UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~November 9, 2019~~May 23, 2020

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

For the transition period from to

Commission file number 1-303

The Kroger Co.

(Exact name of registrant as specified in its charter)


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

1014 Vine Street, Cincinnati, Ohio 45202

(Address of principal executive offices)

(Zip Code)

(513) 762-4000

(Registrant’s telephone number, including area code)

Unchanged

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

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


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

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

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

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


Large accelerated filer	⌧☒	Accelerated filer	◻☐
Non-accelerated filer	◻☐	Smaller reporting company	◻☐
		Emerging growth company	◻☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻☐

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

There were ~~800,587,313~~777,925,812 shares of Common Stock ($1 par value) outstanding as of ~~December 11, 2019.~~June 23, 2020.

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Third Quarter Ended				Three Quarters Ended				First Quarter Ended
	November 9,		November 10,		November 9,		November 10,		May 23,		May 25,
(In millions, except per share amounts)	2019		2018		2019		2018		2020		2019
Sales	$	27,974	$	27,831	$	93,393	$	93,566	$	41,549	$	37,251

Operating expenses
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		21,798		21,753		72,787		73,147		31,454		28,983
Operating, general and administrative		5,097		4,661		16,223		15,630		7,671		6,314
Rent		201		200		675		680		273		274
Depreciation and amortization		624		570		1,994		1,884		825		779

Operating profit		254		647		1,714		2,225		1,326		901

Other income (expense)
Interest expense		(137)		(142)		(463)		(479)		(174)		(197)
Non-service component of company-sponsored pension plan costs		(1)		(6)		(2)		(19)		11		3
Mark to market gain (loss) on Ocado securities		106		(100)		166		152
Mark to market gain on Ocado securities										422		106
Gain on sale of businesses		—		—		176		1,782		—		176

Net earnings before income tax expense		222		399		1,591		3,661		1,585		989

Income tax expense		79		91		398		834		373		226

Net earnings including noncontrolling interests		143		308		1,193		2,827		1,212		763
Net loss attributable to noncontrolling interests		(120)		(9)		(139)		(24)		—		(9)

Net earnings attributable to The Kroger Co.	$	263	$	317	$	1,332	$	2,851	$	1,212	$	772

Net earnings attributable to The Kroger Co. per basic common share	$	0.32	$	0.39	$	1.65	$	3.46	$	1.53	$	0.96

Average number of common shares used in basic calculation		802		797		800		814		780		798

Net earnings attributable to The Kroger Co. per diluted common share	$	0.32	$	0.39	$	1.64	$	3.43	$	1.52	$	0.95

Average number of common shares used in diluted calculation		807		807		805		822		788		805

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

THE KROGER CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Third Quarter Ended				Three Quarters Ended				First Quarter Ended
	November 9,		November 10,		November 9,		November 10,		May 23,		May 25,
(In millions)	2019		2018		2019		2018		2020		2019
Net earnings including noncontrolling interests	$	143	$	308	$	1,193	$	2,827	$	1,212	$	763

Other comprehensive income (loss)
Realized gains on available for sale securities, net of income tax⁽¹⁾		—		—		—		(4)
Change in pension and other postretirement defined benefit plans, net of income tax⁽²⁾		7		10		23		33
Unrealized gains and losses on cash flow hedging activities, net of income tax⁽³⁾		34		37		(29)		37
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax⁽⁴⁾		1		1		3		3
Cumulative effect of accounting change⁽⁵⁾		—		—		(146)		—
Change in pension and other postretirement defined benefit plans, net of income tax⁽¹⁾										3		7
Unrealized gains and losses on cash flow hedging activities, net of income tax⁽²⁾										(22)		(8)
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax⁽³⁾										1		1
Cumulative effect of accounting change⁽⁴⁾										—		(146)

Total other comprehensive income (loss)		42		48		(149)		69
Total other comprehensive loss										(18)		(146)

Comprehensive income		185		356		1,044		2,896		1,194		617
Comprehensive loss attributable to noncontrolling interests		(120)		(9)		(139)		(24)		—		(9)
Comprehensive income attributable to The Kroger Co.	$	305	$	365	$	1,183	$	2,920	$	1,194	$	626

(1)	Amount is net of tax of ~~($1)~~$2 for the first ~~three quarters~~quarter of ~~2018.~~2020 and $3 for the first quarter of 2019.

(2)	Amount is net of tax of ~~$3 for the third quarter of 2019 and 2018. Amount is net of tax of $8~~($11) for the first ~~three quarters~~quarter of ~~2019~~2020 and ~~$10~~($9) for the first ~~three quarters~~quarter of ~~2018.~~2019.

(3)	Amount is net of tax of ~~$10 for the third quarter of 2019 and $11 for the third quarter of 2018. Amount is net of tax of ($16)~~$1 for the first ~~three~~ quarters of ~~2019~~2020 and ~~$10 for the first three quarters of 2018.~~2019.

(4)	~~Amount is net of tax of $1 for the third quarter of 2019 and $1~~ ~~for the third quarter of 2018. Amount is net of tax of~~ ~~$3 for the first three quarters of 2019 and $3 for the first three quarters of 2018.~~

~~(5)~~

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

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

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(unaudited)


		November 9,		February 2,		May 23,		February 1,
(In millions, except par amounts)		2019		2019		2020		2020
ASSETS
Current assets
Cash and temporary cash investments		$	545	$	429	$	2,726	$	399
Store deposits in-transit			1,034		1,181		1,142		1,179
Receivables			1,600		1,589		1,552		1,706
FIFO inventory			8,757		8,123		7,708		8,464
LIFO reserve			(1,345)		(1,277)		(1,411)		(1,380)
Assets held for sale	��		—		166
Prepaid and other current assets			434		592		458		522
Total current assets			11,025		10,803		12,175		10,890

Property, plant and equipment, net			21,801		21,635		21,790		21,871
Operating lease assets			6,847		—		6,831		6,814
Intangibles, net			1,086		1,258		1,044		1,066
Goodwill			3,076		3,087		3,076		3,076
Other assets			1,558		1,335		2,026		1,539

Total Assets		$	45,393	$	38,118	$	46,942	$	45,256

LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under finance leases		$	1,417	$	3,157	$	1,095	$	1,965
Current portion of operating lease liabilities			673		—		669		597
Trade accounts payable			6,867		6,059		7,132		6,349
Accrued salaries and wages			1,087		1,227		1,302		1,168
Liabilities held for sale			—		51
Other current liabilities			4,074		3,780		4,473		4,164
Total current liabilities			14,118		14,274		14,671		14,243

Long-term debt including obligations under finance leases			12,227		12,072		12,376		12,111
Noncurrent operating lease liabilities			6,449		—		6,503		6,505
Deferred income taxes			1,517		1,562		1,532		1,466
Pension and postretirement benefit obligations			471		494		591		608
Other long-term liabilities			1,883		1,881		1,941		1,750

Total Liabilities			36,665		30,283		37,614		36,683

Commitments and contingencies see Note 8
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 2019 and 2018			1,918		1,918
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			3,296		3,245		3,397		3,337
Accumulated other comprehensive loss			(495)		(346)		(658)		(640)
Accumulated earnings			20,781		19,681		22,062		20,978
Common shares in treasury, at cost, 1,116 shares in 2019 and 1,120 shares in 2018			(16,585)		(16,612)
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.			8,915		7,886		9,356		8,602
Noncontrolling interests			(187)		(51)		(28)		(29)

Total Equity			8,728		7,835		9,328		8,573

Total Liabilities and Equity		$	45,393	$	38,118	$	46,942	$	45,256

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

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Three Quarters Ended
	November 9,		November 10,		May 23,		May 25,
(In millions)	2019		2018		2020		2019
Cash Flows from Operating Activities:
Net earnings including noncontrolling interests	$	1,193	$	2,827	$	1,212	$	763
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization		1,994		1,884		825		779
Non-cash operating lease cost		494		—
Operating lease asset amortization						193		197
LIFO charge		69		39		31		15
Stock-based employee compensation		117		115		63		48
Expense for company-sponsored pension plans		32		54
Company-sponsored pension plan costs						(5)		11
Deferred income taxes		(46)		148		76		(73)
Gain on sale of businesses		(176)		(1,782)		—		(176)
Gain on the sale of assets		(150)		—		(12)		(57)
Mark to market gain on Ocado securities		(166)		(152)		(422)		(106)
Impairment of Lucky's Market		238		—
Other		(1)		29		108		(29)
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses:
Store deposits in-transit		148		63		37		115
Receivables		93		(95)		90		33
Inventories		(636)		(601)		756		124
Prepaid and other current assets		66		380		63		86
Trade accounts payable		808		666		783		364
Accrued expenses		299		270		167		(18)
Income taxes receivable and payable		(145)		259		276		63
Contribution to company-sponsored pension plan		—		(185)
Operating lease liabilities		(477)		—		(141)		(146)
Proceeds from contract associated with sale of business		295		—		—		295
Other		(1)		(186)		145		(20)

Net cash provided by operating activities		4,048		3,733		4,245		2,268

Cash Flows from Investing Activities:
Payments for property and equipment, including payments for lease buyouts		(2,363)		(2,257)		(698)		(901)
Proceeds from sale of assets		257		76		35		117
Payments for acquisitions, net of cash acquired		—		(197)
Purchases of stores		—		(44)
Net proceeds from sale of businesses		327		2,169		—		326
Purchases of Ocado securities		—		(392)
Other		(45)		15		(26)		(6)

Net cash used by investing activities		(1,824)		(630)		(689)		(464)

Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		61		1,033		504		9
Payments on long-term debt including obligations under finance leases		(1,540)		(258)		(14)		(1,013)
Net payments on commercial paper		(235)		(1,486)		(1,150)		(700)
Dividends paid		(356)		(324)		(128)		(113)
Proceeds from issuance of capital stock		32		55		57		12
Treasury stock purchases		(34)		(1,996)		(422)		(15)
Other		(36)		(45)		(76)		(4)

Net cash used by financing activities		(2,108)		(3,021)		(1,229)		(1,824)

Net increase in cash and temporary cash investments		116		82
Net increase (decrease) in cash and temporary cash investments						2,327		(20)

