克羅格 (KR) 2014 Q1 法說會逐字稿

Good morning and welcome to the Kroger Company first quarter 2014 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

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

Please go ahead.

Thank you, Laura.

Good morning and thank you for joining us today.

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 that you please limit yourself to one question and one follow-up question if necessary.

Thank you.

I will now turn the call over to Rodney McMullen, Chief Executive Officer of Kroger.

Thank you, Cindy.

Good morning, everyone and thank you for joining us today.

With me to review Kroger's first quarter 2014 results are Mike Ellis, Kroger's President and Chief Operating Officer, and Mike Schlotman, Senior Vice President and Chief Financial Officer.

Kroger delivered an outstanding first quarter.

It is a great start to what we believe will be another exceptional year.

Our associates continue to enhance our connection with all customers and achieve key performance measures which are allowing us to achieve our growth strategy.

We also achieved our 42nd consecutive quarter of positive identical supermarket sales, exceeded our goal to slightly expand FIFO operating margin without fuel on a rolling four quarter basis, maintained a steady return on invested capital while increasing capital investment.

We are achieving synergies from our merger with Harris Teeter.

Both Mikes will have more to say about this in a few minutes.

And we returned over $1 billion in cash back to our shareholders this quarter through our buyback program.

The staying power of our customer first strategy and our accelerated growth plans are generating strong momentum.

We continue to lower our cost of doing business and to invest those savings both for today's customers and for future growth.

Our strong first quarter results set us up to deliver a 12% to 15% net earnings per share growth rate for the year, partly due to the benefit of Harris Teeter compared to our long term growth rate of 8% to 11% plus the dividend in both cases.

I'm also pleased to report that we continue to take meaningful steps to restructure and help secure our associates' pension obligations for the future.

Through two innovative agreements, we plan to move nearly 2,000 associates and retirees to more stable pension plans and 350 associates to a Kroger sponsored 401(k) plan with a match.

We intend to continue looking for opportunities to leverage our strong financial flexibility to safeguard our associates' benefits.

We are always looking for opportunities that are good for our associates, good for Kroger and good for our shareholders.

From an economy and customer shopping behavior, we are seeing strong positive indicators in shopping behavior.

Our customers have exhibited less cautious spending behavior for example.

Consistent with the rise in Consumer Confidence Index in May, our own customer research tells us that more customers perceive the economy to be in recovery.

While it is obviously welcome news, the recovery remains fragile especially for customers on a budget.

We intend to keep delivering value and improving our connection with customers across the entire spectrum, whether through our popular fuel rewards program, our simple truth offerings or a more convenient shopping experience, Kroger is uniquely positioned to deliver on this promise in any economic environment.

And against this back drop and uneven economic recovery, our team's excellent first quarter performance stands out in even greater contrast.

Now I'll turn it over to Mike Ellis to outline our operational performance.

Mike?

Thanks, Rodney.

Good morning, everyone.

I'd like to congratulate the entire Kroger team for executing our customer first strategy with precision in the first quarter which is driving growth and improving our perception in the eyes of our customers.

We are connecting better with our customers, showing them we care, and making sure they have a great shopping experience every time.

Keeping costs down allowed us to invest strategically and increase customer loyalty.

During the quarter we grew our number of loyal households at a much faster rate than total household growth which also was up for the quarter.

We saw inflation increase in the grocery category during the quarter.

This combined with higher inflation in meat, produce and pharmacy has caused us to adjust our view of inflation for the year.

We estimate inflation excluding pharmacy was 1.8% in the first quarter and 2.1% with pharmacy included.

We expect it to be higher than originally anticipated for the rest of the year as well.

Even with higher inflation we saw strong tonnage growth during the first quarter.

I'll jump to Harris Teeter.

Our merger with Harris Teeter is going extremely well.

We are spending time with Harris Teeter and learning a lot about how they connect with customers.

Their store standards and fresh foods are world class and our cultures are a great fit which makes our integration work rather easy.

We are excited by what we're learning about Harris Teeter's online ordering and store pick up model, it's a program with a lot of promise.

A key driver of sustainable growth is customer first innovation.

Each quarter we are highlighting one or more of our innovations that are improving our connection with customers and growing our market share.

This quarter I will highlight some of the new exciting work of our corporate brands and Kroger technology teams.

In corporate brands a strategic differentiator for Kroger's corporate brand portfolio is our multi-tier offering.

It allows us to offer the right price points and product experiences for everyone.

In the first quarter we introduced new branding and packaging for our value products.

The good tier of our good, better, best program.

The new design calls out to customers with attractive uplifting packaging and the response so far has been really terrific.

For fresh products we've replaced Kroger Value with Heritage Farm.

The name better reflects the inherent quality of the brand and we are already seeing positive acceptance from our customers.

Corporate brands had a solid first quarter accelerating Company sales growth and representing approximately 26.2% of total units sold and 24.5% of sales dollars, excluding fuel and pharmacy.

Kroger technology is our team of technology innovators and inventers.

They are implementing a fundamental foundational technology that we can leverage to create the internet of things in the retail environment.

One tangible example of this is realtime temperature monitoring in our supermarkets.

