Good morning, and welcome to The Kroger Co. First 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 of Investor Relations. Please go ahead.

Thank you, Gary. Good morning, and thank you for joining us. I'm joined by Rodney McMullen, Chairman and Chief Executive Officer; and Gary Millerchip, Chief Financial Officer, and they will be providing an update on the business and discussing first quarter results. This is obviously an unprecedented time, and we are taking the additional step of providing more details on current business trends this quarter, so our prepared remarks may run a little longer than normal. But 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, so 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. [Operator Instructions] I will now turn the call over to Rodney McMullen.

Thank you, Rebekah, and good morning, everyone. A lot has happened in our world since the last earnings call. We've had to adapt quickly to a new way of life. The COVID-19 pandemic and the most recent instances of racial injustice have changed our country in unmistakable ways, most profoundly the devastating loss of life and livelihood that has affected so many Americans. During the crisis, Kroger has been guided by our purpose and our values. I am proud of our associates who stepped up when we were called to be there for our customers, communities and each other. We are proud of the heroic and dedicated associates who are on the frontline, serving our customers when they need us most. As America enters the next phase of the pandemic, we know that our associates will continue to rise to the challenge, delivering Fresh for Everyone and helping our customers, communities and America emerge even stronger. I am proud of the measures that we've taken across our business to safeguard and support associates, customers and our communities. During the pandemic, our priority has been to provide a safe environment for our associates and customers with open stores, e-commerce solutions and an efficiently operating supply chain so that our communities have access to fresh, affordable food and essentials. Since March, the company has invested more than $830 million to do just that. This includes the $150 million Thank You Pay for our frontline grocery, supply chain, manufacturing, pharmacy and call center associates, which are providing -- which we are providing to acknowledge their hard work and dedication to maintaining safe, clean and stock stores. We are pleased that our associates will share in the company's success with today's second installment of Thank You Pay. We continue to invest in, support and…

Thanks, Rodney, and good morning, everyone. Before discussing results for the quarter, I also want to thank our associates for their dedication and all they are doing to serve our customers and communities during this time. The pandemic brought unprecedented challenges, and I'm extremely proud of how our teams responded as America relied on Kroger as a trusted resource for their food and essential needs. As a result of the pandemic, we have seen elevated demand across our physical stores and digital channels. Our data insights show customers continue to value the convenience of our physical locations and the ease of our seamless ecosystem. As many of you know, we outlined our Restock Kroger transformation plan in 2017. And as part of that plan, we made the strategic decision to invest in digital. These investments allowed us to quickly add much needed capacity to serve our customers by scaling the foundational capabilities we have built and continue to develop. The outcome of these efforts has been a meaningful uplift in sales across all digital modalities: Kroger pickup, delivery and ship. We made significant investments of more than $830 million in the quarter to reward associates and safeguard associates, customers and communities during the pandemic. We also contribute to $236 million to multiemployer pension plans to help stabilize future associate benefits. Even with these significant investments and accelerated digital growth, we were pleased to achieve an improvement in FIFO operating margin, excluding fuel and adjustment items. We firmly believe that our ongoing investments will help Kroger emerge stronger, and it's clear from our recent customer data insights that our competitive modes, fresh, our brands, personalization and a seamless ecosystem, are even more important as a new normal begins to emerge in food retail. Now I'd like to discuss our quarterly results…

Thanks, Gary. I am so proud and deeply grateful for our 0.5 million associates who step forward to be there for our customers and communities when they need us the most. In true Kroger spirit, they have risen to the occasion to each challenge presented with a strong spirit of agility, determination and service to meet the needs of our customers, and these are the exact skills that will ensure the company will remain relevant to our customers in the future. As I shared when we first began this call, we quickly had to adapt to a new way of life. We continue to make progress on the underlying business, even with the recent customer demand tailwinds. We are confident that Restock Kroger has allowed us to reposition our business and to create value for all our stakeholders prior to and during the COVID-19 pandemic. Now we look forward to your questions.

[Operator Instructions] Our first question comes from Rupesh Parikh with Oppenheimer.

Gary, I just want to go back to your -- I guess your -- what you just said about Q2 EPS growth, mid- to high single digit. I think you said mid- to high single-digit EPS growth. Can you just help us understand more some of the headwinds there getting to that level of growth?

