Q2 2022 Kroger Co Earnings Call
Savings on the items that matter most to them.
Our customers are looking for ways to save and we are therefore them.
During the quarter digital coupon of engagement at an all time high with 750 million digital offers downloaded totaling almost $1 billion in savings.
Our fuel rewards program continues to resonate with customers as more than 600000 incremental households engaged with our fuel rewards program this quarter compared to last year.
And our fuel reward redemption rates were also up significantly.
We.
To see more customers cooking from scratch and eating out less often.
Our broad assortment of products that is meeting the need for customers to buy what they want on their terms.
For example, some customers are continuing to buy more of their favorite fresh products like apples Tomatoes and grapes.
Other customers are choosing products like frozen fruit and vegetables, allowing products to last longer in their homes.
Overall customers are looking to save money and make healthier choices by cooking more meals at home rather than eating out.
Kroger's strong value proposition drove positive household growth and meaningful loyal household growth both online and in store.
Digital sales also returned to positive growth driven by our one of a kind boost membership program and expansion of our Kroger delivery network.
It's clear our go to market strategy is connecting with customers and we continue to build long term customer loyalty through fresh.
Our brands and personalization and our seamless ecosystem.
Yes.
Leading with fresh we are dedicated to serving our customers the freshest products. So when they think food they think kroger.
To achieve this goal, we are utilizing technology and deploying fresh innovation to deliver products faster, which state fashion fat fresher longer for our customers to enjoy and it's working.
And our 864 fresh certified stores customers are purchasing more fresh products and overall store sales are growing faster than the rest of the business.
So supply chain remains an important part of our fresh strategy as well.
In order to maximize freshness, we are utilizing our data science and collaborating with our partners to minimize dwell time in our distribution network and maintaining the integrity of the cold chain.
We are also improving productivity in our supply chain.
During the quarter, we reduced fuel cost headwinds through technology and process efficiencies.
Such as controlling more product movement across the value chain.
Maximizing our trucking capacity.
While some categories remained challenging.
Flyer in stocks are improving and we are cautiously optimistic this will continue in the back half of the year.
Turning to our brands, we saw incredible engagement in our brands during the quarter with identical sales growth of 10, 2% compared to last year.
This increase was led by our Kroger and home chef brands.
Convenience remains a priority and home chef is meeting that need by providing high quality family meals as a budget friendly alternative to eating out at restaurants.
For other customers, who are enjoying cooking from scratch our brands are delivering innovative products at a great value.
The our brands product strategy is rooted in quality provide.
Providing customers with memorable meal experiences they crave.
And these products continue to earn world class recognition.
Most recently Murray's cheese varieties won five awards at the highly regarded 2022 American cheese Society competition.
We were also recognized by store brands magazine.
With 12 editors pick award for best New products, the most of any retailer.
This recognition focus specifically on food.
Customer needs for healthier products.
As we continue to look for ways to help our customers stretch their budgets. This quarter, we launched a new portfolio strategy for our opening price point brands.
Consolidated 17 legacy brands into two.
Heritage farm for our fresh and dairy product lines.
And our newest brand smart way for our non perishable items.
These brands are competitively priced and meet the needs of customers on a budget.
We launched with a 150 skus and expect to rollout additional products by the end of the year.
Now moving to digital we achieved positive sales growth as I mentioned before led by our strong delivery results.
Early in the second quarter, we introduced our boost membership nationwide and.
And it's already showing promising results, including an increase in overall household spend among members.
We remain focused on adding new members and are encouraged that enrollment is in line with our internal expect expectations and projections.
During the quarter, we opened a new customer fulfillment center powered by Ocado automated.
Smart platform enrollment lists Michigan.
Additionally, we are excited to expand that Kroger delivery network to more customers and for new chip geographies during the quarter through spoke to facilities in Austin.
Birmingham, Oklahoma City and San Antonio.
Okay.
This brings our total CFC and spoke count to 18.
We also continue to invest in our pickup business where demand remains strong.
During the quarter, we increased capacity and shorten wait times to improve our customer experience.
We also invested in technology and implemented process efficiencies, which helped lower our cost to serve.
Our customers are telling us they love our seamless experience with.
We continue to see customers efforts effortlessly shift between store pickup and delivery, which is building loyalty.
We continue to improve the experience and we will always encourage our customers to shop with us how they want to do.
Zero compromises.
Our our associate dedication and passion continue to fuel kroger's consistently strong results.
And we are proud to invest in our teams and improve the associate experience.
We saw more people apply to work at Kroger This quarter as we continue to attract talented associates.
Our current associates, we are making progress on retention, we've rolled out improved onboarding guidelines and implemented career planning tools.
In addition, as part of our commitment to associate wellness. We recently introduced a new financial coaching service tool for hourly associates.
This unique benefit offers free financial planning assistant.
To our associates.
We are launching the tool in three pilot divisions and look forward to expanding the service across the company by January of 2023.
It is always exciting to see our associates commitment to creating the outstanding work environment recognized for.
For the third consecutive year <unk> was named a best place to work for disability inclusion.
