Kroger Company (KR) — Q4 2017 Earnings Call Transcript

Thank you, Carrie. 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 will be available on our website at ir.kroger.com. After our prepared remarks, we look forward to taking your questions.

Thank you, Kate, and good morning, everyone, and thank you for joining us today. With me to review Kroger's fourth quarter and fiscal 2016 results is Mike Schlotman, Executive Vice President and Chief Financial Officer. As we all know, sometimes are just more challenging than others, and last year certainly didn't end the way we expected at the start of the year. But 2016 still had its bright spots. Of course, our associates and our customers are always a bright spot, and I'm so proud of this team for their continuing focus on taking care of our customers each and every time they interact in our stores. Despite the challenging operating environment, our team pulled together to deliver some results that we should take stock of. Over the past year, the Kroger team delivered our 12th consecutive year of market share growth; overall tonnage growth; record-high unit share in our Corporate Brands portfolio, which was led by another blockbuster $1.7 billion year for Simple Truth; a strategic merger with specialty pharmacy leader, ModernHEALTH; and reached an agreement to merge with the world's greatest purveyor of specialty cheese, Murray's Cheese; and we created more than 12,000 new American jobs in our stores and hired more than 9,000 veterans and military family members. That's a lot to be proud of. We're obviously disappointed with our identical supermarket sales number in the fourth quarter and our performance on several other KPIs, including FIFO operating margin and return on invested capital, which were driven by the deflationary environment. Kroger is always focused on executing against our long-term strategy. We are lowering costs to invest those savings in our people, our business and the technologies to position Kroger to deliver the value proposition customers are seeking today and in the future. One example of our efforts to control administrative costs is making the very difficult decision to extend the voluntary retirement offer for certain nonstore associates that we announced in December. Approximately 2,000 nonstore associates were eligible for the offer, and at this point, we estimate approximately 1,300 will accept it. As our customers change and evolve, we are taking steps to meet them where they are and more importantly, where they are going. We're making meaningful investments in digital. We feel great about these investments because customers tell us they are important to them. We have aggressively added more than 420 ClickList and ExpressLane locations in 2016, bringing our total online ordering locations to more than 640. This effort was based on learnings from our merger with Harris Teeter. We are also experimenting with ways to solve the last mile equation. We're testing with Uber delivery in several locations with plans to expand in 2017 where our customers can order through ClickList and choose to have their groceries delivered by a local Uber driver. We have a couple of other home delivery tests as well. We're building our digital experiences today, so that customers can engage and shop for anything, anytime, anywhere with us in the future. The excellent service they get from our associates in the stores will carry over seamlessly to the digital platforms whether shopping online, finding great promotions and recipes that are personalized and relevant to them or downloading one of the more than 1 billion digital offers loaded to shopper carts each year. More and more customers are connecting digitally with Kroger. We are leveraging refined customer insights from 84.51° as well as years of online shopping experience from both Vitacost.com and Harris Teeter to develop a sophisticated understanding of our customers' behavior when shopping with us online, in-store and both. We're utilizing this rich data set to make decisions about where the right locations to offer ClickList, what are the right assortments and promotions to engage customers online, and how can we offer the quality and convenience online that customers have come to expect from a Kroger brick-and-mortar location. We are also keenly aware of growing customer trends like health and wellness and high-quality fresh and prepared foods. Our initiatives in these areas are designed to deliver convenience to our time-starved customers and will continue to be a big focus of both our capital and Customer 1st investments. Now we could stop all of these investments given the headwinds our industry is facing. That might make our results look better today, but we are playing for the long term, and that requires being deliberate and determined. There are a lot of companies out there right now investing in digital and e-commerce in opportunistic ways that will likely never create value for their shareholders. A core strength of Kroger is our ability both to create shareholder value today and to make meaningfully strategic investments for the future. We remain determined to execute on our strategy, and we are deliberately investing to grow and create long-term value for our shareholders. Our Corporate Brands business was another real bright spot in 2016. Our brands are in more homes than ever before. In fact, our customers fill their carts with more than 1.25 million Corporate Brand items every hour. We are incredibly proud of the quality of our Corporate Brand products. Our quality is only getting better, and that showed clearly in the Corporate Brands' performance last year when we sold a record number of units and in the fourth quarter, when Corporate Brands had an all-time-high unit share of 29.2%. Simple Truth grew at an impressive rate again in 2016, reaching total sales of $1.7 billion. Simple Truth Organic accounted for more than $1 billion of that figure last year, and we still see more growth ahead in our Simple Truth and Simple Truth Organic lines. In fact, we've begun offering Simple Truth to even more customers throughout the United States by making it available on Vitacost.com. Today, you can find online and conveniently ship to home many of our Simple Truth food, snacks and supplements as well as household and personal care products. Interestingly, New York City is already the #2 Simple Truth online sales market for us, even though we don't have physical store presence there. As you know, we always build our business plan assuming the environment is going to get more competitive the next year and not less. We also don't run a business model that relies on inflation returning. Rather, we proactively make the changes we need to remain competitive well into the future. Kroger's core strengths remain our most valuable assets. On the people front, we have great associates, an effective and experienced management team and a deep bench of future leaders; on the financial front, a strong balance sheet and the flexibility to create sustainable shareholder value; and on the consumer front, deep customer insights through our data analytic experts at 84.51° and above all, an unwavering commitment to putting our customers first. What also remains unchanged is our commitment to long-term growth that investors can count on. Over the last 5 years, Kroger's annual net earnings per diluted share growth rate was 16.3%, excluding one-time items. Over the last 3 years, it was 14.2%, excluding one-time items. We remain committed to delivering our long-term net earnings per diluted share growth rate of 8% to 11% plus a growing dividend. And now Mike will go into more detail on our fourth quarter and fiscal 2016 results.

