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 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 25, 201923, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐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
|
The Kroger Co.
(Exact name of registrant as specified in its charter)
| | |
Ohio | | 31-0345740 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
1014 Vine Street, Cincinnati, Ohio45202
(Address of principal executive offices)
(Zip Code)
(513) (513) 762-4000
(Registrant’s telephone number, including area code)
Unchanged
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common, $1.00 Par Value | KR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
|
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.☒.
There were 798,798,567777,925,812 shares of Common Stock ($1 par value) outstanding as of June 25, 2019.23, 2020.
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements. |
Item 1.Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
|
|
|
|
|
|
| First Quarter Ended |
| ||||
|
| May 25, |
| May 26, |
| ||
(In millions, except per share amounts) |
| 2019 |
| 2018 |
| ||
Sales |
| $ | 37,251 |
| $ | 37,722 |
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
|
| 28,983 |
|
| 29,419 |
|
Operating, general and administrative |
|
| 6,314 |
|
| 6,257 |
|
Rent |
|
| 274 |
|
| 276 |
|
Depreciation and amortization |
|
| 779 |
|
| 741 |
|
|
|
|
|
|
|
|
|
Operating profit |
|
| 901 |
|
| 1,029 |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
Interest expense |
|
| (197) |
|
| (192) |
|
Non-service component of company-sponsored pension plan costs |
|
| 3 |
|
| (10) |
|
Mark to market gain on Ocado securities |
|
| 106 |
|
| 36 |
|
Gain on sale of businesses |
|
| 176 |
|
| 1,771 |
|
|
|
|
|
|
|
|
|
Net earnings before income tax expense |
|
| 989 |
|
| 2,634 |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| 226 |
|
| 616 |
|
|
|
|
|
|
|
|
|
Net earnings including noncontrolling interests |
|
| 763 |
|
| 2,018 |
|
Net loss attributable to noncontrolling interests |
|
| (9) |
|
| (8) |
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. |
| $ | 772 |
| $ | 2,026 |
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per basic common share |
| $ | 0.96 |
| $ | 2.39 |
|
|
|
|
|
|
|
|
|
Average number of common shares used in basic calculation |
|
| 798 |
|
| 839 |
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.95 |
| $ | 2.37 |
|
|
|
|
|
|
|
|
|
Average number of common shares used in diluted calculation |
|
| 805 |
|
| 846 |
|
| | | | | | | | |
| | First Quarter Ended | | | ||||
| | May 23, | | May 25, | | | ||
(In millions, except per share amounts) |
| 2020 |
| 2019 |
|
| ||
Sales | | $ | 41,549 | | $ | 37,251 | | |
| | | | | | | | |
Operating expenses | | | | | | | | |
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below | |
| 31,454 | |
| 28,983 | | |
Operating, general and administrative | |
| 7,671 | |
| 6,314 | | |
Rent | |
| 273 | |
| 274 | | |
Depreciation and amortization | |
| 825 | |
| 779 | | |
| | | | | | | | |
Operating profit | |
| 1,326 | |
| 901 | | |
| | | | | | | | |
Other income (expense) | | | | | | | | |
Interest expense | | | (174) | | | (197) | | |
Non-service component of company-sponsored pension plan costs | | | 11 | | | 3 | | |
Mark to market gain on Ocado securities | | | 422 | | | 106 | | |
Gain on sale of businesses | |
| — | |
| 176 | | |
| | | | | | | | |
Net earnings before income tax expense | |
| 1,585 | |
| 989 | | |
| | | | | | | | |
Income tax expense | |
| 373 | |
| 226 | | |
| | | | | | | | |
Net earnings including noncontrolling interests | |
| 1,212 | |
| 763 | | |
Net loss attributable to noncontrolling interests | |
| — | |
| (9) | | |
| | | | | | | | |
Net earnings attributable to The Kroger Co. | | $ | 1,212 | | $ | 772 | | |
| | | | | | | | |
Net earnings attributable to The Kroger Co. per basic common share | | $ | 1.53 | | $ | 0.96 | | |
| | | | | | | | |
Average number of common shares used in basic calculation | |
| 780 | |
| 798 | | |
| | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 1.52 | | $ | 0.95 | | |
| | | | | | | | |
Average number of common shares used in diluted calculation | |
| 788 | |
| 805 | | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
| | | | | | | |
| | First Quarter Ended | | ||||
| | May 23, | | May 25, | | ||
(In millions) |
| 2020 |
| 2019 |
| ||
Net earnings including noncontrolling interests | | $ | 1,212 | | $ | 763 | |
| | | | | | | |
Other comprehensive income (loss) | | | | | | | |
Change in pension and other postretirement defined benefit plans, net of income tax(1) | | | 3 | | | 7 | |
Unrealized gains and losses on cash flow hedging activities, net of income tax(2) | |
| (22) | |
| (8) | |
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(3) | | | 1 | | | 1 | |
Cumulative effect of accounting change(4) | | | — | | | (146) | |
| | | | | | | |
Total other comprehensive loss | |
| (18) | | | (146) | |
| | | | | | | |
Comprehensive income | |
| 1,194 | |
| 617 | |
Comprehensive loss attributable to noncontrolling interests | |
| — | |
| (9) | |
Comprehensive income attributable to The Kroger Co. | | $ | 1,194 | | $ | 626 | |
|
|
|
|
|
|
|
|
|
| First Quarter Ended |
| ||||
|
| May 25, |
| May 26, |
| ||
(In millions) |
| 2019 |
| 2018 |
| ||
Net earnings including noncontrolling interests |
| $ | 763 |
| $ | 2,018 |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
Realized gains and losses on available for sale securities, net of income tax (1) |
|
| — |
|
| (4) |
|
Change in pension and other postretirement defined benefit plans, net of income tax(2) |
|
| 7 |
|
| 15 |
|
Unrealized gains and losses on cash flow hedging activities, net of income tax(3) |
|
| (8) |
|
| 4 |
|
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4) |
|
| 1 |
|
| 1 |
|
Cumulative effect of accounting change (5) |
|
| (146) |
|
| — |
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income |
|
| (146) |
|
| 16 |
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
| 617 |
|
| 2,034 |
|
Comprehensive loss attributable to noncontrolling interests |
|
| (9) |
|
| (8) |
|
Comprehensive income attributable to The Kroger Co. |
| $ | 626 |
| $ | 2,042 |
|
(1) |
|
(2) | Amount is net of tax of ($ |
|
|
(3) |
|
|
| Amount is net of tax of $1 for the first quarters of |
(4) |
| Related to the adoption of Accounting Standards Update (“ASU”) 2018-02, |
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
|
|
|
|
|
|
|
| May 25, |
| February 2, |
| ||
(In millions, except par amounts) |
| 2019 |
| 2019 |
| ||
ASSETS |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Cash and temporary cash investments |
| $ | 409 |
| $ | 429 |
|
Store deposits in-transit |
|
| 1,066 |
|
| 1,181 |
|
Receivables |
|
| 1,560 |
|
| 1,589 |
|
FIFO inventory |
|
| 7,998 |
|
| 8,123 |
|
LIFO reserve |
|
| (1,291) |
|
| (1,277) |
|
Assets held for sale |
|
| — |
|
| 166 |
|
Prepaid and other current assets |
|
| 420 |
|
| 592 |
|
Total current assets |
|
| 10,162 |
|
| 10,803 |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 21,661 |
|
| 21,635 |
|
Operating lease assets |
|
| 6,819 |
|
| — |
|
Intangibles, net |
|
| 1,123 |
|
| 1,258 |
|
Goodwill |
|
| 3,087 |
|
| 3,087 |
|
Other assets |
|
| 1,467 |
|
| 1,335 |
|
|
|
|
|
|
|
|
|
Total Assets |
| $ | 44,319 |
| $ | 38,118 |
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Current portion of long-term debt including obligations under finance leases |
| $ | 1,453 |
| $ | 3,157 |
|
Current portion of operating lease liabilities |
|
| 682 |
|
| — |
|
Trade accounts payable |
|
| 6,423 |
|
| 6,059 |
|
Accrued salaries and wages |
|
| 1,078 |
|
| 1,227 |
|
Liabilities held for sale |
|
| — |
|
| 51 |
|
Other current liabilities |
|
| 3,939 |
|
| 3,780 |
|
Total current liabilities |
|
| 13,575 |
|
| 14,274 |
|
|
|
|
|
|
|
|
|
Long-term debt including obligations under finance leases |
|
| 12,016 |
|
| 12,072 |
|
Noncurrent operating lease liabilities |
|
| 6,420 |
|
| — |
|
Deferred income taxes |
|
| 1,484 |
|
| 1,562 |
|
Pension and postretirement benefit obligations |
|
| 485 |
|
| 494 |
|
Other long-term liabilities |
|
| 1,807 |
|
| 1,881 |
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
| 35,787 |
|
| 30,283 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies see Note 7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares, $100 par per share, 5 shares authorized and unissued |
|
| — |
|
| — |
|
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2019 and 2018 |
|
| 1,918 |
|
| 1,918 |
|
Additional paid-in capital |
|
| 3,287 |
|
| 3,245 |
|
Accumulated other comprehensive loss |
|
| (492) |
|
| (346) |
|
Accumulated earnings |
|
| 20,481 |
|
| 19,681 |
|
Common shares in treasury, at cost, 1,119 shares in 2019 and 1,120 shares in 2018 |
|
| (16,613) |
|
| (16,612) |
|
|
|
|
|
|
|
|
|
Total Shareholders’ Equity - The Kroger Co. |
|
| 8,581 |
|
| 7,886 |
|
Noncontrolling interests |
|
| (49) |
|
| (51) |
|
|
|
|
|
|
|
|
|
Total Equity |
|
| 8,532 |
|
| 7,835 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
| $ | 44,319 |
| $ | 38,118 |
|
| | | | | | | |
|
| May 23, |
| February 1, |
| ||
(In millions, except par amounts) | | 2020 | | 2020 |
| ||
ASSETS | | | | | | | |
Current assets | | | | | | | |
Cash and temporary cash investments | | $ | 2,726 | | $ | 399 | |
Store deposits in-transit | |
| 1,142 | |
| 1,179 | |
Receivables | |
| 1,552 | |
| 1,706 | |
FIFO inventory | |
| 7,708 | |
| 8,464 | |
LIFO reserve | |
| (1,411) | |
| (1,380) | |
Prepaid and other current assets | | | 458 | | | 522 | |
Total current assets | |
| 12,175 | |
| 10,890 | |
| | | | | | | |
Property, plant and equipment, net | |
| 21,790 | |
| 21,871 | |
Operating lease assets | | | 6,831 | | | 6,814 | |
Intangibles, net | |
| 1,044 | |
| 1,066 | |
Goodwill | |
| 3,076 | |
| 3,076 | |
Other assets | |
| 2,026 | |
| 1,539 | |
| | | | | | | |
Total Assets | | $ | 46,942 | | $ | 45,256 | |
| | | | | | | |
LIABILITIES | | | | | | | |
Current liabilities | | | | | | | |
Current portion of long-term debt including obligations under finance leases | | $ | 1,095 | | $ | 1,965 | |
Current portion of operating lease liabilities | | | 669 | | | 597 | |
Trade accounts payable | |
| 7,132 | |
| 6,349 | |
Accrued salaries and wages | |
| 1,302 | |
| 1,168 | |
Other current liabilities | |
| 4,473 | |
| 4,164 | |
Total current liabilities | |
| 14,671 | |
| 14,243 | |
| | | | | | | |
Long-term debt including obligations under finance leases | | | 12,376 | | | 12,111 | |
Noncurrent operating lease liabilities | | | 6,503 | | | 6,505 | |
Deferred income taxes | |
| 1,532 | |
| 1,466 | |
Pension and postretirement benefit obligations | |
| 591 | |
| 608 | |
Other long-term liabilities | |
| 1,941 | |
| 1,750 | |
| | | | | | | |
Total Liabilities | |
| 37,614 | |
| 36,683 | |
| | | | | | | |
Commitments and contingencies see Note 6 | | | | | | | |
| | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
Preferred shares, $100 par per share, 5 shares authorized and unissued | | | — | | | — | |
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2020 and 2019 | |
| 1,918 | |
| 1,918 | |
Additional paid-in capital | |
| 3,397 | |
| 3,337 | |
Accumulated other comprehensive loss | |
| (658) | |
| (640) | |
Accumulated earnings | |
| 22,062 | |
| 20,978 | |
Common shares in treasury, at cost, 1,140 shares in 2020 and 1,130 shares in 2019 | |
| (17,363) | |
| (16,991) | |
| | | | | | | |
Total Shareholders’ Equity - The Kroger Co. | |
| 9,356 | |
| 8,602 | |
Noncontrolling interests | |
| (28) | |
| (29) | |
| | | | | | | |
Total Equity | |
| 9,328 | |
| 8,573 | |
| | | | | | | |
Total Liabilities and Equity | | $ | 46,942 | | $ | 45,256 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
