The operator introduces the conference call for The Kroger Co.'s second quarter earnings and turns it over to Senior Director of Investor Relations, Rob Quast. Quast reminds listeners of the possibility of forward-looking statements and introduces Chairman and CEO Rodney McMullen and Interim CFO Todd Foley. McMullen outlines the discussion topics for the call, including a recap of the second quarter performance and the company's go-to-market strategy. Foley will cover financial results and McMullen will provide an update on the pending merger with Albertsons. The company has executed its strategy and is delivering solid financial results.

The company is driving positive customer activity by offering affordable prices and personalized promotions on high-quality products. They have also focused on elevating the customer experience through excellent store execution. Due to the current economic environment, customers are becoming more budget-conscious and the company is responding by keeping prices low through promotions and expanding their portfolio of affordable products. They have also executed their go-to-market strategy through their pillars of Fresh, Our Brands, personalization, and seamless, with the help of their dedicated associates.

Kroger's strong customer trends, including loyal household growth and increased visits, are leading to long-term sales growth. The company's focus on Fresh for Everyone promise, which guarantees the quality and freshness of all products, is made possible through strong relationships with farmers and suppliers. The success of the Field & Vine brand, which offers regionally grown berries, is a testament to this promise. Kroger's Our Brands line is also a key differentiator, with sales outpacing national brands and over 90% of customer households purchasing these products. The company is continuously expanding its Our Brands portfolio, with almost 600 new products introduced this year. Additionally, the Smart Way brand, which offers ultra low-priced essentials and pantry staples, is meeting the needs of budget-conscious customers.

Kroger is making progress on refreshing their Our Brands portfolio, with more updates to come later this year. They are also focused on personalization and loyalty programs, using data and insights to improve product recommendations and promotions. Their Boost paid membership program offers additional savings to customers. In terms of e-commerce, digital sales have grown 11% and they are working on converting digitally-engaged households into e-commerce households, which are important for loyalty and potential monetization opportunities.

Kroger's delivery and pickup services continue to drive sales growth, with customers expressing satisfaction with the convenience of home delivery. The company is focused on improving profitability through its Customer Fulfillment Centers and expanding its loyalty and growth opportunities through alternative profit businesses and health and wellness initiatives. Sales for the quarter exceeded expectations, but profitability was impacted by product mix pressures. The company expects its vaccine efforts to help offset the impact of strong GLP-1 sales in the second half of the year.

Kroger's second quarter results reflect the success of their commitment to providing a best-in-class customer experience and being an employer of choice. They achieved identical sales growth and saw positive trends in customer metrics, including increased visits and loyal households. Their digital sales, particularly delivery solutions, had a strong quarter and their pickup service continues to be in high demand. Kroger is reaffirming their full year guidance and remains committed to providing customers with exceptional value.

The digital team's focus on providing a great customer experience has resulted in increased fill rates and reduced wait times, with a 33% improvement in perfect orders. AI-enabled advancements and dynamic batching and routing have allowed for two hour lead times and pickup in all stores. These improvements have also led to increased productivity and a lower cost to serve. The company's long term model aims for consistent gross margin and OG&A rates, with a slightly expanding operating margin over time. For fiscal 2024, they expect a slightly positive FIFO gross margin rate and a slightly negative OG&A rate without fuel. In the second quarter, FIFO gross margin rate was slightly ahead of expectations, while the OG&A rate was unfavorable due to nonrecurring charges. Gross margin for the quarter was 22.6% of sales.

Kroger's gross margin rate increased due to favorable product mix and lower shrink, but pharmacy margins were lower. OG&A rate also increased due to investments in wages and nonrecurring costs. Adjusted EPS declined, but fuel sales were strong and fuel profitability improved. Inflation increased slightly in the second quarter but is still around 1%, consistent with expectations.

In the second quarter, Kroger reached new labor agreements for over 13,000 associates and is currently negotiating with the UFCW for meat and grocery associates at 29 Fred Meyer stores. The company remains committed to balancing investing in associates with keeping groceries affordable for customers and creating job opportunities. Kroger is also generating strong cash flow and has a low debt-to-EBITDA ratio, providing flexibility for future growth and shareholder value. The company prioritizes high-growth opportunities to strengthen the business and deliver returns for shareholders.

The company is committed to maintaining an investment-grade debt rating, increasing dividends, and returning excess capital to shareholders. They have a strong free cash flow and are investing in store projects to support growth in the future. The company has raised their guidance for capital expenditures and their quarterly dividend has grown consistently. They are encouraged by their performance in the first half of the year and have raised their sales outlook for the rest of the year. They expect customers to continue prioritizing food and essentials.

The company has developed plans to increase customer engagement and drive spending, and is confident in its ability to navigate economic pressures. They are reaffirming their full year guidance and are focused on the pending merger with Albertsons. The integration is progressing well and the company is excited about the complementary strengths of both organizations. Kroger has launched an exchange offering for Albertsons notes and a new offering for senior unsecured notes to fund a portion of the cash consideration for the merger. They are confident in their position in the ongoing trial with the FTC and are aware of the changing retail industry.

