Good morning, and welcome to The Kroger Co. Second Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kate Ward, Director of Investor Relations. Please go ahead.

Thank you, Laura. 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 second 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] Please save the date for our 2017 Investor Conference, which we will hold in New York on October 11. Details will be coming soon and we hope you can join us. I will now turn the call over to Kroger's Chairman and Chief Executive Officer, Rodney McMullen.

Thank you, Kate, and good morning, everyone, and thank you for joining us today. With me to review Kroger's second quarter 2017 results is Executive Vice President and Chief Financial Officer, Mike Schlotman. As you know, Kroger has competed in an ever-changing retail landscape for 134 years. Our success over time boils down to one thing: Our relentless focus on the customer. That focus allows us to deepen our connection with customers and create shareholder value. The customer remains the center of everything we do. The 4 core elements of our Customer 1st Strategy are as relevant today as they were when we first introduced them. How we invest each year to drive customer engagement changes regularly based on customers' changing needs and wants. This showed in our second quarter results as we returned to positive identical supermarket sales growth and both loyal and total households increased. Traffic was up, unit movement was up and market share was up. Our customers' perception of our prices is excellent and they continue to get even better. Based on our second quarter results and expectations for the balance of the year, we have confirmed our annual net earnings guidance. The operating environment will continue to be incredibly dynamic, but more importantly, customer behavior is changing faster than ever before. For the last few quarters, we've talked with you about our expanded view of all the food our customers eat and how we've been working to redefine the market as share of stomach rather than share among traditional grocery stores. We know that the massive $1.5 trillion U.S. food market creates a unique and sustainable growth opportunity for Kroger. You'll see changes in the way we go to market as a leading indicator of the lens through which we view our market. We see…

Thanks, Rodney, and good morning, everyone. We're pleased with our second quarter results, especially the return to positive identical supermarket sales. That, combined with strong market share, tonnage growth and both loyal and total household growth, demonstrates our ability to evolve with the changing preferences of customers. Kroger has the team, the skills, the knowledge, the scale and data analytics to be a winner in food retailing. Another positive sign is that we had overall product cost inflation for the first time since 2015. As you know, the change from inflation to deflation and back again is one of the toughest environments to operate in for our stores, and we're proud of our team's ability to manage through it. Our Customer 1st Strategy has always guided our strategic investments to be there for our customers today and, more importantly, to where they are going in the future. To undergo the transformation Rodney discussed, we recognize that we need to make these Customer 1st investments more aggressively and faster than ever before. Like Rodney said earlier, we are eager to share the specific elements of our plan with you at our Investor Conference in October, but today, I will highlight 2 examples. First, 84.51° has helped us redefine space optimization for the entire store. As this comes to life, it will drive sales and operating profit growth. In the short run, there is a cost to doing this, but we feel the return is significant. This is another example of using 84.51° in new and innovative ways. Second, we're making sure we have the right products at the right cost and at the right retail prices for our customers. We are approaching these efforts, along with the areas Rodney outlined earlier, with even more focus and urgency than we have in…

Thanks, Mike. I'm often reminded of the saying, may you live in interesting times. These are interesting times in our industry. And I know some of you wonder how Kroger can continue to thrive in such a dynamic operating environment. We have a history of evolving to meet our customers' ever-changing needs. The key is to proactively see where the customer is going and to proactively address the changes. That is what we are doing today. Through innovation, Kroger is redefining the food and grocery customer experience based on our core strengths. Kroger has more data than any of our competitors, which leads to deep customer knowledge and unparalleled personalization. We have incredibly convenient locations and platforms for pickup and delivery within 1 to 2 miles of our customers. We have a leadership team that competes -- combines deep experience with creative new talent. We have the scale to win with more than 60 million households shopping with us annually. In fact, we've been named America's most beloved grocery store several times. We have a proven track record of consistently returning capital to shareholders through an increasing dividend and share buyback program. And we have a track record of connecting with our associates, customers and communities to uplift and improve lives as evidenced by our team's response to Hurricane Harvey. Now, we look forward to your questions.

