Good morning, and Welcome to The Kroger Company fourth quarter 2020 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Rebekah Manis, Director of Investor Relations. Please go ahead. Thank you, Gary. Good morning, and thank you for joining us. Before we begin, I want to remind you that today's discussions 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. The Kroger Company 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 ir.kroger.com. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question if necessary. I'd like to confirm that Kroger will host its annual virtual Investor Day event on Wednesday, March 31st. Please hold the date, and we look forward to sharing more about our future growth plans with you then. I will now turn the call over to Kroger's Chairman and Chief Executive Officer, Rodney McMullen. Thank you, Rebekah. Good morning, and thank you for joining us. With me today to review Kroger's fourth quarter and full year 2020 results is Chief Financial Officer, Gary Millerchip. This past year presented challenges that none of us could have predicted. I am so proud of how Team Kroger has risen to meet every challenge and to be there for our customers when they've needed us the most. While we hope that the worst of the pandemic is behind us, and we are encouraged by the progress around the initial vaccine rollout, our priority remains the health and safety of our associates, customers, and communities. 2020 was the final year of our three-year transformational plan, Restock Kroger, during which we made strategic investments and changes to our business model to better serve our customers. We focused on widening and deepening our competitive moats, which include seamless personalization, fresh, and our brands. As a result, we generated strong momentum and successfully repositioned our company to serve our customers in new and exciting ways. Let me now turn to our results. Kroger delivered strong results during our fourth quarter and for the full year 2020. We continued to gain market share, and full year results were above the guidance we shared with you last quarter. Identical sales without fuel were 14.1% for the year as customers continued to consolidate trips and spend more per transaction. We grew digital sales triple digits in 2020, enabled by our team's ability to pivot quickly and effectively in the first stage of the pandemic to ensure that we were meeting our customers' demand for safe, low touch and touchless shopping modalities. Our strong performance in digital is also a testament to the proactive investments we made over the last several years in our network, which positioned Kroger to respond with agility during this crisis and critical time. Beyond the numbers, we have built substantial momentum within our business, and more importantly, we continue to deepen our personalized relationships with our customers who remain at the center of everything we do. When the pandemic started, no one knew what to expect. What we did know was that our decisions and actions would be guided by our purpose and our values. Our purpose is to feed the human spirit, which means we are driven to do more and help make the lives of those around us better, especially during times of uncertainty. Since the beginning of the pandemic last March, our most urgent priority has been to safeguard our associates and customers. We've implemented dozens of new safety and cleanliness processes and procedures in our stores and all of our facilities, including safety partitions and physical distancing floor decals, implementation of customer capacity limits, and providing PPE like masks for our associates. All of which are described in our Blueprint for Business, an open source guide we've created to help other companies navigate the complexities of safely operating during a pandemic. Supported by our strong performance and cash position, we've committed more than $2.5 billion to safeguard the environment of our associates and customers where they work and shop in, and to reward associates, including committing nearly $1 billion to better secure pensions for over 30,000 associates. This was in addition to paid emergency leave, financial assistance through our Kroger Helping Hands Fund program, and much more. We continue to provide support for our associates, including awards in November and February that included $100 cash and 1,000 fuel points placed on frontline associate shopper cards to help ease financial hardship from the pandemic, and as a thank you for their continued commitment to serving our customers so tirelessly. We know the critical role that the COVID vaccine plays in creating a safe environment for our associates and customers. That's why we're encouraging everyone to receive the vaccine as soon as they are eligible to do so. During the quarter, we announced a $100 incentive for all associates who receive the manufacturer recommended dosage of the vaccine. We hope this offer, along with targeted education efforts, will help break through vaccine hesitancy and further encourage the health and safety of our associates. Kroger Health is proud to be a partner with the federal government and our state governments in distributing the vaccine. We continue to introduce initiatives to improve the vaccination process, including the recent launch of a new scheduling tool and enhancements to our website to make finding and scheduling vaccine appointments easier. To date, Kroger Health has administered more than 665,000 vaccines, including more than 38,000 for our own associates. Because vaccine availability and eligibility continues to vary by jurisdiction, we are advocating at the local, state, and federal level and calling for our associates and frontline grocery workers broadly to be included in the earliest vaccine phase possible. Inspired by purpose and guided by our values, 2020 taught us that we are capable of doing more, of moving faster, and effectively prioritizing what matters most to our customers, associates, and communities. In addition to changing how we work, COVID-19 has changed how our customers enjoy food. We continue to see people eat and work more from home and prioritize health and cleanliness. We believe that these trends will continue even as restrictions ease and vaccinations are distributed. We will share more of these trends with you at our investor day in a few weeks. What hasn't changed is our fundamental commitment to putting our customers first. Our competitive moats, seamless personalization, fresh, and our brands are built upon this commitment and are stronger today than ever before, especially as customers eat more food at home. We will continue to invest in these critical competitive advantages as we work to win a larger share of the food at home market. Let me provide some more detail on each of these competitive moats. Pickup and delivery continued to grow during the