This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Please note this event is being recorded. I would now like to turn the conference over to Rob Quast, Senior Director of Investor Relations. Please go ahead.
spk04: Good morning. Thank you for joining us for Kroger's second quarter 2023 earnings call. I am joined today by Kroger's Chairman and Chief Executive Officer, Rodney McMullen, and Chief Financial Officer, Gary Millichap. I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements or 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. The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. Given the breadth of information that will be covered on the call and our divestiture announcement earlier this morning, We will extend our Q&A session, if needed, to ensure that we can cover a broad range of topics from as many of you as we can. We still ask that you please limit yourself to one question and one follow-up question, if necessary. I will now turn the call over to Rodney.
spk15: Thank you, Rob. Good morning, everyone, and thank you for joining us today. Before we begin, I'd like to take a moment to outline the framework for our discussion this morning, given that we have several important topics to cover. I will begin by covering the consumer environment and how the strength of our value creation model is supporting earnings growth and generating strong free cash flow. Then Gary will cover our financial results and highlights as well as provide an update on our nationwide opioid settlement framework. Finally, I will conclude with some brief comments on the divestiture plan press release we issued earlier this morning. We are excited about sharing our plans for this important milestone, and we look forward to taking your questions during the Q&A segment of today's call. Now turning to our second quarter, Kroger continues to effectively navigate a challenged environment and delivered another quarter of consistent results. As economic uncertainty persists, the strength of our model is enabling us to deliver value for our customers, continue to invest in our associates, and deliver consistent shareholder return. Value remains top of mind for many of our customers as they are balancing several factors that are impacting their food at home spending. The effect of sustained inflation, reduced government benefits including SNAP, and higher interest rates have pressured customer spending, especially for those on a tight budget. To support our customers, we are delivering increased value through our robust Our Brands portfolio, personalized digital offers, fuel rewards, and loyalty discounts, including weekly specials and yellow tag promotions. Economic instability continues to impact customer segments differently. We are seeing this in their shopping behaviors. Higher income households continue to engage more deeply with us, enjoying our customer experience with zero compromise on convenience, quality, and value. These customers are especially valuable to our mix as they purchase bigger pack sizes, shop more fresh categories, and trade up to more premium R Brands products. On the other hand, Budget conscious households are facing external spending pressures. These customers are buying smaller pack sizes and at times prioritizing the lowest shelf price. These customers are building smaller baskets and switching to lower priced items to stretch their budgets. They are also exhibiting spending patterns that ebb and flow with payroll periods and SNAP benefit distributions. We expect these broader economic headwinds to continue pressuring customer spending in the second half of the year. While the environment is difficult, we are never satisfied with sales, and we are focused on driving more units in the back half of the year. Our teams are sharpening store execution, identifying basket add-ons, and adapting to customers' evolving needs. we saw an improvement in our budget-conscious household trends since last quarter as we expanded our assortment of everyday staples at lower price points. And as an example, we introduced new in-store displays where every item is below $3. Additionally, we continue to improve price position relative to key competitors, demonstrating our long-term commitment to provide customers with exceptional value. We are creating more engagement with customers through personalization, offering more targeted and effective promotions, and our seamless ecosystem is resonating with customer needs and allows us to drive increased loyalty. And customers are rewarding us for this work. The second quarter represented our ninth consecutive quarter of total household growth. And now I'll provide more detail on how our go-to-market strategy is delivering for our customers. We are reimagining our offerings throughout our portfolio of our brands. With more than 13,000 products available, customers can enjoy a wide range of high-quality alternatives to fit each customer's budget. Additionally, we are improving the profitability of our brands. Through our brand architect work, we are ensuring each brand plays a unique role on the shelf. Last year's introduction of our opening price point brand, Smartway, provides a great option for those prioritizing the lowest price at the shelf, and it is resonating with our customers. Turning to Seamless, strong growth in our pickup and delivery businesses led to another excellent quarter in digital. This growth was underscored by a rise in both households and traffic. Our digital team's relentless pursuit of improving the customer's experience is driving our success. We scaled our hands-free technology across the company to improve speed, and expanded pickup options with automated pods and lockers, improving productivity and providing customers with more flexibility. Our in-store associates are also playing a critical role in our success. This quarter, they reduced wait time, lowered costs to serve, and improved fill rates. Pickup has had a positive incremental contribution for some time. In multiple divisions now, our pickup business today is now profitable on a fully loaded basis. And by continuing to scale our operations, we have a clear path to sustainable profitability in pickup. Next, on personalization. Personalization enables us to meet our customers' unique needs and deliver value beyond a product's shelf price. Our best-in-class data science work powered by our loyalty data, is driving strong digital engagement. So far this year, customers have clipped more than 2 billion digital offers. To me, that's just an amazing number when you think about 2 billion. We've also increased our digitally engaged households by 1.2 million compared to last year. This growth is important to our model as digitally engaged households are more loyal, spend nearly three times more with us and help grow our alternative profit businesses like Kroger Precision Marketing. Now I'd like to share more about how our diversified business model continued to support earnings growth this quarter and gives us confidence in our abilities to navigate the environment ahead. Starting with our alternative profit businesses, Alternative profits had an impressive second quarter, led by strong growth in our retail media business, Kroger Precision Marketing. Our seamless ecosystem continues to drive data and traffic, which benefits this business. KPM applies these insights and its data science to build custom audiences and precisely measure return on ad spend delivering significant value to clients. This quarter, KPM announced a new in-house advertising platform which allows greater flexibility to serve clients and improve outcomes for brands. Grover Health is another important component of our business that allows us to help customers live better lives and strengthen our model. The terminated agreement with ESI has freed up some capacity in our pharmacies and our Kroger Health teams are doing a great job of utilizing that capacity. Our pharmacists are dedicating more time to patient care and delivering better patient experiences. We are also simplifying work for our teams and lowering costs by expanding our use of automation. We are improving patient communications through modernized tools, which is driving better patient adherence to care plans and supporting growth. We are encouraged by the momentum in our health and wellness business and believe this is an opportunity for further profitable growth over the next several years. Our amazing associates are providing customers a full, fresh, and friendly experience every day. We remain committed to supporting our associates through investment in wages, and over the last five years, we have raised wages by 30%. We are also committed to supporting our associates' development. I often say that our focus is to make Kroger a place where associates can come for a job and discover a career. Kroger has made significant investments to support this culture, and our teams have done a tremendous job creating training programs to help develop our future leaders. Their work was recently recognized with eight awards from the Brandon Hall Group, a leading human capital management firm. We are so proud of the work you are doing to help make Kroger an employer of choice. I am inspired every day to see how our associates bring our purpose to feed the human spirit. Our zero hunger, zero waste impact plan is a vital part of how we live our purpose in the communities we serve. Upon launching the plan in 2017, Kroger committed to donate 3 billion meals by 2025. We are so excited to share that we reached this ambitious target in the first quarter of this year, more than two years ahead of our goal. This quarter, we announced plans to accelerate our commitment to hunger relief. Upon completion of the merger with Albertsons, the combined company will donate 10 billion meals by 2030 to feed people struggling with hunger. To put that in perspective, it is enough food to feed every person in the cities of Seattle, Denver, Chicago, and Boston. every meal every day for nearly two years. This is one of many ways that this proposed merger will benefit the communities we serve. With that, now, I'll turn it over to Gary to take you through our financial results. Gary?
