Q3 2024 The Kroger Co Earnings Call
Good morning and welcome to the Kroger Co. 3rd Quarter 2024 Earnings Conference Call. If you'd like to ask a question once the presentation has finished, please press star followed by 1 on your telephone keypad. Please note this event is being recorded. I'd now like to turn the conference over to Rob Quast, Senior Director, Investor Relations. Please go ahead.
Rob Quast: Good morning. Thank you for joining us for Kroger's third quarter 2024 earnings call. I am joined today by Kroger's Chairman and Chief Executive Officer, Rodney McMullen, and Interim Chief Financial Officer, Todd Foley. Before we begin, I want to remind you that today's discussions will include forward-looking statements.
Rob Quast: We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information.
Speaker Change: After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question if necessary. I will now turn the call over to Rodney.
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.
Rodney Mcmullen: I will start by sharing a recap of our third quarter performance and highlight how we continue to advance our go-to-market strategy.
Rodney Mcmullen: 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 third quarter and walk through updates to our full year guidance.
Speaker Change: And finally, I will close with some comments on our pending merger with Albertsons.
Speaker Change: Turning first to our performance, we delivered strong third-quarter sales results led by our pharmacy and digital performance.
which reflects the versatility of our model.
Speaker Change: Customer engagement remains strong. Our convenient, seamless shopping experience, along with incredible customer value through low prices, personalized offers, and great quality our brand products, drove growth in both total and loyal households.
Speaker Change: As we entered the last quarter of 2024, we are focused on providing the quality, fresh and affordable products that make holiday celebrations special.
Customer spending habits continue adjusting to current macroeconomic factors.
Speaker Change: As inflation normalizes, our premium and mainstream households are feeling more confident and are returning to their pre-pandemic shopping patterns more quickly.
Speaker Change: While overall consumer sentiment remains low, expectations are improving, which positions us well for the holidays and into next year.
As we said, near-term, some customers are managing macroeconomic uncertainty.
Speaker Change: Spending from budget-conscious households remain under pressure, as the effects of multi-year inflation and higher interest rates have had a larger impact on these households.
Speaker Change: Therefore, we expect it will take longer for these households to fill the benefits of economic improvement.
Speaker Change: Kroger is delivering on its long-standing commitment to provide customers with the value they are seeking.
We are helping customers save in multiple ways.
Speaker Change: including competitive shelf prices and loyalty discounts, personalized offers, fuel rewards, and an expanded multi-tier R Brands portfolio.
Speaker Change: Digital offers are an important way we deliver savings to customers and engagement continues to grow. With 5% more digital offer clips so far this year and that has led to 14% more savings for Kroger customers.
Speaker Change: We are always creating additional ways for our customers to save.
Speaker Change: This quarter, we celebrated and thanked our customers with a Customer Appreciation Week offering new great deals.
Speaker Change: And to help our customers enjoy a memorable Thanksgiving, we lowered the price of Thanksgiving meals for the third consecutive year by creating a meal bundle that served a group of 10 people for less than $5 per person.
Speaker Change: We are focused on executing our go-to-market strategy to deliver a differentiated customer experience through our focus areas of fresh, our brands, personalization, and seamless.
Speaker Change: We appreciate our associates' continued efforts to elevate the customer experience.
Speaker Change: and bringing this strategy to life by improving on our key priorities of full, fresh and friendly again this quarter.
Speaker Change: I would now like to cover how we are enhancing our go-to-market strategy. We are seeing long runways for growth in many areas of our strategy, starting with fresh.
Speaker Change: Customers connect strongly to our Fresh for Everyone brand promise, which is a key differentiator for Kroger. Improvements across the supply chain as part of our end-to-end fresh initiative are increasing days of freshness.
Speaker Change: For example, bagged salads now offer customers more than seven days of freshness.
Speaker Change: Customers are noticing and it has led to identical sales and produce of more than 3% this quarter.
Speaker Change: In addition, we constantly evaluate new ways to apply data and technology to provide an even better fresh experience and deliver more days of freshness for our customers.
Speaker Change: One of the ways we are doing this is through recent implementation of RFID-embedded labels on bakery items.
Speaker Change: These labels provide us with greater insights into our fresh inventory, resulting in consistently fresher items and higher in-stock levels.
Speaker Change: We have seen encouraging results, including higher sales, in locations and categories where we have piloted the RFID labels, and we look forward to scaling this to more stores.
Speaker Change: Turning to our brands, I would like to step back and talk about the significant investments we've made in our brands and how those investments are delivering value to both customers and shareholders.
Speaker Change: For years, the grocery industry offered private label products with the primary goal of creating products at lower price points.
Speaker Change: Several years ago, we recognized an untapped opportunity for growth in these products.
Speaker Change: and envisioned a future where our private label products would match or exceed the innovation, quality and recognition of national brands, which is why we coined the phrase, Our Brands.
Speaker Change: Guided by that vision, our teams built distinct and recognizable brands that our customers want and love.
Speaker Change: providing more value and meeting unique product needs that national brands cannot fill.
Speaker Change: Recently we focused in on refining our brand architecture to optimize the portfolio and ensure each brand plays a unique role on the shelf.
Speaker Change: The successful addition of Smartway, our new opening price point brand, played an important role in rounding out our multi-tiered portfolio and offering an attractive alternative to national brands at every price point.
Speaker Change: The next phase of the work involved refreshing designs and packaging, enhancing brand equity, and reinforcing quality and improving the shopability.
Speaker Change: We are placing guarantees on labels across our Kroger branded products.
Innovation remains a driving force for our brand's growth.
Speaker Change: We utilize our data and insights to understand customer trends and meet increasing demands by consistently introducing new items to our portfolio with a focus on growth areas, including free-from, organic, and multicultural.
Speaker Change: This innovation enables us to differentiate ourselves from both national brands and other private label brands, creating destination items that help build customer loyalty.