Cash and temporary cash investments:
Beginning of year		429		347		399		429
End of period	$	545	$	429	$	2,726	$	409

Reconciliation of capital investments:
Payments for property and equipment, including payments for lease buyouts	$	(2,363)	$	(2,257)	$	(698)	$	(901)
Payments for lease buyouts		24		—		5		—
Changes in construction-in-progress payables		96		(49)		(62)		25
Total capital investments, excluding lease buyouts	$	(2,243)	$	(2,306)	$	(755)	$	(876)

Disclosure of cash flow information:
Cash paid during the year for interest	$	407	$	424	$	188	$	115
Cash paid during the year for income taxes	$	633	$	376	$	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 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
Issuance of common stock:

Stock options exercised

—

—

—

(2)

30

—

—

—

30
Restricted stock issued

—

—

(104)

(2)

64

—

—

—

(40)
Treasury stock activity:

Treasury stock purchases, at cost

—

—

134

2

(135)

—

—

—

(1)
Stock options exchanged

—

—

—

1

(35)

—

—

—

(35)
Share-based employee compensation

—

—

36

—

—

—

—

—

36
Other comprehensive income net of income tax of $2

—

—

—

—

—

5

—

—

5
Other

—

—

55

—

(53)

—

—

—

2
Cash dividends declared ($0.14 per common share)

—

—

—

—

—

—

(101)

—

(101)
Net earnings including noncontrolling interests

—

—

—

—

—

—

508

(7)

501

Balances at August 18, 2018

1,918

$
1,918

$
3,180

1,121

$
(16,605)

$
(450)

$
19,331

$
(36)

$
7,338
Issuance of common stock:

Stock options exercised

—

—

—

(1)

15

—

—

—

15
Restricted stock issued

—

—

(4)

—

3

—

—

—

(1)
Treasury stock activity:

Stock options exchanged

—

—

—

—

(17)

—

—

—

(17)
Share-based employee compensation

—

—

34

—

—

—

—

—

34
Other comprehensive income net of income tax of $15

—

—

—

—

—

48

—

—

48
Other

—

—

(1)

—

(4)

—

—

3

(2)
Cash dividends declared ($0.14 per common share)

—

—

—

—

—

—

(113)

—

(113)
Net earnings including noncontrolling interests

—

—

—

—

—

—

317

(9)

308

Balances at November 10, 2018

1,918

$
1,918

$
3,209

1,120

$
(16,608)

$
(402)

$
19,535

$
(42)

$
7,610
Issuance of common stock:

Stock options exercised

—

—

—

—

10

—

—

—

10
Restricted stock issued

—

—

(5)

(1)

2

—

—

—

(3)
Treasury stock activity:

Stock options exchanged

—

—

—

1

(14)

—

—

—

(14)
Share-based employee compensation

—

—

39

—

—

—

—

—

39
Other comprehensive income net of income tax of $17

—

—

—

—

—

56

—

—

56
Other

—

—

2

—

(2)

—

—

(1)

(1)
Cash dividends declared ($0.14 per common share)

—

—

—

—

—

—

(113)

—

(113)
Net earnings including noncontrolling interests

—

—

—

—

—

—

259

(8)

251

Balances at February 2, 2019

1,918

$
1,918

$
3,245

1,120

$
(16,612)

$
(346)

$
19,681

$
(51)

$
7,835


										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.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(unaudited)


									Accumulated																Accumulated
				Additional					Other											Additional					Other
	Common Stock			Paid-In		Treasury Stock			Comprehensive		Accumulated		Noncontrolling				Common Stock			Paid-In		Treasury Stock			Comprehensive		Accumulated		Noncontrolling
(In millions, except per share amounts)	Shares	Amount		Capital		Shares	Amount		Loss		Earnings		Interest		Total		Shares	Amount		Capital		Shares	Amount		Loss		Earnings		Interest		Total
Balances at February 2, 2019	1,918	$	1,918	$	3,245	1,120	$	(16,612)	$	(346)	$	19,681	$	(51)	$	7,835
Balances at February 1, 2020																	1,918		1,918		3,337	1,130		(16,991)		(640)		20,978		(29)		8,573
Issuance of common stock:
Stock options exercised	—		—		—	(1)		12		—		—		—		12	—		—		—	(4)		57		—		—		—		57
Restricted stock issued	—		—		(14)	—		10		—		—		—		(4)	—		—		(20)	—		10		—		—		—		(10)
Treasury stock activity:
Treasury stock purchases, at cost																	—		—		—	12		(355)		—		—		—		(355)
Stock options exchanged	—		—		—	—		(15)		—		—		—		(15)	—		—		—	2		(67)		—		—		—		(67)
Share-based employee compensation	—		—		48	—		—		—		—		—		48	—		—		63	—		—		—		—		—		63
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 comprehensive loss net of income tax of ($8)																	—		—		—	—		—		(18)		—		—		(18)
Other	—		—		51	—		(51)		—		—		1		1	—		—		17	—		(17)		—		—		1		1
Cash dividends declared ($0.16 per common share)	—		—		—	—		—		—		(131)		—		(131)	—		—		—	—		—		—		(128)		—		(128)
Net earnings including noncontrolling interests	—		—		—	—		—		—		297		(10)		287	—		—		—	—		—		—		1,212		—		1,212

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
Balances at May 23, 2020																	1,918	$	1,918	$	3,397	1,140	$	(17,363)	$	(658)	$	22,062	$	(28)	$	9,328

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

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

1.	ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries and other consolidated entities. The February ~~2, 2019~~1, 2020 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include adjustments, all of which are of a normal, recurring nature that are necessary for a fair statement of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February ~~2, 2019.~~1, 2020.

The unaudited information in the Consolidated Financial Statements for the ~~third quarters~~first quarter May 23, 2020 and ~~three quarters ended November 9,~~May 25, 2019, ~~and November 10, 2018,~~ includes the results of operations of the Company for the ~~12 and 40-week~~16-week periods then ended.

Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to operating, general and administrative expenses (“OG&A”), are classified as a component of sales as of the beginning of fiscal year 2019, except for certain amounts in Media, which are netted against merchandise costs. These prior-year amounts have been reclassified to conform to current-year presentation.

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

~~In the third quarter of 2019, the Company recorded an out of period adjustment that decreased sales by $29 with a corresponding increase to other~~ ~~current liabilities~~ related to a provision in a pharmacy contract that should have been recognized over the previous six quarters. The Company evaluated the impact of the adjustment and concluded it is not material, individually and in the aggregate, to the current or any prior period financial statements.

Fair Value Measurements

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

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

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

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

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

2.	DEBT OBLIGATIONS

Long-term debt consists of:


	November 9,		February 2,		May 23,		February 1,
	2019		2019		2020		2020
1.50% to 8.00% Senior Notes due through 2048	$	11,606	$	12,097
2.20% to 8.00% Senior Notes due through 2049					$	12,097	$	11,598
5.63% to 12.75% Mortgages due through 2027		12		14		7		12
1.83% to 2.63% Commercial paper borrowings		565		800
3.37% Term Loan		—		1,000
1.77% Commercial paper borrowings						—		1,150
Other		495		440		499		496

Total debt, excluding obligations under finance leases		12,678		14,351		12,603		13,256
Less current portion		(1,367)		(3,103)		(1,047)		(1,926)

Total long-term debt, excluding obligations under finance leases	$	11,311	$	11,248	$	11,556	$	11,330

The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at ~~November 9, 2019~~May 23, 2020 and February ~~2, 2019.~~1, 2020. At ~~November 9, 2019,~~May 23, 2020, the fair value of total debt was ~~$13,540~~$14,025 compared to a carrying value of $~~12,678~~.$12,603. At February ~~2, 2019,~~1, 2020, the fair value of total debt was ~~$14,190~~$14,649 compared to a carrying value of ~~$14,351.~~$13,256.

On March 18, 2020, the Company proactively borrowed $1,000 under the revolving credit facility. This was a precautionary measure in order to preserve financial flexibility, reduce reliance on the commercial paper market and maintain liquidity in response to the COVID-19 pandemic. During the first ~~three quarters~~quarter of ~~2019,~~2020, the Company fully repaid athe $1,000 ~~term loan bearing an interest rate of 3.37%. Additionally,~~borrowed under the revolving credit facility and the entire $1,150 in ~~the third quarter of 2019, the Company repaid, upon maturity, $500 of senior notes bearing an interest rate of 1.5%, with proceeds from~~outstanding commercial paper ~~borrowings.~~obligations, using cash generated by operations.

In anticipation of future debt refinancing, the Company, in the first ~~three quarters~~quarter of ~~2019,~~2020, entered into 63 forward-starting interest rate swap agreements with a maturity date of January 2021 with an aggregate notional amount totaling ~~$300 and 1 forward-starting interest rate swap agreement with a maturity date of January 2020 with a notional amount of $50.~~$150. As of the end of the ~~third~~first quarter of ~~2019,~~2020, the Company had a total of ~~$600~~$500 notional amount of forward-starting interest rate swaps outstanding. The forward-starting interest rate swaps entered into in the first ~~three quarters~~quarter of ~~2019~~2020 were designated as cash-flow hedges.

Additionally, in the first quarter of 2020, the Company issued $500 of senior notes due in fiscal year 2030 bearing an interest rate of 2.20%. The net proceeds of the issuance will be used for general corporate purposes and reduce reliance on the commercial paper market. As the net proceeds were not immediately needed for these purposes, the net proceeds were held in cash and temporary cash investments as of the end of the first quarter of 2020.

3.	BENEFIT PLANS

The following table provides the components of net periodic benefit cost for the company-sponsored defined benefit pension plans and other post-retirement benefit plans for the ~~third~~first quarters of ~~2019~~2020 and ~~2018.~~2019.

