Good morning, and welcome to the Kroger Co. Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Rebekah Manis, 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 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, 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 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, Rebekah, and good morning, everyone. Before we get started, I want to acknowledge that the team here at Kroger realizes that we have our work cut out for us as the market points out this morning. We realized business transformations are harder -- hard. But I want to emphasize we are on track to deliver on our Restock Kroger commitments. We look forward to our time together to take your questions and try to better lay things out for you. Joining me on today's call are Mike Schlotman, Executive Vice President and Chief Financial Officer; and Gary Millerchip, for the first time, Mike's successor, who will become Kroger's CFO on April 4. As previously announced, Mike will continue to serve as EVP and a member of our senior team until the end of the year. We can't say enough how grateful the entire Kroger team is for Mike's service, leadership and stewardship of the company for the last 34 years, especially during the last 19 as CFO. We are also incredibly fortunate to have Gary, whose deep finance and business background combined with his successful track record of creating shareholder value as a member of our senior officer team, makes him the right person to carry Kroger forward. This is especially true as Kroger transforms from grocer to growth company. I've talked before about the need for retail companies to constantly reinvent themselves in order to remain relevant. This constant reinvention takes place at least every decade. Gary has been instrumental in helping us think through our transformation as part of Restock Kroger and beyond. He is uniquely positioned to be Kroger's Chief Financial Officer of the future and, as such, will also help shape the future of our omnichannel experience and reporting. During today's call, Mike will…

Thanks, Rodney, and good morning, everyone. Reflecting on Rodney's comments to start the call, it's kind of surreal to know that this is my 77th and final earnings call as CFO. I'm thrilled to be transitioning the role to Gary, who is a terrific partner and will be an excellent Chief Financial Officer. Looking at our results for 2018, I'm very proud of the entire team at Kroger for delivering on the key Restock Kroger commitments we made back in October of 2017. Landing the first year of a 3-year plan is always the toughest and most critical since everything that follows builds on the foundation that gets built. We feel great about the foundation we've built, which sets us up to create shareholder value while continuing to make strategic investments to grow the business. There were a variety of factors that affected fourth quarter in either the OG&A or gross profit line. As a result of better retention and higher average hourly rate, our vacation accrual was a $0.02 headwind in the quarter and incentive pay because of achieving the ID sales we did, and the [ CPS ] was a $0.06 headwind. Both of these affected OG&A. As I said, our incentive plan was primarily based on the grid of EPS and ID sales. As EPS got closer to the top end of the range, we were incentivized to continue to make sustainable investments in our business to grow sales. Some of these investments were in our supply chain for both supermarket business as well as Kroger Ship. On a combined basis, this was about $0.04 per share. These items affected gross profit. When you add these together, it was about a $0.12 headwind to the fourth quarter, a lot of which is something that we're going to…

Thanks, Mike, and good morning, everyone. It's a pleasure to join the call today and more specifically, speak to Kroger's upcoming year, both what we are committing to and how it aligns with the Restock Kroger. For 2019, identical sales growth excluding fuel, we are targeting identical sales that range from 2% to 2.25%. We expect net earnings to range from $2.15 to $2.25 per diluted share and FIFO operating profits to range from $2.9 billion to $3 billion for 2019. The low end of our range is above the current consensus estimate for 2019. Kroger's EPS growth is expected to come from FIFO operating profit growth in 2019, which positions us well to deliver the incremental $400 million in FIFO operating profit by the end of 2020 through Restock Kroger. I'd like to spend a few moments underscoring Kroger's future growth model because the clear path to $400 million in incremental FIFO operating profit includes alternative profit streams. And although these high-margin and asset-light businesses won't have a major impact on our top line in the near term, they play a significant role in helping us achieve bottom line growth. I have made it a priority to join Mike and Rebekah already for several investor meetings. We as an Investor Relations team recognize and appreciate the request to better understand how to model alternative profit streams going forward. Please know that our finance team is spending time on this very topic, including a review of industry best practices with the goal of providing more detail in the future. In 2018, there were several Restock Kroger successes that have created tailwinds we believe will help us continue to grow sales and achieve incremental FIFO operating profit in 2019. We pulled forward price, digital and store investments in 2018, in part…

Thank you, Gary. As America's grocer, Kroger has the winning combination of local presence plus a digital ecosystem, enhanced by strategic partnerships, enabling us to offer our customers Anything, Anytime, Anywhere. We are transforming from grocer to growth company by deploying our assets to serve even more customers and create margin-rich alternative profit streams. We are well positioned to deliver on our Restock Kroger vision to serve America through food inspiration and uplift. Now we look forward to your questions.

