The Kroger Co.
Q3 2020 Earnings Call Transcript

Published: 3 Dec 2020

[Operator:]

Good morning, and welcome to The Kroger Company Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Rebekah Manis, Director of Investor Relations. Please go ahead.

[Rebekah Manis:]

Thank you, Gary. Good morning, and thank you for joining us. 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.

[William McMullen:]

Thank you, Rebekah. Good morning, everyone, and thank you for joining us. With me, today to review Kroger's third quarter 2020 results is Chief Financial Officer, Gary Millerchip. When restrictions were set in place to address the spread of COVID-19 in mid-March, many underestimated the length of time that it would last, and the number of families and communities that would be impacted. Many of the stories from the last nine months have been upsetting to say the least. Out of this grief, we’ve also seen the best parts of human nature. From our store teams to our warehouse associates and drivers and our digital teams, plants and offices, our Kroger family of associates have been nothing short of incredible during this period. I am proud of our dedicated associates, who have continued to diligently execute our Restock Kroger transformation, while serving our customers when they need us most. We delivered strong results in the third quarter. Customers are at the center of everything we do and sales remain elevated and we continue to grow market share, as we enhance our competitive moats, Fresh, Our Brands, Data & Personalization and Seamless. I want to highlight that Kroger's digital sales are incrementally profitable today, partly supported by our rapidly growing digital media business, and partially fueled by our constant improvement in operational efficiency. This is true as the incremental pass-through rate of sales, and we have a clear path to continue improving digital profitability. Gary will touch on this more in a few minutes, but I wanted to call this out as well because it demonstrates the strength of not only our seamless offering, but the overall Kroger ecosystem and how the components parts fit together to deliver value to our customers and our shareholders. We are more certain than ever that the strategic choices and investments made over the last three years have positioned us to meet the moment. And as a result of our strong performance and consistent market share gains, we are raising our guidance for the remainder of the year. We are also positioned to deliver beyond 2020 for our customers, associates and shareholders, as we believe a number of the impacts of COVID-19 will be structural and lasting. As a result of the pandemic, we continue to see increased basket sizes and fewer customer visits.

[Gary Millerchip:]

Thanks, Rodney, and good morning, everyone. The Kroger team delivered strong results in the third quarter and provided a further proof point of the value creation model we shared at our Investor Day last year. We grew market share, and consistent with our value creation model, we are disciplined in balancing significant investments in our customers and our associates with improved productivity and accelerated growth in our alternative profit businesses. The investments we are making in our business are allowing us to deliver strong results today, and importantly are also setting us up to deliver sustained growth in the future. I will now provide more color on our third quarter results. We delivered an adjusted EPS of $0.71 per diluted share, up 51% compared to the same quarter last year. Kroger reported identical sales without fuel of 10.9% during the third quarter and continued to gain market share.

[William McMullen:]

Thank you, Gary. We are executing against our strategy, even during the pandemic, and continue to grow market share. The strong underlying momentum in our core supermarket business and acceleration in the growth of our alternative profit business demonstrates that we are successfully transforming our business model to deliver consistently strong and attractive total shareholder return in 2020 and beyond. Now, we look forward to your questions.

[Operator:]

We will now begin the question-and-answer session. Our first question is from Simeon Gutman with Morgan Stanley. Please go ahead.

[Simeon Gutman:]

Hey. Good morning. Thanks, everyone. I wanted to ask around e-commerce. It doesn't look like it's getting an explicit call out as a headwind, even though it's sort of doubled in terms of sales. So can I ask you where it's showing up in the P&L? And then a bigger question, presumably sales will normalize a bit in 2021, but we think or I don't know if you think digital will still be elevated, so how does that manifest itself in the P&L for next year? Thanks.

