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Text: I am joined today by Kroger 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.
We are excited to see that many of you will also be attending, either virtually or in person, our 2022 Business Update tomorrow in Florida when we will share additional details and answer questions about our long-term strategy and growth initiatives.
More information about virtual registration for this event can be found at ir.
[Operator instructions] Additionally, we would ask that you focus today's questions on our fourth quarter and full year 2021 results, as well as our 2022 guidance.
Our strategy of Leading With Fresh and Accelerating With Digital propelled Kroger to record performance in 2021 on top of record results in 2020.
We are incredibly proud of our associates who continued to deliver for our customers through the pandemic.
During 2021, our team delivered for all stakeholders by, first of all, achieving positive year-over-year identicals, without fuel, against very strong identicals last year and a two-year stack of 14.3%.
Also by connecting with customers through expanding our seamless ecosystem and remarkable, consistent delivery of full fresh and friendly customer experience for everyone, plus investing more than ever before in our associates to raise our average hourly rate to $17 and our average hourly rate to over $22 when you include compensation and benefits as well.
We balance all of these investments by achieving cost savings of greater than $1 billion for the fourth consecutive year, and alternative profits contributed an incremental $150 million of operating profit as well.
As we look to 2022, we expect the momentum in our business to continue, and we have confidence in our ability to navigate a rapidly changing operating environment.
We are leveraging technology, innovation, and our competitive moats to build lasting competitive advantages.
Our balanced model is allowing us to deliver for shareholders, invest in our associates, continue to provide fresh, affordable food for our customers, and support for our communities.
We remain confident in our growth model and our ability to deliver total shareholder return of 8% to 11% over time.
Kroger is leading with fresh.
Our fresh departments outpaced total company identical sales, excluding fuel, during the fourth quarter.
Kroger remains the No.
1 retailer in many exciting areas, such as specialty cheese, sushi, and floral.
As the world's largest florist, we sold over 76 million floral stems for Valentine's Day alone.
And the smiles that came along with that for our customers and associates were free.
We advanced our fresh strategy and strengthened our fresh offerings in 2021 by launching our Go Fresh & Local Supplier Accelerator, supporting our commitment to small businesses.
As a result of the launch, we have brought a number of new products to customers, and the initial results have exceeded our expectations.
We are still early in the program, and we will continue to partner with small businesses to expand our pipeline of new products.
We also remain a leader in innovation through exciting partnerships with companies like Kitchen United and Kipster.
We've completed the initial test phase of our End-to-End Fresh initiatives focused on bringing more days of freshness to our customers and are confident in its scalability and with plans to expand to targeted stores across the country.
Our brands continue to resonate strongly with customers and maintains a culture of innovation, launching over 660 new items during the year.
More than half of those new items were within our Simple Truth and Private Selection portfolios.
We accelerated Home Chef's incredible milestone of becoming a billion-dollar brand, our fourth greater-than-$1 billion brand, which is pretty special.
As a reminder for everyone, we merged with Home Chef in 2018.
At the time, we knew our customers were looking for ways to make mealtime easier without compromising on taste or freshness.
While Home Chef originated as a pure-play e-commerce offering, we saw immense potential to integrate and leverage it across our seamless ecosystem, scaling it within our stores and continuing to grow online.
The success of this integration demonstrates our ability to integrate and scale solutions that provide value to our customers and grow our competitive moats.
Kroger is focused on delivering a seamless experience that requires 0 compromise by customers, and I think that's a really important point, 0 compromise required by customers.
And what that means is the freshest products at competitive prices and flexible lead times.
Yael will go into a lot more detail tomorrow on what 0 compromise means for our customers at our business update.
The strength in our top-line sales in 2021 demonstrates our ability to meet our customers no matter how they choose to engage with us, whether it's in-store or online.
At the same time, we are actively encouraging customers to engage with us on our digital platforms, even when shopping in store.
That's because when a customer engages with us digitally, they spend more with Kroger within all modalities.
We continue to attract new customers to our digital platforms.
During the quarter, we saw new seamless pickup and delivery to household acquisitions increased 25% compared to the third quarter.
We remain committed to doubling digital sales and profitability by 2023, which was announced in 2021.
We look forward to sharing our glide path to this goal with you tomorrow.