| First Quarter Ended |
|
| ||||
|
| May 25, |
| May 26, |
|
| ||
(In millions) |
| 2019 |
| 2018 |
|
| ||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net earnings including noncontrolling interests |
| $ | 763 |
| $ | 2,018 |
|
|
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 779 |
|
| 741 |
|
|
Operating lease asset amortization |
|
| 197 |
|
| — |
|
|
LIFO charge |
|
| 15 |
|
| 15 |
|
|
Stock-based employee compensation |
|
| 48 |
|
| 45 |
|
|
Expense for company-sponsored pension plans |
|
| 11 |
|
| 27 |
|
|
Deferred income taxes |
|
| (73) |
|
| 17 |
|
|
Gain on sale of businesses |
|
| (176) |
|
| (1,771) |
|
|
Gain on sale of assets |
|
| (57) |
|
| — |
|
|
Mark to market gain on Ocado securities |
|
| (106) |
|
| (36) |
|
|
Other |
|
| (29) |
|
| — |
|
|
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses: |
|
|
|
|
|
|
|
|
Store deposits in-transit |
|
| 115 |
|
| 108 |
|
|
Receivables |
|
| 33 |
|
| (123) |
|
|
Inventories |
|
| 124 |
|
| 134 |
|
|
Prepaid and other current assets |
|
| 86 |
|
| 307 |
|
|
Trade accounts payable |
|
| 364 |
|
| 345 |
|
|
Accrued expenses |
|
| (18) |
|
| 43 |
|
|
Income taxes receivable and payable |
|
| 63 |
|
| 558 |
|
|
Operating lease liabilities |
|
| (146) |
|
| — |
|
|
Proceeds from contract associated with sale of business |
|
| 295 |
|
| — |
|
|
Other |
|
| (20) |
|
| (60) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
| 2,268 |
|
| 2,368 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Payments for property and equipment |
|
| (901) |
|
| (758) |
|
|
Proceeds from sale of assets |
|
| 117 |
|
| 47 |
|
|
Purchases of stores |
|
| — |
|
| (44) |
|
|
Net proceeds from sale of businesses |
|
| 326 |
|
| 2,142 |
|
|
Other |
|
| (6) |
|
| (38) |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by investing activities |
|
| (464) |
|
| 1,349 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
| 9 |
|
| 1,010 |
|
|
Payments on long-term debt including obligations under finance leases |
|
| (1,013) |
|
| (214) |
|
|
Net payments on commercial paper |
|
| (700) |
|
| (2,120) |
|
|
Dividends paid |
|
| (113) |
|
| (110) |
|
|
Proceeds from issuance of capital stock |
|
| 12 |
|
| 10 |
|
|
Treasury stock purchases |
|
| (15) |
|
| (1,809) |
|
|
Other |
|
| (4) |
|
| (140) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
| (1,824) |
|
| (3,373) |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and temporary cash investments |
|
| (20) |
|
| 344 |
|
|
|
|
|
|
|
|
|
|
|
Cash and temporary cash investments: |
|
|
|
|
|
|
|
|
Beginning of year |
|
| 429 |
|
| 347 |
|
|
End of period |
| $ | 409 |
| $ | 691 |
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of capital investments: |
|
|
|
|
|
|
|
|
Payments for property and equipment |
| $ | (901) |
| $ | (758) |
|
|
Changes in construction-in-progress payables |
|
| 25 |
|
| (91) |
|
|
Total capital investments |
| $ | (876) |
| $ | (849) |
|
|
|
|
|
|
|
|
|
|
|
Disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
| $ | 115 |
| $ | 124 |
|
|
Cash paid during the year for income taxes |
| $ | 231 |
| $ | 36 |
|
|
| | | | | | | |
| | May 23, | | May 25, | | ||
(In millions) |
| 2020 |
| 2019 |
| ||
Cash Flows from Operating Activities: | | | | | | | |
Net earnings including noncontrolling interests | | $ | 1,212 | | $ | 763 | |
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | |
| 825 | |
| 779 | |
Operating lease asset amortization | | | 193 | | | 197 | |
LIFO charge | |
| 31 | |
| 15 | |
Stock-based employee compensation | |
| 63 | |
| 48 | |
Company-sponsored pension plan costs | |
| (5) | |
| 11 | |
Deferred income taxes | |
| 76 | |
| (73) | |
Gain on sale of businesses | | | — | | | (176) | |
Gain on the sale of assets | | | (12) | | | (57) | |
Mark to market gain on Ocado securities | | | (422) | | | (106) | |
Other | |
| 108 | |
| (29) | |
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses: | | | | | | | |
Store deposits in-transit | |
| 37 | |
| 115 | |
Receivables | |
| 90 | |
| 33 | |
Inventories | |
| 756 | |
| 124 | |
Prepaid and other current assets | |
| 63 | |
| 86 | |
Trade accounts payable | |
| 783 | |
| 364 | |
Accrued expenses | |
| 167 | |
| (18) | |
Income taxes receivable and payable | |
| 276 | | | 63 | |
Operating lease liabilities | | | (141) | | | (146) | |
Proceeds from contract associated with sale of business | | | — | |
| 295 | |
Other | |
| 145 | |
| (20) | |
| | | | | | | |
Net cash provided by operating activities | |
| 4,245 | |
| 2,268 | |
| | | | | | | |
Cash Flows from Investing Activities: | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | |
| (698) | |
| (901) | |
Proceeds from sale of assets | |
| 35 | | | 117 | |
Net proceeds from sale of businesses | | | — | | | 326 | |
Other | |
| (26) | |
| (6) | |
| | | | | | | |
Net cash used by investing activities | |
| (689) | |
| (464) | |
| | | | | | | |
Cash Flows from Financing Activities: | | | | | | | |
Proceeds from issuance of long-term debt | |
| 504 | |
| 9 | |
Payments on long-term debt including obligations under finance leases | |
| (14) | | | (1,013) | |
Net payments on commercial paper | |
| (1,150) | | | (700) | |
Dividends paid | | | (128) | | | (113) | |
Proceeds from issuance of capital stock | | | 57 | |
| 12 | |
Treasury stock purchases | |
| (422) | |
| (15) | |
Other | | | (76) | |
| (4) | |
| | | | | | | |
Net cash used by financing activities | |
| (1,229) | |
| (1,824) | |
| | | | | | | |
Net increase (decrease) in cash and temporary cash investments | |
| 2,327 | |
| (20) | |
| | | | | | | |
Cash and temporary cash investments: | | | | | | | |
Beginning of year | |
| 399 | |
| 429 | |
End of period | | $ | 2,726 | | $ | 409 | |
| | | | | | | |
Reconciliation of capital investments: | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | | $ | (698) | | $ | (901) | |
Payments for lease buyouts | | | 5 | |
| — | |
Changes in construction-in-progress payables | |
| (62) | |
| 25 | |
Total capital investments, excluding lease buyouts | | $ | (755) | | $ | (876) | |
| | | | | | | |
Disclosure of cash flow information: | | | | | | | |
Cash paid during the year for interest | | $ | 188 | | $ | 115 | |
Cash paid during the year for income taxes | | $ | 18 | | $ | 231 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
5
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | | Additional | | | | | | | Other | | | | | | | | | | ||
| | Common Stock | | Paid-In | | Treasury Stock | | Comprehensive | | Accumulated | | Noncontrolling | | | | ||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total | |||||||
Balances at February 2, 2019 | | 1,918 |
| $ | 1,918 |
| $ | 3,245 |
| 1,120 |
| $ | (16,612) |
| $ | (346) |
| $ | 19,681 |
| $ | (51) |
| $ | 7,835 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (1) | |
| 12 | |
| — | |
| — | |
| — | |
| 12 |
Restricted stock issued |
| — | |
| — | |
| (14) |
| — | |
| 10 | |
| — | |
| — | |
| — | |
| (4) |
Treasury stock activity: | | | | | | | | | | | | | | ��� | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (15) | |
| — | |
| — | |
| — | |
| (15) |
Share-based employee compensation |
| — | |
| — | |
| 48 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 48 |
Other comprehensive loss net of income tax of ($5) |
| — | |
| — | |
| — |
| — | |
| — | |
| (146) | |
| — | |
| — | |
| (146) |
Cumulative effect of accounting change | | — | | | — | | | — | | — | | | — | | | — | | | 146 | | | — | | | 146 |
Other |
| — | |
| — | |
| 8 |
| — | |
| (8) | |
| — | |
| (5) | |
| 11 | |
| 6 |
Cash dividends declared ($0.14 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (113) | |
| — | |
| (113) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 772 | |
| (9) | |
| 763 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at May 25, 2019 |
| 1,918 |
| $ | 1,918 |
| $ | 3,287 |
| 1,119 |
| $ | (16,613) |
| $ | (492) |
| $ | 20,481 |
| $ | (49) |
| $ | 8,532 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (1) | |
| 6 | |
| — | |
| — | |
| — | |
| 6 |
Restricted stock issued |
| — | |
| — | |
| (109) |
| (2) | |
| 79 | |
| — | |
| — | |
| — | |
| (30) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (8) | |
| — | |
| — | |
| — | |
| (8) |
Share-based employee compensation |
| — | |
| — | |
| 41 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 41 |
Other comprehensive loss net of income tax of ($14) |
| — | |
| — | |
| — |
| — | |
| — | |
| (45) | |
| — | |
| — | |
| (45) |
Other |
| — | |
| — | |
| 51 |
| — | |
| (51) | |
| — | |
| — | |
| 1 | |
| 1 |
Cash dividends declared ($0.16 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (131) | |
| — | |
| (131) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 297 | |
| (10) | |
| 287 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at August 17, 2019 |
| 1,918 |
| $ | 1,918 |
| $ | 3,270 |
| 1,116 |
| $ | (16,587) |
| $ | (537) |
| $ | 20,647 |
| $ | (58) |
| $ | 8,653 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| — | |
| 14 | |
| — | |
| — | |
| — | |
| 14 |
Restricted stock issued |
| — | |
| — | |
| (3) |
| (1) | |
| 1 | |
| — | |
| — | |
| — | |
| (2) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| 1 | |
| (11) | |
| — | |
| — | |
| — | |
| (11) |
Share-based employee compensation |
| — | |
| — | |
| 28 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 28 |
Other comprehensive income net of income tax of $14 |
| — | |
| — | |
| — |
| — | |
| — | |
| 42 | |
| — | |
| — | |
| 42 |
Other |
| — | |
| — | |
| 1 |
| — | |
| (2) | |
| — | |
| — | |
| (9) | |
| (10) |
Cash dividends declared ($0.16 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (129) | |
| — | |
| (129) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 263 | |
| (120) | |
| 143 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at November 9, 2019 |
| 1,918 |
| $ | 1,918 |
| $ | 3,296 |
| 1,116 |
| $ | (16,585) |
| $ | (495) |
| $ | 20,781 |
| $ | (187) |
| $ | 8,728 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (1) | |
| 23 | |
| — | |
| — | |
| — | |
| 23 |
Restricted stock issued |
| — | |
| — | |
| (2) |
| — | |
| 2 | |
| — | |
| — | |
| — | |
| — |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 14 | |
| (400) | |
| — | |
| — | |
| — | |
| (400) |
Stock options exchanged |
| — | |
| — | |
| — |
| 1 | |
| (31) | |
| — | |
| — | |
| — | |
| (31) |
Share-based employee compensation |
| — | |
| — | |
| 38 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 38 |
Other comprehensive income net of income tax of ($42) |
| — | |
| — | |
| — |
| — | |
| — | |
| (145) | |
| — | |
| — | |
| (145) |
Other |
| — | |
| — | |
| 5 |
| — | |
| — | |
| — | |
| — | |
| (2) | |
| 3 |
Deconsolidation of Lucky's Market | | — | |
| — | | | — | | — | |
| — | |
| — | |
| — | | | 168 | | | 168 |
Cash dividends declared ($0.16 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (130) | |
| — | |
| (130) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 327 | |
| (8) | |
| 319 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at February 1, 2020 |
| 1,918 |
| $ | 1,918 |
| $ | 3,337 |
| 1,130 |
| $ | (16,991) |
| $ | (640) |
| $ | 20,978 |
| $ | (29) |
| $ | 8,573 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
| ||
|
| Common Stock |
| Paid-In |
| Treasury Stock |
| Comprehensive |
| Accumulated |
| Noncontrolling |
|
|
|
| ||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total |
| |||||||
Balances at February 3, 2018 |
| 1,918 |
| $ | 1,918 |
| $ | 3,161 |
| 1,048 |
| $ | (14,684) |
| $ | (471) |
| $ | 17,007 |
| $ | (26) |
| $ | 6,905 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
| — |
|
| — |
|
| — |
| (1) |
|
| 10 |
|
| — |
|
| — |
|
| — |
|
| 10 |
|
Restricted stock issued |
| — |
|
| — |
|
| (6) |
| — |
|
| 5 |
|
| — |
|
| — |
|
| — |
|
| (1) |
|
