UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2019.January 29, 2022.
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-303
THE KROGER CO.
(Exact name of registrant as specified in its charter)
Ohio | 31-0345740 | |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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1014 Vine Street, Cincinnati, OH | | 45202 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code (513) (513) 762-4000
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 |
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes ☒ | | No ☐ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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Yes ☐ | | No ☒ |
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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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Yes ☒ | | No ☐ |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§299.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
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Yes ☐ | | No ☒ |
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity,as of the last business day of the registrant’s most recently completed second fiscal quarter (August 18, 2018)14, 2021). $25.0$31.8 billion.
The number of shares outstanding of the registrant's common stock, as of the latest practicable date. 798,327,065723,308,230 shares of Common Stock of $1 par value, as of March 28, 2019.23, 2022.
Documents Incorporated by Reference:
Portions of Kroger’s definitive proxy statement for its 20192022 annual meeting of shareholders, which shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates, are incorporated by reference into Part III of this Report.
The Kroger Co.
Form 10-K
For the Fiscal Year Ended January 29, 2022
Table of Contents
PART I
FORWARD LOOKING STATEMENTS.
This Annual Report on Form 10-K contains forward-looking statements about our future performance. These statements are based on our assumptions and beliefs in light of the information currently available to us. These statements are subject to a number of known and unknown risks, uncertainties and other important factors, including the risks and other factors discussed in “Risk Factors” and “Outlook” below, that could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward looking statements. Such statements are indicated by words such as “achieve,” “affect,” “anticipate,” “believe,” “committed,” “continue,” “could,” “deliver,” “effect,” “estimate,” “expects,” “future,” “growth,” “intends,” “likely,” “may,” “model,” “objective,” “plan,” “position,” “range,” “result,” “strategy,” “strive,” “strong,” “target,” “trend,” “vision,” “will,“will” and “would,” and similar words or phrases. Moreover, statements in the sections entitled Risk Factors, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Outlook,, and elsewhere in this report 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.
ITEM 1.BUSINESS.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 ongoing COVID-19 pandemic (including any variant), 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. |
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● | Our ability to achieve sales, earnings and incremental FIFO operating profit goals may be affected by: COVID-19 pandemic related factors, risks and challenges, including among others, the length of time that the pandemic continues, future variants, mutations or related strains of the virus and the effectiveness of vaccines against variants, continued efficacy of vaccines over time and availability of vaccine boosters, the extent of vaccine refusal, and global access to vaccines, as well as the effect of vaccine and/or testing mandates and related regulations, the potential for additional future spikes in infection and illness rates including breakthrough infections among the fully vaccinated, and the corresponding potential for disruptions in workforce availability and customer shopping patterns, re-imposed restrictions as a result of resurgence and the corresponding future easing of restrictions, and interruptions in domestic and global supply chains or capacity constraints; whether and when the global pandemic will become endemic, the pace of recovery when the pandemic subsides or becomes endemic, which may vary materially over time and among the different regions we serve; labor negotiations; potential work stoppages; changes in the unemployment rate; pressures in the labor market; changes in government-funded benefit programs; 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 current inflationary environment and future potential inflationary and/or deflationary trends and such trends in certain commodities, products and/or operating costs; the geopolitical environment; unstable political situations and social unrest; changes in tariffs; the effect that fuel costs have on consumer spending; volatility of fuel margins; 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 uncertainty of economic growth or recession; stock repurchases; changes in the regulatory environment in which we operate; 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; 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 our growth strategy and value creation model, including continued cost savings, growth of our alternative profit businesses, and our ability to better serve our customers and to generate customer loyalty and sustainable growth through our strategic moats of fresh, Our Brands, personalization, and seamless; 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 tax 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.
Other factors and assumptions not identified above, including those discussed in Part 1, Item 1A of this Annual Report, 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.
ITEM 1. | BUSINESS. |
The Kroger Co. (the “Company” or “Kroger”) was founded in 1883 and incorporated in 1902. As of February 2, 2019, weWe are one of the world’s largest retailers, as measured by revenue. Our retail business is built on the foundation of our market leading position in food retail which includes the world based on annual sales. added convenience of our retail pharmacies and fuel centers. Our market leading position in food retail reflects the strength of our competitive moats of Fresh, Our Brands, Data & Personalization and Seamless, and our unique combination of assets.
We also manufactureleverage the data and process sometraffic generated by our retail business to deliver incremental value and services for our customers that generates alternative profit streams. These alternative profit streams would not exist without our core retail business.
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Kroger is diversified across brands, product categories, channels of distribution, geographies and consumer demographics. Our unique combination of assets include the food for sale in our supermarkets. We maintain a web site (www.thekrogerco.com) that includes additional information about the Company. We make available through our web site, free of charge, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and our interactive data files, including amendments. These forms are available as soon as reasonably practicable after we have filed them with, or furnished them electronically to, the SEC.following:
Our revenues are predominately earned and cash is generated as consumer products are sold to customers in our stores, fuel centers and via our online platforms. We earn income predominantly by selling products at price levels that produce revenues in excess of the costs to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs and overhead expenses. Our fiscal year ends on the Saturday closest to January 31. All references to 2018, 2017 and 2016 are to the fiscal years ended February 2, 2019, February 3, 2018 and January 28, 2017, respectively, unless specifically indicated otherwise.Stores
EMPLOYEES
As of February 2, 2019,January 29, 2022, Kroger employed approximately 453,000 full-operates supermarkets under a variety of local banner names in 35 states and part-time employees. A majoritythe District of our employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several different international unions. There are approximately 360 such agreements, usually with terms of three to five years.
STORES
Columbia. As of February 2, 2019,January 29, 2022, Kroger operated, either directly or through its subsidiaries, 2,7642,726 supermarkets, under a variety of local banner names, of which 2,2702,252 had pharmacies and 1,5371,613 had fuel centers. We offer Pickup (also referred to as ClickList®) and Harris Teeter ExpressLane™— personalized, order online, pick up at the store services — at 1,581 of our supermarkets and provide home delivery service to 91% of Kroger households. Approximately 54%50% of our supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. Our current strategy emphasizes self-development and ownership of real estate. Our stores operate under a variety of banners that have strong local ties and brand recognition. We connect with customers through our expanding seamless ecosystem and the consistent delivery of a full, fresh, and friendly customer experience. Fuel sales are an important part of our revenue, net earnings and loyalty offering. Our fuel strategy is to include a fuel center at each of our supermarket locations when it is feasible and it is expected to be profitable. Each fuel center typically includes 5 to 10 islands of fuel dispensers and storage tanks with capacity for 40,000 to 50,000 gallons of fuel. Supermarkets are generally operated under one of the following formats: combination food and drug stores (“combo stores”); multi-department stores; marketplace stores; or price impact warehouses.
The combo store is the primary food store format. They typically draw customers from a 2 — 2.52-2.5 mile radius. We believe this format is successful because the stores are large enough to offer the specialty departments that customers desire for one-stop shopping, including natural food and organic sections, pharmacies, general merchandise, pet centers and high-quality perishables such as fresh seafood and organic produce.
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Multi-department stores are significantly larger in size than combo stores. In addition to the departments offered at a typical combo store, multi-department stores sell a wide selection of general merchandise items such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products and toys.
Marketplace stores are smaller in size than multi-department stores. They offer full-service grocery, pharmacy and health and beauty care departments as well as an expanded perishable offering and general merchandise area that includes apparel, home goods and toys.
Price impact warehouse stores offer a “no-frills, low cost” warehouse format and feature everyday low prices plus promotions for a wide selection of grocery and health and beauty care items. Quality meat, dairy, baked goods and fresh produce items provide a competitive advantage. The average size of a price impact warehouse store is similar to that of a combo store.
SEGMENTSSeamless Digital Ecosystem
Our digital ecosystem provides a fresh and seamless offering for our customers. Through investment and innovation, we continue to improve our seamless ecosystem to ensure it remains relevant. We offer a convenient shopping experience for our customers regardless of how they choose to shop with us, including Pickup, Delivery and Ship. We offer Pickup (also referred to as ClickList®) and Harris Teeter ExpressLane™ — personalized, order online, pick up at the store services — at 2,257 of our supermarkets and provide home delivery services, which allows us to offer digital solutions to 98% of our customers. We provide relevant customer-facing apps and interfaces that have the features customers want that are also reliable, easy to use and deliver a seamless customer experience across our store and digital channels.
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Merchandising and Manufacturing
Our Brands products play an important role in our merchandising strategy and represented nearly $28 billion of our sales in 2021. Our supermarkets, on average, stock over 14,000 private label items. Our Brands products are primarily produced and sold in three “tiers.” Private Selection® is our main premium quality brand, offering customers culinary foods and ingredients that deliver amazing eating experiences. The Kroger® brand, which represents the majority of our private label items, is designed to consistently satisfy and delight customers with quality products that exceed or meet the national brand in taste and efficacy, as well as with unique and differentiated products. Big K®, Check This Out…® and Heritage Farm® are some of our value brands, designed to deliver good quality at a very affordable price. In addition to our three “tiers,” Our Brands offers customers a variety of natural and organic products with Simple Truth® and Simple Truth Organic®. Both Simple Truth and Simple Truth Organic are free from a defined list of artificial ingredients that customers have told us they do not want in their food, and the Simple Truth Organic products are USDA certified organic.
Approximately 29% of Our Brands units and 41% of the grocery category Our Brands units sold in our supermarkets are produced in our food production plants; the remaining Our Brands items are produced to our strict specifications by outside manufacturers. We perform a “make or buy” analysis on Our Brands products and decisions are based upon a comparison of market-based transfer prices versus open market purchases. As of January 29, 2022, we operated 33 food production plants. These plants consisted of 14 dairies, 9 deli or bakery plants, five grocery product plants, two beverage plants, one meat plant and two cheese plants.
Our Data
We are evolving from a traditional food retailer into a more diverse, food first business. The traffic and data generated by our retail supermarket business, including pharmacies and fuel centers, is enabling this transformation. Kroger serves over 60 million households annually and because of our market leading rewards program, 96% of customer transactions are tethered to a Kroger loyalty card. Our 20 years of investment in data science capabilities is allowing us to leverage this data to create personalized experiences and value for our customers and is also enabling our fast-growing, high operating margin alternative profits, including data analytic services and third party media revenue. Our retail media business – Kroger Precision Marketing – provides best in class media capabilities for our consumer packaged goods partners and is a key driver of our digital profitability and alternative profit.
Our revenues are predominately earned and cash is generated as consumer products are sold to customers in our stores, fuel centers and via our online platforms. We earn income predominately by selling products at price levels that produce revenues in excess of the costs we incur to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. Our fiscal year ends on the Saturday closest to January 31. All references to 2021, 2020 and 2019 are to the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020, respectively, unless specifically indicated otherwise.
We maintain a web site (www.thekrogerco.com) that includes the Kroger Fact Book and other additional information about the Company. Kroger’s website and any reports or other information made available by Kroger through its website are not part of or incorporated by reference into this Annual Report on Form 10-K. We make available through our web site, free of charge, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and our interactive data files, including amendments. These forms are available as soon as reasonably practicable after we have filed them with, or furnished them electronically to, the SEC.
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SEGMENTS
We operate supermarkets, and multi-department stores and fulfillment centers throughout the United States. Our retail operations, which represent 97% of our consolidated sales, is our only reportable segment. We aggregate our operating divisions into one reportable segment due to the operating divisions having similar economic characteristics with similar long-term financial performance. In addition, our operating divisions offer customers similar products, have similar distribution methods, operate in similar regulatory environments, purchase the majority of the merchandise for retail sale from similar (and in many cases identical) vendors on a coordinated basis from a centralized location, serve similar types of customers, and are allocated capital from a centralized location. Our operating divisions are organized primarily on a geographical basis so that the operating division management team can be responsive to local needs of the operating division and can execute company strategic plans and initiatives throughout the locations in their operating division. This geographical separation is the primary differentiation between these retail operating divisions. The geographical basis of organization reflects how the business is managed and how our Chief Executive Officer, who acts as our chief operating decision maker, assesses performance internally. All of our operations are domestic. Revenues, profits and losses and total assets are shown in our Consolidated Financial Statements set forth in Item 8 below.
MERCHANDISING AND MANUFACTURINGSEASONALITY
Our Brands products play an important role in our merchandising strategy. Our supermarkets, on average, stock over 15,000 private label items. Our Brands products are primarily produced and sold in three “tiers.” Private Selection® is one of our premium quality brands, offering customers culinary foods and ingredients that deliver amazing eating experiences. The Kroger® brand, which represents the majority of our private label items, is designed to consistently satisfy and delight customers with quality products that exceed or meet the national brand in taste and efficacy, as well as with unique and differentiated products. Big K®, Check This Out…® and Heritage Farm® are some of our value brands, designed to deliver good quality at a very affordable price. In addition, we continue to grow natural and organic Our Brands offerings with Simple Truth® and Simple Truth Organic®. Both Simple Truth and Simple Truth Organic are free from a defined list of artificial ingredients that customers have told us they do not want in their food, and the Simple Truth Organic products are USDA certified organic.
Approximately 32% of Our Brands units and 43% of the grocery category Our Brands units sold in our supermarkets are produced in our food production plants; the remaining Our Brands items are produced to our strict specifications by outside manufacturers. We perform a “make or buy” analysis on Our Brands products and decisions are based upon a comparison of market-based transfer prices versus open market purchases. As of February 2, 2019, we operated 37 food production plants. These plants consisted of 17 dairies, 10 deli or bakery plants, five grocery product plants, two beverage plants, one meat plant and two cheese plants.
SEASONALITY
The majority of our revenues are generally not seasonal in nature. However, revenues tend to be higher during the major holidays throughout the year. Additionally, certain significant events including inclement weather systems, particularly winter storms, tend to affect our sales trends.
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HUMAN CAPITAL MANAGEMENT
EXECUTIVE OFFICERS OF THE REGISTRANT
Our People
We want Kroger to be a place where our customers love to shop and associates love to work. This is why we create working environments where associates feel encouraged and supported to be their best selves every day. Our people are essential to our success, and we focus intentionally on attracting, developing and engaging a diverse workforce that represents the communities we serve. We strive to create a culture of opportunity and take seriously our role as a leading employer in the United States. Kroger has provided a large number of people with first jobs, new beginnings and lifelong careers. We have long been guided by our core values – Honesty, Integrity, Respect, Safety, Diversity and Inclusion.
As of January 29, 2022, Kroger employed over 420,000 full- and part-time employees. The disclosure regarding executive officers is set forthnumber of associates decreased in Item 102021, compared to 2020, as sales normalized following the peak of Part IIIthe COVID-19 pandemic and we continue to achieve operational efficiencies in our business.
Attracting & Developing Our Talent
We recognize that our people are our most important asset. To deliver on our customers’ experiences, we continually improve how we attract and retain talent. In addition to competitive wages, quality benefits and a safe work environment, we offer a broad range of this Form 10-K under the heading “Executive Officersemployment opportunities for workers of all ages and aspirations. Many supermarket roles offer opportunities to learn new skills, grow and advance careers — inside or outside our family of companies.
Associates at all levels of the Company” have access to training and education programs to build their skills and prepare for the roles they want. In 2022, we expect to spend approximately $145 million on training our associates through onboarding, leadership development programs, and programs designed to upskill associates across the Company. We continue to invest in new platforms and applications to make learning more accessible to our associates.
Beyond our own programs, associates can take advantage of our tuition reimbursement benefit, which offers up to $3,500 annually — $21,000 over the course of employment — toward continuing education. These funds can be applied to education programs like certifications, associate or graduate degrees. More than 3,000 associates, 90% of whom are hourly, have taken advantage of our tuition reimbursement program in 2021. Kroger has invested more than $40 million in this program since it launched in 2018.
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Rewarding Our Associates
As we continue to operate in a challenging labor market, we are dedicated to attracting and retaining the right talent across the organization to be able to continue delivering for our customers. We are investing in our associates by expanding our industry-leading benefits, including continuing education and tuition reimbursement, training and development, health, and wellness. During 2021, we invested more than ever before in our associates to raise our average hourly wage to $17 and our average hourly rate to over $22 with comprehensive benefits included. Over the last four years, Kroger has invested an incremental $1.2 billion in associate wages and training and our average hourly rate has increased 20%. In addition, we have committed to invest over $1.8 billion during the same time period to help address underfunding and better secure pensions for tens of thousands of associates.
Promoting Diversity, Equity & Inclusion
Diversity and inclusion have been among Kroger’s values for decades. We strive to reflect the communities we serve and foster a culture that empowers everyone to be their true self, inspires collaboration, and feeds the human spirit. We have taken a very thoughtful and purposeful approach to enact meaningful change and develop what we believe are the right actions to achieve true and lasting equality. Our Framework for Action: Diversity, Equity & Inclusion plan reflects our desire to redefine, deepen, and advance our commitment, mobilizing our people, passion, scale and resources. The following summarizes our framework: Create a More Inclusive Culture; Develop Diverse Talent; Advance Diverse Partnerships; Advance Equitable Communities; and Deeply Listen and Report Progress.
Creating a Safe Environment
Our associates’ safety is a top priority and it is one of our core values. Since the beginning of the pandemic, our most urgent priority has been to safeguard our associates and customers. We’ve implemented dozens of new safety and cleanliness processes and procedures in our stores and other facilities. Beyond the pandemic, we prioritize providing the right safety training and equipment, safe working conditions and resources to maintain and improve associates’ well-being. Through our strategy to set clear expectations, routine monitoring, and regular communication and engagement, we reduce the number of injuries and accidents that happen in our workplace.
We track health and safety metrics centrally for an enterprise-wide view of issues, trends and opportunities and monitor associate injury performance including total injuries, Occupational Safety and Health Administration (“OSHA”) injury rates, and lost-time injuries, as well as customer injury metrics like slip-and-fall injuries. We also track the completion of required training for associates and we regularly share these metrics with leaders and relevant team members to inform management decisions.
Supporting Labor Relations
A majority of our employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several different international unions. There are approximately 310 such agreements, usually with terms of three to five years. Wages, health care and pensions are included in all of these collective bargaining agreements that cover approximately 65% of our associates. Our objective is to negotiate contracts that balance competitive wage increases and affordable healthcare for associates with keeping groceries affordable for the communities we serve. Our obligation is to do this in a way that maintains a financially sustainable business.
MANAGING CLIMATE IMPACTS
Managing climate change impacts is an important part of Thriving Together, Kroger’s Environmental, Social & Governance (“ESG”) strategy, and has been a focus for our business for many years. With a large portfolio of supermarkets, distribution warehouses and food production plants, as well as a complex supply chain, we recognize Kroger’s impact on our climate. We continue to explore opportunities and take steps to reduce the impacts of our operations on the environment and to reduce the potential risk of a changing climate on our operations. This includes increasing our usage of renewable energy, investments in new technologies and enhancing our operational efficiency. The key elements of our ESG strategy are included below.
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Governance
Climate impacts are managed by leadership with input from several departments across the business. The Public Responsibilities Committee of the Board of Directors oversees our responsibilities as a corporate citizen and the Company’s practices related to environmental sustainability, including climate impacts, along with other environmental and social topics of material importance. Kroger discloses detailed energy and emissions data, as well as our approach to managing climate effects, in our annual ESG Report, which can be found on our sustainability web site at www.thekrogerco.com/esgreport. The information in our ESG report is not part of or incorporated by reference into this Annual Report on Form 10-K.
Risk assessment
To help identify and manage climate-related risks to our business, we conducted both qualitative and quantitative risk assessments that have assessed the effect and vulnerability of climate risk on our operations. We have also assessed the likelihood and extent to which different climate risks, such as extreme precipitation, drought and heat stress, would affect different types of facilities and geographies. As a result of our risk assessments, we do not currently anticipate the modeled physical risks to adversely affect our financial condition, results of operations or cash flows for the foreseeable future. We plan to continue these qualitative and quantitative risk assessments moving forward.
Kroger also acknowledges that current and emerging climate-related legislation could affect our business. As a result of forthcoming state and federal requirements regarding the phase down of hydrofluorocarbon (HFC) refrigerants, we anticipate steadily replacing our refrigerant infrastructure to reach required levels, which could incur significant costs to the business. If legislation required an accelerated timeline regarding the phase down of HFC refrigerants, we could incur higher costs. This legislation will affect all retailers using refrigerants in their operations.
Climate adaptation
To help prepare for and manage a variety of risk scenarios, including natural disasters and business disruptions to our supply chain, we maintain more than 200 business continuity plans. We have installed technologies and processes to ensure our supermarkets, food production plants, fulfillment centers and supply chain can respond quickly and remain operational. We also monitor energy availability and costs to help anticipate how changing climate patterns, like increasing temperatures, could affect our energy-sourcing costs and activities. Our teams also monitor transition risks due to climate change, including the effect possible new legislation may have on our business.
Climate mitigation
For many years, Kroger has implemented emission reduction projects, including energy efficiency improvements, refrigerant leak detection and mitigation measures, renewable energy installations and procurement and fleet efficiencies. In 2020, we set a new goal to reduce absolute greenhouse gas emissions from our operations (scope 1 and 2 emissions) by 30% by 2030, against a 2018 baseline. The goal was developed using climate science and is incorporated hereinaligned with the Paris Agreement, specifically supporting a well-below 2°C climate scenario according to the absolute contraction method. Kroger anticipates resetting our current greenhouse gas reduction target to meet with the requirements of the Science Based Target Initiative, which would include aligning with the 1.5°C scenario and setting a new Scope 3 target.
Additional discussion about our approach to managing climate effects is included in Kroger’s annual ESG report.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following is a list of the names and ages of the executive officers and the positions held by reference.each such person. Except as otherwise noted, each person has held office for at least five years. Each officer will hold office at the discretion of the Board for the ensuing year until removed or replaced.
Name | Age | Recent Employment History | ||
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Mary E. Adcock | | 46 | | Ms. Adcock was elected Senior Vice President effective May 1, 2019 and is responsible for retail operations as well as the oversight of all Kroger retail divisions. From June 2016 to April 2019, she served as Group Vice President of Retail Operations. Prior to that, Ms. Adcock held leadership roles in Kroger’s Columbus Division, including Vice President of Operations and Vice President of Merchandising. Prior to that, Ms. Adcock served as Vice President of Natural Foods Merchandising and as Vice President of Deli/Bakery Manufacturing and held several leadership positions in the manufacturing department, including human resources manager, general manager and division operations manager. Ms. Adcock joined Kroger in 1999 as human resources assistant manager at the Country Oven Bakery in Bowling Green, Kentucky. |
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Stuart W. Aitken | | 50 | | Mr. Aitken was named Senior Vice President and Chief Merchant and Marketing Officer in August 2020. He was elected Senior Vice President in February 2019 and served as Group Vice President from June 2015 to February 2019. He is responsible for sales, pricing, promotional and category planning for fresh foods, center store and general merchandise categories, as well as analytics & execution, e-commerce and Digital Merchandising, and Our Brands. Prior to joining Kroger, he served as the chief executive officer of dunnhumby USA, LLC. Mr. Aitken has over 15 years of marketing, academic and technical experience across a variety of industries, and held various leadership roles with other companies, including Michaels Stores and Safeway, Inc. |
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Gabriel Arreaga | | 47 | | Mr. Arreaga was elected Senior Vice President of Supply Chain in December 2020. He is responsible for the company’s industry-leading Supply Chain organization, Logistics, Inventory & Replenishment, Manufacturing, and Fulfillment Centers. Prior to Kroger, Mr. Arreaga served as Senior Vice President of Supply Chains for Mondelez, where he was responsible for all operations and functions from field to consumer, internal and external factories, fulfillment centers, direct to store branches, Logistics and product development. He was also Global Vice President of Operations for Stanley Black and Decker and held numerous leadership roles at Unilever including Vice President of Food and Beverage Operations. |
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Yael Cosset | | 48 | | Mr. Cosset was elected Senior Vice President and Chief Information Officer in May 2019 and is responsible for leading Kroger’s digital strategy, focused on building Kroger’s presence in the marketplace in digital channels, personalization and e-commerce. In August 2020, he also assumed responsibility for Kroger’s alternative profit businesses, including Kroger’s data analytics subsidiary, 84.51 ͦ LLC and Kroger Personal Finance. Prior to that, Mr. Cosset served as Group Vice President and Chief Digital Officer, and also as Chief Commercial Officer and Chief Information Officer of 84.51° LLC. Prior to joining Kroger, Mr. Cosset served in several leadership roles at dunnhumby USA, LLC, including Executive Vice President of Consumer Markets and Global Chief Information Officer. |
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Carin L. Fike | | 53 | | Ms. Fike was elected Vice President and Treasurer effective April 2017. Prior to that, she served as Assistant Treasurer and also as Director of Investor Relations. Ms. Fike began her career with Kroger in 1999 as a manager in the Financial Reporting department after working with PricewaterhouseCoopers in various roles, including audit manager. |
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Todd A. Foley | | 52 | | Mr. Foley was named Group Vice President, Corporate Controller on October 1, 2021. From April 2017 to September 2021, he served as Vice President and Corporate Controller. Before that, he held several leadership roles, including Vice President and Treasurer, Assistant Corporate Controller, and Controller of Kroger’s Cincinnati/Dayton division. Mr. Foley began his career with Kroger in 2001 as an audit manager in the Internal Audit Department after working for PricewaterhouseCoopers in various roles, including senior audit manager. |
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Valerie L. Jabbar | | 53 | | Ms. Jabbar was elected Senior Vice President effective August 19, 2021 and is responsible for the oversight of several Kroger retail divisions. From July 2020 to August 2021, she served as Group Vice President of Center Store Merchandising, and from September 2018 to June 2020, as Group Vice President of Merchandising. Prior to that, she served as President of the Ralphs Division from July 2016 to August 2018. Before that, Ms. Jabbar served as Vice President of Merchandising for the Ralphs Division and as Vice President of Merchandising for the Mid-Atlantic Division. She also held several leadership roles, including assistant store director, category manager, Drug/GM coordinator, G.O. Seasonal manager, assistant director of Drug/GM and director of Drug GM, and district manager in the Fry’s Division. She joined the Company in 1987 as a clerk in the Fry’s Division. |
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Kenneth C. Kimball | | 56 | | Mr. Kimball was elected Senior Vice President in March 2022 and is responsible for the oversight of several Kroger retail divisions. From April 2016 to March 2022, he served as President of the Smith’s Division. Prior to that, he held several leadership roles with the Ralphs Division, including Vice President of Operations and Vice President of Merchandising. Prior to that, he held leadership roles, including store manager, district manager, and director in the Smith’s Division as well as Senior Vice President of Sales and Merchandising and Group Vice President of Retail Operations. Mr. Kimball joined the Company in 1984 as a clerk in the Smith’s Division. |
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Timothy A. Massa | | 55 | | Mr. Massa was elected Senior Vice President of Human Resources and Labor Relations in June 2018. Prior to that, he served as Group Vice President of Human Resources and Labor Relations from June 2014 to June 2018. Mr. Massa joined Kroger in October 2010 as Vice President, Corporate Human Resources and Talent Development. Prior to joining Kroger, he served in various Human Resources leadership roles for 21 years at Procter & Gamble, most recently serving as Global Human Resources Director of Customer Business Development. |
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W. Rodney McMullen | | 61 | | Mr. McMullen was elected Chairman of the Board effective January 1, 2015, and Chief Executive Officer effective January 1, 2014. Prior to that, he served as President and Chief Operating Officer from August 2009 to December 2013. Prior to that he held numerous leadership roles, including Vice Chairman, Executive Vice President of Strategy, Planning and Finance, Executive Vice President and Chief Financial Officer, Senior Vice President, Group Vice President and Chief Financial Officer, Vice President, Control and Financial Services, and Vice President, Planning and Capital Management. Mr. McMullen joined Kroger in 1978 as a part-time stock clerk. |
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Gary Millerchip | | 50 | | Mr. Millerchip was elected Senior Vice President and Chief Financial Officer effective April 2019. He joined Kroger in 2008, serving as Chief Executive Officer for Kroger Personal Finance. Before coming to Kroger, Mr. Millerchip was responsible for the Royal Bank of Scotland (RBS) Personal Credit Card business in the United Kingdom. He joined RBS in 1987 and held leadership positions in Sales & Marketing, Finance, Change Management, Retail Banking Distribution Strategy and Branch Operations during his time there. |
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Christine S. Wheatley | | 51 | | Ms. Wheatley was elected Group Vice President, Secretary and General Counsel in May 2014. She joined Kroger in February 2008 as Corporate Counsel, and thereafter served as Senior Attorney, Senior Counsel, and Vice President. Before joining Kroger, Ms. Wheatley was engaged in the private practice of law for 11 years, most recently as a partner at Porter Wright Morris & Arthur in Cincinnati. |
COMPETITIVE ENVIRONMENT
For the disclosure related to our competitive environment, see Item 1A under the heading “Competitive Environment.”
ITEM 1A. | RISK FACTORS. |
ITEM 1A.RISK FACTORS.
There are risks and uncertainties that can affect our business. The significant risk factors are discussed below. The following information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Outlook” section in Item 7 of this Form 10-K,Operations,” which includeincludes forward-looking statements and factors that could cause us not to realize our goals or meet our expectations.
COMPETITIVE ENVIRONMENT
The operating environment for the food retailing industry continues to be characterized by intense price competition, expansion, increasingthe fragmentation of local, regional, and national retailers, including both retail and onlinedigital formats, market consolidation, intense competition and entry of non-traditional competitorscompetitors. Customer behavior shifted quickly and market consolidation. In addition, evolvingconsiderably during the pandemic, including a shift from food away from home to food at home. We see three major trends shaping the industry post-pandemic: e-commerce, cooking at home and prepared foods to go. If we do not appropriately or accurately anticipate customer preferences or fail to quickly adapt to these changing preferences, or if trends shift more quickly to food away from home, our sales and profitability could be adversely affected. If we fail to meet the advancementevolving needs of online, delivery, shipour customers, our ability to home,compete and mobile channelsour financial condition, results of operations or cash flows could be adversely affected.
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We are continuing to enhance the customer connection with investments in our industry enhance thefour competitive environment.
moats – Seamless, Personalization, Fresh, and Our Brands. Each of these are strategic differentiators and each one is designed to better serve our customers and to generate customer loyalty and sustainable growth momentum. We believe our Restock Kroger plan provides a balanced approach thatplans to continue to improve these four strategic differentiators will enable us to meet the wide-ranging needs and expectations of our customers. However,If we are unable to continue to enhance the foregoing key elements of our connection with customers, or they fail to strengthen customer loyalty, our ability to compete and our financial condition, results of operations or cash flows could be adversely affected. Our ecosystem monetizes the traffic and data insights generated by our retail supermarket business to create fast-growing, asset-light and margin rich revenue streams. We may be unsuccessful in implementing Restock Kroger, including our alternative profit strategy, and our cost savings initiatives, which could adversely affect our relationships with our customers, our market share and business growth and our financial condition, results of operations and results.or cash flows. The nature and extent to which our competitors respond to the evolving and competitive industry by developing and implementing their competitive strategies could adversely affect our profitability.
In addition, evolving customer preferences and the advancement of online, delivery, ship to home, and mobile channels in our industry increase the competitive environment. We must anticipate and meet these evolving customer preferences and continue to implement technology, software and processes to be able to conveniently and cost-effectively fulfill customer orders. Providing flexible fulfillment options and implementing new technology is complex and may not meet customer preferences. If we are not successful in reducing or offsetting the cost of fulfilling orders outside of our traditional in-store channel with efficiencies, cost-savings, expense reductions, or alternative revenues, our financial condition, results of operations or cash flows could be adversely affected.
In addition, if we do not successfully develop and maintain a relevant digital experience for our customers, our business, financial condition, results of operations or cash flows could be adversely affected. Digital retailing is rapidly evolving, and we must keep pace with new developments by our competitors as well as the evolving needs and preferences of our customers. Our digital business has accelerated significantly during the COVID-19 pandemic including Pickup, Delivery and Ship. We must compete by offering a convenient shopping experience for our customers regardless of how they choose to shop with us, and by investing in, providing and maintaining relevant customer-facing apps and interfaces that have the features customers want that are also reliable and easy to use. The future success of the digital business will also depend on the efficiency and cost effectiveness of fulfilling orders across our modalities, whether in store, in pickup-only locations, or through customer fulfillment centers powered by Ocado Group plc.
PRODUCT SAFETY
Customers count on Kroger to provide them with safe food and drugs and other merchandise. Concerns regarding the safety of the products that we sell could cause shoppers to avoid purchasing certain products from us, or to seek alternative sources of supply even if the basis for the concern is outside of our control. Any lost confidence on the part of our customers would be difficult and costly to reestablish. We could be adversely affected by personal injury or product liability claims, product recalls, or other health and safety issues, which occur from time to time. If we sell products that cause illness or injury to customers, resulting from product contamination or spoilage, the presence of certain substances, or damage caused in handling, storage or transportation, we could be exposed to claims or litigation. Any issue regarding the safety of items, whether Our Brands items manufactured by the Company or for the Company or CPG products we sell, regardless of the cause, could have a substantial and adverse effect on our reputation, financial condition, results of operations or cash flows.
LABOR RELATIONSEMPLOYEE MATTERS
A majority of our employeesassociates are covered by collective bargaining agreements with unions, and our relationship with those unions, including a prolonged work stoppage affecting a substantial number of locations, could have a material adverse effect on our results.
financial condition, results of operations or cash flows. We are a party to approximately 360310 collective bargaining agreements. Upon the expiration of our collective bargaining agreements, work stoppages by the affected workers could occur (and have occurred in the past) if we are unable to negotiate new contracts with labor unions. A prolonged work stoppage affecting a substantial number of locationsIn addition, changes to national labor policy could have a material adverse effect onaffect labor relations with our results.associates and relationships with unions. Further, if we are unable to control health care, pension and wage costs, or if we have insufficient operational flexibility under our collective bargaining agreements, we may experience increased operating costs and an adverse effect on our financial condition, results of operations or cash flows.
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We have committed to paying fair wages and providing the benefits that were collectively bargained with the United Food and Commercial Workers (“UFCW”) and other labor unions representing associates. Our ability to control labor and benefit costs is subject to numerous internal and external factors, including regulatory changes, wage rates, and healthcare and other insurance costs. Changes to wage regulations, including further increases in the minimum wage and extra pay ordinances enacted by local governments, could have an impact on our future financial condition, results of operations or cash flows. Our ability to meet our labor needs, while controlling wages and other costs, is subject to numerous external factors, including the available qualified workforce in each area where we are located, unemployment levels within those areas, wage rates, and changes in employment and labor laws.
Our continued success depends on the ongoing contributions of our associates, including members of our senior management and other key personnel. We must recruit, hire, develop and retain qualified associates with an increasingly large range of skills to meet the needs of our evolving and complex business. We compete with other retail and non-retail businesses for these associates and invest significant resources in training and motivating them. Competition among potential employers has resulted, and may in the future result, in increased associate costs and has from time to time affected our ability to recruit and retain associates. There is no assurance that we will be able to attract or retain sufficient highly qualified associates in the future, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
DATA AND TECHNOLOGY
Our business is increasingly dependent on information technology systems that are complex and vital to continuing operations, resulting in an expansion of our technological presence and corresponding risk exposure. If we were to experience difficulties maintaining or operating existing systems or implementing new systems, we could incur significant losses due to disruptions in our operations.
Through our sales and marketing activities, we collect and store some personal information that our customers provide to us. We also gather and retain information about our associates in the normal course of business. Under certain circumstances, we may share information with vendors that assist us in conducting our business, as required by law, or otherwise in accordance with our privacy policy.
Our technology systems are vulnerable to disruption from circumstances beyond our control.control, and we regularly defend against and respond to data security incidents. Cyber-attackers have targeted and accessed, and may in the future again attempt to target and access, information stored in our or our vendors’ systems in order to misappropriate confidential customer or business information. Due to the political uncertainty involving Russia and Ukraine, there is a possibility that the escalation of tensions could result in cyberattacks that could either directly or indirectly affect our operations. Although we have implemented procedures to protect our information, and require our vendors to do the same, we cannot be certain that our security systems will successfully defend against, or be able to effectively respond to, rapidly evolving, increasingly sophisticated cyber-attacks as they become more difficult to detect and defend against. Further, a Kroger associate, a contractor or other third party with whom we do business may in the future circumvent our security measures in order to obtain information or may inadvertently cause a breach involving information. In addition, hardware, software or applications we may use may have inherent defects, vulnerabilities, or could be inadvertently or intentionally applied or used in a way that could compromise our information security.
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Our cybersecurity program, continued investment in our information technology systems, and our processes to evaluate and select vendors with reasonable information security controls may not effectively insulate us from potential attacks, data breaches or disruptions to our business operations, which could result in a loss of customers or business information, negative publicity, damage to our reputation, and exposure to claims from customers, financial institutions, regulatory authorities, payment card associations, associates and other persons. Any such events could have an adverse effect on our business, financial condition, and results of operations or cash flows and may not be covered by our insurance. In addition, compliance with privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes and may require us to devote significant management resources to address these issues. The costs of attempting to protect against the foregoing risks and the costs of responding to cyber-attacks are significant. Following a cyber-attack, our and/or our vendors’ remediation efforts may not be successful, and a cyber-attack could result in interruptions, delays or cessation of service, and loss of existing or potential customers. In addition, breaches of our and/or our vendors’ security measures and the unauthorized dissemination of sensitive personal information or confidential information about us or our customers could expose our customers’ private information and our customers to the risk of financial or medical identity theft, or expose us or other third parties to a risk of loss or misuse of this information, and result in investigations, regulatory enforcement actions, material fines and penalties, loss of customers and business relationships, litigation or other actions which could have a material adverse effect on our brands, reputation, business, financial condition, results of operations or cash flows.
Additionally,Data governance failures can adversely affect our reputation and business. Our business depends on October 1, 2015,our customers’ willingness to entrust us with their personal information. Events that adversely affect that trust, including inadequate disclosure to our customers of our uses of their information, failures to honor new and evolving data privacy rights, failing to keep our information technology systems and our customers’ sensitive information secure from significant attack, theft, damage, loss or unauthorized disclosure or access, whether as a result of our action or inaction (including human error) or that of our business associates, vendors or other third parties, could adversely affect our brand and reputation and operating results and also could expose and/or has exposed us to mandatory disclosure to the media, litigation (including class action litigation), governmental investigations and enforcement proceedings, material fines, penalties and/or remediation costs, and compensatory, special, punitive and statutory damages, consent orders, and/or injunctive relief, any of which could adversely affect our businesses, financial condition, results of operations or cash flows. Large scale data breaches at other entities, including supply chain security vulnerabilities, increase the challenge we and our vendors face in maintaining the security of our information technology systems and proprietary information and of our customers’ information. There can be no assurance that such failures will not occur, or if any do occur, that we will detect them or that they can be sufficiently remediated.
The use of data by our business and our business associates is highly regulated. Privacy and information-security laws and regulations change, and compliance with them may result in cost increases due to, among other things, systems changes and the development of new processes. If we, our third party service providers, or those with whom we share information fail to comply with laws and regulations, or self-regulatory regimes, that apply to all or parts of our business, such as section 5 of the FTC Act, the California Consumer Privacy Act (CCPA), the Health Insurance Portability and Accountability Act (HIPAA), or applicable international laws such as the EU General Data Protection Regulation (GDPR), our reputation could be damaged, possibly resulting in lost business, and we could be subjected to additional legal risk or financial losses as a result of non-compliance.
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PAYMENT SYSTEMS
We accept payments using a variety of methods, including cash and checks, select credit and debit cards, and Kroger Pay, a mobile payment solution. As we offer new payment options to our customers, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related acceptance fees, along with additional transaction processing fees. We rely on third parties to provide payment transaction processing services for credit and debit cards. It could disrupt our business if these companies become unwilling or unable to provide these services to us, including due to short term disruption of service. We are also subject to evolving payment card industry shifted liabilityassociation and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers. For example, we are subject to Payment Card Industry Data Security Standards (“PCI DSS”), which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. If our payment card terminals or internal systems are breached or compromised, we may be liable for certain transactionscard re-issuance costs and other costs, subject to retailers who are not ablefines and higher transaction fees, and lose our ability to accept Europay, MasterCard, Visa (EMV) transactions. We completed the implementationcard payments from our members, or if our third-party service providers’ systems are breached or compromised, our business, financial condition, results of the EMV technology for our supermarket transactions, and have a plan in place to complete implementation for our fuel centers prior to the liability shift for fuel centers, which will occur in 2020.operations or cash flows could be adversely affected.
INDEBTEDNESS
Our indebtedness could reduce our ability to obtain additional financing for working capital, mergers and acquisitions or other purposes and could make us vulnerable to future economic downturns as well as competitive pressures. If debt markets do not permit us to refinance certain maturing debt, we may be required to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness. Changes in our credit ratings, or in the interest rate environment, could have an adverse effect on our financing costs and structure.
LEGAL PROCEEDINGS AND INSURANCE
From time to time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrustcontract disputes, regulatory claims and other proceedings. Other legal proceedings purport to be brought as class actions on behalf of similarly situated parties. Some of these proceedings could result in a substantial loss to Kroger. We estimate our exposure to these legal proceedings and establish accruals for the estimated liabilities, where it is reasonably possible to estimate and where an adverse outcome is probable. Assessing and predicting the outcome of these matters involves substantial uncertainties. Adverse outcomes in these legal proceedings, or changes in our evaluations or predictions about the proceedings, could have a materialan adverse effect on our financial results.condition, results of operations or cash flows. Please also refer to the “Legal Proceedings” section in Item 3 and the “Litigation” section in Note 1312 to the Consolidated Financial Statements.
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We use a combination of insurance and self-insurance to provide for potential liability for workers’ compensation, automobile and general liability, property, director and officers’ liability, cyber risk exposure and employeeassociate health care benefits. Any actuarial projection of losses is subject to a high degree of variability. With respect to insured matters, we are liable for retention amounts that vary by the nature of the claim, and some losses may not be covered by insurance. Changes in legal claims, trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers, and changes in discount rates could all affect our financial condition, results of operations or cash flows.
