UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: June 19, 2014
(Date of earliest event reported)
THE KROGER CO.
(Exact name of registrant as specified in its charter)
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An Ohio Corporation |
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No. 1-303 |
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31-0345740 |
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(State or other jurisdiction of |
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(Commission File Number) |
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(IRS Employer |
1014 Vine Street
Cincinnati, OH 45202
(Address of principal executive offices)
Registrant’s telephone number: (513) 762-4000
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Section 2 — Financial Information
Item 2.02 Results of Operations and Financial Condition.
On June 19, 2014, the Company released its earnings for first quarter 2014. Attached hereto as Exhibit 99.1, and filed herewith, is the text of that release.
Section 7 — Regulation FD
Item 7.01 Regulation FD Disclosure.
2014 Guidance, including Harris Teeter:
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Identical supermarket sales growth (excluding fuel sales) |
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3.0% to 4.0% |
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Net earnings per diluted share |
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$3.19 to $3.27 |
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Non-fuel FIFO operating profit margin |
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Until we have Harris Teeter in both the current and base years, the expected increase in the full-year FIFO operating margin rate in 2014, excluding fuel, will be higher than our long-term guidance, which is slightly expanding. Over time, we expect our FIFO operating margin growth rate, excluding fuel, to return to slightly expanding on a rolling four quarters basis. |
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Capital investments |
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$2.8 to $3.0 billion, excluding mergers, acquisitions and purchases of leased property. These capital projects include approximately 55-60 major projects covering new stores, expansions and relocations, 150 to 170 major remodels, and other investments including minor remodels, and technology and infrastructure to support our Customer 1st business strategy. |
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Supermarket square footage growth |
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Approximately 1.8% before acquisitions and operational closings |
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Expected tax rate |
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Approximately 35.0%, excluding the resolution of any tax issues and benefits from certain tax items |
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LIFO |
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$90 million |
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Pension Contributions/Expenses |
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Company-sponsored pension plans We expect 2014 expense to be approximately $40 million. We do not expect to make a cash contribution in 2014. |
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401(k) plan For 2014, we expect an increase in our cash contributions and expense of approximately $30 million compared to 2013, primarily due to the Harris Teeter plan contributions.
Multi-employer plans In 2014, we expect to contribute approximately $225 - $250 million to multi-employer pension funds. This amount excludes any contributions to multi-employer pension funds related to pension obligations that were restructured in the first quarter of 2014. |
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Labor |
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In 2014, we will negotiate agreements with the UFCW for store associates in Cincinnati, Toledo, Food 4 Less in California, Smith’s in New Mexico, Richmond/Hampton Roads, West Virginia and Arizona, and an agreement with the Teamsters covering several distribution and manufacturing facilities. Negotiations this year will be challenging as we must have competitive cost structures in each market while meeting our associates’ needs for good wages and affordable health care. Also, we must address the underfunding of Taft-Hartley pension plans. |
Long Term Guidance:
Our long term net earnings per diluted share growth rate guidance is 8 — 11%, plus a dividend that we expect to increase over time. Our strong first quarter results sets us up to deliver a 12-15% net earnings growth rate for 2014, partly due to the benefit of Harris Teeter, compared to our long-term growth rate of 8-11%, plus the dividend. Thereafter, we would we expect to return to our 8 — 11% long term growth rate.
Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include the specific risk factors identified in our annual report on Form 10-K for our last fiscal year and any subsequent filings, as well as the following:
· 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.
· Our ability to use free cash flow to continue to maintain our investment grade debt rating and repurchase shares, pay dividends, and fund capital investments, could be affected by unanticipated increases in net total debt, our inability to generate free cash flow at the levels anticipated, and our failure to generate expected earnings.
· Our ability to achieve identical sales, earnings and 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, 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 inconsistent pace of the economic recovery; changes in inflation or deflation in product and operating costs; stock repurchases; the effect of brand prescription drugs going off patent; our ability to retain additional pharmacy sales from third party payors; natural disasters or adverse weather conditions; the success of our future growth plans; and the successful integration of Harris Teeter. The extent to which the adjustments we are making to our strategy create value for our shareholders will depend primarily on the reaction of our customers and our competitors to these adjustments, as well as operating conditions, including inflation or deflation, increased competitive activity, and cautious spending behavior of our customers. Our ability to achieve sales and earnings goals may also be affected by our ability to manage the factors identified above.
· Our capital investments could differ from our estimate if we are unsuccessful in acquiring suitable sites for new stores, if development costs vary from those budgeted, if our logistics and technology or store projects are not completed on budget or within the time frame projected, or if economic conditions fail to improve, or worsen.
· During the first three quarters of the year, our LIFO charge and the recognition of LIFO expense will be affected primarily by estimated year-end changes in product costs. Our LIFO charge for the year will be affected primarily by changes in product costs at year-end.
