Kroger 1Q16 Earnings Call Notes

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Rodney McMullen

Strategic investment in grocery store with indoor farmers market feel

“In April, we announced a strategic investment in Lucky’s Market, a specialty grocery store chain focused on natural, organic and locally-grown products currently operating in 22 locations. We invested in Lucky’s because of their great people and unique go-to-market strategy, which includes smaller format stores that resemble an indoor farmers market, plus a culinary department that showcases amazingly restaurant-quality prepared foods. Lucky’s approach is very much aligned with our efforts to provide affordable, fresh organic and natural foods as part of our Customer 1st Strategy. We expect to learn a lot from each other.”

We had expected inflation to start picking up some but it just didn’t

“on inflation; inflation, we had expected that it would start picking up some. And when we look going forward, we just don’t see that picking up. If you look at so far this quarter, we’re inside the range, just slightly below the midpoint of the range of the 2.5% to 3.5%. ”

People are trading up but tough to say if driven by economy or price

“There is no doubt that you see people like in beef, buying more beef, things like that. So, those things are definitely happening. But some of those prices are the best prices that customers would have seen in, I want to say, almost three years, just reflecting back. So how much of it is driven because of economy and how much of it’s just driven because it is a great — it’s a good value, again, given the changes in price.”

Mike Schlotman

There’s a lot going on in the macro

I think Rodney touched, there is clearly a lot going on out there, the macro environment, there is the inflation and deflation, there is gas retails were rising during the quarter. It was an interesting quarter because there are so many unusual things out there. Our own comparisons to a lot of like Rodney said, the Super Bowl this year, then the weather, then Memorial Day moving. As Rodney said, the cadence of ID sales was really a little bit all over the board, depending on the week you’re looking at. ”

We purposely manage DB to be underfunded because interest rates will go up at some point

” So, we purposely manage that to be slightly underfunded — to be underfunded because someday rates will go up. And I don’t want to put a bunch of money in now and then wake up in five years and have the fund be overfunded because I can’t do anything with it.”

Would have expected to see inflation but haven’t

“we would have expected to start seeing a little bit more inflation right now than when we were sitting here three or four months ago thinking about it. And it just hasn’t happened. And as I sit here today, it certainly doesn’t feel like we are going to have the pickup in overall food inflation. Milk would have been projected to start having some cost increases but the federal market order on milk isn’t showing any upward trend or not any significant upward trend. So, I think we are going to wind up most of the year in a fairly low inflationary environment.”

We’re seeing price led not demand driven inflation

” everything we’re seeing is really price led deflation, not demand driven”