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The Kroger Co (KR) Q1 2022 Earnings Call Transcript

KR Earnings Call - Final Transcript

The Kroger Co (NYSE: KR) Q1 2022 earnings call dated Jun. 16, 2022

Corporate Participants:

Rob Quast — Director of Investor Relations

W. Rodney McMullen — Chairman and Chief Executive Officer

Gary Millerchip — Senior Vice President and Chief Financial Officer

Analysts:

Robby Ohmes — Bank of America Merrill Lynch — Analyst

John Heinbockel — Guggenheim Securities — Analyst

Simeon Gutman — Morgan Stanley — Analyst

Spencer Hanus — Wolfe Research — Analyst

Karen Short — Barclays Capital — Analyst

Rupesh Parikh — Oppenheimer — Analyst

Edward Kelly — Wells Fargo — Analyst

Michael Montani — Evercore ISI — Analyst

Michael Lasser — UBS — Analyst

Kate McShane — Goldman Sachs — Analyst

Chuck Cerankosky — Northcoast Research — Analyst

Presentation:

Operator

Hello, and welcome to The Kroger Co First Quarter Earnings Call. My name is Alex, and I’ll be coordinating the call today. [Operator Instructions]

I will now hand over to your host, Rob Quast, Director of Investor Relations. Over to you, Rob.

Rob Quast — Director of Investor Relations

Good morning. Thank you for joining us for Kroger’s first quarter 2022 earnings call. I am joined today by Kroger’s, Chairman and Chief Executive Officer, Rodney McMullen; and our 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. After our prepared remarks. We look forward to taking your questions. In order to cover a broad range of topics, we ask that you please limit yourself to one question and one follow-up question, if necessary. In response to your feedback on allowing more participants during Q&A, we may provide abbreviated responses to your follow-up questions to hear from as many of you as we can.

I will now turn the call over to Rodney.

W. Rodney McMullen — Chairman and Chief Executive Officer

Thank you, Rob. Good morning, everyone, and thank you for joining us today. We’re off to a great start in 2022, delivering strong performance by successfully executing our strategy of Leading With Fresh and Accelerating With Digital. Our associates relentless focus on providing fresh affordable food to our customers is driving our strong results.

During the quarter, we demonstrated the resilience of our business model, led by strong top line sales ahead of internal expectations. In addition, our team navigated a challenging operating environment characterized by continued inflationary cost pressures and supply chain headwinds, which included higher diesel fuel costs. Through our strategic cost savings execution and sustained food at home trends, our team delivered 16% growth in our adjusted FIFO operating profit, providing once again the strength of our financial model in a variety of operating environments. Our teams are focused on delivering a great customer experience with zero compromise.

Rising inflation has consumers rethinking their shopping and eating habits. While customers continue to cook more, we are seeing different shopping behaviors based on how individual customers are experiencing the current inflationary environment. Many customers continue to shop premium products throughout the store, including Private Selection, Murray’s Cheese, and Deluxe meal solutions for other customers whose budget are more directly impacted by food and fuel inflation, they are actively looking for ways to save. We’re doing everything we can to help this customer stretch their budgets.

I’d like to share up more about the work we’re doing for our customers and how our competitive moats uniquely position us to meet these challenging and changing customer needs. First, we are leading with Fresh. Our customers continue to prioritize Fresh as the number one determinant of where to shop. We are meeting their needs with operational efficiencies and new technologies that extend days of freshness and grow our selection of quality Fresh products.

In the first quarter, we achieved 5.2% identical sales growth in our Fresh categories. These gains were led by the expansion of our end-to-end Fresh produce program, which elevate standards and improves our ability to maintain freshness throughout the supply chain. We certified 355 stores this quarter, and the customer feedback has been overwhelmingly positive. We also continue to increase our use of forecasting and analytical tools, specifically leveraging 84.51 [Phonetic] to improve our ability to maintain fresh products in stock, both in-store and online.

Our recent floral results are a great example of how we are leading with Fresh. As the nation’s largest florist, the first quarter was our time to shine for holiday celebrations and our floral team stepped up, achieving record sales. In fact, we set an overall single day floral sales record on Valentine’s Day and a Mother’s Day sales record with strong double-digit growth.

Second is our brands. During the quarter, we saw tremendous growth in our brands, which had identical sales of 6.3% and outpaced all national brands, with 92% of households purchasing at least one of these products. We launched 239 new and innovative products during the quarter, reflecting many of the top food trend predictions we made at the beginning of the year. All of our new products continue to be tested and validated to ensure that they are as good or better than the comparable national brand. We continue to invest heavily in the quality of our brands, which preserves our strong price position and drive higher profitability.

