Kroger Company (KR) — Q1 2023 Earnings Call Transcript

Good morning. Thank you for joining us for Kroger's First Quarter 2022 Earnings Call. I am here with our Chairman and CEO, Rodney McMullen, and our Chief Financial Officer, Gary Millerchip. Before we start, I want to remind you that the discussions today will include forward-looking statements. We advise you that these statements are predictions, and actual events or results may differ significantly. A thorough discussion of the various factors that could materially impact our business is detailed in our SEC filings. Kroger has no obligation to update that information. After our prepared remarks, we look forward to your questions. In response to your feedback about allowing more participants during the Q&A, we may provide shorter responses to your follow-up questions to accommodate as many of you as possible. I will now hand the call over to Rodney.

Thank you, Rob. Good morning, everyone, and thank you for joining us today. We're off to a great start in 2022, delivering strong performance by successfully executing our strategy of Leading With Fresh and Accelerating With Digital. Our associates' relentless focus on providing fresh, affordable food to our customers is driving our strong results. During the quarter, we demonstrated the resilience of our business model led by strong top line sales ahead of internal expectations. In addition, our team navigated a challenging operating environment characterized by continued inflationary cost pressures and supply chain headwinds, which included higher diesel fuel costs. Through our strategic cost savings execution and sustained food-at-home trends, our team delivered 16% growth in adjusted FIFO operating profit, providing once again the strength of our financial model in a variety of operating environments. Our teams are focused on delivering a great customer experience with zero compromise. Rising inflation, as consumers rethink their shopping and eating habits, while customers continue to cook more, we are seeing different shopping behaviors based on how individual customers are experiencing the current inflationary environment. Many customers continue to shop premium products throughout the store, including Private Selection, Murray's Cheese and deluxe meal solutions. For other customers whose budgets are more directly impacted by food and fuel inflation, they are actively looking for ways to save. We're doing everything we can to help these customers stretch their budgets. I'd like to share more about the work we're doing for our customers and how our competitive moats uniquely position us to meet these challenging and changing customer needs. First, we are leading with fresh. Our customers continue to prioritize fresh as the number one determinant of where to shop. We are meeting their needs with operational efficiencies and new technologies that extend days of freshness and grow our selection of quality fresh products. In the first quarter, we achieved 5.2% identical sales growth in our fresh categories. These gains were led by the expansion of our End-to-End Fresh Produce program, which elevates standards and improves our ability to maintain freshness throughout the supply chain. We certified 355 stores this quarter, and the customer feedback has been overwhelmingly positive. We also continue to increase our use of forecasting and analytical tools, specifically leveraging 84.51° to improve our ability to maintain fresh products in stock, both in store and online. Our recent floral results are a great example of how we are leading with fresh. As the nation's largest florist, the first quarter was our time to shine for holiday celebrations and our floral team stepped up, achieving record sales. In fact, we set an overall single-day floral sales record on Valentine's Day and a Mother's Day sales record with strong double-digit growth. Second is Our Brands. During the quarter, we saw tremendous growth in Our Brands, which had identical sales of 6.3% and outpaced all national brands. With 92% of households purchasing at least one of these products, we launched 239 new and innovative products during the quarter, reflecting many of the top food trend predictions we made at the beginning of the year. All of our new products continue to be tested and validated to ensure that they are as good or better than the comparable national brand. We continue to invest heavily in the quality of Our Brands, which preserves our strong price position and drives higher profitability. Next area is personalization. Our data science platform provides unique insights that create personalized customer experiences. In this dynamic environment where customer behaviors are changing rapidly, we use our data and insights to be nimble and react quickly to ever-changing needs. Our broad-based data science approach helps us determine how to best implement price, promotion and display. We are focused on delivering incredible value to our customers through relevant personalized offers and fuel rewards. Our loyal customers are using our fuel rewards program now more than ever and, in fact, more than 600,000 incremental