Q3 2021 Kroger Co Earnings Call
Clearly.
A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings.
The company assumes no obligation to update that information or.
Our press release and supplemental information regarding the quarter can be found on our website at IR Dot Kroger dot.
Com after our prepared remarks, we look forward to taking your questions in order to cover a broad range of topics from as many of you as we can we ask that you. Please limit yourself to one question and one related follow up question if necessary.
I would also like to announce that we will be hosting a business update on March 4th 2022 in Florida with an opportunity.
<unk> to tour, our recently opened Kroger delivery customer fulfillment center, we hope that Youre able to join US I will now turn the call over to Rodney.
Thank you for joining us today.
We often say the holidays are our time to shine and as we move through the holiday season, we feel great about our ability to deliver.
I would like to say a huge thank you to our associates, who remain engaged energized and focused on taking care of our customers.
We are incredibly proud of our third quarter results and the underlying momentum in our business.
We returned to positive identical sales without fuel for the quarter, we saw triple digit digital sales growth on a two year stack and we've increased our full year 2021 guidance.
Our agility and the commitment for from our Amazing associates is allowing us to navigate current labor and supply chain conditions and.
And provide the freshest food at affordable prices across our seamless ecosystem.
Customers are demonstrating more back to normal behaviors and at the same time, our eating more food at home because it's more affordable convenient and healthier than other options plus you can do it as a family.
This was evidenced by our Thanksgiving holiday shopping behavior.
Customers engaged in larger celebrations with friends and family compared to last year.
We also saw them continuing to cook at home.
Leading up to and during the holiday and select more premium products to elevate the food experience.
These are all reasons why we believe the food at home change is structural and not temporary.
With most people consuming meals at home and grocery stores continuing to capture the majority share of stomach. It is more important than ever that we provide customers with flexibility on how they choose to shop with us.
We have the right seamless ecosystem in place to meet our customers' evolving needs.
Leading into Thanksgiving, 70% of consumers said that they would be doing more of their holiday shopping in the store this year at.
At the same time, 84% of consumers said that they will continue to shop online the same amount or more in the future.
These seemingly contradictory behaviors are exactly what kroger seamless ecosystem was designed to accommodate.
We know that inflation is having an impact on customers as well.
82% of consumers polled across the country are feeling the impact of inflation.
And one in four consumers are not confident in their finances right now.
We are leveraging our data and personalization.
To enable our customers to stretch their food dollars.
We deliver value when customers need it the most with personalized promotions big packs and dynamic holiday offerings are.
Our brands also offer our customers flexibility within their spending without compromising thanks.
Thanks to the wide variety of incredibly high quality and innovative products at various price points.
And while price continues to be top of mind customers continue to desire the freshest food options and we're there for them.
Leading with fresh.
We grew sales in natural and organics as customers continue to gravitate toward better for you options.
Our fresh departments outpaced total company identical sales without fuel during the quarter as well.
We had a record quarter in our alternative farming offerings, which includes new approaches to growing produce including vertical and indoor farm operations.
These offerings expand customers access to produce.
At the peak of freshness.
We are very proud to share that home chef became a $1 billion brand on an annualized basis in the third quarter.
As mealtime shortcuts and solutions as well as new product innovations have clearly resonated with our customers.
Kroger is focused on delivering a customer centric seamless experience that requires zero compromise.
No matter, how customers choose to engage with us.
We launched three new offerings during the quarter that supports the plan to double digital sales and digital profitability by 2023.
First boost by Kroger builds on our industry, leading loyalty program.
To deliver additional savings and personalized offers to our members.
We are encouraged by the initial engagement in the program, which is ahead of internal expectations.
Second we launched Kroger delivery now in partnership with <unk>.
This unique convenience and immediacy offering positions us to win more trips with current customers and.
And to bring new customers to the Kroger ecosystem by offering the largest selection of quality fresh products at affordable prices and 30 minutes.
Here's what's so special about this offering.
It was profitable on day one.
Contributing to our goal to double digital profitability by 2023 that was announced during our 2021 Investor day.
And third we announced a strategic collaboration with bed Bath and beyond and buy buy baby that will expand our current marketplace offering and provide kroger shoppers easy access to essential home and baby products.
This exclusive offering will be available through both Kroger dot com and on a small scale physical store pilot in select stores beginning in 2022.
We continue to be pleased with the rollout of our customer fulfillment centers in Groveland, Florida in Monroe, Ohio, which are exceeding internal expectations and we are especially proud of our net promoter scores driven by our teams delivering a world class experience for our customers and.
And we're really looking forward to hosting you in Groveland early next year.
Turning now to our supply chain, we feel great about our ability to serve customer needs through the holidays and beyond.
This is because our teams have done such a good job planning well ahead to maintain a full fresh and friendly customer experience.
In fact, our customers took action to prepare for today's supply chain constraints back in the spring.
And a great example of leveraging learnings from our operate from operating during the pandemic.
We kept the additional warehouses originally brought onto support business through Covid.
To ensure we were able to provide for customers throughout the holiday season as well.
Because of our team's agility, we're better in stock today than we were a year ago.
