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Safeway (NYSE:SWY)

Q1 2013 Earnings Call

April 25, 2013 11:00 am ET

Executives

Melissa C. Plaisance - Senior Vice President of Finance & Investor Relations

Steven A. Burd - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee

Robert L. Edwards - President

Analysts

John Heinbockel - Guggenheim Securities, LLC, Research Division

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

Charles Edward Cerankosky - Northcoast Research

Kelly A. Bania - BofA Merrill Lynch, Research Division

Shane Higgins - Deutsche Bank AG, Research Division

Meredith Adler - Barclays Capital, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Damian Witkowski - Gabelli & Company, Inc.

Tiffany Kanaga

Priya Ohri-Gupta - Barclays Capital, Research Division

Andrew P. Wolf - BB&T Capital Markets, Research Division

Operator

Welcome to the Safeway First Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Melissa Plaisance, Safeway's Senior Vice President of Finance and Investor Relations. Please go ahead.

Melissa C. Plaisance

Good morning, everyone. With me today for Safeway's first quarter 2013 earnings release is Steve Burd, Chairman and CEO; Robert Edwards, President; and Pete Bocian, Executive Vice President and Chief Financial Officer.

Before I turn the call over to Steve, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. However, we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a list and description of those risks and uncertainties, please see our filings with the SEC.

And with that, I'd like to turn the call over to Steve Burd.

Steven A. Burd

Thank you, Melissa. Our earnings per share in the first quarter was $0.49. This compares with $0.30 earned in the same quarter last year. We did get a large tax benefit in the first quarter, 1/2 of which was anticipated. We didn't necessarily expect to get it in the first quarter, but we got $0.14 in this quarter. If you -- if you exclude those tax benefits, we still made $0.35 per share, which compares with $0.30 a share 1 year ago, which is a 17% increase in earnings.

Just touching on the highlights, quarter 1 was our fourth consecutive quarter of market share gains in both the supermarket channel as well as the all-outlets channel. Our market share data is based on Nielsen scan data. Based on that scan data, we gained 25 basis points of share in the supermarket channel, and we gained 3 basis points of share across all-outlets. Now we believe these share gains are understated because the Nielsen scan data only captures 78% our sales, and it does not capture the random weight items. For those of you not familiar with that term, these would be things sold in bulk, maybe produced in the store. So the vast majority of produce fits into that category -- our meat fits into that category for the most part, floral, in-store bakery produced goods. And those were our strongest pieces of the business. And that's why we feel confidently that those share gains I just reported via Nielsen scan really understate the gains for the quarter.

We also achieved an ID sales increase, excluding fuel, of 1.5%. We achieved a volume increase of 0.7% in the U.S. when the supermarket channel declined an estimated 0.8% and the all-outlet channel increased an estimated 0.4%. We anticipated, as I said earlier, a large tax benefit. But the benefits exceeded our own expectations by a full $0.07. If you exclude only the tax benefits that were not in our guidance, we exceeded the First Call estimates by $0.07. Keep in mind that our guidance was a 31% tax rate. We anticipated $0.07 of this coming sometime in the year. So if you're trying to reconcile to the guidance, you have to include $0.07 of that $0.14.

Providing a little bit more detail and turning to sales. Total sales for the quarter were essentially flat with last year. Now these flat sales were the result of a healthy reported ID sales increase, offset by a reduction in total store count from having sold the Genuardi's stores. And additionally, lower fuel sales that were the result of a slight drop in gallons and a modest drop in price per gallon.

Our ID sales increase, excluding fuel, of 1.5%, included a volume increase of 0.5% and price inflation of 1%, which was lower than we expected. The increased use of generic drugs had a larger impact than we expected. And of course, that generic drug switch is a negative on earn -- excuse me, a negative on sales, but a positive on earnings. The full effect of the generic drug move on our IDs was a negative 0.9%. We contemplated that to be a negative 0.7%. And then of course, we did benefit from the calendar shift this quarter, just as we had a disbenefit last quarter.