· If actual results differ significantly from anticipated future results for certain reporting units including variable interest entities, an impairment loss for any excess of the carrying value of the reporting units’ goodwill over the implied fair value would have to be recognized.
· 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.
· The actual amount of automatic and matching cash contributions to our 401(k) Retirement Savings Account Plan will depend on the number of participants, savings rate, compensation as defined by the plan, and length of service of participants.
· Changes in our product mix may negatively affect certain financial indicators. For example, we continue to add supermarket fuel centers to our store base. Since gasoline generates low profit margins, we expect to see our FIFO gross profit margins decline as gasoline sales increase.
Section 8 — Other Events
Item 8.01 Other Events
On June 18, 2014, the Company issued a release announcing agreements to improve security and certainty of pension benefits. Attached hereto as Exhibit 99.2, and filed herewith, is the text of that release.
Section 9 — Financial Statements and Exhibits
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
99.1 Earnings release first quarter 2014, filed herewith.
99.2 Press release regarding pension benefits, filed herewith.
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 hereunto duly authorized.
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THE KROGER CO. | |
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June 19, 2014 |
By: |
/s/ Christine Wheatley |
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Christine Wheatley |
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Group Vice President, |
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Secretary and General Counsel |
EXHIBIT 99.1
Kroger Reports Strong First Quarter Results
Adjusted Q1 EPS of $1.09; Raises Fiscal 2014 Adjusted EPS Guidance to $3.19 to $3.27
ID Sales Up 4.6% Without Fuel; Raises Fiscal 2014 ID Sales Guidance to 3.0% to 4.0%
CINCINNATI, Ohio, June 19, 2014 — The Kroger Co. (NYSE: KR) today reported net earnings of $501 million, or $0.98 per diluted share, and identical supermarket sales growth, without fuel, of 4.6% in the first quarter of fiscal year 2014.
Other highlights of the quarter include:
· Achieved 42nd consecutive quarter of positive identical supermarket sales growth
· Exceeded goal to slightly expand FIFO operating margin, without fuel, on a rolling four quarters basis
· Increased capital investment and maintained ROIC
The company’s net earnings include charges announced yesterday related to the restructuring of certain pension obligations to help stabilize associates’ future benefits. Excluding the effect of these charges, Kroger’s adjusted net earnings were $557 million, or $1.09 per diluted share, for the first quarter. Net earnings in the same period last year were $481 million, or $0.92 per diluted share.
“Kroger associates continue to enhance our connection with all customers and achieve our key performance measures, which are allowing us to achieve our growth strategy and create shareholder value,” said Rodney McMullen, Kroger’s chief executive officer. “Our strong first quarter results set us up to deliver a 12-15% net earnings growth rate for the year, partly due to the benefit of Harris Teeter, compared to our long-term growth rate of 8-11% plus the growing dividend. We are pleased to start the year with growth momentum while also returning $1.1 billion in cash back to shareholders this quarter through our buyback program.”
Details of First Quarter 2014 Results
This is the first period that includes Harris Teeter in Kroger’s statement of operations. Year-over-year percentage comparisons are affected as a result.
Total sales increased 9.9% to $32.96 billion in the first quarter compared to $30.00 billion for the same period last year. Total sales, excluding fuel, increased 11.4% in the first quarter over the same period last year.
Kroger recorded a $28 million LIFO charge during the first quarter compared to a $17 million LIFO charge in the same quarter last year. The company is increasing its LIFO estimate for the year to $90 million from its previous estimate of $55 million.
FIFO gross margin was 21.01% of sales for the first quarter. Excluding retail fuel operations, FIFO gross margin increased 1 basis point from the same period last year.
Operating, general and administrative costs plus rent and depreciation, excluding retail fuel operations and pension agreements, declined 9 basis points as a percent of sales compared to the prior year.
First quarter FIFO operating profit, excluding fuel and pension agreements, increased approximately $124 million over the prior year. On a rolling four quarters basis excluding fuel and pension agreements, the company’s FIFO operating margin increased 12 basis points.
Financial Strategy
Kroger’s strong financial position allowed the company to return more than $1.9 billion to shareholders through share buybacks and dividends over the last four quarters. During the first quarter, Kroger repurchased 25.7 million common shares for a total investment of $1.1 billion. This was contemplated in the company’s original guidance.
Capital investments, excluding mergers, acquisitions and purchases of leased facilities, totaled $709 million for the first quarter, compared to $640 million for the same period last year.
Return on invested capital, on a rolling four quarters 52-week basis, was 13.5%, consistent with the same period last year.