[Operator Instructions] Our first question will come from Karen Short of Barclays.

So I guess, a question I have -- and I know you try to encourage us not to look at your business in terms of the core and fuel and alternative profits, but you did kind of gave us the slide at the Analyst Day with that depicted, so it's hard not to look at your business this way. But when I look at the full year '18 and I try to break out what the core business actually did, the decline was fairly significant. Like I'm kind of backing into almost 30% decline in the quarter. And I guess, can you help me understand what the components of that are that are maybe just transitory? And then the second part I would just ask is, obviously we're trying to think of you in a way that you're thinking of yourselves, meaning as a growth company. But you need stability in your core to have the credit in your valuation for being a growth company. So maybe a little color on how you can attain that, I guess, stability and/or grow your core.

I'll take that one, Karen. Well, obviously, a lot of -- we made a lot of investments in 2018, which affects a wide variety of different lines. And it's difficult to say, obviously fuel had a good quarter or -- and a good year. When you look at trying to back into the core, what do you do with digital, which has been a headwind, and we continue to invest in digital. If you don't back that headwind out and put that in the growing a new business category, yes, that would drag the core down the way you do it. But if you look at the digital investments we've made along with the other investments we've made, in the fourth quarter, I talked about the new warehouses that we opened up to support our digital business. That -- if you look at that all in the core, yes, the core declined. I won't go into a specific number, but it really is how you slice and dice all of this. All of that said, and I wouldn't necessarily discourage you from looking at the different pieces of the business because we do have to do a better job of helping you all understand and explain where the alternative profit streams are going to come from because some of them won't affect the top line. Some of them will just be profit. But when you're trying to transform the company and you have a first year of a plan, we take all the pieces and all the available flows and profitability together and then decide how to invest them in which business, which is what we did in 2018.

And with that said, and Gary mentioned it, we will definitely do a better job helping you be able to see that insight because we certainly understand the question and it makes total sense.

Okay. And I guess, just a follow-up, then. So if we look at that $3.5 billion for 2020, I mean, you're looking at an EBIT growth of 17%, which is not something I've ever seen any grocer do in a year. But is there anything that has changed in terms of each of the streams versus where you're at in your Analyst Day in terms of the growth rate?

This is Gary. I think we feel, as I mentioned in the prepared comments, we feel very good about the 2019 plan that we have for the business. And kind of referring back to your question, Karen, that you asked and Mike answered, there's a lot of noise obviously in 2018 when you're going through a major year of transition. And we feel that as we head into the second year of the plan, as the pieces come together and we have the tailwinds from some of those investments that we made, we have a strong plan in place that we feel is going to make a difference to the way in which growth is occurring across the organization and where you'll see that in the results that we report out as we shared in the prepared comments. I do think that as we head through 2019 and we're building on the plans that we put in place through Restock Kroger, we expect to see the investments that we made in '19 start to come out in -- sorry, 2018 come through in 2019. And we have a very clear plan of what we expect those benefits then to deliver in 2020. So I think we appreciate, to Rodney's comment, that we have to give you a clearer view into how all those pieces fit together. But I wouldn't say there's anything materially changed in the plan that we have for the 3 years and that we're not seeing all the pieces come together in largely the way that we expected.

Karen, one more thing I would add on the calculation of the decline. And you may have done this, but I would remind you that last year had a 53rd week. And you need to take -- obviously take that out when you compare 2017 to '18. And I think last year, we said that extra week was worth $0.09 or so.

Yes -- no, no -- yes, we backed everything out.

Okay. Because I wouldn't come up with a number anywhere near where you are.

Maybe we can follow-up.

The next question will come from Edward Kelly of Wells Fargo.

First thing I wanted to do, is maybe just follow-up on where Karen was going with this. I mean, on the $400 million goal, if we just think about how you started year 1, which you say is on track, but EBIT fell over $200 million. And it would've been down more if not for an epic fuel year. And the biggest decline was in Q4 even if you adjust for that extra week. And I know that you are reaffirming this target, but if you look at 2019 guidance, it's got about $100 million improvement. And it does sound like -- and this is off a big investment year, it does sound like there are some things that should come back to you, which implies a $550 million improvement in 2020. So why isn't there more progress, I guess, in 2019 given what you're going to lap? And then can you give us more comfort around how you see this growth in 2020? I mean, obviously, your stock is down quite a bit today because I don't think the market's seeing progress. The market is kind of seeing the opposite. So if you can just help us to some extent here, I think it would be good.

