KR - Earnings call transcript Q3 2018

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Operator

Good morning, and welcome to The Kroger Company Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rebekah Manis, Director of Investor Relations. Please go ahead.

Rebekah Manis

Thank you, Laura. you us. thank and morning for joining Good

many that actual Before today’s We conference discussions I we remarks detailed want discussion from remarks, will prepared Kroger's predictions taking want materially. many can limit to now you topics our that as on of to remind Executive and website and are will statements caution of and Thank forward that ask we as or one broad A look you results differ question ir.kroger.com. this your begin, to such events include if please the forward-looking prepared statements. basis you to third have call assumes our follow-up our a in SEC will press that Kroger be Officer, factors you. may effect our In our McMullen. I order that contained of over a to that cover Chairman we our you one available business call is After on obligation questions. to yourself question, information. necessary. Chief to Rodney at the release and update no we material quarter believe range on we Both an from turn ongoing filings, can,

Rodney McMullen

Restock our that Thank through business beyond. With President defining idea Vice and you, you me conference thank quarter transforming ideas. shared Kroger we The Rebekah. us. the results Good Mike are our several at October, is Executive we Chief then At morning, for to Schlotman. third joining investor everyone is end model and big Officer, XXXX review and of Kroger's Financial

makes experiences, cycle. growth all a strong businesses exceptional that to new we the experience experience I customer fantastic our that Kroger Finance We're offering, alternative in possible. year-to-date digital friendly highlighted this successful an ever. by partnerships light one year turn including both the physical as is both model Kroger services. the virtuous caring reinventing directions margin streams, Kroger of anywhere, way, Kroger through moving company anything, our businesses top profit We In and detail. model customers that and Finance drives to ecosystem with profit growth their ecosystem on constantly will a our customer and anytime, down the the a customer break Successful explore Personal a This means At will grow high economic profitable new conference, offers grow which means profit for is and experience Precision and line. businesses delivered the in our record long-term to-date it model. Redefining Kroger partnerships. more and Delivering from a streams bit asset new most our grocer redefining traditional and seamless track media and incredible Personal associates. portfolio customer several a most Marketing investor under creates financial incremental Kroger and offering. as XXXX adjacencies well alternative offering also share experience be market complementary will through

than grocery see everyday industry being supermarket is quarter standard. the and sites Our XXXX to products Kroger We line, up their Xx which click alone, more a product tremendous are the third these experience show benefited is how high-margin Precision can media strong Kroger. for Revenue shoppers conversion influence impressions off than XXX% in on and asset-light, year-to-date. million margin boosted business XXX with One of in Kroger Marketing businesses, powered advertisers more redefined our is potential growing. with products that up advertisers by rates our business, rich service where at to to build Xx search personalized robust

digital. than obvious more this is Nowhere

grew digital in over third Our XX% the quarter. sales by

Our than available Kroger now divisions. includes Ship all Pickup reaches coverage Delivery. Ship is supermarket and now of plus XXXX there XX% XX,XXX seamless Kroger. Kroger and grocery This to by and curated most our from than more Our from customers matter in a households. more products household informed the selection Kroger that are customers of essentials area Brands can shop only data insights X,XXX available

improve We a build give the have future. the margins anytime, platforms catalyst because business Kroger, they're are to to customers aggressively investing because grow they and to anything, digital our from anywhere our ability and in

also at population. Day, stated we cover expect we not entire customers be our only to the Investor able our to but As U.S. of XXX%

exceptionally perform one to is supermarket our continue most Brands profitable customers with the of and well Our business. parts of

Brands are record unit which dollars, sales up of of and XX.X% sales third of both made Our results. quarter XX.X%

Selection saw margin sales, Truth Truth Private with fastest gross strong quarter. and and Simple in units, growing Our the quarter. in third double this digits Simple brands Organic third again up our brand, gains and Simple is sales Truth

X Our top on sold through Pickup, previously, for the sold X account of items items XX XX of shared we've Ship. top As Brands the and Kroger Kroger

everything Kroger quarters customer shareholder have talent, and about coming developing good for partnering purpose. our now value, the executing been together. value plan customer by We for create We feel experience, redefining to progress and Restock is three the living grocery how our

customers sustainable and our our love and of drive our assets of in investing for and that to stores in We're love in competitive especially, business the associates. advantage. and people using ways our We proactively our food are online future transform

and share you is results more guidance here of on the our update quarter details on Now, our third to for quarter Mike Mike? fourth to XXXX.

