Q3 2022 Kroger Co Earnings Call
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Good morning, and welcome to the Cracker <unk> third quarter 2022 earnings Conference call. My name is not yet and I will be coordinating the call. Today. If you would like to ask a question at the end of the presentation. Please press star followed by one on your telephone Keypads. Please note. This event is being recorded I would now like to turn the conference over to Robert Class C.
Director of Investor Relations. Please go ahead.
Good morning, Thank you for joining us for Kroger's third quarter 2022 earnings call I am joined today by Kroger's, Chairman and Chief Executive Officer, Rodney Mcmullin, and Chief Financial Officer, Gary Miller, Jeff before.
Before we begin I want to remind you that today's discussions will include forward looking statements.
We want to caution you that such statements are predictions and actual events or results can differ materially.
A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings.
The Kroger company assumes no obligation to update that information.
After our prepared remarks, we look forward to taking your questions in order to cover a broad range of topics from as many of you as we can we ask that you. Please limit yourself to one question and one follow up question if necessary I will now turn the call over to Rodney. Thank.
Thank you Rob good morning, everyone and thank you for joining us today.
We're pleased to announce another quarter of strong results.
Howard by our strategy of leading with fresh and accelerating with digital.
Our associates continue to create a seamless customer experience delivering fresh and affordable food anytime anywhere with zero compromise on quality selection or convenience.
Our associates incredible dedication means we have momentum entering the fourth quarter and we are continuing to consistently deliver a full fresh and friendly experience for our customers throughout the busy holiday season.
It is clear that inflation remains top of mind for our customers and for our company.
We are laser focused on helping our customers by providing fresh and affordable food.
Research shows cooking at home is still three to four times less expensive than dining out.
And we are seeing more customers engage with our brands as a way to stretch their food budgets without compromising on quality.
During the quarter, we continued to see many of the same shopping trends we observed throughout the year.
In addition to higher engagement with our brands products.
Customers are downloading and redeeming digital coupons and continuing to showcase their cooking at home skills learned during the pandemic.
Our breadth of choices quality of fresh products and the value of our personalized promotions are helping customers navigate the current environment.
And our customer focused approach is working well.
We continue to see overall household growth and significant loyal household growth, which drives a meaningful meaningful portion of our sales volume.
Well, we are proud to serve as America's grocer.
Especially during the holiday season.
As friends and family come together, we look forward to providing our customers the perfect ingredients to create cherished memories.
At a time when 48% of customers have told us they plan to cut back on their Thanksgiving celebration due to inflation we.
We took action and made sure Thanksgiving was enjoyable and memorable for everyone.
To do that we introduced an easy guide for customers to build an affordable meal of our brands products.
With all of the Thanksgiving favorites.
That a family could enjoy for as little as $5 a person.
This is just one example of how we create amazing quality at a great price when it matters most to our customers.
We empower our customers to create lasting food memories by consistently executing against our go to market strategy.
Focus on fresh our brands and personalization and our seamless ecosystem.
Fresh remains important in today's environment, and we are committed to bringing the freshest products to our customers tables.
Our fresh for everyone strategy is grounded in keeping products fresher longer.
Our end to end fresh initiative is transforming these efforts.
At the end of quarter three we have a total of 252 certified stores.
At these locations, we see higher fresh sales and identical store sales.
With these impressive results, we continue to rollout the initiative nationwide.
As part of our end to end fresh initiative as their supply chain.
While we continue to invest and enhance operations.
We are improving productivity and maximizing our fleet by controlling more product movement across our network.
Most importantly, we are using our data and science to maximize freshness for our customers.
Beyond our end to end fresh program, we are bringing more fresh products to our customers.
During the quarter home chef launched new plant based ready to Cook meals.
They also collaborated with Krogers and house Dieticians to launch, our new simple and nutritious healthy meal kits.
Home chef continues to be an exceptional example of how kroger's history of mergers helped bring new and exciting capabilities to meet our customers' changing needs across the country.
Turning to our brands, we delivered another strong quarter and our brands.
With identical sales growth that outpaced overall identical sales.
This was led by our by our Kroger and private selection brands.
Customers continue to engage with our brands portfolio, which offers high quality products at affordable prices.
Our brand products are loved by every member of the family, including the pets.
This quarter, we saw tremendous growth in our pet food brands as families continue to treat their dogs and cats.
They're like a member of the family.
We continue to expand and diversify our brands portfolio at every price point.
After launching smart way as our opening price point brand last quarter, we introduced several new smart way products this quarter and.
And plan to rollout additional products next quarter.
These products are meeting the needs of our customers on a budget and we've already seen 2 million households purchased smartway products.
In regard to personalization, our customers are looking for opportunities to save on the products. They love.
Our loyalty programs and personalized promotions allow them to do just that.
We continue to use our leading.
Data science capabilities to develop unique customer insights and offered targeted promotions on the products, we know they love.
This strategy is driving digital engagement with digital coupon downloads, 32% higher than last year.
We anticipate these interactions will continue through the holidays with customers expected to realize more than $200 million in savings from our highly personalized digital offers.
Moving onto seamless.
We're improving our seamless experience that brings our customers fresh products anytime anywhere with zero compromise on quality selection or convenience.
We saw back to back quarters of strong digital growth led by our delivery solutions.
This quarter, we introduced App enhancements that made it make it easier for customers to engage with our savings and promotion.
