Q4 2020 Kroger Co Earnings Call
Yeah.
[music].
Good morning, and.
And welcome to the Kroger Company fourth quarter 2020 earnings conference call all participants.
<unk> will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll 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 two.
Please note. This event is being recorded I.
I would now like to turn the conference over to Rebecca Manis Director of Investor Relations. Please go ahead.
Thank you Gary.
Ernie and thank you for joining us before we begin and I want to remind you that today's discussion will include forward looking statements.
And we want to caution you that such statements are predictions and actual events or results can differ materially.
And he's held discussion of the 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 company assumes no obligation to update that information.
And our fourth quarter press release, and our prepared remarks from this conference call will be available on our website at.
IR Doc Kroger Dot com at.
After our prepared remarks, we look forward to taking your questions in order to cover a broad range of topics from at many of his views and Ken We ask that you. Please limit yourself to one question and one follow up question if necessary.
I'd like to confirm that Kroger will host its annual virtual Investor day event on Wednesday March 31. Please.
Please hold on the day and we look forward to share more about our future growth plans with you that I will now turn the call over to Kroger's, Chairman and Chief Executive Officer Rodney Mcmullen.
Thank you Rebecca good morning, and thank you for joining US with me today to review of Kroger's fourth quarter and full year 2020 results is Chief Financial Officer, Gary Miller Chip.
This past year presented challenges that none of us could have predicted.
I am so proud of how team Kroger has risen to meet every challenge and to be there for our customers when they needed us the most.
While we hope that the worst of the pandemic is behind US and we are encouraged by the progress around the initial vaccine rollout our priority remains of the health and safety of our associates customers and communities.
2020 was the final year of our three year transformational plan restock Kroger during which we made strategic investments and changes to our business model to better serve our customers.
And we focused on widening and deepening our competitive moats, which include seamless.
Personalization fresh and our brands.
As a result, we generated strong momentum and successfully repositioned our company to serve our customers and new and exciting ways.
Now I'll turn to our results.
Kroger delivered strong results during our fourth quarter and for the full year 2020, we.
We continue to gain market share and full.
Full year results were above the guidance, we shared with you last quarter.
Identical sales without fuel were 14, 1% for the year at.
Customers continue to consolidate trips and spend more per transaction.
We grew digital sales triple digits in 2020.
Enabled by our team's ability to pivot quickly and effectively and the first stage of the pandemic to ensure that we're meeting our customers' demand for safe low touch and touchless shopping modalities.
Our strong performance and digital is also a testament to the proactive investments we've made over the last several years and our network, which position Kroger to respond with agility during this crisis and critical time.
Beyond the numbers, we have built substantial momentum within our business and more importantly, we continue to deepen our personal of personalized relationships with our customers who will remain at the center of everything we do.
When the pandemic started no one knew what to expect but what we did know was at our decisions and actions would be guided by our purpose and our values.
Our purpose is to feed the human spirit, which means we are driven to do more and help make the lives of those around us better, especially during times of uncertainty.
Since the beginning of the pandemic last March our most urgent priority has been to safeguard our associates and customers.
We've implemented dozens of new safety, and cleanliness processes and procedures and our stores and all of our facilities.
Including safety partitions, and physical distancing, Florida calc.
Implement implementation of customer capacity limits, and providing PPE like masks for our associates.
All of which are described in our blueprint for businesses and open source guide we've created to help other companies navigate the complexity complexities of safe safely operating during the pandemic.
Supported by our strong performance and cash position, we've committed more than $2 5 billion to safeguard the environment of our associates and customers, where they work and shop and and to reward associates, including committing nearly $1 billion to better secure pensions for over <unk>.
30000 associates.
And this was in addition to pick to paid emergency leave financial assistance through our helping hands fund program and much more.
We continue to provide support for our associates, including awards at November and February that included $100 cash and of $1000 of files and fuel points placed on frontline associate shopper cards to help finance <unk> financial hardship from the pandemic and as of.
Thank you for their continued commitment to serving our customers so tirelessly.
We know the critical role that the Covid vaccine plays and creating a safe environment for our associates and customers.
That's why we are encouraging everyone to receive the vaccine as soon as they're eligible to do so.
During the quarter, we announced the $100 incentive for all associates, who received the manufacturer recommended dosage of the vaccine and we hope this offer along with targeted education efforts will help breakthrough vaccine hesitancy and further encourage the health and safety of our associates.
Kroger health as it is proud to be of partner with the federal government and state governments and distributing the vaccine.
We continue to introduce initiatives to improve the vaccination process, including the recent launch of a new scheduling tool and enhancements to our website.
To make finding and scheduling and vaccine appointments easier.
To date, Kroger health is administrated more than 665000, and vaccines, including more than 38000 for our own associates.
Because vaccine availability and eligibility continues to vary by jurisdiction and we are advocating at the local state and federal level and calling for our associates and frontline grocery workers broadly to be included and the earliest vaccine phase possible.
Inspired by purpose and guided by our values.
2020 taught us that we are capable of doing more of moving faster and effectively prioritizing what matters most to our customers.
Associates and communities.
In addition to changing how we work COVID-19 has changed how our customers enjoy at food.
We continue to see people eat and work more from home and prioritize health and cleanliness.
We believe that these trends will continue even as restrictions ease and vaccinations are distributed we will share more of these trends with you at our Investor day, and a few weeks.
What hasn't changed is our fundamental commitment to provide to further and our customers first or.
Our competitive moats.
