Good morning, and welcome to The Kroger Co. First Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Cindy Holmes, Director of Investor Relations. Please go ahead.

Thank you, Laura. 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 first quarter press release and our prepared remarks from this conference call will be available on our website at ir.kroger.com. After our prepared remarks, we look forward to taking your questions. [Operator Instructions] I will now turn the call over to Kroger's Chairman and Chief Executive Officer, Rodney McMullen.

Thank you, Cindy, and good morning, everyone, and thank you for joining our call today. With me to review Kroger's first quarter 2015 results are Mike Ellis, Kroger's President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer. Kroger delivered strong first quarter sales and earnings results, and we are pleased with our start for the year. We achieved our 46th consecutive quarter of positive identical supermarket sales growth. We exceeded our goal to slightly expand FIFO operating margin without fuel on a rolling 4-quarter basis, and we continue to invest and innovate to grow our business, expanding our use of technology and our digital capabilities. Kroger has produced consistently remarkable results for so long that it might be easy to take a quarter like this for granted, but these results don't happen accidentally. They happen because we lead and drive our business toward these goals. Customer 1st and our 4 keys: our people, products, shopping experience and pricing, remains our fundamental strategy. We strive for balance across these 4 keys, and each quarter, we do a little better in each. And when we do that consistently for as long as we have, our results are more powerful. Based on the strength of our first quarter results, we are raising our identical supermarket sales growth guidance for the year, and we are on track to deliver our long-term net earnings per diluted share growth rate of 8% to 11%, plus the dividend, in 2015. One of the ways we continuously improve the shopping experience is by bringing new technology and digital capabilities to our business. Mike Ellis will provide an update on several digital efforts in a moment, but I wanted to mention what I think is a great example of how we're expanding our…

Thank you, Rodney. Good morning, everyone. Our associates continue to deliver an exceptional experience in ways that make a difference for our customers. Over the past year, more customers have noticed improvements in Kroger's product selection, product freshness and customer service. Our strong identical supermarket sales growth was primarily driven by an increase in the number of households shopping with us in the first quarter. We also met our goal to grow the number of loyal households at even a faster rate than total household growth again in the quarter. We're especially proud of our loyalty and sales results when you consider the current operating environment that we're in, which has less certainty than normal. We are addressing the volatility we see out there every day. Fuel margins, for example, have returned to normal compared to where we ended last year. Another factor is product costs. Some commodities are up, some are down. We are seeing deflation in milk, produce and seafood, which is driving more tonnage volume. Milk is one of our most price-elastic categories that we have. When milk prices come down, people tend to buy a lot more. We're at an advantage because we have a vertically integrated supply chain for milk. When our dairy plants run at higher volume, we become more efficient and productive. We continue to see inflation in generic pharmaceuticals and in certain commodities in the meat department. Overall, inflation continued, but at a lower rate during the first quarter, which is in line with what we had expected. Tonnage growth was very strong during the first quarter. In fact, we saw the strongest first quarter tonnage performance since 2010, which is a clear indication of our ability to get pricing right for our customers. If you look back over the past several…

Thanks, Mike, and good morning, everyone. I'd like to spend a few minutes discussing our results for the quarter in each of the key performance target areas for our long-term growth plan. Our first metric is identical supermarket sales without fuel. We are pleased with our first quarter identical supermarket sales growth of 5.7%. This strong performance was supported by identical supermarket sales growth in every department and every supermarket division. We continue to see outstanding double-digit identical sales growth in our natural foods department. Our meat, deli and pharmacy departments also posted strong identical supermarket sales growth. Rolling 4 quarters FIFO operating margin, excluding fuel, the 2014 and 2013 adjustment items and the contributions to the pension and foundation in the third and fourth quarters of 2014 increased by 10 basis points. This exceeded our commitment to grow the rate slightly over time on a rolling 4 quarters basis. Return on invested capital on a rolling 4 quarters basis was 14.03%. We are not presenting a comparative number this quarter because the prior year first quarter calculation does not include a full year of Harris Teeter assets and results. We do expect return on invested capital for fiscal 2015 to increase slightly from the fiscal 2014 result. This is an important metric as we continue to increase our capital investment to drive our future growth. Now I'll share our first quarter 2015 results in more detail. As you know, we don't provide guidance for total sales because of the unpredictability of fuel margins on our results. Total sales in the first quarter increased 0.3% to $33.1 billion compared to $33 billion for the same period last year. Excluding fuel, total sales increased 6.4% for the first quarter compared to the same period last year. In the first quarter, our…