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at cost |
| — |
|
| — |
|
| (134) |
| 74 |
|
| (1,792) |
|
| — |
|
| — |
|
| — |
|
| (1,926) |
|
Stock options exchanged |
| — |
|
| — |
|
| — |
| 1 |
|
| (17) |
|
| — |
|
| — |
|
| — |
|
| (17) |
|
Share-based employee compensation |
| — |
|
| — |
|
| 45 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 45 |
|
Other comprehensive income net of income tax of $5 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 16 |
|
| — |
|
| — |
|
| 16 |
|
Other |
| — |
|
| — |
|
| (7) |
| — |
|
| 2 |
|
| — |
|
| — |
|
| 5 |
|
| — |
|
Cash dividends declared ($0.125 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (109) |
|
| — |
|
| (109) |
|
Net earnings including noncontrolling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 2,026 |
|
| (8) |
|
| 2,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at May 26, 2018 |
| 1,918 |
| $ | 1,918 |
| $ | 3,059 |
| 1,122 |
| $ | (16,476) |
| $ | (455) |
| $ | 18,924 |
| $ | (29) |
| $ | 6,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 2, 2019 |
| 1,918 |
| $ | 1,918 |
| $ | 3,245 |
| 1,120 |
| $ | (16,612) |
| $ | (346) |
| $ | 19,681 |
| $ | (51) |
| $ | 7,835 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
| — |
|
| — |
|
| — |
| (1) |
|
| 12 |
|
| — |
|
| — |
|
| — |
|
| 12 |
|
Restricted stock issued |
| — |
|
| — |
|
| (14) |
| — |
|
| 10 |
|
| — |
|
| — |
|
| — |
|
| (4) |
|
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exchanged |
| — |
|
| — |
|
| — |
| — |
|
| (15) |
|
| — |
|
| — |
|
| — |
|
| (15) |
|
Share-based employee compensation |
| — |
|
| — |
|
| 48 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 48 |
|
Other comprehensive income net of income tax of ($5) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (146) |
|
| — |
|
| — |
|
| (146) |
|
Cumulative effect of accounting change |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 146 |
|
| — |
|
| 146 |
|
Other |
| — |
|
| — |
|
| 8 |
| — |
|
| (8) |
|
| — |
|
| (5) |
|
| 11 |
|
| 6 |
|
Cash dividends declared ($0.14 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (113) |
|
| — |
|
| (113) |
|
Net earnings including noncontrolling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 772 |
|
| (9) |
|
| 763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at May 25, 2019 |
| 1,918 |
| $ | 1,918 |
| $ | 3,287 |
| 1,119 |
| $ | (16,613) |
| $ | (492) |
| $ | 20,481 |
| $ | (49) |
| $ | 8,532 |
|
6
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | | Additional | | | | | | | Other | | | | | | | | | | ||
| | Common Stock | | Paid-In | | Treasury Stock | | Comprehensive | | Accumulated | | Noncontrolling | | | | ||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total | |||||||
Balances at February 1, 2020 | | 1,918 | |
| 1,918 | |
| 3,337 |
| 1,130 | | | (16,991) | |
| (640) | |
| 20,978 | |
| (29) | |
| 8,573 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (4) | |
| 57 | |
| — | |
| — | |
| — | |
| 57 |
Restricted stock issued |
| — | |
| — | |
| (20) |
| — | |
| 10 | |
| — | |
| — | |
| — | |
| (10) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 12 | |
| (355) | |
| — | |
| — | |
| — | |
| (355) |
Stock options exchanged |
| — | |
| — | |
| — |
| 2 | |
| (67) | |
| — | |
| — | |
| — | |
| (67) |
Share-based employee compensation |
| — | |
| — | |
| 63 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 63 |
Other comprehensive loss net of income tax of ($8) |
| — | |
| — | |
| — |
| — | |
| — | |
| (18) | |
| — | |
| — | |
| (18) |
Other |
| — | |
| — | |
| 17 |
| — | |
| (17) | |
| — | |
| — | |
| 1 | |
| 1 |
Cash dividends declared ($0.16 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (128) | |
| — | |
| (128) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 1,212 | |
| — | |
| 1,212 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at May 23, 2020 |
| 1,918 |
| $ | 1,918 |
| $ | 3,397 |
| 1,140 |
| $ | (17,363) |
| $ | (658) |
| $ | 22,062 |
| $ | (28) |
| $ | 9,328 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
7
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 |
1.ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries and other consolidated entities. The February 2, 20191, 2020 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.
In the opinion of management, the accompanying unaudited Consolidated Financial Statements include adjustments, all of which are of a normal, recurring nature that are necessary for a fair statement of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019.1, 2020.
The unaudited information in the Consolidated Financial Statements for the first quarters endedquarter May 23, 2020 and May 25, 2019, and May 26, 2018, includes the results of operations of the Company for the 16-week periods then ended.
Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to operating, general and administrative expenses (“OG&A”), are now classified as a component of sales, except for certain amounts in Media, which are netted against merchandise costs. These prior-year amounts have been reclassified to conform to current-year presentation.
Refer to Note 5 for a description of changes to the Consolidated Balance Sheet for recently adopted accounting standards regarding the recognition of lease agreements and reclassification of stranded tax effects.
Fair Value Measurements
Fair value measurements are classified and disclosed in one of the following three categories:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities;
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;
Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company records cash and temporary cash investments, store deposits in-transit, receivables, prepaid and other current assets, trade accounts payable, accrued salaries and wages and other current liabilities at approximated fair value. Certain other investments and derivatives are recorded as Level 1, 2 or 3 instruments. Refer to Note 2 for the disclosure of debt instrument fair values.
7
8
2. | DEBT OBLIGATIONS |
2.DEBT OBLIGATIONS
Long-term debt consists of:
|
|
|
|
|
|
| ||||||
|
| May 25, |
| February 2, | ||||||||
|
| 2019 |
| 2019 | ||||||||
1.50% to 8.00% Senior Notes due through 2048 |
| $ | 12,101 |
| $ | 12,097 | ||||||
5.63% to 12.75% Mortgages due in varying amounts through 2027 |
|
| 14 |
|
| 14 | ||||||
2.60% to 2.63% Commercial paper borrowings due through May 2019 |
|
| 100 |
|
| 800 | ||||||
3.37% Term Loan due 2019 |
|
| — |
|
| 1,000 | ||||||
| | | | | | | ||||||
| | May 23, | | February 1, | ||||||||
|
| 2020 |
| 2020 | ||||||||
2.20% to 8.00% Senior Notes due through 2049 | | $ | 12,097 | | $ | 11,598 | ||||||
5.63% to 12.75% Mortgages due through 2027 | |
| 7 | |
| 12 | ||||||
1.77% Commercial paper borrowings | |
| — | |
| 1,150 | ||||||
Other |
|
| 446 |
|
| 440 | |
| 499 | |
| 496 |
|
|
|
|
|
|
| ||||||
| | | | | | | ||||||
Total debt, excluding obligations under finance leases |
|
| 12,661 |
|
| 14,351 | |
| 12,603 | |
| 13,256 |
Less current portion |
|
| (1,405) |
|
| (3,103) | |
| (1,047) | |
| (1,926) |
|
|
|
|
|
|
| ||||||
| | | | | | | ||||||
Total long-term debt, excluding obligations under finance leases |
| $ | 11,256 |
| $ | 11,248 | | $ | 11,556 | | $ | 11,330 |
The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at May 25, 201923, 2020 and February 2, 2019.1, 2020. At May 25, 2019,23, 2020, the fair value of total debt was $12,856$14,025 compared to a carrying value of $12,661.$12,603. At February 2, 2019,1, 2020, the fair value of total debt was $14,190$14,649 compared to a carrying value of $14,351.$13,256.
3.BENEFIT PLANSOn March 18, 2020, the Company proactively borrowed $1,000 under the revolving credit facility. This was a precautionary measure in order to preserve financial flexibility, reduce reliance on the commercial paper market and maintain liquidity in response to the COVID-19 pandemic. During the first quarter of 2020, the Company fully repaid the $1,000 borrowed under the revolving credit facility and the entire $1,150 in outstanding commercial paper obligations, using cash generated by operations.
In anticipation of future debt refinancing, the Company, in the first quarter of 2020, entered into 3 forward-starting interest rate swap agreements with a maturity date of January 2021 with an aggregate notional amount totaling $150. As of the end of the first quarter of 2020, the Company had a total of $500 notional amount of forward-starting interest rate swaps outstanding. The forward-starting interest rate swaps entered into in the first quarter of 2020 were designated as cash-flow hedges.
Additionally, in the first quarter of 2020, the Company issued $500 of senior notes due in fiscal year 2030 bearing an interest rate of 2.20%. The net proceeds of the issuance will be used for general corporate purposes and reduce reliance on the commercial paper market. As the net proceeds were not immediately needed for these purposes, the net proceeds were held in cash and temporary cash investments as of the end of the first quarter of 2020.
3. | BENEFIT PLANS |
The following table provides the components of net periodic benefit cost for the company-sponsored defined benefit pension plans and other post-retirement benefit plans for the first quarters of 20192020 and 2018.2019.
| | | | | | | | | | | | |
| | First Quarter Ended | ||||||||||
| | Pension Benefits | | Other Benefits | ||||||||
| | May 23, | | May 25, | | May 23, | | May 25, | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Components of net periodic benefit cost: | | | | | | | | | | | | |
Service cost |
| $ | 4 |
| $ | 12 |
| $ | 2 |
| $ | 2 |
Interest cost | |
| 34 | |
| 41 | |
| 2 | |
| 2 |
Expected return on plan assets | |
| (52) | |
| (56) | |
| — | |
| — |
Amortization of: | | | | | | | | | | | | |
Prior service cost | |
| — | |
| — | |
| (4) | |
| (3) |
Actuarial loss (gain) | |
| 11 | |
| 16 | |
| (2) | |
| (3) |
| | | | | | | | | | | | |
Net periodic benefit cost |
| $ | (3) |
| $ | 13 |
| $ | (2) |
| $ | (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| First Quarter Ended | ||||||||||
|
| Pension Benefits |
| Other Benefits | ||||||||
|
| May 25, |
| May 26, |
| May 25, |
| May 26, | ||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | 11 |
| $ | 15 |
| $ | 2 |
| $ | 2 |
Interest cost |
|
| 41 |
|
| 43 |
|
| 2 |
|
| 2 |
Expected return on plan assets |
|
| (56) |
|
| (54) |
|
| — |
|
| — |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
| — |
|
| — |
|
| (3) |
|
| (3) |
Actuarial loss (gain) |
|
| 16 |
|
| 25 |
|
| (3) |
|
| (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
| $ | 12 |
| $ | 29 |
| $ | (2) |
| $ | (2) |
9
The Company is not required to make any contributions to its company-sponsored pension plans in 2019,2020, but may make contributions to the extent such contributions are beneficial to the Company. The Company did not make any contributions to its company-sponsored pension plans in the first quarterquarters of 2019 or 2018.2020 and 2019.
The Company contributed $88$96 and $89$88 to employee 401(k) retirement savings accounts in the first quartersquarter of 20192020 and 2018,2019, respectively.
The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded. In addition to the recurring multi-employer pension contributions the Company makes in the normal course of business, in the first quarter of 2020, the Company contributed an incremental $236, $180 net of tax, to multi-employer pension plans, helping stabilize future associate benefits.
During the first quarter of 2019, the Company incurred a charge oftotaling $59, $44 net of tax, due to obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension fund. The charge was recorded in the OG&A caption in the Consolidated Statements of Operations.
