Kroger Co
NYSE:KR
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Kroger Co
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Good morning and welcome to The Kroger Company Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Rob Quast, Director of Investor Relations. Please go ahead.
Good morning. Thank you for joining us for Kroger’s third quarter 2021 earnings call. I am joined today by Kroger’s Chairman and Chief Executive Officer, Rodney McMullen, and Chief Financial Officer, Gary Millerchip. Before we begin, I want to remind you that today's discussions will include forward-looking statements.
We want to caution you that such statements are predictions and actual events or results can differ materially. 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.
The Kroger Company assumes no obligation to update that information. Our press release and supplemental information regarding the quarter can be found on our website at ir. kroger.com. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one related follow-up question if necessary. 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. I will now turn the call over to Rodney.
Thank you for joining us today. 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. I would like to say a huge thank you to our associates, who remain engaged, energized and focused on taking care of our customers. 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 for our -- 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. This was evidenced by our Thanksgiving Holiday shopping behavior. 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.
Leading into Thanksgiving 70% of consumers said that they would be doing more of their holiday shopping in the store this year. 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 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. Our brands also offer our customers flexibility within their spending without compromising, thanks to the wide variety of incredibly high quality and innovative products at various price points. And while price continues to be top of mind, customers continue to desire the freshest food options and we're there for them leading the fresh.
We grew sales in natural and 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 for 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 billion dollar 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.
Progress focused on delivering a customer centric, seamless experience that requires zero 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, like 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 and 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.
In a great example of leveraging learning’s from operating during the pandemic, we kept the additional warehouses originally brought on to support business from COVID. To ensure we were able to provide for customers throughout the holiday season as well. Because of our team's agility, we are better in stock today than we were a year ago. And we were able to serve customers through the Thanksgiving Holiday with items they needed for their celebrations.
In fact, we increased our year-over-year pickup fill rate by over 130 basis points during the week of Thanksgiving. 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 own owned and operated fleet, and we're working closely with suppliers to mitigate pain points for the customer. We are eager to welcome thousands of new associates to our organization as we began an incredible holiday season. 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 and universities and Hispanic serving institutions from six to 17. The Kroger co-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 suppliers 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.
With that, I would like to turn it over to Gary to take you through our third quarter financials. Gary?
Thanks, Rodney. And good morning, everyone. As Rodney shared this morning, Kroger delivered strong results in the third quarter, highlighting the flexibility of our business model in a dynamic operating environment. 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 as well for the future.
Over time, our model is 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 a seamless ecosystem, and customers again, signal higher food at home consumption is here to stay. As justified by operating profit and adjusted EPS, both increased year-over-year and grew by compounded annual growth rates of 22% and 29% respectively, versus 2019.
Third quarter EPS was impacted by two unusual items that were excluded from our adjusted EPS results. First, we engage in 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 non-recurring, non-cash charge of $87 million on a pretax 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 non-recurring 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 stock basis, our identical sales without fuel increased 14%. We also saw digital sales increased 103% on a two years stack. As we have previously shared, we do not expect digital growth to be linear, especially as we cycled last year 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 roadmap as the business updates in March that Rob noted earlier on the call. With regard to digital profitability, we continue to make progress during the quarter and achieve their best cost to serve on record for pickup orders.
Gross margin was 21.66% of sales for the third quarter. The FIFO gross margin rates excluding fuel decreased 41 basis points compared to the same period last year. This decrease primarily related to higher supply chain costs and continue 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 EPS 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 investment 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 high end of our expected range of $100 million to $150 million of incremental operating profits 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, as 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 effects 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 important and 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 modes, 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 at 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 $360 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 USCW for associates in our Columbus and Mid-Atlantic divisions covering over 4500 associates. We continue to negotiate contracts with the UFCW for store associates in Houston, Lake Charles, Free Port, Dallas Meet, Little Rock, Memphis, Portland and Denver. Our financial results are pressured by inefficiencies in health care 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 remains some uncertainties as we look ahead, and our guidance of positive ID sales excluding fuel 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 FICO operating profits 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 EPS 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 EPS 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 these 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% overtime. We believe our businesses emerging stronger through the pandemic and through the investments we are making is well positioned to grow beyond 2021.