Thanks, Mike. This is another terrific quarter. Our associates are making a difference for our customers by providing excellent service and product quality and selection. As I said earlier, results like this don't happen by accident. We create these results by connecting with our customers through our powerful Customer 1st Strategy. When we take care of our customers, we create sustainable value for our shareholders. Now we look forward to your questions.

[Operator Instructions] And our first question will come from Ed Kelly of Crédit Suisse.

So my first question, I guess, is just related to the guidance. So I guess, maybe more for Mike, but you obviously raised your ID guidance for the year. You had a good, strong quarter but you maintained the EPS guidance. So I'm just kind of curious, at this point, is it just early and you want to be conservative? Or are there other incremental offsets that are maybe new?

It's a variety of factors, Ed, and one, it is early in the year. And as we said in both the release and in the prepared comments, the operating environment's a bit volatile right now. There's a lot of volatility in fuel prices. They've obviously come in very quickly to a more normal range from where the range was at the end of the year last year. We know that will be a headwind in the fourth quarter. It was baked into our original 8% to 11%. Our actual first quarter results, while ahead of The Street, were just a little bit over the 8% to 11% range, and we had expected to be the near the high end of the range ourselves, which was our original guidance on cadence. And then just the volatility of inflation that's out there. While we've seen some categories with deflation, we know that pharmacy inflation is actually as high as it's been over the last several years. In the first quarter, it's right at double digits. And then a little bit of concern or thought process about the avian virus with the poultry flocks and how that might affect input costs later in the year and what's going to happen with availability of those products. So when we stepped back and thought about it, while we're pleased with the first quarter, we thought the most prudent move given the uncertainty -- or the volatility of some of the things out there was to maintain our guidance range. We had guided in March that if fuel margins came in, it may put us at the low end. We aren't saying we're going to be at the low end, but we're maintaining the range because that actually has happened with fuel.

And Mike, historically, you've kind of said about $0.14 or so a gallon in fuel. Obviously, this quarter's lower, but kind of like the slope of the curve was rising. Is there anything else that's changed in the marketplace or maybe it's become a bit more competitive, where you're a little concerned about the $0.14?

I -- we -- I wouldn't say we've focused on any one number. Our practice on fuel is to follow the market, and then give our most loyal customers a really good value on fuel by the -- our fuel rewards program, which I'll remind everybody the cost of that reduces our ID sales, it doesn't reduce the fuel margin. And it's really just what's happening in the marketplace as we follow the marketplace and stay right on The Street price and the signs but then give that incremental reward. I wouldn't say there's anything unusual in the first quarter. Any short period of time in fuel is an interesting result but a longer period of time is what's more important.

And we -- internally, we usually use a rolling 4-quarter number. This year, we didn't just because of how strong fuel margins were in the third and fourth quarter. And as Mike mentioned, on a daily basis, we're probably never right, but usually over the year, it gets pretty close.

The next question will come from Rupesh Parikh of Oppenheimer.

So I just wanted to follow up a little more just on inflation. For this upcoming year, have you guys changed your inflation forecast?