[Operator Instructions] And our first question will come from Karen Short of Barclays.

Starting, I guess, with your guidance. I guess, what I'm trying to understand is, obviously, you maintained your earnings guidance, but you now have operating margins down 30 to 40 basis points versus the prior 20 to 30. So by my math, that's about $0.09 to earnings. And so, I guess, I'm wondering, just to clarify, the offset has to be below the line, unless I'm missing something? And I just had a follow-up on the operating margin guidance change.

The benefit comes from multiple places throughout the income statement, Karen. There are efforts underway that will make the operating margin decline that you saw in the second quarter not as much in the third quarter. We feel very good about the health of the business today, the trend of ID sales, our efforts on cost of goods reductions and our efforts on productivity and operating cost reductions. And when we combine all of those, we feel comfortable with the $2 to $2.05.

Okay, but within the change in the operating margin rate. So it's now down 30 to 40 basis points versus the prior 20 to 30. Can you maybe just talk then a little bit about where -- that was a first half event then and so we would already kind of seen that? Or is there more to come in terms of gross margin or operating expenses in the second half that were not kind of -- or we hadn't been previously contemplating?

Yes. I'm not going to go into every specific line of the income statement, but we are seeing good flow of cost of goods coming in and good cost savings opportunities in the back half of the year.

Okay. And then, just one quick question. I guess, on Bloomberg, you indicated sales in the third quarter to-date were off to a nice start. I think that's what you said. Maybe can you get a little more granular, meaning are they at the high end of your second half guidance or a little more color there?

Yes. Currently, quarter-to-date, and this is without the hurricane effects, we would be above where we finished the second quarter and it would be closer to the high side of the guidance range. The reason we exclude the hurricane is because one day it's a positive, one day it's not because of, obviously, one day you'll have business that's up 100% or 200% and the next day it's basically 0. So we just -- until we get completely through the 2 hurricanes and when we release third quarter, we'll obviously give a lot more insight. But so far, we would be trending ahead of second quarter and closer to the top end of the range.

And Houston is doing just fine. They have all but 2 stores back in operational and our warehouse is fully operational.

And the next question will come from John Heinbockel of Guggenheim Securities. I apologize. That actually will be Zach Fadem from Wells Fargo.

I want to follow-up on the ID sales. You mentioned the recent traction, but your second half guidance would imply that you actually narrowed the annual range by 30 to 40 basis points. So could you just talk about parts here, estimates, traffic trends and maybe walk through the decision to narrow that range rather than just holding it steady or taking up the low end?

Yes. Frankly, we talked about it a lot, and what our intention to do is really to take flat for the year off the table because we don't see that in the cards. We still clearly see 1% for the year in the cards and our intent was really to get the notion of flat off of the table. It may be confusing to people so far today, but that's what our intention was. We may not have done it as perfectly as we could have, but we still think the high end of the original annual guidance range is in the cards. But we don't believe flat is in the cards, which is why we wanted to take that off the table.

And on changing the range, as Mike mentioned, if we'd left the range the same as it was before, it could have meant that we would have had positive -- negative identicals, excuse me, for the second half of the year. And obviously, we wanted to make sure that everybody understood that we do expect identicals to be positive. And the trends that we're seeing so far, the identicals continue to improve.

Okay. That's helpful. Appreciate that. And Mike, I also wanted to follow-up on the quarterly EPS cadence that you provided last quarter. Should we still anticipate EPS up slightly in Q3 and then flat in Q4, excluding the extra week?

Yes. We actually purposefully pulled the quarterly guidance cadence out of the earnings release in light of focusing more on an annual earnings per share target. I don't see any big alterations to that guidance that we had last quarter. Halfway through the year, you kind of have to wind up with those kinds of numbers to be in the $2 to $2.05 range anyway.

