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The Kroger Co. (NYSE:KR)

F1Q06 Earnings Conference Call

June 20, 2006 10:00 am ET

Executives

Carin Fike - Investor Relations

David Dillon - Chairman, Chief Executive Officer

Rodney McMullen - Vice-Chairman

Don McGeorge - President and Chief Operating Officer

Mike Schlotman - Senior Vice-President, Chief Financial Officer

Analysts

Meredith Adler - Lehman Brothers

Chuck Cerankosky - KeyBank McDonald

Mark Husson - HSBC

Bob Summers - Bear Stearns

John Heinbockel - Goldman Sachs

Ed Kelly - Credit Suisse

Scott Bender - FTN Midwest Research

Scott Mushkin - Banc of America Securities

Andrew Wolf - BB&T Capital Markets

Mark Wiltamuth - Morgan Stanley

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the first quarter 2006 Kroger Company’s earnings conference call.

My name is Janelle and I will be your audio coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today, Ms. Carin Fike. Please proceed, ma’am.

Carin Fike

Thanks, 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 first quarter press release and our prepared remarks from this conference call will be available on our website at www.kroger.com.

Now I will turn the call over to Mr. Dillon.

David Dillon

Thanks, Carin and good morning, everyone. We are pleased you could join us to review Kroger’s first quarter financial results. With me today are Rodney McMullen, Kroger’s Vice-Chairman; Don McGeorge, Kroger’s President and Chief Operating Officer; and Mike Schlotman, Senior Vice-President and Chief Financial Officer.

I’d like to begin this morning by briefly reviewing Kroger’s first quarter financial performance and then I’ll provide an update on Kroger’s outlook for 2006. Rodney will share additional details about our first quarter results and then we’ll be happy to take your questions.

Kroger’s associates continue to focus on delivering improved service, selection and value to our customers. This is translated into another quarter of impressive sales growth. Total sales for the first quarter increased 8.2% to $19.4 billion. This growth continues to be broad based across all divisions and all store departments. Growth was particularly strong in grocery, produce, natural food and fuel. Our convenience stores also had a very strong quarter not only in fuel, but in non-fuel merchandise as well.

Identical supermarket sales increased 7.2% with fuel, and 5.6% without fuel. Once again, by either measure, this represents Kroger’s highest identical supermarket sales since the merger with Fred Meyer in 1999. It is also the 11th consecutive quarter of positive identical supermarket sales excluding fuel. We are extremely pleased by this performance and believe it compares very favorably to our traditional supermarket competition and indeed, just about every other retail competitor.

Net earnings were $306.4 million, or $0.42 per diluted share, for the first quarter. Net earnings in the year ago period were $294.3 million, or $0.40 per diluted share. Rodney will discuss two items that, together, affected our first quarter earnings by $0.05 per diluted share in the current year. After adjusting for these items, because they did not have a comparable impact on the prior year, you’ll see that Kroger had a very strong quarter.

It was also another quarter that demonstrated the balance that Kroger’s strategic plan requires among several elements, including: sales, earnings, cost control and capital investment. We continue to believe this strategy is the appropriate path to build sustainable earnings growth and long term value for our shareholders.

Turning now to some comments on 2006 guidance. You may recall that we originally forecasted identical supermarket sales growth, excluding fuel sales, in excess of 3.5% for fiscal 2006. Today we are raising our sales guidance. Kroger now expects identical supermarket sales growth, excluding fuel sales, to exceed 4% for the balance of the year; or approximately 4.5% for the full year.

This updated sales guidance reflects the momentum of our first quarter performance as well as opportunities we have identified for additional growth. It is tempered by the difficulty in forecasting additional sales growth in markets that experience unexpected increases as a result of hurricanes Katrina and Rita during the second half of 2005. Even so, the entire Kroger organization is still very focused on driving improvement in identical sales growth. As we’ve stated many times, sustainable, identical sales growth is a key driver of Kroger’s financial objective to increase earnings and generate value for our shareholders.

Kroger’s original guidance for earnings per share growth in 2006 of 6% to 8% did not contemplate the need to increase legal reserves. Based on first quarter results, the Company’s guidance for earnings per share growth for 2006 remains at 6% to 8%, including the increases in legal reserves. Absent the need to increase these reserves, Kroger’s projected earnings per share growth rate would be 9% to 11% for fiscal 2006.

Now I’ll ask Rodney to share some additional details concerning Kroger’s first quarter results.

Rodney McMullen

Thank you, Dave, and good morning, everyone. As Dave mentioned, Kroger reported first quarter net earnings of $306.4 million, or $0.42 per diluted share. These results include a couple of items that are not comparable to our results in the prior year. As we indicated in our guidance for 2006, we began to recognize stock option expense in the first quarter in accordance with Generally Accepted Accounting Principles. This action reduced earnings by $0.02 per diluted share.

As a reminder, our earnings per share guidance for fiscal 2006 included stock option expense of $0.05 to $0.06 per diluted share. We now expect the full year effect for fiscal 2006 will be $0.06 per diluted share from recognizing the stock option expense.

Also, based on developments during the quarter, Kroger increased its reserves associated with legal proceedings arising from hiring practices at its Ralph’s subsidiary during the 2003 and 2004 labor disputes. The current quarter charge reduced earnings by $0.03 per diluted share and increased the amount established for this contingency.

Our reserve represents our best estimate of the Company’s exposure in connection with these legal proceedings. As this is a pending legal matter, we will not comment further on this subject. When it’s appropriate to comment, we will.

As Dave mentioned earlier, after adjusting for the two items I just discussed, we believe Kroger had a very strong quarter. Our financial performance in the first quarter reflects the consistent approach we have taken to managing our business and consistent with the plan we have shared with you.

We continue to balance investments in gross margin and improved customer service with operating cost reductions to provide a better shopping experience for our customers. Our strategy directly affects Kroger’s gross margin, OG&A rate and operating margin. I’ll discuss all three in the context of our first quarter results. Let’s begin with gross margin.

FIFO gross margin was 24.55% of sales, a decrease of 61 basis points compared to the first quarter of 2005. Excluding the effect of retail fuel operations, FIFO gross margins declined 9 basis points from the prior year. Kroger’s first quarter selling gross margin on non-fuel sales declined 33 basis points.