We launched our first in App flash sales and enabled our customers to clip digital offers directly from their cart.
Improving the customer experience is always top of mind for us and Kroger pickup now offers three hour pick up lead times at all stores in our network.
With as little as one hour lead time in some areas.
We're investing in digital growth initiatives, including expanding our Kroger delivery network in new and existing geographies. We are also growing boost or one of the kind membership program.
This is the industry's most affordable membership program and it is foundational to growing our delivery service.
We are incredibly pleased with our customer response to boost as we rolled out the program nationwide earlier this year.
We continue to invest in our associates as part of our long term strategy.
In addition to investing in average hourly rates this quarter, we enhanced the benefits available to our associates.
We expanded the eligibility for a four one 401K plan participants to encourage earlier commitments to lifelong savings.
And we took steps to continue supporting working parents by increasing family lead time in our company sponsored benefit plans.
We are excited to celebrate our amazing associates this quarter, who were recognized for their outstanding work and commitment to our customers.
We're the most recognized employer for progressive grocers Gen next on our Reis with 28 of our young leaders recognized for driving change and innovation.
Both within the organizations and communities they serve.
Additionally, our K pasek. Hispanic and Latino Associate resource group was honored by the U S. Hispanic Chamber of Commerce as the employee resource group of the year.
In summary, we are building momentum as we close out the year, we are excited to surprise and delight our customers. This holiday season with high quality fresh products at affordable prices.
Allowing customers to serve on the items that matter most.
And with that I'll turn it over to Gary to cover our financial results Gary.
Thanks, Rodney and good morning, everyone.
Craig this relentless focus on delivering value for our customers with a foundation of our strong results in quarter three.
As Rodney mentioned earlier, our consistent execution of our go to market strategy is resonating with shoppers and driving increased customer loyalty.
We were especially pleased with the balance achieved in our results. This quarter as we continued to invest in our customers and associates, while also effectively managing costs to achieve solid earnings growth.
These results provide yet another proof point at the strength of our value creation model and our ability to operate successfully in different environments.
I will now provide additional color on our third quarter results.
Adjusted EPS was <unk> 88 for the quarter, an increase of 13% compared to the same quarter last year.
This growth was driven by top line revenue and our disciplined approach to balancing investments with effective cost management.
Identical sales without fuel grew six 9%.
Our brands continue to resonate deeply with customers our sales grew 10, 4%.
The outstanding quality and value offered by these exclusive to critical products is an important differentiator in our go to market strategy.
And this is especially true during periods of high inflation.
Yes.
As we shared at our Investor day in March <unk> products are margin accretive and represents a key pillar in our strategy to grow profitability, while also delivering greater value for customers.
Yes.
Digital sales grew 10% during the quarter with delivery solutions, leading the way up 34% year over year.
Delivery solutions includes the credit delivery network powered by the Ocado.
Delivery from our stores by a Kroger and third party platforms and.
And that convenience offering kroger delivery now.
Our industry, leading net promoter scores and credit delivery are driving new customer engagements and best in class retention rates.
Gross margin was 21, 4% of sales for the quarter.
The FIFO gross margin rate, excluding fuel decreased five basis points compared to the same period last year.
This result reflected our team's ability to effectively manage higher product cost inflation and shrink through strong sourcing practices, while also helping customers manage their budgets and keeping prices competitive.
During the quarter, we recorded a LIFO charge of $152 million compared.
Compared to $93 million in the prior year.
This was primarily driven by higher product cost inflation in grocery.
We still expect to see some moderation in inflation, joining our fourth quarter as we cycle higher inflation from a year ago.
Kroger's operating general and administrative rates decreased three basis points, excluding fuel and adjustment items compared to the same period last year.
The decrease in our G&A rates was driven by sales leverage and execution of cost saving initiatives, partially offset by investments in our associates.
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.
Kroger health had another successful quarter delivering higher than expected sales and profitability. Despite cycling the impact of higher COVID-19 vaccine revenue from a year ago.
We continue to see significant growth opportunities in health care and that Kroger health team remains committed to ensuring our customers obtain medically necessary descriptions.
Recently, we announced that we are terminating our express scripts agreement for commercial customers as of December 31st.
The express scripts contract would have required kroger to fill our customers' prescriptions below our cost of operation.
Something we could not accept as we aim to keep our prices low for customers joined this inflationary period.
We expect this contract termination will reduce sales by about $100 million and kroger's fiscal fourth quarter impacting identical sales without fuel for the quarter by approximately 35 basis points.
This decision is not expected to have an impact on operating profit or EPS.
Included in our results for the quarter is an $85 million pre tax charge related to the supplemental opioid litigation claims with the state of New Mexico.
This amount was excluded from our adjusted FIFO operating profit and adjusted EPS results to reflect the unique and nonrecurring nature of the charge.
This settlement is not an admission of wrongdoing all liability by Kroger and we will continue to vigorously defend against other claims and lawsuits related to opioids.
This settlement is based on a unique set of circumstances and facts related to new Mexico, and Kroger does not believe that the settlement amount or any other terms of our agreement with new Mexico can or should be extrapolated to any other IPO related cases pending against Kroger.
It is our view that this settlement is not a reliable proxy for the outcome of any other cases all of the overall level of kroger's exposure.
