Kroger 3Q Earnings Conference Call: Inflation and Tactical Adjustments

The Kroger Co. (NYSE:KR) reported its third quarter earnings and in its subsequent conference call, we thought you’d be interested in the following topics of discussion.

Inflation and Tactical Adjustments

Deborah Weinswig – Citi asked: You talked about the inflation in the economy having a more negative impact than expected and that you’ve made tactical adjustments. Could maybe enlighten us and expand on those?

David B. Dillon – Chairman and CEO responded: The point really is to look at what’s happening with our customers.

We knew all along in the year that the real issue would be how does the operating world that our customers find themselves in, the macro environment that affects everyone, how will that affect us.

What has happened is the intersection of inflation,which means higher prices for the customer, and a poor economy,which means the customer doesn’t have as much money in their pocket–those two factors together have caused Kroger and I think elsewhere and many of the CPG companies, as retail prices have gone up, tonnage.

The growth in tonnage has declined a bit to where tonnage last quarter was essentially flat. We think that’s essentially a sign of our times, and it’s because when customers have to spend more money to get the groceries they need, they don’t have money to buy more groceries than they were buying before. So, it’s hard to keep the business growing in tonnage in that kind of environment.

If I looked at any issue in the quarter, to me that’s the macro issue that all of us are trying to deal with. The really good news and what I am most pleased about is, that even in the face of that, we ended up growing households; we ended up growing our business; we ended up growing our earnings per share.

We’re thrilled by that outcome and we’re thrilled in that environment that our strategy has produced such solid results.

Weinswig followed up: As we look down the road, what are you hearing from suppliers in terms of cost inflation? How do you think about 2012?

J. Michael Schlotman – SVP and CFO responded: I think in the first half we would expect inflation to continue close to where it is today.

Keep in mind, we didn’t really start to see a huge uptick in inflation until late in the second quarter and that’s obviously continued in the third quarter. It kind of grew throughout the first half of the year. We’ll be lapping that when we get into 2012.

If you look at basic commodities, corn and wheat are down a little but it’s still well above the five-year moving average. I don’t think there has been enough movement in those to actually think about having price declines, but I think there could be price stabilization when we get to the back half of 2012.