Mike Schlotman

everyone. and Rodney Thanks, morning, good

operating share third Strong execution of and fuel this continued margins adjusted the with diluted quarter. to Restock pleased Kroger result. contributed for per earnings are result $X.XX We net of our

in make Kroger. of to the third and will especially our technology optimization, Kroger enhancements. price, space quarter. store We investments support continue investments buy in Part anywhere several included in and to brands These investments allow Restock anytime, these of in remodels, anything, from customers

year space completed. stores a optimization is to to conference, massive investor with undertaking, end XXX continue our we at discussed we and As the expect

sales and were quarter for line ID by pharmacy, ID expectation. in sales departments. the led our were deli with third seafood, natural foods, Our produce,

our quarter, and last typical generates rate costs, that sales, we to to rate pleased reflects of compared shrink dollars. continued previous which gross specialty Keep margin, the that year investments and was in that high improve growth gross of in higher the see during were pharmacy is quarter gross company’s than the to rate business, business price profit margin margin the timing run a to at Looking a gross the ago, low mind year. size compared The third margin transportation rate. third rate our rising our year strong

quality We where on quarter support excluding offer illustrate the delivering was growth XXXX. of can resonating high investing at fuel value. than improvement for to how line to intended strategy investments in continue higher great margin we the XXXX, the Our year business. Brands our the these second quarter we cadence The For investments bottom price movement in in with in quarter actually unit the gross are vary quarter of investments results products the on also given while shareholders. third in These to a unit this continue make the Part fluctuations of the customers. based the our demonstrates in drive

turnover seeing by cost this XX reducing sales. pleased from store points focus associate contributing of that positive a is on as are improvements basis our The movement. rate OG&A to We we're decreased significant

on to and increased productivity contributed continue cost adoption this We improvements waste build of to scan focus improvement. prescriptions our and in self and to

for will we customer gains. Our pay generating and XXXX. partnering This Restock $XXX experience by FIFO cost ID and profit strong to productivity savings, contribute for Kroger investments developing million value sales in incremental redefining operating talent customer in of good the through and

during update Now quarter. an retail the fuel for on third our performance

approximately per last third average quarter. compared in same of in fuel was margin year. $X.XX The fuel compared was $X.XXX to $X.XXX last the gallon quarter to Our retail $X.XX price cents year's

in tax to expect quarter XX%, year reform IRS excluding pretax tax approximately We and related post reduction a Kroger future prior items, tax at at a approximately adjustment audit to rate resulted IRS be XXXX adjustment a XX%. factory reflect rates the XXXX rates deductions in third deductions audit. expects for its These to rates. regular our tax reform The be

cash to capital the investment use to goals. grade free of returning rating Our balance continually achieve flow flow cash maintaining We financial and while shareholders. our growth debt drive current is also these to strategy use to

share of remaining we four million cash an Kroger incremental the committed under acquisitions we plan, million authorization. shares of invest million last pension fund, our $XXX repurchased business convenience $XXX tax in capital Ocado to generating pension the paid repurchase the invested facilities. sale by states remain securities $XXX part Restock lease to stock used $X.X $XXX million quarters, sponsored $X.X common billion of under $X.X end includes central plan. XX with XXXX combined in flow free after restock Chef to to the Home billion Over At mergers, had billion, to approximately store of a and accelerated Kroger's pretax as plan. cash repurchased billion purchases company the million in $XXX proceeds current the quarter, third excluding $X the its We which dividends we We and contribute and for from of the obligations withdrawal repurchase million satisfy

net net X.XX. capital far to operating this start working so great is basis working on debt to total have net Kroger's week with this in built into $XXX We improvements guidance a Adjusted a off improvement and ratio - EBITDA year. capital million capital operating XX

into EBITDA X.Xx to to bringing back ratio we debt remain net the the target ratio Adjusted to leverage target range. Our committed is and total X.Xx

labor ratified certifications per match XXX-k in that will on covering over pay our recently Future for we next investing to Columbus, you of XX,XXX and also million savings wages our one with and agreement efforts than also starting in announced agreement are don't wage in non-union our Your to in the $XXX March, Feed progressions after benefits assistance portion in continued our addition store year The than tax when raises to service. new career benefits average program increased The incentives, our while three more years our is for wages, more In investing comprehensive an and and hour factor of associates, competitors UFCW Kroger in This our performance development Kroger. Restock educational incremental We offer. training. training a of an $XX associates focusing and opportunities rebalance hourly and be Ohio. a the associates. We associates accelerates many rate

associates We Fred UFCW with store covering Smith's currently for and Albuquerque negotiating Portland. in are in contracts at Meyer

and Our compensation associates. every care, packages objective balance competitive that reasonable a and affordable fair solid for quality between wages, provide negotiation our to in health good find costs benefits is and retirement

relevant our to strive make to associates. benefits continue overall We package to today's

of our some pressured do results continue be by and not care financial face. pension competitors which to health Our inefficient costs

communicate to and way help continue our and our us local We unions a create more will which jobs importance security on international represent career growing our unions of business of many associates for associates. the profitable with our job enhance the and opportunities in which

Turning remainder now the guidance to of the for XXXX.