Currently Craig has two active matters pending in West, Virginia, and Texas scheduled for trial in 2023 and 2024, respectively.
Kroger continues to believe that the claims are without merit and that it has strong defenses to these claims.
Cargo is also differently situated for many of the other defendants in these cases.
Our pharmacy operations have a much smaller footprint both in terms of the size of the business and market share with respect to opioids and we are proud of the outstanding work performed by our associates in delivering critical care and services to our pharmacy customers.
Turning now to alternative profit businesses, which are a fast growing and key parts of our value creation model.
The traffic and data generated by our supermarket business continues to create a flywheel effect for alternative profits and growth. This quarter was again led by retail media.
CPG brands are finding significant value in our unique ability to build custom audiences.
Sure on our data to deliver precisely measure return on investment.
Last month KPN added a new channel to its suite of retail media solutions welcoming snapshot into the portfolio.
Advertisers are now able to use kroger's proprietary capabilities to optimize snapshots immersive ad formats.
We are constantly innovating to expand our reach and KPN recently increased its programmatic advertising marketplace capabilities to include video and one of the fastest growing digital media sectors connected TV.
These new frontiers will provide exciting future growth opportunities for KPN.
Fuel is an important part of our overall value proposition and our fuel rewards program remains a key differentiator to help customers stretch their dollars during a period of high inflation.
Fuel rewards engagement remained high during the third quarter and led to gallon sales, which outpaced the market.
The average retail fuel price was $3.84 this quarter versus $3 24 in the same quarter last year.
And our cents per gallon fuel margin was <unk> 50.
Compared to <unk> 42 in the same quarter in 2021.
The results, we reported today would not be impossible without our incredible associates, who continue to do an outstanding job executing our strategy and delivering our full fresh and friendly experience for our customers.
We have a long track record of investing in our associates and are committed to continuing these investments to ensure kroger remains an employer of choice.
Building on $1 2 billion of incremental investments since 2018, we have raised our average hourly rates by over 5% so far in 2022.
Joining the third quarter, we ratified new labor agreements with the USW for associates in Columbus, Las Vegas, Chicago, Fort Wayne and pharmacists in southern California, covering more than 28000 associates.
During the fourth quarter, we have also ratified new labor agreements for associates in Toledo, and Nashville, as well as the teams this master agreement.
Turning now to cash flow and liquidity.
During the quarter cash flow was affected by increased inventory balances.
This was predominantly due to higher product cost inflation, particularly in grocery in stocks improving to pre pandemic levels and forward buying of inventory in pharmacy.
We are comfortable that our current level and mix of inventory is appropriate to support our future sales expectations and would expect to see an improvement in working capital during the fourth quarter.
Regarding capital expenditures, we are committed to investing in the business to support our go to market strategy and continue to see many opportunities to drive future growth.
As shared last quarter various initiatives have been delayed due to supply constraints and we now expect capital expenditures to be in the range of $3 two to $3 4 billion in 2022.
But the net effect of higher inventory and lower capital expenditures for the year is that we continue to expect to generate free cash flow of two three to $2 5 billion in 2022.
Yes.
In closing I'd like to share additional color on our outlook for the remainder of the year.
The Kroger teams consistent execution of our go to market strategy continues to build momentum in that business and gives us the confidence to again raise our full year guidance.
We now expect full year identical sales without fuel of five one to five 3%.
Adjusted FIFO operating profit of $4 eight to $4 9 billion.
And adjusted net earnings per diluted share of $4 five to $4 15.
Representing growth of 10% to 13% over 2021.
This guidance assumes a LIFO charge of approximately $500 million for the full year, which represents a $300 million headwind over the 2021 LIFO charge.
Our third quarter and year to date results highlight the strength of kroger's value creation model, which has proven to be resilient in different operating environments.
Looking ahead, we remain confident in our ability to deliver attractive and sustainable total shareholder returns and we look forward to sharing detailed 2023 guidance during our fourth quarter earnings call in March.
And now I'll turn it back to Rodney.
Thanks, Gary the results we've shared with you today are a testament to our business model strength and agility to support our customers in all economic environments.
This is made possible because of the hard work and dedication of our incredible associates.
Before we open the floor to your questions. Let me provide a brief update on our pending merger with Albertsons.
As you May know I had the opportunity and Vivek did as well.
Testified before the Senate Judiciary Subcommittee on antitrust competition policy and consumer rights. This week.
As shared with the senators that our merger will.
Lower prices for customers starting day one.
Continue investments in our associates and stores and customer experience.
And do even more in our communities than either company can do alone.
We believe this merger will allow us to fulfill these commitments to our customers our associates and our communities well into the future.
We are making early progress on our integration planning as expected and we continue to engage with all of our stakeholders and regulators.
We are advancing our roadmap to close the transaction in early 2024.
We look forward to working with the regulators as they review the transaction and do not have a substantial update at this time.
We would ask that you focus your questions on our quarterly performance and our progress on our strategy with that Gary and I look forward to taking your questions.
Thank you.
I'll ask a question today. Please press star followed by one thank you Pat.
Have you changed your way through a question. Please press star followed by <unk>.
To ask a question. Please ensure your phone is on mute.
And our first question today comes from Michael One Penny of Evercore ISI. Michael. Please go ahead. Your line is open.
