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Kroger Co. (NYSE:KR)
Q1 2018 Earnings Conference Call
June 21, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to The Kroger Company First Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Rebekah Manis, Director of Investor Relations. Please go ahead.

Rebekah Manis -- Director, Investor Relations

Thank you, Laura. 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. 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, that Kroger assumes no obligation to update that information.

Both our first quarter press release and our prepared remarks from this conference call will be available on our website at ir.kroger.com. After our prepared remarks, we look forward to taking your questions.

In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question, if necessary. Thank you.

I will now turn the call over to Kroger's Chairman and Chief Executive Officer, Rodney McMullen.

W Rodney McMullen  -- Chairman & Chief Executive Officer

Thank you, Rebekah, and congratulations on your recent promotion to Director of Internal Relations. Mike and I really look forward to working with you in your new role, on a closer basis. Good morning, everyone, and thank you for joining us. With me to review Kroger's first quarter 2018 results, is Executive Vice President and Chief Financial Officer, Mike Schlotman.

Restock Kroger is off to a great start. I'm especially proud of our team's execution of process changes that led to strong cost controls. We are committed to knowing and serving our customers so well that Kroger serves all of their shopping needs. Our most fundamental strategy remains unchanged. As customers' tastes change and their shopping habits evolve, we will be there for them. That means we will make the investments needed to provide our customers with the best, full service grocery experience in America.

Plus, we are investing in our associates more than ever before and seeing improvements in retention. We are creating a seamless environment where our customers can choose how to engage with us, both in store and online. We are actively improving the store experience. Our space optimization work is ahead of schedule and our brands achieved another period of record growth, while at the same time growing our digital sales by more than 66% in the first quarter, which was due to our ongoing expansion of ClickList, our delivery initiatives, and identical growth.

Our first quarter results enabled us to raise the low end of our EPS guidance for the year, while also setting us up well to deliver on our identical sales target range for 2018. As you know, Restock Kroger is our three-year plan to create shareholder value by redefining how America eats. We are making progress in each of the four main drivers -- redefine the grocer customer experience, partner for customer value, develop talent, and live our purpose.

Using our deep insights and experience, Kroger is imagining the future of retail by building on our core business plus adding exciting and innovative partnerships, like Ocado, and our planned merger with Home Chef. We believe the future of retail will include both physical and digital customer experiences. Everything we are doing today will enhance our ability to provide everyone in America with convenience of shopping for anything, any time, anywhere.

We are incredibly excited that it is Kroger who is bring Ocado's technology to the US for the first time. The platform includes online ordering, automated fulfillment, and home delivery capabilities. So, it's a perfect fit with our vision and strategy. We look forward to innovating together with Ocado to enhance Kroger's digital and robotics capabilities, and we are already working to identify the first three sites for development of the new automated warehouse facilities in the US, to deploy Ocado's proprietary technology and distribution expertise.

Customers want convenience, simplicity, and personalized food experience. Our planned merger with Home Chef will accelerate our ability to deliver exactly this. There is a lot that we admire about Home Chef -- their creativity and entrepreneurial energy, and their use of data to connect with customers, to name just a few. We believe that, by taking over Kroger's meal solutions portfolio, Home Chef will bring out customers even more innovation and delicious offerings so customers can be the hero at mealtime. Pat and his team at Home Chef will be able to leverage Kroger assets, both our physical stores and data, to drive their business even more. By joining forces, we can grow bigger together than either of us could have done alone.

We continue to execute our digital strategy through our core business as well. As I've said before, the households that participate in our seamless offerings -- those who engage with our digital platforms and our physical stores -- spend more per week than households that do not. And households that purchase from us online spend even more. We've aggressively grown our existing seamless coverage to reach approximately 75% of our customers. This includes our network of ClickList locations, stores offering home delivery through InstaCart and other partners, as well as ship to home capabilities. Our goal is to reach 100% of our customers with the seamless experience and, over time, to reach all across America.

All the changes we are making to transform our business will make it even easier for families to share meals together. This business strategy enables us to live our Kroger purpose because we know that families that share meals together have a better relationship. And, if they have children, they do better in all aspects of their life.

Our brands are another example of how we're redefining the grocery customer experience. Kroger customers choose to put more of our brands in their baskets and pantries every day. Our brands grew faster than the national brands in nearly every department and gained significant share overall. In the first quarter, our brands made up 28.7% of unit sales and 26.7% of sales dollars. In fact, our brand set the record for the highest ever retail dollar share in our history. Our brands achieved a 5.1% sales growth and a 3.4% unit growth in the first quarter, led by double-digit growth again in our popular Simple Truth and Simple Truth Organic lines.

Last quarter, we said that the Federal Tax Cuts and Jobs Act would enable us to accelerate investments in Restock Kroger. This is possible because we are taking a balanced approach to how we're spending and investing the benefits. It's distributed evenly between our associates, our customers, and our shareholders. This approach is in line with Kroger's purpose and is helping us make strategic investments and develop talent.

We are investing more than ever before in our associate experience. It all starts with the half a billion dollar investment in wages for many store associates that are part of Restock Kroger. We're also increasing the company's 401 (sic) contribution match to help associates retire with more money in their pockets, plus expanding associate discounts to keep more money in their pockets today.

The one piece I'm most excited about is Feed Your Future. Our new offer of up to $3,500 in annual tuition assistance to any associate who wants to attend classes to build a better future for themselves. Whether they're interested in completing a GED or an undergraduate degree, an MBA or a professional certification, associates can take advantage of up to $21,000 in total assistance as long as they've been with us for at least six months. That's whether they are full-time or part-time employees.

