Q1 2022 Kroger Co Earnings Call
And habits.
Customers continue to Cook more we are seeing different shopping behaviors based on how individual customers are experiencing the current inflationary environment.
Many customers continue to shop premium products throughout the store, including private selection, Murray's cheese and deluxe meal solutions.
For other customers, whose budget are more directly impacted by food and.
Fuel inflation. They are actively looking for ways to save we're doing everything we can to help this customer stretch their budgets.
I'd like to share more about the work, we're doing for our customers and how our competitive moats uniquely position us to meet these challenging and changing customer needs.
First we are leading with fresh our customers continue to prioritize fresh as the number one determinant of where to shop.
We are meeting their needs with operational efficiencies and new technologies that extend days of freshness and grow our selection of quality fresh products.
In the fourth quarter, we achieved five 2% identical sales growth in our fresh categories.
These gains were led by the expansion of our end to end fresh produce program, which elevate standards and improves our ability to maintain freshness throughout the supply chain.
We certified 355 stores this quarter and the customer feedback has been overwhelmingly positive.
We also continue to increase our use of forecasting and analytical tools, specifically leveraging 80 451 to improve our ability to maintain fresh products in stock both in store and online.
Our recent Florida results are a great example of how we are leading with fresh as the nation's largest florist. The first quarter was our time to shine for holiday celebrations.
In our floral team stepped up achieving record sales.
In fact, we set an overall single day floral sales record on Valentine's day, and mother's day sales record with strong double digit growth.
Second is our brands during the quarter, we saw tremendous growth in our brands, which had identical sales of six 3%.
And outpaced all national brands.
With 92% of households, purchasing at least one of these products.
We launched 239, new and innovative products during the quarter, reflecting many of the top food trend predictions, we made at the beginning of the year.
All of our new products continue to be tested and validated to ensure that they are as good or better than the comparable national brand.
We continue to invest heavily in the quality of our brands, which preserves our strong price position and drive higher profitability.
Next area is personalization.
Our data science platform provides unique insights that create personalized customer experiences.
In this dynamic environment, where customer behaviors are changing rapidly we use our data and insights to be nimble and react quickly to ever changing needs.
Our broad based <unk> data science approach helps us determine how to best implement price promotion and display.
We are focused on delivering incredible value to our customers through relevant personalized offers and fuel rewards our loyal customers are using our fuel rewards program now more than ever and in fact more than 600000 incremental households engaged for the first time this quarter.
Finally, our seamless ecosystem continues to deliver fresh products to our customers.
Anytime anywhere and with zero compromise.
During the first quarter more customers returned to in store shopping and as a result, we made strides to enhance that experience.
We introduced a new tools that help our associates better serve customers and.
And pickup we unveiled new technology that improved wait times, 20% and expanded capacity based on customer needs.
And delivery, we continue to introduce key initiatives that expand our reach and shorten delivery times.
We strive to provide more customers access to high quality affordable food rig.
Regardless of whether they have a physical store in their community.
During the quarter, we opened two new customer fulfillment centers powered by Ocado automated smart platform, one in Dallas, Texas, and one in Pleasant Prairie, Wisconsin.
Bringing our total CFC count to five.
We also opened three new spoke locations for a total of six folks.
As we head into summer our end to end cold solutions, including the custom built refrigerated van will ensure customers get the freshest product delivered directly to their doorstep.
Finally, our boost membership is delivering promising results are one of a kind membership program offers incredible value where customers can get unlimited free delivery on orders of $35 or more.
Double the fuel points on every dollar spent at Kroger and other exclusive member benefits.
We are encouraged by the number of new members in the four current pilot divisions.
Importantly, deliver delivery sales increased significantly compared to non boost divisions.
And delivery retention improves approximately 600 basis points.
Because of this early success, we are proud to announce today that our that Kroger boost is launching nationwide beginning in the next few weeks.
This next generation loyalty program is deepening our relationships with customers as they continue to look for value and convenience.
Turning to supply chain or 2022 business plan anticipated ongoing supply chain challenges.
By planning ahead, and focusing on staffing technology and process efficiencies.
We managed our cost effectively.
By owning and operating a portion of our fleet, we better control and manage transportation cost.
Despite diesel fuel cost headwinds.
We were also proactive about forward buying and securing capacity for goods, resulting in better vendor rates.
Through our supplier relationships, we saw sequential improvement and product availability.
We are well positioned to adapt to the evolving environment and we are cautiously optimistic and our broader supply chain recovery throughout the year.
We also continue to invest in our associates and an associate experience that facilitates an amazing customer experience.
We firmly believe that exceptional financial and operating performance connects directly to the ways, we support and invest in our associates.
During the quarter, we took numerous steps to meet our associates needs, while they delivered for our customers.
We continue to invest in associate wages, and we expect hourly wages to grow throughout the year.
We launched new initiatives to simplify day to day work, including the modernized scheduling tool my time.