4. | EARNINGS PER COMMON SHARE |
8
4.EARNINGS PER COMMON SHARE
Net earnings attributable to The Kroger Co. per basic common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding. Net earnings attributable to The Kroger Co. per diluted common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding, after giving effect to dilutive stock options. The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| First Quarter Ended |
| First Quarter Ended | |||||||||||||||||||||||||||||
|
| May 25, 2019 |
| May 26, 2018 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
| Per |
|
|
|
|
|
| Per | |||||||||||||||||||
|
| Earnings |
| Shares |
| Share |
| Earnings |
| Shares |
| Share | |||||||||||||||||||||
|
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | ||||||||||||||||
| | First Quarter Ended | | First Quarter Ended | | ||||||||||||||||||||||||||||
| | May 23, 2020 | | May 25, 2019 | | ||||||||||||||||||||||||||||
|
| | |
| |
| Per |
| | |
| |
| Per |
| ||||||||||||||||||
| | Earnings | | Shares | | Share | | Earnings | | Shares | | Share | | ||||||||||||||||||||
| | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount |
| ||||||||||||||||||||
Net earnings attributable to The Kroger Co. per basic common share |
| $ | 764 |
| 798 |
| $ | 0.96 |
| $ | 2,005 |
| 839 |
| $ | 2.39 | | $ | 1,197 |
| 780 | | $ | 1.53 | | $ | 764 |
| 798 | | $ | 0.96 | |
Dilutive effect of stock options |
|
|
|
| 7 |
|
|
|
|
|
|
| 7 |
|
|
| | | |
| 8 | | | | | | |
| 7 | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
| | | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 764 |
| 805 |
| $ | 0.95 |
| $ | 2,005 |
| 846 |
| $ | 2.37 | | $ | 1,197 |
| 788 | | $ | 1.52 | | $ | 764 |
| 805 | | $ | 0.95 | |
The Company had combined undistributed and distributed earnings to participating securities totaling $15 and $8 in the first quarterquarters of 2020 and 2019, and $21 in the first quarter of 2018.respectively.
The Company had options outstanding for approximately 11 million and 16million shares during the first quarterquarters of 2020 and 2019, and 17 million shares in the first quarter of 2018respectively, 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.
10
5. | RECENTLY ADOPTED ACCOUNTING STANDARDS |
5.RECENTLY ADOPTED ACCOUNTING STANDARDS
On February 3, 2019, the Company adopted ASU 2016-02, “Leases,” which provides guidance for the recognition of lease agreements. The Company adopted the standard using the modified retrospective approach, which provides a method for recording existing leases at adoption that approximates the results of a full retrospective approach. In addition, the Company elected the transition package of practical expedients permitted within the standard, which allowed it to carry forward the historical lease classification, and applied the transition option which does not require application of the guidance to comparative periods in the year of adoption.
The adoption of the standard resulted in the recognition of operating lease assets and operating lease liabilities of approximately $6,800 and $7,000, respectively, as of February 3, 2019. Included in the measurement of the new lease assets is the reclassification of certain balances including those historically recorded as prepaid or deferred rent and favorable and unfavorable leasehold interests. Several other asset and liability line items in the Consolidated Balance Sheets were also impacted by immaterial amounts. The adoption of this standard also resulted in a change in naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. The adoption of this standard did not materially affect the Company’s consolidated net earnings or cash flows.
In FebruaryAugust 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification2018-15, “Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” Under the new standard, implementation costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs. The new standard also prescribes the balance sheet, income statement, and cash flow classification of Certain Tax Effects from Accumulated Other Comprehensive Income." This amendment allows companies to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income (AOCI) to retained earnings.capitalized implementation costs and related amortization expense. The Company adopted ASU 2018-02 on February 3, 2019, which resulted in a decrease to AOCI and an increase to accumulated earnings of $146, primarily related to deferred taxes previously recorded for pension and other postretirement benefits and cash flow hedges. The adoption of this standard did not have an effect on the Company’s consolidated results of operations or cash flows.
9
6.LEASES AND LEASE-FINANCED TRANSACTIONS
The Company leases certain store real estate, warehouses, distribution centers, office space and equipment. While the Company’s current strategy emphasizes ownership of store real estate, the Company operates in leased facilities in approximately half of its store locations. Lease terms generally range from 10 to 20 years with options to renew for varying terms at the Company’s sole discretion. Certain leases also include options to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Certain leases include escalation clauses or payment of executory costs such as property taxes, utilities or insurance and maintenance. Rent expense for leases with escalation clauses or other lease concessions are accounted forguidance on a straight-lineprospective basis over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Certain properties or portions thereof are subleased to others for periods generally ranging from one to 20 years.
The following table provides supplemental balance sheet classification information related to leases:
|
|
|
|
|
|
|
|
|
|
|
|
| May 25, |
| February 2, | ||
|
| Classification |
| 2019 |
| 2019 | ||
Assets |
|
|
|
|
|
|
|
|
Operating |
| Operating lease assets |
| $ | 6,819 |
| $ | — |
Finance |
| Property, plant and equipment, net (1) |
|
| 641 |
|
| 721 |
|
|
|
|
|
|
|
|
|
Total leased assets |
|
|
| $ | 7,460 |
| $ | 721 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
Operating |
| Current portion of operating lease liabilities |
| $ | 682 |
| $ | — |
Finance |
| Current portion of long-term debt including obligations under finance leases |
|
| 48 |
|
| 54 |
|
|
|
|
|
|
|
|
|
Noncurrent |
|
|
|
|
|
|
|
|
Operating |
| Noncurrent operating lease liabilities |
|
| 6,420 |
|
| — |
Finance |
| Long-term debt including obligations under finance leases |
|
| 760 |
|
| 824 |
|
|
|
|
|
|
|
|
|
Total lease liabilities |
|
|
| $ | 7,910 |
| $ | 878 |
|
|
The following table provides the components of lease cost:
|
|
|
|
|
|
|
|
|
| First Quarter Ended | |
Lease Cost |
| Classification |
| May 25, 2019 | |
Operating lease cost (1) |
| Rent Expense |
| $ | 311 |
Sublease income |
| Rent Expense |
|
| (37) |
Finance lease cost |
|
|
|
|
|
Amortization of leased assets |
| Depreciation and Amortization |
|
| 15 |
Interest on lease liabilities |
| Interest Expense |
|
| 14 |
|
|
|
|
|
|
Net lease cost |
|
|
| $ | 303 |
|
|
10
Maturities of operating and finance lease liabilities are listed below. Amounts in the table include options to extend lease terms that are reasonably certain of being exercised.
|
|
|
|
|
|
|
|
|
|
|
| Operating |
| Finance |
|
| |||
|
| Leases |
| Leases |
| Total | |||
Remainder of 2019 |
| $ | 700 |
| $ | 63 |
| $ | 763 |
2020 |
|
| 888 |
|
| 84 |
|
| 972 |
2021 |
|
| 824 |
|
| 84 |
|
| 908 |
2022 |
|
| 706 |
|
| 80 |
|
| 786 |
2023 |
|
| 635 |
|
| 79 |
|
| 714 |
Thereafter |
|
| 6,645 |
|
| 787 |
|
| 7,432 |
|
|
|
|
|
|
|
|
|
|
Total lease payments |
|
| 10,398 |
|
| 1,177 |
| $ | 11,575 |
|
|
|
|
|
|
|
|
|
|
Less amount representing interest |
|
| 3,296 |
|
| 369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of lease liabilities (1) |
| $ | 7,102 |
| $ | 808 |
|
|
|
|
|
Total future minimum rentals under non-cancellable subleases at May 25, 2019 were $274.
The following table provides the weighted-average lease term and discount rate for operating and finance leases:
| |||
| |||
| |||
| |||
| |||
|
| ||
|
| ||
The following table provides supplemental cash flow information related to leases:
|
|
|
|
|
| First Quarter Ended | |
|
| May 25, 2019 | |
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
Operating cash flows from operating leases |
| $ | 239 |
Operating cash flows from finance leases |
| $ | 14 |
Financing cash flows from finance leases |
| $ | 9 |
Leased assets obtained in exchange for new operating lease liabilities |
| $ | 257 |
Leased assets obtained in exchange for new finance lease liabilities |
| $ | 33 |
Net gain recognized from sale and leaseback transactions (1) |
| $ | 51 |
|
|
11
The Company adopted new lease accounting guidance in the first quarter of 2019 as discussed2020. The implementation costs the Company capitalized during the first quarter of 2020 are included in Note 1 and Note 5, and as required, the following disclosure is provided for periods prior to adoption. Minimum annual rentals and payments under capital leases and lease-financed transactions for the five years subsequent to February 2, 2019 and“Other assets” in the aggregateCompany’s Consolidated Balance Sheets. The corresponding cash flows related to these arrangements are listed below. Amountsincluded in “Net cash provided by operating activities” in the table below only include payments through the noncancelable lease term.Company’s Consolidated Statements of Cash Flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Lease- | |
|
| Capital |
| Operating |
| Financed | |||
|
| Leases |
| Leases |
| Transactions | |||
2019 |
| $ | 103 |
| $ | 948 |
| $ | 5 |
2020 |
|
| 89 |
|
| 880 |
|
| 6 |
2021 |
|
| 86 |
|
| 773 |
|
| 5 |
2022 |
|
| 82 |
|
| 649 |
|
| 5 |
2023 |
|
| 81 |
|
| 556 |
|
| 5 |
Thereafter |
|
| 766 |
|
| 3,197 |
|
| 17 |
|
|
|
|
|
|
|
|
|
|
Total |
|
| 1,207 |
| $ | 7,003 |
| $ | 43 |
|
|
|
|
|
|
|
|
|
|
Less estimated executory costs included in capital leases |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments under capital leases |
|
| 1,207 |
|
|
|
|
|
|
Less amount representing interest |
|
| 372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments under capital leases |
| $ | 835 |
|
|
|
|
|
|
6. | COMMITMENTS AND CONTINGENCIES |
7.COMMITMENTS AND CONTINGENCIES
The Company continuously evaluates contingencies based upon the best available evidence.
The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.
Litigation — Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material effect on the Company’s financial position, results of operations, or cash flows.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and where an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. Management currently believes that the aggregate range of loss for the Company’s exposure is not material to the Company. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
12
11
7. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table represents the changes in AOCI by component for the first quarters of 20192020 and 2018:2019:
| | | | | | | | | |
| | | | | Pension and | | | | |
| | Cash Flow | | Postretirement | | | | ||
| | Hedging | | Defined Benefit | | | | ||
|
| Activities(1) |
| Plans(1) |
| Total(1) | |||
Balance at February 2, 2019 | | $ | 6 | | $ | (352) | | $ | (346) |
Cumulative effect of accounting change(2) | | | (5) | | | (141) | | | (146) |
OCI before reclassifications(3) | | | (8) | | | — | |
| (8) |
Amounts reclassified out of AOCI(4) | | | 1 | |
| 7 | |
| 8 |
Net current-period OCI | | | (12) | |
| (134) | |
| (146) |
Balance at May 25, 2019 | | $ | (6) | | $ | (486) | | $ | (492) |
| | | | | | | | | |
Balance at February 1, 2020 | | $ | (42) | | $ | (598) | | $ | (640) |
OCI before reclassifications(3) | |
| (22) | |
| — | |
| (22) |
Amounts reclassified out of AOCI(4) | |
| 1 | |
| 3 | |
| 4 |
Net current-period OCI | |
| (21) | |
| 3 | |
| (18) |
Balance at May 23, 2020 | | $ | (63) | | $ | (595) | | $ | (658) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension and |
|
|
| |
|
| Cash Flow |
|
|
|
| Postretirement |
|
|
| ||
|
| Hedging |
| Available for sale |
| Defined Benefit |
|
|
| |||
|
| Activities(1) |
| Securities(1) |
| Plans(1) |
| Total(1) | ||||
Balance at February 3, 2018 |
| $ | 24 |
| $ | 4 |
| $ | (499) |
| $ | (471) |
OCI before reclassifications(2) |
|
| 4 |
|
| (4) |
|
| — |
|
| — |
Amounts reclassified out of AOCI(3) |
|
| 1 |
|
| — |
|
| 15 |
|
| 16 |
Net current-period OCI |
|
| 5 |
|
| (4) |
|
| 15 |
|
| 16 |
Balance at May 26, 2018 |
| $ | 29 |
| $ | — |
| $ | (484) |
| $ | (455) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 2, 2019 |
| $ | 6 |
| $ | — |
| $ | (352) |
| $ | (346) |
Cumulative effect of accounting change (4) |
|
| (5) |
|
| — |
|
| (141) |
|
| (146) |
OCI before reclassifications(2) |
|
| (8) |
|
| — |
|
| — |
|
| (8) |
Amounts reclassified out of AOCI(3) |
|
| 1 |
|
| — |
|
| 7 |
|
| 8 |
Net current-period OCI |
|
| (12) |
|
| — |
|
| (134) |
|
| (146) |
Balance at May 25, 2019 |
| $ | (6) |
| $ | — |
| $ | (486) |
| $ | (492) |
(1) |
| All amounts are net of tax. |
(2) |
|
(3) |
|
| Net of tax of |
(4) | Net of tax of $1 for cash flow hedging activities and $3 for pension and postretirement defined benefit plans for the first quarter of 2019. Net of tax of $1 for cash flow hedging activities and $2 for pension and postretirement defined benefit plans for the first quarter of 2020. |
|
|
The following table represents the items reclassified out of AOCI and the related tax effects for the first quarters of 20192020 and 2018:2019:
| | | | | | | |
| | First Quarter Ended |
| ||||
|
| May 23, |
| May 25, |
| ||
| | 2020 | | 2019 | | ||
Cash flow hedging activity items | | | | | | | |
Amortization of gains and losses on cash flow hedging activities(1) | | $ | 2 | | $ | 2 | |
Tax expense | |
| (1) | |
| (1) | |
Net of tax | |
| 1 | |
| 1 | |
| | | | | | | |
Pension and postretirement defined benefit plan items | | | | | | | |
Amortization of amounts included in net periodic pension cost(2) |
|
| 5 |
|
| 10 | |
Tax expense |
|
| (2) |
|
| (3) | |
Net of tax |
|
| 3 |
|
| 7 | |
Total reclassifications, net of tax |
| $ | 4 |
| $ | 8 | |
|
|
|
|
|
|
|
|
| First Quarter Ended | ||||
|
| May 25, |
| May 26, | ||
|
| 2019 |
| 2018 | ||
Cash flow hedging activity items |
|
|
|
|
|
|
Amortization of gains and losses on cash flow hedging activities (1) |
| $ | 2 |
| $ | 2 |
Tax expense |
|
| (1) |
|
| (1) |
Net of tax |
|
| 1 |
|
| 1 |
|
|
|
|
|
|
|
Pension and postretirement defined benefit plan items |
|
|
|
|
|
|
Amortization of amounts included in net periodic pension cost (2) |
|
| 10 |
|
| 19 |
Tax expense |
|
| (3) |
|
| (4) |
Net of tax |
|
| 7 |
|
| 15 |
Total reclassifications, net of tax |
| $ | 8 |
| $ | 16 |
(1) |
| Reclassified from AOCI into interest expense. |
(2) |
| Reclassified from AOCI into non-service component of company-sponsored pension plan costs. These components are included in the computation of net periodic pension cost (see Note 3 for additional details). |
12
8. | INCOME TAXES |
13
9.INCOME TAXES
The effective income tax rate was 22.8%23.5% and 23.4%22.8% for the first quarters of 20192020 and 2018,2019, respectively. The effective income tax rate for the first quarter of 20192020 and 20182019 differed from the federal statutory rate due to the effect of state income taxes partially offset by the utilization of tax credits and deductions.
