Q1 2024 The Kroger Co Earnings Call
And interim Chief Financial Officer, Todd fully.
Speaker Change: Before we begin I want to remind you that today's discussion will include forward looking statements.
Speaker Change: Want to caution you that such statements are predictions and actual events or results can differ materially.
The main cold there will be a brief pause I will ask you to please.
Todd Fully: A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings.
The main cold there will be a brief pause I will ask you to please mute your line.
Okay.
Speaker Change: The Kroger company assumes no obligation to update that information.
Speaker Change: Nice to meet you in theory Chi one.
Speaker Change: After our prepared remarks, we look forward to taking your questions.
Speaker Change: Oh.
Speaker Change: In order to cover a broad range of topics from as many of you as we can we ask that you. Please limit yourself to one question and one follow up question if necessary I will now turn the call over to Rodney.
Good morning, and welcome Judy Kroger Cold first quarter 'twenty 'twenty four earnings conference call. My name is Carla and I will be coordinating the call today.
Rodney: Thank you Rob good morning, everyone and thank you for joining us today.
Speaker Change: During the presentation you can register to ask questions Rob for his thoughtful about one on your telephone keypad and you change your mind with breast thoughtful about you. Please note that disadvantage being recorded I would like now to turn the conference call over to Rob Clos Senior director of Investor Relations to begin. Please go ahead.
Rodney: Four we begin I'd like to provide an outline of our discussion topics. This morning.
Rodney: I will start by sharing a recap of our first quarter performance and highlight how we continue to advance our go to market strategy, which.
Speaker Change: Good morning, Thank you for joining us for Kroger's first quarter 2024 earnings call I'm joined today by progress Chairman and Chief Executive Officer, Rodney Mcmullen, and interim Chief Financial Officer, Todd Bali.
Speaker Change: Which powers our value creation model and drives long term sustainable growth for our shareholders.
Speaker Change: Then Todd will cover our financial results for the first quarter.
I: Finally, I will provide a few comments on our proposed merger with Albertsons before we open it up for questions.
Speaker Change: Before we begin I want to remind you that today's discussion will include forward looking statements.
Speaker Change: We're off to a solid start in 2024, reflecting the strength and diversity of our model.
Speaker Change: We want to caution you that such statements are predictions and actual events or results can differ materially.
Todd Fully: As better than expected performance from our grocery business helped us manage fuel and health and wellness results that were behind expectations.
Speaker Change: A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger company assumes no obligation to update that information.
Todd Fully: Kroger is providing exceptional value and a unique omnichannel experience, which combined with strong store execution led to growth in households, and an increase in customer visits.
Speaker Change: After our prepared remarks, we look forward to taking your questions.
Speaker Change: In order to cover a broad range of topics from as many of you as we can we ask that you. Please limit yourself to one question and one follow up question if necessary I will now turn the call over to Rodney.
Todd Fully: As inflation moderates, we expect customer sentiment to continue improving.
Speaker Change: But near term many customers are managing economic uncertainty while.
Rodney Mcmullen: Thank you Rob good morning, everyone and thank you for joining us today.
Rodney Mcmullen: Before we begin I'd like to provide an outline of our discussion topics. This morning.
Kroger spokesperson: We expect health and modest profitability pressures to continue into the second quarter. Our recent improvement on store execution metrics and strong customer trends give us confidence that we are building momentum for a strong back half of the year and we are well positioned to deliver on our full year guidance.
Rodney Mcmullen: I will start by sharing a recap of our first quarter performance and highlight how we continue to advance our go to market strategy, which.
Rodney Mcmullen: Which powers our value creation model and drives long term sustainable growth for our shareholders.
Kroger spokesperson: As we've seen over recent quarters customers continue to seek value and are shopping with us differently based on their financial situations.
Speaker Change: Then Todd will cover our financial results for the first quarter.
Speaker Change: Finally, I will provide a few comments on our proposed merger with Albertsons before we open it up for questions.
Kroger spokesperson: Spending for premium and mainstream customers continue to be strong.
Speaker Change: We're off to a solid start in 2024, reflecting the strength and diversity of our model is.
Speaker Change: Mainstream households drove our overall household growth and we improved our share of wallet with premium customers, who are deepening their loyalty spending more in our fresh departments and enjoying more premium products such as private selection.
Todd A. Foley: It was better than expected performance from our grocery business helped us manage fuel and health and wellness results that were behind expectations.
Todd A. Foley: Kroger is providing exceptional value and a unique omnichannel experience, which combined with strong store execution led to growth in households, and an increase in customer visits.
Speaker Change: Within our most budget conscious households, we are starting to see positive momentum and we grew households in this segment after experiencing declines last year.
Todd A. Foley: And the inflation moderates, we expect customer sentiment to continue improving.
Speaker Change: Historic multiyear inflation across the economy high interest rates and reduced government benefits disproportionately affect these customers and are influencing their spending behaviors.
Todd A. Foley: But near term many customers are managing economic uncertainty.
Todd A. Foley: While we expect health and wellness profitability pressures to continue into the second quarter. Our recent improvement on store execution metrics and strong customer trends give us confidence that we are building momentum for a strong back half of the year and we are well positioned to deliver on our full year guidance.
Kroger spokesperson: Kroger's long standing commitment to low prices and personalized promotions creates real value for our customers at a time when many of them needed more than ever.
Kroger spokesperson: Food at home continues to be the most affordable meal option for customers.
Todd A. Foley: As we've seen over recent quarters customers continue to seek value and are shopping with us differently based on their financial situations.
Speaker Change: While food inflation has impacted every meal occasion inflation in food away from home has been <unk> been higher than food at home inflation since 2019.
Todd A. Foley: Spending from premium and mainstream customers continue to be strong.
Speaker Change: We are committed to making sure our customers can enjoy a great meal experience with zero compromise on quality selection value and convenience.
Todd A. Foley: <unk> stream households drove our overall household growth and we improved our share of wallet with premium customers, who are deepening their loyalty.
Speaker Change: We see a significant growth opportunity to deliver convenient restaurant quality meals at an attractive value and we are expanding our ready to heat and ready to eat offerings.
Todd A. Foley: Spending more in our fresh departments and enjoying more premium products such as private selection.
Todd A. Foley: Within our most budget conscious household we are starting to see positive momentum and we grew households in this segment after experiencing declines last year.
Speaker Change: For example, after we revamped our fried chicken recipe, we created a meal bundle, which feeds a family for $3 50 a person.
Todd A. Foley: Historic multiyear inflation across the economy high interest rates and reduced government benefits disproportionately affect these customers and are influencing their spending behaviors.
Speaker Change: A fraction of what it would cost to eat out at restaurants with quality that's difficult to beat.
Speaker Change: Every day, we strive to provide an outstanding customer experience and we are focused on sharpening our store execution to do just that.
Kroger's long standing commitment to low prices and personalized promotions creates real value for our customers at a time when many of them needed more than ever.
Speaker Change: This year, we raised the bar on our full fresh and friendly customer experience metrics and we are very proud of our store teams, who are delivering an even better shopping experience with service metrics at record highs.
Todd A. Foley: Food at home continues to be the most affordable meal option for customers.
Todd A. Foley: While food inflation has impacted every meal occasion.
Todd A. Foley: Inflation in food away from home has been had been higher than food at home inflation since 2019.
Speaker Change: To continue the momentum in our grocery business, we are committed to keeping prices low for our customers and delivering a consistent experience while growing our pillars of fresh our brands seamless and personalization.
Todd A. Foley: We are committed to making sure our customers can enjoy a great meal experience with zero compromise on quality selection value and convenience.
Speaker Change: Leading with fresh our store team's primary goal. This year is to drive more consistent shopping experience and that begins with fresh.
We see a significant growth opportunity to deliver convenient restaurant quality meals at an attractive value and we are expanding our ready to eat and ready to eat offerings.
Speaker Change: We are introducing new technology, that's enabling our teams to better track and monitor fresh products within our stores, ensuring that we are providing a more consistent fresh experience for every customer every time.
Todd A. Foley: For example, after we revamped our fried chicken recipe, we created a meal bundle, which feeds our family for $3 50, a person.
Speaker Change: As summer kicks off we are expanding fresh options for our customers, we launched a new brand field and vine, which offers customers regionally grown berries on Kroger shelves.
Todd A. Foley: A fraction of what it would cost to eat out at restaurants with quality that's difficult to beat.
Todd A. Foley: Every day, we strive to provide an outstanding customer experience.
Todd A. Foley: And we are focused on sharpening our store execution to do just that.
Speaker Change: Now turning to our brands our Newberry brand is just one example of how Kroger is re imagining there our brands portfolio by.
Todd A. Foley: This year, we raised the bar on our full fresh and friendly customer experience metrics and we are very proud of our store teams, who are delivering an even better shopping experience with service metrics at record highs.
Speaker Change: By innovating into new categories, and strengthening brand perception with customers.
Speaker Change: This quarter, we introduced 346, new products. We are also making progress in refreshing current product lines, completing abound and pet pride, our pet food brands and rolling out new simple truth packaging.
Todd A. Foley: To continue the momentum in our grocery business, we are committed to keeping prices low for our customers and delivering a consistent experience while growing our pillars of fresh our brands seamless and personalization.
Speaker Change: More of our brands portfolio will be refreshed this year and we are excited to see the customer response to these new designs.
Todd A. Foley: Leading with fresh our store team's primary goal. This year is to drive more consistent shopping experience and that begins with fresh.
Speaker Change: Our ongoing work to differentiate and elevate our brands is driving higher profitability.
We are introducing new technology, that's enabling our teams to better track.
Speaker Change: We are identifying new supply sources, using more effective promotions and improving product mix, which is contributing to further margin improvements.
Speaker Change: Now it is seamless.
Speaker Change: Delivery solutions led digital results again, this quarter with an increase in both households and visits.
Speaker Change: Pick up also had solid growth and our focus on delivering best in class fulfillment led to strong improvements in key customer experience metrics.
Speaker Change: This quarter, our teams improved fill rate to a new record high.
Speaker Change: Reduced wait times and delivered a significant improvement in perfect orders compared to last year.
Speaker Change: Through the power of machine learning and AI, we are developing new ways to elevate the pickup experience for customers and at the same time reduce costs.
Speaker Change: With dynamic batching of orders. These tools are providing associates, the most effective pick routes, which.
Speaker Change: Which is enabling us to dramatically reduce pick up lead times and our highest volume stores.
Speaker Change: Our customers love, the Kroger delivery experience with refrigerated products delivered directly to their doorstep.
Speaker Change: As a result, the Kroger delivery network has experienced remarkable growth with sales nearly doubling this quarter as.
Speaker Change: As we focus on providing an incredible customer experience, we are learning and adjusting the delivery network.
Speaker Change: A good example of this is our decision in the first quarter to closed three spoke locations to reallocate capacity closer to our automated fulfillment centers.
Speaker Change: We have lost connection with today's speaker. Please standby, we're super tried direct connect with them.
Speaker Change: We have higher customer density better order level profitability. This decision does not impact kroger's automated Fcs or other spoke locations.
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Speaker Change: We remain confident that our Kroger delivery network provides a differentiated customer experience that will continue to be a key pillar of our digital growth strategy.
Speaker Change: Turning to personalization, the combination of seamless and our personalized capabilities generated another quarter for digital engagement growth up 9% compared to the same quarter last year.
Speaker Change: Personalization enables us to balance the depth and breadth of our promotions more effectively.
Thank you for your patience, everyone. We now have the speaker back on the line. Please continue.
Speaker Change: And encourages customers to engage more with us by focusing on promotions that matter most to them.
Speaker Change: This led to an 18% increase in digital coupon clips compared to last year.
Speaker Change: Capturing more digital households is key to our long term growth model.
Revenue from media.
Speaker Change: As these households are more loyal spend nearly three times as much with us and drive our alternative profit businesses.
Speaker Change: By executing our go to market strategy, we create momentum in our grocery business.
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Our ongoing work to differentiate and elevate our brands is driving higher profitability.
