Kroger Company (The) (KR)

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The Kroger (KR)

Q3 2012 Earnings Call

November 29, 2012 10:00 am ET

Executives

Cindy Holmes - Director of Investor Relations

David B. Dillon - Chairman, Chief Executive Officer and Member of Proxy Committee

W. Rodney McMullen - President, Chief Operating Officer and Director

J. Michael Schlotman - Chief Financial Officer and Senior Vice President

Analysts

Edward J. Kelly - Crédit Suisse AG, Research Division

Tiffany Kanaga

John Heinbockel - Guggenheim Securities, LLC, Research Division

Meredith Adler - Barclays Capital, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Shane Higgins - Deutsche Bank AG, Research Division

Charles Edward Cerankosky - Northcoast Research

Mark Wiltamuth - Morgan Stanley, Research Division

Karen F. Short - BMO Capital Markets U.S.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

Andrew P. Wolf - BB&T Capital Markets, Research Division

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 The Kroger Co. Earnings Conference Call. My name is Derek, and I will be your operator for today. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Cindy Holmes, Director of Investor Relations.

Cindy Holmes

Thank you, Derek, and thank you, everyone, for your patience while we work out these technical issues. 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 third quarter press release and our prepared remarks from this conference call will be available on our website at www.thekrogerco.com. After our prepared remarks, we look forward to taking your questions. [Operator Instructions] Thank you.

I will now turn the call over to Dave Dillon, Chairman and Chief Executive Officer of Kroger.

David B. Dillon

Thank you, Cindy, and good morning, everyone. Thank you for joining us today. If you're on the call, it probably means you did not win the Powerball last night. We do apologize for the technical phone difficulties we had earlier, and thank you for sticking with us.

With me to review Kroger's third quarter 2012 results are Rodney McMullen, Kroger's President and Chief Operating Officer; and Mike Schlotman, our Senior Vice President and Chief Financial Officer.

We are obviously delighted about the numbers we just released. Both our GAAP and our adjusted earnings per share growth are the result of the powerful foundation that we have laid for our business to grow. Our core business drove earnings per share growth by more than 20%. This strong result excludes the 2 items identified in our earnings release and the swing in LIFO from year to year.

This was a remarkable quarter by several measures. We achieved our 36th consecutive quarter positive ID supermarket sales growth, we realized a record third quarter earnings per share, we increased total FIFO operating profit dollars and we saw the highest increase in unit movement since the second quarter of 2010.

This quarter illustrates that the strength of our core business positions Kroger to accelerate our earnings per share growth. The economy is slowly improving, but value customers are still struggling. We continue to monitor changes in gas prices and inflation. Customer concern over fuel and energy costs lessened as gas prices declined through the quarter. Rodney will have more to say about declining inflation shortly, which contributed to the growth in our unit movement in the quarter. Overall consumer confidence is up, but it remains fragile. Uncertainty around issues like the fiscal cliff can have a short-term impact on consumer sentiment, as we saw last year during the debt ceiling debate. Kroger is well positioned to successfully navigate through these factors.

I'd like to say thank you again for your participation in the Investor Conference in New York City last month. The purpose of that event was to outline for you our plans to accelerate Kroger's earnings growth. We're implementing our long-term growth strategy, and we are committed to achieving fully diluted earnings per share growth of 8% to 11% plus a higher dividend over time, supported by targeting capital expenditures to grow our business in new and existing markets, leveraging dunnhumby insights to solve varied customer needs through both traditional and digital channels and continuing our share buyback program. That is what we believe will grow Kroger and shareholder value, and we are bullish about our future.

Rodney will now discuss how Kroger is executing our growth plans and our positive business results in the third quarter. Rodney?

W. Rodney McMullen

Thank you, Dave, and good morning, everyone. It is definitely an exciting time at Kroger. We have aligned our senior leadership team to accelerate our growth strategy. All across the business, our associates are executing to deliver growth results. In 2013, we plan to build, expand or relocate 50 supermarkets compared to 40 expected this year. We are making good progress adding square footage in 4 fill-in markets, and others are being identified based on various metrics. We are narrowing the list of new markets for future expansion.

Earlier this month, we announced that Kroger will acquire the outstanding shares of Axium Pharmacy, a leading specialty pharmacy that provides specialized drug therapies and support services for patients with complex medical conditions. Axium has the skills Kroger doesn't have, and Kroger's size can help Axium grow. Offering specialty pharmacy services will give our customers greater access to drugs we currently can't dispense and access to additional services that we don't provide today. We're very excited about this new partnership.

One of the most important measures of our business is loyal household growth because it lets us know how well we are connecting with our best customers. During the third quarter, we grew the number of loyal households in all divisions. Our loyal household count grew at a much faster rate than total household growth, which was also up for the quarter.

We also achieved positive identical supermarket sales growth for all households. ID sales growth among loyal households outpaced total household growth. Customers continue to visit our stores more frequently and buy more on a monthly basis. Customers also purchased more items on each trip, a welcome change from what we've seen for the last several quarters. As a result, total units sold were up compared to last year. This tonnage growth confirms our belief that we continue to make market share gains in the overall food retailing industry.

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