KROGER CO Q1 FY2025 earnings call

Management Statement and Operational Highlights:

• Priorities include positioning Kroger for long-term growth, accelerating top line sales, and running great stores.
• Made changes to focus on core business, including directing investments to growth projects, reassessing capital allocation, reviewing noncore assets, reducing costs, and restructuring leadership.
• Closed approximately 60 underperforming stores over the next 18 months, with associates at affected stores offered roles in other stores.
• Invested in associates' wages, benefits, and development, achieving record store and company retention rates.
• E-commerce structure unified under Yael Cosset to enhance operations for profitability and customer experience.

Segment Performance:

• Fresh: Fresh identical sales were better than center store sales, supporting identical sales without fuel results.
• Our Brands: Grew faster than national brands for the seventh consecutive quarter, with Simple Truth and Private Selection leading sales growth. Our Brands is also innovating with new products like 80 new protein products from Simple Truth.
• E-commerce: Grew 15% in the first quarter, driven by strong demand in delivery. The new e-commerce business unit under Yael Cosset is working to improve the customer experience and profitability.

Guidance:

• Raised identical sales without fuel guidance to a range of 2.25% to 3.25%.
• Second quarter identical sales without fuel expected to be at the midpoint of the full year guidance range.
• Plan to close ~60 underperforming stores over the next 18 months, with modest financial benefit and reinvestment in customer experience.
• Reaffirmed full-year guidance for net operating profit and adjusted earnings per share.
• $5 billion ASR program expected to be completed by no later than the third fiscal quarter of 2025, with plans to resume open market share repurchases under the remaining authorization by year-end.

Risks:

• Macroeconomic uncertainty with customers spending cautiously.
• Potential impact of tariffs, though currently minimal, and proactive measures to avoid passing on costs to customers.
• E-commerce profitability challenges as the business works to become profitable.

Question and Answer: Q: Edward Kelly of Wells Fargo asked about pricing and value perception.

A: Ronald Sargent said they continue to invest in lower prices, with 2,000 additional items priced lower in Q1, and David Kennerley added on making prices easier to access.

Q: John Heinbockel of Guggenheim asked about noncore assets and capital allocation.

A: Ronald Sargent defined core as serving customers, and David Kennerley said storing projects offer higher returns than remodels.

Q: Robert Ohmes of Bank of America asked about tailwinds to ID sales and customer segments.

A: Ronald Sargent mentioned pharmacy, fresh, and division execution, with David Kennerley adding on inflation and pharmacy growth.

Q: Simeon Gutman of Morgan Stanley asked about market share and e-commerce.

A: Ronald Sargent talked about store openings, in-store experience, and e-commerce growth, with David Kennerley adding no additional comments.

Q: Paul Lejuez of Citigroup asked about Our Brands and regional differences.

A: Ronald Sargent spoke about Our Brands growth and no specific regional differences, with David Kennerley adding on store growth in certain markets.

Q: Michael Lasser of UBS asked about e-commerce cannibalizing center store and price investments.

A: Ronald Sargent and David Kennerley said grocery center store trends are improving and discussed gross margin offsets.

Q: Leah Jordan of Goldman Sachs asked about retail media and shrink.

A: David Kennerley talked about retail media engagement and shrink improvement due to technology.

Q: Rupesh Parikh of Oppenheimer asked about Express Scripts ramp.

A: David Kennerley said ESI had minimal impact on the quarter.

Q: Charles Cerankosky of Northcoast Research asked about storing strategy.

A: Ronald Sargent talked about store closures and future store openings.

Q: Kelly Bania of BMO asked about digital sales and Ocado.

A: Ronald Sargent and David Kennerley spoke about e-commerce growth and Ocado's letter of credit drawdown being contractual.

Q: Scott Marks of Jefferies asked about Our Brands and regulatory changes.

A: Ronald Sargent talked about Our Brands performance and regulatory responses to artificial ingredients and tariffs.