Q3 2020 Kroger Co Earnings Call
[music].
Earnings Conference call.
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I would now like to turn the conference over to Rebecca Manis Director Investor Relations. Please go ahead.
Thank you Gary Good morning, and thank you for joining us before we begin I want to remind you that today's discussion will include forward looking statements.
Want to caution you that such statements are predictions and actual events or results can differ materially.
Detailed discussion and many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger assumes no obligation to update that information from.
Our third quarter press release, and our prepared remarks from net conference call will be available on our website at IR Dot Kroger Dot com.
After our prepared remarks, we look forward to taking your questions and.
In order to cover a broad range of topics from 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'll now turn the call over to Kroger's, Chairman and Chief Executive Officer of Rodney Mcmullen.
Thank you Rebecca good morning, everyone and thank you for joining us.
With me today to review Kroger's third quarter 2020 results as Chief Financial Officer, Gary Miller Chip.
When restrictions were set in place to address the spread a co been 19 and mid March maybe underestimated the length of time that it would last and the number of families and communities that would be impacted.
Many of the stories from the last nine months have been upsetting to say the least.
Out of this grief, we've also seen the best part of human nature.
From our store teams to our warehouse associates and drivers and our digital team plants and offices.
Our Kroger family of associates have been nothing short of incredible during this period.
I am proud of our dedicated associates, who have continued to diligently execute our restock Kroger transformation.
While serving our customers when they need us most.
We delivered strong results and the third quarter.
Customers are at the center of everything we do and sales remain elevated and we continue to grow market share as we enhance.
Our competitive modes fresh our brands day.
Data and personalization and seamless.
I want to highlight that Kroger is digital sales are incrementally profitable today.
At least supported by a rapidly growing digital media business.
And partially fueled by our constant improvement and operational efficiency.
This is true as the incremental pass through rate of sales and we have a clear path to continue improving digital profitability.
Gary will touch on this more and a few minutes, but I wanted to call. This out as well because it demonstrates the strength of not only our seamless offering.
But the overall kroger ecosystem and how the components parts fit together to deliver value to our customers and our shareholders.
We are more certain than ever that the strategic choices and investments made over the last three years.
Have positioned us to meet the moment and.
And as a result of our strong performance and consistent market share gains we are raising our guidance for the remainder of the year.
We are also positioned to deliver beyond 2020 for our customers associates and shareholders and.
As we believe and number the impacts of co was 19 will be structural and lasting.
And as a result of the pandemic, we continue to see increased basket sizes and fewer customer visits.
Customers across the country are still staying home and cooking at home is now part of the new routine.
We are fulfilling our customers' growing demand for premium products as they seek joy and elevated experiences.
We're merchandising and new ways to both meet that demand and inspire our customers to trade up to items like premium jumbo blueberries and by the way the delicious.
And larger size packages of strawberries raspberries grapes.
Hum chefs color and area innovation is inspiring customers with new up and ready to entrees and sites flat.
Flatbread pizza salads and sandwiches.
And the fresh soup category, we have introduced new flavor full and delicious simple truth and home chef varieties.
Our efforts are also driving strong market share gain.
And but growth and packaged produce fresh prepared foods and specialty cheese.
This is also where our brands really shine.
Our multi tiered brand portfolio positions us well to deliver against our customers' diverse needs and desires.
Our brands grew at 8.6% and the third quarter and we grew market share.
Private selection grew over 17% and simple truth grew nearly 15% these.
These are incredible numbers and demonstrates that while many competitors offer private label products.
Brokers unique approach to our brand is a differentiator and a competitive mode.
By leveraging our unique data and customer insights, we continue to be at the forefront of product innovation and new product development.
During the third quarter, we launched 250, new items, the most ever and a single quarter.
New items for the quarter included launches and trending focus areas such as fresh produce frozen grocery and expansion of our simple truth plant based collection unveiling more than 50, new fresh and flavorful plant.
Plant based foods at affordable prices.
Moving now to our third competitive moat data and personalization.
Many retailers have transactional data, but no one has the customer data and the insights that Kroger has.
The quality of our data is a massive advantage because it allows us to develop a significant alternative profit business.
And generate income from the traffic while benefiting our customers.
Our personalization efforts motivate our customers to continue to show interest and Kroger's can communications.
Where nearly 80% have asked to receive relevant information and offers from us.
Our customer email open rates is nearly 18% higher than the industry average.
Which illustrates our ability to offer relevant content and offers to our customers.
We continue to advance our personalization technology.
About 95% of customer interactions with product on our website and app are enabled by personalization.
Driving a significantly higher level of engagement and our offers and nearly doubling the likelihood of adding an item to and cart.
Our fort worth competitive mode the seamless.
Kroger began investing and digital several years ago to build a seamless ecosystem that would deliver anything anytime anywhere.
As part of our journey, we have been evolving our fulfillment network.
First taking advantage of our existing assets, our physical stores, providing flexibility and proximity to our customers with fraud and relevant assortment to meet their needs.
Second expanding our network of assets and capabilities with a portfolio of various sides facilities optimize based on volume demand profile and density.
Leveraging scale and automation to meet the rapidly changing customer needs.
Our early investments laid the foundation and.
Including over 2200 pickup locations.
And over 20, 450 delivery locations, which.
Which allowed us to capture the increased customer demand for E commerce offerings during the pandemic we have today.