spk11: Thank you, Rodney, and good morning, everyone. Kroger's second quarter results demonstrate the resiliency of our value creation model. The investments we have made over recent years to strengthen and diversify our business are enabling us to deliver consistent results despite a difficult environment. And this was very much evident when you consider the key trends we saw in our business in quarter two. While industry-wide disinflation continues to impact food at home sales, our team is doing an excellent job managing the effects of this trend on our business. Key highlights for the quarter include eps growth despite a significant year-over-year headwind from fuel profitability and underlying operating results excluding fuel improved versus prior year due to strong gross margin management tight cost controls and continued growth in alternative profit businesses i'll now provide more detail on our results this quarter identical sales without fuel grew one percent Underlying growth would have been 2.6% after adjusting for the effect of the previously communicated decision to terminate our agreement with Express Scripts. Similar to the first quarter, the terminated agreement with Express Scripts had a positive effect on our FIFO gross margin rate excluding fuel and a negative effect on the OG&A rate excluding fuel and adjustment items. The overall effect on operating profits during the second quarter was slightly positive. And we would expect this to continue to be the case for the remainder of 2023. Our decision to terminate the agreement with Express Scripts reflects our commitment to making decisions that we believe are in the long-term best interests of our customers and shareholders. Turning back now to identical sales without fuel. In the second quarter, results were at the low end of our internal expectations as we saw food at home inflation decelerate at a faster than expected pace. Inflation ended the quarter approximately 350 basis points lower than the start of the quarter. Our sales growth was underpinned by strength in our digital business, which grew 12%. Our unique combination of assets, including stores and fulfillment centers, helped us achieve growth in both pickup and delivery channels. The growth in delivery was led by a continued ramp in volumes through our CFC network and boost membership. Gross margin was 21.8% of sales. Our FIFO gross margin rate excluding fuel increased 35 basis points compared to the same quarter last year. Our team is doing a highly effective job balancing the impact of inflation, and the improvement in rate was primarily attributable to strong our brand's performance, lower supply chain costs, sourcing benefits, and the effect of our terminated agreement with Express Scripts. These tailwinds were partially offset by higher shrink and promotional price investments. Importantly, as Rodney shared earlier, this improvement in rate was achieved while also improving our price position relative to key competitors. Supply chain efficiency is one of many components of our strategy to expand margin over time while continuing to invest in greater value for our customers. This quarter, we achieved meaningful operational efficiencies in supply chain through improved transport capacity utilization and increased productivity in our warehouses and across our network. We continue to invest in our supply chain as we see significant opportunities to further lower costs while also improving freshness for customers by eliminating waste in our ecosystem. Shrink increased during quarter two, primarily due to rising theft and organized retail crime. We are implementing initiatives to mitigate the financial impact, including increased security and new technology solutions, but would expect shrink trends will continue to be a challenge for the remainder of the year. During the quarter, we recorded a LIFO charge of $4 million compared to a charge of $148 million for the same quarter last year. This $144 million year-over-year tailwind from LIFO partially offset the $192 million headwind we experienced in fuel operating profit during the quarter. The decrease in our LIFO charge was primarily attributable to a downwardly revised inflation outlook for the remainder of 2023. Kroger's OG&A rate was flat, excluding fuel and adjustment items. Our team continues to do an excellent job controlling costs, and after adjusting for express scripts, we saw underlying improvement in our OG&A rate, excluding fuel and adjustment items. Our cost saving initiatives are focused on simplification and utilizing technology to enhance the associate experience without impacting the customer. For example, we are improving productivity in our stores by expanding shelf-ready packaging and introducing data-driven enhancements to associate mobile devices that optimize the restocking process. We remain on track to deliver our sixth consecutive year of $1 billion in cost savings. Fuel is an important part of our overall value proposition, and our fuel rewards program continued to drive customer engagement in the second quarter. The average retail fuel price was $3.65 this quarter compared to $4.62 last quarter, and our cents per gallon fuel margin was $0.45 this quarter compared to $0.62 last year. While fuel profitability was a significant headwind compared to prior year, we were cycling historically high results from 2022, and fuel margins remain very healthy relative to historical trends. I'd now like to provide a brief update on labor relations. During the second quarter, we ratified new labor agreements with the UFCW for Dallas Clarks, Southern Illinois Clarks and Meat, and Smith's Utah Clarks and Meat, covering more than 30,000 associates. In the third quarter, we have also ratified a new labor agreement with the UFCW for Fry's Food and Drug Stores Associates. Turning now to liquidity and free cash flow. Kroger continues to generate strong free cash flow through consistent operating results and working capital improvements. At the end of the second quarter, Kroger's net total debt to adjusted EBITDA ratio was a record low of 1.31. This compares to our net total debt to adjusted EBITDA target range of 2.3 to 2.5. The company expects to continue to pay its quarterly dividends and expects this to increase over time, subject to board approval. As a reminder, we have paused our share repurchase program to prioritize deleveraging following the proposed merger with Albertsons. We continue to be disciplined with our deployment of capital, prioritizing the highest return opportunities that support our growth strategy and TSR model. This discipline is reflected in our ROIC results, which have now improved in each of the last three years and is significantly above our cost of capital. This morning, Kroger announced a nationwide opioid settlement framework to settle substantially all opioid lawsuits and claims against Kroger. As a result, included in our financial results is a $1.4 billion charge related to the settlement, resulting in a loss per share of $1.54 this quarter. This amount was excluded from our adjusted FIFO operating profit and our adjusted EPS results to reflect the unique and non-recurring nature of the charge. Under this settlement, Kroger has agreed to pay up to approximately $1.4 billion, or $1.1 billion after tax, with approximately $1.2 billion to be paid over 11 years and approximately $177 million to be paid over six years, each in equal installments. Initial payments will begin in December 2023 and would total approximately $140 million per year pre-tax for the first six years and approximately $110 million per year pre-tax for the following five years. This settlement is not an admission of wrongdoing or