Good day ladies and gentlemen and welcome to The Kroger fourth quarter 2008 earnings conference call. My name is Erica and I’ll be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Miss Carin Fike. You may proceed.

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 continued 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 www.kroger.com. Now I will turn the call over to David Dillon, Chairman and Chief Executive Officer of Kroger.

Thank you Carin and good morning everyone. Thank you for joining us today. With me today to review Kroger’s fourth quarter and full 2008 financial results are Rodney McMullen, Kroger’s Vice Chairman; Don McGeorge, Kroger’s President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer. Today we reported solid results for the fourth quarter and outstanding results for the fiscal 2008. The Kroger team did a remarkable job throughout the year of consistently delivering results in an environment that was more difficult than we assumed when we set our original guidance. Our performance during the quarter was solid in an environment that was uncertain. Total sales were $17.3 billion compared to $17.2 billion for the same period last year. If you exclude fuel sales at our supermarkets and convenience stores, total sales increased 4.4% over the prior year. Keep in mind that the retail price of gasoline fell considerably in the past year. In fact, the average retail price of a gallon of gas sold at Kroger’s fuel outlets was 41% lower than it was in the fourth quarter a year ago. Our fourth quarter identical supermarket sales without fuel increased 3.8%. Several departments posted identical sales well above the company average including meat, grocery, nutrition, pharmacy, and deli bakery. Strong sales in these areas were tempered by continued slowness in sales of discretionary general merchandise. We’re finding that customers are basing their purchasing decisions more on what they need versus what they want. And we are addressing their needs in a variety of ways. Our efforts to help customers and their families navigate this tough economy are driven by our Customer 1st Strategy. As a result, we offer customers a unique combination of values no other competitor can match. We believe many of the…

Good morning everyone. As Dave mentioned we are very pleased to deliver value to both our customers and shareholders during this difficult economic times. We firmly believe our ability to do so is the result of the sustainability of Kroger’s long term Customer 1st Business Strategy and our flexible business model. Our strategy, which is unlike any other operator in our industry, allows us to consistently deliver solid near term results for our shareholders. At the same time, it enables us to invest in Kroger’s future growth. Since it is a long term strategy, I plan to spend most of my time discussing Kroger’s full year 2008 results but first I’ll share some additional color on the quarter. Kroger’s fourth quarter net earnings were $349.2 million or $0.53 per diluted share. This compares with net earnings of $322.9 million or $0.48 per diluted share in the same period last year. The strength of our core grocery business drove this solid year-over-year earnings growth. In the fourth quarter Kroger’s retail fuel operations had minimal impact on total earnings per share. We did benefit from a LIFO charge that was $13 million lower than the same period last year. Note that this lower year-over-year LIFO charge does not reflect lower food inflation rates. Rather it reflects the timing of LIFO expense recorded throughout 2008 compared to the timing in the prior year. Heading into the fourth quarter we had a better understanding of the timing and the amount of the settlement related to a Visa-MasterCard lawsuit associated with interchange fees. This prompted us to accelerate certain planned 2009 price investments to offer customers additional value during the holidays. The after tax benefit of $11.7 million we realized in December is a result of this settlement offset the cost of these accelerated price…

Thanks Rodney. Before we take your questions I want to offer some additional thoughts on what we’re seeing so far this year. Though shoppers are more cautious than they were even three months ago we remain optimistic about 2009. It is clear customers are relying on Kroger because they trust us to deliver low prices, great quality products, friendly service and a pleasant shopping experience, all of which continue to improve. We understand what customers need in this environment better than others and we offer an overall value proposition that meets their changing needs. We look forward to continuing to deliver value to our customers and shareholders in 2009. Now we’d be happy to take a few moments for your questions.

(Operator Instructions) Your first question comes from Karen Short - Friedman, Billings, Ramsey & Co. Karen Short - Friedman, Billings, Ramsey & Co.: Just a couple questions on expense control opportunities. I know you talked about that a bit on your last call and you had some time to kind of put some more thought to it so I’m wondering if you could give a little more color on what you think the opportunity is from you know a dollar perspective and when you think we could expect to see some progress.

