Good morning, and welcome to The Kroger Co. Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kate Ward, Director of Investor Relations. Please go ahead.

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. [Operator Instructions] I will now turn the call over to Kroger's Chairman and Chief Executive Officer, Rodney McMullen. W. McMullen: 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, some times 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 more than -- 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 sort 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 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's 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 store physical 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, 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 onetime items. Over the last 3 years, it was 14.2%, excluding onetime 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. Mike? J. Schlotman: 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 plus 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 has 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 we'll 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, invest $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 the return to -- the 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 provides 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, the importance of growing Kroger's business and doing it profitably, which help 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. Now I will turn it back to Rodney. W. McMullen: 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.

[Operator Instructions] The first question comes from John Heinbockel of Guggenheim Securities, LLC.

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? W. McMullen: Okay. If you look at the '17 plan, at this point, we would expect probably to open a few less in '17 than '16, but it's not driven by the enthusiasm for ClickList. It's driven by finding stores with the space in it and incorporating it, and getting zoning changes and anything else that we need to do. One of the things -- probably, the biggest learning that's at least been a surprise to me, probably not for others, is customers continue to shop inside the store even when they become a ClickList customer. And they'll buy certain products via ClickList, but they still come into the store. If you look at the more mature locations, you can start seeing more financially, they start getting to the point where we're really indifferent in terms of whether somebody shops in store or online. Obviously, that's just the early ones that have been opened more at Harris Teeter than at Kroger. So we continue to have that headwind, and we'll continue to have that headwind in '17 just because the sheer number that we're opening and the number that we opened late in 2016. But they continue to mature, and we can clearly see at a point where we're actually indifferent on how the customer shops with us.

Okay. And then just shifting gears, 2 maybe not related but financial questions. FIFO gross margin x fuel, a little more pressure in the fourth quarter than prior quarters. Where did that come from? And then, the first quarter, when you look at the cadence in the first quarter earnings number, obviously, a substantial deviation from the rest of the year. So curious, is that driven by -- you would think it's driven by something aberrational. I don't know if that's pension or shrink, or what drives that? W. McMullen: I'll let Mark -- Mike talk about the quarter stuff. But on the -- if you look at the gross, it's really a combination of several things. Some would be driven by pharmacy continues to be a headwind on gross. Other areas there, we have definitely become more promotional and more aggressive on some pricing as our sales were softer. So it's really both of those elements together. Mike, I'll let you answer the quarter comment. J. Schlotman: Sure, John. As I said in the prepared remarks, we do expect the first half of the year to be much like how 2016 ended, and it's really just carrying the current trends out through the first -- as you know, this is a 16-week quarter for us, through those first 16 weeks of the year, and we see the clarity to some of the programs Rodney mentioned. And the fact that we continue to drive unit growth, we do expect to see the recovery in the sales later in the year.

The next question comes from Stephen Tanal of Goldman, Sachs & Co.

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. W. McMullen: If you look at it from a competitive environment, most of the changes that we would see is competitors running better stores. I don't think there's any doubt that they are. Most -- you and among others have written about it. Certainly, it wouldn't -- there isn't anything that would show that it's going to online at all. So it would be more driven by some of the competitors running better stores versus other aspects. I don't know, Mike, anything you'd want to add to that? J. Schlotman: No.

I guess, is that -- can you give a sense for whether it's a lower-end customer or a higher-income consumer or right in the middle, or any color you can provide there? W. McMullen: If you -- one of the comments that Mike mentioned in his prepared remarks was when you look at our loyal shopper, we actually had positive identicals with our loyal shoppers. So it's really the customer that isn't very loyal to us. It's where we're seeing it. That would be more driven by value shoppers or shoppers on a budget than mainstream and customers that really value the experience and the freshness of our product and other aspects.