Speaker Change: Our manufacturing capabilities will continue to be an important advantage for our brands.
Speaker Change: With oversight over the quality and the supply, we can develop unique and differentiated products while keeping costs low.
Speaker Change: allowing us to pass the savings to customers while preserving our ability to grow margins. A true win-win for customers in Kroger.
Speaker Change: This quarter, our brands continue to deliver strong financial results, which Todd will cover in more detail.
Next, to personalization.
Speaker Change: Our Kroger Plus program provides our loyal customers access to savings and rewards that in turn drive traffic to our seamless experience.
Speaker Change: As customers become more engaged, we gain deeper insights into customer trends while creating the data that enables us to grow Kroger Precision Marketing and deliver more effective promotions and relevant product recommendations.
Speaker Change: We are working to grow BOOST, the next level of our loyalty program, through new benefits, and this quarter we announced the addition of Disney+, Hulu, or ESPN+, streaming benefits with BOOST annual memberships.
Speaker Change: Turning to seamless, digital sales grew 11%, driven by an increase in both households and traffic.
Speaker Change: Within digital, delivery sales grew at 18% and continues to outpace other channels.
Speaker Change: Boost is one of the important ways we are increasing e-commerce penetration.
providing customers an affordable membership model for free delivery.
Speaker Change: Increasing e-commerce penetration is important to our model as households who shop with us digitally and are in our stores are our most loyal customers and increase retail media monetization opportunities as well [inaudible]
Speaker Change: As our digital business grows, particularly in our delivery network, it continues to have a larger impact on our financial results.
Speaker Change: Improving profitability is a key priority and becoming even more important to our financial model.
Speaker Change: Over nearly a decade, we made significant investments in our digital capabilities, building out our own properties, creating distribution channels in both pickup and delivery.
Speaker Change: investing in automation, enhancing personalization, and introducing an industry-leading retail media network. While each of these capabilities required significant investments,
Speaker Change: We now have a unique digital experience that our customers enjoy.
Speaker Change: Moving forward, we are committed to growing volumes, utilizing automation, and introducing new technology that will create efficiency gains while helping us narrow the profitability gap between online and in-store.
Speaker Change: Narrowing that gap will generate meaningful operating margin benefits and help drive shareholder value over the next several years.
Speaker Change: By executing our go-to-market strategy, we are building loyalty, increasing customer engagement, and creating more growth opportunities.
First, with alternative profit businesses, which had another solid quarter.
Speaker Change: Kroger Precision Marketing continued to deliver the most significant growth from our alternative profit businesses.
Speaker Change: Next, in health and wellness, as the pharmacy industry continues to transform, Kroger has a unique opportunity to play a bigger role in helping patients live healthier lives while growing our share of the industry.
Speaker Change: We are excited about this area of the business and its performance. This quarter demonstrates we can grow this business profitably in a way that supports our customers to live healthier lives.
Speaker Change: Sales and profitability this quarter were well ahead of last year, led by growth in both GLP-1s and vaccines.
Speaker Change: Our strong growth in vaccines reflect patient trust in Kroger to vaccinate them and their families during the start of the cold and flu season.
The peak quarter of the year for vaccinations
Speaker Change: Our health and wellness teams did an excellent job this quarter in building awareness around our vaccine capabilities, growing share, and administrating significantly more vaccines this year versus a year ago.
These helped offset the product mix pressures from GLP-1s.
Speaker Change: Our vaccine efforts are leading to new patient scripts, which is important as these customers are more likely to become loyal households and spend more across the store.
Speaker Change: We appreciate our associates for their continued efforts to elevate the customer experience by delivering on our key priorities of full, fresh, and friendly.
Speaker Change: Team consistency leads to a better customer experience, and we are excited about another quarter of improvement in retention.
Speaker Change: Our focus on retention reflects a holistic strategy, including investments in wages and benefits, as well as enhancing the associate experience through training, technology, and career development opportunities.
Speaker Change: With that, I will hand it over to Todd to take you through our third quarter financial results. Todd?
Todd Foley: Thanks, Rodney, and good morning, everyone. Kroger's third-quarter results reflect the durability of our model with strong pharmacy results that help offset lower fuel profitability, as we cycled strong fuel results from a year ago.
Todd Foley: As we head into the final quarter of the year, we are narrowing the ranges on our identical sales without fuel, adjusted FIFO operating profit, and adjusted EPS guidance.
Todd Foley: The strength of our model gives us confidence in our ability to deliver on this full year guidance.
Todd Foley: Before I walk through our third quarter financial results, I would like to start off by covering a couple of items from the quarter that affected our financial results.
Todd Foley: First, during the third quarter, we finalized the sale of our Kroger Specialty Pharmacy business for $464 million.
Todd Foley: The sale reduced total company sales in the third quarter by approximately $340 million.
Todd Foley: compared to the same period last year. And annualized sales will be approximately $3 billion lower going forward.
Todd Foley: KSP was a low margin business. As a result, the sale of the business increased both Kroger's gross margin and operating general and administrative costs as a rate of sales.
It had no material effect on operating profit.
Todd Foley: Second, on a year-over-year basis, the combined hurricane season and port strike had approximately a 20 basis point favorable impact on sales as customers stocked up in anticipation of these events.
These events had an unfavorable impact on OG&A.
Todd Foley: Together, this did not have a material impact on total operating profit.
I'll now take you through our third quarter financial results.
We achieved identical sales without fuel growth of 2.3%.
Speaker Change: As Rodney mentioned earlier, identical sales without fuel were led by strong pharmacy and digital sales.
Speaker Change: We're also encouraged by the continuation of positive customer metric trends, including increases in total and loyal households.
Speaker Change: Our brands had a strong quarter, with sales outpacing national brands again this quarter, led by mid-single-digit growth in our most premium brand private selection.
Speaker Change: Customers continue to demand premium products, but at the same time are looking for value. Our private selection brand is a perfect solution by offering our customers premium quality at an attractive price.