Kroger remains committed to achieving a 2.00 – 2.20 net debt to EBITDA ratio by mid-to-late 2015. Kroger took on debt to finance the Harris Teeter merger, and realized no incremental EBITDA in fiscal 2013 because the transaction closed late in the fiscal year. This has a material effect on the company’s net total debt to adjusted EBITDA ratio, which is 2.42, compared to 1.85 during the same period last year. As Kroger gets a full year of Harris Teeter EBITDA in the calculation, the company expects to be closer to 2.20 by fiscal year end.
Kroger’s net total debt is $11.3 billion, an increase of $3.4 billion from a year ago, including debt related to the Harris Teeter transaction and Kroger’s share repurchase activity.
Fiscal 2014 Guidance
Based on the first quarter results, the company raised and narrowed its adjusted net earnings guidance to a range of $3.19 to $3.27 per diluted share for fiscal 2014. The original guidance was $3.14 to $3.25 per diluted share.
The company’s long-term net earnings per diluted share growth rate guidance is 8 – 11%, plus a growing dividend.
Kroger raised its identical supermarket sales growth guidance, excluding fuel, to 3.0% to 4.0% for fiscal 2014. The original guidance was 2.5% to 3.5%.
Kroger continues to use cash flow from operations to maintain its current investment grade debt rating, repurchase shares, grow its dividend, and fund capital investments. The company continues to expect capital investments excluding mergers, acquisitions and purchases of leased facilities, to be in the $2.8 to $3.0 billion range for the year, including Harris Teeter.
“Kroger’s Customer 1st culture, remarkably consistent execution and renewed commitment to growth have led us to 42 consecutive quarters of positive identical store sales,” Mr. McMullen said. “We will continue building on this resilient foundation to grow aggressively into the future.”
Kroger, one of the world’s largest retailers, employs more than 375,000 associates who serve customers in 2,642 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer,
Fry’s, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith’s. The company also operates 787 convenience stores, 324 fine jewelry stores, 1,261 supermarket fuel centers and 37 food processing plants in the U.S. Recognized by Forbes as the most generous company in America, Kroger supports hunger relief, breast cancer awareness, the military and their families, and more than 30,000 schools and grassroots organizations. Kroger contributes food and funds equal to 200 million meals a year through more than 80 Feeding America food bank partners. A leader in supplier diversity, Kroger is a proud member of the Billion Dollar Roundtable and the U.S. Hispanic Chamber’s Million Dollar Club.
Note: Fuel sales have historically had a low FIFO gross margin rate and OG&A rate as compared to corresponding rates on non-fuel sales. As a result Kroger discusses the changes in these rates excluding the effect of retail fuel operations.
This press release contains certain forward-looking statements about the future performance of the company. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. These statements are indicated by words such as “expect,” “guidance,” “plans,” “committed,” “goal,” “will” and similar words.
Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include the specific risk factors identified in “Risk Factors” and “Outlook” in our annual report on Form 10-K for our last fiscal year and any subsequent filings, as well as the following:
· Our ability to achieve identical sales, earnings and 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, 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 inconsistent pace of the economic recovery; changes in inflation or deflation in product and operating costs; stock repurchases; the effect of brand prescription drugs going off patent; our ability to retain additional pharmacy sales from third party payors; natural disasters or adverse weather conditions; the success of our future growth plans; and the successful integration of Harris Teeter. The extent to which the adjustments we are making to our strategy create value for our shareholders will depend primarily on the reaction of our customers and our competitors to these adjustments, as well as operating conditions, including inflation or deflation, increased competitive activity, and cautious spending behavior of our customers. Our ability to achieve sales and earnings goals may also be affected by our ability to manage the factors identified above.
· Our ability to use free cash flow to continue to maintain our investment grade debt rating and repurchase shares, pay dividends, and fund capital investments, could be affected by unanticipated increases in net total debt, our inability to generate free cash flow at the levels anticipated, and our failure to generate expected earnings.
· Our capital investments could differ from our estimate if we are unsuccessful in acquiring suitable sites for new stores, if development costs vary from those budgeted, if our logistics and technology or store projects are not completed on budget or within the time frame projected, or if economic conditions fail to improve, or worsen.
We assume no obligation to update the information contained herein. Please refer to Kroger’s reports and filings with the Securities and Exchange Commission for a further discussion of these risks and uncertainties.
Note: Kroger’s quarterly conference call with investors will be broadcast live online at 10 a.m. (ET) on June 19, 2014 at ir.kroger.com. An on-demand replay of the webcast will be available from approximately 1 p.m. (ET) Thursday, June 19 through Thursday, July 3, 2014.
