Good morning, and welcome to the Kroger Company fourth quarter 2021 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 Rob Quast, Director, Investor Relations. Please go ahead. Good morning. Thank you for joining us for Kroger's fourth quarter and full year 2021 earnings call. I am joined today by Kroger's Chairman and Chief Executive Officer, Rodney McMullen, and Chief Financial Officer, Gary Millerchip. 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. We are excited to see that many of you will also be attending, either virtually or in person, our 2022 business update tomorrow in Florida, when we will share additional details and answer questions about our long-term strategy and growth initiatives. More information about virtual registration for this event can be found 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 related follow-up question if necessary. Additionally, we would ask that you focus today's questions on our fourth quarter and full year 2021 results, as well as our 2022 guidance. Now I will turn the call over to Rodney. Thank you, Rob. Good morning, and thank you for joining us today. Our strategy of leading with Fresh and accelerating with digital propelled Kroger to record performance in 2021 on top of record results in 2020. We are incredibly proud of our associates who continue to deliver for our customers through the pandemic. During 2021, our team delivered for all stakeholders by first of all, achieving positive year-over-year identicals without fuel against very strong identicals last year and a two-year stack of 14.3%. Also, by connecting with customers through expanding our seamless ecosystem and remarkably consistent delivery of full, fresh, and friendly customer experience for everyone. Plus, investing more than ever before in our associates to raise our average hourly rate to $17 and our average hourly rate to over $22 when you include comprehensive benefits as well. We balanced all of those investments by achieving cost savings of greater than $1 billion for the fourth consecutive year, and alternative profits contributed an incremental $150 million of operating profit as well. As we look to 2022, we expect the momentum in our business to continue, and we have confidence in our ability to navigate a rapidly changing operating environment. We are leveraging technology, innovation, and our competitive moats to build lasting competitive advantages. Our balanced model is allowing us to deliver for shareholders, invest in our associates, continue to provide fresh, affordable food for our customers and support for our communities. We remain confident in our growth model and our ability to deliver total shareholder returns of 8%-11% over time. Kroger is leading with Fresh. Our Fresh departments outpaced total company identical sales excluding fuel during the fourth quarter. Kroger remains the number one retailer in many exciting areas such as specialty cheese, sushi, and floral. As the world's largest florist, we sold over 76 million floral stems for Valentine's Day alone, and the smiles that came along with that for our customers and associates were free. We advanced our Fresh strategy and strengthened our Fresh offerings in 2021 by launching our Go Fresh & Local Supplier Accelerator, supporting our commitment to small businesses. As a result of the launch, we have brought a number of new products to customers, and the initial results have exceeded our expectations. We are still early in the program, and we will continue to partner with small businesses to expand our pipeline of new products. We also remain a leader in innovation through exciting partnerships with companies like Kitchen United and Kipster. We've completed the initial test phase of our end-to-end Fresh initiatives focused on bringing more days of freshness to our customers and are confident in its scalability and with plans to expand to targeted stores across the country. Our Brands continue to resonate strongly with customers and maintains a culture of innovation, launching over 660 new items during the year. More than half of those new items were within our Simple Truth and Private Selection portfolios. We celebrated Home Chef's incredible milestone of becoming $1 billion brand, our fourth greater than $1 billion brand, which is pretty special. As a reminder for everyone, we merged with Home Chef in 2018. At the time, we knew our customers were looking for ways to make mealtime easier without compromising on taste or freshness. While Home Chef originated as a pure play e-commerce offering, we saw immense potential to integrate and leverage it across our seamless ecosystem, scaling it within our stores and continuing to grow online. The success of this integration demonstrates our ability to integrate and scale solutions that provide value to our customers and grow our competitive moats. Kroger is focused on delivering a seamless experience that requires zero compromise by customers, and I think that's a really important point, zero compromise required by customers. What that means, it's the freshest products at competitive prices and flexible lead times. Yael will go into a lot more detail tomorrow on what zero compromise means for our customers at our business update. The strength in our top line sales in 2021 demonstrates our ability to meet our customers no matter how they choose to engage with us, whether it's in store or online. At the same time, we are actively encouraging customers to engage with us on our digital platforms, even when shopping in store. That's because when a customer engages with us digitally, they spend more with Kroger in all modalities. We continue to attract new customers to our digital platforms. During the quarter, we saw new seamless pickup and delivery household acquisitions increase 25% compared to the third quarter. We remain committed to doubling digital sales and profitability by 2023, which was announced in 2021. We look forward to sharing our glide path to this goal with you tomorrow. We do not expect digital growth will be linear, especially as we cycle the sales spike in 2020, and customers become more comfortable shopping in store again. We are incredibly proud of the new digital modalities we launched during 2021, including Kroger Delivery Now, our Boost Membership Program, and the rollout of new customer fulfillment centers, all of which we expect to contribute meaningfully to our long-term goals. Yesterday, we announced a new customer fulfillment center for the Cleveland region, following on heels of our announcement of a cross-dock spoke facility that will serve Oklahoma City. Just a few weeks ago, we opened our third customer fulfillment center in Forest Park, Georgia, and are leveraging learnings from Monroe and Groveland to drive efficiencies and scale in the new facility. Customers are loving this new offering and we continue to be pleased with the initial rollout of our facilities in