Kroger Company (KR) — Q4 2016 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 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.

Thanks, Kate, and welcome to Investor Relations. Good morning, everyone, and thank you for joining us today. With me to review Kroger's fourth quarter and fiscal 2015 results is Mike Schlotman, Executive Vice President and Chief Financial Officer. Let me just start by saying, wow, what a year. I'm delighted to report that Kroger executed on our growth plan and delivered on our financial performance commitments in 2015. We delivered our 49th consecutive quarter of positive identical supermarket sales growth without fuel and our 11th consecutive year of market share growth. We met our goal to increase capital investment while improving return on invested capital. And excluding Roundy's, we exceeded our commitment to slightly expand FIFO operating margin, excluding fuel. Our 431,000 associates make it all happen. I am very proud of our team. By keeping our focus on serving one customer at a time, we continue to deliver for our customers and for our shareholders with remarkable consistency. I also want to welcome the Roundy's associates in Wisconsin and Chicago to the Kroger family. Our merger closed in December and integration is well underway. As we've gotten to know the people at Roundy's, it is clear they share our values and desire to make a difference for our customers. We continue to successfully expand the technologies that Harris Teeter and Vitacost.com brought to Kroger, which provide an even better shopping experience for our customers. We developed ClickList, our shop online, pick up at the store service based on what we learned from Harris Teeter's Express Lane. I'm pleased to share that we've expanded ClickList from 1 market to 7 markets. We continue to improve the offering, and our customers and associates both are providing very positive feedback. We are testing Vitacost.com's technology and ship-to-home infrastructure in Denver through a pilot in our King Soopers division. We're also testing a similar endless aisle experience in our new store format that we launched earlier this month in Gig Harbor, Washington. We're very excited about this new community-focused grocery store concept called Main & Vine. Main & Vine mixes local, specialty and everyday products all at affordable prices. It reimagines the modern grocery shopping experience, placing in the middle of the store fresh produce and bulk items, along with an event center where shoppers can enjoy cooking demonstrations, food and beverage tastings and find a new recipe idea for dinner tonight. Customer feedback has been very positive. 2015 was a big year for our Corporate Brands portfolio, accounting for more than $20 billion of our total revenue. During the quarter, Corporate Brands represented approximately 29% of total units sold and 26.2% of sales dollars, excluding fuel and Pharmacy. Simple Truth continues to grow at an incredible rate, setting sales records quarter after quarter. The brand reached $1.5 billion in revenue for the year. And already in 2016, Simple Truth expanded to be a true lifestyle brand with the introduction of Simple Truth household, personal care and baby products. We expect 2016 to be an exciting year of continued innovation throughout our Corporate Brands portfolio. Needless to say, there's a lot going on at Kroger. We are creating a seamless experience for our customers. Whether experimenting with new formats, driving digital engagement or launching new corporate brand products, we believe that combining Kroger's culture of innovation with our culture of opportunity will continue to support our growth. Kroger has an incredibly strong management team and a deep bench of leaders throughout our business. We are incrementally investing in leadership development and training for all our associates, including high-volume store managers and future senior leaders. And we have created 9,000 new jobs last year at all levels, which means even more opportunities for current associates to grow and advance. For example, we established a new operating division, the Dallas division, which created dozens of new leadership opportunities. Looking at the economy and customer shopping behavior during 2015, we noticed that customer sentiment held relatively stable throughout the year versus previous years in which their attitudes were more volatile. The past few months, we've seen the top economic concerns shift from rising healthcare cost to the stock market. Customers have more disposable income as a result of significantly lower fuel prices. Yet economic uncertainty remains, which typically causes people to cut back on discretionary spending. That said, an interesting insight is that our customers continue to spend with us. If you look at some of our high-quality offerings such as Murray's Cheese, Private Selection, Starbucks and Boar's Head or at the strength of our wine and craft beer business, it is clear that customers across all demographics want a great food experience. Because Kroger is doing a better job offering high-quality food at affordable prices, we continue to win with our customers even as they remain cautious about their overall spending. 2015 was an outstanding year for Kroger. We delivered on our performance targets and continue to expand our use of technology to drive growth. In 2016, we will continue making a difference for our customers and associates, growing our business and delivering value for shareholders. Now Mike will offer more detail on Kroger's financial results and outline our guidance for 2016.