—30—
1st Quarter 2014 Tables Include:
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL SALES INFORMATION
RECONCILIATION OF TOTAL DEBT TO NET TOTAL DEBT AND
NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. TO ADJUSTED EBITDA
NET EARNINGS PER DILUTED SHARE EXCLUDING ADJUSTMENT ITEMS
RETURN ON INVESTED CAPITAL
Kroger Contacts:
Media: Keith Dailey (513) 762-1304
Investors: Cindy Holmes (513) 762-4969
Table 1.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
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FIRST QUARTER |
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2014 |
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2013 |
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SALES |
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$ |
32,961 |
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100.0 |
% |
$ |
29,997 |
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100.0 |
% |
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|
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|
|
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|
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MERCHANDISE COSTS, INCLUDING ADVERTISING, WAREHOUSING AND TRANSPORTATION (a), AND LIFO CHARGE (b) |
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26,065 |
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79.1 |
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23,817 |
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79.4 |
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OPERATING, GENERAL AND ADMINISTRATIVE (a) |
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5,168 |
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15.7 |
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4,593 |
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15.3 |
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RENT |
|
217 |
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0.7 |
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189 |
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0.6 |
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DEPRECIATION |
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581 |
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1.8 |
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519 |
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1.7 |
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OPERATING PROFIT |
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930 |
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2.8 |
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879 |
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2.9 |
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INTEREST EXPENSE |
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147 |
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0.5 |
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129 |
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0.4 |
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NET EARNINGS BEFORE INCOME TAX EXPENSE |
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783 |
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2.4 |
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750 |
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2.5 |
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INCOME TAX EXPENSE |
|
274 |
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0.8 |
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266 |
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0.9 |
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|
|
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NET EARNINGS INCLUDING NONCONTROLLING INTERESTS |
|
509 |
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1.5 |
|
484 |
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1.6 |
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|
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|
|
|
|
|
|
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NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
|
8 |
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0.0 |
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3 |
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0.0 |
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NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. |
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$ |
501 |
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1.5 |
% |
$ |
481 |
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1.6 |
% |
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NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER BASIC COMMON SHARE |
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$ |
0.99 |
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$ |
0.93 |
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AVERAGE NUMBER OF COMMON SHARES USED IN BASIC CALCULATION |
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501 |
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514 |
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NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER DILUTED COMMON SHARE |
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$ |
0.98 |
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|
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$ |
0.92 |
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|
|
|
|
|
|
|
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AVERAGE NUMBER OF COMMON SHARES USED IN DILUTED CALCULATION |
|
507 |
|
|
|
520 |
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|
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|
|
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|
|
|
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DIVIDENDS DECLARED PER COMMON SHARE |
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$ |
0.165 |
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|
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$ |
0.150 |
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|
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Note: Certain per share amounts and percentages may not sum due to rounding.
Note: The Company defines FIFO gross profit as sales minus merchandise costs, including advertising, warehousing and transportation, but excluding the Last-In First-Out (LIFO) charge.
The Company defines FIFO gross margin, as described in the earnings release, as FIFO gross profit divided by sales.
The Company defines FIFO operating profit as operating profit excluding the LIFO charge.
The Company defines FIFO operating profit margin, as described in the earnings release, as FIFO operating profit divided by sales.
The above FIFO financial metrics are important measures used by management to evaluate operational effectiveness. Management believes these FIFO financial metrics are useful to investors and analysts because they measure our day-to-day operational effectiveness.
(a) Merchandise costs and operating, general and administrative expenses exclude depreciation expense and rent expense which are included in separate expense lines.
(b) LIFO charges of $28 and $17 were recorded in the first quarter of 2014 and 2013, respectively.
Note: Certain prior-year amounts have been reclassified to conform to current-year presentation.
Table 2.