Thanks, Rodney, and good morning, everyone. Kroger's market share grew for the 12th year in a row. Our consistent market share gains drive both top and bottom line growth and generate lasting shareholder value. We report our market share annually and look at it the way customers would look at it: where they spend their money. According to Nielsen POS data, Kroger's overall market share of the products we sell in the markets where we operate grew approximately 20 basis points in 2016 with 14 of 22 markets up, 2 flat and 6 markets down. Starting in 2017, we plan to begin using IRI point-of-sales data to measure market share. While we expect there to be some differences in share reporting between Nielsen and IRI, we expect those differences to be minimal. Regardless of the source, we use market share data as a directional measure and not a specific one. It is also worth noting that market share data is calculated based on total sales and not ID sales. Looking at ID sales, deflation was the primary driver of our negative results for the quarter. Inflation-adjusted ID sales were positive in the fourth quarter. Deflation, excluding fuel, persisted at 1.3% compared to 1.1% in the third quarter. During the quarter, we saw a decline in pharmacy inflation, an acceleration in produce deflation and a slowing in grocery deflation. Another headwind to ID sales was our capital program. Over the last 4 quarters, we relocated or expanded 35 strong performing stores, taking them out of our identical supermarket sales calculation. This caused about a 70 basis point headwind to ID sales in the fourth quarter. Tonnage was positive during the fourth quarter, and we continue to focus on the areas of highest growth like natural and organic products, which, by the way, hit nearly $16 billion in sales in 2016 in areas where we are saving customers' time such as ready-to-eat and ready-to-eat meal solutions. We always give a little insight into our ID sales data. Visits per household and price per unit were down in the fourth quarter, but those were slightly offset by basket size and household growth. Loyal households continue to grow at a faster rate than total households, which was true for both the quarter and the year. It is interesting to note that loyal households had slightly positive ID growth in the fourth quarter. Operating, general, and administrative costs as a rate of sales, excluding fuel, recent mergers and a $30 million contributions in the UFCW Consolidated Pension Plan in the fourth quarter of 2015, declined by 11 basis points. Rent and depreciation, with the same exclusions, increased by 24 basis points. While this result was better than the third quarter, we can and will do better. We are working diligently to pull costs out of the business and improve processes to lower costs through the rate of sales and deliver value to customers. Now for an update on retail fuel. In the fourth quarter, our cents per gallon fuel margin was approximately $0.172 compared to $0.169 in the same quarter last year. The average retail price of fuel was $2.18 versus $1.92 in the same quarter last year. For 2016 in total, we were at $0.171 for the year and $0.174 in 2015. Our net total debt to adjusted EBITDA ratio increased to 2.31x compared to 2.08x during the same period last year. This result is due to the merger with ModernHEALTH and increases in working capital. The increase in working capital is driven by higher inventory in 4 locations where we opened new or expanded distribution centers. When doing this, we duplicate inventory for a period of time to ensure a smooth transition. Also, accrued liabilities are lower due to lower incentive plan payout accruals. This portion will reverse itself in the first quarter when incentive plan cash payments will be lower. It is worth noting that over a longer-time horizon, we do expect our net total debt to EBITDA ratio to grow. This is because we continue to work with our unions to modify pension plans. We continue to negotiate restructuring of troubled multi-employer pension plan