liability by Kroger and Kroger will continue to vigorously defend against any other claims and lawsuits relating to opioids that the final agreement does not resolve. We believe that resolving these claims is in the best interest of Kroger and its customers, associates and shareholders, and all of those affected by the opioid crisis. Additionally, this settlement and the payment terms will not affect Kroger's ability to complete its proposed merger with Albertsons, and we remain on track to achieve a net total debt to adjusted EBITDA ratio of 2.5 within 18 to 24 months post-close. In closing, I'd like to provide additional color on our outlook for the remainder of the year. As I shared earlier, disinflation is occurring at a greater rate in 2023 than we originally anticipated, and our customers are continuing to feel the effects of macroeconomic conditions. For these reasons, we believe the remainder of the year will continue to present challenges to navigate, and we expect identical sales without fuel will now be at the low end of our full-year guidance range of 1% to 2%. we would expect identical sales without fuel to be slightly negative in the second half of the year. As a reminder, this guidance reflects the effect of express scripts, which is reducing our reports identical sales without fuel by approximately 150 basis points in 2023. Despite slowing sales as demonstrated in our year to date results, we believe we have the flexibility within our model to navigate the impact of this environment through effective cost management and growing alternative profits. We are maintaining our adjusted net earnings per diluted share and adjusted net operating profit guidance and would expect adjusted EPS to be in line with the prior year in the third quarter and slightly ahead of the prior year in the fourth quarter before including the approximately 15 cent benefit at the 53rd week. Kroger delivered another quarter of consistent results built on the foundation of record growth over the past three years. While macro uncertainties remain, we are confident the strength and resiliency of our value creation model will allow us to continue to deliver attractive and sustainable total shareholder returns. And now I'll turn it back to Rodney.
spk15: Thank you, Gary. Before we open up the floor to your questions, let me provide a brief update on our pending merger with Albertsons Companies. This morning, Kroger and Albertsons Companies announced that they've entered into a definitive agreement with CNS wholesale grocers for the sale of 413 stores, as well as banners, distribution centers, offices, and private label brands in connection with our proposed merger. When we announced plans to merge with Albertsons last year, we committed to delivering a divestiture plan that would ensure the stores will remain open Front line associates will remain employed, and existing collective bargaining agreements will continue. A critical component of that plan was to identify a well-qualified buyer who would be able to operate as a fierce competitor. Since then, we've conducted a robust and thoughtful diligence process and reviewed dozens of buyers spanning from private to public to union to non-union, domestic and international players. We are very proud today to announce the conclusion of that process, which has led us to CNS Wholesale Grocers, a well-qualified buyer that meets all the criteria necessary to complete our transaction. CNS is one of the largest private companies in America today. and an industry leader in wholesale grocery supply and supply chain solutions, with a strong track record as a successful grocery retailer. Operating for over 100 years, CNS's retail footprint includes more than 160 stores, and the company services customers of all sizes, supplying more than 100,000 products to more than 7,500 independent supermarkets, retail chain stores, and military bases. CNS service offerings include a full suite of retail service offerings very similar to what Kroger provides in the house, including merchandising, e-commerce, accounting, and store design for examples. The company is deeply invested in the communities where it operates. and this retail expansion will continue their long-standing mission to help feed communities. CNS is led by an experienced management team with the financial strength to complete this transaction and also invest in the business for future growth. The company's comprehensive operational infrastructure and purchasing efficiency positions them to successfully operate in today's competitive environment. The divestiture plan ensures no stores will close as a result of the merger and that all frontline associates will remain employed. CNS is also committed to honoring all collective bargaining agreements, which include industry leading benefits and further investing for growth. Importantly, The company also brings experience with the merger process, having been an FTC-approved divestiture buyer in prior grocery transactions with a strong record of successfully integrating union employees and collective bargaining agreements. To help support the immediate and long-term success of the divestiture business, the divestiture plan includes more than just a collection of stores. but also a robust operational infrastructure. Included in the cell are centrally located distribution facilities, regional headquarters, and strong teams with deep industry expertise. In terms of consideration, the financial terms of this divestiture plan are in line with what we expected and allow us to reaffirm the compelling shareholder value creation opportunity this transaction creates. With the announcement today, we are confident that our plans fulfill all the commitments we set out in the original merger agreement. Our proposed merger with Albertsons creates meaningful and measurable benefits for America's consumers. Kroger and Albertsons associates and communities that both Albertsons and Kroger serve This key step keeps us on track to close our proposed merger with Albertsons in early 2024. We encourage you to review the corresponding press release from this morning for further details. In terms of integration planning, we are progressing well, and it's been exciting to see the talent from both the Kroger and Albertsons teams work together to plan on how the combined company will deliver an even stronger omnichannel food retail experience post-close. We are incredibly excited about the future together with Albertsons. As a reminder, given the breadth of information shared in today's call, our divestiture announcement earlier this morning, we will extend our Q&A session, if needed, to ensure we cover a broad range of topics. With that, Gary and I look forward to your questions.
spk08: Thank you. If you'd like to ask a question today, you may do so by pressing the Start followed by 1 on your telephone keypad. To revoke your question, please press Start followed by 2. when preparing for your question please ensure your phone is unmuted locally our first question is from simeon gutman from morgan stanley simeon your line is now open please go ahead hi good morning everyone um i'm going to ask one and a follow-up in case my phone gets cut off my first good morning um my first is on disinflation wanted to talk about more specifically
spk14: if there's a chance we get to deflation around the corner in 24, and then how it's changing, how you run the business, whether it's pricing, and if you're seeing elasticity. And then the follow-up, separate question, was the review process for the merger waiting to begin until this divestiture was announced, or has the FTC's process been ongoing, and that allows you to close on time? Thank you.
