Q3 2023 The Kroger Co Earnings Call

Speaker 1: to making decisions that we believe are in the best long-term interests of our customers and shareholders.

Speaker 1: Our teams have done an excellent job retaining patients and utilizing our pharmacist extra capacity to devote more time to patient care, including growing our number of vaccinations.

Speaker 1: Gary will provide more on the financial impact of this later.

Speaker 1: During the quarter, we continue to see rapid growth in GLP-1 drugs in our retail pharmacies.

Speaker 1: While the long-term impacts of these drugs on customer buying habits are unknown, Crogris food as medicine philosophy positions us well to support our customers' health and wellness goal.

Speaker 1: Our comprehensive approach includes healthcare services.

Speaker 1: professional dietitians, and proprietary tools like our nutrition rating app, opt-up, which are all designed to support healthy living and to do so wholelessly.

Speaker 1: While we pride ourselves on data and insights, the patient data in our pharmacy operations is separate from our customer loyalty data and is protected by privacy laws.

Speaker 1: We are committed to using our data in an appropriate manner while not jeopardizing customer's trust.

Speaker 1: For now, we have not seen any major macro shifts in customer eating habits or spending behaviors.

Speaker 1: Food trends are constantly evolving and we are committed to offering products that meet our customers needs.

Speaker 1: For customers looking to adopt healthier habits, with or without the help of these drugs, we are well positioned to provide important healthcare services and healthy food options.

Speaker 1: At Crobert, our purpose is to feed the human spirit. And I'm so impressed by the many ways our associates bring this to life every day in the ways they support our customers in each other.

Speaker 1: We know when associates are connected to our purpose, they feel connected to Kruger.

Speaker 1: Our annual Crocker Wellness Festival is just one example of living our purpose.

Speaker 1: This festival is one of the nation's largest health and wellness events.

Speaker 1: showcasing more than 150 experiences and food offering.

Speaker 1: sponsors and celebrities joined Kroger and hundreds and thousands of visitors to share our vision for better physical mental and emotional health for families

Speaker 1: It was wonderful to see the level of support and participation in this important mission.

Speaker 1: Also this quarter, we released our annual ESG report.

Speaker 1: which highlighted crovers significant progress on our zero hundred zero waste journey. To expand access to affordable, fresh, and healthy food, and to reduce waste, especially food waste.

Speaker 1: Since we launched 0100 Waste in 2017, Crobert has donated more than 3 billion meals to feed hungry families, including more than 1.3 billion to fight food insecurity and nearly 600 million pounds of surplus food to our food bank partners. I am so proud of our teams and their efforts to reach these incredible milestones.

Speaker 1: Our associates are the driving force behind our success by delivering an outstanding customer experience and helping make the holidays even more special for our customers.

Speaker 1: We facilitate this through a long standing commitment to invest in associate wages and benefits and training tools to advance their career growth.

Speaker 1: Feature, future, our continuing education benefit. It's one of the important ways we make CROGRA a place where associates come for a job and discover a career.

Speaker 1: This benefit provides up to $21,000 lifetime and has helped almost 6,000 associates this year alone with approximately 90% of these participants being hourly.

Speaker 1: Our focus on development is contributing to strong improvements in retention, which includes associate continuity and a more consistent customer experience.

Speaker 1: With that, I'll turn it over to Gary to take you through our financial results. Gary, thank you.

Speaker 2: Kroger's third quarter results demonstrate the resilience of our value creation model.

Speaker 2: The investments we have made over recent years, the strength and diversify our business, are allowing Kroga to navigate the challenged environment, characterized by tightening consumer spending, and food at home disinflation.

Speaker 2: We achieved adjusted earnings per share growth of 8% this quarter, while also providing greater value for our customers.

Speaker 2: Higher wages for our associates and investing in strategic initiatives that will support future growth.

Speaker 2: This was made possible by our teams delivering strong performances across our margin expansion initiatives, fuel, alternative profit businesses and health and wellness.

Speaker 2: Our year-to-date results keep us on track to achieve adjusted earnings per share growth in 2023, building on record results over the prior three years. On now...

Speaker 2: Identical sales without fuel decreased 0.6%.

Speaker 2: Underline growth would have been positive 1% adjusting for the effect of our terminated agreement with ExpressGrip.

Speaker 2: Similar to the first two quarters of the year, the terminated agreement with express scripts had a positive effect on our five-fold gross margin rate, excluding fuel, and a negative effect on the OGNA rate excluding fuel and the adjustment item.

Speaker 2: The overall net effect on operating profit was slightly positive.

Speaker 2: As a reminder, we will begin to cycle the impact of express grips at the start of the new calendar year.

Speaker 2: As Rodney shared earlier, our seamless ecosystem is a critical component of our growth strategy, building customer loyalty and fueling our alternative profit businesses.

Speaker 2: Digital sales were a highlight in the quarter. Growing 11%.

Speaker 2: Our overall sales continue to be affected by industry-wide disinflation.

Speaker 2: Inflation and E-cord to 3 in the low single digits approximately 270 basis points lower than the second quarter.

Speaker 2: Towards the end of the quarter, we saw inflation decline at a slower pace. And we would expect this trend to continue in the fourth quarter with inflation remaining positive at the year end.

Speaker 2: Encouragingly, units of shown signs of improvement have inflation as decelerated.

Speaker 2: And we have sequentially improved units for four straight quarters.

Speaker 2: However, unit growth rates have lagged the rate of inflation decline and have not improved that the pace it would have expected.

Speaker 2: As a team, we are laser focused on returning to unique growth and expect improvement in volumes to continue for the balance of the year.

Speaker 2: Gross margin was 22% of sales, and our FIFO gross margin rate excluding fuel increased three basis points compared to the same quarter last year.

Speaker 2: During the quarter, we increased investments in pricing and promotions to deliver greater value for customers. We were able to successfully fund these investments by continuing to execute our long-term margin improvement plan, including our brand's optimization, sourcing efficiencies and supply chain improvements.

Speaker 2: Shrink was a headwind to Grossmarge enjoying the quarter, primarily due to the continued rise in industry-wide theft and organized retail crime.

Speaker 2: We are investing in initiatives to mitigate shrink and protect our associates and customers in our stores.

Speaker 2: Looking ahead, we would expect the same factor that influenced gross margin in quarter three or drive a similar outcome for gross margin rate in the fourth quarter.

Speaker 2: During quarter three, we recorded a life-o charge of $29 million compared to a charge of $152 million for the same quarter last year.

Speaker 2: This reduction which due to inflation returning to low single digits compared to double digit growth experience last year.

Speaker 2: Prove as OGNA rate increased 32 basis points, excluding fuel and adjustment items.

Speaker 2: The increase in OGNA rate was driven by planned investments in associate wages and benefits and the effect of our terminated agreement with ExpressBrit.

Speaker 2: During the quarter we also made the decision to invest in a number of strategic initiatives that I expect to drive growth in 2024 and beyond.

Speaker 2: Investments were partially offset by execution of cost-saving initiatives and lower incentive plan costs.

Speaker 2: We are confident in our ability to effectively manage costs and continue to deliver savings by eliminating waste in areas that do not affect the customer experience.

Speaker 2: We continue to identify incremental cost-saving opportunities across the business and remain on track to deliver our sixth consecutive year of $1 billion in cost savings.

Speaker 2: In the fourth quarter, we would expect our OGNA rate to be relatively flat compared to last year.

Speaker 2: Kroger Health is an important component of our value creation model and is delivering profitable growth in 2023.

Speaker 2: During the quarter, the team exceeded our internal goal for the number of vaccinations administered, and the higher profit margins associated with these vaccines helped offset the negative impact on margin rate from growth in GLP1 drugs.

Speaker 2: As Rodney shared earlier, we are excited about the momentum in health and wellness and see significant potential for future profitable growth in this area of our business.

Speaker 2: Fuel is also a key part of our strategy, and through our rewards program, is another way that we deliver value for customers and increase loyalty.

Speaker 2: Our fuel team did an outstanding job delivering results that were ahead of expectations in the third quarter.

Speaker 2: Our customers say 14% more in rewards per fuel purchase compared to last year, which led to gallon sales outpacing the industry.

Speaker 2: The average retail price of fuel was $3.77 this quarter versus $3.84 last year.

Speaker 3: And our cents-per-gallon fuel margin was 57 cents this quarter versus 50 cents last year.

Speaker 2: Kroger has made substantial investments over the last five years in our associates, raising the average hourly wage by more than 33%.

Speaker 2: We remain committed to supporting our associates with sustainable investments in wages and comprehensive benefits that will at the same time allow us to continue to keep products affordable for the communities that we serve.

Speaker 2: During the third quarter, we ratified new labor agreements with the USCW for Fry's Food & Drug, Dallas Meat, and four stores in Roundies, in total covering more than 19,000 associates.

Speaker 2: We have now ratified all agreements that were scheduled for negotiation in 2023.

Speaker 2: Kroger continues to generate strong free cash flow through consistent operating results and the disciplined approach to deploying capital, prioritizing the highest return opportunities that support our growth strategy and TSR model.

Speaker 2: At the end of the third quarter, Kroger's net total debt-to-adjusted EBITDA ratio was 1.4, which remains well below our net total debt-to-adjusted EBITDA ratio target range of 2.3 to 2.5.

Speaker 2: This positions as well to execute our financing strategy to close the proposed merger with Albertsons early in 2024. And then quickly return to within our target leverage range, post merger.

Speaker 2: As I wrap up my comments on the quarter, let me provide additional colour on our outlook for the remainder of the year.

Speaker 2: Today we updated our four-year guidance to reflect the impact of near-term economic pressures and food-at-home disinflation.

Speaker 2: We now expect four-year identical sales without fuel to be in the range of 0.6% to 1% and adjusted FIFO net operating profit to be within a range of $4.9 to $5 billion.

Speaker 2: As a reminder, our sales guidance reflects the effect of Express Scripts, which is reducing our reported identical sales without fuel by approximately 150 basis points in 2023.

Speaker 2: Our latest sales trends would put us on track to achieve the midpoint of our updated annual sales guidance ring.

Speaker 2: Importantly, we would expect to exit Q4 with a stronger sales trend than our overall results for the quarter as we start to cycle the effect of Express Scripts in January .

Speaker 2: We believe we are well positioned to navigate near-term headwinds and the strength we are seeing in our alternative profit businesses, health and wellness, and fuel, combined with a lower expected LIFO charge, gives us the confidence to raise the lower end of our four-year adjusted net earnings per diluted share guidance range.

Speaker 2: We now expect adjusted EPS to be between $4.50 to $4.60. And looking forward, Kroger remains committed delivering attractive and sustainable returns for our shareholders. I'll...

Speaker 1: Thanks Gary. Before we open the floor to your questions, let me provide an update on our pending merger with Albertson's company.

Speaker 1: As of November 15, 2023, Crover certified substantial compliance with the second request issued by the FTC.

Speaker 1: would continue to work cooperatively with the FTC in its review of the transaction.

Speaker 1: This step keeps us on track to close our proposed merger with Albertsons in early 2024.

Speaker 1: We are confident that we have fulfilled all the commitments we set out in the original merger agreement, including the comprehensive divestiture plan announced with CNS hostel Grocer.

Speaker 1: CNS is a well-qualified buyer who meets all the criteria necessary to complete our transaction. And we'll ensure no stores will close as a result of the merger.

Speaker 1: Frontline associates will remain employed and existing collective bargaining agreements will continue.

Speaker 1: We have made a compelling case to both Kroger and Albertson stakeholders. Our proposed merger with Albertson creates meaningful and measurable benefits for our customers by lowering prices beginning on day one. Extends our commitment to associates by increasing wages and benefits and deepens trust with our communities by keeping stores open to assure America has access to fresh and affordable food.

Speaker 1: In terms of integration planning, we are progressing well. Our integration teams have made significant progress toward our first goal, which is to ensure continuity for associates and customers at closing.

Speaker 1: It is exciting to see the complimentary strengths of both organizations and how we'll be able to learn from each other to provide customers with an even stronger food retail experience and compete even more effectively against larger non-union operators in the future.

Speaker 1: in closing, Proger delivered another quarter of solid results.

Speaker 1: We are demonstrating our ability to manage through a more challenged environment and remain committed to balancing our investments in our associates and in lower prices for our customers while continuing to generate attractive and sustainable returns for our shareholders. With that, Gary and I look forward to.

Speaker 4: If you would like to ask a question please press the button. The number one on the telephoto e-packs.

Speaker 4: If you would like to retract your question, please press star for the byte too.

Speaker 4: I'm apparent after question please ensure phone is unmuted locally. We ask you please and yourself to one question and one follow up.

Speaker 4: Our first question goes to Dean Rosenblum of Bernstein Dean. Peace go head line is open.

Speaker 5: Hey, good morning guys. Thank you so much for taking my question. Hey, my question is really about a debate regarding the gross profit and operating profit impact of increasing digital sales. I mean, online was digital sales were up 11, this quarter on a total comp express grips of one, which says it's growing share. Can you help us understand? I know you think about it in terms of the full digital ecosystem, including the alternative revenues, but in terms of the actual operating profit.

Speaker 5: contribution from digital relative to this source. Can you help us understand how to think about that or that?

Speaker 1: If you look currently, digital would not be as profitable as stores. We do believe over time that will change. And we think that will change by multiple things, the overall ecosystem.

Speaker 1: If you look at the pickup, we continue to make significant progress on reducing the cost of the server customer on pickup. If you look at our Sheds, we continue to make progress on our Sheds to get them to where

Speaker 1: the profitability of the shed would be the same as a store. So, you know, if you just step back, kind of, we view job one is make sure we don't lose the customer. And what we find is that customer over time will spend more with us when they're engaged with us through pickup delivery and in store. And then obviously, if you look at the incremental profitability that is making meaningful progress,

Speaker 1: And we also, if you want to include media as well, that's making progress. So if you look initially, it is not as profitable, but we have every expectations over time that it will be.

Speaker 2: Yeah, Rodney, maybe just to add Dean, a couple of specific dates applied. It's true. Can you hear me, okay?

Speaker 2: Yeah, please. Yeah, I think we talked in before about we sort of bucket our digital business into into two areas, the sort of the business prior to launching ACSEs, which will be pick up and delivery to our third party providers. And then our customer fulfillment center's power by Ocado.

Speaker 2: We've talked before about the pick up and delivery business, sort of having a pass through profitability rate and incremental sales of around.

