Good morning, and welcome to The Kroger Co. First Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cindy Holmes, Director of Investor Relations. Please go ahead.

Thank you, Laura. Good morning, and thank you for joining us today. 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 first 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. [Operator Instructions] Thank you. I will now turn the call over to Rodney McMullen, Chief Executive Officer of Kroger. W. McMullen: Thank you, Cindy. Good morning, everyone, and thank you for joining us today. With me to review Kroger's first quarter 2014 results are Mike Ellis, Kroger's President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer. Kroger delivered an outstanding first quarter. It is a great start to what we believe will be another exceptional year. Our associates continue to enhance our connection with all customers and achieve key performance measures, which are allowing us to achieve our growth strategy. We also achieved our 42nd consecutive quarter of positive identical supermarket sales, exceeded our goal to slightly expand FIFO operating margin without fuel on a rolling 4-quarter basis, maintained a steady return on invested capital while increasing capital investment. We are achieving synergies from our merger with Harris Teeter. Both Mikes will have more to say about this in a few minutes. And we returned over $1 billion in cash back to our shareholders this quarter through our buyback program. The staying power of our Customer 1st strategy and our accelerated growth plan are generating strong momentum. We continue to lower our cost of doing business and to invest those savings both for today's customers and for future growth. Our strong first quarter results set us up to deliver a 12% to 15% net earnings per share growth rate for the year, partly due to the benefit of Harris Teeter, compared to our long-term growth rate of 8% to 11% plus the dividend in both cases. I'm also pleased to report that we continue to take meaningful steps to restructure and help secure our associates' pension obligations for the future. Through 2 innovative agreements, we plan to move nearly 2,000 associates and retirees to more stable pension plans and 350 associates to a Kroger-sponsored 401(k) plan with a match. We intend to continue looking for opportunities to leverage our strong financial flexibility to safeguard our associates' benefits. We are always looking for opportunities that are good for our associates, good for Kroger and good for our shareholders. From an economy and customer shopping behavior, we are seeing strong positive indicators in shopping behavior. Our customers have exhibited less cautious spending behavior, for example. Consistent with the rise in consumer confidence index in May, our own customer research tells us that more customers perceive the economy to be in recovery. While it is obviously welcome news, the recovery remains fragile, especially for customers on a budget. We intend to keep delivering value and improving our connection with customers across the entire spectrum. Whether through our popular fuel rewards program, our Simple Truth offerings or a more convenient shopping experience, Kroger is uniquely positioned to deliver on this promise in any economic environment. And against this backdrop, an uneven economic recovery, our team's excellent first quarter performance stands out in even greater contrast. Now I'll turn it over to Mike Ellis to outline our operational performance. Mike?