A couple -- a lot of thought there in your question. One of the things I would point to relative to progress we're making is what Gary said in his prepared comments where if you look at operating profit guidance for next year, it is above where the current consensus estimate is. So in our mind, that does demonstrate progress. When you talk about why wouldn't 2019 grow more given the investments we made in '18, we are expecting a more usual year for fuel margins in 2019 versus 2018. We believe it would be -- it wouldn't be prudent to budget 2019 to replicate 2018 in fuel. So the core business and the alternative profit streams, digital not being as big of an investment, in fact, a little bit of a tailwind when you look at expected investments year-on-year. We first have to overcome in 2019 lower expected operating margin in fuel and then grow off of that. And as we built the business plan with the 2 to 2.25 EBITDA -- or [ ID ] sales, that still gets us to an operating profit margin that's above Wall Street. And if you look at the high end of that range, it's essentially right at what Wall Street would be predicting for 2020.

Ed, I mean, we really understand your question. And just to enhance a little bit of what Mike and Gary was talking about, digital, we do expect it to turn to a tailwind versus a headwind. As you know, we accelerated a lot of investments into 2018 that we expect those to pay off in '19. Mike talked about some of those. Obviously, space optimization is one of those. We continue to make great progress on taking costs out of the business. And when you look at all those together then, as Mike mentioned, we also expect fuel to be a headwind when you look at next year total. So totally understand the question. And when we look through and modeling all the pieces, I do think it's important to note when you look at fourth quarter by itself, the incremental $0.12 of charges that Mike talked about, most of which will not reoccur next year. Or if they do, they will be spread out throughout the year versus just in one quarter.

Okay. Just a quick follow-up on the gross margin. The gross margin, down 93 basis points was certainly surprising. It does sound like there are some onetime things in here. But can you just give us a little bit more detail on what happened? What is mix by the way? And what did you do in supply chain? And then how do we think about the gross margin in 2019? Because it's hard to get to your EBIT guidance without, I think anyway, flat to positive FIFO gross margins ex fuel.

If you look at the fourth quarter decline, about 1/3 of it, maybe a little less than 1/3 of it was from price investment. So kind of what we've been experiencing all year long. The other 2/3 of it is a combination of startup costs for some new warehouses that negatively affected warehouse and transportation line, that expense line that's in the gross profit as well as continued growth in primarily our Kroger Specialty Pharmacy team had a great year, very strong sales growth out of them. That is a high-growth business that has, as compared to our core business, a dramatically lower gross margin rate. But because the price of each one of those prescriptions is so high, generates very strong operating profit dollars in that business. So those last 2 were about 2/3 or so of the margin erosion and pricing was about 1/3.

And just for next year?

Yes, I don't think I'm going to give guidance for OG&A and gross profit for next year. If you look at the ID sales, if you look at the earnings per share guidance and we gave you operating profit, there are assumptions that you're going to have to make about where OG&A and gross profit are going to go next year. As Rodney said, some of those investments we made this year won't be as dramatic as they -- as next year. Things like digital not being a headwind and being a tailwind will help margins as well. So we won't be opening new warehouses like we did in 2018. And those startup costs are what cost us on the margin line.

And our next question comes from John Heinbockel of Guggenheim Securities.

Let me start. When you think about the next couple of years, the alternative profit stream impact on margin rate, EBIT margin rate, right, is the greater impact going to be on gross margin line or the expense ratio line? And then when you guys talk about ex fuel margin, does that include the alternative profit streams today? And will it in the future? Or you'll break that out?

Yes. On the first question, as I alluded to, we're doing a lot of work right now to really decide how we best can share that story with you because I think as we mentioned in the past, the alternative businesses that we talk about have grown up a little bit as a legacy over the way they would have been within the Kroger business prior to us really in 2017 identifying this as a big strategic growth area for the company and how do we truly leverage all the data and the knowledge that we have about the customer to drive those alternative businesses across Kroger Personal Finance, the media business and some of the other areas that we shared at the analyst meeting. So right now, it would be reported in a number of different areas of the business. And what we really want to do is to make sure that we're very deliberate in identifying and helping you -- provide you with a clearer picture of how you can see that more clearly as the business continues to accelerate growth in 2019 and 2020.

And John, if you look at the OG&A and the fuel -- and the margin rates, excluding fuel, it would include those businesses. We would have a really long list of things to pull out if we didn't do it any other way.

