Good morning, and welcome to The Kroger Company Fourth Quarter 2019 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Rebekah Manis, Director, Investor Relations. Please go ahead.

Thank you, Gary. 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. The 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. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question, if necessary. I will now turn the call over to Kroger's Chairman and Chief Executive Officer, Rodney McMullen.

Thank you, Rebekah. Good morning, everyone, and thank you for joining us. With me to review Kroger's fourth quarter and 2019 fiscal year results is Chief Financial Officer, Gary Millerchip. We were pleased with our 2019 results and improving trends in our supermarket business. As a result of our customer obsession and renewed intensity around operational excellence, we delivered our commitments for identical sales without fuel, adjusted FIFO operating profit, cost savings and delivered over $100 million of incremental operating profit through alternative profit streams in 2019. For the full year 2019, we delivered on the total shareholder return, or TSR, model that we outlined at our Investor Day and are positioned to deliver on our TSR model of the future, where you're using the power of Kroger's stable and growing supermarket business to create meaningful incremental operating profit through the alternative profit stream businesses, positioning our business for long-term growth that generates consistently attractive total shareholder returns. We continue to generate strong and durable free cash flow as reflected by the fact that the company has reduced debt by $1.1 billion over the prior 4 quarters and continues to increase the dividend to create value for shareholders. In total, we returned $951 million to shareholders in 2019. Our confidence that we can deliver even stronger TSR in the future is guided by our strong free cash flow and sustainable net earnings growth. By executing against the Restock Kroger framework, we are repositioning our business by widening and deepening our competitive moats. The four main areas of Restock Kroger framework, redefine the customer experience, partner to create value, develop talent, and live our purpose, continue to be a top strategic priority for us. We're continuing to enhance the customer connection with investments in our competitive moats today, which are product freshness and quality, Our Brands, and personalized rewards and our competitive moat of tomorrow, the seamless ecosystem we are building. Fresh continues to be an important driver of sales for Kroger. Our fresh departments drive trips, loyalty, and gross margin. Again, our produce department's strong identical sales for the quarter demonstrated how our store teams are focused on improving everyday execution in ways that are highly relevant to our customers. Our Fresh for Everyone campaign has been well received and is driving significant improvements in marketing effectiveness. It is also driving more trips to our seamless ecosystem in-store and online. Our Brands achieved its best year ever, exceeding $23.1 billion in sales. We introduced 758 new Our Brand items in 2019, which helps drive strong year-over-year sales lift across our portfolio of brands. Since its launch in 2013, Simple Truth has become the leading natural and organic brand in the country with annual sales exceeding $2.5 billion in 2019. After identifying plant-based foods as a key food trend well before 2019, we introduced the Simple Truth Plant Based collection in 2019, and that launch is off to a strong start. The Simple Truth brand expanded into plant-based meats with Emerge grinds and patties in January. In only one month, these products ranked third in the category for the entire fourth quarter. Our Private Selection brand eclipsed $2 billion in sales for the first time. The Kroger brand exceeded $13.7 billion in sales capitalizing on product development around key customer trends like global and regional flavors. Kroger continues to invest in digital as we build a seamless ecosystem that combines the best of the physical store experience with the digital customer experience for our customers. This is where customers are increasingly going to meet their needs. We know our customers value the greater convenience this provides, and our data shows it's a central component of driving overall loyalty. Digitally engaged customers not only drive growth through our digital modalities, they also help drive brick-and-mortar sales growth and share of wallet as well. Providing our customers with the ability to have anything, anywhere, anytime from Kroger sets us apart from a large segment of our competitors and will drive loyalty as well as our long-term growth and margin expansion. Our approach to partnerships is simple, but not simplistic. We think they work best when the two of us can do things together that neither of us could have done alone. We're roughly a year away from our first fully functional customer fulfillment center with Ocado in Monroe, Ohio. These facilities will accelerate our ability to provide customers with a seamless experience in a much more cost-effective way. We continue to be excited about the partnership. As we've shared previously, we believe Ocado's value as a partner is not just on its current capabilities, but also how quickly the company is able to innovate and serve rapidly changing consumer markets. We continue to roll out our plan, and you should not assume just large facilities. We're designing a flexible distribution network, combining disaggregated demand and proximity of our stores, medium-sized facilities, and large facilities. Our network will flex as demand matures, and the optionality will allow us to fulfill same-day or next-day delivery or pickup and the customer or store replenishment. As America's grocer, we continue to invest in our associates as part of Restock Kroger and have made significant investments in our associate wages. The investments Kroger is making in human capital is putting more money in our associates' pockets today. Our investments in associate wages have increased Kroger's average hourly rate to $15 an hour in 2019. And with our comprehensive benefits factored in, our average hourly rate is over $20, benefits that many of our competitors don't offer. We are working hard to ensure that we have the right talent, teams, and structure in the right focus areas in our core supermarket business and our alternative profit businesses. Our focus is on developing, training, and promoting internal talent while, at the same time, hiring seasoned food industry executives to drive our retail supermarket business. In addition to investing in American workers and communities, Kroger is also leading the effort to end hunger in the places we call home and eliminate all waste across the company through our award-winning Zero Hunger | Zero Waste social impact plan. We made this bold commitment rooted in our purpose because we fundamentally believe that customers, associates, and investors are increasingly choosing where to shop, work for, and invest in companies that are purpose-driven and are actively making the world a better place. In these ways, Restock Kroger is the right framework to reposition our business to create value for all of our stakeholders, both today and in the future. Our focus on the strategic drivers is expanding Kroger's competitive moats and will drive total shareholder return in 2020 and beyond. And now I will turn it over to Gary for more details on the quarter's financials. Gary?