Speaker Change: These results demonstrate the breadth of our brand's portfolio and the ability to meet customers' needs for quality and value.
Speaker Change: Digital sales delivered another quarter of double-digit growth, led by 18 percent growth in delivery solutions driven by our customer fulfillment centers.
Speaker Change: The CFCs are offering customers a superior digital experience with excellent in-stocks, fresh items, and a white-glove on-time delivery.
Speaker Change: CFC growth was driven by a significant increase in households and trips, as well as an increase in basket size.
Speaker Change: Our third quarter identical sales without fuel results were affected by the boar's head recalls that began in the second quarter.
Speaker Change: We acted quickly, with the safety of our customers in mind, as soon as we became aware of the situation.
Speaker Change: Boars Head is a strategic supplier with brand loyal customers that are an important driver of our deli sales. As a result, some customers have temporarily migrated away from the category.
Speaker Change: It will take some time for those customers to resume their prior purchasing behavior, and we expect this to remain a headwind to sales in the near term.
Speaker Change: The unfavorable sales effect from Boar's Head this quarter was largely offset by the favorable sales impact from the hurricane and port strike.
Speaker Change: Turning to margins, gross margin was 22.9 percent of sales and our FIFO gross margin rate, excluding fuel, increased 51 basis points compared to last year and was ahead of expectations.
Speaker Change: The increase in rate was primarily attributable to the sale of Kroger Specialty Pharmacy, our brand's performance, and lower strength, partially offset by lower pharmacy margins.
Speaker Change: The result reflected Kroger's ability to improve margin while being competitive on price and helping customers manage their budgets.
Speaker Change: The OG&A rate, excluding fuel and adjustment items, increased 22 basis points.
Speaker Change: driven by the sale of Kroger Specialty Pharmacy and increased incentive plan costs partially offset by the continued execution of cost savings initiatives.
Excluding the sale of Kroger Specialty Pharmacy.
Speaker Change: fuel and adjustment items, our OG&A rate to sales would have been nearly flat year over year, demonstrating that our model can leverage expenses when we achieve our long-term ID sales without fuel goal of 2 to 4 percent.
Speaker Change: This is made possible by a relentless focus on productivity and cost savings initiatives.
which remain an essential part of our model.
Speaker Change: These initiatives are focused on simplification and utilizing technology to enhance the associate experience without impacting the customer experience.
Speaker Change: This quarter, we launched a new, internally developed, generative AI-powered sell-through tool, which helps us better manage inventory in both fresh and center store departments through real-time insights tracking sales and shipments.
Speaker Change: This enables our teams to increase freshness on shelves and prioritize sell-through, optimizing both sales and margins.
Speaker Change: Looking ahead, we plan to further enhance the AI capabilities on this platform by extending into improved forecasting and end-to-end inventory management.
Speaker Change: During the third quarter, we recorded a LIFO charge of $4 million compared to a charge of $29 million for the same period last year.
due to lower expected year-over-year inflation.
Speaker Change: Adjusted FIFO operating profit was $1.02 billion and adjusted EPS was $0.98 per diluted share, an increase of 3% compared to last year.
Fuel is an important part of our strategy.
Speaker Change: Fewer awards, through our Carter Plus program, help build customer loyalty.
Speaker Change: Fuel sales were significantly lower this quarter compared to last year, attributable to a lower average retail price per gallon.
Speaker Change: Fuel profitability was also meaningfully behind a year ago as a result of fewer gallons sold and lower cents per gallon margin.
Speaker Change: I wanted to provide a brief update on inflation, as it remains a topic of interest for many investors.
Speaker Change: Inflation was down slightly in the third quarter compared to the second quarter but remains around 1%. We expect inflation to remain consistent in the fourth quarter.
Speaker Change: I would now like to provide a brief update on associates and labor relations.
Speaker Change: During the third quarter, we ratified new labor agreements for Dillon's Columbia, Missouri, clerks.
Speaker Change: Central Division Ottawa and Streeter clerks, Northern Illinois meat clerks, Fred Meyer Portland retail stores, and the Foods Co. contract in Northern California, all covering nearly 13,000 associates.
Speaker Change: We respect Associates' right to collectively bargain. We're also communicating to local unions that coming to the table with proposals that do not balance investing in Associates with keeping groceries affordable for our customers and supporting a growing and profitable business model are untenable.
Speaker Change: These proposals stand in the way of operating our business in a way that ensures job security and advancement opportunities for associates.
Thank you.
Turning to cash flow.
Speaker Change: Kroger continues to generate strong, adjusted free cash flow through consistent operating results.
Speaker Change: Free cash flow generation is an important part of our model and is enabling us to invest in our business for growth.
Speaker Change: At the end of the third quarter, Kroger's net total debt to adjusted EBITDA ratio was 1.21 compared to our target range of 2.3 to 2.5. Our strengthened balance sheet provides us flexibility to pursue growth and enhance shareholder value.
Speaker Change: We continue to take a disciplined approach to deploying capital, prioritizing the highest growth opportunities that strengthen our business and deliver solid returns for our shareholders.
Speaker Change: We're committed to maintaining 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: I would now like to provide some additional color on our outlook for the rest of the year.
Speaker Change: After delivering solid third quarter results, we're narrowing the ranges of identical sales without fuel, adjusted FIFO operating profit, and adjusted EPS guidance. Additionally, we have updated our guidance for adjusted effective tax rate and expect it to be 22.5%.
Speaker Change: We now expect identical sales without fuel for the year to be in the range of 1.2 to 1.5 percent. According to date trends signaling, we will be near the midpoint of this range.
Speaker Change: Identical sales without fuel results here to date have largely been in line with our expectations, with Q3 being slightly ahead of expectations due to the favorable effects from the hurricanes, the port strike, and strong vaccine growth during the peak season for immunizations.
Speaker Change: Our expectations for fourth quarter identical sales without fuel are consistent with our forecast at the beginning of the year.
