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.

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.

~~8.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)~~

7.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table represents the changes in AOCI by component for the first quarters of ~~2019~~2020 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)

~~(1)~~

All amounts are net of tax.

(2)	~~(2)~~ Related to the adoption of ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income."

(3)

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

~~(3)~~

Net of tax of $1($11) for cash flow hedging activities ~~and $4 for pension and postretirement defined benefit plans~~ for the first quarter of ~~2018.~~ 2020.

(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.

~~(4)~~

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

The following table represents the items reclassified out of AOCI and the related tax effects for the first quarters of ~~2019~~2020 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)

~~(1)~~

Reclassified from AOCI into interest expense.

(2)

~~(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).

8.	INCOME TAXES

~~9.INCOME TAXES~~

The effective income tax rate was ~~22.8%~~23.5% and ~~23.4%~~22.8% for the first quarters of ~~2019~~2020 and ~~2018,~~2019, respectively. The effective income tax rate for the first quarter of ~~2019~~2020 and ~~2018~~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.

~~10.HELD FOR SALE AND DISPOSAL OF BUSINESSES~~

~~Certain assets~~The Coronavirus Aid, Relief, and ~~liabilities, related~~Economic 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 Dairy~~COVID-19 pandemic. These measures include deferring the due dates of tax payments and ~~You Technology businesses, were classified as held for sale in~~other 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 sale~~deferred 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 ~~entitled~~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 ~~receive~~be paid by December 31, 2021 and the other ~~cash payments~~half by December 31, 2022. During the first quarter of ~~$105 over five years. The transaction includes a long-term service agreement for Inmar to provide~~2020, the Company ~~digital coupon services. The sale resulted in a gain~~deferred the employer portion of ~~$70, $52 net~~social 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.

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

●

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

~~Net earnings~~Please 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.

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 include~~2020, and came to the ~~following, which~~forefront as we ~~define~~provided 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

●

~~A reduction~~Offered free COVID-19 testing to OG&A of $13 million, $10 million net of tax, for adjustments to obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension fund (the “2018 OG&A Adjusted Item”).

associates based on symptoms and medical need.

●

~~A reduction~~Provided COVID-19 Emergency Leave to ~~depreciation and amortization expenses of $14 million, $11 million net of tax, related to held for sale assets (the “2018 Depreciation Adjusted Item”).~~

associates.

●

~~Gains~~Recognized and rewarded associates with special premium pay and bonuses in ~~other income (expense) of $1.8 billion, $1.4 billion net of tax, related~~addition to ~~the sale of our convenience store business unit~~ongoing comprehensive benefits packages including healthcare coverage and ~~$36 million, $27 million net of tax, for the mark to market gain on Ocado securities (the “2018 Other Income (Expense) Adjusted Items”).~~

retirement benefits that many competitors don’t offer.

●

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.

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%.

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

OVERVIEW

Notable items for the first quarter of ~~2019~~2020 are:

Shareholder Return

●

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

$1.52.

●

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

$1.22.

●

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 ~~1.5%~~19.0% in the first quarter of ~~2019.~~

2020.

●

Digital revenue grew ~~42%~~92% in the first quarter of ~~2019,~~2020, driven by Pickup and ~~Delivery.~~Delivery sales growth. Digital revenue primarily includes revenue from all curbside pickup locations, online sales delivered to customer locations and products shipped to customer locations.

Significant Events

●

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

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

~~During the first quarter of 2019, we returned $128~~Invested more than $830 million to ~~shareholders from share repurchases~~support and ~~dividend payments.~~

safeguard associates, customers and communities during the COVID-19 pandemic. These investments primarily relate to items within OG&A such as associate Thank You pay and Appreciation pay, expanded sick and emergency leave pay, temporary increases in hourly associate labor costs for our frontline associates (Hero Pay) and investments in associate and customer safety during the pandemic (collectively, the “COVID-19 Investments”).

●

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.

