Kroger 2Q16 Earnings Call Notes

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Kroger’s (KR) CEO Rodney McMullen on Q2 2016 Results

The environment wont be deflationary forever

” While we expect continued deflation and tough year-over-year comparisons for the remainder of the year and even into early next year, as we know from past experience, the environment won’t be deflationary forever.”

The only certain thing in retail is that it is always changing

“We often say that the only certain thing in retail is that it is always changing. This is certainly true for an ever-shifting customer preferences as well as the overall competitive environment. We believe one of the reasons for our continued success, regardless of the operating conditions or competition, is our ability to generate increasingly sophisticated customer insights.”

Customers are telling us they are less confident in the economy

” Customer insights give us a big advantage in challenging environments like this one. A lot of what we are seeing suggests a gradual tightening of budgets. Our customers tell us they are less confident about the economy now than they were three months ago, and they expect the economy to get worse in the next three months. We are as committed as ever to doing what is right for the customer.”

Consumers perceive that their basket is going up in price even if it isn’t

“The other thing that’s always hard is getting your message out because – it’s fascinating. In a research, most people are saying their basket of goods cost more money, but we, in fact, know that it isn’t. So helping the customer see that is always a challenge for us and our competitors as well. Go ahead, John.”

Wouldn’t say competitors are being irrationally promotional

“I wouldn’t be quite as aggressive on saying people are being irrational because I don’t see anything that is different today than when you go back and look at it over the last year or three years or 5 years. ”

Organics is now more than 10% of our business

“if you look at natural and organics, when we started the journey, natural and organics really wasn’t a critical part of the product strategy. Today, it’s incredibly important. And I don’t know, Mike, it’s probably, what, 10% or a little over 10% of our business when you look at it in total.”

There is some correlation between deflation and promotions

“So both of those would be within the range where we’ve given for the balance of the year. We would certainly expect – typically, you do see a little bit more promotional activity early in inflation cycles just because the competitors think they’re losing share versus the it’s a fact that it’s deflation. And we would certainly include some of those elements in terms of where we expected things to be for the balance of the year. But everything that we can see, ’09 would be the most similar. And if you look at ’09, there were three quarters of deflation. If you go back and actually look at 2002, there are four quarters of deflation”

High prices solve high prices

” historically, I always like to say high prices solve high prices and low prices solve low prices, because capacity will start changing. And if you look at farmers, they’re very smart, and they’ll start producing less of the things where they don’t make money. So historically, that’s what’s caused inflations to swing. And still an awful lot of our business is driven by the commodity markets. If you look at produce, that’s just going to be driven by what’s the growing season and what’s the growing season like. We continue to see good demand.”

Weak consumer comments are based on surveys. Still seeing good growth in discretionary purchases

” If you look at the areas that we would consider discretionary like high-value wine, Boar’s Head, Starbucks, Murray’s Cheese, all of those areas, they continue to have nice growth. The comments I made are more based on the surveys that we — where we survey customers almost every day and the changes in terms of what the customers tell us they anticipate will happen.”

Deflation should cycle just because you’re lapping it

” if you look at how long it lasts, the only insight that I could provide is the comment I made a little earlier. If you go back and look at 2009, it was three quarters. If you go back to 2002, it was four quarters. We’ve had inflation every quarter other than those since the first quarter of 2002 as how far back we went. On terms of moderating, as you get toward the latter part of the year and early next year, you’re starting to cycle the deflation. So I would — certainly, we would guess that it would start to moderate just because you’re starting to cycle some of the deflation”

Mike Schlotman

Year isn’t shaping up as expected but we are well positioned for the long term

“Thanks, Rodney, and good morning, everyone. As Rodney said, we’ve been through periods like this before, and we have the leaders and the strategy to continue delivering value to our customers, associates and shareholders. While the quarter and the year aren’t shaping up the way we expected, we continue to be well positioned for the long term.”