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MULTI-EMPLOYER PENSION OBLIGATIONS
As discussed in more detail below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Multi-EmployerPolicies-Multi-Employer Pension Plans,,” Kroger contributes to several multi-employer pension plans based on obligations arising under collective bargaining agreements with unions representing employeesassociates covered by those agreements. We believe that the present value of actuarially accrued liabilities in most of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits, and we expect that Kroger’s contributions to thosemost of these funds will increase over the next few years. A significant increase to those funding requirements could adversely affect our financial condition, results of operations or cash flows. Despite the fact that the pension obligations of these funds are not the liability or responsibility of the Company, except as noted below, there is a risk that the agencies that rate our outstanding debt instruments could view the underfunded nature of these plans unfavorably, or adjust their current views unfavorably, when determining their ratings on our debt securities. Any downgrading of our debt ratings likely would adversely affect our cost of borrowing and access to capital.
We also currently bear the investment risk of two multi-employer pension plans in which we participate. In addition, we have been designated as the named fiduciary of these funds with sole investment authority of the assets of these funds. If investment results fail to meet our expectations, we could be required to make additional contributions to fund a portion of or the entire shortfall, which could have an adverse effect on our business, financial condition, results of operations or cash flows.
INTEGRATION OF NEW BUSINESS AND STRATEGIC ALLIANCES
We enter into mergers, acquisitions and strategic alliances with expected benefits including, among other things, operating efficiencies, procurement savings, innovation, sharing of best practices and increased market share that may allow for future growth. Achieving the anticipated or desired benefits may be subject to a number of significant challenges and uncertainties, including, without limitation, whether unique corporate cultures will work collaboratively in an efficient and effective manner, the coordination of geographically separate organizations, the possibility of imprecise assumptions underlying expectations regarding potential synergies, capital requirements, and the integration process, unforeseen expenses and delays, and competitive factors in the marketplace. We could also encounter unforeseen transaction and integration-related costs or other circumstances such as unforeseen liabilities or other issues. Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and attention. If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have an adverse effect on our business, financial condition, and results of operations or cash flows.
FUEL
We sell a significant amount of fuel in our 1,613 fuel centers, which could face increased regulation, including due to climate change or other environmental concerns, and demand could be affected by concerns about the effect of emissions on the environment as well as retail price increases. We are unable to predict future regulations, environmental effects, political unrest, acts of war or terrorism, disruptions to the economy, including but not limited to the COVID-19 pandemic, the recent invasion of Ukraine by Russia, and other matters that may affect the cost and availability of fuel, and how our customers will react to such factors, which could adversely affect our financial condition, results of operations or cash flows.
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ECONOMIC CONDITIONS
Our operating results could be materially impacted by changes in overall economic conditions and other economic factors that impact consumer confidence and spending, including discretionary spending. Future economic conditions affecting disposable consumer income such as employment levels, business conditions, overall economic slowdown or recession, changes in housing market conditions, changes in government benefits such as SNAP/EBT or child care credits, the availability of credit, interest rates, inflation or deflation, tax rates the impact of natural disasters or acts of terrorism, and other matters could reduce consumer spending. Inflation could materially affect our operating results through increases to our cost of goods, supply chain costs and labor costs. In addition, the economic factors listed above, or any other economic factors or circumstances resulting in higher transportation, labor, insurance or healthcare costs or commodity prices, and other economic factors can increase our merchandise costs and operating, general and administrative expenses and otherwise adversely affect our financial condition, results of operations or cash flows. Increased fuel prices could also have an effect on consumer spending and on our costs of producing and procuring products that we sell. A deterioration in overall economic conditions, the likelihood of which is made more uncertain by the recent increases in the inflation rate, could adversely affect our business in many ways, including slowing sales growth, reducing overall sales and reducing gross margins. We are unable to predict how the global economy and financial markets will perform. If the global economy and financial markets do not perform as we expect, it could adversely affect our financial condition, results of operations or cash flows.
WEATHER AND NATURAL DISASTERSCOVID-19
A largeThe global COVID-19 pandemic continues to affect our business. Two full years into the pandemic, many factors and uncertainties remain, including:
● | the continuing concerns about the health of, and the effect on our associates, and our ability to meet staffing needs in our stores, distribution facilities, corporate offices and other critical functions; |
● | the ultimate duration of the pandemic, including whether there will be additional spikes in the number of COVID-19 cases, future variants, mutations or related strains of the virus; |
● | the duration, degree and effectiveness of governmental measures, such as access to unemployment compensation, stimulus payments, and other fiscal policy changes; |
● | the timing and availability of, and prevalence of access to and utilization of, effective medical treatments for COVID-19; |
● | the effectiveness of vaccines against variants and efficacy of vaccines over time, vaccine availability for young children, global vaccine access, and the percentage of fully vaccinated individuals in the US and the corresponding effect on the duration of the pandemic; |
● | whether and when the global pandemic will become endemic; |
● | evolving macroeconomic factors, including general economic uncertainty, unemployment rates, and recessionary pressures; |
● | the impact of the pandemic on economic activity and the pace and extent of recovery when the pandemic subsides or becomes endemic, which may vary materially over time and among the different regions and markets we serve; |
● | the extent and duration of the effect on consumer confidence, economic well-being, spending, customer demand, buying patterns and shopping behaviors, including spend on discretionary categories, which often include higher margin products, and increased utilization of online sales channels, both during and after the pandemic; and |
● | the long-term impact of the pandemic on our business, including consumer behaviors. |
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In addition, we cannot predict with certainty the extent of the effect that COVID-19 will have on our storescustomers, suppliers, vendors, and distribution facilities are geographically located in areas that are susceptible to hurricanes, tornadoes, floods, droughtsother business partners, and earthquakes. Weather conditions and natural disasters could disrupt our operations at one or moreeach of our facilities, interrupt the delivery of products to our stores, substantially increase the cost of products, including supplies and materials and substantially increase the cost of energy needed to operate our facilities or deliver products to our facilities. Adverse weather and natural disasterstheir financial conditions; however, any adverse effect on these parties could materially and adversely impact us. To the extent that COVID-19 continues to affect the U.S. and global economy and our financial condition, resultsbusiness, it may also heighten other risks described in this section, including but not limited to those related to consumer behavior and expectations, competition, implementation of operations, or cash flows.strategic initiatives, cybersecurity threats, payment-related risks, supply chain disruptions, labor availability and cost, litigation and operational risk as a result of regulatory requirements.
LEGAL AND GOVERNMENT REGULATION
Our storesWe are subject to various laws, regulations, and administrative practices that affect our business, including laws and regulations involving antitrust and competition, privacy, data protection, environmental, healthcare, anti-bribery, anti-corruption, tax, accounting, and financial reporting or other matters. These and other rapidly changing laws, regulations, policies and related interpretations, as well as increased enforcement actions by various governmental and regulatory agencies, create challenges for the Company, may alter the environment in which we do business and may increase the ongoing costs of compliance, which could adversely affect our financial condition, results of operations and cash flows. If we are unable to continue to meet these challenges and comply with all laws, regulations, policies and related interpretations, it could negatively affect our reputation and our business results. Additionally, we are currently, and in the future may be, subject to a number of inquiries, investigations, claims, proceeding, and requests for information from governmental agencies or private parties, the adverse outcomes of which could harm our business. WeFailure to successfully manage these new or pending regulatory and legal matters and resolve such matters without significant liability or damage to our reputation may adversely affect our financial condition, results of operations and cash flows. Furthermore, if new or pending legal or regulatory matters result in fines or costs in excess of the amounts accrued to date, that may also materially affect our financial condition, results of operations or cash flows.
In addition, increasing governmental and societal attention to environmental, social, and governance (ESG) matters, including expanding voluntary reporting, diligence, and disclosure on topics such as climate change, waste production, water usage, human capital, labor, and risk oversight, could expand the nature, scope, and complexity of matters that we are required to control, assess, and report and could negatively affect the Company’s reputation.
Additionally, we must comply with numerous provisions regulating, among other things, health and sanitation standards, food labeling and safety, equal employment opportunity, minimum wages, and licensing for the sale of food, drugs, and alcoholic beverages.beverages, and new provisions relating to the COVID-19 pandemic. We cannot predict future laws, regulations, interpretations, administrative orders, or applications, or the effect they will have on our operations. They could, however, significantly increase the cost of doing business. They also could require the reformulation of some of the products that we sell (or manufacture for sale to third parties) to meet new standards. We also could be required to recall or discontinue the sale of products that cannot be reformulated. These changes could result in additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling, or scientific substantiation. Any or all of these requirements could have an adverse effect on our financial condition, results of operations or cash flows.
ITEM 1B.UNRESOLVED STAFF COMMENTS.WEATHER, NATURAL DISASTERS AND OTHER EVENTS
A large number of our stores, distribution facilities and fulfillment centers are geographically located in areas that are susceptible to hurricanes, tornadoes, floods, droughts, ice and snow storms and earthquakes. Weather conditions and natural disasters have, and may again in the future, disrupt our operations at one or more of our facilities, interrupt the delivery of products to our stores, substantially increase the cost of products, including supplies and materials and substantially increase the cost of energy needed to operate our facilities or deliver products to our facilities. Moreover, the effects of climate change, including those associated with extreme weather events, may affect our ability to procure needed commodities at costs and in quantities that are optimal for us or at all. Adverse weather, natural disasters, geopolitical and catastrophic events, such as war, civil unrest, acts of terrorism or other acts of violence, including active shooter situations (which have occurred in the past at our locations), or pandemics, such as the spread of COVID-19, or other future pandemics and other matters that could reduce consumer spending, could materially affect our financial condition, results of operations or cash flows.
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CLIMATE IMPACT
The long-term effects of global climate change present both physical risks, such as extreme weather conditions or rising sea levels, and transition risks, such as regulatory or technology changes, which are expected to be widespread and unpredictable. These changes could over time affect, for example, the availability and cost of products, commodities and energy including utilities, which in turn may impact our ability to procure goods or services required for the operation of our business at the quantities and levels we require. In addition, many of our operations and facilities are in locations that may be affected by the physical risks of climate change, and we face the risk of losses incurred as a result of physical damage to stores, distribution or fulfillment centers, loss or spoilage of inventory and business interruption caused by such events. We also use natural gas, diesel fuel, gasoline and electricity in our operations, all of which could face increased regulation and cost increases as a result of climate change or other environmental concerns. Transitioning to alternative energy sources, such as renewable electricity or electric vehicles, could incur higher costs. Regulations limiting greenhouse gas emissions and energy inputs will also increase in coming years, which may increase our costs associated with compliance, tracking, reporting, and sourcing. These events and their impacts could otherwise disrupt and adversely affect our operations and could have an adverse effect on our financial condition, results of operations or cash flows.
SUPPLY CHAIN
Disruption in our global supply chain could negatively affect our business. The products we sell are sourced from a wide variety of domestic and international vendors, and any future disruption in our supply chain or inability to find qualified vendors and access products that meet requisite quality and safety standards in a timely and efficient manner could adversely affect our business. The loss or disruption of such supply arrangements for any reason, labor disputes, loss or impairment of key manufacturing sites, acts of war or terrorism, disruptive global political events, for example, the recent invasion of Ukraine by Russia, quality control issues, a supplier’s financial distress, natural disasters or health crises, including the COVID-19 pandemic, regulatory actions or ethical sourcing issues, trade sanctions or other external factors over which we have no control, could interrupt product supply and, if not effectively managed and remedied, have an adverse effect on our business, financial condition, results of operations or cash flows.
ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
ITEM 2. | PROPERTIES. |
ITEM 2.PROPERTIES.
As of February 2, 2019,January 29, 2022, we operated approximately 2,800 owned or leased supermarkets, distribution warehouses and food production plants through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. While our current strategy emphasizes ownership of real estate, a substantial portion of the properties used to conduct our business are leased.
We generally own store equipment, fixtures and leasehold improvements, as well as processing and food production equipment. The total cost of our owned assets and capitalizedfinance leases at February 2, 2019,January 29, 2022, was $43.9$49.9 billion while the accumulated depreciation was $22.2$26.1 billion.
Leased premisesWe lease certain store real estate, warehouses, distribution centers, office space and equipment. We operate in leased facilities in approximately half of our store locations. Lease terms generally have base terms rangingrange from ten-to-twenty10 to 20 years with renewal options to renew for additional periods. Somevarying terms at our sole discretion. Certain leases also include options provide the right 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 after the conclusion oftaxes, 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. Store rentalsOur lease agreements do not contain any material residual value guarantees or material restrictive covenants. Certain properties or portions thereof are normally payable monthly at a stated amount or at a guaranteed minimum amount plus a percentage of sales over a stated dollar volume. Rentalssubleased to others for the distribution, food production and miscellaneous facilitiesperiods generally are payable monthly at stated amounts.ranging from one to 20 years. For additional information on lease obligations, see Note 109 to the Consolidated Financial Statements.
ITEM 3. | LEGAL PROCEEDINGS. |
Incorporated by reference herein is information regarding certain legal proceedings in which we are involved as set forth under “Litigation” contained in Note 12 – “Commitments and Contingencies” in the notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report.
719
ITEM 4. | MINE SAFETY DISCLOSURES. |
ITEM 3.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, we believe that any resulting liability will not have a material adverse effect on our financial position, results of operations, or cash flows.
We continually evaluate our exposure to loss contingencies arising from pending or threatened litigation and believe we have 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 involves substantial uncertainties. We currently believe that the aggregate range of loss for our exposures is not material. It remains possible that despite our current belief, material differences in actual outcomes or changes in our evaluation or predictions could arise that could have a material adverse effect on our financial condition, results of operations, or cash flows.
ITEM 4.MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the New York Stock Exchange under the symbol “KR.” As of March 28, 2019,23, 2022, there were 27,03725,466 shareholders of record.
During 2018,2021, we paid two quarterly cash dividends of $0.125$0.18 per share and two quarterly cash dividends of $0.14$0.21 per share. During 2017,2020, we paid two quarterly cash dividends of $0.12$0.16 per share and two quarterly cash dividends of $0.125$0.18 per share. On March 1, 2019,2022, we paid a quarterly cash dividend of $0.14$0.21 per share. On March 14, 2019,10, 2022, we announced that our Board of Directors declared a quarterly cash dividend of $0.14$0.21 per share, payable on June 1, 2019,2022, to shareholders of record at the close of business on May 15, 2019.13, 2022. We currently expect to continue to pay comparable cash dividends on a quarterly basis, that will increase over time, depending on our earnings and other factors, including approval by our Board.
For information on securities authorized for issuance under our existing equity compensation plans, see Item 12 under the heading “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
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PERFORMANCE GRAPH
Set forth below is a line graph comparing the five-year cumulative total shareholder return on our common shares, based on the market price of the common shares and assuming reinvestment of dividends, with the cumulative total return of companies in the Standard & Poor’s 500 Stock Index and a peer group composed of food and drug companies.
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| INDEXED RETURNS |
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Company Name/Index |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
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| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
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The Kroger Co. |
| 100 |
| 194.06 |
| 220.52 |
| 192.09 |
| 172.11 |
| 167.77 |
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| 100 |
| 89.60 |
| 87.34 |
| 85.54 |
| 112.22 |
| 144.28 | |
S&P 500 Index |
| 100 |
| 114.22 |
| 113.46 |
| 137.14 |
| 168.46 |
| 168.36 |
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| 100 |
| 122.83 |
| 122.76 |
| 149.23 |
| 174.97 |
| 211.72 | |
Peer Group |
| 100 |
| 125.06 |
| 116.69 |
| 114.76 |
| 148.26 |
| 143.99 |
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| 100 |
| 129.19 |
| 125.47 |
| 151.40 |
| 186.24 |
| 219.91 | |
Kroger’s fiscal year ends on the Saturday closest to January 31.
Data supplied by Standard & Poor’s.
The foregoing Performance Graph will not be deemed incorporated by reference into any other filing, absent an express reference thereto.
* Total assumes $100 invested on February 1, 2014,January 28, 2017, in The Kroger Co., S&P 500 Index, and the Peer Group, with reinvestment of dividends.
** The Peer Group consists of Albertsons Companies, Inc. (included from June 26, 2020 when it began trading), Costco Wholesale Corp., CVS Caremark Corp, Etablissements Delhaize Freres Et Cie Le Lion (“Groupe Delhaize”, which is included through July 22, 2016 when it merged with Koninklijke Ahold),Health Corporation, Koninklijke Ahold Delhaize NV (changed name from Koninklijke Ahold after merger with Groupe Delhaize), Safeway, Inc. (included through January 29, 2015 when it was acquired by AB Acquisition LLC)N.V., Supervalu Inc. (included through October 19, 2018 when it was acquired by United Natural Foods), Target Corp., Wal-Mart Stores Inc., Walgreens Boots Alliance Inc. (formerly, Walgreen Co.), Walmart Inc., Whole Foods Market Inc. (included through August 28, 2017 when it was acquired by Amazon.com, Inc.).
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The following table presents information on our purchases of our common shares during the fourth quarter of 2018.2021:
ISSUER PURCHASES OF EQUITY SECURITIES
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| | | | | | | | | Approximate Dollar |
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| | | | | | | | | Value of Shares |
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| | | | | | | Total Number of | | that May Yet Be |
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| | | | | | | Shares Purchased | | Purchased Under |
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| | Total Number | | Average | | as Part of Publicly | | the Plans or |
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| | of Shares | | Price Paid Per | | Announced Plans | | Programs(4) |
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Period(1) |
| Purchased(2) |
| Share(2) |
| or Programs(3) |
| (in millions) |
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First four weeks | | | | | | | | | | | |
November 7, 2021 to December 4, 2021 |
| 2,710,844 | | $ | 42.15 |
| 2,710,600 | | $ | 387 | |
Second four weeks | | | | | | | | | | | |
December 5, 2021 to January 1, 2022 |
| 6,239,527 | | $ | 44.64 |
| 6,220,863 | | $ | 140 | |
Third four weeks | | | | | | | | | | | |
January 2, 2022 to January 29, 2022 |
| 4,368,946 | | $ | 47.28 |
| 4,368,946 | | $ | 821 | |
Total |
| 13,319,317 | | $ | 45.00 |
| 13,300,409 | | $ | 821 | |
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| Maximum Dollar |
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| Value of Shares |
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| Purchased as |
| that May Yet Be |
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| Part of Publicly |
| Purchased Under |
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| Total Number |
| Average |
| Announced |
| the Plans or |
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| of Shares |
| Price Paid |
| Plans or |
| Programs (4) |
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Period (1) |
| Purchased (2) |
| Per Share |
| Programs (3) |
| (in millions) |
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First period - four weeks |
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November 11, 2018 to December 8, 2018 |
| 211,696 |
| $ | 30.41 |
| 192,716 |
| $ | 546 |
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Second period - four weeks |
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December 9, 2018 to January 5, 2019 |
| 147,050 |
| $ | 28.84 |
| 128,189 |
| $ | 546 |
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Third period — four weeks |
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January 6, 2019 to February 2, 2019 |
| 196,646 |
| $ | 28.54 |
| 165,094 |
| $ | 546 |
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Total |
| 555,392 |
| $ | 29.33 |
| 485,999 |
| $ | 546 |
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(1) |
| The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The fourth quarter of |
(2) |
| Includes (i) shares repurchased under the June 2021 Repurchase Program and the December 2021 Repurchase Program described below in (4), (ii) shares repurchased under a program announced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, under which repurchases are limited to proceeds received from exercises of stock options and the tax benefits associated therewith (“1999 Repurchase Program”) and |
(3) |
| Represents shares repurchased under the June 2021 Repurchase Program, the December 2021 Repurchase Program and the 1999 Repurchase |
(4) |
| On June 16, 2021, 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 under the Securities Exchange Act of 1934, as amended (the “June 2021 Repurchase Program”). On December 30, 2021, 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 under the Securities Exchange Act of 1934, as amended (the “December 2021 Repurchase Program”). The December 2021 Repurchase Program authorization replaced the existing June 2021 Repurchase Program. The amounts shown in this column reflect the amount remaining under the |
ITEM 6. | RESERVED. |
Not applicable.
1022
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
ITEM 6.SELECTED FINANCIAL DATA.
The following table presents our selected consolidated financial data for each of the last five fiscal years.
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| February 2, |
| February 3, |
| January 28, |
| January 30, |
| February 1, |
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| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
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| (52 weeks) |
| (53 weeks) |
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| (In millions, except per share amounts) |
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Sales |
| $ | 121,162 |
| $ | 122,662 |
| $ | 115,337 |
| $ | 109,830 |
| $ | 108,465 |
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Net earnings including noncontrolling interests |
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| 3,078 |
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| 1,889 |
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| 1,957 |
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| 2,049 |
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| 1,747 |
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Net earnings attributable to The Kroger Co. |
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| 3,110 |
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| 1,907 |
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| 1,975 |
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| 2,039 |
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| 1,728 |
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Net earnings attributable to The Kroger Co. per diluted common share |
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| 3.76 |
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| 2.09 |
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| 2.05 |
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| 2.06 |
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| 1.72 |
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Total assets |
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| 38,118 |
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| 37,197 |
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| 36,505 |
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| 33,897 |
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| 30,497 |
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Long-term liabilities, including obligations under capital leases and financing obligations |
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| 16,009 |
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| 16,095 |
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| 16,935 |
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| 14,128 |
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| 13,663 |
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Total shareholders’ equity — The Kroger Co. |
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| 7,886 |
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| 6,931 |
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| 6,698 |
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| 6,820 |
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| 5,412 |
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Cash dividends per common share |
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| 0.530 |
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| 0.490 |
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| 0.450 |
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| 0.395 |
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| 0.340 |
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Note: This information should be read in conjunction with MD&A and the Consolidated Financial Statements.
Fiscal year ended February 2, 2019 includes the gain on sale of our convenience store business unit.
Refer to Note 2 of the Consolidated Financial Statements for disclosure of business combinations and their effect on the Consolidated Statements of Operations and the Consolidated Balance Sheets.
All share and per share amounts presented are reflective of the two-for-one stock split that began trading at the split adjusted price on July 14, 2015.
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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and results of operations of The Kroger Co. should be read in conjunction with the “Forward-looking Statements” section set forth in Part I and the “Risk Factors” section set forth in Item 1A of Part II. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the “Outlook” section below.accompanying notes thereto contained in Item 8 of this report, as well as Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended January 30, 2021, which provides additional information on comparisons of fiscal years 2020 and 2019.
Significant fluctuations occurred in our business during 2020 due to the COVID-19 pandemic. As a result, management compares current year identical sales without fuel, adjusted FIFO operating profit and adjusted net earnings per diluted share results to the same metrics for the comparable period in 2019, in addition to comparisons made to 2020. This enables management to evaluate results of the business and our financial model over a longer period of time, and to better understand the state of the business after the height of the pandemic compared to the period of time prior to the pandemic.
OUR VALUE CREATION MODEL – DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
Kroger has developed multiple levers within our business model to ensure we deliver net earnings growth and consistent and attractive total shareholder return (“TSR”). Our execution of this model is allowing us to deliver today and invest for the future. The foundation of our value creation model is our market leading omnichannel position in food retail, which is built on Kroger’s unique assets: our stores, digital ecosystem, Our Brands and our data. These unique assets, when combined with our go-to-market strategy, deliver an unmatched value proposition for our customers. We continue to invest in areas of the business that matter most to our customers and deepen our competitive moats of Fresh, Our Brands, Data & Personalization and Seamless, to drive sustainable sales growth in our retail supermarket business, including fuel and health & wellness. This, in turn, generates the data and traffic that enables our fast-growing, high operating margin alternative profits. We are evolving from a traditional food retailer into a more diverse, food first business that we expect will consistently deliver net earnings growth in the future. This will be achieved by:
● | Growing identical sales without fuel. A key component of our growth plan is to double digital sales and our digital profitability rate by 2023. Our plan also involves maximizing growth levers in our supermarket business and is supported by continued strategic investments in our customers, associates, and our Seamless eco-system to ensure we deliver a full, friendly and fresh experience for every customer, every time; and |
● | Expanding operating margin, through a balanced model where strategic price investments for our customers and investments in our associates and seamless ecosystem are offset by our cost savings program, which has delivered $1 billion in cost savings annually for the past four years, and sustained growth in our alternative profit streams. |
We expect to continue to generate strong free cash flow and are committed to being disciplined with capital deployment in support of our value creation model and stated capital allocation priorities. Our first priority is to invest in the business through attractive high return organic and inorganic opportunities that drive long-term sustainable net earnings growth. We are committed to maintaining our current investment grade debt rating and our net total debt to adjusted EBITDA ratio target range of 2.30 to 2.50. We also expect to continue to grow our dividend over time and return excess cash to shareholders via stock repurchases.
We expect our value creation model will result in total shareholder return over the long-term within our target range of 8% to 11%.
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2021 EXECUTIVE SUMMARY
Our strategic priorities of leading with fresh and accelerating with digital propelled Kroger to record performance in 2021, on top of record results in 2020. These results demonstrate the strength of our go-to-market strategy, which led to achieving positive identical sales without fuel against very strong identical sales without fuel last year, resulting in a two-year stacked growth rate of 14.3%. Digital sales two-year stacked growth was 113% for 2021 and has grown triple digits since the beginning of 2019. We connected with customers through our expanding seamless ecosystem and the consistent delivery of a full, fresh, and friendly customer experience. We invested more than ever before in our associates to raise our average hourly wage to $17 and our average hourly rate to over $22 with comprehensive benefits included. We balanced these investments by achieving cost savings greater than $1 billion for the fourth consecutive year and alternative profits contributed an incremental $150 million of operating profit. Our agility and the commitment from our associates is allowing us to navigate a more volatile inflationary environment, current labor and supply chain conditions, and provide fresh food at affordable prices across our seamless ecosystem.
The following graphic illustrates our go-to-market strategy:
As we look to 2022, we expect the momentum in our business to continue and have confidence in our ability to navigate a rapidly changing operating environment. Our 2022 guidance reaffirms that we are creating a new, higher base from which we expect to grow. Our adjusted FIFO operating profit guidance for 2022 is $900 million higher than our TSR model would have projected when we announced it in 2019. Our guidance also highlights the flexibility and multiple levers that exist within our model today, which will allow us to deliver adjusted net earnings per diluted share growth in 2022, while cycling COVID-19 effects and investing for future growth. We are leveraging technology, innovation, and our competitive moats to build lasting competitive advantages. Our balanced model is allowing us to deliver for shareholders, invest in our associates, continue to provide fresh affordable food to our customers and uplift our communities. We remain confident in our value creation model and we expect to deliver total shareholder return over the long-term within our target range of 8% to 11%.
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The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
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| | Fiscal Year | | ||||||
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| Percentage |
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| | 2021 | | Change | | 2020 | | ||
Sales | | $ | 137,888 | | 4.1 | % | $ | 132,498 | |
Sales without fuel | | $ | 123,210 | | 0.2 | % | $ | 123,012 | |
Net earnings attributable to The Kroger Co. | | $ | 1,655 | | (36.0) | % | $ | 2,585 | |
Adjusted net earnings attributable to The Kroger Co. | | $ | 2,802 | | 2.3 | % | $ | 2,740 | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 2.17 | | (33.6) | % | $ | 3.27 | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 3.68 | | 6.1 | % | $ | 3.47 | |
Operating profit | | $ | 3,477 | | 25.1 | % | $ | 2,780 | |
Adjusted FIFO operating profit | | $ | 4,310 | | 6.3 | % | $ | 4,056 | |
Dividends paid | | $ | 589 | | 10.3 | % | $ | 534 | |
Dividends paid per common share | | $ | 0.78 | | 14.7 | % | $ | 0.68 | |
Identical sales excluding fuel | | | 0.2 | % | N/A | | | 14.1 | % |
FIFO gross margin rate, excluding fuel, bps increase (decrease) | | | (0.43) | | N/A | | | 0.14 | |
OG&A rate, excluding fuel and Adjusted Items, bps decrease | | | 0.61 | | N/A | | | 0.06 | |
Reduction in total debt, including obligations under finance leases compared to prior fiscal year end | | $ | 49 | | N/A | | $ | 663 | |
Share repurchases | | $ | 1,647 | | N/A | | $ | 1,324 | |
OVERVIEW
OUR BUSINESSNotable items for 2021 are:
Shareholder Return
● | Net earnings attributable to The Kroger Co. per diluted common share of $2.17, which results in a two-year compounded annual growth rate of 3.1%. |
● | Adjusted net earnings attributable to The Kroger Co. per diluted common share of $3.68, which results in a two-year compounded annual growth rate of 29.6%. |
● | Achieved operating profit of $3.5 billion, which results in a two-year compounded annual growth rate of 24.3%. |
● | Achieved adjusted FIFO operating profit of $ 4.3 billion, which results in a two-year compounded annual growth rate of 20.0%. |
● | Generated cash flows from operations of $6.2 billion. |
● | Returned $2.2 billion to shareholders through share repurchases and dividend payments. |
● | Achieved cost savings greater than $1 billion for the fourth consecutive year. |
Other Financial Results
● | Identical sales, excluding fuel, increased 0.2%, which results in a two-year stacked growth rate of 14.3%. |
● | Digital sales two-year stacked growth was 113%. Digital sales include products ordered online and picked up at our stores and products delivered or shipped directly to a customer’s home. |
● | Our Home Chef business surpassed $1 billion in sales in 2021, becoming the newest Our Brands billion dollar brand in our portfolio. |
25
● | Alternative profit streams contributed an incremental $150 million of operating profit for 2021 fueled by our digital media business – Kroger Precision Marketing (“KPM”) and Kroger Personal Finance. |
● | We are currently operating in a more volatile inflationary environment and we experienced higher product cost inflation in most departments during 2021. Our LIFO charge for 2021 was $197 million, compared to a credit of $7 million in 2020. This increase of $204 million was attributable to higher inflation in most categories, with grocery and meat being the largest contributors. |
Significant Events
● | During 2021, we settled certain company-sponsored pension plan obligations using existing assets of the plans. We recognized a non-cash settlement charge of $87 million, $68 million net of tax, associated with the settlement of our obligations for the eligible participants’ pension balances that were distributed out of the plans via a lump sum distribution or the purchase of an annuity contract, based on each participant’s election. The settlement charge is included in “Non-service component of company-sponsored pension plan costs” in the Consolidated Statements of Operations. The effect of this transaction on net earnings per diluted share was $0.09 for 2021 and is excluded from adjusted net earnings per diluted share results. |
● | During 2021, Fred Meyer and QFC and four local unions ratified an agreement for the transfer of liabilities from the Sound Retirement Trust to the United Food and Commercial Workers (“UFCW”) Consolidated Pension Plan. The agreement transferred $449 million, $344 million net of tax, in net accrued pension liabilities and prepaid escrow funds, to fulfill obligations for past service for associates and retirees. The agreement will be satisfied by cash installment payments to the UFCW Consolidated Pension Plan and are expected to be paid evenly over seven years. The impact of this transaction on net earnings per diluted share was $0.45 for 2021 and is excluded from adjusted net earnings per diluted share results. |
● | During 2021, we opened our first three Kroger Delivery customer fulfillment centers powered by Ocado Group plc in Monroe, Ohio, Groveland, Florida, a new Kroger geography, and Forest Park, Georgia. |
COVID-19
The COVID-19 pandemic has had, and is continuing to have, a significant impact on our business and results of operations. We expect the ultimate significance will be dictated by the length of time that such circumstances continue, which will depend on the currently unknowable extent and duration of the COVID-19 pandemic and any governmental and public actions taken in response. Since the beginning of the pandemic, our most urgent priority has been to safeguard our associates and customers. We’ve implemented dozens of new safety and cleanliness processes and procedures in our stores and other facilities.
As the pandemic has evolved, we have experienced unusually strong sales beginning in 2020 and continuing throughout 2021. We continue to see people eat and work more from home and prioritize health and cleanliness. The change in customer behavior caused by COVID-19 was a major factor in our results over the past two years. The pandemic brought to the forefront the importance to the customer of fresh and a seamless digital offering. We continued to invest and grow our capabilities in these areas, which led to achieving positive identical sales without fuel in 2021 against very strong identical sales results last year, which results in a two-year stacked growth rate of 14.3%. Digital sales two-year stacked growth was 113% for 2021, enabled by our team’s ability to pivot quickly and effectively in the first stage of the pandemic to ensure that we were meeting our customers’ demand for safe, low-touch or touchless shopping modalities.
Our operating, general and administrative (“OG&A”) expenses for 2021 reflected a reduction of the significant COVID related costs we incurred in 2020. Our OG&A expenses for 2020 included significant incremental costs related to investments in pay and benefits for our associates and measures to safeguard our associates and customers. As a percentage of sales, these incremental costs in 2020 were partially offset by sales leverage resulting from strong sales growth due to the COVID-19 pandemic.
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Strong execution by our team and accelerated investments in our competitive moats over the past two fiscal years allowed us to strengthen our balance sheet. At the onset of the pandemic in March 2020, we proactively borrowed $1 billion 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 2020, we fully repaid the $1 billion borrowed under the revolving credit facility in addition to $1.2 billion of commercial paper obligations outstanding as of year-end 2019, using cash generated by operations. We maintain a temporary cash investment balance of $1.5 billion as of year-end 2021.
For additional information about our debt activity in 2021 and 2020, including the drawdown and repayments under our revolving credit facility, forward-starting interest rate swap agreements and our senior note issuances, see Note 5 to the Consolidated Financial Statements. For additional information about our business results, including the impact of the COVID-19 pandemic, see our Results of Operations and Liquidity and Capital Resources sections within MD&A.
OUR BUSINESS
The Kroger Co. (the “Company” or “Kroger”) was founded in 1883 and incorporated in 1902. As of February 2, 2019, Kroger isWe are one of the world’s largest retailers, as measured by revenue, operating 2,764revenue. Our retail business is built on the foundation of our market leading position in food retail which includes the added convenience of our retail pharmacies and fuel centers. Our market leading position in food retail reflects the strength of our competitive moats of Fresh, Our Brands, Data & Personalization and Seamless, and our unique combination of assets.
We also leverage the data and traffic generated by our retail business to deliver incremental value and services for our customers that generates alternative profit streams. These alternative profit streams would not exist without our core retail business.
Kroger is diversified across brands, product categories, channels of distribution, geographies and consumer demographics. Our unique combination of assets include the following:
Stores
As of January 29, 2022, Kroger operates supermarkets under a variety of local banner names in 35 states and the District of Columbia. Of these stores, 2,270 haveAs of January 29, 2022, Kroger operated, either directly or through its subsidiaries, 2,726 supermarkets, of which 2,252 had pharmacies and 1,537 have1,613 had fuel centers. We connect with customers through our expanding seamless ecosystem and the consistent delivery of a full, fresh, and friendly customer experience. Fuel sales are an important part of our revenue, net earnings and loyalty offering. Our fuel strategy is to include a fuel center at each of our supermarket locations when it is feasible and it is expected to be profitable.
Seamless Digital Ecosystem
Our digital ecosystem provides a fresh and seamless offering for our customers. Through investment and innovation, we continue to improve our seamless ecosystem to ensure it remains relevant. We offer a convenient shopping experience for our customers regardless of how they choose to shop with us, including Pickup, Delivery and Ship. We offer Pickup (also referred to as ClickList®) and Harris Teeter ExpressLane™ — personalized, order online, pick up at the store services — at 1,5812,257 of our supermarkets and provide home delivery serviceservices, which allows us to 91%offer digital solutions to 98% of Kroger households.our customers. We provide relevant customer-facing apps and interfaces that have the features customers want that are also operatereliable, easy to use and deliver a seamless customer experience across our store and digital channels.
Merchandising and Manufacturing
Our Brands products play an online retailer.
important role in our merchandising strategy and represented nearly $28 billion of our sales in 2021. We operate 3733 food production plants, primarily bakeries and dairies, which supply approximately 32%29% of Our Brands units and 43%41% of the grocery category Our Brands units sold in our supermarkets; the remaining Our Brands items are produced to our strict specifications by outside manufacturers.
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Our Data
We are evolving from a traditional food retailer into a more diverse, food first business. The traffic and data generated by our retail supermarket business, including pharmacies and fuel centers, is enabling this transformation. Kroger serves over 60 million households annually and because of our market leading rewards program, 96% of customer transactions are tethered to a Kroger loyalty card. Our 20 years of investment in data science capabilities is allowing us to leverage this data to create personalized experiences and value for our customers and is also enabling our fast-growing, high operating margin alternative profits, including data analytic services and third party media revenue. Our retail media business – Kroger Precision Marketing – provides best in class media capabilities for our consumer packaged goods partners and is a key driver of our digital profitability and alternative profit.
Our revenues are predominately earned and cash is generated as consumer products are sold to customers in our stores, fuel centers and via our online platforms. We earn income predominately by selling products at price levels that produce revenues in excess of the costs we incur to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. Our retail operations, which represent 97% of our consolidated sales, is our only reportable segment.
Other Events Affecting our Business
On June 22, 2018, we closed our merger with Home Chef by purchasing 100% ofJanuary 27, 2020, Lucky’s Market filed a voluntary petition in the ownership interest in Home Chef, for $197 million net of cash and cash equivalents of $30 million, in addition to future earnout payments of up to $500 million over five years that are contingent on achieving certain milestones. Home ChefBankruptcy Court seeking relief under the Bankruptcy Code. Lucky’s Market is included in our ending Consolidated Balance Sheet for 2018 and in our Consolidated Statements of Operations from June 22, 2018 through February 2, 2019.January 26, 2020. Refer to Note 16 to the Consolidated Financial Statements for additional information.
On April 20, 2018,26, 2019, we completed the sale of our convenience storeTurkey Hill Dairy business unit for $2.2 billion. The convenience store businesstotal proceeds of $225 million. Turkey Hill Dairy is included in our ending Consolidated Balance Sheet for 2017 and in our Consolidated Statements of Operations in all periods in 2016 and 2017 and through April 19, 2018.25, 2019.
On September 2, 2016,March 13, 2019, we closedcompleted the sale of our merger with Modern HC Holdings, Inc. (“ModernHEALTH”) by purchasing 100%You Technology business to Inmar for total consideration of the outstanding shares$565 million, including $396 million of ModernHEALTHcash 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 $407 million. ModernHEALTHInmar to provide us digital coupon services. You Technology is included in our ending Consolidated Balance Sheet for 2016, 2017 and 2018 and in our Consolidated Statements of Operations from September 2, 2016 through January 28, 2017 and all periods in 2017 and 2018.March 12, 2019.
See Note 2 to the Consolidated Financial Statements for more information related to our mergers with Home Chef and ModernHEALTH.
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 FIFO operating profit, adjusted net earnings and adjusted operating net earnings per diluted share and Restock cash flow because management believes these metrics are useful to investors and analysts. These non-GAAPnon- GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share and net cash provided or used by operating or investing activities or any other GAAP measure of performance. These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP.
12
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 asand management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-daythe merchandising and operational effectiveness.effectiveness of our go-to-market strategy.
We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management asand management believes FIFO operating profit is a useful metric to investors and analysts because it measures the operational effectiveness of our day-to-day operational effectiveness. financial model.
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The adjusted operating net earnings, and adjusted operating net earnings per diluted share and adjusted FIFO operating profit metrics are important measures used by management to compare the performance of core operating results between periods. We believe adjusted operating net earnings, and adjusted operating net earnings per diluted share and adjusted FIFO operating profit are useful metrics to investors and analysts because they present more accurate year-over-year comparisons forof our net earnings, and net earnings per diluted share and FIFO operating profit because adjusted items are not the result of our normal operations.operations. Net earnings for 20182021 include the following, which we define as the “2018“2021 Adjusted Items:”
● | Charges to OG&A of $449 million, $344 million net of tax, for obligations related to withdrawal liabilities for a certain multi-employer pension fund, $66 million, $50 million net of tax, for the revaluation of Home Chef contingent consideration and $136 million, $104 million net of tax, for transformation costs (the “2021 OG&A Adjusted Items”). |
● | Losses in other income (expense) of $87 million, $68 million net of tax, related to company-sponsored pension plan settlements and $821 million, $628 million net of tax, for the unrealized loss on investments (the “2021 Other Income (Expense) Adjusted Items”). |
● | A reduction to income tax expense of $47 million primarily due to the completion of income tax audit examinations covering multiple years. |
Net earnings for 2020 include the following, which we define as the “2020 Adjusted Items:”
● | Gains in other income (expense) of $1.1 billion, $821 million |
Net earnings for 2019 include the following, which we define as the “2019 Adjusted Items:”
● | Charges to OG&A of $135 million, $104 million net of tax, for obligations related to withdrawal liabilities for certain |
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Net earnings for 2017 include the following, which we define as the “2017 Adjusted Items:”
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In addition, net earnings for 2017 include $119 million, $79 million net of tax, due to a 53rd week in fiscal year 2017 (the “Extra Week”).
Net earnings for 2016 include $111 million, $71 million net of tax, of charges to OG&A related to the restructuring of certain pension obligations to help stabilize associates’ future benefits (the “2016 Adjusted Items”).
