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Text: I am joined today by Kroger's chairman and chief executive officer, Rodney McMullen; and Chief Financial Officer Gary Millerchip.
A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings.
[Operator instructions] I would also like to announce that we will be hosting a business update on March 4, 2022, in Florida with an opportunity to tour our recently opened Kroger delivery customer fulfillment center.
We hope that you are able to join us.
We often say the holidays are our time to shine.
And as we move through the holiday season, we feel great about our ability to deliver.
We are incredibly proud of our third quarter results and the underlying momentum in our business.
We returned to positive identical sales without fuel for the quarter.
We saw triple-digit digital sales growth on a two-year stack, and we've increased our full year 2021 guidance.
Our agility and the commitment from our amazing associates is allowing us to navigate current labor and supply chain conditions and provide the freshest food at affordable prices across our seamless ecosystem.
Customers are demonstrating more back-to-normal behaviors, and at the same time, are eating more food at home because it's more affordable, convenient, and healthier than other options, plus you can do it as a family.
Customers engaged in larger celebrations with friends and family compared to last year.
We also saw them continuing to cook at home, leading up to and during the holiday, and select more premium products to elevate the food experience.
These are all reasons why we believe the food at home change is structural and not temporary.
With most people consuming meals at home and grocery stores continuing to capture the majority share of stomach, it is more important than ever that we provide customers with flexibility on how they choose to shop with us.
We have the right seamless ecosystem in place to meet our customers' evolving needs.
At the same time, 84% of consumers said that they will continue to shop online the same amount or more in the future.
These seemingly contradictory behaviors are exactly what Kroger's seamless ecosystem was designed to accommodate.
We know that inflation is having an impact on customers as well.
82% of consumers polled across the country are feeling the impact of inflation, and one in four consumers are not confident in their finances right now.
We are leveraging our data and personalization to enable our customers to stretch their food dollars.
We deliver value when customers need it the most with personalized promotions, big packs, and dynamic holiday offerings.
And while price continues to be top of mind, customers continue to desire the freshest food options, and we're there for them, leading with fresh.
We grew sales in Natural & Organics as customers continue to gravitate toward better-for-you options.
Our fresh departments outpaced total company identical sales without fuel during the quarter as well.
We had a record quarter in our alternative farming offerings, which includes new approaches to growing produce, including vertical and indoor farm operations.
These offerings expand customers' access to produce picked at the peak of freshness.
We are very proud to share that Home Chef became a $1 billion brand on an annualized basis in the third quarter as mealtime shortcuts and solutions, as well as new product innovations, have clearly resonated with our customers.
Kroger is focused on delivering a customer-centric, seamless experience that requires 0 compromise no matter how customers choose to engage with us.
We launched three new offerings during the quarter that support the plan to double digital sales and digital profitability by 2023.
First, Boost by Kroger builds on our industry-leading loyalty program to deliver additional savings and personalized offers to our members.
We are encouraged by the initial engagement in the program which is ahead of internal expectations.
Second, we launched Kroger Delivery Now in partnership with Instacart.
This unique convenience and immediacy offering positions us to win more trips with current customers and to bring new customers to the Kroger ecosystem by offering the largest selection of quality fresh products at affordable prices in 30 minutes.
Here's what's so special about this offering.
It was profitable on day one, contributing to our goal to double digital profitability by 2023 that was announced during our 2021 investor day.
And third, we announced a strategic collaboration with Bed Bath & Beyond and buybuy Baby that will expand our current marketplace offering and provide Kroger shoppers easy access to essential home and baby products.
This exclusive offering will be available through both Kroger.com and on a small-scale physical store pilot at select stores beginning in 2022.
We continue to be pleased with the rollout of our customer fulfillment centers in Groveland, Florida; and Monroe, Ohio, which are exceeding internal expectations, and we are especially proud of our Net Promoter Scores, driven by our teams, delivering a world-class experience for our customers, and we're really looking forward to hosting you in Groveland early next year.
Turning now to our supply chain.
We feel great about our ability to serve customer needs through the holidays and beyond.
This is because our teams have done such a good job, planning well ahead to maintain a full, fresh, and friendly customer experience.
In fact, our customers took action to prepare for today's supply chain constraints back in the spring.
And a great example of leveraging learnings from operating during the pandemic, we kept the additional warehouses originally brought on to support business through COVID to ensure we were able to provide for customers throughout the holiday season as well.
We chose to incur significant costs in our supply chain during 2021, which has allowed us to provide our customers today and into 2022.
We continue to deploy a wide array of tools, including our owned and operated fleet, and we're working closely with suppliers to mitigate pain points for the customer.
Our hybrid hiring event last month contributed to the hiring of over 64,000 new associates during the quarter.
We continue to invest in our associates by expanding our industry-leading benefits, including continuing education and tuition reimbursement, training and development, health and wellness, and continued investments in associate wages.