Speaker Change: We expect Q4 identical sales to remain strong, but sequentially lower than Q3, partially due to the cycling of weather benefits from Q4 of 2023 that are not built into our current forecast for Q4 2024.
Speaker Change: We now expect adjusted FIFO operating profits to be in the range of $4.6 to $4.7 billion, and adjusted net earnings for diluted shares expected to be in the range of $4.35 to $4.45.
Speaker Change: Looking to next year, we are in the process of finalizing our 2025 business plan.
Speaker Change: While we still have many unknowns, we do expect Kroger to deliver FIFO operating profit growth on a standalone basis.
Speaker Change: During our fourth quarter earnings call, we plan to share our full year 2025 outlook in more detail.
Speaker Change: In closing, we are happy to deliver another quarter of strong results, which reflect the resilience of our value creation model.
Speaker Change: While macroeconomic conditions remain uncertain, our model has multiple levers which enable us to navigate any environment, including grocery, health and wellness, fuel, and alternative profit businesses.
Speaker Change: This gives us flexibility in the ways we create shareholder value and confidence in our ability to generate attractive and sustainable returns for shareholders.
I will now turn the call back to Rodney.
Rodney Mcmullen: Thanks, Todd. Before I open it up to Q&A, I'd like to speak briefly about our pending merger with Albertsons.
Rodney Mcmullen: First, I would like to express my appreciation for our associates and their incredible commitment. It has been a long journey, and our associates have done an excellent job serving customers and running the day-to-day operations of our business.
while also preparing for the merger.
Rodney Mcmullen: I would like to extend a special thanks to those who supported the litigation in federal and state courts.
Rodney Mcmullen: Both the associates who testified and the teams who prepared a compelling case about the meaningful and measurable benefits of the merger.
Rodney Mcmullen: Our teams are ready to ensure a seamless transition for our customers and associates from day one. It is exciting to see the complementary strengths of both Kroger and Albertson's organizations.
Rodney Mcmullen: And we look forward to combining these strengths to provide customers with an even better experience.
Rodney Mcmullen: As we await the court rulings and the regulatory challenges to the merger, we remain confident in the facts and the strengths of our position.
Rodney Mcmullen: The retail industry continues to be more competitive, and we know how our customers shop.
Rodney Mcmullen: Every day, they are making decisions on where to eat and where to buy their groceries.
Rodney Mcmullen: They shop at a wide range of competitors, from Costco to Amazon to dollar stores, and they eat at restaurants.
They shop digitally and brick-and-mortar.
Rodney Mcmullen: And as I've said before, we remain committed to closing the merger because it will provide meaningful and measurable benefits for customers, for associates, and for communities across the country.
And we look forward to bringing these commitments to life.
Rodney Mcmullen: Regardless of the outcome of the trials, Kroger is operating from a position of strength and we are optimistic about our future. Our business is more diverse than ever and our value creation model provides us with multiple ways to drive sustainable growth.
Rodney Mcmullen: Our strong free cash flow and strengthened balance sheet provides us with the ability to invest in our business and enhance shareholder value.
Speaker Change: With that, Todd and I look forward to taking your questions. Because we are still in litigation, we will not be taking questions on the merger this morning.
Speaker Change: Thank you. As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad.
Speaker Change: Our first question for today comes from Simeon Gutman of Morgan Stanley. Your line is now open, please go ahead.
Thank you.
Good morning, Rodney, Todd. My question is on the P&L.
Speaker Change: for 2024. If you take out the extra week lap and then you pull out some of the merger-related costs, the big ones, it looks like the core business is growing pretty nicely on EBIT and really nicely, potentially mid-single, even high-single-digit percentage.
Speaker Change: And that's despite lower fuel profitability and the environment's been pretty tough. So first, is that a fair characterization? And is it mixing the way you would have thought between the core business and the alternative? Thanks.
Speaker Change: Great question, Simeon. Thanks for that. I think that's a fair read on how you've described it.
Rodney talk about today. So despite
Rodney Mcmullen: that lever in fuel, giving us a headwind this quarter. We were pleased with the core growth coming from the core business and see that continuing. The mix relative to alternative and core business, I think
Rodney Mcmullen: The growth expectations that we have around the alternative profit business are relatively consistent to what we expected to see. And so I think that those continue to be as balanced as we expected going into the quarter.
Rodney Mcmullen: And, you know, longer term, as everyone knows, the alternative profit businesses will continue to see a great opportunity.
Rodney Mcmullen: And the margins on that business is meaningfully higher than the supermarket business.
Rodney Mcmullen: and the whole flywheel between our brick and mortar business and our seamless business pickup and delivery.
Rodney Mcmullen: is the engine behind driving that continuation there, which we're very excited about. That's a great call, Ronnie. We saw the digital growth again at low double-digit growth, which is an important part of.
Rodney Mcmullen: The growth that you talked about, Simeon, and that, again, when you talk about mix in our business, in our Omnichannel, that low double-digit growth is right on what we expected, and helps drive both the core business and the alternative profit is running.
Speaker Change: And the one follow-up, this is more towards a comment Rodney made, all year we talked about the mainstream, the premium, and the lower end.
Speaker Change: I felt like there may have been an inflection, whereas the mainstream has been resilient and the premium has been healthy. I thought your comments today on mainstream inflected a little more positively. I'm not sure if that's reading too much in. Lower income sounds about the same. Curious if that's fair.
Speaker Change: And certainly, customers that are on a budget continue to be under a lot of strain in the accumulation of inflation and other aspects and higher interest rates.
Speaker Change: have affected, continue to affect them more. And I think the other thing that's always important to remember is
Speaker Change: That customer, in many cases, are starting out in careers and things and they don't have as many physical assets on, you know, a house.
Speaker Change: or a little bit of savings and those things, and inflation obviously affects that person a little harder than others.