Next area is personalization. Our data science platform provides unique insights that creates personalized customer experiences. In this dynamic environment where customer behaviors are changing rapidly, we use our data and insights to be nimble and react quickly to ever changing needs. Our broad-based data science approach helps us determine how to best implement price, promotion and display. We are focused on delivering incredible value to our customers through relevant personalized offers and fuel rewards. Our loyal customers are using our fuel rewards program now more than ever, and in fact, more than 600,000 incremental households engaged for the first time this quarter.

Finally, our seamless ecosystem continues to deliver fresh products to our customers anytime, anywhere, and with zero compromise. During the first quarter, more customers returned to in-store shopping and as a result, we made strides to enhance that experience, while introducing new tools that help our associates better serve customers. In pick up, we unveiled new technology that improved wait times 20% and expanded capacity based on customer needs. In delivery, we continue to introduce key initiatives that expand our reach and shorten delivery times. We strive to provide more customers access to high quality, affordable food regardless of whether they have a physical store in their community.

During the quarter, we opened two new customer fulfillment centers, powered by Ocado’s automated smart platform, one in Dallas, Texas, and one in Pleasant Prairie, Wisconsin, bringing our total CFC count to five. We also opened three new spoke locations for a total of six spokes. As we head into summer, our end-to-end cold solutions, including the custom built refrigerated van will ensure customers get the freshest product delivered directly to their doorstep. Finally, our Boost membership is delivering promising results. Our one of a kind membership program offers incredible value where customers can get unlimited free delivery on orders of $35 or more, double the fuel points on every dollar spent at Kroger, and other exclusive member benefits. We are encouraged by the number of new members in the four current pilot divisions. Importantly, deliver — delivery sales increased significantly compared to non-Boost divisions and delivery retention improves approximately 600 basis points. Because of this early success, we are proud to announce today that are that Kroger Boost is launching nationwide beginning in the next few weeks. This next generation loyalty program is deepening our relationships with customers as they continue to look for value and convenience.

Turning to supply chain. Our 2022 business plan anticipated ongoing supply chain challenges by planning ahead and focusing on staffing, technology and process efficiencies, we managed our cost effectively. By owning and operating a portion of our fleet, we better control and manage transportation cost. Despite diesel fuel cost headwinds, we were — we were also proactive about forward buying and securing capacity for goods, resulting in better vendor rates. Through our supplier relationships, we saw sequential improvement in product availability. We are well positioned to adapt to the evolving environment and we are cautiously optimistic in a broader supply chain recovery throughout the year.

We also continue to invest in our associates and in associate experience that facilitates an amazing customer experience. We firmly believe that exceptional financial and operating performance connect directly to the ways we support and invest in our associates. During the quarter, we took numerous steps to meet our associates needs while they delivered for our customers. We continue to invest in associate wages and we expect hourly wages to grow throughout the year. We launched new initiatives to simplify day to day work, including the modernized scheduling tool, my time. We took steps to improve communication across all of our teams and bring meaningful training to all of our associates, no matter where they work.

One example of this commitment is the addition of Microsoft Teams rooms across most of our store locations. This technology improvement will facilitate deeper connections and improve the associate experiences. As an employer of choice, more people are applying to work for Kroger and more associates are choosing to stay with us. While we still have work to do, we experienced a meaningful improvement in both hiring and retention in the months after the Omicron surge. We are also seeing more boomerangs. These are our associates who left to work elsewhere and ultimately came back to us. Kroger’s strong culture invites associates to come for a job and discover a career, and we’re glad that so many value and appreciate our work environment, our culture and the people they work with every day.

Our winning culture is rooted on in living our purpose to feed the human spirit. During the past last year, our teams took significant steps to support our customers and communities through our Zero Hunger, Zero Waste social and environmental impact plan. We introduced a new Kroger and USO co-branded mobile unit to nourish active duty military service members and their families at military bases and U.S. Service Centers across the country, as well as provide community disaster relief. The first four units hit the road in May.

In summary, we’re off to a very strong start in fiscal 2022. We are widening our competitive moats, creating a shopping experience with zero compromise, investing where it matters most to our customers and associates, and strengthening our purpose in large and small ways every day. When we do all of this well, our teams, our customers and our shareholders all win.

Now I would like to turn it over to Gary to take you through our first quarter results, Gary?

Gary Millerchip — Senior Vice President and Chief Financial Officer

Thank you, Rodney, and good morning, everyone. Kroger delivered another quarter of strong results as our team did an outstanding job executing our go-to-market strategy while navigating a dynamic operating environment. Our results again highlight the strength and resilience of Kroger’s financial model, which allowed us to continue to invest in our associates, deliver fresh affordable food for our customers and create value for our shareholders.