Let's see, in terms of volume, essentially, the volume increases were entirely explained by increases in traffic. Traffic coming predominantly from some of our most loyal customers. And we think that's a good thing, and we think that's what Just for U is intended to provide. ID sales were stronger in the U.S. at 1.7%, while Canada was flat with last year. We believe the entire difference in sales between the U.S. and Canada is explained by the fact that our U.S. operations benefit today from a fully rolled out Just for U. Although it's still maturing, as we add registrants virtually weekly. And it also is benefiting from a strong fuel loyalty program, which will get stronger as we move through the balance of the second half as we add a branded partner in most of our markets.

Turning to operating margin, our operating margin declined 10 basis points. But when you exclude fuel, our margin decline was only 7 basis points. And 5 of the 7 basis points, which is the vast majority of it, represents the negative impact of foreign exchange. And that foreign exchange has now moved a little bit in the other direction. So that can always be a swing factor given the Canadian operations.

There was another 8 basis points. This explained by an increase in net property losses. That's the combination of net gains and losses plus the impairment. And that will flip around from 1 quarter to the next.

Gross margin, that some of you are interested in, ex-fuel, declined 29 basis points. This decline was largely explained by investments in price and promotions as we continue to be competitive in the conventional space, and partially offset by improvements in pharmacy margins, again, helped out by generics and some other things that we've done to improve profitability in the pharmacy area.

And then reduced advertising expense. Our O&A margin, which is the offset to gross margin, excluding fuel, declined 22 basis points. So it’s that combination that represented the 7 basis points decline in operating margin. Now this improvement is largely due to lower depreciation, lower labor cost, rents and other occupancy cost.

Turning to interest expense, our interest expense declined $6.4 million, due both to a lower interest rate and to lower borrowings. The interest rate declined 38 basis points and explains the vast majority of that $6.4 million. Interest decline alone, interest rate decline represents 83% of that $6.4 million. The balance of that is a lower average level of debt outstanding, which was down just under $100 million.

In terms of taxes, again, we anticipated tax benefits. That's why we guided you to a 31% tax rate on the year. While we anticipated these benefits would come in the first half, we received all of them, not just in the first half, but we received some additional tax benefits in the first quarter. The first tax item relates to a cash withdrawal from a corporate-owned life insurance plan, and this reduced our taxes by just over $17 million. The second item, which resulted from the resolution of federal income tax matters, and this reduced taxes by another just under $17 million.

Without these 2 tax items, our income tax expense would've been 30% of pretax income. With these items, our income tax rate for the quarter was actually 2.1% of pretax income. So just to guide you on a go-forward basis, we now expect the full year tax rate to be about 29%, and we expect the remaining 3 quarters to be in the range of 33%.

Turning to capital expenditures, we spent $145 million on capital projects in the quarter, which is $164 million less than we spent during last year's first quarter. For the full year, again, our capital tends to be back-end loaded. For the full year, we still anticipate spending between $1 billion and $1.1 billion.

Just commenting briefly on free cash flow. In part due to the lower capital expenditures, our free cash flow for the quarter was $197 million better than last year.

And then other notable events in the quarter. We sold 22% of Blackhawk Network to the public last Friday. It involved 11.5 million shares in that offering. They were priced at $23, traded up immediately, closed yesterday at $25.03. The cash received was $243 million and was used to repay outstanding debt. $200 million was applied to the early repayment of a term loan, which of course, carries a higher interest rate than our commercial paper. And the balance was used to reduce our outstanding commercial paper.

Blackhawk reported their first quarter earnings today, and they were consistent with everything they said on the roadshow. In the S-1 and on the roadshow, Blackhawk reported their increase in load value, which has been a common metric that we've be using with you for some time now, and it demonstrates -- it was 23% increase and demonstrates that Blackhawk continues to have strong growth.