Thanks, Rodney. Good morning, everyone. I'd like to congratulate the entire Kroger team for executing our Customer 1st strategy with precision in the first quarter, which is driving growth and improving our perception in the eyes of our customers. We are connecting better with our customers, showing them we care and making sure they have a great shopping experience every time. Keeping costs down allowed us to invest strategically and increase customer loyalty. During the quarter, we grew our number of loyal households at a much faster rate than total household growth, which also was up for the quarter. We saw inflation increase in the grocery category during the quarter. This, combined with higher inflation in meat, produce and pharmacy, has caused us to adjust our view of inflation for the year. We estimate inflation excluding pharmacy was 1.8% in the first quarter and 2.1% with pharmacy included. We expect it to be higher than originally anticipated for the rest of the year as well. Even with higher inflation, we saw strong tonnage growth during the first quarter. I'll jump to Harris Teeter. Our merger with Harris Teeter is going extremely well. We are spending time with Harris Teeter and learning a lot about how they connect with customers. Their store standards and fresh foods are world-class, and our cultures are a great fit, which makes our integration work rather easy. We are excited about what we're learning about Harris Teeter's online ordering and store pickup model. It's a program with a lot of promise. A key driver of sustainable growth is Customer 1st innovation. Each quarter, we are highlighting one or more of our innovations that are improving our connection with customers and growing our market share. This quarter, I will highlight some of the new exciting work of our corporate brands and Kroger technology teams. In corporate brands, a strategic differentiator for Kroger's corporate brand portfolio is our multi-tier offering. It allows us to offer the right price points and product experiences for everyone. In the first quarter, we introduced new branding and packaging for our value products, the good tier of our "good, better, best" program. The new design calls out to customers with attractive, uplifting packaging, and the response, so far, has been really terrific. For fresh products, we've replaced Kroger Value with Heritage Farm. The name better reflects the inherent quality of the brand, and we are already seeing positive acceptance from our customers. Corporate brands had a solid first quarter, accelerating company sales growth and representing approximately 26.2% of total units sold and 24.5% of sales dollars, excluding fuel and pharmacy. Kroger technology is our team of technology innovators and inventors. They are implementing a fundamental foundational technology that we can leverage to create the Internet of Things in the retail environment. One tangible example of this is real-time temperature monitoring in our supermarkets. Today, temperature checks are performed manually by our associates, but by using interactive sensors that are connected through an in-store network, we can better ensure the freshest foods by allowing for more frequent, real-time temperature checks of meat, produce, deli and frozen food products. Now we love these kinds of initiatives because they save money and they free up time for our associates to engage with customers. And most importantly, this technology will help improve our already vigorous food safety efforts. We plan to continue leading the adoption of the Internet of Things in our stores. Now I'll give a brief update on labor negotiations, labor relations. We recently agreed to new contracts in both Atlanta and Southern California, as well as for nonfood associates in Portland, Oregon. We are currently negotiating contracts with the UFCW for store associates in Cincinnati, New Mexico, Toledo and parts of California and an agreement with the Teamsters covering several distribution and manufacturing facilities. Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and compensation packages to provide solid wages, good quality, affordable health care and retirement benefits for our associates. Kroger's financial results continue to be pressured by rising health care and pension costs, which some of our competitors do not face. Kroger and the local unions, which represent many of our associates, should have a shared objective: knowing Kroger's business and profitability, which will help us create more jobs and career opportunities and enhanced job security for our associates. Now Mike Schlotman will offer more detail on Kroger's financial results and update our guidance for 2014. Mike? J. Schlotman: Thanks, Mike, and good morning, everyone. We exceeded our expectations for the quarter, thanks to our associates performing to deliver growth. We continue to implement our long-term growth strategy, which includes targeting capital to grow our business in new and existing markets, leveraging customer insights to solve varied customer needs through both traditional and digital channels and continuing to deliver shareholder value through our share buyback program and dividend. When we outlined our accelerated growth strategy at our October 2012 investor conference, we also identified the key performance targets for shareholders to measure our progress. I'd like to spend a few minutes discussing the results in each metric. Our first metric is identical supermarket sales without fuel. We are pleased with our first quarter ID sales growth of 4.6%. This strong performance was supported by ID sales growth in every department and every supermarket division. We continue to see outstanding double-digit identical sales growth in our natural foods department. Our produce and general merchandise departments also posted strong ID sales growth, and Kroger's pharmacy department continued its strong performance. Rolling 4 quarters FIFO operating margin on a 52-week basis, excluding fuel and the pension agreements, increased by 12 basis points. This exceeded our commitment to grow the rate slightly over time on a rolling 4 quarters basis. Until we have Harris Teeter in both the current and base years, the expected increase will be higher than our long-term guidance, which is slightly expanding. Over time, we expect our FIFO operating margin growth, excluding fuel, to return to slightly expanding on a rolling 4 quarters basis. The third metric is return on invested capital. We reported a return on invested capital on a 52-week rolling 4 quarters basis of 13.5%, which is consistent with ROIC during the same period last year. As we increase capital investments, it will be more difficult to grow ROIC in the near term. However, as these investments mature, we expect them to be accretive to ROIC. As Mike and Rodney already said, our integration with Harris Teeter is well underway, and we're achieving synergies in multiple fronts. One great example is combining insurance programs, which has reduced our annual premiums by $6 million already. Now I'll share our first quarter 2014 results in more detail. Please note that this is the first period that includes Harris Teeter in Kroger's statement of operations. Year-over-year percentage comparisons are affected as a result. In the first quarter, our net earnings totaled $501 million or $0.98 per diluted share. This includes charges related to the restructuring of certain pension obligations to help stabilize associates' future benefits, as described in yesterday's press release. Excluding the effect of these charges, Kroger's adjusted net earnings were $557 million or $1.09 per diluted share for the first quarter. Net earnings in the same period last year were $481 million or $0.92 per diluted share. As Mike Ellis said, we are seeing higher inflation than anticipated. We recorded a $28 million LIFO charge during the quarter compared to a $17 million LIFO charge in the same quarter last year. We are increasing our LIFO estimate for the year to $90 million. Our previous LIFO guidance for the fiscal year was a charge of $55 million. This affects the year by about $0.04. FIFO gross margin increased 1 basis point from the same period last year, excluding retail fuel operations. Strong identical sales and cost controls allowed Kroger to leverage operating expenses as a rate of sales in the first quarter. Operating, general and administrative costs plus rent and depreciation, excluding retail fuel operations and pension agreements, declined 9 basis points as a percent of sales compared to the prior year's first quarter. Now for retail fuel operations. About half of our supermarkets have fuel centers today. In the first quarter, our cents per gallon fuel margin was approximately $0.131 compared to $0.116 in the same quarter last year. Our long-term financial strategy continues to be to maintain our current investment-grade rating, repurchase shares, have an increasing dividend and fund increasing capital investments. Kroger remains committed to achieving a 2 to 2.2 net total debt to EBITDA ratio by mid to late 2015. Kroger took on debt to finance the Harris Teeter merger and realized no incremental EBITDA in fiscal 2013 because the transaction closed late in the fiscal year. This has a material effect on the company's net total debt to EBITDA -- adjusted EBITDA ratio, which is 2.42x compared to 1.85x during the same period last year. As we get a full year of Harris Teeter EBITDA in the calculation, we expect to be closer to 2.2x by the end of the year. Kroger's net total debt is $11.3 billion, an increase of $3.4 billion from a year ago. This is a result of the debt related to the Harris Teeter transaction and Kroger's share repurchase activity. Kroger's strong financial position has allowed the company to return more than $1.9 billion to shareholders through buybacks and dividends over the last 4 quarters. During the first quarter, Kroger repurchased 25.7 million common shares for a total investment of $1.1 billion. Capital investments, excluding mergers, acquisitions and purchases of leased facilities, totaled $709 million for the first quarter compared to $600 million -- $640 million for the same period last year. We continue to expect capital investments to be in the $2.8 billion to $3.0 billion range, including Harris Teeter, for fiscal 2014. Now I'd like to update our growth objectives for fiscal 2014. Based on our strong first quarter results, we raised and narrowed our adjusted net earnings guidance to a range of $3.19 to $3.27 per diluted share for fiscal 2014. The original guidance was $3.14 to $3.25 per diluted share. The company's long-term net earnings per diluted share growth remains -- our guidance remains at 8% to 11%. Shareholder return will be further enhanced by a dividend expected to increase over time. We raised our identical supermarket sales growth guidance, excluding fuel, to 3% to 4% for fiscal 2014, including Harris Teeter. The original guidance was 2.5% to 3.5%. And now I'll turn it back to Rodney. W. McMullen: Thanks, Mike. What a terrific start to our year. Our merger with Harris Teeter is going exceptionally well. We are learning a lot from Harris Teeter associates, and our business is performing well. And we're even more excited about Harris Teeter's people and the opportunity today than we were when we first merged. Across our company, our associates' remarkably consistent execution continues to generate consistently remarkable results for our shareholders. We will continue building on this resilient foundation to grow aggressively into the future. And now we look forward to your questions.