All right. So then as a follow-up, is it possible based on what you said, Gary, is it possible that there will be an alternative profit stream segment? Because again, it's getting so significant. It's so different than the core business, does it makes sense to break out separately for all of them, right, combined, revenue and EBIT? Is that something you're thinking about or amenable to? And then the last thing, if you think about the core business, what comp do you think you need to actually grow EBIT in the core business? Is it 2? Is it -- or given cost pressures, is it higher? Is it 3? What do you think?

I think for the first part of the question, we're not ruling anything out right now. We're not committing either to what the answer would look like. We really want to make sure that we're deliberate about thinking through the best approach to make sure that we manage this business effectively, but also can clearly demonstrate and show the story of the value it's driving to the bottom line. But certainly committed to reaching some conclusions on that and being clear in 2019 about how to think about and see that.

And certainly, when you look at the longer-term model, the 2% to 3%, we would certainly agree with that and would see the same number. For the next couple of years, it might be a little on the low end of that to drive earnings growth. But over time, the sustainability of the model really needs 2% to 3% identicals.

I think it's important to note, John, that if you look at our productivity gains during the year from -- not only from the great year we had from reducing our turnover, which means we increased retention as well as some operational efficiencies inside the store. Our productivity pretty much offset the higher investments we made in associates in the store.

And next, we have a question from Paul Trussell of Deutsche Bank.

Just wanted to touch base on the top line. The IDs over the past year were more in the 1.5 to 1.9 range, and just wanted you to just maybe help us better understand the expectations to see acceleration in the business to kind of above 2. Maybe just speak, give a little bit more color on what you're seeing in the stores that have gone through the optimization. And we'll start there. I have a follow-up.

I love the question. If you look, the last part of your question on space optimization and as Mike mentioned in the prepared remarks, it certainly has been a headwind longer than we expected. But for the stores that have opened -- that opened or remodeled longer than 12 weeks, we're finally starting to see where that positively adds to our identicals. So it's been slower than we expected, but it's nice to finally see. So obviously, that's a piece of it. We also expect to continue to see improvements from the investments that we made in 2018. If you look at tonnage in '18, it was actually stronger than what the identical sales growth would be. And we continue to see people trading up in products and in size of products as well. So when you look at the maturation of the remodels that we've done, continuing to improve the way -- we've significantly improved in-stocks in some of the core business pieces and tying that all together with the investments we've made is what gives us confidence in the 2% to 2.25% that we shared.

One other thing relative to that, Rodney, is when you look at quarter to date, we are essentially right on top of where our fourth quarter was. And the split between the core supermarket business and the alternative businesses is very similar to where the fourth quarter ended. I know there's a lot of rhetoric out there that the pull-forward of SNAP means that we've started the year out more slowly, but we're essentially right on top of where the fourth quarter ended so far here in the first quarter now. It's a 16-week quarter. A long way to go, but we are off to a start that helps us feel good about the guidance.

And Mike's point on SNAP, it definitely -- there was definitely a pull-forward. And when you look at SNAP by itself, the first period of the year would be a headwind. But if you look at other pieces...

It would be a headwind, but we filled that headwind with other sales in the supermarkets.

Just maybe one other color to add too. As we think about the journey from Restock Kroger in '18, a lot of the initiatives that we landed during the year that created some of the noise that Mike referred, but really should start to build tailwinds into 2019. Rodney mentioned that the turning point from a profitability impact of digital. But as we continue to grow digital sales at the rates that we're seeing on a much bigger number, that continues to have a bigger influence as we head into the outer years of Restock Kroger on the ID sales performance of the business. And then the work that we did in 2018 to invest in our own brands and driving significantly high customer engagements as customers continue to deepen their relationship with our own brands is an important piece of the, I think, the opportunity that we see in 2019. And then finally, the merger with Home Chef and the work we're doing to expand the fresh food experience in the store and the meal kits opportunity obviously only came in partway through the year and represents another opportunity that we see to really build momentum in '19 from '18.

That's helpful color. And somewhat related, I'm curious what you're seeing over the past few months and what you're forecasting ahead on the inflation front. And if you could just kind of comment a bit more on how we should think about price points given higher input costs? Are you seeing price points go higher? And also to what extent -- or how would you describe kind of the price environment out there? Is the environment rational?

