UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 5, 2022May 20, 2023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-303
|
The Kroger Co.
(Exact name of registrant as specified in its charter)
| | |
Ohio | | 31-0345740 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
1014 Vine Street, Cincinnati, Ohio 45202
(Address of principal executive offices)
(Zip Code)
(513) 762-4000
(Registrant’s telephone number, including area code)
Unchanged
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common, $1.00 Par Value | KR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
There were 715,821,875717,745,520 shares of Common Stock ($1 par value) outstanding as of December 6, 2022.June 20, 2023.
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements. |
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Three Quarters Ended | | | First Quarter Ended | | ||||||||||||
| | November 5, | | November 6, | | November 5, | | November 6, | | | May 20, | | May 21, | | ||||||
(In millions, except per share amounts) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
| ||||||
Sales | | $ | 34,198 | | $ | 31,860 | | $ | 113,436 | | $ | 104,840 | | | $ | 45,165 | | $ | 44,600 | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | |
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below | |
| 26,890 | |
| 24,959 | |
| 89,234 | |
| 81,820 | | |
| 35,080 | |
| 34,952 | |
Operating, general and administrative | |
| 5,587 | |
| 5,177 | |
| 18,001 | |
| 17,692 | | |
| 7,393 | |
| 6,997 | |
Rent | |
| 195 | |
| 197 | |
| 642 | |
| 648 | | |
| 265 | |
| 256 | |
Depreciation and amortization | |
| 685 | |
| 659 | |
| 2,259 | |
| 2,168 | | |
| 957 | |
| 890 | |
| | | | | | | | | | | | | | | | | | | | |
Operating profit | |
| 841 | |
| 868 | |
| 3,300 | |
| 2,512 | | |
| 1,470 | |
| 1,505 | |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (119) | | | (135) | | | (422) | | | (438) | | | | (153) | | | (177) | |
Non-service component of company-sponsored pension plan costs | | | 11 | | | (77) | | | 38 | | | (44) | | |||||||
Non-service component of company-sponsored pension plan benefits | | | 9 | | | 16 | | |||||||||||||
Loss on investments | | | (207) | | | (94) | | | (637) | | | (694) | | | | (78) | | | (532) | |
| | | | | | | | | | | | | | | | | | | | |
Net earnings before income tax expense | |
| 526 | |
| 562 | |
| 2,279 | |
| 1,336 | | |
| 1,248 | |
| 812 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense | |
| 126 | |
| 77 | |
| 481 | |
| 239 | | |
| 286 | |
| 146 | |
| | | | | | | | | | | | | | | | | | | | |
Net earnings including noncontrolling interests | |
| 400 | |
| 485 | |
| 1,798 | |
| 1,097 | | |
| 962 | |
| 666 | |
Net income attributable to noncontrolling interests | |
| 2 | |
| 2 | |
| 5 | |
| 7 | | |
| — | |
| 2 | |
| | | | | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. | | $ | 398 | | $ | 483 | | $ | 1,793 | | $ | 1,090 | | | $ | 962 | | $ | 664 | |
| | | | | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per basic common share | | $ | 0.55 | | $ | 0.64 | | $ | 2.47 | | $ | 1.44 | | | $ | 1.33 | | $ | 0.91 | |
| | | | | | | | | | | | | | | | | | | | |
Average number of common shares used in basic calculation | |
| 716 | |
| 742 | |
| 719 | |
| 747 | | |
| 717 | |
| 722 | |
| | | | | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.55 | | $ | 0.64 | | $ | 2.44 | | $ | 1.43 | | | $ | 1.32 | | $ | 0.90 | |
| | | | | | | | | | | | | | | | | | | | |
Average number of common shares used in diluted calculation | |
| 724 | |
| 752 | |
| 728 | |
| 757 | | |
| 724 | |
| 733 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
2
THE KROGER CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
|
| Third Quarter Ended | | Three Quarters Ended | | | First Quarter Ended | | ||||||||||||
| | November 5, | | November 6, | | November 5, | | November 6, | | | May 20, | | May 21, | | ||||||
(In millions) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
| ||||||
Net earnings including noncontrolling interests | | $ | 400 | | $ | 485 | | $ | 1,798 | | $ | 1,097 | | | $ | 962 | | $ | 666 | |
| | | | | | | | | | | | | | | | | | | | |
Other comprehensive income | | | | | | | | | | | | | | |||||||
Other comprehensive (loss) income | | | | | | | | |||||||||||||
Change in pension and other postretirement defined benefit plans, net of income tax(1) | | | 13 | | | 132 | | | 12 | | | 134 | | | | (4) | | | — | |
Unrealized gains and losses on cash flow hedging activities, net of income tax(2) | |
| 37 | |
| — | |
| 37 | |
| — | | |
| 91 | |
| — | |
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(3) | | | 2 | | | 2 | | | 6 | | | 5 | | | | 1 | | | 2 | |
| | | | | | | | | | | | | | | | | | | | |