obligations to help stabilize associates' future benefits as we did in the second quarter. These restructurings do not change the total obligations of the company because the debt we had is offset by a reduction in the amount of our off-balance sheet multi-employer pension plan obligations. In 2016, Kroger used cash to repurchase $1.8 billion in common shares, paid $429 million in dividends, invested $3.6 billion in capital and merged with ModernHEALTH for approximately $390 million. Capital investments, excluding mergers, acquisitions and purchases of leased facilities, totaled $3.6 billion for the year compared to $3.5 billion last year. The flexibility to return value to shareholders is a core strength of our financial strategy. Return on invested capital for 2016 was 13.09%. This result was affected by current year results and recently merged companies. We are committed to growing return on invested capital over the long term. I will now provide a brief update on labor relations. We recently agreed to a new contract with the Teamsters for our Roundy's distribution center and with the UFCW partner, North Carolina clerks and meat associates. We are currently negotiating contracts covering store associates in Atlanta and Michigan. Our objective in every negotiation is to find a fair and reasonable balance between competitive cost and compensation packages that provide solid wages, good quality affordable health care and retirement benefits for our associates. Kroger's financial results continue to be pressured by rising health care and pension costs, which some of our competitors do not face. Kroger continues to communicate with our local unions, which represent many of our associates, on the importance of growing Kroger's business and doing it profitably, which helps us create more jobs and career opportunities and enhance job security for our associates. Turning now to our guidance for fiscal 2017. We anticipate identical supermarket sales, excluding fuel, to range from flat to 1% growth for 2017. We expect net earnings to range from $2.21 to $2.25 per diluted share, including an estimated $0.09 benefit for the 53rd week. We anticipate the operating environment in the first half of 2017 to be similar to the second half of 2016. Our results in the second half of '17 should show improvement as we cycle the previous year. We recognize that this is an unusual year, and that's why we are going to provide a quarterly cadence relative to last year, rather than compare it to our long-term guidance rate as we've done in the past. In fact, for the first quarter, we're going to give you an earnings per share range, which is not something we plan to do over the long term, but we think it's important to be very clear about how we think the year is going to progress. For net earnings per diluted share, we expect the first quarter to be in the $0.55 to $0.59 range, the second quarter to be slightly up compared to last year, the third quarter to be up strongly compared to last year and the fourth quarter to be up high single digits compared to last year without the benefit of the 53rd week. Our guidance for the year excludes the estimated cost of the voluntary retirement offer but does include the anticipated expense savings, which we will reinvest in the business. Over the long term, we are committed to achieving a net earnings per diluted share growth rate of 8% to 11% plus a growing dividend. We expect a LIFO charge of $25 million for the year. We expect capital investments, excluding mergers, acquisitions and purchases of leased facilities, to be in the $3.2 billion to $3.5 billion range for 2017. Capital expenditures in 2017 will be focused on sales-generating initiatives, remodels, upgrades to our logistics network and merchandising systems and digital and technology initiatives. As we invest more in these areas, our investment in stores will be reduced. And we anticipate Kroger's full year FIFO operating margin in 2017, excluding fuel, to decline approximately 10 basis points compared to 2016 results.