Speaker 2: 5% or mid-single digit percent and the store being sort of north of 15% and we talked a couple of years ago about being on a journey to Improving that pass-through rate through some of the things that Rudd you mentioned around improving mix around improving media revenue per transaction And then also lowering the cost to fill

Speaker 2: We've made good progress on all three of those areas and we would certainly see now sort of the digital pass through profitability heading towards that double digit rate sort of on that journey towards getting towards parity in terms of overall profitability. And then the Akado CFCs, we're really still very much in the early stage of that journey where the total investment is sort of starting to peak and we're starting to see tailwinds in that profitability as we start to achieve more scale in those facilities.

Speaker 5: That's great. So thanks so much, Gary. And my follow up question is you mentioned certifying the second request substantial completion on November 15. That would suggest that the FTC now has 30 days to either make a decision or to extend the period. Give any sense right now as to whether we might expect some sort of an FTC decision or that the FTC is more likely to extend the time for that decision.

Speaker 1: It's a great question. And if you look as you in our prepared comments, we expect to close in early 2024 as we have all along. We're continuing to have a cooperative relationship with the FTC and other interesting parties. And it's still too early terms of specific dates.

Speaker 4: Thank you. The next question goes to Simeon Gytman of Morgan Fannley. Simeon, please go ahead, your line is open.

Speaker 6: Hi there. This is Michael Kessler on for Simeon. Thanks, guys. Maybe starting with a question on your inflation or deflation outlook for 2024, what your current expectation is and what would need to happen in the backdrop for us to see either deflation or a return to more modest inflation. And in the event that we see deflation, is there a scenario in which you can hold or still expand margins even in that kind of backdrop?

Speaker 2: Yeah, thanks for the question. As you know, we'll certainly provide a lot more specific details of our outlook for 2024 when we get to our quarter four earnings in March. And we're continuing, as I'm sure many are in the market to look at all the data points we see both internally and externally. And we're probably looking at some of the same data sources that you are from the top likes of USDA and other published sources.

Speaker 2: I think our view right now, we recognize we don't have the perfect crystal ball and we'll continue to watch and evaluate how we see the outlook for next year. But overall, most of the data that we're seeing would tend to point towards more of a typical year next year for food at home with food at home inflation being in the low single digit range. We certainly think there are different scenarios that can play out and of course we'll look to adapt to our model as we would need to if those were the case. But that would be the data that we're watching and we'll certainly provide more color when we get to the March earnings and toll specifically about our 2024.

Speaker 1: Now one of the things that Gary always reminds me of, if you look over the last 50 years, there's only been two years out of the last 50 where it's been negative, where there's been actual deflation in a year. And as you know, we've been able to maintain and create a strong business results in all environments, whether it's inflationary or deflationary, and you just manage accordingly.

Speaker 6: Great. And then a quick follow-up on the fuel business, which had higher than expected profitability. So you talk about what drove that, and is there any interplay, I guess, between that business and the core supermarket business, if there's any balancing of the profitability dynamics and what you're able to earn to kind of manage the P&L, or this is being managed separately, and it just happened to come in a little stronger.

Speaker 1: Yeah, Gary mentioned it, but we're super proud of our fuel team and the partnership with all the divisions.

Speaker 1: We had a significant increase in the amount of fuel reward.

Speaker 1: that were issued. So we really look at leveraging both of the businesses to support each other.

Speaker 1: The other thing that the fuel team has done a nice job on is making sure from an efficiency standpoint on deliveries, on procurement, and all the ingredients as well.

Speaker 1: really proud of what they've done, but it really is, we leverage both sides of the business to support each other.

Speaker 1: and feel really good about where that business turned out.

Speaker 4: Thank yous and it's question go to Michael Montani of Evercore I.S.I. Michael please go ahead, Ryan is open.

Speaker 1: Hey, good morning. Thanks for taking the question. I wanted to ask on two fronts. One was just if you could discuss the overall competitive backdrop. And then secondly, we've heard a fair amount of promotions could uptick into next year. And I guess the question on that would be, what do you see in terms of vendor support versus you all having to fund that yourself?

Speaker 7: And then the follow up was just OGNA dollar growth. Is there still potential for a billion cost out into 24? And what kind of dollar growth should we look for, you know, underlying in the fourth?

Speaker 1: Yeah, I'll answer the competitive backdrop in promotions and if Gary wants to add anything he can, and then I'll let Gary ask about, or answer the OGNA.

Speaker 1: If you look at overall from a competitive standpoint, the market feels very similar to them and what it has done for a long time.

Speaker 1: If you look at the promotional activity, CPGs are increasing their funding.

Speaker 1: on promotional and you know i think there's two things uh... driving that

Speaker 1: One is CPG's not being satisfied with their tonnage, so they're increasing the amount of support.

Speaker 1: The other thing for everyone is the supply chain constraints that would have been in place a year ago and two years ago is really getting back to normal. So people are beginning to feel comfortable and promoting again.

Speaker 1: where the worst thing that could have happened is for us or for a CPG to promote something and then not have adequate supply.

Speaker 1: So it really is behaviors getting back to pre-COVID. And even if you look at shopping during Thanksgiving, it was really more last minute.

Speaker 1: which really reflected if you go back and look at pre-COVID, it's what kind of what it was.

Speaker 2: And people getting comfortable, there'll be products there when they go to buy it. So both great questions, but that's really what we're seeing right now and very on the OGNA. Yeah, thanks Rodney. So in OGNA, I'll just maybe take a step back as well and just mention a couple of points that I talked about in the third quarter. As we looked at the third quarter, going into it, we would have expected OGNA to be a little bit lower as a rate.

Speaker 2: The things that were in the plan would have been the investments in average hourly rates and increasing wages for our associates in our stores and supply chain network and also the impact of the SRI and they were very much in line with what we expected. The real differences in the third quarter were that we did make some decisions during the quarter to make some strategic investments that we believe will help.

Speaker 2: set up 2024 and beyond in terms of continued revenue growth, but also additional cost savings. So if we look at the fourth quarter, we actually believe that the...

Speaker 2: The trends in average hourly rate will continue and, of course, Express Scripts will continue to be a factor. But outside of that, we'd expect OG&A to be relatively flat during the fourth quarter.

Speaker 2: As we look at 2024, as I mentioned in my prepare remarks, we still see both.

Speaker 2: A sort of tarot win from initiatives that we've launched this year that will have a run rate benefit into next year And we still see good line of site to continued cost savings by leveraging technology and improving efficiency Driving continued improvement in cost of serve in digital and a number of areas of the business So we would remain confident that we see good line of site to continue to find that sort of three to five percent Productivity improvements that we target to make sure we can continue to invest in our customers and continue to invest in our associates

Speaker 4: Thank you. The next question goes to John Heinbockel of Guggenheim Partners. John , please go ahead. Your line is open.

Speaker 5: so rather i want to start with uh... can you talk to you if you think about the promotional basket

Speaker 5: proactive versus reactive on your end, right? And kind of, is it, would you say, I don't know, 80% proactive, 20% reactive. I don't know how you think about that. And then on the reactive side, it would seem that those without a loyalty program would be at a disadvantage to you in that you can see what's going on in the market and possibly respond.

Speaker 5: where yours is more stealth. Is that even remotely how you run the business, right? You can respond to others based on what you see out there.

Speaker 1: Yeah, thanks John for the question. By far the majority and when I say majority would be almost all would be proactive uh versus reactive now, you know our all our teams, uh will

Speaker 1: check prices every single week. And there'll be adjustments based on that, but by far the majority of our discounts are proactive. And some of that is, you know, what you can see in an ad, a lot of that is the things that you mentioned in terms of direct to individual households.

Speaker 1: It's one of the things that we believe the reason why our loyal households continue to grow and some of those aspects is once you become a Kroger shopper, you're getting those loyal customer mailings, which will allow you to stretch your budget more, and there's also personalized...

Speaker 1: Offers that you can go to look at coupons and download those and there's significant increase in those. So when you look at Uh when you shop with us, uh, you know, obviously we are a promotional, uh merchant but when you look at the rewards that we offer between fuel rewards and other rewards and our loyal customer mailing

Speaker 1: Our basket price overall is within, you know, less than cents of our biggest competitor. It's just we go to market and offer a little different way.

Speaker 1: It is the reason why loyal shoppers are so important to us because that's the shopper that really gets the full value equation from us.

Speaker 2: Rodney, maybe the one thing I would add to John's question too, the second part would be, I think, John , it's one of the reasons why we do have additional confidence in how we can navigate through the environment is that I think there's a combination of our reward program and more customers engaging digitally.

Speaker 2: post-COVID, it really does create the ability to channel the dollars in a way that gives the customer the most impact and most value while also being able to target it rather than having to sort of pin up on a spread across in different directions. And I think it's a different dynamic now compared to maybe five, ten years ago in the way that we're able to personalize that value and go to market.

Speaker 1: Yeah, you know, you've been you've followed us for a long time and you would have heard us use the word cherry pickers and really what it is trying to make sure we do is to give value to customers that are loyal to us as opposed to somebody that's just shopping a discounted item that we're not making any money on.

Speaker 5: And then maybe as a follow-up, so it sounds like volume is slightly negative, right? I don't know if it's negative 1 or a little more than that, but volume is negative. Is that fair, low single digit?

Speaker 5: when do you think that returns to positive territory and is that solely driven if you look at the budget conscious uh... customers to the no couple of quarters ago you broke that out is that negativity largely driven by that cohort

Speaker 1: Yeah, if you look, volume would be slightly negative. If you look, we are trends have improved for four quarters in a row, from a trend state.

Speaker 1: That would be largely driven by the value shopper or customers on a budget.

Speaker 1: And, you know, the half full and half empty, the half empty is obviously, that's being driven by that customer or some of that's driven because of the impact from inflation part of it's where snap is down about 30%.

Speaker 1: The full part is the customers that are loyal, we're continuing to grow with that customer and that customer's profitability is meaningfully better than the value shopper.

Speaker 4: Thank you. The next question goes to Christina Katai of Deutsche Bank. Christina, please go ahead, your line is open.

Speaker 8: Hi, good morning. So Rodney, I wanted to ask you just a conceptual question on grocery sector and the level of competition, right? Because the first thing to know about it, why wouldn't the sector be more...

Speaker 8: The consumer remains under pressure. Some of the low end is under increased pressure. TPGs are raising their support. Volumes continue to lag. So that is question one just conceptually. Why wouldn't that be the case? And secondly, how is program position in a potentially no inflation, to even deflationary backdrop relative to the base case of a normal food at home year of low single digits?

Speaker 1: If you look at one of the things that makes this industry a lot of fun is we always assume that the business will continue to be more competitive. And if you look at our fundamental business model over the last five years or 10 years or 15 years. Every year we assume that it's going to be more competitive. We work really hard to identify process changes and cost reduction.

Speaker 1: so that we can continue to fund wage increases and invest in lowering prices for the customer. So when we look at 2024, and obviously we'll go into a lot more detail early next year when we give guidance.

Speaker 1: But right now, we don't see that environment any different than what we would have felt for the last five years or ten years or fifteen years.

Speaker 1: And the positive is customers get a better value every year and they get a better experience every year. And when you look at for us, one of the things that we think is important for the customers, the customer doesn't have to compromise.

Speaker 1: So they get amazing fresh product that will last a long time when they get at home with amazing friendly associates.

Speaker 1: Hi, morning everyone. Thanks for the invitation. Guy, I wanted to ask you about the gross margin. I think you said that the Q4 gross margin you expect to be flatish.

Speaker 9: just confirm that and then you know looking out is the base case for 24 that that flattish trend that would continue and then within that context

Speaker 9: maybe just educate us a little bit on when you do your counts. The visibility you have on

Speaker 2: Sure, thanks Ed. So the first part of the question, yes, you're essentially right that we, I said on my prepared comments, that we would expect.

Speaker 2: Q4 to look very similar to Q3. But the way that I sort of would break that down is that we've been equally as pleased with the progress that we've seen in the margin improvement plan initiatives that we saw in the earlier part of the year as well. So continue to see strong benefits from our brands, strong benefits from

Speaker 2: health and wellness of course with express groups as is a tailwind this year to gross margin and supply chain and alternative profits all those areas continue to generate tailwinds and air in our gross margin rate.

Speaker 2: What we did in the third quarter is we did invest more in gross margin to balance those benefits partly in increased pricing and promotion as Rani mentioned earlier and we did also increase advertising cost during the quarter as well. So those would have been the differences quarter over quarter in terms of what we saw and what we would expect to continue to be a similar pattern as we think about the fourth quarter.

Speaker 2: I'd say as we look into beyond 2023

Speaker 2: We certainly still see a lot of potential for the tailwinds that I mentioned around our brands sourcing the areas where we believe that we're on a multi-year path to continue to drive improvement and drive growth. And of course, alternative profit streams continues to grow in a double digit pace are a bigger base as well. So I think we still have a lot of confidence in those levels and what we're doing is making sure we're balancing the business to set ourselves up to continue to stay and grow in the future.

Speaker 2: From a shrink perspective, we would still see shrink as a headwind, as I mentioned in the prepared comments. I would say it's probably...

Speaker 2: somewhat less dramatic for us than maybe some of our peer group, because while we have a general merchandise business that's impacted, it's less impacted than probably some of the big box retailers, but it would still be a headwind to our gross margin rate that would have impacted the third quarter.

Speaker 2: on a year-over-year basis. That headwind actually would have been less than it was in the second quarter, not dramatically, but it would have eased somewhat. So it's still something that we have to work through and continue to ask that. But we are seeing at least the trend in terms of year-over-year growth decelerate, but it would still be a headwind today because of the crime and organised retail crime factors I mentioned earlier.

Speaker 1: The other thing I think is important to remember is a lot of our shrink as in our fresh department.

Speaker 1: And our fresh departments, actually, a lot of that is you can manage it by changing processes and technology using technology and our teams have done a great job actually on improving shrink in the fresh departments because of our store teams partnering with warehouse teams on processes and leveraging technology as well.

Speaker 1: And I think that's a big chunk of the trend, slight trend improvements that Gary mentioned. Great point.

Speaker 4: Thank you. The next question goes to Chuck Tarran-Corsky of North Coast Research. Chuck, please go ahead, Dr. Enyz Open.

Speaker 10: Good morning, everyone. Good morning. Rodney, could you talk a little bit about the economy?

Speaker 10: the economy to affect inflation on your digital business and I'm thinking particularly about customers willing to spend money on any delivery fees or membership fees and also how the economy might be impacting delivery volumes and digital order.