Today, temperature checks are performed manually by our associates but by using interactive sensors that are connected through an in store network, we can better ensure the freshest foods by allowing for more frequent, realtime temperature checks of meat, produce, deli and frozen food products.

And we love these kinds of initiatives because they save money and they free up time for our associates to engage with customers.

And most importantly this technology will help improve our already vigorous food safety efforts.

We plan to continue leading the adoption of the internet of things in our stores.

Now I'll give a brief update on labor negotiations, labor relations.

We recently agreed to new contracts in both Atlanta and Southern California as well as for non-food associates in Portland, Oregon.

We are currently negotiating contracts with the UFCW for store associates in Cincinnati, New Mexico, Toledo, and parts of California and an agreement with the teamsters covering several distribution and manufacturing facilities.

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 should have a shared objective knowing Kroger's business and profitability which will help us create more jobs and career opportunities and enhance job security for our associates.

Now Mike Schlotman will offer more detail on Kroger's financial results and update our guidance for 2014.

Mike?

Thanks, Mike and good morning, everyone.

We exceeded our expectations for the quarter thanks to our associates performing to deliver growth.

We continue to implement our long term growth strategy which includes targeting capital to grow our business in new and existing markets, leveraging customer insights to solve varied customer needs through both traditional and digital channels, and continuing to deliver shareholder value through our share buyback program and dividend.

When we outlined our accelerated growth strategy at our October 2012 investor conference, we also identified the key performance targets for shareholders to measure our progress.

I'd like to spend a few minutes discussing the results in each metric.

Our first metric is identical supermarket sales without fuel.

We are pleased with our first quarter ID sales growth of 4.6%.

This strong performance was supported by ID sales growth in every department and every supermarket division.

We continue to see outstanding double digit identical sales growth in our natural foods department.

Our produce and general merchandise departments also posted strong ID sales growth and Kroger's pharmacy department continued its strong performance.

Rolling four quarters FIFO operating margin on a 52 week basis, excluding fuel and the pension agreements, increased by 12 basis points.

This exceeded our commitment to grow the rate slightly over time on a rolling four quarters basis.

Until we have Harris Teeter in both the current and base years the expected increase will be higher than our long term guidance which is slightly expanding.

Over time, we expect our FIFO operating margin growth, excluding fuel, to return to slightly expanding on a rolling four quarters basis.

The third metric is return on invested capital.

We reported a return on invested capital on a 52 week rolling four quarters basis of 13.5% which is consistent with ROIC during the same period last year.

As we increase capital investments, it will be more difficult to grow ROIC in the near term.

However as these investments mature, we expect them to be accretive to ROIC.

As Mike and Rodney have already said, our integration with Harris Teeter is well under way and we are achieving synergies on multiple fronts.

One great example is combining insurance programs which has reduced our annual premiums by $6 million already.

Now I'll share our first quarter 2014 results in more detail.

Please note that this is the first period that includes Harris Teeter in Kroger's statement of operations.

Year-over-year percentage comparison are affected as a result.

In the first quarter our net earnings totaled $501 million or $0.98 per diluted share.

This includes charges related to the restructuring of certain pension obligations to help stabilize associates' future benefits as described in yesterday's press release.

Excluding the effect of these charges, Kroger's adjusted net earnings were $557 million or $1.09 per diluted share for the first quarter.

Net earnings in the same period last year were $481 million or $0.92 per diluted share.

As Mike Ellis said, we are seeing higher inflation than anticipated.

We recorded a $28 million LIFO charge during the quarter compared to a $17 million LIFO charge in the same quarter last year.

We are increasing our LIFO estimate for the year to $90 million, our previous LIFO guidance for the fiscal year was a charge of $55 million.

This affects the year by about $0.04.

FIFO gross margin increased one basis point from the same period last year excluding retail fuel operations.

Strong identical sales and cost controls allowed Kroger to leverage operating expenses as a rate of sales in the first quarter.

Operating, general and administrative costs plus rent and depreciation, excluding retail fuel operations and pension agreements, declined nine basis points as a percent of sales compared to the prior year's first quarter.

Now for retail fuel operations.

About half of our supermarkets have fuel centers today.

In the first quarter, our cents per gallon fuel margin was approximately $0.131 compared to $0.116 in the same quarter last year.

Our long term financial strategy continues to be to maintain our current investment grade rating, repurchase shares, have an increasing dividend and fund increasing capital investments.

Kroger remains committed to achieving a 2 to 2.2 net to total debt to EBITDA ratio by mid to late 2015.

Kroger took on debt to finance the Harris Teeter merger and they realized no incremental EBITDA in FY13 because the transaction closed late in the fiscal year.

This has a material effect on the company's net total debt to EBITDA adjusted EBITDA ratio which is 2.42 times compared to 1.85 during the same period last year.

As we get a full year of Harris Teeter EBITDA in the calculation we expect to be closer to 2.2 times by the end of the year.

Kroger's net total debt is $11.3 billion, an increase of $3.4 billion from a year ago.

This is a result of the debt related to the Harris Teeter transaction and Kroger share repurchase activity.

Kroger's strong financial position has allowed the Company to return more than $1.9 billion to shareholders through buybacks and dividends over the last four quarters.