[Operator Instructions] And our first question will come from John Heinbockel of Guggenheim Securities.

So a couple of things. Obviously, it's a little hard to tell with Harris Teeter mixed into the numbers, but if I try to back that out and think about x fuel gross margin decline, it looks about what it's been running or maybe just slightly higher than it's been running. And I ask that because I'm curious what you see with regard to inflation today. Is that being passed along fairly quickly? Or given your value position, are you delaying some of that for weeks or maybe even months? W. McMullen: Yes, breaking it out, you would be correct that without Harris Teeter, the trends would be very similar to what they've been running. From an inflation standpoint, we pass it along, some of it in terms of, obviously, how's the competitive environment going and also, inflation that we think is just a seasonal-type inflation or something that's longer term. And I would say in our ability to pass it through, it's pretty much similar to what it's been running. I don't know, Mike or Mike, anything you want to add to that?

No. J. Schlotman: No.

Okay. And then as a follow-up, when I think about your price investments, right, and you're – I don't know what inning we're in, but how do you think about it now in terms of investing by category, right, because I know you made investments in natural foods. Are there more categories where you need that type of work? Doesn't look like there is. Or is it solely items? And then how do you think about private label, price investments in private label? And when you think about that, do you look at the private label spread versus the brand, or do you actually go out and look at what other retailers are retailing their private label products at? W. McMullen: Well, the first question on overall price investment, we're continuing to look at the markets we do business in and deciding where we want to be positioned. Also, we look at categories within the store and try to determine where we want to be priced relative to competition or the market. But private label, there's several ways we look at private label pricing. One would be how it's related to the branded product. And in some cases, it might be priced with the competition in a way that keeps us on our pricing strategy and keeps us relevant. It really depends upon the item and the market.

But do you think -- we're talking about items now. Most of your category adjustments have been made, or do you disagree with that? W. McMullen: We've been through most categories and made some sort of adjustments over the last several years in pricing, but we're still looking at pricing overall and where we're positioned and making decisions on where we want to be.

And the next question will come from Ken Goldman of JPMorgan.

Forgive me if you mentioned this. Can you estimate, even if it's just a rough number, what weather's tailwind was on your comps in 1Q? W. McMullen: Mike? J. Schlotman: It's really tough. If you look at the cadence of comps during the first quarter, the first 4 weeks of the quarter were a little bit stronger than the rest of the quarter but not remarkably high. In the second, third and fourth periods, the second and third were affected by the Easter shift. If you kind of normalize Easter between the 2 periods, they were very, very close to one another. So I don't think there was a huge bump in the first quarter as a result of weather. It certainly helped, but it's not what made the 4.6% strong. The second, third and fourth on a combined basis certainly contributed to the results as well.

Okay. And then as we look at your comps into 2Q, any particular headwinds or tailwinds we should be thinking about? Just a little more color on how things are progressing so far this quarter. Just curious on those lines. W. McMullen: Yes, we wouldn't see anything unusual versus what it's been running, and we would continue to be slightly above our guidance range in terms of, so far, this quarter and very similar to the first quarter.

One last quick one. It's a bit tricky because of the different days in the quarter and Harris Teeter. I just want to make sure. Your D&A was up 12% year-on-year. Your interest expense was up 14% year-on-year. Are these roughly the growth rates we should be modeling for the rest of the year on a year-on-year basis? W. McMullen: For the year on a year-on-year basis, yes. They will be in that kind of a range because of the Harris Teeter depreciation, as well as the debt we took on for Harris Teeter. And then obviously, next year, we'll return to a more normal level. The other one that's a little different than what we've historically reported is rent as a rate of sales because the large majority of the Harris Teeter stores are leased, not owned like ours, so that affects that line as well, and we break that line out separately.

And the next question will come from Rupesh Parikh of Oppenheimer.