As a reminder, selling gross margin is a term we use internally at Kroger to describe the Company’s gross margin before incurring expenses directly related to distributing and merchandising the products on our store shelves. These expenses include advertising, warehousing, transportation and shrink.

Selling gross margin is a measure of how competitively we are pricing the products we sell. Delivering value to our customers is one component of our overall strategy to improve the shopping experience. In the first quarter we were able to use improvements in shrink, advertising and warehousing expenses to help fund these additional investments and lower prices for our customers.

OG&A declined 19 basis points to 18.17% of sales. Excluding the effect of retail fuel operations, the increase in legal reserves and the stock option expense, OG&A declined 16 basis points. Leverage from strong identical sales plus good cost control in such areas of energy usage and labor productivity helped us overcome some of the significant increases in fuel and energy related costs that many companies are facing.

Excluding our retail fuel operations, we estimate that higher energy prices negatively affected gross margin by 30 basis points and OG&A by 4 basis points for a total negative effect of 7 basis points. This compares favorably to the 13 basis point negative effect in the fourth quarter of 2005.

Next, I would like to make a few comments about our operating margin for the first quarter. Kroger’s operating margin on a GAAP basis declined 12 basis points to 3.32% of sales. Excluding the effect of retail fuel sales, an increase in legal reserves and stock option expense, operating margin grew 32% basis points. 24 basis points came from better sales leverage over rent and depreciation expense. The gross margin and OG&A effects I just discussed explain the remainder of the improvement.

In keeping with our strategic plan, Kroger will continue to invest savings generated from reduced cost and improved productivity to enhance our customer shopping experience through better service, product selection and value. On a quarter-by-quarter basis, however, our operating margin may fluctuate depending on the timing of both our savings and our reinvestment in our customer shopping experience.

For fiscal 2006 we still forecast slightly improving operating margins, resulting primarily from improvements at Ralph’s. During the first quarter we saw improvements in sales and profitability at Ralph’s and expect continual improvement. This will be one of the drivers of our earnings per share growth in 2006.

Kroger’s financial triple play strategy supports the successful execution of our customer first business strategy. During the first quarter, strong cash flow enabled Kroger to invest in our high quality asset base, reduce debt and return value to our shareholders through share buybacks and dividends.

Capital investments totaled $449.9 million in the first quarter compared to $400.6 million a year ago. We are on track to invest approximately $1.7 billion to $1.9 billion in capital projects during fiscal year 2006 and we still anticipate total supermarket square footage growth of 1.5% to 2% before acquisitions and operational closings.

For the first quarter, total supermarket square footage grew 1.6%, year-over-year, excluding acquisitions and operational closings. Our return on asset measures improved almost 1% on a pre-tax basis. This indication gives us confidence that we are investing our capital prudently.

During the quarter, Kroger opened, expanded, relocated or acquired 16 supermarkets. We completed 39 remodels and closed 36 locations. Of these locations, 31 were operational closings. 16 of these stores were located in northern California, whereas we previously announced we are exiting the San Francisco and Sacramento markets under the Cala Foods Bell Markets and Ralph’s banner.

Net total debt was $6.6 billion, a reduction of $829.3 million from a year ago, and a reduction of $2.1 billion since January 2000. Net total debt includes a reduction of $526 million to reflect temporary cash investments. Total debt was $7.2 billion, a reduction of $318 million from a year ago.

As you know, our investment grade rating is very important to us. We have steadily improved our coverage ratios in recent years, and our net total debt/EBITDA ratio in the first quarter was 1.98, the lowest since our recapitalization in 1988. Fitch Ratings recently reaffirmed our credit rating at BBB, and upgraded our outlook to stable from negative.

During the first quarter, Kroger repurchased approximately 6.7 million shares of stock at an average price of $19.90, for a total investment of $133.5 million. Last month, we announced our Board's authorization of a new $500 million stock repurchase program, reflecting the Board's confidence in the company's strategic plan and our belief that Kroger shares represent an attractive investment. At the end of the first quarter, there are approximately $486.9 million remaining under that new authorization.

Since January 2000, Kroger has invested $3.1 billion to repurchase 162.4 million shares, or 18% of the outstanding shares, at an average price of $19.17. Kroger expects to buy back stock in 2006, in accordance with the company's financial strategy of using one-third of free cash flow for debt reduction, and two-thirds for share repurchase and cash dividend payments.

In March, Kroger announced that its Board of Directors adopted a dividend policy, and declared the payment of a quarterly dividend of $0.065 per share. Subsequently, on June 1st, Kroger paid a cash dividend to shareholders, the first such payment since our leveraged recapitalization some 18 years ago.

In addition to the financial triple play, Kroger's first quarter cash flow permitted us to make a cash contribution of $150 million to company-sponsored pension plans. This contribution completes our expected funding for fiscal 2006. Kroger's cash contribution in the year ago quarter was $88.6 million for the first quarter, and $300 million for the entire year.

Our first quarter tax rate was 37.4%, compared to 35.9% for the prior year. The current quarter rate differs from the statutory rate primarily due to state taxes. The first quarter of 2006 rate is higher than the prior year rate because, in 2005, we reduced previously recorded tax contingency allowances, resulting from a revision in the required allowances. We expect that our tax rate for fiscal 2006 will be 37.5%, consistent with our guidance at the beginning of the year.

Now for some brief comments on labor. While we do not face the same magnitude of contract negotiations this year compared to last year, labor negotiations continue to be a challenge in the face of competitive pressures and rising pension and health-care cost. In each contract negotiation, we will work toward an agreement that meets our objectives for cost reductions or containment, while fulfilling our commitment to provide our associates with solid wages and benefits. This balance will allow Kroger to invest in our business to create new job opportunities for our existing associates and hire more people.

Now I will turn it back to Dave for some closing remarks.

David Dillon

We are very pleased with Kroger's first quarter results. This quarter gives us a solid start in fiscal 2006 towards achieving or exceeding the objectives we outlined for investors at the beginning of the year. In fact, we have already raised our identical sales and, from an operating standpoint, earnings-per-share guidance for the year to reflect our confidence in Kroger's strategic plan. We believe that Kroger's strong identical sales are primarily a result of our entire organization's effort to connect better with each and every customer, and to improve their overall shopping experience.

