Kroger Company (KR) — Q4 2018 Earnings Call Transcript

Thanks, Gary. 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.

Thank you, Kate. And good morning, everyone, and thank you for joining us. With me to review Kroger's fourth quarter and full year 2017 results is Executive Vice President and Chief Financial Officer, Mike Schlotman. At our investor conference in October, we discussed the need for retail companies to constantly reinvent themselves in order to remain relevant, and Kroger is right in the middle of such a reinvention. We are proactively addressing customer changes, and we've made strategic decisions to invest in a seamless digital experience, technology, associate wages, and low prices. Combined, these efforts come together in Restock Kroger, our plan to create shareholder value by redefining how people eat. Our vision is to serve America through food inspiration and uplift. Restock Kroger has four main drivers: redefine the grocery customer experience, expand partnerships to create customer value, develop talent, and live our purpose. Combined, these focus areas will create shareholder value. We announced Restock Kroger six months ago while also in the middle of one of the most complicated years in our history. Throughout 2017, we continue to challenge our team to deliver our revised identical sales and earnings guidance from June. We are proud to share today that we delivered on those revised commitments for the year, finishing 2017 with strong sales and business momentum. In 2017, we also grew digital sales by more than 90% and expanded ClickList to more than 1,000 locations. We gained market share for the 13th consecutive year, achieved $16.7 billion in annual natural and organic sales, including $2 billion in Simple Truth sales. We launched Zero Hunger | Zero Waste, our commitment to end hunger in the places we call home and eliminate waste across our business by 2025, and created 10,000 new American jobs in our supermarket locations across the country. All of this is encouraging as we start 2018. Looking at 2018 and beyond, the Tax Cuts and Jobs Act is a catalyst that will enable us to accelerate investments in Restock Kroger. And as we've shared a few times since the fall, we are taking a balanced approach to ensure tax reform benefits our associates, customers, and shareholders. Shareholders will benefit from approximately one-third of the tax savings flowing through the net earnings per diluted share. For our customers, we'll make strategic investments to continue redefining the grocery customer experience through a combination of improved services, lower prices, and added convenience. And for our associates, we are developing plans now to invest in long-term benefits, including education, wages, and retirement. We are looking at ways to differentiate our associate experience with the underlying philosophy that we want to provide more than a one-time award. We want to make investments in our associates' future. As an example of this, we are doing a lot of work right now to develop an industry-leading education offering for associates. Kroger has always been a place where people can come for a job and save for a career. We believe an enhanced commitment to employee education will drive the Develop Talent focus area of our plan. These investments underpin and accelerate Restock Kroger, which means we fully expect a strong return from each. Sharing the benefits with our associates and customers will create a more sustainable and stronger business model to support Kroger's future. The investments are also aligned with our purpose, our promise, and our values. We look forward to sharing more details on our plans with associates in the coming weeks. We continue to create a seamless environment where our customers can choose how to engage with us in-store and online. Whether through ClickList or home delivery, we continue to test, learn and scale what works using our data and customer insights to make it really easy for our customers to navigate across the channels they choose when shopping with us. In the fourth quarter, we introduced a seamless digital shopping experience that fully integrates our ClickList experiences with our other digital services: coupons, recipes, rewards, and more. After just a couple of months, we already know our customers love it. Customers are making purchases on the site at a higher frequency than before and spending more per online order. Households that participate in our seamless offerings, those who engage with our digital platforms and our physical stores, spend more per week than households that do not. And households that transact with us online spend even more. These results further validate our hypothesis, which has always been that customers want to have options for how they shop with us, and that hypothesis continues to shape our strategy to further accelerate our digital and e-commerce efforts. When you look at our customer coverage areas for seamless shopping, more than two-thirds of our customers, over 40 million shoppers, have pickup and/or delivery available from Kroger. Our goal is for every customer to have access to our convenient services. In 2018, we will expand our digital coverage area and enhance our digital shopping experience to provide customers with relevant products, recipes, digital coupons, weekly ads, smart shopping lists, and much more. To support this growth, we offer customers 1,091 pickup locations and more than 872 delivery locations across the country, and it continues to grow. Next, I'd like to discuss how we're winning with Our Brands, and this helps Kroger redefine the customer experience. Our Brands' performance this past year was extraordinary, and I'll share just a few of the highlights. In 2017, Our Brands achieved its highest-ever unit share. We reached $20.9 billion in total sales and reached $2 billion in annual Simple Truth sales, which to me is even all the more remarkable when you consider that the brand is only five years old. We also announced a partnership with Fair Trade U.S.A. Simple Truth now offers more Fair Trade Certified products than any other private-label brand in the country. For the fourth quarter, Our Brands made up 29.5% of unit sales and 26% of sales dollars, excluding fuel and pharmacy. I think it's incredibly easy to take this success for granted, but I've seen the energy our teams have put into creating the right items, and it's really a big deal that independent third-party research has validated the progress that we've made. When you look at the results, they are extraordinary, and I'm incredibly proud of our team. The data is clear. Customers love Our Brands better than the national brands and better than other private-label offerings. Our Brands outperformed even the private-label brands you immediately think of as the best in class. And we're going to shout about it so our customers who have yet to experience Our Brands no longer will miss out. We will be particularly focused on our top brands: Kroger, Private Selection, and Simple Truth. Our customers will be treated to an amazing array of enticing new brand product introductions throughout the year, an assortment that will add excitement and simplicity to their lives, all at amazing prices. And Our Brands are only available at Kroger. This is why Our Brands play such a pivotal role in Restock Kroger. Restock Kroger is off to a great start. Our leadership team and associates are aligned behind that effort, which is further reinforced by our annual incentive plan. Customers are letting us know that they see, feel, and appreciate our efforts to redefine the customer experience. And they continue to reward us with growing loyalty. This is the cycle that creates value for shareholders. We are confident that we will grow identical supermarket sales and market share in 2018, and we will create shareholder value by generating incremental operating margin dollars and free cash flow over the next three years.