And now, our next question will come from John Heinbockel of Guggenheim Securities.

So, Rodney, 2 strategic questions. Let me start with the space optimization project you're talking about. Sort of big picture and/or little picture, is that less center store, more fresh? Is it less brands, more private label? What are you doing there? And then, what are the -- are the costs simply labor costs to rearrange shelving and the like?

They -- in terms of how much it encompasses, it would be everything that you mentioned plus some. And as Mike mentioned in his comments on the space optimization, 84.51° is helping us look across the whole store and how do we use space. So obviously, in some cases, it's going to continue -- continuation of adding more fresh space. It's also -- in terms of the products that we offer to the customer, every single item has to earn its right to be on the shelf and categories have to earn the right to have a certain amount of allocation. So it's all of those things. The expense would really be driven by 2 things. One, when you make some changes, there's some equipment that you would write off. As you make the changes, there's certainly the labor in the cost in doing the changes, plus some of the equipment gets written off almost immediately. So it's both of those factors that is behind what Mike was mentioning.

And if you move things around too much inside of a store, there's obviously disruption for a short period of time to the customers being able to easily navigate as we move a lot of shelving and things around.

And then, secondly, when you talk about capital allocation -- and it sounds like you want to invest in existing stores more than new stores at this point. So what does that mean for your M&A philosophy? Does that suggest less of an appetite for M&A? Does it suggest more of an appetite for digital M&A and less brick-and-mortar?

The -- I would say the broad comment would be, from an M&A standpoint, we would be equally as excited today as 2 years ago when we find the right person to partner with. And as you know, when we look for someone to partner, we're looking at somebody that brings things to us as much as we bring to them. We would continue to be aggressively looking at anything digital that adds capabilities. You may recall in the past 1.5 years or so, we merged with a company called Market6 and another company called YOU Tech and we were able to use in both of those situations the 84.51° and accelerate the work that they did and accelerate some of the work that we're doing plus brought a great amount of talent to our company. So we would increasingly look -- are there certain capabilities that somebody would bring to us and how do you partner with them in a way that would bring that capability. But for the right merger opportunity, whether it's digital or physical, we would be as excited today as 2 years ago, but it would obviously have to be somebody that fit in well with where we operate and has a business that's strong. I don't know, Mike...

I agree.

And our next question will come from Ken Goldman of JP Morgan.

Two for me, if I can. Have you -- in your opinion, your competitors -- and I know it's very soon so maybe the answer is no, but have you seen anyone or have you yourself lowered any prices yet as a direct result of price changes at Whole Foods? And, I guess, can you talk a little bit about how your stores are doing the last couple weeks? It's not that Whole Foods necessarily has lowered prices that much, although arguably they have, it's just that there's been so much news about it. I'm just trying to get a sense of really what you're seeing so far in the marketplace.

Well, as you mentioned, Ken, it's only been 1.5 weeks. So it's very early in the process. And as I mentioned in our prepared remarks, we're really proud of the work that we started over a decade ago on making sure natural and organic product is affordable to all customers. And we've never felt like just because something is natural and organic, you should charge a premium for it. In terms of the impact, obviously it's way early, but there isn't anything that would cause you to develop any point of view at all in terms of changing trends. But it's only been 1.5 weeks so I would caveat it a million different ways.

It feels like it's been longer in my world. The second question...

Obviously, the discussion around it has been longer than that.

Yes. Yes. It wasn't a very quiet August for many of us in this industry. I'm sure not for you either.

No. Right.

Can I just follow-up on one thing? In terms of your guidance for the comps in the back half of the year, I just wanted to dig in a little bit more on that because the business is doing, clearly, in some ways better, right? You're talking about comps being positive. You have positive tonnage, but the guidance does imply a fairly meaningful step down in the 2-year stack in comp in the back half. And I know there's many ways of looking at that, but that's one of the questions I've gotten from investors this morning. I just wanted to see if you had a comment on that, if you could sort of help us out understand why you're sort of thinking that comps will be a little bit maybe weaker on a 2-year level and maybe that means fundamentally weaker? Or is that not how you look at it?

