Kroger 2Q17 Earnings Call Notes

Rodney McMullin

We’re doubling down on digital

“we’re doubling down on digital; and we’re leveraging new and ongoing partnerships to deepen our connection with customers and drive revenue.”

Really too soon to say any impact of the Amazon WFM purchase

“In terms of the impact, obviously, it’s way early, but there isn’t anything that would cause you to develop any point of view at all, in terms of changing trends, but it’s only been a week and a half. So, I would caveat it a million different ways.”

Private label plant is currently operating at capacity

“In terms of our plant capacity, if you asked our manufacturing team, they would probably tell you they’re at almost capacity. I’ve always found and we’ve always found that we always figure out ways to produce incremental product and do it very efficiently. So, in terms of capacity, it is one of the great things about knowing how to operate plants, we could easily expand capacity, either through process change or additional expanding plants, things like that, whether is needed.”

Customers look for total experience

“The biggest thing that the 84.51° insight shows us is the customer decides where to shop based on their total experience. And obviously that total experience is what’s the shopping environment like, so what’s how the associates treat the customer. What kind of rewards do you have, what type of personalized offers are you making, which is very hard for anybody to see that other than each one of us as a customer individually. And then, obviously from fresh product standpoint having great produce, meat, deli, dinner tonight, these kind of things. So, the thing that’s really important is the all of that together, the price, the specific price items, really each one of us would have different items that are in our biggest hot button.”

Mike Schlotman

Have product cost inflation for the first time since 2015

“Another positive sign is that we had overall product cost inflation for the first time since 2015. As you know, the change from inflation to deflation and back again is one of the toughest environments to operate in for our stores, and we’re proud of our team’s ability to manage through it.”

Kroger 1Q17 Earnings Call Notes

Rodney McMullen – Chairman and Chief Executive Officer

We think we have the scale to compete with Amazon

“From everything – from our perspective, we would have plenty of scale and certainly $115 billion revenue Company, we would have the scale. The other thing is, if you look at like our own brands, the strength of our own brands and the strength of the experience the customers enjoy, all those things obviously add to that scale as well.”

Michael Schlotman

Increase starting wages

“As Rodney outlined earlier we’ve made conscious decisions to increase starting wages in certain markets to improve associate engagement and retention that will create a better experience for our customers. We continued invest and grow our digital business. Our digital revenue more than doubled in the first quarter compared to last year. This includes revenue from ClickList, Harris Teeter’s ExpressLane and Vitacost.com.”

Deflationary environment was less severe

“The deflationary environment was less severe in the first quarter compared to the fourth quarter, coming in at 20 basis points deflationary without fuel. Grocery was essentially flat during the quarter but had fluctuations up and down during it. Meat continued its deflationary trends. And produce, while deflationary for the quarter, showed inflation in the last four weeks of the first quarter and pharmacy was inflationary.”

Transition from deflation to inflation creates challenging environment

” there is a lot of change in the retail food industry. That, coupled with the transition from deflation to inflation creates a challenging operating environment.”

We don think there could be a little more inflation than we originally thought

“We do think there could be a little more inflation by the end of the year than we originally thought”

Whole Foods FY 2Q17 Earnings Call Notes

John P. Mackey – Whole Foods Market, Inc.

Rethinking labor scheduling

“I mean, the main thing we’re going to do be doing is we’re going to be rethinking the way we do our labor scheduling. I mean, Whole Foods Market is in the early stages of labor scheduling technology and where we’ve applied it so far, it’s been amazingly successful with getting the right people, the right number of hours scheduled in, say our customer service area. As we extend that through the whole company, we can get, we think we can upgrade our service while significantly reducing our cost. So that’s going to be one of the major initiatives that we think is going to help reduce our labor cost in our stores, not through laying people off, but just through attrition over time and the appropriate scheduling.”

Gabrielle Sulzberger – Whole Foods Market, Inc.