Thanks, Mike. We've never been more determined about our future. We continue to focus on gaining the larger share in the $1.5 trillion U.S. food market. We are working on process changes to lower costs and use those savings to invest in our people, our business and technologies that will enhance Kroger's competitiveness in the future. We will continue to deliver for our customers today while setting the company up for our next phase of growth in Customer 1st innovation. We know that when we deliver for our customers, we create long-term value for our shareholders. Now we look forward to your questions.

So Rodney, let me start with ClickList. Generally speaking, what's the rollout plan for '17? Or do you want to study the 420 a bit more? And then, what have you learned from the 420 you did last year in terms of driving new customer acquisition and building share of wallet with loyal households? Anything you can share on that?

If you look at the 2017 plan, we expect to open fewer locations than we did in 2016, but this isn't because of a lack of enthusiasm for ClickList. The challenge comes from finding stores with the necessary space, securing zoning changes, and addressing other requirements. One surprising insight for me, though perhaps not for others, is that customers continue to shop in-store even after becoming ClickList users. They may purchase some items through ClickList, but they still visit the store. In more established locations, we begin to see financial benefits that indicate we're indifferent to whether customers shop in-store or online. This trend is more evident at Harris Teeter than at Kroger among the early openings. We still face challenges and will continue to do so in 2017 due to the volume of new openings and those launched late in 2016, but these locations are maturing, and we're reaching a point where we have no preference regarding how customers choose to shop with us.

Okay. Shifting focus to some financial questions. There seems to be slightly more pressure on FIFO gross margin and fuel in the fourth quarter compared to previous quarters. What caused this? Additionally, regarding the first quarter earnings, there is a significant difference from the rest of the year. I'm curious if this is due to something unusual, such as pension issues or shrinkage, or what might be influencing it.

I'll let Mike discuss the quarterly details. Looking at the gross, it's really a mix of several factors. One is that the pharmacy continues to be a challenge for our gross margins. Additionally, we have become more promotional and aggressive with our pricing due to softer sales. So it's really these two aspects combined. Mike, I'll let you address the quarterly comment.

Sure, John. As I mentioned in the prepared remarks, we anticipate the first half of the year to mirror the conclusion of 2016, and it's simply an extension of the current trends during the first 16 weeks of the year. We have some clarity on the programs that Rodney highlighted. Furthermore, as we continue to achieve unit growth, we expect to see sales recovery later in the year.

I guess I'd just ask, what you guys are seeing in the competitive environment, to start? Clearly, there's at least some chains that are putting up slightly better comps or better comps, and obviously, versus Nielsen, it looks like you're gaining share. But I wonder what you're seeing, and if you feel like there's a certain customer you may be losing or if there is something you could comment on markets where you're competing with more online challengers. Just any color there in terms of where you think some of the traffic may be headed.

When considering the competitive landscape, most of the changes appear to stem from competitors operating more effective stores, and it's clear they are doing so. Many have discussed this, and there’s no indication that it is shifting online. Therefore, the primary factor seems to be competitors enhancing their store operations rather than other influences. Mike, do you have anything to add?

No.

Can you provide insight into whether the customers are from the lower-end market, higher-income, or somewhere in between?

One of the comments that Mike mentioned in his prepared remarks was that while we had positive identicals with our loyal shoppers, the issue seems to lie with customers who are not very loyal to us. This is more related to value shoppers or those on a budget, rather than the mainstream customers who appreciate the experience and freshness of our products along with other aspects.

I understand. It seems safe to say that you're not seeing much difference in larger, denser, and more affluent cities where there are more home delivery options. I have one more follow-up question after this.

Yes. We're really not seeing it from that aspect at all. And the other thing I think is important to note, we aggressively increased the amount of capital we were spending and increased the number of stores that we were relocating and remodeling, and Mike mentioned it. But if you look at about 35 stores we relocated or expanded, which took them out of the identical calculation, which actually hurt our total company identicals by 70 basis points. So I think that's the other thing that's important to remember.

That's helpful. For my last question, could you provide some insight on the impact of the early retirement offer on operating general and administrative expenses? Can you quantify that and possibly explain if it's ramping up throughout the year? Is that why the year seems to be more weighted towards the second half than we expected?

Sure. As mentioned in the prepared remarks, as we finalize the expenses, they will be reflected in the first quarter. The offer is not fully closed yet, so we won't have precise numbers on how many people accepted it until next week. There will be different timelines for when people retire, which will happen throughout the year. Please remember, as stated in the prepared remarks, that we do not include the expense of the plan in our estimates. We do account for the savings in our plan, which are part of what we aim to invest to enhance the value we provide to our customers.

So just maybe sticking with the guidance here. Is it fair to assume that gross margins will be down in a similar fashion for the first half of this year just kind of given Q4 results and commentary for the full year being down 10 basis points? And then, I guess, for the back half of the year, that would imply, I would assume, some gross margin expansion, to some degree. I get maybe Q4, but can you help us understand why Q3 should be implying 20%-plus EPS growth? And lastly, how does deflation or inflation for that matter play into 1H versus 2H?

