Q1 2023 Kroger Co Earnings Call
Our brands are always a winner with our customers in this period of sustained high inflation. It helps our customers save money without sacrificing quality.
While inflation may have been the reason for some customers trying are our brands products the taste and quality makes the customer love these products and continue to repurchase them.
For customers looking for more convenience home chef plays an important role and continues to innovate and expand offerings to meet growing customer needs.
This quarter home chef expanded its menu to bring more healthy choices premium meals and new concepts.
Our team unveiled its first dedicated family menu designed to make family dinners easier than ever.
The menu includes easy to prepare recipes for larger groups with meals are appealing to both adults and children and it at an attractive value.
Next is personalization.
For years Kroger has been at the forefront of using data and analytics, including artificial intelligence.
To build a better customer and associate experience.
By applying our data and AI based personalization, we can better understand what truly matters to our customers and deliver more targeted and effective experiences.
As customers digital engagement increases, we have new and more efficient channels to present, the most relevant products and the right promotions at the right times, no matter, where and how customers choose.
Choose to shop with us.
As AI advances, we continue to work and constantly evaluate potential use cases throughout the business with privacy and responsible implementation in mind.
For customers, we see opportunities to further simplify the digital experience and offer more accurate personalized recommendations are.
Our teams are working with search algorithms and generate of AI to improve substitution accuracy and search results.
Within our 80 451 customer research team, we're already piloting several large language models the.
To summarize customer database sets.
By applying AI to customer surveys and customer service logs, our team can analyze and categorize them in minutes versus days before.
This allows the business to react to customer feedback more quickly and accurately and then reflect these learnings and the customer experience.
For our associates, we envision ways to further simplify work through advanced algorithms that optimize activities such as store orders.
These in turn help reduce out of stocks improved inventory management and reduce expenses.
Data is in our DNA, our rich history as a technology leader gives us confidence that we will continue to effectively use AI, including more recent innovations.
We also believe robust accurate and diverse first party data.
Is critical to maximizing the impact of innovation in data science and AI.
As a result, Kroger is well positioned to successfully adopt these innovations.
And deliver a better customer and associate experience.
Now on seamless.
Growth in both our pickup and delivery businesses led to a strong quarter of digital sales growth.
A significant rise in both household and transactions fueled this growth.
Pickup remains an important part of our seamless ecosystem.
During the quarter our teams focus on associate training resulted in improvements in the customer experience pick.
Pick up net promoter scores increased as we improved fill rates and reduced customer wait times, obviously, something we're very proud of.
Seamless starts with our digital experience.
Which we built to be simple convenient regardless of how customers choose to shop with us.
Whether our customers want immediacy of Kroger delivery now.
Or to place a large stock up order through our customer fulfillment centers.
The customer experience is the same.
This shifts complexity from our customers to Kroger.
Even customers shopping only in store are beginning their shopping trip through our mobile app or website by clipping coupons and creating shopping lists curated for their store.
These growing interactions contributed to the 13% increase in digitally engaged households, this quarter we've.
We value this behavior as digitally engaged households are more loyal spend nearly three times more with us and help grow our alternative profit businesses like Kroger precision marketing.
Our associates continue to provide our customers with an outstanding full fresh and friendly experience better better continue with tea on our teams and more engaged associates lead to a more consistent customer experience and.
And we are excited about the continued improvement in retention.
This improvement reflects our focus on making Kroger, a place where associates can come for a job and discover career.
Kroger is committed to training our future leaders and made significant investments this quarter, we enhanced our career development framework.
Spaniard our leadership development course catalog and introduced companywide development days.
In the first quarter alone our leaders engaged in more than 445000 leadership development courses.
And their skills.
We are excited for our associates commitment to developing their careers with Kroger.
Our associates are driven by our purpose to feed the human spirit.
Kroger's effort to build healthy communities are being recognized this.
This quarter Kroger was selected as the 2023 seal business sustainability Awards winter and the environmental initiative category we.
We received this award in recognition for our progress in creating communities free from hunger and waste.
Which is a result of our team's collective efforts to more deeply integrate zero hunger zero waste in our operations.
We are incredibly appreciative of all of these efforts.
In closing Kroger delivered a strong first quarter by focusing on delivering customers value through our seamless ecosystem.
We are growing customer household and trips and our business remains well positioned for the environment ahead.
With that I'll turn it over to Gary to take you through our financial results Gary.
Thank you Rodney and good morning, everyone.
Krogers first quarter results clearly demonstrate the durability of our business in a more challenged operating environment the.
The investments we have made in our value creation model over recent years are paying off allowing us to continue to deliver value for customers invest in our associates and the creative create attractive returns for our shareholders.