13
OVERVIEW
Notable items for 2018 are:
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The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted operating net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted operating net earnings attributable to The Kroger Co. per diluted common share excluding the 2018, 20172021, 2020 and 20162019 Adjusted Items.Items:
29
Net Earnings per Diluted Share excluding the Adjusted Items
($ in millions, except per share amounts)
| | | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
| |||
Net earnings attributable to The Kroger Co. | | $ | 1,655 | | $ | 2,585 | | $ | 1,659 | |
(Income) expense adjustments | | | | | | | | | | |
Adjustment for pension plan withdrawal liabilities(1)(2) | |
| 344 | |
| 754 | |
| 104 | |
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 company-sponsored pension plan settlement charges(1)(5) | | | 68 | | | — | | | — | |
Adjustment for loss (gain) on investments(1)(6) | | | 628 | | | (821) | | | (119) | |
Adjustment for severance charge and related benefits(1)(7) | | | — | | | — | | | 61 | |
Adjustment for deconsolidation and impairment of Lucky's Market attributable to The Kroger Co.(1)(8) | | | — | | | — | | | 225 | |
Adjustment for Home Chef contingent consideration(1)(9) | | | 50 | | | 141 | | | (49) | |
Adjustment for transformation costs(1)(10) | | | 104 | | | 81 | | | 37 | |
Adjustment for income tax audit examinations(1) | | | (47) | | | — | | | — | |
Total Adjusted Items | | | 1,147 | | | 155 | | | 127 | |
| | | | | | | | | | |
Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 2,802 | | $ | 2,740 | | $ | 1,786 | |
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Net earnings attributable to The Kroger Co. per diluted common share | | $ | 2.17 | | $ | 3.27 | | $ | 2.04 | |
(Income) expense adjustments | | | | | | | | | | |
Adjustment for pension plan withdrawal liabilities(11) | |
| 0.45 | |
| 0.95 | |
| 0.13 | |
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 company-sponsored pension plan settlement charges(11) | | | 0.09 | | | — | | | — | |
Adjustment for loss (gain) on investments(11) | | | 0.83 | | | (1.05) | | | (0.15) | |
Adjustment for severance charge and related benefits(11) | | | — | | | — | | | 0.08 | |
Adjustment for deconsolidation and impairment of Lucky's Market attributable to The Kroger Co.(11) | | | — | | | — | | | 0.28 | |
Adjustment for Home Chef contingent consideration(11) | | | 0.07 | | | 0.18 | | | (0.07) | |
Adjustment for transformation costs(11) | | | 0.14 | | | 0.12 | | | 0.04 | |
Adjustment for income tax audit examinations(11) | | | (0.07) | | | — | | | — | |
Total Adjusted Items | | | 1.51 | | | 0.20 | | | 0.15 | |
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Net earnings attributable to The Kroger Co. per diluted common share excluding the Adjusted Items | | $ | 3.68 | | $ | 3.47 | | $ | 2.19 | |
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Average numbers of common shares used in diluted calculation | |
| 754 | |
| 781 | |
| 805 | |
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| 2018 |
| 2017 |
| 2016 |
| |||
Net earnings attributable to The Kroger Co. |
| $ | 3,110 |
| $ | 1,907 |
| $ | 1,975 |
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Adjustments for pension plan agreements (1)(2) |
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| 121 |
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| 360 |
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| 71 |
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Adjustment for voluntary retirement offering (1)(3) |
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| — |
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| 117 |
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| — |
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Adjustment for Kroger Specialty Pharmacy goodwill impairment (1)(4) |
|
| — |
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| 74 |
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| — |
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Adjustment for company-sponsored pension plan termination (1)(5) |
|
| — |
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| 335 |
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| — |
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Adjustment for gain on sale of convenience store business (1)(6) |
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| (1,360) |
|
| — |
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| — |
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Adjustment for mark to market gain on Ocado securities (1)(7) |
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| (174) |
|
| — |
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| — |
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Adjustment for depreciation related to held for sale assets (1)(8) |
|
| (11) |
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| (13) |
|
| — |
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Adjustment for contingent consideration (1)(9) |
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| 26 |
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| — |
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| — |
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Adjustment for impairment of financial instrument (1)(10) |
|
| 33 |
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| — |
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| — |
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Adjustment for Tax Act (1)(11) |
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| — |
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| (922) |
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| — |
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Total Adjusted Items |
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| (1,365) |
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| (49) |
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| 71 |
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Net earnings attributable to The Kroger Co. excluding the Adjusted Items |
| $ | 1,745 |
| $ | 1,858 |
| $ | 2,046 |
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Extra Week adjustment (1)(12) |
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| — |
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| (79) |
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| — |
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Net earnings attributable to The Kroger Co. excluding the Adjusted Items and the Extra Week adjustment |
| $ | 1,745 |
| $ | 1,779 |
| $ | 2,046 |
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Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 3.76 |
| $ | 2.09 |
| $ | 2.05 |
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Adjustments for pension plan agreements (13) |
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| 0.15 |
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| 0.40 |
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| 0.07 |
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Adjustment for voluntary retirement offering (13) |
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| — |
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| 0.13 |
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| — |
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Adjustment for Kroger Specialty Pharmacy goodwill impairment (13) |
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| — |
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| 0.08 |
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| — |
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Adjustment for company-sponsored pension plan termination (13) |
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| — |
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| 0.37 |
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| — |
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Adjustment for gain on sale of convenience store business (13) |
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| (1.65) |
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| — |
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| — |
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Adjustment for mark to market gain on Ocado securities (13) |
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| (0.21) |
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| — |
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| — |
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Adjustment for depreciation related to held for sale assets (13) |
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| (0.01) |
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| (0.01) |
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| — |
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Adjustment for contingent consideration (13) |
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| 0.03 |
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| — |
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| — |
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Adjustment for impairment of financial instrument (13) |
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| 0.04 |
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| — |
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| — |
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Adjustment for Tax Act (13) |
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| — |
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| (1.02) |
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| — |
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Total Adjusted Items |
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| (1.65) |
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| (0.05) |
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| 0.07 |
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Net earnings attributable to The Kroger Co. per diluted common share excluding the Adjusted Items |
| $ | 2.11 |
| $ | 2.04 |
| $ | 2.12 |
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Extra Week adjustment(13) |
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| — |
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| (0.09) |
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| — |
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Net earnings attributable to The Kroger Co. per diluted common share excluding the Adjusted Items and the Extra Week adjustment |
| $ | 2.11 |
| $ | 1.95 |
| $ | 2.12 |
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Average numbers of common shares used in diluted calculation |
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| 818 |
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| 904 |
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| 958 |
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Net Earnings per Diluted Share excluding the Adjusted Items (continued)
($ in millions, except per share amounts)
(1) |
| The amounts presented represent the after-tax effect of each |
(2) |
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| The pre-tax adjustment for |
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(3) |
| The pre-tax adjustment for gain on sale of |
(4) |
| The pre-tax adjustment for |
(5) |
| The pre-tax adjustment for |
(6) |
| The pre-tax adjustment for |
(7) |
| The pre-tax adjustment for severance charge and related benefits was $80. |
(8) | The pre-tax adjustment for deconsolidation and impairment of |
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(9) |
| The pre-tax |
(10) |
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(11) | The amount presented represents the net earnings per diluted common share effect of each adjustment. |
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Key Performance Indicators
We evaluate our results of operations and cash flows using a variety of key performance indicators, such as sales, identical sales, excluding fuel, FIFO gross margin, adjusted FIFO operating profit, adjusted net earnings, adjusted net earnings per diluted share and return on invested capital. We use these financial metrics and related computations to evaluate our operational effectiveness and our results of operations from period to period and to plan for near and long-term operating and strategic decisions. These key performance indicators should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. These measures, which are described in more detail in this Annual Report on Form 10-K, may not be comparable to similarly-titled performance indicators used by other companies.
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
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| | 2021 | | Change(1) | | 2020 | | Change(2) | | 2019 | | |||
Total sales to retail customers without fuel(3) | | $ | 122,293 | | 0.1 | % | $ | 122,134 | | 13.6 | % | $ | 107,487 | |
Supermarket fuel sales | | | 14,678 | | 54.7 | % |
| 9,486 | | (32.5) | % |
| 14,052 | |
Other sales(4) | |
| 917 | | 4.4 | % |
| 878 | | 17.5 | % |
| 747 | |
Total sales | | $ | 137,888 | | 4.1 | % | $ | 132,498 | | 8.4 | % | $ | 122,286 | |
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| Percentage |
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| 2018 |
| Change (1) |
| 2017 |
| Adjusted (2) |
| Change (3) |
| 2016 |
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Total sales to retail customers without fuel (4) |
| $ | 104,486 |
| 2.1 | % | $ | 104,207 |
| $ | 102,290 |
| 3.1 | % | $ | 99,243 |
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Supermarket fuel sales |
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| 14,903 |
| 15.5 | % |
| 13,177 |
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| 12,906 |
| 14.4 | % |
| 11,286 |
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Convenience stores (5) |
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| 944 |
| (78.7) | % |
| 4,515 |
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| 4,434 |
| 8.3 | % |
| 4,096 |
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Other sales (6) |
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| 829 |
| 10.1 | % |
| 763 |
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| 753 |
| 5.8 | % |
| 712 |
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Total sales |
| $ | 121,162 |
| 0.6 | % | $ | 122,662 |
| $ | 120,383 |
| 4.4 | % | $ | 115,337 |
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(1) |
| This column represents the percentage change in |
(2) |
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| This column represents the percentage change in |
(3) |
| Digital |
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(4) |
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Total sales decreased in 2018, compared to 2017, by 1.2%. The decrease in total sales in 2018, compared to 2017, is due to the Extra Week in 2017, partially offset by the increase in 2018 sales, compared to 2017 adjusted sales. Total sales increased in 2018,2021, compared to 2017 adjusted sales,2020, by 0.6%4.1%. ThisThe increase was primarily due to our increasesan increase in total sales to retail customers without fuel and supermarket fuel sales. Total sales, partially offset by a reductionexcluding fuel, increased 0.2% in convenience store sales due to the sale of our convenience store business unit. The increase in total sales to retail customers without fuel for 2018,2021, compared to 2017 adjusted sales to retail customers without fuel,2020, which was primarily due to our merger with Home Chef and our identical sales increase, excluding fuel, of 1.8%0.2%. Identical sales, excluding fuel, for 2018, compared to 2017, increased in 2021 on top of record sales results in 2020, which was primarily caused by unprecedented demand due to changes in product mix, including higher quality products at a higher price point, and Kroger Specialty Pharmacythe COVID-19 pandemic during 2020. Our two-year identical sales, excluding fuel, stacked growth partially offset by our continued investments in lower prices for our customers.was 14.3%. Total supermarket fuel sales increased 15.5%54.7% in 2018,2021, compared to 2017 adjusted supermarket fuel sales,2020, primarily due to an increase in fuel gallons sold of 7.9% and an increase in the average retail fuel price of 13.6% and an increase in fuel gallons sold of 1.5%43.6%. The increase in the average retail fuel price was caused by an increase in the product cost of fuel.
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Total sales increased in 2017,2020, compared to 2016,2019, by 6.4%8.4%. The increase in total sales in 2017, compared to 2016, iswas due to the increase in adjusted sales and the Extra Week. Total adjusted sales increased in 2017, compared to 2016, by 4.4%. This increase was primarily due to our increases in total sales to retail customers without fuel and supermarket fuel sales. Thean increase in total sales to retail customers without fuel, for 2017, adjusted forpartially offset by a reduction in supermarket fuel sales and decreased sales due to the Extra Week,disposal of Turkey Hill Dairy and You Technology in the first quarter of 2019. Total sales to retail customers without fuel increased 13.6% in 2020, compared to 2016,2019. The increase was primarily due to our merger with ModernHEALTH, identical sales increase, excluding fuel, of 0.9%, and an increase in supermarket square footage. Identical sales, excluding fuel, for 2017, compared to 2016, increased primarily due to an increase in the number of households shopping with us, changes in product mix, Kroger Specialty Pharmacy sales growth and product cost inflation of 0.7%14.1%, partially offset by decreased sales due to the deconsolidation of Lucky’s Market in the fourth quarter of 2019. Total sales excluding fuel and dispositions increased 14.2% in 2020 compared to 2019. The significant increase in identical sales, excluding fuel, was caused by unprecedented demand due to the COVID-19 pandemic, digital sales growth and growth in market share. Market share growth contributed to our continued investmentsidentical sales increase, excluding fuel, as our sales outpaced the general growth in lower prices for our customers. Excluding mergers, acquisitionsthe food retail industry during 2020. The increase in identical sales, excluding fuel, was broad based across all supermarket divisions and operational closings, total supermarket square footage atremained heightened throughout 2020. During the end of 2017 increased 1.9% over the end of 2016. pandemic, customers reduced trips while significantly increasing basket value.
Total adjusted supermarket fuel sales increased 14.4%decreased 32.5% in 2017,2020, compared to 2016,2019, primarily due to an increasea decrease in fuel gallons sold of 17.5% and a decrease in the average retail fuel price of 12.3% and an increase18.2%. The decrease in fuel gallons sold was reflective of 1.9%.the national trend, which decreased due to the COVID-19 pandemic. The increasedecrease in the average retail fuel price was caused by an increasea 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 acquiredWe define Kroger Specialty Pharmacy businesses are treated as identical as if they were part ofwhen physical locations have been in operation continuously for five full quarters; discontinued patient therapies are excluded from the Companyidentical sales calculation starting in the prior year.quarter of transfer or termination. 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. Certain pharmacy fees recorded as a reduction of sales have been comparatively reflected in theOur identical sales, calculation. Our identical salesexcluding fuel, results are summarized in the following table. We used the identical sales, excluding fuel, dollar figures presented below to calculate percentage changes for 2018.2021 and 2020.
Identical Sales
($ in millions)
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| 2018 (1) |
| 2017 (2) |
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Excluding fuel |
| $ | 101,928 |
| $ | 100,153 |
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Excluding fuel |
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| 1.8 | % |
| 0.9 | % |
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| 2021 |
| 2020 |
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Excluding fuel | | $ | 120,802 | | $ | 120,575 | |
Excluding fuel | |
| 0.2 | % |
| 14.1 | % |
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 rates, as a percentage of sales, were 21.68% in 2018, 22.01% in 20172021 and 22.40%23.32% in 2016. 2020. The decrease in 2018,rate in 2021, compared to 2017,2020, resulted primarily from increased fuel sales, which have a lower gross margin rate, a decrease in our fuel gross margin, continued strategic investments in lower prices for our customers, a COVID-19-related inventory write down for personal protective equipment donated to community partners, a higher LIFO charge a change in product sales mix and increased transportationshrink and advertisingtransportation costs, as a percentage of sales, partially offset by growth in Our Brands our alternative profit streams and effective negotiations to achieve savings on the cost of products which have a higher gross margin compared to national brand products, improved merchandise costs, decreased shrink, as a percentage of sales, and a higher gross margin rate on fuel sales.sold.
The decrease in 2017, compared to 2016, resulted primarily from continued investments in lower prices for our customers and our merger with ModernHEALTH due to its lower gross margin rate, and increased warehousing, transportation and shrink costs, as a percentage of sales, partially offset by improved merchandise costs, a lower LIFO charge, a change in our product sales mix, including higher gross margin perishable departments growing their percentage share of sales to total sales, growth in Our Brands products which have a higher gross margin compared to national brand products, decreased advertising costs, as a percentage of sales, and a higher gross margin rate on fuel sales.
17
Our LIFO charge for 2018 was $29$197 million in 2021 compared to a LIFO credit of $8$7 million in 2017 and a LIFO charge of $19 million2020. The increase in 2016. In 2018, our LIFO charge primarily resulted from annualized product costwas attributable to higher inflation primarily related to pharmacy. Our LIFO credit in 2017 was primarily due to a reduction of pharmacy inventory in 2017 compared to 2016. In 2016, our LIFO charge primarily resulted from annualized product cost inflation related to pharmacy,most categories, with grocery and was partially offset by annualized product cost deflation in other departments. meat being the largest contributors.
Our FIFO gross margin rates,rate, which excludeexcludes the LIFO charges and credit, were 21.70%charge, was 22.15% in 2018, 22.01%2021, compared to 23.32% in 2017 and 22.42% in 2016.2020. Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, and the Extra Week, our FIFO gross margin rate decreased 5543 basis points in 2018,2021, compared to 2017.2020. This decrease resulted primarily from continued strategic investments in lower prices for our lower gross margin rate, excludingcustomers, a COVID-19-related inventory write down for personal protective equipment donated to community partners and increased shrink and transportation costs, as a percentage of sales, partially offset by growth in our alternative profit streams and effective negotiations to achieve savings on the effectcost of the LIFO charge and fuel, which has been described above.products sold.
32
Excluding the effect of fuel, the Extra Week and ModernHEALTH, our FIFO gross margin rate decreased 19 basis points in 2017, compared to 2016. This decrease resulted primarily from our lower gross margin rate, excluding the effect of the LIFO credit and charge, fuel and ModernHEALTH which has been described above.
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, and retirement plan costs; and utilitycosts, utilities, and credit card fees. Certain other income items are classified as a reduction of OG&A expenses. These items include gift card and lottery commissions, coupon processing and vending machine fees, check cashing, money order and wire transfer fees, and baled salvage credits. Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.
OG&A expenses, as a percentage of sales, were 16.76%16.83% in 2018, 17.15%2021 and 18.49% in 2017 and 16.61% in 2016.2020. The decrease in 2018,2021, compared to 20172020, resulted primarily from effective cost controls duedecreased COVID-19-related costs, lower contributions to process changes,multi-employer pension plans, decreased utilities,incentive plan costs, the 20172020 OG&A Adjusted Items, the effect of increased fuel sales, which decreases our OG&A rate, as a percentage of sales, and our incremental contribution of $111 million, $69 million net of tax, to the United Foodbroad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and Commercial Workers (“UFCW”) Consolidated Pension Plan in 2017 (“2017 UFCW Contribution”),sourcing cost reductions, partially offset by significant investments in our associates and the 20182021 OG&A Adjusted Items, investments in our digital strategy and increased incentive plan costs. Items.
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 Extra Week, the 2018 OG&A Adjusted Items, the 20172021 OG&A Adjusted Items and the 2017 UFCW Contribution,2020 OG&A Adjusted Items, our OG&A rate increased 14decreased 61 basis points in 2018,2021, compared to 2017.2020. This increasedecrease resulted primarily from decreased COVID-19-related costs, lower contributions to multi-employer pension plans, decreased incentive plan costs and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by significant investments in our digital strategy and increased incentive plan costs, partially offset by effective cost controls due to process changes and decreased utilities.associates.
The increase in 2017,Rent Expense
Rent expense was $845 million, or 0.61% of sales, for 2021, compared to 2016, resulted primarily from the 2017 OG&A Adjusted Items, investing in our digital strategy, increases in store wages attributed to investing in incremental labor hours and higher wages to improve retention, employee engagement and customer experience, the 2017 UFCW Contribution, increases in incentive plan and healthcare costs, partially offset by savings from the VRO, effective cost controls, higher fuel$874 million, or 0.66% of sales, the 2016 Adjusted Items and our merger with ModernHEALTH due to its lower OG&A rate,for 2020. Rent expense, as a percentage of sales. Excluding the effect of fuel, the Extra Week, the 2017 UFCW Contribution, the 2017 OG&A and 2016 Adjusted Items and ModernHEALTH, our OG&A rate increased 21sales, decreased 5 basis points in 2017,2021, compared to 2016. This increase resulted2020, primarily from investing in our digital strategy, increases in store wages attributeddue to investing in incremental labor hoursthe completion of a property transaction related to 28 previously leased properties that we are now accounting for as owned locations and higher wagestherefore recognizing depreciation and amortization expense over their useful life. For additional information about this transaction, see Note 5 to improve retention, employee engagementthe Consolidated Financial Statements.
Depreciation and customer experience, increases in incentive planAmortization Expense
Depreciation and healthcare costs, partially offset by savings from the VROamortization expense was $2.8 billion, or 2.05% of sales, for 2021, compared to $2.7 billion, or 2.07% of sales, for 2020. Depreciation and effective cost controls.
Rent Expense
Rentamortization expense decreased,remained consistent, as a percentage of sales, in 20182021, compared to 2017, due2020.
Operating Profit and FIFO Operating Profit
Operating profit was $3.5 billion, or 2.52% of sales, for 2021, compared to decreased closed store liabilities. Rent expense decreased$2.8 billion, or 2.10% of sales, for 2020. Operating profit, as a percentage of sales, increased 42 basis points in 2017,2021, compared to 2016,2020, due to our continued emphasis on owning rather than leasing, whenever possible, and higher fuel sales, which decreases our rentdecreased OG&A expense, as a percentage of sales, partially offset by an increased closed store liabilities.LIFO charge and a lower FIFO gross margin rate. Fuel earnings also contributed to our operating profit growth for 2021, compared to 2020.
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Depreciation and Amortization Expense
Depreciation and amortization expense increased as a percentageFIFO operating profit was $3.7 billion, or 2.66% of sales, in 2018,for 2021, compared to 2017, due to the Extra Week and additional depreciation on capital investments, excluding mergers and lease buyouts, of $3.0$2.8 billion, during 2018, partially offset by higher fuel sales, which decreases our depreciation expense as a percentage of sales.
Depreciation and amortization expense decreased as a percentageor 2.09% of sales, in 2017, compared to 2016, due to higher fuel sales, which decreases our depreciation expense as a percentage of sales, the Extra Week and the 2017 Depreciation Adjusted Item, partially offset by additional depreciation on capital investments, excluding mergers and lease buyouts, of $3.0 billion, during 2017.
Operating Profit andfor 2020. FIFO Operating Profit
Operating profit was $2.6 billion in 2018, $2.6 billion in 2017 and $3.5 billion in 2016. Operatingoperating profit, as a percentage of sales, was 2.16% in 2018, 2.13% in 2017excluding the 2021 and 2.99% in 2016. Operating profit, as a percentage of sales,2020 Adjusted Items, increased 37 basis points in 2018,2021, compared to 2017,2020, due to decreased OG&A and rent expenses,expense, as a percentage of sales, partially offset by a lower FIFO gross margin rate, increased depreciation and amortization expenses and a higher LIFO charge, as a percentage of sales.
Operating profit, as a percentage of sales, decreased 86 basis points in 2017, comparedrate. Fuel earnings also contributed to 2016, due to a lower gross margin and increased OG&A expense, as a percentage of sales, partially offset by lower depreciation and amortization and rent expenses and a lower LIFO charge, as a percentage of sales.
our FIFO operating profit was $2.6 billion in 2018, $2.6 billion in 2017 and $3.5 billion in 2016. FIFO operating profit, as a percentage of sales, was 2.18% in 2018, 2.12% in 2017 and 3.01% in 2016. Fuel sales lower our operating profit rate due to the very low operating profit rate, as a percentage of sales, of fuel salesgrowth for 2021, compared to non-fuel sales. FIFO operating profit, as a percentage of sales excluding fuel, the Extra Week, the 2017 UFCW Contribution and the 2018 and 2017 Adjusted Items, decreased 68 basis points in 2018, compared to 2017, due to a lower gross margin and increased OG&A and depreciation and amortization expenses, as a percentage of sales, partially offset by lower rent expense, as a percentage of sales.2020.
FIFO operating profit, as a percentage of sales excluding fuel, the Extra Week, the 2017 UFCW Contribution, the 2017 and 2016 Adjusted Items and ModernHEALTH, decreased 45 basis points in 2017, compared to 2016, due to a lower gross margin and increased OG&A and depreciation and amortization expenses, as a percentage of sales.
Specific factors ofcontributing to the above operating trends underdriving operating profit and FIFO operating profit identified above are discussed earlier in this section.
33
The following table provides a reconciliation of operating profit to FIFO operating profit, and to Adjusted FIFO operating profit, excluding the 2021 and 2020 Adjusted Items:
Operating Profit excluding the Adjusted Items
($ in millions)
| | | | | | | |
|
| 2021 |
| 2020 | | ||
Operating profit | | $ | 3,477 | | $ | 2,780 | |
LIFO charge (credit) | | | 197 | | | (7) | |
| |
| | | | | |
FIFO Operating profit | |
| 3,674 | |
| 2,773 | |
| | | | | | | |
Adjustment for pension plan withdrawal liabilities | | | 449 | | | 989 | |
Adjustment for Home Chef contingent consideration | | | 66 | | | 189 | |
Adjustment for transformation costs(1) | | | 136 | | | 111 | |
Other | | | (15) | | | (6) | |
| | | | | | | |
2021 and 2020 Adjusted items | | | 636 | | | 1,283 | |
| | | | | | | |
Adjusted FIFO operating profit excluding the adjustment items above | | $ | 4,310 | | $ | 4,056 | |
(1) | Transformation costs primarily include costs related to store and business closure costs and third-party professional consulting fees associated with business transformation and cost saving initiatives. |
Interest Expense
Interest expense totaled $620$571 million in 2018, $6012021 and $544 million in 2017 and $522 million in 2016.2020. The increase in interest expense in 2018,2021, compared to 2017,2020, resulted primarily from the completion of a higher weighted average interest rate.property transaction related to 28 previously leased properties that we are now accounting for as owned locations. The structure used to complete this transaction requires our liability to be shown as debt. As a result of this transaction, rent expense decreased with a corresponding increase in interest expense in 2017, comparedand depreciation and amortization expense. For additional information about this transaction, see Note 5 to 2016, resulted primarily from additional borrowings used for share repurchases, the Extra Week, the $1.2 billion we contributed to company-sponsored and company-managed pension plans in 2017, a $467 million pre-tax payment to satisfy withdrawal obligations for certain local unions of the Central States Pension Fund, partially offset by a lower weighted average interest rate.Consolidated Financial Statements.
19
Our effective income tax rate was 22.6%18.8% in 2018, (27.3)%2021 and 23.2% in 20172020. The 2021 tax rate differed from the federal statutory rate due to a discrete benefit of $47 million which was primarily from the favorable outcome of income tax audit examinations covering multiple years, the benefit from share-based payments and 32.8% in 2016.the utilization of tax credits, partially offset by the effect of state income taxes. The 20182020 tax rate 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 Act rates and an increase in future tax deductions at post-Tax Act rates. These 2018 items were partially offset by the utilization of tax credits and deductions, the remeasurement of uncertain tax positions and adjustments to provisional amounts that increased prior year deductions at pre-Tax Act rates and decreased future deductions at post-Tax Act rates. The 2017 tax rate differed from the federal statutory rate primarily as a result of remeasuring deferred taxes due to the Tax Act, the Domestic Manufacturing Deduction and other changes, partially offset by non-deducible goodwill impairment charges and the effect of state income taxes. The 2016 tax rate differed from the federal statutory rate primarily as a result of the recognition of excess tax benefits related to share-based payments after the adoption of Accounting Standards Update (“ASU”) 2016-09, the utilization of tax credits, the Domestic Manufacturing Deduction and other changes, partially offset by the effect of state income taxes.deductions.
Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings of $3.76$2.17 per diluted share in 2018for 2021 represented a decrease of 33.6% compared to net earnings of $3.27 per diluted share for 2020. Adjusted net earnings of $3.68 per diluted share for 2021 represented an increase of 79.9% from6.1% compared to adjusted net earnings of $2.09$3.47 per diluted share in 2017. Adjusted operating net earnings of $2.11 per diluted share in 2018 represented an increase of 8.2% from adjusted operating net earnings of $1.95 per diluted share in 2017. for 2020. The 8.2% increase in adjusted operating net earnings per diluted share resulted primarily from lower income tax expense, higherincreased FIFO operating profit, excluding fuel, increased fuel earnings and lower weighted average common shares outstanding due to common share repurchases, partially offset by lower non-fuel FIFO operating profit, a higher LIFO charge and increased interest expense..
Net earnings of $2.09 per diluted share in 2017 represented an increase of 2.0% from net earnings of $2.05 per diluted share in 2016. Adjusted operating net earnings of $1.95 per diluted share in 2017 represented a decrease of 8.0% from adjusted operating net earnings of $2.12 per diluted share in 2016. The 8.0% decrease in adjusted operating net earnings per diluted share resulted primarily from lower non-fuel FIFO operating profit and increased interest expense, partially offset by higher fuel earnings, a lower LIFO charge, decreased income tax expense and lower weighted average common shares outstanding due to common share repurchases.
COMMON SHARE REPURCHASE PROGRAMS
We maintain share repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act of 1934 and allow for the orderly repurchase of our common shares, from time to time. The share repurchase programs do not have an expiration date but may be suspended or terminated by our Board of Directors at any time. We made open market purchases of our common shares totaling $727 million in 2018, $1.6 billion in 2017 and $1.7 billion in 2016. On April 20, 2018, we entered and funded a $1.2 billion ASR program to reacquire shares in privately negotiated transactions.
In addition to these repurchase programs, we also repurchase common shares to reduce dilution resulting from our employee stock option plans. This program is solely funded by proceeds from stock option exercises, and the tax benefit from these exercises. We repurchased approximately $83 million in 2018, $66 million in 2017 and $105 million in 2016 of our common shares under the stock option program.
The shares repurchased in 2018 were reacquired under two separate share repurchase programs. The first is a series of Board of Director authorizations:
|
|
|
|
2034
|
|
As of February 2, 2019, there was $546 million remaining under the March 2018 Repurchase Program.
The second share repurchase program is a program that uses the cash proceeds from the exercises of stock options by participants in Kroger’s stock option, long-term incentive plans and the associated tax benefits.
During the first quarter through March 28, 2019, we repurchased an additional $9 million of our common shares under the stock option program and no additional shares under the March 2018 Repurchase Program. As of March 28, 2019, we have $546 million remaining under the March 2018 Repurchase Program.
CAPITAL INVESTMENTS
Capital investments, including changes in construction-in-progress payables and excluding mergers and the purchase of leased facilities, totaled $3.0 billion in 2018, $3.0 billion in 2017 and $3.7 billion in 2016. Capital investments for mergers totaled $197 million in 2018, $16 million in 2017 and $401 million in 2016. We merged with Home Chef in 2018 and ModernHEALTH in 2016. Refer to Note 2 to the Consolidated Financial Statements for more information on these mergers. Capital investments for the purchase of leased facilities totaled $5 million in 2018, $13 million in 2017 and $5 million in 2016. The table below shows our supermarket storing activity and our total supermarket square footage:
Supermarket Storing Activity
|
|
|
|
|
|
|
|
|
| 2018 |
| 2017 |
| 2016 |
|
Beginning of year |
| 2,782 |
| 2,796 |
| 2,778 |
|
Opened |
| 10 |
| 24 |
| 50 |
|
Opened (relocation) |
| 4 |
| 15 |
| 21 |
|
Acquired |
| 10 |
| 3 |
| — |
|
Closed (operational) |
| (38) |
| (41) |
| (32) |
|
Closed (relocation) |
| (4) |
| (15) |
| (21) |
|
End of year |
| 2,764 |
| 2,782 |
| 2,796 |
|
|
|
|
|
|
|
|
|
Total supermarket square footage (in millions) |
| 179 |
| 179 |
| 178 |
|
RETURN ON INVESTED CAPITAL
We calculate return on invested capital (“ROIC”) by dividing adjusted ROIC operating profit for the prior four quarters by the average invested capital. Adjusted operating profit for ROIC purposes is calculated by excluding certain items included in operating profit, and adding back our LIFO charge (credit), depreciation and amortization and rent to our U.S. GAAP operating profit of the prior four quarters. Average invested capital is calculated as the sum of (i) the average of our total assets, (ii) the average LIFO reserve and (iii) the average accumulated depreciation and amortization and (iv) a rent factor equal to total rent for the last four quarters multiplied by a factor of eight;amortization; minus (i) the average taxes receivable, (ii) the average trade accounts payable, (iii) the average accrued salaries and wages and (iv) the average other current liabilities, excluding accrued income taxes and (v) the average liabilities held for sale.taxes. Averages are calculated for ROIC by adding the beginning balance of the first quarter and the ending balance of the fourth quarter, of the last four quarters, and dividing by two. We use a factor of eight for our total rent as we believe this is a common factor used by our investors, analysts and rating agencies. ROIC is a non-GAAP financial measure of performance. ROIC should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital. Management believes ROIC is a useful metric to investors and analysts because it measures how effectively we are deploying our assets.
Although ROIC is a relatively standard financial term, numerous methods exist for calculating a company’s ROIC. As a result, the method used by our management to calculate ROIC may differ from methods other companies use to calculate their ROIC. We urge you to understand the methods used by other companies to calculate their ROIC before comparing our ROIC to that of such other companies.
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The following table provides a calculation of ROIC for 20182021 and 20172020 on a 52 week basis ($ in millions). The 2018:
| | | | | | | |
| | Fiscal Year Ended | | ||||
| | January 29, | | January 30, | | ||
|
| 2022 | | 2021 |
| ||
Return on Invested Capital | | | | | | | |
Numerator | | | | | | | |
Operating profit | | $ | 3,477 | | $ | 2,780 | |
LIFO charge (credit) | |
| 197 | |
| (7) | |
Depreciation and amortization | |
| 2,824 | |
| 2,747 | |
Rent | |
| 845 | |
| 874 | |
Adjustment for Home Chef contingent consideration | | | 66 | | | 189 | |
Adjustment for pension plan withdrawal liabilities | | | 449 | | | 989 | |
Adjustment for transformation costs | | | 136 | | | 111 | |
Adjusted ROIC operating profit | | $ | 7,994 | | $ | 7,683 | |
| | | | | | | |
Denominator | | | | | | | |
Average total assets | | $ | 48,874 | | $ | 46,959 | |
Average taxes receivable(1) | |
| (54) | |
| (74) | |
Average LIFO reserve | |
| 1,472 | |
| 1,377 | |
Average accumulated depreciation and amortization | |
| 24,868 | |
| 24,161 | |
Average trade accounts payable | |
| (6,898) | |
| (6,514) | |
Average accrued salaries and wages | |
| (1,575) | |
| (1,291) | |
Average other current liabilities(2) | |
| (5,976) | |
| (4,926) | |
Average invested capital | | $ | 60,711 | | $ | 59,692 | |
Return on Invested Capital | |
| 13.17 | % |
| 12.87 | % |
|
|
|
|
|
|
|
|
|
| Fiscal Year Ended |
| ||||
|
| February 2, |
| February 3, |
| ||
|
| 2019 |
| 2018 |
| ||
Return on Invested Capital |
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
Operating profit (53 week basis in fiscal year 2017) |
| $ | 2,614 |
| $ | 2,612 |
|
Extra Week operating profit adjustment |
|
| — |
|
| (131) |
|
LIFO charge (credit) |
|
| 29 |
|
| (8) |
|
Depreciation and amortization |
|
| 2,465 |
|
| 2,436 |
|
Rent (53 week basis in fiscal year 2017) |
|
| 884 |
|
| 911 |
|
Extra Week rent adjustment |
|
| — |
|
| (17) |
|
Adjustment for merger with Home Chef |
|
| 28 |
|
| — |
|
Adjustment for disposal of convenience store business |
|
| (21) |
|
| — |
|
Adjustment for contingent consideration |
|
| 33 |
|
| — |
|
Adjustment for impairment of financial instrument |
|
| 42 |
|
| — |
|
Adjustment for Kroger Specialty Pharmacy goodwill impairment |
|
| — |
|
| 110 |
|
Adjustments for pension plan agreements |
|
| 155 |
|
| 550 |
|
Adjustment for depreciation related to held for sale assets |
|
| (14) |
|
| (19) |
|
Adjustments for voluntary retirement offering |
|
| — |
|
| 184 |
|
Adjusted operating profit on a 52 week basis |
| $ | 6,215 |
| $ | 6,628 |
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
Average total assets |
| $ | 37,658 |
| $ | 36,851 |
|
Average taxes receivable (1) |
|
| (115) |
|
| (181) |
|
Average LIFO reserve |
|
| 1,263 |
|
| 1,270 |
|
Average accumulated depreciation and amortization |
|
| 21,703 |
|
| 20,287 |
|
Average trade accounts payable |
|
| (5,959) |
|
| (5,838) |
|
Average accrued salaries and wages |
|
| (1,163) |
|
| (1,167) |
|
Average other current liabilities (2) |
|
| (3,571) |
|
| (3,363) |
|
Average liabilities held for sale |
|
| (155) |
|
| (130) |
|
Adjustment for merger with Home Chef |
|
| (145) |
|
| — |
|
Adjustment for disposal of convenience store business |
|
| (198) |
|
| — |
|
Rent x 8 |
|
| 7,072 |
|
| 7,152 |
|
Average invested capital |
| $ | 56,390 |
| $ | 54,881 |
|
Return on Invested Capital |
|
| 11.02 | % |
| 12.08 | % |
|
|
|
|
RESTOCK CASH FLOW
Restock cash flow is an adjusted free cash flow measure calculated as net cash provided by operating activities minus net cash used by investing activities plus or minus adjustments for certain items. We updated our definition of Restock cash flow during 2018 to more closely align with the performance metrics under our Restock Kroger plan. Restock cash flow is an important measure used by management to evaluate available funding for dividends, managing debt levels, share repurchases and other strategic investments. Management believes Restock cash flow is a useful metric to investors and analysts to demonstrate our available funding for dividends, managing debt levels, share repurchases and other strategic investments.
2235
The following table provides a calculation of Restock cash flow for 2018 and 2017 ($ in millions).
|
|
|
|
|
|
| Fiscal Year Ended | ||||
| February 2, |
| February 3, | ||
| 2019 |
| 2018 | ||
|
|
|
|
|
|
Net cash provided by operating activities | $ | 4,164 |
| $ | 3,413 |
|
|
|
|
|
|
Net cash used by investing activities |
| (1,186) |
|
| (2,707) |
|
|
|
|
|
|
Difference |
| 2,978 |
|
| 706 |
|
|
|
|
|
|
Adjustment for payments for lease buyouts |
| 5 |
|
| 13 |
Adjustment for purchases of Ocado securities |
| 392 |
|
| — |
Adjustment for purchases of stores |
| 44 |
|
| — |
Adjustment for net proceeds from sale of business, net of tax |
| (1,709) |
|
| — |
Adjustment for payments for acquisitions, net of cash acquired |
| 197 |
|
| 16 |
|
|
|
|
|
|
Restock cash flow | $ | 1,907 |
| $ | 735 |
CRITICAL ACCOUNTING POLICIESESTIMATES
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 significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements.
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 differ from those estimates.
We believe the following accounting policiesestimates are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.
Impairments of Long-Lived Assets
We monitor the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a triggering event occurs, we perform an impairment calculation, comparing projected undiscounted cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If we identify impairment for long-lived assets to be held and used, we compare the assets’ current carrying value to the assets’ fair value. Fair value is determined based on market values or discounted future cash flows. We record impairment when the carrying value exceeds fair market value. With respect to owned property and equipment held for disposal, we adjust the value of the property and equipment to reflect recoverable values based on our previous efforts to dispose of similar assets and current economic conditions. We recognize impairment for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. We recorded asset impairments in the normal course of business totaling $56$64 million in 2018, $712021 and $70 million in 2017 and $26 million in 2016.2020. We record costs to reduce the carrying value of long-lived assets in the Consolidated Statements of Operations as “Operating, general and administrative”OG&A expense.
The factors that most significantly affect the impairment calculation are our estimates of future cash flows. Our cash flow projections look several years into the future and include assumptions on variables such as inflation, the economy and market competition. Application of alternative assumptions and definitions, such as reviewing long-lived assets for impairment at a different level, could produce significantly different results.
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Business Combinations
We account for business combinations using the acquisition method of accounting. All the assets acquired, liabilities assumed and amounts attributable to noncontrolling interests are recorded at their respective fair values at the date of acquisition once we obtain control of an entity. The determination of fair values of identifiable assets and liabilities involves estimates and the use of valuation techniques when market value is not readily available. We use various techniques to determine fair value in such instances, primarily including the income approach. Significant estimates used in determining fair value include, but are not limited to, the amount and timing of future cash flows, growth rates, discount rates and useful lives. The excess of the purchase price over fair values of identifiable assets and liabilities is recorded as goodwill. See Note 32 for further information about goodwill.
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Goodwill
Goodwill
Our goodwill totaled $3.1 billion as of February 2, 2019.January 29, 2022. We review goodwill for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our operating divisions and other consolidated entities (collectively, “reporting units”) that have goodwill balances. Generally, fair value is determined using a multiple of earnings, or discounted projected future cash flows, and we compare fair value to the carrying value of a reporting unit for purposes of identifying potential impairment. We base projected future cash flows on management’s knowledge of the current operating environment and expectations for the future. We recognize goodwill impairment for any excess of a reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
Our annual evaluation of goodwill is performed for our reporting units during the fourth quarter. In 2017, we recorded goodwill impairment forThe 2021 fair value of our Kroger Specialty Pharmacy (“KSP”) reporting unit totaling $110 million, $74 million net of tax, resulting in a remaining goodwill balance of $243 million. The 2018 fair value of our KSP reporting unit was estimated primarily based onusing multiple valuation techniques: a discounted cash flow model resulting(income approach), a market multiple model and a comparable mergers and acquisition model (market approaches), with each method weighted in a percentagethe calculation. The income approach relies on management’s projected future cash flows, estimates of excessrevenue growth rates, margin assumptions and an appropriate discount rate. The market approaches require the determination of an appropriate peer group, which is utilized to derive estimated fair value over carrying value of approximately 3%.values based on selected market multiples. The annual evaluation of goodwill performed in 20182021, 2020 and 20162019 did not result in impairment for any of our reporting units. Based on current and future expected cash flows, we believe additional goodwill impairments are not reasonably likely. A 10% reduction in fair value of our reporting units would not indicate a potential for impairment of our goodwill balance except for our KSP reporting unit. balance.
For additional information relating to our results of the goodwill impairment reviews performed during 2018, 20172021, 2020 and 2016,2019, see Note 32 to the Consolidated Financial Statements.
The impairment review requires the extensive use of management judgment and financial estimates. Application of alternative estimates and assumptions could produce significantly different results. The cash flow projections embedded in our goodwill impairment reviews can be affected by several factors such as inflation, business valuations in the market, the economy, market competition and our ability to successfully integrate recently acquired businesses.
Multi-Employer Pension Plans
We contribute to various multi-employer pension plans based on obligations arising from collective bargaining agreements. These multi-employer pension plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.
We recognize expense in connection with these plans as contributions are funded or when commitments are probable and reasonably estimable, in accordance with GAAP. We made cash contributions to these plans of $358$1.1 billion in 2021, $619 million in 2018, $9542020 and $461 million in 2017 and $289 million in 2016.2019. The increase in 2017,2021, compared to 2018 and 20162020, is due to the $467 million pre-tax paymentcontractual payments we made in 20172021 related to satisfy withdrawal obligationsour commitments established for certain local unions of the Central States Pension Fund and the 2017 UFCW Contribution.ratification agreements. The increase in 2020, compared to 2019, is due to incremental contributions we made in 2020 to multi-employer pension plans, helping stabilize future associate benefits.