Third Quarter Ended

Pension Benefits

Other Benefits

November 9,

November 10,

November 9,

November 10,


2019

2018

2019

2018
Components of net periodic benefit cost:

Service cost

$
6

$
8

$
2

$
2
Interest cost

32

31

2

2
Expected return on plan assets

(43)

(40)

—

—
Amortization of:

Prior service cost

—

—

(3)

(3)
Actuarial loss (gain)

16

18

(3)

(2)

Net periodic benefit cost

$
11

$
17

$
(2)

$
(1)


	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)

Three Quarters Ended

Pension Benefits

Other Benefits

November 9,

November 10,

November 9,

November 10,


2019

2018

2019

2018
Components of net periodic benefit cost:

Service cost

$
24

$
29

$
6

$
6
Interest cost

105

104

6

6
Expected return on plan assets

(140)

(134)

—

—
Amortization of:

Prior service cost

—

—

(8)

(9)
Actuarial loss (gain)

47

59

(8)

(7)

Net periodic benefit cost

$
36

$
58

$
(4)

$
(4)

The Company is not required to make any contributions to its company-sponsored pension plans in ~~2019,~~2020, but may make contributions to the extent such contributions are beneficial to the Company. The Company did not make any contributions to its company-sponsored pension plans in the first ~~three~~ quarters of 2020 and 2019. ~~In the third quarter of 2018, the Company contributed $185, $117 net of tax, to the company-sponsored pension plan.~~

The Company contributed ~~$209~~$96 and ~~$204~~$88 to employee 401(k) retirement savings accounts in the first ~~three quarters~~quarter of ~~2019~~2020 and ~~2018,~~2019, respectively.

The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded. In addition to the recurring multi-employer pension contributions the Company makes in the normal course of business, in the first quarter of 2020, the Company contributed an incremental $236, $180 net of tax, to multi-employer pension plans, helping stabilize future associate benefits.

During the first ~~three quarters~~quarter of 2019, the Company incurred ~~charges~~a charge totaling ~~$131, $101~~$59, $44 net of tax, due to obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension ~~funds. This included charges in the third quarter of 2019, totaling~~ ~~$45, $35~~ ~~net of tax, due to obligations related to withdrawal liabilities for certain multi-employer pension funds.~~fund. The ~~charges were~~charge was recorded in the OG&A caption in the Consolidated Statements of Operations.

~~Additionally, during the first three quarters of 2019, the Company sold an unused warehouse. The gain on the sale was used to contribute a similar amount into the UFCW Consolidated Pension Plan.~~

During the third quarter of 2019, the Company approved and implemented a plan to reorganize certain portions of its division management structure. This reorganization is expected to increase operational effectiveness and reduce overhead costs while maintaining a high quality customer experience. The Company recorded a charge for severance and related benefits of $80, $61 net of tax, in the third quarter of 2019, which is included in the OG&A caption within the Consolidated Statements of Operations. Of the total charge, $63 remains unpaid as of November 9, 2019 and is included in Other Current Liabilities within the Consolidated Balance Sheet.

4.	EARNINGS PER COMMON SHARE

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

Third Quarter Ended

Third Quarter Ended

November 9, 2019

November 10, 2018






Per





Per

Earnings

Shares

Share

Earnings

Shares

Share

(Numerator)

(Denominator)

Amount

(Numerator)

(Denominator)

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

$
260

802

$
0.32

$
313

797

$
0.39
Dilutive effect of stock options

5

10

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

$
260

807

$
0.32

$
313

807

$
0.39


	Three Quarters Ended					Three Quarters Ended					First Quarter Ended					First Quarter Ended
	November 9, 2019					November 10, 2018					May 23, 2020					May 25, 2019
				Per					Per					Per					Per
	Earnings		Shares	Share		Earnings		Shares	Share		Earnings		Shares	Share		Earnings		Shares	Share
	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Net earnings attributable to The Kroger Co. per basic common share	$	1,317	800	$	1.65	$	2,820	814	$	3.46	$	1,197	780	$	1.53	$	764	798	$	0.96
Dilutive effect of stock options			5					8					8					7

Net earnings attributable to The Kroger Co. per diluted common share	$	1,317	805	$	1.64	$	2,820	822	$	3.43	$	1,197	788	$	1.52	$	764	805	$	0.95

The Company had combined undistributed and distributed earnings to participating securities totaling $3$15 and $4$8 in the ~~third~~first quarters of 2020 and 2019, ~~and 2018,~~ respectively. ~~For the first three quarters of 2019 and 2018, the Company had combined undistributed and distributed earnings to participating securities of~~ ~~$15 and $31, respectively.~~

The Company had options outstanding for approximately 1811 million and 1116 million shares during the ~~third~~first quarters of 2020 and 2019, ~~and 2018,~~ respectively, that were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per share.The Company had options outstanding for approximately 24 million shares during the first three quarters of 2019 and 11 million shares in the first three quarters of 2018 that were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per share.

5.	RECENTLY ADOPTED ACCOUNTING STANDARDS

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

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

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

6.	~~RECENTLY ISSUED ACCOUNTING STANDARDS~~

In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” Under the new standard, implementation costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs. The new standard also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense. ~~This~~The Company adopted this guidance ~~will be effective for the Company~~on a prospective basis in the first quarter of 2020. The implementation costs the Company capitalized during the first quarter of 2020 are included in “Other assets” in the Company’s ~~fiscal year ending January 30, 2021.~~Consolidated Balance Sheets. The ~~amendments may be applied either retrospectively or prospectively~~corresponding cash flows related to ~~all implementation costs incurred after~~these arrangements are included in “Net cash provided by operating activities” in the ~~date~~Company’s Consolidated Statements of ~~adoption. The Company is currently assessing the impact that adoption of this guidance will have on its Consolidated Financial Statements and related disclosures.~~Cash Flows.

7.	~~LEASES AND LEASE-FINANCED TRANSACTIONS~~

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

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

November 9,

February 2,

Classification

2019

2019
Assets

Operating

Operating lease assets

$
6,847

$
—
Finance

Property, plant and equipment, net⁽¹⁾

760

721

Total leased assets

$
7,607

$
721

Liabilities

Current

Operating

Current portion of operating lease liabilities

$
673

$
—
Finance

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

50

54

Noncurrent

Operating

Noncurrent operating lease liabilities

6,449

—
Finance

Long-term debt including obligations under finance leases

916

824

Total lease liabilities

$
8,088

$
878

~~(1)~~

~~Finance lease assets are recorded net of accumulated amortization of $298 and $345 as of November 9, 2019 and February 2, 2019.~~

~~The following table provides the components of lease cost:~~

Third Quarter Ended

Three Quarters Ended
Lease Cost

Classification

November 9, 2019

November 9, 2019
Operating lease cost⁽¹⁾

Rent Expense

$
229

$
768
Sublease and other rental income

Rent Expense

(28)

(93)
Finance lease cost

Amortization of leased assets

Depreciation and Amortization

13

41
Interest on lease liabilities

Interest Expense

12

37

Net lease cost

$
226

$
753

~~(1)~~

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

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

Operating

Finance

Leases

Leases

Total
Remainder of 2019

$
195

$
17

$
212
2020

966

95

1,061
2021

891

96

987
2022

754

93

847
2023

685

93

778
Thereafter

6,910

1,003

7,913

Total lease payments

10,401

1,397

$
11,798

Less amount representing interest

3,279

431

Present value of lease liabilities⁽¹⁾

$
7,122

$
966

~~(1)~~

~~Includes the current portion of $673 for operating leases and $50 for finance leases.~~

~~Total future minimum rentals under non-cancellable subleases at November 9, 2019 were $308.~~

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



	~~November 9, 2019~~
~~Weighted-average remaining lease term (years)~~
~~Operating leases~~	~~16.1~~
~~Finance leases~~	~~16.0~~
~~Weighted-average discount rate~~
~~Operating leases~~	~~4.3~~	%
~~Finance leases~~	~~4.2~~	%

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

Three Quarters Ended

November 9, 2019
Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$
711
Operating cash flows from finance leases

37
Financing cash flows from finance leases

33
Leased assets obtained in exchange for new operating lease liabilities

658
Leased assets obtained in exchange for new finance lease liabilities

185
Net gain recognized from sale and leaseback transactions⁽¹⁾

51
Impairment of operating lease assets

29
Impairment of finance lease assets

40

~~(1)~~

~~During the first three quarters of 2019, the Company entered into sale leaseback transactions related to 8 properties, which resulted in total proceeds of $102.~~

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

Lease-

Capital

Operating

Financed

Leases

Leases

Transactions
2019

$
103

$
948

$
5
2020

89

880

6
2021

86

773

5
2022

82

649

5
2023

81

556

5
Thereafter

766

3,197

17

Total

1,207

$
7,003

$
43

Less estimated executory costs included in capital leases

—

Net minimum lease payments under capital leases

1,207

Less amount representing interest

372

Present value of net minimum lease payments under capital leases

$
835

8.6.

COMMITMENTS AND CONTINGENCIES

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

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

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

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

1511

9.7.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table represents the changes in AOCI by component for the first ~~three~~ quarters of ~~2019~~2020 and ~~2018:~~2019:


					Pension and						Pension and
	Cash Flow				Postretirement				Cash Flow		Postretirement
	Hedging		Available for sale		Defined Benefit				Hedging		Defined Benefit
	Activities⁽¹⁾		Securities⁽¹⁾		Plans⁽¹⁾		Total⁽¹⁾		Activities⁽¹⁾		Plans⁽¹⁾		Total⁽¹⁾
Balance at February 3, 2018	$	24	$	4	$	(499)	$	(471)
OCI before reclassifications⁽²⁾		37		(4)		—		33
Amounts reclassified out of AOCI⁽³⁾		3		—		33		36
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		40		(4)		33		69		(12)		(134)		(146)
Balance at November 10, 2018	$	64	$	—	$	(466)	$	(402)
Balance at May 25, 2019									$	(6)	$	(486)	$	(492)

Balance at February 2, 2019	$	6	$	—	$	(352)	$	(346)
Cumulative effect of accounting change⁽⁴⁾		(5)		—		(141)		(146)
OCI before reclassifications⁽²⁾		(29)		—		—		(29)
Amounts reclassified out of AOCI⁽³⁾		3		—		23		26
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		(31)		—		(118)		(149)		(21)		3		(18)
Balance at November 9, 2019	$	(25)	$	—	$	(470)	$	(495)
Balance at May 23, 2020									$	(63)	$	(595)	$	(658)

(1)	All amounts are net of tax.