I’ll be happy to. I won’t give you a specific dollar amount as a target but I will tell you that in the fourth quarter we saw clear improvement and I’m feeling much better about where we are on our expense control. And it may not on the numbers that we’ve given you it may not at first appear that way. If you look at our OG&A for the quarter we declined 3 basis points I believe and if you adjusted that for Visa-MasterCard it would have been flipped the other direction. We recognize that you have to think of it that way but what’s not included in OG&A and it’s the hazard of the way in which accounting records are kept, we tend to look at total costs as total costs. And so we look at shrink and warehousing and advertising and transportation and all of those, too. And we did indicate and you can see the difference between our selling gross and our FIFO gross. That essentially represents – not entirely I suppose but it’s essentially the improvement we made in warehousing, transportation and shrink. Those numbers combined with what we did in OG&A is meaningful progress from the third quarter. So that’s the basis of my optimism. Now as we look forward, though, we have worked on and did see in the quarter and expect to see this year better control of expenses. We do expect to have healthcare issues that are problematic. What’s driving the healthcare by the way is we have more people on our plan. We’ve mentioned that we’ve added employees. We’re growing our business. We have more people, more lives covered. Turnover is a little less and with lower turnover you have more people eligible for the healthcare that we offer. That gives you more people with lives covered. The utilization of healthcare is up a bit and we’ve had some unfortunate catastrophic events, both in the third and fourth quarters. So the healthcare numbers are as I said problematic. But expense control generally I think is making good progress. We’re seeing of course in a lot of the supply areas that are affected by fuel, [bag] costs and some of those kinds of areas. We’re starting to see some improvement there. And then finally and maybe most important for the long run is we have over the last couple of years begun implementing some process change improvements that we think improve – that they do improve productivity and our objective is clearly to save money on those items in places that really don’t matter to the customer, to invest it in areas like prices but other investments in the other keys as well that do matter to the customer. So that’s the reason, Karen, that I’m optimistic and actually feel pretty good about the progress we made in the fourth quarter and expect even more in 2009.

Looking forward I think all of us see more opportunities and it’s just a matter of prioritizing those and actually executing against those. But certainly no lack of excitement in terms of opportunities that we see. Karen Short - Friedman, Billings, Ramsey & Co.: And then, just wondering if you have any comments or color on divisions geographically that are performing exceptionally well. Were all divisions positive from an [ID] perspective?

We’re not going to give individual numbers for divisions or for regions, but I think it would not surprise you. Maybe a couple of things to note on sales would not surprise you that we had certain parts of the country that are harder hit in the economy whose sales would have suffered a little bit more. Those were problematic. And as we mentioned the discretionary general merchandise kinds of products were harder hit in the fourth quarter too. And in fact if you want to think about sales just for a minute, our biggest division for non-foods would be Fred Meyer and so we did just a little math to look and see how impactful were some of the discretionary general merchandise categories. And if you take just Fred Meyer’s business and take the discretionary general merchandise out, and that’d be most of the non-food. It would not exclude the health and beauty care for instance but it would include most of the non-food that they sell and they are a big seller of this merchandise. The change in that business, if you take that out of our fourth quarter, it would have increased our [idents] without fuel about 40 basis points. So our results would have been about 4.2% without fuel instead of the 3.8. So I guess what I’m trying to describe is that our sales were clearly impacted by specific kinds of things but we saw good signs of progress in sales in the quarter in many of the departments and most of the divisions. We called out specifically meat, grocery, nutrition, pharmacy, deli bakery. Those were all doing very well and better than what our averages were. Karen Short - Friedman, Billings, Ramsey & Co.: And then just lastly –

Karen – Karen before you move on just – Dave may throw something at me, but 17 of our 18 divisions were positive. And the one that was not was only slightly negative so it was pretty broad across the whole country. Karen Short - Friedman, Billings, Ramsey & Co.: Okay. Great.

I guess Rodney’s a softie. I wasn’t going to tell you that. Karen Short - Friedman, Billings, Ramsey & Co.: And then just the last question is do you have any comments on the like on EPS – cadence of EPS, consensus EPS throughout the year? I mean obviously the growth rate isn’t totally even. Just wondering if you had any thoughts.

