Gary Millerchip
Chief Financial officer at Kroger
Thank you, Rodney, and good morning everyone. Before jumping into our 2022 results and sharing our outlook for 2023, I'd like to take a step back and remind you how Kroger's value-creation model is enabling the Company to deliver sustainable value for our shareholders.
We believe our value-creation model has been a key to delivering consistently strong results over the past four years and this positioning Kroger for growth in years to come. The go-to-market strategy that Rodney outlined earlier, it's the foundation of our model. Over recent years, we have invested significantly in our people, our customers and technology to create a leading omnichannel position in food retail.
By executing our go-to-market strategy, we win customers in our core supermarket business including health and fuel and drive significant customer traffic and data into our ecosystem. This, in turn, allows us to deploy our investments in technology at 84/51 to deliver even greater value for customers and to create new high-growth, high-margin alternative profit businesses.
The value generated from these businesses enables us to reinvest back into our supermarkets and drive further store and digital traffic, creating a flywheel effect. We are evolving from a traditional food retailer into a more diverse food service business that we believe can deliver sustainable future growth and succeed in a variety of operating environments.
As a reminder, since introducing this model in 2019, we have achieved consistent returns for our shareholders but has significantly exceeded our TSR commitments of 8% to 11%. As you can see in table -- of table on Slide 19, over the past three years, Kroger has achieved more than 19% compounded annual growth rate in adjusted FIFO operating profit and approximately 25% compounded annual growth rate in adjusted EPS.
Over the same time period, we generated adjusted free cash flow of approximately $9.7 billion, and have returned a total of nearly $5.8 billion to investors via dividends and buybacks. Overall, we have delivered nearly three times the expected return from our TSR model over this three year period.
Importantly, at the same time, we continue to invest in the business to support future growth. This included improving our price position relative to key competitors since the start of the pandemic, increasing associate wages and benefits by 34% since 2019, and increase in the amount of capital investments allocated to technology and digital capabilities to enable top line growth and margin expansion.
Our strong performance and progress with our model in recent years also gave us the financial flexibility and confidence to announce our proposed merger with Albertsons. Upon closing, which is anticipated to be in early 2024, we believe the merger will significantly accelerate our go-to-market strategy and delivered TSR well above our standalone model during the first four years post-close.
I'll now walk-through our full year 2022 financial results. Kroger delivered adjusted EPS of $4.23 per diluted share, an increase of 15%. We achieved identical sales excluding fuel of 5.6%.
The FIFO gross margin rate excluding fuel decreased 9 basis points. This reflects the outstanding work of our merchandising and sourcing teams who are extremely effective in managing higher product cost inflation, while maintaining competitive prices and helping customers manage their budgets. The OG&A rate excluding fuel and adjustment items decreased 19 basis points, reflecting sales leverage and cost-saving initiatives, partially offset by planned investments in associates. I'm delighted to say, for the fifth consecutive year, we delivered cost savings of $1 billion in 2022.
Our adjusted FIFO operating profit was $5.1 billion, an increase of 18% from last year. And the LIFO charge for the full year was $626 million compared to [$197 billion] in 2021.
Turning now to our fourth quarter results. Adjusted EPS was $0.99 for the quarter, an increase of almost 9%. We saw continued momentum in our identical sales without fuel of 6.2%. Underlying growth would have been 6.7% after adjusting for the effect of Express Scripts.
Our Brands contributed another strong quarter with identical sales of 10.1%, reflecting the growing importance to customers, I think is exclusive to Kroger products. Digital sales also accelerated during the quarter of 12%, led by 22% growth in delivery solutions.
Kroger's FIFO gross margin rate excluding fuel decreased 1 basis point and the OG&A rate excluding fuel and adjustment items decreased 56 basis points. Fuel remains an important part of our overall value proposition. Our loyalty program, which can save customers up to $1.25 per gallon as being one of the many ways we have help customers stretch their dollars over the past year and contributed to our gallon sales outpacing the industry during the quarter. The average retail price of fuel was $3.39 compared to $3.30 in the same quarter last year. Our cents per gallon fuel margin was $0.51 compared to $0.44 in the same quarter last year.
Adjusted FIFO operating profit was $1.27 billion, a year-over-year increase of 26%. And the LIFO charge was $234 million in the fourth quarter, reflecting sustained higher product cost inflation, particularly in grocery. This compares to LIFO charge of $20 million in Q4 last year.
Included in our fourth quarter results was a $164 million goodwill and fixed asset impairment charge related to Vitacost.com. The talent and capabilities through the merger with Vitacost in 2014 have been key to advancing Kroger's digital platform and growing our digital business to more than $10 billion in annual sales.
As our digital strategy has evolved, our primary focus looking forward will be to effectivity of utilized Kroger store pickup and delivery capabilities and this re-prioritization resulted in the impairment charge Vitacost.com will continue to operate as an online platform, providing great value, natural, organic and eco-friendly products for our customers.