quarter, and we are seeing more and more new customers engaging in our seamless ecosystem. Our overall digital sales grew 118%, including delivery sales growth of 249% during the quarter. When customers engage in both our in-store and online modalities, we see a 98% retention rate within our ecosystem, highlighting how sticky our customer engagement is. During the quarter, we also saw further improvement in digital profitability as we continue to improve cost efficiency, sales mix, and retail media. Yesterday, we completed the inaugural order through our first Ocado shed in Monroe, Ohio. This marks the soft opening of the facility, and we look forward to our grand opening in early April. We continue to be excited about the elevated experience that this will bring to our customers in the tri-state area and across the country as we continue to open additional facilities. Our data and personalization allow us to deliver meaningful, unique customer moments across channels to address specific customer needs while enhancing their relationship with Kroger. 60 million households shop with Kroger every year. The scale of our digital business has grown rapidly. In fact, during 2020, we had over 1.3 billion customer interactions across our digital modalities, a 30% increase over last year. Our significant reach allows us to meaningfully personalize the customer experience. In 2020, we presented nearly 11 million personalized recommendations per week. That's right, 11 billion recommendations personalized each week. When you look at that over the year, that's more than a half a trillion offered personalized for customers during 2020. We achieved several exciting milestones in fresh this year. As more customers are spending more time at home, our produce and floral departments outperformed total company. Customers are focused on eating healthier, as evidenced by the increased engagement in our Simple Truth brands, which grew 18% during the quarter. We also saw customers trading up and buying higher quality premium products like luxury wine and Murray's Cheese, which also outperformed the total company. Customers look for food inspiration. We continue to develop innovative products to meet their needs, including ready-to-heat and ready-to-eat foods. We have seen significant growth in deli, bakery, and meals solution. Home Chef finished the year with record sales, capturing additional share of stomach from restaurants and grocery retailers. Also this quarter, our Fresh for Everyone campaign celebrated its first anniversary. The marketing campaign is reaching new heights in ad effectiveness and is resonating with our customers. Our brands achieved its best year ever in 2020, exceeding $26.2 billion in sales. Our Simple Truth brand achieved a major milestone, exceeding $1 billion in annual sales for the first time. This is a brand that was created from scratch a little over five years ago. We saw a 20% growth in our premium culinary brand, Private Selection, as more people continue cooking at home and elevating their meals. Our Simple Truth plant-based platform launched 53 new items in 2020. One of the key launches for the year was Simple Truth Oatmilk Ice Cream. This line has brought new customers to the category, and sales are continuing to outpace projections. Over 1.4 million new households have purchased from the Simple Truth plant-based platform this year. As we hold high standards for the taste and experience of our plant-based products, just like the rest of our brands portfolio, our trial rate has continued to grow, and our repeat rate has continued to strengthen. Kroger is committing to helping people and our planet. This is at the core of who we are as a company. During 2020, this work became even more critical as our communities experienced the pandemic and its economic impacts, social unrest, and natural disasters. Let me provide some detail on two important areas under our broader ESG strategy: diversity, equity, and inclusion, and our Zero Hunger, Zero Waste efforts to improve food access and food security. Diversity and inclusion are among Kroger's long-standing core values. In October, we introduced a 10-point framework for action to accelerate diversity, equity, and inclusion and promote greater change in the workplace and in our communities. As part of this framework, we created an internal advisory council comprised of black leaders and associates across the company to help set priorities and drive meaningful change. The Kroger Co Foundation also established a $5 million racial equity fund to align philanthropy to our extended commitment. So far, the foundation has directed $3 million in grants to four organizations with innovative approaches to building stronger, more equitable communities. COVID-19 and its impact also shined a light on the intersection of food security, health and nutrition, and racial equity. Given the increased need in 2020, Kroger nearly doubled our charitable giving to the Feeding America network of food banks and supported key partners like No Kid Hungry to direct meals where needed most. We are pleased to note that our associates continued to rescue surplus food throughout the year, despite heavy stockpiling periods early in the year. Zero Hunger, Zero Waste is the centerpiece of our ESG strategy, and it's how our associates live our purpose every day. I would now like to turn it over to Gary to take you through our quarter four and full year 2020 financial results. Gary? Thanks, Rodney. Good morning, everyone. We are extremely proud of our results in 2020 and the balance achieved in delivering for all our key stakeholders, our associates, customers, communities, and shareholders. Strong execution by our team and accelerated investments in our competitive moats during the pandemic allowed us to create significant value to shareholders and strengthen our balance sheet. The momentum we see in our business, which started pre-pandemic and accelerated during the pandemic, places us in an even better position to grow sales and profitability in the future and deliver on our TSR commitments. Three points of the accelerated momentum in our model achieved during 2020 include significant market share gains, accelerated investments in fresh and digital experience, over $1 billion of cost savings, $150 million of incremental alternative profit, and improved digital profitability. Let me share additional color on each of these points. The change in customer behavior caused by COVID was, of course, a major factor in our results last year. This brought to the forefront the importance to the customer of fresh and digital. We continued to invest and aggressively grow our capabilities in these areas of strength for Kroger, leading to significant gains in both digital and total food-at-home market share. Consistent with our value creation model, we were disciplined in balancing investments in our