Good day, ladies and gentlemen and welcome to the fourth quarter 2006 Kroger Company earnings conference call. (Operator Instructions) I would now like the turn the presentation over to your host for today's call, Miss Carin Fike, the Kroger Company Director of Investor Relations. Please proceed. Carin Fike: Good morning and thank you for joining us. Before we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but Kroger assumes no obligation to update that information. Both our fourth quarter press release and our prepared remarks from this conference call will be available on our website at www.Kroger.com. Now I would like to introduce Mr. David Dillon, Chairman and Chief Executive Officer of Kroger. David Dillon: Thanks, Carin, and good morning, everyone. We're pleased you could join us to review Kroger's fourth quarter and fiscal year 2006 financial results. With me today are Rodney McMullen, Kroger's Vice Chairman; Don McGeorge, Kroger's President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer. I will begin with a recap of Kroger's fourth quarter sales results; then I will provide market share information, along with sales and earnings guidance for 2007. Rodney will discuss Kroger's fourth quarter and fiscal year 2006 results and share additional detail on guidance. Then we'll be happy to take your questions. Total sales for the fourth quarter increased 14.5% to $16.9 billion. After adjusting for the extra week in the fourth quarter of 2006, total sales increased 5.7% over the fourth quarter of…

Thank you, Dave, and good morning, everyone. Net earnings in the fourth quarter totaled $384.8 million, or $0.54 per diluted share. The current quarter benefited by $0.03 per diluted share from the adjustments of certain deferred tax balances; this was not contemplated in the company's prior guidance. Net earnings in the same period last year were $282.1 million or $0.39 per diluted share. Kroger's fourth quarter results illustrate the successful execution of our strategy; that is, we are utilizing operating cost savings to fund improvements in value and service for our customers in order to drive strong identical sales growth that results in earnings growth for our shareholders. Our gross margin and OG&A results reflect this strategy. During the quarter, FIFO gross margin declined 37 basis points to 24.48% of sales. Excluding the effect of retail fuel operations, FIFO gross margin declined 29 basis points from the prior year. Our fourth quarter supermarket selling gross margin on non-fuel sales declined 21 basis points, reflecting continued investment in lower prices for our customers. As you know, selling gross margin is a term we use internally to describe the company's gross margin before incurring expenses directly relating to distributing and merchandising products on our store shelves. Operating, general and administrative costs, or OG&A, declined 32 basis points to 17.65% of sales. Excluding the effect of retail fuel operations and stock option expense, OG&A declined 34 basis points versus last year. This decline was driven by strong identical sales leverage, increased productivity, and progress we have made in controlling our energy and healthcare expenses. These gains were partially offset by higher incentive pay based on Kroger's strong 2006 results. Credit card fees also increased as a percent of sales during the quarter. Our tax rate in the fourth quarter was 33.4% compared to…

(Operator Instructions) Your first question comes from John Heinbockel - Goldman Sachs. John Heinbockel - Goldman Sachs: Can you guys talk to the performance of remodels this past year versus the year before or the year before that? Is the performance in terms of comp lift and related margin, is that getting a lot better?

If you look at their performance they continue to be reasonably good. It would not be appreciably better this year than the last two years, but we are doing a few additional remodels in '06 than what we did in '05 and '04. As you know, when you look toward '07, our intent would be to increase the number of remodels even higher than what we did in '06. David Dillon: John, you can tell we're pretty bullish on what our remodels do for us. But that has been true now for several years. John Heinbockel - Goldman Sachs: Secondly, what's the update on marketplace and the non-food more broadly in the traditional supermarkets? David Dillon: We called out drug GM as having particularly good results, both a good regular quarter and a good seasonal quarter. So we're pleased with the non-foods generally there. Marketplace continues to grow for us as a format. This past year, we introduced stores in the Cincinnati market. We have also announced next year for Wichita, and Tucson I think will open I think later this year; we've announced that as well. So we continue to growth, both in the communities where we have those stores, but we also continue to add a few new communities at the same time. Rodney, do you want to add anything on marketplace?