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(in millions)
(unaudited)
|
|
|
May 24, |
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May 25, |
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|
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2014 |
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2013 |
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ASSETS |
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|
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|
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Current Assets |
|
|
|
|
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Cash |
|
$ |
265 |
|
$ |
247 |
|
|
Store deposits in-transit |
|
937 |
|
851 |
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Receivables |
|
1,108 |
|
961 |
| ||
|
Inventories |
|
5,648 |
|
5,076 |
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Prepaid and other current assets |
|
410 |
|
299 |
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|
|
|
|
|
|
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Total current assets |
|
8,368 |
|
7,434 |
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|
|
|
|
|
|
| ||
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Property, plant and equipment, net |
|
17,030 |
|
14,967 |
| ||
|
Intangibles |
|
698 |
|
132 |
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|
Goodwill |
|
2,135 |
|
1,234 |
| ||
|
Other assets |
|
682 |
|
460 |
| ||
|
|
|
|
|
|
| ||
|
Total Assets |
|
$ |
28,913 |
|
$ |
24,227 |
|
|
|
|
|
|
|
| ||
|
LIABILITIES AND SHAREOWNERS’ EQUITY |
|
|
|
|
| ||
|
Current liabilities |
|
|
|
|
| ||
|
Current portion of long-term debt including obligations under capital leases and financing obligations |
|
$ |
1,652 |
|
$ |
1,784 |
|
|
Trade accounts payable |
|
5,257 |
|
4,855 |
| ||
|
Accrued salaries and wages |
|
1,101 |
|
957 |
| ||
|
Deferred income taxes |
|
248 |
|
288 |
| ||
|
Other current liabilities |
|
2,666 |
|
2,487 |
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|
|
|
|
|
|
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|
Total current liabilities |
|
10,924 |
|
10,371 |
| ||
|
|
|
|
|
|
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Long-term debt including obligations under capital leases and financing obligations |
|
|
|
|
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Face-value of long-term debt including obligations under capital leases and financing obligations |
|
9,665 |
|
6,161 |
| ||
|
Adjustment to reflect fair-value interest rate hedges |
|
(1 |
) |
1 |
| ||
|
Long-term debt including obligations under capital leases and financing obligations |
|
9,664 |
|
6,162 |
| ||
|
|
|
|
|
|
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|
Deferred income taxes |
|
1,325 |
|
772 |
| ||
|
Pension and postretirement benefit obligations |
|
900 |
|
1,199 |
| ||
|
Other long-term liabilities |
|
1,330 |
|
1,127 |
| ||
|
|
|
|
|
|
| ||
|
Total Liabilities |
|
24,143 |
|
19,631 |
| ||
|
|
|
|
|
|
| ||
|
Shareowners’ equity |
|
4,770 |
|
4,596 |
| ||
|
|
|
|
|
|
| ||
|
Total Liabilities and Shareowners’ Equity |
|
$ |
28,913 |
|
$ |
24,227 |
|
|
|
|
|
|
|
| ||
|
Total common shares outstanding at end of period |
|
485 |
|
514 |
| ||
|
Total diluted shares year-to-date |
|
507 |
|
520 |
| ||
Note: Certain prior-year amounts have been reclassified to conform to current-year presentation.
Table 3.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
|
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YEAR-TO-DATE |
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|
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2014 |
|
2013 |
| ||
|
|
|
|
|
|
| ||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| ||
|
Net earnings including noncontrolling interests |
|
$ |
509 |
|
$ |
484 |
|
|
Adjustment to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: |
|
|
|
|
| ||
|
Depreciation |
|
581 |
|
519 |
| ||
|
LIFO charge |
|
28 |
|
17 |
| ||
|
Stock-based employee compensation |
|
40 |
|
24 |
| ||
|
Expense for Company-sponsored pension plans |
|
12 |
|
25 |
| ||
|
Deferred income taxes |
|
(56 |
) |
(14 |
) | ||
|
Other |
|
24 |
|
38 |
| ||
|
Changes in operating assets and liabilities, net of effects from acquisitions of businesses: |
|
|
|
|
| ||
|
Store deposits in-transit |
|
21 |
|
104 |
| ||
|
Receivables |
|
20 |
|
88 |
| ||
|
Inventories |
|
(25 |
) |
53 |
| ||
|
Prepaid expenses |
|
288 |
|
276 |
| ||
|
Trade accounts payable |
|
402 |
|
279 |
| ||
|
Accrued expenses |
|
(109 |
) |
(226 |
) | ||
|
Income taxes receivable and payable |
|
(28 |
) |
89 |
