Kroger Company (KR) — Q4 2015 Earnings Call Transcript

Thank you, Laura. 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 fourth quarter press release, which includes a reconciliation of certain non-GAAP measures discussed today, and our prepared remarks on this conference call will be available on our website at ir.kroger.com. After our prepared remarks, we look forward to taking your questions.

Thank you, Cindy. Good morning, everyone, and thank you for joining us today. With me to discuss Kroger's fourth quarter and full year 2014 results are Mike Ellis, Kroger's President and Chief Operating Officer, and Mike Schlotman, Senior Vice President and Chief Financial Officer. 2014 was an outstanding year for Kroger. I want to express my pride in working with such a fantastic team of associates. They all deserve recognition for strengthening our connection with customers and enhancing our core business in line with our growth strategy. I'm also happy to report that we fulfilled our commitments to our shareholders. The growth plan we outlined in October 2012 focuses on four key performance indicators: positive identical supermarket sales growth, slightly expanding nonfuel FIFO operating margin, growing return on invested capital, and annual market share growth. In 2014, we met or surpassed each of these metrics. By the end of the year, we achieved our industry-leading 45th consecutive quarter of positive identical supermarket sales growth without fuel. We also exceeded our goal of slightly expanding the FIFO operating margin, without fuel, on a rolling four-quarter basis. We improved our return on invested capital even while increasing our capital investments, and we captured incremental market share for the tenth consecutive year. Strong performance translates to strong shareholder returns. We surpassed our long-term net earnings per diluted share growth rate of 8% to 11% in fiscal 2014 and increased our dividend for the eighth consecutive year since reinstating it. Maintaining this high level of performance consistently can sometimes appear easy or be overlooked, but it’s important to acknowledge our associates' commitment to our ongoing success now and in the future. We also made strides in other key aspects of our growth strategy. We are innovating to grow. Our expanded digital capabilities are enhancing our relationships with customers in new and exciting ways, with more customers engaging with us on our digital platforms than ever before. Insights gained from our mergers with Vitacost and Harris Teeter are helping us create an experience where customers can interact with us whenever and however they prefer. Our corporate brand team is pushing the limits of what customers expect from store brands. Our leading natural and organic brand, Simple Truth, reached $1 billion in annual sales for the first time just two years after its launch. We are investing in growth in both new and existing markets, continuing our fill-in strategy, and making significant progress. Our mergers with Harris Teeter and Vitacost.com have opened new markets that provide meaningful growth opportunities for Kroger. We are also creating jobs, proudly employing nearly 25,000 more associates than we did last year. Every day, we are creating opportunities for new and current associates. Our strong results in fiscal 2014 enabled us to make a significant contribution to The Kroger Co. Foundation this year. We use foundation funds to support causes that our customers care about, enhancing our reputation as a locally connected retailer. We take pride in being recognized by Forbes magazine as the most generous company in America. This contribution will help Kroger continue supporting our priorities, including hunger relief, breast cancer awareness, assistance for the military and their families, and local community organizations. We are proud to invest in our efforts to support our customers and the communities that foster our growth. Kroger customers have grown increasingly optimistic about the economy since late last year and into the new year, feeling more comfortable with their discretionary spending partly due to low fuel prices. However, customers' current situations depend on the stability of their family finances. Perceptions of the economic recovery are still mixed, yet we continue to foster loyalty among all our customers. Despite external factors such as inflation in certain commodities, fluctuating fuel prices, or unemployment, we adapt to succeed with our customers. While inflation impacted fuel costs throughout 2014, our personalized offers, weekly promotions, and price investments helped customers maximize their budgets. We are currently investing $3.5 billion annually to lower prices. Although natural and organic foods have traditionally been out of reach for many, we are leveraging our merchandising expertise, manufacturing capabilities, and purchasing power to make them affordable and accessible to all customers through Simple Truth, which continues to experience double-digit sales growth. As customers' expectations for convenience evolve, we have improved our prepared food offerings to meet their changing needs. Like a great meal, what makes Kroger great isn't due to a single characteristic. It’s the combination of food and drink, people and atmosphere, surprise, and delight that make a meal exceptional. This combination, brought together by our associates, the sum of our efforts, explains Kroger's success. Before I hand it over to Mike Ellis, I want to share that both the Harris Teeter and Vitacost mergers are progressing very well, thanks to the remarkable people at both companies. Mike will provide further details on these aspects and our operational performance. Mike?