Thanks, Rodney, and good morning, everyone. As I get started, I'd like to remind you of the key themes we shared during our Investor Day. Our model is built upon a strong and durable base driven by our retail supermarkets, fuel, and health and wellness businesses. It begins with the customer and our obsession with increasing customer loyalty. Our intensified focus on execution and continued improvements in the value and experience we deliver for our customers drive increased identical sales without fuel across our store and digital ecosystem. To drive sustainable sales growth, we continue to invest in areas of the business that are important to our customers. This includes ongoing investments in talent, price, digital, and store experience with an even greater emphasis on our competitive moats: fresh, Our Brands, and personalization, plus the moat we are in the process of building, our seamless ecosystem. We also committed to be very deliberate in balancing these investments with the disciplined execution of cost savings that simplify our business. Our full year 2019 results demonstrated clear progress towards delivering on this model and generating consistently strong and attractive total shareholder returns. Identical sales without fuel grew 2% in 2019. While first quarter results came in below our identical sales guidance range, the balance of the year came in at the top end of our guidance at 2.25%. Adjusted FIFO operating profit of $3 billion came in at the top end of our guidance range and demonstrated the strength of our multi-faceted business model with industry-wide retail pharmacy gross margin headwinds offset by strong fuel results. We demonstrated financial discipline by balancing investments in our customers, associates, and the development of our seamless ecosystem with significant cost savings. This was evidenced by our improvement in OG&A rate of 29 basis points, more than offsetting our investment in gross margin rate of 23 basis points during 2019. We achieved over $1 billion of cost savings in 2019 on top of the $1 billion savings in 2018. We also have clear line of sight to $1 billion of incremental savings in 2020. These savings are being achieved through improved productivity and automation, elimination of waste, improved sourcing of goods for sale and goods not for resale and administrative efficiencies. We also achieved over $100 million of incremental operating profit through alternative profit streams in 2019 and delivered FIFO net operating profit growth within our 3% to 5% target range shared at Investor Day. Adjusted earnings per share came in at $2.19, the middle of our guidance range. Finally, we generated strong adjusted free cash flow, which we have used to pay down debt and bring our leverage ratio to within our target range and reintroduced share repurchasing in the fourth quarter. Now I'd like to provide commentary on Kroger's fourth quarter results. We delivered fourth quarter adjusted EPS of $0.57 per diluted share of 18.8%. LIFO charge for the quarter was $36 million compared to a LIFO credit of $10 million for the same period last year. This increase was driven by higher inflation in dry grocery, pharmacy, and dairy. Our corporate tax rate for the fourth quarter was 18.2% compared to 20.8% for the same period last year. This decrease resulted from an increase in tax deductions. Adjusted FIFO operating profit for the fourth quarter was $758 million, up 20.7% compared to $628 million in the fourth quarter in 2018. Kroger reported identical sales without fuel of 2% during the fourth quarter. Several departments outperformed in our supermarket business, including produce, key beverage categories, pharmacy, and natural foods. The underlying trends in the business were strong. November and December identical sales were consistent with third quarter performance. As expected, January was negatively impacted as we lapped incremental SNAP dollars in the market in January 2019 and we experienced milder weather this year. February bounced back nicely and performed in line with our expectations and slightly ahead of the trend in the third quarter and November and December. As a reminder, we do expect SNAP to positively impact the first quarter of 2020 as we lap a 15 basis point headwind from the prior year. We expect identical sales in 2020 to improve over 2019 as we drive increased customer loyalty through fresh, Our Brands, personalization, and seamless. Digital contributed approximately 75 basis points to identical sales without fuel. Kroger pickup and delivery continue to grow at a faster pace than our overall digital growth. During the 2019 holiday season, we offered a limited time free pickup promotion in select markets. Customers responded positively to the promotion, and we were pleased with our fourth quarter digital sales growth of 22%. Gross margin was 22.1% of sales for the fourth quarter. The FIFO gross margin rate, excluding fuel, increased 6 basis points. This increase resulted from improvements in cost of goods, accelerated alternative to profit streams, and cycling of investments in the fourth quarter of 2018, partially offset by investments in price and personalization, continued industry-wide lower gross margin rates in pharmacy, and growth in the specialty pharmacy business. Our associates continue to do an impressive job managing shrink, which improved in the fourth quarter compared to last year. This represents the tenth consecutive quarter of year-over-year shrink rate improvement. While retail pharmacy gross margin continued to be a headwind in the fourth quarter, retail pharmacy remains an important part of our strategy and continues to generate good returns and strong customer loyalty. OG&A cost as a rate of sales, excluding fuel and adjustment items, decreased 79 basis points in the quarter. Part of this was due