No, other than it is safe to assume that we're working on two or three additional markets that haven't been announced yet for the marketplace stores and we continue to be very pleased with the results because our customer reaction has been very positive to those stores. John Heinbockel - Goldman Sachs: Finally, the market share data, have you been able to cut back -- I am sure you have -- in looking at where supercenters are the most mature and where their footage or their capacity is pretty limited in terms of growth? Obviously, I would think the market share numbers would look better in those mature markets. What have you looked although on that front? David Dillon: Well, we have dissected the data a bit and I don't know if Rodney wants to add anything to that, but I don't think I will comment directly on your specific question, but I will answer it maybe this way: We gave some information that should help you see the bigger picture to this puzzle, is that roughly 47% or so of the major markets is held by competitors that we believe, that we define, don't have the same kind of economies of scales that we think we have. That is slowly declining. That appears to us to be where our market share gains are, because generally speaking, we did look to see, for instance, in Wal-Marts and the markets we identified as having Wal-Mart as a number three or higher position, as we looked as those markets, it appeared that Wal-Mart was not losing position particularly, but that these other competitors were the ones that were losing position compared to where we were and compared to where Wal-Mart was. So they continue to grow, continue to build, continue to have impact in the market. But in the face of that, so do we.

As a general rule, and this isn't just for marketplace stores, it is any time you would have a major new competitor coming in, it would take about three years before you start recovering market share in a meaningful way. But that comment would be true for a supercenter, and would also be true for a traditional competitor that's coming into a market in a major way. For us, you've heard us talk about it before, but it always takes longer for competitors to fall out than what we would have guessed, but it always eventually happens.

Your next question comes from Mark Husson - HSBC. Mark Husson - HSBC: Good morning, astonishing quarter. Well done. Want to talk a little bit about what you're selling, in particular the private brand business. I think you hired a new VP of Corporate Brands -- I could be wrong there. Your approach to branding the Kroger, the various Kroger family of brands around the country. You can't have these kinds of sales and this kind of market share improvement without fairly consistent and improving corporate message, and the consumer response to that. So first of all branding. Secondly, private brand, has it gone up? Also finally, private brand manufacturing and how that worked in the quarter? David Dillon: Mark, we would be happy to talk about that. But you said astonishing. I like the use of that word. Before I get to that, though, I want to talk a little bit about what we're trying to do in our Kroger brand. We did, in fact, hire a new Vice President for the Kroger brand area, and that is an important step for us because we think we can do even better yet than what we've accomplished. As you know in the last several years, we've had good improvements in what Kroger brand represented to our customers in share, both on cases and in dollars. This past year, in the face of strong sales in lots of our national brand areas, too, we still managed to gain some progress in our Kroger brand areas, but we think we can do even better yet, and believe that this step is a way to do that. We're very proud of what we've accomplished in manufacturing this past year, what Kroger brand has accomplished this past year, and see a terrific future ahead for that whole theme. Do you want to add anything, Rodney?

The only thing I was going to add on both aspects, it really is using the Kroger brand or the Ralph’s brand or Fred Meyer, whatever the brand would be, and making it a competitive advantage versus our competition and doing something for our customers that they can't get anywhere else. To me, all of those themes is really about delivering on both of those fronts. Mark Husson - HSBC: What are the challenges, though? I mean, the Kroger brands or whatever the brand is in the local market means different things in different places. How can you ensure around the country that there has been the same kind of weight of thought behind brand development as you might have in the core Kroger business? David Dillon: If I am understanding your question, are you concerned, for instance, when we use a brand that says Ralph’s on it, or Fred Meyer on it, whether or not we can build the same kind of following? Mark Husson - HSBC: Yes. David Dillon: Well, in that situation, it is actually pretty easy to answer. Think of our customers as local customers. Our customers are not national customers. When they shop at a Fred Meyer store, they're shopping at a Fred Meyer store. They're not shopping in their mind at a Kroger store. I am fascinated by the way customers can quickly make the leap, though, to recognize that Fred Meyer is owned by Kroger, and is actually quite pleased to see some Kroger brands at Fred Meyer. But they similarly take great pride in seeing Fred Meyer's name on the products in Fred Meyer stores, and both of those seem to actually work quite well. We believe both have merit, too, because we are going to market locally. Our customers are locally…