Now that Safeway owns just 73% of the outstanding shares, our annual earnings from Blackhawk will be reduced. When we provided guidance on the year, we -- even though we contemplated the Blackhawk IPO, we didn't know the exact timing. So the guidance we gave you essentially assumed that we would own -- well we owned the Blackhawk for the full year. So the earnings effect of selling 22% is going to be a reduction in earnings. But the earnings decline is roughly equal to the extra tax benefit of $0.07 per share that I talked to you earlier in this call. As a result, there's no need to alter our EPS guidance, even though that guidance did not contemplate the sale of -- or contemplate the LBO.

Melissa C. Plaisance

IPO.

Steven A. Burd

The IPO. Good correction there, Melissa. Our fuel loyalty rollout is on schedule. To date, we have rolled out all of California, Dominick's and the eastern division, and we should be completed by the end of July.

Just for U continues to register households at the rate of about 20,000 households per week, and that's happening with a pretty modest marketing effort. And this puts us on pace to be over 6 million registrants by the end of the year.

So with that brief overview, I'm prepared to take questions.

Melissa C. Plaisance

Okay, Shirley?

Question-and-Answer Session

Operator

[Operator Instructions] John Heinbockel.

John Heinbockel - Guggenheim Securities, LLC, Research Division

Guggenheim. So Steve, a couple of things. What's sort of the latest update with regard to comp trend ending 1Q beginning 2Q? And then taking the calendar out, right, so if you think about getting to the midpoint of your -- of guidance for the full year, it sort of means 150, 200 basis points improvement from the first quarter through the balance of the year. When you think about Just for U, loyalty and health care, size up what's going to drive that 150 or more of sequential improvement among those 3 programs?

Steven A. Burd

Okay, so you've -- that's a complicated way to ask about 6 quick questions. So let me try to see if I can remember them all. Let me first of all address what's going to drive the back half, and let's just talk first about sales. As we rollout fuel and as fuel matures, we believe in the back half that's worth about 60 basis points. The center of the store, which you had a look at, at the Investor Conference is delivering considerably more than we expected in terms of incremental sales increase. And we've also added to our ambition about how many of those we can do. We think we can bump that number maybe by as much as 25 stores. We're also trying to accelerate that. But as it stands, 80% of that activity really happens in the back half of the year. And center of the store should deliver in the back half anywhere between 0.4% and 0.6% additional IDs. And then generics, which had a pronounced effect this quarter. We anticipated 0.7% on the IDs. It turned out to be 0.9%. You can never predict it with accuracy because you don't know who else is going to start producing generic drugs and how quickly that transformation will take place. But the hurdles that we face in the back half of the year are much, much lower. And so we think that on the generic side, we'll get another benefit of 0.5% to 0.6%. So by way of example in the fourth quarter, we estimate that at a 0.3% as contrasted with 0.9% in this particular quarter. The other thing that I would remind everybody of is that generics have always been more profitable than branded. And I know everybody is really focused on IDs because IDs drive earnings, and IDs drive confidence in business-building. But the economic effect of a 0.9% shift in generics it's as if the company didn't have a 1.5% ID. It's as if pharmacy was completely flat and the company had a 2.4% ID. So the economics play out as a 2.4%. So the economics will go the other way in the third and the fourth quarter, but the sales will be much better. The other thing that happens to the earnings in the back half is that the earnings -- the earnings benefit, they benefit from just the cost reduction and profit improvement we're doing. So our standard practice once we put the plan to rest is to sit down and look at some improvements. So we have several improvements. And frankly, against our targeted profit improvement, we're well ahead so far. And then fuel is another big add. We would estimate that at about 0.6%. And so that easily gets you in the range of 1.5% to 1.8%. And then finally, Just for U is maturing. We're adding 20,000 registrants, and the registrants that already exist are continuing to become more loyal. So we always said, and I believe I said this at the Investor Conference, that the ID sales will build as we move through the year. And so we're -- we were a little disappointed in the reported IDs. And if you look at the 1.5%, we had a -- besides the generic surprise of 0.2%, we had an inflation surprise of 0.3%. We were expecting inflation in the back half and -- anybody that can predict this with accuracy should get paid handsomely, but we have to make these predictions. And I think most of you have made the same predictions that inflation will build in the back half, and we have that estimated at 1.6%. So if we'd had 1.3% on inflation, that's not enough to dampen demand, had we had our -- if we had nailed the generic number, we would be producing a 2.0% in the first quarter, instead of what we did. Despite that, the earnings in the first quarter are quite good. Now did I miss anything in your question?

