Good morning. Thank you for joining us for Kroger's fourth quarter and full-year 2023 earnings call.

I am joined today by Kroger's Chairman and Chief Executive Officer, Rodney McMullen; and Interim Chief Financial Officer, Todd Foley. Before we begin, I want to remind you that today's discussions will include forward-looking statements.

We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings.

The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions.

[Operator Instructions] I will now turn the call over to Rodney.

Thank you, Rob. Good morning, everyone, and thank you for joining us today.

I'd first like to take a moment to welcome our interim CFO, Todd Foley. Todd has been a meaningful contributor to Kroger for more than 20 years, and we are excited he is serving in this leadership position.

Before we begin, I'd like to provide an outline of our discussion topics this morning. I will start by sharing a recap of our 2023 performance, how the strength of our value-creation model allowed us to deliver on our goals and how it positions us well to continue our momentum in 2024 and beyond.

Then Todd will cover our financial results for the fourth quarter and full-year 2023 as well as our financial guidance for 2024. Finally, I will conclude with an update on our proposed merger with Albertsons before we open it up for questions.

I'd like to start with Kroger's value creation model, which supports our optimism for the future. We are guided by our vision that when people think food, they think Kroger.

To achieve this vision, we are delivering a best-in-class customer experience and investing in our associates. We know that when we take care of our customers and our associates, we generate attractive and sustainable returns for our shareholders.

Kroger's go-to-market strategy includes four focus areas: fresh, power brands, seamless and personalization that propels a customer experience that will grow sales and build loyalty. Our team of associates power Kroger's success by executing this strategy and delivering an outstanding customer experience.

To attract, develop and retain our talented teams, we make holistic investments in our associates. Our value creation model enables us to balance investments in our customers' experience and associates while generating sustainable returns for our shareholders.

We've made significant investments to strengthen this model and are now demonstrating how we can generate growth in more ways than ever. By delivering fresh products and personalized offers through a unique seamless shopping experience, our retail business creates traffic and loyalty that accelerates our growth opportunities in other areas such as alternative profit businesses.

This generates sustainable net earnings growth and increases in cash flow, which supports capital investments to grow the business, which in turn creates more jobs for associates and more career opportunities and enables us to return excess capital to shareholders. As part of our capital investment plans for 2024, we are excited to announce that we are building more new stores in a meaningful way that will support our long-term growth model.

When we launched Restock Kroger several years ago, we knew that a strong omnichannel experience was a key to serving our customers in the future. We are pleased with the progress we've made there, and we'll continue to invest in digital as it remains an important part to our growth model.

In addition, we believe a strong and growing store network is important. Many of the ways we go-to-market in digital still comes through the store channel.

We know that our most profitable customers shop both in-store and online. So it's important to be there for our customers in a way they choose to shop with us.

As a result, we expect new stores to be an important part of sales growth in our TSR model going forward. Now I would like to provide a brief recap of 2023.

Last year, customers were affected by many factors, which pressured their food-at-home spending, including reduced government benefits such as SNAP, higher interest rates and the depletion of excess savings that many families accumulated during the pandemic. As a result, customers were looking for value to stretch their budgets.

Kroger's commitment to lowering prices and executing our go-to-market strategy positioned us well to meet our customers' needs. By delivering fresh products, enhancing our brand's quality and improving our digital experience, we grew loyal households in 2023, and our customers saved even more through our industry-leading personalization capabilities including loyalty discounts, fuel rewards and personalized offers.

By increasing customers' digital experience, we can more effectively deploy our data sciences and our AI to serve the right offers to customers at the right time. In 2023, our customers clipped 4 billion coupons, which is 1 billion more coupons compared to 2022.

We know these offers help customers stretch their budget and lead to deeper loyalty. During the fourth quarter, our effective promotions helped turn traffic positive.

These trends position us well and give us optimism for 2024. We expect consumer sentiment to improve in 2024 but our customers will still have to manage many of the same macro pressures as last year.

Kroger will continue to provide customers with lower prices and exceptional value. We also know that customers expect a great shopping experience, and we have robust plans to improve seamless shopping both in-store and online, where customers can get the products they want without compromising on quality, selection and convenience.

We are raising the bar on our full fresh and friendly metrics and investing for growth. As with our brands, which enables Kroger to offer innovative products at a great value, growing sales and improving margins, we create destination items that our customers love and can only find at Kroger.

This year's addition of the Hispanic-inspired Mercado line to our brand's portfolio is an example of how our brands can innovate in categories that meet our customers' evolving needs and accelerate growth. In 2024, our brands expects to launch more than 800 new products.

As part of the next phase of Kroger's brand architect work, the team is reimagining there our brand’s portfolio with a refreshed look, which is based on the insights and preferences collected from extensive customer feedback studies. Next is Fresh.

Fresh is an important influence on where customers shop and we are continually trying to add days of freshness for our customers. With end-to-end fresh and more than 2,100 stores, we are seeing higher produce sales and improving share.

Beyond adding days of freshness, we are expanding our assortment. Customers love our convenient in-store fresh-cut fruit program, and we will continue to expand the offering by introducing regional specialties and seasonal favorites.

Now turning to seamless. Digital had strong results in 2023, delivering more than $12 billion in sales.

Digital sales grew by 12% on a 52-week basis, and we improved our cost to serve through increased volume and process enhancements as well as technology to optimize associate pick routes for more efficient picking. Digital is an important growth accelerator in our business.

