The Kroger Co.
Q4 2012 Earnings Call Transcript

Published: 7 Mar 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2012 The Kroger Co. Earnings Conference Call. My name is Kirstie, and I'll be your operator for this -- for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Ms. Cindy Holmes, Director of Investor Relations. Please proceed, ma'am.

[Cindy Holmes:]

Thank you, Kirstie. Good morning, and thank you for joining us. Before we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but Kroger assumes no obligation to update that information. Both our fourth quarter press release and our prepared remarks from this conference call will be available on our website at 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. Good morning, everyone, and thank you for joining us today. With me to review Kroger's fourth quarter and full year 2012 results are Rodney McMullen, Kroger's President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer. Kroger had an outstanding fourth quarter and an outstanding year. We accomplished a lot in fiscal 2012. We delivered on ID sales growth, we exceeded expected earnings per share growth, we increased FIFO operating margin and we increased our dividend 30%. Kroger's unique value offering of better service, great products and enjoyable shopping experience and lower prices continues to resonate with a full range of customers. The result is an industry-leading 37 consecutive quarters of positive identical sales growth. In this morning's press release, we provided you with details to make it easier for you to do an apples-to-apples comparison and understand how we look at our business internally. Table 6 in our press release was designed to help you understand the details behind the growth figures we reported. We delivered value to shareholders by increasing our dividend and exceeding our own earnings per share guidance through the combination of solid operating results and share buyback. We returned more than $1.5 billion to shareholders through dividends and stock buyback in 2012. Our associates delivered an outstanding year that underscores Kroger's growing connection with customers remains the key to shareholder value creation. In a moment, Rodney will outline how we got there, and Mike will discuss the numbers. First, I'd like to give you some insight into what our customers are facing today. Consumer confidence was fragile throughout the year, and it hit its lowest point this January as customers voiced heightened concern over taxes. We believe 4 factors will continue to affect consumer confidence

[W. Rodney McMullen:]

Thank you, Dave, and good morning, everyone. We exceeded our expectations for the quarter and the year, thanks to our associates performing to deliver growth. We are implementing our long-term growth strategy, which includes

[J. Michael Schlotman:]

Thanks, Rodney, and good morning, everyone. Obviously, our numbers are a little difficult to dissect this quarter. As I go through our results, there are 3 important comparisons that we want to make sure you understand

[David B. Dillon:]

Thanks, Mike. And as you can tell, we're very pleased with our financial results for the quarter and the year. Kroger's performance is the result of our associates' hard work and commitment to make each day better for our customers. We grew our business in 2012. And building on that momentum, we expect to deliver the growth in 2013 that we outlined at our investor meeting in October. Now we look forward to your questions.

[Operator:]

[Operator Instructions] Your next question comes from the line of Stephen Grambling from Goldman Sachs.

[Stephen W. Grambling:]

I remember at the Analyst Day, you had referenced the incremental CapEx would be a pressure to your SG&A in the near term, yet you still held that 8% to 11% range. Is there something as you look out to 2013 that gives you greater confidence than the long-term range and maybe if you can just give us a little more color?

[J. Michael Schlotman:]

Well, the increased capital, it'll have an effect on holding down our ROIC ability to grow that in the short term. We do expect to continue to not have that go down but, as Rodney said, grow it in the near term. As we open the stores, if you look at our guidance, we opened up 44 stores in 2012 and we're projecting 45 to 50 in 2013. So that's not a dramatic increase year-on-year that would have any kind of material effect on -- or from a preopening cost standpoint or the ramp-up of those new stores.

[Stephen W. Grambling:]

Okay, that's helpful. And then one other quick detail. On the pharmacy business, how should we be thinking about the generic shift impact in the quarter? And I know you referenced that it'll be a little bit less next year, but maybe if you can help us quantify that?