Thanks, Rodney, and good morning, everyone. Over the next three years, Restock Kroger will be fueled by cost savings that we will invest in associates, customers, and infrastructure. Our goal is to continue generating shareholder value even as we make strategic investments to grow our business. We expect Restock Kroger to generate $6.5 billion of free cash flow over the next three years. This is before dividends and considers the benefit of the tax plan. If you recall at the conference, we talked about $4 billion after dividends. This has been converted to a more conventional free dividend free cash flow calculation, so we're trying to be a little more conventional in the number we talk about. As you know, we've already reprioritized the way we invest capital over the next three years by both reducing the amount we spend and optimizing our capital allocation process. We now look first for sales-driving and cost-savings opportunities across brick and mortar and digital platforms. Second, we will continue to make sure our logistics and technology platforms keep pace with and scale to these demands through continued investment. Finally, we will allocate capital to store activity. This process has allowed us to use less free cash flow for capital investments. We're aggressively managing OG&A costs and implementing new programs to reduce our cost of goods sold. A big focus will be on store productivity and waste. Both of these will benefit from the $9 billion in capital investment over the next three years. For example, store productivity will improve with the scheduled launch of Scan, Bag, Go in 400 new locations this year, and we are also pleased that Shrink continued its steady improvement throughout the year with good results in the fourth quarter. We plan to generate $400 million of incremental operating margin from 2018 to 2020. We are taking advantage of the lower federal taxes under the Tax Cuts and Jobs Act to pull investments forward to 2018 so we can move even faster on Restock Kroger than originally anticipated. Turning to our results for the year. As you know, we revised our outlook in June to address the environment we're operating in. We've provided a narrow net earnings guidance range of $2 to $2.05 per diluted share, and we are pleased to have been near the top end of that range for the year. As you can imagine in a company our size, there are many moving parts in our operations. Our goal is to manage the business on at least an annual cycle period. This can lead to quarterly fluctuations, but we always have our eye firmly on annual results and the long-term strength of the company. We saw an opportunity at the beginning of the quarter to invest in the shopping experience and price while still delivering on our annual commitment. This is why our results reflected a gross profit rate decline of 31 basis points in the fourth quarter but only 19 basis points for the year. As a result of these investments, we saw growth in both households and total visits, unit growth, and market share growth. Since 2000, we've reduced prices for our customers by $4.1 billion. We intend to continue investing in price to drive unit and ID sales growth while delivering on the bottom line for our shareholders. This is the strategy we've been following for years, and it has served us well over time. It is a cornerstone of our Restock Kroger plan to invest more in redefining the shopping experience, partnering for customer value, and developing talent that will be paid for by costs of goods savings, strong IDs, and productivity gains. This is where the incremental operating profit margin will come from over the next three years. We continue to make investments in our associates through both higher wages and additional hours for ClickList and other services. In fact, those two categories accounted for about half of the increase in OG&A in the quarter, and we continue to be pleased with the results we're seeing from those investments. Despite higher inflation during the fourth quarter, LIFO turned out to be a tailwind due to lower inventory levels in departments most affected by higher inflation, primarily pharmacy. Speaking specifically about ID sales, we're very pleased with the result of the 1.5% growth in the fourth quarter. Several departments outperformed the company in the fourth quarter, including produce, deli fresh prepared, meat, and seafood. Our Natural Foods Department continued to generate strong double-digit growth in both the fourth quarter and full year. 18 of our 22 supermarket-operating divisions had positive IDs for the year as well, demonstrating the consistency of our results across the enterprise. Kroger's market share grew for the 13th year in a row in 2017. Our consistent market share gains drove both top and bottom line growth to generate lasting shareholder value. We report our market share annually and look at it the way customers would look at it: where do they spend their money? We use market share data as a directional measure and not a specific one. It's also worth noting that market share is calculated based on total sales and not ID sales. According to IRI point-of-sale data, Kroger's overall market share of the products we sell in the markets where we operate grew approximately 21 basis points in 2017, a slight acceleration over last year's growth of 16 basis points based on IRI's calculations. Both our fourth quarter and full year results included several adjustment items described in Table 6 from this morning's press release. I want to spend a couple of minutes walking you through that table. These items are not included in our fourth quarter adjusted net earnings per diluted share result of $0.63, and they are not included in our 2017 adjusted net earnings results of $2.04. So none of these items were included in our $0.63. I think there's a little confusion about that from some folks that some of these numbers might have been in there. As a result of the Tax Act, we recognized a tax benefit of $922 million in the fourth quarter. This was due to the remeasurement of our deferred tax liabilities and the reduction of our statutory income tax rate for the last few weeks of the fiscal year. As part of the company's annual review of goodwill balances in the fourth quarter, we recognized an impairment charge of approximately $110 million related to our Kroger specialty pharmacy business. This is primarily due to lower rebates and gross margins that we built into our future expectations. Kroger specialty pharmacy continues to perform well. In the third quarter of 2017, certain assets and liabilities, primarily those related to our Convenience Store business, were classified as held for sale in the consolidated balance sheet. Due to these assets being classified as held for sale, these are no longer being depreciated. We benefited from this classification in both the fourth quarter of '17 and fiscal 2017 by not having to record the $19 million of depreciation associated with those assets. Our results were also affected by the previously announced settlement of obligations under the company-sponsored pension plan. We also made significant headway throughout the year, in the fourth quarter in particular, on our long-term effort to address exposure in our pension plans while, at the same time, working with unions to provide Kroger associates with a more secure pension. During 