Good morning, and welcome to The Kroger Co. Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Schlotman, Executive Vice President and CFO. Please go ahead.

Thanks. Kate couldn't be with us here this morning, so I will wish you the 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, but Kroger assumes no obligation to update that information. Both our third quarter press release and our prepared remarks from this conference call will be available on our website at ir.kroger.com. After our prepared remarks, we look forward to taking your questions. [Operator Instructions] I will now turn the call over to Kroger's Chairman and Chief Executive Officer, Rodney McMullen.

Thank you, Mike. Good morning, everyone, and thank you for joining us today. To start, I want to say how -- that I'm proud of our associates for their continuing objective in connecting with our customers in a very difficult operating environment. Their efforts helped us grow both total households and loyal households during the third quarter. As expected, deflation persisted during the third quarter. And as we've said before, transition periods create a difficult operating environment. This is the third time we've had deflation in 30 years. And in previous instances, deflation lasted from 3 to 5 quarters in a row. We're in a middle -- in the middle of the cycle right now, and it's not fun. Still, our tonnage continues to grow. Our total market share continues to expand, and we're focused on executing our strategy. A silver lining of deflationary environments is that it reveals to us how we can run our business better by shining a light on areas we can improve. It is really tough when you're in it, but we'll be in a position to benefit from changes we're making today once we're out of this cycle. We are firmly focused on our long-term strategy of improving our connection with customers and associates and continuing to work on process changes to lower costs. We don't change our strategy based on quarterly swings in results. We remain committed to delivering on our long-term earnings per share growth rate target of 8% to 11%, plus an increasing dividend on a 3- to 5-year time horizon. We will continue to try to win every customer meal by driving our strategy and reacting appropriately to the environment. Looking at the broader economy and the customer shopping behavior, what we're seeing is mixed. Typically, our data shows our…

Thanks, Rodney, and once again, good morning, everyone. I want to also thank our associates for their hard work and focus on connecting with customers. As a result, both household and unit growth were up during the quarter as was market share. As we said at the investor conference, the last 2 weeks of the quarter would drive our identical supermarket sales results, and our IDs came in at the low end of our expectations for the quarter. Deflation has not only persisted, but has increased with overall deflation, excluding pharmacy, growing from 1.3% in the second quarter to 1.5% in the third quarter. Additionally, pharmacy inflation declined 130 basis points to 3.3% during the third quarter. Over the last 4 quarters, we have relocated or expanded 49 strong performing stores. This takes them out of our identical supermarket sales calculation. Further, we have opened 42 new stores over the same time frame. Both of these create a headwind to identical food store sales. By way of comparison, last year, there were 19 new stores opened that affected nearby stores. Operating costs, excluding fuel, Roundy's and an $80 million contribution to the UFCW consolidated pension plan in the third quarter of 2015, grew by 19 basis points, of which 15 basis points were related to depreciation due to increases in our capital program. We can clearly do better, and we're redoubling our efforts to reduce these costs as a rate of sales over time. While the environment is difficult, managing operating expenses is something that is in our control. Our Customer 1st strategy is funded by saving costs in areas of the business that customers don't see in order to return value to our customers in the form of lower prices on products that they want, improved service and the…

Thanks, Mike. We are both clear-eyed about the challenges before us and optimistic about Kroger's future. Transitions are no fun, but they do create opportunities to improve the way we run our business. We will continue to focus relentlessly on our customers and our associates. We'll continue to accelerate our adoption of technology to deliver additional value, to provide convenience for and to our customers and take costs out, as Mike mentioned. All these things set us up to grow our business. We have a unique opportunity for strong growth in the $1.5 trillion U.S. food market. Our best days are still ahead of us. Now we look forward to your questions.

[Operator Instructions] Our first question comes from Ken Goldman of JPMorgan.

Just one quick question for clarification. I know you wrote this, but I have received a couple of questions on it. When you're guiding to below 8% EPS growth in fiscal '17, is it reasonable to assume that's on a like-for-like basis, which excludes the benefit of the 53rd week?