Reaching 98% of our customers with a seamless customer experience around and store shopping pickup delivery and ship to home modalities.
We are innovating and building out a flexible network of fulfillment options and working with key solutions providers.
As we recently announced we continue to progress on our Kotto facilities program with plans to build customer fulfillment centers, and Michigan and in the South region of the country.
The upcoming opening of our first two fulfillment centers and early 2021, and Monroe, Ohio, and Groveland, Florida and collaboration to leverage some of their and store fulfillment capabilities.
We work extremely hard to ensure that we have the right talent teams and structure and the right focus areas and our core supermarket business.
And our alternative profit businesses.
We are focused on both developing training and promoting internal talent and higher and external industry executives, which together drives our retail supermarket business.
As well as our other businesses.
Kroger has been investing to raise the wages of our frontline associates for the last several years.
As part of Restock Kroger announced in 2017.
Over the period of 2018 to 2020, Kroger will have invested and an incremental $800 million per year and associate wage increases.
As we've noted before this is a three and this is $300 million more than the original plan and thus than.
As a result of our continued focus on growing associate wages Kroger.
Kroger has increased its average wage rates to over $20 per hour.
With our comprehensive and best in class benefits, including health care.
Paid time off and retirement included.
As the largest grocer retailer and America.
Kroger is committed to being a force for good and the communities. We serve our purpose to feed the human Spirit continues to guide how we operate our business here for our communities and deliver value to all of our stakeholders.
Since launching our ambitious zero hunger zero waste social impact plan.
In 2017, we achieved our goal to donate more than 1 billion meals to feed hungry families and our communities by 2020.
We also continue to increase Kroger is diversion of waste from landfill.
18, 80% diversion last year on our path to achieve 90% diversion or zero waste.
This year Kroger outlined several new long term environmental commitments and they can be found in our annual environmental social and governance report.
Last month, we were proud to be included among the world's sustainability leaders recognized by our inclusion in the Dow Jones sustainability index for the growth year in a row.
We are committed to continuing to integrate SG metrics and to our business strategy driving shared value for our associates customers communities and shareholders.
Since March we have invested nearly $1.3 billion to both reward our associates and to protect our associates and customers through the implementation of dozens of safety measures.
Like installing protective partition and physical distancing floor decals.
We continue to require masks and limits the number of people and our stores to allow for physical distancing and ensure a frequent and proper clean procedures are followed.
We also promote additional ways to shop, using pickup or no contact delivery.
Our total COVID-19 incident rate continues to track below the rate and the surrounding communities, where we operate.
Our supply chain remain strong and healthy and we are replenishing our stores daily so that the supplies and products our customers need are readily available.
To ensure our customers have access to what they need we have proactively secured and additional 5000 truckloads of inventory.
And increased distribution capacity reserves by 20% within our supply chain to get ahead and avoid potential supply disruptions.
Furthermore, we have flexed, our national footprint by dynamically shifting volume from constrained facilities and regions.
The facilities and regions with available capacity to accommodate.
As America's Grocer, we continue to see the unique opportunity to be part of our customers healthy journey.
In addition to being there grocer of choice.
Throughout the pandemic, we have remained committed to helping people live healthier lives by offering and clinic and at home co was 19 testing solutions.
Supported by our team of experienced healthcare professionals.
The size and scale of our health care footprint with over 2200, pharmacies, and 220 clinics and 35 states.
Provides us the unique ability to efficiently facilitate COVID-19 testing and immunized, a large portion of the us population once vaccines become available.
Kroger Health has conducted over 250000 Cove and 19 tests since April and has recently launched rapid antibody tests.
Which are now available across our family of pharmacies and clinics.
We are also partners and the federal with the federal government effort to deliver hundreds of millions of potentially life saving vaccines to our communities.
We have also partnered with dozens of state health departments and preparation for the other early administration of vaccines to priority populations.
Once an FDA authorized vaccine is available we're committed to making and accessible in accordance with the federal rollout plan.
All our pharmacies and clinics are staffed with professionals licensed pharmacist nurse practitioners physician assistants and technicians.
Health and wellness is a critical part of our customer value proposition.
Pharmacy customers are more loyal spending three times more per customer.
We have approached pharmacy from and omni channel perspective for quite some time.
Allowing customers to choose the most appropriate channel.
In which to connect with us whether that be in store on the phone or online.
For all channels, our strategy is consistent simple fight healthcare by creating solutions that combine health wellness and nutrition.
I continue to be proud of the work that our associates do to serve each other our customers and our communities.
Stories and their accomplishments and selfish business inspire me every day.
The investments we have made to enhance our competitive modes are paying off and as a result, we're growing market share.
I will now turn it over to Gary for more details into the quarter financials Gary.
Thanks, Rodney and good morning, everyone.
The Kroger team delivered strong results in the third quarter and provide you defer the proof point of the value creation model, we shared at our Investor day last year.
We grew market share and consistent with our value creation model with discipline and balancing significant investments and our customers and our associates with improved productivity and accelerated growth and our alternative profit businesses.
The investments, we are making and our business are allowing us to deliver strong results today and importantly are also setting us up to deliver sustained growth in the future.
I will now provide more color on our first quarter results.
We delivered an adjusted EPS of 71 cents per diluted share up 51% compared to the same quarter last year.
Craig we reported identical sales without fuel at 10.9% during the third quarter and continued to gain market share.
Alright, and nickel sales growth increase was broad based on all departments, excluding fuel achieved positive growth over the prior year.