As we reflect on the one-year anniversary of our Framework for Action in response to racial injustice across the country and in the communities we serve, we are pleased to share our progress with you.
Over 405,000 associates have completed diversity and inclusion training.
We've increased our strategic hiring partnerships with Historically Black Colleges & Universities and Hispanic-serving institutions from six to 17.
Foundation has awarded more than $3 million in grants to support innovative organizations focused on building more equitable and inclusive communities, and we increased Kroger's diverse supplier spend by 21% to $4.1 billion last year alone and remain on track toward our long-term goal to spend $10 billion annually with diverse suppliers by 2030.
While we know that there is more work to be done, we are energized and look forward to keeping our stakeholders updated on our progress.
One of Kroger's greatest strengths is our ability to manage our business successfully in every operating environment.
We remain customer-obsessed and focused on operational excellence to deliver for our customers, associates, communities and shareholders.
Our focus on execution, combined with our disciplined approach to balancing investments in our associates and customers with strong cost management and growth in our alternative profit business, is positioning us well for the future.
Over time, our model has proven to be resilient during different economic scenarios, and this was true again during the third quarter as we grew the top and bottom lines while navigating higher product cost inflation, a tight labor market, and supply chain constraints.
Our identical sales without fuel in the quarter returned to positive, growing 3.1% as we delivered for our customers across our seamless ecosystem, and customers, again, signaled higher food-at-home consumption is here to stay.
Adjusted FIFO operating profit and adjusted earnings per share both increased year over year and grew by compounded annual growth rates of 22% and 29%, respectively, versus 2019.
Third quarter earnings per share was impacted by two unusual items that were excluded from our adjusted earnings per share result.
First, we engaged in an annuity buyout and lump-sum distribution transaction related to the company's consolidated retirement benefit plan which will reduce future administrative costs.
This triggered a write-off of deferred losses and a nonrecurring noncash charge of $87 million on a pre-tax basis.
This company pension plan is currently 100% funded as a result of previous action taken to freeze the plan and protect benefits for our associates.
This transaction was fully funded by assets in the plan.
The second unusual item was Kroger recording a nonrecurring benefit of $47 million or $0.07 per diluted share, primarily due to the favorable outcome of income tax audit examinations, covering multiple years.
This amount is also excluded from the company's adjusted net earnings per diluted share result for the third quarter.
I'll now provide more detail on our operating results in the quarter.
On a two-year stack basis, our identical sales without fuel increased 14%.
We also saw digital sales increased 103% on a two-year stack.
As we have previously shared, we do not expect digital growth to be linear, especially as we cycle last year's sales spike and customers become more comfortable shopping in store again.
The launch of several new digital offerings, which Rodney outlined earlier, in addition to the rollout of new customer fulfillment centers, gives us confidence in our ability to deliver against our growth targets for digital sales and profitability.
We look forward to sharing more detail on our digital road map at the business update in March that Rob noted earlier on the call.
With regard to digital profitability, we continue to make progress during the quarter and achieved our best cost to serve on record for pickup orders.
Gross margin was 21.66% of sales for the third quarter.
The FIFO gross margin rate, excluding fuel, decreased 41 basis points compared to the same period last year.
This decrease primarily related to higher supply chain costs and continued price investments, partially offset by sourcing benefits.
Our investment was in line with expectations and fully funded by cost savings and OG&A improvement.
Recognizing recent inflation trends and our outlook for the rest of the year, we recorded a higher LIFO charge for the quarter of $93 million, compared to $23 million in the prior year.
This increase represents a $0.07 headwind to earnings per share in the quarter versus 2020.
The operating, general and administrative rates decreased 49 basis points, excluding fuel and adjustment items.
This improvement was achieved even with continued investments in our associates and growth in our average hourly rate and reflects the outstanding work our associates are doing to execute cost-saving initiatives in a very dynamic environment.
We remain on track to deliver $1 billion of cost savings during 2021.
Our alternative profit business had a record third quarter and remains on track to deliver the high end of our expected range of $100 million to $150 million of incremental operating profit in 2021.
We saw increased strength in Kroger Personal Finance results during the quarter, and Kroger Precision Marketing introduced a new programmatic advertising marketplace to unleash first-party targeting and measurement capabilities, further highlighting our ability to differentiate in the advertising space.
Fuel is also an important part of our overall value proposition and a key offering to help customers stretch their dollars, especially in times when fuel prices are high.
During the quarter, we saw a significant increase in the number of customers actively engaging in our fuel program.
Gallons grew in the third quarter by 5%, outpacing market growth.
The average retail price of fuel was $3.24 this quarter versus $2.15 in the same quarter last year.
Our cents per gallon fuel margin was $0.42, compared to $0.37 in the same quarter in 2020.
I'd now like to spend a couple of minutes providing some additional perspective on how we are proactively managing inflation.
We are currently operating in a more volatile inflationary environment.
