The paragraph is an introduction to The Kroger Co.'s Third Quarter 2024 Earnings Conference Call. The operator introduces the participants, including Robert Quast from Investor Relations, Kroger's CEO Rodney McMullen, and interim CFO Todd Foley. Robert Quast reminds listeners that the discussion will include forward-looking statements and advises caution as actual results may vary. After the prepared remarks, they will take questions, asking participants to limit themselves to one question and a follow-up if needed. Rodney McMullen then outlines the topics for discussion: a recap of the third quarter performance, the company's go-to-market strategy for sustainable growth, financial results, full-year guidance, and updates on the pending merger with Albertsons.

In the third quarter, Kroger showcased strong sales performance, particularly in pharmacy and digital sectors, due to its versatile model and strong customer engagement. The company attributes this growth to a seamless shopping experience, low prices, personalized offers, and quality private-label products. As they approach the final quarter of 2024, Kroger aims to provide affordable, quality products for holiday celebrations. Despite low overall consumer sentiment, confidence is improving, with mainstream households leading engagement trends and returning to pre-pandemic shopping behaviors. Budget-conscious households, however, remain pressured by inflation and high interest rates. Kroger continues to provide value through competitive prices, discounts, fuel rewards, and digital offers, which have increased savings for customers by 14%.

In the recent quarter, the company celebrated Customer Appreciation Week and offered Thanksgiving meal bundles at discounted prices for the third year in a row. The company is focused on delivering a unique customer experience through its go-to-market strategy, emphasizing Fresh, Our Brands, Personalization, and Seamless services. They are seeing growth opportunities, particularly in their Fresh initiative, which has led to a 3% increase in produce sales. The use of RFID-embedded labels on bakery items has provided better inventory insights, resulting in fresher products and encouraging sales in pilot locations, with plans to expand to more stores.

The paragraph discusses significant investments in the company's private label, "Our Brands," emphasizing efforts to match or exceed the innovation and quality of national brands. The company has refined its brand architecture to ensure distinct roles for each brand and introduced "Smart Way" to offer competitively priced alternatives. Enhancements include updated designs, packaging, and guarantees of quality across products. Innovation, driven by data and insights, focuses on emerging trends in areas like free-from, organic, and multicultural products to differentiate the company from national and other private label brands, thereby fostering customer loyalty.

The paragraph highlights Kroger's advantages in manufacturing and personalization, emphasizing cost control and unique product offerings through their brands. It discusses the Kroger Plus loyalty program's role in engaging customers and generating data for Kroger Precision Marketing. The text also introduces Boost, an enhanced loyalty program offering streaming service benefits, and notes the growth in digital sales, particularly delivery, which rose by 18%. Increasing e-commerce and digital engagement is crucial for customer loyalty and profitability, with a focus on improving financial outcomes through these channels.

Over nearly a decade, significant investments in digital capabilities - including automation, personalization, and a retail media network - have created a unique customer experience for the company. Their strategy focuses on increasing volumes and efficiency to reduce profitability gaps between online and in-store sales, aiming to boost operating margins and shareholder value. The company is also building customer loyalty and growth in alternative profit businesses, with Kroger Precision Marketing leading growth. In Health & Wellness, there's an emphasis on expanding their role in patient health, with strong results in GLP-1s and vaccines, reflecting trust in Kroger's healthcare offerings. Sales and profitability surpassed last year, particularly during the cold and flu season, highlighting the company's successful engagement in the pharmacy industry.

In the article paragraph, the Health & Wellness teams improved vaccine awareness and administration, helping to offset product mix pressures and attracting new, loyal customers. This contributes to an enhanced customer experience and improved retention through investments in wages, training, and career development. Todd Foley then discusses Kroger’s strong third-quarter financial results, highlighting the strength of their pharmacy operations. Despite lower fuel profitability compared to the previous year, they are confident in meeting their full-year guidance. Additionally, Kroger completed the sale of its Specialty Pharmacy business for $464 million.

