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Section 1: 8-K (8-K)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of Report:  March 7, 2019

(Date of earliest event reported)

 

The Kroger Co.

(Exact name of registrant as specified in its charter)

 

Ohio

 

No. 1-303

 

31-0345740

(State or other jurisdiction
of incorporation)

 

(Commission File Number)

 

(IRS Employer
Identification No.)

 

1014 Vine Street

Cincinnati, OH 45202

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code: (513) 762-4000

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company   o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

 

 

 


 

Item 2.02                                           Results of Operations and Financial Condition.

 

On March 7, 2019, The Kroger Co. issued a press release announcing its fourth quarter and full year 2018 results.  Attached hereto as Exhibit 99.1, and filed herewith, is a copy of that release.

 

Item 9.01                                           Financial Statements and Exhibits.

 

(d)    Exhibits.

 

Exhibit No.

 

Description

 

 

 

99.1

 

Press Release dated March 7, 2019

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

99.1

 

Press Release dated March 7, 2019

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

THE KROGER CO.

 

 

 

March 7, 2019

By:

/s/ Christine S. Wheatley

 

 

Christine S. Wheatley

 

 

Group Vice President, Secretary and General Counsel

 

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(Back To Top)

Section 2: EX-99.1 (EX-99.1)

Exhibit 99.1

 

 

Kroger Delivers Key Year-One Restock Kroger Commitments

 

Achieved 2018 FIFO operating profit and free cash flow goals,
Grew digital sales 58%, Achieved over $1 billion in cost savings,
Media & Kroger Personal Finance beat alternative profit stream goals,

Announced several transformative Partnerships to Create Customer Value

 

CINCINNATI, March 7, 2019 — The Kroger Co. (NYSE: KR) today reported fourth quarter and fiscal 2018 results and provided a Restock Kroger progress update after its first full year executing the company’s three-year transformation plan.

 

Comments from Chairman and CEO Rodney McMullen

 

“Kroger solidly delivered on what we set out to do in 2018, which was an investment year that laid the groundwork for us to achieve our 2020 Restock Kroger targets including financials. We reached our FIFO operating profit goal and finished the year with sales and business momentum. We have a clear path to achieve $400 million in incremental FIFO operating profit growth and $6.5 billion in cumulative Restock cash flow by the end of 2020.

 

“As America’s grocer, Kroger has the winning combination of local presence plus a digital ecosystem enhanced by strategic partnerships enabling us to offer our customers anything, anytime, anywhere. We are transforming from grocer to growth company by deploying our assets to serve even more customers and create margin-rich alternative profit streams. We are well positioned to deliver on our Restock Kroger vision to serve America through food inspiration and uplift.”

 

Key 2018 Restock Kroger Results

 

·                  Identical sales without fuel at 1.8%, improved over last year

·                  EPS of $3.76; Adjusted EPS of $2.11 near the high end of 2018 guidance

·                  Achieved FIFO operating profit and free cash flow goals

·                  Achieved over $1 billion in cost savings through process improvements

·                  Grew digital sales 58%, expanded Pickup or Delivery to reach 91% of Kroger households

·                  Our Brands achieved its best year ever, reaching record 30.5% unit share in Q4

·                  Announced Partnerships to Create Customer Value including Home Chef, Microsoft, Nuro, Ocado, and Walgreens

·                  Alternative profit streams Media and Kroger Personal Finance beat ambitious operating profit goals

·                  Raised dividend for 12th consecutive year, increased by 12%

·                  Invested in wages and launched Feed Your Future education program for associates

 

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Details of Fourth Quarter 2018 Results

 

·                  Q4 EPS of $0.32

·                  Adjusted Q4 EPS of $0.48

·                  Q4 ID Sales Without Fuel 1.9%

 

GAAP net earnings for the fourth quarter totaled $259 million, or $0.32 per diluted share. GAAP net earnings in the same period last year were $854 million, or $0.96 per diluted share.

 

Adjusted net earnings totaled $390 million, or $0.48 per diluted share (see Table 6, the 2018 Fourth Quarter Adjustment Items). Adjusted net earnings in the same period last year were $483 million, or $0.54 per diluted share (see Table 6, the 2017 Fourth Quarter Adjustment Items).

 

Total sales decreased 9.5% to $28.1 billion in the fourth quarter compared to $31.0 billion for the same period last year. Excluding fuel, the 53rd week in fiscal 2017, the convenience store business unit divestiture, and the merger with Home Chef total sales increased 1.6% in the fourth quarter over the same period last year.

 

Gross margin was 22.0% of sales for the fourth quarter. Excluding fuel, the 53rd week, and the LIFO credit, gross margin decreased 93 basis points from the same period last year due mostly to changes in mix and investments in supply chain, as well as investments in price.

 

Kroger recorded a LIFO credit of $10 million in the fourth quarter, compared to a $54 million LIFO credit in the same quarter last year.