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We continue to evaluate and address our potential exposure to under-funded multi-employer pension plans as it relates to our associates who are beneficiaries of these plans. These under-fundings are not our liability. When an opportunity arises that is economically feasible and beneficial to us and our associates, we may negotiate the restructuring of under-funded multi-employer pension plan obligations to help stabilize associates’ future benefits and become the fiduciary of the restructured multi-employer pension plan. The commitments from these restructurings do not change our debt profile as it relates to our credit rating since these off-balance sheet commitments are typically considered in our investment grade debt rating. We are currently designated as the named fiduciary of the UFCW Consolidated Pension Plan and the International Brotherhood of Teamsters (“IBT”) Consolidated Pension Fund and have sole investment authority over these assets. We became the fiduciary of the IBT Consolidated Pension Fund in 2017 due to the ratification of a new labor contract with the IBT that provided for the withdrawal of certain local unions from the Central States Pension Fund. Significant effects of these restructuring agreements recorded in our Consolidated Financial Statements are:
| In |
● | In 2020, we incurred a $989 million charge, $754 million net of tax, for commitments to certain multi-employer pension funds. |
● | In 2019, we incurred a $135 million charge, $104 million net of tax, for obligations related to withdrawal liabilities for certain |
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As we continue to work to find solutions to under-funded multi-employer pension plans, it is possible we could incur withdrawal liabilities for certain funds.
Based on the most recent information available to us, we believe that the present value of actuarially accrued liabilities in most of thethese multi-employer plans to which we contribute substantially exceeds the value of the assets held in trust to pay benefits.benefits, and we expect that our contributions to most of these funds will increase over the next few years. We have attempted to estimate the amount by which these liabilities exceed the assets, (i.e., the amount of underfunding), as of December 31, 2018.2021. Because we are only one of a number of employers contributing to these plans, we also have attempted to estimate the ratio of our contributions to the total of all contributions to these plans in a year as a way of assessing our “share” of the underfunding. Nonetheless, the underfunding is not a direct obligation or liability of ours or of any employer.
As of December 31, 2018,2021, we estimate our share of the underfunding of multi-employer pension plans to which we contribute or as it relates to certain funds, an estimated withdrawal liability, was approximately $3.1$1.1 billion, $2.4 billion$850 million net of tax. This represents an increasea decrease in the estimated amount of underfunding of approximately $800$600 million, $600$450 million net of tax, as of December 31, 2018,2021, compared to December 31, 2017.2020. The increasedecrease in the amount of underfunding is primarily attributable to lowerhigher expected returns on assets in the funds.funds during 2021 and the restructuring of the Sound Retirement Trust, helping stabilize future associate benefits. Our estimate is based on the most current information available to us including actuarial evaluations and other data (that include the estimates of others), and such information may be outdated or otherwise unreliable.
We have made and disclosed this estimate not because, except as noted above, this underfunding is a direct liability of ours. Rather, we believe the underfunding is likely to have important consequences. In the event we were to exit certain markets or otherwise cease making contributions to these plans, we could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP.
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The amount of underfunding described above is an estimate and could change based on contract negotiations, returns on the assets held in the multi-employer pension plans, benefit payments or future restructuring agreements. The amount could decline, and our future expense would be favorably affected, if the values of the assets held in the trust significantly increase or if further changes occur through collective bargaining, trustee action or favorable legislation. On the other hand, our share of the underfunding could increase and our future expense could be adversely affected if the asset values decline, if employers currently contributing to these funds cease participation or if changes occur through collective bargaining, trustee action or adverse legislation. We continue to evaluate our potential exposure to under-funded multi-employer pension plans. Although these liabilities are not a direct obligation or liability of ours, any commitments to fund certain multi-employer pension plans will be expensed when our commitment is probable and an estimate can be made.
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See Note 1615 to the Consolidated Financial Statements for more information relating to our participation in these multi-employer pension plans.
RECENTLY ADOPTEDNEW ACCOUNTING STANDARDS
During the fourth quarter of 2017, we adopted ASU 2017-04 "Intangibles - GoodwillRefer to Note 17 and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. ASU 2017-04 requires applying a one-step quantitative test and recording the amount of goodwill impairment as the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocatedNote 18 to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. We performed our annual evaluation of goodwill in accordance with this standard, which resulted in a goodwill impairment charge in 2017 of $110 million, $74 million net of tax, related to our Kroger Specialty Pharmacy reporting unit.
On February 4, 2018, we adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” which superseded previous revenue recognition guidance. Topic 606 is a comprehensive new revenue recognition model that requires a company to recognize revenue when goods and services are transferred to the customer in an amount that is proportionate to what has been delivered at that point and that reflects the consideration to which the company expects to be entitled for those goods or services. We adopted the standard using a modified retrospective approach with the adoption primarily involving the evaluation of whether we act as principal or agent in certain vendor arrangements where the purchase and sale of inventory are virtually simultaneous. We will continue to record revenue and related costs on a gross basis for the arrangements. The adoption of the standard did not have a material effect on our Consolidated Statements of Operations, Consolidated Balance Sheets or Consolidated Statements of Cash Flows.
In March 2017, the Financial Accounting Standard’s Board (“FASB”) issued ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07).” ASU 2017-07 requires an employer to report the service cost component of retiree benefits in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. We adopted ASU 2017-07 on February 4, 2018 and retrospectively applied it to all periods presented. As a result, retiree benefit plan interest expense, investment returns, settlements and other non-service cost components of retiree benefit expenses are excluded from our operating profit subtotal as reported in our Consolidated Statements of Operations, but remain included in net earnings before income tax expense. Due to the adoption, we reclassified $527 million for 2017 and $16 million for 2016, of non-service company-sponsored pension plan costs from operating profit to other income (expense) on our Consolidated Statements of Operations. Information about retiree benefit plans' interest expense, investment returns and other components of retiree benefit expenses can be found in Note 15 to our Consolidated Financial Statements.
In January 2016, the FASBStatements for recently adopted accounting standards and recently issued “Financial Instruments–Overall (Topic 825),” which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments (ASU 2016-01). Weaccounting standards not yet adopted this ASU on February 4, 2018. As a result of the adoption, we recorded a mark to market gain on Ocado securities, for those securities we owned as of the end of 2018, within the Consolidated Statements of Operations as opposed to a component of Other Comprehensive Income on our Consolidated Statements of Comprehensive Income.January 29, 2022.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2016, the FASB issued ASU 2016-02, “Leases,” which provides guidance for the recognition of lease agreements. The standard’s core principle is that a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance will be effective for us in the first quarter of our fiscal year ending February 1, 2020. We will apply the transition package of practical expedients permitted within the standard, which allows us to carryforward our historical lease classification, and will apply the transition option which does not require application of the guidance to comparative periods in the year of adoption. We estimate adoption of the standard will result in recognition of right of use assets and lease liabilities of approximately $6.7 billion as of February 3, 2019. When combined with our existing capital leases, our total lease assets will be approximately $7.4 billion and our total lease liabilities will be approximately $7.6 billion as of February 3, 2019. We do not expect adoption to have a material impact on our consolidated net earnings or cash flows. We believe our current off-balance sheet leasing commitments are reflected in our investment grade debt rating.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income.” ASU 2018-02 amends ASC 220, “Income Statement - Reporting Comprehensive Income,” to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. In addition, under ASU 2018-02, we may be required to provide certain disclosures regarding stranded tax effects. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the effect of this standard on our Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
The following table summarizes our net increase in cash and temporary cash investments for 2021 and 2020:
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| 2021 |
| 2020 | ||
Net cash provided by (used in) | | | | | | |
Operating activities | | $ | 6,190 | | $ | 6,815 |
Investing activities | | | (2,611) | | | (2,814) |
Financing activities | | | (3,445) | | | (2,713) |
Net increase in cash and temporary cash investments | | $ | 134 | | $ | 1,288 |
Net cash provided by operating activities
We generated $4.2$6.2 billion of cash from operations in 2018,2021, compared to $3.4$6.8 billion in 2017 and $4.3 billion in 2016. The increase in net cash provided by operating activities in 2018, compared to 2017, resulted primarily from an increase in net2020. Net earnings including noncontrolling interests, a decreaseadjusted for non-cash items, generated approximately $6.4 billion of operating cash flow in the non-cash adjustment for deferred income taxes, positive changes in working capital and reduced contributions to the company sponsored pension plans, partially offset by non-cash adjustments for the expense for company-sponsored pension plans, the gain on sale of our convenience store business unit and the mark to market gain on Ocado securities.
The decrease in net cash provided by operating activities in 2017,2021 compared to 2016, resulted primarily from a decrease$5.2 billion in net earnings including noncontrolling interests, the $1.0 billion contribution to the company-sponsored defined benefit plans and deferred taxes, partially offset by an increase in non-cash expenses and changes in working capital. Deferred taxes changed in 2017, compared to 2016, as a result of remeasuring deferred taxes due to the Tax Act.
2020. Cash provided (used) by operating activities for changes in operating assets and liabilities, including working capital, was $580($229) million in 2018, ($164) million2021 compared to $1.6 billion in 2017 and ($492) million in 2016.2020. The increasedecrease in cash provided by operating activities for changes in operating assets and liabilities, including working capital, in 2018, compared to 2017, was primarily due to the following:
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● | An increase in long-term liabilities at the end of |
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● | Partially offset by a decrease in prepaid and |
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The decrease in cash used by operating activities for changes in working capital in 2017, compared to 2016, was primarily due to the following:
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Cash paid for taxes increaseddecreased in 2018,2021, compared to 2017,2020, primarily due to the payment of estimated taxes on the gain on sale of our convenience store business unit and lower estimated tax paymentstaxable income in 2017 due2021, compared to the $1 billion, $650 million net of tax, pension contribution made in 2017.2020.
Net cash used by investing activities
CashInvesting activities used by investing activities was $1.2cash of $2.6 billion in 2018, $2.72021, compared to $2.8 billion in 2017 and $3.9 billion in 2016.2020. The amount of cash used by investing activities decreased in 20182021, compared to 20172020, primarily due to the net proceeds from the sale of our convenience store business unit, partially offset by the paymentdecreased payments for our merger with Home Chefproperty and the purchases of Ocado securities. The amount of cash used by investing activities decreasedequipment in 2017 compared to 2016 primarily2021 due to reduced cash payments for capital investments and lower payments for mergers. timing of payments.
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Net cash used by financing activities
CashWe used by$3.4 billion of cash for financing activities was $2.9in 2021, compared to $2.7 billion in 2018, $681 million in 2017 and $352 million in 2016.2020. The increase in the amount of cash used for financing activities increased in 20182021, compared to 2017 was2020, primarily due to the following:
● | Decreased proceeds from issuance of long-term debt; |
● | Increased payments on long-term debt including obligations under finance leases; and |
● | Increased treasury stock purchases; |
● | Partially offset by decreased net payments on commercial paper; and |
● | Increased proceeds from financing arrangement. |
Capital Investments
Capital investments, including changes in construction-in-progress payables and excluding the purchase of leased facilities, totaled $3.2 billion in 2021 and 2020. Capital investments for the purchase of leased facilities totaled $58 million in 2020. We did not purchase any leased facilities in 2021. Our capital priorities align directly with our value creation model and our target to consistently grow net earnings. Our capital program includes initiatives to enhance the customer experience in stores, improve our process efficiency and enhance our digital capabilities through technology developments. As such, we increased payments on long-term debtour allocation of capital investments related to digital and commercial paper and increased share repurchases, partially offset by an increase in proceeds from issuance of long-term debt. We used a portion of the proceeds from the sale of our convenience store business unit to pay down outstanding commercial paper borrowings and fund a $1.2 billion ASR program, which was completed in the second quarter of 2018. The increase in the amount of cash used for financing activities in 2017technology compared to 2016 was primarily dueprior years. These investments are expected to lower net long-term borrowings, partially offsetdrive digital sales growth and improve operating efficiency by lower treasury stock purchasesremoving cost and higher net commercial paper borrowings. waste from our business.
The table below shows our supermarket storing activity and our total supermarket square footage for 2021, 2020 and 2019:
Supermarket Storing Activity
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| 2021 |
| 2020 |
| 2019 |
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Beginning of year |
| 2,742 |
| 2,757 |
| 2,764 | |
Opened |
| 4 |
| 5 |
| 10 | |
Opened (relocation) |
| 4 |
| 6 |
| 9 | |
Acquired |
| — |
| — |
| 6 | |
Closed (operational) |
| (20) |
| (20) |
| (19) | |
Closed (relocation) |
| (4) |
| (6) |
| (13) | |
End of year |
| 2,726 |
| 2,742 |
| 2,757 | |
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Total supermarket square footage (in millions) |
| 179 |
| 179 |
| 180 | |
Debt Management
Total debt, including both the current and long-term portions of capitalobligations under finance leases, and lease-financing obligations, decreased $360$49 million to $15.2$13.4 billion as of year-end 20182021 compared to 2017.2020. The decrease in 2018,2021, compared to 2017,2020, resulted primarily from net payments on commercial paper borrowings of $1.3 billion andthe payments of $1.3 billion on maturing long-term debt obligations, partially offset by the issuance of (i) $600$300 million of senior notes bearing an interest rate of 4.50%2.60%, (ii) $600 million of senior notes bearing an interest rate of 5.40% and (iii) our $1.0 billion term loan that has a variable interest rate. The variable interest rate on the term loan was 3.37% as of February 2, 2019. The combined $1.2 billion senior notes issuance has a higher weighted average interest rate than the $1.3 billion maturing long-term debt obligations it replaced. As a result, we expect a higher weighted average interest rate in 2019 which may contribute to increased interest expense. The sale of our convenience store business unit allowed us to pay down debt and fund our ASR program.
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Total debt, including both the current and long-term portions of capital lease and lease-financing obligations, increased $1.5 billion to $15.6 billion as of year-end 2017 compared to 2016. The increase in 2017, compared to 2016, resulted from the issuance of (i) $400 million of senior notes bearing an interest rate of 2.80%, (ii) $600 million of senior notes bearing an interest rate of 3.70%, (iii) $500 million of senior notes bearing an interest rate of 4.65%2.95% and (iv) increases in commercial paper borrowings,$500 million of senior notes bearing an interest rate of 3.40%, partially offset by paymentsan increase in debt primarily from the completion of $700a property transaction and a net increase in obligations under finance leases of $616 million on maturingprimarily related to our three Kroger Delivery customer fulfillment center openings. We purchased and then immediately sold a portfolio of 28 of our existing stores, allowing us to secure long-term debt obligations.access to these locations at favorable lease rates. The structure used to complete this transaction requires our liability to be shown as debt.
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Common Share Repurchase Programs
Liquidity Needs
We estimatemaintain share repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act of 1934 and allow for the orderly repurchase of our common shares, from time to time. The share repurchase programs do not have an expiration date but may be suspended or terminated by our Board of Directors at any time. We made open market purchases of our common shares totaling $1.4 billion in 2021 and $1.2 billion in 2020.
In addition to these repurchase programs, we also repurchase common shares to reduce dilution resulting from our employee stock option plans. This program is solely funded by proceeds from stock option exercises, and the tax benefit from these exercises. We repurchased approximately $225 million in 2021 and $128 million in 2020 of our common shares under the stock option program.
On September 11, 2020, 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 under the Securities Exchange Act of 1934, as amended (the “September 2020 Repurchase Program”). The September 2020 Repurchase Program was exhausted on June 11, 2021. On June 16, 2021, 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 under the Securities Exchange Act of 1934, as amended (the “June 2021 Repurchase Program”). On December 30, 2021, 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 under the Securities Exchange Act of 1934, as amended (the “December 2021 Repurchase Program”). The December 2021 Repurchase Program authorization replaced the existing June 2021 Repurchase Program.
The shares repurchased in 2021 were reacquired under the following share repurchase programs:
● | The September 2020 Repurchase Program. |
● | The June 2021 Repurchase Program. |
● | The December 2021 Repurchase Program. |
● | 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”). |
As of January 29, 2022, there was $821 million remaining under the December 2021 Repurchase Program.
During the first quarter through March 23, 2022, we repurchased an additional $92 million of our common shares under the stock option program and $287 million additional shares under the December 2021 Repurchase Program. As of March 23, 2022, we have $534 million remaining under the December 2021 Repurchase Program.
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Dividends
The following table provides dividend information for 2021 and 2020 ($ in millions, except per share amounts):
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| 2021 | | 2020 | ||
Cash dividends paid | $ | 589 | | $ | 534 |
Cash dividends paid per common share | $ | 0.78 | | $ | 0.68 |
Liquidity Needs
We held cash and temporary cash investments of $1.8 billion, as of the end of 2021, which reflects our elevated operating performance and significant improvements in working capital. We actively manage our cash and temporary cash investments in order to internally fund operating activities, support and invest in our core businesses, make scheduled interest and principal payments on our borrowings and return cash to shareholders through cash dividend payments and share repurchases. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in economic and market conditions. We remain committed to our dividend and share repurchase programs and we will evaluate the optimal use of any excess free cash flow, consistent with our previously stated capital allocation strategy.
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The table below summarizes our short-term and long-term material cash requirements, based on year of maturity or settlement, as of January 29, 2022 (in millions of dollars):
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| 2023 |
| 2024 |
| 2025 |
| 2026 |
| Thereafter |
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Contractual Obligations(1)(2) | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt(3) | | $ | 451 | | $ | 1,130 | | $ | 5 | | $ | 84 | | $ | 1,387 | | $ | 8,688 | | $ | 11,745 | |
Interest on long-term debt(4) | | | 494 | | | 471 | | | 422 | | | 422 | | | 399 | | | 4,918 | | | 7,126 | |
Finance lease obligations | | | 159 | | | 158 | | | 156 | | | 152 | | | 152 | | | 1,323 | | | 2,100 | |
Operating lease obligations | | | 920 | | | 862 | | | 791 | | | 717 | | | 664 | | | 5,961 | | | 9,915 | |
Self-insurance liability(5) | | | 236 | | | 152 | | | 102 | | | 65 | | | 40 | | | 126 | | | 721 | |
Construction commitments(6) | | | 542 | | | — | | | — | | | — | | | — | | | — | | | 542 | |
CARES Act(7) | | | 311 | | | — | | | — | | | — | | | — | | | — | | | 311 | |
Purchase obligations(8) | | | 894 | | | 435 | | | 320 | | | 294 | | | 319 | | | 2,163 | | | 4,425 | |
Total | | $ | 4,007 | | $ | 3,208 | | $ | 1,796 | | $ | 1,734 | | $ | 2,961 | | $ | 23,179 | | $ | 36,885 | |
(1) | The contractual obligations table excludes funding of pension and other postretirement benefit obligations, which totaled approximately $36 million in 2021. For additional information about these obligations, see Note 14 to the Consolidated Financial Statements. This table also excludes contributions under various multi-employer pension plans, which totaled $1.1 billion in 2021. For additional information about these multi-employer pension plans, see Note 15 to the Consolidated Financial Statements. |
(2) | The liability related to unrecognized tax benefits has been excluded from the contractual obligations table because a reasonable estimate of the timing of future tax settlements cannot be determined. |
(3) | As of January 29, 2022, we had no outstanding commercial paper and no borrowings under our credit facility. |
(4) | Amounts include contractual interest payments using the interest rate as of January 29, 2022 and stated fixed and swapped interest rates, if applicable, for all other debt instruments. |
(5) | The amounts included for self-insurance liability related to workers’ compensation claims have been stated on a present value basis. |
(6) | Amounts include funds owed to third parties for projects currently under construction. These amounts are reflected in “Other current liabilities” in our Consolidated Balance Sheets. |
(7) | 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 are deferring 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 2020, we deferred the employer portion of social security tax of $622 million. Of the total, $311 million was paid during 2021 and $311 million is included in “Other current liabilities” in our Consolidated Balance Sheets. |
(8) | Amounts include commitments, many of which are short-term in nature, to be utilized in the normal course of business, such as several contracts to purchase raw materials utilized in our food production plants and several contracts to purchase energy to be used in our stores and food production plants. Our obligations also include management fees for facilities operated by third parties and outside service contracts. Any upfront vendor allowances or incentives associated with outstanding purchase commitments are recorded as either current or long-term liabilities in our Consolidated Balance Sheets. We included our future commitments for customer fulfillment centers for which we have placed an order as of January 29, 2022. We did not include our commitments associated with additional customer fulfillment centers that have not yet been ordered. We expect our future commitments for customer fulfillment centers will continue to grow as we place orders for additional customer fulfillment centers. |
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We expect to meet our short-term and long-term liquidity needs overwith cash and temporary cash investments on hand at the next twelve-month period to approximate $6.4 billion, which includesend of 2021, cash flows from our operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility. Our short-term and long-term liquidity needs include anticipated requirements for working capital capital investments,to maintain our operations, pension plan commitments, interest payments and scheduled principal payments of debt and commercial paper, offset by cashservicing our lease obligations, self-insurance liabilities, capital investments, payments deferred under the CARES Act and temporary cash investments on hand atother purchase obligations. We may also require additional capital in the end of 2018. Wefuture to fund organic growth opportunities, additional customer fulfilment centers, joint ventures or other business partnerships, property development or acquisitions, dividends and share repurchases. In addition, we generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months. We have approximately $1.3 billion of senior notes, $800 million of commercial paper and the $1.0 billion term loan maturing in the next twelve months, which are included in the $6.4 billion of estimated liquidity needs. We expect to satisfy these obligations using cash generated from operations, proceeds from the sale of our You Technology and Turkey Hill Dairy businesses and through issuing additional senior notes, a term loan or commercial paper. On March 15, 2019, we repaid our $1.0 billion term loan through increased commercial paper borrowings, which have a lower interest rate. 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.
For additional information about our debt activity in 2021, see Note 5 to the Consolidated Financial Statements.
Factors Affecting Liquidity
We can currently borrow on a daily basis approximately $2.75 billion under our commercial paper program. At February 2, 2019,January 29, 2022, we had $800 million ofno outstanding commercial paper borrowings outstanding.paper. Commercial paper borrowings are backed by our credit facility and reduce the amount we can borrow under the credit facility. If our short-term credit ratings fall, the ability to borrow under our current commercial paper program could be adversely affected for a period of time and increase our interest cost on daily borrowings under our commercial paper program. This could require us to borrow additional funds under the credit facility, under which we believe we have sufficient capacity. However, in the event of a ratings decline, we do not anticipate that our borrowing capacity under our commercial paper program would be any lower than $500 million on a daily basis. Factors that could affect our credit rating include changes in our operating performance and financial position, the state of the economy, the current inflationary environment, conditions in the food retail industry and changes in our business model. Further information on the risks and uncertainties that can affect our business can be found in the “Risk Factors” section set forth in Item 1A of Part I of this Annual Report on Form 10-K. Although our ability to borrow under the credit facility is not affected by our credit rating, the interest cost and applicable margin on borrowings under the credit facility could be affected by a downgrade in our Public Debt Rating. “Public Debt Rating” means, as of any date, the rating that has been most recently announced by either S&P or Moody’s, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Company. As of March 28, 2019,23, 2022, we had $810 million ofno commercial paper borrowings outstanding.
Our credit facility requires the maintenance of a Leverage Ratio and a Fixed Charge Coverage Ratio (our “financial covenants”covenant”). A failure to maintain our financial covenantscovenant would impair our ability to borrow under the credit facility. TheseThis financial covenants arecovenant is described below:
| Our Leverage Ratio (the ratio of Net Debt to Adjusted EBITDA, as defined in the credit facility) was |
|
|
Our credit facility is more fully described in Note 65 to the Consolidated Financial Statements. We were in compliance with our financial covenantscovenant at year-end 2018.2021.
29
The tables below illustrate our significant contractual obligations and other commercial commitments, based on year of maturity or settlement, as of February 2, 2019 (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total |
| |||||||
Contractual Obligations (1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (3) |
| $ | 3,103 |
| $ | 720 |
| $ | 793 |
| $ | 896 |
| $ | 595 |
| $ | 8,244 |
| $ | 14,351 |
|
Interest on long-term debt (4) |
|
| 529 |
|
| 475 |
|
| 441 |
|
| 412 |
|
| 392 |
|
| 4,952 |
|
| 7,201 |
|
Capital lease obligations |
|
| 103 |
|
| 89 |
|
| 86 |
|
| 82 |
|
| 81 |
|
| 766 |
|
| 1,207 |
|
Operating lease obligations |
|
| 948 |
|
| 880 |
|
| 773 |
|
| 649 |
|
| 556 |
|
| 3,197 |
|
| 7,003 |
|
Financed lease obligations |
|
| 5 |
|
| 6 |
|
| 5 |
|
| 5 |
|
| 5 |
|
| 17 |
|
| 43 |
|
Self-insurance liability (5) |
|
| 228 |
|
| 142 |
|
| 98 |
|
| 64 |
|
| 42 |
|
| 122 |
|
| 696 |
|
Construction commitments (6) |
|
| 672 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 672 |
|
Purchase obligations (7) |
|
| 566 |
|
| 277 |
|
| 149 |
|
| 55 |
|
| 42 |
|
| 12 |
|
| 1,101 |
|
Total |
| $ | 6,154 |
| $ | 2,589 |
| $ | 2,345 |
| $ | 2,163 |
| $ | 1,713 |
| $ | 17,310 |
| $ | 32,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
| $ | 349 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 349 |
|
Surety bonds |
|
| 406 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 406 |
|
Total |
| $ | 755 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 2, 2019,January 29, 2022, we maintained a $2.75 billion (with the ability to increase by $1$1.25 billion), unsecured revolving credit facility that, unless extended, terminates on August 29, 2022.July 6, 2026. Outstanding borrowings under the credit facility, the commercial paper borrowings, and some outstanding letters of credit reduce funds available under the credit facility. As of February 2, 2019,January 29, 2022, we had $800 million ofno outstanding commercial paper and no borrowings under our revolving credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled $3$2 million as of February 2, 2019.January 29, 2022.
In addition to the available credit mentioned above, as of February 2, 2019,January 29, 2022, we had authorized for issuance $1.3$3.3 billion of securities remaining under a shelf registration statement filed with the SEC and effective on December 14, 2016.May 24, 2019.
3044
We also maintain surety bonds related primarily to our self-insured workers’ compensation claims. These bonds are required by most states in which we are self-insured for workers’ compensation and are placed with predominately third-party insurance providers to insure payment of our obligations in the event we are unable to meet our claim payment obligations up to our self-insured retention levels. These bonds do not represent liabilities of ours, as we already have reserves on our books for the claims costs. Market changes may make the surety bonds more costly and, in some instances, availability of these bonds may become more limited, which could affect our costs of, or access to, such bonds. Although we do not believe increased costs or decreased availability would significantly affect our ability to access these surety bonds, if this does become an issue, we would issue letters of credit, in states where allowed, against our credit facility to meet the state bonding requirements. This could increase our cost andor decrease the funds available under our credit facility if the letters of credit were issued against our credit facility. We had $412 million of outstanding surety bonds as of January 29, 2022. These surety bonds expire during fiscal year 2022 and are expected to be renewed.
We have standby letters of credit outstanding as part of our insurance program and for other business purposes. The letters of credit for our insurance program collateralize obligations to our insurance carriers in connection with the settlement of potential claims. We have also provided a letter of credit which supports our commitment to build a certain number of fulfillment centers. The balance of this letter of credit reduces primarily upon the construction of each fulfillment center. If we do not reach our total purchase commitment, we will be responsible for the balance remaining on the letter of credit. We had $363 million of outstanding standby letters of credit as of January 29, 2022. These standby letters of credit expire during fiscal year 2022 and are expected to be renewed. Letters of credit do not represent liabilities of ours and are not reflected in the Company’s Consolidated Balance Sheets.
We also are contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. We could be required to satisfy obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of our assignments among third parties, and various other remedies available to us, we believe the likelihood that we will be required to assume a material amount of these obligations is remote. We have agreed to indemnify certain third-party logistics operators for certain expenses, including multi-employer pension plan obligations and withdrawal liabilities.
In addition to the above, we enter into various indemnification agreements and take on indemnification obligations in the ordinary course of business. Such arrangements include indemnities against third partythird-party claims arising out of agreements to provide services to us; indemnities related to the sale of our securities; indemnities of directors, officers and employees in connection with the performance of their work; and indemnities of individuals serving as fiduciaries on benefit plans. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that could result in a material liability.
OUTLOOKTWO-YEAR FINANCIAL RESULTS
Significant fluctuations occurred in our business during 2020 due to the COVID-19 pandemic. As a result, management compares current year identical sales without fuel, adjusted FIFO operating profit and adjusted net earnings per diluted share results to the same metrics for the comparable period in 2019, in addition to comparisons made to 2020. This discussionenables management to evaluate results of the business and analysis contains certain forward-looking statements about our futurefinancial model over a longer period of time, and to better understand the state of the business after the height of the pandemic compared to the period of time prior to the pandemic. The purpose of the following tables is to better illustrate comparable two-year growth from our ongoing business for 2021 for identical sales without fuel, adjusted FIFO operating profit and adjusted net earnings per diluted share compared to 2019. Two year financial results for these measures are useful metrics to investors and analysts because they present more accurate comparisons of results and trends over a longer period of time to demonstrate the effect of COVID-19 on our results. The tables provide the two-year stacked results or compounded annual growth rate for each measure presented and how it was calculated. Items identified in these tables should not be considered alternatives to any other measure of performance. These statementsitems should not be reviewed in isolation or considered substitutes for the Company's financial results including those measures reported in accordance with GAAP. Due to the nature of these items, as further described below, it is important to identify these items and to review them in conjunction with the Company's financial results reported in accordance with GAAP.
45
Identical Sales Two-Year Stacked
($ in millions)
| | | | | | | | | | | | |
| | 2021 | | 2020 | | 2020 | | 2019 | ||||
Excluding fuel | | $ | 120,802 | | $ | 120,575 | | $ | 120,762 | | $ | 105,806 |
Individual year identical sales result | | | 0.2 | % | | | | | 14.1 | % | | |
Two-year stacked identical sales result | | | 14.3 | % | | | | | | | | |
Operating Profit Excluding the Adjusted Items Two-Year CAGR
($ in millions)
| | | | | | |
|
| 2021 |
| 2019 | ||
Operating profit | | $ | 3,477 | | $ | 2,251 |
LIFO charge | | | 197 | | | 105 |
| |
| | | | |
FIFO Operating profit | |
| 3,674 | |
| 2,356 |
| | | | | | |
Adjustment for pension plan withdrawal liabilities | | | 449 | | | 135 |
Adjustment for Home Chef contingent consideration | | | 66 | | | (69) |
Adjustment for severance charge and related benefits | | | — | | | 80 |
Adjustment for transformation costs(1) | | | 136 | ��� | | 52 |
Adjustment for deconsolidation and impairment of Lucky's Market(2) | | | — | | | 412 |
Other | | | (15) | | | 29 |
| | | | | | |
2021 and 2019 Adjusted items | | | 636 | | | 639 |
| | | | | | |
Adjusted FIFO operating profit excluding the adjusted items above | | $ | 4,310 | | $ | 2,995 |
| | | | | | |
Two-year operating profit CAGR(3) | | | 24.3 | % | | |
| | | | | | |
Two-year adjusted FIFO operating profit excluding the adjusted items above CAGR(3) | | | 20.0 | % | | |
46
Net Earnings per Diluted Share Excluding the Adjusted Items Two-Year CAGR
($ in millions, except per share amounts)
| | | | | | |
| | 2021 |
| 2019 | ||
Net earnings attributable to The Kroger Co. | | $ | 1,655 | | $ | 1,659 |
(Income) expense adjustments | | | | | | |
Adjustment for pension plan withdrawal liabilities(1)(2) | | | 344 | | | 104 |
Adjustment for company-sponsored pension plan settlement charges(1)(3) | | | 68 | | | — |
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 loss (gain) on investments(1)(6) | | | 628 | | | (119) |
Adjustment for deconsolidation and impairment of Lucky's Market attributable to the Kroger Co.(1)(7) | | | — | | | 225 |
Adjustment for Home Chef contingent consideration(1)(8) | | | 50 | | | (49) |
Adjustment for transformation costs(1)(9) | | | 104 | | | 37 |
Adjustment for severance charge and related benefits(1)(10) | | | — | | | 61 |
Adjustment for income tax audit examinations(1) | |
| (47) | |
| — |
2021 and 2019 Adjusted Items | | | 1,147 | | | 127 |
| | | | | | |
Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 2,802 | | $ | 1,786 |
| | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 2.17 | | $ | 2.04 |
(Income) expense adjustments | | | | | | |
Adjustment for pension plan withdrawal liabilities(11) | | | 0.45 | | | 0.13 |
Adjustment for company-sponsored pension plan settlement charges(11) | | | 0.09 | | | — |
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 loss (gain) on investments(11) | | | 0.83 | | | (0.15) |
Adjustment for deconsolidation and impairment of Lucky's Market attributable to the Kroger Co.(11) | | | — | | | 0.28 |
Adjustment for Home Chef contingent consideration(11) | | | 0.07 | | | (0.07) |
Adjustment for transformation costs(11) | | | 0.14 | | | 0.04 |
Adjustment for severance charge and related benefits(11) | | | — | | | 0.08 |
Adjustment for income tax audit examinations(11) | | | (0.07) | | | — |
2021 and 2019 Adjusted Items | |
| 1.51 | |
| 0.15 |
| | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share excluding the Adjusted Items | | $ | 3.68 | | $ | 2.19 |
| | | | | | |
Average number of common shares used in diluted calculation | |
| 754 | |
| 805 |
| | | | | | |
Two-year net earnings attributable to The Kroger Co. per diluted common share CAGR(12) | | | 3.1 | % | | |
| | | | | | |
Two-year net earnings attributable to The Kroger Co. per diluted common share excluding the Adjusted Items CAGR(12) | | | 29.6 | % | | |
47
Net Earnings per Diluted Share Excluding the Adjusted Items Two-Year CAGR (continued)
($ in millions, except per share amounts)
48
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
FINANCIAL RISK MANAGEMENT
In addition to the risks inherent in our operations, we are based on management’s assumptionsexposed to market risk from a variety of sources, including changes in interest rates, commodity prices, the fair value of certain equity investments and beliefs in light of the information currently available to it. Such statements are indicated by words such as “achieve,” “affect,” “believe,” “committed,” “continue,” “could,” “effect,” “estimate,” “expects,” “future,” “growth,” “intends,” “likely,” “may,” “plan,” “range,” “result,” “strategy,” “strong,” “trend,” “vision,” “will, and “would,” and similar words or phrases. These forward-looking statements are subject to uncertaintiesdefined benefit pension and other factors that could cause actual results to differ materially.post-retirement benefit plans. Our market risk exposures are discussed below.
Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially. Interest Rate Risk
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31
Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include:
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|
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|
|
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.
Other factors and assumptions not identified above, including those discussed in Item 1A of this Report, 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.
32
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Financial Risk Management
We use derivative financial instruments primarily to manage our exposure to fluctuations in interest rates. We do not enter into derivative financial instruments for trading purposes. As a matter of policy, all of our derivative positions are intended to reduce risk by hedging an underlying economic exposure. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments generally are offset by reciprocal changes in the value of the underlying exposure. The interest rate derivatives we use are straightforward instruments with liquid markets.
We manage our exposure to interest rates and changes in the fair value of our debt instruments primarily through the strategic use of our commercial paper program, variable and fixed rate debt, and interest rate swaps. Our current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, we use the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of the carrying value of our debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.
When we use derivative financial instruments, it is primarily to manage our exposure to fluctuations in interest rates. We do not enter into derivative financial instruments for trading purposes. As a matter of February 2, 2019,policy, all of our derivative positions are intended to reduce risk by hedging an underlying economic exposure. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments generally are offset by reciprocal changes in the value of the underlying exposure. The interest rate derivatives we maintained fiveuse are straightforward instruments with liquid markets. We had no forward-starting interest rate swap agreements with a maturity dateoutstanding as of January 15, 2020 with an aggregate notional amount totaling $250 million. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. We entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on our forecasted issuances of debt in fiscal year 2019. The fixed interest rates for these forward-starting interest rate swaps range from 2.15% to 2.17%. The variable rate component on the forward-starting interest rate swaps is 3 month LIBOR. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of February 2, 2019, the fair value of the interest rate swaps was recorded in other assets for $33 million and accumulated other comprehensive income for $20 million, net of tax.29, 2022 or January 30, 2021.
Annually, we review with the Financial Policy Committee of our Board of Directors compliance with the guidelines described above. The guidelines may change as our business needs dictate.
33
The tables below provide information about our interest rate derivatives classified as fair value hedges and underlying debt portfolio as of February 2, 2019January 29, 2022 and February 3, 2018.January 30, 2021. The amounts shown for each year represent the contractual maturities of long-term debt, excluding capitalfinance leases, and the average outstanding notional amounts of interest rate derivatives classified as fair value hedges as of February 2, 2019January 29, 2022 and February 3, 2018.January 30, 2021. Interest rates reflect the weighted average rate for the outstanding instruments. The variable component of each interest rate derivative and the variable rate debt is based on U.S. dollar LIBORa reference rate using the forward yield curve as of February 2, 2019January 29, 2022 and February 3, 2018.January 30, 2021. The Fair Value column includes the fair value of our debt instruments and interest rate derivatives classified as fair value hedges as of February 2, 2019January 29, 2022 and February 3, 2018.January 30, 2021. We havehad no outstanding interest rate derivatives classified as fair value hedges as of February 2, 2019.January 29, 2022 or January 30, 2021. See Notes 5, 6 7 and 87 to the Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
| | January 29, 2022 |
| |||||||||||||||||||||||||||||||||||||||||||||||
| | Expected Year of Maturity |
| |||||||||||||||||||||||||||||||||||||||||||||||
|
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| Thereafter |
| Total |
| Fair Value |
| |||||||||||||||||||||||||||||||||
|
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| |||||||||||||||||||||||||
|
| February 2, 2019 |
| |||||||||||||||||||||||||||||||||||||||||||||||
|
| Expected Year of Maturity |
| |||||||||||||||||||||||||||||||||||||||||||||||
|
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total |
| Fair Value |
| |||||||||||||||||||||||||||||||||
|
| (in millions) |
| |||||||||||||||||||||||||||||||||||||||||||||||
| | (in millions) |
| |||||||||||||||||||||||||||||||||||||||||||||||
Debt |
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate |
| $ | (1,251) |
| $ | (695) |
| $ | (793) |
| $ | (896) |
| $ | (595) |
| $ | (8,163) |
| $ | (12,393) |
| $ | (12,232) |
| | $ | (416) | | $ | (1,107) | | $ | (5) | | $ | (3) | | $ | (1,387) | | $ | (8,688) | | $ | (11,606) | | $ | (13,050) | |
Average interest rate |
|
| 4.51 | % |
| 4.47 | % |
| 4.47 | % |
| 4.56 | % |
| 4.74 | % |
| 4.70 | % |
|
|
|
|
|
| |
| 4.38 | % |
| 4.50 | % |
| 1.51 | % |
| 3.53 | % |
| 4.27 | % |
| 4.46 | % | | | | | | |
Variable rate |
| $ | (1,852) |
| $ | (25) |
| $ | — |
| $ | — |
| $ | — |
| $ | (81) |
| $ | (1,958) |
| $ | (1,958) |
| | $ | (35) | | $ | (23) | | $ | — | | $ | (81) | | $ | — | | $ | — | | $ | (139) | | $ | (139) | |
Average interest rate |
|
| 3.09 | % |
| 4.26 |
|
| — |
|
| — |
|
| — |
|
| 1.75 | % |
|
|
|
|
|
| |
| 1.86 | % |
| 2.61 | % |
| — | |
| 0.12 | % |
| — | |
| — | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
| | January 30, 2021 |
| |||||||||||||||||||||||||||||||||||||||||||||||
| | Expected Year of Maturity |
| |||||||||||||||||||||||||||||||||||||||||||||||
|
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Thereafter |
| Total |
| Fair Value |
| |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
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| |||||||||||||||||||||||||
|
| February 3, 2018 |
| |||||||||||||||||||||||||||||||||||||||||||||||
|
| Expected Year of Maturity |
| |||||||||||||||||||||||||||||||||||||||||||||||
|
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Thereafter |
| Total |
| Fair Value |
| |||||||||||||||||||||||||||||||||
|
| (in millions) |
| |||||||||||||||||||||||||||||||||||||||||||||||
| | (in millions) |
| |||||||||||||||||||||||||||||||||||||||||||||||
Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate |
| $ | (1,332) |
| $ | (1,243) |
| $ | (696) |
| $ | (795) |
| $ | (897) |
| $ | (7,494) |
| $ | (12,457) |
| $ | (12,837) |
| | $ | (802) | | $ | (894) | | $ | (1,093) | | $ | — | | $ | — | | $ | (9,475) | | $ | (12,264) | | $ | (14,534) | |
Average interest rate |
|
| 4.48 | % |
| 4.65 | % |
| 4.58 | % |
| 4.57 | % |
| 4.65 | % |
| 4.60 | % |
|
|
|
|
|
| |
| 4.20 | % |
| 4.29 | % |
| 4.53 | % |
| — | |
| — | |
| 4.36 | % | | | | | | |
Variable rate |
| $ | (2,177) |
| $ | — |
| $ | (25) |
| $ | — |
| $ | — |
| $ | (128) |
| $ | (2,330) |
| $ | (2,330) |
| | $ | (42) | | $ | — | | $ | (23) | | $ | — | | $ | (81) | | $ | — | | $ | (146) | | $ | (146) | |
Average interest rate |
|
| 1.73 | % |
| — |
|
| 3.15 | % |
| — |
|
| — |
|
| 2.07 | % |
|
|
|
|
|
| |
| 1.87 | % |
| — | |
| 2.62 | % |
| — | |
| 0.08 | % |
| — | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| February 3, 2018 |
| February 3, |
| February 3, |
| ||||||||||||||||||
|
| Average Notional Amounts Outstanding |
| 2018 |
| 2018 |
| ||||||||||||||||||
|
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Thereafter |
| Total |
| Fair Value |
| ||||||||
|
| (in millions) |
| ||||||||||||||||||||||
Interest Rate Derivatives Classified as Fair Value Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed to variable |
| $ | 88 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 88 |
| $ | (1) |
|
Average pay rate |
|
| 7.63 | % |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
Average receive rate |
|
| 6.80 | % |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
Based on our year-end 20182021 variable rate debt levels, a 10 percent change in interest rates would be immaterial. See Note 76 to the Consolidated Financial Statements for further discussion of derivatives and hedging policies.
3449
Commodity Price Risk
We are subject to commodity price risk generated by our purchases of meat, seafood and dairy products, among other food items. We purchase, manufacture and sell various commodity related food products and risk arises from the price volatility of these commodities. The price and availability of these commodities directly impacts our results of operations. To help manage or minimize the effect of commodity price risk exposure on our operations, we use a combination of pricing features embedded within supply contracts, such as fixed-price and price-to-be-fixed contracts, and have the ability to increase or decrease retail prices to our customers as commodity prices change.
