Kroger Company (the) · NYSE:KR
Kroger Company (the) — The Kroger — Investor Day (September 2010)
91 slides from Kroger Company (the)'s investor day presentation, Sep 29, 2010
Slide 1: Slide 1
Slide 2: Welcome: 2010 Investor Conference
Welcome 2010 Investor Conference: Creating Sustainable Long Term Value September 29, 2010
Slide 3: Agenda
Agenda 8:00 am Welcome & Introduction Dave Dillon 8:10 am How We Drive Value Creation Rodney McMullen 8:40 am Customer Loyalty Don Becker 8:55 am Associate Engagement Katy Barclay 9:10 am Break 9:25 am Financial Review Mike Schlotman 9:55 am Technology Innovation Chris Hjelm 10:10 am Summary 10:25 a
Slide 4: Forward-Looking Statements
Forward-Looking Statements This presentation includes forward-looking statements which are subject to risks and uncertainties. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to m
Slide 5: Welcome and Introduction
Welcome and Introduction Dave Dillon Chairman and Chief Executive Officer
Slide 6: Kroger at a Glance
Kroger at a Glance One of the largest U.S. retailers 2,468 supermarkets and multi-department stores in 31 states 2009 annual revenues: $76.7 billion 2009 operating profit: $1.1 billion #1 or #2 market share in 38 of 42 major markets Nearly 50% of households hold one of our shopper cards
Slide 7: A Broad Footprint Across the U.S.
A Broad Footprint Across the U.S. 2,468 Supermarkets in 31 States Washington (126) Montana North Maine (4) Minnesota Dakota Oregon VT (55) NH Idaho South Wisconsin MA (14) New York Wyoming Dakota RI (9) (134) CT Iowa Pennsylvania Nevada Nebraska Ohio NJ (12) Illinois (212) MD (55) Utah WV DE Colorad
Slide 8: Key Retail Grocery Industry Trends
Key Retail Grocery Industry Trends Continued macro uncertainty Consumer behavior mirroring economic realities Cost volatility in food – Inflation in perishables – Deflation in grocery tied to promotions to drive volumes More rational approach to managing for profitability Performance close
Slide 9: Sustained Industry Leadership Over Time
Sustained Industry Leadership Over Time 1987 1997 2007 Safeway Kroger Walmart* Kroger Safeway Kroger American Stores Walmart* Safeway Winn-Dixie Albertsons Costco A&P American Stores SUPERVALU Lucky Stores Costco Publix Albertsons Winn-Dixie Ahold USA Supermarkets Gen. Publix Delhaize America Publix
Slide 10: Significant Growth Opportunities
Significant Growth Opportunities Industry Market Share 2004 2009 $457.4 billion $556.9 billion Average Store Sales in Millions Independents < $20 > $20 Source: Progressive Grocer’s 72nd and 77th Annual Reports of the Grocery Industry 10 *Independents classified as fewer than 10 stores
Slide 11: Volatility in Food Costs
Volatility in Food Costs Source: Company reports 11
Slide 12: Cost Volatility Across Departments
Cost Volatility Across Departments Source: Company reports 12
Slide 13: The New Consumer Reality
The New Consumer Reality Drivers of consumer behavior: – ~ 10% unemployment – Flat/falling home prices – Customer uncertainty regarding economy is reflected in cautious spending Our competitive response: – Rewarding most loyal customers – Balancing price and tonnage – Targeted offerings to meet
Slide 14: How We Drive Value Creation
How We Drive Value Creation Rodney McMullen President and Chief Operating Officer
Slide 15: Our Competitive Advantages
Our Competitive Advantages Unique consumer insights drive high customer loyalty Compelling three-tier corporate brand strategy Successful multi-faceted strategy is difficult to replicate Leader in growing identical sales – 27 consecutive quarters Gaining market share and leveraging scale
Slide 16: Customer 1st Strategy
Customer 1st Strategy Four Key Elements: 16
Slide 17: A Virtuous Cycle of Value Creation
A Virtuous Cycle of Value Creation Improve Connection Strong ID Sales with Customers Growth Invest in Shopping Operating Cost Experience Leverage 17
Slide 18: How We Measure Our Success
How We Measure Our Success Financial Metrics (all excluding fuel) – ID sales – Supermarket selling gross margin – Operating costs – Operating margin Non-Financial Metrics – Customer 1st Tracker scores – Loyal household growth – Market share 18
Slide 19: Progress on Key Customer 1st Metrics
Progress on Key Customer 1st Metrics PEOPLE SHOPPING EXPERIENCE PRODUCTS PRICE 19
Slide 20: Driving Loyal Household Growth
Driving Loyal Household Growth Over 90% of Kroger’s transactions involve a loyalty card* Nearly 50% of U.S. households carry one of our shopper cards Our ability to collect and analyze customer purchase data allows us to respond rapidly to shifts in buying patterns The data allows us to segm
