The Kroger Co. at Banc of America Securities Consumer Conference - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

SCOTT MUSHKIN, ANALYST, BANC OF AMERICA SECURITIES: --Getting them at the back of the room. If you're listening over the internet, I guess you can download them.

So, we -- we're glad to have Kroger here today. We have a little theme going with the supermarket business. Obviously, the supermarkets have gotten somewhat controversial on the street. We remain really bullish -- well, not remain. We've gotten very bullish.

Kroger reported yesterday some good numbers, $0.48. It was above the street. I guess there was some disappoint -- a little disappointment in the guidance, although their business remains incredibly strong, probably the strongest in the industry besides some of the private players.

Mike Schlotman flew out right after, or close to right after. Did a quick dinner last night and is here today to give his views on the Company and we're really excited to have him. Thanks, Mike.

MIKE SCHLOTMAN, SVP AND CFO, THE KROGER CO.: Good morning. Thank you, Scott. And thanks for joining us. As Scott said, I'm Mike Schlotman, Senior Vice President and Chief Financial Officer of the Kroger Company. And with me today is Carin Fike, our Director of Investor Relations.

And now it's time for my legal commercial. Before we begin I want to remind everyone that the discussions today will include forward-looking statements. I 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.

There are several topics that I would like to cover with you this morning. Yesterday Kroger issued its fourth quarter 2007 earnings release, so I'll begin with a brief recap of those results. Then, I will share our expectations for Kroger's business in 2008, and I will also discuss Kroger's business model, our Customer First strategy, and some of our unique advantages that allow Kroger to serve customers and reward investors in a highly competitive industry. At the end of my prepared remarks I'll be happy to take your questions.

Yesterday Kroger reported total sales of $17.2 billion for the 12-week fourth quarter, an increase of 2.2% over the 13-week fourth quarter of the prior year. Adjusting for the extra week in the previous year, Kroger's total sales increased 10.2%. Most of that growth was driven by our strong fourth quarter identical sales results. Our identical supermarket sales increased 8.2% with fuel and 5.3% without fuel, based on the same 12-week period in both years.

Kroger's net earnings in the fourth quarter totaled $322.9 million, or $0.48 per diluted share. Net earnings in the same period last year were $384.8 million or $0.54 per diluted share. Those results included a benefit of $0.03 per diluted share from adjustments to certain deferred tax accounts, as well as an estimated $0.07 per diluted share from the extra week in last year's fiscal calendar.

Kroger's fourth quarter results capped off a very good year. Once again, our actual results compare very favorably to our expectations we set for the year. At the outset of fiscal 2007, we expected identical -- we expected to grow identical sales, excluding fuel, by 3% to 5%. Yesterday we reported identical sales for the full year of 5.3%, exceeding the upper range of our original guidance. We're particularly pleased to report such strong identical sales growth in a challenging economic environment, and we believe this demonstrates the resiliency of our business model.

Kroger's initial guidance for fiscal 2007 earnings was a range of $1.60 to $1.65 per diluted share. Yesterday we reported earnings of $1.69 per diluted share, also exceeding the upper range of our original guidance. This equates to a 15% earnings per share growth after adjusting for the extra week in fiscal 2006. This growth, plus Kroger's dividend yield of slightly more than 1%, created strong value for our shareholders.

Clearly, 2007 was a great year for Kroger and we're expecting continued success in the current year. For fiscal 2008 we're forecasting identical sales growth, excluding fuel, of 3% to 5%. We anticipate earnings of $1.83 to $1.90 per diluted share. And as Scott said, there was some concern that that might be low although, when we developed that range, $1.90 was the street consensus so the street consensus is contained within our range.

The range for identical sales and earnings guidance takes into account the current uncertainty about future economic conditions. The upper end of the range assumes current economic conditions continue, while the lower end assumes economic conditions weaken slightly.

We expect that Kroger's earnings per share growth in fiscal 2008 will be driven by strong identical sales, slightly improving operating margins and fewer shares outstanding, the same drivers of our earnings per share growth in 2007.

For those of you who are not familiar with our business model, I'll discuss Kroger's 2007 results in the context of this framework to illustrate how our model works.

Kroger's track record on strong identical sales growth is solid. As I mentioned a moment ago, our fiscal 2007 identical supermarket sales growth, excluding fuel, was 5.3% which, by the way, is on top of 5.3% growth in the prior year.

Our fourth quarter marks the 11th consecutive quarter that Kroger has reported positive identical supermarket sales, excluding fuel, in excess of 3%. It marks the 8th consecutive quarter that Kroger has reported identical supermarket sales, excluding fuel, in excess of 5%. And on a two-year stacked basis it marks the 5th consecutive quarter that we have reported identical supermarket sales, excluding fuel, of 10% or higher. We believe this track record demonstrates that our business strategy is working, even in the current competitive and economic environment.

Kroger's fiscal 2007 operating margin, excluding fuel, declined 3 basis points from a year ago. This is not consistent with Kroger's business model, so let me take a minute to explain what happened.

Throughout 2007 Kroger and other food retailers began experiencing product cost inflation across many core grocery and perishable categories at levels not seen in years. For Kroger, this inflation resulted in an …