Seamless personalization fresh and our brands are built upon this commitment and are stronger today than ever before especially as customers eat more food at home.
We will continue to invest and these critical competitive advantages as we work to win a larger share of the food at home market.
Let me provide some more detail on each of these competitive moats.
Pickup and delivery continued to grow during the quarter and we are seeing more and more new customers engaging and our seamless ecosystem.
Our overall digital sales grew 118% <unk>.
Including delivery sales growth of 249% during the quarter.
When customers engage and both our in store and online modality, we see at 98% retention rate within our.
Ecosystem, highlighting how sticky our customer engagement is.
During the quarter. We also saw further improvement and digital profitability as we continue to improve cost efficiency sales mix and retail media.
Yesterday, we completed the inaugural order through our first Ekotto shed in Monroe, Ohio. This marks the soft opening of the facility and we look forward to our Grand opening in early April.
We continue to be excited about the elevated experience that this will bring to our customers and the tri state area and across the country as we continue to open additional facilities.
Our data and personalization allow us to deliver meaningfully meaningful unique customer moments across channels to address specific customer needs, while enhancing their relationship with Kroger.
60 million of households shop with Kroger every year.
And the scale of our digital business has grown rapidly and in fact during 2020, we had over one 3 billion customer interactions across our digital modalities at.
At 30% increase over last year, our significant reach allows us to meaningfully personalize the customer experience.
And 2020, we presented nearly 11 million and personalized recommendations.
Per week.
Right 11 billion recommendations personalized each week.
And when you look at that over the year, that's more than a half a trillion dollars offered personalized for customers during 2020.
We achieved several exciting milestones and fresh this year as more customers are spending more time at home our produce and floral departments outperformed total company.
Customers are focused on eating healthier as evidenced by the increased engagement and our simple truth brands, which grew 18% during the quarter.
We also saw customers trading up and buying higher quality premium products like luxury wine and Murray's cheese, which also outperformed the total company.
As customers look for food inspiration, we continue to develop innovative products to meet their needs, including ready to heat and ready to eat foods.
We have seen significant growth and deli bakery and meal solution and home chef finished the year with record sales capturing additional share of stomach from restaurants and grocery retailers.
And also this quarter, our fresh for everyone campaign celebrated its first anniversary the.
And the marketing campaign is reaching new heights, and AD effectiveness and is resonating with our customers.
Our brands achieved its best year ever and 2020.
Exceeding $26 2 billion and sales.
Our simple truth brand achieved a major milestone exceeding 1 billion annual sales for the first time and this is a brand that was just that was created from scratch a little over five years ago.
We saw at 20% growth and our premium culinary brand private selection as more people continue cooking at home and elevating their meals.
Our simple truth plant based platform launched 53, new items and 2020.
One of the key launches for the year with simple truth oat milk ice cream.
This line has brought new customers to the category and sales are continuing to outpace projections.
Over one 4 million new households have purchased from the simple truth plant based platform this year.
As we hold high standards for the taste and experience of our plant based products just like the rest of our brands portfolio.
Our trial rate, that's continued to grow and our repeat rate has continued to strengthen.
Kroger is committed to helping people and our planet.
This is at the core of who we are as a company.
During 2020 this work became even more critical as our communities experienced the pandemic and its economic impacts social unrest and natural disasters.
Let me provide some detail on two important areas under our broader ESG strategy.
Diversity equity and inclusion and our zero hunger zero waste efforts to improve food access and food security.
Diversity and inclusion are among kroger's.
Long standing core values and.
In October.
We introduced at 10 point framework for action to accelerate diversity equity and inclusion and promote greater change and the workplace and and and our communities.
As part of this framework, we created internal advisory Council comprised of Black leaders and associates across the company to.
To help set priorities and drive meaningful change.
The Kroger Co Foundation also established a $5 billion racial equity fund to align flat therapy to our extended commitment.
So far of the foundation has directed $3 million and grants for organizations with innovative approaches to building stronger more at <unk> communities.
COVID-19, and its impact also shined a light on the intersection of food security and health and nutrition and racial equity.
Given the increased need and 2020 Kroger at nearly doubled our Carol charitable giving to the feeding America and network of food banks.
And supporting key partners like no Kid hungry.
Direct meals were needed most.
We are pleased to note that our associates continue to rescue surplus food throughout the year. Despite heavy stockpiling of periods early in the year.
Zero hunger <unk> zero waste is the centerpiece of our at ESG strategy and it's how our associates live our purpose every day.
I would now like to turn it over to Gary to take you through our quarter four and full year 2020 financial results Gary.
Thanks, Rodney and good morning, everyone.
We are extremely proud of our results and 2020 and the balance sheet and delivering for all of our key stakeholders, our associates customers and communities and shareholders.
Strong execution by our team and accelerates and investments and our competitive moats during the pandemic allowed us to create significant value to shareholders and strengthen our balance sheet.
And the next and we see and our business, we started pre pandemic and accelerated joined the pandemic places us at and even banks and position to grow sales and profitability and the future and deliver on at CSR commitments.
Three points of the accelerated momentum in at Marvell achieved during 2020 include significant market share gains.
Alright, and investments and fresh and digital experience I.
And over $1 billion of cost savings $150 million of incremental alternative profit and improve digital profitability.
Let me share additional color on each of these points.
Changing customer behavior and caused by Covid was of course, a major factor and our results last year.
And to the fall from the importance to the customer of fresh and digital.
We continue to invest and aggressively grow our capabilities and these areas of strength of Kroger, leading to significant gains in both digital and total food and high end market share.