And in 2024, we expect to deliver another year of double-digit sales growth. As we grow volume, particularly in our Kroger Delivery network, we expect our unit economics to improve and become a tailwind to our long-term financial model.

We have a clear path to improving our digital margins, closing the gap with our traditional brick-and-mortar business over time. Kroger is well-positioned through our combination of stores and dedicated fulfillment centers enabling us to serve all customer trips, including both immediate and next day.

Customers value the ability to shop on their own terms with zero compromises and we are increasing the number of omnichannel households in our ecosystem. Customers who shop both in-store and online spend 3x to 4x more compared to in-store only shoppers.

Personalization is also driving digital engagement and remains one of the primary ways we deliver value for customers beyond low prices. By offering personalized savings, we can ensure customers get the right promotions at the right time, allowing us to get the most important return on our promotional spend while enhancing loyalty.

Moving promotions online allowed Kroger to take personalization to a new level, targeting customers more efficiently and increasing the breadth and depth of promotions. During the fourth quarter, this led to an 18% increase in digitally engaged households.

Our digitally engaged households are extremely valuable to our long-term growth model as they spend more with us and help power our alternative profit businesses like Kroger Precision Marketing. Operational excellence is essential to bringing our strategic pillars to life.

Our full fresh and friendly strategy is the roadmap to achieving a best-in-class customer experience. We were pleased to see the continued progress on these metrics in 2023, notably significant improvement in our in-stock rate as we achieved a new all-time high during the year.

We will continue our momentum on in-stock rate in 2024 to further drive sales as well as to improve our execution in these other key areas as well. By delivering our retail strategy, including fuel, we are building customer loyalty and expanding opportunities for profitable growth, including alternative profit businesses in health and wellness.

Alternative profit businesses achieved solid results in 2023, generating $1.3 billion in operating profit. We were pleased with the portfolio's performance in 2023, where our media business once again delivered strong results.

Looking ahead, we expect that the significant investments we've made in Kroger Precision Marketing last year will lead to more than 20% growth in our media business in 2024. The U.S.

media landscape is evolving, and Retail Media is one of the fastest-growing channels. Systems built 20 years ago to power digital advertising, including third-party cookies are losing effectiveness and ineffective ad spending is creating more opportunities for those who use first-party data to connect the right content to the right customers while clearly measuring return on investment.

KPM is well-positioned to excel in this space by offering brands a superior advertising experience. Our media business can utilize first-party data from our loyalty program to create relevant audiences and measure ad spend effectiveness based on customer purchases, both in-store and online.

To take the next step in this growth journey, KPM invested in enhanced advertiser functionality. In 2023, KPM launched its own ad platform and introduced a new self-service solution on ad buying platforms.

The new ad platform makes it easier for clients to activate campaigns and gather data insights for advertising on Kroger-owned properties and the new self-service solutions are responsible for offering more direct access to custom Kroger audiences on clients' existing ad buying platforms. We expect these enhancements will be key catalysts for growth in 2024.

Kroger Personal Finance delivered mixed results in 2023, which led to relative flat year-over-year operating profit. Our credit card business experienced a challenging macroeconomic landscape, which led to an increase in customer bad debt.

In money services, we delivered strong results by implementing more fraud controls that allowed us to process payments more quickly while reducing fraud. Turning to health and wellness.

Health and wellness delivered a better-than-expected performance in 2023, and we are excited about the momentum in this area of our business. As we find in other areas of our ecosystem, customers who are retail pharmacy patients are more loyal to Kroger than non-pharmacy customers.

The retail pharmacy industry is going through a period of transformation which presents a significant opportunity for us. We plan to deliver growth by focusing on a few key priorities.

First, cultivating an exceptional patient experience. We are incorporating new technologies and simplifying our team's work, which adds capacity in our pharmacies.

Our pharmacy staff is using this capacity to provide better care and faster checkout for patients. Next, we are attracting new patients by raising awareness to our non-pharmacy customers.

Many of our customers are not familiar with Kroger's retail pharmacy operations. We are working to convert these customers by increasing our marketing and adding in-store engagement and utilizing our data sciences to help build awareness.

Finally, we plan to build on our 2023 momentum in vaccines by accelerating share growth in 2024. By improving our outreach in store, expanding marketing campaigns and working with providers, we can grow vaccines and help customers live healthier lives.

I'd now like to take a moment to talk about our associates. We respect and appreciate our associates for all they do to take care of our customers every day, every time.

We firmly believe that by investing in associates and being an employer of choice, we can facilitate an outstanding customer experience. At the core of our operational initiatives this year is delivering a consistent store experience.

Team consistency is a key to that strategy. To support this strategy, we are taking a holistic approach to retention, which includes wage and benefit investments that Todd will talk on later, as well as investments in associate experience, including training, technology and career development opportunities.

Investments in technology enable us to support our associates beyond the initial onboarding process. Our training app provides ongoing support and development during the flow of work, giving associates more confidence in executing their tasks and leading to a better customer experience.

Importantly, associates are developing the skills for their next role with Kroger. We are pleased to see these efforts lead to strong improvements in retention this year.

In 2024, we will remain focused on further enhancing training and development opportunities, solidifying Kroger as a place where associates come for a job and discover a career. With that, I'll turn it over to Todd to take you through our financial results and guidance for 2024.