During the first quarter, Kroger repurchased 25.7 million common shares for a total investment of $1.1 billion.

Capital investments, excluding mergers, acquisitions and purchases of leased facilities, totaled $709 million for the first quarter compared to $640 million for the same period last year.

We continue to expect capital investments to be in the $2.8 billion to $3.0 billion range including Harris Teeter for FY14.

Now I'd like to update our growth objectives for FY14.

Based on our strong first quarter results, we raised and narrowed our adjusted net earnings guidance to a range of $3.19 to $3.27 per diluted share for FY14.

The original guidance was $3.14 to $3.25 per diluted share.

The Company's long term net earnings per diluted share growth remains -- our guidance remains at 8% to 11%.

Shareholder return will be further enhanced by a dividend expected to increase over time.

We raised our identical supermarket sales growth guidance, excluding fuel, to 3% to 4% for FY14 including Harris Teeter.

The original guidance was 2.5% to 3.5%.

And now I'll turn it back to Rodney.

Thanks, Mike.

What a terrific start to our year.

Our merger with Harris Teeter is going exceptionally well.

We are learning a lot from Harris Teeter associates and our business is performing well.

And we're even more excited about Harris Teeter's people and the opportunities today than we were when we first merged.

Across our Company, our associates' remarkably consistent execution continues to generate consistently remarkable results for our shareholders.

We will continue building on this resilient foundation to grow aggressively into the future.

And now we look forward to your questions.

(Operator Instructions)

John Heinbockel of Guggenheim Securities.

So a couple of things.

Obviously it's a little hard to tell with Harris Teeter mixed into the numbers.

But if I try to back that out and think about ex-fuel gross margin decline it looks about what it's been running or maybe just slightly higher than it's been running, and I ask that because I'm curious what you see with regard to inflation today?

Is that being passed along fairly quickly, or given your value position are you delaying some of that for weeks or maybe even months?

Good morning, John.

In breaking it out you would be correct without Harris Teeter, the trends would be very similar to what they've been running.

Okay.

From an inflation standpoint, we pass it along, some of it in terms of obviously how is the competitive environment going and also is it inflation that we think is just a seasonal type inflation or something that's longer term.

And I would say in our ability to pass it through it's pretty much similar to what it's been running.

I don't know Mike or Mike anything you want to add to that?

No.

No.

Okay, and then as a follow-up when I think about your price investments and you're -- I don't know what inning we're in but how do you think about it now in terms of investing by category because I know you made investments in natural foods.

Are there more categories where you need that type of work, it doesn't look like there is, or is it solely items?

And then how do you think about private label, price investments in private label?

And when you think about that do you look at the private label spread versus the brand or do you actually go out and look at what other retailers are retailing their private label products at?

First question on overall price investment, we're continuing to look at the markets we do business in and deciding where we want to be positioned.

Also we look at categories within the store and try to determine where we want to be priced relative to competition or the market.

But private label, there's several ways we look at private label pricing.

One would be how it's related to the branded product, and in some cases it might be priced with the competition in a way that keeps us on our pricing strategy and keeps us relevant.

It really depends upon the item and the market.

But do you think we're talking about items now, most of your category adjustments have been made or do you disagree with that?

We've been through most categories and made some sort of adjustments over the last several years in pricing but we were still looking at pricing overall and where we positioned and making decisions on where we want to be.

Okay, thanks.

Thanks, John.

Ken Goldman of JPMorgan.

Thanks for the question.

Forgive me if you mentioned this.

Can you estimate, even if it's just a rough number, what weather's tailwind was on your comps in Q1?

Mike?

You know, it's really tough, if you look at the cadence of comps during the first quarter, the first four weeks of the quarter were a little bit stronger than the rest of the quarter, but not remarkably high.

And the second, third and fourth periods, the second and third were affected by the Easter shift, if you normalize Easter between the two periods they were very close to one another.

So I don't think there's a huge bump in the first quarter as a result of weather.

It certainly helped but it's not what made the four six strong, the second, third and fourth on a combined basis certainly contributed to the results as well.

Okay, as we look at your comps into Q2, any particular headwinds or tailwinds we should be thinking about, just a little more color on how things are progressing so far this quarter, just curious on those lines.

We wouldn't see anything unusual versus what it's been running and we would continue to be slightly above our guidance range in terms of so far this quarter and very similar to the first quarter.

One last quick one.

A bit tricky because of the different days in the quarter and Harris Teeter.

I just want to make sure, your D&A was up 12% year-on-year, your interest expense was up 14% year-on-year, are these roughly the growth rates we should be modeling for the rest of the year on a year-on-year basis?

For the year on a year-on-year basis yes, they will be in that kind of a range because of the Harris Teeter depreciation, as well as the debt we took on for Harris Teeter.

Then obviously next year we'll return to a more normal level.

The other one that's a little different than what we historically reported is ramp as a rate of sales because the large majority of the Harris Teeter stores are leased not owned like ours so that affects that line as well and we break that line out separately.

Great.

Thanks very much.

Thanks, Ken.

Rupesh Parikh of Oppenheimer.

I just wanted to delve a little bit more into the upside of your quarter.

