UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
⌧ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 10, 20189, 2019
OR
◻ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-303
|
The Kroger Co.
(Exact name of registrant as specified in its charter)
| | |
Ohio | | 31-0345740 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
1014 Vine Street, Cincinnati OH , Ohio45202
(Address of principal executive offices)
(Zip Code)
(513) (513) 762-4000
(Registrant’s telephone number, including area code)
Unchanged
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common, $1.00 Par Value | KR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒⌧ No ☐◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒⌧ No ☐◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
Large accelerated filer |
| | Accelerated filer |
|
Non-accelerated filer |
| | Smaller reporting company |
|
|
| | Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐◻ No ☒.⌧.
There were 797,743,035800,587,313 shares of Common Stock ($1 par value) outstanding as of December 12, 2018.11, 2019.
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements. |
Item 1.Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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| Third Quarter Ended |
| Three Quarters Ended |
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| November 10, |
| November 4, |
| November 10, |
| November 4, |
| ||||
(In millions, except per share amounts) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
Sales |
| $ | 27,672 |
| $ | 27,749 |
| $ | 93,071 |
| $ | 91,631 |
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Operating expenses |
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Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
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| 21,699 |
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| 21,532 |
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| 72,991 |
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| 71,422 |
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Operating, general and administrative |
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| 4,556 |
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| 4,701 |
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| 15,291 |
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| 15,585 |
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Rent |
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| 200 |
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| 196 |
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| 680 |
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| 691 |
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Depreciation and amortization |
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| 570 |
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| 573 |
|
| 1,884 |
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| 1,871 |
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Operating profit |
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| 647 |
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| 747 |
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| 2,225 |
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| 2,062 |
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Other income (expense) |
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Interest expense |
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| (142) |
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| (136) |
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| (479) |
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| (453) |
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Non-service component of company-sponsored pension plan costs |
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| (6) |
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| (7) |
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| (19) |
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| (21) |
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Mark to market gain (loss) on Ocado securities |
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| (100) |
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| — |
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| 152 |
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| — |
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Gain on sale of business |
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| — |
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| — |
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| 1,782 |
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| — |
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Net earnings before income tax expense |
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| 399 |
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| 604 |
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| 3,661 |
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| 1,588 |
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Income tax expense |
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| 91 |
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| 215 |
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| 834 |
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| 552 |
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Net earnings including noncontrolling interests |
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| 308 |
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| 389 |
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| 2,827 |
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| 1,036 |
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Net loss attributable to noncontrolling interests |
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| (9) |
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| (8) |
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| (24) |
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| (17) |
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Net earnings attributable to The Kroger Co. |
| $ | 317 |
| $ | 397 |
| $ | 2,851 |
| $ | 1,053 |
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Net earnings attributable to The Kroger Co. per basic common share |
| $ | 0.39 |
| $ | 0.44 |
| $ | 3.46 |
| $ | 1.16 |
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Average number of common shares used in basic calculation |
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| 797 |
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| 887 |
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| 814 |
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| 901 |
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Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.39 |
| $ | 0.44 |
| $ | 3.43 |
| $ | 1.15 |
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Average number of common shares used in diluted calculation |
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| 807 |
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| 893 |
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| 822 |
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| 910 |
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| | | | | | | | | | | | | |
| | Third Quarter Ended | | Three Quarters Ended | | ||||||||
| | November 9, | | November 10, | | November 9, | | November 10, | | ||||
(In millions, except per share amounts) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Sales | | $ | 27,974 | | $ | 27,831 | | $ | 93,393 | | $ | 93,566 | |
| | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | |
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below | |
| 21,798 | |
| 21,753 | |
| 72,787 | |
| 73,147 | |
Operating, general and administrative | |
| 5,097 | |
| 4,661 | |
| 16,223 | |
| 15,630 | |
Rent | |
| 201 | |
| 200 | |
| 675 | |
| 680 | |
Depreciation and amortization | |
| 624 | |
| 570 | |
| 1,994 | |
| 1,884 | |
| | | | | | | | | | | | | |
Operating profit | |
| 254 | |
| 647 | |
| 1,714 | |
| 2,225 | |
| | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | |
Interest expense | | | (137) | | | (142) | | | (463) | | | (479) | |
Non-service component of company-sponsored pension plan costs | | | (1) | | | (6) | | | (2) | | | (19) | |
Mark to market gain (loss) on Ocado securities | | | 106 | | | (100) | | | 166 | | | 152 | |
Gain on sale of businesses | |
| — | |
| — | | | 176 | |
| 1,782 | |
| | | | | | | | | | | | | |
Net earnings before income tax expense | |
| 222 | |
| 399 | |
| 1,591 | |
| 3,661 | |
| | | | | | | | | | | | | |
Income tax expense | |
| 79 | |
| 91 | |
| 398 | |
| 834 | |
| | | | | | | | | | | | | |
Net earnings including noncontrolling interests | |
| 143 | |
| 308 | |
| 1,193 | |
| 2,827 | |
Net loss attributable to noncontrolling interests | |
| (120) | |
| (9) | |
| (139) | |
| (24) | |
| | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. | | $ | 263 | | $ | 317 | | $ | 1,332 | | $ | 2,851 | |
| | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per basic common share | | $ | 0.32 | | $ | 0.39 | | $ | 1.65 | | $ | 3.46 | |
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Average number of common shares used in basic calculation | |
| 802 | |
| 797 | |
| 800 | |
| 814 | |
| | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.32 | | $ | 0.39 | | $ | 1.64 | | $ | 3.43 | |
| | | | | | | | | | | | | |
Average number of common shares used in diluted calculation | |
| 807 | |
| 807 | |
| 805 | |
| 822 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
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| Third Quarter Ended | | Three Quarters Ended | | ||||||||
| | November 9, | | November 10, | | November 9, | | November 10, | | ||||
(In millions) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
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Net earnings including noncontrolling interests | | $ | 143 | | $ | 308 | | $ | 1,193 | | $ | 2,827 | |
| | | | | | | | | | | | | |
Other comprehensive income (loss) | | | | | | | | | | | | | |
Realized gains on available for sale securities, net of income tax(1) | |
| — | | | — | |
| — | | | (4) | |
Change in pension and other postretirement defined benefit plans, net of income tax(2) | | | 7 | | | 10 | | | 23 | | | 33 | |
Unrealized gains and losses on cash flow hedging activities, net of income tax(3) | |
| 34 | |
| 37 | |
| (29) | |
| 37 | |
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4) | | | 1 | | | 1 | | | 3 | | | 3 | |
Cumulative effect of accounting change(5) | | | — | | | — | | | (146) | | | — | |
| | | | | | | | | | | | | |
Total other comprehensive income (loss) | |
| 42 | |
| 48 | |
| (149) | | | 69 | |
| | | | | | | | | | | | | |
Comprehensive income | |
| 185 | |
| 356 | |
| 1,044 | |
| 2,896 | |
Comprehensive loss attributable to noncontrolling interests | |
| (120) | |
| (9) | |
| (139) | |
| (24) | |
Comprehensive income attributable to The Kroger Co. | | $ | 305 | | $ | 365 | | $ | 1,183 | | $ | 2,920 | |
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| Third Quarter Ended |
| Three Quarters Ended |
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|
| November 10, |
| November 4, |
| November 10, |
| November 4, |
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(In millions) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
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Net earnings including noncontrolling interests |
| $ | 308 |
| $ | 389 |
| $ | 2,827 |
| $ | 1,036 |
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Other comprehensive income (loss) |
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Realized gains on available for sale securities, net of income tax(1) |
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| — |
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| — |
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| (4) |
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| — |
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Change in pension and other postretirement defined benefit plans, net of income tax(2) |
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| 10 |
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| 10 |
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| 33 |
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| 33 |
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Unrealized gains and losses on cash flow hedging activities, net of income tax(3) |
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| 37 |
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| 9 |
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| 37 |
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| (26) |
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Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4) |
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| 1 |
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| 1 |
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| 3 |
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| 2 |
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Total other comprehensive income |
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| 48 |
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| 20 |
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| 69 |
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| 9 |
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Comprehensive income |
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| 356 |
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| 409 |
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| 2,896 |
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| 1,045 |
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Comprehensive loss attributable to noncontrolling interests |
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| (9) |
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| (8) |
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| (24) |
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| (17) |
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Comprehensive income attributable to The Kroger Co. |
| $ | 365 |
| $ | 417 |
| $ | 2,920 |
| $ | 1,062 |
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(1) |
| Amount is net of tax of |
(2) |
| Amount is net of tax of $3 for the third quarter of |
(3) |
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(4) |
| Amount is net of tax of $1 for the third quarter of |
(5) | Related to the adoption of Accounting Standards Update (“ASU”) 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," (see Note 5 for |
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(unaudited)
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|
| November 10, |
| February 3, |
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(In millions, except par amounts) |
| 2018 |
| 2018 |
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ASSETS |
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Current assets |
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Cash and temporary cash investments |
| $ | 429 |
| $ | 347 |
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Store deposits in-transit |
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| 1,098 |
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| 1,161 |
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Receivables |
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| 1,510 |
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| 1,637 |
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FIFO inventory |
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| 8,368 |
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| 7,781 |
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LIFO reserve |
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| (1,285) |
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| (1,248) |
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Assets held for sale |
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| 172 |
|
| 604 |
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Prepaid and other current assets |
|
| 461 |
|
| 835 |
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Total current assets |
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| 10,753 |
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| 11,117 |
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Property, plant and equipment, net |
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| 21,515 |
|
| 21,071 |
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Intangibles, net |
|
| 1,201 |
|
| 1,100 |
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Goodwill |
|
| 3,087 |
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| 2,925 |
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Other assets |
|
| 1,585 |
|
| 984 |
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Total Assets |
| $ | 38,141 |
| $ | 37,197 |
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LIABILITIES |
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Current liabilities |
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Current portion of long-term debt including obligations under capital leases and financing obligations |
| $ | 3,371 |
| $ | 3,560 |
|
Trade accounts payable |
|
| 6,505 |
|
| 5,858 |
|
Accrued salaries and wages |
|
| 1,070 |
|
| 1,099 |
|
Liabilities held for sale |
|
| 57 |
|
| 259 |
|
Other current liabilities |
|
| 3,793 |
|
| 3,421 |
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Total current liabilities |
|
| 14,796 |
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| 14,197 |
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Long-term debt including obligations under capital leases and financing obligations |
|
| 11,647 |
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| 12,029 |
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Deferred income taxes |
|
| 1,738 |
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| 1,568 |
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Pension and postretirement benefit obligations |
|
| 601 |
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| 792 |
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Other long-term liabilities |
|
| 1,749 |
|
| 1,706 |
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Total Liabilities |
|
| 30,531 |
|
| 30,292 |
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Commitments and contingencies see Note 8 |
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SHAREHOLDERS’ EQUITY |
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Preferred shares, $100 per share, 5 shares authorized and unissued |
|
| — |
|
| — |
|
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2018 and 2017 |
|
| 1,918 |
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| 1,918 |
|
Additional paid-in capital |
|
| 3,209 |
|
| 3,161 |
|
Accumulated other comprehensive loss |
|
| (402) |
|
| (471) |
|
Accumulated earnings |
|
| 19,535 |
|
| 17,007 |
|
Common shares in treasury, at cost, 1,120 shares in 2018 and 1,048 shares in 2017 |
|
| (16,608) |
|
| (14,684) |
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Total Shareholders’ Equity - The Kroger Co. |
|
| 7,652 |
|
| 6,931 |
|
Noncontrolling interests |
|
| (42) |
|
| (26) |
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Total Equity |
|
| 7,610 |
|
| 6,905 |
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Total Liabilities and Equity |
| $ | 38,141 |
| $ | 37,197 |
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| | | | | | | |
|
| November 9, |
| February 2, |
| ||
(In millions, except par amounts) | | 2019 | | 2019 |
| ||
ASSETS | | | | | | | |
Current assets | | | | | | | |
Cash and temporary cash investments | | $ | 545 | | $ | 429 | |
Store deposits in-transit | |
| 1,034 | |
| 1,181 | |
Receivables | |
| 1,600 | |
| 1,589 | |
FIFO inventory | |
| 8,757 | |
| 8,123 | |
LIFO reserve | |
| (1,345) | |
| (1,277) | |
Assets held for sale | ��� |
| — | |
| 166 | |
Prepaid and other current assets | | | 434 | | | 592 | |
Total current assets | |
| 11,025 | |
| 10,803 | |
| | | | | | | |
Property, plant and equipment, net | |
| 21,801 | |
| 21,635 | |
Operating lease assets | | | 6,847 | | | — | |
Intangibles, net | |
| 1,086 | |
| 1,258 | |
Goodwill | |
| 3,076 | |
| 3,087 | |
Other assets | |
| 1,558 | |
| 1,335 | |
| | | | | | | |
Total Assets | | $ | 45,393 | | $ | 38,118 | |
| | | | | | | |
LIABILITIES | | | | | | | |
Current liabilities | | | | | | | |
Current portion of long-term debt including obligations under finance leases | | $ | 1,417 | | $ | 3,157 | |
Current portion of operating lease liabilities | | | 673 | | | — | |
Trade accounts payable | |
| 6,867 | |
| 6,059 | |
Accrued salaries and wages | |
| 1,087 | |
| 1,227 | |
Liabilities held for sale | | | — | | | 51 | |
Other current liabilities | |
| 4,074 | |
| 3,780 | |
Total current liabilities | |
| 14,118 | |
| 14,274 | |
| | | | | | | |
Long-term debt including obligations under finance leases | | | 12,227 | | | 12,072 | |
Noncurrent operating lease liabilities | | | 6,449 | | | — | |
Deferred income taxes | |
| 1,517 | |
| 1,562 | |
Pension and postretirement benefit obligations | |
| 471 | |
| 494 | |
Other long-term liabilities | |
| 1,883 | |
| 1,881 | |
| | | | | | | |
Total Liabilities | |
| 36,665 | |
| 30,283 | |
| | | | | | | |
Commitments and contingencies see Note 8 | | | | | | | |
| | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
Preferred shares, $100 par per share, 5 shares authorized and unissued | | | — | | | — | |
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2019 and 2018 | |
| 1,918 | |
| 1,918 | |
Additional paid-in capital | |
| 3,296 | |
| 3,245 | |
Accumulated other comprehensive loss | |
| (495) | |
| (346) | |
Accumulated earnings | |
| 20,781 | |
| 19,681 | |
Common shares in treasury, at cost, 1,116 shares in 2019 and 1,120 shares in 2018 | |
| (16,585) | |
| (16,612) | |
| | | | | | | |
Total Shareholders’ Equity - The Kroger Co. | |
| 8,915 | |
| 7,886 | |
Noncontrolling interests | |
| (187) | |
| (51) | |
| | | | | | | |
Total Equity | |
| 8,728 | |
| 7,835 | |
| | | | | | | |
Total Liabilities and Equity | | $ | 45,393 | | $ | 38,118 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
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|
|
|
|
|
|
| Three Quarters Ended |
| ||||
|
| November 10, |
| November 4, |
| ||
(In millions) |
| 2018 |
| 2017 |
| ||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
Net earnings including noncontrolling interests |
| $ | 2,827 |
| $ | 1,036 |
|
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,884 |
|
| 1,871 |
|
LIFO charge |
|
| 39 |
|
| 46 |
|
Stock-based employee compensation |
|
| 115 |
|
| 118 |
|
Expense for company-sponsored pension plans |
|
| 54 |
|
| 68 |
|
Deferred income taxes |
|
| 148 |
|
| 267 |
|
Gain on sale of business |
|
| (1,782) |
|
| — |
|
Mark to market gain on Ocado securities |
|
| (152) |
|
| — |
|
Other |
|
| 29 |
|
| 5 |
|
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses: |
|
|
|
|
|
|
|
Store deposits in-transit |
|
| 63 |
|
| (268) |
|
Receivables |
|
| (95) |
|
| 45 |
|
Inventories |
|
| (601) |
|
| (466) |
|
Prepaid and other current assets |
|
| 380 |
|
| 426 |
|
Trade accounts payable |
|
| 666 |
|
| 620 |
|
Accrued expenses |
|
| 270 |
|
| 26 |
|
Income taxes receivable and payable |
|
| 259 |
|
| 143 |
|
Contribution to company-sponsored pension plans |
|
| (185) |
|
| (1,000) |
|
Other |
|
| (186) |
|
| 117 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
| 3,733 |
|
| 3,054 |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
Payments for property and equipment, including payments for lease buyouts |
|
| (2,257) |
|
| (2,137) |
|
Proceeds from sale of assets |
|
| 76 |
|
| 120 |
|
Payments for acquisitions, net of cash acquired |
|
| (197) |
|
| (16) |
|
Purchases of stores |
|
| (44) |
|
| — |
|
Net proceeds from sale of business |
|
| 2,169 |
|
| — |
|
Purchases of Ocado securities |
|
| (392) |
|
| — |
|
Other |
|
| 15 |
|
| (2) |
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
| (630) |
|
| (2,035) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
| 1,033 |
|
| 1,503 |
|
Payments on long-term debt |
|
| (258) |
|
| (769) |
|
Net payments on commercial paper |
|
| (1,486) |
|
| (45) |
|
Dividends paid |
|
| (324) |
|
| (333) |
|
Proceeds from issuance of capital stock |
|
| 55 |
|
| 31 |
|
Treasury stock purchases |
|
| (1,996) |
|
| (1,292) |
|
Other |
|
| (45) |
|
| (84) |
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
| (3,021) |
|
| (989) |
|
|
|
|
|
|
|
|
|
Net increase in cash and temporary cash investments |
|
| 82 |
|
| 30 |
|
|
|
|
|
|
|
|
|
Cash and temporary cash investments: |
|
|
|
|
|
|
|
Beginning of year |
|
| 347 |
|
| 322 |
|
End of period |
| $ | 429 |
| $ | 352 |
|
|
|
|
|
|
|
|
|
Reconciliation of capital investments: |
|
|
|
|
|
|
|
Payments for property and equipment, including payments for lease buyouts |
| $ | (2,257) |
| $ | (2,137) |
|
Payments for lease buyouts |
|
| — |
|
| 9 |
|
Changes in construction-in-progress payables |
|
| (49) |
|
| (149) |
|
Total capital investments, excluding lease buyouts |
| $ | (2,306) |
| $ | (2,277) |
|
|
|
|
|
|
|
|
|
Disclosure of cash flow information: |
|
|
|
|
|
|
|
Cash paid during the year for interest |
| $ | 424 |
| $ | 469 |
|
Cash paid during the year for income taxes |
| $ | 376 |
| $ | 168 |
|
| | | | | | | |
| | Three Quarters Ended | | ||||
| | November 9, | | November 10, | | ||
(In millions) |
| 2019 |
| 2018 |
| ||
Cash Flows from Operating Activities: | | | | | | | |
Net earnings including noncontrolling interests | | $ | 1,193 | | $ | 2,827 | |
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | |
| 1,994 | |
| 1,884 | |
Non-cash operating lease cost | | | 494 | | | — | |
LIFO charge | |
| 69 | |
| 39 | |
Stock-based employee compensation | |
| 117 | |
| 115 | |
Expense for company-sponsored pension plans | |
| 32 | |
| 54 | |
Deferred income taxes | |
| (46) | |
| 148 | |
Gain on sale of businesses | | | (176) | | | (1,782) | |
Gain on the sale of assets | | | (150) | | | — | |
Mark to market gain on Ocado securities | | | (166) | | | (152) | |
Impairment of Lucky's Market | | | 238 | | | — | |
Other | |
| (1) | |
| 29 | |
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses: | | | | | | | |
Store deposits in-transit | |
| 148 | |
| 63 | |
Receivables | |
| 93 | |
| (95) | |
Inventories | |
| (636) | |
| (601) | |
Prepaid and other current assets | |
| 66 | |
| 380 | |
Trade accounts payable | |
| 808 | |
| 666 | |
Accrued expenses | |
| 299 | |
| 270 | |
Income taxes receivable and payable | |
| (145) | |
| 259 | |
Contribution to company-sponsored pension plan | | | — | | | (185) | |
Operating lease liabilities | | | (477) | | | — | |
Proceeds from contract associated with sale of business | | | 295 | | | — | |
Other | |
| (1) | |
| (186) | |
| | | | | | | |
Net cash provided by operating activities | |
| 4,048 | |
| 3,733 | |
| | | | | | | |
Cash Flows from Investing Activities: | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | |
| (2,363) | |
| (2,257) | |
Proceeds from sale of assets | |
| 257 | |
| 76 | |
Payments for acquisitions, net of cash acquired | | | — | | | (197) | |
Purchases of stores | | | — | | | (44) | |
Net proceeds from sale of businesses | | | 327 | | | 2,169 | |
Purchases of Ocado securities | | | — | | | (392) | |
Other | |
| (45) | |
| 15 | |
| | | | | | | |
Net cash used by investing activities | |
| (1,824) | |
| (630) | |
| | | | | | | |
Cash Flows from Financing Activities: | | | | | | | |
Proceeds from issuance of long-term debt | |
| 61 | |
| 1,033 | |
Payments on long-term debt including obligations under finance leases | |
| (1,540) | |
| (258) | |
Net payments on commercial paper | |
| (235) | | | (1,486) | |
Dividends paid | | | (356) | | | (324) | |
Proceeds from issuance of capital stock | | | 32 | |
| 55 | |
Treasury stock purchases | |
| (34) | |
| (1,996) | |
Other | | | (36) | |
| (45) | |
| | | | | | | |
Net cash used by financing activities | |
| (2,108) | |
| (3,021) | |
| | | | | | | |
Net increase in cash and temporary cash investments | |
| 116 | |
| 82 | |
| | | | | | | |
Cash and temporary cash investments: | | | | | | | |
Beginning of year | |
| 429 | |
| 347 | |
End of period | | $ | 545 | | $ | 429 | |
| | | | | | | |
Reconciliation of capital investments: | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | | $ | (2,363) | | $ | (2,257) | |
Payments for lease buyouts | | | 24 | | | — | |
Changes in construction-in-progress payables | |
| 96 | |
| (49) | |
Total capital investments, excluding lease buyouts | | $ | (2,243) | | $ | (2,306) | |
| | | | | | | |
Disclosure of cash flow information: | | | | | | | |
Cash paid during the year for interest | | $ | 407 | | $ | 424 | |
Cash paid during the year for income taxes | | $ | 633 | | $ | 376 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
5
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | | Additional | | | | | | | Other | | | | | | | | | | ||
| | Common Stock | | Paid-In | | Treasury Stock | | Comprehensive | | Accumulated | | Noncontrolling | | | | ||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total | |||||||
Balances at February 3, 2018 |
| 1,918 |
| $ | 1,918 |
| $ | 3,161 |
| 1,048 |
| $ | (14,684) |
| $ | (471) |
| $ | 17,007 |
| $ | (26) |
| $ | 6,905 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (1) | |
| 10 | |
| — | |
| — | |
| — | |
| 10 |
Restricted stock issued |
| — | |
| — | |
| (6) |
| — | |
| 5 | |
| — | |
| — | |
| — | |
| (1) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| (134) |
| 74 | |
| (1,792) | |
| — | |
| — | |
| — | |
| (1,926) |
Stock options exchanged |
| — | |
| — | |
| — |
| 1 | |
| (17) | |
| — | |
| — | |
| — | |
| (17) |
Share-based employee compensation |
| — | |
| — | |
| 45 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 45 |
Other comprehensive income net of income tax of $5 |
| — | |
| — | |
| — |
| — | |
| — | |
| 16 | |
| — | |
| — | |
| 16 |
Other |
| — | |
| — | |
| (7) |
| — | |
| 2 | |
| — | |
| — | |
| 5 | |
| — |
Cash dividends declared ($0.125 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (109) | |
| — | |
| (109) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 2,026 | |
| (8) | |
| 2,018 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at May 26, 2018 |
| 1,918 |
| $ | 1,918 |
| $ | 3,059 |
| 1,122 |
| $ | (16,476) |
| $ | (455) |
| $ | 18,924 |
| $ | (29) |
| $ | 6,941 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (2) | |
| 30 | |
| — | |
| — | |
| — | |
| 30 |
Restricted stock issued |
| — | |
| — | |
| (104) |
| (2) | |
| 64 | |
| — | |
| — | |
| — | |
| (40) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| 134 |
| 2 | |
| (135) | |
| — | |
| — | |
| — | |
| (1) |
Stock options exchanged |
| — | |
| — | |
| — |
| 1 | |
| (35) | |
| — | |
| — | |
| — | |
| (35) |
Share-based employee compensation |
| — | |
| — | |
| 36 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 36 |
Other comprehensive income net of income tax of $2 |
| — | |
| — | |
| — |
| — | |
| — | |
| 5 | |
| — | |
| — | |
| 5 |
Other |
| — | |
| — | |
| 55 |
| — | |
| (53) | |
| — | |
| — | |
| — | |
| 2 |
Cash dividends declared ($0.14 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (101) | |
| — | |
| (101) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 508 | |
| (7) | |
| 501 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at August 18, 2018 |
| 1,918 |
| $ | 1,918 |
| $ | 3,180 |
| 1,121 |
| $ | (16,605) |
| $ | (450) |
| $ | 19,331 |
| $ | (36) |
| $ | 7,338 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (1) | |
| 15 | |
| — | |
| — | |
| — | |
| 15 |
Restricted stock issued |
| — | |
| — | |
| (4) |
| — | |
| 3 | |
| — | |
| — | |
| — | |
| (1) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (17) | |
| — | |
| — | |
| — | |
| (17) |
Share-based employee compensation |
| — | |
| — | |
| 34 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 34 |
Other comprehensive income net of income tax of $15 |
| — | |
| — | |
| — |
| — | |
| — | |
| 48 | |
| — | |
| — | |
| 48 |
Other |
| — | |
| — | |
| (1) |
| — | |
| (4) | |
| — | |
| — | |
| 3 | |
| (2) |
Cash dividends declared ($0.14 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (113) | |
| — | |
| (113) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 317 | |
| (9) | |
| 308 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at November 10, 2018 |
| 1,918 |
| $ | 1,918 |
| $ | 3,209 |
| 1,120 |
| $ | (16,608) |
| $ | (402) |
| $ | 19,535 |
| $ | (42) |
| $ | 7,610 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| — | |
| 10 | |
| — | |
| — | |
| — | |
| 10 |
Restricted stock issued |
| — | |
| — | |
| (5) |
| (1) | |
| 2 | |
| — | |
| — | |
| — | |
| (3) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| 1 | |
| (14) | |
| — | |
| — | |
| — | |
| (14) |
Share-based employee compensation |
| — | |
| — | |
| 39 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 39 |
Other comprehensive income net of income tax of $17 |
| — | |
| — | |
| — |
| — | |
| — | |
| 56 | |
| — | |
| — | |
| 56 |
Other |
| — | |
| — | |
| 2 |
| — | |
| (2) | |
| — | |
| — | |
| (1) | |
| (1) |
Cash dividends declared ($0.14 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (113) | |
| — | |
| (113) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 259 | |
| (8) | |
| 251 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at February 2, 2019 |
| 1,918 |
| $ | 1,918 |
| $ | 3,245 |
| 1,120 |
| $ | (16,612) |
| $ | (346) |
| $ | 19,681 |
| $ | (51) |
| $ | 7,835 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
| ||
|
| Common Stock |
| Paid-In |
| Treasury Stock |
| Comprehensive |
| Accumulated |
| Noncontrolling |
|
|
|
| ||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total |
| |||||||
Balances at 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 |
| — |
|
| — |
|
| — |
| (2) |
|
| 31 |
|
| — |
|
| — |
|
| — |
|
| 31 |
|
Restricted stock issued |
| — |
|
| — |
|
| (115) |
| (2) |
|
| 82 |
|
| — |
|
| — |
|
| — |
|
| (33) |
|
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 45 |
|
| (1,247) |
|
| — |
|
| — |
|
| — |
|
| (1,247) |
|
Stock options exchanged |
| — |
|
| — |
|
| — |
| 2 |
|
| (45) |
|
| — |
|
| — |
|
| — |
|
| (45) |
|
Share-based employee compensation |
| — |
|
| — |
|
| 118 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 118 |
|
Other comprehensive income net of income tax of $6 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 9 |
|
| — |
|
| — |
|
| 9 |
|
Other |
| — |
|
| — |
|
| 51 |
| — |
|
| (67) |
|
| — |
|
| — |
|
| (19) |
|
| (35) |
|
Cash dividends declared ($0.37 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (333) |
|
| — |
|
| (333) |
|
Net earnings including noncontrolling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,053 |
|
| (17) |
|
| 1,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at November 4, 2017 |
| 1,918 |
| $ | 1,918 |
| $ | 3,124 |
| 1,037 |
| $ | (14,364) |
| $ | (706) |
| $ | 16,263 |
| $ | (24) |
| $ | 6,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 3, 2018 |
| 1,918 |
| $ | 1,918 |
| $ | 3,161 |
| 1,048 |
| $ | (14,684) |
| $ | (471) |
| $ | 17,007 |
| $ | (26) |
| $ | 6,905 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
| — |
|
| — |
|
| — |
| (4) |
|
| 55 |
|
| — |
|
| — |
|
| — |
|
| 55 |
|
Restricted stock issued |
| — |
|
| — |
|
| (114) |
| (2) |
|
| 72 |
|
| — |
|
| — |
|
| — |
|
| (42) |
|
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 76 |
|
| (1,927) |
|
| — |
|
| — |
|
| — |
|
| (1,927) |
|
Stock options exchanged |
| — |
|
| — |
|
| — |
| 2 |
|
| (69) |
|
| — |
|
| — |
|
| — |
|
| (69) |
|
Share-based employee compensation |
| — |
|
| — |
|
| 115 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 115 |
|
Other comprehensive income net of income tax of $22 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 69 |
|
| — |
|
| — |
|
| 69 |
|
Other |
| — |
|
| — |
|
| 47 |
| — |
|
| (55) |
|
| — |
|
| — |
|
| 8 |
|
| — |
|
Cash dividends declared ($0.405 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (323) |
|
| — |
|
| (323) |
|
Net earnings including noncontrolling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 2,851 |
|
| (24) |
|
| 2,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at November 10, 2018 |
| 1,918 |
| $ | 1,918 |
| $ | 3,209 |
| 1,120 |
| $ | (16,608) |
| $ | (402) |
| $ | 19,535 |
| $ | (42) |
| $ | 7,610 |
|
6
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | | Additional | | | | | | | Other | | | | | | | | | | ||
| | Common Stock | | Paid-In | | Treasury Stock | | Comprehensive | | Accumulated | | Noncontrolling | | | | ||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total | |||||||
Balances at February 2, 2019 | | 1,918 |
| $ | 1,918 |
| $ | 3,245 |
| 1,120 |
| $ | (16,612) |
| $ | (346) |
| $ | 19,681 |
| $ | (51) |
| $ | 7,835 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (1) | |
| 12 | |
| — | |
| — | |
| — | |
| 12 |
Restricted stock issued |
| — | |
| — | |
| (14) |
| — | |
| 10 | |
| — | |
| — | |
| — | |
| (4) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (15) | |
| — | |
| — | |
| — | |
| (15) |
Share-based employee compensation |
| — | |
| — | |
| 48 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 48 |
Other comprehensive loss net of income tax of ($5) |
| — | |
| — | |
| — |
| — | |
| — | |
| (146) | |
| — | |
| — | |
| (146) |
Cumulative effect of accounting change | | — | | | — | | | — | | — | | | — | | | — | | | 146 | | | — | | | 146 |
Other |
| — | |
| — | |
| 8 |
| — | |
| (8) | |
| — | |
| (5) | |
| 11 | |
| 6 |
Cash dividends declared ($0.14 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (113) | |
| — | |
| (113) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 772 | |
| (9) | |
| 763 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at May 25, 2019 |
| 1,918 |
| $ | 1,918 |
| $ | 3,287 |
| 1,119 |
| $ | (16,613) |
| $ | (492) |
| $ | 20,481 |
| $ | (49) |
| $ | 8,532 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (1) | |
| 6 | |
| — | |
| — | |
| — | |
| 6 |
Restricted stock issued |
| — | |
| — | |
| (109) |
| (2) | |
| 79 | |
| — | |
| — | |
| — | |
| (30) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (8) | |
| — | |
| — | |
| — | |
| (8) |
Share-based employee compensation |
| — | |
| — | |
| 41 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 41 |
Other comprehensive loss net of income tax of ($14) |
| — | |
| — | |
| — |
| — | |
| — | |
| (45) | |
| — | |
| — | |
| (45) |
Other |
| — | |
| — | |
| 51 |
| — | |
| (51) | |
| — | |
| — | |
| 1 | |
| 1 |
Cash dividends declared ($0.16 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (131) | |
| — | |
| (131) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 297 | |
| (10) | |
| 287 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at August 17, 2019 |
| 1,918 |
| $ | 1,918 |
| $ | 3,270 |
| 1,116 |
| $ | (16,587) |
| $ | (537) |
| $ | 20,647 |
| $ | (58) |
| $ | 8,653 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| — | |
| 14 | |
| — | |
| — | |
| — | |
| 14 |
Restricted stock issued |
| — | |
| — | |
| (3) |
| (1) | |
| 1 | |
| — | |
| — | |
| — | |
| (2) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| 1 | |
| (11) | |
| — | |
| — | |
| — | |
| (11) |
Share-based employee compensation |
| — | |
| — | |
| 28 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 28 |
Other comprehensive income net of income tax of $14 |
| — | |
| — | |
| — |
| — | |
| — | |
| 42 | |
| — | |
| — | |
| 42 |
Other |
| — | |
| — | |
| 1 |
| — | |
| (2) | |
| — | |
| — | |
| (9) | |
| (10) |
Cash dividends declared ($0.16 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (129) | |
| — | |
| (129) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 263 | |
| (120) | |
| 143 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at November 9, 2019 |
| 1,918 |
| $ | 1,918 |
| $ | 3,296 |
| 1,116 |
| $ | (16,585) |
| $ | (495) |
| $ | 20,781 |
| $ | (187) |
| $ | 8,728 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
7
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
All amounts in the Notes to the Unaudited Consolidated Financial Statements are in millions except per share amounts.
1. | ACCOUNTING POLICIES |
1.ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries and the variable interest entities in which the Company is the primary beneficiary.other consolidated entities. The February 3, 20182, 2019 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.
In the opinion of management, the accompanying unaudited Consolidated Financial Statements include adjustments, all of which are of a normal, recurring nature that are necessary for a fair statement of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018.2, 2019.
The unaudited information in the Consolidated Financial Statements for the third quarters and three quarters ended November 10, 20189, 2019 and November 4, 2017,10, 2018, includes the results of operations of the Company for the 12 and 40-week periods then ended.
Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to operating, general and administrative expenses (“OG&A”), are classified as a component of sales as of the beginning of fiscal year 2019, except for certain amounts in Media, which are netted against merchandise costs. These prior-year amounts have been reclassified to conform to current-year presentation.
Refer to Note 65 for a description of changes to the Consolidated Statements of OperationsBalance Sheet for a recently adopted accounting standardstandards regarding the presentationrecognition of lease agreements and reclassification of stranded tax effects.
In the third quarter of 2019, the Company recorded an out of period adjustment that decreased sales by $29 with a corresponding increase to other current liabilities related to a provision in a pharmacy contract that should have been recognized over the previous six quarters. The Company evaluated the impact of the non-service component of company-sponsored pension plan costs.adjustment and concluded it is not material, individually and in the aggregate, to the current or any prior period financial statements.
Fair Value Measurements
Fair value measurements are classified and disclosed in one of the following three categories:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities;
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;
Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company records cash and temporary cash investments, store deposits in-transit, receivables, prepaid and other current assets, trade accounts payable, accrued salaries and wages and other current liabilities at approximated fair value. Certain other investments and derivatives are recorded as Level 1, 2 or 3 instruments. Refer to Note 2 and Note 3 for the disclosure of the Ocado shares and debt instrument fair values, respectively.values.