Speaker Change: Our next question comes from Rupesh Parikh of Oppenheimer. Rupesh, your line is now open, please go ahead.
Rupesh Parikh: Good morning and thank you for taking my question. So just going back to your guidance, so you did narrow the outbreak profit ratio to the lower end of the range for the full year, so just curious what's driving that?
I don't want you to start.
Speaker Change: Yeah, well, you know, with one quarter left for PASTE, we wanted to try to narrow the range because there should be less variability in our expectations.
Speaker Change: When you look at the sales part of the guidance down at 1.2 to 1.5, I think it's pretty consistent with what we've been thinking for the year. The midpoint on that range is a tick higher.
Speaker Change: than I think what we had been thinking before. And frankly, when you look at where we expect to be in Q4, I think that's right on how we've been thinking about it all year, relative to all of that.
Speaker Change: Q3 actually is the one that was really strong and we talked about, Rodney talked about the pharmacy and the digital growth there, particularly in the vaccine space, we were really pleased. We've been working hard to grow our vaccine business and we saw that.
Speaker Change: throughout the quarters early in this year, but with Q3 being that key vaccine, you know, Super Bowl season for vaccines, we were really pleased to see that that growth continue and that it paid off in that point in time. So that's where we saw Q3 being really strong and that Q4 guidance being really what we expected.
Speaker Change: When you look at it on the EPS side of our guidance, Rupesh, again,
Speaker Change: Narrow the range there. We took a nickel off the top side and the bottom side and really that midpoint of the range is pretty consistent with
where we've been thinking about it for the year.
As we think about...
Speaker Change: that range and some of the key factors for that range in the fourth quarter. A couple of key things that we're keeping an eye on. One is weather. We alluded to it in our prepared comments. There were several meaningful weather events a year ago that drove some benefits, and we just don't forecast weather on a forward-looking basis. If we see the number and magnitude of weather events in the fourth quarter this year, I think that would be something that could push us towards the higher end of that range.
Speaker Change: and then the other one is fuel. Certainly, fuel tends to be pretty volatile and we've seen that this year.
Speaker Change: and really we have fuel expectations to be pretty in line with where they were last year and frankly from a gallon trend and from a cents per gallon trend in the fourth quarter we're pretty consistent sequentially from where we've been performing over the last few periods so so if we have variance in the fuel profitability either positive or negative I think that could could lean us towards the top of the bottom
and to that range.
Perspective.
Speaker Change: Todd said this but I think it's important to just highlight it. You know if you look at the range for the year, fuel in the third quarter was a tougher quarter than what we expected it to be.
Speaker Change: And that really, relative to the top side, and the other thing that Todd mentioned, we don't budget weather because we just don't know.
Speaker Change: Obviously, there's been some major storms, but those storms haven't been in places where we operate stores, so it really hasn't affected us so far. And generally, that's a positive when we have weather, because people eat at home as opposed to going to restaurants.
Speaker Change: And then my very quick follow-up question, just on the Boost membership, you added the Disney perk as well. Just, you know, overall, are you guys happy with the signups you're seeing and the retention with that program?
Speaker Change: I would say we're very happy but the thing that I guess I get more excited about is the potential because it's an incredible value for customers.
Speaker Change: And customers love it, and we have a high renewal rate and a high MPS score. So our job is to continue to educate more customers on it. So I'm really more excited about, you know, the opportunity going forward and the overall deeper connection with customers.
So, great question. Thanks, Rupesh.
Speaker Change: Thank you. Our next question comes from Leah Jordan of Golden Sacks. The line is now open, please go ahead.
Leah Jordan: Good morning. Thank you for taking my question and thanks for the commentary on inflation this morning and how you're thinking about it in the fourth quarter. But as you plan with your vendors and seeing if you can add more color on how you're thinking about inflation into next year, you know, what are you seeing across categories and hearing from those partners?
Thank you.
Speaker Change: Yeah, no a great question maybe still a little early to think about next year, but You know you think about where we were this year obviously Coming into the year we were coming out of that that crazy disinflation that we had a year ago
Speaker Change: And inflation has played out more or less the way we expected. It's maybe a little bit less than what we expected, but it's been relatively stable at just under 1%. Maybe even saw it take a slight step back in Q3 relative to Q2.
Speaker Change: which as we said we expect to see for next year. As we look to next year at this at this point looking at you know both some of the macro and governmental studies as well as conversations with with vendors
Speaker Change: Again, it's still early to tell. And we might see a slight expansion to inflation next year, but really don't expect to see anything meaningfully different or inconsistent with what we're kind of seeing right now.
syndrome.
Speaker Change: We are continuing to see CPGs be a little more aggressive on trade dollars.
Speaker Change: And, you know, over time, you know, that obviously affects inflation a little bit as well.
Speaker Change: Great, thank you. And I just wanted to follow up on some of your fresh initiatives. I know you've been working on improving days of freshness in produce for a while, so great to see some improvement there. But it seemed like the RFID tags within bakery is new to me. You know, just wanted more color there. You know, what degree of lift are you seeing when you add that to the category? How many of your stores have it today? And how should we think about the rollout over time?
Speaker Change: Well, as I mentioned, we're testing it. We're happy with the initial result.
Speaker Change: The benefits are as much helping our associates be able to do their job a little bit easier.
Speaker Change: It's too early. It's early enough to be excited about the potential. It's too early to say, you know, this much we can budget in terms of what we would do. But, you know, the thing that we're excited about for our customers.
Speaker Change: It's helping us make sure we have fresher product for the customer and stay in stock better.
Speaker Change: Super exciting. You know, we will look at other areas of the store to see what kind of opportunity it is.
Speaker Change: The cost per tag is still higher than we would like, so we still need to continue to work on focusing on the get the cost per tag down. But positive early results, really early in the process and excited about the potential.
Thanks, Lee.
Speaker Change: Thank you. Our next question comes from Ken Goldman of J.P. Morgan. Your line is now open. Please go ahead.
