克羅格 (KR) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2007 The Kroger Co.

earnings conference call.

My name is Grace and I will be your coordinator for today .

At this time all participants are in listen only mode.

We will be facilitating a question and answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

I will now like to turn the presentation over to your host for today's conference, Ms.

Carin Fike, Director of Investor Relations.

Please

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.

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 at our -- on our website at www.kroger.com.

Now, I would like to introduce Mr.

David Dillon, Chairman and Chief Executive Officer of Kroger.

Thanks, Carin.

And good morning, everyone.

We're pleased you could join us to review Kroger's fourth quarter and fiscal year 2007 financial results.

With me today are Rodney McMullen, Kroger's Vice Chairman, and Mike Schlotman, Senior Vice President and Chief Financial Officer.

Don McGeorge is off today.

It would seem that the flu season is indeed finally here.

I will begin with a recap of Kroger's fourth quarter and fiscal year sales results and then provide our latest market share information.

Rodney will review our fiscal year results and provide guidance for 2008.

Then will be happy to take your questions.

Total sales for the fourth quarter increased 2.2% to $17.2 billion.

After adjusting for the extra week in the fourth quarter of 2006, total sales increased 10.2%.

Identical supermarket sales increased 8.2% with fuel, and 5.3% without fuel based on the same 12-week period in both years.

Our strongest identical sales growth continues to be broad-based across the company's geographic regions.

The strongest departments were grocery, produce, nutrition, and bakery/deli.

Net earnings in the fourth quarter totaled $322.9 million or $0.48 per diluted share.

The LIFO charge in the fourth quarter was $0.05 per diluted share resulted in higher than expected inflation, $0.02 per diluted share, more than we anticipated when we reported third quarter results to you back in December.

We continue to drive solid identical sales growth by improving service, value, product quality and selection for our customers.

During the quarter we continued to invest in lower prices for our customers, providing meaningful savings for them in this uncertain economic environment.

We ended the fiscal year with a strong quarter.

The fourth quarter and full fiscal year highlights Kroger's strategy was designed to do, delivered strong financial results today, while we continue to invest in the future.

Rodney will discuss our fiscal results in a few minutes.

First I will share our latest market share results with you.

Increasing market share is a cornerstone of our strategy.

And I am very pleased to report that for the third consecutive year, Kroger has shown impressive market share gains.

The market share figures we report are based on our own in calculation, and consider the potential for sales in each market from all retail outlets where customers can purchase products Kroger sells, including supercenters in other traditional retail formats such as dollar stores, drug stores and warehouse clubs.

Most third-party market share data providers only consider traditional formats.

Kroger serves customers in 44 major markets.

We define a major market as one in which we operate nine or more stores.

In 2007, Kroger held the number one or number two market share position in 39 of our 44 major markets.

Our overall market share in these 44 major markets rose approximately 65 basis points during 2007 on the volume weighted basis.

Kroger's shares -- share increase in 37 of those 44 major markets, declined in six and remained unchanged in one.

Kroger competes against a total of 1,340 supercenters, an increase of 78 over last year.

Supercenters have achieved at least number three market share position in 36 of our major markets.

Kroger's overall market share in these 36 markets rose 95 basis points during 2007 on a volume weighted basis.

Our share increased in 31 of those 36 major markets, declined in four, and remained unchanged in one.

Of the 1,340 supercenters that I have mentioned, 1,065 are operated by Wal-Mart.

This is an increase of 65 of last year.

That increase is the lowest in seven or eight years.

Wal-Mart supercenters have achieved at least a number three share position in 34 of the major markets where Kroger faces significant supercenter competition compared with 32 last year.

Kroger's overall market share in these 34 markets rose over 80 basis points in 2007.

Our share increased in 30 of the 34 major markets, declined in three, and remained unchanged in one.

Despite the growing number of competitors in the grocery business, we have increased our market share on top of strong gains in 2005, and 2006.

During the last three fiscal years combined, Kroger's share in our major markets has increased approximately 165 basis points.

These consecutive year-over-year gains in market share are significant because they show Kroger's long-term strategy is working, as we continue to deliver both -- deliver value to both our customers and our shareholders.

I want to thank our associates for their direct impact on increasing Kroger's market share in so many of the markets we serve.

They see first hand what happens when our -- when new competition enters one of our markets and they understand what it takes to distinguish Kroger from the rest in the eyes of our customers.

While these latest market share numbers are impressive, we know there is more opportunity out there for our company.

Even with Kroger's strong share in our 44 major markets, approximately 46% of the share in those markets continues to be held by competitors without our economies of scale.

We estimate that their share has declined nearly 4% over the last four years.

Now I would like to turn it over to Rodney who will review our fiscal year and discuss guidance for 2008.

Rodney?

Thank you, Dave.

And good morning, everyone.

We delivered another quarter of strong results thanks to the contributions of our associates in every area of our business.

Our associates continue to execute our customer first plan well, as we continue to balance operating cost reductions with investments aimed at improving our customer's shopping experience.

As David Dillon said, Kroger had a great year.

For the full 2007 fiscal year, total sales increased 6.2% to $70.2 billion.

Adjusting for the extra week in fiscal 2006, total sales increased 8.2%.

Identical supermarket sales increased 6.9% with fuel, and 5.3% without fuel, based on the same 52-week period in both years.