customers and associates with cost savings. For the third year in a row, our operations and sourcing teams delivered over $1 billion in incremental cost savings. These savings continue to be focused in areas that take complexity out of the business and allow our associates to provide a better customer experience. Alternative profit continues to be a significant growth driver in our model and contributed $150 million of incremental operating profit on top of the $100 million of incremental profit in 2019. Retail media fueled this acceleration, and we continue to see significant opportunity for additional growth in the future. Importantly, this progress with cost savings and growth of retail media also allowed us to improve the profitability of our digital model in 2020, as we reduced the cost to fulfill a digital order and grew media revenue from digital sales. I'll now provide more color on our full-year results. We delivered adjusted EPS of $3.47 per diluted share, up 58% compared to last year, and ahead of the range we shared during quarter three. Identical Sales excluding fuel were 14.1%, in line with expectations. Our adjusted FIFO operating profit also came in at the top end of our increased guidance. Gross margin was 23.3% of sales for 2020. The FIFO gross margin rate, excluding fuel, increased 14 basis points, reflecting sales leverage, continued growth in alternative profit streams, and sourcing benefits, offset by continued investments in price and value for customers. Our OG&A rate without fuel and adjustment items decreased six basis points, reflecting increased sales leverage and execution of cost savings, offset by COVID-related investments to reward associates and to protect the health and safety of associates, customers, and our communities. Turning now to our fourth quarter results. We delivered adjusted EPS of $0.81 per diluted share, up 42% compared to the same quarter last year. Kroger reported Identical Sales without fuel of 10.6%, driven by continued strength in grocery, produce, and meat. Digital sales grew 118% during the quarter, outpacing the full-year rate as customers continued to rely heavily on our digital modalities. Digital contributed approximately 5.5% to total identical sales without fuel. As a result of productivity improvements in the cost to fulfill a digital order and accelerated retail media revenue, we improved pass-through profitability on digital sales by over 20% in the fourth quarter. FIFO gross margin rate decreased six basis points, with continued price investments offset by growth in alternative profit streams and sourcing benefits. Our OG&A rate without fuel and adjustment items decreased seven basis points, which reflects increased sales leverage and execution of cost savings, offset by continued COVID-related investments to reward our associates and to protect the health and safety of associates, customers, and our communities. During the fourth quarter, the incremental COVID-related investments were approximately $275 million. LIFO was a credit for the quarter of $84 million. The LIFO credit was primarily driven by fourth quarter working capital improvements in pharmacy inventory and dairy deflation. The income tax rate of 30.8% was a benefit for the fourth quarter as a result of the UFCW pension restructure charge. Fuel was a headwind of approximately $50 million to net operating profit during quarter four. Like the broader industry, we experienced a year-over-year decline in fuel gallons, and the average retail price of fuel was also lower at $2.20 this quarter versus $2.58 in the same quarter last year. As Rodney touched on earlier, our associates have been nothing short of amazing over the past year, and we continue to invest in and reward our associates for their incredible work. We invested approximately $300 million in increased hourly rates during 2020 as part of the $800 million incremental investment in associate wages previously announced as part of Restock Kroger. Our average hourly rate is now $15.50, up from $15 last year, and with comprehensive benefits factored in, our average hourly rate is over $20. In 2021, we expect to invest an incremental $350 million in continued average hourly wage increases for our associates. Looking ahead, we have several major labor negotiations in 2021, including contracts with the UFCW for store associates in Atlanta, Houston, Little Rock, Michigan, Memphis, Mid-Atlantic, Cincinnati, and Portland. Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality, affordable healthcare, and retirement benefits for our associates. We strive to make our overall benefit package relevant to today's associates. Our financial results continue to be pressured by healthcare and pension costs, which most of our competitors do not face. We continue to communicate with our local unions and the international unions, which represent many of our associates, on the importance of growing our business in a profitable way, which will help us create more jobs and career opportunities and enhance job security for our associates. Turning now to our financial strategy. As a result of our strong operating performance, Kroger generated tremendous free cash flow in 2020, which resulted in a significant strengthening of our balance sheet and liquidity. We reduced $2 billion over the last four quarters, and Kroger's net total debt to adjusted EBITDA ratio is now 1.75%, compared to our target range of 2.3%-2.5%. Our financial strategy remains unchanged. We will continue to evaluate how to deploy excess cash in ways that will accelerate our value creation model by sustainably growing earnings and delivering on our TSR commitment of 8%-11%. Looking towards 2021, we are providing specific guidance to help you better understand how we see the business today. Due to the uncertainty surrounding trends in the food-at- home market as COVID vaccines roll out, we are sharing a wider range than we typically would, and we will be transparent in sharing more as the year unfolds. Our insights suggest there are a number of consumer changes that have occurred during the pandemic that will prove to be more structural and lasting, which, combined with our strong execution and flexible financial model, give us confidence we will be able to manage through the current unknowns. As we cycle the tough comparisons from 2020, we expect our sales will turn negative in 2021, and are guiding to a range of -3% to -5% Identical Sales excluding fuel, and adjusted FIFO operating profit of $3.3 billion-$3.5 billion in 2021. Evaluating our performance using a two-year period will more accurately measure our underlying momentum. We expect our two-year stacked Identical Sales without fuel to be in the range of 9% and 11%. In addition, we expect our adjusted net earnings per diluted share and adjusted FIFO operating profit to have compounded annual growth rates of between 12% and 