And in actual fact, the number would be very much in line with what we were contemplating. We believe it’s a good solution for our shareholders because, as Rodney mentioned, it actually solves for all the elements that are important to a divestiture plan. It will help us longer term in being able to simplify a transition services to be able to manage the new combined company more effectively and drive future value for our shareholders. And we believe it’s also a price that allows C&S to be able to be a successful operator in the future as well. So very much consistent with what we were thinking and would keep us on track with the commitments that we shared when we announced the deal back in October.
Rodney McMullen: Thanks, Michael.
Operator: Thanks, Michael. Our next question is from Kenneth B. Goldman from JPMorgan. Kenneth, your line is now open. Please go ahead.
Kenneth Goldman: Hi. Thank you. You mentioned you’re seeing volumes start to improve a little bit. It’s kind of going the other way for a lot of your branded, I guess, center store packaged food vendors. You highlighted that your store brands are doing better. Maybe that explains much of the difference. But I’m also curious if you’re seeing consumers change their behavior a little bit in terms of which departments they’re shopping. And I guess the core question there is, has there been a boost that you’re seeing to your perimeter maybe at the expense of the center store? Just wanted to get a little more color on where those volumes are getting, I don’t know if less bad is the right phrase or better?
Rodney McMullen: Yes. In terms of volume, there’s a couple of things. One, if you look at like in the meat department, for an example, you’re seeing people much more move to hamburger meat or we call it grinds, but I don’t know that many people publicly would do that, or chicken and some of those things. So you are starting to see some improvement tonnage relative to that. You are also seeing people moving to the entry price point in many cases. And obviously, that would be affecting the CPGs. And I mentioned in the prepared remarks, we are beginning to see some CPGs be more aggressive on partnering, on moving their tonnage as well. So all of those things are happening, but you’re never satisfied with where you are. But the trends are starting to improve and there’s a ton of focus on making sure that we’re supporting that customer on a budget as well.
Kenneth Goldman: Thank you. And then as a follow-up, I think what concerns some investors about disinflation and possible deflation is that even though deflation has been a rare thing, the last time it came around it did last for a fairly long time, a couple of years. It helped drive a competitive environment in which gross margins actually declined and your core operating income was down as well. So I guess what I’m curious about is, what gives you the confidence that — in a world where consumers are struggling more, that your competitors will remain as rational as they are today? And to what extent does your guidance potentially factor the risk of them being a little bit less rational, I guess?
Rodney McMullen: Yes. When you look at our long-term model, we always assume the market will get more competitive than it is because that’s been the case for the last 10 years, 20 years, 30 years and customers get the benefit of that. The other thing that’s built into our model that’s different today is if you look at our diversified income streams, alternative businesses are well north of $1 billion. That business didn’t even exist the last time when the economy was tough, as an example. If you look at from a seamless standpoint, the retail media which is obviously part of the alternative profit business, those margins are completely different than the supermarket margins. So all of those things are things that are part of the model and part of the long-term thinking.
But the thing that I think is always important to remind people is even in the scenario you’ve outlined, we still were significantly above our cost of capital, significantly generating economic value for shareholders, the stock price didn’t, but if you look at the value of the company. And we continue to generate cash flow that we used to pay a dividend and buy back stock and balance our debt. So all of those things, I think, are important parts of it but it is a different market model today than it was the last time.
Kenneth Goldman: Great. Thank you.
Rodney McMullen: Thanks, Ken.
Operator: Thank you, Kenneth. Our next question is from Ed Kelly from Wells Fargo. Ed, your line is now open. Please go ahead. Ed, your line is now open. Please go ahead. Ed, please ensure that you are not muted on your side.
Edward Kelly: Guys, can you hear me?
Rodney McMullen: We can now. Go ahead, Ed.
Rob Quast: We’ll move on to the next question.
Operator: Hi, Ed. Did you want to try and speak again? Your line is open. Our next question is from Kelly Bania from BMO. Kelly, your line is now open. Please go ahead.
Kelly Bania: Hi. This is Kelly Bania. I think I’m up. Thanks, Ed. I guess I wanted to ask.
Rodney McMullen: We can hear you, Kelly. Hi, Kelly. We can hear you. Yes.
Kelly Bania: Okay. Good. I wanted to ask about the divestiture package. I think the comment was made that the valuation for this is slightly below the three times four-wall EBITDA that the SpinCo was structured at. And so I guess, just can you comment on why that would be in Kroger’s best interest to accept a lower valuation than what was available through SpinCo if that was a viable option? And are you willing to share the estimated EBITDA or EBITDA margin for these planned 413 stores?
Gary Millerchip: Hi, Kelly. Thanks for the question. Essentially, when we think about the SpinCo option that we announced when we communicated the merger with Albertsons, just as a sort of a recap, SpinCo was an option that was always going to be a solution alongside other solutions. The package that would have been involved with SpinCo as a group of stores would have covered certain geographies, but it would not have covered the whole of the store footprint geographically that would need to be divested that we always sort of contemplated as part of the plan to take to the FTC. So we would always have had to have put together SpinCo with another buyer, which adds significant complexity both from the perspective of working with two different companies around their future plans to take forward to the FTC, but also the complexity around transition services agreement, technology solutions, sort of implementing, if you like, a period of time where the companies need to operate and separate effectively.
So when we looked at the options that were available, I would say that from day one, we always viewed SpinCo as a viable option. But if we believe we could find a single buyer that was able to do everything that C&S can do, which is bring a strong plan, a strong capable management team, a well-capitalized balance sheet, commitment to investing in the business in the future and then being able to put together a set of assets for them that will enable them to do that, we always believed that, that would likely be both a more effective solution to move forward with but also longer term, a better solution for Kroger to be able to execute on a plan. So it’s why — I know we didn’t go into specific details when we announced the transaction back in October.
But when we assumed evaluation in our models with the commitments that we shared around being accretive to EPS in year one without onetime costs and improvement of $1 billion of synergy over four years and all the other metrics that we shared, all of that was based on valuation that’s essentially in line with the valuation that we announced today with C&S. So very consistent with what we were assuming. But obviously, the only answer we could actually share when we announced the deal was SpinCo because we haven’t had chance to talk to 20 buyers at that point. That was the only plan that was really fully baked through as part of the discussions with Albertsons.