 

Operating, General & Administrative costs as a rate of sales, excluding fuel, the 53rd week and the 2018 and 2017 Fourth Quarter Adjustment items, increased 39 basis points due entirely to incentive pay and continuing to staff digital initiatives. Rent and depreciation on the same basis was flat.

 

Kroger did not adjust the rates as a percent of sales described above for the divestiture of the convenience store business and the merger with Home Chef because the effect was insignificant.

 

Kroger’s fourth quarter 2018 ended on February 2, 2019.

 

Fiscal 2018 Results

 

·                  2018 EPS of $3.76

·                  Adjusted 2018 EPS of $2.11

·                  2018 ID Sales Without Fuel 1.8%

 

GAAP net earnings for 2018 totaled $3.1 billion, or $3.76 per diluted share. GAAP net earnings in 2017 were $1.9 billion, or $2.09 per diluted share.

 

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Adjusted net earnings totaled $1.7 billion, or $2.11 per diluted share (see Table 6, the 2018 Adjustment Items). Adjusted net earnings in 2017 were $1.8 billion, or $1.95 per diluted share (see Table 6, the 2017 Adjustment Items).

 

For fiscal 2018, Kroger’s adjusted net earnings per diluted share result was slightly ahead of the company’s internal expectations due to results from the solid early execution of Restock Kroger, including process changes that led to sustainable cost controls and higher-margin alternative profit streams. This performance allowed Kroger to continue making incremental Restock Kroger investments while delivering on its guidance range for the year.

 

Total sales decreased 1.2% to $121.2 billion in 2018 compared to $122.7 billion in 2017.  Excluding fuel, the 53rd week, the convenience store business unit divestiture, and the merger with Home Chef total sales increased 2.0% in 2018 compared to 2017.

 

Gross margin was 21.7% of sales in 2018.  Excluding fuel, the 53rd week, and the LIFO charge and credit, gross margin decreased 55 basis points compared to 2017.

 

Kroger’s LIFO charge for 2018 was $29 million, compared to an $8 million LIFO credit in 2017.

 

Operating, General & Administrative costs as a percent of sales — excluding fuel, the 53rd week, the 2018 and 2017 Adjustment Items, and a $111 million contribution to the UFCW Consolidated Pension Plan in 2017, increased 14 basis points; rent and depreciation on the same basis declined 1 basis point compared to 2017.

 

FIFO operating margin for 2018 decreased 68 basis points compared to the prior year, with the following exclusions: fuel, the 53rd week, the 2018 and 2017 Adjustment Items, a $111 million contribution to the UFCW Consolidated Pension Plan in 2017.

 

Restock cash flow was $1.9 billion for 2018 (see table 7).

 

Kroger did not adjust the rates as a percent of sales described above for the divestiture of the convenience store business and the merger with Home Chef because the effect was insignificant.

 

Financial Strategy

 

Kroger’s financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its cash flow to achieve these goals.

 

Over the last four quarters, Kroger has used cash to:

 

·                  Invest a combined $589 million in Ocado securities and Home Chef,

 

·                  Contribute an incremental $185 million pre-tax to company-sponsored pension plans,

 

·                  Repurchase 79 million common shares for $2.0 billion, which includes $1.2 billion repurchased under an accelerated stock repurchase plan with after-tax proceeds from the sale of Kroger’s convenience store business unit,

 

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·                  Pay $437 million in dividends, and

 

·                  Invest $3.0 billion in capital, excluding mergers, acquisitions, and purchases of leased facilities.

 

Kroger’s net total debt to adjusted EBITDA ratio, on a 52-week basis, is 2.83 (see table 5). The company’s net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50. Kroger intends to use its free cash flow to bring the leverage ratio back into the target range.

 

2019 Guidance

 

Kroger is targeting identical sales growth, excluding fuel, to range from 2.0% to 2.25% in 2019.

 

The company expects net earnings to range from $2.15 to $2.25 per diluted share and FIFO operating profit to range from $2.9 to $3.0 billion for 2019.

 

The company expects capital investments, excluding mergers, acquisitions, and purchases of leased facilities, to range between $3.0 and $3.2 billion in 2019.

 

Kroger expects its 2019 tax rate to be approximately 22%.