As Rodney said earlier, we are driving increased customer engagement through our go to market strategy, which in turn is fueling our flywheel, including growth and alternative profit businesses.
I'll now walk through how our execution of this strategy translated into solid first quarter results.
Identical sales without fuel is a key component of our growth model.
During the quarter, we achieved identical sales without fuel of three 5%.
Underlying growth would have been 5% after adjusting for the effect of the previously communicated decision to terminate our agreement with express scripts.
As expected the terminated agreement also had a positive effect on our FIFO gross margin rate, excluding fuel and a negative effect on the G&A rate, excluding fuel and adjustment items.
The overall effect on operating profit during the first quarter was slightly positive and we would expect this to continue to be the case for the remainder of 2023.
Our decision to terminate the agreement with express scripts reflects our commitment to making decisions that we believe are in the long term best interest of our customers and shareholders.
Turning back to our identical sales without fuel growth in the quarter.
These results were underpinned by key elements of our go to market strategy.
Outbound sales grew four 9%.
Our brands continue to be an important source of savings for our customers who are attracted to the unmatched quality and value they provide.
At the same time <unk> helps drive stronger profitability, typically providing 600 to 800 basis points higher margin compared to national brands.
Our merchandising team is doing an excellent job optimizing our portfolio of brands to drive improved penetration and margin performance.
The launch of our new opening price point brands Smart way as enhanced overall brand architecture, and a relentless focus on continuous improvement and innovation is driving strong momentum across the portfolio.
We expect this momentum will continue to deliver value for the remainder of 2023.
Digital sales grew 15% in the quarter.
We saw 11% growth in pickup and 30% growth in delivery solutions powered by a unique combination of CSC and convenient store locations.
Our net promoter scores continue to increase and CFC volumes are growing in line with expectations in 2023.
We are working closely with ocado to make our cfcs, even more efficient and productive.
As a result of these joint efforts on Monroe facility greatly improve the cost per order over the past quarter.
Now in the process of applying these learnings across our other sites.
As outlined desktop business update back in March we believe digital will continue to be an important growth driver and anticipate double digit sales increases will continue for the remainder of 2023.
Gross margin was 22, 3% of sales.
FIFO gross margin rate, excluding fuel increased 21 basis points compared to the same quarter last year.
Importantly, this increase in rates was achieved while also investing in price to maintain a competitive price position and deliver greater value for our customers.
The improvement was primarily attributable to strong operating performance sourcing benefits.
Lower supply chain costs, and the effect of our terminated agreement with express scripts.
Actually offset by higher shrink and increased promotional price investments.
As we've shared previously our strategy to improve margin over time has many components, including utilizing technology to increase supply chain efficiency, improving fresh capabilities expansion of AB brands improve.
Improvements in digital profitability and growth in retail media.
The investments we have made over recent years to strengthen our business in these areas were reflected in our FIFO gross margin rate excluding fuel this quarter and we expect this trend to continue for the remainder of 2023.
During the quarter, we recorded a LIFO charge of $99 million compared.
Compared to a LIFO charge of $93 million for the same period last year.
Kroger's <unk> rate increased 14 basis points, excluding fuel and adjustment items.
Reflecting planned investments in associates and the effect of our terminated agreement with express scripts, partially offset by sales leverage and continued execution of cost saving initiatives.
Associated investments are funded by removing costs from our business that do not impact the customer experience.
This is an essential element in our go to market strategy and we are on track to achieve our sixth consecutive year of $1 billion in annual cost savings.
Adjusted FIFO operating profit in the quarter, one was $1 $669 million and our adjusted EPS was $1 51.
Both measures were up 4% compared to the same period last year.
I'll now walk through how the other key components of our value creation model contributed in the quarter and support our plans to deliver sustainable growth in the future.
Our health and wellness team delivered results ahead of internal expectations during the quarter, including positive I'd sales growth. Despite the effect of the termination of our agreement with express scripts.
This performance was led by strong underlying results in our retail pharmacy business.
Fuel is another important part of our strategy that drives customer loyalty and was a tailwind to profitability in quarter one.
Fuel reward engagement remained high this quarter with a 19% increase in discounts redeemed compared to the first quarter last year.
The average retail fuel price was $3 55, this quarter compared to $4 in the same quarter last year and our cents per gallon fuel margin was 45 this quarter versus 42 in the same quarter last year.
Turning now to alternative profit businesses.
The significant traffic and data created by our food health and fuel businesses continue to enable strong growth and alternative profits.
Retail media is leading the way and this quarter KPN announced a new collaboration with Disney to bring as we're now targeting and measurement capabilities to business portfolio of connected TV.
Connected TV is one of the fastest growing areas of AD spend tripling in the last three years to $20 billion and is expected to double again by 2027.