We took steps to improve communication across all of our teams and bring meaningful training to all of our associates.
No matter, where they work.
One example of this commitment is the addition of Microsoft teams rooms across most of our store locations.
This technology improvement will facilitate deeper connections and improve the associate experiences.
As an employer of choice more people are applying to work for Kroger and more associates are choosing to stay with us.
While we still have work to do we experienced a meaningful improvement in both hiring and retention in the months after the omicron surge.
We are also seeing more boomerangs.
These are our associates, who left to work elsewhere and ultimately came back to us.
<unk> strong culture invites associates to come for a job and discover a career.
And were glad that so many value and appreciate our work environment, our culture and the people they work with everyday.
Our winning culture is rooted in our and living our purpose to feed the human spirit.
During the past last year, our teams took significant steps to support our customers and communities through our zero hunger zero waste, social and environmental impact plan.
We introduced a new Kroger and USO co branded mobile unit to nourish active duty military service members and their families at military bases and USO centers across the country as well as provide community disaster relief.
The first of four units hit the road in May.
In summary, we're off to a very strong start in fiscal 2022.
We are widening our competitive moats Cree.
Creating a shopping experience with zero compromise investing where it matters most to our customers and associates.
In strengthening our purpose in large and small ways every day.
When we do all this well our teams our customers and our shareholders all win.
Now I'd like to turn it over to Gary to take you through our first quarter results Gary.
Thank you Rodney and good morning, everyone.
<unk> delivered another quarter of strong results as our team did an outstanding job executing our go to market strategy, while navigating a dynamic operating environment.
Our results again highlight the strength and resilience of Craig This financial model, which allows us to continue to invest in our associates.
We deliver affordable food for our customers and create value for our shareholders.
I will now provide more detail on our results in the quarter.
Led by our competitive moats, we achieved identical sales without fuel growth of four 1%.
Fresh categories, and our brands identical sales both outpaced overall company results.
Adjusted EPS was $1 45.
Up 22% compared to the same quarter last year, driven by increased sales and exceptional cost management during the quarter.
Digital sales declined 6% in the first quarter broadly in line with our expectations.
We continue to ramp the digital growth initiatives shared at our Investor day, including enhanced personalization capabilities.
Boost membership.
Customer fulfillment centers on Kroger delivery now.
As a result of these initiatives we grew digitally engaged households during the quarter and we would expect digital sales to accelerate as the year progresses.
Gross margin was 21, 6% of sales for the quarter.
FIFO gross margin rate, excluding fuel decreased 26 basis points compared to the same period last year.
This decrease was primarily attributable to continued strategic price investments and higher supply chain costs offset by sourcing benefits and the cycling of a write down related to a donation of personal protective equipment inventory in the prior year.
Our team continues to do an excellent job managing higher product cost inflation.
We are leveraging our data and sourcing expertise on working closely with our suppliers to help minimize the effect on our customers and our financial model.
We are investing where it matters most to our customers and using our proprietary data to deliver additional value through personalization.
Our brands are also proving to be an important differentiator for our customers in this environment, providing an unmatched combination of great quality and great value.
We will continue to leverage these proven and unique capabilities to help our customers manage that grocery budgets more effectively and maintain a strong value proposition relative to our competitors as we believe inflation will remain front of mind for many of our customers for the remainder of 2022.
In recognition of current product cost inflation and our outlook for the rest of the year, we recorded a LIFO charge for the quarter of $93 million compared.
Compared to $37 million in the prior year.
This increase represents a <unk> <unk> headwind to EPS in the quarter versus 2021.
R O G&A rate decreased 46 basis points, excluding fuel and adjustment items.
We were successful in offsetting inflation headwinds in many parts of our business and continued investments in associate wages by reducing costs in areas that do not impact the customer experience.
As an example, this quarter, we introduced a new bakery forecasting tool, which is improving product freshness, reducing waste and at the same time simplifying the associate ordering process.
We have a strong pipeline of process improvement initiatives and innovative technology, driven solutions that will lead with digital fulfillment costs increased productivity and reduce waste and shrink.
For the fifth consecutive year, we remain on track to deliver $1 billion of cost savings in 2022.
The traffic and data generated by our supermarket business continue to create a strong flywheel effect for alternative profits.
Led by retail media and Kroger personal finance alternative profits are on track to contribute meaningful growth in 2022.
During the quarter Kroger precision marketing added more than 100, new brand partners.
We continue to enhance our market leading capabilities and.
We have entered into new agreements with three leading appetizing management platforms, allowing our CPG partners to manage that onsite AD campaigns more effectively.
Fuel remains an important part of our overall value proposition and the key offering to help customers stretch their dollars, especially when fuel prices are high.
We continue to deliver significant value through our loyalty program, which saves customers up to $1 25 per gallon.
As Rodney said earlier more customers engaged with fuel rewards this quarter and our gallons grew at a faster rate than the market.