Yes, there are several factors at play. Looking back at the first quarter, we are comparing against one of our strongest quarters from the previous year, where we achieved high-teens earnings per share growth and had a 2.4% increase in comparable store sales last year. This makes our comparisons particularly challenging. Additionally, I won’t provide a breakdown of gross profit by quarter as we focus on comparable store sales and operating profit. However, we plan to continue investing in the value we provide to our customers, which we believe will help drive positive sales growth again.

Just on the guidance, just to clarify 1 or 2 things. So guidance does include buybacks, correct?

It does.

Okay. And I would assume that maybe given that you have more free cash flow this year than last that the priorities will be skewed to buybacks?

We did not give any specific guidance on the level of buyback we'll do. It'll obviously be dependent on market conditions as well as our board being willing to give us incremental authorization. We will run out of our existing authorization here in the very near term. We've been buying shares since late last year and all through so far this year, off of a grid established in the 10b5-1 plan. So it'll be somewhat predicated on our board giving us incremental authority.

Okay, that's helpful. Sorry, were you going to say something?

Yes. And the other thing that Mike mentioned in his prepared comments, if you look at the range of estimated capital investment in '17 is lower than '16 as well.

Right. So okay, with that then in mind, I guess, when I look at your guidance and I try to kind of back in the operating profit growth, it does look like you can get there but with some pretty meaningful offsets to SG&A in terms of SG&A per week.

There are numerous initiatives underway aimed at reducing our overall business costs across various areas. We can improve in areas such as shrink, store growth productivity, and in-stock levels. One advantage of being part of a company as large and diverse as Kroger is that we can observe that every initiative we pursue already has at least one large group of stores successfully implementing it. We don’t need to rely on competitors to guide us, as we are already achieving strong results with our own stores. As we enhance these results across a broader range of locations, we believe this will provide additional support for our continued investment in our core priorities.

I have 2 questions related to deflation. First, I wanted to get a sense of what you guys are assuming for deflation or inflation this year and whether you expect to return to positive growth or positive prices later this year. And then secondly, related to that, we're hearing more and more announcements, whether it's Target, Walmart and others, just talking more about price investments. Do you expect, I guess, the deflationary impact of competitor actions to be potentially more this year than what you've seen in recent years?

Yes. I think you're doing what a lot of people do, including this morning when I was on CNBC of mixing inflation and deflation at cost and retail. When we talk about our inflation or deflation, it's our product cost inflation or deflation. You kind of threw in what's going to happen to retail product cost inflation or deflation. Overall, we do think that we'll return to a slightly inflationary environment in the back half of the year. It is interesting to note that despite the fact that we pretty much had, I think Rodney was talking even before we went on the call, it's 9 quarters in a row of deflation.

Of declining.

Of declining inflation/deflation. It's been obviously fairly persistent. Despite that, even though we had a lot lower pharmacy inflation in the quarter, that still generated a very large LIFO charge. It was offset by other areas that had deflation. So it's a completely mixed bag. Even in the fourth quarter, grocery inflation over the course of the quarter was basically half of what it was in the third quarter. But produce inflation went up 600 basis points or deflation expanded by 600 basis points. It was over 7% deflationary in the quarter. So it's a huge mixed bag of what's out there, and I'm not going to pinpoint an exact number because I've proven over the years that I can predict a totally inaccurate number on inflation or even LIFO. But we continue to manage through the process that we have.

As we mentioned in our prepared comments, we do expect the market to get more competitive. We've assumed that for a long period of time. We continue to see great opportunities for process change in taking costs out of the business. And the last couple of calls, I've mentioned that we're definitely down on those. In the fourth quarter, we made more progress on those than we did in the third quarter, and you can begin to see some of those things paying some fruit. As Mike mentioned, we're starting to cycle actual deflation. We think the first part of the year will still look an awful lot like third and fourth quarter. But once you get to the third quarter, you start cycling some of those strong deflationary numbers and wouldn't see it. The other thing that I think is important to note, if you look at the cost of goods, there's all kinds of things that we are doing to finance and pay for some of that through cost of goods savings and other pieces of the business as well.

