Kroger Company (The) (KR)

KR 
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The Kroger (KR)

Q3 2011 Earnings Call

December 01, 2011 10:00 am ET

Executives

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

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

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

Cindy Holmes - Director of Investor Relations

Analysts

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Charles Edward Cerankosky - Northcoast Research

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

Mike Otway - Jefferies & Company, Inc., Research Division

Alton K. Stump - Longbow Research LLC

Meredith Adler - Barclays Capital, Research Division

Deborah L. Weinswig - Citigroup Inc, Research Division

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

Todd Duvick - BofA Merrill Lynch, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Presentation

Operator

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

Cindy Holmes

Thank you, Stacy. 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. With me to review Kroger's third quarter 2011 results are Rodney McMullen, Kroger's President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer.

Kroger associates delivered on our Customer 1st strategy in the third quarter. We had strong sales and earnings per share growth. This is exactly the positive momentum we strive for as we enter the holiday season, our most exciting time of the year, and we are very pleased.

Keep in mind that a year ago, third quarter earnings were helped by a $0.02 tax benefit and a $50 million lower LIFO charge. In that context, this was an outstanding quarter.

Based on the consistency of our results over the course of this year, we have the confidence to raise our earnings and sales guidance for the year. Identical supermarket sales increased 5% without fuel for the quarter. This continues Kroger's industry-leading trend of positive identical sales growth for 32 consecutive quarters. Consistent identical sales growth lets us know that our Customer 1st strategy is connecting with customers in a meaningful way.

Our focus on 4 keys, our people, products, prices and shopping experience is how we grow customer loyalty each shopping trip. Positive identical store sales also drive earnings growth as illustrated by our results so far this year.

Our third quarter performance was broad-based across the company. Each of our 18 retail divisions had positive identical sales, excluding fuel. Every department achieved positive identical sales as well, led by growth in natural foods, deli and produce.

I would like to especially recognize our associates for their excellent work to control costs this quarter.

Kroger's financial results are solid, dependable and predictable, especially on a rolling 4-quarter basis. They reflect the balance that we seek between cost savings and investments to consistently grow our business and deliver a value both for our customers and our shareholders.

In a few minutes, Rodney will share some additional customer insights with you, including loyal household and tonnage trends, along with the performance of Kroger's exclusive corporate brands.

First, I'd like to touch on the 2 themes that we told you at the beginning of the year would influence Kroger's fiscal 2011 financial results. The first is our commitment to the Customer 1st strategy that we just discussed. We want to reduce the overall cost of running our business in ways that do not negatively affect our customers, and then reinvest those savings in our customers to drive higher sales. Higher sales, in turn, produce higher earnings.

The second theme includes the external factors that are influencing Kroger's business this year. The pace of the economic recovery, the impact of food and fuel prices on customer spending, the competitive environment, higher pension and healthcare costs and retail fuel margins.

Inflation and the economy have had a more negative effect on the overall operating environment than we had originally expected. We have successfully navigated these influences by following our business strategy and making tactical adjustments as needed over the course of the year.

Rodney will now offer some more insight into the business for the third quarter. Rodney?

W. Rodney McMullen

Thank you, Dave, and good morning, everyone. We are very pleased with the results our Kroger team has achieved in the third quarter. As Dave mentioned, our associates have done an incredible job serving our customers by controlling expenses and cutting costs. We are investing those savings in ways that enhance the shopping experience and help our customers save even as in food inflation persists at high levels. Executing our Customer 1st strategy enables us to deliver value today while continuing to invest for the future.

I would like to begin by discussing how our customers are navigating this challenging consumer environment and how that is impacting our business. Despite the consumer caution and rising food prices, Kroger continued to add both loyal and total households in the third quarter, adding loyal households at a faster rate. The combination of growing loyal households and an increase in shopping trips resulted in more units sold to those customers.

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