I'll now turn it back to Rodney.
Thanks Gary. 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 raise 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 modes to life.
Now we look forward to your questions.
We will now begin the question-and-answer session [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Our first question is from Robert Moskow with Credit Suisse. Please go ahead.
Hi, thank you for the question. You’ve obviously done a very good job passing on inflation to consumers, while shielding them at the same time. Your gross profit dollars are up now. Can you talk a little bit about what came, what drove that out performance versus your expectations last quarter? Because last quarter, I think you were you're pretty cautious on gross margin.
And then secondly, I think there's another big tranche of pricing coming in January from a lot of your vendors. How would you characterize that next tranche? Is it a, an unusually high acceleration or is it just kind of a continued acceleration similar to what you've seen so far? Maybe you could even put it in the context of CPI for us it would be helpful? Thanks.
Rob. I'll start like Gary get into more details. First of all I think it's important to remember what's allowing us to continue to invest in the customer in value is the great work our team is doing on cost reductions. And as Gary mentioned, we're on track to take a billion dollars of cost out. And this is the fourth year in the row, that we've been able to accomplish that, which really gives us the flexibility to be able to continue to invest in our customers.
The other thing that our teams have done a nice job on, if you look at our procurement team, they've done a nice job of identifying opportunities to save money by working with our suppliers. And we continue to aggressively work in partnership with them. If you look at inflation during the quarter, it continued to increase throughout the quarter. As of right now, it's starting to stabilize, but obviously at a pretty high rate. So, it's something that we aggressively use our data to understand. And we aggressively try to make sure that the customer has alternatives, be able to stretch their budget as well. And that's, in some cases that's switching to a cheaper price, meat, in some cases, it's buying our brands, which has amazing quality as well. So with that, Gary, I'll let you get into more some more of the details hereon.
Sure, thanks Rodney. Thanks for the question, Rob. Yes, I would say, Rob, obviously, when we guided at the second quarter, we said that the gross margin contraction could be similar to what we were seeing in Q2, and I would say the dynamics that are that are in place haven't changed dramatically. Obviously, it's a dynamic environment that we're managing. And our goal is, as Rodney mentioned, is to continue to find sourcing benefits and savings to offset the cost increases where we see them, and to pass on pricing where it makes sense, but also to keep investing in the customer.
And I'd say that we in Q2 we were doing that. And in Q3 we've continued to do that supply chain would have been a similar sort of headwind in Q2, and Q3. I would say we were successful in mitigating some of the cost increases and shrink during the quarter, which helps during the quarter, although we still think shrink is a dynamic metric to manage based on some of the organized crime that we see in shrink. But overall, we were pleased with the progress in shrink during the quarter. And I think for us, we kind of guided while we never get into specific numbers on individual gross margin and OG&A metrics, because as Rob mentioned, our goal is to be dynamic in managing it ensuring that we're delivering sustainably for our customers and growing loyalty, while also being able to improve profitability over time by managing the different levers across selling growth rates, costs, cost of goods savings, taking costs out of the business, and continuing to grow alternative profit streams.
So I think it's a dynamic environment. We continue to manage, I think somewhere between that Q2 and Q3 ranges, where we think that we're operating right now, we think Q4 would likely be similar to what we've seen in Q2, and Q3. And as I mentioned, on my prepared comments, we are increasing some advertising in the fourth quarter to support the accelerated growth in some of those new initiatives. So I think, again, I wouldn't be guiding to a specific number, but in the range that you've seen in Q2, and Q3 is where we feel comfortable in managing the business and driving the right balance of sustainable growth for shareholders while continuing to win customer loyalty over time.
And just a quick follow up. I think Rodney said that you're seeing your inflation kind of leveling off. Are you looking at like PPI inflation there? Because I would agree with you, it seems like in the low teens it's leveling off, is that -- is that what you're looking at?
Now, we would be looking at more of our own costs, in terms of what we're incurring, and what we see coming forward. And one of the other things that I always think it's important to remind people, we manufacture a lot of our own products. So we also understand the raw materials themselves and what's going on there. And we would be looking at CPI and PPI both, both in terms of trying to estimate inflation, we would be looking at our actual cost increases that we're incurring.
Okay, thank you very much.
Thanks, Rob.