I would like to understand more about the promotional environment, specifically regarding promotions by categories. Is it accurate to say that the categories experiencing the most deflation are also receiving the most promotions? Additionally, can you provide more details on the expected comp cadence, along with the helpful EPS guidance broken down by quarter?

Yes. For promotions by category, we rely on our 84.51° insights, which vary by customer. Some promotions are personalized and handled on a one-on-one basis. Consequently, if you were to check the retail price in-store, you wouldn't notice them since these offers are directed at specific customers, often through coupons. The approach encompasses a variety of strategies as different customers respond to promotions in unique ways. Thus, the offers are becoming increasingly personalized based on the preferences of each customer, featuring a combination of national brands, corporate brands, fresh products, and others. It's truly a diverse mix. Mike, I’ll turn it over to you for the comp by quarter.

Yes. If you'd repeat your question, I want to make sure I'm answering the question you asked and not what I have in my head.

Yes. Could you provide some insight on how your full year ID sales guidance breaks down on a quarterly basis? Perhaps any updates on the current situation and your thoughts moving forward for each quarter would be helpful.

Well, the comment about we expect the first quarter to look a lot like the first quarter, I guess, would be a little bit of code for ID sales continue to be a little bit negative right now, which means we expect ID sales to recover as we go throughout the year. And that's going back to the questions that we've gotten on the cadence of how we expect to see the underlying EPS as that is predicated on an improvement in ID sales throughout the year.

Okay. Perfect. And if I could just get a quick follow up in there. Just any updates worth highlighting with your partnership with Lucky's?

Bo and his team in Colorado are doing some impressive work in their stores. We're excited about the sales figures from the new locations they've opened. Bo is reviewing his business approach in those stores, adapting as he learns, making changes to his strategy by discontinuing unproductive practices and trying new ones that seem successful. We are very pleased with Bo and his team's performance and remain optimistic about this format.

The 70 basis point headwind from removing some of these high-performing stores from the ID sales base, I'm just trying to figure out. I don't think you've divulged that number in the past very often. Maybe you have, and I missed it. But how does that compare to what you saw in recent years? I'm just trying to figure it out. Is it unusually high impact, because you didn't do necessarily more relocations than you normally did? So was it just that the stores were so much better and taking them out of the base just hadn't that much more of an impact? Or maybe 70 basis points is similar to what you normally experienced. Just trying to get a sense there.

We haven't discussed this much, but when you have 3% or 4% identical sales and a solid capital program with 30 to 50 basis points of headwinds from sister store impacts, the effect isn't as significant as when you're close to a negative 0% ID sales. We mentioned in the third quarter that typically, it's around 20 to 30 basis points. Currently, it's a bit higher due to our increased store activity. A few years ago, our capital spending was under $3 billion, and this year it exceeded $3.5 billion. We've increased our capital expenditure, opened more new stores, and are expanding or relocating some strong stores. These have been performing well but haven't been part of our identical store base long enough yet.

So that's helpful. Just to clarify, it seems you're talking about a headwind of 40 to 50 basis points compared to what you typically experience from this effect, and...

And when you look at the number of stores we did over the last year compared to 2 or 3 years ago, it's about double, major store projects.

Looking ahead, can we expect to see about a 70 basis point impact over the next three quarters? How should we consider this in the following years? Is this an unusual effect, or do you believe you will continue relocating and expanding some of your higher-performing stores in the future?

Well, as those stores are open long enough, they will flip back into our ID store base, and we would hope they continue to perform the way they are and be a tailwind to ID sales. And as I said in the prepared comments, we are taking capital down from what we would originally plan to spend in 2017 because we've been guiding folks to think about 2017 and even '18 to be a similar spend level that we did in '16. And most of that will come out of new store and will continue a strong remodel program. So when we remodel a store, it does not come out of IDs. It's only an expansion or a relocation or a net new that winds up affecting it.

Yes. I just want to get a better understanding of the cadence of your tonnage growth and your nonfuel IDs during the fourth quarter. If you guys could just kind of talk about what happened after early December when you guys were seeing or expecting trends to be slightly positive. Just want to try to get some color there.

