The Kroger Co. — 2023 Q2

I'll start on that and let Gary add some more of the details. The biggest part of the drive in improving trends is continued improvement in our loyal household growth and total household of people coming to our stores. We continue to see average transaction size smaller as people come into the store more often and more frequent. We would continue with some headwinds from the nonfood products as well.

I think you covered most of it, Rodney. As Rodney mentioned, John, we're certainly seeing for our most low shoppers continuing to win that first basket, and we're definitely seeing, as we look at our trends, that's holding up very well compared to what we're seeing overall within the market. And for our most loyal customers, as Rodney mentioned, we're seeing that number grow overall and trips also growing with our customer that most loyal shoppers starting to increase the number of trips into the store as well. So I think they are the key points that I would call out.

Yes. The only other thing that might be helpful insight, John, is it's pretty consistent across the country as well.

Yes. If you look, one of the things that our teams have done a nice job is on procurement. The other piece would be, as you mentioned, mix. The fresh departments continue to help on mix. And we continue to see a lot of customers continue to add value-added products as well.

Yes, I think you picked up the biggest drivers with sourcing and the benefits. It's not so much forward buying but continuing to be really disciplined, John, with how we look at the designer product and how we're managing relationships with our supply partners as well.

Gary, go ahead.

Yes, absolutely. Kelly, thanks for the question. Yes, I think you've actually picked on many of the key points. We would be expecting many of the levers that we've been pulling in managing to grow sales and grow customer loyalty and manage the margin performance in the business will be consistent in the back half of the year. The key elements that we called out are what would optically make our EPS growth look less meaningful in the second half.

Yes. Just a couple of additional things. And Gary mentioned one of these in his prepared remarks, but the organization still has incredibly strong cost control, and this will be the fifth year in a row that we've been able to get over $1 billion of cost out. Obviously, that's an important part of that. And we do expect alternative profit to continue to be a little strong, a little bit stronger in the second half of the year as the first half of the year as well.

Yes. If you look, the thing that I think is always important is Ocado is one part of our overall digital strategy. And the thing that we're wanting to make sure that we have is a seamless ecosystem where customers can easily go between delivery, pickup and shopping in stores. And what we find is, by far, the majority of the people that -- customers that stop engaging with us on pickup come back into store and we capture that in-store versus delivery. So when you look at the overall seamless system, we're really focused on how do we -- and that's one of the reasons we introduced Boost, is how do we have that total loyalty across all the engagements with the customer.

Yes. Thanks, Rodney. Just a couple of things. Overall, I would say, Kelly, we're pleased with the progress that we saw in the quarter. As you heard me mention in my prepared comments, we're certainly starting to see some traction on some of the key initiatives that we've been investing in, whether it's the Customer Fulfillment Centers that are powered by Ocado in both new and existing markets, the launch of Boost and as Boost continues to ramp up and we see about 25% of customers that sign up for Boost are completely new to digital. So that's a really good driver of the digital business as well.

Yes, if you look overall, we continue to be satisfied with inflation and the pass-through. As Gary and I both mentioned, we're doing everything we can to minimize those increases and do it in a way that helps the customer in any way we can. And when you look at the total value proposition, we feel very good. When you look at fuel rewards, as I mentioned, we had 600,000 incremental households engaging in fuel rewards and record redemption from customers as well.

Yes, I'll answer the first part of that and let Gary answer the second part of your question, Spencer. We continue to ramp up and the ramp in new markets would be among some of the best [indiscernible] sheds across the Ocado network. And as I mentioned before, the NPS scores are outstanding, a world-class or whatever positive you want to assign to them. And as customers engage with us with our Boost membership or our membership programs, that's causing them to even be more loyal as well.

Sure. Yes. Thanks, Rodney. I wouldn't say, Spencer, if there's anything dramatically changed in our view that we shared previously around how we think about the CFCs powered by Ocado maturing over time. I think, as Rodney mentioned, we've certainly been pleased with what we're seeing with customer connection and sales trends. And when we think about the Net Promoter Scores and the value that we're offering, we're seeing that the gross margin profile, if you like, of that customer and also the growth that we have expected is very much in line with what we have originally envisaged.

Part of it, Michael, is we're starting to cycle higher inflation a year ago. So it's really -- we do not expect inflation on inflation to be as high. So it's really driven by the cycling of where we were a year ago. And as you would recall, as we get later in the year, inflation ramped up very aggressively in the back half of last year. We expect the business to continue to stay strong and continue to make strong progress. We just don't expect the inflation to be quite as high as it was.

Yes. Michael, I think we tend not to look at it specifically in the way that you're describing at that 3-year view. But I would say that overall, we think about our progress in the second quarter, we believe we were able to accelerate our growth relative to Q1 compared to the market. So we felt that from everything you could see, we were able to win customers and to change trajectory versus how the market was moving from Q1 to Q2. So we feel very positive about the momentum that we saw in the business in Q2.