~~Alternative profit streams grew~~●

In addition to the recurring multi-employer pension contributions we make in the ~~first quarter~~normal course of ~~2019, as compared~~business, we contributed an incremental $236 million, $180 million net of tax, to the first quarter of 2018, achieving our plan. Kroger’s ecosystem fuels the growth of adjacent alternative profit streams like Kroger Personal Finance, customer data insights, and media businesses that are essential components of Restock Kroger. These businesses comprise a significant portion of Kroger’s overall alternative profit stream portfolio. They are dependent on a core supermarket business to deliver sustainable, long-term growth and profitability.

multi-employer pension plans, helping stabilize future associate benefits (the “2020 Multi-Employer Pension Contribution”).

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

The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, excluding the ~~2019~~2020 and ~~2018~~2019 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

(1)The amounts presented represent the after-tax effect of each adjustment, which was calculated using discrete tax rates.

(2)The pre-tax adjustment for pension plan withdrawal liabilities was $59.

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

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

(5)The pre-tax adjustment for mark to market gain on Ocado securities was ($422) in the first quarter of 2020 and ($106) in the first quarter of 2019.

(6)The pre-tax adjustment for Home Chef contingent consideration was $60 in the first quarter of 2020 and ($24) in the first quarter of 2019.

(7)The pre-tax adjustment for transformation costs was $38.

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

RESULTS OF OPERATIONS

Sales

Total Sales

($ in millions)


	First Quarter Ended
	May 23,		Percentage		May 25,		Percentage
	2020		Change⁽¹⁾		2019		Change⁽²⁾
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	%

Total sales	$	41,549	11.5	%	$	37,251	(1.2)	%

(1)

~~(1)~~

~~The amounts presented represent~~This column represents the ~~after-tax effect of each adjustment.~~

~~(2)~~

~~The pre-tax adjustments for pension plan agreements were $59~~percentage change in the first quarter of ~~2019 and ($13) in~~2020, compared to the first quarter of ~~2018.~~

2019.

(2)

~~(3)~~

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

~~(4)~~

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

~~(5)~~

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

~~(6)~~

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

~~(7)~~

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

~~(8)~~

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

~~(9)~~

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

~~RESULTS OF OPERATIONS~~

~~Sales~~

~~Total Sales~~

~~($ in millions)~~

First Quarter Ended

May 25,

Percentage

May 26,

Percentage


2019

Change (1)

2018

Change (2)

Total sales to retail customers without fuel (3)

$
32,594

2.0
%
$
31,967

2.8
%
Supermarket fuel sales

4,396

(3.6)
%

4,560

19.5
%
Convenience stores (4)

—

N/A

944

(28.0)
%
Other sales (5)

261

4.0
%

251

14.6
%

Total sales

$
37,251

(1.2)
%
$
37,722

3.5
%

~~(1)~~

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

(3)

~~(2)~~

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

~~(3)~~

Digital sales, primarily including Pickup, Delivery, Ship and pharmacy e-commerce sales, grew approximately 92% and 42% in the first quarter of 2020 and 2019, ~~and 66% in the first quarter of 2018.~~respectively. These sales are included in the “total sales to retail customers without fuel” line ~~above~~.

above.

(4)

~~(4)~~

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

~~(5)~~

Ot~~her~~Other sales primarily relate to external sales at food production plants, data analytic services and third party media ~~revenue~~revenue. The decrease in other sales in the first quarter of 2020, compared to the first quarter of 2019, is primarily due to the sale of You Technology and ~~digital coupon services.~~

Turkey Hill Dairy during the first quarter of 2019, partially offset by an increase in data analytic services and third party media revenue.

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 ~~decrease~~increase was due to ~~the sale of our convenience store business unit and a decrease in supermarket fuel sales, partially offset by our~~an 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%. Identical~~19.0%, 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, including~~a 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.