We are excited about the opportunities to accelerate <unk> future growth through this recent addition to the KPN ecosystem.
KPMG is also innovating in other areas, including in store digital marketing.
We recently announced our Rollouts of Cola screens in our stores.
These innovative screens will replace traditional refrigerator and freezer doors with a digital overlay that will offer customers information on products as well as KPN curated advertisements.
This will bring a differentiated shopping experience to our customers while also creating yet another powerful marketing tool for KPN to offer to our brand partners.
Our first quarter results would not have been possible without our incredible associates, who are doing an outstanding job executing our strategy and delivering a great customer experience.
Our go to market strategy is underpinned by our commitment to continue investing in our associates to ensure Kroger remains an employer of choice.
Joining the first quarter, we ratified new labor agreements with the UFC W. Four associates in Atlanta, Louisville, and Cincinnati divisions, covering more than 51000 associates.
We also ratified a new agreement with the United Industrial workers for our Columbus distribution Center.
We continue to negotiate contracts with the USW for associates in Smiths, Utah clocks, Amit Dallas clocks, Dallas meat and Fries Division.
Turning now to liquidity and free cash flow.
<unk> continues to generate strong free cash flow.
Our operating results combined with improvements in inventory and receivables led to a reduction in net debt of $1 5 billion compared to Q1 last year.
As a result of improvements in working capital. We now expect adjusted free cash flow to be in the range of two 5% to $2 7 billion for the fiscal year 2023.
At the end of the first quarter Kroger's net total debt to adjusted EBITDA ratio was a record low of 134.
This compares to a net total debt to adjusted EBITDA target ratio range of two three to two five.
The company expects to continue to pay a quarterly dividend and expect this to increase over time subject to board approval.
As a reminder, we have paused our share repurchase program to prioritize deleveraging following the proposed merger with Albertsons.
In closing I'd like to share some additional color on our outlook for the remainder of the year.
As Rodney mentioned earlier inflation started to show signs of deceleration throughout the quarter, particularly in the fresh categories and ended the quarter approximately 400 basis points lower than the start to the year.
We expect inflation will continue to decline as the year progresses and believe the environment will remain challenged for our customers as they deal with higher interest rates and an uncertain economic outlook.
These were factors, we anticipated when we issued our original guidance and the investments we have made over recent years to strengthen our value creation flywheel gives us the confidence to reaffirm our full year guidance for identical sales without fuel and adjusted EPS.
Looking towards the balance of the year, we would expect identical sales without fuel to be at the low end of our guidance range of 1% to 2% for the remaining three quarters of 2023.
Collecting continued styrene inflation, partially offset by underlying improvement in unit growth.
Recall this guidance includes the effect of a spec scripts, which is a headwind to identical sales without fuel of approximately 150 basis points.
We expect adjusted EPS to grow within our full year guidance range of 2% to 5% in each of the remaining quarters, excluding unexpected <unk> 15 benefit from the 50 <unk> week in the fourth quarter.
We would expect Q2 adjusted EPS to be at the low end of our guidance range as we cycle unusually high fuel margins for the same quarter last year.
As you've heard from Rodney.
And myself. This morning program is operating from a position of strength, while they remain macro uncertainties that could affect our operating environment across the remainder of 2023. We believe we have the right strategy and the flexible business model that continues to generate strong free cash flow.
This will allow us to continue to deliver value for our customers invest in our associates and create attractive returns for our shareholders.
I'll now turn the call back to Rodney Thanks.
Thanks, Gary before we open the floor to your questions. Let me provide a brief update on our pending merger with Albertsons companies.
Integration planning has progressed nicely.
And I am energized by the people and talent across both the Albertsons and Kroger teams.
Even more confident in the opportunities ahead, as we accelerate our strategy and deliver more value for our associates customers communities and shareholders.
We remain on track and continue to expect the transaction to close in early 2024.
We are working cooperatively with the regulators and at the same time to identify potential buyers for the stores we.
We expect to divest to obtain clearance for the transaction.
We will find well capitalized buyers with experienced management teams that will maintain competitiveness.
We're very pleased with the level of interest received thus far and we will work towards finding a solution that benefits all stakeholders.
We continue to engage with various stakeholders. In addition to the regulators and are actively working to address dress and accuracies and misrepresentations about the merger.
We made a commitment on the day, we announced the deal that this merger is about growth and that we will not lay off any frontline work associates. As a result of this merger. We are also committed to not closing any stores distribution centers or manufacturing facilities as a result of the merger.
We're very proud of our ability to make such a commitment.
Especially at a time when many companies are announcing job cuts.
And this is consistent with kroger's track record in recent mergers.
We remain incredibly excited about our future together with Albertsons, we are confident that as many of our stakeholders learn about kroger's history of growth through mergers.
