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 November 4, 201710, 2018
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
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(Exact name of registrant as specified in its charter)
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Ohio |
| 31-0345740 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
1014 Vine Street, Cincinnati, OH 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)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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. (Check one):
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 881,361,794797,743,035 shares of Common Stock ($1 par value) outstanding as of December 4, 2017.12, 2018.
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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| Third Quarter Ended |
| Three Quarters Ended |
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| Third Quarter Ended |
| Three Quarters Ended |
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| November 4, |
| November 5, |
| November 4, |
| November 5, |
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| November 10, |
| November 4, |
| November 10, |
| November 4, |
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(In millions, except per share amounts) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
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Sales |
| $ | 27,749 |
| $ | 26,557 |
| $ | 91,631 |
| $ | 87,726 |
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| $ | 27,672 |
| $ | 27,749 |
| $ | 93,071 |
| $ | 91,631 |
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Operating expenses |
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Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
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| 21,532 |
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| 20,653 |
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| 71,422 |
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| 68,019 |
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| 21,699 |
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| 21,532 |
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| 72,991 |
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| 71,422 |
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Operating, general and administrative |
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| 4,708 |
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| 4,443 |
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| 15,606 |
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| 14,695 |
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| 4,556 |
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| 4,701 |
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| 15,291 |
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| 15,585 |
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Rent |
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| 196 |
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| 199 |
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| 691 |
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| 666 |
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| 200 |
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| 196 |
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| 680 |
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| 691 |
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Depreciation and amortization |
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| 573 |
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| 549 |
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| 1,871 |
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| 1,768 |
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| 570 |
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| 573 |
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| 1,884 |
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| 1,871 |
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Operating profit |
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| 740 |
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| 713 |
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| 2,041 |
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| 2,578 |
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| 647 |
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| 747 |
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| 2,225 |
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| 2,062 |
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Other income (expense) |
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Interest expense |
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| 136 |
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| 124 |
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| 453 |
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| 396 |
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| (142) |
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| (136) |
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| (479) |
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| (453) |
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Non-service component of company-sponsored pension plan costs |
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| (6) |
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| (7) |
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| (19) |
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| (21) |
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Mark to market gain (loss) on Ocado securities |
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| (100) |
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| — |
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| 152 |
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| — |
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Gain on sale of business |
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| — |
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| — |
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| 1,782 |
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| — |
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Earnings before income tax expense |
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| 604 |
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| 589 |
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| 1,588 |
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| 2,182 |
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Net earnings before income tax expense |
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| 399 |
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| 604 |
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| 3,661 |
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| 1,588 |
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Income tax expense |
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| 215 |
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| 206 |
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| 552 |
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| 727 |
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| 91 |
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| 215 |
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| 834 |
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| 552 |
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Net earnings including noncontrolling interests |
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| 389 |
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| 383 |
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| 1,036 |
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| 1,455 |
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| 308 |
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| 389 |
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| 2,827 |
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| 1,036 |
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Net loss attributable to noncontrolling interests |
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| (8) |
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| (8) |
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| (17) |
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| (14) |
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| (9) |
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| (8) |
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| (24) |
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| (17) |
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Net earnings attributable to The Kroger Co. |
| $ | 397 |
| $ | 391 |
| $ | 1,053 |
| $ | 1,469 |
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| $ | 317 |
| $ | 397 |
| $ | 2,851 |
| $ | 1,053 |
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Net earnings attributable to The Kroger Co. per basic common share |
| $ | 0.44 |
| $ | 0.41 |
| $ | 1.16 |
| $ | 1.54 |
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| $ | 0.39 |
| $ | 0.44 |
| $ | 3.46 |
| $ | 1.16 |
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Average number of common shares used in basic calculation |
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| 887 |
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| 940 |
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| 901 |
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| 946 |
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| 797 |
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| 887 |
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| 814 |
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| 901 |
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Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.44 |
| $ | 0.41 |
| $ | 1.15 |
| $ | 1.52 |
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| $ | 0.39 |
| $ | 0.44 |
| $ | 3.43 |
| $ | 1.15 |
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Average number of common shares used in diluted calculation |
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| 893 |
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| 953 |
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| 910 |
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| 962 |
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| 807 |
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| 893 |
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| 822 |
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| 910 |
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Dividends declared per common share |
| $ | 0.125 |
| $ | 0.120 |
| $ | 0.370 |
| $ | 0.345 |
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The accompanying notes are an integral part of the Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
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| Third Quarter Ended |
| Three Quarters Ended |
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| Third Quarter Ended |
| Three Quarters Ended |
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| November 4, |
| November 5, |
| November 4, |
| November 5, |
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| November 10, |
| November 4, |
| November 10, |
| November 4, |
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(In millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
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Net earnings including noncontrolling interests |
| $ | 389 |
| $ | 383 |
| $ | 1,036 |
| $ | 1,455 |
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| $ | 308 |
| $ | 389 |
| $ | 2,827 |
| $ | 1,036 |
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Other comprehensive income (loss) |
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Realized gains and losses on available for sale securities, net of income tax(1) |
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| — |
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| — |
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| — |
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| (20) |
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Amortization of amounts included in net periodic pension expense(2) |
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| 10 |
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| 8 |
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| 33 |
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| 23 |
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Unrealized gains and losses on cash flow hedging activities, net of income tax(3) |
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| 9 |
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| 46 |
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| (26) |
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| (52) |
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Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4) |
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| 1 |
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| — |
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| 2 |
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| 1 |
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Realized gains on available for sale securities, net of income tax(1) |
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| — |
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| — |
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| (4) |
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| — |
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Change in pension and other postretirement defined benefit plans, net of income tax(2) |
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| 10 |
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| 10 |
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| 33 |
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| 33 |
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Unrealized gains and losses on cash flow hedging activities, net of income tax(3) |
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| 37 |
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| 9 |
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| 37 |
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| (26) |
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Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4) |
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| 1 |
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| 1 |
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| 3 |
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| 2 |
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Total other comprehensive income (loss) |
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| 20 |
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| 54 |
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| 9 |
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| (48) |
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Total other comprehensive income |
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| 48 |
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| 20 |
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| 69 |
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| 9 |
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Comprehensive income |
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| 409 |
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| 437 |
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| 1,045 |
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| 1,407 |
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| 356 |
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| 409 |
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| 2,896 |
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| 1,045 |
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Comprehensive loss attributable to noncontrolling interests |
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| (8) |
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| (8) |
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| (17) |
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| (14) |
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| (9) |
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| (8) |
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| (24) |
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| (17) |
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Comprehensive income attributable to The Kroger Co. |
| $ | 417 |
| $ | 445 |
| $ | 1,062 |
| $ | 1,421 |
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| $ | 365 |
| $ | 417 |
| $ | 2,920 |
| $ | 1,062 |
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(1) | Amount is net of tax of |
(2) | Amount is net of tax of $3 for the third quarter of 2018 and $5 for the third quarter of |
(3) | Amount is net of tax of $ |
(4) | Amount is net of tax of $1 for the third quarter of |
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(unaudited)
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| November 4, |
| January 28, |
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| November 10, |
| February 3, |
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(In millions, except par amounts) |
| 2017 |
| 2017 |
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| 2018 |
| 2018 |
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ASSETS |
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Current assets |
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Cash and temporary cash investments |
| $ | 352 |
| $ | 322 |
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| $ | 429 |
| $ | 347 |
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Store deposits in-transit |
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| 1,163 |
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| 910 |
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| 1,098 |
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| 1,161 |
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Receivables |
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| 1,452 |
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| 1,649 |
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| 1,510 |
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| 1,637 |
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FIFO inventory |
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| 8,222 |
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| 7,852 |
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| 8,368 |
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| 7,781 |
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LIFO reserve |
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| (1,305) |
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| (1,291) |
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| (1,285) |
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| (1,248) |
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Assets held for sale |
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| 604 |
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| — |
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| 172 |
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| 604 |
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Prepaid and other current assets |
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| 437 |
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| 898 |
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| 461 |
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| 835 |
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Total current assets |
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| 10,925 |
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| 10,340 |
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| 10,753 |
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| 11,117 |
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Property, plant and equipment, net |
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| 20,966 |
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| 21,016 |
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| 21,515 |
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| 21,071 |
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Intangibles, net |
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| 1,113 |
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| 1,153 |
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| 1,201 |
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| 1,100 |
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Goodwill |
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| 3,035 |
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| 3,031 |
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| 3,087 |
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| 2,925 |
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Other assets |
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| 989 |
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| 965 |
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| 1,585 |
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| 984 |
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Total Assets |
| $ | 37,028 |
| $ | 36,505 |
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| $ | 38,141 |
| $ | 37,197 |
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LIABILITIES |
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Current liabilities |
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Current portion of long-term debt including obligations under capital leases and financing obligations |
| $ | 1,729 |
| $ | 2,252 |
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| $ | 3,371 |
| $ | 3,560 |
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Trade accounts payable |
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| 6,307 |
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| 5,818 |
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| 6,505 |
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| 5,858 |
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Accrued salaries and wages |
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| 1,074 |
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| 1,234 |
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| 1,070 |
