KR
#Thanks, <UNK>, and good morning, everyone
Like <UNK> said, we were glad to see the better results compared to the fourth quarter for identical food store sales and for the second quarter-to-date, our ID sales are positive
Tonnage continued to be positive during the first quarter
We continue to focus on the areas of highest growth like natural and organic products as well as areas where we are saving customers’ time, such as ready-to-eat and ready-to-heat meal solutions
Visits per household were flat in the first quarter
Basket size and price per unit were down, but those were offset by household growth
Loyal households grew 3.2% compared to last years first quarter and our loyal households had positive ID sales growth in the first quarter
In the first quarter, our gross margin was down, operating costs were up, and FIFO operating profit was down
While this is not representative of our typical expectations, it is important to keep in mind that we are making very deliberate and targeted investments in line with our Customer 1st Strategy
<UNK>s <UNK> outlined earlier we’ve made conscious decisions to increase starting wages in certain markets to improve associate engagement and retention that will create a better experience for our customers
We continued to invest and grow our digital business
Our digital revenue more than doubled in the first quarter compared to last year
This includes revenue from ClickList, Harris Teeter’s ExpressLane and Vitacost
com
<UNK>s we continued to invest in price, we also remind you, Kroger’s investment in price can be seen very clearly if you look at our gross margins in the early 2000s compare to today
Kroger has invested more than $3.8 billion to lower prices for our customers over that time period
We have no intention of giving up the momentum we’ve gained on low prices
These investments enable us to connect with our customers in a deeper way and increase our market share over time
We are pleased that Kroger’s market share, as traditionally calculated, was up in the first quarter
That said, we recognize there is no perfect metric for capturing market share
We are doing a lot of work to better define or perhaps redefine the market as share of stomach rather than share among traditional grocery stores
We see food as a massive, $1.5 trillion market, and we have a substantial growth opportunity in that market
I also want to stress that we are committed to lowering costs as a rate of sales
Many of the things we are doing to pull costs out of the business today set us up for savings in the future
We will only further intensify our process improvement efforts
Now for an update on retail fuel
In the first quarter, our cents per gallon fuel margin was approximately $0.171 compared to $0.143 in the same quarter last year
The average retail price of fuel was $2.28 versus $1.92 in the same quarter last year
Our net total debt to adjusted EBITD<UNK> ratio increased to 2.33 times compare to 2.12 during the same period last year
This result is due to the merger with ModernHE<UNK>LTH and the repurchase of shares
Over the last four quarters, Kroger has used free cash flow to repurchase $1.5 billion in common shares, pay $438 million in dividends, invest $3.4 billion in capital, and merge with ModernHE<UNK>LTH for approximately $390 million
The flexibility to return value to shareholders is a core strength of our financial strategy
We are committed to balancing the use of cash to maintain our current investment grade rating
Return on invested capital for the first quarter, on a rolling four quarter basis, was 12.75%
On the labor relations front, we are currently negotiating agreements with UFCW for store associates in <UNK>tlanta, Dallas and our Food 4 Less Warehouse Stores in Southern California
Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality, affordable health care, and retirement benefits for our associates
Kroger’s financial results continue to be pressured by rising health care and pension costs, which some of our competitors do not face
Kroger continues to communicate with our local unions, which represent many of our associates, the importance of growing Kroger’s business and profitability, which will help us create more jobs and career opportunities, and enhance job security, for our associates
Turning now to our guidance for fiscal 2017. We had previously indicated that the environment during the first half of this year would be similar to the back half of 2016, and that is what we’re seeing
<UNK>s <UNK> said, there is a lot of change in the retail food industry
That, coupled with the transition from deflation to inflation creates a challenging operating environment
The deflationary environment was less severe in the first quarter compared to the fourth quarter, coming in at 20 basis points deflationary without fuel
Grocery was essentially flat during the quarter but had fluctuations up and down during it
Meat continued its deflationary trends
<UNK>nd produce, while deflationary for the quarter, showed inflation in the last four weeks of the first quarter and pharmacy was inflationary
<UNK>s a result we increased our expectations for LIFO to $80 million; a $55 million increase over our initial expectations
We have also made some incremental investments in price in certain markets that had very hot features on milk and eggs
While this affects gross margin in the short-term, it is less expensive than regaining a customer’s loyalty
These two, plus the incremental investments in hours and wages, are the primary factors causing us to lower our guidance for the year
Our G<UNK><UNK>P net earnings per diluted share guidance for 53 weeks is now $1.74 to $1.79. Our adjusted net earnings guidance range is $2 to $2.05. The previous adjusted net earnings guidance range was $2.21 to $2.25. See Form 8-K we filed this morning for additional information on guidance
Because this is an unusual year, we are going to provide a quarterly cadence relative to last year rather than compared to our long-term guidance rate, as we’ve done in the past
For net earnings per diluted share, we expect the second quarter to be down compared to last year, the third quarter to be up slightly compared to last year, and the fourth quarter to be flat, excluding the 53rd week
We continue to expect identical supermarket sales, excluding fuel, of flat to 1% growth for 2017. <UNK>nd we continue to expect capital investments excluding mergers, acquisitions and purchases of leased facilities, to be in the $3.2 billion to $3.5 billion range for 2017. Over the long term, we remain committed to achieving net earnings per diluted share growth rate of 8% to 11%, plus a growing dividend
Now, I’ll turn it back to <UNK>