Thanks, Rodney. Good morning, everyone. This was a great quarter capping off a really great year. Our associates make everything happen, and they knocked it out of the park this year on several fronts. We achieved an outstanding fourth quarter ID sales growth, without fuel, of 6%. As Rodney pointed out in our press release this morning, while improved fuel margins contributed significantly to our reported results in the second half of the year, our operating performance without fuel shows that our associates are continuing to deepen our relationship with customers in very meaningful ways. The better our connection with customers, the better our shareholder returns. Our identical sales performance was supported by robust performance in every department in every supermarket division. Natural foods, meat, deli and pharmacy departments all posted double-digit identical sales growth. For the 10th year in a row, we lowered costs and reinvested those savings to improve our store experience. It's no surprise that Kroger captured more share of the massive food market also for the 10th year in a row. Our consistent market share gains drive top and bottom line growth and generate lasting shareholder value. We report on market share annually and look at it as the customers would look at it, where they spend their money. Last year, we began using Nielsen point-of-sale plus, a Kroger term for Nielsen data that includes all point-of-sale data from several competitors and includes all departments inside our stores, except for pharmacy. The data is generated by retailers who report their sales to Nielsen. This includes all major food, drug, mass and dollar competitors, as well as most club competitors. It does not include C-stores. Nielsen POS plus captures roughly 85% of the items we sell, including EPC-coded items, PLU and random-weight items, making it a really good and consistent source. According to Nielsen POS plus data, Kroger's overall market share of the products we sell in the markets where we operate grew approximately 60 basis points during fiscal 2014. This data also indicates that our share increased in 18 of the 20 markets outlined by the Nielsen report and was down slightly in just 2 markets. Walmart is one of our top competitors in 15 of the 20 markets outlined in the Nielsen report. Kroger's share increased in all of those markets. In addition to market share growth, we regularly measure our loyal household growth because it lets us know how well we are connecting with our best customers. During the fourth quarter, we continued to grow the number of loyal households and at a much faster rate than total household growth, which was also up for the quarter. Customers are buying fewer units per basket but visiting our stores more frequently. This is consistent with the trend for the past several quarters. Inflation continued in pharmacy and among commodities such as meat during the fourth quarter. We estimate product inflation was 3.5%, excluding fuel, for the fourth quarter. In 2015, we expect the strong tonnage growth that we saw in the fourth quarter to continue. We've talked a lot this year about our Corporate Brands growth and success. That trend continued in the fourth quarter, with Corporate Brands representing 28.2% of total units sold, the highest level in at least 7 years; and 25.8% of sales dollars, excluding fuel and pharmacy. The star, of course, has been Simple Truth, and in 2014, Simple Truth reached an amazing milestone by hitting a $1.2 billion annual sales mark. Simple Truth has been our most successful brand launch ever, reaching billion-dollar-brand status in less than 2 short years. During the year, more than 20 million households bought 1 or more of our 2,688 Simple Truth or Simple Truth Organic items. The brand continues to earn double-digit unit and sales growth, which we don't see ending anytime soon. Shifting gears. We just completed our first year since merging with Harris Teeter, and our integration efforts have been fantastic. We are creating synergies both ways and we are learning new ways to connect with our customers. The Harris Teeter team is great, and both they and our general office teams have done an outstanding job in working together. Also, we are 6 months into the Vitacost merger, and our integration is going well. We continue to discover new ways to use Vitacost as a strategic advantage. We already have a strong national foods business, and Vitacost is helping us get better in that category. A cornerstone of our ability to deliver successful mergers is partnering with businesses that share our cultures and values. This makes it easy to share ideas between each other. Harris Teeter and Vitacost both illustrate that point. Finally, I'll provide a brief update on labor relations. We are currently negotiating in Louisville and with the Teamsters, covering several distribution and manufacturing facilities. During 2015, we will also negotiate agreements with the UFCW for store associates in Columbus; Denver; Las Vegas; Memphis; and Portland, Oregon. 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 health care and retirement benefits for our associates. Kroger's financial results continued to be pressured by rising health care 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: growing Kroger's business and profitably, which will help us create more jobs and more career opportunities and enhance job security for our associates. We have very positive momentum with our customers, associates and communities as we move into 2015. Now Mike Schlotman will offer more detail on Kroger's growth metrics and financial results as well as our guidance for 2015. Mike?

