Operator: Good day, ladies and gentlemen, and welcome to the Q4 2012 The Kroger Co Earnings Conference Call. My name is Christy. I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. As a reminder this call is being recorded for replay purposes.
I would now like to turn the call over to Ms. Cindy Holmes, Director of Investor Relation. Please proceed ma'am.
Cindy Holmes - IR: Thank you, Christy. 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, but Kroger assumes no obligation to update that information.
Both our fourth quarter press release and our prepared remarks from this conference call will be available on our website at www.thekrogerco.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 topic with one question and one follow-up question if necessary.
I will now turn the call over to Dave Dillon, Chairman and Chief Executive Officer of Kroger.
David B. Dillon - Chairman and CEO: Thank you, Cindy. Good morning everyone and thank you for joining us today. With me to review Kroger's fourth quarter and full-year 2012 results are Rodney McMullen, Kroger's President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer.
Kroger had an outstanding fourth quarter and an outstanding year. We accomplished a lot in fiscal 2012. We delivered on ID sales growth. We exceeded expected earnings per share growth. We increased FIFO operating margin and we increased or dividend 30%. Kroger's unique value offering of better service, great products and enjoyable shopping experience and lower prices continues to resonate with a full range of customers. The result was an industry-leading 37 consecutive quarters of positive identical sales growth.
In this morning's press release, we provided you with details to make it easier for you to do an apples-to-apples comparison and understand how we look at our business internal. Table 6 under press release was designed to help you understand the details behind the growth figures we reported. We delivered value to shareholders by increasing our dividend and exceeding our own earnings per share guidance with the combination of solid operating results and share buyback. We returned more than $1.5 billion to shareholders through dividends and stock buyback in 2012. Our associates delivered an outstanding year that underscores Kroger’s growing connection with customers remains the key to shareholder value creation. In a moment, Rodney will outline how we got there and Mike will discuss the numbers.
First, I’d like to give you some insight into what our customers are facing today. Consumer confidence was fragile throughout the year and hit its lowest point this January as customers voiced heightened concern over taxes. We believe four factors will continue to affect consumer confidence; the overall state of the economy, fluctuating gas prices, payroll taxes, and government policy uncertainty. These factors are causing sales comparisons between days and weeks to be highly variable. But overall, we continue to have strong ID sales trends.
We remain confident in our ability to deliver growth despite the economic uncertainty. Our team has delivered strong results by executing our Customer First strategy over the last five years. And as you know, the last five years has been highly volatile and we have continued to consistently deliver through that time.
Cornerstone of our Customer First strategy is the value our associates deliver to our customers. When our customers are stretched at the pump, they look to our fuel points program for meaningful savings. And when families have less to spend in restaurants, our ready-to-heat and ready-to-eat meals help them eat well at home. When you want convenience of finding everything you need plus a little in one place and save time at the checkout, nobody does it better than our family of stores. So whatever the economic and operating environment, Kroger is situated to deliver on our growth targets for 2013 and beyond. Our ability to do this is what makes Kroger a compelling investment.
Rodney will now provide deeper insight into our business performance and share our yearend market share statistics with you. Rodney?
W. Rodney McMullen - President and COO: Thank you, Dave, and good morning, everyone. We exceeded our expectations for the quarter and the year thanks to our associates performing to deliver growth. We are implementing our long-term growth strategy, which includes targeting capital to grow our business in new and existing markets, leveraging dunnhumby insights to solve varied customer needs through both traditional and digital channels, and continuing our share buyback program.
We continue to make good progress adding square footage in four fill-in markets, and we have identified others based on various metrics. We have narrowed the list of new markets for future expansions. In 2013, we plan to build, expand or relocate 45 to 50 supermarkets compared to 44 in fiscal 2012.
At our investors meeting in October we identified four key performance targets for shareholders to measure our success. I'd like to spend a few minutes discussing the results of each metric. On identical sales, we are very pleased with our fourth quarter identical supermarket sales growth of 3% without fuel. We focus on identical sales because it provides the strongest measure of our relevance with customers over time. Our identical sales without fuel and pharmacy were consistent throughout the year. We are very pleased with our identical sales trends through the year, given the fact that inflation declined during the year and tonnage growth improved throughout the year.
Consistent with our guidance at the start of 2012, pharmacy sales benefited overall sales in the first half of the year. This was due to strong growth in our pharmacy business, including attracting and retaining Express Scripts business. That’s also in line with our guidance at the start of the year, identical sales trended down as prescription drugs came off patent.
These events will be important to keep in mind as you estimate our quarterly sales expectations for 2013. Mike will provide our guidance shortly. Rolling four quarters adjusted FIFO operating margin excluding fuel and the extra week increased by six basis points compared to the adjusted fiscal 2011 result. This is in line with our commitment to grow the rate slightly over time on a rolling four quarters basis.
The third target metric is return on invested capital, or ROIC. ROIC in the fourth quarter held steady at 13.4%, the same as last year. We are committed to growing our ROIC over time even with the higher level of capital spending. Our fourth target metric is market share growth, which we report on annually. We look at market share the way customers would look at it, where they spend their money.
According to Nielsen Homescan Data, Kroger's overall dollar share of products we sell in markets where we operate grew approximately 20 basis points during fiscal 2012, the pace of our market share growth accelerated in the back half of the year. This mirrors out tonnage growth during the year. This data also indicates that our share increased intend of the 19 marketing areas outlined by the Nielsen report and declined in nine areas. Walmart Supercenters are a primary competitor in 17 of the 19 marketing areas outlined by the Nielsen report. Kroger's share increased in nine of those 17 markets and declined in eight markets, and overall, market share slightly increased. This Nielsen Homescan data is generated by customers who self-report their grocery purchases to Nielsen. This includes all retail outlets that sell the same products that we sell.