The next question is from Ken Goldman with JPMorgan. Please go ahead.
Rodney, I'm glad you mentioned the fact that you make your own products because it's a good lead into one of my questions, which is we're still seeing at least in the scanner data that we get some pretty poor trends on top of last year's poor trends for store brands in general. I'm not talking about Kroger, I'm talking across measured industry and I'm just hoping for an update for what you're seeing there. I know you've talked about this a little bit in the past, but are there any signs of improvement from that. And again, I know you're somewhat agnostic, you'll make money either way. I’m just trying to get a sense for what the outlook is what you're seeing any updates from your side?
If you look at our brands, if you look at the third quarter trends, they were better than the second quarter trends. And if you look within the quarter, it improved during the trends. Ken, the point you made is, for us, we want to make sure we have the products customers want. So, Kroger brand item has to earn its right on the shelf, just like any other brand. But for us, it's obviously one of our competitive modes. As I mentioned in the prepared remarks, and we did a press release earlier, earlier, in the quarter, we were proud that Home Chef became our fourth brand on that is over a billion dollars a year, our brands for us is incredibly important on our connection with our customers, because it's an incredible, great value for our customers with amazing quality. And when you look at simple truth in private selection, both of those brands offer something that's unique in the marketplace, and continue to grow aggressively, private selection, most of the items are things that you can't get somewhere else. And simple truth it just makes it super easy for customers to eat healthy. So the trends are improving. But for us, it’s an incredibly important part of our overall strategic strategy and a competitive mode.
Thank you for that. And then quick follow up. I think you mentioned that you're not testing on cost increases fully in either certain categories or certain products. Is it safe to assume that like many of your peers, you're a little more hesitant to take pricing up on items that draw people into stores on a regular basis, things like milk and bread etcetera? Or is it a little more strategic and nuanced than that? Just trying to get a sense for how you're thinking about which items to take pricing upon and which not?
Yes, we would be using our data and our historical data over the last several years on elasticity by category and by products within categories on deciding what the pass through or not. We would also just uncertain products, it's an opportunity to create deeper loyalty, some of which is obvious, some of which is not and some of the items in the past wouldn't have the same amount of penetration across households as what they used to do. So it really is dynamic information that's based on what's going on right now in the market. The other thing just do, our data would also show in different parts of the country, some of those elasticity would be different. Gary, anything you'd want to add to that?
Nothing at all.
Okay. Thanks, Gary.
Thanks, everyone.
Thanks again.
The next question is from Simeon Gutman with Morgan Stanley. Please go ahead. Mr. Simeon, the line is open on our right. Is it muted on yours?
Sorry about that. This is Michael Kessler on for Simeon. Can you hear me?
Yes, good morning.
Hey, guys. Thanks for taking my question. First, I wanted to ask about any initial thoughts, if you have any, on 2022, another good quarter in Q3, it looks like the full year is going to end up basically a retention or maybe it's like growth off of 2021 on earnings. So I guess any, any more confidence or conviction that next year could be another, call it algo type of year on both IDs? And in EBIT, and I guess any puts and takes as you're starting to think through that outlook.
It's a good question, and we appreciate it. Obviously, we'll get into a lot more detail when we get out to our March investor day. That's really when we'll go into depth. We're in the middle of going through developing our budgets and partnering with our board on our 2022 expectations. The only comment that I would give in depth is, as we shared in our investor day in 2019, and we've continually updated over time, we would expect the TSR of 8% to 11% on an annualized basis made up of earnings growth and free cash flow made up and returning cash to shareholders.
So overall, we would expect that. We do feel good about the momentum in the business in terms of the connections with the customer, our seamless business processes on identifying ways to take costs out, so we can invest some of those cost savings in our associate wages, cost savings in the customer connection and other things.
So and the business continues to generate good cash flow. And Gary it looks like you want to say something.