[David B. Dillon:]

Let me make a comment first and then I'll ask Rodney to answer the specific question. But I wanted to make the broad observation that our pharmacy business this past year was outstanding. And I want to make sure that anybody who's touched our pharmacy business in our organization knows how we feel about that. We were absolutely thrilled. So Rodney, you want to comment about the generic effect?

[W. Rodney McMullen:]

Yes. The generic effect kept getting bigger and bigger as we went through the year, and we're just now starting to cycle the beginning parts of that. So the heavy -- the largest effect will be in the first and second quarters. It'll get a little smaller in the third and fourth, but not tremendously smaller. And we also obviously have a few more drugs going to generic. So we believe it will be a headwind from a sales standpoint throughout the year. One of the things that's very positive, as Dave mentioned, we had a great year on pharmacy. And so far this year, we've continued to have a strong script count growth in pharmacy as well.

[Operator:]

Your next question comes from Andrew Wolf from BB&T Capital Markets.

[Andrew P. Wolf:]

Wanted to ask you, Dave, when you mentioned the variability in sales, I'm not surprised to hear that given all that's going on in the macro environment. But has that increased a lot compare -- I think you had mentioned it last quarter, too, and I asked you about it. But is that something that's -- the amplitude, the amount of variability is increasing. Or is that something to call out that we should think about?

[David B. Dillon:]

I think we've seen it more amplified in the last 6 months or so than it had been, and that's why I called it out last quarter. And I think what we saw this last quarter was much of the same. Now last year was also hampered by the fact that there was a 2-day swing in the calendar because of leap day a year ago and when you come to the first of month or end of the month. And we've now rounded that, so we don't have that issue to contend with. But the issues that I was referring to really is the fragile nature of the consumer, and I think that they ended up swinging with -- almost with that day's news. Now that may be a little bit of an exaggeration, but you can see, as we do our polling, you can see heightened awareness. In January, for instance, on taxes -- I mean, that just shows crystal clear that it was on their minds. And I think it's things like that, that caused them to have that swing in how they approach their own daily living.

[Andrew P. Wolf:]

So that polling information, that's correlating somewhat with sale -- behavior and people...

[David B. Dillon:]

Well, actually, we're calling out specifically in this case because sometimes, we can see behavior in sales as we did actually see it a couple years ago when the debt ceiling was been debated. But this time, when you look at the payroll tax, lots was written about the payroll tax, and lots of people were assuming. Of course, it's early in that process, so I don't know that we'll feel differently -- could feel differently down the road. But right now, what we see is taxes and the payroll tax and other issues like that on people's minds in a very noticeable way, and we see the variability from day to day, week to week. But we do not see what we think is a dollar sales impact in total on what's happening from the payroll tax.

[J. Michael Schlotman:]

The other thing on top of that is, in some states, government transfer payments, the way those payments are made, have changed, and we haven't yet cycled a year with the new schedule on transfer payments being made to recipients. So that creates some of the volatility as well.

[Andrew P. Wolf:]

Okay. One follow-up then I'll cede because of your one-question rule. Did the delay in tax payments, do you think that also affected the cadence and the variability in the sales results?

[David B. Dillon:]

It certainly could have. It wasn't a big enough factor that we would be able to -- that we were able to discern it specifically in our minds. But it's one of the factors that I think we would list, and it's what was going on in the consumer's world.

[Operator:]

Your next question comes from the line of Mark Wiltamuth from Morgan Stanley.

[Mark Wiltamuth:]

It's Mark Wiltamuth. We saw a number of other retailers show some holiday cautiousness on the part of consumers. Did you see any of that across the demographic cuts that you do as you look at your data?

[David B. Dillon:]

Well, of course there were some signs of caution. But on the other hand, actually, we were pleased with our holiday selling period and the weeks that followed, actually, too. So I would say nothing that should be called out at this point. Rodney, you want to add anything to that?

[W. Rodney McMullen:]

No.

[David B. Dillon:]

No.