Strong identical sales and cost controls allowed Kroger to leverage operating expenses for eighth consecutive year. In fiscal 2012, OG&A plus costs plus rent and depreciation without fuel and the extra week were down 48 basis points as a percent of sales. Sales growth in the fourth quarter was driven by an increase in visits per household, loyal household growth, and slight increases in units per basket and per month. As a result, total units sold were up solidly compared to last year, as I mentioned before.
For the full-year, customer visits and monthly purchases were up, while items purchased each trip were down. The number of loyal households continue to increase as did the number of loyal household store visits. We estimate the rate of product cost inflation decline to 1.7% excluding fuel. Once again, every store department had inflation with the exception of seafood which had deflation. Corporate brands represented approximately 27% of grocery department sales dollars in the fourth quarter, and grocery department corporate brands units sold were 33.5%. The mix between national brands and corporate brands fluctuates in any given quarter. Our goal is to give the best value to our customers and we continue to be a market leader in corporate brands.
Corporate brands introduced 588 new items in the grocery department in 2012. Many of these were sold under our new Simple Truth and Simple Truth Organic brands, which had fiscal 2012 sales that exceeded our internal goal by 33%. Obviously this has been a huge homerun. We plan to continue developing innovative products that solve for unmet needs and that our customers won't find anywhere else in 2013.
Our practice has been to disclose our corporate brand's share in grocery category only. The reason for not using a broader base was the introduction of new items in categories where we previously had not been broadly represented. We felt this would've portrayed our growth in a too favorable light. With this behind us, we plan to begin giving a view of our share across a broader portion of the store in future quarters.
As you know, our commitment to improving the four keys of our Customer First strategy; our people, products, prices, and shopping experience, sets us apart from many of our other food retailers. While many of our competitors do well in one or more of these areas, very, very few excel in all four of them.
I'd like to share a couple of examples how we are seeking to improve our connection to customers through the non-price keys of our Customer First strategy.
An important area of focus for us is improving our digital connection with customers through our mobile phone app and on the web at Kroger.com. We offer Kroger customers the ability to check their fuel points download coupons instantly to their shopper card, create a shopping list and order pharmacy prescription refills virtually wherever they are.
We know that customers who are digitally engaged with Kroger are more loyal than those customers who aren't, which is why we recently began promoting our digital offering to connect with more customers on our digital platforms.
In a short period of time, we have seen visits to our mobile app increased by more than 120% and a 45% increase in traffic to Kroger.com and growth in the number of customers who have signed up for online and mobile accounts with Kroger.
Another measure of our growing digital connection is the total number of digital coupons that have been downloaded. In December, we had a milestone of more than 500 million digital coupons downloaded by our customers. We see only opportunity by improving our offering in the digital arena, particularly as we leverage our world-class loyalty program with dunnhumbyUSA.
Our customers are also eating more seafood as part of their weekly diet, making seafood one of the fastest growing commodities we sell. To meet this growing demand today and in the future, we support both wild-caught and farm-raised fishery improvement projects around the world. So customers can know with confidence that the seafood they buy at Kroger is always fresh, high-quality and sustainably sourced. Just last month we helped launch the global sustainable seafood initiative or GSSI to ensure that certification programs continue to successfully evaluate and validate our suppliers’ best in class sustainability efforts. Kroger is proud to be the only U.S. based retailer to hold a seat on the GSSI steering board and we are also a founding member.
Finally, I’d like to give you an update on labor relations. Our associates play a big part in building customer loyalty. Kroger’s commitment to our associates include our dedication to safety, significant investments in training, solid wages and good quality affordable healthcare. We have to deliver on this in ways that allow us to operate competitively with the nonunion retailers in each of the markets that we serve.
Kroger's financial results continue to be pressured by rising healthcare and pension costs, which some of our competitors do not face. Kroger and the local unions which represent many of our associates have a shared objective. Growing Kroger's business and profitability will help us create more jobs and career opportunities and enhance job security for our associates. We were pleased that our associates ratified a series of new labor agreements covering stores in Portland and throughout Oregon and Southwest Washington.
Currently, negotiations are underway with the UFCW for store associates in the Indianapolis area. In 2013, we have labor contracts expiring in Michigan, Houston, Dallas, Cincinnati, and Seattle. Now Mike will offer more detail on Kroger's 2012 financial results and our guidance for 2013. Mike?
J. Michael Schlotman - SVP and CFO: Thanks, Rodney and good morning everyone. Obviously our numbers are a little difficult to dissect this quarter. As I go through our results, there are three important comparisons that we want to make sure you understand. First, how we performed compared to our guidance in 2012; second, how we compare our fiscal 2012 results to fiscal 2011; and third, to show you how we calculated our growth rate for 2013.
Net earnings for the fourth quarter totaled $461.5 million, or $0.88 per diluted share. LIFO was $0.09 per diluted share, lower than estimated, and a discrete tax item added $0.02 per diluted share to the results for the quarter. These two items were not contemplated in our guidance. Excluding the benefit of these items, we exceeded earnings per diluted share expectations by $0.07.
Comparing our fourth quarter results to the prior year, net earnings per diluted share in the fourth quarter grew 22%. To calculate this, we excluded the extra week from the fourth quarter of 2012 and adjusted fourth quarter 2011 for the UFCW pension plan consolidation charge and to make LIFO comparable between the two quarters. This is illustrated in Table 6 of our press release.
We recorded a $41.2 million LIFO credit during the quarter compared to $73.4 million LIFO charge in the same quarter last year. We reminded you in the third quarter that we manage the Company without regard to our LIFO charge and many of the items we discuss are on a FIFO basis. So when we develop our expectations for any given year, we estimate LIFO last. The reason for this is LIFO is merely an accounting convention. If LIFO was lower than the prior year, our EPS growth rate will be higher than our targets; and if LIFO was higher than the prior year, our EPS growth rate will be lower than our targets. This is why we excluded the benefit of our lower than expected LIFO charge when comparing the guidance and calculating growth rates.