to cycling of investments in OG&A made in the fourth quarter of 2018, plus broad-based improvements in Restock Kroger savings initiatives. We were pleased with our ability to deliver OG&A improvement above the level of gross margin investment as a rate of sales in 2019, and we expect that balance to continue in 2020. Fuel is an important part of our strategy to drive customer engagement. Our loyal customers received hundreds of millions of dollars in fuel rewards in 2019 in the form of price discounts at the pump. The average retail price of fuel was $2.58 this quarter versus $2.34 in the same quarter last year. Our cents per gallon fuel margin in the fourth quarter was $0.33 compared to $0.34 in the same quarter last year. Fuel is a great example of Kroger's sourcing teams continuing to improve buying practices. This allowed us to achieve improvement in fuel cost of goods in the fourth quarter. Alternative profit streams contributed an incremental operating profit of more than $100 million in 2019. Media and Kroger Personal Finance continued to be the primary drivers of growth. Brands continue to invest in Kroger Precision Marketing because we close the loop between media exposure and store and digital sales to make brand advertising more addressable, actionable, and accountable. An annual survey by the Path to Purchase Institute gave us strong ratings for effective targeting, measurement, sales growth, and ROI. Most recently, we became the first retail media platform to be awarded Platinum Certification by the Trustworthy Accountability Group for meeting guidelines to improve transparency and prevent ad fraud, malware, and piracy. We're committed to being the most transparent media organization and making the entire digital media ecosystem a safe and effective investment for CPG brands. As Rodney mentioned, we continue to invest in our associates as a key part of Restock Kroger in a variety of ways, including investments in wages, training, and development. We ratified new labor agreements with the UFCW covering associates in Memphis during the fourth quarter. We are currently negotiating with the UFCW for contracts covering store associates in Las Vegas and Houston. Looking ahead, we have several major negotiations in 2020, including contracts with UFCW for store associates in Dallas, Food 4 Less associates in Southern California, and Fry's associates in Arizona. Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality affordable health care, and retirement benefits for our associates. We strive to make our overall benefit package relevant to today's associates. Our financial results continue to be pressured by health care and pension costs, which some of our competitors do not face. We continue to communicate with our local unions and the international unions, which represent many of our associates, on the importance of growing our business in a profitable way, which will help us create more jobs and career opportunities and enhance job security for our associates. We continue to generate strong free cash flow and are being very disciplined in how we deploy it to deliver strong and attractive total shareholder returns. We are committed to investing in the business to drive profitable growth, maintain our current investment-grade debt rating, and return excess free cash to investors via share repurchases and a growing dividend. In 2019, Kroger reduced our net total debt by $1.1 billion, bringing our net total debt to adjusted EBITDA within our target range. We also returned $486 million to shareholders in dividends and repurchased $400 million of shares in the fourth quarter of 2019 under our $1 billion Board authorization. At our Investor Day, we committed to continue to apply a rigorous and disciplined approach to capital management, and we are focused on ensuring our capital projects deliver strong returns. Consistent with our approach in 2019, the majority of our investments in 2020 will be allocated to driving profitable sales growth, improving productivity, and building out our supply chain and seamless ecosystem. We also committed to effectively manage our portfolio of assets to improve ROIC over time. As part of our review process in the fourth quarter, we recognized an impairment charge relating to the planned closing of 35 stores across the footprint in 2020. This is reflected in the $52 million of transformation costs recognized during the fourth quarter. As we have shared with you previously, Kroger made the decision to divest our interest in Lucky's Market in the third quarter of 2019, and we took the appropriate impairment charge based on the information available at that time. Subsequently, the decision was made by Lucky's Markets to file for bankruptcy in January, which led us to fully write off the value of our investment and deconsolidate Lucky's Market from our consolidated financial statements. This resulted in a noncash charge of $174 million in the fourth quarter. Kroger maintains liabilities associated with certain property-related guarantees that will result in Kroger making payments to settle these over time. These items have no effect on net earnings per diluted share or adjusted free cash flow guidance for 2020. Turning now to guidance for 2020, building on our momentum in 2019, we continue to expect identical sales without fuel of greater than 2.25%. We also continue to expect adjusted FIFO operating profit of $3 billion to $3.1 billion and adjusted net earnings per diluted share to range between $2.30 and $2.40. Looking at the cadence of EPS growth in 2020, we expect the first quarter to be below our annual EPS growth range of 5% to 10% as we cycle real estate gains in the first quarter of 2019. Overall, I'm encouraged with the momentum created in 2019, which provides a solid platform from which to deliver on our commitments in 2020.