Mergers are accounted for using the acquisition method of accounting, which requires that the purchase price paid for an acquisition be allocated to the assets and liabilities acquired based on their estimated fair values as of the effective date of the acquisition, with the excess of the purchase price over the net assets being recorded as goodwill. See Note 2 for further discussion related to accounting for mergers.
7
Revenue Recognition
Sales
The Company recognizes revenues from the retail sale of products, net of sales taxes, at the point of sale. Pharmacy sales are recorded when the product is provided to the customer. Digital channel originated sales are recognized either upon pickup in store or upon delivery to the customer and may include shipping revenue. Discounts provided to customers by the Company at the time of sale, including those provided in connection with loyalty cards, are recognized as a reduction in sales as the products are sold. Discounts provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons. The Company records a receivable from the vendor for the difference in sales price and cash received. For merchandise sold in one of the Company’s stores or online, tender is accepted at the point of sale. Certain pharmacy fees previously recorded as merchandise costs have been reclassified to be recorded as a reduction of sales. Effective February 4, 2018, the Company prospectively reclassified $188 for the first three quarters of 2018 and $62 for the third quarter of 2018 of these pharmacy fees from merchandise costs to sales on the Company’s Consolidated Statements of Operations. For pharmacy sales, collection of third party receivables is typically expected within three months or less from the time of purchase. The third-party receivables from pharmacy sales are recorded in Receivables in the Company’s Consolidated Balance Sheets and were $681 as of November 10, 2018 and $571 as of February 3, 2018.
Gift Cards and Gift Certificates
The Company does not recognize a sale when it sells its own gift cards and gift certificates (collectively “gift cards”). Rather, it records a deferred revenue liability equal to the amount received. A sale is then recognized when the gift cards are redeemed to purchase the Company’s products. The Company’s gift cards do not expire. While gift cards are generally redeemed within 12 months, some are never fully redeemed. The Company recognizes gift card breakage under the proportional method, where recognition of breakage income is based upon the historical run-off rate of unredeemed gift cards. The Company’s gift card deferred revenue liability was $91 as of November 10, 2018 and $90 as of February 3, 2018.
Disaggregated Revenues
The following table presents sales revenue by type of product for the third quarter and first three quarters of 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
|
| Three Quarters Ended |
| ||||||||||||||||
|
| November 10, 2018 |
| November 4, 2017 |
|
| November 10, 2018 |
| November 4, 2017 |
| ||||||||||||
|
| Amount |
| % of total |
| Amount |
| % of total |
|
| Amount |
| % of total |
| Amount |
| % of total |
| ||||
Non Perishable (1) |
| $ | 13,771 |
| 49.8 | % | $ | 13,698 |
| 49.4 | % |
| $ | 45,797 |
| 49.2 | % | $ | 45,161 |
| 49.3 | % |
Fresh (2) |
|
| 6,550 |
| 23.7 | % |
| 6,439 |
| 23.2 | % |
|
| 22,458 |
| 24.1 | % |
| 21,959 |
| 24.0 | % |
Supermarket Fuel |
|
| 3,656 |
| 13.2 | % |
| 3,141 |
| 11.3 | % |
|
| 11,997 |
| 12.9 | % |
| 9,885 |
| 10.8 | % |
Pharmacy |
|
| 2,503 |
| 9.0 | % |
| 2,462 |
| 8.9 | % |
|
| 8,131 |
| 8.8 | % |
| 8,053 |
| 8.8 | % |
Convenience Stores (3) |
|
|
|
| - | % |
| 1,067 |
| 3.8 | % |
|
| 944 |
| 1.0 | % |
| 3,426 |
| 3.7 | % |
Other (4) |
|
| 1,192 |
| 4.3 | % |
| 942 |
| 3.4 | % |
|
| 3,744 |
| 4.0 | % |
| 3,147 |
| 3.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales and other revenue |
| $ | 27,672 |
| 100 | % | $ | 27,749 |
| 100 | % |
| $ | 93,071 |
| 100 | % | $ | 91,631 |
| 100 | % |
|
|
|
|
|
|
|
|
8
Contingent Consideration
Certain Company business combinations involve potential payment of future consideration that is contingent upon the achievement of certain performance milestones. The Company records contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred, estimated as the probability-weighted future cash flows, discounted back to present value using a discount rate determined in accordance with accepted valuation methods. The liability for contingent consideration is remeasured to fair value at each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized in earnings until the contingency is resolved.
Interest Rate Risk Management
The Company is exposed to market risk from fluctuations in interest rates. The Company manages its exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair value hedges) and forward-starting interest rate swaps (cash flow hedges). The Company’s current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, the Company uses the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of the carrying value of the Company’s debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.
The Company reviews compliance with these guidelines annually with the Financial Policy Committee of the Board of Directors. These guidelines may change as the Company’s needs dictate.
2.MERGER AND PARTNERSHIP AGREEMENTS
Merger Agreement
On June 22, 2018, the Company finalized the merger with Home Chef, a meal kit delivery company. The merger will allow the Company to increase the availability of meal kits and expand its offerings to customers. The Company completed the merger by purchasing 100% of the ownership interest in Home Chef, for $197 net of cash and cash equivalents of $30, in addition to future earnout payments of up to $500 over five years that are contingent on achieving certain milestones. The contingent consideration is based on future performance of both the online and offline business and the related customer engagement. The fair value of the earnout liability in the amount of $91 recognized on the acquisition date was measured using unobservable (Level 3) inputs and is included in “Other long-term liabilities” within the Consolidated Balance Sheet. The Company estimated the fair value of the earnout liability by applying a Monte-Carlo simulation method using the Company’s projection of future operating results for both the online and offline businesses related to the Home Chef merger and the estimated probability of achievement of the earnout target metrics. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of valuation paths in order to develop a reasonable estimate of the fair value of the earnout liability. Changes in the fair value of the earnout liability in future periods will be recorded in the Company’s results in the period of the change.
The merger was accounted for under the purchase method of accounting and was financed through the issuance of commercial paper. In a business combination, the purchase price is allocated to assets acquired and liabilities assumed based on their fair values, with any excess of purchase price over fair value recognized as goodwill. In addition to recognizing assets and liabilities on the acquired company’s balance sheet, the Company reviews supply contracts, leases, financial instruments, employment agreements and other significant agreements to identify potential assets or liabilities that require recognition in connection with the application of acquisition accounting under Accounting Standards Codification (“ASC”) 805. Intangible assets are recognized apart from goodwill when the asset arises from contractual or other legal rights, or are separable from the acquired entity such that they may be sold, transferred, licensed, rented or exchanged either on a standalone basis or in combination with a related contract, asset or liability.
9
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date.
|
|
|
|
|
| June 22, | |
|
| 2018 | |
ASSETS |
|
|
|
Total current assets |
| $ | 36 |
|
|
|
|
Property, plant and equipment |
|
| 6 |
Other assets |
|
| 1 |
Intangibles |
|
| 143 |
|
|
|
|
Total Assets, excluding Goodwill |
|
| 186 |
|
|
|
|
LIABILITIES |
|
|
|
Total current liabilities |
|
| (28) |
|
|
|
|
Other long-term liabilities |
|
| (94) |
|
|
|
|
Total Liabilities |
|
| (122) |
|
|
|
|
Total Identifiable Net Assets |
|
| 64 |
Goodwill |
|
| 163 |
Total Purchase Price |
| $ | 227 |
The preliminary purchase price allocation for the Home Chef acquisition is based upon a preliminary valuation which is subject to change as the Company obtains additional information with respect to income taxes during the measurement period. The allocation will be completed by the second quarter of 2019.
Of the $143 allocated to intangible assets, the Company recorded $99 and $44 related to customer relationships and the trade name, respectively. The Company will amortize the customer relationships, using the cash flow trended method over seven years. The goodwill recorded as part of the merger was attributable to the assembled workforce of Home Chef and operational synergies expected from the merger. The merger was treated as a 30% stock purchase and 70% partnership interest purchase for income tax purposes. The tax basis of the assets acquired and liabilities assumed for the portion of the transaction treated as a partnership interest purchase was stepped up, and the related goodwill is deductible for tax purposes. The assets acquired and liabilities assumed for the portion treated as a stock purchase did not result in a step up of tax basis, and goodwill is not expected to be deductible for tax purposes. The Company determined the Home Chef results of operations are not material. Therefore the pro forma information is not required for fiscal year 2018 and 2017.
Partnership Agreement
On May 17, 2018, the Company entered into a Partnership Framework Agreement with Ocado International Holdings Limited and Ocado Group plc (“Ocado”). Under this agreement, Ocado will partner exclusively with the Company in the U.S., enhancing the Company’s digital and robotics capabilities. As part of the agreement, the Company provided a letter of credit for $180, which supports its commitment to contract with Ocado to build a number of fulfilment centers. The balance of the letter of credit will reduce over time with the construction of each fulfilment center.
2. | DEBT OBLIGATIONS |
10
In addition, on May 17, 2018, the Company entered into a Share Subscription Agreement with Ocado, pursuant to which the Company agreed to purchase 33.1 ordinary shares of Ocado for an aggregate purchase price of $243. The Company completed the purchase of these 33.1 shares on May 29, 2018. This is in addition to 8.1 Ocado shares purchased earlier in the first quarter of 2018, and 6.5 additional shares purchased in the second quarter of 2018. The equity investment in Ocado is measured at fair value through earnings. The fair value of all shares owned, which is measured using level 1 inputs, was $544 at November 10, 2018 and is included in “Other assets” in the Company’s Consolidated Balance Sheets. For the third quarter ended November 10, 2018, the Company recorded an unrealized loss of $100. For the first three quarters ended November 10, 2018, the Company recorded an unrealized gain of $152, none of which was realized during the period as the Company did not sell any Ocado securities.
3.DEBT OBLIGATIONS
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
| November 10, |
| February 3, |
| ||
|
| 2018 |
| 2018 |
| ||
1.50% to 8.00% Senior Notes due through 2048 |
| $ | 12,011 |
| $ | 12,201 |
|
5.63% to 12.75% Mortgages due in varying amounts through 2027 |
|
| 14 |
|
| 22 |
|
2.40% Commercial paper borrowings |
|
| 635 |
|
| 2,121 |
|
3.09% Term Loan due 2019 |
|
| 1,000 |
|
| — |
|
Other |
|
| 459 |
|
| 443 |
|
|
|
|
|
|
|
|
|
Total debt, excluding capital leases and financing obligations |
|
| 14,119 |
|
| 14,787 |
|
Less current portion |
|
| (3,319) |
|
| (3,509) |
|
|
|
|
|
|
|
|
|
Total long-term debt, excluding capital leases and financing obligations |
| $ | 10,800 |
| $ | 11,278 |
|
| | | | | | |
| | November 9, | | February 2, | ||
|
| 2019 |
| 2019 | ||
1.50% to 8.00% Senior Notes due through 2048 | | $ | 11,606 | | $ | 12,097 |
5.63% to 12.75% Mortgages due through 2027 | |
| 12 | |
| 14 |
1.83% to 2.63% Commercial paper borrowings | |
| 565 | |
| 800 |
3.37% Term Loan | | | — | | | 1,000 |
Other | |
| 495 | |
| 440 |
| | | | | | |
Total debt, excluding obligations under finance leases | |
| 12,678 | |
| 14,351 |
Less current portion | |
| (1,367) | |
| (3,103) |
| | | | | | |
Total long-term debt, excluding obligations under finance leases | | $ | 11,311 | | $ | 11,248 |
The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at November 10, 20189, 2019 and February 3, 2018.2, 2019. At November 10, 2018,9, 2019, the fair value of total debt was $13,890$13,540 compared to a carrying value of $14,119.$12,678. At February 3, 2018,2, 2019, the fair value of total debt was $15,167$14,190 compared to a carrying value of $14,787.$14,351.
InDuring the first quarterthree quarters of 2018,2019, the Company obtainedrepaid a $1,000 term loan with a maturity datebearing an interest rate of March 16, 2019. The funds were drawn on March 26, 2018 and were used to reduce outstanding commercial paper borrowings. Under the terms of the agreement, interest rates are adjusted monthly based on the Company’s Public Debt Rating and prevailing LIBOR rates.3.37%. Additionally, in the firstthird quarter of 2018,2019, the Company repaid, upon maturity, $200$500 of senior notes bearing an interest rate of 7%.1.5%, with proceeds from commercial paper borrowings.
11
In anticipation of future debt refinancing, the Company, in the first three quarters of 2019, entered into 6 forward-starting interest rate swap agreements with a maturity date of January 2021 with an aggregate notional amount totaling $300 and 1 forward-starting interest rate swap agreement with a maturity date of January 2020 with a notional amount of $50. As of the end of the third quarter of 2019, the Company had a total of $600 notional amount of forward-starting interest rate swaps outstanding. The forward-starting interest rate swaps entered into in the first three quarters of 2019 were designated as cash-flow hedges.
4.BENEFIT PLANS
3. | BENEFIT PLANS |
The following table provides the components of net periodic benefit cost for the company-sponsored defined benefit pension plans and other post-retirement benefit plans for the third quarters of 20182019 and 2017.2018.
| | | | | | | | | | | | |
| | Third Quarter Ended | ||||||||||
| | Pension Benefits | | Other Benefits | ||||||||
| | November 9, | | November 10, | | November 9, | | November 10, | ||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Components of net periodic benefit cost: | | | | | | | | | | | | |
Service cost |
| $ | 6 |
| $ | 8 |
| $ | 2 |
| $ | 2 |
Interest cost | |
| 32 | |
| 31 | |
| 2 | |
| 2 |
Expected return on plan assets | |
| (43) | |
| (40) | |
| — | |
| — |
Amortization of: | | | | | | | | | | | | |
Prior service cost | |
| — | |
| — | |
| (3) | |
| (3) |
Actuarial loss (gain) | |
| 16 | |
| 18 | |
| (3) | |
| (2) |
| | | | | | | | | | | | |
Net periodic benefit cost |
| $ | 11 |
| $ | 17 |
| $ | (2) |
| $ | (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
| ||||||||||
|
| Pension Benefits |
| Other Benefits |
| ||||||||
|
| November 10, |
| November 4, |
| November 10, |
| November 4, |
| ||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | 8 |
| $ | — |
| $ | 2 |
| $ | 2 |
|
Interest cost |
|
| 31 |
|
| 42 |
|
| 2 |
|
| 3 |
|
Expected return on plan assets |
|
| (40) |
|
| (54) |
|
| — |
|
| — |
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
| — |
|
| — |
|
| (3) |
|
| (2) |
|
Actuarial loss (gain) |
|
| 18 |
|
| 19 |
|
| (2) |
|
| (2) |
|
Curtailment |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
| $ | 17 |
| $ | 8 |
| $ | (1) |
| $ | 1 |
|
9
The following table provides the components of net periodic benefit cost for the company-sponsored defined benefit pension plans and other post-retirement benefit plans for the first three quarters of 20182019 and 2017.2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Three Quarters Ended |
| ||||||||||||||||||||||
|
| Pension Benefits |
| Other Benefits |
| ||||||||||||||||||||
|
| November 10, |
| November 4, |
| November 10, |
| November 4, |
| ||||||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||||||||||
| | | | | | | | | | | | | |||||||||||||
| | Three Quarters Ended | |||||||||||||||||||||||
| | Pension Benefits | | Other Benefits | |||||||||||||||||||||
| | November 9, | | November 10, | | November 9, | | November 10, | |||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||||||||||||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Service cost |
| $ | 29 |
| $ | 42 |
| $ | 6 |
| $ | 7 |
|
| $ | 24 |
| $ | 29 |
| $ | 6 |
| $ | 6 |
Interest cost |
|
| 104 |
|
| 140 |
|
| 6 |
|
| 8 |
| |
| 105 | |
| 104 | |
| 6 | |
| 6 |
Expected return on plan assets |
|
| (134) |
|
| (182) |
|
| — |
|
| — |
| |
| (140) | |
| (134) | |
| — | |
| — |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Prior service cost |
|
| — |
|
| — |
|
| (9) |
|
| (6) |
| |
| — | |
| — | |
| (8) | |
| (9) |
Actuarial loss (gain) |
|
| 59 |
|
| 65 |
|
| (7) |
|
| (7) |
| |
| 47 | |
| 59 | |
| (8) | |
| (7) |
Curtailment |
|
| — |
|
| 3 |
|
| — |
|
| — |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | |||||||||||||
Net periodic benefit cost |
| $ | 58 |
| $ | 68 |
| $ | (4) |
| $ | 2 |
|
| $ | 36 |
| $ | 58 |
| $ | (4) |
| $ | (4) |
Although, theThe Company is not required to make any contributions to its company-sponsored pension plans in 2018,2019, but may make contributions to the extent such contributions are beneficial to the Company. The Company did not make any contributions to its company-sponsored pension plans in the first three quarters of 2019. In the third quarter of 2018, the Company contributed $185, $117 net of tax, to the company-sponsored pension plan. This contribution was designated to the 2017 tax year in order to deduct the contributions at the previous year tax rate. In the third quarter of 2017, the Company contributed $1,000 to the company-sponsored pension plans.
During the fourth quarter of 2018, the Company announced changes to certain non-union company-sponsored pension plans. See Note 12 for further discussion related to benefit plan changes.
The Company contributed $204$209 and $173$204 to employee 401(k) retirement savings accounts in the first three quarters of 20182019 and 2017,2018, respectively.
The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded.
During the first three quarters of 2019, the Company incurred charges totaling $131, $101 net of tax, due to obligations related to withdrawal liabilities for certain multi-employer pension funds. This included charges in the third quarter of 2019, totaling $45, $35 net of tax, due to obligations related to withdrawal liabilities for certain multi-employer pension funds. The charges were recorded in the OG&A caption in the Consolidated Statements of Operations.
12Additionally, during the first three quarters of 2019, the Company sold an unused warehouse. The gain on the sale was used to contribute a similar amount into the UFCW Consolidated Pension Plan.