We delivered on the fiscal 2007 objectives we outlined for investors a year ago.

Our original target for identical supermarket sales growth for the year, excluding fuel sales, was 3% to 5%.

We raised the lower end of that range to 3.5% after the first quarter and raised it again to 4% after the second quarter.

At the end of the third quarter, we said we expected identical supermarket sales growth of 5% for the full year excluding fuel sales.

Today, we reported full year identical supermarket sales growth without fuel of 5.3%, exceeding all of our expectations throughout the year.

On a two-year stacked basis, this marks the fifth consecutive quarter that we have reported identical supermarket sales excluding fuel of 10% or higher.

Kroger's strong identical sales growth in 2007 was a key driver of our earnings per share growth, which is consistent with our business model.

We originally expected to deliver earnings per share growth of $1.60 to $1.65 per diluted share for fiscal 2007.

Today, we reported earnings of $1.69 per diluted share.

This equates to a 15% sales growth after adjusting for the extra week in fiscal 2006.

This growth, plus Kroger's dividend yield, of slightly more than 1%, created strong value for our shareholders.

I want to note that we exceeded our original fiscal 2007 earnings guidance, despite a pre-tax LIFO charge that was $104 million higher than our original expectations for the year.

The higher than expected LIFO charge is a reflection of the current inflationary environment.

Like many food retailers, we continue to expand product cost inflation across many core grocery and perishable categories at levels not seen in several years.

We estimate that our product cost inflation during the fourth quarter versus last year was 3.8% excluding fuel.

While the LIFO charge is a noncash expense that negatively impacts Kroger's operating margins and reduces earnings, it does create cash tax savings for the company.

The impact of the higher LIFO charge on our fiscal 2007 earnings was mostly offset by higher than expected sales.

Let me turn to some other highlights of our fiscal 2007 results.

Our operating margin, excluding fuel, declined three basis points from a year ago.

Excluding the impact of the higher than expected LIFO charge, Kroger's operating margin expanded 14 basis points for the year, which is consistent with our strategy.

The 14 basis expansion is the result of the 19 basis point decline in Kroger's nonfuel FIFO gross margin and a 33 basis point improvement in our nonfuel OG&A rate for fiscal 2007 in comparison to the prior year.

Kroger's FIFO gross margin declined on nonfuel sales primarily reflects our strategy of continued investments and lower prices for our customers.

Our supermarkets selling gross margin on nonfuel sales declined 20 basis points on an annual basis which was consistent with the fourth quarter decline of 18 basis points.

The improvement in our OG&A rate is due to our strong identical sales leverage, increased productivity, and progress we have made in controlling our utility, health care and pension expenses.

These improvements continue to be offset by higher credit card fees.

Rents and depreciation expense as the percentage of nonfuel sales were comparable to last year.

However, it is important to note that fiscal 2006 contained 53 weeks of sales and only 52 weeks of depreciation expense due to the structure of our fiscal calendar.

Fiscal 2007 contained 52 weeks of sales and 52 weeks of depreciation expense.

Now I would like to spend a little bit of time talking about capital investment.

At the beginning of fiscal 2007, we planned to invest approximately $1.9 billion to $2.1 billion in capital projects during the year, excluding acquisitions.

Our actual capital investments for 2007 were $2.1 billion excluding acquisitions compared with $1.8 billion in fiscal 2006.

We completed 200 store remodels during the year and opened, expanded, relocated or acquired 102 supermarkets.

In 2006 we remodeled 158 stores and opened, expanded, relocated or acquired 53 locations.

Another important element of our capital investment plan is our logistics network, a vital link between our stores and our customers.

Over the last three years we have invested more than $400 million in our logistics network, making it more efficient and an industry leader in many areas.

These investments have covered a wide range of projects including transitioning three warehouses to automated systems and beginning installations of the same technology as others.

Our investments and logistics are generating an excellent return.

Total debt at year end 2007 was $8.1 billion, an increase of $1.1 billion from a year ago.

On a rolling four quarter basis, Kroger's net total debt to EBITDA ratio was 2.0 compared to 1.9 during the same period last year.

We expect to manage the use of our free cash flow to maintain a leverage ratio that supports our investment rating.

Also during the year, Kroger repurchased 52.5 million shares of stock at an average price of $27.05, for a total investment of $1.4 billion.

Over the past four quarters, Kroger has returned over $1.6 billion to shareholders and share repurchases and dividends.

At the current share price we expect the $941 million remaining under our current authorization to be sufficient to fund repurchases throughout fiscal year 2008.

Since January 2000, Kroger has reduced its net total debt to EBITDA ratio from 2.8 to 2.0, a reduction of .8 times EBITDA.

During the same time frame, Kroger has invested $5 billion to repurchase 270 -- 237.3 million shares of stock at an average price of $21.22 per share.

The company has also paid $341.5 billion in cash dividends to shareholders since it initiated its dividend program in 2006.

In 2007, our board approved a dividend increase from $0.065 to $0.075 per share, reflecting its confidence in Kroger's strategic plan.

Kroger performed well in 2007.

We delivered on the objectives we established at the beginning of the year and we improved our position relative to our major competitors in the four key areas of our customer first plan: our people, our products, our prices and the overall shopping experience for our customers.

We continue to deliver results today while making investments for our future.