No, I absolutely agree
<UNK>nd the whole trick here, <UNK>, is how quickly the lines cross on our price investments create more gross profit margin dollars
<UNK>nd as we said in the prepared remarks, there's really two things relative to the labor, one is adding some hours to certain service departments as well as increase in starting wages, which we believe over time will reduce our turnover, which has a great payback when we can have a higher retention of our associates who then are more productive and give a better shopping experience
So that one has a little bit longer runway relative to when we see the benefits of those investments
Yes, <UNK>, $0.035, $0.04 in that range
<UNK>, it's not necessarily that it’s dramatically different today than we’re expecting, but when we look forward based on the movements we’re seeing in the lot of the underlying commodities
We do think there could be a little more inflation by the end of the year than we originally thought, but the accounting convention is whatever your year-end estimate is, you expense that ratably throughout the year
So it's really more reflective of where we think the end of the year is going to be not necessarily what happened in the first quarter, but we’re required to ratably expense that over the year
We talked about all of those and deciding exactly where to set the guidance range
We spend a lot of time taking where we are today, looking at the forecast for the rest of the year, trying to understand the gives and takes and settled on the $2 to $2.05. <UNK> wider range, perhaps we could have done that
The only answer I had to that is we decided that we feel good about the range we put out there
We do feel good about the traction we are getting in ID sales that we think will help us support that ID guidance range
Relative to the operating cost reductions, I think – I don't have any concern that we aren’t going to continue to get the operating cost reductions we're getting
We have made an independent decision to add some service hours to some departments as well as in some markets increase starting wages to try to reduce the turnover we have, which hurts the customer experience as well as creates its own cost in friction when you are constantly hiring training people
We didn’t do that across the country
It's in select markets, but it's not an inexpensive proposition
So we try to factor all of those in
In fact, what we call enabler savings are actually pretty close to tracking to exactly what we expected in total to save on our cost savings initiatives for the year
Thanks <UNK>
It’s a great question Zach and it's – one of those it's always hard to answer, because you don't know what a customer would have done
The best we can tell, if you would give a range of between 40% to 60%, you’re probably within that range, but it is a hard, hard number to guesstimate, because you really don't know for sure – incremental or that you would have guided anyway either way
<UNK>gain in response to <UNK>’s question, you never know when somebody in select markets is going to run some hot feature, and you have to make independent decisions as those features hit the street
Is it somebody just run an ad for a couple of weeks trying to get some business in the store or they going to do something longer term
<UNK>nd when those kinds of ad stay there for a little bit longer, particularly when it's two important commodities like milk and eggs, ultimately we're going to react and not allow our customers to think they have to go somewhere else to get the best value for those kinds of products
Just so happens those two commodities are big commodities and its expensive when hot features hit versus some other commodities and to say we do or don’t have something exactly built into our business plan
So that's difficult to say, but we did make the decision to react to those prices and to keep the customers inside of our stores
I think we all believe that the industry is going to continue to get more competitive because every year, it does get more competitive
I think the price investments that we've made so far from our original pricing plan are taking good hold and good effect and we always still dollars in and to try to allow us to react to competitive pressures
So I think the guidance where we've lowered it to certainly have some [indiscernible], everything that may happen
<UNK>s <UNK> said, it’s our best guess at this point in time
[Indiscernible]
Yes, well our brand has been incredibly important to Kroger since the founding of the Company
<UNK>nd the research that we did last year, we want to make sure that we weren't just biased because we're so close to it and we did the research with our customers and our customers gave us glowing feedback on how strong our brands were, how great the products were in a blind panel
So they didn’t know it was us
If you look at our Private Selection and Simple Truth and Simple Truth Organic, we just crushed the competitors in that space
So for us, our brands has always been massively important and we will have a world-class our brand approach and it's important for our customers, it's important in terms of being able to make money as well
So we don't look at it in terms of trying to do something versus a CPG, we really look at it is our brand and building our brands and doing the things that customer wants
Yes, I would say that when we look at gross margins overall, there's a variety of factors that wind up going into that
I think you'll continue to see us over time, reduced gross margins
If you think about my prepared comments over the last 12 years or 14 years, we've invested $3.8 billion in price by the drop we've made in gross margin
<UNK>nd I think over time, you'll continue to see it go down, it’s typically what happens in that any segment of retailing to get laser focused on one particular year or one particular quarter
I probably wouldn't get that specific, but certainly when you look at it over time
We built our business model, assuming that gross margins will go down
We need stronger IDs and we've had the last few quarters and we need to get back of the productivity loop of allowing our operating costs to come down as a rate of sales to grow that operating profit margin
Obviously as I said in my prepared remarks, these are representative of the results we expect to deliver over time
But every once in a while you run through cycles, where you have to step back and adjust many of the metrics inside the company and we feel that we've done a good job of react and I'll sensibly and proactively to the environment around us, both from a labor standpoint, from a price investment standpoint and what makes sense to grow the business for the long-term