Great. Thank you for taking the question just wanted to follow up on two fronts. One was into the fourth quarter guide. It appears that <unk> sales could be up around 4% just wanted to understand the deceleration there was that predominantly inflation and or the express scripts or is there anything else to note.
Can you share any start to the quarter information and then kind of follow up.
Yeah, I'll start and let Garry finish it part of it is just cycling inflation from a year ago. We are beginning to now cycled the higher inflation a year ago, Gary with that I'll, let you get into a little bit more specific banks, Rodney and maybe just to confirm the trend in the early part of the fourth quarter as continued consistent with how we're performing in the in the fourth.
I'm, sorry to continue consistent with out of home in the third quarter.
It goes to one one part of your question there I think the other piece is Michael Yes, I think you've captured them. While is as Rodney mentioned, we do believe as we cycle higher inflation in the final quarter of 2021, we expect that to have some impact on the overall.
Year over year growth in food at home during the fourth quarter and obviously, we'll see how that plays out and then secondly, we have factored in.
The impact of the ESI Express scripts.
Contract termination as well for January so overall I think if you could you kind of take out full year guidance, we'd be guiding between four and 5% for the final quarter of the year.
Got it and then just a follow up on the margin implications it looks like those could be flat to down slightly in the fourth quarter. So.
So I just wanted to understand how do you see the competitive environment evolving and then any cost initiatives that you could share with us there.
Relative to the competitive environment, we continue to use the C. It pretty similar to how it has been throughout the year.
All retailers are doing everything everything they can.
To minimize the impact on inflation to customers.
Best you can do and.
We obviously would use our personalized and promotions that are directly that.
Focused on individual households, because of things we know they love to try to help people stretch their budget.
Also as I mentioned in the prepared remarks seeing customers continuing to move to our brands.
In the past what we find is when customers move to our brands, that's very very sticky because the high quality of the product and the satisfaction there.
So what we find is even when things start getting normalized our brands come out of that at a higher penetration level, then going in which is long term good for our business as well.
With that Gary I'll, let you get into yes. Thanks, Rodney just a couple of extra color Michael on the fourth quarter for you.
As you probably gathered from the guidance it would be.
Our lowest quarter of a year over year growth in what we shed for EPS I think a few things to bear in mind that first of all we'll be cycling the strongest quarter from last year last year of EPS growth in Q4, 'twenty one with the highest growth that we have joined the ESI where were cycling.
Higher higher growth from prior year, we are ashamed fuel margins will be flat during the fourth quarter.
No real headwind or tailwind that wire the generic fuel has been a tailwind for us in the last couple of quarters and of course as I mentioned in my prepared remarks year over year.
<unk> will be around $100 million headwind in the fourth quarter of EPS. Because you may recall again, LIFO was only $20 million last fourth quarter, when we finalize the calculations.
So I think it would be factors to bear in mind, when you think about our EPS guidance.
I might mention is that you've heard me talk about on this call and previous quarters that when you look at a rolling four quarter sort of gross margin investment somewhere between 10 and 20 basis points.
G&A leverage of 10 to 20 basis points. Similarly to keep the business imbalance I would say that because we are cycling Q4 of last year gross margin was relatively flat on SG&A was relatively flat. So I would say you should probably expect that gross margin investment will be a little bit north of the 10 to 20 basis points in Q4, but our G&A leverage should also be north of that.
Turning to a 10 to 20 basis points as well.
Thank you.
Thanks, Michael.
Yeah.
Thank you and our next question.
Karen Koski of Northcoast Research. Please go ahead your line is open.
Good morning, everyone nice quarter.
Talk a little bit about which categories.
The worst that inflation or in terms of unit growth and which were stronger on managing a lot of that was in the general merchandise and also Gary could you comment on why.
<unk> sales growth.
Ex fuel was better than total sales growth ex fuel.
Yes in terms of the categories. The one you identified definitely would be the weaker category in terms of general merchandise.
And that would be true.
Fred Meyer Division It would also be true across the rest of the organization as well.
Continue to do well in those categories relative to the market. Our teams have done a great job of making sure that managing inventories relative to where the expectations and sells the other categories that would be weaker than the total would be categories, where we continue to have <unk>.
Supply chain.
Disruptions.
Gary and I, both mentioned overall supply chain is getting better.
But we still have categories.
Like cat.
Cat food dog food baby Formula some of.
Those types of.
Remedy some of those areas continue to have some supply chain issues as well.
With the identical Gary yes, thanks, Rodney Thanks for the question Chuck.
Biggest part of that in fact pretty much all of it Chuck would be you may recall at the start of the year, we shed that we've made the decision to.
Stop dispensing certain drugs in our specialty pharmacy business because.
It didn't really tie to overall customer loyalty and a broader business isn't profitable business for us. So we made that decision at the start of the year and we adjust that out of our IV. So it's it's a like for like comparison, but it does create the disconnect between total sales and identical sales.
Alright. Thank you very much wanted I think samples is actually helping gross margin as well as we're making those decisions to make sure we're optimizing the balance of the business.
Thank you.
Thanks Chuck.
Thank you and the next question guys should add Kelly of Wells Fargo. Please go ahead. Your line is open.
Hi, Good morning, guys. Thanks for taking my question.
I wanted to ask you about.
The dynamic between the LIFO charge and the FIFO gross margin going forward.
FIFO gross margin have been good.
Good.
And this year, there's probably 50 cents a share more than gas.