We're able to serve customers through the Thanksgiving holiday with items they needed for their celebrations.
In fact, we increased our year over year pickup fill rate by over 130 basis points during the week of Thanksgiving.
We chose to incur significant costs in our supply chain during 2021 which has allowed us to provide our customers today and into 2022.
We continue to deploy a wide array of tools, including our own.
Owned and operated fleet and we're working closely with suppliers to mitigate pain points for the customer.
We are eager to welcome thousands of new associates to our organization as we began an incredible holiday season.
Our hybrid.
Hybrid hiring event last month contributed to the hiring of over 64000, new associates during the quarter.
We continue to invest in our associates by expanding our industry, leading benefits, including continuing education and tuition reimbursement.
Training and development health and wellness and continued investments in associate wages.
As we reflect on the one year anniversary of our framework for action in response to Rachel and justice across the country and in the communities. We serve we are pleased to share our progress with you.
Over 405000 associates have completed diversity and inclusion training.
We've increased our strategic hiring partnerships with historically black colleges and universities and Hispanic serving institutions from six to 17.
The Kroger co foundation has awarded more than $3 million in grants to support innovative organizations focused on building more equitable and inclusive communities.
And we increased kroger's diverse supplier spend by 21%.
The $4 $1 billion last year alone.
And remain on track toward our long term goal to spend $10 billion annually with diverse suppliers by 2030.
While we know that there is more work to be done we are energized and look forward to keeping our stakeholders updated on our progress.
One of Kroger's greatest strengths is our ability to manage our business successfully in every operating environment, we remain customer obsessed.
And focused on operational excellence to deliver for our customers.
Associates communities and shareholders.
With that I would like to turn it over to Gary to take you through our third quarter financials Gary.
Thanks, Rodney and good morning, everyone.
As Rodney Schutt. This morning, Kroger delivered strong results in the third quarter highlights the flexibility of our business model and a dynamic operating environment.
Our focus on execution combined with our disciplined approach to balancing investments in our associates and customers with strong cost management and growth in alternative profit business is positioning us well for the future.
Over time, our model has proven to be resilient during different economic scenarios and this was true again during the third quarter as we grew the top and bottom lines, while navigating high upfront cost inflation, a tight labor market and supply chain constraints.
Our identical sales without fuel in the quarter and returned to positive growing three 1% as we delivered for our customers across our seamless ecosystem and customers again signaled higher food at home consumption is here to stay.
Adjusted FIFO operating profit and adjusted EPS, both increased year over year and grew by compounded annual growth rates of 22% and 29% respectively versus 2019.
Third quarter EPS was impacted by two unusual items that were excluded from our adjusted EPS result.
First we engaged an annuity buyouts and lump sum distribution transaction related to the company's consolidated retirement benefit plan, which will reduce future administrative costs.
This triggered a writeoff of deferred losses, and the nonrecurring noncash charge of $87 million on a pre tax basis.
This company pension plan is currently 100% funded as a result of previous actions taken to freeze the plan and protect benefits for our associates.
This transaction was fully funded by assets in the plan.
The second unusual item was Kroger recording a nonrecurring benefit of $47 million or <unk> <unk> per diluted share primarily due to the favorable outcome of income tax already takes nominations covering multiple years.
This amount is also excluded from the company's adjusted net earnings per diluted share results for the third quarter.
I will now provide more detail on our operating results in the quarter.
On a two year stack basis, our identical sales without fuel increased 14%.
We also saw a digital sales increased 103% on a two year stack.
As we have previously shared we do not expect digital growth to be linear, especially as we cycled last year's sales spike and customers become more comfortable shopping in store again.
The launch of several new digital offerings, which Rodney outlined earlier in addition to the rollout of new customer fulfillment centers gives us confidence in our ability to deliver against that growth targets for digital sales and profitability.
We look forward to sharing more detail on our digital roadmap at the business update in March that Rob noted Ralph noted earlier on the call.
With regards to digital profitability, we continued to make progress during the quarter and achieve that best cost to save on record for pickup orders.
Gross margin was 20, 166% of sales for the third quarter.
The FIFO gross margin rates, excluding fuel decreased 41 basis points compared to the same period last year.
This decrease primarily related to higher supply chain costs and continued price investments, partially offset by sourcing benefits.
Our investment was in line with expectations and fully funded by cost savings and G&A improvements.
Recognizing recent inflation trends and our outlook for the rest of the year, we recorded a higher LIFO charge for the quarter of $93 million compared to $23 million in the prior year.
This increase represents a 7% headwind to EPS in the quarter versus 2020.
The operating general and administrative rates decreased 49 basis points, excluding fuel and adjustment items.
This improvement was achieved even with continued investments in our associates and growth in our average hourly rate and reflects the outstanding work of our associates are doing to execute cost saving initiatives in a very dynamic environment.
We remain on track to deliver $1 billion of cost savings during 2021.
Yeah.
I will touch it profit business had a record third quarter and remains on track to deliver high end of our expected range of $100 million to a $150 million of incremental operating profit in 2021.
We saw increased strength in credit card personal finance results during the quarter on Kroger precision marketing introduced our new programmatic advertising marketplace to unleash first pop you're targeting and measurement capabilities further highlighting our ability to differentiate in the advertising space.