16%, and 5.4% and 8.5%, respectively. Over the two years, this would result in total shareholder return significantly above our previously communicated target of 8%-11%. We expect our free cash flow to be at least $1.6 billion in 2021, which includes a payment of $300 million for payroll taxes deferred from 2020. Over the course of 2020 and 2021, average annual free cash flow is forecast to be between $2.9 billion and $3 billion. This excludes the sale of strategic assets, company-sponsored pension contributions, and pension payments related to the restructuring of multi-employer pension plans. These two-year expectations are ahead of our TSR growth algorithm, and we believe the momentum in our business places us in an even better position to grow profitably in the future. We remain committed to delivering strong and attractive total shareholder return over the long term and expect our 2021 operating profit guidance to represent a new higher baseline from which we will deliver future TSR of 8%- 11%. Finally, we look forward to sharing more about our strategy for growth and delivering on our TSR commitments at our upcoming Investor Day. With that, I'll turn it back over to Rodney. Thank you, Gary. I'm incredibly proud of our associates. During this past year, our team was amazingly agile and always led with our purpose and values, especially in dealing with all the unknowns of navigating a global pandemic. We are a different company today because of the events of the past year. We are more resilient than we've ever been. We are more confident in our ability to continue to deliver for our customers, associates, communities, and our shareholders. Now, we look forward to your questions. We will now begin the question and answer session. Our 1st question is from John Heinbockel with Guggenheim Securities. Please go ahead. Hey, Rodney. To start with, can you at least directionally parse out, when you think about that $3.3 billion-$3.5 billion, how alternative profit, fuel, and the remainder, how that might perform? Secondly, your thought on promotional intensity, right? That's been a major source of concern, question mark, right? As your comps turn negative, everybody gets intense promotionally. Your thoughts on that and how that ties into personalization? Thanks, John, and hi. On your first question, we would expect alternative profits to continue to be a driver. As you know, 2020 was higher than 2019. We think 2021 will incrementally be a little bit lower than 2020, but very similar, and part of it will obviously as the year progresses. As you know, the two major parts of alternative profit, one is Kroger Personal Finance. We believe that will get back on track. Obviously, the pandemic has impacted gift card sales and some of those things, which has affected it. If you look at retail media, retail media is increasingly becoming a channel that companies look to advertise in. It's a double win for us because it's an incredibly effective way for CPGs and others to advertise, and they get great insight on how good they do. If you look at our data. Especially, and recently, there was an independent report that showed how well retail media does when somebody invests in Kroger. We think that will continue to be an important part of the model and an incredibly important part of the growth. As you know, our digital channel continues to grow as well. We would expect fuel to be a headwind from a profitability standpoint in 2021, especially earlier in the year. We would expect gallons to turn around and have meaningful growth in gallons. The total gallons will still be less than what they were in 2019. For us, fuel is just a great way of providing rewards to our customers that they care about. We are starting to see people starting to drive a little more, and it's one way to reward customers for shopping with us that's unique to Kroger. If you look at promotional intensity, we would expect it to remain similar to where it is. So far, we haven't really seen a lot different. One of the things that I think everybody knows is that when you start cycling, it's because things beyond your company. I think in the past, a lot of times when promotional intensity started, it started because somebody thought they were losing share. The insights and data is so much better, where people can see where they are in market share. We still continue to see people shopping more for food at home versus in some of the other channels. That will help all boats to rise. That's what we see at the moment. Over time it'll play out. Gary, I don't know if you want to add anything on to John's first question on operating profit? Yeah, sure. Thanks for the question, John. Good morning. I think maybe the only thing I would add is that you picked on a couple of the moving parts in the model for next year. As you might imagine, when we're cycling a year like 2020, there's going to be quite a few pieces to the jigsaw puzzle that represent the overall guidance that we shared for operating profit. I'll maybe just provide a little bit more color on the big pieces. As I mentioned, you certainly hit on a couple of them with all profit and fuel. The other things I would say in the sort of the tailwind category would be, there'll be certain costs, as you might imagine, related to COVID that we won't have to cycle in 2021. Incentive costs we'd also expect to be lower than they would've been in 2020. We continue to take out costs. We expect another $1 billion of cost savings as part of the model in 2021, as we continue to achieve balance across productivity improvements, sourcing savings, administrative savings, and in administrative savings, certainly taking some of those learnings from COVID and how we can continue to operate more leanly and some of those lasting changes that can help us operate more efficiently. We would expect health and wellness to be a tailwind in 2021 as you start to see the new scripts for pharmacy bouncing back and some of those trips that were restricted because of COVID coming back into play. Digital profitability, we think will be a headwind for us as we continue to make progress, not only in the part that Rodney mentioned around digital media, but also as we continue to improve the efficiency of the cost to fill an order. On the headwind side, sales deleverage, of course, is a factor that's fully reflected in our model. Fuel, you mentioned. We have fully contemplated the initial investments in Ocado. They would be north of $100 million in our model for 2021, as well as we take the upfront costs of starting to ramp up the productivity in those first sites. We would also, as I mentioned in my prepared comments, continue to invest in average hourly rate for our associates. In addition to that, of course, there's still going to be some COVID costs that will continue in 2021 as we maintain a safe environment and continue to operate through