You beat the high end of your guidance I think by about a few pennies.

Was that all driven by sales upside or were there other things in play?

The sales piece would be by far the biggest driver of the upside.

And just to clarify we don't give quarterly guidance so we only give an annual guidance so the only thing you can compare it to is what the Street expectations were.

Okay, and then you also mentioned that you're seeing better signs of a consumer this quarter.

What are you seeing in some of your discretionary areas of the business?

Well we really seen, if you look it's continuing a good solid trend.

It's always hard to define what's discretionary but certainly if you look at what areas people cut back on first, we continue to see strong growth on that across-the-board.

Mike anything you want to add to that?

No that pretty much sums it up.

There's been mix changes in what people are buying.

It looks like, but overall it's been strong across-the-board.

Okay.

Thank you and good luck next quarter.

Thank you.

Ed Kelly of Credit Suisse.

This is actually Lauren Wood on for Ed.

Just a quick question.

Can you remind us what percent of your stores have a heavier mix of natural and organic selection and where that number could potentially go to?

Then also if you see a comp lift when you sort of bulk up that offering in your store.

I don't know if there's any area that has a higher mix of natural foods.

We tend to -- it's a strategy for the Company to improve our natural foods offering across the country.

So any of our new stores or remodels we try to be more aggressive on natural foods positioning and the amount of products we carry.

So it's pretty much throughout the country and it is definitely a strategy of ours.

It's really connecting well with customers right now.

It's not always -- pretty much every store has some offering of natural and organic products.

What we're finding, it's as much a lifestyle decision as it is a demographic driven topic.

And people of all demographics are choosing a healthier lifestyle.

So we actually have the product in, really I can't think of stores I go into that don't have some.

Now, the size of the store can dictate how much you have but it's a broad appeal product.

Okay, and then just a quick one.

Can you update us on your total MEPP liability?

I don't remember what it is off the top of my head.

It was in our 10-K and the MD&A.

I don't want to guess the number because I'll be guessing wrong.

You can follow-up with Cindy and I after the call.

Okay, thanks for taking our question.

It was in our MD&A and 10-K.

Thanks.

Thank you.

Scott Mushkin of Wolfe Research.

Thanks for taking my questions.

I had a housekeeping item first before I got into my bigger question.

The ROIC calculation you guys ran in the report, it seems like and maybe I'm wrong, but basically Harris Teeter is reflected in the denominator but the numerator is not pro forma or is it?

Okay, so you are correct, Scott and you also notice that we went to one decimal places instead of two decimal places.

So the way that works it's rolling four quarters calculations so your denominator become the average assets at the beginning and the end of the year.

So you effectively have half of Harris Teeter's assets in there because of that averaging but only one quarter of their EBITDA.

We'll get more and more of their assets and more and more of their EBITDA as we go throughout the year.

So we did it a couple ways.

If we look at it just the way this calculation is, it was about two basis points down.

If you pro forma Harris Teeter in there for the whole time frame it was about two basis points up.

So we just decided that rather to try to confuse it, we'll call it the 13.5 until the end of the year and then we'll go back to two decimal places I would think.

Okay perfect, thank you for that clarification.

So the second question is actually more of a strategy question.

You look at the broader food landscape here and I think you guys just out-comped Whole Foods if I'm not wrong about that, but on the other side of the equation you're clearly out-comping Wal-Mart.

You have a format now and probably the best high/low operator out there, you've got big data.

When do we, and you just bought Harris Teeter, so when do you put this more aggressively on the road?

I think you're in 34 states now, when does Kroger really start to drive even more growth?

Clearly you're taking enormous market share where you are either through more M&A or more aggressively venturing into places you are not.

Scott as you know, if you look at our fill in markets, that is the first part of that and it's really if we look at the returns from that, the higher our market share the higher ROIC.

So that's really the first phase of that is we are increasingly getting aggressive on fill in markets and that's, we're very pleased with the early results.

In terms of new markets by merging with Harris Teeter, we really view that is going into several new markets.

And as I mentioned in the call, one of the things we're really excited about is the market share opportunity growth opportunities that Harris Teeter has.

And we will aggressively partner and support growing in several of those markets as well.

So from our perspective that is going on the road with it in the context of where we think we see the highest return with the capital that we've allocated.

Any chance we could get a bump in the growth rate that you have out there, 8% to 11% I think you've been exceeding now for awhile.

We aren't even two years into the 8% to 11% Scott.

Let us get comfortable and used to this one for a little bit.

As you know the key to our growth rate is being sales led and growing our business and then continuing to execute against our model, so I agree with Mike.

Give us a little time but that's really how we're trying to drive to grow our business.

And it's one thing to announce investments in October of 2012.

It's another thing to begin making those and then it's another thing again for them to come out of the ground and start generating sales and EBITDA.

So there's a lag from when you make the announcement until you get there.

Keep in mind, our share buyback in the first quarter is very strong.

That was contemplated in our guidance and we told everybody in October of 2012 for the first couple or three years, a third to half of our growth was going to come from share buyback until our investments started to mature.

So we'll have to wait until that tipping point happens Scott and see where we are at that point in time.

All right guys, thanks for taking my questions.