Thanks, Rodney, and good morning, everyone. As Rodney said, wow, what a year. We exceeded all 4 of our financial performance commitments for the year. Identical supermarket sales and net earnings per diluted share growth, FIFO operating profit margin and return on invested capital were all better than our annual and long-term guidance. Market share growth continued, improving by 40 basis points, with 17 of 20 markets outlined by Nielsen POS plus data up and just one market down. We had a lot of unique items in last year's fourth quarter, which make comparisons more complicated, so I'd like to spend the next few minutes discussing the story behind the numbers for our fourth quarter and fiscal year and to give you some color on those and the current operating environment. There's a lot of speculation about inflation or deflation or disinflation. We believe a deeper dive is required when the operating environment has increased volatility. When you look at identical supermarket sales, you should not come to the conclusion that less inflation is fundamentally a bad thing. In fact, if you look at our real growth in the fourth quarter, that is, identical supermarket sales less inflation, this year's fourth quarter result was stronger than last year's fourth quarter when identical sales were over 6%. Tonnage stayed strong at over 3% unit growth during the quarter, and the strong tonnage allowed us to grow FIFO gross profit dollars, excluding fuel and Roundy's, by 4.4% in the quarter. All but one supermarket department had positive identical supermarket sales, excluding fuel during the quarter. Our natural foods, deli and produce departments led the way. The meat department was slightly negative due to 5% deflation in the category. This deflation has allowed retail prices to retreat or increase their purchases. As a result of strong tonnage, the meat department had a great quarter with strong FIFO gross profit dollar growth. This is what we often refer to as good deflation. Our operating costs as a rate of sales were down for the 11th consecutive year. However, they were up 23 basis points in the fourth quarter. This calculation excludes retail fuel operations and Roundy's and excludes a $60 million contribution to the Kroger Co. Foundation and $55 million contribution to the UFCW pension plan in last year's fourth quarter and a $30 million contribution to that same plan in this year's fourth quarter. There were several expenses in the quarter that won't continue at the same rate in future quarters, including chargebacks related to the transition of our payment systems to EMV that we expect to level out throughout 2016. We also saw higher pension costs and healthcare costs due to an increase in the number of claims and higher healthcare cost claims that occurred during the fourth quarter. All that said, we can and will do a better job in some expense categories, including shrink, completing our EMV rollout and benefit costs. In December, we said that volatility in weekly fuel costs would influence our fourth quarter results. That was true for the fourth quarter as our cents per gallon fuel margin was approximately $0.169 compared to $0.234 in the same quarter last year. Fuel in the fourth quarter only contributed about half as much net earnings per diluted share as compared to last year's fourth quarter. For the full year, the cents per gallon fuel margin was roughly $0.174 compared to $0.19 last year. Our fourth quarter net earnings per diluted share increased 9.6% to $0.57 compared to $0.52 during the same period last year. This result was helped by the lower tax rate and lower LIFO expense, but our strong real growth contributed to our results. Our 2015 cash flow generation was strong, allowing us to make $3.3 billion in capital investments during the year, excluding mergers, acquisitions and purchases of leased facilities. We repurchased $703 million of stock and returned $385 million to shareholders through our dividend. Net operating working capital declined $451 million, which also enhanced cash flow. Our net total debt to adjusted EBITDA ratio came in at 2.08x compared to 2.14 during the same period last year, even while investing approximately $870 million in our merger with Roundy's late in the year. Our balance sheet is as strong as ever. I'll provide a brief update on labor relations. In 2016, we will negotiate agreements with UFCW for store associates in Houston, Indianapolis, Little Rock, Nashville, Portland, Southern California and Fry's in Arizona. Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality affordable healthcare and retirement benefits for our associates. Kroger's financial results continue to be pressured by rising healthcare and pension costs, which some of our competitors do not face. Kroger and the local unions, which represent many of our associates, have a shared objective: Growing Kroger's business and growing it profitably, which will help us create more jobs and career opportunities and enhance job security for our associates. Turning now to our 2016 guidance. We expect identical supermarket sales growth, excluding fuel, of approximately 2.5% to 3.5% for 2016, reflecting the lower inflationary environment. For full year net earnings, we expect 2016 to range from $2.19 to $2.28 per diluted share. Where we fall within the range will be primarily driven by the actual fuel margins. We expect margins will be at or slightly below the 5-year average with continued volatility. We expect our core business in 2016 to grow in line with its long-term net earnings per share growth rate of 8% to 11%. Shareholder return will be further enhanced by a dividend which is expected to increase over time. In thinking about the cadence of our quarterly results compared to our long-term 8% to 11% guidance, in the first quarter, we would expect to be at the midpoint to high end; the second quarter, below that range, and keep in mind, 2015 grew 26% for earnings per share last year; the third quarter, at the midpoint; and the fourth quarter at the midpoint. We expect capital investments, excluding mergers, acquisitions and purchases of leased facilities to be in the $4.1 billion to $4.4 billion range for 2016. We expect Kroger's full year FIFO operating margin in 2016, excluding fuel, to expand slightly compared to 2015 results.