Rodney, do you have any insight into that? Mike? You might need to repeat that question. I’m not sure I understood it fully, Karen. Karen Short - Friedman, Billings, Ramsey & Co.: Well I was just wondering from a growth rate perspective as you look through first quarter through the fourth quarter earnings growth rate perspective, do you have any color on maybe some quarters being lower or higher.

For ’09 going forward? Karen Short - Friedman, Billings, Ramsey & Co.: Yes.

Okay. I misunderstood. I thought you were looking back to ’08.

It should be a lot smoother this year than last year. I wouldn’t expect wide variances between any one quarter from our average annual growth rate. There were a couple of things that affected ’08 that can make ’09 difficult to compare to, the timing of our LIFO expense as well as the fuel margins in the third quarter can make that a little bit softer than the rest of the year. But overall it should be relatively steady and not wild variations off of that mean.

Your next question comes from Edward Kelly - Credit Suisse.

Could you maybe discuss the cadence of your ID’s throughout the quarter and then into February and March? And did you see any improvement from sort of December, January into February, early March? And maybe could you break that out by traffic and ticket?

Yes. I’ll give you a little color onto that. Through the quarter as we progressed into the holidays our sales growth – the rate of sales growth declined just a little bit so that the Christmas, the month of December was a little worse. We don’t do it exactly in months but we do it in periods. But the month of December was a little bit worse than where we trended in November and the month of January trended a little bit less than where we did in December. If you look then at the month of February – now I’m just taking four weeks instead of five weeks, we had some improvement. And the reason I’m taking the four weeks instead of five weeks is last week which would have been the fifth week had some weather affect last year that could screw the data up a little bit in terms of understanding what it means. But the picture I wanted to give you is that in through the holidays and immediately following the holidays it’s our view that the consumer was more cautious and I think that showed itself in our sales. In February we saw a modest improvement – I won’t say slight, but a modest improvement. And so there was some regaining I think of confidence perhaps in how they were approaching spending. But you can see with us giving you the guidance we did on ID sales that we think two things are occurring. One is the customer as we go into this year is more cautious. And second is that our view of inflation is a little bit lower than what we had given in December. Both of those are quite relevant. As to the back end of your question about average sale and number of visits, we’re actually seeing - in our actual store data, we’re seeing an increase in traffic and we are seeing an increase in the average sale and this is the fourth quarter, increase in traffic and an increase in average sale but the increase in average sale per customer per transaction is actually at a lower rate than what we had been experiencing before. If you look at our data, our customer loyalty data, what we’re seeing is an increase in the number of loyal shopping households and among the loyal shopping households we’re seeing them shop more often with us. Even though the number of items that they may buy in any one trip is not increasing particularly, the number of trips per household is. So that’s an overall picture and then when you add in the four weeks that I described February where we seem to have picked up a bit in the sales, it gives me the feeling that the consumer is not quite as cautious as we saw in December but still nonetheless perhaps more cautious than they were throughout ’08.

I think the other thing that’s difficult to say that during the holidays there was five less shopping days between Thanksgiving and Christmas and that certainly created some swings that we wouldn’t normally see. And how much of that effected the overall sales results is hard to say.

Yes. That’s a good point Rodney.

Now you had mentioned that you’re current ID’s are running in line with the full year guidance that you’ve given. I would imagine that the lower inflation that we’re going to see is much more back half weighted so does that mean that traffic has to get better in the back half for you to continue with that rate? Is that how we should view that?

I don’t think I would view it that necessarily traffic has to get better but I think our overall business whether – we look at households. And we need to grow more households and we need to grow what those households buy from us. And if we do that, then we’ll be just fine. Now whether it shows up in more traffic or whether it shows up in more purchases per visit is hard to say. Part of that depends upon gas pricing for instance. I think one of the reasons that we’re seeing a few more visits right now than we did before was that gas prices are now under generally under $2 a gallon. Where when it was well over that I think people were even trying to, you know, one week shopping trips kind of thing. Stock up at a point. But now they’re a little bit more willing to come in. And of course with the gas at our stores it helps them, too. But it’s a little hard to read. So I would not put it all on just more transactions going forward.