I just wanted to delve a little bit more into the upside in the quarter. So you beat the high end of your guidance, I think, by about a few pennies. Was that all driven by sales upside, or are there other things in play? J. Schlotman: The sales piece would be, by far, the biggest driver of the upside.

And just to clarify, we don't give quarterly guidance, so we only give an annual guidance. So the only thing you can compare it to is what the Street expectations were.

Okay. And then you also mentioned that you're seeing better signs of a consumer this quarter. What are you seeing in some of your more discretionary areas of the business? W. McMullen: Well, we've really seen -- I mean, if you look, it's continuing a good, solid trend. It's always hard to define what's discretionary. But certainly, if you look at what areas people cut back on first, we continue to see strong growth on that across the board. I don't know, Mike, anything you want to add to that? J. Schlotman: No, that pretty much sums it up. There's been some mix changes in what people are buying, it looks like. But overall, it's been strong all across the board.

And our next question is from Ed Kelly of Crédit Suisse.

This is actually Lauren Wood on for Ed. Just a quick question. Can you remind us what percent of your stores have a heavier mix of natural and organic selection and where that number could potentially go to? And then also if you see a comp lift when you add -- when you sort of bulk up that offering in your store? W. McMullen: Well, I don't know if there's any particular area that has a higher mix of natural foods. We tend to -- it's a strategy for the company to improve our natural foods offering across the country, so any of our new stores or remodels, we try to be aggressive on natural foods positioning and the amount of products we carry. So it's pretty much throughout the country, and it's definitely a strategy of ours, and it's really connecting well with customers right now.

And it's not always -- pretty much every store has some offering of natural and organic products. What we're finding is it's as much a lifestyle decision as it is a demographic-driven topic. And people of all demographics are choosing a healthier lifestyle, so we actually have the product. And really, I can't think of stores I go into that don't have some. Now the size of the store can dictate how much you have, but it's a broad-appeal product.

Okay. And then just a quick one. Can you update us on your total MEPP liability?

I don't remember what it is off the top of my head. It was in our 10-K and the MD&A. I don't want to guess the number because I'll be guessing wrong. You can follow up with Cindy and I after the call, but it was in the MD&A and our 10-K.

And the next question comes from Scott Mushkin of Wolfe Research.

I had a housekeeping item first before I got to my bigger question. The ROIC calculation you guys ran in the report, it seems like, and maybe I'm wrong, but basically, Harris Teeter's reflected in the denominator, but the numerator is not pro forma, or is it? J. Schlotman: Okay. So you are correct, Scott. And you also noticed that we went to 1 decimal place instead of 2 decimal places. So the way that works, it's rolling 4 quarters calculations, so your denominator becomes the average assets at the beginning and the end of the year. So you effectively have half of Harris Teeter's assets in there because of that averaging but only 1 quarter of their EBITDA. We'll get more and more of their assets and more and more of their EBITDA as we go throughout the year. So we did it a couple ways. If you look at it just the way this calculation is, it was about 2 basis points down. If you pro forma Harris Teeter in there for the whole time frame, it was about 2 basis points up. So we just decided that rather than try to confuse it, we're going to call it the 13.5% until the end of the year, and then we'll go back to 2 decimal places, I would think.

Okay, perfect. So then the second question is actually more of a strategy question. I mean, you look at the broader food landscape here, and I think you guys just out-comped Whole Foods, if I'm not wrong about that. But on the other side of the equation, you're clearly out-comping Walmart. You have a format now and probably the best high/low operator out there. You got big data. When do we -- and you just bought Harris Teeter, so -- but when do you put this more aggressively on the road? I think you're in 34 states now. When does Kroger really start to drive even more growth? I mean, clearly, you're taking enormous market share where you are, either through more M&A or more aggressively venturing into places you're not. W. McMullen: Scott, as you know, if you look at our fill-in markets, that is the first part of that, and it's really -- if we look at the returns from that, the higher our market share, the higher our ROIC. So that's really the first phase of that is we're increasingly getting aggressive on fill-in markets. And that's -- we're very pleased with the early result. In terms of new markets, by merging with Harris Teeter, we really view that is going into several new markets. And as I've mentioned in the call, one of the things that we're really excited about is the market share opportunity, growth opportunity that Harris Teeter has, and we will aggressively partner and support growing in several of those markets as well. So from our perspective, that is going on the road with it in the context of where we think we see the highest return with the capital that we've allocated.

Any chance we get a bump in the growth rate that you have out there? 8% to 11%, I think you've been exceeding now for a while. W. McMullen: We're not even 2 years in the 8% to 11%, Scott. Let us get comfortable and used to this one for a little bit. But as you know, the key to our growth rate is being sales-led in growing our business and then continuing to executing against our model. So I agree with Mike. Give us a little time, but that's really how we're trying to drive to grow our business.

It's one thing to announce investments in October of '12. It's another thing to begin making those, and then it's another thing again for them to come out of the ground and start generating sales and EBITDA. So there's a lag from when you make the announcement until you get there. Keep in mind, our share buyback in the first quarter is very strong. That was contemplated in our guidance. And we told everybody in October '12 for the first couple, 3 years, 1/3 or half of our growth was going to come from share buyback until our investments started to mature. So we'll have to wait until that tipping point happens, Scott, and see where we are at that point in time.