Your next question comes from Chuck Cerankosky - FTN Midwest Research. Chuck Cerankosky - FTN Midwest Research: Great quarter. If you could just quickly tell us what the option expense was for all of fiscal '06, and what you're looking at for fiscal '07, both on a dollars basis and an EPS basis? Mike Schlotman: Well, for 2006 it was about $0.06. Rodney McMullen: $72 million. Mike Schlotman: And for 2007 on a cents per share basis we would expect something pretty similar to that. I don't know on the dollars, Mike. Rodney McMullen: Similar. Chuck Cerankosky - FTN Midwest Research: That's $72 million? Mike Schlotman: Yes. Chuck Cerankosky - FTN Midwest Research: Can you comment on what role perhaps gift card and gasoline promotions had in the fourth quarter, and might have made it even stronger than it otherwise would have?

Well, let's see. Gift cards do not go in sales, they go into other income; the income portion of it does. And so I suppose if you look at a Kroger gift card and that's gifted to someone, then when they go spend it, that becomes sales. So that could have had some impact there because we did have a good year on gift cards. But I don't put a whole lot of our results on that particularly. We're pleased with the progress we've made. This year was noticeably better than the year before. We have a much wider assortment to offer on the gift cards and so forth. So it's a good program for us, but I would not suggest that that's the reason we had a gangbuster quarter. Rodney McMullen: That was not the driver of the fourth quarter results. Now with that said, our gift card program had a great fourth quarter. But that did not drive the fourth quarter results.

I think that's probably the right message, Chuck. It is a meaningful program for us and growing at a fast rate, but it was not the reason the results were as strong as they were. Similarly for gas, we didn't really change gasoline strategies during the quarter. We just continued what we've been doing through the year, and we think our gasoline strategy is an excellent one. We think it has certainly contributed to people wanting to shop at our stores because we offer great value on gasoline. But again, I don't think it is the reason for those results. There wasn't any particular incremental change in the quarter. Chuck Cerankosky - FTN Midwest Research: Any comment on the jewelry store business in the quarter? Rodney McMullen: Our business was solid, and would be very similar to what our competitors did, and very pleased with the cash flow that business generated last year. Chuck Cerankosky - FTN Midwest Research: Thank you.

Your next question comes from Steve Chick – JP Morgan. Steve Chick - JP Morgan: Good quarter. As I look at the quarter, by my math, Rodney, it looks like you came in $0.06 a share excluding the extra week, extra upside relative to maybe what you had thought. From what I see, sales were very good and pretty much in line with what you had expected. It looks like your selling gross margins were pretty much in check with the trends that you've been reporting. So where did the significant upside come from for the quarter? Rodney McMullen: When you look it really was a solid result from everything. If you look at our identical sales, obviously, it was very strong and a little bit better than where we would have originally estimated. If you look at managing our growth and OG&A together, it was very well managed on both aspects. Certainly when you look at the leverage that the sales generated from a rent and depreciation standpoint, that was a little bit better than what we had expected. When you look at cumulative for the year, our share count was a little lower than what we expected and the LIFO charge was a little lower. So it is really five or six things working together in a way that turned out, obviously, an incredibly strong quarter. Steve Chick - JP Morgan: As we look at your guidance going into next year and you're saying slightly improved operating margins, can we think in the same context of what you've been doing, where selling gross margins are down say 20 to 30 basis points, and it is going to be SG&A driven for margin expansion next year? Rodney McMullen: The margin improvement on operating margin will be driven by the leverage from rent and depreciation that we would pick up from the sales growth, if you want to think of it from that perspective. The straight selling gross and OG&A perspective, we would expect to reinvest most of the OG&A savings at that level, either in pricing or better service for our customers, or a combination of both. Steve Chick - JP Morgan: This might be semantics maybe, but in your sales growth commentary for the quarter, you mentioned nutrition but I don't think you mentioned natural foods. I don't know if that's one in the same. The last three quarters, you've kind of highlighted natural foods specifically. Was there a change in category commentary?