Thanks, Scott.

Karen Short of Deutsche Bank.

Thanks for taking my question.

Just on the comp looking at the numbers that Harris Teeter reported last year, it looks like they actually had some pretty decent comps throughout last year, right up until their third quarter, so I'm kind of wondering if you could give some color on what the impact for Harris Teeter was on your comp?

We won't give specifics and obviously when we talked in the fourth quarter we said we gave guidance with Harris Teeter in it.

We were pleased with where Harris Teeter's numbers was, it was consistent with the budget and that's true for EBITDA as well, but I won't give specifics in terms of how it affected the overall total Kroger number other than it wasn't much.

Okay that's helpful.

And then I know you obviously gave color on your inflation in the current quarter.

What are your expectations on inflation for the whole year or full year?

We're kind of expecting in the range where we saw in the first quarter to hold true for the year.

I figured inflation was going to come back up again so actually flipped to a page in our, you've seen me carry my blue book around to conferences Karen.

If you look at some interesting things and without fuel and pharmacy, last year's inflation cadence was 1.7, 1.6, 1.5 and 0.8 and everybody's concerned about inflation right now and our first quarter in that same metric was 1.8.

Grocery inflation in this year's first quarter was actually lower than grocery inflation in last year's first quarter and pharmacy and meat and produce are basically in the same range.

So this isn't a world we've lived in and it's not a huge shift really from where we were about this same time last year.

We're comfortable managing the business in an inflationary environment like we have today and think we're going to see this continue.

There's some grain prices out there that are favorable.

Milk looks like it has peaked and it's going to start to come down a little bit which will help the grocery inflation index because that's where we classify milk when we talk about inflation.

So we think it's going to be pretty comparable to where it is today.

The blue book came in handy.

Thanks for that color.

Now you know why I carry it.

And then just the last question.

It looks -- obviously you gave your dollar amounts for the buyback but it looks like you're done, pretty much done with your authorization.

So any comments on that?

We did have, our expectation in our guidance for the year contemplated a front end buyback program.

It is somewhat unusual for us to go without any kind of an authorization.

What I would say is unless there's, I wouldn't expect significant incremental buyback activity for the rest of the year.

Great, that's helpful.

It's really left up to our Board on the approval.

Right.

Okay that's helpful, thanks.

Thanks, Karen.

Meredith Adler of Barclays.

I'm going to probably talk about something a little bit bigger picture.

I was very intrigued by the commentary about pension and specifically that you had some employees, a small number, but some employees shift to a 401(k) plan with matching.

And also that you moved a much larger group of employees to a different plan.

Could you just talk a little bit about kind of what the discussions were, why would somebody move away from a defined benefit plan and what do you think the prospects are for other people recognizing the value of a 401(k)?

There were clearly a couple different moves here Meredith both of which came together in the same quarter.

The folks in the Pacific Northwest, there were actually two separate moves with those folks.

They are continuing, their accrued liability moved into the consolidated UFCW plan that we established a couple years ago.

So we took their historical liability they've already earned into that company managed UFCW plan.

Their future benefits are being accrued in the Sound plan and it's not a Sound plan from the financial standpoint although it's very well funded.

It's called the Sound Fund in the Pacific Northwest.

So that was a group of retail associates.

The second move was a group of King Soopers pharmacists who happened to be unionized.

Same thing, we moved their obligation and it was actually through the negotiating process with them where they had the desire to go into our 401k) plan and be able to manage their investments themselves and accrue those dollars and move them around as they see fit.

And it was -- that one was really associate driven at the negotiating table.

I will tell you we have some high level talent dedicated to this effort, and in fact if you remember a year or so ago we moved Scott Henderson who was our Treasurer, and he spends a good chunk of his time; one, he manages our entire pension investment program, both -- all three of the K plan, the company plan and the UFCW plan as well as spends a lot of time with our labor negotiators trying to do this.

Our view is we're trying to be proactive on this front, not reactive, and we think by being proactive it's the best thing for our associates, not only for the pension they've already earned but for the pension they would expect to earn going forward.

Scott and Mike working with our labor negotiators and the union, they understand the opportunity and need for this and this really does improve the quality of the benefits our associates have and secures and improves the security of their ultimate benefits.

So it's one of those things where the union is also working with us on these but it's a lot of work and a lot of effort.

It happens slowly.

And I guess it's fair to say that repeating what you did with the pharmacists may be unusual because they are a unique group of employees?

Perhaps.

You never know what's going to happen in a negotiation.

All I know is the unions and Kroger both have a desire to continue conversations to try to come up with creative solutions to secure, to help secure the benefits they've already earned and give them a decent benefit accrual going forward as well.

That's great.

And then I'm going to just switch gears talking about fuel.

You had what looks like a pretty attractive margin on fuel this quarter and I assume that's because prices were coming flat or coming down.

Is that fair to say and kind of what's your outlook if you can have an outlook about fuel prices for the rest of the year?

Also did it contribute to earnings per share in any kind of a meaningful way?

What we always say about fuel is one thing we'll guarantee and that is it will be volatile.

It was volatile inside the quarter.

There were days and weeks where we were not as thrilled with our fuel results and then there were days and weeks where we were very thrilled with our fuel results.

