Release Date: June 20, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The Kroger Co (KR, Financial) reported better-than-expected performance in its grocery business, which helped offset weaker results in fuel and health and wellness segments.
- The company saw growth in household numbers and an increase in customer visits, driven by strong store execution and a unique omnichannel experience.
- Digital sales grew by more than 8%, led by a 17% increase in delivery solutions, showcasing the effectiveness of their seamless delivery strategy.
- Kroger's alternative profit businesses, particularly Kroger Precision Marketing, had a strong quarter, contributing to overall profitability.
- The company is making significant investments in technology and store execution, leading to improved customer experience metrics and higher retention rates among associates.
Negative Points
- Health and wellness profitability pressures are expected to continue into the second quarter, impacting overall financial performance.
- The company experienced lower pharmacy margins and increased price investments, which contributed to a decrease in FIFO gross margin rate.
- Fuel profitability was below expectations, with cents per gallon fuel margin down low single digits compared to last year.
- The OG&A rate, excluding fuel and adjustment items, increased by 22 basis points due to planned investments in associate wages and increased incentive plan costs.
- The company anticipates a decline in adjusted EPS for the second quarter, similar to the rate observed in the first quarter, due to ongoing pharmacy business profitability pressures.
Q & A Highlights
Q: Can you walk us through the gross margin outlook for the rest of the year, including pharmacy margins?
A: Todd Foley, Interim CFO: We expect relatively flat year-over-year gross margin, with improvements beyond Q1 results driven by our brand's performance, fresh category growth, and retail media. Pharmacy margins faced headwinds but are expected to stabilize.
Q: How do you feel about your price gaps today in light of competitors reducing prices?
A: William McMullen, CEO: We feel good about our relative price position. Our strategy includes annual price investments, and our personalized promotions and fuel rewards help maintain competitiveness.
Q: What changes are you seeing with CPG partners and regional competitors?
A: William McMullen, CEO: We are seeing more trade dollars from CPG partners focusing on tonnage. Regional competitors are behaving similarly to national ones, with slight price increases.
Q: Was Q1 performance stronger than expected, and should we extrapolate this for the full year?
A: William McMullen, CEO: Q1 was strong, but it's early in the year to make significant changes. We feel good about our customer count growth and store execution, but we have higher incentive plan costs in Q2.
Q: Are you still on track to see inflation increase as the year progresses?
A: William McMullen, CEO: Yes, we expect inflation to be slightly over 1% for the year, consistent with our earlier expectations.
Q: When do you expect delivery and pickup to approach breakeven profitability?
A: William McMullen, CEO: Some divisions are now at breakeven or slightly profitable. Our goal is for these customers to be as profitable as in-store customers over time, driven by improved customer experience and operational efficiency.
Q: What are the pressures on pharmacy margins, and do you expect less capacity in the future?
A: Todd Foley, Interim CFO: Pressures are from product mix, particularly high-cost, low-margin drugs like GLP-1. We expect less capacity in the future due to closures by other players and regulatory changes.
Q: How do you view the promotional intensity in the market today?
A: William McMullen, CEO: Promotional activity is similar to pre-COVID levels. We feel good about our pricing strategy and its impact on customer growth, particularly among budget-conscious customers.
Q: What is driving the strong growth in delivery sales?
A: William McMullen, CEO: Growth is driven by improved customer experience and technology, including better acceptance of SNAP. It's across all customer segments, supported by CPG promotions and alternative profit businesses.
Q: How are volumes and tonnage trending year-over-year within different customer cohorts?
A: William McMullen, CEO: Tonnage trends are improving across all customer segments, driven by moderating inflation, better in-stock positions, and enhanced customer experience.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