Those are the same, Steve. Both of those categories we could use the words either way. Organics can actually be in that category, and sometimes would be in the specific department, for instance, meat or produce, would have some organics that would be in those departments. But the rest would be in the nutrition area. Steve Chick - JP Morgan: Great. Thanks.

Your next question comes from Jason Whitmer - Cleveland Research. Jason Whitmer - Cleveland Research: Dave, I think you're roughly halfway through your five-year road map. I was wondering if maybe in your own words you could evaluate your progress to date? What has changed, if anything, and maybe some of the biggest opportunities to improve further from here?

If you looked at it as five years, and we did describe it as five years, you would be correct. I think if anything, one thing I've learned is that the time horizon was a little different. Five years seems like a long time at the beginning of a cycle, but as you get into it, you don't get quite as much accomplished in the first year or two as what you maybe think. I actually don't think we're halfway through on what we think we can achieve from the strategy we're on. I would see us as earlier in the process than that. What I am trying to describe is strong future opportunity. Our strategy essentially is as we've described it, customer-first based, looking at growing our sales, which is the representation really of being meaningful to our customer. As we grow in how meaningful we are to our customer, our sales grow. The way we grow in that meaning to the customer is making sure that the stores that we offer to them are individually important and relevant to them in their locations. We do that through what we've described as our four keys: from our people, our products, the shopping experience, and price. All of those have been important. The role our associates have played in this, I can't overestimate that. It is significant. I think it will be even more significant going down the road. So I would say if I was looking at five equal periods of time in the beginning, I don't think we're halfway through that. I think we're maybe through one-and-a-half periods of that. So we have actually quite a bit of opportunity ahead for us. Jason Whitmer - Cleveland Research: Your top line performance and even your own internal measurements are showing some clear share gains, and I know you've addressed this in different ways saying there is multiple things, broad based, hundreds of things that are all contributing to that. But if you were to really narrow it down to probably the three most important drivers to your top line momentum, in the rearview mirror and even more so going forward, how would you rank order some of the most important levers for driving your business?

Well so far, I would rate a couple of things. First is I would rate what we've done on price as essential to what we've done. I think in addition to that, I would rate the shopping experience that our customers have in the stores that our associates offer, things like quicker checkout, friendlier people in the stores, the degree to which our associates want to satisfy particular needs of individual customers. Those areas I would think would be quite important. I think the use of our data through our loyalty card and the Dunnhumby data that we have would be similarly important to making sure we rifle shoot at what we offer in our stores, what we offer in our ads, and what we offer in our marketing practices, both in mail and in store to individual customers. Dunnhumby has a role to play, too, in what we price and how we price it. So it certainly has had an impact in that regard. Do you want to add anything else, Rodney? Rodney McMullen: Dave mentioned it, but in terms of the shopping experience on friendliness of our associates, but to me it is really broader than that. Certainly when you look at our internal measures, our associates were gaining on our internal measures on how our associates view working and communicating, and our customers are telling us the same. It is one of those where we're making progress, but we still have plenty of opportunity to improve more. And our associates really are starting to make huge amounts of difference in that, and we would expect to continue to even more so. Jason Whitmer - Cleveland Research: Great. Thanks, and good work.