Thanks, Mike. 2015 was an outstanding year. We met our performance targets, increased market share, created 9,000 new jobs, and provided even more opportunities for our associates. We are also continuing to leverage our technology for growth. We are excited to keep that momentum going into 2016. While lower inflation may pose challenges to sales, we have experienced both high and low inflation over the past several years and have consistently managed to navigate through those conditions while maintaining relative pricing. By doing this, we will continue to provide greater value for our customers and shareholders. Now, we look forward to your questions.

So I just want to dive into the kind of the near-term outlook. And Mike, I think you said the tonnage was just fantastic during the quarter and actually better than last year's fourth quarter. Sequentially, did you see tonnage slow? And then as you look at the cadence in the quarter, it does seem like things fell off a little bit as we got to the last 4 weeks of the quarter. And any thoughts there on kind of what the current environment is? I mean, there's a lot of nervousness out there that the deflation is really starting to bite and maybe the consumer and the volumes aren't quite as good.

Our volume continues to perform exceptionally well, Scott. Even at the start of this year, shipments from our warehouses to restock our stores remain very strong. Reflecting on the meat department, we're experiencing beneficial deflation as we're returning to price points that allow customers to purchase more of our products. While this creates a slight challenge for sales when focusing solely on the top line, the number of units we're selling at a healthy gross profit per item means we are generating significantly more gross profit dollars. As we assess the fourth quarter as a whole, it's important to consider several factors regarding your observations about the later part of the quarter. Last year's fourth quarter was impacted by substantial snow events and the Super Bowl moving from the fourth quarter to the first quarter. Both of these, combined with deflation in a category like meat, certainly influence the sales growth percentage, yet unit growth remains very robust.

Okay, that's perfect. You didn't notice any significant change, but you did come in a little below your guidance on the comp. What do you think caused that slight difference? Or maybe nothing changed, and it just turned out to be a bit more challenging than expected?

I think the most significant change was that we experienced almost no weather at all during the quarter. Inflation turned out to be slightly lower than we had anticipated, but I believe the lack of weather was the primary factor. Essentially, we did not benefit from weather in the fourth quarter, and most of that impact would have typically appeared later in the quarter.

So then, Rodney, this is then I'll yield as one kind of just more longer-term type of question. I mean, the industry fundamentals just generally, things seem to be changing rapidly. I know you guys expanded your ClickList, but you have a lot of, like, I call them, alternate business models kind of springing up, whether it's Green Bean in the Midwest, which is delivering to the home, or something like a Blue Apron. Obviously, the idea of click-and-collect or AmazonFresh delivering. Where do you see the industry going? And how do you see Kroger navigating that more long term? And then I'll yield.

Thanks, Scott. When you look at long-term, and if you look at several of the changes we've made over the last couple of years, it is really merging with people that have expertise in some of those areas so that we could bring that within Kroger. And what we're really working hard on, and I mentioned it in my comments, is trying to create it where it's a seamless experience for our customer. By no means do I think we've arrived, but what we're finding is some customers like to engage with us multiple ways, and we're really striving to make sure that we have a model where we can let the customer decide how they want to engage with us versus us deciding that. So it's an exciting time to be in the industry. There's no doubt there's a lot of change going on. And the changes that we've been making over the last couple of years, we feel really good about positioning us to address where the customer is headed versus where they've been.