2017, we proactively managed future risk in several ways. Most recently in December, Kroger and the International Brotherhood of Teamsters announced the ratification of a new labor agreement that provided for Kroger's withdrawal from the Central States pension fund. We recognized a $351 million charge in the fourth quarter of 2017 associated with this withdrawal. And subsequently, we've negotiated a lump-sum settlement for that, that I'll touch on in a moment. This was in addition to the $192 million recognized in the first quarter of 2017 for the obligation associated with the planned withdrawal of Roundy's associates from the same fund and a $7 million charge for a separate multi-employer pension fund. As I said a minute ago, we made a lump-sum payment to Central States in the fourth quarter. This totaled $467 million pretax. This replaces what would have been an approximately $3 million per month pretax withdrawal obligation payment over the next 20 years. In the third quarter, we announced the $1 billion contribution to our company-sponsored pension plan. This funded a $502 million settlement charge accounted for in the fourth quarter for the termination of the cash balance company-sponsored pension plan that we previously announced. So we funded it in the third quarter, terminated it in the fourth quarter, which is why the charge occurred in the fourth quarter. Fuel performance was very good in the fourth quarter. Our cents per gallon fuel margin was approximately $0.198 compared to $0.172 in the same quarter last year. The average retail price of fuel was $2.46 versus $2.18 in the same quarter last year. For 2017, our cents per gallon fuel margin was $0.206 compared to $0.171 the year before. And average retail price of fuel for all of 2017 was $2.36 versus $2.10 in 2016. In February, we announced a definitive agreement for the sale of our Convenience Store business to EG Group for $2.15 billion. Our Convenience Store business has been part of the company for many years, and I can't stress enough how important they have been to Kroger's success both the management and the associates at the store level and in the office. We have been impressed with EG Group's professionalism, commitment to people, and understanding of the U.S. convenience retail market. We're very pleased EG Group plans to establish their North American headquarters in Cincinnati. We continue to expect to close the transaction during the first quarter of our fiscal year, and we look forward to working with them closely to ensure a smooth transition for associates. As we've previously announced, we plan to use the proceeds of the sale to repurchase shares and lower our net total debt to adjusted EBITDA ratio. Our financial strategy is to use our free cash flow to drive growth while also maintaining our current investment-grade debt rating and returning capital to shareholders. We can generally balance the use of cash flow to achieve these goals. In 2017, we used cash to contribute an incremental $1.2 billion pretax to company-sponsored pension plans and $467 million pretax to satisfy the withdrawal obligations to the Central States Pension Fund. We also repurchased 61 million common shares for $1.6 billion, paid $444 million in dividends, and invested $3 billion in capital. At the end of the fourth quarter, our current share repurchase authorization had approximately $270 million remaining, and our return on invested capital for 2017 on a 52-week basis was 12.03%. We have said for some time that we expect our net total debt to adjusted EBITDA ratio to grow. This is because we're bringing an off-balance-sheet item onto our balance sheet for funding an obligation already on our balance sheet, like we did with the company plan. As a result, in the third quarter, we updated our target range for this ratio to 2.2 to 2.4x. These obligations, whether recorded on or off Kroger's balance sheet, have generally been considered when our credit profile has been reviewed. But since they weren't funded, they previously did not get picked up in the net total debt to adjusted EBITDA ratio. The lump-sum settlement negotiated with the Central States Pension Fund in the fourth quarter is the latest example of the company leveraging low interest rates and favorable tax rates to secure the retirement benefits promised to our associates. Because negotiating the settlement and bringing the obligation to our balance sheet was not contemplated when we updated our target last quarter, we're again updating our target range for this ratio to 2.3 to 2.5x. Just as in the past, this obligation has always been part of our credit profile. The funding in the fourth quarter now picks up this obligation in our net total debt amounts. Our current result of 2.6x on a 52-week basis is above this range, due primarily to the funding of the above-mentioned pension obligations. We expect to use free cash flow and a portion of the proceeds from the sale of assets to get us back in this range. And as I said, this includes the sale of our Convenience Store business. Protecting associate and retiree pensions is one significant way that we take care of our associates. Another is hiring and job creation. As we noted in this morning's press release, Kroger created 10,000 supermarket jobs in 2017. Through Restock Kroger, we are investing an incremental $500 million in our associates in wages, training, and development over the next three years. This will be in addition to our continued efforts to rebalance pay and benefits while also focusing on certifications and performance incentives, career opportunities, and training. Our store associates in our Cincinnati/Dayton division are currently voting on a tentative agreement between Kroger and the UFCW. This will be our first contract under Restock Kroger, and it includes an added investment in wages, raising the starting pay to at least $10 an hour and accelerating rate progression to $11 per hour after one year of service. These are the kinds of things we contemplated when we allocated $500 million to the talent portion of our Restock Kroger plan. Looking ahead, we have several major negotiations in 2018, including contracts with the UFCW for store associates in Smith's in Albuquerque, Fred Meyer in Portland, and Kroger stores in Richmond and Fort Wayne. Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and the compensation packages that provide solid wages, good quality, affordable health care, and retirement benefits for our associates. We continue to strive to make our overall benefit package relevant to today's associates. Our financial results continue to be pressured by inefficient health care and pension costs that some of our competitors do not face. We continue to communicate with our local unions and the international unions, which represent many of our associates, the importance of growing our business and profitably, which will help create more jobs and career opportunities and enhance job security for our associates. Turning now to our guidance for 2018. We expect 2018 identical supermarket sales growth, excluding fuel, to range from 1.5% to 2%. We expect net earnings to range from $1.95 to $2.15 per diluted share for 2018. We expect capital investments, excluding mergers, acquisitions, and purchases of leased facilities, to be approximately $3 billion, and we expect our 2018 tax rate to be approximately 22%.