The paragraph discusses how customers make daily decisions on where to eat and shop, and how Kroger remains committed to the merger despite ongoing litigation. The company is operating from a position of strength and is optimistic about its future, with a diverse business and strong free cash flow. The first question in the earnings call is about the competitive backdrop and rising promotions in the industry, to which Kroger responds that promotions are returning to normal levels after being reduced during COVID. The company believes it can manage these promotions and has raised its gross margin guidance.

The company's gross margin was strong in the second quarter, exceeding expectations due to factors such as increased sales in Our Brands and improved shrink results. Digital impact on gross margin was not specified, but the company expects it to remain flat.

The company's margins for the year are expected to be slightly favorable due to progress in digital profitability and other margin enhancement programs. The company is also excited about the potential of their ecosystem and the impact it has on customer engagement and loyalty. The media business has significantly different margins than traditional supermarket products. The company is focused on cost reductions and productivity improvements, and any incremental benefits will likely be reinvested into the business.

The company's business model involves reinvesting value back into the business, resulting in a slightly growing operating profit rate over time. The long term TSR model assumes growth in alternative profit businesses, investments in wages and lower prices for customers. The company generates a lot of free cash flow and expects future growth to come from the business rather than buying back stock. In terms of market share, Fresh trends are stronger than center store, but there is room for improvement.

The company is experiencing strong growth in households and loyal customers, which will lead to future progress. They are confident in their current position and excited about future trends and expansion. In the second quarter, they expect a slight improvement in comps compared to the first half of the year, and they plan to continue investing in the business despite the low single-digit environment. They have updated their sales guidance for the year, taking the lower end off the table to account for last year's disinflation.

In the first half of the year, the company's sales and inflation expectations have played out as expected, and they anticipate a similar trend for the back half of the year. They also continue to see progress in their unit sales and are encouraged by the trends. However, there is a difference in sales between the beginning and end of the month due to budget constraints. The company is not yet ready to share guidance for 2025, but their long-term business model still applies.

The speaker discusses their expectations for the company after completing a merger and the integration process. They also mention that they expect a stable or slightly improved EBIT margin in the second half of the year, with slightly favorable gross margin and slightly unfavorable OG&A compared to the previous year. They also touch on the issue of shrink and the team's efforts to address it.

Rodney McMullen and Todd Foley discuss some of the other costs the company has faced, including improving shrink on the Fresh side of the business and non-recurring costs related to Hurricane Beryl. They also mention that they expect incentive costs to have less of an impact in the second half of the year. Kenneth Goldman asks about inflation, specifically the difference between the CPI and PPI rates for food.

The speaker asks about balancing the need to pass on inflation with appealing to budget-conscious consumers and reconciling this with strong GM growth. The speaker mentions that they try to pass on permanent cost increases but manage short-term increases based on market trends. They also mention that inflation is difficult to predict but they expect it to be around 1%. They note that food away from home is seeing higher inflation than food at home, causing some customers to shift back to cooking at home. The speaker concludes by asking if there is anything else to add about inflation.

In response to a question about CapEx and EPS growth, the company's CFO and CEO discussed their plans to increase capital spending in order to open new stores earlier and the potential for a lift in their capital plan over time. They also reaffirmed their previous guidance for the rest of the year.

In the third quarter, the company expects to see a slight increase in sales compared to last year, while in the fourth quarter, there may be a slight decrease. The company has noticed a trend of customers in lower income brackets trading down and budget customers facing pressure. However, the company is also seeing positive changes in behavior from middle and higher income customers, such as cooking at home and buying more private label products. These changes have been ongoing throughout the year, but have become more pronounced towards the end of the month. The company is adjusting its promotional approach and offers to better connect with customers. Overall, customers are under significant strain, especially those on a budget.

The speaker discusses the introduction of the Smart Way product and the company's efforts to address the trend of entry price point items. They also mention their commitment to helping customers have a great meal without compromising on quality. The speaker then answers a question about wage pressure and general liability claims, stating that the company's guidance for the second half of the year is slightly unfavorable compared to the previous year and that their wage pressure is affected by collective bargaining agreements.

The company has most of their wages locked in through collective bargaining agreements, and they constantly negotiate a quarter or third of them each year. This is reflected in their guidance. Their general liability incident rates are below industry averages, but they have seen an increase in the average cost of claims. They have strategies in place to mitigate this, but have updated their reserves to account for the trend. The company also has a good skill for identifying cost reductions.

In the second half of the year and going into next year, the company expects to have the skill to operate with less labor and simplify the store. The increase in non-traditional competitors has been a 20-year trend, and Kroger must continue to adapt and change to remain successful. The company has invested in staying connected with customers and investing in wages and promotions to compete.

The speaker discusses the company's hopes for increased competition in the food away from home market and their confidence in managing economic pressures. They also mention the strong performance of their Our Brands and their ability to support customers under economic pressure. The next question asks about the company's inventory levels, which have decreased by 3%. The speaker attributes this to a variety of factors including lower cost inflation and effective working capital management.

The speaker discusses the importance of balancing cash flow and working capital in order to be a good steward of resources. They mention the impact of lower costs and inflation on the balance sheet, and thank the 2024 Kroger Scholars for their achievements. The speaker also wishes everyone a happy holiday season.

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