And a LIFO charge in terms of a headwind I mean, assuming inflation eases.
You get much of that LIFO charge back.
Do we just add that back to earnings or is there a dynamic to consider when we think about the FIFO gross margin, presumably some of that's probably still needs to be priced.
I'm just kind of curious the FIFO gross margin performance that we've seen can you sustain that when the LIFO charge is this next year.
Yes. Thanks for the question Ed I think as you heard US mentioned on the call, we probably won't get into a lot of detail around 2023 guidance, because we would rather put it into context of the full picture for next year as you might imagine there'll be a lot of moving tops as we as we sort of bridge to share that color with you when we get to March next year I think overall, though.
Certainly some of the elements that you talked about are going to be key factors. When you think about what will what will be at play as you think about 2023, if I kind of talk more in general themes I think overall I would say we feel good to answer your question about gross margin that we we are very focused on and I think are proving for our model, but there are levers that we can pull to manage costs and sourcing effectively.
Improved mix over time with some of the momentum in our brands and the opportunity to continue to accelerate fresh performance and innovation. So there are there are a number of areas. When we look at the balancing gross margin that we believe we would expect that to be longer term.
Stability and our ability to manage that I think when you. When you look specifically at the moving parts for next year I think this will be a lot of factors that will come into play as you think about next year you are right in terms of if inflation normalizes in your numbers.
The correct around the $500 million impact this year, which would be a $300 million year over year headwind because last year's LIFO was also inflated as inflation starting to rise in quarter four last year. If you remember our LIFO charges calculated at a very specific week of the year, even though we try and estimate it throughout the year. So we would believe that as.
We'll get into guidance next year, obviously, when we share our earnings.
We're still sort of folding views around what we think will happen with inflation, but we're probably looking at most of the external views that you are in most of the analysts reports that we can look at in the USDA et cetera would be in that sort of more of that 2.5% to 3% inflation for next year, we'll obviously provide more color on what we believe but thats sort of where most of the.
Data that we see tendency pointing towards.
Okay, and then just a quick follow up fuel margins have been really strong I mean, there has been some of your peers in the industry have talked about.
That moderating next year I'm, just kind of curious as to whether you share that view.
How we should be thinking about modeling that going forward.
Yes, I think again I'll, maybe just broaden it because I think it's a little bit dangerous to pick out one element of the model for next year I do think that.
Fuel margins have had obviously a very good run in generally I think margins are improving over time, but there is that has been the last two years. So a major volatility in shops in the market I think it's hard to see those being cycle. So you look at margins earlier in this year and I think that's likely to be a headwind next year.
Looking at the fuel profitability, but again I think you mentioned lifetime of another example for US would be as you look at our incentive plan, obviously, we're having a very strong year versus our expectations, having raised our guidance every quarter. So you get to more of a normalized incentive plan next year, assuming the budget is kind of you expect to pay out we've continued to take cost side of our business.
Find new ways to improve leverage in the model has been a five year journey for us.
Really supply chain and alternative profits a potential tailwind next year as we continue to improve efficiency and supply chain. Our profit continues to grow so I think theres a lot of moving parts and again, rather than sort of trying to bridge you to have all those play out I think theres going to be a balance of puts and takes and obviously, we're looking forward to sharing a lot more color when we get to March next year.
I think when you look at various points overall, it's one of the things Thats. So important about our overall business model.
Because we do have a lot of moving parts and we've invested a ton of work and effort of our whole team has over the last several years to reinvent the business model and make sure the business model can be successful in every economic environment.
And to me Gary's point that he was sharing really highlight that as we look forward.
Thanks, Ed Thank you.
Thank you and the next question guys, Hey, Scott, Michigan five capital Scott. Please go ahead. Your line is open.
Hey, guys. Thanks, Thanks for taking my questions. So the first thing I wanted to.
Good morning.
First thing I wanted to get some answers to a little bit as the market shares you guys market share. It seems to have stabilized maybe even growing a little bit do you agree and what do you think is leading to that.
If you look at market share the trends continue to improve and we.
We feel good about where we are but we're not satisfied with where we are we believe the work that we're doing on fresh is a key part of driving that and obviously just the continued personalization.
And making sure that we.
We have a customer experience words.
Household the household type relationship and then our brands always shines.
Economic environment gets a little tougher so it's really those things working together and then.
Our store teams.
Continuing to do a good job of improving on friendliness.
And.
I make that comment based on what customers tell us how we're doing but just my opinion of how we're doing.
Great. Thanks, Rodney and then my second question is a little bit more short term I mean, we've heard some to some retailers not necessary in the food industry, but some retailers that the consumer's behavior.
Somewhat abruptly.
As we work through the fall I mean is that something you guys have seen and if yes do you think it started to leak into the competitive environment.
So it's.
They are still prioritizing food it gets a little bit of back to back to one of the comments I made it's still three or four times cheaper to eat at home versus going out to a restaurant.
And so many more people have learned how to cook. So if you look at the behavior changes other than the movement to our brands and being much more aggressive on downloading digital coupons and engaging with some some of our promotional offers.
That's really the only behavior, we've seen in our business outside of the comment I made earlier on non on our general business, but thats.
A much smaller part of our business in many of our competitors.
And the competitive environment has changed.
No.
As you know.
Any place you look across the country, you'll see it in different stages and but overall what.