Well, I know, I think you said it well, Rodney. I would just add where you were going, I think we're hopefully we've been conveying very clearly while we won't be getting into detailed guidance for 2022. Because that's the March meeting, we, we've been trying to be clear in all of our communication, I think around the confidence we have in the long term prospects of the business, so not specific to 22. But thinking, as we're continuing to build a business from the base that we've established through COVID, that the opportunity to grow and deliver on that TSR commitment that Rodney mentioned. And specifically, we do believe that some of the food at home trends that we've talked a lot about, we set this on time and continue to believe that data shows that a number of those changes will be structural in nature, and we'll continue to see sustained trends in food at home. I think if you look at our performance over the last few years, that Rodney was alluding to some of the individual drivers. But I think it's demonstrated in our mind the confidence in the value creation model, the creating the balance in our model to be able to drive sustainable growth and the alternative profit streams continuing to grow at double digits of a higher base. So certainly hopeful to endorse Rodney’s comment more broadly around that commitment to TSR over time, but obviously, we'll get into more details on 2022 in March.
And hey, guys, it's Simeon for the follow up, I thought maybe Michael might have a better shot at the 22 question than me. But my follow up is on the puts and takes on IDs, it looks like it held pretty consistent Q2 to Q3. And you talked about inflation, lifting but levelling; can you talk about anything to put and take sequentially got worse or better in terms of units, traffic, etcetera?
If you look at most pieces, it would third quarter would have been better than second quarter. If you look at household trends, if you look at basket size would have been a little bit smaller, but not significantly. We continue to see people premiumization during both quarters. We continue to see people buying larger pack sizes on just about every category. So when you look at the puts and takes and I think there's as many puts and takes.
Maybe just to add Rodney. Simeon, the trends were pretty consistent through the quarter in Q3. They got slightly better as the quarter went on. And we would be trending as a top end of the range that we shared in the quarter to date so far, top end of the range that we share for guidance for Q4. And if you look at the trends so far in this quarter, I would say that, the quarter would have started a little bit slower because of the recycling in that week before Thanksgiving, a fairly large spike in consumer behavior that I think started to signal maybe a potential increase in cases this time last year and then Thanksgiving was very strong. We were very pleased with the results over the Thanksgiving week itself.
I think some of the questions in our mind as we look towards Q4 that some of the reasons that we got and some of the uncertainties, it's hard to predict exactly what will happen with government stimulus dollars in the market, particularly at the state level. That's kind of really hard to get into the skin of what will happen in individual states around on-going funding. We obviously know there are some continued supply chain challenges around product availability in certain categories. And that's getting better gradually, but still as certainly some challenges in the market. And it will be those kinds of things that for us would be some of the puts and takes and how strong Q4 plays out in our mind.
Thank you, everyone. Happy holidays.
Thanks, happy holidays. Thanks, Simeon.
The next question is from Robby Ohmes with Bank of America Global Research. Please go ahead.
Hey, good morning. Thanks, guys for taking my question. I guess, Gary, for you, could you I want to just follow up on the sourcing benefits to gross margin, can you remind us what you're doing to achieve kind of sourcing benefits in this environment. And also, you're doing an amazing job with the cost savings initiatives offsetting labor and other cost pressures. Can you remind us also there, what you've been doing and maybe some thoughts on how sustainable those two things could be into next year?
Sure. Thanks for the question, Robby. Yes, we're really proud of the team's work in those areas. As you mentioned, it started out at the beginning of restock Kroger as a sort of let's grab the opportunities that are immediately in front of it, and I think it's really become a core competency within the organization to drive sustainable savings and our model. On the sourcing side, I think, I would describe it across a number of different areas. You start with how do you make sure you're consolidating all the buying in the right places. So you can maximize the data and knowledge and use our own experiences from the cost of commodities. In fact, we manufacture many of our products so that we're getting smarter and more effective in how we buy. It's evolved into, product design and packaging design, and how do you really optimize the value while not compromising on quality for the customer. So continuing to drive value in those areas, it's extended to the GPO partnership that we created with Walgreens and looking at how can you consolidate opportunities and best thinking there as well. So it continues to evolve for us and the team is doing a great job in finding those opportunities to maximize savings. And we would expect that to be a continued opportunity for us because we keep identifying new innovative ways to, to ensure that we're designing for value and maximizing opportunities to be more efficient.