We are going about that in several different ways, and it's more than just lower prices. Yes, customers tell us they want value, but they also tell us that there are other aspects of their shopping experience that are very important, most notably customer service and product selection. We are making strides in several areas that our customers notice every day, including shorter wait times at check-out lanes, full shelves with items our customers want, and improvements in the cleanliness of our stores. In each of these areas, we have seen double-digit percent improvements in our tracking measurements.

We are pleased with the progress we are making, but there is still a lot of work to do. Our results this quarter and in the future can be tied directly to the contributions of our 290,000 associates. We appreciate their hard work and thank them for making strides in several key areas. This is a very competitive industry, and customers have a lot of choices, so we recognize that it is our associates who can and will make all the difference.

We'll now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Meredith Adler - Lehman Brothers. Please proceed.

Meredith Adler – Lehman Brothers

Congratulations on a great quarter.

One of the things I wanted to ask you is that, when we look at the difference between IDs (identical) and total sales, we see very strong growth, and some of that is clearly the convenience stores which are benefiting from fuel, some is jewelry stores where square footage of course isn't that great, so we're just wondering if you could talk a little bit about what's driving that very strong sales performance?

David Dillon

Well, one part of it is, in addition to our very strong sales – that's what's driving that performance – but, part of it is the fuel, of course, because fuel has been a very strong contributor.

Rodney McMullen

It really is all the things you outlined. Obviously, we've had strong sales across the whole company, but, in terms of identical and total supermarket size, as you mentioned, the convenience store group had a very strong quarter, for fuel and also for inside their business, and jewelry had a solid quarter. So, it really was a performance among all parts of our business.

David Dillon

Yea, I'm not sure there was anything, Meredith, that drove the totals any more than what was driving the identicals.

Meredith Adler – Lehman Brothers

Would you say that, it looks like from looking at the numbers that, in a rising environment for fuel prices, that there continues to be some pressure on the gross margin? Any sense about when that starts to level off?

Rodney McMullen

If you look at fuel costs themselves, our assumption is that they'll continue to be high for the balance of the year. We do not feel qualified to really know the answer to that though, but we are running our business with the assumption that it continues to be difficult, and we're working awfully hard to figure out a way to manage and reduce the number of miles that we have to travel to get product to our stores, and to do it in a more effective way. So, you know, the assumption is we assume the worst, and we're managing the business for that, and if it's not, then that's wonderful, but we don't see it in any short period of time changing.

David Dillon

I would even add, Meredith, that I think our team here has done a nice job of keeping those costs and the impact on our results to be as low as possible, because the costs are quite high, as you know.

Rodney McMullen

You know, as I mentioned, it was not as bad in the first quarter as the fourth quarter. Now, obviously, some of that improvement was because of the identical sales growth we have had, but some of it was the things that Dave talked about.

Meredith Adler – Lehman Brothers

And then, I guess my final question would be, we're beginning to see Cerberus be more aggressive about closing stores. I'm just wondering if you can comment at all about, you know, kind of what you are seeing in the competitive environment, any acceleration in closures outside of Cerberus, and what do you think that that means for your business?

David Dillon

Well, I'll comment on the Albertsons stores that are closing. I'll ask Don, if you have a minute, to comment on the competitive climate.

But if you think about the stores that have been announced for closures, we've looked at those individual stores, at least in the markets we're familiar with. Most of those are already very low volume stores, and so, I wouldn't read too much into that. It is pretty obvious to us that, if this is the case, then that should be the way they would do that. As to the other stores that might be available, we always look at stores that are available in the market, whether it's in this particular case, or any case, and we think it's an excellent obligation on our part to think about, how can we make the best of that particular market? And so, whether or not any of these will end up ultimately fitting us or not remains to be determined on an individual store basis. But Don, you want to comment on the overall climate?

Don McGeorge

The overall climate, particularly throughout the quarter, I wouldn't characterize it as being any more or less aggressive than we've been seeing historically. I think that pattern has stayed the same throughout the quarter.

Meredith Adler – Lehman Brothers

I just have one final question: There's been some talk that Wal-Mart is going to consider [inaudible] of new stores in markets where it already has a pretty good penetration. Have you observed that at all, and, you know, do you think that's going to happen, do you think that's a good thing?

David Dillon

Well, to your first question, the answer is no, we have not seen that, I believe, and with me, around here, I'm sure there's no one else that disagrees with that, and, to your second question, I don't think we'll speculate. That's their call obviously, and I don't have an opinion on whether it would happen or not.

Operator

Then our next question comes from the line of Chuck Cerankosky - Key McDonald.

Chuck Cerankosky – Key McDonald

Nice quarter. As I am now looking around at some of your stores, I do see specific store differences in an individual market. Dave, could you talk about how you manage that, you know, if you are looking at a Memphis versus a Cincinnati versus a Portland, Oregon, who's making those local decisions to have the various locations meet the neighborhood needs?

David Dillon

Actually, it's a combination of the work we do here at General Office, and what work goes on at the local divisions. Local divisions, obviously, have the best connection with the local customers. They know the markets, they know the geography, they know their specific stores, and here at General Office, though, we are able to look at data that's particularly helpful. In addition to the typical demographic data that you might expect we look at, our dunnhumby data has been very helpful in thinking about individual store characteristics.

And so, it's really, I think, a combined team effort between the Marketing and Merchandising Group here at General Office and the individual divisions as that was played out. As you know, in years past, our stores were very different from one market to another, but, increasingly, what you'll see is the differences will be more driven by the differences in our customers, more so than just the differences in geography. And so, that segmentation, that process of segmenting stores, thinking about what ought to be offered different in stores, is a very important part of our strategy. I think it is only beginning to be played out, and I think that increasingly you'll see that to be an important factor for us going forward.

Rodney McMullen

There's another thing on Dave's last point there. We do extensively use customer research that's very locally based, including down to the store level, to try to understand what the customers want in those trade areas, each individual trade area, and we try to use that to reflect that in the store to really connect. As Dave mentioned, dunnhumby is part of the backbone of trying to put that process in place, and improving the functionality of that process.

Chuck Cerankosky – Key McDonald

If this is a nine-inning ball game, where are you at in the process?

David Dillon

Well, each one of those, yea, we're expecting an extra-inning game, but we're early in that process still. Dunnhumby, we've been in now several years, we clearly see some strides in key areas. The market research that Rodney described, while we've done market research as a company for lots and lots of years, we actually are focusing it in some different ways today than we did in the past, so I'd say that's in its fairly early stages. So I don't really see us as very deep into the game in this whole process. I see it as clearly progressing though.