(2)	~~Net of tax of $10 for cash flow hedging activities and ($1) for available for sale securities for the first three quarters of 2018. Net of tax of ($16) for cash flow hedging activities for the first three quarters of 2019.~~

~~(3)~~

Net of tax of $3 for cash flow hedging activities and $10 for pension and postretirement defined benefit plans for the first three quarters of 2018. Net of tax of $3 for cash flow hedging activities and $8 for pension and postretirement defined benefit plans for the first three quarters of 2019.

~~(4)~~

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

(3)	Net of tax of ($9) for ~~additional details).~~cash flow hedging activities for the first quarter of 2019. Net of tax of ($11) for cash flow hedging activities for the first quarter of 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.

The following table represents the items reclassified out of AOCI and the related tax effects for the ~~third quarter and~~ first ~~three~~ quarters of ~~2019~~2020 and ~~2018:~~2019:


	Third Quarter Ended				Three Quarters Ended				First Quarter Ended
	November 9,		November 10,		November 9,		November 10,		May 23,		May 25,
	2019		2018		2019		2018		2020		2019
Cash flow hedging activity items
Amortization of gains and losses on cash flow hedging activities⁽¹⁾	$	2	$	2	$	6	$	6	$	2	$	2
Tax expense		(1)		(1)		(3)		(3)		(1)		(1)
Net of tax		1		1		3		3		1		1

Pension and postretirement defined benefit plan items
Amortization of amounts included in net periodic pension cost⁽²⁾		10		13		31		43		5		10
Tax expense		(3)		(3)		(8)		(10)		(2)		(3)
Net of tax		7		10		23		33		3		7
Total reclassifications, net of tax	$	8	$	11	$	26	$	36	$	4	$	8

(1)	Reclassified from AOCI into interest expense.

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

1612

~~10.~~8.

INCOME TAXES

The effective income tax rate was ~~35.6% in the third quarter of 2019, compared to 22.8% in the third quarter of 2018. The effective income tax rate was 25.0% for the first three quarters of 2019, compared to~~23.5% and 22.8% for the first ~~three~~ quarters of ~~2018.~~2020 and 2019, respectively. The effective income tax rate for the ~~third~~first quarter of 2020 and ~~the first three quarters of~~ 2019 differed from the federal statutory rate ~~primarily~~ due to the portion of the impairment of Lucky’s Market attributable to the minority interest, which reduces pre-tax income, but does not impact tax expense. The impact of this item on the effective income tax rate is approximately 12% for the third quarter and 2% for the first three quarters of 2019. The difference from the statutory rate is also impacted by the effect of state income taxes partially offset by the utilization of tax credits and deductions. Refer to Note 11 for information about the impairment of Lucky’s Market. The effective income tax rate for the third quarter and first three quarters of 2018 differed from the federal statutory rate primarily due to the effect of state income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Reform rates and an increase in future tax deductions at post-Tax Reform rates, partially offset by the utilization of tax credits and deductions and favorable provision to return adjustments. Additionally, the rate for the first three quarters of 2018 benefitted from favorable settlements of certain state tax items.

~~11.~~

~~HELD FOR SALE AND DISPOSAL OF BUSINESSES~~

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

OnThe Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March ~~13, 2019,~~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, 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.~~

In the third quarter of 2019, as a result of a portfolio review, the Company has decided to divest its interest in Lucky’s Market. The Company recognized an impairment charge of $238 in the third quarter of 2019, which is included in OG&A in the Consolidated Statements of Operations. The impairment charge consists of property, plant and equipment of $200, which includes $40 of finance lease assets;goodwill of $19; operating lease assets of $11; and other charges of $8. The amount of the impairment charge attributable to The Kroger Co. is $131, $100 net of tax, with the remaining amount attributable to the minority interest.

Cash Flows.

1713

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 ~~three quarters~~quarter of ~~2019~~2020 include the following, which we define as the ~~“2019~~“2020 Adjusted Items”:

●

Charges to operating, general and administrative expenses (“OG&A”) of ~~$131~~$60 million, ~~$101~~$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 OG&A of $59 million, $44 million net of tax, for obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension funds; $80 million, $61 million net of tax, for a severance charge and related benefits; $238 million including $131 million attributable to The Kroger Co., $100 million net of tax, for impairment of Lucky’s Market;fund and a reduction to OG&A of ~~$18~~$24 million, ~~$13~~$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 ~~$166 million, $125 million net of tax, for the mark to market gain on Ocado Group plc (“Ocado”) securities (the “2019 Other Income (Expense) Adjusted Items”).~~

~~Net earnings for the third quarter of 2019 include the following, which we define as the “2019 Third Quarter Adjusted Items”:~~

●

Charges to OG&A of $45 million, $35 million net of tax, for obligations related to withdrawal liabilities for a certain multi-employer pension fund; $80 million, $61 million net of tax, for a severance charge and related benefits; $238 million including $131 million attributable to The Kroger Co., $100 million net of tax, for impairment of Lucky’s Market; and $4 million, $3 million net of tax, for the revaluation of Home Chef contingent consideration (the “2019 Third Quarter OG&A Adjusted Items”).

●

~~A gain in other income (expense) of~~ $106 million, ~~$81~~$80 million net of tax, for the mark to market gain on Ocado securities (the “2019 ~~Third Quarter Other Income (Expense) Adjusted Item”).~~

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

●

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

●

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

●

Gains in other income (expense) of $1.8 billion, $1.4 billion net of tax, related to the sale of our convenience store business unit and $152 million, $115 million net of tax, for the mark to market gain on Ocado securities (the “2018 Other Income (Expense) Adjusted Items”).

~~Net earnings for the third quarter of 2018 includes the following, which we define as the “2018 Third Quarter Other Income (Expense) Adjusted Item”:~~

●

~~A loss in other income (expense) of $100 million, $77 million net of tax, for the mark to market loss on Ocado securities.~~

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. We

CAUTIONARY STATEMENT

This discussion and analysis contains certain forward-looking statements about our future performance. These statements are ~~unable~~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 ~~full reconciliation~~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 2020, and came to the ~~non-GAAP measures used in~~forefront as we provided our ~~guidance (see “Outlook” below) without unreasonable effort~~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 ~~certain information necessary~~a new normal emerges post COVID-19 and are positioning Kroger to ~~calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control~~grow customer loyalty and ~~cannot be determined without unreasonable effort. Actual GAAP results may be materially different from the forward-looking non-GAAP measures provided.~~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 first quarter of 2020 to reward associates and safeguard associates, customers and communities. The key actions taken included the following:

Safeguarding & Rewarding Associates

●

Offered free COVID-19 testing to associates based on symptoms and medical need.

●

Provided COVID-19 Emergency Leave to associates.

●

Recognized and rewarded associates with special premium pay and bonuses in addition to ongoing comprehensive benefits packages including healthcare coverage and 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:

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 ~~third~~first quarter ~~and first three quarters~~ of ~~2019~~2020 are:

Shareholder Return

●

Net earnings attributable to The Kroger Co. per diluted common share of ~~$0.32 for the third quarter and $1.64 for the first three quarters.~~$1.52.

●

Adjusted net earnings attributable to The Kroger Co. per diluted common share of $0.47 for the third quarter and $1.62 for the first three quarters. The third quarter includes an out of period charge related to a provision in a pharmacy contract that should have been recognized over the previous six quarters (“the 2019 Out of Period Charge”). This charge is not material to our total results and the financial effect in each of the prior individual quarters was immaterial to net earnings per diluted share. However, the cumulative effect recorded in the third quarter of 2019 reduced adjusted net earnings per diluted share by $0.03 and our gross margin rate by 9 basis points.$1.22.

●

~~During the first three quarters~~Achieved operating profit of ~~2019, we~~$1.3 billion.

●

Achieved adjusted FIFO operating profit of $1.5 billion.

●

We returned ~~$390~~$550 million to shareholders from share repurchases and dividend payments.

●

~~Over~~Generated cash from operations of $4.2 billion.

●

During the ~~last 12 months,~~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 ~~net~~ total debt, including obligations under finance leases, by ~~$1.5 billion.~~$605 million.

Other Financial Results

●

Identical sales, excluding fuel, increased ~~2.5% for the third quarter and 2.0% for~~19.0% in the first ~~three quarters~~quarter of ~~2019.~~2020.

●

Digital revenue grew ~~21% in the third quarter and 31%~~92% in the first ~~three quarters~~quarter of ~~2019,~~2020, driven by Pickup and Delivery sales growth. ~~Third quarter digital revenue growth has moderated primarily due to cycling our merger with the Home Chef business.~~ Digital revenue primarily includes revenue from all curbside pickup locations, online sales delivered to customer locations and products shipped to customer locations.

●

Alternative profit streams grew in the third quarter and first three quarters of 2019, as compared to the third quarter and first three quarters of 2018. Alternative profit stream results met our expectations for the first three quarters of 2019. 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.

Significant Events

●

~~During~~Invested more than $830 million to support and safeguard associates, customers and communities during the ~~third quarter of 2019, we approved~~COVID-19 pandemic. These investments primarily relate to items within OG&A such as associate Thank You pay and ~~implemented a plan~~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 ~~reorganize certain portions of~~growth in sales volumes. We will continue to make appropriate adjustments to our ~~division management structure, resulting in a charge for severance and related benefits of $80 million, $61 million net of tax. This reorganization is~~workforce to reflect expected ~~to increase operational effectiveness and reduce overhead costs while maintaining a high quality customer experience.~~ sales volumes.

●

~~As a result of a portfolio review,~~In addition to the recurring multi-employer pension contributions we ~~have decided to divest our interest in Lucky’s Market and we recognized an impairment charge of $238 million~~make in the ~~third quarter~~normal course of ~~2019. The amount of the impairment charge attributable to The Kroger Co. is $131~~business, we contributed an incremental $236 million, $100 million net of tax. The impairment charge is a non-cash charge and reflects the write down of our initial investment in Lucky’s Market, as well as additional funding provided to operate and grow the business.

●

~~During the first quarter of 2019, we 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.