spk15: Thanks, Simeon. On the merger, there's been ongoing discussions with the FTC and the related teams throughout the process. And once we announce this morning, we will share this information with the FTC and continue that active engagement and dialogue. So, it's along the way there's been ongoing conversations and they'll be continuing ongoing conversations. But now we have more specifics in terms of the next steps that we'll be able to share on this inflation. I'll start let Gary finish on it. If you look. One of the things that Gary reminded me of is, if you look in the last 50 years, I think we've had, or 40 years, I don't remember which one, that we had two years of deflation when you look at over the last several, you know, lifetime almost. One of the things about the Kroger model is that we've found and we're able to be successful operating in any environment, both from a competitive standpoint and from an inflation standpoint. And we would expect it to be no different. We are beginning to see some volume improvements as inflation has slowed. we believe that there would continue to be a lag there. We're also finding CPGs in many cases are partnering in more aggressive ways on helping us move tonnage as well. Uh, with that Gary, I'll let you finish for the additional comments you want to make.
spk11: Yeah, thanks for me. Well, I think you covered it. Well, all I would say, I mean, maybe it's relative to our expectations. You may recall the beginning of the year. We shared that we thought inflation might end the year and sort of the three to four percent range and certainly as we've seen. trends continue to evolve throughout the year as i mentioned in my prepared remarks we would now expect it to be at a lower level than that which is partly why we've guided to the low end of our sales range for the year uh so we would expect inflation now to be in the low single digits the one to two percent range would be our sort of base assumption for the the end of the year and we believe as rodney said that certainly there's always a risk that the scenarios can turn out differently and we'll continue to adapt our model if we need to to reflect that but uh Our base assumption would be that we'd expect to sort of return to more normalized, very low single-digit food inflation, which, of course, is what our long-term model is based upon of that sort of 1% to 1.5% inflation rate.
spk14: Okay. Thank you for both answers. Good luck.
spk01: Thanks.
spk08: Thank you, Simeon. Our next question is from Christina Kataj from Deutsche Bank. Christina, your line is now open. Please go ahead.
spk06: Hi, good morning, and thanks for taking the question. So I have a strategic question regarding the Alderson merger. So I guess historically M&A hasn't added that much value. You know, we look at the businesses now, margins have remained higher post-COVID, but I think there's a natural question that as ID sales slow, maybe there will be a greater reinvestment needed into the business. So I'd be curious to get your views on the level of reinvestment versus your targeted synergies and if anything has changed regarding your approach versus the October view.
spk15: If you look at the view today versus October, I would say the biggest positive is I've been incredibly impressed with the talent of the Albertsons team. It doesn't surprise me, but actually getting to know people and working with them and the excitement that there is for the merged company together. If you look at it from a shareholder standpoint, We would feel very comfortable with what things we shared October of last year in terms of we would expect from a cash flow perspective that it would be 30% accretive by year four, that the targeted net to EBITDA ratio that will maintain investment grade and be within those ranges within 18 to 24 months. If you look at the synergies, We still are comfortable with a billion dollars. Obviously, we're going to work really hard to make sure and identify savings beyond that. And we also committed and remember that those are net of investing in our associates and investing for the customer to lower prices. And that's always been part of the plan from day one and would expect to. So when you look at overall, we still remain confident. Uh, in terms of the commitments that we outlined in October, and at this point, we just want to get started and start benefiting our associates benefiting the customers and benefiting the communities.
spk11: Yeah, maybe Rodney, just a couple of things to add if I can. I could completely agree with your comments and we obviously we've had almost a year and a half since the announcement. And so while there's only certain conversations you can have as a Kroger and Albertsons talking about planning for the merger, I would say we've only gained more confidence in the synergy expectations that we've had. So we have been able to continue to validate the assumptions that Rodney outlined a moment ago. I think the only other thing that I would mention is way back to when we announced the merger, we talked about this wasn't just about synergies, it was about essentially fueling the flywheel of the new combined company. And if you think about the results we've announced so far this year of the strength in our results in growing digital sales and our digital ecosystem, the strength in our brand's performance, the growth in alternative profit streams, they're sort of the future value creation model for the company. And I think the combination of Albertsons and Kroger combined really create an opportunity to significantly accelerate that flywheel effect across those elements of the model that we see as working very well now and we think can work even better in the future when we combine the two companies.
spk06: Thank you. And just a quick follow-up, the sales transaction with CNS this morning acquiring 413 stores, what is the confidence level in that number? And I think there was a comment that they would be willing to buy up to 650. Can you just maybe talk about the likelihood that it could potentially be that high versus the 413 in today's release? Thank you.
spk11: Sure, yeah, thanks for the question. So we feel very good about the plan. We think the plan is very well thought through. As Rodney shared in prepared comments, we've spent almost 10 months now really working with different potential buyers and pulling together both the plan around How we make sure we find the right buyer that will be able to continue to grow those stores successfully in the future and putting an overall structure around the plan with the number of stores that provide that right concentration for a successful model going forward and providing all the infrastructure to support it. So we feel very good about the plan we've announced. We did include in the agreement, as you mentioned, that you may recall when we announced the deal originally that our agreement with Albertsons has a sort of a break point, if you like, of where Kroger would have the option to not move forward with the transaction if we reach 650 stores as potential divestitures. So what you saw in the announcements today was that we essentially wanted to make sure we align the agreements between Albertsons and CNS and ourselves to make sure that there is a commitment there to be able to, flex up if that was something that was needed, but we feel very good about the plan that we announced today.
spk15: And the announcement today also, no more work will be done in terms of the SPENCO. That's not something that's part of the solution going forward.
spk06: Great. Thank you very much. Best of luck.
spk17: Thank you. Thank you.
spk08: Thank you, Christina. Our next question comes from Michael Lacer from UBS. Michael, your line is now open. Please go ahead.
spk02: Good morning. Thank you so much for taking my question. Given the announcement with CNS today and the flexibility, given the announcement of CNS today and the flexibility that it offers to divest the number of stores that would be consistent with your agreement with Albertsons, What other basis or pushback could the regulators have to blessing this merger? And what actions or steps are you taking today to potentially address those potential concerns?
spk15: Michael, it's a great question, and obviously we feel incredibly excited about CNS and what they bring to the table, and they'll be incredibly fierce competitors. So if you look at the commitments that we made in October last year when we announced the transaction, and if you look at selling the stores to CNS, We've been able to check off every one of those boxes. And we're also, you know, including seven distribution centers, two regional offices, five private label brands in addition to the stores. So this is going to be an amazing, great business for CNS that will be able to operate and grow from an incredible base with incredible talented people. So, you know, for us, we think we've addressed all the things and questions the FTC would have. We also were able to accomplish all the commitments we made in October of last year and found a buyer that would recognize the labor contracts as well. So we feel like all those things that you would have a checkoff list, we've met all of those and exceeded as well. I don't know, Gary, anything you want to add to that because you and Christine didn't.