Todd?

Thanks, Rodney, and thank you for the warm welcome. Good morning, everyone.

Kroger's 2023 results reflect the strength of our business and demonstrate the evolution of our model. We are a more diverse business with more ways than ever to generate net earnings growth.

Over the past four years, adjusted EPS has grown at a CAGR of 20%, significantly higher than our long-term growth model. As net earnings grow, we are also producing improved cash flows.

And in 2023, we delivered more than $3 billion of adjusted free cash flow. This is strengthening our balance sheet, giving us the flexibility to reinvest in growth opportunities for our business and return excess cash to shareholders.

As Rodney discussed, our retail business is performing well and driving data and traffic needed to power our model and accelerate growth in alternative profit businesses. Kroger is entering 2024 from a position of strength.

Many of the headwinds we faced in 2023, including the reduction of SNAP benefits and the loss of pharmacy sales from the termination of our agreement with ESI are cycling this year. Recent investments to expand our strategic pillars and grow alternative profit businesses are paying off.

We remain confident in our ability to navigate many different operating environments and are well-positioned to drive sustainable growth long term. I'll now walk through our full-year 2023 results.

Kroger delivered adjusted EPS of $4.76 per diluted share, including a benefit of $0.20 from the fifty third week. Excluding the fifty third week, adjusted EPS per diluted share increased 8%, which is above the high end of the guidance range we shared at the beginning of the year.

We achieved identical sales without fuel growth of 0.9%. Underlying growth would have been 2.3% after adjusting for the effect of our terminated agreement with Express Scripts.

Digital sales grew 12% on a 52-week basis, led by 25% growth in Delivery Solutions. The FIFO gross margin rate, excluding fuel, and the fifty third week, increased 18 basis points, primarily attributable to strong our brand’s performance, sourcing benefits, lower supply chain costs, and the effect of our terminated agreement with Express Scripts, partially offset by increased price investments and higher shrink.

Our strategy to improve margin over time has many components, including the expansion of our brands improvements in digital profitability, including growth in media, utilizing technology to improve supply chain efficiency and enhancing the product mix through fresh initiatives. Our improvement rate reflected the investments we have made in these areas of our business, and it allows us to further invest in price for customers to help drive the flywheel in our model and continue to have a long runway for improvement.

The OG&A rate, excluding fuel, the fifty third week and adjustment items, increased 21 basis points attributable to planned investments in associates, investments in strategic growth initiatives and the effect of our terminated agreement with Express Scripts, partially offset by the continued execution of cost savings initiatives and lower incentive plan costs. Our adjusted FIFO operating profit was $5 billion and $4.8 billion on an adjusted 52-week basis.

The LIFO charge for the full year was $113 million. Kroger continued to generate strong adjusted free cash flow through our consistent operating results and improvements in working capital.

Working capital improvements primarily reflected an effective inventory management led by our sourcing and supply chain teams. In addition, we cycled through the unfavorable working capital results experienced in the fourth quarter of 2022.

As a result, we delivered adjusted free cash flow of more than $3 billion in 2023. Our strong cash flow generation led to significant debt reduction and a strengthened balance sheet in preparation for our merger with Albertsons.

Our net total debt to adjusted EBITDA ratio on an adjusted 52-week basis is 1.33 compared to 1.56 a year ago. Turning now to our fourth quarter results.

Adjusted EPS was $1.34 per diluted share for the quarter, including a benefit from the fifty third week of $0.20. Excluding the fifty third week, adjusted EPS increased 15%.

Identical sales without fuel declined 0.8%. Underlying growth would have been positive 0.1% after adjusting for the effect of Express Scripts.

Our sales trends improved in the final period of the quarter as we began to cycle the effect of ESI and unit trends improved in the quarter. The fourth quarter was our fifth consecutive quarter of sequential improvement in units and our teams remain laser-focused on volume growth in 2024.

The FIFO gross margin rate, excluding fuel and the fifty third week, increased 13 basis points, reflecting strong our brand’s performance, sourcing benefits and lower supply chain costs, partially offset by increased price investments and higher shrink. The OG&A rate, excluding fuel, the fifty third week and adjustment items increased 40 basis points compared to last year.

The increase was attributable to planned investments in associate wages and adjustment for self-insurance expenses and the decision to contribute an additional $40 million to multiemployer pension plans, helping to stabilize associates' future benefits and to reduce future contribution obligations. These were partially offset by continued execution of cost savings initiatives and lower incentive plan costs.

Our adjusted FIFO operating profit was more than $1.3 billion, driven by our strong performance in gross margin. This quarter, LIFO was a credit of $18 million compared to a charge of $234 million last year.

This was primarily attributable to lower-than-expected inflation in our pharmacy inventory. Fuel is an important part of Kruger's strategy, offering customers an additional way to save through fuel rewards and providing yet another lever for us to grow profitability.

Fuel rewards enhanced customer loyalty and customers who redeem Fuel Points spend twice as much on groceries and buy 3x the number of fuel gallons. Fuel reward engagement was strong throughout the year as customers save 14% more on fuel rewards versus last year.

Our fuel rewards engagement helped lead the gallon sales, which significantly outpaced the industry. The average retail fuel price was $3.14 this quarter compared to $3.39 in the same quarter last year, and our cents per gallon fuel margin was $0.49 this quarter versus $0.51 in the same quarter last year.

