Q1 2021 Kroger Co Earnings Call
Because of our associates' commitment krogers first first quarter identical sales without fuel grew.
Grew ahead of our internal expectations.
Digital sales grew triple digits since the beginning of 2019.
We saw strong growth in alternative profit and significant progress with our cost savings initiatives.
All of this gives us confidence to raise guidance for the year.
A new $1 billion share buyback program.
I'd like to spend the next few minutes discussing 3 key areas first.
First how customer behavior is changing in this transition period.
Second how we are leading with fresh and accelerating with digital.
Finally, I will highlight how we continue to live our purpose.
The human spirit.
Through the associate experience and our work to vaccinate millions of Americans.
Our customers are in a time of transition.
During the quarter, we began to see some free pandemic habits resume.
For example, smaller holiday gatherings are likely to fade as more than half of our shoppers believe holidays will return to normal by the fourth of July.
We are also seeing customers shop more frequently as COVID-19 restrictions ease.
Importantly, we saw a continuation of several pandemic trends.
This includes heightened digital engagement across demographics.
Expanded consumption in key fresh areas like meat produce and natural foods.
And trading up to more premium products.
New trends are emerging as well as customers settle into new routines.
In a recent survey of our customers a remarkable 92% of the people say they enjoyed cooking the same or more than they did pre COVID-19.
And as people busy social lives pick up more customers are looking for convenience and cooking options.
We continue to utilize our data to understand those behaviors that are more permanent in nature.
While the customer habits are returning hardening or emerging.
We will continue to meet the customer where they are and use our data science expertise to be where they are going.
As we discussed during our Investor day fresh is incredibly important to our customers.
Our produce fresh score metrics continue to improve and we are testing and learning through end to end fresh initiatives.
To consistently improve the experience and deliver even more value to our customers.
We announced our go fresh and local supplier accelerator, providing more local and regional suppliers the opportunity to partner with Kroger.
And providing our buyers with the opportunity to discover new suppliers, who share our commitment to advancing freshness quality and our fresh for everyone commitment.
In fact since launching on May 12, we have already received more than 1000 applications to participate.
We are building on the momentum of 2020 within our seamless ecosystem through expanded capacity.
Improved customer experience and continuous innovation.
During the first quarter, we expanded capacity by 15% to support our continued sales growth.
Our teams work together to improve in stock fill rates and further reduce wait time at car side.
Enhancing both enhancing the customer experience.
To date, we have over 2 million times slots available per week to serve our customers the fresh food and essential products they want when they want it.
We continue to expand our seamless ecosystem through our new customer fulfillment centers powered by Ocado.
We opened our first facility in Ohio in March and at the beginning of June launched Kroger delivery in Florida.
Launching in a new geographic.
It's incredibly exciting.
And that milestone moment in our history.
Our Kroger delivery team is ready to bring fresh affordable food and a consistent customer experience directly to the doors of our customers.
In addition to the global in CFC.
Spoke in Tampa and Jacksonville are also now open.
The whole hub and spoke model allows us to extend the range of our CFC.
Allowing us to serve more customers incredible products directly to their door.
And we are just getting started we are thrilled to report that NPS scores are among the highest in the digital retail and we continue to be pleased with our fill rates.
Our on time delivery metrics.
Kroger's data and personalization capabilities will.
Contribute to increasingly meaningful ways to grow our e-commerce reach and capabilities.
And we continue to elevate our personalized customer experience with our data today.
During the quarter, we made more than 258 billion personalized recommendations to our customers through our digital experience.
At Kroger, we have always known that our associates are the heart of our business.
We are proud of our opportunity culture, where.
Where people can come for a job and stay for a career.
More than 70% of our store directors began as part time clerks.
We are building the connected culture that embraces agility and collaboration and that celebrates and incentivize lifelong learning and growth.
For example, since launching it in 2017, our industry, leading education assistance program.
Helped more than 6300 associates.
Take steps to learn and grow as individuals and employees.
That is 1 of many ways, we invest in our associates.
We continue to invest in wages with our average hourly rate increasing during the during quarter 1 as well.
We are on track to increase our average hourly rate to over $16 and with comprehensive benefits. Our average hourly rate will be approaching $21 by the end of the year.
As we've done throughout the pandemic.
<unk> remains committed to health and safety.
To support the biting the administration's goal to have at least 70% of U S. Adults received their first COVID-19 vaccine dose by July 4th.
We launched an aggressive.
Customer and associate marketing campaign and community immunity giveaway.
Next week, we will announce the first $1 million of winter and 10 free 10 free groceries for a year winters.
Since announcing the giveaway, we're running 29% ahead of forecasted vaccinations.
Good day, Kroger health is administrated over 5 million vaccines in our pharmacy and clinic.
Locations and the community sites across the country.
Now I would like to turn it over to Gary to take you through our first quarter results Gary.
Thanks, Rodney and good morning, everyone.
Credit got delivered strong results in the first quarter, providing a further proof point of the momentum we have created in our business model.
We continue to execute our priorities of leading with fresh and accelerating with digital which led to top line sales results ahead of our internal expectations.
We were disciplined in balancing investments in our associates and customers with strong cost management and achieved record growth and alternative profit streams.