Well, it does exclude the benefit of the 53rd week. Basically, the way we business plan is just like you said, like-for-like. And then we go in and estimate what the 53rd week will ultimately add to that result. I'm not going to go to, am I going to be at 8% or 9% with the 53rd week, because I -- that would tell you what we're thinking about without the 53rd week. But the below -- the only guidance we're giving is that on a 52-week basis, we would be below the 8%.

Got it. Okay. And then, Mike, I wanted to follow up. On CNBC, you were sort of, at least to my ears, talking about maybe deflation ebbing a little bit here. You were pointing to some commodities maybe rising. But you're also guiding, I guess, to a similar operating environment well into fiscal '17. So I just wanted to kind of make sure I understood. If deflation's the primary reason for the challenging environment today, and if you think deflation is going to get less bad, then why wouldn't early 2017's operating environment be a little bit less bad than what we're kind of seeing right now?

Yes, what I was going through on CNBC is where some of the raw material markets are trending over the last 4 weeks. A lot of those, when you look at them on year-on-year, they're still quite negative. But there is some trend up in some of those categories in the input costs over the last 4 weeks, but still down on the prior year. Milk and cheese looks like it may be bottoming, but that doesn't mean things turn around on a dime as raw material input costs change. There's usually a lag from that bottom and a slight blip up in those costs until you start to see any effect on retail pricing. So we would expect this to persist. Some of that is just based on the last 2 cycles of inflation and deflation we've had. And we have a 5-year rolling average chart that we look at a lot. And if you think about the waves of where that happens with inflation and deflation, this cycle looks very similar to the last couple, maybe a little closer to '02 versus '09, which was a little bit more persistent, but that's what's in the back of our minds.

Our next question comes from John Heinbockel of Guggenheim Securities.

It's Steve Forbes on for John today. Given the pace of the ClickList and ExpressLane rollout thus far this year and the uptick over the past couple of weeks you mentioned, can you touch on what your thoughts are for 2017 as it relates to these initiatives?

We wouldn't be, at this point, sharing specifics, but obviously, it's something that continues to be important and we'll continue to roll it out. Now at some point, it will slow down a little bit just because the stores that are easy to add, we will have added them. We have identified overall how many stores we think makes sense, and it's over half of our stores we think would make sense to have ClickList. But obviously, you do the easier ones first, and it will slow down just because of the difficulty getting it installed.

And then as a follow up, maybe kind of a bigger picture question about what you've seen historically as it relates to the return to an inflationary cycle, right. If you think about the competitive environment today, how do you think about '17, right, if we do get that eventual reinflation cycle? After such an extended period of deflation, I mean, do you foresee yourself and competitors rapidly passing through price increases once inflation returns? Or in the context of what we've experienced in the past and what we're experiencing now, is there any risk, right, that price increases occur on a slower basis than we may expect?

It's a great question. And obviously, looking back over the last 20 years or so -- what do they say? Every short statements in economics is wrong. So part of it depends on how does it come back? Does it come back with a vengeance? Or is it just 2% or 3%? At this point, we would expect for the inflation, when it becomes inflationary, for it to be pretty modest on the things that we're seeing. But remember that comment, we're very early, so that would be a very early expectation, but you don't know until you're in it. I think everybody from a competitive standpoint is looking at what's going on in the market. So typically, you'll lag a little bit at the front end, but then everybody will pass it through. And that's the reason why you'll always hear me talk about the transition periods are difficult, both going in and coming out of inflation, deflation.

But the pace of increase, I guess, what you expect as you look out to '17 is very dependent on where the absolute level of inflation returns to.

Absolutely. And right now, like on the -- things that are grain-based, obviously, those crops, for the most part, haven't been planted yet. You'll have some winter wheat that's in that process. But crops will be a heavy driver of that inflation, and it's still way too early. I think, what, in '16, it appears that this will be a record crop for 5 years in a row. At some point, you're going to not have great weather.