I see. And I guess, it's safe to say you're probably not seeing all too different in sort of a bigger, denser, more affluent cities that you're in where there are more home delivery options. And I just got one more follow-up on -- one more after that. W. McMullen: 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. Then I just -- the last one for me, maybe for Mike is, the impact of the early retirement offer on OG&A, if you could sort of quantify that, and perhaps maybe is that ramping through the year? Is that maybe why the year looks a little more back-half-weighted than we would have guessed? Or I think... J. Schlotman: Sure. As I said in the prepared remarks, the -- as we finalize what the expense of that will be, that will be reflected in the first quarter. The offer is not entirely closed. So we won't know until next week exactly how many people ultimately accepted the offer. And there will be varying times when people ultimately retire, so that does go throughout the year as we -- as those folks ultimately retire. Do keep in mind, as I said in the prepared remarks, we do not have the expense of the plan in our estimates. We do have the savings in our plan and they're a portion of what we plan to invest to increase the value proposition for our customers.

The next question comes from Chris Mandeville of Jefferies.

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? J. Schlotman: Yes. I mean, there's a variety of contributing factors. Obviously, going back to the first quarter, we're cycling one of, if not, the strongest quarter from the prior year. We had high teens earnings per share growth. We had 2.4% IDs in the first quarter of last year, so we're up against our toughest compare for one thing. Also, as we go through the year, I'm not going to -- I won't break down gross profit by quarter. We try to stick with ID sales and operating profit. We do plan to continue to make the investments, as I said, in the value proposition for our customers, which we think will continue to drive IDs back into the positive range.

The next question comes from Karen Short of Barclays.

Just on the guidance, just to clarify 1 or 2 things. So guidance does include buybacks, correct? J. Schlotman: 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? J. Schlotman: 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? W. McMullen: 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. And SG&A per week has been growing pretty meaningfully, and I know you pointed to that as an area of opportunity, and you talked about that a lot on this call. But I guess, I'm just trying to reconcile like how much you actually have to get that down to achieve your guidance but also reconciling that with that you want to invest for the long term. So wondering if you could talk to that a little bit. J. Schlotman: Well, there -- I can tell you, there are a lot of efforts we have under way to reduce our total cost of doing business, and it's in a variety of areas. We can do better on shrink. We can do better on store growth productivity in some areas. We can certainly do better on in-stock in some areas. And one of the great things about being in a company the size and breadth of Kroger is there's not an initiative we have out there that we don't already have a very large group of stores achieving. We don't have to go outside the company and point to competitor X is doing this, so we are. Every metric we have out there for our stores to do better on, we already have a group of stores achieving those results. And as we get better at achieving those over a broader base of stores, that's one of the things that we think is going to give us incremental fuel for the engine to continue to invest in the 4 keys.

The next question comes from Rupesh Parikh of Oppenheimer.

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? J. Schlotman: 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. W. McMullen: Of declining. J. Schlotman: Of declining. W. McMullen: Inflation/deflation. J. Schlotman: Either inflation coming down or actual deflation, it's 9 straight quarters now that, that trend line would be down. So 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. W. McMullen: 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 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 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.

The next question comes from Vincent Sinisi of Morgan Stanley.

Just wanted to see, with the promotional environment, any further color on kind of promotions by categories? Is it fair to say that the kind of the most deflationary is also getting the most promotions? And then also in -- just in relation to that, if you could give any further color around kind of the comp cadence expected, in addition to the very helpful EPS guidance by quarter. W. McMullen: Yes. On the promotions by category, we would use our 84.51° insights for that, and it would really be different by customer. Some of it would be things that you would do personalized one-on-one. So it actually -- and if you go into the store from checking the retail price, you wouldn't see it because its offers that are made directly to customers, some via coupons. It's all of the above because different customers react different ways to different promotions. So it's becoming an increasingly personalized offers based on what that particular customer wants and desires are, and it would be a mix of national brand, Corporate Brands and fresh product and others, so it's really a mix. On the comp by quarter, Mike, I'll let you... J. Schlotman: 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. Sure, Mike. Just wondering if you could kind of give us, in relation to your full year ID sales guidance, how you're thinking about that on a quarterly basis. Maybe -- if any color around kind of where things are now and/or just how you're kind of thinking about that as we go forward each quarter. J. Schlotman: 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? J. Schlotman: Sure. Bo and his team out there in Colorado continue to do some exciting things inside their stores. Some of the new stores, they've opened. We're pretty excited about the sales levels that they've been able to generate. Bo continues to look at his book of business in his stores, and they're a very new company. He's learning as he goes, and he continue to make tweaks to his model and stopped doing some things that aren't working and try some new things that seem to have -- to be bearing fruit. But we're very pleased with what we see out of Bo and his team and continue to be enthusiastic about that kind of a format.