The average retail price of fuel was $4 this quarter versus $2 79 in the same quarter last year.
Our cents per gallon fuel margin was 42 <unk>.
Compared to 35 in the same quarter last year.
Our associates continue to do an outstanding job executing our strategy and serving our customers.
We introduced a number of new initiatives to support associates this quarter as well as continuing to invest in hourly wages.
These investments are fully contemplated in our guidance and long term financial model.
Joining the first quarter, we ratified new labor agreements with the USW in Denver, Southern California, Houston, Little Rock, Memphis, and Seattle, covering more than 67000 associates.
We continue to negotiate contracts with the UFC W. In Las Vegas, Southern California for Ralph Pharmacists Indianapolis.
Chicago and Columbus.
Turning now to cash flow and liquidity.
Kroger continues to generate strong free cash flow.
Our net total debt to adjusted EBITDA ratio is 168 compared to $1 79, a year ago.
The company's net total debt to adjusted EBITDA ratio target range is two three to $2 five.
Consistent.
With our financial strategy, we are investing in the business to drive sustainable future earnings growth and continue to expect capital expenditures of between three eight and $4 billion in 2022.
During quarter, one we were disciplined in returning cash to shareholders.
In total credit and returned $819 million via combination of share repurchases and dividends.
We are operating from a position of financial strength and will continue to evaluate opportunities to deploy excess cash to accelerate our growth model and deliver sustainable total shareholder returns.
In closing, let me share additional color on our outlook for the rest of the year.
While there are a number of uncertainties in the macroeconomic and inflation outlook for the remainder of 2022.
<unk> is laser focused on executing the plans outlined at our Investor day.
And we believe our go to market strategy will serve us well in navigating the current environment.
Based on the strength of our quarter, one results and sustained food at home trends, we are raising our full year guidance.
We now expect full year identical sales without fuel of two five to three 5% adjusted FIFO operating profit of $4 three to $4 4 billion.
And adjusted net earnings per diluted share of $3 85 to $3 95.
Representing an annual growth rate of 5% to 7%.
Our updated guidance assumes inflation will remain at heightened levels for the remainder of the year.
Although although we would expect the year over year rate to moderate in the second half of the year as we cycle higher inflation from quarter, three and quarter four of 2021.
Due to this higher outlook for inflation, we now expect our LIFO full year charge will be in the range of $300 million compared to $197 million last year.
As a reminder, while the actual LIFO charge is calculated at a point in time at the end of our full quarter, we recognize the projected charge evenly throughout the year.
Our guidance also assumes retail fuel profitability will be a headwind for the remainder of 2022 as we cycle high of CPG margins from 2021.
Our full year projected tax rate has been lowered from 23%, 22%, primarily due to higher than expected tax deductions related to employee stock option exercises.
Overall, we are extremely pleased with our start to the year, which provides another proof point of the strength of our financial model and looking forward. We remain confident in our ability to deliver sustained earnings growth and total shareholder returns of 8% to 11% overtime.
And now I will turn it back to Rodney.
Thanks, Gary I would like to once again acknowledge and thank our outstanding associates.
Their hard work and dedication fuel are leading with fresh and accelerating with digital strategy and our obsession for our customers.
We continue finding new ways to help customers stretch their dollars through everyday prices.
Data driven promotions personalized experiences trusted our brand products and a seamless E. Commerce platform. We believe this relentless focus on delivering for customers will help us maintain robust sales and drive growth.
Moving ahead, we remain confident that we have the right strategy to deliver value for all stakeholders, including our shareholders.
Now, we'll turn to your questions.
Thank you as a reminder, if you'd like to ask a question that you compress the star one on your telephone keypad.
So it's really a question you May press star two please.
Please ensure you're on mute locally when asking your question.
First question for today comes from Robert <unk> of ISI.
Mobile research will be your line is now open.
Hi, good morning, guys.
Great quarter.
My question is I was wondering if we could get a little more color on the.
<unk> sales, so maybe thoughts on what the traffic component of that what youre seeing in traffic.
The ticket component and maybe specifically.
The inflation component and the IV sales.
And then sort of along with that some of your.
Competitors that sell groceries, and food and beverage are seeing very strong sort of double digit same.
Same store sales is the price spread versus your competitors widening.
Because of the price investments you're making thanks.
Thanks, Robbie and good morning.
If you look at.
In terms of traffic the two areas that we felt really good about is if you look at the number of loyal shoppers we have in our household count both improved now.
Typical basket size for a customer coming in continues to decline part of that is.
Just driven because of the economic environment some customers are having.
If you look at identical during the quarter towards the end of the quarter. They finished.
A little stronger than where we were during the quarter and that's continued so.
So far early in the second quarter, obviously, we're extremely early in the quarter.
Obviously, we do have a reasonable size general merchandize business that affected as well and the comment that I made in the prepared comments.
If you look at our fresh departments.