Hi, thank you.
I wanted to follow up on
Speaker Change: On the topic of next year, I appreciate it's too early for specifics and I'm not asking for any numbers. But to Simeon's question, you agree that it's a fair read that the core underlying business is doing...
Speaker Change: Very well, I think those are the words. You know, despite, you know, when you x out the merger cost and the digital mix and fuel and so forth. And you talked a little bit about inflation being sort of steady and predictable and consistent in that low single digit range.
Thank you.
Speaker Change: Are there any other unusual tailwinds or headwinds that we should consider, just directionally, as we think about next year? I'm just trying to get a sense for what would kind of throw you off from having another, you know, reasonably good year. You did say that operating profit would be up, but you didn't kind of tell us how much. And your longer-term outlook goes 3 to 5 percent, of course.
Speaker Change: And it would be way too early to tell you specifics and obviously we're waiting for the ruling on the merger which will affect guidance as well.
Speaker Change: The other thing that I guess from a positive standpoint that I'm excited about, in the third quarter, we opened or expanded the most number of stores that we've done. I think it's actually in a quarter in seven years.
Speaker Change: and as you know last year we talked about it that we will open
More stores this year than we have in several years.
and we would expect to continue to open more stores.
Speaker Change: And so far, the stores that we've opened, we're happy with the way they're connecting with customers, and we're happy in terms of the volumes they're creating and the early read-on.
Speaker Change: you know, the profitability of the stores as well. So over time, we would hope that that would continue to be a tailwind.
and obviously on Seamless.
Speaker Change: We continue to see that as really critical to our, you know, five or ten year future to be awesome there. And we still have a lot of work to do to make where we're in different, whether somebody shops with us online or in store. And we'll continue to put a lot of effort there. In terms of when Todd, I'll let you.
Anything that you can think of that's...
Todd Foley: I can't think of anything unusual, headwinds or tailwinds, as we sit here today.
Frankly Ken, but you know going into next year
Todd Foley: Part of what has us optimistic and feeling good about the strength of our value creation model is a lot of the momentum we have in the things that are in our high growth areas today. We've talked about a lot of them already.
It's pharmacy, it's our digital business, it's our alternative profit.
Todd Foley: And we have good momentum in those spaces and are executing on those. And from a headwinds standpoint, we're going to continue to invest in the business. We're going to invest in price. You've heard Rodney say it before. We assume every year is going to be more competitive than the last, and that view hasn't changed. And so we'll continue to engage in customers, make sure we're delivering value to them by investing in price and investing in their shopping experience.
Todd Foley: And we're committed to continue to invest in wages. So some of those are headwinds. They're just the parts of our model that as we deliver the value in our model through all our different value propositions, we're able to use that to invest in the business.
to keep the flywheel moving.
Speaker Change: Okay, thank you for that. And then speaking about price investments, you know, Rodney, you mentioned that CPGs continue to be a little bit more aggressive on trade dollars. Your largest competitor are, you know, in food retail. We'll see if the...
Speaker Change: Judiciary. Did the judges agree that it's a competitor or not? But your largest competitor in food retail had more kind of commentary last week or this week about
Speaker Change: You know, how they would like to see more of those price investments from key vendors. Rodney, your tone, you know, since I've known you, has always been more sort of agnostic about that. You know, if investors, if your vendors don't invest with that.
Speaker Change: you'll be happy to sell customers more private label. I'm just curious where you stand in terms of
Speaker Change: with the level of price investment or are you more just sort of agnostic and saying,
It'll play out, either way, beneficially for you.
Speaker Change: Yeah, I guess a little bit of both. If you look at tonnage growth in CPGs, there's a lot of CPGs that cannot be satisfied with their tonnage growth.
Speaker Change: And I believe the trade dollars and being more aggressive on partnering with us to make sure the right customer gets access.
Speaker Change: to those benefits is good long-term for the customer, a long-term benefit for both of us on tonnage. If they're not willing to do that, it really gets back to the comment that we talked about.
Speaker Change: Our brands, and you know Todd and I both mentioned it, had a strong quarter. The profitability of our brands is you know several hundred basis points higher than national brand.
Speaker Change: And if the CPGs are willing to continue to give up share,
Speaker Change: to our brands, we're okay with that. Because what we find is once a customer tries our brand, their repeat rate of customers coming back is incredibly high. Because what they find is they have, there's no compromise on quality.
Speaker Change: and they have a great value for the money. So, you know, at the end of the day, the customer wins when they buy our brands, but it really is, we try to run a business where the customer decides what they want to buy as opposed to forcing them to buy something.
Thanks again.
Speaker Change: Thank you. Our next question comes from Ed Kelly of Wells Fargo. Your line is now open, please go ahead.
Hi. Good morning, everyone.
Ed Kelly: I'm curious about the gross margin, you've had a couple good quarters, you know, on the gross margin front. I think you admit this quarter was better than...
Ed Kelly: expected. How are you thinking about gross margin in Q4? And then, you know, even like into, I don't know, you're not going to get next year, but sort of like the, you know, the outlook for the gross margin, and I'm talking like ex-spec pharma, divestiture, and maybe, you know, just talk about the puts and takes, you know, around that.
Speaker Change: Yeah, great, great question, Ed, and I think you hit on a key part, thinking about it.
excluding
Speaker Change: KSP, you know, we talked about, you know, it was a strong quarter in gross margin and about half of that year-over-year benefit was a result of the divestiture. But the other piece of it really came, we highlighted both of Ronnie, layers and wealth that Ronnie was just talking about, was our growth in our brands. We continue to have our brands' sales growth outpacing national brands, and that is always going to drive, you know, solid margin expansion. And so that's certainly what we saw, again, in the third quarter, very similar to what we saw in the second.
Speaker Change: and then Shrink had another nice quarter. So we've got, you know, cautiously optimistic on the progress we're making there, but we are making progress on the Shrink space that really helped us in the third. As we look to the fourth, I think...