Meats and fresh use departments led the way continuing to underscore the importance of fresh and how we differentiate and quality and assortment for our customers.
Digital sales grew 108% in the third quarter and contributed approximately 4.6% two identical sales without fuel.
Customer engagement without digital solutions is driving overall loyalty when customers, the Kate engage with banks and physical stores and digital channels. Thanks.
Is it more frequently and on average spend twice as much as legacy shop and install annually.
The vast majority of our digital customers are shopping in store as well as online.
We all have full confidence that the seamless experience, we are building across our store and digital ecosystem position us well flow continued growth and impacts caving world.
At the same time digital sales growth in the quarter was profitable on an incremental basis, and we continue to improve digital profitability by lowering the cost to fulfill and pickup on EPS and accelerating digital advertising revenue.
As trucking activity, we see a clear path to further improve digital profitability by leveraging our personalization tools to increase basket size and improved sales mix.
Further reduce the cost to fulfill and order by a process improvements and automation.
And continue to grow and digital media revenue.
We are also excited about the value and merger with high Michele I spoke about digital capabilities. Both in terms of the extended meal solutions attract customers and a significant sales growth and profitability improvements the visitors' achieving.
Adjusted operating profit for the third quarter was $871 million up 33% compact and the third quarter of 2019.
We were pleased with our ability to consistently pass through the benefits of and make sales and the quota which was in line and our expectations and guidance as previously shared.
Gross margin was 23% of sales and with a cool and then the FIFO gross margin range, excluding fuel decreased two basis points compared to the same period last year.
We achieved improvements in gross margin during the quarter through sourcing efficiencies sales leverage and growth and authentic profit streams.
These tailwinds were offset by changes in the sales mix as a result of paving 19 and continued investments to deliver greater value for our customers and shoring, we sustained long term customer loyalty and position the business to success and Twentytwenty, one and beyond.
The energy and any rates, excluding fuel and interest and Tysons decreased 30 basis points. This.
This reflects sales leverage and strong cost control and execution of restock, Craig or initiatives, which more than offset continued topic 19 relates to investments to protect the health and safety and our associates customers and communities and.
Increased incentive costs.
We were pleased with progress on at least our current cost saving initiatives in the quarter and continued to be on track to achieve the targeted $1 billion of savings and Twentytwenty.
As an example through the implementation of multiple price and technology and previous this year, we have been able to reduce the cost and what from a pickup flow to install by double digits compared to the same period last year, while at the same time, improving the customer experience by significantly reducing customer wait times.
Fuel remains an important part of our strategy to drive customer loyalty consistent with market trends and decline in gallons in the third quarter slowed to around 13% we.
We remain well positioned within our markets due to our fuel procurement practices and our market leading reward program.
The average retail price and fuel was $2.15 this quarter versus $2.62 and the same quarter last year.
Offense pick out and a fuel margin in the third quarter was 57 cents compared compared to 30 cents and the same quarter last year.
Craig and alternative profit business is built on a platform that net for Kate supermarket traffic and data.
Our alternative profit businesses had a very strong third quarter led by tremendous growth and not digital media business growth and precision marketing.
On the strength and growth and digital sales digital customer engagement and new inventory KPM achieved revenue growth of over 190%.
Hi, David 1200, Britons on that engaging with KPN as an effective way to invest marketing dollars that were previously being spanked weve appetizing platforms and digital media companies.
CPG brands continue to leverage our audience intelligence from more effective brand building activations that are achieving better return on average spend.
Thanks, John our teams nimbleness and responding to the challenges presented by kv alternative profit basis are performing well and we now expect profit growth to exceed $100 million for the fiscal year 2020.
We continue to believe alternative 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 shacks pocket, we stopped Kroger.
We continue to invest and our associates as a key part of restock, Kroger Guy and a variety of ways, including investments in wages training and development.
As you know and for the last decade or more Kroger has sought opportunities to address the funding challenges facing the multiemployer pension plans and which many of our associates participate.
We have been a challenging related to pension funding can be mitigated and plans all reviewed and to trust over time.
In July we announced the tentative agreement to increase security for future time and benefits.
33000, Kroger family accompany associates across 20, local U.S. Sidoti and unions with a pre tax investment of nearly $1 billion that will be satisfied by installment payments over the next three years.
I am pleased to site and agreements has not been ratified by participating Union Michaels and credit and will incur a charge to net earnings during the full quarter of approximately 98 cents per diluted share on a GAAP basis.
This does not affect adjusted net earnings per diluted share results, and Twentytwenty, which I'll provide it on a basis that excludes adjustment items such as this contribution.
We rectify and new labor agreements with the Uxc W covering associates, and Las Vegas, and Dallas during the third quarter.
Last week, we ratified a new labor agreement with the U.S. CW covering associates and West Virginia, and we are currently negotiating with the U.S.C. W ill contracts covering store associates, and little rock Houston and Arizona.
Our objective and every negotiation is to find the fat and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality affordable healthcare and retirement benefits for our associates.
We strive to make our overall benefit package relevance today's associates.
Our financial results continued to be pressured by health care and pension costs, which some of our 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 and and profitable way, which will help us create more jobs and create opportunities and attach jobs.
Security for our associates.
Turning now to financial strategy, we continue to generate strong free cash flow and remain committed to our previously communicated capital allocation framework.