[William McMullen:]

Yes. Thanks, Simeon, for the question. If you look at e-commerce, as Gary and I both mentioned, incrementally, it is profitable this quarter on the incremental growth and it was driven by the continued improvement in reducing the cost to serve our digital customer and the incremental growth in media. And as both of us mentioned, we would expect to continue to make progress on both of those fronts. As you look to 2021, we expect – obviously, the digital growth won't be as much as it was in 2020, but we would expect for the customer to continue to expect in one digital service. But the thing that to me is inspiring and great to see is customers that are digital shoppers, generally still continue to come into the store to use it and to have an in-store experience when they want to. And that customer basically spends double what they spend, if they don't. So we really like the overall seamless omni-channel experience that we're delivering and creating for the customer. And we would expect as we continue going forward, that will continue to make progress on the profitability of that digital shopper. And then obviously, once you get past the start-up costs of Ocado and some of the micro fulfillment centers, things like that, that is significantly even lower cost than serving the customer in the store. So when we really look at all the pieces together, we love the progress we are making and we are excited about the continued progress we expect to make. Everything we can see, we think that pandemic has accelerated growth or transition to digital probably by three years or so. It wouldn't surprise me if it dropped off a smidgen, but I think it will continue to grow from that because it is a long-term trend, where customer really expects to be able to get something in-store pickup or delivery, and they expect to be able to bounce back and forth based on what's easy for them. I don't know, Gary, anything you want to add?

[Gary Millerchip:]

Well, I’d agree completely, Rodney, with your overall comments. Maybe a couple of specifics, I mean into 2020 and 2021, just to build on some of Rodney's comments. First of all, as you think about 2020, we talked about the pass-through rates, obviously being lower on digital although being incrementally positive. So the way we show up in our P&L is where typically on the sales growth that we're seeing this year, we might have normally seen a pass-through rate of north of 15% on our traditional brick-and-mortar sale. The blended rate between digital and store having in the COVID cost maybe coming in around 10% versus that 15% or higher for the combination of lower pass-through rate on digital and the incremental COVID cost would be bringing down that overall blended rate. Interesting, though, on a specific example, as you know, we took away the fee on a promotional basis during the quarter, so that would be a headwind to gross margin. But actually, the value that we're creating through media revenue is really offsetting that. So we've been able to invest in the customer, while still be able to replace that revenue by offering personalized digital communications to customers that drive new revenue streams to offset that promotional activity. As you think about 2021, just one sort of – I guess an unusual phenomenon, just I think through it, the more improvements we make now on our digital business as we are continuing to improve digital profitability, so as we take cost out of the cost to fill an order as we grow the average order value through personalization, as we grow media revenue. Those tailwinds will be – if we achieve them in Q3 this year, we'll get the full benefit on the whole volume next year. So actually on the same level of business, digital would be a tailwind in next year's financial model. Now obviously, as digital continues to grow, it will create some additional investment next year. But on the base level of business that we're generating in 2020, as you create the full benefit from those cost savings from media revenue, it will become a tailwind on that base level business next year in terms of improving the profitability of digital.

[Simeon Gutman:]

Thanks, Gary. Maybe just one follow-up. And I think Rodney mentioned also micro-fulfillment will help over time. Just to clarify, the pickup that you're doing for click-and-collect or pickup orders, all the pickup is being done by in-house employees, and I think that's pressuring the SG&A line. The Instacart and the third-party partnerships, where does that show up in the P&L? Do any of your employees actually pick for Instacart? And then big picture, the economics with some of these third parties, I guess where does the pricing power – is their pricing power with you – with some of those partners? And thank you very much.

[Gary Millerchip:]

Yes. Simeon, you'll be correct in the way in which our core pickup business which show up in our P&L as a lower pass-through rate is the labor associated with picking the product in the stores. That's what drives the mid single-digit pass-through rate versus the sort of high-teen rate, if you like our traditional brick-and-mortar sale. We have a fairly unique model I think with Instacart. They are our predominant partner, and we do use other partners as well in terms of delivery. So part of our business of Instacart is still delivered through the Kroger ecosystem, so the customer would come onto kroger.com or the Kroger app and would order a grocery delivery. Instacart will pick that product for us, but we're managing it through the Kroger ecosystem. So a significant part of our volume would flow through there and then, of course, we're compensating Instacart or another third party for that service. And that would also appear in OG&A, so that would be a similar area of the P&L. The part of the business where Instacart is using their own digital assets and the customers going through the digital ecosystem of Instacart, that would flow through more as a traditional sale and wouldn't have the same level of impact on the P&L. We are a big partner of Instacart, and obviously, we work very closely with them to make sure we're maximizing the efficiency of the model and continue to work on where we can improve the pass-through profitability and all those modalities.