These investments include: lower prices and better service for our customers, a wide array of products that align with the changing needs of our customers, a strong commitment to investing capital in our store base, our store remodels are producing results above our expectations, and the return on investment in our new stores continue to improve, and a share repurchase program that continues to demonstrate the confidence in Kroger's future.

Our strategic plan continues to serve customers, associates and shareholders well, and we believe it will enable us to achieve our objectives in 2008.

Now, I would like to turn to our expectations for fiscal 2008.

As Dave mentioned, we expect that our strategy will work, even as economic and competitive landscapes continue to evolve.

For fiscal 2008, Kroger anticipates earnings of $1.83 to $1.90 per diluted share.

As in 2007, we anticipate Kroger's EPS growth will be driven by strong identical sales, a slight improvement in nonfuel operating margins, and fewer shares outstanding.

Identical supermarket sales growth is expected to be in the range of 3% to 5%, excluding fuel cells.

Shareholder return will be further enhanced by Kroger's dividend.

The range for identical sales and earnings guidance takes into account the current uncertainty about future economic conditions.

The upper end of the range assumes current economic conditions will continue, while he lower end assumes economic conditions weaken slightly.

Our annual earnings guidance assumes fuel margins similar to fiscal 2007.

As you know, due to the nature of the fuel business, there could be volatility from quarter to quarter as we saw last year.

Our earnings per share growth and sales guidance is based on a stable labor environment.

This year, we have labor negotiations covering store associates in Columbus, Indianapolis, Las Vegas, Louisville, Nashville, Phoenix and Portland.

In every negotiation we work to achieve a competitive cost structure in market while meeting our associates needs for good wages and affordable health care.

While we do not give specific quarterly guidance, I do want to note that we anticipate earnings per share growth in the first and fourth quarter of 2008 will be higher than the the annual growth rate and that the third quarter will be lower than the annual growth rate.

This is important to remember when calculating your 2008 quarterly estimates.

We filed an 8K earlier today that outlines some of our additional expectations for fiscal 2008.

And one other point before I turn it back over to Dave.

Although it is still early in the year, and so far in the first quarter our identical supermarket sales trends are tracking at the high end of our identical sales guidance range.

There are signs that there are some discretionary spending decreasing, but our business model is well-suited for this environment.

Now, I would like to turn it over to Dave for some closing remarks.

Dave?

Thanks, Rodney.

I am very pleased with Kroger's performance during the fourth quarter and full year.

We did better than we said we would and our results clearly indicate that.

Our results highlight Kroger's ability to consistently deliver results in the near term, and at the same time, make meaningful investments in the future.

This year, Kroger is honored to celebrate our 125th anniversary.

Our longevity is a testament to our ability to change, along with our customers.

We have been fortunate as a company to welcome change decade after decade and to use it to benefit our customers, associates and shareholders.

The success we have enjoyed a long way is a tribute to the hundreds of thousands of associates who work hard to set Kroger apart from the rest.

And while I have additional comments from our associates listening in today after we answer your questions, I want to take this opportunity to thank the entire Kroger team, every store, every division, every banner, every plant, every distribution center, every office and every operations center, for a terrific year.

Our growth has taken many forms over the years, but there is one constant that has never changed, the commitment of our associates to deliver value to our customers and shareholders.

Thank you.

We will now take a few minutes for your questions.

(OPERATOR INSTRUCTIONS) And please stand by for your first question.

And your first question comes from the line of John Heinbockel of Goldman Sachs.

A few things.

I want to drill down on inflation a little bit and how that might change the way you look at the business.

For example, if you look at wage rate pressure, does there come a point here, I don't know if its this year or next year or beyond, you get pressure on labor costs because of higher wage rate increases?

That is one thing.

And then secondly, in terms of how you by product, we had inflation in the past, we saw a lot of forward buying activity, do you think we see that again or do we see an increase in consignment to keep working capital under better control?

Well, good morning, John.

On the wage question, wages are products of every individual market and that market's conditions.

And every contract would be different as to what contractual obligations there would be on wages.

Of course, there's always some pressure on wages, but actually the issue over the last several contracts in many markets has been we had to find a way to reduce the ongoing costs of pension and health-care costs that were built into the contracts in order to afford the higher wages that actually the company wanted to pay.

And so I don't see the wage picture particularly changing with the inflationary environment, even though the inflation we described a 3.8% is higher than we have seen for many years, it is so what I would characterize as still moderate in long traditional terms.

As for [forward buy] I think we actually already saw some increases in forward buy in the year and certainly the quarter.

It is, one, not the biggest reason but it is one of the reasons that our inventories are higher on the balance sheet because we are fairly deliberate about as we see costs go up, of making sure we have made a conscious choice of how to buy products best to reduce the cost for our customers and reducing the retail price for the customer.

Okay.

Secondly, I have always asked about price elasticity of pricing investments.

It would seem in this market, a, the price elasticity is higher and, b, you'd get more bang for your buck by investing more.

How do you look at that as a balance?

And do you see the same level of investment as a year ago, or some different amount?

Well, the customers do notice on some products as inflation draws the price up.

Milk was the best example last year.

And we've talked about it all year long, where tonnage or gallonage in milk actually suffered because of the inflated price.

We remain competitive and in fact a couple times during the year we were more actually competitive than what the costs would have ordinarily provided.

But generally speaking, we have been able to pass through cost increases as we receive them.

And that is our objective and that has been successfully done.