[Mark Wiltamuth:]

And Mike, if you could maybe quantify your health care and pension headwinds because you still have a strong earnings growth story here, but it sounds like there are some headwinds we just can't see behind the scenes.

[J. Michael Schlotman:]

Well, health care and pension headwinds are always out there. We -- in the 8-K, we filed what we expect our contributions to the union funds to be for pensions, and that dollar for dollar is an expense item. Whatever we contribute is an expense. The other item that's out there is the amount of expense we expect for the company-sponsored pension plan. And that's actually a little lower next year than we would have originally expected. But those items are always out there. It's one of the reasons why our identical sales performance is so important. And our goal is to be able to grow identical sales faster than our underlying costs are going so we can make the operating profit margin growth be what we expect.

[Operator:]

Your next question comes from the line of Ajay Jain from Cantor Fitzgerald.

[Ajay Jain:]

Maybe I'll address this to Mike Schlotman. I noticed your D&A was lower compared to last year, and I think it was down more materially if you account for the calendar shift. So just wondering, is there any change in your schedule? Can you just talk about what's driving that decrease? And what's implicit in your 2013 guidance for D&A expense?

[J. Michael Schlotman:]

I wouldn't say there's anything specific that winds up being in there. Some of it's just reflective of some older stuff becoming fully depreciated. As you know, when you look at our CapEx, keep in mind not everything we spend capital on gets depreciated because we like owning our properties. So therefore, we buy the land, and that doesn't wind up in depreciation. So it doesn't affect that. We would expect the depreciation to be up a little bit in 2013 compared to 2012 on an apples-to-apples basis.

[Ajay Jain:]

Okay. And just as a follow-up, maybe you guys mentioned it earlier and I might have missed it, but I just wanted to ask if you could comment on the intra-quarter ID trends?

[David B. Dillon:]

Yes. The ID trends grew. By the 13th period, they were the strongest of the quarter, which is our last period of that quarter. And in fact, you didn't ask about it, but I'll add the additional 4 quarter -- or 4 weeks, rather, 4.5 weeks that we've had since that time. If you take the 13th period and the 4.5 weeks since that time, they both were about the same, and they both exceeded actually slightly above what our sales range guidance is for the year 2013. So we're pleased with that. We did have some weather in the last few weeks that has positively helped our sales. But even if you take that out, I think we were solidly -- certainly above the midpoint of what the guidance is that we gave.

[Operator:]

Your next question comes from the line of John Heinbockel from Guggenheim Securities.

[John Heinbockel:]

I wanted to drill down a little bit on sort of the market share performance. So if I'm right, the share gains have moderated a little bit, say, from '11 and '10. Is that just because the prior gains were unsustainable and where we are now is more sustainable? Or I don't know how you've dove into that and taken a look at that. And then as part of that, if you then looked at loyal households, you looked at different customer groups and/or different competitors, is there something where, as you dice it, the market share gains are actually stronger or accelerating with certain customers and again, certain competitors?

[David B. Dillon:]

Let me take a shot at the market share question, and then I'll see if Rodney wants to bring that and the loyal households together. But on the market share, I would encourage you not to think of it as an accounting number and with precision. I would think of it as more a directional picture. It's a very helpful indicator of where things are headed, but I think it's more important really to look at it in combination with other things. So the first thing we noted on our market share was that it has been growing in the second half of the year so that you can assume that the comparison for the year, that we're -- we may have had -- we had some -- we did have. In fact, we talked about some of the struggles we had with tonnage early last year, and that's changed. Our tonnage through the last half of this past year was strong. And in fact, as I indicated on the sales so far in the 4.5 weeks we've had it in this quarter, our tonnage continued strong, too. So if you combine the sales trends we've experienced, the tonnage we have experienced with what the ACNielsen material shows us, it's certainly directionally strong. Yes, it may be a little bit less than what it had been, but I don't -- in terms of market share. But I don't think it's a meaningful variance. I don't think that the numbers are that accurate that we can see that kind of variance in them. Rodney, you may want to add to that, and feel free to comment on the households.