Slide 21: Growing Share of Market – Dollar Sales
Growing Share of Market – Dollar Sales FY 2007 FY 2009 1.7% 1.9% 10.2% 19.0% 9.7% 4.3% 4.1% 20.0% 10.9% 11.1% 27.0% 26.4% 27.4% 26.9% Kroger Rem Food Mass Warehouse Drug Dollar A/O Channels Source: Nielsen Homescan Fiscal Year Sales Trends – August 14, 2010 21 See Appendix 1 for definition of segmen
Slide 22: Customer 1st Drives Value Creation
Customer 1st Drives Value Creation More return visits and increased sales and share Growing profits and cash flow to reinvest in business & enhance shareholder value 22
Slide 23: Earning Customer Loyalty
Earning Customer Loyalty Don Becker Executive Vice President
Slide 24: Deep Customer Knowledge
(i ge f) Deep Customer Knowledge 24
Slide 25: Growing Loyalty Helps Drive ID Sales
Growing Loyalty Helps Drive ID Sales 6% GAP between KR IDs and Industry IDs 5% 4% 3% 2% 1% 0% 25 Source: Credit Suisse and Company data
Slide 26: Our Pricing Strategy
Our Pricing Strategy Significant investment in price based on research data Strategy focuses on three areas: – Everyday prices – Weekly specials – Store brands We are price competitive for everyday items important to price sensitive shoppers Shoppers are willing to pay a certain premium for
Slide 27: Products
Products Produce & meat quality Offer the products our customers want Corporate brands 27
Slide 28: Shopping Experience
Shopping Experience Improving speed of checkout Store cleanliness & convenience 28
Slide 29: People!
People! 29
Slide 30: Produce: Investing in Price
Produce: Investing in Price Customer research & loyalty card data told us that we needed to address pricing We responded by investing in lower prices on produce – Lower everyday prices on fruits and vegetables that matter most to our customers – Weekly specials – Price competitive, not the price
Slide 31: Produce: Investing in Products
Produce: Investing in Products 31
Slide 32: Produce: Investing in the Shopping Experience
Produce: Investing in the Shopping Experience Great displays Improved signage 32
Slide 33: Produce: Investing in Service
Produce: Investing in Service Keep departments clean & well-stocked Engage with customers 33
Slide 34: Produce: Investment Results
Produce: Investment Results Emphasizing the 4 Keys help drive double-digit tonnage growth Focusing on all 4 attributes of Customer 1st has delivered similar successes throughout our stores 34
Slide 35: Our Exclusive Brands
Our Exclusive Brands 35
Slide 36: Industry Leader in Corporate Brands…
Industry Leader in Corporate Brands… Private label penetration as a percent of industry unit sales has risen markedly in recent years Kroger’s three-tier corporate branding strategy serves the needs of a diverse customer mix Source: Private Label Manufacturing Association 2Q10 data as reported i
Slide 37: …and Gaining Share
| COOT TOOT | 6060 | £060 _ 7060 _ 1060 _ 7080 | £080 _ 7080 _ 1080 bO0Z0 xey40) | 7020 _ 1020 b090 | £090 | 7090 _ 1090 bOSO | £050 | zOS0 _ TOSO i 4e,!) | €0+0 | 70-0 _ TOKO _ pOE0 | €0€0 i4e)3) TOEO —Dollars —Units @ = o rr wa D = = © o>) oS SI A 38% > 36% — 34% 32% — 30% 28% 26% - 24% — 22% — 20
Slide 38: Three-Tier Corporate Brand Strategy
Three-Tier Corporate Brand Strategy Private Value Banner 38
Slide 39: Responding to Customer Needs with Unique New Products
Responding to Customer Needs with Unique New Products 39
Slide 40: Creating Win – Win Vendor Relationships
Creating Win – Win Vendor Relationships Customer-centric approach to merchandising The right product for the right customer at the right store More effective promotion, advertising and direct mail spend Data sharing on the performance of national brands in Kroger stores Tonnage growth Gr
Slide 41: Strengthening Our Relationship with CPG Companies
Strengthening Our Relationship with CPG Companies Improving Rating in Cannondale Associates Survey Source: Cannondale Associates Manufacturer Survey Results as reported in Barclays Capital U.S. Supermarket Industry Review – 41 Fall 2010 and Company Reports
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Slide 43: Driving Success Through Associate Engagement
Driving Success Through Associate Engagement Katy Barclay Senior Vice President
Slide 44: 44
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Slide 45: A More Focused Approach
A More Focused Approach More sophisticated tools and processes to define and measure employee engagement Aligning associates with Kroger’s business objectives and strategy Carefully acknowledging input from our associates and rewarding success 45
Slide 46: What is Associate Engagement?