If you look at during the quarter, it started out slow when we had the earnings call. It actually during the holidays improved. And in January, it slowed down again. So if you look at during the quarter, that's kind of a cadence within the quarter. I always hate to use weather as an excuse, but we had absolutely no weather benefits this year. Now the negative of that was we had no weather benefits. The positive is next year, if we have any weather at all, we cycle that.

Yes. And if you look at the prior year, we didn't have much weather either. And in fact, the only one big weather event we had was the last weekend of the year in last year's numbers. So our year ended against the only weather event we had in the prior year with no weather this year.

Yes. And then tonnage growth cadence remained positive, but it's because of the deflation. But obviously, around the holidays is stronger than the 2 sides of the holiday.

Okay. And then just, Rodney, back to your earlier comments that you guys were a bit more aggressive on your pricing and promotions during the quarter, was that kind of a decision based on some of the insights that you're getting from your customers that you decided to make greater investments in price versus maybe investing in other areas of the store? And were those concentrated in any specific regions in response to the competitive environment out there? Just any color there would be great.

Yes, they were very broad-based. We would use our insights to determine our approach.

Just a follow-up on the competitive environment. I think you mentioned earlier you're seeing it from competitors running better stores. What about in the form of pricing or promotions? Are you seeing major changes there since the quarter ended?

I wouldn't say changes since the quarter ended. I would say that we definitely are seeing some pricing in certain pockets. I've never tried to calculate it on a percentage basis, but any point in time, you will always have competitors doing things from a pricing standpoint.

Great. And just a follow-up on some things about your delivery initiatives. You mentioned you'll be expanding Uber in 2017. Wondering if you could speak to that? Is that something that's been driving incremental sales and profitability? And how many stores are covered by Uber at this point in time? And how many do you expect in the future?

Yes, it's a relatively small test and we are still in the early stages. As I mentioned earlier regarding ClickList, it presents a challenge, but as it develops, we will be neutral in how customers engage with us. At this time, we are not ready to disclose specific numbers for this year, but we are focused on scaling it appropriately if it proves to be beneficial.

If I could sneak one in, just related to that, Vitacost, it sounds like you've expanded it with Simple Truth. Just wondering about your future plans to expand beyond Simple Truth into other categories? And is this a preferred delivery method versus Uber?

Well, we would look at all the delivery options together and really leaving it up to customer how they want to engage with us. We'll continue to add items to Vitacost that make sense, and the Simple Truth product is obviously the initial part of that.

Just 2 quick things. Thanks for the color on the first quarter trends to date. And I was just curious or maybe, Rodney, can you remind us, do delayed tax refunds, are they having an impact on your business? And maybe give us some history on that. And then I have a follow-up question.

Yes. On the delayed tax refund, I don't know, Mike. I really don't have very much insight into it. If you look, most of our products aren't as discretionary as some of the other retailers that have talked about it.

I agree with Rodney's perspective. From my experience at Kroger, I don't believe the timing of tax refunds significantly impacts us like it does for others. I have never heard anyone say they're looking forward to tax refunds to boost sales, which suggests it doesn't play a major role in our business.

Yes. And the only exception would be like in Alaska where you get paid to live in Alaska, and it's based on the size of the check, based on fuel profits or gasoline profits for the state.

From the pipeline.

Got it. That's helpful. Then just the other question, the Roundy's integration, can you just give us maybe more update on that? And was it a drag to the fourth quarter? And when could Roundy's become a year-over-year sort of tailwind for you guys?

We remain very pleased with the efforts of Michael Marx and his team in Wisconsin, as well as Don Rosanova and his team in Chicagoland, regarding the two banners. Mike and his team have completed the first round of store remodels and customer offerings. They are now in the second market finishing the remodels, after which we will launch a full campaign there. If we continue to observe a positive customer response reflected in both ID sales dollars and units, we expect to expand this initiative throughout the state. In terms of ID sales, the impact on this quarter was minimal, certainly less than earlier in the year.

Yes. Rodney, could we start, I just have a big-picture question I mean, if we think back over the years at the analyst meetings that you have had, you used to put up a slide showing the gap between your ID growth and your peers, highlighting, well, it's really been very remarkable, consistent share gains. And as we think about the fourth quarter now and you think about the results that some other players are putting up, specifically Walmart, is a good example, it just doesn't seem like that type of share gain is continuing. And I just wanted to get your thoughts on why you think this momentum's changed and importantly, how is it impacting the way that you're thinking about strategy and specifically the cadence around price investments going forward.