Identical Sales

($ in millions)


	First Quarter Ended
	May 23,		Percentage		May 25,		Percentage
	2020		Change⁽¹⁾		2019		Change⁽²⁾
Excluding fuel centers	$	38,137	19.0	%	$	32,046	1.5	%

First Quarter Ended

May 25,

Percentage

May 26,

Percentage


2019

Change (1)

2018

Change (2)

Excluding fuel centers

$
32,133

1.5
%
$
31,670

1.9
%

(1)	~~(1)~~ This column represents the percentage change in identical sales in the first quarter of 2020, compared to the first quarter of 2019.

(2)

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

~~(2)~~

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

Gross Margin, LIFO and FIFO Gross Margin

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

Our gross margin rate, as a percentage of sales, was 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, as~~fuel sales, which have a ~~percentage of sales, growth in our alternative profit stream portfolio and a higher~~lower 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 warehouse~~decreased shrink, transportation and ~~transportation~~warehousing 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 40~~increased 44 basis points in the first quarter of ~~2019,~~2020, compared to the first quarter of ~~2018.~~2019. This ~~decrease~~increase 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 warehouse~~warehousing and ~~transportation~~advertising costs, as a percentage of sales, ~~due to start up costs associated with new warehouses and new warehouse capabilities, partially offset by decreased shrink, as a percentage of~~reflecting 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 ~~2018~~2019 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 effect~~broad 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.

Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, the ~~2019~~2020 OG&A Adjusted Items and the ~~2018~~2019 OG&A Adjusted ~~Item,~~Items, our OG&A rate ~~decreased 12~~increased 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 execution~~effect of ~~Restock Kroger initiatives and planned real estate transactions during~~increased 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~~

~~Rent~~rent 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 ~~lower~~the 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 31~~increased 77 basis points in the first quarter of ~~2019,~~2020, compared to the first quarter of ~~2018,~~2019, due to ~~increased OG&A~~improved 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 ~~fuel~~the 2020 and ~~the~~ 2019 ~~and 2018~~ Adjusted Items, ~~decreased 33~~increased 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 ~~lower~~higher gross margin rate, decreased rent and ~~increased~~ depreciation and amortization ~~expense,~~expenses, as a percentage of sales, and increased fuel earnings, partially offset by ~~lower~~increased OG&A expense, as a percentage of sales.

Specific factors ofcontributing to the ~~above~~ operating trends ~~under~~for operating profit and FIFO operating profit above are discussed earlier in this section.

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,
	2020		2019
Operating profit	$	1,326	$	901
LIFO charge		31		15

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 ~~2019~~2020 and ~~2018~~the 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% from~~2019. Adjusted net earnings of ~~$2.37~~$1.22 per diluted share for the first quarter of ~~2018. Adjusted~~2020 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 ~~decrease~~increase in adjusted net earnings per diluted share resulted primarily from ~~lower~~increased FIFO operating profit ~~partially offset by lower income tax~~without 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.

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 net~~2019. Net earnings including noncontrolling interests, adjusted for non-cash items and other impacts, generated approximately $2.2 billion of operating cash ~~provided by operating activities~~flow 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 ~~decrease~~increase 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 ~~prepaid medical benefit costs~~FIFO inventory at the end of the first quarter of ~~2019,~~2020 due to accelerated timing of inventory sell-through resulting from elevated demand for our products during the pandemic;

●

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 ~~end~~first quarter of ~~2018~~;

~~Reduced working capital related~~2019, primarily due to ~~income taxes receivable and payable over~~ the ~~prior year as a result of a prior year overpayment~~deferral of our ~~fourth~~first quarter ~~2017~~2020 federal estimated ~~taxes~~tax payment under the Coronavirus Aid, Relief, and ~~our estimated taxes on~~Economic Security Act (the “CARES Act”) which was enacted in the ~~gain on sale~~first quarter of ~~our convenience store business unit; and~~

2020;

●

~~Payments on operating lease liabilities; partially~~Partially offset by

~~Proceeds~~ no proceeds from a contract associated with the sale of a ~~business.~~

business in the first quarter of 2020.