John Heinbockel - Guggenheim Securities, LLC, Research Division

No. And you're assuming health care is 0 as a benefit this year?

Steven A. Burd

Yes, we -- and we said that. We said that at the beginning. And so that becomes all upside. Melissa, just signaled me that I didn't cover how we doing this far -- so far this quarter. We think that this quarter will play out as a duplicate of the first quarter. We think this quarter will be in the 1.5% range. And the sales in the bank after the first 5 weeks are not a good indicator of that. I think we've been talking for a couple of years that when you reach the end of the month, the difference between end of month sales and beginning of the month is increasingly pronounced. And Easter fell at the end of the month. And so it was a softer Easter than normal. And then the second week, you go against Easter from the previous year and then the third week. So we saw some softness in that, but we're not concerned. Since that softness, sales have been building, and we think we'll be at 1.5%. That's a good number for the quarter. And the pharmacy number will also contribute to that 1.5% because the generic effect is softening a little bit even in the second quarter.

John Heinbockel - Guggenheim Securities, LLC, Research Division

And then just one last thing. I know you've talked about for the full year operating margin being flat to up or up a bit. On a dollar basis, it would strike me that you do think that operating income, FIFO operating income, the remaining 3 quarters would be up versus the prior year. Maybe helped by some property gains, but you would be up year-over-year. Is that fair?

Steven A. Burd

Yes. I still think year-over-year, we should be up a bit.

Operator

Our next question comes from Karen Short.

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

Karen Short, BMO Capital. Just following on that question on -- but more related to volumes. I guess you had said in the first 8 weeks, U.S. volumes were running up 1.4% in the first quarter. And obviously, you gave us the U.S. volumes for the full quarter. I mean, any color there?

Steven A. Burd

Yes. I think the color is simply that we had that flip in the New Year's Eve, New Year's Day shopping. That was New Year's Eve in 2000 -- let's see, I got to get this right, in 2000 -- see, we're in 2013, in 2012 was not in this number. And so we got the benefit of New Year's Eve shopping for the very first part of 2013. And so that was going against the previous year when it was in the -- when the New Year's Eve shopping was in the fourth quarter. So that -- so you get a little artificial bump there because the effect of that particular holiday drove a stronger ID in the front part of the quarter. And then it began to normalize after that. And same thing is true with volume.

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

Okay. And then just following on your comp expectations for the year, you didn't mention the Wellness initiative as a potential to boost your comps. Any color on...

Steven A. Burd

Yes. I mean, obviously, we think that Wellness is going to add. If you go back to the Investor Conference, we never said -- we didn't put it into the IDs, and we considered it upside. So that upside should be there. I gave you -- I gave you fuel because it's a known winner. I gave you generics because it's easy to understand, and I gave you center of the store because it's easy to understand. You didn't have -- we had only 7 center of the store projects in the first quarter. We obviously have more done now. And we're going to try to do 275 for the full year. Whereas the Wellness thing, we have some internal expectations for that. But there's no particular value in trying to put those out there as part of guidance for you on ID sales. It hasn't happened yet.

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

Got it. And just to clarify, all of your stores -- the goal was to have 94% of your stores with some kind of fuel program by the end of the second quarter, is that still on track?

Steven A. Burd

Yes, I don't know exactly the date the second quarter ends, just say July. It should be done in July.

Operator

Our next question comes from Chuck Cerankosky.