The next question comes from Ken Goldman of JPMorgan.

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. J. Schlotman: It's not something we've talked about a whole lot, and it's one of those things when you -- if you have 3% or 4% IDs and you have a strong capital program and it's 30 or 40 or 50 basis points of headwinds from sister store impacts, the effect of that isn't as dramatic as it is when you're close to a 0 ID sales negative. So we haven't really talked about it. We did in the third quarter -- what did I say? 20 to 30 basis points. W. McMullen: Is what it typically is. J. Schlotman: Is what it typically is. So it is a bit higher today because we have been doing more stores. A couple of 3 years ago, we were under $3 billion in capital, and we were above $3.5 billion in capital this year. So we have ramped up our capital spend. We are touching more stores. We're opening more new stores, which caused a sister store impact and expanding and relocating some very strong stores, which continue to perform very well but haven't been brand reopened long enough to be into our identical store base yet.

So that's helpful. Just to clarify, so it sounds like incrementally, I think -- it is rough, I know, but you're talking 40, 50 basis points of a headwind versus what you normally experience from this effect, and... J. Schlotman: 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.

So then, looking ahead, is it safe to assume we will still see roughly a 70 basis point impact over the next 3 quarters or so? And then how do we think about that in years beyond? Is that -- is this an unusual effect? Or do you continue to think that you're maybe just again, generally going to be relocating, expanding some of your higher-performing stores in the future? J. Schlotman: 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.

Right. I meant relocation. So just to clarify, Mike, though, is it not -- is it reasonable to assume that sort of 70-ish basis point headwind will continue for the next 4 -- few, 3 quarters or so? J. Schlotman: I think it'll continue for a while, but it'll decline over time as those stores become identical again.

The next question comes from Shane Higgins of Deutsche Bank.

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. W. McMullen: 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. J. Schlotman: 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. W. McMullen: 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. W. McMullen: Yes. Very -- they were very broad-based. And anything like -- anything that we would do, we would use our insights to decide what our approach is.

The next question comes from Alvin Concepcion of Citi.

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? W. McMullen: 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? W. McMullen: Yes. Well, it's a pretty small test. We're early in the process. And the same comment that I made earlier about -- on ClickList, it's a headwind, but you can see, as they mature, it becomes where we're neutral in terms of how customer engages with us. In terms of specific numbers that we would expect for this year, we're not to the point where we'd be willing to share it other than obviously, we're working hard to scale it if it makes sense in ways that it makes sense.

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? W. McMullen: 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.

The next question comes from Robbie Ohmes of Bank of America Merrill Lynch.

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. W. McMullen: 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. J. Schlotman: And Robbie, I would be in Rodney's boat from an insight standpoint. My conclusion, without meeting with some other folks and having a conversation, would be that the timing of those doesn't affect us in a big way like it does other folks because over my time here at Kroger, I've never heard anybody talk about I can't wait till tax refunds drop, so we can get a boost in sales. So it just doesn't -- I agree with what Rodney's conclusion, it's based on what most of what we sell. W. McMullen: 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. J. Schlotman: From the pipeline. W. McMullen: From the pipeline. And that, you can clearly see when the checks go out and the size of the checks. J. Schlotman: And they're year-to-year. But those are all great big Fred Myer stores with a lot of general merchandise.