Consistent with our value creation model, we were disciplined and balancing investments and our customers and associates with cost savings from.
From the third year in a row, our operations and sourcing teams delivered over $1 billion and incremental cost savings.
These savings continue to be focused in areas that take complexity out of the business and allow our associates to provide and better customer experience.
Alternative profit continues to be of significant growth driver and our model and contributed $150 million of incremental operating profit on top of the $100 million of incremental profit in 2019.
Retail media fueled this acceleration and we continued to see significant opportunities for additional growth and the future.
Importantly, this progress with cost savings and growth of retail media also allow us to improve the profitability of our digital model and 2020 as we reduce the cost of simple set of digital order and grew media revenue from additional sales.
I'll now provide more color on our full year results.
<unk> delivered adjusted EPS of $3 and 47 and goodbye.
And your churn up 58% compared to last year and ahead of the range we share during quarter three.
Identical sales and excluding fuel were 14, 1% inline with expectations and our adjusted FIFO operating profit also came in at the top end of our increased guidance.
Gross margin was 23 three percentage of sales of 2020 and.
FIFO gross margin rate, excluding fuel increased 14 basis points, reflecting sales leverage continued price and alternative profit streams and sourcing benefits offset by continued investments and price and value for customers.
Our G&A range without fuel and adjustment items decreased six basis points, reflecting increased sales leverage and execution of cost savings offset by COVID-19 related investments to reward associates and to protect the health and safety of associates customers and communities.
Turning now to our fourth quarter results, we delivered adjusted EPS of <unk> 81.
Chan of 42% compared to the same quarter last year.
Primary and post identical sales without fuel of 10, 6% driven by continued strength in grocery and produce and meat.
Digital sales grew 119% during the quarter outpacing the full year range as customers continue to rely heavily on our digital and modalities.
Digital contributes at approximately five 5% to total identical sales without fuel and as a result of productivity improvements and the cost to fulfill and digital order and accelerates and media retail media and revenue, we improved passenger and profitability on digital sales by over 20% and the fourth quarter.
FIFO gross margin rate decreased six basis points with continued price investments offset by growth and alternative profit streams and sourcing benefits.
And G&A range without fuel and adjustment items decreased seven basis points, which reflects increased sales leverage and execution and cost savings offset by continued COVID-19 related investments to reward our associates and to protect the health and safety of associates customers and our communities.
Joining the full of quarter, the incremental COVID-19 related investments were approximately $275 million.
And <unk> was a credit from the quarter of $84 million. The LIFO credit was primarily driven by full quarter of working capital improvements and pharmacy inventory and dairy deflation.
The income tax rate of 38% was a benefit from the fourth quarter as a result of the UFC and W pension restructure charge.
Fuel was a headwind of approximately $50 million operating profit during quarter, four and like the broader industry. We experienced at year end of year decline and fuel gallons and the average retail price of fuel was also at.
At $2 <unk> this quarter versus $2.58 and the same point of last year.
And as Rodney touched on earlier, our associates of being nothing short of amazing over the past year, and we continue to invest in and reward our associates for their incredible work.
We invested approximately $300 million and increased Audi range during 2020 as part of the $800 million of incremental investment and associate wages and previously announced as part of restock Kroger.
Our average hourly rate is now at $15 50.
Up from $16 last year and with comprehensive benefits factored in our average out of the range of exciting for $20.
And 2021, we expect to invest an incremental $350 million and can.
Average hourly wage increases for our associates.
Looking ahead, we have several major labor negotiations and 'twenty 'twenty, one including contracts with the UFC W for store Associates, and Atlanta, Houston, and Little Rock, Michigan, Memphis, mid Atlantic Cincinnati and Poland.
Our objective and every negotiation is to find at 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.
And we strive to make out of overall benefit package and relevance debate and associates.
Our financial results continued to be pressured by health care and pension costs, which most of our competitors do not face we continue to communicate with our local unions and the international unions, which represent many of our sanctions on the importance of growing our business and unprofitable way, which will help us create more jobs and career opportunities and and.
Kind of jumps security for our associates.
Turning now to our financial strategy.
As a result of our strong operating performance Kroger generates tremendous free cash flow and 2020, which resulted in a significant strengthening of on balance sheet and liquidity.
And we reduced net total debt by $2 billion over the last couple of quarters and co.
And as net total debt to adjusted EBITDA ratio is now at 175 compared to our target range of two three to $2 five.
Our financial strategy remains unchanged and we will continue to evaluate how to deploy excess cash and ways that will accelerate kind of value creation model by sustainably growing earnings and delivering on our CSR commitments and making sure.
11%.
Looking towards 2021, we aren't providing specific guidance to help you better understand how we see the business today.
Due to the uncertainty surrounding trends and the food at high end market is kind of at vaccines Rollouts. We are sharing a wider range and we typically would and we will be transparent and sharing more of the year unfolds.
Our insight suggests there are a number of consumer changes, but at occurred during the pandemic that will prove to be more structural and lasting which combined with our strong execution and flexible financial model give us confidence we will be able to manage through the current on loans.
As we cycled and tough comparisons from 2020, we expect our sales will turn negative in 2021 and are guiding to a range of of negative 3% to negative 5% identical sales executed and fuel and logistics FICO offerings and profit of three 3% to $3 5 billion and 2021.
Evaluating on performance using a two year period will more accurately measure of our underlying momentum.
We expect that two year stacked identical sales without fuel to be and the range of 9% and 11%.
