Kroger 1Q15 Earnings Call Notes

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Establishing in house technology/data capabilities

“I wanted to mention what I think is a great example of how we’re expanding our use of technology. Our recent decision to established 84.51° which replaced our previous joint venture, dunnhumbyUSA, 84.51° is helping us to continue to use data science for the benefit of our customers and to deliver a more personalized experience both in-store and online.'”

Some commodities up some down

“Some commodities are up, some are down. We are seeing deflation in milk, produce and seafood which is driving more tonnage volume. Milk is one of our most price-elastic categories that we have. When milk prices come down, people tend to buy a lot more. We’re at an advantage because we have a vertically integrated supply chain for milk. When our dairy plants run at higher volume, we become more efficient and productive. We continue to see inflation in generic pharmaceuticals and in certain commodities in the meat department.’

“Overall, inflation continued but at a lower rate during the first quarter which is in line with what we had expected.”

Invest in people even at entry levels

“Every day we hire people who come to Kroger for a job, then decide to stay for a career. In fact, two-thirds of our store managers today started as an hourly clerk stocking shelves or bagging groceries. We continue to increase our investment in training to build skills so our associates are ready for opportunities to advance and lead others.”

5.7% comps

“We were pleased with our first quarter identical supermarket sales growth of 5.7%. This strong performance was supported by identical supermarket sales growth in every department and every supermarket division. We continue to see outstanding double-digit identical sales growth in our natural foods department. Our meat, deli and pharmacy departments also posted strong identical supermarket sales growth.”

Inflation is pretty volatile right now

“just the volatility of inflation that’s out there, while we’ve seen some categories with deflation, we know that pharmacy inflation is actually as high as it’s been over the last several years in the first quarter. It’s right at double digits. And then a little bit of concern or thought process about the avian virus with the poultry flocks and how that might affect input costs later in the year and what’s going to happen with availability of those products.”

Still expecting 1-2% inflation

“We do expect to see some potential inflation out there in the poultry flocks as the avian flu issue hits. We don’t know what’s going to happen with all of the input ingredients that go into products from liquid eggs and how that might affect a lot of products that contain as an ingredient. So we think 1% to 2% is right. So far that’s what we’re seeing.”

Our to do list is longer than our done list

“hen you look at our culture overall, we’re always very proud of what we’ve accomplished. But at the same time, we feel like we have a tremendous opportunity to get better, and a lot of times we like to use the words that our to-do list is longer than our done list. And when you look at what’s out in front of us, we are incredibly excited about the opportunities that we see to continue to get better.’

Focus your efforts on the most important things

“The hardest thing that we have to do is actually make sure that we’re trying not to improve on all things at once, but what are the things that are most important to the customer and put all our resources against that.”

Analyst comment: some companies have noted a slowdown in dry grocery organic spending

“I know you said your Natural Organic department was up double digits. Did you see any changes at all? I think there are some other retailers that have said there was a bit of a slowdown, I think, primarily in the dry grocery side, but I don’t know. It doesn’t sound like you saw anything, but did you?”

I wouldn’t say there’s a shift away from speciality grocers, may just be a little slower share gain for them

“I’m not sure I 100% agree with your thesis when you look at some of the specialty retailers just because some of them have reported lower ID sales than what their trend has been, they continue to open stores, they have a little bit of cannibalization and a lot of them continue to post ID sales above what the market would be growing at. So I wouldn’t subscribe to the theory that they’re necessarily a sudden shift in market share away from them, it may be a slower growth in market share gain, but I wouldn’t say it’s a shift away from them.”

I wouldn’t be embarrassed if I were them

“if I we’re sitting in their chairs, I wouldn’t necessarily be embarrassed by some of the recent results they’ve had.”

We believe there will be continued consolidation in our industry

“we believe there will be continued consolidation in our industry, and we have every intention of being a consolidator in that consolidation of the industry. And as you know, we participated in several mergers over the last year and the last several years.”

We keep buying power available so that we can act when the right opportunity comes up

“we wouldn’t sit back and say Harris Teeter is behind us, we’ve delevered, let’s go spend another $2.5 billion, get it back up to 2.4 and work our way back down. It’s really quite the opposite. It’s one of the reasons we try to maintain the ratio where it is. If an opportunity does come up, can we take on the leverage of that correct unique opportunity, act on it, have the rating agencies continue to have the believability in us doing what we say, and that is we told them 18 months to 24 months we’d get our leverage back down?”