We are continuing to invest in the business to drive profitable growth. While also maintaining our current investment grade debt rating and returning excess free cash to investors by share repurchases and a growing dividend over time.
We now expect total capital expenditures to range between 2.8 and $3.2 billion and Twentytwenty.
This low range is primarily due to the expected delay and when spending will occur as a result of Tyvek 19.
We are being disciplined and how we deploy capital to ensure that our investments will deliver strong returns and we continue to see many opportunities to invest in the business to support sustainable long term revenue and profit growth consistently not CSR goals.
Craig its net total debt to adjusted EBITDA ratio is 1.7 full capacity 2.5, a year ago. This.
This is below our target range of 2.3 to 2.5.
Our strong liquidity reflects our elevated operating performance and significant improvements in working capital.
This improvement and working capital and place the impact of temporary increase and warehousing and build up and inventory during the third quarter that Rodney referenced earlier, which we implemented to minimize supply disruptions as a result, and high acuity cases forecast over the winter months.
During the quarter, Kroger repurchased $304 million of shares under its $1 billion authorization announced on September 11 Twentytwenty.
Year to date, Craig has not repurchased $989 million of shares.
In June Kroger increased the dividend by 13%, marking the 14th consecutive year of dividend increases.
Finally, I'd like to provide additional color on our guidance for the remainder of Twentytwenty. As we said previously the COVID-19 pandemic has changed the outlook for food retail and we continue to monetize evaluate and adjust our plans to address the impact to our business.
As a result, and our continued strong sales and market share performance and the expectation of sustained trends and food and Penn consumption for the remainder of our fiscal year, we are raising our full year 2020 guidance.
For the full year Twentytwenty, we now expect total identical sales without fuel to be around 14%.
We expect to achieve adjusted EPS growth of approximately 50% to 53% and adjusted free cash flow of $2.8 billion to $3.1 billion.
And our guidance contemplates continued investments and the customer and ongoing topic 19 related costs to protect the safety of our customers and associates balanced with continued execution of cost saving initiatives and growth and alternative profits.
Looking towards Twentytwenty, one we believe that our performance will be stronger and we wouldn't expect to price and the pandemic when viewed as a two year stacked result from identical sales without fuel growth and as a compounded growth rate to David Twentytwenty and Twentytwenty, one for adjusted earnings per share growth.
We remain confident in our business model and our ability to achieve consistently attractive total shareholder returns, we look forward to providing detailed guidance and 2020 long and updating you on and roadmap to deliver long term growth in March next year.
And now I'll turn it back to Rodney.
Thank you Gary we are executing against our strategy, even during the pandemic and continue to grow market share.
The strong underlying momentum and our core supermarket business and acceleration in the growth of our alternative profit business demonstrates that we are successfully transforming our business model to deliver consistently strong and attractive total shareholder return in 2020 and beyond.
We look forward to your questions.
We will now begin the question and answer session.
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Our first question is from Simeon Gutman with Morgan Stanley. Please go ahead.
Hey, good morning, Thanks, everyone.
I wanted to ask.
Around E commerce, and it doesn't look like it's getting and explicit call out and the headwind.
Even though it's sort of doubled in terms of sales. So can I ask you, where it's showing up and the TNL and then a bigger question Brazil.
Presumably sales will normalize a bit and 21, but we think or I don't know if you think digital will still be elevated so how does that manifest itself and the piano for next year. Thanks.
Thanks, Simeon for the question if you look at E Commerce, Gary as Gary and I both mentioned.
Incrementally is profitable this quarter on the incremental growth and it was driven by the continued improvement and reducing the costs.
To serve our digital customer and the incremental growth.
And media and as both of US mentioned, we would expect to continue to make progress on both of those fronts.
As you look to 2021.
We expect.
Finally, the digital growth won't be as much as it was and 2020, but we would expect.
For the customer to continue to.
To expect and what digital service, but the thing that to me is.
And.
Inspiring and great to see is customers that are digital shoppers generally still continue to come into the store to use and heaven and store experience, where they want to and that customer basically spent double what they spend if they don't.
So we really like the overall seamless omni channel experience that we're delivering and and creating for the customer and we would expect as we continue going forward.
That will continue to make progress on the profitability of that digital shopper and then obviously once you get past the startup costs of Ocado and some of the micro fulfillment centers things like that.
That.
Is significantly even lower cost than serving the customer and the store. So when we really look at all the pieces together, we love the progress, we're making and we are excited about the continued progress we expect to make.
Everything we can see we think that.
Pandemic is accelerated the.
Growth or transition to digital probably by three years or so.
It wouldn't surprise me if it dropped off a smidgen, but I think it was it will continue to grow from that because it is a long term trend where customer really expects.
To be able to get it get something and store pickup for delivery and they expect to be able to bounce back and forth based on whats easy for them I don't know Gary anything you would add.
I agree completely Rodney with your overall comments, maybe a couple of specific semi into Twentytwenty and Twentytwenty, one just to build on some and run these comments from.
And most you think about Twentytwenty, we've talked about the past free range, obviously being lower on digital although being incrementally publicity. So the way it would show up and operating and now is where typically on net sales growth that we're seeing this JV might have normally seen a pass through range of north of 15% on a traditional brick and mortar sale the blended rate between digit.
We'll install and nothing in the current costs may be coming around and around 10% versus that 15% to Ohio and the combination of lower cost free range on digital and the incremental targeted cost will be bringing down the overall blended rate.