Never had 6.

I don't think we've ever had 5 before. So you never know. But there isn't anything that we see out there that would cause us to have a different point of view. Now obviously, in produce, that is -- that will change very quickly depending -- the growing seasons are much shorter there.

The next question comes from Ed Kelly of Credit Suisse.

So can I just start asking about guidance and just a little bit more color. So at the Analyst Day, you reaffirmed full year guidance, but openly admitted, right, that the end of Q3 was difficult to judge. Today, you ended up lowering the outlook a bit. I guess what's changed since the Analyst Day? If you could sort of like provide a bit more detail there. Is it really just the conclusion that the end of Q3 was softer than really what you were thinking? And then how is Q4 shaping up so far quarter-to-date on IDs? Are you at that point of low -- up -- low single digits?

So if you think about the -- where we've been at -- from the Analyst Day and transitioning through that, I would actually encourage you to step back a bit from that and look at it at a little bit bigger lens. It takes about $23 million of sales to move our IDs by 10 basis points. When you're plus or minus $23 million on a 2- or 3-day time frame, or even $40 million on a 2- or 3-day time frame, when you're at 4% or 4.5% idents, it's a blip on the radar screen. When you're between 0 -- when you're between flat and 50 basis points of identicals, it's a huge percentage move on where your identicals can be. And when you think about $23 billion a quarter in ID sales, so $1.5 billion to $2 billion a week, the potential for a couple of days to move by $20 million is very real. You've all heard me at different times talk about -- if you saw our daily sales when calendar shifts and holiday shifts, you would understand why grocers get gray hair early in their careers. And those kinds of things just happen, and it's a big effect. The effect of milk, eggs and cheese continues to be big. It's a big headwind to ID sales this year versus last year, a meaningful percentage. I won't necessarily give the exact amount, but it's a meaningful amount. Rodney's shrugging his shoulders. So it's as much as 50 basis points effect to ID sales in the quarter, just those 3 commodities, because of the deflation this year versus last year. So these kinds of things are real. You've often heard us talk about milk being elastic when there's deflation. When it's deflation on deflation, the elasticity happens when you first break that $2 barrier and then demand flattens out. So you don't get a 2-year bump in it.

Yes, I would just add a little bit to Mike's comment. When Mike shared the guidance at our Analyst Day, he did talk about the uncertainty because of the calendar shifts. So there is -- what -- where we ended up was exactly consistent with what -- how Mike outlined in terms of the uncertainty for the balance of a few days. When you look at quarter-to-date in the fourth quarter, we would be slightly negative. But if you look at last year, last year's -- the first 4 weeks of last year's fourth quarter were by far the strongest, and it kept getting weaker during the quarter. So we will start cycling numbers from a year ago that look a lot different than what we've been cycling so far this year. So that's the reason why we were comfortable on giving the guidance in terms of being slightly positive for the fourth quarter.

Great, and just a follow-up. On the gross margin, I guess, Rodney and Mike, your gross margin this period of -- this deflationary cycle, I guess, has been, I guess, remarkably resilient given sort of like what you've seen historically in terms of the relationship between the margin and IDs. And the competitive environment, from what we hear, right, sounds like it's more difficult. Can you just give us a sense as to what's really going on in the underlying gross margin? I mean, I know you continually invest in price, but it doesn't seem like you're being as impacted by the competitive environment as what we've seen at other places. And any color there would be great in sort of like how you think about that over the next few quarters as well.

Yes. I'll make a couple of comments and let Mike finish it. First of all, when you look at having Roundy's and not having Roundy's, that affected some of the year-over-year change because Roundy's has a higher gross margin than the Kroger-based, Kroger company. The other thing is that our buying teams have done a ton of work on changing the way we buy product in terms of cost of goods. And if you look, we have a lot of corporate brand products where we buy direct. So a lot of those changes have really been helpful in terms of making improvement in cost of goods, too, which has helped some on the cost -- the gross margin line. I know Mike, you -- I'm sure you have a couple of other comments you want to add.