Speaker Change: In turn this creates the data and traffic to accelerate growth in areas like health and wellness and our alternative profit businesses.
We are identifying new supply sources, using more effective promotions and improving product mix, which is contributing to further margin improvement.
Speaker Change: Alternative profit businesses had a strong quarter led by growth in Kroger precision marketing.
Now seamless delivery solutions led digital results again this quarter with an increase in both household and visits.
Speaker Change: <unk> results were in line with what we expected and keep us on track to meet our full year expectations of more than 20% media growth.
Pick up also had solid growth and focus on delivering best in class fulfillment led to strong improvements in key customer experience metrics.
Speaker Change: Yesterday, KPN continued to broaden its reach by offering its custom audiences and add measurement capabilities to advertisers unmet as social media platforms.
This quarter, our teams improved fill rates to a new record high.
<unk> wait time and delivered a significant improvement in perfect orders compared to last year.
Speaker Change: This is another important step in <unk> growth, creating more opportunities for clients to reach relevant audiences in more places and providing better transparency into ad effectiveness.
Through the power of machine learning and AI, we are developing new ways to elevate the pickup experience for customers and at the same time reduce costs.
With dynamic batching of orders these tools are providing associates the most effective pick routes.
Speaker Change: Health and wellness grew its topline this quarter, however profitability results were below expectations.
Which is enabling us to dramatically reduce pick lead time, and our highest volume stores.
Speaker Change: We are optimistic about the potential of this area of our business. Our script adherence initiatives are on track and our teams are providing excellent care, which helps patients live healthier lives.
Our customers loved the Kroger delivery experience with refrigerated products delivered directly to their doorstep.
As a result, the Kroger delivery network has experienced a remarkable growth with sales nearly doubling this quarter versus last year.
Speaker Change: Additionally, our marketing plans and in store Activations designed to raise awareness and attract new patients are launching now to help drive growth in the back half of the year.
As we focus on providing an incredible customer experience, we are learning and adjusting the delivery network.
Speaker Change: Turning now to associates, our associates are doing an excellent job elevating the customer experience and improving our full fresh and friendly metrics this quarter.
A good example of this is our decision in the first quarter to close three spoke locations to reallocate capacity closer to our automated fulfillment centers, where we have higher customer density and better order.
Speaker Change: Team consistency leads to better execution and retention improved again this quarter we.
<unk> profitability.
Speaker Change: We are retaining more associates.
This decision does not impact kroger's automated Fcs or other spoke locations.
Speaker Change: Our holistic approach, which includes wage and benefit investments and also a focus on associate wellbeing.
We remain confident that our Kroger Kroger delivery network provides.
Speaker Change: And this work is being recognized this quarter Kroger received the 2020 for platinum belt seal for workplace mental health. This is the third consecutive year that we've been recognized with the certification.
<unk> provides a differentiated customer experience and we will continue to be a key pillar of our digital growth strategy.
Turning to virtualization.
The combination of seamless and our personalization capabilities generated another quarter of digital engagement growth up 9% compared to the same quarter last year.
Speaker Change: And it's the first time, we've received the top distinction.
Speaker Change: This program recognized Kroger as an employer, who creates a mentally healthy workplace for our associates through culture benefits compliance and wellness programs.
<unk> enables us to balance the depth and breadth of our promotions more effectively and encourages customers to engage more with us by focusing on promotions that matter most to them.
Speaker Change: We will continue to invest in our associates.
And when our associates have a better experience they provide a better experience to our customers.
This led to an 18% increase in digital coupons clips compared to last year.
Speaker Change: With that I'll turn it over to Todd to take you through our first quarter financial results Todd.
Speaker Change: Capturing more digital household is a key to our long term growth model. As these households are more loyal spend nearly three times as much with us and drive our alternative profit businesses.
Todd Fully: Thanks, Rodney and good morning, everyone Krogers first quarter performance reflects the resiliency of our model, which enables us to manage a variety of economic cycles.
Strength of our model combined with the momentum in our grocery business gives us the confidence to reaffirm our full year guidance, even as we continue to navigate an environment of economic uncertainty.
Speaker Change: By executing our go to market strategy, we create momentum in our grocery business and turn this creates the data and traffic to accelerate growth in areas like health and wellness and our alternative profit businesses.
Todd Fully: I'll now take you through our first quarter results, we achieved identical sales without fuel growth of 0.5% as Rodney mentioned earlier, our identical sales were driven by several positive customer metric trends, including increases in total and loyal households, and increased customer visits.
Speaker Change: Alternative profit businesses had a strong quarter led by growth in Kroger precision marketing.
Speaker Change: J P. M results were in line with what we expected and keeps us on track to meet our full year expectations of more than 20% media growth.
Speaker Change: We continue to see sequential unit improvement and our teams remain focused on returning to positive units later this year.
Speaker Change: Yesterday <unk> P M and continued to broaden its reach by offering its custom audiences and add measurement capabilities to advertisers on the meta social media platforms. This.
Speaker Change: Inflation continues to moderate which is consistent with our expectations at the start of the year and towards the end of the first quarter, we began cycling the headwinds from the reduction in snap benefits.
Speaker Change: This is another important step and KPMG growth, creating more opportunities for clients to reach relevant audiences in more places and providing better transparency to ad effectiveness.
Speaker Change: Digital sales grew more than 8%, which was led by 17% growth and delivery solutions.
Speaker Change: Gross margin was 22, 4% of sales in our FIFO gross margin rate, excluding fuel decreased seven basis points.
Speaker Change: Health and wellness grew its topline this quarter, however profitability results were below expectations.
Speaker Change: The decrease in rate was primarily attributable to lower pharmacy margins and increased price investments, partially offset by favorable product mix, reflecting our brands margin performance.
Speaker Change: We are optimistic about the potential of this area of our business. Our script today adherence initiatives are on track and our teams are providing excellent care, which helps patients live healthier lives.
Speaker Change: The slight decline in our FIFO gross margin rate was in line with our expectations we.
Speaker Change: We expect our FIFO gross margin rate to improve beyond our first quarter result, driven by the core components of our margin expansion initiatives.
Rodney Mcmullen: Additionally, our marketing plans and in store Activations designed to raise awareness and attract new patients are launching now to help drive growth in the back half of the year.
Speaker Change: During the first quarter, we recorded a LIFO charge of $41 million compared to a charge of $99 million for the same quarter last year.
Rodney Mcmullen: Turning now to associates, our associates are doing an excellent job elevating the customer experience and improving our full fresh and friendly metrics this quarter.
Speaker Change: The decrease turns for the quarter was due to lower inflation expectations for the current year compared to last year.
Speaker Change: D O G&A rate, excluding fuel and adjustment items increased 22 basis points driven by planned investments in associate wages and increased incentive plan costs, partially offset by continued execution of cost savings initiatives.
Rodney Mcmullen: Team consistency leads to better execution and retention improved again this quarter.
Speaker Change: We are retaining more associates through a holistic approach, which includes wage and benefit investments and also a focus on associate wellbeing.
Speaker Change: In the second quarter, we expect the factors identified in the first quarter to continue leading to similar slightly higher <unk> rate.
Speaker Change: And this work is being recognized.
Speaker Change: This quarter Kroger received the 2020 for platinum boll sale for workplace mental health.
Speaker Change: We expect our <unk> rate to improve in the second half of 2024.
Speaker Change: We continue to make progress on our digital profitability delivering another quarter of improvement in our pickup cost to serve.
Todd A. Foley: This is the third consecutive year that we've been recognized with the <unk> certification.
Todd A. Foley: And for the first time, we received the top distinction.
Speaker Change: It remains a long term margin opportunity with runway to improve through increased volume and process enhancements.
Todd A. Foley: This program recognized Kroger as an employer, who creates a mentally healthy workplace for our associates through culture benefits compliance and wellness programs.
Speaker Change: Our store associates played a key role in the cost to serve improvements and as Rodney mentioned earlier did so while they improved key customer experience metrics.
Todd A. Foley: We will continue to invest in our associates.
Speaker Change: Adjusted FIFO operating profit was $1 $4 99 billion.
Todd A. Foley: Our associates have a better experience they provide a better experience to our customers.
Speaker Change: Our adjusted EPS was $1 43 per diluted share a decline of 5% compared to last year.
Speaker Change: With that I'll turn it over to Todd to take you through our first quarter financial results.
Speaker Change: Fuel continues to be a key driver of our strategy to build loyalty by providing compelling fuel rewards to customers. We continue to see more reward activity with 8% more redemptions contributing to gallon sales, which outpaced the industry this quarter.
Todd A. Foley: Thanks, Rodney and good morning, everyone.
Todd A. Foley: Our first quarter performance reflects the resiliency of our model, which enables us to manage a variety of economic cycles.
Todd A. Foley: The strength of our model combined with the momentum in our grocery business.
Todd A. Foley: US confidence to reaffirm our full year guidance, even as we continue to navigate an environment of economic uncertainty.
Speaker Change: Our fuel profitability was below expectations this quarter with our cents per gallon fuel margin down low single digits compared to last year.
Speaker Change: I'll now take you through our first quarter financial results.
Speaker Change: I would now like to provide a brief update on associates and labor relations.
Todd A. Foley: We achieved identical sales without fuel growth of <unk>, 5%.
Speaker Change: We continue to invest in our associates as part of our long term strategy, resulting in an average hourly rate of $19 an hour and a rate of nearly $25 with comprehensive benefits factored in.
Todd A. Foley: As Rodney mentioned earlier, our identical sales were driven by several positive customer metric trends.
Todd A. Foley: Leading increases in total and loyal households, and increased customer visits.
Todd A. Foley: We continue to see sequential unit improvement and our teams remain focused on returning to positive units later this year.
Speaker Change: During the first quarter, we ratified new labor agreements on our Houston clerks and meet mid Atlantic Division stores in West, Virginia, South Carolina stores in Colombia, and Myrtle Beach, and Portland distribution center and drivers covering more than 21000 associates.
Todd A. Foley: Inflation continued to moderate which is consistent with our expectations at the start of the year.
And towards the end of the first quarter, we began cycling the headwinds from the reduction in snap benefits.
Todd A. Foley: Digital sales grew by more than 8%, which was led by 17% growth and delivery solutions.
Speaker Change: Turning to cash flow Kroger continues to generate strong adjusted free cash flow through consistent operating results, which is enabling us to continue deleveraging in anticipation of our merger with Albertsons.
Todd A. Foley: Gross margin was 22, 4% of sales in our FIFO gross margin rate, excluding fuel decreased seven basis points.
Speaker Change: At the end of the first quarter Kroger's net total debt to adjusted EBITDA ratio was 125 compared to our target range of $2 three to $2 five or.
Todd A. Foley: The decrease in rate was primarily attributable to lower pharmacy margins and increased price investments, partially offset by favorable product mix, reflecting our brands margin performance.
Speaker Change: Our strengthened balance sheet provides ample opportunities for kroger to pursue growth and enhance shareholder value.
Todd A. Foley: The slight decline in our FIFO gross margin rate was in line with our expectations. We expect our FIFO gross margin rate to improve beyond our first quarter results driven by the core components of our margin expansion initiatives.
Speaker Change: We continue to take a disciplined approach to deploying capital with a focus on projects, which drive long term sustainable net earnings growth, while remaining committed to our investment grade debt rating, increasing our dividend over time subject to board approval and returning excess capital to shareholders. When we are able to do so.
Todd A. Foley: During the first quarter, we recorded a LIFO charge of $41 million compared to a charge of $99 million for the same quarter last year.
Todd A. Foley: The decrease charges for the quarter was due to lower inflation expectations for the current year compared to last year.
Speaker Change: As part of our capital investment plans for 2024, we shared last quarter. Our plans for approximately 30 major store projects focused on higher growth geographies, where we have traditionally achieved a strong ROIC and operating profit growth.
Todd A. Foley: C O G&A rate, excluding fuel and adjustment items increased 22 basis points.
Todd A. Foley: Driven by planned investments in associate wages and increased incentive plan costs.
Speaker Change: Made good progress on our projects, so far and remain on track with our plans while early we're happy with the results from projects completed in the first quarter.
