The operator introduces the Kroger Co.'s Fourth Quarter and Full-Year 2023 Earnings Conference Call and turns it over to Rob Quast, Senior Director of Investor Relations. Quast introduces Kroger's Chairman and CEO, Rodney McMullen, and Interim CFO, Todd Foley. McMullen outlines the topics to be discussed, including a recap of 2023 performance and financial results, while Foley will cover financial guidance for 2024. McMullen also provides an update on the proposed merger with Albertsons before opening the call up for questions.

Kroger's value creation model is focused on delivering a best-in-class customer experience and investing in their associates. Their go-to-market strategy includes four key areas: fresh products, power brands, seamless shopping, and personalization. They believe that by taking care of their customers and associates, they will generate attractive and sustainable returns for their shareholders. Kroger has made significant investments in this model and is now seeing growth in various areas, such as alternative profit businesses, thanks to their focus on fresh products, personalized offers, and seamless shopping. This growth allows them to make capital investments, create more jobs and career opportunities, and return excess capital to shareholders. As part of their plans for 2024, they will be building more new stores to support their long-term growth. This is in line with their omnichannel approach to serving their customers.

Kroger is pleased with their progress in the digital market and will continue to invest in it. They also believe that a strong store network is important for their growth, as many customers shop both in-store and online. In 2023, Kroger focused on providing value to their customers through lower prices and improved digital experiences. They also saw an increase in loyal households and coupon usage, which helped drive traffic and position them well for 2024, despite expected continued macro pressures.

Kroger is committed to providing customers with lower prices and a great shopping experience. They are investing in improving their in-store and online shopping options, expanding their fresh and friendly metrics, and launching new products under their brands. They are also focusing on freshness and expanding their assortment, including a convenient fresh-cut fruit program. Their digital sales have seen strong growth and they are continuously improving their processes and technology to optimize efficiency. Digital is an important factor in Kroger's growth.

In 2024, Kroger expects to have double-digit sales growth and improved unit economics. Their combination of stores and fulfillment centers allows them to serve all customer trips and increase the number of omnichannel households. Personalization and offering personalized savings are important ways they deliver value to customers. Moving promotions online has led to an 18% increase in digitally engaged households. Operational excellence is crucial for their full fresh and friendly strategy, which has shown progress in 2023 with improved in-stock rates.

Kroger plans to continue improving their in-stock rate in 2024 while also focusing on other key areas such as fuel and alternative profit businesses. They have seen success in their media business and expect it to grow by 20% in 2024 due to investments in Kroger Precision Marketing. This will allow them to use first-party data from their loyalty program to create targeted and effective advertising for brands. They have also launched a new ad platform and self-service solutions to make it easier for clients to advertise on Kroger-owned properties.

Kroger expects their recent enhancements to drive growth in 2024, but their personal finance sector had mixed results due to a challenging economic landscape. They saw success in their money services and are focusing on improving their health and wellness sector, where they have seen strong performance and increased customer loyalty. They plan to achieve growth by improving the patient experience, attracting new patients, and increasing their share in the vaccine market. Kroger also values and appreciates their associates for their dedication to providing excellent customer service.

Kroger's focus on investing in associates and being an employer of choice has led to a strong customer experience. This year, they are prioritizing team consistency and retention through wage and benefit investments, as well as investments in training, technology, and career development. These efforts have resulted in improved retention rates. In 2024, Kroger plans to continue enhancing training and development opportunities to solidify their reputation as a place for associates to build a career. In terms of financial results, Kroger's adjusted EPS has grown at a CAGR of 20% over the past four years, and they have delivered over $3 billion in adjusted free cash flow in 2023. This has allowed them to strengthen their balance sheet and reinvest in growth opportunities while also returning excess cash to shareholders.

In 2023, Kroger's retail business performed well and drove data and traffic to support growth in alternative profit businesses. The company is entering 2024 from a position of strength, with many headwinds from the previous year cycling out. Recent investments in strategic pillars and alternative profit businesses have paid off, and the company is confident in its ability to navigate different operating environments. In terms of financial results, Kroger's adjusted EPS increased 8% (excluding the fifty third week), identical sales grew 0.9%, and digital sales grew 12%. The FIFO gross margin rate also increased, driven by various factors such as brand performance, sourcing benefits, and supply chain efficiency. Kroger's strategy to improve margin includes expanding its brands, improving digital profitability, and enhancing the product mix through fresh initiatives.