Speaker 1: If you look at overall, thanks, Chuck. If you look at overall, inflation is definitely stabilizing overall and, you know,

Speaker 1: from a customer standpoint, they, they appreciate the stabilization, but they also know the fact that if you look at over the last two years, they've had to endure a lot of inflation. And if you look at some of the fresh departments, some of that, uh, is actually returned back to normal. But if you look at on the process side, you wouldn't see that. So if you look at like eggs, for an example, eggs are significantly deflationary.

Speaker 1: and we'll all be happy when we get to the point where we're cycling that early next year or next year.

Speaker 1: Um, if you look at, uh, customer behavior, it's fascinating. Um, customers, uh, do a lot of work to save where they want to save or feel like they need to save. So, uh,

Speaker 1: you know, impact size. If you look at moving to our brands versus some of the national brands, but if you look at...

Speaker 10: membership fees and delivery fees and things like that That business continues to grow strongly and in fact it was up, you know double digits And that's what true. Oh, they 11%

Speaker 1: I'm sure part of that, and anytime I talk to a politician, I always remind them, if you look at customers on a budget, they're under a lot of strain and they're doing a lot of behavior changes.

Speaker 1: If you look at customers that are not as focused on price because

Speaker 1: Inflation has it affected them as much. That customer's behavior is still very strong and they are still continuing to buy big packs, continuing to buy nicer wines, Murray's cheese, Starbucks, things like that.

Speaker 1: I, you know, we over index with our membership program on customers that are more mainstream and not scale. So I'm sure that's part of the reason why we're not seeing the behavior change.

Speaker 10: Okay, thanks for that. And just real quick, you're exiting the ghost kitchen business.

Speaker 10: Any particular reason for that?

Speaker 1: Yeah, great question. Appreciate it. We test a lot of different things. And we'll go move on to the next version of it. We still think food away from home is a huge growth opportunity for us. And we'll continue to focus on it. The Ghost Kitchen, the few customers that used it loved it, but it just wasn't enough. So it's one of those things where you move on. So thanks, Chuck.

Speaker 4: Thank you. The next question goes to Rupesh Parikh of Oppenheimer. Rupesh, please go ahead, your line is open.

Speaker 11: Good morning, and thanks for taking my question. Just going back to Kroger's digital performance, another quarter of double-digit growth. Did anything surprise you on the digital front? And just any more color in terms of what you guys are seeing, delivery versus pickup.

Speaker 1: Yeah, I'll start and let Gary finish. I wouldn't call it a surprise, but it's great to see that the MPS scores both in terms of

Speaker 1: our year on year from a pickup standpoint and a delivery standpoint is very strong. If you look at our shed delivery business, the repeat rate continues to be strong. So it really is, the customers really appreciate that white glove experience. So I don't wanna make it sound like we're surprised by it, but it's nice to see what we thought play out. Gary, I'll let you...

Speaker 2: Yeah, I think you said it well, Rodney. I think the only thing I would add, Rupesh, is that we said before, we believe that digital is a growth engine for the company and I think everything we continue to see.

Speaker 3: gives us that belief it will continue to be an opportunity to drive the customer engagement and growth. And I mentioned in a comment earlier, but the thing we didn't talk about in the script was we are seeing continued improvement in profitability. So it's helping profitable growth as well as we're lowering the cost to fill and all of that driving more efficiency through technology and continuing to see media revenue growth. So that's the only piece I think that I would reinforce.

Speaker 4: Thank you the next question goes to Kenneth Goldman of JP Morgan. Kenneth, please go ahead. Your line is open.

Speaker 6: hi thank you uh... i'll take a shot here on next year and you're not in a position to really give numbers and i wouldn't ask about that now but

Speaker 6: You did talk about hopefully having low single-digit sort of normal inflation next year. You highlighted a healthy amount of productivity you expected or expecting, but you also

Speaker 6: mention that maybe your unit growth right now is a little bit disappointing.

Speaker 6: and you'll surely be lapping some challenging fuel margins that I imagine you won't assume will work hard. So I'm just trying to get a sense if you have maybe sluggish units, fuel comp to tough.

Speaker 6: To get to your earnings growth algo for next year, do you theoretically have to find other drivers that are better than their algo to offset those headwinds? I just wanna kind of get a sense of, how to think about at least some initial headwind and tailwinds into next year, if that all makes...

Speaker 2: Yes, thanks Ken. As you mentioned, we'll definitely share a lot more color as you might expect when we get to March. I think as we think about the model, I'm just taking a bigger picture step back. We certainly believe that we've over the last few years built a more diverse ecosystem as a company. So of course.

Speaker 2: food at home is an important part of the sort of, it tries the flywheel, but as you know, we've been continuing to grow fuel business, continuing to grow health and wellness this year, even with the impact of express groups, and continuing to grow alternative profit stream. So we look at it more as a journey, and we do believe that as we're building the strength in our ecosystem, it creates a new way to generate value for our shareholder over time, as we've talked about at previous investor meetings.

Speaker 2: I mean, I think some of the points you've raised would certainly be the areas where we'll be focusing on. I don't think it's a different strategy for CROGOR. It's how do we continue to drive that flywheel as we think about taking costs out of our business so that we can invest more in customers and associates?

Speaker 2: continuing to drive traffic so we can continue to grow the alternative profit businesses and we do think those opportunity for

Speaker 2: margin improvement to continue beyond 2023 because of the initiatives we're driving around sourcing supply chain.

Speaker 2: alternative profit streams, etc. So I think from our perspective, certainly if you were in a period where you weren't seeing sales growth for a sustained period of time because our model is built on sales growth, we have to look at our cost base and we'll look at our cost base.

Speaker 2: in certain areas to be more productive, but we still believe that, you know, food at home is...

Speaker 2: is will normalise in the typical pattern that we see if that's one to two percent inflation over time and two to three percent food at home growth. And we think our model is really well set up to be able to drive growth within that framework.

Speaker 1: And thanks again, the only other thing I would add to Gary's comment is if you look at our seamless business We would expect that to continue to make progress as well as I mentioned earlier

Speaker 4: Thank you. The next question goes to Michael Lassa of UBS. Michael, please go ahead, your line is open.

Speaker 12: Good morning, thank you so much for taking my question. As you talk to your process, food, and CPG partners.

Speaker 12: What are they telling you about their desire to further raise prices into next year, given your expectation that there could be typical inflation across the assortment, that would necessitate that center of the sort prices go up. And this is against the backdrop where volume continue to go down and providing more support.

Speaker 12: Why are they not going back to practice to try to drive volume? And it's part of that given that you use your P&L.

Speaker 12: to fund promotions a bit more in the third quarter. Is that a sign that you are running into the limitations of the vendors willing to provide support for you to do these?

Speaker 1: Thanks, Michael. If you look at overall, you know, they say in economics all short statements are wrong, and you have CPGs that are all over the board in terms of their approach. Some CPGs are very willing to give up tonnage.

Speaker 1: And if they are, our brands will stay that will be there for a customer to give them incredible value. And what we find is when a customer tries our brand, our repeat rate is incredibly high because of the quality and the value for the money.

Speaker 1: If you look in the quarter in terms of funding, it was really done by CPGs and us. And as I mentioned earlier, CPGs were more aggressive in funding some of the promotions in the third quarter than the second quarter, and would expect that to continue. We are seeing more CPGs worrying about their tonnage growth.

Speaker 1: And I think that's part of what's driving that willingness to. So, appreciate the question and things, Michael.

Speaker 4: Thank you, our last question goes to Kelly Bamiya of BMO. Kelly, please, your headline is open.

Speaker 13: Good morning, Ronny Dary. Thanks for taking our questions. Wanted to go back to the comment about building the more diverse ecosystem and talk a little bit more about alternative profit growth.

Speaker 13: I think there was a comment that is still growing double digits, which I think would mean around 150 to 200 million in incremental year-over-year profits, but maybe just wanted to give you the opportunity to comment on that if that's the right ballpark. And how many more years can this business continue to grow a double digit rate?

Speaker 1: I don't know that Gary and I will want to give the specifics for 24 on the all-profit so we're going through the process, but we would expect all-profit to be a meaningful contributor of growth next year. And that's really driven by two things. One is our continued growth in their digital business, which is supporting our media business growth. And we think we're just getting started on that. If you look.

Speaker 1: You know, in the media world, your competitors are Google and Amazon and

Speaker 10: Meta and Walmart and then a lot of other players.

Speaker 1: And one of the things that we think transparency is so important and being able to give people good data is we think that Is incredibly helpful relative to the Google's and others and others so we see a long term opportunity to continue to grow the business there

Speaker 1: and the specifics, I don't know that we want to get there either. And if you look at some of the other alternative profit businesses.

Speaker 1: Some of those, we have wide variance of performance within the company. So part of that growth is just driven by taking best in class within our own company and growing that as well. So Kelly, appreciate the question.

Speaker 1: And thanks everyone for all the questions. And as always, I'd like to take a few moments to share some comments with our associates listening in.

Speaker 1: To start, I'd like to say a huge thank you for all the hard work you've done to make the holidays be so memorable for our customers and what you will do for the following, you know, the rest of the holiday season to make it equally as memorable for customers. As you know, food plays an important part in any celebration and it provides an opportunity for people to connect.

Speaker 1: and people that we love, especially with them and sharing special moments.

Speaker 1: If you had a chance to see our holiday film, you saw that idea come to life. If you haven't seen our holiday film, you can go to YouTube to look at the full film. It really does recognize that food connects us all. Whether that's honoring family traditions or creating new family ones, I've just been so inspired to see how our associates and our customers sharing their videos in the unique ways they celebrate the holidays.

Speaker 1: As I said before, thank you for everything you do to create special memories for our customers every single day. And thank you everyone for joining us. We wish everyone a happy holiday season, Merry Christmas and Happy New Year.

Please note this event is being recorded.

Now I'd like to turn the conference over to Robert <unk> Senior Director Investor Relations. Please go ahead.

Good morning, Thank you for joining us for Kroger's third quarter 2023 earnings call I'm joined today by Kroger's, Chairman and Chief Executive Officer, Rodney Mcmullen, and Chief Financial Officer, Gary Miller, Jim before we begin I want to remind you that today's discussion will include forward looking statements. We want to caution you that such statements are predictions.

And actual events or results can differ materially.

A 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.

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'll now turn the call over to Rodney.

Thank you Rob good morning, everyone and thank you for joining us today.

Before we begin I'd like to take a moment to outline our discussion topics. This morning.

I will begin by covering the current retail environment and how the strength of kroger's value creation model is supporting earnings growth and generating strong free cash flow.

Then Gary will cover our financial results and guidance for the remainder of the year.

Finally, I will conclude with an update on our proposed merger with Albertsons before we open it up for questions.

Now turning to our third quarter.

<unk> third quarter results highlight the strength and diversity of our business model and a challenged operating environment.

Strong fuel performance and growth in our alternative profit businesses.

Supported continued adjusted net earnings per diluted share growth.

As consumer spending tightened we are focused on providing customers with exceptional value by maintaining our long term commitment to lower prices personalized promotions and rewards.

We are growing households, and increasing loyalty positioning kroger for sustainable future growth.

Customers are managing many economic factors that are pressuring their spending.

Including higher interest rates reduced savings and fewer government benefits, including snap.

Although inflation is decelerating customers are still adjusting to the impacts from eight consecutive quarters of broad and significant inflation.

During the quarter Kroger grew higher income households, once again as our attractive mix of quality value and convenience continues to drive engagement by.

By buying larger packs more fresh items and more premium <unk> brand products. These households are more profitable.

As we've seen over recent quarters, our customers are actively looking for value and our budget conscious customers are under more significant spending pressure.

We are also looking for ways to support customers with additional value, including in store displays with everyday staples at low price points.

We've seen a great response from all customers to these offers.

But engagement firm our budget conscious household has been especially strong.

Customers purchasing these offer items are making more trips and buying more units not only recognizing the value with these displays but the value across the entire store.

To help more customers manage their budget, we are only deepening our commitment to deliver exceptional value for our customers.

Our personalized promotions are an increasingly critical way for customers to save on items that matter most to them.

We are applying analytics to kroger's unmatched purchase data to strike the right balance between the depth and breadth of promotions.

To ensure customers, we're able to enjoy a memorable Thanksgiving for example.

We created a meal bundle that served a group of 10 for less than $5 per person, which represents a lower price than last year.

We have a long history of delivering value to our customers.

By providing a broad assortment of fresh foods at low prices through our unique omnichannel shopping experience, we achieved our 10th consecutive quarter of total household growth and increased loyal households, even faster.

Positioning kroger for sustainable future growth.

Now I will provide more details about how our go to market strategy is delivering for our customers.

Starting with seamless.

Our digital business delivered a strong third quarter with double digit growth in both our pickup and delivery businesses mulch.

Multiple <unk> are driving our sales momentum.

Including growth in both households, and visits.

Our new two hour pickup service available in more than one third of our stores also contributed to our success in the quarter.

To become the online food retailer of choice, we are focused on delivering best in class fulfillment.

Our teams improved key customer experience metrics and pick up increasing fill rates and reducing wait times during the quarter. This resulted in improved net promoter scores.

Our customer fulfillment centers again led our deliberate growth, where we continue to rapidly increase households.

Our delivery customers enjoyed the convenience of on time refrigerated delivery directly to their doorstep.

With zero compromise on freshness quality and value.

Turning to personalization.

Investments in our personalized capabilities ensure we are meeting elevated customer demand for savings and enables us to deploy promotional dollars more effectively.

Digital offers have increased compared to last year, and our personalization capabilities and resulted in an even more significant increase in redemptions.

Driving loyalty and increasing digitally engaged households, this quarter by 13%.

Digitally engaged households are incredibly valuable to our model as they are more loyal spend nearly three times more with us and accelerate growth in our alternative profit businesses.

Now I'd like to share more about how our diversified business model supported earnings growth this quarter and gives us confidence in our ability to navigate the environment ahead.

Starting with our alternative profit businesses growth in our alternative profit businesses remained strong in the third quarter with balanced growth across the portfolio.

The strength of our seamless ecosystem and elevated digital engagement is having a flywheel effect, creating the traffic and the data needed to drive growth and Kroger precision marketing a higher margin profit stream.

Recently, we celebrated the sixth anniversary of KPN. This.

This quarter APM made an important step in its journey to become the most trusted and transparent media company.

By activating AD buying platforms, we are offering more self service solutions to meet clients, where they are today.

Providing advertisers more direct access to custom Kroger audiences.

This first iteration is already launched and <unk> expects to expand to other buying platforms in the future.

These new innovative features will help accelerate <unk> impressive growth by allowing advertisers to reduce waste and enhanced measurement tools.