Thanks, Mike. We're proud of how our team finished 2017, ending the year with positive momentum in sales and the overall business. We delivered the revised sales and earnings guidance we promised, gained market share for the 13th year in a row, continued to grow our natural and organic food sales, grew digital sales by more than 90%, and now offer a seamless digital experience to more than 40 million customers in America. And of course, we relaunched Restock Kroger. As we embark on our first full year of implementing Restock Kroger, we are committed to continuing this great momentum. And we will only accelerate our efforts to redefine the grocery customer experience through investments in digital, technology, pricing, and convenience; to expand partnerships to create customer value by forming meaningful alliances with partners who share our commitment to putting the customer first; to develop talent by investing in our associate wages and education; and to live our purpose through our purpose and promise and Zero Hunger | Zero Waste commitment. We are focused on these key drivers of Restock Kroger because we know when we execute them well, we will create shareholder value. We are encouraged at the start of 2018 and confident in our ability to deliver on both our plan for the year and our long-term vision to serve America through food inspiration and uplift.

So Rodney and Mike, I guess, the first thing I want to start with is on the gross margin because obviously that's the point, I think, that investors were probably most disappointed with this quarter. Can you just provide more color on what happened here? I mean, theoretically, you would have gotten a full quarter of the vendor initiative in Q4. Comparisons seemed a bit easier.

