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Safeway (NYSE:SWY)

Q1 2012 Earnings Call

April 26, 2012 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 and Chief Financial Officer

Analysts

John Heinbockel - Guggenheim Securities, LLC, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Charles X. Grom - Deutsche Bank AG, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

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

Meredith Adler - Barclays Capital, Research Division

Charles Edward Cerankosky - Northcoast Research

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

Colin Guheen - Cowen and Company, LLC, Research Division

Deborah L. Weinswig - Citigroup Inc, Research Division

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

Operator

Welcome to the Safeway First Quarter Earnings Conference Call. [Operator Instructions] I will now turn the call over to Ms. Melissa Plaisance, Safeway's Senior Vice President of Finance. Please go ahead.

Melissa C. Plaisance

Good morning, everyone, and thank you for joining us for Safeway's First Quarter Earnings Call. With me today are Steve Burd, our Chairman and CEO; and Robert Edwards, President and Chief Financial Officer.

Before I hand the call over to Steve, I'd like to remind you that management will make statements during this call that will include forward-looking statements within the meaning of the Federal Securities laws. Forward-looking statements contain information about our 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, Steve, please take over the call.

Steven A. Burd

All right. Thank you, Melissa. I'm going to talk about net income from continuing operations and just as a reminder, in the fourth quarter, I think or at least in the call, we mentioned that we had put 27 stores on the East Coast, Genuardi's branded stores into discontinued operations and assets for sale. So, the impairment charge we took for doing that is not in these numbers, nor will the gain that we expect to get in the second quarter from the sale of those assets…

[Audio Gap]

Steven A. Burd

…be in our numbers in the second quarter.

So the net income for from continuing operations in the quarter came in at $81.6 million. This compares with earning $25.1 million in 2011. Now I would like to remind everybody that the low number in 2011 was driven in large part by the taxes that we paid by repatriating some money from Canada, bringing down over $1 billion. So we paid a tax in Canada for doing that of 80 -- or we paid a tax on the Canadian dividend of $80.2 million. So if you really want to compare the net income performance of the 2 years, you need to adjust that $25.1 million for that tax. And the right comparison would be we made $81.6 million this year and we made $105.3 million last year. Now that is just under a $24 million difference, but later in the call, I will explain that there are some reasons for that difference that I think will give you comfort that our net income and our operating profit was essentially flat over those 2 quarters.

Expressed as earnings per share, we made $0.30 per share in 2012. This contrasted with $0.29 a share in 2011. Obviously, the share buyback program helped in that $0.01 improvement despite the fact that the net income, as reported, was lower.

By way of some quick highlights, as expected, and in fact, we discussed this in our fourth quarter earnings release, our ID sales were soft for the quarter. This softness in sales resulted from a combination of factors. The first is that we had a calendar shift with respect to New Year's Day. Now, we're unique in that. Other food retailers that report do not experience that same calendar shift. So we always have an opportunity for New Year's Day to be split from New Year's Eve, which is a big business day. Periodically, we have a split across quarters on Easter. And so, we get affected where other retailers do not. So that was a big effect in the quarter.

We also had some unusual weather patterns. I think others have talked about that where a general lack of snow this year did affect our sales and did affect our income when compared to last year. And then we continue to have high fuel inflation and high food inflation. I'm going to talk in more detail about food inflation, but it was quite high in the first half of the quarter. And then just as we expected, it really moderated as we moved through the back half of the quarter. But the inflation in food and fuel continues to have a dampening effect on consumer demand.

Under the circumstances just described, we were very pleased with our net income and our earnings per share results for the quarter. Almost 80% of the shortfall from last year's first quarter net income is explained by a shift in the holiday and higher interest expense. Now the shift in the holiday, there are 2 facts to consider there. One piece of that is that we started the quarter on New Year's Day, which is a Sunday, but compared to any other Sunday, it's going to be a very slow Sunday as we took in all that business on the last day of the year called New Year's Eve. At the same time, all of the labor costs that we have on that day is going to be with some kind of a premium. And so, those 2 things in combination materially affected the numbers for the quarter in terms of net income. And then the higher interest expense was also a significant factor. But again, that's a good thing because it enabled us to buy back stock. And you'll recall from the investor conference, we're cash accretive on that because the interest that we pay on the borrowed funds to buy the stock is less on an after-tax basis than the dividends we otherwise would be paying on that stock.

The remaining difference in net income is explained by a higher pension expense because we changed the interest rate assumptions and then the weather differences and a small change in the tax rate. But for interest expense, the same factors could be used to reconcile the operating profit from Q2 -- from Q1 of 2011 to Q1 of 2012. So the way we look at it, we essentially were flat in both a net income basis and an operating profit basis. And given the fact that we had flat IDs, we think that's a very good result.

Our gross margin rate and O&A expenses were also very well controlled and our earnings per share for the quarter matched the comps and first call consensus. And this is the eighth consecutive quarter that we've either met or beat those consensus estimates. Looking forward, we continue to expect sales to accelerate as the year progresses and we have not changed our guidance on the year.

So getting into some of the details and starting first with sales, total sales increased 2.4% versus last year. The increase in total sales is explained by higher fuel sales, and also, new stores net of closures, and third, higher revenue from Blackhawk.

ID sales, excluding fuel, were flat with last year. The combination of weather, plus the calendar impacted sales would be 0.6%. So were it not for the calendar shift, which is the -- which is about half of this number and the weather, which others experienced, we would've turned in a positive 0.6% ID.

We also saw an acceleration in inflation that negatively impacted volume in the quarter. The food inflation, as I indicated earlier, moderated considerably in the back half of the quarter, and volume improved when that occurred. We expect food inflation to continue to moderate as we move through the balance of the year. Rising fuel costs continue to affect consumers, but the comparisons to last year are beginning to narrow. So we had a much smaller increase in fuel expense in the quarter. It was just under 7%. And right now, as we look compared to last year, the numbers are dangerously close to what we experienced last year. Now about this time last year, fuel costs began to decline. So we'll see now whether they decline or whether they hold up in terms of their effect on consumer behavior.