Groveland and Monroe, and we look forward to sharing additional insights tomorrow. Now turning to the supply chain. Our teams across our stores, warehouses, plants, and offices have been incredible in working together to supply fresh food and necessities for our customers while addressing the rapidly changing environment. During the quarter, industry challenges continued within the supply chain, and we remain confident in our ability to navigate these challenges. Within our supply chain, we continue to deploy a wide array of tools, including our owned and operated fleet. We are also partnering with our suppliers to improve product availability using the strength of our data science teams to provide insights that shorten lead times and optimize inventory flow across the extended supply chain. We continue to focus on expanding our transportation contracts and attracting carriers from outside our industry, which has kept product flowing predictably across our network. The teams are doing a great job managing the increased costs, and the trends within our costs are improving sequentially. We're using our data and supplier data, plus leveraging technology to support future growth. We expect the supply chain to continue to improve throughout the year as a result of our actions. When I visit our stores, I often hear from our associates that what they love most about their job is that they can positively impact the lives of our customers, communities, and each other every day. It's also what I love about our business too, and it's what makes our purpose to feed the human spirit so vital for our people. One way we live our purpose is through progress toward our ESG goals and our commitments. As part of our Zero Hunger Zero Waste social and environmental impact plan, last year, Kroger donated 499 million meals. That's right, 499 million meals to feed hungry families across America. We continue to make progress toward our goal of zero waste. As part of our commitments to helping people live healthier lives, we've administered almost 11 million doses of the COVID-19 vaccine through Kroger Health. For our more than 450,000 associates, we strive to create a culture of opportunity, and we take seriously our role as a leading employer in the United States. Kroger has provided an incredible number of people with their first jobs, new beginnings, and lifelong careers. As we continue to operate in a challenging labor market, we are dedicated to attracting and retaining the right talent across the organization to be able to continue delivering for our customers. We are investing more than ever before in our associates by expanding our industry-leading benefits, including continuing education and tuition reimbursement, training and development, health and wellness, as well as the continued investment in wages that I mentioned earlier. This is enabling us to navigate current labor conditions while continuing to provide America with the freshest food at affordable prices across our seamless ecosystem. We are cultivating an environment where all associates are able to thrive. For the fourth year in a row, Kroger earned top score in the Human Rights Campaign Foundation's 2022 Corporate Equality Index, the nation's benchmark in measuring corporate policies and practices related to LGBTQ+ workplace equality. Last year alone, we provided more than $5 million to support associates through unexpected hardships through our Helping Hands fund. This includes providing critical funds for disaster relief for nearly 1,300 associates. 2021 was an incredible year for Kroger, and we are committed to continued growth. One of Kroger's greatest strengths is our relentless focus on learning and improving every day. I believe this has been a key to navigating our business successfully in every operating environment. We remain customer-obsessed and focused on operational excellence to deliver for our customers, associates, communities, and shareholders. Now I'd like to turn it over to Gary. Gary. Thank you, Rodney, and good morning, everyone. Kroger continues to execute at a high level and is delivering exceptional results while navigating a rapidly changing environment. Before I get into our results in more detail, I would like to start by echoing Rodney's appreciation to our fantastic associates. Their dedication to serve our customers and support each other throughout the pandemic has been nothing short of incredible. Our performance last year clearly highlights the strength of Kroger's go-to-market strategy as we achieve positive identical sales without fuel and adjusted EPS growth on top of record results in 2020. We also continued to invest in our customers and associates to ensure Kroger is well positioned for future success. These investments were balanced with over $1 billion in cost savings and $150 million of incremental operating profit from alternative profit streams. I will now provide additional color on our full year results. We delivered adjusted EPS of $3.68 per diluted share, up 6% compared to last year. Identical sales excluding fuel were positive 0.2%, and digital sales on a two-year stack basis grew by 113%. Our adjusted FIFO operating profit was $4.3 billion, up 6% over 2020. Gross margin was 22% of sales for 2021. The FIFO gross margin rate, excluding fuel, decreased 43 basis points compared to the same period last year. This decrease primarily related to higher supply chain costs and strategic price investments, partially offset by sourcing benefits and growth in alternative profits. The OG&A rate decreased 61 basis points, excluding fuel and adjustment items, reflecting a reduction in COVID-related costs and cost-saving initiatives, partially offset by significant investments in our associates. Turning now to our fourth quarter results. Adjusted EPS was $0.91 for the quarter, up 12% compared to the same quarter last year. Kroger reported identical sales without fuel of 4%, our strongest quarter of the year, with Fresh departments leading the way. Kroger's FIFO gross margin rate, excluding fuel, increased three basis points compared to the same period last year. The stability in our gross margin rate reflects effective management of cost inflation and sourcing benefits offset by strategic price investments and higher supply chain costs. The OG&A rate, excluding fuel and adjustment items, increased seven basis points. This was driven by significant investments in our associates, including a year-end associate thank you reward and various asset impairments, offset by decreased COVID-related costs, sales leverage, and cost-saving initiatives. The LIFO charge for the fourth quarter was $20 million compared to an $84 million credit in the same period last year and represented an 11-cent headwind to EPS in the quarter. The year-over-year increase was attributable to higher inflation in most categories, with grocery and meat being the largest contributors. One of Kroger's