And next, we have a question from Karen Short of Deutsche Bank.

Just on the comps, looking at the numbers that Harris Teeter reported last year, it looks like I mean they actually had some pretty decent comps throughout last year, right up until their third quarter. So I'm kind of wondering if you could give some color on what the impact for Harris Teeter was on your comps. J. Schlotman: Yes, we won't give specifics, and obviously, when we talked in the fourth quarter, we said we would -- we gave guidance with Harris Teeter in it. We were pleased with where Harris Teeter's numbers was. It was consistent with the budget, and that's true for EBITDA as well. But I won't give specifics in terms of how effective the overall total Kroger number other than it wasn't much.

Okay, that's helpful. And then I know you obviously gave color on your inflation in the current quarter. What are your expectations on inflation for the whole year or full year? J. Schlotman: Yes, we're kind of expecting in the range where we saw in the first quarter to hold true for the year. I figured inflation was going to come back up again, so I actually flipped to a page in our – you've see me carrying the bluebook around the conferences, Karen. If you look at some interesting things, and without fuel and pharmacy, last year's inflation cadence was 1.7%, 1.6%, 1.5% and 0.8%. And everybody's concerned about inflation right now. In our first quarter, that same metric was 1.8%. Grocery inflation in this year's first quarter was actually lower than grocery inflation in last year's first quarter, and pharmacy and meat and produce are basically in the same range. So this isn't a world we've lived in, and it's not a huge shift, really, from where we were about the same time last year. We're comfortable managing the business in an inflationary environment like we have today and think we're going to see this continue. There's some grain prices out there that are favorable. Milk looks like it's peaked, and it's going to start to come down a little bit, which will help the grocery inflation index because that's where we classify milk when we talk about inflation. So we think it's going to be pretty comparable to where it is today.

The bluebook came in handy. And then just the last question. It looks -- obviously, you gave your dollar amount for the buyback, but it looks like you're done, pretty much done with your authorization. So any comments on that? J. Schlotman: We did have -- our expectation in our guidance for the year, contemplated a front-end buyback program. It is somewhat unusual for us to go without any kind of an authorization. What I would say is unless there's -- I wouldn't expect significant incremental buyback activity for the rest of the year. W. McMullen: And it's really left up to our board on the approval. J. Schlotman: Right.

And the next question is from Meredith Adler of Barclays.

I'm going to probably talk about something a little bit bigger picture. I was very intrigued by the commentary about pension and specifically that you had some employees, a small number, but some employees shift to a 401(k) plan with matching and also that you moved a much larger group of employees to a different plan. Could you just talk a little bit about kind of what the discussions were, why would somebody move away from a defined benefit plan, and what do you think the prospects are for other people recognizing the value of a 401(k)? W. McMullen: Yes, there were clearly a couple different moves here, Meredith, both of which came together in the same quarter. The folks in the Pacific Northwest, there were actually 2 separate moves with those folks. They're continuing -- their accrued liability moved into the consolidated UFCW plan that we established a couple years ago. So we took their historical liability that they've already earned into that company-managed UFCW plan. Their future benefits are being accrued in the sound plan, and it's not a sound plan from a financial standpoint, although it's very well-funded. It's called a sound fund in the Pacific Northwest. So that was a group of retail associates. The second move was a group of King Soopers pharmacists who happen to be unionized. Same thing, we moved their obligation, and it was actually through the negotiating process with them where they had the desire to go into our 401(k) plan and be able to manage their investments themselves and accrue those dollars and move them around as they see fit, and that one was really associate-driven at the negotiating table. I will tell you we have some high-level talent dedicated to this effort. In fact, if you remember, a year or so ago, we moved Scott Henderson, who was our Treasurer, and he spent a good chunk of his time, one, he manages our entire pension investment program, both of the -- all 3 of the K plan, the company plan and the UFCW plan, as well as spends a lot of time with our labor negotiators trying to do this. Our view is we're trying to be proactive on this front, not reactive. And we think by being proactive, it's the best thing for our associates, not only for the pension they've already earned but for the pension that they would expect to earn going forward. J. Schlotman: And Scott and Mike working with our labor negotiators and the union, they understand the opportunity and need for this, and this really does improve the quality of the benefits our associates have and secures -- and improves the security of their ultimate benefit. So it's one of the things where the union is also working with us on these, but it's a lot of work and a lot of effort. W. McMullen: It happens slowly. 300 contracts out there.

I guess it's fair to say that repeating what you did with the pharmacists may be unusual because they are a unique group of employees. W. McMullen: Perhaps. You never know what's going to happen in the negotiation. All I know is the unions and Kroger both have a desire to continue conversations to try to come up with creative solutions to secure -- to help secure the benefits they've already earned and give them a decent benefit accrual going forward as well.