During the third quarter of 2019, the Company approved and implemented a plan to reorganize certain portions of its division management structure. This reorganization is expected to increase operational effectiveness and reduce overhead costs while maintaining a high quality customer experience. The Company recorded a charge for severance and related benefits of $80, $61 net of tax, in the third quarter of 2019, which is included in the OG&A caption within the Consolidated Statements of Operations. Of the total charge, $63 remains unpaid as of November 9, 2019 and is included in Other Current Liabilities within the Consolidated Balance Sheet.
10
4. | EARNINGS PER COMMON SHARE |
5.EARNINGS PER COMMON SHARE
Net earnings attributable to The Kroger Co. per basic common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding. Net earnings attributable to The Kroger Co. per diluted common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding, after giving effect to dilutive stock options. The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Third Quarter Ended |
| Third Quarter Ended |
| ||||||||||||||||||||||||||||
|
| November 10, 2018 |
| November 4, 2017 |
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
| Per |
|
|
|
|
|
| Per |
| ||||||||||||||||||
|
| Earnings |
| Shares |
| Share |
| Earnings |
| Shares |
| Share |
| ||||||||||||||||||||
|
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
| ||||||||||||||||||||
| | | | | | | | | | | | | | | | | |||||||||||||||||
| | Third Quarter Ended | | Third Quarter Ended | |||||||||||||||||||||||||||||
| | November 9, 2019 | | November 10, 2018 | |||||||||||||||||||||||||||||
|
| | |
| |
| Per |
| | |
| |
| Per | |||||||||||||||||||
| | Earnings | | Shares | | Share | | Earnings | | Shares | | Share | |||||||||||||||||||||
| | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | |||||||||||||||||||||
Net earnings attributable to The Kroger Co. per basic common share |
| $ | 313 |
| 797 |
| $ | 0.39 |
| $ | 393 |
| 887 |
| $ | 0.44 |
| | $ | 260 |
| 802 | | $ | 0.32 | | $ | 313 |
| 797 | | $ | 0.39 |
Dilutive effect of stock options |
|
|
|
| 10 |
|
|
|
|
|
|
| 6 |
|
|
|
| | | |
| 5 | | | | | | |
| 10 | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | |||||||||||||||||
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 313 |
| 807 |
| $ | 0.39 |
| $ | 393 |
| 893 |
| $ | 0.44 |
| | $ | 260 |
| 807 | | $ | 0.32 | | $ | 313 |
| 807 | | $ | 0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Three Quarters Ended |
| Three Quarters Ended |
| ||||||||||||||||||||||||||||
|
| November 10, 2018 |
| November 4, 2017 |
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
| Per |
|
|
|
|
|
| Per |
| ||||||||||||||||||
|
| Earnings |
| Shares |
| Share |
| Earnings |
| Shares |
| Share |
| ||||||||||||||||||||
|
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
| ||||||||||||||||||||
| | | | | | | | | | | | | | | | | |||||||||||||||||
| | Three Quarters Ended | | Three Quarters Ended | |||||||||||||||||||||||||||||
| | November 9, 2019 | | November 10, 2018 | |||||||||||||||||||||||||||||
|
| | |
| |
| Per |
| | |
| |
| Per | |||||||||||||||||||
| | Earnings | | Shares | | Share | | Earnings | | Shares | | Share | |||||||||||||||||||||
| | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | |||||||||||||||||||||
Net earnings attributable to The Kroger Co. per basic common share |
| $ | 2,820 |
| 814 |
| $ | 3.46 |
| $ | 1,044 |
| 901 |
| $ | 1.16 |
| | $ | 1,317 |
| 800 | | $ | 1.65 | | $ | 2,820 |
| 814 | | $ | 3.46 |
Dilutive effect of stock options |
|
|
|
| 8 |
|
|
|
|
|
|
| 9 |
|
|
|
| | | |
| 5 | | | | | | |
| 8 | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | |||||||||||||||||
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 2,820 |
| 822 |
| $ | 3.43 |
| $ | 1,044 |
| 910 |
| $ | 1.15 |
| | $ | 1,317 |
| 805 | | $ | 1.64 | | $ | 2,820 |
| 822 | | $ | 3.43 |
The Company had combined undistributed and distributed earnings to participating securities totaling $3 and $4 in each of the third quarters of 2019 and 2018, and 2017.respectively. For the first three quarters of 20182019 and 2017,2018, the Company had combined undistributed and distributed earnings to participating securities of $15 and $31, and $9, respectively.
The Company had options outstanding for approximately 1118 million and 2611 million shares during the third quarterquarters of 2019 and 2018, and 2017, respectively, that were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per share. The Company had options outstanding for approximately 1124 million shares during the first three quarters of 20182019 and 1511 million shares in the first three quarters of 20172018 that were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per share.
5. | RECENTLY ADOPTED ACCOUNTING STANDARDS |
13
6.RECENTLY ADOPTED ACCOUNTING STANDARDS
On February 4, 2018,3, 2019, the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 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. The Company adopted the standard using a modified retrospective approach with the adoption primarily involving the evaluation of whether the Company acts as principal or agent in certain vendor arrangements where the purchase and sale of inventory are virtually simultaneous. The Company 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 the Company’s Consolidated Statements of Operations, Consolidated Balance Sheets or Consolidated Statements of Cash Flows.
In March 2017, the FASB issued ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07).” ASU 2017-07 requires an employer to report the service cost component of retiree benefits in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. The Company 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 the Company’s operating profit subtotal as reported in the Company’s Consolidated Statements of Operations, but remain included in net earnings before income tax expense. Due to the adoption, the Company reclassified $7 million for the third quarter of 2017 and $21 million for the first three quarters of 2017, of non-service company-sponsored pension plan costs from operating profit to other income (expense) on the Company’s Consolidated Statements of Operations. Information about retiree benefit plans' interest expense, investment returns and other components of retiree benefit expenses can be found in Note 4 to the Company’s Consolidated Financial Statements.
In January 2016, the FASB issued “Financial Instruments–Overall (Topic 825),” which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments (ASU 2016-01). The Company adopted this ASU on February 4, 2018. As a result of the adoption, the Company recorded a mark to market gain (loss) on Ocado securities, for those securities the Company owned as of the end of the third quarter of 2018, within the Consolidated Statements of Operations as opposed to a component of Other Comprehensive Income on the Company’s Consolidated Statements of Comprehensive Income.
7.RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2016, the FASB issued ASU 2016-02, “Leases,” which provides guidance for the recognition of lease agreements. The standard’s core principle isCompany adopted the standard using the modified retrospective approach, which provides a method for recording existing leases at adoption that approximates the results of 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 forfull retrospective approach. In addition, the Company in the first quarter of the Company’s fiscal year ending February 1, 2020. The Company plans to applyelected the transition package of practical expedients permitted within the standard, which allowsallowed it to carry forward the Company to carryforward their historical lease classification, and to applyapplied the transition option which does not require application of the guidance to comparative periods in the year of adoption.
11
The adoption of the standard resulted in the recognition of operating lease assets and operating lease liabilities of approximately $6,800 and $7,000, respectively, as of February 3, 2019. Included in the measurement of the new lease assets is the reclassification of certain balances including those historically recorded as prepaid or deferred rent and favorable and unfavorable leasehold interests. Several other asset and liability line items in the Consolidated Balance Sheets were also impacted by immaterial amounts. The adoption of this ASU will resultstandard also resulted in a material increase on the Company’s Consolidated Balance Sheetschange in naming convention for lease liabilities and right-of-use assets. While the Company is continuingleases classified historically as capital leases. These leases are now referred to evaluate all potential impactsas finance leases. The adoption of thethis standard the Company doesdid not expect adoption to have a material impact onmaterially affect the Company’s consolidated net earnings or cash flows. The Company’s evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the Company’s accounting policies and assessing opportunities to make certain changes to the Company’s business processes and lease accounting information technology system in order to determine the best implementation strategy.
14
In February 2018, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2018-02, “Reclassification"Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects Fromfrom Accumulated Other Comprehensive Income.” ASU 2018-02 amends ASC 220, “Income Statement - Reporting Comprehensive Income,”" This amendment allows companies to allow a reclassification from accumulated other comprehensive income to retained earnings forreclassify stranded tax effects resulting from the Tax Cuts and Jobs Act. In addition, underAct from accumulated other comprehensive income (AOCI) to retained earnings. The Company adopted ASU 2018-02 on February 3, 2019, which resulted in a decrease to AOCI and an increase to accumulated earnings of $146, primarily related to deferred taxes previously recorded for pension and other postretirement benefits and cash flow hedges. The adoption of this standard did not have an effect on the Company’s consolidated results of operations or cash flows.
6. | RECENTLY ISSUED ACCOUNTING STANDARDS |
In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” Under the new standard, implementation costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs. The new standard also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense. This guidance will be effective for the Company in the first quarter of the Company’s fiscal year ending January 30, 2021. The amendments may be requiredapplied either retrospectively or prospectively to provide certain disclosures regarding stranded tax effects. ASU 2018-02 is effective for fiscal years beginningall implementation costs incurred after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted.the date of adoption. The Company is currently evaluatingassessing the effectimpact that adoption of this standardguidance will have on its Consolidated Financial Statements and related disclosures.
7. | LEASES AND LEASE-FINANCED TRANSACTIONS |
The Company leases certain store real estate, warehouses, distribution centers, office space and equipment. While the Company’s current strategy emphasizes ownership of store real estate, the Company operates in leased facilities in approximately half of its store locations. Leaseterms generally range from 10 to 20 years with options to renew for varying terms at the Company’s sole discretion. Certain leases also include options to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Certain leases include escalation clauses or payment of executory costs such as property taxes, utilities or insurance and maintenance. Rent expense for leases with escalation clauses or other lease concessions are accounted for on a straight-line basis over the lease term. The Company’s Consolidated Financial Statements.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.
12
The following table provides supplemental balance sheet classification information related to leases:
8.COMMITMENTS AND CONTINGENCIES
| | | | | | | | |
|
| |
| November 9, |
| February 2, | ||
| | Classification | | 2019 | | 2019 | ||
Assets | | | | | | | | |
Operating | | Operating lease assets | | $ | 6,847 | | $ | — |
Finance | | Property, plant and equipment, net(1) | | | 760 | | | 721 |
| | | | | | | | |
Total leased assets | | | | $ | 7,607 | | $ | 721 |
| | | | | | | | |
Liabilities | | | | | | | | |
Current | | | | | | | | |
Operating | | Current portion of operating lease liabilities | | $ | 673 | | $ | — |
Finance | | Current portion of long-term debt including obligations under finance leases | | | 50 | | | 54 |
| | | | | | | | |
Noncurrent | | | | | | | | |
Operating | | Noncurrent operating lease liabilities | | | 6,449 | | | — |
Finance | | Long-term debt including obligations under finance leases | | | 916 | | | 824 |
| | | | | | | | |
Total lease liabilities | | | | $ | 8,088 | | $ | 878 |
(1) | Finance lease assets are recorded net of accumulated amortization of $298 and $345 as of November 9, 2019 and February 2, 2019. |
The following table provides the components of lease cost:
| | | | | | | | |
| | | | Third Quarter Ended | | Three Quarters Ended | ||
Lease Cost | | Classification |
| November 9, 2019 |
| November 9, 2019 | ||
Operating lease cost(1) | | Rent Expense | | $ | 229 | | $ | 768 |
Sublease and other rental income | | Rent Expense | |
| (28) | |
| (93) |
Finance lease cost | | | |
| | |
| |
Amortization of leased assets | | Depreciation and Amortization | | | 13 | | | 41 |
Interest on lease liabilities | | Interest Expense | | | 12 | | | 37 |
| | | | | | | | |
Net lease cost | | | | $ | 226 | | $ | 753 |
(1) | Includes short-term leases and variable lease costs, which are immaterial. |
13
Maturities of operating and finance lease liabilities are listed below. Amounts in the table include options to extend lease terms that are reasonably certain of being exercised.
| | | | | | | | | |
| | Operating | | Finance | | | |||
| | Leases | | Leases | | Total | |||
Remainder of 2019 | | $ | 195 | | $ | 17 | | $ | 212 |
2020 | |
| 966 | |
| 95 | |
| 1,061 |
2021 | |
| 891 | |
| 96 | |
| 987 |
2022 | |
| 754 | |
| 93 | |
| 847 |
2023 | |
| 685 | |
| 93 | |
| 778 |
Thereafter | |
| 6,910 | |
| 1,003 | |
| 7,913 |
| | | | | | | | | |
Total lease payments | | | 10,401 | | | 1,397 | | $ | 11,798 |
| | | | | | | | | |
Less amount representing interest | |
| 3,279 | | | 431 | | | |
| | | | | | | | | |
Present value of lease liabilities(1) | | $ | 7,122 | | $ | 966 | | | |
(1) | Includes the current portion of $673 for operating leases and $50 for finance leases. |
Total future minimum rentals under non-cancellable subleases at November 9, 2019 were $308.
The following table provides the weighted-average lease term and discount rate for operating and finance leases:
| | | |
| | | |
| | November 9, 2019 | |
Weighted-average remaining lease term (years) | | | |
Operating leases | | 16.1 | |
Finance leases | | 16.0 | |
Weighted-average discount rate | | | |
Operating leases | | 4.3 | % |
Finance leases | | 4.2 | % |
| | | |
The following table provides supplemental cash flow information related to leases:
| | | |
| | Three Quarters Ended | |
| | November 9, 2019 | |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from operating leases | | $ | 711 |
Operating cash flows from finance leases | | | 37 |
Financing cash flows from finance leases | | | 33 |
Leased assets obtained in exchange for new operating lease liabilities | | | 658 |
Leased assets obtained in exchange for new finance lease liabilities | | | 185 |
Net gain recognized from sale and leaseback transactions(1) | | | 51 |
Impairment of operating lease assets | | | 29 |
Impairment of finance lease assets | | | 40 |
(1) | During the first three quarters of 2019, the Company entered into sale leaseback transactions related to 8 properties, which resulted in total proceeds of $102. |
14
The Company adopted new lease accounting guidance in the first quarter of 2019 as discussed in Note 1 and Note 5, and as required, the following disclosure is provided for periods prior to adoption. Minimum annual rentals and payments under capital leases and lease-financed transactions for the five years subsequent to February 2, 2019 and in the aggregate are listed below. Amounts in the table below only include payments through the noncancelable lease term.
| | | | | | | | | |
|
| | |
| | |
| Lease- | |
| | Capital | | Operating | | Financed | |||
| | Leases | | Leases | | Transactions | |||
2019 | | $ | 103 | | $ | 948 | | $ | 5 |
2020 | |
| 89 | |
| 880 | |
| 6 |
2021 | |
| 86 | |
| 773 | |
| 5 |
2022 | |
| 82 | |
| 649 | |
| 5 |
2023 | |
| 81 | |
| 556 | |
| 5 |
Thereafter | |
| 766 | |
| 3,197 | |
| 17 |
| | | | | | | | | |
Total | | | 1,207 | | $ | 7,003 | | $ | 43 |
| | | | | | | | | |
Less estimated executory costs included in capital leases | |
| — | | | | | | |
| | | | | | | | | |
Net minimum lease payments under capital leases | |
| 1,207 | | | | | | |
Less amount representing interest | |
| 372 | | | | | | |
| | | | | | | | | |
Present value of net minimum lease payments under capital leases | | $ | 835 | | | | | | |
8. | COMMITMENTS AND CONTINGENCIES |
The Company continuously evaluates contingencies based upon the best available evidence.
The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.