| ||
|
Other |
|
73 |
|
(139 |
) | ||
|
|
|
|
|
|
| ||
|
Net cash provided by operating activities |
|
1,780 |
|
1,617 |
| ||
|
|
|
|
|
|
| ||
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
|
Payments for property and equipment, including payments for lease buyouts |
|
(730 |
) |
(618 |
) | ||
|
Proceeds from sale of assets |
|
9 |
|
6 |
| ||
|
Other |
|
18 |
|
(14 |
) | ||
|
|
|
|
|
|
| ||
|
Net cash used by investing activities |
|
(703 |
) |
(626 |
) | ||
|
|
|
|
|
|
| ||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
|
Proceeds from issuance of long-term debt |
|
17 |
|
2 |
| ||
|
Payments on long-term debt |
|
(14 |
) |
(409 |
) | ||
|
Net payments on commercial paper |
|
(5 |
) |
(545 |
) | ||
|
Dividends paid |
|
(84 |
) |
(78 |
) | ||
|
Excess tax benefits on stock-based awards |
|
12 |
|
7 |
| ||
|
Proceeds from issuance of capital stock |
|
33 |
|
95 |
| ||
|
Treasury stock purchases |
|
(1,143 |
) |
(146 |
) | ||
|
Net increase (decrease) in book overdrafts |
|
(29 |
) |
93 |
| ||
|
Other |
|
— |
|
(1 |
) | ||
|
|
|
|
|
|
| ||
|
Net cash used by financing activities |
|
(1,213 |
) |
(982 |
) | ||
|
|
|
|
|
|
| ||
|
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS |
|
(136 |
) |
9 |
| ||
|
|
|
|
|
|
| ||
|
CASH AND TEMPORARY CASH INVESTMENTS: |
|
|
|
|
| ||
|
BEGINNING OF YEAR |
|
401 |
|
238 |
| ||
|
END OF QUARTER |
|
$ |
265 |
|
$ |
247 |
|
|
|
|
|
|
|
| ||
|
Reconciliation of capital investments: |
|
|
|
|
| ||
|
Payments for property and equipment, including payments for lease buyouts |
|
$ |
(730 |
) |
$ |
(618 |
) |
|
Payments for lease buyouts |
|
17 |
|
6 |
| ||
|
Changes in construction-in-progress payables |
|
4 |
|
(28 |
) | ||
|
Total capital investments, excluding lease buyouts |
|
$ |
(709 |
) |
$ |
(640 |
) |
|
|
|
|
|
|
| ||
|
Disclosure of cash flow information: |
|
|
|
|
| ||
|
Cash paid during the quarter for interest |
|
$ |
134 |
|
$ |
114 |
|
|
Cash paid during the quarter for income taxes |
|
$ |
351 |
|
$ |
181 |
|
Table 4. Supplemental Sales Information
(in millions, except percentages)
(unaudited)
Items identified below should not be considered as alternatives to sales or any other GAAP measure of performance. Identical supermarket sales is an industry-specific measure and it is important to review it in conjunction with Kroger’s financial results reported in accordance with GAAP. Other companies in our industry may calculate identical sales differently than Kroger does, limiting the comparability of the measure. These results include Harris Teeter sales for stores that are identical as if they were part of Kroger in the prior year.
IDENTICAL SUPERMARKET SALES (a)
|
|
|
FIRST QUARTER |
| ||||
|
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
|
| ||
|
INCLUDING FUEL CENTERS |
|
$ |
29,666 |
|
$ |
28,458 |
|
|
EXCLUDING FUEL CENTERS |
|
$ |
24,949 |
|
$ |
23,855 |
|
|
|
|
|
|
|
| ||
|
INCLUDING FUEL CENTERS |
|
4.2 |
% |
2.9 |
% | ||
|
EXCLUDING FUEL CENTERS |
|
4.6 |
% |
3.3 |
% | ||
(a) Kroger defines a supermarket as identical when it has been open without expansion or relocation for five full quarters.
Table 5. Reconciliation of Net Total Debt and
Net Earnings Attributable to The Kroger Co. to Adjusted EBITDA
(in millions, except for ratio)
(unaudited)
The items identified below should not be considered an alternative to any GAAP measure of performance or access to liquidity. Net total debt to adjusted EBITDA is an important measure used by management to evaluate the Company’s access to liquidity. The items below should be reviewed in conjunction with Kroger’s financial results reported in accordance with GAAP.
The following table provides a reconciliation of net total debt.
|
|
|
May 24, |
|
May 25, |
|
|
| |||
|
|
|
2014 |
|
2013 |
|
Change |
| |||
|
|
|
|
|
|
|
|
| |||
|
Current portion of long-term debt including obligations under capital leases and financing obligations |
|
$ |
1,652 |
|
$ |
1,784 |
|
$ |
(132 |
) |
|
Face-value of long-term debt including obligations under capital leases and financing obligations |
|
9,665 |
|
6,161 |
|
3,504 |
| |||
|
Adjustment to reflect fair-value interest rate hedges |
|
(1 |
) |
1 |
|
(2 |
) | |||
|
|
|
|
|
|
|
|
| |||
|
Net total debt |
|
$ |
11,316 |
|
$ |
7,946 |
|
$ |
3,370 |
|
The following table provides a reconciliation from net earnings attributable to The Kroger Co. to adjusted EBITDA, as defined in the Company’s credit agreement, on a rolling four quarters 52 week basis. The table below includes one quarter of Harris Teeter’s operations in the rolling four quarters ended May 24, 2014.
