The Kroger Co. — 2023 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Hello, and welcome to the Kroger Co. First Quarter Earnings Call. My name is Alex, and I'll be coordinating the call today. [Operator Instructions]
Good morning. Thank you for joining us for Kroger's First Quarter 2022 Earnings Call. I am joined today by Kroger's Chairman and Chief Executive Officer; Rodney McMullen; and our Chief Financial Officer, Gary Millerchip.
Thank you, Rob. Good morning, everyone, and thank you for joining us today. We're off to a great start in 2022, delivering strong performance by successfully executing our strategy of Leading With Fresh and Accelerating With Digital. Our associates' relentless focus on providing fresh, affordable food to our customers is driving our strong results.
Thank you, Rodney, and good morning, everyone. Kroger delivered another quarter of strong results as our team did an outstanding job executing our go-to-market strategy while navigating a dynamic operating environment. Our results again highlight the strength and resilience of Kroger's financial model, which allowed us to continue to invest in our associates, deliver fresh, affordable food for our customers and create value for our shareholders.
Thanks, Gary. I would like to once again acknowledge and thank our outstanding associates. Their hard work and dedication fuel our Leading With Fresh and Accelerating With Digital strategy and our obsession for our customers. We continue finding new ways to help customers stretch their dollars through everyday prices, data-driven promotions, personalized experiences, trusted Our Brand products and a seamless e-commerce platform. We believe this relentless focus on delivering for customers will help us maintain robust sales and drive growth.
[Operator Instructions] Our first question for today comes from Robby Ohmes of BofA Global Research.
Guys, great quarter. My question is, I was wondering if we could get a little more color on the ID sales. So maybe thoughts on what your -- the traffic component of that, what you're seeing in traffic, the ticket component and maybe specifically the inflation component in the ID sales.
Thanks, Robby, and good morning. If you look at -- in terms of traffic, the 2 areas that we felt really good about is if you look at the number of loyal shoppers we have and our household count, both improved. Now a typical basket size for a customer coming in continues to decline. Part of that is just driven because of the economic environment some customers are having.
I think you covered it well, Rodney. The only other point you mentioned around total households and loyal households growing, we also saw visits improving during the quarter as well, Robby, which was -- we were really pleased with that trend as well.
Our next question comes from John Heinbockel of Guggenheim Partners.
Yes. So let me start with our own brand, right? So it looks like own brand is probably growing 2x the rate of national brand. I'm curious, price spreads there, so maybe, Rodney, talk about that. Where you think own brand momentum goes from here? And I know historically, right, you guys have always said that own brand strength leads to increased CPG promotions. Do you think that will be true this time?
Yes. I love the question, John. And as you know, we're super proud of our brands and super proud of Private Selection, the banner brand and Simple Truth and then Home Chef is our most recent owned brand.
A quick follow-up to that. Forward buying, right? Normally, a big P&L benefit in inflationary times. It sounds like today, it's limited, right, because of their capacity constraints?
Yes. We do -- the excess warehouse space that we took on as part of COVID, a lot of that space, we've continued to keep. And I would say we're using that space to be able to get product when we can get it. So I think a lot of the CPGs are using it to level out production. So when they have excess production, we're taking that. And it, in essence, becomes forward buy, but I don't think it will be as big as it's been in past situations.
Our next question comes from Simeon Gutman from Morgan Stanley.
I'll ask my question and follow-up, one shot here.
Yes. Well, it's a good question. And obviously, we always spend a lot of time focused on it.
Our next question comes from Spencer Hanus of Wolfe Research.
Can you provide some more color on the FIFO adjusted gross margins in the quarter? Because it looks like that slowed sequentially. And then you said your price gaps are well positioned, but do you think you're going to need to invest further in price in the second half as we just see sort of inflation pick up and that consumer gets under more pressure?
Yes, thanks for the question. Yes, I'll cover that, and Rodney can add any additional color he'd like to.
The other thing I think it's always important to remember is we always look at gross margin in light of our OG&A cost as well. And obviously, our teams did an incredible job of managing OG&A costs. And we always will invest some of those OG&A savings in trying to extend the customer's budget, especially in an environment like this where it's important. And I think some of those reasons are the reasons why our customer counts have improved as well.
Our next question comes from Karen Short of Barclays.
I have a couple of questions. I just -- and they can all kind of tie into one. But the first is on your actual volume versus your comp. So as you look at your guidance, we know where CPI is and we know what your implied 2Q to 4Q guidance is. So it certainly implies demand destruction from a volume and tonnage perspective. So wondering if you could talk about that.
Sure. Thanks, Karen. Yes, I think the first part of the question would be, as I mentioned it a moment ago, around we look at the guidance for the rest of the year. Our overall outlook for inflation is that we do expect inflation is going to be higher for the rest of the year than we originally expected when we sort of entered 2022 and provided our original guidance.