Our sales have been much stronger over the last 8 weeks. Inflation has slowed from north of 5% in the first 6 weeks of the quarter to something approaching 3% beginning with about week 10. And I've picked week 10 because that's a time period in which all the snow effects are gone. So you've got a pretty normal period beginning with week 10 up till today so an 8-week period ending yesterday is basically represented by about 3% inflation. Volume as expected, has improved as inflation has slowed. You recall it's been my long-term view that as long as inflation is 3% or less, inflation itself in food, does not have a dampening effect on consumer demand. But once you get north of 3% you begin to affect that. Now that's all other things being equal. What has not been equal for us is fuel. So if fuel gets under control and inflation continues to moderate or stays in that 3% range, that will mean good things for our volume, and frankly, good things for our sales. So ID sales, excluding fuel, are currently over the last 8 weeks, running at 1%.

As we continue to roll out and market our just for U platform, we expect these sales to continue to get better in quarters 2, 3 and 4. Our first real marketing effort, which is now evident in Southern California, continues to deliver on our expectations. Remember, the challenge there is to get people to register for the just for U service, then make sure that, that registration entices them to actually try it and use it. And then of course, we want to convert them to regular use. And the numbers that we have forecast and the timeframe it takes to get a large body of regular users, we're right on track with that, granted we're only 2.5 weeks into that effort. But we're certainly meeting our expectations.

Turning to gross margins. Our gross margin rate, excluding fuel sales, declined 8 basis points for the quarter. Now I would be quick to point out that 7 of those 8 basis points that declined are explained by Blackhawk's contribution to our gross margin rate. Now that might surprise some of you, but Blackhawk actually has a lower gross margin rate than Safeway. Now obviously, Blackhawk is growing at a much faster pace than Safeway. And so, that lower gross margin rate, in combination with its fast growth rate, has an effect on gross margin, which in this quarter, lowered it 7 basis points. Stated a little bit differently, if it weren't for Blackhawk or if you were isolating yourself and looking at the retail food operations, basically, gross margin was flat.

O&A expense margins. O&A expressed as a percentage of sales, declined 35 basis points from last year. But when you exclude the fuel sales, the O&A expense ratio declined only 2 basis points. Now the holiday pay that I referred to earlier associated with New Year's Day, in combination with the soft sales in New Year's Day, compared to a normal Sunday, actually increased O&A expense 17 basis points. So that increase in 17 basis points was absorbed, and yet, we ended up with only a 2 basis point increase. So frankly, if we were like other retailers and didn't have that calendar shift in there, O&A expenses would've been up 17 basis points. Now just as Blackhawk affects gross margin negatively, Blackhawk affects operating or O&A expenses positively. But when you net it all out, our operating profit margin actually improved slightly in the quarter, which I think is a surprise to some people.

For those of you that like to follow our real estate activity, there's really nothing unusual to report. We've always said that you have to look at property gains in combination with impairments because there's a flip side of the same coin. And so if you look at the combination our property gains and impairments for the quarter, they basically matched last year's number. One number was 55 negative and the others number was 57 negative.

Now at the investor conference, we talked about this new entity we had created, Property Development Corp., which is in the Shopping Center Development business, with the aim of developing shops around our stores and then flipping those shops when they get fully tenanted. For the year, we expect that activity to generate $31 million in pretax gains. There were no gains from PDC, nor did we expect any here in the first quarter. So that entire $31 million, which we expect over the next 5 years to grow to something like $60 million. So we believe it to be, on an annual basis, a highly predictable number. None of that is in the first quarter comparison.

In terms of interest expense, interest expense increased $5.7 million over last year. The increase in interest expense is largely the result of higher average borrowings. In fact, our borrowings were $1.70 billion increase in the quarter on average, all of that designed to support the stock repurchase plan. Now, the cost of the higher borrowings were partially offset by a decline in the average borrowing rate. So our average borrowing rate went from 5.67% to 5.08%.

Turning to capital expenditures. We spent $308 million on capital projects in the quarter, which is about $123 million more than last year. Two big pieces of that, the largest piece of it is the work that we're doing with Property Development Corp. where we're obviously spending money on some centers. The bulk of that money is focused on 6 shopping centers, but bits and pieces of it would be supporting other centers as well. And then while we don't have any Lifestyle remodels to report this quarter, we're constantly doing sort of in-store remodels of various kinds, and that would be the second largest piece of that increase in capital. And then of course, there are some ins and outs, some lower expenditures compared to last year and some higher. But those are the 2 big pieces. We also completed 4 new stores on the quarter.

Turning to free cash flow. Predictably, free cash flow was negative in the quarter. We always have a negative number in the quarter, reflecting a pattern of cash outlays that we have, particularly associated with the Blackhawk business. So our first quarter free cash flow was a negative $224 million.

Other notable events in the quarter, we purchased 46 million shares at an average cost of $21.70 per share for a total expenditure in the quarter of $1 billion. We also borrowed $300 million under our prearranged term loan during the quarter and the remaining $400 million on that term loan were taken down early here in the second quarter.

We continue to have great access to commercial paper. We are paying 75 to 100 basis points for maturities that sometimes run as long as 180 days. We currently have $770 million outstanding on commercial paper, with an average term of 14 days and an average rate of 90 basis points. I point that out only because it had a material effect on our average interest cost for the quarter. And I think it's useful for you to know what kind of access we have to commercial paper and what kind of rates we pay. Because I think it underscores the quality of our credit rating.

Our tax rate for the quarter was 34% compared to 33% from last year, and we expect on the full year that, that tax rate will be about 34%.

Just a quick note on Blackhawk. The performance which has really been strong, over the last 5 quarters, just continues. The load value and the revenue growth in Blackhawk was around 33% in the quarter.

Just a brief update on the discontinued assets. We think there's a good chance that both the Ahold and Weis transactions that have been announced will close in quarter 2. As you know, we can't predict the timing with perfection as others are involved, but we think there's a good chance to close this in quarter 2. And we expect the remaining stores that will be sold, will be sold over the balance of the year. As a reminder, the cash proceeds are estimated to be about $102 million. And our second quarter gains, albeit will be below the line, will be about $67 million.

Net of the quarter one impairment from the lease exit cost, that was about a $14 million pretax number, we should have a gain from disposition across those 2 quarters of about $53 million.

Just turning to one more subject that's been in the news lately, the multi-employer pension plan, there's some still some confusion regarding our multi-employer pension plan so I've asked Robert to review this outstanding liability and explain why we don't expect any significant increase in our costs in the foreseeable future. So Robert, you want to take us through that?