greatest strengths is our ability to successfully navigate many different operating environments. Our team is doing an excellent job managing the current higher inflationary environment. We continue to leverage our data and work closely with our suppliers to minimize the effect on our customers and our financial model. We are investing where it matters most to our customers, using our proprietary data to be strategic in our pricing and personalization. Our Brands is also an important differentiator for Kroger in this environment, offering customers an unmatched combination of great quality and great value. Our strategic approach is helping our customers manage their grocery budgets more effectively and is allowing Kroger to maintain a strong price position relative to our key competitors. Fuel also remains an important part of our overall value proposition for our customers, and we continue to invest in our fuel program in 2021. Customers that redeem fuel points spend on average four times more at Kroger and visit four times more frequently. Our investment in fuel rewards, which is reflected in our supermarket gross margin, also helps customers stretch their dollars further and allowed us to achieve gallon growth of 5% in the fourth quarter, outpacing market growth. The average retail price of fuel was $3.30 this quarter versus $2.20 in the same quarter last year. Our cents per gallon fuel margin was $0.44 compared to $0.33 in the same quarter in 2020. Turning now to cash flow and liquidity. Our operating results generated exceptional free cash flow in 2021, which resulted in a further strengthening of our balance sheet and liquidity. Kroger's net total debt to adjusted EBITDA ratio is now 1.63 compared to our target range of 2.3-2.5. We were also disciplined in accelerating the return of cash to shareholders in 2021. In total, Kroger returned $2.2 billion to investors via a combination of share repurchases and dividends. I'd now like to take a few minutes to discuss our continued commitment to investing in our associates and our deep experience with collective bargaining. Wages at Kroger grew before and during the pandemic. As you know, we committed to significant associate wage investments when we launched our Restock Kroger program at the end of 2017. Kroger has invested an incremental $1.2 billion in associate wages and training over the last four years. In addition, we have committed to invest over $1.8 billion during the same time period to help address underfunding and better secure pensions for tens of thousands of associates. Wage, healthcare, and pensions are included in all of the more than 350 collective bargaining agreements that cover approximately 66% of our associates. These contracts are regularly negotiated by our professional labor relations team. Our objective is to negotiate contracts that balance competitive wage increases and affordable healthcare for associates with keeping groceries affordable for the communities that we serve. Our obligation is to do this in a way that maintains a financially sustainable business. If negotiations do become contentious, we have contingency plans in place to continue to support our communities. During the fourth quarter, we ratified new labor agreements with the UFCW for associates in Fred Meyer, King Soopers, and our Michigan division, covering more than 25,000 associates. For 2022, we have contract negotiations with the UFCW for store associates in Las Vegas, Southern California, Seattle, Indianapolis, Portland, Columbus, Fort Wayne, Chicago, and Toledo, in addition to continued negotiations with the UFCW for store associates in Houston, Little Rock, and Memphis. We are actively proposing generous wage increases over the life of the various contracts we are negotiating, and these increases are included in our financial model and our guidance for 2022. We are also communicating to local unions that coming to the table with unrealistic proposals that do not balance associate investments with keeping groceries affordable for our customers, is untenable and undermines our shared goal of growing the company to create more jobs and advancement opportunities for more associates. In closing, let me now provide additional color on the 2022 guidance that we released this morning. While we recognize there remain a number of uncertainties in the economic and geopolitical outlook, we believe the strength of Kroger's go-to-market strategy and our ability to manage multiple levers within our financial model will allow us to continue to build momentum within our business in 2022. We have shared previously that we expect to emerge from the pandemic stronger, and our guidance for 2022 creates a new baseline for FIFO net operating profit that is some $900 million higher than the midpoint of our TSR model would have projected when we announced it in 2019. Our plans contemplate meaningful investments in associate hourly rates, as well as investments in delivering greater value for our customers and enhancing our digital capabilities. We expect these investments and the impact of cycling COVID-19 vaccine revenue will be fully offset by tailwinds in our model and allow us to grow adjusted net earnings per diluted share to between $3.75 and $3.89. Plan includes sales leverage from growing identical sales without fuel between 2% and 3%. We also expect to deliver cost savings of $1 billion, incremental alternative profit growth largely in line with 2021, and underlying improvement in Kroger Health profitability, excluding vaccine income. Fuel profitability is expected to be relatively flat year over year as gallon growth is offset by slightly lower fuel margins. In terms of quarterly cadence for identical sales without fuel and EPS growth, we expect identical sales without fuel in quarter one and quarter two will be above the midpoint of our 2%-3% range as we expect heightened inflation will continue in the first half of the year. We would expect our second half identical sales without fuel to be below the midpoint of our range as we expect inflation to moderate later in the year as we cycle higher inflation from the second half of 2021. Regarding adjusted EPS, we would expect quarter one to be above the annual growth rate range of 2%-5%, quarter two to be below the range and the second half of the year to be within the range. Turning briefly to our capital priorities, we will continue to be disciplined with capital allocation. As you heard this morning, we are increasing capital investments to $3.8 billion-$4 billion in 2022. This reflects some catch up from the last two years, where spend was below original guidance due to COVID-related constraints, as well as an acceleration of our strategic initiatives that will drive longer term earnings growth. At the same time, we expect to generate free cash flow of between $2 billion and $2.2 billion. Consistent with our TSR model, we will continue to return excess