Yes. I think the one I would go a little deeper on is the corporate brands. And as we continue to have an expansion of our Private Selection line, when you look at Simple Truth continuing to grow nearly -- basically, double digits, those kinds of products contain a higher gross margin as well. And as they continue to become a higher and higher portion of our mix, that somewhat distorts the historical reference. The number's a little bit difficult to interpret this quarter because of the fact of the dairy complex, because such a high percentage of the dairy complex is corporate brands. The other thing that's in there is the fresh mix. You heard Rodney talk a lot about being on top of the foodie trends and snacking and things like that. Those departments do come with a higher gross margin mix. Now their contribution to overhead or their operating profit may not be as strong as other departments because there's a lot of labor costs and more shrink in those categories and more fixed costs like electricity and things like that. So it's a combination of all those leading to it. Rest assured, we do continue to invest in price and continue to drive value to our customers. And it's something that we've -- been our cornerstone for the last 14 years.

Our next question comes from Scott Mushkin of Wolfe Research.

So I wanted to kind of take a different direction here a little bit and talk more about the nonfresh, maybe even the branded side, the branded -- which some of the data coming out lately has shown volumes are just negative in the measured channel. And then also inquire about e-commerce, you've obviously seen Walmart buy Jet.com. Amazon is making some big inroads all of a sudden into some of these consumable categories, these everyday essential categories. And just in that context, get your guys' perspective on what's going to happen with margins, what's going to happen with these categories and how do you react to an environment that seems to changing pretty quickly?

Well, there's about 10 questions within that. So I'm trying to...

So you don't get a follow up, Scott.

I'll try to summarize it in such a way that it's helpful. When you look at our relationships with the CPGs, it would be -- our business, with most of those CPG partners, would continue to grow. And the trends that they would be seeing overall, for the most part, the trends we would be seeing is different. In terms of -- at our Analyst Day, we increasingly see competition much broader than we would have in the past. And we're really focused on, how do we give the customer what they want when they want it in the way they want it? And Amazon is one way of doing that. But not every customer wants to have 10 boxes of stuff sitting in front of their door all day. What we find is a lot of customers love having groceries picked -- picking it up. And we're starting to test, obviously, we -- partnering with third parties to deliver. So for us, we're really focused on the customer and letting the customer decide how to engage and doing it in a way that's seamless. We've always said that we believe margins over time will continue to decline from a gross profit margin standpoint. And that's the reason why we worked so hard to get costs out, partner with 84.51° in using -- and partnering with our technology teams to fundamentally change the way we do work to get costs out. I don't know, Mike, anything you want to add?

No, and I -- one of the things -- I agree 100% with Rodney on the e-commerce relative to deliveries and being on your porch. And where we're situated, our customers live within 2 or 3 miles of the store they most regularly shop in. And it's extremely convenient for them to order online and make that stop by the store on their way to and from either work or daily activities. And the easiest way to see if a retailer is excited about something is, are they doing more of it or less of it? And as Rodney said, we continue to roll more ClickList locations out.

Our next question comes from Karen Short of Barclays.

This is Sean on for Karen. Can you guys provide -- can you provide some color on tonnage trends this quarter versus the first 2 quarters of the year?