Yes. I think the biggest factor, Rupesh, would be that -- I mentioned it earlier, but just to maybe to give a bit more color on fuel for quarter 1 and how we see quarter 2 potentially shaping up because that would be the -- I think the biggest factor in the numbers. Overall, as I mentioned earlier, when we think about the supermarket business, we're expecting continued strong sales momentum, and we feel good about the ability to manage the margin and the investments that we'll continue to make as a result of COVID-19. I think the biggest factor and the difference between the 2 quarters as we look at the guidance for the second quarter, in the first quarter, fuel has been a significant tailwind for us overall despite the fact that gallons were significantly lower through COVID. As we start to look at Q2, and we'll be cycling margins from Q2 last year, and even though the fuel trend in gallons has continued to gradually get better every week, we're still seeing a decline in year-over-year gallons. And the current trend would be in the sort of mid-teens range of negative growth in gallons, which is consistent with what's being seen in the market. So as we look at the fuel performance in Q2 and what we see today, we're thinking that could be a headwind of anywhere between $50 million to $100 million. So it would be important to think about that as you're thinking about the guidance that we shared for Q2 because that would be the -- I think the primary factor that would despite the continued growth and improvement in performance that we'd expect over the original budget in the supermarket business. Hope that helped.

That's great. And then -- okay. That's really helpful. And then just one follow-up question. So just on e-commerce. So as you guys look at -- obviously, you have the partnership with Ocado. How does what you've seen recently change your, I guess, your e-commerce plans or investments going forward?

I love the question. And if you look at the strategic decisions we've made over the last several years, it highlighted those decisions really paid off in the current environment. Our digital and delivery and pickup business in the last 2 months grew triple digits and continues to grow at that. And to have the ability to grow at that kind of level that quickly, just so proud of the whole team in terms of the foundations that were already in place but also the stores and all the other parts and supply chain on being able to supply and hire people and support that. So we fundamentally believe the long-term trend will continue where people will continually depend more on e-commerce. We certainly have seen that be accelerated. We don't think it will stay at the higher level where it is today permanently, but we do think, fundamentally, the growth has been accelerated and will be higher than where it started before COVID-19 and then grow from there. One of the things that's incredibly important is all the pieces tied together, including Ocado, will allow us to continue to grow and improve our profitability of that part of the business. As you know, when a customer first switches to online, it typically takes 3 or 4 years before that customer's profitability is the same as when they shop in the store. But what we find is we get a significantly higher share of that customer's total household spend. And there isn't anything that we've seen that wouldn't cause us to believe that the new e-commerce shopper doesn't feel that way, and a lot of those customers are telling us they intend to continue to shop more e-commerce than before, and we would expect to get a higher share of their business. We've also seen a lot of customers new to Kroger come and use our delivery and pickup business, and we're seeing nice repeat purchases from those customers. So all those things cause us to feel good about the things we have in place and feel even better about Ocado and the other pieces that we're working on going forward.

The next question is from Simeon Gutman with Morgan Stanley.

I was going to ask something different, but I wanted to ask you, Rodney. You just made the comment, it takes about 3 to 4 years to achieve the same profits. Do you mean that on an ongoing basis? Or is that lifetime value because over 3 to 4 years, I've purchased enough through the digital channel. And therefore the -- I guess the profit becomes equal? Or on a go-forward basis after year 3 or 4, the variable cost or the actual basket economics of each become even?

It's each customer's household. So if you look, obviously, when they first switched to e-commerce, we're spending the labor to pick their order, where before that, the customer spent that labor. What we find is, over time, we continue to get more efficient with our picking operations on picking an order, and the customer spends more money with us, so their total spend increases. So what we find is every -- you'd have to look at every single customer separately. So the customers that first started shopping e-commerce 3 years ago, they're to the point now where their profitability is the same as before they went to e-commerce, but we're getting a higher percentage of their spend. And looking forward, we believe we'll be able to continue to reduce the cost to serve that customer. A new customer starts day 1, so you have that headwind until we are able to earn more of their total household spend. And what we find is we're able to do that.

Yes. That's helpful. And my follow-up is on the 92% growth in the first quarter. Did you say the mix? Or are you surprised by anything about the mix between delivery and pickup? And then anything you can share on how it impacted gross margins or margins broadly? It sounds like if you picked up a lot of new customers, it would be in a pretty dilutive position for that lifetime of the customer, but anything you can share on it, please.