What we see is pretty similar to what it how it has been.
Alright, Thanks, guys I appreciate it.
Thanks, Scott Scott.
Thank you and the next question guys, Hey, John <unk> of Guggenheim Partners. Please go ahead. Your line is open.
So where do you want to start with Big picture here. When do you guys think about because you've got the data.
Think about growth in households, right. So if youre going to comp, let's say I don't know, 3% to 4% longer term.
Household growth would be what of that and comp growth with comp households would.
It would be what.
How do you think about that and then when you is there any way for you to dive into your your penetration right.
With your desks aisles, and where the biggest opportunity is.
Yes, I will start and then Gary please add any color you want but if you look long term, we always build our business model around 1% to two 1% to 2% inflation and if you as you know.
Any given year will be different than that.
<unk>.
Longer term, we've always felt that thats kind of where.
Fundamental inflation will be.
Obviously over the last couple of years, it's been completely different than that.
As I shared in my prepared remarks, our loyal household growth.
What's very strong this quarter and it's been moving in the right direction when customers first become loyal household.
What we find is over time, we get a higher share of that household growth and we really are seeing.
<unk> seen that.
What we define as our seamless experience, where a customer can engage with us.
Where we deliver.
Where they pick up in store and shop in store, it's that combination together that earns us the right. So as our loyal household grows we get a higher share and that should be a tailwind to our identical sales growth over time.
And that was the reason that we talked about it and it's something internally we spend a lot of energy on it I don't know Gary is there any other color that you think it would be helpful for people to understand I think you covered it well Rodney I guess, the only couple of extra points, John I would maybe add.
I do think as you know our core strategy is to grow existing loyal customers on what was really pleasing in the quarter as we saw two 5% growth in low customers. So we're seeing customers move through the loyalty kind of and that's always been part of the strategy to already.
Plea reward customers and grow that relationship I think what we're also seeing though is the as Rami mentioned, we are building that seamless capability with digital we are starting to now attract a larger number of households to and the investments we're making in digital are creating that capacity to grow households, as well.
I think the one thing on the loyal households, I would say activity is what we saw during the quarter. The same for last couple of quarters is that.
Maybe that more affluent customer.
Maybe a larger number of retails before as consolidated more of their trips and total basket with Kroger as they they may not need to adjust that budget because of inflation, but they fail.
<unk> and responsible thing to do and they see Kroger is a great place to get the right quality.
At a great value as well and we're seeing that consolidation happened.
And there's one more one more quick thing can you just conceptually I know you don't want to talk about anything beyond this year, but right you've raised the EBIT guide quite a bit right now Europe high fours when you look at 'twenty two.
What was in there.
The good guys and the bad guys that.
That kind of work against each other I'm sort of wondering.
How sustainable is that new level of profitability and created the margin is not up as much as the dollars are.
How do you think about that in terms of how representative that performances.
What goes and comes next year off the P&L from this year.
John as you know we.
We manage our business on dollars.
<unk>.
And for Us.
Growing dollars is what creates a sustainable business model long term and we always view that the better offer that we can be able to afford to give to our customers. The more sustainable that is and the only way. We can do that is by managing our costs and continuing to find and identify aerie.
'cause of waste, so that we can reduce debt and fund that.
Fundamentally.
If you look at Kroger.
We still would have that same strategy and would still expect that.
Over time, because what we find is that really connect well with the customers.
We can take that allows us the capacity to continue to invest in our associates and support our communities and when we do those three things right the shareholders benefit so.
I know broad picture, that's what we would do with.
The way, we look at things and.
Obviously, everything we do we try to make sure we're doing it in a way that's sustainable long periods of time.
Okay. Thank you.
Thanks, John Thanks, John .
Yes.
Thank you and the next question guys Hey, Kenneth.
<unk> of Jpmorgan Chase. Please go ahead your line is open.
Hi, Thank you it's important to listen I.
Middle initial separately I'm just curious.
Yeah.
The second quarter in a row.
You've lowered your Capex guidance I understand why you've been clear about that and as Rob Moskow I pointed out last quarter Youre not the only company to feel that pressure.
I'm curious at what point is it reasonable for us to sell.
I'd be concerned, but sort of be aware of.
The potential impact on your growth from not being able to expand.
In a way that you'd like I'm, just curious how it affect anything in the near term if at all.
Yes, Thanks, Ken.
I don't think it's really something that we're concerned about we obviously did have very ambitious plans for capex. This year, playing some catch up from last year and we still believe the projects that we have on the horizon are going to be.
<unk> significant value for the company in the future and support our growth plans, but when we looked at the expectations for the rest of the year. There are a number of large projects, whether it's in supply chain or some of the stores, just where it's just taking longer to get them completed or there are some costs, where it just makes sense to pause for a period of time and reintroduced when we believe that.
Those costs will be more rational so from our perspective, we don't look at it as having a major impact on our growth model as you know, we kind of historically, where it sort of that three two to $3 3 billion of Capex spend a year, we've moved it up to three and a half being asked of the target range and I would still say that's probably direct.
<unk>, where we'd want to be long term to be pushing to the top end of our tsi models. So we do believe it's important to be investing in the business and we can still see plenty of opportunities to support that growth, but we just felt it was based on how long, it's taking with certain things to get projects completed with a supply availability that we think is going on.