Fuel is also an important part of our overall value proposition and a key offering to help customers stretch their dollars.
Specially in times when fuel prices are high.
During the quarter, we saw a significant increase in the number of customers actively engaging in our fuel program.
Gallons grew in the third quarter by 5% outpacing market growth.
The average retail price of fuel was $3.24 this quarter versus $2 15 in the same quarter last year.
Our cents per gallon fuel margin was 42 <unk>.
Compared to 37 cents in the same quarter in 2020.
I'd now like to spend a couple of minutes, providing some additional perspective on how we are proactively managing inflation.
We are currently operating in a more volatile inflationary environment and joined the third quarter Kroger's saw higher product cost inflation in most categories.
We are being disciplined in managing these increases.
Our teams are doing an excellent job working to minimize the effect on our customers I'm not financial model by using that data I'm working closely with our suppliers.
We are passing along higher cost to the customer what it makes sense to do so.
In some key areas, we are choosing not to pass through cost increases on continuing to invest in value for the customer.
We are investing where it matters most using our proprietary data to be strategic in our pricing and personalization with the objective of winning long term customer loyalty.
We also believe <unk> is an important isn't even more important differentiator for kroger in an inflationary environment offering customers, an unmatched combination of great value and great quality.
Turning now to our financial strategy.
<unk> is operating from a position of strength and continues to generate strong free cash flow as evidenced by our net debt to EBITDA ratio hitting an all time low of 168 in the third quarter.
While we continue to see attractive opportunities to invest in the business to widen our competitive moats and drive sustainable revenue and earnings growth capital.
Capital expenditures in 2021 are now expected to be below our original guidance range of $3 4 billion to $3 6 billion.
This is because of delays in project implementations, primarily due to COVID-19 related supply challenges.
Private continues to return cash to shareholders, joining the quarter, we repurchased $297 million of shares and year to date have repurchased $1 billion of shares.
Since 2000, we have now returned more than $20 billion to shareholders via share repurchases at an average price of $16 45 per share.
I thought at the end of the third quarter $511 million remains outstanding under the current board authorization announced on June 17 2021.
We look forward to sharing more of our plans for future deployment of excess cash to drive sustainable growth and create value for our shareholders a top business update in March.
As Rafi mentioned, we continue to invest meaningfully in our associates.
In addition to the $350 million of Audi rates investment or do you plan. This year, we are committed to further investments in the fourth quarter, which equates to an incremental $100 million.
<unk> basis.
During the third quarter, we ratified new labor agreements with the U S. C. W. Four associates in our Columbus, and mid Atlantic divisions, covering over 4500 associates.
We continue to negotiate contracts with the U S. C. W for store associates in Houston Lake, Charles Shreveport that let's meet little rock, Memphis, Portland and Denver.
Our financial results are 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.
I'll now turn to our expectations for the remainder of 2021.
Driven by the momentum in our third quarter results and sustained trends in food at home, we are raising our full year guidance.
We now expect identical sales without fuel for the full year to be between negative, 4% and negative 2% on a two year identical sales stack of between $13 seven to 13, 9%.
There remains some uncertainties as we look ahead and our guidance of positive I'd sales, excluding fuel of between one 5% to two 5% in the fourth quarter reflects this.
We expect adjusted net earnings per diluted share to be in the range of $3 40 to $3 50.
We expect our adjusted FIFO operating profit to be in the range of $4 1 billion to $4 2 billion.
Reflecting a two year compounded annual growth rate of between 17% at 18, 4%.
The midpoint of our adjusted EPS range for 2021, now equates to full year results approximately in line with our 2020 results. Despite cycling the unique COVID-19 related demand just like last year.
Our guidance fully reflects the investments in our customers and associates I shared earlier plus increased marketing to support exciting new digital initiatives, we launched in the third quarter.
It also reflects the latest protection for LIFO, because we recorded a LIFO credit in the fourth quarter last year LIFO is now expected to be a 13th headwind to EPS in the fourth quarter.
Overall, we are very proud of our results, which are projected to be significantly ahead of where we originally had guided for the year.
In conclusion croda in executing against these key financial and operational initiatives and continues to invest in strategic priorities that will deliver attractive unsustainable total shareholder return of 8% to 11% over time.
We believe our business is emerging stronger through the pandemic and through the investments we are making is well positioned to grow beyond 2021.
I'll now turn it back to Rodney.
Thanks, Gary Kroger's strong year to date results are the outcome of our customer obsession, our incredible associates, who bring our vision and values to life.
And our commitment to bringing fresh affordable food to everyone.
The strength of our teams have never been more apparent.
With every new challenge they write raise to the occasion, whether by implementing solutions to minimize supply chain disruptions.
Delivering the freshest produce to our customers.
Or using our data to offer personalized promotions that surprise and delight.
Our team is bringing our competitive moats to life.
Now we look forward to your questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Order to cover a broad range of topics from as many of you as possible. We ask that you. Please limit yourself to one question and one related follow up question. At this time, we will pause momentarily to assemble our roster.