We are exposed to changes in the prices of diesel and unleaded fuel. The majority of our fuel contracts utilize index-based pricing formulas plus or minus a fixed locational/supplier differential. We expect to take delivery of these commitments in the normal course of business, and, as a result, these contracts qualify as normal purchases. While many of the indices are aligned, each index may fluctuate at a different pace, driving variability in the prices paid for fuel. Because of this, our operating results may be affected should the market price of fuel suddenly change by a significant amount, which can affect our operating results either positively or negatively in the short-term.
We have entered into fixed price contracts to purchase electricity and natural gas for a portion of our energy needs. We expect to take delivery of these commitments in the normal course of business, and, as a result, these contracts qualify as normal purchases.
As of January 29, 2022 and January 30, 2021, we had no commodity derivative contracts outstanding.
Equity Investment Risk
We are exposed to market price volatility for our investment in Ocado Group plc (“Ocado”), which is measured at fair value through net earnings. Fair value adjustments flow through “(Loss) gain on investments” in the Company’s Consolidated Statements of Operations. The change in fair value of this investment resulted in an unrealized (loss) gain on investments of ($821) million in 2021, $1.0 billion in 2020 and $157 million in 2019. As of January 29, 2022, the value of our investment in Ocado was $987 million. As of January 29, 2022, a 10% change in the fair value of this investment would be approximately $100 million. For additional details on this investment, see Note 7 to the Consolidated Financial Statements.
Company-Sponsored Benefit Plans
We sponsor defined benefit pension plans and post-retirement healthcare plans for certain eligible employees. Changes in interest rates affect our liabilities associated with these retirement plans, as well as the amount of expense recognized for these retirement plans. Increased interest rates could result in a lower fair value of plan assets and increased pension expense in the following years. The target plan asset allocations are established based on our LDI strategy. An LDI strategy focuses on maintaining a close to fully-funded status over the long-term with minimal funded status risk. This is achieved by investing more of the plan assets in fixed income instruments to more closely match the duration of the plan liability. As of January 29, 2022, our defined benefit pension plans had total investment assets of $3.1 billion. Declines in the fair value of plan assets could diminish the funded status of our defined benefit pension plans and potentially increase our requirement to make contributions to these plans. For additional details, see Note 14 to the Consolidated Financial Statements.
50
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
Consolidated Financial Statements of The Kroger Co.
For the Fiscal Year Ended January 29, 2022
Table of Contents
| |
| Page |
52 | |
55 | |
56 | |
57 | |
58 | |
59 | |
60 |
51
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Shareholders of
The Kroger Co.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets ofThe Kroger Co. and its subsidiaries (the “Company”) as of February 2, 2019January 29, 2022 and February 3, 2018,January 30, 2021, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders’shareholders' equity and of cash flows for each of the three years in the period ended February 2, 2019,January 29, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of February 2, 2019,January 29, 2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
��
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 2, 2019January 29, 2022 and February 3, 2018, January 30, 2021, and the results of itsoperations and itscash flows for each of the three years in the period ended February 2, 2019January 29, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 2, 2019,January 29, 2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 19 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,, included in Management'sManagement’s Report on Internal Control over Financial Reporting appearing under Item 9A.9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits inin accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
3552
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment – Kroger Specialty Pharmacy (“KSP”) Reporting Unit
As described in Notes 1 and 2 to the consolidated financial statements, the Company’s consolidated goodwill balance was $3.1 billion as of January 29, 2022 and the goodwill associated with the KSP reporting unit was $242 million. Management reviews goodwill annually for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. The fair value of a reporting unit is compared to its carrying value for purposes of identifying potential impairment. Goodwill impairment is recognized for any excess of the reporting unit’s carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. As disclosed by management, the fair value of the Company's KSP reporting unit was estimated using multiple valuation techniques, a discounted cash flow model (income approach), a market multiple model and comparable mergers and acquisition model (market approaches), with each method weighted in the calculation. The income approach relies on management’s estimates of revenue growth rates, margin assumptions, and discount rate to estimate future cash flows. The market approaches require the determination of an appropriate peer group, which is utilized to derive estimated fair values based on selected market multiples.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the KSP reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the reporting unit; (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s cash flow projections and significant assumptions related to revenue growth rates, margin assumptions, discount rate, peer group determination, and market multiple selection; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
53
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s KSP reporting unit. These procedures also included, among others, testing management’s process for developing the fair value estimate, evaluating the appropriateness of the income and market approach models, testing the completeness, accuracy, and relevance of the underlying data used in the models and evaluating the significant assumptions used by management related to the revenue growth rates, margin assumptions, discount rate, peer group determination, and market multiple selection. Evaluating management’s assumptions relating to revenue growth rates and margin assumptions involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Evaluating the Company’s peer group determinations included evaluating the appropriateness of the identified peer companies. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow and market models, and certain significant assumptions related to the discount rate, peer group determination, and market multiples.
/s/ PricewaterhouseCoopers LLP
Cincinnati, Ohio
April 2, 2019March 29, 2022
We have served as the Company’s auditor since1929. 1929.
3654
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
| February 2, |
| February 3, |
| ||
(In millions, except par amounts) |
| 2019 |
| 2018 |
| ||
ASSETS |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Cash and temporary cash investments |
| $ | 429 |
| $ | 347 |
|
Store deposits in-transit |
|
| 1,181 |
|
| 1,161 |
|
Receivables |
|
| 1,589 |
|
| 1,637 |
|
FIFO inventory |
|
| 8,123 |
|
| 7,781 |
|
LIFO reserve |
|
| (1,277) |
|
| (1,248) |
|
Assets held for sale |
|
| 166 |
|
| 604 |
|
Prepaid and other current assets |
|
| 592 |
|
| 835 |
|
Total current assets |
|
| 10,803 |
|
| 11,117 |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 21,635 |
|
| 21,071 |
|
Intangibles, net |
|
| 1,258 |
|
| 1,100 |
|
Goodwill |
|
| 3,087 |
|
| 2,925 |
|
Other assets |
|
| 1,335 |
|
| 984 |
|
|
|
|
|
|
|
|
|
Total Assets |
| $ | 38,118 |
| $ | 37,197 |
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Current portion of long-term debt including obligations under capital leases and financing obligations |
| $ | 3,157 |
| $ | 3,560 |
|
Trade accounts payable |
|
| 6,059 |
|
| 5,858 |
|
Accrued salaries and wages |
|
| 1,227 |
|
| 1,099 |
|
Liabilities held for sale |
|
| 51 |
|
| 259 |
|
Other current liabilities |
|
| 3,780 |
|
| 3,421 |
|
Total current liabilities |
|
| 14,274 |
|
| 14,197 |
|
|
|
|
|
|
|
|
|
Long-term debt including obligations under capital leases and financing obligations |
|
| 12,072 |
|
| 12,029 |
|
Deferred income taxes |
|
| 1,562 |
|
| 1,568 |
|
Pension and postretirement benefit obligations |
|
| 494 |
|
| 792 |
|
Other long-term liabilities |
|
| 1,881 |
|
| 1,706 |
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
| 30,283 |
|
| 30,292 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies see Note 13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2018 and 2017 |
|
| 1,918 |
|
| 1,918 |
|
Additional paid-in capital |
|
| 3,245 |
|
| 3,161 |
|
Accumulated other comprehensive loss |
|
| (346) |
|
| (471) |
|
Accumulated earnings |
|
| 19,681 |
|
| 17,007 |
|
Common shares in treasury, at cost, 1,120 shares in 2018 and 1,048 shares in 2017 |
|
| (16,612) |
|
| (14,684) |
|
|
|
|
|
|
|
|
|
Total Shareholders’ Equity - The Kroger Co. |
|
| 7,886 |
|
| 6,931 |
|
Noncontrolling interests |
|
| (51) |
|
| (26) |
|
|
|
|
|
|
|
|
|
Total Equity |
|
| 7,835 |
|
| 6,905 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
| $ | 38,118 |
| $ | 37,197 |
|
| | | | �� | | | |
|
| January 29, |
| January 30, |
| ||
(In millions, except par amounts) | | 2022 | | 2021 |
| ||
ASSETS | | | | | | | |
Current assets | | | | | | | |
Cash and temporary cash investments | | $ | 1,821 | | $ | 1,687 | |
Store deposits in-transit | |
| 1,082 | |
| 1,096 | |
Receivables | |
| 1,828 | |
| 1,781 | |
FIFO inventory | |
| 8,353 | |
| 8,436 | |
LIFO reserve | |
| (1,570) | |
| (1,373) | |
Prepaid and other current assets | | | 660 | | | 876 | |
Total current assets | |
| 12,174 | |
| 12,503 | |
| | | | | | | |
Property, plant and equipment, net | |
| 23,789 | |
| 22,386 | |
Operating lease assets | | | 6,695 | | | 6,796 | |
Intangibles, net | |
| 942 | |
| 997 | |
Goodwill | |
| 3,076 | |
| 3,076 | |
Other assets | |
| 2,410 | |
| 2,904 | |
| | | | | | | |
Total Assets | | $ | 49,086 | | $ | 48,662 | |
| | | | | | | |
LIABILITIES | | | | | | | |
Current liabilities | | | | | | | |
Current portion of long-term debt including obligations under finance leases | | $ | 555 | | $ | 911 | |
Current portion of operating lease liabilities | | | 650 | | | 667 | |
Trade accounts payable | |
| 7,117 | |
| 6,679 | |
Accrued salaries and wages | |
| 1,736 | |
| 1,413 | |
Other current liabilities | |
| 6,265 | |
| 5,696 | |
Total current liabilities | |
| 16,323 | |
| 15,366 | |
| | | | | | | |
Long-term debt including obligations under finance leases | | | 12,809 | | | 12,502 | |
Noncurrent operating lease liabilities | | | 6,426 | | | 6,507 | |
Deferred income taxes | |
| 1,562 | |
| 1,542 | |
Pension and postretirement benefit obligations | |
| 478 | |
| 535 | |
Other long-term liabilities | |
| 2,059 | |
| 2,660 | |
| | | | | | | |
Total Liabilities | |
| 39,657 | |
| 39,112 | |
| | | | | | | |
Commitments and contingencies see Note 12 | | | | | | | |
| | | | | | | |
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 2021 and 2020 | |
| 1,918 | |
| 1,918 | |
Additional paid-in capital | |
| 3,657 | |
| 3,461 | |
Accumulated other comprehensive loss | |
| (467) | |
| (630) | |
Accumulated earnings | |
| 24,066 | |
| 23,018 | |
Common shares in treasury, at cost, 1,191 shares in 2021 and 1,160 shares in 2020 | |
| (19,722) | |
| (18,191) | |
| | | | | | | |
Total Shareholders’ Equity - The Kroger Co. | |
| 9,452 | |
| 9,576 | |
Noncontrolling interests | |
| (23) | |
| (26) | |
| | | | | | | |
Total Equity | |
| 9,429 | |
| 9,550 | |
| | | | | | | |
Total Liabilities and Equity | | $ | 49,086 | | $ | 48,662 | |
The accompanying notes are an integral part of the consolidated financial statements.
3755
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 29, 2022, January 30, 2021 and February 2, 2019, February 3, 2018 and January 28, 20171, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
| 2018 |
| 2017 |
| 2016 |
| |||
(In millions, except per share amounts) |
|
| (52 weeks) |
| (53 weeks) |
| (52 weeks) |
| |||
Sales |
|
| $ | 121,162 |
| $ | 122,662 |
| $ | 115,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
|
|
| 94,894 |
|
| 95,662 |
|
| 89,502 |
|
Operating, general and administrative |
|
|
| 20,305 |
|
| 21,041 |
|
| 19,162 |
|
Rent |
|
|
| 884 |
|
| 911 |
|
| 881 |
|
Depreciation and amortization |
|
|
| 2,465 |
|
| 2,436 |
|
| 2,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
| 2,614 |
|
| 2,612 |
|
| 3,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
| (620) |
|
| (601) |
|
| (522) |
|
Non-service component of company-sponsored pension plan costs |
|
|
| (26) |
|
| (527) |
|
| (16) |
|
Mark to market gain on Ocado securities |
|
|
| 228 |
|
| — |
|
| — |
|
Gain on sale of business |
|
|
| 1,782 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings before income tax (benefit) expense |
|
|
| 3,978 |
|
| 1,484 |
|
| 2,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense |
|
|
| 900 |
|
| (405) |
|
| 957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings including noncontrolling interests |
|
|
| 3,078 |
|
| 1,889 |
|
| 1,957 |
|
Net loss attributable to noncontrolling interests |
|
|
| (32) |
|
| (18) |
|
| (18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. |
|
| $ | 3,110 |
| $ | 1,907 |
| $ | 1,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per basic common share |
|
| $ | 3.80 |
| $ | 2.11 |
| $ | 2.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares used in basic calculation |
|
|
| 810 |
|
| 895 |
|
| 942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per diluted common share |
|
| $ | 3.76 |
| $ | 2.09 |
| $ | 2.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares used in diluted calculation |
|
|
| 818 |
|
| 904 |
|
| 958 |
|
| | | | | | | | | | | |
| | | | | | | |
| |||
| | | 2021 |
| 2020 |
| 2019 | | |||
(In millions, except per share amounts) |
|
| (52 weeks) | | (52 weeks) | | (52 weeks) |
| |||
Sales | | | $ | 137,888 | | $ | 132,498 | | $ | 122,286 | |
| | | | | | | | | | | |
Operating expenses | | | | | | | | | | | |
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below | | |
| 107,539 | |
| 101,597 | |
| 95,294 | |
Operating, general and administrative | | |
| 23,203 | |
| 24,500 | |
| 21,208 | |
Rent | | |
| 845 | |
| 874 | |
| 884 | |
Depreciation and amortization | | |
| 2,824 | |
| 2,747 | |
| 2,649 | |
| | | | | | | | | | | |
Operating profit | | |
| 3,477 | |
| 2,780 | |
| 2,251 | |
| | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | |
Interest expense | | |
| (571) | |
| (544) | |
| (603) | |
Non-service component of company-sponsored pension plan (costs) benefits | | | | (34) | | | 29 | | | — | |
(Loss) gain on investments | | | | (821) | | | 1,105 | | | 157 | |
Gain on sale of businesses | | | | — | | | — | | | 176 | |
| | | | | | | | | | | |
Net earnings before income tax expense | | |
| 2,051 | |
| 3,370 | |
| 1,981 | |
| | | | | | | | | | | |
Income tax expense | | |
| 385 | |
| 782 | |
| 469 | |
| | | | | | | | | | | |
Net earnings including noncontrolling interests | | |
| 1,666 | |
| 2,588 | |
| 1,512 | |
Net income (loss) attributable to noncontrolling interests | | |
| 11 | |
| 3 | |
| (147) | |
| | | | | | | | | | | |
Net earnings attributable to The Kroger Co. | | | $ | 1,655 | | $ | 2,585 | | $ | 1,659 | |
| | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per basic common share | | | $ | 2.20 | | $ | 3.31 | | $ | 2.05 | |
| | | | | | | | | | | |
Average number of common shares used in basic calculation | | |
| 744 | |
| 773 | |
| 799 | |
| | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | | $ | 2.17 | | $ | 3.27 | | $ | 2.04 | |
| | | | | | | | | | | |
Average number of common shares used in diluted calculation | | |
| 754 | |
| 781 | |
| 805 | |
The accompanying notes are an integral part of the consolidated financial statements.
3856
THE KROGER CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended January 29, 2022, January 30, 2021 and February 2, 2019, February 3, 2018 and January 28, 20171, 2020
| | | | | | | | | |
| | | | | | | |||
| | 2021 | | 2020 |
| 2019 | |||
(In millions) |
| (52 weeks) | | (52 weeks) | | (52 weeks) | |||
Net earnings including noncontrolling interests | | $ | 1,666 | | $ | 2,588 | | $ | 1,512 |
| | | | | | | | | |
Other comprehensive income (loss) | | | | | | | | | |
Change in pension and other postretirement defined benefit plans, net of income tax(1) | | | 156 | | | 22 | | | (105) |
Unrealized gains and losses on cash flow hedging activities, net of income tax(2) | |
| — | |
| (14) | |
| (47) |
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(3) | | | 7 | | | 2 | | | 4 |
Cumulative effect of accounting change(4) | | | — | | | — | | | (146) |
| | | | | | | | | |
Total other comprehensive income (loss) | |
| 163 | |
| 10 | |
| (294) |
| | | | | | | | | |
Comprehensive income | |
| 1,829 | |
| 2,598 | |
| 1,218 |
Comprehensive income (loss) attributable to noncontrolling interests | |
| 11 | |
| 3 | |
| (147) |
Comprehensive income attributable to The Kroger Co. | | $ | 1,818 | | $ | 2,595 | | $ | 1,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| 2018 |
| 2017 |
| 2016 |
| |||
(In millions) |
| (52 weeks) |
| (53 weeks) |
| (52 weeks) |
| |||
Net earnings including noncontrolling interests |
| $ | 3,078 |
| $ | 1,889 |
| $ | 1,957 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
Realized gains and losses on available for sale securities, net of income tax (1) |
|
| (4) |
|
| 4 |
|
| (20) |
|
Change in pension and other postretirement defined benefit plans, net of income tax(2) |
|
| 147 |
|
| 214 |
|
| (64) |
|
Unrealized gains and losses on cash flow hedging activities, net of income tax(3) |
|
| (23) |
|
| 23 |
|
| 47 |
|
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax (4) |
|
| 5 |
|
| 3 |
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
| 125 |
|
| 244 |
|
| (35) |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
| 3,203 |
|
| 2,133 |
|
| 1,922 |
|
Comprehensive loss attributable to noncontrolling interests |
|
| (32) |
|
| (18) |
|
| (18) |
|
Comprehensive income attributable to The Kroger Co. |
| $ | 3,235 |
| $ | 2,151 |
| $ | 1,940 |
|
(1) |
| Amount is net of tax expense (benefit) of |
(2) |
| Amount is net of tax |
| Amount is net of tax expense of $3 in |
(4) | 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,” (See Note 17 for additional details). |
The accompanying notes are an integral part of the consolidated financial statements.
3957
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 29, 2022, January 30, 2021 and February 2, 2019, February 3, 2018 and January 28, 20171, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| 2018 |
| 2017 |
| 2016 |
| |||
(In millions) |
| (52 weeks) |
| (53 weeks) |
| (52 weeks) |
| |||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
Net earnings including noncontrolling interests |
| $ | 3,078 |
| $ | 1,889 |
| $ | 1,957 |
|
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 2,465 |
|
| 2,436 |
|
| 2,340 |
|
LIFO (credit) charge |
|
| 29 |
|
| (8) |
|
| 19 |
|
Stock-based employee compensation |
|
| 154 |
|
| 151 |
|
| 141 |
|
Expense for company-sponsored pension plans |
|
| 76 |
|
| 591 |
|
| 94 |
|
Goodwill impairment charge |
|
| — |
|
| 110 |
|
| — |
|
Deferred income taxes |
|
| (45) |
|
| (694) |
|
| 201 |
|
Gain on sale of business |
|
| (1,782) |
|
| — |
|
| — |
|
Mark to market gain on Ocado securities |
|
| (228) |
|
| — |
|
| — |
|
Other |
|
| 116 |
|
| 79 |
|
| (2) |
|
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses: |
|
|
|
|
|
|
|
|
|
|
Store deposits in-transit |
|
| (20) |
|
| (265) |
|
| 13 |
|
Receivables |
|
| (208) |
|
| 61 |
|
| (110) |
|
Inventories |
|
| (354) |
|
| (23) |
|
| (382) |
|
Prepaid and other current assets |
|
| 244 |
|
| 41 |
|
| (172) |
|
Trade accounts payable |
|
| 213 |
|
| 158 |
|
| 16 |
|
Accrued expenses |
|
| 416 |
|
| (40) |
|
| (118) |
|
Income taxes receivable and payable |
|
| 289 |
|
| (96) |
|
| 261 |
|
Contribution to company-sponsored pension plans |
|
| (185) |
|
| (1,000) |
|
| — |
|
Other |
|
| (94) |
|
| 23 |
|
| 14 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
| 4,164 |
|
| 3,413 |
|
| 4,272 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment, including payments for lease buyouts |
|
| (2,967) |
|
| (2,809) |
|
| (3,699) |
|
Proceeds from sale of assets |
|
| 85 |
|
| 138 |
|
| 132 |
|
Proceeds on settlement of financial instrument |
|
| 235 |
|
| — |
|
| — |
|
Payments for acquisitions, net of cash acquired |
|
| (197) |
|
| (16) |
|
| (401) |
|
Purchases of stores |
|
| (44) |
|
| — |
|
| — |
|
Net proceeds from sale of business |
|
| 2,169 |
|
| — |
|
| — |
|
Purchases of Ocado securities |
|
| (392) |
|
| — |
|
| — |
|
Other |
|
| (75) |
|
| (20) |
|
| 93 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
| (1,186) |
|
| (2,707) |
|
| (3,875) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
| 2,236 |
|
| 1,523 |
|
| 2,781 |
|
Payments on long-term debt |
|
| (1,372) |
|
| (788) |
|
| (1,355) |
|
Net (payments) borrowings on commercial paper |
|
| (1,321) |
|
| 696 |
|
| 435 |
|
Dividends paid |
|
| (437) |
|
| (443) |
|
| (429) |
|
Proceeds from issuance of capital stock |
|
| 65 |
|
| 51 |
|
| 68 |
|
Treasury stock purchases |
|
| (2,010) |
|
| (1,633) |
|
| (1,766) |
|
Other |
|
| (57) |
|
| (87) |
|
| (86) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
| (2,896) |
|
| (681) |
|
| (352) |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and temporary cash investments |
|
| 82 |
|
| 25 |
|
| 45 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and temporary cash investments: |
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
| 347 |
|
| 322 |
|
| 277 |
|
End of year |
| $ | 429 |
| $ | 347 |
| $ | 322 |
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of capital investments: |
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment, including payments for lease buyouts |
| $ | (2,967) |
| $ | (2,809) |
| $ | (3,699) |
|
Payments for lease buyouts |
|
| 5 |
|
| 13 |
|
| 5 |
|
Changes in construction-in-progress payables |
|
| (56) |
|
| (188) |
|
| 72 |
|
Total capital investments, excluding lease buyouts |
| $ | (3,018) |
| $ | (2,984) |
| $ | (3,622) |
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
| $ | 614 |
| $ | 656 |
| $ | 505 |
|
Cash paid during the year for income taxes |
| $ | 600 |
| $ | 348 |
| $ | 557 |
|
| | | | | | | | | | |
| | | | | | |
| |||
| | 2021 |
| 2020 |
| 2019 | | |||
(In millions) |
| (52 weeks) | | (52 weeks) | | (52 weeks) |
| |||
Cash Flows from Operating Activities: | | | | | | | | | | |
Net earnings including noncontrolling interests | | $ | 1,666 | | $ | 2,588 | | $ | 1,512 | |
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | |
| 2,824 | |
| 2,747 | |
| 2,649 | |
Asset impairment charges | | | 64 | | | 70 | | | 120 | |
Operating lease asset amortization | | | 605 | | | 626 | | | 640 | |
LIFO charge (credit) | |
| 197 | |
| (7) | |
| 105 | |
Share-based employee compensation | |
| 203 | |
| 185 | |
| 155 | |
Company-sponsored pension plans expense (benefits) | |
| 50 | |
| (9) | |
| 39 | |
Deferred income taxes | |
| (31) | |
| 73 | |
| (56) | |
Gain on sale of businesses | | | — | | | — | | | (176) | |
Gain on the sale of assets | | | (44) | | | (59) | | | (158) | |
Loss (gain) on investments | | | 821 | | | (1,105) | | | (157) | |
Loss on deconsolidation and impairment of Lucky's Market | | | — | | | — | | | 412 | |
Other | |
| 64 | |
| 165 | |
| (109) | |
Changes in operating assets and liabilities net of effects from mergers and disposals of business: | | | | | | | | | | |
Store deposits in-transit | |
| 13 | |
| 83 | |
| 3 | |
Receivables | |
| (61) | |
| (90) | |
| (36) | |
Inventories | |
| 80 | |
| 7 | |
| (351) | |
Prepaid and other current assets | |
| 232 | |
| (342) | |
| (33) | |
Trade accounts payable | |
| 438 | |
| 330 | |
| 342 | |
Accrued expenses | |
| 331 | |
| 1,382 | |
| 302 | |
Income taxes receivable and payable | |
| 16 | | | 24 | | | (142) | |
Operating lease liabilities | | | (618) | | | (552) | | | (639) | |
Proceeds from contract associated with sale of business | | | — | |
| — | |
| 295 | |
Other | |
| (660) | |
| 699 | |
| (53) | |
| | | | | | | | | | |
Net cash provided by operating activities | |
| 6,190 | |
| 6,815 | |
| 4,664 | |
| | | | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | |
| (2,614) | |
| (2,865) | |
| (3,128) | |
Proceeds from sale of assets | |
| 153 | | | 165 | | | 273 | |
Net proceeds from sale of businesses | | | — | | | — | | | 327 | |
Other | |
| (150) | |
| (114) | |
| (83) | |
| | | | | | | | | | |
Net cash used by investing activities | |
| (2,611) | |
| (2,814) | |
| (2,611) | |
| | | | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | | | |
Proceeds from issuance of long-term debt | |
| 56 | |
| 1,049 | |
| 813 | |
Payments on long-term debt including obligations under finance leases | |
| (1,442) | | | (747) | | | (2,304) | |
Net (payments) proceeds on commercial paper | |
| — | | | (1,150) | | | 350 | |
Dividends paid | | | (589) | | | (534) | | | (486) | |
Proceeds from issuance of capital stock | | | 172 | |
| 127 | |
| 55 | |
Treasury stock purchases | |
| (1,647) | |
| (1,324) | |
| (465) | |
Proceeds from financing arrangement | | | 166 | | | — | | | — | |
Other | | | (161) | |
| (134) | |
| (46) | |
| | | | | | | | | | |
Net cash used by financing activities | |
| (3,445) | |
| (2,713) | |
| (2,083) | |
| | | | | | | | | | |
Net increase (decrease) in cash and temporary cash investments | |
| 134 | |
| 1,288 | |
| (30) | |
| | | | | | | | | | |
Cash and temporary cash investments: | | | | | | | | | | |
Beginning of year | |
| 1,687 | |
| 399 | |
| 429 | |
End of year | | $ | 1,821 | | $ | 1,687 | | $ | 399 | |
| | | | | | | | | | |
Reconciliation of capital investments: | | | | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | | $ | (2,614) | | $ | (2,865) | | $ | (3,128) | |
Payments for lease buyouts | | | — | |
| 58 | |
| 82 | |
Changes in construction-in-progress payables | |
| (542) | |
| (359) | |
| 2 | |
Total capital investments, excluding lease buyouts | | $ | (3,156) | | $ | (3,166) | | $ | (3,044) | |
| | | | | | | | | | |
Disclosure of cash flow information: | | | | | | | | | | |
Cash paid during the year for interest | | $ | 607 | | $ | 564 | | $ | 523 | |
Cash paid during the year for income taxes | | $ | 513 | | $ | 659 | | $ | 706 | |
The accompanying notes are an integral part of the consolidated financial statements
40
58
THE KROGER CO.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended January 29, 2022, January 30, 2021 and February 2, 2019, February 3, 2018 and January 28, 20171, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
|
| |
|
| |
|
|
|
| |
| Accumulated |
|
| |
|
| |
|
| | |
| | | | | | | Additional | | | | | | | Other | | | | | | | | | | ||
| | Common Stock | | Paid-In | | Treasury Stock | | Comprehensive | | Accumulated | | Noncontrolling | | | | ||||||||||
(In millions, except per share amounts) | | Shares | | Amount | | Capital | | Shares | | Amount | | Income (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 |
| — | |
| — | |
| — |
| (3) | |
| 55 | |
| — | |
| — | |
| — | |
| 55 |
Restricted stock issued |
| — | |
| — | |
| (128) |
| (3) | |
| 92 | |
| — | |
| — | |
| — | |
| (36) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 14 | |
| (400) | |
| — | |
| — | |
| — | |
| (400) |
Stock options exchanged |
| — | |
| — | |
| — |
| 2 | |
| (65) | |
| — | |
| — | |
| — | |
| (65) |
Share-based employee compensation |
| — | |
| — | |
| 155 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 155 |
Other comprehensive loss net of tax of ($47) |
| — | |
| — | |
| — |
| — | |
| — | |
| (294) | |
| — | |
| — | |
| (294) |
Cumulative effect of accounting change (see note 17) | | — | |
| — | | | — |
| — | |
| — | | | — | | | 146 | | | — | | | 146 |
Deconsolidation of Lucky's Market | | — | |
| — | | | — |
| — | |
| — | | | — | | | — | | | 168 | | | 168 |
Other |
| — | |
| — | |
| 65 |
| — | |
| (61) | |
| — | |
| (5) | |
| 1 | |
| — |
Cash dividends declared ($0.62 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (503) | |
| — | | | (503) |
Net earnings (loss) including non-controlling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 1,659 | |
| (147) | |
| 1,512 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
| — | |
| — | |
| — |
| (7) | |
| 127 | |
| — | |
| — | |
| — | |
| 127 |
Restricted stock issued |
| — | |
| — | |
| (134) |
| (3) | |
| 71 | |
| — | |
| — | |
| — | |
| (63) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 36 | |
| (1,196) | |
| — | |
| — | |
| — | |
| (1,196) |
Stock options exchanged |
| — | |
| — | |
| — |
| 4 | |
| (128) | |
| — | |
| — | |
| — | |
| (128) |
Share-based employee compensation |
| — | |
| — | |
| 185 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 185 |
Other comprehensive income net of tax of $1 |
| — | |
| — | |
| — |
| — | |
| — | |
| 10 | |
| — | |
| — | |
| 10 |
Other |
| — | |
| — | |
| 73 |
| — | |
| (74) | |
| — | |
| — | |
| — | |
| (1) |
Cash dividends declared ($0.70 per common share) | | — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (545) | |
| — | |
| (545) |
Net earnings including non-controlling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 2,585 | |
| 3 | |
| 2,588 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at January 30, 2021 |
| 1,918 | | $ | 1,918 | | $ | 3,461 |
| 1,160 | | $ | (18,191) | | $ | (630) | | $ | 23,018 | | $ | (26) | | $ | 9,550 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (7) | |
| 172 | |
| — | |
| — | |
| — | |
| 172 |
Restricted stock issued |
| — | |
| — | |
| (137) |
| (3) | |
| 73 | |
| — | |
| — | |
| — | |
| (64) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 35 | |
| (1,422) | |
| — | |
| — | |
| — | |
| (1,422) |
Stock options exchanged |
| — | |
| — | |
| — |
| 6 | |
| (225) | |
| — | |
| — | |
| — | |
| (225) |
Share-based employee compensation |
| — | |
| — | |
| 203 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 203 |
Other comprehensive income net of tax of $51 |
| — | |
| — | |
| — |
| — | |
| — | |
| 163 | |
| — | |
| — | |
| 163 |
Other |
| — | |
| — | |
| 130 |
| — | |
| (129) | |
| — | |
| — | |
| (8) | |
| (7) |
Cash dividends declared ($0.81 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (607) | |
| — | |
| (607) |
Net earnings including non-controlling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 1,655 | |
| 11 | |
| 1,666 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at January 29, 2022 |
| 1,918 | | $ | 1,918 | | $ | 3,657 |
| 1,191 | | $ | (19,722) | | $ | (467) | | $ | 24,066 | | $ | (23) | | $ | 9,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
| ||
|
| Common Stock |
| Paid-In |
| Treasury Stock |
| Comprehensive |
| Accumulated |
| Noncontrolling |
|
|
| ||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Gain (Loss) |
| Earnings |
| Interest |
| Total | |||||||
Balances at January 30, 2016 |
| 1,918 |
| $ | 1,918 |
| $ | 2,980 |
| 951 |
| $ | (11,409) |
| $ | (680) |
| $ | 14,011 |
| $ | (22) |
| $ | 6,798 |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
| — |
|
| — |
|
| (1) |
| (5) |
|
| 68 |
|
| — |
|
| — |
|
| — |
|
| 67 |
Restricted stock issued |
| — |
|
| — |
|
| (116) |
| (3) |
|
| 57 |
|
| — |
|
| — |
|
| — |
|
| (59) |
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 47 |
|
| (1,661) |
|
| — |
|
| — |
|
| — |
|
| (1,661) |
Stock options exchanged |
| — |
|
| — |
|
| — |
| 4 |
|
| (105) |
|
| — |
|
| — |
|
| — |
|
| (105) |
Share-based employee compensation |
| — |
|
| — |
|
| 141 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 141 |
Other comprehensive loss net of income tax of $(28) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (35) |
|
| — |
|
| — |
|
| (35) |
Other |
| — |
|
| — |
|
| 66 |
| — |
|
| (68) |
|
| — |
|
| — |
|
| 52 |
|
| 50 |
Cash dividends declared ($0.465 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (443) |
|
| — |
|
| (443) |
Net earnings (loss) including non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,975 |
|
| (18) |
|
| 1,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 28, 2017 |
| 1,918 |
| $ | 1,918 |
| $ | 3,070 |
| 994 |
| $ | (13,118) |
| $ | (715) |
| $ | 15,543 |
| $ | 12 |
| $ | 6,710 |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
| — |
|
| — |
|
| — |
| (4) |
|
| 51 |
|
| — |
|
| — |
|
| — |
|
| 51 |
Restricted stock issued |
| — |
|
| — |
|
| (119) |
| (2) |
|
| 85 |
|
| — |
|
| — |
|
| — |
|
| (34) |
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 58 |
|
| (1,567) |
|
| — |
|
| — |
|
| — |
|
| (1,567) |
Stock options exchanged |
| — |
|
| — |
|
| — |
| 2 |
|
| (66) |
|
| — |
|
| — |
|
| — |
|
| (66) |
Share-based employee compensation |
| — |
|
| — |
|
| 151 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 151 |
Other comprehensive gain net of income tax of $87 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 244 |
|
| — |
|
| — |
|
| 244 |
Other |
| — |
|
| — |
|
| 59 |
| — |
|
| (69) |
|
| — |
|
| — |
|
| (20) |
|
| (30) |
Cash dividends declared ($0.495 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (443) |
|
| — |
|
| (443) |
Net earnings (loss) including non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,907 |
|
| (18) |
|
| 1,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 3, 2018 |
| 1,918 |
| $ | 1,918 |
| $ | 3,161 |
| 1,048 |
| $ | (14,684) |
| $ | (471) |
| $ | 17,007 |
| $ | (26) |
| $ | 6,905 |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
| — |
|
| — |
|
| — |
| (4) |
|
| 65 |
|
| — |
|
| — |
|
| — |
|
| 65 |
Restricted stock issued |
| — |
|
| — |
|
| (119) |
| (3) |
|
| 74 |
|
| — |
|
| — |
|
| — |
|
| (45) |
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 76 |
|
| (1,927) |
|
| — |
|
| — |
|
| — |
|
| (1,927) |
Stock options exchanged |
| — |
|
| — |
|
| — |
| 3 |
|
| (83) |
|
| — |
|
| — |
|
| — |
|
| (83) |
Share-based employee compensation |
| — |
|
| — |
|
| 154 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 154 |
Other comprehensive gain net of income tax of $39 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 125 |
|
| — |
|
| — |
|
| 125 |
Other |
| — |
|
| — |
|
| 49 |
| — |
|
| (57) |
|
| — |
|
| — |
|
| 7 |
|
| (1) |
Cash dividends declared ($0.545 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (436) |
|
| — |
|
| (436) |
Net earnings (loss) including non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 3,110 |
|
| (32) |
|
| 3,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 2, 2019 |
| 1,918 |
| $ | 1,918 |
| $ | 3,245 |
| 1,120 |
| $ | (16,612) |
| $ | (346) |
| $ | 19,681 |
| $ | (51) |
| $ | 7,835 |
The accompanying notes are an integral part of the consolidated financial statements.
41
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts in the Notes to Consolidated Financial Statements are in millions except per share amounts.
1. | ACCOUNTING POLICIES |
The following is a summary of the significant accounting policies followed in preparing these financial statements.
Description of Business, Basis of Presentation and Principles of Consolidation
The Kroger Co. (the “Company”) was founded in 1883 and incorporated in 1902. As of February 2, 2019,January 29, 2022, the Company was one of the largest retailers in the world based on annual sales. The Company also manufactures and processes food for sale by its supermarkets.supermarkets and online. The accompanying financial statements include the consolidated accounts of the Company, its wholly-owned subsidiaries and other consolidated entities. Intercompany transactions and balances have been eliminated.
Refer to Note 1917 for a description of changes to the Consolidated Financial Statements of Operations for a recently adopted accounting standardstandards regarding the presentationimplementation costs of the non-service component of company-sponsored pension plan costs.cloud computing arrangements.
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest January 31. The last three fiscal years consist of the 52-week period ended February 2, 2019, 53-week period ended February 3, 2018 and 52-week periodperiods ended January 28, 2017.29, 2022, January 30, 2021 and February 1, 2020.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of consolidated revenues and expenses during the reporting period is also required. Actual results could differ from those estimates.
Cash, Temporary Cash Investments and Book Overdrafts
Cash and temporary cash investments represent store cash and short-term investments with original maturities of less than three months. Book overdrafts are included in “Trade accounts payable” and “Accrued salaries and wages” in the Consolidated Balance Sheets.
Deposits In-Transit
Deposits in-transit generally represent funds deposited to the Company’s bank accounts at the end of the year related to sales, a majority of which were paid for with debit cards, credit cards and checks, to which the Company does not have immediate access but settle within a few days of the sales transaction.
42
Inventories
Inventories
Inventories are stated at the lower of cost (principally on a last-in, first-out “LIFO” basis) or market. In total, approximately 90%91% of inventories in 20182021 and 93%92% of inventories in 20172020 were valued using the LIFO method. The remaining inventories, including substantially all fuel inventories, are stated at the lower of cost (on a FIFO basis) or net realizable value. Replacement cost was higher than the carrying amount by $1,277$1,570 at February 2, 2019January 29, 2022 and $1,248$1,373 at February 3, 2018.January 30, 2021. The Company follows the Link-Chain, Dollar-Value LIFO method for purposes of calculating its LIFO charge or credit. During 2020, the Company had a LIFO liquidation primarily related to pharmacy inventory. The liquidated inventory was carried at lower costs prevailing in prior years as compared with current costs. The effect of this reduction in inventory decreased “Merchandise costs” by approximately $76, $58 net of tax.
60
The item-cost method of accounting to determine inventory cost before the LIFO adjustment is followed for substantially all store inventories at the Company’s supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory. In addition, substantially all of the Company’s inventory consists of finished goods and is recorded at actual purchase costs (net of vendor allowances and cash discounts).
The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the financial statement date.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost or, in the case of assets acquired in a business combination, at fair value. Depreciation and amortization expense, which includes the depreciation of assets recorded under capitalfinance leases, is computed principally using the straight-line method over the estimated useful lives of individual assets. Buildings and land improvements are depreciated based on lives varying from 10 to 40 years. All new purchases of store equipment are assigned lives varying from three to nine years. Leasehold improvements are amortized over the shorter of the lease term to which they relate, which generally varies from four to 25 years, or the useful life of the asset. Food production plant, fulfillment center and distribution center equipment is depreciated over lives varying from three to 15 years. Information technology assets are generally depreciated over three to five years. Depreciation and amortization expense was $2,465$2,824 in 2018, $2,4362021, $2,747 in 20172020 and $2,340$2,649 in 2016.2019.
Interest costs on significant projects constructed for the Company’s own use are capitalized as part of the costs of the newly constructed facilities. Upon retirement or disposal of assets, the cost and related accumulated depreciation and amortization are removed from the balance sheet and any gain or loss is reflected in net earnings. Refer to Note 43 for further information regarding the Company’s property, plant and equipment.
Deferred RentLeases
The Company recognizes rent holidays, includingleases certain store real estate, warehouses, distribution centers, fulfillment centers, office space and equipment. The Company determines if an arrangement is a lease at inception. Finance and operating lease assets and liabilities are recognized at the time period during whichlease commencement date. Finance and operating lease liabilities represent the present value of minimum lease payments not yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments, lease incentives and impairment, if any. To determine the present value of lease payments, the Company has accessestimates an incremental borrowing rate which represents the rate used for a secured borrowing of a similar term as the lease.
Lease terms generally range from 10 to 20 years with options to renew for varyingterms at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option. 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 for construction of buildingstaxes, utilities or improvementsinsurance and escalating rent provisionsmaintenance. Operating lease payments are charged on a straight-line basis to rent expense over the lease term ofand finance lease payments are charged to interest expense and depreciation and amortization expense over the lease. The deferred amount is includedlease term. Assets under finance leases are amortized in “Other current liabilities” and “Other long-term liabilities” onaccordance with the Company’s normal depreciation policy for owned assets or over the lease term, if shorter. The Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants. For additional information on leases, see Note 9 to the Consolidated Balance Sheets.Financial Statements.
61
Goodwill
Goodwill
The Company reviews goodwill for impairment during the fourth quarter of each year, and alsoor earlier upon the occurrence of a triggering event. The Company performs reviews of each of its operating divisions and other consolidated entities (collectively, “reporting units”) that have goodwill balances. Generally, fair value is determined using a market multiple of earnings,model, or discounted projected future cash flows, and is compared to the carrying value of a reporting unit for purposes of identifying potential impairment. Projected future cash flows are based on management’s knowledge of the current operating environment and expectations for the future. Goodwill impairment is recognized for any excess of the reporting unit’s carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Results of the goodwill impairment reviews performed during 2018, 20172021, 2020 and 20162019 are summarized in Note 3.2.
