The operator introduces the call and turns it over to Senior Director of Investor Relations, Robert Quast. Quast introduces Chairman and CEO Rodney McMullen and CFO Gary Millerchip. McMullen outlines the discussion topics, including the current retail environment and Kroger's strong value creation model. Millerchip will cover financial results and guidance, and McMullen will provide an update on the proposed merger with Albertsons. The third quarter results demonstrate the strength and diversity of Kroger's business model in a challenging operating environment.

Kroger has seen continued growth in their fuel performance and alternative profit businesses, leading to an increase in adjusted net earnings per diluted share. As consumer spending tightens, Kroger remains committed to offering lower prices, personalized promotions, and rewards to provide exceptional value to their customers. The company has also seen growth in higher income households, who are more profitable due to their purchasing of larger packs, fresh items, and premium Our Brands products. Kroger is actively looking for ways to support budget-conscious customers, including offering in-store displays with low-priced everyday staples. These efforts have been well-received, especially among budget-conscious households, who are making more trips and purchasing more units. Kroger is committed to delivering exceptional value through personalized promotions to help customers manage their budget.

Kroger is using analytics to improve their promotional strategies, such as offering a Thanksgiving meal bundle at a lower price than last year. Their omnichannel shopping experience and focus on value has resulted in growth in total and loyal households. The company's digital business has also experienced double-digit growth, driven by multiple factors including their new two-hour pickup service and improved customer experience metrics. Kroger is focused on becoming the top online food retailer by providing best-in-class fulfillment and personalized savings for customers.

In the third quarter, digital offers and personalized capabilities led to a 13% increase in digitally-engaged households, which are highly valuable to the company. The alternative profit businesses also saw strong growth, with Kroger Precision Marketing (KPM) making advancements in becoming a trusted and transparent media company. KPM now offers self-service solutions and plans to expand to other buying platforms in the future. Kroger Health also had a successful quarter, exceeding expectations and contributing to overall sales and profit growth. The company's decision to end their agreement with Express Scripts was made with the long-term interest of customers and shareholders in mind.

The company has seen success in retaining patients and utilizing their pharmacists' extra time for patient care, resulting in growth in vaccinations. They also have a 'Food as Medicine' philosophy and offer healthcare services, dietitians, and tools to support healthy living. Customer data in the pharmacy is protected by privacy laws, and the company is committed to using it appropriately. There have been no major shifts in customer eating habits or spending behaviors. The company's purpose is to feed the human spirit, and they hold an annual wellness festival to showcase health and wellness experiences and food offerings.

In the third quarter, Kroger received strong support from sponsors and celebrities for their mission to improve physical, mental, and emotional health for families. They also released their annual ESG report, highlighting their progress on their 'Zero Hunger Zero Waste' journey. Since 2017, they have donated over 3 billion meals and reduced food waste. Kroger also invests in their associates through wages, benefits, and training programs, resulting in strong retention and a better customer experience. The financial results for the quarter demonstrate the success of Kroger's value creation model.

The investments made by Kroger in recent years have allowed the company to navigate a challenging environment and achieve 8% growth in adjusted earnings per share. This was possible due to strong performances in margin expansion, fuel, alternative profit businesses, and health and wellness. Identical sales without fuel decreased by 0.6%, but would have been positive if adjusted for the terminated agreement with Express Scripts. Kroger's seamless ecosystem and digital sales were highlights in the quarter, but overall sales were affected by industry-wide disinflation.

Inflation has been declining at a slower pace in the fourth quarter, but unit growth rates have not improved as expected. The company is focused on returning to unit growth and has seen an increase in gross margin rate due to investments in pricing and promotions. However, shrink has been a challenge due to industry-wide theft. The company expects similar factors to influence gross margin rate in the fourth quarter. The LIFO charge decreased compared to the same quarter last year, and OG&A rate increased due to planned investments in associate wages and benefits and a terminated agreement with Express Scripts.

During the quarter, Kroger made strategic investments to drive growth in the future, while also implementing cost-saving measures and maintaining a focus on customer experience. The company's Kroger Health division exceeded goals for vaccinations and is expected to contribute to profitable growth in 2023. Fuel sales and margins also exceeded expectations, with customers saving more through the rewards program. Kroger has also invested in its associates, with a significant increase in average hourly wages over the past five years.

Kroger remains committed to supporting their associates with sustainable wages and benefits while keeping products affordable for their communities. They have ratified new labor agreements and have a strong liquidity and free cash flow position. Their net total debt to adjusted EBITDA ratio is well below their target range and they are on track to close their proposed merger with Albertsons in 2024. They have updated their full-year guidance to reflect current economic pressures and food-at-home disinflation, but are still on track to achieve their annual sales guidance range.

The company expects to see stronger sales in the fourth quarter due to the effect of Express Scripts and other factors. They have raised their full-year earnings guidance and remain committed to delivering returns for shareholders. The company is also providing an update on their pending merger with Albertsons Companies, stating that they have fulfilled all commitments and are on track to close the merger in early 2024. They have found a qualified buyer for divested stores and have made a compelling case to stakeholders for the merger.

Kroger's proposed merger with Albertsons will bring benefits to customers, associates, and communities. The integration planning is going well and the teams are focused on ensuring continuity for associates and customers. Kroger is confident in its ability to manage through a challenging environment and balance investments in associates and lower prices for customers. The company also saw solid results for the quarter. There is a debate about the impact of increasing digital sales on gross profit and operating profit, but Kroger is focused on the overall digital ecosystem and alternative revenue streams.

Rodney McMullen, CEO of a retail company, discusses the profitability of their digital operations compared to their physical stores. He explains that currently, digital is not as profitable as stores, but they are making progress in reducing the cost to serve customers through pickup and delivery. They also expect the profitability of their customer fulfillment centers to eventually match that of their stores. The CFO, Gary Millerchip, adds that they have previously stated that their pickup and delivery business has a pass-through profitability rate of around 5%, while their stores have a profitability rate of over 15%.

The company has made good progress in improving its digital pass-through profitability and expects to reach double-digit rates in the near future. The Ocado CFCs are still in the early stages of profitability, but are expected to see tailwinds as they achieve more scale. The company expects to close the second request substantial completion in early 2024, but it is still too early to determine specific dates. On the topic of inflation and deflation, the company does not have a specific outlook for 2024, but will continue to monitor the market and make adjustments accordingly. Factors such as market conditions and consumer behavior may impact the inflation or deflation rates in the future.

The speaker is asked about the potential for deflation and its impact on their business. They state that they will provide more specific details in their upcoming earnings report, but most data suggests a typical year with low single-digit food-at-home inflation. They also mention their ability to adapt to different scenarios and their history of strong business results in both inflationary and deflationary environments. The speaker then briefly discusses the higher-than-expected profitability of their fuel business.

The speaker discusses the competitive landscape and promotions in the supermarket industry, noting that they leverage both sides of their business to support each other. They also mention a potential cost-out plan and growth in OG&A. The market is described as feeling similar to the past.

The paragraph discusses the increase in promotional funding by CPGs and the return to normalcy in supply chain constraints. It also mentions the trend of last-minute shopping during Thanksgiving and the impact of COVID-19 on consumer behavior. The paragraph also touches on the OG&A, noting that it was slightly lower than expected due to investments in wages and strategic investments for future growth and cost savings. The trend of average hourly rates is expected to continue in the fourth quarter, along with the continued impact of Express Scripts.

The majority of discounts offered by OG&A are proactive rather than reactive, with most adjustments based on regular price checks. This approach allows the company to respond to market trends and offer targeted discounts to individual households through their loyalty program. OG&A expects to see continued cost savings through technology and efficiency improvements, allowing them to invest in customers and associates.

Kroger believes that their loyal customers continue to grow because of the benefits they offer, such as loyal customer mailings, personalized offers, and rewards like fuel rewards. They are a promotional merchant but their overall basket price is similar to their biggest competitor. They have confidence in their ability to navigate through the current environment because of their reward program and the increase in customers engaging digitally. They aim to target their value and personalize it for loyal customers rather than spreading it across all customers. They refer to non-loyal customers as "cherry-pickers" and prioritize giving value to loyal customers over those who are just looking for discounted items.

John Heinbockel asks about the negative volume trend and when it will return to positive territory. Rodney McMullen responds that volume is slightly negative and has improved for four quarters, driven by budget-conscious customers. He also mentions that the loyalty customer segment is growing and more profitable. The next question is about the level of competition in the grocery sector and how Kroger is positioned in a potentially deflationary environment.

The speaker discusses the competitive nature of the industry and how the company has been able to adapt and remain successful over the years. They mention their focus on process changes and cost reductions in order to continue investing in their employees and providing better value and experience for customers. They also mention that they do not anticipate any major changes in the competitive environment in the coming years and that customers do not have to compromise on quality or pricing. The other speaker adds that the impact of Express Scripts will be cycling out in the early part of the year, which will be beneficial for the company.

The speaker discussed the impact of reduced SNAP dollars in certain markets and how it may affect the industry's growth in the coming years. They also mentioned that the Q4 gross margin is expected to be similar to Q3 and that they have been making progress in their margin improvement plan. They also addressed the issue of shrink and whether it has peaked.

The company continues to see strong benefits from various areas, such as Our Brands, sourcing, health and wellness, and alternative profits, which have helped increase their gross margin rate. In the third quarter, they invested more in gross margin and advertising, which may continue in the fourth quarter. Looking beyond 2023, the company is confident in their ability to drive growth through these levers. However, shrink remains a headwind for their gross margin rate, although it has eased slightly compared to the previous quarter.

The company is working to offset the effects of inflation and organized retail crime, which have been a headwind in terms of year-over-year growth. The majority of shrink is in the fresh departments, but the team has been successful in managing it through process changes and technology. Inflation is stabilizing, but customers have had to endure a lot of inflation in the past two years. Some fresh departments have returned to normal, but processes are still experiencing inflation.

The speaker discusses the success of Kroger's digital performance, noting a double-digit growth for another quarter. They also mention customer behavior and how some are focused on saving money while others continue to purchase higher-end products. The company is exiting the ghost kitchen business but remains focused on the growth opportunity of food away-from-home.

The executives at Kroger discussed the positive impact of their digital strategy on their Net Promoter Scores and profitability. They also expressed confidence in the growth potential of their digital business and mentioned their expectation of low single-digit inflation and increased productivity in the coming year.

In response to a question about unit growth and potential headwinds for earnings growth next year, Gary Millerchip of Kroger mentions that the company has built a more diverse ecosystem and is focused on driving the "flywheel" of its business. He also highlights the importance of food-at-home, fuel, health and wellness, and alternative profit streams in this ecosystem. Kroger's strategy remains the same, but they will continue to focus on driving traffic and reducing costs in order to invest in customers and associates. More details will be shared in March.

The company believes there is potential for margin improvement beyond 2023 due to various initiatives. They will reassess their cost base if sales growth declines for a sustained period. The company expects food-at-home to normalize with 1-2% inflation and 2-3% growth. The seamless business is also expected to make progress. The company's processed food and CPG partners are not willing to roll back prices despite decreasing volumes and increased support from the company. The company used their P&L to fund promotions in the third quarter, possibly indicating limitations from vendors.

The speaker discusses the diversity of their CPGs and their willingness to give up tonnage. They also mention the high repeat rate of customers trying their brands due to the quality and value. In terms of funding, CPGs were more aggressive in the third quarter and this trend is expected to continue. The speaker also mentions building a more diverse ecosystem and the potential for double-digit growth in alternative profit in the coming years.

The speaker discusses the importance of transparency in the media world and mentions competitors such as Google and Amazon. They also mention the company's long-term growth opportunities and the variance in performance within the company. The speaker then thanks associates for their hard work during the holidays and acknowledges the role of food in bringing people together. They also mention a holiday film and encourage associates to watch it. The paragraph ends with a thank you to associates for their efforts in creating special memories for customers.

The writer is extending well wishes for the holiday season, specifically for Christmas and the New Year.

This summary was generated with AI and may contain some inaccuracies.