Yes, we're still expecting it to be in the 1% to 2% range. We're actually at the high end of that range in the first quarter, a lot of that driven by the pharmaceutical inflation that Mike mentioned -- or we mentioned in the prepared comments, primarily in the generic arena. So that's out there. We do expect to see some potential inflation out there in the poultry flocks as the avian flu issue hits. We don't know what's going to happen with all of the input ingredients that go into products from liquid eggs and how that might affect a lot of products that contain that as an ingredient. So we think that 1% to 2% is right. So far, that's what we're seeing.

Okay, thanks for the color. And then switching topics, maybe to your competition. We hear a lot about capacity growth in the specialty grocery arena and even some -- even I guess, more commentary out there on the hard discount channel. What are you seeing right now from competitor openings in, I guess, from a full-service grocery perspective?

Well, from a full service, I guess, I would say it's probably been pretty consistent over the last 3 or 4 years. Not -- certainly not aggressive. Certainly, if you look at the niche merchants, there would be much higher growth there, but we consider everybody a competitor. So we don't -- we wouldn't segment it as different as what probably most people would think we would.

The next question is from Karen Short of Deutsche Bank.

So I'm just curious on, well, maybe this is just semantics, Mike, and maybe I'm overreading, but just to clarify on your guidance by quarter, you said just now that 3Q, you expect it to be at the high end of your guidance? I think last quarter you said it would be slightly above?

Yes, if you look at second and third quarter, actually I think second quarter we said at high end and third quarter above. We just flip flopped those a little bit. It takes $8 million flipping between quarters to do that, and it's just our best thinking today. So it doesn't affect the year. I think if you look back to what we just said in March, the guidance on those 2 quarters just flipped between quarters. We still expect a very strong year.

Okay. And then on tonnage, I don't know if you guys would be willing to give an actual percent tonnage number. And then, I guess, following on that, I guess, when I look at O&A, your O&A growth rate definitely seemed higher than what I would have expected. I know in the past, we -- you talked about tonnage impacting that number, but maybe just some color on those 2.

Yes, relative to tonnage, we won't give an actual number. As Mike said in his prepared comments, it was the strongest we've had since 2010, and we haven't given a specific number, but we're very pleased with where it is. If you think about in the comments I made on OG&A, we're very pleased with the leverage we've got of 15 basis point reduction in that as a rate of sales. We did make conscious decisions to invest in other keys of our 4 key strategy versus price to provide a better shopping experience to our customers, both through making sure the products are on the shelves in a timely basis, having our associates friendly and we keep our products as fresh as possible. So there was some conscious decision to invest in incremental services for our customers, which provides more jobs and hours for our associates as well.

The other thing on tonnage, we always try to give an outline of where we are and how it feels, but it's very hard to calculate. And when a customer buys a 24 unit of something versus a 12 unit of something in our -- internally, we count that as one and one.

Or water, the common package for bottled water today is 32 bottles. It used to be 24. That's still a unit.

It's not that we're trying to avoid the question. It's just that it's -- there's an awful lot of assumptions behind that, and what we try to do is give everybody a general feel for what's going on.

Okay. And then just on the ClickList, I guess, in Cincinnati. I mean, obviously I know you guys are always very conservative and want to make sure your customer is getting the best experience, but it definitely seemed like it was a pretty long test phase. So I guess, maybe can you maybe clarify or give some color on what you ironed out, and what made you feel comfortable to roll it out now, and how quickly you think you could accelerate that?

Yes, the length of the test would seem long just because it became public a lot faster than we had intended to because somehow, one of the newspaper folks that follow us found the actual website that we were testing with our associates. So it's not that it was longer than normal. It's just that it was public longer than what we normally would. It's tracking -- if you look at our original plan, we're tracking on exactly where we thought we would be on the original plan, and feel good about it. And then Mike just pointed out to me, we just added our second store, I guess it was this week or last week.

And again that's in a beta test and you kind of have to know it's there. It's a new experience for us, and we just want to make sure it's right.

And next we have a question from Vincent Sinisi of Morgan Stanley.

