Kroger Company (The) (KR)

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The Kroger (KR)

Q2 2012 Earnings Call

September 07, 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

Deborah L. Weinswig - Citigroup Inc, Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Charles X. Grom - Deutsche Bank AG, Research Division

Meredith Adler - Barclays Capital, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

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

Brian Cullinane - Jefferies & Company, Inc., Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Charles Edward Cerankosky - Northcoast Research

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

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 The Kroger Co. Earnings Conference Call. My name is Janeda, and I will be your operator for today. [Operator Instructions] Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Cindy Holmes, Director of Investor Relations. Please proceed.

Cindy Holmes

Thank you, Janeda. 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. [Operator Instructions]

On behalf of all of us at Kroger, we thank many of you for participating in our June survey. We strive to be exceptional listeners at Kroger, whether listening to our customers, our associates or our shareholders. We appreciated your time and honest assessments. We are also hopeful that you can join us for our 2012 investor conference on October 16 in New York. We look forward to seeing many of you next month for this important session with Kroger leadership.

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 second quarter 2012 results are Rodney McMullen, Kroger's President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer.

I am pleased with Kroger's strong performance in the second quarter. Kroger's shareholders once again benefited from our Customer 1st strategy. Increased customer loyalty and solid cost controls allowed us to grow sales, profitability and shareholder value.

In the second quarter, we reported record second quarter earnings per share. We increased identical supermarket sales for the 35th consecutive quarter. We increased identical sales in every operating division and every store department. We grew the number of loyal households in all divisions. We increased FIFO operating profit by $47 million. We increased tonnage over last year. And we put Kroger's strong free cash flow to work for shareholders by repurchasing 23.7 million shares.

Based on the strength of our second quarter results and the higher-than-anticipated share repurchase activity, we have raised our earnings per share guidance for the year and expect to achieve toward the upper end of our identical supermarket sales growth and earnings per share guidance. Mike will have more to say on our guidance in a few minutes.

Our associates controlled costs and improved productivity in the second quarter, saving money in places not important to customers so we can reinvest in places that are. We target investments in the 4 keys of our strategy, people, products, shopping experience and price to increase relevance with our customers. Greater relevance inspires customer loyalty and grows both sales and profit as our second quarter results demonstrated. This is what makes Kroger unique among food retailers, our unrelenting focus on solving our customers' needs. That we've achieved consistent ID sales growth demonstrates that our strategy resonates with customers and our increased earnings guidance demonstrates how this creates shareholder value.

Rodney will now discuss Kroger's positive business trends in the second quarter. Rodney?

W. Rodney McMullen

Thank you, Dave, and good morning, everyone. Kroger leveraged operating expenses in the second quarter as OG&A costs plus rent and depreciation without fuel were down 59 basis points as a percent of sales. On this basis and excluding one-time items, we have had 7 consecutive years of reductions in this metric. And our year-to-date results set us up to achieve our eighth consecutive year.

We do this consistently through a determined emphasis on productivity improvements. For example, we've gained efficiencies in our 1,948 pharmacy locations by utilizing new technology that helps our pharmacists to better manage workflow, prioritize prescriptions and allocate work between pharmacists and pharmacy technicians. The increased productivity reduces customer wait times and provides an enhanced pharmacy experience.

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 second quarter, our loyal household count grew at a faster rate than total household growth, which was also up for the quarter. We also achieved positive identical sales for both total households and loyal households. Identical sales growth among loyal households was stronger than total household result. Customers continue to visit our stores more frequently, purchase fewer items on each trip and buy more on a monthly basis. This is consistent with what we've seen for the last several quarters.

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