LIFO gross margin excluded retail fuel operations and the extra week decreased 43 basis points from the same period last year. Operating, general and administrative costs, plus rent and depreciation excluding retail fuel operations and the extra week declined 70 basis points as a percent of sales compared to the prior year's adjusted fourth quarter.
Before I move onto to discuss Kroger's full-year 2012 results, I'll share some data on our retail fuel operations. We disclosed many items with and without fuel due to its effect on operating costs and gross rates but we view fuel as a core department that over time is expected to contribute to earnings per share growth.
About half of our supermarkets have fuel centers today. In the fourth quarter, our cents per gallon fuel margin was approximately $0.127 compared to $0.121 in the same quarter last year after adjusting for the additional week. For the full-year, the cents per gallon fuel margin was roughly $0.139 compared $0.138 after adjusting for an additional week.
Turning now to Kroger's full-year 2012 results. For the full-year 2012, total sales increased $96.8 billion or to $96.8 billion or 7.1% compared with the prior fiscal year. After adjusting for the extra week in fiscal 2012, total sales increased to $94.8 billion or 4.9% compared with the prior fiscal year. Excluding fuel, total sales increased 6% over that same time period and further adjusting for the extra week total sales excluding fuel increased 4%.
Identical supermarket sales without fuel increased 3.5% in fiscal 2012 compared with the prior year.
Net earnings for fiscal year 2012 totaled $1.5 billion or $2.77 per diluted share. These results include LIFO being lower than our guidance by $0.08 per diluted share and the discrete tax item that added $0.02 per diluted share in the fourth quarter and the $0.14 per diluted share effect from the credit card settlement and a reduction in the UFCW pension accrual in the third quarter. Collectively, these totaled $0.24 per diluted share and were not contemplated in our guidance of $2.44 to $2.46 per diluted share. So comparing our performance without these items to guidance, we exceeded the high end of our range by $0.07 per diluted share.
Comparing our 2012 results to the prior year, net earnings per diluted share in 2012 grew 16%. In order to calculate this, we believe adjustments to 2012 and 2011 are required. Adjustments for 2012 included the benefits gained from the pension accrual and credit card settlement in the third quarter and excluding the extra week. In 2011, adjustments included the UFC pension plan consolidation charge into fourth quarter and making LIFO comparable to 2012. This calculation is illustrated in Table 6 of our press release.
The fact that we beat our own earnings guidance for the year even after raising it upwards several times throughout the year, demonstrates the underlying strength of our core business and the benefit of our share buybacks to increase shareholder value. Kroger reported a full-year LIFO charge of approximately $55 million. The Company's fiscal 2011 full-year LIFO charge was $216 million.
As Dave and Rodney said earlier, we expect a slightly expanded FIFO operating margin on a rolling four quarters basis. On this basis, FIFO operating margin, excluding fuel and the extra week, increased by six basis points. This also excludes the benefits of the credit card settlement and the reduction in UFC pension accrual, both of which incurred in the third quarter of fiscal 2012. We were pleased that we were able to deliver on our commitment and it remains our goal to continue to slightly improve Kroger's nonfuel operating margin rate over time.
For 2013 our planned uses of cash remain unchanged. We're going to fund capital investments, repurchase shares, pay dividends to shareholders, and maintain our current investment-grade debt rating. Capital investments, excluding acquisitions and purchases of leased facilities, totaled $2 billion for the year compared to $1.9 billion in 2011. For 2013 we expect capital investments to be in the $2.1 billion to $2.4 billion range for the year.
During the fourth quarter, Kroger repurchased 2.2 million common shares for an investment of $57 million. Since the end of the fourth quarter and through the close of the market yesterday, Kroger has $466 million remaining under the $500 million stock repurchase program announced in October of 2012.
Net total debt was $8.6 billion, an increase of $470.6 million from a year ago. Kroger's net total debt to adjusted EBITDA ratio was 2.04 compared to 2 during the same period last year. Our objective is to maintain our current debt rating and we believe a net total debt to EBITDA ratio of 2 to 2.2 times will support this objective.
Now I would like to outline our specific growth objectives for fiscal 2013. Kroger anticipates identical supermarket sales growth excluding fuel of approximately 2.5% to 3.5% for fiscal 2013. We expect identical sales to trend up during the year as we lap higher inflation early in the year and the effect of generics in the second half of the year.
Full-year net earnings for fiscal 2013 are expected to range from $2.71 to $2.79 per diluted share. This equates to the Company's long-term growth rate of 8% to 11% from the adjusted fiscal 2012 earnings per diluted share of $2.52 as shown in Table 6 of our press release.
Calculate our base, we excluded the benefits gained from the pension accrual and credit card settlement in the third quarter and the extra week and we also normalized LIFO. Shareholder return will be further enhanced by a dividend of 2% to 2.5% for a total shareholder return of approximately 10% to 13.5%.
When looking at our cadence by quarter, we expect the following; the low-end of our growth rate, we expect quarter one to be at the low end of our growth rate. Inflation is expected to be lower in the first quarter of 2013 and the growth of our pharmacy business won't be as substantial as last year's first quarter.
We expect the second and third quarters to be at the high to above our growth rate expectations as inflation is expected to become more comparable between the years and we expect our ID sales to be trending up. For the fourth quarter, we expect lower than the prior year on a 12 week to 12 week basis due primarily to a budgeted LIFO charge of $13 million versus a credit of $41 million for the fourth quarter of 2012. We expect our full-year LIFO charge to be approximately $55 million for 2013. This is the same as our LIFO charge for fiscal 2012. When it ultimately ends up, could be one of the factors that will determine where we land in the $2.71 to $2.79 EPS range. A higher LIFO charge would move us down in the range and a lower LIFO charge would move us up in the range. As I said earlier, we expect Kroger's full-year FIFO operating margin rate in 2013 excluding fuel to expand slightly compared to fiscal 2012 results.