I’ll now provide more detail on our results in the quarter. Led by our competitive moats, we achieved identical sales without fuel growth of 4.1%. Fresh categories and our brands identical sales both outpaced overall company results. Adjusted EPS was $1.45, up 22% compared to the same quarter last year, driven by increased sales and exceptional cost management during the quarter. Digital sales declined 6% in the first quarter, broadly in line with our expectations. We continue to ramp the digital growth initiatives shared at our Investor Day, including enhanced personalization capabilities, Boost membership, customer fulfillment centers and Kroger Delivery Now. As a result of these initiatives, we grew digitally engaged households during the quarter and we would expect digital sales to accelerate as the year progresses. Gross margin was 21.6% of sales for the quarter. The FIFO gross margin rate excluding fuel, decreased 26 basis points compared to the same period last year. This decrease was primarily attributable to continued strategic price investments and higher supply chain costs, offset by sourcing benefits and the cycling of a write-down related to a donation of personal protective equipment inventory in the prior year.

Our team continues to do an excellent job managing higher product cost inflation. We are leveraging our data and sourcing expertise and working closely with our suppliers to help minimize the effect on our customers and our financial model. We are investing where it matters most to our customers and are using our proprietary data to deliver additional value through personalization. Our brands are also proving to be an important differentiator for our customers in this environment, providing an unmatched combination of great quality and great value. We will continue to leverage these proven and unique capabilities to help our customers manage their grocery budgets more effectively and maintain a strong value proposition relative to our competitors, as we believe inflation will remain front of mind for many of our customers for the remainder of 2022.

In recognition of current product cost inflation and our outlook for the rest of the year, we recorded a LIFO charge for the quarter of $93 million compared to $37 million in the prior year. This increase represents a $0.06 [Phonetic] headwind to EPS in the quarter versus 2021. Our SG&A rate decreased 46 basis points, excluding fuel and adjustment items. We were successful in offsetting inflation headwinds in many parts of our business and continued investments in our associate wages by reducing costs in areas that do not impact the customer experience. As an example, this quarter, we introduced a new bakery forecasting tool, which is improving product freshness, reducing waste and at the same time, simplifying the associate ordering process. We have a strong pipeline of process improvement initiatives and innovative technology driven solutions that will lower digital fulfillment costs, increase store productivity and reduce waste and shrink. For the fifth consecutive year, we remain on track to deliver $1 billion of cost savings in 2022.

The traffic and data generated by our supermarket business continue to create a strong flywheel effect for alternative profits. Led by retail media and Kroger Personal Finance, alternative profits are on track to contribute meaningful growth in 2022. During the quarter, Kroger Precision Marketing added more than 100 new brand partners. We continue to enhance our market-leading capabilities and have entered into new agreements with three leading advertising management platforms, allowing our CPG partners to manage their onsite ad campaigns more effectively.

Fuel remains an important part of our overall value proposition and the key offering to help customers stretch their dollars, especially when fuel prices are high. We continue to deliver significant value through our loyalty program, which saves customers up to $1.25 per gallon. As Rodney shared earlier, more customers engage with fuel rewards this quarter and our gallons grew at a faster rate in the market. The average retail price of fuel was $4 this quarter versus $2.79 in the same quarter last year. Our cents per gallon fuel margin was $0.42 compared to $0.35 in the same quarter last year.

Our associates continue to do an outstanding job executing our strategy and serving our customers. We introduced a number of new initiatives to support associates this quarter as well as continuing to invest in hourly wages. These investments are fully contemplated in our guidance and long-term financial model. During the first quarter, we ratified new labor agreements with the UFCW in Denver, Southern California, Houston, Little Rock, Memphis and Seattle, covering more than 67,000 associates. We continue to negotiate contracts with the UFCW in Las Vegas, Southern California for Ralphs Pharmacists, Indianapolis, Roanoke, Chicago, and Columbus.

Turning now to cash flow and liquidity. Kroger continues to generate strong free cash flow. Our net total debt to adjusted EBITDA ratio is 1.68 compared to 1.79 a year ago. The company’s net total debt to adjusted EBITDA ratio target range is 2.3 to 2.5. Consistent with our financial strategy, we are investing in the business to drive sustainable future earnings growth and continue to expect capital expenditures of between $3.8 billion and $4 billion in 2022.

During quarter one, we were disciplined in returning cash to shareholders. In total, Kroger returned $819 million via a combination of share repurchases and dividends. We are operating from a position of financial strength and we’ll continue to evaluate opportunities to deploy excess cash to accelerate our growth model and deliver sustainable total shareholder returns.

In closing, let me share additional color on our outlook for the rest of the year. While there are a number of uncertainties in the macroeconomic and inflation outlook for the remainder of 2022, Kroger is laser-focused on executing the plans outlined at our Investor Day, and we believe our go-to-market strategy will serve us well in navigating the current environment. Based on the strength of our quarter one results and sustained food at home trends, we are raising our full year guidance. We now expect full year identical sales without fuel of 2.5% to 3.5%, adjusted FIFO operating profit of $4.3 billion to $4.4 billion, and adjusted net earnings per diluted share of $3.85 to $3.95, representing an annual growth rate of 5% to 7%.