households engaged for the first time this quarter. Finally, our seamless ecosystem continues to deliver fresh products to our customers anytime, anywhere and with zero compromise. During the first quarter, more customers returned to in-store shopping. And as a result, we made strides to enhance that experience while introducing new tools that help our associates better serve customers. In pickup, we unveiled new technology that improved wait times by 20% and expanded capacity based on customer needs. In delivery, we continue to introduce key initiatives that expand our reach and shorten delivery times. We strive to provide more customers access to high-quality, affordable food regardless of whether they have a physical store in their community. During the quarter, we opened 2 new customer fulfillment centers powered by Ocado's automated Smart Platform, one in Dallas, Texas and one in Pleasant Prairie, Wisconsin, bringing our total CFC count to 5. We also opened 3 new spoke locations for a total of 6 spokes. As we head into summer, our end-to-end cold solutions, including the custom-built refrigerated van, will ensure customers get the freshest product delivered directly to their doorstep. Finally, our Boost membership is delivering promising results. Our one-of-a-kind membership program offers incredible value where customers can get unlimited free delivery on orders of $35 or more, double the fuel points on every dollar spent at Kroger and other exclusive member benefits. We are encouraged by the number of new members in the 4 current pilot divisions. Importantly, delivery sales increased significantly compared to non-Boost divisions and delivery retention improved approximately 600 basis points. Because of this early success, we are proud to announce today that Kroger Boost is launching nationwide beginning in the next few weeks. This next-generation loyalty program is deepening our relationships with customers as they continue to look for value and convenience. Turning to supply chain. Our 2022 business plan anticipated ongoing supply chain challenges. By planning ahead and focusing on staffing, technology and process efficiencies, we manage our costs effectively. By owning and operating a portion of our fleet, we better control and manage transportation costs despite diesel fuel cost headwinds. We were also proactive about forward buying and securing capacity for goods, resulting in better vendor rates. Through our supplier relationships, we saw sequential improvement in product availability. We are well positioned to adapt to the evolving environment, and we are cautiously optimistic about a broader supply chain recovery throughout the year. We also continue to invest in our associates and an associate experience that facilitates an amazing customer experience. We firmly believe that exceptional financial and operating performance connects directly to the ways we support and invest in our associates. During the quarter, we took numerous steps to meet our associates' needs while they delivered for our customers. We continue to invest in associate wages, and we expect hourly wages to grow throughout the year. We launched new initiatives to simplify day-to-day work, including the modernized scheduling tool, MyTime. We took steps to improve communication across all of our teams and bring meaningful training to all of our associates, no matter where they work. One example of this commitment is the addition of Microsoft Teams Rooms across most of our store locations. This technology improvement will facilitate deeper connections and improve the associate experiences. As an employer of choice, more people are applying to work for Kroger, and more associates are choosing to stay with us. While we still have work to do, we experienced a meaningful improvement in both hiring and retention in the months after the Omicron surge. We are also seeing more boomerangs. These are associates who left to work elsewhere and ultimately came back to us. Kroger's strong culture invites associates to come for a job and discover a career. And we're glad that so many value and appreciate our work environment, our culture, and the people they work with every day. Our winning culture is rooted in living our purpose to feed the human spirit. During the past year, our teams took significant steps to support our customers and communities through our Zero Hunger | Zero Waste social and environmental impact plan. We introduced a new Kroger and USO co-branded mobile unit to nourish active-duty military service members and their families at military bases and USO centers across the country as well as provide community disaster relief. The first of 4 units hit the road in May. In summary, we're off to a very strong start in fiscal 2022. We are widening our competitive moats, creating a shopping experience with zero compromise, investing where it matters most to our customers and associates, and strengthening our purpose in large and small ways every day. When we do all of this well, our teams, our customers, and our shareholders all win. Now I'd like to turn it over to Gary to take you through our first quarter results. Gary?

