Q2 2021 Kroger Co Earnings Call
I will now turn the call over to Rodney.
Thank you, Rob and congratulations on your new role.
I'd also like to take a minute to thank Rebecca Manis first service to the IR team. We wish her continued success in her new role as head of new geographies for our customer fulfillment centers.
Finally, I would like to thank you all for joining us today.
Our associates have done an incredible job operating our stores pharmacy supply chain and manufacturing facilities through the Covid environment.
Their unending commitment to serving our customers and communities continues to make a difference and Kroger second quarter identical sales without fuel.
Grew 14% on a two year stacked basis.
Head of our internal expectations.
We saw triple digit growth in digital over the same time period and continue to drive cost out of the business through cost saving initiatives and operating operational efficiencies.
We remain confident in our positioning and our ability to deliver consistently attractive total shareholder returns of 8% to 11% over time.
I'd like to spend the next few minutes discussing three key areas first customer behavior and how our seamless ecosystem is working.
Second I'll share share examples of how we are leading with fresh and accelerating with digital.
And finally I will highlight how we continue to live our purpose.
The human spirit through the associate experience in our work to advance Kroger's ESG commitments.
Our strategic focus on leading with fresh and accelerating with digital continues to build momentum across our businesses.
As we've operated through the pandemic, we've recognize that the structural shifts in our customers' eating and cooking habits.
Customers are responding favorably to our value proposition and are enjoying the convenience of our seamless offerings.
Early in the quarter customers visited stores more frequently and many shifted from online to in store.
This highlights the relevance and convenience of our easily accessible footprint.
Towards the end of the quarter as COVID-19 cases increased in many geographies.
Customers began shifting back to our digital solutions.
This further demonstrates the strength of our seamless ecosystem.
Customers can choose how they want to shop.
Our job is to be available in every channel.
The customer does not have to compromise.
Regardless of how they choose to shop customers are eating more food at home, because it's more affordable convenient and healthier than other options.
While some food at home trends may be transitory or research success. Those I highlighted are structural.
And Kroger is uniquely positioned to address them.
Through our assortment of fresh products World class digital platforms and innovative meal solutions, we will continue to elevate our position as a food authority. So that when customers think food they think kroger.
We continue to advance our position as a leader in fresh during the second quarter.
We saw positive identical sales in produce and floral deli bakery, even as we lapped elevated cells in 2020 are.
Our research shows how much our customers love our brands.
Sales for both simple truth and private selection brands were strong as food food at home trends remain sticky.
We continue to innovate within fresh for example, our expanded partnerships with ghost kitchens allow us to offer customers a freshly prepared on demand restaurant food.
This is especially relevant at a time when many customers are looking for inspiration.
And 70% of our customers. They convenience is important when you're cooking.
We also announced our 2021 go fresh and local supplier accelerator cohort cohort and are already bringing innovative locally and regionally sourced products to stores across the country and helping many small entrepreneurs achieve their dreams.
Earlier, this week Kroger announced our new brand icon.
Fresh cart icon brings together the Kroger family of companies.
They're one unifying visual and reinforces our brand promise of fresh for everyone.
We are very proud of our growth in digital which increased 114% over the last two years.
To our first quarter growth.
We remain on track to deliver against our 2023 digital growth and profitability targets introduced at our 2021 IR day.
While digital sales decreased 13% during the quarter, almost all customers who reduced their online spend during the quarter continue to shop with us in store highlighting the power of our ecosystem and our ability to create a meaningful customer experience across all channels.
It is a short reminder, kroger has doubled our ecommerce household penetration increasing the number of our brick and mortar customers that engage with our digital solutions since 2019.
During the quarter, we added over 340000, new customers to our digital platforms.
We continue to expand capacity across our footprint and we reduced wait times for Kroger pickup.
As we look ahead, our seamless ecosystem will remain a competitive advantage as we offer what customers need and want in a way that fits into their life, whether it's shopping in our stores picking it up at our stores are getting it delivered or shipped directly to their homes.
We continue to enhance our seamless ecosystem.
As we shared last quarter. We currently have two customer fulfillment centers open.
Which are expanding our capabilities in Ohio, and allowing us to expand it to new geographies within Florida.
We are happy with the performance, thus far and are energized by the volume and growth in both sheds.
In Ohio, our focus has been on involving the customer proposition to maximize opportunities alongside our existing digital solutions.
In Florida, we launched delivery savings pass offering customers unlimited deliveries for just $79 per year.
We continue to see incredible net promoter scores and our customers tell us they love our friendly professionally trained drivers and their refrigerated delivery vans that bring the freshest food directly to their doorsteps.
Looking ahead, we remain on track to open six customer fulfillment centers over 2022, and 2023, which will further expand our seamless ecosystem.
Before I share some specifics on how we are using data and personalization to grow the business.
I thought it would be helpful to remind you about how our rewards program and how it works.
Our rewards program has been active for over two decades.
Captures data from 60 million households at 96% of ourselves.
Customers clearly see the value of our program, which drive cells and builds loyalty.
As an example.
Nearly 60% of all items in a digital basket were added through our personalization science.
Highlighting our ability to make meaningful suggestions that surprise and delight customers.
Furthermore, when we personalized recommendations for our customers.
We can reduce their time to shop by nearly 70%.