Earning a perfect score on the 2022 disability equity index.
Additionally, the Brandon Hall group, a leading human capital management firm honored Kroger for our training programs.
And the ways in which our teams promote diversity equity and inclusion.
Each team member has involved in creating our culture or associates come for a job and discover a career.
Our purpose to feed the human spirit inspires our teams every day.
One important way, we bring our purpose to life through Kroger's comprehensive ESG strategy.
Our aim is to achieve lasting positive change.
For people and our planet.
Our newly published 2022, ESG report called nurturing shared values outlines the entire Kroger family strong progress against dozens of environmental sustainability, social impact and governance goals and commitments.
We continued working to operationalize and integrate ESG within our business.
Nowhere is this more evident than through our zero hunger <unk> zero waste social impact plan.
This month marks the fifth anniversary of the launch of zero hunger <unk> zero waste.
And while we still have much so much more work to do to achieve our moonshot goal of achieving a world free from hunger and food waste. We also have so much to celebrate.
Over the past five years, our team donated $2 3 billion meals to our neighbors in need.
This included a $1 billion in giving the fight food insecurity.
500 million pounds of surplus food donated to our food bank partners and nearly $45 million in grants to support food recovery and system change from our zero hunger <unk> zero waste Foundation.
And I'm very proud to share for the first time ever our store teams achieved 100% execution of zero.
Zero hunger <unk> zero waste food rescue.
Which is the strongest proof point yet of the value of operationalized in ESG.
It took all of our teams working cross functionally to achieve this important milestone.
A huge congratulations and thank you to all involved.
In summary, Kroger delivered another strong second quarter.
We continue to delight our customers.
And our business model and execute on our strategy of leading with fresh and accelerating with digital.
We remain focused on delivering for our associates customers and communities and when we do that well to deliver value for our shareholders.
With that I'll turn it over to Gary to take you through our second quarter financials Gary.
Thank you Rodney and good morning, everyone.
The Kroger team is laser focused on executing our go to market strategy, which we outlined at our Investor day in March.
Our balanced business model has proven to be resilient in a variety of operating and economic environments and our second quarter performance provided another proof point to this as we delivered significant year over year growth.
I will now provide additional color on our second quarter results.
We achieved strong identical sales growth without fuel of five 8% and saw momentum build throughout the quarter.
Our brands led the way with identical sales growing 10, 2%.
We believe the unmatched combination of innovation quality and value provided by <unk> is a clear competitive advantage as inflation remains front of mind for many of our customers.
Adjusted EPS was <unk> 90, <unk> for the quarter, an increase of 13% compared to the same quarter last year and ahead of our internal expectations.
These results were driven by increased sales without fuel disciplined margin management and strong fuel profitability.
A seamless digital ecosystem is critical to building deeper customer loyalty and accelerated market share growth.
During the quarter digital sales grew 8% led by strength in delivery solutions, which grew by 34%.
We continue to invest in digital growth and growth initiatives, including the expansion of our credit delivery network in new and existing geographies.
Investments in the customer value proposition by a kroger boost membership.
And the expansion of customer trip missions, including mail solutions and credit delivery now.
As a result of these initiatives, we expect a positive momentum in digital sales will continue in the second half of the year.
<unk> also contributed meaningfully to our second quarter results as we grew the profitability of our core pharmacy business.
This allows us to cycle the impact of higher COVID-19 vaccine revenue from a year ago.
Which is especially impressive given the number of vaccinations administered last year.
Gross margin was 29% of sales for the quarter.
The FIFO gross margin rate, excluding fuel increased two basis points compared to the same period last year.
This result reflected our ability to effectively manage product cost inflation through strong sourcing practices, while helping customers manage their budgets and keeping prices competitive.
Our team is doing an outstanding job navigating the current inflationary environment.
Experiencing the benefits of a multi year journey and enterprise sourcing that is delivering significant and sustainable savings to kroger and our customers.
Our personalized pricing strategy is enabling us to maximize the reach and effectiveness of our promotional investments to drive loyalty and deliver value for our customers in ways they value most.
Together this has enabled <unk> to improve our price position relative to our key competitors.
Due to continued heightened levels of product cost inflation, we recorded a LIFO charge for the quarter of $148 million compared to $47 million in the prior year.
We expect inflation will remain at heightened levels in the second half of the year, but moderate on a year over year basis, as we start to cycle, the higher inflation, which began in the third quarter last year.
Yeah.
Credit or G&A rate increased 36 basis points, excluding fuel and adjustment items compared to the same period last year.
This increase was driven by investments in associates higher incentive plan costs and strategic investments in various margin expansion initiatives.
We offset by sales leverage and continued execution of cost savings.
We continue to identify opportunities to remove costs from our business without affecting the customer experience and are on track to deliver our fifth consecutive year of $1 billion in cost savings.
As I mentioned, a moment ago the increase in our G&A rate during the quarter was unusual as it included an accrual catch up for higher projected incentive costs covering the first half of the year as well as strategic investments in a number of margin expansion initiatives that will drive future growth.
We would expect to achieve year over year improvements in our SG&A rate in the second half of the year and for the full year.