Thanks, Gary. Before we invite your questions, I'd like to say a few words about the coronavirus. From a financial standpoint, it is too early to tell the effect on our business. It is not included in our guidance. And while it is obviously very early for this public health event in the United States, we're not seeing anything so far that would cause us to change our guidance. From a business preparedness standpoint, we have established an internal task force that has activated our pandemic preparedness plan with a focus on our customers, associates, and supply chain. We generally believe that we have limited supply chain exposure in China as the majority of the products we source is domestic. We certainly feel for those in America and around the world who have been affected. The health and well-being of our associates, our customers, and our communities is Kroger's top priority. Always being there for our communities is part of our heritage and especially in times of uncertainty. We believe everyone deserves to have access to affordable fresh food. Returning now to our business results, I want to stress that Restock Kroger is the right strategic framework to deliver both on our 2020 guidance and position Kroger for sustainable growth and total shareholder return.

Our first question comes from Robbie Ohmes with Bank of America Global Research.

A couple of quick ones. First, just on ClickList with the kind of fee waiver and the response to that and maybe some color, what happens after you put the fee back in and also what are your sort of intermediate term thoughts on keeping a fee versus getting rid of it like some of your competitors seem to have. That would be one. And then just two other quick ones, just the pharmacy expectations for 2020 and the fuel profit assumptions in your guidance for 2020. Maybe just give us some color so we can think about those things in our modeling.

Thanks, Robbie. As Gary mentioned, we're pleased with what we learned from the digital promotional offer involving the waived fee. We engaged with some new customers, and it's important to remember that this was just one of many tests we continue to conduct. Our main focus is on creating a seamless experience. Moving forward, I'm not comfortable sharing our specific plans as that could reveal our strategies to competitors. Customer behavior aligned with our expectations; they responded positively, and the results have continued to meet our expectations. It's crucial to keep in mind that our goal is to build a seamless experience, which strengthens customer loyalty. Gary, I'll let you discuss the pharmacy expectations and fuel.

Sure. Thanks, Rodney. Thanks for the question, Robbie. So yes, as you think about the model for 2020, I'll maybe refer back a little bit to some of the things that we talked about at Investor Day. We very much look at the overall customer ecosystem across our food and grocery business, retail pharmacy business, and also the fuel business as an overall how do we manage those multifaceted parts of the model. And I think if you look at our performance in 2019, as I've said in some of the prepared comments, we feel like it's a really good demonstration of how we're managing that model where, really, the pharmacy headwinds that we saw in 2019 were fully offset by the fuel benefits that we saw. And then the sort of foundational food and grocery business was pretty stable within that environment. I would say that as we look towards 2020, we'll be managing the business in a very similar way. When you think about our overall guidance for 2020, we're essentially expecting that ecosystem to be relatively stable overall, and alternative profit will drive us towards the operating profit growth that we've shared for the full year. Within that guidance, we do expect that pharmacy will continue to have some headwinds, nothing to the extent that we saw in 2019. We think the gross margin structural challenges will continue in 2020. But the team has done a great job in continuing to look for opportunities to take out costs where they don't add value for the customer, our associates, and looking for ways to improve our cost of goods where we have control over those items. And so we would expect to see less of a headwind, albeit still somewhat of a headwind from pharmacy in 2020. We would also expect fuel, obviously, to start to normalize. And so probably something of a headwind there within the overall model. And really, the way that we cycle those will be through the strength of continuing to improve our ID sales in the core and the $1 billion of cost savings that I talked about overall within the model. So overall, we think about it very much as all those moving parts creating a relatively stable core business from an operating profit point of view in 2020 and alternative profits driving the growth in the year.