Were up over 5%.
So overall, we think the customers are doing a lot of work on balancing their total budget.
And we continue to balance that.
Well with promotions and then customers are aggressively starting to buy our brands and what they're finding is the quality of that product.
And there is no compromise with that versus some of the other products.
And if you look at our price spreads.
We checked.
Reising obviously.
Every week, we look at pricing spreads for different types of customers and.
Those spreads continue to be where they have been or improving slightly as been the case over the last couple of years I don't know Gary anything you want to add.
I think you covered it well Rodney the only other point you mentioned around total households, and loyal households, growing. We also saw visits improving during the quarter as well Robbie which was we were really pleased with that trend as well.
Thanks, Gary.
Great. Thank you.
Thanks Robby.
Thank you next question comes from John <unk> of Guggenheim Partners. Your line is now open.
Yes, So let me start with.
Own brand right. So it looks like the owned brand probably growing two X the rate of National brand.
Curious price spreads there maybe Rob can you talk about that where do you think.
Brand momentum goes from here and I know historically you guys have always said that owned brand strength leads to increased.
CPG promotions do you think that'll be true this time.
I love the <unk>.
<unk>, John and as you know, we're super proud of our brands in Super proud of private selection. The banner brand in simple truth, and then home chef as our most recent owned brand.
That.
Growth has been strong across all <unk>.
<unk>.
Only exception to that is simple truth was a little soft earlier in the quarter, because we did have supply issues with one of the chicken suppliers.
But other than that.
Growth is nice as well.
As you know what we've always found is over time.
Our brands gained share and that's been true for over 25 years and when the economy is.
Tight our brands always gained share and then once the economy is good.
We may lose a little or maintain but thats been the case all throughout.
Because what customers find is once they try it they love it.
We if you look at our leadership team.
R R.
And really upgraded our leadership team in terms of our focus on our brands and for US It really is.
Look at it the same as the National brand, our customers do and as I mentioned over 90% of our customers.
Included in their basket, so feel really good.
Your second part of your question about the National brand change.
There's still a lot of capacity constraints.
Some of the National brands. So I would expect if it's a national brand with capacity Youll see a typical trend where they get more aggressive in promoting as their tonnage goes down but if there are supply constraint.
I'd be surprised and part of that is just because all of us are exiting COVID-19 at level of volume higher than what we had going in which is pud.
Different people at different points on.
Supply constraints.
Quick follow up to that forward buying right normally a big P&L benefit and inflationary times it sounds like today, it's limited right because of their capacity constraints.
Yes, we do the excess warehouse space that we took on as part of Covid.
Lot of that space, we've continued to keep.
And I would say we are using that space.
To be able to get product when we can get it. So I think a lot of the cpg's are using it to level out production. So when they have excess production, we're taking that.
In essence becomes forward by but I don't think it'll be as big as its been in past.
Situations. Thanks, John .
Thank you.
Thank you. Our next question comes from Simeon Gutman from Morgan Stanley Simeon Your line is now open.
Hey, good morning, everyone I'll add my question and follow up one shot here.
Rodney I wanted to ask about the competitive environment. It feels like it's pretty rational out there and it seems like the consumer has been taking for the last call it number of months.
And even Walmart mentioned, a week and a half ago Theyre not.
Getting too aggressive on price I wanted to ask you now that the consumer or consumer.
Behavior is starting to change.
Right.
Environment change do we think do you think we're at a new normal in terms of promotional.
Activity or do you think this is Don.
To put it like a house of cards, but it feels like every everyone's kind of playing nice.
Break.
Yes.
It's a good question and obviously, we always spend a lot of time focused on it.
First comment we are seeing the competitive environment pretty similar to what it's been.
As you know our go to market strategy really is leading with fresh and what we find is the most important reason why somebody decides where to shop.
Our teams are really working hard to take our fresh.
<unk> to the next level and our customers are telling us.
They appreciate what they're doing and they're seeing that improvement.
So when you look at it.
We think price is just one component we're going to make sure that we always maintain.
A reasonable spread and the things that we're good at with our rewards program, our fuel rewards and our fresh go to market strategy, those things matter and that's where we're going to win in the marketplace and we expect that to continue to be important.
Every imaginable environment going forward so.
It's one of those things, where it's important we continually check but we always think it's important to remember it's the total customer experience.
We're focused on.
Rather than price alone.
Okay, Thanks, Paul and.
Thank you.
Okay. Thanks.
Thank you. Our next question comes from Spencer Hanus of Wolfe Research.
Your line is now open.
Good morning.
You provide some more color on the adjusted gross margins in the quarter because it looks like that slowed sequentially and then you said your price gaps are well positioned but do you think youre going to need to invest further in price in the second half as we just see sort of inflation pick up and that consumer gets under more pressure.
Hi, yes, thanks for the question.
Yes, I'll cover that and Randy can add any additional color he'd like to generally at a gross margin rate was in line with our expectations for the quarter.