I'd now like to provide a brief update on associates. In 2023, we increased associate wages resulting in an average hourly rate of nearly $19 an hour at a rate of nearly $25 with comprehensive benefits factored in.

Over the last five years, Kroger has now invested more than $2.4 billion in incremental wage investments. Kroger remains committed to supporting our associates with investments in wages and comprehensive benefits that are sustainable and will allow us to continue to keep products affordable to the communities we serve.

We expect to make continued associated investments in 2024, and those are fully contemplated in our 2024 guidance and long-term growth model. Turning now to financial strategy and capital allocation.

We continue to be disciplined with our capital allocation decisions, and our priority is to invest in high-return projects that support net earnings growth. We also remain committed to maintaining our current investment-grade rating, growing our dividends over time, subject to Board approval and returning excess capital to shareholders.

We expect capital investments for 2024 to be between $3.4 billion and $3.6 billion. which is consistent with 2023 in our long-range model.

Capital investments will be aligned with our strategic priorities and expect to drive sales growth and improve margins. To drive sales, our focus is on enhancing the customer shopping experience and increasing store investments.

As Rodney mentioned earlier, in 2024, we plan on completing 30 major storing projects, including new stores, relocations and expansions with a focus on investments in higher-growth geographies that have a track record of delivering strong ROIC. To improve margins, 2024 investments will also enhance our supply chain, including expanding distribution center capacity and utilizing data and technology to optimize network efficiency.

Productivity improvements and cost savings continue to be an essential element of our model and are key to helping us fund investments in associates and the customer experience. These opportunities are embedded into all of our business areas, including in-store operations, digital, supply chain and procurement.

Our productivity and cost saving initiatives are focused on simplification and utilizing technology to enhance the associate experience without impacting the customer experience. Looking forward, we're testing new initiatives like customer pickup lockers, drive-thru lanes and AI-enabled store routing technology that will allow our pickup associates to be more efficient.

Through efforts like these, we continue to improve digital margins, which remains a significant opportunity to improve total company operating results. Turning now to 2024 guidance.

We expect to achieve identical sales without fuel of 0.25% to 1.75%, adjusting FIFO operating profit of between $4.6 billion and $4.8 billion, and adjusted net earnings per diluted share of $4.30 to $4.50. This compares to 2023 adjusted EPS of $4.56 on an adjusted 52-week basis.

We anticipate LIFO to be a similar charge to last year. We expect inflation to be around 1%, which is in line with the external forecast and consistent with our long-range financial model.

We expect to grow revenue by investing in value for the customer and enhancing our seamless shopping experience. We plan to balance investments in our business, including lower prices and increased associate wages with improved productivity and cost saving initiatives, improvement on long-term initiatives in gross margin and growth in our alternative profit businesses.

As Rodney discussed earlier, growth in loyal households and digitally engaged customers position us well to grow profits and power the flywheel in our model. Overall, we expect FIFO gross margin rate, excluding fuel, and adjusted OG&A rate, excluding fuel, to remain relatively flat on a year-over-year basis.

In terms of quarterly cadence, we expect identical sales without fuel to be stronger in the second half of the year. This reflects SNAP headwinds in the first quarter, combined with lower inflation.

We expect inflation to be lowest in the first quarter but do expect it to increase as the year progresses. As a result, we would expect identical sales without fuel to be at or slightly below the bottom end of our annual guidance range for the first quarter, in the middle of our guidance range in the second quarter and near the top end of our range of guidance in the second half of the year.

We expect adjusted net earnings per diluted share in quarter one will be down low double digits year-over-year, reflecting our most challenging quarter for sales growth. Quarter two is expected to be relatively in line with last year.

Quarter three, we expect to increase double digits compared to last year. And quarter four is expected to be in line with last year on an adjusted 52-week basis.

Kroger is well positioned to continue the momentum we've generated over the last few years. In 2023, we delivered adjusted net earnings per diluted share growth, in line with our long-term growth model and on top of our historic growth from the prior three years despite navigating a challenging operating environment.

We're evolving into a more diverse business, and our value creation model is providing us multiple ways to drive sustainable future growth. I will now turn the call back to Rodney.

Thanks, Todd. In closing, Kroger delivered another strong performance in 2023, and I'm optimistic about 2024 and beyond.

Our retail business is performing well. And by building loyalty, increasing digital engagement and driving customer visits, it is well-positioned to continue that momentum in 2024 and beyond, which will accelerate growth in our alternative profit businesses.

We are focused on enhancing our strategy with consistent store execution to drive sales and expect to build sales momentum throughout the year as we cycled SNAP benefits in the first quarter resulting in a strong finish to the year. Before we open up the floor to your questions, I'd like to provide an update on our pending merger with Albertsons Company.

While we were disappointed about the FTC's recent attempt to challenge our merger, we were not surprised given the current political environment. Our track record in previous mergers is clear.

Kroger lowered prices, invested in associates, improved the customer experience and deepened its connections with the communities we serve. The character of a company is clear in its actions regardless of what others claim.

Kroger keeps its commitments, and we're happy to share this with whomever is willing to talk with us. We know this merger will result in a secure future for union jobs.

Kroger has added more than 100,000 union jobs in a national retail environment where these union jobs shrank elsewhere. We are making historic investments in wages including $2.4 billion in incremental investments since 2018 on top of hundreds of millions of dollars in benefit investments.

