Q2 2020 Kroger Co Earnings Call
[music].
Good morning, and welcome to the Kroger Company second quarter 2020 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal that conference specialist by pressing the Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note. This is that is being recorded.
I would now like to turn the conference over to Rebecca Man as director Investor Relations. Please go ahead.
Thank you Gary Good morning, and thank you for joining before we begin I'd like to remind you that today's discussion will include forward looking statement.
We want to caution you that such statements are predictions and actual events or results could differ materially.
He can't discuss and as many factors that we believe they had a material is back on our business on an ongoing basis is contained in our FCC filings, the Kroger, saying no obligation to update that information.
Our second quarter press release, and our prepared remarks from this conference call will be available on our website at <unk> Dot Kroger Dot com.
This is obviously an unprecedented times and we're taking the additional that's providing more detail on current business trends. This quarter. So our prepared remarks made ran a little longer than normal.
After our prepared remarks, we look forward to taking your question in order to cover a broad range of topics from as many as you as we can we ask that you. Please limit yourself to one question and one follow up question if necessary.
Placemark October 20 cents on your calendar for free business update from Robbie Mcmillan, Gary Miller trip on our performance again, restock or her girls and how the pandemic is shaping our business model given the travel restrictions that are still in place. This meeting will be conducted virtually and we plan to host a full investor day in spring 2020.
The one hopefully in person to share more on the business outlook and key drivers of our long term growth model further details will be shared soon and we hope you will join us.
We'll now turn the call over to Kroger's, Chairman and Chief Executive Officer, fracking, the small and.
Thank you Rebecca good morning, everyone and thank you for joining enough.
With me today to review Kroger second quarter, 2020 result is Chief Financial Officer, Gary Miller Chip.
Each day I'm inspired by the work our incredible associates due to bring to life, our purpose to feed the human spirit.
I am proud of our dedicated associates, who are serving our customers when they need us most.
Our top priority is to provide a safe environment for associates and customers and as a pandemic continues we know that Kroger will continue to rise to meet the challenge.
Six months into the pandemic.
While there's still much we cannot predict we still we have a greater clarity in many areas across the business.
Since March we have invested more than $1 billion to both reward our associates and to safeguard them and our customers through implementation of dozens of safety measures.
Companies total covert 19 incident rate continues to track meaningfully below the rate and surrounding communities, where we operate.
We have learned to continue to learn a lot while keeping our stores and supply chain open and serving America during that pandemic.
We continue to play a key role in addressing the critical need to expand cobot 19 testing.
The Kroger health team facilitated more than 150000 covert 19 tests at walk up and drive through locations across the country.
Recently, Kroger health announced the expansion of Cobas 19 testing offerings at more than 220, the little clinic locations.
As a nation prepares to enter the flu season testing will become even more critical to help diagnose cobot 19 missed potential similar symptoms.
We announced earlier this week a comprehensive flu shot program designed to help Americans get their recommended vaccines during the cobot 19 pandemic.
Despite the pandemic related challenges, we delivered extremely strong results in the second quarter.
Customers are at the center of everything we do and as a result, we're growing market share.
Kroger's strong digital business is a key contributor to this growth.
As the investments made to expand or just digital ecosystem are resonating with customers.
Our results continue to show that Kroger as a trusted brand and our customers choose to shop with us because they value the product quality and freshness convenience and digital offerings that we provide.
While we delayed certain cost saving initiatives in the first quarter as of the close of the second quarter, we're back on pace to achieve them.
I continue to be proud of the way our associates have adapted and adopted.
To the new ways of working during that pandemic to continue to achieve strong results.
We are more certain than ever that just strategic choices and investments made through restock kroger to execute against our competitive modes fresh our brand personalization and seamless.
I have positioned us that meet the moment.
We're also physician to deliver.
2020, and beyond for our customers associates and shareholders as we believe a number of impacts of co, but we'll be structural and lasting.
Our data insights show customers are rediscovering their passion for cooking at home.
And have an aspiration to eat more healthy foods as a result of cobot.
When we talk to our customers they tell us they plan to continue to prepare and eat more meals at home.
As children returned to school met many families are telling us they plan to make breakfast in the morning.
Apparel lunch for their children to take school.
As we talk to other companies across America. We believe reach returned to work will look very different with many employees working part of the week from home.
And finally, while the full economic impact of Cobot 19 is yet understood.
Our data shows that during the periods of lower economic activity, we see a structural shift from food consumed away from home to food consumed at home.
All of these factors combined lead us to believe there will be more meals eaten at home or prepared at home for the foreseeable future.
Now I'd like to walk you through some examples of our competitive boats have positioned us for growth in the short and long term.
Even before that pandemic, our digital business had become a tailwind.
The Pandemics certainly has accelerated customer preference for seamless offerings.
Our customers are increasingly turning to our ecommerce solutions for their grocery and household essential needs.
Many of our customers ordering ordering groceries online for the first time as a result of cope with 19.
And the majority of them tell us they plan to continue to do so in the future.
Kroger began investing in digital several years ago to build a seamless ecosystem that would deliver anything anytime anywhere.
As a result, we have over 2100 pick up locations and 2400 or delivery locations, reaching 98% of our customers with a seamless customer experience.
That combines the best of our physical stores with digital.
Kroger was the first integrate pickup and delivery into one seamless experience.
These investments, where especially timely as customer adoption of pickup and delivery has grown significantly during that pandemic.
Krogers digital ecosystem continues to expand and customers are increasingly engaging with us.
For example, home chef is growing incredibly fast.
No doubt accelerated by the food at home trend that we believe as a structural change.
