克羅格 (KR) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 The Kroger Company earnings conference call.

My name is Colby, and I will be your operator for today.

At this time, all participants are in listen-only mode.

Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Cindy Holmes, Director of Investor Relations.

Please proceed.

Thank you, Colby.

Good morning, and thank you for joining us.

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

We want to caution you that such statements are predictions, and actual events or results can differ materially.

A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but Kroger assumes no obligation to update that information.

Both our first quarter press release and our prepared remarks from this conference call will be available on our website at IR.

Kroger.com.

After our prepared remarks, we look forward to taking your questions.

In order to cover a broad range of topics from as many of you as we can, we ask you please limit yourself to one question and one follow-up question if necessary.

Thank you.

We are hopeful that you can join us for our 2013 investor conference to be held in New York in October.

We will provide details later this year, and look forward to seeing many of you then.

I will now turn the call over to Dave Dillon, Chairman and Chief Executive Officer of Kroger.

Thank you, Cindy, and good morning, everyone.

Thank you for joining us today.

With me to review Kroger's first quarter 2013 results are Rodney McMullen, Kroger's President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer.

The year is off to a great start.

In the first quarter, we achieved strong sales and record earnings per share.

In our investor conference last October, we outlined our long-term strategy and strategic and capital investment plans, which include expanding into new markets and adding square footage in markets where we currently operate.

Based upon these plans, our positive identical store sales growth for the last nine years plus, and our strong earnings per share results in 2011 and 2012, we raised our long-term earnings per share growth rate guidance to 8% to 11%, plus an increase in dividend.

These first-quarter results give us continued confidence that we will achieve our long term guidance again this year.

Our ability to achieve earnings per share growth of this magnitude puts Kroger in an exclusive class of companies capable of delivering, (technical issues) so let me continue.

Our ability to achieve earnings per share growth of this magnitude puts Kroger in an exclusive class of companies capable of delivering this level of growth on a consistent basis.

I am very proud of our associates for delivering another quarter of inspired customer first performance.

We're connecting with our customers better than ever before, and their positive view of Kroger continues to improve.

Our associates also did an outstanding job of keeping costs down this quarter.

We continue to find our cost savings in places that do not negatively impact our customer shopping experience, so that we can reinvest those savings in ways that create lasting customer loyalty.

As a result of this cycle, we achieved our 38th consecutive quarter of positive identical store sales growth.

Our solid operating performance continues to support our plans to increase capital investment, to grow our business over time.

We continue to monitor how four factors are affecting consumer confidence; the overall state of the economy, fluctuating gas prices, payroll taxes, and government policy uncertainty.

While there are signs of a better economy, the improvement is not robust.

Customer sentiment is gradually improving, but remains fragile.

We continue to see high variability and sales comparison between days and weeks.

Overall, we are confident that we will meet the targets we committed to in October, both now and in the future.

We've raised our fiscal 2013 earnings per share guidance to reflect this confidence.

Rodney will now provide additional details about our first-quarter business performance.

Rodney?

Thank you, Dave, and good morning, everyone.

Our first-quarter results demonstrate the progress we are making on our long-term growth strategy.

We continue to narrow our focus on new markets for future expansion, and to add square footage in several fill-in markets.

Fort Wayne, Indiana is a good example of where we've done this successfully.

Over the last several years, we've upgraded our position in the market by investing in new stores and remodels, completing an acquisition, and making incremental investments in our people through training and leadership development.

As a result, we have doubled our market share in Fort Wayne over the last five years.

We view this as a successful pilot, and are well underway with similar strategies in several other markets.

A key growth metric of our business is identical sales, because it provides the best measure of our growing relevance with customers over time.

We are very pleased with our first-quarter identical supermarket sales growth of 3.3% without fuel.

This is even better when you look at identical sales without fuel and pharmacy.

On this basis, our identical sales grew to 4% versus 3.2% on a comparable basis last year.

Sales growth in the first quarter was driven by loyal household growth, more visits per household, and increases in prices per unit.

In addition to visiting our stores more frequently, customers continued to buy more on a monthly basis.

Items per basket were slightly up on a per trip basis and a monthly basis.

As a result, total units sold were up solidly compared to last year.

During the first quarter, we grew the number of loyal households in all divisions.

Our loyal household growth count grew at a much faster rate than total household growth, which was also up for the quarter.

The product cost inflation is estimated at 1.7%, excluding fuel.

Every store department had inflation, with the exception of seafood, which had deflation.

Our pharmacy business has undergone a lot of change in the last 18 months, and we are thrilled with where we are.

The amount of Express Scripts volume we retained.

As expected, the effect of generics continued in the first quarter, which I described earlier affected identical sales by 70 basis points.

Even with these headwinds, our pharmacy team continues to deliver outstanding performance, including solidly positive script count growth.

I want to echo Dave's earlier comment, that our associates did a great job controlling costs in the first quarter.

OG&A costs, plus rent and depreciation, without fuel, were down 21 basis points as a percent of sales.

Now I'd like to update you on the progress in corporate brand.

As we said last quarter, our practice had been to disclose our corporate brand share in the grocery category only.