While year over year comparisons are impacted by the pandemic struck by the dramatic change in customer behavior, we saw in quarter, 1 last year due to COVID-19.
Looking over a 2 year time horizon, our adjusted EPS of $1.19.
Represents a compounded annual growth rate of 28, 6% versus 2019.
I will now provide additional color on our first quarter results.
Identical sales without fuel declined 4.1%, which translates to a 2 year stacked Greg a 14, 9%.
Digital sales grew 16% on top of the 92% growth during quarter 1 of 2020.
And we continue to make progress in improving the sustainability of our digital business.
As previously shared 2 key drivers of long term digital profitability all the cost to fill a digital order and the retail media revenue generated from a digital transaction.
In the first quarter, we reduced the amount of time taken to pick a digital or debt by 5% and increased media revenue digital baskets by 33%.
Gross margin was 22.6 percentage of sales for the quarter.
The FIFO gross margin rate, excluding fuel decreased 65 basis points compared to the same period last year.
This decrease was wholly attributable to sales deleverage higher shrink on debt.
<unk> 19 related inventory write down in full PPE to be donated to community partners.
Pricing investments during the quarter and the impact of mix changes as a result of cycling COVID-19 trends last year were fully offset by sourcing benefits and alternative profit growth.
On a 2 year basis, our FIFO gross margin rate, excluding fuel decreased 21 basis points compared to 2019.
The operating general and administrative rates decreased 108 basis points, excluding fuel and adjustment items, reflecting our continued discipline in cost management.
This improvement was driven by decrease COVID-19 related costs net of contributions to multiemployer pension plans.
<unk> of cost saving initiatives and decreased incentive costs, partially offset by sales deleverage.
On a 2 year basis G&A rate decreased by 58 basis points compared to 2019, and we remain on track to deliver $1 billion in cost savings for the fourth consecutive year.
Alternative profit achieved record profit growth during the quarter led by exceptional growth in retail media.
Kroger personal finance also delivered double digit profit growth with strong performance across several key product areas.
Based on our performance in the first quarter, we now expect alternative profit growth to be towards the top end day back all of the $100 million to $150 million of incremental profit in 2021.
Jewel remains an important part of our overall value proposition.
<unk> grew in the first quarter by 13% as we started to cycle the impact of COVID-19 last year.
The average retail price of fuel was $2.79 this quarter versus $2.13 in the same quarter last year.
Our cents per gallon fuel margin was 35 cents compared to 48 in the same quarter last year.
While fuel was a headwind to operating profit of approximately $130 million versus 2020, we were encouraged by our trends which were better than expected.
Kroger continues to generate strong free cash flow and remains committed to investing in the business to drive long term sustainable net earnings growth maintaining its current investment grade debt rating and returning excess free cash to shareholders via share repurchase and the growing dividend over time.
Last month, we announced the restructuring of the sound pension Trust.
Similar to previous Multiemployer pension restructurings this transaction will improve security and stability of future pension benefits to those associates, while also minimizing our future exposure to market risk and produces a XOMA investments above our internal hurdle rate like mitigating future pension contribution.
Costs.
On an after tax basis $344 million will be needed to execute the transaction and we expect this to be funded evenly over 7 years.
Yeah.
Kroger's net total debt to adjusted EBITDA ratio was 179 compared to $1.8 1 a year ago.
The company's net total debt to adjusted EBITDA ratio target range is 2.3 to 2.5.
Net total debt increased during the quarter, primarily due to the company entering into a transaction to purchase and then immediately sell a portfolio of 28 of our existing stores.
This transaction allowed us to secure long term access to these locations at very favorable lease rates.
The unusual structure used to complete this transaction requires kroger is liability for the long term commitment to these stores to be shown as debt similar to a capital finance lease as opposed to being recognized as a typical operating lease.
A new $1 billion share buyback program announced today reinforce if the board and management's confidence in our cash flow generation and is consistent with our commitment to deliver sustainable and attractive total shareholder returns of 8% to 11%.
Our associates have been incredibly incredible throughout the pandemic, we continue to invest in our associates and strive to make our overall benefits package relevant in today's employment market.
During the first quarter, we ratified a new labor agreement with the U F C W covering associates in Cincinnati Division.
Looking ahead, we have several major negotiations later in the year, including contracts with the U S. C. W for store associates in Atlanta Houston.
Rock, Michigan, Memphis mid Atlantic in Portland.
Our financial results continue to be pressured by health care and pension costs, which most of our competitors do not face.
Screen fault negative, 4%, a negative 2.5%, which represents a 2 year stack of $10.1 211.6%.
We also expect fully adjusted net earnings per diluted share to be in the range of $2.95 to $3.10 representing at 2 year compounded annual growth rate of 16% to 19%.
Looking at the cadence 4 identical sales for the remainder of the year.
We would expect are identical sales in quarter to to be within a new target range of for a negative for the negative 2.5%.
And we would expect quota 3 unquote before to be at the top end or slightly better than the range.
Turning to EPS or increase guidance employs adjusted EPS will be will be between 10.5 and 15% less than 2020.
We expect second quarter adjusted EPS will be around the top end of this range as we continue to cycle Haida COVID-19 related costs from quota to last year.
And we expect quota free and called the fall will be slightly below the range.