Kroger health had a strong quarter that exceeded our internal expectations and help drive sales and profit growth.

Our decision to terminate our agreement with express scripts reflects our commitment to making decisions that we believe are in the best long term interest of our customers and shareholders.

Our teams have done an excellent job retaining patients and utilizing our pharmacist extra capacity to devote more time to patient care, including growing our number of vaccinations.

Gary will provide more on the financial impact of this later.

During the quarter, we continued to see rapid growth in <unk> drugs in our retail pharmacies.

While the long term impacts of these drugs on customer buying habits are unknown kroger's food as medicine philosophy positions us well to support our customers' health and wellness goals.

Our comprehensive approach includes health care services.

<unk> dietitians and proprietary tools like our nutrition rating app opt up.

I believe are in the best long term interest of our customers and shareholders.

Which are all designed to support healthy living and to do so holistically.

Our teams have done an excellent job retaining patients and utilizing our pharmacist extra capacity to devote more time to patient care, including growing our number of vaccinations.

While we pride ourselves on data and insights the patient data and our pharmacy operations is separate from our customer loyalty data and is protected by privacy laws.

<unk> will provide more on the financial impact of this later.

We are committed to using our data in an appropriate manner, while not jeopardizing customers Trust.

During the quarter, we continued to see rapid growth in <unk> drugs in our retail pharmacies.

For now we have not seen any major macro shifts in customer eating habits or spending behaviors.

While the long term impacts of these drugs on customer buying habits are unknown kroger's food as medicine philosophy positions us well to support our customers' health and wellness goals.

Food trends are constantly evolving and we are committed to offering products that meet our customers' needs.

For customers looking to adopt healthier habits with or without the help of these drugs, we are well positioned to provide important healthcare services and healthy food options.

Our comprehensive approach includes health care services professionals.

Professional dieticians and proprietary tools like our nutrition rating app opt up.

At Kroger, our purpose is to feed the human spirit and I'm. So impressed by the many ways our associates bring this to life every day and the ways they support our customers and each other.

Which are all designed to support healthy living and to do so holistically.

While we pride ourselves on data and insights the patient data and our pharmacy operations as separate from our customer loyalty data and is protected by privacy laws.

We know when associates are connected to our purpose they feel connected to Kroger.

We are committed to using our data in an appropriate manner, while not jeopardizing customers Trust.

Our annual Kroger Wellness Festival is just one example of living our purpose.

For now we have not seen any major macro shifts in customer eating habits are spending behaviors.

This festival is one of the nation's largest health and wellness events.

Okay, so more than a 150 experiences and food offerings.

Food trends are constantly evolving and we are committed to offering products that meet our customers' needs.

Sponsors and celebrities joined Kroger and hundreds of thousands of visitors to share our vision for better physical mental and emotional health for families.

For customers looking to adopt healthier habits with or without the help of these drugs. We are well positioned to provide important health care services and healthy food options.

It was wonderful to see the level of support and participation in this important mission.

At Kroger, our purpose is to feed the human spirit and I'm. So impressed by the many ways our associates bring this to life every day and the ways they support our customers and each other.

Also this quarter, we released our <unk>.

<unk> report, which.

Highlighted Kroger is significant progress on our zero hunger zero waste journey to expand access to affordable fresh and healthy food and to reduce waste, especially food waste.

We know and associates are connected to our purpose they feel connected to Kroger.

Our annual Kroger Wellness Festival is just one example of living our purpose.

Across our footprint.

Since we launched zero hunger <unk> zero waste in 2017.

This festival is one of the nation's largest health and wellness events.

<unk> has donated more than 3 billion meals to feed hungry families <unk>.

<unk> more than 150 experiences and food offerings.

Including more than $1 3 billion to fight food and security.

Sponsors and celebrities joined Kroger and hundreds of thousands of visitors to share our vision for better physical mental and emotional health for families.

And nearly 600 million pounds of surplus food to our food Bank partners I.

I am so proud of our teams and their efforts to reach these incredible milestones.

It was wonderful to see the level of support and participation in this important mission.

Our associates are the driving force behind our success by delivering an outstanding customer experience and helping make the holidays, even more special for our customers.

Also this quarter, we released our <unk>.

<unk> report.

Which highlighted Kroger is significant progress on our zero hunger zero waste journey to expand access to affordable fresh and healthy food and to reduce waste, especially food waste.

We facilitate this through our longstanding commitment to invest in associate wages and benefits and training tools to advance their career growth.

Feed your future our continuing education benefit is one of the important ways, we make kroger, a place where associates come for a job and discover a career.

Across our footprint.

Since we launched zero hunger <unk> zero waste in 2017, Kroger has donated more than 3 billion meals to feed hungry families, including more than one 3 billion to fight food and security and nearly 600 million pounds of surplus food to our food Bank partners.

This benefit provides up to $21000 lifetime and has helped almost 6000 associates. This year alone with approximately 90% of these participants being hourly.

I am so proud of our teams and their efforts to reach these incredible milestones.

Our focus on development is contributing to strong improvements in retention, which includes associate continuity and a more consistent customer experience.

Our associates are the driving force behind our success by delivering an outstanding customer experience and helping make the holidays, even more special for our customers.

With that I'll turn it over to Gary to take you through our financial results Gary.

We facilitate this through our long standing commitment to invest in associate wages and benefits and training tools to advance their career growth.

Thank you Rodney and good morning, everyone.

Kroger's third quarter results demonstrate the resilience of our value creation model.

The investments we have made over recent years to strengthen and diversify our business are allowing Craig that's and navigate a challenging environment characterized by tightening consumer spending on food at home Disinflation.

Feed your future our continuing education benefit is one of the important ways, we make kroger, a place where associates come for a job and discover a career.

This benefit provides up to $21000 lifetime and has helped almost 6000 associates. This year alone with approximately 90% of these participants being hourly.

We achieved adjusted earnings per share growth of 8% this quarter, while also providing greater value for our customers.

Higher wages for our associates and.

And investing in strategic initiatives that will support future growth.

Our focus on development is contributing to strong improvements in retention, which includes associate continuity and a more consistent customer experience.

This was made possible by our teams delivering strong performances across our margin expansion initiatives fuel alternative profit businesses and health and wellness.

With that I'll turn it over to Gary to take you through our financial results Gary.

Our year to date results keep us on track to achieve adjusted earnings per share growth in 2023.

Thank you Rodney and good morning, everyone.

Kroger's third quarter results demonstrate the resilience of our value creation model.

Building on record results over the prior three years.

I'll now provide more detail on our third quarter.

The investments we have made over recent years to strengthen and diversify our business are allowing Craig that's and navigate a challenging environment characterized by tightening consumer spending on food at home Disinflation.

Identical sales without fuel decreased <unk>, 6%.

Underlying growth would have been positive 1% adjusting for the effect of our termination agreement with express scripts.

We achieved adjusted earnings per share growth of 8% this quarter, while also providing greater value for our customers.

Similar to the first two quarters of the year. The terminated agreement with express scripts had a positive effect on our FIFO gross margin rate, excluding fuel and the negative effect on the G&A rates, excluding fuel and adjustment items.

Higher wages for our associates.

Investing in strategic initiatives that will support future growth.

This was made possible by our teams delivering strong performances across our margin expansion initiatives.

The overall net effect on operating profit was slightly positive.

Alternative profit businesses and health and wellness.

As a reminder, we will begin to cycle the impact of express scripts at the start of the new calendar year.

Our year to date results keep us on track to achieve adjusted earnings per share growth in 2023 building.

Turning back to identical sales without fuel.

Building on record results over the prior three years.

As Rodney said earlier, our seamless ecosystem is a critical component of our growth strategy building customer loyalty and fueling our alternative profit businesses.

I'll now provide more detail on our third quarter.

Identical sales without fuel decreased <unk>, 6%.

Digital sales were a highlight in the quarter growing 11%.

Underlying growth would have been positive 1% adjusting for the effect of our termination agreement with express scripts.

Our overall sales continued to be affected by industry wide disinflation.

Similar to the first two quarters of the year. The terminated agreement with express scripts had a positive effect on our FIFO gross margin rate, excluding fuel and the negative effect on the G&A rates, excluding fuel and adjustment items.

Inflation ended quarter three in the low single digits, approximately 270 basis points lower than the second quarter.

Towards the end of the quarter, we saw inflation declined at a slower pace than.

The overall net effect on our pricing profit was slightly positive.

We would expect this trend to continue in the fourth quarter with inflation remaining positive at the year end.

As a reminder, we will begin to cycle the impact of express scripts at the start of the new calendar year.

Encouragingly units have shown signs of improvement as inflation is decelerating and.

Turning back to identical sales without fuel.

And we have sequentially improved units for full of straight quarters.

As Rodney said earlier, our seamless ecosystem is a critical component of our growth strategy building customer loyalty and fueling our alternative profit businesses.

However unit growth rates have lagged the rate of inflation decline as have not improved at the pace you would have expected.

As a team we are laser focused on returning to unit growth and expect improvement in volumes to continue for the balance of the year.

Digital sales were a highlight in the quarter growing 11%.

Our overall sales continued to be affected by industry wide disinflation.

Gross margin was 22% of sales and our FIFO gross margin rate, excluding fuel increased three basis points compared to the same quarter last year.

Inflation ended quarter three in the low single digits, approximately 270 basis points lower than the second quarter.

During the quarter, we increased investments in pricing and promotions to deliver greater value for customers.

Towards the end of the quarter, we saw inflation declined at a slower pace we.

We were able to successfully fund these investments by continuing to execute our long term margin improvement plan.

We would expect this trend to continue in the fourth quarter with inflation remaining positive at the year end.

Including <unk> optimization.

Encouragingly units have shown signs of improvement as inflation has decelerated and.

Sourcing efficiencies and supply chain improvements.

And we have sequentially improved units for four straight quarters.

Shrink was a headwind to gross margin during the quarter, primarily due to the continued rise in industry wide theft and organized retail crime.

However unit growth rates have lagged the rate of inflation decline as have not improved at the pace you would have expected.

We are investing in initiatives to mitigate shrink and protect our associates and customers in our stores.

As a team we are laser focused on returning to unit growth and expect improvement in volumes to continue for the balance of the year.

Looking ahead, we would expect the same factors that influenced gross margin in quarter, three we'll drive a similar outcome for gross margin rate in the fourth quarter.

Gross margin was 22% of sales and our FIFO gross margin rate, excluding fuel increased three basis points compared to the same quarter last year.

During quarter, three we recorded a LIFO charge of $29 million compared.

During the quarter, we increased investments in pricing and promotions to deliver greater value for customers.

Compared to a charge of $152 million for the same quarter last year.

We were able to successfully fund these investments by continuing to execute our long term margin improvement plan.

This reduction was due to inflation returning to low single digits compared to double digit growth experienced last year.

Including <unk> optimization.

Sourcing efficiencies and supply chain improvements.

Kroger's or G&A rate increased 32 basis points, excluding fuel and adjustment items.

Shrink was a headwind to gross margin during the quarter, primarily due to the continued rise in industry wide theft and organized retail crime.

The increase in higher G&A range was driven by planned investments in associate wages and benefits and the effect of our terminated agreement with express scripts.

We are investing in initiatives to mitigate shrink and protect our associates and customers in our stores.

During the quarter. We also made the decision to invest in a number of strategic initiatives that are expected to drive growth in 2024 and beyond.

Looking ahead, we would expect the same factors that influenced gross margin in quarter, three we'll drive a similar outcome for gross margin rate in the fourth quarter.

Investments were partially offset by execution of cost saving initiatives and lower incentive plan costs.

During quarter, three we recorded a LIFO charge of $29 million compared.

We are confident in our ability to effectively manage costs and continue to deliver savings by eliminating waste in areas that do not affect the customer experience.

Compared to a charge of $152 million for the same quarter last year.

This reduction was due to inflation returning to low single digits compared to double digit growth experienced last year.

We continue to identify incremental cost saving opportunities across the business and remain on track to deliver our sixth consecutive year of $1 billion in cost savings.

Krogers or G&A rates increased 32 basis points, excluding fuel and adjustment items.

In the fourth quarter, we would expect Aro G&A rates to be relatively flat compared to last year.

The increase in higher G&A range was driven by planned investments in associate wages and benefits and the effect of our terminated agreement with express scripts.

Kroger health as an important component of our value creation model and is delivering profitable growth in 2023.

During the quarter. We also made the decision to invest in a number of strategic initiatives that are expected to drive growth in 2024 and beyond.

During the quarter the team exceeded our internal goal for the number of vaccinations administered on.

Investments were partially offset by execution of cost saving initiatives and lower incentive plan costs.

And the higher profit margins associated with these vaccines helped offset the negative impact on margin rate from growth in <unk> drugs.

We are confident in our ability to effectively manage costs and continue to deliver savings by eliminating waste in areas that do not affect the customer experience.

As Rodney said earlier, we are excited about the momentum in health and wellness.

See significant potential for future profitable growth in this area of our business.

We continue to identify incremental cost saving opportunities across the business and remain on track to deliver our sixth consecutive year of $1 billion in cost savings.

Fuel is also a key part of our strategy and through our rewards program is another way that we deliver value for customers and increase loyalty.

In the fourth quarter, we would expect Aro G&A rates to be relatively flat compared to last year.

Our field team did an outstanding job delivering results that were ahead of expectations in the third quarter.

<unk> health is an important component of our value creation model and is delivering profitable growth in 2023.

Our customers say, 14% more than rewards per fuel purchase compared to last year, which led to gallon sales outpacing the industry.

During the quarter the team exceeded our internal goal for the number of vaccinations administered.

The average retail price of fuel was $3 77, this quarter versus $3 84 last year.

And the higher profit margins associated with these vaccines helped offset the negative impact on margin rate from growth in <unk> drugs.

Our cents per gallon fuel margin was 57 cents this quarter versus 50 last year.

As Rodney said earlier, we are excited about the momentum in health and wellness and see significant potential for future profitable growth in this area of our business.

I'd now like to provide a brief update on labor relations.

Kroger has made substantial investments over the last five years and our associates raising the average hourly wage by more than 33%.

Fuel is also a key part of our strategy and through our rewards program is another way that we deliver value for customers and increase loyalty.

We remain committed to supporting our associates with sustainable investments in wages and comprehensive benefits that well at the same time allow us to continue to keep products affordable for the communities that we serve.

Our field team did an outstanding job delivering results that were ahead of expectations in the third quarter.

Our customers say, 14% more than rewards fuel purchase compared to last year, which led to gallon sales outpacing the industry.