I don't think -- I actually don't look at 2-year stacks very much because I sold whatever I sold last year and I'm selling that plus more this year. And we feel very good about the underlying health of our business. As we said in the prepared remarks and in response to questions so far, ID sales so far in the quarter are pushing the high end of the guidance range. We grew loyal households. We grew total households. We had strong market share growth and strong tonnage growth. And I would also remind you that as our brands continue to gain strength and gain a bigger share of both units and sales, that comes at the expense of a lower retail ring, which winds up being a bit of a headwind to reported ID sales. And we are -- we have been very aggressive with how we position those products inside of our stores.

And the next question will come from Ben Bienvenu of Stephens.

On the digital revenue growth, pretty significant and obviously making progress there on the ClickList side. I'm curious, did that have any meaningful contribution to the comp that you reported in the quarter?

Well, it's a great question and it's hard to answer because the thing that we're trying to do for our customers is to do it in a way that's totally seamless. So the customer continues to come into the store and shop. So we actually get more of their total basket. So it's helping comps, but it's helping comps from that total customer household and how much they're spending with us. From a -- so it's helping identicals, but it's really hard to say ClickList is x percent of it or y percent of it. I don't know, Mike, anything you want to...

No. It's clear that the customers love the service and it gives them an incremental connection with Kroger. And as Rodney said, it gives us a bigger share of their wallet the longer they're engaged in ClickList.

Understood. And then, second question on the private label business. That's been a big success factor for you. Rodney, you've highlighted in some of your initial comments the customer perception of the brands that you offer under your corporate brand. I'm curious, as you think about the future opportunity, a, what is the magnitude of that opportunity as a percentage of sales? And then, b, how much capacity do you have for self-manufacturing to deliver on that higher penetration opportunity?

Yes. I'll give a little bit broader answer than just your question. First of all, we would talk about it in terms of our brands versus private label because from -- and it's something that took us longer than it should have, but those brands, they are Our Brands and the customers tell us they love it. And one of the things that we probably should have done years ago, but we hadn't, but we actually was much more aggressive on hiring a third party company to do a broad taste -- taste and quality preferences for our brands across multiple national brands and other private -- other companies' private label programs. And we always thought we were good, but we came out even significantly better than what we would have even thought. So it really highlighted the progress that our team has been making on improving the innovation in our brands, the variety of offerings. If you look at Simple Truth, obviously, 5 years ago, it didn't exist. Today, it continues to grow double digits. So when you look at overall, our customers tell us they love our brands and we continue to even get more aggressive in terms of creating additional innovation brands, offerings within it, new flavors. In terms of the potential, at this point, the only thing that I would say is it would be massive. And one of the things that we did several years ago, we went to the outside and hired a new leader for that team and about half of our team is from the outside. And when you go and look at Europe, obviously, on our brand products in Europe, the market shares there are significantly higher than the U.S. And we would be much more focused on how do we make sure the innovation, the quality and the offerings that we have, we earn the right for the customers to take it to that kind of level. In terms of our plant capacity, if you asked our manufacturing team, they would probably tell you they're at almost capacity. I've always found and we've always found that we always figure out ways to produce incremental product and do it very efficiently. So in terms of capacity, it is one of the great things about knowing how to operate plants. We could easily expand capacity either through process change or additional -- expanding plants, things like that, whatever's needed.

And next, we have a question from Robbie Ohmes of Bank of America Merrill Lynch.

Rodney, Walmart -- you guys called out your great digital sales growth. And one thing is can we get digital as a percent of sales from you guys?

Not at this point. I don't know, Mike, if you -- not at this point. As you know, we're continuing to provide a little bit more insight than before, but...

