Good morning, and welcome to The Kroger Company Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Rebekah Manis, Director, Investor Relations. Please go ahead.

Thank you, Gary. Good morning, and thank you for joining us. Before we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger assumes no obligation to update that information. Both our third 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. I will now turn the call over to Kroger's Chairman and Chief Executive Officer, Rodney McMullen. W. 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 9 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 an 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 3 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. Customers across the country are still staying home and cooking at home is now part of the new routine. We are fulfilling our customers' growing demand for premium products as they seek joy and elevated experiences. We're merchandising in new ways to both meet that demand and inspire our customers to trade up to items like premium jumbo blueberries, and by the way, they're delicious, and larger-sized packages of strawberries, raspberries and grapes. Home Chef's culinary innovation is inspiring customers with new oven-ready entrées and sides, flat bread, pizzas, salads and sandwiches. In the Fresh soup category, we have introduced new flavorful and delicious Simple Truth and Home Chef varieties. Our efforts are also driving strong market share gain in -- growth in packaged produce, fresh prepared foods and specialty cheese. This is also where our brands really shine. Our multi-tiered brand portfolio positions us well to deliver against our customers' diverse needs and desires. Our Brand grew at 8.6% in the third quarter, and we grew market share. Private Selection grew over 17% and Simple Truth grew nearly 15%. These are incredible numbers and demonstrate that while many competitors offer private label products, Kroger's unique approach to Our Brands is a differentiator in a competitive moat. By leveraging our unique data and customer insights, we continue to be at the forefront of product innovation and new product development. During the third quarter, we launched 250 new items, the most ever in a single quarter. New items for the quarter included launches in trending focus areas such as fresh produce, frozen grocery and expansion of our Simple Truth plant-based collection, unveiling more than 50 new fresh and flavorful plant-based foods at affordable prices. Moving now to our third competitive moat, Data & Personalization. Many retailers have transactional data, but no one has the customer data and the insights that Kroger has. The quality of our data is a massive advantage because it allows us to develop a significant alternative profit business that generates income from the traffic while benefiting our customers. Our personalization efforts motivate our customers to continue to show interest in Kroger's communications, where nearly 80% have asked to receive relevant information and offers from us. Our customer e-mail open rate is nearly 18% higher than the industry average, which illustrates our ability to offer relevant content and offers to our customers. We continue to advance our personalization technology. About 95% of customer interactions with product on our website and app are enabled by personalization, driving a significantly higher level of engagement in our offers and nearly doubling the likelihood of adding an item to a cart. Our store's competitive moat is Seamless. Kroger began investing in digital several years ago to build a seamless ecosystem that would deliver anything, anytime, anywhere. As part of our journey, we have been evolving our fulfillment network. First, taking advantage of our existing assets, our physical stores, providing flexibility and proximity to our customers with broad and relevant assortment to meet their needs. Second, expanding our network of assets and capabilities with a portfolio of various-sized facilities optimized based on volume, demand profile and density, leveraging scale and automation to meet the rapidly changing customer needs. Our early investments lay the foundation, including over 2,200 pickup locations and over 2,450 delivery locations, which allowed us to capture the increased customer demand for e-commerce offerings during the pandemic we have today, reaching 98% of our customers with a seamless customer experience around in-store shopping, pickup, delivery and ship-to-home modalities. We are innovating and building out a flexible network of fulfillment options and working with key solutions providers. As we recently announced, we continue to progress on our Ocado facilities program with plans to build customer fulfillment centers in Michigan and in the south region of the country. The upcoming opening of our first 2 fulfillment centers in early 2021 in Monroe, Ohio and Groveland, Florida in collaboration to leverage some of their in-store fulfillment capabilities. We work extremely hard to ensure that we have the right talent, teams and structure in the right focus areas in our core supermarket business and our alternative profit businesses. We are focused on both developing, training and promoting internal talent and hiring external industry