cash to shareholders, as evidenced by the acceleration in share buybacks over the last six months. Finally, we are looking forward to spending more time with you at our business update tomorrow when you will hear from key members of our leadership team about our strategic priorities and our path to deliver total shareholder returns of 8%-11% over time. With that, I'll turn it back to Rodney. Thanks, Gary. Kroger is operating from a position of strength, and we have a variety of levers and growth opportunities to continue to build on this strength. As we reflect on 2021, we are incredibly proud of our ability to navigate both a rapidly changing operating environment and evolving customer behaviors. We are obviously in an inflationary environment. Our teams are managing it well, and as Gary talked about, we are doing everything we can to keep prices low for customers, including our award-winning customer rewards program, which includes fuel rewards, our amazing and high quality Our Brands products, and personalized offers and savings for each customer individualized. As we look to 2022, we are confident in our ability to continue to differentiate ourselves, serve our customers in new and exciting ways, and continue to change the definition of what it means to be a grocery retailer while never losing sight of what's most important to our customers. When we do this, we have a clear path to delivering on our commitment of 8%-11% total shareholder returns over time for our shareholders. Now, we look forward to your questions. As Rob shared at the top of the call, we would like to focus all questions on our quarter four and full year 2021 results as well as 2022 guidance. We look forward to sharing additional details about our long-term strategy tomorrow at our 2022 business update. With that, we'll turn it over for questions. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. In order to cover a broad range of topics from as many of you as possible, we ask that you please limit yourself to one question and one related follow-up question. Our first question comes from Rupesh Parikh with Oppenheimer. Please go ahead. Good morning, and thanks for taking my question and also congrats on a really strong quarter. Thank you. Good morning. I guess just starting out just on the gross margin line, pretty significant improvement in gross margins, you know, on a one and two year basis. What are the key changes, you know, maybe some more color in terms of what drove that improvement versus what we saw in Q2 and Q3? Yeah. Thanks, Rupesh. As we mentioned in the prepared remarks and Rodney covered it a moment ago, really proud of the team in the way that we managed the business in Q4 and some of the changes that were happening. From I think what the team did, we're obviously laser focused on how can we continue to be effective in managing the sourcing approach to how we are leveraging the relationships we have with our suppliers and using our data. We've been very effective in using our personalization and promotional activities to really sort of target the offers to the customer to make sure that they're feeling the value, but that we're also then able to manage those cost increases effectively in the business. I think mix is also another important trend that the team's really focused on, is how do we ensure that we're upselling customers to better quality products and premiumized products, and whether it's adding the cedar plank to the salmon or the seasoning to the shrimp and some of those opportunities are really important in how the merchandising team are really focused on recognizing some consumer trends in how many of our customers are moving to more meal solutions as well as continuing to look for value. So overall, we feel really good around the way the team managed gross margin during the quarter. As we think about going forward into 2022, you know, we continue to focus on, of course, the same elements and continue to manage those pieces tightly while also wanting to make sure we're continuing to deliver value for our customers. I think to us, really, we look at it more of how do we manage the model overall across gross margin and OG&A and pulling the different levers. Certainly, I think we'd look at 2022 and think that, you know, we'll continue to invest in the customer. We'll continue to manage those different levers. I would suspect that we'll see continued investment in gross margin in 2022 and continued operating leverage in OG&A. I think the fourth quarter is a good example of where we wouldn't expect to see some of the major volatility or the gap in gross margin in OG&A that we saw across the whole year, for example, in 2021. Just a couple of additional things. During COVID, as we've mentioned several times, people have learned how to cook again. What they're finding is that they can have restaurant quality food that they prepare at home. In numerous categories like the specialty cheese that I mentioned, but there's numerous categories where customers have traded up to higher quality product and everything that we're seeing they continue with that. As the other thing I think is always important to remind all of us is that our Fresh departments grew faster than the center store departments, and our Fresh departments have a higher gross rate as well versus the center store. Just a couple additional things. Thanks, Rupesh. Great. Maybe just one follow-up. You know, with a lot of inflation out there in the marketplace, how do your price gaps look today versus maybe where they were a few quarters ago? If you look at overall, it's pretty close to the cost increases we've incurred. If you look at in a couple of departments strategically, the retail price hasn't increased as much as cost, and we've been able to balance all of those pieces. We really are using our data to make sure that we understand the elasticity of everything. We are starting to see customers engaging in coupons a little bit more aggressive than before and doing other things in terms of starting to move to Our Brands where they don't have to compromise on quality and they can save money as well. We are starting to see the beginning of some behavior changes as well, but really early. Yeah. Maybe anything to add, Rodney. Certainly as you know, Rupesh, the customer that as we look at our data defines value in multiple ways. Part of it is the everyday price, part of it is the promotions. It includes our fuel rewards and all the personalization that we offer. I would say if we look at our position as we end the year from where we started, we feel very good about the way in which we've been able to deliver value for the customer. When we look at our price position, we feel we've been able to maintain a very strong position with the customer in terms of how they would perceive the value of the Kroger basket and the value that Kroger is delivering. Okay, great. Thank you. I'll pass it