Your next question comes from Perry Caicco - CIBC World Markets. Perry Caicco - CIBC World Markets: Good morning. Dave, as I recall, 2007 was to be a year I think when you indicated a plan to put a bigger focus on meat, seafood and produce. Just wondering what exactly you've done in those categories so far this year? Can you give us some indication of how those areas should contribute to sales? As I recall I think from the start of the call, meat and seafood I think weren't mentioned among your stronger departments in that quarter.

That's correct. Actually, we had strong results in seafood through the year. Meat was a little less strong, and in part that was impacted by significant deflation in the quarter, I believe it was in the quarter if I am remembering right. I am looking to Mike to see if that was accurate. Don't want to give you bad information. But these are areas of focus for us, and we expect that this year we'll be strong in all of those areas. We just had a company-wide meeting just I think two weeks ago, and had a chance to drop by and see many of the meat and seafood people that were attending that, and thank them for the past year, but more importantly to comment on the opportunities for this year ahead. We did refer, I think in our analyst meeting, to some steps we're taking in our key retailing process in the stores that we think will actually improve our sales and availability of product. That is partly rolled out. We've accomplished that in some of our stores. But I don't think we have it in all of them yet, but expect to, and that should pay some meaningful dividends. In addition to that, I think we are paying some additional attention to what our customers want to buy in these areas and how we might improve on the offering. In produce, for instance, we have seen some good improvements in organic sales this past year and I would expect '07 would be much the same. Was I right on the inflation? Mike Schlotman: Meat was deflationary in every quarter except the third.

So in the first, second and fourth quarter last year meat was deflationary, which contributed to part of the issue there. Seafood, though, we had great results there really through the year, although we don't normally break that out as a separate category. Perry Caicco - CIBC World Markets: I guess as produce and meat grow, shrink becomes a bigger issue for you. So just wondering, has that been your experience so far this year? How is your progress on shrink so far?

Actually if I remember correctly, I may have Mike pull out the data to look, but shrink in the quarter -- not now, but in the fourth quarter -- I believe we actually showed some improvements compared to the year before in the perishable areas, in produce and meat in particular. That was the direct result of some of the work that you were asking about, and I think we've made improvements because of that. Shrink continues to be an opportunity for us, and we think there is still good room for improvement there. But the opportunity in this last quarter was mostly in the grocery and drug GM areas. While we've had good progress from the beginning of when we've gone down this path, we just have seen times when we get challenged a bit, and we have to stop, step back and look at a balanced approach, make sure we don't impact our sales, make sure we look at the ways in which we can use technology to improve our results, and then move forward to make some gentle improvements. Is that fair, what I have said, Mike? Mike Schlotman: Produce and meat did both improve. Do keep in mind, as hopefully as you introduce new products in those categories, that's really when you have the incremental shrink upfront as those new categories, like organics and produce, catch on with consumers. Hopefully you don't have to put incremental more product out. You start selling more of it instead of shrinking the amount you did at the initiation of the program.

We did comment earlier in the year about some increases in shrink in produce in particular because of that. And because I can't determine right now what kinds of new products and pushes we might have throughout the year, I am not going to try to project whether or not our shrink will go up or down in the perishable areas, but the most important part from our point of view, and this is what we would mean by rifle shooting it, is to look at the shrink and where it is derived. In the example we just gave, if our shrink increase in produce was because of organics being introduced and being encouraged and pushed further in stores, that's one thing. If it is because of the other products that we've been carrying, that's quite another, and more controllable. So we tend to try to rifle shoot and say where is the shrink coming from, and where do we want to expand shrink a little bit to benefit sales, and where do we want to contract it because we think we have the ability to do that. Perry Caicco - CIBC World Markets: Just on the segmentation work that you've done on your stores, I think you've been trying to segment your stores into value, mainstream and upscale. I know the analysis is done. But I am just wondering how far along you are in actually executing changes in SKUs, signage, perishables, et cetera?