Robert L. Edwards

Like many employers, we are not fully funded on our multi-employer pension plans. Our actuarial shortfall as of January 2011, was $1.88 billion. Now, this underfunding amount has declined steadily since late 2008 due to improved market returns, contribution increases and benefit reductions. The underfunded liability, we expect to be further reduced over time through collective bargaining, increased market returns and other actions taken by the trustees of these plans.

All of the U.S. plans are governed by ERISA and the Pension Protection Act or PPA. With PPA, the PPA, with few exceptions, required that plan trustees put in a rehabilitation plan whenever a plan is less than 80% funded. These rehabilitation plans typically provide 10 to 13 years, and in some case, longer, to reach 80% funding. These plans typically include a combination of benefit reductions and contribution increases. We now have rehabilitation plans in place where every plan that is less than 80% funding.

As we have put these plans in place, our pension expense, which is about 5% of our total employee costs, have increased at a compound rate of less than 2.9% per year. As asset values recover, these shortfalls should improve and perhaps, moderate our contributions. There is no scenario which we would be required to make a lump sum contribution to cover the underfunding, or for that matter, make a large contribution increase. We have a long history dating back to the 1960s of managing these expenses.

We manage wages, health care and pensions as a single cost and we've done this under both favorable as well as unfavorable market conditions. We see no big surprises in the future on this issue. Of all the things we worry about in managing our business, this issue does not make it to the first page of our concerns. And so therefore, we believe it is a manageable issue.

Steven A. Burd

Just a couple more comments on guidance. Although I mentioned it earlier, our guidance remains unchanged. We believe our sales momentum will continue to build and that's heavily driven by what we anticipate in just for U. And that rollout is on track and delivering just as expected.

So Melissa, I'm prepared to take questions.

Melissa C. Plaisance

Wendy, if you could get started with the questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is from John Heinbockel.

John Heinbockel - Guggenheim Securities, LLC, Research Division

Guggenheim. So guys, a couple of things. So Steve, when you look at the core business in the quarter, strip out -- like core Food Retail business and you strip out the holiday shift and weather and even Blackhawk, EBIT was basically flat. I think that number may have included Blackhawk but if you look at core, would that have been flat or down a little bit? And does that correlate to a 0.6 comp?

Steven A. Burd

It was flat. I think it would correlate to the 0.6 comp, you're correct.

John Heinbockel - Guggenheim Securities, LLC, Research Division

What happened with CPG during the quarter? Because I thought you might take a little bit of the margin hit. It doesn't sound like it was as bad as it might have been.

Steven A. Burd

Yes, I mean I think that what you can see from the numbers is that we have been effective in passing along inflation. And we've gotten adequate support from the vendor community. The first quarter looks very much like how we expect the year to be. We said that on an operating margin basis, we would be plus or minus 5 points. And when you make all the adjustments here, we are actually up as opposed to down.

John Heinbockel - Guggenheim Securities, LLC, Research Division

All right. And then, when you think about the timing of the buyback and where we go the remainder of the year, to what degree -- are there any limitations with respect to -- so you've done a lot, a lot of it has been debt-financed. Are you comfortable taking on more debt or have we basically seen the bulk of the buyback for the year in the first 20 weeks?

Steven A. Burd

I think that there are some practical limitations. I mean, we have repeatedly said that we like being investment-grade. It has certainly helped us out in the 2008 financial crisis when we could borrow money and others couldn't, and at attractive rates. It has a material effect on our average borrowing cost per day. So I think a practical matter our intention is to maintain our investment-grade and that does put a near-term limiting factor on how much stock you would buy.

John Heinbockel - Guggenheim Securities, LLC, Research Division

Okay, and the just one final thing. If you look at interplay between inflation and volume, as inflation has come down from 5 to 3, did volume go up? I guess, it sounded like it went up a like amount.

Steven A. Burd

Yes, volume did go up a like amount. We had between the first half and the second half, we had about a 200 basis point improvement in volume. Admittedly, volume was still negative but as you know, it's negative for the CPG world as well. But if you were to plot our volume against inflation as I have done on a scale, you would see a very tight correlation. I didn't try to run it in our square but you see a tight correlation between the level of inflation and the level of volume. And so, as we get back to that 3% range, and I think there's a good chance that inflation goes below that 3% number between now and the end of the year, that should help us out on volume, just for U should help us out in volume and we're determined to take market share, not just in our channel but across the channel.

Operator

Our next question is from Ken Goldman.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

It's JPMorgan. I know you can't talk about all the M&A speculation out there and I'm not going to ask that question directly but from the perspective of an outsider, there does seems to be a large level of activity lately at Safeway unrelated to fundamentals. Bob was promoted, buying back all the stock, calling out detail on Blackhawk sales and earnings, a double trigger mechanism and so forth. So maybe I can ask this question. Is it just a coincidence that all of this is happening at the same time or has there been somewhat of a change in strategy and/or maybe the way the company sees the world and its business that perhaps, drove some of these changes to happen in the short period?

Steven A. Burd

What I would tell you is that basically, everything that you described, even though you've pieced them together and tried to do some sort of connection of dots is happening kind of a normal course. So let's go ahead and let's take the stock buyback. As we explained at the investor conference, we had record low interest rates, we had a stock price that drifted down to 16, and we really believe in our ability to grow top line sales. And while just for U is a big piece of it, it's not the only piece. And so, it just made so much sense to get aggressive on that stock buyback. And then let's take -- you mentioned the double trigger. If you look at, I don't know if you have access to what I'll call our governance scores but we get very high governance scores. And so, we sit around with our board on a regular basis and we look to see whether or not we should make any changes. And we went from what's called a single trigger to a double trigger if there were changes in control. But the -- no one should interpret that as we did that because we expect a change in control. It's really just a migration toward increasingly better governance conditions. And we operate, unlike most people out there, there are no parachutes of the management team, there are no contracts. I mean, there's really -- because we believe if you're going to operate a business that has 200,000 hourly employees who come to work and enter at risk every day, that our management team should be at risk. And so that's why we don't have contracts and double trigger is just a good governance thing. Let's see, you had -- let's talk about Robert's change. There are a lot of strategic things going on in the business, things that number one, I think I'm pretty good at and I really enjoy and this gives me an opportunity to focus on some of those things that I think creates some real value. It's also considered a fact that I'm 62 and while I'm not planning to go anywhere soon. It does make sense to create some logical succession opportunities for the company. And then you had a fourth thing on your list that you -- what was that?

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Just calling out the detail on Blackhawk, I think was perhaps another one.