Cash paid for ~~taxes~~interest increased in the first quarter of ~~2019,~~2020, compared ~~with~~to the first quarter of ~~2018,~~2019, primarily due to the ~~payment~~timing of ~~estimated taxes on~~certain semi-annual senior notes interest payments that were paid during the ~~gain on sale~~first 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 to~~2019. The amount of cash ~~provided~~used by investing activities ~~of $1.3 billion~~increased in the first quarter of ~~2018. We used cash in investing activities in~~2020 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 ~~2019~~2020 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.

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 of~~no 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.

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, 2019~~23, 2020 compared to our fiscal year end ~~2018~~2019 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%.

��

Common Share Repurchase Program

During the first quarter of ~~2019,~~2020, we invested ~~$15~~$422 million to repurchase ~~564 thousand~~14.3 million Kroger common shares at an average price of ~~$26.68~~$29.51 per share. The shares repurchased in the first quarter of ~~2019~~2020 were reacquired under ~~a program that uses~~ the following share repurchase programs:

●

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, $546~~23, 2020, there was $245 million ~~remained~~remaining under the ~~March 2018~~November 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

First Quarter Ended

May 25,

May 26,

2019

2018
Cash dividends paid
$
113

$
110
Cash dividends paid per common share
$
0.140

$
0.125

Liquidity Needs

We estimate our liquidity needs over the next twelve-month period to approximate $4.8 billion, which includes anticipated requirements for working capital, capital investments, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of the first quarter of 2019. We generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months. 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 of~~our estimated liquidity needs. We expect to satisfy these obligations using cash generated from operations, ~~and~~temporary cash investments on hand, or through ~~issuing~~the 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 ~~199~~143 major within-the-wall remodels. Total supermarket square footage at the end of the first quarter of ~~2019 increased~~2020 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 ~~2019~~2020 increased ~~0.7%~~0.5% over the end of the first quarter of ~~2018.~~2019.

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 ADOPTED~~26

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 guidance~~continue 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 adopted~~these 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.~~

~~SUPPLEMENTAL INFORMATION~~

~~Sales Reclassification~~

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

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

First Quarter Ended

Previously Stated

Reclassification

Reclassified

May 26,

May 26,

2018

2018

2018
Sales
$
37,530

$
192

$
37,722

Operating expenses

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

29,362

57

29,419
Operating, general and administrative

6,122

135

6,257
Rent

276

—

276
Depreciation and amortization

741

—

741

Operating profit
$
1,029

$
—

$
1,029

~~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-K~~April 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 basis~~generate strong free cash flow and ~~other uncertainties described below could cause actual results to differ materially.~~achieve sustainable and attractive total shareholder returns.

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

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

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

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

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

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

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

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

●

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

markets.

●

Our ability to achieve sales, earnings and incremental FIFO operating profit ~~and free cash flow~~ goals may be affected by: COVID-19 related factors, risks and challenges, including among others, the length of time that the pandemic continues, the temporary inability of customers to shop due to illness, quarantine, or other travel restrictions or financial hardship, shifts in demand away from discretionary or higher priced products to lower priced products, or stockpiling or similar pantry-filling activities, reduced workforces which may be caused by, but not limited to, the temporary inability of the workforce to work due to illness, quarantine, or government mandates, or temporary store closures due to reduced workforces or government mandates; labor negotiations or disputes; changes in the types and numbers of businesses that compete with us; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; ~~Our~~our response to these actions; the state of the economy, including interest rates, the inflationary and deflationary trends in certain commodities, changes in tariffs, and the unemployment rate; the effect that fuel costs have on consumer spending; volatility of fuel margins; changes in government-funded benefit ~~programs;~~programs and the extent and effectiveness of any COVID-19 stimulus packages; manufacturing commodity costs; diesel fuel costs related to our logistics operations; trends in consumer spending; the extent to which our customers exercise caution in their purchasing in response to economic conditions; the ~~uncertain pace~~uncertainty of economic ~~growth;~~growth or recession; changes in inflation or deflation in product and operating costs; stock repurchases; our ability to retain pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; our ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the effect of public health crises or other significant catastrophic events, including the coronavirus; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of our future growth plans; the ability to execute on Restock ~~Kroger;~~Kroger; and the successful integration of merged companies and new ~~partnerships~~.

partnerships.