Overall, one in three people have noted that groceries, they've gotten more expensive in the past month.
Kroger customers benefit from our personalization as we offer a highly relevant savings at a household level, allowing them to further stretch their food dollars.
Our associates continue to deliver a full fresh and friendlier customer experience every day every time.
While also supporting our communities through the pandemic.
We remain urgently focused on keeping people safe and our stores and facilities.
Our teams were recently recognized with the Gold award for excellence in Human capital management.
The Brandon Hall group for our people centered COVID-19 response.
Obviously, we were especially proud of that recognition.
During the quarter, we introduced new technology to elevate our associate experience.
Kroger launched fresh start.
Our new personalized training program to foster greater associate engagement and retention.
We also launched our feed app.
Which provides associates easy access to company communications and resources from their smartphones.
We are incredibly proud that during the quarter, we saw an improvement in retention as we strive to be an employer, where associates can come for a job and stay for a career.
Now turning now to live our purpose, we continue to believe that customers associates and investors are increasingly choosing where to shop.
To work and where to invest in companies that are taking meaningful steps.
To improve our communities and work to build a more sustainable planet.
We recently published our 2021 ESG report on the Kroger co Dot com.
It outlines our progress over the last several years.
It further outlines our aspiration to further integrate ESG performance and to lines of business.
And our commitment to creating shared value that benefits all stakeholders.
We imagine a world where everyone is thriving together.
Kroger is helping millions of people live healthier more sustainable lifestyles.
Protecting and restoring natural resources and.
Contributing to more responsible and inclusive global mobile systems.
One of the many ways, we bring our ESG vision to life as do our work that are Kroger health team has been doing to serve and support our customers and communities through the pandemic.
During the quarter, we worked with lifts or provide rides to COVID-19 vaccine appointments.
Teamed up with local sports icon to drive awareness and access and the underserved communities and we concluded our community immunity giveaway.
To date, we have provided over $13.0 million doses of the vaccine.
And continue to drive availability and education.
And yesterday President Biden noted that Kroger is one of three national partners, who have agreed to make rapid COVID-19 tests.
Available to customers at cost for the next 100 days.
Kroger is committed to helping people live healthier lives while safeguarding the communities we serve.
Our ESG goals are ambitious and with a team of almost 500000 dedicated and driven associates. They are also achievable.
Since we first introduced our commitment to delivering strong and sustainable total shareholder return in 2019, our teams have been laser focused on execution.
This focus has resulted in tangible results.
Allowing us to deliver this quarter and for the long term.
Now I would like to turn it over to Gary to discuss our second quarter financial results Gary.
Thanks, Rodney and good morning, everyone.
Kroger is delivering strong results and continues to build momentum as we execute on our priorities of leading with fresh and accelerating with digital.
During the quarter adjusted FIFO operating profit grew by a compounded annual growth rate of 23% over 2019.
And adjusted EPS grew by a compounded annual growth rate of 35% over the same two year period.
This reflects our disciplined approach to executing our strategy balancing investments in our associates and customers with strong cost management and accelerating growth in our alternative profit business.
It also provides a further proof point of how we are successfully navigating the pandemic and emerging stronger as a business.
I will now provide additional details on our second quarter results.
Identical sales without fuel declined 6%.
On a two year stack basis identical sales without fuel increased 14%.
Each period during the quarter was stronger than the last and I'm delighted to say, we returned to positive identical sales without fuel during the final period at the quarter.
Our digital platform remains a key strength in our model and we were pleased with the triple digit growth achieved for 2019.
We remain on track with our plan is to double our digital business by 2023, I would expect continued investments in the customer experience scaling up new fulfillment centers and several new innovations, which we will announce throughout the year to drive future growth.
I shared last quarter, we would not expect future digital growth to be linear, especially as we cycled tired of it in 2021.
During the quarter. We also made further progress in improving digital profitability as we achieved a record low for the time taken to pick a digital order in store and continue to see growth in the media revenue generated from digital transactions.
Gross margin was 21, 4% of sales for the second quarter.
FIFO gross margin rate, excluding fuel decreased 60 basis points compared to the same period last year.
This decrease was primarily related to price investments and higher shrink and supply chain costs, partially offset by sourcing benefits and growth in alternative profit business.
On a two year basis, our FIFO gross margin rate, excluding fuel decreased 55 basis points compared to 2019.
Consistent with many retailers, we experienced supply chain constraints and increased warehouse and transportation costs during the quarter.
We are actively managing this risk within our business by securing increased capacity and augmenting associate retention programs within our own facilities.
We expect supply chain costs to remain elevated in the second half of the year and this is contemplated in our updated guidance.
In the second half of the quarter, we also saw higher inflation in some categories.
We are being disciplined and working with suppliers to manage these increases I'm not passing along higher cost to the customer where it makes sense to do so.
While it's difficult to predict with precision as we shared last quarter, we believe inflation for the full year will be higher than originally contemplated in our 2021 business plan.
Well the second half of 2021, our guidance now assumes an inflation of between two and 3%.
Recognizing recent inflation trends and our outlook for the rest of the year, we recorded a higher LIFO charge for the quarter, a $47 million compared to $23 million in the prior year.
Private strong operational execution allowed us to leverage operating general and administrative expenses by 76 basis points, excluding fuel and adjustment items in the second quarter.