Given the breadth of our corporate brand offerings, we are now comfortable to give you a view of our share across the whole store, excluding fuel and pharmacy.

On this broader basis, corporate brands represented approximately 26% of total units sold, up 30 basis points compared to the first quarter last year.

Total corporate brand sales dollars were 23.7%, also up 30 basis points compared to the same period last year.

We continue to see impressive growth in our Simple Truth and Simple Truth Organic brands.

We are regularly adding new items.

In fact we plan to launch 75 new items between now and the end of this year, and today offer 450 honest, easy, and affordable Simple Truth options for our customers, and by the way, they're great.

We also continue to make progress to integrate sustainable practices into our everyday business operations Next week, we will publish our seventh annual sustainability report.

As a preview, I'd like to highlight some of the most successful initiatives of 2012.

We have reduced total store energy usage by 32.7% since the year 2000.

We also reduced our carbon footprint and made significant progress toward our goal of zero waste.

21 of our 37 manufacturing plants have now achieved the impressive goal of sending zero waste to landfills.

I'd like to thank our associates for bringing all these initiatives to life through their individual actions, each and every day.

Their efforts are helping make each community we serve a better place to live.

Finally, an update on labor relations.

Our store associates ratified a series of new labor agreements covering stores in Michigan, Houston, Indianapolis, plus Fred Meyer and QFC stores in Oregon.

We have many contracts that have expired or will expire soon, including contracts in Roanoke, Seattle, and later this year in Cincinnati and Dallas.

Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality affordable healthcare, and retirement benefits for our associates.

Kroger's financial results continue to be pressured by rising healthcare and pension costs, which some of our competitors do not face.

Kroger and the local unions, which represent many of our associates, have a shared objective.

Growing Kroger's business and profitability will help us create more jobs and career opportunities, and enhance job security for all of our associates.

In fact over the last five years, we've added 33,000 jobs.

Now, Mike will provide more detail on Kroger's first-quarter financial results and our guidance for the rest of the year.

Mike?

Thanks, Rodney, and good morning, everyone.

Total sales increased 3.4% to $30 billion in the first quarter, compared with $29.1 billion for the same period last year.

Total sales, excluding fuel, increased 3.8% in the first quarter over the same period last year.

Net earnings for the first quarter totaled $481 million, or $0.92 per diluted share.

Net earnings for the first quarter of last year were $439 million or $0.78 per diluted share.

Several factors contributed to this great result, including strong operations, lower LIFO expense, lower share count, and partially offset by our higher effective tax rate this year.

FIFO gross urge margin was 20.65% of sales for the first quarter.

Excluding retail fuel operations, FIFO gross margin decreased 15 basis points from the same period last year.

The Company recorded a $17 million LIFO charge during the quarter, compared to a $46 million LIFO charge in the same quarter last year.

We were pleased to deliver on our goal to grow FIFO operating margin in the first quarter.

First-quarter FIFO operating profit, excluding fuel, increased approximately $47 million over the prior year.

Excluding fuel and the extra week in fiscal 2012, on a rolling four quarters basis, FIFO operating margin increased 11 basis points.

On a rolling four-quarter 52-week basis, return on invested capital was 13.5%, compared to 13.4% during the same period last year.

We're committed to growing our ROIC over time, even with the higher level of capital spending.

Turning now to retail fuel operations.

We disclose many items with and without fuel, due to its effect on operating costs and gross rates, but we view fuel as a core department that over time is expected to contribute to earnings per share growth.

About 50% of our supermarkets have fuel centers today.

In the first quarter, our supermarket fuel centers margin per gallon was approximately $0.116, compared to $0.121 in the same quarter last year.

As it relates to retails per gallon at all fuel outlets, they averaged $3.52 in this quarter, compared to $3.65 last year.

Total gallons sold showed solid growth.

Our planned uses of cash remain unchanged.

Maintain our current investment grade debt rating, repurchase shares, pay dividends to shareholders, and fund capital investments.

You will notice on our balance sheet that the current portion of long-term debt has increased, and our net total debt to adjusted EBITDA ratio has declined to 1.85.

As it relates to the current portion of long-term debt, we made the conscious decision to fund out our first-quarter maturities using the historically low interest rates available in the commercial paper market.

Since we have hedged the expected financing, our exposure to fluctuations in interest rates has been mitigated.

The lower than expected net total debt to adjusted EBITDA ratio was primarily a result of our stock's recent performance, which took us out of the market for share repurchases based on the 10b5-1 grid in place at the time.

As you know, we modified our grid from time to time.

We currently have $447 million remaining on our Board authorization, and believe that repurchases in the current range are attractive.

During the first quarter, Kroger repurchased 4.5 million common shares, for a total investment of $146 million.

Kroger's strong financial position has allowed the Company to return more than $1.3 billion to shareholders through share buybacks and dividends over the last four quarters.

Capital investment totaled $646 million for the first quarter, compared to $557 million for the same period last year.

We continue to expect full-year capital investments to be in the $2.1 billion to $2.4 billion range.

Now I'll update our growth objectives for fiscal 2013.

Based on the first-quarter results, we increased our net earnings guidance range to $2.73 to $2.80 per diluted share for the year.