Well, relative to the last portion of your question, I think I would answer that the same way we answered the increase in the gross margin in the third quarter, that you should never really take any particular quarter and extrapolate it over any period of time other than that particular quarter. As I said in the prepared comments, yes, we were down 30-something basis points in the quarter but only 19 basis points in the year, which is a fairly normal reduction in investment in gross margins for us. I think that's more normal. We've been very open since October with Restock Kroger. When you look at the recent findings in the customer shopping experience key, that the investment in that key is going to be more than the dollars we generate from that, and that's going to be funded by other parts of it. There was a chart back in October that delineated how we expect to invest in the business and how we expect to generate revenue or EBITDA from those investments, leading to the $400 million increase in operating profit margin, just giving you a little more background than you maybe wanted of the journey we've been on since October. The short answer is you should expect gross margin to decline somewhat in 2018. We aren't giving guidance on the individual amounts.

I would like to add a couple of points to what Mike said. He mentioned our focus on gross margin for the year. Looking at the progress we've made with Restock Kroger, we are on track with our expectations. As I've stated before, we won't compromise on price, but we also aren't trying to drive the market down. And as you know, as part of Restock Kroger, we committed to improving operating margin dollars by $400 million over the next three years. And we remain, as Mike said, to that expectation of ourselves and we would continue to expect to grow going forward. The way we will finance that is continuing to take costs out of the business through cost of goods, through process changes. Mike mentioned the improvement that we had on Shrink, for example, as well.