Robert L. Edwards

I think we've had a lot of requests among shareholders over the years to provide more detail on Blackhawk. And I think we first talked about Blackhawk at maybe in 2007, I could be off by a year, at an investor conference. And we have provided modest updates. And so, a lot of people say hey, have you ever thought of splitting that out and we answer those questions periodically. And so, we thought that one way to give people some insight into its independent value was to provide a lot more information. And so, we elected for the first time to show the EBITDA performance of Blackhawk. And as you know, it's a great story. So none of this is preparation for some other event. We think that all of this is pretty natural behavior.

Operator

Our next question is from Charles Grom.

Charles X. Grom - Deutsche Bank AG, Research Division

It's Deutsche Bank. Just on the guidance, Steve, if I layer in the 1% to 2% IDs with the $70 million of asset sales that you spoke about at the Analyst Day, with the buybacks you done to date and maybe a reasonable assumption that some of that continues, I get an EPS range that's north of your guidance view. And I'm just wondering if you could help me connect the dots on what your expectations are for the tax rate in the back half, interest expense in the back half for fuel margins in the back half because I really can't get to your numbers.

Steven A. Burd

You mentioned the $70 million. I'm not -- tell me what the $70 million is?

Charles X. Grom - Deutsche Bank AG, Research Division

Is it $31 million or is it $70 million...

Steven A. Burd

It's $31 million. $31 million on the property.

Robert L. Edwards

$31 million was from PDC but we had some normal real estate gains as well.

Steven A. Burd

Yes, okay.

Charles X. Grom - Deutsche Bank AG, Research Division

So it's $31 million in PDC but then there's $40 million in other?

Robert L. Edwards

Right. That's what we talked about in the investor conference, correct.

Steven A. Burd

I think the future, as you know, is always uncertain. We don't have a clue as to what's going to happen to fuel cost and anybody can make their own guess at that. So fuel cost, we don't know about. Tax rate, we don't want to have certainty on that but if we were 34% in the quarter, and I commented that we thought we would be about 34%, that would suggest that from here out, it'll be in that 34% range. So I'm not sure exactly how you're doing your math, but we do have a range for a reason. It sounds to me like if you do the math, you clearly get to the upper end of the range. And I guess, you're saying you actually get higher. There could be some things that you're assuming that we're not. I don't know.

Charles X. Grom - Deutsche Bank AG, Research Division

I'll circle back with Melissa off-line. Then I guess, my follow-up would be just I was wondering if you could reconcile to the comments you made about inflation, 5% for a good chunk of the quarter with the fact that your LIFO charge was $0.5 million. Can you help us out on that front? We thought it would have been a little bit higher and maybe some -- you probably have a little bit of sense for what's in your guidance for LIFO for the year. If you could share that with us, it'd be great.

Robert L. Edwards

The LIFO charge is based on cost inflation as opposed to inflation in price per item. And as Steve mentioned, during the -- as the quarter progressed, the price per item increases in our stores decreased.

Charles X. Grom - Deutsche Bank AG, Research Division

So if they continue to decrease, you wouldn't expect there's any LIFO charge this year?

Robert L. Edwards

What's that?

Charles X. Grom - Deutsche Bank AG, Research Division

So if prices continue to decline as the year progresses, you wouldn't expect to have a LIFO charge for this year, is that correct?

Robert L. Edwards

We're not giving specific guidance on individual line items.

Steven A. Burd

The LIFO charge last year, as you recall, was extraordinary. And so, we're contemplating much lower LIFO expense this year and it's a function of cost of goods and how the inventories sit as we measure that at the end of each quarter.

Robert L. Edwards

And then also, as you may know, our LIFO excludes certain categories, particularly produce which is a large category for us as well.

Steven A. Burd

In large part, it's a nonperishable collection of items. So it represents about what, maybe, 60%, close to 60% of our sales.

Charles X. Grom - Deutsche Bank AG, Research Division

And then my last question is just, and I apologize, I hopped on a couple of minutes late, if you explained this already but what is -- can you remind me why the New Year's Day shift impacts you guys and not other grocers?

Steven A. Burd

Well because a lot of other people end their quarter at the end of January, the first couple weeks of February. Kroger does that, SUPERVALU does that. I think Kroger might have gone through a change when they acquired Fred Meyer because Christmas in the general merchandise should be very important. But it's really -- it's a function that we line up with the fiscal year and others have a different calendar. And so, New Year's Day and New Year's Eve will never be split and Christmas will always be in the same quarter as New Year's Day. And because of that calendar, they never split Easter either, whereas, occasionally we have a split.

Operator

Our next question is from Ed Kelly.

Edward J. Kelly - Crédit Suisse AG, Research Division

Credit Suisse. Steve, is it possible for you to give some sense as to where sales are trending so far in April? I know there's a lot of noise with the Easter shift so I was wondering if we could get your thoughts there.

Steven A. Burd

Yes, the number I gave earlier was intended to kind of give you the current run rate, because you're correct with the Easter shift. If I gave you the last 2 weeks, they wouldn't help you out at all. But if I give you the last 8 weeks, that number is 1%. And that also the inflation number that goes with that is 3%.

Edward J. Kelly - Crédit Suisse AG, Research Division

Okay, is that inflation number of 3%, that's price per item?

Steven A. Burd

Correct.

Edward J. Kelly - Crédit Suisse AG, Research Division

And the price per item in the first quarter, what was that number?

Steven A. Burd

I think it was around 47, 48. Which quarter did you ask for?

Edward J. Kelly - Crédit Suisse AG, Research Division

The first quarter.

Steven A. Burd

It was one tick higher than quarter 4. Someone's going to dig up here. It was 47 or 48. I commit a lot of numbers...

Robert L. Edwards

46.

Steven A. Burd

Okay. 46 across the U.S. and Canada.

Edward J. Kelly - Crédit Suisse AG, Research Division

And then Steve, as you're thinking about your ID guidance for 2012, what have you factored in from a generic standpoint? Back a few years ago, you were calling that out right as a headwind and obviously, that's going to be the case this year. So I'm just curious as to how to that [indiscernible] number.

Steven A. Burd

The combination of generics and private label continues to run in that 50 basis point range. So I think that, that's a fair number, 50 basis points. And right now, generics would be a bigger driver of that 50 basis points.

Edward J. Kelly - Crédit Suisse AG, Research Division

Right, and that's going to get a lot bigger as the year progresses probably, right?

