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#Thank you, <UNK>, and good morning, everyone, and thank you for joining us
With me to review Kroger’s second quarter 2017 results is Executive Vice President and <UNK>hief Financial Officer, Mike <UNK>
As you know, Kroger has competed in an ever-changing retail landscape for 134 years
Our success over time boils down to one thing, our relentless focus on the customer
That focus allows us to deepen our connection with customers and create shareholder value
The customer remains the center of everything we do
The four core elements of our <UNK>ustomer 1st Strategy are as relevant today as they were when we first introduced them
How we invest each year to drive customer engagement changes regularly based on customers’ changing needs and wants
This showed in our second quarter results, as we returned to positive identical supermarket sales growth, and both loyal and total households increased
Traffic was up, unit movement was up and market share was up
Our customers’ perception of our prices is excellent and we continue to get even better
Based on our second quarter results and expectations for the balance of the year, we have confirmed our annual net earnings guidance
The operating environment will continue to be incredibly dynamic
But more importantly, customer behavior is changing faster than ever before
For the last few quarters we’ve talked with you about our expanded view of all the food our customers eat, and how we’ve been working to redefine the market as share of stomach rather than share among traditional grocery stores
We know that the massive, $1.5 trillion U.S
food market creates a unique and sustainable growth opportunity for Kroger
You’ll see changes in the way we go to market as a leading indicator of the lens through which we view our market
We see anyone who sells food as competitors in the future
Kroger has a history of successfully evolving to meet our customers’ changing needs, because we put the customer at the center of everything we do
We are transforming today, too
We are reprioritizing and accelerating investments in our <UNK>ustomer 1st Strategy in order to anticipate and meet rapidly-evolving consumer demands to shop with us for anything, anytime, anywhere
Our transformation is all about redefining the customer experience
As our business continues to improve, we remain committed to delivering on our guidance for 2017 and believe we have the ability to grow identical supermarket sales and market share in 2018 as well
In this dynamic operating environment, we will continue to provide annual guidance as we have done for many years but will no longer provide longer-term guidance
This will provide needed flexibility in how we invest to position us for the future success
We look forward to getting into the details of our goals and priorities at our upcoming investor conference in October
But in the meantime, I’d like to begin to create a vision by sharing several ways we are redefining the customer experience to be America’s inspiration and destination for everything food
We’re doing this by combining our knowledge of food and our ability to personalize through the use of data analytics; we’re doubling down on digital; and we’re leveraging new and ongoing partnerships to deepen our connection with customers and drive revenue
I’ll take a few moments to share more about each of these areas where we have deep credibility from our past and are aggressively developing for our future
Food retailing is more exciting than ever before, especially as more of us become foodies
<UNK>ustomers have nearly an unlimited number of options when you combine tastes, flavors and types of meals with the growing number of food outcomes that consumers are focused on
Those outcomes might include eating for health or for enjoyment, for example, or for lifestyle or performance reasons
Kroger is uniquely positioned to be the partner our customers turn to for their meal needs because we know food and we know our customers better than anyone
Meals have always been our expertise
Kroger is often the one driving change and innovation behind the scenes
We are very proud of the role we’ve played for over a decade in making natural and organic products more affordable and accessible to America, especially for shoppers on a budget
We’ve always believed that our customers shouldn’t have to pay higher prices just because a product is natural or organic
We developed our Simple Truth brand to be honest, easy and affordable because our data told us this was a great customer need in the marketplace
Today, Simple Truth is the biggest natural and organic brand in the country by volume
This market continues to provide a robust opportunity for Kroger
Similarly, our culinary innovation team is bringing truly affordable and incredibly tasty meal kits to American households through our Prep+Pared offering
Just last week, we announced that we are expanding our offering of Prep+Pared to more than 50 stores in three of our divisions, <UNK>incinnati, Louisville, and Ralphs
Across Kroger, we know our customers better than anyone
We have a 13-year advantage of using data insights to connect with customers
Data analytics are fully integrated in our business, as 84.51° helps us make merchandising, operations and marketing decisions
In the last year alone, Kroger has made more than 3 billion personalized recommendations to customers through product offers, promotions, recipes and more
Data analytics is helping us win with Our Brands by identifying the best products to bring to market based on consumer behavior and taste trends
Research by an independent third party shows us that our customers favor Our Brands over national brands and competitor offerings
The strength of Our Brands is what our customers realize Kroger quality is superior, and at a very affordable price