This morning, we filed an 8-K summarizing the guidance and financial strategy that I just discussed and some additional items including pension contributions and expense and our tax rate expectations. Now, I will turn it back to Dave.
David B. Dillon - Chairman and CEO: Thanks Mike, and as you can tell we are very pleased with our financial results for the quarter and the year. Kroger's performance is the result of our associates’ hard work and commitment to make each day better for our customers. We grew our business in 2012 and building on that momentum, we expect to deliver the growth in 2013 that we outlined at our investors meeting in October.
Now we look forward to your questions.
Operator: Stephen Grambling, Goldman Sachs.
Stephen Grambling - Goldman Sachs: I remember at the Analyst Day, you had referenced the incremental CapEx would be a pressure to your SG&A in the near-term, yet you still held at 8% to 11% range. Is there something as you look out to 2013 that gives you greater confidence than the long-term range and maybe if you could just give us a little more color?
J. Michael Schlotman - SVP and CFO: Well the increased capital – it will have an effect on pulling down our ROIC ability to grow that in the short term. We do expect to continue to not have that go down, but as Rodney said, grow it in the near-term. As we open the stores, if you look at our guidance, we opened up 44 stores in 2012 and we're projecting 45 to 50 in 2013, so that's not a dramatic increase year on year that would have any kind of material effect on from an preopening cost standpoint or the ramp up of those new stores.
Stephen Grambling - Goldman Sachs: And then one other quick detail. On the pharmacy business, how should we be thinking about the generic shift impacting the quarter? And I know you referenced that it will be a little bit less next year, but maybe if you can help us quantify that?
David B. Dillon - Chairman and CEO: Let me make a comment first and then I'll ask Rodney to answer the specific question, but I wanted to make the broad observation that our pharmacy business this past year was outstanding. And I want to make sure that anybody who has touched our pharmacy business in our organization knows how we feel about that. We were absolutely thrilled. So Rodney, you want to comment about the generic effect?
W. Rodney McMullen - President and COO: Yeah, the generic effect kept getting bigger and bigger as we went through the year and we just now are starting to cycle the beginning parts of that, so the largest effect will be in the first and second quarters. It will get a little smaller in the third and fourth but not tremendously smaller, and we also obviously have a few more drugs going to generic. So we believe it will be a headwind from a sales standpoint throughout the year. One of the things that's very positive, as Dave mentioned, we had a great year on pharmacy, and so far this year, we've continued to have strong script count growth in pharmacy as well.
Operator: Andrew Wolf, BB&T Capital Markets.
Andrew Wolf - BB&T Capital Markets: Wanted to ask you Dave, when you mentioned the variability and sales, I'm not surprised to hear that given all that’s going on in the macro environment, but has that increased a lot, I think you had mentioned the last quarter too and I asked you about it, but is that something that’s amplitude the amount of variability is increasing or is that something to call out that we should think about?
David B. Dillon - Chairman and CEO: I think we have seen it more amplified in the last six months or so than it had been and that’s why we call it out last quarter and I think what we saw this last quarter was much the same. Now last year was also hampered by the fact that there was a two day swing in the calendar because of leap day a year ago. And when you come to first of the month or end of the month and we have now rounded that, so we don't have that issues to content with. But the issues that I was referring to really is the fragile nature of the consumer and I think as they end up swinging with almost with that day's news and that maybe a little bit of an exaggeration, but you can see, as we do our polling you could see heightened awareness. In January for instance on taxes, I mean that just shows crystal clear that it was on their minds. And I think it's things like that that caused them to have that swing in how they approach their own daily living.
Andrew Wolf - BB&T Capital Markets: So, that polling information that’s correlating somewhat with sales behavior, people…
David B. Dillon - Chairman and CEO: Actually we are calling on specifically in this case, because sometimes we can see behavior in sales and we did actually see a couple of years ago when the debt ceiling has been debated. But this time when you look at payroll tax, a lot was written about the payroll tax and lots of people were assuming. Of course, it’s early in that process, so I don’t know that we’ll feel differently – could feel differently down the road. But right now what we see is taxes and the payroll tax and other issues like that on people's minds in a very noticeable way, and we see the variability from day-to-day, week-to-week, but we do not see what we think is a dollar sales impact in total on what's happening from the payroll tax.
W. Rodney McMullen - President and COO: The other thing on top of that, in some states government transfer of payments, the way those payments are made have changed and we haven’t yet cycled a year with the new schedule on transfer of payments being made to recipients, so that creates some of the volatility as well.
Andrew Wolf - BB&T Capital Markets: One follow-up and I’ll cede because of your one question rule. Did the delay in tax payments, do you think that also affected the cadence and the variability in the sales results?
David B. Dillon - Chairman and CEO: It certainly could have. It wasn't a big enough factor that we were able to discern it specifically in our minds, but it's one of the factors that I think we witnessed as what was going on in the consumers’ world.
Operator: Mark Wiltamuth, Morgan Stanley.
Mark Wiltamuth - Morgan Stanley: We saw a number of other retailers show some holiday cautiousness on the part of consumers. Did you see any of that across the demographic cuts that you do as you look at your data?
David B. Dillon - Chairman and CEO: Well, of course, there were some signs of caution, but on the other hand, actually we were pleased with our holiday selling period and the weeks that followed actually too. So, I would say nothing that should be called out at this point. Rodney, you want to add anything to that?
W. Rodney McMullen - President and COO: No.
Mark Wiltamuth - Morgan Stanley: And Mike, if you could maybe quantify your healthcare and pension headwind because you still have a strong earnings growth story here, but it sounds like there are some headwinds we just can't see behind the scenes?
