Kroger Earnings Call Insights: Guidance and Competition

Kroger Co (NYSE:KR) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Guidance

Edward Kelly – Credit Suisse: Just a quick question for you to start on the MEPP benefit. David, talking about guidance that excludes both the Visa, MasterCard settlement as well as MEPP. I don’t remember you saying over prior quarters that the guidance excluded the pension benefit. So, was that new this quarter or it was always excluded?

J. Michael Schlotman – SVP and CFO: No. Just to clarify, this $50 million reduction that happened this quarter, back in January, we took the $900 million plus charge to establish what that obligation was going to be based on the actuaries estimate at that point in time. The actuaries recently finished their final work on exactly what that obligation is and it round up being $50 million less. So it has nothing to do with what the ongoing cost of that plan is, that was the reduction of the charge we took back in January and that won’t repeat itself. It doesn’t have anything to do with the annual cost of that plant.

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Edward Kelly – Credit Suisse: So what happened this quarter is truly one time?

J. Michael Schlotman – SVP and CFO: It was an adjustment to results. Certain people don’t like the use of one time.

Edward Kelly – Credit Suisse: I know, but back in the fourth quarter you talked about $0.04 to $0.06 benefit.

J. Michael Schlotman – SVP and CFO: We’re delivering on that and that’s baked into the numbers and it’s in our run rate. This $50 million is above and beyond that and it was just a true up of what that initial obligation was.

Edward Kelly – Credit Suisse: Then my next question for you is on the gross margin a little bit better this quarter than what I was expecting sequentially, nice improvement and I think lines up pretty well is what you were talking about at the Analyst Day. Could you just maybe give us a little bit of color around the gross margin? I know last quarter 45% of the decline was shrinked for instance, so how did that do – how did you do with non-selling versus selling for instance, could you talk a little bit about that?

W. Rodney McMullen – President and COO: As you know overall, every quarter what we’re trying to do is to balance our improvement in operating costs with a change in gross profit rate, and we continue to be focused on giving our customers a better value than before. So, a change in gross profit rate really is given by lowering prices to our customers and that’s what drove it. And we’re really pleased with the balance that we had in terms of expense reductions. You specifically asked about shrink, shrink is an area where weren’t real pleased with our results, but it actually wasn’t inconsistent with what I expected. And any time when you have swings, large swings from heavy inflation to low inflation, it seems that it affect shrink, and I think a lot of fact last couple of quarters in shrink has been that. I feel good about where are overall. As you know you never want to get so focused on shrink, you hurt yourself and that’s the balance we’re always focused on maintaining.

Edward Kelly – Credit Suisse: So, I mean shrink last quarter hurt you by, I think 19 basis points if we do that 45%, was that impact similar this quarter?

W. Rodney McMullen – President and COO: It wasn’t quite that bad but it wasn’t something we are pleased with.

Edward Kelly – Credit Suisse: Over the next few quarters is that something that would diminish do you thing?

W. Rodney McMullen – President and COO: Certainly, yes. I would certainly expect that it would diminish and what we are trying to do is to make sure we manage it on a progressive and strong basis but not do something that overreacts.

Competition

Tiffany Kaneta – Citigroup: This is (Tiffany Kaneta) from Deborah Weinswig’s team. We’d like to know what are you seeing in terms of the competitive environment and how are you thinking about price investments going forward?

David B. Dillon – Chairman and CEO: The competitive environment, Tiffany, really hasn’t changed. We still see as we have said just about every quarter robust competition about the biggest change what you see is one market to another as one market might improve a little bit and another market get a little tougher but I certainly don’t see it as being harder or difficult today than it was last quarter or easier today than it was less quarter. So I’d say to be very similar. Rodney you want to add anything to that.

W. Rodney McMullen – President and COO: No. I would agree completely.

David B. Dillon – Chairman and CEO: Then on the price area, I think Rodney answered that best when we said that our interest is in having balance between what we save in terms of operating costs and what we spend in terms of gross. We have lots of places we think, additional price investment would give benefit to not only to our customers but would ultimately grow the sales and help the shareholders but we tempered in our approach to try to make sure we have offset those with costs. Do you want to add anything?

W. Rodney McMullen – President and COO: I’m just going to add one other thing Dave and as you know we work a lot with dunnhumby to understand the pricing dollars we have to invest to make sure we invest in places that helps the customers the most and we’ve been doing that for several years and we would continue to work with dunnhumby to help to make sure that it benefits the customer in the best way we can, or for what dollars we do have to invest.

A Closer Look: Kroger Earnings Cheat Sheet>>