Our original guidance was $2.71 to $2.79 per diluted share.

The Company's long-term growth rate guidance is 8% to 11%, and shareholder return will be further enhanced by a dividend that we expect to grow over time.

The calculation of our growth rate for fiscal 2013 is based on our fiscal 2012 adjusted earnings per share of $2.52, as was shown in Table 6 of the fourth-quarter press release.

Adjustments include the UFCW consolidated pension plan liability, credit card settlement, and the extra week.

As you look at our expectations for the year, please keep in mind the guidance we gave in March for the fourth quarter.

On a 12-week basis, we still expect this year's fourth quarter to be behind the fourth quarter last year.

This is because we currently expect the $13 million LIFO charge in the fourth quarter this year, compared to a credit of $41 million in the fourth quarter of last year.

Kroger continues to expect identical supermarket sales growth excluding fuel of approximately 2.5% to 3.5% for fiscal year 2013.

Now I will turn it back to Dave.

Thank you, Mike.

I understand that, at the beginning of the call, several of you were not able to hear our opening comments, and so I know that a lot of the purpose of this call is to give you a sense of how we felt about the quarter, so I want to go back and repeat just a little bit of what I think you may have missed.

The most important parts you missed was the stunning oratory that Cindy offered of the forward-looking statement caution, but that, rather than read that to you, I just want you to know that is posted online, so you can find that there But the other paragraph that you missed was my initial comments about how I felt about the quarter, and so I want to read those to you, they're important.

I said that this year is off to a great start, and in the first quarter, we achieved strong sales and record earnings per share.

In our investor conference this last October, we outlined our long-term strategy, our strategic and capital investment plans, which include expanding into new markets, and adding square footage in markets where we currently operate.

Based upon these plans, our positive identical sales growth for the more than nine years and our strong earnings per share results in 2011 and 2012, we raised our long-term earnings per share growth rate guidance from 8% to 11%, plus an increase in dividend.

These first-quarter results that we're here to talk about today give us continued confidence that we will achieve our long-term earnings guidance again this year.

Our ability to achieve earnings per share growth of this magnitude puts Kroger in an exclusive class of companies, capable of delivering this level of growth on a consistent basis.

So with that background before I turn to questions, I want to close with these observations.

I'm very proud of the Kroger team's relentless focus on delivering on our customer first strategy, quarter after quarter.

It's what sets us apart from competition.

Our customer's positive view of Kroger continues to improve, and they are rewarding us with their loyalty.

We achieved strong sales and record earnings per share for the quarter, controlled costs, and delivered on our goal to improve FIFO operating margin.

The momentum coming out of the first quarter will continue to drive growth and greater shareholder value.

So now, we look forward to your questions.

(Operator Instructions)

Your first question comes from John Heinbockel with Guggenheim Securities.

First, did the first quarter come in a little bit better than you had planned, in light of sort of the quarterly break down Mike had given on the last call?

If that's true, what may have driven the upside in your mind?

And then I know on the last call, Mike, you also had talked about the second and third quarter being up toward the high end of your long term range.

Are those still about right, or has anything changed there?

The second and third quarter guidance would remain unchanged, and then we didn't call that out in the prepared comments.

I focused only on the fourth quarter, just to make sure everybody remembered that's what we said about the fourth quarter.

Relative to the first quarter, yes, it came out a little better than we expected.

Sales were a little stronger than we had anticipated at the beginning of the year, so I would say it's primarily a sales-driven beat in the first quarter.

It's just well with great execution at store level from a cost-control standpoint as well.

And then secondly, as you think about market share, maybe for Dave and Rodney, when you think about market share and we gave the Fort Wayne example, have you yet had a market -- and I'm not sure if it would be Cincinnati or Denver or one of those, a market where you've not been able to increase share?

You've hit a natural ceiling?

And then when you think about the incremental margin attached to that, does that, as you get to certain points of share, whether it be 30 or 35 or whatever, does the incremental margin step up, up to a certain point, and then flatten out?

How do you think about the economics of that?

Well, I'm sure there's some point of diminishing returns but I don't think we found it yet, and I think we're pleased at any of the historical references we would have to look at market share.

We're not going to talk specific markets in that regard, but we have plenty of examples, some of which you've already listed, that illustrate well how that strategy will work.

Rodney you want to add anything?

Only thing I would add is one of the thins that we continue to expand some of the things we offer in a market too.

So if you look at the core grocery business, you may start getting a cap there or a diminishing return, but one of the things we've had and we've had very good results that help our return on investment is expanding some of the things we're offering.

In some of the markets that you gave examples of, if you look at our Marketplace store we're finding we're getting good returns by expanding what we offer to the customer.

That's a really good point, because it is a dynamic marketplace, and things will change over time, and even when you think you've hit a peak, you just push yourself to find additional either products or services or remodel the stores or approach the stores differently, it's a dynamic place.

Every time we do an investment project, we look at the incremental effect that it has on surrounding stores, to make sure that their incremental return is there.

So it becomes store-specific on each individual investment decision.

But I guess you haven't hit a peak yet in share, as far as you can tell, in any market right?

Not that we can tell.

Okay, thank you.

Your next question comes from the line of Meredith Adler with Barclays.