We also announced that Kroger ship will expand to offer an extended ship to home assortment through a marketplace offering of third party sellers.
We will continue to expand our ecosystem over time.
The Kroger technology and digital team continues to create innovative experiences that are changing the way we serve customers across America and.
And was recognized for the third consecutive year as the best place to work and I T by Computerworld.
This recognition is awarded to companies that have innovative industry, leaving work spaces.
Offering a great customer associate experience.
As a result of the pandemic, we continue to see a slow returned to normal from a shutdown period, resulting in fewer customer visits.
But increased basket size.
Customers across the country are still staying home and cooking at home and is that is now part of the new routine.
This makes our leadership position in fresh and even more important cells driver for Kroger.
Customers rank, our fresh departments higher than all of our big box competitors and our fresh departments generated strong identical sales in the second quarter and gained market share.
Our brands is also a key competitive mode for Kroger.
We continue to meet the diverse needs of our customers with significant growth across the three largest brands.
Our customers are eating more at home and we are seeing some customer segments trade up to the larger pack sizes.
As well as more premium quality food and natural and organic foods.
Our larger sized big pack platform is up well over 50%.
Private selection is up over 17% and simple truth is up over 20% in the second quarter.
Our brands continues to tap into emerging trends and evolving customer need.
Delivering new flavors and innovative new items like the new plant based emerged grind and patties, which launched in late 2019.
A recent third party industry study reconfirmed that simple truth is the most flubs natural organic brand in the us.
Simple truth significantly outperformed competitors on strengthened brand, which is a combination of awareness.
Willingness to recommend and strength of as the driver of store selection.
And continuing to exceed our customers' expectations of value and quality, while also consistently delivering innovative new items our customers love.
Our brands remain one of our most powerful competitive advantages.
Finally, personalization and data remains one of krogers key and core competitive most.
We use our data to understand what is most important to our customers and continue to offer promotions throughout the quarter.
And we think it is an important component to continue to support as a pandemic continues and government stimulus benefits have expired.
Many of our customers are experiencing some form of financial hardship that we expect to unpack discretionary purchases and eating out.
This is one of the unique capabilities of the Kroger ecosystem.
We can deliver for both customers on a budget and customers, who are trading up to premium products and or laugh larger sizes.
Turning now to partnerships all cobot 19 has not necessarily changed how we think about our approach to E. Commerce. It has accelerated our thinking about how our full evolution of seamless strategy.
Inclusive of Ricardo.
Colorado is a strategic partner of choice delivering innovation and best in class experience and economic advantage through efficient fulfillment.
We are confident the future of our ecosystem will incorporate a mix of capabilities and facilities ranging in sizes and 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 customers.
For store replenishment.
Condos model incorporates state of the art automation and AI to expand kroger's products to a larger footprint.
And their model to deliver to customer.
It's significantly less costly than our existing model.
We are on track to open the first two sites in the spring of 2021.
Develop talent is a driver of restock Kroger and we work extremely hard to ensure that we have the right talent teens and structure in the right focus areas in our core supermarket business and our alternative profit businesses.
We are focused on both developing training and promoting internal talent and hiring external executives, both food industry and technology, which together drives our retail supermarket business and all of our businesses.
Program has been that investing to raise wages of our frontline associates for the last several years.
As part of Restock Kroger announced in 2017.
Over the period of 2018 to 2025.
Rubber will have invested an incremental $800 million and associate wage increases.
And that is $300 million more than the original plan.
As a result of this continuing investment.
Program has increased its average hourly rate over $15 per hour.
And with our comprehensive and best in class benefits, including healthcare paid time off and retirement plans. Our average hourly rate is over $20.
As the largest traditional grocery retailer in America Kroger is committed to being a for some good.
In the communities we serve.
Our purpose to feed the human Spirit continues to guide how we operate our business.
Air for our community and deliver value to all of our stakeholders.
Last month, we released our 2020 SG report.
Highlighting progress toward our sustainability goals.
We are committed to continuing to integrate DSG metrics into our business strategy driving shared value for our associates customers communities and company.
We recently made the decision to compare contribute an additional $20 million.
Split evenly between the Kroger Co foundation, and the zero hunger zero waste Foundation.
We also added $5 billion to up fund created to support the advancement of racial equity and justice.
We believe.
That is vitally important to get resources to our communities as they continue to face hardships related to the pandemic the economic downturn and racial and justice.
Other restock Kroger, we've made significant investments to establish a seamless digital ecosystem.
Strengthen our brands and our personalization capabilities.
And to enhance product freshness and a quality.
These investments combined with how our associates have responded to the pandemic.
And customers eating more meals at home give us confident that kroger's performance in both 2020, and 2021 will be even stronger than previously anticipated.
I will now turn it over to Gary for more details into the quarter financials Gary.
Thanks, Rodney and good morning, everyone.
Before getting into our business results I wanted to ask Rockies comments from earlier and say how extremely proud I am of our associates for continuing to serve our customers on communities throughout the pandemic.
We remain committed to investing to ensure a safe environment fire associates and customers.
But also continue to use our customer insights to invest in delivering greater value for customers in ways that all nice relevant today and the build future loyalty.
Results for the second quarter was strong and reinforce the strategic investments we have made over the last several years as positive restock Kroger.
The cost to turn that much better than we previously expected basically shaped to several factors, including stronger sales results and disciplined balance between cost savings on the investments while also managing cost inflation volatility in key fresh categories.
Additionally, fueled performed better than predicted and we were very pleased with that alternative profit results, which rebounding from Tyvek 19 impacts more quickly than anticipated.