As someone who got their start stocking shelves on the night shift in Lexington, Kentucky for Kroger in 1978, I can attest to education's lifechanging power. I worked my way through college and, upon graduation, I was so proud to accept a full-time job with Kroger. The incredible learning experiences and work that makes a difference in people's daily lives has kept me here ever since.

Kroger has always been a place where people can come for a job and stay for a career. We believe that making education benefits available to more associates, and at more generous levels than ever before, is the best way to support their career in their future professional growth. As part of Restock Kroger, we fully expect these investments will have an ROI that will create shareholder value.

We are in the process of transforming our business so that in the future we can connect with customers in ways that add more ease and convenience to their lives. To do this, and to do it profitably, we must have an economic model that supports this transformation. Kroger is better positioned than anyone to make this transformation because we have a set of unique and differentiating strengths. Kroger has more data than any of our competitors, which leads us to deep customer knowledge and unperilled (sic) personalization.

We have incredibly convenient locations and platforms for pickup and delivery within one to two miles of our customers. We have a leadership team that combines broad experience with creativity and diversity of thought. We have the scale to win with more than 60 million households shopping with us annually. We connect personally with our associates, customers, and communities to uplift and improve lives. We have a proven track record of consistently returning capital to shareholders through an increasing dividend and share buyback program.

Because of these strengths, we are on track to generate the free cash flow and incremental FIFO operating profit we committed to in Restock Kroger. We are confident in our ability to deliver on both our plan for the year and our long-term vision to serve America through food inspiration and uplift.

Now, here is Mike to share more details on our first quarter and update you on our guidance for 2018. Mike?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

Thanks, Rodney, and good morning, everyone. We're very pleased with our first quarter ID sales and earnings results. We did slightly better than our internal expectations. We completed the sale of our convenience stores business unit and, as Rodney said, we had one of the best cost control quarters in a long time due to implementing process changes. This is important because, over the next three years, Restock Kroger will be fueled by cost savings that we will invest in associates, customers, and our infrastructure. Our goal is to continue generating shareholder value even as we make these strategic investments to grow our business.

We expect Restock Kroger to generate $6.5 billion of free cash flow over the next three years. This is before dividends and considers the benefit of the tax plan. We've already reprioritized the way we will invest capital over the next three years by both reducing the amount we spend and optimizing our capital allocation process. We now look first for sales driving and cost savings opportunities across both brick-and-mortar and digital platforms.

Second, we will continue to make sure our logistics and technology platforms keep pace with and scale to these demands through continued investment. Finally, we will allocate capital to storing activity. This process has allowed us to use less free cash flow for capital investments.

Our investment in Ocado is a great example of what's possible with our new approach to investing capital. We continue to aggressively manage OG&A costs and implement new programs to reduce our cost-of-goods sold. A big focus continues to be on store productivity and waste. Are teams controlled shrink well in the first quarter. We won't leave a penny on the table as we seek to reinvest savings to grow our business.

We plan to generate $400 million of incremental FIFO operating profit through 2020. We are taking advantage of the lower federal taxes under the Tax Cuts and Jobs Act to pull investments forward into 2018 so we can move even faster on Restock Kroger than originally anticipated.

Our pull forward investments in Restock Kroger began the last four weeks of the first quarter. While the incremental 401(k) contribution match investment was retroactive the first of the year, costs to support our new associate education program Feed Your Future have not begun in earnest. Our investments in wages will roll in as contracts are negotiated and the education payments will occur over time as associates take advantage of the opportunities to further their education.

We will make investments for the rest of the year to drive our strategy and keep prices low to retain our customers. As a reminder, since 2000, we've reduced process to our customers by over $4 billion. We intend to continue investing in price to drive unit and ID sales growth while delivering on bottom line for shareholders.

We manage our business every day to drive shareholder value. Our investments in Restock Kroger, in defining the grocery customer experience, partnering for customer value, and developing talent will be paid for by costs of goods savings, strong ID sales, and productivity gains. This is precisely where the incremental FIFO operating profit will come from over the next three years.

For ID sales, we're pleased with our result for the first quarter. Several departments outperformed the company in the first quarter, most notably meat, seafood, and our floral department. Natural Foods continued to generate strong double-digit growth in the first quarter. And, during the quarter, we saw growth in households and loyal households as well as unit growth.

As noted in our press release this morning, we reported identical supermarket sales without fuel of 1.4%. This result was aligned with our internal expectations for the quarter. When calculating identical sales to be more inclusive of all company business units, including Kroger Specialty Pharmacy and ship to home solutions, our ID sales without fuel were 1.9% in the first quarter. We intend to use this calculation going forward as it presents a comprehensive view of our performance as we redefine the grocery customer experience, and is therefore a more appropriate measure of our performance. We've also look at what others include in their ID calculations and have taken this step to be more consistent with how our peers report.

Our space optimization work is right on plan. We have about 30% of our planned 600 stores completed for 2018. Space optimization will continue to be a headwind to ID sales until late third quarter. By then, we will have more stores completed and maturing than in process or not yet started, which is why it'll start to be a benefit to sales later in the year.

Retail fuel performance during the quarter was good again. Our cents per gallon fuel margin was 18.7 cents compared to 17.1 cents in last year's first quarter. The average retail price of fuel was $2.65 versus $2.28 in the same quarter last year. This includes convenience stores for the period prior to the divestiture.