Steven A. Burd

Well, the generics it'll -- generics will get bigger until probably about October. And then, maybe that would moderate only because I think it was October or November of last year that Lipitor, the biggest blockbuster of all time, went generic.

Edward J. Kelly - Crédit Suisse AG, Research Division

And one last question for you, Steve. It's just kind of like bigger picture, take a step back. When I talk to investors on your stock, I hear a lot of concern about sort of permanent structural decline about the industry and your business. The view from investors, is that -- you obviously evaluate $21 right? And there was sort of this race to buy the last share and obviously 2 different views. Now as we think about the trend in your business since 2008 where EBITDA is down 25%, 30%, free cash flow is lower, but if you can stabilize the business then you obviously win. Now, the question though is what gives you the confidence that this is the correct use of cash in terms of the repo and that your business can be stable over time and especially in an environment where we've got a lot of competition in food, people using this traffic driver in places, decelerating labor cost is may be rising. So I think understanding your mindset there would maybe go a long to helping people to sort of understand what to do with the stock?

Steven A. Burd

Sure, I think the basic difference between those that are bearish and those that are bullish is the different assumption they make about our ability to grow top line sales. And we spent a good deal of time at the investor conference, talking about the just for U platform, which we believe is state-of-the-art. It's where the world is going, personalization. And it allows us to be completely stealth in our marketing efforts someday. And it allows us the single best vehicle for competing with price operators. It allows us to do an extraordinary job competing with conventional operators. And so, I would encourage you to talk to people, maybe, in the technology world that might have taken a peek at this thing. And I think, if you talk to the right people, I think you would hear very good things. Secondly, I would point out, and I did this at the investor conference, that for those of you that were there and saw it, you should have been intrigued, you should have been somewhat impressed by it, but you should have been nervous about whether or not consumers would make that big a change in behavior. Well, we showed you some numbers there that basically said, for those that just tried it once. So this is like going to a restaurant once, and you were so impressed that you become a regular restaurant go-er to that restaurant. Our numbers were roughly 50% for those who were accessing the site from a desktop, and north of 60% for those accessing the site with a mobile application. The mobile application is rolled out in Southern California and in every subsequent rollout of just for U, it will roll out coincident with that application. And we just got the Android application approved and done as well. And that's not yet in all markets. So high confidence that just for U is going to deliver on the sales increase. And then we have a much more robust fuel program that is continuing to build, which is adding incrementally to sales. And then, we have a few other things that we intend to do. I commented at the investor conference in the wellness arena, all of which will be added to ID sales. And so, that gives us the confidence that the core business itself will begin to a, first stabilize and then generate operating income improvements. In addition to that, we spent some time and we talked earlier on this call about Blackhawk, and Blackhawk has an extraordinary growth ahead of it and we think we're going to play -- we think we're going to have a real role in the digital space, in the digital wallet space with regard to gift cards and maybe a few other things and none of that is in our numbers. And then third, we developed this entity called PDC, and we've done shopping center development before, but oftentimes, we sort of turned over some of that profit to others. And if you were in the dairy business, you wouldn't throw away the cream, you would actually keep it and sell it. So think of PDC as the cream and the new Store Development business. So those are all reasons to believe that we think that we're at an inflection point in terms of our ability to grow operating profit. Couple that with low interest rates and if you believed as I did, you'd buy the stock.

Operator

Our next question is from Scott Mushkin.

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

It's Jefferies. So I had a couple of questions, one follow-up and a couple of questions. Current competitive climate, we've seen kind of picking up the same thing you're talking about, Steve, that maybe pricing in retail is coming off a little bit. We've heard from one of your big competitors that they -- and we've seen -- we have pictures showing what they're doing in the produce section, really lowering price in certain markets. So where do you think this goes competitively as it looks like some people are ramping up their activities?

Steven A. Burd

You know, I think that I just got some coffee in my throat. I may have Robert answer it.

Robert L. Edwards

Scott, generally we don't see a big change in competitive activity. In one market at a certain period we'll see something and that's maybe what you're referring to. And so, at different times, individual competitors will take various actions. But generally, those are not sustained over a long period of time. And so, as we look across our 10 geographies and look at the competitive activity and there'll be changes or fluctuations on a week or a period basis. As a general comment, if we look across the entire company, we don't really see material change in competitive activity.

Steven A. Burd

The other thing I would mention relative to produce or you can pick one, you can pick any category you want, you occasionally see and you rarely see it across all the geographies. You see it in a geography even if the competitor is across many geographies. And they're trying things to see whether or not they can take share. Our job is to make sure that, that doesn't work for them, which means that we have to react. And typically, when you get sharper on price, dramatically sharper on some items, you become less sharp on other items because you have to have some way of sort of financing that. So consistent with what Robert said, in the main, it's a tough environment out there. But I would not say that it's any more competitive now than it was a year ago or even 6 months ago.

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

That's good color. And then I want to follow up a little bit with Ed's question and almost like reverse it a little bit. Because I think it's really clear sales pop-up and as Chuck said, it's hard to get to your numbers actually if sales start working here. I'm going to take the other side. What if things don't work? What are your contingency plans? What do you think this company is worth if some of these things don't work out as well as you may intend them to? Because clearly, if they do, the stock is just a home run. So I was kind of really trying to understand what you guys think is kind of the value if things don't work out perfectly?

Steven A. Burd

Here would be my response to that. We're focused on taking a 1% ID and taking it, for starters, to 3%. It wouldn't be prudent for me to suggest a number north of 3% until I get to 3%. And essentially, I have 3 ways to get to that number. So there is my contingency. I actually have 3 ways to get to that number, 3 ways to jump my ID sales 200 basis points. That's where I get my comfort from. So that if one of those 3 ways doesn't work exactly as I planned, I still have 2 other ways. Now what you should consider is what if all of 3 of them work?

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

Steve, that's an interesting answer, because just for U is one, right? What are -- maybe I'm missing it, what are the other 2 have you maybe talked about?

Steven A. Burd

Well, I've talked about, just a general terms, I've talked about a more robust fuel program. And I've talked about a wellness play. So think about those as my 3 ways.

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

Okay, and then my final question is the cadence of just for U, still expect we should see some comp benefit by the third quarter? I think you said that at the Analyst Day. And then when you report the third quarter, will you give us some data on that?