Todd A. Foley: Partially offset by continued execution of cost savings initiatives.
Todd A. Foley: In the second quarter, we expect the factors identified in the first quarter to continue leading to a simmer similar to slightly higher G&A rate.
Speaker Change: We are confident these new storing projects will help advance our omni channel strategy and be an important component to our sales growth in PSM model going forward.
Todd A. Foley: We expect our <unk> rate to improve in the second half of 2024.
Speaker Change: During the first quarter, we announced we had entered into an agreement for the sale of our Kroger specialty pharmacy business as.
Todd A. Foley: We continue to make progress on our digital profitability delivering another quarter of improvement in our pickup cost to serve.
Speaker Change: As part of a regular and ongoing review of our portfolio. We determined that specialty pharmacy was not part of our core strategy going forward and a sale would enable us to focus on our health and wellness strategies that revolve around our retail pharmacies.
Todd A. Foley: It remains a long term margin opportunity with runway to improve to increase volume and process enhancements.
Our store associates by the key role in the cost of serve improvements and as Rodney mentioned earlier since so while they improved key customer experience metrics.
Speaker Change: Due to the sale of nonrecurring held for sale tax adjustments of $31 million was recognized in the quarter.
Speaker Change: Adjusted FIFO operating profit was 1.499 billion.
Speaker Change: And it has been reflected as an adjustment item in our results.
Speaker Change: Our adjusted EPS was $1 43 per diluted share a decline of <unk> compared to last year.
Speaker Change: Of KSP is not expected to have an impact on our 2020 for guidance.
Speaker Change: I'd now like to provide some additional color on our outlook for the rest of the year.
Todd A. Foley: Fuel continues to be a key driver of our strategy to build loyalty by providing compelling fuel rewards to customers.
Speaker Change: Today, we reaffirmed our annual guidance, reflecting both the positive momentum we are seeing in our business along with a more cautious customer environment in the near term.
Todd A. Foley: We continue to see more reward activity with 8% more redemptions contributing to gallon sales, which outpaced the industry this quarter.
Speaker Change: In terms of quarterly cadence, we now expect a decline in adjusted EPS for the second quarter similar to the rate we observed in the first quarter as we expect pharmacy business profitability pressures to carry over into the second quarter.
However, our fuel profitability was below expectations this quarter with our cents per gallon fuel margin down low single digits compared to last year.
Speaker Change: This reaffirms, where we expect it to be through both the first half of the year as well as the full fiscal year 2024.
Todd A. Foley: I would now like to provide a brief update on associates and labor relations.
Todd A. Foley: We continue to invest in our associates as part of our long term strategy, resulting in an average hourly rate of $19 an hour and a rate of nearly $25 with comprehensive benefits factored in.
Speaker Change: In closing our first quarter performance reflects the strength and resiliency of our model, we are strengthening our grocery business, which drives the data and traffic to accelerate growth in our alternative profit businesses and we remain confident in our ability to drive attractive and sustainable returns for our shareholders.
Todd A. Foley: During the first quarter, we ratified new labor agreements for our Houston clerks, and mean mid Atlantic Division stores in West, Virginia, South Carolina stores in Colombia, and Myrtle Beach, and Portland distribution center and drivers covering more than 21000 associates.
Speaker Change: I will now turn the call back to Rodney.
Rodney: Thanks, Todd as you heard from both of US are grocery business is performing well and we are building momentum across our business.
Rodney: Kroger is operating from a position of strength, we have the right strategy, which is resonating with customers and we have the financial strength to pursue growth and enhance shareholder value.
Todd A. Foley: Turning to cash flow for continues to generate adjusted free cash flow.
Todd A. Foley: Strong adjusted free cash flow through consistent operating results, which is enabling us to continue deleveraging in anticipation of our merger with Albertsons.
As we continue to prepare for our merger with Albertsons I'd like to thank our associates for their incredible commitment.
Todd A. Foley: At the end of the quarter Kroger's net debt to adjusted EBITDA ratio was 1.25 compared to our target range of two three to $2 five.
Speaker Change: Since we announced the proposed merger back in October of 2022, our associates have done an exceptional job preparing for integration with Albertsons, while never taking their eye off the ball of serving our customers every day advancing our strategy operating our business and driving results.
Todd A. Foley: Our strengthened balance sheet provides ample opportunities for kroger to pursue growth and enhanced shareholder value.
Todd A. Foley: We continue to take a disciplined approach to deploying capital with a focus on projects, which drive long term sustainable net earnings growth, while remaining committed to our investment grade debt rating, increasing our dividend over time subject to board approval and returning excess capital to shareholders. When we are able to do so.
Speaker Change: Because of their efforts, we will be prepared to hit the ground running as a combined company.
Speaker Change: Ready to serve more customers from day one.
Speaker Change: As part of our capital investment plans for 2024, we shared last quarter. Our plans for approximately 30 major scoring projects focused on higher growth geographies, where we have traditionally achieved a strong ROIC and operating profit growth.
Speaker Change: As a more general merger update in April we announced an expanded divestiture plan with CNS, which directly responds to the concerns raised by federal and state antitrust regulators regarding the original agreement.
Speaker Change: We've made good progress on our projects so far and remain on track with our plans while early we're happy with the results from projects completed in the first quarter.
Speaker Change: We believe that package, which includes a modified and expanded store set and more non store assets bolsters kroger's position and regulatory challenges to the proposed merger, including our upcoming court proceedings.
Speaker Change: We are confident these new storing projects will help advance our omni channel strategy and be an important component to our sales growth and CSR model going forward.
Speaker Change: It also positions CNS to be a strong and successful competitor.
Speaker Change: During the first quarter, we announced we had entered an agreement for the sale of our Kroger specialty pharmacy business.
Speaker Change: We are prepared to defend our merger because it will produce meaningful and measurable benefits for customers associates and communities across the country.
Speaker Change: As part of a regular and ongoing review of our portfolio, we determine determined that specialty pharmacy was not part of our core strategy going forward and a sale would enable us to focus on our health and wellness strategies that revolve around our retail pharmacies.
Speaker Change: Customers will benefit from lower prices and more choices following the merger close.
Speaker Change: Due to the sale of nonrecurring held for sale tax adjustment of $31 million was recognized in the quarter.
Speaker Change: We are committed to investing $500 million.
Speaker Change: To begin lowering prices day, one following close.
Speaker Change: And it has been reflected as an adjustment item in our results.
Speaker Change: Along with an additional $1 $3 billion to improve albertson stores.
Speaker Change: The sale of KFC is not expected to have an impact on our 2020 for guidance.
Kroger spokesperson: Employees will benefit from kroger's commitment to invest $1 billion to raise wages and comprehensive benefits further building on our $2 $4 billion in.
Speaker Change: I'd now like to provide some additional color arent outlook for the rest of the year.
Speaker Change: Today, we reaffirmed our annual guidance, reflecting both the positive momentum we are seeing in our business along with a more cautious customer environment in the near term.
Kroger spokesperson: And then incremental investments since 2018.
Kroger spokesperson: As Union membership continues to decline nationwide. This merger will secure union jobs.
Speaker Change: In terms of quarterly cadence, we now expect a decline in adjusted EPS for the second quarter similar to the rate we observed in the first quarter as we expect as we expect pharmacy business profitability pressures to carry over into the second quarter.
Speaker Change: And communities will benefit from the strength and ability of the combined company to accelerate kroger's commitment to ending hunger.
Speaker Change: As a combined company Kroger is committed to donating 10 billion meals to families across the U S by 2030.
Speaker Change: This reaffirms, where we expect it to be through both the first half of the year as well as the full fiscal 2024.
Speaker Change: In closing our first quarter performance reflects the strength and resiliency of our model, we are strengthening our grocery business, which drives the data and traffic to accelerate growth in our alternative profit businesses and we remain confident in our ability to drive attractive and sustainable returns for our shareholders.
In closing Kroger is off to a solid start to the year positioning us well to deliver on our commitments.
Speaker Change: We continue to invest in associates and the associate experience because when they have a better experience our customers do as well.
Speaker Change: I'll now turn the call back to Rodney.
Grocery results are off to a better than expected start which provides the foundation for growth and alternative profit businesses.
Rodney Mcmullen: Thanks, Todd as you've heard from both of US are grocery business is performing well and we are building momentum across our business.
Speaker Change: And our model is generating strong free cash flow, which has strengthened our balance sheet and positions us for future growth.
<unk> is operating from a position of strength, we have the right strategy, which is resonating with customers and we have the financial strength to pursue growth and enhance shareholder value.
Speaker Change: With that Todd and I look forward to taking your questions.
Speaker Change: We are in litigation, we will not be taking questions on the merger this morning.
Rodney Mcmullen: As we continue to prepare for our merger with Albertsons I'd like to thank our associates for their incredible commitment.
Speaker Change: We will now begin the question and answer session, if you'd like to ask a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by Chi Linda bearing to ask your questions. Please ensure your devices on muted locally.
Rodney Mcmullen: Since we announced the proposed merger back in October of 2022, our associates have done an exceptional job preparing for the integration with Albertsons, while never once taking their eye off the ball of serving our customers advancing our strategy operating our business and driving results because.
Speaker Change: And our first question comes from with.
Parekh: <unk> parekh from Oppenheimer.
Rodney Mcmullen: Their efforts, we will be prepared to hit the ground running as a combined company.
Speaker Change: Good morning, and thanks for taking my question.
unknown: So I wanted to dig deeper into the gross margin line. If you can maybe walk us through the puts and takes as you guys see it for the balance of the year, including how you think about the pharmacy margins in the back half of the year.
Rodney Mcmullen: Ready to serve more customers from day one.
Rodney Mcmullen: As a more general merger update in April we announced an expanded divestiture plan with CNS, which directly responds to the concerns raised by federal and state antitrust regulators regarding the original agreement.
Speaker Change: Yes, Thanks, Great question.
Speaker Change: We talked at the beginning of year that our expectation was to have relatively flat year over year gross margin and that is still the expectation as mentioned in my comments, we do expect results for the balance of the year to improve beyond our Q1 results.
We believe the package, which which includes a modified and expanded store set and more non store assets bolsters kroger's physician and regulatory challenges to the proposed merger.
Speaker Change: And that's really reflective of some of the gross margin expansion efforts that we have going on there going actually really well.
Rodney Mcmullen: Including our upcoming court proceedings.
Speaker Change: We alluded to our our brand's performance our margins and our brands continue to do very well.
Rodney Mcmullen: It also positions CNS to be a strong and successful competitor.
Rodney Mcmullen: We are prepared to defend our merger because it will produce meaningful and measurable benefits for customers for associates and for our communities across the country.
Speaker Change: As that business continues to grow, particularly in today's environment, we talked about the budget conscious consumer.
Speaker Change: That continues to connect with them and so the growth in that business help helps drive the margins and we expect to see that as the year goes on fresh is another category, where we've had.
Rodney Mcmullen: Customers will benefit from lower prices and more choices following the merger close.
Speaker Change: Meaningful growth fresh is doing really well, we've talked a lot about produce and fresh and how that business is growing and certainly that comes with a higher margins, which has a positive effect on our mix.
We are committed to investing $500 million to begin lowering prices day, one following close.
Rodney Mcmullen: Along with an additional $1 $3 billion to improve albertson stores.
Speaker Change: And then when you look at alternative profits and in particular.
Rodney Mcmullen: Employees will benefit from kroger's commitment to invest $1 billion to raise wages and comprehensive benefits further building on our $2 $4 billion and the incremental investments since 2018.
Speaker Change: Retail media.
Speaker Change: That business continues to grow well and especially the second half of the year.
Speaker Change: We expect retail media is a continuous momentum to achieve our <unk>.
Speaker Change: Growth of in excess of 20% for the year.
Rodney Mcmullen: As Union membership continues to decline nationwide. This merger will secure union jobs.
Speaker Change: Going on in that space, and we went to a new platform a year ago and as we went we ramped up the platform a year ago, we'll be cycling that period of time with some of the momentum we have in that business. So so all of those.