spk11: The majority of the words, you know, I think you said it well, Rodney. I mean, this has been very well thought through. We've had great advisors that help us on the journey, and we're excited now to talk to the FTC about the plan.
spk03: Thanks, Michael.
spk17: I'm here. Can you hear me? Can you hear me?
spk02: Can you hear me, Rodney?
spk15: Yeah, you cut out. So if you were asking a question, we can hear you now, but you were cutting out, so we couldn't hear what you asked.
spk02: All right. I'm sorry about that. Sorry. My question is, if we look at your guidance for IDs for the back half of the year, which imply slightly negative IDs, is that would translate to four-year geometric stacks that are relatively consistent with what you experienced in the second quarter, despite what is likely to be less of an inflation benefit in the third and the fourth quarter. So inherently, either your volume is going to have to pick up or your market share is going to need to improve, presumably both. So A, to what degree are you going to need to see an improvement in volumes in order for you to achieve the implied guidance, and B, how hard and to what degree are you going to need to push the other parts of your P&L, how much price investment are you going to need to make in order to drive that volume improvement and those share gains?
spk11: Thank you.
spk02: Yeah.
spk11: Hey, Michael, thanks for the question. You know, I think, as we mentioned in the prepared comments, we do expect inflation to continue to decelerate, but we are sort of coming through, we think, the largest part of that deceleration. If you look at the number that I mentioned for Q2, it's down 3.5% from the start of the quarter to the end of the quarter. And then my comment about we're expecting to be between the one and 2% by the end of the year, we would expect that to be a slowdown in the deceleration rate in inflation impacting our results. And then, as you mentioned, if you look at our second quarter results, we saw a sort of slight decline from being maybe slightly above the 1% that we achieved in Q2 in the first period to being slightly positive in the final period of the quarter. And I share that because the slowdown in growth in sales would have been less than the inflation decline, which is really pointing to your point that we are seeing an improvement in unit trends. And we expect that to continue by leaning into some of the things that are working really well for us around growing households, driving digital sales, and then also continuing to execute our plan of delivering more promotions for customers and continuing to execute on the strategies that support that lower income customer on a budget around accelerating smart way, private label products and and continuing to deliver those merchandising strategies that connect with that customer in the store as well.
spk02: Thank you very much and good luck.
spk17: Thank you.
spk08: Thank you, Michael. Our next question comes from John Heinbockel from Guggenheim Partners. John, your line is now open. Please go ahead.
spk03: Sure. So, you know, if we think about the old algo on comp, right, which is higher than where we are now, I'm curious, do you think 1% to 2% inflation, as we normalize to that, does that support, right, the algo that you had historically on comp, or is MAP and some of the other headwinds, right, work against that? I mean, I think you said you saw improvement in budget conscious comps, which were negative, I think, 2% last quarter. So is that still negative? And are the higher income households still performing as they did before?
spk15: I'll start and let Gary talk about the longer term stuff, but if you look at the higher income household, that growth continues, that customer is meaningfully more profitable because of buying a lot more fresh product and buying bigger size products and things. If you look at the budget conscious shopper, the trends have improved, but they would still be negative. But the trends have improved in terms of relative to the long term model. Gary, I'll let you sure.
spk11: And John, I think your question may be was weaving a little bit between the second half of the year and the long term plan as well. So I would definitely think about it in those. I wouldn't say that we're changing our long term growth algorithm view that we believe, you know, food at home will continue to grow in that sort of two to three percent a year of a long term. And we will expect to grow top line between two and four percent and deliver earnings growth of three to five percent by both. achieving growth in line with slightly ahead of the market and also continuing to expand margin through the different levels that we've talked about during our various investor days. I think in the short term, when we think about the rest of the year, I would use the first half as a sort of decent sense of how we're thinking about the rest of the year. I expect us to continue to see some tailwinds in our gross margin rate around some of the areas that I mentioned in the prepared remarks on supply chain and our brands, sourcing benefits, et cetera. OG&A will continue to manage costs very closely, given that the environment is, to your point, lower in terms of the headline growth rate. than we would be expecting in our long-term model, so we'll be managing costs accordingly. And obviously, we do continue to flex our model to make sure that we're adjusting our plans when we have those short-term adjustments to what we see in the operating environment.
spk03: And then maybe as a quick follow-up, what is the update now on the Ocado process, right, in terms of rollout and adoption? I think we've talked about it a bit. And movement to toward your profitability objective. You know, where are we on all of that relative to I know you talked about pickup.
spk15: Yeah, if you look at the sheds. continued great progress on the growth in the sheds and the base operating model. Right now, all the energy is focused on the ones we have and making sure that those are where we want them to be, where they need to be, and on a sustainable basis. The other thing that I think is incredibly important is if you look at the repurchase rate when somebody starts using a shed, and the MPS scores, they remain very high. So I would say that a ton of work is being done. We're making progress, but we wouldn't be to the point where we would start focusing on additional sheds until we make sure that we have a clear path on the ones we have. And we are making meaningful progress, but we still have a lot of work to do. Thanks, John. Okay, thank you. Thanks. Take care.
spk08: Thank you, John. Our next question is from Michael Montani from Evercore ISI. Michael, your line is now open. Please go ahead.
spk12: Hey, everyone. Thanks for taking the question. I just wanted to ask about ESI. You know, so one question earlier was related to market share and why that might improve towards the end of the year, you know, thinking that could be part of it. But I wanted to ask at a high level, you know, would you be comfortable kind of going it alone if you can't seem to find a good partner? And then what could some of the longer-term benefits be, you know, to the business model if that is the case?
spk15: On ESI, first of all, I'm incredibly proud of our pharmacy teams. They've done an amazing job on being able to retain a meaningful part of those customers. And it's a combination of doing direct contracting with some companies and also leveraging our discount card for patients. So, you know, when you look at overall, I think they've done an incredible job on minimizing the effect. Now, with that said, it's still, you know, over, you know, about a percent and a half. I think this quarter, I think we shared 1.6%. We're very comfortable with where we are, but we're always focused on trying to make sure we're taking care of the customers and taking care of patients. But we have to be able to do that in a way where we don't lose money on every prescription filled. So that's really what the focus is on, and we feel very comfortable with where we are. Gary, anything you want to add to that? No, I think that's all, Rodney. Okay, thanks.
