The Kroger Co.

Good morning and welcome to the Kroger Co fourth quarter and full year 2022 earnings conference call. If you'd like to ask a question at the end of the presentation, you can press star one on your telephone keypad. If you'd like to withdraw your question, you may press star two. Please note this event is being recorded. I would now like to turn the conference over to Robert Quast, Senior Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's fourth quarter and full year 2022 earnings call. I am joined today by Kroger's Chairman and Chief Executive Officer, Rodney McMullen, and Chief Financial Officer, Gary Millichap. 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. The Kroger Company assumes no obligation to update that information. This morning, we released a presentation to accompany our call today, which can be found on our investor relations webpage at ir.kroger.com. We encourage you to refer to these materials as Rodney and Gary will make references to the presentation throughout the call. During our prepared remarks, we will share our fourth quarter and full year results. We will update you on the progress our team has made since our investor day last year on our leading with fresh and accelerating with digital strategy. We look forward to returning to a full investor day in 2024, where we expect to share detailed plans for how we will achieve synergies and maximize shareholder value from our merger with Albertsons. 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 Rodney.

Thank you, Rob. Good morning, everyone, and thank you for joining us today. I'd like to start by sharing how incredibly optimistic I am about Kroger's future. Our performance last year demonstrates how Kroger is consistently delivering for our customers, our associates, and our communities, and by doing so, creating value for our shareholders. Since announcing our leading with fresh and accelerating with digital strategy at our 2020 Investor Day, we have made tremendous progress against our commitments. As you will see from the chart on slide six of the presentation that Rob mentioned, we are delivering a fresh, affordable, and seamless shopping experience for our customers with zero compromise on value, quality, selection, or convenience. We are advancing our purpose to feed the human spirit by significantly increasing associate wages and uplifting our communities. And we are delivering on our financial commitments through our strong, resilient value creation model. With this strategy, we exceeded our financial goals and delivered attractive total shareholder returns during the past two years. In 2022, customer preferences shifted in response to inflation. and macroeconomic uncertainty. Our customers were looking for more ways to stretch their budget. The gap between food at home and food away from home spending grew in the fourth quarter as more customers gravitated toward affordable meal solutions that restaurants simply can't provide. Our research shows that cooking at home is three to four times less expensive than dining out. And as Kroger was there for our customers, innovating quickly to meet their needs and wants. Our nimble and customer-focused approach helped us deliver strong results in 2022, leading to total household growth and enhanced customer loyalty. We saw an especially strong response in our higher-income households as this segment grew by 1.1 million households. Further illustrating the resiliency in our model and strong value proposition we offer customers across all segments. Gary will get into the specific details of our 2022 financial results and outlook for 2023 a little later. Before doing so, I'd like to spend some time reviewing how each pillar of our go-to-market strategy provided meaningful and measurable customer benefits last year and how we will accelerate those benefits in 2023. The foundation of our go-to-market strategy is fresh, our brand, personalization, and seamless. By delivering on these four pillars, our customers win and Kroger attracts new and more loyal customers. At the center of our go-to-market strategy is a superior customer experience. We deliver that by consistently providing customers a full, fresh, and friendly experience. Kroger continued to demonstrate operational excellence in 2022 as we saw improvements in all three metrics. We believe our go-to-market strategy is creating a unique customer value proposition designed to perform in many economic environments. We will continue to invest in our pillars and the customer experience to differentiate the value we offer. First, leading with fresh. As an important influence on where customers shop, we are constantly improving how we bring even fresher food to our stores and e-commerce experience. Our end-to-end fresh initiative is changing the way our teams deliver on our commitment to freshness, and we are incredibly pleased with its success. In 2022, more than 1,400 stores implemented the end-to-end produce solution. driving measurable increases in both fresh and total store sales. In 2023, we will continue innovating the fresh experience to drive customer satisfaction and improve our product mix. We continue to improve inventory management tools, strengthen our supply chain to deliver additional days of freshness, and enhance our offering to meet customer demand. As a reminder, our merger with Home Chef brought significant capabilities in store and restaurant quality meal solutions. We will be expanding our Home Chef production facilities to meet this growing customer need. Next, Our Brands. The Our Brands portfolio allows us to offer exciting products at great value while driving incremental sales and improving margins. Our brand's quality and value proposition is especially important when inflation is affecting so many of our customers' lives. To meet the needs of customers on a budget, we launched a new opening price point product line called Smartway. By consolidating and simplifying several brands into one, we are making it easier for customers while creating a point of differentiation across the full portfolio. We will continue expanding our brands to more categories with innovative product offerings. Our goal is to help every customer find high-quality, affordable products they love, from pantry staples to fresh food to ready-to-eat restaurant-quality meals. Now I'll move to personalization. Our data science teams are using predictive science to serve customers the right products at the right time and at the best value. Because we know our customers so well, we are able to provide recommendations to start their baskets and deliver personalized offers on the products most important to them, saving them time and money and making their lives easier. In return, our customers reward us with their trust and loyalty, consistently ranking us among the best at being able to offer personalized savings and solutions that meet their needs. In 2022, we grew loyalty as our customers more deeply engaged with personalized coupons and fuel rewards. As customers looked for more ways to save, digital coupon engagement hit an all-time high during the year. Our combined paper and digital coupons helped save our customers more than $1.4 billion on products they