Total other comprehensive income | |
| 52 | |
| 134 | |
| 55 | | | 139 | | |
| 88 | | | 2 | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income | |
| 452 | |
| 619 | |
| 1,853 | |
| 1,236 | | |
| 1,050 | |
| 668 | |
Comprehensive income attributable to noncontrolling interests | |
| 2 | |
| 2 | |
| 5 | |
| 7 | | |
| — | |
| 2 | |
Comprehensive income attributable to The Kroger Co. | | $ | 450 | | $ | 617 | | $ | 1,848 | | $ | 1,229 | | | $ | 1,050 | | $ | 666 | |
(1) | Amount is net of tax of |
(2) | Amount is net of tax of |
(3) | Amount is net of tax of $1 for the first |
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(unaudited)
| | | | | | | | | | | | | | |
|
| November 5, |
| January 29, |
|
| May 20, |
| January 28, |
| ||||
(In millions, except par amounts) | | 2022 | | 2022 |
| | 2023 | | 2023 |
| ||||
ASSETS | | | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | | |
Cash and temporary cash investments | | $ | 916 | | $ | 1,821 | | | $ | 2,632 | | $ | 1,015 | |
Store deposits in-transit | |
| 1,209 | |
| 1,082 | | |
| 1,143 | |
| 1,127 | |
Receivables | |
| 2,019 | |
| 1,828 | | |
| 1,766 | |
| 2,234 | |
FIFO inventory | |
| 10,628 | |
| 8,353 | | |
| 9,325 | |
| 9,756 | |
LIFO reserve | |
| (1,962) | |
| (1,570) | | |
| (2,295) | |
| (2,196) | |
Prepaid and other current assets | | | 593 | | | 660 | | | | 633 | | | 734 | |
Total current assets | |
| 13,403 | |
| 12,174 | | |
| 13,204 | |
| 12,670 | |
| | | | | | | | | | | | | | |
Property, plant and equipment, net | |
| 24,080 | |
| 23,789 | | |
| 24,935 | |
| 24,726 | |
Operating lease assets | | | 6,705 | | | 6,695 | | | | 6,659 | | | 6,662 | |
Intangibles, net | |
| 906 | |
| 942 | | |
| 893 | |
| 899 | |
Goodwill | |
| 3,076 | |
| 3,076 | | |
| 2,916 | |
| 2,916 | |
Other assets | |
| 1,817 | |
| 2,410 | | |
| 1,586 | |
| 1,750 | |
| | | | | | | | | | | | | | |
Total Assets | | $ | 49,987 | | $ | 49,086 | | | $ | 50,193 | | $ | 49,623 | |
| | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | | | |
Current portion of long-term debt including obligations under finance leases | | $ | 788 | | $ | 555 | | | $ | 1,319 | | $ | 1,310 | |
Current portion of operating lease liabilities | | | 654 | | | 650 | | | | 664 | | | 662 | |
Trade accounts payable | |
| 8,219 | |
| 7,117 | | |
| 7,353 | |
| 7,119 | |
Accrued salaries and wages | |
| 1,463 | |
| 1,736 | | |
| 1,130 | |
| 1,746 | |
Other current liabilities | |
| 6,614 | |
| 6,265 | | |
| 6,664 | |
| 6,401 | |
Total current liabilities | |
| 17,738 | |
| 16,323 | | |
| 17,130 | |
| 17,238 | |
| | | | | | | | | | | | | | |
Long-term debt including obligations under finance leases | | | 12,442 | | | 12,809 | | | | 12,114 | | | 12,068 | |
Noncurrent operating lease liabilities | | | 6,370 | | | 6,426 | | | | 6,353 | | | 6,372 | |
Deferred income taxes | |
| 1,481 | |
| 1,562 | | |
| 1,694 | |
| 1,672 | |
Pension and postretirement benefit obligations | |
| 407 | |
| 478 | | |
| 427 | |
| 436 | |
Other long-term liabilities | |
| 1,620 | |
| 2,059 | | |
| 1,595 | |
| 1,823 | |
| | | | | | | | | | | | | | |
Total Liabilities | |
| 40,058 | |
| 39,657 | | |
| 39,313 | |
| 39,609 | |
| | | | | | | | | | | | | | |
Commitments and contingencies see Note 7 | | | | | | | | |||||||
Commitments and contingencies see Note 6 | | | | | | | | |||||||
| | | | | | | | | | | | | | |
SHAREOWNERS’ 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 2022 and 2021 | |
| 1,918 | |
| 1,918 | | |||||||
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2023 and 2022 | |
| 1,918 | |
| 1,918 | | |||||||
Additional paid-in capital | |
| 3,758 | |
| 3,657 | | |
| 3,826 | |
| 3,805 | |
Accumulated other comprehensive loss | |
| (412) | |
| (467) | | |
| (544) | |
| (632) | |
Accumulated earnings | |
| 25,338 | |
| 24,066 | | |
| 26,375 | |
| 25,601 | |
Common shares in treasury, at cost, 1,202 shares in 2022 and 1,191 shares in 2021 | |
| (20,647) | |
| (19,722) | | |||||||
Common shares in treasury, at cost, 1,200 shares in 2023 and 1,202 shares in 2022 | |
| (20,670) | |
| (20,650) | | |||||||
| | | | | | | | | | | | | | |
Total Shareowners’ Equity - The Kroger Co. | |
| 9,955 | |
| 9,452 | | |
| 10,905 | |
| 10,042 | |
Noncontrolling interests | |
| (26) | |
| (23) | | |
| (25) | |
| (28) | |
| | | | | | | | | | | | | | |
Total Equity | |
| 9,929 | |
| 9,429 | | |
| 10,880 | |
| 10,014 | |
| | | | | | | | | | | | | | |
Total Liabilities and Equity | | $ | 49,987 | | $ | 49,086 | | | $ | 50,193 | | $ | 49,623 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | | | | | | | | | | | | | |
| | Three Quarters Ended | | | First Quarter Ended | | ||||||||
| | November 5, | | November 6, | | | May 20, | | May 21, | | ||||