They will understand the meaningful and measurable benefits. This will have for our customers associates and communities.
We are proud of the results our team delivered while navigating a challenged environment.
We are focused on delivering lower prices and more choices to our customers than ever before.
Our value proposition is growing households, and customer trips, which positions us well for long term growth.
We are confident that we have the right strategy.
The strength of our value creation model positions us well to continue investing in our business, our customers and our associates, which powers our ability to deliver attractive returns for our shareholders.
With that Gary and I look forward to taking your questions.
As a reminder, if you'd like to ask a question equal Presto fly by one on your telephone keypad.
I'd like to remove your question you May press now too.
Please ensure you're on mute locally when asking your question.
Our first question for today comes from Chuck Cerankosky from Northcoast research.
Your line is now open. Please go ahead.
Good morning, everyone nice quarter.
<unk>.
You mentioned the increased.
You mentioned the increased amount of promotional activity that Kroger was in during the quarter.
To what degree are the <unk>.
<unk> is involved in that and how much of the how much of it is kroger spending its own call. It.
Gross profit dollars too.
Promote your own brands.
They are extremely engaged in that process. Obviously, we're targeting those based on each individual household and what's important to that household.
If you look at.
Items that our national brand items.
It would be heavily financed by cpg's.
C C.
Cpg's as supply chains have gotten.
A much fuller.
Products are starting to flow we have started seeing.
Cpg's more starting to worry about tonnage and supporting that obviously with targeted promotions on our products. Those are funded out of by Kroger and it would be a pure economics in terms of the increase in tonnage and the investments, we're making but.
Overall.
We're pleased because it is helping people that's on a budget be able to stretch their money further which is helpful and we're able to do that at the same time, while managing our margins as well.
And Rodney when you go back to that 30% increase in and delivered.
Digital orders.
Could you put a dollar amount on that and how much of that 30% is coming out of the ocado related cfcs and spokes.
The majority would be.
Becoming through their sheds.
In terms of the dollar numbers I don't remember the specifics I know the total overall, but I don't know the specifics, but the majority of that would be driven by the sheds and as Gary mentioned.
A condo.
<unk> partnership with Ocado, and we're making good progress, especially on Monroe on ramping that facility up and now we're in the process of rolling those learnings out to the other shuts that Gary anything you want to add all I would add chunky that as you may recall, we announced a couple of years ago that our digital business recent $10 billion in total sales. So when you think about that.
15% growth it would be growth on one quarter of a number north of $10 billion.
Got it thank you.
Thanks Chuck.
Thank you. Our next question comes from Simeon Gutman of Morgan Stanley . Your line is now open. Please go ahead.
Hey, good morning, everyone.
My first question is also on the price investments and promotions. Good morning. So this isn't the first quarter, you've talked about making price investments. It seems like it stepped up a bit the tone is a little more elevated is that right and it seems like thats in response to the competitive environment.
Curious if it's something sustainable Youre seeing this as a one time how should we read this and is this or is this a permanent change that you think will be persistent for the for the time being.
I wouldn't.
I would read it a little different than the way you asked the questions.
If you look it's really broad based but it's we.
We continue to get better on using our own algorithms and AI to make sure that we're offering promotions that are most attractive to customers by.
By household so some of that.
Increased engagement as being able to do a better job targeting as.
As I mentioned the Chuck on the CPG is a significant portion of that is funded by Cpg's, which.
We think it's good for our customers and obviously good for tonnage over time.
In terms of talking about it more I would say it's more in terms of trying to share what's really going on behind the numbers to the best of our ability so.
I wouldn't say that we're talking about it more I would.
Completely agree that more customers are engaging in those promotions than before and some of that is because of the economic environment. Some of it's because of the targeting algorithms.
I think maybe it ties a little bit as well about the comment earlier.
Current customer segments, and how that changing behavior in the current environment.
And we mentioned earlier in the prepared remarks, we're seeing the mainstream customer and then the higher income customer in many cases, they're engaging more in fresh products engaging more in brands like private selection, we sold private selection outperformed our overall sales growth during the quarter. So there are certain customers that with with Sun using a personalized.
Asian to target to drive greater loyalty greater engagement, and then that customer that we clearly sees on a very constrained budget and have been impacted by the lower number of snap dollars in the market really focusing our marketing efforts to ensure that we're personalizing offers to resonate with those customers and help them manage that budgets more effectively.
And maybe related follow up you were talking about how inflation is pressuring the wallet you mentioned that we're seeing some price come down you mentioned fresh food in some places.
At what 0.1st what is the elasticity are you seeing any pickup in volume and prices are in categories in which prices are going down or is it just too much weight on the consumer wallet right now and at what point do you expect that intersection when inflation comes down enough youll start to see it pick back pick back up in unit or even trading back up.