In addition, we expect our adjusted net earnings per diluted share and logistics FIFO operating profit to have compounded annual growth rates of between 12% and 16% and five 4% and eight 5% respectively.
Over the two years. This would result in total shareholder return significantly above our previously communicated target of 8% to 11%.
We expect our free cash flow to be at least $1 6 billion and 2021, which includes of payments and $300 million from payroll taxes deferred from 2020.
Over the course of 2020 and 2021 average annual free cash flow is forecast to be between $2 9 billion and $3 billion.
This excludes the sale of strategic aspects company sponsored pension contributions and pension payments related to the restructuring of multi employer pension plans.
And.
And these two of your expectations or ahead of our cash saw growth out of our algorithm and we believe the momentum and our business places us at an even better position to Greg and buffer profitably in the future.
We remain committed to delivering strong and attractive shareholder and type of shareholder return over the long term unexpected <unk> 'twenty 'twenty, one operating profit guidance to represent a new high at baseline from which we will deliver future CSR and I get to 11%.
Finally, we look forward to sharing more of our kind of strategy for growth and delivering on on CSR commitments at our upcoming Investor day and we.
And that I'll tell you kind of favorites and Rodney and thank you Gary I'm incredibly proud of our associates. During this past year. Our team was amazingly agile and always lead with our purpose and values, especially and dealing with all of the unknowns of navigating a global pandemic we are.
We're a different company today because of the events of the past year, we are more resilient than we've ever been.
We are more confident and our ability to continue to deliver for our customers associates and communities and our shareholders now we look forward to your questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question is from John Heimbach of with Guggenheim Securities. Please go ahead.
Hey, Rodney can you sort of.
To start with can you at least Directionally of course out when.
And when you think about that at three three to $3 5 billion.
Alternative profit fuel and.
The remainder of how that might perform.
And then secondly, you report on promotional.
Promotional intensity right that's been a major source of.
And third question Mark price at all your is your comps of negative everybody gets a intense promotional your thoughts on that and how that ties into personalization.
If you look at the thanks, John and high on.
On your first question, we would expect alternative profit the continue to be of driver.
As you know to 2020 was higher than 2019.
We think 2021 will incrementally will be a little bit lower than 2020, but very similar.
And part of it will obviously that as of year progresses.
As you know of the two major parts of our alternative profit.
And as Kroger personal finance and we believe that we will get back on track.
And obviously the pandemic has impacted our gift card sales and some of those things which is affected at if you look at retail media and retail media is increasingly becoming a channel that companies look to advertise in at.
And.
It's at a double win for us because it's an incredibly effective way for CPG and others to advertise and they get great insight on how good they do and if you look at our data, especially and recently there was an independent report that showed how kroger.
Retail media does when somebody invests and Kroger.
So we think that will continue to be and important part of the model and of <unk>.
And the incredible and important part of the growth and as you know our digital channel continues to grow as well.
We would expect fuel to be had.
Headwind from a profitability standpoint in 2021, especially earlier in the year, but we would expect gallons to turn around and have meaningful growth and gallons, but the gallon at total gallons will still be less and what they were in 2019.
And you know for us of fuel is just a great way of providing a reward rewards to our customers that they care about and.
We are starting to see people starting to drive a little more and it's one way to reward customers for shopping with US that's unique to Kroger.
If you look at promotional intensity.
We would expect it to remain similar to where it is so far we haven't really seen a lot different.
One of the things that.
I think everybody knows is that.
When you start cycling, it's because of things beyond.
Your company I think in the past a lot of times when promotional.
And sensitive started it started because somebody thought they were losing share and the insights and data is so much better where people can see where they are of market share.
And we still continue to see people are shopping more.
And for food at home versus and some of the other channels. So that will help all boats.
Right. So that's what we see at the moment no overtime at will.
It'll play out at Gary I don't know if you want to add anything on to the John's first question on operating profit Yeah sure. Thanks for the question John Good morning.
I think maybe at anything I would add is that you picked on a couple of the moving parts and the model for next year and you might imagine when we're talking a year like 2020 was going to be quite a few pieces of the jigsaw puzzle, but they represent of the overall guidance that we had for operating profit and maybe just provide a little bit more color on on the <unk>.
Big piece as I mentioned, you use 70 hits on a couple of them, we'd all profit and fuel deal and things I would say and the independent of the tailwind and category would be and that'll be certain costs as you might imagine relating to COVID-19, but we went and pop the cycle in 2021.
Incentive costs legal expenses to be lower than they would've been in 2020, we continued to take out costs and we'd expect to number $1 billion of cost savings as part of the model in 2021, as we continue to achieve balance across productivity improvements sourcing savings administrative savings and and diminished savings and.
Taking some of those learnings from aggravated and how we can continue to operate more lean Lee and some of those lasting changes that can help us operate more efficiently.
We would expect health and wellness to be a tailwind in 2021 and five you start to see that.
And news fix of pharmacy bouncing back and and.
And some of those chips and restricted because of Covid coming back into play on.
Digital profitability, we think will be a headwind for us as we continue to make progress on only in department Rodney mentioned around digital media, but also as we continue to improve the efficiency of the cost of fill on order.
And then on the headwind side.
Sales deleverage of policies and the fact that that's.
That's fully reflected and our model of fuel you mentioned, we and fully contemplated the initial investments and ocado and they would be north of at $100 million and App and our model for 2021 as well as we take the upfront costs of <unk>.
Of opting to ramp up of the the productivity.
And those sites.