Yes, Gary's last point about the additional profit from alternative profits is important to keep in mind. As we indicated in our guidance, we anticipate this will fall between $125 million and $150 million.

Next question is from Ken Goldman with JPMorgan.

I have a couple of questions. Firstly, I understand it's too early to measure the impact of the coronavirus, but I'd like to ask anyway. I would appreciate any insights you can provide. Can you at least give a sense of whether it has been advantageous in recent weeks? For example, Campbell's Soup mentioned they have seen improved orders recently from some of their customers. There have been reports of shortages of water and similar items. Based on your perspective, do you think this has provided some benefit so far, or is it still too early to determine?

Personally, I believe it's too early to say for certain. The key point is that we want to ensure we are supporting our communities, customers, and associates. Comments made by Campbell's and others indicate that we might see an increase in volume in specific categories. If you consider the essentials that people need to maintain their health, it is still very early in the process in the United States. The only pattern we can reference would be China, as it has progressed the furthest in dealing with the impacts. Our teams, stores, supply chain, and procurement are highly focused on keeping critical items in stock by collaborating with consumer packaged goods companies and our own supply chain for replenishment. Gary, do you have anything you would like to add?

I fully agree with your observation, Rodney. It’s too soon to determine how customer behavior will change and what the effects will be as the situation in the U.S. market continues to evolve. Building on some points, Ken, the data we have today shows that February has been generally in line with our expectations for the first month after New Year. We did not observe any significant deviations from what we anticipated during that timeframe. The trend has improved slightly compared to what we experienced in Q3, as well as in November and December. We'll need to evaluate the situation post-January, knowing that it would be a challenging month to compare against. As Rodney mentioned, in recent days, we've noticed that customers are beginning to spend more on essentials like water, hand sanitizer, hand soap, and paper products, as well as prepared meals and soups in response to market guidance. This has certainly led to increased activity. However, the long-term implications for customer behavior and shopping patterns remain uncertain, and I don't believe we've seen anything that deviates from our expectations over the last few days.

Totally understand. I appreciate that. Can I ask a very quick follow-up? Depreciation and amortization seem to be a little bit higher than most people were looking for this quarter. Gary, can you help us understand or think about how to model that for 2020? What numbers do you have in your internal models?

Yes, thank you for the question. It is an area where we experienced some fluctuations during the year. This is partly due to our ongoing adjustments in capital allocation, leading to a different average lifespan for some of our technology investments compared to more traditional investments like store remodels or new openings. We continue to invest in those traditional areas, but the mix is certainly evolving over time. As things stabilize, we anticipate an annualized increase in depreciation of around 3% to 5%, which should help provide a broader perspective on how to approach 2020.

The next question is from Rupesh Parikh with Oppenheimer.

I want to revisit your comments, Rodney, regarding Ocado and the flexibility beyond assuming large facilities. Could you elaborate on the flexibility you have in selecting different facility sites and how you're planning to approach that flexibility in the future?

Yes. As we've discussed previously, we genuinely believe that it will ultimately be a mix of our physical stores and various sizes of facilities, including small, medium, and large. So far, we've only announced large facilities. However, over time, Ocado continues to invest significantly in research and development and is consistently progressing. We anticipate it will be a mix of store-based models, smaller facilities, and larger regional facilities, with Ocado playing a vital role in that entire ecosystem. Having this combination will also enable us to achieve the best cost of goods for the different facilities while utilizing all the assets we currently have. We're quite optimistic about the components we are assembling. We truly believe this will support our capability to offer both same-day and next-day services. We've noticed that in some instances, customers prefer same-day delivery, while others prefer next-day. We're excited about the impending opening of our facility in Monroe, and the second facility in Florida will open shortly thereafter.

Great. I have a follow-up question. You announced the closing of 35 stores. Is that the right way to consider the pace going forward? Could you explain the reasoning behind these store closures?

