Kroger Co Earnings Call Insights: Under-Indexing and Share Gains Outlook

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

Under-Indexing

John Heinbockel – Guggenheim Securities: So, guys, two things. One, when you look at that 50% share of loyal households when you talk to those customers and get a sense of why they are not spending a larger piece with you, what do you typically hear from them? And then secondly, I know you don’t want to get too much detailed here but where do you think there are particular opportunities where you’re way under-indexing with those loyal customers in certain product categories?

W. Rodney McMullen – President and COO: If you look at why they are not shopping with us, it’s kind of interesting, when we talk to them, they’ll tell us they are giving us more business than they give us. And it’s really a mixture of two things; one, things that they don’t put on their Kroger list and they just for the last several years have put it on another retailer list. And the other part would be when they are out taking their kids to soccer practice or some other type of event, they’ll just stop by and pick up a few items somewhere else, in most times, people pick up a few extra things. The big opportunities, the easiest way to answer it, there are certain categories where we’ve significantly improved what we offer from a variety and a price standpoint that those customers don’t realize that we’ve changed and it really is trying to make sure that customers realize the improvements that we’ve made, would be the biggest opportunities that I could answer your question without giving a tremendous amount of detail. Obviously, there’s a lot of detail behind that statement.

John Heinbockel – Guggenheim Securities: But is it safe to say that the things that they might think of first at another retailer whether it’d be paper, cleaning, HBA, I would think those roll areas where you probably under-index as opposed to food, correct?

W. Rodney McMullen – President and COO: That would be correct. Anything that’s not food related we would probably under-index on…

John Heinbockel – Guggenheim Securities: Then, secondly, because I know you guys like to try to appear around the corner a little bit. What’s the current take, because I know you’ve been a little bit skeptical about the whole food eCommerce channel, do you think that that will ultimately be – maybe not two years from now, but five or 10 years, something people will – it will be more mainstream and something you want to start noodling around with. And if so, do you still think it would more store level pickup, a better option for the consumer ultimately than home delivery, as you think about it?

W. Rodney McMullen – President and COO: We continue to experiment with it as you know in Denver, Colorado and we have for last several years. We have a few customers that are very loyal to it. But it’s modestly growing and that’s modestly grown for a long period of time. We think overtime it will just be one part of the way a customer shops, along with physical assets too. So we don’t think it’s in place of, we think its part of and we’re really focused on trying to deliver something along those lines. One of the things we’re looking forward to merging with Harris Teeter. Harris Teeter has a pickup model in lot of their stores. We don’t have too much – we have a little bit of insight, but it’s very little at this point until we merge because obviously in some markets, we’re in those same markets together. So you don’t have the complete understanding, I mean, how successful it is, but we want to make sure we understand that and what pieces of that makes sense to use in other places.

David B. Dillon – Chairman and CEO: And John, I would add that, we’re thrilled in the meantime at the development of the whole digital world and our customers are engaging with us, everything from the Kroger app to the online work we do, to the downloading of digital coupons, has all been very successful for us.

W. Rodney McMullen – President and COO: It’s kind of exciting, but if you look at our digital app now, it’s one of the top 2% – it’s in the top 2% of downloads off – from Apple.

Share Gains Outlook

Scott Mushkin – Wolfe Research: I had a kind of housekeeping one to start off with. I know you gave us the four quarter rolling on fuel. Did you have it for just this quarter, on fuel penny profit?

W. Rodney McMullen – President and COO: It was higher than the rolling four quarters, go ahead and ask your second question and I’ll get – I don’t have that exact number in front of me, but we’ll get it.

Scott Mushkin – Wolfe Research: Then kind of along what John was asking but maybe asking a little bit different ways, more strategic question, Kroger’s probably been the biggest share gainer in the industry for a long time, I think partly because you’ve just driven the price gaps down with Walmart and then also widened them with some your conventional guys. But you also did a huge amount of service in perishable and merchandising. But, I guess, the question is going forward, how do you envision share gains? Do you think you can keep up the same pace? And what’s going to be the biggest mechanism to drive it?