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| 1,099 |
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Deferred income taxes |
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| — |
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| 251 |
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Liabilities held for sale |
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| 259 |
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| — |
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| 57 |
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| 259 |
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Other current liabilities |
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| 3,521 |
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| 3,305 |
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| 3,793 |
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| 3,421 |
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Total current liabilities |
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| 12,890 |
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| 12,860 |
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| 14,796 |
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| 14,197 |
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Long-term debt including obligations under capital leases and financing obligations |
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| 13,118 |
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| 11,825 |
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| 11,647 |
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| 12,029 |
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Deferred income taxes |
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| 2,452 |
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| 1,927 |
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| 1,738 |
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| 1,568 |
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Pension and postretirement benefit obligations |
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| 522 |
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| 1,524 |
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| 601 |
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| 792 |
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Other long-term liabilities |
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| 1,835 |
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| 1,659 |
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| 1,749 |
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| 1,706 |
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Total Liabilities |
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| 30,817 |
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| 29,795 |
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| 30,531 |
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| 30,292 |
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Commitments and contingencies (see Note 7) |
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Commitments and contingencies see Note 8 |
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SHAREHOLDERS’ EQUITY |
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Preferred shares, $100 per share, 5 shares authorized and unissued |
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| — |
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| — |
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| — |
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| — |
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Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2017 and 2016 |
|
| 1,918 |
|
| 1,918 |
| |||||||
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2018 and 2017 |
|
| 1,918 |
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| 1,918 |
| |||||||
Additional paid-in capital |
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| 3,124 |
|
| 3,070 |
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|
| 3,209 |
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| 3,161 |
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Accumulated other comprehensive loss |
|
| (706) |
|
| (715) |
|
|
| (402) |
|
| (471) |
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Accumulated earnings |
|
| 16,263 |
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| 15,543 |
|
|
| 19,535 |
|
| 17,007 |
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Common shares in treasury, at cost, 1,037 shares in 2017 and 994 shares in 2016 |
|
| (14,364) |
|
| (13,118) |
| |||||||
Common shares in treasury, at cost, 1,120 shares in 2018 and 1,048 shares in 2017 |
|
| (16,608) |
|
| (14,684) |
| |||||||
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Total Shareholders’ Equity - The Kroger Co. |
|
| 6,235 |
|
| 6,698 |
|
|
| 7,652 |
|
| 6,931 |
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Noncontrolling interests |
|
| (24) |
|
| 12 |
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| (42) |
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| (26) |
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Total Equity |
|
| 6,211 |
|
| 6,710 |
|
|
| 7,610 |
|
| 6,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
| $ | 37,028 |
| $ | 36,505 |
|
| $ | 38,141 |
| $ | 37,197 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Quarters Ended |
|
| Three Quarters Ended |
| ||||||||
|
| November 4, |
| November 5, |
|
| November 10, |
| November 4, |
| ||||
(In millions) |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings including noncontrolling interests |
| $ | 1,036 |
| $ | 1,455 |
|
| $ | 2,827 |
| $ | 1,036 |
|
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,871 |
|
| 1,768 |
|
|
| 1,884 |
|
| 1,871 |
|
LIFO charge |
|
| 46 |
|
| 19 |
|
|
| 39 |
|
| 46 |
|
Stock-based employee compensation |
|
| 118 |
|
| 110 |
|
|
| 115 |
|
| 118 |
|
Expense for Company-sponsored pension plans |
|
| 68 |
|
| 62 |
| |||||||
Expense for company-sponsored pension plans |
|
| 54 |
|
| 68 |
| |||||||
Deferred income taxes |
|
| 267 |
|
| 5 |
|
|
| 148 |
|
| 267 |
|
Gain on sale of business |
|
| (1,782) |
|
| — |
| |||||||
Mark to market gain on Ocado securities |
|
| (152) |
|
| — |
| |||||||
Other |
|
| 5 |
|
| (27) |
|
|
| 29 |
|
| 5 |
|
Changes in operating assets and liabilities net of effects from mergers of businesses: |
|
|
|
|
|
|
| |||||||
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses: |
|
|
|
|
|
|
| |||||||
Store deposits in-transit |
|
| (268) |
|
| (120) |
|
|
| 63 |
|
| (268) |
|
Receivables |
|
| 45 |
|
| 48 |
|
|
| (95) |
|
| 45 |
|
Inventories |
|
| (466) |
|
| (798) |
|
|
| (601) |
|
| (466) |
|
Prepaid and other current assets |
|
| 426 |
|
| 219 |
|
|
| 380 |
|
| 426 |
|
Trade accounts payable |
|
| 620 |
|
| 509 |
|
|
| 666 |
|
| 620 |
|
Accrued expenses |
|
| 26 |
| �� | (144) |
|
|
| 270 |
|
| 26 |
|
Income taxes receivable and payable |
|
| 143 |
|
| 267 |
|
|
| 259 |
|
| 143 |
|
Contribution to Company-sponsored pension plans |
|
| (1,000) |
|
| — |
| |||||||
Contribution to company-sponsored pension plans |
|
| (185) |
|
| (1,000) |
| |||||||
Other |
|
| 117 |
|
| 83 |
|
|
| (186) |
|
| 117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
| 3,054 |
|
| 3,456 |
|
|
| 3,733 |
|
| 3,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment, including payments for lease buyouts |
|
| (2,137) |
|
| (3,025) |
|
|
| (2,257) |
|
| (2,137) |
|
Proceeds from sale of assets |
|
| 120 |
|
| 114 |
|
|
| 76 |
|
| 120 |
|
Payments for acquisitions, net of cash acquired |
|
| (16) |
|
| (401) |
|
|
| (197) |
|
| (16) |
|
Purchases of stores |
|
| (44) |
|
| — |
| |||||||
Net proceeds from sale of business |
|
| 2,169 |
|
| — |
| |||||||
Purchases of Ocado securities |
|
| (392) |
|
| — |
| |||||||
Other |
|
| (2) |
|
| 39 |
|
|
| 15 |
|
| (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
| (2,035) |
|
| (3,273) |
|
|
| (630) |
|
| (2,035) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
| 1,503 |
|
| 1,785 |
|
|
| 1,033 |
|
| 1,503 |
|
Payments on long-term debt |
|
| (769) |
|
| (1,332) |
|
|
| (258) |
|
| (769) |
|
Net borrowings (payments) on commercial paper |
|
| (45) |
|
| 1,200 |
| |||||||
Net payments on commercial paper |
|
| (1,486) |
|
| (45) |
| |||||||
Dividends paid |
|
| (333) |
|
| (316) |
|
|
| (324) |
|
| (333) |
|
Proceeds from issuance of capital stock |
|
| 31 |
|
| 51 |
|
|
| 55 |
|
| 31 |
|
Treasury stock purchases |
|
| (1,292) |
|
| (1,401) |
|
|
| (1,996) |
|
| (1,292) |
|
Other |
|
| (84) |
|
| (73) |
|
|
| (45) |
|
| (84) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
| (989) |
|
| (86) |
|
|
| (3,021) |
|
| (989) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and temporary cash investments |
|
| 30 |
|
| 97 |
|
|
| 82 |
|
| 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and temporary cash investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
| 322 |
|
| 277 |
|
|
| 347 |
|
| 322 |
|
End of year |
| $ | 352 |
| $ | 374 |
| |||||||
End of period |
| $ | 429 |
| $ | 352 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of capital investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment, including payments for lease buyouts |
| $ | (2,137) |
| $ | (3,025) |
|
| $ | (2,257) |
| $ | (2,137) |
|
Payments for lease buyouts |
|
| 9 |
|
| 5 |
|
|
| — |
|
| 9 |
|
Changes in construction-in-progress payables |
|
| (149) |
|
| 14 |
|
|
| (49) |
|
| (149) |
|
Total capital investments, excluding lease buyouts |
| $ | (2,277) |
| $ | (3,006) |
|
| $ | (2,306) |
| $ | (2,277) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
| $ | 469 |
| $ | 410 |
|
| $ | 424 |
| $ | 469 |
|
Cash paid during the year for income taxes |
| $ | 168 |
| $ | 450 |
|
| $ | 376 |
| $ | 168 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
| ||||
|
| Common Stock |
| Paid-In |
| Treasury Stock |
| Comprehensive |
| Accumulated |
| Noncontrolling |
|
|
|
|
| Common Stock |
| Paid-In |
| Treasury Stock |
| Comprehensive |
| Accumulated |
| Noncontrolling |
|
|
|
| ||||||||||||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total |
|
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total |
| ||||||||||||||
Balances at January 30, 2016 |
| 1,918 |
| $ | 1,918 |
| $ | 2,980 |
| 951 |
| $ | (11,409) |
| $ | (680) |
| $ | 14,011 |
| $ | (22) |
| $ | 6,798 |
| ||||||||||||||||||||||||||
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Stock options exercised |
| — |
|
| — |
|
| — |
| (4) |
|
| 51 |
|
| — |
|
| — |
|
| — |
|
| 51 |
| ||||||||||||||||||||||||||
Restricted stock issued |
| — |
|
| — |
|
| (111) |
| (2) |
|
| 55 |
|
| — |
|
| — |
|
| — |
|
| (56) |
| ||||||||||||||||||||||||||
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 37 |
|
| (1,319) |
|
| — |
|
| — |
|
| — |
|
| (1,319) |
| ||||||||||||||||||||||||||
Stock options exchanged |
| — |
|
| — |
|
| — |
| 2 |
|
| (82) |
|
| — |
|
| — |
|
| — |
|
| (82) |
| ||||||||||||||||||||||||||
Share-based employee compensation |
| — |
|
| — |
|
| 110 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 110 |
| ||||||||||||||||||||||||||
Other comprehensive loss net of income tax of $(32) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (48) |
|
| — |
|
| — |
|
| (48) |
| ||||||||||||||||||||||||||
Other |
| — |
|
| — |
|
| 60 |
| — |
|
| (63) |
|
| — |
|
| — |
|
| 54 |
|
| 51 |
| ||||||||||||||||||||||||||
Cash dividends declared ($0.345 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (330) |
|
| — |
|
| (330) |
| ||||||||||||||||||||||||||
Net earnings including noncontrolling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,469 |
|
| (14) |
|
| 1,455 |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Balances at November 5, 2016 |
| 1,918 |
| $ | 1,918 |
| $ | 3,039 |
| 984 |
| $ | (12,767) |
| $ | (728) |
| $ | 15,150 |
| $ | 18 |
| $ | 6,630 |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Balances at January 28, 2017 |
| 1,918 |
| $ | 1,918 |
| $ | 3,070 |
| 994 |
| $ | (13,118) |
| $ | (715) |
| $ | 15,543 |
| $ | 12 |
| $ | 6,710 |
|
| 1,918 |
| $ | 1,918 |
| $ | 3,070 |
| 994 |
| $ | (13,118) |
| $ | (715) |
| $ | 15,543 |
| $ | 12 |
| $ | 6,710 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
| — |
|
| — |
|
| — |
| (2) |
|
| 31 |
|
| — |
|
| — |
|
| — |
|
| 31 |
|
| — |
|
| — |
|
| — |
| (2) |
|
| 31 |
|
| — |
|
| — |
|
| — |
|
| 31 |
|
Restricted stock issued |
| — |
|
| — |
|
| (115) |
| (2) |
|
| 82 |
|
| — |
|
| — |
|
| — |
|
| (33) |
|
| — |
|
| — |
|
| (115) |
| (2) |
|
| 82 |
|
| — |
|
| — |
|
| — |
|
| (33) |
|
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 45 |
|
| (1,247) |
|
| — |
|
| — |
|
| — |
|
| (1,247) |
|
| — |
|
| — |
|
| — |
| 45 |
|
| (1,247) |
|
| — |
|
| — |
|
| — |
|
| (1,247) |
|
Stock options exchanged |
| — |
|
| — |
|
| — |
| 2 |
|
| (45) |
|
| — |
|
| — |
|
| — |
|
| (45) |
|
| — |
|
| — |
|
| — |
| 2 |
|
| (45) |
|
| — |
|
| — |
|
| — |
|
| (45) |
|
Share-based employee compensation |
| — |
|
| — |
|
| 118 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 118 |
|
| — |
|
| — |
|
| 118 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 118 |
|
Other comprehensive income net of income tax of $6 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 9 |
|
| — |
|
| — |
|
| 9 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 9 |
|
| — |
|
| — |
|
| 9 |
|
Other |
| — |
|
| — |
|
| 51 |
| — |
|
| (67) |
|
| — |
|
| — |
|
| (19) |
|
| (35) |
|
| — |
|
| — |
|
| 51 |
| — |
|
| (67) |
|
| — |
|
| — |
|
| (19) |
|
| (35) |
|
Cash dividends declared ($0.370 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (333) |
|
| — |
|
| (333) |
| ||||||||||||||||||||||||||
Cash dividends declared ($0.37 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (333) |
|
| — |
|
| (333) |
| ||||||||||||||||||||||||||
Net earnings including noncontrolling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,053 |
|
| (17) |
|
| 1,036 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,053 |
|
| (17) |
|
| 1,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at November 4, 2017 |
| 1,918 |
| $ | 1,918 |
| $ | 3,124 |
| 1,037 |
| $ | (14,364) |
| $ | (706) |
| $ | 16,263 |
| $ | (24) |
| $ | 6,211 |
|
| 1,918 |
| $ | 1,918 |
| $ | 3,124 |
| 1,037 |
| $ | (14,364) |
| $ | (706) |
| $ | 16,263 |
| $ | (24) |
| $ | 6,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
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 |
| — |
|
| — |
|
| — |
| (4) |
|
| 55 |
|
| — |
|
| — |
|
| — |
|
| 55 |
| ||||||||||||||||||||||||||
Restricted stock issued |
| — |
|
| — |
|
| (114) |
| (2) |
|
| 72 |
|
| — |
|
| — |
|
| — |
|
| (42) |
| ||||||||||||||||||||||||||
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 76 |
|
| (1,927) |
|
| — |
|
| — |
|
| — |
|
| (1,927) |
| ||||||||||||||||||||||||||
Stock options exchanged |
| — |
|
| — |
|
| — |
| 2 |
|
| (69) |
|
| — |
|
| — |
|
| — |
|
| (69) |
| ||||||||||||||||||||||||||
Share-based employee compensation |
| — |
|
| — |
|
| 115 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 115 |
| ||||||||||||||||||||||||||
Other comprehensive income net of income tax of $22 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 69 |
|
| — |
|
| — |
|
| 69 |
| ||||||||||||||||||||||||||
Other |
| — |
|
| — |
|
| 47 |
| — |
|
| (55) |
|
| — |
|
| — |
|
| 8 |
|
| — |
| ||||||||||||||||||||||||||
Cash dividends declared ($0.405 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (323) |
|
| — |
|
| (323) |
| ||||||||||||||||||||||||||
Net earnings including noncontrolling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 2,851 |
|
| (24) |
|
| 2,827 |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Balances at November 10, 2018 |
| 1,918 |
| $ | 1,918 |
| $ | 3,209 |
| 1,120 |
| $ | (16,608) |
| $ | (402) |
| $ | 19,535 |
| $ | (42) |
| $ | 7,610 |
|
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 the variable interest entities in which the Company is the primary beneficiary. The January 28, 2017February 3, 2018 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 January 28, 2017.February 3, 2018.
The unaudited information in the Consolidated Financial Statements for the third quarterquarters and three quarters ended November 4, 201710, 2018 and November 5, 2016,4, 2017, includes the results of operations of the Company for the 1212 and 40-week40-week periods then ended.
Refer to Note 6 for a description of changes to the Consolidated Statements of Operations for a recently adopted accounting standard regarding the presentation of the non-service component of company-sponsored pension plan costs.
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 and Note 3 for the disclosure of the Ocado shares and debt instrument fair values.values, respectively.
Mergers are accounted for using the acquisition method of accounting, which requires that the purchase price paid for an acquisition be allocated to the assets and liabilities acquired based on their estimated fair values as of the effective date of the acquisition, with the excess of the purchase price over the net assets being recorded as goodwill. See Note 2 for further discussion related to accounting for mergers.
7
Revenue Recognition
Sales
2.DEBTThe Company recognizes revenues from the retail sale of products, net of sales taxes, at the point of sale. Pharmacy sales are recorded when the product is provided to the customer. Digital channel originated sales are recognized either upon pickup in store or upon delivery to the customer and may include shipping revenue. Discounts provided to customers by the Company at the time of sale, including those provided in connection with loyalty cards, are recognized as a reduction in sales as the products are sold. Discounts provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons. The Company records a receivable from the vendor for the difference in sales price and cash received. For merchandise sold in one of the Company’s stores or online, tender is accepted at the point of sale. Certain pharmacy fees previously recorded as merchandise costs have been reclassified to be recorded as a reduction of sales. Effective February 4, 2018, the Company prospectively reclassified $188 for the first three quarters of 2018 and $62 for the third quarter of 2018 of these pharmacy fees from merchandise costs to sales on the Company’s Consolidated Statements of Operations. For pharmacy sales, collection of third party receivables is typically expected within three months or less from the time of purchase. The third-party receivables from pharmacy sales are recorded in Receivables in the Company’s Consolidated Balance Sheets and were $681 as of November 10, 2018 and $571 as of February 3, 2018.
Gift Cards and Gift Certificates
The Company does not recognize a sale when it sells its own gift cards and gift certificates (collectively “gift cards”). Rather, it records a deferred revenue liability equal to the amount received. A sale is then recognized when the gift cards are redeemed to purchase the Company’s products. The Company’s gift cards do not expire. While gift cards are generally redeemed within 12 months, some are never fully redeemed. The Company recognizes gift card breakage under the proportional method, where recognition of breakage income is based upon the historical run-off rate of unredeemed gift cards. The Company’s gift card deferred revenue liability was $91 as of November 10, 2018 and $90 as of February 3, 2018.
Disaggregated Revenues
The following table presents sales revenue by type of product for the third quarter and first three quarters of 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
|
| Three Quarters Ended |
| ||||||||||||||||
|
| November 10, 2018 |
| November 4, 2017 |
|
| November 10, 2018 |
| November 4, 2017 |
| ||||||||||||
|
| Amount |
| % of total |
| Amount |
| % of total |
|
| Amount |
| % of total |
| Amount |
| % of total |
| ||||
Non Perishable (1) |
| $ | 13,771 |
| 49.8 | % | $ | 13,698 |
| 49.4 | % |
| $ | 45,797 |
| 49.2 | % | $ | 45,161 |
| 49.3 | % |
Fresh (2) |
|
| 6,550 |
| 23.7 | % |
| 6,439 |
| 23.2 | % |
|
| 22,458 |
| 24.1 | % |
| 21,959 |
| 24.0 | % |
Supermarket Fuel |
|
| 3,656 |
| 13.2 | % |
| 3,141 |
| 11.3 | % |
|
| 11,997 |
| 12.9 | % |
| 9,885 |
| 10.8 | % |
Pharmacy |
|
| 2,503 |
| 9.0 | % |
| 2,462 |
| 8.9 | % |
|
| 8,131 |
| 8.8 | % |
| 8,053 |
| 8.8 | % |
Convenience Stores (3) |
|
|
|
| - | % |
| 1,067 |
| 3.8 | % |
|
| 944 |
| 1.0 | % |
| 3,426 |
| 3.7 | % |
Other (4) |
|
| 1,192 |
| 4.3 | % |
| 942 |
| 3.4 | % |
|
| 3,744 |
| 4.0 | % |
| 3,147 |
| 3.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales and other revenue |
| $ | 27,672 |
| 100 | % | $ | 27,749 |
| 100 | % |
| $ | 93,071 |
| 100 | % | $ | 91,631 |
| 100 | % |
(1) | Consists primarily of grocery, general merchandise, health and beauty care and natural foods. |
(2) | Consists primarily of produce, floral, meat, seafood, deli, bakery and fresh prepared. |
(3) | The Company completed the sale of its convenience store business unit during the first quarter of 2018. |
(4) | Consists primarily of sales related to jewelry stores, food production plants to outside parties, data analytic services, variable interest entities, specialty pharmacy, in-store health clinics, digital coupon services and other online sales not included in the categories above. |
8
Contingent Consideration
Certain Company business combinations involve potential payment of future consideration that is contingent upon the achievement of certain performance milestones. The Company records contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred, estimated as the probability-weighted future cash flows, discounted back to present value using a discount rate determined in accordance with accepted valuation methods. The liability for contingent consideration is remeasured to fair value at each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized in earnings until the contingency is resolved.
Interest Rate Risk Management
The Company is exposed to market risk from fluctuations in interest rates. The Company manages its exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair value hedges) and forward-starting interest rate swaps (cash flow hedges). The Company’s current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, the Company uses the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of the carrying value of the Company’s debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.
The Company reviews compliance with these guidelines annually with the Financial Policy Committee of the Board of Directors. These guidelines may change as the Company’s needs dictate.