along. Thanks. The next question is from Simeon Gutman with Morgan Stanley. Please go ahead. Hey, good morning, everyone, and nice quarter and guide. My question is the comp guide is solid for next year, and we're a little surprised at how good the EBIT flow through or the margin still looks given all the cost pressures on the wage side. You mentioned some things on the gross margin. You mentioned tailwinds, but I wanted to put it to you know, holistically and, you know, hear your reaction to this question. Yeah. I'll start and let Gary get into some more of the details. I think one of the things that's to me your question's great, but the thing that's, I think, is really important to remember is the things that we continue to do to take costs out of our system all across everything. We would expect to be able to take another $1 billion of cost out. As you know, last year we took over $1 billion out, and that was the fourth consecutive year. Through process change and really it's becoming a capability that the organization has, that's really critical to be able to afford to do some of the things that we're doing. The other thing is alternative profit and some of the other things related to that continues to change the fundamental business model in a positive way that inflation doesn't affect the same way, and the profitability of that part of the business is significantly higher than the traditional grocery store would be as well. Gary, any additional stuff? Well, I think you summarized it well, Rodney. I think, Simeon, we feel about it as you look at our 2021 results and then you think about our guides 2022, it really demonstrates the strength in that, the overall diversity of our model now and the different levers that we're able to pull to make sure that we're investing in our associates, investing in our customers, and still able to deliver a strong return for our shareholders. We would agree with you that 2022 is a year where we do expect to make significant investments, whether it's around continuing to support the customer and drive growth in our business, investing in our associates, investing in digital, and of course, we will be cycling some COVID vaccine revenue that'll be lower in 2022 than 2021. Rodney mentioned the cost savings and alternative profit benefits that we see within the model. We do continue to expect, obviously, to generate sales leverage in our model as well. As I mentioned in my prepared remarks, health and wellness will certainly have some headwinds from COVID vaccines, but we believe there's continued opportunity to improve the underlying profitability in health and wellness as well in 2022. Maybe related, the value-conscious customer, are you seeing any signs of trade down? Are you seeing customers trade out? Are you seeing any decisions in the store that lead you to see that the customer is feeling a little more pinched? Yeah. What the customers are telling us is that they're changing their spend behavior outside of food more than food, which obviously makes sense. They also have found that eating at home is a lot more affordable than going out to restaurants. They're able to stretch their budget that way as well. As I mentioned a second ago, we are seeing people starting to engage in coupons and some of those things a little more than before, but nothing substantial so far, and we really feel good about the way we're positioned with the customer. If you look at our connection to that customer segment, it actually improved in the fourth quarter versus prior year. What customers are finding is our Fresh departments are a huge strength, and then they're able to get personalized rewards and engage with us on promotional items and things like that. Okay, thanks. I'll see you tomorrow. Thanks. See you. The next question is from John Heinbockel with Guggenheim Securities. Please go ahead. Rodney, I wanna start with if you look at the $1 billion of cost takeout, right, how does that roughly break out between COGS and OG&A, and how has that changed over the last 3 or 4 years? You know, has it shifted more to OG&A or has it stayed relatively consistent? Yeah. If you look at overall, it would be a more cost driven. Now goods not for resale, you know, do you put it in cost or do you put it in COGS? Because you can argue either one. But it's more driven by process change and eliminating work. Obviously sourcing is an important component of it. Goods not for resale is incredibly important as well. If you look at the mix, the mix has been pretty consistent over the last four years. If you look at our expectations for 2022, Gary, it would be pretty similar to 2021. I mean, it might be 5% difference, but not much. Right. Yeah, no, I think the only thing, John, that's really accelerated over the last couple of years. I completely agree with Rodney around the sourcing benefits and the taking cost out of the operation. The one thing that, as you know, we've talked about is we invested in digital to ensure that we're winning the customer to build that $10 billion business that we talked about. We did that sometimes recognizing that there'd be some inefficiency in our model. I think one of the areas that we've been able to accelerate is taking cost out of the digital sort of cost to serve a customer, if you like, as we can leverage more efficiency in that scale, and that's become a tailwind this year, or was last year, and will be in 2022, as part of the cost structure. That's probably the one area that's maybe changed a little bit over the last couple of years, but I completely agree with Rodney on the balance is pretty consistent. Yeah. Yeah, John, you know, Gary's last point to me is incredibly important. Everybody on the call, you've all heard us talk about job one is don't lose the customer as they switch to being a combination of digital and in store. Over time, we'll figure out a way to make that customer this, just as profitable, as a customer that traditionally shopped in a store. I think Gary's last point is really important. Maybe talk about how fuel rewards performs, you know, in an environment where price per gallon may be approaching $4, right? How it performs, and then do you do anything differently? I don't think the plan, the program construct would change, but does it or does your marketing change? 