[W. Rodney McMullen:]

Yes. I would -- I agree completely. And as Dave and I both mentioned, and I mentioned earlier, we've improved during the year. So actually, the last half of the year, the gains were better than the overall year. When you look at customer segments, the value customer early in the year, we were very soft on share with that type of customer, and it's improved nicely. But that would have been the -- earlier in the year, that would have been a very soft area of our share by segment. If you look at more a traditional and upscale customer, those customer gains were really, across the year, and continue to be very nice.

[John Heinbockel:]

And when you guys look at -- to Dave's point, you think it's -- share and comp together is probably a good matrix to use. And the levels we're at today, you're comfortable with. I would also think as the capital program picks up, share will pick up. Maybe there's some cannibalization, but share should pick up as you roll out more stores, correct?

[David B. Dillon:]

I would agree with all of that. I would add to the metric. I would add tonnage, too. So I'd look at ID sales, tonnage and then what the ACNielsen material shows. And I'd look for the intersection of what those 3 things together are telling us. That's how we look at it.

[W. Rodney McMullen:]

And there's not one single number that gives you all the answers, and that's one of the things that your comment really highlights, is you really need to look across more than one to get a feel overall. But at the end of the day, we felt very good about the progress we made on share gain last year in all markets.

[Operator:]

Your next question comes from the line of Meredith Adler from Barclays.

[Meredith Adler:]

I would like to actually talk a little bit more about tonnage. I thought there were comments that you were making last year that the tonnage weakness was, to some extent, a result of high inflation at the beginning of the year. And then produce was deflationary, so you started to see some tonnage improvement. Is it fair to think about it in that sort of broad sense about the consumer and pricing? Or do think that whatever happens with tonnage is just based on what you guys do?

[David B. Dillon:]

Meredith, I think it's actually both, personally. We were -- I think we admitted a little surprise in how quickly tonnage returned when inflation subsided. I thought it would take longer than it did. And so obviously, that has -- it has something to do with the fact that inflation subsided. But I also would like to think that we positioned ourselves really well to take advantage of that situation by the investments we've made in price and with the improvements that we continue to make in the other 3 keys in our stores. So I really think it ends up being both.

[Meredith Adler:]

Okay, great. And then I wanted to -- you had great success in terms of controlling expenses in the fourth quarter, and congratulations on that. I know there's always a whole lot of different things you're working on, but is there anything that particularly stood out in the fourth quarter? And did the extra week, which we had guessed would benefit $0.07, and it benefited by $0.11, did the extra week contribute particularly much to that improvement in SG&A -- or OG&A?

[J. Michael Schlotman:]

Yes. Thanks, Meredith, for the comment. And on the OG&A improvement that I mentioned on the call, it was adjusted for the extra week so we did not get any benefit in the number that I shared. In terms of specifics to call out, it was really broad based. It's almost every division of the company, and it's really core operations. Obviously, having good tonnage growth and identical sales gives you some tailwind, so we had that across the whole company, which was helpful, but just very good execution on our strategy and the things that we've identified. I wouldn't highlight one, Mike or Dave. I...

[W. Rodney McMullen:]

No, I agree with you. It's actually refreshing that there's not one to highlight. That means there's a lot of things contributed to it, and the fact that it's broad based can make it sustainable.

[David B. Dillon:]

And I do tend to look at that number over a longer period. One quarter is good. The number Rodney used in his -- in the prepared comments was the full year number, and I think that's a better reflection of how we did. Now that's still pretty darn good. But I tend to look over a long haul because the longer the period, the more likely that what you did is sustainable. And the things we did were really process-oriented. And changes that our customers actually either prefer or don't notice, either one.