10.HELD FOR SALE AND DISPOSAL OF BUSINESSES
Certain assetsThe Coronavirus Aid, Relief, and liabilities, relatedEconomic Security Act (the “CARES Act”), which was enacted on March 27, 2020, includes measures to assist companies in response to the Company’s Turkey Hill DairyCOVID-19 pandemic. These measures include deferring the due dates of tax payments and You Technology businesses, were classified as held for sale inother changes to income and non-income-based tax laws. As permitted under the Consolidated Balance Sheet as of February 2, 2019.
On March 13, 2019,CARES Act, the Company completed the saledeferred its first quarter 2020 federal estimated tax payment of its You Technology business$150 to Inmar for total consideration of $565, including $396 of cash and $64 of preferred equity received upon closing.July 15, 2020. The Company iswill also entitleddefer the remittance of the employer portion of the social security tax. The social security tax provision requires that the deferred employment tax be paid over two years, with half of the amount required to receivebe paid by December 31, 2021 and the other cash paymentshalf by December 31, 2022. During the first quarter of $105 over five years. The transaction includes a long-term service agreement for Inmar to provide2020, the Company digital coupon services. The sale resulted in a gaindeferred the employer portion of $70, $52 netsocial security tax of tax,$157 which is included in “Gain on sale of businesses” in the Consolidated Statement of Operations. The Company recorded the fair value of the long-term service agreement of $358 in “Other current liabilities” and “Other long-term liabilities” in the Company’s Consolidated Balance Sheets and such amount is being recorded as sales over the 10-year agreement.
On April 26, 2019 the Company completed the sale of its Turkey Hill Dairy business to an affiliate of Peak Rock Capital for total proceeds of $225.Sheets. The sale resulted in a gain of $106, $80 net of tax, which$157 deferral is included in “Gain on sale“Other” within “Changes in operating assets and liabilities net of effects from mergers and disposals of businesses” in the Company’s Consolidated Statements of Operations. Cash Flows.
14
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis should be read in conjunction with the Consolidated Financial Statements.
USE OF NON-GAAP FINANCIAL MEASURES
The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles (“GAAP”). We provide non-GAAP measures, including First-In, First-Out (“FIFO”) gross margin, FIFO operating profit, adjusted net earnings and adjusted net earnings per diluted share because management believes these metrics are useful to investors and analysts. These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share or any other GAAP measure of performance. These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP.
We calculate FIFO gross margin as FIFO gross profit divided by sales. FIFO gross profit is calculated as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs exclude depreciation and rent expenses. FIFO gross margin is an important measure used by management as management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness.
We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management as management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness.
The adjusted net earnings and adjusted net earnings per diluted share metrics are important measures used by management to compare the performance of core operating results between periods. We believe adjusted net earnings and adjusted net earnings per diluted share are useful metrics to investors and analysts because they present more accurate year-over-year comparisons for our net earnings and net earnings per diluted share because adjusted items are not the result of our normal operations. Net earnings for the first quarter of 2020 include the following, which we define as the “2020 Adjusted Items”:
● | Charges to operating, general and administrative expenses (“OG&A”) of $60 million, $44 million net of tax, for the revaluation of Home Chef contingent consideration and $38 million, $28 million net of tax, for transformation costs (the “2020 OG&A Adjusted Items”). |
● | Gains in other income (expense) of $422 million, $312 million net of tax, for the mark to market gain on Ocado Group plc (“Ocado”) securities (the “2020 Other Income (Expense) Adjusted Item”). |
Net earnings for the first quarter of 2019 include the following, which we define as the “2019 Adjusted Items”:
| Charges to |
| Gains in other income (expense) of $106 million, $80 million net of tax, related to the sale of Turkey Hill Dairy; $70 million, $52 million net of tax, related to the sale of You Technology; and $106 million, $80 million net of tax, for the mark to market gain on Ocado |
Net earningsPlease refer to the “Net Earnings per Diluted Share excluding the Adjusted Items” table below for reconciliations of certain non-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the most comparable GAAP financial measure and related disclosure.
14
CAUTIONARY STATEMENT
This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Such statements are indicated by words such as “achieve,” “affect,” “believe,” “confident,” “could,” “effect,” “estimate,” “expect,” “future,” “goal,” “growth,” “guidance,” “incremental,” “likely,” “maintain,” “may,” “plans,” “range,” “result,” “strategy,” “success,” “trend,” and “will,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. These include the specific risk factors identified in “Risk Factors” and “Outlook” in our Annual Report on Form 10-K for our last fiscal year and any subsequent filings, as well as those identified in this Form 10-Q.
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 in this report could cause actual results to differ materially.
EXECUTIVE SUMMARY – OUR PATH TO DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
Our most urgent priority during the COVID-19 pandemic has been to provide a safe environment for associates and customers with open stores, ecommerce solutions and an efficiently operating supply chain so that our communities have access to fresh, affordable food and essentials. At the same time, under our Restock Kroger framework, we have made significant investments over the last several years to establish a digital ecosystem, strengthen Our Brands and our personalization capabilities, and to enhance product freshness and quality. These investments helped us build momentum in 2019, a strong start to the first quarter of 2018 include2020, and came to the following, whichforefront as we defineprovided our customers with the fresh food and essentials they have needed during the pandemic. We believe our Restock Kroger investments will be even more important as a new normal emerges post COVID-19 and are positioning Kroger to grow customer loyalty and deliver attractive and sustainable Total Shareholder Returns.
To further address our top priorities related to COVID-19, we invested more than $830 million during the “2018 Adjusted Items”:first quarter of 2020 to reward associates and safeguard associates, customers and communities. The key actions taken included the following:
Safeguarding & Rewarding Associates
|
|
|
|
|
|
● | Provided personal protective equipment, including masks for all associates, and encouraged them to stay home if they are sick. |
Safeguarding & Supporting Customers
● | Installed partitions at check lanes, pharmacy and Starbucks registers across the enterprise. |
● | Enhanced cleaning procedures and implemented deep disinfection process at all stores. |
● | Added floor decals to promote physical distancing at check lanes and other counters. |
● | Offered a no-contact delivery option, low-contact pickup service and ship-to-home orders. |
15
Community
● | Hired more than 100,000 new associates in response to growth in sales volumes. We will continue to make appropriate adjustments to our workforce to reflect expected sales volumes. |
● | Tested over 82,000 patients in 15 states as one of only five U.S. retailers to develop, staff and expand a free COVID-19 testing model in partnership with the federal and state governments. |
● | Activated The Kroger Co. Zero Hunger | Zero Waste Foundation's Emergency COVID-19 Response Fund to help families disproportionately impacted by COVID-19. For the first quarter of 2020, Kroger and the Foundation have committed more than $8 million to nonprofit organizations addressing urgent COVID-19 response efforts. |
● | Published Sharing What We’ve Learned: A Blueprint for Businesses resource guide to provide actionable recommendations to help America’s businesses reopen safely. |
Our response to the COVID-19 pandemic demonstrates that when our company is clear on its purpose, values, and vision, we can navigate through any challenge together.
During the first quarter of 2020, we continued to execute our Restock Kroger framework. We continue to reposition our business by widening and deepening our competitive moats of fresh, data, personalization, and Our Brands. For example, our investments in technology over the past several years enabled us to reliably and seamlessly sustain the almost-overnight increase in demand for our Pickup and Delivery services. We were also able to offer value to our customers during this time of continued economic anxiety through personalized promotions. Once the initial stock up phase of the pandemic passed, customers turned to fresh produce and proteins as the staples of their increasing number of home-cooked meals. All of this was supported by a 21% increase in Our Brands products, which deliver both value and innovation that is only available at our family of stores.
Our financial model is driven by our retail supermarket, fuel, and health and wellness businesses, in addition to our fast growing alternative profit businesses. Our financial strategy is to continue to use the strong free cash flow generated by the business and deploy it in the business in a disciplined way to drive long-term sustainable growth through the identification of high-return projects that support our strategy. We will allocate capital toward driving profitable sales growth in stores and digital, improving productivity, and building a seamless digital ecosystem and supply chain. At the same time, we are committed to maintaining our net debt to adjusted EBITDA range of 2.30 to 2.50 in order to keep our current investment-grade debt rating. We also expect to continue to grow our dividend over time, reflecting the confidence we have in our free cash flow, and expect to continue to return excess cash to investors via share repurchases. Our financial model has proven to be resilient throughout the economic cycle. We expect our model to deliver improved operating results over time and continued strong free cash flow, which will translate into a consistently strong and attractive total shareholder return over the long-term of 8% to 11%.
16
The following table provides highlights of our financial performance:
OVERVIEW
Financial Performance Data
($ in millions, except per share amounts)
| | | | | | | | | |
| | First Quarter Ended | | ||||||
| | May 23, |
| Percentage |
| May 25, | | ||
| | 2020 | | Change | | 2019 | | ||
Sales | | $ | 41,549 | | 11.5 | % | $ | 37,251 | |
Net earnings attributable to The Kroger Co. | | | 1,212 | | 57.0 | % | | 772 | |
Adjusted net earnings attributable to The Kroger Co. | |
| 972 | | 65.9 | % |
| 586 | |
Net earnings attributable to The Kroger Co. per diluted common share | |
| 1.52 | | 60.0 | % |
| 0.95 | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | | 1.22 | | 69.4 | % |
| 0.72 | |
Operating profit | | | 1,326 | | 47.2 | % | | 901 | |
Adjusted FIFO operating profit | | | 1,453 | | 51.8 | % | | 957 | |
Dividends paid | | | 128 | | 13.3 | % | | 113 | |
Dividends paid per common share | | | 0.160 | | 14.3 | % | | 0.140 | |
Identical sales excluding fuel | | | 19.0 | % | N/A | | | 1.5 | % |
FIFO gross margin rate, excluding fuel, bps increase (decrease) | | | 0.44 | | N/A | | | (0.40) | |
OG&A rate, excluding fuel and Adjusted Items, bps increase (decrease) | | | 0.51 | | N/A | | | (0.12) | |
Reduction in total debt, including obligations under finance leases compared to prior fiscal year end | | | 605 | | N/A | | | 1,760 | |
Share repurchases | | | 422 | | N/A | | | 15 | |
17
OVERVIEW
Notable items for the first quarter of 20192020 are:
Shareholder Return
| Net earnings attributable to The Kroger Co. per diluted common share of |
| Adjusted net earnings attributable to The Kroger Co. per diluted common share of |
| Achieved operating profit of $1.3 billion. |
● | Achieved adjusted FIFO operating profit of $1.5 billion. |
● | We returned $550 million to shareholders from share repurchases and dividend payments. |
● | Generated cash from operations of $4.2 billion. |
● | During the first quarter of 2020, we increased cash and temporary cash investments by $2.3 billion, reflecting improved operating performance and a significant improvement in working capital. |
● | During the first quarter of 2020, we decreased total debt, including obligations under finance leases, by $605 million. |
Other Financial Results
● | Identical sales, excluding fuel, increased |
| Digital revenue grew |
Significant Events
|
|
|
|
|
|
| Hired more than 100,000 new associates in response to growth in sales volumes. We will continue to make appropriate adjustments to our workforce to reflect expected sales volumes. |
| In addition to the recurring multi-employer pension contributions we make in the |
|
|
16
18
The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, excluding the 20192020 and 20182019 Adjusted Items.