Our first question is from Robert Moskow with Credit Suisse. Please go ahead.
Hi, Thank you for the question.
Good morning.
You've obviously done a.
A very good job.
Passing on inflation.
In place and to consumers.
Building them at the same time.
Gross profit dollars are up now.
Can you talk a little bit about <unk>.
What <unk>, what drove that outperformance versus your expectations last quarter, because last quarter. I think you were pretty cautious on gross margin.
And then secondly, I think there's another big tranche of pricing coming in January from a lot of your vendors.
How would you characterize that next tranche is it a.
And usually high acceleration or is it just a kind of a continued acceleration similar to what you've seen so far maybe if you could even put it in context at CPI for us it would be helpful. Thanks.
Okay, Rob I'll start and I'll, let Gary get into more of the details.
First of all I think it's important to remember, what's allowing us to continue to invest in the customer and value is the <unk>.
Great work our team is doing on cost reductions and as Gary mentioned, we're on track to take $1 billion of cost out.
And this is the fourth year in a row that we've been able to accomplish that which really gives us the flexibility to be able to continue to invest in our customers.
The other thing that our teams have done a nice job on if you looked at our procurement team they've done a nice job of identifying opportunities to save money by working with our suppliers and we continue to aggressively work in partnership with them.
If you look at inflation during the quarter.
Continue to increase throughout the quarter.
As of right now it is starting to stabilize but obviously at a pretty high rate.
So it's something that we aggressively use our data to understand am we aggressively try to make sure that the customer has alternatives.
To be able to stretch their budget as well and that's you know in some cases that's switching.
Switching to a cheaper price meet in some cases, it's buying our brands, which has amazing quality as well so with that Gary I'll, let you get into more some more of the details from Joan Thanks, Rodney Thanks for the question Rob Yeah.
Yeah, I would say, Rob obviously, when we guided at the second quarter, we said that the gross margin.
Contraction could be similar to what we were seeing in Q2 and I would say the dynamics that are that are in place I haven't changed dramatically.
Obviously, it's a it's a dynamic environment that we're managing in alcohol as Rodney mentioned is to continue to find sourcing benefits and savings to offset the.
Cost increases, where we see them and to pass on pricing why it makes sense, but also have to keep investing in the customer not to say that we in Q2, we were doing that in Q3, we continue to do that supply chain would have been a similar sort of headwind in Q2 and Q3 I would say we were successful in mitigating some of the cost increase.
And shrink joined the quarter, which helped to join the quarter. Although we still think shrink is a dynamic metric.
The metric to manage based on some of the organized crime that we see in shrink, but overall, we were pleased with the progress and shrink joined the quarter and I think for US we kind of guided while we never get into specific numbers on individual gross margin I know G&A metrics, because as Rodney mentioned that our goal is to be dynamic in managing it and showing that we're delivering sustained.
I believe for our customers and growing loyalty, while also being able to improve profitability over time by managing the different levers across.
Selling gross rates across cost of goods savings, taking cost out of the business and continuing to grow alternative profit streams. So I think it's a it's a dynamic you've evolved we continue to manage I think somewhere between that Q2 and Q3 range is where we think that where we're operating right now we think Q4.
Would likely be similar to what we've seen in Q2 and Q3.
And as I mentioned on my prepared comments, we are increasing some advertising in the fourth quarter to support the accelerated growth in some of those new initiatives. So I think you know again I wouldn't be guiding to a specific number but in the range that you've seen in Q2 and Q3, that's why we feel comfortable in managing the business and driving the right balance of sustainable growth.
Shareholders, while continuing to win customer located at a time.
And just a quick follow up I think Rodney said that youre seeing your inflation kind of leveling off.
Looking at like PPI inflation, there cause I would agree with you it seems like in the low teens, it's leveling off is it.
Is that is that what youre looking at now.
Now we would be looking at more of our own cost.
In terms of what we're incurring in what we see coming forward.
And one of the other things that I always think it's important to remind people we manufacture a lot of our own products. So we also understand the raw materials themselves and what's going on there.
And.
We would be looking at C. P. I M. P. P. I both booked in terms of trying to estimate inflation, we would be looking at our actual cost increases that we're incurring.
Okay. Thank you very much.
Thanks, Rob.
The next question is from Ken Goldman with Jpmorgan. Please go ahead.
Rodney I'm glad you mentioned.
In fact, you can make your own products because that's a good lead into one of my questions, which is we're still seeing at least in the scanner data that we get some some pretty poor trends on top of last year's core trends for store brands in general I'm, not talking about Kroger I'm talking about across the measured industry.
Hoping for an update for what you're seeing there I know you've talked about this a little bit in the past but.
Are there any signs of improvement from that and again I know youre somewhat agnostic.
Money either way just trying to get a sense for what the outlook is what you are seeing any updates from your side.
If you look at our brands.
If you look at the third quarter trends, they were better than the second quarter trends and if you look within the quarter. It improved during the trends are.
And the point you made is you know for us.
We want to make sure we have the products customers want.
So you.
Our Kroger brand item has to earn its right on the shelf just like any other brand.
But for US, it's obviously one of our competitive moats.