I wouldn't say we're very far along that path. We have done some work. This is probably a really good analogy to when you climb the top of a mountain and you look out over the mountain, you see the next mountain, and you think you accomplished something. But then you see that there is a lot more opportunity ahead. This is an area where we've made some progress, but there is lots more to be done there, and even just on some of the simple stuff. We have paid attention to the pricing. We've paid attention to the product selection. We've paid attention to how we write our ads. We've paid attention to marketing within the stores. We've paid attention in some cases to a wider and narrower product selection, where appropriate. But past that, I would still see lots of additional opportunity. Rodney McMullen: This is an area where I don't think you will ever find us getting finished, because as we learn, we learn more that we can do even better for our customers. It is the reason why we find it so exciting, is the opportunity. Perry Caicco - CIBC World Markets: That's good. Thanks.

Your next question comes from Meredith Adler - Lehman Brothers. Meredith Adler - Lehman Brothers: I will have to add the congratulations on top of everybody else. I am going to start by asking a question I am not sure you can answer. Can you comment at all about what's going on in the Southern California negotiation? Is there anything that you feel comfortable saying?

Yes, I feel comfortable in saying no comment. All of the parties, the unions and the company have worked with the federal mediation, and we've all agreed and the federal mediator has encouraged us to not make comments about the negotiations for obvious reasons and so we're choosing not to do that. I think you all know we're operating under a two-week extension. We're about halfway through that two-week extension. Certainly, you'd take that as a good sign. I don't think I would say anything more about the Southern California negotiations, other than what we've said always before, is that what we're looking for is a balanced approach that works well to keep us competitive, and works well for our associates to give them good wages and good healthcare and good benefits. Meredith Adler - Lehman Brothers: Great. Another question would be about just looking at your balance sheet, it seems to me that your leverage has gotten to a pretty reasonable level for a company like Kroger. What would you do with free cash flow if you decided you really didn't need to pay down more debt? I know you would like to get back to a triple B rating, but your leverage seems to be there already.

I will let Mike or Rodney comment on that if you want. Rodney McMullen: I certainly wouldn't disagree that on your observation that it's at a very reasonable level. In terms of what we would do with the cash, it really would depend on the opportunities we see at that point in time. And at this point, we wouldn't be ready to say here is what we're going to do with it. As you know, we continue to use about one-third of our free cash flow to pay down debt and two-thirds to buy back stock and pay a dividend. Our intent would be to continue on that at this point. Meredith Adler - Lehman Brothers: Okay. It looks pretty clear that you are able to take market share without having to put any capital down, not major capital, like acquisitions. Another leader in the grocery business did comment on acquisition opportunities increasing. I was just wondering what your perspective was on that?

I will let Rodney comment on acquisitions. But let me comment that one of the things that we found in emphasizing remodels, and one of the reasons we think we're getting decent results, or one of the signs we're getting decent results, is market share gain. It is a lower risk environment because we have a good strong reputation and we can improve it even more in those markets when we spend a little bit of capital in those stores to get them up to snuff. I think what's happening with our market share growth without acquisition, I think that that's a direct result of the overall strategy focusing on the customer, taking those four keys seriously, the role our associates play in making all of that true, and then making sure our assets are in decent shape in those markets, has all contributed to that success without adding stores. However, there is plenty of opportunity for acquisitions, and do you want to comment a little bit on that? Rodney McMullen: Well, I was just going to say, if you look at the last couple years, it is not lack of effort in terms of not being able to acquire anything. It has just been lack of being able to agree to a price that we think works for us and works for a seller. So it is not lack of looking at things and spending some time on it. We continue to see a lot of things out there. So far, there has been a disagreement or difference on what the price we would view something that we're willing to pay. The other thing I would add that's our helping market share in some markets, is if you go back and look at the acquisitions we acquired three or four years ago, it is getting into those stores and expanding them when we can, doing a major remodel to them. When we initially bought them, we would have done a small remodel just to convert the banner. But as you go through time, you would expend more energy and be able to work with a landlord or buy the real estate or whatever, to do something more major to those stores and in a couple of markets or three markets, that certainly continues to help us. Meredith Adler - Lehman Brothers: Great. My final question would be what you are experiencing in terms of Wal-Mart's expansion into new markets. Certainly they have been putting an effort on western markets where real estate is tougher. Do you see that process accelerating? I think I had heard a comment that in Cincinnati you were able to really fend them off very well or compete with them extremely effectively. What are you seeing in other parts of the country?