Well, obviously, all -- everything that you asked would have been reflected in our guidance for the balance of the year. We would -- most CPGs, you know well in advance of cost increases. So you're balancing the actual getting the cost increase along with what you pass through to customers. Obviously, you are -- on a weekly basis, you're looking at what pricing, where you are on spreads, better or worse than your competitors.

Yes. Maybe just to add, Rodney, I think, Michael, from the perspective of how we manage gross margin, I think of it much more of a -- we're not trying to manage to a number every quarter. Obviously, we're managing it more long term and there's lots of moving parts that we manage. The tailwinds would be the work we do in sourcing, the mix improvements through fresh growing and Our Brands growing and new innovation products. And of course, things like alternative profit streams adding to that model as well. So we're still investing in the customer. And from our perspective, we feel very good about our ability to manage the model through the evolving environment.

If you look at customer behavior, they're telling us they're modifying behavior more so outside of the grocery store than with us. Now the movement to Our Brands, what we always find is customers do it initially to save a little bit of money, but they fall in love with the product. So part of the continued acceleration of growth in Our Brands is driven by the value, but part of it is just the quality of the product. And that's been something that's been a long-term trend, not just a current trend.

Yes. I mean I think from what we see, we wouldn't expect it to be that dramatic a change. As I mentioned, I think we would expect there to be some flattening out of inflation in the back half of the year, but there's nothing that we see right now that would cause us to believe there's going to be a dramatic change in the level of inflation in the back half of the year.

Yes, it's a great question, Ken. And it's really broad-based. And the banner brand, I wouldn't say it's a surprise, but the banner brand continues to gain solid share. But even if you look at like private selection, which has a lot of unique and new products, the growth there continued to be strong as well. So it was very broad-based across really the whole store.

Yes. Thanks, Ken. I think what I would say is overall, if you think about there's probably three pieces that impacted OG&A materially during the quarter. The one you mentioned, which was the true-up for the first half of the year on our incentive calculation based on our improved performance, we calculate what the [indiscernible] would be for the year. And so we have to catch up for the first 2 quarters in the year.

The majority is consolidating the sub-brands, just making it easier to shop. Those items are always great value for the money. The other thing that there would be incremental items introduced under the Smart Way brand in terms of just the absolute number of SKUs. So it's really a combination of introducing some new items and consolidating several sub-brands and making it easier for customers to shop.

I wouldn't say, Robert, really changes our view of the opportunity ahead of us. As you know, we've laid out a clear plan at our Investor Day in March, and we still feel really confident in both the growth model that we outlined and where we believe the strategic investments will make sense across the supply chain, across our store portfolio and obviously continue to invest in digital. So I wouldn't read into it that we're any less excited or have less confidence in those plans. It's far more the former point that you made. But when we look at some of the short-term supply challenges, when we look at some of the costs in the market in the short term, it just made more sense in our view to balance that plan and to adjust the schedule. So it would be far more in that camp than the other.

Sure. Yes. Overall, our team did a fantastic job in managing fuel margins. And as I think you probably know, we -- our goal is to make sure we're very competitive on price, and then we give significant value back to our customers via our fuel rewards program that flows through our supermarket gross margin, not through that fuel P&L that we share -- the metrics that we shared on the call. So overall, last quarter would certainly have been some great work by our team in capturing value wherever they go through sourcing of fuel and how we promoted and drove engagement with customers. But a lot of it is also just to do with the volatility in the market and as prices were changing in the fuel market, which I think has been seen across the industry.

Yes. I think just a bit of color maybe to the last comment, we mentioned on this one would be that our sales growth was higher than the increase that we saw from Q1 to Q2, was higher than the increase we saw in cost inflation. So overall, we're pleased with the trajectory in our growth. And we believe compared to the market, we were able to improve our trajectory, Q2 versus Q1 compared to how the market overall performed.

Thanks, [ Brandon ], for the question. The other thing I think is important that I mentioned earlier is that we had household growth overall and loyal household growth as well, which is always important for the future.

Alex, we have time for one more question.

Yes. The gap has continued to narrow and it's narrowed during the quarter as well. And if you look at it for the balance of the year, our teams would expect to continue to make progress and really proud of where we are. And we think the overall value for the customer and the overall seamless experience and focus on fresh continues to accelerate, and the customer continues to reward us for that as well.

I think, Rupesh, like I mentioned earlier, we feel very good about the plans we have to achieve our long-term -- or our overall TSR model around the growth that we've shared around growing earnings at 3% to 5% and our TSR at 8% to 11%. And we've got, I think, some very clear capital expenditure plans that we believe will allow us to drive that sustained growth.

Thank you, everyone, for joining us today.