I wanted to ask you first about really the private label, in particular the Simple Truth, if you could just give us a quick update in terms of where that brand is today? If over the first quarter there had been any updates in terms of product expansion and how big that particular segment is for you right now.

The brand, we're very pleased with. I think you'll find around 2,600 SKUs in our stores today and talk about connecting with the customer in a meaningful way. They have taken the brand and really embraced the brand. For us, it's been not only strategic, but it's really lining up with what customers are looking for today. And you can also buy it now on Vitacost.com. And it's available there also, so anybody who -- even if you don't shop in a Kroger market, you're able to get the product today. But no, we've been totally -- completely pleased with the progress we're making, and there are many more new items to come.

Okay. And then maybe just as a follow-up, sticking with the natural segment, as you're continuing to learn the Vitacost division and as you're -- as you mentioned, you have the Soopers site now up, have you had any further progress? I know it's still admittedly pretty early, but have you had any further progress that you could share with us in terms of maybe bringing some more of those products that had historically been Vitacost into some of your other banners?

Well, today, we have a pretty good selection of natural foods, supplements, body building products, health care products in our stores. Vitacost really just helps us fulfill that long tail of items that are smaller in some cases, and on the King Soopers website now, you can pick up 25,000 to 30,000 additional SKUs than what you'd find in a typical Kroger store. So it's really helped us take natural foods, natural products to the customer in a much broader way. We're really pleased with where we're headed. There's a lot of work still to do. We're approaching our first anniversary with Vitacost next month, and so we're actually moving pretty fast as a company and we're pleased with where we're headed.

The next question comes from John Heinbockel of Guggenheim Securities.

So Rodney, I want to start with -- you put up a quarter like this, but I know you guys can be somewhat self-critical. When you step back and say, from a skill set standpoint or a business line standpoint, where are you still not where you want to be in a significant way, not we're 90% of the way there but we have a lot of work to do? And then as part of that, address maybe the issue of speed to market and that being a more important skill set to work on over the next couple of years.

The shortest hard question to answer, and when I did my own performance review with our Board, somebody asked the same question. And you've followed Kroger for a long time, and you realize when you look at our culture overall, we're always very proud of what we've accomplished. But at the same time, we feel like we have a tremendous opportunity to get better, and a lot of times, we like to use the words that our to-do list is longer than our done list. And when you look at what's out in front of us, we are incredibly excited about the opportunities that we see to continue to get better. And the hardest thing that we have to do is actually make sure that we're trying not to improve on all things at once, but what are the things that are most important to the customer and put all our resources against that. So I guess that the way I would say overall is obviously, we're delighted with the quarter, delighted with the progress we're making. We're even more excited about the opportunity to continue to get better. So I feel very good about where we are, but I feel even better about the opportunities we have in front of us.

But are there certain -- there have to be, right, certain product categories -- I don't want to get into geographic differences, but certain product categories, businesses, customer groups that you're not fully resonating with yet, it'd have to be those, and what would tie those together, if anything?

It's -- probably I'm trying to think of the easiest way to answer your question because it's a very good question. The -- it's more opportunity. So if you think about like apparel, where you just -- we've added apparel to, I don't know, I think we're up to 70-some marketplace stores. We're still learning what is the right selection of product to have that's in a marketplace store. Obviously, the Fred Meyer Group helps us get insight and procures the product for us through that channel, but we're still learning what's the right things to put in. And there's a ton of those kind of things going on, so it's really hard to say we're -- there's one specific item or one specific customer. It's much broader than that, and it's 100 different things versus just one thing that we're really trying to get better at.

All right. And then just lastly, when you think about pricing, right, and pricing being a journey, it looks to me like, whether it's traditional competitors or mass, there's been some stabilization with regard to pricing, right? It's not a race to the bottom. Is that fair? And at this point, you're largely where you need to be. And the adjustments to come, is it -- do you think it's more kind of rifle -- you sort of look at maybe the hard discounters and work to be done on private label pricing, but are we stable and largely there and it's just selective guys you've got to address at this point?