Sure.
Turning now to alternative profits.
Kroger precision marketing continues to increase its relevance with our CPG partners.
During the quarter, we saw an increase in brand reinvestment rates of Cpg's experienced strong returns on their marketing spend with KPN.
Kroger personal finance products and services are also connecting well with customers in the current environment, providing even more ways to save.
This includes our KPN credit card featuring an introductory 55 cents off per gallon of fuel and our gift card program, which promotional office full time Civil Awards.
Fuel remains an important part of our business model and delivered exceptional performance in the second quarter.
As Rami mentioned earlier, our fuel rewards program is a key differentiator to help customers stretch their dollars, especially when fuel prices are high.
Customers engage with our fuel rewards program at the highest rate since the start of the pandemic during the second quarter.
And this helped ensure a gallon sales outpaced the market.
The average retail fuel price was $4 62, this quarter compared to $3 13 in the same quarter last year.
Our cents per gallon fuel margin was 62.
Compared to 39 in the same quarter in 2021.
The strength of our fuel results is a great example of the flexibility that exists within our business model.
As higher fuel profit fully offset the higher LIFO charge in the quarter and allowed us to reinvest strategically in a number of margin expansion initiatives.
Yes.
Our associates continue to do an outstanding job executing our strategy and serving our customers and we are investing in hourly wages to ensure <unk> remains an employer of choice.
We're also committed to continuing to invest in our size ships and sustainably growing Audi wages. These.
These investments are fully contemplated in our long term financial model.
During the second quarter, we ratified new labor agreements with the USW for associates in Houston, Memphis Lake Charles Shreveport, Las Vegas, Fox, a neat south southern California clocks that means on Indianapolis covering more than 40000 associates.
In the second half we plan to complete contract negotiations for Chicago, Columbus, Fort Wayne Toledo, South Bend on Southern California pharmacists.
Turning now to our financial strategy and liquidity.
Kroger continues to generate strong free cash flow.
As a result of our operating performance and working capital improvement type of recent years net total debt to adjusted EBITDA ratio is not 163 compared to our target range of two 3% to two five.
Underlying initiatives to improve working capital also helped offset higher inventory balances during the quarter, which were a function of higher product cost inflation and in stocks returning to pre pandemic levels.
We continue to prioritize capital investments that support our go to market strategy and see many opportunities to drive future growth.
As we updated in our guidance today, we now expect a range for capital investments for 2022 to be between $3 4 billion and $3 6 billion.
As various initiatives have been delayed due to supply constraints.
Earlier this quarter, we raised our quarterly dividend by 24%, reflecting our confidence in our long range plans and our ability to continue to generate strong free cash flow.
The quarterly dividend has grown at a 14% compounded annual growth rate since being reinstated in 2006 and this marks the 16th consecutive year of dividend increases.
During the quarter, we also repurchased $309 million of shares and year to date have repurchased $975 million of shares.
Earlier today, our board of directors authorized a new $1 billion share repurchase program.
I would now like to share additional color on our outlook for the remainder of the year.
The credit teams consistent execution of our go to market strategy is building momentum in our business, which combined with sustained through to home trends gives us the confidence to again raise our full year guidance.
We now expect full year identical sales without fuel of four to four 5% adjusted FIFO operating profit of $4 6 billion to $4 7 billion.
And adjusted net earnings per diluted share of $3 95 to.
The $4 five.
Representing growth of 7% to 10% over 2021.
This outlook includes a year over year headwind from LIFO of approximately $100 million in the second half of 2022.
In closing we have the right go to market strategy and are operating from a position of strength.
Looking forward, we remain confident in our ability to deliver attractive and sustainable total shareholder returns of 8% to 11% over time I.
And now I'll turn it back to Rodney.
Thanks, Gary the clever team successfully navigated another quarter and a dynamic operating environment with strong results.
As our customers continue to deal with high inflation, our value proposition is resonating with them.
And this reflects the balance we've built into our model.
We have demonstrated the ability to offer customers fresh affordable food and the value they need to help them manage their budgets, while we continue to invest in our associates reinvest in our business.
Instantly generate strong results.
Our performance gives us the confidence that we have the right plan in place to build on our momentum and continue delivering value for all stakeholders.
So with that Alex will turn it over for questions.
<unk>.
Thank you.
<unk> like to ask a question a compressed star one on your telephone keypad.
Lots of Australia, a question that you May press Star two please ensure you Amit Luckily when asking a question.
Please also limit yourselves to one question and one final question. Thank.
Thank you.
First question for state comes from John <unk> of Guggenheim.
Your line is now open.
Hey, guys, sorry, real quick with.
The improvement you saw in <unk>.
Can you break that out into traffic and ticket and then maybe within ticket.
Right AUR versus items per basket.
I know non food had been a big drag.
Is that still a drag does that get better at all.
I'll start on that and let Gary add some more of the details.
Biggest part of the drive.
Improving trends as continued improvement in our loyal household growth and total household growth of people coming to our stores.
We continue to see.
Average transaction size.
<unk> as people come into the store more often.
And more frequent.