You heard us share we had two major investments during the quarter, which was investing in value for the customer and also the supply chain headwinds that we brought in you mentioned his prepared comments, we fully expect to join the year.
Overall.
We feel like we were right inline with what we expect it to be I think we called out in our comments around the.
The PPA.
Inventory write off that really wasn't material enough to so there would be something that I think investors should be thinking about is going to be a factor in our expectations for the rest of the year I think we shared in our original guidance for the year that we believe gross margin would be a headwind during the year, we made the investments in price and supply chain that the first quarter played out largely as we.
<unk>.
Don't call out all the puts and takes in the quarter and things like Covid vaccines would have been a tailwind last year that wouldnt been a tailwind. This year. So I think there is a lot of extra moving parts in that and what we try and do is called out the pieces that we've communicated previously that were consistent and also give you a flavor for the major moving parts, but overall, we felt the quarter was very much in line with strategy.
And we wouldn't be pointing to.
Changing that for the rest of the year.
I'll, maybe just add one piece of additional collectors I know, it's kind of something that I've seen as I said a question floating around before before the call started was certainly the gross margin outlook Hasnt changed that's not a factor in how we think our guidance looks for the rest of the year. We are very confident with how we think about the outlook for the rest of the year I think.
Some of the factors to bear in mind, when you think about the second half I mentioned in my prepared comments, but LIFO for the year is going to be about $150 million higher than budget and about $100 million the pie than prior year spread across the four quarters. We do expect fuel margins will be a headwind for the rest of the year and Directionally think about it.
Be a $50 million also headwind as well so I think about it more of the underlying trends that we shed during the quarter.
Something that we feel is right on track with our plan, but there are some unique factors that will influence the second half of the year.
From my perspective, those are generally going to be things that you won't have to cycle in 2023, but they are obviously headwinds in the rest of this year in terms of our overall financial outlook.
The other thing I think it's always important to remember is we.
Always look at gross margin in light of our G&A cost as well and obviously our teams did an incredible job of managing G&A costs.
And we always will invest some of those old G&A savings and trying to extend the customer's budget and especially in an environment like this where it is important and I think some of those reasons are the reasons why our customer accounts have improved as well.
Thanks Spencer.
Got it.
Got it that's helpful. Thank you.
Thanks, Mike next question.
It comes from Karen short of Barclays.
Your line is now open.
Hi, Thanks very much.
Couple of questions.
The account to kind of tie into one.
First one is on.
The actual volume versus your comp so as you look at your guidance, we know where CPI is and we know what you implied.
<unk> guidance, so it certainly implies.
Demand destruction from volume and tonnage perspective.
Wondering if you could talk about that and then specifically on your <unk> guide.
Obviously, we can back into the FIFO guide for operating profit for Teekay to for Q. It looks like you'll be down about 6% on that operating profit number versus where you were at this quarter, which is up around 16. So wondering if you could triangulate those two.
Sure. Thanks, Karen.
The first part of the question would be as I mentioned it a moment to go around we look at the guidance for the rest of the year.
Our overall outlook for inflation is that we do expect inflation is going to be higher for the rest of the year than we originally expected when we when we sort of enter 2022 and provided average guidance, having said that it's important I think to remember that we don't have a perfect crystal ball of course like all of US are trying to figure out there are multiple scenarios that could play out.
I think our central scenario is that we think inflation will remain higher as we cycle about a 4% increase in inflation in the second half of last year compared to the first half of last year.
Absolutely annual inflation, we may will actually start to see a more moderated number in the second half of the year. So we're currently assuming inflation in the second half as a headline rate may be a couple of percentage points or so lower than the first half of the year. So we're actually if you think about our sales guidance. We are we are assuming that we'd see some momentum.
<unk> units because of the way, we're thinking about inflation now of course that outcome could be different and that will impact the outcome of the results that we report, but our overall assumption is based on that kind of high level view, which we think takes into account all the different data points that we've been able to to look at both internally and externally.
And then from a from an operating profit perspective.
Mentioned, a few moments ago from really the way, we think about the rest of the year. Our overall EPS guidance. If you kind of look at the midpoint of our new range for the rest of the year it would be it would be flat to slightly down.
I think the really key messages and that would be think about that as I mentioned, a moment ago. The LIFO charge, we will be having a major impact on that.
Versus budget and versus prior year, and as I mentioned, whereas fuel would have been a tailwind in the first quarter. It will actually be a headwind for the rest of the year. So we think of the sort of supermarket business as being robust.
Relatively.
On track in terms of what we would've expected and continuing to build momentum it's really around those other factors that are driving the lack of sort of carryforward of.
The momentum on year over year growth in the first quarter. When you look at that relative to the rest of the year.
As well as the vaccine headwind correct.
The vaccine headwind would have been in the first quarter I, probably a factor and then it would also be a factor in Q2 and Q3, but again I wouldn't think of that as being a major headwind on.