On the sort of the OT&A side of things that's, that's across a number of different areas as well. So we'd include using technology and automation to reduce shrink and waste in the business, to improve on some of those activities in the store and our operations that are very manual and don't really maximize the value that our green associates can deliver for customers. So taking that non value added work out wherever we can to allow our associates to focus on the customer. It includes automating our ordering and production planning type processes. One of the big ones, of course, this year that we think we would expect to be a tailwind into next year, as well, for every dollar that we can capture this year would be taking cost out of our digital cost to serve. So we've invested significant labor over the years in building that digital ecosystem. And we'd expect to continue to grow that business, of course, but if we can take out if we can improve efficiency on that $10 billion digital business, it creates not just a saving on the next new sale, but it creates a saving on that baseline $10 billion business as well.
And then finally, I would say we've taken the opportunity to use things like learning through COVID on things like administrative costs, and where are there areas you can actually work more efficiently and operate in more of a hybrid environment to take cost out of the model as well. So hopefully that gives you an idea of the waste kind of religion from embedded more in the business. And we certainly would expect as part of our overall GSR growth GSR growth model, to be continuing to take costs to be able to fund investments in our average hourly rate for associates to be able to invest in pricing and value for the customer, while at the same time growing shareholder returns.
Robby, the only other thing I would add to Gary's comments and it's implied throughout Gary’s comments. But we have done a lot of people changes and talent changes both in terms of recruiting people from within the company, but external as well outside of the industry that have skills that were different than traditional in our industry, which has been a huge help in both areas for us to think about things in new ways and for people to approach things in new ways as well.
That's great, that's really helpful. And if one really quick follow up question if I may. With the changes you're making on the sourcing side and with own brands, can what is happening with total SKUs versus national brands SKUs versus own brands, SKUs in your stores? Are they shrinking? Are some growing? Can you give us any color on that?
If you look at before COVID, the number of SKUs would be lower now than before. Just because it's you know, you don't have as much change time and things like that. There are selective areas for some of the national players haven't reintroduced some of the variety that we are introducing some of that variety in our own brands. And we introduced over 200 new SKUs in the quarter and we would have an aggressive pipeline going forward. But, overall, if you look at you there's still continued SKU growth in natural organics plant based areas like that. And you will if you think about like paper towels and paper goods and things like that, you would see fewer SKUs just because the customers move to purchasing bigger size packages.
Got it really helpful. Thanks so much.
Thanks Robby.
The next question is from Greg Badishkanian with Wolfe Research. Please go ahead.
Good morning. This is Spencer Hanus on for Greg. I just wanted to ask how you're thinking about the delta between retail and cost inflation in 2022. And then what is the breadth and depth of promotions that you need to hit your long term top line targets just given the unique opportunity the industry has had to reset promos over the last 18 plus months here?
Gary, you want to?
Sure. Yes, thanks for the question Spencer. As we mentioned, we're kind of not really providing sort of an outlook for 2022 at this point around how we think about sales and investments overall. We'll be doing that for sure as we get to the March meeting and sharing our Q4 results. I think really, I would, I would pivot back to some of the comments that we made earlier around, we think very much of it from the perspective of in all operating environments, Kroger has been able to demonstrate our ability to navigate through those situations. And it's really comes back to what we were talking about earlier around, ensuring that we understand the customer better than anybody using our data, targeting our promotional activity and our personalized pricing. And of course, where the pricing structure product starts to change, really ensuring that customers see the value in our own brand products because of the great quality and value that they offer in combination and during times of high inflation, and certainly in times of economic challenge, we found that Kroger has performed very well. And we've seen customers pivot to some of those opportunities based on the way we can communicate and connect customers with those strategies.
So I think from our perspective, we're very much managing the business dynamically to ensure that we can deliver for the customer. But at the same time that [Indiscernible] TSR commitments in the way that we talked about earlier in the conversation. On promotions, we would always use our insights, because different types of customers react different types of promotions. So we would aggressively use our insights to personalize promotions, a lot of that is one on one with a customer either sending an old fashioned mail, mailing, or electronically with email or text or whatever. And it really depends on each customer, and what do they best react to?
Got it, that's helpful. And then in the prepared remarks, I think you mentioned that the [Indiscernible] facility is performing better than expected the one in Florida. But could you just provide some more details on the basket size and the repeat orders relative to your targets? And then how are you thinking about the need longer term to build or acquire stores in that market to provide a more complete Omni experience down there?