During the third quarter, we ratified new labor agreements with the U S CW fall fries food and drug.

The average retail price of fuel was $3 77, this quarter versus $3 94 last year.

Dallas meet unfolds stalls in randy's in total covering more than 19000 associates.

We have now ratified all agreements that were scheduled for negotiation in 2023.

Our cents per gallon fuel margin was 57 this quarter versus 50 last year.

Yeah.

Turning to liquidity and free cash flow.

I'd now like to provide a brief update on labor relations.

Kroger continues to generate strong free cash flow through consistent operating results.

Kroger has made substantial investments over the last five years and our associates raising the average hourly wage by more than 33%.

The disciplined approach to deploying capital prioritizing the highest return opportunities that support our growth strategy and Tsi model.

We remain committed to supporting our associates with sustainable investments in wages and comprehensive benefits.

At the end of the third quarter Kroger's net total debt to adjusted EBITDA ratio was one four.

Well at the same time allow us to continue to keep products affordable for the communities that we serve.

Which remains well below our net total debt to adjusted EBITDA ratio target range of $2 three to $2 five.

During the third quarter, we ratified new labor agreements with the U S CW fall fries food and drug.

This positions us well to execute our financing strategy to close the proposed merger with Albertsons early in 2024, and then quickly returned to within our target leverage range post merger.

Dallas meet and full stalls in randy's in total covering more than 19000 associates.

We have now ratified all agreements that were scheduled for negotiation in 2023.

As I wrap up my comments on the quarter, let me provide additional color on our outlook for the remainder of the year.

Turning to liquidity and free cash flow.

Today, we updated our full year guidance to reflect the impact of near term economic pressures on food at home Disinflation.

Kroger continues to generate strong free cash flow through consistent operating results and the disciplined approach to deploying capital prioritizing the highest return opportunities that support our growth strategy and Tsi model.

We now expect full year identical sales without fuel to be in the range of 6% to 1% and adjusted FIFO operating profit to be within a range of $4 $9 billion to $5 billion.

At the end of the third quarter Kroger's net total debt to adjusted EBITDA ratio was one four.

Which remains well below our net total debt to adjusted EBITDA ratio target range of $2 three to $2 five.

As a reminder, our sales guidance reflects the effect of express scripts, which is reducing our reported identical sales without fuel by approximately 150 basis points in 2023.

This positions us well to execute our financing strategy to close the proposed merger with Albertsons early in 2024, and then quickly returned to within our target leverage range post merger.

Our latest sales trends, which puts us on track to achieve the midpoint of our updated annual sales guidance range.

Importantly, we wouldn't expect to exit quarter fall with a stronger sales trend in our overall results for the quarter as we start to cycle the effect of express scripts in January.

As I wrap up my comments on the quarter, let me provide additional color on our outlook for the remainder of the year.

Today, we updated our full year guidance to reflect the impact of near term economic pressures and food at home Disinflation.

We believe we are well positioned to navigate near term headwinds and the strength. We are seeing in our alternative profit businesses health and wellness and fuel combined with a lower expected LIFO charge gives us the confidence to raise the lower end of our full year adjusted net earnings per diluted share guidance range.

We now expect full year identical sales without fuel to be in the range of 6% to 1% and adjusted FIFO operating profit to be within a range of $4 $9 billion to $5 billion.

As a reminder, our sales guidance reflects the effect of express scripts, which is reducing our reported identical sales without fuel by approximately 150 basis points in 2023.

We now expect adjusted EPS to be between $4 50 to.

The $4 60.

Looking forward Kroger remains committed to delivering attractive and sustainable returns for our shareholders.

Our latest sales trends, which puts us on track to achieve the midpoint of our updated annual sales guidance range.

I'll now turn the call back to Rodney.

Thanks, Gary before we open the floor to your questions. Let me provide an update on our pending merger with Albertsons companies.

Importantly, we wouldn't expect to exit quarter fall with a stronger sales trend in our overall results for the quarter as we start to cycle the effect of express scripts in January.

As of November 15, 2023, Kroger certified substantial compliance with the second request issued by the FTC.

We believe we are well positioned to navigate near term headwinds and the strength. We are seeing in our alternative profit businesses health and wellness and fuel combined with a lower expected LIFO charge gives us the confidence to raise the lower end of our full year adjusted net earnings per diluted share guidance range.

We continue to work cooperatively with the FTC and its review of the transaction.

This step keeps us on track to close our proposed merger with Albertsons and early 2024.

We are confident that we have fulfilled all of the commitments we set out in the original merger agreement, including the comprehensive divestiture plan announced with CNS wholesale grocers.

We now expect adjusted EPS to be between $4 50 to.

The $4 60.

Looking forward Kroger remains committed to delivering attractive and sustainable returns for our shareholders.

CNS is a well qualified buyer who meets all the criteria necessary to complete our transaction and will ensure no stores will close as a result of the merger.

I'll now turn the call back to Rodney.

Thanks, Gary before we open the floor to your questions. Let me provide an update on our pending merger with Albertsons companies.

Frontline associates will remain employed an existing collective bargaining agreements will continue.

As of November 15, 2023, Kroger certified substantial compliance with the second request issued by the FTC.

We have made a compelling case to both Kroger and albertsons stakeholders our.

Our proposed merger with Albertsons creates meaningful and measurable benefits for our customers by lowering prices beginning on day one.

We continue to work cooperatively with the FTC and its review of the transaction.

This step keeps us on track to close our proposed merger with Albertsons and early 2024.

Extends our commitment to associates by increasing wages and benefits and deepens trust with our communities by keeping stores open to assure America has access to fresh and affordable food.

We are confident that we have fulfilled all of the commitments we set out in the original merger agreement, including the comprehensive divestiture plan announced with CNS wholesale grocers.

In terms of integration planning, we are progressing well and our integration teams have made significant progress towards our first goal.

CNS is a well qualified buyer who meets all the criteria necessary to complete our transaction and will ensure no stores will close as a result of the merger.

<unk> is to ensure continuity for associates and customers at closing.

Frontline associates will remain employed an existing collective bargaining agreements will continue.

It is exciting to see the complementary strengths of both organizations and how we'll be able to learn from each other to provide customers with an even stronger food retail experience and compete even more effectively against larger nonunion operators in the future.

We have made a compelling case to both Kroger and albertsons stakeholders our.

Our proposed merger with Albertsons creates meaningful and measurable benefits for our customers by lowering prices beginning on day one.

In closing Kroger delivered another quarter of solid results.

Extends our commitment to associates by increasing wages and benefits and deepens trust with our communities by keeping stores open to assure America has access to fresh and affordable food.

We are demonstrating our ability to manage through a more challenged environment and remain committed to balancing our investments in our associates and in lower prices for our customers, while continuing to generate attractive and sustainable returns for our shareholders.

In terms of integration planning, we are progressing well and our integration teams have made significant progress towards our first goal.

With that Gary and I look forward to taking your questions.

Our first question is <unk> Reagan Bloom.

It's to ensure continuity for associates and customers at closing.

Please go ahead your line is open.

It is exciting to see the complementary strengths of both organizations and how we'll be able to learn from each other to provide customers with an even stronger food retail experience and compete even more effectively against larger nonunion operators in the future.

Hey, good morning, guys. Thank you so much for taking my question.

My question is really about a debate regarding the gross profit and operating profit impact of increasing digital sales.

Online with digital sales were up 11.

In closing Kroger delivered another quarter of solid results.

This quarter on a total comp.

Express scripts, a one which says it's growing share can you help us understand I know you think about it in terms of the whole digital ecosystem, including the alternative revenues, but in terms of the actual operating profit contribution from digital relative to the stores can you help us understand how to think about that as that mix continues to increase.

We are demonstrating our ability to manage through a more challenged environment and remain committed to balancing our investments in our associates and in lower prices for our customers, while continuing to generate attractive and sustainable returns for our shareholders.

With that Gary and I look forward to taking your questions.

If you look currently digital would not be as profitable as stores.

Thank you.

We do believe over time.

I'll ask a question. Please press Star then one on <unk>.

That will change and we think that will change by multiple things the overall ecosystem.

Pat.

If you would like to attract your question. Please press star followed by team.

If you look at the pickup we continue to make significant progress on reducing the cost to serve a customer a pickup if you look at our sheds, we continue to make progress.

On the phone to ask your question Davis Your line is on mute lately.

We ask you please limit yourself to one question and one follow up.

Our first question.

Reagan bluhm.

On our sheds to get them to wear.

Please go ahead your line is open.

The profitability of the shed would be the same as a store so.

Hey, good morning, guys. Thank you so much for taking my question.

If you just step back kind of we view job one is to make sure we don't lose the customer and what we find is that customer over time, we will spend more with us when they are engaged with us through pick up delivery and in store and then obviously if you look at the incremental profitability.

My question is really about a debate regarding the gross profit and operating profit impact of increasing digital sales.

Online with digital sales were up 11 this quarter on a total comp.

Express scripts, a one which says it's growing share can you help us understand I know you think about it in terms of the whole digital ecosystem, including the alternative revenues, but in terms of the actual operating profit contribution from digital relative to the stores can you help us understand how to think about that as that mix continues to increase.

<unk>.

<unk> is making meaningful progress and we also when you include media as well, that's making progress. So if you look initially.

It is not as profitable, but we have every expectations over time that it will be.

If you look currently digital would not be as profitable as stores.

Yes, Rodney and Mike maybe just to add Deane a couple of specific data products.

We do believe over time.

That will change and we think that will change by multiple things the overall ecosystem.

Can you hear me okay.

Yes, please yes.

I think we talked to you before about we set a bucket our digital business into into two areas that the sort of the the business prior to launching <unk>, which would be pickup and delivery through a third party providers and then our customer fulfillment center powered by Ocado, we've talked before about the pickup and delivery business, so to having a pass through profitability right.

If you look at the pick up we continue to make significant progress on reducing the cost to serve a customer pick up if you look at our sheds, we continue to make progress.

On our sheds to get them to wear.

The profitability of the shed would be the same as a store so.

If you just step back kind of we view job one is make sure we don't lose the customer and what we find is that customer over time, we will spend more with us when they are engaged with us through pick up delivery and in store and then obviously if you look at the incremental profitability.

On incremental sales of around.

5% or mid single digit percent and stall being sort of north of 15% and we talked a couple of years ago about being on a journey to improving that past III rate through some of the things that Rami mentioned around improving mix around improving media revenue per transaction and then also lowering the cost to fill a digit lauder.

<unk>.

<unk> is making meaningful progress and we also have when you include media as well that's making progress. So if you look initially it is not as profitable, but we have every expectations over time that it will be.

We've made good progress on all three of those areas and we would certainly see now sort of the digital pass III profitability heading towards that double digit rates.

On that journey towards getting towards parity.

In terms of overall profitability and then the <unk>.

<unk>, we're really still very much in the early stages of that journey, where the total investments is sort of starting to peak and we're starting to see tailwind and that profitability as we start to achieve more scale in those facilities.

Yes, Rodney and maybe just to add Deane a couple of specific data products.

Can you hear me okay.

Yes, please yes.

I think we talked to you before about we sort of bucket that digital business into into two areas that the sort of the business prior to launching <unk>, which will be pickup and delivery through a third party providers and then our customer fulfillment center powered by Ocado, we've talked before about the pickup and delivery business sort of having a pass through profitability right.

That's great. Thanks, so much Gary My follow up question is you mentioned certifying the second request substantial completion on November 15 that would suggest that the FTC now has 30 days to either make a decision or to extend the period.

Any sense right now as to whether we might expect some sort of an FTC decision or that the FTC is more likely to extend the.

On incremental sales of around.

5% or mid single digit percent and stall being sort of north of 15% and we talked a couple of years ago about being on a journey to improving that passed through right through some of the things that Randy mentioned around improving mix around improving media revenue per transaction and then also lowering the cost to fill a digit lauder.

Time for that decision.

I mean, it's a great question and if you look.

In our prepared comments.

We expect to close in early 2024, as we have all along.

We continue to have a cooperative relationship with the FTC and other interested parties.

We've made good progress on all three of those areas and we would certainly see now sort of the digital pass III profitability heading towards that double digit rates.

It's still too early in terms of specific dates.

On that journey towards getting towards parity.

In terms of overall profitability and then the <unk>.

Thanks Dean.

Kadow Cfcs, we're really still very much in the early stages of that journey, where the total investments is sort of starting to peak and we're starting to see a tailwind and that profitability as we start to achieve more scale in those facilities.

Thank you. The next question Simeon Gutman of Morgan Stanley Simeon. Please go ahead. Your line is open.

Hi, there this is Michael Kaufman on for Simeon Thanks, guys.

Starting with the question on your inflation or deflation outlook for 2024, what your current expectation is.

That's great. Thanks, so much Gary and my follow up question is you mentioned certifying the second request substantial completion on November 15 that would suggest that the FTC now has 30 days to either make a decision or to extend the period.

And what would need to happen in.

In the backdrop for us to see either deflation or a return to more modest inflation and in the event that we see deflation.

Any sense right now as to whether we might expect some sort of an FTC decision or that the FTC is more likely to extend the.

Is there a scenario in which you can hold or still expand margins even in that kind of backdrop.

Yeah. Thanks for the question.

The time for that decision.

It's a great question and if you look.

As you know will we will certainly provide a lot more specific details on our outlook for 2020 fall when we get to our quarter four earnings in March and.

In our prepared comments.

We expect to close in early 2024, as we have all along.

We're continuing as I'm sure. Many are in the market to look at all the data points, we see both internally and externally and we're probably looking at some of the same data sources that you are from the likes of USDA and other published sources I think after you right now we recognize we don't have the perfect Crystal ball and we'll continue to watch and.

We continue to have a cooperative relationship with the FTC and other interested parties and it's still too early in terms of specific dates.

Thanks Dean.

Thank you. The next question does he Simeon Gutman of Morgan Stanley Simeon. Please go ahead. Your line is open.

<unk>, how we see the outlook for next year, but overall most of the data that we're seeing would tend to point towards more of a typical year next year for food at home with food at home inflation being in the low single digit range. We certainly think there are different scenarios that can play out in the call as well, we will look to them at that time model as we would need to if that goes with it.

Hi, there this is Amit Singh on for Simeon Thanks, guys maybe.

Maybe starting with the question on your inflation or deflation outlook for 2024, what your current expectation is and what would need to happen.

Case, but that would be the data that we're watching and we'll certainly provide more color when we get to the March earnings and talk specifically about our 2020 <unk> and one of the things that Gary always reminds me of if you look over the last 50 years, there's only been two years out of the last 50, where it has been negative.