Yes. If you look, delivery was a higher growth than pickup, especially during the peak of the COVID cases. As areas have reopened and companies have reopened their offices and things like that, the growths are starting to get more similar. Gary, on the growth, I'll let you answer the growth and the changes there.

Sure, yes. Thanks for the question. I would say that the way that we see the digital customer behavior flow through in the P&L, it's not a meaningfully different mix in terms of overall pass-through in gross margin rates. Rodney's point earlier, generally, we see customers increase their spend. The basket size increases, and the mix is pretty consistent. The area that would have impacted gross margin would have been more in the fact that we run the fee waiver promotion. So that would have certainly been a headwind in the gross margin category. Really, where we see the bigger impact on digital is Rodney's earlier response around the incremental labor that's involved in picking the order. So if you think about the pass-through rate that we might see on a traditional sale through the store, which we've talked about historically being the 15% plus range, it would be significantly lower than that on the equivalent basis because you've got the incremental labor associated with those sales. So it would be more of an impact in the OG&A rate than it would be in gross margin when you think about the quarter.

The next question is from Edward Kelly with Wells Fargo.

Yes. Just, first, a follow-up and then a real question. As we think about Q2, could you just help us out? What are you assuming for IDs in the quarter? What are you thinking about from a continued COVID cost perspective? And how do we think about gross margin relative to what we just saw in Q1?

Yes. Thanks for the question, Ed. There's a couple of parts for that, obviously. I think in terms of sales, as we shared in our brief prepared comments on sales, we're obviously watching the trends very closely. Part of the challenge is it's very hard to know obviously exactly how we expect the customer behavior to return back to whatever a new normal becomes. We certainly expect as states have reopened to start to see a gradual return to some level of lower food eaten at home, but we do think that's going to be more gradual than a specific stair step-down. We're starting to see some change in Q2, as we mentioned during the prepared comments, and -- but it's not really sort of a specific step-down when states have reopened. It's much more of a gradual process as you start to see customers returning to some level of normal behavior. I would also say it's not very consistent. It's not as though states that reopened first are seeing the bigger step-down. It's relatively more tied to when states first experienced a major outbreak of COVID from what we can see and also depending on how aggressive the spike in sales were in that market when the outbreak first happened. That's tending to more correlate with the gradual change in shopping behavior. So we're watching it very closely. We are starting to see visit frequency pick up a bit. We're seeing more of the departments that might be more splurge I mentioned earlier growing like daily baker and specialty cheese and floral, but it really is a gradual process. And I think we still say it's too early at the moment, only a few weeks in to know. So we're expecting it to be a gradual step-down from where…

One other comment, Ed, on the first part of your question, and it's hard to assign specific numbers and specific numbers just for the second quarter versus third quarter, fourth quarter and even 2021. But when we talk to customers, we -- our customers still tell us they plan to eat more meals at home than before. When talking to customers about when their children return to schools, we still have a significantly higher percentage of families telling us they plan to make breakfast for the kids to take to school and lunch for the kids to take to school. All of those things in terms of what customers are telling us, we would expect there'll be more meals eaten at home or prepared at home that obviously will help support growth as well.

I understand the reluctance to really give ID guidance. But the only thing that I would say is that it does matter if it's mid- to high single-digit EPS growth on a double-digit ID versus a single-digit ID from an investment perspective. So to the extent that you can help out with that, that I think would matter to how people are looking at your story. The other thing that I needed to ask about is the pension contribution because I think people are getting kind of hung up here. The $200-plus million contribution that you made this quarter, I believe that relates to that group of 4 meat plants that you essentially kind of control and take in-house. Is that right?

That's right. So think of it as it's a green status plan. It's over 80% funded, so there's not an obligation for us to make that payment. But obviously, it's something that we're committed to making sure that, long term, we're securing that future liquidity of the plant. And especially during times like this when there's market volatility, sometimes there could be pressure on those plans to have to liquidate assets to be able to make contributions, and we wanted to make sure that the plans were not put in that risk. So we decided to basically invest those dollars now to protect the future. And obviously, over time, that will derisk the need for us to have to invest, but it wasn't a requirement to make those payments.

Okay. So it sounds like that's pretty funded at this point, so maybe we don't see that type of contribution going forward. The other plans that you have is you have a -- you're obviously in the traditional map, right, with other grocers, which is negotiated, and there's no real reason for you to make one-off contributions like this into those plans. Isn't that right?