Yes, I don't know if I'll get -- if I'll grade the environment to rational or irrational. This is a competitive industry. It's always been a competitive industry, and we always build a business plan assuming it's going to be a little bit more competitive versus less competitive. And if we get surprised and it's not more competitive, it winds up being a help. If you think about inflation just in the fourth quarter and you take out fuel and pharmacy, cost inflation was less than that. It was about 39 basis points. When you add in pharmacy, it kicked up to 1.08 basis points. For the year, it's actually without pharmacy was slight deflation on the year from a cost basis, which is -- may not reconcile with everything you're hearing about cost increases coming through. Our team's done a phenomenal job of going after cost of goods savings in a variety of ways. And keep in mind, the numbers I'm talking about is what we pay for products based on how many of those units we have this year and last year and the price this year and last year. So we've done a great job of being able to offset some of those cost increases you hear about.

The other thing that I would add, and we talked about this before, but when you look at some of the companies, they've raised prices more than what the true cost is. And it's -- it really helps that our own brands are so strong because what we find is when somebody does that, they end up giving up market share and they give up market share to our own brands. And over time, we make more profit on Our Brands than we do selling the national brands. Now we're going to always give the customer choice and we want to earn whatever we get. But if somebody's pushing costs through more, they will end up giving up share when they do that.

The next question comes from Chris Mandeville of Jefferies.

Can we just start off again with 2019 guidance here? How much of this $100 million to $200 million EBIT growth is essentially going to be coming from your core grocery versus your alternative revenue streams? And how are you thinking about the fuel margin in 2019? And then I suppose, Mike, I can certainly understand that you don't want to go line for line on guidance. But clearly, the market is reacting to the negative 93 basis point gross margin results. So maybe just at the very least, you could hold our hands a little bit going into the first half of the year on gross margins and how to think about that as alternative revenues become a greater component of your EBIT.

Yes, I understand your request to hold your hand a little bit, but we're going to stick with the guidance we've given and not get specific on gross margins and things like that. I would say a big chunk of the growth in operating profit margin for next year would be coming from the core business with ID sales like we talked about. We do expect, as I said, fuel to be a pretty dramatic headwind next year, which leads us to the bottom line result of the guidance Gary talked about in his section.

On fuel, we would be pretty close to using our 3-year average on margin in terms of expectations of fuel. We do skew that a little bit to more recent times, but it's pretty close to the 3-year average. On gross margin, you should not expect a 93 basis point reduction in gross margin.

That I agree with.

And if you look at the model overall, as you know, we've accelerated a lot of the investments. And some of the things showing up in [ gross ] is just the way the accounting shows in terms of warehouse and transportation cost. So those types of things, we would not expect that same headwind.

Okay. So I suppose my quick follow-up to that just really is, we were expecting to see far less than 93 basis points in Q4 based on Q3 comments. So just to be clear, so long as we don't receive any type of material tailwind from fuel, which we are very unlikely to receive in Q1, there should be some sequential improvement in your gross margin degradation, correct?

Correct.

And then my follow-up would be, just I've spent quite a bit of time in Vegas these last couple of days at Shop Talk. We've been speaking to a lot of folks within micro fulfillment. So Rodney, I guess, I just want to get your take here again as it relates to the relationship with Ocado. Can you help us think about a few items here and just why you think this is the right technology going forward? Have you spoken to them with respect to their own micro fulfillment option -- called Zoom? And then maybe does that actually afford you some flexibility with respect to the 20 CFCs that you dedicated yourself to with them?

In terms of -- first of all, somebody on the Ocado team and the Kroger team would -- actually would be talking daily. Now if you look on a broader strategic conversation, those would be happening probably on the monthly type basis. The thing -- one of the reasons that we were incredibly excited about partnering with Ocado is Tim and his team continually push themselves. And what they have today, they'll continue to get better and they'll continue to give a look at different approaches and alternatives. And when we signed an agreement with Tim, one of the comments we made was that we're not signing it based on what you have today, we're signing it based on what we think you're going to have in 3 to 5 years because of the talent they have, their drive to keep getting better and some of the things they have on their drawing board. So I feel very comfortable that if there's a model out there that's more efficient and gives the customer what they want, the partnership with Ocado, we'll be able to discover that and we'll be there when it needs to be there as well.

The next question comes from Scott Mushkin of Wolfe Research.

Mike, gosh, it's been years. So congratulations. I can't believe you're going to be not on the call.

Yes. My 77th one, as I said.

Yes. I don't think I've done 77, but I've done a few myself. So congratulations.

Some days, it feels like you've done more than that, Scott.

