The Kroger Co.

Good morning and welcome to the Kroger Company third 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, 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 discussions 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 ir.kroger.com. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question if necessary. I will now turn the call over to Kroger's Chairman and Chief Executive Officer, Rodney McMullin.

Rodney McMullin Thank you, Rebecca. Good morning, everyone, and thank you for joining us. With me today to review Kroger's third quarter 2020 results is Chief Financial Officer Gary Millership. When restrictions were set in place to address the spread of COVID-19 in mid-March, Many underestimated the length of time that it would last and the number of families and communities that would be impacted. Many of the stories from the last nine months have been upsetting to say the least. Out of this grief, we've also seen the best parts of human nature. From our store teams to our warehouse associates and drivers and our digital teams, plants, and offices, Our Kroger family of associates have been nothing short of incredible during this period. I am proud of our dedicated associates who have continued to diligently execute our restocked Kroger transformation while serving our customers when they need us most. We delivered strong results in the third quarter. Customers are at the center of everything we do and sales remain elevated and we continue to grow market share as we enhance are competitive moats, fresh, our brand, data and personalization, and seamless. I want to highlight that Kroger's digital sales are incrementally profitable today, partly supported by our rapidly growing digital media business, and partially fueled by our constant improvement in operational efficiency. This is true as the incremental pass-through rate of sales and we have a clear path to continue improving digital profitability. Gary will touch on this more in a few minutes, but I wanted to call this out as well because it demonstrates the strength of not only our seamless offering, but the overall Kroger ecosystem and how the components parts fit together to deliver value to our customers and our shareholders. We are more certain than ever that the strategic choices and investments made over the last three years have positioned us to meet the moment. And as a result of our strong performance and consistent market share gains, we are raising our guidance for the remainder of the year. We are also positioned to deliver beyond 2020 for our customers, associates, and shareholders, as we believe a number of the impacts of COVID-19 will be structural and lasting. As a result of the pandemic, we continue to see increased basket sizes and fewer customer visits. Customers across the country are still staying home and cooking at home is now part of their new routine. We are fulfilling our customers' growing demand for premium products as they seek joy and elevated experiences. We're merchandising in new ways to both meet that demand and inspire our customers to trade up to items like premium jumbo blueberries, and by the way, they're delicious, and larger-sized packages of strawberries, raspberries, and grapes. Home Chef's culinary innovation is inspiring customers with new oven-ready entrees and sides, flatbread, pizzas, salads, and sandwiches. In the fresh soup category... We have introduced new flavorful and delicious simple truth and home chef varieties. Our efforts are also driving strong market share gain and growth in packaged produce, fresh prepared foods, and specialty cheese. This is also where our brands really shine. Our multi-tiered brand portfolio positions us well to deliver against our customers' diverse needs and desires. Our brands grew at 8.6% in the third quarter, and we grew market share. Private selection grew over 17%, and simple truth grew nearly 15%. These are incredible numbers and demonstrate that while many competitors offer private label products, Kroger's unique approach to our brands is a differentiator and a competitive mode. By leveraging our unique data and customer insights, we continue to be at the forefront of product innovation and new product development. During the third quarter, we launched 250 new items, the most ever in a single quarter. New items for the quarter included launches in trending focus areas, such as fresh produce, frozen grocery, and expansion of our Simple Truth plant-based collection, unveiling more than 50 new fresh and flavorful products. plant-based foods at affordable prices. Moving now to our third competitive moat, data and personalization. Many retailers have transactional data, but no one has the customer data and the insights that Kroger has. The quality of our data is a massive advantage because it allows us to develop a significant alternative profit business that generates income from the traffic while benefiting our customers. Our personalization efforts motivate our customers to continue to show interest in Kroger's communications, where nearly 80% have asked to receive relevant information and offers from us. Our customer email open rate is nearly 18% higher than the industry average, which illustrates our ability to offer relevant content and offers to our customers. We continue to advance our personalization technology. About 95% of customer interactions with product on our website and app are enabled by personalization, driving a significantly higher level of engagement in our offers and nearly doubling the likelihood of adding an item to a cart. Our fourth competitive moat is seamless. Kroger began investing in digital several years ago to build a seamless ecosystem that would deliver anything, anytime, anywhere. As part of our journey, we have been evolving our fulfillment network. First, taking advantage of our existing assets, our physical stores, providing flexibility and proximity to our customers with broad and relevant assortment to meet their needs. Second, expanding our network of assets and capabilities with a portfolio of various sized facilities optimized based on volume, demand profile, and density, leveraging scale and automation to meet the rapidly changing customer needs. Our early investments laid the foundation, including over 2,200 pickup locations and over 2,450 delivery locations. which allowed us to capture the increased customer demand for e-commerce offerings during the pandemic we have today, reaching 98% of our customers with a seamless customer experience around in-store shopping, pickup, delivery, and ship-to-home modalities. We are innovating and building out a flexible network of fulfillment options and working with key solutions providers. progress on our Ocado facilities program with plans to build customer fulfillment centers in Michigan and in the south region of the country. The upcoming opening of our first two fulfillment centers in early 2021 in Monroe, Ohio and Groveland, Florida, in collaboration to leverage some of their in-store fulfillment capabilities. 