克羅格 (KR) 2002 Q1 法說會逐字稿

Good morning, my name is Latisha, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Kroger's first quarter earnings conference call.

All lines have been placed to prevent any background noise.

As for the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you, Miss Cathy Kelly, you may begin your conference.

Thank you, good morning everybody.

Before we begin today's call, I want to remind you that the discussions today will include forward-looking statements.

We want to caution you that such statements are predictions of actual events resulting in differ materially.

The detailed discussions may have a material affect on our business on an ongoing basis is contained our SEC filings.

And now, I would like to turn the call over to Joe Pichler.

Thank you, Cathy.

Good morning and welcome to Kroger's first quarter conference call.

Thanks for joining us.

With me today are Dave Dillon, Kroger's President and Chief Operating Officer, Rodney McMullen, Executive Vice President, and Mike Schlotman, Group Vice President and Chief Financial Officer.

I will begin with a brief review of Kroger's first quarter results, then I'll provide an update on Kroger's strategic growth plan announced last December.

Rodney will add some additional details about our first quarter financial results and then we'll be happy to answer your questions.

I'll begin with the a discussion of Kroger's financial results from the 16 week quarter ending May 25th.

Earnings per diluted share were 48 cents.

These results exclude restructuring charges associated with the implementation of the previously announced strategic growth plan, one-time items, and a charge for adopting FASB 142.

On this basis, earnings per diluted share increased 26% over the first quarter of fiscal 2001.

Adjusting prior year results to eliminate goodwill amortization as required by FASB 142, earnings per share before one-time expenses increased 17%.

Later on, Rodney will provide some detail on the one-time items and FASB 142 charge.

Sales for the quarter total $15.7 billion, an increase of 3.7% over the first quarter of fiscal 2001.

Total food store sales rose 4%.

Identical food store sales including fuel, increased .6%.

This represents an increase of 90 basis points over our performance in the fourth quarter of 2001.

Identical food store sales excluding fuel were slightly positive.

Comparable food store sales, which include relocations and expansions, rose 1.3% for the quarter.

This represents an increase of 100 basis points, over our performance in the 4th quarter of 2001.

Comparable food store sales excluding fuel, rose .6%.

If we include expansions as some Kroger peers do, identicals were up .8%.

We estimate that product cost inflation for the quarter was flat.

We are pleased by the substantial improvement in identical food store sales and expect the same store sales increase in the second quarter will be higher than the .6% increase achieved in the first quarter.

In the first four weeks of the second quarter, same store sales are running ahead of that mark.

EBITDA total $1.1 billion, an increase of 8.9% from a year ago.

The FIFO gross profit rate for the first quarter, excluding one-time items rose 3 basis points to 27.07%.

The increase was driven by strong corporate brand results, including another solid performance from Kroger's manufacturing division, and from savings in advertising.

In the east, Kroger's private label brands achieved a market share of 25.8% of grocery dollar sales, up 22 basis points from a year ago, and a share of 33.3% in terms of grocery unit sales.

In the west region, private label market share is 20.7%, up from 16 to 18% at the time of the merger.

As we have said many times, increases in private label market share have a dampening affect on sales, but enhance grocery gross margins by an average of 10%.

OG&A expense in the first quarter without one-time items, decreased 28 basis points to 18.46%.

These strong results reflect Kroger's successful cost reduction and productivity initiatives.

They were achieved despite higher health care benefit costs in credit card fees.

The implementation of Kroger's strategic growth plan is moving forward as expected, and we're pleased with the initial results.

As you will recall, the plan is designed to achieve identical food store sales growth of 2 to 3% above product cost inflation by the end of fiscal 2003.

The plan has three key elements: First, reduce operating and administrative costs.

Second, leverage our $50 billion size to achieve greater economies of scale, and third, reinvest in our core business to increase sales and market share.

Here's a closer look at our progress and each element of the plan.

The first element, again, is to reduce operating and administrative expenses.

We're implementing a more affective operating structure from store level to corporate office.

As of June 1st, this process had eliminated over 1400 of the 1500 management and clerical positions targeted for reduction under the plan.

The Nashville division office and distribution center have been consolidated into the Louisville and Atlanta divisions.

Kroger's strong OG&A results in the first quarter reflect the savings from our cost reduction initiatives.

Kroger continues to roll out a store labor productivity improvement programs and we're pleased with the results.

The second element of our strategic growth plan is to leverage our size more fully to achieve even greater economies of scale from Kroger's 50 plus billion dollars annual sales volume.

Over the past two years, Kroger has centralized a number of categories, including meat, produce, and health and beauty care.

Under the strategic growth plan, we have accelerated the centralization of additional merchandising and procurement categories.

I'm delighted to report that we are proceeding on schedule.

Our plan included the relocation of approximately 100 seasoned buyers and merchandisers from the divisions to our new buying center in Cincinnati.

80 of those veteran managers have already transferred here.

The remainder are either on their way or they will relocate as additional categories are folded in.

Kroger has not hired any managers from outside the company to fill positions in the buying center.

We believe that centralizing these categories will enable us to reduce product costs and better align us with vendors that are set up to serve one primary contact point at large retailers.