●

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

●

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

expenses.

We cannot fully foresee the effects of changes in economic conditions on our business. We have assumed economic and competitive situations will not change significantly in ~~2019.~~the remainder of 2020.

Other factors and assumptions not identified above, including those discussed in Item 1A of ~~this~~Part 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.

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.

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.

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

(c)

ISSUER PURCHASES OF EQUITY SECURITIES


					Approximate
					Dollar Value of
					Shares that May
				Total Number of	Yet Be
				Shares Purchased	Purchased
	Total Number	Average		as Part of Publicly	Under the Plans
	of Shares	Price Paid Per		Announced Plans	or Programs⁽⁴⁾
Period⁽¹⁾	Purchased⁽²⁾	Share		or Programs⁽³⁾	(in millions)
First four weeks
February 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

Maximum

Dollar Value of

Shares that May

Total Number of

Yet Be

Shares Purchased

Purchased

Total Number

Average

as Part of Publicly

Under the Plans

of Shares

Price Paid Per

Announced Plans

or Programs(4)

Period(1)

Purchased(2)

Share

or Programs(3)

(in millions)

First four weeks

February 3, 2019 to March 2, 2019

150,556

$
28.83

149,724

$
546

Second four weeks

March 3, 2019 to March 30, 2019

383,212

$
25.64

176,269

$
546

Third four weeks

March 31, 2019 to April 27, 2019

128,718

$
25.23

128,687

$
546

Fourth  four weeks

April 28, 2019 to May 25, 2019

109,294

$
25.37

109,294

$
546

Total

771,780

$
26.15

563,974

$
546

(1)

~~(1)~~

The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The first quarter of ~~2019~~2020 contained four 28-day ~~periods~~.

periods.

(2)

~~(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 ~~(ii) 207,806~~(iii) 322,385 shares that were surrendered to the Company by participants under our ~~long-term~~long term incentive plans to pay for taxes on restricted stock ~~awards~~.

awards.

(3)

~~(3)~~

Represents shares repurchased under the November 2019 Repurchase Program and the 1999 Repurchase Program.

(4)

~~(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 ~~March 2018~~November 2019 Repurchase Program as of the specified period end dates. Amounts available under the 1999 Repurchase Program are dependent upon option exercise activity. The ~~March 2018~~November 2019 Repurchase Program and the 1999 Repurchase Program do not have an expiration date but may be suspended or terminated by our Board of Directors at any ~~time~~.

time.

Item 6. Exhibits.


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

EXHIBIT 3.2	-	The Company’s regulations are hereby incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 27, 2019.

EXHIBIT 4.1	-	Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request.

EXHIBIT 31.1	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.

EXHIBIT 31.2	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer.

EXHIBIT 32.1	-	Section 1350 Certifications.

EXHIBIT 101.INS	-	XBRL Instance ~~Document.~~Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

EXHIBIT 101.SCH	-	XBRL Taxonomy Extension Schema Document.

EXHIBIT 101.CAL	-	XBRL Taxonomy Extension Calculation Linkbase Document.

EXHIBIT 101.DEF	-	XBRL Taxonomy Extension Definition Linkbase Document.

EXHIBIT 101.LAB	-	XBRL Taxonomy Extension Label Linkbase Document.

EXHIBIT 101.PRE	-	XBRL Taxonomy Extension Presentation Linkbase Document.

~~Exhibit Index~~


EXHIBIT ~~3.1~~104	-	~~Amended Articles of Incorporation~~Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are ~~hereby incorporated by reference to Exhibit 3.1 of~~embedded within the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010, as amended by the Amendment to Amended Articles of Incorporation, which is hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 23, 2015.Inline XBRL document.