As I mentioned in the prepared remarks, and we did a press release earlier and earlier in the quarter. We were proud that home chef became our fourth brand.
That is over $1 billion a year.
Our brands for US is incredibly important on our connection with our customers because it's an incredible great value for our customers with amazing quality and when you look at simple truth and private selection both of those brands offer something that's unique in the marketplace.
And continue to grow aggressively you know private selection.
Most of the items or things that you can't get somewhere else.
In simple truth, just makes it super easy for a customer to eat healthy.
So the trends are improving.
But you know for us.
It is an incredibly important part of our overall strategic strategy and our competitive mode.
Thank you for that and then quick follow up.
You mentioned.
But you're not passing on cost increases fully in either certain categories or certain products is it safe to assume that.
Like many of your peers, you're a little more hesitant to take pricing up.
On items that draw people into stores on a regular basis things like milk and bread et cetera, or is it a little more strategic and nuanced in that I'm, just trying to get a sense for how youre thinking about which items to take pricing up on and which not.
Yes, we would be using our data and our historical data over the last several years on a less to city by category and by products within categories on deciding what the pass through or not.
We would also.
Just on certain products, it's an opportunity to create deeper loyalty some of which is obvious some of which is not in some of the items in the past wouldn't have the same amount of penetration across households.
As what they used to do.
So it really is dynamic information that's based on whats going on right now in the market. The other thing just to.
Our data would also show in different parts of the country. Some of those elasticities would be different.
Gary anything you'd want to add to that.
Okay. Thanks, Gary.
Thanks, everyone. Thanks again.
The next question is from Simeon Gutman with Morgan Stanley. Please go ahead.
Mr. Gutman. Your line is open on all right is it muted on yours.
Sorry about that this is Michael Kessler on for Simeon can you hear me.
Yes, good morning, Hey.
Hey, guys.
Thanks for taking my question first I wanted to ask about any initial thoughts if you have any.
On 2022.
Another another good quarter in Q3, it looks like the full year is going to end up basically a retention or if maybe it's like growth off of 2021 on earnings.
So I guess, you know any any more confidence or conviction that next year could be another call. It al go type of your on both Ids.
And and EBIT and I guess and.
Any puts and takes as you're starting to think through that outlook.
It's a good question and we appreciate it obviously, we'll get into a lot more detail when we get out to our March Investor Day, That's really when we'll go into depth, we're in the middle of going through.
Developing our budgets.
And partnering with our board on our 2022 expectations. The only comment that I would give in depth as you know as we shared in our Investor day in 2019, and we've continually updated over time, we would expect the T. S are 8% to 11% on an annualized basis made up of Earth.
Earnings growth and free cash flow.
<unk> made up and returning cash to shareholders. So overall, we would expect that we do feel good about the momentum in the business in terms of the.
<unk> with the customer our seamless business processes on identifying ways to take cost out. So we can invest some of those cost savings in our associate wages cost savings are in the customer connection and other things so and the business continues to generate.
Good cash flow Gary it looks like you want to say something I thought I think you said it well Rodney.
Is that.
You were getting I think hopefully we've been conveying is already clearly while we won't be getting into detailed guidance for 2022, because that was such that the March meeting, we we'd be trying to be clear and all of that communication I think around the confidence we have in the long term prospects of the business.
For 'twenty took about thinking as we are continuing to build the business from the base that we've established through COVID-19, but the opportunity in particular, I mean really from that T. S. All commitment that Rodney mentioned.
And specifically, we do believe that some of the food at home trends that we've talked a lot about we've said for some time and continue to believe that data shows that a number of those changes will be structural in nature, and we will continue to see sustained trends in food at home I think if you look at our performance over the last two years that Rodney was alluding to some of the individual drivers, but I think it's that.
Australia and online the confidence in the value creation model, the creating the balance in our model to be able to drive sustainable growth in the alternative profit streams continuing to grow at double digits off a higher base. So certainly I wouldnt dose throughout these companies more broadly around that commitment to.
T S already at a time, but obviously, we will get into more details on 2022 in March.
And then hey, guys. Its Simeon for the follow up I thought maybe Michael might have a better shot at the 'twenty. Two question than me, but my follow up is on the puts and takes on Ids. It looks like it held pretty consistent Q2 to Q3, and you talked about inflation lifting but leveling can you talk about anything to puts and takes sequentially got worse or better in terms of unit.
Its traffic et cetera.
Yeah.
If you look at most.
Pieces, it would third quarter would have been better than second quarter. If you look at household trends if you look at.
Basket size would have been a little bit smaller but.
But not significantly.
We continue to see people premium amortization.
During both quarters, we continue to see people.
Buying a larger pack sizes on just about every category.
So when you look at the puts and takes and I think there's as many puts and takes.
Maybe just to add Rodney yes, I mean, the the trends are pretty consistent through the quarter in Q3, they got slightly better as the quarter went on and we.
We would be trending at the top end of the range that we shed in the quarter to date, so far sort of top end of the range that we should have a guidance for Q4 and if you look at the trend. So far in this quarter am I would say that the quarter would have started a little bit slower because of we were cycling in that week before Thanksgiving a fairly large viking in consumer behavior.