2.MERGER AND PARTNERSHIP AGREEMENTS
Merger Agreement
On June 22, 2018, the Company finalized the merger with Home Chef, a meal kit delivery company. The merger will allow the Company to increase the availability of meal kits and expand its offerings to customers. The Company completed the merger by purchasing 100% of the ownership interest in Home Chef, for $197 net of cash and cash equivalents of $30, in addition to future earnout payments of up to $500 over five years that are contingent on achieving certain milestones. The contingent consideration is based on future performance of both the online and offline business and the related customer engagement. The fair value of the earnout liability in the amount of $91 recognized on the acquisition date was measured using unobservable (Level 3) inputs and is included in “Other long-term liabilities” within the Consolidated Balance Sheet. The Company estimated the fair value of the earnout liability by applying a Monte-Carlo simulation method using the Company’s projection of future operating results for both the online and offline businesses related to the Home Chef merger and the estimated probability of achievement of the earnout target metrics. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of valuation paths in order to develop a reasonable estimate of the fair value of the earnout liability. Changes in the fair value of the earnout liability in future periods will be recorded in the Company’s results in the period of the change.
The merger was accounted for under the purchase method of accounting and was financed through the issuance of commercial paper. In a business combination, the purchase price is allocated to assets acquired and liabilities assumed based on their fair values, with any excess of purchase price over fair value recognized as goodwill. In addition to recognizing assets and liabilities on the acquired company’s balance sheet, the Company reviews supply contracts, leases, financial instruments, employment agreements and other significant agreements to identify potential assets or liabilities that require recognition in connection with the application of acquisition accounting under Accounting Standards Codification (“ASC”) 805. Intangible assets are recognized apart from goodwill when the asset arises from contractual or other legal rights, or are separable from the acquired entity such that they may be sold, transferred, licensed, rented or exchanged either on a standalone basis or in combination with a related contract, asset or liability.
9
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date.
|
|
|
|
|
| June 22, | |
|
| 2018 | |
ASSETS |
|
|
|
Total current assets |
| $ | 36 |
|
|
|
|
Property, plant and equipment |
|
| 6 |
Other assets |
|
| 1 |
Intangibles |
|
| 143 |
|
|
|
|
Total Assets, excluding Goodwill |
|
| 186 |
|
|
|
|
LIABILITIES |
|
|
|
Total current liabilities |
|
| (28) |
|
|
|
|
Other long-term liabilities |
|
| (94) |
|
|
|
|
Total Liabilities |
|
| (122) |
|
|
|
|
Total Identifiable Net Assets |
|
| 64 |
Goodwill |
|
| 163 |
Total Purchase Price |
| $ | 227 |
The preliminary purchase price allocation for the Home Chef acquisition is based upon a preliminary valuation which is subject to change as the Company obtains additional information with respect to income taxes during the measurement period. The allocation will be completed by the second quarter of 2019.
Of the $143 allocated to intangible assets, the Company recorded $99 and $44 related to customer relationships and the trade name, respectively. The Company will amortize the customer relationships, using the cash flow trended method over seven years. The goodwill recorded as part of the merger was attributable to the assembled workforce of Home Chef and operational synergies expected from the merger. The merger was treated as a 30% stock purchase and 70% partnership interest purchase for income tax purposes. The tax basis of the assets acquired and liabilities assumed for the portion of the transaction treated as a partnership interest purchase was stepped up, and the related goodwill is deductible for tax purposes. The assets acquired and liabilities assumed for the portion treated as a stock purchase did not result in a step up of tax basis, and goodwill is not expected to be deductible for tax purposes. The Company determined the Home Chef results of operations are not material. Therefore the pro forma information is not required for fiscal year 2018 and 2017.
Partnership Agreement
On May 17, 2018, the Company entered into a Partnership Framework Agreement with Ocado International Holdings Limited and Ocado Group plc (“Ocado”). Under this agreement, Ocado will partner exclusively with the Company in the U.S., enhancing the Company’s digital and robotics capabilities. As part of the agreement, the Company provided a letter of credit for $180, which supports its commitment to contract with Ocado to build a number of fulfilment centers. The balance of the letter of credit will reduce over time with the construction of each fulfilment center.
10
In addition, on May 17, 2018, the Company entered into a Share Subscription Agreement with Ocado, pursuant to which the Company agreed to purchase 33.1 ordinary shares of Ocado for an aggregate purchase price of $243. The Company completed the purchase of these 33.1 shares on May 29, 2018. This is in addition to 8.1 Ocado shares purchased earlier in the first quarter of 2018, and 6.5 additional shares purchased in the second quarter of 2018. The equity investment in Ocado is measured at fair value through earnings. The fair value of all shares owned, which is measured using level 1 inputs, was $544 at November 10, 2018 and is included in “Other assets” in the Company’s Consolidated Balance Sheets. For the third quarter ended November 10, 2018, the Company recorded an unrealized loss of $100. For the first three quarters ended November 10, 2018, the Company recorded an unrealized gain of $152, none of which was realized during the period as the Company did not sell any Ocado securities.
3.DEBT OBLIGATIONS
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 4, |
| January 28, |
|
| November 10, |
| February 3, |
| ||||
|
| 2017 |
| 2017 |
|
| 2018 |
| 2018 |
| ||||
1.50% to 8.00% Senior Notes due through 2048 |
| $ | 12,198 |
| $ | 11,311 |
|
| $ | 12,011 |
| $ | 12,201 |
|
5.63% to 12.75% Mortgages due in varying amounts through 2027 |
|
| 32 |
|
| 38 |
|
|
| 14 |
|
| 22 |
|
0.91% to 1.36% Commercial paper borrowings due through November 2017 |
|
| 1,380 |
|
| 1,425 |
| |||||||
2.40% Commercial paper borrowings |
|
| 635 |
|
| 2,121 |
| |||||||
3.09% Term Loan due 2019 |
|
| 1,000 |
|
| — |
| |||||||
Other |
|
| 454 |
|
| 541 |
|
|
| 459 |
|
| 443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, excluding capital leases and financing obligations |
|
| 14,064 |
|
| 13,315 |
|
|
| 14,119 |
|
| 14,787 |
|
Less current portion |
|
| (1,677) |
|
| (2,197) |
|
|
| (3,319) |
|
| (3,509) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, excluding capital leases and financing obligations |
| $ | 12,387 |
| $ | 11,118 |
|
| $ | 10,800 |
| $ | 11,278 |
|
In the second quarter of 2017, the Company issued $400 of senior notes due in fiscal year 2022 bearing an interest rate of 2.80%, $600 of senior notes due in fiscal year 2027 bearing an interest rate of 3.70% and $500 of senior notes due in fiscal year 2048 bearing an interest rate of 4.65%. Additionally, in the third quarter of 2017, the Company repaid, upon maturity, $600 of senior notes bearing an interest rate of 6.40%, with proceeds from the second quarter senior notes issuances. In connection with the senior note issuances, the Company also terminated forward-starting interest rate swap agreements with an aggregate notional amount of $600. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the second quarter of 2017. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $20, $12 net of tax, has been deferred in Accumulated Other Comprehensive Loss, the Company will continue to amortize to earnings as the interest payments are made.
In the third quarter of 2017, the Company entered into an amended and restated $2,750 unsecured revolving credit facility (the “Amended and Restated Credit Agreement”), with a termination date of August 29, 2022, unless extended as permitted under the Amended and Restated Credit Agreement. This Amended and Restated Credit Agreement amended the Company’s $2,750 credit facility that would otherwise have terminated on June 30, 2019. The notable changes from the previous agreement include: (1) the Company has the ability to increase the size of the Amended and Restated Credit Agreement by up to an additional $1,000, subject to certain conditions compared to $750 in the prior agreement; (2) the Company’s Public Debt Rating, as opposed to the Company’s Leverage Ratio, is now used as one of the factors in calculating the Company’s Interest Rate, Commitment Fee, and Letter of Credit Fees; (3) reduced annual Commitment and certain Letter of Credit Fees at the Company’s current Public Debt Rating. Public Debt Rating means, as of any date, the rating that has been most recently announced by either S&P or Moody’s, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Company. The financial covenants in the Amended and Restated Credit Agreement did not change compared to the prior credit agreement.
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 November 4, 201710, 2018 and January 28, 2017.February 3, 2018. At November 4, 2017,10, 2018, the fair value of total debt was $14,504$13,890 compared to a carrying value of $14,064.$14,119. At January 28, 2017,February 3, 2018, the fair value of total debt was $13,905$15,167 compared to a carrying value of $13,315.$14,787.
In the first quarter of 2018, the Company obtained a $1,000 term loan with a maturity date of March 16, 2019. The funds were drawn on March 26, 2018 and were used to reduce outstanding commercial paper borrowings. Under the terms of the agreement, interest rates are adjusted monthly based on the Company’s Public Debt Rating and prevailing LIBOR rates. Additionally, in the first quarter of 2018, the Company repaid, upon maturity, $200 of senior notes bearing an interest rate of 7%.
811
3.BENEFIT4.BENEFIT PLANS
The following table provides the components of net periodic benefit cost for the Company-sponsoredcompany-sponsored defined benefit pension plans and other post-retirement benefit plans for the third quarters of 20172018 and 2016.2017.
|
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|
|
| Third Quarter Ended |
|
| Third Quarter Ended |
| ||||||||||||||||||||
|
| Pension Benefits |
| Other Benefits |
|
| Pension Benefits |
| Other Benefits |
| ||||||||||||||||
|
| November 4, |
| November 5, |
| November 4, |
| November 5, |
|
| November 10, |
| November 4, |
| November 10, |
| November 4, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | — |
| $ | 14 |
| $ | 2 |
| $ | 2 |
|
| $ | 8 |
| $ | — |
| $ | 2 |
| $ | 2 |
|
Interest cost |
|
| 42 |
|
| 44 |
|
| 3 |
|
| 2 |
|
|
| 31 |
|
| 42 |
|
| 2 |
|
| 3 |
|
Expected return on plan assets |
|
| (54) |
|
| (55) |
|
| — |
|
| — |
|
|
| (40) |
|
| (54) |
|
| — |
|
| — |
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
| — |
|
| — |
|
| (2) |
|
| (2) |
|
|
| — |
|
| — |
|
| (3) |
|
| (2) |
|
Actuarial loss (gain) |
|
| 19 |
|
| 16 |
|
| (2) |
|
| (2) |
|
|
| 18 |
|
| 19 |
|
| (2) |
|
| (2) |
|
Other |
|
| 1 |
|
| — |
|
| — |
|
| — |
| |||||||||||||
Curtailment |
|
| — |
|
| 1 |
|
| — |
|
| — |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
| $ | 8 |
| $ | 19 |
| $ | 1 |
| $ | — |
|
| $ | 17 |
| $ | 8 |
| $ | (1) |
| $ | 1 |
|
The following table provides the components of net periodic benefit cost for the Company-sponsoredcompany-sponsored defined benefit pension planplans and other post-retirement benefit plans for the first three quarters of 20172018 and 2016.2017.
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
| Three Quarters Ended |
|
| Three Quarters Ended |
| ||||||||||||||||||||
|
| Pension Benefits |
| Other Benefits |
|
| Pension Benefits |
| Other Benefits |
| ||||||||||||||||
|
| November 4, |
| November 5, |
| November 4, |
| November 5, |
|
| November 10, |
| November 4, |
| November 10, |
| November 4, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Components of net periodic benefit cost: |
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|
|
Service cost |
| $ | 42 |
| $ | 50 |
| $ | 7 |
| $ | 7 |
|
| $ | 29 |
| $ | 42 |
| $ | 6 |
| $ | 7 |
|
Interest cost |
|
| 140 |
|
| 145 |
|
| 8 |
|
| 8 |
|
|
| 104 |
|
| 140 |
|
| 6 |
|
| 8 |
|
Expected return on plan assets |
|
| (182) |
|
| (183) |
|
| — |
|
| — |
|
|
| (134) |
|
| (182) |
|
| — |
|
| — |
|
Amortization of: |
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Prior service cost |
|
| — |
|
| — |
|
| (6) |
|
| (6) |
|
|
| — |
|
| — |
|
| (9) |
|
| (6) |
|
Actuarial loss (gain) |
|
| 65 |
|
| 50 |
|
| (7) |
|
| (7) |
|
|
| 59 |
|
| 65 |
|
| (7) |
|
| (7) |
|
Other |
|
| 3 |
|
| — |
|
| — |
|
| — |
| |||||||||||||
Curtailment |
|
| — |
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| 3 |
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| — |
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| — |
| |||||||||||||
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|
Net periodic benefit cost |
| $ | 68 |
| $ | 62 |
| $ | 2 |
| $ | 2 |
|
| $ | 58 |
| $ | 68 |
| $ | (4) |
| $ | 2 |
|
Although, the Company is not required to make any contributions to its Company-sponsoredcompany-sponsored pension plans in 2018, in the third quarter of 2018, the Company contributed $185, $117 net of tax, to the company-sponsored pension plan. This contribution was designated to the 2017 tax year in order to deduct the contributions at the previous year tax rate. In the third quarter of 2017, the Company contributed $1,000 to the Company-sponsoredcompany-sponsored pension plans that will significantly addressplans.
During the underfunded positionfourth quarter of 2018, the Company-sponsoredCompany announced changes to certain non-union company-sponsored pension plans. The $1,000 is deductibleSee Note 12 for tax purposes, resulting in a tax further discussion related to benefit of $375. The Company did not make any contributions to its Company-sponsored pension plans in the first three quarters of 2016. plan changes.
The Company contributed $173$204 and $167$173 to employee 401(k) retirement savings accounts in the first three quarters of 20172018 and 2016,2017, respectively.
The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements, which included an incremental $111, $69 net of tax, contribution to the UFCW Consolidated Pension Plan in the third quarter of 2017.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.
912
During the first quarter of 2017, the Company incurred a charge of $199, $126 net of tax, due to withdrawing from two multi-employer pension plans, which represents the Company’s best estimate of the withdrawal liability, absent demand letters from the multi-employer pension plans. Demand letters from the affected multi-employer pension plans may be received in 2017, or later, and the ultimate withdrawal liability may change from the currently estimated amount. Any future charge will be recorded in the period in which the change is identified. Based on ERISA regulations, the liability will be paid out in installments, which vary by plan, over a period of up to 20 years. The net present value of the liability was determined using a risk free interest rate. The charge was recorded in the ‘Operating, general and administrative’ (“OG&A”) caption in the Consolidated Statements of Operations and the liability was recorded in the ‘Other long-term liabilities’ caption in the Consolidated Balance Sheets.
During the second quarter of 2016, the Company incurred a charge of $111, $71 net of tax, due to commitments arising from the restructuring of certain multi-employer pension plan obligations during the second quarter of 2016.