We would continue with headwind some headwinds from the non foods.
Products as well.
Jerry any additional insights you want to provide.
I think you've covered most of it roughly.
Rob you mentioned, John with that we're seeing for a nice long shop is continuing to win that first basket and we're definitely seeing as we look at options that holding up very well compared to what we're seeing overall within the market and.
Most low customers as Rafi mentioned, we are seeing that number grow overall and on trips also growing with that customer that nice little sharper starting to increase the number of trips into the store as well.
I think that the key point that I would call out yes. The only other thing that might be helpful. Insight John is it's pretty consistent across the country.
As well.
Yeah.
Quick follow up there.
Youre not youre non fuel gross was the best we've seen it.
One of the best we've seen in a while despite the inflation.
So maybe it is that mix of role of mix versus Im curious if theres a lot of forward product.
That youre benefiting from or is that still hard to get.
Yes.
Look.
One of the things that our teams have done a nice job is on procurement.
The other piece would be as you mentioned mix.
The fresh departments continue to help our mix and we continue to see a lot of customers continue.
Add value added products as well.
I don't know Gary any additional comments I think you picked up the biggest drivers with sourcing.
Benefits, it's not so much forward volume will continuing to be really disciplined John with how we look at the design of products and hardware.
Managing relationships with that with our supply partners as well one of the areas I would say specifically in that that was a tailwind this quarter versus last quarter is the sourcing team and supply chain is working really well together to offset the pressure on the fuel costs and making sure that we're in.
Improving efficiency in the supply chain and operating at optimum levels to really offset that naturally whereas in the last couple of quarters supply chain would have been a headwind to gross margin. It was essentially flat this quarter and that wasn't because fuel costs were not a headwind year over year. It was really how we apply our approach to the challenge of course sourcing and supply chain.
And like our operation more efficient.
Thank you.
Thanks, Sean.
Thank you next.
Our next question comes from Kelly Bania BMO Kelly. Please go ahead.
Yes.
Hi, good morning, Thanks for taking our question.
Just with the Mag will be updated.
Guidance good morning.
If you could help us understand.
How fuel is impacting that and I think your prior plan was for a $50 million.
Headwind I think you just talked about LIFO it sounds like.
That's going to be about $150 million higher for the year, just trying to think about.
There's puts and takes as it relates to kind of the core flow through of the higher I E.
And how that impacts the back half.
Gary I'll go ahead, and yes, absolutely good morning, Kelly Thanks for the question.
Yes, I think you've actually picked on many of the key points, we would be expecting many of the levers that we've been pulling in managing to grow sales and grow customer loyalty and manage the margin performance in the business will be consistent in the back half of the year. The key elements that you called out.
Optically make out EPS growth look less meaningful in the second half.
First of all as you mentioned, our total LIFO charge for the year is about.
About a $250 million headwind for the whole year, which translates to about $100 million set.
So about 10 cents of EPS impact in the back half of the year on fuel we haven't changed our view we feel has been.
Very difficult to predict and we don't want to kind of rely on potential upside in fuel when it's really isn't something that we.
While the team does a great job of managing the best and the conditions, we don't lead obviously.
On fuel pricing that reward program is really what drives our strategy. We feel so we're assuming as we cycle 43 to 44 cents of CPG profit from the back half of last year, but if fuel rates more sort of returned to normalized levels, then that would be a $50 million to $60 million headwind in the back half of the year. So so there is about 16.
Of EPS headwinds that we have built in today for fuel and for LIFO were it not for those those two then essentially at our EPS would be sort of in the 6% to 8% growth range very much in line with <unk>. So we do fully expect the underlying profitability of our supermarket business to improve in the back half of the year. If you exclude LIFO in fuel.
Just a couple of additional things and Gary mentioned one of these in his prepared remarks, but the organization still has incredibly strong cost controls and this will be the fifth year in a row that we've.
We've been able to get over $1 billion of cost out obviously.
An important part of that and we do expect alternative profit to continue to be.
A strong and a little bit stronger in the second half of the year as the first half of the year as well.
Okay, that's very helpful.
Just a follow up.
So growth of 8% I think that brings it about flat in the first half just wondering if you could help us understand how that compares to your expectation.
How really how a condo is ramping within that I see here that 34% growth in.
Delivery sales.
But just are you on pace with the ramp of Ocado and just about your goal in terms of doubling digital sales.
How do you feel about that today.
If you look the thing that I think is always important as cod.
<unk> is one part of our overall digital strategy and the thing that.
Wanting to make sure that we have is and seamless ecosystem, where customers can easily go between delivery pickup and shopping in stores and what we find is by far the majority of the people that come.
Customers that stopped engaging with us on pick up.
Come back into the store and we capture that in store versus delivery. So when you look at the overall.
Seamless system, we're really focused on how do we.
And that's one of the reasons, we introduced boost is how do we.
Of that total loyalty across all of the engagement with the customer if you look at the thing that I'm Super proud of our teams.
On the shelves.
As we open them and the spokes is our net promoter score.
From those continue to be.
World Class and incredibly strong in that business and the customer continues to engage more frequently with us there.
