John Heinbockel (Goldman Sachs): Do you think you will start to get some pressure on labour costs because of contractually higher wage rate increases?
David B. Dillon: Wages are a product of every individual market and that market’s conditions. Every contract would be different as to what contractual obligations there would be on wages. There is always some pressure on wages, but the issue over the last several contracts in many markets has been we have had to find a way to reduce the ongoing cost of pension and some of the health care costs that were built into the contracts in order to afford the higher wages that the company even wanted to pay. I do not see the wage picture particularly changing with this inflationary environment, even though the inflation we described at 3.8% is higher than what we have seen for many years. It is still what I would characterize as still moderate in long traditional terms.
John Heinbockel (Goldman Sachs): When we had inflation in the past we saw a lot of forward-buying activity. Do you see that again or do you think there is an increase in consignment to keep working capital under better control?
David B. Dillon: We already saw some increases in forward buy in the year and in the quarter. It is not the biggest reason, but it is one of the reasons that our inventories are higher on the balance sheet because we are deliberate about it as we see costs go up of making sure we have made a conscious choice of how to buy products best to reduce the cost for our customers, therefore reducing the retail price for the customer.
John Heinbockel (Goldman Sachs): In this market the price of elasticity is higher and you get more bangs for your buck by investing more. How do you look at that as a balance?
David B. Dillon: The customers do notice on some products as inflation draws the price out. Milk was the best example last year. We have talked about it all year long where a tonnage or gallonage in milk actually suffered because of the inflated price. We remain competitive and a couple of times during the year we were more competitive than what the costs would have ordinarily provided. Generally speaking, we have been able to pass through cost increases as we receive them and that is our objective and that has been successfully done. For the most part, you have heard a lot of the national brand vendors talk about their volume, their tonnage does not seem to have been impacted by that. Our tonnage has been strong this year and even when you take inflation into account our identical sales were strong. We were pleased with the year’s outcome. The price elasticity depends entirely on what the items are and how much they go up and we are conscious of what our customers see in pricing. Our investment in pricing is going to be based on what we think the customers want, what we think we can afford based on our cost structure, and what we think will produce sustainable results. We are trying not to put money into promotional practices that are not sustainable. We are trying to do things that we can do for a long period of time and that will sustain our sales for a long period of time.
John Heinbockel (Goldman Sachs): What LIFO charge is in your guidance and corporates?
J. Michael Schlotman: Similar to this year.
W. Rodney McMullen: Overall we expect an improving operating margin and we would expect that would continue this year as it has been in the past for a strategy.
Karen Short (Friedman, Billings, Ramsey and Company): There has been a lot of discussion about generics in general. What the negative impact of generics is on your identical store sales and on the flip side the positive impact on gross margins?
David B. Dillon: In pharmacy we have tracked the change from the patented prescriptions to the generic prescriptions as everyone else has. We would characterize that shift for us in the same ball park as what you have heard from other retailers in the same sector.
W. Rodney McMullen: When you look at pharmacy by itself you can see the improvement in margin, but by the time you look at the total company results it gets blended across all departments.
J. Michael Schlotman: It would help percent, the dollars would be different because the dollars on the sale are much lower, but the percent on a generic item like that is much higher.
W. Rodney McMullen: By the time you look at total Kroger it does not have much of an influence relative to that.
Karen Short (Friedman, Billings, Ramsey and Company): What would the impact of the extra day in this quarter be on your comp?
David B. Dillon: There is no extra benefit of an extra day for us. The way the calendar works for us, every few years we have a 53rd week as we did in 2006. The reason we do that is to adjust for that leap day every few years. We have the exact same number of days and weeks in our totals for the first quarter of 2008 as we would have had last year. More importantly, as we give identical sales we always make sure that there are a comparable number of days and weeks and we adjust for those kinds of things.
W. Rodney McMullen: Our 52-week years have 364 days and the 53rd week year to catch up to the calendar versus our fiscal calendar, they will have seven more days.
Karen Short (Friedman, Billings, Ramsey and Company): What are you seeing in the acquisition landscape?
David B. Dillon: It would be similar to what we have said for the last several years. We continue to see availability. Pricing expectations are not consistent with what we think the economics work as a general rule. Last year we were able to acquire almost 40 stores in a couple of different markets but we continue to look at several opportunities and at the right price we will deal with it.
Chuck Cerankosky (FTN Midwest Securities): Did you have wild food purchases last weekend a head of the snowstorms in Cincinnati?
David B. Dillon: Yes. We did have a snowstorm across this part of the country and it does give us a good strong sales boost for those couple of days. If you went in right after the snowstorm you would see some holes in place of soup and milk and some places like that. I was in stores on Sunday, which was the day after that, and we had recovered well.
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