Rodney McMullen

To me that question is always a great question. We obviously get asked it a lot. Now, we've always felt like we've always been in the third inning, we've felt that for the last four or five years.

David Dillon

It's a long inning.

Chuck Cerankosky – Key McDonald

As long as you are improving during the inning.

David Dillon

We think we are, yes.

Chuck Cerankosky – Key McDonald

Good. I want to ask a couple of product mix questions. If you're just looking at the food store part of your business, what do you see in product mix in terms of moving towards fresh, and then, if we could shift, when you're looking at some of your general merchandise sales, whether in a Fred Meyer or some of the GM stuff in your marketplace stores or your combos, how are customers behaving towards the higher-ticket merchandise right now?

David Dillon

Well I don't think we have anything specific we would report on consumer behavior today on those kinds of items. I will tell you, though, that -- as we pointed out -- the sales growth we achieved was solidly across all store departments and across all geographies.

The store departments, we called out a few of them to point out the ones that did even better than average. But nonetheless, all of the departments really were contributing. So I don't see it as a major shift either on the part of consumers, based on what is happening in their lives, or on the part of consumers, based on what is happening at Kroger.

I really think what is happening is we are getting our best customers to shop more often with us for their full load; and we're getting more people to be our best customer. The combination of those two things is causing, for instance, grocery; a solid quarter in grocery in like that has to be that people are buying more from us than they previously were buying. Nonetheless, we also think our meat and produce, our perishable areas are doing quite well, too and are connecting well with our customers.

Rodney McMullen

As Dave mentioned in his prepared remarks, produce and nutrition both had strong quarters. That is driven by strong base performance; but obviously with organic and natural foods and everything else, it's working very well.

Chuck Cerankosky - KeyBank McDonald

Last question, can you comment on credit card costs and any ability to manage those, given the environment you are in?

David Dillon

Well, we would welcome any ideas you might have. The biggest cost increases for us in OG&A that we had to offset; credit card fees were a big one. Utilities we have already talked a little bit about, and of course, pension.

Those areas were big issues. Even with the increase in sales we had, credit card fees are still a major issue for us; because those go up as more credit card usage occurs. They don't decline as a result of higher sales; they just keep going higher. It is a big issue.

Rodney McMullen

But that is one of the reasons why we got involved with the Royal Bank of Scotland on Kroger Personal Finance. In may not necessarily manage the cost, but it does allow us to give the customer the benefit of some of those cost increases directly rather than indirectly.

David Dillon

Most of us in this room, Chuck, have a Kroger card, which is part of that venture with Royal Bank of Scotland. Many of our customers now, too, in growing numbers have that. Those customers get significant rebates back from us, both on their purchases outside of Kroger and especially for the purchases in Kroger.

Chuck Cerankosky - KeyBank McDonald

Thank you.

Operator

Our next question comes from Mark Husson - HSBC.

Mark Husson - HSBC

I think it would be an interesting bet to see which one of you, Kroger or Wal-Mart, has got the better comparable store sales in grocery right now. I guess my bet might be, with your momentum, it might actually be you. That is probably the first time ever, so congratulations.

My question is on the price side of the business. Can you talk a bit about whether the sales on opening price point have been stronger for you recently?

Secondly, you track price inventory closely. I think that is probably one of the areas where you haven’t done so well. What have been the sort of improvements you have been seeing in your price, in its tracking?

Is it fair to say that because your selling gross margin has gone down, that you are still reducing the pricing gap or the pricing spread between yourself and discounters?

David Dillon

Let's see if I can get all of those; it is quite a few. Let me start with the entry price point items. We are clearly seeing improvement in those sales. Part of that could be driven by what the customer is going through with higher gas prices and needing to reduce their own costs. But I also believe that part of it is the result of a better offering on our part; not only better price points, but also a better assortment of products at the entry-level prices. Clearly, that is an area that we're seeing improvement in the sales.

Your second point had to do with how our price image is. Rodney, you have tracked that very closely. Did you want to comment on that?

Rodney McMullen

We are seeing improvements. Obviously we won't give the specific results, but we're seeing improvements.

David Dillon

Mark, what was the third?

Mark Husson - HSBC

The actual pricing spreads, are they still coming down?

David Dillon

As you can tell from what Rodney described, we invested in our selling gross margin 33 basis points in the quarter. That is in a variety of ways. That was targeted in lots of different ways. Some of that would be in everyday pricing, some of that would be in specific everyday pricing.

Now that was, in part, offset -- in fact, a lot of it was offset -- by the improvements in shrink and advertising and warehousing, which we also described. So we have invested it more in price in the quarter; and going forward, we expect to continue to do some investing like that, to the extent that we can offset it either by reduced expenses that are embedded in gross -- like the warehouse, advertising, and shrink --or transportation, which has been challenging in recent times. Or, to the extent we can reduce our OG&A cost through better productivity and so forth.

Those all will help us focus more on pricing and focus on those non-price initiatives that we have talked a lot about, which are increasingly playing an active role in Kroger and I think producing just as good a results as what the pricing may be producing.

In terms of the actual spreads, we have not really given and don't plan to give specific spread numbers. There are so many ways you can calculate that; I don't really believe it would be meaningful for us to try to address that point, except to say that we pay close attention to our pricing position relative to our competitors and believe that we need to keep focus on that continually.

There is not a point in time ever where we say, well, we are done with that; we don't need to pay attention to it any longer.

Mark Husson - HSBC

Finally, can you just talk about the differences in basket and traffic in the composition of your IDs?

David Dillon

Both have increased in our IDs. Our IDs on average sale, it was up clearly; and transaction count was up clearly on IDs as well as total. So both were contributing.

Rodney McMullen

It was a little more skewed to the number of transactions versus the size. If you just said over 50% was [on account] and less than 50% would be size.

David Dillon

It's that data that causes me to say that really what I think is happening is our very best customers are buying more from us, more of what they need. You can see it in lots of different ways, and this is just one of them. We're getting more customers who are considering us their very best customers. The combination of those two has worked really well for us.

Mark Husson - HSBC

Excellent. Thank you very much.

Operator

Our next question comes from Bob Summers - Bear Stearns.