So a question for you. I just wanted to follow up on Scott's question on inflation. I guess, Mike, first of all, do you have the inflation number for this quarter? I don't know if you gave that or not.

Yes. Just give me one second or whatever. It's about 60 basis points overall, but there's a lot of variability in that number. As I said in my prepared comments, the meat department was deflationary, deli was deflationary, seafood was deflationary, grocery was a little bit inflationary. So it's a mixed bag overall. And as Rodney said, if you look at produce, it was actually inflationary. So produce has been all over the map this year, deflationary in the first 2 quarters, about flat in the third quarter, now inflationary. And our job is to operate the best we can given the environment we're operating in. And I think we've done a phenomenal job of managing our way through some of the volatility in the commodities that are out there. And in the backdrop of that, pharmacy continues to have inflation, although it declined throughout the year. And at the fourth quarter, at just under 5% inflation, and it started the year at 10%. So it's a wide range of things that have happened throughout the year on the inflationary front.

The question I really wanted to ask about this is if I look into your guidance for next year, 2.5% to 3.5% IDs. Inflation, I think, in the 8-K you said, up 1% to 2%, which is not that different, I guess, than what 2015 is going to average out at. And you do have some difficult tonnage comparisons. You had such a great year in '15. So I guess, as we try to dissect this, is the difficult comparison in tonnage also playing a role in terms of how you're thinking about '16? And maybe as part of all that, you can sort of help us maybe understand why tonnage accelerated the way that it did last year?

There are a few points to consider. First, when we merge with another company, we immediately factor that company into our same-store sales calculations. Unlike some other companies that exclude newly merged businesses for the first year, our approach will impact our guidance by approximately 40 to 50 basis points regarding same-store sales expectations. Additionally, we cannot predict inflation accurately until after it happens. We anticipate that inflation will be minimal early in the year, with a slight increase later on, rather than a steady rate throughout the year. The inflation forecast significantly influences our LIFO estimate and reflects our expectations when we look at volume weighted for the entire year. It is certainly more challenging to compare against strong prior results, but the inflation we expect and the mergers will play a substantial role in this. Mike, do you have anything to add?

I completely agree with you. If we look at some of the perishable departments, such as produce, the nearly 6% inflation in the fourth quarter is concerning. This suggests there may have been a shortage of products and that the available products were of lower quality. Therefore, it's important not to focus solely on my 60 basis points of inflation. Instead, I encourage everyone to examine the various components to better understand their impact on our business.

Okay. Let me add one more question, which I think is important, and this is for you, Rodney. Can you discuss how your M&A strategy is changing? Over the past few years, your company has become more aggressive than before. You acquired Roundy's, which years ago, from a Street perspective, we might have thought was something you wouldn't pursue, as it involved a turnaround in a new market. Could you elaborate on how things are evolving and what opportunities you are looking for moving forward?

It's important to note that we've consistently evaluated merger opportunities over the last 5 to 10 years. We closely examine most possibilities, particularly in the U.S., looking for companies that offer us something we currently lack. Our merger with Roundy's exemplifies this approach, as it enabled us to enter the Chicago market with a business that has excelled in customer engagement and holds a market share in the low teens since its entry in 2010. We believe there's a lot to learn from them, and we started with a strong position due to their success. In Wisconsin, both Pick 'n Save and Copps maintain significant market share throughout the state, which we are excited about. We value Wisconsin and are eager to operate there. Our focus is on the partnerships and synergies we can create with Roundy's and leveraging their strengths to enhance our position. This merger approach differs from traditional models, but it doesn't indicate a fundamental shift in our strategies or how we assess opportunities.

The other thing about Roundy's, particularly in Wisconsin, as Rodney said, not only did they have the very strong market share even though it's declined, the real estate sites they have were phenomenal. And we probably would not have considered a transaction like this if they didn't have outstanding real estate sites where we know we can grow their market share back to where it once was.

CapEx for '16 seems way higher than I would have expected. Can you give any color there? And I guess I was also wondering if you can give some puts and takes on how Roundy's might impact your comps for '16 in terms of guidance?