The retail industry continues to be more competitive. We know our customers better than anyone.

And every day, they make decisions about where to buy their groceries and how they eat. They shop with us, they shop with a wide range of competitors from Costco to Amazon to dollar stores, and they eat at restaurants.

No matter how others define the industry, we know how our customers behave and we run our business accordingly. Throughout my four decades in the retail business, I have seen that when we take care of our customers and take care of our associates, our shareholders benefit.

This is true in the past, and this will be true in the future. I know you likely have questions on the next steps.

Here's what we know today. The FTC joined by several states has sued to enjoin the merger.

Two states, Washington and Colorado have also sued separately. We are committed to defending the merger and litigation because we believe this is the best outcome for America's families.

We cannot close the merger while these actions are pending. Hearing dates have not been set yet, but we expect these to proceed in the mid- to late summer.

We remain excited about the future of our combined company, and we look forward to explaining the benefits of our merger. Because we are in litigation, we will not be taking any questions on the merger this morning.

With that, Todd and I look forward to taking your questions.

My first question is on the comp. The comp guide with inflation expectation, I think you said about 1%.

I guess, at the high end may imply a little bit of market share gain. At the low end, it wouldn't.

So I guess, how did you think about market share, especially as you're investing into pricing, why shouldn't that spread look a little bit stronger versus inflation?

Great question, Simeon, and I'll start and Todd add anything you want to add. But as Todd mentioned in the prepared remarks, we expect the first quarter to be a tougher quarter as we're cycling ESI and SNAP, and we would expect as you go through the year, that our market position, market share would continue to improve throughout the year, both from cycling and from the comment that I shared that we expect to open incremental stores and more stores in '24 than we did in '23 or in fact, several of the past years.

And it's really all of those things together. Todd, anything you want to add?

No, I think that's a good color, Rodney. And frankly, actually, we are satisfied with the trajectory we're seeing in some of our volume share trends.

It's improved consistently for the last five quarters. And I think what Rodney described is our expectation to build on that.

Yes, that's a great point. And we've seen improvements in tonnage and in dollars, both sequentially on trends, and we would expect that to continue.

A quick follow-up on advertising. The grocery space in particular, there's always been a lot of support on product in the store promotion, where product is placed.

Now we're getting advertising dollars as the consumer shifts the channel in which they're shopping. The way in which your suppliers or your suppliers are looking at it, is the dollar basket you think still getting larger on whole?

Or are they looking at it more holistically, the advertising plus the product support? Are those dollars still growing?

And how do you think about that over the next several years?

If you look from a media standpoint, we're really competing against Google and Facebook and other channels. And everything that we can see that, those dollars are coming from other channels or even traditional media channels.

And we tell our CPGs, we have to earn our right for you to want to spend media money with us because it doesn't do us any good if you just take trade dollars and move them over. So that's something we've been aggressive in terms of communicating with CPG since day one, and it's really important.

If you look at trade support, we actually saw a pickup in trade support. And it's more around some of the CPGs are starting to focus more on tonnage growth than what they have in the last several quarters.

And the trade dollars are really trying to support tonnage growth for certain CPGs, but not all.

I had noted an inflection to positive traffic in the quarter. I'm just curious if you could comment on where you think you're gaining that trip.

How much do you think a shift to more food at home has been a factor? And then just where are you seeing maybe in trip frequency across your customer base versus those that are more loyal versus maybe those that are a little lesser?

Yes. In terms of where we're seeing the growth, our loyal household continued to grow and it's several quarters in a row.

They are starting to shop with us more frequently as well. So it's really both of those together.

The food away-from-home to me is -- if you ask me, what's one of our biggest opportunities? Seamless is obviously one of them.

But one of them would be food away-from-home. Our market share there is very low.

And our deli and bakery team are doing some incredible work and incredible work partnering with a couple of outside companies really focused on making it a destination. One of the things that we recently did was reformulate our fried chicken and the customers are telling us they really like it.

So when we look at food away-from-home, we think we’re just scratching the surface, and we think that’s really a huge growth opportunity. But the growth is really coming from frequency and our loyal shoppers.

Rodney, presumably, you would get a lot of new stores if and when the Albertsons merger closes. So what's driving the decision to accelerate organic store growth now?

Yes. Thanks, Michael, and great seeing you a couple of weeks ago as well, and you did a great job.

Touring, when you look at -- it really ties back to capital. And it's kind of, I call it, bifurcation because we continue to run our business just like we would run our business without the merger.

And we're finding good growth opportunities in certain markets where we have a strong ROIC and there's good population growth. And it's something that we feel comfortable doing with or without the merger.

So it's really strong from a both perspective. And we have good, strong, obviously, cash flow to be able to fund it as well.

Yes. Great call, Rodney.

And if you think over the last few years, we've really concentrated a lot of our capital investments in the digital space as we saw customers evolving more into that space, naturally, our investments went there. to help support what they were looking for and what we were trying to do in our business.

And we've been very pleased with the progress we've made with those investments with customers. But as Rodney said, we continue to see opportunities to go into higher-growth areas in some of those markets where we have a good track record and making sure that we're balancing those investments with both online and in-store investments because our best shoppers engage with us in both of those areas.