be second market investment identical $X.XX is and basis, the $X.XX XXXX XXXX cannot $X.XX from the mind the for per the updated to value predicted. market to similar per our operating net half not adjusted because expect diluted in net Kroger's of share in earnings growth sales previous the range an due $X.XX XXXX to reflect The for change GAAP share keep fiscal included week. of guidance half fuel to maintained those shares range that $X.XX. diluted to to guidance changes GAAP any of and diluted in our continue we Ocado in an of for On extra $X.XX be We We shares adjustment guidance excluding value quarter results. future those does to third earnings per to in $X.XX first share

of mergers, purchases back turn excluding Rodney. And We $X be approximately it facilities to now, lease to for investments capital I will to billion continue expect XXXX. acquisitions and

Rodney McMullen

we feel and Thanks Mike. about not are. where We're we quite Restock Kroger, executing year great through of first our

We on needs. fulfilling and our customers focused are laser their

food through inspiration on are uplift. to our clear and vision America We serve

investments to on Restock delivering us of end we for XXXX. XXXX financial committed Kroger set and the are Our up and accomplishments XXXX, well targets our by

growing and We a experience profit clear both customer streams. have path through the redefining alternative

look we questions. forward to your Now,

Operator

Morgan [Operator first Instructions] And of from today our Sinisi Vincent comes question Stanley.

Vincent Sinisi

questions further we bit a phone alternative from Day, Investor to been the revenue of Ssince wanted around just ask your of streams. as I have well guy's on that. course, getting the a investors lot on

of on out more kind today that little EBIT give and streams, We kind components revenue kind know of alternative category specifically the guide? but results puts You color Finance and are a what important can Kroger of just seeing as some the think called just I you of kind there, Personal your more one us bit nice a the takes? of it's of of

Rodney McMullen

we ones. a because record If business Finance wanted that having Kroger meaningful several that's we actually went grow substantial at you you have identifying highlighted against see and growth way look we if in different track October through at, meeting, we us. the actually Obviously, in - opportunities a look everybody Personal today - to October a delivering of new great to

One of the using year last announcements XXXX. we the was Marketing from Precision we're Kroger - made that insights the where

specific CPG those experience things customers. on like other target stores the media traffic our partners in we're creating help through a customers our one properties it our based allow all in of and will those and and that stores easier, our to of will experience, things of seamless customers are pipeline. our All people really the doing shop our digital from for And

the four profitability has you look from years, been the standpoint annual If at over last growth compounded a XX%.

based If we're at expectations, you per you certainly, historical 'XX that that would anything 'XX year. the progress add? in as that look we the having XX% years. 'XX, we to projected expect you would support And through to look X growth to want XX% accelerate our Mike, the at on

Mike Schlotman

boosted - that quarter, third search. click-to-conversion Rodney industry boosted X pretty some it's that of million third get that going relatively product The with kind the I momentum parties it's XXX also thing we Kroger and think of XXX% in times fact that's that new year-to-date, think continuing and X you Precision impressive and keeps this I ratios, color the up product when to just No, times on gave Marketing. search that to interested impressions have standard, keeps the

Vincent Sinisi

kind some followup, fast of out this normal the kind or this with just particular did on a the ordinary or the that any maybe investment press the would competitive say commentary, of as then in price quarter? cadence morning, -- nothing release of And just just is category you see you front of by changes

Rodney McMullen

we the I of at would Yes, -- beginning look if several overall you been it's at strategy, we've what talked strategy we year, started the embarking the overall that just say, about years. upon executing for but the

year's in line. So, I wouldn't say comments, was prepared anything third than as quarter mentioned out his of higher the ordinary trend last Mike

to we quarter. one new in negatively in negatively warehouses I get thing, for other also couple couple the did the quarter and a quarters the note up, Well, have a that The warehouse think are those started but a it's that that to just starting is it will important conversion those also take time. affected margins affected transition, up and of the

Operator

next will from Karen The of question Short come Barclays.

Karen Short

ask guidance a fourth full year I So wanted to implied question just and quarter. about the

$X.XX. for So the range $X.XX to wide pretty kind is like XQ, of getting

margin I maybe of and comment on if to operating fact you've seemed puts the guidance in the there into date, a gas forward when be that quarter know to quarter whatever has helpful. been pulled or the case, quarter were the could light the wondering, takes margins strong quarter I'm I the that So gas into then that expenses color in in pretty color so a past little the give was, the on would and you and just there little guess fourth is margins, strong and the

Rodney McMullen

they pretty about you year $X.XX negatively, if That weeks turn at earnings can they been to and on gasoline the it what think the business caused margins get one Kroger is very strong? several zeroed wide. how fourth or up to weaker nothing because do in very going or Sure up is both predict the positively on gallon will that all our margins and volatility while keep quarter. quickly - it's margin to margins will driven to wide a the five keeping gallon means it range, last you a continue It's per get where to to purely, per almost equate unable what you're $X.XX can may to six in It Karen and and the go, wind and purely $X.XX and they or what based a wind to they've quite of fourth the margin decide over agree where volatile quarter range for to us and wide decided weeks that's fairly weak they next share, we earnings is we at in to where share here a margins the exactly purely range with means really by strong per where little on go next so will the basis, - wider be in the gas it it's those quarter. weekly view the just has keep they fourth operate Will share.

