KR
#I'm going to broaden your question a little bit, <UNK>.
For us, Corporate Brands is a huge important critical part of our strategy and a very important competitive advantage.
And it starts with what products are we offering and what's the quality of those products and the value for those products.
We find it always an advantage from a competitive standpoint because of national brands do something that's non-economic, our Corporate Brands pick up share.
So, we find them our customers love them and they vote by buying a lot of them.
We also find that it's a way of keeping the market honest.
We certainly would have an advantage in terms of understanding the true economic cost to produce something, and retail pricing would be based on that true economic cost.
I always ---+ and, as you know, we always look at the CPG companies as partners ---+ I obviously go to quite a few meetings where the CPG partners and Kroger meet, and a lot of times it's hard to figure out who works for who, which I view as a positive.
Both of us are trying to drive volume and trying to drive profitability.
Most of the CPG teams have a responsibility for part of our profit, as well.
I don't see those discussions changing.
They're healthy respect but they're also healthy negotiations that go on.
I don't sense a change in that basic approach.
The other thing that we always feel that we were able to provide the best insights for CPG companies on introducing new items, what's the success what customers are buying, and we try to work with the partners to grow their business, as well.
If you look at the areas that we would consider discretionary, like high-value wine, Boar's Head, Starbucks, Murray's Cheese, all those areas, they continue to have nice growth.
The comments I made are more based on the surveys where we survey customers almost every day, and the changes in terms of what the customers tell us they anticipate will happen.
We did not provide a point estimate or a range in our 8-K that we filed this morning.
We only talked about the fact that we expect to see product cost deflation for the balance of the year.
And, as <UNK> said, it could extend into early next year, as well, in his prepared comments.
We continue to be very pleased with our tonnage growth.
It's positive.
There's a lot of things that go on inside tonnage growth.
There's mix pack changes, there are certain categories where we've gone to multi-pack units, selling units of multiple items in the same package.
We continue to be very bullish about our ability to grow tonnage.
We try to avoid giving an exact measure because it's as much an art as a science.
But it's something we're fundamentally focused on.
We had nice tonnage growth and we continued to have market share growth in the quarter, as well.
If you look at how long it lasts, the only insight that I could provide is the comment I made a little earlier.
If you go back and look at 2009 it was three quarters, if you go back to 2002 it was four quarters.
We've had inflation every quarter other than those since the first quarter of 2002, is how far back we went.
In terms of moderating, as you get toward the latter part of the year and early next year you're starting to cycle the deflation.
So, certainly we would guess it would start to moderate just because you're starting to cycle some of the deflation.
And an awful lot of the deflation is driven because of commodity pricing.
That would be the reason why that we would believe that it would start moderating.
And then when you start cycling we don't expect it to be negative on top of negative for a long period of time.
<UNK>, if you don't mind asking the question again because all of a sudden we had extra voice in the room.
I would certainly say a big piece of that is the compare to last year.
Last year in the third quarter we had 5.4% ID sales.
So, when you look at the deflation we've had since then compared to that compare, it's really a little bit of a compounding effect as we begin the third quarter here.
Keep in mind last year's fourth quarter was 3.7% IDs, so the compare starts to moderate a little bit, as well.
It's the range we feel at this point where we think we would wind up in.
When you look at the total health and wellness strategy, we are very excited about the opportunities there.
Obviously all of us baby boomers keep getting older, and the new generations, as well, and it creates higher demand for pharmaceuticals and other things.
So, it's an area that we like.
It's an area where we believe we have a unique competitive advantage just because we can start helping customers eat healthier, as well.
And that's something that's a positive in terms of the overall connection with the customer.
When you look at all of the pieces together, we think it's a great opportunity to create sum of all parts where a customer can engage with us in a physical facility, online or through the specialty drug channel, and we can leverage across.
And then the Little Clinic helps, as well.
We really get excited about the opportunities.
And the other thing that we really like is that customer is very loyal, as well.
It's the back-half range.
And remember <UNK>'s comment about, first of all, we're cycling incredibly strong identicals a year ago, and then as you get to the fourth quarter you start cycling identicals that were lower than where they were in the third quarter.
<UNK>, anything you want to add.
A little less than 1% including pharmacy, 1.25% excluding pharmacy, and grocery is about 1.5% negative.
And that's grocery only, and that's the way we define grocery.
Which include the dairy complex.
Not everybody has the dairy complex in grocery but we do.