Now I'd like to provide further detail on second quarter performance.
We delivered an adjusted EPS of 73 cents per diluted share up 66% compared to the same quarter last year.
Craig the reporting identical sales about fuel a 14.6% during the second quarter.
Sales momentum continued from the first quarter was identical sales without fuel in June and July trending in the mid teens.
Joining our final period at the quota, which runs from mid July to mid August identical sales without fuel were 12.5% as we saw reduced government stimulus in the stock funding and lower back to school activity.
Digital sales grew 127% and contributing 4.4% two identical sales without fuel.
New customer engagement and without pickup and delivery services continue to grow and we continue to invest in the customer experience.
Thank you ladies offering fee for you pick up to provide more value for our customers in ways that most relevant at this time.
Our digital sales growth was profitable on an incremental basis.
We're pleased with the progress we made to improve profitability by reducing the cost to fulfill that pickup on that joined the quota.
We see a clear path to further improve digital profitability by leveraging our personalization tolls to improve sales mix continuing to reduce cost to fulfill and order by a process improvements and automation and accelerating growth immediate revenue generated from digital sales.
Adjusted FIFO operating profit for the second quarter was $894 million up 43% compared to the second quarter of 2019.
We were pleased with the April pass through rate achieved from the elevated sales in the quota, which including the impact of digital drags on incremental costs associated with quite a bit 19 was approximately 10%.
Painted related cost investments and associate depreciation cleaning safety and supply chain totaled approximately $250 million in the quota.
Gross margin was 22.9% of sales for the second quarter.
The five five gross margin range, excluding fuel increased five basis points, primarily driven by sourcing efficiencies sales left-brace relating to shrink transportation appetite in costs.
Plus gross and alternative profit streams.
This was partially offset by price investments as we continue to invest in delivering great value to customers and mix changes from lower relative sales and higher gross margin categories, such as study bakery.
The o'shea rank, excluding fuel and adjustment items increased 61 basis points due to sales leverage and execution of restock Craig or initiatives.
Mostly offset by ongoing typing 19 related costs mentioned earlier to protect the health and safety about customers and associates.
Rent and depreciation excluding fuel decreased 27 basis points due to sales leverage.
We were very pleased with the progress on our restart credit cost savings initiatives in the quarter and now expect to achieve the talking to 1 billion dollar savings in Twentytwenty.
Fuel remains an important part of our strategy to drive customer located.
Compared to the first quarter and consistent with market trends the declining gallons slowed to around 16% in the second quarter.
We remain well positioned with our markets to our fuel procurement practices and knocking heating reward program.
The average retail price appeal was 2014 cents this quarter versus $2, a 71 cents in the same quarter last year.
Thanks pick out on fuel margin in the second quarter was 37 cents compared to 35 cents in the same quarter last year.
While fuel operating profit was $13 million last on the same quarter last year this was better than expected.
For the remainder of Twentytwenty, we expect fuel profitability will continue to be a headwind compared to prior year as we cycle margins from 2019 and gallons continue to be impacted by caving.
Craig because alternative profit model is built on a platform leveraging supermarket traffic and data with media and Coca personal finance, representing the largest contributions to grossing twentytwenty.
Thanks to our teams responsiveness to the challenges carry because presented to our tendency profits portfolio. These businesses rebounded strongly in the second quota and we now expect Greg is approaching $100 million for the fiscal year Twentytwenty.
We continue took a level tenants in profit will be a major accelerator of our model in the future and kind of big 19 has not changed a longtime profit expectations previously shad as possibly stock Kroger.
Craig the precision marketing driving tremendous acceleration in our media business in the second quarter.
On the strength of credit in digital sales digital customer engagement, a new inventory revenue growth doubled compared to the first quarter.
Installed media also it bounced back a stay at higher mode as well, let's take a many of the communities we said.
Craig a personal finance experienced higher transaction in the second quarter compared to the first quarter as customer activity in predicting gift cards luxury on money services.
While trends a capex, while improving we continue to expect KPN profit will be like with an hour original expectations Twentytwenty Dziedzic Ivig 19.
We continue to invest in our associates as a key part of restock crowded out in a variety of ways, including investments in wages training and development.
As you know for the last decade, all mall Kroger is thought opportunities to address the funding challenges facing the pension plans in which our associates participate.
We believe challenges related to pension funding company mitigated the plans all refute unaddressed over time.
Consistent with the fact that last month, we announced a tentative agreement to improve security of future retirement benefits I'd like to 33000, Craig a family of company associates across 20, local U.S. CW unions with an investment of nearly $1 billion.
Ratification of disagreement is still expected to occur in the third quarter Twentytwenty.
We ratified new labor agreements with the U.S. CW covering us I should say recognized during the second quarter.
We are currently negotiating with the U.S. CW contracts covering store associates in Las Vegas, Little Rock, Houston, Dallas, and Charleston, West Virginia.
Looking ahead towards the end of this year, we won't be negotiating with the U.S.C. dobles youthful fries Fellows associates in Arizona.
I've checked keeping heparin negotiation is to find a fat and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality affordable health care and retirement benefits for our associates.
We strive to make already enrolled benefit package relevant to today's associates.
Our financial results continue to be pressured by health care and pension costs, which some of that competitive to know face we continue to communicate with local unions on the international unions, which represents many of our associates on the importance of growing our business in a profitable way.
Which will help us to create more jobs and create opportunities and enhance job security for our associates.
Turning now to financial strategy Kroger's financial model has proven to be Brazilian throughout the economic cycle.
We continue to generate strong free cash flow and maintain strong liquidity.