Thanks, Mike. Good morning, everyone. Before I share our fourth quarter and fiscal 2014 results, I'd like to mention a couple of important points regarding fiscal 2014. We're adjusting our full year results for two items: charges from the first quarter related to the restructuring of certain pension obligations aimed at stabilizing associates' future benefits, and specific tax benefits from the third quarter. Throughout the year, we also saw low retail fuel prices and high fuel margins, a significant LIFO charge compared to 2013, and a $55 million contribution to our UFCW Consolidated Pension Plan in the fourth quarter. Additionally, we contributed $85 million to our charitable foundation this year, with $60 million of that in the fourth quarter. Now, moving on to our fourth quarter results. It's important to note that Kroger's operating results for the fourth quarter of fiscal 2014 include Harris Teeter, which was not included in the fourth quarter of fiscal 2013, impacting many year-over-year comparisons. Total sales in the fourth quarter reached $25.2 billion, reflecting an 8.5% increase. Excluding fuel, total sales grew by 14.2%. Our net earnings for the fourth quarter were $518 million, or $1.04 per diluted share. We experienced a $9 million LIFO charge for the quarter compared to $10 million in the same quarter last year. FIFO gross margin was on par with last year, excluding retail fuel operations. Our total operating expenses, excluding retail fuel operations, pension contributions, and other adjustments, decreased by 15 basis points as a percentage of sales from the previous year. Before reviewing Kroger's full year 2014 results, I want to provide details about our fuel operations, which include supermarket fuel and convenience store business. In the fourth quarter, our cents-per-gallon fuel margin was about $0.234, significantly higher than $0.113 in the same quarter last year. For the full year, the cents-per-gallon fuel margin averaged around $0.19, compared to $0.141 last year. We anticipate that fuel margins will return to historical averages moving forward. Now, regarding Kroger's complete results for 2014, we reported total sales of $108.5 billion, a 10.3% increase. Excluding fuel, total sales grew by 12.9% compared to the previous year. Identical supermarket sales without fuel saw a 5.2% increase in 2014 versus the prior fiscal year. Our net earnings for 2014 totaled $1.73 billion or $3.44 per diluted share, while excluding adjustment items, net earnings reached $1.77 billion or $3.52 per diluted share. It's worth noting that our adjusted EPS, excluding fuel, was at the high end of our long-term growth target, even with pension and foundation contributions included. While fuel margins drew much attention, our nonfuel business performed exceptionally well. Kroger's LIFO charge for 2014 was $147 million, notably higher than 2013 due to increased product costs. FIFO gross margin, excluding retail fuel operations, saw a small decline of 3 basis points. As previously mentioned, robust identical supermarket sales and effective cost management allowed Kroger to decrease operating expenses as a percentage of sales for a tenth consecutive year. Our total operating expenses for 2014, excluding retail fuel operations and other contributions, reduced by 13 basis points compared to the previous year. FIFO operating margin for 2014, excluding those same items, increased by 10 basis points compared to the prior fiscal year. Kroger's strong EBITDA performance led to a return on invested capital of 13.74% for fiscal 2014, up from 13.43% in fiscal 2013. For 2015, we plan to maintain our current investment grade debt rating, repurchase shares, fund dividends, and increase capital investments. Relating to our merger with Harris Teeter, we committed to achieving a net total debt-to-adjusted EBITDA ratio of 2x to 2.2x by mid to late fiscal 2015. I'm happy to report we reached this goal sooner than expected due to strong operating results in fiscal 2014. By the end of the fourth quarter, our net total debt-to-adjusted EBITDA ratio decreased to 2.15x, down from 2.43x the same period last year. Based on our current expectations for 2015, we aim to keep this ratio below the 2.2x target throughout the year. Our capital investments, excluding mergers and facility leases, totaled $2.8 billion this year, up from $2.3 billion in 2013. For 2015, we expect capital investments to range between $3 billion and $3.3 billion. One element of our long-term growth strategy is to gradually increase capital investments. Our new store openings are meeting expectations, and we have a solid pipeline of high-quality projects that should keep this momentum going. We're focusing more of our spending on expanding square footage in our fill-in markets, having identified 8 markets for this purpose, an increase from 6. We're very enthusiastic about these opportunities. Kroger's strong financial standing enabled us to return over $1.6 billion to shareholders through buybacks and dividends. Throughout the year, we repurchased 28.4 million common shares at a total investment of $1.3 billion. As of February 27, 2015, we have around $432 million remaining under the $500 million share repurchase authority granted in June 2014. Now, let me outline our growth objectives for 2015. We're aiming for identical supermarket sales growth, excluding fuel, of about 3% to 4% for fiscal 2015. This estimate considers several factors, including that it's still early in the year, our lower inflation outlook compared to last year, and expectations for continued strong unit growth in 2015. For the entirety of fiscal 2015, we expect net earnings to fall between $3.80 and $3.90 per diluted share. This reflects Kroger's long-term net earnings growth rate of 8% to 11%, based on 2014 adjusted earnings of $3.52 per diluted share. We further anticipate enhancing shareholder returns through a dividend expected to increase over time. As we plan for growth in 2015, we expect fuel margins to align closer to historical averages. We do not anticipate similar contributions to pension or foundation efforts, and we expect LIFO charges to be lower than they were in 2014. We're predicting inflation, excluding fuel, to be around 1% to 2%, primarily driven by meat and pharmacy inflation. Although fuel margins may pose a challenge in 2015, we believe they will be balanced out by reduced LIFO charges, no planned contributions to the pension plan or foundation, and continued strength in our core business. For the full year, we expect to fall within the middle of our outlined range. In terms of quarterly comparisons related to our 8% to 11% annual growth rate, we anticipate quarter 1 results to align with that range, quarters 2 and 3 to slightly exceed it, and quarter 4 to fall below the range. Additionally, we expect Kroger's full year operating profit margin in 2015, excluding fuel, to expand modestly compared to 2014 results. Now, I will turn it back over to Rodney.