Thank you for the question. I've mentioned some of this during the Investor Day and in my prepared comments. Our focus is to take a comprehensive look at the performance of our asset portfolio. We want to ensure we're making the right investments to accelerate our business growth while also identifying opportunities to optimize our portfolio and enhance our return on invested capital over time. This review is quite thorough; we're examining stores, most of which are about 28 years old, and are spread across various regions rather than focused on specific markets. It's about understanding our portfolio better and where customer preferences are heading so we can allocate our resources effectively. We aim to be disciplined in our investments targeted towards future growth and in evolving the entire customer ecosystem, as Rodney mentioned earlier. As we manage the business, we are committed to making thoughtful decisions that will help us improve and optimize our operations.

The next question is from Kelly Bania with BMO Capital Markets.

I wanted to discuss alternative profits and where trade promotion dollars were allocated for the year. In your conversations with CPG, have you noticed any indications of cannibalization or plans for cannibalization as this situation evolves? I would like to hear your updated thoughts on this.

Yes. I'll talk broadly, and then I'll let Gary get into the specifics. It's one of the reasons that we partner on the media side of the CPGs, and one of the things that we have a very open and transparent relationship going both ways. So we don't want to spend money on media if the CPG isn't getting a return for it. And that was the reason why we thought it was so important to get the Platinum Certification from the Trustworthy Accountability Group, is that we want to make sure that when we invest the CPG money, that we're able to show that they get a return for it. And by making sure that people are getting a return, that's the best protection, to make sure that they're just not moving trade dollars over. We tell the CPGs it doesn't do us any good if you just move the trade dollars over. What we're trying to do is provide something that you can't get in the marketplace from a media standpoint. We're getting great feedback from the CPGs. We have an incredibly high retention rate, and many CPGs continue to expand the amount of money they spend with us.

Thank you, Rodney. I completely agree with your points. One of the main areas our team is concentrating on is fostering collaboration between Stuart Aitken's media group and Joe Grieshaber's merchandising team to ensure we effectively manage all the various components together. We are pleased with how these relationships are functioning, enabling us to capture revenue and assist our CPG partners in growing their businesses through our merchandising efforts and alternative profit streams in the media sector. We do not see any issues with how these areas are being managed; they seem to be distinct categories that are generally assigned to specific activities. We are optimistic about the advancements we are making, particularly concerning how rising costs for goods affect our gross margin. This was highlighted in this quarter's earnings report, as we continue to invest in pricing and personalization for our customers. The advantages from cost of goods and alternative profit streams have effectively balanced the impact on gross margin, contributing to our solid performance in that area this quarter.

That’s very helpful. Since we were discussing gross margin, I have another question regarding pharmacy. It seems that the challenges there should lessen somewhat compared to last year as we look into 2020. What are your long-term expectations? Will this issue eventually resolve, or is this likely the new normal?

I think certainly, our assumption in the model is that we expect to continue to see pressure in certain parts of the way the pharmacy business is structured. Our focus is on really making sure that we're continuing to improve our operation in a way that ensures that, in addition to all the great things that our pharmacy business do for us today around driving overall customer loyalty and delivering a great experience in the store for customers, that we continue to evolve the way we think about the business model. I mentioned some of the things in one of the earlier comments around how we're taking costs out of the model where that makes sense and doesn't create value for our associates working in that part of the business or for our customers. We've launched a number of new services, like Kroger's pharmacy program that allows us to be able to deliver more value for the customer, but also to be able to influence more of the dynamics of how the profitability works in the marketplace and really to deliver more value for customers through that program. And then I think the third piece that we talked a little bit about, I think, on a previous call is we truly believe that the power of our data and the overall relationship that we have with the customer potentially opens up opportunities to develop new revenue streams in connecting food to how we deliver our health and wellness services in the store, so thinking about the trend towards food as medicine and how can we connect those relationships even more clearly to help our customers live and eat more healthily when they want to do that, but also to connect into the healthcare system and helping to take out some of the cost and complexity in that model and generate new revenue streams.

We are actively testing where food is actually written under a prescription and helping people live healthier. When you look at all of that together, we continue to have great scripts count growth as well. We really think it's our pharmacy teams and their connections with the patients that's creating that deeper relationship. And as Gary mentioned, when you look at the overall ecosystem, half of health care costs can be affected by the way people eat, and we really believe, with our data, we have the right to help people eat better.

The next question is from Edward Kelly with Wells Fargo.

My question is about the past year and how your business has evolved. Your stock moved from $30 to $20 and back to $30. In this quarter, even after excluding the benefits of one-time laps, FIFO EBIT was up despite challenges with fuel. However, you've faced difficult quarters in core grocery. Have you turned a corner? What is your confidence level? I'm interested in your overall thoughts on how things have changed over the last year and your current confidence in the business.