The first two elements of the plan expense reduction and greater economies of scale, are expected to reduce costs by $500 million over two years.

We expect to achieve approximately 40% of the reduction from store labor savings, 25% from administrative cost savings, 15% from shrink reduction, 15% from product cost savings, and 5% from other areas.

Approximately two-thirds of the $500 million in savings should be achieved in fiscal 2002, and we're on track to meet that goal.

Through the end of the first quarter, we have taken out approximately $124 million in costs.

The third element of Kroger's strategic growth plan is a targeted program designed to increase revenues in our core business.

Our goal is to increase identical food store sales by 2 to 3% above product cost inflation by the end of fiscal 2003.

Kroger is reducing prices in selected product categories in geographic areas in order to increase sales and market share.

These investments are being made in targeted areas rather than across-the-board price-cutting.

This investment will be funded by the $500 million reduction in cost savings and by Kroger's earnings growth model.

Now, I'll ask Rodney to provide some additional perspective on Kroger's first quarter financial results.

Rodney.

Thank you Joe and good morning, everyone.

As Joe said, EBITDA totalled $1.1 billion in the first quarter, an increase of 8.9% from a year ago.

On a rolling four-quarter basis, [ERINOA] OR EBITDA return on net operating assetS before one-time items was 25.57%, a decrease of two basis points from a year ago.

As a result of our investmentS in the strategic growth plan, we expect [ERINOA] to decline slightly in 2002 and improve thereafter.

Our goal remains to be at the top of our peer group in return on assets.

Networking capital totaled $530 million, a decrease of $147 million from the first quarter of fiscal 2001.

Kroger is committed to reducing networking capital by $500 million from the benchmarked set in the third quarter of fiscal 1999.

During the quarter, Kroger repurchased 5.5 million shares of stock at an average price of $21.89 for a total investment of $121 million.

Since January 2000, Kroger has invested $1.4 billion to repurchase 64 million shares.

The company had $574 million remaining under the billion-dollar repurchase program authorized early last year.

At current prices, Kroger continues to aggressively repurchase shares.

Net total debt was $8.3 billion, a decrease of $370 million, compared to the first quarter 2001.

It's worth noting adjusting for the $192 million that Kroger used to purchase assets, previously financed under a synthetic lease, Kroger's net total debt would have declined by $562 million.

Net total debt improved to 2.16 times EBITDA, as compared to 2.39 times in the first quarter of 2001.

This represents Kroger's lowest net total debt to EBITDA ratio in 14 years and is slightly better than where we were before the merger with Fred Meyer.

The company continues to improve toward the goal of net total debt, equal to 2.0 times EBITDA.

We're delighted by the reduction in that total debt.

During the past year, Kroger's strong free cash flow enabled the company to reduce debt by $370 million while repurchasing $546 million in stock and investing $2.4 billion in capital projects.

These three elements comprise the triple play for Kroger and our shareholders.

Net interest expense totaled $189 million for the first quarter, a decrease of $17 million from a year ago period.

Kroger invested $890 million in capital projects during the first quarter, including approximately $120 million to acquire 22 stores and the $192 million mentioned before for the purchase of assets previously financed under a synthetic lease.

We continue to forecast free cash flow of $550 to $650 million for the year.

This figure excludes acquisition, stock repurchase, purchases, and the purchase of assets under a synthetic lease that I just noticed.

The great first quarter performance for free cash flow has put us in a position to achieve this projection or exceed it.

As a result of the store's that we have acquired and the purchase previously financed under the synthetic lease, we now expect capital expenditures to total 2.4 to 2.5 billion for fiscal 2002.

Our previous guidance was $2.1 billion.

During the quarter Kroger opened, acquired, expanded or relocated 34 food stores versus 46 a year ago.

We completed 32 within the wall remodels, and closed 17 stores.

Square footage in food store sales totalled 131 million square feet, an increase of 3.4%.

Now I'd would like to do a brief look at the one-time items reflected in the quarter.

Restructuring charges related to the company's strategic growth plan totaled $13 million, pretax.

The majority of these expenses related to severance charges, the closing of the national warehouse and related conversion costs.

Merger related expenses for primarily for system conversion in the final restricted stock grants related to the achieving merger synergy totaled $5.5 million pretax.

The company also reported one-time income of $7.4 million pretax from the mark-to-market revaluation of our excess utility contracts.

You may recall that Kroger took a charge in the 3rd quarter of 2001 related to excess energy that we are required to purchase under electricity supply contracts in California.

Accounting rules require these contracts to be revalued each quarter based on current market prices and expected usage.

Together, these items total $11.1 million pretax or one cent per share.

The adoption of FASB 142 resulted in a goodwill writedown in the jewelry store division of $26.4 million pretax, or two cents per diluted share after-tax.

Including the 11.1 million of one-time items and the FASB 142 charge, earnings for the first quarter of fiscal 2002 were 45 cents per diluted share.

Now, I would like to turn it back over to Joe.

Joe.

Thanks, Rodney.

In summary, Kroger's results for the first quarter put the company on track to achieve the key elements of the strategic growth plan.

We're delighted with our strong first quarter results and believe the current consensus estimate of annual earnings for 2002 appropriately reflects the current economic environment, the competitive landscape and the investments necessary to achieve our strategic growth plan.