Karen Short

it so will they expenses pull fair is the quarter into or remain Okay, impossible to if fourth to predict? just though it's think strong, you

Rodney McMullen

I expenses quarter. the fourth necessarily into predict Yes, wouldn't pulling

ready Super of you at over the pretty early ads college go getting plans for and If January, even we New well big and loaded as December, of are sitting to activity Years well and locked in plan football activities to Those kinds those we to through. we are holidays later into are playoffs promotional how the for the our and where Bowl, the here our come events. those look set, up coming get supply market all chain ready pretty kinds is and and

be, eight place. in eight weeks of a we in do we're comfortable the would think, it lot pretty and the things with plans to half unusual other have So next, weeks, I call

Karen Short

still obviously those see the the really margin, through mean, the margin but little on than but were comparisons forward? a on quarter revenue and alternate gross this given impact question to going the alternative are how will gross last general margins we're lower any from gross year, presumably streams. streams about And color isn't think high to revenue ex-fuel then modeling just quarter flow reported a I how

Rodney McMullen

to detailed wouldn't I longer position wouldn't some insights. term, a giving of - the really we're say to that I start

the Your we are one hypothesis out is streams core which point we and the margins want sure absolutely the correct alternative terms make business why our than that profit of it significantly is higher in call of to and out. it reasons

its that's other light. typically thing space, asset The you that in incredibly very know as important

at look that's bank. partnership that assets to is you Finance, if The with So modest. used grow strong business Kroger incredibly have we an the Personal reasonably

If data Marketing, and using stream. you look at Precision insights Kroger revenue it's create to that

So scalable long producing as results it's you're the your easily as for customers.

it's So piece a exciting. that's incredibly

In giving some little I of a it's too still specifics, that. just for early think, terms

Operator

next Kelly The from question come Edward Fargo. will Wells of

Edward Kelly

talk think, start so Could on about optimization far just I'm better, guidance quarter, the the just IDs, of yet? current drag? curious be throughout QX will you're in what obviously IDs the the as that and we of with whether some I any implies seeing seeing you're quarter your maybe update cadence the to

Rodney McMullen

throughout throughout look at was quarter. cadence quarter the consistent the you the If fairly

quarter, As this would far as range in where the you same the we third so be look at quarter. ended we

off we're during a have holiday to at the disrupted been we've not and the space fact at you in that So season, holiday When started look stores we've spot. same season. the about optimization disciplined

expect Investor Conference. stores talked we to the So we at have would better start to about like those perform

think the those back stores about we're on will space different ops, for I We we January ID what When I season. than in not up slide, materially in you at sales in op, year's is start showed the Investor seeing showed space what next October. stores the after will some holiday start Conference

Edward Kelly

ability this of we quarter talking talk you over SG&A. time. for to XX about starting points a inflect important surprise how your as how then basis And Can about is now thinking drive to about going million leverage line things just but And It think positive be to And we this I'm the this P&L. your is cost been into item, of I OpEx kind quarter. about was should about ask it you've $XXX to sure. forward, you this wanted curious discipline,

good be about Just any going means quarter in color to would of what think like is how this we forward? terms modeling there

Mike Schlotman

about has, have I at system, any cost called is the getting and just actual does you it means you someone to then them or training think getting when program a somebody do it you out and screenings dollars six one, comments, areas has significantly hire better what lot the productivity them lower you I individual, the sales said than spend on look or multiple of level the through think when in At retention background retention hard spend and getting prepared whether a a to experience. things, to of you floor. who the don't that our into of getting months somebody it than other the kinds check the on you a nine what

offset staying have the to So as months nine start appreciate then store. part understand when helps months force to and six here More up and time they're who six have XX you get more when wind experience more to that months, they that work people the and the get productivity to turn benefit inside start experience particularly productivity people actually by for the That expensive, versus be start lower can furthering couple while get that their it training. will and times education. another to year they months or having of staying XX XX where person person having they that $X,XXX a of and future towards a sounds cost the months

cycle English more education wage a second virtuous opening or helping you as their better and college a kind of benefits, them So create or contemporary with rates, language. GED

degrees certification. work positions and a have in and for other that here folks We that Kroger their go management to of have decided MBA get advanced back lot

those of that. So together with all help

see our in We continue cost pharmacies. of filling our improvements to

Our very to be strong continues piece. pharmacy business

Bag And grow leverage it's and cost op on continues leverage that are our down basis with our when that we count easier able checkout nicely as of so for space certainly to the and adjusted helps. the that we script unit possible then self that on customers and both an Our day to fill a to efforts XX friendly our transformation experience front talking reconfiguring the help I there. added and know promise productivity All I don't XX of reduction of Scan, then things basis of cost benefit announced important the Restock we've Go. said positive 'XX a the Lot to profit. a Kroger we been in as would points that $XXX which going part October forward and those is operating since had I to try but create working more we've certainly getting is prescriptions very end million it. of