Net Earnings per Diluted Share excluding the Adjusted Items
($ in millions, except per share amounts)
| | | | | | | | | |
| | First Quarter Ended | | ||||||
|
| May 23, |
| May 25, |
| Percentage |
| ||
| | 2020 | | 2019 | | Change | | ||
Net earnings attributable to The Kroger Co. | | $ | 1,212 | | $ | 772 |
| | |
| | | | | | | | | |
(Income) expense adjustments | | | | | | | | | |
Adjustment for pension plan withdrawal liabilities(1)(2) | | | — | | | 44 | | | |
Adjustment for gain on sale of Turkey Hill Dairy(1)(3) | | | — | | | (80) | | | |
Adjustment for gain on sale of You Technology(1)(4) | | | — | | | (52) | | | |
Adjustment for mark to market gain on Ocado securities(1)(5) | | | (312) | | | (80) | | | |
Adjustment for Home Chef contingent consideration(1)(6) | | | 44 | | | (18) | | | |
Adjustment for transformation costs(1)(7) | |
| 28 | |
| — | | | |
2020 and 2019 Adjusted Items | | | (240) | | | (186) | | | |
| | | | | | | | | |
Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 972 | | $ | 586 |
| 65.9 | % |
| | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 1.52 | | $ | 0.95 |
| | |
| | | | | | | | | |
(Income) expense adjustments | | | | | | | | | |
Adjustment for pension plan withdrawal liabilities(8) | | | — | | | 0.05 | | | |
Adjustment for gain on sale of Turkey Hill Dairy(8) | | | — | | | (0.10) | | | |
Adjustment for gain on sale of You Technology(8) | | | — | | | (0.06) | | | |
Adjustment for mark to market gain on Ocado securities(8) | | | (0.40) | | | (0.10) | | | |
Adjustment for Home Chef contingent consideration(8) | | | 0.06 | | | (0.02) | | | |
Adjustment for transformation costs(8) | | | 0.04 | | | — | | | |
2020 and 2019 Adjusted Items | |
| (0.30) | |
| (0.23) | | | |
| | | | | | | | | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 1.22 | | $ | 0.72 |
| 69.4 | % |
| | | | | | | | | |
Average number of common shares used in diluted calculation | |
| 788 | |
| 805 | | | |
|
|
|
|
|
|
|
|
|
|
|
| First Quarter Ended |
| ||||||
|
| May 25, |
| May 26, |
| Percentage |
| ||
|
| 2019 |
| 2018 |
| Change |
| ||
Net earnings attributable to The Kroger Co. |
| $ | 772 |
| $ | 2,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) expense adjustments |
|
|
|
|
|
|
|
|
|
Adjustments for pension plan agreements (1)(2) |
|
| 44 |
|
| (10) |
|
|
|
Adjustment for gain on sale of convenience store business (1)(3) |
|
| — |
|
| (1,352) |
|
|
|
Adjustment for gain on sale of Turkey Hill Dairy (1)(4) |
|
| (80) |
|
| — |
|
|
|
Adjustment for gain on sale of You Technology (1)(5) |
|
| (52) |
|
| — |
|
|
|
Adjustment for mark to market gain on Ocado securities (1)(6) |
|
| (80) |
|
| (27) |
|
|
|
Adjustment for depreciation related to held for sale assets (1)(7) |
|
| — |
|
| (11) |
|
|
|
Adjustment for contingent consideration (1)(8) |
|
| (18) |
|
| — |
|
|
|
2019 and 2018 Adjusted Items |
|
| (186) |
|
| (1,400) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. excluding the Adjusted Items |
| $ | 586 |
| $ | 626 |
| (6.4) | % |
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.95 |
| $ | 2.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) expense adjustments |
|
|
|
|
|
|
|
|
|
Adjustments for pension plan agreements (9) |
|
| 0.05 |
|
| (0.01) |
|
|
|
Adjustment for gain on sale of convenience store business (9) |
|
| — |
|
| (1.59) |
|
|
|
Adjustment for gain on sale of Turkey Hill Dairy (9) |
|
| (0.10) |
|
| — |
|
|
|
Adjustment for gain on sale of You Technology (9) |
|
| (0.06) |
|
| — |
|
|
|
Adjustment for mark to market gain on Ocado securities (9) |
|
| (0.10) |
|
| (0.03) |
|
|
|
Adjustment for depreciation related to held for sale assets (9) |
|
| — |
|
| (0.01) |
|
|
|
Adjustment for contingent consideration (9) |
|
| (0.02) |
|
| — |
|
|
|
2019 and 2018 Adjusted Items |
|
| (0.23) |
|
| (1.64) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.72 |
| $ | 0.73 |
| (1.4) | % |
|
|
|
|
|
|
|
|
|
|
Average number of common shares used in diluted calculation |
|
| 805 |
|
| 846 |
|
|
|
19
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
| | | | | | | | | | | | |
| | First Quarter Ended | | | ||||||||
| | May 23, | | Percentage | | May 25, | | Percentage | | | ||
|
| 2020 |
| Change(1) |
| 2019 |
| Change(2) |
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Total sales to retail customers without fuel(3) | | $ | 38,634 | | 18.5 | % | $ | 32,594 | | 2.0 | % | |
Supermarket fuel sales | | | 2,692 | | (38.8) | % | | 4,396 | | (3.6) | % | |
Other sales(4) | | | 223 | | (14.6) | % | | 261 | | 4.0 | % | |
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Total sales | | $ | 41,549 | | 11.5 | % | $ | 37,251 | | (1.2) | % | |
(1) |
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17
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
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| First Quarter Ended |
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| May 25, |
| Percentage |
| May 26, |
| Percentage |
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| 2019 |
| Change (1) |
| 2018 |
| Change (2) |
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Total sales to retail customers without fuel (3) |
| $ | 32,594 |
| 2.0 | % | $ | 31,967 |
| 2.8 | % |
Supermarket fuel sales |
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| 4,396 |
| (3.6) | % |
| 4,560 |
| 19.5 | % |
Convenience stores (4) |
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| — |
| N/A |
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| 944 |
| (28.0) | % |
Other sales (5) |
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| 261 |
| 4.0 | % |
| 251 |
| 14.6 | % |
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Total sales |
| $ | 37,251 |
| (1.2) | % | $ | 37,722 |
| 3.5 | % |
| This column represents the percentage change in the first quarter of 2019, compared to the first quarter of 2018. |
(3) |
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| Digital sales, primarily including Pickup, Delivery, Ship and pharmacy e-commerce sales, grew approximately 92% and 42% in the first quarter of 2020 and 2019, |
(4) |
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Total sales were $41.5 billion in the first quarter of 2020, compared to $37.3 billion in the first quarter of 2019, compared to $37.7 billion for the first quarter of 2018.2019. This decreaseincrease was due to the sale of our convenience store business unit and a decrease in supermarket fuel sales, partially offset by ouran increase in total sales to retail customers without fuel.fuel, partially offset by a reduction in supermarket fuel sales and decreased sales due to the disposal of Turkey Hill Dairy and You Technology in the first quarter of 2019. Total sales excluding fuel and the effect of selling our convenience store business unit,dispositions increased 2.0%19.1% in the first quarter of 2019,2020, compared to the first quarter of 2018.2019. The increase in total sales to retail customers without fuel for the first quarter of 2019,2020, compared to the first quarter of 2018,2019, was primarily due to our merger with Home Chef and our identical sales increase, excluding fuel, of 1.5%. Identical19.0%, partially offset by decreased sales due to the deconsolidation of Lucky’s Market. The significant increase in identical sales, excluding fuel, was caused by unprecedented demand for products across grocery and fresh departments due to the COVID-19 pandemic. Our identical sales, excluding fuel, in the first quarter of 2020 leading into the COVID-19 pandemic were strong. February identical sales, excluding fuel, exceeded our internal expectations, and were ahead of identical sales trends, excluding fuel, that we experienced near the end of fiscal year 2019. The increase in identical sales, excluding fuel, was broad based across all retail divisions and remained heightened throughout the quarter as customers adjusted to the new restrictions and started preparing and eating more meals at home. During the pandemic, customers reduced trips while significantly increasing basket value. As such, identical sales, excluding fuel, for the first quarter of 2019,2020, compared to the first quarter of 2018,2019, increased primarily due to changes in product mix, includinga significantly higher quality products at a higher price point, retail inflation and Kroger Specialty Pharmacy sales growth,customer basket value, partially offset by our continued investments in lower prices for our customers. decreased customer transactions.
Total supermarket fuel sales decreased 3.6%38.8% in the first quarter of 2019,2020, compared to the first quarter of 2018,2019, primarily due to a decrease in fuel gallons sold of 3.3%24.6% and a decrease in the average retail fuel price of 0.4%18.8%. The decrease in fuel gallons sold was consistent with the national trend due to the COVID-19 pandemic. The decrease in the average retail fuel price was caused by a decrease in the product cost of fuel.
We calculate identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket locations, Kroger Specialty Pharmacy businesses and ship-to-home solutions. We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Additionally, sales from all acquired businesses are treated as identical as if they were part of the Company in the prior year. Products and services related primarily to Kroger Personal Finance, which were historically accounted for as an offset to OG&A, are now classified as a component of sales. These prior-year amounts have been reclassified to conform to current-year presentation, which is consistent with our Restock Kroger initiative and our view of the products and services as part of our core business strategy. This is also more consistent with industry practice. These Kroger Personal Finance transactions represent sales to retail customers and, as such, are included in identical sales in 2019 and 2018. This change affected identical sales by 3 basis points in 2019 and 5 basis points in 2018. Although identical sales is a relatively standard term, numerous methods exist for calculating identical sales growth. As a result, the method used by our management to calculate identical sales may differ from methods other companies use to calculate identical sales. We urge you to understand the methods used by other companies to calculate identical sales before comparing our identical sales to those of other such companies. Our identical sales, excluding fuel, results are summarized in the following table. We used the identical sales, excluding fuel, dollar figures presented below to calculate percentage changes for the first quarter of 2019.2020.
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18
Identical Sales
($ in millions)
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| | First Quarter Ended |
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| | May 23, | | Percentage | | May 25, | | Percentage |
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| 2020 |
| Change(1) |
| 2019 |
| Change(2) |
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Excluding fuel centers |
| $ | 38,137 |
| 19.0 | % | $ | 32,046 |
| 1.5 | % |
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| First Quarter Ended |
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| May 25, |
| Percentage |
| May 26, |
| Percentage |
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| 2019 |
| Change (1) |
| 2018 |
| Change (2) |
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Excluding fuel centers |
| $ | 32,133 |
| 1.5 | % | $ | 31,670 |
| 1.9 | % |
(1) |
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(2) | This column represents the percentage change in identical sales in the first quarter of 2019, compared to the first quarter of 2018. |
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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 24.30% for the first quarter of 2020, compared to 22.20% for the first quarter of 2019, as compared to 22.01% for the first quarter of 2018.2019. The increase in rate in the first quarter of 2019,2020, compared to the first quarter of 2018,2019, resulted primarily from decreased shrink, asfuel sales, which have a percentage of sales, growth in our alternative profit stream portfolio and a higherlower gross margin rate, onan increase in our fuel sales, partially offset by continued investments in lower prices for our customers which we can provide due to effective negotiations to achieve savings on the cost of products sold, industry-wide lower gross margin rates in pharmacy and increased warehousedecreased shrink, transportation and transportationwarehousing and advertising costs, as a percentage of sales, due to start up costs associated with new warehouses and new warehouse capabilities.reflecting the significant increase in sales volumes, partially offset by a higher LIFO charge.
