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

Kenneth Goldman: You mentioned that one of the reasons why working capital was higher than usual in the fourth quarter is that you were buying a little bit ahead to protect margins, I assume as inflation rises. Two underlying questions here. First, was this mainly in the grocery department. You talked about grocery being particularly tough in terms of inflation. And then maybe more importantly, I’m just curious, is there going to be an offset to this in the first quarter, maybe as you run through that higher-than-usual inventory, I guess I’m really just trying to ascertain if you’re going to buy less than usual from some of your grocery vendors next quarter or this quarter.

Gary Millerchip: Yes. Thanks for the question, Ken. From our perspective, the main forward buying would be in pharmacy and some in grocery, that will be the 2 key areas that we looked at and felt there was a good opportunity to protect margins, as I mentioned in the prepared comments. From our perspective on working capital, certainly, some of the year-over-year variance would be things that we would expect to maintain because we are seeing continued higher inflation on inventory. And as we called out, we’re expecting as we improve in-stock levels as we have that some of that will be sticky. We would look at some of the payables and receivables timing impact and would expect that to be coming back. In fact, if we look at our cash at the end of the first period, the first month of the new year, it was actually up by $1 billion and back in line with the prior year, which obviously wasn’t the case at the year-end.

So we do think some of it was timing and will flow through. But obviously, we have strong plans for the year in terms of continuing to grow with our partners. And I would focus more on — from our perspective, how we make sure we’re continuing to drive free cash flow, and we feel good about our ability to do that.

William McMullen: And the forward buying is really driven by the economics at any given day in terms of what’s available in the marketplace. If it’s a good return, we’ll invest the money there. If the return is not good, then you’ll see the flow of benefiting working capital.

Gary Millerchip: We didn’t give exact numbers. I would also say, Ken, the forward buying would be a smaller part of the number, the timing of payments would be a bigger part of that than the actual forward buying.

Kenneth Goldman: Got it. And then a quick follow-up. Implied operating cash flow. It’s one of the questions I’m getting from investors. You gave a CapEx number, so we can back into it, obviously. Just curious why given the strong EBIT growth this year, given some of the working capital reversals, why would it not be a little bit better than what guidance is suggesting. I know you talked a little bit about this. I just wanted to get a little bit more detail on some of the underlying factors there if possible.