Please proceed.

Congratulations on a good quarter.

I'd like to just understand, a little bit, your sales guidance.

You're still maintaining the 2.5 to 3.5, although we hit close to the high end, and I would have thought that generics would have been a particularly negative impact on the first quarter, probably even the whole first half and then I think fuel prices were down a little bit.

So are you being just very conservative, or is there something about sales for the next three quarters that make you believe that you'll stay no more than this range?

It's really just so early in the year, and just having a fourth of the year over with.

Obviously so far we're very pleased with ourselves, we continue to strive to be in the top part of that range, we continue to strive to be there, but I would say the biggest thing is it's just early in the year, and it felt too early to change guidance on that, given all of the uncertainty that's going on in the marketplace.

Okay, I understand that.

I guess I would like to ask a little bit about inflation, 1.7 is not a excessively moderate number.

I don't know what the trends have looked like and a concern often is that if inflation gets to be moderate enough, some retailers could end up with negative comps, and you could see a heightening of the competitive environment.

Are you seeing anything like that anywhere, is there any reason to be concerned about that?

Meredith, I'll have Mike maybe comment on inflation and Rodney on the competitive environment, but the inflation we saw in the first quarter was very similar to what you saw in the fourth quarter, and while there was a little push and take, in what [market we fell in], it was very similar and quite moderate.

So you want to comment on where you see inflation, anything else you want to add, Mike?

I think inflation in the first quarter is about where we expected it to be, and it's essentially inline with what we baked into our expectations for the year.

Certainly from a competitive standpoint, we don't see huge changes.

As you know, we always try to make sure we stay flexible to deal with competitive changes, as they happen, but so far, we haven't seen any change going on.

Okay that's great.

I guess my one other question would be about your investments in new stores, in maybe new markets or adjacent markets.

Is there anything in terms of what's happening with competitors or the real estate market that make you feel better or worse about the ability to generate a good return from those new investments?

I think the decision more rides upon our confidence in what we're doing and I think it's somewhat independent.

I mean, I suppose there's some outside factors that could cause you to go a different direction, but more than anything, it's really focused on what we do well, and what we have confidence that we can continue to do well.

That's super, thanks very much.

Thanks, Meredith.

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

Please proceed.

Nice quarter.

Dave, could you discuss the cadence of your IDs throughout the quarter, what you're seeing so far in Q2, and how underlying -- I guess underlying volume is probably the same since inflation is the same, but could you just give a little bit of color there?

Sure, I'll describe what I think I recall and Beth will correct me if I'm wrong because she's sitting here with me, but earlier in the quarter, let's say through the first half or even two-thirds of the way through the quarter was a little stronger than at the tail end of the quarter, but we still ended up happy and strong at the end of the quarter.

And then, so far after 3.5 weeks, we've seen IDs without fuel to be very similar to what they were in the first quarter.

The other thing worth mentioning is just Easter.

Oh, yes, that's true.

The comment earlier in the is certainly true, then when you look midway through the quarter, it's a little harder to see, because Easter was earlier this year than last year.

So some of the cycling of the change in Easter also affected the cadence during the quarter.

Yes, I think I'd tell you the same caution I tell ourselves is, don't try to over-read it, because the first quarter in particular -- because of that Easter phenomenon, every year we're in this no man's land of trying to read, are you happy or not happy with your sales, and the week before Easter, the week after Easter, and a few of the days surrounding either direction of that have a big impact on how you're going to feel.

So I wouldn't over-read it.

Okay, my next question for you is on the gross margin.

Historically, there seems -- like our perception, at least in the markets, is there has been more volatility in your gross margin quarter-to-quarter whereas you may see an opportunity to make an investment, it's probably hurt investor perception of the Company historically, but more recently, it's felt a little bit more consistent, and I guess the question really is, has there been any change in the way you think about running the Company, in terms of the investments that you're making in margin, and the volatility around that, in terms of you trying to take advantage of different opportunities?

Well, I think you're well aware that we try to look at this on an annual basis.

However, we have also tried to be a little more consistent and conscious of the way in which a quarter might appear, so that we don't end up doing something abrupt in one quarter and wishing we hadn't done that, and then, the next quarter have to go the other direction.

So we have been a little bit more careful ourselves.

We also have learned a little bit better how to pace ourselves on those kinds of investments, so that's helped.

Rodney, you may want to comment a little bit on just how you see growth generally in the quarter.

I would agree with the comments Dave made.

One of the things that, over the last several years, we've worked really hard to make sure that we understand what cost reductions we're getting, and trying to make sure that we manage our gross investments, tying in, and getting costs out.

I would say that probably our internal estimation systems, we feel are a little higher quality in terms of giving us really better estimates, in terms of what we're seeing on taking costs out, because of our operations team and our finance team working together, which then in turn makes it a little easier to balance that with the selling changes too.

Now one thing you ought to recognize too is that the moderation you saw in the first quarter was, at least in part, helped by the gross margin in pharmacy.

Rodney commented on that in his prepared remarks, that pharmacy, because of the change to generics, has -- the sales dollars are down, script count is terrific, but the effect on gross, it tends to flip it a little bit, because the gross margin has been improved.