Tonnage trends continue to be positive for the quarter. I would -- there is some softening from the second quarter to the third quarter in tonnage. But overall, we're -- we continue to have positive tonnage, and we continue to grow our share. In some of the categories, we're very pleased with the tonnage growth we're seeing. It's -- tonnage is a little bit of a difficult animal to get your arms around because there are so many pack-size changes. Today -- it used to be, you bought a -- well, you didn't even buy bottled water, and then you bought a 12-pack of bottled water, then you bought 24-pack of bottled water. Now you buy a 32-pack of bottled water. All of those are 1 unit, even though we're selling more bottled water units. And there's a lot of multipacks and bigger packs that are trending to that kind of an opportunity. You also see some of that with ClickList in categories that customers are finding convenient to buy bigger packs because they don't have to fill up their basket cart with it. We do that for them and put it in their trunk. So they may be buying a 12-pack of paper towels instead of a 4-pack of paper towels, because they don't have to worry about space in the basket cart. It's just -- as long as their trunk can hold it, it's okay. We continue to be pleased with our tonnage growth. It's something we know is the fundamental piece of what is core to our business.

Okay, that's helpful. Then, I guess, my follow-up would be just some color on extra week next year and the impact to earnings per share. We went back and looked at 2012 as sort of a proxy for that and thought that the merchant flow-through would -- maybe equates about $0.09 a share. Just wondering if you could give some comments on that.

Well, one extra week out of 52 is a little over 1.9%. The gives and takes of that and what happens inside that week drive what the benefit of it is. But historically, it's -- I would agree that it's somewhere in that range, but it's difficult to understand what's going to happen in the first week of late January, early February of 2018.

We do always try to break that out and provide that insight because we don't take credit for that extra week in terms of achieving numbers. As we mentioned in our prepared comments, we are in the middle of our business plan process and just wanted to give you a little bit of flavor of what we're seeing next year's shape up to be and letting people know the 53rd week, we're not taking credit for achieving the numbers.

Our next question comes from Zach Fadem of Wells Fargo.

You mentioned several times during the call, just a focus going forward on taking costs out. Can you talk a little bit about what this means for things like employee costs, wages, health care, store productivity initiatives, pension, stuff like that?

I would say probably all of those -- all of the above are things that we're working on. One of the things that we've been able to do over the last several years is through process change, changing the way work is done. And we continue to see great opportunities there. And we're really working hard on partnering with our R&D team and our technology team to take things -- to change the way we do work. And I know Mike at our investor meeting talked a little bit about temperature monitoring. And temperature monitoring, for example, is something that we developed internally with our R&D team. We've rolled it out, and it saves about $25 million a year in terms of just what it costs to execute it. Obviously, it takes capital to do that. So the first year doesn't create too much value, but the second year and beyond is great value. So labor is always the area where there's the most opportunity. We will do those savings there through process changes. We think it's incredibly important.

Okay. And just a follow-up. I know it's still early days here, but are there any metrics you can provide on the performance of your ClickList stores? Maybe is there data to suggest that sales are incremental? And do you view ClickList as a potential driver of market share or rather just an added convenience for your customers over time?

Yes. The -- I'll try -- obviously, we're very, very early, so I won't be able to answer all of the questions you asked. They're great questions. It's just that we're so early in the process. It would be some growing share and some just one more convenience for the customer. And it's really a mix of both, and each customer would be a different combination of that mix. What we believe over time is that it starts teaching us how do we deliver what the customer wants, the way they want it, when they want it. So we think it's something that's even more important than just ClickList per se in terms of teaching us how to connect with the customer even deeper and in a better way for them. Some of the business is incremental. It's a reasonably high range when you look across the company. If you look at the financial performance, it's a headwind initially. If you go back and look at some of the original locations that Harris Teeter had before we merged, it becomes where you're indifferent whether somebody shops via ClickList or in the store. But if you look at the stores overall, it's still a reasonable, significant headwind in terms of rolling out ClickList from a financial standpoint.

Our next question comes from Shane Higgins of Deutsche Bank.

I just wanted to drill down a little bit on your ID sales by region. Did you guys see any significant regional differences in ID sales during the quarter? Anything that you could call out?

Yes. We always see ID sales ranges by region. When we're in 30-something states plus D.C., it's like anything else, there's somebody that's at the top of the list and somebody at the bottom of the list. We typically don't go into specific geographic descriptions of where we saw relative strength and where we saw relative weakness, if you will, or towards the bottom end. Broad-based, again, I would say the story is pretty much the same for all of the regions with the persistent deflation. And a continued focus on trying to drive tonnage is the story that we're trying to drive home with all of our geographies.

