David B. Dillon: The two that we did we are pleased with the results of both of those and where they are tracking. We are starting now to focus on the remodelling of those stores and that is when it becomes special for our customers and associates.
Meredith Adler (Lehman Brothers): 18 months ago at the analyst meeting you gave a slide that looked at customer perception of areas that were important to you. There were four of them in total. What customer research says now about all those things beyond price?
David B. Dillon: The other three that we talked about was people, shopping experience, and products. On all three of those we continue to make progress relative to our traditional and non-traditional competitors. Internally, we are not making as much progress as we would like to be, but if you look at where we are, we are making progress.
Meredith Adler (Lehman Brothers): Do you believe that you are taking share back from Wal-Mart in any of these markets?
David B. Dillon: Our market share in the markets where Wal-Mart has gained a one, two or three share for the last several years has increased and my personal view of where we have gained that share and the way in which we have looked at it is the same as it was last year and the year before that. What is happening in those markets is that both Wal-Mart and Kroger are taking that share from other sources. That is not true every place, but that is true in the bulk of the situations. I do not see us as taking a share from Wal-Mart, I see us taking it from the other traditional and some other non-traditional grocers that are out there.
If you look at the traditional companies that track these sorts of things, and we look at AC Nielsen, for instance. What we see there is remaining, what they call remaining food, which would exclude us and exclude Wal-Mart. That continues to decline year after year. I think that’s mostly where it’s coming from.
J. Michael Schlotman: Last year there were 32 major markets where Wal-Mart was at least third of our major markets at and this year that increased by two to 34. That statistic would lead you to believe that they continue to either grow sales in their existing boxes and/or build new boxes to move up into more markets like that to at least a number three position.
Meredith Adler (Lehman Brothers): You talk about 65 new Wal-Mart stores. Would you say that the majority of those are in markets where they are not yet fully established?
David B. Dillon: I do not know the answer to that. Sixty-five is a lot of stores and so there are a lot of places. They have opened a lot of stores around the Cincinnati market in the last couple of years.
Meredith Adler (Lehman Brothers): You have already commented that you are seeing a slow down in some of the discretionary categories and yet you are still excited about the marketplace stores. Do you have any concern that those stores are going to start out more slowly in the next year or so?
David B. Dillon: While those products may be down on the whole, or at least less than the growth that we were experiencing in some of them, they still are an opportunity for us. I am not at all discouraged about that.
Meredith Adler (Lehman Brothers): CPG inflation is a tailwind, but the perishable items and more commodity items, are you managing gross profit dollars more than you are managing gross margin and does that have the potential, just mathematically, to make your gross margin percent go down?
David B. Dillon: I suppose mathematically. That gets to be hypothetical, but mathematically it certainly could do that. What we are looking at making sure we maintain the penny gross. We are also looking at the percentage gross. Most importantly we are looking at the balance of where our financials come out because we are trying to balance where we end up on gross margin investment and where we have found savings in OG&A. Or if you prefer, our total cost on one side and our selling gross on the other. We take all of our pricing into account on that, including the inflationary environment.
Ed Kelly (Credit Suisse): Gas has been relatively neutral this quarter. Is that a fair assessment?
David B. Dillon: From our perspective, in the fourth quarter it was positive versus the overall year. If you look at it for the year it was almost exactly where we expected it to be and consistent with 2006 when you look at it for the whole year.
Ed Kelly (Credit Suisse): Gas prices right now are rising. They increased for almost the entire first quarter last year as well, so it seems like the comparison is not difficult there. Is that true?
David B. Dillon: We would not give any additional insight on that.
Ed Kelly (Credit Suisse): Your level of spending increased in 2006 and 2007. Did you give an outlook for 2008?
J. Michael Schlotman: It was in the 8K we filed today and we gave a $2 billion to $2.2 billion range.
Ed Kelly (Credit Suisse): How do you think about the level of spend that you are undertaking right now versus a normalized rate of spend?
David B. Dillon: There are two things out there. One is we have been happy with the remodels that we have done. They continue to generate a return above our expectations, which we believe always winds up meaning that we have made a good choice with the use of our shareholders money. The returns on our new stores, which a few years ago we were disappointed with, continue to improve. If you look at the guidance we gave today as well in the number of new stores and back out the number of acquisitions we had from our store count in 2007 it has an increase in the number of new stores in 2008 as a result of our improving returns. There are a few more marketplace stores in that number which causes the square footage growth to be higher than we have been tracking.
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