the next phase of the pandemic. Thank you very much. Thanks, John. The next question is from Karen Short with Barclays. Please go ahead. Hi. Thanks very much. Couple questions just with respect to digital and then on your comments on the flow-through, Gary. I was wondering if you could give a little color on what the digital flow-through was in 4Q and actual thoughts on how to think about that for 2021. I had another separate question. Sure. Hi, Karen. Good morning. Yeah. We mentioned before, as you know, that our digital pass-through rates on profitability is lower than our store profitability. Typically, in the brick-and-mortar store, it's in the mid-to high teens, actually, and you look at 2020 with the significantly ramped up sales volume. We talked about digital being in that mid-single digit range. When I talk about the improvement that we saw in Q4, it would be taking approximately 5% and essentially a 20% improvement on that. Taking it from mid-single digits up from, say, in the region of 5% to maybe 6.5% would be directionally the number that I was referring to when I shared that comment in the prepared remarks. It really comes back to the two levers that we talked about in the last call and at our investor meeting in the fall last year, where we're extremely focused on continuing to use technology and process improvement to reduce the cost to fill a digital order, and we've made significant progress there across our technology and operations teams. Secondly, as Rodney alluded to in his last answer to John's question around media growth and the significant momentum we're seeing in media, most of that growth is coming through our digital channels because when customers engage with us digitally, we can truly personalize the experience, and that's where our CPG partners today get very excited about the unique value we can create for them by personalizing the offer and the promotion and driving a higher return on ad spend. As we look at 2021, we would expect that path to continue to improve as we continue to accelerate the momentum in the two areas that I just mentioned. We'll share a lot more color at our Investor Day at the end of March on how we think about the overall path. The goal that we've laid out for ourselves is to get to parity with the store profitability that I referenced earlier. Actually with Ocado, we believe there's potential to go beyond that level too, as we roll out those facilities and get them up to full capacity. Karen, thanks for the question. If you look at the overall guidance we've provided, that does reflect the startup costs of the various Ocado sheds that will get open this year as well. Great, thanks. Can you actually just provide a little color on how much of the $1.5 billion in COVID costs will actually be sticky in 2021? I know that's hard to predict, anything in terms of your thought process on that? Karen, we're not giving specific numbers in all the individual parts because, as you know, we tend to manage the model to make sure we can flex as we need to. That's something we think is really important as we manage through all the changes and the unknowns that are in front of us. I think I shared earlier the cost in Q4 was $275 million approximately. We would expect that number to be ramping down in the first half of the year. Certainly as we reach the second half of 2021, as hopefully we're in an environment where the COVID vaccine is more widely in place, then that would significantly see a slowdown in those costs. We expect it to be a continued gradual reduction as we move into the 2021 year, and as we start to be able to continue to optimize the plans around safety and cleaning and processes, and of course, as we're rolling out the vaccination. The reason it doesn't ramp down more quickly is that, as Rodney shared in his prepared comments, we've been very deliberate about wanting to really focus on helping our associates get the vaccination as quickly as possible, and with offering the $100 incentive to our associates to try and achieve that as quickly as we can. Great. Thanks very much. Thanks, Karen. The next question is from Michael Lasser with UBS. Please go ahead. Good morning. My 1st question relates to the down 3%- 5% Identical Sales for 2021. What do you assume the market growth rate is embedded in that expectation? Also, your share and how much does inflation impact that as well? If you look at inflation overall, we would expect inflation over the whole year to be 1%-2%. It's going to be incredibly volatile within the year and within categories. If you think about meat, will be hugely deflationary, we expect, in the second quarter because it was so inflationary last year. We expect quite a bit of volatility, but at the end of the year, we think it's going to look pretty normal at 1%-2%. We would expect our market share overall to be very similar to where it is today. When you look at the - 3, we would expect to gain share. At the - 5, we would expect to be pretty similar to where we are today. Nothing specifically that's unusual or anything like that. Okay. That's very helpful. My follow-up question is, the key debate right now, or a key debate is there's been a rapid acceleration in the increase of online penetration in the grocery category. Now we're going to be on the other side of this. The online penetration's going to stick. Store volumes probably decline, and that's going to have a negative impact on the profitability for the grocery channel and in turn, Kroger. It seems like what you're suggesting is we can manage through that because, A, we're improving alternative profit streams, Ocado's coming online. B, we think our store sales will be stable. Can you reconcile all of these various forces? Yeah. I'll talk about some of the overall pieces, and Gary can get into some more of the specific numbers if he wants to add anything. As you know, all along, we've always said we believe that the customer will continue to transition to wanting to do some of their shopping online. What we find is by far the majority of our customers that move online, they still physically go into our stores. It's incredibly important for us to create a seamless experience to where customers can be bounced back and forth, be inspired on both channels. We've always felt very strongly that job one was to make sure that we didn't lose any customers. One of the things that we have found that Gary and I both have mentioned, is during COVID, we had a lot of new customers, and we had a lot of new customers that came to our digital channels, both that had never shopped at Kroger before and people that deepened their relationship. Incrementally, we get a higher share of the household spend, and those new customers is obviously incremental as well. Obviously, that has a certain benefit to profitability. Our operations team is doing an incredible job partnering with our technology team