Okay. And just a follow-up as it pertains to reinvesting the tax since we're on that topic. Ever since I can remember from following you guys, the narrative has always been that your cost structure is uncompetitive because of unionization. Now it appears that the non-unionized players have to catch up. The thought process is maybe you should be spending a little bit less than what they are, but this actually doesn't seem to be the case. So could you just help us understand why your investment around the labor side actually kind of seems to be at a similar magnitude of what we're hearing around the rest of retail?

If you look at the majority of our investment in labor, which Mike mentioned, it has primarily been focused on starting wages. In the past, we found that people would easily come for a job and turn it into a career, recognizing over time that there would be wage progression. As job availability increased, the starting wage became even more significant. So we've meaningfully increased starting wages across the company. And a big chunk of the increase is there, and the other huge chunk is the investment in labor that we're making on ClickList and the aggressive expansion and rollout of ClickList. I don't know, Mike, anything you want to add to that?

Yes. And those two combined to be about half of the increase in the OG&A in the quarter.

I just wanted to clarify if you provided the tax dollar benefit amount before I ask my question. You didn't give one or address it on CNBC this morning, and it was $200 million. I thought the amount you were expecting was higher than that.

Well, I will say that on CNBC this morning, that was a little bit all over the board. It didn't focus very much in the quarter. I actually didn't have a chance to respond to their number of $200 million, but it is higher than that. As mentioned in the prepared comments, we plan to allocate one-third of our investment to the business, one-third to our associates, and one-third to the bottom line. Therefore, in total, it's approximately $0.36 to $0.37. At the new tax rate, we need about $11 million pre-tax to achieve $0.01 per share, translating to around $400 million in benefits, which we are distributing as one-third, one-third, one-third.

We truly expect to see returns from the investments we have discussed during the call. We accelerated some of the key components of Restock Kroger.

Yes. And we're moving some of them up so we can get the benefits sooner, and then the latter years won't be burdened by these investments because we've already taken care of them.

Okay. So I guess that matters as it relates to your EPS. So when you look at your EPS guidance and you back in to EBIT, I guess, the numbers I get for EBIT for fiscal '18 or calendar '18 could be down anywhere from 15% to 22%. So I guess the first question I had on EBIT, is it fair to say that you'll be much more kind of at that low end in the first half given the accelerated D&A and then, I guess, the second half hopefully a little bit better? And then, I guess, what matters is what the core is doing because we can all take this $400 million and pay 2/3 of it, right? So 2/3 of that is part of the EBIT decline as opposed to the core decline, if that question makes sense. Is that the way to think about it?

Yes. I'm not going to get into giving guidance on what our EBIT's going to be. If you notice in our 8-K, we didn't give guidance on our operating profit margin, primarily because of the conversation you're having, Karen, trying to predict exactly where it's going to be when that's up above and I'm paying for some of my investments with tax savings dollars down below. We are balanced to try to make the numbers we talked about, and our incentive plan will only kick in, in a big way if we make the numbers we talked about relative to our earnings per share guidance. We have been discussing this since September, and I reiterated it in November and then in December. I have mentioned multiple times during our webcasts that we do not anticipate anything this year that would lead us to fall below $1.80, and we are aiming to be at or slightly above our adjusted 52-week target. A 52-week year is at $1.95, and then adding $0.12 brings us to $2.15, which is based on the $1.95 as our reference instead of $1.80. The increase includes $0.10 to $0.12 from tax savings and slightly exceeding expectations. Currently, the estimates for next year show a significant range, from $1.84 to $2.40, which I can't recall seeing such a wide variation before.

Okay. But it is fair to say, though, the first half, you have a much higher D&A, right? So the decline will be greater in the first half, all else equal, than it will be in the second half?

The depreciation for book will not be influenced by the immediate deduction availability under the Tax Act. If I purchase a seven-year piece of equipment for book, I will depreciate it over seven years. For tax purposes, I receive the deduction immediately. Therefore, this will not increase my deferred tax liability balance after I have reduced it. The immediate expensing of depreciation and amortization applies only for tax, not for book.