If you look historically.
The context that you mentioned as inflation gets lower you do see tonnage increases.
Would expect as you look over the balance of the year that would be would happen as yet again I would say we are.
Too early in the process to really be able to say specifically.
We are seeing trend improvements in <unk>.
Market share in some of those aspects and very good share gain.
In mainstream and less price sensitive shoppers so.
It really is a bifurcation where.
Certain customers are behaving as if the economy. The way the economy has always been that customers that are on our budget under snap theres a significant reduction in snap dollars in the marketplace and they are making significant modifications.
Including before may be buying something that was a unit of 12 and now they'll buy a unit of four.
They are coming more frequent but buying less each trip and things like that so we would expect as you look over the balance of the year tonnage would improve.
As inflation continues.
Decline on a year on year basis, but I always think it's important to remember that inflation is cycling high inflation, which usually causes inflation increases to be less moderate and as we look out through the balance of the year. We would still expect to have inflation is just less than what it's been in the last couple of years.
Year and a half.
Okay. Thanks, guys good quarter.
Thanks.
And our next question comes from Michael Lasser of UBS.
Your line is now open. Please go ahead.
Good morning, Thanks, a lot for taking my question given your updated modest needed expectation for Ids to be at the lower end of your full year comp guidance does that imply that you do expect ids to be negative in the back half of the year and what is key.
We've seen the updated expectation, especially within the grocery business because you did see that the pharmacy business. Despite the loss of express scripts.
Doing well, presumably you're feeling a lot of <unk> prescriptions and Thats supporting the overall Ids and so grocery is getting worse than what you had originally thought.
Thanks for the question Michael I think you may have misunderstood what I mentioned in the prepared remarks, what we what we were saying was that we would expect the identical sales for the final three quarters of the year to be at the low end of our range and that that's essentially what we would have contemplated within our original guidance that still supports the war.
To 2% excluding express scripts, so two five to three 5%, including express scripts. So what I was really calling out was the trying to give you some specific sort of understanding of how we're thinking about those final three quarters of the year and what they may look like but we're not.
Indicating that we expect the full year.
We weren't intending to signal the full year would be at the bottom end of that range. It was really specific to the the final three quarters.
And you expect each one of those quarters to be positive and does that does that embed an expectation that.
Tonnage has to be positive.
We would expect the identical sales to be positive in each of the final three quarters.
We would be assuming on inflation that inflation continues to dig.
Decline as the year progresses and end the year at low single digit inflation back to sort of more normalized levels. We've we've seen really the fresh department start to reach that point, but the grocery department has started to decline, but would still be at elevated levels. So I think it really ties back to Rodney is comment said that we would expect to see a continued.
Improvement in unit trajectory to offset some of the decelerating inflation and I think we've seen a little bit of that during the first quarter because.
I'd sales didn't decelerate at the same rate as inflation decelerated during the quarter.
Okay.
Good question.
The perception is that <unk> might be losing a little bit of share at least within certain customer segments, given that Walmart doing double digit grocery sales increases.
<unk>.
The point that you made is a lot of the price investments and promotional investments that are being.
Made this year are being funded by the <unk>, how far is kroger willing to use its own P&L.
Find further investments.
To confront maybe some market share losses to more price leading players in the marketplace.
Michael as I mentioned before if you look at the different customer segments customer segments, our mainstream and upscale customers. We continue to have strong household growth and strong market share growth with those customers.
The ones that we would not be as happy with is our.
Are price sensitive shopper.
<unk> on a budget.
One of the things that we've we've done a lot of analysis on if you look at our total go to market value.
When you look at our price plus looking at our promotional activity and the way people shop, our ads our rewards programs are.
We used to call them.
Loyal customer mailings, but now theyre, mostly online so.
But personalized offers for each household.
Our total value equation is extremely close to what.
The ERP merchants would be we just go to market in a different way.
Obviously, the customers that are on it.
On a budget.
That customer is more focused on this week's shopping and you will see us continuing to make modifications to make sure that we're able to help achieve.
Go support their weekly budget some of that will be impact product sizes.
And other things, it's not just price alone as you know we introduced our brand called Smart way, that's really focused on that entry price point as well. So there's a lot of things that's within it well.
Well beyond just the price itself and we've always been.
Very personalized with pricing in terms of doing things for each household individually.
Thanks, Thanks, Michael for the question. Thank.
Thank you very much.
And Keith.
Question comes from Robert <unk> of Bank of America.
Your line is now open. Please go ahead.
Oh, Hey, good morning, I think Mike My first question is maybe for Gary can you can you speak a little more about what the FIFO gross margin assumptions ex fuel how youre thinking about the puts and takes at least for FIFO gross margin ex fuel for the next three quarters.