Thank you, Rodney, and good morning, everyone. Kroger delivered another quarter of strong results as our team did an outstanding job executing our go-to-market strategy while navigating a dynamic operating environment. Our results again highlight the strength and resilience of Kroger's financial model, which allowed us to continue to invest in our associates, deliver fresh, affordable food for our customers and create value for our shareholders. I'll now provide more detail on our results in the quarter. Led by our competitive moats, we achieved identical sales without fuel growth of 4.1%. Fresh categories and Our Brands identical sales both outpaced overall company results. Adjusted EPS was $1.45, up 22% compared to the same quarter last year, driven by increased sales and exceptional cost management during the quarter. Digital sales declined 6% in the first quarter, broadly in line with our expectations. We continue to ramp the digital growth initiatives shared at our Investor Day, including enhanced personalization capabilities, Boost membership, customer fulfillment centers and Kroger Delivery Now. As a result of these initiatives, we grew digitally engaged households during the quarter and we would expect digital sales to accelerate as the year progresses. Gross margin was 21.6% of sales for the quarter. The FIFO gross margin rate, excluding fuel, decreased 26 basis points compared to the same period last year. This decrease was primarily attributable to continued strategic price investments and higher supply chain costs, offset by sourcing benefits and the cycling of a write-down related to a donation of personal protective equipment inventory in the prior year. Our team continues to do an excellent job managing higher product cost inflation. We are leveraging our data and sourcing expertise and working closely with our suppliers to help minimize the effect on our customers and our financial model. We are investing where it matters most to our customers and are using our proprietary data to deliver additional value through personalization. Our Brands are also proving to be an important differentiator for our customers in this environment, providing an unmatched combination of great quality and great value. We will continue to leverage these proven and unique capabilities to help our customers manage their grocery budgets more effectively and maintain a strong value proposition relative to our competitors as we believe inflation will remain front of mind for many of our customers for the remainder of 2022. In recognition of current product cost inflation and our outlook for the rest of the year, we recorded a LIFO charge for the quarter of $93 million compared to $37 million in the prior year. This increase represents a $0.06 headwind to EPS in the quarter versus 2021. Our OG&A rate decreased 46 basis points, excluding fuel and adjustment items. We were successful in offsetting inflation headwinds in many parts of our business and continued investments in our associate wages by reducing costs in areas that do not impact the customer experience. As an example, this quarter, we introduced a new bakery forecasting tool, which is improving product freshness, reducing waste, and, at the same time, simplifying the associate ordering process. We have a strong pipeline of process improvement initiatives and innovative technology-driven solutions that will lower digital fulfillment costs, increase store productivity and reduce waste and shrink. For the fifth consecutive year, we remain on track to deliver $1 billion of cost savings in 2022. The traffic and data generated by our supermarket business continue to create a strong flywheel effect for alternative profits. Led by retail media and Kroger Personal Finance, alternative profits are on track to contribute meaningful growth in 2022. During the quarter, Kroger Precision Marketing added more than 100 new brand partners. We continue to enhance our market-leading capabilities and have entered into new agreements with three leading advertising management platforms, allowing our CPG partners to manage their on-site ad campaigns more effectively. Fuel remains an important part of our overall value proposition and a key offering to help customers stretch their dollars, especially when fuel prices are high. We continue to deliver significant value through our loyalty program, which saves customers up to $1.25 per gallon. As Rodney shared earlier, more customers engaged with fuel rewards this quarter, and our gallons grew at a faster rate than the market. The average retail price of fuel was $4 this quarter versus $2.79 in the same quarter last year. Our cents per gallon fuel margin was $0.42 compared to $0.35 in the same quarter last year. Our associates continue to do an outstanding job executing our strategy and serving our customers. We introduced a number of new initiatives to support associates this quarter as well as continuing to invest in hourly wages. These investments are fully contemplated in our guidance and long-term financial model. During the first quarter, we ratified new labor agreements with the UFCW in Denver, Southern California, Houston, Little Rock, Memphis, and Seattle, covering more than 67,000 associates. We continue to negotiate contracts with the UFCW in Las Vegas, Southern California for Ralphs pharmacies, Indianapolis, Roanoke, Chicago and Columbus. Turning now to cash flow and liquidity. Kroger continues to generate strong free cash flow. Our net total debt to adjusted EBITDA ratio is 1.68 compared to 1.79 a year ago. The company's net total debt to adjusted EBITDA ratio target range is 2.3 to 2.5. Consistent with our financial strategy, we are investing in the business to drive sustainable future earnings growth and continue to expect capital expenditures of between $3.8 billion and $4 billion in 2022. During quarter 1, we were disciplined in returning cash to shareholders. In total, Kroger returned $819 million via a combination of share repurchases and dividends. We are operating from a position of financial strength and we'll continue to evaluate opportunities to deploy excess cash to accelerate our growth model and deliver sustainable total shareholder returns. In closing, let me share additional color on our outlook for the rest of the year. While there are a number of uncertainties in the macroeconomic and inflation outlook for the remainder of 2022, Kroger is laser-focused on executing the plans outlined at our Investor Day, and we believe our go-to-market strategy will serve us well in navigating the current environment. Based on the strength of our quarter 1 results and sustained food-at-home trends, we are raising our full year guidance. We now expect full year identical sales without fuel of 2.5% to 3.5%, adjusted FIFO operating profit of $4.3 billion to $4.4 billion, and adjusted net earnings per diluted share of $3.85 to $3.95, representing an annual growth rate of 5% to 7%. Our updated guidance assumes inflation will remain at heightened levels for the remainder of the year, although we would expect the year-over-year rate to moderate in the second half of the year as we cycle higher inflation from quarter 3 and quarter 4 2021. Due to this higher outlook for inflation, we now expect our LIFO full year charge will be in the range of $300 million compared to $197 million last year. As a reminder, while the actual LIFO charge is calculated at a point in time at the end of our fourth quarter, we recognize the projected charge evenly throughout the year. Our guidance also assumes retail fuel profitability will be a headwind for the remainder of 2022 as we cycle higher CPG margins from 2021. Our full year projected tax rate has been lowered from 23% to 22%, primarily due to higher-than-expected tax deductions related to employee stock option exercises. Overall, we are extremely pleased with our start to the year, which provides another proof point of the strength of our financial model. And looking forward, we remain confident in our ability to deliver sustained earnings growth and total shareholder returns of 8% to 11% over time. And now I'll turn it back to Rodney.