You know there’s a number of things taking place on the gross margin side this year that should help. I mean just less inflation, increased private label, maybe even more promo dollars from vendors. How should we think about the implications of each of these on your non-fuel margin? And what’s the probability that these benefits get reinvested back into lower selling prices?

Well, we’re going to balance of course what ends up being our gross margin by what we can on one hand gain on some of the issues that you described; selling more Kroger brand as one of the examples that you gave. With what we can save in lower cost of product we’re going to take those savings and we’re going to look to what we do in our OG&A and our other costs, the shrink and the advertising and warehouse and transportation. And then we’re going to determine how much of that can be reinvested and where. Certainly in this environment a reasonable amount of that gets reinvested in price because this is an environment where price is more important. But that’s not the only key that we’re dealing with. We also have the other three keys and we’re investing in all four keys during the year. And it is our intent to look at the guidance the way we gave it which is the margins will improve a little. In fact, they have to, given how much we got from gasoline this past year. But beyond that our hope is to save enough money to then invest further in those keys in ways that will drive our sales further.

Your next question comes from John Heinbockel - Goldman Sachs.

Dave, quick question. What happens to private label sales and margin as your commodity costs come down, you know, to you which should be happening just about now? You know, what do you think happens to market share and margin with private label products?

It depends on a lot of things, John, because our improvements in Kroger brand, this strong tailwind that we’re experiencing in Kroger brand really is riding on at least three really important factors. And only some of those factors are affected by what you describe. So let me describe those and maybe come back to your question. They’re affected by the better approach we have to branding. We’ve talked two years ago at least, maybe even three, about the fact that we were going to focus more on how we branded our Kroger brands. We’ve approached that from a quality aspect, from a better marketing and packaging aspect. We’ve broadened the selection of our products, the introduction of our Value brand, which as we’ve indicated has had excellent results especially in this time. That better approach to branding we think gives us better sales regardless of where the economic environment is, regardless of what happens to inflation. The second big area of course is the economy. It’s made customers a little more willing perhaps to try products that they view as providing better value. That part, the economy, is forecasted this whole year to stay difficult for our customers. And so I would expect that they will keep on increasing the trial rate of Kroger brands. And then finally what will the national brand companies do on their pricing? And we’ve seen some price declines but we’ve seen lots of commodity cost declines where there has not been a respective cost decline of the base product by the national brands. And if that continues very long, the price differential between our Kroger brand products and the national brands will continue even higher. Our growth in tonnage in the quarter in grocery in particular was all driven by Kroger brands. The national brands were basically flat or slightly down in tonnage. And there may have been a few brands that were up, but on the whole it’s the Kroger brand story. And that’s going to continue as long as that kind of price differential exists and as long as we keep handling our brand with the professional way that we’ve learned how to do.

So as your input costs come down, you’ll reflect that in retail pricing so the gap in pricing will widen versus the brands, assuming they don’t do anything. Does there come a point where the price elasticity of that, if you open up too wide a gap you know you’re better off booking some of that as margin? Or you never get to that point?

I think it’ll be item by item. We will not make a blanket statement that every cost improvement in product cost of Kroger brands will be reinvested to lower prices. But generally speaking that will be our intention. And as we go down the path, if we see some products that actually don’t improve and it’s in the sales by lowering the price then we would argue ourselves that we ought to keep that margin and instead invest that margin in something else that does matter to the customer. So I think we’ll balance that out in a way that you’d be pleased with actually. But I think it will also be one that will continue to drive Kroger brand sales.

Our divisions and merchants will actually look at that analysis on an item by item basis and make that call about you know is it something that we can gain share? You know, what produces the best result?

Yes.

Do you still think that we’ll see from the branded guidance more of an increase in trade spend as opposed to shelf price roll backs? Is that still the most likely outcome here?

Well, I’m speculating but that would be my opinion, yes.

Short term.

Yes, short term.

And then finally, what are you seeing on the acquisition opportunity front? A lot of people have to be suffering, a lot of your competitors. It’s a buyers market. Are there a lot of in market opportunities that you’re seeing today?