Okay, that's helpful. And I know you guys earlier in the year, you talked about Roundy's as being a 30 basis point headwind to the comp. But obviously, you're going to cycle that in fourth quarter. Is that -- first of all, is that about right? Was it -- has it been around 30 basis points? And as we do cycle that, do you guys expect that to help contribute to the comp improvement as the fourth quarter progresses?

Yes. If you think about Roundy's even more broadly than that, it is still in that same kind of a range. We've talked about that we've gone into 13 stores in Wisconsin and have done those stores the way we want them done. And we continue to be very pleased with the sales and tonnage growth inside those stores. We've also converted those 13 stores to our -- to the Kroger systems, which, for us, relative to a merger, is lighting speed because we want to get them integrated into our -- all of our processes as quickly as possible. We remain very excited about that merger and the potential we see. Particularly, the Wisconsin assets I think is -- if you will, if you think about it in purely economic terms, is the optionality of that merger. Getting into Chicago for the cost of the entire merger was great. And as Wisconsin with Michael Marx and his team running Wisconsin, that will continue to be a very positive thing for us in the future. It's not going to turn on a dime. It's a lot of hard work, but the team up there is up to the challenge.

Yes. The one thing that -- and you've heard me say this before, the thing that I've really been pleased with in Mariano's and the Wisconsin stores with Pick 'n Save and Copps and Metro are the engagement of our store associates and how supportive they've been and how excited they've been. And the changes that we're making, we're seeing a little bit more improvement in tonnage than we are in identical sales results, just because some of the changes deflate the retail prices. But I'm just thrilled and delighted with our teams and the way our teams are engaging and excited about being part of the Kroger team, and much more so than I would have expected this early in the process.

All right. I appreciate that color. So just in terms of kind of thinking over the next year or 2, so this is going to be something that, obviously, Mike, you said, you guys have done some conversion. You still have a lot more to go. So this would be something that will probably be a multi-quarter effort. We shouldn't expect to see any significant tailwinds then from Roundy's over the next couple of quarters [ph].

Yes. I -- It's clearly something -- it's -- we're coming up on the 1-year anniversary of the closure of the merger. I think it was December 18 of last year. So it's very new part of our book of business. And it is going to be something that over time will continue to be worked on. I wouldn't -- I can tell you, part of our business plan process is not a tailwind from Wisconsin in 2017; individual stores, yes, but overall, no.

Our next question comes from Vincent Sinisi of Morgan Stanley.

This is Andrew Ruben on for Vinny. I just had a question on deflation, bigger picture. You characterized being in mid-cycle. Just curious what drives that characterization. And given that you've been through a few of these cycles, as you referenced, any color on how the cycle that we're in compares to the few you've experienced over the past 30 years?

Well, the -- the bigger picture is it probably looks the most like the one in 2002. That one, really, it was about 5 quarters. And if you look at when it was the worst is in the middle of it, and that's kind of where we are. Part of it will -- part of it determines what -- I'm trying to think about how to word this in a way that's helpful. The cycle coming out will be driven by what caused you to go in and how do you end up coming out of it. Everything that we can see, the reason what we would expect today would be a modest increase once we cycle on the other side of it is most of it is supply-oriented. So if you look at like 2008 and 2009, it was as much driven by the economy and everything going on. If you look at 2002, it was more supply-driven because there was a lot of supply in the market. Unless there would just be a terrible crop year in '17, we would expect this to look much more like 2002. Remember, once -- and Mike talked about it a little bit, like on dairy, if you have $3 a gallon milk and it goes to $2 a gallon milk, when you cycle that the next year and if milk is still at $2 a gallon, you're cycling $2 on $2 versus $2 on $3. And that's the reason why the pressures decreases. I don't know, Mike, anything else you want to add that?