If you look at longer term on pricing, as you know, over the last several years, we've invested in price as we reduced OG&A to take costs out of the business. The last few quarters, we have been a little more aggressive in investing in service. So it's not just price based. So if you look at the mix of where we invest, we have invested some of that cost reduction in additional service hours and things like that. So it's a journey that you never arrive at a destination, so you're continually making progress, and you continually change based on your competitive -- your competitors change as well. So we're happy where we are, but we are continuing to invest but it's really driven by as we get costs out of the business. I don't know if, Mike, anything you'd want to add to that?

No, I absolutely agree. It's right in sync with the prepared comments we had. And I'll just throw in, when you think about our 4 keys, we're constantly asking ourselves what do we invest in to make sure that we're offering the best balance to the customer based on what the customer wants and the retail environment that we're in. So Rodney's point about investing more in our people in the last few quarters is right on.

The next question comes from Meredith Adler of Barclays.

One question would just be, real quickly, you talked about where your guidance for inflation was for the year but did you comment on what you thought inflation was for the quarter?

We did not. But Mike...

We're at the high end of that range, primarily driven by Pharmacy. It's about 1/8. If you look at it without Pharmacy, it would have been lower, and the comments we had on a volatile operating environment is -- if you just get rid of the headline news on inflation and you start to dig into the commodities, you have things going all over the world. And one of the things I think we're most proud of this quarter is there were so many things bouncing around, and our ability to manage through that this quarter really showed up in our results.

Great. And then I was wondering if you would talk at all about the formats that you're testing called Ruler. I think you maybe have about 30 stores, and I was just wondering what your thoughts are. And we do know that Aldi is going to be opening more stores in Southern California is getting a big push, and Lidl is also going to be coming to the U.S. pretty soon, just how do you feel about that format? And do you want to be a competitor in that format?

We're still -- it's still very early and it's obviously a test for us. It's one of the things where we feel good about the progress the team made. The format actually came to us through one of our mergers. When we merged with Jay C, they had the format even back then, and the team has made a lot of changes to what's inside of it, and we continue to make changes. I wouldn't say that we're ready for prime time yet, but we are making progress in the right direction. And it really ties back to when you look at -- you've heard us over the years talk a lot about how customers are bifurcating, and we want to make sure that we have a format that serves all customers, and there's certain customers that living on a budget is really important because either they want to or they have to, and it's operating a store as efficient as you can to give the best prices you can. So it really ties to that. I don't know, Mike, anything you want to add to that?

Just what we learned from this type of a format has really been helpful to better understand that value segment and how to operate in that value world. So we've really, as a company, learned a lot, I think.

Great. And then just real quickly, I know you said your natural organic department was up double digits. Did you see any changes at all? I think there are some other retailers that have said there was a bit of a slowdown, I think primarily in the dry grocery side, but I don't know, it doesn't sound like you saw anything, but did you?

Nothing that I can put my finger on. It's still real healthy for us. Again, we have good supplies, so we haven't had any issues around that. But no, customers still are as interested in the natural category, the natural foods world, real food, we call it, as they ever have been.

And next, we have a question from Andrew Wolf of BB&T Capital Markets.

I wanted to follow up on your thinking around the guidance. I think you said the quarter came in slightly above, with fuel, slightly below. So how does that, if we just isolate the stores, does that mean the stores was little better than that versus internal expectations?

Yes, I think the strong IDs without fuel would demonstrate how happy we are with our core grocery performance, and our -- that's built into our expectations for the year when we raised ID sales guidance without fuel. So we're very pleased with what's going on inside the 4 walls of the store.

Okay. And Meredith asked about the, I guess, the cadence on natural, but I'd like to ask about it just on a -- across the store. It sounds like, from your answer and the answer on natural, that there hasn't been a big fall off or some volatility on the consumer side. I think it sounds to me like the worry is more on the supply side, whether it's the fuel margins coming in or what's going to happen with some of the commodities.