[Meredith Adler:]

And then my final question would just be about labor, and maybe you could talk about -- you don't have to talk about any individual contract, but in terms of generally the negotiation, are you able to stick with kind of the total numbers you want to get in terms of labor cost increases, balancing the health care, pension and wages?

[David B. Dillon:]

Well, there's 2 balances we actually -- probably more that we try to make each time. First -- or probably second is the one you mentioned, is balancing the health care costs, pension costs and so forth, and those are going to continue to be issues that need to be addressed. But the first balance that we actually try to address is on one hand, we do have the natural tension of wanting and needing to keep our expenses down low as a company. On the other hand, we genuinely want our associates to be fairly paid, certainly paid based on what the market rates are and so forth. We have a workforce that we've very proud of, and we don't look at this as something that is some opposition argument. We're trying to actually work on their side on this argument. We're trying to find a way to balance the business needs with what our associates need. So that's how we think of the labor. Now, Rodney, you may have some specifics.

[W. Rodney McMullen:]

No.

[David B. Dillon:]

That's it.

[Operator:]

Your next question comes from the line of Jason DeRise from USB (sic) [UBS].

[Jason DeRise:]

It's Jason DeRise at UBS. I wanted to ask a question on guidance, and I guess it's multipart and so I'm going to put them all together, and then what you're able to share will be great in terms of the color. So obviously, we have the square footage piece of that, but it's not a net. So I'm wondering if you can share what you're planning in terms of closures. Obviously, you're not going to be able to share what acquisitions you're planning on doing, unless you want to. Feel free to. And then in terms of the FIFO x-fuel gross margin, if you can share some thoughts on what you think between the gross margin element and the SG&A leverage? And then I guess the other ones that aren't mentioned directly but are going to be important in understanding this is the fuel contribution expected and the buybacks expected. So basically, the question is asking for more color on the guidance.

[J. Michael Schlotman:]

The square footage at this point in time, we always give what we expect gross square footage to do. Our model is not built needing any acquisitions to make our numbers, so that's why we always say excluding acquisitions. If there were something out there that worked, it would be something that's additive to our results because we don't need to do anything to have -- to reach our growth expectations. Relative to the closures, while there are certainly a handful that are out there, that's something that occurs throughout the year as we constantly look at our portfolio of assets and look at what stores may need to close. I don't have a specific number for that at this point that we would -- that I would be willing to disclose. Relative to...

[Jason DeRise:]

Can I ask if it would be a -- we would expect a net positive number? Because I mean I guess, last year, there was a positive gross number out there, but it...

[J. Michael Schlotman:]

It's been a net positive for the last several years. Sometimes, what happens is we -- there have been occasions where we've closed a couple smaller stores and opened up one bigger store. And it looks like our store count goes down, but that bigger store is actually more square footage than the 2 stores we closed on a combined basis. So that certainly helps. When you look at the FIFO fuel gross margin and without fuel gross margin and SG&A leverage, we don't give specific guidance on those line items. We always expect to get SG&A savings that we'll invest back on our 4 keys, whatever line that key might fall in the income statement. And our overall goal was to grow our operating margin for the year slightly from the prior year, and that would remain our goal for this year. And relative to fuel contribution, I would say, typically, when we go into a year and when you, for instance, when you look at the fourth quarter of the year, it was only $0.01 difference without the extra week between the 2 years' fourth quarters. So the growth in that is not something that's a huge driver of the 8% to 11% earnings per share growth rate.

[W. Rodney McMullen:]

Usually, we just use what, Mike, a 3-year rolling average in terms of the actual results and use that as a base point.

[J. Michael Schlotman:]

Right. Look at gross margin per gallon over the last 3 years, and that's about where we start.