Bob Summers - Bear Stearns

Actually I want to dovetail off that last question, if you could talk about maybe where the market share is coming from today versus 12-18 months ago? If you had to pick one or two top catalysts for the accelerating ID performance, what would they be?

It feels like there is sort of a sea change in the business right now. Is it independents, or does it have to do with some of the larger transformational events that are occurring? Or is that an additional opportunity?

David Dillon

That is a great question. I don't know that we can identify right now where that is coming from. Once a year, we go through a pretty detailed drill to identify our own market share through our own internal calculations. We try to also then estimate what has happened with other peoples' market share, and we are in a better position to judge that at that point in time.

But it is very clear with our sales improvement that we have picked up market share. I don't think there is any way that it could be true for us to have these sales and not have market share improvement.

I suspect, based on what I have seen anyway, that it is coming from everything; it is coming from lots of things. We are much more focused on our own customers and what their behavior is in shopping more with us, and winning more customers to shop with us, than we are focused on addressing any one particular competitor, as we look at it.

Now if you think about the reason for our sales growth, which is the heart of your question, we think there are a lot of things contributing to it. That is actually what helps us be bullish going forward, looking at the rest of this year.

Our sales, for instance. The strong growth in identicals we think is a direct result of the good job our associates are doing in serving customers. We think that is improving every day. We think that our pricing certainly plays a role with that. We also think the non-price initiatives that we have talked often about are playing a very important role.

Products, not only what we carry but the fact that we are in-stock on our shelves more often than we maybe were in the past helps a lot. Our people in our stores; we talked about our associates already.

The shopping experience, not only the waits in line but also cleanliness of the store, et cetera. Those are all very helpful reasons for our sales improvement.

As we mentioned it is broad-based, it's across all divisions and across all departments. So overall, the store conditions that we have achieved, the improvements in those store conditions, I think it paid off in better sales.

So ultimately, what we're seeing is I can probably give you ten good reasons that our sales are up, and any one of those is a contributing factor, but none of them fully explains it. That is good news. We take that as good news, because we think that is more sustainable than if I could just point to a few hot promotions that we had run that gave us the high sales.

Bob Summers - Bear Stearns

Okay, great. Thanks.

Operator

Our next question comes from John Heinbockel - Goldman Sachs.

John Heinbockel - Goldman Sachs

A couple of things. At what point does the success with the comps start to flow into your new store model? At what point does it start to model better because the sales are better than they might have been prior to what you have done here? As we look out over the next couple of years, does that lead or will that lead to a likely increase in CapEx, new store openings, pace of remodels? How does that all play out?

David Dillon

Let me comment on the new stores and sales there; and maybe Rodney or Mike will want to comment on the CapEx. I am not sure I understand exactly your connection. In my mind, when I think about our improving comps, what it says is we're running better stores. When we're running better stores, that also suggests that our new stores are likely to be more successful.

But we have already made, as we have pointed out, some improvements in the results from our CapEx spending in our new stores and we are pleased with those currently.

The overall picture we are trying to describe, the improvements we're trying to make, the success we're having with sales, we think of that as affecting all stores, new and old alike.

I don't really think, though, that because you had momentum in your other sales that your new stores necessarily will be more successful. It all comes down to the experience the customer has when they come in the store. I think that is why we're having the success in our current stores. I also think that is why we're having good success with our new and remodeled stores.

Rodney McMullen

The only other thing I would add is I would expect you to see gradually over time a change, not a huge amount at one point. You have heard us talk numerous times, it's one of the reasons we are working so hard on the Marketplace stores and the price format stores, is really trying to create the growth vehicle when you look out three to five years.

When you say two to three, I don't think it is going to be something where you just can draw a line. I think it's going to be something you will gradually see the difference.

If you look at the Marketplace stores, we obviously did it in Phoenix first, then Columbus. As you know we have some under construction in Cincinnati that will open this year, and we're working on a few other markets.

So I think it's going to be one of those things that you will gradually see a difference. It really is, as we get comfortable understanding what the customers' wants and needs are, and delivering against that.

John Heinbockel - Goldman Sachs

So do you think the incremental CapEx where we are today will be new format as opposed to conventional supermarkets?

Rodney McMullen

In any type of meaningful way, it would be.

John Heinbockel - Goldman Sachs

Secondly, has the thought on the breakeven comp changed? Meaning the comp you need to generate, to get some expense leverage, is that number pretty much where it was a year or two ago? Has that gone down? How has that developed?

David Dillon

I don't know that we think in terms of here is where you have to have sales to have that leverage, and how it changes over time. Instead, I tend to look at where are we now, what do we think we will get in the way leverage now, what is the current environment?

In the current environment, obviously in the sales we had last quarter we got very good leverage on our expenses in that quarter. We also think going forward, with the additional guidance we have given or the change in guidance we gave for sales for the remainder of this year, at 4% for the remainder of the year in IDs, we see that as a very good performance.

We see that performance also achieving good leverage on our sales and the impact on the expenses as a result. So you can bracket it in that range if you want, but certainly, we feel like we're getting at that point today.

John Heinbockel - Goldman Sachs

All right, two final things. What was the inflation rate for the quarter that you saw?

David Dillon

Mike, you want to comment on the inflation rate? I don't have the number in front of me.

Mike Schlotman

If you look at inflation without fuel, it was 1.4%. If you look at without fuel and pharmacy, it was about 1%. So it's fairly benign.

John Heinbockel - Goldman Sachs

Some things would have been deflationary? Dairy, meat, or no?

Mike Schlotman

Not a lot. Meat slightly. Grocery was less than 1% inflation which is where dairy would be.

David Dillon

So if you look at dairy by itself it would be, but we are not seeing much change in the inflation environment.

John Heinbockel - Goldman Sachs

Do you think we will?

David Dillon

We are not seeing much change right now based on this data, in terms of what we have seen in the first quarter. We just don't see much change right now.

Mike Schlotman

You have heard us talk about it before, that one of the best protections against inflation as the CPG companies raise prices more than what real costs are going up, we have our incredibly strong private label program, and we will not raise those prices. So the customer will get that benefit and the private label will pick up share. It happens time and time again whenever a national brand tries to do that.

John Heinbockel - Goldman Sachs

All right, and one final thing. As Tesco comes into the U.S., is there a conflict there between you and they with regard to dunnhumby and their ability to use it in the U.S.? Or is that a potential issue, or is it too early to know?