We are committed to investing in the business to drive profitable growth maintaining high investment grade debt rating on returning excess free cash to invest as via share repurchases under growing dividend over time.
We remain confident in our business model and our ability to achieve consistently attractive total shareholder returns.
We will provide more color on our future approach to capital allocation on the use of excess cash joining amash 2020 want Investor day.
In Twentytwenty, we all being disciplined in how we deploy capital and all aspects of our capital plan are being evaluated to make sure that I investments will deliver strong returns on physician Craig if a longtime success pace kind of at 19.
We now expect total capital expenditure to range between 3 billion on $3.4 billion in Twentytwenty.
We have widened the range about guidance due to the uncertainty on timing of when spending will occur because it kind of at 19.
Craig <unk> total debt to adjusted EBITDA ratio is 1.7 compared to 2.46 a year ago.
This is below our target range of 2.3 to 2.5.
Craig how temporary cash investments approximately $2.4 billion I thought the ended the quarter, reflecting improvements in operating performance significant improvements in working capital on delayed tax payments as a result at the cap Act.
We expect working capital to improved for the here, although not to they'll have an experienced year to date, which is inflated by sales growth future caving 19.
During the quarter HOKA repurchased $211 million of shares under its 1 billion dollar Board authorization announced on November the phase 2019.
On September 11th Twentytwenty, The board of directors authorized a new 1 billion dollar share repurchase program, replacing the prior authorization.
In June Craig to increase the dividend by 13% mocking the 14th consecutive year of dividend increases.
Turning now to guidance for the remainder of Twentytwenty as we shared last quarter. The Capex 19 pandemic has changed the outlook for food retail and we continue to moneta evaluate and adjust our plans to address the impact to our business.
Well that clearly still many unknowns as Rodney said in his opening comments, we now have greater clarity in many areas of our business on the drivers of food at home consumption.
As a result of our strong performance in the first half of the here the expectation if sustained Chinese and food at home consumption and confidence in our ability to execute against the restock Craig a strategy, we are updating our full year 2020 guidance.
For the full year Twentytwenty, we expect total identical sales without fuel to exceed 13%.
We expect to achieve adjusted EPS growth of approximately 45% to 50%.
We are providing a wider range on guidance then we would normally provide at this point in the year to account for the variety of outcomes that could materialize as a result at the pandemic.
In the second half of Twentytwenty, we expect identical sales excluding fuel to continue at elevated levels, although tapering from the level we've experienced so far this year.
Guidance contemplates continued investments in the customer an ongoing kind of big 19 related costs to protect the safety of our customers and associates.
So it continued execution of cost saving initiatives on growth and I will say take profits.
We expect fuel profitability will be a headwind for the remainder of twentytwenty.
Finally relative to delivering on our total shareholder return growth targets, a shantytown event by 2019 Investor day.
These factors also need us to believe that Twentytwenty, one business results will be higher than we would've expected prior to the kind of big 19 pandemic.
At the operating environment continues to evolve we will be transparent and communicate any important changes that could impact our outlook.
I'll now turn you back to Rodney.
Thanks, Gary.
We provided specific guidance to help you understand how we see the business today.
While there are still a lot of uncertainties, we are confident in our team's ability to navigate through this.
We are laser focused on winning with the customer.
And our Tru measure of success internally will be growing market share sustainably over time.
As Rebecca said earlier, we have scheduled to call on October 27.
We will provide a business update relative to our November 2019 business commitments.
As well as our overall, yes cheek commitments.
We value the impact of an in person meeting with you and it made the decision to reschedule the timing of our traditional Investor day spring of 2021.
We remain incredibly confident in both our business model and TSR model and believe that not only 2020 will be strong, but as Gary mentioned 2021 will be even stronger than we previously anticipated.
Now we look forward to your questions.
We will now begin the question and answer session.
You asked a question you May press Star then one on your telephone keypad.
If you are 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 Greg Badishkanian with Wolfe Research. Please go ahead.
Good morning. This is actually sensor handsets on for Greg. My first question is just can you talk about the concerns that you guys are seeing quarter today, and then we've seen ticket growth outpacing.
Kind of growth as consumers combined trips what do you think ticketing traffic trends get more normalized.
At the.
In terms of where we are quarter to date, we would still be slightly ahead double digits.
And a if you if you look at a when traffic returns to normal it's kind of fascinating if you look at markets where.
Cobot incident rates are lower or less severe what we find our people start visiting the store more often but they don't spend as much but if you look at overall the trends are pretty similar.
It's probable reserve really the only insights that we have it at this point.
We do find everything that we can tell people are enjoying cooking at home enjoying eating as a family.
And those are things that we believe will last past cobot I don't know Gary anything you'd want to add to that.
No I think you covered it well Rodney I think where we are seeing.
Some gradual sort of I guess is returned two patents that customers get comfortable with it hasnt been that kind of environment as continue to see lodge large basket size in future years, but we've been encouraged them into second quarter by while I categories like down the bakery would be significantly lower than the heightened levels of sales we've seen in the last.
Quarter also.
From categories like grocery and meat and produce demi bakery is positive again, we tempting shows that customers are starting to at least we tend to some of those and behaviors and certainly in areas like specialty cheese and floral it's really encouraging to see those.
Categories tending to tied to sort of low to mid single digit I'd sales as well.
That's really helpful. And then in your prepared remarks, I think you mentioned that digital sales were profitable on an incremental basis can you provide some more color on that comment and then how do you expect the launch of other marketplace with Kroger ship impacted profitability out of the online business.