No.

Andrew, is that helpful?

That is.

Our next question comes from Rupesh Parikh of Oppenheimer.

So the first question I had was just on traffic. Your press release, it sounds like in your press release, you again had positive household -- loyal households growth. I just want to get a sense, as you look at your traffic this quarter or this, I guess, Q3, were there any changes versus what you saw in Q2? I just want to get a sense on how traffic played out versus your expectations.

Yes. If you look at it versus expectations, it's pretty similar. It continues to be positive. In terms of playing out, you always want more traffic than you had, but I would have said that every quarter. I don't know, Mike, from your perspective. I think it really well played out the way we would expect.

I agree with you.

We felt like third quarter would be a very tough quarter, given everything that what was going on. And -- but you start cycling some of those things as well.

Okay, great. And then for gas margins. I just want to get a sense what your outlook is for the balance of the year. And as you think about where gas fuel margins could end up for this year, do you expect to be back at your historical average on the fuel margin line?

Fuel has certainly been a wild ride the last few years and even in the last few even days and weeks as -- is OPEC going to do something? Is OPEC not going to do something? And they ultimately did the 32.5 billion -- or billion gallon decline -- barrel decline, 32.5 billion barrel. I put the b on the dollar -- the number instead of the barrel. That equates to 500,000 barrels a day. And to see the wild swings down $1.50 one day, up almost $4 the next day is kind of confusing on what's -- when you look at that relative to worldwide supply of oil is relatively modest amount of production cut. That said, volatility, up and down. Volatility is generally very positive for us because we have many, many fuel centers at our supermarket locations that get not just a delivery a day, but some of them get a couple of deliveries a day. So when there's daily volatility like that, it allows us to take advantage of market fluctuations.

Yes. When we do our business planning process, we always just use the 5-year rolling average. We find that's as close as anything else. I think Mike mentioned, if you look at over a rolling 4 quarter to a rolling 4 quarter, fuel margins are down just shy of a couple of cents. But for us, anybody's guess is as good as anybody else's. And I always get a kick out of -- if gas is at $100 a barrel, it's going to $150. And if it's at $50, it's going to $20. Neither of which have ever been right. But we just, in terms of the way we do our planning process, we look at a 5-year rolling average. When we look at, do our shareholders get a return for us being in that business, we also do the same thing.

And we essentially business plan the nonfuel business, add the fuel business on, and then, of course, this -- we'll then add the 53rd week on.

Our next question comes from Robbie Ohmes of Bank of America Merrill Lynch.

Rodney, for people like me who were not covering this industry back in '02, I was hoping you could maybe give us some insights. How does this deflation and promo environment change the way your customer is shopping? Or does it? Like for example, you called out snacks and drinks, maybe some color on other categories. Or also, does sort of the balance of fill-in versus stock-up change? How does the reaction to promos change in sort of a multi-quarter deflationary environment? And maybe some color on what happens in center-of-store when you're in an environment like this? And I have to ask because I don't think anybody did, but just the question you love getting, what's Walmart doing right now promotionally? Are they investing more and more in price in the markets you're in?

Okay. Well, if you look at the '02 versus today, probably the biggest change from a customer standpoint, I guess, it would be 2 things. One, obviously, they buy food that's already prepared much more. And when we shared everything at our Investor Day, you could see a lot of the changes that we've done in terms of having food that you can come to one of stores and eat at the store or take home and eat. That, obviously, is a huge change today versus '02. If you look at the things that are -- and I guess, the other big change is customers shop more frequently but smaller baskets. So if you go back then, and we didn't have a loyalty card, and we didn't have the analysis we do today. But everything we could find, the customer would -- the basket would be bigger on an individual basis. But if you look at a monthly basis, it's bigger today. In terms of the cycle comments, the things that we think are the same are more the materials in raw ingredients space, where if you look at beef and pork and chicken, the biggest component of that is corn price. And chicken in that cycle is much quicker than it is on pork and beef. And that hasn't changed now versus 2002. So it's really what's the raw materials themselves and how's the growing crops doing and how does that flow through the supply chain. And that would have the biggest effect on some of the proteins and some of the center store components. I don't know, Mike, on inflation, anything that...