I will address the question in a broader context rather than focusing on just one competitor. It is evident that several competitors are enhancing their operations and running more effective stores, and this observation extends beyond just Walmart. In response, we are significantly committed to improving the customer experience. We are becoming more proactive in changing processes and reducing costs wherever feasible, which enhances the competitiveness of our business model. Regarding our actions, we are concentrating on these areas because we have realized that while some customers are price-conscious, many simply desire a fair price. They place a strong emphasis on having fresh produce, fresh meat, and an excellent shopping experience, areas where we hold competitive advantages. We will maintain our focus on these aspects, supported by our store teams and associates across the organization.

As we think about the industry now going forward, it certainly seems like the next 5 years could certainly be more challenging than the last 5. Just given what we're hearing from competitors around what they're doing from a pricing perspective, you've talked about players being better at actually just running stores. We've got online to deal with. We've got hard discount to deal with. Do you think that it makes sense that the industry could enter another wave of consolidation? And how are you thinking about M&A versus organic store growth now from here?

I have been in the industry for over 30 years, and I consistently believe that the upcoming five years will be more competitive than the previous five. I fully agree with that perspective today. We are confident that these next five years will present more competition because only the strongest will thrive. We are excited about the growth opportunities available to us. I categorize these opportunities into two areas: operational improvements within our existing business and exploring the $1.5 trillion total food market. We are becoming increasingly aggressive in the fresh food sector, including prepared meals and convenient options for dinner, which continue to perform well for us. We recognize this as a significant growth opportunity, and we currently have a clearer view of the potential than we have of our ongoing initiatives. During our recent Investor Meeting, we showcased various tests we are conducting, and we continue to enhance that segment of our business. We have been pleasantly surprised by customers’ willingness to dine in our stores, which we see as a chance to expand our business and establish a new growth platform. So, both of these aspects contribute to our strategy. And M&A, any more or less important for you going forward, do you think? I would say it's kind of the same. If the right opportunity became available, we would be very interested. However, we haven't changed our approach, as we have designed a model where mergers and acquisitions are not required. If the right opportunity arises, we would have discussions, but we're not actively seeking to make any changes in that regard.

My question was previously asked, so I'll pass it on to someone else.

I wanted to ask a couple of questions about recent volume trends. There seems to be a lot of industry data indicating weak volumes, particularly in center store categories. I'm curious about your assessment of whether you are experiencing similar unexpected weakness in volume, especially in the current quarter. Do you think this relates to shifts in channels, changing consumer behavior, or perhaps is it a consequence of the ongoing deflationary environment?

We continue to observe that consumers are increasingly spending in the fresh departments. There is a noticeable shift in sales from the center store to the perimeter, which has been ongoing for a long time. While the center store has experienced long-term softness, there is still tonnage growth occurring, largely driven by natural and organic products. It's important to note that very few public companies highlight this growth separately. For our company, our total natural and organic business is approximately $16 billion, with our Simple Truth brand contributing $1.7 billion, representing over 10% of that category. Despite the challenges in the center store, we have successfully gained market share while also evolving the product mix within that area.

And different category reinventions with coffee and pet and baby where we've totally redone the look and feel of those departments for our customer.

Got it. That's helpful, and then, I guess, just lastly, the shift to IRI, is there any reason or anything you can tell us about kind of making that shift from Nielsen to IRI?

Well, we announced earlier in the year a new relationship with IRI that we didn't talk about a whole lot, and it's really just furthering that relationship with them. And they have a few nuggets of data that Nielsen may not have that we think is going to be helpful to us overall as we look at our volume in the overall food industry, not just the grocery store industry.

Before we end today's call, I'd like to share some additional thoughts with our associates listening in today. Thank you for continuing to connect with our customers every day. They are rewarding us with their business. With your help, we gained more of the market and improved our customer satisfaction scores in 2016. Thank you for your hard work. For those associates who are choosing to accept the voluntary retirement offer, thank you for your contributions to Kroger. I know for some the decision to retire was not an easy one. You should know Kroger would not be the company it is today without your years of dedicated service. Each of you has made a difference in the lives of our customers, our communities and each other, and we are very grateful for all of your contributions. Thank you.