In April, we completed the sale of our convenience store business unit for $2.15 billion. After tax proceeds will total $1.7 billion. We are returning a significant amount of the capital to shareholders through our $1.2 billion accelerated share repurchase program and we used the balance of our after-tax proceeds to lower our net total debt to adjusted EBITDA ratio compared to the end of Fiscal 2017.

Kroger's net total debt to adjusted EBITDA ratio increased to 2.43 on a 52-week basis. Our net total debt to adjusted EBITDA ratio target range is 2.3-2.5X. We expect our net total debt to adjusted EBITDA ratio to increase throughout the year due to increased borrowings to fund our investment in Ocado, our planned merger with Home Chef, and tax payments related to the gain from the sale of our convenience store business unit.

Our financial strategy is to use our free cash flow to drive growth while also maintaining our current investment grade debt rating and returning capital to shareholders. We continually balance the use of cash flow to achieve these goals.

Over the last four quarters, we used cash to contribute an incremental $1.2 billion pre-tax to company sponsored pension plans and $467 million pre-tax to satisfy withdrawal obligations to the Central States Pension Fund, repurchase 110 million common shares for $2.7 billion, which includes $1.1 billion repurchased through the accelerated stock repurchase plan, pay $442 million in dividends, and invest $3 billion in capital.

At the end of the first quarter, we had approximately $546 million remaining under the March share repurchase authorization. Purchases under the ASR will be completed no later than July 6th. We're investing an incremental $500 million in our associates in wages, training, and development over the next three years through Restock Kroger. This will be in addition to our continued efforts to rebalance pay and benefits while also focusing on certifications, performance incentives, career opportunities, and training.

We have several major negotiations in 2018, including contracts with the UFCW for store associates at Smith's in Albuquerque, Fred Meyer in Portland, and Kroger stores in Richmond and Fort Wayne. Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and a compensation package to provide solid wages, good quality affordable healthcare, and retirement benefits for our associates. We continue to strive to make our overall benefit package relevant to today's associates.

Our financial results continue to be pressured by inefficient healthcare and pension costs, which some of our competitors do not face. We continue to communicate with our local unions and the international unions, which represent many of our associates, the importance of growing our business and profitably, which will help us create more jobs and career opportunities and enhance job security for our associates.

Turning now to guidance for 2018. We expect identical sales growth, excluding fuel, to range from 2-2.5% in 2018. This reflects our updated definition of identical sales and is supported by an expectation for identical supermarket sales that is the same as our original guidance for the year. To be clear, if we hadn't updated the ID sales definition, we would've confirmed our original guidance for the year this morning.

We have raised the low end of our net earnings guidance range to $3.64-3.79 per diluted share for 2018. The previous gap range was $3.59-3.79. On an adjusted basis, we raised the low end of our net earnings guidance range to $2.00-2.15 per diluted share compared to $1.95-2.15 previously.

We feel very good about the year. We planned for our first quarter to be our strongest EPS quarter, which creates a tailwind for the investments we plan the rest of the year. Our first quarter was a $0.10 outperformance over the consensus forecast, and it was also a little better than our internal expectations.

Looking at the consensus forecast for the remainder of the year, we believe the second and fourth quarters are a little high compared to our own expectations, and the third quarter looks reasonable. I'm taking the unusual step of commenting on this because, if you simply add the $0.10 to your forecasts for the year, that would put the consensus above the high side of our guidance range.

We're off to a great start to 2018 and are on pace to deliver our $2.00-2.15 net earnings per diluted share guidance range for the year. We continue to expect capital investments, excluding mergers, acquisitions, and the purchases of leased facilities, to be approximately $3 billion for 2018. And finally, we expect our 2018 tax rate to be approximately 22%.

And now, I'll turn it back to Rodney.

W Rodney McMullen  -- Chairman & Chief Executive Officer

Thanks, Mike. When we announced Restock Kroger, we talked about retailers needing to constantly reinvent themselves. It takes time to do this. We're now past the halfway point, and everything we're doing today is transforming our business for renewed growth. For 2018, we are a little ahead of where we thought we'd be. We're hitting our cost control targets due to process change, improving the associate experience, and innovating to create the future of retail. That innovation is both internal and external.

We are joining up with external partners like Ocado and Home Chef to create customer value while quickly expanding our seamless coverage area. We remain confident in our ability to deliver both on our plan for the year and to execute restock Kroger over the next three years, which will create shareholder value.

...

Now, we look forward to your questions.

Questions and Answers:

Operator

We will now begin the question and answer session. [Operator Instructions] Our first question will come from Michael Lasser of UBS.

Michael Lasser -- UBS Investment Bank -- Analyst

Good morning. Thanks for taking my question. Why is buy versus build the right decision for some of the recent actions you've taken, particularly in the home delivery market that is increasingly competitive and has relatively low barriers to entry?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

I'm not sure what you mean by buy versus build on the home delivery. With Home Chef and the meal kits, we do anticipate merging with them and they have a great process and home delivery business of those meal kits. But, they're also going to take over managing the in-store portion of that business. So, they'll get insight, not just to home delivery, but also delivering the meals to those customers in the brick and mortar environment. On other aspects of home delivery, we're actually creating partnerships, whether it's with InstaCart as we do today and areas, or as we further our relationship with Ocado and start building the sheds here in the US and have that be an avenue for home delivery as well. We think some of these partnerships and the phenomenal technology and proprietary information and processes that Ocado has will accelerate our ability to do those in the US.