Yeah. Thanks to the question I'd say the white, we think about digital profitability at them on every shed some of this company fall, but essentially we track very closely how it power custom it behaves and those when the engage digitally and we see significant level of incremental sales overall in the customer relationship. Obviously, you have to offset that against the incremental.
Costs that we incur in fitting the on if all the customer and in addition to map and of course, we now seeing tremendous growth in digital media revenue that is generated off of a customer I'm spending dollars are those digitally because we can then surely personal lines of communication to the customer and we can play to leave for CPG partnering understanding whether.
That appetizing led to a a sale with a customer in the south so when we look at the overall impact of the incremental sales the cost to fill the old hat on the media revenue, we see a I profitability pass through if you like contends that the transaction from a from a digital perspective, it's obviously in a much like that.
I'll then you would see in the store channel, but we are seeing that not profitability flights from an incremental basis I. We believe that there's some significant opportunities as I mentioned in my prepared comments to continue to improve that profitability. The fast would be improving sales mix and we believe there's a lot of opportunity using app personalization totals to do that.
Marketplace would be a good example that would also benefit sheet opportunity to do that as well so that would be a part of that component, where we think continuing to improve the basket size and the type of products. The customizing. The basket is definitely going to be a driver of bridging any gap between store in digital profitability beyond that we also believe the significant opportunity to improve profit.
MLT by continuing to reduce the cost of ethanol that actually want to mention and process improvement and continuing to grow those digital media dollars and the short term we have plans on those areas today and then of course is Romney shed on that call out again, I'm Cod I would also be a significant accelerator those drive this by further improving the customer mix.
Parents to improve mix and continuing to take more cost out of the model through automation and eye on it just to add a little bit and everybody's heard me say this before but when you look at digital overall.
We've always viewed our first job is to make sure we don't lose the customer.
And obviously with our teams they've done a fantastic job of supporting amazing growth and that's.
Our technology team or digital team, our store teams and warehouse.
We we can now see a clear path the profitability of that and one of the insights that Gary just shared in terms of the incremental is one piece of that path to profitability obviously.
All the things that we're working on together what were expecting of ourselves as we will get to the point where were in different if a customer.
Connects with us digitally or physical store and everything that we can see the customer actually will do both and we made.
Great progress on reducing cost to serve on a per customer basis, and then if you look at some of the other pieces of our digital offering.
Like home chef pump chef had an incredible quarter, both the sales growth and profitability as well.
Thank you.
Thanks.
Our next question is from Michael Lasser would you be S. Please go ahead.
Good morning, Thanks for taking my question. So why are you, making cuts here in whereas how do you think you're hearing other categories trended and you can you give us more detail behind your decision to to Reengage in price investments during the period.
It's something that well locations were put on hold in the prior period. It sounds like you overall environment gotten a bit more competitive for the most recent period is that fair.
No I wouldn't.
I'd say, a little differently, we promoted throughout that pandemic now we did change what we promoted.
Because obviously you want to promote what you have so we would have not promoted.
Paper, towels, and toilet paper and certain meat items and things like that.
Because just the availability of supply, but we've had promotions throughout the pandemic and it's really on the things that matter.
We continue to invest in price and we think it's really important than we think customers will look at it reflectively that we've been there to support them throughout to help them stretch their budget. So you know the weight that as Gary mentioned waving the pickup fee continue to invest in promotions continuing to invest in price.
Will pay off from our customers will reward us for what we're doing overtime.
On market share.
Oh, I, specifically talked about fresh, but we continue to gain share in that center store fresh and all areas of the store and our own brands continued to gain share as well.
Okay and you see you mentioned the final period.
Quarter was.
These were up about 12% it sounds like it slowed a little bit.
Is the most recent period would you attribute that to some of the teams in unemployment benefits in <unk>.
And continued pressure from from back to school and how does that back to back to school pressure.
Manifest thank you very much.
Yeah, if you look at the.
Back to school.
There's a lot of moving parts.
We think thats part of it we also think.
If you look at the holidays people celebrate holidays differently. If you look at some of the sporting events people are celebrating those differently. So theres a lot of moving parts.
So I think it's hard to say the specifics I don't know Gary anything you'd want to add to that yeah. I think it sounds interesting time right now to Romney's point, because we look at the trend in markets, where we try and correlate results to higher levels of I kind of the cases and it's become a lot more difficult to really track those trends, but certainly a small.
The level of correlation it seems like between the the higher Mockups would probably be paces and and differentiation why you've got to stay in some markets that have small that levels of cases, but that being said it seems like to Romney's point I think more of the trends are being as customers are now adapting to some level of a new normal on so as you.
You mentioned, Michael things like I back to school certainly impacts for a period of time I think the government snowfalls in them optic lose sight, we saw a change there in the final period of the prior quarter another element in this quarter.
But then it's like what's the next I guess I was not coming through the back to school campaign, what will happen in the final part of the uterus, maybe customers are less willing to italia to restaurants in the called and this capacity is still constrained in restaurants I shall not just I think there's going to be almost different triggers that it's less in some ways, what we're seeing the trends around what.
Happening would probably be cases, but more about how a custom is adapting to what's the new theme in the new event and that causes them to change shopping behavior. I think there's multiple different factors that are going on with the customer and I think the combination of all negative at what led to I think the slightly different trajectory compared to the first two positive quantity.
Yeah.
Okay. Thank you very much.
Thank you.
His question is from Ken Goldman with JP Morgan. Please go ahead.
Hi, good morning, Thank you.
Turning to from high two for me first I wanted to see if you've seen any notable changes in your product sales mix since the stimulus checks have run out.
At least in the scanner data that we can see store brands are still losing a lot of share.
Within the the measure and grocery channel.