That's correct. Yes. The only way that we would approach those examples would be if we identified an opportunity to be able to pull away from the multiemployer plans and bring them into the same way that we run that UFCW plan if there was a -- if it made sense for us to do that from an investor and associate perspective because we could derisk the future liabilities and be able to take more control of that potential exposure in the future But we have no obligation on those, unless we were to make -- take that action like we did with the plan you described earlier.

Right. And your defined benefit plan, the corporate one, is frozen now, right?

That's right. Exactly, yes. That's fully funded.

The next question is from Karen Short with Barclays.

Just following up on that. So the actual -- can you give us an update on what the actual liability is on the multi-employer pension in dollars pretax? And then with this contribution that you just made, is there -- do we adjust -- and I know you haven't given the annual P&L and cash impact of the multiemployer pension contribution for many years. But -- are we think -- like when we think about modeling it, beginning 2Q, does that actual expense dollar amount come down based on the contribution you just made? And then I had a totally separate question.

Yes. So it depends on which piece of the plan, just to clarify, Karen, you're talking about. So as Ed mentioned a moment ago, we have a multiemployer plans that we separated and we now manage internally. And as I mentioned earlier, they would be in the green status, so there'd be no obligation for us to be making those payments, but we're obviously looking to get them over time a fully funded status and to minimize the risk to associates. So think about that as it's minimizing. If returns weren't where they needed to be, it minimizes the risk as of us having to make contributions in the future and ensures those pension plans are in a strong position for our associates. The multiemployer plans that we're a participant in but we don't have a current obligation to fund beyond the annual contributions that we're making through our negotiated contracts with the unions, that would be an exposure as of the end of last year and as we reported in the 10-K, $2.3 billion or $1.8 million after tax. And they're ones where, over time, we would certainly look at if there are options to figure out different ways to structure our arrangements so that we can address those liabilities, but they would be very specifically defined and ring-fenced transactions that we would obviously share publicly in the future, if we were to decide that was the right thing to do.

But as we think about the actual expense on the P&L beginning in 2Q, I know, again, you don't guide to that anymore, but how should we think about that?

Expense related to what, I'm sorry, Karen, I'm not sure I'm following.

Well, the multiemployer expense.

Yes. So we -- as I mentioned, we would have pension expense related to our multiemployer plans that we pay into as part of the negotiated contracts with the unions. And obviously, where we need to continue to fund the plan that's internal, we'll make those contributions when we need to. But we -- obviously, that can vary significantly. But most of the most of the pull -- if I call it, pull forward may be a potential liability in the future, it doesn't relate to what we would do in 2020.

Okay. Got it. And then just looking at digital, in terms of your overall digital, would you just be able to give us what your actual percent of sales in digital was in 1Q? And then what the split was between -- I guess, click-and-collect and third party, which I would say is mostly Instacart? And then the last question I had was just on your cash balance of the $2 billion, just thoughts on that.

Well, if you look in terms of overall, digital would have been, I don't know, probably 6.5% or 7% of the total company. It would have been predominantly pickup versus delivery in terms of the mix, but the percentage growth was higher on delivery. So -- and if you look at -- the other thing on delivery, a lot is delivered directly to people's homes, either through FedEx or UPS. And that's basically the similar number is what is delivered via Instacart and other services. On the other piece, Gary, I'll let you answer Karen's other.

Yes. Thanks, Rodney. Sorry, we were all looking to get the digital number for you there, Karen. Can you repeat the second part of the question?

Oh, just on the cash balance. I mean you guys haven't had a cash balance like that for a while. So thoughts on where you're at in terms of deployment of that?