David Dillon

I think it is too early to know. At this point, the way dunnhumby is structured, though, they're used to compartmentalizing data within their organization. Dunnhumby today serves as a partner with us, and dunnhumby USA serves us. They also serve Tesco in the UK and other places. They serve other retail companies in other locations. At this point, we're not anticipating that being a problem.

John Heinbockel - Goldman Sachs

It is not an exclusive for you in the U.S.?

David Dillon

As to some retailers, there is, but not as to Tesco, since they have been a long-term customer and an owner of dunnhumby.

John Heinbockel - Goldman Sachs

Okay, thanks.

Operator

Our next question comes from Ed Kelly - Credit Suisse.

Ed Kelly - Credit Suisse

Good morning. Very good quarter. Bigger picture question for you on your store base. How do you think about it in terms of current position and where it should be or I guess even could be? Meaning to what extent can you use the dunnhumby data, Food 4 Less, Marketplace, Fresh Fare concept, to better tailor each market? When you think about growth of new concepts, how much of that could be conversions as well?

David Dillon

Well, we think about new formats and the format array that we currently have all the time. We are presently using dunnhumby data and demographic data and our own market research to help us determine what we can do and where we can do it. You have seen us recently put Marketplace stores in additional markets, which is the beginning of running some differences in formats in existing markets.

The biggest change you have actually seen up until now, and you would not necessarily see it unless you shopped in the store pretty regularly, is differences in one store to another. These are just regular combo stores that are segmented more because of what we see in those markets.

I think increasingly we are asking ourselves, to what extent can we use these formats like we do segmented stores? How can we use the format as the extreme version of a segmented market?

We see some examples of that in some markets where we already have multiple formats. There are also some problematic issues, too, of how you overlap in existing markets, and we still have yet to work through all of that.

Rodney, I don't know if you want to comment on that, too.

Rodney McMullen

To me, the question is a great one. It's one of the things that we're continually working on. What we really find is almost every month we're making progress on that. You actually have to make sure that you don't cause that to slow down a process, because you're learning so much; you do have to get things done.

But you will find if you go in one of our stores that we open today and you go in one six months ago, you will see changes in that because of what we have learned in that process.

David Dillon

I think one of the things I would add, too, that often we get asked, when are we going to take the Fred Meyer store as a store and put it somewhere else? My answer to that has always been the same. That is, that we're doing that every day. We take things we learn from the Fred Meyer stores. Our team general merchandise team here puts together ways in which we can use some of those ideas and thoughts and expressions, and put them into a typical combo store or a Marketplace store or any other store that we operate.

Those are the ways, the many ways that these formats actually contribute even more broadly to the success of the Company.

Ed Kelly - Credit Suisse

Okay, then one last question for you. Safeway recently increased its fuel promotion. Have you made any changes to that program recently, or even since last year?

David Dillon

Our fuel promotion, I don't remember if it's gone on for a full year. Basically the fuel promotions we have been consistent over time -- certainly the last six months. Has it been for the last year? I'm looking around in here to see. Yes, in some markets we have had it going on for that long. But it is basically the same. I don't think we're making any big changes there.

Ed Kelly - Credit Suisse

Okay, great. Thank you.

Operator

Our next question comes from Jason Whitmer – FTN Midwest Research.

Scott Bender - FTN Midwest Research

Hi, this is actually Scott Bender; Jay is out on the road today. Just a couple questions real quick on the consumer. Within our restaurant coverage we have seen some regional weakness, specifically out on the West Coast in recent months, and some in the Midwest as well. In terms of your sales strength, have you seen any variance by the specific regions that you are concentrated in?

David Dillon

We don't give out regional sales data. Part of what I think embedded in your question is, is the price of gas impacting consumer behavior in some fashion? At this point, we don't really have any hard data to point to.

We are certain, though, there is less expendable income. There has to be, because much more is being spent on gasoline, assuming you take gas out of the expendable income equation. We think it is a net-net slight positive for us, in part because of our convenient locations.

But also it may be -- and this is speculation on my part -- but it also may be in part because our customers realize that they can prepare food at home less expensively than they can pay for it in a restaurant.

One of the best ways you can save money, separate from maybe buying Kroger brand in our store, is to shop at our store for the ingredients and make the food at home, rather than shop at a restaurant.

But it would be speculation on our part to say that we can identify that trend. Based on the data that you have suggested, some weakness in some of those sectors in restaurants, that certainly could be one of the reasons that might occur.

Now one of the reasons we commented that our sales were broad-based, though, is not just because we don't give geography; but that aside, we're trying to illustrate the point that our sales are across the Company doing well. That means -- to me anyway -- that it is not any one competitor or not any one consumer event that is driving them. It is numerous events.

Scott Bender - FTN Midwest Research

All right. Yes, that was going to actually be the second part of my question, whether you were seeing any positive impact from consumers possibly trading out of eating out and eating at home more often in order to save money. So it sounds like you would speculate that that is occurring but there's no hard data to point to, basically?

David Dillon

We think there is a net-net slight positive with the gas impact from the customers' point of view, but we cannot tell for certain why that is. We just think that it is. I am speculating when I gave you those comments.

Rodney McMullen

As you know, one of our competitive strategies is to have convenient locations. Our average customer has to drive less than two miles to get to one of our stores. Hopefully that convenience along with things that Dave talked about on saving money, in terms of buying the food in our stores to prepare it, are working in our favor.

David Dillon

We said years ago, this goes back, 10 years ago -- maybe even longer -- but the combination store that is still today our bread and potatoes -- it's a big part of our business -- that combination store is the best combination size for being a local store that is close to home and having a full assortment of the products customers want to buy.

As you get bigger you have to draw from further trade areas. As you get smaller you can't have the kind of mix that you really need to appeal to the wide customer assortment. So it plays exactly to our sweet spot.

Scott Bender - FTN Midwest Research

All right. Just one other maintenance question real quick. On the OG&A, I know that you said it declined 19 basis points all in; and if you exclude fuel, the legal reserves, and stock options it declined 16 basis points. Just wondering within that 3 basis point difference, how much of that was specifically fuel? Is it 1 basis point, 2 basis points?

David Dillon

It would be quite a bit.

Rodney McMullen

Yes, it would be quite a bit. We did not break it out separately.