This reflects lower traffic 19 related costs and savings captured through our cost saving initiatives.
On a two year basis, our G&A rate, excluding fuel and adjustment items decreased by 137 basis points compared to 2019.
We continue to see opportunities to streamline processes and leverage technology and remain on track to deliver $1 billion in cost savings during 2021.
The traffic and data generated by our seamless ecosystem continues to create a strong flywheel effect for our alternative profit business, which again experienced significant profit growth in the quarter.
Media and Kroger personal finance continued to lead the way and we remain on track to achieve the high end of our expected range of $100 million $250 million of incremental operating profit in 2021.
She only is also an important part of our overall value proposition for our customers.
Gallons grew in the second quarter by 7% and outpaced market growth.
The average retail price of fuel was $3.13 this quarter versus $2.14 in the same quarter last year.
Our cents per gallon fuel margin was 39 cents compared to 37 cents in the same quarter in 2020, and fuel was a tailwind to operating profit of $33 million compared to prior year.
Turning now to our financial strategy, we continue to generate strong free cash flow and remain committed to investing in the business to drive sustainable growth, while also returning excess cash to shareholders.
We are prioritizing capital investments to support that growth strategy widen our competitive moats and deliver strong returns.
Capital expenditures year to date were down compared to prior year as we carefully navigated the impact of higher project costs and longer project lead times due to a challenging labor market.
As we confirmed in guidance today, we are maintaining our range for capital investments, excluding mergers acquisitions and purchases of leased facilities up between three four and $9.0 billion.
We currently anticipate coming in at the low end of this range for the year.
During the quarter, Kroger repurchased $349 million of shares and year to date has repurchased $751 million of shares.
I was at the end of the second quarter $779 million remains outstanding under the current board authorization announced on June 17.2021.
In June Craig also increased the dividend by 17%, marking the 15th consecutive year of dividend increases.
Our proactive approach to investing in our associates over recent years is helping us navigate a challenging labor market.
Strategy continues to focus on investing in compensation plans that reward our associates and way if at all meaningful to them.
We are committing to investing $350 million and hourly wage increases for our social during 2021. In addition to the $800 million, we invested in associate wages between 4038.
Over the same period, we have also taken several opportunities to improve the security of our associates pension benefits.
Our average hourly rate is now in excess of $16 an hour and with comprehensive benefits factored in we will be approaching $21 by the end of 2021.
We are committed to increasing retail hourly wages sustainably and our long term financial model fully contemplates continued investments in associate hourly rates.
During the second quarter, we ratified new labor agreements with the UFC W. Four associates in our Atlanta, Michigan food for less mid Atlantic divisions, covering over 34000 associates.
We continue to negotiate contracts with the U S. C. W for store associates in Houston, Little Rock, Memphis and Portland.
Our financial results continued to be pressured by inefficiencies in health care and pension costs, which most of our competitors do not face.
We continue to communicate with our local and international unions, which represent many of our associates about the importance of growing our business in a profitable way, which will help us create more jobs and career opportunities and enhance job security for our associates.
Turning now to our expectations for the second half of 2021.
Driven by momentum in our results and a sustained trends in food at home, we are raising our full year guidance.
We have also narrowed the range of our guidance as we all further into the year and the trends in our business and the broader food at home market become clearer.
We now expect identical sales without fuel in the second half of 2021 to be flat to slightly positive, resulting in full year results of negative one 5% to negative 1% and two you have identical sales stack up between 12 six to 13, 1%.
We expect our adjusted net earnings per diluted share to be in the range of $28.0 to $3.35.
We expect our adjusted FIFO operating profit to be in the range of $12.0 billion to $4 billion, reflecting a two year compounded annual growth rate between 14, 1% and 15, 6%.
In conclusion, we are emerging stronger through the pandemic and remain confident in our ability to deliver total shareholder return of 8% to 11% by sustainably growing earnings and using that resilient free cash flow to return excess cash to investors.
Now I'll turn it back to Rodney.
Thank you Gary the environment, we operate in dynamic and I am so proud of our associates ability to meet the challenge and serve our customers while building for the future.
Kroger is seamless ecosystem is working.
This was evident during the quarter as we saw customers seamlessly shift between channels.
And we continue to see strong digital engagement.
We are leveraging technology innovation, and our competitive moat to deliver against the total shareholder return model, we introduced in 2019 and reaffirmed in 2021.
Cooper will continue to deliver for all stakeholders and position the business for long term success.
Now we look forward to your questions.
We will now begin the question and answer session.
Can I ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the heat.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble all wrong okay.
Our first question comes from Greg <unk> with Wolfe Research. Please go ahead.
Good morning, this is behind us.
Right.
Can you guys talk about the comps that you're seeing quarter to date.
It does imply somewhat of a slowdown.
In the second half and then right now although it's early how are you thinking about comps in 2022 do you guys get back to your long term algorithm next year. Thanks.
Yeah as Gary mentioned in his prepared remarks, the last period of the second quarter, we returned to positive identical.
And so far in the third quarter, we've continued to see the trend of positive identical and our guidance for the balance of the year is positive as well.
So.
We're very pleased with where we are we're pleased with the performance of our teams are doing and we're making progress and substantially ahead of where we initially we thought we would be at this point in time on cycling the Covid thing from last year.