Charles Edward Cerankosky - Northcoast Research

Chuck Cerankosky with Northcoast Research. If we look at what the consumer's buying, Steve, what's it telling you right now about consumer sentiment in terms of trading up? And how is Just for U affecting that?

Steven A. Burd

I think that Just for U has, as you might expect, a much stronger appeal to people that are concerned about price and budget, and income taxes and other things. I still believe that it's a very sluggish recovery. I still believe, if you look at the consumer confidence numbers, I believe the most recent report, they went down. I don't really think -- I don't think you have a really strong economy until consumer confidence is -- hits 90. We haven't seen 90 in probably over 5 years. So I think consumers are still affected by that and trying to be very careful with how they spend their dollars. And food retailers see that probably better than anybody else out there because people have to shop for food on a weekly basis. And this pronounced difference between end of month and beginning of month is higher than I've ever seen it. And so I think that tells me that things are still pretty sluggish out there. That said, our game with our fuel loyalty program, Just for U, everything else we talked about, is about gaining share. And we're pretty pleased that we now have 4 consecutive quarters of gaining share, not just in the channel, but across all outlets. And I think 2 years ago, people didn't think we could do that.

Operator

Our next question comes from Kelly Bania.

Kelly A. Bania - BofA Merrill Lynch, Research Division

This is Kelly Bania from BofA Merrill Lynch. Steve, I was wondering if you could just talk about gross margin a little bit more. It sounds like the price investments you made were a little bit beyond the 29 basis points decline in the gross margin ex-fuel. So I was just wondering, is that -- is it a little bit front-loaded this year or should we expect kind of a similar price investment throughout the rest of the year?

Steven A. Burd

Price investment is essentially dictated by the competition. So it is what it has to be in order to maintain and build market share. So even though the inflation is on the modest side relative to recent history, we're not seeing across the board competitor pass-through on a universal basis. And so we have to react to that. That said, I think that we have a lot of things going for us positively on how to either manage the gross margin or in fact manage the operating expenses. So we don't get too excited about operating margin going down 6 basis points or 7 basis points, particularly since the vast majority of that was currency. So the fundamentals underneath that are strong, and we think we can manage through that.

Kelly A. Bania - BofA Merrill Lynch, Research Division

And then just one more if I can on Just for U. Any color you can give us on what IDs would look like for that group of Just for U users versus the non-Just for U users? I don't know if that's the way you look at it, but if there's any color you can give us on that, I think it would be helpful.

Steven A. Burd

Yes, we don't look at it that way. We look at -- it clearly has an impact on IDs. We continue to run increased spend on a weekly basis for those shoppers that exceeded our initial expectations by some distance. And then the good news is, is as we round those markets, we continue to put good numbers on top of good numbers. So the Just for U user becomes more loyal, spends more money. And it's reminiscent of what we always see with new stores. And I think all food retailers see the same thing when you anniversary the opening. Except for the promotion, ignore that, you do very well, often double-digit in the first year. And it takes about 5 years for that to normalize. Well with Just for U, there's so much additional value you can bring as you learn more about the shoppers, that we don't see -- we don't see the sales increase from that flattening at all. We think that, that will just continue because some day, others will have a tool like this. But we should be 2 to 3 years smarter than them, and the more experience you have with it, the more value you can create.

Operator

Your next question comes from Shane Higgins.

Shane Higgins - Deutsche Bank AG, Research Division

It's Deutsche Bank. Steve, I think you mentioned that ID fuel gallons were actually down year-over-year in the first quarter. And I was a little surprised to hear that. Was there something that -- number one, was that something that you guys were expecting? And number two, do you expect that to reverse?

Steven A. Burd

Our IDs -- our ID gallons have been strong there for a long time. And while branded people were experiencing declines, we were experiencing increases. It's a modest tick down.