It really hasn’t changed as much as what we would have guessed. And it’s kind of fascinating. And the couple that we would be in discussions, people still have valuation views that are too high for the market. But at some point that will change, but so far not as much as I would have guessed.

And then would your – let’s say those opportunities come up, that would be incremental to your CapEx or might replace portions of the CapEx?

If you look at it historically normally it’s probably half to two-thirds incremental and a third to half replacing. Because like in Cincinnati a few years ago when we acquired some stores, some of the stores that we acquired from Winn-Dixie were sites that we had wanted and had in our plan and it replaced that site. But still even with that said we still remodeled the store and some other things. So as a general rule if you look at it historically I would say it’s probably more half and half, John.

Your next question comes from Neil Currie – UBS. Neil Currie – UBS: I wonder if I can ask about the competitive environment out there. Obviously given the economy it’s going to be very competitive. But you’ve been pretty much on the front foot now for a good four or five years in terms of reinvesting productivity gains. How more rapidly are you doing that? It doesn’t seem that you’re being irrational although the competition is being irrational even if competitions stepped up a bit. What’s your views on potentials for price wars?

Well, I tend to think that the industry compared to say 30 or 40 years ago has gotten very rational and it’s because every quarter we have these calls and have to explain what it is we’ve done. And I think that’s a helpful thing for us to have to do. As you can tell from even the discussions we’ve had already this morning, all the choices we make are made from a clear business perspective, from a long term strategy perspective, and it maybe gets to your point of how we reinvest on productivity. Our objective is to do this on a steady basis. As we expect to have savings over time every year, year-in and year-out, and we expect to have places that we can invest that savings and places that is meaningful to our customer, year-in and year-out. We don’t expect to do it all in one year, either the cost savings or the reinvestment. We expect to do it over time for the long pull. So we’re in this for a very long process. We’re not in this for what it will produce tomorrow or next week or even next quarter. And I think that produces a different kind of action on our part at least and as a result I think we’ve shown ourselves to be very rational and my judgment of the market is it continues to be rational. It is a bit more competitive in that the economy when it turned a bit south and as the year progressed it got progressively worse in the customer’s mind in terms of how cautious the customers were. And as a result that does cause people to have some concern over sales. But actually I think maybe you should take some encouragement from the fact that our sales guidance is what it is. We’re not guiding sales that are unreasonable to achieve, given the strengths that we offer in the market. And so you’re not going to see us as a result try to do something irrational in order to achieve it. Neil Currie – UBS: Just on that guidance and also the performance of sales in the fourth quarter, if you would just strip out the moderating inflation which you’re managing sort of quite neutrally it seems, so it shouldn’t be too much of an impact on the bottom line. And also the increase in private label sales you’re seeing which should be a positive for the bottom line that you can either reinvest or do what you like with. What would you say the tonnage, you know not just private label but overall, what’s the – how much change has there been in the volume growth of the business over the past quarter and what you’re expecting for this coming year? Would you say that you’re still assuming a fairly steady volume performance on an underlying basis or with the economy some moderation?

I feel that our tonnage if you think – tonnage is hard to track, but let me just talk generally about say grocery as a category. I believe that we will keep increasing our grocery tonnage. And in the food categories I’m a lot more comfortable in making this statement than if I included also the drug GM. But if I look at the food categories like food – or like grocery, produce, meat, bakery, deli, those kind of categories; nutrition, I’m very comfortable that we did grow – modestly grew our tonnage, continued to in the year. I actually think maybe the tonnage available in this area is a little bit less if you look at the pie, it’s maybe shrinking a hair in that customers are buying even some discretionary food items a little less often than they were. But I’m feeling pretty good about our ability to have captured some growth. I look forward into the next year and I think in ’09 that it’s going to be more of the same. I don’t expect ’09 to change much although the rate of inflation may change, I don’t expect the economy or the consumer outlook to change very much. And that’s why I have that outlook. Rodney you may have a different view.