Okay. So I'll keep pushing on that, but maybe in the future some time. But I was just going to ask, Walmart, obviously, is being really aggressive with the rollout of their version of ClickList. I was hoping you can maybe speak to us about where you're having crossover with them, sort of what the dynamic looks like because, I think, you 2 are being the most aggressive at going after this new way of grocery shopping. And then, the other question I had on competition, ALDI has been out there -- sorry, Lidl has been out there now a little bit longer than Amazon's owned Whole Foods. So maybe you could kind of update us on what you are seeing there.

Yes. On the crossover with Walmart on digital, I actually don't know the answer to that. Mike, do you?

I don't know how many we overlap with. I do know that the thing that customers really appreciate about our offering is the fact that most of our customers live within a mile or 2 of the store. They shop and they can go pick the ClickList up offering in. So it's extremely convenient for them to engage in that kind of an activity and often use the [ in easy out ] and not all of our competitors have that advantage.

Yes. And it's incredibly easy to develop a shopping list with us, the work that our teams have done working with 84.51°. We do a lot of work on predicting what your shopping list will be to make it really easy to do. Like, one insight that I can give you, and I'll -- we'll have to go back and look to see what the overlap on Walmart is, our success on ClickList is very consistent across the country. You don't see one place where it's a 1% and somewhere else it's 100%. The variance of success is pretty consistent. On Lidl, obviously they continue to open stores. So far, what they've done has been pretty consistent with what we expected. And obviously, you've heard us talk about, from a pricing standpoint, we won't lose on price. We're not trying to lead the market down on price, but we're not going to lose on price. The success so far in terms of being able to maintain our business and grow our business, we feel very good about our -- the ability to compete against ALDI, Lidl and anybody else. So I wouldn't say there's been any surprises so far. Obviously, they're a great competitor, but there's a lot of great competitors out there.

And just last question. The lack of -- the move away from giving us long-term guidance. Is the ramp-up of ClickList a big piece of that, meaning does it really pressure store profitability in the short-term because you haven't -- is that how we should think about it? Is ClickList just great, but in the short-term, it's a real pressure on margins?

Well, as everybody on the call knows, we make our investment decisions in terms of what do we think is best for our business 3 to 5 years out and -- which, in turn, means what's best for our shareholders 3 to 5 years out. There is no doubt that ClickList is a headwind on earnings currently. And we've even continued to accelerate the speed in which we put ClickList in. So it's an incremental headwind. We feel very comfortable when you look at it over a 3- to 5-year period of time. Our customers will appreciate that we offer ClickList. Our associates obviously, in terms of being able to provide the service, will be glad and our shareholders will be glad. So we can clearly see where we're -- there's a path where we're indifferent on whether somebody comes into the store or shops with us on ClickList. It's -- you do have initial pain. And that would be a peek of caused us to affect the long-term guidance perspective.

And our next question comes from Michael Lasser of UBS.

This is Mark Carden on for Michael Lasser today. So you commented earlier that periods transitioning from deflation to inflation can lead to a challenging operating environment. And so given we saw food at home CPI turn inflationary again this quarter, can you comment on how the competitive environment has held up relative to your expectations? And by that, has it been different from past cycles or pretty much in line with what you've seen recently?

Yes. I would say it's fairly common or a fairly traditional kind of a transition. It's just that any time you go from higher prices to lower prices, the thing that gets disrupted is how quickly will people lower prices. And then, the flip is the case as inflation creeps back in, how quickly will people adjust their prices the other direction to continue to protect their gross margin dollars that they would have in those products. And that's what causes the disruption in the short run as you're cycling through the 2 of those. I would say broad-based there isn't anything that's really out of the realm of what you normally see. The one exception to that would be what we talked about earlier in the year relative to some low milk prices earlier in the year and eggs continue to be pretty inexpensive as well, but those would probably be the only 2 categories that I would hold out as maybe exceptions to the norm right now.