Litigation — Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material effect on the Company’s financial position, results of operations, or cash flows.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and where an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. Management currently believes that the aggregate range of loss for the Company’s exposure is not material to the Company. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
15
9. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
9.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table represents the changes in AOCI by component for the first three quarters of 20182019 and 2017:2018:
| | | | | | | | | | | | |
| | | | | | | | Pension and | | | | |
| | Cash Flow | | | | | Postretirement | | | | ||
| | Hedging | | Available for sale | | Defined Benefit | | | | |||
|
| Activities(1) |
| Securities(1) |
| Plans(1) |
| Total(1) | ||||
Balance at February 3, 2018 | | $ | 24 | | $ | 4 | | $ | (499) | | $ | (471) |
OCI before reclassifications(2) | | | 37 | |
| (4) | |
| — | |
| 33 |
Amounts reclassified out of AOCI(3) | | | 3 | |
| — | |
| 33 | |
| 36 |
Net current-period OCI | | | 40 | |
| (4) | |
| 33 | |
| 69 |
Balance at November 10, 2018 | | $ | 64 | | $ | — | | $ | (466) | | $ | (402) |
| | | | | | | | | | | | |
Balance at February 2, 2019 | | $ | 6 | | $ | — | | $ | (352) | | $ | (346) |
Cumulative effect of accounting change(4) | | | (5) | | | — | | | (141) | | | (146) |
OCI before reclassifications(2) | |
| (29) | |
| — | |
| — | |
| (29) |
Amounts reclassified out of AOCI(3) | |
| 3 | |
| — | |
| 23 | |
| 26 |
Net current-period OCI | |
| (31) | |
| — | |
| (118) | |
| (149) |
Balance at November 9, 2019 | | $ | (25) | | $ | — | | $ | (470) | | $ | (495) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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) |
|
| (26) |
|
| — |
|
| — |
|
| (26) |
|
Amounts reclassified out of AOCI(3) |
|
| 2 |
|
| — |
|
| 33 |
|
| 35 |
|
Net current-period OCI |
|
| (24) |
|
| — |
|
| 33 |
|
| 9 |
|
Balance at November 4, 2017 |
| $ | (26) |
| $ | — |
| $ | (680) |
| $ | (706) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2018 |
| $ | 24 |
| $ | 4 |
| $ | (499) |
| $ | (471) |
|
OCI before reclassifications(2) |
|
| 37 |
|
| (4) |
|
| — |
|
| 33 |
|
Amounts reclassified out of AOCI(3) |
|
| 3 |
|
| — |
|
| 33 |
|
| 36 |
|
Net current-period OCI |
|
| 40 |
|
| (4) |
|
| 33 |
|
| 69 |
|
Balance at November 10, 2018 |
| $ | 64 |
| $ | — |
| $ | (466) |
| $ | (402) |
|
(1) |
| All amounts are net of tax. |
(2) |
| Net of tax of |
(3) | Net of tax of |
|
|
(4) | Related to the adoption of ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," (see Note 5 for additional details). |
The following table represents the items reclassified out of AOCI and the related tax effects for the third quarter and first three quarters of 20182019 and 2017:2018:
| | | | | | | | | | | | | |
| | Third Quarter Ended | | Three Quarters Ended |
| ||||||||
|
| November 9, |
| November 10, |
| November 9, |
| November 10, |
| ||||
| | 2019 | | 2018 | | 2019 | | 2018 | | ||||
Cash flow hedging activity items | | | | | | | | | | | | | |
Amortization of gains and losses on cash flow hedging activities(1) | | $ | 2 | | $ | 2 | | $ | 6 | | $ | 6 | |
Tax expense | |
| (1) | |
| (1) | |
| (3) | |
| (3) | |
Net of tax | |
| 1 | |
| 1 | |
| 3 | |
| 3 | |
| | | | | | | | | | | | | |
Pension and postretirement defined benefit plan items | | | | | | | | | | | | | |
Amortization of amounts included in net periodic pension cost(2) |
|
| 10 |
|
| 13 |
|
| 31 |
|
| 43 | |
Tax expense |
|
| (3) |
|
| (3) |
|
| (8) |
|
| (10) | |
Net of tax |
|
| 7 |
|
| 10 |
|
| 23 |
|
| 33 | |
Total reclassifications, net of tax |
| $ | 8 |
| $ | 11 |
| $ | 26 |
| $ | 36 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
| Three Quarters Ended |
| ||||||||
|
| November 10, |
| November 4, |
| November 10, |
| November 4, |
| ||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
Cash flow hedging activity items |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of gains and losses on cash flow hedging activities(1) |
| $ | 2 |
| $ | 2 |
| $ | 6 |
| $ | 4 |
|
Tax expense |
|
| (1) |
|
| (1) |
|
| (3) |
|
| (2) |
|
Net of tax |
|
| 1 |
|
| 1 |
|
| 3 |
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement defined benefit plan items |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of amounts included in net periodic pension expense(2) |
|
| 13 |
|
| 15 |
|
| 43 |
|
| 52 |
|
Tax expense |
|
| (3) |
|
| (5) |
|
| (10) |
|
| (19) |
|
Net of tax |
|
| 10 |
|
| 10 |
|
| 33 |
|
| 33 |
|
Total reclassifications, net of tax |
| $ | 11 |
| $ | 11 |
| $ | 36 |
| $ | 35 |
|
(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 |
16
10. | INCOME TAXES |
10.INCOME TAXES
The effective income tax rate was 35.6% in the third quarter of 2019, compared to 22.8% in the third quarter of 2018,2018. The effective income tax rate was 25.0% for the first three quarters of 2019, compared to 35.6% in22.8% for the third quarterfirst three quarters of 2017.2018. The effective income tax rate for the third quarter and the first three quarters of 2019 differed from the federal statutory rate primarily due to the portion of the impairment of Lucky’s Market attributable to the minority interest, which reduces pre-tax income, but does not impact tax expense. The impact of this item on the effective income tax rate is approximately 12% for the third quarter and 2% for the first three quarters of 2019. The difference from the statutory rate is also impacted by the effect of state income taxes, partially offset by the utilization of tax credits and deductions. Refer to Note 11 for information about the impairment of Lucky’s Market. The effective income tax rate for the third quarter and first three quarters of 2018 differed from the federal statutory rate primarily due to the effect of state income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Reform rates and an increase in future tax deductions at post-Tax Reform rates, partially offset by the utilization of tax credits and deductions and favorable provision to return adjustments. The rate forAdditionally, the third quarter of 2018 is lower than the rate for the third quarter of 2017 primarily due to a reduction in the federal statutory rate enacted by the Tax Cuts and Jobs Act.
The effective income tax rate was 22.8% for the first three quarters of 2018, compared to 34.8% for the first three quarters of 2017. The effective income tax rate for the first three quarters of 2018 differed from the federal statutory rate primarily due to the effect of state income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Reform rates and an increase in future tax deductions at post-Tax Reform rates, partially offset by the utilization of tax credits and deductions, favorable provision to return adjustments and the benefitbenefitted from favorable settlements of certain state tax items. The rate for the first three quarters of 2018 is lower than the rate for the first three quarters of 2017 primarily due to a reduction in the federal statutory rate enacted by the Tax Cuts
11. | HELD FOR SALE AND DISPOSAL OF BUSINESSES |
Certain assets and Jobs Act.
11.HELD FOR SALE AND DISPOSAL OF BUSINESS
During the second quarter of 2018, the Company announced that as a result of a review of its assets, the Company has decided to explore strategic alternatives for its Turkey Hill Dairy business, including a potential sale.
The following table presents informationliabilities related to the major classes of assets and liabilities of all businesses, includingCompany’s Turkey Hill Dairy and You Technology that were held for sale as of November 10, 2018:
|
|
|
|
|
| November 10, | |
(In millions) |
| 2018 | |
Assets held for sale: |
|
|
|
Cash and temporary cash investments |
| $ | 2 |
Receivables |
|
| 71 |
FIFO inventory |
|
| 20 |
LIFO reserve |
|
| (1) |
Prepaid and other current assets |
|
| 5 |
Property, plant and equipment, net |
|
| 74 |
Goodwill |
|
| 1 |
Total assets held for sale |
| $ | 172 |
|
|
|
|
Liabilities held for sale: |
|
|
|
Trade accounts payable |
| $ | 33 |
Accrued salaries and wages |
|
| 8 |
Other current liabilities |
|
| 16 |
Total liabilities held for sale |
| $ | 57 |
The Company believes sales of these businesses are probable as of November 10, 2018. The businesses classified as held for sale will not be reported as discontinued operations as the dispositions do not represent a strategic shift that will have a major effect on the Company’s operations and financial results.
Certain assets and liabilities, primarily those related to the Company’s convenience store business unit, were classified as held for sale in the Consolidated Balance Sheets beginning in the third quarterSheet as of 2017. February 2, 2019.
On April 20, 2018,March 13, 2019, the Company completed the sale of its convenience storeYou Technology business unitto Inmar for $2,169.total consideration of $565, including $396 of cash and $64 of preferred equity received upon closing. The Company recognizedis also entitled to receive other cash payments of $105 over five years. The transaction includes a netlong-term service agreement for Inmar to provide the Company digital coupon services. The sale resulted in a gain on this sale for $1,782, $1,360of $70, $52 net of tax, in the first three quarters of 2018.
17
The Company used the proceeds from the sale of the convenience store business unit to pay down outstanding commercial paper borrowings and fund an accelerated stock repurchase (“ASR”) program. The Company entered and funded a $1,200 ASR program on April 20, 2018. The final delivery under the ASR program occurred during the second quarter of 2018, which included the settlement of the remaining 2.3 Kroger common shares. In total, the Company invested $1,200 to repurchase 46.3 Kroger common shares at an average price of $25.91 per share.
12.SUBSEQUENT EVENTS
During the fourth quarter of 2018, the Company announced changes to certain non-union company-sponsored pension plans. The Company will freeze the compensation and service periods used to calculate pension benefits for active employees who participate in the affected pension plans as of December 31, 2019. Beginning January 1, 2020, the affected active employees will no longer accrue additional benefits for future service and eligible compensation received under these plans. The Company expects the financial effects of these changes will not be material to the financial statements for the year ending February 3, 2019.
On December 18, 2018, the Company announced that it had entered into a definitive agreement to sell its You Technology business, subject to customary closing conditions and any regulatory reviews. The transaction will result in a material gain and will beis included in “Gain on sale of business”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 once it is completed.Operations.
In 2016, the Company received a financial instrument as part of the consideration for entering into certain agreements with a third party. In the fourth quarter of 2018, a transaction occurred that resulted in the settlement of the financial instrument. As2019, as a result of the settlementa portfolio review, the Company received cash proceeds of $235.has decided to divest its interest in Lucky’s Market. The Company will recognize a loss on settlementrecognized an impairment charge of $42$238 in the fourththird quarter of 2018, as2019, which is included in OG&A in the financial instrument was valued at $277 priorConsolidated 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 settlement.minority interest.
18
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis should be read in conjunction with the Consolidated Financial Statements.
USE OF NON-GAAP FINANCIAL MEASURES
The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles (“GAAP”). We provide non-GAAP measures, including First-In, First-Out (“FIFO”) gross margin, FIFO operating profit, adjusted operating net earnings and adjusted operating net earnings per diluted share and Restock Kroger free cash flow because management believes these metrics are useful to investors and analysts for the reasons explained below.analysts. These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share 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.
We calculate FIFO gross margin as FIFO gross profit divided by sales. FIFO gross profit is calculated as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs exclude depreciation and rent expenses. FIFO gross margin is an important measure used by management as management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness.
We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management as management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness.
The adjusted operating net earnings and adjusted operating net earnings per diluted share metrics are important measures used by management to compare the performance of core operating results between periods. WeWe believe adjusted operating net earnings and adjusted operating net earnings per diluted share are useful metrics to investors and analysts because they present more accurate quarter-over-quarteryear-over-year comparisons for our net earnings and net earnings per diluted share because adjusted items are not the result of our normal operations. Net earnings for the first three quarters of 2019 include the following, which we define as the “2019 Adjusted Items”:
● | Charges to operating, general and administrative expenses (“OG&A”) of $131 million, $101 million net of tax, for obligations related to withdrawal liabilities for certain multi-employer pension funds; $80 million, $61 million net of tax, for a severance charge and related benefits; $238 million including $131 million attributable to The Kroger Co., $100 million net of tax, for impairment of Lucky’s Market; and a reduction to OG&A of $18 million, $13 million net of tax, for the revaluation of Home Chef contingent consideration (the “2019 OG&A Adjusted Items”). |
● | Gains in other income (expense) of $106 million, $80 million net of tax, related to the sale of Turkey Hill Dairy; $70 million, $52 million net of tax, related to the sale of You Technology; and $166 million, $125 million net of tax, for the mark to market gain on Ocado Group plc (“Ocado”) securities (the “2019 Other Income (Expense) Adjusted Items”). |
Net earnings for the third quarter of 2019 include the following, which we define as the “2019 Third Quarter Adjusted Items”:
● | Charges to OG&A of $45 million, $35 million net of tax, for obligations related to withdrawal liabilities for a certain multi-employer pension fund; $80 million, $61 million net of tax, for a severance charge and related benefits; $238 million including $131 million attributable to The Kroger Co., $100 million net of tax, for impairment of Lucky’s Market; and $4 million, $3 million net of tax, for the revaluation of Home Chef contingent consideration (the “2019 Third Quarter OG&A Adjusted Items”). |
● | A gain in other income (expense) of $106 million, $81 million net of tax, for the mark to market gain on Ocado securities (the “2019 Third Quarter Other Income (Expense) Adjusted Item”). |
Net earnings for the first three quarters of 2018 include the following, which we define as the “2018 Adjusted Items”:
18
| A reduction to |
| A reduction to depreciation and amortization expenses of $14 million, $11 million net of tax, related to held for sale assets (the “2018 Depreciation Adjusted Item”). |
| Gains in other income (expense) of $1.8 billion, $1.4 billion net of tax, related to the sale of our convenience store business unit and $152 million, $115 million net of tax, for the mark to market gain on Ocado securities (the “2018 Other Income (Expense) Adjusted Items”). |
Net earnings for the third quarter of 2018 include a loss in other income (expense) of $100 million, $77 million net of tax, forincludes the mark to market loss on Ocado securities (thefollowing, which we define as the “2018 Third Quarter Other Income (Expense) Adjusted Item”).:
● | A loss in other income (expense) of $100 million, $77 million net of tax, for the mark to market loss on Ocado securities. |
Similarly, net earnings for the first three quarters of 2017 include $199 million, $126 million net of tax, relatedPlease refer to the withdrawal obligations“Net Earnings per Diluted Share excluding the Adjusted Items” table below for reconciliations of certain multi-employer pension funds and $184 million, $117 million net of tax, relatednon-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the voluntary retirement offering (“VRO”) (together,most comparable GAAP financial measure and related disclosure. We are unable to provide a full reconciliation of the “2017 Adjusted Items”). There were no adjusted itemsnon-GAAP measures used in our guidance (see “Outlook” below) without unreasonable effort as certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be determined without unreasonable effort. Actual GAAP results may be materially different from the third quarter of 2017.forward-looking non-GAAP measures provided.
19
Restock Kroger free cash flow is an adjusted free cash flow measure calculated as net cash provided by operating activities minus: payments for property and equipment, excluding lease buyouts; payments for Home Chef, net of cash acquired and excluding the earnout; and purchases of Ocado securities. We updated our definition of Restock Kroger free cash flow during the second quarter of 2018 to more closely align with the performance metrics under our Restock Kroger plan. Restock Kroger free cash flow is an important measure used by management to evaluate available funding for share repurchases, dividends, other strategic investments and managing debt levels. Management believes Restock Kroger free cash flow is a useful metric to investors and analysts because it demonstrates our ability to make share repurchases and other strategic investments, pay dividends and manage debt levels.OVERVIEW
OVERVIEW
Notable items for the third quarter and first three quarters of 20182019 are:
Shareholder Return
| Net earnings attributable to The Kroger Co. per diluted common share of |
● | Adjusted net earnings attributable to The Kroger Co. per diluted common share of $0.47 for the third quarter and $1.62 for the first three quarters. The third quarter includes an out of period charge related to a provision in a pharmacy contract that should have been recognized over the previous six quarters (“the 2019 Out of Period Charge”). This charge is not material to our total results and the financial effect in each of the prior individual quarters was immaterial to net |
| During the first three quarters of 2019, we returned $390 million to shareholders from share repurchases and dividend payments. |
| Over the last 12 months, we decreased net |
Other Financial Results
● | Identical sales, excluding fuel, increased 2.5% for the third quarter and |
|
|
|
|
19
|
|
|
|
|
|
Significant Events
● | During the third quarter of 2019, we |
● | As a result of a portfolio review, we have decided to divest our interest in Lucky’s Market and we recognized an impairment charge of $238 million in the third quarter of 2019. The amount of the impairment charge attributable to The Kroger Co. is $131 million, $100 million net of tax. The impairment charge is a non-cash charge and reflects the write down of our initial investment in Lucky’s Market, as well as additional funding provided to operate and grow the business. |
● | During the first quarter of 2019, we sold our You Technology business |
| During the first quarter of 2019, we sold our Turkey Hill Dairy business to an affiliate of Peak Rock Capital for $225 million. |
| During the second quarter of 2019, we accepted an offer to sell an unused warehouse that had been on the market for some time. We used this gain as an opportunity to contribute a similar amount into the UFCW Consolidated Pension Plan, helping stabilize associates’ future benefits. The net impact of these transactions to EPS growth was |
● | Additionally, in the first, |
|
|
20
The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted operating net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted operating net earnings attributable to The Kroger Co. per diluted common share, excluding the 20182019 and 20172018 Adjusted Items.