Well, I was just going to say as Dave mentioned it’s hard to get a good handle on tonnage because there’s so many moving parts. But the way we would measure it internally we actually feel like the fourth quarter tonnage growth was better than both the second and third quarter. So it was the best when you look at the last three quarters from a tonnage growth standpoint. Now some of that is because as you mentioned, you know, if we mentioned about the private label so if you look at the average ring per item, there’s been some decline in certain categories. Neil Currie – UBS: Just on that comment on inflation as well, obviously that will impact the dollar growth of in store sales in 2009, but philosophically does that really matter if you’re managing your costs reasonably well enough? And isn’t in fact a lower inflation environment or even deflationary environment better for your customers, better for demand and better for you to manage than a sort of rampant inflationary environment?

Well, our objective is to make inflation basically neutral anyway. And the only time that we’ve not really been successful to do that is when it’s quickly erratic, when you have some radical change in cost up or down, you know. And we’ve had a little bit of that in the last two years but not a lot of that. But generally speaking we try to neutralize that, so whether inflation is going up or going down I think we can probably do that. I’ve tended to believe that in periods of modest inflation that that’s a net net, slight positive for us. But I don’t particularly think that the reverse corollary is true, that to have less inflation or to have deflation that is necessarily negative, although we’re not forecasting deflation either. That’s not our expectation.

There’s just a few categories where we’ve actually had some pretty meaningful deflation in them and the tonnage growth in those categories is amazing, and gross profit dollars have actually improved. So what is it? Economists always say all short statements are wrong, and I certainly think you can’t just look at deflation and assume it’s bad for the business.

Your next question comes from [Unidentified Analyst] - Jefferies & Co. Unidentified Analyst - Jefferies & Co.: Just two questions. First on the vendor relationships, I mean you’ve talked around it somewhat but I mean I’ve got to imagine that you may be pushing some vendors that got aggressive with price increases over the last year pretty hard at this stage. Could you talk to that a little bit?

Sure. We have a lot of active dialog with our vendors. But I would characterize our relationships with our vendors as outstanding and I would characterize what we have as working partnerships with our national brand vendors and expect to have that continue. We do push back a bit on price increases and we push back on the failure of prices to decline when the underlying costs have declined. But ultimately we’re pushing back on behalf of our customers, not on our behalf. Because our intent is just as when costs rise we’re passing those along in retails, as costs decline we would expect that those would generally not individually but generally would be passed back to the customer, too. So we’re sort of the proxy for the customer in this regard. But as a business, though, we’re quite happy in either scenario because our Kroger brand, one of the three factors that I said was driving our Kroger brand was the pricing position that the national brands have taken on some of the categories that are strong for us in Kroger brand. Well, if that continues then so much more we gain on our Kroger brand and our customers love that. So we’re happy in that event but we’re also happy in the other direction. So I would – I think it’s wrong to characterize this as a tug-of-war between retailers and the national brand vendors. I just don’t think that’s the way to think about this. I think it’s a question of dealing with customers on our part and dealing with customers on the part of the national brand companies.

You know, we’ve always looked at it that the customer should be the one deciding what product that they buy, whether it’s the Kroger brand or the national brand. And you know we’re not trying to skew the customer one way or the other, other than trying to make sure we give them the best value we can give them. [Unidentified Analyst] - Jefferies & Co.: To that I mean obviously we’ve seen a huge increase here in private label penetration and I have to imagine that you’ve given some thought to allocating shelf space a little differently – I mean I understand where you’re coming from, that you’re speaking on behalf of the customer. But obviously the customer has to have the option to buy different items. I mean, where would you see this private label penetration potentially going, assuming that we stay relatively in the same environment that we’re in right now?

We have with occasional changes in quarter-to-quarter but on the whole for the last 20 years or so we’ve steadily improved our private label penetration every year, year after year after year after year. We expect that trend to continue. 2008 was a stronger year than we had expected or had seen in past years. I would expect actually ’09 to be strong, too. I’m looking forward to it being strong. But again I don’t see this as a tug-of-war, just private label versus national brand. We change our shelf sets really every week and not every item every week, but categories are changing every week. And we readjust them based on sales and what customers want to buy from those sets. Sometimes it’s expanding – it is always expanding some items and it’s always contracting some items. And sometimes those items that are expanded are Kroger brand, more often lately they’ve been Kroger brand, but sometimes they’re national brands, too. And sometimes we contract on Kroger brand. We let the customer actually ultimately decide that. [Unidentified Analyst] - Jefferies & Co.: And final question, just a quick one. Obviously the competitive environment’s always competitive. Have you seen anything the last three months or so that you find markedly different than the previous year or whatever? I mean, is there any significant changes out there?