Steven A. Burd

We expect to roll out, to be rolled out by then end of the second quarter. It is a little maturing time. But I think you would clearly see benefits in the third quarter because you would have several markets that would be mature at that point. And our goal is not to have this built slowly but to have it built with some speed. So the marketing efforts that we put in place 2.5 weeks ago have increased our registration rate tenfold.

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

And as far as providing us data on the third quarter conference call or maybe it's too early?

Steven A. Burd

Yes. Well, I think that we can provide some -- we can probably provide some metrics. I'll probably, if I were to forecast the metrics that I would maybe offer up in the third quarter, that might be useful to you, I might pick from the pile of things that we reviewed at the investor conference because this is about introducing a platform to change consumer behavior. So there's a metric about registration, there's a metric about trial and there's a metric about conversion. And then with conversion, there's an increase in spend associated with somebody now becoming a regular user. And then don't miss out on the fact that once you've got several million regular users, and you can really tailor your marketing effort and personalize it for them, not only have you affected your ID sales, but you've affected your markdown spend because now, you're being completely efficient with your markdown spend. You're giving markdowns to consumers for products that they really want to buy. And I go back to the Gloria Wilson example where we expanded the categories from 8 to 25. I mean, that's really the game here, is to expand the categories, expand the loyalty and to do that with precision. So this should have positive effects on gross margin and very positive effects on sales.

Operator

Our next question is from Meredith Adler.

Meredith Adler - Barclays Capital, Research Division

Barclays. I wanted to ask you to go back to your commentary about inflation and volume. I was recently chatting with another big food retailer who expressed concern that because we're not really talking about the inflation other than in produce where we are seeing big increases in volume, that putting 3% inflation on top of the kind of inflation that we had last year, that you're still going to have people's shopping behavior being very cautious. And I think you're saying kind of something a little different from that.

Steven A. Burd

Yes, what I'm really saying is just that I will go back to my long-held view that 3% inflation is has been normal for this industry. Now it's also been more normal for fuel prices not to be where they are. That stayed. That's the thing that's really change. So what I've done, Meredith, is I've given you a relative measure of improvement in volume and sales that resulted from a decline in inflation and there's just a really strong correlation. So volume is still negative for us. It's still negative for the industry, it's negative for the CPG world. And so I think the people that generate positive volume are going to be those who are taking share. I'm not predicting that the Consumer Packaged Goods business is suddenly going to turn positive because inflation hovers around 3% because there are a lot of other factors going on. But I think there was a conventional wisdom had it that if inflation slowed and most people think it will slow, that that's going to hurt sales. That's not true for us. And frankly, I don't think it will be true for the retail food industry. I think it will actually help.

Meredith Adler - Barclays Capital, Research Division

And some of the -- the 1% comp that you're seeing in this last -- a most recent 8 weeks, how much of that is in the produce department which is actually wonderfully deflationary which is good?

Steven A. Burd

Well, we wouldn't use the word wonderfully deflationary, but you are correct. Inflation last year was extraordinary in produce. And in conjunction with the mild winter that we had, we have an abundance of crop. We have early crops and we actually see deflation in produce. And we'll have a little abatement of that here for a while. But for most of the year, we're going to see deflation in produce and that is about 11% of our sales. And so, if you had deflation of 3% or 4% in produce, it does have a material effect. It says you have to sell a lot more produce in order to get back to ground zero. But that's going to -- deflation is a bit unusual for us right now. It's more about a slowdown in inflation.

Meredith Adler - Barclays Capital, Research Division

Okay. And are you seeing big volume increases in produce?

Steven A. Burd

I mean, we work everyday to generate volume increases there and I think over the next -- we got a period of time here when the summer hits. I think that is our best opportunity to grow volume regardless of what the price is. So it's a little early.

Meredith Adler - Barclays Capital, Research Division

Okay, and then one final question on a different subject. I'm just wondering, you were talking a little bit about and answering somebody else's question about Robert Edwards' promotion, congratulations, Robert. I just was wondering, are we supposed to be making many assumptions that Robert is in fact going to replace you if you choose to retire? When you choose to retire?

Steven A. Burd

Well, you should be making an assumption that I'm a young 62, okay, that's number one. Number two, you should be making an assumption that it's not illogical for us to prepare for the fact that some day, I won't be CEO. And what was it? Thomas Jefferson said, at some point, you got to give these younger people a chance, these young kids. The decision about who succeeds me as CEO, that's a board level decision. But I think it's not illogical to think that the company should be preparing sometime in advance for the fact that someday I won't be CEO. And I think that one of the things that we did with Robert, besides give him marketing and retail is we cut back some of the other responsibilities, gave 2 of those to Larree Randa because even though Robert has spent a lot of time in retail and marketing, he needs to spend a lot more and the more time he spends there, the less time I have to spend there. And I can do these other things to ensure that I have 3 ways to get to 3%.

Operator

Our next question is from Chuck Cerankosky.

Charles Edward Cerankosky - Northcoast Research

Northcoast Research. Steve, I'd like to start off with asking about Private Label performance during the quarter. Can you give us some color on that, please?

Steven A. Burd

Yes, Private Label performance, as you would expect, continues to be strong. It runs about 400 basis points higher than national brand product growth. That's now been true for some time. And then we got 3 big brands that we've created as you know, Open Nature, O Organics and Eating Right and all of those continue to grow nicely. And what we like about them is they're only available at Safeway. So we create some loyalty along the way.

Charles Edward Cerankosky - Northcoast Research

Looking at sales mix, can you point out what's doing better? Maybe giving you some optimism about what some of your sales building programs are doing, and maybe also what's telling you, you've got to watch out for certain aspects of the slow growth economy?

Steven A. Burd

You know, I think along those lines, we have struggled as have others to grow center of the store sales. And we've seen a really nice recovery there. And if you look at the fourth quarter, the center of the store actually has done better than the perimeter and I think that's a result of all the hard work we put into how do we go to market and how we skew set those stores and making sure that we have the right product mix for each store and that we're priced right. And so, the nonperishable element of the business, which has sort of felt like they've been playing second fiddle to perishables for the last 3 years, are now starting to feel pretty good. And I think that's a good omen for the future because part of what's holding us back in perishables is this deflation in produce. When that gets corrected, I think perishables will start humming just along with non-perishables.

Charles Edward Cerankosky - Northcoast Research

When you look at some of the more high-end departments, which tend to be perishables, how would you describe their performance in the quarter?