Net Earnings per Diluted Share excluding the Adjusted Items
($ in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Three Quarters Ended |
| ||||||||||||
|
| November 9, |
| November 10, |
| Percentage |
| November 9, |
| November 10, |
| Percentage |
| ||||
| | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
| ||||
Net earnings attributable to The Kroger Co. | | $ | 263 | | $ | 317 |
| | | $ | 1,332 | | $ | 2,851 |
| | |
| | | | | | | | | | | | | | | | | |
(Income) expense adjustments | | | | | | | | | | | | | | | | | |
Adjustments for pension plan withdrawal liabilities(1)(2) | | | 35 | | | — | | | | | 101 | | | (10) | | | |
Adjustment for gain on sale of convenience store business(1)(3) | | | — | | | — | | | | | — | | | (1,360) | | | |
Adjustment for gain on sale of Turkey Hill Dairy(1)(4) | | | — | | | — | | | | | (80) | | | — | | | |
Adjustment for gain on sale of You Technology(1)(5) | | | — | | | — | | | | | (52) | | | — | | | |
Adjustment for mark to market loss (gain) on Ocado securities(1)(6) | | | (81) | | | 77 | | | | | (125) | | | (115) | | | |
Adjustment for depreciation related to held for sale assets(1)(7) | | | — | | | — | | | | | — | | | (11) | | | |
Adjustment for severance charge and related benefits(1)(8) | | | 61 | | | — | | | | | 61 | | | — | | | |
Adjustment for impairment of Lucky's Market attributable to The Kroger Co.(1)(9) | | | 100 | | | — | | | | | 100 | | | — | | | |
Adjustment for Home Chef contingent consideration(1)(10) | |
| 3 | |
| — | | | |
| (13) | | | — | | | |
2019 and 2018 Adjusted Items | | | 118 | | | 77 | | | | | (8) | | | (1,496) | | | |
| | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 381 | | $ | 394 |
| (3.3) | % | $ | 1,324 | | $ | 1,355 |
| (2.3) | % |
| | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.32 | | $ | 0.39 |
| | | $ | 1.64 | | $ | 3.43 |
| | |
| | | | | | | | | | | | | | | | | |
(Income) expense adjustments | | | | | | | | | | | | | | | | | |
Adjustments for pension plan withdrawal liabilities(11) | | | 0.04 | | | — | | | | | 0.12 | | | (0.01) | | | |
Adjustment for gain on sale of convenience store business(11) | | | — | | | — | | | | | — | | | (1.64) | | | |
Adjustment for gain on sale of Turkey Hill Dairy(11) | | | — | | | — | | | | | (0.10) | | | — | | | |
Adjustment for gain on sale of You Technology(11) | | | — | | | — | | | | | (0.06) | | | — | | | |
Adjustment for mark to market loss (gain) on Ocado securities(11) | | | (0.10) | | | 0.09 | | | | | (0.16) | | | (0.14) | | | |
Adjustment for depreciation related to held for sale assets(11) | | | — | | | — | | | | | — | | | (0.01) | | | |
Adjustment for severance charge and related benefits(11) | | | 0.08 | | | — | | | | | 0.08 | | | — | | | |
Adjustment for impairment of Lucky's Market attributable to The Kroger Co.(11) | | | 0.12 | | | — | | | | | 0.12 | | | — | | | |
Adjustment for Home Chef contingent consideration(11) | | | 0.01 | | | — | | | | | (0.02) | | | — | | | |
2019 and 2018 Adjusted Items | |
| 0.15 | |
| 0.09 | | | |
| (0.02) | |
| (1.80) | | | |
| | | | | | | | | | | | | | | | | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.47 | | $ | 0.48 |
| (2.1) | % | $ | 1.62 | | $ | 1.63 |
| (0.6) | % |
| | | | | | | | | | | | | | | | | |
Average number of common shares used in diluted calculation | |
| 807 | |
| 807 | | | |
| 805 | |
| 822 | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
| Three Quarters Ended |
| ||||||||||||
|
| November 10, |
| November 4, |
| Percentage |
| November 10, |
| November 4, |
| Percentage |
| ||||
|
| 2018 |
| 2017 |
| Change |
| 2018 |
| 2017 |
| Change |
| ||||
Net earnings attributable to The Kroger Co. |
| $ | 317 |
| $ | 397 |
|
|
| $ | 2,851 |
| $ | 1,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) expense adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for pension plan agreements (1)(2) |
|
| — |
|
| — |
|
|
|
| (10) |
|
| 126 |
|
|
|
Adjustment for VRO (1)(3) |
|
| — |
|
| — |
|
|
|
| — |
|
| 117 |
|
|
|
Adjustment for gain on sale of convenience store business (1)(4) |
|
| — |
|
| — |
|
|
|
| (1,360) |
|
| — |
|
|
|
Adjustment for mark to market (gain) loss on Ocado securities (1)(5) |
|
| 77 |
|
| — |
|
|
|
| (115) |
|
| — |
|
|
|
Adjustment for depreciation related to held for sale assets (1)(6) |
|
| — |
|
| — |
|
|
|
| (11) |
|
| — |
|
|
|
2018 and 2017 Adjusted Items |
|
| 77 |
|
| — |
|
|
|
| (1,496) |
|
| 243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating net earnings attributable to The Kroger Co. excluding the Adjusted Items |
| $ | 394 |
| $ | 397 |
| (0.8) | % | $ | 1,355 |
| $ | 1,296 |
| 4.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.39 |
| $ | 0.44 |
|
|
| $ | 3.43 |
| $ | 1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) expense adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for pension plan agreements (7) |
|
| — |
|
| — |
|
|
|
| (0.01) |
|
| 0.13 |
|
|
|
Adjustment for VRO (7) |
|
| — |
|
| — |
|
|
|
| — |
|
| 0.13 |
|
|
|
Adjustment for gain on sale of convenience store business (7) |
|
| — |
|
| — |
|
|
|
| (1.64) |
|
| — |
|
|
|
Adjustment for mark to market (gain) loss on Ocado securities (7) |
|
| 0.09 |
|
| — |
|
|
|
| (0.14) |
|
| — |
|
|
|
Adjustment for depreciation related to held for sale assets (7) |
|
| — |
|
| — |
|
|
|
| (0.01) |
|
| — |
|
|
|
2018 and 2017 Adjusted Items |
|
| 0.09 |
|
| — |
|
|
|
| (1.80) |
|
| 0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.48 |
| $ | 0.44 |
| 9.1 | % | $ | 1.63 |
| $ | 1.41 |
| 15.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares used in diluted calculation |
|
| 807 |
|
| 893 |
|
|
|
| 822 |
|
| 910 |
|
|
|
21
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Three Quarters Ended |
| ||||||||||||||||
| | November 9, | | Percentage | | November 10, | | Percentage | | November 9, | | Percentage | | November 10, | | Percentage |
| ||||
|
| 2019 |
| Change(1) |
| 2018 |
| Change(2) |
| 2019 |
| Change(3) |
| 2018 |
| Change(4) |
| ||||
Total sales to retail customers without fuel(5) | | $ | 24,575 | | 2.6 | % | $ | 23,959 | | 2.0 | % | $ | 81,766 | | 2.3 | % | $ | 79,940 | | 2.3 | % |
Supermarket fuel sales | | | 3,242 | | (11.3) | % | | 3,656 | | 16.4 | % | | 11,043 | | (8.0) | % | | 11,997 | | 21.4 | % |
Convenience stores(6) | | | — | | — | % | | — | | (100.0) | % | | — | | (100.0) | % | | 944 | | (72.4) | % |
Other sales(7) | | | 157 | | (27.3) | % | | 216 | | 20.0 | % | | 584 | | (14.7) | % | | 685 | | 16.1 | % |
| | | | | | | | | | | | | | | | | | | | |
|
Total sales | | $ | 27,974 | | 0.5 | % | $ | 27,831 | | (0.2) | % | $ | 93,393 | | (0.2) | % | $ | 93,566 | | 1.6 | % |
(1) |
|
|
|
|
|
|
|
|
|
|
(2) |
|
|
|
|
21
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
| Three Quarters Ended |
| ||||||||||||||||
|
| November 10, |
| Percentage |
| November 4, |
| Percentage |
| November 10, |
| Percentage |
| November 4, |
| Percentage |
| ||||
|
| 2018 |
| Change (2) |
| 2017 |
| Change (3) |
| 2018 |
| Change (4) |
| 2017 |
| Change (5) |
| ||||
Total sales to retail customers without fuel |
| $ | 23,816 |
| 1.9 | % | $ | 23,363 |
| 3.0 | % | $ | 79,483 |
| 2.2 | % | $ | 77,735 |
| 3.2 | % |
Supermarket fuel sales |
|
| 3,656 |
| 16.4 | % |
| 3,141 |
| 15.7 | % |
| 11,997 |
| 21.4 | % |
| 9,885 |
| 14.2 | % |
Convenience stores (6) |
|
| — |
| (100.0) | % |
| 1,067 |
| 8.4 | % |
| 944 |
| (72.4) | % |
| 3,426 |
| 7.6 | % |
Other sales (1) |
|
| 200 |
| 12.4 | % |
| 178 |
| (0.6) | % |
| 647 |
| 10.6 | % |
| 585 |
| 5.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
| $ | 27,672 |
| (0.3) | % | $ | 27,749 |
| 4.5 | % | $ | 93,071 |
| 1.6 | % | $ | 91,631 |
| 4.5 | % |
|
|
| This column represents the percentage change in the third quarter of 2018, compared to the third quarter of 2017. |
(3) |
| This column represents the percentage change in the |
(4) |
| This column represents the percentage change in the first three quarters of 2018, compared to the first three quarters of 2017. |
(5) |
|
|
(6) |
| We completed the sale of our convenience store business unit during the first quarter of |
(7) | Other sales primarily relate to external sales at food production plants, data analytic services, third party media revenue and digital coupon services. |
22
���
Total sales decreasedwere $28.0 billion in the third quarter of 2018,2019, compared to $27.8 billion in the third quarter of 2017, by 0.3%.2018. This decreaseincrease was primarily due to the sale of our convenience store business unit, partially offset by our increasesan increase in total sales to retail customers without fuel, andpartially offset by a reduction in supermarket fuel sales.sales and decreased sales due to the disposal of Turkey Hill Dairy and You Technology in the first quarter of 2019. Total sales excluding fuel and dispositions increased 2.7% in the third quarter of 2019, compared to the third quarter of 2018. The increase in total sales to retail customers without fuel for the third quarter of 2018,2019, compared to the third quarter of 2017,2018, was primarily due to our merger with Home Chef and our identical sales increase, excluding fuel, of 1.6%2.5%. Identical sales, excluding fuel, for the third quarter of 2018,2019, compared to the third quarter of 2017,2018, increased primarily due to an increase in the numbergrowth of loyal households, shopping with us, changes in product mixa higher customer basket value, retail inflation and Kroger Specialty Pharmacy sales growth, partially offset by our continued investments in lower prices for our customers. Total supermarket fuel sales increased 16.4%decreased 11.3% in the third quarter of 2018,2019, compared to the third quarter of 2017,2018, primarily due to an increasea decrease in fuel gallons sold of 5.0% and a decrease in the average retail fuel price of 14.9% and an increase in fuel gallons sold of 1.2%6.8%. The increasedecrease in the average retail fuel price was caused by an increasea decrease in the product cost of fuel.
Total sales increasedwere $93.4 billion in the first three quarters of 2018,2019, compared to $93.6 billion for the first three quarters of 2017, by 1.6%.2018. This increasedecrease was primarily due to our increases in total sales to retail customers without fuel and supermarket fuel sales, partially offset by a reduction in convenience store sales due to the sale of our convenience store business unit.unit in the first quarter of 2018, Turkey Hill Dairy and You Technology in the first quarter of 2019 and a decrease in supermarket fuel sales, partially offset by the increase in total sales to retail customers without fuel. Total sales, excluding fuel, dispositions and the merger with Home Chef increased 2.3% in the first three quarters of 2019, compared to the first three quarters of 2018. The increase in total sales to retail customers without fuel for the first three quarters of 2018,2019, compared to the first three quarters of 2017,2018, was primarily due to our merger with Home Chef and our identical sales increase, excluding fuel, of 1.7%2.0%. Identical sales, excluding fuel, for the first three quarters of 2018,2019, compared to the first three quarters of 2017,2018, increased primarily due to an increase in the numbergrowth of loyal households, shopping with us, changes in product mixa higher customer basket value, retail inflation and Kroger Specialty Pharmacy sales growth, partially offset by our continued investments in lower prices for our customers. Total supermarket fuel sales increased 21.4%decreased 8.0% in the first three quarters of 2018,2019, compared to the first three quarters of 2017,2018, primarily due to an increasea decrease in fuel gallons sold of 4.5% and a decrease in the average retail fuel price of 19.0% and an increase in fuel gallons sold of 1.9%3.7%. 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 jewelry and ship-to-home solutions. We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Additionally, sales from all acquired businesses are treated as identical as if they were part of the Company in the prior year. Products and services related primarily to Kroger Personal Finance, which were historically accounted for as an offset to OG&A, are classified as a component of sales as of the beginning of fiscal year 2019. These prior-year amounts have been reclassified to conform to current-year presentation, which is consistent with our Restock Kroger initiative and our view of the products and services as part of our core business strategy. This is also more consistent with industry practice. These Kroger Personal Finance transactions represent sales to retail customers and, as such, are included in identical sales in 2019 and 2018. This change increased identical sales for the third quarter and year-to-date periods of 2018. See “Supplemental Information” section below for more detail on the changes and the impact of the reclassification. Although identical sales is a relatively standard term, numerous methods exist for calculating identical sales growth. As a result, the method used by our management to calculate identical sales may differ from methods other companies use to calculate identical sales. We urge you to understand the methods used by other companies to calculate identical sales before comparing our identical sales to those of other such companies. Certain pharmacy fees recorded as a reduction of sales have been comparatively reflected in the identical sales calculation. Our identical sales results are summarized in the following table. We used the identical sales dollar figures presented below to calculate percentage changes for the third quarter and first three quarters of 2018.2019.
23
Identical Sales
($ in millions)
| | | | | | | | | | | |
| | Third Quarter Ended |
| ||||||||
| | November 9, | | Percentage | | November 10, | | Percentage |
| ||
|
| 2019 |
| Change(1) |
| 2018 |
| Change(2) |
| ||
Excluding fuel centers |
| $ | 24,319 |
| 2.5 | % | $ | 23,717 |
| 1.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter Ended |
| ||||||||
|
| November 10, |
| Percentage |
| November 4, |
| Percentage |
| ||
|
| 2018 |
| Change (1) |
| 2017 |
| Change (2) |
| ||
Excluding fuel centers |
| $ | 23,323 |
| 1.6 | % | $ | 22,945 |
| 1.3 | % |
(1) |
|
(2) | This column represents the percentage change in identical sales in the third quarter of 2018, compared to the third quarter of 2017. |
| | | | | | | | | | | |
| | Three Quarters Ended |
| ||||||||
| | November 9, | | Percentage | | November 10, | | Percentage |
| ||
|
| 2019 |
| Change(1) |
| 2018 |
| Change(2) |
| ||
Excluding fuel centers |
| $ | 80,751 |
| 2.0 | % | $ | 79,156 |
| 1.8 | % |
(1) |
| This column represents the percentage change in identical sales in the |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Quarters Ended |
| ||||||||
|
| November 10, |
| Percentage |
| November 4, |
| Percentage |
| ||
|
| 2018 |
| Change (1) |
| 2017 |
| Change (2) |
| ||
Excluding fuel centers |
| $ | 77,374 |
| 1.7 | % | $ | 76,065 |
| 0.6 | % |
(2) |
| This column represents the percentage change in identical sales in the first three quarters of 2018, compared to the first three quarters of 2017. |
|
|
Gross Margin, LIFO and FIFO Gross Margin
We define gross margin as sales minus merchandise costs, including advertising, warehousing, and transportation. Rent expense, depreciation and amortization expense, and interest expense are not included in gross margin.
Our gross margin rate, as a percentage of sales, was 21.59%22.08% for the third quarter of 2018, as2019, compared to 22.41%21.84% for the third quarter of 2017.2018. The decreaseincrease in the third quarter of 2018,2019, compared to the third quarter of 2017,2018, resulted primarily from a higher gross margin rate on fuel sales, decreased warehousing and transportation costs, as a percentage of sales, growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the timing and sizecost of products sold, partially offset by industry-wide lower gross margin rates in pharmacy, continued investments in lower prices for our customers, increased transportationthe 2019 Out of Period Charge, a higher LIFO charge and advertising costs,continued growth in the specialty pharmacy business, which has a lower gross margin rate. In addition, we improved shrink, as a percentage of sales, growthin each of the specialty pharmacy business and a higher LIFO charge, partially offset by improved merchandise costs, growth in Our Brands products which have a higher gross margin compared to national brand products, and decreased shrink, as a percentage of sales.last nine quarters.
Our gross margin rate, as a percentage of sales, was 21.57%22.06% for the first three quarters of 2018, as2019, compared to 22.05%21.82% for the first three quarters of 2017.2018. The decreaseincrease in the first three quarters of 2018,2019, compared to the first three quarters of 2017,2018, resulted primarily from a higher gross margin rate on fuel sales, decreased shrink, as a percentage of sales, growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold, partially offset by industry-wide lower gross margin rates in pharmacy, continued investments in lower prices for our customers, the 2019 Out of Period Charge, a higher LIFO charge, continued growth in the specialty pharmacy business and increased transportation and advertisingwarehouse costs, as a percentage of sales, partially offset by improved merchandisedue to cycling of costs growth in Our Brands products which have a higher gross margin compared to national brand products,associated with new warehouses and decreased shrink, as a percentage of sales.new warehouse capabilities.
Our LIFO charge was $23 million for the third quarter of 2019 compared to $12 million for the third quarter of 2018 compared to $3 million for the third quarter of 2017.2018. Our LIFO charge was $38$69 million for the first three quarters of 20182019 compared to $46$39 million for the first three quarters of 2017.2018. Our decreased LIFO charge for the first three quarters of 2018, compared to the first three quarters of 2017, reflects an increase in our lower expected annualized product cost inflation through three quarters of 2018 compared to 2017, primarily related to pharmacy. for 2019, driven by dry grocery, pharmacy and dairy.
23
24
Our FIFO gross margin rate, which excludes the third quarter LIFO charge, was 21.63%22.16% for the third quarter of 2018, as2019, compared to 22.42%21.88% for the third quarter of 2017.2018. Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, our FIFO gross margin rate decreased 9124 basis points in the third quarter of 2018,2019, compared to the third quarter of 2017.2018. This decrease resulted primarily from ourindustry-wide lower gross margin rate, excluding rates in pharmacy, continued investments in lower prices for our customers, the effect2019 Out of Period Charge and continued growth in the LIFO chargespecialty pharmacy business, partially offset by decreased warehousing and fuel, which has been described above.transportation costs, as a percentage of sales, growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold.
Our FIFO gross margin rate, which excludes the first three quarters LIFO charge, was 21.62%22.14% for the first three quarters of 2018, as2019, compared to 22.11%21.86% for the first three quarters of 2017. Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales.2018. Excluding the effect of fuel, our FIFO gross margin rate decreased 4332 basis points in the first three quarters of 2018,2019, compared to the first three quarters of 2017.2018. This decrease resulted primarily from ourindustry-wide lower gross margin rate, excluding rates in pharmacy, continued investments in lower prices for our customers, the effect2019 Out of Period Charge, continued growth in the LIFO chargespecialty pharmacy business and fuel, which has been described above.increased warehouse costs, as a percentage of sales, due to cycling of costs associated with new warehouses and new warehouse capabilities, partially offset by decreased shrink, as a percentage of sales, growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold.
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utility,utilities, and credit card fees. Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.
OG&A expenses, as a percentage of sales, were 16.47%18.23% for the third quarter of 2018, as2019, compared to 16.94%16.75% for the third quarter of 2017. This decrease resulted primarily from effective cost controls due to process changes, decreased multi-employer pension plan costs and decreases in incentive plan costs and utilities, partially offset by investments in our digital strategy and increased healthcare costs. Our multi-employer pension plan costs decreased2018. The increase in the third quarter of 2018,2019, compared to the third quarter of 2017, due2018 resulted primarily from the 2019 Third Quarter OG&A Adjusted Items, investments in our digital strategy, increased incentive plan costs, increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience and the effect of decreased fuel sales, which increases our incremental contributionOG&A rate, as a percentage of $111 million, $69 million netsales, partially offset by broad based improvement of tax, to the UFCW Consolidated Pension Plan in the third quarter of 2017 (“2017 UFCW Contribution”). Restock Kroger cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions.
Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel and the 2017 UFCW Contribution,2019 Third Quarter OG&A Adjusted Items, our OG&A rate decreased 2015 basis points in the third quarter of 2018,2019, compared to the third quarter of 2017.2018. This decrease resulted primarily from effectivebroad based improvement of Restock Kroger cost controls due to process changessavings initiatives that drive administrative efficiencies, store productivity and decreasessourcing cost reductions, partially offset by investments in our digital strategy, increased incentive plan costs and utilities,increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience.
25
OG&A expenses, as a percentage of sales, were 17.37% for the first three quarters of 2019, compared to 16.70% for the first three quarters of 2018. The increase in the first three quarters of 2019, compared to the first three quarters of 2018 resulted primarily from the 2019 OG&A Adjusted Items, the 2018 OG&A Adjusted Item, the effect of decreased supermarket fuel and convenience store sales, which increases our OG&A rate, as a percentage of sales, investments in our digital strategy and increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience, partially offset by broad based improvement of Restock Kroger cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, decreased incentive plan costs and planned real estate transactions during the first quarter of 2019. Excluding the effect of fuel, the 2019 OG&A Adjusted Items and the 2018 OG&A Adjusted Item, our OG&A rate decreased 14 basis points in the first three quarters of 2019, compared to the first three quarters of 2018. This decrease resulted primarily from broad based improvement of Restock Kroger cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, decreased incentive plan costs and planned real estate transactions during the first quarter of 2019, partially offset by investments in our digital strategy and increased healthcare costs.increases in hourly associate labor costs attributed to investing in higher wages and other comprehensive benefits to improve employee retention, engagement and customer experience.
During the second quarter of 2019, we accepted an offer to sell an unused warehouse that had been on the market for some time. We used this gain as an opportunity to contribute a similar amount into the UFCW Consolidated Pension Plan, helping stabilize associates’ future benefits. The net impact of these transactions had no effect to OG&A expenses, as a percentage of sales, were 16.43% for the first three quarters of 2018, as compared to 17.01% for the first three quarters of 2017. This decrease resulted primarily from effective cost controls due to process changes, decreased utilities, the 2018 OG&A Adjusted Item, the 2017 Adjusted Items, and the 2017 UFCW Contribution, partially offset by investments in our digital strategy and increased incentive plan costs and credit card fees. Excluding the effect of fuel, the 2018 OG&A Adjusted Item, the 2017 Adjusted Items, and the 2017 UFCW Contribution, our OG&A rate increased 6 basis points in the first three quarters of 2018, compared to the first three quarters of 2017. This increase resulted primarily from increased incentive plan costs and credit card fees, partially offset by effective cost controls due to process changes.2019.
Rent Expense
Rent expense, increased, as a percentage of sales, for the third quarter of 2018 compared to the third quarter of 2017. This increase resulted primarily from the sale of our convenience store business unit, which had a lower rent expense, as a percentage of sales.
Rent expense decreased, as a percentage of sales, for the first three quarters of 2018 compared to the first three quarters of 2017. This decrease resulted primarily from decreased closed store liabilities, partially offset by the sale of our convenience store business unit, which had a lower rent expense, as a percentage of sales.
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Depreciation and Amortization Expense
Depreciation and amortization expense decreased, as a percentage of sales,remained relatively consistent in both the third quarter and first three quarters of 2018,2019, compared to the same periods in 2018.
Depreciation and Amortization Expense
Depreciation and amortization expense increased, as a percentage of 2017,sales, in the third quarter of 2019, compared to the third quarter of 2018. This increase is primarily due to higherdecreased fuel sales, which decreasesincreases our depreciation expense as a percentage of sales, partially offset by additional depreciation on capital investments, excluding mergers and lease buyouts, of $3.0 billion, during the rolling four quarter period ending with the third quarter of 2018.2019 and a decrease in the average useful life on these capital investments. Our strategy under Restock Kroger includes initiatives to enhance the customer experience in stores, improve our process efficiency and integrate our digital shopping experience through technology developments. As such, the percentage of capital investments related to digital and technology has grown compared to the prior year, which has caused a decrease in the average depreciable life of our capital portfolio.
Depreciation and amortization expense increased, as a percentage of sales, in the first three quarters of 2019, compared to the first three quarters of 2018. This increase is primarily due to lower fuel sales, which increases our depreciation expense as a percentage of sales, the 2018 Depreciation Adjusted Item, additional depreciation on capital investments, excluding mergers and lease buyouts, of $3.0 billion, during the rolling four quarter period ending with the third quarter of 2019 and a decrease in the average useful life on these capital investments.
Operating Profit and FIFO Operating Profit
Operating profit was $647$254 million, or 2.34%0.91% of sales, for the third quarter of 2018,2019, compared to $747$647 million, or 2.69%2.33% of sales, for the third quarter of 2017.2018. Operating profit, as a percentage of sales, decreased 35142 basis points in the third quarter of 2018,2019, compared to the third quarter of 2017,2018, due to a lower gross margin rate, a higher LIFO charge and increased rent expense, as a percentage of sales, partially offset by decreased OG&A and depreciation and amortization expenses, as a percentage of sales.
Operating profit was $2.2 billion, or 2.39% of sales, for the first three quarters of 2018, compared to $2.1 billion, or 2.25% of sales, for the first three quarters of 2017. Operating profit, as a percentage of sales, increased 14 basis points in the first three quarters of 2018, compared to the first three quarters of 2017, due to decreased OG&A, rent and depreciation and amortization expenses, as a percentage of sales, and a lower LIFO charge, partially offset by a lower gross margin rate.
FIFO operating profit was $659 million, or 2.38% of sales, for the third quarter of 2018, compared to $750 million, or 2.70% of sales, for the third quarter of 2017. FIFO operating profit, as a percentage of sales, excluding fuel decreased 26 basis points in the third quarter of 2018, compared to the third quarter of 2017, due to a lower gross margin rate and increased rent expense, as a percentage of sales, partially offset by decreased OG&A expense, as a percentage of sales.
FIFO operating profit was $2.3 billion, or 2.43% of sales, for the first three quarters of 2018, compared to $2.1 billion, or 2.30% of sales, for the first three quarters of 2017. FIFO operating profit, as a percentage of sales, excluding fuel, the 2018 and 2017 Adjusted Items and the 2017 UFCW Contribution, decreased 48 basis points in the first three quarters of 2018, compared to the first three quarters of 2017, due to a lower gross margin rate and increased OG&A and depreciation and amortization expenses, as a percentage of sales, partially offset by a higher gross margin rate.
Operating profit was $1.7 billion, or 1.83% of sales, for the first three quarters of 2019, compared to $2.2 billion, or 2.38% of sales, for the first three quarters of 2018. Operating profit, as a percentage of sales, decreased rent54 basis points in the first three quarters of 2019, compared to the first three quarters of 2018, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, partially offset by a higher gross margin rate.
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FIFO operating profit was $277 million, or 0.99% of sales, for the third quarter of 2019, compared to $659 million, or 2.37% of sales, for the third quarter of 2018. FIFO operating profit excluding the 2019 Third Quarter Adjusted Items decreased 1.7% in the third quarter of 2019, compared to the third quarter of 2018, due to decreased pharmacy gross profit, the 2019 Out of Period Charge and increased depreciation and amortization and OG&A expenses, as a percentage of sales, partially offset by increased fuel earnings and improved sales to retail customers without fuel. Fuel sales lower our operating profit rate due to the very low operating profit rate, as a percentage of sales, of fuel sales compared to non-fuel sales. FIFO operating profit, as a percentage of sales excluding fuel and the 2019 Third Quarter Adjusted Items decreased 23 basis points in the third quarter of 2019, compared to the third quarter of 2018, due to decreased pharmacy gross profit, the 2019 Out of Period Charge, increased depreciation and amortization expenses, as a percentage of sales, partially offset by decreased OG&A expenses, as a percentage of sales.
FIFO operating profit was $1.8 billion, or 1.91% of sales, for the first three quarters of 2019, compared to $2.3 billion, or 2.42% of sales, for the first three quarters of 2018. FIFO operating profit excluding the 2019 and 2018 Adjusted Items decreased 0.7% in the first three quarters of 2019, compared to the first three quarters of 2018, due to decreased pharmacy gross profit, the 2019 Out of Period Charge and increased depreciation and amortization and OG&A expenses, as a percentage of sales, partially offset by increased fuel earnings and improved sales to retail customers without fuel. FIFO operating profit, as a percentage of sales excluding fuel and the 2019 and 2018 Adjusted Items decreased 24 basis points in the first three quarters of 2019, compared to the first three quarters of 2018, due to decreased pharmacy gross profit, the 2019 Out of Period Charge and increased depreciation and amortization expense, as a percentage of sales, partially offset by lower OG&A expense, as a percentage of sales.
Specific factors ofcontributing to the above operating trends underfor operating profit and FIFO operating profit above are discussed earlier in this section.
Income Taxes
The effective income tax rate was 35.6% in the third quarter of 2019, compared to 22.8% in the third quarter of 2018,2018. The effective income tax rate was 25.0% for the first three quarters of 2019, compared to 35.6% in22.8% for the third quarterfirst three quarters of 2017.2018. The effective income tax rate for the third quarter and the first three quarters of 2019 differed from the federal statutory rate primarily due to the portion of the impairment of Lucky’s Market attributable to the minority interest, which reduces pre-tax income, but does not impact tax expense. The impact of this item on the effective income tax rate is approximately 12% for the third quarter and 2% for the first three quarters of 2019. The difference from the statutory rate is also impacted by the effect of state income taxes, partially offset by the utilization of tax credits and deductions. The effective income tax rate for the third quarter and first three quarters of 2018 differed from the federal statutory rate primarily due to the effect of state income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Reform rates and an increase in future tax deductions at post-Tax Reform rates, partially offset by the utilization of tax credits and deductions and favorable provision to return adjustments. The rate forAdditionally, the third quarter of 2018 is lower than the rate for the third quarter of 2017 primarily due to a reduction in the federal statutory rate enacted by the Tax Cuts and Jobs Act.
The effective income tax rate was 22.8% for the first three quarters of 2018, compared to 34.8% for the first three quarters of 2017. The effective income tax rate for the first three quarters of 2018 differed from the federal statutory rate primarily due to the effect of state income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Reform rates and an increase in future tax deductions at post-Tax Reform rates, partially offset by the utilization of tax credits and deductions, favorable provision to return adjustments and the benefitbenefitted from favorable settlements of certain state tax items. The rate for the first three quarters of 2018 is lower than the rate for the first three quarters of 2017 primarily due to a reduction in the federal statutory rate enacted by the Tax Cuts and Jobs Act.
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Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings were $0.32 per diluted share for the third quarter of 2019 compared to net earnings of $0.39 per diluted share for the third quarter of 2018 represented a decrease of 11.4% from2018. Adjusted net earnings of $0.44$0.47 per diluted share for the third quarter of 2017. Adjusted operating2019 represented a decrease of 2.1% compared to adjusted net earnings of $0.48 per diluted share for the third quarter of 2018 represented an increase of 9.1% from adjusted operating net earnings of $0.44 per diluted share for the third quarter of 2017.2018. The increasedecrease in adjusted operating net earnings per diluted share resulted primarily from lowerdecreased FIFO operating profit without fuel, a higher income tax expenserate and lower weighted average common shares outstanding due to common share repurchases, partially offset by lower FIFO operating profit, a higher LIFO charge, partially offset by increased fuel earnings and increaseddecreased interest expense.
Net earnings were $1.64 per diluted share for the first three quarters of 2019 compared to net earnings of $3.43 per diluted share for the first three quarters of 2018 represented an increase of 198.3% from2018. Adjusted net earnings of $1.15$1.62 per diluted share for the first three quarters of 2017. Adjusted operating2019 represented a decrease of 0.6% compared to adjusted net earnings of $1.63 per diluted share for the first three quarters of 2018 represented an increase of 15.6% from adjusted operating net earnings of $1.41 per diluted share for the first three quarters of 2017.2018. The increasedecrease in adjusted operating net earnings per diluted share resulted primarily from decreased FIFO operating profit without fuel, higher income tax expense and a lowerhigher LIFO charge, lower income taxpartially offset by increased fuel earnings, decreased interest expense and lower weighted average common shares outstanding due to common share repurchases, partially offset by lower FIFO operating profit and increased interest expense.repurchases.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
Net cash provided by operating activities
We generated $3.7$4.0 billion of cash from operations during the first three quarters of 2018 compared to $3.1 billion during the first three quarters of 2017. The increase in net cash provided by operating activities in the first three quarters of 2018,2019 compared to $3.7 billion in the first three quarters of 2017, resulted primarily from an increase in net2018. Net earnings including noncontrolling interests, positive changesadjusted for non-cash items and other impacts, generated approximately $3.6 billion of operating cash flow in working capital and reduced contributionsthe first three quarters of 2019 compared to $3.0 billion in the company sponsored pension plans, partially offset by non-cash adjustments for the gain on salefirst three quarters of our convenience store business unit and the mark to market gain on Ocado securities.
2018. Cash provided by operating activities for changes in working capital was $942$451 million in the first three quarters of 20182019 compared to $526$757 million in the first three quarters of 2017. 2018. The increasedecrease in cash provided by operating activities for changes in working capital in the first three quarters of 2018,2019, compared to 2017,the first three quarters of 2018, was primarily due to the following:
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our fourth quarter 2017 estimated taxes and our estimated taxes on the gain on sale of our convenience
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Cash paid for taxes increased in the first three quarters of 2018,2019, compared withto the first three quarters of 2017,2018, primarily due to the payment of estimated taxes on the gain on sale of the You Technology and Turkey Hill Dairy businesses in the first three quarters of 2019 and an overpayment of our convenience store business unit andfourth quarter 2017 estimated taxes that resulted in lower estimated tax payments in the first three quarters of 2017 due to the $1 billion, $650 million net of tax, pension contribution made in 2017.2018.
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Net cash used by investing activities
Investing activities used cash of $1.8 billion in the first three quarters of 2019 compared to $630 million in the first three quarters of 2018 compared to $2.0 billion in the first three quarters of 2017.2018. The amount of cash used by investing activities decreasedincreased in the first three quarters of 20182019 compared to the first three quarters of 2017,2018, primarily due to the net proceeds from the sale of our convenience store business unit, partially offset by the payment for our merger with Home Chef and the purchases of Ocado securities.following:
● | A lower amount of net proceeds from the sale of businesses, since the proceeds from the sale of the convenience store business exceeded the proceeds from the sales of the Turkey Hill Dairy and You Technology businesses; partially offset by |
● | Increased proceeds from the sale of assets due to the sale of an unused warehouse and proceeds from sale leaseback transactions; |
● | No payments for purchases of Ocado securities in the first three quarters of 2019; and |
● | No acquisitions in the first three quarters of 2019. |
Net cash used by financing activities
We used $3.0$2.1 billion of cash for financing activities in the first three quarters of 20182019 compared to $1.0$3.0 billion during the first three quarters of 2017.2018. The amount of cash used for financing activities for the first three quarters of 2018,2019, compared to the first three quarters of 2017, increased $2.0 billion2018, decreased primarily due to increaseddecreased payments on commercial paper and share repurchases, partially offset by increased payments on long-term debt including obligations under finance leases and a decrease inreduction of proceeds from the issuance of long-term debt, partially offset by a reduction in payments on long-term debt. We used a portion of the proceeds from the sale of our convenience store business unit to pay down outstanding commercial paper borrowings and fund a $1.2 billion ASR program, which was completed in the second quarter of 2018.
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Debt Management
Asof November 10, 2018,9, 2019, we maintained a $2.75 billion (with the ability to increase by $1 billion), unsecured revolving credit facility that, unless extended, terminates on August 29, 2022. Outstanding borrowings under the credit facility, the commercial paper borrowings, and some outstanding letters of credit reduce funds available under the credit facility. As of November 10, 2018,9, 2019, we had $635$565 million of outstanding commercial paper and no borrowings under our revolving credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled $5$2 million as of November 10, 2018.9, 2019.
Our bank credit facility and the indentures underlying our publicly issued debt contain various financial covenants. As of November 10, 2018,9, 2019, we were in compliance with the financial covenants. Furthermore, management believes it is not reasonably likely that we will fail to comply with these financial covenants in the foreseeable future.
Total debt, including both the current and long-term portions of capitalobligations under finance leases, and lease-financing obligations, decreased $571 million$1.6 billion as of November 10, 20189, 2019 compared to our fiscal year end 20172018 debt of $15.6$15.2 billion. TheThis decrease in 2018, compared to 2017, resulted primarily from net payments on commercial paper borrowings of $1.5 billion and the$235 million, payment of $200$500 million of senior notes bearing an interest rate of 7.00%, partially offset by1.50% and the issuancerepayment of our $1.0 billion term loan that has a variable interest rate. The variable interest rate on the term loan was 3.09% as of November 10, 2018. The sale of our convenience store business unit allowed us to pay down debt and fund our ASR program.loan.
Interest Rate Risk Management
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair value hedges) and forward-starting interest rate swaps (cash flow hedges). Our current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, we use the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of the carrying value of our debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.
We review compliance with these guidelines annually with the Financial Policy Committee of the Board of Directors. These guidelines may change as our needs dictate.
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Common Share Repurchase Program
During the third quarter of 2018,2019, we invested $17$11 million to repurchase 582447 thousand Kroger common shares at an average price of $30.03$25.38 per share. For the first three quarters of 2018,2019, we invested $2.0 billion$34 million to repurchase 78.41.4 million Kroger common shares at an average price of $25.44$25.14 per share. The shares repurchased in the first three quarters of 20182019 were reacquired under two separate share repurchase programs. The first is a series of Board of Director authorizations:
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As of November 10, 2018, there was $546 million remaining under the March 2018 Repurchase Program.
The second is a program that uses the cash proceeds from the exercises of stock options by participants in Kroger’s stock option, long-term incentive plans and the associated tax benefits.