Interest in you know on on a specific example, as you know we took a wait and see and on a promotional basis during the quarter. So that would be a headwind to gross margin, but actually the value that we and cranking through media and.
And you, it's really offsetting that sir and we've been able to invest and the customer while still be able to replacing that revenue by offering Tesla and digital communications to customers that and drive new revenue streams to offset not promotional activity and I should say.
Think about Twentytwenty, one just one sort of I guess and unusual phenomena interest and being through and the more improvements we make now and our digital businesses. We are continuing to improve digital profitability. So as we take cost out of the cost of from an order as we grow the average order value through customization as we grow media revenue not that.
Those tailwinds will will be if we achieve them in Q3. This year, we will get the full benefit on the whole volume next year. So actually on the same level and business digital would be a tailwind in next year's from National model now obviously as digital continues to grow it will it will create some additional investment next year, but on that on the base level net.
And is that we are generating and 2020 as you create the full benefit from nice cost savings from media revenue it'll become a tailwind on that thank you and I will business next year in terms of improving profitability of digital.
Thanks, Gary maybe just the one follow up and I think Rodney mentioned also micro fulfillment will help over time just to clarify the pickup that you're doing for for click and collect the pickup orders all the pickup is being done by in house employees, and I think thats pressure and the SDMA line.
The Instacart and the third party partnerships, where does that show up in the PML do any of your employees and actually pick for Instacart and and Big picture the economics with some of these third parties.
I guess, where does the pricing power is there pricing power with with you.
Some of those partners and thank you very much.
Yes, and then you'd be correcting the and the the way in which I call pickup business, which all cannot be analysed I'd like to pass through rates is the labor associated with taking the profit and this still if thats what drives the that mid single digit pass through rate versus the.
So the high teen range, if you like on traditional brick and mortar sale.
We have a fairly unique model I think with Instacart. They are after dominant part and we do use on deposits as well in terms of delivery asset part of operations of instant coffee is still delivered through the Kroger ecosystems and the custom I would come on to Craig Dotcom, and all other Kroger, app and and what holds or a grocery.
Livery.
Just a comp and pick up product force, but we're managing through the Kroger ecosystem. So a significant part of App volume would flow through that and and then of course, we are compensating.
Instacart or under the Coffey from asset base and that would also appear and energy and things that would be a similar and but the and now.
The part of the business wagons to cost is.
Using their own and digital assets and the customer is going through the digital ecosystem of Instacart that would flow through more as a traditional cyan and wouldn't have the same level of impact on the pay and now we are a big partner of Instacart and obviously, we work very closely with them to to make showing maximizing the efficiency of the model and continue to work on where we can improve.
The path to profitability and all those modalities and.
And we would look at constantly people to partner with to help accelerate our experiences for our customers. So.
And the example, Gary gave is just one of many different partners and some are larger companies. Some are smaller companies, but it's really.
How do we make sure we deliver for the customer the way they won delivered for them.
The next question is from Rupesh Parikh with Oppenheimer. Please go ahead.
Good morning. This is actually Kyle on to your question.
Question.
Well I'm not sure how much price provide here, but.
Thats what benefits you see and on the gross margin Michael recent quarters that might go away and 2021, so and we'll look towards next year.
The potential for some of the recent growth Super current burst.
Should we be thinking about greater growth margin pressure than a typical year and the benefit from sales leverage.
Person.
And is there anything positive and negative you can call out from next year and the gross margin line and everything.
GAAP comparison and.
2021 and general.
Yes, hi, Thanks, and the question Erika we wouldn't at this point get into specifics around Twentytwenty, one detailed guidance as we plan to share more color on App overall outlook for next year.
Today in March and track key flow update when we get to that what I would say and in general terms I think it's important to and remember that as we talk about the investments that were making and gross margin today.
Many of those are and areas that matter and ice and the customer around.
Personalize promotions and value offers that really resonate with the customer and the areas that are.
We believe will drive loyalty long time operating.
The most important countries for the customer ramp fresh because that's what primarily drives that decision to shop, when a food retailer and.
We continue to investing net advertising to grow and my.
Operating effectiveness and share of voice and these are the kinds of investments that we'd be making this year because everything we see an AD age and insights and has the somo to ensure that we come out of the end of the kind of environment and a stronger position to me when team and winning market share. We believe those investments that we're making a critical to that and that price increase.
Operation from some of our traditional vs. As we come towards that lapsing that time, and we retired day.
Many insight and investments on opposite of everyday low prices. So I wouldn't necessarily think gives all of them and having to be incrementally and 2020 long vs. Twentytwenty because as we cycle day as we will obviously be layering on new formations next year the day.
On new and it's not one on top of the other is the new calendar and investments that we made so I wouldn't necessarily think of the investments that we're making and having to be dramatically different there are certainly going to be some unique factors in the model and actually when you start to see de leveraging some of the sales measures that may create some.
Headwinds and the model that you cycle, but with the continued improvements that were driving and sourcing and continued improvements that we expect to dry and within our media revenue and alternative profit, which by and to gross margin and we still feel very good and that the balanced model that we've shared with you and the investment community around continuing to gain and to balance investments with.
Growing customer loyalty and driving overall earnings growth and.
Gary just briefly mentioned that and we'll get into more detail in March but when you look at overall, we do see.
Meaningful opportunities to continue through process change.
And.
Take costs out both and goods not for resale cost of goods and operating cost itself and we'll get into more detail in March.