Rodney, do you want to?

Well I was just going to say the change in pharmacy made a huge effect in the total numbers, so if you look at the individual pieces it would have actually been a little more than what it appears on the total.

I thought that's important for you to know, but that was still on a very planned basis, we knew exactly where pharmacy was headed, and I could see that completely coming, so it wasn't a surprise to us at all.

And one very quick follow-up for Mike.

Mike, is your SG&A comparison in the second quarter as difficult as it looks?

Dollars were not up much last year.

Should we consider that in the model?

Yes, I don't think it's something you should be overly concerned with.

I can't think of anything that we're facing right now, as compared to the prior year, and our expectations for the quarter are certainly baked into our guidance.

Okay, thank you.

Your next question comes from the line of Ken Goldman with JPMorgan.

A few quarters ago, you had such I guess intense promotional spending from your vendors who sell branded food, that your share of private label actually went down temporarily.

I'm curious, I guess, if you can update us on the promotional dynamic today among your branded vendors in general.

And the reason I'm asking is, we're seeing some data today from Nielsen that would suggest maybe a broader number of grocery items sold on promotion today, but we're not seeing either way how deep some of those discounts are.

So I guess I'm just curious for any color on the promotional dynamic overall among your grocery vendors.

I'll see if Rodney wants to give any specifics, but before he does I would just say the keyword you used was dynamic, and you should think of this as changing all the time.

I mean every month, every quarter.

So I don't know that we're going to be able to identify a clear pattern for you, but Rodney do you have any comments on it?

If you just look at over a long period of time, private label or corporate brands have continued to gain share.

Usually what happens is some CPGs will make more money than they should be, because of the raw material costs haven't increased, and that always provides a huge umbrella for corporate brands to gain share, which happens.

Then the CPGs will get a little more aggressive with promotional dollars, which will bring it back down, but what we find is very seldom does the share ever go back to where it was before.

There's a permanent loss when CPGs do that, so it is, as Dave mentioned, it's a dynamic process, but overall we think it's one of the really important reasons, and critical for us to have such a strong corporate brand program that connects with customers.

Great, thanks very much.

Your next question comes from Shane Higgins with Deutsche Bank.

Could you just talk about, obviously there's been a lot of focus on rates.

If rates, and I guess Mike maybe you could answer this, if rates back up another 50 or 100 basis points, what's going to be the overall impact on your expenses, say over the next year or two?

Will that actually be a net positive, since it could take certain expenses such as pensions down a little bit?

It will have some marginal effect on the funded status of my corporate plan.

Keep in mind that all the UFCW funds that we participate in, actually present value, their liability at the expected rate of return, not current interest rates, so it won't have any effect on my UFCW funded status.

And the contributions to those funds are dictated by a contractual obligation anyway, not necessarily an exact funded status.

So I don't really see any effect on my operating expenses as it relates to the back up in rates.

Even -- it's interesting to talk about a 2.4% 10-year Treasury or so as a back up in rates, because it's still historically low Treasury rate, and even if I had to refinance the debt I have coming due at these rates, I still wind up leveraging down the weighted average cost of my debt portfolio.

So I'm still comfortable we're going to be able to execute the financial strategy we have, plus, as I said earlier in my prepared comments, we've actually been utilizing our commercial paper availability rather than accessing the market, because we've been able to borrow at such low rates, and it helped the first quarter probably by $0.005.

So I don't really see a huge positive or negative at this point from where rates are.

Great, thanks for that color and just a question on the fuel rewards program.

Have you made any significant changes to the fuel rewards promotions, particularly as more and more competitors roll-out these similar programs?

We would continually offer different promotions on fuel rewards, things like that, but it's one of the nice things about being first in the market.

It continues to connect extremely well with our customers, and especially our loyal customers, but there's always different offers that you'll do in a specific market from time to time.

Okay, great.

Thanks a lot, and congrats on the quarter.

Your next question comes from Andrew Wolf with BB&T Capital Markets.

Dave, I think I've asked you this before, but when you mentioned the variability of sales, not too surprising given some changes in payroll taxes and so on, but are you trying to tell us the amplitude, or has that gotten worse, better or stayed the same?

I'd say it's about like it had been, that in short-term periods, for like a day or a week, often unpredictable, but there's a reasonably clear pattern we've seen once you extend the time period to go to a period or a quarter.

So yes, I'd say pretty much like what we've been seeing.

Rodney?

The only thing I would add, and this is if you look at electronic benefit transfers, states continue to change the days that the dollars go out on benefit, which also causes some of the variability, and you don't know how much that variability is, just because of that change or how much of it is broader than just that change.

Okay, so obviously, when it smoothed out over a quarter or what have you, things are fine.

Your IDs are excellent.

But how about operationally?

Are you trying to say it's harder to set store hours because it's harder to predict who is coming in what day?

It certainly is harder to make sure you stay in stock.

I think our teams are doing a great job doing that, but it does -- any type of variability obviously makes it a little more complicated to manage against.

Okay, and I also wanted to follow-up just on the guidance.

You were above your internal expectations, and then raised guidance a little bit.

So is that -- I just want to underline this, or ask you to underline this.