And for the most part, you have heard a lot of national brand vendors talk about their volume, their tonnage does not seem to have been impacted by that.

I don't know that I can speak specific to any of them, but I can say that our tonnage has been strong this year.

And even when you take inflation into account, are identical sales were strong.

We were very pleased with the year's outcome.

So you may be right a little bit on the price of elasticity as it changes, as some costs go up, but I think it depends on what the items are and how much they go up and I think we are very conscious of what our customers see in pricing.

And so our investments in pricing is going to be based on what we think the customers want, what we think we can afford based on our cost structure and what we think will produce sustainable results.

I think that is important.

We are trying not to put money into promotional practices that are not sustainable.

We are trying to do things that we can do for a very long period of time and that will sustain our sales for a very long period of time.

And finally, your guidance incorporates what LIFO charge?

Similar to this year, John.

[$155 million-ish]?

Yes.

Thanks.

One other single, Dave mentioned a little bit.

But in terms of what we invest in pricing will be driven by what we take out in costs for OG&A.

And we have said overall we expect a slightly improving operating margin and we would expect that that will continue this year as it has been in the past for our strategy.

Thanks.

Thanks, John.

Your next question comes from the line of Karen Short of Friedman, Billings and Ramsey.

Hey, there.

Thanks for taking my question.

I'm just wondering if there has been a lot of discussion about generics in general.

And I'm wondering if you could give some color on what the negative impact of generics on your identical store sales, and the flip side, the positive impact on gross margins.

And then I just have a follow-up.

Karen, are you referring -- on generics, are you referring to corporate brands, our own brands?

Oh, sorry.

I meant on pharmacy.

Oh, in pharmacy.

Okay.

In pharmacy we have of course tracked the change from the patented prescriptions to the generic prescriptions as everyone else has and I think we would characterize the shift for us in the same ballpark as you have heard from other retailers in the same sector.

It is not much different than what they described.

Okay.

And the benefit on the gross margin?

I don't know whether we have said anything on that.

When you look at pharmacy by itself you can clearly see the improvement in margin.

But by the time you look at for the total company results it gets pretty blended when you look at it --

Yes.

It would help percent.

The dollars would be different because the dollars on sale are so much lower.

The percentage obviously on a generic item like this is much higher.

But by the time you look at total Kroger it really doesn't have much of an influence relative to that.

Okay.

Great.

And then just thinking about leap year, the extra day in this quarter.

I guess the first question would be what is the impact of that on your comp?

Would your ID be tracking the high end of the range in guidance if we exclude the benefit of the extra day?

Karen, there is no extra benefit of an extra day for us.

The way the calendar works for us, every few years we have a 53rd week as we did -- not last year, but in 2006.

The reason we do that is to adjust for that leap day every few years.

So we have the exact same number of days and weeks in our totals for the first quarter of 2008 as we would have had last year.

And more importantly is when we give identical sales, we always make sure they are comparable number of days and weeks, and we adjust for those kind of things.

Our 52 week year have 364 days, and the 53rd week year to catch up to the calendar versus our fiscal calendar, they'll have seven more days.

Okay.

Great.

Do you have any comments on what you're seeing in the acquisition landscape?

It would be very similar to what we said for the last several years, continue to see quite a bit of availability, pricing expectations really are not consistent with what we think the economics work as a general rule.

As you know though, last year we were able to acquire almost 40 stores in a couple of different markets, but we continue to look at several opportunities and at the right price would deal with it.

Okay.

Great.

Thanks very much.

Thanks, Karen.

Your next question comes from the line of Chuck Cerankosky of FTN Midwest.

Good morning, everyone.

Good morning, Chuck.

Just check on one thing.

You have wild food purchase last weekend ahead of the snowstorms in Cincinnati.

That would be true.

Yes.

I want to make sure customers respond as usual.

Can you talk about the whole prepared foods category last year, how you thought it progressed, and especially what kind of trends you saw in the fourth quarter?

Chuck, before we turn to that, I want to go back to your first comment about the snowstorm.

We did have a snowstorm across this part of the country, and yes, it does give us a good, strong sales boost for those couple of days.

You would expect -- and in fact, if you went in right after the snowstorm, you would see some holes in place of soup and milk and some places like that.

I was in stores on Sunday, which was the day after that, and we had recovered actually pretty well.

I want to tip my hat to the store associates and division associates and all of our logistics people, and the manufacturing people who just did a remarkable job of making sure we had products to sell during that time.

So it is a tricky time.

Now to your specific question, prepared foods, those are developing both at Kroger and generally within the U.S.

I wouldn't go to say it is a rapid pace.

It's probably a rapid percentage but it's still a pretty low base.

And as a result it is not going to be meaningful in anything you will see in overall data for a while.

But, yes, it is clearly increasing for us and across a number of competitors.

And as Dave mentioned in his prepared remarks, deli/bakery is one of the departments that had very strong sales growth, and a lot of that is driven by prepared foods and it is not just new prepared food items, some of it is existing items too.

Yes.

In fact, I would -- I am speculating, but I believe that the sales growth is more by the existing items even than the new prepared items.

Certainly on a dollar basis.

Yes, on a dollar basis.

Percent-wise that -- what I said before is right.

Do you think that reflects quality improvements in the traditional items, or the price of gas?

What is affecting that?

I think it has improved on the traditional items for us.