We will now be happy to take your questions.

At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question is from Jon [Heinbachle] with Goldman Sachs.

Hi, John.

Hi Joe. Um, two things, first, and I'm trying to take a conservative approach here, when you look at this quarter, the 17% core growth, if the 10 to 12 holds, that implies to 7%, maybe 8% in the back 3/4 of the year.

Do you guys see something -- everyone's concerned about a price war -- do you see something on the horizon like that that tempers growth in the back half of the year or do you see simply being conservative in holding your guidance where it is this early in the year?

Well, it's always hard to predict what the competitive environment will be.

I'll tell you, John, I think the, um, environment today is about the same as it was last year.

There are some puts and takes we had markets in which competitors left, and we were able to pick up some stores, that was a positive.

We've had a couple of mass merchant stores go under, that's a positive.

At the same time, um, the competitive landscape is challenging, and the economic environment is -- is a lag on our results, I believe.

It's very hard to predict what is going to happen there, and the investments necessary to achieve the strategic growth plan as you know, are targeted to kick in as we achieve the savings, and we still have more to come there, so as we balance it out, we think the 10 to 12 for the year is our best guess.

Given all the circumstances.

The circumstances change, of course, then the results will be different.

What is your take on the, um, the likelihood of a broad, you know, destructive price war here between now and year end, um, and what's your -- you're certainly I guess, not a believer that that's going to materialize.

Well, you know, as I said, um, sometime ago, I think the price wars happened last year, um, with K Mart announcing 38,000 price rollbacks, they were met by significant competitors, and we began tracking that in the second period, the second quarter last year, and, um, have tracked it since.

So I -- my own judgment is the environment will stay about where it is, there will be some markets, I would guess, where there'll be a bit of a flare-up.

The great thing about Kroger is, we have broad geographic diversity, we have the number one and number two share in 41 of the 48 major markets and we've got the economies of scale to play a very tough game.

Finally, um, Safeway got into some trouble with an overzealous approach to certain operating initiatives, centralized procurement, et cetera, you guys are doing some of the same things, moving in the same direction, what are you doing, or how do you safeguard against the same kind of problems they ran into over the next little while here?

Well, we have a -- we have an advantage.

We started this process years ago with produce, meat, health and beauty care -- those were all moved into, um, more central and coordinated, um, buying and -- and to some extent, merchandising programs years ago.

Um, we also began, as you will recall, to centralize different additional categories before the Fred Meyer merger, and then we paused a bit for the merger to take the centralized approach into the Fred Meyer divisions, and now we're beginning the process again.

As I mentioned in my remarks, the steps that we took, have taken, required about 100 people to transfer from our divisions to our central buying office here in Cincinnati.

Um, and we have extended the offers to our seasoned folks, we picked the best among the best, and any of those folks are here on site doing a great job, another 20 are either on the way or they'll come in as we fold in the additional categories, so, you know, in addition to having the very strong quarter, I think it's significant to say that the strategic growth plan initiatives have been implemented in a disciplined in, a smooth manner, they have required, you know, a continuation of the steps that began, in some cases, years ago, and I'm really proud in the way which the team here is taking additional steps.

They really maintained control to the process.

Okay, thanks.

Your next question from Mark Hudson with Merrill Lynch.

Hi, Mark.

Good morning, and the first thing, you made a mistake here with your earnings numbers, because you've obviously haven't heard the news that the sectors all over.

[ laughter ]

Um, I hope [INAUDIBLE].

[ laughter ]

Was everyone's hair rising except mine.

Hopefully your earnings will collapse over the rest of the year and you'll fall into line.

A couple of questions, um, the first one is can you just say whether you management currently is constrained in any way from exercising share options?

No, um, I'm subject to the usual rules.

Okay.

You know, there's always the rules on blackout for exercise and sale of items.

Okay, if there was a major SEC investigation going on, would you be prescribed from selling stock?

I don't have any comment on that.

I just don't know.

At the time of the restatement, um, what we said is we would cooperate with the SEC, and we also said we would comment if there were any material developments and there are no material developments.

Okay, it was just in surface again in the last couple of weeks.

It seems to me that if you're not as a management team constrained from selling options and that's a reasonable signal for the rest of the market that there's nothing serious going on.

Okay, don't comment on that.

We'll leave it there.

Material developments.

Not material developments.

Okay, thanks.

Can you just talk about the square footage growth and, of course, it was considering you were talking about 4% plus for the year, can tell us what your new square footage target is for the year, and um, whether that includes the Albertsons stores, how many Albertsons stores you're actually picking up finally.

In terms of the square footage growth for the year, at this point we really wouldn't change it. In the quarter I believe there is only four or five Albertsons stores that were open that we acquired.

We acquired a total of 17 stores, and those opened up four to five stores per week.

It also did not include the Winn-Dixie stores that we announced.

And, we still remain comfortable with the square footage guidance that we gave before.

Okay, and then on the FASB 142 on the ride down on jewelry stores, that's relatively small amounts of money, but from my recollection, wasn't it Ralphs that was done by Fred Meyer as an acquisition and those on goodwill out there on Ralphs, and was that tested at the same time?