Is that more what you're seeing out there either with the consumer or with pricing and competition, or is it just it's early yet, and you just don't want to raise guidance more than you might want -- at this juncture, raise guidance more than you did?

No, I think we're comfortable with the guidance we gave and it's where we believe we'll wind up in the year.

Obviously, we raised the low end a little more than the high end, and that's because of the strength of the first quarter.

We think the potential low end will be better than we originally thought.

And I do want to remind folks that the fourth quarter, we do, as we sit here today on a 12-week 12-week basis, expect that to be behind because of the LIFO swing.

And that's in our numbers but not necessarily in everybody else's numbers.

Fair enough and I understand about the guidance.

Your guidance is your guidance, but I guess I'm trying to say, was there any change during the quarter, or now, competitively or with the consumer, that has changed your thinking on the year?

I think relative to what we see for the rest of the year, we remain committed to what our original guidance was, and we tried, compared to our original expectations, and we flowed that through our annual expectations, and we're comfortable with what we see from our original expectations for the rest of the year.

Thanks.

This is probably for Rodney.

Rodney, in the past, when people asked you about M&A, you said a lot of the chains don't pencil out because their pricing in the market is too high.

As I think about the portfolio of banners at Kroger, you actually run some high-end and low-end, such as Food 4 Less and Quality Foods, one which goes at a discount, versus conventional, which goes at a premium.

So how do you view when things come up in the marketplace that are either discount or premium-type banners that are for sale, how do you view, looking at their relative pricing?

Do you still want it to be in line with the market, which I guess you would, I guess, for typical conventional, or do you adjust that thinking for the type of banner that is out there in the marketplace?

Thank you.

I won't give any insight into how we actually analyze any opportunity that comes up.

As we've said historically, we look at a lot of things when they come up, act on very little of that, and actually when I say act, make an offer on very little of that, and have a deal come to fruition even on less assets than that.

If you look at our pattern over the last several years, we continue to be very happy with the fill-in acquisitions we've done.

But to give specifics on how we might look at a particular group of stores, I just don't see any upside in going down that path.

Okay, thank you.

Congrats on the quarter.

Your next question comes from the line of Kelly Bania with Merrill Lynch.

Just curious on private label, now, you mentioned some changes into how you're measuring the units and the dollars in that category.

Can you remind us, or let us know what categories are now in there?

Related to that, how do you think about the Simple Truth line and shelf space there?

I guess what I'm wondering, is there opportunity to add more?

Sounds like it still continues to go very well.

If you look at the private label share that I outlined, it includes all the departments except for fuel and pharmacy, so it would include produce, meat, seafood, drug GM, plus the grocery categories that we've always done in the past.

So it's the complete store, excluding pharmacy and fuel.

Those things we thought would be a little complicated, because we're not -- generic drugs, do you put as private label or not?

And then obviously, fuel, we sell all our fuel unbranded.

So that's what's included in the market share and the unit share that I talked about.

I'm going to broaden your question a little bit in terms of, if you look at shelf space, the model we use to determine whether an item gets on the shelf is exactly the same for our corporate brands as it is for national brands, because we don't want, we want to make sure from a customer standpoint, the same dynamic is driving the location on a shelf, and the item itself, whether it even gets on the shelf.

The accountability for that has to be the same for our corporate brands, just like a national brand.

In terms of Simple Truth, its been obviously a huge home run, it has connected really well with our customers.

Because of that, the brand itself is earning more shelf space, and we continue to find new items that will fit nicely into that, free from 101 different ingredients and Simple Truth Organic.

So it's working really well, but its earning its way there, because of the connection with our customer.

Great, that's very helpful.

And then if I could just follow-up with one more question on gas.

It looks like your gas margin came in a little bit lower for the quarter year over year, and just wondering if you can remind us how you're planning that segment for the year, in terms of profitability?

And then just remind us you mentioned that 50% of your stores, roughly 50% of your stores, have the gas offering.

Is there much trend difference in trend and traffic or IDs right now?

Particularly with gas prices a little bit lower right now year over year?

Mike, you want to address that?

Well, when you look at fuel, any one quarter can be somewhat volatile on fuel margins and retails, which is why we talked about that.

Relative to what we saw in the first quarter compared to our expectations for the year, I would say the first quarter wasn't that far out of the ballpark, when you look at the comparison of the numbers that we talked about at the supermarkets.

They weren't wildly different, and it's clearly something that, as I said, we expect fuel to be a contributor to the overall growth of the Company.

Fuel earned a little bit less in the first quarter than it earned last year in the first quarter, but we experience that from time to time, and my guess is, there will be a period of time this year where it earns more from year to year.

Relative to why we put them at our supermarkets, essentially.

Just one more thing that we can solve a convenience for, and offer a value to our customer, where when they are already at our store and they come to -- our most loyal customers come to our stores two, three, four times a week, and they have the availability of fuel there, along with the fuel rewards, it's an incremental reason for them to want to come to Kroger versus a competitor.

It's clearly part of the overall value proposition our customers see.

Thanks.

Your next question comes from the line of Jason DeRise with UBS.

Sorry if there's background noise here, I'm on the road and once I ask it, I'll mute.