David Dillon

It would be more than the difference, I just don't know what it is. Do you happen to know, Mike? I don't think we have calculated it that way.

Scott Bender - FTN Midwest Research

Okay, thank you.

Operator

Our next question comes from Scott Mushkin - Banc of America Securities.

Scott Mushkin - Banc of America Securities

Thanks, guys. Quite a quarter on sales. In our surveying we have seen that the price difference between you and the mass merchants can vary quite a bit. I was wondering is there -- and I know you haven't really talked about it -- is there a rolling strategy, where you look at a market and say, okay, now we are going to really drop it? We have seen 5%, 6% price difference in some of your big markets ranging up to 12% to 15% in others. I was just wondering why we would be seeing that.

David Dillon

Scott, I would offer two explanations. First is we look at our pricing, literally look at it in each market. What do we need? What do we think the competitive landscape is? What does the customer seem to respond to? Really, we look at that as a market-by-market choice.

Second is your question also illustrates the extreme difficulty in trying to do price surveys and to come up with variances that are meaningful. We carried tens of thousands of different items, and to try to pick the items that would represent what is happening with pricing is hard to do.

We have been in this business at Kroger a long time, and we do that same kind of comparison; and yet we have difficulty finding anyone or even any two or three or four kinds of measurements that tell us the whole picture.

I just think doing price comparisons when there are so many items involved is a very hard thing to do, and to make a lot of sense of it, particularly the kind of surveys -- I'm not referring to yours in particular -- but particularly the kind of surveys that are typically run, where it is a few dozen items or a few hundred items even. That is an interesting representation and a nice cut, but it doesn't really tell you the whole picture from the customer point of view.

Rodney McMullen

The other thing, and you have heard us say it numerous times, there is a lot more to it than just price. In some markets, the customer is much more interested in some of the non-price elements. So in those markets we will focus a lot more attention on different level of service, different level of products, product offering. In some cases we may purposely take higher shrink, as an example, because you have to have that for some of the product variety.

So those type of decisions really are things that we look at on a market-by-market basis. When you look at it overall, Dave said it; our sales growth was broad-based, so that would obviously have to pick up markets where we had both spreads in place and obviously had generated good earnings growth, too.

Scott Mushkin - Banc of America Securities

I agree with you on the price surveying; they are very difficult to do. But the one thing that did occur to me as we were seeing certain markets, that the price gap was narrow enough, given what you said about the travel, that it could be that there is some switching because it is just not worth it for people to make the drive. Do you think you're seeing that type of action from your customers?

David Dillon

Scott, not only do we think we are seeing that; you just described perfectly our pricing strategy. What we have said all along is that pricing -- we want to neutralize on price. That is, in the customer's mind, price differences when they occur -- and they don't always occur; we are not the high price guy here, by the way. But when the price differences do occur, we want to make sure that they're small enough that the customer says the other things that Kroger offers are more important.

Then there's plenty of times where we are the price leader; and where that is true then of course that can help drive our results. We're not trying to be the low guy on price on every item in every category. That is just not our strategy.

Scott Mushkin - Banc of America Securities

Then on final one. We have written about this Houston market in particular; and this has to do with the strength of your dunnhumby data. The one thing that HEB does down there is really local merchandise really well; to the degree where they know there is a British population around their store.

Can your dunnhumby data get to that granularity yet? If not, when do you think we can seen the differences? With not just Hispanic, Brazilian; so you can compete more effectively against some of these regional guys?

David Dillon

Well, the demographic data, which is available really to anybody, first tells you who resides in the area. What dunnhumby data does for us is tells us the actual purchasing behavior of those customers. Dunnhumby data today can tell us the kind of things you are describing. Our ability to act on that actually is a bigger limiter than the dunnhumby data.

But there is a difference between what customers do in their behavior and simply the ethnicity of that particular neighborhood. We find a lot of people who maybe come from Somalia who want products they are used to from home; but they also may want very Americanized products.

As a result, it may not simply be that the demographics say that the Somalian population is large and so put a lot of Somalian product there. It may well be, based in the data we see, that it's a little different mix of product that will do well in that store.

So dunnhumby actually goes the next step past the demographics into the actual spending and consumer behavior on the part of the people in that particular store. We are able to get to that data today.

Scott Mushkin - Banc of America Securities

Great, thanks very much.

Operator

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

Andrew Wolf - BB&T Capital Markets

Two questions. Can you describe maybe at a typical store, on the conversation about segmenting, it is sort of an artificial question: but the SKU count in organics and produce and in dry grocery?

David Dillon

I'm not sure I understand your question. Can we describe the SKU count?

Andrew Wolf - BB&T Capital Markets

Can you quantify it?

David Dillon

Well, you offered a comment about store segmentation, and you kind of cut out a little bit, so I wasn't sure I picked up the full gist of your question.

Andrew Wolf - BB&T Capital Markets

By store, could you quantify the organic produce by SKU count, and the organic dry grocery by SKU count?

David Dillon

Let me tell you what we have done in those areas. We have expanded our natural food. We have expanded our natural food and our organic offering in a number of stores. We have segmented those stores based on our own read of the data where it will be more successful than in others.

So we won't put, say 100 SKUs of produce organic product in every store; but we will easily put 100 SKUs of produce organic product in selected stores where the demographics or the customer behavior is such that it will work well.

Rodney McMullen

Or even more.

David Dillon

Yes, or even more, and it will grow. We let it grow naturally to where the customers want it to grow. We do have a number that would be that high and some that would be higher.

Then same thing in grocery. It gets a little cloudy what is in the natural food category and what is in the grocery category because a number of products that you would think of as traditional grocery could be classified as a natural food product.

We also have offered them in a wide variety of ways. We been very successful, for instance, at Fred Meyer, where they have a separate department and it's worked extremely well. In other markets, Colorado being an example of that, where we have distributed the product throughout the grocery departments, it works very well there too. To get a SKU count in that area I think would be impossible; trying to determine if you're going to call this an organic item or not.

What is crystal clear though is the SKU counts are growing every day in both grocery, and in produce, and in other categories too. Health and beauty care, it is growing there. I can't think of a category where it is not growing, really.

Andrew Wolf - BB&T Capital Markets

Just to follow up on the produce. At a medium store, I am sure some of the stores, I don't know if it is close to zero, but in others it's where you said, 100 plus. What might that be on the organic produce SKU count at kind of your medium store?