Question on what you've talked about in terms of tax reinvestment. I think you mentioned that some of it will go to educating employees. And if I'm hearing you right, it sounds like the implication is that maybe you have a pool of money that's going toward your associates, some of it toward cash bonuses and some of it toward this education. And I get that from a long-term perspective, right? I'm just curious in a tight labor market, do you have data that really shows you the right move to sort of not spend all of that on bonuses or on raises? I'm just curious, you talked about some markets being $10 or $11 per hour. I think Costco said the average wages of their employees is over $22.

Yes. Our average wage is considerably higher than any numbers we've previously discussed. Additionally, it's important to note that alongside our average wage, we offer health care and pension benefits to associates typically after they've been with us for a certain period or are full-time. We were very focused on not having something that was a one-time bonus but what were the things that our associates told us that's important to them and what are the reasons that they come to work for us. And when you look at people earlier in their career, the ability to have flexible hours and the ability to continue with an education was something that they give us feedback that was very important to them. So we really view that, that is an important part of investing in our associates. And it's something that we believe, as our associates gain skill, they will be more productive in terms of their day-to-day influence on Kroger and also help them move from a job to a career with us.

So Ken, to be clear, none of our one-third of tax-saving investment in our associates will be in the form of a bonus. We just don't think that's long lasting and drives retention or drives employee morale over the long term. We think that's temporary, gets a big headline, and is somewhat fleeting. And we're trying to make our investment in things that will drive retention and morale over the longer term.

That's very helpful. Can I just ask a quick follow-up? Mike, I appreciate you not wanting to give some of the guidance items that you typically in the past would have given. But there are certain items that maybe are unaffected by tax, fuel gross profit per gallon assumption, LIFO assumption, maybe some color on the current quarter. Any help you could give with that would be appreciated.

Yes. We haven't typically provided specific guidance, although we have offered a range for margin per gallon. We consciously chose to limit the individual items for which we provide guidance. When results deviate from expectations, that tends to overshadow our broader commitments. Our focus is on delivering Restock Kroger over the next three years, achieving $6.5 billion in free cash flow, and $400 million in operating profit growth during that period. Specifically for 2018, we aim for comparable sales growth between 1.5% and 2% and earnings per share ranging from $1.95 to $2.15.

Mike, I would like to follow up on some comments you made regarding the pull-forward of investments related to Restock Kroger. My understanding is that there isn't an associated pull-forward of the operating margin growth benefits from those investments. Is it correct to interpret that these benefits would appear in years 2 and 3 of the plan instead of concurrently with the pull-forward of investments in 2018? Additionally, how will this be reflected in your guidance?

Yes. If you consider how we began discussing Restock Kroger back in October, it was always intended to indicate that, based on our earlier guidance from September of 2018 of no less than $1.80 and aiming to be flat or slightly above last year, we did not anticipate expansion in operating margin dollars with an earnings per share range like that. We've obviously updated it with the final results for this year, the final business plan for 2018 now completed as well as really good clarity on exactly how we're going to invest the tax savings dollars. The shorter answer is, yes, operating profit margin dollars will likely be down in 2018, and we're going to pull dollars forward out of '19 and '20 where the margin dollars should be higher. And we will pay for that for known, the known being the tax savings that are real dollars. And we are working diligently to deliver the savings dollars. We're pulling these dollars forward with real savings dollars that we effectively already have in the bank because of the lower tax dollars we're going to have to spend.

And Ben, I don't know if this helps you. But one of the numbers Mike outlined in October was we expect cost reductions and savings of $4.45 billion over the next three years. That savings is what we would still expect. We have not included tax savings in that $4.45 billion. And then if you look at what we plan to invest, the $4.45 billion that Mike talked about in October, our investment plan would still be the $4.45 billion. We've just accelerated some of that into '18 where before it was in '19 or '20.