Yes, relative to the CapEx, as you know, we talked about our fill-in market strategy back in October of 2012, and we had expected a steady step-up in the CapEx. The guidance at that point in time didn't contemplate a merger with Harris Teeter and then a subsequent merger with Roundy's. Harris Teeter had gone into a new market in the Washington DC, Baltimore area. We continue to fill in those markets with some very attractive sites. Another chunk of the increase in the CapEx is allocating capital to Roundy's, not only to support the plan they had in place, there were a lot of plans they would have had that, given their financial position, they couldn't have executed on. So there are dollars in there for us to go in and refresh and remodel some of their stores to show the folks in Wisconsin what they can expect going forward. The rest of it is really, we didn't start off as quickly on our fill-in strategies as we would've thought in 2012. It took us a little longer to get projects lined up, and we feel comfortable now that the pipeline of projects we have are starting to come to fruition. And the other thing that's in there for Roundy's is probably a little bit of capital for conversions and the like on systems and so forth.

And on the identical piece, I mentioned that mergers in total, if you look at our guidance we gave, you should assume about 40 to 50 basis points is the impact from the mergers that we've done.

And sorry, what is $4.1 billion to $4.4 billion the new base that we should use and grow a couple of hundred million off of that every year going forward? Can you just provide an update on what the Pharmacy impact is on the comparisons in 2016?

As far as the $4.1 billion to $4.4 billion, we will continue to increase our CapEx, and execute our fill-in strategy so long as we're seeing the performance on the stores we're opening achieve the budgeted expectation so that they become the fuel for the engine. And from a granular standpoint, I don't think I'll get into department-by-department expectations for ID sales.

I wanted to talk a little bit about some of the experiments and formats that you're doing. I mean, obviously, you're looking at how to connect more broadly digitally with your customers. But I think, and maybe I missed a little bit of what you were saying, Rodney, but that they're Main & Vine. Maybe just talk a little bit about what the goal is with that test and where you think that can go?

We think it's always important to be trying different approaches to connecting with customers. As you know, we've had phenomenal success in natural and organic over the last several years, and we really see customers continuing to see that as important. But with that said, there are certain items where the customer still wants to buy everyday stuff. And when you look at Main & Vine, what we're trying to do is to merge those 2 pieces but connect at a local level a little deeper than we normally would.

And that would be a smaller store of 35,000, 40,000 square feet as opposed to what you build for most new Kroger's?

Yes, the store would be probably more likely in the 22,000 to 30,000 square-foot type store.

Okay. And then just at the other end, and I'm assuming that Main & Vine is not aimed at the lowest income customer, I know you've been testing Ruler, what are your thoughts about that format or whatever you need to do to extend the test? All these going to be expanding, I'm not sure how significant it will be, but customer feedback is actually surprisingly good about all these. So maybe you could just talk about your dealing with that lower-end customer.

Yes. If you look at Main & Vine and Ruler, they are definitely targeted to a different customer. So I would agree with your comment completely. On Ruler, we're still trying to understand the economics of the model to get to where it actually performs at an ROIC that we're happy with. We continue to make progress, but we do not think we'd figured it out. We have a tremendous amount of respect for all the Lidl as well. We've spent as much time in Lidl stores as we have Ruler stores over the years. And Lidl has done a great job when you look at a lot of the European countries. So we have a lot of respect for those formats. There are certain customers that we believe likes to shop in that environment. Everything we can tell, it's not all customers. This is a customer segment, and what we're trying to do is to serve that segment. And if you look at Main & Vine, it's the same thing. There's a customer segment that we don't think anybody out there is really serving. And we're trying to identify a model that will serve that customer.

I have a follow-up question on Main & Vine. Do those stores need to be located in areas where the customers are low or middle income, or is it more important that they are near a significant population that isn't very affluent?

Yes. At Main & Vine, we're still in the early stages with only one store open for a few weeks. Our target customers tend to prioritize speed and convenience for dinner and are more inclined toward natural and organic options. This customer base is guided more by these preferences than by economic factors. Thank you, Meredith. I believe this is your last call, and we really appreciate your support over the years. We wish you the best in your upcoming retirement and thank you for your partnership with Kroger and for your friendship.

Take care, Meredith.