[William McMullen:]

Yes. And we would look constantly at people to partner with to help accelerate our experiences for our customers. So the example Gary gave is just one of many different partners and some are larger companies, some are smaller companies, but it's really how do we make sure we get delivered for the customer the way they want to be delivered for them.

[Operator:]

The next question is from Rupesh Parikh with Oppenheimer. Please go ahead.

[Erica Eiler:]

Good morning. This is actually Erica Eiler on for Rupesh. Thanks for taking our questions. So I'm not sure how much color you can provide here, but we're trying to assess what benefits you've seen on the gross margin line in recent quarters that might go away in 2021. So as we look towards next year with the potential for some of the recent grocery boom to reverse, should we be thinking about greater gross margin pressure than a typical year as the benefits from that sales leverage reverses? And is there anything positive or negative you can call out for us next year on the gross margin line as we think about comparisons in 2021 in general?

[Gary Millerchip:]

Yes. Thanks for the question, Erica. We wouldn't at this point get into specifics around 2021 detailed guidance, as we plan to share more color on our overall outlook for next year at our Investor Day in March and through our Q4 update when we get to that. What I would say in general terms, I think it's important to remember that as we talk about the investments that we are making in gross margin today, many of those are in areas that matter most of the customer around personalized promotions and value offers that really resonate with the customer in the areas that we believe will drive loyalty long-term are in the most important categories for the customer around fresh because that's what primarily drives their decision to shop with a food retailer. We continue to invest in advertising to grow our marketing effectiveness and share of voice. So these are the kind of investments that we've been making this year because everything we see in our data and insights says that to ensure that we come out of the end of the COVID environment in a stronger position to be maintained and winning market share. We believe those investments that we are making are critical to that and they are creating increased separation from some of our traditional peers as we come towards that – lapsing that time period with COVID. And many of those investments on sort of everyday low prices, so I wouldn't necessarily think of all of them is having to be incremental in 2021 versus 2020 because as we cycle those, we will obviously be layering on new promotions next year. But they are new and it's not one on top of the other. It's the new calendar of investments that we make. So I wouldn't necessarily think of the investments that we are making having to be dramatically different. There are certainly going to be some unique factors in the model next year when you start to see deleveraging some of the sales measures that they create some headwinds in the model that you cycle, but with the continued improvements that we are driving and sourcing, the continued improvements that we expect to drive within media revenue, with alternative profits which were into gross margin. We still feel very good about the balanced model that we shared with you and the investment community around continuing to be able to balance investments with growing customer loyalty and driving overall earnings growth.

[William McMullen:]

Gary just briefly mentioned it and we'll get into more detail in March. But when you look at overall, we do see meaningful opportunities to continue through process change and take cost out both in goods, not for resale, cost of goods and operating cost itself. And we will get into more detail in March. Gary mentioned this year we're on track to take over $1 billion out, and we still see opportunity in 2021 to take additional costs out, while not affecting the customers' experience.

[Erica Eiler:]

Okay. Great. That's helpful. And then just – I mean given some recent industry developments on the online pharmacy side, can you just remind us where Kroger is at right now with its effort on our online pharmacy side? What opportunities do you see going forward here? And also just curious what you are seeing from the consumer adoption of your existing offerings?