As well as the vaccine headwind, correct?
Vaccine headwind would have been in the first quarter probably a factor, and then it would also be a factor in Q2 and Q3. But again, I wouldn't think of that as being a major headwind on what -- so that was probably a bigger factor in Q1 as any quarter. So I wouldn't think of the gross margin performance that we saw in the first quarter of the year as being dramatically different expectation in the remaining quarters based on the impact of vaccine and other factors.
Our next question comes from Rupesh Parikh from Oppenheimer & Co.
So I just want to go back to grocery market share. Just want to get a sense of how your markets are held up in the grocery category. And I guess related to that, it sounds like the general merchandise category had some headwinds. So just wondering if that contributed maybe to the weaker ID performance.
If you look at grocery market share for the -- overall, it's pretty much close to where we thought it would be. We would expect continued improvement throughout the year, which was reflected in the original guidance.
Great. And then maybe just one quick housekeeping question. I know last quarter, you gave quarterly cadence guidance. Is that still intact on the comp and EPS line? Or I don't know if there's any updated views there.
Sure. Yes. Just briefly, I would say, on the EPS side of things, I mentioned a moment ago, Rupesh, that I think if you look at the guidance for the back -- the last 3 quarters of the year, it would sort of predominantly be around the sort of flat to slightly down. I would think of that, if you look at the cadence last year, it would be relatively consistent if you think about the next 3 quarters. So I wouldn't call out any dramatic year-over-year variance to that overall.
Our next question comes from Edward Kelly of Wells Fargo.
I wanted to go back to the question on -- I want to go back to the question just on tonnage and underlying unit volume. Rodney, I think when we were sort of all looking at this quarter, I think we would all, on the investor side, agree that we probably thought your ID would be better given the trends that we saw in inflation. And I'm kind of curious as to what you are seeing in underlying tonnage. And then you talked about, I think I heard you right when you said that basket is down despite that backdrop. So I'm just kind of curious as to what you're seeing on like that side. And do you think any -- are you seeing anything that is being caused by changes in consumer behavior, right, whether that's sort of like channel shifting, seeking value, that type of stuff?
Yes. If you look on the basket size, that's driven by units per basket. And what we're finding is customers are coming in more frequently before but they're not buying as many items on each shop. And that's what we're seeing.
Yes. Well, I think just to clarify maybe the comment we made, the total basket size is actually up. It's the number of units in the basket that are down. So if we look at our overall metrics, households are up, loyal households are up, visits have turned positive, basket size is up. But the number of items in the basket, as Rodney mentioned, is the item that I think customers are adapting behavior as they start to manage the inflationary environment. And that's obviously a focus area for us to use data personalization and different tools around rewards to really aim to continue to drive that up.
Okay. And then just a quick follow-up. I think that you said that you sort of expected the gross margin trend for the rest of the year to be similar to Q1. Did you mean the year-over-year decline? Or did you mean multiyear? Just kind of curious as to what you were talking about there.
Yes. I wouldn't want to get into specific guidance because of the comment that Rodney mentioned around we do try and manage the business dynamically. I think what I was really saying, Ed, was it was specific to the current year. I'm really saying that when you think about Q1, I think there was some concern that the PPE write-down was somehow need to be reversed out and that would be the trend that we're seeing in terms of gross margin rate. So I think the guidance that we shared at the beginning of the year was we expected gross margin to be a headwind. We didn't expect the volatility to be as significant as we've seen in the past. And as I mentioned, the PPE is really one of a number of puts and takes. But because we called it out last year in the first quarter, we didn't want to not clearly mention it again in the current quarter, but I wouldn't see it as a major factor. And so it was related to Q1 was the -- that's the kind of directional shape of gross margin, which is, I think, consistent with what we shared when we gave our guidance for the year.
Our next question comes from Michael Montani from Evercore.
Just wanted to ask, first off, looking at food-at-home inflation, it looks like it was up just about double digits for your quarter calendarized. And if we adjusted that, given your gen merch mix a little bit, maybe it's a point or 2 below. But just wanted to see, is that kind of the right way to think about what you might have been able to pass through to the consumer given that PPI is so much ahead of those levels?
Yes. I always think it's important to look at CPI and PPI together. And it's also the reason why we shared a little bit more details about Our Brands than normal because you have -- customers are doing their own behavior in terms of changing the way they shop.
Okay. And then for a follow-up, if I could, was just around the $1 billion plus of gross cost savings. I was just wondering if that would be kind of metered out evenly throughout the course of the year and how it might compare to kind of inflationary pressures you might be seeing in wages and/or transportation with diesel at record highs.