And during the third quarter, Kroger saw higher product cost inflation in most categories.
We are being disciplined in managing these increases.
Our teams are doing an excellent job, working to minimize the effect on our customers and our financial model by using our data and working closely with our suppliers.
We are passing along higher cost to the customer where it makes sense to do so.
In some key areas, we are choosing not to pass through cost increases and continuing to invest in value for the customer.
We are investing where it matters most, using our proprietary data to be strategic in our pricing and personalization with the objective of winning long-term customer loyalty.
We also believe our brands is an -- is an even more important differentiator for Kroger in an inflationary environment, offering customers an unmatched combination of great value and great quality.
Turning now to our financial strategy.
Kroger is operating from a position of strength and continues to generate strong free cash flow as evidenced by our net debt-to-EBITDA ratio hitting an all-time low of 1.68 in the third quarter.
While we continue to see attractive opportunities to invest in the business, to widen our competitive moat, and drive sustainable revenue and earnings growth, our capital expenditures in 2021 are now expected to be below our original guidance range of $3.4 billion to $3.6 billion.
This is because of delays in project implementations, primarily due to COVID-19-related supply challenges.
Kroger continues to return cash to shareholders.
During the quarter, we repurchased $297 million of shares, and year to date, have repurchased $1 billion of shares.
Since 2000, we have now returned more than $20 billion to shareholders via share repurchases at an average price of $16.45 per share.
As of the end of the third quarter, $511 million remains outstanding under the current Board authorization announced on June 17, 2021.
We look forward to sharing more about our plans for future deployment of excess cash to drive sustainable growth and create value for our shareholders at our business update in March.
As Rodney mentioned, we continue to invest meaningfully in our associates.
In addition to the $350 million of hourly rate investment already planned this year, we have committed to further investments in the fourth quarter, which equates to an incremental $100 million on an annualized basis.
During the third quarter, we ratified new labor agreements with the UFCW for associates in our Columbus and Mid-Atlantic divisions, covering over 4,500 associates.
We continue to negotiate contracts with the UFCW for store associates in Houston, Lake Charles, Freeport, Dallas meat, Little Rock, Memphis, Portland, and Denver.
Our financial results are pressured by inefficiencies in healthcare and pension costs, which most of our competitors do not face.
We continue to communicate with our local and international unions, which represent many of our associates about the importance of growing our business in a profitable way, which will help us create more jobs and career opportunities and enhance job security for our associates.
I'll now turn to our expectations for the remainder of 2021.
Driven by the momentum in our third quarter results and sustained trends in food at home, we are raising our full year guidance.
We now expect identical sales without fuel for the full year to be between negative 0.4% and negative 0.2% and a two-year identical sales stack of between 13.7% to 13.9%.
There remain some uncertainties as we look ahead, and our guidance of positive ID sales excluding fuel of between 1.5% to 2.5% in the fourth quarter reflects this.
We expect adjusted net earnings per diluted share to be in the range of $3.40 to $3.50.
We expect our adjusted FIFO operating profit to be in the range of $4.1 billion to $4.2 billion, reflecting a two-year compounded annual growth rate of between 17% and 18.4%.
The midpoint of our adjusted earnings per share range for 2021 now equates to full year results, approximately in line with our 2020 results, despite cycling the unique COVID-19-related demand spike last year.
Our guidance fully reflects the investments in our customers and associates I shared earlier, plus increased marketing to support the exciting new digital initiatives we launched in the third quarter.
It also reflects the latest projection for LIFO.
And because we recorded a LIFO credit in the fourth quarter last year, LIFO is now expected to be a $0.13 headwind to earnings per share in the fourth quarter.
Overall, we are very proud of our results, which are projected to be significantly ahead of where we originally guided for the year.
In conclusion, Kroger is executing against its key financial and operational initiatives and continues to invest in strategic priorities that will deliver attractive and sustainable total shareholder return of 8% to 11% over time.
We believe our business is emerging stronger through the pandemic and through the investments we are making is well-positioned to grow beyond 2021.
Kroger's strong year-to-date results are the outcome of our customer obsession, our incredible associates who bring our vision and values to life, and our commitment to bringing fresh, affordable food to everyone.
The strength of our teams have never been more apparent.
With every new challenge, they raised to the occasion, whether by implementing solutions to minimize supply chain disruptions, delivering the freshest produce to our customers, or using our data to offer personalized promotions that surprise and delight.
Our team is bringing our competitive moats to life.

user
qtrly identical sales without fuel increased 3.1%.
qtrly digital sales two-year stack grew 103%.
expect 2021 adjusted net earnings per diluted share to be in range of $3.40 to $3.50.
now expect our two-year identical sales stack to be in range of 13.7% to 13.9% for 2021.
expect our adjusted net earnings per diluted share to be in range of $3.40 to $3.50 for 2021.
sees 2021 adjusted capex $3.1 billion - $3.3 billion.

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