4.EARNINGS5.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:
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|
| Third Quarter Ended |
| Third Quarter Ended |
|
| Third Quarter Ended |
| Third Quarter Ended |
| ||||||||||||||||||||||||
|
| November 4, 2017 |
| November 5, 2016 |
|
| November 10, 2018 |
| November 4, 2017 |
| ||||||||||||||||||||||||
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| Per |
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| Per |
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| Per |
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| Per |
| ||||
|
| Earnings |
| Shares |
| Share |
| Earnings |
| Shares |
| Share |
|
| Earnings |
| Shares |
| Share |
| Earnings |
| Shares |
| Share |
| ||||||||
|
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
|
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
| ||||||||
Net earnings attributable to The Kroger Co. per basic common share |
| $ | 393 |
| 887 |
| $ | 0.44 |
| $ | 388 |
| 940 |
| $ | 0.41 |
|
| $ | 313 |
| 797 |
| $ | 0.39 |
| $ | 393 |
| 887 |
| $ | 0.44 |
|
Dilutive effect of stock options |
|
|
|
| 6 |
|
|
|
|
|
|
| 13 |
|
|
|
|
|
|
|
| 10 |
|
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|
|
|
|
| 6 |
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|
|
|
|
|
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 393 |
| 893 |
| $ | 0.44 |
| $ | 388 |
| 953 |
| $ | 0.41 |
|
| $ | 313 |
| 807 |
| $ | 0.39 |
| $ | 393 |
| 893 |
| $ | 0.44 |
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|
|
| Three Quarters Ended |
| Three Quarters Ended |
|
| Three Quarters Ended |
| Three Quarters Ended |
| ||||||||||||||||||||||||
|
| November 4, 2017 |
| November 5, 2016 |
|
| November 10, 2018 |
| November 4, 2017 |
| ||||||||||||||||||||||||
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| Per |
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| Per |
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|
|
| Per |
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|
|
|
|
| Per |
| ||||
|
| Earnings |
| Shares |
| Share |
| Earnings |
| Shares |
| Share |
|
| Earnings |
| Shares |
| Share |
| Earnings |
| Shares |
| Share |
| ||||||||
|
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
|
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
| ||||||||
Net earnings attributable to The Kroger Co. per basic common share |
| $ | 1,044 |
| 901 |
| $ | 1.16 |
| $ | 1,458 |
| 946 |
| $ | 1.54 |
|
| $ | 2,820 |
| 814 |
| $ | 3.46 |
| $ | 1,044 |
| 901 |
| $ | 1.16 |
|
Dilutive effect of stock options |
|
|
|
| 9 |
|
|
|
|
|
|
| 16 |
|
|
|
|
|
|
|
| 8 |
|
|
|
|
|
|
| 9 |
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|
|
|
|
|
|
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|
|
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|
|
|
|
|
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 1,044 |
| 910 |
| $ | 1.15 |
| $ | 1,458 |
| 962 |
| $ | 1.52 |
|
| $ | 2,820 |
| 822 |
| $ | 3.43 |
| $ | 1,044 |
| 910 |
| $ | 1.15 |
|
The Company had combined undistributed and distributed earnings to participating securities totaling $4 in each of the third quarterquarters of 20172018 and $3 in the third quarter of 2016.2017. For the first three quarters of 20172018 and 2016,2017, the Company had combined undistributed and distributed earnings to participating securities of $9$31 and $11,$9, respectively.
The Company had options outstanding for approximately 1261 million and 1126 million shares during the third quarter of 2018 and 2017, and 2016, respectively, 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. The Company had options outstanding for approximately 15 million shares in the first three quarters of 2017 and 7 million shares in the first three quarters of 2016 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. The Company had options outstanding for approximately 11 million shares during the first three quarters of 2018 and 15 million shares in the first three quarters of 2017 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.
1013
5.RECENTLY6.RECENTLY ADOPTED ACCOUNTING STANDARDS
In November 2015,On February 4, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”Board's ("FASB") issued Accounting Standards Update (“ASU”("ASU") 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This amendment requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. This amendment became effective for the Company beginning January 29, 2017, and was adopted prospectively in accordance with the standard. The implementation of this amendment resulted in the reclassification of current deferred tax liabilities as non-current and had no effect on the Company’s Consolidated Statements of Operations.
6.RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715),” which requires that the service cost component of pension and postretirement benefit costs be presented in the same line item as other current employee compensation costs and other components of those benefit costs be presented separately from the service cost component and outside a subtotal of income from operations, if presented. The ASU also requires that only the service cost component of pension and postretirement benefit costs is eligible for capitalization. The update is effective for annual periods beginning after December 15, 2017 and interim periods within that annual period. Application is retrospective for the presentation of the components of these benefit costs and prospective for the capitalization of only service costs. The Company does not expect application of this ASU to have a material impact on its Consolidated Financial Statements.
In May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers”, as amended by several subsequent ASUs,Customers (Topic 606)” which provides guidance forsuperseded previous revenue recognition. Therecognition guidance. Topic 606 is a comprehensive new standard’s overarching principle isrevenue recognition model that requires a company to recognize revenue must be recognized when goods and services are transferred to the customer in an amount that is proportionate to what has been delivered at that point and that reflects the consideration to which the company expects to be entitled for those goods or services. Per ASU 2015-14, “DeferralThe Company adopted the standard using a modified retrospective approach with the adoption primarily involving the evaluation of Effective Date,” this guidancewhether the Company acts as principal or agent in certain vendor arrangements where the purchase and sale of inventory are virtually simultaneous. The Company will be effectivecontinue to record revenue and related costs on a gross basis for the Company in the first quarter of its fiscal year ending February 2, 2019.arrangements. The Company formed a project team to assess and document the Company’s accounting policies related to the new revenue guidance. Asadoption of the end of the third quarter of 2017, the Company has nearly completed this assessment and documentation. Based on this project, the Company doesstandard did not expect that the implementation of the new standard will have a material effect on the Company’s Consolidated Statements of Operations, Consolidated Balance Sheets or Consolidated Statements of Cash Flows.
In March 2017, the FASB issued ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07).” ASU 2017-07 requires an employer to report the service cost component of retiree benefits in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. The Company intendsadopted ASU 2017-07 on February 4, 2018 and retrospectively applied it to adoptall periods presented. As a result, retiree benefit plan interest expense, investment returns, settlements and other non-service cost components of retiree benefit expenses are excluded from the new standard on a modified retrospective basis and will be addressing new disclosures regarding revenue recognition policiesCompany’s operating profit subtotal as required byreported in the new standard at adoption. AsCompany’s Consolidated Statements of Operations, but remain included in net earnings before income tax expense. Due to the adoption, the Company completes its assessment, it is also identifyingreclassified $7 million for the third quarter of 2017 and preparing$21 million for the first three quarters of 2017, of non-service company-sponsored pension plan costs from operating profit to implement changesother income (expense) on the Company’s Consolidated Statements of Operations. Information about retiree benefit plans' interest expense, investment returns and other components of retiree benefit expenses can be found in Note 4 to its accounting policies and practices, business processes, systems and controls to support the new revenueCompany’s Consolidated Financial Statements.
In January 2016, the FASB issued “Financial Instruments–Overall (Topic 825),” which updates certain aspects of recognition, measurement, presentation and disclosure requirements.of financial instruments (ASU 2016-01). The Company adopted this ASU on February 4, 2018. As a result of the adoption, the Company recorded a mark to market gain (loss) on Ocado securities, for those securities the Company owned as of the end of the third quarter of 2018, within the Consolidated Statements of Operations as opposed to a component of Other Comprehensive Income on the Company’s Consolidated Statements of Comprehensive Income.
7.RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2016, the FASB issued ASU 2016-02, “Leases,” which provides guidance for the recognition of lease agreements. The standard’s core principle is that a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance will be effective for the Company in the first quarter of the Company’s fiscal year ending February 1, 2020. Early adoption is permitted.The Company plans to apply the transition package of practical expedients permitted within the standard, which allows the Company to carryforward their historical lease classification, and to apply the transition option which does not require application of the guidance to comparative periods in the year of adoption. The adoption of this ASU will result in a significantmaterial increase toon the Company’s Consolidated Balance Sheets for lease liabilities and right-of-use assets, andassets. While the Company is currently evaluatingcontinuing to evaluate all potential impacts of the other effects ofstandard, the Company does not expect adoption of this ASUto have a material impact on its Consolidated Financial Statements. Thisthe Company’s consolidated net earnings or cash flows. The Company’s evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the practical expedientsCompany’s accounting policies and assessing opportunities to make certain changes to the Company’s business processes and lease accounting information technology system in order to determine the best implementation strategy.
1114
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income.” ASU 2018-02 amends ASC 220, “Income Statement - Reporting Comprehensive Income,” to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. In addition, under ASU 2018-02, the Company may be required to provide certain disclosures regarding stranded tax effects. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of this standard on the Company’s Consolidated Financial Statements.
7.COMMITMENTS8.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.
15
8.ACCUMULATED9.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table represents the changes in AOCI by component for the first three quarters of 20162018 and 2017:
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| Pension and |
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| Pension and |
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| ||
|
| Cash Flow |
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| Postretirement |
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| Cash Flow |
|
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| Postretirement |
|
|
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| ||||
|
| Hedging |
| Available for sale |
| Defined Benefit |
|
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|
|
| Hedging |
| Available for sale |
| Defined Benefit |
|
|
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| ||||||
|
| Activities(1) |
| Securities(1) |
| Plans(1) |
| Total(1) |
|
| Activities(1) |
| Securities(1) |
| Plans(1) |
| Total(1) |
| ||||||||
Balance at January 30, 2016 |
| $ | (51) |
| $ | 20 |
| $ | (649) |
| $ | (680) |
| |||||||||||||
OCI before reclassifications(2) |
|
| (52) |
|
| (6) |
|
| — |
|
| (58) |
| |||||||||||||
Amounts reclassified out of AOCI(3) |
|
| 1 |
|
| (14) |
|
| 23 |
|
| 10 |
| |||||||||||||
Net current-period OCI |
|
| (51) |
|
| (20) |
|
| 23 |
|
| (48) |
| |||||||||||||
Balance at November 5, 2016 |
| $ | (102) |
| $ | — |
| $ | (626) |
| $ | (728) |
| |||||||||||||
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|
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| |||||||||||||
Balance at January 28, 2017 |
| $ | (2) |
| $ | — |
| $ | (713) |
| $ | (715) |
|
| $ | (2) |
| $ | — |
| $ | (713) |
| $ | (715) |
|
OCI before reclassifications(2) |
|
| (26) |
|
| — |
|
| — |
|
| (26) |
| |||||||||||||
Amounts reclassified out of AOCI(3) |
|
| 2 |
|
| — |
|
| 33 |
|
| 35 |
| |||||||||||||
OCI before reclassifications(2) |
|
| (26) |
|
| — |
|
| — |
|
| (26) |
| |||||||||||||
Amounts reclassified out of AOCI(3) |
|
| 2 |
|
| — |
|
| 33 |
|
| 35 |
| |||||||||||||
Net current-period OCI |
|
| (24) |
|
| — |
|
| 33 |
|
| 9 |
|
|
| (24) |
|
| — |
|
| 33 |
|
| 9 |
|
Balance at November 4, 2017 |
| $ | (26) |
| $ | — |
| $ | (680) |
| $ | (706) |
|
| $ | (26) |
| $ | — |
| $ | (680) |
| $ | (706) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at February 3, 2018 |
| $ | 24 |
| $ | 4 |
| $ | (499) |
| $ | (471) |
| |||||||||||||
OCI before reclassifications(2) |
|
| 37 |
|
| (4) |
|
| — |
|
| 33 |
| |||||||||||||
Amounts reclassified out of AOCI(3) |
|
| 3 |
|
| — |
|
| 33 |
|
| 36 |
| |||||||||||||
Net current-period OCI |
|
| 40 |
|
| (4) |
|
| 33 |
|
| 69 |
| |||||||||||||
Balance at November 10, 2018 |
| $ | 64 |
| $ | — |
| $ | (466) |
| $ | (402) |
|
(1) | All amounts are net of tax. |
(2) |
|
(3) | Net of tax of |
12
The following table represents the items reclassified out of AOCI and the related tax effects for the third quarter and first three quarters of 20172018 and 2016:2017:
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|
| Third Quarter Ended |
| Three Quarters Ended |
|
| Third Quarter Ended |
| Three Quarters Ended |
| ||||||||||||||||
|
| November 4, |
| November 5, |
| November 4, |
| November 5, |
|
| November 10, |
| November 4, |
| November 10, |
| November 4, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Cash flow hedging activity items |
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|
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Amortization of gains and losses on cash flow hedging activities(1) |
| $ | 2 |
| $ | 1 |
| $ | 4 |
| $ | 2 |
| |||||||||||||
Tax expense |
|
| (1) |
|
| (1) |
|
| (2) |
|
| (1) |
| |||||||||||||
Net of tax |
|
| 1 |
|
| — |
|
| 2 |
|
| 1 |
| |||||||||||||
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| |||||||||||||
Available for sale security items |
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|
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|
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| |||||||||||||
Realized gains on available for sale securities(2) |
|
| — |
|
| — |
|
| — |
|
| (27) |
| |||||||||||||
Amortization of gains and losses on cash flow hedging activities(1) |
| $ | 2 |
| $ | 2 |
| $ | 6 |
| $ | 4 |
| |||||||||||||
Tax expense |
|
| — |
|
| — |
|
| — |
|
| 13 |
|
|
| (1) |
|
| (1) |
|
| (3) |
|
| (2) |
|
Net of tax |
|
| — |
|
| — |
|
| — |
|
| (14) |
|
|
| 1 |
|
| 1 |
|
| 3 |
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement defined benefit plan items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of amounts included in net periodic pension expense(3) |
|
| 15 |
|
| 12 |
|
| 52 |
|
| 37 |
| |||||||||||||
Amortization of amounts included in net periodic pension expense(2) |
|
| 13 |
|
| 15 |
|
| 43 |
|
| 52 |
| |||||||||||||
Tax expense |
|
| (5) |
|
| (4) |
|
| (19) |
|
| (14) |
|
|
| (3) |
|
| (5) |
|
| (10) |
|
| (19) |
|
Net of tax |
|
| 10 |
|
| 8 |
|
| 33 |
|
| 23 |
|
|
| 10 |
|
| 10 |
|
| 33 |
|
| 33 |
|
Total reclassifications, net of tax |
| $ | 11 |
| $ | 8 |
| $ | 35 |
| $ | 10 |
|
| $ | 11 |
| $ | 11 |
| $ | 36 |
| $ | 35 |
|
(1) | Reclassified from AOCI into interest expense. |
(2) | Reclassified from AOCI into |
|
|
16
9.INCOME10.INCOME TAXES
The effective income tax rate was 22.8% in the third quarter of 2018, compared to 35.6% in the third quarter of 2017, compared to 35.0% in the third quarter of 2016. The effective income tax rate was 34.8% for the first three quarters of 2017, compared to 33.3% for the first three quarters of 2016.2017. The effective income tax rate for the third quarter of 20172018 differed from the federal statutory rate primarily due to the effect of state income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Reform rates and an increase in future tax deductions at post-Tax Reform rates, partially offset by the utilization of tax credits and deductions.deductions and favorable provision to return adjustments. The rate for the third quarter of 2018 is lower than the rate for the third quarter of 2017 primarily due to a reduction in the federal statutory rate enacted by the Tax Cuts and Jobs Act.
The effective income tax rate was 22.8% for the first three quarters of 2018, compared to 34.8% for the first three quarters of 2017. The effective income tax rate for the first three quarters of 2017 differed from the federal statutory rate due to the utilization of tax credits and deductions partially offset by the effect of state income taxes. The effective income tax rate for the third quarter of 2016 was equal to the federal statutory rate due to the utilization of tax credits and deductions, offset by the effect of state income taxes. The effective income tax rate for the first three quarters of 20162018 differed from the federal statutory rate primarily due to the recognitioneffect of excess tax benefits related to share-based payments after the adoption of ASU 2016-09, “Compensation-Stock Compensation (Topic 718),” which causedstate income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Reform rates and an increase in incomefuture tax expensedeductions at post-Tax Reform rates, partially offset by the utilization of $42 intax credits and deductions, favorable provision to return adjustments and the benefit from favorable settlements of certain state tax items. The rate for the first three quarters of 2016, and2018 is lower than the benefit from tax credits and deductions, partially offset by the effect of state income taxes.