●

~~During the first quarter of 2019, we sold our Turkey Hill Dairy business to an affiliate of Peak Rock Capital for $225 million.~~

●

During the second quarter of 2019, we accepted an offer to sell an unused warehouse that had been on the market for some time. We used this gain as an opportunity to contribute a similar amount into the UFCW Consolidated Pension Plan, helping stabilize associates’ future benefits. The net impact of these transactions to EPS growth was neutral. The net impact of these transactions also had no effect to OG&A.

●

~~Additionally, in the first, second and third quarters of 2019, respectively, we recorded charges to OG&A of $59 million, $44~~$180 million net of tax, ~~$27 million, $22 million net of tax, and $45 million, $35 million net of tax, for obligations related~~ to ~~withdrawal liabilities for certain~~ multi-employer pension ~~funds.~~plans, helping stabilize future associate benefits (the “2020 Multi-Employer Pension Contribution”).

2018

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)

Third Quarter Ended

Three Quarters Ended


November 9,

November 10,

Percentage

November 9,

November 10,

Percentage


2019

2018

Change

2019

2018

Change

Net earnings attributable to The Kroger Co.

$
263

$
317

$
1,332

$
2,851

(Income) expense adjustments

Adjustments for pension plan withdrawal liabilities⁽¹⁾⁽²⁾

35

—

101

(10)

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

—

—

—

(1,360)

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 loss (gain) on Ocado securities⁽¹⁾⁽⁶⁾

(81)

77

(125)

(115)

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

—

—

—

(11)

Adjustment for severance charge and related benefits⁽¹⁾⁽⁸⁾

61

—

61

—

Adjustment for impairment of Lucky's Market attributable to The Kroger Co.⁽¹⁾⁽⁹⁾

100

—

100

—

Adjustment for Home Chef contingent consideration^(1)(10)

3

—

(13)

—

2019 and 2018 Adjusted Items

118

77

(8)

(1,496)

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

$
381

$
394

(3.3)
%
$
1,324

$
1,355

(2.3)
%

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

$
0.32

$
0.39

$
1.64

$
3.43

(Income) expense adjustments

Adjustments for pension plan withdrawal liabilities⁽¹¹⁾

0.04

—

0.12

(0.01)

Adjustment for gain on sale of convenience store business⁽¹¹⁾

—

—

—

(1.64)

Adjustment for gain on sale of Turkey Hill Dairy⁽¹¹⁾

—

—

(0.10)

—

Adjustment for gain on sale of You Technology⁽¹¹⁾

—

—

(0.06)

—

Adjustment for mark to market loss (gain) on Ocado securities⁽¹¹⁾

(0.10)

0.09

(0.16)

(0.14)

Adjustment for depreciation related to held for sale assets⁽¹¹⁾

—

—

—

(0.01)

Adjustment for severance charge and related benefits⁽¹¹⁾

0.08

—

0.08

—

Adjustment for impairment of Lucky's Market attributable to The Kroger Co.⁽¹¹⁾

0.12

—

0.12

—

Adjustment for Home Chef contingent consideration⁽¹¹⁾

0.01

—

(0.02)

—

2019 and 2018 Adjusted Items

0.15

0.09

(0.02)

(1.80)

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

$
0.47

$
0.48

(2.1)
%
$
1.62

$
1.63

(0.6)
%

Average number of common shares used in diluted calculation

807

807

805

822


	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

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

(2)The pre-tax adjustment for pension plan withdrawal liabilities was ~~$45 in the third quarter of 2019, $131 in the first three quarters of 2019 and ($13) in the first three quarters of 2018.~~$59.

(3)~~The pre-tax adjustment for gain on sale of convenience store business was ($1,782).~~

~~(4)~~The pre-tax adjustment for gain on sale of Turkey Hill Dairy was ($106).

~~(5)~~(4)The pre-tax adjustment for gain on sale of You Technology was ($70).

~~(6)~~(5)The pre-tax adjustment for mark to market ~~loss (gain)~~gain on Ocado securities was ($~~106) and $100 in the third quarters of 2019 and 2018, respectively. The pre-tax adjustment was ($166) and ($152)~~422) in the first ~~three quarters~~quarter of ~~2019~~2020 and ~~2018, respectively.~~($106) in the first quarter of 2019.

~~(7)The pre-tax adjustment for depreciation related to held for sale assets was ($14).~~

~~(8)The pre-tax adjustment for severance charge and related benefits was $80.~~

~~(9)The pre-tax adjustment for impairment of Lucky’s Market was $238 including $131 attributable to The Kroger Co.~~

~~(10)~~(6)The pre-tax adjustment for Home Chef contingent consideration was $4$60 in the ~~third~~first quarter of ~~2019~~2020 and ($~~18) for~~24) in the first ~~three quarters~~quarter of 2019.

~~(11)~~(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)


	Third Quarter Ended								Three Quarters Ended								First Quarter Ended
	November 9,		Percentage		November 10,		Percentage		November 9,		Percentage		November 10,		Percentage		May 23,		Percentage		May 25,		Percentage
	2019		Change⁽¹⁾		2018		Change⁽²⁾		2019		Change⁽³⁾		2018		Change⁽⁴⁾		2020		Change⁽¹⁾		2019		Change⁽²⁾
Total sales to retail customers without fuel⁽⁵⁾⁽³⁾	$	24,575	2.6	%	$	23,959	2.0	%	$	81,766	2.3	%	$	79,940	2.3	%	$	38,634	18.5	%	$	32,594	2.0	%
Supermarket fuel sales		3,242	(11.3)	%		3,656	16.4	%		11,043	(8.0)	%		11,997	21.4	%		2,692	(38.8)	%		4,396	(3.6)	%
Convenience stores⁽⁶⁾		—	—	%		—	(100.0)	%		—	(100.0)	%		944	(72.4)	%
Other sales⁽⁷⁾		157	(27.3)	%		216	20.0	%		584	(14.7)	%		685	16.1	%
Other sales⁽⁴⁾																		223	(14.6)	%		261	4.0	%

Total sales	$	27,974	0.5	%	$	27,831	(0.2)	%	$	93,393	(0.2)	%	$	93,566	1.6	%	$	41,549	11.5	%	$	37,251	(1.2)	%

(1)	This column represents the percentage change in the ~~third~~first quarter of ~~2019,~~2020, compared to the ~~third~~first quarter of ~~2018.~~2019.

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

~~(3)~~

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

~~(4)~~

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

~~(5)~~(3)

Digital sales, primarily including Pickup, Delivery, Ship and pharmacy e-commerce sales, grew approximately ~~21%~~92% and ~~64% in the third quarter of 2019 and 2018, respectively. Digital sales grew approximately 31% and 64%~~42% in the first ~~three quarters~~quarter of ~~2019~~2020 and ~~2018,~~2019, respectively. These sales are included in the “total sales to retail customers without fuel” line above. ~~Digital sales growth has moderated primarily due to cycling our merger with the Home Chef business.~~

~~(6)~~

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

~~(7)~~(4)

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 ~~$28.0~~$41.5 billion in the ~~third~~first quarter of ~~2019,~~2020, compared to ~~$27.8~~$37.3 billion in the ~~third~~first quarter of ~~2018.~~2019. This increase was due to an increase in total sales to retail customers without 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 dispositions increased ~~2.7%~~19.1% in the ~~third~~first quarter of ~~2019,~~2020, compared to the ~~third~~first quarter of ~~2018.~~2019. The increase in total sales to retail customers without fuel for the ~~third~~first quarter of ~~2019,~~2020, compared to the ~~third~~first quarter of ~~2018,~~2019, was primarily due to our identical sales increase, excluding fuel, of ~~2.5%. 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 ~~third~~first quarter of ~~2019,~~2020, compared to the ~~third~~first quarter of ~~2018,~~2019, increased primarily due to ~~growth of loyal households,~~ a significantly higher customer basket value, ~~retail inflation and Kroger Specialty Pharmacy sales growth,~~ partially offset by ~~our continued investments in lower prices for our customers.~~ decreased customer transactions.

Total supermarket fuel sales decreased ~~11.3%~~38.8% in the ~~third~~first quarter of ~~2019,~~2020, compared to the ~~third~~first quarter of ~~2018,~~2019, primarily due to a decrease in fuel gallons sold of ~~5.0%~~24.6% and a decrease in the average retail fuel price of ~~6.8%~~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.

Total sales were $93.4 billion in the first three quarters of 2019, compared to $93.6 billion for the first three quarters of 2018. This decrease was due to the sale of our convenience store business unit in the first quarter of 2018, Turkey Hill Dairy and You Technology in the first quarter of 2019 and a decrease in supermarket fuel sales, partially offset by the increase in total sales to retail customers without fuel. Total sales, excluding fuel, dispositions and the merger with Home Chef increased 2.3% in the first three quarters of 2019, compared to the first three quarters of 2018. The increase in total sales to retail customers without fuel for the first three quarters of 2019, compared to the first three quarters of 2018, was primarily due to our merger with Home Chef and our identical sales increase, excluding fuel, of 2.0%. Identical sales, excluding fuel, for the first three quarters of 2019, compared to the first three quarters of 2018, increased primarily due to growth of loyal households, a higher customer basket value, retail inflation and Kroger Specialty Pharmacy sales growth, partially offset by our continued investments in lower prices for our customers. Total supermarket fuel sales decreased 8.0% in the first three quarters of 2019, compared to the first three quarters of 2018, primarily due to a decrease in fuel gallons sold of 4.5% and a decrease in the average retail fuel price of 3.7%. 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 classified as a component of sales as of the beginning of fiscal year 2019. 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 increased identical sales for the third quarter and year-to-date periods of 2018. See “Supplemental Information” section below for more detail on the changes and the impact of the reclassification. 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 ~~third~~first quarter ~~and first three quarters~~ of ~~2019~~2020..