In the backdrop for us to see either deflation or a return to more modest inflation and in the event that we see deflation.

Is there a scenario in which you can hold or still expand margins even in that kind of backdrop.

Yeah. Thanks for the question.

Where theres been actual deflation in a year.

As you know will we will certainly provide a lot more specific details on our outlook for 2024, when we get to our quarter four earnings in March.

And as you know.

We've been able to maintain.

Create a strong business results in all environments, whether it's inflationary or deflationary and you just manage accordingly.

We're continuing as I'm sure. Many are in the market to look at all the data points, we see both internally and externally and we're probably looking at some of the same data sources that you all from the likes of USDA and other published sources I think after you right now.

Okay, Great and then a quick follow up on the fuel business, which had higher than expected profitability can you talk about what drove that and is there any interplay I guess between that business.

Recognize we don't have the perfect Crystal ball and we'll continue to watch and evaluate how we see the outlook for next year, but overall most of the data that we're seeing would tend to point towards more of a typical year next year for food at home with food at home inflation being in the low single digit range. We certainly think there are different scenarios.

And the core supermarket business, if there is any balancing of the.

The profitability dynamics, and what you're able to earn two to kind of manage the P&L already this is being managed separately and it just happened to come in a little stronger in Q3. Thank you.

Can play out and of course, we'll we'll look to adapt our model is we would need to win the case, but that would be the data that we're watching and we'll certainly provide more color when we get to the March earnings and talk specifically about our 2020 for abuse.

Yes, Gary mentioned, it but we're super proud of our field team and the partnership with all of the divisions.

Had a significant increase in the amount of fuel rewards that were issued so we really look at leveraging both of the businesses to support each other.

One of the things that Gary always reminds me of.

If you look over the last 50 years, there's only been two years out of the last 50, where it has been negative.

Other thing that the field team has done a nice job on is making sure from an efficiency standpoint on deliveries on procurement and all the ingredients as well so.

Where theres been actual deflation in a year.

And as you know.

We've been able to.

Maintaining.

Create a strong business results in all environments, whether it's inflationary or deflationary and you just manage accordingly.

Really proud of what they've done but it really is we leverage both sides of the business to support each other and feel really good about where that business turned out.

Okay, Great and then a quick follow up on the fuel business, which had higher than expected profitability can you talk about what drove that and is there any interplay I guess between that business and the core supermarket business, if there's any balance.

Thank you.

Thank you. The next question. Thank you, Mike Hoffmann tiny of Evercore ISI. Michael. Please go ahead. Your line is open.

Hey, good morning, Thanks for taking the question I wanted to ask on two fronts. One was just if you could discuss the overall competitive backdrop and then secondly, we've heard a fair amount of promotions could uptick into next year and I guess the question on that would be what do you see in terms of vendor support versus.

Saying of the.

The profitability dynamics, and what you're able to earn two to kind of manage the P&L already this is being managed separately and it just happened to come in a little stronger in Q3. Thank you.

Yes, Gary mentioned, it but we're super proud of our field team and the partnership with all of the divisions.

As you all having to fund that yourselves and then the follow up was just Oh G&A dollar growth is there still potential for 1 billion cost out into 'twenty, four and what kind of dollar growth should we look for underlying in the fourth quarter.

Had a significant increase in the amount of fuel rewards that were issued so we really look at leveraging both of the businesses to support each other.

Other thing that the fuel team has done a nice job on is making sure from an efficiency standpoint on deliveries on procurement and all the ingredients as well so.

Yes al.

To answer the competitive backdrop in promotions and if Gary wants to add anything he can and then ill let Gary.

Ask about are answering the G&A.

Really proud of what they've done but it really is we leverage both sides of the business to support each other and feel really good about where that business turned out.

Overall from a competitive standpoint, the market feels very similar than what it has been for a long time, if you look at the promotional activity.

Yeah.

Activity Cpg's are increasing their funding on promotional and I think there's two things driving that.

Thank you.

Thank you. The next question. Thank you, Mike Hoffmann tiny of Evercore ISI. Michael. Please go ahead. Your line is open.

One is CPG is not being satisfied with their tonnage so theyre, increasing the amount of support the other thing.

Hey, good morning, Thanks for taking the question wanted to ask on two fronts. One was just if you could discuss the overall competitive backdrop and then secondly, we've heard a fair amount of promotions could uptick into next year and I guess the question on that would be what do you see in terms of vendor support versus.

Everyone is the supply chain constraints that would have been in.

In place a year ago and two years ago.

Really getting back to normal so people are beginning to feel comfortable in promoting again, where the worst thing that could have happened is for us or for our CPG to promote something and then not have adequate supply. So it really is behaviors getting back to pre COVID-19 and even if you look at shopping.

As you all having to fund that yourselves and then the follow up was just Oh G&A dollar growth is there still potential for 1 billion cost out into 'twenty, four and what kind of dollar growth should we look for underlying in the fourth quarter.

During Thanksgiving it was really more last minute.

Yes.

To answer the competitive backdrop in promotions and if Gary wants to add anything he can and then ill let Gary.

Which really reflected if you go back and look at pre Covid it what kind of what it was.

Ask about or answer the G&A.

And people are getting comfortable that will be products there when they go to buy it so.

Overall from a competitive standpoint, the market feels very similar to that.

Both great questions, but that's really what we're seeing right now and Gary.

What it has been for a long time, if you look at the promotional.

G&A, yes, thanks Rodney.

And our G&A I'll, just maybe take a step back as Robin just mentioned a couple of points that I talked about in the third quarter as we looked at the third quarter.

Activity Cpg's are increasing their funding on promotional and I think there's two things driving that.

Going into it we would've expected G&A to be a little bit lower as a rate.

One is CPG is not being satisfied with their tonnage. So they are increasing the amount of support the other thing.

The things that were in the plan would have been the investments in average hourly rates increasing wages for our associates in our stores and supply chain network and also had the impact of ESI and they were very much in line with what we expected the real differences in the third quarter were that we did make some decisions during the quarter to make some strategic investments that we built.

For every one is the supply chain constraints that would have been in.

In place a year ago and two years ago.

Really getting back to normal so people are beginning to feel comfortable in promoting again, where the worst thing that could have happened is for us or for our CPG to promote something and then not have adequate supply. So it really is behavior was getting back to pre COVID-19 and even if you look at shopping.

<unk> will help set up 2024 and beyond in terms of continued revenue growth, but also additional cost savings. So as we look at the fourth quarter, we actually believe that the.

The trends in average hourly rate will continue and of course that express scripts will continue to be a factor, but outside of that we'd expect our G&A to be relatively flat during the fourth quarter. As we look at 2024 as I mentioned in my prepared remarks, we still see both a set.

During Thanksgiving it was really more last minute.

Which really reflected if you go back and look at pre Covid it what kind of what it was.

And people are getting comfortable that will be products there when they go to buy it so.

So the tailwind from initiatives that we've launched this year that will have a run rate benefit into next year and we still see good line of sight to continued cost savings by leveraging technology and improving efficiency driving continued improvement in cost to serve and digital on a number of hours of the business. So we would remain confident that we see good line of sight to continue to find that sort of 3%.

Both great questions, but that's really what we're seeing right now and Gary G&A, yes. Thanks Rodney.

G&A I'll, just maybe take a step back as well and just mentioned a couple of points that I talked about in the third quarter as we looked at the third quarter.

Coming into it we would've expected G&A to be a little bit lower as a rate.

<unk>, 5% productivity improvements that we target to make sure. We can continue to invest in our customers and continue to invest in our associates.

The things that were in the plan would have been the investments in average hourly rates increasing wages for our associates in our stores and supply chain network and also had the impact of ESI and they were very much in line with what we expected the real differences in the third quarter, what we did.

Thanks, Thanks, Michael.

Thank you. The next question Betsy John <unk> of Guggenheim Partners. Please go ahead. Your line is open.

Make some decisions during the quarter to make some strategic investments that we believe will help set up 2024 and beyond in terms of continued revenue growth, but also additional cost savings. So as we look at the fourth quarter, we actually believe that the trends in average hourly rate will continue and of course express scripts will continue to be a factor, but outside of that we'd expect.

So Rodney I want to start with can you talk to if you think about the promotional basket.

Proactive versus reactive on your end right.

Kind of.

Steve would you say I don't know, 80% proactive 20% of reactive I don't know how you think about that and then on the reactive side. It would seem that those without a loyalty program would be at a disadvantage to you and that you can see what's going on in the market and possibly respond.

Our G&A to be relatively flat during the fourth quarter as we look at 2024 as I mentioned in my prepared remarks, we still see both sort.

So the tailwind from initiatives that we've launched this year that will have a run rate benefit into next year and we still see good line of sight to continued cost savings by leveraging technology and improving efficiency driving continued improvement in cost to serve and digital on a number of hours of the business. So we would remain confident that we see good line of sight to continue to find that sort of 3%.

Where yours is more stealth.

Is that is that even remotely how you run the business right, where you can respond to others based on what you see out there.

Thanks, John for the question by far the majority and when I say majority of it would be almost all would be proactive versus reactive.

<unk>, 5% productivity improvements that we target to make sure. We can continue to invest in our customers and continue to invest in our associates.

All our teams.

Check prices every single week and there'll be adjustments based on that but by far the majority of our discounts are proactive.

Thanks, Thanks, Michael.

Thank you. The next question Betsy John <unk> of Guggenheim Partners. Please go ahead. Your line is open.

And some of that is what you can see in and add a lot of that is the things that you mentioned in terms of direct.

Okay.

So Rodney I want to start with can you talk to if you think about the promotional basket.

The individual household offers.

It's one of the things that.

Proactive versus reactive on your end right.

We believe the reason why our loyal households continue to grow.

Kind of.

Some of those aspects is once you become a kroger shopper.

Would you say I don't know, 80% proactive 20% of reactive I don't know how you think about that and then on the reactive side. It would seem that those without a loyalty program would be at a disadvantage to you and that you can see what's going on in the market and possibly respond.

Getting those loyal customer mailings, which will allow you to stretch her budget more and there is also personalize offers that you can go to look at coupons and download those and there's significant increase in those so when you look at it.

Where yours is more stealth.

When you shop with us.

Is that is that even remotely how you run the business right. When you can respond to others based on what you see out there.

Obviously, we are a promotional merchant, but when you look at the rewards that we offer between fuel rewards and other rewards and our loyal customer mailings, our basket price overall is.

Thanks, John for the question by far the majority and when I say majority of it would be almost all would be proactive versus reactive.

<unk>.

Yes.

Our biggest competitor.

All our teams.

It's just when we go to market and offer a little different way, but.

Check prices every single week and there'll be adjustments based on that but by far the majority of our discounts are proactive.

It is the reason why a loyal shoppers are so important to us because that's the shopper that really gets the full value equation from us.

And some of that is what you can see in and add a lot of that is the things that you mentioned in terms of direct.

Roughly maybe the one thing I would add to John's question to the second part would be I think Johnny is one of the reasons why we.

Individual household offers.

We do have additional confidence in how we can navigate through the environment is that I think is a combination of a reward program and more customers engaging digitally post COVID-19. It really does create the ability to channel $1 in a way that gives the customer the most impacted and most value while also being able to target date, rather than having to set a peanut butter spread it across.

It's one of the things that.

We believe the reason why our loyal households continue to grow.

Some of those aspects is once you become a kroger shopper.

Getting those loyal customer mailings, which will allow you to stretch her budget more and there is also personalize offers that you can go to look at coupons and download those and there is significant increase in those so when you look at it.

And in different directions, and I think it's a different dynamic now compared to maybe 510 years ago in the way that we're able to personalize that value and go to market.

When you shop with us.

You better you've followed us for a long time and you would have heard us use the word cherry pickers and really what it is trying to make sure. We do is to give value to customers that are loyal to us as opposed to somebody thats just shopping at discounted item that we're not making any money on.

Obviously, we are a promotional merchant, but when you look at the rewards that we offer between fuel rewards and other rewards and our loyal customer mailings, our basket price overall is.

<unk>.

Less than <unk> of our biggest competitor.

And then maybe as a follow up.

As we go to market and offer a little different way, but.

So it sounds like volume is slightly negative right I don't know, if it's negative one or or little more than that but volume is negative is that fair.

It is the reason why a loyal shoppers are so important to us because that's the shopper that really gets the full value equation from us.

Robin maybe the one thing I would add to John's question to the second part would be I think Johnny is one of the reasons why we.

Low single digit.

When do you think that returns to positive territory and is that solely driven if you looked at the budget conscious customers because I know a couple of quarters ago, you broke that out.

We do have additional confidence in how we can navigate through the environment is that I think is a combination of high reward program and more customers engaging digitally post COVID-19. It really does create the ability to channel the dollars in a way that gives the customer the most impact and most value while also being able to target date, rather than having to send a peanut butter spread it across.

Does that negativity largely driven by that cohort.

Yes, if you look volume would be slightly negative if you look our trends have improved for four quarters in a row.

From a trend standpoint.

That would be largely driven by the value shopper our customers on a budget.

In different directions, and I think it's a different dynamic now compared to maybe 510 years ago and the way that we're able to personalize that value and go to market.

And the <unk>.

Full and half empty the half empty as obviously.

You better you've followed us for a long time and you would have heard us use the word cherry pickers and really what it is trying to make sure. We do is to give value to customers that are loyal to us as opposed to somebody thats just shopping a discounted item that we're not making any money on.

That's being driven by that customer some of thats driven because of the impact from inflation part of it.

Or snap is down about 30%.

Full part is the customers that are loyal we're continuing to grow with that customer and that customer's profitability is meaningfully better than the value shopper.

And then maybe as a follow up.

Thanks, John.

So it sounds like volume is slightly negative right I don't know, if it's negative one or or little more than that but volume is negative is that fair.

Thank you. The next question guys, Hey, Kristina <unk> of Deutsche Bank Christina. Please go ahead. Your line is open.

Low single digit.

When do you think that returns to positive territory.

Hi, good morning.

Rodney I wanted to ask you just a conceptual question.

Is that solely driven if you looked at the budget conscious customers because I know a couple of quarters ago, you broke that out.

Grocery sector and the level of competition because.

Does that negativity largely driven by that cohort.

We're thinking about it.

This sector will be more competitive as we head into 2024 and consumer remains under pressure. Some of the low end is under increased pressure tpg's are raising their support volumes continued to lag. But then question. One just conceptually why wouldn't that be the case and secondly, how is kroger position.

Yes, if you look volume would be slightly negative if you look our trends have improved for four quarters in a row.

