The Kroger Co.

Good morning and welcome to the Kroger Company second quarter 2020 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Rebecca Maness, Director of Investor Relations. Please go ahead.

Thank you, Gary. 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 or predictions in 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 ir.kroger.com. This is obviously an unprecedented time, and we are taking the additional step of providing more details on current business trends this quarter. so our prepared remarks may run a little longer than normal. 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 question and one follow-up question if necessary. Please mark October 27th on your calendar for a brief business update from Rodney McMullen and Gary Millichap on our performance against restock burger goals and how the pandemic is shaping our business model. Given the travel restrictions that are still in place, this meeting will be conducted virtually, and we plan to host a full investor day in spring 2021, hopefully in person, to share more on the business outlook and key drivers of our long-term growth model. Further details will be shared soon, and we hope you will join us. I will now turn the call over to Kroger's Chairman and Chief Executive Officer Rodney McMullen.

Thank you, Rebecca. Good morning, everyone, and thank you for joining us. With me today to review Kroger's second quarter 2020 results is Chief Financial Officer Gary Millership. Each day I'm inspired by the work our incredible associates do to bring to life our purpose to feed the human spirit. I am proud of our dedicated associates who are serving our customers when they need us most. Our top priority is to provide a safe environment for associates and customers. And as the pandemic continues, we know that Kroger will continue to rise to meet the challenge. Six months into the pandemic, while there is still much we cannot predict, we have a greater clarity in many areas across the business. Since March, we have invested more than $1 billion to both reward our associates and to safeguard them and our customers through implementation of dozens of safety measures. The company's total COVID-19 incident rate continues to track meaningfully below the rate in surrounding communities where we operate. We have learned and continue to learn a lot while keeping our stores and supply chain open and serving America during the pandemic. We continue to play a key role in addressing the critical need to expand COVID-19 testing. The Kroger Health team facilitated more than 150,000 COVID-19 tests at walk-up and drive-through locations across the country. Recently, Kroger Health announced the expansion of COVID-19 testing offerings at more than 220 political clinic locations. As the nation prepares to enter the flu season, testing will become even more critical to help diagnose COVID-19 amidst potential similar symptoms. We announced earlier this week a comprehensive flu shot program designed to help Americans get their recommended vaccines during the COVID-19 pandemic. Despite the pandemic-related challenges, we delivered extremely strong results in the second quarter. Customers are at the center of everything we do, and as a result, we are growing market share. Kroger's strong digital business is a key contributor to this growth. As the investments made to expand our digital ecosystem are resonating with customers, our results continue to show that Kroger is a trusted brand and our customers choose to shop with us because they value the product quality and freshness, convenience, and digital offerings that we provide. While we delayed certain cost-saving initiatives in the first quarter, As of the close of the second quarter, we are back on pace to achieve them. I continue to be proud of the way our associates have adapted and adopted to the new ways of working during the pandemic to continue to achieve strong results. We are more certain than ever that the strategic choices and investments made through Restock Kroger to execute against our competitive moats, fresh, our brand, personalization and seamless have positioned us to meet the moment. We are also positioned to deliver 2020 and beyond for our customers, associates and shareholders, as we believe a number of impacts of COVID will be structural and lasting. Our data insights show customers are rediscovering their passion for cooking at home and have an aspiration to eat more healthy foods as a result of COVID. When we talk to our customers, they tell us they plan to continue to prepare and eat more meals at home. As children return to school, many families are telling us they plan to make breakfast in the morning and prepare lunch for their children to take to school. As we talk to other companies across America, we believe return to work will look very different with many employees working part of the week from home. And finally, while the full economic impact of COVID-19 is yet understood, our data shows that during the periods of lower economic activity, we see a structural shift from food consumed away from home to food consumed at home. All of these factors combined lead us to believe there will be more meals eaten at home or prepared at home for the foreseeable future. Now I'd like to walk you through some examples of how our competitive moats have positioned us for growth in the short and long term. Even before the pandemic, our digital business had become a tailwind. The pandemic certainly has accelerated customer preference for seamless offerings. Our customers are increasingly turning to our e-commerce solutions for their grocery and household essential needs. Many of our customers are ordering groceries online for the first time as a result of COVID-19, and the majority of them tell us they plan to continue to do so in the future. Kroger began investing in digital several years ago to build a seamless ecosystem that would deliver anything, anytime, anywhere. As a result, we have over 2,100 pickup locations and 2,400 delivery locations, reaching 98% of our customers with a seamless customer experience that combines the best of our physical stores with digital. Kroger was the first to integrate pickup and delivery into one seamless experience. These investments were especially timely as customer adoption of pickup and delivery has grown significantly during the pandemic. Kroger's digital ecosystem continues to expand and customers are increasingly engaging with us. For example, Home Chef is growing incredibly fast, no doubt accelerated