I'm going to ask two quick questions. First, regarding inflation, you mentioned protein prices decreasing while produce prices increased this quarter. Can you provide insights on the overall inflation or deflation trends in the center of the store? Any thoughts as we look ahead to 2016? Additionally, can you share any updates on competition? Walmart has been making strides in produce within their supercenters, and Neighborhood Market had a strong comparable performance last quarter. What can you share about the competitive landscape, particularly in relation to Walmart?

When you look at the grocery category from an inflation or deflation standpoint in the fourth quarter, it was slightly inflationary. I would remind you that, for us, we categorize milk and the dairy case overall in the grocery category. If you were to take the effect of lower cost and lower retails of milk out, the grocery department would have been closer to 1% inflation. And relative to the competitive environment, we pay attention to every competitor and what they're doing. As Rodney said, we get into a lot of our competitor's stores. I think a lot of this when we travel around, whether it's domestically or internationally, we probably often get into as many or more competitor stores as our own stores to keep an eye on what everybody else is trying to do. But what we really wake up every day trying to do is to make sure we're focused on our customers and understand what our customers want and try to deliver more on that every day. Certainly, in the background is what the competitive landscape is, but with knowledge and understanding we have of what drives our customers, that is our primary focus.

And one other thing I would just add, and this is a Kroger comment, yes, we've invested a lot in our Fresh departments, especially this year, and we've invested a lot in labor to improve the experience for our customers. I know our customers are giving us good feedback on what we've done. I think every competitor is really working hard to get better, and the customer's telling us, the changes we're making, they like what we do.

And just on the grocery inflation ex milk, anything we should think about for 2016 that would make it different than what you guys saw in 2015?

Yes, I would say that it's difficult to predict. Weather disruptions or various events throughout the year can occur, impacting agricultural yields like corn and wheat, which could affect both our Fresh departments and Grocery categories. When we look at our capability to forecast LIFO, particularly in relation to predicting inflation at the year's end and estimating the units we'll have, the situation remains highly unpredictable. Our goal is to monitor ongoing developments and ensure we meet our customers' wants and needs.

Mike, you've mentioned some of the expense pressures you experienced in Q4, and it seems many of them could be temporary. Could you share what types of expense pressures you anticipate for your business in 2016?

There are always expense pressures to consider. As I mentioned earlier, we anticipate that some of these burdens will diminish over time, likely by the end of the first quarter, such as the chargebacks related to the EMV conversion. We need to improve our shrink control, as this is a clear opportunity. We're currently testing some processes and tools to enhance our success in this area. Additionally, as noted in our labor negotiations, we face pension and healthcare costs that some of our non-union competitors do not, and it's important for us to keep this in mind as we negotiate the contracts that are up this year.

And when you look at the year overall, we would expect to be able to continue to manage for our costs are going down. And we have a ton of process changes that we're working on to take cost out of the business.

Yes. I actually agree, Rodney. Our goal is year-over-year to be able to continue to reduce our total operating costs.

As a percent of sales.

Right.

Great. And my follow-up question, is it possible to get the quarter-to-date trends?

If you examine the quarter-to-date results for identicals, they fall slightly below the lower end of our expected range. This aligns with our projections at this stage. The weather situation continues to impact us, as we have not experienced any weather-related benefits. However, our current position is consistent with our expectations thus far.

Could you discuss the effect of the capital program, particularly this year on the profit and loss statement, as well as cash flow? Specifically, will the increased footage have an impact on EBIT margin excluding fuel? Is this the peak year for that? Additionally, how does this influence the use of free cash, especially in regard to your thoughts on buybacks?

I believe this won't be the peak year, but it will be close. We are planning on 100 major store projects, which is a number we haven't achieved in some time. These projects usually take a while before they start producing positive EBITDA, so I don't think we've reached that point yet. When we build our model, we definitely consider the impact of our capital program, as well as ensuring that we continue to receive contributions from stores that are one or two years old, which should generate significant EBITDA to help us navigate this process.

Yes, but it would be very close.

And how about the cash flow impact?

I believe that when you examine our free cash flow generation over the past few years, we are in a solid position to continue implementing our expanded capital expenditures, maintain a strong dividend, and grow it over time, while also executing a buyback strategy. We anticipate being able to pursue all three initiatives.