Steven A. Burd

I consider things like Starbucks kind of high-end, and the wine department high-end. Those are doing well. We're experiencing increases in both of those departments.

Charles Edward Cerankosky - Northcoast Research

When you consider the economy, and I know you don't like to talk individual areas but you have a lot of stores in California relative to the overall company. How do you feel about housing issues, home value issues affecting your California consumers?

Steven A. Burd

I would just tell you in California, at least here in the Bay Area, and I just based on personal observation, not any looking at national or actually, government statistics, everybody I talk to, the housing market is really getting better here in California. I mean materially, I could point to a half-dozen examples where houses had 3 bidders and sold above asking price just really in the last 4 weeks. Now that happens to be the East Bay Area of San Francisco. But I don't think there's any question. I don't know anybody that wouldn't say that housing has bottomed and the real estate people that I talk to, prices are beginning to recover. They're not where they were 5 years ago, but I think there's a recovery underway and at the end of the day, I think consumers see that and consumer confidence builds and if you can see a rise in home prices while interest rates are still low, that should actually bode well for consumer confidence in the future.

Operator

Our next question is from Karen Short.

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

BMO Capital. Thanks for taking my questions. I'm still -- going back to your comments on what -- I think you were talking more about and net income, but looking at operating profit, when I back out kind of the real estate kind of noise and I kind of factor in or track the change in pension contribution, I still show a pretty hefty decline in operating profit dollars year-over-year. I mean, to the tune of $30 million. I guess I'm having a hard time reconciling that they would have that kind of impact.

Steven A. Burd

Okay, let me help you out, okay? Because you're obviously making some assumptions that are not correct. In terms of operating profit, I'll round these numbers but the calendar, the lost sales from the New Year's Day versus a normal Sunday, call that about $6 million.

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

Sorry, that was $6 million?

Steven A. Burd

$6 million. Call it the holiday pay $15 million; call the weather effects $5 million; and call the pension just under $8 million and you get $33 million.

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

Okay, perfect. And then just going to the fuel initiatives that you kind of mentioned was one of the I guess, backup plans but I guess -- well, not to put it as a backup plan but the fuel initiative that you're doing, has this been fully rolled out to all your stores or is there more to come going forward?

Steven A. Burd

More to come.

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

Okay. And so what inning would you say you're kind of in right now?

Steven A. Burd

Obviously a baseball fan. I would say, we are probably in the bottom of the fourth.

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

Okay. And then I guess, just looking at free cash flow obviously, you burned through more than you generally do this quarter. But looking at your free cash flow guidance for the year, can you maybe just walk me through how you feel comfortable? I'm mean, your comfort level in generating the midpoint, call it 900, given the trends in the first quarter?

Robert L. Edwards

Karen, we still feel very good about free cash flow. As you know, Q1 has been a negative or a cash out quarter for some time. And as the Blackhawk business gets bigger, there's more cash out there as well. And so, as we look at our capital spending, it was heavier in the first quarter than we see as we go through the balance of the year. A lot of that was PDC activity so we spent quite a bit of cash in the first quarter. That pace of play for CapEx for PDC will not continue. And so, we feel good about cash flow going forward.

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

And then just the last question. Because you did mention the wellness play on the fourth quarter call, and then you didn't really talk about it much at the Analyst Day. But could you maybe elaborate a little bit on what that play is exactly, and then maybe was there any timing you could give us on when we might start to see more of it?

Steven A. Burd

I'm not really going to elaborate on it. The only thing I would tell you is that we believe and I think others believe that we know more about health and wellness than most anybody else. And so -- and it has become a real passion of mine. And so, we are just working on a bunch of stuff that's not ready for prime time that we have been working on for a long time. And we expect that you will see some of that and we think it'll have a material impact.

Melissa C. Plaisance

We're running a little long here but we're going to take time for 3 more questions. I know there's more than that in the queue but Christiane and I will be available to take calls after we're done here. So operator, 3 more questions please.

Operator

Our next question is from Colin Guheen.

Colin Guheen - Cowen and Company, LLC, Research Division

Cowen and Company. I'll make it pretty quick. What's your confidence in growing margins in a flat volume environment heading into the second half?

Steven A. Burd

Well, the way to think about some of the margin stuff I talked about I mean, we're basically at a flat sales level and we essentially were flat on margin. You make some of those adjustments and you're a little better than that. We continue to believe that on the year, we'll be plus or minus 5. And so -- and again, it's really hard to get any more precise than that. Somebody earlier talked about somebody lowering produce prices in a market and we have to respond to that. And so, I think plus or minus 5 on the operating margin for this year, that's good. What I was referring to in the broad scheme of things with just for U is it should be a margin improvement mechanism as you think about 2013 and beyond. So we may get some benefit from that this year as well. But I wouldn't count on operating margin being any more than plus or minus 5 on the year, I think.

Operator

Our next question is from Deborah Weinswig.

Deborah L. Weinswig - Citigroup Inc, Research Division

Citigroup. So a few questions. So number one, Steve as we think about just for U going forward and what you've baked in, in terms of the comp driver, will the greater driver be traffic or ticket in your estimate?

Steven A. Burd

A greater driver will be ticket. You will get some additional traffic because you're getting more loyalty from consumers. But as you saw at the investor conference, it's largely about expanding the categories. The example we gave you, which was a real shopper, we renamed the shopper. But if you recall, we went from a $69 a week spend to $169, 8 categories to 25. But this particular family of shopping trips went from 4 to 5, right? So it's really the increase in weekly spend. So it should be basket more than their trips. The other thing I would tell you is that this is an attractive approach to a pre-shopping experience for people that have some degree of loyalty already. And so, they're already coming to the store, probably once or twice a week and some of them more than that. So some of the target -- it's hard to increase your trips from 5 to 7 necessarily unless you live across the street.

Deborah L. Weinswig - Citigroup Inc, Research Division

And then secondly, I was very impressed with your gross margin performance in the quarter. Can you just provide some additional color on this particular quarter? And once again, as just for U rolls out, how should we think about the gross margins in the future?