10.VOLUNTARY RETIREMENT OFFERING
In 2016, the Company announced a Voluntary Retirement Offering (“VRO”)rate for certain non-store associates. Approximately 1,300 associates irrevocably accepted the VRO in the first quarter of 2017. Due to the employee acceptances, the Company recognized a VRO charge of $184, $117 net of tax, in the first quarter of 2017, which was comprised of $165 for severance and other benefits, as well as $19 of other non-cash charges. This charge was recorded in the OG&A caption within the Consolidated Statements of Operations. The Company paid $162 of the severance and other benefits in the first three quarters of 2017 and will fulfill all payment obligationsprimarily due to a reduction in the federal statutory rate enacted by the end of the fourth quarter of 2017.Tax Cuts and Jobs Act.
13
11.HELD FOR SALE AND DISPOSAL OF BUSINESS
During the thirdsecond quarter of 2017,2018, the Company announced that as a result of a review of its assets, the Company has decided to explore strategic alternatives for its Turkey Hill Dairy business, including a potential sale, of its convenience store business. sale.
At November 4, 2017, certain assets and liabilities, primarily thoseThe following table presents information related to the Company’s convenience store business,major classes of assets and liabilities of all businesses, including Turkey Hill Dairy and You Technology, that were classified as held for sale in the Consolidated Balance Sheet. as of November 10, 2018:
|
|
|
|
|
| November 10, | |
(In millions) |
| 2018 | |
Assets held for sale: |
|
|
|
Cash and temporary cash investments |
| $ | 2 |
Receivables |
|
| 71 |
FIFO inventory |
|
| 20 |
LIFO reserve |
|
| (1) |
Prepaid and other current assets |
|
| 5 |
Property, plant and equipment, net |
|
| 74 |
Goodwill |
|
| 1 |
Total assets held for sale |
| $ | 172 |
|
|
|
|
Liabilities held for sale: |
|
|
|
Trade accounts payable |
| $ | 33 |
Accrued salaries and wages |
|
| 8 |
Other current liabilities |
|
| 16 |
Total liabilities held for sale |
| $ | 57 |
The Company expects to complete the salebelieves sales of these disposal groups within the next year.businesses are probable as of November 10, 2018. The businesses classified as held for sale will not be reported as discontinued operations as the dispositions do not represent a strategic shift that will have a major effect on the Company’s operations and financial results.
The following table presents informationCertain assets and liabilities, primarily those related to the major classes of assets and liabilities thatCompany’s convenience store business unit, were classified as assets and liabilities held for sale in the Consolidated Balance Sheet asSheets beginning in the third quarter of November 4, 2017:2017. On April 20, 2018, the Company completed the sale of its convenience store business unit for $2,169. The Company recognized a net gain on this sale for $1,782, $1,360 net of tax, in the first three quarters of 2018.
17
The Company used the proceeds from the sale of the convenience store business unit to pay down outstanding commercial paper borrowings and fund an accelerated stock repurchase (“ASR”) program. The Company entered and funded a $1,200 ASR program on April 20, 2018. The final delivery under the ASR program occurred during the second quarter of 2018, which included the settlement of the remaining 2.3 Kroger common shares. In total, the Company invested $1,200 to repurchase 46.3 Kroger common shares at an average price of $25.91 per share.
|
|
|
|
|
| November 4, | |
(In millions) |
| 2017 | |
Assets held for sale: |
|
|
|
Cash and temporary cash investments |
| $ | 1 |
Store deposits in-transit |
|
| 16 |
Receivables |
|
| 55 |
FIFO inventory |
|
| 96 |
LIFO reserve |
|
| (34) |
Prepaid and other current assets |
|
| 17 |
Property, plant and equipment, net |
|
| 428 |
Intangibles, net |
|
| 9 |
Goodwill |
|
| 14 |
Other assets |
|
| 2 |
Total assets held for sale |
| $ | 604 |
|
|
|
|
Liabilities held for sale: |
|
|
|
Trade accounts payable |
| $ | 130 |
Accrued salaries and wages |
|
| 10 |
Other current liabilities |
|
| 101 |
Other long-term liabilities |
|
| 18 |
Total liabilities held for sale |
| $ | 259 |
12.SUBSEQUENT EVENTEVENTS
During the fourth quarter of 2018, the Company announced changes to certain non-union company-sponsored pension plans. The Company will freeze the compensation and service periods used to calculate pension benefits for active employees who participate in the affected pension plans as of December 31, 2019. Beginning January 1, 2020, the affected active employees will no longer accrue additional benefits for future service and eligible compensation received under these plans. The Company expects the financial effects of these changes will not be material to the financial statements for the year ending February 3, 2019.
On December 5, 2017,18, 2018, the Company settled certain Company-sponsored pension plan obligations using existing assetsannounced that it had entered into a definitive agreement to sell its You Technology business, subject to customary closing conditions and any regulatory reviews. The transaction will result in a material gain and will be included in “Gain on sale of business” in the Consolidated Statements of Operations once it is completed.
In 2016, the Company received a financial instrument as part of the plan.consideration for entering into certain agreements with a third party. In the fourth quarter of 2018, a transaction occurred that resulted in the settlement of the financial instrument. As a result of the settlement the Company received cash proceeds of $235. The Company expects towill recognize a one-time non-cashloss on settlement charge of approximately $400$42 in the fourth quarter of 2017, associated with2018, as the settlement offinancial instrument was valued at $277 prior to the Company’s obligations for the eligible participants’ pension balances that are distributed out of the plan via a transfer to other qualified retirement plan options, a lump sum payout, or the purchase of an annuity contract, based on each participant’s election. This charge will not have a cash tax effect in 2017. The actual amount of the settlement charge could vary based on final valuation of liabilities and assets transferred.settlement.
1418
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 operating net earnings, adjusted operating net earnings per diluted share and Restock Kroger free cash flow because management believes these metrics are useful to investors and analysts.analysts for the reasons explained below. These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings, net earnings per diluted share and net cash provided or used by operating or investing activities 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. Our calculation and reasons these are useful metrics to investors and analysts are explained below.
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 to evaluate merchandising and operational effectiveness. Managementas 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 to evaluate operational effectiveness. Managementas management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness.
We believe theThe adjusted operating net earnings and adjusted operating net earnings per diluted share metric presentsmetrics are important measures used by management to compare the performance of core operating results between periods. We believe adjusted operating net earnings and adjusted operating net earnings per diluted share are useful metrics to investors and analysts because they present more comparableaccurate quarter-over-quarter and 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 three quarters of 20172018 include chargesthe following, which we define as the “2018 Adjusted Items”:
· | A reduction to operating, general and administrative expenses (“OG&A”) of $13 million, $10 million net of tax, for adjustments to obligations related to withdrawing from 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 $152 million, $115 million net of tax, for the mark to market gain on Ocado securities (the “2018 Other Income (Expense) Adjusted Items”). |
Net earnings for the third quarter of 2018 include a loss in other income (expense) of $100 million, $77 million net of tax, for the mark to market loss on Ocado securities (the “2018 Third Quarter Other Income (Expense) Adjusted Item”).
Similarly, net earnings for the first three quarters of 2017 include $199 million, $126 million net of tax, related to the withdrawal liabilityobligations for certain multi-employer pension funds and $184 million, $117 million net of tax, related to the voluntary retirement offering (“VRO”) (collectively,(together, the “2017 Adjusted Items”). There were no adjusted items in the third quarter of 2017. Net earnings for the first three quarters of 2016 include $111 million, $71 million net of tax, of charges to OG&A related to the restructuring of certain pension obligations to help stabilize associates’ future benefits (the “2016 Adjusted Items”). There were no adjusted items in the third quarter of 2016.
19
We calculate
Restock Kroger free cash flow is an adjusted free cash flow measure calculated as net cash provided by operating activities minusminus: payments for property and equipment, excluding lease buyouts; payments for Home Chef, net of cash used by investing activities. Freeacquired and excluding the earnout; and purchases of Ocado securities. We updated our definition of Restock Kroger free cash flow during the second quarter of 2018 to more closely align with the performance metrics under our Restock Kroger plan. Restock Kroger free cash flow is an important measure used by management to evaluate available funding for share repurchases, dividends, debt levels and other strategic investments.investments and managing debt levels. Management believes Restock Kroger free cash flow is a useful metric to investors and analysts because it demonstrates our ability to make share repurchases and other strategic investments, pay dividends and manage debt levels.
15
OVERVIEW
Notable items for the third quarter and the first three quarters of 20172018 are:
· | Net earnings per diluted share of |
· | Adjusted operating net earnings per diluted share of |
· | Identical |
· | Digital revenue |
· |
|
· |
|
|
|
|
|
· | During the first three quarters of |
· |
|
· |
|
|
|
|
|
1620
The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted operating net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted operating net earnings attributable to The Kroger Co. per diluted common share, forexcluding the third quarter2018 and 2017 Adjusted Items.
Net Earnings per Diluted Share excluding the first three quarters of 2017 and 2016 ($Adjusted Items
($ in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
| Three Quarters Ended |
| ||||||||||||
|
| November 4, |
| November 5, |
| Percentage |
| November 4, |
| November 5, |
| Percentage |
| ||||
|
| 2017 |
| 2016 |
| Change |
| 2017 |
| 2016 |
| Change |
| ||||
Net earnings attributable to The Kroger Co. |
| $ | 397 |
| $ | 391 |
| 1.5 | % | $ | 1,053 |
| $ | 1,469 |
| (28.3) | % |
Adjustments for pension plan agreements(1)(2) |
|
| — |
|
| — |
|
|
|
| 126 |
|
| 71 |
|
|
|
Adjustments for VRO(1)(3) |
|
| — |
|
| — |
|
|
|
| 117 |
|
| — |
|
|
|
2017 and 2016 Adjusted Items |
|
| — |
|
| — |
|
|
|
| 243 |
|
| 71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings attributable to The Kroger Co. |
| $ | 397 |
| $ | 391 |
| 1.5 | % | $ | 1,296 |
| $ | 1,540 |
| (15.8) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.44 |
| $ | 0.41 |
| 7.3 | % | $ | 1.15 |
| $ | 1.52 |
| (24.3) | % |
Adjustments for pension plan agreements(4) |
|
| — |
|
| — |
|
|
|
| 0.13 |
|
| 0.07 |
|
|
|
Adjustments for VRO(4) |
|
| — |
|
| — |
|
|
|
| 0.13 |
|
| — |
|
|
|
2017 and 2016 Adjusted Items |
|
| — |
|
| — |
|
|
|
| 0.26 |
|
| 0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.44 |
| $ | 0.41 |
| 7.3 | % | $ | 1.41 |
| $ | 1.59 |
| (11.3) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares used in diluted calculation |
|
| 893 |
|
| 953 |
|
|
|
| 910 |
|
| 962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
| Three Quarters Ended |
| ||||||||||||
|
| November 10, |
| November 4, |
| Percentage |
| November 10, |
| November 4, |
| Percentage |
| ||||
|
| 2018 |
| 2017 |
| Change |
| 2018 |
| 2017 |
| Change |
| ||||
Net earnings attributable to The Kroger Co. |
| $ | 317 |
| $ | 397 |
|
|
| $ | 2,851 |
| $ | 1,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) expense adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for pension plan agreements (1)(2) |
|
| — |
|
| — |
|
|
|
| (10) |
|
| 126 |
|
|
|
Adjustment for VRO (1)(3) |
|
| — |
|
| — |
|
|
|
| — |
|
| 117 |
|
|
|
Adjustment for gain on sale of convenience store business (1)(4) |
|
| — |
|
| — |
|
|
|
| (1,360) |
|
| — |
|
|
|
Adjustment for mark to market (gain) loss on Ocado securities (1)(5) |
|
| 77 |
|
| — |
|
|
|
| (115) |
|
| — |
|
|
|
Adjustment for depreciation related to held for sale assets (1)(6) |
|
| — |
|
| — |
|
|
|
| (11) |
|
| — |
|
|
|
2018 and 2017 Adjusted Items |
|
| 77 |
|
| — |
|
|
|
| (1,496) |
|
| 243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating net earnings attributable to The Kroger Co. excluding the Adjusted Items |
| $ | 394 |
| $ | 397 |
| (0.8) | % | $ | 1,355 |
| $ | 1,296 |
| 4.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.39 |
| $ | 0.44 |
|
|
| $ | 3.43 |
| $ | 1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) expense adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for pension plan agreements (7) |
|
| — |
|
| — |
|
|
|
| (0.01) |
|
| 0.13 |
|
|
|
Adjustment for VRO (7) |
|
| — |
|
| — |
|
|
|
| — |
|
| 0.13 |
|
|
|
Adjustment for gain on sale of convenience store business (7) |
|
| — |
|
| — |
|
|
|
| (1.64) |
|
| — |
|
|
|
Adjustment for mark to market (gain) loss on Ocado securities (7) |
|
| 0.09 |
|
| — |
|
|
|
| (0.14) |
|
| — |
|
|
|
Adjustment for depreciation related to held for sale assets (7) |
|
| — |
|
| — |
|
|
|
| (0.01) |
|
| — |
|
|
|
2018 and 2017 Adjusted Items |
|
| 0.09 |
|
| — |
|
|
|
| (1.80) |
|
| 0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.48 |
| $ | 0.44 |
| 9.1 | % | $ | 1.63 |
| $ | 1.41 |
| 15.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares used in diluted calculation |
|
| 807 |
|
| 893 |
|
|
|
| 822 |
|
| 910 |
|
|
|
(1) | The |
(2) | The pre-tax adjustments for |
(3) | The pre-tax adjustment for |
(4) | The pre-tax adjustment for gain on sale of convenience store business was ($1,782). |
(5) | The pre-tax adjustment for mark to market (gain) loss on Ocado securities was $100 in the third quarter of 2018 and ($152) for 2018. |
(6) | The pre-tax adjustment for depreciation related to held for sale assets was ($14). |
(7) | The amount presented represents the net earnings per diluted common share effect of |
1721
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
| Three Quarters Ended |
| ||||||||||||||||
|
| November 4, |
| Percentage |
| November 5, |
| Percentage |
| November 4, |
| Percentage |
| November 5, |
| Percentage |
| ||||
|
| 2017 |
| Change |
| 2016 |
| Change(2) |
| 2017 |
| Change |
| 2016 |
| Change(3) |
| ||||
Total supermarket sales without fuel |
| $ | 22,597 |
| 2.5 | % | $ | 22,044 |
| 5.9 | % | $ | 75,239 |
| 2.0 | % | $ | 73,732 |
| 7.1 | % |
Fuel sales |
|
| 3,872 |
| 15.2 | % |
| 3,362 |
| (1.4) | % |
| 12,195 |
| 13.6 | % |
| 10,738 |
| (10.5) | % |
Other sales(1) |
|
| 1,280 |
| 11.2 | % |
| 1,151 |
| 35.9 | % |
| 4,197 |
| 28.9 | % |
| 3,256 |
| 14.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
| $ | 27,749 |
| 4.5 | % | $ | 26,557 |
| 5.9 | % | $ | 91,631 |
| 4.5 | % | $ | 87,726 |
| 4.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
| Three Quarters Ended |
| ||||||||||||||||
|
| November 10, |
| Percentage |
| November 4, |
| Percentage |
| November 10, |
| Percentage |
| November 4, |
| Percentage |
| ||||
|
| 2018 |
| Change (2) |
| 2017 |
| Change (3) |
| 2018 |
| Change (4) |
| 2017 |
| Change (5) |
| ||||
Total sales to retail customers without fuel |
| $ | 23,816 |
| 1.9 | % | $ | 23,363 |
| 3.0 | % | $ | 79,483 |
| 2.2 | % | $ | 77,735 |
| 3.2 | % |
Supermarket fuel sales |
|
| 3,656 |
| 16.4 | % |
| 3,141 |
| 15.7 | % |
| 11,997 |
| 21.4 | % |
| 9,885 |
| 14.2 | % |
Convenience stores (6) |
|
| — |
| (100.0) | % |
| 1,067 |
| 8.4 | % |
| 944 |
| (72.4) | % |
| 3,426 |
| 7.6 | % |
Other sales (1) |
|
| 200 |
| 12.4 | % |
| 178 |
| (0.6) | % |
| 647 |
| 10.6 | % |
| 585 |
| 5.8 | % |
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Total sales |
| $ | 27,672 |
| (0.3) | % | $ | 27,749 |
| 4.5 | % | $ | 93,071 |
| 1.6 | % | $ | 91,631 |
| 4.5 | % |
(1) |
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(2) | This column represents the percentage change in the third quarter of |
(3) | This column represents the percentage change in the third quarter of 2017, compared to the third quarter of 2016. |
(4) | This column represents the percentage change in the first three quarters of |
(5) | This column represents the percentage change in the first three quarters of 2017, compared to the first three quarters of 2016. |
(6) | We completed the sale of our convenience store business unit during the first quarter of 2018. |
Total sales increaseddecreased in the third quarter of 2017,2018, compared to the third quarter of 2016,2017, by 4.5%0.3%. This increasedecrease was primarily due to the sale of our convenience store business unit, partially offset by our increases in total supermarket sales to retail customers without fuel and supermarket fuel sales and our merger with Modern HC Holdings, Inc. (“ModernHEALTH”).sales. The increase in total supermarket sales to retail customers without fuel for the third quarter of 2017,2018, compared to the third quarter of 2016,2017, was primarily due an increase in supermarket square footageto our merger with Home Chef and our identical supermarket sales increase, excluding fuel, of 1.1%1.6%. Identical supermarket sales, excluding fuel, for the third quarter of 2017,2018, compared to the third quarter of 2016,2017, increased primarily due to an increase in the number of households shopping with us, changes in product mix and product cost inflation of 0.5%,Kroger Specialty Pharmacy sales growth, partially offset by our continued investments in lower prices for our customers. Excluding mergers, acquisitions and operational closings, totalTotal supermarket square footage at the end of the third quarter of 2017 increased 2.3% over the end of the third quarter of 2016. Total fuel sales increased 15.2%16.4% in the third quarter of 2017,2018, compared to the third quarter of 2016,2017, primarily due to an increase in the average retail fuel price of 13.4%14.9% and an increase in fuel gallons sold of 1.6%1.2%. The increase in the average retail fuel price was caused by an increase in the product cost of fuel.