It truly is quality without compromise
<UNK>ustomers get the best and most innovative quality at the best prices
We will build this momentum to be the premier private label destination in America
<UNK>ombining our love of food with our data expertise allows us to offer content that inspires
We recently launched a new My Recipes feature on Kroger
com that serves up a personalized selection of suggested recipes
The recipes offer greater diversity of meal ideas, all based on your individual purchase behavior
Our growing collection of recipes is also searchable by a variety of filters including seasonality, world cuisine, meal or dish type, and cooking style
While online recipes are not new, serving them up on a personalized recipe for your family is and customer and your family will love the new offerings
And this is distinctly Kroger
Personalized recipes are just one example on how we are bringing the combination of food and data together to create new and highly-relevant customer experiences, especially through digital and ecommerce
<UNK>ustomers expect a great shopping experience and the ability to interact with us digitally or online in a seamless way
Our digital efforts are all about making things easier for our customers and providing personal, affordable and exclusive options that fit their needs
This includes our mobile app, for example, in addition to Vitacost
com, <UNK>lickList, Express Lane and home delivery
Today, we have more than 25 million digital customer accounts
As we said in our press release, our total digital sales are up 126%, driven by <UNK>lickList
We operate more than 813 <UNK>lickList and Express Lane locations offering the convenience of online ordering and curbside pickup
By the end of the year, we will offer the service at more than 1,000 locations
<UNK>ustomers continue to respond exceptionally well to <UNK>lickList
We know that in the future more customers will want the option of home delivery, so we are also testing various home delivery models with companies like Uber and Shipt and on our own in more than 150 stores
We will keep making the strategic investments to serve customers anything, anytime and anywhere in the near future
With new entrants in a fragmented market, we’re also transforming our business and building partnerships to deepen our relationship with, and create value for, our customers
We’ve been preparing for new market entrants for years, and the fact that Kroger is trusted by more than 60 million households annually is a great strength when customers have more food choices than ever before
We continue to gain share in key categories like natural foods, produce and fresh prepared foods
We will continue to focus on growing our core business to generate free cash flow and deepen our personal connection with customers
These changes also create opportunities to work with our existing partners to deliver more value for customers and to identify new partnerships to create alternative revenue streams
Now, here is Mike to share more details on our second quarter results and to walk you through changes to our capital allocation process and long-term guidance
Mike?
Thanks, Mike
I’m often reminded of the saying, “may you live in interesting times”
These are interesting times in our industry, and I know some of you wonder how Kroger can continue to thrive in such a dynamic operating environment
We have a history of evolving to meet our customers’ ever-changing needs
The key is to proactively see where the customer is going and to proactively address the changes
That is what we are doing today
Through innovation, Kroger is redefining the food and grocery customer experience based on our core strengths
Kroger has more data than any of our competitors, which leads to deep customer knowledge and unparalleled personalization
We have incredibly convenient locations and platforms for pickup and delivery within one-to-two miles of our customers
We have a leadership team that combines deep experience with creative new talent
We have the scale to win with more than 60 million households shopping with us annually
In fact, we’ve been named America’s most beloved grocery store several times
We have a proven track record of consistently returning capital to shareholders through an increasing dividend and share buyback program
And, we have a track record of connecting with our associates, customers and communities to uplift and improve lives, as evidenced by our team’s response to Hurricane Harvey
Now, we look forward to your questions
Question-and-Answer Session
<UNK>urrently quarter-to-date, and this is without the hurricane effects, we would be above where we finished the second quarter and we would be closer to the high side of the guidance range
The reason we exclude the hurricane is because one day it’s a positive, one day it’s not because of obviously one day you will have business that’s up 100% or 200% and the next day it’s basically zero
So, we just ---+ until we get completely through the two hurricanes and when we release third quarter, we will obviously give a lot more insight
But so far, we would be trending ahead of second quarter and closer to the top end of the range
And on changing the range, as Mike mentioned, if we left the range the same as it was before, it could have meant, we would have had positive ---+ negative identical, excuse me, for the second half of the year
And obviously, we wanted to make sure that everybody understood that we do expect identicals to be positive and the trends that we’re seeing so far, the identicals continue to improve
In terms of how much it encompasses, it would be everything that you mentioned plus some
And as Mike mentioned in his comments on the space optimization 84.51° is helping us look across the whole store and how do we use space
So, obviously, in some cases, it’s continuation of adding more fresh space