'Cause you would think in this environment, fuel rewards is way more important than it was, you know, a year or two ago. Your belief and comment is correct. What we find is customers find it very helpful, and as fuel prices go up, they engage in the fuel rewards more. Obviously, we continue to leverage fuel rewards in ways that make sense for different customer segments because different segments engage differently in fuel rewards. Obviously we would prefer for fuel not to be at $3-$4 a gallon, but we're gonna do everything we can to help the customer stretch their budget as much as we can. Okay. Thank you. Thanks, John. Thanks, John. The next question is from Greg Badishkanian with Wolfe Research. Please go ahead. Good morning. This is Spencer Hanus on for Greg Badishkanian. I just wanna follow up on the Q4 adjusted gross margins for a minute. Did you see any change in the competitive environment that allowed you to pass through more costs? We know that Walmart's U.S. gross margins were up 54 basis points last quarter, so the theory is that provided an opening for you guys. Then should we look at the 4Q performance as a good run rate for 2022? Yeah, the first part of that, I wouldn't say that we saw it really change any differently. Obviously, Walmart is one competitor, but there's numerous competitors out there. What we're trying to do is to make sure that we're balancing inflation and helping the customer stretch their budget as much as we can. We've continued to invest in pricing in areas that matter most to customers. We really are, we wouldn't consider it easier or harder. It's just part of the overall managing the business. In terms of looking forward, Gary, I'll let you answer that part. Yeah. Thanks, Rodney. Spencer, as you know, we don't tend to give detailed guidance on the puts and takes in gross margin rate and OG&A rate 'cause we much more view it as how do we manage the business as a whole to drive sustainable earnings growth? I would say that I mentioned it in one of the earlier responses, that we would expect to continue to invest in the customer in 2022, and we'd also actually expect to see some accelerated advertising costs too, because we're gonna obviously continue to grow the business. We'll talk about tomorrow some of the digital growth opportunities that we're focused on as well. I think as we look at the total year, we still expect some investment in gross margin in 2022, but we'd also continue to expect to see significant OG&A leverage as well in many areas through the cost savings that Rodney mentioned. Certainly we wouldn't expect the gap between those two to be anywhere near as wide as it was when you look at the full year results in 2021. I wouldn't take the fourth quarter as the sort of number to use, but I would certainly expect us to be tightly managing those. We do believe, as we mentioned in the prepared remarks, all the work the team's done around sourcing, connecting with customers, driving our strategy to deliver value for customers gives us confidence in the overall guidance that we share for next year. Got it. That's helpful. Fuel profitability is up significantly versus 2019 despite the rising prices, which is typically a headwind to that profitability. I understand that you expect profitability down this year a little bit, but how sustainable do you think it is, this step up versus 2019? Could you just remind us how much operating profit the fuel business contributed in fourth quarter, just so we can better back into how the core performed? Sure. Yeah, it's a great question on fuel. As you know, we talk about this each year, and we've, you know, we used to base our assumptions on a sort of a three- to fivve-year trend. If you look at the last three to five years, really fuel profitability has continued to improve pretty consistently, as we look at the trends in our business and how our fuel reward program has connected and what a great job our team has done in managing fuel margins. You know, I do think there's a little bit of left pocket, right pocket in some of that, of course, as well, because we spend a tremendous amount of money in rewarding customers, giving up to over $1 a gallon off a discount for customers that are highly engaged in the program. I think it's important to remember that there are two dimensions to it, and we recognize that in our gross margin on the supermarket business and don't flow it through on the fuel side because the redemption of those points is tied to when you spend at Kroger in the store online, not tied to specifically the fuel usage. That's an important factor to remember. We believe that the fuel business has sustained improvement in profitability, so we're less focused on the historical trends now because we believe the industry has changed structurally, and we'd expect that to be maintained for us, and also because of the strength in our value proposition with the customer. We don't specifically call out details on fuel in total profitability. I would say that actually, broadly speaking, the tailwind on fuel in the fourth quarter largely aligned with the headwind in LIFO, so the two of those pretty much offset each other during the quarter. One other thing on fuel that our team, two or three years ago, we restructured our procurement team in fuel, and they've also made progress relative to the market on cost of goods, which has been helpful for that business as well. Got it. Thank you so much. Thanks, Spencer. The next question is from Michael Lasser with UBS. Please go ahead. Good morning. Thanks a lot for taking my question. Good morning. How much did inflation contribute to IDs in 4Q, and how much do you expect inflation to contribute to IDs in the year ahead? As part of that, it does look like you're expecting IDs to still be positive in the second half of the year. Does that mean you expect the total number of meal occasions in the second half of the year, number of meal occasions at home to remain positive? If you look at, as Gary mentioned, we would expect inflation in the second half of the year to moderate just because it's cycling the inflation from the second half of this year or last year, I guess now. Overall, as you know, we operate successfully in every operating environment, whether it's inflationary or deflationary, and we're doing everything we can to minimize the impact on our customers. If you look at overall, we would expect the business to continue to grow. Then part of that is really the seamless ecosystem altogether. What we're finding is we get a bigger part of their overall household spend. We also, if you look at total households, we had good numbers on total households for the fourth quarter versus 2020 and 2019. What we find is that once we get a new customer, we're able to move them up the loyalty ladder over time because of the experience they get from our associates on a customer experience, the seamless ecosystem, fresh and good value, plus we're able to start personalized rewards for them. We would expect to be able to move those new customers up the loyalty ladder, which would be helpful on identicals as well. I don't know, Gary, anything you wanna add on? No, I think you covered it well, Rodney. Yep. Thanks, Michael. Yeah, my follow-up question is, Rodney, the percentage of grocery units that are in promotion is still about 500 basis points below where it was prior to the pandemic. Prior to the pandemic, that metric for their industry had been very consistent over time. Why is it that the industry is just gonna be less promotional moving forward than