Yes, I'm not sure I understood the last part of the question on the supply side, Andrew.

Well, first of all, I want to ask if you're seeing any change in your sales cadence, and is that where you're seeing volatility? Or is it just in the other things you mentioned such as fuel margins and potential disruptions or whatever you're thinking about with avian flu?

Yes, I'll answer part of it. I'll let Mike or Mike answer the other part. If you look at the change, during the quarter would be more driven by inflation, clearly is a little -- ended the quarter slower than it started out in the quarter. So the change has been more inflation-driven. Tonnage has been pretty consistent -- or was pretty consistent. If you look at this quarter, quarter-to-date, we would still be slightly ahead of the range that we gave for the balance of the year. And part of the reason for that is we expect inflation to continue to get lower as we go through the year. In terms of the avian flu and some of the other pieces, Mike or Mike?

When we just -- Andy, when we sat back and looked at all the factors out there and the fact that even though it's -- even though on a calendar, we're almost halfway through the year, but for Kroger, we're only a quarter of the way through the year, we just thought it was very early to change our EPS guidance for the year given the volatility in a lot of commodities inside inflation, giving -- given what could be an unknown effect of the avian virus as we go throughout the year, volatility in fuel. Again, we're very happy with where we are and we think given the 8% to 11% growth rate off of a very strong last year, being able to deliver in that range and continue to produce the results on the cadence we projected we think will result in a very fine year.

The next question is from Ken Goldman of JPMorgan.

I'm not sure if you answered this yet. If you did, forgive me, but in terms of ID sales into 2Q, how are they progressing quarter-to-date, even if just on a qualitative basis? And are there any timing issues, any items we should be aware of as we model that near-term top line?

Ken, as I just mentioned, if you look at the identicals so far this quarter, we continue to be a little ahead of the range guidance we gave for the year. Part of that is driven because we believe inflation will continue to decline during the year, and we would still expect that based on what we're seeing today when you look at the impact on identicals.

I did miss it when you just said it. I apologize. Broader question, we've seen quite a sudden market share shift in food retail in general away from sort of specialty channels back toward, for lack of a better term, the Krogers of the world, more traditional, I know you don't love that term, but more traditional grocers. I think the general thesis out there, which I agree with, is that much of the shift is generated by you and some peers adding natural and organic products, but it seems like better for you isn't quite big enough to move the needle as much as what we've seen. So are there any other drivers that you are seeing out there that would sort of explain this kind of quick shift in consumer behavior? Or is it just too vague and too hard to tell?

Yes, I'm not sure. I guess, I'll speak for myself a little bit here. I'm not sure I 100% agree with your thesis. When you look at some of the specialty retailers, just because some of them have reported lower ID sales than what their trend has been, they continue to open stores. They have a little bit of cannibalization, and a lot of them continue to post ID sales above what the market would be growing at. So I wouldn't subscribe to the theory that there's necessarily a sudden shift in market share away from them. It may be a slower growth in market share gain, but I wouldn't say it's a shift away from them. We actually -- we can't ask our customers where did you shop before. When they -- when our IDs go up 5.1%, we believe we're taking share and more sales dollars from our customers from a wide variety of retailers and are happy to do that, and that's really what we focus on. But I think our sales strength comes from a broad base of folks, including doing a better job of offering new and unique products that they may not be able to get somewhere else, like Simple Truth. But I think -- I wouldn't -- if I were sitting in their chairs, I wouldn't necessarily be embarrassed by some of the recent results they've had.

And I will answer your question a little different than how Mike did. If you look at the Fresh side of our business, produce, meat and some of those departments, deli, we're having incredibly strong growth. Some of that is improving freshness. Some of it is that customers wanting to eat products that's fresher. And that is something that we have a huge competitive advantage versus a lot of our competitors because the variety that we offer, we offer it all, plus we do still have some -- there are certain products you just can't get an organic item or a natural item. So we're able to make your full shop with us. So it's really a position of strength for us and an opportunity for us to continue to deliver.