Five new directors to the board

“First, Ken Hicks. Ken brings an impressive record of successful leadership at Foot Locker and other companies in the retail sector. As the former Chairman, President, and CEO of Foot Locker, he is credited with developing and executing a highly successful turnaround plan. Joe Mansueto is the Founder and Executive Chairman of Morningstar. Joe grew Morningstar from a start-up to a global organization that is one of the most recognized and trusted names in the investment industry. Sharon McCollam is the former CFO of Best Buy and Williams-Sonoma. Sharon has more than two decades of experience as a senior leader in the retail industry. Scott Powers brings an important long-term shareholder perspective to the board. Scott was the President and CEO of State Street Global Advisors and brings decades of experience engaging with the investing community. And finally, Ron Shaich. Ron is the Co-Founder, Chairman, and CEO of Panera Bread Company. The results during Ron’s tenure have been impressive, with Panera delivering total shareholder return of more than 5,000%.”

UNFI FY 2Q17 Earnings Call Notes

Steven Spinner – Chairman and Chief Executive Officer

Ongoing challenges faced by deflation

“And while we are encouraged by these initiatives, we also have to acknowledge the ongoing challenges facing our industry. Our customers are facing a difficult retail environment due to deflation and increased competition. We view deflation as cyclical, inflation will come back at some point but while it’s here, it’s leading to some very real challenges for us and our retail customers. Many of our broadline customer contracts are on a cost plus basis, so when we have less inflation or deflation, the gross profit dollars we generate for case is lower.”

Outlook incorporates little to no improvement in inflation

“We believe our outlook incorporates the ongoing industry challenges, including heightened competition and little to no meaningful improvement in inflation. But at the same time, it reflects our continued commitment and confidence in our strategic initiatives, strength in our new customer pipeline and growth opportunities with our retail partners.”

Deflation is cyclical

“Well Eric, the issue that we have and it is cyclical. I mean obviously it is not going to last forever is that the produce deflation got worse in the second quarter than it was in the first. And so, in the produce world, as the product deflates we still incur the same amount of cost to get the products from the DCs into the retailers. Yes, we have considerably less gross margin to cover the cost. And so, it is a short term issue, and misery loves company; everybody has got the same problem. As far as when it’s going to cycle through, your guess is as good as mine, the only thing I would say is we have a high degree of confidence that is not going to be forever, it will turn but we are just not sure when.”

Would rather buy companies doing well than struggling

“Yes I mean that’s true. I think the challenge for us is we typically don’t like to acquire turnarounds or companies that are financially troubled. We’d rather pay a fair price for a company that’s doing well than a very inexpensive price for a company that’s not doing well. Now the exception to that might be a company that’s recently struggling, that’s small that we can close and put into one of our existing distribution centers but generally we would acquire the healthy companies first.”

Increasingly doing direct to consumer fulfillment for customers

“Yes actually you are right in that we can’t sell direct to consumers as UNFI one of our fastest growing platforms to sell direct to consumers on behalf of our retailers. So essentially becoming the endless aisle for a retail partner where they are looking to expand their product offering to their consumers, we are doing that today, it’s just the consumer doesn’t know that we exist. We’re just doing the back-of-the-house fulfillment. We have a network of e-commerce fulfillment centers across the country. We’re adding to it, so that we get it to our customers in the most efficient and cost-effective manner. So we’re investing in e-commerce’s platform and we certainly spend a lot of time with some of the larger e-commerce providers to ensure that we have – we’re have were giving them access to all of the fresh and vitamin supplements in center store gluten-free organic et cetera as we possibly can. ”

Michael Zechmeister

Inflation outlook is lower

Yes and Steve, this is Mike. You asked a little bit about forward looking. It’s often difficult to forecast where deflation or inflation is going, but we would say the outlook for the remainder of the year would be in the range of minus 0.5% to plus 0.5% which is down about 25 basis points from where we were thinking last quarter

Kroger 4Q16 Earnings Call Notes

Rodney McMullen

Competitors are running better stores, don’t think we’re losing share to online

“If you look at from a competitive environment, most of the changes that we would see is competitors running better stores. I don’t think there’s any doubt that they are, most of you and lot others have read about it. Certainly, it wouldn’t – there isn’t anything that would show that it’s going to online at all. So it would be more driven by some of the competitors running better stores versus other aspects. I don’t Mike anything you’d want to add to that.”