it has been in the past? Yeah. Relative to the industry, I wouldn't have as much detail on that. If you look at our revenue, our sales on promotion, it's pretty much very similar today as it was before the pandemic. It's really something we track every week or whatever. During the pandemic, there were promotions we didn't do just because there were some items you couldn't get product. Obviously you don't want to promote an item where you don't have enough inventory to support the product. In some cases, that's still the case. Overall, our promotional activity is pretty similar to what it was before the pandemic. I think, Michael, just to add that, I think that's Rodney's comments are really what causes us to believe that when we talk to our customers and look at our data, we feel we're in a very good position relative to the value customers receiving from Kroger in this environment and our ability to continue to deliver value for our customers and maintain a strong perception as customers continue to evolve into 2022 and beyond. One of the things I think it's important to remember, we would track internally on sales on promotion, not items on promotion. It's volume weighted, as well, I think is an important point too. Thank you very much. Thanks, Michael. The next question is from Edward Kelly with Wells Fargo. Please go ahead. Yeah. Hi, guys. Good morning. Morning. I wanted to ask you about labor, you know, because you brought it up on the call. Can you just provide, you know, a little bit, you know, more color on, you know, sort of like what's, you know, going on on the labor front, you know, right now? I mean, you have a very strong history of being fair, right? Like, I think if you take an objective view here, you know, that seems to be the case. As we saw with Denver, you know, these renewals now can be costly, and there are other big contracts coming up. I guess, how has the dialog been? It does seem like you're poised to see some acceleration, you know, of inflation. I wonder if you agree with that and you quantify. What are you doing to offset that pressure? You know, things like automation, you know, in addition to some of the cost save stuff. Yeah. As you know, when we embarked upon Restock Kroger several years ago, we made the commitment that we would accelerate our associate wages. As Gary mentioned, now incrementally, it's about $1.2 billion per year that we are investing in supporting our associates. You know, we think supporting our associates is incredibly important. What we're always trying to do is to make sure that we have solid wages, strong wages, and industry-leading benefits, which we do have, and making sure that we're keeping food affordable for customers. You know, it's a balance that we're always trying to do. Obviously, we work with the unions, but, it's, you know, we want to make sure that our business is sustainable for the long term, and we're creating jobs long term, and we're creating career opportunities. You know, if you look at our store directors, 70% started out as an hourly associate. If you look at department heads, almost all started out as hourly part-time associates. Those are things that are incredibly important. You know, it's obviously a balance. We strategically several years ago decided to invest more in wages, because we thought it was important to do. What we find is over time, it also reduces turnover. When you have turnover reduction, obviously the productivity of you know, somebody that's been working for us for a couple of years is higher than a new hire. It really gets back to the cost saves that Gary and I both talked about. You know, literally, you're looking for every single thing where you can you know, stock something in a different way because if you save a second across our company, it's about $14 million. It's you know, you're looking for every single thing that you can do anywhere in the store, anywhere in a plant or warehouse to be able to eliminate waste. We believe that we have a core competency now on how to do that. Those are things that are allowing us to make the investments in our associate wages. I think, Gary, over the last, what, four years, our average hourly rate is up 22%, and we've been able to obviously do that at the same time on significantly lowering our OG&A expense. Yeah. Maybe just a couple of things to add, Rodney. Ed, you know, when Rodney talked about the last four years and the investment we've made, I wouldn't think of that as being the end of the journey when we announced our TSR model. We were actually fully expecting as we look out towards 2025, that we will continue to invest in our associates and our model when we announced the TSR model of 8%-11% growth. We actually did expect that we would continue to invest not just over 2018, 2019, and 2020, but continue to invest 2021 through 2025. It's always been something that we contemplate in our model. We kind of felt that this was something that would come. Now, admittedly, the last 12 months obviously have changed the landscape a little bit. I would say we've pulled forward some of that thinking, and we would fully expect within our guidance that we've shared, 2022 will be a higher number in wage investment than 2021 was. We are fully contemplating that with the guidance that we've shared, and we expect that growth in wage to continue. Again, it was fully part of our TSR model. We'll talk a little about it tomorrow. To Rodney's point, one of the reasons that we're increasing our capital investments in 2022 beyond the sort of catch up of some of the things that were slowed down by COVID, is we are gonna be investing more in technology. We still feel like, as proud as we are of the $1 billion we've saved plus for the last four years, we still think there's a lot of opportunity to use technology even more effectively to take more cost out of the business. It's one of the reasons that we're accelerating capital because we believe it will help support, continue to increase efficiency over the next few years as we continue to invest in average hourly rates. Mary Ellen Adcock will share a little bit more color on that when we see you tomorrow as well. Great. Thanks, guys. Thanks, Ed. The next question is from Michael Montani with Evercore ISI. Please go ahead. Hi. Thanks for taking the question. The first question I had was just around the IDs that you reported. I was wondering if you could discuss what kind of cost increases you all were seeing in terms of a percentage, and how much you were able to pass through, and then also what your outlook would be for that same basis for 2022. If you look within the quarter, it was pretty consistent, obviously, and in the fourth quarter especially, you'll have some weather that drives it. If you look at so far this quarter, it would look pretty similar to the fourth quarter on IDs. Overall, on cost increases for the most part, they were passed through, but not every