[William McMullen:]

Yes. As I mentioned in the prepared remarks, pharmacy customer typically spends three times more in our stores. And the pharmacy customer for us, we've been working hard – our whole team by treating food as medicine, and we're increasingly learning how to help customers eat healthier and live healthier. And for us, it's really the two working together is how we help customers stay healthy. If you look at some of the different cards in terms of discount offerings, those are things that we've been offering for several years. We have partnerships with GoodRx as an example, and then others. And for us, we think it's part of the overall ecosystem. We really like the fact that we're able to help customers eat healthier and high-end food. And it appears that about half of healthcare costs are driven by the way people eat, and we're helping people eat healthier. And it's a partnership that we think will work well. And one of the things that we find is customers still appreciate – they appreciate online at times, delivery at times, but they also really appreciate having a healthcare professional that they can talk to one-on-one to answer their questions. And that's what we are able to offer either in person or on telehealth.

[Erica Eiler:]

Okay. Great. Thank you, and happy holidays.

[William McMullen:]

Thanks, Erica. You too.

[Gary Millerchip:]

You too.

[Operator:]

The next question is from Ken Goldman with JPMorgan. Please go ahead.

[Kenneth Goldman:]

Hi. Good morning. Thank you.

[William McMullen:]

Good morning.

[Kenneth Goldman:]

There is a decent amount of inflation up the supply chain from you – everything from corn to freight. Your net pricing, I think it's safe to say, it's already risen thanks to reduced discounting, even if maybe you didn't pull back as much as your peers did. But I'm curious to what extent some of your vendors are asking you now to accept list price increases on their end because of inflation, and what your appetite is to take these increases and pass them on to consumers, especially as we think about the next few months? And I get right, you want to be competitive on price, but an argument can be made you do have a chance to push some prices higher in a low elasticity environment too. So I'm just curious for your thoughts there.

[William McMullen:]

When you look at – I'll let Gary get into some of the details. But when you look at overall, a little bit of inflation always a little easier. And we don't think we have a little inflation, but as you know, we've built a business model that is strong whether inflation is higher or low or anything in between. If you look in the third quarter, inflation was a little bit lower in the third quarter than the second quarter, and that was primarily driven in the meat commodity, which was consistent with what we expected. You're going to always work with CPGs initially to try to find ways to take costs out of the system, so that our customers don't have to have inflation. And it's something that every CPG that partnership is a different approach in terms of trying to figure out a way to minimize the impact on customers. Gary, anything that you want to add or some of the specifics on Ken's question?

[Gary Millerchip:]

Sure. Thanks, Rodney. Ken, I would say that overall, we are seeing – as Rodney mentioned that you probably heard us say before we build our model based on sort of 0.5% to 1% inflation aligned with Rodney's initial comment. We've been seeing inflation running more in the sort of 2% range I would say and slightly up or down as Rodney mentioned, but generally speaking in that kind of range. From our perspective, it's obviously hard to predict exactly where inflation goes. We don't see anything in the overall supply chain when you think about food in the system that would cause – dramatically different. But there are also risks obviously with COVID and what happened in the first quarter around meat that Rodney also mentioned a moment ago, and there are certainly some produce categories that because of the season has had some supply shortages too, but nothing that I would say that will take us dramatically today as we look forward outside of that sort of 2% give or take range. I think from our perspective, as Rodney said, we always look for ways to mitigate that where we can, where it's justified and makes sense, then of course, we look at how would that be passed on to the customer. And really we try and disconnect between inflation and what makes sense to pass on, and then our pricing investments, which are more focused on where do we believe customer is looking for the most value and what's going to drive long-term loyalty. So, we really try and make sure that if it makes sense to pass, then we'll do that. But we're always looking to identify ways in which we can really connect more deep with the customer and build loyalty at the same time.

[Kenneth Goldman:]

That's helpful. Thank you. For my quick follow-up, we are hearing some indications and seeing some indications of consumers’ pantry loading a little bit over the last couple of weeks as COVID has unfortunately worsened. Can you help us with what you're seeing there and maybe what that means for the quarter-to-date trends so far in terms of your numbers?

