Jeff Harmening: So, when we talk about historical, it kind of depends, Nik, on what we mean by historical. I don’t mean to be cute with this, but if we look relative to where we were a year ago, what we see is our lifts have actually improved vis-a-vis where they were a year ago. If we look to see where the lifts are versus where they were four years ago, they’re not quite at the levels of where they were four years ago. And I don’t have a fact that I can point to as why exactly that is the case, but I would tell you that neither we nor consumers have seen inflation the way we’ve seen it over the last few years, and consumers are still getting used to new prices in the marketplace. And I suspect whether that’s food or gas or rent or any number of things, that is absolutely the case.
And it will take a little while for consumers to settle into what new price points are to the extent we continue to see inflation, which we do, even if at more modest levels. So, Nik, I would say that relative to a year ago, we’re pleased with the progress of our lifts, but relative to historic pre-pandemic, they’re a little bit lower. And I wouldn’t surmise that it’s the consumer catching up to a new reality.
Nik Modi: Great. Thanks. I’ll pass it on.
Operator: Our next question is coming from the line of Pamela Kaufman with Morgan Stanley. Please go ahead.
Pamela Kaufman: Hi. Good morning.
Jeff Harmening: Good morning.
Pamela Kaufman: I had a follow up question on the guidance for this year. Just wanted to see if you could walk through the puts and takes of the updated outlook. So, your org sales outlook implies about $800 million less in sales this year at the midpoint versus before. But you narrowed your EBIT growth guidance slightly compared to your prior expectations. So, can you just walk through — I know, you have the higher HMM savings, but where else are you finding offsets in the P&L, because HMM wouldn’t seem to explain the full impact on the lower impact on EBIT changing?
Jeff Harmening: So, Pam, Kofi and I are going to tag team this. Let me talk about that. Let me talk about the revenue, and then Kofi is going to take the rest of the P&L side. On the revenue side, the way I think about our guidance is that, in order to hit the lower end of our guidance, so let’s call it minus 1%, that would indicate that we’d see a continuation of the top line performance we saw in Q2, and — which would indicate a little bit better volume and a little bit less price/mix than we saw in the second quarter, but in absolute terms, about the same as we saw in the second quarter. The higher end of our guidance, which suggests that the categories get a little bit better, which we think they certainly could, due to lapping the SNAP emergency reductions from a year ago in January through March, and from our lapping pricing activity from March and April of last year.
So, those two things combined with a little bit better share performance based on the out-of-stock situation changing near the end of the year. We could hit the top end of the guidance we suggested, but that kind of brackets the top line. I’ll let Kofi talk a little bit more about the profitability.
Kofi Bruce: Sure, Pam, and thanks for the question. I would just note that the HMM adjustment is pretty significant. As a reminder, the past two years we’ve delivered below our historic levels of kind of 4% [and] (ph) 3% for each of the prior two years due to the supply chain disrupted environment. We’re now on pace to deliver 5% against an early expectation of 4%. That is the biggest single contributor. But we are seeing improvement in our inflation, but not significant enough to change the routing. So, that’s a modest contributor as well. But the other component in gross margin is the supply chain related disruption costs. So, as I mentioned earlier, one of the features of this environment is supply chain stability has allowed us to get at some of those embedded costs we took on to operate in this environment.
And we’ve made sequential improvement over the last four quarters on this in — most acutely within our North America Retail business. And then, lastly, the adjustment of our incentive off of last year’s peak level. So, as you know, last year, really strong year performance, historically high levels of incentive-based comp, which is variable and based on the top and bottom line projections as that’s both normalized at the start of the year to a base expectation of planned targets. And now as we take the top line down, that’s almost $100 million in reduction in admin expense. So, as you take all of those, that gives us the confidence to keep within the range, albeit a little tighter as volume expectations come in from the top of the year.
Pamela Kaufman: Thanks. That’s very helpful. And just a follow up question on gross margins. They’re now back to pre-pandemic levels. So, how are you thinking about the potential for gross margin expansion from here? On one hand, you have the benefit from HMM, but I’m assuming there will be some volume deleverage. So, how should we expect gross margins to progress? And do you kind of see them at the right levels here?
Kofi Bruce: Yeah. Well, okay, I think implied within our guidance would be a little bit less gross — operating margin expansion, bolstered obviously by gross margins in the back half as we see a step down, a sequential step down in the contributions from price/mix as we lapped last year’s SRM actions fully by Q4 of this year. I just note we’ve made significant progress at the gross margin level, bolstered in part not just by HMM these past two quarters, but in part by the disruption costs that I mentioned earlier, 170 basis points, 120 basis points in the back half of last year and the first half of this year, respectively. So, I would expect we’d see more normalized levels of gross margin expansion going forward, kind of off of this base.