Thanks, Gary. I would like to once again acknowledge and thank our outstanding associates. Their hard work and dedication fuel our Leading With Fresh and Accelerating With Digital strategy and our obsession for our customers. We continue finding new ways to help customers stretch their dollars through everyday prices, data-driven promotions, personalized experiences, trusted Our Brand products and a seamless e-commerce platform. We believe this relentless focus on delivering for customers will help us maintain robust sales and drive growth. Moving ahead, we remain confident that we have the right strategy to deliver value for all stakeholders, including our shareholders. Now we'll turn to your questions.

Great quarter. I have a question regarding the ID sales. Can you provide more details on the traffic aspect, what trends you're noticing in traffic, the ticket sizes, and specifically the impact of inflation on ID sales? Also, some of your grocery and food competitors are experiencing strong double-digit same-store sales. Is the price difference between you and your competitors increasing due to the pricing strategies you're implementing?

Thanks, Robby, and good morning. In terms of traffic, we are encouraged by the increase in both our loyal shoppers and household count. However, the average basket size for customers is still declining, partly due to the current economic conditions faced by some customers. Toward the end of the quarter, our identical sales showed slightly stronger performance compared to earlier in the quarter, and this trend has continued into the early part of the second quarter, although it's still early. We also have a significant general merchandise business that influences this. As I mentioned earlier, our fresh departments saw a growth of over 5%. Overall, we believe customers are actively managing their total budgets, and we are doing the same through promotions. Customers are increasingly purchasing our brands and are impressed with the quality, which holds up well against other products. We monitor pricing regularly and have observed that our price spreads remain consistent or have improved slightly over the past couple of years. Gary, do you want to add anything?

I think you covered it well, Rodney. The only other point you mentioned about the growth in total households and loyal households is that we also saw visits improving during the quarter, which we were really pleased with.

Yes. So let me start with our own brand, right? So it looks like own brand is probably growing 2x the rate of national brand. I'm curious, price spreads there, so maybe, Rodney, talk about that. Where you think own brand momentum goes from here? And I know historically, right, you guys have always said that own brand strength leads to increased CPG promotions. Do you think that will be true this time?

Yes, I appreciate the question, John. We take pride in our brands, particularly Private Selection, Simple Truth, and our newest brand, Home Chef. Overall, we have seen strong growth across all segments. The only exception was Simple Truth, which faced some softness earlier in the quarter due to supply issues with one of our chicken suppliers. Aside from that, growth has been solid. Historically, our brands have gained market share over time, a trend that has persisted for over 25 years. When the economy tightens, our brands tend to gain share, and in better economic conditions, we either maintain or see a slight loss, consistent with our past experiences. Customers tend to love our products once they try them. We're also proud of the enhancements made to our leadership team, focusing on our brands. We consider them comparable to national brands in our customers' eyes. More than 90% of our customers include our brands in their shopping baskets, which gives us confidence. Regarding your second question about national brand changes, there are still significant capacity constraints with some national brands. If a national brand has capacity, we can expect a typical trend of increased promotions as their tonnage decreases. However, if they are supply-constrained, that would be unexpected. This situation arises as we all emerge from COVID with higher volume levels than we had before, which has placed different brands at varying stages of supply constraints.

A quick follow-up to that. Forward buying, right? Normally, a big P&L benefit in inflationary times. It sounds like today, it's limited, right, because of their capacity constraints?