Kroger's improvement rate has been reflected in their investments in different areas of the business. This has allowed them to invest more in pricing for customers, leading to a long runway for improvement. Their OG&A rate, excluding fuel, increased due to planned investments and the termination of their agreement with Express Scripts. They generated strong adjusted free cash flow and reduced their debt, preparing for their merger with Albertsons. In the fourth quarter, their adjusted EPS increased by 15% and identical sales without fuel declined by 0.8%, but would have been positive if adjusted for the effect of Express Scripts. Sales trends improved in the final period of the quarter.

In the fourth quarter, the company saw its fifth consecutive quarter of sequential improvement in units and has a strong focus on volume growth in 2024. The gross margin rate, excluding fuel and the fifty third week, increased due to strong brand performance and lower supply chain costs, offset by increased price investments and higher shrink. The OG&A rate also increased due to planned investments in associate wages and contributions to pension plans. Adjusted FIFO operating profit was over $1.3 billion. LIFO was a credit of $18 million, primarily due to lower-than-expected inflation in pharmacy inventory. Fuel rewards have enhanced customer loyalty and engagement, leading to increased gallon sales and outpacing the industry. The average retail fuel price and cents per gallon fuel margin were lower this quarter compared to the same quarter last year.

In 2023, Kroger increased associate wages resulting in an average hourly rate of nearly $19 an hour. They have invested over $2.4 billion in wage investments over the last five years and plan to continue making investments in wages and benefits in 2024. Their financial strategy and capital allocation prioritize high-return projects, maintaining their investment-grade rating, growing dividends, and returning excess capital to shareholders. They expect capital investments for 2024 to be between $3.4 billion and $3.6 billion, with a focus on enhancing the customer shopping experience and improving margins through store investments and supply chain enhancements.

The company is focused on productivity improvements and cost savings to fund investments in associates and the customer experience. They are implementing initiatives like customer pickup lockers and AI-enabled store routing technology to improve efficiency. For 2024, they expect modest sales growth, and plan to balance investments in the business with improved productivity and cost savings, as well as growth in alternative profit businesses. The company's loyal households and digitally engaged customers are expected to drive profits and power the company's model.

Kroger expects their gross margin rate and adjusted OG&A rate to remain steady, with stronger sales expected in the second half of the year due to SNAP headwinds and lower inflation. They anticipate a decrease in earnings in the first quarter, followed by relatively consistent performance in the second and fourth quarters and a double-digit increase in the third quarter. Despite a challenging operating environment, Kroger is confident in their ability to continue their momentum and drive sustainable growth through their diverse business and value creation model. CEO Rodney McMullen is optimistic about their performance in 2024 and beyond.

Kroger is focused on building loyalty, increasing digital engagement, and driving customer visits to continue its growth in alternative profit businesses. They are confident in their strategy and expect to see sales momentum throughout the year. They also provide an update on their pending merger with Albertsons Company, stating that they are committed to keeping their promises and investing in union jobs. They acknowledge the competitiveness of the retail industry but remain confident in their understanding of their customers and their ability to run their business accordingly.

The speaker, who has been in the retail business for four decades, believes that taking care of customers and associates leads to benefits for shareholders. They are currently facing litigation over a merger and cannot answer questions about it. The speaker and another person will be taking questions from investors. The first question is about the company's comp, which may see market share gains due to inflation and pricing investments. The speaker believes this is a strong strategy and the other person may add more information.

In the first quarter, the company expects to face challenges due to cycling ESI and SNAP, but they anticipate improvement in market share throughout the year. They also plan to open more stores in 2024 than in previous years. The company is satisfied with their volume share trends and expects to build on them. In terms of advertising, the company competes with other channels like Google and Facebook, and they must earn the right for suppliers to spend media money with them.

The company has been communicating with CPGs since the beginning and has seen an increase in trade support. Trade dollars are being used to support tonnage growth for certain CPGs. There has been an inflection to positive traffic in the quarter, with loyal customers shopping more frequently. The company sees food away-from-home as a big growth opportunity and has recently reformulated its fried chicken. The growth is mainly coming from frequency and loyal shoppers.

Michael Lasser asks Rodney McMullen about the decision to accelerate organic store growth and the assumption for overall wage growth in 2024. McMullen explains that the decision is driven by capital and opportunities for growth in certain markets, and that they have strong cash flow to fund it. Todd Foley adds that they have also been investing in the digital space to meet customer needs. In terms of wage growth, they have flexibility to manage it in the event that IDs don't accelerate as expected.