As we look toward 2022.
Gary unless you want to get into more of the details.
I think the key thing would be what we talked about at our Investor day for <unk>, and 2020, one and that's our commitment to a T S. Our model of 8% to 11% and that's driven by a combination of sales growth.
A slight margin improvements and taking free cash flow and returning to our shareholders via dividend and stock buyback and the.
Some of those together is what will drive the eight to 11, and we remain committed to that and obviously since we put it in place in 2019, we've outperformed it Gary.
Gary if you want to add anything there.
The only thing I would add I think he said it very well Rodney is we feel really good about the trends in the business. Obviously as we said on the prepared comments. If you look at the back half of the year you ask.
For additional color on how we're thinking about the you know the.
Trends that we're seeing there in the guidance I would say, we're obviously heading into the back half of the year as Rodney mentioned with momentum in the business. We did raise the guidance to now be in that sort of zero to 1% for the back half of the year based on reversing into that from the year to date performance and the guidance that we gave for the year you know overall, we're thinking of.
Really good about how we're executing in the business and seeing that sustained trend in food at home as consumers continue to gravitate towards some of the trends that Rodney talked about I'd also have obviously, we are seeing some return to previous behavior with the Delta Varian currently prevalent in the U S as well I'm not being.
We do still think there are some knowns and in the market. If you look at different countries, how long the impact of the Delta variant.
Lastly, if you like on consumer behavior, we are seeing some consumers return to a normal behavior of returning to two offices in some cases and so while we feel really good about our trends and our ability to continue to win with the customer the back half of the year would be more of an 11% to 12% two year stack based on still with some of the uncertainties.
Unknown is around those elements that we're still looking to see how they play out I think the only other thing that I would reinforce I'm. Rodney has commented that we do expect as we said at our Investor day at the beginning of the year, but as we come through 2020 in 2021, we expect the overall food at home trends in the market, but also specifically correct because I ever.
Sales to come out of 2021, and a much stronger position than we would have been Uh huh.
The pandemic not occurred and so we believe that that will still send them to be true as we head towards 22, and obviously, we look forward to sharing more details on 2022, when we get to towards the end of the year.
Thanks, That's really helpful color and then could you guys comment on how rational your peers have been passing through inflation are you expecting any gross margin headwinds from some of the elevated inflation in the perimeter of the store any additional color there would be would be helpful.
If you look at AR during the quarter about half of the gross margin impact was from higher shrink and higher supply chain costs and Gary in his prepared remarks talked a little bit about both of those but if you look at shrink.
A lot of that about half of the half or 25% of it is driven within the shrink component and that's heavily driven by organized crime.
Or at least it appears to be and I know Congress and other groups are starting to.
I spend more time on understanding.
What's driving that and what's behind it and what's the distribution channels for the stolen products as well and trying to manage that.
Then on the supply chain costs, we are proactively investing there to minimize the effect on on both of those areas are the guidance that Gary shared for the balance of the year reflects the pressure in those areas.
From a inflationary standpoint, as you know over time, we've been successful in operating in low or negative inflation and high inflation and we wouldnt see this no different.
And our business are the easiest place to operate as when inflation between three or 4%, but you don't ever given what you are.
It makes it the easiest, but so far where costs are being passed through in an organized way for the most part and as we would expect in following our strategy.
Great. Thank you so much.
Thanks, Greg.
Sorry [laughter].
Yeah.
Our next question comes from Michael Lasser with UBS. Please go ahead.
Good morning, Thanks, a lot to get to my question I wanted to drill down.
Into your comments around the consumer and breathing eating at home coupled with <unk>.
Targeting the total shareholder return Formula for next year.
Still largely in the midst of the pandemic many workers.
Working from home.
Extreme this year.
Leanne you know.
Revenue boost here.
The food away from home in calendar 'twenty two.
Can you dive into a 3% operating margin here.
How will.
Will you be able to maintain.
Operating margin rate.
Behind me, where your fields are going to continue to be.
Be pressured, particularly as you have reduced a lot of your old G&A expenses this year.
Thank you.
Thanks, Michael I'll start and let Garry finish if you've looked at all of our research on people eating at home.
Customers are telling us.
They enjoy eating at home and eating with their families, which we believe is structural and sustainable they're also telling us that.
Eating at home, they're able to eat healthier strike stretch their budget significantly further because it's not nearly as expensive as eating in a restaurant.
And they also like showing off their new skills on cooking.
And all of those things everything that our research would suggest are long term trends in.
In structural trends.
The other thing that.
Everybody on the call.
Guess is as good as ours, but.
Everything that we can tell we believe that people will continue working from home more than the past and many companies and I know certainly we are oh.
We're supporting people in terms of different jobs, what jobs can be worked from what location and in all of those cases, what we're finding is people are eating more meals at home I eat breakfast and lunch.
So everything that we can see a.
A meaningful part of the trend change.
It is really structural and sustainable and it's not just a onetime blip because of COVID-19.
In terms of the margins and stuff Gary I'll, let you drill into some of that detail. Yeah. I think all I would add Rodney is maybe just Mike will take you back to the journey, we've been telling for the last three years without model and as you think about how we teed it up at our Investor days, you know, we feel that I have a 2019.2020 at that time.