Yes. We have retained much of the excess warehouse space we acquired during COVID. We are utilizing this space to store products when they are available. Many consumer packaged goods companies are also using it to stabilize their production. When they experience surplus production, we are taking that inventory. While it essentially acts as forward buying, I don’t anticipate it will be as significant as it has been in previous instances.

I'll ask my question and follow up in one shot. First, Rodney, I want to ask about the competitive environment. It seems quite rational right now, and it looks like consumers have been accepting prices for the past few months. Even Walmart mentioned recently that they are not being too aggressive with their pricing. Now that consumer shopping habits are starting to shift, could this environment change? Do you believe we have reached a new normal regarding promotional activity, or does it feel like there's a chance for something to disrupt the current equilibrium?

Yes. Well, it's a good question. And obviously, we always spend a lot of time focused on it. Your first comment, we are seeing the competitive environment pretty similar to what it's been. As you know, our go-to-market strategy really is Leading With Fresh. And what we find is it's the most important reason why somebody decides where to shop. Our teams are really working hard to take our fresh experience to the next level, and our customers are telling us they appreciate what they're doing and they're seeing that improvement. So when you look at it, we think price is just one component. We're going to make sure that we always maintain a reasonable spread in the things that we're good at with our rewards program, our fuel rewards, and our fresh go-to-market strategy. Those things matter, and that's where we're going to win in the marketplace. And we expect that to continue to be important in every imaginable environment going forward. So to me, it's one of those things where it's important, we continually check. But we always think it's important to remember it's the total customer experience that we're focused on rather than price alone.

Can you provide some more color on the FIFO adjusted gross margins in the quarter? Because it looks like that slowed sequentially. And then you said your price gaps are well positioned, but do you think you're going to need to invest further in price in the second half as we just see sort of inflation pick up and that consumer gets under more pressure?

Thank you for your question. I'll address that, and Rodney can provide any additional insights he has. Overall, our gross margin rate met our expectations for the quarter. As mentioned, we made two significant investments during this period: one focused on delivering value to the customer and the other addressing the supply chain challenges we anticipated for the year. We believe our performance was in line with what we expected. The PPE inventory write-off we highlighted was not substantial enough to impact our expectations for the remainder of the year significantly. We had initially indicated that gross margin would face challenges this year due to our investments in pricing and the supply chain. The first quarter unfolded largely as we had planned, though we do not disclose every detail regarding quarterly fluctuations. Factors like COVID vaccine revenues contributed positively last year, but we do not expect that this year. We aim to highlight the elements we have previously discussed to maintain consistency and provide insight into significant factors affecting us. Overall, we felt the quarter aligned with our strategy and do not foresee a shift in that approach for the rest of the year. Additionally, I want to emphasize that our gross margin outlook remains unchanged, and this will not influence our guidance for the rest of the year. We are confident in our projections moving forward. It's important to note that for the second half of the year, LIFO is projected to be about $150 million above budget and approximately $100 million more than the previous year, distributed over the four quarters. We anticipate that fuel margins will be a headwind for the remainder of the year, potentially around a $50 million challenge as well. While the underlying trends we discussed this quarter align with our plan, there are unique factors that will affect the second half of the year. From our viewpoint, most of these will not be recurring in 2023, but we do face financial headwinds as we progress through this year.

The other thing I think it's always important to remember is we always look at gross margin in light of our OG&A cost as well. And obviously, our teams did an incredible job of managing OG&A costs. And we always will invest some of those OG&A savings in trying to extend the customer's budget, especially in an environment like this where it's important. And I think some of those reasons are the reasons why our customer counts have improved as well.

I have a couple of questions that are related. The first one concerns your actual volume compared to your expectations. As you review your guidance, we understand the current CPI and your implied guidance for the second to fourth quarter. This suggests a decline in demand from a volume and tonnage standpoint. Could you provide some insights on this? Additionally, regarding your full guidance, it appears that your operating profit projection for the second to fourth quarter indicates a decrease of about 6% compared to the current quarter, which is around 16% higher. Can you clarify these two points?