That's great. And then I'm going to just switch gears talking about fuel. You had what looks like a pretty attractive margin on fuel this quarter. And I assume that's because prices were coming flat or coming down. Is that fair to say? And kind of what's your outlook, if you can have an outlook, about fuel prices for the rest of the year? And also, did it contribute to earnings per share in any kind of a meaningful way? J. Schlotman: What we always say about fuel is one thing we'll guarantee, and that is it will be volatile. It was volatile inside the quarter. There were days and weeks where we were not as thrilled with our fuel results, and then there were days and weeks where we're very thrilled with our fuel results. Relative to the retail price per fuel, in quarter 1, on a total company basis, fuel supermarkets and convenience stores combined, the average retail price per gallon last year was $3.524, and this year, it was $3.456, so it was actually a little bit lower on a combined basis between the 2 years. And the cost was actually about the same amount, maybe just a touch amount lower as well. So it's -- and we had very, very strong gallon growth, almost 6% gallon growth. W. McMullen: It helped the quarter, but it wasn't the driver for the quarter by no means. And as you know, we always budget fuel margins kind of the same this year as the prior year. And over time, that always seems to come out pretty close to right. Along the way, there's, as Mike mentioned, quite a bit of volatility.

Right, and I'm just going to throw in one more quick question. I think I just didn't hear what was said about pharmacy and what pharmacy did maybe to comps and anything else about pharmacy profitability. I don't know if you made a comment. Some stuff broke up when I was listening to it. J. Schlotman: Yes, I made a comment when I spoke about ID sales for the quarter, that they continued their strong performance both from a script count and the sales count -- sales basis. So good ID sales growth in dollars and scripts.

And next, we have a question from Andrew Wolf of BB&T Capital Markets.

Wanted to ask one follow-up on the inflation questions that you've been getting. With meat rising really quite rapidly the last couple months and the quarter coming out okay in gross margin and you guys saying your survey works, looks like your customers are loosening up their pocketbooks. Are you seeing a lot less change in behavior in terms of trading down in proteins and into lower-quality meats and stuff like that? Well, that's really the question. So it's kind of a pass-through, and are you able to pass it through in a sort of more reasonable way than you would 1 or 2 years earlier, when that type of thing happened? And how's the consumer reacting to that?

If you look at meat, specifically, you can clearly see behavior changes as prices increase. So people buying more cube steaks or buying more hamburger, those kind of things, you can clearly see. The comment on the customer overall is very broadly in terms of if you look at what they're doing in total. We feel very good about and we like what we're seeing in terms of customer in total being willing to spend a little bit more.

Okay. And I wanted to ask just a follow-up on Harris Teeter. I know you guys do a lot of survey work with customers, and Harris Teeter has a pretty rich loyalty card as well. Have you been able to do any survey work with their customers? And could you reveal what it is you might have heard from them in terms of -- maybe in terms of the 4 keys that you guys go to the market with or that kind of thing? I know at a conference, recently, you said perishable pricing was a focus, for example.

If you look at, obviously, Harris Teeter has done customer research for years. And before, in a couple of markets, we would have our customer research on Harris Teeter just because they were somebody else in the market. Harris Teeter scores incredibly strong on people and products and freshness of products. So when you look at produce, meat, deli department, they score very well. And their associates are very friendly, and that's really their strong suit. And we would expect, when we start doing the combined research that, that's consistent with the research Harris Teeter had done before. We would expect to see the same.

And where they score well, let's say, in some of that merchandising and maybe customer interaction as well, is that something where that can be integrated into all or parts of Kroger? Or is it just too much of a task given the size differential between the 2 companies? W. McMullen: Mike Ellis, on his prepared comments, talked about it a little bit. I can tell you that Mike Ellis and the operators are spending quite a bit of time trying to understand exactly how Harris Teeter does that. Mike, you're in the middle of all of that.

Well, it's really been fun to have someone who was a competitor that you admire, and now you can actually see what they do, how they do it. But as Rodney mentioned, they've been really strong on some of the matrix, better than us in several markets. So to learn how they do what they do has been actually, really, a lot of fun, and we're integrating some of that into some of our operations today throughout Kroger.

And our next question is from Stephen Grambling of Goldman Sachs.

I guess turning back to the guidance, given the big buyback upfront, it looks like the year assumes a bit of a change in the margin on a stand-alone basis when factoring in the high LIFO charge. I know you don't like to get into this that much, but can you talk qualitatively about your underlying gross margin, even OG&A assumptions in the back half and any unusual shifts we should be expecting? J. Schlotman: Yes, I wouldn't -- I won't get that granular. The closest I'll come is we did make comments about operating profit, and as we get a full year of Harris Teeter into the numbers, we would expect our operating profit margin to not be the 12 basis point rolling 4 quarters increase we had in the first quarter. But as we get a full year of them in, we would expect it to come closer to the slight increase that we project overall.

Okay, that's helpful. And then I think the other thing that, I guess, Kroger's been doing that's a little bit different than other areas in retail is moving towards a few of the larger-format stores, marketplace stores. As you look at general merchandise, which has been shifting online, and you learn from click and collect at Harris Teeter, how are you thinking about the opportunity to offer general merchandise at a broader group of stores with the web? And what are the implications for sales per square foot? W. McMullen: Well, all of our large stores have some selection of general merchandise, including apparel, in all of our future plans and remodels that we're working on. And we're really pleased with the results, pleased with sales per square foot and pleased with customers' reaction to the product offering. So it is part of our strategy going forward.

And for the smaller stores, is there an ability right now to actually have click and collect on general merchandise? W. McMullen: Not today. We would expect to take the Harris Teeter click and collect, as Mike mentioned, to other -- to do it in another market. We like what we're seeing there.