'twenty, one where we're really demonstrating how we're able to manage the business more holistically.
As we think about delivering on a T. S. All models. So you think about the continued investments even through the pandemic that we are making our customers to ensure that they see the value we're delivering whether that's in the experience and some of the digital investments all through continuing to invest in price, where it makes sense and personalization to make sure were positioned well with the customer the investments.
But we're making an average Audi right for our associates to.
To ensure that we're continuing to improve the experience there.
And as you look at that and then think about the the way in which way it we'd manage costs with continuing to accelerate our alternative profit businesses and at the same time continue to get stronger and more effective sourcing and managing margins in that way I think that gives us.
Confidence in our ability to continue to manage the business overall and drive a strong <unk> T. S are in line with our commitments as you think about over time, what I can even talk to our shareholders. So we'll obviously get into more specifics around how we think about 2022 later in the year and I at this point I wouldn't I wouldn't want to get into specific details about next year.
That's certainly how we think about our model and how do we get confidence in our ability to maintain the trajectory over time and supported by dropping these comments on how we think about continuing to see the customer.
Spend dollars at food at home and how we can continue to grow our business within that context.
Yeah.
Look at cost, it's one of those things, where we've been able to you know.
Take costs out of the business without affecting the customer experience for years and.
I know when we set out a goal we always think that that's all we're going to find and then our great teams are able to find more Eric more areas for process change and cost opportunities and when I watch our operations team Gary mentioned.
German team.
Technology team, but more importantly, how our stores and technology and operations team are working as one.
They continue to identify things to make our associates job easier to reduce the number of touches of product and be able to take costs out which are customers then benefit and some of that cost reduction is shared with our customers. Some of it is shared with her associates.
But it's part of the overall flywheel that continues to accelerate and make our model sustainable and Gary's point on alternative profit is an important component of that as well actually about one other thing on the cost side, Michael that I think is important to we mentioned this again at our Investor day, but this is the plan that we have to double digital profitability.
Let's see.
That's obviously very important to the long term strategy that Rodney outlined around how do we make sure that from a customer perspective, they're not having to compromise between store and digital experiences, but he's also important from a business model point of view to continue to improve the profitability of the channels say that from our perspective. We can you know we can be agnostic from whether the customers.
Online or buying in the store as we grow that digital profitability rate important to remember that just doesn't affect the growth in the future. It affects the $10 billion business that we have today. So that's also are proving to be a tailwind in the financial modeling of G&A now, but also we will continue to be a tailwind because we're only partway through that journey as we take cost out of fitting I don't want to.
And continue to grow median revenue per transaction as well.
And my follow up is on the media revenue per transaction it seems like that area.
Where you're really supporting the profitability of your digital business.
And subsequently the overall gross margin for Kroger.
No.
Where are you from an advertising perspective from a large CPG company perspective.
Getting more advertising advertisers on the platform can you frame out how big advertising opportunity can be.
In.
Unrelated I know what it was there a vaccine distribution benefit within the gross margin one of your large competitors talked about that within the quarter.
But there's several questions there I'll.
Briefly talk about the media, we still see our retail media is a significant opportunity.
And we shared at Investor day, but krogers retail media team and in our retail media offer in five different areas. We ranked number one among our competitors are in three of the five and we were tied for number one of the other two so obviously the value CPG is good.
From our offer and our ability.
To use our data to make sure. The right customers are seeing offers is substantial and significant and we believe that it's a significant opportunity to continue to.
Grow our retail media I won't get into specifics other than we would say that we feel like we're just getting started.
And then Michael I would just say on the the health and wellness question. We would certainly have seen some benefit from COVID-19 vaccines during the quarter, having said that we pivoted a lot of our efforts in the pharmacy business, which as you know was a big part of our operation and that it'll clinics I would say net net ticket up to the health and wellness business I would I would think of it as largely being.
On plan and so I wouldn't think of it as a headwind or tailwind during the quarter or for that matter being a headwind for the rest of the year either I you know I think we've got fully contemplated in our guidance.
The expectations around the health and wellness business going forward.
Thank you very much and good luck.
Thank you.
Our next question comes from Chuck Cerankosky with it.
That's the research. Please go ahead.
Good morning, everyone nice quarter I wanted to talk a little bit about or ask a little bit about private label in this inflationary period, how how do you see customers reacting to it and is there a difference between.
Customer shopping in store and online.
Yeah, if you look at our brands.
Simple truth in private selection continues to really gain.
Gained share and grow we're also finding big packs.
Our growing significantly.
If you look at FERC.
For us.
Are we find to our brands.
If cpg's are passing through inflation, that's not real.
All every time when somebody does that our brands even gain incremental share.
Sure. The other thing that I've been really proud of our team as the innovation they behind put behind the product and we've introduced over 140, new products in the quarter and we'd continue to expect that going forward.
I don't we're not seeing that.
Behavior changes if.
If you go back to prior times when you had inflation.
The customer a lot of times would trade over to our.
Our brands are.
As part of their structuring their budget, we're not seeing budge.
Budget changes on our brands happening at this point.
But I'm sure if inflation continued.
Our customers are telling us they still feel pretty good where they are financially.
And for the most part people are still saving at record levels and things like that now at some point, if our budgets got more constrained.