Yes. So as I mentioned a little bit in the prepared remarks, we -- certainly, we're thrilled with the cash balance that we generated during the quarter. Part of that does reflect the improved operating performance. Part of it was a significant improvement in working capital. We want to make sure that, obviously, we maintain maximum flexibility in the short term, just with some of the uncertainty that still exists in the market. And we also want to make sure we understand how much of the working capital benefit will continue because we do believe we've made strong progress on working capital over the last really 12 months to 18 months as we've continued to look at ways to free up cash flow, but some elements of that will be inflated, just because of the higher sales in the first quarter and the way our working capital cycle works. And some of it is also related to the CARES Act, where there's a delay in certain tax payments as part of the way that the CARES Act was structured. So we would expect as a result of all of that still to generate incremental free cash flow this year. As we go through the next couple of months, we're really going to focus on what do we think is the optimal way to use that cash flow consistent with our overall capital allocation strategy that we shared with you in our Investor Day in November. So think about is we'll look at are there opportunities where we could continue to invest in the business to drive longer-term growth. We'll certainly be looking at are there any reasons to restructure any of the pension future MEPP liabilities that would allow us to take that potential liability and risk off the table longer term. And then, of course, we'll also be looking at how might we redeploy that cash to our shareholders consistent with our strategy of continuing to grow our dividend over time but also looking at buybacks to shareholders as well.

The next question is from Judah Frommer with Crédit Suisse.

One, a little bit more long term. You guys probably have some of the best data analytics on your customer base in the industry. So when Rodney mentioned kind of the habits of newer customers and specifically new e-com customers, right, how could you see the opportunity to further monetize or kind of gain further loyalty from new and existing customers kind of beyond the pandemic, right? If you assume that people are going to eat a little bit more at home and that you have the ability to kind of incentivize your customers to do a little bit more than that, how does maybe next year look for you relative to where you may have thought it would be before the pandemic?

Yes. We love the question, and it's something that we're spending a ton of resources. We had as many new customers come to us in a couple of weeks as what we did all of last year, and we continue to have a lot of new customers. So we're using all the things that we would normally do on welcoming new customers in but doing it in a much more aggressive way. Obviously, one of the things that we want to make sure is they have a great experience. So if you look at our supply chain team working with our merchants, we're getting the stores inventories back up to pre-COVID levels. So the in-stock position improves. The continued focus on fresh and continuing to even -- fresh was a priority already, but making sure that the products that customers get stays fresh and then with a friendly smile or an incredibly easy digital experience. So your question, we love, it's the opportunity that we have in front of us. So far, we've been able to gain good market share during the pandemic. And obviously, we're going to continue to focus on making sure we take care of those customers and keep them and continue to build their basket in terms of what they spend with us versus other places.

Judah, the only thing I would add is that, to your point around data, we spent a lot of time looking at the data that we have and also the data that's available in the marketplace over the last 20 years from whether it's government data, more broad market data, along with our own shopping information, and really looking at what are the scenarios around where we see the customer going over, to your point, not really the next sort of month or 2 but the rest of the year and into next year and maybe even further out. We do feel from everything that we see that we're putting ourselves in a strong position based on the investments that we're making as part of Restock Kroger to come out the other side of this in a stronger place. And everything that we see, while this obviously no one knows and it's hard to predict, would say that based on the -- less around maybe the pandemic but just on generally when customers are in more of an economically challenged situation and combining that with these restrictions, we do think there'll be some level of a -- I won't call it a permanent shift but a multiple-year shift to food eaten at home versus food away from home, and that's been very much the case in our data and the external data when you look at the last couple of recessions. So our focus is very much on how do we make sure we're using personalization and tools and our strategy around creating value to really make sure that as we look out 12, 18 months, we come out of this in a stronger position, both in customers consuming more food at home but also Kroger's market share, so that it allows us to accelerate our overall long-term model around Restock Kroger but also delivering shareholder value. And we feel very positive about the way in which we believe we can deliver that over longer term. I think it's easier to look at the longer term in some ways than it is probably for the next 6 months and how exactly the trends will play out.

Okay. That's helpful. And if I could just follow up on kind of 2 items that maybe we could clean up a little bit. Just first on the pension. In terms of go-forward expense that's hitting the income statement, that hasn't changed at all. Just what's running through the income statement is what you're required to contribute to those external net plans? Is that right? And then second, for the gross margin in Q2, is there still a headwind from alternative profits being a little bit slower than they would be? And is there also some benefit from promotions not being fully back to where you'd expect them to be?