We would also and as I mentioned in my prepared comments continue to invest and average Audi weighted for our associates.
And in addition to that of course, that's still going to be some type of costs that will continue in 2021, as we maintain a safe environment and continued to operate through the next phase of the pandemic.
Thank you very much thanks John.
The next question is from Karen short with Barclays. Please go ahead hi.
Thanks very much.
Couple of questions just with respect he did at all and then.
And.
And on your comments on the flow through of Gary I was wondering if you could give a little color on what the digital flow through was and <unk> and acts and thoughts on how to think about that for 2020, one and then I had at another separate question.
Sure Hi, and good morning, Yeah, and we mentioned before she knows of that digital pass through rates.
Profitability is lower than our store profitability typically and this and the brick and mortar starts and the mid teens mid to high teens actually and you look at 2020 with a significantly ramped up sales volume and we talked about digital being in that mid single digit range. So when I talk about the the.
The improvement that we saw in Q4 and it would be taking approximately 5% on a net.
Essentially at 20% improvement on that same taking it from mid.
Mid single digits of bi.
And from site and in the region of 5% and maybe six 5% would be directionally. The number that I was referring to when I share and not commented in the prepared remarks and it really comes back to the the two levers that we talked about and the last call and at our Investor meeting and the fall of last year, while we're extremely focused on continuing to use technology and.
Process improvements to reduce the cost of fill of digital order and we've made significant progress and of course of that technology and operations teams and secondly, as Rodney alluded to and your last answer to John's question around on media growth on.
The significant momentum we're seeing in media and most of that growth is coming through on digital channels, because when customers engage with us digitally we can truly personalize the experience and that's where on CPG partners and they get very excited about the unique value. We can create for them by on personal lines and the offer and the promotion on driving on high return on that spend.
As we look at 2021, we would expect that to continue to improve as we continue to make sunlight and momentum in the two areas and I. Just mentioned, we will share on a lot more color on at our Investor day at the end of March on how we think about the overall path.
The goals that we've laid out for ourselves is to get to parity with the store profitability that I referenced earlier on and now.
And then Todd and we believe there's potential to go beyond that level of two as we roll.
All of that and those facilities and get them up to full capacity.
Karen and thanks for the question and if you look at the overall guidance. We've provided that does reflect the start up costs of the various ocado.
And <unk> that will get open this year.
As well.
Great. Thanks, and then can you actually just provide a little color on how much of the $1 5 billion and Covid.
Well actually be sticky and 2021, and how that's hard to predict but anything in terms.
And my thought process on that.
Yeah, we're not giving specific numbers and all of the individual and pop because as you know we tend to manage the model to make sure we can flex as we need to and.
And that's something we think is so important because we manage through all of the changes and the other guys that are in front of of I think I said earlier with at the cost in Q4 was $275 million approximately we would expect that number to be ramping down and the finished half of the year and certainly as we reach the.
The second half of 2021.
Hopefully, we are and the environment rather than kind of at vaccine is.
And more widely and place then that would significantly osseous linked on and those costs. So we expect it to be of continued gradual reduction.
As we move into the 2021 year and as we start to be able to continue to optimize the plans around safety and cleaning and processes on of course is with rolling out of the <unk>.
The nation and the reason it didn't run time more quickly as Rodney said in his prepared comments, we've been very deliberate about wanting to really focus on helping our associates and the vaccination of as quickly as possible with offerings of 100 dollar of incentive to honest I should see true.
Try and achieve that as quickly as we can.
And thank you very much.
Thanks, Karen.
The next question is from Michael Lasser with UBS. Please go ahead.
Good morning.
And my question. My first question relates to the down 3% to 5% I'd sales for.
For 2021, what have you assumed the market growth rate is embedded in that expectation also your share and how much of inflation impact.
Impact that as well.
And if you look at inflation overall, we would expect inflation over the whole year to be 1% to 2% now it's going to be incredibly volatile, but between within the year and within categories. So if you think about meat.
Will be hugely deflationary, we expect and.
And the second quarter, because it was so inflationary last year, so we'd expect to quite of bit of volatility, but at the end of the year. We think it's going to look pretty normal at 1% to 2%.
We would expect our market share overall to be very similar to where it is today when you look at.
At the minus three way to we expect to gain share at the minus five we would expect to be pretty similar to where we are today.
But.
Nothing.
Specific.
That's unusual or anything like that.
Okay. That's very helpful. My follow up question is of the key debate right now on key debate is there has been.
Rapid acceleration and the increase of online penetration and the grocery category now we're going to be on the other side of it.
And kind of stick store volumes, probably decline and.
And that's going to have a negative impact on the profitability for the grocery channel and it sort of Kroger. It seems like what you're suggesting is we can manage through that because a.
And we're improving alternative profit streams of Ocado is coming on coming on line.
We think our store sales will be stable. So can you Rick and reconcile.
Reconcile all of these various forces.
I'll talk about some of the overall pieces and Gary you can get into some more of the specific numbers if he wants to add anything.
As you know all along we've always said, we believe that the customer will continue to transition to wanting to do some of their shopping online and what we find is by far the majority of our customers that move online and they still physically go into our stores.
So it is incredibly important for us to create a seamless experience to where customers can be a bounce back and forth be inspired on both channels and we've always felt very strongly that job one was to make sure that we didn't lose any customers.
One of the things that we have found that I mentioned, Gary and I both have mentioned.
Is during Covid, we had a lot of new customers and we had a lot of new customers that came to digital towards digital channels.