So market share. You guys usually ran through market share in the fourth quarter, and I was just wondering if you can give us some thoughts on what's happened with the market share during the year. And then I wanted to follow-up.

Yes. When you think about market share the way it's traditionally calculated, our market share did grow in the year. As Rodney talked about, our tonnage was actually better than what our ID sales were. And as you invest in price and things like that, it can distort the top line, but you're moving -- you continue to grow tonnage.

But it did slightly improve for the year.

Market share?

Yes.

And when you're talking tonnage when we look at the IDs, you're excluding about 50 basis points from specialty pharma contribution. Is that correct or no?

Let me understand you. I don't understand your question exactly.

I thought you put specialty pharma into the comp. And I forget what quarter you did that -- it was the first quarter of last year and I was just wondering...

Yes, we started at the beginning of the year.

Yes. On tonnage, what we tried to do is just look at the absolute number of units that's flowing through our stores. So a unit of toilet paper counts as 1 whether it's a 1 pack or a club pack size. But it's just looking at the units that are flowing through our stores is how we try to track it.

Perfect. And my follow-up question is, I know you guys have been working on alternative revenues for a while. So I assume in the '18 numbers there's a chunk of that EBIT that's alternative revenues. I was just wondering if you can size how big the year-over-year gain was and how big the alternative revenues are already.

Yes. I think as we mentioned a few minutes ago, we saw really nice growth in alternative profits year over year. The 2 biggest areas, as you know, from the analyst meeting, are media and Kroger Personal Finance. And both of those 2 grew profitability by over 20% during 2018. As I kind of referred to earlier, we're still really wanting to work through what's the best way to be able to give you the full picture around alternative profit going forward. It's becoming obviously a bigger and more meaningful part of our business. As Mike mentioned, Mike Schlotman mentioned earlier, with the fuel being a headwind in 2019, we expect both what you traditionally think of as the core business an alternative profits both to be contributing to the improvements in FIFO operating profit in 2019 with a headwind that we'll face in fuel. But at this point, we're really taking a step back and determining what's the best way to really share the alternative profit story in a meaningful way for all of you and to make sure that we can connect the dots for everybody.

And if you remember back at the investor conference this year in '18, Stuart Aitken had a slide that showed the slope of the growth of alternative profit. Admittedly, it didn't have the dollars on it. But if you take a look at that slide, it shows how we expect it to continue to build over time. And as that momentum starts, you'll see even more growth out into the future.

And next question will come from Greg Badishkanian of Citi.

Great. So just a follow-up on the food inflation. You had mentioned it was 39 basis points. So I'm just wondering how much -- how'd you expect that to trend in 2019? And also, just your ability to pass that amount or even maybe greater than that in terms of [ to the ] customer?

Yes, our expectation for inflation in 2019 is relatively benign. And I would say the way it gets passed on depends a lot about where the inflation comes from. Is it in a category where we have a specific pricing program that we want to stay committed to. Or is it in a -- or in a category where it might be a little easier to pass on and others are passing on along -- passing it on along as well. So it really depends exactly where you wind up seeing the inflation, whether or not it gets passed along and how quickly it gets passed along.

Right. Makes sense. And then just with the -- a lot of discussion on the press -- in the press about Amazon opening up physical stores, how would you characterize the level of risk to larger conventional food retailers from that move? And what are kind of the things that are maybe embedded in terms of your competitive positioning and your footprint that would help to offset that?

Well, a couple of things. First of all, as you know, we embarked upon creating an omnichannel experience for our customers of almost 5 years ago now. And we're -- if you look at the feedback our customers give us, we're increasingly being able to help it -- help the customer make it easier for them to get they want. And what we find is when customers are engaged digitally, they still come into the physical store and they also spend more with us in total. So our teams have done a great job of being able to create that and make sure that we keep that customer connection and continuing to improve that customer connection. The thing that we've had for years is we have 460,000 associates out there that are just every day working hard to serve our customers and each other. The quality of our fresh product continues to get better and better and it's a competitive advantage. When you take all of those things together, and we have a lot of great physical locations that are high-quality sites that have been accumulated over several years. It's really all of those things together in terms of what will cause the customer to want to come from us, partner with us and for us to be able to give them an experience they can't get somewhere else. And very excited about where we are. And as Gary mentioned in the prepared remarks, from a digital standpoint, we would expect that to become a tailwind in 2019. Thanks, Greg, appreciate it. As always, thank you for everyone's call. As I mentioned at the beginning, we understand and acknowledge that we have our work cut out for us, and the market showed it this morning. But I want to emphasize…

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