Our updated guidance assumes inflation will remain at heightened levels for the remainder of the year, although we would expect the year-over-year rate to moderate in the second half of the year as we cycle higher inflation from quarter three and quarter four of 2021. Due to this higher outlook for inflation, we now expect our LIFO full year charge will be in the range of $300 million compared to $197 million last year. As a reminder, while the actual LIFO charge is calculated at a point in time at the end of our fourth quarter, we recognize the projected charge evenly throughout the year.

Our guidance also assumes retail fuel profitability will be a headwind for the remainder of 2022, as we cycle higher CPG margins from 2021. Our full year projected tax rate has been lowered from 23% to 22% primarily due to higher-than-expected tax deductions related to employee stock option exercises. Overall, we are extremely pleased with our start to the year, which provides another proof point of the strength of our financial model. And looking forward, we remain confident in our ability to deliver sustained earnings growth and total shareholder returns of 8% to 11% over time.

And now, I’ll turn it back to Rodney.

W. Rodney McMullen — Chairman and Chief Executive Officer

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

Now, we’ll turn to your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question foot’s day comes from Robby Ohmes of BofA Global Research. Robby, your line is now open.

Robby Ohmes — Bank of America Merrill Lynch — Analyst

Good morning, guys, and great quarter. My question is, I was wondering if we could get a little more color on the ID sales. So maybe thoughts on what you’re the traffic component of that, what you’re seeing in traffic, the ticket component and maybe specifically the inflation component in the ID sales? And and then sort of along with that — some of your competitors that sell groceries and food and beverage are seeing very strong sort of double-digit same-store sales, is the price spread versus your competitors widening because of price investments you’re making Thanks.

W. Rodney McMullen — Chairman and Chief Executive Officer

Thanks, Robby, and good morning. If you look at in terms of traffic, the two areas that we felt really good about is if you look at the number of loyal shoppers we have at our household count, both improved. Now the typical basket size for our customer coming in continues to decline. Part of that is just driven because of the economic environment some customers are having. If you look at identicals during the quarter, towards the end of the quarter they finished a little stronger than where we were during the quarter and that’s continued so far early in the second quarter. Obviously, we’re extremely early in the quarter.

Obviously, we do have a reasonable size general merchandise business that affected as well. And the comment that I made in the prepared comments. If you look at our Fresh departments, they were up over 5%. So overall, we think the customers are doing a lot of work on balancing their total budget and we continue to balance that as well with promotions and then customers are aggressively starting to buy our brands, and what they’re finding is the quality of that product and there is no compromise with that versus some of the other products.

And if you look at our price spreads, we checked pricing obviously every week. We look at pricing spreads for different types of customers and those spreads continue to be where they’ve been or improving slightly as has been the case over the last couple of years. I don’t know, Gary, anything you want to add?

Gary Millerchip — Senior Vice President and Chief Financial Officer

I think you covered it well, Rodney. The only other point you mentioned around total households and loyal households growing, we also saw visits improving during the quarter as well, Robby, which was — we’re really pleased with that trend as well.

W. Rodney McMullen — Chairman and Chief Executive Officer

Thanks, Gary.

Robby Ohmes — Bank of America Merrill Lynch — Analyst

Great, thank you.

W. Rodney McMullen — Chairman and Chief Executive Officer

Thanks, Robby.

Operator

Thank you. Our next question comes from John Heinbockel of Guggenheim Partners. John, your line is now open.

John Heinbockel — Guggenheim Securities — Analyst

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

W. Rodney McMullen — Chairman and Chief Executive Officer

Yeah, I love the question, John. And as you know, we’re super proud of our brands and super proud of Private Selection, the Banner Brand and Simple Truth, and then Home Chef is our most recent own brand. The — that growth has been strong across all opponents. The only exception of that is Simple Truth was a little soft earlier in the quarter because we did have supply issues with one of the chicken suppliers. But other than that, its growth is nice as well.

As you know, what we’ve always found is over time our brands gains share and that’s been true for over 25 years. And when the economy is tight, our brands always gained share and then once the economy is good, it — we may lose a little or maintain, but that’s been the case all throughout because what customers find is once they try it, they love it. We, if you look at our leadership team, our — we’ve gone and really upgraded our leadership team in terms of our focus on our brands and for us, it really is — we look at it the same as a national brand, our customers do. And as I mentioned, over 90% of our customers included in their basket. So feel really good.

Your second part of your question about the national brand change. I think there’s still a lot of capacity constraints among some of the national brand. So I would expect if it’s a national brand with capacity, you’ll see a typical trend where they get more aggressive in promoting as their tonnage goes down, but if there are supply constraint, I would be surprised. And part of that is just because all of us are exiting COVID at a level of volume higher than what we had going in, which has put different people at different points on supply constraints.

John Heinbockel — Guggenheim Securities — Analyst

Quick follow-up to that forward buy, right, normally a big P&L benefit in inflationary times, it sounds like today it’s limited, right, because of their capacity constraints?