What is Associate Engagement? A positive emotional attachment to the job and the company A strong personal desire for the company to be successful A personal commitment to always do the right thing 46
Slide 47: Why Focus on Associate Engagement?
Why Focus on Associate Engagement? Companies with engaged employees report: Greater sales and profit growth Higher productivity Greater customer loyalty Higher shareholder value 47 Source: Towers Watson
Slide 48: Financial Impact of Engagement
Financial Impact of Engagement Companies with high levels of engagement: Have higher 5-year total returns to 13% shareholders 50% Enjoy a higher market premium 26% Experience greater employee productivity 48 Source: Towers Watson
Slide 49: Going a Level Deeper …
Going a Level Deeper … Extensive research proves that engaged employees are: Twice as likely to be top performers Exceed performance expectations Miss fewer days of work Connect with the company, products and customers Resilient during organizational change 49 Source: Towers Watson
Slide 50: Engagement Defined
Engagement Defined Connected attached to their companies motivated to help their companies Committed succeed Aligned know how to make their companies successful 50
Slide 51: Engagement Drivers
Engagement Drivers Customer Focus Leadership Associate Communications Recognition 51
Slide 52: Engaging Front-end Associates
Engaging Front-end Associates Leaders are involved and committed Teams come together to build and own the outcomes Associates are involved and excited to deliver results Customers are scoring us higher in the Customer 1st Tracker 52
Slide 53: Measuring Effectiveness and Outcomes
Measuring Effectiveness and Outcomes Measuring Effectiveness: – Proven, action-oriented questions – Highly predictive of associate engagement – Customer data validates effectiveness Outcomes: – Identical sales growth, excluding fuel – Annual productivity improvements 53
Slide 54: Driving Success through Associate Engagement
Driving Success through Associate Engagement 54
Slide 55: Slide 55
Slide 56: Financial Review
Financial Review Mike Schlotman Senior Vice President and Chief Financial Officer
Slide 57: Driving Sustainable Earnings Growth
Driving Sustainable Earnings Growth Objective: Grow earnings through steady increases in identical sales coupled with a slight increase in annual operating margin, both excluding fuel sales Key long-term financial metrics (all exclude fuel): – ID sales – Supermarket selling gross margin – Operat
Slide 58: 27 Consecutive Quarters of Positive ID Sales Growth
27 Consecutive Quarters of Positive ID Sales Growth 58
Slide 59: Kroger Outperforms Industry ID Sales Growth
Kroger Outperforms Industry ID Sales Growth 59 Source: Kroger ID Sales and Credit Suisse Supermarket Industry ID Estimates 8/4/10
Slide 60: Slowing the Rate of Gross Margin Decline
Slowing the Rate of Gross Margin Decline Change in Supermarket Selling Gross Margin Rate (ex fuel, rolling 4-qtrs basis) - (20) Basis Points (40) (60) (80) (100) (120) Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Source: Company data 60
Slide 61: Reducing Operating Costs
Reducing Operating Costs Since 2003, operating costs have declined by over 200 basis points, as a rate of non fuel sales due to: – Cost reduction and efficiency initiatives – Sales leverage If not for these efficiencies and increased sales leverage, operating costs would have been $1.5 billion h
Slide 62: Operating Margin Goals
Operating Margin Goals Long term objective: slight increase in operating margin annually (ex fuel) Sales leverage will drive operating margin improvement FY09 operating margin isn’t “the new normal” 62
Slide 63: Outperforming Peers
Outperforming Peers 5-Yr Compound Annual EPS Growth Rate – Food Retailers A B C D E KR 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 63
Slide 64: Attractive Returns on Invested Capital
Attractive Returns on Invested Capital 5-Yr Average 16% 14% 12% 10% 8% 6% 4% 2% 0% 2005 2006 2007 2008 2009 Kroger 64 Source: Thomson Reuters
Slide 65: Delivering Value to Shareholders
Delivering Value to Shareholders Cash Returned to Shareholders 2005 – 2009 ($ in Millions) KR SWY SVU WFMI Dividends $807 $538 $633 $609 Share Repurchases $3,161 $1,789 $490 $204 Net Cash Returned to $3,968 $2,326 $1,123 $813 Shareholders Market Capitalization $12,933 $7,363 $2,117 $6,098 Cash Retur
Slide 66: Disciplined Investment for Future Growth
Disciplined Investment for Future Growth (In Billions) *Excludes acquisitions & purchases of leased facilities. 66 **Halfway point of guidance for $1.9 to $2.1 billion.