on changing the way how efficient we can pick an order in a store. If you look at over time, we would expect online to continue to grow, but we think it's massively critical to be able to have an experience where a customer still wants to come into a store and shop online. As I mentioned in the prepared remarks, we have a 98% retention rate with that customer. When you look at the overall online, we'll have a combination of Ocado facilities, some type of smaller regional type facilities and stores. Ocado is an important part of that overall relationship from a technology and process change. If you look at retail media, we still see huge growth opportunities there because the channel is just now starting to get momentum behind it, and people are finding that it's a great investment of their marketing dollars overall, and they get a great return for that money. By having first-party data, we can help people see whether they get a return on that spend or not. One of the things that we believe in is total transparency with our customers there. Gary, anything you want to add on? I think you said it well, Rodney. The only thing, I guess, coming back to the big picture question of how we think about our model, as Rodney alluded to it in his comments. We've shared this, and we'll talk more about at the end of March around our value creation model. We feel very confident in our ability to continue to invest in the customer through digital and through what's valuable to them and our associates through our brutality rate, and do that in a balanced way as we continue to take cost out of the business and use our traffic to drive alternative profit streams. We feel like we've got into that flywheel effect and believe that 2020 was an inflection point for digital as part of that, as we hit a scale of over $10 billion in sales and really pulling the different levers together to start to improve the profitability in the model, as Rodney described. I think when you take all that together, we believe through the journey with Restock Kroger, the combined two years of 2020 and 2021, we think will look very strong in terms of TSR. We come out of that with more momentum in our business because we were able to leverage that model and the investments that we made to support customers and our associates as we come through the other side of the pandemic. Okay. Thank you very much. Thanks, Michael. The next question is from Rupesh Parikh with Oppenheimer. Please go ahead. Good morning, thanks for taking my question. My 1st question is just on quarter-to-date trends. I was curious if you can give any color in terms of what you're seeing quarter-to-date, and also if you're starting to see any geographic differences lately in your business. Thanks, Rupesh, and good morning. If you look at quarter-to-date sales, it would be just slightly below where fourth quarter was. I, as you're starting to see some of those regional differences because it started on the West Coast, especially in the Northwest first. You are starting to see some of those differences as well. I wouldn't put too much into it, in terms of my answer to your question, because we do think it's going to be very volatile during the quarter. When you look at it overall for the whole year, we do think we'll continue to maintain and grow share and achieve the numbers that we've given on guidance. The one thing, Rupesh, I might add, just to give it a little bit more color on how we're thinking about the year and the way it will play out and sort of quarterly cadence. As you know and saw from the guidance that we shared this morning, we're very much focused on the two-year journey and how do we come out stronger through the end, hopefully, of the pandemic in 2021. As we think about the guidance that we've shared, there'll be an interesting dynamic when you look at the numbers based on the individual year-over-year Identical Sales and then the two-year stack Identical Sales, and essentially, it'll be kind of an inverse as you go through the year. In the 1st part of the year, we would expect to be maybe even slightly below the bottom end of the range in terms of Identical Sales on the individual year 2021, but actually at the top end and potentially even over the range on the two-year stack number. As the year progresses, the two-year stack number moves more towards the lower end and maybe even below the bottom end of the range. Actually, the current year Identical Sales improve significantly. There is going to be an odd dynamic as we go through the year, as you might imagine, when you think about the quarterly cadence of sales. Okay. That's helpful. Then maybe just one follow-up question, and this, Gary, goes to your comments at the end of your prepared script. You mentioned that you expect 2021 to be the operating profit base that you expect to grow off of going forward. Does your team right now believe the pandemic and comparison-related headwinds will primarily impact 2021 and then 2022, it could be more of a normal year? I think there's definitely going to be some puts and takes in there that will still be flowing through. I think the headline would be exactly as you described it, Rupesh. We think of it very much as 2022 will be that new baseline, and we feel confident in our ability, back to my comments to the earlier question about how we think about the flywheel and the overall financial model that we've created, that'll be the new baseline in 2021 to build the growth off of. Yeah. We do think, we've all talked about it in various pieces, that digital will continue to grow, and it will be incredibly critical for the overall seamless experience for the customers. We believe that in that seamless environment, our competitive moats are even more important, in trust and fresh food, being able to personalize things directly for that customer one-on-one, and our brands, all of those things are things that we believe the overall ecosystem will continue to add value for our customers. Okay, great. Thank you. I'll pass it along. Thanks, Rupesh. The next question is from Robbie Ohmes with Bank of America Global Research. Please go ahead. Oh, hey, good morning, guys. I have two quick follow-ups. One was just, Rodney, can you give if you look at the loyal customers and what they did last year versus new customers, what played out? Did the loyal customers spend a lot more with you and you got a lot of new customers and/or did you lose any loyal customers or maybe some color on what happened and how you net out. Do you just have a lot more customers today than you would've had back in 2019? That's what we should really be considering also for this guidance. Then, the second question is just I'm sorry if I missed it, but just with the ad campaign around Fresh, how are Fresh comps relative to expectations? Are they super strong or just any color on that? Thanks. If you look at customers