Ed Kelly: Gary, I wanted to ask you about the gross margin. I think you said that the Q4 gross margin, you expect to be flattish. If you could just confirm that. And then looking out, is the base case for ’24 that, that flattish trend would continue? And then, within that context, I’m curious about shrink. And maybe just educate us a little bit on when you do your accounts, the visibility you have on where you stand in shrink, and do you believe it’s peaked?
Gary Millerchip: Sure. Thanks, Ed. So, the first part of the question, yes, you’re essentially right that we — I said in my prepared comments that we would expect Q4 to look very similar to Q3. The way that I sort of would break that down is that we’ve been equally as pleased with the progress that we’ve seen in the margin improvement plan initiatives that we saw in the earlier part of the year as well. So, we continue to see strong benefits from Our Brands, strong benefits from sourcing, health and wellness, of course, with Express Scripts is a tailwind this year to gross margin, and supply chain and alternative profits. All those areas continue to generate tailwinds in our gross margin rate. What we did in the third quarter is we did invest more in gross margin to balance those benefits partly in increased pricing and promotion, as Rodney mentioned earlier.
And we did also increase advertising costs during the quarter as well. So, those would have been the differences quarter-over-quarter in terms of what we saw and what we would expect to continue to be a similar pattern as we think about the fourth quarter. I’d say as we look into beyond 2023, we certainly still see a lot of potential for the tailwinds that I mentioned around Our Brands sourcing, these areas where we believe that we are on a multiyear path to continue to drive improvement and drive growth. And of course, alternative profit streams continues to grow at a double-digit pace off a bigger base as well. So, I think we still have a lot of confidence in those levers. And what we’re doing is making sure we’re balancing the business to set ourselves up for continued sustained growth in the future.
From a shrink perspective, we would still see shrink as a headwind, as I mentioned in the prepared comments. I would say, it’s probably somewhat less dramatic for us than maybe some of our peer group because while we have a general merchandise business that’s impacted, it’s less impacted than probably some of the big-box retailers, but it would still be a headwind to our gross margin rate that would have impacted the third quarter on a year-over-year basis. That headwind actually would have been less than it was in the second quarter, not dramatically, but it would have eased somewhat. So, it’s still something that we have to work through and continue to offset, but we are seeing at least the trend in terms of year-over-year growth decelerate, but it would still be a headwind today because of the crime and organized retail crime factors I mentioned earlier.
Rodney McMullen: The other thing I think is important to remember is a lot of our shrink is in our fresh departments. And our fresh departments, actually, a lot of that is, you can manage it by changing processes and using technology. And our teams have done a great job actually on improving shrink in the fresh departments because of our store teams partnering with warehouse teams on processes and leveraging technology as well, and I think as a big chunk of the trend — slight trend improvements that Gary mentioned.
Ed Kelly: Great point.
Rodney McMullen: Thanks, Ed.
Operator: Thank you. The next question goes to Chuck Cerankosky of Northcoast Research. Chuck, please go ahead. Your line is open.
Chuck Cerankosky: Good morning, everyone.
Rodney McMullen: Good morning.
Chuck Cerankosky: Rodney, could you talk a little bit about the economy’s effect and inflation on your digital business, and I’m thinking particularly about customers’ willingness to spend money on any delivery fees or membership fees, and also how the economy might be impacting delivery volumes and digital order volumes?
Rodney McMullen: If you look at overall — thanks, Chuck. If you look at overall, inflation is definitely stabilizing overall. And it’s — from a customer standpoint, they appreciate the stabilization but they also know the fact that if you look at over the last two years, they’ve had to endure a lot of inflation. And if you look at some of the fresh departments, some of that has actually returned back to normal. But if you look at on the process side, you wouldn’t see that. So, if you look at like eggs, for an example, eggs are significantly deflationary. And we’ll all be happy when we get to the point where we’re cycling that early next year or next year. If you look at customer behavior, it’s fascinating. Customers do a lot of work to save where they want to save or feel like they need to save, so in pack size, if you look at moving to Our Brands versus some of the national brands.
But if you look at membership fees and delivery fees and things like that, that business continues to grow strongly. And in fact, it was up double digits and that’s what drove the 11%. I’m sure part of that, and any time I talk to a politician, I always remind them, if you look at customers on a budget, they’re under a lot of strain and they’re doing a lot of behavior changes. If you look at customers that are not as focused on price because inflation hasn’t affected them as much, that customers’ behavior is still very strong, and they’re still continuing to buy big packs, continuing to buy nicer wines, Murray’s Cheese, Starbucks, things like that. So, we over-index with our membership program on customers that are more mainstream and upscale, so I’m sure that’s part of the reason why we’re not seeing the behavior change.
Chuck Cerankosky: Okay. Thanks for that. And just real quick, you’re exiting the ghost kitchen business. Any particular reason for that?