W Rodney McMullen  -- Chairman & Chief Executive Officer

Yeah. One additional thing -- we're really looking at what's a blend of both and which one accelerates for us to be able to get it complete as fast as possible in an efficient way in making sure we maintain and grow on the relationship with the customer. It's really looking at partnerships and some things we continue to build on our own. If you look at our own ClickList business, we're growing. It's really a blend of both.

Michael Lasser -- UBS Investment Bank -- Analyst

That's helpful. On the guidance, can you give us a little bit more insight into some of the moving pieces? Have you changed what's imbedded for operating profit dollars for this year, particularly after -- it sounds like you're seeing more success with some of the process improvements and changes that are resulting in SG&A dollar savings. It's hard for us to tell given what's been provided.

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

I would say we haven't changed our view of where operating profit dollars would trend for the year. It would be a consistent view that we would expect overall, for 2018 to be a bit of an investment year. Our share count's a lot lower, which will help the earnings per share calculation. We are off to a great start for the year. I think we purposely, if you look at how we set this year up, made sure we had some of the savings in the bank from the process changes. We began the pull forward of investments in the business in the last several weeks of the quarter. So, you didn't see a lot of the effect from the investments we're going to make in price and other service elements in the store until very late in the quarter. Those will start to happen in the second quarter and throughout the rest of the year.

Michael Lasser -- UBS Investment Bank -- Analyst

Okay. Thank you so much.

Operator

The next question comes from Edward Kelly of Wells Fargo.

Edward Kelly -- Wells Fargo Securities, LLC -- Analyst

Hi, guys. Good morning. First, the comps and the outlook. Could you talk about the cadence of the IDs throughout the quarter and what you're seeing so far in Q2? Just as we think about the full year, you maintained your ID guidance, it does look like there's going to be less inflation probably than what we would have thought about a quarter ago. I guess it suggests that your outlook on tonnage is probably a bit better than what it's been. Just to get to that number, you need an improvement from here. So, just your thoughts on all of that would be helpful.

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

Sure, Ed. If you look at IDs, we're just barely below the guidance range, either the old definition or the new definition. We're only 10 basis points short of being inside our guidance range for the year. It's not a huge hill to climb to be inside that guidance range for the year. There are a lot of moving parts to ID sales out there. I would agree with you on inflation. There certainly isn't as much inflation. There is between 1-2% inflation in pharmacy. The rest of the business would probably be 0.5% to a little less than 0.5%. In some categories, it's actually deflationary, but it's a little bit all over the board.

When you think about, as we continue to execute our space optimization strategy, that certainly creates a headwind today. We think that headwind will continue to mitigate throughout the second quarter, it'll continue to be headwind. And, by the time we get to late third quarter, we would expect that to be a tailwind, which we think will help offset some of the headwind we create on our own on the retail cost deflation by the investments in prices we're making. I would say our expectations for ID sales this year were not really predicated on an inflation driven result. It was based on a unit driven result, just when you think about the fact we knew we were going to be creating headwinds early in the year with space optimization. And, now that we've done the first slug of the pull forward investments we plan to make at the end of this quarter, that will create a bit of the headwind in the near term as well.

In answering you question about where we are so far in the quarter, I think our expectations from the quarter would be that we would expect to be somewhere in the neighborhood of where we were in the first quarter. We would expect the second quarter to be comparable to that or slightly below it. But, keep in mind, we're probably at the peak of the headwind for space optimization today and we're right in the biggest portion of having made all of the pull forward price investments we made in the last four weeks of the quarter. All of those are converging right now.

We continue to be very happy with the unit growth we see and the response from our customers of what we see in reaction to the price investments. A lot of those are our brands, and you heard Rodney talk about our brand unit growth in the first quarter of over 5%. It's not only phenomenal product, it's a phenomenal result and even more value for our customers.

Edward Kelly -- Wells Fargo Securities, LLC—Analyst

Okay. On labor, labor negotiations, and structuring of contracts. Obviously, it does seem like you're approaching negotiations a little bit differently in trying to structure contracts that provide you with more flexibility within the store, particularly around who can do what. Can you give a little bit more color on what you're looking to accomplish there? As we think about the structure of those changes, how does that play into your ability to drive labor cost savings in the stores going forward?

W Rodney McMullen  -- Chairman & Chief Executive Officer

If you look at overall in terms of the approach, it's really contemporizing the way our associates are paid and understanding -- we have five generations in the work force, and having a pay design that connects with each one of those five generations. A big part of every negotiation is understanding the balance between healthcare and pension. We still have one of the generous healthcare and pension benefits in the industry. Some of our younger associates, that's not as important in making sure that we balance plan designs with wages. As you know, we've increased starting wages and a lot of the acceleration that's part of Restock Kroger was acceleration of starting wages. We are seeing improvements in retention.

You're always working on process changes to improve how the work flows and use direct reduced labor. We can reinvest that labor in better service. If you think about today, we're investing labor in ClickList and in some of the service departments. As our business continues to grow, it also creates more demand on people. Mike, anything you want to add to that?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

No, I absolutely agree. One of the exciting things we're seeing are the green shoots of investments in the opening wage and age for our associates and our ability to retain that associate for a longer period of time. If we can keep that associate for a full year, we're actually on the positive side of the investment because we haven't had to hire, train, and get a new associate up to speed. That costs us actually more than the $1.00 an hour wage investment for 2080 worked in a year. It winds up being very positive for our associates. They get more pay. It winds up being positive for our customers because you have a more experienced and recognizable work force as well.