And overall Im pleased with the results, but we still obviously have plenty of work to do I don't know Gary anything else you want to add.
Thanks, Ron It is just a couple of things overall I would say we're pleased with the progress that we saw in the quarter. As you heard me mentioned in my prepared comments, we are certainly starting to see some traction on some of the key initiatives that we've been investing in whether it's the customer.
Customer fulfillment centers that are powered by Ocado in both new and existing markets.
The launch of boost in the space continues to ramp up when we see about 25% of customers who sign up for based on a completely new to the digital side.
A really good driver of the digital business as well.
And the early infancy stages of some of those convenience trip missions that I mentioned, whether it's credit delivery now with our partnership with <unk>.
Products can be a bit smaller baskets within 30 minutes and also have EMEA solutions things like sushi in Florida. So a lot of really exciting developments of activities that we're focused on and we saw some good momentum in those areas coming through which is why we also shared in my prepared comments that we would expect the momentum to continue in the back half of the year I think we have any other comments I would make of it.
We are taking a step back certainly to to figure out what is the what the overall market digital growth likely to look like this year, because rami mentioned in his prepared comments that we're building our seamless ecosystem for the customer on what we're seeing is customers moving between the channels and making the decisions where they shop and then ultimately we want to make sure the customer is.
Royalty croda and choosing to shop through the store or pick up or delivery whatever works for them and we certainly have certain assumptions around how we thought the digital market will grow this year and we sort of taken a step back as we look at the back half of the year and have already sort of.
That's how we think the market overall is growing but our focus is really on making sure that seamless ecosystem is winning the customer loyalty able or whichever channel they choose to shop.
Thanks Kelly.
Thank you.
Our next question comes from Spencer Hanus from Wolfe Research.
Your line is now open.
Good morning. Thanks for the question I just wanted to talk about the price gaps for a minute could you talk about how comfortable you are with where youre trending today and have you noticed any change in your ability to pass through price increases as some of your peers have been a bit more rational on that front.
Yes.
You look overall, we continue to.
Be satisfied with inflation.
Inflation in the pass through.
As Gary and I, both mentioned, we're doing everything we can to minimize those increases and do it in a way that helps the customer in any way we can.
When you look at the total value proposition, we feel very good when you look at fuel rewards.
As I mentioned, we had 600000 incremental households, engaging in fuel rewards and record redemption from customers as well.
So overall.
We're doing feel very good about the ability to balance all the pieces and minimize the impact on the customer as much as weak.
Can.
We feel very comfortable with our price gaps.
And price gaps with the multiple of different.
Competitors is something that we track on an ongoing basis.
And we feel good about the everyday price gap and as you know.
We get more we.
We get great feedback from customers on our promotional approach.
And customers really appreciate the promotional values that we offer as well to allow customers to <unk>.
Doc up on items they use the most.
We are very focused on using our data to mature offers a personalized for each household individually.
Discounts that just apply to them and that's probably part of what's driving the fact that we had 750.
Brilliant.
Coupons downloaded as well.
Got it that's helpful. And then just to go back to kind of for a minute. What are you seeing from the facilities that are located in the new geographies versus your existing markets.
As we think about the profitability of these sheds any updated view on when we'll get to break breakeven EBITDA there.
Yes, I'll answer the first part of that and let Gary answer the second part of your question Spencer.
We continue to ramp up.
In.
The ramp in new markets.
We'll be among some of the best foot sheds across the Ocado network and as I mentioned before the NPS scores are.
Outstanding a world class or whatever.
Positive you want to.
Assigned to them.
And as customers.
Engage with us with our boost membership or our membership programs.
It's causing them to even be more loyal.
Well in terms of the financial side, Gary I'll, let Joe Thanks, Rodney I wouldn't say aspects of if anything dramatically changing in our view that we should had previously around how do we think about the <unk>.
<unk> power by Ocado.
Turing over time, I think as Robert mentioned, we've certainly been pleased with what we're seeing with customer connection and sales trends and when we think about.
The net promoter scores on the value that we're offering.
Seeing the gross margin profile, if you like about that customer and also the growth that we would have expected is very much in line with what we would have originally envisaged.
I think that one of the key things for us with the big facility because it is a four to five year journey is your ability to maturity and ability to scale and so there are some elements of that that until you kind of understand what the customer density looks like and at scale.
We still figuring out some of that operational efficiency in the model. So there's nothing really new I would call out, but we continue to work on building that full picture.
In the first two facilities.
18 months early in that journey of a of a full year journey overall to get to a capacity, but generally I would say still consistent with what we've had previously.
Thanks, Spencer got it got it thank you.
Thank you next.
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.
There was about a 50 basis point acceleration in your three year geometric stack was that all driven by an acceleration in inflation from the first to the second quarter and it looks like your guidance implies that youre expecting your I'd have to go back to that kind of high.
5% run rate in the second half of the year on the same three year geometric stacked basis. So would that also imply.
That you are.
Expecting the.
Lower contribution from inflation in the back half of the year.
Part of it Michael.
We're starting to cycle higher inflation, a year ago. So it's really.