We see a little bit of everything out there.
As <UNK> said a few minutes ago, over the breadth of the geographies we have you see a variety of everything.
You see people in certain ---+ even if they're a broad-based retailer you see them doing things in one geography and not other geographies.
And then you see regionals doing particular things in and out of different promotions, and then other people continuing to make investments in price.
We do a little bit of all those, as well.
We put out a circular, sometimes weekly, sometimes for a couple weeks.
And we continue to invest in everyday price, as well.
So, it's really no different.
I think the thing to keep in mind is we don't always necessarily just react to what particular competitors are doing.
With our relationship with 84.51 we put significantly more science behind how and when we make price investments, whether it's promotional activity or a permanent price reduction.
When you look at the surveys overall, first of all, SNAP continues to decline, and it has for the last ---+ I'm going off memory, and, <UNK>, if you remember the exact number ---+ but I want to say like a year and a half or so that it's been declining.
That's about right.
Some of the decline is driven because of changes in terms of what is in SNAP in terms of programs that get renewed or don't get renewed.
If you look at the items in the basket, that's always a tough one to answer because, if you look at items in the basket, we've been flat or up slightly or down slightly for a long period of time.
The thing that's important to note is, if you look at customers over a month, how do they spend with us.
And they continue to spend five more items from us.
And as we get better and better in our fresh departments, customers come in and shop our stores more often because on fresh products people want to buy it.
It's not quite to the European standards where people buy daily but you'll see people increasingly come into the store every two or three days to pick up their fresh items, and that affects the items in the basket.
I think it's always difficult to look too much at items in the basket.
We would focus much more in terms of over a month how are customers behaving.
In terms of competitors, I don't know that there's too much I can add from what <UNK> and I mentioned before.
Overall, I wouldn't say that we're seeing a huge difference.
If you go back and look you, you have competitors that had gone out of business that now stores have been reopened in some parts of the country.
You have all kinds of different things going on.
And to make a blanket statement or a blanket statement toward a specific competitor, I don't think it would be helpful because I really don't see it changing massively when you look at big groups.
<UNK>, anything you would want to add to that.
I would agree with you.
We've obviously done a lot of work at this point in the year to pare back capital spending in the current fiscal year because you have projects in the pipeline.
There are certain projects that will slide into the next fiscal year and then projects from 2017 that will slide into 2018.
I'll remind you that our view of the $500 million reduction is for this year and next year ---+ well, for this year and then keeping next year in the same range as this year.
We just think it's prudent in this environment to maintain and increase our financial flexibility to respond to the environment that's out there, and to have that incremental cash to be able to spend.
Our view is that there will always be a significant number of projects in the pipeline and we're comfortable we're going to be able to do the projects we have the highest level of confidence in and get those built while maintaining as much financial flexibility as we can.
It's not concentrated in any one geography particularly this year.
Frankly, some of it was where did we have stores we're not legally committed to open or start projects on.
And we feel very good about ---+ that level of spending will still be a record year for spending, so it's a very substantial investment in the business.
The biggest effect will probably be in terms of net new stores, if you just make a blanket statement in terms of where will it.
It will be a little bit of everything, but that's probably the biggest bucket.
I would agree with that.
If you look at our market, we continued to gain market share in the second quarter.
If you look at from a competitive standpoint, our second biggest competitor would actually be somebody other than Albertsons.
I don't remember where Albertsons is right now but Costco would be the second largest competitor.
I always think it's important to look across the whole country and what's going on.
I made the comment before about all short statements in economics are wrong.
You can see all kinds of different behavior across the country.
What competitors are going to do, your guess is as good as ours would be in terms of whether that's something they're going to do everywhere or if that's something they're testing, and what speed does it take for them to do it everywhere.
I don't know, <UNK>, anything you'd want to add.
I agree.
Keep in mind, when you think about what competitors are doing it's not like our prices have remained stable or increased.
We continue to invest in price, as well.
I would challenge your comment because, first of all, we would not publicly say what we are going to do from a competitive standpoint in advance of doing it, because I think the FTC would probably get a little bit upset with us, along with I know our General Counsel would be.
I did not say that we would be comfortable at any specific number.
And you gave the specific numbers that you speculate what that is.
I would go back to the comments that <UNK> and I made before.
We continue to execute our strategy.
There's parts of the strategy that's more important than just price.
It really is everything altogether.
To react to your specific comments I think would be very difficult.