That was probably a bigger factor in Q1 is there any quarters that I wouldn't think of the gross margin performance that we saw in the first quarter first quarter of the year as being dramatically different expectation in the remaining quarters based on the impact of a vaccine or other factors.
Okay. Thank you.
Thanks, Kevin.
Thank you. Our next question comes from <unk>.
Patrick from Oppenheimer and co.
Your line is now open.
Good morning, Thanks for taking my question. So I just wanted to go back to grocery market share just wanted to get a sense of how your market share held up in the grocery category and I guess related to that it sounds like the general merchandize Calgary had some headwinds I was just wondering if that if that contributed to the weaker performance.
If you look at the grocery market share for <unk>.
Overall, it's pretty much close to where we thought it would be we would expect continued improvement throughout the year, which was reflected in the original guidance.
Comment on general merchandise.
Correct.
General merchant if you look at our identical in total.
Without general merchandise, it would be pretty similar to where the fresh <unk>.
Sure.
And.
The general merchandise obviously.
Households are starting to change their behavior on shopping and it shows up there and obviously some of the.
Savings in things that customers had.
Not being able to spend money on services.
As well as showing up there so.
We are making progress on market share overall and would expect to continue to make.
<unk> as we go along in the year.
Great and then maybe just one quick housekeeping question I know last quarter, you gave quarterly cadence guidance is that still intact on the company EPS line or I don't know if there is any updated views there.
Sure, Yes, just just briefly I would say.
On the EPS side of things I mentioned, a moment ago I think if you look at the guidance for the back at the.
The last three quarters of the year, it would sort of predominantly be around that sort of flat to slightly down I would think of that if you look at the cadence last year. It would be relatively consistent if you think about the next three quarters. So I wouldn't call out any dramatic year over year variance to that overall and then I think on a sales perspective, as we mentioned we would expect the first half to be.
A little bit better than the second half in terms of sales.
Located on this belief, though that.
Inflation continues to heighten levels, but on a year over year basis in the back half would be potentially a few basis points lower because we're cycling 4% higher inflation in the second half of last year than the first half of last year.
Great. Thank you.
Thanks <unk>.
Thank you next question comes from Edward Kelly of Wells Fargo. Your line is now open.
Yeah, Hi, guys good morning.
Good morning going back to the to the question on <unk>.
Thanks, I wanted to go back to the question just on tonnage and underlying unit volume.
I think when we were all looking at this quarter I think we would all on the.
The investor side.
With that we probably thought it would be.
Better given the trends that we saw in an inflation and I'm kind of curious as to what you are seeing in underlying tonnage and then you talked about.
I heard you right when you said.
The basket is down.
Despite that backdrop.
I'm, just kind of curious as to what youre seeing on that side.
And do you think any of.
Are you seeing anything that is being caused by changes in consumer behavior right, whether that's sort of like channel shifting seeking value of that type of stuff.
Yes.
If you look on the basket size, that's driven by units per basket and what we're finding is customers are coming in more frequently before but they're not buying as many items.
Each shop.
And that that's what we're seeing we're also seeing customers, especially customers that aren't as sensitive to the budget up scaling with our buying bigger packs, especially earlier in the month.
When depending on when people are getting money. So we can continue to see.
Both of those dynamics.
If you look at the fresh departments.
Trends, there would be better than the overall.
The.
If you look at overall units.
For most of the CPG partners, we would be tracking pretty similar to where.
Their unit changes our overall in the marketplace.
And if you look at our top 25.
Gary anything you want to add to that and I know you were pulling up some yeah, well I think just to clarify maybe at the comment we made the total basket size has actually outpaced the number of units in the basket that are Dan. So if we look at our overall metrics households are up loyal households are up visits.
Positive.
<unk> size is up but the number of items in the basket as Rodney mentioned is the item that I think customers are adapting behavior.
As they start to manage the inflationary environment and Thats, obviously, a focus area for us to use our.
Data personalization and different tools around rewards to ready aim to continue to drive that up and as I mentioned, if you look at our second half guidance as we expect and our current assumption inflation would be on a year over year basis, maybe not.
Not as quite as high even though remaining a sustained levels then our guidance reflects the expectation that we continue to make progress on that front.
Okay, and then just a quick follow up I think that you said that you expected the gross margin trend for the rest of the year to be similar to Q1 did you mean the year over year decline or did you mean multiyear just kind of curious as to.
You were talking about there.
Yes.
I wouldn't want to get into specific guidance because of the comment that Rodney mentioned that we do try and manage the visit dynamically I think what I was really saying it was it was specific to the current year and really saying that when you think about Q1 I think there was some concern that the PPE write down was somehow needs to be reversed out and that will be the trend that we're seeing in terms of.
Gross margin rates. So I think the guidance that we set at the beginning of the year, whilst we expected gross margin to be a headwind we didn't expect the volatility to be significant.