In closing, we believe I used to date performance provides further and further proof point of the strength and momentum we are seeing in our business model and build on the progress achieved in 2019 and 2020.
We remain confident in our ability to deliver strong and sustainable total shareholder at times by it.
Leveraging how leading market position and executing on the exciting great opportunities Shantytown Investor day.
And now I'll turn it back to the Rodney.
Thanks, Gary I want to again, thank our amazing and associates for their tireless work to serve our customers.
Is Gary and I noted our customers have changed because of the COVID-19.
Our job is to be there for them.
This quarter's results are evidence that we are deepening our connection with our customers by focusing on and leading with fresh and accelerating with digital.
And we remain a purpose driven company that honors and appreciates our associates and lifts off our communities.
As we look forward, we are incredibly confident that we will deliver for our shareholders and all stakeholders.
Now we look forward to your questions.
We will now begin the question and answer session.
To ask a question you May present Star then 1 on your telephone keypad. If you were using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press the Star then too.
As a reminder, please limit your questions to 1 with a single follow up.
Our first question comes from Edward Kelly with Wells Fargo. Please go ahead.
Hi, guys good morning.
Alright.
First question for you is just on on the I D. So I was wondering if you could help us at all with Kate and storing the quarter do you think or to what extent do you think vaccines and possibly even whether helped what we're seeing so far in Q2, and then as we think about the guidance. There. There is a decent slowdown I guess throughout the rest of the year, but is that just.
Is that just sort of reopen so thoughts there. Thank you.
Yeah, I'll I'll start out and then like Gary fill in the pieces. If you look at quarter to so far we're tracking a little bit better than where we were in quarter 1.
And we would be slightly better than the guidance that Gary talked about for the quarter.
If you look at during the first quarter early in the quarter, we were still cycling non COVID-19 and the sales early in the quarter were especially strong.
If you look at really starting in the second period, and the third and fourth periods.
We were cycling Covid and if you look at the 2 year stack for those periods. It was pretty consistent on a 2 year stack basis, but when you look at year on year, obviously it it wasn't.
If you look at it.
Comment I made during the second quarter quarter to day, obviously, the trends of improved slightly on a year on year basis, but would be the very similar on a 2 year stack basis.
Gary anything you wouldn't want to add.
I think you said he'd well about the current trends in the business Rodney as.
We look at trying to make sure. We're on the side of our customer behavior is changing we all focusing on that sales trends vs..2019 is Rodney mentioned, because the cycling of the behaviour last year and some of the customer.
Activity can be saw his break some noise on that stock basis, but when we look at the trend in.
Sales volume vs. What we're seeing in 2019 and the growth 19.
It's already been remarkably consistent when you look it after that March initial time period, where there was obviously, some stockpiling and panic buying by consumers last year. When when you look at the 2021 vs 2019 over April May and June Jim are they trying to being very consistent even with some of the reacting has been happening in the economy, which.
Thank you some other comments that Rodney made around.
Finally is getting back together in larger groups continuing to want to eat healthier and I'm, sorry, seeing some of those sort of trends that we think may be more structure and last thing because of the the way consumers are looking to to change the way. They balance there are other eating habits. The I think the the question around guidance. If you have any other comments I.
Maybe make essentially as you know we're only a couple of months on from when we got even reconfirm. The original guidance. So it is really.
She was suggesting we we still believe within overall plan that we're going to continue to execute a high level and continue to.
Grow a share of the the food at home business over time, what we do think will happen is I will be some softening in food at home trends as we can definitely go through the years of the the market continues to reopen and of course, I think everybody's seeing somebody could right now of government's thinking installed in the market and it's hard to predict how that will change.
Enjoy the time as well so I would say for the rest of the year with only 2 more months of data points, while we've been very pleased with our progress in their executing at a high level. Then that's Rodney mentioned, we've seen sales above where we can expect it to be so far this year in terms of a macro what do we think will happen in the year plays out I wouldn't say, we've fundamentally change that view.
Okay, and I just want to ask a follow up on the gross margin. So you know down 21 basis points vs..19, you know it was good actually relative to her.
History for you guys Prepandemic, though you or to your stack was down more than that so my question is how normal is the Q1 gross margin you know what I'm sure promotions personal levels right now play a role on that and how do we think about that too you're right as the year progresses.
Yes, Thank you said.
I think as we talked about and some other prepared comments, we very much focused on how do we manage the overall business model to make sure that when being that other customer and I think the most excited about if you look at 1920 in the first quarter and 21 is highway managing and balancing the business across the investments that we need to make them to come.
I'm taking.
Taking costs out of it just why it makes sense, obviously continuing to grow alternative profit streams from a gross margin perspective, you know I think what was encouraging for us during the first quarter, whether you look at it he Arabia all the 2 year comparison to your point is that outside of the sales deleverage in the.
The 1 time.
Their nation that will make it on P P equipment ready.
<unk>.
The improvements that we saw in sourcing and the acceleration all profit funded the gross margin investments that we're making so I'm not I'm not trying to suggest that that's something that we should assume happens every quarter is will continue to manage dynamically and sometimes we'll funding investments through continued cost savings initiatives, but overall, we feel very good about.
The the balance in the business and our ability to manage those led us to believe in for our customers, but also deliver sustainable growth in the future and earnings.