 

Fourth Quarter 2018 Restock Kroger Highlights

 

Redefine the Grocery Customer Experience

 

·                  Introduced Kroger Pay (http://ir.kroger.com/file/Index?KeyFile=396724453) and the Kroger REWARDS debit card

·                  Expanded nationwide retail rollout of Home Chef (http://ir.kroger.com/file/Index?KeyFile=396641437) meal kits

·                  Welcomed half a million new households to the Simple Truth® brand in one period

·                  Shared five predictions for the future of retail (http://ir.kroger.com/file/Index?KeyFile=396365680) at NRF 2019: Retail’s Big Show

·                  Launched the Rx Savings Club (http://ir.kroger.com/file/Index?KeyFile=396075018) to reduce the cost of prescription drugs for customers

·                  Hosted ‘First Pitch’ event at Natural Products Expo West (http://ir.kroger.com/file/Index?KeyFile=396990323) to partner with more natural and organic suppliers

 

Partner for Customer Value

 

·                  Announced a collaboration with Microsoft (http://ir.kroger.com/file/Index?KeyFile=396285733) to introduce connected store experience pilot and Retail as a Service commercial product

·                  Announced two additional Ocado (http://ir.kroger.com/file/Index?KeyFile=396791694) shed locations in Florida and the Mid-Atlantic

·                  Activated the world’s first-ever unmanned grocery delivery service (http://ir.kroger.com/file/Index?KeyFile=396134793) in partnership with Nuro

 

Develop Talent

 

·                  Consistent with the company’s history of thoughtful and measured succession planning, Kroger announced transition plans in 2019 for two key roles that support Kroger’s future:

·                  Announced promotion of Gary Millerchip to senior vice president and chief financial officer, effective April 4, 2019, and retirement of Mike Schlotman,

 

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executive vice president and chief financial officer at the end of 2019. Mr. Schlotman will continue as chief financial officer until April 3, 2019. He will then remain as executive vice president and continue to sit on the senior leadership team to support the company during this transition period until December 28, 2019.

·                  Announced promotion of Yael Cosset to senior vice president and chief information officer effective May 1, 2019 and retirement of Chris Hjelm, executive vice president and chief information officer. Mr. Hjelm will remain as executive vice president and continue to sit on the senior leadership team to support the company during this transition period until his retirement on August 1, 2019.

·                  The company also announced a key promotion in support of Restock Kroger and beyond with the appointment of Stuart Aitken to the newly-created role of senior vice president, alternative business. In this role, Mr. Aitken assumes oversight for Kroger’s successful existing alternative profit businesses, including 84.51° and Kroger Personal Finance. Mr. Aitken will also lead the development of a full portfolio of alternative businesses to support the transformation of Kroger’s growth model.

 

Live Kroger’s Purpose

 

·                  Launched the Zero Hunger | Zero Waste Innovation Fund (http://ir.kroger.com/file/Index?KeyFile=396624315)

·                  Named a finalist for the 2019 Engage for Good Halo Awards for Zero Hunger | Zero Waste (https://www.thekrogerco.com/sustainability/zero-hunger-zero-waste/)

·                  Kroger’s Zero Hunger | Zero Waste Food Rescue program in stores rescued 15% more food and resulted in $2.3 million waste expense savings compared to the previous year.

 

At The Kroger Co. (NYSE: KR), we are dedicated to our Purpose: to Feed the Human SpiritTM. We are nearly half a million associates who serve over nine million customers daily through a seamless digital shopping experience and 2,764 retail food stores under a variety of banner names (https://www.thekrogerco.com/about-kroger/our-business/grocery-retail/), serving America through food inspiration and uplift, and creating #ZeroHungerZeroWaste communities by 2025. To learn more about us, visit our newsroom (https://www.thekrogerco.com/newsroom/) and investor relations site (http://ir.kroger.com/).

 


 

Note: Fuel sales have historically had a low gross margin rate and operating expense rate as compared to corresponding rates on non-fuel sales. As a result, Kroger discusses the changes in these rates excluding the effect of fuel.

 

Note: Kroger discusses the changes in certain operating results, as a percentage of sales, excluding recent mergers due to them affecting comparability to last year.

 

Please refer to the supplemental information presented in the tables for reconciliations of the non-GAAP financial measures used in this press release to the most comparable GAAP financial measure and related disclosure.

 

This press release contains certain statements that constitute “forward-looking statements” about the future performance of the company. These statements are based on management’s

 

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assumptions and beliefs in light of the information currently available to it. These statements are indicated by words such as “achieve,” “committed,” “continue,” “effect,” “expects,” “future,” “goal,” “growth,” “guidance,” “intends,” “pilot,” “plan,”  “range,” “result,” “strategy,” “target,” “vision,” and “will.” Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include the specific risk factors identified in “Risk Factors” and “Outlook” in Kroger’s annual report on Form 10-K for the last fiscal year and any subsequent filings, as well as the following:

 

·                  Kroger’s ability to achieve sales, earnings, incremental FIFO operating profit, and free cash flow goals may be affected by: labor negotiations or disputes; changes in the types and numbers of businesses that compete with Kroger; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; Kroger’s response to these actions; the state of the economy, including interest rates, the inflationary and deflationary trends in certain commodities, changes in tariffs, and the unemployment rate; the effect that fuel costs have on consumer spending; volatility of fuel margins; changes in government-funded benefit programs; manufacturing commodity costs; diesel fuel costs related to Kroger’s logistics operations; trends in consumer spending; the extent to which Kroger’s customers exercise caution in their purchasing in response to economic conditions; the uncertain pace of economic growth; changes in inflation or deflation in product and operating costs; stock repurchases; Kroger’s ability to retain pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; Kroger’s ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of Kroger’s future growth plans; the ability to execute on Restock Kroger; and the successful integration of merged companies and new partnerships.

·                  Kroger’s ability to achieve these goals may also be affected by Kroger’s ability to manage the factors identified above. Kroger’s ability to execute its financial strategy may be affected by its ability to generate cash flow.

·                  Kroger’s effective tax rate may differ from the expected rate due to changes in laws, the status of pending items with various taxing authorities, and the deductibility of certain expenses.

 

Kroger assumes no obligation to update the information contained herein. Please refer to Kroger’s reports and filings with the Securities and Exchange Commission for a further discussion of these risks and uncertainties.

 

Note: Kroger’s quarterly conference call with investors will be broadcast live online at 10 a.m. (ET) on March 7, 2019 at ir.kroger.com. An on-demand replay of the webcast will be available at approximately 1 p.m. (ET) on Thursday, March 7, 2019.

 

4th Quarter and Fiscal Year 2018 Tables Include:

 

1.              Consolidated Statements of Operations

2.              Consolidated Balance Sheets

3.              Consolidated Statements of Cash Flows

4.              Supplemental Sales Information

 

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5.              Reconciliation of Net Total Debt and Net Earnings Attributable to The Kroger Co. to Adjusted EBITDA

6.              Net Earnings Per Diluted Share Excluding the Adjustment Items

7.              Restock Cash Flow

 

—30—

 

Contacts: Media: Kristal Howard (513) 762-1304; Investors: Rebekah Manis (513) 762-4969

 

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Table 1.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

 

 

 

FOURTH QUARTER

 

YEAR-TO-DATE

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SALES

 

$

28,091

 

100.0

%

$

31,031

 

100.0

%

$

121,162

 

100.0

%

$

122,662

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MERCHANDISE COSTS, INCLUDING ADVERTISING, WAREHOUSING AND TRANSPORTATION (a), AND LIFO CHARGE (b)

 

21,902

 

78.0

 

24,240

 

78.1

 

94,894

 

78.3

 

95,662

 

78.0

 

OPERATING, GENERAL AND ADMINISTRATIVE (a)

 

5,013

 

17.9

 

5,456

 

17.6

 

20,305

 

16.8

 

21,041

 

17.2

 

RENT

 

204

 

0.7

 

220

 

0.7

 

884

 

0.7

 

911

 

0.7

 

DEPRECIATION AND AMORTIZATION

 

581

 

2.1

 

565

 

1.8

 

2,465

 

2.0

 

2,436

 

2.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING PROFIT

 

391

 

1.4

 

550

 

1.8

 

2,614

 

2.2

 

2,612

 

2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

(142

)

(0.5

)

(148

)

(0.5

)

(620

)

(2.2

)

(601

)

(0.5

)

NON-SERVICE COMPONENT OF COMPANY-SPONSORED PENSION PLAN COSTS

 

(7

)

(0.0

)

(506

)

(1.6

)

(26

)

(0.1

)

(527

)

(0.4

)

MARK TO MARKET GAIN ON OCADO SECURITIES

 

75

 

0.3

 

 

 

228

 

0.8

 

 

 

GAIN ON SALE OF BUSINESS

 

 

 

 

 

1,782

 

6.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE

 

317

 

1.1

 

(104

)

(0.3

)

3,978

 

3.3

 

1,484

 

1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX (BENEFIT) EXPENSE

 

66

 

0.2

 

(957

)

(3.1

)

900

 

0.7

 

(405

)

(0.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS INCLUDING NONCONTROLLING INTERESTS

 

251

 

0.9

 

853

 

2.8

 

3,078

 

2.5

 

1,889

 

1.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

(8

)

 

(1

)

 

(32

)

 

(18

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

 

$

259

 

0.9

%

$

854

 

2.8

%

$

3,110

 

2.6

%

$

1,907

 

1.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER BASIC COMMON SHARE

 

$

0.32

 

 

 

$

0.97

 

 

 

$

3.80

 

 

 

$

2.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVERAGE NUMBER OF COMMON SHARES USED IN BASIC CALCULATION

 

798

 

 

 

875

 

 

 

810

 

 

 

895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER DILUTED COMMON SHARE

 

$

0.32

 

 

 

$

0.96

 

 

 

$

3.76

 

 

 

$

2.09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVERAGE NUMBER OF COMMON SHARES USED IN DILUTED CALCULATION

 

806

 

 

 

884

 

 

 

818

 

 

 

904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.140

 

 

 

$

0.125

 

 

 

$

0.545

 

 

 

$

0.495

 

 

 

 


Note:

Certain percentages may not sum due to rounding.

 

 

Note:

The Company defines First-In First-Out (FIFO) gross profit as sales minus merchandise costs, including advertising, warehousing and transportation, but excluding the Last-In First-Out (LIFO) charge.

 

 

 

The Company defines FIFO gross margin, as described in the earnings release, as FIFO gross profit divided by sales.

 

 

 

The Company defines FIFO operating profit as operating profit excluding the LIFO charge.

 

 

 

The Company defines FIFO operating margin, as described in the earnings release, as FIFO operating profit divided by sales.

 

 

 

The above FIFO financial metrics are important measures used by management to evaluate operational effectiveness. Management believes these FIFO financial metrics are useful to investors and analysts because they measure our day-to-day operational effectiveness.

 

 

(a)

Merchandise costs and operating, general and administrative expenses exclude depreciation and amortization expense and rent expense which are included in separate expense lines.

 

 

(b)

LIFO credits of ($10) and ($54) were recorded in the fourth quarters of 2018 and 2017, respectively. For the year-to-date period, a LIFO charge of $29 and a credit of ($8) were recorded for 2018 and 2017, respectively.

 

 

Note:

Certain prior-year amounts have been reclassified to conform to current-year presentation. In the first quarter of 2018, the Company adopted ASU 2017-07, “Compensation — Retirement Benefits (Topic 715 ): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” and restated prior periods for the adoption.

 


 

Table 2.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions)

(unaudited)

 

 

 

February 2,

 

February 3,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash

 

$

411

 

$

339

 

Temporary cash investments

 

18

 

8

 

Store deposits in-transit

 

1,181

 

1,161

 

Receivables

 

1,589

 

1,637

 

Inventories

 

6,846

 

6,533

 

Assets held for sale

 

166

 

604

 

Prepaid and other current assets

 

592

 

835

 

 

 

 

 

 

 

Total current assets

 

10,803

 

11,117

 

 

 

 

 

 

 

Property, plant and equipment, net

 

21,635

 

21,071

 

Intangibles, net

 

1,258

 

1,100

 

Goodwill

 

3,087

 

2,925

 

Other assets

 

1,335

 

984

 

 

 

 

 

 

 

Total Assets

 

$

38,118

 

$

37,197

 

 

 

 

 

 

 

LIABILITIES AND SHAREOWNERS’ EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt including obligations under capital leases and financing obligations

 

$

3,157

 

$

3,560

 

Trade accounts payable

 

6,059

 

5,858

 

Accrued salaries and wages

 

1,227

 

1,099

 

Liabilities held for sale

 

51

 

259

 

Other current liabilities

 

3,780

 

3,421

 

 

 

 

 

 

 

Total current liabilities

 

14,274

 

14,197

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

12,072

 

12,029

 

Deferred income taxes

 

1,574

 

1,568

 

Pension and postretirement benefit obligations

 

494

 

792

 

Other long-term liabilities

 

1,869

 

1,706

 

 

 

 

 

 

 

Total Liabilities

 

30,283

 

30,292

 

 

 

 

 

 

 

Shareowners’ equity

 

7,835

 

6,905

 

 

 

 

 

 

 

Total Liabilities and Shareowners’ Equity

 

$

38,118

 

$

37,197

 

 

 

 

 

 

 

Total common shares outstanding at end of period

 

798

 

870

 

Total diluted shares year-to-date

 

818

 

904

 

 


 

Table 3.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

 

 

 

YEAR-TO-DATE

 

 

 

2018

 

2017

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net earnings including noncontrolling interests

 

$

3,078

 

$

1,889

 

Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

2,465

 

2,436

 

LIFO (credit) charge

 

29

 

(8

)

Stock-based employee compensation

 

154

 

151

 

Expense for Company-sponsored pension plans

 

70

 

591

 

Goodwill impairment charge

 

 

110

 

Deferred income taxes

 

(33

)

(694

)

Gain on sale of business

 

(1,782

)

 

Mark to market gain on Ocado securities

 

(228

)

 

Other

 

122

 

79

 

Changes in operating assets and liabilities, net of effects from mergers and disposals of businesses:

 

 

 

 

 

Store deposits in-transit

 

(20

)

(265

)

Receivables

 

(208

)

61

 

Inventories

 

(354

)

(23

)

Prepaid and other current assets

 

244

 

41

 

Trade accounts payable

 

213

 

158

 

Accrued expenses

 

416

 

(40

)

Income taxes receivable and payable

 

289

 

(96

)

Contribution to Company-sponsored pension plan

 

(185

)

(1,000

)

Other

 

(106

)

23

 

 

 

 

 

 

 

Net cash provided by operating activities

 

4,164

 

3,413

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Payments for property and equipment, including payments for lease buyouts

 

(2,967

)

(2,809

)

Proceeds from sale of assets

 

85

 

138

 

Payments for acquisitions, net of cash acquired

 

(197

)

(16

)

Purchases of stores

 

(44

)

 

Net proceeds from sale of business

 

2,169

 

 

Purchases of Ocado securities

 

(392

)

 

Other

 

160

 

(20

)

 

 

 

 

 

 

Net cash used by investing activities

 

(1,186

)

(2,707

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

2,236

 

1,523

 

Payments on long-term debt

 

(1,372

)

(788

)

Net (borrowings) payments on commercial paper

 

(1,321

)

696

 

Dividends paid

 

(437

)

(443

)

Proceeds from issuance of capital stock

 

65

 

51

 

Treasury stock purchases

 

(2,010

)

(1,633

)

Other

 

(57

)

(87

)

 

 

 

 

 

 

Net cash used by financing activities

 

(2,896

)

(681

)

 

 

 

 

 

 

NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS

 

82

 

25

 

 

 

 

 

 

 

CASH AND TEMPORARY CASH INVESTMENTS:

 

 

 

 

 

BEGINNING OF YEAR

 

347

 

322

 

END OF YEAR

 

$

429

 

$

347

 

 

 

 

 

 

 

Reconciliation of capital investments:

 

 

 

 

 

Payments for property and equipment, including payments for lease buyouts

 

$

(2,967

)

$

(2,809

)

Payments for lease buyouts

 

5

 

13

 

Changes in construction-in-progress payables

 

(56

)

(188

)

Total capital investments, excluding lease buyouts

 

$

(3,018

)

$

(2,984

)

 

 

 

 

 

 

Disclosure of cash flow information:

 

 

 

 

 

Cash paid during the year for interest

 

$

614

 

$

656

 

Cash paid during the year for income taxes

 

$

600

 

$

348

 

 


 

Table 4. Supplemental Sales Information

(in millions, except percentages)

(unaudited)

 

Items identified below should not be considered as alternatives to sales or any other GAAP measure of performance.  Identical sales is an industry-specific measure and it is important to review it in conjunction with Kroger’s financial results reported in accordance with GAAP.  Other companies in our industry may calculate identical sales differently than Kroger does, limiting the comparability of the measure.

 

IDENTICAL SALES (a)

 

 

 

FOURTH QUARTER

 

YEAR-TO-DATE

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

EXCLUDING FUEL

 

$

24,554

 

$

24,087

 

$

101,928

 

$

100,153

 

 

 

 

 

 

 

 

 

 

 

EXCLUDING FUEL

 

1.9

%

1.8

%

1.8

%

0.9

%

 


(a)                       Kroger defines identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket locations, Kroger Specialty Pharmacy businesses, jewelry and ship-to-home solutions.  Kroger defines a supermarket as identical when it has been in operation without expansion or relocation for five full quarters.  Additionally, sales from all acquired businesses are treated as identical as if they were part of the Company in the prior year.

 


 

Table 5.  Reconciliation of Net Total Debt and

Net Earnings Attributable to The Kroger Co. to Adjusted EBITDA

(in millions, except for ratio)

(unaudited)

 

The items identified below should not be considered an alternative to any GAAP measure of performance or access to liquidity.  Net total debt to adjusted EBITDA is an important measure used by management to evaluate the Company’s access to liquidity.  The items below should be reviewed in conjunction with Kroger’s financial results reported in accordance with GAAP.

 

The following table provides a reconciliation of net total debt.

 

 

 

February 2,

 

February 3,

 

 

 

 

 

2019

 

2018

 

Change

 

 

 

 

 

 

 

 

 

Current portion of long-term debt including obligations under capital leases and financing obligations

 

$

3,157

 

$

3,560

 

$

(403

)

Long-term debt including obligations under capital leases and financing obligations

 

12,072

 

12,029

 

43

 

 

 

 

 

 

 

 

 

Total debt

 

15,229

 

15,589

 

(360

)

 

 

 

 

 

 

 

 

Less: Temporary cash investments

 

18

 

8

 

10

 

Less: Prepaid employee benefits

 

125

 

385

 

(260

)

 

 

 

 

 

 

 

 

Net total debt

 

$

15,086

 

$

15,196

 

$

(110

)

 

The following table provides a reconciliation from net earnings attributable to The Kroger Co. to adjusted EBITDA, as defined in the Company’s credit agreement, for 2018 and 2017 on a 52 week basis.

 

 

 

YEAR-TO-DATE

 

 

 

 

 

February 2,

 

February 3,

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. on a 53 week basis in fiscal year 2017

 

$

3,110

 

$

1,907

 

 

 

LIFO (credit) charge

 

29

 

(8

)

 

 

Depreciation and amortization

 

2,465

 

2,436

 

 

 

Interest expense

 

620

 

601

 

 

 

Income tax (benefit) expense

 

900

 

(405

)

 

 

Adjustments for pension plan agreements

 

155

 

550

 

 

 

Adjustment for voluntary retirement offering

 

 

184

 

 

 

Adjustment for Kroger Specialty Pharmacy goodwill impairment

 

 

110

 

 

 

Adjustment for company-sponsored pension plan termination

 

 

502

 

 

 

Adjustment for mark to market gain on Ocado securities

 

(228

)

 

 

 

Adjustment for gain on sale of convenience store business

 

(1,782

)

 

 

 

Adjustment for contingent consideration

 

33

 

 

 

 

 

Adjustment for loss on settlement of financial instrument

 

42

 

 

 

 

 

53rd week EBITDA adjustment

 

 

(131

)

 

 

Other

 

(20

)

(18

)

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

5,324

 

$

5,728

 

 

 

 

 

 

 

 

 

 

 

Net total debt to adjusted EBITDA ratio on a 52 week basis

 

2.83

 

2.65

 

 

 

 


 

Table 6. Net Earnings Per Diluted Share Excluding the Adjustment Items

(in millions, except per share amounts)

(unaudited)

 

The purpose of this table is to better illustrate comparable operating results from our ongoing business, after removing the effects on net earnings per diluted common share for certain items described below.  Items identified in this table should not be considered alternatives to net earnings attributable to The Kroger Co. or any other GAAP measure of performance.  These items should not be reviewed in isolation or considered substitutes for the Company’s financial results as reported in accordance with GAAP.  Due to the nature of these items, as further described below, it is important to identify these items and to review them in conjunction with the Company’s financial results reported in accordance with GAAP.

 

The following table summarizes items that affected the Company’s financial results during the periods presented.

 

 

 

FOURTH QUARTER

 

YEAR-TO-DATE

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

 

$

259

 

$

854

 

$

3,110

 

$

1,907

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENTS FOR PENSION PLAN AGREEMENTS (a)(b)

 

131

 

234

 

121

 

360

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR VOLUNTARY RETIREMENT OFFERING (a)(c)

 

 

 

 

117

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR KROGER SPECIALTY PHARMACY GOODWILL IMPAIRMENT (a)(d)

 

 

74

 

 

74

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR COMPANY-SPONSORED PENSION PLAN TERMINATION (a)(e)

 

 

335

 

 

335

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR GAIN ON SALE OF CONVENIENCE STORE BUSINESS (a)(f)

 

 

 

(1,360

)

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR MARK TO MARKET GAIN ON OCADO SECURITIES (a)(g)

 

(59

)

 

(174

)

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR DEPRECIATION RELATED TO HELD FOR SALE ASSETS (a)(h)

 

 

(13

)

(11

)

(13

)

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR CONTINGENT CONSIDERATION (a)(i)

 

26

 

 

26

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR LOSS ON SETTLEMENT OF FINANCIAL INSTRUMENT (a)(j)

 

33

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR TAX ACT (k)

 

 

(922

)

 

(922

)

 

 

 

 

 

 

 

 

 

 

2018 AND 2017 ADJUSTMENT ITEMS

 

131

 

(292

)

(1,365

)

(49

)

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. EXCLUDING THE ADJUSTMENT ITEMS ABOVE

 

$

390

 

$

562

 

$

1,745

 

$

1,858

 

 

 

 

 

 

 

 

 

 

 

53RD WEEK ADJUSTMENT (a)(l)

 

 

(79

)

 

(79

)

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. EXCLUDING THE ADJUSTMENT ITEMS ABOVE AND THE 53RD WEEK

 

$

390

 

$

483

 

$

1,745

 

$

1,779

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER DILUTED COMMON SHARE

 

$

0.32

 

$

0.96

 

$

3.76

 

$

2.09

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENTS FOR PENSION PLAN AGREEMENTS (m)

 

0.16

 

0.26

 

0.15

 

0.40

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR VOLUNTARY RETIREMENT OFFERING (m)

 

 

 

 

0.13

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR KROGER SPECIALTY PHARMACY GOODWILL IMPAIRMENT (m)

 

 

0.08

 

 

0.08

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR COMPANY-SPONSORED PENSION PLAN TERMINATION (m)

 

 

0.38

 

 

0.37

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR GAIN ON SALE OF CONVENIENCE STORE BUSINESS (m)

 

 

 

(1.65

)

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR MARK TO MARKET GAIN ON OCADO SECURITIES (m)

 

(0.07

)

 

(0.21

)

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR DEPRECIATION RELATED TO HELD FOR SALE ASSETS (m)

 

 

(0.01

)

(0.01

)

(0.01

)

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR CONTINGENT CONSIDERATION (m)

 

0.03

 

 

0.03

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR LOSS ON SETTLEMENT OF FINANCIAL INSTRUMENT (m)

 

0.04

 

 

0.04

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR TAX ACT (m)

 

 

(1.04

)

 

(1.02

)

 

 

 

 

 

 

 

 

 

 

2018 AND 2017 ADJUSTMENT ITEMS

 

0.16

 

(0.33

)

(1.65

)

(0.05

)

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER DILUTED COMMON SHARE EXCLUDING THE ADJUSTMENT ITEMS ABOVE

 

$

0.48

 

$

0.63

 

$

2.11

 

$

2.04

 

 

 

 

 

 

 

 

 

 

 

53RD WEEK ADJUSTMENT (m)

 

 

(0.09

)

 

(0.09

)

 

 

 

 

 

 

 

 

 

 

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. EXCLUDING THE ADJUSTMENT ITEMS ABOVE AND THE 53RD WEEK

 

$

0.48

 

$

0.54

 

$

2.11

 

$

1.95

 

 

 

 

 

 

 

 

 

 

 

AVERAGE NUMBER OF COMMON SHARES USED IN DILUTED CALCULATION

 

806

 

884

 

818

 

904

 

 


 

Table 6. Net Earnings Per Diluted Share Excluding the Adjustment Items (continued)

(in millions, except per share amounts)

(unaudited)

 


(a)                                   The amounts presented represent the after-tax effect of each adjustment.

 

(b)                                  The pre-tax adjustments for pension plan agreements were $168 and $351 in the fourth quarter of 2018 and 2017, respectively. For the year-to-date period, pre-tax adjustments for pension plan agreements were $155 and $550 in 2018 and 2017, respectively.

 

(c)                                   The pre-tax adjustment for voluntary retirement offering was $184.

 

(d)                                  The pre-tax adjustment for Kroger Specialty Pharmacy goodwill impariment was $110.

 

(e)                                   The pre-tax adjustment for Company-Sponsored pension plan termination was $502.

 

(f)                                    The pre-tax adjustment for gain on sale of convenience store business was ($1,782).

 

(g)                                   The pre-tax adjustment for mark to market (gain) on Ocado securities was ($75) in the fourth quarter of 2018 and ($228) in 2018.

 

(h)                                  The pre-tax adjustment for depreciation related to held for sale assets was ($14) in 2018, and ($19) in 2017.

 

(i)                                     The pre-tax adjustment for contingent consideration was $33.

 

(j)                                     The pre-tax adjustment for loss on settlement of financial instrument was $42.

 

(k)                                  Due to the re-measurement of deferred tax liabilities and the reduction of the statutory income tax rate for the last few weeks of the fiscal year.

 

(l)                                     The pre-tax 53rd week adjustment was ($119).

 

(m)                               The amounts presented represent the net earnings per diluted common share effect of each adjustment.

 

Note:                       2018 Fourth Quarter Adjustment Items include adjustments for pension plan agreements, mark to market gain on Ocado securities, contingent consideration adjustment and an adjustment for the loss on settlement of financial instrument.

 

2018 Adjustment Items include the 2018 Fourth Quarter Adjustment Items plus the adjustments that occurred in the first three quarters of 2018 for pension plan agreements, the gain on sale of convenience store business, the mark to market gain on Ocado securities and depreciation related to held for sale assets.

 

2017 Fourth Quarter Adjustment Items include adjustments for pension plan agreements, Kroger Specialty Pharmacy goodwill impairment, company-sponsored pension plan termination, depreciation related to held for sale assets and the Tax Act.

 

2017 Adjustment Items include the 2017 Fourth Quarter Adjustment Items plus the adjustments that occurred in the first quarter of 2017 for pension plan agreements and the voluntary retirement offering.

 


 

Table 7.  Restock Cash Flow

(in millions)

(unaudited)

 

The items identified below should not be considered an alternative to net cash provided or used by operating or investing activities or any other GAAP measure of performance.  Restock cash flow is an important measure used by management to evaluate available funding for share repurchases, dividends, other strategic investments and managing debt levels. The items below should be reviewed in conjunction with Kroger’s financial results reported in accordance with GAAP.   Management believes restock cash flow is a useful metric to investors and analysts because it demonstrates our ability to make share repurchases and other strategic investments, pay dividends and manage debt levels.

 

The following table provides a reconciliation of restock cash flow.

 

 

 

February 2,

 

February 3,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

4,164

 

$

3,413

 

 

 

 

 

 

 

Net cash used by investing activities

 

(1,186

)

(2,707

)

 

 

 

 

 

 

Free cash flow

 

2,978

 

706

 

 

 

 

 

 

 

Adjustment for payments for lease buyouts

 

5

 

13

 

Adjustment for purchases of Ocado securities

 

392

 

 

Adjustment for purchases of stores

 

44

 

 

Adjustment for the sale of business, net of tax

 

(1,709

)

 

Adjustment for payments for acquisitions, net of cash acquired

 

197

 

16

 

 

 

 

 

 

 

Restock cash flow

 

$

1,907

 

$

735

 

 


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