executives, which together drives our retail supermarket business as well as our other businesses. Kroger has been investing to raise the wages of our frontline associates for the last several years. As part of Restock Kroger announced in 2017, over the period of 2018 to 2020, Kroger will have invested an incremental $800 million per year in associate wage increases. As we've noted before, this is $300 million more than the original planned investment. As a result of our continued focus on growing associate wages, Kroger has increased its average wage rate to over $20 per hour with our comprehensive and best-in-class benefits, including health care, paid time off and retirement included. As the largest grocery retailer in America, Kroger is committed to being a force for good in the communities we serve. Our purpose to feed the human spirit continues to guide how we operate our business, care for our communities and deliver value to all of our stakeholders. Since launching our ambitious Zero Hunger | Zero Waste social impact plan in 2017, we achieved our goal to donate more than 1 billion meals to feed hungry families in our communities by 2020. We also continue to increase Kroger's diversion of waste from landfill, reaching 80% diversion last year on our path to achieve 90% diversion or Zero Waste. This year, Kroger outlined several new long-term environmental commitments and they can be found in our annual environmental, social and governance report. Last month, we were proud to be included among the world's sustainability leaders, recognized by our inclusion in the Dow Jones Sustainability Index for the eighth year in a row. We are committed to continuing to integrate ESG metrics into our business strategy, driving shared value for our associates, customers, communities and shareholders. Since March, we have invested nearly $1.3 billion to both reward our associates and to protect our associates and customers through the implementation of dozens of safety measures like installing protective partitions and physical distancing floor decals. We continue to require masks and limit the number of people in our stores to allow for physical distancing and ensure frequent and proper cleaning procedures are followed. We also promote additional ways to shop using pickup or no-contact delivery. Our total COVID-19 incident rate continues to track below the rate in the surrounding communities where we operate. Our supply chain remains strong and healthy, and we are replenishing our stores daily so that the supplies and products our customers need are readily available. To ensure our customers have access to what they need, we have proactively secured an additional 5,000 truckloads of inventory and increased distribution capacity reserves by 20% within our supply chain to get ahead and avoid potential supply disruptions. Furthermore, we have flexed our national footprint by dynamically shifting volume from constrained facilities and regions to facilities and regions with available capacity to accommodate. As America's grocer, we continue to see the unique opportunity to be part of our customers' healthy journey in addition to being their grocer of choice. Throughout the pandemic, we have remained committed to helping people live healthier lives by offering in-clinic and at-home COVID-19 testing solutions, supported by our team of experienced health care professionals. The size and scale of our health care footprint with over 2,200 pharmacies and 220 clinics in 35 states provide us the unique ability to efficiently facilitate COVID-19 testing and immunize a large portion of the U.S. population once vaccines become available. Kroger Health has conducted over 250,000 COVID-19 tests since April and has recently launched rapid antibody tests, which are now available across our family of pharmacies and clinics. We are also partners in the federal -- with the federal government effort to deliver hundreds of millions of potentially life-saving vaccines to our communities. We have also partnered with dozens of state health departments in preparation for the other early administration of vaccines to priority populations. Once an FDA-authorized vaccine is available, we're committed to making it accessible in accordance with the federal rollout plan. All our pharmacies and clinics are staffed with professionals, licensed pharmacists, nurse practitioners, physician assistants and technicians. Health and wellness is a critical part of our customer value proposition. Pharmacy customers are more loyal, spending 3x more per customer. We have approached pharmacy from an omnichannel perspective for quite some time, allowing customers to choose the most appropriate channel in which to connect with us, whether that be in-store, on the phone or online. For all channels, our strategy is consistent: simplify health care by creating solutions that combine health, wellness and nutrition. I continue to be proud of the work that our associates do to serve each other, our customers and our communities. Stories of their accomplishments and selflessness inspire me every day. The investments we have made to enhance our competitive moats are paying off and as a result, we are growing market share. I will now turn it over to Gary for more details into the quarter financials. Gary?