And our next question is from Alvin Concepcion of Citi.

There's been quite a few questions about competitive environment, but I'll tack on another one. Are you seeing anything different in the promotional environment as the quarter progressed, or even over the last month?

Well, we probably have seen different competitive pockets of activity around the country, but that's not unusual. But as a company, we just tend to deal with that as things change and as our customers -- try to meet our customers' needs in the most beneficial way to them. But there's nothing really specific that I can put my finger on, but again, there is promotional activity. But when you have as broad a geography as we have, you see just about everything throughout the course of time. So yes, nothing I can really put my finger on.

I guess, maybe more specifically, are you seeing anything different on the margin environment for your natural and organic food part of the portfolio?

Nothing that I would say is worth reporting, but -- most of what we see today is just this mainstreaming of natural and organics continues, but I wouldn't say there's additional retail pressure on those categories, I guess.

Great. And one more quick one for me, you talked a little bit about the growth in loyal households. Wondering if you could give us a sense of how fast that growth was and what kind of share of wallet you're getting now from those loyal customers?

Well, we -- I can say we're pleased with transactions, and number of households and visits per household and spend per customer. So in general, it's very healthy for us right now. I really don't want to get too specific about any of the numbers, but overall, it's been a combination of those factors that have been driving our ID sales.

The next question comes from Filippe Goossens of Mitsubishi.

Typically, you don't comment obviously on M&A activity, but I was wondering if you perhaps could opine a little bit on if there were to be a merger between Ahold and Delhaize, whether that would at all impact your competitive position in those markets where you do overlap with the 2 companies.

The -- you're correct when you say we don't comment on mergers. So I won't talk about the particular specifics on the one you asked about. But any time companies merge, it creates certain opportunities and you try to make sure that you deal with the opportunities that are created, and different ones create different kinds of opportunities. And it really is you sit down and say what is the right strategy for this particular one? So -- and we wouldn't look at, if the 2 of them merge, any different than whenever somebody else merges. And we believe there'll be continued consolidation in our industry and we have every intentions of being a consolidator in that consolidation of the industry. And as you know, we've participated in several mergers over the last year and the last several years.

Okay. And then if I perhaps may ask a derivative question. Obviously you've seen the news of CVS and Target working together right now for the operation of the pharmacy stores within the Target locations. I presume that Kroger remains fully committed to operating the respective pharmacy locations you have within your different formats yourselves going forward?

Well, we love the pharmacy business and the whole offer that it offers for the customer, and we continue to see strength -- strong results there. One of the things that if you look at the average volume per location and some of that, we would have very, very strong performance on a per location basis and continue to do very well and grow. So we're...

And next we have a question from Scott Mushkin of Wolfe Research.

So Rodney kind of teed this up because you said you see yourself as a consolidator in the business and so I know, Mike, I think you said your leverage is 2.09. Thinking about your balance sheet, what is your capacity to do further transactions?

Well, I think the answer to that question isn't what my financial capacity is, it's what's the capacity of the organization to do something, it's what assets might be available, and do they fit the metrics that we typically would go after when you would look at a transaction. So we wouldn't sit back and say, oh, Harris Teeter's behind us. We've delevered. Let's go spend another $2.5 billion, get it back up to 2.4 and work our way back down. It's really quite the opposite. It's one of the reasons we try to maintain the ratio where it is if an opportunity does come up, can we take on the leverage of that correct unique opportunity, act on it, have the rating agencies continue to have the believability in us doing what we say, and that is we told them 18 to 24 months we'd get our leverage back down. It took 12, and it went down again this year. And I think the statistics we went through with the return of capital to shareholders as well as what we've invested back in the business, all told, when you add that up, it's about $4.5 billion we either returned or invested. And to maintain debt at a flat level really demonstrates the power of the cash that we can generate as a company.