We start seeing some of that behavior, but the business, we're gaining right now is.
As really being created because of the innovation in our product and the quality of the product and its really standing on its own.
And then secondly.
Are you seeing a regional differences and the shifts in the way people moved in and out of e-commerce over the course of the quarter.
Yes, we would and its really wherever COVID-19, it's higher.
You would you would see the shift to more online and that's a delivery and pickup.
And you know as it as it moves north you would see that within the company.
And as I mentioned in my prepared remarks, the things that we're especially proud of is almost every customer that were shopping with us digitally early in the quarter that started that stopped shopping digitally when he started shopping in the stores and for US that's really important as part of.
Our overall strategy for seamless.
Because what we find is after the first year and online shopper actually comes into the store more often than they did before they became an online shopper.
And have you quantified what are your total ecommerce.
Yes.
Due to the operating earnings during the quarter or is there any way to put a number on that whether it's smaller loss or is it trending towards a positive number.
Well I'll, let Gary Oh, I'll talk a little bit if you look at within the quarter. Obviously, we had the startup costs of our sheds and Florida and our Monroe. So that created a headwind obviously that was reflected in our guidance that we gave for the year and our updated guide.
Gary if there's any additional.
Well I think we talked about the profitability of digitally in different ways. You know when we add in all the fixed costs, where it with more on the journey towards profitability. As you are you are alluding to do we generally focus there on what's the pass through rate on the the transactions as a way of growing customers because what we find with digital as you know is the customer it becomes.
More loyal over old to Kroger, and we see about 50% or so instrumentality is the customer's engaging digitally as we talked about previously we've kind of when you think back to last year were mid single digit a pass through rate compared to a pass through rate that will be closer to mid to high teens on a store transaction and we're on the path to improving that.
Profitability to to drive towards doubling the profit rate on the digital transaction and ultimately talking to them to get to parity I would say, we're making good progress on that journey as I mentioned on my prepared comments, we continue to make solid improvements in the efficiency of picking a digital order and over time, we'd expect our Colorado to play a role in that as well of course.
The automation, they provide and with media revenue continuing to grow rapidly. That's also creating a tailwind. So I'd say, we're seeing good momentum in and on track with where we expect it to be with that journey in the quarter.
Thank you very much good luck on the rest of the year.
Thanks Chuck.
Yeah.
Our next question comes from Edward Kelly with Wells Fargo. Please go ahead.
Yeah, Hey, guys good morning.
I wanted to ask about I wanted to ask about share repo and the cash balance. So you ended the quarter with a lot of cash again, you're well below your leverage target.
Thoughts on the buyback.
As the stock attractive here I guess is a straightforward question.
And what are your thoughts on taking on additional debt to buy back stock because you know with the dry powder that Terry I mean, it seems like you could probably take out north of 10% of the shares is this a bigger part of delivering 8% to 11% next year, just kind of curious as to how we should be thinking about all of this.
Yeah. Thanks for the question, Ed I would say overall, where we're not.
Changing our overall financial strategy, you know as we think about our free cash flow. We continue to start with how can we invest in the business to grow it profitably and sustained growth and we still think there's lots of opportunity to accelerate the model I.
I think they need to do a little bit of as I said I like the Investor day I called over time would be to be stretching our topline growth in our April earnings growth sorry, the focus for excess free cash flow. He suddenly looking for where are the opportunities as we believe we can continue to lead with fresh and accelerate with digital to drive that growth, we certainly going to look at any of those incremental investments against the bar.
Is that going to drive a stronger return for investors versus especially as buying back incremental stock, but within our overall framework today as we obviously continue to invest in the business to grow we are committed to continuing to return cash to shareholders at the level that we've shared in our current tsi model as you've heard us say, we increased the dividend.
And by 17% to reflect our confidence that we expect to come out of cart, even at a higher position from a from an operating profit perspective, as we leave 2021, and we we'd continue to buy back stock during the quarter and would expect to continue to buy back stock at the current price, we do leverage our great and I think ive referred to this before.
So think about it is depending on where the shop share prices.
The shaft project library buys back more stock during the quarter, if the share price is higher it buys back less stock because we're not trying to time anything in the market, but really trying to make sure that we're maximizing the return on the dollars as we go through the year to take advantage of fluctuations in the prices it as it happens during a typical trading period.
But we certainly remain committed to returning cash to investors, we stopped with the excess cash from that point of view of saying, where I could we accelerate that growth and ultimately you know well.
We'll share more on that as we identify those opportunities and we will continue to flex. If we believe that there are nice opportunities. Then obviously, we'll we'll look to make sure we are dynamic and making sure we're deploying excess cash.
Okay, Great and just a quick follow up on the gross margin is the is the two year number for Q2 is that a good way to think about the back half or with inflation accelerating and <unk>.
Supply chain does that headwind grow a little bit in the back half just curious how we should be thinking about that.
No I think actually came to us it is a pretty good sort of I ever.
I'm going to GAAP, we don't you know we're not going.
And into specific numbers, but I think directionally. It's a helpful way to think about in the back half of the year. As you think about overall earnings. We would think gross margin continued to be a headwind part of that being warehouse and transportation part of it being shrink. We're also continuing to invest in the business, where we think it makes sense and give value to customers Oh G&A.