When you look at it on a cash flow, we've also made great progress on improving working capital, which is funding part of it as well.

I wanted to ask a bit further on Roundy's. Can you guys just give us a little bit more color in terms of, now you're a month and a half or so in, what have you found to be kind of, let's take the main conventional banners for a second in terms of the amount of work that needs to be done. Is it more kind of assortment? What percentage may need more kind of true remodels or anything like that? And then maybe on Mariano's, anything worth noting that needs to be done versus maybe just looking towards future expansion?

Yes, Mariano's is a very strong brand that supports the foundation we've built and continues to expand. When I think about Wisconsin, it reminds me of Kroger's situation from several years ago, as it is on a similar path that we've followed. There are many learnings we can apply from Mariano's back to Kroger. We are focused on leveraging the synergies of our $110 billion company in procurement and utilizing 84.51° for valuable insights, which we have developed over a long and successful journey. Mike, is there anything else you would like to add?

We invested significant time in the Wisconsin market before proceeding with the merger. I believe every member of our senior management team has visited stores in Wisconsin, and many have visited multiple times throughout the state. We gained a clear understanding of the necessary investments in infrastructure and improvements needed, such as potential store resets or additional hours to better serve our customers. We considered these factors before we could discuss how to restore the market share they previously held.

We have a strong sense of confidence in the team. Roundy's faced significant debt, which limited their financial flexibility to pursue various initiatives. The associates at Roundy's are deeply committed to serving the customers. The senior leadership is dedicated to enhancing the customer experience in the stores. I initially felt optimistic about this area, but my confidence has grown even more than expected.

That is helpful. And maybe just one more quick question here. Going back to Main & Vine, I appreciate the insight from Meredith's question. Just to help us picture things until the people on this call can visit the store, I know it's early, but could you share a bit more about whether there will be a significant amount of Simple Truth and private label offerings, as well as any additional information that would be helpful?

The most noticeable aspect will likely be the significant space allocated to the Fresh departments. Additionally, we aim to support local food suppliers, including local coffee, cheeses, and bakery items. On the grocery side, there will be a presence of Simple Truth products along with a variety of natural and organic options. Health and wellness, cosmetics, and community support are other departments that will also see some expansion. We've utilized our 84.51° insights to inform our decisions on what to stock and how to arrange the store, ensuring that data has guided our approach.

I was somewhat surprised to learn that the quarter-to-date ID number was lower than some may have expected, as I thought the Super Bowl shift would have provided some support. Given your guidance for the first quarter to be stronger, I would have anticipated a better top line performance. Perhaps those assumptions were incorrect, but it seems the impact of unfavorable weather was more significant than we realized. I'm trying to understand how much football and weather influenced the quarter and also seek clarification on how comparative sales can be lower while earnings per share are projected to be higher at the ends of your ranges.

Looking at the current quarter, Super Bowl sales were strong. However, we've noticed that in many areas, especially daily ID sales, we've encountered weather challenges compared to last year. These fluctuations are not uncommon, and it's our responsibility to navigate through them. Our tonnage remains robust, and we feel optimistic about our performance in these areas. The trends we observed in the fourth quarter were positive, particularly when we didn't face weather issues. More customers visited our stores, the frequency of visits per household increased, and the amount of items purchased per transaction rose as well. These are the positive trends we want to carry into the new year. Regarding your question about lower ID sales versus increased EPS, I want to emphasize that sales numbers can be misleading. It's important to consider the product costs, selling prices, and the gross profit generated from them. In the meat department, for example, despite a drop in retail prices, we saw a rise in sales volume, leading to significantly higher gross profits. We anticipate similar patterns will emerge in various categories over the year. For instance, milk contributed positively to our overall profits this year, despite being a drag on reported ID sales. Overall, milk remained a significant source of profitability for us.

Yes. And remember, the other comment I made earlier is we would expect inflation to be lower in the early part of the year and higher at later part of the year. But when you look at inflation overall, we've operated our business in low inflation and high inflation, and we've been successful in both environments.

Just to stick with Roundy's for a minute. How are you thinking about the timeline of just integration and investments throughout fiscal '16? And have you started to roll out things like price investments and store improvements yet? And given the volatile deflationary environment, have you considered delaying price investments in certain categories?