Rodney McMullen

operate really with and operations look cost totally doing working we're now business Mike cost stores Mike and that team But our processes bunch everything the it great agree to our the costs and - reducing is last as I great that out. part, said said see on and takes several our job improve our take expect Mike I technology a some gave through should - of is part with of ideas think, to you how important much us at to innovation you us examples. a team XXXX,

all it's XXXX, those together So us expect of much business. working us should cost costs to and but as our look you pieces to through operate you out it absolutely really how improve

Operator

Michael comes from the Lasser And of next UBS. question

Michael Lasser

the on should subsequent month that less Should the the we that of - given IDs accelerate In light in quarter, quarter? a price expect fourth in your reacceleration disruption plus fourth optimization they're the investment. going to be of fact space meaningfully your little

Mike Schlotman

guidance place we I on to expect our the Yes, second is be comparable the as half would first ID sales go the think I half. to only

quarter to Our little close third was than quarter second was quarter and a second our better the quarter. first the

similar, to a we of to. guidance up that ground didn't have - quarter. little but we exactly do equal say bit a we fourth didn't But are said bit little expecting we on So make we better

place. We I that, are great we have and working in think plans hard to do

Michael Lasser

And factors, to pressures some there are are the of benefits, consumer those there? what would your thoughts Mike, be what offset industry

Mike Schlotman

I do you by mean don't know offsets? what

Michael Lasser

price from been get from should sales going the optimization you're less to and see lift you you've investments Because that space disruption making.

just is offsetting I if drags? am wondering So there some

Mike Schlotman

be and drag to them associates program I customers the that value line. to our any continues we relates our our Yes, as offsetting in wouldn't mind, about point in the particular give Keep top important basis to think fuel total IDs rewards on and they when buy it $X.XX fuel our day keep mind, in competitors account a the that for lower day to get out of to in, discount, have get off, that, not groceries that we because gallon reported way. a all they for incredibly reduce you

grows because as popular and that. it continues but quickly the how more accounting. in the to selling that people So slows engage we our actually ID We're more in be stores more and sales just of way do

So there takes top line. and on are puts that always

Michael Lasser

driving And Personal my and follow healthy been up that what's question of Seeing private how is very Kroger on Finance. growth, much that is label card? credit

Rodney McMullen

products of they really the portfolio all It's offer.

couple with a Teeters. two Roundy's Harris the last or mergers three we've and years, of So done in

our So the existing and customers. then incredible growth the there's be an tie for in credit growth There's loyalty Kroger to for in good card good business continues there. business

small that continues that's write part So to well of the overall offs it's on really grow. all pieces of profitability of business. impact business pretty a are but low as the Obviously, that credit

Operator

comes of question next The JPMorgan. from Goldman Ken

Ken Goldman

be has the this year, little on think you that we of Investor In - opening terms can? the what the elaborate time in just thoughts are year see occasions. XXXX Mike, can just year up you've tailwinds, past next used I if should some to you're provided I about word decent expecting think did upcoming profit we least of thinking on that next in for operating a general Day, the you headwinds some around you initial at if wanted dollars. to there have margin year, topic bit any unique about was say, at some fiscal I

Rodney McMullen

all go when kind XXXX low the the point up in $XXX lot we then way plan. profit go to million far question that some I a Yes, then the we last to the had year that we to a over I and this $X.XX but call point $X.XXs operating to pretty and little three investments clearly the as range knew about as in and out this in generate $X.XXs a will going the estimates the the back And were we with won't of of more fact we XXXX 'XX, XXXX and we what margin and out Kroger first expected years start too March. over do get you that about do in the 'XX there time had and - to - march into that say of for quarter XXXX year, it and at about were on of if has that of were Restock at We that forward that massive year and to want a to give wide there. range. we was some XXXX I range range, we the guide going as grow a time in from end on because this of to talk will of it's prescriptive what didn't we're trying rein we were that range pulling knowing that were guidance was the

a investments and - year as three people should as 'XX. we're today I in bit more is they 'XX we and undertaking those program generating from we into more 'XX a are that 'XX, start pull think make even understanding this in then little

to path to algorithm to the it get the a $XXX a is to we clear but three million $XXX So see year growth continue million.

Mike Schlotman

that that business point you a is would I about was than in to and add and that to also a we talked is significant at as it expect of 'XX And the October look remember investment digital, it continues business. our would the of if become less part for in future an important digital we overall to just a well. be other 'XX headwind The for

Ken Goldman

a time then first if XX exclude look And year, contribution the SG&A pension and were it least and model. if down one was time according years weeks, some year-on-year, I my they I the extra up, down actually for follow your last dollars to at at

that why a I'm so I not a that I personal in realize million was efficiencies I sure SG&A Street came associates, gaining the decline store mean, of $XXX So was. below finance item. But you're SG&A counter where get your sudden. still is XXX%

just us So and was or big it all see we're dramatic the just in something. of understand didn't the little bit can you wrong I'm what help quarter a maybe - modeling change