No, I think you covered it.

Both of us were around in '02 as well. We had different jobs.

I think you covered landscape. Well, you did, I didn't.

Maybe, guys, just on -- if you think back to '02, I don't know if you can remember, but in terms of promotionally how the competition reacted, has that changed a lot? Is it -- is there more in-store signage? Or is it more circulars? Or what are the promotional tactics that are being used right now out there? And is it similar or different than '02 from the competition?

Well, on the promotional stuff, the -- you would -- in '02, and this is going off of a lot of memory without having the data in front of me. But competitors then didn't have as much insights, and they didn't know if it was just because somebody was getting their sales or if it was deflation. Today, people have much better data. So they understand it's things that's going on in the overall marketplace. It's not some competitor getting the business. So all of us reacted in a different kind of way at the front end of deflation back then because you thought a competitor was getting the business.

Yes, and that parallels Rodney's comment on basket size. Historically, all we would see is what's the average transaction per customer. And if that's softening, back in '02 when you didn't have the data, you didn't know that that household was coming more times in a monthly basis and it wound up spending more with you on a month because we simply didn't have that technology back then.

Got it. That's helpful. And just quickly, Walmart, any color on any changes in their level of price investment?

Yes. It would be similar to what we've seen before in terms of our comments. As you know, we won't talk too much about specific competitors. We have a ton of respect for them. There is no doubt they continue to improve. But that's the same comments I made at the investor call and I made at the last quarter. And all of us would have different approaches in different regions of the country.

And our last question will come from William Kirk of RBC.

So I'm still a little confused about the end of the third quarter. If ID sales have been running at essentially 0.5 with 2 weeks left and finished at 0.1, does that imply the last 2 weeks were down 2%? And then taking the calendar commentary, does that imply Halloween sales or sales associated with Halloween are down, too, thanks to moving from a weekday to a -- or moving from a weekend to a weekday?

Yes. I don't know if I'll get that precise in answering the question because daily fluctuations are always dangerous because of things like you cited, Halloween moving between days. I don't think we said that we were absolutely at the low end of our 50 basis points to 150 basis points ID guidance. We said we were near it, and it's actually -- in our original guidance for that, we expect that the third quarter to not get to the low end, but the fourth quarter to be above the low end to bring us inside that range. And we didn't end up the third quarter drastically different than we did. And I think it's -- maybe it was my communication skills back on November 2, and people hearing that we're near the low end, just assuming that you're at the low end. I go back to, it takes $20 million in a quarter to move ID sales by 10 basis points. So the fluctuations when you're in this range, if I missed those 4 days that were left by $20 million, that cuts my ID sales in half if I was at 20 basis points. If I'm at 4%, it goes to 3.9%, and it's not a very big deal.

Thanks, William. Before we end today's call, I'd like to share some additional thoughts with our associates listening in today. Being part of millions of families' celebrations this holiday season is a great honor and privilege. Our customers count on us to have what they need and more, and you make it all happen. Just last week, nearly 10.5 million customers shopped with us on Tuesday and 13.5 million on Wednesday before Thanksgiving. That's incredible. A huge thank you. No matter where you work, you make the holidays special for our customers, our communities and each other. I also want to thank our store teams for their outstanding response to our national hiring event in November for all military veterans and family members. We hired 4,000 veterans and family members in one day, which is nearly 3,000 more than last year's event. We are delighted to welcome them to our Kroger family as part of our continuing commitment to active duty troops and the nation's 23 million veterans. Thank you for all you do every day. Merry Christmas and happy holidays to you and your family. That completes our call today. Thanks for joining.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.