Thanks, Mike. I am so proud of our team. We fulfilled our commitments to our customers, associates, shareholders and bondholders in 2014. Kroger captured more share of the massive food market and continued to invest in growing our business. We created thousands of new jobs and hired more than 6,000 veterans last year. While we are very proud of this outstanding year, we are committed to even more. As I mentioned at our Investor Day, our to-do list remains longer than our done list. Now we look forward to your questions.

So guys, a few things. I think you said $3.5 billion of annual investment in price. Was that right? And what do you include in there? Is that merely price reductions, promotions or something else? Is that sustainable? Do you think you can do $3.5 billion a year? And then what happens to the elasticity of the return over time if the returns remain high on that investment?

Yes, that’s $3.5 billion, which refers to the annual figure for 2014 that we discussed. We began our journey about 10 years ago focused on reducing costs in the business and, as we do that, we aim to provide customers with better value through both everyday prices and promotions. We see this as a key part of our strategy moving forward. As we continue to eliminate costs, we plan to pass those savings on to customers through a mix of service and pricing, based on the opportunities we identify. We're pleased with how demand responds as we invest in pricing. We have accumulated a substantial amount of internal data to ensure our investments are optimally placed for the best returns. We believe this approach is sustainable and is integral to our ongoing strategy. Mike, do you have anything to add?