Rodney Mcmullen: And communities will benefit from the strength and the ability of the combined company to accelerate kroger's commitment to ending hunger.
Speaker Change: <unk>.
Rodney Mcmullen: As a combined company.
A lot of our confidence comes from when we talk about reaffirming our guidance for the year.
Rodney Mcmullen: <unk> has committed to donating 10 billion meals and families across the U S by 2030.
Speaker Change: And we alluded to some of the pharmacy headwinds.
Speaker Change: Even though we expect some of those to carryover into the second quarter I think all of the <unk>.
Rodney Mcmullen: In closing Kroger is off to a solid start to the year.
Rodney Mcmullen: <unk> well to deliver on our commitments.
Speaker Change: Results that we're seeing from our margin expansion efforts.
Rodney Mcmullen: We continue to invest in associates and the associate experience.
Speaker Change: We're going to continue to drive it so that we hit our expectations to improve the result relative to Q1.
Rodney Mcmullen: When they have a better experience our customers do as well.
Speaker Change: I'll just add a couple of points on Todd's last point.
Rodney Mcmullen: Grocery results are off to a better than expected start which provides the foundation for growth and alternative profit businesses and.
Speaker Change: We continue to have good success with value add product and typically that product is something that the customer can eat almost immediately.
Rodney Mcmullen: And our model is generating strong free cash flow, which has strengthened our balance sheet and positions us for future growth.
In the car at home and that's helping on margin and then our sourcing teams continue to have making progress in cost of goods, which helps as well.
Speaker Change: With that Todd and I look forward to taking your questions. Because we are in litigation, we will not be taking questions on the merger. This morning.
Speaker Change: Great and then maybe just one quick follow up question in light of some of the competitor announcements of reducing price on certain items. Just wondering how you guys feel about your price gaps today.
Speaker Change: We will now begin the question and answer session, if you'd like to ask a question. Please press star followed by one on your telephone keypad. If you change your mind with Westar followed by Chi.
Speaker Change: If you look at overall as you know for the last I don't know 15, 18 years part of the Kroger's strategy has always been to invest in pricing every year and 2020 for Whitney have been any different than any of the previous years and we continue to execute against that plan of helping the customer stretch their budget.
Speaker Change: Preparing to ask your question Mr. Shaw your devices are muted locally.
Speaker Change: And our first question comes from Greg <unk> from Oppenheimer.
Speaker Change: If you look at where we feel on our relative price position, we feel very good and one of the things that we even though.
Speaker Change: Good morning, and thanks for taking my question.
Greg <unk>: So I wanted to dig deeper into the gross margin line. If you can maybe walk us through the puts and takes as you guys see it for the balance of the year, including how you think about the pharmacy margins in the back half of the year.
Speaker Change: I was glad to see is if you look at the customer that's on a budget.
Speaker Change: For the first time in over a year, we actually had growth in count from that customer base. So overall, we feel good about where we are one of the things I always think it's important to remember too is.
Speaker Change: Yes, Thanks refresh a great question.
Speaker Change: Uh huh.
We talked at the beginning of year that our expectation was to have relatively flat year over year gross margin and that is still the expectation as mentioned in my comments, we do expect.
Speaker Change: Is it promotional merchant.
Speaker Change: People buy a lot more when things are promotion. We also have a very sophisticated rewards program for personalized offers that publicly you wouldnt see and also our fuel rewards. So overall, we feel good about where we are and we feel good about where we are relative to any of our competitors.
Speaker Change: <unk> for the balance of the year to improve beyond our Q1 results and that's really reflective of some of the gross margin expansion efforts that we have going on there going actually really well.
<unk>.
Speaker Change: We alluded to our our brand's performance our margins and our brands continue to do very well and as that business continues to grow particularly in today's environment, we talked about the budget conscious consumer.
Speaker Change: Thanks for <unk>, great. Thank you I'll pass it along.
Speaker Change: The next question comes from Robert <unk> from Bank of America Merrill Lynch.
Continues to connect with them and so the growth in that business help helps drive the margins that we expect to see that as the year goes on fresh is another category, where we've had.
Oh, Hey, Rami.
Robert: I had just two follow ups on <unk>.
Speaker Change: Meaningful growth fresh is doing really well, we've talked a lot about produce and fresh and how the business is growing and certainly that comes with a higher margins, which has a positive effect on our mix.
Speaker Change: The first question.
Speaker Change: Just in terms of the.
Robert <unk>: Price investments and I know you guys always do do them, but has anything changed with what this your CPG partners are doing with Kroger to to drive volumes.
Speaker Change: And then when you look at alternative profits and in particular.
Speaker Change: Retail media.
Speaker Change: That business continues to grow well and especially the second half of the year.
Speaker Change: We know that they're looking to do that and then also would love to just get further perspective on what what Kroger is seeing competitively.
Speaker Change: We expect retail media is a continuous momentum to achieve our <unk>.
Speaker Change: Growth of in excess of 20% for the year, what going on in that space and we went to a new platform a year ago and as we ramped up the platform a year ago, we'll be cycling that period.
Speaker Change: Either the same or different sort of theres kind of Walmart and target, but what are the regionals and independents doing competitively are they changing at all what theyre doing.
Speaker Change: Some of the momentum we have in that business. So so all of those.
If you look at CPG partners.
Speaker Change: Our.
Speaker Change: What are a lot of our confidence comes from when we talk about reaffirming our guidance for the year.
Speaker Change: Overall, we would be seeing more trade dollars than in the past and I think some of that ties to the comment I made before on sourcing.
Speaker Change: And we alluded to some of the pharmacy headwinds.
Speaker Change: Even though we expect some of those to carryover into the second quarter I think all of the.
Speaker Change: Yes.
Speaker Change: The economy is always say all short statements are incorrect. We there are some CPG partners that arent worried as much about tonnage and wouldn't be as aggressive, but we are seeing an increased trend where CPG. Most CPG partners are starting to focus on tonnage again, and then trying to.
Speaker Change: Results that we're seeing from our margin expansion efforts.
Speaker Change: We're going to continue to drive it so that we hit our expectations to improve the result relative to Q1.
Speaker Change: I'll just add a couple of points on Todd's last point.
Speaker Change: We continue to have good success with value add product and typically that product is something that the customer can eat almost immediately.
Speaker Change: Partner with us more aggressively to help tonnage.
Speaker Change: If you look at our regional competitors really wouldn't see much difference there than the national competitors.
Speaker Change: In the car at home and that's helping on margin and then our sourcing teams continue to have making progress in cost of goods, which helps as well.
Speaker Change: Overall.
Speaker Change: Inflation is up slightly you would see people raising and slightly more prices than lowering but nothing thats, especially different there than what we would see and as you know there is a ton of great awesome regional competitors out there.
Speaker Change: Great and then maybe just one quick follow up question in light of some of the competitor announcements of reducing price necessary items. Just wondering how you guys feel about your price gaps today.
Speaker Change: If you look at overall as you know for the last I don't know 15 18 years part of the Kroger's strategy has always been to invest in pricing every year in 2024, Witten had been any different than any of the previous years and we continue to execute against that plan of helping the customer stretch their budget.
Speaker Change: Thanks Robby.
Speaker Change: The next question comes from Simeon Gutman from Morgan Stanley.
Hi, This is zach on for Simeon Thanks for taking our questions.
Speaker Change: First with respect to the.
Speaker Change: If you look at where we fill on our relative price position, we feel very good and one of the things that we even though.
Zach: Q1 performance would you say that you set up the guidance with some conservatism or was it genuinely stronger than what you thought it would look like and maybe as a follow up why why shouldn't we extrapolate that level of upside for the full year and was it driven primarily by price or units or some of both.
Speaker Change: I was glad to see is if you look at the customer that's on a budget.
Speaker Change: For the first time in over a year, we actually had growth in count from that customer base. So we overall, we feel good about where we are one of the things I always think it's important to remember too is.
Speaker Change: Thank you.
Speaker Change: Yes, if you look at the first quarter performance as Todd and I. Both mentioned, we felt very good about where we are.
Speaker Change: As a promotional merchant.
Speaker Change: People buy a lot more when things are promotion, we also have a.
Speaker Change: We're finished or where it turned out.
Speaker Change: Very sophisticated rewards program for personalized offers that publicly you wouldnt see and also our fuel rewards. So overall, we feel good about where we are and we feel good about where we are relative to any of our competitors.
Speaker Change: One of the things I always think it's.
Speaker Change: The first quarter. So early in the year I never feel.
Speaker Change: It would be unusual for us to feel comfortable changing too much.
Speaker Change: Look at the things that we felt good about are the things that we've outlined in the prepared comments.
Speaker Change: Thanks, <unk>, great. Thank you I'll pass it along.
Speaker Change: Round are our.
Speaker Change: Our customer count growth the growth broad based across all of our customer types.
Speaker Change: The next question comes from Robert at Home from Bank of America Merrill Lynch.
Speaker Change: Our store team is doing a very good job of continuing to improve the experience and in stock positions and all of those things.
Yeah.
Oh, Hey, Rami.
Rami: I had just two follow ups on <unk>.
Speaker Change: A couple of headwinds that we do have is if you look at like incentive plans, especially in the second quarter, we will have significantly higher incentive plan accruals in the second quarter than what we did a year ago, which is partially what's affecting the second quarter.
Speaker Change: The first question.
Justin: Justin in terms of the.
Speaker Change: Price investments and I know you guys always do a do them, but has anything changed with what this your CPG partners are doing with Kroger to to drive volumes.
Speaker Change: But overall for the year.
Speaker Change #100: Good about where we are we feel good about where we are relative to where we thought we would be but it's really too early in the year to make too. Many changes that's a good call routing and extra to go together the strength we saw in the first half of the business.
Speaker Change: Because we know that they're looking to do that and then also would love to just get further perspective on.
Speaker Change: What what Kroger is seeing competitively.
Speaker Change: The same or different sort of there is theres kind of Walmart and target, but what are the regionals and independents doing competitively are they changing at all what they are doing.
Speaker Change #100: It's really time year incentive plan comment a big contributor to the strength, we're seeing in our grocery business is around our teams delivered on in store execution and the shopping experience an improvement in those metrics is an important part of our incentive plan. This year. So so it's those two thoughts are connected with one another.
Speaker Change: If you look at CPG partners.
Speaker Change: Overall, we wouldn't be seeing more trade dollars than in the past and I think some of that ties to the comment I made before on sourcing.
Speaker Change #100: Okay.
Thanks Zack.
Speaker Change: Economists always say all short statements are incorrect. We there are some CPG partners that arent worried as much about tonnage and wouldn't be as aggressive, but we are seeing an increased trend where CPG. Most CPG partners are starting to focus on tonnage again, and then trying to of part.
Speaker Change #101: Your next question comes from Kenneth Lee Goldman from J P. Morgan.
Speaker Change #102: Hi, Thank you.
Speaker Change #103: I just wanted to clarify are you still on track to see inflation increase as the year progresses. I think that was mentioned in last quarter I didn't hear any update on that rate of change and then.
Speaker Change: With us more aggressively to help tonnage.
Speaker Change: If you look at our regional competitors really wouldn't see much difference there than the national competitors.
Don't think you provided again I may have missed it gross profit dollars or pennies per gallon for fuel.
Speaker Change #103: Just trying to follow up on those two.
Speaker Change: And overall.
Speaker Change #103: Relative to I'll, let Todd answer the second part.
Speaker Change: Inflation is up slightly you would see people raise even slightly more prices and lowering but nothing that's especially different there than what we would see and as you know there is a ton of great awesome regional competitors out there.
Speaker Change #104: Inflation for the year, the first quarter was pretty much where we expected to be.
Todd: For the year is pretty consistent with where we thought it would be so if I'm going off memory, but I think we said it was slightly over 1% and we would continue to see it slightly over 1%.
Speaker Change: Thanks Robby.
Speaker Change: The next question comes from Simeon Gutman from Morgan Stanley.
Speaker Change #106: If you look at some of the.
Speaker Change #106: Commodity the commodities themselves, obviously that will bounce up and down and as you get later in the year. It will be that some of that balance will be driven by what kind of crop year is that relative to corn and some of those things but early overall.