Well, as <UNK> said in response to an earlier question, we typically don't lead our market down on price, accepting categories where it's one of our strategic investments we're making
You typically won't see us anymore maybe in the 1990s we did this
But you won't see the kind of reaction where we have very, very hot features that in the end don’t drive any kind of loyalty in your store and just tries to drive foot traffic and get them to buy other things
Will we react to those types of things and make investments, so that they don’t attracting of our customer stores, absolutely we will
But I think if you look over time, we’ll continue to be proactive on how we make the investments
Yes, a great question that I won't get into all the specifics because obviously competitors would appreciate that knowledge as well
What we're finding is the quality of that meal is the same as going to a restaurant and getting the meal, but people like to prepare something at home and they find it easy and they love the variety that we offer
So lot of the price comparisons is what the prices versus going to a restaurant, but being able to do it at home and when it takes to 20 minutes, it's just as fast as Kroger’s that is going to a restaurant and going through all that household when you're at a restaurant, and we're getting great feedback
We’ll continue to roll it out based on the ability for the facilities to handle the volume, and so far it's been very good and we appreciate and looking forward to work out
When you look at how people are going to promote and what will be features are going to be, I wouldn't have enough time to step back and think about how our merchants develop their marketing plan, they’re well out, the multiple weeks out
We certainly make assumptions about how customers or how other competitors reacting around holidays, how they may react in weeks, during the summer when there's a lot of vacations going on and maybe fewer people at home shopping and what kind of promotions they may do
But to be able to sit here and say, this is exactly what we're expecting from a promotional standpoint will be very difficult to say I have X, Y or Z built into the plan
Other than we know there is always going to be markets and there always are markets where there are a lot of hot features going on
There's other markets that are kind of in the middle, there is high low kind of activity kind of normal traditional grocery store pricing
<UNK>nd then there is other markets that are relatively benign where you go back to daily that fortunately for us, we have the number of markets we're in the breath of those markets that not every market is high for competitive at the same time in some of the ones that aren't quite as competitive help offset that
So to sit here and try to project what the competitive environment are more specifically, the promotional environment maybe would probably not be any significantly prudent
I'm not sure exactly where to start on all those questions
<UNK>t the end of the day, we always assume this industry is going to get more competitive quarter in, quarter out, year in, year out and unfortunately I guess we're really disappointed with the result of our expectation and that's that – it's always been a competitive market
It's always been a competitive industry
In our view, it's going to continue to be competitive
There are bursts of time where things heat up and then burst of times where cool down and we know over time that if somebody runs a high feature over the course of the weekend that's one thing
If somebody appears to be try and to put a stake in the ground on big volume important commodities to drive volume into their stores, the best thing we can do to counteract that is as <UNK> say, not lose on price of that commodity, because that takes the advantage away from them and it doesn't get any of our loyal customers or any of our customers, any reason to go anywhere else to shop
<UNK>nd you have to make judgments throughout the course of a year and a quarter of – is this a short-term thing somebody is doing that you can not necessarily this way, but by and large ignore or is this something you need to react to? How do you balance that with planned price promotions you have? Nobody on the call can see the advantage we create with our loyal household with the My Magazine, <UNK> talked about or there were 6 million individualized offers in the first quarter alone, but offered those households a different price and everybody sees on their shelf edge
We do that without creating any kind of price impression amongst our competitors because they don't know we're doing it
But that's the way to be able to reward and give a better price to our most loyal customers without putting it on the front page of an ad and perhaps us causing something like that to happen
So we're constantly using those kind of advantages we have primarily through 84.51° to figure out how to reward our most loyal customers the best
I wouldn't say we're thinking about M&<UNK> any differently at all
I do agree with <UNK>’s assessment of consolidation
I think you'll continue to see us have the opportunity to increase our footprint in markets we're already in by the consolidation of competitors we're going by the wayside, you saw the news reports from earlier in the week in Indiana
<UNK>nd I think there will be a further opportunities like that going throughout the course of the next few years
It's one of the reasons why <UNK>’s comment on reducing our capital expenditure on increasing our footprint
It doesn't worry me too much over the next few years, because I think I can lower my CapEx invested in things are going to drive sales and reduce operating costs and increase my footprint and prices below what it would cost me to build from the ground up
<UNK>nd when they get into those kinds of situations, it sites you really want the fit rate rather than buying an entire chain and trying to do something with that
So I feel really good about that part of what's going on around this
I wouldn't get through specific
One of the bigger areas that just always particularly of late, we have a lot of projects going on in/and around shrink, some tests going on and a handful of markets trying to reduce the trends on shrink
It's early on in those handfuls of markets, but early signs are the customers doing seems to be encouraging and hopefully as we get to the end of the year and it starts to be – end of the year and then the next year something that becomes a little bit of a tailwind instead of the headwind
Or just shrink not being exactly where we wanted in these projects being able to turn the trend on shrink