43
Impairment of Long-Lived Assets
The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a triggering event occurs, an impairment calculation is performed, comparing projected undiscounted future cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If the Company identifies impairment for long-lived assets to be held and used, the Company compares the assets’ current carrying value to the assets’ fair value. Fair value is based on current market values or discounted future cash flows. The Company records impairment when the carrying value exceeds fair market value. With respect to owned property and equipment held for disposal, the value of the property and equipment is adjusted to reflect recoverable values based on previous efforts to dispose of similar assets and current economic conditions. Impairment is recognized for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. The Company recorded asset impairments totaling $64, $70 and $120 in 2021, 2020 and 2019, respectively. The decrease in the normal course2021 and 2020 impairment charges, compared to 2019, was the result of business totaling $56, $71 and $2635 planned store closures in 2018, 2017 and 2016, respectively.2020 recognized in 2019. Costs to reduce the carrying value of long-lived assets for each of the years presented have been included in the Consolidated Statements of Operations as Operating, general and administrative (“OG&A”) expense.
Accounts Payable Financing Arrangement
The Company has an agreement with a third party to provide an accounts payable tracking system which facilitates participating suppliers’ ability to finance payment obligations from the Company with designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not affected byby suppliers’ decisions to finance amounts under this arrangement. These obligations are included in “Other current liabilities” in the Consolidated Balance Sheets.
Contingent Consideration
Certain CompanyThe Company’s Home Chef business combinations involvecombination involves potential payment of future consideration that is contingent upon the achievement of certain performance milestones. The Company recordsrecorded contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred, estimated as the probability-weighted future cash flows, discounted back to present value using a discount rate determined in accordance with accepted valuation methods. The liability for contingent consideration is remeasured to fair value at each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized in earnings until the contingency is resolved. In 2018, an adjustment2021 and 2020, adjustments to increase the contingent consideration liability as of year-end 2018were recorded for $66 and $189, respectively, in OG&A expense. In 2019, an adjustment to decrease the contingent consideration liability as of year-end 2019 was recorded for $33($69) in OG&A expense.
62
Store Closing Costs
The Company provides for closedregularly evaluates the performance of its stores and periodically closes those stores that are underperforming. Related liabilities arise, such as severance, contractual obligations and other accruals associated with store liabilities relating to the present value of the estimated remaining non-cancellable lease payments after the closing date, net of estimated subtenant income.closings. The Company estimates the net lease liabilities usingrecords a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease termsliability for costs associated with an exit or disposal activity when the closed stores, which generally have remaining terms ranging from one to 20 years.liability is incurred, usually in the period the store closes. Adjustments to closed store liabilities primarily relate to changes in subtenant income and actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known. Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs is adjusted to income in the proper period.
Owned stores held for disposal are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, plant, equipment and leasehold improvementsoperating lease assets are accounted for in accordance with the Company’s policy on impairment of long-lived assets. Inventory write-downs, if any, in connection with store closings, are classified in the Consolidated Statements of Operations as “Merchandise costs.”costs”. Costs to transfer inventory and equipment from closed stores are expensed as incurred.
The current portion of the future lease obligations of stores is included in “Other current liabilities,” and the long-term portion is included in “Other long-term liabilities” in the Consolidated Balance Sheets.
44
Interest Rate Risk Management
The Company uses derivative instruments primarily to manage its exposure to changes in interest rates. The Company’s current program relative to interest rate protection and the methods by which the Company accounts for its derivative instruments are described in Note 7.6.
Benefit Plans and Multi-Employer Pension Plans
The Company recognizes the funded status of its retirement plans on the Consolidated Balance Sheets. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized as part of net periodic benefit cost are required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). The Company has elected to measure defined benefit plan assets and obligations as of January 31, which is the month-end that is closest to its fiscal year-ends, which were February 2, 2019January 29, 2022 for fiscal 20182021 and February 3, 2018January 30, 2021 for fiscal 2017.2020.
The determination of the obligation and expense for company-sponsored pension plans and other post-retirement benefits is dependent on the selection of assumptions used by actuaries and the Company in calculating those amounts. Those assumptions are described in Note 1514 and include, among others, the discount rate, the expected long-term rate of return on plan assets, mortality and the rates of increase in compensation and health care costs. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the pension and other post-retirement obligations and future expense.
The Company also participates in various multi-employer plans for substantially all union employees. Pension expense for these plans is recognized as contributions are funded or when commitments are probable and reasonably estimable, in accordance with GAAP. Refer to Note 1615 for additional information regarding the Company’s participation in these various multi-employer pension plans.
The Company administers and makes contributions to the employee 401(k) retirement savings accounts. Contributions to the employee 401(k) retirement savings accounts are expensed when contributed or over the service period in the case of automatic contributions. Refer to Note 1514 for additional information regarding the Company’s benefit plans.
63
Share Based Compensation
The Company accounts for stock options under fair value recognition provisions. Under this method, the Company recognizes compensation expense for all share-based payments granted.granted under fair value recognition provisions. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.award based on the fair value at the date of the grant. The Company grants options for common shares (“stock options”) to employees under various plans at an option price equal to the fair market value of the stock option at the date of grant. Stock options typically expire 10 years from the date of grant. Stock options vest between one and five years from the date of grant. In addition to stock options, the Company records expenseawards restricted stock to employees and nonemployee directors under various plans. The restrictions on these awards generally lapse between one and five years from the date of the awards. The Company determines the fair value for restricted stock awards in an amount equal to the fair market value of the underlying stockshares on the grant date of the award, over the period the awards lapse. Excess tax benefits related to share-based payments are recognized in the provision for income taxes. Refer to Note 12 for additional information regarding the Company’s stock based compensation.award.
Deferred Income Taxes
Deferred income taxes are recorded to reflect the tax consequences of differences between the tax basis of assets and liabilities and their financial reporting basis. Refer to Note 54 for the types of differences that give rise to significant portions of deferred income tax assets and liabilities.
Uncertain Tax Positions
The Company reviews the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in its consolidated financial statements. Refer to Note 54 for the amount of unrecognized tax benefits and other related disclosures related to uncertain tax positions.
45
Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. As of February 2, 2019,January 29, 2022, the Internal Revenue Service had concluded its examination of our 2012 and 2013all federal tax returns. returns up to and including the return for the year ended February 3, 2018.
The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Self-Insurance Costs
The Company is primarily self-insured for costs related to workers’ compensation and general liability claims. Liabilities are actuarially determined and are recognized based on claims filed and an estimate of claims incurred but not reported. The liabilities for workers’ compensation claims are accounted for on a present value basis. The Company has purchased stop-loss coverage to limit its exposure to any significant exposure on a per claim basis. The Company is insured for covered costs in excess of these per claim limits.
The following table summarizes the changes in the Company’s self-insurance liability through February 2, 2019.January 29, 2022:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2018 |
| 2017 |
| 2016 |
| |||||||||||||
| | | | | | | | | | | ||||||||||
|
| 2021 |
| 2020 |
| 2019 |
| |||||||||||||
Beginning balance |
| $ | 695 |
| $ | 682 |
| $ | 639 |
| | $ | 731 | | $ | 689 | | $ | 696 | |
Expense |
|
| 229 |
|
| 247 |
|
| 263 |
| |
| 226 | |
| 262 | |
| 209 | |
Claim payments |
|
| (228) |
|
| (234) |
|
| (220) |
| |
| (236) | |
| (220) | |
| (216) | |
Ending balance |
|
| 696 |
|
| 695 |
|
| 682 |
| |
| 721 | |
| 731 | |
| 689 | |
Less: Current portion |
|
| (228) |
|
| (234) |
|
| (229) |
| |
| (236) | |
| (220) | |
| (216) | |
Long-term portion |
| $ | 468 |
| $ | 461 |
| $ | 453 |
| | $ | 485 | | $ | 511 | | $ | 473 | |
The current portion of the self-insured liability is included in “Other current liabilities,” and the long-term portion is included in “Other long-term liabilities” in the Consolidated Balance Sheets.
64
The Company maintains surety bonds related to self-insured workers’ compensation claims. These bonds are required by most states in which the Company is self-insured for workers’ compensation and are placed with third-party insurance providers to insure payment of the Company’s obligations in the event the Company is unable to meet its claim payment obligations up to its self-insured retention levels. These bonds do not represent liabilities of the Company, as the Company has recorded reserves for the claim costs.
The Company is similarly self-insuredalso maintains insurance coverages for some risks, including cyber exposure and property-related losses. The Company maintains stop lossCompany’s insurance coverage begins for these exposures ranging from $25 to limit its property loss exposures including coverage for earthquake, wind, flood and other catastrophic events.$50.
46
Revenue Recognition
Sales
The Company recognizes revenues from the retail sale of products, net of sales taxes, at the point ofsale. Pharmacy sales are recorded when the product isprovided tothe customer. Digital channel originated sales are recognized either upon pickup in store or upon delivery to the customer. Amounts billed to a customer related to shipping and may includedelivery represent revenues earned for the goods provided and are classified as sales. When shipping revenue. is discounted, it is recorded as an adjustment to sales. Discounts providedto customers by the Company at the time of sale, including thoseprovidedin connection with loyalty cards, are recognized as a reduction in sales as the products are sold.Discounts provided by vendors, usually inthe formof paper coupons, are not recognized as a reduction insales providedthe couponsare redeemable at any retailer that accepts coupons.The Company records a receivable fromthe vendorfor the difference in sales price and cash received.For merchandise sold in one of the Company’s stores or online, tender is accepted at the point of sale. The Company acts as principal in certain vendor arrangements where the purchase and sale of inventory are virtually simultaneous. The Company records revenue and related costs on a gross basis for these arrangements. Effective February 4, 2018, the Company prospectively reclassified certain pharmacy fees of $250 for 2018 from merchandise costs to be recorded as a reduction to sales on the Company’s Consolidated Statements of Operations. For pharmacy sales, collection of third partythird-party receivables is typically expected within three months or less from the time of purchase. The third-party receivables from pharmacy sales are recorded in Receivables in the Company’s Consolidated Balance Sheets and were $645$774 as of February 2, 2019January 29, 2022 and $571$672 as of February 3, 2018.January 30, 2021.
Gift Cards and Gift Certificates
The Company doesnotrecognize a sale revenue whenit sells its own gift cardsandgift certificates (collectively “gift cards”).Rather, it records a deferred revenue liability equal to the amount received.A sale is thenrecognized when the gift cards areredeemedto purchase the Company’sproducts. The Company’s gift cards do not expire. While gift cards are generally redeemed within 12 months, some are never fully redeemed. The Companyrecognizes gift card breakage under the proportionalmethod,where recognition of breakage income is basedupon the historical run-offrateof unredeemed gift cards. The Company’s gift card deferred revenue liability was $100$185 as of February 2, 2019January 29, 2022 and $90$160 as of February 3, 2018.January 30, 2021.
65
Disaggregated Revenues
Thefollowing table presents sales revenueby type of product for the year-ended January 29, 2022, January 30, 2021, and February 2, 2019, February 3, 2018, and January 28, 2017:1, 2020:
| | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| |||||||||
|
| Amount |
| % of total |
| Amount |
| % of total |
| Amount |
| % of total |
| |||
Non Perishable(1) | | $ | 69,648 |
| 50.6 | % | $ | 71,434 |
| 53.9 | % | $ | 61,464 |
| 50.3 | % |
Fresh(2) | |
| 33,972 |
| 24.6 | % |
| 33,449 |
| 25.2 | % |
| 29,452 |
| 24.1 | % |
Supermarket Fuel | |
| 14,678 |
| 10.6 | % |
| 9,486 |
| 7.2 | % |
| 14,052 |
| 11.5 | % |
Pharmacy | |
| 12,401 |
| 9.0 | % |
| 11,388 |
| 8.6 | % |
| 11,015 |
| 9.0 | % |
Other(3) | |
| 7,189 |
| 5.2 | % |
| 6,741 |
| 5.1 | % |
| 6,303 |
| 5.1 | % |
| | | | | | | | | | | | | | | | |
Total Sales | | $ | 137,888 |
| 100 | % | $ | 132,498 |
| 100 | % | $ | 122,286 |
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2018 |
| 2017 |
| 2016 |
| |||||||||
|
| Amount |
| % of total |
| Amount |
| % of total |
| Amount |
| % of total |
| |||
Non Perishable (1)(5) |
| $ | 60,649 |
| 50.1 | % | $ | 60,872 |
| 49.6 | % | $ | 58,828 |
| 51.0 | % |
Fresh (2)(5) |
|
| 29,089 |
| 24.0 | % |
| 29,141 |
| 23.8 | % |
| 27,666 |
| 24.0 | % |
Supermarket Fuel |
|
| 14,903 |
| 12.3 | % |
| 13,177 |
| 10.7 | % |
| 11,286 |
| 9.8 | % |
Pharmacy (5) |
|
| 10,617 |
| 8.8 | % |
| 10,724 |
| 8.7 | % |
| 10,421 |
| 9.0 | % |
Convenience Stores (3) |
|
| 944 |
| 0.8 | % |
| 4,515 |
| 3.7 | % |
| 4,096 |
| 3.6 | % |
Other (4)(5) |
|
| 4,959 |
| 4.0 | % |
| 4,233 |
| 3.5 | % |
| 3,040 |
| 2.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
| $ | 121,162 |
| 100 | % | $ | 122,662 |
| 100 | % | $ | 115,337 |
| 100 | % |
(1) | Consists primarily of grocery, generalmerchandise, health and beauty careand naturalfoods. |
(2) | Consists primarily of produce,floral,meat,seafood, deli, bakery andfresh prepared. |
(3) |
|
|
|
|
|
47
Merchandise Costs
The “Merchandise costs” line item of the Consolidated Statements of Operations includes product costs, net of discounts and allowances; advertising costs (see separate discussion below); inbound freight charges; warehousing costs, including receiving and inspection costs; transportation costs; and food production and operational costs. Warehousing, transportation and manufacturing management salaries are also included in the “Merchandise costs” line item; however, purchasing management salaries and administration costs are included in the OG&A line item along with most of the Company’s other managerial and administrative costs. Shipping and delivery costs associated with the Company’s digital offerings originating from non-retail store locations are included in the “Merchandise costs” line item. Rent expense and depreciation and amortization expense are shown separately in the Consolidated Statements of Operations.
Warehousing and transportation costs include distribution center direct wages, transportation direct wages, repairs and maintenance, utilities, inbound freight and, where applicable, third partythird-party warehouse management fees. These costs are recognized in the periods the related expenses are incurred.
The Company believes the classification of costs included in merchandise costs could vary widely throughout the industry. The Company’s approach is to include in the “Merchandise costs” line item the direct, net costs of acquiring products and making them available to customers in its stores.customers. The Company believes this approach most accurately presents the actual costs of products sold.
The Company recognizes all vendor allowances as a reduction in merchandise costs when the related product is sold. When possible, vendor allowances are applied to the related product cost by item and, therefore, reduce the carrying value of inventory by item. When the items are sold, the vendor allowance is recognized. When it is not possible, due to systems constraints, to allocate vendor allowances to the product by item, vendor allowances are recognized as a reduction in merchandise costs based on inventory turns and, therefore, recognized as the product is sold.
Advertising Costs
The Company’s advertising costs are recognized in the periods the related expenses are incurred and are included in the “Merchandise costs” line item of the Consolidated Statements of Operations. The Company’s advertising costs totaled $752$984 in 2018, $7072021, $888 in 20172020 and $717$854 in 2016.2019. The Company does not record vendor allowances for co-operative advertising as a reduction of advertising expense.
66
Operating, General and Administrative Expenses
OG&A expenses include all operatingconsist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utilities, and credit card fees. Shipping and delivery costs associated with the Company's digital offerings originating from retail store locations, including third-party delivery fees, are included in the “OG&A” line item of the Company, except merchandise costs, as described above, and rent andConsolidated Statements of Operations. Rent expense, depreciation and amortization. Certain other income itemsamortization expense and interest expense are classified as a reductionshown separately in the Consolidated Statement of OG&A costs. These include items such as gift card and lottery commissions, coupon processing and vending machine fees, check cashing, money order and wire transfer fees, and baled salvage credits.Operations.
Consolidated Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be temporary cash investments.
48
Segments
Segments
The Company operates supermarkets, multi-department stores and fulfillment centers throughout the United States. The Company’s retail operations, which represent 97% of the Company’s consolidated sales, are its only reportable segment. The Company’sCompany aggregates its operating divisions have been aggregated into one1 reportable segment due to the operating divisions having similar economic characteristics with similar long-term financial performance. In addition, the Company’s operating divisions offer customers similar products, have similar distribution methods, operate in similar regulatory environments, purchase the majority of the merchandise for retail sale from similar (and in many cases identical) vendors on a coordinated basis from a centralized location, serve similar types of customers, and are allocated capital from a centralized location. Operating divisions are organized primarily on a geographical basis so that the operating division management team can be responsive to local needs of the operating division and can execute company strategic plans and initiatives throughout the locations in thetheir operating division. This geographical separation is the primary differentiation between these retail operating divisions. The geographical basis of organization reflects how the business is managed and how the Company’s Chief Executive Officer, who acts as the Company’s chief operating decision maker, assesses performance internally. All of the Company’s operations are domestic.
2.MERGERS AND PARTNERSHIP AGREEMENTS
2. | GOODWILL AND INTANGIBLE ASSETS |
Merger Agreement
On June 22, 2018, the Company finalized the merger with Home Chef, a meal kit delivery company. The merger will allow the Company to increase the availability of meal kits and expand its offerings to customers. The Company completed the merger by purchasing 100% of the ownership interest in Home Chef, for $197 net of cash and cash equivalents of $30, in addition to future earnout payments of up to $500 over five years that are contingent on achieving certain milestones. The contingent consideration is based on future performance of both the online and offline business and the related customer engagement. The fair value of the earnout liability in the amount of $91 recognized on the acquisition date was measured using unobservable (Level 3) inputs and is included in “Other long-term liabilities” within the Consolidated Balance Sheet. The Company estimated the fair value of the earnout liability by applying a Monte-Carlo simulation method using the Company’s projection of future operating results for both the online and offline businesses related to the Home Chef merger and the estimated probability of achievement of the earnout target metrics. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of valuation paths in order to develop a reasonable estimate of the fair value of the earnout liability. Changes in the fair value of the earnout liability in future periods will be recorded in the Company’s results in the period of the change.
The merger was accounted for under the purchase method of accounting and was financed through the issuance of commercial paper. In a business combination, the purchase price is allocated to assets acquired and liabilities assumed based on their fair values, with any excess of purchase price over fair value recognized as goodwill. In addition to recognizing assets and liabilities on the acquired company’s balance sheet, the Company reviews supply contracts, leases, financial instruments, employment agreements and other significant agreements to identify potential assets or liabilities that require recognition in connection with the application of acquisition accounting under Accounting Standards Codification (“ASC”) 805. Intangible assets are recognized apart from goodwill when the asset arises from contractual or other legal rights, or are separable from the acquired entity such that they may be sold, transferred, licensed, rented or exchanged either on a standalone basis or in combination with a related contract, asset or liability.
49
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date.
|
|
|
|
|
| June 22, | |
|
| 2018 | |
ASSETS |
|
|
|
Total current assets |
| $ | 36 |
|
|
|
|
Property, plant and equipment |
|
| 6 |
Other assets |
|
| 1 |
Intangibles |
|
| 143 |
|
|
|
|
Total Assets, excluding Goodwill |
|
| 186 |
|
|
|
|
LIABILITIES |
|
|
|
Total current liabilities |
|
| (28) |
|
|
|
|
Other long-term liabilities |
|
| (94) |
|
|
|
|
Total Liabilities |
|
| (122) |
|
|
|
|
Total Identifiable Net Assets |
|
| 64 |
Goodwill |
|
| 163 |
Total Purchase Price |
| $ | 227 |
The preliminary purchase price allocation for the Home Chef acquisition is based upon a preliminary valuation which is subject to change as the Company obtains additional information with respect to income taxes during the measurement period. The allocation will be completed by the second quarter of 2019.
Of the $143 allocated to intangible assets, the Company recorded $99 and $44 related to customer relationships and the trade name, respectively. The Company will amortize the customer relationships, using the cash flow trended method over seven years. The goodwill recorded as part of the merger was attributable to the assembled workforce of Home Chef and operational synergies expected from the merger. The merger was treated as a 30% stock purchase and 70% partnership interest purchase for income tax purposes. The tax basis of the assets acquired and liabilities assumed for the portion of the transaction treated as a partnership interest purchase was stepped up, and the related goodwill is deductible for tax purposes. The assets acquired and liabilities assumed for the portion treated as a stock purchase did not result in a step up of tax basis, and goodwill is not expected to be deductible for tax purposes. The Company determined the Home Chef results of operations are not material. Therefore the pro forma information is not required for fiscal year 2018 and 2017.
On September 2, 2016, the Company closed its merger with Modern HC Holdings, Inc. (“ModernHEALTH”) by purchasing 100% of the outstanding shares of ModernHEALTH for $407. This merger allows the Company to expand its specialty pharmacy services by significantly increasing geographic reach and patient therapies. The merger was accounted for under the purchase method of accounting and was financed through the issuance of commercial paper.
The Company’s purchase price allocation was finalized in the third quarter of 2017. The changes in the fair values assumed from the preliminary amounts determinedgoodwill balance as of September 2, 2016January 29, 2022 and January 30, 2021 was $3,076. Gross goodwill and accumulated impaired losses were a decrease in goodwill$5,737 and $2,661, respectively, as of $2, a decrease in current liabilities of $2. The table below summarizes the final fair value of the assets acquiredJanuary 29, 2022 and liabilities assumed: January 30, 2021.
50
|
|
|
|
|
|
| September 2, |
| |
|
| 2016 |
| |
ASSETS |
|
|
|
|
Total current assets |
| $ | 82 |
|
|
|
|
|
|
Property, plant and equipment |
|
| 8 |
|
Intangibles |
|
| 136 |
|
|
|
|
|
|
Total Assets, excluding Goodwill |
|
| 226 |
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Total current liabilities |
|
| (68) |
|
|
|
|
|
|
Fair-value of long-term debt including obligations under capital leases and financing obligations |
|
| (1) |
|
Deferred income taxes |
|
| (33) |
|
|
|
|
|
|
Total Liabilities |
|
| (102) |
|
|
|
|
|
|
Total Identifiable Net Assets |
|
| 124 |
|
Goodwill |
|
| 283 |
|
Total Purchase Price |
| $ | 407 |
|
Of the $136 allocated to intangible assets, the Company recorded $131 and $5 related to pharmacy prescription files and distribution agreements, respectively. The Company will amortize the pharmacy prescription files and distribution agreements, using the straight line method, over 10 years. The goodwill recorded as part of the merger was attributable to the assembled workforce of ModernHEALTH and operational synergies expected from the merger, as well as any intangible assets that did not qualify for separate recognition. The merger was treated as a stock purchase for income tax purposes. The assets acquired and liabilities assumed as part of the merger did not result in a step up of tax basis and goodwill is not expected to be deductible for tax purposes.
Partnership Agreement
On May 17, 2018, the Company entered into a Partnership Framework Agreement with Ocado International Holdings Limited and Ocado Group plc (“Ocado”). Under this agreement, Ocado will partner exclusively with the Company in the U.S., enhancing the Company’s digital and robotics capabilities in its distribution networks. As part of the agreement, the Company provided a letter of credit for $180, which supports its commitment to contract with Ocado to build a number of fulfilment centers. The balance of the letter of credit will reduce over time with the construction of each fulfilment center.
In addition, on May 17, 2018, the Company entered into a Share Subscription Agreement with Ocado, pursuant to which the Company agreed to purchase 33.1 million ordinary shares of Ocado for an aggregate purchase price of $243. The Company completed the purchase of these 33.1 million shares on May 29, 2018. This is in addition to 8.1 million Ocado shares purchased earlier in the first quarter of 2018, and 6.5 million additional shares purchased in the second quarter of 2018. The equity investment in Ocado is measured at fair value through earnings. The fair value of all shares owned, which is measured using Level 1 inputs, was $620 at February 2, 2019 and is included in “Other assets” in the Company’s Consolidated Balance Sheets. The Company recorded an unrealized gain of $228 in 2018, none of which was realized during the period as the Company did not sell any Ocado securities.
51
3.GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the changes in the Company’s net goodwill balance through February 2, 2019.
|
|
|
|
|
|
|
|
|
| 2018 |
| 2017 |
| ||
Balance beginning of year |
|
|
|
|
|
|
|
Goodwill |
| $ | 5,567 |
| $ | 5,563 |
|
Accumulated impairment losses |
|
| (2,642) |
|
| (2,532) |
|
Subtotal |
|
| 2,925 |
|
| 3,031 |
|
|
|
|
|
|
|
|
|
Activity during the year |
|
|
|
|
|
|
|
Mergers |
|
| 163 |
|
| 18 |
|
Impairment losses |
|
| — |
|
| (110) |
|
Held for sale adjustment |
|
| (1) |
|
| (14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of year |
|
|
|
|
|
|
|
Goodwill |
|
| 5,729 |
|
| 5,567 |
|
Accumulated impairment losses |
|
| (2,642) |
|
| (2,642) |
|
Total Goodwill |
| $ | 3,087 |
| $ | 2,925 |
|
In 2018, the Company acquired all of the outstanding shares of Home Chef (see Note 2) resulting in additional goodwill totaling $163. Certain assets and liabilities including goodwill totaling $1 and $14, respectively for 2018 and 2017 were classified as held for sale in the Consolidated Balance Sheet (see Note 17).
Testing for impairment must beis performed annually, or on an interim basis upon the occurrence of a triggering event or a change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The annual evaluation of goodwill and indefinite-lived intangible assets was performed during the fourth quarter of 20182021, 2020 and 20162019 and did not result in impairment.
Based on the results of the Company’s impairment assessment in the fourth quarter of 2017, the Kroger Specialty Pharmacy reporting unit was the only reporting unit for which there was a potential impairment. In the fourth quarter of 2017, the operating performance of the Kroger Specialty Pharmacy reporting unit began to be affected by reduced margins as a result of compression in reimbursement by third party payers and a reduction of certain types of revenue. As a result of this decline, particularly in future expected cash flows, along with comparable fair value information, management concluded that the carrying value of goodwill for Kroger Specialty Pharmacy reporting unit exceeded its fair value, resulting in a pre-tax impairment charge of $110 ($74 after-tax). The pre-impairment goodwill balance for Kroger Specialty Pharmacy was $353, as of the fourth quarter 2017.
The following table summarizes the Company’s intangible assets balance through February 2, 2019.January 29, 2022:
| | | | | | | | | | | | | |
| | 2021 | | 2020 |
| ||||||||
|
| Gross carrying |
| Accumulated |
| Gross carrying |
| Accumulated |
| ||||
| | amount | | amortization(1) | | amount | | amortization(1) |
| ||||
Definite-lived pharmacy prescription files | | $ | 317 | | $ | (199) | | $ | 315 | | $ | (167) | |
Definite-lived customer relationships | | | 186 | | | (160) | | | 186 | | | (143) | |
Definite-lived other | |
| 111 | |
| (88) | |
| 110 | |
| (78) | |
Indefinite-lived trade name | |
| 685 | |
| — | |
| 685 | |
| — | |
Indefinite-lived liquor licenses | |
| 90 | |
| — | |
| 89 | |
| — | |
| | | | | | | | | | | | | |
Total | | $ | 1,389 | | $ | (447) | | $ | 1,385 | | $ | (388) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2018 |
| 2017 |
| ||||||||
|
| Gross carrying |
| Accumulated |
| Gross carrying |
| Accumulated |
| ||||
|
| amount |
| amortization(1) |
| amount |
| amortization(1) |
| ||||
Definite-lived favorable leasehold interests |
| $ | 160 |
| $ | (47) |
| $ | 174 |
| $ | (53) |
|
Definite-lived pharmacy prescription files |
|
| 316 |
|
| (92) |
|
| 238 |
|
| (70) |
|
Definite-lived customer relationships |
|
| 186 |
|
| (88) |
|
| 93 |
|
| (67) |
|
Definite-lived other |
|
| 103 |
|
| (55) |
|
| 99 |
|
| (44) |
|
Indefinite-lived trade name |
|
| 685 |
|
| — |
|
| 641 |
|
| — |
|
Indefinite-lived liquor licenses |
|
| 90 |
|
| — |
|
| 89 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 1,540 |
| $ | (282) |
| $ | 1,334 |
| $ | (234) |
|
(1) |
|
|
52
67
In 2018, the Company acquired definite and indefinite lived intangible assets totaling approximately $143, excluding goodwill, as a result of the merger with Home Chef (see Note 2). Additionally, the majority of the Company’s pharmacy prescription file purchases for 2018 were completed in a single transaction for $75.
Amortization expense associated with intangible assets totaled approximately $80, $59, $67 and $63,$85, during fiscal years 2018, 20172021, 2020 and 2016,2019, respectively. Future amortization expense associated with the net carrying amount of definite-lived intangible assets for the years subsequent to 20182021 is estimated to be approximately:
|
|
|
| |||
2019 |
| $ | 87 | |||
2020 |
|
| 83 | |||
2021 |
|
| 67 | |||
| | | | |||
2022 |
|
| 59 |
| $ | 51 |
2023 |
|
| 47 | |
| 39 |
2024 | |
| 34 | |||
2025 | |
| 31 | |||
2026 | |
| 10 | |||
Thereafter |
|
| 140 | |
| 2 |
|
|
|
| |||
| | | | |||
Total future estimated amortization associated with definite-lived intangible assets |
| $ | 483 | | $ | 167 |
3. | PROPERTY, PLANT AND EQUIPMENT, NET |
4.PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
|
|
|
|
|
|
|
| |||||||
|
| 2018 |
| 2017 |
| |||||||||
| | | | | | | | |||||||
|
| 2021 |
| 2020 |
| |||||||||
Land |
| $ | 3,254 |
| $ | 3,201 |
| | $ | 3,395 | | $ | 3,373 | |
Buildings and land improvements |
|
| 12,245 |
|
| 12,072 |
| |
| 13,996 | |
| 13,149 | |
Equipment |
|
| 14,277 |
|
| 13,635 |
| |
| 15,951 | |
| 14,928 | |
Leasehold improvements |
|
| 10,306 |
|
| 9,773 |
| |
| 10,775 | |
| 10,516 | |
Construction-in-progress |
|
| 2,716 |
|
| 2,050 |
| |
| 3,831 | |
| 2,892 | |
Leased property under capital leases and financing obligations |
|
| 1,066 |
|
| 1,000 |
| |||||||
|
|
|
|
|
|
|
| |||||||
Leased property under finance leases | |
| 1,939 | |
| 1,165 | | |||||||
| | | | | | | | |||||||
Total property, plant and equipment |
|
| 43,864 |
|
| 41,731 |
| |
| 49,887 | |
| 46,023 | |
Accumulated depreciation and amortization |
|
| (22,229) |
|
| (20,660) |
| |
| (26,098) | |
| (23,637) | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Property, plant and equipment, net |
| $ | 21,635 |
| $ | 21,071 |
| | $ | 23,789 | | $ | 22,386 | |
Accumulated depreciation and amortization for leased property under capitalfinance leases was $345$414 at February 2, 2019January 29, 2022 and $354$321 at February 3, 2018.January 30, 2021.
Approximately $169$136 and $177,$152, net book value, of property, plant and equipment collateralized certain mortgages at February 2, 2019January 29, 2022 and February 3, 2018,January 30, 2021, respectively.
53
68
4. | TAXES BASED ON INCOME |
The provision for taxes based on income consists of:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2018 |
| 2017 |
| 2016 |
| |||||||||||||
| | | | | �� | | | | | | ||||||||||
|
| 2021 |
| 2020 |
| 2019 |
| |||||||||||||
Federal |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Current |
| $ | 775 |
| $ | 309 |
| $ | 721 |
| | $ | 349 | | $ | 577 | | $ | 454 | |
Deferred |
|
| (3) |
|
| (747) |
|
| 158 |
| |
| (46) | |
| 75 | |
| (50) | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
Subtotal federal |
|
| 772 |
|
| (438) |
|
| 879 |
| |
| 303 | |
| 652 | |
| 404 | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
State and local |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Current |
|
| 108 |
|
| 15 |
|
| 51 |
| |
| 67 | |
| 133 | |
| 70 | |
Deferred |
|
| 20 |
|
| 18 |
|
| 27 |
| |
| 15 | |
| (3) | |
| (5) | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
Subtotal state and local |
|
| 128 |
|
| 33 |
|
| 78 |
| |
| 82 | |
| 130 | |
| 65 | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
Total |
| $ | 900 |
| $ | (405) |
| $ | 957 |
| | $ | 385 | | $ | 782 | | $ | 469 | |
A reconciliation of the statutory federal rate and the effective rate follows:
|
|
|
|
|
|
|
| |||||||
|
| 2018 |
| 2017 |
| 2016 |
| |||||||
| | | | | | | | |||||||
|
| 2021 |
| 2020 |
| 2019 |
| |||||||
Statutory rate |
| 21.0 | % | 33.7 | % | 35.0 | % |
| 21.0 | % | 21.0 | % | 21.0 | % |
State income taxes, net of federal tax benefit |
| 2.6 |
| 1.7 |
| 1.6 |
|
| 3.2 | | 3.0 | | 2.6 | |
Credits |
| (1.3) |
| (2.5) |
| (1.1) |
|
| (1.3) | | (0.7) | | (1.5) | |
Resolution of issues |
| 0.5 |
| — |
| (0.5) |
| |||||||
Domestic manufacturing deduction |
| — |
| (1.1) |
| (0.7) |
| |||||||
Resolution of tax audit examinations |
| (3.1) | | — | | (0.1) | | |||||||
Excess tax benefits from share-based payments |
| (0.3) |
| (0.4) |
| (1.6) |
| | (1.3) | | (0.8) | | (0.2) | |
Effect of Tax Cuts and Jobs Act |
| — |
| (60.8) |
| — |
| |||||||
Impairment of goodwill |
| — |
| 2.3 |
| — |
| |||||||
Impairment losses attributable to noncontrolling interest | | — | | — | | 1.2 | | |||||||
Non-deductible executive compensation | | 0.6 | | 0.3 | | 0.3 | | |||||||
Other changes, net |
| 0.1 |
| (0.2) |
| 0.1 |
|
| (0.3) | | 0.4 | | 0.4 | |
|
|
|
|
|
|
|
| |||||||
|
| 22.6 | % | (27.3) | % | 32.8 | % | |||||||
| | | | | | | | |||||||
|
| 18.8 | % | 23.2 | % | 23.7 | % |
The 2018Company’s effective income tax rates were 18.8% in 2021 and 23.2% in 2020. The 2021 tax rate differed from the federal statutory rate primarily due to a discrete benefit of $47 which was primarily from the favorable outcome of income tax audit examinations covering multiple years, the benefit from share-based payments and the utilization of tax credits, partially offset by the effect of state income taxes.
The 2020 tax rate differed from the federal statutory rate primarily due to the effect of state income taxes, partially offset by the utilization of tax credits and deductions.
The 2019 tax rate 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 Act rates and an increase in future tax deductions at post-Tax Act rates. These 2018 items were partially offset by the utilization of tax credits and deductions, the remeasurement of uncertain tax positions and adjustments to provisional amounts that increased prior year deductions at pre-Tax Act rates and decreased future deductions at post-Tax Act rates. In accordance with SAB 118, the Company has completed accounting for the Tax Act resulting in no measurement period adjustments.
The 2017 tax rate differed from the federal statutory rate primarily as a result of remeasuring deferred taxes dueLucky’s Market losses attributable to the Tax Act, the Domestic Manufacturing Deduction and other changes, partially offset by non-deducible goodwill impairment charges and the effect of statenoncontrolling interest, which reduced pre-tax income taxes. The 2016but did not impact tax rate differed from the federal statutory rate primarily as a result of the recognition of excess tax benefits related to share-based payments after the adoption of Accounting Standards Update (“ASU”) 2016-09, the utilization of tax credits, the Domestic Manufacturing Deduction and other changes, partially offset by the effect of state income taxes.
54
expense.
69
The tax effects of significant temporary differences that comprise tax balances were as follows:
|
|
|
|
|
|
|
| |||||||
|
| 2018 |
| 2017 |
| |||||||||
| | | | | | | | |||||||
|
| 2021 |
| 2020 |
| |||||||||
Deferred tax assets: |
|
|
|
|
|
|
| | | | | | | |
Compensation related costs |
| $ | 350 |
| $ | 348 |
| | $ | 560 | | $ | 766 | |
Lease accounting |
|
| 81 |
|
| 78 |
| |||||||
Lease liabilities | |
| 1,926 | |
| 1,932 | | |||||||
Closed store reserves |
|
| 41 |
|
| 45 |
| |
| 46 | |
| 38 | |
Net operating loss and credit carryforwards |
|
| 110 |
|
| 146 |
| |
| 98 | |
| 86 | |
Deferred income | | | 126 | | | 149 | | |||||||
Allowance for uncollectible receivables | | | 36 | | | 23 | | |||||||
Other |
| | 55 |
|
| 54 |
| | | 25 | |
| 46 | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Subtotal |
|
| 637 |
|
| 671 |
| |
| 2,817 | |
| 3,040 | |
Valuation allowance |
|
| (54) |
|
| (62) |
| |
| (72) | |
| (53) | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Total deferred tax assets |
|
| 583 |
|
| 609 |
| |
| 2,745 | |
| 2,987 | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Deferred tax liabilities: |
|
|
|
|
|
|
| | | | | | | |
Depreciation and amortization |
|
| (1,850) |
|
| (1,892) |
| |
| (2,006) | |
| (2,115) | |
Operating lease assets | |
| (1,790) | | | (1,794) | | |||||||
Insurance related costs |
|
| (38) |
| | (32) |
| | | (54) | | | — | |
Inventory related costs |
|
| (257) |
| | (253) |
| | | (310) | | | (264) | |
|
|
|
|
|
|
|
| |||||||
Equity investments in excess of tax basis | | | (147) | | | (356) | | |||||||
| | | | | | | | |||||||
Total deferred tax liabilities |
|
| (2,145) |
|
| (2,177) |
| |
| (4,307) | |
| (4,529) | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Deferred taxes |
| $ | (1,562) |
| $ | (1,568) |
| | $ | (1,562) | | $ | (1,542) | |
At February 2, 2019,January 29, 2022, the Company had net operating loss carryforwards for state income tax purposes of $1,208.$1,259. These net operating loss carryforwards expire from 20192022 through 2038.2041. The utilization of certain of the Company’s state net operating loss carryforwards may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of thecertain deferred tax assets resulting from its state net operating losses.
At February 2, 2019,January 29, 2022, the Company had state credit carryforwards of $47, most of which$37. These state credit carryforwards expire from 20192022 through 2027.2035. The utilization of certain of the Company’s credits may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of thecertain deferred tax assets resulting from its state credits.
At February 2, 2019, the Company had federal net operating loss carryforwards of $2. These net operating loss carryforwards expire from 2036 through 2037. The utilization of certain of the Company’s federal net operating loss carryforwards may be limited in a given year. Further, based on the analysis described below, the Company has not recorded a valuation allowance against the deferred tax assets resulting from its federal net operating losses.
The Company regularly reviews all deferred tax assets on a tax filer and jurisdictional basis to estimate whether these assets are more likely than not to be realized based on all available evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Projected future taxable income is based on expected results and assumptions as to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary differences is based on current tax law and the Company’s tax methods of accounting. Unless deferred tax assets are more likely than not to be realized, a valuation allowance is established to reduce the carrying value of the deferred tax asset until such time that realization becomes more likely than not. Increases and decreases in these valuation allowances are included in "Income tax expense" in the Consolidated Statements of Operations. As of January 29, 2022, January 30, 2021 and February 2, 2019, February 3, 2018 and January 28, 2017,1, 2020 the total valuation allowance was $54, $62$72, $53 and $50,$55, respectively.
55
70
A reconciliation of the beginning and ending amount of unrecognized tax benefits, including positions impacting only the timing of tax benefits, is as follows:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2018 |
| 2017 |
| 2016 |
| |||||||||||||
| | | | | | | | | | | ||||||||||
|
| 2021 |
| 2020 |
| 2019 |
| |||||||||||||
Beginning balance |
| $ | 180 |
| $ | 177 |
| $ | 204 |
| | $ | 193 | | $ | 174 | | $ | 174 | |
Additions based on tax positions related to the current year |
|
| 7 |
|
| 11 |
|
| 10 |
| |
| 10 | |
| 7 | |
| 13 | |
Reductions based on tax positions related to the current year |
|
| (1) |
|
| (1) |
|
| (1) |
| ||||||||||
Additions for tax positions of prior years |
|
| 23 |
|
| 6 |
|
| 3 |
| |
| 9 | |
| 16 | |
| 8 | |
Reductions for tax positions of prior years |
|
| (22) |
|
| (8) |
|
| (30) |
| |
| (108) | |
| — | |
| (1) | |
Settlements |
|
| (10) |
|
| — |
|
| (2) |
| | | — | |
| — | |
| (19) | |
Lapse of statute |
|
| (3) |
|
| (5) |
|
| (7) |
| | | (4) | | | (4) | | | (1) | |
Ending balance |
| $ | 174 |
| $ | 180 |
| $ | 177 |
| | $ | 100 | | $ | 193 | | $ | 174 | |
The Company does not anticipate that changes in the amount of unrecognized tax benefits over the next twelve months will have a significant impact on its results of operations or financial position.
As of January 29, 2022, January 30, 2021 and February 2, 2019, February 3, 2018 and January 28, 2017,1, 2020, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $72, $88$73, $85 and $73$74 respectively.
To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense. During the years ended January 29, 2022, January 30, 2021 and February 2, 2019, February 3, 2018 and January 28, 2017,1, 2020, the Company recognized approximately $2, $8$(15), $7 and $(1),$7, respectively, in interest and penalties (recoveries). The Company had accrued approximately $30, $28$22, $38 and $20$30 for the payment of interest and penalties as of January 29, 2022, January 30, 2021 and February 2, 2019, February 3, 2018 and January 28, 2017, respectively.1, 2020.
As of February 2, 2019,January 29, 2022, the Internal Revenue Service had concluded its examination of our 2012 and 2013all federal tax returns.returns up to and including the return for the year ended February 3, 2018.
The Coronavirus Aid, Relief, and Economic Security Act (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, the Company deferred 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 to be paid by December 31, 2022. During 2020, the Company deferred the employer portion of social security tax of $622. Of the total, $311 was paid during 2021 and $311 is included in “Other current liabilities” in the Company’s Consolidated Balance Sheets.
