Kroger Company (The) (KR)

KR 
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The Kroger (KR)

Q4 2011 Earnings Call

March 01, 2012 10:00 am ET

Executives

Cindy Holmes - Director of Investor Relations

David B. Dillon - Chairman, Chief Executive Officer and Member of Proxy Committee

W. Rodney McMullen - President, Chief Operating Officer and Director

J. Michael Schlotman - Chief Financial Officer and Senior Vice President

Analysts

John Heinbockel - Guggenheim Securities, LLC, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Karen F. Short - BMO Capital Markets U.S.

Mark Wiltamuth - Morgan Stanley, Research Division

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

Meredith Adler - Barclays Capital, Research Division

Charles Edward Cerankosky - Northcoast Research

Charles X. Grom - Deutsche Bank AG, Research Division

Kelly A. Bania - BofA Merrill Lynch, Research Division

Deborah L. Weinswig - Citigroup Inc, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 The Kroger Company Earnings Conference Call. My name is Fab, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Cindy Holmes, Director of Investor Relations. Please proceed.

Cindy Holmes

Thank you, Fab. Good morning, everyone, and thank you for joining us. Before we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but Kroger assumes no obligation to update that information.

Both our fourth quarter press release and our prepared remarks from this conference call will be available on our website at www.thekrogerco.com. After our prepared remarks, we look forward to taking your questions. [Operator Instructions] Thank you.

I will now turn the call over to Dave Dillon, Chairman and Chief Executive Officer of Kroger.

David B. Dillon

Thank you, Cindy, and good morning, everyone. Thank you for joining us today. With me to review Kroger's fourth quarter and full year 2011 results are Rodney McMullen, our company President and Chief Operating Officer; and Mike Schlotman, our Senior Vice President and Chief Financial Officer.

We are very pleased with Kroger's outstanding performance in fiscal year 2011 and strong fourth quarter financial results. That we were able to raise earnings per share and identical sales guidance through the year and achieve those higher results demonstrates the strength of our business strategy and momentum for a strong 2012.

Kroger's strong performance rewarded shareholders in 2011. We delivered adjusted earnings of $2 per diluted share, a 15% increase in earnings over 2010. We hit the high end of guidance despite a much higher LIFO charge. We increased our quarterly dividend payment by almost 10%, and we implemented an aggressive stock buyback program using Kroger's strong free cash flow to repurchase 67 million shares. Later, Rodney and Mike will provide more details on our full year performance. I'd like to highlight several of the commitments that our teams successfully delivered on in 2011.

Kroger increased identical supermarket sales. We grew market share. We effectively used free cash flow to reward shareholders and invested wisely to continue to win customer loyalty. Importantly, we also balanced cost reductions with investments in our Customer 1st strategy to increase FIFO operating margin for the year. Kroger is off to a healthy start for the year ahead, and we expect earnings per share growth in 2012 to exceed our business model.

Kroger had strong performance in the fourth quarter. Identical supermarket sales for the quarter increased 4.9%, excluding fuel. More loyal and total households are shopping with us, and identical sales are up among both groups. This consistent sales performance contributed to Kroger's market share gains in fiscal 2011. And we achieved the high end of growth estimates for both earnings per share and identical sales growth.

Our operating performance was broad-based and consistent across the company. Every operating division achieved positive identical sales for the quarter, and every supermarket department achieved positive identical sales. Our natural food, pharmacy, produce and deli departments posted the strongest results. I'm very proud of our associates for bringing customer -- the Customer 1st strategy to life for our customers. Our relentless focus on our 4 keys, our people, prices, products and shopping experience, is why Kroger has achieved an industry-leading 33 consecutive quarters of positive identical supermarket sales results. Our associates work to please and delight our shoppers inspires customer loyalty, which grows our business and generates shareholder returns. Simply put, we put our Customer 1st -- when we put our customers first, shareholders win.

Well, as we look to 2012, we expect the external environment to be a little better than 2011. All of the data we're seeing suggests the overall economy and customer sentiment are improving. Both give us reason to be optimistic about the year ahead. We're also mindful that consumer sentiment is fragile. And as we've seen over the last few years, it can be affected by external factors such as rising gas prices and geopolitical issues. So we will continue to carefully monitor the pace of economic recovery, higher gas prices and the slowing of the rate of inflation. And while these factors will influence all retailers, our success will come from making tactical adjustments as needed throughout the year, just as we did throughout 2011.

Rodney will now offer insight into Kroger's strong business trends in the fourth quarter and 2011 market share statistics. Rodney?

W. Rodney McMullen

Thank you, Dave, and good morning, everyone. Our focus on building loyal customer base continues to increase sales and reward shareholders. Today, close to 50% of all U.S. households carry one of our loyalty cards. That percentage obviously is much higher in the markets where we operate.

One of the ways we create value for our customers is by leveraging scale and position as a share leader in most of the markets in which we operate. Even with Kroger's deep market penetration, we have a tremendous opportunity to increase incremental spending among our loyal customers, who on average spend about $0.50 of every food dollar with Kroger. Kroger's partnership with dunnhumby is another powerful way we build our loyal household base. The unique customer insights gained from our loyalty data help us reward our most loyal customers with highly relevant, personalized offers for the products they like and buy regularly.

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