Gary mentioned this year, we're on track to take over $1 billion out and we still see opportunity and 2021 to take additional costs out.
And not affecting the customer's experience.
Okay, Great and that's helpful. And then just given some recently from recent industry developments and online pharmacy side can you just remind us from where kroger and that right now and that effort on our online pharmacy side.
And maybe going forward here and also just curious what you're seeing from it.
From a adoption and offering.
Yes.
Yes. It is I mentioned in the prepared remarks, the pharmacy customer typically sprint spends three times more in our stores and.
The pharmacy customer for us we've been working hard our whole teams have by treating food as medicine, and we're increasingly learning how to help customers eat healthier and live healthier and for US. It's really the two working together is how we help customers stay healthy.
I see.
If you look at some of the different.
Cards in terms of discount offerings those are things that weve been offering for several years, we have partnerships with good Rx as an example, and and others and.
And.
For us.
We think it's part of the overall ecosystem.
Really.
Like the fact that we're able to help customers eat healthier and tie and food and it appears that about half of healthcare costs are driven by the way people eat and we're helping people eat healthier.
And.
It's a.
The partnership that we think will work well and one of the things that we find is customers still appreciate I appreciate online and.
At times delivery at times, but they also really appreciate having and health care professionals that they can talk to one on one.
To answer their questions and that's what we're able to offer either in person or and Tele health.
Okay, great. Thank you and happy holidays, Thanks, Erika you too.
The next question is from Ken Goldman with JP Morgan. Please go ahead.
Hi, good morning, Thank you.
Morning, there's a decent amount of inflation up the supply chain from you everything from core interest rate and your net pricing I think it's safe to say, it's already risen thanks to reduce discount and you've been if maybe you didnt pull back as much as your peers day.
Curious to what extent some of your vendors are asking and now that we accept list price increases are on there and because of inflation and what your appetite is to take these increases and pass them on to consumers.
Especially as we think about the next few months and again, where you want to be competitive on price, but John.
John argument can be made you do have a chance to put some price is higher in a low elasticities environment too. So I'm just curious for your thoughts.
And when you look at and I'll, let Gary get into some of the details, but when you look at overall.
A little bit of inflation always.
This is a little.
And your and.
We don't claim when we have a little inflation.
But as you know we've built a business model that is strong and whether inflations high or low or anything in between.
If you look at in the third quarter inflation was a little bit lower and the third quarter than the second quarter and that was primarily driven and in the meat commodity which was consistent with what we expected.
You're you're going to always work with Cpgs initially to try to find ways to take costs out of the system. So that our customers don't have to have inflation and.
It's something that every seat.
CPG that partnership.
Is a different approach in terms of trying to figure out a way to minimize the impact from customers.
And Gary and either you want to add or some of the specifics on Ken's question Joel Thanks Rodney.
And I would say that overall, we are seeing as Rodney mentioned that you've probably heard us say before we build our model based on so the hospice and to 1% inflation.
And with Rodney his initial comment.
We have been seeing inflation running more in the sort of 2% range and what I would say and slightly up or down as Randy mentioned, but generally speaking in that and that kind of range.
From my perspective, and it's obviously hard to predict exactly learn pricing Gary as we didn't see anything in the overall supply chain. When you think about food and the system that would come and is dramatically different but there are also risk obviously, we've cultivated and what happened in the first quarter around me too Rodney you also mentioned a moment ago and their 70 some odd.
He is categories that because of the season I've had some supply shortages tape and nothing that I would say that would take us dramatically today as we look forward outside and that sort of 2% give or take range I think from aspect to it as Rodney said, we always look for ways to mitigate not wherever we can where it's justified and makes sense and co.
Lastly, we look at how would that be passed on to the customer I'm ready, we try and disconnect between inflation and what makes sense to pass on and then and pricing investments, which and more focused on where do we believe customer is looking for the most value and loss and to drive long term low Ti. So we really try and make sure that if it makes sense to pass and we'll we'll do that but.
And we're always looking to to identify ways in which we can ready and connect more deeply the customer and build loyalty and same time.
That's helpful. Thank you for my quick follow up and.
We are hearing some indications and seeing some indications of consumers.
Reload and a little bit over the last couple of weeks as co made has unfortunately worsened.
Can you help us with what you're seeing there and maybe what that means for the quarter to date trends so far in terms of your numbers.
Ken You said, a word and hot is trying to help me understand what industry.
Pantry low.
The day, we did put and eliminates uncertain category.
Early in the quarter and that was really the reason we did that was because the learnings from early and we.
We are as we mentioned seen people shop fewer times that buying more when they shop.
The other thing and the.
Holidays, obviously on Christmas time will tell but and new years of both people, obviously celebrated the holidays and a much smaller family gatherings.
And what they would have and past year. So it's a little of all the above.
That's going on and one of the things that our supply chain team did was go and.
Get access to additional warehouse space and then our procurement.
Hi from the hard to find inventory.
So that we will be there for our customers. So I would say overall, it's pretty limited its a little stronger in the west that in the Midwest.
Just because of where different parts of the country are with co but in their approach to co but but.
Overall.
Not as much as what we saw earlier in the year, but some.
And anything I would would have to answer the second part of your question. So when you look at the case and some sales last quarter I would say relatively consistent throughout the quarter, we give people take a percent within the where we landed at the 10.9% as Rodney mentioned, we certainly saw some variability by west versus Midwest and west being more elevated I think because.