J. Michael Schlotman - SVP and CFO: Well, healthcare and pension headwinds are always out there. In the 8-K we filed what we expect our contributions to the union funds to be for pensions and that dollar for dollar is an expense item, whatever we contribute it's an expense. The other item that's out there is the amount of expense we expect for the Company-sponsored pension plan and that's actually a little lower next year than we would've originally expected. But those items are always out there. It's one of the reasons why our identical sales performance is so important, and our goal is to be able to grow identical sales faster than our underlying cost are growing, so we can make the operating profit margin growth be what we expect.
Operator: Ajay Jain, Cantor Fitzgerald.
Ajay Jain - Cantor Fitzgerald: Maybe I'll address this to Mike Schlotman. I noticed your D&A was lower compared to last year and I think it was down more materially, if you account for the calendar shift. So just wondering, is there any change in your schedule? Can you just talk about what's driving that decrease and what's implicit in your 2013 guidance for D&A expense?
J. Michael Schlotman - SVP and CFO: I wouldn't say there's anything specific that winds up being in there. Some of it is just reflective of some older stuff becoming fully depreciated. As you know, when you look at our CapEx, keep in mind not everything we spend capital on gets depreciated, because we like owning our properties, so therefore we buy the land and that doesn't wind up in depreciation, so it doesn't affect that. We would expect the depreciation to be up a little bit in 2013 compared to 2012 on an apples-to-apples basis.
Ajay Jain - Cantor Fitzgerald: And just as a follow-up, maybe you guys mentioned it earlier and I might have missed it, but I just wanted to ask if you can comment on the intra-quarter ID trends?
David B. Dillon - Chairman and CEO: Yes, the ID trends grew by the 13th period, they were the strongest of the quarter, which is our last period of that quarter. And in fact you didn't ask about it, but I will add the additional fourth quarter, four weeks rather, 4.5 weeks that we've had since that time. If you take the 13th period and the 4.5 week since that time, they both were about the same and they both exceeded actually slightly above what our sales range guidance is for the year 2013. So, we are pleased with that, we did have some weather in the last few weeks that has positively helped our sales, but even if you take that out I think we were solidly certainly above the midpoint of what the guidance that we gave.
Operator: John Heinbockel, Guggenheim Securities.
John Heinbockel - Guggenheim Securities: I wanted to drill down a little bit on sort of the market share performance. If I'm right the share gains have moderated a little bit, say from '11 and '10. Is that just because of the prior gains were unsustainable and where we are now is more sustainable or I don't know how you built into that and taken a look at that. And then as part of that if you then looked at loyal households, you looked at different customer groups and to our different competitors, is there something where as you guys said the market share gains are actually stronger or accelerating in certain customers and again certain competitors?
David B. Dillon - Chairman and CEO: Let me take a shot at the market share question and then I'll see if Rodney wants to bring that in the low households together, but on the market share, I would encourage you not to think of it as an accounting number and with precision. I would think of it as more a directional picture. It’s a very helpful indicator of where things are headed. But I think it's more important really to look at it in combination with other things. So the first thing we noted on our market share was that it has been growing in the second half of the year, so that you can assume that the comparison for the year that we may have had – we had some – we did have, in fact, we talked about some of the struggles we have in tonnage early last year, and that’s changed. Our tonnage through the last half of this past year was strong, and in fact as I indicated on the sales so far in the four and a half weeks we’ve had in this quarter, our tonnage continued strong too. So if you combine the sales trends we've experienced, the tonnage we have experienced with what the AC Nielsen material shows us. It’s certainly directionally strong. Yeah, I maybe a little bit less than what it had been in terms of market share, but I don't think it's a meaningful variance. I don't think that the numbers are that accurate that we can see that kind of variance in them. Rodney, you may want to add to that and feel free to comment on the households.
W. Rodney McMullen - President and COO: Yeah, I would agree completely, and as Dave and I both mentioned earlier, we've improved during the year. So actually the last half of year the gains were better than the overall year. When you look at customer segments, the value customer early in the year, we were very soft on share with that type of customer and it’s improved nicely, but that would've been – earlier in the year that would've been a very soft area of our share by segment. If you look at more traditional and upscale customer, those customer gains were really across the year and continue to be very nice. And when you guys look at – to Dave's point, do you think it's share and comp together is probably a good matrix to use and the levels we're at today, you're comfortable with. I would also think, as the capital program picks up, share will pick up. Maybe there's some cannibalization, but share should pick up as you roll out more stores correct?
W. Rodney McMullen - President and COO: I would agree with all of that. I would add to the metric. I would add tonnage too. So I'd look at ID sales, tonnage and then what AC Nielsen material shows and I'd look for the intersection of what those three things together are telling us; that how we look at it.
David B. Dillon - Chairman and CEO: And there's not one single number that gives you all the answers and that's one of the things that your comment really highlights is you really need to look across more than one to get a feel overall. But at the end of the day we felt very good about the progress we made on share gain last year in all markets.
Operator: Meredith Adler, Barclays Capital.
Meredith Adler - Barclays Capital: I would like to actually talk a little bit more about tonnage. I thought there were comments that you were making last year that the tonnage weakness was to some extent a result of high inflation at the beginning of the year, and then produce was deflationary so you started to see some tonnage improvement. Is it fair to think about it in that sort of broad sense about the consumer and pricing, or do you think that whatever happens with tonnage, it's just based on what you guys do?
David B. Dillon - Chairman and CEO: I think it's actually both personally. We were – I think we admitted a little surprise in how quickly tonnage returned when inflation subsided. I thought it would take longer than it did, and so obviously that has – it has something to do with the fact that the inflation subsided. But I also would like to think that we’ve positioned ourselves really well to take advantage of that situation by the investments we’ve made in price and with the improvements that we continue to make in the other three keys in our stores. So, I really think it has been both.