Could you quantify the gross margin impact from the pharmacy?

Could you also talk about the impact on gross margins from ending the double couponing in many of your banners?

And then actually the follow-up to the last question, if you could actually quantify the difference in same-store sales for your stores with and without fuel stations?

Thank you.

In terms of gross margin effect from pharmacy, I won't break it out separately.

It was a meaningful number, but I won't break it out separately.

On double coupons, we invested the moneys that were saved from double coupons into lower every day pricing, so if you look in total, it actually had no effect on gross margin, because what we found was there wasn't very many customers actually engaged with double coupons, and we felt like it was better to give lower prices to all customers, so all customers could get the benefit of that.

So it really didn't affect much.

Then identical sales with and without fuel locations, that, obviously for competitive reasons, we have not shared in, and wouldn't think it's appropriate to share at this point either.

On the gross margin for the pharmacy, the impact, if I put out a number, will you say if that makes sense or not?

Kind of in the 20 to 30 basis point range as a positive to the net results?

I won't.

I don't know if Dave or Mike, if there's any insights that you would think Jason could find helpful?

No.

I don't think there's anything else to add other than, I don't think you would find the quarter and the variations and stuff to be unusual.

The only thing that was unusual here is, and you can see with a 15 basis point investment in our gross margin, that's a little smaller than where we ran in any of the quarters last year, and we've just identified that the reason it was as moderate as it was, was, in large part because it was helped from the pharmacy.

Now, we knew that going in, and had that expectation, so it's part of a planned program.

But that's about as far as I think we're going to be able to go.

Okay, thank you.

Your next question comes from the line of Priya Ohri-Gupta with Barclays.

I was hoping that you could provide a little bit more color around how we should think about your long-term debt market needs for the duration of this year.

We appreciate the commentary around your shift to CP usage.

Should we expect that (inaudible - technical difficulty) for the potential need for you to come back into the long term debt markets this year?

Well at some point in time this year, we will access the fixed income markets and term out some of the debt.

We just made the strategic decision early on in the year, because we had plenty of capacity on our revolver.

Our exposure to floating rates over the last several years has actually been relatively modest, so to try to adjust for that, we termed out in the short run on our commercial, well it's the commercial paper we issued, backstopped by our bank revolver.

If you look at that trend since then, the balance of that has come in some, because this is really the point in time of the year where we generate a lot of cash flow, and that also gave us the comfort to have it out there in the commercial paper markets.

When you think about issuing it, say between 40 and 45 basis points on a regular basis, as compared to even the historically low rates.

(technical difficulty) Hello?

Okay.

I think you got cut off right after you talked about issuing on a regular basis at about 40 to 45 basis points.

Okay, I appreciate you telling me how much of my wonderful answer I gave, let's see if I can repeat it now, so Cindy will look at the transcript to see how close to the two of them compare, but we've been very successful at being able to issue that debt, as I said, in the 40 to 45 basis point range.

The fact of the matter is in this part of the year is when we generate a lot of free cash flow, so we felt taking a little bit of risk of terming that, or putting that out in the working capital line made sense.

We don't have historically a lot of floating rate exposure, and it was really an attempt to gain a little bit more exposure to floating rates.

The amount of commercial paper we have outstanding has come in since then, but as you may or may not have heard me say we do expect at some point this year to term out some of our longer term debt needs.

Do you have any sense, or could you give us guidance on potential size or part of the curve that you might look at?

I don't want to give too much insight to it.

You can look at our 10-Q or 10-K and you can see how many dollars we've had hedged, to give you some insight to what we think our expectations and needs may be.

But as far as exact amount and what duration those may be, we'll wait and see what the markets will like when we actually access the markets.

Great.

We appreciate that, thank you very much.

Your next question comes from the line of Tiffany Kanaga with Citi.

Can you give an update on how online retail and home delivery is going at King Soopers, and are there any thoughts around expanding it to other markets?

As you know, we've been experimenting with Denver for several years.

It continues to grow at a modest rate.

We're working on it, as much in terms of understanding the economics and trying to get a model that actually is profitable, so it's one of those things where you should see us continue to work on it to improve it.

We've actually changed our team, our complete digital team in terms of bringing some high talent from the outside to help us accelerate our growth.

We feel very good about where we are headed, and as you know from a digital standpoint, it's broader than just what you sell online.

We also are very aggressive on making sure we use our strength and insights we already have on our digital strategy, based on customer needs.

We're having huge growth in terms of the use of our website, the use and download of our apps, and we're also partnering with dunnhumby to improve those from a relevancy standpoint.

So we actually are looking at digital much broader than just what you sell online, and we're making huge progress in terms of connecting with the customer digitally, and partnering with dunnhumby to do that in a way that uses our strength and insights.

Thank you so much.

Your next question comes from the line of Joe Feldman with Telsey Advisory Group.

I wanted to ask sort of a bigger picture question, just with the recent launch of like Amazon Fresh, and there's more talk of delivery and e-commerce, shopping for groceries, and I was just wondering if you could provide us with your latest updates and thoughts on e-commerce strategies or digital strategies within the grocery business?

I'll give a little bit just in terms of tie it in and talk about some of the comments I just made to Tiffany.