Yeah, there would've been goodwill created when Fred Meyer acquired Smiths and when Fred Meyer acquired Ralphs on both of those transactions.

All of those transactions in addition to several others were tested, and the jewelry store proof was the only group that required a writedown under FASB 142.

Okay, so either the tests on the Ralphs and Smith's store came in at exactly the right number, or, in fact there could have been an excess.

Which one was it?

There was a comfortable excess.

Okay, that's useful to know.

And, I suppose a final thing is, um, how are the markets settled down where Albertsons's have left, have they closed all their stores down now, and I think you're in you said four of those market now. And what are you seeing out there in those markets.

Well, let's see, the store's that we purchased are up and running as of the second quarter.

I believe they're all open, I think we opened the last one, last week if I'm not mistaken. I haven't kept track of the other ones they sold to others I believe, the ones in Memphis are running, um, they're supposed to close, I just don't know, Mark.

Anybody around the table?

For the most part, um, Mark, they're closed.

I mean that's not a hundred percent.

Now, if you look in, like Jackson, Mississippi, somebody bought those stores and they're in the process of reopening, um, Memphis, I think, just opened, or transitioned, um, National would not be yet.

Okay, outstanding. Thank you very much.

Your next question is from Meredith Adler with Lehman Brothers.

Hi, Meredith.

Hi, guys, congratulations.

Thanks.

You know Mark asked all the really, really easy questions, but, um -- [ laughter ] -- why, I should say the nice questions, but I guess I would just like to have you talk a little bit more about what you're seeing in terms of consumer behavior, you know, you said you thought the economy was still a drag.

I remember awhile ago you talked about your floral business being down because the consumer wasn't spending discretionary money.

Has that changed and what kind of trading down or other things are you seeing that indicates the consumer is still feeling nervous?

Actually, I think the floral sales have bottomed out.

I have seen in the last couple of weeks a little bit of an uptick.

But, I'm not getting too excited about it yet.

But, there has been an uptick there.

You know, it's a complicated picture because we had a terrific Spring in terms of general merchandise sales, um, for example our patio furniture, um, the adult swing sets that we sold were dynamite, um, and yet, that doesn't run in the face or conflict with, I think a general caution as part of a customer, it's hard to read because we have some great merchandise out there at tremendous prices thanks to our merchandising group, and so, you know, we look at that and say gee, things must be getting better.

But on the other hand, we think we took some of the business from [Mass] because we had terrific products.

Um, there is caution and it -- it's a complicated picture to read because, you know, we've had significant deflation in meat, we've had, um, I think deflation in produce, no, Rodney's saying no.

But in meat that has been very noticeable, and it's hard to read the leaves, but there is certainly no major pickup in -- in -- in the, um, extra in the unnecessary parts of the customer shopping list.

I don't think it's gotten any worse, Meredith, but you know, there's not that lift that you get from improvement.

We still have pockets of high unemployment, for example, in the Northwest.

And what do you say --

Meredith, if you look at just the jewelry group, overall they had a good quarter, or dropped a little over 2%, the total was up over 7, but you make all your money in the 4th quarter.

It's really hard to judge when you look at just the 1st quarter.

The other thing is if you look at the results, the details behind the results are very, very mixed, when you look at between weeks and across regions of the country.

You have some regions doing very nicely, other regions where the economy and unemployment rate is high.

Businesses is very soft.

Very slowly improving but very, very mixed, just look at it relative to jewelry.

And would you say that if you look at, um, markets, and look at stores that might be in lower-income neighborhoods, is there anything you can particularly discern that there may be the low-end customer is hurting the most, clearly you have a pretty broad range of customers.

Do you have any read on that?

I don't.

Meredith, I don't think that we see much difference, really, than where it's just been. We don't, though, go out of our way to try to track the the kinds of issues that you were describing.

I periodically go take a look, but I've not done so lately. I don't see anything in the shopping pattern that suggests to me that there is any significant change either direction, either getting worse or better.

Okay, I just have one more question about central procurement, um, could you talk about what it is you anticipate when you've got this effort completed, if it ever is really completed, but do you anticipate that all of dry grocery will have been centralized, and how many buyers do you anticipate leaving.

Will you still have people in the regions who are buying products for local tastes?

I don't want to go in too much detail on this because we think we have a very good model that people would be interested in

who are not as friendly as you are.

But as I've said in the remarks, the plan that we had calls for a hundred fires and category managers to come in, and we have 80 here, and 20 on the way, um, or will be falling in as the categories are, and we've done this over the years on a systematic basis as we evaluate categories by categories and ask ourselves are there economies of scale here.

If the answer's no, then you leave them out to divisions.

If the answer is yes, how big are they, and what would be the net as far as savings estimates go, and, um, make the judgment in a way that maintains local choice.

We're very -- I think it's very important that we have local diversity so that, um, individual customers and individual markets will get the brands that they want, it may be a regional brand or maybe a local brand, and so we're trying to be very careful here, but we've been at this a long time, and, you know, we make the move when we see that the net advantage is on the central basis.

As far as the plan is right now, um, you know, we have the 80 folks here, 20 on the way, and then we continue to reevaluate.

This is a moving stream here, and as opportunities come up, we take advantage of it.