The next five years are more competitive than the last

“‘ve been around for 30-some years and I always would tell you that we’ve always felt that the next five years are going to be more competitive than the last five. I would definitely agree with that comment today. We definitely believe the next five will be more competitive than the last five because only the strong survive.”

Mike Schlotman

Reeturn to a slightly inflationary environment in the back half of the year

I think you’re doing what a lot of people do including this morning when I was on CNBC of mixing inflation and deflation at cost and retail. When we talk about our inflation or deflation it’s our product cost inflation or deflation. You kind of through and what’s going to happen to retail product cost inflation or deflation. And overall, we do think that we will return to a slightly inflationary environment in the back half of the year. It is interesting to note that despite the fact that we pretty much add, I think Rodney was talking before with one of the callers, nine quarters in a row of deflation, declining inflation/deflation. I’ll be there inflation coming down or actual deflation, it’s nine straight quarters now but that trend volume would be down.

Whole Foods FY 1Q17 Earnings Call Notes

John P. Mackey

Setting a new strategic direction

“Thank you, Cindy. Good afternoon, everyone. As we have announced today, we are setting a new strategic direction for Whole Foods Market in order to deliver improved performance and higher returns over the long-term.”

Don’t want to be in a race to the bottom

“What has become clear is that we don’t want to compete in a race to the bottom as consumers have ever-increasing choices for how much and where they shop. Through our affinity work, we know that our core customers represent our largest customer segment and account for a majority of our sales. They are dedicated to the high-quality, fresh, healthy foods, and transparency that we offer”

Focus on serving our core customer

“While they are already highly engaged with our brand, there is still significant opportunity for growth. And if these customers add just one more item per trip, the sales potential is significantly greater than with any other segment. Going forward, Whole Foods Market will focus on serving this growing niche of customers better than ever before.”

No longer have a goal of 1200 stores

“We will continue to grow, but no longer have a goal of 1,200-plus stores. We remain optimistic about the future growth potential for our 365 format but want to see how this next round of stores perform before getting more aggressive. As we work to position Whole Foods Market for long-term success, we have carefully evaluated our portfolio of stores and have made the difficult but prudent decision to close nine stores in the second quarter.”

Going to be focused on being a more disciplined growth company

“That’s a lot of questions, and so we’ll try to take them. First, this does not mean we’re stopping growth. First of all, we’ve got 80-some-odd stores in our pipeline at this point, so we’ve got a number of stores that are queued up to open. So we’re going to continue to move through those stores. We’re probably going to moderate the number of future lease signings that you see. We are – part of the reset that Whole Foods is talking about today is that we’re going to continue to grow, but we’re going to be, I think, a more disciplined growth company than we’ve been in the past. We are going to focus a little bit less on growth and a lot more on getting our comps increasing and getting – and focused on increasing our EBITDA, our returns on invested capital, and our free cash flow.”

Change in the competitive landscape

“we were ignored for most of our history. Nobody paid any attention to us. And – but we continued to expand and grow and we got more and more successful, and then kind of the conventional supermarkets, they were – I think they were really pre-occupied with Walmart, and trying to be competitive with Walmart for a long time. And then I think they began to pay more attention to Whole Foods Market and they began to pick up more of our products. They began to study it in a more systematic fashion, and particularly as they began to see their customers begin to migrate over to doing more and more shopping with Whole Foods Market. So what it means for us is that in a lot of ways, the more conventional mainstream supermarkets have upped their game. They’ve picked up more of their products. And that has slowed the erosion of some of their business that was heading towards Whole Foods Market. One of the things that we’ve noticed, for example – and it’s also given people a good enough alternative in some cases. So one of the things we’ve noticed, for example, is that many of our stores where people used to drive long distances on the weekends and do big shops, we’re seeing a little bit of a decline on that. We’re not getting as much – some of our comp deceleration has been particularly on the weekends. We’re not getting as many people coming in on the weekends buying as bigger baskets. And we conclude that’s partly because the competitive alternatives mean people aren’t coming to us as frequently as they did previously.”