Robert L. Edwards

It is. And if you recall, I think we had commented earlier in the year of almost an unprecedented number of days of price increases early in the year. And if you look at demand across the country, I mean, consumption is down. And so it's just reflecting a national pattern of lower fuel consumption.

Steven A. Burd

The other thing is that would affect this year somewhat as we bring on branded partners in these markets, you have an opportunity for people to fuel up at a branded station if it's nearer. And it would have a modest effect, but it contributes toward that.

Shane Higgins - Deutsche Bank AG, Research Division

Okay. That's kind of what I figured. So we might see that continue over the next couple of quarters as consumers opt to go to fuel up at other stations.

Steven A. Burd

I don't think it'll be material. And then keep in mind, we win on the profit side of this equation when costs come down, and they always do. They go up and down. So over the course of the year, our fuel business has been one of the steadiest performers of any business we have.

Shane Higgins - Deutsche Bank AG, Research Division

Okay. Great. That's helpful. And just one last question on the rollout of Just for U up in Canada. I don't know if you talked about this already, but are you still planning to roll that out later this year, and how do you think that's going to impact IDs in the back half?

Steven A. Burd

Well, it's going to be rolled out, what's the timing of that, Robert?

Robert L. Edwards

Q3.

Steven A. Burd

Q3. So in Q3, we'll roll it out. We will get some benefit from that, modest in Q3, more in Q4, but there's a maturing effect here that will have a more pronounced effect on Canada in 2014 than 2013. And that's why I didn't put it in my big 4 buckets.

Operator

Our next question comes from Meredith Adler.

Meredith Adler - Barclays Capital, Research Division

Meredith Adler from Barclays. I was wondering if you have done any research in relation to the fuel rewards program, which is obviously a great deal for consumers. But is there a different reaction to programs like that when gas prices are moderating, or do they just kind of look through that and say, this is still a great deal?

Steven A. Burd

Yes, I think the consumer -- obviously, there's a greater interest when gas is over $3 a gallon and only people my age remember $0.19 a gallon. And so we have not really seen people that are engaged in the fuel loyalty program. We've probably witnessed, Robert, a $0.50 swing and haven't really seen any difference in that. It's conceivable if you got down to $2.50 a gallon, you might see something. But people really like to go to that fuel station and watch that fuel price ratchet down and given those rewards. And again, as I think you know, it's perceived as higher value than it often is. And so we benefit from that.

Meredith Adler - Barclays Capital, Research Division

Great. And then I guess I just have a question about generics. Is it possible to quantify what the gross margin benefit was in this quarter? And just kind of related to that, I'm a little surprised it had a bigger impact in this quarter than the last quarter, didn't seem to jive with the numbers that we were getting from Walgreens and Rite Aid. Was there something, you think, specific about the way you guys are running your business that it might have been bigger in the first quarter than those others?

Robert L. Edwards

Meredith, it's difficult to predict with certainty the change in generics, primarily due to the uncertainties that we have as to when the generic drug will be manufactured by multiple -- many companies as opposed to the initial manufacturer that does that. So it's hard for us to predict with certainty when multiple manufacturers will be manufacturing that generic drug. And that's when you see the big spike up in demand. And so that's really the factor that's the hardest to predict. Over a year's period, you can predict that pretty well, but quarter-to-quarter, that causes the change that we weren't anticipating.

Steven A. Burd

We grew our script volume in the quarter even though we rounded the anniversary of the benefits that we got from bringing on the Express Scripts business. So we were pleased with that. Oftentimes, competitors, even in our own sector, will report different numbers of inflation. So I don't know the numbers that Walgreens and CVS reported. I can't explain theirs. I can only explain ours.

Meredith Adler - Barclays Capital, Research Division

Okay. And then the benefit of generics, now that we're backward looking, and you have some idea about the multi-sourcing, can you give us an idea of how beneficial it is to the gross margin or was in the first quarter?