[Jason DeRise:]

Okay. All of that's useful. I guess, in terms -- just to follow-up on the gross margin element. Within this last quarter that you talked about, I guess it's your inflation cost that you're talking about at 1.7%, but your large national competitor was talking about how their basket inflation was 0.8%. So I mean, if you're passing through that, most of that 1.7%, there's a gap there. I know a lot of people in the market are trying to interpret how the new 8% to 11% guidance -- what that means in terms of your aggressiveness in price or if you're pulling back. So if you can share some thoughts on that, if maybe your pricing isn't as aggressive in the quarter as it has been relative to your competition?

[W. Rodney McMullen:]

It's really a little bit of apples and oranges. What we measure is our estimated inflation based on using government statistics on inflation by category at the mix of business we have. If you look at the actual basket that customers are buying from us, it would have a completely different inflation rate, and it would actually be meaningfully less, especially if the customer has pharmacy in their basket, it's substantially less. So it's -- those 2 are really apples and oranges. And what we try to give on an inflation rate is more based on our sales mix and some of the government statistics out there.

[Jason DeRise:]

Do you feel that you maintained or improved your price position during the quarter?

[W. Rodney McMullen:]

Our internal measures would all show that we've improved our relative price position versus all our major competitors, not just the one that you mentioned.

[David B. Dillon:]

And we have no expectation that, that will change.

[Operator:]

Your next question comes from the line of Karen Short of firm BMO Capital.

[Karen F. Short:]

Back on the inflation and the LIFO for a minute. When you guys gave your guidance for the LIFO charge for the full year in your third quarter call, it seemed like you kind of expected inflation to come in where it came in for the year. So I guess I'm confused about the credit this quarter. And then looking to next year, I guess what are your expectations on inflation for next year? Because given the LIFO charge for this year, just kind of going back to your P&L in prior years, it would look like you're kind of expecting like 1-ish percent.

[J. Michael Schlotman:]

Yes. In the -- at the end of the third quarter when we gave our expectation for LIFO, our expectation at that time was that our full year LIFO charge would be $125 million. So through 10 periods, we had expensed enough to have 10/13 of $125 million behind us. So when the year wound up at only $55 million by the time we got to the end of the year, we had almost $95 million, a little over $95 million accrued. So we had to reduce that number down to the $55 million, which led to the credit in the fourth quarter. That make sense?

[Karen F. Short:]

Yes, that makes sense. Okay. And then for next year, your inflation expectations?

[J. Michael Schlotman:]

Relative to next year, at this point in time, we're estimating LIFO to be at $55 million for next year, just like this year. As we sit here today, with inflation in the 1 percentage kind of range, maybe a little over, depending how pharmacy winds up affecting that, we think that's the best guess at this time. The other thing to keep in mind is inflation throughout the year has no effect on LIFO. So the fact that last year was very high early in the year and then it trended down throughout the year doesn't really affect LIFO. It is a single day point in time calculation of how many products do I have this year, what was last year's price and this year's price on that particular day. Now that's a little bit of a Reader's Digest version of how the calculation works, but it gets you close.

[Karen F. Short:]

Okay, that's helpful. And then wondering if you'd be prepared to give CapEx allocation for next year?

[J. Michael Schlotman:]

You mean how much capital investment we plan to make? Or...

[Karen F. Short:]

No, the allocation in -- I mean, you gave the dollars in your 8-K, but wondering if you could give the allocation?

[J. Michael Schlotman:]

You mean allocation by what we're sort of spending on stores and things like that?

[Karen F. Short:]

Category. Yes.

[J. Michael Schlotman:]

Well, I wouldn't get into the exact dollar amount of allocation, but we also gave guidance that we expect to do one -- a few more stores, new relocate and expands in 2013 compared to 2012 and probably a comparable number of remodels.

[W. Rodney McMullen:]

Most of the dollar increase would be driven by the store-in program that we've outlined incrementally.

[J. Michael Schlotman:]

And the other thing to keep in mind is as we're increasing our capital spend to focus on existing and some new fill-in markets as well as exploring new markets, it takes a while for those stores to open. So we'll be spending dollars in 2013 that wind up being 2014 store openings. So the growth in that store count takes a while because the spending happens so far in advance of that. So it'll be a slow growth or a slow build into the higher store count.