(In millions) |
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
| ||||
Cash Flows from Operating Activities: | | | | | | | | | | | | | | |
Net earnings including noncontrolling interests | | $ | 1,798 | | $ | 1,097 | | | $ | 962 | | $ | 666 | |
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: | | | | | | | | | | | | | | |
Depreciation and amortization | |
| 2,259 | |
| 2,168 | | |
| 957 | |
| 890 | |
Operating lease asset amortization | | | 471 | | | 468 | | | | 188 | | | 186 | |
LIFO charge | |
| 392 | |
| 177 | | |
| 99 | |
| 93 | |
Share-based employee compensation | |
| 145 | |
| 159 | | |
| 49 | |
| 57 | |
Company-sponsored pension plans | |
| (28) | |
| 56 | | |||||||
Company-sponsored pension plans benefit | |
| (2) | |
| (12) | | |||||||
Deferred income taxes | |
| (93) | |
| 34 | | |
| (5) | |
| (30) | |
Gain on the sale of assets | | | (36) | | | (34) | | | | (41) | | | — | |
Loss on investments | | | 637 | | | 694 | | | | 78 | | | 532 | |
Other | |
| 82 | |
| 106 | | |
| 73 | |
| 54 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | |
Store deposits in-transit | |
| (127) | |
| (44) | | |
| (16) | |
| (28) | |
Receivables | |
| (130) | |
| (80) | | |
| 274 | |
| (2) | |
Inventories | |
| (2,267) | |
| (673) | | |
| 419 | |
| (676) | |
Prepaid and other current assets | |
| 99 | |
| 371 | | |
| 82 | |
| 117 | |
Trade accounts payable | |
| 1,102 | |
| 1,200 | | |
| 233 | |
| 439 | |
Accrued expenses | |
| 146 | |
| (40) | | |
| (449) | |
| (748) | |
Income taxes receivable and payable | |
| (69) | | | (54) | | |
| 198 | | | (70) | |
Operating lease liabilities | | | (533) | | | (532) | | | | (215) | | | (214) | |
Other | |
| (510) | |
| (282) | | |
| (24) | |
| (152) | |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | |
| 3,338 | |
| 4,791 | | |
| 2,860 | |
| 1,102 | |
| | | | | | | | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | |
| (2,261) | |
| (2,008) | | |
| (1,028) | |
| (745) | |
Proceeds from sale of assets | |
| 71 | | | 139 | | |
| 86 | | | 14 | |
Other | |
| (2) | |
| (90) | | |
| (5) | |
| 8 | |
| | | | | | | | | | | | | | |
Net cash used by investing activities | |
| (2,192) | |
| (1,959) | | |
| (947) | |
| (723) | |
| | | | | | | | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | | | | | | | |
Proceeds from issuance of long-term debt | |
| — | |
| 43 | | |||||||
Payments on long-term debt including obligations under finance leases | |
| (526) | | | (915) | | |
| (62) | | | (45) | |
Dividends paid | | | (494) | | | (433) | | | | (188) | | | (154) | |
Financing fees paid | | | (62) | | | (5) | | |||||||
Proceeds from issuance of capital stock | | | 127 | |
| 118 | | | | 23 | |
| 113 | |
Treasury stock purchases | |
| (985) | |
| (1,049) | | |
| (29) | |
| (665) | |
Proceeds from financing arrangement | | | — | | | 166 | | |||||||
Other | | | (111) | |
| (156) | | | | (40) | |
| (67) | |
| | | | | | | | | | | | | | |
Net cash used by financing activities | |
| (2,051) | |
| (2,231) | | |
| (296) | |
| (818) | |
| | | | | | | | | | | | | | |
Net (decrease) increase in cash and temporary cash investments | |
| (905) | |
| 601 | | |||||||
Net increase (decrease) in cash and temporary cash investments | |
| 1,617 | |
| (439) | | |||||||
| | | | | | | | | | | | | | |
Cash and temporary cash investments: | | | | | | | | | | | | | | |
Beginning of year | |
| 1,821 | |
| 1,687 | | |
| 1,015 | |
| 1,821 | |
End of period | | $ | 916 | | $ | 2,288 | | | $ | 2,632 | | $ | 1,382 | |
| | | | | | | | | | | | | | |
Reconciliation of capital investments: | | | | | | | | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | | $ | (2,261) | | $ | (2,008) | | | $ | (1,028) | | $ | (745) | |
Payments for lease buyouts | | | 10 | |
| — | | | | — | |
| 3 | |
Changes in construction-in-progress payables | |
| 59 | |
| (144) | | |
| (71) | |
| (229) | |
Total capital investments, excluding lease buyouts | | $ | (2,192) | | $ | (2,152) | | | $ | (1,099) | | $ | (971) | |
| | | | | | | | | | | | | | |
Disclosure of cash flow information: | | | | | | | | | | | | | | |
Cash paid during the year for interest | | $ | 456 | | $ | 493 | | | $ | 164 | | $ | 198 | |
Cash paid during the year for income taxes | | $ | 649 | | $ | 364 | | | $ | 92 | | $ | 244 | |
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 January 30, 2021 | | 1,918 | | $ | 1,918 | | $ | 3,461 |
| 1,160 | | $ | (18,191) | | $ | (630) | | $ | 23,018 | | $ | (26) |
| $ | 9,550 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (2) | |
| 31 | |
| — | |
| — | |
| — | |
| 31 |
Restricted stock issued |
| — | |
| — | |
| (35) |
| (1) | |
| 17 | |
| — | |
| — | |
| — | |
| (18) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 10 | |