We have a timeline planned for working with the Roundy's team, especially in Wisconsin. While I won't disclose the specifics of that timeline, you should know it's not limited to just 2016. It will resemble our overall investment strategy at Kroger and will be comprehensive over a longer period. We believe there’s nothing that would make us postpone our plans for Roundy's due to the current market conditions. As Rodney mentioned, we remain as optimistic as we were six months ago when we first evaluated this situation. It's only been a couple of months since the deal closed on December 18, so it’s really been about 2.5 months. There were no disruptions for our team or theirs during the holiday season. It was only after the new year that we began meeting individually with them to devise plans and strategies. We are very confident in the direction our plans are taking moving forward.

We've done a ton of work on research and working with the Roundy's team to try to understand the customer and understand the customer wants and needs. And the plan will actually be starting to execute against our understanding of the customer wants and needs. And some of it will be test and some of it will be to go do it.

Just wanted to go back to the guidance and the inflation outlook for a second. If I'm hearing you correctly, so the ID guidance 2.5% to 3.5% includes the 40 to 50 basis points drag from Roundy's. So if you take that out, you're kind of in that 3% to 4% range, which is just what you guided to last year, and also you'd also guided to a 1% to 2% inflation outlook last year. So am I right to think that it's really the same but that maybe the products within the categories are a little bit different and the pace may be accelerating throughout the year instead of decelerating throughout the year? Or what's really different, I guess?

You did a better job of explaining our point. We believe that early in the year we are experiencing some inflation effects from last year that were higher, and this year they are lower. As we progress later into the year, we anticipate a slight increase in inflation, particularly considering the dairy prices that Mike mentioned. We will soon begin to see the impact of lower dairy prices among other factors. Your observation is completely accurate regarding all those aspects.

In terms of the impact from Roundy's this year, should we expect it to continue for a couple of years? What would be a reasonable timeframe to anticipate it becoming less of an issue, even if it doesn't align with the rest of the base?

If you consider our models, we think it would take 2 to 3 years before it resembles a typical Kroger division. In our merger model, that is the timeframe we projected. We do not see it differently today. Mike, do you have any other insights to add on this?

I agree with you. We won't move too fast or too slow. If we have a preference, it will lean towards being a bit slower rather than too fast because we've observed that when companies try to move too quickly, they often don't achieve long-term success.

Got it. And just wanted to maybe end with just a question on Simple Truth. I think you said it was growing at an incredible rate. I think it's been in the double-digit range in the past. Just what are you seeing there? What are you expecting from Simple Truth in 2016? I think you mentioned some new categories that have been launched in the recent year. How are you thinking about even more categories? Or what are you expecting, really, from that in 2016?

Yes, it has been incredibly strong. As I mentioned, it was a $1.5 billion brand for us last year. And if you recall, three years ago, we launched the brand. We're seeing very good early results. We're really positioning it as a lifestyle brand rather than just focusing on food, and the additional categories we've introduced have fostered a strong initial customer connection. We see continued growth opportunities for the brand, likely even stronger than we initially anticipated. It's exciting.

Before we end today's call, I'd like to share some additional thoughts with our associates listening in today. As you know, a lot of our associates listen into the call each quarter. Our strong results in 2015 are the result of your hard work and dedication to our customers, each other and the communities that we serve. I want to thank each of you for what you do every day to make a difference for our customers. Sometimes even simple things make someone's day brighter, like when Kroger associates in Tennessee worked with a community partner to deliver flowers to seniors, or when our Fry's team celebrated a special customer's 101st birthday at a Tucson store. Just awesome. Our customers appreciate your thoughtfulness. Keep up the great work. Across the country, we continue to listen to our associates' feedback. In addition to solid pay, healthcare, pension and other benefits, you told us that work-life balance is important, too. That's why we are introducing advance notice work schedules for associates working in our stores. This means associates will have their work schedule further in advance every time. This is designed to help you plan and manage other important things such as school, family and other events and responsibilities; 14 of our retail divisions have introduced this or are doing so now. And several others will have launched by the end of the first quarter. We work closely with our union locals who introduced this. So far, feedback from our associates have been very positive. As always, thank you, again, for your continued commitment to Kroger and our customers. That completes today's call. Thanks for joining.