Our LIFO charge was $31 million for the first quarter of 2020 compared to $15 million for the first quarter of 2019 and the first quarter of 2018.2019. Our LIFO charge reflects an increase in our expected annualized product cost inflation for 2019, which we expect will remain relatively consistent with 2018. 2020, primarily driven by meat.
Our FIFO gross margin rate, which excludes the first quarter LIFO charge, was 24.37% for the first quarter of 2020, compared to 22.24% for the first quarter of 2019, as compared to 22.05% for the first quarter of 2018.2019. Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, our FIFO gross margin rate decreased 40increased 44 basis points in the first quarter of 2019,2020, compared to the first quarter of 2018.2019. This decreaseincrease resulted primarily from continued investments in lower prices for our customers which we can provide due to effective negotiations to achieve savings on the cost of products sold, industry-wide lower gross margin rates in pharmacydecreased shrink, transportation and increased warehousewarehousing and transportationadvertising costs, as a percentage of sales, due to start up costs associated with new warehouses and new warehouse capabilities, partially offset by decreased shrink, as a percentage ofreflecting the significant increase in sales and growth in our alternative profit stream portfolio.volumes.
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utility,utilities, and credit card fees. Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.
OG&A expenses, as a percentage of sales, were 18.46% for the first quarter of 2020, compared to 16.95% for the first quarter of 2019, as compared to 16.59% for the first quarter of 2018.2019. The increase in the first quarter of 2019,2020, compared to the first quarter of 20182019 resulted primarily from the 2020 Multi-Employer Pension Contribution, the 2020 OG&A Adjusted Items, the COVID-19 Investments, growth in our digital channel as a result of heightened demand during the pandemic and the effect of decreased fuel sales, which increases our OG&A rate, as a percentage of sales, partially offset by the effect of increased sales due to the pandemic which decreases our OG&A rate, as a percentage of sales, the 2019 OG&A Adjusted Items the 2018 OG&A Adjusted Item, increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience, investments in our digital strategy and the effectbroad based improvement of lower current year sales, primarily as a result of the sale of our convenience store business unit, partially offset by the effective execution of Restock Kroger cost savings initiatives that drive administrative efficiencies, store productivity and planned real estate transactions during the first quarter of 2019.sourcing cost reductions.
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Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, the 20192020 OG&A Adjusted Items and the 20182019 OG&A Adjusted Item,Items, our OG&A rate decreased 12increased 51 basis points in the first quarter of 2019,2020, compared to the first quarter of 2018.2019. This increase resulted primarily from the 2020 Multi-Employer Pension Contribution, the COVID-19 Investments and growth in our digital channel as a result of heightened demand during the pandemic, partially offset by the effect of increased sales due to the pandemic which decreases our OG&A rate, as a percentage of sales and broad based improvement of Restock Kroger cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions. Excluding the effect of fuel, the 2020 OG&A Adjusted Items, the 2019 OG&A Adjusted Items and the 2020 Multi-Employer Pension Contribution, our OG&A rate improved 10 basis points.
Rent Expense
Rent expense decreased, as a percentage of sales, for the first quarter of 2020 compared to the first quarter of 2019. This decrease resulted primarily from the effective executioneffect of Restock Kroger initiatives and planned real estate transactions duringincreased sales due to the first quarter of 2019, partially offset by increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience and investments inpandemic which decreases our digital strategy.
Rent Expense
Rentrent expense, as a percentage of sales, remained consistent for the first quarter of 2019 compared to the first quarter of 2018. sales.
Depreciation and Amortization Expense
Depreciation and amortization expense increased,decreased, as a percentage of sales, in the first quarter of 2019,2020, compared to the first quarter of 2018,2019. This decrease resulted primarily from the effect of increased sales due to lowerthe pandemic which decreases our depreciation expense, as a percentage of sales, partially offset by decreased fuel sales, which increases our depreciation expense as a percentage of sales, the 2018 Depreciation Adjusted Item and additional depreciation on capital investments, excluding mergers and lease buyouts of $3.0 billion, during the rolling four quarter period ending with the first quarter of 2019.2020 of $2.9 billion and a decrease in the average useful life on these capital investments. Our strategy under Restock Kroger includes initiatives to enhance the customer experience in stores, improve our process efficiency and integrate our digital shopping experience through technology developments. As such, the percentage of capital investments related to digital and technology has grown compared to the prior year, which has caused a decrease in the average depreciable life of our capital portfolio.
Operating Profit and FIFO Operating Profit
Operating profit was $1.3 billion, or 3.19% of sales, for the first quarter of 2020, compared to $901 million, or 2.42% of sales, for the first quarter of 2019, compared to $1.0 billion, or 2.73% of sales, for the first quarter of 2018.2019. Operating profit, as a percentage of sales, decreased 31increased 77 basis points in the first quarter of 2019,2020, compared to the first quarter of 2018,2019, due to increased OG&Aimproved sales to retail customers without fuel, a higher gross margin rate, decreased rent and depreciation and amortization expenses, as a percentage of sales, and increased fuel earnings, partially offset by increased OG&A expense, as a higher gross margin rate.percentage of sales.
FIFO operating profit was $1.4 billion, or 3.27% of sales, for the first quarter of 2020, compared to $916 million, or 2.46% of sales, for the first quarter of 2019, compared to $1.0 billion, or 2.77% of sales, for the first quarter of 2018. Fuel sales lower our operating profit rate due to the very low operating profit rate, as a percentage of sales, of fuel sales compared to non-fuel sales.2019. FIFO operating profit, as a percentage of sales excluding fuelthe 2020 and the 2019 and 2018 Adjusted Items, decreased 33increased 95 basis points in the first quarter of 2019,2020, compared to the first quarter of 2018,2019, due to improved sales to retail customers without fuel, a lowerhigher gross margin rate, decreased rent and increased depreciation and amortization expense,expenses, as a percentage of sales, and increased fuel earnings, partially offset by lowerincreased OG&A expense, as a percentage of sales.
Specific factors ofcontributing to the above operating trends underfor operating profit and FIFO operating profit above are discussed earlier in this section.
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The following table provides a reconciliation of operating profit to FIFO operating profit, and to Adjusted FIFO operating profit, excluding the 2020 and 2019 Adjusted Items.
Operating Profit excluding the Adjusted Items
($ in millions)
| | | | | | |
| | First Quarter Ended | ||||
| | May 23, | | May 25, | ||
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| 2020 |
| 2019 | ||
Operating profit | | $ | 1,326 | | $ | 901 |
LIFO charge | | | 31 | | | 15 |
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FIFO Operating profit | |
| 1,357 | |
| 916 |
| | | | | | |
Adjustment for pension plan withdrawal liabilities | | | — | | | 59 |
Adjustment for Home Chef contingent consideration | | | 60 | | | (24) |
Adjustment for transformation costs | | | 38 | | | — |
Other | | | (2) | | | 6 |
| | | | | | |
2020 and 2019 Adjusted items | | | 96 | | | 41 |
| | | | | | |
Adjusted FIFO operating profit excluding the adjustment items above | | $ | 1,453 | | $ | 957 |
Income Taxes
The effective income tax rate was 23.5% for the first quarter of 2020 and 22.8% for the first quarter of 2019 and 23.4% for the first quarter of 2018.2019. The effective income tax rate for the first quarter of 20192020 and 2018the first quarter of 2019 differed from the federal statutory rate due to the effect of state income taxes partially offset by the utilization of tax credits and deductions.
Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings were $1.52 per diluted share for the first quarter of 2020 compared to net earnings of $0.95 per diluted share for the first quarter of 2019 represented a decrease of 59.9% from2019. Adjusted net earnings of $2.37$1.22 per diluted share for the first quarter of 2018. Adjusted2020 represented an increase of 69.4% compared to adjusted net earnings of $0.72 per diluted share for the first quarter of 2019 represented a decrease of 1.4% from adjusted net earnings of $0.73 per diluted share for the first quarter of 2018.2019. The decreaseincrease in adjusted net earnings per diluted share resulted primarily from lowerincreased FIFO operating profit partially offset by lower income taxwithout fuel, increased fuel earnings, decreased interest expense and lower weighted average common shares outstanding due to common share repurchases.repurchases, partially offset by a higher income tax expense and a higher LIFO charge.
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20
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
Net cash provided by operating activities
We generated $2.3$4.2 billion of cash from operations in the first quarter of 2019,2020 compared to $2.4$2.3 billion in the first quarter of 2018. The decrease in net2019. Net earnings including noncontrolling interests, adjusted for non-cash items and other impacts, generated approximately $2.2 billion of operating cash provided by operating activitiesflow in the first quarter of 2019,2020 compared to $1.4 billion in the first quarter of 2018, resulted primarily from a decrease in net earnings including noncontrolling interests, non-cash adjustments for the 2019 gain on sale of businesses and increased mark to market gain on Ocado securities and reduced cash provided by operating activities for changes in working capital, partially offset by the prior year non-cash adjustment for the gain on sale of our convenience store business unit and operating lease asset amortization.
2019. Cash provided by operating activities for changes in working capital was $2.0 billion in the first quarter of 2020 compared to $916 million in the first quarter of 2019 compared to $1.4 billion in the first quarter of 2018. 2019. The decreaseincrease in cash provided by operating activities for changes in working capital in the first quarter of 2019,2020, compared to the first quarter of 2018,2019, was primarily due to the following:
| A decrease in |
● | Increased trade accounts payable at the end of the first quarter of 2020, primarily related to inventory purchases to meet elevated demand during the pandemic; |
● | An increase in accrued salaries and wages at the end of the first quarter of 2020, primarily related to an increase in employee headcount in response to the pandemic; and |
● | Cash flows from income taxes were favorable in the first quarter of 2020 compared to the |
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Cash paid for taxesinterest increased in the first quarter of 2019,2020, compared withto the first quarter of 2018,2019, primarily due to the paymenttiming of estimated taxes oncertain semi-annual senior notes interest payments that were paid during the gain on salefirst quarter of 2020 which were accrued as of the You Technology and Turkey Hill Dairy businesses.end of fiscal year 2019.
Net cash used by investing activities
Investing activities used cash of $689 million in the first quarter of 2020 compared to $464 million in the first quarter of 2019 compared to2019. The amount of cash providedused by investing activities of $1.3 billionincreased in the first quarter of 2018. We used cash in investing activities in2020 compared to the first quarter of 2019, compared to cash provided by investing activities in the first quarter of 2018, primarily due to increased payments for property and equipment and reduced net proceeds from the sale of businesses, partially offset by increased proceeds from the sale of assets. following:
● | Decreased proceeds from the sale of assets in the first quarter of 2020 compared to the first quarter of 2019; and |
● | No proceeds from the sale of businesses in the first quarter of 2020, partially offset by |
● | Reduced payments for property and equipment in the first quarter of 2020 to ensure the focus of our teams was on addressing our most important priorities during the pandemic. |
Net cash used by financing activities
We used $1.8$1.2 billion of cash for financing activities in the first quarter of 20192020 compared to $3.4$1.8 billion during the first quarter of 2018.2019. The amount of cash used for financing activities for the first quarter of 2019,2020, compared to the first quarter of 2018,2019, decreased $1.5 billion primarily due to increased proceeds from issuance of long-term debt and decreased payments on long-term debt, partially offset by increased payments on commercial paper and share repurchases, partially offset by increased payments on long-term debt including obligations under finance leases and a reduction of proceeds from the issuance of long-term debt. repurchases.
24
Debt Management
Asof May 25, 2019,23, 2020, we maintained a $2.75 billion (with the ability to increase by $1 billion), unsecured revolving credit facility that, unless extended, terminates on August 29, 2022. Outstanding borrowings under the credit facility, the commercial paper borrowings, and some outstanding letters of credit reduce funds available under the credit facility. As of May 25, 2019,23, 2020, we had $100 million ofno outstanding commercial paper and no borrowings under our revolving credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled $3$2 million as of May 25, 2019.23, 2020.
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Our bank credit facility and the indentures underlying our publicly issued debt contain various financial covenants. As of May 25, 2019,23, 2020, 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 obligations under finance leases, and lease-financing obligations, decreased $1.8 billion$605 million as of May 25, 201923, 2020 compared to our fiscal year end 20182019 debt of $15.2$14.1 billion. This decrease resulted primarily from net payments on commercial paper borrowings of $700$1.2 billion partially offset by the issuance of $500 million and the repayment of our $1.0 billion term loan.senior notes bearing an interest rate of 2.20%.