My follow-up question is what is your assumption for overall wage growth in 2024? And how much flexibility do you have with managing that line item in the event that IDs don't accelerate to the degree that you expect over the course of the year?

No. Great question, and I appreciate that.

One thing to keep in mind when we talk about wage investments. 75% of our collectively bargained wages are already kind of locked in through previous CBAs.

So we have that on our radar and that's built into our model. And the other part to keep in mind, our associates are a vital part of our strategy, and we're going to continue to invest in associates, wage and benefits through everything that we do.

They are so important to our model because they are the ones that unlock the customer experience. And you've seen that over the last five or so years, we've increased average hourly rate 30% to help support those investments in those associates.

So we will continue to invest in associates next year. The other part of our model, I would even argue part of our culture that's critical to what we do is identifying and investing in productivity improvements and cost savings initiatives to help us be able to fund those investments in our associates and in our customers.

And so I think that's an important part of our model, and we'll continue that through 2024.

And Todd's last point, that's really how we fund. As Todd mentioned, we've increased average hourly rate by over 30% over the last 5 years.

And the way we've funded that, that's been in excess of our sales growth and the way we funded that is through the cost saves, and its process change. It's using less energy.

It's a whole host of hundreds of different things that our teams are doing, and we would have the same type of commitment expectation of ourselves that we can do the same thing again in 2024 as well.

Congrats on a great quarter. Rodney, you talked about the -- so Rodney, you talked about the importance of pricing for the consumer, but you also mentioned taking personalization to a new level.

So I was wondering if you could just talk about how you are positioned price-wise to take share, especially when you're using loyalty? And to what degree is Kroger investing own dollars in prices, which is aided by higher profits from the media business versus what you're getting from vendors?

Yes. It's a mixture of both.

And as I mentioned earlier, we did see an increase in trade dollars, but we would also take some of the savings and some people would call it a productivity loop. But if you look at the cost saves that we're able to achieve, the leverage we get from sales growth and some of those things, we would also be investing in lower pricing.

If you look at overall, when you look at the way somebody shops, obviously, we go to market as a promotional merchant and customers when things are on promotion, they buy more of it. So when you look at the total mix price and you include our rewards, we're exactly where we are satisfied and like to be and the customer is getting incredible value and many of our customers feel like they actually get a better value than some of our competitors, and they don't have to compromise on experience, both in terms of people experience and fresh experience.

On personalization, it really is being able to identify what's important to each of us individually and doing specific offers where something that matters to me is going to be different than what matters to everyone else. And almost every household that shops with us gets a unique offer.

It would be highly unusual for somebody to actually get the same offers.

And then just my quick follow-up question on FIFO gross margin. 13 basis point expansion in the fourth quarter, I think, probably came in ahead of plan.

So you could talk about sort of how you view some of the opportunities. What are some of the main puts and takes that we should keep in mind for the year because I think you talked about flat levels overall, that would be great.

Yes. Sure, Krisztina.

Yes, very pleased with the progress we made with driving margin expansion. But it's been a lot of the initiatives that we've been talking about for most of the year and the ones, frankly, that we'll continue to execute on going forward.

A lot of our merchandising strategies around really driving product mix, driving fresh penetration improves margin through mix and same with our brands. Our brands to me is, we get the best of both worlds, not only from a margin expansion standpoint because of the margin that our brand delivers us.

But in the current environment that we're in, where customers are looking for value, they get to experience that through our brands where they get value and they don't have to sacrifice quality. So that's a double win to me.

It's not just a margin expansion, but also customer opportunity. But then -- and Rodney alluded to this, some of the margin enhancement, things that we're doing in our logistics business in operating, optimizing operations and supply chain.

And of course, sourcing, we’ve talked about several times, that partnership with sourcing, working with all of our vendors to help drive margin improvement. Those are the initiatives that gave us momentum in 2023, and those are the same ones that give us confidence as we go forward.

We’ll continue to drive that margin expansion.

Rodney, can you talk about where are we now with profitability on the $12 billion of digital sales? I know that -- I'm pretty sure it's profitable.

It's not where, right, the brick-and-mortar is. But where are we?

And is it possible if you look out over the next three years, whatever that profit is, could that easily double or triple in dollar terms from where we are today?

John, it's a great question. As you know, because we've been -- you've followed us a long time, and we've always told everybody job one is to make sure we don't lose the digital customer and job two is our responsibility to figure out how to make sure that customer is profitable.

I would say that we continue to make meaningful progress, but it's a meaningful tailwind that should be with us for several years. And when I say several years, I'm talking three to five years.

If you look at the in-store digital business, we have a pathway to get to where the margins are the same there is shopping in store. If you look at our sheds, we believe that maturity shed margin will actually be better than a store because of the media and other pieces.

If you think of a baseball game, we're still in a very early inning of this journey. And we're incredibly excited about the customer's reaction from a Net Promoter Score.

And in fact, our sheds had the highest net promoter score that they've ever had this quarter. And the repeat rates and all those things continue to improve.

But we're early in the game on something that's going to be a tailwind for a long time, and we're still learning how from a profitability standpoint, how to make it a meaningful contributor. So excited, but we still have a long way to go.

All right. Maybe sort of a follow-up on that in terms of profit buckets.

So is this going to be another year of $1 billion of proactive cost out? I'm not sure.

And then alternative profit, I think the goal was to be up $150 million last year. I'm not sure if you got there, but this coming year, given what you said about Personal Finance, is the idea for that business to grow maybe $100 million?