Adjusted free cash flow for the year came in $800 million lower than anticipated. This was entirely due to movements in working capital towards the end of the year. The cost was a combination of factors, including higher inflation affecting inventory, some forward buying to protect margins and timing of accounts payable and third-party receivable payments around the year end. As shared last quarter, we feel comfortable with our overall level and mix of inventory which is high as you to heightened levels of inflation and in-stocks returning to pre-pandemic levels.
Looking over a five year time horizon and smoothing the volatility and working capital experienced during the pandemic. We have seen an underlying benefit from working capital over this time period. And we would expect to see further improvement going forward. We remain confident in our ability to generate strong free cash flow and I've shared in our guidance this morning, expect to achieve adjusted free cash flow of $2.3 billion to $2.5 billion in 2023.
Turning now to financial strategy and capital allocation. We will continue to be disciplined with our capital investments, prioritizing the highest-growth opportunities and strengthen our business and deliver solid returns for our shareholders. As you saw in our guidance this morning, we are anticipating capital investments of $3.4 billion to $3.6 billion this year, which is consistent with our long-range TSR level. Our priorities for 2023 are aligned with our value-creation model and are expected to drive future sales growth and margin expansion.
To drive sales, our focus is on enhancing our store and digital ecosystem. We apply a data-driven approach to make decisions on a store-by-store basis, prioritizing store formats locations with the highest-growth potential. Additionally, we are continuously enhancing our seamless experience, including investing in technology to improve the customer proposition and augmenting personalization which will in turn create additional alternative profit opportunities.
We continue to invest in areas of the business that will drive operating margin expansion, including enhancements to our supply chain capabilities. These investments helped improve margins and differentiate our fresh offering.
And finally, as essential element of our value-creation model that's been our ability to take cost out of our business. We remain focused on eliminating waste in areas that did not affect the customer experience, and we are making investments in technology to improve store productivity, lower digital fulfillment costs, and reduce waste and shrink. These improvements will drive an incremental $1 billion of cost savings in 2023 which would mark our full our sixth year in a row of delivering $1 billion of savings.
In closing, I'd like to share some additional color on our expectations for 2023. While there is still uncertainty regarding the economic outlook, our go-to-market strategy is resonating with customers. And we believe our successful value creation model positions us well to navigate evolving market conditions.
Before I go into the details of our 2023 guidance there are a couple of unusual factors that I'd like to highlight. First, Kroger's this decision to terminate our agreement with Express Scripts in December of 2022 is expected to have a negative impact of 150 basis points of identical sales without fuel. This decision is not expected to have a material effect on profitability.
Second, 2023 will include a 53rd week. We expect the effect of this extra week add approximately $0.15 to our adjusted net earnings per diluted share for the year. With that important context, we expect to achieve identical sales without fuel of 1% to 2% in 2023. Excluding the effect of Express Scripts, our underlying identical sales without fuel growth is expected to be between 2.5% and 3.5%.
We expect to achieve adjusted FIFO operating profit of between $5 billion and $5.2 billion and adjusted net earnings per diluted share between $4.45 and $4.60 including the expected benefits of the 53rd week. We expect to grow revenue by continuing to invest in our customers through competitive pricing and personalization and providing fresh products and a better shopping experience across our store and digital ecosystem. We will fund investments in gross margin in 2023 by improving our product mix as we accelerate momentum with our fresh and Our Brand's initiatives and by growing our alternative profit businesses.
As Rodney mentioned earlier, we will also continue to invest significantly in associate wages and this will be funded by our planned cost-saving initiatives. While we believe fuel margins will remain structurally higher than historical averages, fuel profitability is expected to be a headwind to our model in 2023 as we lap historic fuel margins from last year.
Our 2023 guidance assumes a LIFO charge of between $300 million to $350 million as a result of lower product cost inflation compared to 2022. While this amount is well-above historical levels, LIFO is expected to be a year-over-year tailwind and should more than offset lower fuel profitability.
In terms of quarterly cadence, we expect identical sales without fuel to be above the top-end of our guidance range in the first-half of the year as we continue to experience heightened levels of inflation.
In the second half of the year, we expect identical sales without fuel to be at/or slightly below the bottom end of our range as we expect inflation to tape out later in the year. We expect adjusted earnings per diluted share in quarter one will be slightly negative year-over-year as we cycle 22% growth in EPS from Q1 last year.
Quarter two and quarter three are expected to be within our annual guidance range, and quarter four is expected to be above our guidance range as we cycle the higher LIFO charge in '22 and benefit from the 53rd week. As you know from Rodney and myself this morning, Kroger is operating from a position of strength and the investments that we have made in our go-to-market strategy, provide exciting opportunities for future growth. Our team is energized by these opportunities and we believe Kroger is well-positioned to continue to deliver attractive and sustainable returns for our shareholders.
I'll now turn the call back over to Rodney.