With that I think started to signal maybe a potential increase in case at this time last year and then Thanksgiving was very strong with it we were very pleased with the results.
Thanksgiving week itself I think some of the questions in our mind as we look towards Q4. Some of the reason that we got into some of the uncertainty as you know it's hard to predict exactly what will happen with a government stimulus dollars and the market, particularly at the state level. That's that's kind of really hard to get under the skin of what will happen in individual states around ongoing funding.
We obviously know there are some continued supply chain challenges around productivity and ability in certain categories and that's getting back at it gradually but it still is certainly some challenges in the market and it will be those kinds of things that for us would be some of the puts and takes and how strong Q4 plays out and online.
Thank you everyone happy holidays, Thanks happy holidays, Thanks Man.
The next question is from Robby <unk> with Bank of America Global Research. Please go ahead.
Hey, good morning, Thanks, guys for taking my question I guess, Gary for you could you.
I wanted to just follow up on the sourcing benefits to gross margin can you remind us what youre doing to achieve.
Kind of sourcing benefits in this environment and also you're doing an amazing job with the cost savings initiatives offsetting labor and other cost pressures can you remind us also there what you've been doing and maybe some thoughts on how sustainable are those two things could be into next year.
Sure. Thanks for the question Robby Yeah, we were really proud of the team's work in those areas. As you mentioned is it started out at the beginning of restock Kroger as a sort of let's say grabbed the the opportunities that are immediately in front of us and I think it's really become a core competency within the organization to drive sustainable savings in our model on the sourcing side I think I would describe it across.
A number of different areas you know you start with the how do you make sure you're consolidating all the buying in the right places. So you can maximize the data and knowledge and use our own experiences from the cost of commodities and the fact, we manufacture many of our products. So that we're getting smarter and more effective in how we buy it's evolved into product design.
In packaging design and how do you really optimized the value while not compromising on quality for the customer so continuing to drive value in those areas, it's extending to the GPO partnership with me Crazy with Walgreens and looking at how can you consolidate opportunities invest thinking there as well. So it continues to evolve for us and the team is doing a great job in finding.
Those opportunities to maximize savings and we would expect that to be a continued opportunity for us because we keep identifying new and if it keep ways to to ensure that we are designing for value and maximizing opportunities to to be more efficient.
On the G&A side of things, that's that's across a number of different areas as well. So it would include using technology and automation to reduce shrink and waste in the business to improve on some of those activities in the store and our operations that are very manual and don't really maximize the value that our great associates can deliver for customers.
So taking that non value added work out wherever we can to allow our associates to focus on the customer. It includes automating app ordering and production planning type processes, one of the big ones of course. This year that we think we would expect to be a tailwind into next year as well for every dollar that we can capture this year would be taking cost out of our digital cluster.
So we've invested significant labor over the years in building that digital ecosystem and we'd expect to continue to grow that business of course, but if we can take out a if we can improve efficiency on that $10 billion digital business. It creates not just a saving on the next new sale, but it creates a saving on that baseline $10 billion business is.
And then finally I would say we've taken the opportunity to use things like the alerting Street Covid on things like administrative costs and why are there areas you can actually work more efficiently and operate in more of a hybrid environment to take cost out of the model as well. So hope that gives you an idea of the way, it's kind of really become embedded more in the business and we certainly would expect as part of our overall.
T S outgrowth T S outgrowth model to be continuing to take costs to be able to fund investments and our average hourly rate for associates to be able to invest in pricing and value for the customer while at the same time growing shareholder returns.
Ravi the only other thing I would add to Gary's comments and its implied throughout Gary's comments, but we have done a lot of people changes and talent changes both in terms of recruiting people from within the company, but external as well.
Outside of the industry that have skills that were different than traditional in our industry, which has been a huge help in both areas.
For us to think about things and new ways for people to approach things in new ways as well.
That's great. That's really helpful. And then one really quick follow up question if I may.
The changes you're making on the sourcing side and with the own brands what is happening with total skus.
Versus national brands Skus versus owned brands Skus in your stores.
Are they shrinking or some growing can you give us any color on that.
If you look at.
Before COVID-19 the number of Skus would be lower now than before.
Just because it's you don't have as much change time and things like that there are selective areas, where some of the national players Havent rehab reintroduce some of the variety that we are introducing some of that variety and our own brands.
And we introduced over 200, new Skus in the quarter and we would have an aggressive pipeline going forward.
But you know overall.
If you look at there's still continued.
U S <unk> growth yeah.
Natural organics plant based areas like that and you will and if you think about like paper towels and.
Paper goods and things like that you would see fewer skus, just because the customers move to purchasing bigger sized packages.
Got it really helpful. Thanks, so much thanks Robyn.
The next question is from Greg <unk> with Wolfe Research. Please go ahead.
Good morning. This is Spencer hanus on for Greg.
Wanted to ask how youre thinking about the delta between retail and cost inflation in 'twenty two.
Then what is the breadth and depth of promotions that you need to hit your long term topline targets just given the unique opportunity. The industry has had to reset promos over the last 18 plus months here.
Gary you want to.
Sure Yeah. Thanks for the question Spencer.