From a trend standpoint.

That would be largely driven by the value shopper our customers on a budget.

And the <unk>.

Full and half empty the half empty as obviously.

<unk> potentially no inflation, even deflationary backdrop relative to the base case of a normal food at home yet of low single digit inflation.

That's being driven by that customer some of thats driven because of the impact from inflation part of it.

Or snap is down about 30%.

If you look at it.

One of the things that makes sense center industries, a lot of fun is we always assume that the business will continue to be more competitive and if you look at our fundamental business model over the last five years or 10 years or 15 years every year, we assume that it's going to be more competitive.

Full part is the customers that are loyal we're continuing to grow with that customer and that customer's profitability is meaningfully better than the value shopper.

Thanks, John.

Thank you. The next question guys, Hey, Kristina <unk> of Deutsche Bank Christina. Please go ahead. Your line is open.

We worked really hard to identify process changes and cost reductions. So that we can continue to fund wage increases and invest in lowering prices for the customer so when we look at.

Hi, good morning.

Rodney I wanted to ask you just a conceptual question.

2024, and obviously, we'll go into a lot more detail early next year, when we give guidance.

Grocery sector and the level of competition because.

We're thinking about it.

But right now we don't see that environment any different than what we would've felt them felt for the last five years or 10 years or 15 years.

This sector will be more competitive as we head into 2024 and consumer remains under pressure. Some of the low end is under increased pressure tpg's are raising their support volumes continue to lag. So that is question. One just conceptually why wouldn't that be the case and secondly, how is kroger position.

And.

The positive as customers get a better value every year and they get a better experience every year.

And.

When you look at for US one of the things that we think is important for the customers the customer doesn't have to compromise. So they get amazing fresh product that will last a long time when they get at home with amazing friendly associates.

<unk> potentially no inflation, even deflationary backdrop relative to the base case of a normal food at home yet of low single digit inflation.

If you look at it.

One of the things that makes this center industries a lot of fun is we always assume that the business will continue to be more competitive and if you look at our fundamental business model over the last five years or 10 years or 15 years every year, we assume that it's going to be more competitive.

With a smile and support that.

Everything in their basket, plus a little bit.

An extra piece of cheese or something.

Engage with Murray's so.

And not have to compromise from a pricing standpoint, so when you look.

We worked really hard to identify process changes and cost reductions. So that we can continue to fund wage increases and invest in lowering prices for the customer so when we look at.

Overall, we feel very good in terms of how we're positioned.

The customers.

That really appreciate what we offer.

Maybe around the one thing I would just add to Cristina specific to 2024.

2024, and obviously, we'll go into a lot more detail early next year, when we give guidance.

A couple of things that we.

Things are helpful. As we look into next year. One is of course that we are cycling the impact of express scripts. When we get to January we will start to see that flow through in the early in the early periods of the year and then secondly, one of the things that we've seen as we look at 2023. Many states as you know reduce the amount of snap dollars that were available in the market and those happen.

But right now we don't see that environment any different than what we would have felt the felt for the last five years or 10 years or 15 years.

And.

The positive as customers get a better value every year and they get a better experience every year.

And.

Sort of around the <unk>.

When you look at for US one of the things that we think is important for the customers the customer doesn't have to compromise. So they get amazing fresh product that will last a long time when they get at home with amazing friendly associates.

Middle part of Q1.

Last deal decision you I should say, what we've seen in one or two markets where.

We're cycling those earlier mark.

Markets, where they can reduce the snap dollars 70 starts to create a bit of a different trend in the growth in those markets too. So we do think there is for the industry and specifically for the markets that we operate in as you start to cycle the impact of those snap dollars, which perhaps a bit more of an impact than we were originally thinking they might across the industry that starts to create some.

With a smile and support that.

Everything in their basket, plus a little bit.

An extra piece of cheese or something.

<unk> engaged with Murray's so.

And not have to compromise from a pricing standpoint, so when you look.

I think tailwind in the in the industry towards next year's growth as well.

Overall, we feel very good in terms of how we're positioned.

The customers.

That really appreciate what we offer.

Thanks, Christina Thank Keith.

Maybe around the one thing I would just add to Cristina specific to 2024.

The next question goes to Ed Kelly with Wells Fargo. Please go ahead. Your line is open.

A couple of things that.

We think our health.

As we look into next year. One is of course that we are cycling the impact of express scripts. When we get to January we will start to see that flow through in the early in the early periods of the year and then secondly, one of the things that we've seen as we look at 2023. Many states as you know reduce the amount of snap dollars that were available in the market and those happened sort of around.

Hi, good morning, everyone and thanks for taking good morning, Ken.

Gary I wanted to ask you about the gross margin I think you said that the Q4 gross margin you expect to be flattish.

You could just confirm that and then.

Looking out is the base case for 'twenty for that that flattish trend would continue and then within that context, I'm curious about shrink and.

Middle part of Q1.

Last year all of this this year I should say, what we've seen even one or two markets where.

Maybe just educate us a little bit on when you do your accounts.

We're cycling those earlier.

Its ability you have on where you stand in shrink.

Markets, where they can reduce the snap dollars suddenly starts to create a bit of a different trend in the growth in those markets too. So we do think there is for the industry and specifically for the markets that we operate in as you start to cycle the impact of those snap dollars, which perhaps a bit more of an impact than we were originally thinking they might across the industry that starts to create.

And do you believe.

Joe Thanks, Ed.

The first part of the question, Yes, Youre essentially right that we I said on my prepared comments that we would expect Q4 to look very similar to Q3.

But the way that I assumed it would break that down is that we have been equally as.

I think tailwind in the in the industry towards next year's growth as well.

Pleased with the progress that we've seen in the margin improvement plan initiatives that we saw in the earlier part of the year as well. So we've continued to see strong benefits from a brand's strong benefits from sourcing health and wellness of course with express scripts as a tau initiate your gross margin and supply chain and alternative profits all of those areas continue to generate tower.

Thanks, Christina Thanks, Keith.

The next question goes to Ed Kelly Wells Fargo. Please go ahead. Your line is open.

Hi, good morning, everyone. Thanks, Nick Good morning, Ken.

Wins in our.

Gary I wanted to ask you about the gross margin I think.

And our gross margin rate, what we did in the third quarter is we did invest more in gross margin to balance those benefits, partly an increased pricing and promotion as Rodney mentioned earlier and we did also increase advertising costs during the quarter as well. So those would have been the differences quarter over quarter in terms of what we saw on what we would expect.

You said that the Q4 gross margin you expect to be flattish.

You could just confirm that and then.

Looking out is the base case for 24 that that flattish trend would continue and then within that context, I'm curious about shrink and.

To continue to be a similar pattern as we think about the fourth quarter.

Maybe just educate us a little bit on when you do your accounts.

I'd say as we look into beyond 2023, we certainly still see a lot of potential for the tailwind that I mentioned around our brands.

Do you have on where you stand in shrink.

And do you believe.

Yes.

Joe Thanks, Ed So first part of the question, Yes, Youre essentially ride that we I said on my prepared comments that we would expect Q4 to look very similar to Q3.

Brands sourcing these areas, where we believe that we run a multi year path to continue to drive improvement and drive growth and of course alternative profit streams continues to grow at a double digit pace off a bigger base as well.

The way that I sort of would break that down is that we have been equally as pleased with the progress that we've seen in the margin improvement plan initiatives that we saw in the earlier part of the year as well. So we've continued to see strong benefits from <unk> strong benefits from sourcing health and wellness of course with express scripts as a tau initiate the gross.

We still have a lot of confidence in those levers and what we're doing is making sure. We're balancing the business to set ourselves up for continued sustained growth in the future.

From a shrink perspective.

We would still see shrink because of headwinds as I mentioned in the prepared comments.

<unk> and supply chain and alternative profits all of those areas continue to generate tailwind.

I'd say, its probably somewhat less dramatic for us than maybe some of our peer group because while we have a general merchandise business. That's impacted it's less impacted than probably some of the big box retailers, but it would still be a headwind to our gross margin rate that would have impact on third quarter.

Our gross margin rate, what we did in the third quarter is we did invest more in gross margin. So a balanced those benefits, partly an increased pricing and promotion as Rami mentioned earlier and we did also increased advertising costs during the quarter as well. So those would have been the differences quarter over quarter in terms of what we saw and what we would expect to.

On a year over year basis that headwind actually would have been less than it was in the second quarter not dramatically, but it would have it would have a somewhat so it's.

Still something that we have to work through and continue to offset but we are seeing at least that the trend in terms of year over year growth decelerate, but it would still be a headwind today because of the crime and organize retail crime factors I mentioned earlier.

<unk> continued to be a similar patent as we think about the fourth quarter.

I'd say as we look into beyond 2023, we certainly still see a lot of potential for the tailwind that I mentioned around our brands sourcing. These areas, where we believe that we're on a multiyear path to continue to drive improvement and drive growth and of course alternative profit streams continues to grow at a double dip.

The other thing I think is important to remember is a lot of our shrink is in our fresh departments and our fresh departments actually.

Lot of that is you can manage it by changing processes and.

<unk> pays off a bigger base as well so I think we still have a lot of confidence in those levers and what we're doing is making sure. We're balancing the business to set ourselves up for continued sustained growth in the future.

Technology using technology and our teams have done a great job actually on improving shrink in the fresh departments because.

Our store teams partnering with warehouse teams on processes and leveraging technology as well.

From a shrink perspective.

We would still see shrink as a headwind as I mentioned in the prepared comments.

And I think as a.

A big chunk of the trend.

I'd say its probably.

Somewhat less dramatic for us than maybe some of our peer group because while we have a general merchandise business. That's impacted it's less impacted than probably some of the big box retailers, but it would still be a headwind to our gross margin rate that would have impact the third quarter.

Slight trend improvements that Gary mentioned.

<unk>.

Thanks, Ed.

Thank you. The next question guys, Hey, Kevin Koskey of Northcoast Research. Please go ahead. Your line is open.

On a year over year basis that headwind actually would've been less than it was in the second quarter not dramatically, but it would have it would have a somewhat so it's.

Good morning, everyone. Good morning, Ronnie can you talk a little bit about the economy.

Still something that we have to work through and continue to offset but we are seeing at least that the trend in terms of year over year growth decelerate, but it would still be a headwind today because of the crime and organized retail crime factors I mentioned earlier.

The economy's effect and inflation.

On your digital business, and I'm thinking, particularly about customers' willingness to spend money.

The other thing I think is important to remember is a lot of our shrink is in our fresh departments and our fresh departments actually.

On any delivery fees or membership fees and also how the economy might be impacting delivery volumes in digital order volumes.

Lot of that is you can manage it by changing processes and.

If you look at it over thanks, Chuck if you look at overall inflation.

Technology using technology and our teams have done a great job actually on improving shrink in the fresh departments because.

Definitely stabilizing overall.

Our store teams partnering with warehouse teams on processes and leveraging technology as well.

And.

From a customer standpoint.

And I think a big chunk of the trend.

I appreciate the stabilization, but they also know the fact that if you look at over the last two years they've had to endure a lot of inflation and if you look at some of the fresh departments some of that.

Slight trend improvements that Gary mentioned.

Yeah.

Thanks, Ed.

Is actually returned back to normal, but if you look at on the process side you wouldn't see that so if you look at like eggs for an example eggs are significantly deflationary and.

Thank you. The next question guys, Hey, Karen Kolsky of Northcoast Research. Please go ahead. Your line is open.

We'll all be happy when we get to the point where were cycling that early next year or next year.

Good morning.

Everyone. Good morning, Rodney could you talk a little bit about the economy.

If you look at customer behavior.

The economy's effect and inflation.

Fascinating.

On your digital business, and I'm thinking, particularly about customers' willingness to spend money.

Customers do a lot of work to save where they want to save or feel like they need to save so.

On on any delivery fees or membership fees and also how the economy might be impaired.

<unk>.

And pack size.

If you look at moving to our brands versus some of the national brands, but if you look at.

<unk> delivery volumes in digital order volumes.

If you look at it over thanks, Chuck if you look at overall inflation.

Membership fees and delivery fees and things like that.

That business continues to grow strongly and in fact, it was up double digits and Thats what drove the 11%.

Definitely stabilizing overall and.

From a customer standpoint.

I'm sure part of that and anytime I talk to a politician I always remind them. If you look at customers on a budget, they're under a lot of strain and theyre doing a lot of behavior changes.

I appreciate the stabilization, but they also know the fact that if you look at over the last two years they've had to endure a lot of inflation and if you look at some of the fresh departments some of that.

You look at customers that are not as focused on price because inflation hasn't affected them as much that.

Is actually returned back to normal, but if you look at on the process side you wouldn't see that so if you look at like eggs for an example eggs are significantly deflationary and.

That customer's behavior is still very strong and they are still continuing to buy big box, continuing Dubai nicer wines.

We'll all be happy when we get to the point where were cycling that early next year or next year.

<unk> cheese, Starbucks things like that so.

If you look at customer behavior.

<unk>.

Fascinating.

We over index with our membership program on customers that are more mainstream and upscale so I'm sure. That's part of the reason why we're not seeing the behavior change.

Customers do a lot of work to save where they want to save or feel like they need to save so.

<unk>.

And pack size.

If you look at moving to our brands versus some of the national brands, but if you look at.

Okay. Thanks for that and just real quick.

Exiting the ghost kitchen business.

Membership fees and delivery fees and things like that.

Any particular reason for that.

That business continues to grow strongly and in fact, it was up double digits and Thats what drove the 11%.

Yes.

Yes, great question I appreciate it we test a lot of different things and.

We will go move on to the next version of it we still think food away from home is a huge growth opportunity for us and we will continue to focus on it.

I'm sure part of that and anytime I talk to a politician I always remind them. If you look at customers on a budget, they're under a lot of strain and theyre doing a lot of behavior changes.

<unk> kitchen.

A few customers that used it loved it but it just wasn't enough. So it's one of those things where you move on so.

You look at customers that are not as focused on price because inflation hasn't affected them as much.

Thanks Chuck.

Thank you. The next question guys have re <unk> of Oppenheimer.

That customer's behavior is still very strong and they are still continuing to buy big banks continuing to buy nicer.

Please go ahead your line is open.

Good morning, and thanks for taking my question. So just going back to Kroger's digital performance another quarter of double digit growth did anything surprise you on the digital front and just any more color in terms of what your understanding delivery versus pickup yes.

<unk> wines, Murray's cheese, Starbucks things like that so.

We over index with our membership program on customers that are more mainstream and upscale so I'm sure. That's part of the reason why we're not seeing the behavior change.