Or do you think it can do better?

If you look at cost reductions or whatever because it's a whole host of things. Our internal target would be around $1 billion again, and this would be the seventh year for that.

If you look at all profit at this point, $100 million would be a good number. But obviously, we're going to work really hard to make it a little bit better than that.

But the media business, we think, will be a meaningful driver of that. KPF, we think there's a lot of opportunity.

But right now, the consumer sentiment is improving. So hopefully, that starts showing up in bad debt and other things, so that becomes a tailwind as opposed to neutral.

Just wanted to ask two things, I guess. First off, just wondering if you could discuss the leverage point that we should be thinking about from ID sales given some of the cross currents?

And do you see store hours needing to grow if units start to recover? And then I had a follow-up.

If you look at leverage point, this won't be true forever, but right now, we're having a leverage point lower because if you look at the softness in identicals, a lot of that is driven by things that were low margin. So our ESI business was something that actually was a negative on profitability.

So by not having that, it actually supports improving profitability. If you look at hour -- I mean we use AI in every department and every store has generated the hours to support the business is generated by the number of units.

And I feel very good that we'll be able to continue to provide great service to our customers. The other thing that helps us is you're always figuring out new ways of doing something to reduce how many hours it takes to do it.

So if you think about picking a pickup order, the walk time continually gets reduced because we're able to identify every individual store where every item is on what shelf and it reduces the time to pick an order as an example. So all of those things together, we feel really good about leverage points relative to where we are on IDs.

Now, that's not going to last forever. But certainly, if you look at 2024, we feel good about where we are.

And then if I could just follow-up on the fuel side. Is there a CPG that you could share with us that you guys have in the guidance or how to think about fuel?

And then similarly for pharmacy, can margins start to improve in that business?

Yes. Thanks for the question.

On the fuel side, I think our outlook for 2024 is we expect to be flat in that business year-over-year. You recall the last five years, it was -- prior to this one, it was it was quite a profit driver.

And as we guided for 2023, we're a little bit behind year-over-year in '23, but our expectation for 2024 is to be flat in operating profit.

Pharmacy margins. We would view margins probably pretty stable.

We continue to identify ways to improve service, and we invest most of that savings that we get in reducing wait time for customers and other aspects because what our customers or patients are telling us when you look at our principal competitors, they're continuing in close locations. They're continuing to pull out in certain markets, and we view that as an opportunity.

So we're reinvesting in that business and our pharmacy team or health awareness team is doing a great job of really working with the whole team to be able to support our patients. And the thing that's always -- I always find amazing is about a third of our customers don't even realize we have a pharmacy, and we've been in the business for, I don't know, at least 30 years.

And we continue to see where we have opportunity to gain share in that business, and we'll do that.

So want to add to that, Rodney, in pharmacy as a specific point relates to GLP. Obviously, we saw quite a bit of sales volume in that in '23 and expect the same in '24.

But to your point on rate, the rate on GLP, that's obviously a little bit of a headwind relative to rate because the margins on those. But we're still excited about those because it's high demand with our customers and it helps drive traffic in our stores.

And then on top of that, the other sales driver we saw in the back half of the year related to our vaccine business as well. And that obviously is helpful both on the sales and the margin side.

So just a couple of other points in addition to what Rodney called out.

I wanted to ask you about the outlook for unit volumes within grocery. And I was hoping you could dig in here.

I mean, obviously, the industry has had negative volumes. It looks like you've had negative volumes there.

But I think the issues have been all this elasticity on price, I mean low income pressure, probably a little bit of share loss in that cohort. And then the lack of trade spend, which I think is probably particularly important to driving traffic for grocery.

Can you maybe just talk about how those points are evolving in '24? And then your expectation for unit volumes because back in '19, right, your volumes were positive.

Why can't Kroger get back to positive unit volumes in the back half of the year? I mean I know you're projecting that.

But maybe just some support for it.

We would expect unit volumes to be positive. And we expect ourselves holding ourselves accountable for positive unit volume.

Todd and I mentioned in our prepared remarks, we've seen sequential positive trends in units. If you look at trade dollars, as I mentioned earlier on one of the questions, we actually saw an increase in trade dollars to support.

Now, our success has been much better with the mainstream and upscale customer, and we've continued to gain share with that customer. And one of the things that's always important to remember on units and economists always say all short answers are wrong.

But that customer buys a bigger pack of items. So on that perspective, units are down because somebody buys a 30-pack or 36-pack of something.

If you look at the customers that are under a lot of budget pressure, they're actually buying smaller units pack of goods and stuff. So overall, it's a great question.

We would hold ourselves accountable for continuing to improve trends in units and getting to positive as well.

And then just a quick follow-up for you on current debt leverage. Is there any reason to believe that this 2.3 to 2.5 target would not be the target if let's just say that you failed to close the Albertsons deal.

Is there any reason why you would go back to that pretty quickly? I don't know if it's CapEx related, if it's environment, if it's rating agencies are sort of looking at things.

But just thoughts about that.

Yes. Thanks, Ed.

First and foremost, we're laser-focused on closing on the merger. But appreciating your comment.

And our model is always built to drive TSR and accelerate TSR in that space. But when you think about the business, the business does continue to generate strong free cash flow, and we have a very strong balance sheet right now.