Okay. Great. And then, I guess, a little bit more near-term, you mentioned that, with hurricanes, there's obviously some variability. One day you could see a benefit from stock-up trips while the next day you see a decline from closed stores. I guess, historically, have you seen this trend towards either a net benefit or a net loss? Or is it really just varied based on the storm?

It really varies based on the storm. I would say, at the end of the day, there is probably -- it depends -- one, it depends how the insurance claim winds up getting reconciled. But from your business inside the store, there is usually a slight benefit. One of the things we've always done a great job at is being one of the first people fully back in business and being able to service our customers and the communities where we have our stores. And it's very important for those folks when if they've been evacuated and the local authorities lift the evacuation order, we have to be back in business for them or they're going to have a really big problem when they let folks come back into their homes. Many of those folks have lost product in their homes and they have to stock back up once they can get back in their homes. So there are just so many factors in it, but first and foremost, we try to be in it for our associates, our customers and our communities because they do need food to eat and we've always been there to provide it for them.

The other thing that's -- we have such great relationships with local agencies. Almost always, we would be considered part of the first responder group because people understand that it's important for the grocery stores to get stocked. So our associates would be given clearance as a first responder in most cases.

Clearance to get to the store, often part of the first grids to come back on in power. There's a whole litany of things that -- before you come back from an evacuation, you have to get basic services up, you have to have food. And we typically always fall inside that and are there ready to help.

The next question comes from Rupesh Parikh of Oppenheimer.

So I also just wanted to touch on maybe some of the larger CPG players out there. We continue to see weakening trends from a number of the larger players. And I was just curious, as you look at your partnerships with them, are you at all starting to see more efforts by them in terms of maybe supporting their products in store or even maybe improving competitiveness?

Well, on CPGs, as you know, we always work with CPG partners trying to understand how we grow our business on a combined basis. So both of us are very focused on growing the business. I think CPGs continue to aggressively incrementally try to work on -- work with us on helping grow their business. It's one of the things that's nice about having the great insight we have with 84.51°. We partner with most CPGs in a different and more deep way that also involves product innovation. So there is no doubt there's a tremendous amount of change going on. The CPGs feel that change. And we're working with the CPGs for both of us to grow our business. But obviously, we're also working on focusing on growing our business as well.

Okay. Great. And going back to maybe a question that was asked earlier on the promotional environment. Because it sounds like some of the items that were more promotional, eggs and milk, you continue to see pockets of increased promotions out there. But outside of that, how would you characterize the promotional environment versus what you were seeing earlier this year?

Outside of that, I really wouldn't say that it's -- there's been a massive trend change. What did they used to always say in economics, all short statements are wrong. So you give the scenario and I can find it somewhere. The biggest change would be -- continue to be milk and eggs across the country. Everywhere else would be puts and takes.

And our next question will come from Vincent Sinisi of Morgan Stanley.

I just want to go back a little bit more to the overall pricing strategy, right? Obviously, kind of since last quarter, it's been a big topic for you guys. What is the 84.51° data telling you? Like, when you're making decisions in different geographies to either be a leader or a match or a close follower on pricing on some of these high-velocity items, is it kind of always the case that you kind of have to match it to keep that loyal customer? Or if they go somewhere else, how long does it take to get them back? And maybe just a little bit around the consumer behavior that the data is telling you.

The biggest thing that the 84.51° insight shows us is the customer decides where to shop based on the total experience. And obviously, that total experience is what's the shopping environment like. So what's -- how the associates treat the customer, what kind of rewards do you have, what type of personalized offers are you making, which it's very hard for anybody to see that other than each one of us as a customer individually, and then obviously, from a fresh product standpoint, having great produce, meat, deli, dinner tonight, those kind of things. So the thing that's really important is the -- all of that together. The price -- the specific price items -- really each one of us would have different items that are our biggest hot button. So it would be factoring in all of those things in terms of how we decide where to price and how to price. And the insights -- the biggest part of the insights is it really is important to customers for the over total experience, not just one dimensional of the experience.