It’s also in terms of the products that we offer to the customer, every single item has to earn its right to be on the shelf and categories have to earn the right to have certain amount of allocation
So, it’s all of those things
The expense would really be driven by two things
One, when you make some changes, there are some equipments that you would write off
As you make the changes, there is certainly the labor and the cost in doing the changes, plus some of the equipment gets written off almost immediately
So, it’s both of those factors that is behind what Mike was mentioning
I would say, the broad comment would be, from an M&A standpoint, we would be equally as excited today as two years ago, when we find the right person to partner with
And as you know, when we look for someone to partner, we’re looking at somebody that brings things to us as much as we bring to them
We would continue to be aggressively looking at anything digital that adds capabilities
You may recall, in the past year and a half or so, we merged with a company called <UNK>et6 and another company called You Tech
And we were able to use in both of those situations, the 84.51° and accelerate the work that they did and accelerate some of the work that we’re doing plus brought a great amount of talent to our <UNK>ompany
So, we would increasingly look at curtain capabilities that somebody would bring to us and how do you partner with them in a way that would bring that capability
But for the right merger opportunity, whether it’s digital or physical, we would be as excited today as two years ago, but it would obviously have to be somebody that fit in well with where we operate and has a business that’s strong
Well, as you mentioned, Ken, it’s only been a week and a half, so it’s very early in the process
And as I mentioned in our prepared remarks, we’re really proud of the work that we started over a decade ago, and making sure natural and organic product is affordable to all customers, and we never felt like just because something is natural or organic, you should charge a premium for it
In terms of the impact, obviously, it’s way early, but there isn’t anything that would cause you to develop any point of view at all, in terms of changing trends, but it’s only been a week and a half
So, I would caveat it a million different ways
Obviously, the discussion around it has been longer than that
I don’t think ---+ I actually don’t look at two-year stacks very much, because I sold whatever I sold last year and I’m selling that plus more this year
And we feel very good about the underlying health of our business
As we said in the prepared remarks and in response to questions so far, ID sales so far in the quarter are pushing the high end of the guidance range
We grew loyal households, we grew total households, we have strong market share growth and strong tonnage growth
And I would also remind you that as our brands continue to gain strength and gain a bigger share of both units and sales that comes at the expense of a lower retail ring, which winds up being a bit of a headwind to reported ID sales
And we have been very aggressive with how we position those products inside of our stores
It’s a great question and it’s hard to answer because the thing that we’re trying to do for our customers is to do it in a way that’s totally seamless
So, the customer continues to come into the store and shop, so we actually get more of their total basket
So, it’s helping comps but it’s helping comps from that total customer household and how much they’re spending with us
So, it’s helping identicals but it’s really hard to say <UNK>lickList is X percent of it or Y percent of it
I don’t know, Mike, anything want to add?
I’ll give a little bit broader answer than just your question
First of all, we would talk about it in terms of our brands versus private label, because from ---+ and it’s something that took us longer than it should have
But, if those brands, they are our brands and the customers tell us they love it and one of the things that we probably should have done years ago but we hadn’t but we actually, was much more aggressive on hiring a third-party company to do a broad test taste and quality preferences for our brands across multiple national brands and other companies’ private label programs
And we always thought we were good but we came out even significantly better than what we would have even thought
So, it really highlighted the progress that our team has been making on improving the innovation in our brands, the variety of offerings
If you look at Simple Truth, obviously five years ago it didn’t exist; today, it continues to grow double digits
So, when you look at overall, our customers tell us they love our brands
And we continue to even get more aggressive in terms of creating additional innovation, brands, offerings within, new flavors
In terms of the potential, at this point, the only thing that I would say is it’s ---+ would be massive
And one of the things that we did several years ago, we went to the outside and hired a new leader for that team and about half of our team is from the outside
And when you go and look at Europe, obviously, on the Our Brand product in Europe, the market shares there are significantly higher than the U.S
And we would be much more focused on how do we make sure the innovation, the quality and the offerings that we have, we earn the right for the customers to take it to that kind of level
In terms of our plant capacity, if you asked our manufacturing team, they would probably tell you they’re at almost capacity
I’ve always found and we’ve always found that we always figure out ways to produce incremental product and do it very efficiently
So, in terms of capacity, it is one of the great things about knowing how to operate plants, we could easily expand capacity, either through process change or additional expanding plants, things like that, whether is needed