No, I think that's it, Rodney.

It seems that there are plenty of investment opportunities available, and you believe that the returns will continue to be consistent moving forward.

Absolutely. And every category would have different results, and that's one of the values of our insight is understanding that.

All right. And then just one for Mike Schlotman. I know you guys have liked a front-end-loaded buyback program, right, for the productivity that gives you throughout the year. Is that the idea this year? Is that sort of embedded in the guidance, that a lot of it will be done in the first half?

Yes, I would say that the daily market conditions will ultimately determine when we proceed with those investments. However, I want to emphasize that at the end of our conference call in December, we had not utilized any of the $500 million authorization for buybacks. As I mentioned today, we have now used some of that.

I want to begin with the center store trends. We've heard from several major CPG companies about challenges in some of the center store categories. I would like to know if you are experiencing the same issues or can provide more insight into what's happening there.

Well, actually, our center store has performed better in the fourth quarter than it had in other quarters in 2014. And we've done a lot of work in relaying our center store, getting things refreshed, new products in. And it's been a big focus of us to using customer insights and really going through our stores and doing the work that's around assortment that's really effective.

A lot of the consumer packaged goods companies have different approaches, especially regarding natural food items. The challenge we face is whether to categorize these items in the center store or as a separate department. It’s becoming increasingly complex because there are certain categories where natural foods are almost as significant as our traditional products. It’s a straightforward question, but the answer is not easy. For us, our complete focus is on understanding what the customer wants.

And then switching gears maybe to the Simple Truth brand. You achieved your targets this year for sales of more than $1 billion. Do you have any new targets out there? And is it getting more difficult to get the supply for that business?

Supply has been an issue in certain areas, but when you have over 2,600 items, we have a great base of product today, and we're going to continue to expand that. But for the most part, in some of the perishable areas, there's been a supply issue or 2, but we've been able to really take care of the customer. And I don't foresee anything this year in the near future.

Yes, but certain categories will always have some tightness on supply, especially at the front end, as farmers transition over to growing more of the organic or natural product.

Okay, I have a question for Mike.

Which one?

Mike Schlotman. Question about labor negotiations. With the company's strong performance, do you think it makes it more challenging to secure agreements with the unions, or more broadly, are they advocating for wage increases?

Our average wage for our hourly associates in the store is nearly $14 an hour. The total benefit package our associates receive is even stronger. It varies by geography and specific contracts, but we have been leaders in offering a solid wage. We have been transparent with the unions and have taken many steps to safeguard the future pension benefits of our associates, unlike others in the field. This isn't just about the significant agreement we made two or three years ago; we've also implemented some smaller agreements in the first quarter of this year, and it's likely that more will follow in the future. Overall, we are creating jobs, having added 25,000 jobs last year, bringing our total to 400,000 jobs. Many part-time workers, especially those under 18, come to Kroger seeking employment and often find a career. In fact, two-thirds of our store managers started as hourly part-time associates, which speaks volumes about how we treat our employees. Thus, it's not solely about wages; there is much more that our associates value when they join Kroger.

What you earn today will be different as you advance in your career and take on greater responsibilities.

And then changing gears, maybe just talk a little bit about the test you have of click and collect in Cincinnati. Maybe it's too early to say anything, but are you feeling good about how that's going?

It is too early to provide a definitive answer, Meredith, but the insights we gained from Harris Teeter are significantly influencing our future plans. Harris Teeter has successfully operated in the click-and-collect sector for over a decade, and we have learned a great deal from them, which is helping us speed up our learning and growth.

Just a little color, I guess, following on John Heinbockel's question. In terms of share buybacks, obviously, your guidance for fiscal '15 is very strong given the tailwind that you're going to have in gas margins. So, I mean, maybe a little color on how much of this is buyback related versus core EBIT growth. I don't know if you can just elaborate a little bit on that.