Zach: Hi, This is zach on for Simeon Thanks for taking our questions.
Zach: First with respect to the Q1 performance would you say that you set up the guidance with some conservatism or was it genuinely stronger than what you thought it would look like and maybe as a follow up why why shouldn't we extrapolate that level of upside for the full year and was it driven primarily by price.
Speaker Change #106: We expect inflation to be similar to where we did last year and it is starting to stabilize we don't see deflation broad based at all but it is stabilizing around that a little over 1%.
Zach: Units or some of both thank you.
Speaker Change: Yeah. If you look at the first quarter performance as Todd and I. Both mentioned, we felt very good about where we are.
Speaker Change #107: That's great and on the fuel point.
Speaker Change #108: We did in my comments that we did see the cents per gallon margin was down low single digits.
Speaker Change: We're finished or work turned out one of the things I always think it's.
Speaker Change #108: Yes.
Speaker Change: The first quarter. So early in the year I never feel it.
Speaker Change #109: Okay. Thanks, Dan question comes from.
Speaker Change: It would be unusual for us to feel comfortable changing too much. If you look at the things that we felt good about are the things that we've outlined in the prepared comments around our.
Speaker Change #110: The next question comes from John Haynesville Telecom Guggenheim partners.
Speaker Change #110: Yeah.
Speaker Change #110: Hey, Ron do you want to start with when.
Speaker Change: Our customer count growth the growth is broad based across all of our customer types.
Speaker Change #111: When you think about delivery and pickup.
John Haynesville: Profitability, I mean, I know, you're losing money in those areas.
Speaker Change: Our store teams doing a very good job of continuing to improve the experience and in stock positions and all of those things.
Speaker Change #113: Do you have an idea in mind when you can begin to approach breakeven.
Speaker Change #113: I know, it's going to take a while but.
A couple of headwinds that we do have is if you look at like incentive plans, especially in the second quarter, we'll have significantly higher incentive plan accruals in the second quarter than what we did a year ago, which is partially what's affecting the second quarter.
Speaker Change #114: Hold on that and then if you had to pick a couple of key drivers right that would get you. There what do you think they are.
Speaker Change #115: Yes, if you look.
John Haynesville: And John we've talked about it a lot of times I always say our job one is to make sure. We don't lose the customer and job. Two is we have the responsibility to figure out how to be profitable with each of those customers.
Speaker Change: But overall for the year.
Speaker Change: So good about where we are we feel good about where we are relative to where we thought we would be but it's really too early in the year to make too many changes.
Speaker Change #116: We do have some divisions that are now at breakeven or slightly profitable and if you look at incrementally on a per order basis.
Speaker Change: Colorado accidents, you've got together the strength we saw in the first half of the business is.
Speaker Change: It's really time year incentive plan comment a big contributor to the strength, we're seeing in our grocery business is around our teams delivered on store execution in the shopping experience and an improvement in those metrics is an important part of our incentive plan. This year. So so.
Speaker Change #117: Certain almost all of our channels now.
Speaker Change #117: Incrementally they are contributing.
In terms of.
Speaker Change #117: Our expectation of ourselves is that that customer will be just as profitable as the store customer over time.
Speaker Change: Those two thoughts are connected with one another.
Speaker Change #117: I don't know that I would put a specific date on it yet but that is the expectations we have for ourselves.
Speaker Change: Sure.
Speaker Change: Thanks Zack.
Speaker Change #117: And the key things, but it will be continuing.
Speaker Change: Your next question comes from Kenneth Lee Goldman from J P. Morgan.
Speaker Change #118: For me I think number one is making sure NPS scores stay strong because thats what causes that customer.
Speaker Change: Hi, Thank you.
Speaker Change: Just wanted to clarify are you still on track to see inflation increase as the year progresses. I think that was mentioned in last quarter I didn't hear any update on that.
To continue to repeat.
Speaker Change #118: Then making sure.
Speaker Change #119: That each basket, we start getting more of the customer adds items within the basket and then always from an operating cost standpoint, we'll continue to use our technology to be more efficient.
Speaker Change: Rate of change and then I don't think you provided again I may have missed it gross profit dollars or pennies per gallon for fuel.
Speaker Change: Just trying to follow up on those two.
Speaker Change #120: Okay, and then maybe as a follow up on pharmacy.
Speaker Change: Yes relative to I'll, let Todd answer the second part.
Speaker Change #121: What's your sense, the pressures coming from where is it solely reimbursement or something else.
Speaker Change: Inflation for the year, the first quarter was pretty much where we expect them to be where we for the year is pretty consistent with where we thought it would be so if I'm going off memory, but I think we said it was slightly over 1% and we would continue to see it slightly over 1%.
Speaker Change #121: I mean, what's your take on reimbursement longer term.
Speaker Change #122: Are we basically going to see less capacity drugstore.
Speaker Change #122: Drugstores rider closing a lot of locations, but do you think between that supermarket is getting out of the business there will be a lot less capacity in pharmacy.
Speaker Change: If you look at some of the.
Speaker Change #122: Three or four or five years from now that will help profitability.
Speaker Change: Commodity.
Speaker Change: <unk> themselves, obviously that will bounce up and down and as you get later in the year, we that some of that balance will be driven by what kind of crop year is it relative to corn and some of those things but early overall.
Speaker Change #122: Yes.
Speaker Change #123: I'll talk to the headwinds a little bit of what we're seeing there was really a couple of items and product mix.
Speaker Change #123: One was around <unk>, one we've talked about that before its a high retail ring, but at an extremely low margin and so that puts pressure on our margins and coming into the year. If you recall the latter part of last year, we had supply constraints on <unk> and so.
Speaker Change: We expect inflation to be similar to where we did last year and it is starting to stabilize we don't see deflation broad based at all but it is stabilizing around that a little over 1% yes.
Speaker Change #123: <unk>.
Speaker Change #124: Those restrict restraints, we're relieved in the first quarter and frankly, our team did a really nice job with suppliers getting out there to get product to meet demand in our stores and so so our sales exceeded what we expected to see in the first quarter that put put a little bit of that unexpected pressure on margins and then the second there is another category of drugs as well.
Speaker Change: Yes, that's great and on the pure point.
Speaker Change: We did in my comments, though we did see the cents per gallon margin was download.
Speaker Change: Okay.
Okay. Thanks, Dan question comes from.
Speaker Change #124: We saw some regulatory restrictions that were unexpected that drove up the cost on those meds and put some pressure on the margin. So so when we talked about some unexpected chosen pharmacy was really around product mix in those couple of areas and wanted to make sure we called it out because we do see that carrying over into the second part of the year it wasn't necessarily reimbursement related.
Speaker Change: The next question comes from John Haynesville Telecom Guggenheim partners.
Speaker Change: Yeah.
Speaker Change: Hey, Ron you wanted to start with when.
Speaker Change: When you think about delivery and pickup.
Speaker Change: Profitability, I mean, I know, you're losing money in those areas.
Speaker Change: Do you have an idea in mind when you can begin to approach breakeven.
Speaker Change #125: And as we look longer term three or five years, we definitely think there'll be less capacity.
Speaker Change: I know, it's going to take a while but.
Speaker Change #126: And as you noted.
Speaker Change: Hold on that and then if you had to pick a couple of key drivers right that would get you. There what do you think they are.
Speaker Change #126: A significant number of closures by the other three players in that space and Theres a lot of work that's being done from a governmental standpoint around pbms. The thing that I get Super excited about our pharmacies and our health and wellness teams that continue to do a great job of improving the experience and how you're thinking.
Speaker Change: Yes, if you look.
John: And John we've talked about it a lot of times I always say our job one is to make sure. We don't lose the customer and job. Two is we have the responsibility to figure out out of the profitable each of those customers.
Speaker Change #126: It's amazing that a third of our customers don't even realize we have a pharmacy and.
John: We do have some divisions that are now at breakeven or slightly profitable and if you look at incrementally on a per order basis.
Speaker Change #127: We're obviously working incredibly hard to make sure that third of our customers that don't even realize we have a customer that we have a pharmacy to get them to convert to become a patient of a pharmacy because our teams do an amazing job on service.
John: Certain almost all of our channels now.
John: Incrementally they're contributing.
John: In terms of.
Speaker Change #127: Incredibly quick lines and things like that and it's one less trip that somebody estimates so thanks John.
John: Our expectation of ourselves is that that customer will be just as profitable as the store customer over time.
John: I don't know that I would put a specific date on it yet but that is the expectations we have for ourselves.
Speaker Change #128: The question.
Speaker Change #129: Our next question comes from Michael Lasser from UBS.
John: And then the key things audit will be continuing.
John: For me I think number one is making sure our MBS for stays strong because thats what causes that customer.
Michael Lasser: Good morning. Thank you so much for taking my question.
Speaker Change #131: Ron with a tween some of the comments from other who morning before it between some of the comments from other food retailer as well as your own discussion around increased price investments.
John: To continue to repeat.
John: Then making sure.
John: And that each basket, we start getting more of the customer adds items within the basket and then always from an operating cost standpoint, we'll continue to use our technology to be more efficient.
Michael Lasser: There is a perception that the industry is becoming more competitive and that is going to disrupt the profitability of food retail in the back half of the year.
John: Okay.
Speaker Change: Okay, and then maybe as a follow up on pharmacy.
What's your sense that the pressures coming from where is it solely reimbursement or something else.
Speaker Change #132: Could you compare where the overall promotional intensity.
Speaker Change #133: Youre witnessing is today versus where it's been in the past, especially around disruptive time and how much did you were price investments contribute to the improvement that you saw in more price sensitive customers lower income consumers in the quarter.
I mean, what's your take on reimbursement longer term.
Speaker Change: Are we basically going to see less capacity drugstores.
Speaker Change: Drugstores rider closing a lot of locations but.
Speaker Change: I think between that supermarket is getting out of the business there will be a lot less capacity in pharmacy.
Speaker Change: Three or four or five years from now that will help profitability.
Speaker Change #134: In terms of overall.
Speaker Change #135: I would say in terms of promotional activity looks very similar to pre COVID-19 and for the first time.
Speaker Change: Yes.
Speaker Change: I'll talk to the headwinds a little bit with what were seeing there was really a couple of items and product mix.
Speaker Change #136: And finally starts looking and feeling more like pre Covid times.
Speaker Change: One was around <unk>, one we've talked about that before its a high retail ring, but at an extremely low margin and so that puts pressure.
As I mentioned, a second ago overall, we saw more prices go up and go down.
Speaker Change: On our margins and coming into the year. If you recall the latter part of last year, we had supply constraints on <unk> and so.
Speaker Change #137: So when you look at the individual number of Skus.
Speaker Change #138: I feel really good about where we are.
Speaker Change: Some of those restrict restraints, we're relieved in the first quarter and frankly, our team did a really nice job with suppliers getting out there to get product to meet demand in our stores and so so our sales exceeded what we expected to see in the first quarter that put a little bit of that unexpected pressure on margins and then the second there was another category of drugs as well.
Speaker Change #138: And I feel good about our teams and their ability to continue taking care of customers in terms of the value customer.
Speaker Change #138: I think a lot of it is driven more from some of the things that we've done.
Speaker Change #138: Relative to.
Speaker Change #138: Our new brand in terms of smart way, helping that customer understand that they can come and shop with us and it's and you don't have to compromise relative to fresh and quality and some of those other aspects and experience.
Speaker Change: We saw some regulatory restrictions that were unexpected that drove up the cost on those meds and put some pressure on the margin. So so when we talked about some unexpected chunk in pharmacy was really around product mix in those couple of areas and wanted to make sure we called it out because we do see that carrying over into the second part of the year it wasn't necessarily reimbursement plan.
Speaker Change #138: Customer experience, our associate experience that they give so when you look at it overall.
It's pretty consistent.
Speaker Change #139: We thought it would be.
Speaker Change: And as we look longer term three or five years, we definitely think there'll be less capacity.
Speaker Change #139: And.