Meredith Adler - Barclays Capital: And then I wanted to – you had great success in terms of controlling expenses in the fourth quarter, and congratulations on that. I know there is always a whole lot of different things you are working on, but is there anything that particularly stood out in the fourth quarter? And did the extra week, which we had guessed would benefit $0.07 and it benefited by $0.11, did the extra week contribute particularly much to that improvement in SG&A – or OG&A?
W. Rodney McMullen - President and COO: On the OG&A improvement that I mentioned on the call, was adjusted for the extra week. So we did not get any benefit in the number that I shared. In terms of specifics to call out, it was really broad-based. It's almost every division of the Company and it's really core operations, obviously, having good tonnage growth and identical sales gives you some tailwind, so we had that across the whole company which was helpful, but just very good execution on our strategy and the things that we've identified. I wouldn't highlight one. Mike or Dave...
J. Michael Schlotman - SVP and CFO: I agree with you. It's actually refreshing that there is not one to highlight. That means there is a lot of things contributed to it, and the fact that it's broad-based can make it sustainable.
David B. Dillon - Chairman and CEO: I do tend to look at that number over a longer period, one quarter is good. The number Rodney used in his prepared comments was the full-year number, and I think that’s a better reflection of how we did and I still pretty darn good. But I tend to look over a long haul, because the longer the periods, the more likely that what you did is sustainable. And the things we did were really process oriented and changes that our customers actually either prefer or don’t notice, either one.
Meredith Adler - Barclays Capital: Then my final question would just be about labor, and maybe you could talk about – you don’t have to tell about any individual contract, but in terms of generally the negotiations, are you able to stick with kind of the total numbers you want to get in terms of labor cost increases, balancing the healthcare, pension and wages?
David B. Dillon - Chairman and CEO: Well, there’s two balances we actually, probably more, that we try to make each time. First or probably second is the one you mentioned, is balancing the healthcare cost, pension cost and so forth, and those are going to continue to be issues that need to be addressed. But the first balance that we actually try to address is, on one hand, we do have the natural tension of wanting and needing to keep our expenses down low as a company. On the other hand, we genuinely want our associates to be fairly paid, certainly paid based on what the market rates are and so forth. We have a workforce that we are very proud of, and we don’t look at this as something that is opposition argument. We are trying to actually work on their side on this argument. We are trying to find a way to balance the business needs with what our associates need. So that’s how we think of the labor. Now, Rodney, you may have some specifics.
W. Rodney McMullen - President and COO: No, I don’t.
David B. Dillon - Chairman and CEO: That’s it.
Operator: Jason Derise, UBS.
Jason Derise - UBS: I wanted to ask a question on guidance, and I guess it's multipart, so I’m just going to put them all together and then what you're able to share will be great in terms of the color. So, obviously, we have the square footage piece of that, but it's not a net. So I'm wondering if you can share what you're planning in terms of closures. Obviously, you're not going to be able to share what acquisitions you're planning on doing, unless you want to, feel free to. Then the FIFO ex-fuel gross margin, if you can share some thoughts on what you think between the gross margin element and the SG&A leverage. And then I guess the other ones that aren’t mentioned directly, but are going to be important in understanding this, is the fuel contribution expected and the buybacks expected. So basically the question is asking for more color on the guidance.
David B. Dillon - Chairman and CEO: The square footage, at this point in time we always give what we expect gross square footage to do. Our model was not built needing any acquisitions to make our numbers, so that's why we always say excluding acquisitions. If there was something out there that worked, it would be something that's additive to our results, because we don’t need to do anything to have to reach our growth expectations. Relative to the closures, while there are certainly a handful that are out there, that's something that occurs throughout the years. We constantly look at our portfolio of assets and look at what stores we may need to close. I don't have a specific number for that at this point that we would be willing to disclose.
Jason Derise - UBS: We would expect a net positive number, because I guess last year there was a positive gross number out there, but…
David B. Dillon - Chairman and CEO: It's been a net positive for the last several years. Sometimes what happens is we – there have been occasions where we have closed a couple smaller stores and opened up one bigger store, and it looks like our store count goes down, but that bigger store is actually more square footage than the two stores we closed on a combined basis, so that certainly helps. When you look at the FIFO fuel gross margin and without fuel gross margin and SG&A leverage, we don't give specific guidance on those line items. We always expect to get SG&A savings that we'll invest back in our four keys, whatever line that key might fall on the income statement, and overall goal was to grow our operating margin for the year slightly from the prior year, and that would remain our goal for this year. And relative to fuel contribution, I would say typically when we go into a year, and for instance, when you look at the fourth quarter of the year, it was only $0.01 difference without the extra week between the two years fourth quarters. So, the growth in that is not something that’s a huge driver of the 8% to 11% earnings per share growth rate.
W. Rodney McMullen - President and COO: Usually we just use what, Mike, three year rolling average in terms of the actual results and use that as a base point.
J. Michael Schlotman - SVP and CFO: Look at gross margin per gallon over the last three years and that’s about where we start.
Jason Derise - UBS: So, I guess just to follow-up on the gross margin elements. Within this last quarter that you talked about, I guess that your inflation cost that you are talking about at 1.7, but your large national competitor was talking about how their basket inflation was 0.8%. So, I mean, if you are passing through that most of that 1.7, there is a gap there. I know a lot of people in the market are trying to interpret how the new 8% to 11% guidance, what that means in terms of your aggressiveness in price or if you are pulling back. So, if you can share some thoughts on that if maybe your pricing isn't as aggressive in the quarter as it has been relative to your competition.