Okay. Second question is, and I know we touched on some of the natural and organic guys and other things just, but I was just kind of broadly looking at the space, you guys commented tonnage growth has accelerated. It seems to me that your market share gains are accelerating. Why, I guess? What's changing? Why is more market share accreting to Kroger at an accelerating rate? And is -- does your outlook -- forget gas and inflation, but just basically is the outlook over the next 12 to 24 months that this pattern is going to continue?

For us, the progress that we've made overall, we really would give our hats off to our associates. It's our associates interacting one-on-one every time and helping make the customers' experience a little bit better is what's driving the results, and it's our ability to support our associates to deliver great service. So it's -- I don't know that there's a big magic wand that we're waving. It really is 100 small things but doing each one of those things a little bit better and our associates continue to improve our execution and giving us feedback so we can keep getting better. And then using the insights we have working with 84.51° and then now going forward, we'll be able to work with others broader than just 84.51°. So it's all of those things together that's supporting that.

Right. And if I could have one more. Publix continues to encroach. How do you stop that, and what do you think about that?

Well, we would say about Publix the way we would say about tons of competitors, Walmart, Costco and on and on and on. They're a great competitor. We always learn a lot from them because they do a great job running their stores, and we don't look at so much in terms of how do you stop a specific competitor. We're really focused on how do we make sure we keep getting better, and if they're successful in a market, they're successful at somebody else's expense, not us.

And that question will come from Kelly Bania of BMO Capital Markets.

I was just curious if you could talk a little bit about 84.51°. I thought it was interesting that you -- I think Rodney characterized it as a game changer, and I understand that you'll -- the new structure allows you to work with outside data service providers in conjunction with 84.51°, but just curious if you could talk a little bit more about what are some of the priorities in terms of how you would like to expand the use of that business for Kroger.

Yes, the -- how do I answer your question without our competitors understanding exactly what we're trying to do? The -- I can tell you I've had more dialogue, and several of us have, in terms of how do we better use the data we have for the benefit of our customers and to run our business better. And we've had more of those discussions in the last 8 weeks than we had in the 2 years before that because we spent an awful lot of time talking about things other than Kroger. So to us, there -- and as I mentioned in my prepared comments, there are a lot of great people at 84.51° that we're just so excited for them to be part of our family, and I know they're so excited because they're going to be able to even help us accelerate what we're doing. So it's really hard to say specifics other than I can tell you we have a huge list of things that we can use our data for, for the benefit of our customers and running our business better that would, for whatever reason, we hadn't taken advantage of. And we're going to figure out a way to prioritize that and figure out a way to take advantage of that, and some of those cases will involve partnering with other companies other than just 84.51°.

That's helpful, and any comments on what's the strategy? Or is there a strategy to grow the 84.51° business with other retailers or clients like Kroger, so the company can grow its own profitability and growth?

Yes, we really won't comment on that at this point. Before we end today's call, I'd like to share some additional thoughts with our associates listening in today. We recently wrapped up our Red, White and Barbecue celebration in stores across our company. Special thanks to each of you for making this exciting event possible, and I can tell you I personally ate way too much on the samples. Our customers loved kicking off the summer grilling season with fresh flavors and fun ideas to share with their family and friends. I also want to thank you for helping show Kroger's gratitude to our active duty troops and our nation's 23 million veterans this summer. Through our partnership with the USO and the Honoring Our Heroes campaign, we hope to raise an additional $2 million for our military men and women. Together, Kroger's associates and customers have raised more than $11.9 million since 2010 to support USO programs. This represents the largest gift to the USO in its history. Visit the Honoring our Heroes website for more information about how you can help. We also continue to hire our heroes. More than 29,000 veterans have joined our team since 2009, including more than 6,000 associates last year. Thank you for helping welcome them to our Kroger family. That completes our call today, and thanks for joining.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.