W Rodney McMullen  -- Chairman & Chief Executive Officer

Yeah. You hear us talk a lot about opportunity culture. We find that, when people love people and love working with people and they love food, we're a beautiful place to come. People come here for a job, but as they spend time around people and they have the ability to understand how they impact people's lives every single day, they fall in love with it. That's when it becomes a career. The nice thing about us is, over 70% of our stores managers started out as hourly associates. It's a great place to come for a job and then make it a career.

Edward Kelly -- Wells Fargo Securities, LLC -- Analyst

What I was trying to get at -- I think part of the reason you're cost structure is higher is because there are different work rules in the stores relative to some of your nonunionized peers. Are those things you're able to address through restructuring of labor contracts? I think more recently you had done that in one of the contracts you'd talked about.

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

It's certainly a component in every negotiation we have, of getting wall-to-wall clerk status in those contracts. So, whatever task needs to be completed next, we can manage a work force that can do all the tasks inside of a store rather than need to have three or four different employees all ready to do the next task in each individual department. That was clearly a component of the Cincinnati negotiation that we completed most recently. It's not like flipping a switch for Cincinnati, where they immediately understand how to manage a work schedule with a clerk like that after many years of not having that type of a clerk. So, those savings continue to grow in the Cincinnati market. But, we strive to get that more and more added. It's an important component. We have to have fewer people because I can have one person work 15-16 hours a week instead of four people working a few hours in every department. [Crosstalk] number of hours worked.

Edward Kelly -- Wells Fargo Securities, LLC -- Analyst

[Crosstalk] Thanks, guys.

Operator

The next question comes from Karen Short of Barclays.

Karen Short -- Barclays Investment Bank -- Analyst

Hi. Thanks. I want to make sure I understand this. Mike, based on your comments on consensus EPS for 2Q, 3Q, and 4Q, it implies operating profit swings from being slightly up in 1Q to being down somewhere in the 20% range 2Q to 4Q? Is that fair?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

I don't have that exact math right in front of me. We've been very outspoken about the fact that we expect FIFO operating profit dollars to be down this year as compared to last year. That would continue to be our expectation. We continue to make the investments in the business and they became later in the year as well.

Karen Short -- Barclays Investment Bank -- Analyst

The reason this swing is so extreme from 1Q into 2Q is, as you said, the remodels ramp and price investments ramp pretty meaningfully?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

Well, a lot of the pull forward price investments we made in the last four weeks of the quarter. We wanted to make sure we had that tailwind and knew we were going to get the cost savings before we made the investments. I'll remind you, in the year-on-year comparison, last year had 53 weeks and this year has 52 weeks, so you have to adjust for that as well.

Karen Short -- Barclays Investment Bank -- Analyst

Okay. So, can you give us an update on how many units you will have completed on the restock program by the end of maybe 2Q? And then, if there are any early indications you can give us on how you think comps at those stores are performing -- maybe separate how comps in stores that didn't have optimization are performing versus the ones that did?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

I guess I could give you comp by store, too. We're about 30% of the way through the 600, so that would mean we have about 200-or-so of the stores completed. That doesn't mean that they've gone through the maturation process. It takes a few weeks after the completion for the customer to come back into the store, get familiar with the new layout -- there are instances where a customer is looking for something and, in the near term, throws up the white flag until they can figure out exactly where everything's located in the new layout.

Now, we staff up and have maps and things like that, but that takes a while. We expect, over the course of the next couple of periods, that the peak amount of the headwind from the pace optimization will be occurring. By the time we get late in the third quarter, we will clearly have more stores completed and on the upside of the maturation process than stores we have left to start or are still in process. It's a little early to talk about the stores and the lift we're having. We had that conversation yesterday in our meetings, and we think that's probably something we'll address in our second quarter. So far, we're seeing exactly the pattern we expected and we saw in the 20-or-so stores we did early in this process to determine it was something worth doing on a broader basis. We haven't seen any surprises whatsoever.

Karen Short -- Barclays Investment Bank -- Analyst

Okay. Has there been any contemplation that maybe you could accelerate opening the Ocado facilities? I know you've given us the timeline and are still evaluating the markets, but it would seem that maybe an acceleration would be something that would be viewed favorably.

W Rodney McMullen  -- Chairman & Chief Executive Officer

We're going to open the facilities as fast as we can. There is a certain amount of time it takes to construct a facility and then for Ocado to build it out. So, there is plenty of pressure on Ocado and us to get them open as quick as we can. But, there is a certain amount of time in terms of what it takes to get the work done.

Karen Short -- Barclays Investment Bank -- Analyst

Okay. Thanks.

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

Karen, I just want to point out one thing on your question on operating profit. I would encourage you to look at the tables attached to the press release to understand the adjustment items that are in there. When you pull out the c-stores and that we had a market-to-market gain on the Ocado shares we owned before the announcement of the merger -- that was $36 million, which is on Table Six of the Earnings Release. When you look at operating profit margin dollars apples to apples, the dollars are actually down slightly in the quarter as compared to last year, not up, which is exactly the trend we expect. But, again, it's all about balance and trying to keep things within the range we have.

There were several things that happened in the first quarter that were income that we took out as adjustment items when you look at Table Six in the Press Release. That'll be an important table for everybody to look at.

Karen Short -- Barclays Investment Bank -- Analyst

Okay, thanks for the color.

Operator

The next question comes from Ken Goldman of J.P. Morgan.