5. | DEBT OBLIGATIONS |
Long-term debt consists of:
| | | | | | |
| | January 29, | | January 30, | ||
|
| 2022 |
| 2021 | ||
1.70% to 8.00% Senior Notes due through 2049 | | $ | 10,607 | | $ | 11,899 |
Other | |
| 1,138 | |
| 511 |
| | | | | | |
Total debt, excluding obligations under finance leases | |
| 11,745 | |
| 12,410 |
Less current portion | |
| (451) | |
| (844) |
| | | | | | |
Total long-term debt, excluding obligations under finance leases | | $ | 11,294 | | $ | 11,566 |
In 2021, the Company repaid $300 of senior notes bearing an interest rate of 2.60%, $500 of senior notes bearing an interest rate of 2.95%, and $500 of senior notes bearing an interest rate of 3.40%, all using cash on hand.
|
|
|
|
|
|
|
|
|
| February 2, |
| February 3, |
| ||
|
| 2019 |
| 2018 |
| ||
1.50% to 8.00% Senior Notes due through 2048 |
| $ | 12,097 |
| $ | 12,201 |
|
5.63% to 12.75% Mortgages due in varying amounts through 2027 |
|
| 14 |
|
| 22 |
|
1.68% to 2.63% Commercial paper borrowings due through February 2019 |
|
| 800 |
|
| 2,121 |
|
3.37% Term Loan due 2019 |
|
| 1,000 |
|
| — |
|
Other |
|
| 440 |
|
| 443 |
|
|
|
|
|
|
|
|
|
Total debt, excluding capital leases and financing obligations |
|
| 14,351 |
|
| 14,787 |
|
Less current portion |
|
| (3,103) |
|
| (3,509) |
|
|
|
|
|
|
|
|
|
Total long-term debt, excluding capital leases and financing obligations |
| $ | 11,248 |
| $ | 11,278 |
|
71
Additionally in 2021, the Company acquired 28, previously leased, properties for a purchase price of $455. Separately, the Company also entered into a transaction to sell those properties to a third party for total proceeds of $621. Total cash proceeds received as a result of the transactions was $166. The sale transaction did not qualify for sale-leaseback accounting treatment. As a result, the Company recorded property, plant and equipment for the $455 price paid and recorded a $621 financing obligation. The leases have a base term of 25 years and 12 option periods of five years each. The Company has the option to purchase the individual properties for fair market value at the end of the base term or at the end of any option period. The Company is obligated to repurchase the properties at the end of the base term for $300 if the lessor exercises its put option.
In 2018,2020, the Company issued $600$500 of senior notes due in fiscal year 20292030 bearing an interest rate of 4.50%2.20% and $600$500 of senior notes due in fiscal year 20492030 bearing an interest rate of 5.40%1.70%. In connection with the senior note issuances, the Company also terminated forward-starting interest rate swap agreements with an aggregate notional amount of $750.$450 due in fiscal year 2030. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the fourth quarter of 2018.2020. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized gainloss of $39, $30$41, $31 net of tax, has been deferred in Accumulated Other Comprehensive Loss and will continue to amortize to earnings as the interest payments are made. The Company also repaid upon maturity, $300$700 of senior notes bearing an interest rate of 6.80%, $300 of senior notes bearing an interest rate of 2.00%, $200 of senior notes bearing an interest rate of 7.00% and $500 of senior notes bearing an interest rate of 2.30%,3.30% with proceeds from the senior notes issuances.
56
In 2017,On March 18, 2020, the Company issued $400 of senior notes dueproactively borrowed $1,000 under the revolving credit facility. This was a precautionary measure in fiscal year 2022 bearing an interest rate of 2.80%, $600 of senior notes dueorder to preserve financial flexibility, reduce reliance on the commercial paper market and maintain liquidity in fiscal year 2027 bearing an interest rate of 3.70% and $500 of senior notes due in fiscal year 2048 bearing an interest rate of 4.65%. In connection withresponse to the senior note issuances,COVID-19 pandemic. During 2020, the Company also terminated forward-starting interest rate swap agreements with an aggregate notional amount of $600. These forward-starting interest rate swap agreements were hedgingfully repaid the variability$1,000 borrowed under the revolving credit facility and the entire $1,150 in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the second quarter of 2017. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $20, $12 net of tax, has been deferred in Accumulated Other Comprehensive Loss and will continue to amortize to earnings as the interest payments are made. The Company also repaid, upon maturity, $600 of senior notes bearing an interest rate of 6.40%, with proceeds from the senior notes issuances.
In 2018, the Company obtained a $1,000 term loan with a maturity date of March 16, 2019. The funds were drawn on March 26, 2018 and were used to reduce outstanding commercial paper borrowings. Under the termsobligations, as of the agreement, interest rates are adjusted monthly based on the Company’s Public Debt Rating and prevailing LIBOR rates. February 1, 2020, using cash generated by operations.
On March 15, 2019, the Company paid the $1,000 term loan through increased commercial paper borrowings.
On August 29, 2017,July 6, 2021, the Company entered into an amended, extended and restated $2,750 unsecured revolving credit facility (the “Credit Agreement”), with a termination date of August 29, 2022,July 6, 2026, unless extended as permitted under the Credit Agreement. This Credit Agreement amended the Company’s $2,750 credit facility that would otherwise have terminated on June 30, 2019. The Company has the ability to increase the size of the Credit Agreement by up to an additional $1,000,$1,250, subject to certain conditions.
Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (i) LIBOR plus a market spread, based on the Company’s Public Debt Rating or (ii) the base rate, defined as the highest of (a) the Federal Funds Rate plus 0.5%, (b) the Bank of America prime rate, and (c) one-month LIBOR plus 1.0%, plus a market rate spread based on the Company’s Public Debt Rating.Rating. The Company will also pay a Commitment Fee based on its Public Debt Rating and Letter of Credit fees equal to a market rate spread based on the Company’s Public Debt Rating. “Public Debt Rating” means, as of any date, the rating that has been most recently announced by either S&P or Moody’s, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Company. The Credit Agreement includes fallback language related to the transition from LIBOR to alternative reference rates. The Company does not expect a significant change to its cost of debt as a result of the transition from LIBOR to an alternative reference rate.
The Credit Agreement contains covenants,a covenant, which, among other things, requirerequires the maintenance of a Leverage Ratio of not greater than 3.50:1.00 and a Fixed Charge Coverage Ratio of not less than 1.70:3.50:1.00. The Company may repay the Credit Agreement in whole or in part at any time without premium or penalty. The Credit Agreement is not guaranteed by the Company’s subsidiaries.
As of February 2, 2019,January 29, 2022, and January 30, 2021, the Company had $800 of0 commercial paper borrowings with a weighted average interest rate of 2.63% and no0 borrowings under the Credit Agreement. As of February 3, 2018, the Company had $2,121 of commercial paper borrowings, with a weighted average interest rate of 1.68%, and no borrowings under the Credit Agreement.
As of February 2, 2019,January 29, 2022, the Company had outstanding letters of credit in the amount of $363, of which $3$2 reduces funds available under the Credit Agreement. As of January 30, 2021, the Company had outstanding letters of credit in the amount of $381, of which $2 reduces funds available under the Credit Agreement. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company.
72
Most of the Company’s outstanding public debt is subject to early redemption at varying times and premiums, at the option of the Company. In addition, subject to certain conditions, some of the Company’s publicly issued debt will be subject to redemption, in whole or in part, at the option of the holder upon the occurrence of a redemption event, upon not less than five days’ notice prior to the date of redemption, at a redemption price equal to the default amount, plus a specified premium. “Redemption Event” is defined in the indentures as the occurrence of (i) any person or group, together with any affiliate thereof, beneficially owning 50% or more of the voting power of the Company, (ii) any one person or group, or affiliate thereof, succeeding in having a majority of its nominees elected to the Company’s Board of Directors, in each case, without the consent of a majority of the continuing directors of the Company or (iii) both a change of control and a below investment grade rating.
57
The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2018,2021, and for the years subsequent to 20182021 are:
|
|
|
|
| ||||
2019 |
| $ | 3,103 |
| ||||
2020 |
|
| 720 |
| ||||
2021 |
|
| 793 |
| ||||
| | | | | ||||
2022 |
|
| 896 |
|
| $ | 451 |
|
2023 |
|
| 595 |
| |
| 1,130 | |
2024 | |
| 5 | | ||||
2025 | |
| 84 | | ||||
2026 | |
| 1,387 | | ||||
Thereafter |
|
| 8,244 |
| |
| 8,688 | |
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| ||||
| | | | | ||||
Total debt |
| $ | 14,351 |
| | $ | 11,745 | |
6. | DERIVATIVE FINANCIAL INSTRUMENTS |
7.DERIVATIVE FINANCIAL INSTRUMENTS
GAAP requires that derivatives be carried at fair value on the balance sheet and provides for hedge accounting when certain conditions are met. The Company’s derivative financial instruments are recognized on the balance sheet at fair value. Changes in the fair value of derivative instruments designated as “cash flow” hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings. Other comprehensive income or loss is reclassified into current period earnings when the hedged transaction affects earnings. Changes in the fair value of derivative instruments designated as “fair value” hedges, along with corresponding changes in the fair values of the hedged assets or liabilities, are recorded in current period earnings. Ineffective portions of fair value hedges, if any, are recognized in current period earnings.
The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of the hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively.
Interest Rate Risk Management
The Company is exposed to market risk from fluctuations in interest rates. The Company manages its exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair value hedges) and forward-starting interest rate swaps (cash flow hedges). The Company’s current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, the Company uses the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of the carrying value of the Company’s debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.
73
The Company reviews compliance with these guidelines annually with the Financial Policy Committee of the Board of Directors. These guidelines may change as the Company’s needs dictate.
58
Fair Value Interest Rate Swaps
The table below summarizes the outstanding interest rate swaps designated as fair value hedges as of February 3, 2018. WeCompany did not have noany outstanding interest rate derivatives classified as fair value hedges as of February 2, 2019. January 29, 2022 and January 30, 2021.
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The gain or loss on these derivative instruments as well as the offsetting gain or loss on the hedged items attributable to the hedged risk is recognized in current earnings as “Interest expense.” These gains and losses for 2018 and 2017 were as follows:
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The following table summarizes the location and fair value of derivative instruments designated as fair value hedges on the Company’s Consolidated Balance Sheets:
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| Asset Derivatives |
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| February 3, |
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Derivatives Designated as Fair Value Hedging Instruments |
| 2019 |
| 2018 |
| Balance Sheet Location |
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Interest Rate Hedges |
| $ | — |
| $ | (1) |
| Other long-term liabilities |
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59
Cash Flow Forward-Starting Interest Rate Swaps
As of February 2, 2019, theThe Company had fivedid not have any outstanding forward-starting interest rate swap agreements with a maturity dateas of January 2020 with an aggregate notional amount totaling $250. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuance of debt in January 2020. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of February 2, 2019, the fair value of the interest rate swaps was recorded in other assets for $33 and accumulated other comprehensive income for $20 net of tax.
As of February 3, 2018, the Company had nine forward-starting interest rate swap agreements with a maturity date of January 2019 with an aggregate notional amount totaling $750 and five forward-starting interest rate swap agreements with maturity dates of January 2020 with an aggregate notional amount totaling $250. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuance of debt in January 201929, 2022 and January 2020. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of February 3, 2018, the fair value of the interest rate swaps was recorded in other assets for $103 and accumulated other comprehensive income for $73 net of tax.30, 2021.
During 2018,2020, the Company terminated nine9 forward-starting interest rate swaps with maturity dates of January 20192021 with an aggregate notional amount totaling $750.$450. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the fourth quarter of 2018.2020. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized gainloss of $39, $30$41, $31 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made.
During 2017, In addition, the Company terminated elevenand discontinued hedge accounting for 1 forward-starting interest rate swapsswap with a maturity datesdate of August 2017,January 2021 with an aggregate notional amount totaling $600. These forward-starting$50. The gain of $7 from the termination of this forward starting interest rate swap agreements were hedgingwas record in interest income in the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the thirdfourth quarter of 2017. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $20, $12 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made.2020.
The following table summarizes the effect of the Company’s derivative instruments designated as cash flow hedges for 20182021, 2020 and 2017:2019:
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| | Amount of Gain/(Loss) in | | Amount of Gain/(Loss) | | |
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| | AOCI on Derivative | | Reclassified from AOCI into | | Location of Gain/(Loss) |
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Derivatives in Cash Flow Hedging | | (Effective Portion) | | Income (Effective Portion) | | Reclassified into Income |
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Relationships |
| 2021 | | 2020 |
| 2019 |
| 2021 | | 2020 |
| 2019 |
| (Effective Portion) |
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Forward-Starting Interest Rate Swaps, net of tax* | | $ | (47) | | $ | (54) | | $ | (42) | | $ | (7) | | $ | (2) | | $ | (4) |
| Interest expense | |
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Forward-Starting Interest Rate Swaps, net of tax* |
| $ | 6 |
| $ | 24 |
| $ | (5) |
| $ | (3) |
| Interest expense |
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* | The amounts of Gain/(Loss) in AOCI on derivatives include unamortized proceeds and payments from forward-starting interest rate swaps once classified as cash flow hedges that were terminated prior to the end of 2020. |
*The amounts of Gain/(Loss) in AOCI on derivatives include unamortized proceeds and payments from forward-starting interest rate swaps once classified as cash flow hedges that were terminated prior to end of 2018 and 2017, respectively.
7. | FAIR VALUE MEASUREMENTS |
For the above fair value and cash flow interest rate swaps, the Company has entered into International Swaps and Derivatives Association master netting agreements that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. These master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.
Collateral is generally not required of the counterparties or of the Company under these master netting agreements. As of February 2, 2019 and February 3, 2018, no cash collateral was received or pledged under the master netting agreements.
60
The effect of the net settlement provisions of these master netting agreements on the Company’s derivative balances upon an event of default or termination event is as follows as of February 2, 2019 and February 3, 2018:
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Cash Flow Forward-Starting Interest Rate Swaps |
| $ | 33 |
| $ | — |
| $ | 33 |
| $ | — |
| $ | — |
| $ | 33 |
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Cash Flow Forward-Starting Interest Rate Swaps |
| $ | 103 |
| $ | — |
| $ | 103 |
| $ | — |
| $ | — |
| $ | 103 |
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Fair Value Interest Rate Swaps |
| $ | 1 |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 1 |
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8.FAIR VALUE MEASUREMENTS
GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy defined in the standards are as follows:
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.
74
For items carried at (or adjusted to) fair value in the consolidated financial statements, the following tables summarize the fair value of these instruments at February 2, 2019January 29, 2022 and February 3, 2018:January 30, 2021:
February 2, 2019January 29, 2022 Fair Value Measurements Using
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Trading Securities |
| $ | 671 |
| $ | — |
| $ | — |
| $ | 671 |
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Other Investment |
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| — |
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| 22 |
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| 22 |
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Interest Rate Hedges |
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| — |
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| 33 |
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| — |
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| 33 |
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Total |
| $ | 671 |
| $ | 33 |
| $ | 22 |
| $ | 726 |
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| Quoted Prices in | |
| | Active Markets | |
| | for Identical | |
| | Assets | |
| | (Level 1) | |
Marketable Securities | | $ | 1,054 |
61
February 3, 2018January 30, 2021 Fair Value Measurements Using
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| (Level 2) |
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| Total |
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Trading Securities |
| $ | 64 |
| $ | — |
| $ | — |
| $ | 64 |
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Available-For-Sale Securities |
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| 25 |
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| — |
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| — |
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| 25 |
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Interest Rate Hedges |
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| — |
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| 102 |
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| — |
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| 102 |
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Total |
| $ | 89 |
| $ | 102 |
| $ | — |
| $ | 191 |
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| | (Level 1) | | (Level 3) | | Total |
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Marketable Securities | | $ | 1,882 | | $ | — | | $ | 1,882 | |
Other Investment | | | — | |
| 160 | |
| 160 | |
Total | | $ | 1,882 | | $ | 160 | | $ | 2,042 | |
In 2018, realized gains on Level 1, available-for-sale securities totaled $5.
The Company values interest rate hedges using observable forward yield curves. These forward yield curves are classified as Level 2 inputs.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of goodwill, other intangible assets, long-lived assets and in the valuation of store lease exit costs. The Company reviews goodwill and indefinite-lived intangible assets for impairment annually, during the fourth quarter of each fiscal year, and as circumstances indicate the possibility of impairment. See Note 32 for further discussion related to the Company’s carrying value of goodwill. Long-lived assets and store lease exit costs were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. See Note 1 for further discussion of the Company’s policies and recorded amounts for impairments of long-lived assets and valuation of store lease exit costs. In 2018,2021, long-lived assets with a carrying amount of $85$74 were written down to their fair value of $29,$10, resulting in an impairment charge of $56.$64. In 2017,2020, long-lived assets with a carrying amount of $98$72 were written down to their fair value of $27,$2, resulting in an impairment charge of $71. In 2018, the Company entered into an agreement with a third party. As part of the consideration for entering the agreement, the Company received a financial instrument of $22. $70.
Mergers are accounted for using the acquisition method of accounting, which requires that the purchase price paid for a merger be allocated to the assets and liabilities acquired based on their estimated fair values as of the effective date of the merger, with the excess of the purchase price over the net assets being recorded as goodwill. See Note 2 for further discussion related to accounting for mergers.
Fair Value of Other Financial Instruments
Current and Long-term Debt
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 respective year-ends. At February 2, 2019,January 29, 2022, the fair value of total debt excluding obligation under finance leases was $14,190$13,189 compared to a carrying value of $14,351.$11,745. At February 3, 2018,January 30, 2021, the fair value of total debt excluding obligation under finance leases was $15,167$14,680 compared to a carrying value of $14,787.$12,410.
75
Contingent Consideration
As a result of the Home Chef merger, the Company recognized a contingent liability of $91 on the acquisition date. The contingent consideration was measured using unobservable (Level 3) inputs and iswas included in “Other long-term liabilities” within the Consolidated Balance Sheet. The Company estimated the fair value of the earnout liability by applying a Monte-Carlo simulation method using the Company’s projection of future operating results for both the online and offline businesses related to the Home Chef merger and the estimated probability of achievement of the earnout target metrics. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of valuation paths in order to develop a reasonable estimate of the fair value of the earnout liability.The liability is remeasured to fair value using the Monte-Carlo simulation method at each reporting period, and the change in fair value, including accretion for the passage of time, is recognized in net earnings until the contingency is resolved. In 2018, an adjustment2020, the Company amended the contingent consideration agreement including the performance milestones to align with the Company’s current business strategies. In 2021 and 2020, the Company recorded adjustments to increase the contingent consideration liability as of year-end 2018 was recorded for $33$66 and $189, respectively, in OG&A expense.&A.
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
The carrying amounts of these items approximated fair value.value due to their short term nature.
Other Assets
62
The equity investment in Ocado Group plc is measured at fair value through net earnings. The fair value of all shares owned, which is measured using Level 1 inputs, was $987 and $1,808 as of January 29, 2022 and January 30, 2021, respectively, and is included in “Other assets” in the Company’s Consolidated Balance Sheets. The unrealized gain (loss) for this Level 1 investment was approximately ($821) and $1,032 for 2021 and 2020, respectively, and is included in “(Loss) Gain on investments” in the Company’s Consolidated Statements of Operations.
The Company held other equity investments without a readily determinable fair value. These investments are measured initially at cost and remeasured for observable price changes to fair value through net earnings. The value of these investments was $309 and $189 as of January 29, 2022 and January 30, 2021, respectively, and is included in “Other assets” in the Company’s Consolidated Balance Sheets. During 2020, certain of these investments with a carrying value of $87 were remeasured to their fair value of $160, resulting in an unrealized gain of $73. The gain was measured using Level 3 inputs and is included in “(Loss) Gain on investments” in the Company’s Consolidated Statements of Operations. There were 0 observable price changes or impairments for these investments during 2021, and as such, they are excluded from the fair value measurements table above for January 29, 2022.
The following table presents the Company’s remaining other assets as of January 29, 2022 and January 30 2021:
| | | | | | |
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| January 29, 2022 |
| January 30, 2021 | ||
Other Assets | | | | | | |
Equity method and other long-term investments | | $ | 282 | | $ | 250 |
Notes receivable | |
| 191 | | 240 | |
Prepaid deposits under certain contractual arrangements | | 214 | | 186 | ||
Implementation costs related to cloud computing arrangements | | | 151 | | | 81 |
Funded asset status of pension plans | | | 156 | | | 21 |
Other | | | 120 | | | 129 |
Total | | $ | 1,114 | | $ | 907 |
76
8. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table represents the changes in AOCI by component for the years ended January 29, 2022 and January 30, 2021:
| | | | | | | | | |
| | | | | Pension and | | | | |
| | Cash Flow | | Postretirement | | | | ||
| | Hedging | | Defined Benefit | | | | ||
|
| Activities(1) |
| Plans(1) |
| Total(1) | |||
Balance at February 1, 2020 | | $ | (42) | | $ | (598) | | $ | (640) |
OCI before reclassifications(2) | | | (14) | | | 8 | |
| (6) |
Amounts reclassified out of AOCI(3) | | | 2 | |
| 14 | |
| 16 |
Net current-period OCI | | | (12) | |
| 22 | |
| 10 |
Balance at January 30, 2021 | | $ | (54) | | $ | (576) | | $ | (630) |
| | | | | | | | | |
Balance at January 30, 2021 | | $ | (54) | | $ | (576) | | $ | (630) |
OCI before reclassifications(2) | |
| — | |
| 82 | |
| 82 |
Amounts reclassified out of AOCI(3) | |
| 7 | |
| 74 | |
| 81 |
Net current-period OCI | |
| 7 | |
| 156 | |
| 163 |
Balance at January 29, 2022 | | $ | (47) | | $ | (420) | | $ | (467) |
(1) | All amounts are net of tax. |
(2) | Net of tax of ($8) and $2 for cash flow hedging activities and pension and postretirement defined benefit plans, respectively, as of January 30, 2021. Net of tax of $25 for pension and postretirement defined benefit plans as of January 29, 2022. |
(3) | Net of tax of $5 and $2 for pension and postretirement defined benefit plans and cash flow hedging activities, respectively, as of January 30, 2021. Net of tax of $23 and $3 for pension and postretirement defined benefit plans and cash flow hedging activities, respectively, as of January 29, 2022. |
The following table represents the items reclassified out of AOCI and the related tax effects for the years ended January 29, 2022, January 30, 2021 and February 1, 2020:
| | | | | | | | | | | |
| |
| For the year ended | | For the year ended | | For the year ended | | |||
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|
| January 29, 2022 |
| January 30, 2021 |
| February 1, 2020 |
| |||
Cash flow hedging activity items | | | | | | | | | | | |
Amortization of gains and losses on cash flow hedging activities(1) | | | $ | 10 | | $ | 4 | | $ | 7 | |
Tax expense | | |
| (3) | |
| (2) | |
| (3) | |
Net of tax | | |
| 7 | |
| 2 | |
| 4 | |
| | | | | | | | | | | |
Pension and postretirement defined benefit plan items | | | | | | | | | | | |
Amortization of amounts included in net periodic pension cost(2) | | |
| 97 | |
| 19 | |
| 38 | |
Tax expense |
| |
| (23) | |
| (5) | |
| (9) | |
Net of tax |
| |
| 74 | |
| 14 | |
| 29 | |
Total reclassifications, net of tax |
| | $ | 81 | | $ | 16 | | $ | 33 | |
(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 expense. |
77
9. | LEASES AND LEASE-FINANCED TRANSACTIONS |
The Company leases certain store real estate, warehouses, distribution centers, fulfillment centers, office space and equipment. 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:
| | | | | | | | |
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| |
| January 29, |
| January 30, | ||
| | Classification | | 2022 | | 2021 | ||
Assets | | | | | | | | |
Operating | | Operating lease assets | | $ | 6,695 | | $ | 6,796 |
Finance | | Property, plant and equipment, net(1) | | | 1,525 | | | 844 |
| | | | | | | | |
Total leased assets | | | | $ | 8,220 | | $ | 7,640 |
| | | | | | | | |
Liabilities | | | | | | | | |
Current | | | | | | | | |
Operating | | Current portion of operating lease liabilities | | $ | 650 | | $ | 667 |
Finance | | Current portion of long-term debt including obligations under finance leases | | | 104 | | | 67 |
| | | | | | | | |
Noncurrent | | | | | | | | |
Operating | | Noncurrent operating lease liabilities | | | 6,426 | | | 6,507 |
Finance | | Long-term debt including obligations under finance leases | | | 1,515 | | | 936 |
| | | | | | | | |
Total lease liabilities | | | | $ | 8,695 | | $ | 8,177 |
(1) | Finance lease assets are recorded net of accumulated amortization of $414 and $321 as of January 29, 2022 and January 30, 2021. |
The following table provides the components of lease cost:
| | | | | | | | |
| | | | Year-To-Date | | Year-To-Date | ||
Lease Cost | | Classification |
| | January 29, 2022 |
| January 30, 2021 | |
Operating lease cost(1) | | Rent Expense | | $ | 954 | | $ | 981 |
Sublease and other rental income | | Rent Expense | |
| (109) | |
| (107) |
Finance lease cost | | | |
| | |
| |
Amortization of leased assets | | Depreciation and Amortization | | | 95 | | | 55 |
Interest on lease liabilities | | Interest Expense | | | 52 | | | 45 |
| | | | | | | | |
Net lease cost | | | | $ | 992 | | $ | 974 |
(1) | Includes short-term leases and variable lease costs, which are immaterial. |
78
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 | |||
2022 | | $ | 920 | | $ | 159 | | $ | 1,079 |
2023 | |
| 862 | |
| 158 | |
| 1,020 |
2024 | |
| 791 | |
| 156 | |
| 947 |
2025 | |
| 717 | |
| 152 | |
| 869 |
2026 | |
| 664 | |
| 152 | |
| 816 |
Thereafter | |
| 5,961 | |
| 1,323 | |
| 7,284 |
| | | | | | | | | |
Total lease payments | | | 9,915 | | | 2,100 | | $ | 12,015 |
| | | | | | | | | |
Less amount representing interest | |
| 2,839 | | | 481 | | | |
| | | | | | | | | |
Present value of lease liabilities(1) | | $ | 7,076 | | $ | 1,619 | | | |
(1) | Includes the current portion of $650 for operating leases and $104 for finance leases. |
Total future minimum rentals under non-cancellable subleases at January 29, 2022 were $256.
The following table provides the weighted-average lease term and discount rate for operating and finance leases:
| | | | | | |
| | | | | ||
| | January 29, 2022 | | January 30, 2021 | ||
Weighted-average remaining lease term (years) | | | | | | |
Operating leases | | 14.9 | | | 15.3 | |
Finance leases | | 14.7 | | | 16.2 | |
Weighted-average discount rate | | | | | | |
Operating leases | | 4.1 | % | | 4.2 | % |
Finance leases | | 3.7 | % | | 4.4 | % |
| | | | | | |
The following table provides supplemental cash flow information related to leases:
| | | | | |
| Year-To-Date | | Year-To-Date | ||
| January 29, 2022 | | January 30, 2021 | ||
Cash paid for amounts included in the measurement of lease liabilities | | | | | |
Operating cash flows from operating leases | $ | 897 | | $ | 849 |
Operating cash flows from finance leases | | 52 | | | 45 |
Financing cash flows from finance leases | | 127 | | | 37 |
Leased assets obtained in exchange for new operating lease liabilities | | 669 | | | 679 |
Leased assets obtained in exchange for new finance lease liabilities | | 753 | | | 190 |
Net gain recognized from sale and leaseback transactions(1) | | 35 | | | 39 |
Impairment of operating lease assets | | 8 | | | 4 |
Impairment of finance lease assets | | 4 | | | 2 |
(1) | In |
The fair values of certain investments recorded in “other assets” within the Consolidated Balance Sheets were estimated based on quoted market prices for those or similar investments, or estimated cash flows, if appropriate. At February 2, 2019 and February 3, 2018, the carrying and fair value of long-term investments for which fair value is determinable was $155 and $176, respectively. At February 2, 2019 and February 3, 2018, the carrying value of notes receivable for which fair value is determinable was $146 and $170, respectively.
9.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table represents the changes in AOCI by component for the years ended February 2, 2019 and February 3, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension and |
|
|
|
| |
|
| Cash Flow |
|
|
|
| Postretirement |
|
|
|
| ||
|
| Hedging |
| Available for sale |
| Defined Benefit |
|
|
|
| |||
|
| Activities(1) |
| Securities(1) |
| Plans(1) |
| Total(1) |
| ||||
Balance at January 28, 2017 |
| $ | (2) |
| $ | — |
| $ | (713) |
| $ | (715) |
|
OCI before reclassifications(2) |
|
| 23 |
|
| 4 |
|
| 165 |
|
| 192 |
|
Amounts reclassified out of AOCI(3) |
|
| 3 |
|
| — |
|
| 49 |
|
| 52 |
|
Net current-period OCI |
|
| 26 |
|
| 4 |
|
| 214 |
|
| 244 |
|
Balance at February 3, 2018 |
| $ | 24 |
| $ | 4 |
| $ | (499) |
| $ | (471) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2018 |
| $ | 24 |
| $ | 4 |
| $ | (499) |
| $ | (471) |
|
OCI before reclassifications(2) |
|
| (23) |
|
| (4) |
|
| 104 |
|
| 77 |
|
Amounts reclassified out of AOCI(3) |
|
| 5 |
|
| — |
|
| 43 |
|
| 48 |
|
Net current-period OCI |
|
| (18) |
|
| (4) |
|
| 147 |
|
| 125 |
|
Balance at February 2, 2019 |
| $ | 6 |
| $ | — |
| $ | (352) |
| $ | (346) |
|
|
|
79
|
|
|
|
|
63
The following table represents the items reclassified out of AOCI and the related tax effects for the years ended February 2, 2019, February 3, 2018 and January 28, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended |
| For the year ended |
| For the year ended |
| |||
|
|
| February 2, 2019 |
| February 3, 2018 |
| January 28, 2017 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedging activity items |
|
|
|
|
|
|
|
|
|
|
|
Amortization of gains and losses on cash flow hedging activities (1) |
|
| $ | 8 |
| $ | 6 |
| $ | 2 |
|
Tax expense |
|
|
| (3) |
|
| (3) |
|
| — |
|
Net of tax |
|
|
| 5 |
|
| 3 |
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale security items |
|
|
|
|
|
|
|
|
|
|
|
Realized gains on available for sale securities (2) |
|
|
| — |
|
| — |
|
| (27) |
|
Tax expense |
|
|
| — |
|
| — |
|
| 13 |
|
Net of tax |
|
|
| — |
|
| — |
|
| (14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement defined benefit plan items |
|
|
|
|
|
|
|
|
|
|
|
Amortization of amounts included in net periodic pension expense (3) |
|
|
| 56 |
|
| 69 |
|
| 53 |
|
Tax expense |
|
|
| (13) |
|
| (20) |
|
| (20) |
|
Net of tax |
|
|
| 43 |
|
| 49 |
|
| 33 |
|
Total reclassifications, net of tax |
|
| $ | 48 |
| $ | 52 |
| $ | 21 |
|
On May 17, 2018, the Company entered into a Partnership Framework Agreement with Ocado International Holdings Limited and Ocado Group plc (“Ocado”), which has since been amended. Under this agreement, Ocado will partner exclusively with the Company in the U.S., enhancing the Company’s digital and robotics capabilities in its distribution networks. The Company opened its first 3 Kroger Delivery customer fulfillment centers in Monroe, Ohio, Groveland, Florida and Forest Park, Georgia. The Company determined the arrangement with Ocado contains a lease of the robotic equipment used to fulfill customer orders. As a result, the Company established a finance lease when each facility began fulfilling orders to customers and used its 10-year incremental borrowing rate to calculate the lease liability. The base term of each lease is 10 years with options to renew at the Company’s sole discretion. The Company elected to combine the lease and non-lease elements in the contract. As a result, it will account for all payments to Ocado as lease payments. In 2021, the Company recorded finance lease assets of $401 and finance lease liabilities of $372 related to these location openings.
|
|
|
|
|
|
10.
10.LEASES AND LEASE-FINANCED TRANSACTIONS
While the Company’s current strategy emphasizes ownership of store real estate, the Company operates primarily in leased facilities. Lease terms generally range from 10 to 20 years with options to renew for varying terms. Terms of certain leases include escalation clauses, percentage rent based on sales 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 beginning with the earlier of the lease commencement date or the date the Company takes possession. Portions of certain properties are subleased to others for periods generally ranging from one to 20 years.
Rent expense (under operating leases) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
| 2018 |
| 2017 |
| 2016 |
| |||
Minimum rentals |
| $ | 967 |
| $ | 1,005 |
| $ | 973 |
|
Contingent payments |
|
| 19 |
|
| 19 |
|
| 16 |
|
Tenant income |
|
| (102) |
|
| (113) |
|
| (108) |
|
|
|
|
|
|
|
|
|
|
|
|
Total rent expense |
| $ | 884 |
| $ | 911 |
| $ | 881 |
|
64
Minimum annual rentals and payments under capital leases and lease-financed transactions for the five years subsequent to 2019 and in the aggregate are listed below. Amounts in the table 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 |
|
|
|
|
|
|
|
Total future minimum rentals under noncancellable subleases at February 2, 2019 were $183.
11.EARNINGSEARNINGS PER COMMON SHARE
Net earnings attributable to The Kroger Co. per basic common share equals 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 equals 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:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended | | For the year ended | | For the year ended |
| ||||||||||||||||||
| | January 29, 2022 | | January 30, 2021 | | February 1, 2020 |
| ||||||||||||||||||
|
| | |
| |
| Per |
| | |
| |
| Per |
| | |
| |
| Per |
| |||
| | Earnings | | Shares | | Share | | Earnings | | Shares | | Share | | Earnings | | Shares | | Share |
| ||||||
(in millions, except per share amounts) | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount |
| ||||||
Net earnings attributable to The Kroger Co. per basic common share | | $ | 1,639 |
| 744 | | $ | 2.20 | | $ | 2,556 |
| 773 | | $ | 3.31 | | $ | 1,640 |
| 799 | | $ | 2.05 | |
Dilutive effect of stock options | | | |
| 10 | | | | | | |
| 8 | | | | | | |
| 6 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 1,639 |
| 754 | | $ | 2.17 | | $ | 2,556 |
| 781 | | $ | 3.27 | | $ | 1,640 |
| 805 | | $ | 2.04 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The Company had combined undistributed and distributed earnings to participating securities totaling $16, $29 and $19 in 2021, 2020 and 2019, respectively.
The Company had stock options outstanding for approximately 2.4 million, 9.1 million and 18.4 million shares, respectively, for the years ended January 29, 2022, January 30, 2021, and February 1, 2020, which 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 diluted share.
11. |
|
The Company recognizes compensation expense for all share-based payments granted. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award based on the fair value at the date of the grant.
The Company grants options for common shares (“stock options”) to employees under various plans at an option price equal to the fair market value of the stock option at the date of grant. The Company accounts for stock options under the fair value recognition provisions. Stock options typically expire 10 years from the date of grant. Stock options vest between one and five years from the date of grant.
In addition to the stock options described above, the Company awards restricted stock to employees and nonemployee directors under various plans. The restrictions on these awards generally lapse between one and five years from the date of the awards. The Company determines the fair value for restricted stock awards in an amount equal to the fair market value of the underlying shares on the grant date of the award.
80
At January 29, 2022, approximately 19 million common shares were available for future options or restricted stock grants under the 2011, 2014, and 2019 Long-Term Incentive Plans (the “Plans”). Options granted reduce the shares available under the Plans at a ratio of 1 to one. Restricted stock grants reduce the shares available under the Plans at a ratio of 2.83 to one.
Equity awards granted are based on the aggregate value of the award on the grant date. This can affect the number of shares granted in a given year as equity awards. Excess tax benefits related to equity awards are recognized in the provision for income taxes. Equity awards may be approved at one of four meetings of its Board of Directors occurring shortly after the Company’s release of quarterly earnings. The 2021 primary grants were made in conjunction with the March and June meetings of the Company’s Board of Directors.
All awards become immediately exercisable upon certain changes of control of the Company.
Stock Options
Changes in options outstanding under the stock option plans are summarized below:
| | | | | | |
|
| Shares |
| Weighted- |
| |
| | subject | | average |
| |
| | to option | | exercise |
| |
|
| (in millions) |
| price |
| |
Outstanding, year-end 2018 |
| 34.1 | | $ | 23.42 | |
Granted |
| 3.1 | | $ | 24.63 | |
Exercised |
| (4.0) | | $ | 14.17 | |
Canceled or Expired |
| (1.0) | | $ | 28.87 | |
| | | | | | |
Outstanding, year-end 2019 |
| 32.2 | | $ | 24.52 | |
Granted |
| 2.9 | | $ | 29.31 | |
Exercised |
| (7.3) | | $ | 17.72 | |
Canceled or Expired |
| (1.0) | | $ | 30.53 | |
| | | | | | |
Outstanding, year-end 2020 |
| 26.8 | | $ | 26.65 | |
Granted |
| 2.1 | | $ | 35.45 | |
Exercised |
| (7.1) | | $ | 24.70 | |
Canceled or Expired |
| (0.7) | | $ | 28.88 | |
| | | | | | |
Outstanding, year-end 2021 |
| 21.1 | | $ | 28.15 | |
A summary of options outstanding, exercisable and expected to vest at January 29, 2022 follows:
| | | | | | | | | | | |
| | | | Weighted-average | | | | | Aggregate |
| |
| | | | remaining | | Weighted-average | | intrinsic |
| ||
|
| Number of shares |
| contractual life |
| exercise price | | value |
| ||
|
| (in millions) |
| (in years) | | | | | (in millions) | | |
Options Outstanding |
| 21.1 |
| 5.31 | | $ | 28.15 | | $ | 324 | |
Options Exercisable |
| 14.6 |
| 4.19 | | $ | 27.58 | | $ | 232 | |
Options Expected to Vest |
| 6.4 |
| 7.79 | | $ | 29.35 | | $ | 90 | |
81
Restricted stock
Changes in restricted stock outstanding under the restricted stock plans are summarized below:
| | | | | | |
|
| Restricted |
| | |
|
| | shares | | Weighted-average |
| |
| | outstanding | | grant-date |
| |
| | (in millions) | | fair value |
| |
Outstanding, year-end 2018 |
| 8.8 | | $ | 27.86 | |
Granted |
| 5.4 | | $ | 22.72 | |
Lapsed |
| (4.1) | | $ | 28.07 | |
Canceled or Expired |
| (0.8) | | $ | 25.68 | |
| | | | | | |
Outstanding, year-end 2019 |
| 9.3 | | $ | 24.85 | |
Granted |
| 4.0 | | $ | 31.99 | |
Lapsed |
| (4.9) | | $ | 24.69 | |
Canceled or Expired |
| (0.6) | | $ | 26.71 | |
| | | | | | |
Outstanding, year-end 2020 |
| 7.8 | | $ | 28.46 | |
Granted |
| 3.9 | | $ | 37.29 | |
Lapsed |
| (4.0) | | $ | 29.58 | |
Canceled or Expired |
| (0.5) | | $ | 31.31 | |
| | | | | | |
Outstanding, year-end 2021 |
| 7.2 | | $ | 32.52 | |
The weighted-average grant date fair value of stock options granted during 2021, 2020 and 2019 was $8.54, $6.43 and $6.00, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes accounting judgment and financial estimates, including the term option holders are expected to retain their stock options before exercising them, the volatility of the Company’s share price over that expected term, the dividend yield over the term and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations. The increase in the fair value of the stock options granted during 2021, compared to 2020, resulted primarily from increases in the Company’s share price and the weighted-average expected volatility. The increase in the fair value of the stock options granted during 2020, compared to 2019, resulted primarily from increases in the Company’s share price and the weighted-average expected volatility, partially offset by a decrease in the interest rate.
The following table reflects the weighted-average assumptions used for grants awarded to option holders:
| | | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
|
Weighted average expected volatility |
| 28.52 | % | 26.96 | % | 25.37 | % |
Weighted average risk-free interest rate |
| 1.21 | % | 0.82 | % | 2.54 | % |
Expected dividend yield |
| 2.00 | % | 2.00 | % | 2.00 | % |
Expected term (based on historical results) |
| 7.2 | years | 7.2 | years | 7.2 | years |
The weighted-average risk-free interest rate was based on the yield of a treasury note as of the grant date, continuously compounded, which matures at a date that approximates the expected term of the options. The dividend yield was based on our history and expectation of dividend payouts. Expected volatility was determined based upon historical stock volatilities; however, implied volatility was also considered. Expected term was determined based upon historical exercise and cancellation experience.
Total stock compensation recognized in 2021, 2020 and 2019 was $203, $185 and $155, respectively. Stock option compensation recognized in 2021, 2020 and 2019 was $20, $22 and $24, respectively. Restricted shares compensation recognized in 2021, 2020 and 2019 was $183, $163 and $131, respectively.
82
The total intrinsic value of stock options exercised was $121, $115 and $51 in 2021, 2020 and 2019, respectively. The total amount of cash received in 2021 by the Company from the exercise of stock options granted under share-based payment arrangements was $172. As of January 29, 2022, there was $194 of total unrecognized compensation expense remaining related to non-vested share-based compensation arrangements granted under the Plans. This cost is expected to be recognized over a weighted-average period of approximately two years. The total fair value of options that vested was $20, $23 and $26 in 2021, 2020 and 2019, respectively.
Shares issued as a result of stock option exercises may be newly issued shares or reissued treasury shares. Proceeds received from the exercise of options, and the related tax benefit, may be utilized to repurchase the Company’s common shares under a stock repurchase program adopted by the Company’s Board of Directors. During 2021, the Company repurchased approximately 5 million common shares in such a manner.
12. | 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.
The principal contingencies are described below:
Insurance — The Company’s workers’ compensation risks are self-insured in most states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans, and self-insured retention plans. The liability for workers’ compensation risks is accounted for on a present value basis. Actual claim settlements and expenses incident thereto may differ from the provisions for loss. Property risks have been underwritten by a subsidiary and are all reinsured with unrelated insurance companies. Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.