But I'm not sure if that sort of corresponds with exactly what you're seeing I might have expected store brands to do a little bit better right now overall, but I'm. Just curious if maybe you are seeing anything that's changing the mayor more recently.
I can I would say that we're seeing anything that's a massive type trends.
You look at during the quarter, we would have seen better sales growth in CPG brands than owned brands.
But if you look at home brands overall, they continue to gain share.
Share relative to the market.
The.
You know you continue to see a behavior changes based on what's going on in People's lives, but you still see people aggressively alcohol sales are very strong beer and wine is very strong. If you look at big pack cells are strong.
If you look at premium products cells are strong so you continue to see.
People trading up in places, where they want to.
You know if you look at as Gary mentioned.
Only bakery.
Continued to make progress.
So it's.
The question, but I think it's still hard to give a specific answer.
Nope I understand thank you for that and then.
My follow up.
Your your FIFO gross margin ex fuel in the first quarter was up I think 46 basis points year on year.
It was up still this quarter, but to your point it was up less I think side just a number you know Gary I think you were very clear highlighting price investments as one of the reasons for that deceleration I just would love to get a sense.
So what you're looking at for that number going ahead, with whether we should be sort of thinking about and their models something close in the first quarter or something closer to the second in terms of year on year and I know, there's all sorts of puts and takes that's very difficult one to answer I'm. Just trying to you know sort of poke around a bit and see what you might think about that.
Yeah, I think at Thanks, a question, Ken I think as we chat kind of consistently I call. It strikes me balanced in the business model and continue to balance the investments we make in in supporting the customer, which you certainly have continued intent with the savings that we achieved through sourcing benefits and then of course alternative profit being acceleration of gross margin as well.
Now and the cautionary south where a lot of that and the focus for us losses as Rami mentioned you know the the fee for you pick up as an important part of value on a custom and we believe.
Digital sales relative to the more traditional grocery sector is pretty high on site not so a bigger influencing on them wasn't we believe we gained market share in digital is while enjoying the quantify that I think influences. The at the level of investments along thing I think the second part is fresh departments inflation was pretty volatile joined the quarter.
And we so certainly meet high inflation.
And in meat surprise, you sounded he may create a cost inflation would it be higher than than retail because we were investing in supporting the customer through the you know the volatility in price and making sure we were building longtime low today.
So I think we've continued to be expecting to invest why it makes sense. When it comes from that but we feel very confident in our ability to a balanced ladies investments with cost savings through restock, Craig our sourcing benefits and continuing to to see on leverage and things like shrink warehouse and transportation unappetizing. So I think the key message most would be balances.
Consistent with the long term growth model that we shed.
Thank you.
Thanks.
The next question is from Rupesh Greek with Oppenheimer. Please go ahead.
Good morning, Thanks for taking my question.
Because I wanted to start off I.
I guess, what does your capacity I click and collect I'm. Just curious where are you guys are today from meeting all the demand out there for click and collect and their related to that I was also curious whether you think.
Removal the pick up the temporary removal that because he is contributing to some of this very interesting.
In terms of capacity a year, we're constantly adjusting.
The company capacity during the day, because as people get used to the new normal the times they want pick up slots constantly change.
Which one area, where I've been super proud of our teams both stores and our data and technology and operations team is that constant.
Adjusting and incrementally hiring people.
There are stores now, where we're aggressively investing a little bit of capital to be able to expand whats available within that store and when we do that that'll allow us to add slots as well. So I would say that constraints on slots would be a slight.
Opportunity.
But I think the teams have done a great job of continuing to expand.
The removal of the fee.
For a pick up the temporary removal is you know we look at it more in terms of trying to help a customer stretch their budget.
And try to be helpful. In this environment.
Customer still tell us the reason they like our pickup experience is really the freshness of our products and the quality of that the assortment that we offer so bid probably helps but I think it's more driven by the experience in the fresh side, then waving the feed.
Great and then I guess, one quick follow up or Gary what's the right way to think about cobot expenses in the back up here.
Yeah, I think we wouldn't get into I'm specific numbers, but obviously, we did give you some color on to this expense that we saw in Q2 I'm certainly we would expect to be able to continue to optimize our operating plans that we'd expect to provide continued efficiency and some of those plans that we execute on.
And certainly that was the case, if you think about out our investment in Q1 Q2, as we transitioning through the even letting more unable to optimize our approach that being said one of the reasons that cost would have been I, probably a little bit high than we originally thought in Q2 was that joined the call should if you recall many states not all the states.
Now operating a mandating masks and we decided to adopt that proactively before it happened in many states the ready reinforces the importance of safety Astellas and providing the inventory whole masks to make sure that joined that transition all of our customers were able to have access to a mass because of a new cost anything like that.
We incurred so we've been very dynamic in what you're managing those cost to make sure that way first and foremost maintaining safety and then secondly, obviously being as efficient as we can be but we feel very confident in our ability to to manage imbalance I as cost with the incremental cost savings that we're achieving in our original model and as I said in the in the purpose.
<unk> comments, we've been the team has done a phenomenal jobbing running adapting and adjusting our cost saving plans. They like it kind of made whereas in Q1, we announced that we may have some headwinds on the original billion dollars. We feel confident now we can achieve those so overall they'll certainly be there's ongoing investments, but we feel confident now goes to be able to manage them.
Great. Thank you.
Thank you.
Next question is from Karen short with Barclays. Please go ahead.
Hi, Thanks, very much just actually on the gross margin I had one quick follow up and then I had a bigger question.
Can you just getting a little color on selling gross margins I know that's not a topic that we've talked about on a consistent basis, but I think it would just how the context of.