That had never shopped at Kroger before and people that deepens our relationship.
So incrementally we get a higher share of the household spend and those new customers is obviously incremental.
And as well, obviously that has a certain benefit to profitability.
And also our operations team is doing at incredible job partnering with our technology team on.
And changing the way how efficient we can pick on order.
And of store.
If you look at over time, we would expect online to continue to grow but we think it's massively critical to be able to have an experience where a customer still wants to come into a store and shop online and as I mentioned in the prepared remarks, we have of 98% retention rate with that customer.
And when you look at the overall online will have a combination of ocado facilities.
Some type of smaller regional type facilities and stores and Ocado is an important part of that overall.
Relationship from a technology and process change.
And then if you look at retail media, we still see huge growth opportunities.
And there because the channel is just now starting to get momentum behind it and people are finding.
That it's of great investment of their.
Getting dollars overall.
Overall, and they get a great return for that money and by having first party data.
We can help people see whether they get a return on that spend or not and one of the things that we believe and as total transparency with our customers there.
Gary anything you want on it on.
I think he said it well Rodney anything.
Coming back to.
The Big picture question of of how we think about on a model as Rodney alluded to and can you comment.
And we share at this and we'll talk more about at the end of March around and I bought mutation model, we feel very confident and our ability to continue to invest and the customer through digital and them through what's valuable to them and our associates through average Audi right and do that and and violence flying as we continue to take cost out of the business and end user traffic to drive alternative profit streams and we feel like we've got into.
And on slightly on effect and believe that 2020 was an inflection point for digital as part of that as we and a span of at eight of $10 billion and sales and Rudy.
Pulling the different levers together to stop to improve the profitability of the model as Rodney described and I think when you take all of that together, we believe through them at the journey with restock Kroger.
And by end June year end of 2020, and 2021, and we think we will look very strong and Kim who kantar and we come out of that with more momentum and that business. Because we were able to kind of language that model on the investments that we made too simple of customers and isolation since we actually come through on the pandemic.
Okay. Thank you very much thanks.
Thanks, Michael.
The next question is from Roop has perique with Oppenheimer. Please go ahead.
Good morning, and thanks for taking my question. So my first question is just on quarterly trends and I was curious if you can give any color in terms of what you're seeing quarter to date and also if youre starting to see any geographic differences lately and your business.
And thanks to refresh and good morning.
At quarter to date sales it would be just slightly below where fourth quarter was but I would put it.
Cozily and caveat Senate.
Cuz, where we're just now starting and cycling some of the ramp up from a year ago.
And when the pandemic started at.
And at the.
Yeah.
Second question in terms of regional differences are starting to see some of those regional differences because it started on the west coast, especially in the northwest first so you are starting to see some of those.
Differences as well.
Wouldn't put too much into it.
In terms of my answer to your question because we do think it's going to be very volatile during the quarter, but when you look at at overall for the whole year. We do think we'll continue to maintain and grow share and achieve the numbers that we've given on guidance.
The one thing we've touched on I might add just to give it a little bit more color on how we're thinking about the year on the way it will play out and sort of.
Quarterly cadence.
As you know and so from the guidance that we share at this morning, we're very much focused on the two year journey and how do we come out strong net through the end of totally at the pandemic and 2021.
As we think about the guidance that we shed and there'll be an interesting dynamic when you look at the numbers based on the individual year end of year cycles, and then the two year stack I E sales and it will essentially and will gain and kind of and even for US as you go through the year, sorry, and the and the first part of the year, we would expect.
To be maybe even slightly below the bottom end of the range in terms of I E sales on the individually and 2021, but actually at the top end and potentially even at over the range on the two day stock number and then as the year progresses.
Stock number moves moving towards the lower end and maybe even below at the bottom end of the range, but actually the current view of identical sales improved significantly and there is gonna be a and on dynamic because we go through the year as you might imagine when you think about at the quarterly cadence of sales.
Okay. That's helpful. And then and then maybe just one follow up question and this Gary goes to your comments at the end of your prepared.
Script, you mentioned that you expect 2021 to be the operating profit based on you expect to grow off of going forward. So does your team right now believes the pandemic and comparison and related headwinds will primarily impact 2021 and on 2022, it could be more of a normal year.
I think there's definitely going to be some puts and takes in that and that will still be at.
And but I think of the headline would be exactly as you described even cash we think of it very much on 2022 will be not a new baseline and we feel confident and our balance sheet back to my comments at the end of your question about how we think about and the flywheel and the overall financial model and we've created that that'll be the new baseline and 21 to build on the great Buffalo we.
Do think and we've all talked about at various pieces that digital will continue to grow and it will be incredibly critical for the overall seamless experience for the customers and we believe that and that seamless environment, our competitive moats are even more important.
And of trust and fresh food being able to personalize things directly for that customer one on one.
And our brands all of those things are things that we believe.
And the overall ecosystem will continue to add value for our customers.
Okay, great. Thank you I'll pass it on thanks.
Thanks for that.
The next question is from Robby <unk> with Bank of America Global Research. Please go ahead.
Hey, good morning, guys I have.
Two quick follow ups, one was just on.
Rodney can you give any if.
If you look at the Royal customer.
And the loyal customers and what they did last year versus new customers kind of what what played out did the loyal customers spend a lot more with you and you've got a lot of new customers and.
And where did you lose any loyal customers or maybe some color on kind of what happened and and how you kind of on net out do you just have a lot more customers.