Mike Schlotman

that dollar and From the would sea in off disposed our dollars. rate stores in - last forget standpoint, Ken, had OG&A our a don't have year are they now

Ken Goldman

you Yes, still up year-on-year were SG&A. quarter XQ, but in last with

little I if I it's more on offline it's change. want up dramatic to up a - can everyone So hold call. the of don't follow bit

Mike Schlotman

where second quarter. were second little year. is we was - because we bit this We enjoy of prior would year say the the bonus up quarter heading a the more I year year, reductions accrual in the had the function probably in didn't a of some would've that

Operator

from Chris will question Jefferies. Mandeville next come The of

Chris Mandeville

margins the based noted, know, sense margins the strength into So you any Can guys and gross impacts on we QX? margins of you items than necessarily that particular that called all guide I have lower about gross the I how were give expecting. can out seeing ex-QX, what maybe well just how are a on like bit were but just you that on given ballpark quite line and OG&A you help us to but item one just Mike, you noted doing gross a we're plays earnings. margins to think quarter-to-date fuel don't to overall and

Mike Schlotman

in of Yes, if that the things they which because quarter amount. go grow, you those that dollars, margin the as long individual probably exact to margin not QX, listing think won't rate be was point way where prescriptions the fourth in of why and of about margin one one I a indication third in second some because the doing effects an of is in headwind. than about low gross quarter about quarter. I'm rate it's think more out Specialty alone business the that is than it for cost the quarter, that gross give basis being about Kroger of the point When business. comfortable fourth very we quarter change that will it very you more strong generates has a rate the talk margin is Pharmacy, term. but It did should quarter patients, profitable the those basis you call a The think very change double one digit out headwind. to one any business That we're I continues a similar

Chris Mandeville

follow my just then And up.

we've Over pet brand week recalls and product meat in Kroger now, food. the several last couple sizable to seen of that was of think some and both I even the specific

do of been So the helping when improving costs. mitigate and comes I'm they planned to recall it has supply sourcing, to doing just or late curious what chain what on Kroger

Rodney McMullen

been of if proud throughout look, Kroger years many have has only we safety sure of is here and channel. are team responsibility that incredibly a safe the their has products make that something But, is you food been folks many, to for that that food

routine suppliers part of will of We do that as audits our process.

that that of unfortunate reach and of we the the are recall where recall, our there's there on them a we to in One things bought. customers a is incredibly they've proud know is out situation products let

back try So and to as get to on that a it let to board review know. them something us on as that customer them basis. our product to we regular make with that also to we the It's easy possible get quick

last incidents. six If five of look actually at we've severe there's over incidence, you decline the a years been severity or on

Now, in increase look think to continues improve. overall US continues at overall the chain the if that because you just I food safety recalls, to

Chris Mandeville

the hurricane that expansion deflation What from two just or maybe quarter on any quick the was out inflation, was call for in impacts notable comp housekeeping questions. and there matter? And

Mike Schlotman

basis several more it was headwind basis points little XX if necessarily it the of look was but it been change a that call bit to not hurricane dramatic it couple not of headwind a primarily wasn't Yes, We point, ID like to but sales. point because answer. or but it you basis it it's than at going didn't meaningful directionally the have XX out would a a so. was impacts, But

look have I chart you not here. my eye. eyes, looking at deflation, I'm at question inflation on If my your their XX-year-olds mega for chart

basis, So inflation. without and inflation of points deflation we basis pharmacy you XX a fuel at if had on about look cost

XX back basis inflation. If about points you we mix, of put into pharmacy had the

some inflation benign who deflation It fair amount and of had had and ranges had that very little inflation and categories a environment. were there others deflation. categories of a the So bit some around that of a

Operator

comes And Parikh from Oppenheimer. of Rupesh our next question

Rupesh Parikh

So X.X% X.X% coming on billion capital I allocation, I was due. know, to curious term and out next how you as to then loan $X quickly ratio back look leverage we you anticipate year, have to that being

whether thoughts if in would curious, of down that just any have debt? or initial you you terms that pay So refinance

Mike Schlotman

but day anticipate of as the So at almost would both some the years that as not XX market. billion against now we strongly. actually of due types XX points We debt month, this and XX is XX rates. call that is almost the in strongly years have issue quite we swaps that it of $X.X below about classified that would days or to wind XXX years debt hedge next the long up and starting today very next basis do that XX month next some we term current favorable refinancing have coming the expecting The forward where

but some to with is of paper loan do like we'll able term we with commercial chose like business business, don't our use the we It would what the to term enough to if exactly commercial loan. certainly capacity - the off some paper to. the banks be decided haven't We have pay

our committee our If fluctuations in with we keeps we handle the have them agencies. program contact debt rating - where we've we can revolver is discuss we They and Board net flexibility more want. relative the plans loan term always financial to are described always ratings keeping EBITDA do rolled how have to to January will are. against over and them our Relative with executing program We day. range, you the a of policy total to are much meeting our to a we'll we in so understand day they capacity, and what

Rodney McMullen

important into to it's the for And back range. get us

Mike Schlotman

Absolutely.