Okay. And then, maybe just a quick follow-up. Just going back to the maintained EPS guidance for the year. It would seem that, at least with 10 basis points lower margin, at least one of the larger offsetting factors would be from fuel. So maybe just any thoughts on the profitability on the fuel side for the back half of the year. And also, just I don't know, I might have missed it, but can you give us an inflation number as well for this quarter?

What was the last part? You kind of tailed...

Yes, the inflation for the quarter.

So for fuel, it continues to be a strong year in fuel. And I don't want to play the hurricane card again, but obviously, refineries have been shut down. The Colonial Pipeline was shut down for a while. Supply has been tight in some places. So there will probably be some disruptions overall in the third quarter. We haul fuel from a lot of distant places to get -- to keep a lot of our stores in fuel. So I still think fuel had a relatively good back half of the year. Relative to inflation, I ticked off the categories that saw some inflation and deflation. We did have inflation for the first time ever. In the grocery category, it was -- probably it was 48 or 49 basis points of inflation, which is the biggest driver of where the overall business winds up going. And that's the first time in -- well, my sheet goes all the way back to third quarter of '14 in the grocery category, on a quarterly basis, that's the first time since the fourth quarter of '14 that we had any inflation in the grocery category.

The next question comes from Stephen Tanal of Goldman Sachs.

Just to better understand the reduction in the nonfuel operating margin guidance, is that more about gross margin or operating expenses versus sort of the initial thought process?

Yes. What was your comment on the guidance of reducing the nonfuel operating margin?

Yes. Is the reduction more about gross margin being a little worse than initially thought or operating expenses being a bit higher?

I don't know that we gave -- I'm unfamiliar with us having given guidance on operating margin for the back half of the year.

It's in the 8-K.

It's in the 8-K? Okay. I got you. I was going to say we didn't talk about it in the -- on the call. It's the continuation of what we've seen. We do think from a dollar standpoint that we're going to continue -- that we'll start to see some strengthening of gross profit dollars and operating profit margin dollars as we go throughout the year. As ID sales continue to get stronger, that will help grow the dollars, which is obviously the most important thing to grow earnings per share by. And at the end of the day, we focus on the dollars, not the rate.

Okay. Fair enough. And just to follow-up on the milk and eggs comment, I think you might have mentioned just now sort of across the country, and I don't know that, that was consistent with sort of the last time I heard about that. Has it broadened out? Did I catch that right? And pursuant to that, were the price investments that you guys announced last quarter, do you feel like still they're already sufficient?

Yes. The milk and eggs, I didn't -- the comment I made, I didn't intend to infer that it changed anything from the first quarter in terms of broadening out or narrowing or anything on milk and eggs. Now, what was the second part of your question?

Second part is just around the price investments in those categories. Do you still feel pretty good about that? Or what you've done already, is that sufficient at this stage based on the geographies where you're seeing that pressure?

Well, I would just, I guess, I would broaden it we feel good about the pricing investments that we make. And based on what the customer's telling us, it continues to connect as we expected and we feel good about it when you look at everything in total.

Got it. And this is the last one, just on the inflation comment. Was that specific to groceries or to center store? Or was that kind of all-in applicable to IDs? And if not, could you give us sort of an all-in number?

Well, the all-in number was ID sales, without inflation, without the pharmacy business, was about 60 basis points of inflation, so not a whole lot different than the grocery category.

And the next question comes from Shane Higgins of Deutsche Bank.

So nonfuel FIFO gross margins, excluding ModernHEALTH, were down about 30 basis points. That was a pretty good improvement versus the first quarter. Could you guys just walk us through some of the puts and takes of that decline? And is that more reflective of some moderation in the price investments? Is it private label mix? Just any color there would be great.