Great, I have one more question for you.

Safeway talked on their conference call about a buyout of highway's union employees in Manitoba, and they indicated that was something- an iniative they would consider looking at in the U.S.

I was wondering whether something like that is -- what you have looked at as well, do you see an opportunity and how easy would it be to implement something like that?

We've done it.

We've done it a number of places, and you know, it depends on the -- on the structure of the labor force, it depends on the structure of the contract, um, as far as the benefits go, um, and we have done it in several places, and it's a -- it's been very affective.

And you expect to do more of it?

Yeah, as the opportunities are there, again, if the structure's right, and the savings are there, it's a very good investment.

We were careful in doing so to maintain, a complementive veteran employee so we don't lose our skill base, but we have done it on many occasions.

Great, thank you very much.

Okay.

Your next question is from Neil Curry from UBS Warburg.

Hi Neil.

Hi there. How are You?

You obviously had a good performance in the first quarter against expectation on earnings, and that seems to be driven by an exceptionally good constant -- cost improvement, but the sales performance was slightly behind the expectations [INAUDIBLE].

Neil, we can't hear you, you're cutting in and out.

Sorry, I'll try to speak up.

The earnings performance was obviously much past the expectations that was said earlier, but the sales performance was behind expectations, I was bit surprised to see that considering your, your willingness to reinvest excess profits in order to grow sales faster.

[INAUDIBLE]

We have said, um, in December 11th, that the target that we said, .8 was an aggressive target.

As I said in my remarks, you know, I said at the time, we were running against a very tough comparison, because the first quarter of 2001 was by far our strongest quarter, with [high dense] of positive 1.9, um, and as I have also said in the second quarter, one month later, our sales are running above the .6%.

So, as I see it, we're on target, and the sales are responding, and we've got a smooth and disciplined implementations, strategic growth plan.

Given the, um, great work you do and of course there's an opportunity, maybe be a touch more aggressive short term, and get the sales momentum moving a little bit faster?

Well, one of the things we have learned, um, this is a big company.

And its a big ship, and we're very careful to do a lot of planning.

The strategic growth plan, as you may recall, [was some] five months in the making, and we are right on that plan, and that's where we plan to stay, because we like the results.

So you still expect to reach the, um, the two to 3% [ID] by the end of the year, any indication as to --

By 2003.

2003, okay, but the run rate, when do you expect to hit that run rate?

I don't know that we have projected that.

I don't think so.

That's the target we're shooting for, and again thats [built into] the plans.

Okay thanks. Well done anyway. Thank you.

Okay, thanks.

Your next question is from Jack Murphy with CSFB.

Hi, Jack.

Good morning, um, let me ask a somewhat related question.

If the cost savings do come in higher than your $500 million goal, should we expect to see, um, an even lower level of growth margin that drives sales or do you expect to let that drop to the bottom line?

Well, um, the cost, again, we're investing as we make the cost savings, you know, we have structured this program very carefully, and it was way too early to comment about what we might do if we blow away the cost savings.

We're on track to get the savings and we'r on track to do the investment, and we'll see where we are, you know, when we reach that goal.

I guess just to Neil's point, the fact that you appear to be ahead on, um, OG&A cost reductions, you may take an opportunity to move the promotional spending ahead, is that incorrect or --

At this point, you know, we've got a plan, and we're working the plan, and in my experience is that that's the best way to do it, if the plan is resulting and the way you -- getting the results, um, you wanted to achieve stay with the plan.

Okay.

Let me ask, um, two kind of related questions [INAUDIBLE] and that will be it.

Are you adjusting for the synthetic lease. Did [KPax] guidance change at all, and secondarily, um, in terms of competitors, seems to be concentrating their capital spending, um, is that effected the way you allocated your capital on a regional or [high] market basis?

I'll ask Rodney to respond to that.[INAUDIBLE]

In terms of the adjustment for the guidance for the year, um, about a 100, a little over a hundred-million dollar of the increase was for the acquisitions of the 22 stores that were made in the first quarter, so the adjustments is for the synthetic lease that you noted that were approximately 200 million and the balance of 100 million is for the acquisition.

That takes you to 2.4?

Yeah.

Yeah.

In terms of the allocation of the capital between markets, if that process obviously has a pretty long sleeve time in term of where you allocate capital.

We always look at where we are getting the returns for the capital, and where he great opportunities, we've always felt very strongly, when you look at the markets with high growth, and as you know, we operate 10 of the 15 fastest growing markets in the U.S., that's where we make sure that we have capital allocated, and that would certainly pick up the markets of Texas, Georgia, California, and some other places, just to name a few.

So we wouldn't have skewed it based on those comments.

But those are places where we already had a lot of capital focused.

Cause we like those markets.

Okay, thank you.

Your next question is from Charles Lemose with [INAUDIBLE] Bank.

Good morning, how are you.

Thanks.

A couple of questions, one can you give us an update on private label, anywhere your in penetration east and west, and, um, what new items are coming out, where you think you will go with it, impact on gross margins.

Well, as you said in the remarks, our private label is, in the east, um, that is in the pre Fred Meyer merger divisions, our market share was this quarter, was, in private label was 25.8% in dollar sales, that's up 22 basis points from a year ago, and it's on unit basis, it's 33.3%.