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 industry executives, which together drives our retail supermarket business as well as our other businesses. Kroger has been investing to raise the wages of our frontline associates for the last several years. As part of restock Kroger announced in 2017, over the period of 2018 to 2020, Kroger will have invested an incremental $800 million per year in associate wage increases. As we've noted before, this is $300 million more than the original planned investment. As a result of our continued focus on growing associate wages, Kroger has increased its average wage rate to over $20 per hour with our comprehensive and best-in-class benefits, including health care, paid time off, and retirement included. As the largest grocery retailer in America, Kroger is committed to being a force for 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. Since launching our ambitious Zero Hunger, Zero Waste social impact plan in 2017, we achieved our goal to donate more than one billion meals to feed hungry families in our communities by 2020. We also continue to increase Kroger's diversion of waste from landfill. reaching 80% diversion last year on our path to achieve 90% diversion or zero waste. This year, Kroger outlined several new long-term environmental commitments, and they can be found in our annual Environmental, Social, and Governance Report. Last month, we were proud to be included among the world's sustainability leaders, recognized by our inclusion in the Dow Jones Sustainability Index, for the eighth year in a row. We are committed to continuing to integrate ESG metrics into our business strategy, driving shared value for our associates, customers, communities, and shareholders. Since March, we have invested nearly $1.3 billion to both reward our associates and to protect our associates and customers. through the implementation of dozens of safety measures, like installing protective partitions and physical distancing floor decals. We continue to require masks and limit the number of people in our stores to allow for physical distancing and ensure frequent and proper cleaning procedures are followed. We also promote additional ways to shop using pickup or no contact delivery. Our total COVID-19 incident rate continues to track below the rate in the surrounding communities where we operate. Our supply chain remains strong and healthy, and we are replenishing our stores daily so that the supplies and products our customers need are readily available. To ensure our customers have access to what they need, we have proactively secured an additional 5,000 truckloads of inventory and increase distribution capacity reserves by 20 percent within our supply chain to get ahead and avoid potential supply disruptions. Furthermore, we have flexed our national footprint by dynamically shifting volume from constrained facilities and regions to facilities and regions with available capacity to accommodate. As America's grocer, we continue to see the unique opportunity to be part of our customers' healthy journey, in addition to being their grocer of choice. Throughout the pandemic, we have remained committed to helping people live healthier lives by offering in-clinic and at-home COVID-19 testing solutions, supported by our team of experienced healthcare professionals. The size and scale of our healthcare footprint with over 2,200 pharmacies and 220 clinics in 35 states, provides us the unique ability to efficiently facilitate COVID-19 testing and immunize a large portion of the U.S. population once vaccines become available. Kroger Health has conducted over 250,000 COVID-19 tests since April and has recently launched rapid antibody tests which are now available across our family of pharmacies and clinics. We are also partners with the federal government effort to deliver hundreds of millions of potentially life-saving vaccines to our communities. We have also partnered with dozens of state health departments in preparation for the early administration of vaccines to priority populations. Once an FDA authorized vaccine is available, we're committed to making it accessible in accordance with the federal rollout plan. All our pharmacies and clinics are staffed with professionals, licensed pharmacists, nurse practitioners, physician assistants, and technicians. Health and wellness is a critical part of our customer value proposition. Pharmacy customers are more loyal, spending three times more per customer. We have approached pharmacy from an omnichannel perspective for quite some time, allowing customers to choose the most appropriate channel in which to connect with us, whether that be in-store, on the phone, or online. For all channels, our strategy is consistent. Simplify healthcare by creating solutions that combine health, wellness, and nutrition. I continue to be proud of the work that our associates do to serve each other, our customers, and our communities. Stories of their accomplishments and selfishness inspire me every day. The investments we have made to enhance our competitive modes are paying off, and as a result, we are growing market share. I will now turn it over to Gary for more details into the quarter financials. Gary?