Speaker Change: excluding KSP. I think overall, we'll probably be slightly favorable. And the fourth, reflecting KSP, when you pull that out, I think we'll probably be relatively flat on that relative to some of the puts and takes.
Speaker Change: Again, if we over-index in things like our brands and whatnot, but we may be a little bit favorable. But overall, I think we'll be relatively consistent, relatively flat year over year on the margins in Q4.
Speaker Change: I totally agree with everything Todd said and Todd said the big pieces I would also add a couple of smaller pieces that's helping on gross margin that should continue as if you look at our warehouse and transportation costs.
Speaker Change: continue to make some progress there. And the customer continues to buy more value added product and fresh continues to grow as well. So those are things that help on mix in addition to things that Todd talked about.
Thank you.
Speaker Change: And just, Rodney, a quick follow-up. This one's for you, and you kind of hinted at it or talked about it, but, you know, Albertsons would be a transformational deal. How do you feel about Kroger's position, you know, if the deal is rejected?
Speaker Change: Do you need to hunt for something else more transformational, or is it just simply more prudent to double down on what you have and reward shareholders for their patience with return of capital?
Speaker Change: It's a great question. If you look at the balance sheet capacity that we have,
Speaker Change: There's probably nothing else that would be transformational that would use the balance sheet capacity that we would have. So I don't know that.
Speaker Change: We would be out there trying to find what's the next Albertsons.
Speaker Change: As you know, and you just said it, we've always made sure that we don't need to do mergers to make our business successful.
Speaker Change: And that was one of the reasons that we've always been proud of what Kroger has done. We're super excited about Albertsons and the potential, and we believe we will be able to add a ton of value for giving customers better value. The people there will be able to provide security.
Speaker Change: and grow our business and create additional career opportunities and support communities.
Speaker Change: But, if it doesn't happen, we'll continue to go on. As you know, we always will continue to look at ways to grow the business.
Speaker Change: Mergers is always one of those ways of growing the business, but we try to make sure that we only do a merger when it makes sense and we're not chasing something and we won't get in a position where we are having to chase something. So, great question and thanks, Ed.
Speaker Change: Thank you. Our next question comes from Michael Lasser of UBS. Your line is now open, please go ahead.
Michael Lasser: Good morning. Thank you so much for taking my question. As of the second quarter, Mr. Kroger had made a point in its presentation that it was on track to deliver more than 20 percent
Michael Lasser: media growth this year, and that line was removed this quarter.
Michael Lasser: So is it right to interpret that the media growth, which is an important driver of the alternative revenue streams, is starting to slow, perhaps as there are more platforms for advertisers?
Michael Lasser: to choose and direct its advertising dollars. And if that's the case,
Speaker Change: How does Kroger accelerate that element of its algorithm in order to support the long-term outlook for the business?
Speaker Change: Yeah, let me start there, Michael. Thanks for the question. It's a good call. We do still expect to see
Speaker Change: our retail media growth being in that 20% range for the year. It's still a fast-growing part of our business, and the outcomes that we're seeing continue to demonstrate that we're well positioned for that growth.
Speaker Change: You know, as we look at those CPGs that are advertising with us,
Speaker Change: We see the outsized return on ad spend that they're generating. And so that's why I say we're able to demonstrate that we're seeing those results. And not coincidentally, the sales for those CPGs at Kroger are strong. And so I think the proof points continue to be there. But as you say, there's a proliferation of...
Speaker Change: options as everybody's kind of got their own flavor of what this is so I think we just need to continue to demonstrate that to CPGs because I think the group will be
Speaker Change: Todd's last point to me, and the CPGs are listening, and that's the only reason why I'm adding on top.
Speaker Change: The CPGs that increased spending the most had the highest tonnage growth with us.
on
Speaker Change: which to me is it shows you the power of our platform and you know Todd said it I just wanted to double down on it.
Speaker Change: Okay, and my follow-up question is, what do you need to drive, what do you need to happen in order to drive change?
the back of the Covid-19.
achieve the the sales piece.
Speaker Change: of its long-term algorithm in 2025. This year, there's been a contribution from the GOP One drug, some storm-related spending. Perhaps those won't be as meaningful contributors next year. So is it that you would be banking on A, market share stabilizing, and is that realistic, and B, some acceleration in inflation to offset what had been driving some of the comp this year?
Speaker Change: Yeah, we would not be dependent on inflation, and it's really, we continue to double down on the customer experience.
Speaker Change: And when we find that we improve the customer experience, our business follows that, or the customer rewards us for that, and it's, you know, it really gets back to, you've heard us say it a million times, full, fresh, and friendly.
The other thing that we're increasingly supporting is allocating capital.
to growth areas.
Speaker Change: And that would be, you know, storing, obviously continuation of Seamless, our online business
continues to have outside growth.
and then specific projects.
Speaker Change: that support cost reductions and sales opportunities. Yeah, I agree with everything you said, Ron, especially the storing that you hit on earlier as well. You mentioned GLP, Juan, and that certainly has been part of this year, but
As we sit here today I think
Speaker Change: We continue to expect to see growth in that area as more manufacturers get in the mix and the supply continues to become more available and more and more patients continue to utilize that drug. So I think we'll still expect to see growth in the GLP-1 space as well, at least near future, foreseeable future.
Thanks, Michael.
Speaker Change: Thank you. Our next question comes from John Heinbockel of Guggenheim Parlours. Your line is now open, please go ahead.
Speaker Change: Hey Rodney, can you talk about the, you referenced in your release, the initiatives, productivity initiatives on in-store order selection.
Speaker Change: And, you know, how broadly is that rolled out when I think about how much you can take the cost per order down? Can you take that down a double digit from where we are today?
Speaker Change: Over time, we would certainly expect to take it down double digit from where we are today. And when I talk about over time, I'm talking about over the next two or three years. And it's...
Thank you.