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? J. Schlotman: Well, if you look at the -- if you look at Roundy's overall, we continue to be very happy with what Michael Marx and team are doing in Wisconsin as well as Don Rosanova and team in Chicagoland with the 2 banners. Mike and team have cycled through the first set of store remodels and offerings to the customers. They're now the second market getting remodels completed, and then we'll put a full campaign in that market. And then if we continue to see the positive reaction from the customers from ID sales dollars and units, we would expect to continue to roll that out throughout the state. From an ID sales standpoint, it really didn't affect it very much in the quarter, certainly not as much as it did earlier in the year.

The next question comes from Ed Kelly of Crédit Suisse.

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. W. McMullen: Yes. Well, I'll answer the question a little broader than just one specific competitor. But with the comment that I made earlier, there is no doubt, several competitors are improving and running better stores. So that is really clear when you go into their stores, and it's much broader than just Walmart. In terms of the things that we're doing, we're really doubling down on the customer experience. We're getting even more aggressive on process change and taking costs out where it makes sense to take costs out and improving the competitiveness of our model. So it's -- in terms of what are we doing about it, those would be the things that we're doing about it because what we find is certain customers are interested in price, but all they want is a fair price. They're really, really interested in having fresh produce, fresh meat and a great experience, and those are things that we have competitive advantages on. And we'll continue to focus on that, and our store teams and our folks, our associates across the whole company will continue to focus on those.

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? W. McMullen: The -- well, if you look, we would -- I've been around for 30-some years, and I always would tell you that we've always felt that the next 5 years are going to be more competitive than the last 5. I would definitely agree with that comment today. We definitely believe the next 5 will be more competitive than the last 5 because only the strong survive. If you look at in terms of -- we feel very excited about the opportunities that we have to continue to grow our business. And I put it in 2 buckets. Some of it is operational driven where if you look at the historical business that we're in, getting better at that. But if you think about the comments that we -- you hear us increasingly talk about, looking at the opportunity in the $1.5 trillion total food business, we continue to get more and more aggressive in terms of fresh food, fresh food prepared, what's for dinner and picking things up, and that continues to grow well for us. So we really see that, that continues to be a large growth opportunity, and I would say, at the moment, we can see the opportunity more than the things that we're doing. When we were -- when you're out for our Investor Meeting, you saw some of the things we're testing, but we really continue to improve and get better and better about that part of the business. And one of the things that we've been very pleasantly surprised is the willingness that our customers are to eat at one of our stores, and we believe that, that will be an opportunity to grow the business and create a new leg, a platform for growth. So it's really both of those things together.

And M&A, any more or less important for you going forward, do you think? W. McMullen: I would say it's kind of the same. If the right opportunity became available, we would be very interested. But we don't -- we haven't changed in terms of we design a model where M&A is not required. And if the right opportunity becomes available, we would sit down and talk to somebody. But it's not something that we're out proactively trying to change that.

Our last question comes from Chuck Cerankosky of Northcoast Research.

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

Our last question goes to Kelly Bania of BMO Capital.

Just wanted to ask a couple of questions about volume as of late. I think there's been -- our industry data and a lot of industry data seems to suggest some pretty weak volumes, and I think a lot of that data's skewed towards center store categories. But I'm just curious what your assessment is if you feel like you're seeing any similar surprisingly weakness in volume, particularly quarter-to-date. And if you think it has anything to do with channel shifting or changing consumer behavior or just maybe a result of this prolonged deflationary environment. W. McMullen: Well, yes, we continue to see very much where people are increasingly spending money in the fresh departments. So there is no doubt there's a shift in tonnage from the center store to the perimeter of the store, and that's been a long-term shift. And that hasn't changed. If you look at the center store, we would still see tonnage growth there. But remember, natural and organic is part of what's driving that growth, and natural and organic is not -- there's very few public companies where you can just see that by itself. And if you look at even for us, Mike talked about our total natural and organic business at about $16 billion. Our Simple Truth brand by itself is $1.7 billion of that, so over 10%, and those are things that you really don't see in some of the other measures. So the center store has been soft for a long period of time, but we've continued to gain share in the center store, and we also have continued to change the mix of what's inside the center store. J. Schlotman: 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? J. Schlotman: 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. W. McMullen: 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. That completes our call today. Thanks for joining.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.