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, were 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'll 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. Our identical sales growth increase was broad-based and all departments, excluding fuel, achieved positive growth over the prior year. Meat and produce departments led the way, continuing to underscore the importance of Fresh and how we differentiate in quality and assortment for our customers. Digital sales grew 108% in the third quarter and contributed approximately 4.6% to identical sales without fuel. Customer engagement with our digital solutions is driving overall loyalty. When customers engage with both our physical stores and digital channels, they visit more frequently and, on average, spend twice as much as those who shop in store only. The vast majority of our digital customers are shopping in-store as well as online. We are, therefore, confident that the seamless experience we are building across our store and digital ecosystem position us well for continued growth in a post-COVID world. At the same time, digital sales growth in the quarter was profitable on an incremental basis, and we continue to improve digital profitability by lowering the cost to fulfill a pickup order and accelerating digital advertising revenue. As Rodney noted, we see a clear path to further improve digital profitability by leveraging our personalization tools to increase basket size and improve sales mix, further reduce the cost to fulfill an order via process improvements and automation, and continue to grow digital media revenue. We are also excited about the value our merger with Home Chef has brought to our digital capabilities, both in terms of the extended meal solutions offered for our customers and the significant sales growth and profitability improvements the business is achieving. Adjusted FIFO operating profit for the third quarter was $871 million, up 33% compared to the third quarter of 2019. We were pleased with our ability to consistently pass-through the benefits of elevated sales in the quarter, which was in line with our expectations and guidance previously shared. Gross margin was 23% of sales in the third quarter. The FIFO gross margin rate, excluding fuel, decreased 2 basis points compared to the same period last year. We achieved improvements in gross margin during the quarter through sourcing efficiencies, sales leverage and growth in alternative profit streams. These tailwinds were offset by changes in the sales mix as a result of COVID-19 and continued investments to deliver greater value for our customers, ensuring we sustain long-term customer loyalty and position the business for success in 2021 and beyond. The OG&A rate, excluding fuel and adjustment items, decreased 30 basis points. This reflects sales leverage and strong cost control through execution of Restock Kroger initiatives, which more than offset continued COVID-19-related investments to protect the health and safety of our associates, customers and communities and increased incentive costs. We were pleased with progress on our Restock Kroger cost-saving initiatives in the quarter and continue to be on track to achieve the targeted $1 billion of savings in 2020. As an example, through the implementation of multiple process and technology improvements this year, we have been able to reduce the cost to fulfill a pickup order in-store by double digits compared to the same period last year, while at the same time improving the customer experience by significantly reducing customer wait times. Fuel remains an important part of our strategy to drive customer loyalty. Consistent with market trends, our decline in gallons in the third quarter slowed to around 13%. We remain well positioned within our markets due to our fuel procurement practices and our market-leading reward program. The average retail price of fuel was $2.15 this quarter versus $2.62 in the same quarter last year. Our cents per gallon fuel margin in the third quarter was $0.37 compared to $0.30 in the same quarter last year. Kroger's alternative profit businesses are built on a platform that leverages our supermarket traffic and data. Our alternative profit businesses had a very strong third quarter, led by tremendous growth in our digital media business, Kroger Precision Marketing. On the strength of growth in digital sales, digital customer engagement and new inventory, KPM achieved revenue growth of over 190%. Over 1,200 brands are now engaging with KPM as a better way to invest marketing dollars that were previously being spent with advertising platforms and digital media companies. CPG brands continue to leverage our audience intelligence for more effective brand building activations that are achieving better return on ad spend. Thanks to our team's nimbleness and responding to the challenges presented by COVID, our alternative profit businesses are performing well, and we now expect profit growth to exceed $100 million for the fiscal year 2020. We continue to believe alternative profit will be a major accelerator of our model in the future and COVID-19 has not changed the long-term profit expectations previously shared as part of Restock Kroger. We continue to invest in our associates as a key part