Kroger Co Earnings Call Insights: Quarterly Guidance Outlook and Sales Analysis

Kroger Co (NYSE:KR) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Quarterly Guidance Outlook

John Heinbockel – Guggenheim Securities: Couple of things. First, did the first quarter come in a little bit better than you guys have planned? In light of sort of the quarterly breakdown, Mike, you’d given on the last call, if that’s true, what may have driven the upside in your mind? Then I know on the last call, Mike, you’d also – you talked about the second and third quarter being up toward the high-end of your long-term range. Are those still about right or has anything changed there?

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J. Michael Schlotman – SVP and CFO: The second and third quarter guidance would remain unchanged and then we didn’t call that out into prepared comments. I focused only on the fourth quarter just to make sure everybody remembered that’s what we said about the fourth quarter. Relative to the first quarter, yes, it came out a little better than we expected. Sales were a little stronger than we had anticipated at the beginning of the year, so I would say it was primarily a sales-driven beat in the first quarter as just well as great execution at store level from a cost control standpoint as well.

John Heinbockel – Guggenheim Securities: And then secondly, as you think about market share, maybe for Dave and Rodney, when you think about market share and we gave the Fort Wayne example, have you yet had a market – and I’m not sure if it would be Cincinnati or Denver or one of those, a market where you’ve not been able to increase share, you’ve had a natural ceiling, and then when you think about the incremental margin attached to that, does that – as you get to certain points of share, whether it be 30 or 35 or whatever, does the incremental margin sort of step up, up to a certain point and then flatten out, or how do you think about the economics of that?

David B. Dillon – Chairman and CEO: Well, I’m sure there is some point of diminishing returns, but I don’t think we found it yet. And I think we’re pleased that at any of the historical references we would have to look at market share, we’re not going to (indiscernible) specific markets in that regard. But we have plenty of examples, some of which you’ve already listed, that illustrate well how that strategy will work. Rodney, you want to add anything to that?

W. Rodney McMullen – President and COO: The only think I would add is one of the things that we continue to expand some of the things we offer in a market too. So, if you look at the core grocery business, you may start getting a cap there or a diminishing return. But one of the things that we’ve had, and we’ve had very good results that help our return on investment is expanding some of the things we’re offering. So – and some of the markets that you gave examples of, if you look at our marketplace store, we’re finding we’re getting good returns by expanding what we offer to the customer.

David B. Dillon – Chairman and CEO: That’s a really good point, because it is a dynamic marketplace, and things will change over time. And even when you think you’ve hit a peak, you just push yourself to find additional either products or services or remodel the stores or approach the stores differently, and it’s a dynamic place.

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W. Rodney McMullen – President and COO: And every time we do an investment project, we look at the incremental effect that it has on surrounding stores to make sure that their incremental return is there. And so it becomes store-specific on each individual investment decision.

John Heinbockel – Guggenheim Securities: But I guess, you haven’t hit a peak yet in share as far as you can tell in any market, right?

W. Rodney McMullen – President and COO: Not that we can tell.

Sales Analysis

Meredith Adler – Barclays Capital: I would like to just understand a little bit your sales guidance. You’re still maintaining the 2.5% to 3.5%, although you hit close to the high end. And I would have thought that generics would have been a particularly negative impact on the first quarter, probably even now the whole first half, and then, I think fuel prices were down a little bit. So, are you being just very conservative, or is there something about sales for the next three quarters that make you believe that you’ll stay no more than this range?

J. Michael Schlotman – SVP and CFO: It’s really just so early in the year and just having a fourth of the year over with, obviously, so far we’re very pleased with our sales. We continue to strive to be in the top part of that range. We continue to strive to be there. But I would say the biggest thing is it’s just early in the year and it felt too early to change guidance on that, given all the uncertainty that’s going on in the marketplace.

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Meredith Adler – Barclays Capital: I guess I just would like to ask a little bit about inflation. 1.7 is not accessibly moderate number. I don’t know what the trends have looked like. A concern often is that if inflation gets to be moderate enough, some retailers could end up with negative comps and you could see a heightening of the competitive environment. Are you seeing anything like that anywhere? Is there any reason to be concerned about that?

David B. Dillon – Chairman and CEO: Meredith, I’ll have Mike maybe comment on inflation, and then Rodney on the competitive environment. The inflation we saw in the first quarter was very similar to what you saw in the fourth quarter, and (indiscernible) is a little push and take and what pharmacy (indiscernible). It was very similar and quite moderate. So you want to comment on where you see inflation, anything else you want to add, Mike?

J. Michael Schlotman – SVP and CFO: No, I think inflation in the first quarter is about where we expected it to be, and it’s essentially in line with what we baked into our expectations for the year. Certainly from a competitive standpoint, we don’t see huge changes. As you know, we always try to make sure we stay flexible with competitive changes as they happen, but so far we haven’t seen really any change going on.

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Meredith Adler – Barclays Capital: I guess my just one other question would be about your investments in new stores in maybe new markets or adjacent markets. Is there anything in terms of what’s happening with competitors or the real estate markets that make you feel better or worse about the ability to generate a good return from those new investments.

David B. Dillon – Chairman and CEO: I think the decision more rides upon our confidence in what we’re doing. And I think it’s somewhat independent. I mean I suppose there are some outside factors that could cause you go a different direction, but more than anything, it’s really focused on what we do well and what we have confidence that we can continue to do well.

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