[William McMullen:]

Ken, you said a word, and Todd is trying to help me understand -- pantry load. We did put in limits on certain categories early in the quarter, and that was really the reason we did that was because of learnings from early. And we’re, as we mentioned, seeing people shop fewer times, they're buying more when they shop. The other thing, the holidays, obviously, on Christmas time will tell, but the New Year's. But people obviously, celebrated the holidays in much smaller family gatherings than what they would in the past year. So it's a little of all the above that's going on. And one of the things that our supply chain team did was go and get access to additional warehouse space and then our procurement, we are able to buy some of the hard to find inventory, so that we will be there for our customers. So I would say overall, it's pretty limited. It's a little stronger in the West than the Midwest, just because of – where different parts of the country are with COVID in their approach to COVID. But overall, not as much as what we saw early in the year, but some.

[Gary Millerchip:]

Ken, the only thing I would add to the second part of your question. So when you look at the cadence of sales last quarter, I would say relatively consistent throughout the quarter, give or take at the same within the – where we landed at the 10.9% as Rodney mentioned, we certainly saw some variability by West versus Midwest, and West being more elevated, I think because of some of the restrictions that were in place. As we look at the trends in the current quarter, it would be very similar quarter-to-date in Q4 versus where we ended in Q3. What would be interesting there would be though as Rodney alluded to this was in the first couple of weeks of the quarter, we have seen more of that elevated spend in the week of Thanksgiving, while in any normal environment, that week would have been an outstanding week. It wouldn't have been at the same level as sort of a COVID typical week that we've seen. And so the blend of those three weeks get you to looking very similar to where we were in Q3. And I think to Rodney's point, one of the things – reason that we left the guidance range out there is clearly, we're expecting continued tailwind from executing our strategy. We're seeing COVID trends continuing food at home, but understanding how exactly the holidays play out when you've got two more holidays a bit like Thanksgiving with Christmas and New Year still to come. And then Super Bowl actually fall into our fiscal year – this year, where it did in the fiscal Q4 last year. And that has a fairly significant impact on sales as well. So how our customers spend holiday gatherings and how big their basket sizes are and how that behavior plays out is still something that will be I think interesting to see and evolve over the coming weeks and months.

[Kenneth Goldman:]

That makes sense. Thanks so much.

[William McMullen:]

Thank you.

[Operator:]

The next question is from Michael Lasser with UBS. Please go ahead.

[Mark Carden:]

Good morning. It's Mark Carden on for Michael today. Thanks a lot for taking the questions. So you noted that you're continuing to take market share. So I mean this is relative to other retailers, where do you think it's coming from? Is it largely from small traditional players, mass merchants, another channel? A little more color here would be helpful. Thanks.

[William McMullen:]

Yes. As you know, we never really look at market share in terms of where it's coming from and we do everything we can to expand the market and then how are we doing within that market. So we think the market share is pretty broad-based. We're getting it by our existing customer spending more with us. Some of that is driven by our digital offerings in the seamless – of the digital offer. Some of it's driven because we are getting new customers into our ecosystem, both digitally and in-store. So it's really very broad-based in terms of where it's coming from.

[Mark Carden:]

Okay. And then as a follow-up, any update on the Walgreens initiative, and whether you're looking to accelerate expansion there? Thanks.

[William McMullen:]

I would say, we continue to learn. We really aren't yet in a position where we would decide whether to expand or whatever. It continues – the customers react positively, but we are continuing to learn how to better and deeper connect with the customers. So happy, but still early on.

[Mark Carden:]

Great. Thank you very much.

[William McMullen:]

Thanks, Mark.

[Operator:]

The next question is from Greg Badishkanian with Wolfe Research. Please go ahead.

[Spencer Hanus:]

Good morning. This is Spencer Hanus on for Greg. My first question is, can you talk about how you think price investments are driving share shifts in this operating environment today? And are you seeing promotions becoming more important say than they were three or six months ago? And sort of how you're thinking about that as we head into 2021? Thanks.