area within the department. It's really balancing all of the different pieces in terms of cost increases and trying to minimize the impact on the customer. Then I guess just the outlook for 2022, like if we look at the USDA, they're calling for, I think, 2.5%-3.5% full year inflation for this year. Is that a good benchmark for us to use without any better information, would you say? Well, yeah, that we would be using the same data source, but we would expect, within the year, it would be meaningfully higher in the first half versus the second half. Somebody on Gary's team, I could probably have gotten a PhD on the amount of time that he's spent on trying to estimate inflation. At the end of the day, you basically end up in that spot. We would expect SNAP just the pure number of SNAP households to be a headwind. What we find on SNAP is some people switch to buying items with credit card, cash, and other things as well. The other piece of our guidance would reflect in our health and wellness business. There's some third-party plans that weren't profitable that we also are gonna move away from or have moved away from. That's impacted our number on our guidance as well. The only other thing I would add, Rodney shared this earlier in the Q&A, but you know, we are seeing customers tell us that inflation is certainly higher in food, which obviously we're all focused on, but inflation's obviously higher pretty much everywhere in the economy right now. Actually, whereas maybe a few months ago, customers were telling us they were eating more food at home because of concerns around COVID, some of that shifted more to while food at home inflation is higher, actually relative to other inflation and how I need to manage my budget, food at home is more attractive in terms of helping me be able to manage my budget and manage my dollars. I think there's a lot of factors that are impacting that outlook that we're obviously using the best information we can to forecast and feel good about the guidance that we've shared and our ability to manage different levers if things change. We recognize our crystal ball isn't perfect and we'll continue to be dynamic in the way we manage it. Great. Just the follow-up question in terms of expense outlook was, you know, in light of the $1+ billion of gross cost out, is there a certain kind of IDs level that you would need, probably to leverage that you could discuss? How much vaccine contribution did you have in 2021 that needs to cycle now in 2022? As Gary mentioned on the vaccines, that is something we factored into the guidance overall, and it's just part of the total puzzle. We would also expect some of that to be offset because we're able to provide more of the regular vaccines that we always have and, you know, some of that focus that went on vaccines, we'll be able to acquire additional customers to offset some of that. All of that is factored into the guidance we gave. On the identical sales, right now, as long as we can continue to get the costs out, we're able to leverage a pretty modest amounts of identical sales in terms of being able to leverage. Yeah, there's lots of plus and takes, as you heard us mention in our 2022 guidance overall, and we would expect there to be cost increases, obviously, from our investment in average hourly wage, and we continue to invest in the customer experience. Overall, factoring in all the elements of our model, we would expect to generate leverage and our OG&A rate would improve in 2022 over 2021 based on all the different pieces coming together in our model. Within 2022, specifically with that 2%-3% IDs, we would expect to be able to improve the OG&A rate in the year. Thanks, Michael. This will be our last question, and it comes from Ken Goldman with JP Morgan. Please go ahead. Hi. Thanks. I'll make it quick. Just to build on Ed's question. Can you elaborate a bit, if possible, on how we should think about the risk of labor this year? I was struck a little bit by how much time Gary spent on the subject and a little bit of the tone. It's kinda felt like a warning to investors, frankly. If there's any data you can provide on what percentage of your workers are up for renegotiation this year or whatever metric is appropriate, that'd be great. Yeah, if you look at labor overall, it's something that you know, we're proud. We're one of the largest union employers in the United States. You know, we go in with the ability and assumption that we're gonna continue to invest in our associates. We have industry-leading benefits, and we support their ability to come for a job and make it a career by Feed Your Future, providing tuition reimbursement and other things to help people continue to achieve a career. You know, we're always balancing all of the pieces. You know, our associates are critical to our future success. We invest in our associates, and wanna make sure that we have a strong, sustainable business so that they're able to support their families as well. You know, there's nothing more inspiring than when you're in a store and somebody talks about the other day I was at a Ralphs, and somebody was talking about how they were able to send four of their kids to college, and one was a doctor and one was an attorney. Those are the kind of things that it's incredibly inspiring to hear our associates talk about. Ken, I think just one thing to add. We obviously try and listen to feedback carefully, and we got a sense that there was a desire to hear more about our overall strategy. As we shared in the prepared comments, we feel really good about the investments we have made and are continuing to make in our associates. We have a team that's very experienced in managing those relationships. We wanted to make sure, as we've had some feedback that we'd like more color, that we try and listen to investor feedback and wanted to make sure we addressed that in the prepared remarks. Sounds good. Thank you so much. Thanks, Ken. Thank you all for attending today's call. We look forward to engaging with all of you again tomorrow at our business update in Florida. As I always do, I would like to conclude our call by taking a moment to address our associates who may listen in. I'm extremely proud of the things we have accomplished this year, and we celebrated many significant milestones. Thank you on behalf of all our team for making Kroger better every day. I'm so proud of you. As America's grocer, Kroger is taking action to show our support and solidarity with Ukraine. Today, we are sending emergency food assistance to support refugees through a grant from The Kroger Co. Zero Hunger | Zero Waste Foundation to the UN World Food Programme Ukraine Emergency Fund. We will match all gifts made by our associates and customers up to $250,000. That concludes our fourth quarter earnings call. Thank you. We look forward to seeing many of you tomorrow. Take care. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.