David B. Dillon - Chairman and CEO: It's really a little bit of apples and oranges. What we measure is our estimated inflation based on using government statistics on inflation by category at the mix of business we have. If you look at the actual basket that customers are buying from us, they would have a completely different inflation rate and it would actually be meaningfully less, especially if a customer has pharmacy in their basket, it's substantially less. So, those two are really apples and oranges, and what we try to give on inflation rate is more based on our sales mix and some of the government statistics out there.
Jason Derise - UBS: But do you feel that you maintained or improved your price position during the quarter?
David B. Dillon - Chairman and CEO: Our internal measures would all show that we've improved our relative price position versus all our major competitors, not just the one that you mentioned.
W. Rodney McMullen - President and COO: And we have no expectation that that will change.
Operator: Karen Short, BMO Capital.
Karen Short - BMO Capital: Back on the inflation and the LIFO for a minute. When you guys gave your guidance for the LIFO charge for the full year on your third quarter call, it seemed like you kind of expected inflation to come in where it came in for the year. So I guess I’m confused about the credit this quarter. And then looking to next year, I guess, what are your expectations on inflation for next year? Because given the LIFO charge for this year, just kind of going back to your P&L in prior years, it would look like you were kind of expecting like 1-ish percent.
J. Michael Schlotman - SVP and CFO: At the end of the third quarter when we gave our expectation for LIFO, our expectation at that time was that our full year LIFO charge would be $125 million. So through 10 periods we had expensed enough to have 10/13th of $125 million behind us. So when the year wound up at only $55 million, by the time we got to the end of the year we had almost $95 million, a little over $95 million accrued, so we had to reduce that number down to the $55 million, which led to the credit in the fourth quarter. That makes sense?
Karen Short - BMO Capital: Yeah, that makes sense. Okay. And then for next year, your inflation expectation?
J. Michael Schlotman - SVP and CFO: Relative to next year, at this point in time, we’re estimating LIFO to be at $55 million for next year just like this year. As we sit here today with inflation in the one percentage kind of range, maybe a little over, depending on how pharmacy winds up affecting that, we think that's the best guess at this time. The other thing to keep in mind is inflation throughout the year has no effect on LIFO. So the fact that last year was very high early in the year and then it trended down throughout the year doesn't really affect LIFO. It is a single day point-in-time calculation of how many products do I have this year, and what was last year's price and this year's price on that particular day. Now that's a little bit of a Reader's Digest version of how the calculation works, but it gets you close.
Karen Short - BMO Capital: And then wondering if you would be prepared to give CapEx allocation for next year?
J. Michael Schlotman - SVP and CFO: You mean how much capital investment we plan to make or…?
Karen Short - BMO Capital: No, the allocation. You gave the dollars in your 8-K, but wondering if you could give the allocations.
J. Michael Schlotman - SVP and CFO: You mean allocation by what we're spending on stores and things like that. Well, I wouldn’t get into the exact dollar amount of allocation, but we also gave guidance that we expect to do few more stores new, relocated and expanded in 2013 compared to 2012, and probably a comparable number of remodels.
David B. Dillon - Chairman and CEO: Most of the dollar increase would be driven by the storing program that we've outlined incrementally.
J. Michael Schlotman - SVP and CFO: The other thing to keep in mind is, as we're increasing our capital spend to focus on existing and some new fill-in markets as well to exploring new markets, it takes a while for those stores to open. So we'll be spending dollars in 2013 that wind up being 2014 store openings. So the growth in that store count takes a while, because the spending happened so far in advance of that. So it will be a slow growth or a slow build into the higher store count.
Karen Short - BMO Capital: And then just a last question, maybe if you could give some color on both the competitive and the acquisition environment. It seems like on the acquisition side there may be some assets coming up and presenting themselves shortly, and then comments on the competitive environment.
David B. Dillon - Chairman and CEO: On the acquisition environment, I'd just give you the comments we have made before. We don't generally comment. What we have tried to do share with our philosophy, how we approach that, and that really hasn't changed at all from in the past. So, the competitive environment, I'd characterize it as we have recently. It's still hotly contested markets, very competitive kind of the business, that’s the nature of our business. But I see people making rational choices. I don't see it as performing irrationally, which is a good thing in our minds, and I presume in yours too. Rod, do you have anything you want to add to that.
W. Rodney McMullen - President and COO: No.
Operator: Edward Kelly, Credit Suisse.
Edward Kelly - Credit Suisse: So, I was hoping we could dig into the gross margin, the FIFO gross margin a little bit this quarter. It was a little bit lighter than what I thought it was going to be and I think if you would look at it and remove the generic benefit my guess, so I was hoping you can help, but my guess is the selling gross margin this quarter is probably weaker than what we have seen otherwise this year. So, could you maybe just give us some more detail on selling, what’s going on, on the shrink side, maybe the non-selling side, and the how the margin played out versus what you are expecting?
David B. Dillon - Chairman and CEO: It really played out very close to what we were expecting and as you know, one of the things that we always work on is making sure we balance with our expense improvement. And any given quarter you can't always get a balance perfectly, but for the year we work really hard to get those two balanced. And it’s driven as much by balancing those two pieces. If you look at it versus what we were expecting, it was very close to what we were expecting. Obviously, the generics improved gross margin, selling gross margin for the quarter, but overall we were pleased with where it ended up and felt good about the balance, and we felt good about our relative price position in the market from a competitive standpoint.
J. Michael Schlotman - SVP and CFO: Rodney, I agree, and when you look at operating profit margin, which is what we always focus on, the fact we grew it by 6 basis points when really through three quarters year-to-date we were slightly negative demonstrates the strong cost control and the fact that we really – as Rodney said, we executed the plan we had and it came to fruition in the fourth quarter, because a lot of what occurred was planned.
Edward Kelly - Credit Suisse: On the repo front share repurchase, how should we think about ‘13? I mean, it’s obvious that you’re not probably going to buy back nearly as much stock this upcoming year as you did in the past. Will you still be borrowing to maintain a leverage ratio and then using that to buy stock?