As you know, we've had where we deliver in Denver for several years and a website where we sell through.

As I mentioned a couple minutes ago, we continue to work on how to get that to scale and profitability, but we think it's important to look at it more than just what you sell on the web, and how do you connect with the customer on an overall digital basis, and making sure we use some of the strengths and insights we have.

We're having huge growth with people downloading our apps, using our apps on almost a daily-type basis, and we partnered with dunnhumby in terms of making that relevant for each customer, using each customer in terms of setting the prioritization.

We feel really good about where we're headed, and it's something we continue to work on, we continue to get better and better at, and selling is just one piece of that connection with the customer digitally.

Got you.

I mean do you envision like a store pick-up type of program, or are you testing that anywhere?

We would be testing almost everything that you can imagine.

But I think at the end of the day, there will be something that will be a combination of a lot of different pieces together, and we actually think that's one of the strengths that will play to us.

Just because we have so many convenient stores located close to customers' houses, that it will be left up to the customer in terms of how they want to engage with us.

Got it, and then one last one.

And I apologize for repeating that question, but the Affordable Care Act, and how are you guys thinking about that?

What kind of impact do you think it might have on you and your business, on the labor negotiations that you have?

Just any thoughts and more color on that would be helpful.

Well it certainly affects, in one way or another, everything you do that touches healthcare.

So in all of our union negotiations, whether it's at the trust fund level or in the negotiations themselves, you have to make sure that the healthcare plans work their way to complying with and actually working together with what the Affordable Healthcare Act requires.

So we've been going through that process and negotiations, and it certainly adds some degree of tension in the negotiations, but we have a good really solid working relationship with the locals that we work with, and as you've seen the contracts get settled over the last really couple of years, all of those have had some implications from the Affordable Healthcare Act.

As to the Company plan, we've done our same thing within our own organization, of making sure that we worked through understanding those requirements, and including them in our own plans.

In terms of costs, sure we think they will go up a little.

We're not -- I don't think we've publicly quantified that, and nor do we intend to today, but I think its all so far been workable, and we've been happy with the way things have worked out so far.

Rodney do you want to add anything?

No.

Okay, so maybe deeper into the year, we'll get a better sense of what you're thinking as far as.

I guess I'm trying to understand, like, will there be any kind of an EPS impact, really it's more 2014 thing, and I know you don't want to quantify it today, but just should we expect that maybe the October meeting?

Well what you should expect is that we took into account what we know about healthcare costs when we gave you the guidance in March and when we updated the guidance today for this year.

And we also have in mind, and have a sense of what we see in healthcare trends, when we gave you the long term guidance of our earnings growth of the 8% to 11% plus a growing dividend, so we're knowledgeable of that, when we made those decisions.

So to that extent, it's been included in what we've told you.

That's great.

Very helpful to understand.

Thank you so much.

Your next question is a follow-up from the line of Jason DeRise.

Please proceed.

I just sorry about the background noise, but I thought the comment about the convenience stores as they fit into this omni-channel Kroger was really interesting, and I wanted to get a sense of how far into the future do you think that would be a reality of the omni channel Kroger using all the points online and pick-ups?

I know in the past its been said that Kroger is a slow Midwest moving Company but some of these other retailers are thinking about this more aggressively, so if you can comment on that, would be great.

Well, it's really -- I mean our strategy is really built around letting the customers decide digitally how they want to connect with us, and we spend a ton of effort and energy making sure that we do an awful lot of research and testing things enough to understand the economics of what we're doing.

So it's really taking all the pieces and tying them together, and you should expect to see us, when we find something that makes money we'll move very aggressively, and until then, you'll see us continuing to test to make sure we're involved and aware, but we don't see a benefit of rolling something out that doesn't create value for our customers and our investors as well.

Well, thank you.

Hopefully, we hear more about this.

Thank you, Jason and I think that's our last question.

Given that we had disruption a couple of times on the call, I thought it would be best to run a little longer, and make sure we got all of the questions in, and we appreciate all of those.

We apologize for the two interruptions that we had, and as I usually do, before we end the call today, I'd like to share some additional thoughts with our associates who are listening in today.

We encourage them to do that.

First, I want to thank each of the 4,800 leaders around the country who joined us for the first ever Kroger Leadership Summit in Louisville recently.

Because of you, this event was a big success.

Taking the next steps in our customer first journey together is important, and we're inspired by the enthusiasm and passion that you show for leading our associates and serving our customers.

We know you will continue to make a difference every day for our customers and our communities.

Also, this month, we celebrate community service in a special way at Kroger.

Through widespread volunteer activities our associates help strengthen the communities where we live and work.

We're pleased to recognize, in our Annual Report, 29 associates across the Company for their outstanding service as recipients of Kroger's 2012 Community Service Award.

These women and men give their time and talent to feed the homeless, raise money to fight cancer, and coach at-risk teens, among many other causes, and we are grateful for their commitment.

I want to personally thank all our associates from coast to coast who volunteer in so many ways.

Rodney and I are touched by the work you do.

You make a big difference for so many others, in all the places around America that we call home.

That completes our call today.

We thank you all for joining us.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.