In response to a question about pricing and personalization, Rodney McMullen, CEO of a company, explains that 75% of their wages are already locked in through previous agreements and that they will continue to invest in associates and productivity improvements. He also mentions that they have increased average hourly rate by 30% over the last five years and will continue to do so in the future. McMullen emphasizes the importance of both pricing and personalization in their strategy to gain market share, especially through their loyalty program.

Kroger is investing both its own funds and profits from its media business in lower prices for customers. They are also focusing on personalization to offer unique deals to each customer. The company saw a 13 basis point expansion in FIFO gross margin in the fourth quarter, ahead of plan, and is aiming for flat levels overall for the year.

The company has been focusing on initiatives to drive product mix, fresh penetration, and brand value in order to improve margins. They have also been working on margin enhancement through logistics, supply chain optimization, and sourcing partnerships. These initiatives have given them momentum in 2023 and they are confident they will continue to drive margin expansion. When asked about the profitability of their $12 billion in digital sales, the CEO states that it is currently profitable but not at the same level as brick-and-mortar sales. However, he believes that the profit from digital sales could easily double or triple in the next three years.

The company's main focus is retaining digital customers and making them profitable. They have made progress and expect this trend to continue for the next three to five years. They are still learning how to make it a significant contributor to profitability. The company has seen positive customer reactions and high net promoter scores. They are still early in the game and have a long way to go. The company aims to reduce costs by $1 billion and expects the Personal Finance business to grow by $100 million.

The company is aiming for a profit of $100 million, but hopes to improve upon that number. They see potential for growth in their media business and are optimistic about consumer sentiment improving. The leverage point is currently lower due to the softness in identical sales, but this is expected to change in the future. The company uses AI to manage store hours and is constantly finding ways to reduce the time it takes to complete tasks. Overall, the company is confident in their ability to maintain profitability despite current challenges.

The executives of the company feel confident about their performance in 2024. They expect the fuel business to remain flat, while pharmacy margins are expected to remain stable. The company plans to invest in improving service and gaining market share in the pharmacy business. The GLP sales volume is expected to continue in 2024, but the margins on these sales may be lower.

The company is excited about high demand products and their vaccine business driving sales and margins. The outlook for unit volumes in grocery is expected to be positive, with the company holding themselves accountable for this. Trade dollars have increased to support this growth, and the company has seen success with mainstream and upscale customers, gaining share with them. It's important to consider that these customers may buy larger pack sizes, affecting unit volume numbers.

The speaker discusses the decrease in units sold due to customers opting for smaller packs of goods. They also mention their commitment to improving unit trends and maintaining a strong balance sheet. In response to a question about debt leverage, they state that their priorities remain the same regardless of the outcome of the Albertsons deal, including maintaining an investment-grade rating, investing in the business, and returning money to shareholders.

Rupesh Parikh asks Rodney McMullen about the promotional backdrop for the company and McMullen expects it to stay similar to last year. He also mentions that customers on a budget are aggressively downloading digital coupons. McMullen predicts an improving consumer sentiment in 2024, but currently there haven't been significant changes in consumer behavior. Robert Ohmes asks about the pharmacy opportunity and McMullen discusses the potential for reengaging with PBMs in a profitable way.

The speaker discusses the outlook for the pharmacy business, stating that they are open to conversations that would increase their profit margins. They also mention efforts to improve services for lower income customers. The speaker then answers a question about alternative profit and KPM, stating that they expect a $500 million EBIT contribution in 2023 and a 20% growth in 2024, with factors such as property and off-property investments driving this growth. They also mention their goal to increase their share of CPGs media spend.

The company is responsible for ensuring that customers get a good return on their investment. The KPM team is transparent and accountable for this. The company sees opportunities for growth in both on and off property businesses, and is excited about the new platform that will make it easier for clients to activate campaigns and access audiences. The CEO thanks the associates for their hard work and dedication.

The speaker celebrates two outstanding associates in Colorado, Chris Gay and Jeff Gregory, for their achievements in the Special Olympics. Chris won two gold medals in skiing and Jeff was honored as Male Athlete of the Year. The speaker commends their inspiration and impact on customers and communities. The call concludes with a thank you to all attendees.

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