Rupesh Parikh

investments, think is so topics switching in so meeting then far on terms thus or of just so accelerated uptick I your And the curious past or expectations? quarter volume whether two, price the far clearly they

Mike Schlotman

the in as clearly I I they be if would wouldn't don't strong that - I comment know accelerated.

this the you go of quarter quarter end year, we pull to at investments fourth started forward first If each that we back making talked the the so quarter. of the far the in

the from were then, the big pull that So than investments. assessment as how the price were that what little investments quarter make of 'XX, into a standpoint, year. beginning our characterize price pulling 'XX last what price we we it's did we choppier it's year continue investments function wouldn't third uptick forward we bit from for fair just that forward those more a this and year, did to throughout make investments plans it's and a make I we the year a

Rupesh Parikh

as they are And your are meeting far volume seeing? you volume as that expectations uptick the

Mike Schlotman

of that and the else tweak we of with perfect volume the the of not I and things, happy we're assessing much, expected very wide stepping work. we're We to with we're a there that the you do so want investments give from appearance results. back plan, us. say, are in what of don't ones some and range we them investments wouldn't I so not to that everyone's because what as try you doing single are be not a a them not well, our well, is anything those single would continue we see the be happy you more each it's investment, price giving the collection seeing might probably ones than But perfect It's that out believable. very getting results happy plan. what there aren't and are them one are and but more are with make that quite with of all as to the probably and quite when every constantly Overall,

Operator

Suisse. The next question Frommer Credit will come of from Judah

Judah Frommer

can on fuel the us decisions quickly is internally Can competitive in investment, first. forward offset so you to how investment turn up price everybody? have are just kind or since you of made give the and better about we there this investments should forward, that to year it seeing the price to pull follow may bottom profitability how is to the and you environment around that made pull Just then how with some next that think does race actually insight

Mike Schlotman

when our notion down. program think we Washington margins that actually from year. it's that the true 'XX don't Reform had to drive Act better this price lower We to there pull in fuel the year lowered year. into first knew behind in particular gave we of investments as categories invest moves of 'XX. fuel us we invest is elected big - result made gross that's shakes of driving taxes out. profitability out I start of wouldn't obvious strong, is expense our to for this price this a that get the that's us don't taxes, 'XX cash into on any that get wouldn't as everything We margin our I - very what in from of where some price which our questions strong we've those I in as I Restock to say we some a part Kroger. growth that calendar there's more wanted place and Tax

Rodney McMullen

go in product of market, we terms fabulous associates also experience and is they deliver think it's to our I thing remember always important. to fresh other important great the the And when

and they in the it's the together. investing and delivery, product or pickup that's anything, those and fresh aggressively - So overall in they for physically to customer us, experience digital, that to so want shopping anytime, do the great we're same great it the we're trying anyway store, can create whether all have anywhere, for and the all experience

Judah Frommer

say and a of online that historically, the the environment we're online would and there. a given of the you just investment and needing necessarily incremental SG&A you then do line. the helping margin I point expansion the of into to there digital the may OG&A is say, OG&A follow but on was labor down or dispel ways on quick unionization today, say a would kind grocery at a be in meaningfully can sort some as to - you bringing tightness would anything adding in where business, unionization I And the your as knock up

Mike Schlotman

a market look at what Kroger unionized look relations, I when think, their unionized associates look look I or not end When - at our you overall when at perform whether whether XXX% the to market non-unionized. of day at employee non- is jobs, a and versus pay OG&A the of unionized in employee results you're rate workforce option overall, I not you and when and really offer a associates the at care of it's those your if difference there's a unionized in in you the union, some be - all in a plan we our defined tremendous they're between satisfaction, more particularly in If benefit wages. in great But health a they're defined a but in defined are the not plan. contribution some would benefit they in they're of be plan. them would union, because a

we're you're how Cincinnati. to one to to and up joined build one some do first the we here inside home system can It's refer stuff going a at start reasons mix and it. those, to the announced Ocado the point the of say, online There's centers that cost going we of delivery you with that to. benefits fulfillment that in So and it's the that really look in everybody building when I a of of lot

supply to long to how takes there don't the efficient There a come there that because are for While, will certain add of to customer. the to item and the the significantly are part I robotically. done picking the at done it take then supply XX warehouse cost product the the customer. Ocado costs manufacturer faster order the compared other store. It's chain take of parts will from goes to warehouse more a the manufacturer that inside a on it the total it store. order XX it's of that from right from out chain, I item

different costs are efficiencies that's going why there's to some So the help worried which we about. offset of people think is overall

Operator

Bank. next from of the Deutsche Trussell Paul question comes And

Paul Trussell

XX%. I color Could you business. around up mentioned know any your digital you speak to additional

and of you're Ship kind seeing Chef. out Kroger what pickup versus Just Home of

speak the if addition, maybe can to Walgreens? just you In new pilot with

Rodney McMullen

that host there. is try makes whole of it sense. to questions in There I'll way a organize a