| (338) | |
| — | |
| — | |
| — | |
| (338) |
Stock options exchanged |
| — | |
| — | |
| — |
| 2 | |
| (64) | |
| — | |
| — | |
| — | |
| (64) |
Share-based employee compensation |
| — | |
| — | |
| 56 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 56 |
Other comprehensive income net of income tax of $2 |
| — | |
| — | |
| — |
| — | |
| — | |
| 3 | |
| — | |
| — | |
| 3 |
Other |
| — | |
| — | |
| 23 |
| — | |
| (23) | |
| — | |
| 1 | |
| 3 | |
| 4 |
Cash dividends declared ($0.18 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (138) | |
| — | |
| (138) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 140 | |
| 3 | |
| 143 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at May 22, 2021 |
| 1,918 |
| $ | 1,918 |
| $ | 3,505 |
| 1,169 |
| $ | (18,568) |
| $ | (627) |
| $ | 23,021 |
| $ | (20) |
| $ | 9,229 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (2) | |
| 54 | |
| — | |
| — | |
| — | |
| 54 |
Restricted stock issued |
| — | |
| — | |
| (99) |
| (2) | |
| 56 | |
| — | |
| — | |
| — | |
| (43) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 8 | |
| (299) | |
| — | |
| — | |
| — | |
| (299) |
Stock options exchanged |
| — | |
| — | |
| — |
| 1 | |
| (50) | |
| — | |
| — | |
| — | |
| (50) |
Share-based employee compensation |
| — | |
| — | |
| 52 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 52 |
Other comprehensive income net of income tax of $4 |
| — | |
| — | |
| — |
| — | |
| — | |
| 2 | |
| — | |
| — | |
| 2 |
Other |
| — | |
| — | |
| 69 |
| — | |
| (69) | |
| — | |
| — | |
| (2) | |
| (2) |
Cash dividends declared ($0.21 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (154) | |
| — | |
| (154) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 467 | |
| 2 | |
| 469 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at August 14, 2021 |
| 1,918 |
| $ | 1,918 |
| $ | 3,527 |
| 1,174 |
| $ | (18,876) |
| $ | (625) |
| $ | 23,334 |
| $ | (20) |
| $ | 9,258 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (1) | |
| 33 | |
| — | |
| — | |
| — | |
| 33 |
Restricted stock issued |
| — | |
| — | |
| (3) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (3) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 6 | |
| (251) | |
| — | |
| — | |
| — | |
| (251) |
Stock options exchanged |
| — | |
| — | |
| — |
| 1 | |
| (47) | |
| — | |
| — | |
| — | |
| (47) |
Share-based employee compensation |
| — | |
| — | |
| 51 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 51 |
Other comprehensive income net of income tax of $37 |
| — | |
| — | |
| — |
| — | |
| — | |
| 134 | |
| — | |
| — | |
| 134 |
Other |
| — | |
| — | |
| 15 |
| — | |
| (15) | |
| — | |
| (1) | |
| (10) | |
| (11) |
Cash dividends declared ($0.21 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (158) | |
| — | |
| (158) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 483 | |
| 2 | |
| 485 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at November 6, 2021 |
| 1,918 |
| $ | 1,918 |
| $ | 3,590 |
| 1,180 |
| $ | (19,156) |
| $ | (491) |
| $ | 23,658 |
| $ | (28) |
| $ | 9,491 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (2) | |
| 54 | |
| — | |
| — | |
| — | |
| 54 |
Restricted stock issued |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 11 | |
| (534) | |
| — | |
| — | |
| — | |
| (534) |
Stock options exchanged |
| — | |
| — | |
| — |
| 2 | |
| (64) | |
| — | |
| — | |
| — | |
| (64) |
Share-based employee compensation |
| — | |
| — | |
| 44 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 44 |
Other comprehensive income net of income tax of $8 |
| — | |
| — | |
| — |
| — | |
| — | |
| 24 | |
| — | |
| — | |
| 24 |
Other |
| — | |
| — | |
| 23 |
| — | |
| (22) | |
| — | |
| — | |
| 1 | |
| 2 |
Cash dividends declared ($0.21 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (157) | |
| — | |
| (157) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 565 | |
| 4 | |
| 569 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at January 29, 2022 |
| 1,918 |
| $ | 1,918 |
| $ | 3,657 |
| 1,191 |
| $ | (19,722) |
| $ | (467) |
| $ | 24,066 |
| $ | (23) |
| $ | 9,429 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | | Additional | | | | | | | Other | | | | | | | | | | ||
| | Common Stock | | Paid-In | | Treasury Stock | | Comprehensive | | Accumulated | | Noncontrolling | | | | ||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Income (Loss) |
| Earnings |
| Interest |
| Total | |||||||
Balances at January 29, 2022 | | 1,918 | | $ | 1,918 | | $ | 3,657 |
| 1,191 | | $ | (19,722) | | $ | (467) | | $ | 24,066 | | $ | (23) |
| $ | 9,429 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (4) | |
| 113 | |
| — | |
| — | |