Total sales increased in the first three quarters of 2017,2018, compared to the first three quarters of 2016,2017, by 4.5%1.6%. This increase was primarily due to our increaseincreases in total supermarket sales to retail customers without fuel and supermarket fuel sales, andpartially offset by a reduction in convenience store sales due to the sale of our merger with ModernHEALTH.convenience store business unit. The increase in total supermarket sales to retail customers without fuel for the first three quarters of 2017,2018, compared to the first three quarters of 2016,2017, was primarily due to our merger with Home Chef and our identical supermarket sales increase, excluding fuel, of 0.4%, and an increase in supermarket square footage.1.7%. Identical supermarket sales, excluding fuel, for the first three quarters of 2017,2018, compared to the first three quarters of 2016,2017, increased primarily due to an increase in the number of households shopping with us, changes in product mix and product cost inflation of 0.2%,Kroger Specialty Pharmacy sales growth, partially offset by our continued investments in lower prices for our customers. Total supermarket fuel sales increased 13.6%21.4% in the first three quarters of 2017,2018, compared to the first three quarters of 2016,2017, primarily due to an increase in the average retail fuel price of 12.0%19.0% and an increase in fuel gallons sold of 1.4%1.9%. The increase in the average retail fuel price was caused by an increase in the product cost of fuel.
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We calculate identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket locations, Kroger Specialty Pharmacy businesses, jewelry and ship-to-home solutions. 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. Although identical supermarket sales is a relatively standard term, numerous methods exist for calculating identical supermarket sales growth. As a result, the method used by our management to calculate identical supermarket sales may differ from methods other companies use to calculate identical supermarket sales. We urge you to understand the methods used by other companies to calculate identical supermarket sales before comparing our identical supermarket sales to those of other such companies. Fuel discounts received at our fuel centers and earned based on in-store purchases are includedCertain pharmacy fees recorded as a reduction of sales have been comparatively reflected in all of the identical supermarket sales results calculations illustrated below and reduce our identical supermarket sales results. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Identical supermarket sales include sales from all departments at identical multi-department stores.calculation. Our identical supermarket sales results are summarized in the following table. We used the identical supermarketsales dollar figures presented below to calculate percentage changes for the third quarter and first three quarters of 2017.2018.
Identical Supermarket Sales
($ in millions)
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| Third Quarter |
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| November 4, |
| Percentage |
| November 5, |
| Percentage |
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| 2017 |
| Change |
| 2016 |
| Change(1) |
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Including fuel centers |
| $ | 24,605 |
| 2.4 | % | $ | 24,026 |
| (0.2) | % |
Excluding fuel centers |
| $ | 21,629 |
| 1.1 | % | $ | 21,398 |
| 0.1 | % |
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| Third Quarter Ended |
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| November 10, |
| Percentage |
| November 4, |
| Percentage |
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| 2018 |
| Change (1) |
| 2017 |
| Change (2) |
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Excluding fuel centers |
| $ | 23,323 |
| 1.6 | % | $ | 22,945 |
| 1.3 | % |
(1) | This column represents the percentage |
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| Three Quarters Ended |
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| Percentage |
| November 5, |
| Percentage |
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| 2017 |
| Change |
| 2016 |
| Change(1) |
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Including fuel centers |
| $ | 81,327 |
| 1.6 | % | $ | 80,045 |
| (0.1) | % |
Excluding fuel centers |
| $ | 71,958 |
| 0.4 | % | $ | 71,636 |
| 1.5 | % |
(2) | This column represents the percentage change in identical sales in the third quarter of 2017, compared to the third quarter of 2016. |
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| Three Quarters Ended |
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| November 10, |
| Percentage |
| November 4, |
| Percentage |
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| 2018 |
| Change (1) |
| 2017 |
| Change (2) |
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Excluding fuel centers |
| $ | 77,374 |
| 1.7 | % | $ | 76,065 |
| 0.6 | % |
(1) | This column represents the percentage |
(2) | This column represents the percentage change in identical sales in the first three quarters of 2017, compared to the first three quarters of 2016. |
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 21.59% for the third quarter of 2018, as compared to 22.41% for the third quarter of 2017, as compared to 22.23% for2017. The decrease in the third quarter of 2016. Improved merchandise costs helped offset2018, compared to the third quarter of 2017, resulted primarily from the timing and size of continued investments in lower prices for our customers. This increase also resulted fromcustomers, increased transportation and advertising costs, as a change in our product sales mix, including higher gross margin perishable departments growing their percentage share of sales, to total sales,growth of the specialty pharmacy business and a higher LIFO charge, partially offset by improved merchandise costs, growth in Our Brands products which have a higher gross margin compared to national brand products, a higher gross margin rate on fuel sales,and decreased shrink, and adverting costs, as a percentage of sales, partially offset by a higher LIFO charge, and our merger with ModernHEALTH due to its lower gross margin rate, as a percentage of sales.
Our gross margin rate, as a percentage of sales, was 21.57% for the first three quarters of 2018, as compared to 22.05% for the first three quarters of 2017, as compared to 22.46% for2017. The decrease in the first three quarters of 2016. This decrease2018, compared to the first three quarters of 2017, resulted primarily from continued investments in lower prices for our customers a higher LIFO charge, our merger with ModernHEALTH due to its lower gross margin rate, and increased warehousing, transportation and shrinkadvertising costs, as a percentage of sales, partially offset by improved merchandise costs, a change in our product sales mix, including higher gross margin perishable departments growing their percentage share of sales to total sales, growth in Our Brands products which have a higher gross margin compared to national brand products, and decreased advertising costs,shrink, as a percentage of sales, and a higher gross margin rate on fuel sales.
Our LIFO charge was $12 million for the third quarter of 2018 compared to $3 million for the third quarter of 2017 compared to a credit of $82017. Our LIFO charge was $38 million for the third quarterfirst three quarters of 2016. Our LIFO charge was2018 compared to $46 million for the first three quarters of 2017 and $19 million2017. Our decreased LIFO charge for the first three quarters of 2016. Our increased LIFO charge2018, compared to the first three quarters of 2017, reflects our lower expected year endannualized product cost inflation for 2017through three quarters of 2018 compared to 2016.2017, primarily related to pharmacy.
1923
Our FIFO gross margin rate, which excludes the third quarter LIFO charge, was 21.63% for the third quarter of 2018, as compared to 22.42% for the third quarter of 2017, as compared to 22.20% for the third quarter of 2016.2017. 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, and ModernHEALTH, our FIFO gross margin rate increased 30decreased 91 basis points in the third quarter of 2017,2018, compared to the third quarter of 2016. Improved merchandise costs helped offset continued investments in2017. This decrease resulted primarily from our lower prices for our customers. This increase also resulted from a change in our product sales mix, including higher gross margin perishable departments growing their percentage sharerate, excluding the effect of sales to total sales, growth in Our Brands productsthe LIFO charge and fuel, which have a higher gross margin compared to national brand products, and decreased shrink and adverting costs, as a percentage of sales.has been described above.
Our FIFO gross margin rate, which excludes the first three quarters LIFO charge, was 21.62% for the first three quarters of 2018, as compared to 22.11% for the first three quarters of 2017,2017. 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 22.49% for the first three quarters of 2016.non-fuel sales. Excluding the effect of fuel, and ModernHEALTH, our FIFO gross margin rate decreased 1843 basis points in the first three quarters of 2017,2018, compared to the first three quarters of 2016.2017. This decrease resulted primarily from continued investments inour lower prices for our customers, increased warehousing, transportation and shrink costs, as a percentage of sales, partially offset by improved merchandise costs, a change in our product sales mix, including higher gross margin perishable departments growing their percentage sharerate, excluding the effect of sales to total sales, growth in Our Brands productsthe LIFO charge and fuel, which have a higher gross margin compared to national brand products and decreased advertising costs, as a percentage of sales.has been described above.
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, increased 24 basis points to 16.97%were 16.47% for the third quarter of 2017 from 16.73%2018, as compared to 16.94% for the third quarter of 2016.2017. This increasedecrease resulted primarily from investingeffective cost controls due to process changes, decreased multi-employer pension plan costs and decreases in incentive plan costs and utilities, partially offset by investments in our digital strategy increases in store wages attributed to investing in incremental labor hours and higher wages to improve retention, employee engagement and customer experience, the 2017 UFCW Contribution, increases in incentive andincreased healthcare costs. Our multi-employer pension plan costs partially offset by savings from the VRO, effective cost controls, higher fuel sales and our merger with ModernHEALTH due to its lower OG&A rate, as a percentage of sales. The VRO, which is includeddecreased in the 2017 Adjusted Items, was completed inthird quarter of 2018, compared to the firstthird quarter of 2017, and is expecteddue to resultour incremental contribution of $111 million, $69 million net of tax, to the UFCW Consolidated Pension Plan in future OG&A savings.the third quarter of 2017 (“2017 UFCW Contribution”). 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 and the 2017 UFCW Contribution, and ModernHEALTH, our OG&A rate increased 18decreased 20 basis points in the third quarter of 2017,2018, compared to the third quarter of 2016.2017. This increasedecrease resulted primarily from investingeffective cost controls due to process changes and decreases in incentive plan costs and utilities, partially offset by investments in our digital strategy increases in store wages attributed to investing in incremental labor hours and higher wages to improve retention, employee engagement and customer experience, and increases in incentive andincreased healthcare costs, partially offset by savings from the VRO and effective cost controls.costs.
OG&A expenses, as a percentage of sales, increased 28 basis points to 17.03%were 16.43% for the first three quarters of 2017 from 16.75%2018, as compared to 17.01% for the first three quarters of 2016. The increase 2017. This decrease resulted primarily from investingeffective cost controls due to process changes, decreased utilities, the 2018 OG&A Adjusted Item, the 2017 Adjusted Items, and the 2017 UFCW Contribution, partially offset by investments in our digital strategy the 2017 Adjusted Items, increases in store wages attributed to investing in incremental labor hours and higher wages to improve retention, employee engagementincreased incentive plan costs and customer experience, the 2017 UFCW Contribution, increases in Company-sponsored pension plan and healthcare costs, partially offset by savings from the VRO, effective cost controls, higher fuel sales, the 2016 Adjusted Items and our merger with ModernHEALTH due to its lower OG&A rate, as a percentage of sales.credit card fees. Excluding the effect of fuel, the 2017 UFCW Contribution,2018 OG&A Adjusted Item, the 2017 and 2016 Adjusted Items, and ModernHEALTH,the 2017 UFCW Contribution, our OG&A rate increased 206 basis points in the first three quarters of 2017,2018, compared to the first three quarters of 2016.2017. This increase resulted primarily from investing in our digital strategy, increases in store wages attributed to investing in incremental labor hoursincreased incentive plan costs and higher wages to improve retention, employee engagement and customer experience, increases in Company-sponsored pension plan and healthcare costs,credit card fees, partially offset by savings from the VRO and effective cost controls. due to process changes.
Rent Expense
Rent expense decreased onincreased, as a total dollars and percentage of sales, basis for the third quarter of 20172018 compared to the third quarter of 2016, due to:2017. This increase resulted primarily from the sale of our convenience store business unit, which had a lower rent expense, as a percentage of sales.
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Rent expense increased on a total dollars basis and decreased, as a percentage of sales, for the first three quarters of 20172018 compared to the first three quarters of 2016, due to:2017. This decrease resulted primarily from decreased closed store liabilities, partially offset by the sale of our convenience store business unit, which had a lower rent expense, as a percentage of sales.
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Depreciation and Amortization Expense
Depreciation and amortization expense increased on a total dollars basis and decreased, as a percentage of sales, forin both the third quarter and first three quarters of 2018, compared to the same periods of 2017, due to higher fuel sales, which decreases our depreciation expense as a percentage of sales, partially offset by additional depreciation on capital investments, excluding mergers and lease buyouts of $3.0 billion, during the rolling four quarter period ending with the third quarter of 2017, compared to the third quarter of 2016, due to:2018.