by the food at home trend that we believe is a structural change. We also announced that Kroger's ship will expand to offer an extended ship-to-home assortment through a marketplace offering of third-party sellers we will continue to expand our ecosystem over time. The Grover Technology and Digital team continues to create innovative experiences that are changing the way we serve customers across America and was recognized for the third consecutive year as the best place to work in IT by Computer World. This recognition is awarded to companies that have innovative, industry-leading workspaces offering a great customer-associate experience. As a result of the pandemic, we continue to see a slow return to normal from the shutdown period, resulting in fewer customer visits but increased basket size. Customers across the country are still staying home and cooking at home, and that is now part of the new routine. This makes our leadership position in Fresh an even more important sales driver for Kroger. Customers rank our Fresh departments higher than all of our big box competitors, and our Fresh departments generated strong identical sales in the second quarter and gained market share. Our Brands is also a key competitive mode for Kroger. We continue to meet the diverse needs of our customers with significant growth across the three largest brands. Our customers are eating more at home, and we are seeing some customer segments trade up to the larger pack sizes, as well as more premium quality foods and natural and organic foods. Our larger size big pack platform is up well over 50%. Private selection is up over 17%. and Simple Truth is up over 20% in the second quarter. Our brand continues to tap into emerging trends and evolving customer needs, delivering new flavors and innovative new items, like the new plant-based Emerge Grinds and Patties, which launched in late 2019. A recent third-party industry study reconfirmed that Simple Truth is the most loved natural organic brand in the U.S. Simple Truth significantly outperformed competitors on strength of brand, which is the combination of awareness, willingness to recommend, and strength of the driver of store selection. In continuing to exceed our customers' expectations of value and quality, while also consistently delivering innovative new items our customers love. Our brands remain one of our most powerful competitive advantages. Finally, personalization and data remains one of Kroger's key and core competitive moats. We use our data to understand what is most important to our customers and continue to offer promotions throughout the quarter. and we think it is an important component to continue to support as the pandemic continues and government stimulus benefits have expired. Many of our customers are experiencing some form of financial hardship that we expect to impact discretionary purchases and eating out. This is one of the unique capabilities of the Kroger ecosystem. We can deliver for both customers on a budget and customers who are trading up to premium products. and or larger sizes. Turning now to partnerships. While COVID-19 has not necessarily changed how we think about our approach to e-commerce, it has accelerated our thinking about how our full evolution of seamless strategy, inclusive of Ocado. Ocado is a strategic partner of choice, delivering innovation, investing class experience, and economic advantage through efficient fulfillment. We are confident the future of our ecosystem will incorporate a mix of capabilities and facilities ranging in sizes and our network will flex as demand matures and the optionality will allow us to fulfill same day or next day delivery or pickup and customers or store replenishment. Ocado's model incorporates state-of-the-art automation and AI to expand Kroger's products to a larger footprint. And their model to deliver to customers is significantly less costly than our existing model. We are on track to open the first two sites in the spring of 2021. Developed talent is a driver of Restock Kroger's And we work extremely hard to ensure that we have the right talent, teams, and structure in the right focus areas in our core supermarket business and our alternative profit businesses. We are focused on both developing, training, and promoting internal talent and hiring external executives, both food industry and technology, which together drives our retail supermarket business and all of our businesses. Kroger has been investing to raise wages of our frontline associates for the last several years. As part of restock Kroger announced in 2017, over the period of 2013 to 2020, Kroger will have invested an incremental $800 million in associate wage increases. And that is $300 million more than the original plan. As a result of this continuing investment, Kroger has increased its average hourly rate to over $15 per hour. And with our comprehensive and best-in-class benefits, including health care, paid time off, and retirement plans, our average hourly rate is over $20. As the largest traditional grocery retailer in America, Kroger is committed to being a force of good in the communities we serve. Our purpose, to feed the human spirit, continues to guide how we operate our business, care for our communities, and deliver value to all of our stakeholders. Last month, we released our 2020 ESG report, highlighting progress toward our sustainability goals. We are committed to continuing to integrate ESG metrics into our business strategy, driving shared value for our associates, customers, communities, and companies. We recently made the decision to contribute an additional $20 million that split evenly between the Kroger Co. Foundation and the Zero Hunger, Zero Waste Foundation. We also added $5 million to a fund created to support the advancement of racial equity and justice. We believe that it is vitally important to give resources to our community as they continue to face hardships. related to the pandemic, the economic downturn, and racial injustice. Under Reece Scott Kroger, we have made significant investments to establish a seamless digital ecosystem, strengthen our brand and our personalization capabilities, and to enhance product freshness and quality. These investments, combined with how our associates have responded to the pandemic, and customers eating more meals at home, give us confidence that Kroger's performance in both 2020 and 2021 will be even stronger than previously anticipated. I will now turn it over to Gary for more details into the quarter financials. Gary?