Steven A. Burd

I mean, I don't know if I want to give you a specific number. We tended to talk about it in terms of how it translates into profit. But it would -- it was a pronounced effect in the quarter on gross margin, and gross margin was also enhanced by the fact that we had a supplier change a while ago. So Robert, why don't you just, if you want to provide...

Robert L. Edwards

Yes, it's close to $0.02 a share, between $0.01 and $0.02 a share.

Operator

Our next question comes from Mark Wiltamuth.

Mark Wiltamuth - Morgan Stanley, Research Division

It's Mark Wiltamuth from Morgan Stanley. Steve, at the Analyst Day, there was some commentary that you were putting your Canada REIT analysis on hold and you were going to pick that back up after the analyst event. Maybe can you give us an update on what's going on there?

Robert L. Edwards

Yes, Mark, that's accurate and the analysis is ongoing and no conclusion's been reached.

Mark Wiltamuth - Morgan Stanley, Research Division

Okay. And with Steve's retirement coming up here on May 14, any update on the CEO search?

Steven A. Burd

I think the only update that I could provide is that we think we'll have a CEO on May 15.

Mark Wiltamuth - Morgan Stanley, Research Division

Okay. And just to circle back to the comp trend here. It looks like things definitely fell off in that last month. Maybe you could just comment on what was happening there in the last month of the quarter.

Steven A. Burd

Well, part of it was that the first couple weeks, particularly the first week, were very pronounced because of this calendar shift. And so you did see some falloff after that. And then now we're beginning to strengthen from there. So I think it's more a result of that calendar flip than anything else.

Mark Wiltamuth - Morgan Stanley, Research Division

And do you think there was any weather vagaries, because we had a very soft and mild winter last year. And this year, we actually had some snow storms, and you're also lapping easy volume compares, was that a factor with the weather changes?

Steven A. Burd

We did not measure the weather changes, but you're absolutely correct that the weather was much more -- it was much milder this year. We didn't have as many snowstorms. But we didn't try to calculate that difference. But it would have had some negative effect on the quarter. In fact, we didn't benefit from snowstorms as much.

Operator

Your next question comes from Damian Witkowski.

Damian Witkowski - Gabelli & Company, Inc.

It's Gabelli & Company. Congratulations on getting Blackhawk IPO off to a good start. Is -- what is your timeframe that you can share with the investment community regarding Blackhawk, the remaining proceeds. I know the initial proceeds were used to pay off debt. But the remaining 73% that you now own, do you have a timeframe of how you're going to monetize that? Either through a cap shrink, use the proceed to cap shrink or just spin it off?

Robert L. Edwards

As we've indicated previously, as of today, we have no intention to sell anymore Blackhawk. We like this business very much, very pleased with the results, roadshow went well. I think as people saw, we've got a very strong management team there. So very pleased with the results, but there's no current intention to monetize anymore Blackhawk.

Damian Witkowski - Gabelli & Company, Inc.

Okay. And then did I -- on the operating margin side for the first quarter, if you exclude fuel and currency, did you say that the operating margin was actually flat?

Steven A. Burd

I said, it was down 2 basis points.

Damian Witkowski - Gabelli & Company, Inc.

2 basis points. Okay.

Steven A. Burd

Essentially flat.

Operator

Our next question comes from Tiffany Kanaga.

Tiffany Kanaga

I'm calling from Deborah Weinswig's team at Citi. How has flat ID sales in Canada compared to your expectations? And what do you see as the major drivers in Canada going forward? I know you mentioned bringing Just for U later this year, but that will take some time to mature.

Steven A. Burd

Yes, I think that flat was not as good as we expected. And I commented in my opening remarks that the big difference, the 1.7% U.S. versus Canada is the lack of a fuel program and the lack of Just for U. And we are -- we currently have a test in place in Canada on the fuel side and think that we can bring both of those to Canada. And then Canada is going to benefit just like the U.S. from our center of store and premium work. And so I think Canada is going to be just fine.

Operator

Our next question comes from Priya Ohri-Gupta.