I'll bet, the only thing I would add agree with Gary points.
We talked about it and are prepared remarks, but we are seeing a continuation of people buying more premium products.
And and especially like on private selection and simple truth those types of purchases normally have at higher margin. We're also seeing Ah Ah Ah tailwinds from mix changes.
People continue to be more aggressive on buying fresh all of those things and the point that Gary made that I think is incredibly important and as you know an investor day, we talked about it that we would expect can take an operating margin improvements once you get through a cycling through Covid, we would continue to expect that because of.
The points that we made in Gary point on alternative profits as well.
Great. Thank you.
The next question is from colleges with city. Please go ahead.
[noise] Hey, Thanks, guys can you just give us an update on what you're seeing on the inflation front, maybe more importantly, just how do you feel about your ability to pass through higher prices relative to historical periods. Thanks.
Yep, Thanks, Paul for the question.
As you know or if you looked at over the years Kroger has been able to successfully operate in high inflationary environment and low inflationary environments. If you look at the details of inflation during the quarter.
If you look in the fresh departments inflation has continued to increase during the quarter part of that is driven because of if you look at a lot of supply disruptions a year ago because of the COVID-19.
So it's it's gonna, it's gonna be hard to tell but we would expect overall to be able to successfully operate in whatever the environment is and we would expect to be able to pass those costs customers. As you look at things that are permanent nature. The other thing I think it is always important.
Just to remind each of us, including our internal teen is if you look typically our business operates the best when inflation is about 3% to 4%.
And we have a a meaningful amount of fixed costs and when inflation is at 3% to 4% that gives you leverage on those costs and the inflation of 3% to 4% customers don't overly aggressive ah react to that inflationary environment, either so we we view a little bit.
Inflation is always good in our business and we would expect to be able to pass that through as well on things that are permanent in nature and 1 of the the last comment I would make is it is the important part of having such a strong our brands program and our own manufacturing plants. If we have inflation that is <unk>.
Not driven by a true cost changes what always happens is our brands gained significant share at the expense of some of those national brand players as well.
Got it and are you, saying, you're you're in that 3 or 4% range currently alright.
Or you want to.
Sure Yeah, maybe just have a little bit more color I play for the first quarter. As you know we guide you to the initial business plan of 1% to 2% I would say we were actually in the first quarter, we'd be towards the bottom end of that range. So we didn't really see it in a in a first quarter trends at all we are seeing as I think would be consistent across the industry.
Some increasing cost flow starting to flow through in in grocery in particular is Rodney mentioned produce a me can tend to have more short term volatility in those results and we send you show some of that in Q1, So I'd say where would we believe we're starting to see some of that inflation rate flights room, but I wouldn't say, we're seeing it at that at that level yet in terms of current model.
Kinda. Thank you guys. Good luck.
Oh, thank you.
The next question is from Chuck Sarah Koskey with Northcoast Research. Please go ahead.
Good morning, everyone nice quarter I'd like to ask about your prior guidance on startup costs at the Ocado sheds I think it was about $100 million. This year how's that looking at this point.
Given the little bit of time, you've had with these things open.
Yeah, I'll I'll start out and like Gary talk about the financials is Chuck Thanks for the question and as I mentioned that the prepared comments initially that customer feedback has been very good and our focus on the initial ramp up of Groveland and Monroe is to make sure that we give the customer at great expense.
Variance great in stock positions, great fresh experience in on time deliveries and all those things are tracking along and our volume ramp is tracking consistent with expectations as well, but I do think it's important to remind all of us that were very very early in the process, but so far.
<unk> so good Gary I'll, let you talk about some of the costs pieces John Thanks, Rodney Thanks for the question Chuck.
Yeah, I would I would say essentially consistent with Rodney his comments things are playing out at this point for the year wherever you would have expected them to meet Chuck. The good news is building on Romney's comments about the early indicators on the customer facing part of al-qaeda everything we've seen within the technology and supply chain James would say that the way that we envisage the.
The technology and the the efficiency of the model with what is.
Finding so far with the operation up and running that everything would be consistent with that expectation and the model. So nothing new or different 2 reported that as you like most of the costing in the first you're gonna be those that are largely fixed costs and really as we shed at the investor day, the focus froze will be as as we start to wrap up the volume.
Our ability to to speed up that ramp over time is there any.
What will be critical to delivering on the overall financial returns what we're expecting from Mockado and also an opportunity to potentially vs. Those returns I'm, sorry, because you'll recall to recap. We we would expect and he won for that to be a family meaningful investment does that fixed overhead is putting in place for dichotic salty and then as a volume.
So if we buy yet 2 week, we're getting to that.
Breakeven point and then by year 3 was starting to improve the profitability and with the goal of getting to at least parakeet, but still so a long way to go on that journey, but I would say, we're not seeing anything right now that would be different or inconsistent with the what we were expecting to say, but that's Rodney said very early day and a lot of work to do and the feedback from Ocado is.
The ramp is pretty consistent what day would expect if you look at the Ocado retail success in the UK. It continues to be extremely strong.
As well.
After the experience you've had thus far in Florida and in the 2 spokes added.
You're thinking about any other markets were Kroger doesn't have stores, where you can put in an ocado facility at this time.