As we mentioned when we were kind of not really.
Hiding sort of an outlook for 2022 at this point around how we think about sales and on investments overall, we will be doing that for sure as we get to the the March meeting and sharing our Q4 results I think really I would I would pivot back to some of the comments that we made earlier around do we think very much of it from the perspective of in all operating environments kroger's been able to demonstrate.
Our ability to navigate through those situations, but it really comes back to what we were talking about earlier around ensuring that we understand the customer better than anybody using our data targeting and promotional activity and a personalized pricing and of course, where the the pricing structure product starts to change really ensuring that customer.
I see the value in our own brand products because of the great quality and value that they offer in combination and enjoying times of high inflation and certainly in times of economic challenge, we found that kroger's.
Kroger has performed very well and we've seen customers pivot to some of those opportunities based on the way, we can communicate and connect customers with those those strategies. So I think from our perspective, we're very much managing the business dynamically to ensure that we can deliver for the customer but at the same time that I've run out T. S. All commitments.
And the way that we talked about earlier in the conversation.
Promotions, we would always use our insights because different types of customers react to different types of promotions. So we would aggressively use our insights to personalized promotions a lot of that is a one on one with the customer either.
Sending an old fashioned mail mailing or.
Electronically with the email or text or whatever and it really depends on each customer what do they react to.
Got it that's helpful. And then in the prepared remarks, I think you mentioned that the ocado facilities performing better than expected the one and the one in Florida, but could you just provide some more details on the basket size and the repeat orders relative to your targets and then how are you thinking about the need longer term to build or acquire stores in that market to provide a more complete.
Omni experience down there.
Yeah her on.
On your second question I'll answer it first and you got to walk before you run so right now we're totally focused on making sure that the sheds open strongly and we continue to maintain outstanding M.
NPS scores, our net promoter scores with our customers and I am Super proud of our team in Florida and Monroe, both in terms of how they continue to connect with the customer and continue to improve our if you look at the basket size.
The basket size continues to grow and what weeks, what we expected and what we believe is as our customers begin to trustee experience again to have good experiences we get a higher share of their total spend and that's what we're.
Starting to see.
And when you look at overall in Florida, one of the reasons why we announced the two additional facilities in Florida is obviously the.
The connection and the growth that we're achieving.
So far we feel good about the opportunity in Florida, and as everybody knows the population growth in Florida, and the economic growth in Florida is just mind boggling.
Relative to an awful lot of the country. So it's an incredible opportunity.
For all grocery retailers and Florida, obviously, the offering we have is unique in the in the markets and very proud of what we're getting done there.
And the repeat usage Romney is higher than we expected right around that for Microsoft Yeah.
Great. Thank you so much thanks.
Thanks Spencer.
The next question is from John <unk> with Guggenheim Securities. Please go ahead.
Hey, Rod let me start with.
If you look you know how consumer behaviors evolved over the last couple of years in terms of what percent of.
The purchases right are done.
Shelf price versus promo versus promo.
How has that shifted right as you know and if you think about personalized promo, but is that is that as much as 50%.
Or something along those lines.
Purchases of recurring.
And then work you've done on price perception.
How has that trended maybe early days of Covid.
To where we are today.
If you look at the cuts.
Customer behavior I wanted to broaden it a little bit.
Relative to your question, we continue to see people.
Our focus on health if you look at early in Covid people, we're not as focused on health.
But there.
Definitely back where they're focused on health and a more aggressive way.
All across the board you see premiums Asian.
On what people do and I always say.
You know I I.
I am a reasonably aggressive shopper in our Murray's cheese growing up I would have never had a really good cheese and once you have a really good cheese, it's hard to go back to what you were used to when you before and what we're finding is customers when they upgrade and try higher quality product they find out there.
I love, it and they become loyal to it.
If you look at.
Customers in terms of behavior or buying on promotion, it's been reasonably consistent throughout.
The pandemic.
People stretch their budget, where they need to or want to because and they will splurge and other places.
Which is one of the things that from a go to market standpoint that we really try to help a customer stretch their budget on things that are important to them. So.
So they can splurge on what's important to them as well.
Alright, maybe it was a quick one for Gary.
Guys now have something on the order of four to 5 billion right of.
Dry powder.
In terms of your leverage target.
How do you think about that conceptually.
In terms of timing in terms of return to shareholders versus a strategic M&A.
Whats the philosophy there.
Thanks. Thanks, John obviously, we are very proud of the the business performance and it has demonstrated strength in the overall model and that the position that we're in as we said in the prepared comments.
I'd say, our overall capital allocation strategy is unchanged that we start with where are the opportunities to invest in capital in the business to drive sustainable growth.
We're obviously in a great position around maintaining our investment grade debt rating and we've been able to make some good progress on chipping away at the pension funding from an overall sort of that's in potential liability there as well. This year of course, we've been very committed to continuing to return cash to shareholders with a $1 billion so far.
Buybacks in the 17% increase in the dividend that we announced earlier in the year. So I think we've been very consistent with that plan. So far and we do think that in the short term it's important to maintain some flexibility recognizing some of the <unk>.