We do not expect digital growth will be linear, especially as we cycle the sales spike in 2020 and customers become more comfortable shopping in store again.
We are incredibly proud of the new digital modalities we launched during 2021, including Kroger Delivery Now, our Boost membership program, and the rollout of new customer fulfillment centers, all of which we expect to contribute meaningfully to our long-term goals.
Yesterday, we announced a new customer fulfillment center for the Cleveland region, following on heels of our announcement of a cross-dock spoke facility that will serve Oklahoma City.
And just a few weeks ago, we opened our third customer fulfillment center in Forest Park, Georgia, and are leveraging learnings from Monroe and Groveland to drive efficiencies and scale in the new facility.
Customers are loving this new offering, and we continue to be pleased with the initial rollout of our facilities in Groveland and Monroe, and we look forward to sharing additional insights tomorrow.
Now turning to the supply chain.
Our teams across our stores, warehouses, plants, and offices have been incredible in working together to supply fresh food and necessities for our customers while addressing the rapidly changing environment.
During the quarter, industry challenges continued within the supply chain, and we remain confident in our ability to navigate these challenges.
Within our supply chain, we continue to deploy a wide array of tools, including our owned and operated fleet.
We are also partnering with our suppliers to improve product availability using the strength of our data science teams to provide insights that shorten lead times and optimize inventory flow across the extended supply chain.
We continue to focus on expanding our transportation contracts and attracting carriers from outside our industry, which has kept product flowing predictably across our network.
The teams are doing a great job managing the increased costs, and the trends within our costs are improving sequentially.
We are using our data and supplier data plus leveraging technology to support future growth.
We expect the supply chain to continue to improve throughout the year as a result of our actions.
When I visit our stores, I often hear from our associates that what they love most about their job is that they can positively impact the lives of our customers, communities, and each other every day.
And it's also what I love about our business too.
And it's what makes our purpose, to Feed the Human Spirit, so vital for our people.
One way we live our purpose is through progress toward our ESG goals and our commitments.
As part of our Zero Hunger | Zero Waste social and environmental impact plan, last year, Kroger donated 499 million meals, that's right, 499 million meals, to feed hungry families across America.
And we continue to make progress toward our goal of 0 waste.
As part of our commitments to helping people live healthier lives, we've administrated almost 11 million doses of the COVID-19 vaccine through Kroger Health.
For our more than 450,000 associates, we strive to create a culture of opportunity, and we take seriously our role as a leading employer in the United States.
Kroger has provided an incredible number of people with their first jobs, new beginnings, and lifelong careers.
As we continue to operate in a challenging labor market, we are dedicated to attracting and retaining the right talent across the organization to be able to continue delivering for our customers.
We are investing more than ever before in our associates by expanding our industry-leading benefits, including continuing education and tuition reimbursement, training and development, health and wellness, as well as the continued investment in wages that I mentioned earlier.
This is enabling us to navigate current labor conditions while continuing to provide America with the freshest food at affordable prices across our seamless ecosystem.
We are cultivating an environment where all associates are able to thrive.
For the fourth year in a row, Kroger earned top score in the Human Rights Campaign Foundation's 2022 Corporate Equality Index, the nation's benchmark in measuring corporate policies and practices related to LGBTQ+ workplace equality.
Last year alone, we provided more than $5 million to support associates through unexpected hardships through our Helping Hands Fund.
This includes providing critical funds for disaster relief for nearly 1,300 associates.
2021 was an incredible year for Kroger, and we are committed to continued growth.
One of Kroger's greatest strengths is our relentless focus on learning and improving every day.
I believe this has been a key on navigating 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.
Kroger continues to execute at a high level and is delivering exceptional results while navigating a rapidly changing environment.
Before I get into our results in more detail, I would like to start by echoing Rodney's appreciation to our fantastic associates.
Their dedication to serve our customers and support each other throughout the pandemic has been nothing short of incredible.
Our performance last year clearly highlights the strength of Kroger's go-to-market strategy as we achieved positive identical sales without fuel and adjusted earnings per share growth on top of record results in 2020.
We also continued to invest in our customers and associates to ensure Kroger is well-positioned for future success.
These investments were balanced with over $1 billion in cost savings and $150 million of incremental operating profit from alternative profit streams.