And the reason our bakery sales are up is we have improved our quality, we have improved our price position, we have improved the offering.

All of that I think has contributed to that.

Certainly, our sales overall are at least modestly helped by what is happening with gas as we have discussed before.

That tends to be a slight positive for us.

Okay.

Dave, can you talk about, and Rodney as well, looking about your choice between stock repurchase and improving the yield on the stock with the dividend, what you are thinking about that going forward?

Rodney or Mike, do you want to comment on that?

If you look at on the stock repurchase and dividend, we continue to be slightly biased stock repurchase.

Obviously, if you look at last year, that's what we actually did.

And at current stock prices that would certainly be our bias.

Okay.

And then last thing, Dave, can you give us some color on what you saw in the changes in spending among discretionary categories?

Well, overall, I assume you want to get a sense of how the consumer is behaving in this environment?

Yes.

At Kroger we really do not see clear signs of the customer pulling back.

We do see improved sales in Kroger brand, but we've been seeing improved sales in Kroger brand for a number of years now, so it is not just the result of the economy, it is also the result of what we have done in improved packaging and quality on the Kroger brand.

We have seen some declines in selected categories.

But they are the obvious categories that you have heard elsewhere, jewelry as an example, selected nonfood areas like domestics and home furnishings are other examples.

But one of the reasons Rodney made the comment he did about where we are so far in 2008 was to help you see what we are seeing in today's economy.

Just to refresh your memory, what Rodney said is the identical sales trend so far in 2008 is tracking the high end of sales range that we gave for guidance so far.

We think Kroger is well positioned as a value proposition, and better positioned than in the past.

Our strategy, our pricing approach, the work our associates do, really positions us well to weather in this economy in our opinion.

Yes, we see changes as I described in a few categories, but there are really no clear signs of the customer pulling back at Kroger.

Thank you.

Thanks, Chuck.

Your next question comes from the line of Scott Mushkin of Banc of America.

Hi.

Yes.

This is [Blake Lee] filling in for Scott here.

I just want to touch on -- in terms of inflation, at what point do you -- you said 3.8% for the quarter, at what point do you get concerned about the input inflation, what number would we look for as far as becoming less orderly in your minds?

Well, the 3.8% number actually is an annualized number.

I want to make sure you have that in mind.

And I characterized it as moderate inflation and I genuinely feel that it is moderate.

I don't think I want to speculate on how high ends up trouble.

You could get to a high enough level and it could be disruptive in the economy in ways that creates other issues for us.

But generally speaking, inflation, particularly moderate inflation like we are seeing, is a net-net positive for us.

And as I mentioned, we have been successful in passing along the costs this past year.

I will tell you also that in 2008, we are seeing so far in '08 pretty much what we saw last quarter, a continuation of the same trend.

It is not much higher, not much lower, it is basically the same picture.

You have heard us say many times before in inflation, it is about the wonderful thing having a corporate brand program that we have.

At any point in time, if CPG companies would pass prices more than what the actual inflation is, we have our corporate brand product that's excellent product that customers will routinely switch over.

And you can see whenever a CPG company raises prices more than what the economics makes sense, corporate brand always picks up share in a reasonably quick period of time.

And in terms of traffic versus ticket, are you seeing reasonably stable trends there?

What does it look like there?

Well, both the traffic and the ticket increased.

And if you were to try to inflation adjust the average sale, that would give a little stronger emphasis on the traffic than on the average sales.

But they've both improved

And I was just going to say, and it is very consistent with what we have seen in the last three or four quarters.

Yes.

Not much different.

Okay.

Thanks.

Nice quarter, guys.

Thanks.

Your next question comes from the line of Jason Whitmer of Cleveland Research Company.

Hi.

Good morning.

Good morning, Jason.

Hey, Dave, can you talk a little bit about a slowdown in square footage growth from what you are seeing with other traditional outlets?

There has been a continuing trend of rationalization and consolidation but there seems to be more of a newer phenomenon where other retailers are slowing it down a bit?

Is that something that is starting to have an impact within some of your markets?

Or where would you expect maybe over the next couple years, and how that -- and how Kroger can respond in that sort of an environment?

Well, the example that I gave in the earlier comments was, last year we had 65 Wal-Mart supercenters open up against us in major markets.

That is the lowest number of new Wal-Mart supercenters we have had in seven or eight years.

And that is significant in one sense but on the other hand, it is still a very large number of stores.

In our view, Wal-Mart is still doing very well in groceries, and that is actually -- you see that in their sales trends when they talk about it.

So I think every traditional and nontraditional retailer, like we do, makes their own rational choices as to where they think they get their advantages and what works for them and what doesn't.

I just simply read into Wal-Mart's statement that they maybe felt they were cannibalizing too much of their own sales, and so they're going to slow it down a bit.

But that slowdown still looks like 65 last year which is a big number.

Is your step-up in square footage, it looks modest but noticeable, up to 2%, 2.5%.

It that going to be pretty broad based or do you have certain geographic markets or certain formats in mind for that?

We are targeting a number of things.

But as you know we're bullish on what we have done with our marketplace store.

So that is important.

We still continue to emphasize remodels even though that doesn't increase square footage, we think it connects well with the customer, particularly with what we have been doing.

Rodney, Mike?

And we continue to focus on expansions.