Yes, I won't go into too much detail about the model. You can expect that we will likely spend a bit less on share buybacks in 2015 compared to 2014. We are raising our expectations for capital spending by a few hundred million dollars more due to the impressive pipeline of projects I mentioned in my prepared comments. We believe this will be the driver for future growth. Remember, back in October 2012, we stated that for the initial years of this new growth model, about a quarter to one-third of our EPS growth might come from share buybacks, but this would decrease over time as we successfully open more stores in our targeted markets.

Okay, that's helpful. And then just looking at the year in general. So when I look at obviously how strong this year was, can you maybe try to frame how much of that was Harris Teeter related in terms of Harris Teeter outperforming what your original guidance was on accretion? I mean, obviously, let's exclude fuel from the conversation. And then just following on that is, when we start to model comps throughout the year, any color on how we should think of how Harris Teeter, now that it's in the comp base, how that'll impact the comps throughout the year?

Well, I won't give specifics on Harris Teeter. I would say that they added a little bit more to earnings per share than our original expectations for the year. They had a phenomenal year. They also helped the core Kroger with some ideas that they have done historically and helped the core Kroger have a very strong year as well. Relative to the comp cadence throughout the year, even though we only had Harris Teeter as a business for this year, we included them in our comp base all year using their 2013 sales. So the sales numbers we reported during 2014 actually included Harris Teeter as though we had owned them in 2013. So there won't be a big inflection point in ID sales from including Harris Teeter going forward.

Karen, I want to add to what Mike mentioned. Harris Teeter performed better than we anticipated, thanks to their strong operations and synergies, along with the impact of fuel. However, if you focus on core Kroger without those two factors, we still achieved positive results. So, it was really the combination of all three elements that led to our strong performance.

The first question is for Mike Schlotman regarding the pace of EPS growth next year. Mike, you indicated that Q1 will align with the annual range. I had anticipated it might have been more favorable since the fuel comparisons are easier at that time. You will also benefit from the repo in the first quarter and the share count. Additionally, I assume your comparisons are likely stronger early in the year compared to later. Could you clarify why Q1 is expected to only align with the range?

At this point, we had a very strong first quarter last year, so we are comparing against that. I agree there will still be some ongoing benefits in the first quarter from the share buyback, but that was heavily front-loaded last year. As I mentioned earlier, we will buy back fewer shares this year than last year. The way we executed the buyback last year did assist the first quarter somewhat. A lot of this depends on numerous factors. We have recently finalized our business plan by quarter based on how the previous year concluded and our expectations for the various quarters. The best answer I can provide is that we're striving to be transparent about how our operators perceive the cadence throughout the year, which reflects our expectations. Many elements contribute to this situation. LIFO will certainly influence how and when we incur expense charges in the quarter. As you know, we increased our LIFO charge throughout the year and it decreased in the fourth quarter. If our estimate for LIFO holds true this year, the second and third quarters may benefit slightly from a lower LIFO charge compared to the previous year. There are many components involved in forming that model.

A couple. Can you help us a bit with how QTD comp trends are proceeding either quantitatively or qualitatively? And I guess, similarly, on 1Q fuel margins to date, any sort of flow-through margin help? Or have retail prices come down enough to maybe offset wholesale ones by this point?

If you look at our identical sales so far this quarter, we are slightly ahead of the guidance we provided, although it's still early in the year. Regarding fuel margins, I'll have to let Mike answer that question because I don't have the information.

Yes, I don't think we need to talk about weekly fuel margins. It's difficult enough to predict what the year is going to be, let alone 4 or 5 weeks, because it's such a volatile area and just won't go down that path this morning.

That's fair. And my follow-up is you're guiding to inflation being about 1.5% lower than it was in '14. You're talking about maybe a roughly 1.5% deceleration in total ID sales x fuel. So always risky embarrassing myself asking a simple math question, but is it fair to assume your guidance is thus implying that everything outside passing along inflation, like sort of traffic and basket size, you're expecting that to grow at a similar rate in '15 as '14, roughly?