I will now provide additional color on our full year results.
We delivered adjusted earnings per share of $3.68 per diluted share, up 6% compared to last year.
Identical sales, excluding fuel, were positive 0.2% and digital sales on a two-year stacked basis grew by 113%.
Our adjusted FIFO operating profit was $4.3 billion, up 6% over 2020.
Gross margin was 22% of sales for 2021.
The FIFO gross margin rate, excluding fuel, decreased 43 basis points compared to the same period last year.
This decrease primarily related to higher supply chain costs and strategic price investments, partially offset by sourcing benefits and growth in alternative profits.
The OG&A rate decreased 61 basis points, excluding fuel and adjustment items, reflecting a reduction in COVID-related costs and cost-saving initiatives, partially offset by significant investments in our associates.
Turning now to our fourth quarter results.
Adjusted earnings per share was $0.91 for the quarter, up 12% compared to the same quarter last year.
Kroger reported identical sales without fuel of 4%, our strongest quarter of the year, with fresh departments leading the way.
Kroger's FIFO gross margin rate, excluding fuel, increased 3 basis points compared to the same period last year.
The stability in our gross margin rate reflects effective management of cost inflation and sourcing benefits, offset by strategic price investments and higher supply chain costs.
The OG&A rate, excluding fuel and adjustment items, increased 7 basis points.
The LIFO charge for the fourth quarter was $20 million, compared to an $84 million credit in the same period last year, and represented an $0.11 headwind to earnings per share in the quarter.
The year-over-year increase was attributable to higher inflation in most categories, with grocery and meat being the largest contributors.
One of Kroger's greatest strengths is our ability to successfully navigate many different operating environments, and our team is doing an excellent job managing the current higher inflationary environment.
We continue to leverage our data and work closely with our suppliers to minimize the effect on our customers and our financial model.
We are investing where it matters most to our customers using our proprietary data to be strategic in our pricing and personalization.
Our brands is also an important differentiator for Kroger in this environment, offering customers an unmatched combination of great quality and great value.
Our strategic approach is helping our customers manage their grocery budgets more effectively and is allowing Kroger to maintain a strong price position relative to our key competitors.
Fuel also remains an important part of our overall value proposition for our customers, and we continue to invest in our fuel program in 2021.
Customers that redeem fuel points spend, on average, four times more at Kroger and visit four times more frequently.
Our investment in fuel rewards, which is reflected in our supermarket gross margin, also helps customers stretch their dollars further and allowed us to achieve gallon growth of 5% in the fourth quarter, outpacing market growth.
The average retail price of fuel was $3.30 this quarter versus $2.20 in the same quarter last year.
Our cents per gallon fuel margin was $0.44, compared to $0.33 in the same quarter in 2020.
Turning now to cash flow and liquidity.
Our operating results generated exceptional free cash flow in 2021, which resulted in a further strengthening of our balance sheet and liquidity.
Kroger's net total debt-to-adjusted EBITDA ratio is now 1.63, compared to our target range of 2.3 to 2.5.
We were also disciplined in accelerating the return of cash to shareholders in 2021.
In total, Kroger returned $2.2 billion to investors via a combination of share repurchases and dividends.
I'd now like to take a few minutes to discuss our continued commitment to investing in our associates and our deep experience with collective bargaining.
Wages at Kroger grew before and during the pandemic.
As you know, we committed to significant associate wage investments when we launched our Restock Kroger program at the end of 2017.
Kroger has invested an incremental $1.2 billion in associate wages and training over the last four years.
In addition, we have committed to invest over $1.8 billion during the same time period to help address underfunding and better secure pensions for tens of thousands of associates.
Wage, healthcare, and pensions are included in all of the more than 350 collective bargaining agreements that cover approximately 66% of our associates.
These contracts are regularly negotiated by our professional labor relations team.
Our objective is to negotiate contracts that balance competitive wage increases and affordable healthcare for associates with keeping groceries affordable for the communities that we serve.
Our obligation is to do this in a way that maintains a financially sustainable business.
If negotiations do become contentious, we have contingency plans in place to continue to support our communities.
During the fourth quarter, we ratified new labor agreements with the UFCW for associates in Fred Meyer, King Soopers, and our Michigan division, covering more than 20,500 associates.