Sure. Thanks, Karen. Regarding the first part of your question, our guidance for the remainder of the year indicates that we expect inflation to be higher than we initially anticipated at the start of 2022. However, it's important to acknowledge that we do not have a definitive forecast, and various scenarios could unfold. Our primary expectation is that inflation will stay elevated, but we may see a more moderated figure in the second half of the year as we compare it to a 4% increase in inflation from the latter half of last year relative to the first half of last year. In terms of our sales guidance, we are projecting some positive momentum in units due to our outlook on inflation. Nevertheless, this outcome could vary, affecting the results we report. Our overall assumptions are informed by the various data points we've analyzed both internally and externally. When it comes to operating profit, our EPS guidance suggests that it will remain flat or slightly decline at the midpoint of our new range for the year. A key takeaway is that the LIFO charge will significantly influence this, both in relation to our budget and compared to the previous year. While fuel was a positive factor in the first quarter, it will become a negative impact for the remainder of the year. We view the supermarket business as robust and generally on track, continuing to gain momentum, but external factors are affecting our year-over-year growth compared to the first quarter relative to the rest of the year.

As well as the vaccine headwind, correct?

The vaccine headwind likely impacted the first quarter and will also influence Q2 and Q3. However, I wouldn't consider it a significant obstacle. It was probably more of a factor in Q1 than in any other quarter. Therefore, I don't view the gross margin performance we experienced in the first quarter as dramatically different from what we can expect in the upcoming quarters, despite the influence of the vaccine and other factors.

So I just want to go back to grocery market share. Just want to get a sense of how your markets are held up in the grocery category. And I guess related to that, it sounds like the general merchandise category had some headwinds. So just wondering if that contributed maybe to the weaker ID performance.

If you look at grocery market share overall, it is pretty much close to our expectations. We anticipate continued improvement throughout the year, as indicated in our original guidance. Your observation on general merchandise is accurate. Looking at our identical stores in total, excluding general merchandise, it is quite similar to the performance of fresh items. In general merchandise, households are beginning to change their shopping behaviors, which is evident there. Additionally, some of the savings customers gained from reduced spending on services are reflected in this category. We are making progress on market share overall and expect to see significant improvements as the year progresses.

Great. And then maybe just one quick housekeeping question. I know last quarter, you gave quarterly cadence guidance. Is that still intact on the comp and EPS line? Or I don't know if there's any updated views there.

Sure. On the EPS front, I mentioned earlier that if you examine the guidance for the last three quarters of the year, it will likely be around flat to slightly down. This should align with the patterns from last year when considering the next three quarters. Therefore, I don't anticipate any significant year-over-year differences overall. Regarding sales, we expect the first half to perform slightly better than the second half. This expectation is based on the assumption that inflation remains at elevated levels. Year-over-year, the second half might be a few basis points lower since we are comparing against a 4% higher inflation rate in the second half of last year compared to the first half.

I wanted to revisit the question about tonnage and underlying unit volume. Rodney, when we looked at this quarter, I think we could all agree on the investor side that we expected your ID to be better based on the inflation trends we observed. I'm curious about what you're noticing in terms of underlying tonnage. I believe I heard you mention that the basket is down despite that context. What insights do you have on that? Additionally, are you observing any changes in consumer behavior, such as channel shifting or a focus on value?

Yes, the size of the basket is influenced by the number of items purchased per basket. We are noticing that customers are visiting more often but are purchasing fewer items during each trip. Additionally, we observe that customers who are less budget-conscious are opting for larger packs, particularly at the beginning of the month when they receive their funds. We continue to witness both of these trends. In the fresh departments, the performance is stronger than average. In terms of overall units, most of our consumer packaged goods partners show similar unit changes compared to the wider marketplace, especially among our top 25 partners. Gary, do you have anything to add to that? I know you're gathering some data...

Yes. Well, I think just to clarify maybe the comment we made, the total basket size is actually up. It's the number of units in the basket that are down. So if we look at our overall metrics, households are up, loyal households are up, visits have turned positive, basket size is up. But the number of items in the basket, as Rodney mentioned, is the item that I think customers are adapting behavior as they start to manage the inflationary environment. And that's obviously a focus area for us to use data personalization and different tools around rewards to really aim to continue to drive that up. And as I mentioned, if you look at our second half guidance as we expect in our current assumption, inflation would be, on a year-over-year basis, maybe not quite as high even though remaining at sustained levels, then our guidance reflects the expectation that we continue to make progress on that front.

Okay. And then just a quick follow-up. I think that you said that you sort of expected the gross margin trend for the rest of the year to be similar to Q1. Did you mean the year-over-year decline? Or did you mean multiyear? Just kind of curious as to what you were talking about there.