Yes, as Mike Ellis said in his remarks, we had great tonnage growth throughout the year, and it accelerated a little bit in the fourth quarter. And we don't see any reason why that would slow down during the year. And it's it winds up being in our hands to continue that underlying unit growth.

I just wanted to confirm the guidance. For next year, it seems that while there was a significant advantage from fuel margins in the second half of this year, we're also expecting lower LIFO and no pension expenses, as well as the foundation expense not impacting us again next year. Overall, you might still maintain an earnings growth of 8% to 11%, but it sounds like fuel could be a bit of a challenge. Could you clarify the overall impact of these factors that influenced this year, to help us understand the guidance for 2015?

Yes, if you look at where fuel margins benefited us and consider how our gallons figures over time, you can likely determine the incremental benefit from a margin perspective on fuel. When you think about normalizing that and considering the expectation for lower LIFO, along with not having the pension contribution or the contribution to the charitable foundation, these factors don't perfectly offset each other, but they come close. That's why we're projecting growth off the $3.52 in the 8% to 11% range. It's important to note that our core operations, excluding these factors, would have been at the high end of our 8% to 11% range on their own last year. The underlying strength in our core business gives us confidence to foresee another strong year within that range.

Perfect, that's very helpful. And then just on the comps for the quarter. I think, when you were planning the comps for the quarter in Q3, you talked about cycling the benefit from the weather. Just curious what really came in better than expected for the fourth quarter in terms of those core ID comps. Was there a weather benefit? Or did you just kind of hang onto some of those customers that maybe were pushed into your stores last year with the weather? Or just curious, thoughts there.

Yes, the weather was not as favorable this year compared to last year. We focused on retaining some of our customers, and the operating and merchandising teams did an excellent job ensuring we had strong programs to address the weather impact. Ultimately, it was the team's execution that made a significant difference.

Okay. And we'll take one more question.

Wanted to get some thoughts on, now that you're contemplating more of these fill-in markets, what should we be thinking about for a longer-term square footage growth rate for you? Because you have been fading off of your store closures, so I'm curious what the flow-through is going to be on actual net square footage growth.

Yes, it's really difficult to predict exactly how many operational closings you're going to have in a particular year. And there's a wide variety of reasons those happen, but if you look at our gross, we expect it to be 2% to 2.5% next year. Our net was a little bit under 1% last year. Our store count has been down. Keep in mind, sometimes when we close an underperforming store, we may be closing an underperforming store, it's underperforming because its sales per square foot are at the way low end of a range of what would make that store profitable. And as we replace that store or open a new store that's larger than that, the net square footage may not go up dramatically, but the sales per square foot of that new store can often be several multiples of the store we closed. So it's a little misleading just to say, "Oh, square footage growth hasn't been that much so they can't grow sales that much." The difference between that productivity of the new store and the store we closed can be quite remarkable sometimes.

Okay. And were there any tax implications from the charitable contribution in the fourth quarter, or anything that carries into 2015?

No. Obviously, we got a tax deduction for that, but it didn't affect the tax rate in any way, shape or form. And we've just taken advantage of the opportunity of a very strong year to be able to continue to have dollars to support the efforts that we support, both that are important to us and are important to our customers.

I want to express my gratitude to everyone for joining our call today. Before we conclude, I would like to share some additional thoughts with our associates who are listening in. I appreciate all of our associates for their hard work and commitment to serving our customers. We finished 2014 on a strong note, thanks to your dedication to providing friendly service and fresh products to our 8 million customers every day. Thank you to each of you for making a difference for our customers and for one another. As many of you are aware, our community service awards recognize associates who, through their significant volunteer efforts, charitable involvement, and leadership, positively impact the communities where we live, work, and raise our families. Nominations for the 2014 community service awards are now open. Whether you support those in need, veterans, cancer awareness, or your preferred local organization, I encourage you to apply or nominate a coworker for this esteemed award. Winners from each division will receive a donation to their chosen charity. Please reach out to your HR manager for more details and nomination deadlines in your division. Thank you for your incredible contributions. Your work in our communities is truly remarkable. That concludes our call for today. Thank you for being part of it.