[Karen F. Short:]

Okay, that's helpful. And then just a last question, maybe if you could give some color on both the competitive and the acquisition environment? It seems like, on the acquisition side, there may be some assets coming up or presenting themselves shortly? And then comments on the competitive environment?

[David B. Dillon:]

Well, on the acquisition environment, I would just give you the comments we've made before. We don't generally comment. What we've tried to do is share with you our philosophy how we approach that, and that really hasn't changed at all from the past. As to the competitive environment, I would characterize it as we have recently, it's still a hotly contested market, a very competitive kind of a business. That's the nature of our business. But I see people making rational choices. I don't see it as performing irrationally, which is a good thing in our minds and, I presume, in yours too. Rodney, anything else you want to add to that?

[W. Rodney McMullen:]

No. No. No.

[David B. Dillon:]

Okay.

[Operator:]

Your next question comes from the line of Edward Kelly from Credit Suisse.

[Edward J. Kelly:]

So I was hoping we could dig into the gross margin, the FIFO gross margin a little bit this quarter. It was a little bit lighter than what I thought it was going to be. And I think if you were to look at it and remove the generic benefit, my guess, and this is where I'm hoping you could help, but my guess is the selling gross margin this quarter is probably weaker than what we've seen otherwise this year. So could you maybe just give us some more detail on selling, what's going on, on the shrink side, maybe the non-selling side and how this -- how the margin played out versus what you were expecting?

[W. Rodney McMullen:]

It really played out very close to what we were expecting. And as you know, one of the things that we always work on is making sure we balance with our expense improvements. And any given quarter, you can't always get a balance perfectly. But for the year, we work really hard to get those 2 balanced. And it's driven as much by balancing those 2 pieces. If you look at it versus what we were expecting, it was very close to what we were expecting. Obviously, the generics improved gross margin, selling gross margins for the quarter. But overall, we were pleased with where it ended up and felt good about the balance. And we felt good about our relative price position in the market from a competitive standpoint.

[J. Michael Schlotman:]

Rodney, I agree. And when you look at operating profit margin, which is what we always focus on, the fact we grew it by 6 basis points when really through 3 quarters year-to-date we were slightly negative, demonstrates the strong cost control. And the fact that we really -- as Rodney said, our -- we executed the plan we had, and it came to fruition in the fourth quarter because a lot of what occurred was somewhat planned. It was planned. So...

[Edward J. Kelly:]

Okay. And on the repo front, share repurchase, how should we think about '13? I mean, it's obvious that you're not probably going to buy back nearly as much stock this upcoming year as you did in the past. Will you still be borrowing to maintain a leverage ratio and then using that to buy stock?

[W. Rodney McMullen:]

Again, the use of our cash flow, including maintaining our net total debt to EBITDA ratio in our 2x to 2.2x range, will really be used for all 4 of the things we laid out, and that's to fund our capital investments; to repurchase shares; maintain and hopefully, over time, grow our dividend; as well as maintaining our current credit rating. So we'll balance all of those needs. Relative to the stock share buyback, we would expect to continue to buy in shares. We obviously didn't buy as much in the fourth quarter as we had throughout the course of the year. That was not any kind of a statement on where our share price was in the fourth quarter relative to the rest of the year. It was really based on the fact that we were cognizant of where our debt levels were going into the fourth quarter, and the fact of the way the rating agencies look at our debt level, things like our $250 million contribution to our EBIT [ph] at the end of the year, it's a very smart thing to do from a tax standpoint because we accelerate the tax deduction. But even though that burns off in the first few months of the next fiscal year, they treat it as debt at the end of the year. So I would have -- it made great return sense to make that contribution and get the tax deduction this year versus next year and balance that with how much free cash flow that leaves me to buy in shares. So we try to balance all of our needs on a quarter-by-quarter basis.