Obviously, just broad brush strokes, but like maybe some some things we should think about in terms of investing in price versus and more promotions and shrink.
Versus what would be offsets to that in gross margin.
Sure Good morning Ravi.
<unk>.
We don't generally give specific guidance by by line in the P&L, but I do think if you look at what happened in quarter. One we would see that as a very good proxy for how we think about the rest of the year.
From an investment point of view as Rodney mentioned continuing to make sure we're delivering value for customers and the remaining highly competitive as customers are managing inflation and the interest rate environment.
We do think that shrink will continue to be somewhat of a headwind its really in the center of the store I would say that the.
The team is doing a fantastic job managing fracturing, but there are a lot of.
Structural challenges right now incentive structuring because you've heard I think from a number of different retailers in the marketplace. So those would be the two big investments that we'd be fully contemplating for the rest of the year and then really the tailwind.
The pieces that we called out in our communication. This morning around our Q1 results and it's it's really a combination of many of the different plans coming together that we've talked about at our investor meetings over the last couple of years first of all <unk> is performing really well as we continued to drive sales growth mix improvement and.
Improve the.
The innovation of new products in that area sourcing benefits and continuing to manage cost and product design really closely.
As you heard US mentioned, we did see express scripts as a <unk>.
<unk> to gross margin during the first quarter that will continue through the rest of the year, although to some extent the <unk> product sales offset a meaningful part of that so it's not necessary that health and wellness is a major driver of the gross margin rate, but certainly express scripts has an impact we're seeing strong performance in supply chain in the first quarter.
And we believe thats sustainable as well for the rest of the year and then of course alternative profits as you know we continue to grow at double digit rates on alternative profit businesses and as we continue to improve.
Improve the optimizing the APM business and growing Kroger personal finance, we would expect alternative profits to be a continued tailwind to the model.
All in all I think the best way I think to characterize it would be to look at the different pieces that we should add for Q1, and we would expect similar kind of impacts and drivers in the rest of the year as we think about gross margin rate.
Got you so net net basis up.
FIFO gross margin ex fuel maybe.
Maybe maybe similarly to the way it was up in the first quarter.
Yes, obviously.
There's always kind of puts and takes a different times of the year and we are already focused on balancing the model, but directionally I think given interpreting correctly that's right.
Got you that's helpful and just a quick follow up in our brands.
The.
Do you think our brand's penetration accelerates from here and also the.
It sounds like you're you are being more promotional in our brands. So does the margin benefit from our brand's penetration stay the same or.
Or is it sort of as you promote it more it has less benefit to gross margin or is it youre still going to net ahead, because you're driving more volume.
And when you look at our brands. The margins are typically six months to 800 basis points better on our brands and national brands.
It would have been actually at the high side of that this quarter.
Look within it and.
Gary and I, both mentioned it briefly but if you look at private selection in some of those parts of our brands.
Grew even faster.
Which are extremely unique products that customers. What we find is they love the uniqueness and the quality of it so it's really the whole mix. So.
Smartway, obviously has a lower margin, but when you look at all the pieces together.
We feel good about where we are we would expect it to continue to be margin accretive.
For the balance of the year as well and then also we're continuing to leverage our own manufacturing plants.
In many places too which is helpful.
And Ravi just to the first part of your question on what we can expect in terms of growth in our brands I think we don't target specific growth for our brands because we really do use a customer led approach so that data on what the customer is looking for already drive where the growth comes from in the business, having said that typically during a more challenged economic environment.
<unk> mentioned in his prepared comments as well, we do see more customers engage with <unk> products and as they start to see the quality and the value often we find that as a sort of a higher penetration level that occurs during that time and typically it stays at a more elevated level even after the economic challenges have dissipated so we're not <unk>.
Getting a specific number but we do expect that customers will continue to resonate with those products and continue to engage with them at a high level.
Great. Thanks, so much to you both.
Thank you.
Our next question comes from Ed Kelly of Wells Fargo. Your line is now open. Please go ahead.
Yeah, Hi, guys good morning.
Good morning, I had a follow up.
Michael Hi, I was hoping that you could quantify the benefit that the <unk> trucks are providing to the IBD I mean, it seems material because your pharmacy business, despite losing a.
A decent chunk.
That through the express.
And then what are you seeing related to the attachment on the expressions business, meaning the impact.
In store.
From from those scripts exiting.
If you look at the second part of your question it would be extremely modest.
Single digit basis points, which I never.
It's so low that I am not comfortable that it's the data's precise so it's.
Our team has done a great job I think one of the things that is important to remind people is our pharmacy team has done an incredible job of helping people identify other ways of getting those prescriptions filled.