Well Wal-Mart continues to grow as we commented, I think we said for us, at least, additional 125 stores that we compete against, which is really significant in my mind, anyway. I think earlier, Rodney commented, and I think it is probably the right way to think about this, is that any new entrant to a market, whether it is a Wal-Mart supercenter or whether it is a more traditional competitor, new entrants change those markets for a period of time, and as a result have an impact. We are seeing Wal-Mart come into new additional markets that they had not previously been in. You commented on the west. That's certainly true. It is also true in other markets. They really hadn't been in Cincinnati until just recently and now there is quite a few stores and more to go. So we see them lots of places. I just don't think that that picture is changing much from what it was last year or maybe even the year before that. Meredith Adler - Lehman Brothers: Thank you very much.

Your next question comes from Todd Duvick - Banc of America. Todd Duvick - Banc of America: I wanted to circle back on the balance sheet if I could quickly. Generally speaking on the fixed income side, reducing debt is a good thing. But we've seen over the last year or so, it is kind of like a narrow band in which, if you get leverage too low, it is almost a bad thing. And in fact, Kroger is showing up on some LBO screens, although I don't think there is a high likelihood of that. We've also seen private equity kind of rearing its head, especially in Europe. So I am just wondering if you can comment on what you view as your optimal capital structure, and do you see a point in the future where debt reduction is no longer a viable use of your cash?

Do you want to talk about the capital structure? Mike Schlotman: I would really just reiterate what Rodney said earlier in response to Meredith's question, and we do agree that our leverage is fairly low for our structure. We think we've done a good job of managing our debt to equity ratio, and delevering the balance sheet. At this point the alternate uses of those cash, is again, it depends on the opportunities. As Rodney said on the acquisition front, it is not for lack of trying. It is for lack of being able to agree on a price. So certainly the opportunity, if any of those come to fruition where we can agree on price or would have agreed on price, it is nice to be able to make some of those smaller acquisitions, and not have any worries about what it does to your leverage ratio. We'll continue to buy in stock and continue to pay a dividend, as we have been last year for the dividend, last several years for buying in stock. Blake Smith - Banc of America: Okay. And this is actually Blake Smith in for Scott Mushkin here, we're at the Banc of America conference here. I just wanted to ask a quick question if I could. In the third quarter call related to pricing right with Wal-Mart, pricing right with the big boxes. Where do you think you are in that process at this point, three months later?

The pricing that we've described before, if you go back several years ago, we needed to take some rather important big steps and we took those. Then about a year, maybe two years ago now, we said that at the pricing level we're at now, we're satisfied that our sales are beginning to grow and that our prices are in the range of appropriate with our customers. As a result, we want to invest in pricing only as we're able to save money through our operations and in effect, pay the bill. That's been our operation this whole past year. I should point out, the savings we generate through OG&A, productivity, other things that we are able to save, and in some of the expenses in our gross margin, like shrink and advertising, warehousing and logistics, all of those areas, as we make progress, our intent is to reinvest in both price and in other things that may raise our actual operating costs, like shopping experience and training and some of those areas. So we would say we'll continue that path down the future. We don't see that changing much. But because we made the big progress we were after a couple years ago, we also don't see taking unilateral steps on price without paying for it as we go. Blake Smith - Banc of America: You've talked about this a little bit. But where do you see the use of the Dunnhumby data and sort of merchandising at the sort of store cluster level, and those kind of things a couple years out? I mean, what kind of things are you working on on that front?