Yes. The $1 billion of savings would certainly be sort of an ongoing flow of initiatives. So certainly think about it as being consistently sort of building from -- so we've got a certain number of benefits from last year that flow through, and then we're introducing new initiatives this year. So because we're on this 5-year journey, $1 billion of savings, it's very much a continual flow of new initiatives that are being implemented in the business to drive those efficiencies and savings.
Our next question comes from Michael Lasser of UBS.
In light of the perception that your food categories were up, call it, 5% in the quarter and Nielsen was up 6%, the mass merchants were comping and improving leverage up high single, double digits. There's a perception out there, Rodney, that Kroger lost market share during the period. Why would that have been the case? And you made a comment that you expect your market share trends to improve in the next couple of quarters. What do you expect will drive that improvement?
If you look, all of us, our quarters end at a little different time. So it's always difficult to be exactly comparison. And I know some of the competitors don't break out specific by category. And I know for us, obviously, general merchandise is a bigger part of our business than some of our traditional competitors, not as much as some of the big-box competitors.
Yes. The only other thing maybe I would add, Rodney, is that the comments we made, Michael, about digital growth and the expectation that with the investments we're making in customer fulfillment centers, the announcement -- the exciting announcement that Rodney shared this morning around Boost membership launching across the whole of the company, we feel that the momentum that we're seeing starting to build in digital will also be an important component of that growth in the future as well.
And if I could add a quick clarifying question on that. The perception is also that over the next couple of quarters, economic pressure across a broader swath of consumers, not just those at the lowest income demographic, that pressure is going to increase. And that might push people to shop more at the dollar stores, might push them to shop more at the warehouse clubs, where the perception is that they may be able to stretch their budget a little further. So in response to that, what is Kroger going to need to do, invest more in price, change pack sizes and other actions that could impact its profitability to prevent customers from going elsewhere?
Thanks, Michael. Yes, I think briefly, we see that as an opportunity actually for Kroger because what we tend to see in those more economically challenged times is that the customer that's less stressed, as you described them, actually views Kroger as a high-quality place to get more value compared to maybe shopping a larger number of stores, and we even see it with some of our own brand performance. Rodney mentioned the strong value and ingredients for cooking at home, but we also saw strength during the quarter in Private Selection and Meal Solutions. So we see that as an opportunity for us to really connect with that customer as they start to maybe determine the best place to shop for quality and value combined.
Our next question comes from Kate McShane of Goldman Sachs.
I wondered if you could talk a little bit about how conversations are going with your vendor partners currently, especially in light of the ongoing inflation to the second half. Have you been able to push back with regards to some of the cost inflation? And will you be getting more aggressive in those conversations like some of your competitors have suggested?
It's an ongoing dialogue. And obviously, overall, we try to make sure that we have a partnership relationship. It's also one of the values in having Our Brands so it's such a strong component. So we understand true cost increases versus somebody just wanting to raise margins.
And if I could just ask an unrelated follow-up. Just with regards to the Boost rollout, are there any more details with regards to the timing of that? And I know there was higher retention and other metrics you cited, but was there also a comp lift impact from Boost during the quarter in those 3 test regions?
Yes. If you look at the test regions, it would positively affect our identicals. And the thing that's most important to us is it causes that customer to be stickier to our overall ecosystem, not just on delivery. So -- and our strategy is that if a customer thinks food, we want them to think Kroger. So we feel good about where we are and it's continued in the right direction.
Our final question for today comes from Chuck Cerankosky from Northcoast Research.
Rodney, if you talk about your e-commerce sales, they were down 6% overall. Can you shed some light on the components of that because I don't think it reflects what's going on with the new CFCs and spokes. So where is the negative numbers coming from? And how are the -- how is the Ocado-based facilities performing?
Yes. Thanks, Chuck. If you look at -- pickup would be the area where we would have the biggest decline. And what -- as I mentioned, what we're finding is that customer, as they get comfortable, they move back into stores. And the retention rate is better than the overall retention rate.
And then on the increase in working capital dollars spent during the quarter, does a lot of that simply reflect inflation? Or are you -- is Kroger, in fact, getting more aggressive on forward buying or just trying to grab stuff when it's available?
Chuck, yes, I think there's a couple of different factors just briefly in there. Overall, we've been on a plan for a number of years to continue to optimize working capital. So I wouldn't say it's a dramatic change in strategy. We're very focused on continuing to drive improvements there and have seen good tailwinds in our cash flow because of that.
Thank you for -- to everyone for joining us today. I am incredibly proud of the way we are beginning in 2022, with a continued focus on our Leading With Fresh and Accelerating With Digital strategy.
Thank you for joining today's call. You may now disconnect.