Doubling down on our core customer

“But the thing is, is that we still see that our core customer, the Whole Foodie customer, the person that’s really, really dedicated to Whole Foods Market, they are still coming to us. And so, part of what our strategy here is, is to – we’re going to double down on focusing on our best customers. We are going to create more value for them than we’ve ever created for them. “

Supervalu FY 3Q17 Earnings Call Notes

SUPERVALU’s (SVU) CEO Mark Gross on Q3 2017 Results

Challenges

” we, not unlike others in the food industry, continue to be challenged by an environment that includes competitive openings, deflation and lower levels of SNAP benefits.”

Lots of competition

“What I would lean into in terms of these retail banners is we have an unprecedented amount of new competition among our five banners. We are between two-thirds and 70% of all of our stores have been competitively impacted, which has a significant impact on our IDs. We obviously look at our IDs in a number of ways. One of which is how our stores are competing when they are not being competitively impacted and I can tell you that they are significantly better from a trend perspective”…

“Yes. So, we have historically had in the Minneapolis and Twin Cities market, we have had a host of competitors, some of whom we actually supply, but I think the new – there is a number of new entrants into the Twin Cities. One is a smaller hard discount retailer, but they are opening stores here and then we have another larger competitor from the Midwest that’s recently opened stores and in fact, they opened I think it’s about 5 stores this past calendar year. They are expecting to open more in this current calendar year and probably beyond that and they are very good competitors. So, that would be an example of some competitors coming into the Twin Cities markets. There are additional competitors going into Farm Fresh, hard discount competitors have begun opening stores there. And then there is the usual suspects across all of the banners, in some cases, there is the national competitors like Safeway and Kroger and so on that continue to open stores.”

E-commerce skew higher private label

“It’s a lot of things. I mean, it’s just a little color. They are bigger, they are more frequent and they also skew higher on our private label assortment that it really goes to the loyalty of that shopper. So, it’s a piece that we need to continue to examine and work with.”

Bruce Besanko

Bigger baskets for e-commerce customers

“Yes, our experience so far with these e-commerce – our e-commerce customers is that they have – they buy more, they have bigger baskets and they shop more often. So, it’s a nice story here and we need to – we are working to roll this thing out rapidly. I think our intent is to have an e-commerce solution in each of our five banners by the end of this year and then the continued investment into our new fiscal year.

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.”

Whole Foods FY 4Q16 Earnings Call Notes

Whole Foods Market (WFM) Q4 2016 Results
John Mackey

Expecting EPS of $1.42 in 2017

“Turning to our outlook for fiscal year 2017, we expect sales growth of 2.5% to 4.5% and earnings per share, excluding potential future buybacks of $1.42 or greater.”

365 results have been mixed

“We just still think it’s really too early to give long-term projections on 365. Our results have been a little bit mixed. Some of the results have then absolutely blown us away and others have been a little bit less than we had hoped for. So we’re still incredibly bullish. We’ve got 19 stores in development and we’re evolving the 365 concept. David said we’re in a pause right now, so when we open our fourth store, it’s going to be kind of 365 2.0 and we’re taking the things that have worked better and we’re putting more capital into them. Things that haven’t worked, we’re phasing out and so I think the – our next store opens in Cedar Park, is that correct? We’re opening our next store in Austin.”

It’s a very competitive environment

“yes, maybe a little bit but it’s a very tough market out there. There’s a lot of – I mean if you think about it, you not only have strong conventional supermarkets like Kroger and H-E-B and Wegmans, but you’ve also now got more of the discount natural food operators like Sprouts and Fresh Thyme and Lucky’s and they’re all growing. And then you’ve got more delivery fresh stuff like Amazon, and then you’ve got these meal kit operators like Blue Apron and HelloFresh and Plated. And so it’s a very competitive market out there. And I like Whole Foods’ positioning. I like our positioning frankly better than anybody else’s, but I think everybody’s feeling it. You’ve got this macro environment of deflation that people are trying to deal with plus competition everywhere. Everybody’s feeling that. I’m seeing everybody’s comps go down everywhere. And it’s just a very competitive environment. ”

A little Ulysses S Grant

“Thanks. It makes me remember a famous quote from the Civil War when Ulysses S. Grant took over the Union Army. He was always getting criticized. He was always hearing from his generals about what Robert E. Lee was going to do. Robert E. Lee is doing this. What are you going to do about that? And one day Grant said, you know, I’m so sick and tired of hearing what Lee is going to do. Well, Lee needs to worry about what we’re going to do. And I think that’s how I feel about our competitors. They need to worry about what Whole Foods is going to do.”