Yeah, I'll start and let Garry finished I wouldn't call. It a surprise, but it's great to see that the NPS scores both in terms of.

Okay. Thanks for that.

Our year on year from a pickup standpoint, and a delivery standpoint is very strong if you look at it our shed delivery business the repeat rate continues to be strong.

And just real quick.

Getting the ghost kitchen business.

Any particular reason for that.

Yes.

Yes, great question I appreciate it we test a lot of different things and.

So it really is.

The customers really appreciate that white glove experience. So I don't want to make it sound like we're surprised by it but its nice to see what we thought play out Gary I'll, let you.

We will go move on to the next version of it we still think food away from home is a huge growth opportunity for us and we will continue to focus on it.

<unk> kitchen.

A few customers that used it loved it but it just wasn't enough. So it's one of those things where you move on so.

I think <unk>, obviously, I think the only thing I would add to it refreshes that we said before we believe that digital is a is a growth engine for the company and I think everything we continue to see it gives us I believe it will continue to be an opportunity to drive deeper customer engagement and growth and I mentioned in our comments earlier, but they think we didnt talk about in the script was we are seeing continued improvement in profitability. So it helped.

Thanks Chuck.

Thank you. The next question guys have we passed.

Oppenheimer <unk>. Please go ahead your line is open.

Good morning, and thanks for taking my question, just going back to Kroger's digital performance another quarter of double digit growth did anything surprise you on the digital front and just any more color in terms of what youre seeing delivery versus pickup.

Profitable growth as well as with lowering the cost to fill and all of that driving more efficiencies through technology and continuing to see media revenue growth. So that's the only piece I think that I would reinforce.

Yeah, I'll start and let Garry finished I wouldn't call. It a surprise, but it's great to see that the NPS scores both in terms of.

Thanks for <unk>.

Thank you. The next question guys you Kenneth Goldman of Jpmorgan. Kenneth. Please go ahead. Your line is open.

Our year on year from a pickup standpoint, and a delivery standpoint.

Hi, Thank you I will take a shot here on next year I know you are not in a position to really give numbers and I wouldn't ask about that now, but you did talk about hopefully having low single digit sort of normal inflation next year.

Is very strong if you look at our shed delivery business the repeat rate continues to be strong.

So it really is.

The customers really appreciate that white glove experience. So I don't want to make it sound like we're surprised by it but its nice to see what we saw play out Gary I'll, let you.

You highlighted a healthy amount of productivity you expected, we're expecting but you also mentioned that maybe your unit growth right now is a little bit disappointing.

Surely be lapping some challenging fuel margins that I imagine you won't assume a worker. So I'm just trying to get a sense. If you have maybe sluggish units fuel comps are tough to get to your earnings growth Algo for next year do you see radically have to find other drivers that are better than their algo to offset those headwinds I just wanted to kind of get a search.

Yes.

Rodney I think the only thing I would add that refreshes that we said before we believe that digital is a is a growth engine for the company and I think everything we continue to see gives us I believe it will continue to be an opportunity to drive deeper customer engagement and growth and I mentioned in our comments earlier, but they think we didnt talk about in the script was we are seeing continued improvement in profitability. So it's helping promptly.

How to think about at least some initial headwind and tailwind into next year, if it all makes sense.

Growth as well as we're lowering the cost to fill and all of that driving more efficiencies through technology and continuing to see media revenue growth. So that's the only piece I think that I would reinforce.

Yes, Thanks, Ken.

As you mentioned, we will definitely share a lot more color as you might expect when we get to March I think.

As we think about the model I'm, just taking a bigger picture stat that.

Thanks <unk>.

We certainly believe that we have over the last few years built a more diverse ecosystem as a company. So of course food at home is an important part of the sort of its drives the flywheel, but as you know we've been continuing to grow.

Thank you. The next question guys, Hey, Kenneth Goldman of Jpmorgan. Please go ahead. Your line is open.

Hi, Thank you I'll take a shot here on next year I know youre not in a position to really give numbers and I wouldn't ask about that now, but you did talk about hopefully having low single digit sort of normal inflation next year.

<unk> business continued to grow in health and wellness. This year, even with the impact of express scripts and continuing to get our alternative profit streams. So we look at it more as a journey and we do believe that as we are building the strength in that ecosystem and create.

You highlighted a healthy amount of productivity you expected, we're expecting but you also mentioned that maybe your unit growth right now is a little bit disappointing.

A new way to generate value for our shareholders over time as we've talked about at previous Investor meetings, I think some of the points you raised 70 would be the areas, where we will be focusing on I don't think it's a different strategy for credit cards. How do we continue to drive that flywheel as we think about taking cost out of our business that we can invest more in customers and associate.

Surely be lapping some challenging fuel margins that I imagine you want.

Sumo recur so I'm just trying to get a sense. If you have maybe sluggish units fuel comps are tough to get to your earnings growth Algo for next year do you see radically have to find other drivers that are better than their algo to offset those headwinds I just wanted to kind of get a sense of how to think about at least some initial headwind and tailwind into next year.

Yes.

Continuing to drive Traffics that we can continue to grow in the alternative profit businesses and we do think there's opportunity for.

That all makes sense.

Margin improvement to continue beyond 2023, because of the initiatives, we're driving around our sourcing supply chain alternative profit streams et cetera.

Yes, Thanks, Ken.

As you mentioned, we will definitely share a lot more color as you might expect when we get to March I think as we as we think about the model and just taking a bigger picture stat Pak.

So I think from our perspective, certainly if you are in a period, where you are seeing sales growth for a sustained period of time because our model is built on sales growth. We would have to look at our cost base and we will look at our cost base.

We certainly believe that we've over the last few years built a more diverse ecosystem as a company. So of course food at home is an important part of the sort of it's driving a flywheel, but as you know we've been continuing to grow.

Certain areas to be more productive, but we still believe that food at home is.

It will normalize in a typical pattern that we see in that sort of 1% to 2%.

Fuel business continues to grow and health and wellness. This year, even with the impact of express scripts and continuing to get our alternative profit streams. So we look at it more as a journey and we do believe that as we are building the strength in that ecosystem. It creates.

Inflation over time, and sort of 2% to 3% food to home growth and we think our model is we're really well set up to be able to drive growth within that framework.

A new way to generate value for our shareholders over time as we've talked about at previous Investor meetings, I think some of the points you raised would certainly be the areas, where we will be focusing on I don't think it's a different strategy for credit cards. How do we continue to drive that flywheel as we think about taking cost out of our business that we can invest more in customer as an associate.

Thanks, Ken the only other thing I would add to Gary's comment is if you look at our seamless business. We would expect that to continue to make progress as well as I mentioned earlier.

Thanks, Ken.

Thank you. The next question guys you Michael Lasser of UBS. Michael. Please go ahead. Your line is open.

Yes.

Continuing to drive Traffics that we can continue to grow the alternative profit businesses and we do think there's opportunity for.

Good morning. Thank you so much for taking my question.

Margin improvement to continue beyond 2023, because of the initiatives we're driving around.

Thank you talk to your profit food and CPG partners.

All seeing supply chain alternative profit streams et cetera.

What are they telling you about their desire to further re pricing into next year.

So I think from our perspective, certainly if you are in a period, where you are seeing sales growth for a sustained period of time because our model is built on sales growth we'd have to look at our cost base and we will look at our cost base in certain areas to be more productive, but we still believe that food at home is.

When your expectation that there could be hidden inflation across the assortment that would necessitate that center of the store.

Heightened go up against.

Against the backdrop, where volume continued to go down or providing more support.

It will normalize in a typical.

Typical pattern that we see in that sort of 1% to 2%.

Why are they not moving back pricing.

Inflation over time, and sort of 2% to 3% food or home growth and we think our model is really well set up to be able to drive growth within that framework.

Claims volume.

Part of that even that you used your P&L.

The fun promotions more in the third quarter.

Thanks, Ken the only other thing I would add to Gary's comment is if you look at our seamless business. We would expect that to continue to make progress as well as I mentioned earlier.

A sign that you're running into the limitation of the vendors willing to provide.

Sure.

Right.

TV promotion, thank you very much thanks.

Thanks, Ken.

Things like if you look at overall.

Thank you. The next question guys you Michael Lasser of UBS. Michael. Please go ahead. Your line is open.

And the economics, all short statements are wrong and you have <unk> that are all over the board in terms of their approach. Some cpg's are very willing to give up tonnage NFC.

Good morning. Thank you so much for taking my question.

And if they are our brands will stay that will be there for our customer to give them incredible value and what we find is when a customer tries our brand our repeat rate is incredibly high because of the quality and the value for the money.

Thank you talk to your profit food and CPG partners.

What are they telling you about their desire to further reach pricing into next year, given your expectation that there could be hidden.

If you look in the quarter.

In terms of funding it was really done by Cpg's and us and as I mentioned earlier.

Inflation across the assortment that would necessitate that center of the store.

Heightened go up against.

<unk> were more aggressive in funding some of the promotions in the third quarter than the second quarter and would expect that to continue.

Against the backdrop, where volumes continue to go down we are providing more support.

Why are they not rolling back pricing.

Claims volume.

We are seeing.

Part of that even that you used your P&L.

More CPG is worrying about their tonnage growth.

To fund promotions more in the third quarter.

And I think thats part of whats driving that willingness to so appreciate the question and thanks Michael.

A sign that you are running into the limitation of the vendors willing to provide.

Thank you our last question guys to Kelly Bania of BMO Kelly. Please go ahead. Your line is open.

Sure.

Yeah.

The promotion thank you very much thanks.

Thanks, Michael if you look at overall.

Say in economics, all short statements are wrong and you have CPG that are all over the board in terms of their approach. Some cpg's are very willing to give up tonnage and if they are our brands will stay that will be there for our customer to give them incredible value and what we find is when a customer tries our brand.

Good morning, Sean.

Gary Thanks for taking our question.

I wanted to go back to the comment about building anymore.

First eco system and talk a little bit more about alternative profit growth.

There was a comment that that is still growing double digits, which I think would mean around $150 million to $200 million and incremental.

Our repeat rate is incredibly high because of the quality and the value for the money.

On a year over year profit, but maybe just wanted to give you the opportunity to comment on that is that correct, Bob Houghton and how many more.

If you look in the quarter.

In terms of funding it was really done by Cpg's and us and as I mentioned earlier.

Here's can this business.

<unk> were more aggressive in funding some of the promotions in the third quarter than the second quarter and would expect that to continue.

Continue to grow in double digit rate.

And to the coming years.

Yes.

I don't know that Gary and I will want to give the specifics for 24 on the op profit so going.

We are seeing.

More cpg's worrying about their tonnage growth.

Going to the process.

I think thats part of whats driving that willingness to so appreciate the question and thanks Michael.

But we would expect profit to be a meaningful contributor of growth next year, and that's really driven by two things.

One is our continued growth in our digital business, which is supporting our media business growth and we think we're just getting started on that.

Thank you our last question guys to Kelly Bania of BMO Kenny. Please go ahead. Your line is open.

You look.

In the media World your competitors are Google and Amazon and.

Good morning Ronnie.

Thanks for taking my question. Good morning, I wanted to go back to the comment about building a more diverse.

Meta and Walmart and then a lot of other players.

Ecosystem and talk a little bit more about alternative profit growth I think there was a comment that that is still growing double digits, which I think would mean around $150 million to $200 million and incremental.

And one of the things that we think transparency is so important and being able to give people. Good data is we think that.

Is incredibly helpful relative to the googles and matters and others. So we see a long term opportunity to continue to grow the business there and the specifics I don't know that we want to get there either and if you look at some of the other alternative profit businesses.

Year over year profit, but maybe just wanted to give you the opportunity to comment on that is that correct ballpark and how many more years.

Can this business.

<unk> to grow at double digit rate.

Into the coming years.

Some of those.

A wide variance in performance within the company. So part of that growth is just driven by taking best in class within our own company and growing that as well so.

Yes.

I don't know that Gary and I will want to give the specifics for 24 on the op profit going through the process, but we would expect.

Kelly I appreciate the question.

<unk> profit to be a meaningful contributor of growth next year, and Thats really driven by two things.

And thanks, everyone for all the questions and as always I'd like to take a few moments to share some comments with our associates listening in.

One is our continued growth in our digital business, which is supporting our media business growth and we think we're just getting started on that.

To start I'd like to say a huge thank you for all the hard work that you've done to make the holidays b cell memorable for our customers and what you will do for the <unk>.

If you look.

In the media World your competitors are Google and Amazon and.

Following the rest of the holiday season to make it equally as memorable for customers as you know food plays an important part.

Meta and Walmart and then a lot of other players.

And one of the things that we think transparency is so important and being able to give people. Good data is we think that.

Any celebration and it provides an opportunity for people to connect and people that we love.

Is incredibly helpful relative to the googles and matters and other so we see a long term opportunity to continue to grow the business there.

Especially with them and sharing special moments.

If you had a chance to see our holiday film you saw that.

The specifics I don't know that we want to get there either and if you look at some of the other alternative profit businesses.

I'd come to life and if you haven't seen our holiday film you can go to Youtube to look at the full film and it really does recognize that food connects us all and whether thats honoring family traditions are creating new family ones.

Some of those.

The wide variance in performance within the company. So part of that growth is just driven by taking best in class within our own company and growing that as well. So Kelly I appreciate the question.

Just been so inspired to see how our associates and our customers and sharing their videos and the unique ways. They celebrate the holidays.

And thanks, everyone for all the questions and as always I'd like to take a few moments to share some comments with our associates listening in.

As I said before thank you for everything you do to create special memories for our customers every single day and thank you everyone for joining us we wish everyone a happy holiday season, Merry Christmas and happy New year.

To start I'd like to say a huge thank you for all the hard work that you've done.

To make the holidays b, so memorable for our customers and what you will do for the.

Following the rest of the holiday season to make it equally as memorable for customers as you know food plays an important part in any celebration and it provides an opportunity for people to connect and people that we love.

Thank you. This now concludes today's call. Thank you all for joining you may now disconnect your lines.

Especially with them and sharing special moments.

If you had a chance to see our holiday film you saw that.

I'd come to life and if you haven't seen our holiday film you can go to Youtube to look at the full film and it really does recognize that food connects us all and whether thats honoring family traditions are creating new family ones.

Just been so inspired to see how our associates and our customers and sharing their videos and the unique ways. They celebrate the holidays.

As I said before thank you for everything you do to create special memories for our customers every single day and thank you everyone for joining us we wish everyone a happy holiday season, Merry Christmas and happy New year.