In the west, I'm really pleased with the way in which the private label initiatives have been implemented there.

Because our market share is now 20.7%, thats up from the 16 to 18% at the time of the merger.

Um, we have a lot of new products, how many products have we launched?

We introduced 266 in the first quarter.

266, you might note on private selections label is doing very, very well. That's our upscale label, um, and so we have, you know, we have a lot of new products coming, we're now up to something like 7500 private label items, um, great strategic advantage for us, two-third of those are made in our own plants and manufacturing groups just had a dynamite quarter they're doing a great job. And so I expect to see this growth continue because it's real value for our customers and, you know the question, the tough question show high is up.

The answer is I don't know.

There is a lot more coming.

Okay. And then the other question I had, is just kind of personal curiousity.

This past week I got a [BellCala] foods loyalty card program, and I've acually never applied for one.

So I was wondering how you were doing this.

I could say we're trying to make nice with all of you folks, but that's not the answer.

I just don't know.

[INAUDIBLE] You have any ideas?

Um --

I mean I shopped at your FoodCo stores in San Francisco, I think they're great stores, I was actually in on Friday night, great traffic, great private label, you have the Kroger label in there, you had the FMB, but I never recalled if I used a credit card there, and you got my address, I was wondering?

That certainly could have been, Charles.

And I don't exactly what database we used in that case.

But what you saw in the FoodCo stores is exactly what we hoped you would see, so I'm glad you reported that for all of us.

Now, that's a great store, I buy all my commodity products there.

But you should buy everything there, Charles.

I'm still a Whole Foods food shopper, I hate to tell you.

Alright thanks a lot, I look forward to seeing you later this week.

Okay.

The next question is from Mark Wiltamous with Morgan Stanley.

Um, a question on how far you are into the price reduction campaign.

Is there any way you can quantify the progress there.

No.

[ laughter ]

We can, but we're not going to tell you.

I'm not being cute here.

This is obviously a key part of the program and, um, as I said-- answering other questions, we had a game plan very carefully laid out as of December 11th, and we initiated it, um, beginning with the new fiscal year in February.

And we're right on the plan, and I guess the question is -- is, is the plan completely installed, no, but that's probably as far as I really want to go on that Mark.

But it's safe to say that the cost cutting comes first and the price reductions come later.

Please?

Is it safe to say cost reductions are coming first.

Yeah, we -- we mapped that out, um to make sure that we hit the balance that we wanted.

Okay.

And how has the competitive response been in the market where you have put them in?

Well, um, in some markets, um there's been some response, and we have a -- we have a way of dealing with that, um, yeah, in some markets, there hasn't been, you know, and it varies by market, so it's hard to give you a general answer to that because there's really not a general trend that we see, such as a general price war.

And any color you can give us at all, on which of your markets are doing better than others.

You indicated there were other markets that were having some unemployment issues, just some idea of geographic issues.

Now, that's something we really don't ever talk about.

I understand your reasons for the question, but we just don't talk about individual areas.

Okay, thank you.

You're welcome.

Your next question is from Chuck Serokowski with MacDonald Investments.

Hello, Chuck

Hello, Joe.

A couple of questions here.

You can give us some examples of what you're doing to improve in-store productivity, can we have an update on how you're doing with the food 4 less introduction in Chicago, and why use the cash [verses] buy out of the synthetic lease and [saying that's your] repurchase?

Okay, as far as in storage, a combination of best practices, um, and, um, um, technology.

And in the most miserable technology, of course, would be the, um, checkout.

Automated checkout systems.

There is behind the scenes technology that you don't want to talk about that has significant labor hour productivity implications, um, again, Chuck you know, I don't want to dodge the answer, but it's -we really don't talk about what it is that we're doing, other than the things are visible, such as u-scan.

Cause we have been in the planning stage for this for sometime and have been putting productivity programs in for two years.

It's like anything else.

The more you do the more you find sort of thing, so I probably ought to let it go for that.

Food 4 less, we're on schedule for that.

We plan to open in the fall, um, and, um, we're looking forward to it. This is an exciting event for us. It's a great market, it's a big market, it's got growth opportunities, we believe, um, um, for some time to come, and we've got a great format to put in there.

There's nobody like that in Chicago; and um, so that's going to be a, um, exciting time for us.

I [INAUDIBLE] say anything more about Chicago or about [INAUDIBLE] the lease I don't know the answer.

No additional comments on Chicago in terms of on the synthetic lease, um, there's about a $400 million total synthetic lease that was outstanding at the time of the merger with Fred Meyer.

That lease matures in 2003 mid next year.

We -- we redeemed about half of that because the economics was cheaper to finance that on our balance sheet verses financing it under the synthetic lease.

And that's the reason why we did it, you know, the real question was at what point would we do it, and we, you know, we -- we inherited the synthetic lease, [INAUDIBLE] something synthetic just to keep it off the balance sheet, and we're driven purely by the economics and when the economics got better to bring it back on the balance sheet we did for about half of it.

Okay, um, what's the store [count] plan for Chicago for the Food 4 less?

We'll be announcing that Rodney.