We do not expect inflation on inflation to be as high so it is really driven.
By the cycling of where we were a year ago.
You would recall.
As you get later in the year inflation ramped up very aggressively in the back half of last year, we expect the business to continue to stay strong and continue to make.
Strong progress, we just don't expect the inflation to be quite as high as it was the first part of your question. Gary you may have been able to get that.
Just.
Yes, you're kind of breaking in and out so yes, Michael I think we tend not to look at it specifically in the way that youll, describing about three year view, but I would say that overall, we think about our progress in the second quarter.
We believe we do.
We were able to accelerate that growth relative to Q1 compared to the markets that we felt that from everything you could see we were able to.
To win customers them to change trajectory versus how the market was moving from Q1 to Q2. So we feel very positive about the momentum that we saw in the business in Q2 and as Robin mentioned, we believe that momentum will continue in the back half of the year, but we are expecting while inflation will remain a heightened levels. We think it will it will.
<unk> to taper because with the cycling and call it 4% higher inflation in the back half of last year compared to the first half of last year, even if inflation does continue to grow.
<unk> about 4% higher inflation rate from the prior year. Let me also let me say a little bit of data that would say.
It's really hard to predict and none of us have that perfect Crystal ball, but if we look at the growth in cost inflation from Q1 to Q2, it would be less than the growth that we saw in Q4 last year to Q1 this year.
And some of the forward looking futures data on some of the key commodities are starting to show a little bit of signs that things may be leveling off somewhat so obviously, there's been plenty of shops in the last 12 months that can change that very quickly, but the data points that we can see right now we think it's appropriate to two.
Forecast and provide guidance that assumes a slight tapering of the inflation rate in the back half of the year.
Okay. Thank you very much and my follow up question is <unk> has been pretty nimble.
Managing its FIFO gross margin as was evidenced by this quarter.
With some of that due to the ability to pass along price increases a little faster than you are getting the.
Price increases pass along to you from your vendor community and it does seem like some consumable retailers are announcing that they're going to make sizable price investments in the back half of the year. So how does that influence you.
Your view of the ability to sustain the FIFO gross margin performance over the next couple of quarters.
Well, obviously, all everything that you asked would have been reflected in our guidance for the balance of the year.
We would.
Most CPG as you know well in advance of cost increases so youre balancing the actual getting the cost increase along with what you pass through to customers.
Obviously you are weak.
A weekly basis, you're looking at pricing, where you are on spreads.
Better or worse than your competitors and the other thing that I think it's always important to remember for a customer that shops at Kroger.
Theres personalize rewards that are individualized for each household debt market would never see.
That's something that's incredibly valuable for our customers. In addition to our fuel rewards and other pieces. So I think you really have to look at the total value proposition.
Just to add Rodney I think Michael from the perspective of how we manage gross margin I think of it much more of the.
Trying to manage to a number every quarter, obviously, we're managing it more long term and there's lots of moving parts, but we manage that the tailwind would be the way we do on sourcing the mix improvements through fresh grabbing an outbound is bearing a new innovation in products and of course things like alternative profit streams, adding to that model as well, but we're still investing in the customer but from our perspective.
We feel very good about our ability to manage the model through the evolving environment and.
And overall again, if you look at that Rolling 12 months of gross margin, it's probably in that sort of 10 to 20 basis points of investments.
That's what we said at the beginning of the year is where we expected. So we are delivering we believe on the planet we share.
Thank you very much good luck.
Thanks, Michael.
Thank you Michael our next question comes from Simeon Gutman from Morgan Stanley Simeon Your line is now open.
Hey, everyone. Thanks for the question.
My question is on the consumer for diagnosis.
Some of the changes you're seeing it looks like there was <unk>.
Down brewing across all consumer and you mentioned that your business picked up throughout the quarter. So.
Can you talk about if youre seeing a level of either trade down and movements of private brands. We aired the level is it stabilizing that its only 5% of gasoline prices leveling off and the consumer is actually getting stronger now or would this playbook.
Okay.
Customer behavior.
They are telling us they are modifying behavior more so outside of the grocery store them with us.
Now.
<unk>.
Movement to our brands, what we always find is customers do it initially to save a little bit of money, but they fall in love with the product. So part of the continued acceleration of growth in our brands is driven by the value, but part of it is just the quality of the product and.
And thats been something Thats been a long term trend not just current trend.
The customers.
One of the reasons why we're so proud of our overall offering as customers can move between different types of product.
But we still see customers engaging in things that are fresh.
Healthy those aspects as well so.
We're going to be there forever, how the customer wants and needs us to be and we're going to be very agile as well.
Abbreviated follow ups is inflation it sounds like we're not quantifying, but the absolute level is.
No we're going to see moderation in the second half.
Let's just say you are running in line with CPI for food at home.
Could that actually get cut in half in the back half of the year is it going to be more moderate and then in terms of elasticity.
It doesn't actually behave that quickly where you see unit volume actually respond and then go back up so we're in the same place anyway.
Yes.