2320

Identical Sales

($ in millions)

Third Quarter Ended

November 9,

Percentage

November 10,

Percentage


2019

Change⁽¹⁾

2018

Change⁽²⁾

Excluding fuel centers

$
24,319

2.5
%
$
23,717

1.7
%

~~(1)~~

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

~~(2)~~

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


	Three Quarters Ended								First Quarter Ended
	November 9,		Percentage		November 10,		Percentage		May 23,		Percentage		May 25,		Percentage
	2019		Change⁽¹⁾		2018		Change⁽²⁾		2020		Change⁽¹⁾		2019		Change⁽²⁾
Excluding fuel centers	$	80,751	2.0	%	$	79,156	1.8	%	$	38,137	19.0	%	$	32,046	1.5	%

(1)	This column represents the percentage change in identical sales in the first ~~three quarters~~quarter of ~~2019,~~2020, compared to the first ~~three quarters~~quarter of ~~2018.~~2019.

(2)	This column represents the percentage change in identical sales in the first ~~three quarters~~quarter of ~~2018,~~2019, compared to the first ~~three quarters~~quarter of ~~2017.~~2018.

Gross Margin, LIFO and FIFO Gross Margin

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

Our gross margin rate, as a percentage of sales, was ~~22.08%~~24.30% for the ~~third~~first quarter of 2020, compared to 22.20% for the first quarter of 2019. The increase in rate in the first quarter of 2020, compared to the first quarter of 2019, ~~compared to 21.84% for the third quarter of 2018. The increase in the third quarter of 2019, compared to the third quarter of 2018,~~ resulted primarily from decreased fuel sales, which have a ~~higher~~lower gross margin rate, onan increase in our fuel ~~sales,~~gross margin and decreased shrink, transportation and warehousing and ~~transportation~~advertising costs, as a percentage of sales, ~~growth~~reflecting the significant increase in ~~our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold,~~sales volumes, partially offset by ~~industry-wide lower gross margin rates in pharmacy, continued investments in lower prices for our customers, the 2019 Out of Period Charge,~~ a higher LIFO ~~charge and continued growth in the specialty pharmacy business, which has a lower gross margin rate. In addition, we improved shrink, as a percentage of sales, in each of the last nine quarters.~~charge.

Our gross margin rate, as a percentage of sales, was 22.06% for the first three quarters of 2019, compared to 21.82% for the first three quarters of 2018. The increase in the first three quarters of 2019, compared to the first three quarters of 2018, resulted primarily from a higher gross margin rate on fuel sales, decreased shrink, as a percentage of sales, growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold, partially offset by industry-wide lower gross margin rates in pharmacy, continued investments in lower prices for our customers, the 2019 Out of Period Charge, a higher LIFO charge, continued growth in the specialty pharmacy business and increased warehouse costs, as a percentage of sales, due to cycling of costs associated with new warehouses and new warehouse capabilities.

Our LIFO charge was ~~$23 million for the third quarter of 2019 compared to $12 million for the third quarter of 2018. Our LIFO charge was $69~~$31 million for the first ~~three quarters~~quarter of ~~2019~~2020 compared to ~~$39~~$15 million for the first ~~three quarters~~quarter of ~~2018.~~2019. Our LIFO charge reflects an increase in our expected annualized product cost inflation for ~~2019,~~2020, primarily driven by ~~dry grocery, pharmacy and dairy.~~meat.

Our FIFO gross margin rate, which excludes the ~~third~~first quarter LIFO charge, was ~~22.16%~~24.37% for the ~~third~~first quarter of ~~2019,~~2020, compared to ~~21.88%~~22.24% for the ~~third~~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 24~~increased 44 basis points in the ~~third~~first quarter of ~~2019,~~2020, compared to the ~~third~~first quarter of ~~2018.~~2019. This ~~decrease~~increase resulted primarily from ~~industry-wide lower gross margin rates in pharmacy, continued investments in lower prices for our customers,~~ ~~the 2019 Out of Period Charge~~decreased shrink, transportation and ~~continued growth in the specialty pharmacy business, partially offset by decreased~~ warehousing and ~~transportation~~advertising costs, as a percentage of sales, ~~growth~~reflecting the significant increase in ~~our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold.~~

Our FIFO gross margin rate, which excludes the first three quarters LIFO charge, was 22.14% for the first three quarters of 2019, compared to 21.86% for the first three quarters of 2018. Excluding the effect of fuel, our FIFO gross margin rate decreased 32 basis points in the first three quarters of 2019, compared to the first three quarters of 2018. This decrease resulted primarily from industry-wide lower gross margin rates in pharmacy, continued investments in lower prices for our customers, ~~the 2019 Out of Period Charge, continued growth in the specialty pharmacy business and increased warehouse costs, as a percentage of~~ sales due to cycling of costs associated with new warehouses and new warehouse capabilities, partially offset by decreased shrink, as a percentage of sales, growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold.volumes.

Operating, General and Administrative Expenses

OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, 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 ~~18.23%~~18.46% for the ~~third~~first quarter of ~~2019,~~2020, compared to ~~16.75%~~16.95% for the ~~third~~first quarter of ~~2018.~~2019. The increase in the ~~third~~first quarter of ~~2019,~~2020, compared to the ~~third~~first quarter of ~~2018~~2019 resulted primarily from the ~~2019 Third Quarter~~2020 Multi-Employer Pension Contribution, the 2020 OG&A Adjusted Items, ~~investments~~the COVID-19 Investments, growth in our digital strategy, increased incentive plan costs, increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experiencechannel 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 and broad based improvement of Restock Kroger cost savings initiatives that drive administrative efficiencies, store productivity and 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 2020 OG&A Adjusted Items and the 2019 ~~Third Quarter~~ OG&A Adjusted Items, our OG&A rate ~~decreased 15~~increased 51 basis points in the ~~third~~first quarter of ~~2019,~~2020, compared to the ~~third~~first quarter of ~~2018.~~2019. This ~~decrease~~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, partially offset by investments in our digital strategy, increased incentive plan costs and increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience.

OG&A expenses, as a percentage of sales, were 17.37% for the first three quarters of 2019, compared to 16.70% for the first three quarters of 2018. The increase in the first three quarters of 2019, compared to the first three quarters of 2018 resulted primarily from the 2019 OG&A Adjusted Items, the 2018 OG&A Adjusted Item, the effect of decreased supermarket fuel and convenience store sales, which increases our OG&A rate, as a percentage of sales, investments in our digital strategy and increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience, partially offset by broad based improvement of Restock Kroger cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, decreased incentive plan costs and planned real estate transactions during the first quarter of 2019.reductions. Excluding the effect of fuel, the 2020 OG&A Adjusted Items, the 2019 OG&A Adjusted Items and the ~~2018 OG&A Adjusted Item,~~2020 Multi-Employer Pension Contribution, our OG&A rate ~~decreased 14~~improved 10 basis points in the first three quarters of 2019, compared to the first three quarters of 2018. This decrease resulted primarily from broad based improvement of Restock Kroger cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, decreased incentive plan costs and planned real estate transactions during the first quarter of 2019, partially offset by investments in our digital strategy and increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience.

During the second quarter of 2019, we accepted an offer to sell an unused warehouse that had been on the market for some time. We used this gain as an opportunity to contribute a similar amount into the UFCW Consolidated Pension Plan, helping stabilize associates’ future benefits. The net impact of these transactions had no effect to OG&A for the first three quarters of 2019.points.

Rent Expense

Rent expense decreased, as a percentage of sales, ~~remained relatively consistent in both~~for the ~~third~~first quarter ~~and first three quarters~~ of ~~2019,~~2020 compared to the ~~same periods in 2018.~~first quarter of 2019. This decrease resulted primarily from the effect of increased sales due to the pandemic which decreases our rent expense, as a percentage of sales.

Depreciation and Amortization Expense

Depreciation and amortization expense ~~increased,~~decreased, as a percentage of sales, in the ~~third~~first quarter of ~~2019,~~2020, compared to the ~~third~~first quarter of ~~2018.~~2019. This ~~increase is~~decrease resulted primarily from the effect of increased sales due to 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, additional depreciation on capital investments, excluding mergers and lease buyouts ~~of $3.0 billion,~~ during the rolling four quarter period ending with the ~~third~~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.

Depreciation and amortization expense increased, as a percentage of sales, in the first three quarters of 2019, compared to the first three quarters of 2018. This increase is primarily due to lower fuel sales, which increases our depreciation expense as a percentage of sales, the 2018 Depreciation Adjusted Item, additional depreciation on capital investments, excluding mergers and lease buyouts, of $3.0 billion, during the rolling four quarter period ending with the third quarter of 2019 and a decrease in the average useful life on these capital investments.

Operating Profit and FIFO Operating Profit

Operating profit was ~~$254 million,~~$1.3 billion, or ~~0.91%~~3.19% of sales, for the ~~third~~first quarter of ~~2019,~~2020, compared to ~~$647~~$901 million, or ~~2.33%~~2.42% of sales, for the ~~third~~first quarter of ~~2018.~~2019. Operating profit, as a percentage of sales, ~~decreased 142~~increased 77 basis points in the ~~third~~first quarter of 2020, compared to the first quarter of 2019, ~~compared to the third quarter of 2018,~~ 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, ~~partially offset by a higher gross margin rate.~~

Operating profit was $1.7 billion, or 1.83% of sales, for the first three quarters of 2019, compared to $2.2 billion, or 2.38% of sales, for the first three quarters of 2018. Operating profit, as a percentage of sales, decreased 54 basis points in the first three quarters of 2019, compared to the first three quarters of 2018, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, partially offset by a higher gross margin rate.

FIFO operating profit was $277 million, or 0.99% of sales, for the third quarter of 2019, compared to $659 million, or 2.37% of sales, for the third quarter of 2018. FIFO operating profit excluding the 2019 Third Quarter Adjusted Items decreased 1.7% in the third quarter of 2019, compared to the third quarter of 2018, due to decreased pharmacy gross profit, the 2019 Out of Period Charge and increased ~~depreciation and amortization and OG&A expenses, as a percentage of sales,~~fuel earnings, partially offset by increased fuel earnings and improved sales to retail customers without fuel. Fuel sales lower our operating profit rate due to the very low operating profit rate, as a percentage of sales, of fuel sales compared to non-fuel sales. FIFO operating profit, as a percentage of sales excluding fuel and the 2019 Third Quarter Adjusted Items decreased 23 basis points in the third quarter of 2019, compared to the third quarter of 2018, due to decreased pharmacy gross profit, the 2019 Out of Period Charge, increased depreciation and amortization expenses, as a percentage of sales, partially offset by decreased OG&A ~~expenses,~~expense, as a percentage of sales.