In terms what have we said, it's 3 to 5 this year, and we would expect similar numbers going forward and thats about as as much detail as we have given it at this point in time.

Really, it's driven by the customer reaction to our format and the opportunity for additional stores.

We are aggressively looking for additional sites in the market, several identified.

But we have found out that the Chicago, approvals take a little longer than what we're accustomed to in some other places, but eventually we'll get there.

All right, thank you very much.

You're welcome, Chuck.

Your next question is from Robert O'Clark with Oppenheimer Capital.

Hi Robert.

Good morning, guys.

Great results.

You -- you almost reached the debt coverage goal.

So I thought I would have you talk a little bit about the trade off in your triple play of paying down debt, the capital extending repurchase, are you likely to redirect your cash flow toward capital spending chair repurchase and how do you look between one versus the other, in early its of the return you're going to get.

I'll start out by saying we're following a balance program here.

The goal is to get the 2.0 coverage, and we made consistent quarter over quarter improvement toward that goal, um, capital plan is fixed as Rodney said at this point, if there are additional acquisition opportunities, we evaluate that.

Those in terms of the rate of return, um, share price -- share repurchases depend on the stock police.

You said it, current prices we're aggressively buying.

Any additional comment on, that Rodney?

That's how we looked at it.

Okay, thank you.

You're welcome.

Your next question is from Felipe with EFSB.

Good morning, congratulations.

Not only on the growth in EBITDA, but in the growth in the absolute reduction.

My question in terms of synthetic lease has been answered.

I was wondering about the competitive environment in the southeast.

When we listen to -- it seems they buy low in the second half of the year.

Winn-dixie seems to be getting a little bit of formats on their loyalty program, and comment on whether you're observing any changes in the market, please.

Again, we don't comment on any individual markets, we have a lot of people listening who would like to know what we think about competitors.

Are we don't talk about that.

Thanks very much.

You're welcome.

Your next question from Jason with Midwest Research.

Hi, Jason.

Good morning.

I would like to revisit your perspective on a couple of different points, first in, December you mentioned your price cap was -- [INAUDIBLE] you have made any progress on that or is that more a second half of the year?

I think we have made progress.

Okay.

In terms of your competitors talks about, a pure discount channel, they mass merchandise, have you seen any of that in some of your markets?

We have commented on that in the past saying people believe thats one of the results of two things.

One, the economic downturns.

People get more cautious with their money.

And, two, we let the gap get wide. And we're narrowing the gap.

And, um, the positive results are showning our same store sales for the quarter.

So it's something we track.

Have you seen Walmart raise prices at all.

We wouldn't comment that.

Okay. And then last on the pricing. What has been your perspective from independence.

Are they trying to be more price competitive in reaction to your movements based on their successes or failures in any given market.

Was the word independent?

Correct.

Well, again, you know, we don't count on individual markets in, and as I indicated earlier, in some case there is have been some response.

And we dealt with that.

In other cases, it's been very nice.

So, you know, it's market-by market situation, I really couldn't make any generalized comment that would be meaningful.

Okay.

Fair enough.

And then in terms of OG&A, what would your OG&A been without, um, health care and credit cards fees?

Yeah, I don't remember the number.

We'll get it to Cathy and she can follow up.

Okay.

And in terms of your proportion of savings, you have broken out like store labor and admin and shrink and so forth.

Was first quarter essentially, in line with those savings or were you more heavy in certain areas getting better results from certain categories?

Well, again, there is a plan and the components, um, kick in at different times, um, and, um, you know, we've got those scheduled, probably the safest answer is to say we're on schedule.

Different components will come in at different points in the next year, um, but the plan is being worked as we had estimated it would be.

Great, thanks. Good quarter.

Thank you.

Your next question is from Lisa Cartwright with Solomon Smith Barney.

Hi, Lisa.

Hi, congratulations.

Thank you.

My question is going back to the private label, can you quantify the effect of the growth of private label on your identical store sales and can you also talk about where you are with average ticket versus customer count and if you have seeing any pickup in the ticket versus last year, maybe indicating the economy is improving somewhat.

Um, I don't know that we have broken out the impact of the additional 22 basis points of market share in private label, um, -- .

It's big growth and private label.

That's probably dampenung your I.D.S.

I don't have any -- Dave, do you have --

We have -- we have time to see.

In the past, um, Rodney has eyeballed that to try to give us a feel.

and to see whether it was significant, and I don't have any reason to think it's greater than it has been in the past, but, actually we've had really great results on the Kroger brands, so it's very possible there might be slightly more.

Yeah, particularly on the West Coast.

Where you're going from 16, 17% up to 20.

That's a big jump.

Yeah.

In that case, that would be true.

But the numbers of course that we're reporting other than those shares would be washed for the whole company, so, while it may be significant in the division or two divisions, you wouldn't see a future [INAUDIBLE].

Okay, you can comment on where you are with average ticket versus last year as well as customer accounts?

I don't think I have anything to release on that.

I'm always skeptical on customer accounts because of the way they get calculated.

The Loyalty Card [now is what] gives us the ability to track households, and I think that's a more, a better, um, look at that issue, but I don't believe we have planned to release anything on that.

Yeah.

Yeah, customer accounts get affected by simple things like changes in procedures on how you count how many times you cash register opens.