| — | |
| 113 |
Restricted stock issued |
| — | |
| — | |
| (77) |
| (2) | |
| 12 | |
| — | |
| — | |
| — | |
| (65) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 10 | |
| (520) | |
| — | |
| — | |
| — | |
| (520) |
Stock options exchanged |
| — | |
| — | |
| — |
| 3 | |
| (145) | |
| — | |
| — | |
| — | |
| (145) |
Share-based employee compensation |
| — | |
| — | |
| 57 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 57 |
Other comprehensive income net of tax of $- |
| — | |
| — | |
| — |
| — | |
| — | |
| 2 | |
| — | |
| — | |
| 2 |
Other |
| — | |
| — | |
| 77 |
| — | |
| (77) | |
| — | |
| — | |
| 3 | |
| 3 |
Cash dividends declared ($0.21 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (147) | |
| — | |
| (147) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 664 | |
| 2 | |
| 666 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at May 21, 2022 |
| 1,918 |
| $ | 1,918 |
| $ | 3,714 |
| 1,198 |
| $ | (20,339) |
| $ | (465) |
| $ | 24,583 |
| $ | (18) |
| $ | 9,393 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| — | |
| 6 | |
| — | |
| — | |
| — | |
| 6 |
Restricted stock issued |
| — | |
| — | |
| (89) |
| (2) | |
| 47 | |
| — | |
| — | |
| — | |
| (42) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 6 | |
| (300) | |
| — | |
| — | |
| — | |
| (300) |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (10) | |
| — | |
| — | |
| — | |
| (10) |
Share-based employee compensation |
| — | |
| — | |
| 46 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 46 |
Other comprehensive income net of tax of $1 |
| — | |
| — | |
| — |
| — | |
| — | |
| 1 | |
| — | |
| — | |
| 1 |
Other |
| — | |
| — | |
| 45 |
| — | |
| (45) | |
| — | |
| — | |
| (1) | |
| (1) |
Cash dividends declared ($0.26 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (186) | |
| — | |
| (186) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 731 | |
| 1 | |
| 732 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at August 13, 2022 |
| 1,918 |
| $ | 1,918 |
| $ | 3,716 |
| 1,202 |
| $ | (20,641) |
| $ | (464) |
| $ | 25,128 |
| $ | (18) |
| $ | 9,639 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| — | |
| 8 | |
| — | |
| — | |
| — | |
| 8 |
Restricted stock issued |
| — | |
| — | |
| (4) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (4) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| — | |
| (1) | |
| — | |
| — | |
| — | |
| (1) |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (9) | |
| — | |
| — | |
| — | |
| (9) |
Share-based employee compensation |
| — | |
| — | |
| 42 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 42 |
Other comprehensive income net of tax of $11 |
| — | |
| — | |
| — |
| — | |
| — | |
| 52 | |
| — | |
| — | |
| 52 |
Other |
| — | |
| — | |
| 4 |
| — | |
| (4) | |
| — | |
| — | |
| (10) | |
| (10) |
Cash dividends declared ($0.26 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (188) | |
| — | |
| (188) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 398 | |
| 2 | |
| 400 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at November 5, 2022 |
| 1,918 |
| $ | 1,918 |
| $ | 3,758 |
| 1,202 |
| $ | (20,647) |
| $ | (412) |
| $ | 25,338 |
| $ | (26) |
| $ | 9,929 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| — | |
| 7 | |
| — | |
| — | |
| — | |
| 7 |
Restricted stock issued |
| — | |
| — | |
| (3) |
| — | |
| 3 | |
| — | |
| — | |
| — | |
| — |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (8) | |
| — | |
| — | |
| — | |
| (8) |
Share-based employee compensation |
| — | |
| — | |
| 45 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 45 |
Other comprehensive loss net of tax of ($63) |
| — | |
| — | |
| — |
| — | |
| — | |
| (220) | |
| — | |
| — | |
| (220) |
Other |
| — | |
| — | |
| 5 |
| — | |
| (5) | |
| — | |
| — | |
| (2) | |
| (2) |
Cash dividends declared ($0.26 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (188) | |
| — | |
| (188) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 451 | |
| — | |
| 451 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at January 28, 2023 |
| 1,918 |
| $ | 1,918 |
| $ | 3,805 |
| 1,202 |
| $ | (20,650) |
| $ | (632) |
| $ | 25,601 |
| $ | (28) |
| $ | 10,014 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
6
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | ||||||
| | | | | | | Additional | | | | | | Other | | | | | | | | | | | | | | | Additional | | | | | | Other | | | | | | | | | ||||||||
| | Common Stock | | Paid-In | | Treasury Stock | | Comprehensive | | Accumulated | | Noncontrolling | | | | Common Stock | | Paid-In | | Treasury Stock | | Comprehensive | | Accumulated | | Noncontrolling | | | ||||||||||||||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Income (Loss) |