Relative to the retail price per fuel in quarter one, on a total company basis, fuel supermarkets and convenience stores combined, the average retail price per gallon last year was $3.524 and this year it was $3.456 so it was actually a little bit lower on a combined basis between the two years.

And the cost was actually about the same amount, maybe just a touch amount lower as well.

So it's, and we had very strong gallon growth, almost 6% gallon growth.

It helped the quarter but it wasn't the driver for the quarter by no means.

And as you know we always budget fuel margins kind of the same this year as the prior year, and over time that always seems to come out pretty close to right.

Along the way there's, as Mike mentioned, quite a bit of volatility.

Right, and I'm just going to throw in one more quick question.

I think I just didn't hear what was said about pharmacy and what pharmacy did maybe to comps and anything else about pharmacy profitability.

I don't know if you made a comment.

Some stuff broke up when I was listening to it.

Yes, I made a comment when I spoke about ID sales for the quarter, that they continued their strong performance both from a script count and a sales count, sales basis, so good ID sales growth in dollars and scripts.

Okay, great.

Thank you very much.

Thanks Meredith.

Andrew Wolf of BB&T Capital Markets.

Wanted to ask one follow-up on the inflation questions that you've been getting.

With meat rising really quite rapidly the last couple months and the quarter coming out okay on gross margin and you guys saying your survey works looks like your customers are loosening up their pocket books, are you seeing a lot less change in behavior in terms of trading down in proteins and into lower quality meats and stuff like that?

And, well that's really the question, so it's kind of a pass through.

Are you able to pass it through in a sort of more reasonable way than you would one or two years earlier than when that type of thing happened?

And how is the consumer reacting to that?

If you look at meat specifically, you can clearly see behavior changes as prices increase so people buying more cube steaks or buying more hamburger, those things you can clearly see.

The comment on the customer overall is very broadly in terms of if you look at what they are doing in total.

We feel very good about and we like what we are seeing in terms of the customer in total being willing to spend a little bit more.

Okay, and I wanted to ask just a follow-up on Harris Teeter.

I know you guys do a lot of survey work with customers and Harris Teeter has a pretty rich loyalty card as well.

Have you been able to do any survey work with their customers?

And could you reveal what it is you might have heard from them in terms of the four T's that you guys go to market with or that kind of thing?

I know at a conference recently you said perishable pricing was a focus as an example.

If you look at obviously Harris Teeter has done customer research for years and before in a couple of markets we would have our customer research on Harris Teeter just because they were somebody else in the market.

Harris Teeter scores incredibly strong on people and products and freshness of products.

So when you look at produce, meat, deli department they score very well and their associates are very friendly.

That's really their strong suit.

And we would expect when we start doing the combined research that that's consistent with the research Harris Teeter had done before, we would expect to see the same.

Where they score well at some of that merchandising and maybe customer interaction as well, is that something where that can be integrated into all or parts of Kroger or is it just too much of a task for, given the size differential between the two companies?

Mike Ellis, on his prepared comments talked about it a little bit.

I can tell you that Mike Ellis and the operators are spending quite a bit of time trying to understand exactly how Harris Teeter does that.

Mike you're in the middle of all of that.

It's really been fun to have someone who was a competitor that you admire and now you can actually see what they do, how they do it, but as Rodney mentioned they've been really strong on some of the matrix, better than us in several markets.

So to learn how they do, what they do has been actually really a lot of fun, and we're integrating some of that into some of our operations today throughout Kroger.

Look forward to hearing more about that, thank you.

Thanks, Andrew.

Stephen Grambling of Goldman Sachs.

Thanks for taking my questions.

I guess turning back to the guidance given the big buyback up front it looks like the year assumes a bit of a change in the margin on a standalone basis even when factoring in the high LIFO charge.

I know you don't like to get into this that much, but can you talk qualitatively about underlying gross margins, even OG&A assumptions in the back half, and any unusual shifts we should be expecting?

I won't get that granular.

The closest I'll come is we did make comments about operating profit and as we get a full year of Harris Teeter into the numbers we would expect our operating profit margin to not be the 12 basis point rolling four quarters increase we had in the first quarter.

But as we get a full year of them in we would expect it to come closer to the slight increase that we project overall.

Okay that's helpful.

And then I think the other thing that I guess Kroger has been doing that's a little bit different than other areas in retail is moving towards a few of the larger format stores, marketplace stores.

As we look at general merchandise, which has been shifting online and you learn from click and collect at Harris Teeter, how are you thinking about the opportunity to offer general merchandise at a broader group of stores with the web?

And what are the implications for sales per square foot?

Well all of our large stores have some selection of general merchandise including apparel in all of our future plans and remodels that we're working on.

And we're really pleased with the results, pleased with sales per square foot, and pleased with customers' reaction to the product offering.

So it is part of our strategy going forward.

For the smaller stores is there an ability right now to actually have click and collect on general merchandise?

Not today.

We would expect to take the Harris Teeter click and collect, as Mike mentioned, to other -- to do it in another market.

We like what we're seeing there.

Okay, great thanks, best of luck.

Thanks, Stephen.

Jason DeRise of UBS.