We moved the plans forward to 2018 instead of 2019 and 2020. We are still targeting the same numbers and the same growth in operating profit margins by the end of three years, and we are still expecting the same free cash flow. And if you remember, on free cash flow, in fact, I talked about $6.5 billion. If you take what I talked about in October, it was $4.5 billion but that was reduced for $1.5 billion of dividends over the three years. So we've increased that by $500 million for some of the tax savings flowing into free cash flow.

Okay. So just to summarize that, there's a pull-forward of the operating margin investments into this year versus what would have been more steadily over three years, there's not a pull-forward of the operating growth, but it will be heavier in years 2 and 3 and paired with less operating margin investment in years 2 and 3? Is that the right way to think about it?

Correct. And from an earnings per share standpoint, we're paying for that with a known increase in earnings per share from the lower tax rate. So we have to go out and figure out a lot of ways to save. We know we're going to be able to pay for that from an earnings per share standpoint and a cash flow standpoint because these are real cash dollars with a lower tax payment. So that the investments we made this year will align with the earnings we expect in years two and three. We're anticipating improved cash flow and earnings performance as we drive cost reductions and those savings we talked about.

Maybe first on the guidance. I'm guessing you probably won't answer, but we're getting a lot of questions in terms of how to think about the seasonality of EBIT growth this year. So anything you can qualitatively give us color in terms of how you think about first half or second half EBIT growth?

Yes. I would refer back to the earlier question about the margin per gallon of fuel and our expectations in that regard. We manage our business over the course of a year, and in fact, we aim to operate on a slightly longer timeframe than just a year. But we do try to make sure that we have guidance out there that's relevant and meaningful to investors. My long-winded answer is I'm not going to give you a quarterly cadence. We are in this for the long haul. A quarter is 12 weeks long most times; the first quarter, 16 weeks long. And trying to say every quarter is going to be exactly X or exactly Y, I can tell you they rarely wind up exactly at X or exactly Y. And that's why we make modifications throughout the year.

Okay, great. My main question for the call is about home delivery. I know you recently expanded your partnership with Instacart at Ralphs. How is that going?

Well, as you know, if you go back a little over a year ago, we did home delivery almost in no stores, and now we're up to almost 900 stores. We would continue to look at home delivery as part of our offering. What we find is some customers like delivery, some customers like to have pickup, and some customers like to go in store. And probably the most common thing is we find customers actually do all three. And it just depends on what's going on in their life and whether they have a soccer practice to get to or from or whatever. So for us, you should expect to see us continually expanding the way customers can engage with us and do that digitally and with the mobile app. And we'll continue to make investments in those areas. Hopefully, from Mike's and my comments and stuff, you can tell that we're incredibly excited about the future of Kroger. And when you look at Restock Kroger, the pieces of Restock Kroger are coming together exactly the way we would have hoped, and we get excited about it. Our customers continue to tell us we're doing a better job, and our associates tell us that they're having more fun serving our customers. So all those pieces are coming together, and we continue to invest for the future in terms of the way we think customers will want to engage in a retailer 5 years from now, not just today. So hopefully, you could feel that excitement from our comments. The other thing I'd like to do is just share a few additional comments with our associates listening in. Today, it's very fitting that it's International Women's Day. Kroger is proud to join organizations across the world to support and celebrate the social, economic, cultural, and political achievements of women. This day is a great opportunity to live our purpose and demonstrate our values of diversity and inclusion by uplifting the women in our workplace. At our headquarters building in Cincinnati, we're joining with several other downtown companies in lighting up our building with the female symbol to celebrate women in business. And last night, we had it lit up, and it looked fabulous. I'd also want to encourage you to check out a video that we're sharing online both internally and externally that highlights several of our women executives. We are proud to be a workplace that works for women and to support their career aspirations and goals. This is what it really means to live our purpose: to Feed the Human Spirit. With St. Patrick's Day and a pretty big basketball tournament right around the corner, March is always fun and a fabulous celebration time of the year. I encourage you to take advantage of the opportunities we have to uplift our customers and each other every day and to help our customers have great celebrations, great parties and a great experience in our stores and through our digital experiences. Thank you for what you do each and every day. That completes our call today. Thanks for joining.