Sure. On the pension side, yes, so the payment that we're making in Q2 is a discrete payment that we -- sorry, in Q1, I'm sorry, that we deliberately took the decision as we were in a strong position from a performance perspective and a cash flow perspective. We have no obligation to make that payment. It doesn't cause us to have to make payments later in the year or that we are obligated to some additional commitments later in the year. It was very much a decision that we made to take advantage of the strong performance and essentially protect that future risk and make sure that our associates' pension plans are in a strong position. So it's very much more of a forward-looking view of saying let's make sure we're putting ourselves and putting our associates in a position where we're protecting the future when we have the opportunity to do so. From a gross margin perspective, yes, certainly, I think on the alternative profit side, I mentioned it earlier. On the Media business, we're seeing a tremendous pickup in growth. So I wouldn't believe that we would see any headwinds from media. That's continuing to bounce back very strongly from a very temporary delay that we experienced in the first quarter, really during the lockdown period and as things were reset. Kroger Personal Finance is the biggest element of alternative profit from a profit contribution perspective, and that is sort of more, I guess, dependent on some of the broader recovery in the market when you think about gift card sales, restaurants are an important part of that category. And when you think about credit card spend, those elements are all tied to continued improvement in the economic situation. So while we are still able to tap into opportunity in KPF because we have low penetration of our customer base, we would expect that to continue to be a headwind in terms of impacting gross margin and performance for the year. But media, certainly, we wouldn't have that same view there.

And we would expect to continue to do promotions. And one of the things when you look at the details behind first quarter, almost basically all the gross margin improvement was driven by leverages and marketing expense from the higher sales, warehouse and transportation and shrink, and our team had incredible strong quarter on shrink. So it's really those leverage, and we would expect continue to have some of those leverage benefits at the higher sales that we're expecting.

The next question is from Michael Lasser with UBS.

Recognizing that it takes several years for a digital customer to become as profitable as an in-store customer, what will be the margin impact over the next 3 years if your digital penetration remains where it is today?

It's a great question. And I can tell you before COVID-19, our digital business has become a tailwind in terms of the incremental improvement from where it was before. And as we look forward, we would expect as customers mature that, that would still be the case. And that's going to be a combination of customer spending -- and I'm talking about in total, not just the new customers by themselves. In total, as that customer continues to give us more of their total share of spend for a household and as our teams continue to take costs out in terms of serving that customer and as our Ocado sheds begin to take -- come online and some of the other facilities to supply our customers, we would expect that digital will be a tailwind for us as we move forward, and it's really just the fact that the business basically doubled overnight.

And you mentioned that you're building all different types of Ocado shed. The first one are large ones in different parts of the country. What has the learnings from this experience influence -- how it influenced the sheds that you're going to create moving forward?

It's really if you look -- as we've been working on it in total, and Ocado has done a lot of work to be able to get the economics viable for a smaller shed, over time, that will allow us to go into smaller markets with those -- with sheds as well. So it's part of the overall supply chain design, and it's playing out as we expected. And Ocado is continuing to up their game as well. So it's really the experience. We're looking forward to Ocado's sheds opening up in Canada and France, and that will provide an additional set of learnings as well.

And if I could add one last one. I know this is hard to tease out from the data, but you have a lot of really good information. What have you been able to discern about different meal occasions that are now being eaten at home? So as consumers return to work and eat more of their meals at restaurants around where they work, to what degree is that going to result in the slowdown in the IDs that you're experiencing? Similarly, maybe you can tease out how soups and salads are doing versus something you might eat at dinner, where dinner could also slow as we go to those families more.

Yes. The -- overall, we're still seeing people shop at fewer stores and, as Gary mentioned, a large spend per basket. If you look at the department, that's probably the easiest directly to talk about is our deli department. And our deli department, the trends over the last 4 or 5 weeks have been significantly improved from where it was in the height of the lockdowns. We would expect a lot of those meals are things where people are preparing at home and taking to work. Our customers tell us they're still minimizing the different places they go and minimizing their exposure. So that's something that we want to make sure that we're there for the customer.

The next question is from Greg Badishkanian with Wolfe Research.

This is Spencer on for Greg. I understand that the situation still remains pretty fluid. But can you just provide some additional color on what you think the new normal looks like for food retail? And do you think COVID has accelerated a structural shift towards sort of eating at home channel?

Yes. The -- first of all, if you look at things that we think, for sure, is the digital channel and people eating via that accelerated the trends that we're already on. If you look at like our Home Chef business, they had an incredible quarter with picking up new customers as well. The thing that I get most hopeful about is when we talk to customers, customers tell us they like eating at home as a family and eating together and having meals together at home. And one of our responsibilities is to help them keep it fresh and innovative and new ideas, and we continue to work on that. But everything that we can see, the customer likes that, and they like learning how to cook and cook as a family. So that trend is something that we focus on a lot and try to make sure we're supportive of it.

