Release Date: September 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The Kroger Co (KR, Financial) achieved identical sales without fuel growth of 1.2%, supported by positive customer metric trends.
- Digital sales grew 11%, driven by an increase in both households and traffic, with e-commerce households growing 14%.
- Our Brands sales growth outpaced national brand sales growth, with more than 90% of customer households purchasing Our Brands products.
- The company raised its quarterly dividend by 10%, marking the 18th consecutive year of dividend increases.
- Kroger's net total debt to adjusted EBITDA ratio was 1.24, indicating a strong balance sheet and financial flexibility.
Negative Points
- Customers are adjusting to economic pressures, leading to reduced spending and a focus on essentials, impacting overall sales.
- The OG&A rate, excluding fuel and adjustment items, was 65 basis points unfavorable to last year due to non-recurring charges.
- Shrink related to theft remains high on a historical basis, despite improvements in Fresh shrink.
- Adjusted EPS declined by 3% compared to last year, reflecting challenges in maintaining profitability.
- The company faces ongoing labor negotiations and strikes, which could impact operations and labor costs.
Q & A Highlights
Q: There's been increased concern around the competitive backdrop, rising promotions across the industry. Can you just talk about what you are seeing from a promotional and competitive standpoint? And then what are your plans as you think about the back half of the year?
A: If you look, I would say the promotions are getting back to pretty much normal. And obviously, during COVID, there was less promotions because supply chains are under tremendous pressure. The other thing that we would say on the promotions we are doing, we view -- the ones that we're doing are more effective. And the CPG partners are increasing their support for some of those as well as they're trying to grow tonnage. If you look at, as Todd outlined, the -- overall, we feel good about the balance of the year and balancing cost reductions and the mix changes that are helping gross and our continued investment in pricing, which we've been doing for, I think, close to 20 years now.
Q: Just wanted to dive in a little bit more on gross margin. It was really quite strong, and you called out some of the factors there, but can you help us just understand how digital is impacting gross margin? Is that included in your mix category? And just a general update on digital profitability as we look forward, really, into the back half of the next couple of years here.
A: Yeah, you're right. As we went into the year, we talked about the expectations for our margins to be relatively flat. And included in that expectation was a little bit of an increase in the second quarter year over year. But even on top of that, some of the strength that we saw in Our Brands, like we called it out, we had tremendous quarter in Our Brands, actually. The sales growth there outpaced national brands quite meaningfully that helped drive at above our expectations. And also, we had a great shrink quarter. It's been a while since we've looked a year over year on shrink and seen positive results, so that's really exciting to see. As we called out, still a lot of work to do there on a go-forward basis, but -- so it was a little bit better than our expectations, which were to be up some. And therefore, for the balance of the year, we do expect for the full year margins to now be slightly favorable on a year-over-year basis. From a digital profitability standpoint, we continue to make progress. If you look at over the next two or three years, we see the opportunity to make significant progress, and we would hold ourselves accountable for doing that. The thing that's pretty special about the overall ecosystem that we're building is when you look at a customer that engages with us seamless, they actually still physically go into stores. Sometimes they do delivery, sometimes they do pickup. They also become more loyal in other aspects, becoming Boost members, engaging and pharmacy. So as you look at over the next two or three years, we are very excited about the potential of that and the continued progress. Obviously, the media business helps gross margin. And the margins in that is significantly different than anything that we've ever sold in the supermarket store.
Q: Between the proactive cost reductions, the media growth, and the moderating digital losses, should we expect a greater amount of P&L benefits than there have been in recent years? And if so, how much of this incremental benefit flows through to the bottom line versus reinvestment into other areas of the business?
A: The things that you call out are great examples of some of the margin enhancement programs that we've talked about in the past, as well as some of the productivity improvements and cost improvements that we've realized over time. That's an important part of our overall business model, being able to use that value that we create through the things that you called out to invest it back in the business. And Rodney alluded to it, we have a long history of taking that value and reinvesting it back in the business in a way that over time, our operating profit rate grows slightly over time. So as we grow the top line is we're able to balance the investments with the benefits that we get from those. That drives the bottom line over time. Our long-term TSR model is 8% to 11% a year. That long-term TSR model assumes that we continue to move and grow alternative profit businesses, continue to invest in wages, continue to invest in lower prices for our customers. As you know, fortunately, we generate a tremendous amount of free cash flow. We would expect over time for more of that growth to come from the business as opposed to buying back stock. And then once the merger happens, obviously, there's incremental accretion that will happen because of the merger for first a period of time that once the merger happens, we'll give more insights into.
Q: Seeing if you could comment on your market share trends in the quarter, and especially interested in any color on what you're seeing in Fresh specifically, as I know that's been a big area of investment for you.
A: If you look at our Fresh trends, overall, they would be stronger than the center store. Overall, I would say that we're -- we feel okay about where we are. But if you look, going forward, we continue to see improvement, and we would expect to see improvement throughout the balance of the year. So it's one of those areas where we're not satisfied. We are gaining strong household growth and strong loyal household growth as well, which also, in the past, always leads to future progress as well. So I would say that we feel okay where we are. We're more excited about what we see where the trends are and where we see for the balance of the year and next year, because we're also incrementally adding storing as well, which helps on market share as well.
Q: If you look at the second quarter and the second half, the difference in comp that you're guiding to, how is it changing between units and inflation? I heard of the inflation piece, but curious how the guidance reflects this. It looks like a slightly better than consensus. The second part is, if this environment stays, and I know you're not -- you're trying to improve share and grow comps, but if we stay in this low -- very low single-digit environment, do you spend the same way in the business next year? And do you think you can keep the core EBIT dollars roughly flat or margin flat in this backdrop?
A: We did update our sales guidance for the year, taking up the bottom end of that range, as you saw, from 25 basis points to 75 basis points, but kept the top end of the range at at 1.75 basis points. And I think that was -- our thought process around that was really to take the low end off the table. If you think about where we came into the year, and there was quite a bit of disinflation last year, that was still kind of hitting us early in the year, and we wanted to make sure that we were navigating through that uncertainty
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