You need to be a tailwind, but we will see less COVID-19 cycling if you like in the back half of the year. So so that's why the overall impact on operating profit won't be as strong in the back half of the year, but I think if you think about Q2 in general outside of that cycling of extra COVID-19 costs last year in the first half of the year I think it's a pretty good way to think about the back half.
Yeah.
Great. Thank you.
Thanks, Ed.
Yeah.
Your next question comes from Michael <unk> with Evercore ISI. Please go ahead.
Great. Thank you for taking the question I was just hoping to get a little bit of incremental color around the I D sales has the transaction count.
It turned positive at this point and then secondly, if you could provide some incremental color around you know how much inflation you were able to kind of pass through to consumers vis vis what you saw on Cogs because at times in the past you had some given some helpful context there.
If you look at our transaction count.
We would continue to have a.
Slightly declining or kind of flat.
Transaction count it really depends on if youre looking at versus prior year or two years.
If you look at a basket size per purchase it's significantly increased in terms of when customers come into the store they buy significantly more or if you look at our online shop a.
Customer that customer's basket size is significantly higher than as a basket when somebody comes into a store so both from a digital standpoint.
And individual transactions standpoint customers are significantly buying more.
It's all it's really three things one they're buying more they're also buying premium amortization of product where they upgraded the products they buy.
And they also are buying bigger sized products as well. So if you think about toilet paper a very few customers now can or will even by a four pack of toilet paper.
Where most customers now are buying you know 24 pack or even bigger in some cases.
In terms of the inflation, Gary I'll, let you answer that Michael.
Michael's question on the thanks for the question Michael.
We've laid out before I know on the call we have a very robust process for how we manage them when we see inflationary costs flowing through from suppliers and first of all we challenge to make sure that we feel confident that legitimate because obviously, we want to make sure that that they they truly are structural cost changes and then if they are.
We absolutely have a processual passing them on to the customer and you know I would say that generally we've been very comfortable with our ability to pass on the increases that we've seen at this point and we would expect that to continue to be the case looking into the back half of the year as you saw during the quarter. We also continuing to invest in price, where we think it makes sense sometimes.
That might be in areas, where we're seeing inflation, sometimes it might be where we are investing because we believe it's the right thing to do to grow our customer long term loyalty and other places around personalization strategies. So you know overall, we feel good about the way in which we're able to manage the inflation within the business at the same time, we all can.
To invest because we believe that's going to be important to to grow share in the long term as well.
Got it thank you.
Thank you.
Our next question comes from Karen short with Barclays. Please go ahead.
Yes.
Yeah.
Aaron are you there.
Oh, sorry can you hear me now yeah, I'm, sorry about that yeah. So I have a couple of questions just related to guidance I'm, Gary you mentioned that the vaccine admin fee kind of netted out.
With respect to other initiatives that you had and I guess health and wellness in general I'm. Just wondering if you could give a little more color on that because it was a very sizable and wind up your competitors in terms of basis point contribution to gross margin and then other model questions that I just wanted to clarify where what your actual lifestyle expert.
Patients are for the year, because that's obviously relevant for EPS and then what your Covid.
Costs were in the quarter and what your expectations for Covid costs will be for the rest of the year and then I had one other bigger picture question.
Sure. Thanks, Karen I'm on the pharmacy side of things, yes, So essentially as you know we operate a little clinics as well and a number and I still have multiple years of still is not a little tiny facilities and are in a pharmacy coal business, we continue to.
It's a fault the kind of in vaccines. So my comment earlier was when you look at the total health and wellness business as we pivoted resources to do more COVID-19 vaccinations and as we provided that support whether it be through offsite locations all through our own facilities and you look at the total impact of the pharmacy business as customers.
Shifting to more COVID-19 vaccines and.
Less of the newer prescriptions, if you like even though we grew script count over all during the quarter and continued to grow script comps if I look at the total impact on the health and wellness business for the quarter and the year to date, they wouldn't be immaterial overall outside of business time performance. Although certainly if you look to the COVID-19 vaccines in isolation, they would if they would've crazy that incremental.
<unk> value to the health and wellness business, but he was offset by lower revenue and lower margin impact on other parts of that business that netted out to being on unplanned if you like and as we look at the back half of the year wouldn't expect it to be a reason that we have an incremental headwind in margin because of having less COVID-19 vaccinations in the back half of it.
Here as things start to return to suddenly we expect some vaccines in the back half of the year, but things start to return a little bit more to a normal and less of a spike in vaccines compared to what we saw in the first half of the year.
From a lifestyle perspective is as you I think you'll probably know it says it's not really an easy thing to predict because life I was a charge is one data point at the end of the year as we looked at the data points. So far this year, we've seen inflation, we use those spots to predict where it would be I think the best guidance. We could give you is if you take the year to date performance in.
And lifestyle that we charged to the P&L and then gross that up effectively for the full year that would be essentially a full year expectation based on the data points that we've seen today's point in the year and our outlook, but five five I'm sorry life I beg your pardon me as a it is notoriously difficult to predict so we're giving you our best estimate but at the end of the day it'll be.
Driven by accounting rules and a data point towards the end of the year, but I think the best indication. We can give you at this point to use the year to date performance and gross that up for the year that is our best estimate in essence annualize into divide by seven five times exactly right.