I don't want to provide specific guidance since, as Rodney pointed out, we manage the business dynamically. What I meant to convey, Ed, is that my comments were specific to the current year. Regarding Q1, there were concerns that the PPE write-down might need to be adjusted, which could influence the trend we see in gross margin rates. Our guidance at the beginning of the year indicated that we anticipated gross margin to be a headwind, although we didn't expect the volatility to be as pronounced as it has been previously. The PPE is just one of several factors affecting our margins. Since we highlighted it last year in Q1, we wanted to reiterate it in the current quarter, but I don’t see it as a significant issue. The indication related to Q1 reflects the general trend of gross margin that aligns with the guidance we provided for the year.

Just wanted to ask, first off, looking at food-at-home inflation, it looks like it was up just about double digits for your quarter calendarized. And if we adjusted that, given your gen merch mix a little bit, maybe it's a point or two below. But just wanted to see, is that kind of the right way to think about what you might have been able to pass through to the consumer given that PPI is so much ahead of those levels?

Yes, I believe it's important to consider both CPI and PPI together. This is also why we provided more details about Our Brands than usual, as customers are changing their shopping habits. For example, a national brand item might cost $3, while Our Brand could be $1 or $2, which may explain why our inflation rate is not as high as what’s observed in the marketplace. Additionally, Our Brands have a gross margin about 600 basis points better than national brands, and the profit per item is comparable, or often higher. Thus, I see these numbers as general indicators rather than precise comparisons due to the shifts in customer behavior. For instance, during the quarter, there was a noticeable shift towards pork, which occurred partly at the expense of beef purchases, making pork a great value for money. Overall, the data reflects significant changes in customer behavior, which is informative directionally but not exact.

Okay. And then for a follow-up, if I could, was just around the $1 billion plus of gross cost savings. I was just wondering if that would be kind of metered out evenly throughout the course of the year and how it might compare to kind of inflationary pressures you might be seeing in wages and/or transportation with diesel at record highs.

Yes. The $1 billion in savings will be an ongoing flow of initiatives. Think of it as a consistent buildup; we have benefits from last year that continue and are adding new initiatives this year. As we pursue this 5-year plan to achieve $1 billion in savings, it will involve a constant implementation of new initiatives in the business to enhance efficiencies and savings. Generally, it will remain consistent throughout the year. However, there are various factors to consider, and we are still investing in average hourly rates. In the first quarter, we benefited from lower pension contributions, so I wouldn't consider the OG&A rate improvement seen in Q1 as representative for the whole year. Nevertheless, we do expect to see ongoing improvements in the OG&A rate as a positive factor for the year.

In light of the perception that your food categories were up, call it, 5% in the quarter and Nielsen was up 6%, the mass merchants were comping and improving leverage up high single, double digits. There's a perception out there, Rodney, that Kroger lost market share during the period. Why would that have been the case? And you made a comment that you expect your market share trends to improve in the next couple of quarters. What do you expect will drive that improvement?

If you look, all of us, our quarters end at a little different time. So it's always difficult to make exact comparisons. And I know some of the competitors don't break out specific by category. And I know for us, obviously, general merchandise is a bigger part of our business than some of our traditional competitors, not as much as some of the big-box competitors. If you look at during the quarter, our trends improved as we went along during the quarter. As Gary mentioned, our household count went up, increased. Our loyal household count went up. And our visits in total also increased. And our trends improved as well. So those are the things that give us confidence in terms of the things that we're doing and the direction we're headed is continuing to move in the right direction.

Yes. I would like to add that the comments we made about digital growth and the expectations from our investments in customer fulfillment centers, along with the exciting announcement about the Boost membership launching across the entire company, indicate that the momentum we are starting to see in digital will also play an important role in our growth moving forward.

And if I could add a quick clarifying question on that. The perception is also that over the next couple of quarters, economic pressure across a broader swath of consumers, not just those at the lowest income demographic, that pressure is going to increase. And that might push people to shop more at the dollar stores, might push them to shop more at the warehouse clubs, where the perception is that they may be able to stretch their budget a little further. So in response to that, what is Kroger going to need to do, invest more in price, change pack sizes and other actions that could impact its profitability to prevent customers from going elsewhere?