~~EXHIBIT 3.2~~	-	~~The Company’s regulations are hereby incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 27, 2019.~~

~~EXHIBIT 4.1~~	-	Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request.

~~EXHIBIT 31.1~~	-	~~Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.~~

~~EXHIBIT 31.2~~	-	~~Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer.~~

~~EXHIBIT 32.1~~	-	~~Section 1350 Certifications.~~

~~EXHIBIT 101.INS~~	-	~~XBRL Instance Document.~~

~~EXHIBIT 101.SCH~~	-	~~XBRL Taxonomy Extension Schema Document.~~

~~EXHIBIT 101.CAL~~	-	~~XBRL Taxonomy Extension Calculation Linkbase Document.~~

~~EXHIBIT 101.DEF~~	-	~~XBRL Taxonomy Extension Definition Linkbase Document.~~

~~EXHIBIT 101.LAB~~	-	~~XBRL Taxonomy Extension Label Linkbase Document.~~

~~EXHIBIT 101.PRE~~	-	~~XBRL Taxonomy Extension Presentation Linkbase Document.~~

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.
	~~THE KROGER CO.~~

Dated: June ~~28, 2019~~26, 2020	By:	/s/ W. Rodney McMullen
		W. Rodney McMullen
		Chairman of the Board and Chief Executive Officer

Dated: June ~~28, 2019~~26, 2020	By:	/s/ Gary Millerchip
		Gary Millerchip
		Senior Vice President and Chief Financial Officer

3233


Ohio		31-0345740
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


Title of each class	Trading Symbol	Name of each exchange on which registered
Common, $1.00 Par Value	KR	New York Stock Exchange


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer ~~(do not check if a smaller reporting company)~~	☐	Smaller reporting company	☐
		Emerging growth company	☐


	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


	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


									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


	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)


	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


		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


		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


	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



	~~May 25, 2019~~
~~Weighted-average remaining lease term (years)~~
~~Operating leases~~	~~16.3~~
~~Finance leases~~	~~15.0~~
~~Weighted-average discount rate~~
~~Operating leases~~	~~4.4~~	%
~~Finance leases~~	~~4.4~~	%


	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


					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


					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)


	First Quarter Ended
	May 25,		Percentage		May 26,		Percentage
	2019		Change (1)		2018		Change (2)
Total sales to retail customers without fuel (3)	$	32,594	2.0	%	$	31,967	2.8	%
Supermarket fuel sales		4,396	(3.6)	%		4,560	19.5	%
Convenience stores (4)		—	N/A			944	(28.0)	%
Other sales (5)		261	4.0	%		251	14.6	%

Total sales	$	37,251	(1.2)	%	$	37,722	3.5	%


	First Quarter Ended
	Previously Stated		Reclassification		Reclassified
	May 26,				May 26,
	2018		2018		2018
Sales	$	37,530	$	192	$	37,722

Operating expenses
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		29,362		57		29,419
Operating, general and administrative		6,122		135		6,257
Rent		276		—		276
Depreciation and amortization		741		—		741

Operating profit	$	1,029	$	—	$	1,029


					Maximum
					Dollar Value of
					Shares that May
				Total Number of	Yet Be
				Shares Purchased	Purchased
	Total Number	Average		as Part of Publicly	Under the Plans
	of Shares	Price Paid Per		Announced Plans	or Programs(4)
Period(1)	Purchased(2)	Share		or Programs(3)	(in millions)
First four weeks
February 3, 2019 to March 2, 2019	150,556	$	28.83	149,724	$	546
Second four weeks
March 3, 2019 to March 30, 2019	383,212	$	25.64	176,269	$	546
Third four weeks
March 31, 2019 to April 27, 2019	128,718	$	25.23	128,687	$	546
Fourth four weeks
April 28, 2019 to May 25, 2019	109,294	$	25.37	109,294	$	546
Total	771,780	$	26.15	563,974	$	546