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Depreciation and amortization expense increased on a total dollars and percentage of sales basis for the first three quarters of 2017, compared to the first three quarters 2016, due to:
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Operating Profit and FIFO Operating Profit
Operating profit was $740$647 million, or 2.67%2.34% of sales, for the third quarter of 2017,2018, compared to $713$747 million, or 2.68%2.69% of sales, for the third quarter of 2016.2017. Operating profit, as a percentage of sales, decreased one35 basis pointpoints in the third quarter of 2017,2018, compared to the third quarter of 2016,2017, due to increased OG&A expenses anda lower gross margin rate, a higher LIFO charge and increased rent expense, as a percentage of sales, partially offset by decreased OG&A and depreciation and amortization expenses, as a higher gross margin, lowerpercentage of sales.
Operating profit was $2.2 billion, or 2.39% of sales, for the first three quarters of 2018, compared to $2.1 billion, or 2.25% of sales, for the first three quarters of 2017. Operating profit, as a percentage of sales, increased 14 basis points in the first three quarters of 2018, compared to the first three quarters of 2017, due to decreased OG&A, rent and depreciation and amortization expenses, as a percentage of sales.sales, and a lower LIFO charge, partially offset by a lower gross margin rate.
OperatingFIFO operating profit was $2.0$659 million, or 2.38% of sales, for the third quarter of 2018, compared to $750 million, or 2.70% of sales, for the third quarter of 2017. FIFO operating profit, as a percentage of sales, excluding fuel decreased 26 basis points in the third quarter of 2018, compared to the third quarter of 2017, due to a lower gross margin rate and increased rent expense, as a percentage of sales, partially offset by decreased OG&A expense, as a percentage of sales.
FIFO operating profit was $2.3 billion, or 2.23%2.43% of sales, for the first three quarters of 2017,2018, compared to $2.6$2.1 billion, or 2.94%2.30% of sales, for the first three quarters of 2016. Operating profit, as a percentage of sales, decreased 71 basis points in the first three quarters of 2017, compared to the first three quarters of 2016, due to a lower gross margin, increased OG&A and depreciation and amortization expenses, and a higher LIFO charge, as a percentage of sales.
FIFO operating profit was $743 million, or 2.68% of sales, for the third quarter of 2017, compared to $705 million, or 2.65% of sales, for the third quarter of 2016. 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.2017. FIFO operating profit, as a percentage of sales, excluding fuel, the 2018 and 2017 UFCW Contribution,Adjusted Items and ModernHEALTH, increased 13 basis points in the third quarter of 2017, compared to the third quarter of 2016 due to increased gross margin and lower rent, partially offset by increasing OG&A and depreciation and amortization expenses.
FIFO operating profit was $2.1 billion, or 2.28% of sales, for the first three quarters of 2017, compared to $2.6 billion, or 2.96% of sales, for the first three quarters of 2016. FIFO operating profit, as a percentage of sales excluding fuel, the 2017 UFCW Contribution, the 2017 and 2016 Adjusted Items and ModernHEALTH, decreased 4648 basis points in the first three quarters of 2017,2018, compared to the first three quarters of 20162017, due to a lower gross margin rate and increased OG&A and depreciation and amortization expenses, as a percentage of sales, partially offset by decreased rent 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.
21
Income Taxes
OurThe effective income tax rate was 22.8% in the third quarter of 2018, compared to 35.6% in the third quarter of 2017, compared to 35.0% for the third quarter of 2016. Our effective income tax rate was 34.8% for the first three quarters of 2017, compared to 33.3% for the first three quarters of 2016. Our2017. The effective income tax rate for the third quarter of 20172018 differed from the federal statutory rate primarily due to the effect of state income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Reform rates and an increase in future tax deductions at post-Tax Reform rates, partially offset by the utilization of tax credits and deductions. Ourdeductions and favorable provision to return adjustments. The rate for the third quarter of 2018 is lower than the rate for the third quarter of 2017 primarily due to a reduction in the federal statutory rate enacted by the Tax Cuts and Jobs Act.
The effective income tax rate was 22.8% for the first three quarters of 2018, compared to 34.8% for the first three quarters of 2017. The effective income tax rate for the first three quarters of 2017 differed from the federal statutory rate due to the utilization of tax credits and deductions partially offset by the effect of state income taxes. Our effective income tax rate for the third quarter of 2016 was equal to the federal statutory rate due to the utilization of tax credits and deductions, offset by the effect of state income taxes. Our effective income tax rate for the first three quarters of 20162018 differed from the federal statutory rate primarily due to the recognitioneffect of excess tax benefits related to share-based payments after the adoption of ASU 2016-09, “Compensation-Stock Compensation (Topic 718),” which causedstate income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Reform rates and an increase in incomefuture tax expensedeductions at post-Tax Reform rates, partially offset by the utilization of $42 intax credits and deductions, favorable provision to return adjustments and the benefit from favorable settlements of certain state tax items. The rate for the first three quarters of 2016, and2018 is lower than the benefit from tax credits and deductions, partially offsetrate for the first three quarters of 2017 primarily due to a reduction in the federal statutory rate enacted by the effect of state income taxes.Tax Cuts and Jobs Act.
25
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 $0.39 per diluted share for the third quarter of 2018 represented a decrease of 11.4% from net earnings of $0.44 per diluted share for the third quarter of 2017 represented an increase of 7.3% from2017. Adjusted operating net earnings of $0.41$0.48 per diluted share for the third quarter of 2016.2018 represented an increase of 9.1% from adjusted operating net earnings of $0.44 per diluted share for the third quarter of 2017. The increase in adjusted operating net earnings per diluted share resulted primarily from higher FIFO operating profitlower income tax expense and lower weighted average common shares outstanding due to common share repurchases, partially offset by lower FIFO operating profit, a higher LIFO charge and increased interest and income tax expenses.expense.
Net earnings of $3.43 per diluted share for the first three quarters of 2018 represented an increase of 198.3% from net earnings of $1.15 per diluted share for the first three quarters of 2017 represented a decrease of 24.3% from2017. Adjusted operating net earnings of $1.52$1.63 per diluted share for the first three quarters of 2016. Excluding the 2017 and 2016 Adjusted Items,2018 represented an increase of 15.6% from adjusted operating net earnings of $1.41 per diluted share for the first three quarters of 2017 represented a 11.3% decrease from2017. The increase in adjusted net earnings of $1.59 per diluted share for the first three quarters of 2016. The 11.3% decrease in adjustedoperating net earnings per diluted share resulted primarily from lower non-fuel FIFO operating profit, a higherlower LIFO charge, and increased interest expense, partially offset by higher fuel earnings, decreasedlower income tax expense and lower weighted average common shares outstanding due to common share repurchases.repurchases, partially offset by lower FIFO operating profit and increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
Net cash provided by operating activities
We generated $3.1$3.7 billion of cash from operating activitiesoperations during the first three quarters of 20172018 compared to $3.5$3.1 billion during the first three quarters of 2016.2017. The increase in net cash provided fromby operating activities decreased in the first three quarters of 2018, compared to the first three quarters of 2017, versus 2016,resulted primarily due to a decreasefrom an increase in net earnings including noncontrolling interests, the $1 billion pension contribution we made in the third quarter of 2017, partially offset by positive changes in working capital. Changescapital and reduced contributions to the company sponsored pension plans, partially offset by non-cash adjustments for the gain on sale of our convenience store business unit and the mark to market gain on Ocado securities.
Cash provided by operating activities for changes in working capital provided cash from operating activitieswas $942 million in the first three quarters of 2018 compared to $526 million in the first three quarters of 2017, compared to a use of2017. The increase in cash of $19 millionprovided by operating activities for changes in working capital in the first three quarters of 2016. This increase2018, compared to 2017, was primarily due to a reductionthe following:
· | A decrease in store deposits in-transit due to decreased sales in the last few days of the third quarter of 2018 compared to the end of the fourth quarter of 2017; |
· | Increases in accrued incentive plan costs and accrued payroll due to the timing of our quarter end date; and |
· | Positive working capital related to income taxes receivable and payable as a result of an overpayment of |
our fourth quarter 2017 estimated taxes and our estimated taxes on the gain on sale of prepaid and other current assets, a lower amount of cash used for inventory, and an increase in trade accounts payable and accrued expenses,our convenience
store business unit; partially offset by lower cash provided by income taxes receivable and payable and an increase in store deposits in transit.
· | Higher third-party payor receivables due to increasing pharmacy sales and the timing of third-party payments; |
· | Increased inventory purchases due to store growth and new distribution centers. |
Cash paid for taxes decreasedincreased in the first three quarters of 2018, compared with the first three quarters of 2017, primarily due to the payment of estimated taxes on the gain on sale of our convenience store business unit and lower estimated tax payments in the first three quarters of 2017 compared with the first three quarters of 2016, primarily due to lower estimatedthe $1 billion, $650 million net of tax, payments as a result of the 2017 UFCW Contribution and the $1.0 billion pension contribution made to the Company-sponsored pension plans in the third quarter of 2017, as the contributions are deductible for tax purposes, resulting in a combined tax benefit of $417 million.
2017.
2226
Net cash used by investing activities
WeInvesting activities used $2.0 billioncash of cash for investing activities during$630 million in the first three quarters of 20172018 compared to $3.3$2.0 billion duringin the first three quarters of 2016.2017. The amount of cash used forby investing activities decreased in the first three quarters of 2017 versus 2016, primarily due2018 compared to decreased cash payments for capital investments.
We define free cash flow as net cash provided by operating activities minus net cash used by investing activities. Free cash flow was $1.0 billion in the first three quarters of 2017, comparedprimarily due to $183 million during the first three quartersnet proceeds from the sale of 2016. This increase in free cash flow increases our flexibility when making decisions regarding share repurchases, dividends, debt levels,convenience store business unit, partially offset by the payment for our merger with Home Chef and other strategic investments.the purchases of Ocado securities.
Net cash used by financing activities
We used $1.0$3.0 billion of cash for financing activities in the first three quarters of 20172018 compared to $86 million$1.0 billion during the first three quarters of 2016.2017. The amount of cash used for financing activities for the first three quarters of 2017,2018, compared to the first three quarters of 2016,2017, increased $903 million$2.0 billion primarily due to decreases in borrowingsincreased payments on commercial paper and share repurchases and a decrease in proceeds from the issuance of long-term debt, partially offset by decreasesa reduction in payments on long-term debt. We used a portion of the proceeds from the sale of our convenience store business unit to pay down outstanding commercial paper borrowings and fund a $1.2 billion ASR program, which was completed in the second quarter of 2018.
Debt Management
As of November 4, 2017,10, 2018, 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 November 4, 2017,10, 2018, we had $1.4 billion$635 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 $6$5 million as of November 4, 2017.10, 2018.
Our bank credit facility and the indentures underlying our publicly issued debt contain various financial covenants. As of November 4, 2017,10, 2018, 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 capital leases and lease-financing obligations, increased $770decreased $571 million as of November 4, 201710, 2018 compared to our fiscal year end 20162017 debt of $14.1$15.6 billion. The increasedecrease in debt is2018, compared to 2017, resulted primarily due to the 2017 UFCW Contributionfrom net payments on commercial paper borrowings of $1.5 billion and the payment of $200 million of senior notes bearing an interest rate of 7.00%, partially offset by the issuance of our $1.0 billion pension contribution madeterm loan that has a variable interest rate. The variable interest rate on the term loan was 3.09% as of November 10, 2018. The sale of our convenience store business unit allowed us to the Company-sponsored pension plans in the third quarter of 2017.pay down debt and fund our ASR program.
Interest Rate Risk Management
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair value hedges) and forward-starting interest rate swaps (cash flow hedges). Our current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, we use the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of the carrying value of our debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.
We review compliance with these guidelines annually with the Financial Policy Committee of the Board of Directors. These guidelines may change as our needs dictate.
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Common Share Repurchase Program
During the third quarter of 2017,2018, we invested $262$17 million to repurchase 12.2582 thousand Kroger common shares at an average price of $30.03 per share. For the first three quarters of 2018, we invested $2.0 billion to repurchase 78.4 million Kroger common shares at an average price of $21.51$25.44 per share. ForThe shares repurchased in the first three quarters of 2017, we invested $1.3 billion to repurchase 47.9 million Kroger common shares at an average price of $26.99 per share. These shares2018 were reacquired under two separate share repurchase programs. The first is a series of Board of Director authorizations:
· | On |
· | On March 15, 2018, our Board of Directors approved a $1.0 billion share repurchase program, to supplement the June 2017 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”). |
· | On |
As of November 10, 2018, there was $546 million remaining under the March 2018 Repurchase Program. |
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The second is 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.
Dividends
23
We paid dividends of $113 million for the third quarter of 2018 and $324 million for the first three quarters of 2018. We paid dividends of $113 million for the third quarter of 2017 and $333 million for the first three quarters of 2017. Dividends declared per common share was $0.140 for the third quarter of 2018, compared to $0.125 for the third quarter of 2017. Dividends declared per common share was $0.405 for the first three quarters of 2018, compared to $0.370 for the first three quarters of 2017. We currently expect to continue to pay comparable cash dividends on a quarterly basis, that will increase over time, depending on our net earnings and other factors, including approval by our Board.
Liquidity Needs
We estimate our liquidity needs over the next twelve-month period to range from $5.0 to $5.3approximate $6.6 billion, which includes anticipated requirements for working capital, capital expenditures,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 third quarter of 2017.2018. 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 $1.4$1.6 billion of senior notes, $635 million of commercial paper and $200 million of senior notesthe $1.0 billion term loan maturing in the next twelve months, which isare included in the $5.0 to $5.3$6.6 billion range of estimated liquidity needs. The commercial paper matures in the fourth quarter of 2017 and the $200 million of senior notes matures in the first quarter of 2018. We expect to refinance this debt bysatisfy these obligations using cash generated from operations or asset sales and through issuing additional senior notes, a term loan or commercial paper on favorable terms based on our past experience. 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 $782 million for the third quarter of 2018, compared to $658 million for the third quarter of 2017, compared to $817 million for the third quarter of 2016.2017. Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $2.3 billion in both the first three quarters of 20172018 and $3.0 billion in the first three quarters of 2016.2017. During the rolling four quarter period ended with the third quarter of 2017,2018, we opened, expanded or relocated 5727 supermarkets and also completed 105165 major within-the-wall remodels. Total supermarket square footage at the end of the third quarter of 20172018 increased 1.2%0.1% from the end of the third quarter of 2016.2017. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the third quarter of 20172018 increased 2.3%0.9% over the end of the third quarter of 2016.2017.