In the third quarter, Kroger experienced a reduction in total sales due to the sale of a low-margin business, though this improved gross margins and had little impact on operating profit. Despite challenges like the hurricane season and a port strike, which affected operating general and administrative costs, these did not significantly affect overall profits. The company achieved a 2.3% growth in identical sales excluding fuel, driven by strong pharmacy and digital performance, with digital sales seeing double-digit growth fueled by delivery solutions. The Private Selection brand showed strong sales, reflecting customer demand for premium yet value-oriented products. Additionally, customer fulfillment centers contributed significantly to digital growth by enhancing the shopping experience with efficient delivery.

In the third quarter, Kroger faced sales challenges due to a Boar’s Head recall, affecting deli sales as customers temporarily shifted away. However, these sales declines were largely balanced by increased demand resulting from a hurricane and a port strike. Kroger's gross margin improved, primarily due to the sale of Kroger Specialty Pharmacy, strong performance of Our Brands, and cost-saving measures, though pharmacy margins declined. Operating margins were affected by increased incentive costs and the sale of the pharmacy, yet cost-saving initiatives helped maintain expense control. Kroger continues to focus on productivity and technological enhancements to drive efficiency and meet long-term sales goals.

In the recent quarter, a new AI-powered tool was launched to improve inventory management and optimize sales and margins. The company recorded a $4 million LIFO charge due to lower expected inflation, and adjusted FIFO operating profit was $1.02 billion with a 3% increase in adjusted EPS. Fuel sales and profitability declined due to lower retail prices and fewer gallons sold. Inflation slightly decreased but is expected to remain around 1% in the next quarter. The company also ratified new labor agreements for nearly 13,000 associates across several regions, emphasizing respect for the right to collective bargaining.

The paragraph discusses Kroger's financial strategy and outlook. The company emphasizes the importance of balancing investments in associates with maintaining affordable groceries and a profitable business model. Kroger reports strong adjusted free cash flow and a low net total debt-to-adjusted EBITDA ratio of 1.21, which is below their target range. This financial stability allows Kroger to invest in growth opportunities and enhance shareholder value while maintaining an investment-grade debt rating. Kroger plans to increase dividends subject to board approval and return excess capital to shareholders. The company has updated its yearly guidance, expecting identical sales without fuel to grow by 1.2% to 1.5%, with an adjusted effective tax rate of 22.5%.

The paragraph discusses Kroger's financial performance and outlook. Year-to-date sales without fuel have met expectations, with Q3 slightly surpassing them due to favorable impacts from hurricanes, a port strike, and strong vaccine demand. Q4 sales are expected to remain strong but lower than Q3 due to cycling of previous weather benefits. Kroger expects adjusted FIFO operating profit between $4.6 billion and $4.7 billion, and adjusted net earnings per diluted share between $4.35 and $4.45. The 2025 business plan is being finalized, with expected FIFO operating profit growth. Despite macroeconomic uncertainties, Kroger's diverse business model allows flexibility and confidence in generating shareholder returns. The paragraph ends with Rodney McMullen beginning a discussion about Kroger's pending merger with Albertsons.

The paragraph discusses the progress and efforts of associates in preparing for a merger between Kroger and Albertsons, highlighting their readiness for a smooth transition. It expresses gratitude to those involved in supporting litigation related to the merger and emphasizes confidence in the merger's benefits despite awaiting court rulings. The competitive nature of the retail industry and diverse shopping habits of customers are acknowledged. The company remains committed to closing the merger for its benefits to customers, associates, and communities. Regardless of legal outcomes, Kroger is confident in its strong position, diverse business model, and ability to grow sustainably, and is open to questions.

The discussion focuses on the company's financial outlook for 2024. Simeon Gutman from Morgan Stanley inquires about the company's core business growth, excluding merger-related costs and an extra week. Todd Foley confirms the positive growth, particularly in the pharmacy sector, despite challenges like lower fuel profitability. He notes that the mix between the core and alternative profit businesses is in line with expectations. Rodney McMullen highlights the long-term potential of the alternative profit business, which has higher margins than the traditional supermarket business, driven by the integration of brick-and-mortar operations with online services like pickup and delivery.