Significant as we've seen in the past and as I mentioned, the PPA is really one of a number of puts and takes but because we called it out last year in the first quarter, we didn't want to.
Clearly.
Mentioned again in the current quarter, but I wouldn't say it is a major factor in so it was related to Q1 was.
That's the kind of directional shape of gross margin, which is I think consistent with what we said when we gave our guidance for the year.
Okay. Thank you.
Thanks, Ed.
Thank you.
Next question comes from Michael <unk> from Evercore, Michael Your line is now open.
Hi, Good morning, Thanks for taking my questions just wanted to ask first off looking at food at home inflation looks like it was up just about double digits for your quarter calendar is.
If we adjusted that given your Gen merch mix, a little bit maybe it's a point or two below but just wanted to see is that kind of the right way to think about what you might have been able to pass through to the consumer given the PPI. So much ahead of those levels.
Yes, I always think it's important to look at CPI.
PPI together and it's also the reason why we shared a little bit more details about our brands and normal because you have customers.
Doing doing their own behavior in terms of changing the way they shop. So if you think about in some cases, a national brand item may cost $3, and our brand might be a dollar and a half or $2.
So that would show up.
And would cause our inflation rate not to be as high as what's in the marketplace.
I also think it's important to remind people that when you look at our brands overall.
Our gross margins about 600 basis points better than the National brand and if you look at profit per item.
Similar or in many cases actually higher.
No.
To me I look I would look at those numbers as general directional things, but not specifics to be able to compare directly just because customers behavior is changing and if you look at like <unk>.
Pork is an example.
Customers aggressively move to pork.
During the quarter and.
Some of that movement.
The expense of people not buying as much beef because it's such a it's a great value for the money as an example, so you know.
You have within all the data you have a lot of customer behavior changes.
But I think it's helpful Directionally, but not exactly.
Okay, and then for a follow up if I could was just around the $1 billion pluses gross cost savings I was just wondering if that would.
It would be kind of metered out evenly throughout the course of the year and how it might compare to kind of inflationary pressures you might be seeing in wages and ore.
Transportation with diesel at record highs.
Yes, the $1 billion of savings would certainly be a sort of.
An ongoing flow of initiatives. So certainly think about it as being consistently sort of building from sorry, we got set a number of benefits from last year that flow through and then we're introducing new initiatives. This year because we're on this five year journey of $1 billion of savings is very much a continual flow of new initiatives that are being implemented in the business to to dry.
Those efficiencies and savings.
Think of it in general terms as being fairly consistently throughout the year now of course, there are a number of puts and takes in lines and we'll continue to invest in average hourly rates I think we mentioned in the first quarter that was a benefit from lower pension contributions during the first quarter. So I wouldn't think of the G&A rate in <unk>.
Given that we saw in Q1 as being typical for the year, but we do expect to continue to see <unk>.
G&A rate in the year being.
An improvement and a tailwind for the year. Thanks, Michael.
Thank you.
Yeah.
Thank you. Our next question comes from Michael Lasser of UBS, Michael Your line is now open.
Good morning, Thanks, a lot for taking my question.
Good morning.
Good morning.
Your food categories.
5% in the quarter.
Nielsen was up.
Merchants were comping in food and beverage.
High single double digit.
That's been out there Rodney Cougar la markets.
During the period why would that have been the key.
You made a comment that.
Sure.
The next couple of quarters.
We'll provide that.
<unk>.
If you look at all.
All of US our quarters ended a little different time, so it's always difficult to be exactly comparison and I know some of the competitors don't breakout specific by category and I know for US obviously general merchandise is a bigger part of our business and some of our traditional <unk>.
<unk> not as much.
Some of the big box.
Competitors.
If you look at during the quarter.
Our trends improved as we went along during the quarter as Gary mentioned, our household count went up increased our loyal household count went up and our visits.
In total also increased.
And our trends improved as well so those are the things that gives us confidence in terms of the things that we're doing and the direction. We're headed it's continuing to move in the right direction.
Yes, the only other thing maybe I would add Rodney is that the comments, we made Michael about digital growth and the expectation that with the investments, we're making in customer fulfillment centers. The announcement the exciting announcement that Rodney shed this morning around <unk>.
Bruce membership launching across the whole of the company, we feel that the momentum that we're seeing starting to build and digital will also be an important component to that that growth in the future as well.
Yeah.
If I could add a quick clarifying question on that.
Also that over the next couple of quarters economic pressure.
A broader swath of consumers not cheap, though at the lower income demographic.
Question is going to increase.
And that Mike.
Sure.
Towards.
Pushing the top line for warehouse.
The perception is that they made.
Stretch their budget a little further.
In response to that what is quoted.
And that's more important.
Pack sizes, and other actions that could impact profitability.
That customer is going.
Sure.