Speaker Change #140: Part of it I think is just the moderating inflation, but we still continue to expect a little bit of inflation.
Speaker Change: And as you noted.
Speaker Change: A significant number of closures by the other three players in that space and Theres a lot of work that's being done from a governmental standpoint around pbms.
Speaker Change #141: My follow up question is there progress financial Formula works very well when it's <unk> sales or above 3% when is a realistic expectation that it could resume seeing ids sales back at that level.
I get Super excited about our pharmacies, and our health and wellness team. They continue to do a great job of improving the experience and how you think it is amazing that a third of our customers don't even realize we have a pharmacy and.
Speaker Change #142: I think youre right our model is to drive 2% to 4% I'd sales and as you looked at we talked a lot last quarter around the.
Speaker Change: We're obviously working incredibly hard to make sure that third of our customers that don't even realize we have a customer that we have a pharmacy to get them to convert to become a patient of our pharmacy because our teams do an amazing job on service we have incredibly quick.
Speaker Change #143: Dynamics of inflation than what we saw last year with our with the rapid disinflation throughout the year and as we get back to this year, the more normal inflation environment that Rodney alluded too and.
Speaker Change: Lines and things like that.
Speaker Change: And it's one less trip that somebody estimate so thanks, John for the question.
Speaker Change #143: And we start cycling those heavy disinflation.
Speaker Change #143: We talk about the.
Speaker Change #143: Getting towards the high end of our guidance range relative to sales.
Speaker Change: Our next question comes from Michael Lasser from UBS.
Speaker Change #143: <unk>.
Rodney: By the second half of the year and I think that starts to get us back into that range that are long long term model is based on in the 2% to 4%.
Speaker Change: Good morning. Thank you so much for taking my question.
Speaker Change: Ron was a tween some of the comments from other <unk>.
Rodney: Yes.
Rodney: It's a great question, it's hard to give a specific date other than I can assure you that our team is working really hard.
Speaker Change: Morning, before between some of the comments from other food retailer as well as your own discussion around increased price investments.
Rodney: To get there. We're also and this is something I would say, we've always done, but you always try to get better and if you look at capital investments.
Speaker Change: There is a perception that the industry is becoming more competitive and that is going to disrupt the profitability of food retail in the back half of the year. So could you compare where the overall promotional intensity.
Rodney: We would also be using capital investments to support that growth and as you know we are starting to increase the number of stores that we're opening.
Rodney: The maturity of those stores and the remodel those stores also with identical over time, and we would expect that that obviously would be the case now and as Todd mentioned.
Speaker Change: Youre witnessing is today versus where it's been in the past, especially around disruptive time and how much do you were price investment contribute to the improvement that you saw in more price sensitive customers lower income consumer in the quarter.
Rodney: It's early and the slightly higher capital spending for new stores and expansions and stuff, but we're pleased with the early results. Thanks Michael.
Speaker Change: Yes.
Speaker Change: In terms of overall.
Speaker Change #144: And our next question comes from Michael one tiny from Evercore.
Speaker Change: I would say in terms of promotional activity looks very similar to pre COVID-19 and for the first time.
Speaker Change #145: Hey, Thanks for taking the question wanted to ask if you could discuss the sales cadence through the quarter and then in the month of June how should we think about it.
And finally starts looking and feeling more like pre Covid times.
Speaker Change: As I mentioned, a second ago overall, we saw more prices go up and go down.
Speaker Change #146: Sales for <unk>, and then I had a follow up.
Speaker Change: So when you look at the individual number of Skus.
Speaker Change #146: Yes.
Speaker Change #147: The first quarter was a little choppy because we had had a.
Speaker Change: Really good about where we are.
Easter.
Speaker Change: And I feel good about our teams and their ability to continue taking care of customers in terms of the value customer.
Speaker Change #148: The mismatch relative to the calendar, but the general trend throughout the quarter, we saw Ids.
Speaker Change: I think a lot of it is driven more from some of the things that we've done.
Speaker Change #148: Increased steadily as we went through the quarter on average and then as we look to Q2.
Speaker Change: All of them to.
Speaker Change: Our new brand in terms of smart way, helping that customer understand that they can come and shop with us and it's and you don't have to compromise relative to fresh and quality and some of those other aspects.
Speaker Change #150: To date, so far were.
Speaker Change #149: Right on plan relative to our expectations for Q2, Q2 results and the guidance that we've given and as you know we.
Speaker Change: Spirit.
Speaker Change #151: We do expect it.
Speaker Change: The customer experience, our associate experience that they give so when you look at it overall, it's pretty consistent with where we thought it would be.
Speaker Change #151: To improve throughout the year and we continue so far we're continuing to see that and would expect that to continue.
Speaker Change: <unk>.
Speaker Change: Part of it I think is just the moderating inflation, but we still continue to expect a little bit of inflation.
Speaker Change #151: Got it that's helpful and if I can.
Speaker Change #152: Just wanted to try to better get the arms around some of the pharmacy pressures.
Speaker Change #153: Is there anything that you could point to in the back half of the year, whether it be comparison based or otherwise that would help to alleviate some of those pressures or perhaps other sources of profit whether it be media or fuel that could offset somewhat.
Speaker Change: My follow up question is there progress financial Formula work, very well, when it's <unk> sales or above 3%.
Speaker Change: When is a realistic expectation that it could resume.
Speaker Change: Ids sales back at that level.
Speaker Change #154: I'll make a couple of comments and Todd feel free to add one of the things as you get to the third quarter and early in the fourth quarter as vaccines and as you know last year. Our team did an amazing job of increasing the number of vaccines, we gave and we have a ton of <unk>.
Speaker Change: I think youre right. Our model is to is to drive 2% to 4% I'd sales and as you looked at we've talked a lot last quarter around the.
Speaker Change: Dynamics of inflation than what we saw last year with that with the rapid disinflation throughout the year and as we get back to this year the more normal inflation environment that Rodney alluded to.
Todd: Earnings that we think will be able to do that again this year and so when you look at just the pharmacy business.
Speaker Change: And we start cycling those heavy different patients.
Todd: Part of that will be that and also.
Speaker Change: We talk about the the getting towards the high end of our guidance range relative to sales.
Todd: On some of the supply issues, we would hope that.
Todd: And expect for those to get more normalized in like the.
Speaker Change: <unk>.
Speaker Change: By the second half of the year and I think that starts to get us back into that range that are long long term model is based on the 2% to 4%.
Todd: One drug that Todd was talking about the generics as they come out and stuff historically, that's always improved profitability and we would expect at some point in the later part of the year for those things to happen relative to the other pieces title work.
Speaker Change: It's a great question, it's hard to give a specific date other than I can assure you that our team is working really hard.
Speaker Change: To get there. We're also and this is something I would say, we've always done, but you always try to get better and if you look at capital investments.
Todd: Youre right on with what I was going to say on pharmacy, Rodney and just overall with the business I alluded to earlier.
Todd: The margin expansion.
Speaker Change: We would also be using capital investments to support that growth.
Todd: Efforts that we're seeing and those are all factored into the guidance for the rest of the year and even even given those pharmacy headwinds, we expect the pharmacy or the.
Speaker Change: And as you know, we're starting to increase the number of stores that we're opening.
Speaker Change: The maturity of those stores and the remodel those stores also help with identical over time, and we would expect that the obviously the case now and as Todd mentioned, it's early and the slightly higher capital spending for new stores and expansions and stuff, but we're pleased with the early results. Thanks Michael.
Todd: The margin expansion in the gross margin expansion initiatives that we have.
Blended with the pharmacy headwinds that we called out should enable us to achieve.
Todd: Gross profit results.
Speaker Change #155: Beyond what we saw in the first quarter. Thanks, Michael.
Speaker Change #156: Our next question comes from Ed Kelly from Wells Fargo.
Speaker Change: And our next question comes from Michael one tiny from Evercore.
Speaker Change #157: Hi, good morning, everyone.
Ed Kelly: I wanted to start two questions. The first question I had is just around.
Speaker Change: Hey, Thanks for taking the question I wanted to ask if you could discuss the sales cadence through the quarter and then in the month of June how should we think about it.
Ed Kelly: Good morning, it's just around the second quarter guidance. So Q1, you beat.
Ed Kelly: On lower fuel margins and lower pharmacy.
Speaker Change: Sales for <unk>, and then I had a follow up.
Speaker Change #159: Q2, the guidance is coming down.
Speaker Change: Yes.
Is that just solely based on pharmacy and incentive comp is there something else happening within here I'm, just trying to figure out the level of conservatism that.
Speaker Change: During the first quarter was a little choppy because we had a.
Speaker Change: Easter.
Speaker Change: The mismatch relative to the calendar, but the general trend throughout the quarter was that we saw.
Speaker Change #159: Is sitting in the in the second quarter guidance, given what you just did in Q2 against all of this.
Speaker Change: Increased steadily as we went through the quarter on average and then as we look to Q2.
Speaker Change #160: Yes, no you're right and it is primarily based on pharmacy.
Speaker Change: To date, so far we are.
Speaker Change #161: And incentive you are correct from.
Speaker Change: Right on plan relative to our expectations for Q2, Q2 results and the guidance that we've given.
Speaker Change #162: From a fuel perspective.
Speaker Change #162: So volatile it's really week to week, it's part of what we keep our keep our eye on as we go forward.
Speaker Change: As you know we.
Speaker Change: We do expect it to improve throughout the year and we continue so far we're continuing to see that and would expect that to continue.
Speaker Change #162: So far it has been closer to our expectations for the quarter, but thats, one that we truly monitor daily.
Speaker Change #162: <unk> to understand the impact it's having on businesses.
Got it that's helpful and if I could just wanted to try to better get the arms around some of the pharmacy pressures is there anything that you could point to in the back half of the year.
Speaker Change #163: Alright, and then I guess a quick follow up is just on leverage. So you continue to reiterate your leverage target.
Speaker Change #163: You are well below that at this point.
Speaker Change: Whether it be comparison based or otherwise that would help to alleviate some of those pressures or perhaps other sources of profit whether it be media or fuel that could offset somewhat.
Speaker Change #164: <unk> a step back are there any advantages that you see to the business to running below the target long term.
Speaker Change #165: Is this a metric that you think you would reassess post the Albertsons decision.
Speaker Change: I'll make a couple of comments and Todd feel free to add one of the things as you get to the third quarter.
Speaker Change #165: Just curious as to how youre thinking about that.
Speaker Change #165: <unk>.
Speaker Change #166: I think long term our targets of two three to $2 five are in the right place that that that is one of our key objectives is to maintain our investment grade rating and over time it's.
Speaker Change: And early in the fourth quarter as vaccines and as you know last year. Our teams did an amazing job of increasing the number of vaccines. We gave and we have a ton of learnings that we think will be able to do that again this year and so when you look at just the pharmacy business.
It's proven that that that is the range that enables us to be able to do that so I think long term continue to look to operate within that range with or without the merger frankly.
Speaker Change: Part of that will be that and also.
Speaker Change #166: And the beauty with where we're at here you are right. We do have a lot of capacity. There. Obviously, we are firmly focused on closing the merger in being able to use that capacity relative to the merger.
On some of the supply issues, we would hope that and expect for those to get more normalized in like the one.
Ravi: The one drug that Todd was talking about the generics as they come out and stuff historically, that's always improved profitability and we would expect at some point in the later part of the year for those things to happen relative to the other pieces title work done Youre right on with what I was going to say on pharmacy, Ravi and just overall in the business I alluded to earlier.
Speaker Change #166: And come out the other end, but I think in any scenario.
Speaker Change #166: The capital allocation approach that we've taken over time, we've got a long track record on what that is and how we do it and I would expect us to execute under that framework on a go forward basis, we really view, our lowest cost of capital is a triple b.
Speaker Change: <unk>.
Speaker Change: The margin expansion.
Speaker Change #166: <unk> and <unk>.
Speaker Change: Efforts that we're seeing and those are all factored into the guidance for the rest of the year and even even given those pharmacy headwinds, we expect the pharmacy or the margin expansion in the gross margin expansion initiatives that we have.
