The Kroger Co. (KR)
Q1 2010 Earnings Call Transcript
June 17, 2010 10:00 am ET
Carin Fike – IR
David Dillon – Chairman and CEO
Rodney McMullen – President and COO
Mike Schlotman – SVP and CFO
Andrew Wolf – BB&T Capital Markets
Chuck Cerankosky – Northcoast Research
Deborah Weinswig – Citigroup
Charles Grom – JPMorgan
Ed Kelly – Credit Suisse
Scott Mushkin – Jefferies
Robby Ohmes – Bank of America-Merrill Lynch
Karen Short – BMO Capital
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Good day, ladies and gentlemen, and welcome to the Q1 2010 The Kroger Company earnings conference call. At this time, all participants are in listen-only mode. (Operator instructions) I would now like to turn the call over to Carin Fike, Director of Investor Relations. Please proceed.
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 first quarter press release and our prepared remarks from this conference call will be available on our website 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.
Before I turn the call over to David Dillon, Kroger’s Chairman and Chief Executive Officer, we want to take a moment to invite you to join us here in Cincinnati for our 2010 Investor Conference on September 28 and 29. We will be sharing more details with you soon and look forward to seeing you then.
I’ll now turn the call over to Dave.
Thank you, Carin. Good morning, everyone, and thank you for joining us today. With me to review Kroger’s first quarter 2010 results are Rodney McMullen, Kroger’s President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer.
I am pleased with the strong positive identical sales growth we achieved in the first quarter on striking a better balance of margin investments. Our Customer 1st strategy continues to deliver results through improvements in all four key areas we target; our people, our products, the overall shopping experience in our stores, and 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 also reducing debt and returning value to shareholders through dividends and share repurchases. Identical supermarket sales increased 2.4% without fuel during the quarter. This continues Kroger’s trend of positive identical sales growth that is among the strongest in the industry. Each one of our 18 supermarket divisions had positive identical sales results. Let me repeat that. Every supermarket division we operate posted positive identical sales results for the quarter.
I want to thank all our associates for these great results. Growth in loyal households and strong sales of our own brands and national brands continued throughout the first quarter, demonstrating the strength of Kroger’s overall competitive position and the value proposition we provide to customers.
As you know, several years ago, we developed a strategy to strengthen our connection with customers. Our Customer 1st strategy focuses on four key areas, our customers have told us are important to them; our people, our products, the overall shopping experience in our stores, and our prices. All of these – all of these are important to our customers when they decide where to shop.
Based on feedback from our customers, we continue to make good progress in these four key areas, as we focused our offering on offering shoppers more value for the way they live. Customers tell us they appreciate the entire spectrum Kroger’s unique value proposition offers, including friendly service, quality products that they trust, good prices, a pleasant shopping experience, and a personalized reward for their loyalty.
As a result, both the total number of families and the total number of loyal households we serve continues to grow. Equally important to us, our most loyal customers are buying more with us. We are building momentum through our multi-dimensional strategy, which serves Kroger customers, associates and shareholders well in a variety of economic conditions.
Several factors continued to influence Kroger’s business in the first quarter. They include aggressive competition, rising commodity costs, and the slow and inconsistent pace of the economic recovery, and consumer confidence. Kroger continues to perform well, as the economy struggles to recovery. Our loyalty card data and proprietary analysis point to mixed spending behaviors across several customer segments.
Several signs indicate that customers are feeling more optimistic. They are spending more money inside our stores on certain discretionary categories such as organic foods, specialty deli needs, higher in lines. Many non-food categories also show improvement. At the same time, customers who are more price sensitive remain cautious about discretionary spending.
Furthermore, the continued high use of food stamps and government programs is still causing volatility in our weekly sales trends. Our Customer 1st strategy serves all of these varying customer needs in one. Food cost also continued to affect our financial results.
For the quarter, we estimate product cost inflation, excluding fuel, was roughly 90 basis points. Because this figure is an average across several different departments, some additional detail might be helpful to you. When you exclude milk, which was slightly inflationary and of course a big category for us, the grocery department experienced nearly 180 basis points of deflation. This compares to almost 270 basis points of deflation in the fourth quarter last year.
We saw a very different picture in produce where we experienced over 700 basis points of cost inflation due to supply issues stemming from unfavorable weather in some growing regions. This was a trend change in 2009 when we experienced significant deflation in produce cost throughout much of the year. Our results show we are striking a better balance between delivering solid near-term financial results and investing for the future growth of Kroger’s business. We are committed to improving this balance as the year progresses and as the industry continues to normalize.