David B. Dillon – Chairman and CEO: Well, as I mentioned in my own comments, we see this as a sustainable model that continues to build on itself. And I think the most important fact that demonstrates that we believe this can continue for very long time is the fact that roughly half of the business our best customers can give us, they are giving someplace else. And Rodney addressed that in his comments earlier. I think that’s the best evidence now there’s plenty of others evidence too, just the fact that we have 39 quarters in a row of positive identical sales illustrates that there continues to be room to grow. And so we think that the future is still bright and that we see very good opportunity to grow our market share ahead…

J. Michael Schlotman – SVP and CFO: The quarter was $0.17 versus $.164 last year. So while higher, the spread was about the same. So the profit margin per gallon in the quarter was six-tenths higher and the rolling four-quarter is four-tenths higher. So the incremental was not that significantly different even though the absolute number was higher.

Scott Mushkin – Wolfe Research: And then my last question goes to kind in the current environment are you seeing anything different out there as far as your current trends go, but also wanted to talk about – there has been a lot of talk of some changes to food stamp program, some of those are just going to happen and then maybe there’s going to be some further adjustments as we go forward into the fall. So, both current environment and then how you’re thinking about the current environment vis-a-vis some of these changes that may roll through the food stamp program.

David B. Dillon – Chairman and CEO: I’m not sure I followed the first part of your questions about current trends. You are just talking about generally in the economy?

Scott Mushkin – Wolfe Research: Yeah, generally in the economy and I guess your trends. I mean, you’re seeing anything different out of the consumer that led to your comps that you’ve produced this quarter and then as we go forward how are you thinking of your business, particularly on the sales line with the pending cuts?

David B. Dillon – Chairman and CEO: Well, first, as you saw, we moved the lower end of our sales guidance up, which should tell you that we are reasonably confident in what the second half of this year looks like. Sales so far, we have three-and-a-half weeks in this quarter and while that’s hard to predict the whole quarter from that, but they are slightly ahead of where we were for the second quarter. So we’re comfortable with that picture. Rodney described the economy. The way we’re thinking about it is, it’s still quite fragile but continues to improve (and no signs) of improvement are many, so there’s lots of categories and items and in areas that you would say are more kind of discretionary items that people are buying more today than they were before and the growth in areas like apparel and cosmetics and toys and greeting cards, Starbucks, Sushi are all of those areas – natural food, (indiscernible), cheese, prepared meals, all of those doing really well and growing at good pace. Food stamps are still at a reasonably high level. They did kind of plateau for a while, and you could argue right now in the last few weeks anyway that there’s been a slight softening, but it’s still at a very high-level. And so I wouldn’t read too much into that. Your question about food stamps is what happens if those get cut substantially, and I know there’s lots of conversations in the Congress on that topic. We of course don’t know how Congress comes out on that; we don’t know how the states will come out on that. We do know that there’s a reasonably high demand for food stamps. But remember, the food stamp customers also spend some of their own cash on food. That’s not their only source to pay for food with us. And while we have a lot of households that use food stamps, just the fact that we’ve seen some little softening in these last few weeks and you had the sales through the three-and-a-half weeks I’ve just mentioned is a little bit stronger than last quarter. That’s a good sign too, that even in a case where food stamps might get a little softer; we still think we can do quite well in sales. Rodney, do you want to add anything to that?

W. Rodney McMullen – President and COO: No. I mean, it’s something that we certainly look at and we work every day trying to make sure that we give all customers a better value for their money. And if you look at our digital app and everything that we’re doing, we are trying to make sure that we continue the take costs out of business, so we can give the customers a better value for their money. So, hopefully the customer that’s on food stamps would be able to take advantage of many of those opportunities as well.