And our next question is from Jason DeRise of UBS.

It's Jason DeRise. Wanted to ask on natural foods, obviously growing double digits. Can you share what it contributed to the 4.6% comp? W. McMullen: We really wouldn't get into that level of detail in terms of how much of the 4.6% is driven by that. Mike did mention that all departments were positive identicals. J. Schlotman: All departments and all geographies. W. McMullen: Yes. So it's broad-based, so that isn't the thing that's driving it, but obviously a nice growth.

And when you look at your customer data, do you think that this is a customer who's just entering the category in a more meaningful way now that you're offering it? Or do you think that, perhaps, this is sales that previously were outside of Kroger, at maybe a specialty store, and now that shopper is deciding to do that trip back at Kroger solely? W. McMullen: I think it's all of the above. There's been lower prices in a lot of areas in natural foods, so it's bringing new customers to the category. But certainly, people are more health-conscious for their family and the things that they consume. So a lot of our customer insights are driving a lot of the decisions on what we carry and what we put into our stores. And they are – customer is shouting that this is something they're really interested in, so it's a big focus for us.

I think it was maybe a year or 2 ago, there was a lot of talk about how Kroger only has half of their customers' grocery spend. How has that trended since the efforts in natural foods and other categories to try to win more of that share? W. McMullen: Jason, it's a great question, and it's one that if you were in the room, you'd see us smiling at each other because it's pretty similar to what it was because the fortunate part, we keep adding new customers. So if you look at the loyal shoppers that have been loyal for a while, we continue -- that 50% would probably be more like 70% to 75%. Fortunately, we keep growing our customers, so you have new loyal customers coming in. So when you look at the blend of existing loyals and new loyals, it's still around the 50%.

Yes, and if you look at ID loyal customers, it would be much higher than 50%. But the good news is, is we keep adding people that become loyal below the 50%, so it dilutes the total back down. W. McMullen: Obviously, natural foods helps on that, but it's really across the whole store that we're picking up that customer, including the fresh departments, produce, meat, deli, bakery, seafood.

Okay, great. And I guess I just wanted to see if I can put this in there on Harris Teeter. Would you quantify just the EPS accretion for the quarter just so that we can sanity-check the original guidance on that? W. McMullen: You should assume that our original guidance, our updated guidance would have the same base assumptions for the Harris Teeter contributions to the year. I did mention that Harris Teeter is performing consistent -- a little bit better but not a lot in terms of the analysis that we used when we were working on the merger. So we're pleased with where they're tracking, and it would be consistent with what we shared before.

Right on track with what our expectations were.

I mean, there's been, in the press, I guess, part of it's your press, but that the Harris Teeter started dropping prices, similar type of press releases that you had seen coming out of other Kroger banners on this. And so that's -- I guess is there anything you could share about how that's gone. Is that what's driven maybe a bit more of the upside response to that, or is that not where the incremental upside has been? W. McMullen: Yes, it's really very, very early in that process. And what we're doing is the synergies, as we accomplish them, Harris Teeter is taking that money and giving it back to the customers. So it's really giving the customers something back from the merger and some of the savings, and Mike mentioned insurance, for example.

And next, we have a question from Chuck Cerankosky of Northcoast Research.

Looking again at the pension benefit announcement you made the other day, Mike, I'd like to get a better idea on how the cash flows are going to look on this. You're obviously not going to pay $56 million immediately. But at the same time, how might that be broken up over the next 5 years or so as it moves into the funds, and is there a corresponding offset in your hourly contribution to these plans? J. Schlotman: A couple questions there. So the $56 million is the after-tax cash we'll have to put in. And as we said, we have up to 5 years to do that. We really haven't decided exactly how we're going to do it. The Kings Sooper pharmacists is a smaller part of that total contribution, and we actually have longer than 5 years to do theirs. But you should expect some plan over the 5 years to do it. What this really does is, technically, what happened is assets and liabilities came attached to their already earned and accrued benefits, and that's what we're shoring up in these plans. Going forward, they will continue to earn benefits. In the pharmacists' case, they'll get a K plan matched. In the Pacific Northwest contract, they'll continue to earn a benefit going forward, and there will be cents per hour accrual for those benefits going forward. So it won't reduce that.

So the $56 million is to shore up the plans, and whatever's negotiated going forward is an additional pennies per hour kind of deal? J. Schlotman: Right. Now, what we don't have to negotiate and worry about funding going forward is any cents per hour to make up the $56 million because we'll do that separately. So going forward, any portion of an hourly contribution that was there to make up an underfunding in the plan, obviously, we've already negotiated that and walled it off. So all we have to worry about funding is future benefit accruals, not vested benefit accruals. It'll be separate.

And announcements of this sort are likely to recur, but it's very difficult to forecast when and how frequent. Is that a fair statement? J. Schlotman: Can't predict when and how, and it's one of the reasons we had a disclosure of this kind of activity in our outlook section in the 10-K because -- that's why we dedicated some very talented resources to this because we would love to continue to pick off opportunities like this to secure -- to help secure the pension benefits of our associates going forward in some of these underfunded plans, get that out of that fund. If that fund runs into trouble, we know our associates are taken care of because we have them in a fund that we're helping manage. And we do view that what we have is an obligation to do that for them.