You know you said it drives customer loyalty to continue to come out during this time period I'm in a lot of your competitors are not promoting I'm sorry, I was wondering if you could give him a little color on selling gross margins this quarter versus the first quarter.
Well, certainly I kind of thanks for the question what have been any investments has as you are.
All right away from what we said in the first quarter that we saw significant benefit in expensing gross sales leverage across warehouse and transportation across.
Shrink and also across appetizing and while sales obviously type in Q2 versus Q1, we would continue to see selling expensing rice and sorry leverage on our overall sales results so to be up 5% basis point improvement overall on gross margin not would reflect the fact, we invested in our southern gross rate joined.
Quota and in Indiana that I mentioned around continued acceleration of digital pick up but taking a fresh categories can make sure that we're delivering value for our customers and then it would also be I think you know and it's important to mention a mix and the fact that some we've now the bakery being a I left factor in the overall sales.
Gross would also have brought down the Sun English right somewhat as well.
And then I wanted to just shift gears to digital for a second so I. It lets them anything kinda back end to E com being around the seven precise and sales range now.
So first is that accurate and then I was wondering if you could provide a little bit of a split or a split between pick up is an versus delivery within that and then I was wondering if you could give little more color in terms of.
Basket on each of the different like in store versus pick out first as delivery and then last question and that it's just.
Any color on the new customers that you're gaining with respect to digital.
If you look at.
Our percent of sales would be a little bit higher than a your estimate.
If you look at mix between pickup and delivery, it's still predominantly pick up.
And we find customers find pick up incredibly flexible on their schedule I'm much more so than delivery and that's the reason why they continue to like a pickup in a in a good way. If you look at basket size basket size would be significantly bigger on.
Pick up versus in store.
And pickup and delivery would be pretty similar.
On new customers.
We're fine we're finding a we're getting a lot of new customers, both in store and digital both and.
Probably the biggest a change for both of those are.
Groups.
We in the past.
Hi.
Summer would have to earn their right to start getting a loyal customer mailings and digital offers and things like that.
During this we've started treating customers as loyal shoppers immediately rather than waiting for them to engage with us for a period of time and what and what we're finding is we're having success on retaining those customers and read repeat purchases.
As well.
And any differently I look at running just carrying on the comments about pick up on delivering strong you mentioned pickup is a significantly larger portion of the and that the overall volume I.
I would say both of them regarding triple digit. So we are seeing very strong growth in value, but the everything like a major changing in the mix. If you like photos and continue to grow significantly in the kind of parents.
Thank you.
Your next question is from Robby Ohmes with Bank of America Global Research. Please go ahead.
Hey, Thanks for taking my question, Hey, Rodney I was hoping you know as a follow up to the Karen's question can you.
Give us more color kind of on what you're doing with Ocado versus the original plan and maybe a little more color on kind of signposts, we should be looking for you know in the back happening into next year on Ocado and then I'm just a separate question can you guys just give us color on what happened.
Oh Labor day weekend for you guys and how that was there was not similar to last year et cetera.
Yeah, I'll answer Ocado and Gary I'll, let you talk about the labor day weekend, when we have our investor meeting in March will get into a lot more details on Ocado. If you look at.
Obviously the first initial.
Part of the two first shuts that will open.
In a minute or Ohio and in Florida.
We'll be just.
Scaling it and ER.
You know the assortment that customers have a desire for in that offering versus some other offering.
Those are two key parts you know we're.
We will get into specific sign post of in terms of how to hold us accountable.
We're using the learnings from Ocado in terms of what they having the UK, obviously, Canada in France.
And it will be a taking all of those learnings and making sure we manage the cost of the start up as well.
So we're excited we can't wait and we wish they would have opened a year ago.
Mhm.
And then dropping on your second question I would say I'm, probably the brought to comment I would make his Rodney shag, we still trending in.
Double digit sales in the on deposits at the current quarter.
It's a pretty difficult player to read actually is probably the most important points I would say because at the labor day weekend change by a week, but we're also cycling went up from last year and then having someone initiate aside it's been out I really interesting I would say right for the first four weeks as the new quota I'm trying to inject from what's going on if we look at the cycling.
On adjusting for the week, so I wouldn't say when he saw anything materially or unusual Adam labor day, except for some of the weather events in certain markets, adding some complex to the data, but overall as were coming out. The other side is that as Rob you mentioned trending and then in the low double digit part of the quota.
That's helpful. Just one quick just follow up on digital in those markets, where people are coming back into stores is it do you see a significant falloff in digital and would it be coming more from delivery or more from pick up.
The mix between pickup and delivery is more driven by available slots, we do not.
It is the growth, it's still triple digit growth, but it would be a little bit slower growth, but it's still meaningful growth.
Got it thanks, so much thanks Robbie.
Your next question is from Edward Kelly with Wells Fargo. Please go ahead.
Hi, guys good morning.
Go quarter by the way.
I feel for you guys on the gross margin by the way and I wanted to follow up on this because I think there's been some criticism in the market that your gross margin was not up as much as the sell side with modeling.
Probably doing what you sit with this means all right you're investing in price still delivering a large GPS steep.
Others are not investing some kind of curious what what are you seeing some price gap standpoint in the marketplace. Currently in both places like bigger discount players like Walmart, but also you know your conventional players who may be seem to be taking advantage of than the current environment.
Yeah. Thanks for the question Ed I think you you summarize the while from my perspective, we believe it's very important that we continue to deliver value for customers and we're staying very true so that plan and when we look at prices as we've had a couple of examples on the call from its not just about everyday low price, but it's about the promotional plan, it's about the investment in digital.