Litigation — Various claims and lawsuits arising in the normal course of business, including personal injury, contract disputes, employment discrimination, wage and hour and other regulatory claims are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. 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 when an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves 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.
On February 9, 2022, a putative shareholder filed a derivative action in the Court of Common Pleas, Hamilton County, Ohio against certain current and former directors of The Kroger Co. and The Kroger Co., as a nominal defendant, alleging among other things, that the defendants breached their fiduciary duties in connection with the data incident involving the Company’s former third party secure file transfer vendor, Accellion.
83
The Company is one of dozens of companies that have been named in various lawsuits alleging that defendants contributed to create a public nuisance through the distribution and dispensing of opioids. At present, the Company is named in a significant number of lawsuits pending in various state courts as well as in the United States District Court for the Northern District of Ohio, where over 2,000 cases have been consolidated as Multi-District Litigation ("MDL") pursuant to 28 U.S.C. §1407 in a case entitled In re National Prescription Opiate Litigation. Most of these cases have been stayed but Kroger entities have been named in 5 bellwether cases that are proceeding on a staggered discovery schedule before Judge Polster, the MDL judge. Once discovery is completed, those cases will be remanded to the originating federal court for trial. The Company is vigorously defending these matters and believes that these cases are without merit. At this stage in the proceedings, the Company is unable to determine the probability of the outcome of these matters or the range of reasonably possible loss, if any.
Assignments — The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees is unable to fulfill its lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.
13. | STOCK |
Preferred Shares
The Company has authorized 5 million shares of voting cumulative preferred shares; 2 million shares were available for issuance at January 29, 2022. The shares have a par value of $100 per share and are issuable in series.
Common Shares
The Company has authorized 2 billion common shares, $1 par value per share.
Common Stock Repurchase Program
The Company maintains stock repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act of 1934 to allow for the orderly repurchase of The Kroger Co. common shares, from time to time. The Company made open market purchases totaling $1,422, $1,196 and $400 under these repurchase programs in 2021, 2020 and 2019, respectively.
In addition to these repurchase programs, in December 1999, the Company began a program to repurchase common shares to reduce dilution resulting from its employee stock option plans. This program is solely funded by proceeds from stock option exercises and the related tax benefit. The Company repurchased approximately $225, $128 and $65 under the stock option program during 2021, 2020 and 2019, respectively.
14. | COMPANY- SPONSORED BENEFIT PLANS |
The Company administers non-contributory defined benefit retirement plans for some non-union employees and union-represented employees as determined by the terms and conditions of collective bargaining agreements. These include several qualified pension plans (the “Qualified Plans”) and non-qualified pension plans (the “Non-Qualified Plans”). The Non-Qualified Plans pay benefits to any employee that earns in excess of the maximum allowed for the Qualified Plans by Section 415 of the Internal Revenue Code. The Company only funds obligations under the Qualified Plans. Funding for the company-sponsored pension plans is based on a review of the specific requirements and on evaluation of the assets and liabilities of each plan.
In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. Based on employee’s age, years of service and position with the Company, the employee may be eligible for retiree health care benefits. Funding of retiree health care benefits occurs as claims or premiums are paid.
84
The Company recognizes the funded status of its retirement plans on the Consolidated Balance Sheets. Actuarial gains or losses and prior service credits that have not yet been recognized as part of net periodic benefit cost are required to be recorded as a component of AOCI. The Company has elected to measure defined benefit plan assets and obligations as of January 31, which is the month-end that is closest to its fiscal year-ends, which were January 29, 2022 for fiscal 2021 and January 30, 2021 for fiscal 2020.
Amounts recognized in AOCI as of January 29, 2022 and January 30, 2021 consist of the following (pre-tax):
| | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits | | Total |
| ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||
Net actuarial loss (gain) | | $ | 715 | | $ | 951 | | $ | (127) | | $ | (147) | | $ | 588 | | $ | 804 | |
Prior service credit | |
| — | |
| — | |
| (43) | |
| (55) | |
| (43) | |
| (55) | |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 715 | | $ | 951 | | $ | (170) | | $ | (202) | | $ | 545 | | $ | 749 | |
Other changes recognized in other comprehensive income (loss) in 2021, 2020 and 2019 were as follows (pre-tax):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits | | Total |
| |||||||||||||||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2019 |
| |||||||||
Incurred net actuarial loss (gain) | | $ | (109) | | $ | 36 | | $ | 179 | | $ | 2 | | $ | (46) | | $ | 9 | | $ | (107) | | $ | (10) | | $ | 188 | |
Amortization of prior service credit | |
| — | |
| — | |
| — | |
| 12 | |
| 13 | |
| 11 | |
| 12 | |
| 13 | |
| 11 | |
Amortization of net actuarial gain (loss) | |
| (126) | |
| (40) | |
| (61) | |
| 17 | |
| 8 | |
| 12 | |
| (109) | |
| (32) | |
| (49) | |
Other | |
| — | |
| — | |
| (1) | |
| — | |
| — | |
| (12) | |
| — | |
| — | |
| (13) | |
Total recognized in other comprehensive income (loss) | | $ | (235) | | $ | (4) | | $ | 117 | | $ | 31 | | $ | (25) | | $ | 20 | | $ | (204) | | $ | (29) | | $ | 137 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total recognized in net periodic benefit cost and other comprehensive income (loss) | | $ | (164) | | $ | (4) | | $ | 165 | | $ | 10 | | $ | (34) | | $ | 11 | | $ | (154) | | $ | (38) | | $ | 176 | |
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Information with respect to change in benefit obligation, change in plan assets, the funded status of the plans recorded in the Consolidated Balance Sheets, net amounts recognized at the end of fiscal years, weighted-average assumptions and components of net periodic benefit cost follow:
| | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | | | | |
| ||||||||||
| | Qualified Plans | | Non-Qualified Plans | | Other Benefits |
| ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||
Change in benefit obligation: | | | | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of fiscal year | | $ | 3,615 | | $ | 3,518 | | $ | 351 | | $ | 328 | | $ | 152 | | $ | 198 | |
Service cost | |
| 12 | |
| 13 | |
| — | |
| — | |
| 4 | |
| 7 | |
Interest cost | |
| 92 | |
| 104 | |
| 9 | |
| 10 | |
| 4 | |
| 6 | |
Plan participants’ contributions | |
| — | |
| — | |
| — | |
| — | |
| 13 | |
| 12 | |
Actuarial (gain) loss | |
| (125) | |
| 175 | |
| (12) | |
| 35 | |
| 2 | |
| (47) | |
Plan settlements | | | (442) | | | (16) | | | — | | | — | | | — | | | — | |
Benefits paid | |
| (172) | |
| (171) | |
| (24) | |
| (21) | |
| (25) | |
| (24) | |
Other | |
| (3) | |
| (8) | |
| 1 | |
| (1) | |
| — | |
| — | |
| | | | | | | | | | | | | | | | | | | |
Benefit obligation at end of fiscal year | | $ | 2,977 | | $ | 3,615 | | $ | 325 | | $ | 351 | | $ | 150 | | $ | 152 | |
| | | | | | | | | | | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of fiscal year | | $ | 3,569 | | $ | 3,422 | | $ | — | | $ | — | | $ | — | | $ | — | |
Actual return on plan assets | |
| 141 | |
| 342 | |
| — | |
| — | |
| — | |
| — | |
Employer contributions | |
| — | |
| — | |
| 24 | |
| 21 | |
| 12 | |
| 12 | |
Plan participants’ contributions | |
| — | |
| — | |
| — | |
| — | |
| 13 | |
| 12 | |
Plan settlements | | | (442) | | | (16) | | | — | | | — | | | — | | | — | |
Benefits paid | |
| (172) | |
| (171) | |
| (24) | |
| (21) | |
| (25) | |
| (24) | |
Other | |
| — | |
| (8) | |
| — | |
| — | |
| — | |
| — | |
| | | | | | | | | | | | | | | | | | | |
Fair value of plan assets at end of fiscal year | | $ | 3,096 | | $ | 3,569 | | $ | — | | $ | — | | $ | — | | $ | — | |
Funded status and net asset and liability recognized at end of fiscal year | | $ | 119 | | $ | (46) | | $ | (325) | | $ | (351) | | $ | (150) | | $ | (152) | |
As of January 29, 2022, other assets and other current liabilities include $156 and $34, respectively, of the net asset and liability recognized for the above benefit plans. As of January 30, 2021, other assets and other current liabilities include $21 and $35, respectively, of the net asset and liability recognized for the above benefit plans. Pension plan assets do not include common shares of The Kroger Co.
In 2021, the Company settled certain company-sponsored pension plan obligations using existing assets of the plans. The Company recognized a non-cash settlement charge of $87, $68 net of tax, associated with the settlement of its obligations for the eligible participants’ pension balances that were distributed out of the plans via a lump sum distribution or the purchase of an annuity contract, based on each participant’s election. The settlement charge is included in “Non-service component of company-sponsored pension plan costs” in the Consolidated Statements of Operations.
| | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| ||||||||
Weighted average assumptions |
| 2021 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2019 |
|
Discount rate — Benefit obligation |
| 3.17 | % | 2.72 | % | 3.01 | % | 3.01 | % | 2.43 | % | 2.97 | % |
Discount rate — Net periodic benefit cost |
| 2.72 | % | 3.01 | % | 4.23 | % | 2.43 | % | 2.97 | % | 4.19 | % |
Expected long-term rate of return on plan assets |
| 5.50 | % | 5.50 | % | 6.00 | % | | | | | | |
Rate of compensation increase — Net periodic benefit cost |
| 3.03 | % | 3.03 | % | 3.04 | % | | | | | | |
Rate of compensation increase — Benefit obligation |
| 3.05 | % | 3.03 | % | 3.03 | % | | | | | | |
Cash Balance plan interest crediting rate | | 3.30 | % | 3.30 | % | 3.60 | % | | | | | | |
86
The Company’s discount rate assumptions were intended to reflect the rates at which the pension benefits could be effectively settled. They take into account the timing and amount of benefits that would be available under the plans. The Company’s policy is to match the plan’s cash flows to that of a hypothetical bond portfolio whose cash flow from coupons and maturities match the plan’s projected benefit cash flows. The discount rates are the single rates that produce the same present value of cash flows. The selection of the 3.17% and 3.01% discount rates as of year-end 2021 for pension and other benefits, respectively, represents the hypothetical bond portfolio using bonds with an AA or better rating constructed with the assistance of an outside consultant. A 100 basis point increase in the discount rate would decrease the projected pension benefit obligation as of January 29, 2022, by approximately $316.
The Company’s 2021 assumed pension plan investment return rate was 5.50% compared to 5.50% in 2020 and 6.00% in 2019. The value of all investments in the company-sponsored defined benefit pension plans during the calendar year ended December 31, 2021, net of investment management fees and expenses, increased 5.9% and for fiscal year 2021 investments increased 4.2%. Historically, the Company’s pension plans’ average rate of return was 8.2% for the 10 calendar years ended December 31, 2021, net of all investment management fees and expenses. For the past 20 years, the Company’s pension plans’ average annual rate of return has been 7.8%. To determine the expected rate of return on pension plan assets held by the Company, the Company considers current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories.
The Company calculates its expected return on plan assets by using the market-related value of plan assets. The market-related value of plan assets is determined by adjusting the actual fair value of plan assets for gains or losses on plan assets. Gains or losses represent the difference between actual and expected returns on plan investments for each plan year. Gains or losses on plan assets are recognized evenly over a five-year period. Using a different method to calculate the market-related value of plan assets would provide a different expected return on plan assets.
The pension benefit unfunded status decreased in 2021, compared to 2020, due primarily to an increase in discount rates, reducing the benefit obligation.
The following table provides the components of the Company’s net periodic benefit costs for 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | | | | | | | |
| ||||||||||||||||
| | Qualified Plans | | Non-Qualified Plans | | Other Benefits |
| |||||||||||||||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2019 |
| |||||||||
Components of net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 12 | | $ | 13 | | $ | 32 | | $ | — | | $ | — | | $ | 1 | | $ | 4 | | $ | 7 | | $ | 6 | |
Interest cost | |
| 92 | |
| 104 | |
| 124 | |
| 9 | |
| 10 | |
| 12 | |
| 4 | |
| 6 | |
| 8 | |
Expected return on plan assets | |
| (168) | |
| (168) | |
| (182) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prior service credit | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (12) | |
| (13) | |
| (11) | |
Actuarial (gain) loss | |
| 33 | |
| 35 | |
| 55 | |
| 6 | |
| 5 | |
| 6 | |
| (17) | |
| (8) | |
| (12) | |
Settlement loss recognized | | | 87 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Other | | | (1) | |
| 1 | |
| — | |
| 1 | |
| — | |
| — | |
| — | |
| (1) | |
| — | |
Net periodic benefit cost | | $ | 55 | | $ | (15) | | $ | 29 | | $ | 16 | | $ | 15 | | $ | 19 | | $ | (21) | | $ | (9) | | $ | (9) | |
The following table provides the projected benefit obligation (“PBO”) and the fair value of plan assets for those company-sponsored pension plans with projected benefit obligations in excess of plan assets:
| | | | | | | | | | | | | |
| | Qualified Plans | | Non-Qualified Plans |
| ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
PBO at end of fiscal year | | $ | 244 | | $ | 3,415 | | $ | 325 | | $ | 351 | |
Fair value of plan assets at end of year | | $ | 207 | | $ | 3,349 | | $ | — | | $ | — | |
87
The following table provides the accumulated benefit obligation (“ABO”) and the fair value of plan assets for those company-sponsored pension plans with accumulated benefit obligations in excess of plan assets:
| | | | | | | | | | | | |
| | Qualified Plans | | Non-Qualified Plans | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
ABO at end of fiscal year | | $ | 244 | | $ | 3,415 | | $ | 325 | | $ | 351 |
Fair value of plan assets at end of year | | $ | 207 | | $ | 3,349 | | $ | — | | $ | — |
The following table provides information about the Company’s estimated future benefit payments:
| | | | | | | |
|
| Pension |
| Other |
| ||
| | Benefits | | Benefits |
| ||
2022 | | $ | 207 | | $ | 12 | |
2023 | | $ | 204 | | $ | 12 | |
2024 | | $ | 207 | | $ | 13 | |
2025 | | $ | 209 | | $ | 13 | |
2026 | | $ | 209 | | $ | 13 | |
2027 —2031 | | $ | 1,009 | | $ | 58 | |
The following table provides information about the target and actual pension plan asset allocations as of January 29, 2022:
| | | | | | | |
| | | | Actual |
| ||
| | Target allocations | | Allocations |
| ||
|
| 2021 |
| 2021 |
| 2020 |
|
Pension plan asset allocation | | | | | | | |
Global equity securities |
| 2.0 | % | 7.0 | % | 6.0 | % |
Emerging market equity securities |
| 1.0 | | 1.7 | | 1.6 | |
Investment grade debt securities |
| 80.0 | | 73.6 | | 77.9 | |
High yield debt securities |
| 4.0 | | 2.5 | | 2.7 | |
Private equity |
| 10.0 | | 10.6 | | 8.1 | |
Hedge funds |
| — | | 2.9 | | 2.2 | |
Real estate |
| 3.0 | | 1.7 | | 1.5 | |
| | | | | | | |
Total |
| 100.0 | % | 100.0 | % | 100.0 | % |
Investment objectives, policies and strategies are set by the Retirement Benefit Plan Management Committee (the “Committee”). The primary objectives include holding and investing the assets and distributing benefits to participants and beneficiaries of the pension plans. Investment objectives have been established based on a comprehensive review of the capital markets and each underlying plan’s current and projected financial requirements. The time horizon of the investment objectives is long-term in nature and plan assets are managed on a going-concern basis.
Investment objectives and guidelines specifically applicable to each manager of assets are established and reviewed annually. Derivative instruments may be used for specified purposes, including rebalancing exposures to certain asset classes. Any use of derivative instruments for a purpose or in a manner not specifically authorized is prohibited, unless approved in advance by the Committee.
The target allocations shown for 2021 were established in 2020 based on the Company’s LDI strategy. An LDI strategy focuses on maintaining a close to fully-funded status over the long-term with minimal funded status risk. This is achieved by investing more of the plan assets in fixed income instruments to more closely match the duration of the plan liability.
The Company did not make any contributions to its company-sponsored pension plans in 2021, and the Company is not required to make any contributions to these plans in 2022. If the Company does make any contributions in 2022, the Company expects these contributions will decrease its required contributions in future years. Among other things, investment performance of plan assets, the interest rates required to be used to calculate the pension obligations, and
88
future changes in legislation, will determine the amounts of any contributions. The Company expects 2022 net periodic benefit costs for company-sponsored pension plans to be approximately ($38).
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The Company used a 5.30% initial health care cost trend rate, which is assumed to decrease on a linear basis to a 4.50% ultimate health care cost trend rate in 2037, to determine its expense.
The following tables, set forth by level within the fair value hierarchy, present the Qualified Plans’ assets at fair value as of January 29, 2022 and January 30, 2021:
Assets at Fair Value as of January 29, 2022
| | | | | | | | | | | | | | | | |
| | Quoted Prices in | | | | | Significant | | | | | |
| |||
| | Active Markets for | | Significant Other | | Unobservable | | Assets | | | |
| ||||
| | Identical Assets | | Observable Inputs | | Inputs | | Measured | | | |
| ||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| at NAV |
| Total |
| |||||
Cash and cash equivalents | | $ | 80 | | $ | — | | $ | — | | $ | — | | $ | 80 | |
Corporate Stocks | |
| 98 | |
| — | |
| — | |
| — | |
| 98 | |
Corporate Bonds | |
| — | |
| 1,070 | |
| — | |
| — | |
| 1,070 | |
U.S. Government Securities | |
| — | |
| 144 | |
| — | |
| — | |
| 144 | |
Mutual Funds | |
| 265 | |
| — | |
| — | |
| — | |
| 265 | |
Collective Trusts | |
| — | |
| — | |
| — | |
| 871 | |
| 871 | |
Hedge Funds | |
| — | |
| — | |
| 39 | |
| 49 | |
| 88 | |
Private Equity | |
| — | |
| — | |
| — | |
| 326 | |
| 326 | |
Real Estate | |
| — | |
| — | |
| 37 | |
| 16 | |
| 53 | |
Other | |
| — | |
| 101 | |
| — | |
| — | |
| 101 | |
Total | | $ | 443 | | $ | 1,315 | | $ | 76 | | $ | 1,262 | | $ | 3,096 | |
Assets at Fair Value as of January 30, 2021
| | | | | | | | | | | | | | | | |
| | Quoted Prices in | | | | | Significant | | | | | |
| |||
| | Active Markets for | | Significant Other | | Unobservable | | Assets | | | |
| ||||
| | Identical Assets | | Observable Inputs | | Inputs | | Measured | | | |
| ||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| at NAV |
| Total |
| |||||
Cash and cash equivalents | | $ | 120 | | $ | — | | $ | — | | $ | — | | $ | 120 | |
Corporate Stocks | |
| 89 | |
| — | |
| — | |
| — | |
| 89 | |
Corporate Bonds | |
| — | |
| 1,240 | |
| — | |
| — | |
| 1,240 | |
U.S. Government Securities | |
| — | |
| 225 | |
| — | |
| — | |
| 225 | |
Mutual Funds | |
| 329 | |
| — | |
| — | |
| — | |
| 329 | |
Collective Trusts | |
| — | |
| — | |
| — | |
| 1,014 | |
| 1,014 | |
Hedge Funds | |
| — | |
| — | |
| 35 | |
| 46 | |
| 81 | |
Private Equity | |
| — | |
| — | |
| — | |
| 289 | |
| 289 | |
Real Estate | |
| — | |
| — | |
| 39 | |
| 16 | |
| 55 | |
Other | |
| — | |
| 127 | |
| — | |
| — | |
| 127 | |
Total | | $ | 538 | | $ | 1,592 | | $ | 74 | | $ | 1,365 | | $ | 3,569 | |
Certain investments that are measured at fair value using the NAV per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented for these investments in the preceding tables are intended to permit reconciliation of the fair value hierarchies to the total fair value of plan assets.
89
For measurements using significant unobservable inputs (Level 3) during 2021 and 2020, a reconciliation of the beginning and ending balances is as follows:
| | | | | | |
|
| Hedge Funds |
| Real Estate | ||
Ending balance, February 1, 2020 | | $ | 43 | | $ | 43 |
Contributions into Fund | |
| 2 | |
| 1 |
Realized gains | |
| — | |
| 4 |
Unrealized gains | |
| — | |
| (6) |
Distributions | |
| (10) | |
| (3) |
| | | | | | |
Ending balance, January 30, 2021 | |
| 35 | |
| 39 |
Contributions into Fund | |
| — | |
| 1 |
Realized gains | |
| 2 | |
| 2 |
Unrealized gains | |
| 7 | |
| 6 |
Distributions | |
| (5) | |
| (11) |
| | | | | | |
Ending balance, January 29, 2022 | | $ | 39 | | $ | 37 |
See Note 7 for a discussion of the levels of the fair value hierarchy. The assets’ fair value measurement level above is based on the lowest level of any input that is significant to the fair value measurement.
The following is a description of the valuation methods used for the Qualified Plans’ assets measured at fair value in the above tables:
● | Cash and cash equivalents: The carrying value approximates fair value. |
● | Corporate Stocks: The fair values of these securities are based on observable market quotations for identical assets and are valued at the closing price reported on the active market on which the individual securities are traded. |
● | Corporate Bonds: The fair values of these securities are primarily based on observable market quotations for similar bonds, valued at the closing price reported on the active market on which the individual securities are traded. When such quoted prices are not available, the bonds are valued using a discounted cash flow approach using current yields on similar instruments of issuers with similar credit ratings, including adjustments for certain risks that may not be observable, such as credit and liquidity risks. |
● | U.S. Government Securities: Certain U.S. Government securities are valued at the closing price reported in the active market in which the security is traded. Other U.S. government securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for similar securities, the security is valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks. |
● | Mutual Funds: The fair values of these securities are based on observable market quotations for identical assets and are valued at the closing price reported on the active market on which the individual securities are traded. |
● | Collective Trusts: The collective trust funds are public investment vehicles valued using a Net Asset Value (NAV) provided by the manager of each fund. These assets have been valued using NAV as a practical expedient. |
● | Hedge Funds: The Hedge funds classified as Level 3 include investments that are not readily tradeable and have valuations that are not based on readily observable data inputs. The fair value of these assets is estimated based on information provided by the fund managers or the general partners. Therefore, these assets are classified as Level 3. Certain other hedge funds are private investment vehicles valued using a NAV provided by the manager of each fund. These assets have been valued using NAV as a practical expedient. |
90
● | Private Equity: Private Equity investments are valued based on the fair value of the underlying securities within the fund, which include investments both traded on an active market and not traded on an active market. For those investments that are traded on an active market, the values are based on the closing price reported on the active market on which those individual securities are traded. For investments not traded on an active market, or for which a quoted price is not publicly available, a variety of unobservable valuation methodologies, including discounted cash flow, market multiple and cost valuation approaches, are employed by the fund manager to value investments. Fair values of all investments are adjusted annually, if necessary, based on audits of the private equity fund financial statements; such adjustments are reflected in the fair value of the |
● | Real Estate: Real estate investments include investments in
practical expedient. |
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
The Company contributed and expensed $289, $294 and $264 to employee 401(k) retirement savings accounts in 2021, 2020 and 2019, respectively. The 401(k) retirement savings account plans provide to eligible employees both matching contributions and automatic contributions from the Company based on participant contributions, compensation as defined by the plan and length of service.
In 2019, the Company approved and implemented a plan to reorganize certain portions of its division management structure. This reorganization increased operational effectiveness and reduced 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 2019, which is included in the OG&A caption within the Consolidated Statements of Operations. Of the total charge, $42 was unpaid as of February 1, 2020 and was included in Other Current Liabilities within the Consolidated Balance Sheet and the remaining balance was paid in 2020.
The Company contributes to various multi-employer pension plans based on obligations arising from collective bargaining agreements. These multi-employer pension plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.
The Company recognizes expense in connection with these plans as contributions are funded or when commitments are probable and reasonably estimable, in accordance with GAAP. The Company made cash contributions to these plans of $1,109 in 2021, $619 in 2020 and $461 in 2019. The increase in 2021, compared to 2020, is due to the contractual payments made in 2021 related to our commitments established for certain ratification agreements. The increase in 2020, compared to 2019, is due to incremental contributions we made in 2020 to multi-employer pension plans, helping stabilize future associate benefits.
The Company continues to evaluate and address potential exposure to under-funded multi-employer pension plans as it relates to the Company’s associates who are beneficiaries of these plans. These under-fundings are not a liability of the Company. When an opportunity arises that is economically feasible and beneficial to the Company and its associates, the Company may negotiate the restructuring of under-funded multi-employer pension plan obligations to help stabilize associates’ future benefits and become the fiduciary of the restructured multi-employer pension plan. The commitments from these restructurings do not change the Company’s debt profile as it relates to its credit rating since these off balance sheet commitments are typically considered in the Company’s investment grade debt rating.
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The Company is currently designated as the named fiduciary of the United Food and Commercial Workers (“UFCW”) Consolidated Pension Plan and the International Brotherhood of Teamsters (“IBT”) Consolidated Pension Fund and has sole investment authority over these assets. Due to opportunities arising, the Company has restructured certain multi-employer pension plans. The significant effects of these restructuring agreements recorded in our Consolidated Financial Statements are:
● | In 2021, associates within the Fred Meyer and QFC divisions ratified an agreement for the transfer of liabilities from the Sound Retirement Trust to the UFCW Consolidated Pension Plan. The Company transferred $449, $344 net of tax, in net accrued pension liabilities and prepaid escrow funds to fulfill obligations for past service for associates and retirees. The agreement will be satisfied by cash installment payments to the UFCW Consolidated Pension Plan and will be paid evenly over seven years. |
● | In 2020, certain of the Company’s associates ratified an agreement with certain UFCW local unions to withdraw from the UFCW International
National Fund. The Company also
|
● | In 2019, the Company
|
The risks of participating in multi-employer pension plans are different from the risks of participating in single-employer pension plans in the following respects:
a. | Assets contributed to the |
b. | If a participating employer stops contributing to the plan, the unfunded obligations of the plan allocable to such withdrawing employer may be borne by the remaining participating employers. |
c. | If the Company stops participating in some of its multi-employer pension plans, the Company may be required to pay those plans an amount based on its allocable share of the unfunded vested benefits of the plan, referred to as a |
92
The Company’s participation in multi-employer plans is outlined in the following tables. The EIN / Pension Plan Number column provides the Employer Identification Number (“EIN”) and the three-digit pension plan number. The most recent Pension Protection Act Zone Status available in 2021 and 2020 is for the plan’s year-end at December 31, 2020 and December 31, 2019, respectively. Among other factors, generally, plans in the red zone are less than 65 percent funded, plans in the yellow zone are less than 80 percent funded and plans in the green zone are at least 80 percent funded. The FIP/RP Status Pending / Implemented Column indicates plans for which a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. Unless otherwise noted, the information for these tables was obtained from the Forms 5500 filed for each plan’s year-end at December 31, 2020 and December 31, 2019. The multi-employer contributions listed in the table below are the Company’s multi-employer contributions made in fiscal years 2021, 2020 and 2019.
The following table contains information about the Company’s multi-employer pension plans:
| | | | | | | | | | | | | | | | | | | | |
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|
|
|
|
|
|
| FIP/RP |
|
| |
|
| |
|
| |
|
|
|
| | | | Pension Protection | | Status | | | | | | | | | | | |
| ||
| | EIN / Pension | | Act Zone Status | | Pending/ | | Multi-Employer Contributions | | Surcharge |
| |||||||||
Pension Fund | | Plan Number | | 2021 | | 2020 | | Implemented | | 2021 | | 2020 | | 2019 | | Imposed(5) |
| |||
SO CA UFCW Unions & Food Employers Joint Pension Trust Fund(1)(2) |
| 95-1939092 - 001 |
| Yellow |
| Yellow |
| Implemented | | $ | 83 | | $ | 86 | | $ | 75 |
| No | |
Desert States Employers & UFCW Unions Pension Plan(1) |
| 84-6277982 - 001 |
| Green |
| Green |
| No | |
| 22 | |
| 19 | |
| 19 |
| No | |
Sound Retirement Trust (formerly Retail Clerks Pension Plan)(1)(3) |
| 91-6069306 – 001 |
| Yellow |
| Yellow |
| Implemented | |
| 24 | |
| 29 | |
| 25 |
| No | |
Rocky Mountain UFCW Unions and Employers Pension Plan(1) |
| 84-6045986 - 001 |
| Green |
| Green |
| No | |
| 29 | |
| 28 | |
| 23 |
| No | |
Oregon Retail Employees Pension Plan(1) |
| 93-6074377 - 001 |
| Green |
| Green |
| No | |
| 10 | |
| 9 | |
| 9 |
| No | |
Bakery and Confectionary Union & Industry International Pension Fund(1) |
| 52-6118572 - 001 |
| Red |
| Red |
| Implemented | |
| 8 | |
| 8 | |
| 10 |
| No | |
Retail Food Employers & UFCW Local 711 Pension(1) |
| 51-6031512 - 001 |
| Yellow |
| Yellow |
| Implemented | |
| 11 | |
| 11 | |
| 10 |
| No | |
United Food & Commercial Workers Intl Union — Industry Pension Fund(1)(4) |
| 51-6055922 - 001 |
| Green |
| Green |
| No | |
| 550 | |
| 29 | |
| 32 |
| No | |
Western Conference of Teamsters Pension Plan |
| 91-6145047 - 001 |
| Green |
| Green |
| No | |
| 37 | |
| 35 | |
| 34 |
| No | |
Central States, Southeast & Southwest Areas Pension Plan |
| 36-6044243 - 001 |
| Red |
| Red |
| Implemented | |
| 37 | |
| 12 | |
| — |
| No | |
UFCW Consolidated Pension Plan(1) |
| 58-6101602 – 001 |
| Green |
| Green |
| No | |
| 243 | |
| 321 | |
| 174 |
| No | |
IBT Consolidated Pension Plan(1)(6) | | 82-2153627 - 001 | | N/A | | N/A | | No | | | 29 | | | 18 | | | 33 | | No | |
Other | | | | | | | | | |
| 26 | |
| 14 | |
| 17 | | | |
Total Contributions | | | | | | | | | | $ | 1,109 | | $ | 619 | | $ | 461 | | | |
(1) | The Company's multi-employer contributions to these respective funds represent more than 5% ofthetotalcontributionsreceivedbythepension
|
(2) | The information for this fund was obtained from the Form 5500 filed for the |
(3) | The information for this fund was obtained from the Form 5500 filed for the plan's year-end at September 30, 2020 and September 30, 2019. |
(4) | The information for this fund was obtained from the Form 5500 filed for the plan's year-end at June 30, 2020 and June 30, 2019. |
(5) | Under the Pension Protection Act, a surcharge may be imposed when employers make contributions under a collective bargaining agreement that is not in compliance with a rehabilitation plan. As of |
(6) | The plan was formed after 2006, and therefore is not subject to |
93
The following table describes (a) the expiration date of the Company’s collective bargaining agreements and (b) the expiration date of the Company’s most significant collective bargaining agreements for each of the material multi-employer funds in which the Company participates:
| | | | | | | |
| | Expiration Date | | | | | |
| | of Collective | | | | Most Significant Collective | |
| | Bargaining | | | | Bargaining Agreements(1) | |
Pension Fund | Agreements | Count | Expiration | ||||
SO CA UFCW Unions & Food Employers Joint Pension Trust Fund | March 2022 to June 2024 | 2 | March 2022 to June 2024 | | |||
UFCW Consolidated Pension Plan | April 2020(2) to August 2026 | 4 | April 2020(2) to August 2026 | | |||
Desert States Employers & UFCW Unions Pension Plan | October 2023 to June 2025 | 1 | October 2023 | | |||
Sound Retirement Trust (formerly Retail Clerks Pension Plan) | April 2022 to September 2024 | 4 | May 2022 to August 2022 | | |||
Rocky Mountain UFCW Unions and | January 2025 to February 2025 | 1 | January 2025 | | |||
Oregon Retail Employees Pension Plan | August 2024 to March 2026 | 3 | August 2024 to July 2025 | | |||
Bakery and Confectionary Union & Industry International Pension Fund | May 2021(2) to July 2024 | 3 | October 2021(2) to June 2024 | | |||
Retail Food Employers & UFCW Local 711 Pension | March 2022 to January 2024 | 1 | March 2022 | | |||
United Food & Commercial Workers Intl Union — Industry Pension Fund | April 2020(2) to June 2025 | 2 | July 2023 to August 2023 | | |||
Western Conference of | April 2022 to September 2025 | 4 | April 2022 to September 2025 | | |||
International Brotherhood of | | September 2022 to | | 3 | | September 2022 to September 2024 | |
(1) | This column represents the number of significant collective bargaining agreements and their expiration date for |
(2) | Certain collective bargaining agreements for each of
|
In 2020, the Company held escrow deposits amounting to $271 due to certain restructuring agreements. These payments were included in “Prepaid and other current assets” in the Company’s Consolidated Balance Sheets. These escrow deposits were paid in 2021.
Based on the most recent information available to it, the Company believes the present value of actuarial accrued liabilities in most of these multi-employer plans exceeds the value of the assets held in trust to pay benefits. Moreover, if the Company were to exit certain markets or otherwise cease making contributions to these funds, the Company could trigger a withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and it can be reasonably estimated.
The Company also contributes to various other multi-employer benefit plans that provide health and welfare benefits to active and retired participants. Total contributions made by the Company to these other multi-employer health and welfare plans were approximately $1,197 in 2021, $1,262 in 2020, and $1,252 in a gain and it is expected to close in the first quarter of 2019.
16. | DISPOSAL OF BUSINESS |
On March 13, 2019, the Company completed the sale of its You Technology business to Inmar for total consideration of $565, including $396 of cash and $64 of preferred equity received upon closing. The Company is also entitled to receive other cash payments of $105 over five years. The transaction includes a long-term service agreement for Inmar to provide the Company digital coupon services. The sale resulted in a gain of $70, $52 net of tax, 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 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. The sale resulted in a gain of $106, $80 net of tax, which is included in “Gain on sale of businesses” in the Consolidated Statements of Operations.
94
In the third quarter of 2019, as a result of a portfolio review, the Company 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. Subsequently, the decision was made by Lucky’s Market to file for bankruptcy in January 2020, which led the Company to fully write off the value of its investment and deconsolidate Lucky’s Market from the consolidated financial statements. This resulted in an additional non-cash charge of $174, $125 net of tax, in the fourth quarter of 2019, which is included in OG&A in the Consolidated Statements of Operations. The amount of the total 2019 charge attributable to The Kroger Co. is $305, $225 net of tax. The Company maintains liabilities associated with certain property related guarantees that will result in the Company making payments to settle these over time.
17. |
|
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.
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. The Company adopted this guidance on a prospective basis in the first quarter of 2020. Capitalized implementation costs of $151, net of accumulated amortization of $15, and $81, net of accumulated amortization of $2, are included in “Other assets” in the Company’s Consolidated Balance Sheets as of January 29, 2022 and January 30, 2021, respectively. The corresponding cash flows related to these arrangements are included in “Net cash provided by operating activities” in the Company’s Consolidated Statements of Cash Flows.
18. | RECENTLY ISSUED ACCOUNTING STANDARDS |
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This standard provides optional expedients and exceptions for applying GAAP to certain contract modifications and hedging relationships that reference LIBOR or other reference rates expected to be discontinued. This guidance is effective upon issuance and can be applied through December 31, 2022. The Company may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The adoption of the standard is not expected to have a material effect on the Company’s Consolidated Statements of Operations, Consolidated Balance Sheets or Consolidated Statements of Cash Flows.
95
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A. | EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. |
As of January 29, 2022, our Chief Executive Officer and Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated the Company’s disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of January 29, 2022.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company is in the process of implementing a broad, multi-year, technology transformation project to modernize mainframe, middleware and legacy systems to achieve better process efficiencies across customer service, merchandising, sourcing, payroll and accounting through the use of various solutions. Implementation of new accounting ERP modules for general ledger, accounts receivable, accounts payable, fixed assets and a new indirect procurement module were implemented at the beginning of the first quarter of 2021. Additional phases of the project will continue to be implemented over the next several years. As of January 29, 2022, there have been no material additional implementations of modules since the beginning of the first quarter of 2021. As the Company’s technology transformation project continues, the Company continues to emphasize the maintenance of effective internal controls and assessment of the design and operating effectiveness of key control activities throughout development and deployment of each phase and will evaluate as additional phases are deployed.
There were no changes in Kroger’s internal control over financial reporting that materially affected, or were reasonably likely to materially affect, Kroger’s internal control over financial reporting during the quarter ended January 29, 2022.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of January 29, 2022.
The effectiveness of the Company’s internal control over financial reporting as of January 29, 2022, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which can be found in Item 8 of this Form 10-K.
ITEM 9B. | OTHER INFORMATION. |
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
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PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Our board of directors has adopted The Kroger Co. Policy on Business Ethics, applicable to all officers, employees and directors, including Kroger’s principal executive, financial and accounting officers. The Policy on Business Ethics is available on our website at ir.kroger.com under Investors – Governance – Policy on Business Ethics. A copy of the Code of Ethics is available in print free of charge to any shareholder who requests a copy. Shareholders may make a written request to Kroger’s Secretary at our executive offices at 1014 Vine Street, Cincinnati, Ohio 45202. We intend to satisfy the disclosure requirement regarding any amendment to, or a waiver from, a provision of the Policy on Business Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website. The information required by this Item 10 with respect to executive officers is included within Item 1 in Part I of this Annual Report on Form 10-K under the caption “Information about our Executive Officers.” The information required by this Item not otherwise set forth in Part I above or in this Item 10 of Part III is set forth under the headings Election of Directors, Information Concerning the Board of Directors- Committees of the Board, Information Concerning the Board of Directors- Audit Committee and Delinquent 16(a) Reports in the definitive proxy statement to be filed by the Company with the Securities and Exchange Commission within 120 days after the end of the fiscal year 2021 (the “2022 proxy statement”) and is hereby incorporated by reference into this Form 10-K.
The information required by this Item is set forth in the sections entitled Compensation Discussion and Analysis, Compensation Committee Report, and Compensation Tables in the 2022 proxy statement and is hereby incorporated by reference into this Form 10-K.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|
The following table provides information regarding shares outstanding and available for issuance under our existing equity compensation plans:
Equity Compensation Plan Information
| | | | | | | | |
|
| (a) |
| (b) |
| (c) |
| |
| | | | | | | Number of securities |
|
| | | | | | | remaining available for future |
|
| | Number of securities to | | Weighted-average | | issuance under equity |
| |
| | be issued upon exercise | | exercise price of | | compensation plans |
| |
| | of outstanding options, | | outstanding options, | | (excluding securities |
| |
Plan Category | | warrants and rights(1) | | warrants and rights(1) | | reflected in column (a)) |
| |
| | | | | | | | |
Equity compensation plans approved by security holders |
| 29,683,904 | | $ | 28.15 |
| 19,319,196 | |
Equity compensation plans not approved by security holders |
| — | | $ | — |
| — | |
Total |
| 29,683,904 | | $ | 28.15 |
| 19,319,196 | |
|
|
|
|
|
|
|
|
|
|
| (a) |
| (b) |
| (c) |
| |
|
|
|
|
|
|
| Number of securities |
|
|
|
|
|
|
|
| remaining for future |
|
|
| Number of securities to |
| Weighted-average |
| issuance under equity |
| |
|
| be issued upon exercise |
| exercise price of |
| compensation plans |
| |
|
| of outstanding options, |
| outstanding options, |
| (excluding securities |
| |
Plan Category |
| warrants and rights (1) |
| warrants and rights (1) |
| reflected in column (a)) |
| |
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders |
| 36,526,924 |
| $ | 23.42 |
| 28,386,544 |
|
Equity compensation plans not approved by security holders |
| — |
| $ | — |
| — |
|
Total |
| 36,526,924 |
| $ | 23.42 |
| 28,386,544 |
|
97
The remainder of the information required by this Item is set forth in the section entitled Beneficial Ownership of Common Stock in the 2022 proxy statement and is hereby incorporated by reference into this Form 10-K.
|
|
The remainder of the information required by this Item is set forth in the section entitled Beneficial Ownership of Common Stock in the 2019 proxy statement and is hereby incorporated by reference into this Form 10-K.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
This
The information required by this Item is set forth in the sections entitled Related Person Transactions and Information Concerning the Board of Directors-Independence in the 2022 proxy statement and is hereby incorporated by reference into this Form 10-K.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
The information required by this Item is set forth in the section entitled Ratification of the Appointment of Kroger’s Independent Auditor in the 2022 proxy statement and is hereby incorporated by reference into this Form 10-K.
98
PART IV
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
(a)1.† | Financial Statements: | |
| | Report of Independent Registered Public Accounting Firm (PCAOB ID 238) |
| | Consolidated Balance Sheets as of January 29, 2022 and January 30, 2021 |
| | Consolidated Statements of Operations for the years ended January 29, 2022, January 30, 2021 and February 1, 2020 |
| | Consolidated Statements of Comprehensive Income for the years ended January 29, 2022, January 30, 2021and February 1, 2020 Consolidated Statements of Cash Flows for the years ended January 29, 2022, January 30, 2021 and February 1, 2020 |
| | Consolidated Statement of Changes in Shareholders’ Equity for the years ended January 29, 2022, January 30, 2021 and February 1, 2020 |
| | Notes to Consolidated Financial Statements |
| | |
(a)2. | | Financial Statement Schedules: |
| | There are no Financial Statement Schedules included with this filing for the reason that they are not applicable or are not required or the information is included in the |
| | |
(a)3.(b) | | Exhibits |
| | |
3.1 | |
|
| | |
3.2 | | |
| | |
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. |
| | |
4.2 | | |
| | |
10.1* | | |
| | |
10.2* | | |
| | |
10.3* | | |
| | |
10.4* | | |
| | |
10.5* | | |
| | |
10.6 | | |
| | |
99
10.7* |
|
100
Not Applicable. 101 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|