Speaker Change #166: If you look at.
Speaker Change #167: Historically, it's like 80% of the time that would be the lowest cost of capital and as you look at the markets going forward, we don't see anything that would cause that to change. So that gives you the financial flexibility to do things like merging with Albertsons I'd also.
Speaker Change: Blended with the pharmacy headwinds that we called out.
Speaker Change: It should enable us to achieve.
Speaker Change #167: That creates the lowest cost of capital and the reason, we always reiterate that two three to two five is that really is the point that we believe creates a solid triple b rating.
Speaker Change: Gross profit results beyond.
Speaker Change: Beyond what we saw in the first quarter. Thanks, Michael.
Speaker Change: Okay.
Speaker Change: Our next question comes from Ed Kelly from Wells Fargo.
Speaker Change #167: The thing that.
Speaker Change: Yeah.
Todd and I, both mentioned the business continues to be incredibly strong from a free cash flow standpoint, and the anticipation going forward. So it gives us the opportunity to continue to invest in the business continue to grow the business and we can't wait to be able to merge with albertsons. So we can do that even a scale a little bit bigger so.
Speaker Change: Hi, good morning, everyone.
I wanted to start two questions. The first question I had is just around.
Speaker Change: Good morning, it's just around the second quarter guidance. So Q1, you beat on lower fuel margins and lower pharmacy.
Speaker Change: Q2, the guidance is coming down.
Speaker Change #168: Thanks, Ed for the questions.
Speaker Change: Is that just solely based on pharmacy and incentive comp is there something else happening within here I'm, just trying to figure out the level of conservatism that.
Speaker Change #169: And our next question comes from Kelly.
Danya: Danya from BMO.
Speaker Change: As sitting in there.
Speaker Change: In the second quarter guidance, given what you just did in Q2 against all of this.
Kelly Bania: Hi, Good morning. This is Kelly bania from BMO.
Good morning.
Speaker Change: No Youre right and it is primarily based on pharmacy.
Speaker Change #172: The volume and the tonnage.
Speaker Change #172: Outlook.
Speaker Change: And incentive you are correct.
Speaker Change #173: Thank you mentioned some positive momentum with the budget consumers.
Speaker Change: From a fuel perspective.
Speaker Change #174: And maybe an increasing customer count there, but how how our volumes in tonnage trending year over year within your different customer cohorts and how how is that impacting your outlook for the full year in terms of tonnage and volume overall.
Speaker Change: That's that's a volatile it's really week to week, it's part of what we keep our keep our eye on as we go forward.
Speaker Change: So far it has been closer to our expectations for the quarter, but thats, one that we truly monitor daily.
Speaker Change: <unk> to understand the impact of government business.
Speaker Change #175: If you look.
Speaker Change #176: The tonnage trends are all trying to think if theres any exception to this they are all in the right direction and they are improving.
Speaker Change: Alright, and then I guess a quick follow up is just on leverage. So you continue to reiterate your leverage target.
Speaker Change #100: You are well below that at this point.
Speaker Change #176: If you look at historically part of that we believe is because of the moderating inflation part of it is because of doing a better job on in stock and the customer experience.
Speaker Change #101: <unk> a step back are there any advantages that you see in the business to running below the target long term.
Speaker Change #102: Is this a metric that you think you would reassess post the albertsons precision.
Speaker Change #176: <unk>.
Speaker Change #176: Connecting better with each customer segment so.
Speaker Change #103: Just curious as to how youre thinking about.
Speaker Change #176: We feel good about those trends.
Speaker Change #102: Yeah.
Speaker Change #176: For multiple reasons.
Speaker Change #104: I think long term our targets of two three to $2 five are in the right place. So that that is one of our key objectives is to maintain our investment grade rating and overtime.
Speaker Change #176: Yeah.
Yeah.
Speaker Change #104: It's proven that that that is the range that enables us to be able to do that so I think long term continue to look to operate within that range with or without the merger frankly.
Speaker Change #176: Yes.
Was there a follow up question or.
Speaker Change #177: Oh, yes. Thank you I wasn't sure if youre done.
Speaker Change #105: And the beauty with where we're at here Youre right. We do have a lot of capacity. There. Obviously, we are firmly focused on closing the merger in being able to use that capacity relative to the merger.
Speaker Change #178: Wanted to ask maybe another question on the promotional and the competitive environment. It sounds like you'd characterize it may be back to normal.
Speaker Change #179: I guess, what's different today about kroger's tenant.
Speaker Change #105: And come out the other end, but I think in any scenario.
Speaker Change #180: Gross margin profile being more more stable and it sounds like maybe up a little bit in the next couple of quarters here relative to a few years ago, how much of that just rest on the alternative profit and the magnitude of that continued growth there versus anything different that you see in the gross margin.
Speaker Change #105: The capital allocation approach that we've taken over time, we've got a long track record on what that is and how we do it and I would expect us to execute under that framework on a go forward basis, we really view, our lowest cost of capital is a triple b.
Speaker Change #105: <unk> and <unk>.
Speaker Change #105: If you look at it historically.
Speaker Change #181: So the kind of the core business.
Speaker Change #105: Historically, it's like 80% of the time that would be the lowest cost of capital and as you look at the markets going forward, we don't see anything that would cause that to change. So that gives you the financial flexibility to do things like merging with Albertsons I'd also.
Speaker Change #181: Yes, Kelly I think you hit on part of it I don't think it's just alternative profit I think we have today more.
Speaker Change #181: More levers maybe than we've had in the past to be able to drive that value through margin expansion. So it's alternative profit in retail media, it's what our merchants to what we've already talked a little bit today about our brands and the value that our brands <unk> and the margin expansion there and same with fresh I think it's all of those areas and I think it's also.
That creates the lowest cost of capital and the reason, we always reiterate that two three to two five is that really is the point that we believe creates a solid triple b rating.
Speaker Change #181: Things will continue to do with process improvement, whether it's in supply chain.
Speaker Change #105: The thing that Todd and I, both mentioned the business continues to be incredibly strong from a free cash flow standpoint, and the anticipation going forward. So it gives us the opportunity to continue to invest in the business continue to grow the business and we can't wait to be able to emerge with albertsons. So we can do that even though.
Speaker Change #181: Whether it's continuing to drive down shrink et cetera et cetera. So.
Speaker Change #181: I think it's the variety of margin improvement initiatives that we have.
Speaker Change #181: Whats a little different than maybe what we saw several years ago, because we have various sources of value to help fund those investments and our customers.
Edward Joseph Kelly: Scale, a little bit bigger so thanks, Ed for the questions.
Speaker Change #181: And in our associated spring.
Speaker Change #182: You look at some of the things Thats in margin like warehouse and transportation costs. Our teams are making good progress there, reducing the number of empty miles, taking and managing more the transportation. So.
Edward Joseph Kelly: Yeah.
Speaker Change #107: And our next question comes from Cow.
Speaker Change #108: Danya from BMO.
Hi, Good morning. This is Kelly bania from BMO.
Speaker Change #183: There is a lot one of the things as you know we've done a ton of work over the last five or 10 years on diversifying our business model and how we create value.
Kelly Ann Bania: Good morning.
Speaker Change #110: About the volume and mechanics.
Speaker Change #110: Outlook.
Speaker Change #111: You mentioned some positive momentum with the budget consumer.
Speaker Change #183: Part of it is.
Speaker Change #183: The traffic that our base business creates being able to monetize that in ways that the customer actually views and finds a value.
Speaker Change #112: And maybe an increasing customer count there, but how how are volume and tonnage trending year over year within your different.
Customer cohorts and how how is that impacting your outlook for the full year in terms of tonnage and volume overall.
Speaker Change #184: Thanks Kelly.
Chris <unk>: And our next question comes from Chris <unk> from Deutsche Bank.
Speaker Change #113: If you look.
Speaker Change #114: Tonnage trends are all trying to think if theres any exception to this they are all in the right direction and they are improving.
Speaker Change #186: Hi, good morning, and thanks for taking the question I wanted to ask about the store execution plan that you implemented with the daily scoring system now you're really addressing some of the underperforming stores relative to the chain average. So one is what has been the biggest opportunity for some of the store level improvements youre seeing just how much.
Speaker Change #113: <unk>.
If you look at historically part of that we believe is because of the moderating inflation part of it is because of doing a better job on in stock and the customer experience and <unk>.
Speaker Change #187: Are they contributing to the traffic gains that you are also seeing and just how best to think about further upside with both your budget conscious customers, but also the mainstream and premium customers.
Speaker Change #113: Connecting better with each customer segment so.
Speaker Change #113: We feel good about those trends.
For multiple reasons.
When you look at upside.
Speaker Change #113: Okay.
Speaker Change #188: I think our whole team feels incredibly good.
Speaker Change #189: If you were in one of our meetings you would hear US talk about all the things that we can get better at and it's things that matter to our associates that matter to our customers. So.
Speaker Change #113: Yeah.
Speaker Change #113: Yes.
Speaker Change #115: Was there a follow up question or.
Speaker Change #190: We're incredibly excited about the continued opportunity we have on getting better on the store execution.
Speaker Change #116: Oh, yes. Thank you.
Speaker Change #117: So have you done.
Speaker Change #118: Wanted to ask.
Speaker Change #119: Another question on the promotional and competitive environment. It sounds like you'd characterize it may be back to normal.
Speaker Change #190: <unk>.
Speaker Change #191: Obviously, they always say reach retail is detail and it literally is working with every single store as we mentioned in our prepared remarks turnover continue to improve.
Speaker Change #120: I guess, what's different today about krogers.
Speaker Change #121: Gross margin profile being more more stable and it sounds like maybe up a little bit in the next couple of quarters here relative to a few years ago, how much of that just rest on the alternative profit and the magnitude of that.
Turnover is lower when retention is better.
Speaker Change #191: On the experience that helps on the execution of the store on in stocks and other things.
Speaker Change #191: Our teams are doing a very good job on fresh and Thats everything from our supply chain to our folks are ordering product to using AI to make sure the right stores get the right product to the stores getting it out on the shelf and helping the customer have a couple more days of freshness at home. So it's really all of those things together.
Speaker Change #121: Growth there versus anything different that you see in the gross margin.
Speaker Change #122: So the kind of the core business.
Kelly: Yes, Kelly I think you hit on part of it I don't think it's just alternative profit I think we have today more.
Speaker Change #124: More levers maybe than we've had in the past to be able to drive that value through margin expansion. So it's alternative profit in retail media what.
Speaker Change #191: We think that's what's driving the increase.
Speaker Change #191: Traffic and increased.
Speaker Change #124: What our merchants to what we've already talked a little bit today about our brands and the value that our brands and the margin expansion there and same with fresh I think it's all of those areas I think it's also the thing.
Speaker Change #192: Connection with our customers. So it's obviously super proud of the whole team and excited about the opportunities going.
Speaker Change #192: Front of us.
Speaker Change #192: Yeah.
Speaker Change #124: We continue to do with process improvement, whether it's in supply chain.
Speaker Change #193: Great and just a quick follow up on.
Speaker Change #124: It's continuing to drive down strength et cetera et cetera. So.
Speaker Change #194: To beat this but just on the promo backdrop, just how should we think about your promotional basket how much of that is proactive versus reactive that you are.
Speaker Change #124: I think it's the variety of margin improvement initiatives that we have.
Whats a little different than maybe what we saw several years ago, because we have various sources of value to help.
Speaker Change #195: In the current environment and think you said that it's pretty much back to pre COVID-19 levels is it fair to assume that your vendor funding is also in line with pre COVID-19 levels or do you anticipate that to continue to ramp.
Speaker Change #124: Those investments in our customers.
Speaker Change #124: And in our associated spring.
Speaker Change #124: You look at some of the things that's in margin like warehouse and transportation costs. Our teams are making good progress there, reducing the number of empty miles, taking and managing more the transportation. So.
Speaker Change #196: Our vendors are focusing on driving volumes. Thank you.
Speaker Change #197: Yes, if you look at vendor funding, we would expect it to continue to increase because.
Speaker Change #198: Cpg's are trying to move tonnage if you look at overall.