That's helpful. And then we've seen promotions tick down across the industry throughout this crisis. Has COVID changed your philosophy on price investments at all? And then would you expect an acceleration in promotions in the back half of the year?

Yes. One of the things that I'm super proud of our teams is we've had an ad and promoted every week during the pandemic to try to help our customers' budget go as far as possible. The only change that we made was we stopped doing the buy 10 for 10s and things like that, that incentivized multiple purchases on items that we're in short supply because we wanted to support as many customers as possible, getting those. We would continue to use our data to understand what's important to the customer and some customers are in different financial situations, whether they lost their jobs or they were able to work from home. And we're supporting both of those customer segments with promotions, loyalty mailings and other offers that are 1:1, in addition to what you can see in an ad, and we think that's an important component to continue to support.

I think the other thing I would add, Rodney, is that we mentioned earlier around the pickup fee being an investment in price with the promotion there. But also, we did adapt our plan around making sure we're giving value to customers where product was more available. And so the team did a really nice job in promoting on HBC and general merchandise products. And while it's very true to say that grocery and fresh led the way, we saw significant double-digit growth in both of those categories and would have seen some lower gross margin in those 2 categories because we were more promotional in making sure that as being a business that was opened through the pandemic that we were delivering value for customers. I think that's been -- the team did a really nice job of making sure we were creating value there and delivering value there.

The next question is from Ken Goldman with JPMorgan.

I'll just ask 1 because I know we're late. You talked about some of the trends in states that reopened first. Maybe too early, but what are you seeing in states where there are headlines about a second wave or cases increasing? Have you seen any upticks there? Or again, is it just too early to say for sure?

I think it's too early to tell for sure, and those were states where people were more comfortable going out, anyway, even during lockdowns. So it's really early to -- but we're really not seeing massive shift changes. One last question.

And that question comes from Michael Montani with Evercore ISI.

Just want to see if -- can you hear me?

Yes.

Okay. Great. Sorry about that. So the question I have was 2 parts. The first was on traffic and ticket. I know you don't typically disclose that, but if you could give some incremental color around the 19% ID sales on that line? And then secondly, related to that was just if there's a sense of what percentage of that comp is being generated by existing loyal households versus the new households. Obviously, you had mentioned, Rodney, there was some strong growth in new customer acquisition.

Yes. If you look at -- on the ticket growth, we had significant double-digit increases in the average basket size. And we're finding that customers are going into the store less frequently, and so well over 100% of the growth is driven by basket size. If you look at new customers and existing customers, it's a meaningful number, but it's maybe 1/4 or 1/3 of the total when you look at all the pieces because we also have a lot of new customers to pick up and where we've launched where customers can pay a SNAP at pickup and things like that, new customers there as well.

Okay. And then I guess the other one I had was a lot of the questions I've been getting relate to how you all would be positioned to cycle this kind of comp in a year from now. And so I was just wondering if you could provide some incremental color around the Ocado partnership and I guess, in particular, as it relates to some of the c-store fulfillments and also like center store potential efficiencies that you could gain and reinvest back into competitive positioning.

Yes. The -- that's a question, obviously, we're spending a lot of time internally talking through and trying to understand as well. The thing that, Gary talked about it a little bit, but if you look at -- we would expect '21 to be better than what the trend would have been for '21 before COVID, and Gary mentioned that briefly in answering one of the other questions. So everything that we can see, we believe there are certainly meaningful shifts in the way people eat. I won't say permanent but certainly multiyear and that we would expect '21 to be better than what '21 would have been before COVID. To give more specifics than that, I think it's hard to say. As we get to next year, one of the things that we would expect is, certainly, in-stock positions will be better, which will be helpful, but people will be going back to a normal life more so as well. So we're going to do everything we can to make sure we're taking care of the customers we have and getting more of their share in the new customers. And the easiest point of context is just we would expect '21 to be better than what '21 would have been pre-COVID. Thanks, Michael. Appreciate it. I think the last question was a great question to end on. If you look at Restock Kroger and the work from Restock Kroger certainly position the Kroger well to deal, and we had good growth before COVID, and COVID certainly accelerated the infrastructure and foundations we had in place. And as we look to 2021, we would expect that to be better than what it was before COVID. The other comment that I want to make is, as you know, we always like…

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