overall, shopped fewer spots, so fewer retailers. We had a significant increase in the amount that they spent per transaction. If you look at the number of loyal shoppers, there was a ton of change in the numbers because of consolidation of households where people moved in with family members or shopping for other family members, things like that. If you look, there's a decline in loyal shoppers, but it's really hard to assign all of that to a customer not shopping with you anymore because what we find is a lot of those customers have consolidated with a different household member because people have moved back. Kids have moved in with parents or kids are buying for parents, things like that. If you look at new customers, the most new customers we've seen in a year, probably if you took the last three or four years added together, we had more new customers this year. We've done a couple of things on changing where in the past, a new customer had to be with us a period of time before we started engaging with them on a personalized basis. Now we engage with them immediately, and we keep improving that personalization to be more and more directed to just that household as we learn more about them. Hopefully they're understanding by being part of our ecosystem, the overall value we provide. On our fresh identicals, overall, they would be, for the year, if you look at meat and produce and seafood and floral and those, it would be meaningfully higher than our overall IDs. If you look at deli, it would be behind, especially early in the year. We did continue to gain share in deli, but deli especially in stores where we had a high lunchtime crowd of people coming in just for lunch that day, it definitely affected our deli business. If you look within deli, on deli sliced meats and things had great growth, but other pieces of it was a little different than that. That's really helpful. Thanks so much, Rodney. Thanks, Robbie. The next question is from Greg Badishkanian with Wolfe Research. Please go ahead. Good morning. This is Spencer Hanus on for Greg. My first question was just on your price gaps. How confident are you with where your price gaps are today relative to other conventionals and your mass peers? Are you seeing any signs that price is becoming a more important factor in driving market share? Is product availability still just one of the key motivators about where consumers are shopping today? If you look at price gaps, and as you know, one of the things we were very proud of, we kept doing promotions throughout the pandemic. Wanted to make sure that we continue to provide a good value to our customers. We feel good about where we are on gaps versus all of our competitors. As you know, customers decide where to shop based on fresh and friendliness of service and other things in addition to price. It's fascinating. The customer sensitivity to price really doesn't seem to be changing much, but when they get money in their pocket, they definitely spend more, and they are definitely upgrading to higher quality products as well. It doesn't appear that there's a huge change in price sensitivity, but there is a change in terms of when somebody gets the government stimulus money, things like that. You can definitely see that flowing through on spending. Gary, it looks like you wanted to add something. Yeah. Well, I think you said it well, Rodney. I was just going to add, Spencer, that I think, as Rodney said, we feel very good about our position and actually probably compared to some of the more regional players, we've potentially expanded our price gap because of the continued investments that we made in 2020. We would expect the promotional environment to be higher in 2021, of course, than 2020 because there was a period of time where a number of our competitors were not promoting. That being said, I think it's important to remember a lot of our investments in 2020 were promotional in nature, so we can cycle those again and deploy them where they have the most value for the customer based on the way that they are defining value as they come through the pandemic. As Rodney mentioned, we feel very good about our position and the market seems to be acting generally pretty rationally around. It's going to be a unique year in 2021 that we're cycling, obviously, a change in customer behavior. We believe we're well positioned to manage through that. That's really helpful. With the better digital flow through this quarter, have you seen any changes in online basket size or a mix shift towards higher margin categories? What's your outlook for online growth in 2021? We would expect overall to grow. We haven't given specific numbers. Obviously, on Investor Day, we'll talk about it a lot more. If you look on terms of basket size, as customers get used to and enjoy the experience, you find they're using it more frequently, and usually when they start using it more frequently, their size declines. If you look at their total spend over a period of time, it grows. We view that as a positive because we want to make sure when customers think food, they think us, of Kroger. We see that as a positive. Great. Thank you. Thank you. The next question is from Matt Fishbein with Jefferies. Please go ahead. Hi. Good morning. Thanks for the question. Good morning. Do you have any ballpark approximation for the basis point benefit to Q4 gross margin owing to the shrink from elevated at-home food demand or maybe to the OG&A rate owing to increased sales leverage, sort of just the parts that may be less sustainable as away-from-home channels more fully recover? A 2nd question would be regarding your capital allocation guidance for the year. How are you thinking about share repurchases and where returning cash to shareholders maybe shakes out in your cash utilization priority ranking in 2021? Thank you very much. Sure. Thanks for the questions. I think as we mentioned in the prepared comments, we really think about managing the gross margin in the OG&A as a balance within our overall financial model. We generally don't get into specific elements. As you might imagine, we did see sales leverage and shrink improvement throughout the year, and we talked about that in some of our results. We've taken very much a balanced approach, though, to be investing in areas in the business where we believe that sets us up for continued growth in 2021. And that's why I think we do feel good about the position we go in next year, having managed through the balance of maintaining those investments in the customer and our associates, and being able to then manage through the transition next year and still deliver what we think by the end of the year will be a strong outcome and significantly ahead of our overall TSR model. From a capital allocation perspective, we'll share more again at the Investor Day at the end of March. We haven't given specific guidance