| Earnings |
| Interest |
| Total | ||||||||||||||
Balances at January 29, 2022 | | 1,918 | | $ | 1,918 | | $ | 3,657 |
| 1,191 | | $ | (19,722) | | $ | (467) | | $ | 24,066 | | $ | (23) | | $ | 9,429 | |||||||||||||||||||||||||
Balances at January 28, 2023 | | 1,918 | | $ | 1,918 | | $ | 3,805 |
| 1,202 | | $ | (20,650) | | $ | (632) | | $ | 25,601 | | $ | (28) | | $ | 10,014 | |||||||||||||||||||||||||
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Stock options exercised |
| — | |
| — | |
| — |
| (4) | |
| 113 | |
| — | |
| — | |
| — | |
| 113 |
| — | |
| — | |
| — |
| (1) | |
| 23 | |
| — | |
| — | |
| — | |
| 23 |
Restricted stock issued |
| — | |
| — | |
| (77) |
| (2) | |
| 12 | |
| — | |
| — | |
| — | |
| (65) |
| — | |
| — | |
| (72) |
| (1) | |
| 30 | |
| — | |
| — | |
| — | |
| (42) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 10 | |
| (520) | |
| — | |
| — | |
| — | |
| (520) | |||||||||||||||||||||||||
Stock options exchanged |
| — | |
| — | |
| — |
| 3 | |
| (145) | |
| — | |
| — | |
| — | |
| (145) |
| — | |
| — | |
| — |
| — | |
| (29) | |
| — | |
| — | |
| — | |
| (29) |
Share-based employee compensation |
| — | |
| — | |
| 57 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 57 |
| — | |
| — | |
| 49 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 49 |
Other comprehensive income net of income tax of $- |
| — | |
| — | |
| — |
| — | |
| — | |
| 2 | |
| — | |
| — | |
| 2 | |||||||||||||||||||||||||
Other |
| — | |
| — | |
| 77 |
| — | |
| (77) | |
| — | |
| — | |
| 3 | |
| 3 | |||||||||||||||||||||||||
Cash dividends declared ($0.21 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (147) | |
| — | |
| (147) | |||||||||||||||||||||||||
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 664 | |
| 2 | |
| 666 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
Balances at May 21, 2022 |
| 1,918 |
| $ | 1,918 |
| $ | 3,714 |
| 1,198 |
| $ | (20,339) |
| $ | (465) |
| $ | 24,583 |
| $ | (18) |
| $ | 9,393 | |||||||||||||||||||||||||
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
Stock options exercised |
| — | |
| — | |
| — |
| — | |
| 6 | |
| — | |
| — | |
| — | |
| 6 | |||||||||||||||||||||||||
Restricted stock issued |
| — | |
| — | |
| (89) |
| (2) | |
| 47 | |
| — | |
| — | |
| — | |
| (42) | |||||||||||||||||||||||||
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 6 | |
| (300) | |
| — | |
| — | |
| — | |
| (300) | |||||||||||||||||||||||||
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (10) | |
| — | |
| — | |
| — | |
| (10) | |||||||||||||||||||||||||
Share-based employee compensation |
| — | |
| — | |
| 46 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 46 | |||||||||||||||||||||||||
Other comprehensive income net of income tax of $1 |
| — | |
| — | |
| — |
| — | |
| — | |
| 1 | |
| — | |
| — | |
| 1 | |||||||||||||||||||||||||
Other comprehensive income net of tax of $26 |
| — | |
| — | |
| — |
| — | |
| — | |
| 88 | |
| — | |
| — | |
| 88 | |||||||||||||||||||||||||
Other |
| — | |
| — | |
| 45 |
| — | |
| (45) | |
| — | |
| — | |
| (1) | |
| (1) |
| — | |
| — | |
| 44 |
| — | |
| (44) | |
| — | |
| — | |
| 3 | |
| 3 |
Cash dividends declared ($0.26 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (186) | |
| — | |
| (186) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (188) | |
| — | |
| (188) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 731 | |
| 1 | |
| 732 |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 962 | |
| — | |
| 962 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Balances at August 13, 2022 |
| 1,918 |
| $ | 1,918 |
| $ | 3,716 |
| 1,202 |
| $ | (20,641) |
| $ | (464) |
| $ | 25,128 |
| $ | (18) |
| $ | 9,639 | |||||||||||||||||||||||||
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
Stock options exercised |
| — | |
| — | |
| — |
| — | |
| 8 | |
| — | |
| — | |
| — | |
| 8 | |||||||||||||||||||||||||
Restricted stock issued |
| — | |
| — | |
| (4) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (4) | |||||||||||||||||||||||||
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| — | |
| (1) | |
| — | |
| — | |
| — | |
| (1) | |||||||||||||||||||||||||
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (9) | |
| — | |
| — | |
| — | |
| (9) | |||||||||||||||||||||||||
Share-based employee compensation |
| — | |
| — | |
| 42 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 42 | |||||||||||||||||||||||||
Other comprehensive income net of income tax of $11 |
| — | |
| — | |
| — |
| — | |
| — | |
| 52 | |
| — | |
| — | |
| 52 | |||||||||||||||||||||||||
Other |
| — | |
| — | |
| 4 |
| — | |
| (4) | |
| — | |
| — | |
| (10) | |
| (10) | |||||||||||||||||||||||||