|
|
|
Rolling Four Quarters Ended |
| ||||
|
|
|
May 24, |
|
May 25, |
| ||
|
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
|
| ||
|
Net earnings attributable to The Kroger Co. |
|
$ |
1,539 |
|
$ |
1,539 |
|
|
LIFO |
|
63 |
|
26 |
| ||
|
Depreciation |
|
1,765 |
|
1,670 |
| ||
|
Interest expense |
|
461 |
|
450 |
| ||
|
Income tax expense |
|
759 |
|
828 |
| ||
|
Adjustments for the UFCW consolidated pension plan liability and credit card settlement |
|
— |
|
(115 |
) | ||
|
53rd week EBITDA adjustment |
|
— |
|
(99 |
) | ||
|
Adjustments for the pension plan agreements |
|
87 |
|
— |
| ||
|
Other |
|
10 |
|
(7 |
) | ||
|
|
|
|
|
|
| ||
|
Adjusted EBITDA |
|
$ |
4,684 |
|
$ |
4,292 |
|
|
|
|
|
|
|
| ||
|
Net total debt to adjusted EBITDA ratio on a 52 week basis |
|
2.42 |
|
1.85 |
| ||
Table 6. Net Earnings Per Diluted Share Excluding the Adjustment Items
(in millions, except per share amounts)
(unaudited)
The purpose of this table is to better illustrate comparable operating results from our ongoing business, after removing the effects on net earnings per diluted common share of certain items described below. Items identified in this table should not be considered alternatives to net earnings attributable to The Kroger Co. or any other GAAP measure of performance. These items should not be reviewed in isolation or considered substitutes for the Company’s financial results as reported in accordance with GAAP. Due to the nature of these items, as further described below, it is important to identify these items and to review them in conjunction with the Company’s financial results reported in accordance with GAAP.
The following table summarizes items that affected the Company’s financial results during the periods presented. In 2014, these items include charges related to the restructuring of certain pension obligations. In the first quarter of 2013, The Kroger Co. did not have any adjustment items.
|
|
|
FIRST QUARTER |
|
FIRST QUARTER |
| ||
|
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
|
| ||
|
NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. |
|
$ |
501 |
|
$ |
481 |
|
|
|
|
|
|
|
| ||
|
ADJUSTMENTS FOR PENSION PLAN AGREEMENTS (a) (b) |
|
56 |
|
— |
| ||
|
|
|
|
|
|
| ||
|
NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. EXCLUDING THE ADJUSTMENT ITEM ABOVE |
|
$ |
557 |
|
$ |
481 |
|
|
|
|
|
|
|
| ||
|
NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER DILUTED COMMON SHARE |
|
$ |
0.98 |
|
$ |
0.92 |
|
|
|
|
|
|
|
| ||
|
ADJUSTMENTS FOR PENSION PLAN AGREEMENTS (c) |
|
0.11 |
|
— |
| ||
|
|
|
|
|
|
| ||
|
NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER DILUTED COMMON SHARE EXCLUDING THE ADJUSTMENT ITEM ABOVE |
|
$ |
1.09 |
|
$ |
0.92 |
|
|
|
|
|
|
|
| ||
|
AVERAGE NUMBER OF COMMON SHARES USED IN DILUTED CALCULATION |
|
507 |
|
520 |
| ||
(a) The amounts presented represent the after-tax effect of each adjustment.
(b) The pre-tax adjustment for the pension plan agreements was $87.
(c) The amounts presented represent the net earnings per diluted common share effect of each adjustment.
Table 7. Return on Invested Capital
(in millions, except percentages)
(unaudited)
Return on invested capital should not be considered an alternative to any GAAP measure of performance. Return on invested capital is an important measure used by management to evaluate our investment returns on capital and our effectiveness in deploying our assets. Return on invested capital should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. Other companies may calculate return on invested capital differently than Kroger, limiting the comparability of the measure.
The following table provides a calculation of return on invested capital on a rolling four quarters 52 week basis ended May 24, 2014 and May 25, 2013. The numerator in the calculation for return on invested capital includes one quarter of Harris Teeter’s operations in the rolling four quarters ended May 24, 2014. The denominator includes the assets and liabilities of Harris Teeter for the first quarter of 2014.
|
|
|
Rolling Four Quarters Ended |
| ||||
|
|
|
May 24, |
|
May 25, |
| ||
|
|
|
2014 |
|
2013 |
| ||
|
Return on Invested Capital |
|
|
|
|
| ||
|
Numerator (a) |
|
|
|
|
| ||
|
Operating profit |
|
$ |
2,776 |
|
$ |
2,829 |
|
|
53rd week operating profit adjustment |
|
— |
|
(99 |
) | ||
|
LIFO charge |
|
63 |
|
26 |
| ||
|
Depreciation |
|
1,765 |
|
1,670 |
| ||
|
Rent |
|
641 |
|
626 |
| ||
|
53rd week rent adjustment |
|
— |
|
(12 |
) | ||
|
Adjustments for the UFCW consolidated pension plan liability and credit card settlement |
|
— |
|
(115 |
) | ||
|
Adjustments for the pension plan agreements |
|
87 |
|
— |
| ||
|
Other |
|
16 |
|
— |
| ||
|
|
|
|
|
|
| ||
|
Adjusted operating income on a 52 week basis |
|
$ |
5,348 |
|
$ |
4,925 |
|
|
|
|
|
|
|
| ||
|
Denominator (b) |
|
|
|
|
| ||
|
Average total assets |
|
$ |
26,570 |
|
$ |
23,997 |
|
|
Average taxes receivable (c) |
|
(12 |
) |
(9 |
) | ||
|
Average LIFO reserve (d) |
|
1,120 |
|
1,102 |
| ||
|
Average accumulated depreciation |
|
15,429 |
|
14,430 |
| ||
|
Average trade accounts payable |
|
(5,056 |
) |
(4,665 |
) | ||
|
Average accrued salaries and wages |
|
(1,029 |
) |
(948 |
) | ||
|
Average other current liabilities (e) |
|
(2,444 |
) |
(2,309 |
) | ||
|
Rent * 8 (f) |
|
5,128 |
|
4,912 |
| ||
|
|
|
|
|
|
| ||
|
Average invested capital |
|
$ |
39,706 |
|
$ |
36,510 |
|
|
|
|
|
|
|
| ||
|
Return on Invested Capital |
|
13.5 |
% |
13.5 |
% | ||
(a) Represents results for the rolling four quarters ended for the periods noted.