For 2022, we have contract negotiations with the UFCW for store associates in Las Vegas, Southern California, Seattle, Indianapolis, Portland, Columbus, Fort Wayne, Chicago, and Toledo, in addition to continued negotiations with the UFCW for store associates in Houston, Little Rock and Memphis.
We are actively proposing generous wage increases over the life of the various contracts we are negotiating, and these increases are included in our financial model and our guidance for 2022.
We are also communicating to local unions that coming to the table with unrealistic proposals, proposals that do not balance associate investments with keeping groceries affordable for our customers is untenable and undermines our shared goal of growing the company to create more jobs and advancement opportunities for more associates.
While we recognize there remain a number of uncertainties in the economic and geopolitical outlook, we believe the strength of Kroger's go-to-market strategy and our ability to manage multiple levers within our financial model will allow us to continue to build momentum within our business in 2022.
We have shared previously that we expect to emerge from the pandemic stronger, and our guidance for 2022 creates a new baseline for FIFO net operating profit that is some $900 million higher than the midpoint of our TSR model would have projected when we announced it in 2019.
Our plans contemplate meaningful investments in associate hourly rates, as well as investments, in delivering greater value for our customers and enhancing our digital capabilities.
We expect these investments and the impact of cycling COVID-19 vaccine revenue will be fully offset by tailwinds in our model and allow us to grow adjusted net earnings per diluted share to between $3.75 and $3.85.
The tailwinds in our 2022 plan includes sales leverage from growing identical sales without fuel between 2% and 3%.
We also expect to deliver cost savings of $1 billion, incremental alternative profit growth largely in line with 2021, and underlying improvement in Kroger Health profitability, excluding vaccine income.
Fuel profitability is expected to be relatively flat year over year as gallon growth is offset by slightly lower fuel margins.
In terms of quarterly cadence for identical sales of our fuel and earnings per share growth, we expect identical sales without fuel in quarter 1 and quarter 2 will be above the midpoint of our 2% to 3% range as we expect heightened inflation will continue in the first half of the year.
We would expect our second-half identical sales, without fuel, to be below the midpoint of our range as we expect the inflation to moderate later in the year as we cycle higher inflation from the second half of 2021.
Regarding adjusted EPS, we would expect quarter 1 to be above the annual growth rate range of 2% to 5%, quarter 2 to be below the range and the second half of the year to be within the range.
Turning briefly to our capital priorities.
We will continue to be disciplined with capital allocation.
This reflects some catch-up from the last two years, where spend was below original guidance due to COVID-related constraints, as well as an acceleration of our strategic initiatives, that will drive longer-term earnings growth.
At the same time, we expect to generate free cash flow of between $2 billion and $2.2 billion.
And consistent with our TSR model, we will continue to return excess cash to shareholders as evidenced by the acceleration in share buybacks over the last six months.
And finally, we are looking forward to spending more time with you at our business update tomorrow when you will hear from key members of our leadership team about our strategic priorities and our path to deliver total shareholder returns of 8% to 11% over time.
Kroger is operating from a position of strength, and we have a variety of levers and growth opportunities to continue to build on this strength.
As we reflect on 2021, we are incredibly proud of our ability to navigate both a rapidly changing operating environment and evolving customer behaviors.
We are obviously in an inflationary environment.
Our teams are managing it well.
And as Gary talked about, we are doing everything we can to keep prices low for customers, including our award-winning customer rewards program, which includes fuel rewards, our amazing and high-quality Our Brands products, and personalized offers and savings for each customer individualized.
As we look to 2022, we are confident in our ability to continue to differentiate ourselves, serve our customers in new and exciting ways and continue to change the definition of what it means to be a grocery retailer while never losing sight of what's most important to our customers.
And when we do this, we have a clear path to delivering on our commitment of 8% to 11% total shareholder returns over time for our shareholders.
As Rob shared at the top of the call, we would like to focus all questions on our quarter 4 and full year 2021 results, as well as 2022 guidance.
We look forward to sharing additional details about our long-term strategy tomorrow at our 2022 Business Update.

user
qtrly earnings per share of $0.75; adjusted earnings per share of $0.91.
sees 2022 adjusted earnings per share of $3.75 to $3.85.

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