Thank you, Ed. Overall, as previously mentioned, we feel really positive about the progress and momentum throughout the year, particularly in terms of identical sales and operational execution. Mike and the entire team have done an excellent job in these areas. We are dedicated to taking care of our customers and are continuing to invest strongly in creating a seamless experience. The alternative profit is also performing as we anticipated. When we consider all these factors, they give us the confidence to maintain the guidance we provided in November of an EPS of $2.30 to $2.40. We expect the business to keep generating significant cash and strong free cash flow while simultaneously investing capital in enhancing the seamless experience. Looking back on the last two or three years, we have been diligently working to transform our core business model and believe we have made substantial progress while continuing to invest in our future digital initiatives. We are enthusiastic about our current position and even more excited about our future direction.

Okay. And I just wanted to ask you a question about share repo and expectations for 2020, especially Q1. I mean Q1's a big cash flow quarter. It seems like share repo is back on. Historically, you bought a lot of stock in Q1. Just thoughts on how we should be thinking about that in the coming years for modeling?

Yes. Thanks for the question, Ed. So obviously, I mentioned a little bit around this in the prepared comments. We committed that as we continue to see strong free cash flow generation, which is a core part of our total shareholder return model, we are committed to continuing to buy back stock as part of the model. As you know, we had a $1 billion authorization from the Board. And as long as we continue to deliver on the performance of the business that we expect and generate the strong free cash flow that we've guided to during the year while also maintaining our debt-to-EBITDA ratio within that target range to support our commitment to our investment-grade rating, we would expect to be continuing to buy back stock within the overall authorization that we have. I would say that the way that we're approaching it is very much in a structured way. We're not specifically trying to time the market in some way. It's much more based on a grid approach to how we determine and look at the intrinsic value of the stock. And then we'll put a grid in place to make sure that, over time, if there are opportunities to buy back, we will certainly be executing on that plan throughout the year.

The next question is from Christopher Mandeville with Jefferies.

I guess as it relates to some of the expense control measures found within Restock, can you flesh those out a little bit more specifically? How much of this is related to possibly some headcount reductions at the store level or even some reductions in store hours for that matter? Reason why I bring it up is because we have been hearing certain regions have seen some layoffs at the assistant store manager level, and there's been some reductions in hours of operations. So maybe you could just kind of talk about that a little bit and then to what extent maybe some of those reductions are being offset by wage increases that you're putting forward to your associates.

Sure, thanks, Chris. As we noted in our prepared comments, the fourth quarter results reflected an increase in investments made in Q4 2018, which we anticipated and had included in our EPS expectations for 2019. We're observing improvements across a range of activities with Restock Kroger. Some significant areas include better sourcing of goods not for resale, where we're finding efficiencies in procurement practices across the organization. We're also utilizing technology and automation to streamline tasks that don't add value for customers. For instance, cleaning can be done more effectively, allowing our associates to concentrate on customer service. Additionally, we previously announced structural changes to simplify operations in our divisional offices, bringing our associates closer to customers in crucial management roles and reducing redundant work for quicker decision-making and better service. We are optimistic about our approach to managing costs. Regarding our store performance, building on Rodney's comments about confidence in our model, we're excited to see our stores executing at a higher level and making progress in fresh offerings, customer experience, and our inventory availability with Kroger pickup. We are committed to ensuring our stores are well-positioned to meet customer expectations, which contributes to our confidence in projecting higher in-store sales in 2020, thanks to the dedication of our store associates.

Okay. And then just my follow-up, it's maybe a little bit too early. But in the areas where we've seen some of the natural organics, not named Lucky's shutter, and then with Ahold Delhaize pulling Peapod out of the Midwest, have you realized any benefits already? Or maybe you could just talk about how you're planning to be positioned to capitalize on the share being up for grabs?

Yes. Thanks, Christopher. If you look at natural and organic, it continues to be one of the highest growing areas. And we really think it's something that, over the years, our teams have done a great job on continuing to make sure we have the most recent product things on trend. The example that I talked about in the prepared remarks in Simple Truth and plant-based. So for us, we're incredibly excited about natural organic. It's grown above the company average for several years, and we would expect it to continue to do that. Anytime market share becomes available, we're going to fight for making sure that we get our fair share plus some. And we certainly feel good about what we're getting, and we'll continue to focus on taking care of our customers. Because when our associates are able to take care of the customers, it turns out really well.

The next question is from Simeon Gutman with Morgan Stanley.

Rodney, you mentioned on the free pickup that you were pleased with some of the customer satisfaction, I think. Can you tell us, was it a reasonable assumption? Or did you assume that your business would accelerate offering that feature? And was that the case? Did your overall business grow because of it?

