Todd Foley
Interim Chief Financial Officer at Kroger
Thanks, Rodney, and good morning, everyone.
Kroger's first quarter performance reflects the resiliency of our model, which enables us to manage a variety of economic cycles. The strength of our model combined with the momentum in our grocery business, gives us confidence to reaffirm our full year guidance even as we continue to navigate an environment of economic uncertainty.
I'll now take you through our first quarter financial results. We achieved identical sales without fuel growth of 0.5%. As Rodney mentioned earlier, our identical sales were driven by several positive customer metric trends, including increases in total and loyal households and increased customer visits. We continue to see sequential unit improvement and our teams remain focused on returning to positive units later this year.
Inflation continues to moderate, which is consistent with our expectations at the start of the year, and towards the end of the first quarter, we began cycling the headwinds from the reduction in SNAP benefits.
Digital sales grew by more than 8%, which was led by 17% growth in delivery solutions. Gross margin was 22.4% of sales and our FIFO gross margin rate, excluding fuel, decreased 7 basis points. The decrease in rate was primarily attributable to lower pharmacy margins and increased price investments partially offset by favorable product mix reflecting Our Brands' margin performance. The slight decline in our FIFO gross margin rate was in line with our expectations. We expect our FIFO gross margin rate to improve beyond our first quarter result driven by the core components of our margin expansion initiatives.
During the first quarter, we recorded a LIFO charge of $41 million compared to a charge of $99 million for the same quarter last year. The decreased charge for the quarter was due to lower inflation expectations for the current year compared to last year. The OG&A rate excluding fuel and adjustment items increased 22 basis points, driven by planned investments in associate wages and increased incentive plan costs partially offset by continued execution of cost savings initiatives. In the second quarter, we expect the factors identified in the first quarter to continue, leading to a similar to slightly higher OG&A rate. We expect our OG&A rate to improve in the second half of 2024.
We continue to make progress on our digital profitability, delivering another quarter of improvement in our pickup cost to serve. It remains a long-term margin opportunity with runway to improve through increased volume and process enhancements. Our store associates played a key role in the cost to serve improvements and, as Rodney mentioned earlier, did so while they improved key customer experience metrics.
Adjusted FIFO operating profit was $1.499 billion. Our adjusted EPS was $1.43 per diluted share, a decline of $0.05 compared to last year. Fuel continues to be a key driver of our strategy to build loyalty by providing compelling fuel rewards to customers. We continue to see more reward activity with 8% more redemptions contributing to gallon sales, which outpaced the industry this quarter. However, our fuel profitability was below expectations this quarter with our cents per gallon fuel margin down low single digits compared to last year.
I'd now like to provide a brief update on associates and labor relations. We continue to invest in our associates as part of our long-term strategy, resulting in an average hourly rate of $19 an hour and a rate of nearly $25, with comprehensive benefits factored in. During the first quarter, we ratified new labor agreements for our Houston Clerks and Meat, Mid-Atlantic Division stores in West Virginia, South Carolina stores in Columbia and Myrtle Beach and Portland Distribution Center and Drivers covering more than 21,000 associates.
Turning to cash flow. Kroger continues to generate adjusted free cash flow, strong adjusted free cash flow, through consistent operating results which is enabling us to continue deleveraging in anticipation of our merger with Albertsons. At the end of the quarter, Kroger's net debt to adjusted EBITDA ratio was 1.25 compared to our target range of 2.3 to 2.5. Our strengthened balance sheet provides ample opportunities for Kroger to pursue growth and enhance shareholder value.
We continue to take a disciplined approach to deploying capital with a focus on projects which drive long-term sustainable net earnings growth while remaining committed to our investment-grade debt rating, increasing our dividend over time subject to Board approval and returning excess capital to shareholders when we are able to do so.
As part of our capital investment plans for 2024, we shared last quarter our plans for approximately 30 major storing projects focused on higher growth geographies, where we have traditionally achieved a strong ROIC and operating profit growth. We've made good progress on our projects so far and remain on track with our plans. While early, we're happy with the results from projects completed in the first quarter. We are confident these new storing projects will help advance our omnichannel strategy and be an important component to our sales growth and TSR model going forward.
During the first quarter, we announced we had entered an agreement for the sale of our Kroger Specialty Pharmacy business. As part of our regular and ongoing review of our portfolio, we determined that Specialty Pharmacy was not part of our core strategy going forward and a sale would enable us to focus on our Health & Wellness strategies that revolve around our retail pharmacies.
Due to the sale, a non-recurring held for sale tax adjustment of $31 million was recognized in the quarter and it has been reflected as an adjustment item in our results. The sale of KSP is not expected to have an impact on our 2024 guidance.
I'd like -- I'd now like to provide some additional color on our outlook for the rest of the year. Today, we reaffirmed our annual guidance reflecting both positive momentum we are seeing in our business along with a more cautious customer environment in the near term. In terms of quarterly cadence, we now expect a decline in adjusted EPS for the second quarter similar to the rate we observed in the first quarter as we expect pharmacy -- as we expect pharmacy business profitability pressures to carry over into the second quarter. This reaffirms where we expected to be through both the first half of the year as well as the full fiscal 2024.
In closing, our first quarter performance reflects the strength and resiliency of our model. We are strengthening our Grocery business, which drives the data and traffic to accelerate growth in our alternative profit businesses and we remain confident in our ability to drive attractive and sustainable returns for our shareholders.
I'll now turn the call back to Rodney.