Thanks, Michael. Yes, I think briefly, we see that as an opportunity actually for Kroger because what we tend to see in those more economically challenged times is that the customer that's less stressed, as you described them, actually views Kroger as a high-quality place to get more value compared to maybe shopping a larger number of stores, and we even see it with some of our own brand performance. Rodney mentioned the strong value and ingredients for cooking at home, but we also saw strength during the quarter in Private Selection and Meal Solutions. So we see that as an opportunity for us to really connect with that customer as they start to maybe determine the best place to shop for quality and value combined.

I wondered if you could talk a little bit about how conversations are going with your vendor partners currently, especially in light of the ongoing inflation to the second half. Have you been able to push back with regards to some of the cost inflation? And will you be getting more aggressive in those conversations like some of your competitors have suggested?

It's an ongoing dialogue. And obviously, overall, we try to make sure that we have a partnership relationship. It's also one of the values in having Our Brands so it's such a strong component. So we understand true cost increases versus somebody just wanting to raise margins. In many cases, with the CPG partners, we're identifying areas where we can work together to take costs out so that we can reduce it. And like on backhauls is an area that we're making great progress on by using technology, both of our technologies and databases, to understand how to change. I would say that we're going to always push back on any type of cost increase that's not justified. And we're going to also try to work together to figure out a way to reduce our combined costs whenever we can. I think it's a difficult answer to say how are we doing versus competition or competitors. I'm super proud of our procurement team. As Gary mentioned earlier, one of the big components on the cost savings is renegotiating both things not for resale and resale. So we feel good about where we are, but it's an ongoing dialogue. And obviously, it's a little more difficult dialogue when you have such high inflation.

And if I could just ask an unrelated follow-up. Just with regards to the Boost rollout, are there any more details with regards to the timing of that? And I know there was higher retention and other metrics you cited, but was there also a comp lift impact from Boost during the quarter in those 3 test regions?

Yes. Looking at the test regions, it would have a positive impact on our same-store sales. The most important aspect for us is that it makes customers more loyal to our entire ecosystem, not just with delivery. Our strategy is that when customers think of food, we want them to think of Kroger. We feel confident about our position, and it's progressing in the right direction.

Rodney, your e-commerce sales were down 6% overall. Can you explain the reasons behind this, as it doesn't seem to align with the performance of the new CFCs and spokes? Where are the negative figures coming from? Also, how are the Ocado-based facilities performing?

Thank you, Chuck. Pickup is where we are seeing the most significant decline. What we're noticing is that as customers feel more at ease, they are returning to stores, which has resulted in a better retention rate than the overall average. Regarding the sheds, the NPS scores remain excellent, and both the retention and repeat purchase rates are very strong, continuing to improve. Observing the end of the quarter, our year-on-year performance for online sales has turned positive in recent weeks. The first quarter aligned closely with our expectations since we were comparing against some strong figures from the beginning of the quarter, and now the trend is back in a positive direction. Thank you, Chuck.

Regarding the increase in working capital dollars spent during the quarter, does much of that simply reflect inflation? Or is Kroger becoming more aggressive in forward buying or trying to secure products when they are available?

Chuck, yes, I think there's a couple of different factors just briefly in there. Overall, we've been on a plan for a number of years to continue to optimize working capital. So I wouldn't say it's a dramatic change in strategy. We're very focused on continuing to drive improvements there and have seen good tailwinds in our cash flow because of that. This quarter, we would have seen an increase in inventory. Part of that would be to do with sort of starting to get back towards pre-COVID levels as the in-stock and supply chain improves. Nothing that would be concerning to us from a sell-through perspective, but we do think it's important to make sure we continue to improve the supply chain. And of course, inflation would have also impacted that number as well, but nothing out of the ordinary.

Thank you to everyone for joining us today. I am incredibly proud of our progress as we begin 2022, maintaining our focus on our Leading With Fresh and Accelerating With Digital strategy. I would like to take a moment to acknowledge our associates who are tuning in. First and foremost, thank you. The past several years have posed challenges that have affected each of us differently. While we all respond uniquely, no one should feel they have to face these struggles alone. This is why we provide a range of resources, including in-person and virtual counseling sessions through our well-being assistant, and tools to help leaders create a supportive environment. I encourage everyone to take the time to ensure that we have the support systems we need. If we find we don't, it's important to seek help. We are our best advocates and understand our needs best. Thank you for everything you do for each other, for our customers every day, and for our communities. I am inspired daily by the incredible work you do. Thanks again for being with us today, and that wraps up our first quarter earnings call.