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Common Share Repurchase Program
During the first quarter of 2019,2020, we invested $15$422 million to repurchase 564 thousand14.3 million Kroger common shares at an average price of $26.68$29.51 per share. The shares repurchased in the first quarter of 20192020 were reacquired under a program that uses the following share repurchase programs:
● | On November 5, 2019, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with rule 10b5-1 of the Securities Exchange Act of 1934 (the “November 2019 Repurchase Program”), and |
● | 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. |
The November 2019 Repurchase Program does not have an expiration date but may be suspended or terminated by participants in Kroger’s stock option, long-term incentive plans and the associated tax benefits.
On March 15, 2018, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, including accelerated stock repurchase transactions, block trades, or pursuant to trades intending to comply with rule 10b5-1 of the Securities Exchange Act of 1934 (the “March 2018 Repurchase Program”).at any time. As of May 25, 2019, $54623, 2020, there was $245 million remainedremaining under the March 2018November 2019 Repurchase Program.
Dividends
The following table provides dividend information ($ in millions, except per share amounts):
| | | | | |
| First Quarter Ended | ||||
| May 23, | | May 25, | ||
| 2020 | | 2019 | ||
Cash dividends paid | $ | 128 | | $ | 113 |
Cash dividends paid per common share | $ | 0.160 | | $ | 0.140 |
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| First Quarter Ended | ||||
| May 25, |
| May 26, | ||
| 2019 |
| 2018 | ||
Cash dividends paid | $ | 113 |
| $ | 110 |
Cash dividends paid per common share | $ | 0.140 |
| $ | 0.125 |
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Liquidity Needs
We estimate our liquidity needs over the next twelve-month period to approximate $4.8 billion, which includes anticipated requirements for working capital, capital investments, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of the first quarter of 2019. We generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months. Our liquidity needs include anticipated requirements for working capital, capital investments, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of the first quarter of 2020. 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. We have approximately $1.3$1.0 billion of senior notes and $100 million of commercial paper maturing in the next twelve months, which are included in the $4.8 billion ofour estimated liquidity needs. We expect to satisfy these obligations using cash generated from operations, andtemporary cash investments on hand, or through issuingthe issuance of additional senior notes a term loan or commercial paper. We believe we have adequate coverage of our debt covenants to continue to maintain our current investment grade debt ratings and to respond effectively to competitive conditions.
We held cash and temporary cash investments of $2.7 billion as of the end of the first quarter of 2020, reflecting improved operating performance and significant improvements in working capital. We expect working capital to improve for the year, although not to the level experienced in the first quarter of 2020, which was inflated by significant sales growth due to COVID-19. Given the uncertainties that remain related to COVID-19 and the outlook for the remainder of 2020, we believe it is prudent to maintain liquidity and financial flexibility in the short term. We remain committed to our dividend and share repurchase program and we will be evaluating the optimal use of any excess free cash flow, consistent with our previously stated capital allocation strategy.
The CARES Act, which was enacted on March 27, 2020, includes measures to assist companies in response to the COVID-19 pandemic. These measures include deferring the due dates of tax payments and other changes to income and non-income-based tax laws. As permitted under the CARES Act, we deferred our first quarter 2020 federal estimated tax payment of $150 million to July 15, 2020. We will also defer the remittance of the employer portion of the social security tax. The social security tax provision requires that the deferred employment tax be paid over two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. During the first quarter of 2020, we deferred the employer portion of social security tax of $157 million which is included in “Other long-term liabilities” in our Consolidated Balance Sheets. We expect to defer a total of approximately $600 million of payments related to the employer’s portion of social security tax in 2020.
For additional information about our debt activity in the first quarter of 2020, including the drawdown and repayments under our revolving credit facility and our senior notes issuance, see Note 2 to the Consolidated Financial Statements.
CAPITAL INVESTMENTS
Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $755 million for the first quarter of 2020 compared to $876 million for the first quarter of 2019, compared to $848 million for the first quarter of 2018.2019. During the rolling four quarter period ended with the first quarter of 2019,2020, we opened, expanded, relocated or acquired 3021 supermarkets and also completed 199143 major within-the-wall remodels. Total supermarket square footage at the end of the first quarter of 2019 increased2020 decreased 0.1% from the end of the first quarter of 2018.2019. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the first quarter of 20192020 increased 0.7%0.5% over the end of the first quarter of 2018.2019.
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CRITICAL ACCOUNTING POLICIES
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our critical accounting policies are summarized in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. 1, 2020.
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 ADOPTED26
NEW ACCOUNTING STANDARDS
On February 3, 2019,Refer to Note 5 to the Consolidated Financial Statements for recently adopted accounting standards.
OUTLOOK
The COVID-19 pandemic has dramatically changed the outlook for food retail in 2020 and we adopted ASU 2016-02, “Leases,” which provides guidancecontinue to monitor, evaluate and adjust our plans to address the impact to our business. There are still many unknown factors related to the long-term impact of COVID-19 that could influence our financial results for the remainder of 2020, such as:
● | Continued investments to help our customers and associates, |
● | Uncertainty surrounding consumer behavior, restrictions and what will be the new normal, and |
● | Potential long-term shift in customers eating more food at home. |
In recognition of lease agreements. We adoptedthese factors, it is difficult to predict specific outcomes and as such we are not reaffirming or providing new 2020 guidance. While we expect to exceed the standard using the modified retrospective approach, which provides a method for recording existing leases at adoption that approximates the results of a full retrospective approach. In addition, we elected the transition package of practical expedients permitted within the standard, which allowed us to carry forward our historical lease classification, and applied the transition option which does not require application of the guidance to comparative periods in the year of adoption.
The adoption of the standard resulted in the recognition of operating lease assets and operating lease liabilities of approximately $6.8 billion and $7.0 billion, respectively, as of February 3, 2019. Included in the measurement of the new lease assets is the reclassification of certain balances, including those historically recorded as prepaid or deferred rent and favorable and unfavorable leasehold interests. Several other asset and liability line items in the Consolidated Balance Sheets were also impacted by immaterial amounts. The adoption of this standard also resulted in a change in naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. The adoption of this standard did not materially affect our consolidated net earnings or cash flows.
In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This amendment allows companies to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income (AOCI) to retained earnings. We adopted ASU 2018-02 on February 3, 2019, which resulted in a decrease to AOCI and an increase to accumulated earnings of $146 million, primarily related to deferred taxes previously recorded for pension and other postretirement benefits and cash flow hedges. The adoption of this standard did not have an effect on our consolidated results of operations or cash flows.
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SUPPLEMENTAL INFORMATION
Sales Reclassification
Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to OG&A, are now classified as a component of sales, except for certain amounts in Media, which are netted against merchandise costs. These prior-year amounts have been reclassified to conform to current-year presentation, which is consistent with our Restock Kroger initiative and our view of the products and services as part of our core business strategy. This is also more consistent with industry practice.
The following table summarizes the Company's 2018 sales reclassification ($ in millions):
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| First Quarter Ended | |||||||
| Previously Stated |
| Reclassification |
| Reclassified | |||
| May 26, |
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| May 26, | ||
| 2018 |
| 2018 |
| 2018 | |||
Sales | $ | 37,530 |
| $ | 192 |
| $ | 37,722 |
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Operating expenses |
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Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
| 29,362 |
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| 57 |
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| 29,419 |
Operating, general and administrative |
| 6,122 |
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| 135 |
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| 6,257 |
Rent |
| 276 |
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| — |
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| 276 |
Depreciation and amortization |
| 741 |
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| — |
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| 741 |
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Operating profit | $ | 1,029 |
| $ | — |
| $ | 1,029 |
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OUTLOOK
This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Such statements are indicated by words such as “achieve,” “affect,” “believe,” “could,” “effect,” “estimate,” “expect,” “future,” “goal,” “growth,” “incremental,” “likely,” “may,” “plan,” “range,” “result,” “strategy,” “success,” “target,” “trend,” and “will,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. These include the specific risk factors identified in “Risk Factors” and “Outlook”outlook shared in our Annual Report on Form 10-KApril 1 business update for identical sales without fuel, adjusted FIFO operating profit and adjusted EPS, we are not able to forecast the extent of such upside for the reasons mentioned above.
Our financial model has proven to be resilient throughout the economic cycle. We remain confident in our last fiscal year and any subsequent filings,business model 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 basisgenerate strong free cash flow and other uncertainties described below could cause actual results to differ materially.achieve sustainable and attractive total shareholder returns.
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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 global pandemics, including the novel coronavirus, 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 |
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| Our ability to achieve sales, earnings and incremental FIFO operating profit |
| Our ability to achieve these goals may also be affected by our ability to manage the factors identified above. Our ability to execute our financial strategy may be affected by our ability to generate cash flow. |
| Our effective tax rate may differ from the expected rate due to changes in laws, the status of pending items with various taxing authorities, and the deductibility of certain |
We cannot fully foresee the effects of changes in economic conditions on our business. We have assumed economic and competitive situations will not change significantly in 2019.the remainder of 2020.
Other factors and assumptions not identified above, including those discussed in Item 1A of thisPart I of our Annual Report on Form 10-K, could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in, contemplated or implied by forward-looking statements made by us or our representatives. We undertake no obligation to update the forward-looking information contained in this filing.filing unless required by applicable law.
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Item 3.Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.1, 2020.
Item 4.Controls and Procedures.
The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures as of the quarter ended May 25, 2019,23, 2020, the end of the period covered by this report. Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In the first quarter of 2019, the Company adopted ASU 2016-02, “Leases.” The Company updated accounting policies and implemented new internal controls in conjunction with the new lease standard. In connection with the evaluation described above, there was no change in Kroger’s internal control over financial reporting during the quarter ended May 25, 2019,23, 2020, that has materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting.
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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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
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| | | | | | | | | Approximate |
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| | | | | | | | | Dollar Value of |
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| | | | | | | Total Number of | | Yet Be |
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| | | | | | | Shares Purchased | | Purchased |
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| | Total Number | | Average | | as Part of Publicly | | Under the Plans |
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| | of Shares | | 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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First four weeks | | | | | | | | | | | |
February 2, 2020 to February 29, 2020 |
| 7,526,940 |
| $ | 28.62 |
| 7,526,645 |
| $ | 395 | |
Second four weeks | | | | | | | | | | | |
March 1, 2020 to March 28, 2020 |
| 6,445,125 |
| $ | 30.41 |
| 6,123,092 |
| $ | 245 | |
Third four weeks | | | | | | | | | | | |
March 29, 2020 to April 25, 2020 |
| 332,108 |
| $ | 29.46 |
| 332,108 |
| $ | 245 | |
Fourth four weeks | | | | | | | | | | | |
April 26, 2020 to May 23, 2020 |
| 328,161 | | $ | 32.42 | | 328,104 | | $ | 245 | |
Total |
| 14,632,334 |
| $ | 29.51 |
| 14,309,949 |
| $ | 245 | |
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| Dollar Value of |
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| Shares that May |
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| Total Number of |
| Yet Be |
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| Purchased |
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| Total Number |
| Average |
| as Part of Publicly |
| Under the Plans |
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| of Shares |
| 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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First four weeks |
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February 3, 2019 to March 2, 2019 |
| 150,556 |
| $ | 28.83 |
| 149,724 |
| $ | 546 |
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Second four weeks |
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March 3, 2019 to March 30, 2019 |
| 383,212 |
| $ | 25.64 |
| 176,269 |
| $ | 546 |
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Third four weeks |
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March 31, 2019 to April 27, 2019 |
| 128,718 |
| $ | 25.23 |
| 128,687 |
| $ | 546 |
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Fourth four weeks |
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April 28, 2019 to May 25, 2019 |
| 109,294 |
| $ | 25.37 |
| 109,294 |
| $ | 546 |
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Total |
| 771,780 |
| $ | 26.15 |
| 563,974 |
| $ | 546 |
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(1) |
| The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The first quarter of |
(2) |
| Includes (i) shares repurchased under the November 2019 Repurchase Program described below in (4), (ii) shares repurchased under a program announced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, under which repurchases are limited to proceeds received from exercises of stock options and the tax benefits associated therewith (“1999 Repurchase Program”) and |
(3) |
| Represents shares repurchased under the November 2019 Repurchase Program and the 1999 Repurchase Program. |
(4) |
| On November 5, 2019, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with rule 10b5-1 of the Securities Exchange Act of 1934 (the “November 2019 Repurchase Program”). The amounts shown in this column reflect the amount remaining under the |
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Item 6. Exhibits.
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 101.INS | - | XBRL Instance |
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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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Exhibit Index
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE KROGER CO. | ||
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Dated: June | By: | /s/ W. Rodney McMullen | |
| | W. Rodney McMullen | |
| | Chairman of the Board and Chief Executive Officer | |
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Dated: June | By: | /s/ Gary Millerchip | |
| | Gary Millerchip | |
| | Senior Vice President and Chief Financial Officer |
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