Kroger Company (The) (KR)

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The Kroger (KR)

Q2 2011 Earnings Call

September 09, 2011 10:00 am ET

Executives

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

Rodney McMullen -

J. Schlotman - Chief Financial Officer and Senior Vice President

Unknown Executive -

Cindy Holmes - Director of Investor Relations

Analysts

Edward Kelly - Crédit Suisse AG

Meredith Adler - Barclays Capital

John Heinbockel - Guggenheim Securities, LLC

Scott Mushkin - Jefferies & Company, Inc.

Karen Short - BMO Capital Markets U.S.

Mark Wiltamuth - Morgan Stanley

Alton Stump - Longbow Research LLC

Deborah Weinswig - Citigroup Inc

Charles Cerankosky - Northcoast Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Kroger Co. Earnings Conference Call. My name is Janita, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Cindy Holmes, Director of Investor Relations. Please proceed.

Cindy Holmes

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

David Dillon

Thank you, Cindy. And good morning, everyone. Thank you for joining us. With me today to review Kroger second quarter 2011 results are Rodney McMullen, Kroger's President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer.

We are pleased with Kroger's strong performance this quarter, which we believe is the outcome of our consistent approach to managing the business and executing our Customer 1st strategy. Our ongoing investments in the 4 keys, or people, products, prices and shopping experience, continue to enhance our connection with customers and drive positive identical sales growth.

Identical supermarket sales for the second quarter increased 5.3%, excluding fuel. This is Kroger's 31st consecutive quarter of positive identical sales growth. These industry-leading results are due to the efforts of our associates to delight our customers while at the same time, delivering good savings on expenses.

Kroger's second quarter performance was broad based across the country and supermarket departments. Each of our 18 retail divisions produced positive identical sales growth, excluding fuel. Every supermarket department also experienced positive identical sales growth in the quarter with the strongest increases in natural foods, deli bakery, produce and meat.

Overall, the second quarter results reflect the balance we strive for in our business. We want to consistently deliver value to both our customers and shareholders. Despite the stagnant economy, our sales grew, tonnage remained positive and both total and loyal household counts are up. Fuel performed better and we maintained good cost control.

In keeping with those solid measures of our performance, we also delivered earnings and earnings per share growth right in line with our internal expectations. In March and again in June, we discussed 5 external factors that are shaping the overall operating environment this year. I'd like to briefly update you on how we're managing our business in the context of these 5 factors.

First, the sluggish economy continues to strain household budgets while increasing consumer anxiety. In fact, customers tell us their expectation for the economy are more pessimistic now than at any time this year. And for the first time, customers list instability of the financial markets as one of the top economic concerns. These examples illustrate how consumer sentiment changed during the quarter and are important because most discretionary spending is based on what people feel or perceive about the economy.

Second, food and fuel prices increased again this quarter. In June, Rodney noted that we were beginning to detect slight changes in consumer behavior due to the increased variability of the economy and food inflation. We read this shifting sentiment correctly, which played out this quarter. Our market share continues to grow as we benefit from the credit customers give us for the investments we've made and continue to make to lower the overall pricing of items in our stores. Rodney will have more to say about how food inflation is affecting shopping behavior shortly.

Third, the overall competitive retail environment is rational and our price check show that most competitors are passing higher costs onto consumers, particularly in the center of the store. There are some exceptions to this. One example is produce. During the quarter, retails did not rise at the same pace as costs because of the shortages in product due to the late growing season.

Fourth, in the last quarter, we told you we expected to see an increase in pension and healthcare costs for this year. The increase will be slightly less than originally projected, but remains a significant challenge.

And finally, during the second quarter, our retail fuel operations generated higher earnings per share compared to last year. Fuel is an important part of our business and as you know, has a high level of variability.

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