spk12: Just wanted to follow up if I could quickly on the potential multiple implied by the transaction for the divested stores have had some pushback. It seems to be around two to two and a half times, which was a little less than we thought. So I didn't know if you could discuss that, you know, potentially in the context of the ability to increase the stores divested if needed to close the deal vis-a-vis what the potential profitability might be of those locations.
spk11: Yeah, thanks for the question. I think maybe the confusion could be around the multiple and what we were assuming because the, I think the only previous information that we've shared was relative to spin Co, which was potentially a solution for a part of the overall divestiture planning wouldn't have been actually a solution for. all geographies and but that was a 100 stores to 375 stores that were contemplated in the spin co-structure and we mentioned or shared in that agreement that the multiple could be three times full or EBITDA so this this this multiple would be a little bit below that number but that being said as Rodney mentioned the prepared comments we hadn't actually assumed in our modeling that the transaction would move forward with a different number than we actually announced today. In actual fact, the number would be very much in line with what we were contemplating. We believe it's a good solution for our shareholders because, as Rodney mentioned, it actually solves for all the elements that are important to a divestiture plan. It will help us longer term in being able to simplify our transition services to be able to manage the new combined company more effectively and drive future value for our shareholders. And we believe it's also a price that allows CNS to be able to be a successful operator in the future as well. So very much consistent with what we were thinking and would keep us on track with the commitments that we shared when we announced the deal back in October.
spk17: Thanks, Michael.
spk08: Thank you, Michael. Our next question is from Kenneth B. Goldman from JP Morgan. Kenneth, your line is now open. Please go ahead.
spk00: Hi, thank you. You mentioned you're seeing volumes start to improve a little bit. It's kind of going the other way for a lot of your branded, I guess, center store packaged food vendors. You highlighted that your store brands are doing better. Maybe that explains much of the difference, but I'm also curious if you're seeing consumers change their behavior a little bit in terms of which departments they're shopping. And I guess the core question there is, you know, has there been a boost that you're seeing to your perimeter, maybe at the expense of the center store, just want to get a little more color and where those volumes are, are getting, I don't know if less bad is the right phrase or better.
spk15: In terms of volume, there's a couple of things. One, if you look at like in the meat department, for an example, you're seeing people much more move to hamburger meat or we call it grinds. But I don't know that many people publicly would do that or chicken and some of those things. So you are starting to see some improvement tonnage relative to that. you are also seeing people moving to the entry price point in many cases and obviously that would be affecting the CPGs and you know I mentioned in the prepared remarks we are beginning to see some cpgs be more aggressive on partnering on moving their tonnage as well so all of those things are happening but you know you're never satisfied with where you are but the trends are starting to improve and there's a ton of focus on making sure that we're supporting that customer on a budget as well thank you and then as a follow-up you know i think
spk00: What concerns some investors about, you know, disinflation and possible deflation is that, you know, even though deflation has been a rare thing, you know, the last time it came around, it did last for a fairly long time, a couple of years. It helped drive a competitive environment in which gross margins actually declined and your core operating income was down as well. So I guess what I'm curious about is, you know, what gives you the confidence that in a world where consumers are struggling more, that your competitors will remain as rational as they are today? And to what extent does your guidance potentially factor the risk of them being a little bit less rational, I guess?
spk15: Yeah, when you really look at our long-term model, we always assume the market will get more competitive than it is because that's been the case for the last 10 years, 20 years, 30 years, and customers get the benefit of that. The other thing that's built into our model that's different today is if you look at our diversified income streams, alternative businesses are well north of a billion dollars. That business didn't even exist the last time when the economy was tough, as an example. If you look at from a seamless standpoint, the retail media, which is obviously part of the alternative profit business, those margins are completely different than the supermarket margins. So all of those things are things that are part of the model and part of the long-term thinking. The thing that I think is always important to remind people is even in the scenario you outlined, we still were significantly above our cost of capital, significantly generating economic value for shareholders. The stock price didn't, but if you look at the value of the company, And we continue to generate cash flow that we use to pay a dividend and buy back stock and balance our debt. So all of those things, I think, are important parts of it. But, you know, it is a different market model today than it was the last time. Great. Thank you. Thanks, Ken.
spk08: Thank you, Kenneth. Our next question is from Ed Kelly from Wells Fargo. Ed, your line is now open.
spk09: Please go ahead. Ed, your line is now open. Please go ahead. Ed, please ensure that you are not muted on your side.
spk17: Guys, can you hear me? We can now. Go ahead, Ed. We'll move on to the next question.
spk09: Hi, Ed. Did you want to try and speak again? Your line is open. Our next question is from
spk08: Kel Abanya from VMA. Kel, your line is now open. Please go ahead.
spk07: Hi. This is Kelly Abanya. I think I'm up. Thanks, Ed. I guess… We can hear you, Kelly. Hi, Kelly.
spk11: We can hear you. Yep.
spk07: Okay, good. I wanted to ask about the divestiture. package, I think the comment was made that the valuation for this is slightly below the three times for Walt EBITDA that the SPIN Co was structured at. And so I guess just can you comment on why that would be in Kroger's best interest to accept a lower valuation than than what was available through SpinCo if that was a viable option? And are you willing to share the estimated EBITDA or EBITDA margin for these planned 413 stores?
spk11: Hi, Kelly. Yeah, thanks for the question. Essentially, when we think about the SpinCo option that we announced when we communicated the merger with Albertsons, just as a sort of a recap, SpinCo was an option that was always going to be a solution alongside other solutions. The package that would have been involved with SpinCo as a group of stores would have covered certain geographies, but it would not have covered the whole of the store footprint geographically that would need to be divested that we always sort of contemplated as part of the plan to take to the FTC. we would always have had to have put together SpinCo with another buyer, which adds significant complexity, both from the perspective of working with two different companies around their future plans to take forward to the FTC, but also the complexity around transition services agreement, technology solutions, sort of implementing, if you like, a period of time where the companies need to operate and separate effectively. So when we looked at the options that were available, I would say that from Day one, we always viewed spinco as a viable option, but if we believe we could find a single buyer that was able to do everything that CNS can do, which is bring a strong plan, a strong capable management team, a well-capitalized balance sheet, a commitment to investing in the business in the future, and then being able to put together a set of assets for them that would enable them to do that, we always believe that that would likely be both a more effective solution to move forward with, but also a longer term, a better solution for Kroger to be able to execute on a plan. So it's why I know we didn't go into specific details when we announced the transaction back in October, but when we assumed evaluation in our models with the commitments that we shared around being accretive to EPS in year one without one time costs and over four years and all the other metrics that we shared, all of that was based on evaluation that's essentially in line with the evaluation that we announced today with CNS. So very consistent with what we were assuming, but obviously the only answer we could actually share when we announced the deal was BINCO because we hadn't had a chance to talk to any buyers at that point. That was the only plan that was really fully baked through as part of the discussions with Albertsons.