On your second question, I'll answer it first. And you got to walk before you run. So right now, we're totally focused on making sure that the sheds open strongly and we continue to maintain outstanding NPS scores or net promoter scores with our customers. And I am super proud of our team in Florida and Monroe, both in terms of how they continue to connect with the customer and continue to improve.
If you look at basket size, the basket size continues to grow and what we what we expected and what we believe, is as the customers begin to trust the experience, again to have good experiences, we get a higher share of their total spend. And that's what we're starting to see. And when you look at overall in Florida, one of the reasons why we announced the two additional facilities in Florida is obviously the connection and the growth that we're achieving. So far, we feel good about the opportunity in Florida. And as everybody knows the population growth in Florida and the economic growth in Florida is just mind boggling relative to an awful lot of the country. So it's an incredible opportunity for all grocery retailers in Florida. Obviously, the offering we have is unique in the markets and very proud of what we're getting done there.
And the repeat usage revenue is higher than we expected regular Net Promoter Score.
Yes.
Great. Thank you so much.
Thanks, Spencer.
The next question is from John Heinbockel with Guggenheim Securities. Please go ahead.
Hey Rodney, let me start with if you look how consumer behaviors evolved over the last couple of years? In terms of what percent of purchases right are done. Shelf price versus promo versus, wise promo? How has that shifted? Right is you know, if you think about personalized promo, is that is that as much as 50% or something along those lines of what purchases are recurring, and then work you've done on price perception. How is that trended? Maybe early days of COVID to where we are today?
If you look at customer behavior I want to broaden it a little bit -- on relative to your question. We continue to see people focus on health. If you look at earlier in COVID people were not as focused on health but they're definitely back where they're focusing on health in a more aggressive way. All across the board, you see premiumization. On what people do, and I always say, I am a reasonably aggressive shopper and are Murray's Cheese. Growing up, I would have never had a really good cheese. And once you have a really good cheese, it's hard to go back to what you were used to when, before. And what we're finding as customers when they upgrade and try higher quality products, they find out they love it, and they become loyal to it.
If people get customers in terms of behavior on buying on promotion, it's been reasonably consistent throughout the pandemic. People stretch their budget where they need to or want to, because and they will splurge and other places, which is one of the things that from a go to market standpoint that we really try to help a customer stretch their budget on things that are important to them. So they can splurge on what's important to them as well.
All right, maybe there's a quick one for Gary. You guys now have something on the order of four to 5 billion write-off of dry powder in terms of your leverage target. How do you think about that conceptually? In terms of timing, in terms of return to shareholders versus strategic M&A? What's the philosophy there?
Thanks. Thanks, John. Obviously, we are really proud of the business performance. And it has demonstrated strength in the overall model in the position that we're in, as we said, setting the prepared comments. I would say our overall capital allocation strategy is unchanged that we start with, where are the opportunities to invest in capital in the business to drive sustainable growth. We are obviously in a great position around maintaining our investment grade debt rating. And we've been able to make some good progress on chipping away at the pension funding from an overall sort of debt and potential liability there as well.
This year, of course, we we've been very committed to continuing to return cash to shareholders with the billion dollar so far on buybacks and the 17% increase in the dividend that we announced earlier in the year. So I think we've been very consistent with that plan so far. And we do think that in the short term, it's important to maintain some flexibility, recognizing some of the uncertainty and in the market that we've all talked about, that we're all navigating through at the moment.
That being said, within those principles, we do think it's important, and we've been very committed as a company to being very disciplined with cash flow, and deploying it to either grow the business or return to shareholders. So as we as we head towards 2022. And as we move towards the March planning meeting, and the business update meeting that Rob shared, we certainly expect to share more color of how we're thinking about the excess cash and, and some of the opportunities we're exploring there.
And we would continue to look for things that are the right opportunity for things that add capabilities. So if you think about merging with Home Chef, a couple of years ago, it was a capability that we didn't have on the direct to customer meal kits. And we've been able to partner with the team there to leverage it back within Kroger as well. So, and I always think it's important to remind people that we're not required to do any kind of mergers in order to achieve our TSR of eight to 11 Eat as well.
Thank you.
Thanks, John.
The next question is from Chuck Cerankosky with Northcoast Research. Please go ahead.