The paragraph features a discussion among Todd Foley, Simeon Gutman, and Rodney McMullen about their company's digital growth and customer performance across different market segments. Todd Foley highlights the company's expected low double-digit digital growth, which supports core and alternative profit. Simeon Gutman notes an observed improvement in mainstream market performance compared to the previous quarter, discussing resilience in mainstream and healthy performance in the premium segment, while the lower-income segment remains strained due to inflation and higher interest rates. Rodney McMullen confirms better engagement with mainstream customers in the third quarter but acknowledges the continued financial challenges faced by budget-conscious customers. The conversation then shifts to Rupesh Parikh, who asks about the company's decision to narrow their operating profit guidance to the lower end for the full year.

In the conversation, Rodney McMullen and Todd Foley discuss narrowing their company's financial guidance range due to reduced variability as the year progresses. They highlight strong Q3 performance, particularly in the pharmacy and digital vaccine sectors, labeling it a peak period for vaccines. For Q4, they anticipate results aligning with expectations, and they've slightly adjusted their earnings per share guidance range. Factors influencing the Q4 outlook include potential weather events, which they note they cannot predict but could impact results.

The paragraph discusses the volatility of fuel prices and their impact on the company's financial performance, suggesting that fluctuations in fuel profitability could affect their position within a projected range. Rodney McMullen notes that the third quarter was more challenging than expected due to fuel, and mentions that storms have not impacted their stores so far, which is advantageous because it encourages more at-home eating. Rupesh Parikh asks about the Boost membership program, particularly the addition of a Disney perk. McMullen expresses satisfaction with the program's signups, retention, and customer value, emphasizing the potential for future growth and customer engagement. The passage ends with an acknowledgment to Rupesh and an introduction of a new question from Leah Jordan of Goldman Sachs.

In the paragraph, Rodney McMullen discusses inflation, noting that it has been relatively stable and slightly less than expected this year. Looking to next year, he anticipates a slight increase in inflation but nothing drastically different from the current trend. Todd Foley adds that CPGs are being more aggressive with trade dollars, impacting inflation. Leah Jordan then inquires about new Fresh initiatives, particularly RFID tags in bakery, and McMullen mentions they are testing this technology and are pleased with the initial results.

The paragraph discusses the company's potential benefits and challenges, including making associates' jobs easier and ensuring fresher products for customers. There's optimism about these opportunities, though it's too early to budget specific amounts. Ken Goldman from JPMorgan asks about potential influences on the business for the next year, noting the steady inflation and core business performance. Rodney McMullen responds that it's too early for specifics and guidance is pending a merger ruling, though operating profit is expected to rise.

In the third quarter, the company opened or expanded the most stores in seven years, aligning with their goal to open more stores than in previous years. The new stores are performing well in customer engagement, volume, and early profitability. They aim to thrive both online and in-store, emphasizing seamless shopping experiences. Looking ahead, they are optimistic due to strong momentum in high-growth areas like pharmacy, digital, and alternative profits, though they anticipate increased competition. The company plans to continue investing in pricing, customer experience, and employee wages.

The paragraph discusses the strategies and perspectives of Rodney McMullen regarding price investments in the food retail sector. Ken Goldman inquires about McMullen's stance on price investments from key vendors, noting a competitor's recent comments on the matter. McMullen expresses a balanced view, indicating that while he appreciates vendors' investments in trade dollars to benefit customers and drive growth, he's also content to promote private label products, which are more profitable than national brands, should vendors not invest as aggressively. He highlights that this approach is beneficial for both customers and business growth in the long term.

The paragraph discusses the company's successful performance in terms of gross margin, highlighting that recent quarters have been better than expected. A significant factor contributing to this performance is the growth in sales of "Our Brands," which provides a high margin compared to national brands, leading to solid margin expansion. Additionally, the company benefited from the divestiture of its Spec Pharma business, which accounted for about half of the year-over-year margin improvement. The company notes that once customers try "Our Brands" due to their quality and value, the repeat purchase rate is high. The discussion concludes with Todd Foley acknowledging the role of brand growth and reduced shrinkage in contributing to the strong margin results.