spk07: Okay, that's very helpful. And should we assume that the additional 200 potential stores would be under a similar or the same valuation? Just a quick question there. And then also, can you help us understand the financing structure and the commitment from DNS's partner here with SoftBank to this transaction and the potential for the incremental 200 stores?
spk11: Yeah, thanks, Kelly. Well, first of all, you know, in terms of the incremental stores, we certainly share more details on that if that was required. But as we shared earlier, you know, we feel really good about the plan that we have. We believe it's a very strong package, and it really does address all of the questions and feedback that we've sort of received and evaluated as we thought about the plan. So our focus is really on moving forward with that plan, but we did think it was important to build flexibility into the agreement so that if we have to flex, we're able to do that. I wouldn't be able to comment on CNS's financing strategy. That's obviously specific to them, and that would be something for them to comment on if they wanted to. I would just say that from our perspective, we got very comfortable with their financing strategy and feel they both have the financial strength to be able to complete the transaction, but also the financial strength to be able to keep investing in the business going forward as well.
spk15: Thanks, Kelly. Thanks, Kelly.
spk08: Thank you, Kelly. Our next question is from Rupesh Parikh from Oppenheimer. Rupesh, your line is now open. Please go ahead.
spk05: Good morning, and thanks for taking my question. So I just want to touch on the promotional competitive backdrop. Just curious what you guys are seeing right now in the promotional environment. Any changes on the competitive front lately? And then just curious, you know, as there is waning inflation out there and there is a clear desire for the industry to drive volumes. So just curious if you guys expect it to become more promotional in the coming months or quarters.
spk15: Yeah, if you look at overall, the promotional activity is getting close to where it was pre-COVID, so it's pretty consistent with where we expected it to be. And, you know, obviously during COVID, the supply chains were such a mess, and it's really those are recovering. If you look at the conversations with CPGs, it's getting, for the most part, it's getting much more back to normal in terms of, you know, how do you grow units and the CPGs, you know, in some cases, raised their own margins, and now they're starting to focus on tonnage again. So, you know, for us, we feel like it's a good, healthy dialogue, and it's one of the reasons, as you know, that we believe our brands is such an important part of our overall go-to-market equation for customers, because if the CPGs are doing things that aren't justifiable, our brands always gain share, because We have an amazing set of products, and when people try them, the repeat rate is incredibly strong as well.
spk05: Great. And then maybe just one follow-up question. So as you look at the consumer backdrop for the balance of the year, is your team assuming it stays pretty similar to what you've seen recently, or do you expect it to get worse? And I also want to just get a sense of how you think that student loan impacts on groceries.
spk15: Yeah, that's I was going to say, if you hadn't added the last part, that's the 1 part where we do expect it will get from an environment standpoint from a consumer standpoint that it will be a little tougher is the student loan repayments. And you don't know for sure until it happens. We do believe that the impact on grocery would be less than other categories. So we've assumed that to be a headwind. But the specifics until it happens, you just don't know.
spk11: And on that reference, when we talk to customers about it, we know it's going to be a meaningful financial impact on their overall budget, which obviously creates some risk that we factor into our thinking. What customers also say, though, is that one of the first places they go to adjust their budgets to pay for the incremental cost is to eat more food at home versus eating out. So it'll be interesting to see if that turns out to be a trend that's helpful over time as well.
spk05: Great. Thank you for all the color possible.
spk15: Take care.
spk08: Thank you, Rupesh. Our next question is from Ed Kelly from Wells Fargo. Ed, your line is now open. Please go ahead.
spk13: Hi, guys. Can you hear me now?
spk15: We can. Sounds like a commercial.
spk13: All right. Good. I thought you were going to say that you can't, so I'm happy to hear that you can. I wanted to ask about the sustainability of margin opportunity going forward. You know, if we look at the back half of this year with, I guess, minimal comp, you know, and it seems like maybe that's the environment, you know, for next year as well, you are getting benefit out of LIFO, gross margin, cost control is really good. But how do we think about the potential for continued improvement in those type of areas in 24 to offset what traditionally would be an environment where it's really difficult for grocers to actually get any earnings growth or even keep earnings flat? Okay.
spk11: Yeah, it's a great question. You know, what I would say is, as you know, we typically don't get into like forward guidance beyond the current year until later in the year. But what I would maybe comment on is if you look at the areas that we've called out as being tailwinds during the quarter that helped us on the gross margin rate, we think of those as more long term drivers of our model versus sort of. short-term, you know, one-time benefit cycling, you know, prior activity in our business. And what I mean by that is if we look at our brands, Rodney mentioned it on the call earlier, but we've been doing a tremendous amount of work, our merchandising team in our brands, really focusing on how do we continue to improve the portfolio, both in terms of how we architect the products to get the maximum reach and value from each different product category, across private selection, Simple Truth, Kroger Branner, and the Smartway product range. How do we continue to innovate? How do we drive sourcing best practices? So really kind of taking almost a CPG-type mindset to that approach to our products and saying, how do we maximize value? And I would say the team would probably tell you they're maybe a third of the way through that work right now. So still a lot of opportunity, we believe, to continue to get stronger in our brand's performance. From a supply chain perspective, I mentioned it in my comments, but we continue to invest significantly in supply chain because the team's doing a great job identifying ways in which we believe we can continue to drive efficiency in our supply chain strategy by leveraging data more effectively and technology and continuing to optimize the routes that we're taking, the capacity that we're utilizing on those routes. And we believe there's still, again, significant opportunity ahead of us there. alternative profits you've heard us talk about before as being, you know, we're still in the early innings in our mind of what the potential for alternative profits can be, particularly as we keep growing digital and driving engagement through our Kroger Precision Marketing business. So I think overall, we would say that, you know, we've been on the journey for a few years that we've talked to investors about how do we manage these levers to be able to continue to improve profitability over time. And I would say we have a good degree of confidence that we see continued plans in those areas. Now, all that being said, obviously, we're going to continue to invest in the customer and continue to deliver more value there to balance that model so that we're driving top line growth over time as well.