24
RETURN ON INVESTED CAPITAL
We calculate return on invested capital (“ROIC”) by dividing adjusted operating profit for the prior four quarters by the average invested capital. Adjusted operating profit is calculated by excluding certain items included in operating profit, and adding back our LIFO charge, depreciation and amortization and rent to our U.S. GAAP operating profit of the prior four quarters. Average invested capital is calculated as the sum of (i) the average of our total assets, (ii) the average LIFO reserve, (iii) the average accumulated depreciation and amortization and (iv) a rent factor equal to total rent for the last four quarters multiplied by a factor of eight; minus (i) the average taxes receivable, (ii) the average trade accounts payable, (iii) the average accrued salaries and wages, (iv) the average other current liabilities, excluding accrued income taxes and (v) the average liabilities held for sale. Averages are calculated for ROIC by adding the beginning balance of the first quarter and the ending balance of the fourth quarter, of the last four quarters, and dividing by two. We use a factor of eight for our total rent as we believe this is a common factor used by our investors, analysts and rating agencies. ROIC is a non-GAAP financial measure of performance. ROIC should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital. Management believes ROIC is a useful metric to investors and analysts because it measures how effectively we are deploying our assets.
Although ROIC is a relatively standard financial term, numerous methods exist for calculating a company’s ROIC. As a result, the method used by our management to calculate ROIC may differ from methods other companies use to calculate their ROIC. We urge you to understand the methods used by other companies to calculate their ROIC before comparing our ROIC to that of such other companies.
The following table provides a calculation of return on invested capital on a rolling four quarter basis ended November 4, 2017.
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| Rolling Four Quarters Ended | ||
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| ($ in millions) | ||
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| November 4, 2017 |
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Return on Invested Capital |
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Numerator |
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Operating profit |
| $ | 2,899 |
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LIFO charge |
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| 46 |
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Depreciation and amortization |
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| 2,443 |
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Rent |
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| 906 |
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Adjustments for pension plan agreements |
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| 199 |
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Adjustments for voluntary retirement offering |
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| 184 |
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Adjusted operating profit |
| $ | 6,677 |
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Denominator |
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Average total assets |
| $ | 36,768 |
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Average taxes receivable (1) |
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| (81) |
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Average LIFO reserve |
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| 1,298 |
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Average accumulated depreciation and amortization |
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| 20,017 |
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Average trade accounts payable |
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| (6,309) |
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Average accrued salaries and wages |
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| (1,114) |
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Average other current liabilities (2) |
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| (3,448) |
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Average liabilities held for sale |
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| (130) |
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Rent x 8 |
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| 7,248 |
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Average invested capital |
| $ | 54,249 |
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Return on Invested Capital |
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| 12.31 | % |
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2528
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 January 28, 2017.February 3, 2018.
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
In November 2015,On February 4, 2018, we adopted the Financial Accounting Standards Board (“FASB”Board's ("FASB") issued Accounting Standards Update (“ASU”("ASU") 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This amendment requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. This amendment became effective for us beginning January 29, 2017, and was adopted prospectively in accordance with the standard. The implementation of this amendment resulted in the reclassification of current deferred tax liabilities as non-current and had no effect on our Consolidated Statements of Operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715),” which requires that the service cost component of pension and postretirement benefit costs be presented in the same line item as other current employee compensation costs and other components of those benefit costs be presented separately from the service cost component and outside a subtotal of income from operations, if presented. The ASU also requires that only the service cost component of pension and postretirement benefit cost is eligible for capitalization. The update is effective for annual periods beginning after December 15, 2017 and interim periods within that annual period. Application is retrospective for the presentation of the components of these benefit costs and prospective for the capitalization of only service costs. We do not expect application of this ASU to have a material impact on our Consolidated Financial Statements.
In May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers”, as amended by several subsequent ASUs,Customers (Topic 606)” which provides guidance forsuperseded previous revenue recognition. Therecognition guidance. Topic 606 is a comprehensive new standard’s overarching principle isrevenue recognition model that requires a company to recognize revenue must be recognized when goods and services are transferred to the customer in an amount that is proportionate to what has been delivered at that point and that reflects the consideration to which the company expects to be entitled for those goods or services. Per ASU 2015-14, “DeferralWe adopted the standard using a modified retrospective approach with the adoption primarily involving the evaluation of Effective Date,” this guidancewhether we act as principal or agent in certain vendor arrangements where the purchase and sale of inventory are virtually simultaneous. We will be effectivecontinue to record revenue and related costs on a gross basis for us in the first quarter of fiscal year ending February 2, 2019. We formed a project team to assess and document our accounting policies related to the new revenue guidance. Asarrangements. The adoption of the end of the third quarter of 2017, we have nearly completed this assessment and documentation. Based on this project, we dostandard did not expect that the implementation of the new standard will have a material effect on our Consolidated Statements of Operations, Consolidated Balance Sheets or Consolidated Statements of Cash Flows. We intend
In March 2017, the FASB issued ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07).” ASU 2017-07 requires an employer to adoptreport the new standard on a modified retrospective basis and will be addressing new disclosures regarding revenue recognition policiesservice cost component of retiree benefits in the same line item or items as requiredother compensation costs arising from services rendered by the new standard at adoption.pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. We adopted ASU 2017-07 on February 4, 2018 and retrospectively applied it to all periods presented. As a result, retiree benefit plan interest expense, investment returns, settlements and other non-service cost components of retiree benefit expenses are excluded from our operating profit subtotal as reported in our Consolidated Statements of Operations, but remain included in net earnings before income tax expense. Due to the adoption, we completereclassified $7 million for the third quarter of 2017 and $21 million for the first three quarters of 2017, of non-service company-sponsored pension plan costs from operating profit to other income (expense) on our assessment, we are also identifyingConsolidated Statements of Operations. Information about retiree benefit plans' interest expense, investment returns and preparing to implement changesother components of retiree benefit expenses can be found in Note 4 to our accounting policies and practices, business processes, systems and controls to supportConsolidated Financial Statements.
In January 2016, the new revenueFASB issued “Financial Instruments–Overall (Topic 825),” which updates certain aspects of recognition, measurement, presentation and disclosure requirements.of financial instruments (ASU 2016-01). We adopted this ASU on February 4, 2018. As a result of the adoption, we recorded a mark to market gain (loss) on Ocado securities, for those securities we owned as of the end of the third quarter of 2018, within the Consolidated Statements of Operations as opposed to a component of Other Comprehensive Income on our Consolidated Statements of Comprehensive Income.
29
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2016, the FASB issued ASU 2016-02, “Leases,” which provides guidance for the recognition of lease agreements. The standard’s core principle is that a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance will be effective for us in the first quarter of our fiscal year ending February 1, 2020. Early adoption is permitted.We plan to apply the transition package of practical expedients permitted within the standard, which allows us to carryforward our historical lease classification, and to apply the transition option which does not require application of the guidance to comparative periods in the year of adoption. The adoption of this ASU will result in a significantmaterial increase toon our Consolidated Balance Sheets for lease liabilities and right-of-use assets, andassets. While we are currently evaluatingcontinuing to evaluate all potential impacts of the other effects ofstandard, we do not expect adoption of this ASUto have a material impact on our Consolidated Financial Statements. Thisconsolidated net earnings or cash flows. Our evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the practical expedientsour accounting policies and assessing opportunities to make certain changes to our business processes and lease accounting information technology system in order to determine the best implementation strategy. We believe our current off-balance sheet leasing commitments are reflected in our investment grade debt rating.rating.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income.” ASU 2018-02 amends ASC 220, “Income Statement - Reporting Comprehensive Income,” to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. In addition, under ASU 2018-02, we may be required to provide certain disclosures regarding stranded tax effects. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the effect of this standard on our Consolidated Financial Statements.
SUPPLEMENTAL INFORMATION
Disaggregated Revenues
The following table presents sales revenue by type of product for the first, second, third and fourth quarters of 2017 and for the fiscal year ended February 3, 2018. We included this information for comparability purposes to supplement the disaggregated revenue information included in Note 1.
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| Quarters Ended |
| Fiscal Year Ended |
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| May 20, 2017 |
| August 12, 2017 |
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| November 4, 2017 |
| February 3, 2018 |
| February 3, 2018 |
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| % |
| Amount |
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| % |
| Amount |
| % |
| Amount |
| % |
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Non Perishable (1) |
| $ | 17,927 |
| 49.4 | % | $ | 13,536 |
| 49.1 | % |
| $ | 13,698 |
| 49.4 | % | $ | 15,711 |
| 50.6 | % | $ | 60,872 |
| 49.6 | % |
Fresh (2) |
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| 8,775 |
| 24.2 | % |
| 6,745 |
| 24.4 | % |
|
| 6,439 |
| 23.2 | % |
| 7,182 |
| 23.2 | % |
| 29,141 |
| 23.8 | % |
Supermarket Fuel |
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| 3,817 |
| 10.5 | % |
| 2,927 |
| 10.6 | % |
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| 3,141 |
| 11.3 | % |
| 3,292 |
| 10.6 | % |
| 13,177 |
| 10.7 | % |
Pharmacy |
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| 3,198 |
| 8.8 | % |
| 2,393 |
| 8.7 | % |
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| 2,462 |
| 8.9 | % |
| 2,671 |
| 8.6 | % |
| 10,724 |
| 8.7 | % |
Convenience Stores |
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| 1,311 |
| 3.6 | % |
| 1,048 |
| 3.8 | % |
|
| 1,067 |
| 3.8 | % |
| 1,089 |
| 3.5 | % |
| 4,515 |
| 3.7 | % |
Other (3) |
|
| 1,257 |
| 3.5 | % |
| 948 |
| 3.4 | % |
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| 942 |
| 3.4 | % |
| 1,086 |
| 3.5 | % |
| 4,233 |
| 3.5 | % |
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Total Sales and other revenue |
| $ | 36,285 |
| 100 | % | $ | 27,597 |
| 100 | % |
| $ | 27,749 |
| 100 | % | $ | 31,031 |
| 100 | % | $ | 122,662 |
| 100 | % |
(1) | Consists primarily of grocery, general merchandise, health and beauty care and natural foods. |
(2) | Consists primarily of produce, floral, meat, seafood, deli, bakery and fresh prepared. |
(3) | Consists primarily of sales related to jewelry stores, food production plants to outside parties, data analytic services, variable interest entities, specialty pharmacy, in-store health clinics, digital coupon services and other online sales not included in the categories above. |
2630
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 “will,“achieve,” “would,“anticipate,” “believe,” “can,” “commitment,” “continue,” “could,” “possible,“estimate,” “estimate,“expect,” “future,” “goal,” “growing,” “growth,” “guidance,” “intend,” “likely,” “may,” “expect,“plan,” “goal,“potential,” “predict,” “predicted,” “preliminary,” “projection,” “range,” “schedule,” “seek,” “should,” “intend,“strategy,” “believe,“target,” “anticipate,“will,” “plan,“would,” 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.
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· | On an adjusted basis, we maintained our operating net earnings guidance range of $2.00 to $2.15 per diluted share for 2018. |
· | We also reconfirmed our identical sales guidance, excluding fuel, for the remainder of the year. We expect second half results to be similar to first half results. |
· | We continue to expect |
· | We |
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27
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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. |
31
· | Our ability to achieve sales, earnings, incremental FIFO operating profit and Restock Kroger 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 |
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· | 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. |
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We cannot fully foresee the effects of changes in economic conditions on Kroger’s business.
Other factors and assumptions not identified above 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. WeExcept as required by law, we undertake no obligation to update the forward-looking information contained in this filing. Refer to Kroger's reports and filings with the SEC for a further discussion of these risks and uncertainties.
2832
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 January 28, 2017.February 3, 2018.
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 November 4, 2017,10, 2018, 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 connection with the evaluation described above, there was no change in Kroger’s internal control over financial reporting during the quarter ended November 4, 2017,10, 2018, that has materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting.
2933
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.
3034
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
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| Average |
| as Part of Publicly |
| Under the Plans |
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| Average |
| as Part of Publicly |
| Under the Plans |
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| Price Paid Per |
| Announced Plans |
| or Programs(4) |
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| Price Paid Per |
| Announced Plans |
| or Programs(4) |
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Period(1) |
| Purchased(2) |
| Share |
| or Programs(3) |
| (in millions) |
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| Purchased(2) |
| Share |
| or Programs(3) |
| (in millions) |
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First four weeks |
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August 13, 2017 to September 9, 2017 |
| 4,076,026 |
| $ | 22.75 |
| 4,076,026 |
| $ | 759 |
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August 19, 2018 to September 15, 2018 |
| 261,805 |
| $ | 30.89 |
| 225,419 |
| $ | 546 |
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Second four weeks |
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September 10, 2017 to October 7, 2017 |
| 4,108,716 |
| $ | 20.90 |
| 4,059,922 |
| $ | 675 |
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September 16, 2018 to October 13, 2018 |
| 228,312 |
| $ | 28.97 |
| 217,110 |
| $ | 546 |
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October 8, 2017 to November 4, 2017 |
| 4,024,398 |
| $ | 20.89 |
| 4,024,100 |
| $ | 592 |
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October 14, 2018 to November 10, 2018 |
| 139,487 |
| $ | 29.48 |
| 139,487 |
| $ | 546 |
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Total |
| 12,209,140 |
| $ | 21.51 |
| 12,160,048 |
| $ | 592 |
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| 629,604 |
| $ | 29.88 |
| 582,016 |
| $ | 546 |
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(1) | The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The third quarter of |
(2) | Includes (i) |
(3) | Represents shares repurchased under the |
(4) | The amounts shown in this column reflect the amount remaining under the |
3135
Item 6. Exhibits.
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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. |
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EXHIBIT 3.2 | - | The Company’s regulations are hereby incorporated by reference to Exhibit |
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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.
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EXHIBIT 31.1 | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer. |
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EXHIBIT 31.2 | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer. |
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EXHIBIT 32.1 | - | Section 1350 Certifications. |
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EXHIBIT |
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| - | XBRL Instance Document. |
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EXHIBIT 101.SCH | - | XBRL Taxonomy Extension Schema Document. |
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EXHIBIT 101.CAL | - | XBRL Taxonomy Extension Calculation Linkbase Document. |
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EXHIBIT 101.DEF | - | XBRL Taxonomy Extension Definition Linkbase Document. |
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EXHIBIT 101.LAB | - | XBRL Taxonomy Extension Label Linkbase Document. |
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EXHIBIT 101.PRE | - | XBRL Taxonomy Extension Presentation Linkbase Document. |
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3236
Exhibit Index
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EXHIBIT 3.1 | - | |
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EXHIBIT 3.2 | - | |
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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.
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EXHIBIT 31.1 | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer. |
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EXHIBIT 31.2 | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer. |
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EXHIBIT 32.1 | - | |
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EXHIBIT |
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| - | XBRL Instance Document. |
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EXHIBIT 101.SCH | - | XBRL Taxonomy Extension Schema Document. |
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EXHIBIT 101.CAL | - | XBRL Taxonomy Extension Calculation Linkbase Document. |
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EXHIBIT 101.DEF | - | XBRL Taxonomy Extension Definition Linkbase Document. |
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EXHIBIT 101.LAB | - | XBRL Taxonomy Extension Label Linkbase Document. |
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EXHIBIT 101.PRE | - | XBRL Taxonomy Extension Presentation Linkbase Document. |
3337
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.
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| THE KROGER CO. | |
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Dated: December | By: | /s/ W. Rodney McMullen |
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| W. Rodney McMullen |
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| Chairman of the Board and Chief Executive Officer |
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Dated: December | By: | /s/ J. Michael Schlotman |
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| J. Michael Schlotman |
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| Executive Vice President and Chief Financial Officer |
3438