The increase in square footage would be primarily driven by market place, additional marketplace stores, not so much additional number of stores.

Okay.

And then lastly, you talked briefly about the new market acquisitions in '07 and some of the availability opportunity going forward.

What has been the impact so far of those?

Obviously it doesn't move the needle for the entire company a whole lot, but as far as the return on that investment and some the in market impact especially as things rationalize in some of those key markets for you?

The two that we did, we are very pleased with the results of both of those and where they are tracking.

We are starting now to focus on the remodeling of those stores and that is when it really becomes special for customers and our associates.

Great.

Thank you very much.

You are welcome.

Thanks, Jason.

And your next question comes from the line of Meredith Adler of Lehman Brothers.

Hi, everybody.

I would like to start with 18 months ago when you had an analyst meeting, you gave us a slide that looked at customer perception of areas that were important to you, price being one of them, service, and I forget what the others were, but I think there were four of them in total.

I was wondering if you could talk a little bit about what customer research says now about all those things, beyond price, because I think we know your price image has gotten better.

If you look, the other three that we talked about was people's shopping experience and products.

In all three of those we continue to make progress relative to our traditional and nontraditional competitors.

If you ask us internally, we would tell you we're not making as much progress as we would like to be, but if you look at where we are, we are making progress on all three.

Great.

Wonderful.

And then another question I would like to ask, is we have been talking a little bit about Wal-Mart.

First, do you believe you are taking share back from Wal-Mart in any of these markets?

It sounds like your share went up in markets where you compete with them.

And then I have another question about Wal-Mart.

Meredith, our market share in the markets where Wal-Mart has gained a one, two or three shares for the past several years has increased.

And my view -- my personal view of where we have gained that share and the way we looked at it is the same as it was last year and the year before that.

And that is, that what is happening in this market is we are gaining at Kroger, Wal-Mart continues to gain in share, sometimes that's because they have added new stores, but Wal-Mart continues to gain in share, and that both Wal-Mart and Kroger are taking that share from other sources, other places that people are shopping.

And that is not true every place, but it is true in the bulk of the situations.

So, I think the answer is no.

I don't see us as taking share from Wal-Mart.

I see us taking it from other traditional and some other nontraditional grocers that are out there.

If you look at the traditional companies that track these sorts of things, and we look at AC Nielsen for instance, what we see there is remaining -- what they call remaining food which would exclude us and Wal-Mart.

That continues to decline year after year, that is mostly where it is coming from.

Off the lot, would be from people without our economies of scale, and as you know the way we define markets, there's still well over 40% market held by people without our economies of scale.

The number I used was 46%.

And we said that's declined, the share for that group has declined four percentage points in four years.

So about 1% a year.

The other thing, Meredith, is last year there were 32 major markets where Wal-Mart was at least third of our major markets, and this year that increased by 2% to 34%.

That statistic would lead you to believe they continue to ease their gross sales in their existing boxes and/or build new boxes to move up in two more markets like that to at least a number three position.

Okay.

And then we talk about 65 new Wal-Mart stores.

Would you say that the majority of those are in markets where they are not yet fully established, further west of Ohio, those areas?

Actually, I don't know the answer to that.

65 is a lot of stores.

So there are a lot of places.

They certainly built a lot of stores around the Cincinnati market in the last couple years.

It has been a big deal here.

You could call that a new market from that point of view and the fact that there's two additional markets where they have gone up to the number one, two or three in that market.

That is probably significant too to your point.

I would over index a little bit for Ohio, especially Cincinnati, and a little bit Columbus, and some of the other areas, it would over index the farther west you go, and a little bit in Texas and the rest would be pretty -- spread out pretty normal looking.

Okay.

And then I would like -- you have already commented that you are seeing a little slowdown in some of the discretionary categories and yet you are still very excited about the marketplace stores.

Do you have any concern that those stores are going to start out more slowly, or slow a bit in the next year or so, because obviously they are carrying more discretionary general merchandise?

Actually, I am not because the marketplace stores went in a variety of ways, only one of those is in some of those products.

While those products may be down on the whole, or at least less than the growth that we were experiencing in some of them, they still are an opportunity for us.

So, no, I am not discouraged about that.

Okay.

And I just have one other question back to the topic of inflation.

There's -- I think you folks have said CPG inflation is a bit of a tail wind.

But on the perishable items, the more commodity items, are you managing gross profit dollars more than you are managing GM?

And does that have the potential to optically, mathematically, to make your gross margin percentage go down, even though the dollars maybe flat or up?

I suppose mathematically, that gets to be pretty hypothetical, but yes, I think, mathematically it certainly could do that.

But what we are looking -- we are looking at making sure we maintain the $0.01 gross.

But also we are looking -- we're not just doing that, we're also looking at the percentage gross and most importantly we're looking at the balance at where our financials come out.

Because, as we said before, we are trying to balance where we end up on gross margin investment, and where we have found savings in OG&A, or if you prefer, our total cost on one side and our selling gross on the other.

And we take all of our pricing into account on that including the inflationary environment.

Okay.

The reason I am asking is because people assume that any decline in your selling gross is absolutely a function of price investments you've made, where in fact it could be again, an end results of how you are managing the inflation and gross profit dollars.

On that point I would agree.

Yes.

Okay.

Thank you very much.

Thank you, Meredith.

Your next question comes from the line of Ed Kelly of Credit Suisse.