[William McMullen:]

Yes. If you look overall and I'll let Gary to get into a more of – some of the specifics. We think it's important. Obviously, there are some customers whose financial situation continues to be very strong and growing. But there's other customers that their financial situation has been more pressed, especially as they've been affected in COVID in different ways on losing jobs and things like that. We just believe when you look at long-term, that it's important for customers to understand we did not take advantage of them during COVID. And we continue to invest both in everyday pricing and promotional pricing. And as Gary mentioned like waiving fees for pickup, things like that to try to help customer's budget to go further because we think it's one of those things where the customer is going to appreciate everything that we've done during COVID when we get out of COVID. The other thing, and I mentioned it in my prepared remarks that I'm so proud of the Kroger team, is if you look at we continue to make good progress on our fresh dimensions – our friendly dimensions relative to our competitors. And when you look at all those things together between a seamless experience where a customer can go online, in-store, incredible fresh experience that's better than they can get with our competition and with great pricing and incredible promotions, we just really see no reason that customers would shop anywhere else.

[Gary Millerchip:]

Yes. I think you covered it well, Rodney. The only point I would add and you said it a moment ago. But as we look at the data over a longer period of time and obviously, none of those have been through something like a pandemic like this before, what we look at periods where customers go through different economic conditions and different environments, whether that be through short-term natural disasters that we manage or through a longer-term economic cycle. And in our learnings over time, rather it's really important to stay true to your values and it's really important to continue to deliver what the customer expects consistently because over the longer term, it really does show through. And we think that's going to be very important to deliver on that expectation, if we have to come out of COVID stronger.

[Spencer Hanus:]

Great. That's really helpful. And then switching to online, can you just give us an update on the basket size for online orders and how that compares to in-store orders? And would you expect that gap to widen over time? And then, just an update on the incrementality, how incremental are online orders today? Thank you.

[William McMullen:]

Yes. If you look at the basket size, it's significantly higher. Over time, I've always assumed that it will get smaller as the customer gets more comfortable with shopping multiple channels. But I would say take 10 of us for average – our average guess together and that will probably be the closest. Gary, you want to answer the last?

[Gary Millerchip:]

Yes. I would say, on incrementality, we're seeing – as I mentioned some of this in my prepared remarks, but we're seeing very similar consistent patterns and incrementality, would still be north of 50% in terms of when we look at what customers are buying when they engage with us digitally and then we look over a longer period of time and look at the categories and the products that we're buying from us before engaging in digital. And you combine the total purchasing behavior between store and digital for that customer, we're seeing new categories and new products and that is on the basket that Rodney mentioned are significantly higher, north of 50% of that basket is incremental when we look at the customers' shopping behavior for a longer period of time.

[Spencer Hanus:]

Great. Thank you.

[William McMullen:]

Thanks.

[Operator:]

The next question is from Karen Short with Barclays. Please go ahead.

[Renato Basanta:]

Hi. This is Renato Basanta on for Karen. Thanks for taking my question. So I wanted to follow up on next year at a pretty high level with respect to how you're thinking about the P&L. And appreciating sort of some of the color you've given already. If IDs are down mid single-digits next year, our math implies something like 200 basis points of margin deleverage. I mean you presumably lose some COVID costs and you have some cost savings flowing through. But I'm not totally sure that the – that makes up for the deleverage. So just wondering if you could help us think about the P&L in that scenario, specifically what sticks in terms of COVID cost next year, and then any color on any other P&L levers you have to pull? Thank you.

[Gary Millerchip:]

Yes, sure. Thanks for the question. And I think overall, we think about – I wouldn't get into specifics on the sales numbers because we're going to talk about those as we mentioned in our Investor Day. But we do believe when we look at customer behavior and how it's changing and some of the structural changes we're seeing and when we look at in previous economic downturns, which we think there'll still be, as Rodney mentioned, some customers that are going to continue to feel the economic impact of COVID for some time to come, that we would expect our two-year stack sales to be above the traditional level that our model is built on because of how we're connecting with customers, how we're growing market share and some of those external factors. As you think specifically around the puts and takes in the model for next year, the areas where I think it would be important to be thinking about, and we'll be sharing more again in March when we provide that additional color, we would be expecting a significant amount of non-recurring costs into next year if you think about things like rewards and incentive plans paying out based on performance in the business, if you think about some of the one-time costs we would have incurred in the early part of COVID. Even if you look at the run rate cost that we're incurring now versus the earlier part of the year, they would be significantly lower as we've optimized our plans and adjusted. And by the back half of the year, I'm sure we're all hoping that if a vaccine will be in place, it starts to change the environment somewhat as well. So we would absolutely expect certain costs not to flow through into next year. We would expect all profit to continue to be growing, I mean, that's not a business area where we expect to see a slowdown in momentum. We continue to see a tremendous opportunity for growth. As you know, we shared, I think, through Restock Kroger on cost savings, we'll deliver $1 billion this year. We delivered $1 billion in 2019 and 2018. They're all incremental on top of each other. And we wouldn't expect that to the end of the story on cost savings either, so we would be expecting to share additional plans in next year for how we're going to drive continued cost out of the business. And in the health and wellness space, as Rodney mentioned that COVID vaccine is certainly an opportunity. But even just more broadly, the pharmacy business, while we continue to grow our business successfully, it is definitely had some impacts of customers visiting the doctor less frequently and therefore new scripts being added as would be a headwind versus what potentially becomes a tailwind next year. To your point that we would still expect and contemplate some COVID cost to carry over into next year. We would expect to be continuing to invest in the business as we always do to drive loyalty and drive long-term market share gains. And we will think fuel will be a headwind likely next year too, just because of some of the unique circumstances in Q1 this year when you think about the Russia, Saudi Arabia incident that caused prices to get completely in our position that drove margins at a level that unlikely to repeat. So I think there's a lot of moving parts in next year, and that's why we think it's important that we provide you with a much fuller picture in March when we feel like we've got clarity on what the full picture looks like for next year. But overall, we feel very confident in our ability to, on a two-year basis, see earnings per share growth on a compounded rate and ID sales growth where to be headed where we would have expected in our TSR model that we shared in November last year.

[Renato Basanta:]

Okay, that's a great color. And then, just wanted to get your perspective with respect to labor costs. You mentioned your all-in average wages, but can you give some color on what your actual entry-level wages and how many associates are actually at that level? And presumably, the federal minimum wage could go to $15 an hour, so wondering how you're thinking about managing that possibility for next year? Thanks so much.

[William McMullen:]

Yes. We have very few of our associates at minimum wage, and about 90% of those are younger than 18 years old or 18 years and younger. So it's people who it is their first job. And as you know, we have a ton of people that come to work for us as a job and then make it a career. And we want to make sure that we're providing great career opportunities for people's income to continue to improve. Whatever the federal minimum wage is, we're comfortable with that. We don't take a position on that because as long as our competitors have the same cost as we do, we're very comfortable on operating on an even ground. It's always not good when we have a cost they don't have. So we don't take a position on federal minimum wage and we view that that's the politicians' responsibility. As I mentioned and as you know, as part of Restock Kroger, we originally included $500 million for incremental pay increases. And so far, we've actually done $800 million of incremental pay increases for our associates in addition to providing great benefits for paid time off, sick, vacation and other things.

[Renato Basanta:]

Great. Thank you.

[William McMullen:]

Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Rodney McMullen for any closing remarks.

[William McMullen:]

Thank you for your questions today. I wish all of you and your friends and family happy holidays, Merry Christmas, and a happy New Year, and encourage you to stay safe. At Kroger, our purpose is to feed the human spirit, which means that we are called to do more and help make the lives of those around us better. When we see our associates, customers and neighbors affected by systematic racism, discrimination and injustice, we are called to speak out and act in accordance with our values. Over the past several months, we've listened closely to our half a million associates and countless communities across the nation to learn what we can do better to accelerate and promote greater change and equity in our workplace and the communities we serve. We recently shared our Framework for Action

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.