And we feel like we're on a I've already play a path to deliver value for the customers that will drive long term multi either way that act customers. When we talk to them and how we look at that age I measure value. We feel very good about the position that we're in and I customers tell us with delivering strong value to them and we believe a really kind of at least.
Little bit I think the Rockies comments about how we think about spending 2021, and making sure that we're winning longtime market share I'm going out business started at the last thing cycle through the pandemic. We we ended a stronger position than we would've done prior to carry with 19 Israeli the the journey that we believe we're on to make sure that we continue to connect on degree customers.
And drive value reveal we feel good about the journey. There was also repeating we feel it's nothing is helpful. The ability to be able to sustain not long term growth in the future from you know.
Can I just follow up carried by the way you know when when you look at the gross margin. We had heard from one of your peers that the you know the end of May June period was tougher because there is inflation in some of your categories, particularly protein.
Are there anything about the cadence of the gross margin this quarter that was notable like at softer earlier on.
And they certainly there's been a lot of.
Now make changes in some of those fresh categories as I mentioned earlier that we have to manage through and I think the can you give her a phenomenal job in doing that and making sure that we help our customers navigate through that.
I certainly the Buddhist experience some of those same elements the money showing nearly pocket quarter, which would have impacted at that point that I think you know.
I think your initial question is the number one important one of how we're thinking about balancing and investing in the business to make sure that we're delivering long term growth I wouldn't say that it you know effects on we think about how we're managing the this is for the future.
To me overall Gary's last point as the critical one we really are looking at everything in terms of what will connect us with the customer.
And position us best for sustainable growth over time, and continuing to gain market share and we're able to then that's what we're doing obviously, we were able to continue to manage expenses very well as well, which gave us capacity to invest.
As well.
Great. Thanks, guys.
Thank you and we have time for one last question and that question will come from Kelly Bania would be ammo capital markets. Please go ahead.
Hi, good morning, thank for thanks for fitting in my question.
Curious if we could talk a little bit about just price inflation mix and tonnage I know there's been a lot of comments about traffic and basket, but I think the way that you guys tend to look at it is more tonnage and so it was just curious if you can help us understand how that.
Played out in the quarter and what you're thinking about into the back half as you think about that kind of high single digit I'd outlook there between price.
Inflation and tonnage.
Yeah, we tonnage wouldn't continue to be strong Oh, we have we're still continuing to.
If you look at our supply chain, our teams done a nice job of identifying other sources of capacity.
We are have access to a warehouses, both that we manage on a temporary bases and others.
They continue to support manage the tonnage.
For me I like the thing I find exciting about the tonnage is it's across the whole store. So tonnage growth is strong in center store, its strong and produce strong and meat.
And well all areas.
So and obviously.
The guidance that Gary gave for the rest of the year, we would expect that to continue.
We continue to expect cost inflation will be a little bit more than retail inflation and those are categories, where it's more driven by short term things if you look at meat.
We would expect to beat inflation to be more normalized and visit more normalize as than you would see our balance between the two very close.
Just maybe ask.
Tim Robbins comments on tonnage, it's tied to hold me back to Romney's comments on our market shares while that when it certainly focused on especially Rob you mentioned that most important measure of success on sales growth because all the growing market share and we look at not very closely through tonnage in units as much as we do $3 because of the again, making sure that were investing in the custom and weak.
He certainly pleased with that punish market share growth as well as the.
<unk> market share growth during the quarter and then I was wrong you mentioned caveat, we check I think if I decided before but we generally no not model off at half the 1% inflation would certainly be.
Running ahead of that when you think about cost inflation as Randy mentioned down here with a meeting particular being high but a currency would gradually would be probably little bit north of 2% as well right now based on some of the trends that we see.
Okay. That's that's very helpful. Then if I can just two quick follow up one and related to digital.
I think I heard you mentioned regarding the pickup see that that was a temporary removal and I guess I was just curious under what.
Stances their timeframe would you consider bringing that back or is that a market by market.
Terrific thought process.
And also maybe just just thoughts on on membership obviously, a lot of competitive developments with membership in.
In terms of digital whether pickup and delivery. So just curious if you're in any way thinking of evolving into something like a membership program over time.
Yeah, the digital fee it really at the moment, we put in place just trying to help our customers.
And especially customers on a budget to help them stretch their weekly spending and you know what we would do over time, we were at this point, we really havent decided but it's a part of the overall value equation that we're providing the customers on on membership as you know.
We continually and have been for a while testing various types of membership programs.
And when we find the membership programs that really works, a you'll see us continuing to be more aggressive with it.
As everybody on the call knows we've had a membership program in terms of fuel rewards for years now customers don't have to pay for that and they get the.
Rewards.
Incrementally for free obviously, and that's something that's been very successful and very successful and sharing value with customers and creating additional customer loyalty, even which is something that we've done for several years. So.
Thanks, Kelly for your questions and thanks, everyone for your questions.
Before we close today I'd like to start with just a moment of silence and remembrance of the lives lost during the tragic events that occurred on September 11th 2001.
Thank you.
As you know I, usually take time before we end our call to share a few final comments directed toward our associates.
The Cobot 19 pandemic continues to challenge and change our country.
Not the least of which is the loss of lives in America and around the world.
I appreciate our associates for doing their part to keep our customers at each other safe.
Especially for leading by example by consistently wearing masks.
We are incredibly confident in terms of.
The future and the things that we do to take care of our associates and customers M. together, we will get through.
Covidien 18, thank you for your time today and have a great weekend.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].
[noise] [noise].
[noise].