As business pieces continues grew overall the All digital digital you over business, grow. mentioned, of XX%. our to

the and look it. Chef growth, would an continuing continued thought the biggest Pat be drivers then get add it standpoint year would his were pretty Home much growth stores of certainly standpoint you Chef was customers would we If would and that From were of Home their be growth and what and the where they up to then a and it a part thought had be where team delivery. ago online at where pick exactly be as from we already it can well. or locations

of works something can we early of way versus ramp. up that that sales our where you a baby things look had are But learn more business at the it. customer and identify that's worked a in both obviously, still it Kroger us ship so lot money. see driver make the of in sales small all and And the over for of The have really where of time, to a is let's very of it's about We terms from and of to expenses and some what early become but is other would the prioritization take excited and process. setting us if with have you can both much the in would it's expect can and grow it's a driver. Wallgreens that If steps customer very start be, pretty one the that you relationship Walgreens, a systems - but some really pieces, more

most you time when identify some I to that. early spent able their but exciting, know so - something aggressiveness I thing customers start the for thing openness excited on that's that's teams trying giving of specifics it's is our both combined about is and than excited our more the customers, to to for So pretty I'm and our great guess with be

Paul Trussell

as circle is about to in you or wanted you come impact know, outlook terms your think what's Any months. a on I back your Then quickly on impact your lack of circle environment quarter benign just outlook, inflation just the the change deflation to back on clearly third thereof few inflation results. next your over in to just results? to

Mike Schlotman

the that Yes, up relative about through talk there's time I to that goes deflation, pushing price mind, don't a and increases Keep and inflation necessarily. out marketplace a I about everybody the in over and would like see companies see reacting lot say, where lot CPG really there. no. know of noise Kroger not in I winds forces how we we to when it's will it. marketplace

knows cost key a So years this year last component as next places. of it's is over our continued profit of of in other of things the goods Kroger not the that operating get better three and $XXX versus driving cost that's goods doing million year our of is be may So cost and that something deflation of goods at some actually replicated to improvement inside pricing everybody

Rodney McMullen

somebody than raise their over cost will CPGs more always of always our think important disproportionate I amount whenever a does brands I share increasing when dangerous remember it's as the to thing, economic The a other up think, it's that, and thing of somebody for what what find time that. own something we does to pick cost

doing price it's a try that to So to find that balance we're fine all optimal to what's me point.

Operator

that And Merrill Ohmes of America comes question final Lynch. of from Bank Robby

Robby Ohmes

us can look there ones, in previous the Just what in households similar you through again, - customer if And was quarter, maybe trade this a were and I'm the just the doing that Are at sorry couple seeing there? variances that - to versus I loyal missed they're ticket you traffic I if is of up when give then Mike, Rodney growing chime the quarter? XQ in. again Thanks. quarters? still also of tone any but sorry missed you quick this, curious

Mike Schlotman

up in in that's - in quarter, of was was Yes result inside it of look transactions entities grew a well. the And basket all quarter when you that up a at little as you at mix the little basket look the when what's bit add going you the a value overall of the the quarter. bit when primarily in

Rodney McMullen

tone feels anything - the of buy good, wine, - their they economy easier, to that aggressively to very The still that they buy. people continue will continue life customer the makes

be standpoint, well. and growth to a we as did wouldn't from household So slight continue in have anything then households

Rodney McMullen

Kroger. especially We about incredibly Kroger, are Restock confident the with of future

course associates earnings into our of understand One call that And listen exciting about the of associates well. better of is our of shareholders as our in things gain and to are insights business. many many our

within We like Grieshaber So to with them. seven stores Last eliminating Kroger our end we raise enough associates before what to hustle get to the million to and customers, Zero customers one spirits I'm as of uplift your their to well. day. to feed other. communities all all than inside our our just as are with Together today's with they you happy serve leadership provide examples we hunger Hunger and customer few do We spirits our meals this That and door. our can a human as need and final privilege toward the our partner raised help the call Thanks we Tuesday goal rattled celebration our directed meals million do money job X to New and amazing and Joe Among what and opened safe. us proud conjunction thankfully make walks Alaska. I'd during holiday and almost and welcome share season, affected Fred season. our in of Fred X customers set team operate enough to all call, our Feeding live holiday as so goal celebrated Waste our day. an those holidays few the Zero always brighter. spirit. for customers, Thank our everybody and awesome all X in celebrations closer were earthquake to lift in. serve Giving bustle that Each Year stores for unique together we who you Happy America, week, in or more together. through it of thing It's to the Christmas, Last of a joining. season, shop purpose helping Under our move today. who completes Merry a comments customer These Friday, you our Meyer us million our family our communities. the means a Meyer were we Every to listening each those tradition of of every and teams, work that for is did. of major of I'm you stores customers, to reminded our

Operator

now for concluded. has conference today's presentation. Thank attending The you

You disconnect. may now

The Kroger Co. (KR) 6 Dec 182018 Q3 Earnings call transcript