I guess I'm just trying to figure out, I mean your results are very solid. You cost cutting was excellent, and it sounds like you're happy with the results from your -- you know, from investing and lowering prices and closing up price gaps.

Yet the I.D.S of .6 being light.

And I'm just wondering if the affects of private label as well as the, just the economic sluggishness, and if you factored that out, are you really tracking at 1, 1 1/2%.

There's no doubt the private label's having some affect.

Again, we haven't calculated it, you know, we accept the target at something north of .8 running against very tough, um, first quarter of last year, 1.9, you recall our second quarter was .8, I believe, third quarter, .8, and minus .3.

So we had a really tough comparison, and, um, so, we're pleased, you know, we're pleased with the outcome.

As I also indicated the [INAUDIBLE] second quarter we're running ahead of that number.

Lisa I could add, too, that we're certain in selective markets, we're certain we're seeing an increase in households or customer accountability, however you want to look at it, we're also certain in some of the same markets that we're seeing an increase in average sales, so we're getting a little bit of both what have you described, some of our merchandise and plans are geared towards one or another.

We try to get a mix because actually it will help business will have both of those.

Switching gears just a little bit, we had talked previously about using technology to help you share data on a realtime basis with your manufacturers to develop better promotional programs and you talked about rolling out -- or building a data warehouse.

Right, uh-huh.

You can talk about where you are on that.

Well, the data warehouse is operating, and um, it's a huge project and forunatedly we stored it about three years ago, Don?

And, um, we are sharing some data, but that probably will not go beyond that.

No indications as to, um, you know, how many vendors are actually sharing data with at this point, and where you expect to be by the end of the year?

No, that's just something we wouldn't talk about.

Okay, thanks.

You're welcome.

Your next --

I'm going to interrupt for a second.

The question before on health care costs and credit card fees, the health care costs negatively affected OG&A by approximately 13 basis points and credit card was negatively affected approximately 5 basis points.

So that everyone has that at the same time.

Your next question comes from Bob Summers with Bank of America.

Good morning, um, two things: One, if you could maybe size the gross margin investment in the quarter, and then talk about how I.D.S trended during the quarter.

Because I think that, there were a couple of times during the quarter we came out and expressed a high degree of confidence going to .8.

But more importantly, when we talked about doing the number that you did in the first quarter, seems to me that it might indicate a deceleration given--

Well, it shouldn't indicate a deceleration.

Cause as I said in the second quarter part of the date, we're running ahead of the .6. That addresses that.

Um, and as far as the investment in gross, um, I don't think we have given any indication what have we intend to invest, other than the $500 million.

Okay, and what do the inflation numbers look like once you strip out fuel and pharmacy.

If take out, I'll have to calculate it here real fast, Bob.

If you take out pharmacy, because that's the only area that actually has inflation.

Just a moment.

It would been about a negative .7 to negative .8.

Okay, thanks.

You're welcome.

At this time, we'll take one more question.

Your last question is from Steve Gick with JP Morgan.

Hi, Steve.

Hi.

A couple of questions Joe, I was wondering if you could comment on how happy you are with the multi-department store format, and I guess, you know, given that the positive commentary out of alternative channels with food and consumables in this industry, I'm wondering when or why you don't take a more aggressive stance with the rollout of that format, and then we might be able to hear about a new market entry at some point.

I would say we're delighted with the multi-performance, um, performance.

Sam and the group out there doing a great job, and they're having an influence throughout the company.

The influence is already here and widespread, um, as I commented, we had it's have a small example, a great seasonal merchandising spring, and that's the result of this skill, and the expertise, and the cost savings that Fred Meyer Merchandise Group brings to us.

Secondly, as you also know we converted the stores in, um, Arizona to marketplace stores.

I think we have 16 of them down there operating, um, and, we have done some adjustments in merchandising there, and I'm pleased with the results, and there will be some additions to that format, so, you know, we got a lot of things going and, of course, Fred Meyer continues to grow, some of our Capx goes there to expand that number of stores, um, and so in my own feeling here, the impact of the multi-department stores throughout the organization is pretty strong, and there's more to come.

Still, [might we see] a new market entry of that format at some point.

Oh, yeah.

Okay, um, one other thing, Rodney, the -- can you just lay out, what are your expectations for one-time charge, for this year, and then I think you said you're expecting none for 2003, is that right?

The only thing for 2003 would be the remaining system conversion if we decide to convert the Fred Meyer stores, but the amount that we would incur for doing that is included in the previous estimates that we provided.

And at this point, the estimates we gave at the end of the year we really wouldn't change those, except subtract from them.

The expenditure we had in this quarter.

Okay, so I think it was like 35 or 37, $52 million or something like that.

That's your target square--

For the strategic growth plan, in terms of implementing the balance of that.

Okay, is there anything -- that's it, or are there still other charges--

Its a merger related cost.

We're separating the two.

Okay, what are left from merger related cost?

In the merger related costs, um, we would expect 20 to $30 million to be incurred in 2002, and about $15 million in 2003.

Okay, thanks.

You're welcome.

Thank you all for joining us.

We really appreciate your questions and your interest in the company.

We'll see you all later.

Bye.

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