Some of those projects will not blend into 2023, but we don't have a concern today about it impacting our growth algorithm.
Got it thank you and then.
I very much respect your request for us not to ask about the transaction I wanted to ask about it but I am curious is there a plan ahead to sort of.
Give updates to investors.
On a separate kind of forum, just because it's obviously such a.
Big part of the story from here.
I think people don't want.
A black hole or a vacuum of news I'm just curious what the plan is to kind of update investors on progress as it just you'll let us know during each quarter of what's new and and Thats kind of it and then we won't have any Q&A around that I'm, just trying to get a sense of that kind of news flow from here.
Yes, it's a great question, Ken and it's something that we're going to obviously manage in a very transparent way.
And we wanted to go ahead and included in this quarter just the context of what is new and that's what we've shared.
If there was something material.
We would share it between quarters, but.
All in all likelihood in the foreseeable future updates would be on a quarterly basis.
If it was something material what we tried to do on disclosure is if our roles were reversed what is it that we think it would be helpful for someone to know and Thats, what we always try to do so.
And obviously feel free to give us feedback when that doesn't feel right to you because we appreciate the feedback.
Yes.
Thanks Rodney.
Thanks, Ken.
Thank you and the next question guys from Michael Lasser of UBS. Michael. Please go ahead. Your line is open.
Good morning, Thanks, a lot for taking my question Ross why wouldnt, the grocery sector being more competitive and seen more price competition in 2023, given that the consumer is going to be under pressure.
There's going to be more competitors, who are going to want to try and gain some share given the potential distraction from the uncertainty of the merger with Albertsons. Many consumable retailers will have this LIFO gross margin benefit into 'twenty, three and there is going to be disinflation.
Where at times, it can be easier to make price investments in an environment of disinflation than it is when there is inflation.
It really gets back to overall I think it's incredibly important to understand that we connect with the customer in multiple ways and fresh is a critical component of that.
We fundamentally assume over time the market is going to get more competitive we've done that for 25 years, we will continue to do that.
And that's the reason why we put so much investment energy on personalizing experiences.
Supporting our associates.
In.
Any way, we can pay continuing education.
Even additional.
Support on mental health and especially in today's environment.
And what we have found in every environment.
By supporting and connecting with the customer from a full fresh and friendly experience and then having.
Good prices.
Very aggressive promotion and then personalizing the experience, we're able to support the customer one of the things that also supports gross margin as we continue to expect larger growth in our fresh departments, which have higher margins than center store.
And then when you look at our alternative profit businesses and some of those businesses have margins.
Better.
And what the center store would be so for US. It's you really have to look at all of those things together and look at those things over time, and we feel really good about the business model that we continue to develop and then grow at our company.
Yes.
Understood My follow up question.
On the outlook for <unk>.
What are you hearing right now from your vendor T&D about their desire to raise prices into 2023, Gary you said previously that there will be some of the prognostications are for two 5% to 3%.
Food at home inflation next year.
Were to not raise another price from here, how much inflation benefit with Kroger experienced in 2023, just from the wraparound effect of what you've already read this.
This year and then when you meant two to two 5% three would it be another two five to three on top of that.
Well I'll make a couple of comments and Gary you can think about some of the specifics.
If you look at.
In our fresh departments, clearly inflation is slowing down.
In many categories chicken would be an example.
Youre starting to see that in some of the other categories as well and I always make the comment high inflation solves high inflation because farmers produce more.
When their margins improve.
If you look at on Cpg's CPG companies themselves.
Right now it's.
Kind of mixed some CPG companies are willing much willing to have higher prices and give up.
Rose.
And.
What we find is when Cpg's do that our brands are so strong we really gained share and that helps the customer's budget and it also improves the stickiness.
And the loyalty of that customer as well so it's.
What are they always say all short statements in economics are wrong and I really think you have to look at all the moving parts I don't know Gary anything else you want to add to Michaels.
Deflation, yes, I think you've covered it well Rodney I think Michael as Rodney mentioned, we're seeing that fresh is certainly starting to.
See some change in trajectory on inflation. So I think it is the grocery category that's the.
But most of it if you like in terms of where it is holding an inflation at the moment and as Rodney said I think from as we look forward from our perspective, if that if that were to continue without being sort of supported by true cost increases then that creates an opportunity for us with <unk> to improve margin and grow share over time, So I think thats the way, we think about it in general.
Thanks, Michael Thank you very much have a great holiday.
You too.
Thank you and the next question that your California.
Please go ahead your line is open.
Hi, Good morning, Kelly Bania from BMO.
Taking a question good morning, Kelly good morning.
Just a couple of simple questions I guess as we think about the comp.
Even in the back half can you just help us understand how much inflation drove the upside there first as tonnage or.
You talked quite a bit about <unk>.
Initiative.
Stores is just helping us understand where the upside is coming from and then on top of that.
We often talk on the foodservice side of our.
And the industry.
About volume and tonnage I guess is the way you talk about it relative to 2019 and I'm. Just curious if you can help us understand where you are in terms of volume or tonnage.
We think about that relative to 2019 levels at this point.
Gary I'll, let you talk about the.
A little color on the <unk> and then on the foodservice ft finish all okay, great. Thanks, I'll share some things there.
Yes, I think overall.
