Gary Millerchip
Chief Financial Officer at Kroger
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 achieved positive identical sales without fuel and adjusted EPS growth on top of record results in 2020. We also continue 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. Kri -- 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 credits in the same period last year, and represented an $0.11 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, and our team is doing an excellent job managing the current hire 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 brand 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 continued 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 to 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 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, health care and pensions are included in all of the more than 350 collective bargaining agreements that cover approximately 66% of our associates. These contracts are regular negotiated by our professional labor relations team. Our objective is to negotiate contracts that balance competitive wage increases and affordable health care 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 20,500 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, 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, [Part 3 end] 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 $3.85. The tailwinds in our 2022 plan include 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% to 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% to 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 to $4 billion in 2022. This reflects some catch-up from the last few 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, and 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. And 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% to 11% over time. With that, I'll turn it back to Rodney.