Good morning, everyone. Great quarter. Rodney, I think it was you who earlier mentioned that you chose to incur some significant cost in this to bolster the supply chain in the quarter. Can you give us some detail on that and whether they last into next year? And then I have a follow up related that.
If you look at the supply chain investments, it was pretty similar to what we did in the second quarter. Now, our team has done a nice job of starting to identify some opportunities for efficiency. One of the biggest areas is that we continue to have extra warehouse space. And I guess I hesitate to call it extra warehouse space because we're actually using the warehouse space. But then over time, as we feel like things are permanent, you'll see us do more permanent type warehouse projects to expand capacity rather than you using it and maybe in a way that's not as efficient
We would expect to continue to do that in the fourth quarter, as we look at next year, we really are working hard to make sure we stay agile in that area, because things continue to change so quickly. And what's going on with COVID, what's the COVID variants and things like that. So we really are making the decisions on an agile basis. And it's one of the learnings that we've had early on in the pandemic. And we'll continue to do that relative to the supply chain as well.
Anything on the labor side worth noting? And then also, when you're talking about the supply chain issues, and product outages, is we're talking about branded versus private label, fresh versus shelf stable, edible versus non edible products. I mean, where are you, where are you seeing the need to spend the most money and use the most management resources to make sure the shelves are stocked?
If you look at labor, we certainly have partnered with outside companies to supplement our labor resources, especially on the supply chain. If you look at in stocks, they would be more affected on centre’s store, if you look in the fresh departments, we would be in much better shape in most of the fresh departments in terms of in stock.
All right, thank you. Good luck for the fourth quarter.
Thanks, Chuck. Appreciate it, take care.
The next question is from Michael Lasser with UBS. Please go ahead.
Good morning. This is Mark [Indiscernible] on for Michael today. Thanks for taking the questions. As a follow up to some of the earlier inflation questions, where do price -- stand today? And what's the posture on further investments from here and have competitors been acting as rationally given just the heightened inflation this time around? Thanks.
If you look at, as everybody knows, we go to market as a high low merchant. So we're aggressive on promotion, we're aggressively on using promotion. And we feel very good about where we stand relative to price gaps. And if you look at, our strategy has always been to neutralize on price and when on our fresh areas and our friendliness, and connection our associates have with our customers. And that continues to work well. And we continue to feel good about where we are relative to the various gaps.
Great, that's helpful. And then on Ocado, how integrated is the CFC today with your Cincinnati operations? Has it been integrated and click and collect yet? And then in Florida, who do you think you're taking the most share from? Thanks.
Yes, if you look at Florida, I think the growth in the market is so strong that I think every all boats are rising in Florida. So to say that we're taking share away from somebody, I really don't think of it that way, because I just think the market is growing so much. If you look at your first question, part of your question on Monroe, we continue to further integrate it within the store network. And it's something that literally every single week that goes by, we further integrate to really make it a seamless experience for the customer.
Great, thanks so much. And good luck.
Thanks Mark.
Thanks for your questions. And that will end our question and answer session.
As Rob said, thanks for questions. Obviously, thank you for your interest in Kroger. As you know many of our associates own stock. And we always use the end of this to communicate directly with our associates as well. And as all of us embrace the holiday season, it often becomes a time where we can a reflection as we sat down to enjoy special meals with our loved ones. And as I said earlier, I am just so incredibly proud of our associates across the Kroger family of companies, and what we as a team have accomplished this year. Every one of our associates is helping make the holidays brighter and fresher for our customers and more importantly for that customer and their family. And it doesn't matter if you're making a difference together like our Kroger health team, who has administrated eight and a half million doses of the COVID-19 vaccine, or as individuals like Donna Greer, a cashier at our store 387 in Collierville, Tennessee, whose unshakable positivity has been an inspiration to many, including the Collierville Herald independent who just named her Collierville Woman of the Year.
We are so proud of Donna and congratulations Donna. When you look at these, they're just a few examples of our incredible people who bring our vision and values to life each and every day. Our associates are beyond amazing and continue to serve our communities and uplift each other and our customers. That concludes our call for today. We wish everyone a happy holiday season. Merry Christmas and encourage you to stay safe. And as always, thank you for your interest in Kroger.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.