[Operator:]

Your next question comes from the line of Kelly Bania from Bank of America Merrill Lynch.

[Kelly A. Bania:]

I was wondering if you could go back to some comments you made a little earlier about the value and the traditional and upscale consumers and how the value kind of improves through the year. I was wondering, one, what do you think has driven that? Have you been catering to that a little bit better as we move through the year? And two, how do you think the volatility -- the mild volatility that you saw in January, how did that impact those different customer segments?

[W. Rodney McMullen:]

Yes, in terms of -- it would definitely have been targeted things that we did looking at the customer. It's one of the things that's such a wonderful benefit of our partnership with dunnhumby. That example was on a value customer, but we'd really look at it on every customer segment. We're constantly testing marketing, direct marketing with different customers and different methods of direct marketing. And when something connects, we do more of it. When it doesn't connect, we don't do it as much. And when we're not satisfied with our performance, we will work and put some extra focus there. So it really was something that we weren't pleased with, we weren't connecting as well as we liked and made some changes to make sure that we did, and that improvement happened. In January, it's really hard -- as Dave mentioned before, it's really hard to see some of the external numbers affecting -- the external things that went on, we don't really see it in our numbers. We believe some of that is probably really driven because we had connected better with some of those customer segments for some of the things we had put in place. What happened at other companies, we really don't have insight into that. But we really didn't see the -- in total, the variability as we mentioned from a day-to-day basis we do.

[Kelly A. Bania:]

Great. And then if I can just squeeze in one more follow-up. Can you give any color on the tonnage trends? As you look back over the year between the core grocery categories and the fresh, you mentioned kind of the seafood being strong. But any more color there you can give us?

[W. Rodney McMullen:]

It improved throughout the year, and it was broad based on the improvement in all categories. So it really would be difficult to call out one area being stronger than the other. The only area that I would probably specifically call out is, obviously, pharmacy had great script count growth throughout the year, and our natural foods area had a phenomenal year as well. And it was strong throughout the year.

[Operator:]

Your final question comes from the line of Greg Hessler from Bank of America.

[Gregory Hessler:]

So I apologize, I missed a little bit of the beginning of the call. I was just wondering if you could talk about the upcoming maturity, the $400 million maturity in April? Do you plan to turn that out into debt capital markets?

[J. Michael Schlotman:]

Yes. We've talked -- we have not talked about that yet on the call. We actually had a maturity right at the beginning of this fiscal year that we drew down -- that we actually have refinanced with commercial paper on a temporary basis. And then, as you said, we have the other maturity in April. Our expectation would be that sometime in April, that we would term those out. If you look at our SEC filings, we already have a significant amount of that kind of an issuance contemplated and hedged out from an interest rate standpoint, and that coverage goes out until April. So it may not be the exact day. But dependent on market conditions, I would expect, somewhere around that time, we will wind up terming those out.

[Gregory Hessler:]

Okay. So that could be maybe up to $1 billion in size. Any thoughts on tenor there? Do you have any preference for shorter-dated stuff? Or should we be thinking about 10s or 30s? Or what are your thoughts there?

[J. Michael Schlotman:]

We'll let the market tell us where the sweet spot is. Sometimes, we may start out with a particular idea. And then we find out, as you start to look at the market on that particular day, that there's a hole on our maturity chart that fits with what the market has an appetite for on that particular day. So rather than lock myself in, when we go to market, we'll let the market tells us what makes the most sense.

[David B. Dillon:]

And before we end the call today, I would like to share a few additional thoughts with our associates who we encouraged to listen in today. 2013 marks the 130th anniversary when Barney Kroger opened his first store in Cincinnati, Ohio. This is an amazing accomplishment, and yet 2 of our banners have been in business even longer

[Operator:]

Thank you. Thank you for your participation in today's conference. You may now disconnect. Good day.