Cash dividends declared ($0.26 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (188) | |
| — | |
| (188) | |||||||||||||||||||||||||
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 398 | |
| 2 | |
| 400 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||
Balances at November 5, 2022 |
| 1,918 |
| $ | 1,918 |
| $ | 3,758 |
| 1,202 |
| $ | (20,647) |
| $ | (412) |
| $ | 25,338 |
| $ | (26) |
| $ | 9,929 | |||||||||||||||||||||||||
Balances at May 20, 2023 |
| 1,918 |
| $ | 1,918 |
| $ | 3,826 |
| 1,200 |
| $ | (20,670) |
| $ | (544) |
| $ | 26,375 |
| $ | (25) |
| $ | 10,880 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
All amounts in the Notes to the Unaudited Consolidated Financial Statements are in millions except per share amounts.
1. | ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation
The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries and other consolidated entities. The January 29, 202228, 2023 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 January 29, 2022.28, 2023.
The unaudited information in the Consolidated Financial Statements for the third quarters and threefirst quarters ended November 5,May 20, 2023 and May 21, 2022 and November 6, 2021 includes the results of operations of the Company for the 12 and 4016 week periods then ended.
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.
The equity investment in Ocado is measured at fair value through net earnings. The fair value of all shares owned, which is measured using Level 1 inputs, was $332236 and $987$401 as of November 5, 2022May 20, 2023 and January 29, 2022,28, 2023, respectively, and is included in “Other assets” in the Company’s Consolidated Balance Sheets. An unrealized loss for this Ocado investment of approximately $655$165 and $694$532 for the first three quarters of 20222023 and 2021,2022, respectively, is included in “Loss on investments” in the Company’s Consolidated Statements of Operations. An unrealized loss of $225 and $94 for this Level 1 investment was recorded for the third quarters of 2022 and 2021, respectively, and is included in “Loss on investments” in the Company’s Consolidated Statements of Operations.
The Company's forward-startingforward-starting interest rate swaps are considered a Level 2 instrument. The Company values interest rate hedgesswaps using observable forward yield curves. These forward yield curves are classified as Level 2 inputs. AsRefer to Note 2 for the disclosure of November 5, 2022, the fair value of theforward-starting interest rate swaps was recorded in other assets and other long-term liabilitiesswap fair values.
Refer to Note 2 for $67 and $1, respectively, and accumulated other comprehensive income for $37 netthe disclosure of tax.debt instrument fair values.
8
Accounts Payable Financing Arrangement
The Company has an agreement with a third party to provide an accounts payable tracking system which facilitates participating suppliers’ ability to finance payment obligations from the Company with designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not affected by suppliers’ decisions to finance amounts under this arrangement. The payment term that the Company has with participating suppliers under these programs is approximately 90 days.
As of May 20, 2023 and January 28, 2023, the Company had $241 and $249, respectively, in “Trade accounts payable” in the Company’s Consolidated Balance Sheets associated with financing arrangements. As of May 20, 2023 and January 28, 2023, the Company had $77 and $65, respectively, in “Other current liabilities” associated with financing arrangements.
2. | DEBT OBLIGATIONS |
Long-term debt consists of:
| | | | | | | | | | | | |
| | November 5, | | January 29, | | May 20, | | January 28, | ||||
|
| 2022 |
| 2022 |
| 2023 |
| 2023 | ||||
1.70% to 8.00% Senior Notes due through 2049 | | $ | 10,213 | | $ | 10,607 | | $ | 10,218 | | $ | 10,215 |
Other | |
| 1,101 | |
| 1,138 | |
| 1,070 | |
| 1,077 |
| | | | | | | | | | | | |
Total debt, excluding obligations under finance leases | |
| 11,314 | |
| 11,745 | |
| 11,288 | |
| 11,292 |
Less current portion | |
| (650) | |
| (451) | |
| (1,149) | |
| (1,153) |
| | | | | | | | | | | | |
Total long-term debt, excluding obligations under finance leases | | $ | 10,664 | | $ | 11,294 | | $ | 10,139 | | $ | 10,139 |
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 5, 2022May 20, 2023 and January 29, 2022.28, 2023. At November 5, 2022,May 20, 2023, the fair value of total debt was $9,80510,300 compared to a carrying value of $11,314$11,288. At January 29, 2022,28, 2023, the fair value of total debt was $13,18910,593 compared to a carrying value of $11,745.