Not at this point
I don’t know, Mike, if you ---+ not at this point
As you know, we are continuing to provide a little bit more insight than before
Yes, On the crossover with Walmart on digital, I actually don’t know the answer to that
And it’s incredibly easy to develop a shopping list with us, the work that our teams have done working with 84.51°
We do a lot of work on predicting what your shopping list will be, to make it really easy to do
The one insight that I can give you and we’ll have to go back and look to see the overlap on Walmart is ---+ our success on <UNK>lickList is very consistent across the country
You don’t see one place where it’s 1% and somewhere else it’s a 100% variance of success
It’s pretty consistent
On the Lidl, obviously, they continue to open stores
So far, what they’ve done has been pretty consistent with what we expected
And obviously, you’ve heard us talk about from a pricing standpoint, we won’t lose on price; we’re not trying to lead the market down on price, but we are not going to lose on price
The success so far in terms of being able to maintain our business and grow our business, we feel very good about the ability to compete against all the Lidl and anybody else
So, I wouldn’t say there has been any surprises so far
Obviously, they are our great competitor but there is a lot of great competitors out there
Well, as everybody on the call knows, we make our investment decisions in terms of what do we think is best for our business three to five years out and which intern means what’s best for our shareholders three to five years out
There is no doubt that <UNK>lickList is a headwind on earnings currently and we’ve even continued to accelerate the speed in which we put <UNK>lickList in
And so, it’s incremental headwind
We feel very comfortable, when you look at it over a three to five-year period of time
Our customers will appreciate that we offer <UNK>lickList; our associates obviously in terms of being able to provide the service will be glad; and our shareholders will be glad
So, we can clearly see where we’re ---+ there is a path where we’re indifferent on whether somebody comes into the store or shops with us on <UNK>lickList
It’s you have initial paying and that would be a ---+ of what caused to affect the long-term guidance perspective
I would say it’s fairly common or fairly traditional time of a transition
It’s just at anytime you go from higher prices to lower prices, the thing that gets disruptive is how quickly will people lower prices and then the flip is the case as inflation creeps back in, how quickly will people adjust prices the other direction, to continue to protect the gross margin dollars that they would have in those products
And that’s what causes the disruption in the short run as you’re cycling through the two of those
I would say broad based, there isn’t anything that’s really out of the realm of what you normally see
The one exception to that would be what we talked about earlier in the year relative to some low milk prices earlier in the year and eggs continue to be pretty inexpensive as well
But, those would probably be the only two categories that I would hold out as maybe exceptions to the norm right now
The other thing that we have such great relationships with local agencies, almost always we would be considered part of the first responder group, because people understand that it’s important for the glossary stores to get stocks
So, our associates would be given clearance as a first responder in most cases
One <UNK>PGs, as you know, we always work with <UNK>PG partners, trying to understand how we grow our business on a combined basis
So, both of us are very focused on growing the business
I think <UNK>PGs continue to aggressively, incrementally try to work with us on helping grow their business
It’s one of the things that’s nice about having the great insight we have with 84.51°
We partner with most <UNK>PGs in a different and more deep way that also involves product innovation
So, there is no doubt, there is tremendous amount of change going on, the <UNK>PGs feel that change, and we’re working with the <UNK>PGs for both of us to grow our business
But, obviously, we’re also working and focusing on growing our business as well
Outside of that, I really wouldn’t say that it’s ---+ there has been a massive trend change, what do they always say in economics, all short statements are wrong
So, you give the scenario and I can find it somewhere
The biggest change would be ---+ continue to be milk and eggs across the country; everywhere else would be puts and takes
The biggest thing that the 84.51° insight shows us is the customer decides where to shop based on their total experience
And obviously that total experience is what’s the shopping environment like, so what’s how the associates treat the customer
What kind of rewards do you have, what type of personalized offers are you making, which is very hard for anybody to see that other than each one of us as a customer individually
And then, obviously from fresh product standpoint having great produce, meat, deli, dinner tonight, these kind of things
So, the thing that’s really important is the all of that together, the price, the specific price items, really each one of us would have different items that are in our biggest hot button
So, it would be factoring in all of those things in terms of how we decide where to price and how to price
And the insights, the biggest part of the insights is, it really is important to customers for their over total experience not just one dimension of the experience
Yes
On the milk and eggs, I just ---+ I didn’t ---+ the comment I made, I didn’t intend to infer that it changed anything from the first quarter in terms of broadening out or narrowing or anything on milk and eggs
What was the second part of your question?