FIFO operating profit was ~~$1.8~~$1.4 billion, or ~~1.91%~~3.27% of sales, for the first ~~three quarters~~quarter of ~~2019,~~2020, compared to ~~$2.3 billion,~~$916 million, or ~~2.42%~~2.46% of sales, for the first ~~three quarters~~quarter of ~~2018.~~2019. FIFO operating profit, excluding the ~~2019~~2020 and ~~2018~~2019 Adjusted Items, ~~decreased 0.7%~~increased 95 basis points in the first ~~three quarters~~quarter of ~~2019,~~2020, compared to the first ~~three quarters~~quarter of ~~2018,~~2019, due to improved sales to retail customers without fuel, a higher gross margin rate, decreased ~~pharmacy gross profit, the 2019 Out of Period Charge~~rent and ~~increased~~ depreciation and amortization ~~and OG&A~~ expenses, as a percentage of sales, and increased fuel earnings, partially offset by increased fuel earnings and improved sales to retail customers without fuel. FIFO operating profit, as a percentage of sales excluding fuel and the 2019 and 2018 Adjusted Items decreased 24 basis points in the first three quarters of 2019, compared to the first three quarters of 2018, due to decreased pharmacy gross profit, the 2019 Out of Period Charge and increased depreciation and amortization expense, as a percentage of sales, partially offset by lower OG&A expense, as a percentage of sales.

Specific factors contributing to the operating trends 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 ~~35.6% in the third quarter of 2019, compared to 22.8% in the third quarter of 2018. The effective income tax rate was 25.0%~~23.5% for the first ~~three quarters~~quarter of ~~2019, compared to~~2020 and 22.8% for the first ~~three quarters~~quarter of ~~2018.~~2019. The effective income tax rate for the ~~third~~first quarter of 2020 and the first ~~three quarters~~quarter of 2019 differed from the federal statutory rate ~~primarily~~ due to the portion of the impairment of Lucky’s Market attributable to the minority interest, which reduces pre-tax income, but does not impact tax expense. The impact of this item on the effective income tax rate is approximately 12% for the third quarter and 2% for the first three quarters of 2019. The difference from the statutory rate is also impacted by the effect of state income taxes partially offset by the utilization of tax credits and deductions. The effective income tax rate for the third quarter and first three quarters of 2018 differed from the federal statutory rate primarily due to the effect of state income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Reform rates and an increase in future tax deductions at post-Tax Reform rates, partially offset by the utilization of tax credits and deductions and favorable provision to return adjustments. Additionally, the rate for the first three quarters of 2018 benefitted from favorable settlements of certain state tax items.

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 ~~$0.32~~$1.52 per diluted share for the ~~third~~first quarter of ~~2019~~2020 compared to net earnings of ~~$0.39~~$0.95 per diluted share for the ~~third~~first quarter of ~~2018.~~2019. Adjusted net earnings of ~~$0.47~~$1.22 per diluted share for the ~~third~~first quarter of ~~2019~~2020 represented ~~a decrease~~an increase of ~~2.1%~~69.4% compared to adjusted net earnings of ~~$0.48~~$0.72 per diluted share for the ~~third~~first quarter of ~~2018.~~2019. The ~~decrease~~increase in adjusted net earnings per diluted share resulted primarily from ~~decreased~~increased FIFO operating profit without fuel, ~~a higher income tax rate and a higher LIFO charge, partially offset by increased fuel earnings and decreased interest expense.~~

Net earnings were $1.64 per diluted share for the first three quarters of 2019 compared to net earnings of $3.43 per diluted share for the first three quarters of 2018. Adjusted net earnings of $1.62 per diluted share for the first three quarters of 2019 represented a decrease of 0.6% compared to adjusted net earnings of $1.63 per diluted share for the first three quarters of 2018. The decrease in adjusted net earnings per diluted share resulted primarily from decreased FIFO operating profit without fuel, higher income tax expense and a higher LIFO charge, partially offset by 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.

2723

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Information

Net cash provided by operating activities

We generated ~~$4.0~~$4.2 billion of cash from operations in the first ~~three quarters~~quarter of ~~2019~~2020 compared to ~~$3.7~~$2.3 billion in the first ~~three quarters~~quarter of ~~2018.~~2019. Net earnings including noncontrolling interests, adjusted for non-cash items and other impacts, generated approximately ~~$3.6~~$2.2 billion of operating cash flow in the first ~~three quarters~~quarter of ~~2019~~2020 compared to ~~$3.0~~$1.4 billion in the first ~~three quarters~~quarter of ~~2018.~~2019. Cash provided by operating activities for changes in working capital was ~~$451~~$2.0 billion in the first quarter of 2020 compared to $916 million in the first ~~three quarters~~quarter of ~~2019 compared to $757 million in the first three quarters of 2018.~~2019. The ~~decrease~~increase in cash provided by operating activities for changes in working capital in the first ~~three quarters~~quarter of ~~2019,~~2020, compared to the first ~~three quarters~~quarter of ~~2018,~~2019, was primarily due to the following:

●

A decrease in ~~the change in prepaid medical benefit costs~~FIFO inventory at the end of the ~~third~~first quarter of ~~2019, compared~~2020 due to accelerated timing of inventory sell-through resulting from elevated demand for our products during the ~~end of the third quarter of 2018;~~pandemic;

●

~~Reduced cash flow~~Increased trade accounts payable at the end of the first quarter of 2020, primarily related to ~~income taxes receivable~~inventory purchases to meet elevated demand during the pandemic;

●

An increase in accrued salaries and ~~payable as a result~~wages at the end of ~~a prior year overpayment~~the first quarter of ~~our fourth quarter 2017 estimated taxes and our estimated taxes on~~2020, primarily related to an increase in employee headcount in response to the ~~gain on sale of our convenience store business unit;~~pandemic; and

●

~~Payments on operating lease liabilities; partially offset by~~Cash flows from income taxes were favorable in the first quarter of 2020 compared to the first quarter of 2019, primarily due to the deferral of our first quarter 2020 federal estimated tax payment under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which was enacted in the first quarter of 2020;

●

~~Proceeds~~Partially offset by 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 ~~three quarters~~quarter of ~~2019,~~2020, compared to the first ~~three quarters~~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 in the first three quarters~~end of ~~2019 and an overpayment of our fourth quarter 2017 estimated taxes that resulted in lower tax payments in the first three quarters of 2018.~~fiscal year 2019.

Net cash used by investing activities

Investing activities used cash of ~~$1.8 billion in the first three quarters of 2019 compared to $630~~$689 million in the first ~~three quarters~~quarter of ~~2018.~~2020 compared to $464 million in the first quarter of 2019. The amount of cash used by investing activities increased in the first ~~three quarters~~quarter of ~~2019~~2020 compared to the first ~~three quarters~~quarter of ~~2018,~~2019, primarily due to the following:

●

A lower amount of net proceeds from the sale of businesses, since the proceeds from the sale of the convenience store business exceeded the proceeds from the sales of the Turkey Hill Dairy and You Technology businesses; partially offset by

●

~~Increased~~Decreased proceeds from the sale of assets ~~due to the sale of an unused warehouse and proceeds from sale leaseback transactions;~~

●

~~No payments for purchases of Ocado securities~~ in the first ~~three quarters~~quarter of 2020 compared to the first quarter of 2019; and

●

No ~~acquisitions~~proceeds from the sale of businesses in the first ~~three quarters~~quarter of ~~2019.~~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 ~~$2.1~~$1.2 billion of cash for financing activities in the first ~~three quarters~~quarter of ~~2019~~2020 compared to ~~$3.0~~$1.8 billion during the first ~~three quarters~~quarter of ~~2018.~~2019. The amount of cash used for financing activities for the first ~~three quarters~~quarter of ~~2019,~~2020, compared to the first ~~three quarters~~quarter of ~~2018,~~2019, decreased 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.

2824

Debt Management

As of ~~November 9, 2019,~~May 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, commercial paper borrowings, and some outstanding letters of credit reduce funds available under the credit facility. As of ~~November 9, 2019,~~May 23, 2020, we had ~~$565 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 $2 million as of ~~November 9, 2019.~~May 23, 2020.

Our bank credit facility and the indentures underlying our publicly issued debt contain various financial covenants. As of ~~November 9, 2019,~~May 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, decreased ~~$1.6 billion~~$605 million as of ~~November 9, 2019~~May 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 ~~$235 million, payment~~$1.2 billion partially offset by the issuance of $500 million of senior notes bearing an interest rate of ~~1.50% and the repayment of our $1.0 billion term loan.~~2.20%.

��

Common Share Repurchase Program

During the ~~third~~first quarter of ~~2019,~~2020, we invested ~~$11~~$422 million to repurchase ~~447 thousand Kroger common shares at an average price of $25.38 per share. For the first three quarters of 2019, we invested $34 million to repurchase 1.4~~14.3 million Kroger common shares at an average price of ~~$25.14~~$29.51 per share. The shares repurchased in the first ~~three quarters~~quarter of ~~2019~~2020 were reacquired under ~~a program that uses~~ the ~~cash proceeds from the exercises of stock options by participants in Kroger’s stock option, long-term incentive plans and the associated tax benefits.~~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.

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”). 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 November 2019 Repurchase Program ~~authorization replaced the existing March 2018 Repurchase Program that had approximately $546 million remaining.~~does not have an expiration date but may be suspended or terminated by our Board of Directors at any time. As of ~~November 9, 2019, $1.0 billion remained~~May 23, 2020, there was $245 million remaining under the November 2019 Repurchase Program.