David Dillon

Well, I think it varies enough that I am not sure medium would be very helpful. But maybe half of that, I don't know, 50 or so ballpark. I just don't know that that is helpful, because really we're trying to tailor based on what we see in the particular markets and in the particular stores.

Andrew Wolf - BB&T Capital Markets

Okay, one last thing which is probably more helpful. How quickly is that mix going from a higher index SKU count of organic versus a lower one? How quick is that shift occurring?

David Dillon

Would you repeat that question? I'm not sure I followed it.

Andrew Wolf - BB&T Capital Markets

You know, how quickly are your stores becoming more highly indexed in organic over time?

David Dillon

How quickly are we moving in this direction? I would say there's two things that are happening. The customers are moving to more interest in organics than was there before. That is for a variety of reasons. So even a mainstream store, availability of organics is beginning to have some importance. Which is why we would have some presence in a kind of middle-of-the-road store.

But in addition to that, we are improving on what we're doing in our own offering. Vendors are providing more available products. We are sourcing it better. We are pushing ourselves on the standards on the organics as well. Working with growers, for instance, in produce to develop a wider variety of product and a better quality of product.

I think it is all of those things that are contributing to it rising at a quicker pace. The incremental change in terms of what is happening in these sales would be very strong because of the double-play of customers more interested and we're doing a better job of providing the products.

Andrew Wolf - BB&T Capital Markets

Thanks. My second question is on the gross margin, where this quarter and last quarter you gave granularity into the selling gross margin. What drops out of that is it is clear that you have big improvements in shrink and warehousing and advertising. Could you kind of rank order those three cost areas as to which is improving the most?

Dave, I think you talked about it a bit; but could you kind of just comment on what you think is sustainable in there?

David Dillon

The ranking of advertising, shrink, and warehousing improvements, I don't know for sure.

Rodney McMullen

We really should not get into that level of detail. In terms of sustainability, I think the market will tell us how sustainable it is in terms of how the market customers react.

David Dillon

What we have done, though, in shrink as an example, because that's been an important one for a long time, the steps we are taking we believe are sustainable steps. They are intended as the kind of thing we can do for a very long time.

But Rodney is right, the market will determine a lot of that. Shrink changes too, though. Take for instance the organic product question that you were asking earlier. The question of organics and how those sales work. Well, the more organics we offer in our stores, until they really take off in sales like a conventionally grown product, you end up with more shrink.

We're not trying to drive shrink at any cost. We are trying to drive shrink in balance with the other things. Balance is the whole theme of really everything we are trying to do in this business plan, and I think this quarter illustrates many parts of that. This particular point illustrates it too.

Andrew Wolf - BB&T Capital Markets

Just a comment on the market in a sense to help determine that; I just want to make sure I'm understanding what you are trying to say. I am interpreting that to mean there is a lot of sales leverage in those areas; and that is what you're talking about.

David Dillon

Yes, we think there is. In fact that is some of the balance point. We often are pushing ourselves in categories or products that will improve our sales but might increase our shrink.

In balancing that, what we look at is the sales benefit; and then we look at how much shrink are we talking about; and we look at what is left over when we are done.

Sustainability in our sales growth and our earnings is really what we are after here. I think what you described is exactly correct.

Andrew Wolf - BB&T Capital Markets

Thank you.

David Dillon

I think we have time for one more question.

Operator

Our final question comes from Mark Wiltamuth - Morgan Stanley.

Mark Wiltamuth - Morgan Stanley

Good morning. I wanted to focus a little on the Albertson's dislocations. Have you been able to see any store level or divisional data that shows that some of those closures from Cerberus have impacted you? Could just give us an idea of how much of your store base is overlapped with the Cerberus-owned properties. Do you think this could be a big benefit for you in the next couple quarters?

David Dillon

Well, on the overlap, I will see if Rodney has anything he wants to comment on that in a second. But before we get to that, let me just comment on the sales. There's two things I would offer.

First is the stores that have been announced for closure are already low-volume stores. So the impact in those markets will not likely be much to notice, because they are low-volume stores.

Secondly is, one of the main reasons we talked about our sales being broad-based in geography and through departments is to illustrate that our sales growth is not just the direct result of what is happening in any particular market. Yes, we have some markets that are better than others.

I would not describe our sales improvement as a functioning result of what is happening in Cerberus or in any part of the former Albertson's chain.

Do you want to comment on the overlap, Mike and Rodney? I think they are looking at the numbers to try to see if they can get some sense of that.

Mike Schlotman

Relative to the Cerberus assets, obviously they're in isolated markets. I probably should not speculate on the number of stores without doing the calculation, but it is a relatively low percentage of our total store base is overlapping with the Cerberus assets.

Rodney McMullen

It is probably 10% to 15% of our stores.

David Dillon

I think as I look at the transaction we went through, for me the real question isn't so much the short term, what is the impact now? But the long term, what is the message here? The message here is this is what has been happening in the industry for a very long time.

Consolidation, change in how we survive with customers today, and how we thrive with customers today. The business plan that we have carved out at Kroger we think is the best combination to end up achieving the ability to thrive in today's business climate and today's business environment.

We're pleased with the results that we have just reported and I think it is specifically because of the strategy that we have carved out.

Rodney McMullen

Our assumption is that they will run better stores than has been run in the past. If they don't, then that is wonderful, but they have a good management team they have put in place. Our assumption is they will continue to improve the operations of the stores they have that they don't close.

David Dillon

We respect the operators both of the Cerberus stores but also the SuperValu group. They will do a fine job, so we think that will be a continued competitive challenge in the industry.

Mark Wiltamuth - Morgan Stanley

Thank you.

David Dillon

Thank you. Let me just close. Before we sign off today, I would like to make one last comment to our associates who are listening in today. Good results don't just happen. The strong results of the sales and the improved earnings that we just reported are a direct result of your personal efforts. You are raising the bar here at Kroger, and these results illustrate what we can accomplish individually and collectively.

Thank you for your commitment to our customers. Let's all keep reminding each other what our paycheck says -- a satisfied customer made this paycheck possible. Thank you for joining us today. Goodbye.

Operator

Thank you for your participation on today’s conference call. This concludes today’s presentation. You may now disconnect.

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Source: The Kroger Co. F1Q06 (Qtr Ending May 20, 2006) Earnings Conference Call Transcript (KR)
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