Well, I guess, I would broaden it
We feel good about the pricing investments that we make and based on what the customers’ telling us, it continues to connect as we expected
And it’s ---+ we feel good about it when you look at everything in total
Also in some of the costs ---+ operating costs categories, the second quarter trends improved versus the first quarter as well
We feel very strongly that we would expect additional consolidation going forward and the consolidation will happen the way you describe, plus other ways in terms of companies merging and other thing
So, we don’t think there is any doubt that you’ll continue to see a lot of consolidation
You’ve always heard us talk about ---+ anything that happens, you should assume that we’ve looked at it
And if you look at what we did with Marsh, obviously those work out really well for us, because of specific trade areas that we haven’t been able to get into
And by buying some stores from somebody in that situation, you’re able to get into trade areas and leverage all your existing infrastructure
Those we always like, but they’re lumpy
So, you won’t have any for a couple of years and then you’ll have a whole bunch of them happen
But, those are once that we will always be interested in and always take a look at
But, you should assume that our overall view on the merging with somebody is the same and we continue to look at stuff
If you look at natural and organic overall, it’s over $16 billion business for us on an annual basis
So, obviously, it’s an important part of our business
It continues to grow strongly and we would continue to see a great opportunity in that space
We find more and more customers
For some items, they will purchase natural organic items and other places, they will buy traditional items
And for us, what we try to do is, we don’t judge a customer on how they eat, and we try to make sure we have what the customer wants at a great value
In terms of the share of market, it depends on how you define share of market
If you look at Simple Truth, last year it was about a 1.7 billion category for us
And if you look at the $16 billion in total that would obviously include some non-branded meat items and other items
So, that would give you some insight in terms of share of market
If you look at grocery overall, grocery typically on units is close to 30%
So, obviously, there is still a lot of room to grow
When you look at total, we get more of the customers business and that’s what we find the reason why we are so supportive and keep working on it
In terms of the share of business, at this point, we wouldn’t give the specifics on stores and what percentage of their business is in <UNK>lickList
It’s a reasonably wide range
And the range isn’t driven by anything that ---+ it’s more specific stores
So, I know one store that has a pretty high percentage, it’s right off the interstate, so that store has gained a lot of new customers because it’s easy on and easy off, the interstate and their trade area for <UNK>lickList is completely different than their trade area for the store
For us, what we’ve tried to design is a business model that we know at certain percentage of business it’s more efficient to do it in store because of not having incremental asset investment
At the point in time that it grows, it’s easily converted to dark stores or a freestanding warehouse facility where you put in more automation
So, what we’ve tried to do is design where we can support and partner and make money and the customers will take it to whatever percentage of our business they take it and we’ll be there for them as they go
So, we’ve really worked hard on having a model that’s easily scalable and scalable in terms of what percent of penetration it becomes
So, thanks <UNK>
Okay
Thanks, <UNK>
Thanks to everyone on the call
Obviously ---+ hopefully you hear some of the comments that Mike and I are making, Kroger is playing to win
And the things that we do are what we believe will be best when you look out three to five years for our customers and associates
And what we’ve always found, when we do both of those, then, our shareholders are well rewarded as well
And the business continues to generate great free cash flow and we have great opportunities in front of us
So, and then one other comment, as you know, I always like to share some additional thoughts with our associates that are listening in
First of all, I would like to send our well wishes to the people of Huston and especially members of our Kroger family whose lives have been turned upside down by the recent hurricane and its aftermath
Our thoughts and prayers are with those who are now bracing for Hurricane Irma as well
Since the rains stopped in Houston, you have shown nothing can stop the strength, resilience and power of our amazing associates
Many of you stayed in or couldn’t easily leave stores, distribution centers, plants and offices and stayed overnight and worked tirelessly to not only serve our customers, but to provide food and supplies to first responders and local shelters
As a company we’ve sent nearly 2,800 semis packed with food, water and other critical supplies to the region
More than 350 individual associates from all corners of the country traveled to Houston to lend their hands to help uplift the community
Having a physical presence and truly being part of a community is always important
This is perhaps never more apparent than when natural disasters strike
You and our stores are a vital part of the communities we serve
What I’m most proud of is how you’ve taken care of each other
Whether that’s giving a hug to someone who needs it or traveling across the country to work side by side in reopening our stores and warehouse, we take care of each other, it’s who we are
Each day we open our doors and welcome our neighbors with true hospitality and generosity, and together, we make the world a better place
Thank you for all you do in big ways and small ways to feed the human spirit
We are truly Kroger Strong
That completes our call today