of Restock Kroger in a variety of ways, including investments in wages, training and development. As you know, for the last decade or more, Kroger has sought opportunities to address the funding challenges facing the multi-employer pension plans in which many of our associates participate. We believe charges related to pension funding can be mitigated if plans are reviewed and addressed over time. In July, we announced a tentative agreement to improve security for future retirement benefits of over 33,000 Kroger family of company associates across 20 local UFCW unions with a pretax investment of nearly $1 billion that will be satisfied by installment payments over the next 3 years. I'm pleased to say that, that agreement is now being ratified by participating union locals and Kroger will incur a charge to net earnings during the fourth quarter of approximately $0.98 per diluted share on a GAAP basis. This does not affect adjusted net earnings per diluted share results for 2020, which are provided on a basis that excludes adjustment items such as this contribution. We ratified new labor agreements with the UFCW covering associates in Las Vegas and Dallas during the third quarter. Last week, we ratified a new labor agreement with the UFCW covering associates in West Virginia, and we are currently negotiating with the UFCW for contracts covering store associates in Little Rock, Houston and Arizona. Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality affordable health care and retirement benefits for our associates. We strive to make our overall benefit package relevant to today's associates. Our financial results continue to be pressured by health care 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, on the importance of growing our business in a profitable way which will help us create more jobs and career opportunities and enhanced job security for our associates. Turning now to financial strategy. We continue to generate strong free cash flow and remain committed to our previously communicated capital allocation framework. We are continuing to invest in the business to drive profitable growth while also maintaining our current investment-grade debt rating and returning excess free cash to investors via share repurchases and the growing dividend over time. We now expect total capital expenditures to range between $2.8 billion and $3.2 billion in 2020. This lower range is primarily due to the expected delay in when spend will occur as a result of COVID-19. We are being disciplined in how we deploy capital to ensure that our investments will deliver strong returns, and we continue to see many opportunities to invest in the business to support sustainable long-term revenue and profit growth consistent with our CSR goals. Kroger's net total debt to adjusted EBITDA ratio is 1.74 compared to 2.5 a year ago. This is below our target range of 2.3 to 2.5. Our strong liquidity reflects our elevated operating performance and significant improvements in working capital. This improvement in working capital includes the impact of temporary increase in warehousing and buildup of inventory during the third quarter that Rodney referenced earlier, which we implemented to minimize supply disruptions as a result of higher COVID cases forecast over the winter months. During the quarter, Kroger repurchased $304 million of shares under its $1 billion board authorization announced on September 11, 2020. Year-to-date, Kroger has now repurchased $989 million of shares. In June, Kroger increased the dividend by 13%, marking the 14th consecutive year of dividend increases. Finally, I'd like to provide additional color on our guidance for the remainder of 2020. As we shared previously, the COVID-19 pandemic has changed the outlook for food retail, and we continue to monitor, evaluate and adjust our plans to address the impact to our business. As a result of our continued strong sales and market share performance and the expectation of sustained trends in food at home consumption for the remainder of our fiscal year, we are raising our full year 2020 guidance. For the full year 2020, we now expect total identical sales without fuel to be around 14%. We expect to achieve adjusted EPS growth of approximately 50% to 53%, and adjusted free cash flow of $2.8 billion to $3.1 billion. Our guidance contemplates continued investments in the customer and ongoing COVID-19-related costs to protect the safety of our customers and associates, balanced with continued execution of cost-saving initiatives and growth in alternative profits. Looking towards 2021, we believe that our performance will be stronger than we would have expected prior to the pandemic when viewed as a 2-year stacked result for identical sales without fuel growth and as a compounded growth rate over 2020 and 2021 for adjusted earnings per share growth. We remain confident in our business model and our ability to achieve consistently attractive total shareholder returns. We look forward to providing detailed guidance for 2021 and updating you on our road map to deliver long-term growth in March next year. And now I'll turn it back to Rodney. W. 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 Instructions] Our first question is from Simeon Gutman with Morgan Stanley.