Kenneth Goldman -- J. P. Morgan Equity Research -- Analyst

Hi. Good morning. I wanted to first clarify what is outside ID sales now? Is it just new stores, remodels, and jewelry, or am I missing something?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

Net new stores would not be in. Relocations would not be in. The stores don't go in until they're open in their current state for five full quarters. If we expand, relocate, or open a new store, it's the fifth quarter where they go in. There are other parts of our business that generate revenue -- things like 84.51° and our data sales and those kinds of items -- that we don't include in ID sales. What is ID sales are things that we sell directly to a customer, whether it's through a brick-and-mortar store or an online business. That's what's in ID sales today going forward.

W Rodney McMullen  -- Chairman & Chief Executive Officer

Some of our competitors would include expansions, but we do not include expansions in our calculation. We didn't before and we still don't.

Kenneth Goldman -- J. P. Morgan Equity Research -- Analyst

Thank you for that. That's helpful. I also wanted to ask about Rodney's comment about, over time, reaching all of America. Given that the northeast has such a dense population and that you don't really have a presence there, is that a hint about how you view the potential of Ocado going forward? I want to get a sense of what that comment meant, or maybe I misheard it?

W Rodney McMullen  -- Chairman & Chief Executive Officer

No, you did not mishear it. That is our vision and our aspiration. That will be one piece of the puzzle on serving -- Home Chef will also be a piece of serving it. Our customers tell us we do a great job of helping them solve everyday needs in a great way, and any way that we can expand the number of people that can get access to that, that's good for our customers and our associates. And, when we do things good for them, our shareholders benefit. So, you did not misinterpret my comment.

Kenneth Goldman -- J. P. Morgan Equity Research -- Analyst

On your corporate brands, your own brands, you talked them up a little more than usual -- at least the tone seemed to be that way to me. How much of that was due to some of the changes you've made in Restock Kroger in terms of prioritizing private label in certain categories, putting them at the top, right in the middle of the shelf? Is there a correlation there in your mind?

W Rodney McMullen  -- Chairman & Chief Executive Officer

Yeah. I'll give you a little bit more answer than you even want, Ken. One of the things last year that our team did was a very elaborate analysis of our brands versus our competitors' own brands. We also did taste comparisons and quality comparisons versus national brands. One of the things that we had underappreciated was the quality of product scored incredibly well with our customers and potential customers. One of things that Mike, Robert, and Gill and their teams decided to do was based on that insight -- to be much more aggressive about telling our customers the quality of what we have and what we have to offer. That's what caused us to make our own brand such a key and integral part of restock Kroger. It's that commitment and drive that our customers are supporting us and it's showing in the results.

Kenneth Goldman -- J. P. Morgan Equity Research -- Analyst

Very helpful.

Operator

The next question comes from John Heinbockel of Guggenheim Securities.

John Heinbockel -- Guggenheim Partners -- Analyst

I know it's early, but on Ocado. It can do a lot of things for you, but when you think about the ability to do ClickList in a more labor efficient manner -- maybe be less disruptive to the stores -- how important is that on the pecking order? If it is important, how would you transition that? Secondly, when you do Ocado in a market where you don't have brick-and-mortar, would you want to have some brick-and-mortar? Does that open the door to partnering with other retailers or is that too difficult to do?

W Rodney McMullen  -- Chairman & Chief Executive Officer

I love your questions and agree with your comment that it's early in the process. We're trying to make sure that we have an overall infrastructure for digital that can support, whether it's 5% of share or 30% of share. If it ends up being 30% of share in grocery as digital, then the Ocado -- you'll have more sheds and they'll be used to take pressure off of a store and a store will become more of a distribution point. We're trying to design the flexibility of a system that can scale based on how the customer changes. We would expect that Ocado would be something that we will pick orders out of for stores if the orders in a store become a high enough percentage that it effects the customers' experience.

John Heinbockel -- Guggenheim Partners -- Analyst

Today, because the volume is so modest, there's no evidence that doing ClickList adversely impacts the in-store experience? Correct?

W Rodney McMullen  -- Chairman & Chief Executive Officer

So far, it doesn't. But we don't know -- if you look at our sales growth on ClickList, our overall digital was in the high 60s. In some of that growth, it's driven by identicals. We're starting to get a pretty good base of identical stores that are on ClickList. If it continues to grow at its pace, we certainly could see, when you go out a couple of years, where it could and we want to be proactive on being positioned to deal with it versus reactive.

John Heinbockel -- Guggenheim Partners -- Analyst

Fair. Lastly, the price investments you're making this year compared to prior rounds -- what does the elasticity look like? You did the high-volume items first. We're getting to a longer tail. Is the elasticity less significant than prior rounds?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

Elasticity is consistent with what we expected it would be. There are certain categories where there is very little elasticity. There are others that would have elasticity. So far, the investments have been consistent with what we would've expected. You're always balancing a mix between those different items.

John Heinbockel -- Guggenheim Partners -- Analyst

Okay. Thank you.

Operator

The next question comes from William Kirk of RBC Capital Markets.

William Kirk -- RBC Capital Markets -- Analyst

Hi. Thanks for taking the question. We've seen some high-profile closures at some of your competitors. The part of that is, have you seen a material benefit from any of those closures? Do you expect more closures to come? In particular, I'm thinking of the California market. Are there any pending closures you would expect in that marketplace?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

You can never predict when a competitor's going to wind up closing. If you look around some of our markets where there have been closures, we've been the beneficiary in a few ways. One, from picking up the business. Two, from picking up some of their closed store sites like we did in Indianapolis when Marsh closed and as Farm Fresh has exited the Hampton Roads area. We've picked up some of those stores and some other folks have as well. You continue to see those kinds of things happening. Southeastern Grocers, as they emerge from bankruptcy were not very effected by the stores in Florida they closed. But, as they reposition their portfolio of BI-LO stores, there are certainly a number of those that would've gone up against a Kroger store or a Harris Teeter store. Those wind up being beneficial.