And the next question is from Philippe Guzens [ph] of Mitsubishi.

[indiscernible] has recently indicated that they had seen a pickup in competitive activity, not only, obviously, in their home market with the expansion of Albert Heijn [ph] stores, but also in some U.S. markets. Should we read into that that you, perhaps, have sharpened a little bit your pricing already with Harris Teeter, given that they do compete with the Food Lion stores in a number of markets? W. McMullen: Yes. As I mentioned before, that's a good assumption, but it's just early in that process.

Okay. And then just as a follow-up, if I may. I may have missed this, but following the announcement yesterday, have you indicated by how much your multiemployer liability will shrink on the balance sheet? J. Schlotman: Well, that amount we put in the MD&A is not entirely on our balance sheet. And theoretically, it will be reduced by the $56 million once we fund it. That $56 million will actually now sit as a liability in our balance sheet until we do fund it.

And next, we have a question from Kelly Bania of BMO Capital Markets.

Just on your comp guidance, you clearly raised it. First quarter was strong, sounds like second quarter's running strong as well. And you talked about a little bit of a less cautious consumer behavior, which I don't think I've heard you guys say for a while, and upticking inflation. So just curious if there's any conservatism in that 3% to 4% kind of outlook for the rest of the year or any other thing that we should be thinking about getting back to a 3% to 4% range. W. McMullen: The one thing that -- if you look at last year by quarter, the fourth quarter actually was a little better than the trend had been. It wasn't driven by weather, but it was helped by weather. And as we start cycling some of those things, until you actually cycle them, obviously, you don't know where you are. Now we'll always hope that we're a little conservative, but until you get there, it is our best estimate at this point it time. I don't know, Mike or Mike, you want to...

I agree completely. J. Schlotman: I would agree completely also.

Great. And if I can just add another question on natural foods, clearly up strong again. Just curious, if you look at your competition, whether it's discount channel or supermarkets or elsewhere, do you see them investing as much as you are in natural product categories? I mean, I realize Walmart's announced a Wild Oats line. We haven't really seen that show up in stores yet, but do you think some others could start to invest more in natural foods as well? Or what are you seeing versus your competition? W. McMullen: Well, there is investment. We're seeing competitive investment in natural foods. For us, we've positioned natural foods in different parts of the store now. You'll find soy milks, almond milks in the regular dairy case and things like that. So we're just trying to answer what the customer wants and have products available at a price they're willing to pay and in a location that they're happy to find them. So but competitively, yes, we've seen a little bit of move but not much.

And that question will come from Kate Wendt of Wells Fargo Securities.

So I just actually had a bigger picture question. As you look at your overall store base, whether you think you'll see a net increase in competitive openings against you this year or if it's consistent, you think, with last year or maybe offset by closures at weaker chains? Obviously, it doesn't seem to be affecting your comps this quarter, but just curious how you see that playing out this year.

Yes, it's a good question. And you continue to see a lot of people talk about adding square footage in the space. Some of that square footage is dedicated to what we sell inside of a different format, be it inside of a Dollar General store or a drugstore or something like that. Walmart's obviously building some smaller neighborhood and kind of markets, so that's there. What kind of gets lost is competitors who are closing stores that I would call -- versus a small offering inside of another format, what I would call a destination store. So when you have a destination store close and it's 50,000 or 60,000 square feet and somebody else has added 1,200 square feet, that's really a convenience shop. It's a different kind of competitor. So I think we'll continue to see a lot of square footage open up that sells food. I think overall, the destination kind of square footage is probably flat to slightly down.

Got it. That's really helpful. And then just one other quick one. I saw that you recently introduced a premium pet food assortment, which sounds like it could be a nice incremental comp driver for you guys. I was wondering how many stores that's in today and maybe how many you're planning by year end. And then it also sounds like maybe along with that, there's been a change in the receptivity of premium pet food brands distributing to the supermarket channel. W. McMullen: Yes, we just recently introduced, I'm glad you caught that, a new line of premium pet foods. And it should be in every store in Kroger, I would hope. That is the plan. And sales have started out strong, we're pleased with it. Glad you caught that. Before we end today's call, I'd like to share some additional thoughts with our associates listening in today. Earlier this month, we introduced the Taste of Mexico event in all our stores. We hope our associates are enjoying this fun celebration of Mexican food with our customers, including in-store sampling, creative displays and special activities. I know I've enjoyed visiting our stores across the country and seeing the creativity, passion and enthusiasm from our associates for the Taste of Mexico. This special event is the first of a series of celebrations of foods of the world in our stores and runs through June 24. Our associates' passion for doing good is evident in the way we serve our customers and neighbors in the communities where we live and work every day. This month, we honor our associates' efforts in serving our communities and those in need. We are pleased to recognize in our 2013 annual report 28 associates across the company for their outstanding volunteer service as recipients of The Kroger's 2013 Community Service Award. These women and men give their time and talent on our veterans, feed the homeless, raise money to fight cancer and bringing music to mentally challenged, among many other causes. We are grateful for their commitment. A big heartfelt thank you to all our associates who volunteer. Mike and I are proud of the work you do. You make a big difference for so many others and the communities we call home. Thank you. That completes our call today. Thanks for joining us.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.