I don't think I am going to tip our hand on some of the future opportunities with it. But suffice it to say that we're bullish on the use of our customer data and customer loyalty data to determine what paths we ought to take in the future in marketing and in advertising and in store mix, products, pricing, all of those areas. I think in two or three years out it will be more significant than it is today. We certainly expect it to be. Blake Smith - Banc of America: Thank you.

Thank you. We have time for one more question.

Your next question comes from Neil Currie - UBS. Neil Currie - UBS: I wonder if I could just ask about the gross margin. I think one of the keys to your successes has been your willingness to not just reinvest gross margin gains, but you are actually continuing to take down your gross margin to levels which I presume other supermarkets just can't compete with. Balance that with obviously OG&A improvements. Is there any magic number that you feel as if you are aiming for, or careful enough to get to low? Or are you just happy to continue with this strategy of going for gross profit dollars?

Neil, really what we're going for is a balance. The dollars are essential. We do look at this as a dollar gain. Over time, we try to evaluate where we are in each market and each category, and make deliberate steps. We do not have a several years out end game that says here is where we will have arrived. I think we check our position as we go. I think it is true in retail markets that it is sort of a fluid business and you have to read that really quarter to quarter, year to year, to see where you are on pricing and where you want to be on pricing. Yet, I think you can see that we were certainly more comfortable with where we are after just a year or so ago, as we shifted to investing only as we were able to save the money. I think that's important for us to note that we are generally pleased with where we are. Specifically, we always see some opportunity for improvement, and we'll target that as we both can afford to do so and see the opportunity to do so. Neil Currie - UBS: Do you see lower gross margins now as an actual strength of the company?

Absolutely. In fact, I was commenting to someone just yesterday, that when we look at variances from one quarter to another, one year to another, we typically put brackets around things that are unfavorable, and don't put brackets around it when it is favorable. In the past, we've always shown gross margins when they decline as unfavorable with brackets around it. I said, we probably shouldn't put brackets around that, that's a favorable move. We actually see it as a strength, as an advantage, and as a plus, particularly in selling gross margin, as we look at our selling gross margin. Because to the extent we can reduce the expenses that are otherwise in gross, that allows us in our selling gross margin to be even more meaningful to our customer. Neil Currie - UBS: Well certainly agree with you there. Congratulations.

Good. Thank you. Well, as we close, let me make a few comments before we sign off. I want to offer some additional comments to the associates that are listening in today. On behalf of our customers and shareholders, I want to congratulate and thank all 300,000 plus associates across all our banners and operations for a really successful year. The market share gains we outlined earlier underscore the efforts that you make on a daily basis. You are the reason behind our success and we appreciate your hard work and dedication. There is one more important area where Kroger excels that we should be proud of. That is leading the fight to end hunger in America. Last year, our family of stores contributed more than 30 million pounds of food and other products to more than 85 food banks serving the local communities where we operate. Thanks to the generous contributions of our customers, our associates and our vendors, those donations provided more than 22 million meals to families and individuals across the country through food banks, soup kitchens and emergency pantries. Kroger has been supporting the fight to end hunger in America for more than 25 years. Last year, we were again selected Retailer of the Year by America's Second Harvest, the largest hunger relief organization in the U.S. It is the fourth time in six years our company has received this award. This honor is particularly noteworthy because food banks across the country select the recipient. Kroger was selected again because of the relationships our associates have directly with local food banks. We are proud of the longstanding relationships you have all helped to build in our communities. We're helping to combat hunger as one of Kroger's core priorities, and we appreciate the role of our associates, customers and our vendors play in helping us make a difference in every community we serve. In closing, because of you, we had a terrific year. Thank you all.