W. Rodney McMullen — Chairman and Chief Executive Officer

Yeah, we do — the excess warehouse space that we took on as part of COVID, a lot of that space we’ve continued to keep. And I would say we’re using that space to be able to get product when we can get it. So I think a lot of the CPGs are using it to level out production. So when they have excess production, we’re taking that and it in essence becomes forward buy, but I don’t think it will be as big as it’s been in past situations. Thanks, John.

John Heinbockel — Guggenheim Securities — Analyst

Thank you.

Operator

Thank you. Our next question comes from Simeon Gutman from Morgan Stanley. Simeon, your line is now open.

Simeon Gutman — Morgan Stanley — Analyst

Hey, good morning, everyone. I’ll ask my question and follow up one shot here. First, Rodney I want to ask about the competitive environment. It feels like it’s pretty rationale out there and it seems like the consumer has been price taking for the last, call it, number of months, and even Walmart mentioned a week and a half ago they’re not getting in too aggressive on price. I want to ask you, now that the consumer basket or where consumer behavior is starting to change, might this environment change? Do we think, do you think we’re at a new normal in terms of promotional activity, or do you think this is — I don’t want to put it like a house of card, but it feels like every everyone’s kind of playing nice something can break.

W. Rodney McMullen — Chairman and Chief Executive Officer

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

Simeon Gutman — Morgan Stanley — Analyst

Okay, thanks. I’ll leave it there. Thank you.

W. Rodney McMullen — Chairman and Chief Executive Officer

Okay, thanks, Simeon.

Operator

Thank you. Our next question comes from Spencer Hanus of Wolfe Research. Spencer, your line is now open.

Spencer Hanus — Wolfe Research — Analyst

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

Gary Millerchip — Senior Vice President and Chief Financial Officer

Thanks for the question. Yeah, I’ll cover that and Rodney can give any additional color he’d like to. Generally, our gross margin rate was in line with our expectations for the quarter. And you heard us share, we had two major investments during the quarter, which was investing in value for the customer and also the supply chain headwinds that as Rodney mentioned in his prepared comments, we fully expected during the year. Overall, we feel like we were right in line with what we expect it to be. I think we called out in our comments around the the PPE inventory write-off and that really wasn’t material enough to sort of be something that I think investors should be thinking about is going to be a factor in our expectations for the rest of the year. I think we shared in our original guidance for the year that we believe gross margin would be a headwind during the year because we made the investments in price and supply chain. The first quarter played out largely as we expected. We don’t call out all the puts and takes in the quarter, and you know things like COVID vaccines would have been a tailwind last year that wouldn’t been a tailwind this year. So I think there is a lot of extra moving parts in that, and what we’re trying to do is call out the pieces that we’ve communicated previously. So we’re consistent and also give you a flavor for the major moving parts. But overall, we felt the quarter was very much in line with strategy and and we wouldn’t be pointing to a change in that for the rest of the year.

I’ll maybe just add one piece of additional color because I know it’s kind of something I’ve seen as a question floating around before — before the call started was, certainly the gross margin outlook hasn’t changed. That’s not a factor in how we think our guidance looks for the rest of the year. We are very confident with how we think about the outlook for the rest of the year. I think some of the factors to bear in mind when you think about the second half I mentioned in my prepared comments, but LIFO for the year is going to be about $150 million higher than budget, and a about $100 million higher than prior year spread across the four quarters. We do expect fuel margins will be a headwind for the rest of the year and directionally think about as maybe a $50 million also headwind as well. So I think about it more of the underlying trends that we shared during the quarter. It’s something that we feel is right on track with our plan, but there are some unique factors that — that will influence the second half of the year. And you know, from our perspective, those are generally going to be things that you won’t have to cycle in 2023, but they are obviously headwinds in the rest of this year in terms of our overall financial outlook.

W. Rodney McMullen — Chairman and Chief Executive Officer

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

Spencer Hanus — Wolfe Research — Analyst

Got it, that’s — got it. That’s helpful. Thank you.

W. Rodney McMullen — Chairman and Chief Executive Officer

Thanks, Spencer.

Operator

Thank you. Our next question comes from Karen Short of Barclays. Karen, your line is now open.

Karen Short — Barclays Capital — Analyst

Hi, thanks very much. I had a couple of questions, and just they can all kind of tie into one. But the first is on your actual volume versus your comp. So as you look at your guidance, we know where CPI is and we know what your implied 2Q to 4Q guidance is, so it certainly implies, you know, demand destruction from volume and tonnage perspective. So wondering if you could talk about that. And then specifically on your full guide, obviously we came back into the FIFO guide for operating profit for 2Q to 4Q. It looks like you’ll be down about 6% on that operating profit number versus where you were at this quarter, which is up around 16% [Phonetic] So wondering if you could triangulate those two.

Gary Millerchip — Senior Vice President and Chief Financial Officer

Sure. Thanks, Karen. Yeah, I think the first part of the question would be, as I mentioned a moment ago, we look at the guidance for the rest of the year. Our overall outlook for inflation is that we do expect inflation is going to be higher for the rest of the year than we originally expected when we — when we sort of entered 2022 and provided our original our guidance. Having said that, it’s important I think to remember that we don’t have a perfect crystal ball, of course, like all of us are trying to figure out, there are multiple scenarios that could play out. I think our central scenario though is that we think inflation will remain higher. But as we cycle about a 4% increase in inflation in the second half of last year compared to the first half of last year, absolutely annual inflation, we may well actually start to see a more moderated number in the second half of the year. So we are currently assuming inflation in the second half as a headline rate, may be a couple of percentage points or so lower than the first half of the year. So we’re actually, if you think about our sales guidance, we are — we are assuming that we’d see some momentum in our units because of the way we’re thinking about inflation. Now of course, that outcome could be different and that will impact the outcome of the results that we report, but our overall assumption is based on that kind of high level view, which we think takes into account all the different data points that we’ve been able to — to look at both internally and externally.

And then from a — from an operating profit perspective, as I mentioned a few moments ago, from really the way we think about the rest of the year, our overall EPS guidance, if you kind of look at the midpoint of our new range for the rest of the year, it would be — it would be flat to slightly down. I think the really key messages in that would be think about the, as I mentioned a moment ago, the LIFO charge will be having a major impact on that, both versus budget and versus prior year. And as I mentioned, whereas, fuel would have been a tailwind in the first quarter. If that should be a headwind for the rest of the year. So we think of the sort of supermarket business as being robust and relatively on track in terms of what we would have expected and continuing to build momentum, it’s really around those other factors that are driving the lack of sort of carry forward of — of the momentum on year-over-year growth in the first quarter when you look at that relative for the rest of the year.

Karen Short — Barclays Capital — Analyst

As well as the vaccine headwind, correct?

Gary Millerchip — Senior Vice President and Chief Financial Officer

Vaccine headwind would have been in the first quarter, probably a factor and then it would also be a factor in Q2 and Q3. But again, I wouldn’t think if that as being a major headwind on what. So that was probably a bigger factor in Q1 as any quarters. So I wouldn’t think of the gross margin performance that we saw in the first quarter — the first quarter of the year is being dramatically different expectation in the remaining quarters based on the impact of a vaccine or other factors.

Karen Short — Barclays Capital — Analyst

Okay, thank you.

Gary Millerchip — Senior Vice President and Chief Financial Officer

Thanks, Karen.

Operator

Thank you. Our next question comes from Rupesh Parikh from Oppenheimer and Co. Rupesh, your line is now open.

Rupesh Parikh — Oppenheimer — Analyst

Good morning. Thanks for taking my question. So I just want to go back to grocery market share. I just wanted to get a sense of how your markets held up in the grocery category. And I guess related to that, it sounds like the general merchandise category had some headwinds. So I was just wondering if that contributed, maybe to the weaker ID performance?

W. Rodney McMullen — Chairman and Chief Executive Officer

If you look at grocery market share, for the — overall it’s pretty much close to where we thought it would be. We would expect continued improvement throughout the year, which was reflected in the original guidance. Your comment on general merchandise is correct. Our general merchant — if you look at our identicals and total without general merchandise, it would be pretty similar to where the Fresh IDs were. And the general merchandise, obviously households are starting to change their behavior on shopping and it shows up there, and obviously some of the savings and things that customers had from not being able to spend money on services as well as showing up there. So we are making progress on market share overall and would expect to continue to make improvements as we go along in the year.

Rupesh Parikh — Oppenheimer — Analyst

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

Gary Millerchip — Senior Vice President and Chief Financial Officer

Sure, yeah just — just briefly I would say, on the EPS side of things I mentioned a moment ago, Rupesh, that I think if you look at the guidance for the back of last 3 quarters of the year, it would sort of predominantly be around the sort of flat to slightly down. I would think that if you look at the cadence, last year to be relatively consistent. If you think about the next three quarters, I wouldn’t call out any dramatic year-over-year variance to that overall. And then I think on a sales perspective as we mentioned, we would expect the first half to be a little bit better than the second half in terms of sales. That’s predicated on this belief though that inflation continues at heightened levels, but on a year-over-year basis in the back half would be potentially a few basis points lower because we’re cycling 4% higher inflation in the second half of last year than the first half of last year.

Rupesh Parikh — Oppenheimer — Analyst

Great, thank you.

W. Rodney McMullen — Chairman and Chief Executive Officer

Thanks, Rupesh.

Operator

Thank you. Our next question comes from Edward Kelly of Wells Fargo. Edward, your line is now open.

Edward Kelly — Wells Fargo — Analyst

Yeah, hi guys, good morning.

W. Rodney McMullen — Chairman and Chief Executive Officer

Good morning.

Edward Kelly — Wells Fargo — Analyst

I want to go back to the — to the question on ton –Thanks, I want to go back to the question just on tonnage and underlying unit volume. Rodney, I think when we were sort of all looking at this quarter, I think we would all on the investor side agree that we probably thought your ID would be better given the trends that we saw in an inflation, and I’m kind of curious as to what you are seeing in underlying tonnage? And then you talked about, I think I heard you right when you said that basket is down despite that backdrop. So I’m just kind of curious as to what you’re seeing on like that side? And do you think any, or you seeing anything that is being caused by changes in consumer behavior, right, whether that’s sort of like channel shifting, seeking value, that type of stuff?

W. Rodney McMullen — Chairman and Chief Executive Officer

Yeah, if you look on the basket size, that’s driven by units per basket, and what we’re finding is customers are coming in more frequently before, but they’re not buying as many items on each shop, and that — that’s what we’re seeing. We’re also seeing customers, especially customers that aren’t as sensitive to their budget, upscaling with or buying bigger packs, especially earlier in the month when — depending on when people are getting money. So we can continue to see both of those dynamics. If you look at the Fresh departments, the trends there would be better than the overall.

The — if you look at overall units, for most of the CPG partners we would be tracking pretty similar to where their unit changes our overall in the marketplace in — if you look at our top 25. I know, Gary, anything you want to add to that? And I know you’re pulling up some.

Gary Millerchip — Senior Vice President and Chief Financial Officer

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

Edward Kelly — Wells Fargo — Analyst

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

Gary Millerchip — Senior Vice President and Chief Financial Officer

Yeah, I wouldn’t want to get into specific guidance because of the comment that Rodney mentioned, and we do try and manage the business dynamically. I think what I was really saying it was — it was specific to the current year, really saying that when you think about Q1, I think there was some concern that the PPE write-down was somehow need to be reversed out and that would be the trend that we’re seeing in terms of gross margin rate. So I think the guidance that we shared at the beginning of the year was we expected gross margin to be a headwind. We didn’t expect the volatility to be as significant as we’ve seen in the past. And as I mentioned, the PPE is really one of a number of puts and takes. But because we called it out last year in the first quarter, we didn’t want to not clearly mention it again in the current quarter, but I wouldn’t see it as a major factor and so it was related to Q1 was — that’s the kind of directional shape of gross margin, which is I think consistent with what we shared when we gave our guidance for the year.

Edward Kelly — Wells Fargo — Analyst

Okay, thank you.

W. Rodney McMullen — Chairman and Chief Executive Officer

Thanks, Ed.

Operator

Thank you. Our next question comes from Michael Montani from Evercore. Michael, your line is now open.

Michael Montani — Evercore ISI — Analyst

Hi, good morning. Thanks for taking the questions. Just wanted to ask, first off, you know, looking at food at home inflation, looks like it was up just about double digits for your quarter calendarized and if we adjusted that given your gen merch mix a little bit, maybe it’s a point or 2 below, but just wanted to see, is that kind of the right way to think about what you might have been able to pass through to the consumer given the PPI is so much ahead of those levels?

W. Rodney McMullen — Chairman and Chief Executive Officer

Yeah, I only think it’s important to look at CPI and PPI together, and it’s also the reason why we shared a little bit more details about our brands and normal because you have a customers are doing their own behavior in terms of changing the way they shop. So if you think about, in some cases a national brand item may cost $3 and our brand might be a $1.5 or $2. So that would show up and would cause our inflation rate not to be as high as what’s in the marketplace. I also think it’s important to remind people that on, when you look at our brands overall, our gross margins. About 600 basis points better than the national brand. And if you look at profit per item, it’s similar or in many cases actually higher.

So to me, I look — I would look at those numbers as general directional things, but not specifics to be able to compare directly just because customers’ behavior is changing. And if you look at like in, pork as an example, customers aggressively move to pork during the quarter and some of that movement was at the expense of people not buying as much beef because it’s such a — it’s a great value for the money as an example. So you have — within all the data, you have a lot of customer behavior changes, but I think it’s helpful directionally, but not exactly.

Michael Montani — Evercore ISI — Analyst

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

Gary Millerchip — Senior Vice President and Chief Financial Officer

Yeah, the $1 billion of savings would certainly be a sort of an ongoing flow of initiatives. So certainly think about it as being consistently sort of building from, so we’ve got certain number of benefits from last year in the flow through and then we’re introducing new initiatives this year. So because we’re on this five-year journey, a $1 billion of savings is very much a continual flow of new initiatives that are being implemented in the business to drive those efficiencies and savings. So, I’d certainly think of it in general terms as being fairly consistently throughout the year. Now of course, there are a number of puts and takes in lines and we continue to invest in average hourly rates. I think we mentioned in the first quarter there was a benefit from lower pension contributions during the first quarter. So I wouldn’t think of the OG&A rate improvement that we saw in Q1 as being typical for the year, but we do expect to continue to see OG&A rate in the year being an improvement and a tailwind for the year.

