Kroger 4Q15 Earnings Call Notes

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W. Rodney McMullen – Chairman & Chief Executive Officer

Customers continue to spend with us

“Looking at the economy and customer shopping behavior during 2015, we noticed that customer sentiment held relatively stable throughout the year versus previous years in which their attitudes were more volatile. In the past few months, we’ve seen the top economic concerns shift from rising healthcare costs to the stock market. Customers have more disposable income as a result of significantly lower fuel prices, yet economic uncertainty remains, which typically causes people to cut back on discretionary spending. That said, an interesting insight is that our customers continue to spend with us. If you look at some of our high quality offerings, such as Murray’s Cheese, Private Selection, Starbucks and Boar’s Head, or at the strength of our wine and craft beer business, it is clear that customers across all demographics want a great food experience. ”

Working on making a seamless experience for customer

“When you look at long term and if you look at several of the changes we’ve made over the last couple of years, it is really merging with people that have expertise in some of those areas so that we could bring that within Kroger. And what we’re really working hard on, and I mentioned it in my comments, is trying to create it where it’s a seamless experience for our customer. By no means do I think we have arrived, but what we’re finding is some customers like to engage with us multiple ways and we’re really striving to make sure that we have a model where we can let the customer decide how they want to engage with us versus us deciding that. So it’s an exciting time to be in the industry. There is no doubt there’s a lot of change going on and the changes that we have been making over the last couple of years we feel really good about positioning us to address where the customer is headed versus where they’ve been”

We like learning from the success of acquired companies

“One of the things that we loved about merging with Roundy’s was, as everybody knows, that we were looking at going into a new market. By merging with Roundy’s, it allowed us to go into Chicago with a business that Mariano’s has done a phenomenal job on connecting with customers, and their market share is in the low teens. And they entered that market in 2010. So, we felt like we could learn a lot, plus we started out a position of strength because of the success they have had.”

J. Michael Schlotman – Chief Financial Officer & Executive Vice President

Volumes continue to hold up well

“Our volume continues to hold up very well, Scott. When you look at even coming into this year, when you look at shipments, case shipments out of our warehouses to replenish our stores, it remains very, very strong”

The deflation isn’t bad deflation

“If you go back to the commentary I had on the meat department, some of the categories, as we say, it’s good deflation because we’re getting back to retail price points where the customers can buy a lot more of that product. And while for the time being it’s a slight headwind to sales when you just look at the top line, with the number of units we’re selling at a good gross profit dollar rate per item, we’re generating significantly more gross profit dollars.”

Meat was deflationary but produce was actually a little inflationary

“the meat department was deflationary, deli was deflationary, seafood was deflationary. Grocery was a little bit inflationary. So it’s a mixed bag overall. And as Rodney said – if you look at produce, it was actually inflationary. So, produce has been all over the map this year, deflationary in the first two quarters, about flat in the third quarter and now inflationary”

Very few weather events this year

“When you look at the quarter to date, it is – Super Bowl selling was great but almost every week or really every day when we get ID sales, it seems there’s some geography that was up against weather last year and no weather this year. That’s going to flesh itself out. Those things happen occasionally. It’s our job to manage through it. “