Great and then just COVID-19.
For the quarter and Oh, yeah. So as I mentioned earlier, we've certainly saw a significantly greater cost in the first half of last year as I said it kind of a company, we adapted and learned how to operate more efficiently. We would certainly see continued COVID-19 costs in the back half of this year the cycling less costs from last year, we would expect it to be.
South of a $100 million a quarter of assembly, we're still seeing incremental costs and some of the areas that you would.
Probably expect when you think about how we're continuing to operate through the Covid. We still have masks cost joined the quarters. We still have painting costs. We still have extended leave of absence for any of SEC shifts that are identified as having.
The Covid virus I haven't been diagnosed as a positive COVID-19 case, so those would be the kind of cost that we would say and we would expect it to be a little bit less than $100 million a year I'm, sorry, a quarter I beg your pardon as we look at the back half of the year and I'm still being a slight tailwind year over year, but but nothing like what we've just seen in the first half of 2020.
And then just my bigger picture question is on Florida, So with respect to the Ocado I'm curious Rodney on your early learnings from Florida, and whether you think that you may want to emphasize opening sets in markets, where you actually don't have physical retail locations or any thoughts on way.
You're at on that philosophy in terms of you know markets, where you have high market share markets. We've middle markets are markets, where you have no presence based on like you know so far.
Yeah, It's a great question, but we're still early in the process of answering that.
And if you look in Florida, we are tracking ahead of where we thought we would be at this point and the thing that I'm, especially proud of our teams in Florida is our net promoter net promoter scores are incredibly strong I mean mindboggling strong.
Made it up in up in the neighborhood of best in class across all industries and as you know Oh.
Food retail usually struggles with having a net promoter scores that are up in the Apple neighborhood and things like that so I'm incredibly proud of what our teams are doing in terms of creating the experience for the customer.
And I I I appreciate and like your question I would say, we're still early in the process and we continue to learn every day on our ability to ramp up our facility in a new market.
Certainly, it's easier communicating to the customer and new markets or markets, where our share isn't as high.
And that was one of the reasons why we picked Florida picked you know Monroe here and send outs.
Side of Cincinnati was to learn how to integrate it within our existing infrastructure and then having something from the ground up and I would expect over time, we'll learn how to do both of them and we'll be really happy with the results.
Great. Thank you very much that's helpful.
Yeah.
Yeah.
Our last question comes from Rick with.
Please go ahead. Good morning, Thanks for taking my question and fitting me in so I guess, just going back to the gross margin headwinds during the quarter that you saw to that you called out a shrinking supply chain. It sounds like that maybe half the pressure that you saw during the quarter I was curious if you see those headwinds on the shrinking supply chain at all transitory.
I think.
Incrementally, yes, but if you look at shrink.
I think shrink will remain higher now we will go through and do all kinds of process changes to try to minimize shrink.
But we are being more aggressive and Christine Wheatley Who's our general Counsel is also working with some trade associations.
To try to.
Start working on it in a broader group not just a kroger specific when you look at organized crime and I know I was reading home Depot's earnings our earnings calls and they talked about the same thing.
So we do believe it'll be important.
The partner with the government.
And the way products are able to be sold in the marketplace.
So I do think there's things, we will do to improve but some of it will be a headwind until we're able to address that on supply chain.
I think a awful lot of that will be a transitory.
But you still have to manage through it.
Okay, Great and then maybe just one follow up question, we're hearing more and more from suppliers lately or challenges in the supply chain and being able to fill all the consumer demand out there. So I was just curious how your out of stocks right now trending versus what you've seen in recent months.
Yeah.
I would say that we were were slightly higher.
Now our team has had.
Going in than continuing to aggressively forward buy inventory originally it was because of the inflation pressures. Its ended up because of some of the supply chain issues are it's also one of the benefits of a lot of our own brands and we manufacture a lot of our own brands.
So our plants are.
Aggressively pushing capacity, so I would say that it is a headwind it's slightly worse than it was but we.
To work on minimizing.
Maximizing the in stocks.
Okay, great. Thank you.
Thank you I appreciate it.
Yeah.
Before we conclude today's call I'd like to take a moment to remember the tragic events that took place nearly 20 years ago 20 years ago Tomorrow.
And to honor the lives lost on September 11, 2001.
And as always I'd like to take a moment to address our associates who are listening in.
Thank you for delivering an outstanding performance this quarter and continuing to support our communities through the pandemic.
As the number of COVID-19 cases continue to rise due to the rapid spread of the Delta variant.
I want to affirm that health and safety of our associates and customers remain our top priority.
We are doing everything we can do to make sure that the vaccine is accessible and available to you and our customers wherever they are.
I am so proud of our Kroger health team, who have already administrated $13.0 million doses as a COVID-19 vaccine.
Thank you to our talented health care professionals for being there for our communities and for addressing questions two for our customers about the vaccine and about getting the vaccine.
I'm often reminded of the impact our associates have on the lives of our customers.
Recently, one of our pharmacy managers and Atlanta save the life of a customer it was having a allergic reaction in one of our stores.
This is just one of the many examples that an extra ordinary way our associates care for those around them. Thank.
Thank you for inspiring me every day and thank you for all you do every day every day to be there for our customers our communities and each other that concludes today's call.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.