Hi, it's Jason DeRise.

Wanted to ask on natural foods obviously growing double digits.

Can you share what it contributed to the 4.6% comp?

We really wouldn't get into that level of detail in terms of how much of the 4.6% is driven by that.

Mike did mention that all departments were positive identicals.

All departments and all geographies.

So it is broad based so that isn't the thing that's driving it but obviously a nice growth.

When you look at your customer data, do you think that this is a customer who is just entering the category in a more meaningful way now that you're offering it or do you that perhaps this is sales that previously were outside of Kroger at maybe a specialty store and now that shopper is deciding to do that trip at Kroger solely?

I think it's all of the above.

There's been lower prices in a lot of areas and natural foods so it's bringing new customers to the category but certainly people are more health conscience for their family and the things that they consume.

So a lot of our customer insights are driving a lot of the decisions on what we carry and what we put into our stores and they are, customers is shouting that this is something they are really interested so it's a big focus by us -- for us.

I think it was maybe a year or two ago there was a lot of talk about how Kroger only has half of their customers' grocery spend.

How has that trended since the efforts in natural foods and other categories to try to win more of that share?

Jason it's a great question and it's one that if you were in the room you'd see us smiling at each other because it's pretty similar to what it was because the fortunate part we keep adding new customers.

So if you look at the loyal shoppers that have been loyal for awhile we continue, that 50% would probably be more like 70% to 75%, but fortunately we keep growing our customers so you have new loyal customers coming in.

So when you look at the blend of existing loyals and new loyals it's still around the 50%.

If you looked at ID loyal customers it would be much higher than 50% but the good news is we keep adding people that become loyal below the 50% so it dilutes the total back down.

Obviously natural foods helps on that but it's really across the whole store that we're picking up that customer including the fresh departments, produce, meat, deli, bakery, seafood.

Okay, great and I guess I just wanted to see if I can put this in there on Harris Teeter.

Would you quantify just the EPS accretion for the quarter just so that we can sanity check the original guidance on that?

You should assume that our original guidance, our updated guidance would have the same base assumptions for the Harris Teeter contributions to the year.

I did mention that Harris Teeter is performing consistent, a little better but not a lot in terms of the analysis that we used when we were working on the merger so we're pleased with where they're tracking and it would be consistent with what we shared before.

Right on track with what our expectations were.

There's been in the press, I guess part of it's your press, but that the Harris Teeter started dropping prices, similar type of press releases that you'd see coming out of other Kroger banners on this.

So I guess is there anything you could share about how that's gone, has that what's driven maybe a bit more of the upside, the response to that or is that not where the incremental upside has been?

It's really very early in that process and what we're doing is the synergies as we accomplish them, Harris Teeter is taking that money and giving it back to the customers.

So it's really giving the customer something back from the merger and some of the savings, and Mike mentioned insurance for example.

Okay great, thank you.

Thank you.

Chuck Cerankosky of Northcoast Research.

Nice quarter.

Thanks, Chuck.

Looking again at the pension benefit announcement you made the other day, Mike I'd like to get a better idea on how the cash flows are going to look on this.

You're obviously not going to pay the $56 million immediately but at the same time, how might that be broken up over the next five years or so as it moves into the funds?

And is there a corresponding offset in your hourly contribution of these plans?

Couple questions here, so the $56 million is the after-tax cash we'll have to put in and as we said we have up to five years to do that.

We really haven't decided exactly how we're going to do it.

The King Sooper pharmacist is a smaller part of that total contribution and we actually have longer than five years to do theirs.

But you should expect some plan over the five years to do it.

What this really does is technically what happened is assets and liabilities came attached to their already earned and accrued benefits and that's what we're shoring up in these plans.

Going forward they will continue to earn benefits.

In the pharmacist's case they will get a K plan match, in the clerk's -- in the Pacific northwest contract, they will continue to earn a benefit going forward and there will be cents per hour accrual for those benefits going forward.

So it won't reduce that.

So the $56 million is to shore up the plans and whatever is negotiated going forward is an additional pennies per hour kind of deal?

What we don't have to negotiate and worry about funding going forward is any cents per hour to make up the $56 million because we'll do that separately.

So going forward, any portion of an hourly contribution that was there to make up an under funding in the plan obviously we've already negotiated that and walled it off so all we have to worry about funding is future benefit accruals, not vested benefit accruals that will be separate.

Announcements of this sort are likely to recur but it's very difficult to forecast when and how frequent, is that a fair statement?

Predict when and how and it's one of the reasons we had a disclosure of this kind of activity in our outlook section in the 10-K because that's why we dedicated some very talented resources to this because we would love to continue to pick off opportunities like this to secure, to help secure the pension benefits of our associates going forward in some of these under funded plans, get that out of that fund.

If that fund runs into trouble, we know our associates are taken care of because we have them in a fund that we're helping manage and we do view that what we have is an obligation to do that for them.

Thank you.

Thanks, Chuck.

[Philippe Gusins] of Mitsubishi.

Many thanks for taking my question here.

[Dell] has recently indicated that they had seen a pick up in competitive activity not only obviously in their home markets with the expansion of Albert Heijn stores but also in some US markets.

