The Kroger Co. (NYSE:KR) Q4 2022 Earnings Call Transcript

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Gary Millerchip: Maybe just to add, Rodney — Michael, to the sort of short-term answer to Rodney’s long-term perspective, I would say that we are seeing the benefits flow through in the profitability that we talked about on prior investor meetings. So if you think about our existing digital business today, pick up through the store delivery, what we’re seeing is the cost to serve. We had our best ever quarter for the cost to serve a digital order in the Q4 of 2022. Rodney mentioned media, the amount of media revenue we generate per digital transaction continues to grow. So those are 2 of the big drivers that we expect to drive digital profitability, and we continue to see improvements in ’22, and we expect improvements in ’23 that were actually part of the tailwind in the financial model I described earlier. So we remain on that path and we are making good progress.

Michael Lasser: And Gary, just to clarify that, then why slow the rollout of the Ocado sheds? And my second question just at this time. To get to the slightly below the low end of the range for ID sales by the end of the year with still low to mid-single-digit inflation, do you assume that there’s going to be a unit erosion by the end of the year as — I don’t need to tell you guys, groceries are expensive and in a tough economic environment that may get worse by the end of the year. The consumer may be pulling back even further, and we just want to make sure that you factored in some conservatism into your outlook.

Gary Millerchip: Sure. Thanks, Mike. I’ll try and be brief on those 2. So I think just to clarify on the first part of the question, I was describing the majority of our digital business today. So think about pickup through the stores, think about the work that we’re doing in delivery to customers today. And when we share that doubling our digital profitability, that was based on those metrics. And so how do we improve the cost to serve, how do we improve digital media revenue. On the customer fulfillment centers, we’re very much in the middle of that journey right now of sort of 18 months or so into those first 2 facilities, really kind of fully understanding the scale of demand to how the customers behave and how you optimize that model.

So I’d say more to come on that as we continue to understand that sort of key phase of those first 2 facilities really seeing the progress there on profitability. But from a customer demand, the customer experience, we’re seeing all the sort of things we have hoped to have seen around customer engagement.

William McMullen: And we are actively looking for sites for some preannounced locations too on those and finding the sites ended up being a little bit more difficult than what we would have expected.

Gary Millerchip: And I think just very brief on your second question, Michael. But for us, it’s about maintaining flexibility. We believe we built our model to be able to adapt and to deliver value for our customers. We gave directional numbers just because I think it’s helpful on inflation because of the LIFO calculation. But our expectation is our goal will be to continue to deliver more value for customers and over time grow our share and obviously make sure we meet the customer where they are and we expect the second half of the year to have some — definitely some things that we don’t know how to perfectly plan for. We need to make sure we’re nimble and agile to be adapt to that because there’s clearly going to be changed in the second half of the year.

William McMullen: And we feel good about our overall model being able to adapt in any situation in any market because we give a great value for the customer regardless. Thanks for the question, Michael.

Operator: Our next question comes from Kenneth Goldman of JPMorgan.

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