need and want. That's on top of our everyday promotions and all the other value we offer. To provide even more value, we launched BOOST, the industry's most affordable membership nationwide in July. Early results are exceeding our expectations with incremental engagement and overall household spend. We are evolving BOOST with new benefits to further broaden its appeal and create additional customer value. In 2023, we will make significant investments to build out our personalization capabilities, including increasing the use of real-time data to predict customer needs, which will support sales growth during the next three years. Finally, turning to seamless. Seamless is growing in importance among our customers and we expect it will be a significant growth driver over the next several years. We have built a digital platform that offers a seamless shopping experience with zero compromise, allowing customers to shift effortlessly between store, pickup, and delivery solutions. As you'll see on slide 12, our combination of stores and dedicated fulfillment centers positions Kroger to serve all customer trips, from in-stock shopping to rapid delivery on needed now items to large stock-off orders. Despite the easing of pandemic-related shopping behaviors that led to a significant increase in online shopping, more and more customers are incorporating e-commerce into their daily permanent routines, recognizing the value and convenience online shopping offers. We expect digital sales will continue to grow at a faster pace than overall food at home sales and believe Kroger is well positioned to deliver double-digit growth in over the next three years. As we work to become the most trusted online grocery destination, we are focused on four key areas that will position us to deliver that growth. We start by providing a compelling Kroger-owned digital destination, where we offer customers exceptional value, personalization, and freshness in a single, easy-to-use online experience. Second, we are focused on delivering best-in-class fulfillment, driving trust and loyalty by exceeding expectations for quality and freshness Our delivery approach is unique in the fact that we have a large store network conveniently located close to our customers and large dedicated fulfillment centers designed efficiently to pick large orders. Our dedicated fulfillment centers provide the most reliable experience, the highest in-stock levels, best on-time delivery, and one-of-a-kind white glove experience with industry leading net promoter scores. Kroger delivery customers are more engaged across our entire ecosystem, spending more and shopping with us more often. Looking ahead, we will continue to learn through our customer fulfillment network with a focus on driving profitability and efficiencies to ensure that we are well positioned to deliver sustainable, profitable growth while delighting our customers. Next, we are focused on reaching new customers and adding more shopping occasions. Our delivery network allows us to offer enhanced service to new customers, and we will also grow our share of wallet by increasing the number of orders customers place with us. Solutions like Kroger Delivery Now, enabled by our vast network of conveniently located stores, can connect customers to fresh groceries and household essentials in as little as 30 minutes. This seamless ecosystem makes any shopping experience simple for our customers. Finally, we are driving our profit flywheel and improving margins by reducing our digital cost to serve and growing our alternative profit streams. To accomplish this goal, we are lowering fulfillment costs, building the density of demand, and last mile routing. engaging directly with their third party vendors and growing digital retail media. Now let me share how we are accelerating growth in our model through alternative profits. During the last several years, we invested heavily in technology to transform our business and enter new high growth and high return businesses. These businesses contribute meaningfully to our results with alternative profit businesses achieving 1.2 billion dollars in operating profit in 2022. Kroger Precision Marketing is one of our fastest growing businesses and is well positioned to win within the U.S. retail media landscape, which is projected to be a 55 billion dollar industry by 2024. What makes our retail media business special is our ability to help brands achieve a greater return on their media investment. For the fifth year in a row, KPM was recognized as a leader in the retail media space by the Path to Purchase Institute, which collects feedback from those closest to the retail media networks and accessing their effectiveness. KPM was recognized as a leader for many of its capabilities including maintaining its leadership in targeting and measurement capabilities, a testament to the strength of our unique product offerings and the insights we bring to this emerging landscape. Our associates enable our success, and we are committed to investing in theirs. To remain an employer of choice, we support our associates' development and holistic well-being. We provide our associates with the tools they need to grow their careers that they want at all stages. In 2022, Kroger was named as a best place to work in IT for the fifth consecutive year and a best place to work for disability inclusion for the third year. We also continue to support our associates through investments in wages and comprehensive benefits. In 2022, We raised our average hourly rate by more than 6% and have now invested an incremental $1.9 billion in associate wages since 2018. Our average hourly rate is now more than $18 and more than $23 when you include comprehensive benefits. We are committed to sustainably increasing associate wages and plan to invest more than $770 million and associates in 2023. We value and respect our associates, and investing in their success is just one way we demonstrate that. We take seriously our role in helping to create a healthier and thriving neighborhoods across the country. The centerpiece of our efforts is Kroger's Zero Waste Social Impact Plan. an industry-leading commitment to build communities free from hunger and waste. Since launching Zero Hunger, Zero Waste, we have made continual progress toward our goals. We have directed more than $1.65 billion in food and funds to help end hunger, including donating more than 2.3 billion meals. We are making progress on our carbon emissions reduction plan and our brand's sustainable packaging goal. I'm especially proud of our incredible associates who helped us reach a key milestone this year with 100% execution of our surplus food rescue programs across each and every store across the company. Looking ahead, we will continue to focus our efforts on our ambitious goal of ending hunger in our communities and eliminating waste especially food waste throughout the company. In summary, our proven go-to-market strategy led to enhanced loyalty and household growth as we help customers manage the effect of inflation in 2022. We are well positioned to sustain our momentum into 2023. And with that, I'll turn it over to Gary to take you through our results and expectations for 2023. Gary?