Should we read into that that you perhaps have sharpened a little bit your pricing already with Harris Teeter, given that they do compete with the Food Lion stores in a number of markets?

Yes, as I mentioned before that is a good assumption but it's just early in that process.

Okay, and then just a follow-up if I may.

I may have missed this but following the announcement yesterday, have you indicated by how much your multi-employer liability will shrink on the balance sheet?

Well that amount we put in the MD&A is not entirely on our balance sheet and theoretically it would be reduced by the $56 million once we fund it.

That $56 million will actually now sit as a liability on our balance sheet until we do fund it.

Okay, great.

Thanks very much for the color today.

Thank you, Philippe.

Kelly Bania of BMO Capital Markets.

Thanks for taking my question.

Just on your comp guidance, you clearly raised it, first quarter was strong, sounds like second quarter is running strong as well.

And you talked about a little bit of a less cautious consumer behavior which I don't think I've heard you guys say for awhile and upticking inflation.

So just curious if there's any conservatism in that 3 to 4 outlook for the rest of the year or any other things that we should be thinking about getting back to a 3 to 4 range.

The one thing that if you lock at last year by quarter, the fourth quarter actually was a little better than the trend had been.

It wasn't driven by weather but it was helped by weather and as we start cycling some of those things until you actually cycle them obviously you don't know where you are.

Now we'll always hope that we're a little conservative but until you get there it is our best estimate at this point in time.

Mike or Mike?

I would agree completely.

I would agree completely also.

Great and if I could just add another question on natural foods.

Clearly up strong again.

Just curious, as you look at your competition whether it's discount channel or supermarkets or elsewhere, do you see them investing as much as you are in natural product categories?

I realize Wal-Mart's announced the Wild Oats line.

We haven't really seen that show up in stores yet but do you think some others could start to invest more in natural foods as well or what are you seeing versus your competition?

Well you know, there is investment we're seeing competitive investment in natural foods.

For us, we've positioned natural foods in different parts of the store now, you'll find soy milks, almond milks in the regular dairy case and things like that.

So we're just trying to answer what the customer wants and have products available at a price that they're willing to pay and in a location that they're happy to find them.

But competitively, yes we've seen a little bit of move but not much.

Great, thanks.

We have time for one more question.

Thanks, Kelly.

Kate Wendt of Wells Fargo Securities.

Thanks for squeezing me in.

So just actually had a bigger picture question.

As you look alt your overall store base whether you think you'll see a net increase in competitive openings against you this year or if it's consistent you think with last year or maybe offset by closures at weaker chains.

Obviously it doesn't seem to be affecting your comps this quarter.

But just curious how you see that playing out this year?

It's a good question and you continue to see a lot of people talk about adding square footage in the space.

Some of that square footage is square footage dedicated to what we sell inside of a different format, be it inside of a Dollar General store or a drug store or something like that.

Wal-Mart is obviously building some smaller neighborhood and kind of markets so that's there.

What kind of gets lost is competitors who are closing stores that I would call versus a small offering inside of another format, what I would call a destination store.

So when you have a destination store close and it's 50,000 or 60,000 square feet and somebody else has added 1,200 square feet, that's really a convenience shop.

It's a different kind of competitor.

So I think we'll continue to see a lot of square footage open up that sells food.

I think overall the destination kind of square footage is probably flat to slightly down.

Got it.

That's really helpful and then just one other quick one.

I saw that you recently introduced a premium pet food assortment which sounds like it could be a nice incremental comp driver for you guys.

I was wondering how many stores that's in today and maybe how many you're planning by year-end.

And then it also sounds like maybe along with that there's a change in the receptivity of premium pet food brands distributing to the supermarket channel?

Yes, we just recently introduced, I'm glad you caught that, a new line of premium pet foods and it should be in every store in Kroger I would hope.

That was the plan and sales have started out strong and we're real pleased with it.

Glad you caught that.

I try.

Thanks so much.

Thanks, Kate.

Before we end today's call, I'd like to share some additional thoughts with our associates listening in today.

Earlier this month, we introduced the Taste of Mexico event in all our stores.

We hope our associates are enjoying this fun celebration of Mexican food with our customers, including in store sampling, creative displays, and special activities.

I know I've enjoyed visiting our stores across the country and seeing the creativity, passion, and enthusiasm from our associates for the Taste of Mexico.

This special event is the first of a series of celebrations of foods of the world in our stores and runs through June 24th.

Our associates passion for doing good is evident in the way we serve our customers and neighbors in the communities where we live and work every day.

This month we honor our associates' efforts in serving our communities and those in need.

We are pleased to recognize in our 2013 annual report 28 associates across the Company for their outstanding volunteer service as recipients of the Kroger's 2013 community service award.

These women and men give their time and talent to honor veterans, feed the homeless, raise money to fight cancer, and bring music to mentally challenged, among many other causes.

We are grateful for their commitment.

A big heartfelt thank you to all our associates who volunteer.

Mike and I are proud of the work you do.

You make a big difference for so many others and the communities we call home.

Thank you.

That completes our call today.

Thanks for joining us.

The conference has now conclude.

Thank you for attending today's presentation.

You may now disconnect your lines.