Dividends

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

Third Quarter Ended

November 9,

November 10,

2019

2018
Cash dividends paid
$
130

$
113
Cash dividends paid per common share
$
0.160

$
0.140


	Three Quarters Ended				First Quarter Ended
	November 9,		November 10,		May 23,		May 25,
	2019		2018		2020		2019
Cash dividends paid	$	356	$	324	$	128	$	113
Cash dividends paid per common share	$	0.440	$	0.390	$	0.160	$	0.140

2925

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 third 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 ~~$750 million~~$1.0 billion of senior notes ~~and $565 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 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 ~~$691~~$755 million for the ~~third~~first quarter of ~~2019~~2020 compared to ~~$782~~$876 million for the ~~third~~first quarter of 2018. Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $2.2 billion in the first three quarters of 2019 and $2.3 billion in the first three quarters of 2018.2019. During the rolling four quarter period ended with the ~~third~~first quarter of ~~2019,~~2020, we opened, expanded, relocated or acquired 2721 supermarkets and also completed ~~130~~143 major within-the-wall remodels. Total supermarket square footage at the end of the ~~third~~first quarter of ~~2019 increased 0.2%~~2020 decreased 0.1% from the end of the ~~third~~first quarter of ~~2018.~~2019. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the ~~third~~first quarter of ~~2019~~2020 increased ~~0.6%~~0.5% over the end of the ~~third~~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.

NEW ACCOUNTING STANDARDS

Refer to Note 5 ~~and Note 6~~to the Consolidated Financial Statements for recently adopted accounting standards ~~and recently issued accounting standards not yet adopted as of November 9, 2019~~.

~~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 classified as a component of sales as of the beginning of fiscal year 2019, 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 tables summarize the Company's third quarter and first three quarters of 2018 sales reclassifications~~ ~~($ in millions)~~:

Third Quarter Ended

Previously Stated

Reclassification

Reclassified

November 10,

November 10,

2018

2018

2018
Sales
$
27,672

$
159

$
27,831

Operating expenses

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

21,699

54

21,753
Operating, general and administrative

4,556

105

4,661
Rent

200

—

200
Depreciation and amortization

570

—

570

Operating profit
$
647

$
—

$
647

Three Quarters Ended

Previously Stated

Reclassification

Reclassified

November 10,

November 10,

2018

2018

2018
Sales
$
93,071

$
495

$
93,566

Operating expenses

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

72,991

156

73,147
Operating, general and administrative

15,291

339

15,630
Rent

680

—

680
Depreciation and amortization

1,884

—

1,884

Operating profit
$
2,225

$
—

$
2,225

OUTLOOK

~~This discussion~~The COVID-19 pandemic has dramatically changed the outlook for food retail in 2020 and ~~analysis contains certain forward-looking statements about~~we continue to monitor, evaluate and adjust our ~~future performance. These statements~~plans to address the impact to our business. There are ~~based on management’s assumptions and beliefs in light~~still many unknown factors related to the long-term impact 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,” “guidance,” “incremental,” “likely,” “maintain,” “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 factorsCOVID-19 that could ~~cause actual~~influence our financial results ~~to differ materially. These include~~for the ~~specific risk factors identified in “Risk Factors” and “Outlook” in our Annual Report on Form 10-K for our last fiscal year and any subsequent filings, as well as those identified below.~~

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

~~2019 Guidance~~2020, such as:

●

~~We are targeting identical sales growth, excluding fuel,~~Continued investments to ~~range from 2.0% to 2.25% in 2019.~~help our customers and associates,

●

~~Our GAAP net earnings guidance range is $2.17 to $2.27 per diluted share for 2019.~~Uncertainty surrounding consumer behavior, restrictions and what will be the new normal, and

●

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

●

~~We expect operating profit to range from $2.4 billion to $2.5 billion for 2019.~~

●

~~On an adjusted basis, 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~~Potential long-term shift in ~~operating profit in 2019, compared to 2018.~~

●

We expect our 2019 tax rate to range from 24.0% to 24.5%. Excluding the 2019 Adjusted Items, we expect our 2019 tax rate to range from 22.5% to 23.0%. This guidance reflects typical tax adjustments and does not reflect changes to the rate from the completion of income tax audit examinations, which cannot be predicted.

●

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

●

~~We expect to begin share repurchases under the November 2019 Repurchase Program in the fourth quarter of 2019.~~customers eating more food at home.

In recognition of these factors, it is difficult to predict specific outcomes and as such we are not reaffirming or providing new 2020 ~~Guidance~~guidance. While we expect to exceed the outlook shared in our 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.

●

~~We are targeting identical sales growth, excluding fuel, to exceed 2.25% in 2020.~~

Our financial model has proven to be resilient throughout the economic cycle. We remain confident in our business model as well as our ability to generate strong free cash flow and achieve sustainable and attractive total shareholder returns.

●

~~On an adjusted basis, our net earnings guidance range is $2.30 to $2.40 per diluted share for 2020.~~

●

~~On an adjusted basis, we expect FIFO operating profit to range from $3.0 billion to $3.1 billion for 2020.~~

●

On an adjusted basis, we expect our 2020 tax rate to be approximately 23.0%. This guidance reflects typical tax adjustments and does not reflect changes to the rate from the completion of income tax audit examinations, which cannot be predicted.

●

~~We expect capital investments, excluding mergers, acquisitions, and purchases of leased facilities, to range between $3.2 billion and $3.4 billion in 2020.~~

●

~~We expect our alternative profit stream portfolio to contribute an incremental $125 million to $150 million of operating profit in 2020, compared to 2019.~~

●

~~We expect share repurchases to range between $500 million and $1.0 billion in 2020.~~

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.

●

Our ability to achieve sales, earnings and incremental FIFO operating profit 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 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.

●

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

●

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

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

Other factors and assumptions not identified above, including those discussed in Item 1A of 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 unless required by applicable law.

3328

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 ~~November 9, 2019,~~May 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 connection with the evaluation described above, there was no change in Kroger’s internal control over financial reporting during the quarter ended ~~November 9, 2019,~~May 23, 2020, that has materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting.

3429

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.

3530

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

(c)

ISSUER PURCHASES OF EQUITY SECURITIES


					Maximum						Approximate
					Dollar Value of						Dollar Value of
					Shares that May						Shares that May
				Total Number of	Yet Be					Total Number of	Yet Be
				Shares Purchased	Purchased					Shares Purchased	Purchased
	Total Number	Average		as Part of Publicly	Under the Plans		Total Number	Average		as Part of Publicly	Under the Plans
	of Shares	Price Paid Per		Announced Plans	or Programs⁽⁴⁾		of Shares	Price Paid Per		Announced Plans	or Programs⁽⁴⁾
Period⁽¹⁾	Purchased⁽²⁾	Share		or Programs⁽³⁾	(in millions)		Purchased⁽²⁾	Share		or Programs⁽³⁾	(in millions)
First four weeks
August 18, 2019 to September 14, 2019	61,112	$	24.78	44,050	$	546
February 2, 2020 to February 29, 2020							7,526,940	$	28.62	7,526,645	$	395
Second four weeks
September 15, 2019 to October 12, 2019	358,725	$	25.61	342,954	$	546
March 1, 2020 to March 28, 2020							6,445,125	$	30.41	6,123,092	$	245
Third four weeks
October 13, 2019 to November 9, 2019	60,082	$	24.71	60,082	$	1,000
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	479,919	$	25.39	447,086	$	1,000	14,632,334	$	29.51	14,309,949	$	245

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

(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) 32,833~~(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.

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

(4)

On November 5, 2019, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with rule 10b5-1 of the Securities Exchange Act of 1934 (the “November 2019 Repurchase Program”). The amounts shown in this column reflect the amount remaining under ~~the March 2018 Repurchase Program and~~ the 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 November 2019 Repurchase Program ~~replaced the March 2018 Repurchase Program during the third quarter of 2019. The 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.

3631

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 - 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 104~~	-	~~Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.~~

~~Exhibit Index~~


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

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

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

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

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

EXHIBIT 32.1	-	Section 1350 Certifications.

EXHIBIT 101.INS	-	XBRL Instance Document - 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 104	-	Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

3832

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE KROGER CO.

Dated: ~~December 17, 2019~~June 26, 2020	By:	/s/ W. Rodney McMullen
		W. Rodney McMullen
		Chairman of the Board and Chief Executive Officer

Dated: ~~December 17, 2019~~June 26, 2020	By:	/s/ Gary Millerchip
		Gary Millerchip
		Senior Vice President and Chief Financial Officer

3933


		November 9,		February 2,
	Classification	2019		2019
Assets
Operating	Operating lease assets	$	6,847	$	—
Finance	Property, plant and equipment, net⁽¹⁾		760		721

Total leased assets		$	7,607	$	721

Liabilities
Current
Operating	Current portion of operating lease liabilities	$	673	$	—
Finance	Current portion of long-term debt including obligations under finance leases		50		54

Noncurrent
Operating	Noncurrent operating lease liabilities		6,449		—
Finance	Long-term debt including obligations under finance leases		916		824

Total lease liabilities		$	8,088	$	878


		Third Quarter Ended		Three Quarters Ended
Lease Cost	Classification	November 9, 2019		November 9, 2019
Operating lease cost⁽¹⁾	Rent Expense	$	229	$	768
Sublease and other rental income	Rent Expense		(28)		(93)
Finance lease cost
Amortization of leased assets	Depreciation and Amortization		13		41
Interest on lease liabilities	Interest Expense		12		37

Net lease cost		$	226	$	753


	Operating		Finance
	Leases		Leases		Total
Remainder of 2019	$	195	$	17	$	212
2020		966		95		1,061
2021		891		96		987
2022		754		93		847
2023		685		93		778
Thereafter		6,910		1,003		7,913

Total lease payments		10,401		1,397	$	11,798

Less amount representing interest		3,279		431

Present value of lease liabilities⁽¹⁾	$	7,122	$	966


	Three Quarters Ended
	November 9, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	711
Operating cash flows from finance leases		37
Financing cash flows from finance leases		33
Leased assets obtained in exchange for new operating lease liabilities		658
Leased assets obtained in exchange for new finance lease liabilities		185
Net gain recognized from sale and leaseback transactions⁽¹⁾		51
Impairment of operating lease assets		29
Impairment of finance lease assets		40


					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


	Third Quarter Ended
	Previously Stated		Reclassification		Reclassified
	November 10,				November 10,
	2018		2018		2018
Sales	$	27,672	$	159	$	27,831

Operating expenses
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		21,699		54		21,753
Operating, general and administrative		4,556		105		4,661
Rent		200		—		200
Depreciation and amortization		570		—		570

Operating profit	$	647	$	—	$	647