Steven A. Burd

Well, as I commented in with the earlier caller, I think in the long-term, you should think about just for U, with its personalization, actually enhancing gross margins over time. And you recall also, we have a great vehicle for introducing new products. And so increasingly, CPGs are supporting that effort. In terms of color on the gross margin, I'm not sure there's much I could add to what we already talked about. Obviously, we're recouping whatever cost inflation that we're experiencing and that's helping out. And we expect to continue to do that and the lower that inflation number is, the easier that is to do. So again, I think plus or minus 5 is -- I can't tell you it'll be that every quarter, but plus or minus 5 on the year, I think that's a pretty good number.

Deborah L. Weinswig - Citigroup Inc, Research Division

And then last question, can you just talk about your performance on your new stores?

Steven A. Burd

Robert, you want to comment on that?

Robert L. Edwards

We've been very pleased with the performance of the new stores. If you look at our capital last year and this year, we are allocating more capital to new stores and many of those new stores are replacement stores and particularly focused in urban areas and many of them have some PDC developments associated with those. And so, if you recall, we reviewed some of the stats in the PDC presentation at the investor conference about how well those stores that we're developing are doing relative to the average stores. They're having higher sales. And so, we're very pleased with the new stores and we actually commented in Steve's remarks about the increase in sales was partially driven by the new store program. So we feel very good about the capital that we are allocating to new stores.

Operator

Our final question today is from Andrew Wolf.

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

BB&T. I wanted to ask you on just for U. Steve, earlier I think you said it was on plan. At the Investor Day, you said in Chicago it had enhanced market comps by 2%. Where I'm going with this is that 2% something -- is that really what the plan is or is it something better than that?

Steven A. Burd

Well, I think that -- keep in mind since this rollout really began a couple of weeks ago and ends at the end of the second quarter, I think that we identified how you get to 2% and in an individual market, and we expect to get there at a relatively short period but it won't have a 2% effect by itself on the year. So if you wanted to try to lay this thing out, you could probably do a little math on that. But basically, you should certainly by sometime in the fourth quarter, we will be everywhere in the U.S. and we should have, all other things being equal, lifted those sales by this mechanism alone, 2%. So obviously, the fourth quarter should be a much stronger quarter than either 1, 2 or 3.

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

Got it. So that's a normal -- that's the run rate, obviously.

Robert L. Edwards

Correct. But that's not where we have our -- that's not like our goal. I mean, that's a reasonable near-term thing to do. But this is a platform that we built that should be good for at least a decade.

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

You said longer-term it can help gross margin and you know Kroger uses dunnhumby and my interpretation on how to use it is to drive share wallet as well but not to help gross margin, just to help gross profit dollars. So kind of 2 parts. One, in the near term, I would imagine this is more of a gross profit dollar mechanism for you guys than gross margin. Because obviously, if you can get the basket size and the visits up, you make a lot more money per customer. But can you just kind of walk us through how this can be gross margin enhancing? Is this through CPG partnership? Especially given that the leader in this area right now doesn't seem to be pursuing exactly that strategy?

Steven A. Burd

Right. Well, first of all, the way to think about this, we covered some of this at the investor conference. Increasingly, shoppers, regardless of what they're shopping for go online in a pre-shopping experience. And what this platform allows us to do or allows consumers to do is they can go visit the site on their time whenever they want to, with a desktop or mobile device. And so, we basically have, since we have over the course of a, let's say, a year, we would see 30 million different households. We have 30 million unique offers that are sitting there virtually every week. Now they're more targeted for people that we see more often because we know their patterns, we know what they like. But what it allows you to do is to be rifle-accurate, if you will, in the items that matter to that household. And so, if you -- let's say that what mattered to a household was milk, okay? It really mattered to them. It was one of the things that really mattered. Now in my household, empty nester, I have a hard time getting through 1/2 gallon in 2 weeks. So milk is not as important to me. So being able to provide a milk price for a family where milk is among those items that are really important, I could add cereal, I could add Gatorade, I could add a bunch. Basically over time, tailor pricing to their needs which causes them to give their loyalty to us rather than having some price in the broader market that is an extraordinary sale price and is available to everyone. So the offer is personalized, the price is personalized and people get what they want at a better value than they could get by simply responding to an ad that's available to everybody. And then we showed you examples where we've done some things at the investor conference where we did a broadscale offer and about 1/3 of the customers responded with more loyalty and the other 2/3 didn't. Well, if you look at your data, you know the 1/3 that will and the 2/3 that won't. So you can actually be even sharper priced with the 1/3 and then find what are the other hot buttons for the other 2/3 that didn't respond to that offer. And so, the cumulative effect of all of that should be sales enhancing and gross margin enhancing. In the short term, you are correct that you won't see an enhancement in gross margin rate for the simple reason that we have to promote and advertise this. And so, that works against the near-term results. But I was really referring to kind of 2013 and beyond. It's really a smart way to do this and keep in mind that we started the personalization with our employees. And so, every employee has a different set of offers and they work together and they talk all day long. And we wanted to do that intentionally to make sure that people didn't feel left out because they didn't get the bagel offer. But it was fine because everybody got what was important to them. That's what they cared about, what was important to them. So it's really taking the kind of data that you referred to that others have and creating a platform that allows people to come on their own time. And we all have downtime. We don't really think of it as downtime, we think we're constantly busy. But I have to go into the city tonight and my wife could pull out her iPad and basically pre-shop for this week's experience in that downtime. Or if she comes by the office to pick me up, and she's sitting in the car, she can do it then. She can load this to our car, she can build her list, she can add things to her list and then, she can look at her iPhone when she comes in the store to remind her which size of Bounty she really downloaded at $2 off. So it's just a -- I think it's the wave of the future and we think we're on the front edge.

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

And I just have a housekeeping last question. You said the adjusted comp in the quarter was like 0.6% X weather and the holiday swing. Can you just split those out for me?

Steven A. Burd

Yes, it's about half and half.

Melissa C. Plaisance

Okay. Thanks, everyone and Christiana Pelz and I will be available for the balance of the day and Steve has one more thing to say.

Steven A. Burd

Just to kind of sum it all up and I think everybody's focused on it. At the end of the day, it's about whether or not the operating profits of this company are going to stabilize and grow, and whether or not the ID sales are going to begin to turn positive and will gain market share. If you believe as we do, those 2 things will happen and that's why we buy our stock. The good thing about all of this, for those of you that are skeptical about this, you do not have to wait very long to find out if you're right. This all takes place in the third and fourth quarter.

Melissa C. Plaisance

Thanks again. I appreciate your participation today.

Operator

Thank you. This does conclude today's conference. Thank you for participating. You may disconnect at this time.

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