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 '21, 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? W. 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 costs 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 and want 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 -- 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 omnichannel experience that we're delivering and creating for the customer. And we would expect, as we continue going forward, that we'll continue to make progress on the profitability of that digital shopper. And then obviously, once you get past the start-up cost 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're making and we're excited about the continued progress we expect to make. We -- everything we can see, we think the pandemic has accelerated the growth or transition to digital probably by 3 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 a 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?

Well, I 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 it would 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 a traditional brick-and-mortar sale. The blended rate between digital and store and having in the COVID cost may be coming in around 10% versus that 15% or higher. So a combination of lower pass-through rate on digital and the incremental COVID cost will be bringing down that overall blended rate. Interestingly, 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 being 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 to think through it, but the more improvements we make now on our digital business as we're continuing to improve digital profitability, so as we take cost out of the cost fulfillment order, as we grow the average order value through personalization, as we grow media revenue, that -- 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 profitability of digital.

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 pick-up orders, all the pickup is being done by in-house employees and I think that's pressure in 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 is the pricing power? Is there pricing power with you with some of those partners?

Yes. Simeon, you'd be correct in the way in which our core pickup business would show up in our P&L as a lower pass-through rate is the labor associated with picking the product in the store. That's what drives the mid-single-digit pass-through rate versus the sort of high-teen rate, if you like, on a traditional brick-and-mortar sale. We have a fairly unique model, I think, with Instacart. They are our predominant partner. We do use other partners as well in terms of delivery. So part of that business of Instacart is still delivered through the Kroger ecosystem. So the customer would come on to kroger.com or the Kroger app and would order a grocery delivery. Instacart would 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 it 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 on all those modalities. W. McMullen: 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 -- deliver for the customer the way they want it delivered for them.

The next question is from Rupesh Parikh with Oppenheimer.

This is actually Erica Eiler on for Rupesh. 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 and 2021 in general?

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 is, in general terms, I think it's important to remember that as we talk about the investments that we're making in gross margin today, many of those are in areas that matter most to 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 for -- to ensure that we come out at the end of the COVID environment in a stronger position than we went in and winning market share, we believe those investments that we're making are critical to that, and they're creating increased separation from some of our traditional peers as we come towards that lapsing that time period with COVID. Many of those investments are answered at everyday low prices. So I wouldn't necessarily think of all of them as having to be incremental in 2021 versus 2020, because as we cycle those, we'll 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're 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 deleverage in some of the sales measures that they create some headwinds in the model that you cycle, but with the continued improvements that we're driving in sourcing, the continued improvements that we expect to drive within media revenue, within alternative profits, which went into gross margin, we still feel very good about the balance model that we've shared with you and the investment community around continuing to be able to balance investments with growing customer loyalty and driving overall earnings growth. W. 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 costs out both in goods not for resale, cost of goods and operating costs itself. And we'll get into more detail in March. But 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.

Okay. Great. That's helpful. And then just -- I mean given some recently -- some recent industry developments on the online pharmacy side, can you just remind us where Kroger is at right now with its efforts on online pharmacy side? What opportunities do you see going forward here? And also, just curious what you're seeing from the consumer adoption of your existing offerings? W. McMullen: Yes. As I mentioned in the prepared remarks, pharmacy customer typically spends 3x more in our stores. And the pharmacy customer, for us, we've been working hard, our whole teams have, 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 2 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 tie-in food. And it appears that about half of health care 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 health care professional that they can talk to one-on-one to answer their questions, and that's what we're able to offer, either in-person or on telehealth.

The next question is from Ken Goldman with JPMorgan.

There's 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 it, 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. W. McMullen: When you look at -- and I'll let Gary get into some of the details. But when you look at overall, a little bit of inflation always [ makes this ] a little easier. And we don't have [ anything ] when we have a little inflation. But as you know, we've built a business model that is strong, whether inflation is high or low or anything in between. If you look at 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. I don't know, Gary, anything you want to add or some of the specifics on Ken's question?

Sure. Thanks, Rodney. Ken, I would say that overall, we're seeing, as Rodney mentioned, and you've 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 us to be dramatically different. But there are also risks, obviously, with COVID and what happened in the first quarter around meat, as Rodney also mentioned a moment ago, and there are certainly some produce categories but because of the season have had some supply shortages, too. But nothing that I would say that would take us dramatically today as we look forward outside of that sort of 2%, give or take, range. I think from that perspective, as Rodney said, we always look for ways to mitigate that wherever 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 to them, we'll do that. But we're always looking to identify ways in which we can really connect more deeply with the customer and build loyalty at the same time.

That's helpful. 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 trend so far in terms of your numbers? W. McMullen: Ken, you said a word and [ Todd ] is trying to help me understand what you...