Priya Ohri-Gupta - Barclays Capital, Research Division

It's Barclays. Firstly, can you just talk about what drove the change in your debt balance over the first quarter? And secondly, are we still on track to end the year with a debt balance of $4.8 billion?

Robert L. Edwards

I missed the first part, we couldn't hear the first part of your question.

Priya Ohri-Gupta - Barclays Capital, Research Division

Sorry about that. Can you just talk about the drivers for your change in debt over the first quarter?

Robert L. Edwards

Debt increased sequentially from the end of the year. Again, it’s primarily driven by the cash cycle for Blackhawk, collect a lot of cash at the end of the year, hold that for relatively short period of time. Most of that cash moves out early in the first quarter. So essentially, the change is primarily commercial paper. And I think as we --as Steve said on the early part of the call, our priorities for use of cash this year: number one, the dividend; and then secondly, paying down debt. And the one piece of evidence of that intent is using the proceeds from the Blackhawk transaction to reduce debt, which we've done this week.

Priya Ohri-Gupta - Barclays Capital, Research Division

And you're still on track for that $4.8 billion debt figure that you highlighted at your Analyst Day?

Robert L. Edwards

Yes -- no, our cash flow guidance for the year is still $850 million to $950 million, and we feel very good about that and the priorities haven't changed.

Operator

And our final question comes from Andrew Wolf.

Andrew P. Wolf - BB&T Capital Markets, Research Division

BB&T. Just on the inflation coming in 30 bps below what you expected, is that all in lower cost increases from suppliers or was that meeting some of the competition you mentioned where some of the competition wasn't passing through pricing? Was some of that lowering shelf prices more than you expected?

Steven A. Burd

Yes, I think it's really a combination -- I've said for some time that the supplier community -- they've had a really hard time growing volume. So they've been, in the main, pretty concerned and sensitive about raising prices at the rate that they used to historically. So I think it's just a combination of having to react to competitive price movements and not seeing, certainly in the first quarter, the kind of price inflation that we otherwise would've expected.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Just a follow-up on the competition, it sounds like it did get a little more intense from the fourth quarter it sounds from the way you're portraying it. I want to make sure I'm hearing that right. And if so, which class of trade, was that more from the traditional supermarkets or discounters?

Steven A. Burd

I would say it's a combination. And we get asked this question a lot about, has the competitive landscape heated up? What I would say is, relative to the fourth quarter, it's like the temperature in your living room. In the fourth quarter, it was 70, and in the first quarter it was 71. I mean, it's not -- we can measure it, but it's not -- it's not an overwhelming challenge. I mean, I think that it's been my experience over the last 20 years is that people we compete with in the main are pretty rational, and they have the same challenges we do, and we haven't seen any abnormal behavior. People always try to do things as do we to take market share. And the reason you react is because if those things work, they keep doing it. And so you have to react. And we built that reaction into our plan and into our guidance.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Do you think some of that reaction from your competitors is just sort of their blunt force reaction to Just for U? I mean, as you talk to your...

Steven A. Burd

Some of it is. Some of it's a reaction to our expanded fuel program. Some of it's a reaction to, they don't like their numbers. Because I think that our numbers, compared to the people we compete with in the supermarket channel and even in the mass channel, I think our numbers will look pretty decent.

Andrew P. Wolf - BB&T Capital Markets, Research Division

One last -- I wanted to follow-up I think was to Mark's question on the IDs. In the last month and how they did, did you say that they are building a little bit from the last month of the quarter or did you say you expect them to build? I just want...

Steven A. Burd

Yes, I said, they're building from the downdraft that resulted from Easter following at the end of the month. Easter is one of those holidays that can fall at either the beginning, the middle or the end. And the thing you -- the thing you don't want is for it to fall at the end. But we have no say in the matter, and it did.

Melissa C. Plaisance

Okay. Well, thank you, everyone. Appreciate you participating in the call, and I will be available for any follow-ups for the balance of the day. Thank you.

Operator

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.

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