Slide 67: Financial Leverage Decreasing
Financial Leverage Decreasing 2.3 Net Total Debt to EBITDA 2.2 2.1 2.0 1.9 1.8 1.7 1.6 67 Source: Company data
Slide 68: Attractive Credit Rating
Attractive Credit Rating BBB Credit Rating Committed to a solid investment grade Current $2.5 billion credit agreement expires November 2011 Favorable credit environment for issuers; anticipate negotiating a new credit agreement on favorable terms 68
Slide 69: Improving Performance in Q2
Improving Performance in Q2 ($ in millions except for per share amounts) 2Q10 2Q09 % Change Sales $18,795.9 $17,728.2 6.02% Operating Profit $493.5 $499.1 (1.12%) Net Earnings $261.6 $254.4 2.83% EPS $0.41 $0.39 5.13% Operating Margin 2.63% 2.82% Tax Rate 31.70% 34.75% 69
Slide 70: Strong Cash Flow
Strong Cash Flow Year-to-date Highlights: Operating Activities – Generated $2.3 billion net cash Investing Activities – $952 million in capital expenditures Financing Activities – Issued $300 million in long-term debt – Repurchased $228 million in common stock – Paid out $123 million in divide
Slide 71: Fiscal 2010 Annual Guidance
Fiscal 2010 Annual Guidance Guidance ID Sales (ex fuel) 2% to 3% Non-fuel Operating Margin Slight decline compared to FY 2009 Tax Rate 35.5% Fuel Margin $0.11/gal EPS (diluted) $1.60 to $1.80 (Targeting the upper half of the range) Capital Expenditures $1.9 to $2.1 billion 71
Slide 72: The Role of Technology Innovation in Customer 1st
The Role of Technology Innovation in Customer 1st Chris Hjelm Senior Vice President and Chief Information Officer
Slide 73: Our Technology Strategy
Our Technology Strategy Focus on Four Key Areas: Build Drive Reliable Innovation Platforms Implement Transform Customer & the Associate Organization Solutions 73
Slide 74: Customer 1st Strategy
Customer 1st Strategy “Align Technology Objectives for Positive Business Outcomes” 74
Slide 75: Good Prices – Distribution Center Automation
Good Prices – Distribution Center Automation 75
Slide 76: Good Prices – Distribution Center Automation
Good Prices – Distribution Center Automation 76
Slide 77: Shopping Experience Makes Me Want to Return – Pharmacy
Shopping Experience Makes Me Want to Return – Pharmacy Single view of patient across Kroger Prescription imaging Release to patient, we know when prescriptions are sold, not just filled Signature capture for HIPAA, EZ Caps, counseling, proof of delivery Platform for innovation 77
Slide 78: Shopping Experience Makes Me Want to Return – Digital Coupons
Shopping Experience Makes Me Want to Return – Digital Coupons Conservative estimates have us crossing 15M coupon downloads a month by March of next year We offer over 100 coupons valued at over $150 every week Redemption rates are typically 10% We’re currently working to release a cross-plat
Slide 79: Digital Coupon Growth
Digital Coupon Growth 79 Source: Company data since inception in February 2010
Slide 80: Great People – Associate Portal
Great People – Associate Portal New secure website provides content and gives associates a single trusted source for company and division information Access from home or work End goal is to personalize and provide role-specific information to our associates Platform for innovation 80
Slide 81: Driving Continuous Innovation
Driving Continuous Innovation Research and Development Capability – Game changing focus – Challenge the status quo – Partnerships to accelerate commercialization Associate Engagement – Everyone plays a role Technology Infrastructure Leverage Intellectual Property 81
Slide 82: Innovation In Process – Consumer Mobility
Innovation In Process – Consumer Mobility Pilot in 2010 Kroger Mobile Technology Platforms (i-Phone/Droid) 82
Slide 83: Innovation in Process – Advantage Checkout
Innovation in Process – Advantage Checkout 83
Slide 84: Innovation in Process – Advantage Checkout
Innovation in Process – Advantage Checkout 84
Slide 85: Summary
Summary
Slide 86: Creating Sustainable Long Term Value
Creating Sustainable Long Term Value Unique consumer insights drive high customer loyalty Compelling three-tier corporate brand strategy Successful multi-faceted strategy is difficult to replicate Leader in growing identical sales – 27 consecutive quarters Gaining market share and leveragi
Slide 87: Questions and Answers
Questions and Answers
Slide 88: Slide 88
Slide 89: Appendix
Appendix
Slide 90: Appendix 1: Nielsen Homescan Definitions
Appendix 1: Nielsen Homescan Definitions Kroger Rem Food – all other grocery retailers excluding Kroger Mass – Walmart, K-mart, Target, etc. Warehouse – Sam’s Club, BJ’s, Costco, etc. Drug – CVS, Walgreens, Rite-aid, etc. Dollar – Dollar stores A/O Channels – Gas stations, convenience stores, milita
Slide 91: Forward-Looking Statements
Forward-Looking Statements The accompanying slides contain certain forward-looking statements about the future performance of the Company. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. These forward-looking statements are su