So some of the greater restrictions that were in place as we look at the trends in the current quota and would be very similar.
And at quarter to date and Q4 that is where we ended in Q3 and what would be interesting that would be the areas and Rodney alluded to this was and that the first couple of weeks of the quarter, we have seen and more about elevated spend and the week of Thanksgiving Wild and any nolan environment than we would have been and outstanding weak and it wouldn't be it wouldn't have been the sales.
Same level as sort of accounts the typical week that we've seen and so the blend of those three weeks gets you to looking very similar to where we were in Q3 and I think the Romney's 0.1 of the things that the reason that we left the guidance range and Marys plan.
Clearly, we're expecting continued tailwinds from executing our strategy and seeing kind of and trends continuing food.
And understanding how exactly the holidays play out when you've got two and.
And we'll holiday is a bit like Thanksgiving with Christmas and new year still to come and then Super ball, how should fall into App fiscal year, this year, where the data and the fiscal Q4 last year and the asset value significant impact on on sales as well, so how how our customers spend holiday gatherings and and how how big.
And our basket sizes are and how that behavior plays I still from things that will be up and interesting to see and evolve over the coming weeks and months.
That makes sense. Thanks, so much thank you.
The next question is from Michael Lasser with you vs. Please go ahead.
Morning, and smartcard on from Michael today, and slump and taking the questions. So you noted that you're continuing to take market share and assuming this is relative to other retailers, where do you think it's coming from is it largely from small traditional players mass merchants and other channel a little more color here would be helpful. Thanks.
And as you know, we never really look at market share in terms of where it's coming from and what we do everything we can to expand the market and then how are we doing within that market. So we think the market shares pretty broad based were getting that by our existing customers spending more with us some.
Some of that is driven by our digital offerings and the seamless and this of the digital offer some of its driven because we are getting new customers and to our ecosystem.
Both digitally and and stores. So it's really very broad based in terms of where it's coming from.
Okay, and then as a follow up any update on the Walgreens initiative, and whether you're looking to accelerate expansion there. Thanks.
I would say we continue to learn we really are.
Yet and the position, where we would decide whether to expand or whatever.
It continues and the customers react.
Reasonably.
We are continuing to learn how to better and deeper connect with the customers. So.
Happy, but still early on.
Great. Thank you very much.
Thanks Mark.
The next question is from Greg Badishkanian with Wolfe Research. Please go ahead.
Good morning, and Spencer and on for Greg. My first question is can you talk about how you think price investments are driving share shifts and is operating environment today, and they're seeing promotions, becoming more important state and they were three or six months ago and sort of how you're thinking about that as we head into 2021. Thanks.
If you look overall and I'll, let gary get into more than some of the specifics.
We think it's important obviously there are some customers, whose financial situation continues to be very strong and growing but theres other customers.
That their financial situations.
But and more price, especially if as they've been affected and cobot in different ways, and losing jobs and things like that.
We thought we just believe when you look at long term.
That it's important for customers and understand we did not take advantage of them during co, but and we've continued to invest both and everyday pricing and promotional pricing.
And as Gary mentioned like waiving fees for pick up things like that to try to help customers budget to go further because we just think it's one of those things where the customer is going to appreciate everything that we've done during.
During co, but when we get out of co but.
The other thing and I mentioned that in my prepared remarks, and I'm. So proud of the Kroger team is if you look at we've continued to make good progress on our fresh dimensions are friendly dimensions relative to our competitors and when you look at.
All those things together between a seamless experience, where a customer and go online and in store and credible fresh experience that's better than they can get with our competition.
And with great pricing incredible promotions, we just really see no reason that customers would shop anywhere else.
Yes, I think you covered it well Rodney I have your endpoint I went out and you said, it's a magnet together, but as we look at the nitrate for a longer period of time, and obviously, none of us have been through something like a pandemic like this before but we look at periods, where customers go through and different and.
Economic conditions and different environments and not be three short term natural disasters that we manage all true a longer term economic cycle and our earnings over time off and it's really pull and staying true to your values and it's really important to continue to deliver what the customer expects consistently because over the longer term.
It really does show through and we think thats going to be very important to deliver on that expectation and we have to come out and kind of a stronger.
Great. That's really helpful. And then switching to online can you just give us an update on the basket size or online orders and how that compares to in store orders and and would you expect that GAAP to widen over time and then just an update on the Incrementality how incremental our online orders today. Thank you.
Yeah, if you look at the basket size, it's significantly higher.
Over time, I always assumed that it will get smaller as a customer gets more comfortable moving choppy multiple channels.
But.
I would say take 10 of us from average our average guess together and that will probably be the closest day, Gary you want to answer the last yes, I would say and Incrementality, we're seeing and I mentioned some of my prepared remarks, but were seeing very similar consistent patterns and incrementality. It would still be north of 50% in terms.
When we look at what customers are buying when they engage with US digitally and then we look over a longer period of time and look at the categories and the products that were buying from us before engaging and digital and you combine the total purchasing behavior between store and digital from that customer we are seeing new new categories, and new products and that is a on the basket and Rodney and.
Cash and the significantly higher AD and north of 50% of that about basket is incremental let me look and the customer shopping behavior over a longer period of time.
Great. Thank you.
Thank you.
Next question is from Karen short with Barclays. Please go ahead.
Hi, This is Renato Basanta honestly and thanks for taking my question.