(b) Represents the average of amounts at the beginning and end of the rolling four quarter periods presented.
(c) Taxes receivable is recorded in the Consolidated Balance Sheet in receivables.
(d) LIFO reserve is recorded in the Consolidated Balance Sheet in inventories.
(e) The calculation of average other current liabilities excludes accrued income taxes.
(f) The factor of eight estimates the hypothetical capitalization of our operating leases.
EXHIBIT 99.2
Kroger Announces Agreements to Improve
Security and Certainty of Pension Benefits
CINCINNATI, June 18, 2014 — The Kroger Co. (NYSE: KR) today announced changes in its participation in two multi-employer pension funds that will provide greater stability of current and future benefits for Kroger associates, reduce administration costs and enhance the prospects for future returns.
Pending approval of the fund trustees and the Pension Benefit Guarantee Corporation, Kroger has negotiated withdrawals from two multi-employer pension funds. These include:
· The Washington Meat Industry Pension Trust, which covered approximately 870 current and 840 retired Kroger associates, mostly in Washington State. Kroger will move the liability for pensions earned from this fund into the UFCW Consolidated Pension Fund that was established in December 2011. Pension liabilities for current associates’ future service will be earned in the Seattle-based Sound Retirement Trust, which includes the majority of Seattle-area store clerks.
· The Pace Industry Union-Management Pension Fund, which included approximately 350 King Soopers pharmacists in the Denver area. These associates will now participate in a Kroger-sponsored 401k plan with matching benefits.
Kroger has agreed to contribute a total of approximately $56 million, after-tax, to restructure these pension obligations. Because Kroger has made a commitment to fund this amount in the future, the majority of it over the next 5 years, the company will incur a charge in this amount to earnings for the first quarter of 2014.
“We are pleased to have reached agreements to help secure pension benefits that more than 2,000 associates have earned and to provide a future benefit that is competitive and affordable,” said Mike Schlotman, Kroger’s chief financial officer. “We intend to continue looking for opportunities to leverage our strong financial flexibility to safeguard our associates’ benefits, increase certainty and control over future pension obligations, and continue delivering strong shareholder value.”
Kroger, one of the world’s largest retailers, employs more than 375,000 associates who serve customers in 2,640 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry’s, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith’s. The company also operates 786 convenience stores, 320 fine jewelry stores, 1,240 supermarket fuel centers and 38 food processing plants in the U.S. Recognized by Forbes as the most generous company in America, Kroger supports hunger relief, breast cancer awareness, the military and their families, and more than 30,000 schools and grassroots organizations. Kroger contributes food and funds equal to 200 million meals a year through more than 80 Feeding America food bank partners. A leader in supplier diversity, Kroger is a proud member of the Billion Dollar Roundtable and the U.S. Hispanic Chamber’s Million Dollar Club.
—
This press release contains certain forward-looking statements about the future performance of the company. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. These statements are indicated by words such as “will” and “intend.”
The extent to which the restructuring of pension obligations will provide stability of benefits, reduce costs, and enhance prospects for future returns will depend primarily on the performance of the funds in which the associates will participate after the restructuring. Our ability to find additional opportunities to safeguard associates’ benefits, increase certainty and control over future pension obligations, and deliver strong shareholder value will depend primarily on the extent to which fund trustees are willing to negotiate changes to or withdrawal from funds covering our associates.
We assume no obligation to update the information contained herein. Please refer to Kroger’s reports and filings with the Securities and Exchange Commission for a further discussion of these risks and uncertainties.
—30—
Contacts:
Media, Keith Dailey, +1-513-762-1304, or Investors, Cindy Holmes, +1-513-762-4969