And in the market that we've all talked about that we're all navigating through at the moment I'm not being said within those principles. We do think it's important than we'd been very committed as you know as a company to being very disciplined with cash flow and deploying it to either grow the business always say to shareholders. So as we as we head towards 2022 and as we.
Moved towards the March planting leaching and the business update meeting that that rupture. We certainly expect a shang will pillar of how we're thinking about the excess cash in and some of the opportunities we're exploring that.
And we would continue to look for things that are the right opportunity for things that add capabilities. So if you think about merging with home chef.
A couple of years ago. It was a capability that we didn't have on the direct to customer meal kits and we've been able to partner with the team there to leverage it back within Kroger as well so.
<unk>.
And I always think it's important to remind people that we're not required to do any kind of mergers.
In order to achieve our T S or of eight to 11 as well.
Thank you.
Thanks, John.
The next question is from Chuck Cerankosky with Northcoast Research. Please go ahead.
Good morning, everyone great quarter.
Rodney I think it was you earlier mentioned.
That you chose to incur some significant cost to.
To bolster the supply chain in the quarter can you give us some detail on that and whether they last into next year and then I have a follow up related to that.
If you look at this supply chain investments.
It was pretty similar to what we did in the second quarter now that our team has done a nice job of starting to identify some opportunities for efficiency. One of the biggest areas is that we continue to have extra warehouse space and I guess I hesitate to call it extra warehouse space, because we're actually using the warehouse space.
<unk>.
But in over time as we feel like things are permanent Youll see us do more permanent type warehouse projects.
To expand capacity rather than.
Using it and.
Maybe in a way that's not as efficient.
We would expect to continue to do that in the fourth quarter as we look out next year.
We really are working hard to make sure we stay agile in that area.
Because things continue to change so quickly.
And you know what's going on with Covid, what's the Covid variance and things like that so we really are.
Making the decisions on an agile basis and it's one of the learnings that we've had early on in the pandemic and we will continue to do that relative to the supply chain as well.
Anything on the labor side worth noting.
And then also when you're talking about the supply chain issues and product outages.
Is it worth talking about branded versus private label fresh versus shelf stable edible versus non edible products.
Where are you seeing the need to spend the most money in.
Use the most management resources to make sure the shelves or is that yes.
If you look at labor, we certainly are partnered with outside companies to supplement our labor resources, especially on the supply chain.
If you look at.
And stocks are at they would be more affected on center store. If you look in the fresh departments.
We would be in much better shape.
And most of the fresh departments in terms of our in stock.
Alright, Thank you and good luck for the fourth quarter Chuck I appreciate it take care take care.
The next question is from Michael Lasser with UBS. Please go ahead.
Good morning. This is mark Carden on for Michael today, Thanks for taking the questions and as a follow up to some of the earlier inflation questions, where do you price cap stand today, and what's the posture and further investments from here and have competitors been acting as rationally given just the heightened inflation this time around.
But if you look at.
As everybody knows we go to market is a high low merchants. So were aggressive on promotion, we're aggressively on using promotion and we feel very good about where we stand relative to price gaps and our if you look at.
Our strategy has always been to neutralize on price and win on our fresh areas and our friendliness and connection our associates have with our customers and that continues to work well and we continue to feel good about where we are relative to the various gaps.
Great. That's helpful and then on Ocado, how integrated is the.
CFC today with your Cincinnati operation has it been integrated and clicking quite yet and then in Florida, What do you think you're taking the most share from banks.
Yeah. If you look at Florida, I think the growth in the market is so strong that I think every all boats are rising in Florida. So to say that we're taking share away from somebody I really don't think of it that way because I just think the market is growing so much.
If you look at your first question part of your question on Monroe, We continue to further integrate it within the store network.
And it's something that literally every single week that goes by.
We further integrate that.
To really.
Really make it a seamless.
Our experience for the customer.
Great. Thanks, so much and good luck. Thanks.
Thanks Mark.
Thanks for your questions and that will end our question and answer session.
And as Rob said, thanks for questions. Obviously, thank you for your interest in Kroger as you know many of our associates own stock and we always use the end of this to communicate directly with our associates as well and as all of us embrace the holiday season, and it often becomes a tie.
Where we can reset of reflection as we sat down to enjoy special meals with our loved ones and as I said earlier I am just so incredibly proud of our associates across the Kroger family of companies and what we as a team have accomplished this year.
Every one of our associates is helping make the holidays brighter and fresher for customers and more importantly for that customer and their family.
And it doesn't matter, if you're making a difference together like our Kroger health team, who is administrated eight and a half million doses of the COVID-19 vaccine or as individuals like Don agree or a cashier at our store 387 and call your Bill, Tennessee, whose unshakable positivity.
It's been an inspiration to many including the call your Villa Harold Independent who just named her call your Bill woman of the year.
We are so proud of Donna and congratulations Dana when you look at these are just a few examples of our incredible people, who bring our vision and values to life each and every day.
Our associates are beyond amazing and continue to serve our communities and uplift each other and our customers.
That concludes our call for today, we wish everyone a happy holiday season, Merry Christmas and encourage you to stay safe and as always thank you for your interest in Kroger.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Yeah.
[music].