J. Michael Schlotman - SVP and CFO: Again, the use of our cash flow, including maintaining our net total debt-to-EBITDA ratio in our 2 to 2.2 times range will really be used for all four of the things we laid out and that’s to fund our capital investments, to repurchase shares, maintain, and hopefully over time grow our dividend as well as maintaining our current credit rating. So we’ll balance all of those needs. Relative to the stock share buyback, we would expect to continue to buy in shares. We always didn’t buy as much in the fourth quarter as we had throughout the course of the year. That was not any kind of a statement on where our share price was in the fourth quarter relative to the rest of the year. It was really based on the fact that we were cognizant of where our debt levels were going into the fourth quarter and the fact that the way the rating agencies look at our debt level, things like our $215 million contribution to our (indiscernible) at the end of year. It's a very smart thing to do from a tax standpoint as we accelerate the tax deduction, but even though that burns off in the first few months of the next fiscal year, they treat it as debt at the end of the year. So, it made great return sense to make that contribution and get the tax deduction this year versus next year and balance that with how much free cash flow that leaves me to buy in shares. So we try to balance all of our needs on a quarter-by-quarter basis.
Operator: Kelly Bania, Bank of America Merrill Lynch.
Kelly Bania - Bank of America Merrill Lynch: I was wondering if we could go back to some comments you made a little earlier about the value and the traditional and upscale consumers and how the value kind of improved through the year. I was wondering, one, what you think has driven that? Have you been catering to that a little bit better as we moved through the year? And two, how do you think the volatility, the mild volatility that you saw in January, how did that impact those different customer segments?
David B. Dillon - Chairman and CEO: It would definitely have been targeted things that we did looking at the customer. It’s one of the things that’s such a wonderful benefit of our partnership with dunnhumby. That example was on our value customer, but we really look at it on every customer segment. We are constantly testing marketing, direct marketing with different customers and different methods of direct marketing. And when something connects, we do more of it. When it doesn’t connect, we don’t do it as much, and when we’re not satisfied with our performance, we will work and put some extra focus there. So it really was something that we weren’t pleased with, we weren’t connecting as well as we like, and made some changes to make sure that we did and that improvement happened. In January it's really hard – as Dave mentioned before, it's really hard to see some of the external numbers affecting – the external things that went on, we don't really see it in our numbers. We believe some of that is probably really driven because we had connected better with some of those customer segments for some of the things we had put in place. What happens at other companies we really don't have insight into that but we really didn't see in total the variability as we mentioned from a day-to-day basis we do.
Kelly Bania - Bank of America Merrill Lynch: Can you give any color on the tonnage trends, if you look back over the year between the core grocery categories and the fresh you mentioned kind of the seafood being strong, but any more color there you can give us?
W. Rodney McMullen - President and COO: It improved throughout the year and it was broad-based on the improvement in all categories. So it really would be difficult to call out one area being stronger than the other. The only area that I'd probably specifically call out is obviously, pharmacy had great script count growth throughout the year and our natural foods area had a phenomenal year as well and it was strong throughout the year.
Operator: (Greg Hessler, Bank of America Merrill Lynch).
Gregory Hessler - Bank of America Merrill Lynch: I apologize, I missed a little bit of the beginning of the call. I was just wondering if could talk about the upcoming maturity to $400 million maturity in April. Do you plan to turn that out into that capital markets?
David B. Dillon - Chairman and CEO: We have not talked about that yet on the call. We actually had a maturity right at the beginning of this fiscal year that we drew down that we actually have refinanced with commercial paper on a temporary basis. Then as you said, we have the other maturity in April. Our expectation would be that sometime in April that we would turn those out. If you look at our SEC filings, we already have a significant amount of that kind of an issuance contemplated and hedged out on from an interest rate standpoint and that coverage goes out until April. So, it may not be the exact date, but depending on market conditions, I would expect somewhere around that time we will line up terming those out.
Gregory Hessler - Bank of America Merrill Lynch: So that could be maybe up to $1 billion in size. Any thoughts on tenure there, do you have any preference for shorter dated stuff or should we be thinking about 10s to 30s or what are your thoughts there?
David B. Dillon - Chairman and CEO: We’ll let the market tell us where the sweet spot is. Sometimes we may start out with a particular idea and then we find out as you start to look at the market on that particular day that there is a hole on our maturity chart that fits what the market has an appetite for in that particular day, so rather than lock myself in, when we go to market, we’ll let the market tell us what makes the most sense.
David B. Dillon - Chairman and CEO: Thank you. And before we end the call today, I would like to share a few additional thoughts with our associates who we encourage to listen in today. 2013 marks the 130th anniversary when Barney Kroger opened his first store in Cincinnati, Ohio. This is an amazing accomplishment, and yet, two of our banners have been in business even longer. Ralphs division which is 140 years old and the JayC Foods division will celebrate its 150th anniversary this year. Our heritage of enduring growth and reinvention gives us great confidence for the future. Each of you played a big part in the success in 2012. Working together as a team we made shopping more easy and efficient for our customers and they are giving us credit for all of our hard work. You also helped keep costs under control so that we could invest the savings in lower prices. Special thanks to each of you for your contributions. This week we also thank 36 special Kroger Associates for their extraordinary efforts for our company and our communities. We honor these Associates because they represent strong leadership, courage, and character. They live our leadership model and our values by leading effective teams, serving local community organizations, making healthy lifestyle changes, and more. You can find more about each of our honorees by watching our live quarterly broadcast tomorrow or reading their inspiring stories at the greatpeople.me website in the coming weeks. That completes our call today. Thank you all for joining us.
Operator: Thank you. Thank you for your participation in today's conference. You may now disconnect. Good day.