DividendsOn March 15, 2018, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, including accelerated stock repurchase transactions, block trades, or pursuant to trades intending to comply with rule 10b5-1 of the Securities Exchange Act of 1934 (the “March 2018 Repurchase Program”). On November 5, 2019, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with rule 10b5-1 of the Securities Exchange Act of 1934 (the “November 2019 Repurchase Program”). The November 2019 Repurchase Program authorization replaced the existing March 2018 Repurchase Program that had approximately $546 million remaining. As of November 9, 2019, $1.0 billion remained under the November 2019 Repurchase Program.
We paid dividends of $113 million for the third quarter of 2018 and $324 million for the first three quarters of 2018. We paid dividends of $113 million for the third quarter of 2017 and $333 million for the first three quarters of 2017. Dividends declared
The following table provides dividend information ($ in millions, except per common share was $0.140 for the third quarter of 2018, compared to $0.125 for the third quarter of 2017. Dividends declared per common share was $0.405 for the first three quarters of 2018, compared to $0.370 for the first three quarters of 2017. We currently expect to continue to pay comparable cash dividends on a quarterly basis, that will increase over time, depending on our net earnings and other factors, including approval by our Board.amounts):
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| Third Quarter Ended | ||||
| November 9, | | November 10, | ||
| 2019 | | 2018 | ||
Cash dividends paid | $ | 130 | | $ | 113 |
Cash dividends paid per common share | $ | 0.160 | | $ | 0.140 |
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| Three Quarters Ended | ||||
| November 9, | | November 10, | ||
| 2019 | | 2018 | ||
Cash dividends paid | $ | 356 | | $ | 324 |
Cash dividends paid per common share | $ | 0.440 | | $ | 0.390 |
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Liquidity Needs
We estimate our liquidity needs over the next twelve-month period to approximate $6.6$4.8 billion, which includes anticipated requirements for working capital, capital investments, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of the third quarter of 2018.2019. We generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months. We have approximately $1.6 billion$750 million of senior notes $635and $565 million of commercial paper and the $1.0 billion term loan maturing in the next twelve months, which are included in the $6.6$4.8 billion of estimated liquidity needs. We expect to satisfy these obligations using cash generated from operations or asset sales and through issuing additional senior notes a term loan or commercial paper on favorable terms based on our past experience.paper. We believe we have adequate coverage of our debt covenants to continue to maintain our current investment grade debt ratings and to respond effectively to competitive conditions.
CAPITAL INVESTMENTS
Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $691 million for the third quarter of 2019 compared to $782 million for the third quarter of 2018, compared to $658 million for the third quarter of 2017.2018. Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $2.3$2.2 billion in both the first three quarters of 20182019 and $2.3 billion in the first three quarters of 2017.2018. During the rolling four quarter period ended with the third quarter of 2018,2019, we opened, expanded, relocated or relocatedacquired 27 supermarkets and also completed 165130 major within-the-wall remodels. Total supermarket square footage at the end of the third quarter of 20182019 increased 0.1%0.2% from the end of the third quarter of 2017.2018. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the third quarter of 20182019 increased 0.9%0.6% over the end of the third quarter of 2017.2018.
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CRITICAL ACCOUNTING POLICIES
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our critical accounting policies are summarized in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018. 2, 2019.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could vary from those estimates.
RECENTLY ADOPTEDNEW ACCOUNTING STANDARDS
On February 4, 2018, weRefer to Note 5 and Note 6 to the Consolidated Financial Statements for recently adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 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 goodsaccounting standards and recently issued accounting standards not yet adopted as of November 9, 2019.
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SUPPLEMENTAL INFORMATION
Sales Reclassification
Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to OG&A, are 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 usingclassified as a modified retrospective approach with the adoption primarily involving the evaluationcomponent of whether we actsales 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 notbeginning of fiscal year 2019, except for certain amounts in Media, which are netted against merchandise costs. These prior-year amounts have a material effect onbeen reclassified to conform to current-year presentation, which is consistent with our Consolidated StatementsRestock Kroger initiative and our view of Operations, Consolidated Balance Sheets or Consolidated Statementsthe products and services as part of Cash Flows. our core business strategy. This is also more consistent with industry practice.
In March 2017,The following tables summarize the FASB issued ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07).” ASU 2017-07 requires an employer to report the service cost component of retiree benefits in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. 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 $7 million for theCompany's third quarter of 2017 and $21 million for the first three quarters of 2017, of non-service company-sponsored pension plan costs from operating profit to other income (expense) on our Consolidated Statements of Operations. Information about retiree benefit plans' interest expense, investment returns and other components of retiree benefit expenses can be found2018 sales reclassifications ($ in Note 4 to our Consolidated Financial Statements.millions):
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| Previously Stated | | Reclassification | | Reclassified | |||
| November 10, | | | | | November 10, | ||
| 2018 | | 2018 | | 2018 | |||
Sales | $ | 27,672 | | $ | 159 | | $ | 27,831 |
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Operating expenses | | | | | | | | |
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
| 21,699 | | | 54 | | | 21,753 |
Operating, general and administrative | | 4,556 | | | 105 | | | 4,661 |
Rent | | 200 | | | — | | | 200 |
Depreciation and amortization | | 570 | | | — | | | 570 |
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Operating profit | $ | 647 | | $ | — | | $ | 647 |
In January 2016, the FASB issued “Financial Instruments–Overall (Topic 825),” which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments (ASU 2016-01). We adopted this ASU on February 4, 2018. As a result of the adoption, we recorded a mark to market gain (loss) on Ocado securities, for those securities we owned as of the end of the third quarter of 2018, within the Consolidated Statements of Operations as opposed to a component of Other Comprehensive Income on our Consolidated Statements of Comprehensive Income.
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| Previously Stated | | Reclassification | | Reclassified | |||
| November 10, | | | | | November 10, | ||
| 2018 | | 2018 | | 2018 | |||
Sales | $ | 93,071 | | $ | 495 | | $ | 93,566 |
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Operating expenses | | | | | | | | |
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
| 72,991 | | | 156 | | | 73,147 |
Operating, general and administrative | | 15,291 | | | 339 | | | 15,630 |
Rent | | 680 | | | — | | | 680 |
Depreciation and amortization | | 1,884 | | | — | | | 1,884 |
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Operating profit | $ | 2,225 | | $ | — | | $ | 2,225 |
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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 plan to apply the transition package of practical expedients permitted within the standard, which allows us to carryforward our historical lease classification, and to apply the transition option which does not require application of the guidance to comparative periods in the year of adoption. The adoption of this ASU will result in a material increase on our Consolidated Balance Sheets for lease liabilities and right-of-use assets. While we are continuing to evaluate all potential impacts of the standard, we do not expect adoption to have a material impact on our consolidated net earnings or cash flows. Our evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing our accounting policies and assessing opportunities to make certain changes to our business processes and lease accounting information technology system in order to determine the best implementation strategy. We believe our current off-balance sheet leasing commitments are reflected in our investment grade debt rating.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income.” ASU 2018-02 amends ASC 220, “Income Statement - Reporting Comprehensive Income,” to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. In addition, under ASU 2018-02, we may be required to provide certain disclosures regarding stranded tax effects. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the effect of this standard on our Consolidated Financial Statements.
SUPPLEMENTAL INFORMATION
Disaggregated Revenues
The following table presents sales revenue by type of product for the first, second, third and fourth quarters of 2017 and for the fiscal year ended February 3, 2018. We included this information for comparability purposes to supplement the disaggregated revenue information included in Note 1.
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| Amount |
| % |
| Amount |
| % |
| Amount |
| % |
| |||||
Non Perishable (1) |
| $ | 17,927 |
| 49.4 | % | $ | 13,536 |
| 49.1 | % |
| $ | 13,698 |
| 49.4 | % | $ | 15,711 |
| 50.6 | % | $ | 60,872 |
| 49.6 | % |
Fresh (2) |
|
| 8,775 |
| 24.2 | % |
| 6,745 |
| 24.4 | % |
|
| 6,439 |
| 23.2 | % |
| 7,182 |
| 23.2 | % |
| 29,141 |
| 23.8 | % |
Supermarket Fuel |
|
| 3,817 |
| 10.5 | % |
| 2,927 |
| 10.6 | % |
|
| 3,141 |
| 11.3 | % |
| 3,292 |
| 10.6 | % |
| 13,177 |
| 10.7 | % |
Pharmacy |
|
| 3,198 |
| 8.8 | % |
| 2,393 |
| 8.7 | % |
|
| 2,462 |
| 8.9 | % |
| 2,671 |
| 8.6 | % |
| 10,724 |
| 8.7 | % |
Convenience Stores |
|
| 1,311 |
| 3.6 | % |
| 1,048 |
| 3.8 | % |
|
| 1,067 |
| 3.8 | % |
| 1,089 |
| 3.5 | % |
| 4,515 |
| 3.7 | % |
Other (3) |
|
| 1,257 |
| 3.5 | % |
| 948 |
| 3.4 | % |
|
| 942 |
| 3.4 | % |
| 1,086 |
| 3.5 | % |
| 4,233 |
| 3.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales and other revenue |
| $ | 36,285 |
| 100 | % | $ | 27,597 |
| 100 | % |
| $ | 27,749 |
| 100 | % | $ | 31,031 |
| 100 | % | $ | 122,662 |
| 100 | % |
|
|
|
|
|
|
30
OUTLOOK
OUTLOOK
This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Such statements are indicated by words such as “achieve,” “anticipate,“affect,” “believe,” “can,“could,” “commitment,” “continue,” “could,“effect,” “estimate,” “expect,” “future,” “goal,” “growing,” “growth,” “guidance,” “intend,“incremental,” “likely,” “maintain,” “may,” “plan,” “potential,” “predict,” “predicted,” “preliminary,” “projection,” “range,” “schedule,” “seek,” “should,“result,” “strategy,” “success,” “target,” “will,“trend,” “would,and “will,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. These include the specific risk factors identified in “Risk Factors” and “Outlook” in our Annual Report on Form 10-K for our last fiscal year and any subsequent filings, as well as those identified 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.
2019 Guidance
| We are targeting identical sales growth, excluding fuel, to range from 2.0% to 2.25% in 2019. |
● | Our GAAP net earnings guidance range is |
| On an adjusted basis, we |
|
|
|
|
| We expect our alternative profit stream portfolio to contribute an incremental $100 million in operating profit in 2019, compared to 2018. |
● | We |
● | We expect capital investments, excluding mergers, acquisitions, and purchases of leased facilities, to |
| We expect to begin share repurchases under the November 2019 Repurchase Program in the fourth quarter of 2019. |
2020 Guidance
● | We are targeting identical sales growth, excluding fuel, to exceed 2.25% in 2020. |
● | On an adjusted basis, our |
● | On an adjusted basis, we expect FIFO operating profit to range from $3.0 billion to $3.1 billion for 2020. |
● | On an adjusted basis, we expect our 2020 tax rate to be approximately |
● | We expect capital investments, excluding mergers, acquisitions, and purchases of leased facilities, to range between $3.2 billion and $3.4 billion in 2020. |
32
● | We expect our |
● | We expect share repurchases to range between $500 million and $1.0 billion in 2020. |
Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include:
| The extent to which our sources of liquidity are sufficient to meet our requirements may be affected by the state of the financial markets and the effect that such condition has on our ability to issue commercial paper at acceptable rates. Our ability to borrow under our committed lines of credit, including our bank credit facilities, could be impaired if one or more of our lenders under those lines is unwilling or unable to honor its contractual obligation to lend to us, or in the event that natural disasters or weather conditions interfere with the ability of our lenders to lend to us. Our ability to refinance maturing debt may be affected by the state of the financial markets. |
31
| Our ability to achieve sales, earnings and incremental FIFO operating profit |
● | Our ability to achieve |
| Our effective tax rate may differ from the expected rate due to changes in laws, the status of pending items with various taxing authorities, and the deductibility of certain expenses. |
We cannot fully foresee the effects of changes in economic conditions on Kroger’sour business. We have assumed economic and competitive situations will not change significantly in 2019 or 2020.
Other factors and assumptions not identified above, including those discussed in Item 1A of Part I of our Annual Report on Form 10-K, could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in, contemplated or implied by forward-looking statements made by us or our representatives. Except as required by law, weWe undertake no obligation to update the forward-looking information contained in this filing. Refer to Kroger's reports and filings with the SEC for a further discussion of these risks and uncertainties.filing unless required by applicable law.
32
33
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018.2, 2019.
Item 4.Controls and Procedures.
The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures as of the quarter ended November 10, 2018,9, 2019, the end of the period covered by this report. Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with the evaluation described above, there was no change in Kroger’s internal control over financial reporting during the quarter ended November 10, 2018,9, 2019, that has materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting.
34
33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is possible to reasonably estimate and where an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse impact on the Company’s financial condition, results of operations, or cash flows.
34
35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | |
| | | | | | | | | Maximum |
| |
| | | | | | | | | Dollar Value of |
| |
| | | | | | | | | Shares that May |
| |
| | | | | | | Total Number of | | Yet Be |
| |
| | | | | | | Shares Purchased | | Purchased |
| |
| | Total Number | | Average | | as Part of Publicly | | Under the Plans |
| ||
| | of Shares | | Price Paid Per | | Announced Plans | | or Programs(4) |
| ||
Period(1) |
| Purchased(2) |
| Share |
| or Programs(3) |
| (in millions) |
| ||
First four weeks | | | | | | | | | | | |
August 18, 2019 to September 14, 2019 |
| 61,112 |
| $ | 24.78 |
| 44,050 |
| $ | 546 | |
Second four weeks | | | | | | | | | | | |
September 15, 2019 to October 12, 2019 |
| 358,725 |
| $ | 25.61 |
| 342,954 |
| $ | 546 | |
Third four weeks | | | | | | | | | | | |
October 13, 2019 to November 9, 2019 |
| 60,082 |
| $ | 24.71 |
| 60,082 |
| $ | 1,000 | |
Total |
| 479,919 |
| $ | 25.39 |
| 447,086 |
| $ | 1,000 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Maximum |
| |
|
|
|
|
|
|
|
|
| Dollar Value of |
| |
|
|
|
|
|
|
|
|
| Shares that May |
| |
|
|
|
|
|
|
| Total Number of |
| Yet Be |
| |
|
|
|
|
|
|
| Shares Purchased |
| Purchased |
| |
|
| Total Number |
| Average |
| as Part of Publicly |
| Under the Plans |
| ||
|
| of Shares |
| Price Paid Per |
| Announced Plans |
| or Programs(4) |
| ||
Period(1) |
| Purchased(2) |
| Share |
| or Programs(3) |
| (in millions) |
| ||
First four weeks |
|
|
|
|
|
|
|
|
|
|
|
August 19, 2018 to September 15, 2018 |
| 261,805 |
| $ | 30.89 |
| 225,419 |
| $ | 546 |
|
Second four weeks |
|
|
|
|
|
|
|
|
|
|
|
September 16, 2018 to October 13, 2018 |
| 228,312 |
| $ | 28.97 |
| 217,110 |
| $ | 546 |
|
Third four weeks |
|
|
|
|
|
|
|
|
|
|
|
October 14, 2018 to November 10, 2018 |
| 139,487 |
| $ | 29.48 |
| 139,487 |
| $ | 546 |
|
Total |
| 629,604 |
| $ | 29.88 |
| 582,016 |
| $ | 546 |
|
(1) |
| The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The third quarter of |
(2) |
| Includes (i) shares repurchased under a program announced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, under which repurchases are limited to proceeds received from exercises of stock options and the tax benefits associated therewith (“1999 Repurchase Program”) and (ii) |
(3) |
| Represents shares repurchased under the 1999 Repurchase Program. |
(4) |
| The amounts shown in this column reflect the amount remaining under the March 2018 Repurchase Program and the November 2019 Repurchase Program as of the specified period end dates. Amounts available under the 1999 Repurchase Program are dependent upon option exercise activity. The November 2019 Repurchase Program replaced the March 2018 Repurchase Program during the third quarter of 2019. The November 2019 Repurchase Program and the 1999 Repurchase Program do not have an expiration date but may be suspended or terminated by our Board of Directors at any |
35
36
Item 6. Exhibits.
EXHIBIT 3.1 | - | Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010, as amended by the Amendment to Amended Articles of Incorporation, which is hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 23, 2015. |
| | |
EXHIBIT 3.2 | - | The Company’s regulations are hereby incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on June |
| | |
EXHIBIT 4.1 | - | Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request. |
| | |
EXHIBIT 31.1 | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer. |
| | |
EXHIBIT 31.2 | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer. |
| | |
EXHIBIT 32.1 | - | Section 1350 Certifications. |
| | |
EXHIBIT 101.INS | - | XBRL Instance |
| | |
EXHIBIT 101.SCH | - | XBRL Taxonomy Extension Schema Document. |
| | |
EXHIBIT 101.CAL | - | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
EXHIBIT 101.DEF | - | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
EXHIBIT 101.LAB | - | XBRL Taxonomy Extension Label Linkbase Document. |
| | |
EXHIBIT 101.PRE | - | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
EXHIBIT 104 | - | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
36
37
Exhibit Index
EXHIBIT 3.1 | - | |
| | |
EXHIBIT 3.2 | - | |
| | |
EXHIBIT 4.1 | - | Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request. |
| | |
EXHIBIT 31.1 | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer. |
| | |
EXHIBIT 31.2 | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer. |
| | |
EXHIBIT 32.1 | - | |
| | |
EXHIBIT 101.INS | - | XBRL Instance |
| | |
EXHIBIT 101.SCH | - | XBRL Taxonomy Extension Schema Document. |
| | |
EXHIBIT 101.CAL | - | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
EXHIBIT 101.DEF | - | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
EXHIBIT 101.LAB | - | XBRL Taxonomy Extension Label Linkbase Document. |
| | |
EXHIBIT 101.PRE | - | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
EXHIBIT 104 | - | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
38
37
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE KROGER CO. | ||
|
| ||
| |||
Dated: December | By: | /s/ W. Rodney McMullen | |
| | W. Rodney McMullen | |
| | Chairman of the Board and Chief Executive Officer | |
| | | |
Dated: December | By: | /s/ | |
| |
| |
| |
|
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