Kroger Co. CEO Discusses Q3 2010 - Earnings Call Transcript
Kroger Company (KR)
Q3 2010 Earnings Call
December 2, 2010 10:00 am ET
Executives
David Dillon – Chairman, Chief Executive Officer
Rodney McMullen – President, Chief Operating Officer
Michael Schlotman – Senior Vice President, Chief Financial Officer
Carin Fike – Director, Investor Relations
Analysts
Susan Anderson – Citigroup
Scott Mushkin – Jefferies & Company
Karen Short – BMO Capital Markets
Robert Ohmes – Bank of America Merrill Lynch
Edward Kelly – Credit Suisse
Charles Cerankosky – Northcoast Research
John Feeney – Janney Capital Markets
Neil Currie - UBS
Presentation
Operator
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Good day ladies and gentlemen and welcome to the Third Quarter 2010 The Kroger Company Earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. If at any time during the call you require audio assistance, please press star followed by zero and we will happy to assist you. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the call over to your host, Carin Fike, Director of Investor Relations. Please go ahead.
Carin Fike
Good morning and thank you for joining us. First I’d like to take a moment to express our thanks to those who came to our investor conference in Cincinnati. It was great to see you there and we hope you enjoyed our meeting, including a presentation by Clive Humby. If you weren’t there, you missed a lot.
Before we begin today, I want to remind you that today’s discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but Kroger assumes no obligation to update that information. Both our third quarter press release and our prepared remarks from this conference call will be available on our website at
. After our prepared remarks, we look forward to taking your questions.
Just as a reminder, in order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one topic with one question and one follow-up question, if necessary. Thank you.
Now I will turn the call over to David Dillon, Kroger’s Chairman and Chief Executive Officer.
David Dillon
Thank you, Carin, and good morning everyone. Thank you for joining us today. With me to review Kroger’s third quarter 2010 results are Rodney McMullen, Kroger’s President and Chief Operating Officer, and Mike Schlotman, Senior Vice President and Chief Financial Officer.
We were pleased with Kroger’s third quarter results and believe they demonstrate the continued success of our Customer First strategy. Increases in identical sales, tonnage, and loyal household count show our core grocery business is strong and resilient. We also met our commitment to strike an appropriate balance between sales growth and margin investment, and we achieved operating margin leverage through sales growth and ongoing operating efficiencies.
I’m very pleased that Kroger increased both earnings and earnings per share for our investors in the third quarter. These results reflect our progress towards building a flexible customer-focused business model that can create shareholder value through sustainable earnings growth and strong cash flow.
Kroger’s identical supermarket sales for the quarter increased 2.4% excluding fuel. Our associates produced these positive results in an environment that continues to be challenging for both retailers and customers. Some say the great recession is technically over. For Kroger, it’s not over until our customers say it is, and many of our customers continue to be cautious in their spending. At a time when many retailers are struggling to turn around negative identical sales trends, Kroger continues its exceptional identical sales record, now 28 consecutive quarters of positive identical supermarket sales growth excluding fuel.
By listening closely to our customers, Kroger has created a variety of competitive advantages that collectively are very difficult for other retailers to replicate. The strength of Kroger’s identical sales results relative to many of our competitors trends strongly suggest we continue to gain market share.
Our positive identical sales growth continues to be broad-based across the store and nearly all markets. All departments experienced positive identical sales growth in the third quarter with the strongest increases in our nutrition, produce and deli bakery departments. Sixteen of our 18 supermarket divisions produced positive identical sales growth excluding fuel during the quarter. Of the two remaining divisions, one was essentially flat and the other experienced a slight decline.
In a few minutes, Rodney will share some additional sales insights with you, including loyal household trends, tonnage growth, and performance of our exclusive store brands. First I’d like to update you, though, on the four major factors we told you at the beginning of the year would influence Kroger’s fiscal 2010 financial results. These factors are the economy and its effect on customer spending, food costs, competition, and fluctuating fuel margins. Mike will talk about the performance of our retail fuel operations in a few minutes. I’ll briefly discuss the trends we’ve seen in the other three areas.
Overall, the economic recovery is slower and weaker than we anticipated it would be at this point in the year. Job growth remains elusive and fuel prices have risen. These factors affect consumer confidence and their grocery budgets, and many of our customers remain cautious in their discretionary spending. We continue to manage our business with the expectation that this economic environment will persist through the end of this fiscal year and throughout next year.
Although the economy is sluggish, some food costs are rising. We’ve seen inflation in our meat, dairy and produce departments; however, our grocery department continues to experience deflation. Rodney will address this further in his remarks.
The competitive environment remains challenging. Our unique competitive advantages, including our Customer First strategy, positioned Kroger to compete and win in this environment. While price is important, it is not the only factor that determines where customers spend their grocery dollars. They tell us the entire customer experience matters. That’s why we continue to invest in all four areas of our strategy to strengthen their loyalty to Kroger and our family of stores.
This morning Kroger narrowed its identical sales guidance to a range of 2.5% to 3% for the year excluding fuel. The previous range was 2 to 3%. Three weeks into the fourth quarter, our identical sales are tracking a little above the upper end of this guidance; but it’s still early. For earnings, we have narrowed our guidance to a range of $1.65 to $1.78 per diluted share. We are striving for a result in the upper upper half of this range. This guidance reflects the fact that our customers remain cautious. We are off to a good start in the fourth quarter, but volatility from week to week remains high which makes predicting a narrower range difficult. While the competitive environment hasn’t worsened, competition remains intense.
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