Pantry load. W. McMullen: Pantry load. The -- we did put in limits on certain categories early in the quarter, and it was really -- the reason we did that was because of learnings from early. And we are -- as we mentioned, we've seen people shop fewer times, but buying more when they shop. The other thing on the holidays, obviously, on Christmas, time will tell, but -- and New Year's, but people obviously celebrated the holidays in a much smaller family gatherings than what they would have in the past year. So it's a little of all of 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 was 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 and their approach to COVID. But overall, not as much as what we saw early in the year, but some.

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 a percent within the -- where we landed at the 10.9%, as Rodney mentioned. We certainly saw some variability by West versus Midwest. The West being more elevated, I think, because of some of the greater restrictions that were in place. As we look at the trend in the current quarter, it will be very similar in -- quarter-to-date in Q4 versus where we ended in Q3. What would be interesting there would be, though, is -- and Rodney alluded to this, was in the first couple of weeks of the quarter, we'd have seen more of that elevated spend in the weaker Thanksgiving, while in any normal environment the 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 3 weeks gets you to looking very similar to where we were in Q3. And I think to Rodney's point, one of the things that the reason that we've left the guidance range out there is, clearly, we're expecting continued tailwind from executing our strategy and seeing COVID trends continuing food-at-home. But understanding how exactly the holidays play out when you've got 2 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, whereas 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.

The next question is from Michael Lasser with UBS.

It's Mark Carden on for Michael today. So you noted that you're continuing to take market share. Assuming 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. W. McMullen: Yes. As you know, we never really looked 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 customers spending more with us. Some of that is driven by our digital offerings in the seamlessness 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.

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

The next question is from Greg Badishkanian with Wolfe Research.

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 today than they were 3 or 6 months ago? And sort of how you're thinking about that as we head into 2021? W. McMullen: Yes. If you look overall, and I'll let Gary get into more on some of the specifics, we just 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's 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 customers' budget to go further because we just 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've continued to make good progress on our Fresh dimensions, our Friendly dimensions relative to our competitors. And when you look at all of 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.

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 us have been through something like a pandemic like this before, but 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 our learnings over time are that 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 that we have to come out of COVID-19 stronger.

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? W. McMullen: 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, what average our average guests together, and that will probably be the closest that -- Gary, do you want to answer the last?

Yes. I would say, on incrementality, we're seeing -- and I mentioned some of this in my prepared remarks, but we're seeing very similar consistent patterns in incrementality. It 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 at it for a longer period of time and look at the categories and the products they were 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 there's a -- on the basket that Rodney mentioned, it was significantly higher. The north of 50% of that basket is incremental when we look at the customers' shopping behavior over a longer period of time.

The next question is from Karen Short with Barclays.

This is Renato Basanta on for Karen. So I wanted to follow up on next year, 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 had some cost savings flowing through. But I'm not totally sure that, 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 costs next year? And then any color on any other P&L levers you have to pull?

Yes, sure. Thanks for the question. 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 they'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 2-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 nonrecurring 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 onetime costs we would have incurred in the early part of COVID. Even if you look at the run rate costs 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 a vaccine will be in place that 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 our profit to continue to be growing. We -- that's not a business area where we expect to see a slowdown in momentum. We continue to see tremendous opportunity for growth. As you know, we've 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 be 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, Rodney mentioned it, but COVID vaccines is certainly an opportunity. But even just more broadly, the pharmacy business, while we've continued to grow our business successfully, it has 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, 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. We would 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 an odd position that drove margins at a level that we're 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 2-year basis, the earnings per share growth on a compounded rate and ID sales growth, though, to be ahead of where we would have expected our TSR model we shared in November last year.

Okay. That's great color. And then just wanted to get your perspective with respect to labor costs. You mentioned you're 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? W. 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's 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 can continue to improve. We are -- 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 costs as we do, we're very comfortable on operating on an even ground. We -- 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.

This concludes our question-and-answer session. I would like to turn the conference back over to Rodney McMullen for any closing remarks. W. 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 0.5 million associates in 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, diversity, equity and inclusion plan. This plan is just the beginning. We are approaching this effort with humility, knowing that we can't do it alone and don't and won't have all the answers. But we are committed. I am committed to continuing to listen, to speak out and to take action. That concludes our call for today. Thanks again for your questions, and thanks for your time. Goodbye.

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