I would say there would be 2 things that helped that. And one is the continued strength and growth of our brands, which, while it dampens the top line a little bit, comes at a better gross margin rate. And the second is we continue to do a great job on cost of goods and the input cost of that. And one of the things the CPGs partners like about the cost of goods investments is we do pass those on to the customers, but it does help strengthen the gross profit rate in dollars over time when you have the better cost of goods that are out there.

Also, in some of the cost -- operating cost categories, the second quarter trends improved versus the first quarter as well.

And should we expect that to continue into the third quarter, that trend?

I would think so.

Okay. Great. And just a quick follow-up. I just had a bigger picture question on just -- obviously, the retail environment has been pretty challenging over the past year or 2. Do you guys anticipate any kind of acceleration in store closures from weaker competitors over the next year or 2 years? Not sure how much visibility you guys have into that, but if so, would you guys be prepared to maybe purchase any of these assets or locations, similar to what you did with Marsh? And how does your decision to pare back CapEx kind of play into that dynamic, if at all?

We feel very strongly that we would expect additional consolidation going forward. And the consolidation will happen the way you described plus other ways in terms of companies merging and other things. So we don't think there is any doubt that you'll continue to see a lot of consolidation. You've always heard us talk about on -- anything that happens, you should assume that we've looked at it. And if you look at what we did with Marsh, obviously those worked out really well for us because it's specific trade areas that we haven't been able to get into. And by buying some stores from somebody in that situation, you're able to get into trade areas and leverage all your existing infrastructure. Those we always like, but they're lumpy. So you won't have any for a couple of years, and then you'll have a whole bunch of them happen, but those are ones that we will always be interested in and always take a look at. But you should assume that our overall view on merging with somebody is the same and we continue to look at stuff.

That final question will come from Alvin Concepcion of Citi.

Great. Just curious about your natural and organic portfolio, the growth rate you're seeing there, what portion of your business it now represents. And related to that, what is your private label penetration in natural and organic?

If you look at natural and organics overall, it's over a $16 billion business for us on an annual basis. So obviously it's an important part of our business. It continues to grow strongly and we would continue to see a great opportunity in that space. We find more and more customers, for some items, they will purchase a natural or organic item. In other places, they will buy traditional items. And for us, what we try to do is we don't judge a customer on how they eat and we try to make sure we have what the customer wants at a great value. In terms of the share of market, if you -- it depends on how you define share of market. If you look at Simple Truth last year, it was, what, a $1.7 billion category for us. And they -- if you look at the $16 billion in total, that would obviously include some non-branded items and other items, so that would give you some insight in terms of share of market. If you look at grocery overall, grocery, typically on units, is close to 30%. So obviously there's still a lot of room to grow.

Great. And my follow-up is just on click-and-collect. Just curious what kind of penetration you've seen in stores that have had it longer? Where do you think that can go? And also how do the visits and basket compare to an in-store customer?

Yes. When you look at total, we get more of the customers' business and that's what we find -- the reason why we are so supportive and keep working on it. In terms of the share of business, at this point, we wouldn't give the specifics on stores and what percentage of their business is in ClickList. It's a reasonably wide range. And the range isn't driven by anything that is -- it's more specific stores. So I know one store that has a pretty high percentage. It's right off the interstate so that store has gained a lot of new customers because it's easy on and easy off the interstate and their trade area for ClickList is completely different than their trade area for the store. For us, what we've tried to design is a business model that we know -- a certain percentage of business, it's more efficient to do it in store because of not having incremental asset investment. At the point in time that it grows, it's easily convert it to dark stores or a freestanding warehouse facility where you put in more automation. So what we've tried to do is design where we can support and partner and make money, and the customers will take it to whatever percentage of our business they take it, and we'll be there for them as they go. So we've really worked hard on having a model that's easily scalable and scalable in terms of what percent of penetration it becomes. Thanks to everyone on the call. Obviously, hopefully, you hear some of the comments that Mike and I are making. Kroger is playing to win. And the things that we do are what we believe will be best when you look out 3 to 5 years for our…

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