And I think as you think about our targets in the future, I would look to how we thought about it in the past. I think that would be a good way to think about it and a good benchmark.

Our priorities have always been and will continue to be maintaining an investment-grade rating, investing and growing the business. We've talked a lot about storing and digital investments that we've made.

We've continued to do that. And then third, always returning money to shareholders through a growing dividend and a buyback program.

So I would expect that in any scenario, those will be our priorities from financial strategy standpoint.

Yes. And we’ll use that free cash flow to continue to support growth.

Thanks, Ed.

I just wanted to touch on the promotional competitive backdrop. I was just curious how you guys are thinking about the promotional backdrop this year?

We would expect it to stay pretty similar. And probably for us, more and more of our promotions would be done directly to a customer, so it's not necessarily what shows up in an ad.

But we would expect overall to be pretty similar to what it was last year. And I mentioned it a couple of times, but customers that are on a budget or strained financially, continue to aggressively try to look at ways to stretch their budgets.

And one of the ways they're doing that is downloading digital coupons. And to me, in our prepared remarks, we shared that we had people download 4 billion coupons, and that was an increase of $1 billion over the prior year.

And the customer on a budget would be a bigger driver of that increase in downloading coupons. So overall, we think about the same.

But if you look at within segments, we would expect that customer on a budget to still be under strain.

Great. And then maybe just one follow-up question.

Rodney, you made the comment that you expect an improving consumer sentiment in 2024. Are you seeing any positive changes in consumer behavior lately?

I wouldn’t say a ton of stuff. The people that aren’t under pressure, they continue to buy nicer wine and engage in Starbucks and Murray’s cheese and things like that.

But the work they tell us they’re feeling better more so than their behavior is changing so far.

Rodney, I was wondering if you could talk more about the pharmacy opportunity. Do you see an opportunity to sort of reengage with some of the PBMs and become a more significant player over time in a more profitable way than you guys had been and which ended you up in the situation with Express Scripts?

Could you maybe kind of give us some thoughts on maybe the multiyear outlook for pharmacy and what could happen there for you guys?

For somebody else's profit margin. But we're always open to those conversations.

And would be delighted to fill those scripts, assuming that they had the appropriate margins in it to cover our costs. And hopefully, over time, their customers or patients will keep -- start reaching out because they want to have the great service that we're providing to everyone else and their customers not getting the opportunity to engage and get that great customer experience.

Got you. And then just a quick follow-up on the previous question.

I think with the lower income customer that might have been where you had been seeing more market share pressure. Is there any change in that or any change in your lower income customer or your ability to keep them?

Not. It's slightly better, but we still have a lot of work to do.

And one of the things that half full and half empty, the half full is that our customers that are most profitable for us is our mainstream and upscale customer, but we’re not satisfied with where we are.

Just wanted to go back to alternative profit in KPM in particular. Did that end up around a $500 million EBIT contribution in 2023?

And at this stage, just can you just help us understand what are the factors that are going to drive that 20% growth that you're planning for ’24? How much is maybe on property or off-property or some of the new investments that you're making in this business?

Can you help us just dig in a little bit more on that.

I will talk broad and then I'll let Todd get into the specifics. When you look at media overall, we see no reason why our share of CPGs media spend should be the same as what our share of the products we sell.

And it's our responsibility to make sure that the way we help them spend their money that they get a great ROI on that investment. And our KPM team holds themselves accountable to be transparent and making sure that people get a good return on their investment.

And we will continue to do that. So we think the opportunity is still huge in terms of continued growth.

Relative to specifics for '24 and other things, Todd, I'll let you answer that.

Yes. No, that's good, and I appreciate the question.

Thanks, Rodney. I don't know that I'll get into the breakout between on and off, but I think we see growth in both, both on property and off.

Certainly, our digital ecosystem is built around driving that digital engagement within our stores. We know those customers are more loyal to us and increase their spend.

And that ecosystem, along with KPM really gives us some opportunities to drive our own growth in both of those businesses. The other thing that KPM is doing and that has us really excited, I think you heard it alluded to earlier, is the new platform that they've put in place.

We've always used first-party data from our loyalty programs so that our clients can create custom audiences in the work that they do in building out their campaigns. But this new platform, I think makes it even easier for them to activate their campaigns and drive their data and insights, and it gives them some self-service opportunities for more direct access to these audiences as they execute these on property and off.

And so I think the new tool and the functionality and the features that it brings has us really excited about that opportunity for growth, both on and off.

Thanks, Kelly. And thank you for all the questions today.

As always, I'd like to share a few comments with our associates that are listening in, and we always have a lot of associates listening each quarter. First, thank you for all you do every day for our customers and each other.

I'd also like to take a moment to celebrate two of our outstanding associates in Colorado. Just this week, Chris Gay from Citi market who won two gold medals in skiing during the Special Olympics event at Copper Island, the Copper Mountain.

Chris is an amazing athlete, taking second place in an Olympics event in Aspen just last month. A few months ago, I had the pleasure to meet Jeff Gregory, a special Olympian at King Supers.

Last year, Jeff was honored as Male Athlete of the Year. And I had a chance to meet Jeff and his parents and what an inspiration.

Congratulations, Chris and Jeff. We are so proud of all you do and what you continue to accomplish and all that you’ve done for our customers and communities and uplifting those around you.

Thanks, everyone, for joining us today, and have a great day.