Through alternative networks, and discount cards, and other things and that.
It has been a huge positive and retaining a huge percentage of those ESI customers, which obviously flow through too so.
It's not like you just lose all of that business.
And what we're finding is in.
And over half the cases that we're actually able to save the customer money versus what they were paying before with ESI. So it's worked out our teams have done an incredibly great job, obviously, a lot of hard work on terms of the.
Other drug the margins on that is extremely small in terms of.
It's.
Net sales dollars are a lot bigger than the margin dollars. The margin is basically almost no impact.
I don't know Gary anything you'd want to add to either one of those.
Okay. Thanks, Ed.
Thank you.
Next question comes from John <unk> of Guggenheim Partners John .
John Your line is now open. Please go ahead.
Hey, guys wanted to drill down on the segments right. So mainstream is that about 60% of your business.
In that ballpark and then if you look at how that segment and maybe the upper income are performing is more of the growth transactions.
Would be versus items per basket.
And then just lastly, right on the budget guys.
Is that.
Are they comping negative right or Theyre, just not growing as fast as the other two.
If you look at our mainstream.
It would be a little bit more than the percentage you suggested and our.
Upscale customer.
If you look at percentages, the upscale and value customer is about the same.
But if you look at.
<unk> ability they upscale customer is a lot more profitable than the value customer we would see.
Very nice positive in the upscale up strong positive in the mainstream and the negative and the value customer.
But if you look at in total as I mentioned, we had positive household growth.
In total.
Okay, and then maybe one quick follow up I know you guys do a lot of survey work, which you talked about the work you've done on.
Value proposition versus <unk>.
Is that something that's.
Nor can you do that is understood and perceived by.
Customers or or not.
Perception has not caught up with reality.
Yes, it's a great question, John and what we find is.
Certain customer segments understand it really well.
Other customer segments understand that but if you only have so much money to spend you really don't have the ability to stock up on something.
So.
Customers that are more mainstream and upscale they love.
They would tell us that they feel like they're beating the system.
Fuel rewards.
Offers that are personalized to them.
They buy instead of buying one of something they buy five of it so they stock up at a great price. So they very much understand the way we go to market.
The customer on a budget and what we're finding is.
The customer may understand it but their budget is such that they don't really have the.
The money to stock up and Thats. The reason why we introduced smart way and some of the other things that we've been doing.
Okay. Thank you.
Thanks, John .
Our next question comes from Kenneth Goldman of J P. Morgan Kenneth Your line is now open. Please go ahead.
Hi, Thank you.
One of the reasons there is some anxiety among investors about the whole industry is that.
<unk> I guess evokes memories of 2016 17 18 win.
It slowed but also gross margins ex fuel struggled not just for you, but for others and so it is great to see that this past quarter rate deflation or disinflation, rather didn't correspond with that kind of decline gross margin was up but I think I'm curious what's different this time that gives you confidence in your ability to.
Kind of maintained profitability and margins into this disinflationary environment I know last time was deflation and youre not calling for that so maybe that's the answer but is there also an element that the competitive environment just isn't as intense now as it was back then I'm just trying to get your sense of how different it is to be a grocer.
Now than it was back then and how the world has changed in terms of competition.
Yes.
Yes, I would always hesitate to ever say that it's not as competitive because when you are in the middle of it it feels massively competitive.
Every day and.
I guess I don't look at that as a negative because at the end of the day, the customer gets a better experience and a better value.
And it's our job to figure out a way to.
Grow our business and create value for all of the.
Porting groups in terms of being able to invest in wages, and giving a great value for customers and creating value for shareholders as well.
And that.
That combination.
Like for US it's one of the reasons why we think it's so important to continue to look for process changes and other things to get costs out of the business and we will achieve.
We expect to achieve over $1 billion of cost reductions this year and that will be the sixth consecutive year that we've done that if.
If you look at our importance of our alternative profit business and growing that.
And other elements in.
The growth in terms of more prepared type products.
Products that have value add items those are things for.
For us that gives us confidence in the long term sustainability of our model and gives us the capacity to continue to invest in wages and continuing to invest in great value for customers. So it's really.
The total ecosystem that we're focused on I feel much better about our total ecosystem today than 2016, but I feel comfortable that in three or four years, we will say the same thing.
Then versus today, because we'll continue to get better and better.
And our customers get the benefit of that our associates get the benefit of that Gary It looks like you want to say something so Jeff one thing I would add Rodney I think you said it really well around we've obviously built I think a more diverse business model and that when you think about alternative profits and the size of fuel and health and wellness alongside the core supermarket business.
I would add Ken is I do think through Covid and I've mentioned this on previous calls, but just the.
