Kroger Earnings Call NUGGETS: Growth and Tonnage, Expense Opportunity

On Friday, Kroger Co (NYSE:KR) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Growth and Tonnage

Deborah Weinswig – Citigroup: Congratulations on a great quarter. Can you just help us understand the growth and tonnage this quarter maybe versus the past three? It sounds like it’s improving in terms of overall growth but maybe just help us understand the actual numbers?

David B. Dillon – Chairman and CEO: Well, the tonnage trend in growth has increased because as we said the last two quarters I believe we were essentially flat and now we’re seeing actual growth. We did see a little bit more growth in national brands than we did Kroger brands, but we saw growth overall and that’s probably to the extent of the color. Rodney, do you want to add anything?

W. Rodney McMullen – President and COO: I would just say it’s very broad-based, most categories had growth and it’s really – it’s been driven by the increased loyalty from the customers with the household count flowing through to buying more products that’s what’s really driving it.

Deborah Weinswig – Citigroup: Can you point anything at anything specifically that you are doing or what do you think at this point, the game is driving at?

W. Rodney McMullen – President and COO: I think its multiple things. I think the lower inflation rate is certainly helping some. Certainly, if you look at some of our work with dunnhumby and targeted mailings, there are certain segments we weren’t satisfied with the result we were getting and we worked real hard on making some targeted offers for those customers and they are rewarding us with increased purchases. So it’s really both of those pieces together and then just an overall improvement in household count shopping with us.

Deborah Weinswig – Citigroup: When did the queuing initiative start and how you then communicating that to existing customers and may be not existing customers?

W. Rodney McMullen – President and COO: It’s really started probably 3.5 year ago in terms of learning how to do it. It involves a tremendous amount of work with our associates and technology behind the scenes to support our associates, so it’s really both working together. It probably took a year to get to where all that was working together and then it took a couple years to get it rolled out across the Company. The way we communicated to our customers is really letting our associates in in the advertising tell – our associates tell our customers what they are doing for them.

Deborah Weinswig – Citigroup: I would say as somebody, myself who is in your stories a lot. Now you’re going and you’re like where is everyone and it’s when you get to the front line, it’s just that they are getting to your lines so quickly. That’s the experience and so I just wanted to see if that was having any impact of the tonnage as well.

W. Rodney McMullen – President and COO: Certainly it has to help some because the customer realizes they can come to Kroger and to get out really fast, so it has to help. Everything we’re doing, Deb, is designed to cause customers want to shop with us more of their shopping trip and this is certainly one really good example. But there is of course lots of other things we are doing but all of those contribute to that trend.

Deborah Weinswig – Citigroup: One last question out there. Any plans with regards to bringing your corporate brands available to consumers outside of where you stores through e-commerce. I was just thinking about how great that coffee pod sounded?

W. Rodney McMullen – President and COO: At this point not directly now from using a website I would expect some time and not forever future that you’ll see that.

Expense Opportunity

John Heinbockel – Guggenheim Securities: So two things. One, if you think about the expense opportunity, some of the bulk of it is going to be in-store right where that – where the bulk of the costs are, where do you think there is still a large opportunity to take some costs down and you have done some work at the front end but if you think about back room, if you think about some of the perishable departments maybe grocery and if you do think about all more like that, where do you think the one or two biggest opportunities are to continue to take labor out?

David B. Dillon – Chairman and CEO: Well it won’t surprise you John that, we won’t identify the specific things going out there, but I will identify a couple of observations. First the best way to save in our kind of business is in lots of different ways. They can be multiplied by the number of stores and by our volume. By the way it’s definitely not all focused on just taking labor hours out, in fact more of what we are trying to do is find ways to reduce the labor required for some tasks that don’t matter to the customer and then spend those same labor hours on things that do matter to the customer like getting them through the front end quicker. So it’s not so much – in fact, we’ve grown number of employees this year. We end up growing hours in our stores. All of that is on the upswing. So, really what we’re trying to do is to being more effective in the tasks that just simply don’t matter and apply the resources in places that actually do. We see plenty of opportunities out there. Not all of them have to do with things that people do. A lot of them have to do with things that are not involving labor. Rodney?

W. Rodney McMullen – President and COO: If you look at the sustainability that we talked about obviously for the environment, it’s a tremendous improvement in sustainability and helping make the world a better place. But it also saves a lot in costs, because if you think about the 19 plants that have zero waste to landfill, while we are not taking stuff to landfill, so that cost is no longer there. So, it’s not just labor in the stores where we’re able find costs and we have a long list of opportunities and it’s really prioritizing in terms of how many can do you at a time.

John Heinbockel – Guggenheim Securities: Tell me if I’m wrong, but I would think just on a kind of a normalized basis, normal cost inflation in your cost items, you’d be 2% to 3%. So, I guess the question is could you do a much better job the last couple of years. Can 1% to 2%, can you grow and it will always will depend on the comp. If 2% to 3% is the right number on an ongoing basis, should O&A grow lower than that as you take some of these costs out or was that too optimistic?

W. Rodney McMullen – President and COO: Well, you’ll see us work awfully hard not to have a 2% to 3% base inflation and we do an awful lot of partnering with our suppliers and vendors to try to understand how can we work together to take costs out of the system both for them and for us. So, as it is right – I wouldn’t – you shouldn’t assume that we’ll have a 2% to 3% cost increase.

John Heinbockel – Guggenheim Securities: Then just finally, just describe where do you think the M&A environment is right now and. I know you want to do more in-market transactions if you can, but where is the environment and is there any appetite for entirely new markets or not really in the economic environment we’re in today.

David B. Dillon – Chairman and CEO: I feel like I have to just pullout the script from speech number 47 because the same thing we’ve said for many quarters in a row is still true today is that we look at lots of stuff. We find that in-market things seem to be more successful and appealing to us. Big things are things we’re going to be very selective about and that we don’t comment on anything that we’re taking a look at. Now you just need to recognize that we are regularly looking at things that are out there. I don’t really see the environment any different. I don’t see our strategy or plans any different than they had been for the last several quarters.