Hi.

Congratulations on a good quarter.

My first question for you is on gas.

It looks to me like it may have been relatively neutral this quarter.

Is that a fair assessment?

If you look at gas for the whole year, we would have said from our perspective, in the fourth quarter it is positive versus the overall year, if you look at it for the year, it is almost exactly where we expected it to be and pretty consistent with '06 when you look at it for the full year, so slightly positive in the fourth quarter, pretty neutral for the year.

Okay.

And then gas prices right now, are rising which is not good, but it looks like they increased for almost the entire first quarter of last year as well.

So to me, it seems like the comparison is not very difficult anyway.

Is that true?

That we wouldn't give any additional insight.

Okay.

And then regarding your guidance, the last two years, you got to 6% to 8% EPS growth, and meaningfully exceeded those estimates, your guidance is 6% to 10% EPS growth today, and saying that if current conditions hold you will be high into the range, but it seems like history would suggest the current conditions hold, there is a possibility you could do better than that.

Is that a fair way to think about it?

I think we would position it more in terms of if you look at the targets we have given, it reflects the fact that we did exceed the last two years and we try to reflect that up front.

So, I wouldn't necessarily assume that.

Okay.

And one last question for you on your outlook for CapEx.

Your level of spending increase in '06 and '07.

I don't know, did you give an outlook for 2008, was it $2 billion?

It was in the 8K we filed it today, and we gave a $2 billion to $2.2 billion range.

Okay.

How should we think about the level of spend that you are undertaking versus the normalized rate of spend?

How much of that is due to the fact that you seem to be more in a remodeled cycle, or is this a rate that we should be thinking about longer term?

There are two things, one is that we have been very happy with the remodels that we have done.

As we said in prepared remarks, they continue to generate a return above our expectations which we believe always winds up meaning we made a very good choice with the use of our shareholder's money, and our returns on our new stores which a few years ago we were disappointed with continued to improve.

And if you look to the guidance we gave today as well, and the number of new stores, and back out the number of acquisitions we had for the new store count in 2007, it is actually a slight increase in the number of new stores in 2008 as a result of our improving returns, and there are a few more marketplace stores in that number which caused square footage growth to be higher than we have been tracking.

The other thing is we're seeing nice opportunities with logistics projects, and some IT projects we feel good about, the return potential.

And as long as we see those out there, we will continue to fund them in a balanced sort of way.

Okay.

Thank you.

Your next question comes from the line of Mark Wiltamuth of Morgan Stanley.

Hi.

Good morning.

I wanted to ask a little bit about what you are seeing in food away from home trends versus food trends at the grocery stores in general.

And also if you look across the spectrum here, we have seen some very strong sales out of the club stores and I am curious if you think the consumer is shading in that direction now, that we're in a more price-focused environment?

On the food away from home, I don't get a lot of data from the restaurant industry.

But what little data I see, and episodically what I hear from restaurateurs, has not been pretty for them.

That in this economy, that their sales have been less than they would like them to be.

And we have believed this year, this past year, and in the year before even, we believe that trend has been a benefit not just to Kroger but probably to all supermarkets.

You saw the supermarkets as a whole, an industry, our identical sales tended to move up a couple years ago.

And my personal view is that is probably the reason why.

But I think that continues.

We think we are doing a particularly good job in our deli/bakery and in some other parts of the store which help us capture that particular time which is perhaps one of the reasons our sales are strong.

As for the club stores, I would be speculating if I answered that, but I would think one of the reasons that you are suggesting is probably right, that in a tighter economy, I could see people turning to a number of places, including our Kroger brand and including the club stores, as a way to save money.

Okay.

You mentioned you were probably taking share from some of the independents and those who don't have scale.

Do you think this environment could foster more consolidation?

Are those players under more pressure than usual?

And you have made a lot of price investments.

I am curious, when you are doing your price comparisons, what are the independents doing with their prices?

Well, consolidation is a funny thing.

It takes a lot of years.

And most industries we have watched, it is not just a linear movement, it is some starts and stops, and some diversions and so forth.

But I think it is generally continuing as it has been continuing.

I don't think there is any greater pressure today than there was before or less pressure than there was before in my view anyway.

As for pricing, you have been able to see pretty well what we have done with our pricing, and I think it is generally true that relative to our competitors, our pricing, not in every case but in many cases, has generally improved.

If it stayed the same and we lowered our price, that is what we would produce that improvement.

And I think that is more of what we are seeing.

I don't see really any radical change in pricing strategies out in the competitive environment right now.

Another thing I would add on Dave, if you look at consolidation, if you look at a long-term trend, there has been consolidation in our industry for 20 years, and certainly don't see anything that would cause that to change looking forward.

That is something we have been saying for the past five or 10 years I know for sure.

And then lastly on inflation, we've seen several periods now of rising inflation.

I'm wondering if you think there's at some point maybe late in the year when we'll lap out of inflationary trends?

That is hard to predict.

That is why I mentioned that in '08 so far, based on what information we have on cost increases expected this quarter, we don't think it is abating at this point in time.

Okay, thank you.

Your next question comes from the line of Mark Stahlman of MacKay Shields.

Hi, good morning.

Just wanted to -- I didn't catch all of the earlier comments.

Could you break out on the comp -- do you have a sense of price versus volume?

It is pretty even between the two.

Okay.

Great.