The we're not in a position of announcing any incremental sheds at this point, but if you look at some of the ones that we've announced those sheds will give us the ability to go into new markets as well. If you look at the 1 in D. C part of that will cover existing areas Geography's. Some.
That will cover geographies that are new to us as well.
Thanks, very much best of luck for the rest of this year. Thanks, Chuck next time.
The next question is from Karen short with Barclays. Please go ahead.
[noise], hi payments a couple of questions I have.
Complicated generally.
I've been free we know in Atlanta.
Lee No way.
For the rest of the year I guess.
A little more color and why there would be such a slowdown in the 2 years that you know took a T M 600 basis points for the rest of the year.
And then I had another question on costume placement vs retail inflation is it related to grasp mine too.
Thanks for the question Carin, Yeah. So I think just maybe a recap on how.
How the year played out last year and then your point, how we kind of see the guidance for this year.
You may recall, so last year, we started the year in Q1 with 19 percentage I D. And then I think it was 14.6% in Q2 Q3 and Q full range anywhere between 10 and operating then just south of 11. So we did see a 9% deceleration in sales last year. So.
Cycling, obviously that thought into this year, so even with improvement in our sales growth expectations. As we go through the year as I mentioned in my prepared comments, we are expecting to go from the the 4.1% in Q1 and Q2, we sort of thing will be in the range of a new guidance of negative 2 and a half to 4 and then.
In in Q3 in queue for the sort of the top end of that range low maybe slightly better than than that range based on what we are seeing today. So I think a lot of our our expectations already based on our original guidance on the end of what we are really pleased with the execution that we've had across the business that we continue to see if you look at our results. Today. This is why are they.
<unk> in 2019 that we still we still have more sure than we did 2 years ago. So so our expectation of ourselves as to to continue that but but we do ultimately expect that to be some deceleration in to your stock is customers stopped to return to what we think will be the new normal I would say that.
Even with those numbers of calls you're still getting too when you think about the end of the year if you're in the so I'll just take the example of the the bottom end of a range you you're still going to be at that sort of 90% 2 year growth in terms of Ah trends across 2019 and 21, so significantly ahead of what Ah.
Long term model would typically have been in 70 wouldn't put us well ahead of where we didn't expect it to be pretty carry big when we talked about our <unk> our expectations.
Right now I mean, obviously.
Right on into your tax basis.
Give me higher than it was.
Okay.
I'm unemployed and I'm wondering if you could get a little color on actual cost inflation vs retail and inflation and then within that I mean, obviously, we saw what you called out in terms of debt components of the gross margin corner, but I'm wondering if you could actually give them a little color. Unlike gross margins are.
Like a corner basis sounds for awhile gross margin so excluded.
Revenue streams, because obviously, we don't really have enough information to.
Back into what the contribution lines from alternative revenue as it relates to the core gross margin.
Yeah. Thanks for the question if if you look at the cost inflation in retail inflation on the fresh departments cost inflation would've been slightly higher than retail inflation in the center store categories that would be the other way around in terms of historical basis.
In terms of looking at gross margin, we think it's incredibly important to look at the total business and when you look at the overall retail model that we've developed it alternative profit is driven by the traffic that we have both online and physical and stores. So we think it's an important part of the overall business.
Model and it's really hard to.
Separate what is what <unk>, what 1 piece of a margin is being driven by something else and as you know retail media is the fastest growing media channel.
And the margins on that are significantly better than traditional supermarkets, and we continue to grow in that space because of the great work that Kroger precision marketing is done over the last 3 years and the team that we've built so for US. It is retail media is a core part of the bill.
If you look at the overall margins, it's a core part of the business and we really the way we manage our business is looking at operating margins in total and how are those trending and how are we balancing cost reductions in margin improvements.
Okay, great. Thank you.
Gary next time.
Next question is from <unk> with Oppenheimer. Please go ahead.
The morning is actually at the island to pass Thanks for taking my question.
I wanted to talk to an estimate yeah, I'm asking price is 2019 expensive romper about 10%.
Curious if there is anything you can send it to rationally from the balance of the year on the expense Bryant, maybe you can just walk us through extended appointment takes a deep currently seen him on the on the answers you need that.
Sure Yeah. Thanks for the question.
Really there's.
Can you imagine cause of other moving parts and you know G&A just because of what was cycling from from 2020 and has all that on rebels and he's actually 1 of the reasons why we felt it was important to share a comparison vs 2019, because I think in some ways that gives you a sense of momentum that we cranking overall, an hour, but I need to manage costs and continue to.
Improve our efficiency and the model.
If I kind of maybe talk you through some of the the major.
Put some types of your liking the model, we do over all expect <unk> to be a tailwind for the year and that's consistent with the original guidance that we shed.
The main drive is that will will kind of support that tailwind would be as we start to cycle. The COVID-19 cost as we did in Q1, we obviously continued to be very disciplined you're making sure we're creating a safe environment Privatisations, Matt customers, but we have ensured that we continue to be more efficient Jean identifying how we can improve our processes and Ah.
Model to minimize those costs without compromising on safety and ensuring that we're creating the right environment and install an online. So there will be some benefit that continues to flow through we would estimate the COVID-19 coursework, probably just shy of $150 million in this quarter in any future quarters, they'll probably be left with $100 million.
Culture as we as we look forward and gradually declining over time.
In addition to those COVID-19 costs that were cycling, we do expect that you know digital profitability to continue to improve and a lot of that improvement is in the cost of 7 cost to fill in order and say that is something that we continue to focus on that will help other overall, though G&A model as we get more efficient and digital.
There's a sort of a practical cost saving 2 when you think about last year with a very strong year for the business across a key incentive metrics around operating profit growth in sales growth. This year, we would expect incentive costs to be more normalized so I've looked more like a normal year, which creates a tailwind in our cost structure as well.
<unk> and then I think I'm the headwind side of things that would offset those savings would be I continued investments in the average Audi rates for our sex shifts.
Rodney mentioned in the prepared remarks, we ought to make it to continuing to invest in our associates to make sure that we continue to be competitive but also recognized the value of our associates I can play a critical rolling and obviously delivering for our customers.
And then secondly helpful. If the sales deleverage will have a negative impact on cost as well said net net we still expect that I would hate to be a tailwind as we head through the year that they will be able to put some takes and the model.
And.
<unk> mentioned it earlier, but we would expect the operating margins to be higher in 2021 them. What they were in 2019 when you look at everything.
Put together as well and Gary mentioned it but we expect this will be the fourth consecutive year, we've taken over a billion dollars of costs out of operating in the business.
Some of that shows up in growth some of that shows up and operating costs.
Okay, that's mainly how 'bout color and then they follow me set you know.
<unk> continued to reopen here in recent months and has anything surprise you. This far in terms of what you're seeing from you know category channel geographic consumer behavior perspective, I know you said your kitchen right continuing to see Peter Knight K up to premium premium items and then just you know from a traffic basket for a second hold any.
Anything changed things continue to reopen here and are you expecting to fully recover Kathy acquaintances here.
The to me, it's a great question and I wouldn't necessarily say that it was surprising but it was it's good to see and it's some of the factors you just mentioned but people.
Still continue to eat at home more than free Covid. They still continue to cook more than pre COVID-19 and they're buying more premium products than pre COVID-19.
Those things were things that I wouldn't say, we're surprises, but it was it's good to see vs.
Our research our customers telling us they plan too so it's.
It's actually happening as what customers told us they would do vs. The end of surprise vs. What we expected.
In terms of traffic and changes there very consistent I would say the biggest surprise. So far has been continuing to find associates to hire and last year. We last week excuse me last week, we did Ah ha.
<unk> hiring event and we were very pleased with the number of people who are high able to hire from the hybrid hiring of that.
But we continue to have a job openings pretty much across all areas of the company and that's an area that I would say the number of openings. We have is more than what we would have expected.
Yeah.
Okay, great. Thank you so much thank you.
The next question is from Simeon Guttman with Morgan Stanley. Please go ahead.
Hey, guys. This is actually might work absolutely on for for sending and thanks for taking our questions.
So first of all I wanted to to ask about market share. What you guys are seen what you saw through the quarter and he took a lot of sure last year. So it just kind of curious how that evolved through to 1 as you started lapping those sure. Nathan I guess are are are they the sticking are giving a little back, but still you know training well above pre COVID-19 any any.
Thoughts and kind of have you seen in your markets.
If you look at done a 2 year basis, it's been very consistent on how the market share gains halves state. If you look at the fresh departments market share you're even year on year has state even that even stronger than we were.
Hoping but it's obviously great to see but everything that we're looking at where we really are focusing on the 2 year stack and what kind of progress, we're making there and that is great to see on the market share that we've been able to keep and it's been pretty consistent I dunno, Gary any additional.
Color you'd want to add well I think he said he well Rodney part of the challenge using Q1 in particular is a quarter is just that volatility and what was happening almost week by week. If you remember back to how customers with shopping and some of the supply chain issue. So I think to Romney's point that focus on 1 of the reasons I should probably say if we deliberately sort of wait until later in the day to talk.
Market share last year was we felt like it was hard to rejoin that time and so is Rodney said the focus really about how do we make sure as we can we take we would we would become a strong got through Covid overall and looking at that to your time period and I think what we're seeing so far we feel good about the momentum and why we also increase the like the guidance for the Red.
The year.
Yeah.
Great and my follow up on on digital sales. The 2 year stack was still very strong it did they celebrate a little bit vs Q4, and so I guess you know what are your expectations for the rest of the year is this the kind of level wanted to your snack basis that you're expecting for that kind of the rest of the year and I also as it relates to your a bigger picture of you.
With digital sales doubling over the next several years is that still intact has anything changed as far as your outlook given what you saw in Q1.
I'll start out with the broader question and then like Gary filling on some of the specifics.
But if you look at the commitment on the doubling the business digitally and.
The continued improvement in profitability, we would expect we continue to expect those broader trends the hold in place ever.
Everything that we can see the customers continue to like to shop online. The thing that I think is very important is that very few of our customers actually only shop online and most shopper shop online.
Our stores and when they shop, both our retention rate is incredibly high end.
And our ability to gain share within that household is very high as well and those are the major trends that we would expect to continue and those are the trends that we believe that will drive our ability to double our online business, along with expanding with the sheds and other pieces.
In terms of if you look at within the year, Gary I'll, let you talk.
Talk through that sure. Thanks Romney yeah. The the way we think about it is very much that we believe the COVID-19 has been a reset if you'd like for digital so we probably pulled forward day mountain bike anywhere between 3 and 4 years based on the way the customers are already engaged in digital over the last 12 months. So I think the way you described is highway so do you think.
Nobody is looking about 2 year view across 20.
2000, and 2021 is the right way to think about it because after such price I think there's going to be something of a if you'd like a normalization this year and.
From there of course with building to the commitment of doubling the business over the next few years. So you mentioned it I think an investor day, we didn't ready necessary or do you think that it was a linear John even think about 2021.22, 92 and 2023. So we do expect I'm still very focused on that plan that we share that are investor day, a few months ago.
And we still believe that's that's the journey that were on and what we're gonna King to achieving over the next few years, but I I do think this year and last year and will be more of a 2 year you in similar in a similar language looked at overall sales as as as kind of a normalization initiate following that drive the growth in 2020 and will.
Continue to build from there as we head towards that.
Opening the business by 2023.
Okay. Thank you very much thanks.
The next question is from Michael Lasser with UBS. Please go ahead.
Morning, Thanks, a lot for taking my question, you mentioned that you'd previously anticipated, 1% to 2% inflation business Opry.
When you have 3% to 4% inflation is that what you're now.
<unk> for you. We can you clarify what you are now I'm getting into your guidance and your reset to your attention.
Yeah, I I don't think if you look at overall, we're really not changing our inflation expectations for the year and we're still managing the business with 1% to 2% overall.
There's still so many moving parts.
That for us to fundamentally change our estimate we don't see anything that's hugely different than what we were expecting.
Earlier in the year.
Now if inflation ended up tracking into that 3% to 4% range, we won't complain.
Got it.
Second question is on 2 pieces that you'd mentioned previously you you mentioned that you're getting a sore throat again, if it would help the gross margin and a 33 per cent increase in digital advertising or advertising revenue for digital transaction, suggesting that you're able to harvest.
More maiden being hurt each 1 of your Bender.
Getting any pushback from the vendor community as you look to gain more support how are you able to do this and do you think that this is a trajectory that is sustainable from here.
Yeah, I'll talk brought her about the retail media and then like Gary talk about the sourcing benefit since sourcing Ah reports through Gary's organization.
If you look at retail media.
And I mentioned it briefly a few minutes ago. It is the fastest growing media channel.
And we do not force are cpg's to advertise with US vs somewhere else and we want to be held accountable for delivering results are the same way anyone else would be and we shared it at our Investor day, but.
Independently.
C B G as in others, right or retail media incredibly strong and better than pretty much anybody in the market in terms of the ability to target customers getting Ah Roy on that retail spend and.
Being able to adjust and make and eliminate wasted money because we're totally transparent.
With our C. D G partners in terms of how they invest their media money and for US. We think that's incredibly important because we want to make sure we earn the right and earn the right in terms of gaining share. When you look at the amount of money that's that in digital as well north of.
$100 billion and getting our fair share of that is important and it's important for the business model as well on sourcing benefit Gary I'll, let you go into the detail there.
So the question Michael I think that part of the answer what day is.
Bridging back to a track record as well as the last few years you know we've seen significant savings from sourcing over 2019.2020. Michael is 2021 is part of the million dollars of savings and at the same time as Rodney mentioned, we've been growing alternative profit with media being the fastest growing part of that significantly as well as income.
Actually I have a $100 million again or you have a 2019.20 I'm 2021, 1 compounding on top of the other so we feel very good about our ability to to drive by parts about it that model and I think I'll track record would show that that we've been able to maintain that momentum I think we do think of them as very different.
Pulls up money as well, though is Rodney mentioned, so insulting it's not just about squeezing an extra penny out by negotiating it's about being creative about sourcing it's about our own brand products is why I'm using those and I'm thinking about design of the product and looking at how we.
Manage future cost inflation hedging of or getting ahead of sort of changes in cost structure. So we think about sourcing in a very strategic level to look at it across many different levels to make sure that way continuing to get better how we operate most efficiently and we would still see significant runway to keep getting better on those fronts and being I.
Went to support our model overall volume proved assaulting benefits out at the same time as Rodney mentioned on the on the media side of the business Ah ready all of that revenue is coming from different poles of opportunity, where many of I C. B G partners are spending with media companies should be able to drive that overall sales growth.
Medium off the canon digital channels that are available and e-commerce platforms, and we believe that the Kroger ecosystem offered some significant advantages and can be redeploying some of those dollars for a C V. G pawn to help them get a either a higher return on what they're spending all spend left all of us to get the same returned because we can offer a more efficient model.
For them.
Thank you very much thanks, Michael.
The next question is from Ken Goldman with J P. Morgan. Please go ahead.
Yeah. Thank you first question, you talked about being able to pass along inflation as it increases is there any reason to think that this will mostly.
Would it be any different in terms of how you think about that meeting list prices vs. Reduced promotions were just any other sort of factors just trying to get a sense of because we're in a sort of still well COVID-19 world, whether you're replacing strategies would be similar to what you might do in a normal environment or just similar.