And so I wanted to follow up on next year I got from Korea.
Hi, Michael with respect to how you're thinking about the PML and appreciate and sort of some of the current you've given already.
If I heard down mid single digits from next year, our map imply something like 200 basis points of margin de leverage.
I mean, you know you presumably lose from some co root cause from enhanced from some cost savings flowing through but I'm not totally sorted that growth that makes up from the de leverage so.
So just wondering if you could help us think about the key and now in that scenario.
Typically what sticks in terms of coal good cost next year, and then any color on any other key and out piano levers you have to cool. Thank you.
Yeah sure. Thanks, and the question and I think overall, we think about I wouldn't get into specifics on the sales numbers, because we're going to talk about size as you mentioned at our Investor day, but we do believe when we look at customer behavior, and how it's changing and some of the structural change that we see and when we look at and.
And previous.
Economic downturns, which we think they'll still be as Rodney mentioned, some customers that are going to continue to feel that the economic impact and Kobe for some time to come that we would expect cash two year stack sales to be above the traditional level that our model is built on because of how we connected and customers have a great market share and some of those and external factors.
I actually think specifically around the puts and takes and the model for next year I did the average is where I think it would be important to be thinking about and we'll be sharing more again in March when we provide the update additional color we would be expecting a significant amount of non recurring costs into next year. If you think about things like.
Rewards and incentives plans paying out based on performance and the business. If you think about.
Some of the onetime costs, we would have been could and the early positive Gary that even if you look at the run rate costs that we're incurring now versus the earlier part of the and they would be significantly lower as we optimized our plans and adjusted and and by the back half of the year I'm sure World and things that a vaccine will be in place that starts to change the environment somewhat as well.
Also we would we would absolutely expect I'm certain costs not to flow through into next year, and we would expect all profit to continue to be growing wheat, thats not a business and everywhere, we expect to see a slowdown in momentum we continue to see tremendous opportunity for growth.
As you know we shed I think through restock Kroger on cost savings will deliver a billion dollars. This year. We did have a billion dollars in 2019, and 2018 and they're all incremental on top of each other and we wouldn't expect that to be the end of the story and cost savings either side, we would be expecting to share net additional plans and next year for how we're going to drive continued cost out of the business.
And then the health and wellness space that Rodney mentioned, it but Tom.
Hi, David vaccines is certainly an opportunity, but even just more broadly the pharmacy business and while we've continued to grow our business successfully it is definitely had some impacts of customers visiting.
The doctor less frequently and national and new scripts being added as would be a headwind versus what potentially becomes a tailwind next year.
To your point that we would still expect and contemplate some credit cost to carry over into next year and we.
I would expect to be continuing to invest in the business EPS, we always do to drive low teen and drive long term market share gains and we would think fuel will be a headwind likely next year too just because of some of the unique circumstances and Q1. This year when you think about the.
The Russia, Saudi Arabia incident that caused prices to get completely and in and.
And our position that drive margins at a level that flow unlikely to repeat so I think its a lot and moving policy next year and that's why we think it's important that we provide you with a much flow picture in March when we when we I feel like we've got a clarity on what the full picture looks like for next year, but overall, we feel very confident and our ability to on a two year basis see.
Earnings per share growth on a compounded range and that I'd sales growth and to be and Atlantic wood and expecting and TSR model that we had in November last year.
Okay. That's that's great color.
And then just wanted to get your perspective with respect to labor costs.
You mentioned your all in average wages, but can you give some color on what your actual entry level wages and how me so.
And whats are actually at that level and presumably the federal minimum wage could go to $15 an hour. So wondering how you're thinking about managing that possibilities for next year. Thanks, so much.
Yes, we and very few of our associates at minimum wage and about 90% of those are younger than 18 years old or 18 years and younger so its.
People, whose is their first job and as you know we have a ton of people that come to work for us as a job and and make it a career and we want to make sure that we're providing great career opportunities from peoples income and continue to improve.
We are whatever the federal minimum wage is low.
Comfortable with that we don't take a position on that because as long as our competitors have the same costs as we do.
You know, we're very comfortable and operating on uneven ground.
We it's always side not good when we have a cost they don't have so.
We don't take a position and federal minimum wage and we view that thats the politicians responsibility.
As I mentioned and as you know as part of Restock Kroger. We originally included $500 million for incremental pay increases and and so far we've actually done $800 million of incremental pay increases.
For our associates, and addition to provide and great benefits.
For paid time off sales.
Occasion, and other things.
Great. Thank you.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to Rodney Mcmullen for any closing remarks.
Thank you for your questions today I wish all of you and your friends and family Happy holidays, Merry Christmas and a happy new year and encourage you to stay safe.
At Kroger, our purpose is to feed the human spirit, which means that we are called to do more and help make the lives of those around us better.
When we see our associates customers and neighbors effected by systematic racism discrimination and and just as.
We are called the speak out and act in accordance with our values.
Over the past several months, we've listened closely to our half a million associates and countless communities across the nation to learn what we can do better to accelerate and promote greater change and equity and our workplace and the communities we serve.
We recently shared our framework for action diversity equity and inclusion plan.
This plan is just the beginning.
We are approaching this effort with humility, knowing that we can't do it alone and don't and won't have all the answers, but we are committed I am committed to continuing to listen to speak out and to take action.
That concludes our call for today.
Thanks again for your questions and thanks for your time and by.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
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