The Kroger Co. (KR)

Q2 2010 Earnings Call Transcript

September 14, 2010 10:00 am ET

Executives

Carin Fike – IR

Dave Dillon – Chairman and CEO

Rodney McMullen – President and COO

Mike Schlotman – SVP and CFO

Analysts

Scott Mushkin – Jefferies

Ed Kelly – Credit Suisse

Karen Short – BMO Capital

Meredith Adler – Barclays Capital

Chuck Cerankosky – Northcoast Research

Charles Grom – JPMorgan

Deborah Weinswig – Citigroup

Mark Wiltamuth – Morgan Stanley

Andrew Wolf – BB&T Capital Markets

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the second quarter 2010 The Kroger Company earnings conference call. My name is Carissa and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of today’s conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call Carin Fike, Director of Investor Relations. Please proceed.

Carin Fike

Good morning, and thank you for joining us. Before we begin, 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 second quarter press release and our prepared remarks from this conference call will be available on our Web site at

www.kroger.com

.

After our prepared remarks, we look forward to taking your questions. 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.

On behalf of all of us at Kroger, we look forward to seeing many of you later this month, here in Cincinnati for our 2010 Investor Conference on September 28 and 29. It will be an engaging and informative session, and we appreciate you taking the time to join us to learn more about Kroger.

Now, I will turn the call over to David Dillon, Kroger’s Chairman and Chief Executive Officer.

Dave Dillon

Thank you, Carin and good morning, everyone. Thank you for joining us today. With me to review Kroger’s second quarter 2010 results are Rodney McMullen, Kroger’s President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer.

Kroger’s Customer 1st Strategy is on target. As our strong second quarter results show, we continue to grow identical sales even as we worked to better balance margin and investments.

Identical supermarket sales increased 2.7%, without fuel, during the quarter. This represented more than six years of positive identical sales growth for our company, an impressive record by any measure and even more so considering the uncertain economy in the competitive environment.

The strength in Kroger’s identical sales growth, excluding fuel continues to be broad-based across the store in nearly all geographies. 17 of our 18 supermarket divisions produced positive identical sales growth, excluding fuel during the quarter. The other division was essentially flat.

Kroger’s ability to sustain such long-standing identical sales growth is a direct result of the effort and commitment of our talented associates. Our associates strive daily to make each shopping trip the best experience possible for each customer. This relentless focus on our customers day after day, year after year builds long-term credibility with our shoppers.

Our team understands the importance of finding ways to make each customer visit better than the last one. I want to thank all of our associates for their outstanding work in producing the results Kroger reported today. Our performance reflects the consistent successful execution of all aspects of our strategy, not simply a single factor.

We’re building momentum through our Customer 1st strategy which serves Kroger customers, associate shareholders and our communities well. Our Customer 1st strategy continues to deliver results through improvements in all four key areas that we target; our people, our products, the shopping experience in our stores, and the prices.

As a result the total number of families we serve continues to grow and our most loyal customers are buying more with us. We are creating value for shareholders by reducing debt and returning value to them through dividends and share repurchases.

Growth in loyal households and strong sales of our own brands and national brands continued throughout the second quarter, demonstrating the strength of Kroger’s overall competitive position, and the value proposition we provide to customers.

The economy, food cost and the competitive environment continue to influence Kroger’s business. Customers are uneasy in this economy and the variability of their spending behavior continues to reflect their concerns about the job market, cost of living and healthcare expenses.

Customer in all segments continued to adjust their lifestyle, even if their households aren’t directly affected by the economy. Many are making significant lifestyle changes while others feel they should spend less as the economy continues on its uneven path to recovery. This environment is consistent with our view at the beginning of the year.

Changing food cost are also affecting Kroger’s financial results. During the quarter, most of our perishable departments experienced higher product costs compared to the same period last year, but we continued to see product cost deflation in the center of the store. Rodney will provide some additional color on this topic in a few minutes.

The competitive environment remains challenging. During the quarter, we saw significant and aggressive promotional pricing at several competitors. Our customers tell us that while price is important, it is not the only factor that influences their shopping decisions. The customer experience matters and that’s why Kroger strategy incorporates all elements that are important to our customers.

Our sales have remained solid in the face of competitive and economic challenges because of the strong credibility we have with our customers. We continue to build momentum through our strategy which serves all of our various customer segments well.

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