And how you look at a basket of goods may be different than how a customer looks at a basket of goods, as well.
One of the other things that continues to fascinate me with all of the conversation about investing in price or not investing in price, 18 months ago all of the questions I was getting is ---+ why do you guys continue to invest in price, why don't you let your gross margins go up.
You've closed the gap everywhere, now you can reap the benefits of what you've sown.
And we've staunchly said for years we're going to continue to invest in price because if you look at any segment of retail over any period of time, gross margins always decline.
And we'll continue to maintain our financial flexibility and execute our Customer First strategy, investing not only in price but through other elements of it, as well.
In looking at market share gains I don't think the data is quick enough to be able to answer where we are so far in the third quarter on market share gains.
And I actually couldn't answer the question because we wouldn't have the data yet from the market.
We look at market share by looking at Nielsen data, IRI data and other sources.
It certainly did pick up in the grocery category in the second quarter as far as more deflation.
The other thing that's happened, and I said this actually earlier today when I was on CNBC, if you look at produce it wasn't deflationary in the quarter but there was disinflation in produce in the second quarter.
So, it was less inflationary in the second quarter than the first quarter.
It's fairly broad based.
Yes, but if you look at within grocery, it's heavily driven by the dairy category, which is obviously mostly milk, eggs is a huge part of that.
If you look at the acceleration it's really being driven by a few select items within it.
Fair point.
It would only be in terms of the areas that are commodity driven.
So, if you look at eggs, eggs is fascinating because there wasn't as much inflation a year ago in eggs that were organic eggs.
So, the deflation there isn't as much because they didn't inflate as much.
So, it would be a little bit but if you look at the alternatives in terms of grain-based milks, really not so much there.
I don't know, <UNK>, any---+.
I agree with you.
We continue to be thrilled with Simple Truth.
It continues to grow as a brand.
More and more households continue to enter into the category and stay in the category.
Our corporate brand folks continue to do a great job of expanding the category with incremental products in the category, as well.
It's really the cornerstone of our natural and organic program.
And it would continue to be growing at close to double digits, especially if you don't include chicken because quite a bit of deflation in chicken right now.
I wouldn't feel comfortable telling you the specific time until we give 2017 guidance.
And I don't want to think we want to go ahead and give 2017 guidance now.
We really look at it over a rolling three- to five-year period of time.
And if you look at it historically, we've actually grown well in excess of the 11% over a three-year period of time and five-year period of time, both on the quarter and the annual basis.
It really is, when you look at the overall ability to connect with the customers, that's why we feel comfortable with that 8% to 11%.
We still see tremendous opportunities to improve the way we connect with customers and the way we run our business.
And you guys hear me say often that our to do list remains bigger than our done list, and that certainly remains the case.
That's the reason we remain confident in the 8% to 11% plus the dividend that's increasing over time, is that we still see plenty of opportunities to grow the business, connect with the customer in a deeper way, and to continue to run our business better.
It's one of the things that's exciting.
Every time you figure out something to do better and you do, it helps you learn how to do something else better.
So, that's the reason why we get excited.
At this point I wouldn't feel comfortable to give you the specific period of time.
And obviously at some point we'll give some guidance on 2017 but it's really too early at this point.
It's purely driven by how many stock options wind up getting exercised in any time frame, and a reclassification from an accounting standpoint, where the benefit of that goes in the financial statements.
Our view for the rest of the year is that on a rolling four-quarters basis, it will continue to trend down from where we finished the quarter.
And I wouldn't see that expectation any different.
We had a very strong fuel quarter last year.
Its actually held up better so far this year than we thought.
We finished the rolling four quarters at the end of the second quarter at 18.4.
That was down.
$0.02 from last year and we would expect that downward trend to continue a little.
Thanks <UNK>.
Before we end today's call, I'd like to share some additional thoughts with our associates listening in today.
I want to thank the many associates sharing in the Kroger journey.
We have six generations working with us today.
Each associate makes a unique contribution.
You bring your energy and ideas, your experiences and expertise.
We are a better Company because you've made Kroger the place where you want to be and work.
Even as we've grown and gotten bigger as a Company, I know that when the doors open and the lights go on at our stores, offices, distribution centers and manufacturing facilities, everyone is giving their best to our customers, our Company, and each other.
That means a lot and that will make all the difference.
Thank you for everything that you do for our customers every day.
That completes our call today.
Thanks for joining.