Haven’t seen the competitive environment change. What we’ve said is that we have seen the consumer confidence environment during the holidays come to a little lower level in terms of their spending level. But that’s about the only change that I’ve noted recently.

Your next question comes from Meredith Adler - Barclays Capital.

A lot of my questions have been answered, but I’d like to talk a little bit more about fuel. I think you said that in the fourth quarter the bottom line impact was nil or very low. If we start to think about what happened in the prior three quarters and then also what we should anticipate, I mean we’ve been spending a lot of time trying to take – show the impact of lower fuel prices and finding it rather challenging. So maybe some guidance on that?

Well, the first thing you should remember on fuel is to remember that it is hard to predict any single quarter. And last year actually would illustrate it maybe even hard to predict the whole year. But certainly quarter-to-quarter is hard for us to know until we get into the quarter. We did not expect in advance the way it fell in the quarters this past year, where we had very strong margins in the third quarter in particular. We also had strong margins in second quarter but they were much stronger in the third. The year before that we had strong margins in the second and in the fourth. And so what we’re forecasting for the year is something closer to where we were in 2007 in margins per gallon and we are forecasting growth in gallons. So that’s how I would look at this and the quarters will end up how the quarters end up on gas in terms of the actual margins, but it will have a – it has the effect of moderating itself when you go over four quarters in time.

And that’s also the reason why we try to give a lot of our financial results if you exclude the effect from fuel because we understand the retail fuel price has huge effects on our income statement especially. And that’s one of the reasons why we try to give that insight. Now the way we manage it internally we’re focused incredible on gallons growth and that’s how we manage the business and that’s how we’re incentified to manage that business while we’re –

Maybe I just will ask the question another way. Assuming the $0.11 of gas margin and current prices stay just about $2, will you be making about the same money from fuel bottom operating profit dollars as you made last year?

It would be less than 2008 by a meaningful amount of money. And it would be more consistent with 2006 or 2007 and growing that for our growth and number of locations.

Meredith, that’s why we talked about the fact that the lower LIFO charge while it seems like a tailwind to ’09 that will be offset by the headwind meaningfully less EBITDA on fuel.

The other thing if it’s helpful, at $0.11 our return on assets on that business continues to be very good. And it creates a very good shareholder return. 2008 was an unusually good year and would be very surprised to have very many of those.

And then another question just did talk a little bit about some categories that were deflationary, I think dairy is deflationary and I think we said something about produce being deflationary. Is it fair to say that as retail prices are sticky on the way up, and I think you experienced that in the spring of ’07, that retail prices would be sticky on the way down?

I think it’ll depend on the items and the markets, but yes I think that’s reasonably fair to assume that in some cases that will be true. Produce for us was actually had some inflation, but it was a much lower rate of inflation than we had experienced. And dairy was deflationary I think wasn’t it? Yes. But yes I think that’s fair to say that there is perhaps some lag as the costs go down before the retails actually get fully reflected.

My final structure is more a capital structure question. It looks like your bonds are trading very well now. What would you expect to see before you would decide to buy back stock? Because your stock price is quite low in my opinion and it’s a great opportunity.

Well, we thank you for that commercial. Mike, you want to comment on that?

