Kroger 3Q16 Earnings Call Notes

The Kroger’s (KR) CEO Rodney McMullen on Q3 2016 Results

Deflation persisted and deflation is tough

“As expected, deflation persisted during the third quarter. And as we’ve said before, transition periods create a difficult operating environment. This is the third time we’ve had deflation in 30 years. And in previous instances, deflation lasted from three to five quarters in a row. We’re in the middle of the cycle right now and it’s not fun, still our tonnage continues to grow, our total market share continues to expand, and we’re focused on executing our strategy.”

Consumers telling us they expect the environment to get worse, but that was in October

“Looking at the broader economy and the customer shopping behavior, what we’re seeing is mixed. Typically, our data shows our customers economic concerns mirror what they see in the headlines. For example, healthcare cost continue to be a worry for customers. Consumer confidence retreated during the quarter, with customers telling us they expect the economy to get worse in the next three months. It’s important to remember, this survey was completed in October and it’s too early to say what the mood of our customers is since then.”

Some of the raw materials prices are trending higher, but that will take some time to affect retail pricing

“Yes, what I was going through on CNBC is where some of the raw material markets are trending over the last four weeks. A lot of those when you look at them on year-on-year, they’re still quite negative. But there’s some trend in some of those categories, the input cost over the last four weeks, but still down on the prior year. Milk and cheese looks like, it may be bottoming, but that doesn’t mean things turnaround on a dime as raw material input cost change. There’s usually a lag from that bottom and a slight blip up in those costs until you start to see any effect on retail pricing. So we would expect this to persist. ”

We’re seeing broader competition,but not every customer wants a box of stuff sitting at their door all day

“In terms of, at our Analyst Day, we increasingly see competition much broader than we would have in the past. And we’re really focused on how do we give the customer what they want, when they want it in a way they want it. And Amazon is one way of doing that, but not every customer wants to have 10 boxes of stuff setting in front of their door all day. What we find is a lot of customers love having groceries picked – picking it up, and we’re starting to test, obviously, we’re partnering with third parties to deliver. So, for us, we’re really focused on the customer and letting the customer to decide how to engage and doing it in a way that’s seamless.”

This deflation cycle is more reminiscent of 2002

“Well, the bigger picture is that, it probably looks the most like the one in 2002, that one really, it was about five quarters. And if you look at when it was the worst just in the middle of it and that’s kind of where we are. Part of it will – part of it determines why – I’m trying to think about how to word this in a way that’s helpful…If you look at 2002, it was more supply-driven, because there was a lot of supply in the market. Unless, there would just be a terrible crop year in 2017, we would expect this to look much more like 2002. Remember, once and Mike talked about it a little bit like on dairy, if you have $3 a gallon milk and it goes to $2 a gallon milk, when you cycle that to next year and if milk is still at $2 a gallon, you’re cycling $2 on $2 versus $2 on $3, and that’s the reason why the pressures decreases.”