Todd Foley
Interim Chief Financial Officer at Kroger
Thanks, Rodney. And good morning, everyone.
Kroger's second quarter results reflect the resilience of our model as investments made to diversify our business are enabling us to navigate an environment of economic uncertainty. Our results through the first half of the year are in line with our expectations, and with our improving sales momentum, we are able to reaffirm our full year guidance.
I'll now take you through our second quarter financial results. We achieved identical sales without fuel growth of 1.2%. As Rodney mentioned earlier, our identical sales were supported by several positive customer metric trends, including increases in total and loyal households and increased customer visits. We are encouraged by favorable unit trends as we continue to make progress toward achieving positive unit growth. As we saw in the first quarter, vendor support for promotions has been strong and we will continue to deliver on our long-term commitment of providing customers with exceptional value.
Digital sales had a strong quarter, led by 17% growth in delivery solutions. Pickup is an important part of our seamless ecosystem, and demand continues to be strong, with pickup sales growing 10%. This reflects our digital team's relentless focus on delivering a great customer experience, resulting in increased fill rates, a reduction in wait times, and a 33% improvement in perfect orders, which are orders with both a 100% fill rate and that are completed within an appropriate wait time. With the help of AI-enabled advancements in dynamic batching and routing, we are able to offer two-hour lead times in pickup in all stores. These improvements in customer experience are being accompanied by productivity enhancements, resulting in an improvement in our cost to serve.
Turning to margins. I would like to spend a little more time today talking about our second quarter trends in gross margin and OG&A rates. As you know, our long-term model is designed to deliver consistent year-over-year gross margin rate and OG&A rates in a way that we deliver slightly expanding operating margins over time. Though there can be puts and takes in these measures from quarter-to-quarter, over the long term, our business model gives us the flexibility to balance investments in lower prices and higher associate wages with growth in margins through Our Brands and alternative profit businesses, as well as cost-saving initiatives and productivity, all to ensure that we are consistently returning value to shareholders.
This expectation is true for fiscal 2024 as well. For the full year, we now expect FIFO gross Margin rate, excluding fuel, to be slightly positive, balanced by the OG&A rate without fuel, which will be slightly negative. This quarter, FIFO gross margin rate, excluding fuel, was 42 basis points Favorable to last year and was slightly ahead of our expectations for the quarter. Conversely, the OG&A Rate, excluding fuel and adjustment items, was 65 basis points unfavorable to last year as well as unfavorable to our expectations, primarily due to several nonrecurring charges During the quarter.
Looking in more detail at our quarterly results. Gross margin was 22.6% of sales. The increase in FIFO gross margin rate, excluding fuel, was primarily attributable to favorable product mix in our grocery business, including Our Brands, lower shrink and sourcing benefits, partially offset by lower pharmacy margins. The result reflected Kroger's ability to improve margin while being competitive on price and helping customers manage their budgets. The improvement in shrink reflects the significant ongoing work from our operations team as they address this challenging issue. While we are pleased with the result this quarter, shrink related to theft remains high on a historical basis, and we still have work to do to further mitigate the financial impact.
The increase in OG&A rate, excluding fuel and adjustment items, was driven by investments in associate wages, increased incentive plan costs, and nonrecurring costs, including hurricane expenses and an increase in cost due to severity of general liability claims, partially offset by continued execution of cost savings initiatives.
During the second quarter, we recorded a LIFO charge of $21 million compared to a charge of $4 million for the same quarter last year. Adjusted FIFO operating profit was $984 million. Our adjusted EPS was $0.93 per diluted share, a decline of 3% compared to last year.
Fuel is an important part of our total value proposition. It builds loyalty through our Kroger Plus program by offering customers another way to save and led to gallon sales outpacing the industry this quarter. Fuel profitability was stronger in the second quarter compared to last year on a cents per gallon basis. In the second half, we will be cycling stronger fuel results, but expect margins to be relatively flat compared to last year.
I wanted to provide a brief update on inflation, a topic I am asked about frequently. Inflation increased slightly in the second quarter from the first quarter, but is trending around 1%, which is consistent with our expectations since the start of the year.
I'd now like to provide a brief update on associates and labor relations. During the second quarter, we ratified new labor agreements for our Food 4 Less warehouse stores in Southern California, Columbus Valley stores, Mid-Atlantic division stores, Anderson Bakery, Michigan, West Michigan and New Market clerks, Central Peoria clerks and Shelbyville warehouse covering more than 13,000 associates. Kroger is working to reach an agreement with the UFCW for meat and grocery associates at 29 Fred Meyer stores in Portland. We respect our associates' right to collectively bargain.
Associates at these stores chose to strike for six days before returning to work last week. Negotiations continue this week and we remain open to constructive dialogue with the UFCW. We are also communicating to local unions that coming to the table with proposals that do not balance investing in associates with keeping groceries affordable for our customers and supporting a growing and profitable business model are untenable. It undermines our goal of growing the Company in a way that helps to ensure job security and create more jobs and advancement opportunities for more associates.
Turning to cash flow. Kroger continues to generate strong adjusted free cash flow through consistent operating results. Consistent generation of free cash flow is an important part of our model and is enabling us to deleverage in anticipation of our merger with Albertsons. At the end of the second quarter, Kroger's net total debt to adjusted EBITDA ratio was 1.24 compared to our target range of 2.3 to 2.5. Our strengthened balance sheet provides us flexibility to pursue growth and enhance shareholder value.
We continue to take a disciplined approach to deploying capital, prioritizing the highest growth opportunities that strengthen our business and deliver solid returns for shareholders. We're committed to maintaining 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. The strength of our free cash flow gives us the ability to invest in the growth of our business. We are allocating more capital to our major and minor store projects this year.
Our teams have done an excellent job completing projects ahead of schedule, and year-to-date, we have completed almost doubled the amount of store projects as we had completed last year at this time, which will position us to grow in the second half of 2024 and 2025. It also creates capacity later this year to work towards opening 2025 projects earlier in the year as well.
To reflect this, we are raising our guidance for full year capital expenditures from a range of $3.4 billion to $3.6 billion to a range of $3.6 billion to $3.8. billion. Based on the strength of our free cash flow, the change to our capex guidance does not affect our adjusted free cash flow guidance. In the second quarter, we raised our quarterly dividend by 10%, reflecting confidence in our ability to generate strong cash flow. Our quarterly dividend has grown at a 13.5% compounded annual growth rate since being reinstated in 2006. And this marked the 18th consecutive year of dividend increases.
I'd now like to provide some additional color on our outlook for the rest of the year. We are encouraged by our performance through the first half of the year, which led to results that were in line with expectations. Our solid sales results through the first two quarters of the year give us confidence to raise the low-end of our full year identical sales without fuel guidance. We now expect identical sales without fuel to be in the range of 0.75% to 1.75%. We are cautiously optimistic about our sales outlook for the second half of the year and expect customers to continue prioritizing food and essentials.
We have developed merchandising plans that are designed to enhance customer engagement, drive spending, and improve unit volumes. The strength of our model enables us to navigate an environment where customer spending is constrained by current economic pressures, and we expect the various components of our model, including grocery, health and wellness, fuel and alternative profit businesses to provide us with flexibility in how we create shareholder value. As a result, we are reaffirming the rest of our full year guidance.
I'll now turn the call back to Rodney.