We didn't really pick up much of anything from there. There were only one or two stores that had any interest and I frankly don't even know if they came to fruition as I sit here right now. But, any time a store closes in a market, it winds up helping. Sometimes our folks say, "Well, they're only doing X-volume in the business," and I say, "Well, if you get half of that and divide it by the sales of the nearest store, you're talking 3-4% ID through that store." It can be kind of beneficial when those come in on top. Those incremental sales are very valuable.

W Rodney McMullen  -- Chairman & Chief Executive Officer

And broader, over time and not specific to any market, we would expect continued consolidation in our industry. That's been a trend that's happened for the last 20-30 years. If you look at competitors in terms of who has market share, almost 30% of the market share is still held by people without our economy as a scale.

William Kirk -- RBC Capital Markets -- Analyst

That's useful. On the convenience stores, now that that transaction's closed, are there any other assets that would be worth considering divestiture, or is that the streamlining that needs to be done at this time?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

We're constantly looking at our portfolio. We constantly look at closing underperforming stores and reallocating capital. I wouldn't say that we specifically want to sell anything or buy anything, but we're cognizant of what might be more valuable to someone else versus us. That's what happened with the convenience store business. It's a business we had invested a lot of capital in, and multiples of EBITDA for the sales of those are pretty much at all-time highs and it's a prudent time to have that asset. We found a great partner in EG who wound up taking all of our associates. It's a process we go through with our board in a regular basis, so they understand which assets we have are generating a good return on invested capital and which aren't.

William Kirk -- RBC Capital Markets -- Analyst

Okay. That's all for me. Thank you.

Operator

Our next question comes from Judah Frommer of Credit Suisse.

Judah Frommer -- Credit Suisse -- Analyst

Hi, guys. Thanks for taking the question. On the competitive pricing environment. This is somewhat tied to inflation, but if we listen to commentary out of smaller players, it sounds like they are seeing some passing on of whatever little inflation there is to shelf pricing, but that seems less and less important for players like yourselves or larger competitors that are more focused on targeted promotion. What are you seeing out there, and how important is it to continue to invest in price and environment, where maybe some other players are pulling back there?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

In our mind, a big portion and fundamental piece of Restock Kroger is to continue to invest in our business. That takes all forms. When we say invest in the business, everybody immediately goes to price. Price is an important component of it. We are making investments in price in certain categories. I would say we're not opposed to a retail shelf price going up and sometimes we have to be cognizant as the dominant player in many markets. If there is price inflation in a particular item or category, if the big players don't pass on that inflation, it's probably not going to get passed on. So, we do make those value judgments day in and day out as we look at the particular categories where the inflation might be. This is a game of how do we make sure that our offering resonates with the consumers and we try to balance all facets of that.

Judah Frommer -- Credit Suisse -- Analyst

Back to Ocado, if we think about ClickList and home delivery being the key components of online grocery now and what Ocado's been doing in their home market in terms of better profitability on basket, given just fewer picking touches and efficiencies, how do you think about the potential for your online grocery business's profitability over time as Ocado comes in?

W Rodney McMullen  -- Chairman & Chief Executive Officer

We would certainly view that it's part of the overall equation in improving the profitability over time. But, as you've heard us talk about before, we're really focused on, when somebody decides to eat something, they can get it from us. We're increasingly adding delivery service to markets. We're using our data to help inspire people on a meal that they will enjoy. So, it's part of that overall ecosystem as we create the retail of the future. It's an important component to that, but it's one piece of the total puzzle.

Judah Frommer -- Credit Suisse -- Analyst

Thanks.

Operator

Our next question comes from Rupesh Parikh with Oppenheimer.

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

Good morning and thanks for taking my question. I wanted to touch on your commentary about the better cost controls during the quarter. Is there any more color you can provide in terms of what's driving those improvements and process changes and benefits on your cost line?

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

Our shrink folks had a great result in the quarter and continued to get a better result on our waste. They don't use the word shrink; we use it because it resonates with all of you. Internally, we talk about waste. They're trying to understand every facet of waste, whether it's not having the product aligned in the back cooler the right way to get on the sales floor before it goes out of code, making sure the back doors are locked so product only comes in the back door and not out the back door, making sure that the high theft areas of our store are monitored, generally electronically. You can go in the stores today and you'll see visible cameras in high theft areas like cosmetics. They probably saw me this weekend when I waved at one of the cameras when I was in my local Kroger store. Now, they're probably going to watch me in every store I go into.

But, those kinds of techniques are out there to prevent the waste. When you have those kinds of techniques, people are less likely to even try. Then they do try and get caught, that does spread through that community and they stop trying with you. But, it goes across the broad spectrum of monitors on cooler doors not being shut at a store. If it's open for X-seconds, not only does it waste energy, it lets hot air in and the product quality can be diminished. With our temperature monitoring process that we originally put in a labor savings initiative, so we didn't have to go about the store and take temperatures throughout -- it winds up being quite a bit of a waste reduction benefit in keeping the cold chain secure.