Well, I mean the biggest issue out there in today’s market, Meredith, isn’t necessarily where our bonds are trading on an absolute basis, because I actually agree with Dave, thanks for the commercial. Because I agree with both of your points. The bigger issue today is what does our coverage ratio need to be to maintain a triple B flat rating and to get the one positive watch we have from triple B minus up to triple B flat? We’re keenly focused on having all three at a triple B flat. That will open up the A2/P2 market because today we can only issue commercial paper in the A3/P3 market. And there’s a lot of liquidity there but it’s at least double if you can get the A2/P2. So that’s a focus to get our ratio a little better which would have us a little less eager to buying stock. And then the other issue is our bank credit facility which is $2.5 billion and expires in November of 2011. We are planning and conducting ourselves with the expectation that we won’t have nearly the same kind of facility when we renegotiate that between now and then in either size, term or price. And we’re trying to make sure that we develop internally some of that liquidity rather than the reliance that we’ve been able to have on the bank credit markets that’s there today. So all of that said, the overhang is really the bank credit market and our belief that we need to be a little bit less reliant on a $2.5 billion type facility than is available today.

And I guess my final question would be about capital investments. You are still planning to spend a fair amount. Are you still seeing the kind of returns in the projects that you’ve had over the past times? Are you adjusting where you spend money based on expectations of returns?

We continue to adjust our investment of where we invest it and how we invest it. Our remodels and expansions continue to develop very well compared to our 11.3% internal hurdle rate and the budgets that the divisions forecasted when they developed those. The returns on our net new stores and relocations while good as compared to 11.3% return are not quite as good in the early years yet on those first year or so of the budget, which is one of the reasons you continue to see our new and [re-lows] come down and the number of our expansions and remodels go up. I would expect that trend to continue. The range we did give today is $1.9 to $2.1 billion and I do want to note that each end of that range is $100 million less than last year’s guidance of $2 to $2.2 billion.

Thanks Meredith. We have time for one more question.

Your last question comes from Charles Grom - J.P. Morgan.

Could you just clarify your traffic comment? You said that it increased. Does that mean it’s positive or did it just increase relative to the prior quarter?

It’s positive. The increase I was talking about was compared to the year before.

Okay. Great. Thank you. And then on the –

And it was positive.

Yes, and it was positive. Yes.

And on the 1 to 2% product cost inflation, how do you see that trending by quarter? Is it sort of in the 3 to 4% range now and getting flat by the end of the year? And when you look to 2010 can you guys envision a deflationary environment?

Well, someone on an earlier question asked or commented about that, about they assumed that it was more rear weighted and I think that’s a fair assumption. Remember LIFO which does not determine how we calculate our inflation, but LIFO is a calculation that really is a snapshot essentially at the end of the year, almost at the end of the year as to where we were compared to the year before. And Mike you may want to comment on the rest, but I don’t think we expect to have a deflationary environment.

Going out to 2010 would be difficult at best, and I won’t go there. I do agree with Dave’s comment that we would expect it to moderate as the year goes on and keep in mind that prices have to actually come down for there to be disinflation. Just no price increases means it’s flat. It doesn’t mean it’s negative.

And then last question, housekeeping, looks like you did a reclass between your cogs and SG&A line. Could you just discuss what you guys did there?

I don’t know what you’re referring to.

Okay.

Give Carin a call afterwards and –

Okay. Thanks very much.

Thank you and before we sign off though I’d like to share some thoughts with our associates who have joined us today. First a really big thank you for your outstanding efforts throughout 2008. In a year when challenges only escalated, you made a positive difference for our customers by providing meaningful value in so many ways. I want to congratulate each of you on a job well done last year. Your commitment to one initiative in particular paid off in an extremely powerful way last year. Kroger’s perishable donation partnership, which allows stores to donate perishable food that’s still safe and nutritious to eat that can no longer be sold in the stores, expanded to include more than a half of our stores last year. And thanks to your efforts, our family of stores contributed nearly 14 million pounds of fresh meat, dairy products, fruit and vegetables to local food banks in the communities we serve. This fresh meat and produce provides much needed protein and nutritional value to food banks that struggle to supplement the dry goods and canned foods that they typically receive. Our perishable donation program helped us feed hungry families and is gratifying for you, our associates, who hate throwing away edible food. It’s also good for Kroger and the environment because it helps us reduce waste. We continue to add new stores to the program and we hope to have 85% of our stores donating perishable food by the end of 2009. Our goal is to deliver 25 to 30 million pounds of perishable food annually. Well, thank you for all you do. That completes our call today. Thank you all for joining us.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a wonderful day.