Speaker Change: We still have a reasonable amount to roll it out. Now, as you followed Kroger long enough to know that we will start, whenever we roll something out, we start with the biggest opportunity places first. So it's the highest volume locations and those kind of things.
The thing that I think is...
Speaker Change: fascinating and exciting is if you look at the fundamental things behind the software we're learning that we can actually use that same technology in other areas of the business and I would hope that we'll continue to find those kind of opportunities so I feel you know confident and comfortable that certainly
Speaker Change: Well, you know, double-digit type stuff of improvement, but, you know, our team's not going to be satisfied until they get to where it's indifferent how somebody shops with us.
Speaker Change: Thank you. Our next question comes from Michael Montani of Evercore ISI. Your line is now open, please go ahead.
Michael Montani: Yes, good morning. Thanks for taking the question. I just wanted to ask first, did I miss the fuel CPG contribution for this quarter? Wondering if you could give some added color there and then just had a follow up.
Speaker Change: Yeah, thanks Michael. We don't typically, we stopped a few quarters ago giving details around CPG.
Speaker Change: You did catch on to the point that I think that Rodney brought out that both Gatlin's and CPG were down in the third quarter again
Speaker Change: Some of the volatility in fuel, but as we've looked at the fourth quarter relative to our expectations versus a year ago, we think fuel will be a little bit... Our expectation is that fuel will be a little bit more stable year over year in Q4, and that's supported by some of the trends that we've seen over the last few periods in both gallons and margins.
Thank you. Thank you. Thank you.
Speaker Change: Thank you. Our next question comes from Rob Dickerson of Jeffreys. Your line is now open, please go ahead.
Rob Dickerson: You know, there are some green shoots. Maybe it's improving a little bit. So I'm just wondering, kind of as you got through the Thanksgiving holiday, and then as we're kind of, you know, kind of real time in the current holiday season, like, have you seen any, you know, incremental, almost like sequential traffic improvement in the actual retail stores?
Speaker Change: If we feel good about where we are, the thing I guess I would say that we still don't quite under, it'll take time, is there's five less shopping days between Thanksgiving and Christmas.
Speaker Change: So we feel good about where we are. We're tracking a little bit better than where we thought we would be But we still are cautious because of the five less shopping days and how does that play out?
Speaker Change: And, as you mentioned, we are seeing the customer, most of the customers are starting to feel a little bit more relaxed and comfortable in terms of where they stand and what's coming, how things look going forward.
Speaker Change: Thank you. Our next question comes from Jacob Akin-Phillips of Melius Research. Your line is now open, please go ahead.
Well, good morning, everyone. Thanks for the question.
I just wanted to...
Go back to inflation a little bit.
Speaker Change: So, you showed that you were able to kind of leverage SG&A, given like five comms.
Speaker Change: excluding KSB. How do we think about that relationship going forward in terms of wage inflation and wage investment? And then also with tariffs, we're of the view that it could be a self-fulfilling prophecy in terms of like people buying stuff and causing inflation even if there aren't actually tariffs happening. I just wanted your thoughts on that.
Speaker Change: I'll start with the wage investments. It's a great question. We've talked a lot about how important it is for us to invest in our associates because they're so critical delivering our customer experience.
Speaker Change: But, you know, we will continue to balance, you know, those wage investments with the other
Speaker Change: profitability enhancement items that we say so in any inflationary environment and in any any sales leverage environment you know we've demonstrated that our model enables us to pull the levers to be able to balance those wage increases accordingly over time so so
Speaker Change: Given the comments that we said, with fairly balanced inflation, we think we'll be able to leverage our SG&A, including wage investments.
Speaker Change: Ronny, I don't know if you want to comment on the tariffs. Tariffs for us, you know, first of all, you know, the effect on us is probably a little less than most companies.
And we buy product internationally, but it's pretty modest.
Speaker Change: If you look in the fresh departments, it's less than 20% of the stuff. If you look in the center store, it's a fraction of that. So we would see the tariffs affecting others generally more than us.
Thanks, Jacob. Thank you.
Speaker Change: Our next question comes from Chuck Cerankosky of North Coast Research.
The line's now open, please go ahead.
Speaker Change: Good morning, everyone. Rodney, you mentioned that the mainstream and premium customers were pretty close to spending how they had been before COVID. But there are also, from what I can observe,
Speaker Change: The groups that are more likely to be going to restaurants, which seem to be doing fairly well right now. How do you sort of offset that with Kroger's prepared food offerings and maybe what changes are you making in those categories?
Thank you.
Speaker Change: First of all, we believe that that's a huge opportunity. Our market share, half of meals bought at a restaurant is consumed in a car or at home.
Speaker Change: Actually, I think it's a little over half. So we see that as a huge opportunity. I would say we're trying a lot of different things. We're working with a couple of outside companies trying to help us there, but to me, it's more of a...
Speaker Change: In the future, we have a bigger opportunity than we've been able to unlock so far, and we believe it's a huge opportunity because what we've found is that a customer can buy a meal from us
Speaker Change: and it's usually the cost is one-third to one-fourth versus going out to a restaurant so it's for us it's a great opportunity but we're just scratching the surface.
Speaker Change: Thank you. At this time I'll take no further questions so I'll hand back to Rodney for any further remarks.
Rodney Mcmullen: Thank you for all the questions and as always we have a lot of our associates listening in. First I would like to send our thoughts and prayers to those impacted by the recent hurricanes.
Rodney Mcmullen: I would also like to take a moment to express my gratitude and appreciation for our dedicated team of associates, especially during this time. They just did amazing things on supporting communities.
Rodney Mcmullen: And as you know, our stores are vital to each community we serve.
and during these types of times
Rodney Mcmullen: Our customers rely on us to provide them with food and other essential items. And I am so proud of our associates who have stepped up to be there for our customers, communities, and each other.
Speaker Change: Thank you all for joining today's call. You may now disconnect your lines.
Thank you. Thank you. Thank you.