Yes. It did pick up. And as I mentioned, we did get some new customers. Overall, it was kind of what we expected it to be, and we did it so we can continue to learn. And I think the thing that's important is at any point in time, we'll probably have 20 or 30 different types of tests going on. And the key will be identifying those tests, when you put them together, that create something that's not easily that a competitor can duplicate and it really creates something new for the customer. One of the things that's always our strength is our incredible strength on fresh product. Our customers tell us that relative to our big traditional competitors, we score very well. And we think things like that and the service that our associates provide is equally as important.

Yes. And I guess just checking on some websites, it looks like it's still being offered. I think you may have mentioned you're not going to divulge if that's your strategy. And just tied to it, Ocado, broadly. And I guess, it's early but you still haven't opened the first facility yet. But do you think in this world of click and collect and delivery, that this Ocado model, you could be able to offer these services for free as table stakes and still have pretty good economics on doing those type of fulfillments?

Yes. We believe that by integrating Ocado with our existing physical stores, we can create an exceptional customer experience and convenience tailored to their needs. The fee aspect is not the primary factor in determining the economic viability of this model. Whether we choose to implement a fee will ultimately depend on the market opportunity. However, Ocado operates with remarkable efficiency.

And our final question today is from John Heinbockel with Guggenheim Securities.

Rodney, if you think about the $1 billion of cost saves, right, and the core business ex alternative profit being flat, do you think about that $1 billion going to cover normal inflation in OG&A and then investments in the business, would you think that would be a 50-50 split in terms of how that $1 billion gets spent? And then do you think there's another $1 billion more or less in 2021?

Yes. I'm trying to calculate in my head as you asked the question. We certainly believe there are opportunities in 2021. We haven't conducted an in-depth analysis to specify what that number might be. One interesting aspect of cost savings and process changes is that the more we learn about them, the more we discover. So, we are very eager to continue identifying ways to simplify our business and eliminate complications, which results in cost savings each time we do it. As for the spending split, I wouldn't say it would be exactly 50-50. Our aim is to ensure that we achieve the total shareholder return we outlined in November at our investor meeting. The cost savings, combined with ongoing enhancements to our seamless customer experience becoming a larger positive factor, all contribute to our confidence in meeting the commitments we made regarding total shareholder return. I don’t know, Gary, if there are any specifics you'd like to add?

I agree with your points, Rodney. Regarding cost savings, as you mentioned, many opportunities we see lie in how we can use technology more effectively and simplify the design of the work to help our associates succeed in their roles. This often involves reinvesting in other areas of the store experience and the digital experience. As a result, it doesn't always lead to total cost savings because we're frequently redeploying those savings to enhance the experience or to better meet customer needs. So, referring back to Rodney's comment about distinguishing between inflation and incremental costs is becoming more complex as customers' minimum expectations evolve along with average wages in the marketplace.

And then just lastly, maybe just talk to how the Walgreen partnership is ramping up on the procurement side. And does that become a much bigger driver of part of that $1 billion later this year and even bigger next year?

Yes. Thanks for the question, John. That's a good point. It’s very accurate to characterize it that way. We have just begun to explore this aspect of the partnership. The retail test we’ve had in the market has been running for a while, and we are pleased with the progress we’ve made. We are continuously refining our approach to better connect with customers and enhance their shopping experience. The group purchasing organization aspect is still in the early stages. We’ve just started identifying potential opportunities, which will definitely contribute to our momentum into 2020 and beyond by driving greater efficiency and cost savings.

Thanks, John. As always, before we end today's call, I'd like to share a few final comments directed to our associates and how we live our purpose every day. To our associates, thank you for everything that you do for our customers, communities, and each other every single day, every single hour of every day. You truly make a difference. This difference makes people's lives better, and this was obviously incredibly evident earlier this week when the devastating tornado touched down in Nashville. I'm always amazed and proud to hear stories of our associates pulling together in the aftermath of events like this. One story that was shared with me is some customers that didn't have protection came to our store to seek shelter inside of our dairy case when the tornado hit, and that's just one example. And the thing that's even, to me, more impressive is what our associates do, what you do when your own families are personally impacted, and to all the work that you do to ensure our stores are open and serving our communities. As I mentioned earlier on the call in regard to the threat of the coronavirus, always being there for our communities is part of our heritage. This is Kroger at our best, when we come together and uplift our customers, communities, and each other. Thank you for what you do for everyone every day, and thank you for joining our call today.

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