on buybacks. We did that specifically in 2019 because we were coming towards the end of Restock Kroger, and we'd changed our long-term outlook, so we wanted to make sure we gave everybody clarity on what the financial model would look like in 2020. We haven't given specific numbers. With that being said, I think we've been pretty clear in our communication on our TSR model that we expect between 5% and 6% of our TSR algorithm to be generated from a payout ratio to our investors. If you think about that, we'd certainly be expecting with our cash flow being strong that in 2021, the amount of buybacks that we would do would be consistent with delivering on the payout ratio that we share within our TSR model, which is 5%-6%. That includes the dividend at between 2% and 2.5%. We'll share a little bit more color on how we're thinking about cash flow in general at the Investor Day, because as I mentioned in my prepared comments, our free cash flow is significantly stronger over 2020 and 2021 than our TSR model contemplates. We're being very diligent in looking at what's the best way to deploy that free cash flow to make sure that we're accelerating growth in the company and delivering on the 8-11 beyond 2021 as we look at longer-term guidance. Great. Thanks for the question, thanks for squeezing me in. Thanks, Matt. The next question is from Paul Lejuez with Citi. Please go ahead. Hey, thanks, guys. I'm curious, as you look back to performance in different categories in 2020, how you think the mix might impact your gross margin in 2021. Also just curious, just big picture, gain share in 2020. Curious who you think was losing share and as you think to the future and your ability to gain share, where do you think that comes from? Thanks. If you look at the 2021 on margin or mix, I think there's a couple of things that happened in 2020 that I think will be permanent. One is people are buying bigger-sized products, I think people have found that that's really convenient. I think about toilet paper, the amount of toilet paper that's sold in bigger packs. The customer gets a better value, and they're stocked up for a longer period of time. The other thing that to me is incredibly exciting because of our strong position in fresh and our strong on brands is that customers have upgraded in quality significantly. As I mentioned, if you look at the growth of Private Selection, we've had huge growth in Private Selection. If you look at the growth in fresh on seafood, there's been great growth there. People have learned how to cook seafood. All of those things, I think once you get addicted to something that's high quality, it's hard to go back. A small example, but I remember growing up, I thought macaroni and cheese came out of a box, and that was fine. Now I buy my cheese for macaroni and cheese from Murray's Cheese, and it's a completely different experience, and once you get used to that experience, it's hard to go back. I think customers will continue to have those behaviors, and they've learned how to cook. On share, the thing that we think is absolutely massively critical i s seamless and having an experience where a customer can easily switch between online and in-store, because what we find is different shopping occasions, customers have a different need in terms of the channel to deliver that. What we find is by being multi-channel, it allows the customer to deal with it on their terms, not our terms. Fresh is always important. It's the number one driver on where people decide where to shop, is the quality of fresh. If you were at some of our internal meetings, you would hear us talk about all the things that we're doing to get better on fresh. If you look at our customers, they tell us, versus our big box, we start out in a great position, but you wouldn't know that if you look at the drive internally. Our brands, and then being able to personalize every experience one-on-one, are the things that's going to allow us to continue to grow share. Rodney, I might just add a little bit of color to the guidance for 2021 as well, just to help maybe sort of frame up how we think about the year and what will happen with margins. We would expect within the guidance that we've shared, gross margin to decline in 2021, and that's a combination of factors. One of it would be the example you shared of mix. I think a good example of that would be, we'd expect our pharmacy and health and wellness business to continue to grow in 2021, and that has a lower gross margin rate than the overall business excluding fuel. Whereas obviously we've guided to our overall sales being down in 2021. We would expect some sales deleverage as you would think across things like shrink and advertising. They would also be offset by sourcing benefits that I mentioned earlier and alternative profit streams. There's going to be some momentum in gross margin too. Net-net, we think all of that results in a decline in gross margin. Conversely, we'd actually expect there to be an improvement in OG&A because of some of the items I listed earlier on the call around the cost savings, the digital improvement in profitability, and not cycling some of the COVID costs that we had in 2020. Thanks, guys. Helpful. Good luck. Thank you. Thanks, Paul. This concludes our question and answer session due to time constraints. I would like to turn the conference back over to Rodney McMullen for any closing remarks. Thanks, Gary, thank you for joining us today. We look forward to sharing additional details surrounding our long-term plans at our upcoming Investor Day, which will be held virtually on March 31st. Details surrounding the event will be shared in the coming days. We are incredibly excited to be talking to you about our focus on growth opportunities in front of us, which build upon our learnings from the pandemic, investing in seamless technology, and Restock Kroger. As is our practice, I'd like to share a few final thoughts directed to our associates who are listening in today. Throughout our more than 137-year history, we've worked together through good times and bad. We've always come out stronger. Team Kroger, each of us, has led us through a difficult time for our country, our communities, and our company. Ultimately our own personal struggles as we adapted to life during an unprecedented pandemic that has lasted a lot longer than any of us would have imagined. This team, this incredible Kroger team, will make its mark forever on our company's history and will be remembered for its strength and resilience, its heart and compassion, its agility and dedication for the years to come. I am humbled to be part of this amazing company. To all of our associates, thank you for all you do and continue to do every day for our customers, communities, and each other. That concludes our call. Thanks for joining us today. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.