And as far as I think somebody touched on it, the economic trends, do you guys discuss traffic at all, as far as since the end of the year?

You mean currently this year?

Yes, currently.

Or even less, quarter, whatever information, I would assume you would have -- I am wondering if there is some fiscal backup.

As I said earlier, half of our identical sales gain came from traffic, half from higher traffic which is pretty much -- from higher sales per customer, and that pretty much consistent in the fourth quarter and all of last year.

Okay.

Thank you.

Your next question comes from the line of Deborah Weinswig of Citi.

Good morning.

Hi.

Can you talk about your fuel strategy as it relates to your promotional efforts and specifically when customers are using their Kroger Plus card or their 1-2-3 Reward MasterCard?

Well we don't have the same program in every market, but in most markets if you make purchases at Kroger with your Kroger Plus Card you will get a discount on gasoline and if you use your 1-2-3 Plus Kroger Mastercard which is from our Kroger personal finance group, and this is a commercial, Deborah, you will get a $0.15 per gallon reduction at the pump if you've spent, in most markets, if you've spent $100 in purchases.

And I have my card and got that same discount just this past week.

Okay.

Great.

And then can you provide us with an update on Kroger personal finance and how has it contributed to your recent results, and if you look out further, when can we expect KPF to represent a significant enough driver to your overall results really to see it broken out on your financial?

I was just at the KPF office last night and really pleased with the progress they made this past year.

But, Rodney, you want to comment on KPF?

To me it is really two aspects when you look at Kroger personal finance.

Obviously the business itself, and we have a great partnership with World Bank of Scotland.

It has just been outstanding.

They really do bring the expertise to the financial industry and we obviously have a connection with the customers and customer traffic.

Working together, we have been able to create several products that have really been very positive with our customers.

The other thing that we really like is the loyalty it creates from our customers, and clearly we can see changing customer behavior when they become Kroger personal finance customer.

So it really is both.

In terms of at what point does it show up in overall results.

It really depends on how you define showing up.

Because from a loyalty standpoint we would certainly say it is showing up today.

One other thing that you may note, when a customer uses the Kroger credit card, they earn gift certificates.

And so far our customers have earned over $40 million worth of gift certificates to reuse at Kroger, and the redemption rate is incredibly high so we know the customer is love that $40 million.

Great.

Thanks so much, and best of luck in 2008.

Congratulations too, congratulations to you.

Last question -- we'll take one more question.

And your final question comes from the line of Bob Summers of Bear, Stearns.

Hi.

Good morning.

You touched on corporate brand.

So I wonder if you could you give us some metrics around performance, talking about increased penetration levels, maybe what the drag to comp has been, and your thoughts on how that progresses through 2008?

Well, I don't know about 2008 for the moment, but our market share on Kroger brands on the whole continue to increase in the year.

I don't think we gave any specific data this time on that.

In grocery, which is the way we traditionally looked at it, that definitely has continued to grow.

So we are pleased with that progress.

You talked about drag to comp, I don't really think it is causing the drag on our comps, because I think it is improving our sales.

But I suppose if a person trades from a higher priced item to this item, then you can have some impact on comps but that has been meaningful.

If you look up the fourth quarter, we didn't give the specifics, but we did gain share in both dollars and units.

The gain in dollars was more than units but if you look at the inflation is a little bit higher in a lot of the corporate brand categories, especially milk and some of those.

Okay.

And then, there has been a lot of talk about Wal-Mart potentially taking price up at a slower rate than either CPI or product cost inflation, I don't know, pick your metric.

Is that something that you're seeing?

You have to go look in Wal-Mart for yourself.

We of course watch them and lots of other competitors to see, but I'm not going to comment on their pricing strategy.

Okay.

And then one last thing, I think you outlined the LIFO charge for next year that's about in line with what you did this year.

But if I try and extrapolate the trend in the fourth quarter, I get to a number that is a lot higher, help me understand that.

The reason the trend looks like that in the fourth quarter, Bob, is at the end of a third quarter we were projecting $130 million charge for the year and it wound up being $154 million charge for the year.

So we had to take all of that $24 million in the fourth quarter.

If we had known at the beginning of the year it would be $154 million, about $16 million of that $24 million would have been spread over the first three quarters of the year.

Okay.

Thank you.

Thank you.

Thanks, Bob.

And before everyone hangs up, we just wanted to close with a few -- share a few thoughts with our associates who have joined us because we encourage them to call in.

Once again, congratulations on a great year.

I'm particularly pleased with gains we continue to make and market share.

Those numbers only move in a positive direction when customers choose us over our competition.

Our increases in market share mean you are doing what you do so well, making sure our customers want to return to our stores time and time again.

Our performance during the quarter and year points to another significant achievement you should all be proud of, because it is the result of your individual contributions.

You heard us mention that Kroger continues to make progress in our four key areas: our people, our products, our prices, and the overall shopping experience for our customers.

One example where you have a huge impact is in helping to keep costs low.

Kroger is able to invest these lower costs and lower prices for our customers because of the choices each of you make on the job every day.

Our family, friends and neighbors are making different choices in today's economy than they did a year ago, because household budgets are not as flexible.

Your personal commitment makes our lower prices possible.

We hope your friends and neighbors appreciate the help that you provide particularly when they need it most.

That completes our call today.

Thank you all for joining us.

Thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect.