10-Q 1 kr-20190525x10q.htm 10-Q kr_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 25, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to         

Commission file number 1-303

 


 

 

Picture 1

The Kroger Co.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Ohio

 

31-0345740

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1014 Vine Street, Cincinnati, Ohio 45202

(Address of principal executive offices)

(Zip Code)

 

(513) 762-4000

(Registrant’s telephone number, including area code)

 

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common, $1.00 Par Value

KR

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer (do not check if a smaller reporting company)

 

Smaller reporting company

 

 

Emerging growth company

 

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.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒.

 

There were 798,798,567 shares of Common Stock ($1 par value) outstanding as of June 25, 2019.

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.Financial Statements.

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

 

 

May 25,

 

May 26,

 

(In millions, except per share amounts)

    

2019

    

2018

 

Sales

 

$

37,251

 

$

37,722

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below

 

 

28,983

 

 

29,419

 

Operating, general and administrative

 

 

6,314

 

 

6,257

 

Rent

 

 

274

 

 

276

 

Depreciation and amortization

 

 

779

 

 

741

 

 

 

 

 

 

 

 

 

Operating profit

 

 

901

 

 

1,029

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest expense

 

 

(197)

 

 

(192)

 

Non-service component of company-sponsored pension plan costs

 

 

 3

 

 

(10)

 

Mark to market gain on Ocado securities

 

 

106

 

 

36

 

Gain on sale of businesses

 

 

176

 

 

1,771

 

 

 

 

 

 

 

 

 

Net earnings before income tax expense

 

 

989

 

 

2,634

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

226

 

 

616

 

 

 

 

 

 

 

 

 

Net earnings including noncontrolling interests

 

 

763

 

 

2,018

 

Net loss attributable to noncontrolling interests

 

 

(9)

 

 

(8)

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co.

 

$

772

 

$

2,026

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per basic common share

 

$

0.96

 

$

2.39

 

 

 

 

 

 

 

 

 

Average number of common shares used in basic calculation

 

 

798

 

 

839

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per diluted common share

 

$

0.95

 

$

2.37

 

 

 

 

 

 

 

 

 

Average number of common shares used in diluted calculation

 

 

805

 

 

846

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

2

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

First Quarter Ended

 

 

 

May 25,

 

May 26,

 

(In millions)

    

2019

    

2018

    

Net earnings including noncontrolling interests

 

$

763

 

$

2,018

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

Realized gains and losses on available for sale securities, net of income tax (1)  

 

 

 —

 

 

(4)

 

Change in pension and other postretirement defined benefit plans, net of income tax(2)

 

 

 7

 

 

15

 

Unrealized gains and losses on cash flow hedging activities, net of income tax(3)

 

 

(8)

 

 

 4

 

Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4)

 

 

 1

 

 

 1

 

Cumulative effect of accounting change (5)

 

 

(146)

 

 

 —

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(146)

 

 

16

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

617

 

 

2,034

 

Comprehensive loss attributable to noncontrolling interests

 

 

(9)

 

 

(8)

 

Comprehensive income attributable to The Kroger Co.

 

$

626

 

$

2,042

 


(1)

Amount is net of tax of ($1) for the first quarter of 2018.

(2)

Amount is net of tax of $3 for the first quarter of 2019 and $4 for the first quarter of 2018.

(3)

Amount is net of tax of ($9) for the first quarter of 2019 and $1 for the first quarter of 2018.

(4)

Amount is net of tax of $1 for the first quarters of 2019 and 2018.

(5)

Related to the adoption of Accounting Standards Update (“ASU”) 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," (see Note 5 for additional details).

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

 

3

 

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

May 25,

    

February 2,

 

(In millions, except par amounts)

 

2019

 

2019

 

ASSETS 

 

 

 

 

 

 

 

Current assets 

 

 

 

 

 

 

 

Cash and temporary cash investments 

 

$

409

 

$

429

 

Store deposits in-transit 

 

 

1,066

 

 

1,181

 

Receivables 

 

 

1,560

 

 

1,589

 

FIFO inventory 

 

 

7,998

 

 

8,123

 

LIFO reserve 

 

 

(1,291)

 

 

(1,277)

 

Assets held for sale

 

 

 —

 

 

166

 

Prepaid and other current assets 

 

 

420

 

 

592

 

Total current assets 

 

 

10,162

 

 

10,803

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net 

 

 

21,661

 

 

21,635

 

Operating lease assets

 

 

6,819

 

 

 —

 

Intangibles, net

 

 

1,123

 

 

1,258

 

Goodwill 

 

 

3,087

 

 

3,087

 

Other assets 

 

 

1,467

 

 

1,335

 

 

 

 

 

 

 

 

 

Total Assets 

 

$

44,319

 

$

38,118

 

 

 

 

 

 

 

 

 

LIABILITIES 

 

 

 

 

 

 

 

Current liabilities 

 

 

 

 

 

 

 

Current portion of long-term debt including obligations under finance leases

 

$

1,453

 

$

3,157

 

Current portion of operating lease liabilities

 

 

682

 

 

 —

 

Trade accounts payable 

 

 

6,423

 

 

6,059

 

Accrued salaries and wages 

 

 

1,078

 

 

1,227

 

Liabilities held for sale

 

 

 —

 

 

51

 

Other current liabilities 

 

 

3,939

 

 

3,780

 

Total current liabilities 

 

 

13,575

 

 

14,274

 

 

 

 

 

 

 

 

 

Long-term debt including obligations under finance leases

 

 

12,016

 

 

12,072

 

Noncurrent operating lease liabilities

 

 

6,420

 

 

 —

 

Deferred income taxes 

 

 

1,484

 

 

1,562

 

Pension and postretirement benefit obligations

 

 

485

 

 

494

 

Other long-term liabilities 

 

 

1,807

 

 

1,881

 

 

 

 

 

 

 

 

 

Total Liabilities 

 

 

35,787

 

 

30,283

 

 

 

 

 

 

 

 

 

Commitments and contingencies see Note 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares, $100 par per share, 5 shares authorized and unissued 

 

 

 —

 

 

 —

 

Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2019 and 2018

 

 

1,918

 

 

1,918

 

Additional paid-in capital 

 

 

3,287

 

 

3,245

 

Accumulated other comprehensive loss 

 

 

(492)

 

 

(346)

 

Accumulated earnings 

 

 

20,481

 

 

19,681

 

Common shares in treasury, at cost, 1,119 shares in 2019 and 1,120 shares in 2018

 

 

(16,613)

 

 

(16,612)

 

 

 

 

 

 

 

 

 

Total Shareholders’ Equity - The Kroger Co.

 

 

8,581

 

 

7,886

 

Noncontrolling interests 

 

 

(49)

 

 

(51)

 

 

 

 

 

 

 

 

 

Total Equity 

 

 

8,532

 

 

7,835

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity 

 

$

44,319

 

$

38,118

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

4

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

 

 

 

May 25,

 

May 26,

 

 

(In millions)

    

2019

    

2018

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net earnings including noncontrolling interests 

 

$

763

 

$

2,018

 

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

779

 

 

741

 

 

Operating lease asset amortization

 

 

197

 

 

 —

 

 

LIFO charge

 

 

15

 

 

15

 

 

Stock-based employee compensation

 

 

48

 

 

45

 

 

Expense for company-sponsored pension plans

 

 

11

 

 

27

 

 

Deferred income taxes

 

 

(73)

 

 

17

 

 

Gain on sale of businesses

 

 

(176)

 

 

(1,771)

 

 

Gain on sale of assets

 

 

(57)

 

 

 —

 

 

Mark to market gain on Ocado securities

 

 

(106)

 

 

(36)

 

 

Other

 

 

(29)

 

 

 —

 

 

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

 

 

 

 

 

 

 

 

Store deposits in-transit

 

 

115

 

 

108

 

 

Receivables

 

 

33

 

 

(123)

 

 

Inventories

 

 

124

 

 

134

 

 

Prepaid and other current assets

 

 

86

 

 

307

 

 

Trade accounts payable

 

 

364

 

 

345

 

 

Accrued expenses

 

 

(18)

 

 

43

 

 

Income taxes receivable and payable

 

 

63

 

 

558

 

 

Operating lease liabilities

 

 

(146)

 

 

 —

 

 

Proceeds from contract associated with sale of business

 

 

295

 

 

 —

 

 

Other

 

 

(20)

 

 

(60)

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

2,268

 

 

2,368

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Payments for property and equipment

 

 

(901)

 

 

(758)

 

 

Proceeds from sale of assets

 

 

117

 

 

47

 

 

Purchases of stores

 

 

 —

 

 

(44)

 

 

Net proceeds from sale of businesses

 

 

326

 

 

2,142

 

 

Other

 

 

(6)

 

 

(38)

 

 

 

 

 

 

 

 

 

 

 

Net cash (used) provided by investing activities

 

 

(464)

 

 

1,349

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 9

 

 

1,010

 

 

Payments on long-term debt including obligations under finance leases

 

 

(1,013)

 

 

(214)

 

 

Net payments on commercial paper

 

 

(700)

 

 

(2,120)

 

 

Dividends paid

 

 

(113)

 

 

(110)

 

 

Proceeds from issuance of capital stock

 

 

12

 

 

10

 

 

Treasury stock purchases

 

 

(15)

 

 

(1,809)

 

 

Other

 

 

(4)

 

 

(140)

 

 

 

 

 

 

 

 

 

 

 

Net cash used by financing activities

 

 

(1,824)

 

 

(3,373)

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and temporary cash investments

 

 

(20)

 

 

344

 

 

 

 

 

 

 

 

 

 

 

Cash and temporary cash investments:

 

 

 

 

 

 

 

 

Beginning of year

 

 

429

 

 

347

 

 

End of period

 

$

409

 

$

691

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of capital investments:

 

 

 

 

 

 

 

 

Payments for property and equipment

 

$

(901)

 

$

(758)

 

 

Changes in construction-in-progress payables

 

 

25

 

 

(91)

 

 

Total capital investments

 

$

(876)

 

$

(849)

 

 

 

 

 

 

 

 

 

 

 

Disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the year for interest

 

$

115

 

$

124

 

 

Cash paid during the year for income taxes

 

$

231

 

$

36

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

 

5

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Treasury Stock

 

Comprehensive

 

Accumulated

 

Noncontrolling

 

 

 

 

(In millions, except per share amounts)

  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Loss

  

Earnings

  

Interest

  

Total

 

Balances at February 3, 2018

 

1,918

 

$

1,918

 

$

3,161

 

1,048

 

$

(14,684)

 

$

(471)

 

$

17,007

 

$

(26)

 

$

6,905

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 —

 

 

 —

 

 

 —

 

(1)

 

 

10

 

 

 —

 

 

 —

 

 

 —

 

 

10

 

Restricted stock issued

 

 —

 

 

 —

 

 

(6)

 

 —

 

 

 5

 

 

 —

 

 

 —

 

 

 —

 

 

(1)

 

Treasury stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchases, at cost

 

 —

 

 

 —

 

 

(134)

 

74

 

 

(1,792)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,926)

 

Stock options exchanged

 

 —

 

 

 —

 

 

 —

 

 1

 

 

(17)

 

 

 —

 

 

 —

 

 

 —

 

 

(17)

 

Share-based employee compensation

 

 —

 

 

 —

 

 

45

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

45

 

Other comprehensive income net of income tax of $5

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

16

 

 

 —

 

 

 —

 

 

16

 

Other

 

 —

 

 

 —

 

 

(7)

 

 —

 

 

 2

 

 

 —

 

 

 —

 

 

 5

 

 

 —

 

Cash dividends declared ($0.125 per common share)

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(109)

 

 

 —

 

 

(109)

 

Net earnings including noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,026

 

 

(8)

 

 

2,018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at May 26, 2018

 

1,918

 

$

1,918

 

$

3,059

 

1,122

 

$

(16,476)

 

$

(455)

 

$

18,924

 

$

(29)

 

$

6,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at February 2, 2019

 

1,918

 

$

1,918

 

$

3,245

 

1,120

 

$

(16,612)

 

$

(346)

 

$

19,681

 

$

(51)

 

$

7,835

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 —

 

 

 —

 

 

 —

 

(1)

 

 

12

 

 

 —

 

 

 —

 

 

 —

 

 

12

 

Restricted stock issued

 

 —

 

 

 —

 

 

(14)

 

 —

 

 

10

 

 

 —

 

 

 —

 

 

 —

 

 

(4)

 

Treasury stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exchanged

 

 —

 

 

 —

 

 

 —

 

 —

 

 

(15)

 

 

 —

 

 

 —

 

 

 —

 

 

(15)

 

Share-based employee compensation

 

 —

 

 

 —

 

 

48

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

48

 

Other comprehensive income net of income tax of ($5)

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(146)

 

 

 —

 

 

 —

 

 

(146)

 

Cumulative effect of accounting change

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

146

 

 

 —

 

 

146

 

Other

 

 —

 

 

 —

 

 

 8

 

 —

 

 

(8)

 

 

 —

 

 

(5)

 

 

11

 

 

 6

 

Cash dividends declared ($0.14 per common share)

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(113)

 

 

 —

 

 

(113)

 

Net earnings including noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

772

 

 

(9)

 

 

763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at May 25, 2019

 

1,918

 

$

1,918

 

$

3,287

 

1,119

 

$

(16,613)

 

$

(492)

 

$

20,481

 

$

(49)

 

$

8,532

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

 

6

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

All amounts in the Notes to the Unaudited Consolidated Financial Statements are in millions except per share amounts.

 

1.ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries and other consolidated entities.  The February 2, 2019 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”).  Significant intercompany transactions and balances have been eliminated.  References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

 

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include adjustments, all of which are of a normal, recurring nature that are necessary for a fair statement of results of operations for such periods but should not be considered as indicative of results for a full year.  The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations.  Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

 

The unaudited information in the Consolidated Financial Statements for the first quarters ended May 25, 2019 and May 26, 2018, includes the results of operations of the Company for the 16-week periods then ended.

 

Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to operating, general and administrative expenses (“OG&A”), are now classified as a component of sales, except for certain amounts in Media, which are netted against merchandise costs. These prior-year amounts have been reclassified to conform to current-year presentation.

 

Refer to Note 5 for a description of changes to the Consolidated Balance Sheet for recently adopted accounting standards regarding the recognition of lease agreements and reclassification of stranded tax effects.

 

Fair Value Measurements

 

Fair value measurements are classified and disclosed in one of the following three categories:

 

Level 1 – Quoted prices are available in active markets for identical assets or liabilities;

 

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;

 

Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability. 

 

The Company records cash and temporary cash investments, store deposits in-transit, receivables, prepaid and other current assets, trade accounts payable, accrued salaries and wages and other current liabilities at approximated fair value.  Certain other investments and derivatives are recorded as Level 1, 2 or 3 instruments.  Refer to Note 2 for the disclosure of debt instrument fair values.

7

 

2.DEBT OBLIGATIONS

 

Long-term debt consists of:

 

 

 

 

 

 

 

 

 

 

May 25,

 

February 2,

 

    

2019

    

2019

1.50% to 8.00% Senior Notes due through 2048

 

$

12,101

 

$

12,097

5.63% to 12.75% Mortgages due in varying amounts through 2027

 

 

14

 

 

14

2.60% to 2.63% Commercial paper borrowings due through May 2019

 

 

100

 

 

800

3.37% Term Loan due 2019

 

 

 —

 

 

1,000

Other

 

 

446

 

 

440

 

 

 

 

 

 

 

Total debt, excluding obligations under finance leases

 

 

12,661

 

 

14,351

Less current portion

 

 

(1,405)

 

 

(3,103)

 

 

 

 

 

 

 

Total long-term debt, excluding obligations under finance leases

 

$

11,256

 

$

11,248

 

 

The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence.  If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at May 25, 2019 and February 2, 2019.  At May 25, 2019, the fair value of total debt was $12,856 compared to a carrying value of $12,661.  At February 2, 2019, the fair value of total debt was $14,190 compared to a carrying value of $14,351.

 

3.BENEFIT  PLANS

 

The following table provides the components of net periodic benefit cost for the company-sponsored defined benefit pension plans and other post-retirement benefit plans for the first quarters of 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

 

Pension Benefits

 

Other Benefits

 

 

May 25,

 

May 26,

 

May 25,

 

May 26,

 

    

2019

    

2018

    

2019

    

2018

Components of net periodic benefit cost: 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost 

 

$

11

 

$

15

 

$

 2

 

$

 2

Interest cost 

 

 

41

 

 

43

 

 

 2

 

 

 2

Expected return on plan assets 

 

 

(56)

 

 

(54)

 

 

 —

 

 

 —

Amortization of: 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost 

 

 

 —

 

 

 —

 

 

(3)

 

 

(3)

Actuarial loss (gain)

 

 

16

 

 

25

 

 

(3)

 

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost 

 

$

12

 

$

29

 

$

(2)

 

$

(2)

 

The Company is not required to make any contributions to its company-sponsored pension plans in 2019, but may make contributions to the extent such contributions are beneficial to the Company.  The Company did not make any contributions to its company-sponsored pension plans in the first quarter of 2019 or 2018.

 

The Company contributed $88 and $89 to employee 401(k) retirement savings accounts in the first quarters of 2019 and 2018, respectively.

 

The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements.  These plans provide retirement benefits to participants based on their service to contributing employers.  The Company recognizes expense in connection with these plans as contributions are funded.

 

During the first quarter of 2019, the Company incurred a charge of $59, $44 net of tax, due to obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension fund. The charge was recorded in the OG&A caption in the Consolidated Statements of Operations.

8

 

4.EARNINGS  PER  COMMON  SHARE

 

Net earnings attributable to The Kroger Co. per basic common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding.  Net earnings attributable to The Kroger Co. per diluted common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding, after giving effect to dilutive stock options.  The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

First Quarter Ended

 

 

May 25, 2019

 

May 26, 2018

 

    

 

 

    

 

    

Per

    

 

 

    

 

    

Per

 

 

Earnings

 

Shares

 

Share

 

Earnings

 

Shares

 

Share

 

 

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Net earnings attributable to The Kroger Co. per basic common share

 

$

764

 

798

 

$

0.96

 

$

2,005

 

839

 

$

2.39

Dilutive effect of stock options

 

 

 

 

 7

 

 

 

 

 

 

 

 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per diluted common share

 

$

764

 

805

 

$

0.95

 

$

2,005

 

846

 

$

2.37

 

The Company had combined undistributed and distributed earnings to participating securities totaling $8 in the first quarter of 2019 and $21 in the first quarter of 2018.

 

The Company had options outstanding for approximately 16 million shares during the first quarter of 2019 and 17 million shares in the first quarter of 2018 that were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per share.

 

5.RECENTLY  ADOPTED  ACCOUNTING  STANDARDS

 

On February 3, 2019, the Company adopted ASU 2016-02, “Leases,” which provides guidance for the recognition of lease agreements.  The Company adopted the standard using the modified retrospective approach, which provides a method for recording existing leases at adoption that approximates the results of a full retrospective approach.  In addition, the Company elected the transition package of practical expedients permitted within the standard, which allowed it to carry forward the historical lease classification, and applied the transition option which does not require application of the guidance to comparative periods in the year of adoption. 

 

The adoption of the standard resulted in the recognition of operating lease assets and operating lease liabilities of approximately $6,800 and $7,000, respectively, as of February 3, 2019.  Included in the measurement of the new lease assets is the reclassification of certain balances including those historically recorded as prepaid or deferred rent and favorable and unfavorable leasehold interests.  Several other asset and liability line items in the Consolidated Balance Sheets were also impacted by immaterial amounts.    The adoption of this standard also resulted in a change in naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. The adoption of this standard did not materially affect the Company’s consolidated net earnings or cash flows.

 

In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This amendment allows companies to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income (AOCI) to retained earnings. The Company adopted ASU 2018-02 on February 3, 2019, which resulted in a decrease to AOCI and an increase to accumulated earnings of $146, primarily related to deferred taxes previously recorded for pension and other postretirement benefits and cash flow hedges.  The adoption of this standard did not have an effect on the Company’s consolidated results of operations or cash flows.

9

 

6.LEASES AND LEASE-FINANCED TRANSACTIONS 

 

The Company leases certain store real estate, warehouses, distribution centers, office space and equipment.  While the Company’s current strategy emphasizes ownership of store real estate, the Company operates in leased facilities in approximately half of its store locations.  Lease terms generally range from 10 to 20 years with options to renew for varying terms at the Company’s sole discretion.  Certain leases also include options to purchase the leased property.  Leases with an initial term of 12 months or less are not recorded on the balance sheet.  Certain leases include escalation clauses or payment of executory costs such as property taxes, utilities or insurance and maintenance. Rent expense for leases with escalation clauses or other lease concessions are accounted for on a straight-line basis over the lease term.  The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.  Certain properties or portions thereof are subleased to others for periods generally ranging from one to 20 years.

 

The following table provides supplemental balance sheet classification information related to leases:

 

 

 

 

 

 

 

 

 

 

 

    

 

    

May 25,

    

February 2,

 

 

Classification

 

2019

 

2019

Assets

 

 

 

 

 

 

 

 

Operating

 

Operating lease assets

 

$

6,819

 

$

 —

Finance

 

Property, plant and equipment, net (1)

 

 

641

 

 

721

 

 

 

 

 

 

 

 

 

Total leased assets

 

 

 

$

7,460

 

$

721

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

Operating

 

Current portion of operating lease liabilities

 

$

682

 

$

 —

Finance

 

Current portion of long-term debt including obligations under finance leases

 

 

48

 

 

54

 

 

 

 

 

 

 

 

 

Noncurrent

 

 

 

 

 

 

 

 

Operating

 

Noncurrent operating lease liabilities

 

 

6,420

 

 

 —

Finance

 

Long-term debt including obligations under finance leases

 

 

760

 

 

824

 

 

 

 

 

 

 

 

 

Total lease liabilities

 

 

 

$

7,910

 

$

878


(1)

Finance lease assets are recorded net of accumulated amortization of $287 and $345 as of May 25, 2019 and February 2, 2019.

 

The following table provides the components of lease cost:

 

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

Lease Cost

 

Classification

    

May 25, 2019

Operating lease cost (1)

 

Rent Expense

 

$

311

Sublease income

 

Rent Expense

 

 

(37)

Finance lease cost

 

 

 

 

 

Amortization of leased assets

 

Depreciation and Amortization

 

 

15

Interest on lease liabilities

 

Interest Expense

 

 

14

 

 

 

 

 

 

Net lease cost

 

 

 

$

303


(1)

Includes short-term leases and variable lease costs, which are immaterial.

10

 

Maturities of operating and finance lease liabilities are listed below.  Amounts in the table include options to extend lease terms that are reasonably certain of being exercised.

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

Finance

 

 

 

 

Leases

 

Leases

 

Total

Remainder of 2019

 

$

700

 

$

63

 

$

763

2020

 

 

888

 

 

84

 

 

972

2021

 

 

824

 

 

84

 

 

908

2022

 

 

706

 

 

80

 

 

786

2023

 

 

635

 

 

79

 

 

714

Thereafter

 

 

6,645

 

 

787

 

 

7,432

 

 

 

 

 

 

 

 

 

 

Total lease payments

 

 

10,398

 

 

1,177

 

$

11,575

 

 

 

 

 

 

 

 

 

 

Less amount representing interest

 

 

3,296

 

 

369

 

 

 

 

 

 

 

 

 

 

 

 

 

Present value of lease liabilities (1)

 

$

7,102

 

$

808

 

 

 


(1)

Includes the current portion of $682 for operating leases and $48 for finance leases.

 

Total future minimum rentals under non-cancellable subleases at May 25, 2019 were $274.

 

The following table provides the weighted-average lease term and discount rate for operating and finance leases:

 

 

 

 

 

 

 

 

 

 

May 25, 2019

Weighted-average remaining lease term (years)

 

 

 

Operating leases

 

16.3

 

Finance leases

 

15.0

 

Weighted-average discount rate

 

 

 

Operating leases

 

4.4

%

Finance leases

 

4.4

%

 

 

 

 

 

The following table provides supplemental cash flow information related to leases:

 

 

 

 

 

 

 

First Quarter Ended

 

 

May 25, 2019

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

Operating cash flows from operating leases

 

$

239

Operating cash flows from finance leases

 

$

14

Financing cash flows from finance leases

 

$

 9

Leased assets obtained in exchange for new operating lease liabilities

 

$

257

Leased assets obtained in exchange for new finance lease liabilities

 

$

33

Net gain recognized from sale and leaseback transactions (1)

 

$

51


(1)

During the first quarter of 2019, the Company entered into sale leaseback transactions related to eight properties, which resulted in total proceeds of $102.

11

 

The Company adopted new lease accounting guidance in the first quarter of 2019 as discussed in Note 1 and Note 5, and as required, the following disclosure is provided for periods prior to adoption. Minimum annual rentals and payments under capital leases and lease-financed transactions for the five years subsequent to February 2, 2019 and in the aggregate are listed below. Amounts in the table below only include payments through the noncancelable lease term.

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Lease-

 

 

Capital

 

Operating

 

Financed

 

 

Leases

 

Leases

 

Transactions

2019

 

$

103

 

$

948

 

$

 5

2020

 

 

89

 

 

880

 

 

 6

2021

 

 

86

 

 

773

 

 

 5

2022

 

 

82

 

 

649

 

 

 5

2023

 

 

81

 

 

556

 

 

 5

Thereafter

 

 

766

 

 

3,197

 

 

17

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,207

 

$

7,003

 

$

43

 

 

 

 

 

 

 

 

 

 

Less estimated executory costs included in capital leases

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net minimum lease payments under capital leases

 

 

1,207

 

 

 

 

 

 

Less amount representing interest

 

 

372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Present value of net minimum lease payments under capital leases

 

$

835

 

 

 

 

 

 

 

 

 

7.COMMITMENTS AND  CONTINGENCIES

 

The Company continuously evaluates contingencies based upon the best available evidence.

 

The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable.  To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.

 

Litigation — Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company.  Some of these suits purport or have been determined to be class actions and/or seek substantial damages.  Any damages that may be awarded in antitrust cases will be automatically trebled.  Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material effect on the Company’s financial position, results of operations, or cash flows.

 

The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and where an adverse outcome is probable.  Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties.  Management currently believes that the aggregate range of loss for the Company’s exposure is not material to the Company.  It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

 

12

 

8.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table represents the changes in AOCI by component for the first quarters of 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and

 

 

 

 

 

Cash Flow

 

 

 

 

Postretirement

 

 

 

 

 

Hedging

 

Available for sale

 

Defined Benefit

 

 

 

 

    

Activities(1)

    

Securities(1)

    

Plans(1)

    

Total(1)

Balance at February 3, 2018

 

$

24

 

$

 4

 

$

(499)

 

$

(471)

OCI before reclassifications(2)

 

 

 4

 

 

(4)

 

 

 —

 

 

 —

Amounts reclassified out of AOCI(3)

 

 

 1

 

 

 —

 

 

15

 

 

16

Net current-period OCI

 

 

 5

 

 

(4)

 

 

15

 

 

16

Balance at May 26, 2018

 

$

29

 

$

 —

 

$

(484)

 

$

(455)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 2, 2019

 

$

 6

 

$

 —

 

$

(352)

 

$

(346)

Cumulative effect of accounting change (4)

 

 

(5)

 

 

 —

 

 

(141)

 

 

(146)

OCI before reclassifications(2)

 

 

(8)

 

 

 —

 

 

 —

 

 

(8)

Amounts reclassified out of AOCI(3)

 

 

 1

 

 

 —

 

 

 7

 

 

 8

Net current-period OCI

 

 

(12)

 

 

 —

 

 

(134)

 

 

(146)

Balance at May 25, 2019

 

$

(6)

 

$

 —

 

$

(486)

 

$

(492)


(1)

All amounts are net of tax.

(2)

Net of tax of $1 for cash flow hedging activities and ($1) for available for sale securities for the first quarter of 2018.  Net of tax of ($9) for cash flow hedging activities for the first quarter of 2019.

(3)

Net of tax of $1 for cash flow hedging activities and $4 for pension and postretirement defined benefit plans for the first quarter of 2018.  Net of tax of $1 for cash flow hedging activities and $3 for pension and postretirement defined benefit plans for the first quarter of 2019.

(4)

Related to the adoption of ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," (see Note 5 for additional details).

 

The following table represents the items reclassified out of AOCI and the related tax effects for the first quarters of 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

    

May 25,

    

May 26,

 

 

2019

 

2018

Cash flow hedging activity items

 

 

 

 

 

 

Amortization of gains and losses on cash flow hedging activities (1)

 

$

 2

 

$

 2

Tax expense

 

 

(1)

 

 

(1)

Net of tax

 

 

 1

 

 

 1

 

 

 

 

 

 

 

Pension and postretirement defined benefit plan items

 

 

 

 

 

 

Amortization of amounts included in net periodic pension cost (2)

 

 

10

 

 

19

Tax expense

 

 

(3)

 

 

(4)

Net of tax

 

 

 7

 

 

15

Total reclassifications, net of tax

 

$

 8

 

$

16


(1)

Reclassified from AOCI into interest expense.

(2)

Reclassified from AOCI into non-service component of company-sponsored pension plan costs.  These components are included in the computation of net periodic pension cost (see Note 3 for additional details).

 

13

 

9.INCOME TAXES

 

The effective income tax rate was 22.8% and 23.4% for the first quarters of 2019 and 2018, respectively. The effective income tax rate for the first quarter of 2019 and 2018 differed from the federal statutory rate due to the effect of state income taxes partially offset by the utilization of tax credits and deductions.

 

10.HELD FOR SALE AND DISPOSAL OF BUSINESSES

 

Certain assets and liabilities, related to the Company’s Turkey Hill Dairy and You Technology businesses, were classified as held for sale in the Consolidated Balance Sheet as of February 2, 2019.

 

On March 13, 2019, the Company completed the sale of its You Technology business to Inmar for total consideration of $565, including $396 of cash and $64 of preferred equity received upon closing.  The Company is also entitled to receive other cash payments of $105 over five years.  The transaction includes a long-term service agreement for Inmar to provide the Company digital coupon services.  The sale resulted in a gain of $70, $52 net of tax, which is included in “Gain on sale of businesses” in the Consolidated Statement of Operations. The Company recorded the fair value of the long-term service agreement of $358 in “Other current liabilities” and “Other long-term liabilities” in the Consolidated Balance Sheets and such amount is being recorded as sales over the 10-year agreement.

 

On April 26, 2019 the Company completed the sale of its Turkey Hill Dairy business to an affiliate of Peak Rock Capital for total proceeds of $225.  The sale resulted in a gain of $106, $80 net of tax, which is included in “Gain on sale of businesses” in the Consolidated Statements of Operations.  

 

 

 

 

 

14

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following analysis should be read in conjunction with the Consolidated Financial Statements.

 

USE OF NON-GAAP FINANCIAL MEASURES

 

The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles (“GAAP”). We provide non-GAAP measures, including First-In, First-Out (“FIFO”) gross margin, FIFO operating profit, adjusted net earnings and adjusted net earnings per diluted share because management believes these metrics are useful to investors and analysts.  These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share or any other GAAP measure of performance.  These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP.

 

We calculate FIFO gross margin as FIFO gross profit divided by sales. FIFO gross profit is calculated as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs exclude depreciation and rent expenses. FIFO gross margin is an important measure used by management as management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness.

 

We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management as management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness. 

 

The adjusted net earnings and adjusted net earnings per diluted share metrics are important measures used by management to compare the performance of core operating results between periods. We believe adjusted net earnings and adjusted net earnings per diluted share are useful metrics to investors and analysts because they present more accurate year-over-year comparisons for our net earnings and net earnings per diluted share because adjusted items are not the result of our normal operations.  Net earnings for the first quarter of 2019 include the following, which we define as the “2019 Adjusted Items”:

 

·

Charges to operating, general and administrative expenses (“OG&A”) of $59 million, $44 million net of tax, for obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension fund and a reduction to OG&A of $24 million, $18 million net of tax, for the revaluation of contingent consideration (the “2019 OG&A Adjusted Items”).

 

·

Gains in other income (expense) of $106 million, $80 million net of tax, related to the sale of Turkey Hill Dairy; $70 million, $52 million net of tax, related to the sale of You Technology; and $106 million, $80 million net of tax, for the mark to market gain on Ocado Group plc (“Ocado”) securities (the “2019 Other Income (Expense) Adjusted Items”).  

 

Net earnings for the first quarter of 2018 include the following, which we define as the “2018 Adjusted Items”:

 

·

A reduction to OG&A of $13 million, $10 million net of tax, for adjustments to obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension fund (the “2018 OG&A Adjusted Item”).

 

·

A reduction to depreciation and amortization expenses of $14 million, $11 million net of tax, related to held for sale assets (the “2018 Depreciation Adjusted Item”).

 

·

Gains in other income (expense) of $1.8 billion, $1.4 billion net of tax, related to the sale of our convenience store business unit and $36 million, $27 million net of tax, for the mark to market gain on Ocado securities (the “2018 Other Income (Expense) Adjusted Items”).

15

 

OVERVIEW

 

Notable items for the first quarter of 2019 are:

 

·

Net earnings attributable to The Kroger Co. per diluted common share of $0.95.

 

·

Adjusted net earnings attributable to The Kroger Co. per diluted common share of $0.72.

 

·

Identical sales, excluding fuel, increased 1.5% in the first quarter of 2019.

 

·

Digital revenue grew 42% in the first quarter of 2019, driven by Pickup and Delivery. Digital revenue primarily includes revenue from all curbside pickup locations, online sales delivered to customer locations and products shipped to customer locations.

 

·

Sold our You Technology business to Inmar for total consideration of $565 million, including $396 million of cash and $64 million of preferred equity received upon closing.  We are also entitled to receive other cash payments of $105 million over five years.  The transaction includes a long-term service agreement for Inmar to provide digital coupon services.

 

·

Sold our Turkey Hill Dairy business to an affiliate of Peak Rock Capital for $225 million. 

 

·

During the first quarter of 2019, we returned $128 million to shareholders from share repurchases and dividend payments.

 

·

Alternative profit streams grew in the first quarter of 2019, as compared to the first quarter of 2018, achieving our plan.  Kroger’s ecosystem fuels the growth of adjacent alternative profit streams like Kroger Personal Finance, customer data insights, and media businesses that are essential components of Restock Kroger. These businesses comprise a significant portion of Kroger’s overall alternative profit stream portfolio. They are dependent on a core supermarket business to deliver sustainable, long-term growth and profitability.

 

·

Formed PearlRock Partners, a new platform to identify, invest in and help grow the next generation of leading consumer product brands, with private investment firm Lindsay Goldberg.

16

 

The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, excluding the 2019 and 2018 Adjusted Items. 

 

Net Earnings per Diluted Share excluding the Adjusted Items

($ in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

 

   

May 25,

   

May 26,

   

Percentage

   

 

 

2019

 

2018

 

Change

 

Net earnings attributable to The Kroger Co.

 

$

772

 

$

2,026

 

 

 

 

 

 

 

 

 

 

 

 

 

(Income) expense adjustments

 

 

 

 

 

 

 

 

 

Adjustments for pension plan agreements (1)(2)

 

 

44

 

 

(10)

 

 

 

Adjustment for gain on sale of convenience store business (1)(3)

 

 

 —

 

 

(1,352)

 

 

 

Adjustment for gain on sale of Turkey Hill Dairy (1)(4)

 

 

(80)

 

 

 —

 

 

 

Adjustment for gain on sale of You Technology (1)(5)

 

 

(52)

 

 

 —

 

 

 

Adjustment for mark to market gain on Ocado securities (1)(6)

 

 

(80)

 

 

(27)

 

 

 

Adjustment for depreciation related to held for sale assets (1)(7)

 

 

 —

 

 

(11)

 

 

 

Adjustment for contingent consideration (1)(8)

 

 

(18)

 

 

 —

 

 

 

2019 and 2018 Adjusted Items

 

 

(186)

 

 

(1,400)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. excluding the Adjusted Items

 

$

586

 

$

626

 

(6.4)

%  

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per diluted common share

 

$

0.95

 

$

2.37

 

 

 

 

 

 

 

 

 

 

 

 

 

(Income) expense adjustments

 

 

 

 

 

 

 

 

 

Adjustments for pension plan agreements (9)

 

 

0.05

 

 

(0.01)

 

 

 

Adjustment for gain on sale of convenience store business (9)

 

 

 —

 

 

(1.59)

 

 

 

Adjustment for gain on sale of Turkey Hill Dairy (9)

 

 

(0.10)

 

 

 —

 

 

 

Adjustment for gain on sale of You Technology (9)

 

 

(0.06)

 

 

 —

 

 

 

Adjustment for mark to market gain on Ocado securities (9)

 

 

(0.10)

 

 

(0.03)

 

 

 

Adjustment for depreciation related to held for sale assets (9)

 

 

 —

 

 

(0.01)

 

 

 

Adjustment for contingent consideration (9)

 

 

(0.02)

 

 

 —

 

 

 

2019 and 2018 Adjusted Items

 

 

(0.23)

 

 

(1.64)

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net earnings attributable to The Kroger Co. per diluted common share

 

$

0.72

 

$

0.73

 

(1.4)

%  

 

 

 

 

 

 

 

 

 

 

Average number of common shares used in diluted calculation

 

 

805

 

 

846

 

 

 


(1)

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

(2)

The pre-tax adjustments for pension plan agreements were $59 in the first quarter of 2019 and ($13) in the first quarter of 2018. 

(3)

The pre-tax adjustment for gain on sale of convenience store business was ($1,771).

(4)

The pre-tax adjustment for gain on sale of Turkey Hill Dairy was ($106).

(5)

The pre-tax adjustment for gain on sale of You Technology was ($70).

(6)

The pre-tax adjustment for mark to market gain on Ocado securities was ($106) in the first quarter of 2019 and ($36) in the first quarter of 2018.

(7)

The pre-tax adjustment for depreciation related to held for sale assets was ($14).

(8)

The pre-tax adjustment for contingent consideration was ($ 24).

(9)

The amount presented represents the net earnings per diluted common share effect of each adjustment.

17

 

RESULTS OF OPERATIONS

 

Sales

Total Sales

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

 

 

May 25,

 

Percentage

 

May 26,

 

Percentage

 

 

   

2019

   

Change (1)

   

2018

 

Change (2)

   

Total sales to retail customers without fuel (3)

 

$

32,594

 

2.0

%  

$

31,967

 

2.8

%  

Supermarket fuel sales

 

 

4,396

 

(3.6)

%  

 

4,560

 

19.5

%  

Convenience stores (4)

 

 

 —

 

N/A

 

 

944

 

(28.0)

%  

Other sales (5)

 

 

261

 

4.0

%  

 

251

 

14.6

%  

 

 

 

 

 

 

 

 

 

 

 

 

Total sales 

 

$

37,251

 

(1.2)

%  

$

37,722

 

3.5

%  


(1)

This column represents the percentage change in the first quarter of 2019, compared to the first quarter of 2018.

(2)

This column represents the percentage change in the first quarter of 2018, compared to the first quarter of 2017.

(3)

Digital sales, primarily including Pickup, Delivery, Ship and pharmacy e-commerce sales, grew approximately 42% in the first quarter of 2019 and 66% in the first quarter of 2018.  These sales are included in the “total sales to retail customers without fuel” line above.

(4)

We completed the sale of our convenience store business unit during the first quarter of 2018.

(5)

Other sales primarily relate to external sales at food production plants, data analytic services, third party media revenue and digital coupon services.

 

Total sales were $37.3 billion in the first quarter of 2019, compared to $37.7 billion for the first quarter of 2018.  This decrease was due to the sale of our convenience store business unit and a decrease in supermarket fuel sales, partially offset by our increase in total sales to retail customers without fuel.  Total sales, excluding fuel and the effect of selling our convenience store business unit, increased 2.0% in the first quarter of 2019, compared to the first quarter of 2018.  The increase in total sales to retail customers without fuel for the first quarter of 2019, compared to the first quarter of 2018, was primarily due to our merger with Home Chef and our identical sales increase, excluding fuel, of 1.5%.  Identical sales, excluding fuel, for the first quarter of 2019, compared to the first quarter of 2018, increased primarily due to changes in product mix, including higher quality products at a higher price point, retail inflation and Kroger Specialty Pharmacy sales growth, partially offset by our continued investments in lower prices for our customers. Total supermarket fuel sales decreased 3.6% in the first quarter of 2019, compared to the first quarter of 2018, primarily due to a decrease in fuel gallons sold of 3.3% and a decrease in the average retail fuel price of 0.4%. The decrease in the average retail fuel price was caused by a decrease in the product cost of fuel.  

 

We calculate identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket locations, Kroger Specialty Pharmacy businesses and ship-to-home solutions. We define 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.  Products and services related primarily to Kroger Personal Finance, which were historically accounted for as an offset to OG&A, are now classified as a component of sales. These prior-year amounts have been reclassified to conform to current-year presentation, which is consistent with our Restock Kroger initiative and our view of the products and services as part of our core business strategy.  This is also more consistent with industry practice.  These Kroger Personal Finance transactions represent sales to retail customers and, as such, are included in identical sales in 2019 and 2018.  This change affected identical sales by 3 basis points in 2019 and 5 basis points in 2018.  Although identical sales is a relatively standard term, numerous methods exist for calculating identical sales growth. As a result, the method used by our management to calculate identical sales may differ from methods other companies use to calculate identical sales. We urge you to understand the methods used by other companies to calculate identical sales before comparing our identical sales to those of other such companies. Our identical sales results are summarized in the following table. We used the identical sales dollar figures presented below to calculate percentage changes for the first quarter of 2019.

18

 

Identical Sales

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

 

 

May 25,

 

Percentage

 

May 26,

 

Percentage

 

 

    

2019

    

Change (1)

    

2018

    

Change (2)

   

Excluding fuel centers

 

$

32,133

 

1.5

%

$

31,670

 

1.9

%


(1)

This column represents the percentage change in identical sales in the first quarter of 2019, compared to the first quarter of 2018.

(2)

This column represents the percentage change in identical sales in the first quarter of 2018, compared to the first quarter of 2017.

 

Gross Margin, LIFO and FIFO Gross Margin

 

We define gross margin as sales minus merchandise costs, including advertising, warehousing, and transportation.    Rent expense, depreciation and amortization expense, and interest expense are not included in gross margin.

 

Our gross margin rate, as a percentage of sales, was 22.20% for the first quarter of 2019, as compared to 22.01% for the first quarter of 2018.  The increase in the first quarter of 2019, compared to the first quarter of 2018, resulted primarily from decreased shrink, as a percentage of sales, growth in our alternative profit stream portfolio and a higher gross margin rate on fuel sales, partially offset by continued investments in lower prices for our customers which we can provide due to effective negotiations to achieve savings on the cost of products sold, industry-wide lower gross margin rates in pharmacy and increased warehouse and transportation costs, as a percentage of sales, due to start up costs associated with new warehouses and new warehouse capabilities.

 

Our LIFO charge was $15 million for the first quarter of 2019 and the first quarter of 2018.  Our LIFO charge reflects our expected annualized product cost inflation for 2019, which we expect will remain relatively consistent with 2018.   

 

Our FIFO gross margin rate, which excludes the first quarter LIFO charge, was 22.24% for the first quarter of 2019, as compared to 22.05% for the first quarter of 2018.  Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales.  Excluding the effect of fuel, our FIFO gross margin rate decreased 40 basis points in the first quarter of 2019, compared to the first quarter of 2018.  This decrease resulted primarily from continued investments in lower prices for our customers which we can provide due to effective negotiations to achieve savings on the cost of products sold, industry-wide lower gross margin rates in pharmacy and increased warehouse and transportation costs, as a percentage of sales, due to start up costs associated with new warehouses and new warehouse capabilities, partially offset by decreased shrink, as a percentage of sales and growth in our alternative profit stream portfolio.

 

Operating, General and Administrative Expenses

 

OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utility, and credit card fees.  Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.

 

OG&A expenses, as a percentage of sales, were 16.95% for the first quarter of 2019, as compared to 16.59% for the first quarter of 2018.  The increase in the first quarter of 2019, compared to the first quarter of 2018 resulted primarily from the 2019 OG&A Adjusted Items, the 2018 OG&A Adjusted Item, increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience, investments in our digital strategy and the effect of lower current year sales, primarily as a result of the sale of our convenience store business unit, partially offset by the effective execution of Restock Kroger initiatives and planned real estate transactions during the first quarter of 2019.

19

 

Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel sales.  Excluding the effect of fuel, the 2019 OG&A Adjusted Items and the 2018 OG&A Adjusted Item, our OG&A rate decreased 12 basis points in the first quarter of 2019, compared to the first quarter of 2018. This decrease resulted primarily from the effective execution of Restock Kroger initiatives and planned real estate transactions during the first quarter of 2019, partially offset by increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience and investments in our digital strategy.

 

Rent Expense

 

Rent expense, as a percentage of sales, remained consistent for the first quarter of 2019 compared to the first quarter of 2018. 

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense increased, as a percentage of sales, in the first quarter of 2019, compared to the first quarter of 2018, due to lower fuel sales, which increases our depreciation expense as a percentage of sales, the 2018 Depreciation Adjusted Item and additional depreciation on capital investments, excluding mergers and lease buyouts, of $3.0 billion, during the rolling four quarter period ending with the first quarter of 2019.

 

Operating Profit and FIFO Operating Profit

 

Operating profit was $901 million, or 2.42% of sales, for the first quarter of 2019, compared to $1.0 billion, or 2.73% of sales, for the first quarter of 2018.  Operating profit, as a percentage of sales, decreased 31 basis points in the first quarter of 2019, compared to the first quarter of 2018, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, partially offset by a higher gross margin rate.

 

FIFO operating profit was $916 million, or 2.46% of sales, for the first quarter of 2019, compared to $1.0 billion, or 2.77% of sales, for the first quarter of 2018.  Fuel sales lower our operating profit rate due to the very low operating profit rate, as a percentage of sales, of fuel sales compared to non-fuel sales.  FIFO operating profit, as a percentage of sales excluding fuel and the 2019 and 2018 Adjusted Items decreased 33 basis points in the first quarter of 2019, compared to the first quarter of 2018, due to a lower gross margin rate and increased depreciation and amortization expense, as a percentage of sales, partially offset by lower OG&A expense, as a percentage of sales.

 

Specific factors of the above operating trends under operating profit and FIFO operating profit are discussed earlier in this section.

 

Income Taxes

 

The effective income tax rate was 22.8% for the first quarter of 2019 and 23.4% for the first quarter of 2018. The effective income tax rate for the first quarter of 2019 and 2018 differed from the federal statutory rate due to the effect of state income taxes, partially offset by the utilization of tax credits and deductions.

 

Net Earnings and Net Earnings Per Diluted Share

 

Our net earnings are based on the factors discussed in the Results of Operations section.

 

Net earnings of $0.95 per diluted share for the first quarter of 2019 represented a decrease of 59.9% from net earnings of $2.37 per diluted share for the first quarter of 2018.  Adjusted net earnings of $0.72 per diluted share for the first quarter of 2019 represented a decrease of 1.4% from adjusted net earnings of $0.73 per diluted share for the first quarter of 2018.  The decrease in adjusted net earnings per diluted share resulted primarily from lower FIFO operating profit, partially offset by lower income tax expense and lower weighted average common shares outstanding due to common share repurchases.

20

 

LIQUIDITY AND CAPITAL  RESOURCES

 

Cash Flow Information

 

Net cash provided by operating activities

 

We generated $2.3 billion of cash from operations in the first quarter of 2019, compared to $2.4 billion in the first quarter of 2018.  The decrease in net cash provided by operating activities in the first quarter of 2019, compared to the first quarter of 2018, resulted primarily from a decrease in net earnings including noncontrolling interests, non-cash adjustments for the 2019 gain on sale of businesses and increased mark to market gain on Ocado securities and reduced cash provided by operating activities for changes in working capital, partially offset by the prior year non-cash adjustment for the gain on sale of our convenience store business unit and operating lease asset amortization. 

 

Cash provided by operating activities for changes in working capital was $916 million in the first quarter of 2019 compared to $1.4 billion in the first quarter of 2018.  The decrease in cash provided by operating activities for changes in working capital in the first quarter of 2019, compared to the first quarter of 2018, was primarily due to the following:

 

·

A decrease in prepaid medical benefit costs at the end of the first quarter of 2019, compared to the end of 2018;

 

·

Reduced working capital related to income taxes receivable and payable over the prior year as a result of a prior year overpayment of our fourth quarter 2017 estimated taxes and our estimated taxes on the gain on sale of our convenience store business unit; and

 

·

Payments on operating lease liabilities; partially offset by

 

·

Proceeds from a contract associated with the sale of a business.

 

Cash paid for taxes increased in the first quarter of 2019, compared with the first quarter of 2018, primarily due to the payment of estimated taxes on the gain on sale of the You Technology and Turkey Hill Dairy businesses.

 

Net cash used by investing activities

 

Investing activities used cash of $464 million in the first quarter of 2019 compared to cash provided by investing activities of $1.3 billion in the first quarter of 2018.  We used cash in investing activities in the first quarter of 2019 compared to cash provided by investing activities in the first quarter of 2018, primarily due to increased payments for property and equipment and reduced net proceeds from the sale of businesses, partially offset by increased proceeds from the sale of assets.   

 

Net cash used by financing activities

 

We used $1.8 billion of cash for financing activities in the first quarter of 2019 compared to $3.4 billion during the first quarter of 2018.  The amount of cash used for financing activities for the first quarter of 2019, compared to the first quarter of 2018, decreased $1.5 billion primarily due to decreased payments on commercial paper and share repurchases, partially offset by increased payments on long-term debt including obligations under finance leases and a reduction of proceeds from the issuance of long-term debt.  

 

Debt Management

 

As of May 25, 2019, we maintained a $2.75 billion (with the ability to increase by $1 billion), unsecured revolving credit facility that, unless extended, terminates on August 29, 2022.  Outstanding borrowings under the credit facility, the commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit facility.  As of May 25, 2019, we had $100 million of outstanding commercial paper and no borrowings under our revolving credit facility.  The outstanding letters of credit that reduce funds available under our credit facility totaled $3 million as of May 25, 2019.

21

 

Our bank credit facility and the indentures underlying our publicly issued debt contain various financial covenants.  As of May 25, 2019, we were in compliance with the financial covenants.  Furthermore, management believes it is not reasonably likely that we will fail to comply with these financial covenants in the foreseeable future.

 

Total debt, including both the current and long-term portions of finance leases and lease-financing obligations, decreased $1.8 billion as of May 25, 2019 compared to our fiscal year end 2018 debt of $15.2 billion. This decrease resulted primarily from net payments on commercial paper borrowings of $700 million and the repayment of our $1.0 billion term loan.

 

Common Share Repurchase Program

 

During the first quarter of 2019, we invested $15 million to repurchase 564 thousand Kroger common shares at an average price of $26.68 per share.  The shares repurchased in the first quarter of 2019 were reacquired under a program that uses the cash proceeds from the exercises of stock options by participants in Kroger’s stock option, long-term incentive plans and the associated tax benefits.

 

On March 15, 2018, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, including accelerated stock repurchase transactions, block trades, or pursuant to trades intending to comply with rule 10b5-1 of the Securities Exchange Act of 1934 (the “March 2018 Repurchase Program”).  As of May 25, 2019, $546 million remained under the March 2018 Repurchase Program.

 

Dividends

 

The following table provides dividend information ($ in millions, except per share amounts):

 

 

 

 

 

 

 

First Quarter Ended

 

May 25,

 

May 26,

 

2019

 

2018

Cash dividends paid

$

113

 

$

110

Cash dividends paid per common share

$

0.140

 

$

0.125

 

Liquidity Needs

 

We estimate our liquidity needs over the next twelve-month period to approximate $4.8 billion, which includes anticipated requirements for working capital, capital investments, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of the first quarter of 2019.  We generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months.  We have approximately $1.3 billion of senior notes and $100 million of commercial paper maturing in the next twelve months, which are included in the $4.8 billion of estimated liquidity needs.  We expect to satisfy these obligations using cash generated from operations and through issuing additional senior notes, a term loan or commercial paper.  We believe we have adequate coverage of our debt covenants to continue to maintain our current investment grade debt ratings and to respond effectively to competitive conditions.

 

CAPITAL  INVESTMENTS

 

Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $876 million for the first quarter of 2019, compared to $848 million for the first quarter of 2018.  During the rolling four quarter period ended with the first quarter of 2019, we opened, expanded, relocated or acquired 30 supermarkets and also completed 199 major within-the-wall remodels. Total supermarket square footage at the end of the first quarter of 2019 increased 0.1% from the end of the first quarter of 2018.  Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the first quarter of 2019 increased 0.7% over the end of the first quarter of 2018.

22

 

CRITICAL  ACCOUNTING  POLICIES

 

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner.  Our critical accounting policies are summarized in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. 

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could vary from those estimates.

 

RECENTLY  ADOPTED  ACCOUNTING  STANDARDS

 

On February 3, 2019, we adopted ASU 2016-02, “Leases,” which provides guidance for the recognition of lease agreements.  We adopted the standard using the modified retrospective approach, which provides a method for recording existing leases at adoption that approximates the results of a full retrospective approach.  In addition, we elected the transition package of practical expedients permitted within the standard, which allowed us to carry forward our historical lease classification, and applied the transition option which does not require application of the guidance to comparative periods in the year of adoption.  

 

The adoption of the standard resulted in the recognition of operating lease assets and operating lease liabilities of approximately $6.8 billion and $7.0 billion, respectively, as of February 3, 2019.  Included in the measurement of the new lease assets is the reclassification of certain balances, including those historically recorded as prepaid or deferred rent and favorable and unfavorable leasehold interests.  Several other asset and liability line items in the Consolidated Balance Sheets were also impacted by immaterial amounts.  The adoption of this standard also resulted in a change in naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. The adoption of this standard did not materially affect our consolidated net earnings or cash flows.

 

In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This amendment allows companies to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income (AOCI) to retained earnings. We adopted ASU 2018-02 on February 3, 2019, which resulted in a decrease to AOCI and an increase to accumulated earnings of $146 million, primarily related to deferred taxes previously recorded for pension and other postretirement benefits and cash flow hedges.  The adoption of this standard did not have an effect on our consolidated results of operations or cash flows.

23

 

SUPPLEMENTAL INFORMATION

 

Sales Reclassification

 

Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to OG&A, are now classified as a component of sales, except for certain amounts in Media, which are netted against merchandise costs. These prior-year amounts have been reclassified to conform to current-year presentation, which is consistent with our Restock Kroger initiative and our view of the products and services as part of our core business strategy.  This is also more consistent with industry practice.

 

The following table summarizes the Company's 2018 sales reclassification ($ in millions):

 

 

 

 

 

 

 

 

 

 

 

First Quarter Ended

 

Previously Stated

 

Reclassification

 

Reclassified

 

May 26,

 

 

 

 

May 26,

 

2018

 

2018

 

2018

Sales

$

37,530

 

$

192

 

$

37,722

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below

 

29,362

 

 

57

 

 

29,419

Operating, general and administrative

 

6,122

 

 

135

 

 

6,257

Rent

 

276

 

 

 —

 

 

276

Depreciation and amortization

 

741

 

 

 —

 

 

741

 

 

 

 

 

 

 

 

 

Operating profit

$

1,029

 

$

 —

 

$

1,029

24

 

OUTLOOK

 

This discussion and analysis contains certain forward-looking statements about our future performance.  These statements are based on management’s assumptions and beliefs in light of the information currently available to it.  Such statements are indicated by words such as “achieve,” “affect,” “believe,” “could,” “effect,” “estimate,” “expect,” “future,” “goal,” “growth,” “incremental,” “likely,” “may,” “plan,” “range,” “result,” “strategy,” “success,” “target,” “trend,”  and “will,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.  These include the specific risk factors identified in “Risk Factors” and “Outlook” in our Annual Report on Form 10-K for our last fiscal year and any subsequent filings, as well as those identified below.

 

Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially.

 

·

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

 

·

Our GAAP net earnings guidance range is $2.38 to $2.48 per diluted share for 2019.

 

·

On an adjusted basis, we maintain our net earnings guidance range of $2.15 to $2.25 per diluted share for 2019.

 

·

We expect FIFO operating profit to range from $2.9 billion to $3.0 billion for 2019.

 

·

We expect our alternative profit stream portfolio to contribute an incremental $100 million in operating profit in 2019, compared to 2018.

 

·

We expect our 2019 tax rate to be approximately 23%.  Excluding the 2019 Adjusted Items, we expect our 2019 tax rate to be approximately 22%.

 

·

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

 

Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements.  These include:

 

·

The extent to which our sources of liquidity are sufficient to meet our requirements may be affected by the state of the financial markets and the effect that such condition has on our ability to issue commercial paper at acceptable rates.  Our ability to borrow under our committed lines of credit, including our bank credit facilities, could be impaired if one or more of our lenders under those lines is unwilling or unable to honor its contractual obligation to lend to us, or in the event that natural disasters or weather conditions interfere with the ability of our lenders to lend to us.  Our ability to refinance maturing debt may be affected by the state of the financial markets.

25

 

·

Our 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 us; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; Our 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 our logistics operations; trends in consumer spending; the extent to which our 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; our ability to retain pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; our 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 our future growth plans; the ability to execute on Restock Kroger; and the successful integration of merged companies and new partnerships.

 

·

Our ability to achieve these goals may also be affected by our ability to manage the factors identified above. Our ability to execute our financial strategy may be affected by our ability to generate cash flow.

 

·

Our 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.

 

We cannot fully foresee the effects of changes in economic conditions on our business. We have assumed economic and competitive situations will not change significantly in 2019.

 

Other factors and assumptions not identified above, including those discussed in Item 1A of this Report, could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in, contemplated or implied by forward-looking statements made by us or our representatives.  We undertake no obligation to update the forward-looking information contained in this filing.

26

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

 

Item 4.    Controls and Procedures.

 

The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures as of the quarter ended May 25, 2019, the end of the period covered by this report.  Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

In the first quarter of 2019, the Company adopted ASU 2016-02, “Leases.”  The Company updated accounting policies and implemented new internal controls in conjunction with the new lease standard.  In connection with the evaluation described above, there was no change in Kroger’s internal control over financial reporting during the quarter ended May 25, 2019, that has materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting.

27

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company.  Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is possible to reasonably estimate and where an adverse outcome is probable.  Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse impact on the Company’s financial condition, results of operations, or cash flows.

28

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

(c)

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

 

 

 

 

 

 

 

 

 

Dollar Value of

 

 

 

 

 

 

 

 

 

 

Shares that May

 

 

 

 

 

 

 

 

Total Number of

 

Yet Be

 

 

 

 

 

 

 

 

Shares Purchased

 

Purchased

 

 

 

Total Number

 

Average

 

as Part of Publicly

 

Under the Plans

 

 

 

of Shares

 

Price Paid Per

 

Announced Plans

 

or Programs(4)

 

Period(1)

    

Purchased(2)

    

Share

    

or Programs(3)

    

(in millions)

 

First four weeks

 

 

 

 

 

 

 

 

 

 

 

February 3, 2019 to March 2, 2019

 

150,556

 

$

28.83

 

149,724

 

$

546

 

Second four weeks

 

 

 

 

 

 

 

 

 

 

 

March 3, 2019 to March 30, 2019

 

383,212

 

$

25.64

 

176,269

 

$

546

 

Third four weeks

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019 to April 27, 2019

 

128,718

 

$

25.23

 

128,687

 

$

546

 

Fourth  four weeks

 

 

 

 

 

 

 

 

 

 

 

April 28, 2019 to May 25, 2019

 

109,294

 

$

25.37

 

109,294

 

$

546

 

Total 

 

771,780

 

$

26.15

 

563,974

 

$

546

 


(1)

The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The first quarter of 2019 contained four 28-day periods.

 

(2)

Includes (i) shares repurchased under a program announced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, under which repurchases are limited to proceeds received from exercises of stock options and the tax benefits associated therewith (“1999 Repurchase Program”) and (ii) 207,806 shares that were surrendered to the Company by participants under our long-term incentive plans to pay for taxes on restricted stock awards.

 

(3)

Represents shares repurchased under the 1999 Repurchase Program.

 

(4)

The amounts shown in this column reflect the amount remaining under the March 2018 Repurchase Program as of the specified period end dates. Amounts available under the 1999 Repurchase Program are dependent upon option exercise activity. The March 2018 Repurchase Program and the 1999 Repurchase Program do not have an expiration date but may be suspended or terminated by our Board of Directors at any time.

29

 

Item 6.  Exhibits.

 

 

 

 

EXHIBIT 3.1

-

Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010, as amended by the Amendment to Amended Articles of Incorporation, which is hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 23, 2015.

 

 

 

EXHIBIT 3.2

-

The Company’s regulations are hereby incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 27, 2019.

 

 

 

EXHIBIT 4.1

-

Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request.

 

 

 

EXHIBIT 31.1

-

Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.

 

 

 

EXHIBIT 31.2

-

Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer.

 

 

 

EXHIBIT 32.1

-

Section 1350 Certifications.

 

 

 

EXHIBIT 101.INS

-

XBRL Instance Document.

 

 

 

EXHIBIT 101.SCH

-

XBRL Taxonomy Extension Schema Document.

 

 

 

EXHIBIT 101.CAL

-

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

EXHIBIT 101.DEF

-

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

EXHIBIT 101.LAB

-

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

EXHIBIT 101.PRE

-

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

30

 

 

 

Exhibit Index

 

 

 

 

EXHIBIT 3.1

-

Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010, as amended by the Amendment to Amended Articles of Incorporation, which is hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 23, 2015.

 

 

 

EXHIBIT 3.2

-

The Company’s regulations are hereby incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 27, 2019.

 

 

 

EXHIBIT 4.1

-

Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request.

 

 

 

EXHIBIT 31.1

-

Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.

 

 

 

EXHIBIT 31.2

-

Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer.

 

 

 

EXHIBIT 32.1

-

Section 1350 Certifications.

 

 

 

EXHIBIT 101.INS

-

XBRL Instance Document.

 

 

 

EXHIBIT 101.SCH

-

XBRL Taxonomy Extension Schema Document.

 

 

 

EXHIBIT 101.CAL

-

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

EXHIBIT 101.DEF

-

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

EXHIBIT 101.LAB

-

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

EXHIBIT 101.PRE

-

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

31

 

SIGNATURES

 

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 thereunto duly authorized.

 

 

 

 

 

THE KROGER CO.

 

 

Dated:  June 28, 2019

By:

/s/ W. Rodney McMullen

 

 

W. Rodney McMullen

 

 

Chairman of the Board and Chief Executive Officer

 

 

 

Dated:  June 28, 2019

By:

/s/ Gary Millerchip

 

 

Gary Millerchip

 

 

Senior Vice President and Chief Financial Officer

 

32