It used to be you didn't know an ice cream freezer was losing temperature until you saw the ice cream melt. Now, we get an alert that that motor in that ice cream case is being inefficient. You can get the product out, get the motor fixed, and probably get it fixed with a repair instead of a replacement like we used to have to do in the past. There are a whole lot of things like that. I highlight waste today because they're working really hard and having great results. I want to have a little bit of a shout-out to that team and thank you for all the hard work they've done. It's starting to show in the results.

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

Great. Thank you.

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

We have time for one more question.

Operator

Okay, and that final question will come from Vincent Sinisi with Morgan Stanley.

Vincent Sinisi -- Morgan Stanley Research -- Analyst

Thank you, guys, for taking my question. It's still early, but digital is clearly increasing in focus. With some of the 84.51° data that you guys have, in some of the areas where it's a bit longer, can you give us further color on what you are seeing from a customer perspective? In the stores where some forms of it have been available for a while, how is the progression changing? What's in the basket, ticket, frequency to the store? And then, maybe also just as you're looking at these first three Ocado facilities, anything at this point you can provide in terms of thoughts around how much of the geographies or stores that may encompass?

W Rodney McMullen  -- Chairman & Chief Executive Officer

If you look at digital, the key point -- this is the part that hasn't surprised us at all. When a customer engages with us digitally, we get a higher share of their total household spend. We find is the customer still comes into the store, but they come into based on when they want to. For example, if you have a couple of kids at home and they bring their friends over, you probably didn't buy food for their friends and somebody will stop by or get a delivery to their house really quick.

We find that, the more digitally engaged somebody is, the higher their total household spend is. It's not necessarily consistent from week to week in terms of your share of how much of it's digital and how much of it's physical in the store. The thing that's absolutely critical is to do it in a seamless way and do it seamlessly from food inspiration or help you eat healthier. We just launched an app called OptUP. If a customer opts in, we can help a customer eat better on a sugar basis. Over time, it will have more functionality. But, today, it's more minimizing and managing your sugar intake.

But, all of those things are how do we make your life easier and how do we help support you living your life the way you want to. Everything that we're doing is to make sure it's seamless across all of our channels. That's the piece we're working hard on.

On your second question about Ocado, that's one of the things the Ocado team is working with us, in modeling -- to understand how far can a shed reach in a market. With Ocado, they also have local depots that will be part of a shed network. Right now, they are modeling that. At some point, we'll be able to answer your question with more specifics.

Vincent Sinisi -- Morgan Stanley Research -- Analyst

We get asked about this all the time. I think it's now been two quarters since you had mentioned, within the gross margin benefit, vendor negotiations. Any update there? How are some of those conversations going? As we go through the year -- I think, 3Q, from a compare, is the most difficult. Any updates there that you can share, or basic thoughts? Thanks, guys.

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

Our team that negotiations the cost of goods with our vendors continue to have great success, using a variety of techniques, depending on the category. Keep in mind, everything we do in our negotiation process, begins with the customer in the forefront and understanding, by category, what items are important to the customer and what items might be less important to the customer. That begins the entire negotiation process and oftentimes, playing one vendor off of another, when the customer might be indifferent to it.

I would say it's right on track with our expectation. It is a big component of our expected savings over the next three years. I'm thrilled with what that entire team has done. We've brought some new talent into that group, and we're thrilled with how that group has hit the ground running on not only cost of good and saving of goods for sale, but also goods not for resale. Supplies and the like -- and other items that we consume ourselves in doing business every day.

Vincent Sinisi -- Morgan Stanley Research -- Analyst

Perfect. Good luck, guys.

W Rodney McMullen  -- Chairman & Chief Executive Officer

Thank you. We are incredibly confident about the future of Kroger, especially with Restock Kroger. One of the exciting things about our earnings call is that many of our associates listen in to better understand and gain insights into our business. Of course, many of our associates are shareholders as well. Before we end today's call, I'd like to share a few final comments directed toward them.

We are very proud of Kroger's opportunity culture, where you can come for a job and stay for a career. We took one-third of our tax savings to invest in new and enhanced benefits for our associates. We used part of that investment to establish our best in class educational offering, Feed Your Future. I'm thrilled to see so many of you already taking advantage of these new benefits.

Let me tell you a story about one of the first associates to take advantage of Feed Your Future. Lindsey is a pharmacy technician in one our Louisville division. She was working her way through college, accumulating student loans, and had planned to stop working to focus on school full-time. But, after an assistant store manager told her about Feed Your Future, Lindsey decided to stay with Kroger while she finishes her bachelor's degree. Now, Lindsey's goal is to pursue a graduate degree with dreams of becoming a physician's assistant for our Little Clinic business.

Lindsey's story is exactly what we hoped would happen when we introduced Feed Your Future. We believe that, when we support our associate and each other, and our customers, business and shareholders will benefit. Thank you for all you do for each other and everybody every day.

That completes our call for today. Thanks for joining.

...

Operator

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

Duration: 68 minutes

Call participants:

Rebekah Manis -- Director, Investor Relations

W Rodney McMullen  -- Chairman & Chief Executive Officer

J Michael Schlotman -- Executive Vice President & Chief Financial Officer

Edward Kelly -- Wells Fargo Securities, LLC -- Analyst

Karen Short -- Barclays Investment Bank -- Analyst

Kenneth Goldman -- J. P. Morgan Equity Research -- Analyst

John Heinbockel -- Guggenheim Partners -- Analyst

Vincent Sinisi -- Morgan Stanley Research -- Analyst

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

William Kirk -- RBC Capital Markets -- Analyst

Michael Lasser -- UBS Investment Bank -- Analyst

Judah Frommer -- Credit Suisse -- Analyst

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