Yes, I mean, I think from that from what we see we wouldn't expect it to be that dramatic change as I mentioned I think we would expect that to be some flattening asset inflation in the back half of the year, but theres nothing that we see right now that.
What caused us to believe there is going to be a dramatic change in the level of inflation in the back half of the year.
And from our perspective as you think it probably ties back to <unk> earlier comment we feel that with <unk>.
Monitoring and using our data is already closely to adapt as to how customers change behavior and we believe through the combination of.
Fuel rewards through the brand portfolio products that we offer them through the pricing and promotional offers that we have we've got a very strong sort of portfolio of plans to be able to adapt to the customer that thanks demand.
Thank you.
Yes.
Our next question comes from Kenneth Goldman of Jpmorgan Chase. Your line is now open.
Hi, Thank you.
I was curious you mentioned home chef.
Are there any other categories or broader departments, where your brands or maybe surprisingly strong this quarter I would assume the usual suspects milken so were healthy.
But were there others, where the I guess the share shift was bigger than you might typically see in this kind of environment.
It's a great question, Ken and it's really broad based and the banner brand I wouldn't say, it's a surprise, but the banner brand continues the gains.
Solid share, but even if you look at like private selection, which has a lot of unique and new products. The growth there continued to be strong as well. So it was very broad based across really the whole store.
Got it thank you and then.
On the higher G&A this quarter, you called out a few reasons for it and thank you for that one of them was a one time accrual catch up can you give us a sense I don't think I heard how big that catch up was and then on the margin expansion initiatives I recognize it's an ongoing process, but just in light of where the G&A came in.
Are there any new initiatives launched anything that we should think about that that might be unique that we haven't necessarily heard about yet or is it just more of the ongoing process that you have.
Yes, Thanks, Ken I think.
What I would say is overall, if you think about there's probably three pieces that impacted our G&A materially during the quarter. The one you mentioned, which was the true up for the first half of the year on our incentive calculation based on our improved performance.
We calculate what the payment would be for the year and so we have to catch up for the first two quarters in the year.
Secondly, as you mentioned, we invested with some strategic initiatives that we believe will accelerate growth as we look into 'twenty three and beyond in particular and I'll come back to that in the second the third would be we were cycling one or two items that were sort of timing were particularly strong in Q2 last year. So when you add those three things together and sort of remove them from the number we would have.
<unk> achieved an improvement in the G&A rate during the quarter, which is why we kind of guide you to when you take out those three factors, which wouldn't repeat in app and our view for the rest of the year that we would expect overall for the rest of the year to see our G&A rate improvement, it's probably fairly flat in Q3, but likely to be meaningfully better than that in Q4.
We would think about it.
And I wouldn't want to get into maybe breaking it out individually because we typically don't do that but I would just say that all three of those together, we're really what caused the increase in the rates.
We got the new initiatives I think it is more what <unk> seen before it's more just that as we look at how the customers changing in our business model continues to evolve evolve we identified two or three areas, where we think there are opportunities to accelerate and an example would be in shrink and investing in.
Some new capabilities to be able to continue to improve <unk> performance as we look out for the forecast for our model on shrink and that of course helps gross margin as well and then I mentioned it earlier, but we're really pleased with the progress that we made in health and wellness during the quarter.
On some strategic investments in the health and wellness space, where we believe there's an opportunity for us to continue to drive profitable growth not only in the second half of this year as we cycle the vaccines from last year, but also beyond 2023 and 2024.
Thanks, Ken.
Yes.
Thank you.
Our next question comes from Robert Moskow from Credit Suisse.
Line is now open.
Hi, Thank you for the question.
I Wonder if you could give a little more color on the smart brands initiatives.
Is it providing anything new to the consumer in terms of opening price points lower price points than before or are you really just consolidating several of your sub brands to make it a little easier to shop, and then just had a quick follow up.
The majority is consolidating the sub brands, just making it easier to shop.
Items are always a great value for the money. The other thing that would be incremental items introduced under the Smartway brand in terms of just the absolute number of FCA use. So it's really a combination of introducing some new items and consolidating several sub.
Brands, and making it easier for our customers shop.
Okay.
And then a follow up on Capex, you're not the first to lower Capex guidance among.
Tumor goods companies and it all it usually seems to be because of project delays, but I imagine volume is less than what you had expected. This year because pricing is so high so is there any correlation here between.
Like a lower volume environment.
And in in flight in an inflationary cycle and what your Capex plans might be for the next couple of years.
I wouldn't I wouldn't say, Rob it really changes our view of the opportunity ahead of us the issue that we've laid out a clear plan at our Investor day in March and we still feel really confident in both the growth model that we outlined on why we believe the strategic investments, we'll make sense across the supply chain across our store portfolio and then obviously continue.
To invest in digital so I wouldn't read into it that we're any less excited or have less confidence in those plans as far more with the fall in the point that you've made but when you look at some of the short term supply challenges. When you look at some of the costs in the market in the short term.
Just made more sense and may not be.
Due to its a balance of that plan.
Just the schedule so it would be far more than that and that comes in and then the other.
Got it thanks for clarity.
Yes.
Thank you next.
Our next question comes from from Citigroup Your.