Yeah.
Can your questions are good 1 we would <unk>. So far we don't see anything different we do see a bigger pack sizes. So the customers able to offset some of the inflation by.
Buying a more of a bigger pack, which is more efficient on a per unit usage.
But nothing.
Nothing that we would say so far anything that we've seen that would be significantly different than what we've seen before.
Okay. Thank you for that and then.
You know, we're still seeing store brands at least what we're seeing in Nielsen data lose quite a bit of sure in the food at the supermarket channel.
With the understanding obviously remains a critical part of your strategy I'm. Just curious are are your own brands performing as you would have expected year to date and you expect that to start getting better a stimulus benefits, maybe diminish a little bit.
Yeah, if you will get our brands and I always look at it over a 5 or 10 or 20 year period. Our brands of always gain chair you you may have 1 or 2 years within that 20 year period, where that hasn't been the case, but overall our brands continues to gain Chai.
There last year, because we had had our other manufacturing plants and we were able to ramp up production and it was dedicated to US we were able to significantly gain chair last year, just because we had product and many of our CPG partners did not.
The other thing that.
The private and mentioned a minute ago, but our private selection product and are simple truth brands continue to really have strong strong.
Quarters year on year, and actually had for the most part positive sales growth, even cycling last year and.
We think it really is part of that prime premiumization of product and our team does a great job of identifying new opportunities to make something fun.
It cannot be great day, thanks, so much.
2 stories on that the other operands is Rodney mentioned, because simple truth in private selection continue to outperform other overall sales growth and to your point I think that that the Kroger brand offers a great opportunity as a as.
Is a great.
Great value for the customer.
Things potentially I'll I'll I'll stimulus funding stops to become a little bit less significant in the future. So we think that such as a well for the future as well.
Thanks again, thanks, so much.
Our last question comes from John Hi, Buckle with Guggenheim Partners. Please go ahead.
So 2 things Rodney starting with forward by right, which we haven't talked about maybe a decade, what's the opportunity. There is that just naturally going to be limited by vendor availability of product.
Yeah.
You're you're right it's been a long time since we've talked about forward by.
We would if you look at some areas on pharmaceuticals, and things you continue to for advice, it's something that's been done throughout it's just not as big as other things. If you end up in an environment, where there was heavier inflation you would expect to be doing more forward buying but if inflation.
Is more normal we would not the other thing that drove a lot of forward by the past is cpg's had excess capacity.
And they were trying to fill up the production of that excess capacity.
And as of right now, we don't see that but it is a great question and that is something we will continue to look for the opportunities.
We did do a lot of forward by last year during COVID-19, but it wasn't forward by it was just when you could find the product. We we least about 20 extra warehouses to have to get product to have to be able to serve customers.
And then secondly, you know how many how many more years.
Think the billion dollar a call saves you know is that is that he's still a long runway.
<unk> I assume you think your account will be higher post COVID-19 right that it that it was pre that'd be free I'll go.
And does that mean that the the model right going forward is significant expense leverage.
Growth being down even with alternative profit.
And that's that's what drives the EBIT margin improvement.
Yeah. Your last part of the question alternative profit would be a key part of driving margin.
I can tell you on the cough saves we've been able to find more cost savings that I would have ever guessed when we started the journey.
We're just now starting to work on things for 2022 on cost saves. Some other things that are being put in place that are cost savings for the balance of 21 will flow through the next year I don't know the degree of what kind of cost savings will have but I would certainly expect that will find a meaningful cost say.
<unk> threw process changes and and work changes.
And things like that.
John I think it's it's suddenly become a co.
Co competence to Rodney spot I think when we started the journey a few years ago I'm not sure we have.
A sense of what the opportunity he wants to continue to find ways to be more efficient and take cost and innovate in this space and we still look at it is Rodney mentioned, whether it's continuing to look at how we can use technology I still think there are a number of areas in a business, where we have the opportunity to to leverage more technology. Even if you think about learning from the law.
12 months with Covid and we're all day ways to operate administrative costs more efficiently I think we continue to identify new opportunities and we still believe that as long as it's become a core competence in the company to finding those areas to improve efficiency. We we would expect that to offer offer changed into the future Michele.
Thank you.
John for the question before we.
Finish today I'd like to share a few final comments directed to our associates or listening then.
Opportunity collaboration and innovation are the core of who we are.
The opportunity to be your authentic self can be celebrated for it.
To dream Big innovate and drive change.
To demonstrate care empathy and compassion for the people around you and the world.
Which we live.
The opportunity to be part of something special and work side by side with other people who are United by our purpose.
I would also like to encourage all of our associates to get COVID-19 vaccination.
You have the opportunity to enter our community immunity giveaway. In addition to the hundred dollar instead of that you will receive when you complete the recommended doses of the vaccines.
From our first higher hybrid hiring event that I mentioned earlier to drone grocery delivery, expanding kroger delivery accelerating partnerships with fresh suppliers and supporting small businesses star.
Striving for community immunity and welcoming innovators to join us in our fight and hunger. These are just a few of the many examples of how our teams collaborate to develop new and innovative ways to grow our business help our customers help our communities and create job opportunities.
Thank you for all you do each day to be there for our customers communities in each other and that concludes today's call.
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