The paragraph discusses the progress being made in certain areas, with expectations of slightly favorable or flat margins in the fourth quarter, excluding KSP. Rodney McMullen agrees with Todd's assessment and highlights improvements in warehouse, transportation costs, and growth in Fresh products as positive factors for gross margins. Ed Kelly asks McMullen about Kroger's strategy if the Albertsons deal is rejected, questioning whether the company should seek other transformational opportunities or focus on rewarding shareholders with capital returns. McMullen responds that there likely wouldn't be another transformational deal that would utilize their balance sheet capacity like the Albertsons deal.

The paragraph discusses Kroger's strategic approach to business growth, emphasizing that while mergers, such as the potential one with Albertsons, can add value and opportunities, they are not essential for success. If the merger doesn't happen, Kroger will continue exploring other growth avenues. Additionally, during a Q&A, Michael Lasser from UBS asks about the slowing growth in Kroger's media segment, a key part of its alternative revenue. Todd Foley responds that Kroger still expects around 20% retail media growth for the year, indicating confidence in the segment's continued expansion.

The paragraph discusses the success of Consumer Packaged Goods (CPGs) companies advertising with Kroger, noting that those who increased their spending experienced significant growth. This suggests the effectiveness of Kroger's advertising platform. Rodney McMullen emphasizes the link between increased ad spend and sales growth. Michael Lasser asks about Kroger's strategy to maintain sales growth in 2025, given that factors like GLP-1 drugs and storm-related spending may not be as impactful next year. McMullen responds that Kroger will focus on enhancing the customer experience, with an emphasis on their "Full, Fresh & Friendly" approach, rather than relying on inflation for growth.

The paragraph discusses the company's strategy of investing in growth areas, particularly in seamless or online business and initiatives that support cost reduction and sales opportunities. Todd Foley agrees with Rodney McMullen, mentioning the growth expected in the GLP-1 drug market as supply increases. John Heinbockel from Guggenheim Partners asks Rodney about productivity initiatives related to in-store order selection. Rodney responds, stating that they expect cost per order to decrease by double digits over the next two to three years, with initial efforts focused on high-volume locations.

The paragraph discusses a conversation between Michael Montani from Evercore ISI and Todd Foley, regarding their company's performance, specifically relating to fuel contribution per gallon (CPG). The company has stopped providing detailed figures for CPG, but Todd mentions that both gallons and CPG were down in the third quarter due to fuel volatility. They expect fuel to be more stable in the fourth quarter compared to the previous year, based on recent trends in gallons and margins. Additionally, Robert Dickerson from Jefferies asks about consumer sentiment, noting that although it's still low, there might be some signs of improvement.

The paragraph discusses the impact of the holiday shopping season on retail stores, highlighting concerns about having five fewer shopping days between Thanksgiving and Christmas. Despite this, the company feels positive about their current situation and notes a slight improvement in customer comfort and outlook. Jacob Aiken-Phillips from Melius Research asks about how wage inflation and tariffs might affect future financial strategies. Todd Foley responds by acknowledging the importance of balancing wage investments with profitability, emphasizing the need to continue investing in associates to enhance customer experience while managing financial aspects.

In the given paragraph, Rodney McMullen discusses the impact of tariffs on their company, noting they are less affected than most due to their modest international purchases. He points out that while tariffs might influence competitors more, they can manage the situation. In a conversation with Chuck Cerankosky, McMullen mentions that mainstream and premium customers' spending habits are returning to pre-COVID levels, and the trend towards dining out is rising. However, he sees this as an opportunity for Kroger's prepared food offerings, particularly as a significant portion of restaurant meals are consumed outside the restaurant. Kroger is also collaborating with external companies to enhance their offerings in this area.

The paragraph discusses the significant opportunity for growth in offering cost-effective meals compared to dining out at restaurants, as it's typically one-third to one-fourth the cost. The speaker, Rodney McMullen, expresses gratitude towards associates for their dedication, particularly during challenging times like recent hurricanes, emphasizing their crucial role in supporting communities. He thanks the associates and participants of the call, wishing them a happy holiday season.

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