Walter Robb – Whole Foods Market, Inc.

Robb stepping down

This is Walter, and how about them earnings. But I would say, I’ve also been here a few years and I think that – I think we have – life’s not a straight line, but I think we have as a team, John and I and the team here that’s around the table, we have really worked hard the last year to work through kind of the changes of the environment, the structural changes in retail. And I think you all know we’ve gone here or we’ve gone there trying to figure out exactly the right places to land. I think you can see in the coherence of the script today how it’s really come together in a very thoughtful and strategic manner in terms of how we go forward.

Glenda Jane Flanagan – Whole Foods Market, Inc.

CFO leaving

This is Glenda. I’ll go first. For me, I’ve been with Whole Foods or I will have been with Whole Foods 29 years next year when I retire. I’ll turn 63 this year, so that’s almost half of my life. It just feels like time for me and excited about the opportunity to be here and assist with the thorough search for a new CFO and have plenty of time for a smooth transition. So we will probably start the search process sometime in January.

A.C. Gallo – Whole Foods Market, Inc.

Going to be more strategic with our price investments

Hi, Kelly, A.C. here. As John just mentioned a few minutes ago, we want to be a lot more strategic with our price investments. We realized two things over this past year. One is that our customers really are – the most important thing for us is to maintaining quality both in our products and our experience. So it’s very clear that we’re not going to lower our quality in order to get lower pricing. The second thing that we realize is that we do a lot better with our promotional activity than just lowering regular pricing. So we have maintained our – as I said earlier, we’re going to continue to really push our promotional activity.

UNFI FY 4Q16 Earnings Call Notes

United Natural Foods’ (UNFI) CEO Steven Spinner on Q4 2016 Results

Still challenging food retail environment in fiscal 2017

“Before I turn the call over to Mike to discuss the financials, I just want to comment on some of the headlines in recent weeks. Some of our publically traded food retailers have recently commented that they are experiencing slower same-store sales trends and ongoing pressure from food deflation. We believe our guidance for fiscal 2017 incorporates a still challenging and difficult food retail environment as well as little to no inflation. However, as always, we are intently watching and listening to our customers.”

A deflationary environment works against us

” as a distributor, that’s primarily cost plus. The math works against us, when we don’t have 3% inflation, right? So, 3% inflation we passed it through, and the math works in our favor because we’re using percentages. So, we’re delivering the same case, we can have a little bit more margin, where we have no inflation, it’s a little harder. We still have to ship the same case and it still costs us the same, we’re just generating less margin. If I may also that, when we’re in periods of high product cost inflation, our opportunity from a buy side, from a purchasing side, from an inventory optimization side improves and so we have incremental gross margin gains as a result of forward buying against those product cost increases.”

It’s hyper competitive at the shelf

” I think kind of we’re all seeing the same thing. It’s hyper competitive at the shelf, I think from what we read is the same thing you read, the retailers are feeling the same pinch on – in terms of their margin structure, certainly some of the retailers are talking about reduction in basket size and obviously that same kind of pressure ultimately finds our way to us. So, the one side of it is, misery loves company, the other side of it is, the tide has to arrive at some point. ”

Still considerable demand for organic products but many many more outlets

“There’s still considerable demand for the products across center store and [ph] Brenner, it’s just being dispersed over a much wider approach. So, there’s many, many, many, many more outlets by the same product.”

Sean Griffin

Shoot for 85% capacity utilization

So, what we’re looking for, from a utilization perspective out of our network that we believe is optimum is in the range of approximately 85% capacity. It’s our best perspective around productivity and service, as well as giving us some flex around new customer wins. So, today with the addition of Gilroy, our capacity is in the mid-70s. So, you can kind of do the modeling between mid-70s to 85% based upon FY 2017’s revenue guidance to sort of come up with our opportunity to add business without doing any further expansions.