Thanks, Michael Yes, I think briefly we see that as an opportunity actually for Kroger, because what we tend to see in those more economically challenged times is that the customer is less stressed as you describe them actually views <unk> as a high quality place to get more value compared to may be shopping a larger number of stores and we even see it with <unk>.
Our <unk> brand performance Rodney mentioned, the strong value in ingredients for cooking at home, but we also saw strength during the quarter in private selection in meal solutions. So we see that as an opportunity for us to really connect with that customer as they start to maybe.
And the best places to shop for quality and value combined.
Thanks, Michael.
Okay.
Thank you good luck.
Thank you.
Next question comes from Kate Mcshane of Goldman Sachs. Your line is now open.
Sure.
Hi, Thanks, Good morning, Thanks for taking our question.
I'm wondering if you could talk a little bit about how conversations are going with your vendor partners currently, especially in light of the ongoing inflation into the second half have you been able to push back with regards to some of the cost inflation and will you be getting more aggressive in those conversations like some of your competitors have suggested.
Yes.
Ongoing dialogue and obviously overall, we try to make sure that we have a partnership relationship. It's also one of the values and having our brands such.
Such a strong components. So we understand true cost increases versus somebody just wanting to raise margins.
Hi.
In many cases with the CPG partners, we are identifying areas, where we can work together to take costs out so that we can reduce it.
Like on backhaul is an area that we're making great progress on by using technology, both of our technologies and databases.
To understand how to change.
I would say that we're going to always pushed back on any type of cost increase that's not justified.
And we're going to also try to work together to figure out a way to reduce our combined costs whenever we can.
I think it is a difficult answer to say how are we doing versus competition or competitors.
I'm Super proud of our procurement team as Gary mentioned earlier, one of the big component on the cost saves is renegotiating.
Both things not for resell and resell boat. So we feel good about where we are but it's an ongoing dialogue and obviously, it's a little more difficult dialogue when you have such high inflation.
Thank you and if I could just ask an unrelated follow up.
Just with regards to the boost rollout are there any more details with regards to the timing of that and I know there was higher retention and other metric you cited but was there also a comp lift impact from boost during the quarter and those three test regions.
Yes, if you look at the test regions it would positively affect our identical and the thing that's most important to us as it causes that customer to be stickier to our overall ecosystem.
Not just on delivery so.
Our strategy is customer thinks food, we want them to think Kroger. So we feel good about where we are and that's continued in the right direction. Thanks Kate.
Thank you our final question for today comes from Chuck Cerankosky from Northcoast Research.
Your line is now open.
Good morning, everyone.
Good morning can you talk about your.
E Commerce sales they were down 6% overall could you shed some light on the components of that because they don't think.
It reflects what's going on with the new Cfcs and spokes, so where's the negative numbers coming from and how are the how's the ocado base facilities performing.
Thanks Chuck.
If you look at the pickup would be the area, where we would have the biggest decline.
Well as I mentioned, what we're finding is that customer is.
Get comfortable they move back into stores and the retention rate is better than the overall retention rate.
If you look at.
The sheds.
The NPS scores continue to be outstanding the retention rate.
Repeat purchase rate on the sheds, it's very strong and they're continuing to move in the right direction and if you look towards the end of the quarter in <unk>.
A recent few weeks.
Our performance on year on year for online has actually turned to positive. So the first quarter was pretty similar to where we thought it would be because we were cycling some strong numbers early in the quarter.
The trend has moved back into the positive neighborhood. So thanks Chuck.
And then on the.
The increase in working capital dollars spent during the quarter.
A lot of that simply reflect the inflation or are you.
In fact getting more aggressive on.
Forward buying or just trying to grab stuff when it's available.
Yes, I think Theres a couple of different factors just briefly and that overall, we've been on a plan for a number of years to continue to optimize working capital. So I wouldn't say, it's a dramatic change in strategy. We are very focused on continuing to drive improvements there and are seeing good tailwind and a <unk>.
Cash flow because of that this quarter, we would have seen an increase in inventory part of that will be today, we sort of starting to get back towards pre COVID-19 levels.
As the in stock in the supply chain improves nothing that would be concerning to us from a sell through perspective, but we do think it's important to make sure. We continue to improve the supply chain any cost inflation would have also impacted that number as well, but nothing out of the ordinary.
Thanks, Chuck and thanks, Gary.
Thank you for everyone for joining us today I'm incredibly proud of the way. We are beginning 2022 with a continued focus on our leading with fresh and accelerating with digital strategy.
As always I'd like to share a few comments with our associates listening in first obviously thank you.
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Would encourage each of us to take time to ensure we have the support systems, we need in place and if we don't please ask for help.
We are all our best advocates and know what truly we need.
Thank you for everything you do for each other thank you for what you do for our customers every day and thank you for what you do for our communities every day I am inspired every single day of the week by your Amazing work that you do.
Thanks, again for joining us today and that concludes our first quarter earnings call.
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Yeah.
Okay.