We mentioned it in your prepared remarks somewhat as well we've seen inflation starting to the level. It still obviously at very heightened levels, but if you look at the trend quarter over quarter. It really narrow it down to less than I was sort of a 1% increase in inflation in our Q3 versus Q2. So what we were pleased about was.
In that context, the continued momentum in our overall sales when we look at our Q3 performance versus our Q2 and I think a lot of that ties to some of the prepared remarks that Rodney associated around household growth that we're seeing and really.
Solidifying more share of wallet from loyal customers, we're seeing low customer growth. So that's the piece that I think we we've been the most pleased around and we continue to perform really well with winning that first large basket with customers.
We continue to see strong momentum there and even as customers continue to adjust their behavior.
<unk> kind of wrestle with inflation and decide how to balance budgets.
Really pleased with how our overall, putting that first basket has continued to maintain strong momentum.
Yes.
Foodservice.
Volume would actually be above where we were.
Would have been in 2019.
For us.
When we look at.
Foodservice or food.
But.
I never know quite what to call. It other than it's a great meal easy to Cook easy to heat up easy to assemble.
It was the reason why strategically we merged with home chef because we've got home chef.
On its own.
Great trends and could continue to grow we also felt like their capabilities.
Could leverage back into Kroger to.
Further improve our meal kit and <unk>.
Great restaurant quality meals.
Would be an example, if you look at sushi, we're the largest sushi restaurant in the United States as an example.
Obviously, we partner with a lot of third parties and local entrepreneurs on that Sam.
Wages and all of those things that we see.
Foodservice is an important component of our growth not so much relative to 2023, but as you start looking out at.
2025 and beyond.
<unk> been having an amazing quality meal, that's easy and leveraging our delivery network or pickup network is an important part of the growth as you look longer term.
Thanks, Kelly for the questions.
Thank you our next question question.
Great.
Please go ahead your line is open.
Good morning, Thanks for taking my questions. So I just had one question just on OJ leverage. So this quarter there wasn't minimal leverage on a very strong comp that appears to be driven by wage pressures. So as you look forward to next year, just any any insight in terms of how you guys are thinking about wage pressures at this juncture and whether you think Doj leverage point could be lower.
Yes, hi, Thanks for the question, maybe just a little bit more color on Q3, and Q4 as well because I think theres a little bit more to the story there as well as with understanding I would say that certainly you are right.
We saw a lot of benefit from sales leverage and productivity improvements during the quarter. The team did a great job.
And really managing costs, considering the inflation that were facing in some of those cost areas. We would have also had higher incentive plan costs year over year.
Our higher technology costs, we're investing in a number of areas that we're seeing growth in year over year and some of that is maybe flipping from capital to operating expense because as you move more to cloud based activity Hs. It does change the mix there as well.
And we also invested as we did in Q2 in some consultants.
And some advisory work to help build future momentum and the growth. So I would say the underlying improvement in productivity was that was stronger than the quarter would've suggested and we feel good about the ability to leverage our G&A and fund the average hourly rate increases that we're seeing in fact as I mentioned earlier. The Q4 number as we are cycling a fatty flat or G&A dollars.
Getting into in Q4, we would expect to be north of 20 basis points of leverage in the fourth quarter. This year as we head into next year.
Thanks for great. Thanks, Thank you.
Thank you and the next question is our final question.
Yes.
Thanks, Matt Merrill Lynch. Please go ahead your line is open.
Hi, This is <unk> on for Ravi Thanks for taking my question.
I just wanted to see if you could give any more color on how traffic booked during the quarter.
What kind of trends youre seeing with items in the basket.
The number of trips to the store and then I guess as youre expecting inflation to moderate a little bit in the fourth quarter, what you would expect.
On those items going forward.
If you look at the overall trends in traffic it continues to be an improving obviously the overall basket itself is heavily driven by inflation.
But as.
I mentioned earlier, our trends on market share are moving in the right direction and continue to go.
In the right direction in terms of the last part I know Gary on inflation.
I think probably similar to what we said earlier I think overall.
Looking at the way the customers changing behavior.
As Rodney mentioned trips improving generally fairly consistent I would say over the year, but we are seeing higher trips from those low shoppers that have traditionally shopped in many different retailers for different categories and now seeing that trip to consolidate to CRO. There I think is an important trend that we've seen throughout the year and continue to.
Accelerate in the third quarter.
Gary I think Thats, a great point and thanks for the questions and.
For everyone. Thank you for joining us today.
As always.
I always like to share a few comments directly with our associates listening them because so many of our associates take the time to do that which we appreciate.
This is the time of year, we truly shine our special holiday film made clear we create the opportunity for our customers to transform today's holiday moments.
Tomorrow's memories.
We've had the pleasure to hear from countless associates, former associates and customers.
Just how touching this film has been I know I can't watch it without getting a tier II.
And just reminding all of US how special it is this shares favorite meals with those we love most.
Thank you to our teams who put this together. Thank you for our teams who make the memories happen, it's a wonderful way to kick off the holiday season.
As we all prepare together with our loved ones I am so incredibly proud of our associates across the Kroger family of companies.
We will accomplish so much this year thank.
Thank you for the many ways you serve our communities and uplift our customers and each other this concludes our call for today, we wish everyone. A happy holiday season, Merry Christmas Happy New year, and encourage you to stay safe. Thank you.
Thank you. This now concludes today's call. Thank you so much for joining you may now disconnect your lines.
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