Day than you would've had back in 2019 and Thats, what we should really be considering also for this guidance and then on the second question is just on the I'm sorry, if I missed it but just with the AD campaign around pressure, how our crush comps relative to expectations or are they super strong or just any color on that thanks.
And if you look at customers overall shopped fewer spots so.
Fewer retailers and so we had a significant increase and the amount that they spent per transaction.
If you look at the number of loyal shoppers are.
There was a ton of change and the numbers because of consolidation of households, where people moved in with family members or shopping for other family members and things like that so if you look there was a decline and loyal shoppers, but it's really hard to assign all.
Of the at two of customer not shopping with you anymore, because what we find is a lot of those customers of consolidated with another of different household number because people move back kids and moved in with parents are kids are buying for parents and things like that if you look at new customers.
As you know the most new customers, we've seen and a year probably if you took the last three or four years added together, we had more new customers this year of what.
We've done a couple of things on changing where and the past some of new customer had to be with US a period of time before we started engaging with them on a personalized basis now we engage with them immediately.
And we keep improving that personalization to be more and more directed to that just that household as we learn more about them and then hopefully they're understanding by being part of our ecosystem.
All value we provide on our.
Fresh identical overall, they would be for the year.
But if you look at meat and produce and seafood and floral and those it would be meaningfully higher than our overall Ids.
Look at Delhi at would be behind especially early in the year that we did continue to gain share and Delhi, but.
Delhi.
Especially in stores, where it was we had a high lunchtime crowd of people coming in and just for lunch that day at definitely affected our deli business. So.
Within Delhi.
On like Deli, sliced meats, and things had great growth, but other pieces of it was a little different than that.
And that's really helpful. Thanks, so much Rodney.
Robin.
The next question is from Greg <unk> with Wolfe Research. Please go ahead.
Good morning, Mr. Spencer Hanus on for Greg.
First question was just on your your price gaps how confident are you with where your price gaps and are today relative to other conventionals and and your Masters and then are you seeing any signs that price is becoming a more important factor and driving market share or our as product availability and still just wanted to key motivators about where consumers are shopping today.
If you look at price gaps and as you know one of the things we were very proud of we kept doing promotions throughout the pandemic.
And wanted to make sure that we continue to provide a good value for our customers. We feel good about where we are on gaps versus all of our competitors and you know.
As you know customers decide where to shop based on fresh and friendliness of service and other things in addition to price.
It's.
Fascinating the customer sensitivity to price.
Really doesn't seem to be changing much but when they get money in their pocket. They definitely spend more and they are definitely upgrading to higher quality products as well. So it doesn't appear that there's a huge change and price sensitivity, but there is.
Change in terms of when somebody gets a.
The government stimulus money things like that you can definitely see that flowing through on spending Gary It looks like you wanted to add something off of.
And he said it well Rodney I was just gonna aspects of it I think as Rodney said, we feel very good about opposition and actually probably compared to some of the more regional play.
Plans, we've spent and potentially expanded on price got because of the continued investments that we made in 2020.
We would expect of the promotional environment to be higher in 2021 of course from 'twenty. Because there was a period of time, where a number of on competitors, we're not promoting and not.
That being said and I think it's important to remember a lot of our investments in 2020 would promotional in nature and we can cycle those again and deploy them when they have the most value from the customer based on the way that they are defining value as they come through at the pandemic and.
As Rodney mentioned, we feel we feel very good about our position and on the market seems to be acting generally pretty rationally around he's going to be at a unique name and 'twenty. One that we're cycling obviously of changing customer behavior, and we believe at well positioned to 93 of them.
That's really helpful and then with the better digital flow through this quarter have you seen any changes and online basket size or a mix shift towards higher margin categories and.
And then what's your outlook for online growth in 2020 one.
We would expect overall to grow we haven't given specific numbers, obviously on Investor Day, we'll talk about at all.
A lot more.
If you look at in terms of basket size as customers get used to and.
Okay.
Enjoy the experience.
And you find they're using it more frequently and usually when they start using it more frequently either size of declines, but if you look at their total spend over a period of time and it grows.
And we view that as a positive because we want to make sure when customers think food and they think us of Kroger. So we see that as a positive.
Great. Thank you. Thank you. The next question is from Matt Fishbein with Jefferies. Please go ahead.
Hi, good morning, Thanks for the question.
And do you have any ballpark approximation for the basis point benefit to Q4 gross margin owing to the shrink from elevated at home food demand or maybe to the G&A rate owing to increased sales leverage sort of just the parts that may be less sustainable as away from home channels more fully recover and.
And.
Second question would be.
And regarding your capital allocation guidance for the year, how are you thinking about share repurchases and we're returning cash to shareholders, maybe maybe six out and your cash utilization priority ranking and 21. Thank you very much.
Sure Thanks for the questions.
And I think as we mentioned in the prepared comments, we really think about managing the at the gross margin and the G&A and the balance within our overall financial models. So we generally don't get into specific elements and you might imagine we did see sales leverage and shrink improvement throughout the year and we talked about that and some of our results.
We've taken very much of a balance approach, though to be investing in hours and the business land and we believe that sets us up for continued growth and 2020 people on and that's why I think we we do feel good about the position we're going to be next year, having managed through the balance of maintaining those investments and the customer and our associates and being able to then manage through the transition next year and still deliver on what we think by the end.
Of the year will be a strong outcome and significantly ahead of our <unk> model from.
A capital allocation perspective and.
We will share more again at the at the Investor day at the end of March.
Haven't given specific guidance on buybacks, we did that specifically in 2019 because of that.