Speaker Change #124: There is a lot one of the things as you know we've done a ton of work over the last five or 10 years on diversifying our business model and how we create value.
I think feel like it's pretty much back to pre COVID-19, but at a higher level. Some is some cpg's have increased their margins.
Speaker Change #124: Part of it is.
Speaker Change #124: The traffic that our base business creates being able to monetize that in ways that the customer actually views and finds a value.
Speaker Change #199: So, they're just making flat out more profit.
Speaker Change #200: So we think they actually have room to even further invest in trade dollars.
Speaker Change #201: To your comment on reactive versus proactive.
Speaker Change #125: Thanks Kelly.
Speaker Change #201: We put our plan together for the year and our guidance for the whole nine yards, we put together our pricing strategy for the year and we're executing on the strategy that we've put in place and we think.
Speaker Change #126: And our next question comes from Christian <unk> from Deutsche Bank.
Speaker Change #127: Hi, good morning, and thanks for taking my question I wanted to ask about the store execution plan that you implemented with the daily scoring system now you're really addressing some of the underperforming stores relative to the chain average. So one is what has been the biggest opportunity for some at the store level improvements Youre seeing just how.
Speaker Change #201: Clearly customers are responding to that very favorably, we're not deviating from the plan that we have that we've put into place.
Rami: We are executing our playbook Rami mentioned it earlier, it's what we've done for 15 years or 20 years.
Rami: Our playbook.
Speaker Change #203: I think that's what's resonating with our customers there isn't.
Are they contributing to the traffic gains that you are also seeing and just how best to think about further upside with both your budget conscious customers, but also the mainstream and premium customers.
Speaker Change #204: Things that are going on out there that I would say, that's causing us to be reactive.
Speaker Change #205: You always pay attention a nice spend as much time getting to the competitor stores as I do our own stores.
Speaker Change #128: When you look at upside.
Speaker Change #129: I think our whole team feels incredibly good.
Speaker Change #205: But when I look at overall.
Speaker Change #205: We're running our plan and we're using our data and insights to make sure that we're taking care of our customers and associates.
Speaker Change #130: If you were in one of our meetings you would hear US talk about all the things that we can get better at and the things that matter to our associates a matter to our customers. So.
Speaker Change #205: So really good about.
Speaker Change #130: We're incredibly excited about the continued opportunity we have on getting better on the store execution.
Where we are overall in that so thanks for the questions.
Yeah.
Speaker Change #206: The next question comes from Chuck Cerankosky from Northcoast research.
Speaker Change #130: It's.
Speaker Change #130: Obviously, they always say reached at retail is detail and it literally is working with every single store as we mentioned in our prepared remarks turnover continue to improve.
Speaker Change #205: Right.
Speaker Change #207: Good morning, everyone.
Speaker Change #207: Good morning, Chuck I was cut off for a while but it sounded like.
Speaker Change #207: He said Rodney that your delivery sales doubled year over year in the first quarter.
Speaker Change #130: Turnover is lower when retentions better and help.
Speaker Change #130: On the experience that helps on the execution of the store on in stocks and other things.
Speaker Change #208: Driving that is it just your execution.
Speaker Change #209: Customer demand and I and when you look at customer and customer demand for delivered groceries, how does it break down between.
Speaker Change #130: Our teams are doing a very good job on fresh and Thats everything from our supply chain to our folks are ordering product to using AI to make sure the right stores get the right product to the stores getting it out on the shelf and helping the customer have a couple more days of freshness at home. So it's really all of those things together.
Speaker Change #209: Budget conscious customers and more affluent customers.
Speaker Change #209: Yes.
Speaker Change #209: Look.
Speaker Change #210: Sorry that you got cut off but.
Speaker Change #211: The delivery business almost doubled.
Speaker Change #211: Year on year.
Speaker Change #130: We think that's what's driving the increased and <unk>.
Speaker Change #211: It's pretty broad based again on all customer segments.
Speaker Change #130: Traffic and increased.
Speaker Change #212: But I think one of the things that's important to remember is that our technology allows us to do a better job now accepting snap and some of those things.
Speaker Change #130: Connection with our customers. So it's obviously super proud of the whole team and excited about the opportunities.
Speaker Change #130: In front of us.
What it did a year ago.
Speaker Change #130: Okay.
Speaker Change #131: Great and just a quick follow up.
Speaker Change #212: So it's really across all customers.
Speaker Change #132: To beat this but just on the promo backdrop, just how should we think about your promotional basket how much of that is proactive versus reactive that you are.
Speaker Change #213: The thing Thats driving it is our teams are doing a nice job on making sure. The experience is good I can tell you in Florida people will get ice cream that still frozen.
During in the current environment and think you said that it is pretty much back to pre COVID-19 levels is it fair to assume that your vendor funding is also in line with pre COVID-19 levels or do you anticipate that to continue to ramp.
Speaker Change #214: Chocolate, that's not melted because of our delivery because of the delivery trucks in it.
Speaker Change #215: It's really it's one of those things were.
Speaker Change #216: All the things you feel good about we still have a lot of work to make sure that we're satisfied with the profitability.
Speaker Change #133: Your vendors are focusing on driving volumes. Thank you.
Speaker Change #134: Yes, if you look at vendor funding, we would expect it to continue to increase because.
Yeah.
Speaker Change #134: Cpg's are trying to move tonnage if you look at overall.
Speaker Change #217: And are there any.
Speaker Change #218: CPG promotions or.
Speaker Change #134: I think feel like it's pretty much back to.
Speaker Change #134: Pre COVID-19, but at a higher level. Some is some cpg's and increase their margins.
Speaker Change #219: Moneys made available to help.
Speaker Change #219: Uh huh.
Speaker Change #220: Get the customer to make the first delivery order.
Speaker Change #134: Without so that just make them flat out more profit so.
Speaker Change #221: Yes. The short answer is yes, and there is as you know online and with our data and personalization.
Speaker Change #134: So we think they actually have room to even further invest in trade dollars.
Speaker Change #134: And to your comment on reactive versus proactive when we put our plan together for the year and our guidance for the whole nine yards.
Speaker Change #221: There's all kinds of things that you're learning.
Speaker Change #221: Of different customers.
Put together our pricing strategy for the year and we're executing on the strategy that we've put in place and we think.
Speaker Change #221: Find it attractive at different times.
Speaker Change #221: So the short answer is absolutely yes. The other thing is obviously online really supports the alternative profit business.
Speaker Change #134: Clearly customers are responding to that very favorably.
Speaker Change #134: Not deviating from the plan that we have that we've put into place.
Speaker Change #221: As well for them from a media standpoint.
We are executing our playbook Rodney mentioned it earlier, it's that's what we've done for 15 or 20 years.
Speaker Change #222: Thanks Chuck.
Speaker Change #134: We stuck to our playbook.
Speaker Change #222: Thanks, Ron and good luck for the rest of the year. Thank you I appreciate it.
Speaker Change #134: And we think that's what's resonating with our customers.
Speaker Change #134: There isn't.
<unk> that are going on out there that I would say, that's causing us to be reactive.
Speaker Change #223: The question and answer session is now finished.
Speaker Change #224: Back over to you Rodney for any final remarks.
Speaker Change #134: You always pay attention and I spend as much time getting to the competitors' stores as I do our own stores.
Thank you for all the questions as always.
Speaker Change #134: But when I look at overall.
Rodney: As you know I always like to share a few comments with our associates listening in.
Speaker Change #134: We're running our plan and we're using our data and insights to make sure that we're taking care of our customers and associates.
Rodney: Today I'd like to take a moment to celebrate Alex Spurlock, Alex as a store leader at KFC store $8 60 in Redmond, Washington, and recently was named the 2020 for food Industry Association store leader of the year. Obviously this is a huge honor and we are so impressed by the.
Speaker Change #134: Really good about.
Speaker Change #134: Where we are overall on that so thanks for the questions.
Speaker Change #134: Yeah.
Speaker Change #135: The next question comes from Chuck Cerankosky from Northcoast research.
Speaker Change #136: All right.
Rodney: Amazing work that Alex does that our store.
Okay.
Speaker Change #137: Good morning, everyone.
Rodney: With more than a decade in the grocery business Alex understands the industry.
Jack: Good morning, Jack I was cut off for a while but it sounded like.
Speaker Change #139: You said Rodney that your delivery sales doubled year over year in the first quarter.
Speaker Change #225: She is a general spirit and our fears attention to detail that clearly earned her this recognition.
Speaker Change #139: What's driving that is it just your execution.
Most impressive is Alex his passion for our associates.
Speaker Change #140: Customer demand and I and when you look at cluster customer demand for delivered groceries, how does it break down between budget.
Speaker Change #225: She is always ready to coach our team and celebrate their success in meaningful ways.
Speaker Change #226: Thank you and congratulations Alex for everything you do for our customers and your fellow associates.
Speaker Change #140: Budget conscious customers and more affluent customers.
Yeah.
Speaker Change #140: Look.
Speaker Change #226: Congratulations on this amazing honor.
Speaker Change #141: Sorry that you got cut off but.
Speaker Change #227: And thank you to all of our teams for all the work they do everyday to take care of each other and our associates and thank you for everyone for joining us today.
Speaker Change #142: The delivery business almost doubled year on year.
Speaker Change #142: It's pretty broad based again on all customer segments.
Speaker Change #227: Yeah.
Speaker Change #142: But I think one of the things that's important to remember is that our technology allows us to do a better job now accepting snap and some of those things.
Speaker Change #228: That does conclude today's conference call have a nice day you may now disconnect your lines.
Speaker Change #142: Then what it did a year ago.
Speaker Change #142: So it's really across all customers.
Speaker Change #142: The thing that's driving it as our teams are doing a nice job on making sure. The experience is good I can tell you in Florida, He will get ice cream that still frozen.
Speaker Change #142: Chocolate, that's not melted because of our delivery because of the delivery trucks and it is really it's one of those things were.
Speaker Change #142: Yeah.
All the things you feel good about we still have a lot of work to make sure that we're satisfied with the profitability.
Speaker Change #142: Okay.
Speaker Change #143: And are there any.
Speaker Change #144: CPG promotions or.
Speaker Change #145: Moneys made available to help.
Speaker Change #145: Get the customer to make the first delivery order.
Speaker Change #146: Yes. The short answer is yes, and there is as you know online and with our data and personalization.
Speaker Change #146: There's all kinds of things that you're learning.
Speaker Change #146: Of different customers.
Speaker Change #146: Find it attractive at different times.
Speaker Change #146: So the short answer is absolutely yes. The other thing is obviously online really supports the alternative profit business.
Speaker Change #146: As well for them from a media standpoint.
Speaker Change #147: Thanks Chuck.
Speaker Change #147: Thanks, Ron and good luck for the rest of the year. Thank you I appreciate it.
Speaker Change #148: The question and answer session is now finished.
Rodney Mcmullen: Over to you Rodney for any final remarks.
Rodney Mcmullen: Thank you for all the questions as always.
Rodney Mcmullen: As you know I always like to share a few comments with our associates listening in.
Rodney Mcmullen: Today I'd like to take a moment to celebrate Alex furlong, Alex as a store leader at KFC store 860 in Redmond, Washington, and recently was named the 2020 for food Industry Association store leader of the year. Obviously this is a huge honor and we are so impressed by the.
Rodney Mcmullen: Amazing work that Alex does that our store.
With more than a decade in the grocery business Alex understands the industry.
Rodney Mcmullen: She is a general spirit and our fears attention to detail that clearly earned her this recognition. What's most impressive is Alex his passion for our associates.
Rodney Mcmullen: She is always ready to culture team and celebrate their success in meaningful ways.
Speaker Change #149: Thank you and congratulations Alex for everything you do for our customers and your fellow associates.
Speaker Change #149: Congratulations on this amazing honor.
Speaker Change #149: And thank you to all of our teams for all the work they do everyday to take care of each other and our associates and thank you for everyone for joining us today.
Speaker Change #149: Yeah.
Speaker Change #150: That does conclude today's conference call have a nice day you may now disconnect your lines.