facility but.
Do you think in this in this world of click and collect and delivery that this ocado model you could be able to offer the services for free as a as table Stakes and still have pretty good economics on on doing those type of Fulfillments.
Yeah, when you look at Ocado, ER and the combination of our physical existing physical stores.
We think we'll be able to offer the customer an incredible customer experience inconvenient.
Based on what they want.
The fee part won't be isn't the major driver of making the economics of that work or not.
And you know, whether we charge a fee or not will really depend on what's the market opportunity, but ocado is incredibly efficient.
Got it okay. Thanks. Good luck this year. Thank you. Thank you.
And our final question today is from John Heinbockel with Guggenheim Securities. Please go ahead.
Hey, Rob if you think about the $1 billion a cost saves right in the the core business ex alternative profit being flat. So that you think about that billion going to cover normal inflation and no DNA and then investments in the business would you think that would be a 50 50 split.
In in terms of how that billion get spend and then do you think there's another billion or you know more or less than 2021.
The.
Let's see.
I'm trying to do the math in my head as you were asking the question.
If you look we would certainly believe there's opportunities in 2021.
We really haven't done the indepth analysis for to be able to say what do I think the specific number is.
One of the things that I think is interesting on cost saves in process changes.
The <unk> them or we learn how to do it the more that we find.
So we would be very excited about continuing to identify opportunities to simplify our business and take complication out which every time, we do it saves money.
In terms of a we would I don't know that we would say 50 50, I guess, what we're looking to do is.
Im making sure that we deliver the TSR that we outlined in November at our Investor meeting and the cost saves along with.
Our continued improvement from our seamless customer experience in terms of that becoming a bigger tailwind all of that together as what allows us to be confident and make the commitments. We did on TSR, Gary any specifics that you would want to add nowadays I would agree with your points Rodney I think a intensive.
Cost savings as you mentioned it for me many of the opportunities that we still see out there around how we can continue to use technology more effectively and really simplify the design of the wants to make it easier for our associates to add to be successful in the role.
Now if that means is as you know John is where we often reinvesting that in other areas of the store experience with digital experience. So that net net it doesn't necessarily translate through to a total saving in cost because what were often doing is a redeploying those savings into new ways to either improve the experience. So it to meet the customer weather weather out so.
It is a a back to run these comments on the loss inflation assays, while same kind unclear.
Difficult as the World scale Blair. Your around you know what are the minimum expectations that the customer and where things like average wage going in the marketplace.
And just lastly, hey, maybe just talk to how the Walgreen partnership is ramping up on the procurement side and does that does that become a much bigger.
Driver of part of that 1 billion later this year and even bigger next year.
Yeah. Thanks, the question Johnny say, yeah, that's a good call actually that would be very true in the way you characterized it said, we'd really just them got off the ground with that part of the partnership as you know that the retail test that we have any market. It mapping going for some time and we've been pleased with the progress there and we continue to develop our thinking around you know how to connect more deeply with the customer.
And and fulfill all navtech convenient shopping experience that the group purchasing organization part of it is very much in its infancy stage. We've just started to to work on why the opportunities all they're not would certainly be part of the tailwinds into 2020, m. beyond in driving more efficiency and cost savings.
Thank you thanks John.
As always before we end todays call I'd like to share a few final comments directed to our associates.
And how we live our purpose every day.
Sure Associates. Thank you for everything that you do for our customers communities in each other every single day every single our of every day you.
You truly make a difference.
This difference makes People's lives better and this was obviously incredibly other than earlier this week when the devastating tornado touched down in Nashville.
I'm always amazed im proud to hear stories of our associates pulling together in the aftermath of events like this one story that we shared with me as.
Some customers that didn't have protection came to our store to seek self shelter inside of our dairy case when the tornado hit that's just one example.
The thing that's even to me more impressive is what our associates to what you do when your own families are personally impacted into all the work that you do to ensure our stores are open and serving our communities.
As I mentioned earlier on the call in regard to the threat of the Corona virus always being there for our communities is part of our heritage. This is kroger at our best when we come together and uplift our customers communities and each other thank you for what you do for everyone every day and thank you for joining our call.
Today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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