Just the percentage of customers that now start their shopping online whether it's through a tablet through their phones through a PC. It does give you significantly greater ability to personalize the value to the customers. So I think you can channel investments in a far more effective way than you could have done for example, five to eight years ago and obviously, we feel we're in a very.
A good spot to be able to do that most effectively because of the power of our 80 451 data science business and how they can truly use customer information to help.
Save money and save time for the customer.
Great. Thank you thanks, Ken.
Thank you.
Question comes from Kelly Bania from BMO.
Your line is now open. Please go ahead.
Hi, good morning.
Thanks for fitting us in.
Good morning.
But.
Good morning.
Can you maybe unpack the math.
Magnitude of this.
Health and wellness outside of the express scripts.
Coming in line that the DLP one impact on.
Just the total comp and the total transactions for the quarter and and what is in the plan for the rest of this year. At this point are you planning on the kind of health and wellness momentum.
Through the rest of the year.
As I mentioned before the impact on sales is a lot more than margin the margin on that product is.
And a very marginal.
The thing that I think our teams have done a great job on and they've actually delivered is the number of customers customers or patients.
That we've been able to retain that had ESI and through the discount cards and other things.
That we've been able to retain those.
You look at for the balance of the year, we would expect.
The G G L P. One type drugs to continue.
But remember.
The impact on profitability is pretty pretty narrow I don't know Gary anything you want to add to that I think you said it well Rodney certainly for us clearly because of the.
The ppm change it may not have been as dramatic for us as some of those a shot but he is certainly would have been a tailwind during the quarter on sales as Rami mentioned, but really.
If you look at the gross margin impact it.
Eliminated much of the benefit in gross margin rate that we saw from express scripts.
Got that.
I guess, one more follow up.
Okay.
Console.
<unk> talked about.
And the comment that we're really prioritizing so.
Can you just elaborate on what's happening there they not.
The total rewards and the personalization and everything that you can offer your consumer.
Does that make you think about communicating with them in a different way to value or changing your strategy and how you.
Connect with that customer segment.
Yes.
Certainly be modifying the way, we connect with that customer and if you go back a few months ago. That's the reason, we introduced smart way and we continue to expand that where the focus of that brand is more.
Everyday price position will promote it but not as aggressive as other things.
We've also focused a lot.
In terms of making sure that we have entry price point items.
For that customer on things that are most important to them.
And.
Those are things, where we are modifying.
How we merchandise in the store and some of the products, we offer to that customer and we're leveraging our own plants as well for that customer.
Thanks Kelly.
Thank you.
Our final question for today comes from <unk> Parikh from Oppenheimer.
Your line is now open. Please go ahead.
Good morning, and thanks for taking my question. So I just wanted to go to the.
Promotional backdrop.
Just curious on the promotional backdrop, what you guys are seeing today expectations for the remainder of year and Thats a supply is improving I'm guessing. There was also a normalization of our CPG players, but just be more promotional and fund more promotions just wanted to get a sense as to what maybe normalization and then what.
Could just be driven by a more competitive backdrop.
Yeah.
My perspective, and Gary if you disagree just say, so but I think it's much more supply driven and access to supply and I say that because there are still a few categories that are constrained and you don't see as much.
But the CPG companies.
The supply chain in most categories are back to normal I think there's probably three or four areas that its not.
And.
It's more in terms of how things were before COVID-19. So.
People are coming to you with offers.
We're looking at those promotional offers in terms of how customers react to them and it's really I would say back to way it was.
Before COVID-19 in terms of probably by far the majority of it is that as opposed to just being a more promotional environment.
Great. That's helpful color and then just on quarter to date trends I'm not sure. If there's any commentary you provided in terms of what you guys are seeing quarter to date.
Yes quarter to date it would.
Would be kind of in the middle part of the range that Gary talked about.
In terms of identical so that's where we're tracking so far.
Thank you I'll pass it along.
Thanks, Rob appreciate it.
Thank you all for the questions today and as always before we close I'd like to share a few comments directly with our associates listening in.
In May we celebrated kroger's longest serving associate Mary tenant who has worked at our Moundsville West Virginia store for 65 years.
Mary at 85 years young loves our fellow associates, and our customers and she plans to keep working at our store and if you have a chance to watch Mary is video Youll understand why I said 85 years young we can all aspire to have that attitude and that.
Shipping us in funding at that age.
<unk> been a great example of coming to Kroger for a job and discovering a career and she's worked in almost every role at her store congratulations and thank you Mary on this impressive milestone and your recent birthday. We are so happy you picked kroger to build your career with us.
I hope everyone has a fantastic summer and thank you for joining us today that concludes the call.
Yeah.
Thank you all for joining today's call you may now disconnect your lines.
Concludes the call.