W. Rodney McMullen — Chairman and Chief Executive Officer

Thanks, Michael.

Michael Montani — Evercore ISI — Analyst

Thank you.

Operator

Thank you. Our next question comes from Michael Lasser of UBS. Michael, your line is now open.

Michael Lasser — UBS — Analyst

Good morning. Thanks a lot for taking my question.

W. Rodney McMullen — Chairman and Chief Executive Officer

Good morning.

Michael Lasser — UBS — Analyst

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

W. Rodney McMullen — Chairman and Chief Executive Officer

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

Gary Millerchip — Senior Vice President and Chief Financial Officer

Yeah, the only other thing maybe I would add, Rodney, is that the comments we made, Michael, about digital growth and the expectation with the investments we’re making in customer fulfillment centers, the announcement, the exciting announcement that Rodney shared this morning around our Boost membership launching across the whole of the company, we feel that the momentum that we’re seeing starting to build in digital will also be an important component of that that growth in the future as well.

Michael Lasser — UBS — Analyst

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

Gary Millerchip — Senior Vice President and Chief Financial Officer

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

W. Rodney McMullen — Chairman and Chief Executive Officer

Thanks, Michael.

Michael Lasser — UBS — Analyst

Thank you. Good luck.

Operator

Thank you. Our next question comes from Kate McShane of Goldman Sachs. Kate, your line is now open.

Kate McShane — Goldman Sachs — Analyst

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

W. Rodney McMullen — Chairman and Chief Executive Officer

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

Kate McShane — Goldman Sachs — Analyst

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

W. Rodney McMullen — Chairman and Chief Executive Officer

Yeah, if you look at the test regions, it would positively affect our identicals. And the thing that’s most important to us is it causes that customer to be stickier to our overall ecosystem, not just on delivery. So, and our strategy is if the customer thinks food, we we own the same Kroger. So we feel good about where we are and it’s continued in the right direction. Thanks, Kate.

Operator

Thank you. Our final question for today comes from Chuck Cerankosky from Northcoast Research. Chuck, your line is now open.

Chuck Cerankosky — Northcoast Research — Analyst

Good morning, everyone.

W. Rodney McMullen — Chairman and Chief Executive Officer

Good morning.

Chuck Cerankosky — Northcoast Research — Analyst

Rodney, if you talk about your e-commerce sales, they were down 6% overall. Could you shed some light on the component to that, because I don’t think it reflects what’s going on with the new CFCs and spokes, so where is the negative numbers coming from and how are the — how’s the Ocado-based facilities performing?

W. Rodney McMullen — Chairman and Chief Executive Officer

Yeah, thanks, Chuck. If you look at pick up, would be the area where we would have the biggest decline and what — as I mentioned, what we’re finding is that customer as they get comfortable they move back into stores and the retention rate is better than the overall retention rate. If you look at the sheds, the NPS scores continue to be outstanding, the retention rate and repeat purchase rate on the sheds is very strong and they’re continuing to move in the right direction. And if you look towards the end of the quarter and the recent few weeks, our performance on year-on-year for online is actually turned to positive. So the first quarter was pretty similar to where we thought it would be because we were cycling some strong numbers early in the quarter and the trend has moved back into the positive neighborhoods. So thanks, Chuck.

Chuck Cerankosky — Northcoast Research — Analyst

And then on the increase in working capital dollars spent during the quarter, there’s a lot of that simply reflect inflation or are you — is Kroger in fact getting more aggressive on — on forward buying or just trying to grab stuff when it’s available?

Gary Millerchip — Senior Vice President and Chief Financial Officer

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

W. Rodney McMullen — Chairman and Chief Executive Officer

Thanks, Chuck, and thank you, Gary.

Chuck Cerankosky — Northcoast Research — Analyst

Thank you.

W. Rodney McMullen — Chairman and Chief Executive Officer

Thank you for — to everyone for joining us today. I am incredibly proud of the way we are beginning 2022 with a continued focus on our Leading With Fresh and Accelerating With Digital Strategy. As always, I’d like to share a few comments with our associates listening in. First, obviously, thank you. The past several years have been challenging and weighed on all of us differently. While each of us react in a unique way, no one should have to struggle alone. That’s why we offer a variety of resources from in-person and virtual counseling sessions through our well-being assistant, to tools to help leaders of others foster supportive environment.

I would encourage each of us to take time to ensure we have the support systems we need in place and if we don’t, please ask for help. We are all our best advocates and know what truly we need. Thank you for everything you do for each other. Thank you for what you do for our customers every day and thank you for what you do for our communities every day. I’m inspired every single day of the week by your amazing work that you do. Thanks again for joining us today. And that concludes our first quarter earnings call.

Operator

[Operator Closing Remarks]

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