Your line is now open.
Hey, everyone. This Brandon Cheatham on for Paul Thanks for taking our question.
So wondering if you could help us a little bit on the fuel margin per gallon.
Very strong in the quarter, but it sounds like do you expect.
Fuel to be a headwind in the second half so can you help us how.
How much of the fuel margin was driven by internal initiatives or external market forces.
I guess youre not expecting to repeat in the second half. Thanks.
Sure Yes.
I came with a fantastic job in managing fuel margins and.
You probably know.
Our goal is to make sure we are very competitive on price and then we gave significant value back to our customers through our fuel rewards program that plays to our supermarket gross margin not through that fuel P&L that we share the metrics that we shared on the call.
So overall last quarter would certainly have been some great work by our team in capturing value wherever they go through sourcing of fuel and we promoted and drive engagement with customers, but a lot of it is also just to deal with the volatility in the market that is <unk>.
This is the changes in the fuel market, which I think has been seen across the industry. So as we look forward. We believe we have a clear strategy around delivering great value for the customer making sure. We're sourcing the product really effectively optimizing the reward program view at some point is that fuel margin sort of normalize and we don't think it's prudent for us to predict this.
Extremely high unusual levels of profitability. So I wouldn't say, we have perfect insight into what will happen to fuel margins in the back half of the year. We think it's prudent to bring them back to more of what we felt would be a normal rates at the beginning of the year. If it turns out that there is.
Significantly greater margins on fuel and of course that would impact kind of outcome for the rest of the year, but we think it would be not prudent for us to be forecasting that but that's really how we think about the rest of the year.
Got it Thats helpful.
A quick follow up I was just wondering if.
You could break out when you price inflation, how much that drove sales in the quarter and how much that was offset by by unit I assume declined slightly in the quarter. Thank you.
Yes, I think I think just to add a bit of color maybe for the last comment we mentioned on this one would be that.
Sales growth was higher than the increase that we saw from Q1 to Q2 was higher than the increase we saw in cost inflation. So.
So overall, we were pleased with the trajectory in our growth and we believe compared to the market, we were able to improve that trajectory Q2.
Q1, compared to how the market overall performance.
<unk>.
Thanks, Brandon for the question. The other thing I think is important that I mentioned earlier is that we had household growth overall and loyal household growth as well which is.
As always important for the future.
Alex we have time for one more question.
Thank you.
Final question comes from <unk> Parikh from Oppenheimer.
Your line is now open.
Good morning, Thanks for taking my question. So maybe just a follow up to the prior question does any perspective, just on market share. It sounds like your gap versus peers may have narrowed this quarter, but just any thoughts on the performance. This quarter and then how you're looking at that for the balance of the year.
Yes. The gap has continued to narrow and it's been narrowed during the quarter as well and if you look at it for the balance of the year. Our teams would expect to continue to make progress and really proud of where we are and we think the overall value for the customer and the overall seamless experience.
And focus on fresh.
<unk> to accelerate and the customer continues to reward us for that as well.
Okay, Great and then one final question just on just on Capex as well. So this is your capex is pretty significantly below your prior plan do you believe we could be in a period of just lower sustained capex plan, just given some of that happens out there.
I think we especially like I mentioned earlier, we feel very good about the plans we have to achieve long term.
Our overall CSR model around the growth that we've had around growing earnings at 3% to 5% of that CSR at 811, and we've got I think some very clear capital expenditure plans that we believe will allow us to drive that sustained growth. So I think we are being deliberate in the short term about making sure.
The pricing of certain supplies and products, but just would change their return materially then we're adjusting our timing there and there are some challenges just around labor and raw materials and getting the plan executed in the time scales that we had originally envisaged but I don't think for US we look at the.
The announcements that we made this morning on our latest forecast for Capex as being a less excited about the prospects of <unk>.
Investing in the business for growth I think it's more of a function of just some of the short term headwinds for us.
Great. Thank you Ms <unk>.
Thanks.
Thank you everyone for joining us today.
As you know I always like to share a few comments directly with our associates listening in as well.
We are so proud of everything that everyone's achieved in the first half of the year. Our outstanding Associates continue to provide a world class customer experience and thank you directly on behalf of everyone for everything that you do for our communities our customers and each other every day.
Also like to take a moment to recognize our Louisville and Delta the divisions and our manufacturing and distribution teams who responded immediately to help in the aftermath of a devastating flood in eastern Kentucky, and a water shortage in Jackson, Mississippi, our store manufacturing and distribution team.
<unk> went to work to offer of company and customer donations of supplies and funds and delivered more than 55000 gallons of fresh water to those communities.
When they needed it.
Thank you for stepping up to support our neighbors when they needed. It the most I also want to congratulate our stores.
Once again on achieving 100% execution of our zero hunger <unk> zero waste food rescue your efforts provide healthy food directly to our neighbors, who need it. The most thank you for your commitment to creating and supporting communities free from hunger and waste.
Thanks to everyone again for joining us today that concludes our second quarter earnings call.
Thank you for Tony.
The Q2 earnings call you May now disconnect your line.
Yes.