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Q4 2007 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to The Kroger Co.'s fourth quarter earnings call. My name is Grace Ann and I'll be your coordinator for today.At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of today's conference. ( Instructions).I would now like to turn our presentation over to your host for today's conference, Ms. Carin Fike, Director of Investor Relations. Please proceed.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 Pandora Silver Gray Charm 114 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 further assumes no obligation to update that information.Now I would like to introduce Mr. David Dillon, Chairman and Chief Executive Officer of Kroger.Thanks, Carin, and good morning, everyone. We're pleased you could join us to review Kroger's fourth quarter and fiscal year 2007 financial results. With me today are Rodney McMullen, Kroger's vice chairman, and Mike Schlotman, Senior Vice President and Chief Financial Officer. Don McGeorge is off today. It would seem that the flu season is indeed finally here.I'll begin with a recap of Kroger's fourth quarter and fiscal year sales result and then provide our latest market share information. Rodney will review our fiscal year results and provide guidance for 2008 and then we'll be happy to take your questions.Total sales for the fourth quarter increased 2.2% to $17.2 billion. After adjusting for the extra week in the fourth quarter of 2006 total sales increased 10.2%. Identical supermarket sales increased 8.2% with fuel and 5.3% without fuel based on the same 12 week period in both years.Our strong identical sales growth continues to be broad based across the company's geographic regions. The strongest departments were grocery, produce, nutrition, and bakery/deli.Net earnings in the fourth quarter totalled $322.9 million or $0.48 per diluted share. The LIFO charge in the fourth quarter was $0.05 per diluted share resulting from higher than expected inflation and was $0.02 per diluted share more than we anticipated when we reported our third quarter results to you back in December.We continue to drive solid identical sales growth by improving service, value, product quality, and selection for our customers. During the quarter we continued to invest in lower prices for our customers providing meaningful savings for them in this uncertain economic environment.We ended the fiscal year with a strong quarter. The fourth quarter and full fiscal year highlight what Kroger's strategy is designed to do: deliver strong financial results today while we continue to invest in the future.Rodney will discuss our fiscal Pandora Silver Gray Charm 114 year results in a few minutes. First I'll share our latest market share results with you. Increasing market share is a corner stone of our strategy and I am very pleased to report that for the third consecutive year Kroger has shown impressive market share gains. The market share figures we report are based on our own calculations and consider the potential for sales in each market from all retail outlets where customers can purchase products Kroger sells, including supercentres and other non traditional retail formats such as dollar stores, drug stores, and warehouse clubs. Most third party market share data providers only consider traditional formats.Kroger serves customers in 44 major markets. We define a major market as one in which we operate nine or more stores. In 2007 Kroger held a number one or number two market share position in 39 of our 44 major markets. Our overall market share in these 44 major markets rose approximately 65 basis points during 2007 on a volume weighted basis. Kroger shared an increase in 37 of those 44 major markets, a decline in six, and remained unchanged in one.Kroger competes against a total of 1,340 supercentres, an increase of 78 over last year. Supercentres have achieved at least a number three market share position in 36 of our major markets. Kroger's overall market share in these 36 markets rose 95 basis points during 2007 on a volume weighted basis. Our share increased in 31 of those 36 major markets, declined in four, and remained unchanged in one.Of the 1,340 supercentres that I mentioned 1,065 are operated by Wal Mart. This is an increase of 65 over last year. That increase is the lowest in seven or eight years. Wal Mart supercentres have achieved at least a number three share position in 34 of the major markets where Kroger faces significant supercentre competition compared with 32 last year. Kroger's overall market share in these 34 markets rose over 80 basis points in 2007. Our share increased in 30 of the 34 major markets, declined in three, and remained unchanged in one.Despite the growing number of competitors in the grocery business we have increased our market share on top of strong gains in Pandora Silver Gray Charm 114 href=>buy cheap tiffany jewelry 2005 and 2006. During the last three fiscal years combined, Kroger's share in our major markets has increased approximately 165 basis points. These consecutive year Pandora Bead With Stone Stone Silver And Gold over year gains in market share are significant because they show that Kroger's long term strategy is working as we continue to deliver value to both our customers and our shareholders.I want to thank our associates for their direct impact on increasing Kroger's market share in so many of the markets we serve. They see first hand what happens when new competition enters one of our markets and they understand what it Long Riband Hoop Earrings takes to distinguish Kroger from the rest in the eyes of our customers.While these latest market share numbers are impressive, we know there is more opportunity out there for our company. Even with Kroger's strong share in our 44 major markets, approximately 46% of the share in those markets continues to be held by competitors without our autonomies of scale. We estimate that their share as declined nearly 4% over the last four years.Now I'd like to turn it to Rodney, who will review our fiscal year and discuss our guidance for 2008. Rodney?Thank you, Dave. Good morning, everyone. We delivered another quarter of strong results thanks to the contributions of our associates in every area of our business. Our associates continue to execute our customer first plan well as we continue to balance operating cost reductions with investments aimed at improving our customers' shopping experience.As Dave said, Kroger had a great year. For the full 2007 fiscal year total sales increased 6.2% to $70.2 billion. Adjusting for the extra week in fiscal 2006, total sales increased 8.2%. Identical supermarket sales increased 6.9% with fuel and 5.3% without fuel based on the same 52 week period in both years.We delivered on a fiscal 2007 objectives we outlined for investors a year ago. Our original target for identical supermarket sales growth for the year, excluding fuel sales, was 3% to 5%. We raised the lower end of that range to 3.5% after the first quarter and raised it again to 4% after the second quarter.At the end of the third quarter Pandora Silver Gray Charm 114 we said we expected identical supermarket sales growth of 5% for the full year excluding fuel sales. Today we reported full year identical supermarket sales growth without fuel of 5.3%, exceeding all of our expectations throughout the year. On a two year stacked basis, this marks the fifth consecutive quarter that we've reported identical supermarket sales excluding fuel of 10% or higher.Kroger's strong identical sales growth in 2007 was a key driver of our earnings per share growth, 1837 Collection Lock Charm Bracelet which is consistent with our business model. We originally expected to deliver earnings per share growth of $1.60 to $1.65 per diluted share for fiscal 2007. Today we reported earnings of $1.69 per diluted share. This equates to a 15% growth after adjusting for the extra week in Thomas Sabo Bracelets Black Obsidian 054 fiscal 2006. This growth, plus Kroger's dividend yield of slightly more than 1%, created strong value for our shareholders.I want to note that we exceeded our original fiscal 2007 earnings guidance despite a pre tax LIFO charge that was $104 million higher than our original expectations for the year. The higher than expected LIFO charge is a reflection of the current inflationary environment.Like many food retailers, we continue to experience product cost inflation across many core grocery and perishable categories at levels not seen in several years. We estimate that our product cost inflation during the fourth quarter versus last year was 3.8% excluding fuel.