And coming towards the end of restock Kroger and Chinese.
Chinese at long term outlook. So you wanted to make sure we gave.
But any clarity on what the financial model would look like in 2020. So we haven't given specific numbers without being side I think we've been pretty clear and our communication on on Tsi and model that we expect between five and 6% of our tsi algorithm to be generated from a payout ratio of <unk> came out of investors and so if you think of.
And that then we'd certainly be expecting without cash flow being stronger in 2021, the amount of of buybacks that we would do would be consistent with delivering on the payout ratio that we should have and the <unk> model, which is 5% to 6% and that includes the dividend.
Two and two 5% and so we're showing a little bit more color on how we're thinking about cash flow and general at Investor day, because of I mentioned in my prepared comments, our free cash flow at a significantly stronger end of 'twenty to 2020, one and then a.
Cancer model contemplates on where we're being very diligent and looking at most of the best ways of deploying that free cash flow to make sure that we're accelerating growth and the company and delivering on the eight to 11 beyond 2021, as we are as we look at longer term guidance.
Great. Thanks for the question and thanks for squeezing me in.
Thanks, Matt.
The next question is from colleges with Citi. Please go ahead.
Hey, Thanks, guys I'm curious as you look back to performance of different categories and 'twenty. How you think the mix might impact your gross margin and 21.
And also just curious just big picture gained share in 2020 and curious if anything was losing share and as you think of the future and your ability to gain share where do you think of that comes from.
And if you look at the <unk>.
'twenty one.
On on margin or mix of.
I think theres a couple of things that happened in <unk> that I think will be permanent.
One is people are buying bigger size.
Size products.
And I think people at.
And found that that's really convenient and.
And I think about like toilet paper and the amount of toilet paper that sold and bigger packs the customer gets a better value and.
They are stocked up for a longer period of time. The other thing that to me is incredibly exciting because of our strong.
Position and fresh and our strong on brands is that customers.
And I have upgraded and quality significantly.
As I mentioned, if you look at the growth of private selection, we've had huge growth and private selection. If you look at the growth and fresh unlike seafood and there's been great growth there people have learned how to cook seafood.
All of those things.
Once you get addicted.
To something that's high quality, it's hard to go back.
Small example, but I remember growing up I thought macaroni and cheese came out of a box and that was fine.
And now I, if I buy cheese for macaroni and cheese from Murray's cheese, and it's a completely different experience and once you get it.
Used to that.
And it's hard to go back and.
And I think customers will continue to have those behaviors and they've learned how to cook.
You know on share of the thing that we think is absolutely a massively critical.
As seamless and having an experience where a customer can easily switch between online and in store because what we find is different shopping occasions customers have a different.
Need in terms of the channel to deliver that and what we find is by being multi channel. It allows the customer to deal with it on their terms not our terms.
Fresh is always important it's the number one driver on where people decide where to shop is the quality of fresh and if you were at some of our internal meetings, you would hear us making talk about all the things that we're doing to get better on fresh, but if you look at our customers they tell us versus our big box, we start out.
And of Great position, but you wouldn't know that if you look at the drive internally and.
And then our brands and then being able to personalize every experience one on one of those are the things that is going to allow us to continue to grow share.
Rodney how much of that a little bit of color to the.
The guidance for 2020, one as well.
To help maybe.
Maybe sort of frame up how we think about the year and what will happen with margins we would expect.
I think within the guidance that we share gross margin to be a decline.
The decline in 2021, and that's a combination of factors I wonder if it would be the example, you shed of mix I think of a good example of that would be we'd expect a pharmacy and health and wellness business to continue to grow in 2021 and that has a level of gross margin rate and the.
Overall business, excluding fuel, whereas obviously, we've guided to on our overall sales being down.
<unk> and 'twenty 'twenty, one we would expect some sales deleverage as you'd think across things like shrink and.
Advertising, but that would also be offset by sourcing benefits as I mentioned earlier and alternative profit streams. So there's going to be some momentum and gross margin figure, but net net we think all of that results in that and a decline in gross margin and then Conversely, we'd actually expect that to be on improvements and our G&A because of some of the items obviously the earlier on the call and around the cost savings the.
Digitally improvement and profitability and not cycling some of the kind of at cost that we had in 2020.
Thanks, guys helpful. Good luck. Thank you thanks Paul.
This concludes our question and answer session due to time constraints I would like to turn on the conference back over to Rodney Mcmullan for any closing remarks.
Thanks, Gary and thank you for joining US today, we look forward to sharing additional details surrounding our long term plans at our upcoming Investor day, which will be held virtually on March 31.
Details surrounding the event will be shared in the coming days and we are incredibly excited to be talking to you about our focus on growth opportunities in front of us.
Which build upon our learnings from the pandemic investing.
Investing and seamless technology and restock Kroger.
As is our practice I'd like to share a few final thoughts directed to our associates, who are listening in today.
Throughout our more than 137 year history, we've worked together through good times and bad.
And we've always come out stronger.
<unk> Kroger each of US has led us through a difficult time for our country, our communities and our company.
And ultimately our own personal struggles as we adapted to life. During an unprecedented pandemic that has lasted a lot longer than any of us would have imagined.
This team this incredible Kroger team will make its mark forever on our company's history.
And we will be remembered for its strength and resilience it.
Its heart and compassion at.
Its agility and dedication for the years to come.
And humbled to be part of this amazing company.
So all of our associates. Thank you for all you do and continue to do every day for our customers communities and each other that concludes our call. Thanks for joining us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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