spk13: All right. And just a quick follow up. I don't think Albertsons has had a large opioid settlement yet. Is that correct?
spk15: That would be correct.
spk13: Okay, great. Thank you.
spk08: Thank you, Ed. Our next question is from Robert F. Alms from Bank of America Merrill Lynch. Robert, your line is now open. Please go ahead.
spk16: Oh, thank you. Can you guys hear me okay?
spk11: Yeah, good morning, Robbie. Hey, Robbie.
spk16: Okay, excellent. Excellent. You can hear me. Great. Hey, two follow-up questions on the CNS deal. The first one, just the eight DCs, two regional headquarters, I guess, and the five private brands, was that part of the original October outline, or is that sort of unique to this deal with CNS?
spk15: Yeah, it's actually part. It was one of those things where we knew that it would be part of the consideration, but until you had a specific buyer, you wouldn't know the specifics. So we had always had in the back of our mind that that was something that might be needed in order to find a buyer that would be able to, you know, day one hit the ground running. but it was one of those things where we could have managed it either way, depending on what the particular needs of that particular buyer would have been.
spk11: And the only thing I would add, maybe, Robbie, would be that if you think about Spinko, of course, Spinko was going to have to be set up as a full separate company, so there would have to be meaningful assets that would have moved with Spinko for it to be a viable solution, not having any infrastructure other than what would have to move across from some of the Albertsons or Kroger business today. So that would have been
spk16: uh probably more meaningful in terms of the impact have we not have moved forward with a a buy like cns gotcha that's helpful and then it looks like there's a fair amount of kroger and harris teeter stores as part of the plan was that part of the october thinking or you know like i noticed the harris teeter stores i guess in virginia like was that part of the original thinking or is there a greater mix of you know kroger banners as part of this
spk15: It was always part of the original thinking that some of the stores to be divested would be best for it to be Kroger stores. So that wasn't something that was new to the analysis that was done like last year.
spk16: Got it. And what's the total Kroger banner stores in the CNS announcement?
spk15: There isn't a specific number yet. We're still in the middle of the dialogue with the FTC, so there wouldn't be specifics. In the press release, it would show by state the number of stores and the banners, but there wouldn't be specifics at this point.
spk16: Gotcha. And just last question, is there any difference in the expected dilution in year one, whether you do 650 or 411?
spk11: Yeah, as I mentioned earlier, Robbie, we really focused on the four hundred and thirteen store plan because we have a high degree of confidence that that addresses all the areas that we think are important to have a viable operator in the markets that we're divesting stores. And we believe the package is really effective in solving for that. So what we. What we shared with the guidance back in October would still be. Very consistent now in our thinking based on the plans that we're moving forward with. And if obviously, if our plans were to change over time, we would share more details around that. But we feel we've got a, a very strong plan and we feel the guidance that we've shared nothing. Nothing at this point would. would say that we have anything that would be a concern to move away from those guidances that we shared. And if anything, I would say between the work that we've done now to identify the Bible with CNS and some of the additional work we've been able to do in planning for the merger, in some respects with Albertsons, gives us a high degree of confidence that the plans that we shared are still very much the expectation. Thanks, Robbie.
spk16: Great. Great. Thank you.
spk09: Thank you, Robert.
spk08: Our final question today comes from Dean Rosenblum from Bernstein. Dean, your line is now open. Please go ahead.
spk10: Thank you so much. Hey, guys, thanks so much for making time for the question. I really appreciate it. I have two questions regarding the divested stores. The first question is, you know, there's a big debate about whether you guys are going to allow the acquirer, now known as BNS, to operate the stores under the banners that they're currently operating on. And I guess it's a two-part question. One is, are you going to allow CNS to operate the stores under their existing banners, yes or no? And if not, do you have any idea what the plan is for CNS in terms of rebranding the stores? And then the second question is, you know, you mentioned 160 stores that CNS operates at retail. Can you share some detail on where those stores are actually located? Because there's very little regional geographic overlap between existing Piggly Wiggly stores and the locations where you've announced the divested stores to be. Thanks.
spk11: Sure. Yeah, thanks for the question. So, just to clarify on the banner, what we shared this morning was that CNS will be provided with three banners that we'll be divesting as part of the plan. QFC and cars are all banners that they will be essentially acquiring as part of the divestiture package. And they will also receive a license to operate under the Albertsons banner in four states. So that would be California, Colorado, Wyoming, and Arizona. Thanks Rodney. So essentially CNS, I won't speak for what their plans are, that's obviously their decision to move forward, but they will have the right to be able to use those banners and Albertsons in the four states I mentioned and the three other banners in any states they choose to use them and operate the store. So that will be a decision They will make over time, but they, they, they would not key if they are, if they ultimately buy stores that are different banners than those for today, they would need to rebound to those stores over a period of time.
spk15: And the stores, they operate Piggly Wiggly would be in the Midwest and the South and the Grand Union would be in the Northeast.
spk11: So, yeah, we think that's a compelling part of the plan actually for CNS because it will introduce a new competitor into markets where they have infrastructure and capability, but are able to present a new competitor in that market as well.
spk15: Thanks, Dean. And thanks everyone for all the questions. As always, I'd like to share a few comments directly with our associates listening in. As the back to school season gets underway, we want to wish all families good luck on the upcoming school year and acknowledge our own associates who continue their education through our Feed Your Future program. Feed Your Future is our continuing education benefit that provides up to $21,000 for each associate over the course of their career to cover continuing education. We are proud that since the program started in 2018, more than 16,000 associates have utilized this benefit. With approximately 91% of these participants are being hourly associates. We're so thankful that you've chosen to grow your career with Kroger, and we're excited to see that number to continue to increase. And we've committed to bringing this benefit to Albertsons once we merge as well. And then in closing, overall Kroger is delivering consistent results, which reflect the strength of our business model that we've talked about in a challenged environment. By managing costs and growing alternative profit streams, we drove earnings growth and generated strong free cash flow again this quarter. We are proud of our ability to deliver these results while creating value for our customers. We are thankful for our incredible associates and their dedication to providing our customers a full, fresh and friendly experience. We are excited about the significant step Kroger has taken to fulfill our merger commitments through the divestiture plan, and we remain committed to fulfilling all the commitments we set out last year when we announced our proposed merger with Albertsons. Thanks again for everyone for joining us today. That concludes today's call.
spk09: This concludes today's call. You may now disconnect your lines.
Disclaimer