In the first three quarters of 2022, the Company repaid $400 of senior notes bearing an interest rate of 2.80% using cash on hand.
In the third quarter of 2021, the Company repaid $500 of senior notes bearing an interest rate of 2.95% using cash on hand. Additionally, in the first three quarters of 2021, the Company repaid $300 of senior notes bearing an interest rate of 2.60% using cash on hand.$11,292.
In the third quarter of 2022, the Company entered into five forward-starting interest rate swap agreements with a maturity date of August 2027 with an aggregate notional amount totaling $5,350. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuances of debt. A notional amount of $2,350 of these forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. Accordingly, the changes in fair value of these forward-starting interest rate swaps are recorded to other comprehensive income and reclassified into net earnings when the hedged transaction affects net earnings. As of November 5, 2022, the fair value of these interest rate swaps was recorded in other assets for $48 and accumulated other comprehensive income for $37 net of tax. The remainder of the notional amount of $3,000 of the forward-starting interest swaps were not designated as a cash-flow hedges.hedge. Accordingly, the changes in the fair value of the forward-starting interest rate swaps not designated as cash-flow hedges are recognized through net earnings.
As of November 5, 2022,May 20, 2023 and January 28, 2023, the fair value of thesethe interest rate swaps designated as cash-flow hedges was recorded$6 and $(116), respectively. As of May 20, 2023 and January 28, 2023, the amount included in “Accumulated other assetscomprehensive income” is $4 and other long-term liabilities for($89), net of tax, respectively. As of May 20, 2023 and January 28, 2023, the fair value of forward-starting interest swaps not designated as cash-flow hedges were $19(55) and $1,$(142), respectively. During the thirdfirst quarter and the first three quarters of 2022,2023, the Company recognized an unrealized gain of $1887 related to these swaps that is included in “Loss on investments” in the Company’s Consolidated Statements of Operations.
During the first quarter of 2021, the Company acquired 28, previously leased, properties for a purchase price of $455. Separately, the Company also entered into a transaction to sell those properties to a third party for total proceeds of $621. Total cash proceeds received as a result of the transactions was $166. The sale transaction did not qualify for sale-leaseback accounting treatment. As a result, the Company recorded property, plant and equipment for the $455 price paid and recorded a $621 financing obligation. The leases have a base term of 25 years and twelve option periods of five years each. The Company has the option to purchase the individual properties for fair market value at the end of the base term or at the end of any option period. The Company is obligated to repurchase the properties at the end of the base term for $300 if the lessor exercises its put option.
For additional information about the Company’s unsecured bridge loan facility and term loan credit agreement, see Note 10 to the Consolidated Financial Statements.
9
3. | BENEFIT PLANS |
The following table provides the components of net periodic benefit cost for the company-sponsored defined benefit pension plans and other postretirement benefit plans for the thirdfirst quarters of 20222023 and 2021:2022:
| | | | | | | | | | | | | |
| | Third Quarter Ended |
| ||||||||||
| | Pension Benefits | | Other Benefits |
| ||||||||
| | November 5, | | November 6, | | November 5, | | November 6, |
| ||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Components of net periodic benefit cost (benefit): | | | | | | | | | | | | | |
Service cost |
| $ | 2 |
| $ | 2 |
| $ | 1 |
| $ | 1 | |
Interest cost | |
| 23 | |
| 24 | |
| 1 | |
| 1 | |
Expected return on plan assets | |
| (35) | |
| (36) | |
| — | |
| — | |
Amortization of: | | | | | | | | | | | | | |
Prior service cost | |
| — | |
| — | |
| (3) | |
| (3) | |
Actuarial loss (gain) | |
| 6 | |
| 8 | |
| (3) | |
| (4) | |
Settlement loss recognized | | | — | | | 87 | | | — | | | — | |
| | | | | | | | | | | | | |
Net periodic benefit cost (benefit) |
| $ | (4) |
| $ | 85 |
| $ | (4) |
| $ | (5) | |
The following table provides the components of net periodic benefit cost for the company-sponsored defined benefit pension plans and other postretirement benefit plans for the first three quarters of 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Quarters Ended |
| | First Quarter Ended |
| ||||||||||||||||||||
| | Pension Benefits | | Other Benefits |
| | Pension Benefits | | Other Benefits |
| ||||||||||||||||
| | November 5, | | November 6, | | November 5, | | November 6, |
| | May 20, | | May 21, | | May 20, | | May 21, |
| ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||||||
Components of net periodic benefit cost (benefit): | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost |
| $ | 7 |
| $ | 9 |
| $ | 3 |
| $ | 3 | |
| $ | 6 |
| $ | 3 |
| $ | 1 |
| $ | 1 | |
Interest cost | |
| 77 | |
| 78 | |
| 4 | |
| 3 | | |
| 40 | |
| 30 | |
| 2 | |
| 2 | |
Expected return on plan assets | |
| (118) | |
| (129) | |
| — | |
| — | | |
| (46) | |
| (47) | |
| — | |
| — | |
Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prior service cost | |
| — | |
| — | |
| (10) | |
| (10) | | |
| — | |
| — | |
| (3) | |
| (4) | |
Actuarial loss (gain) | |
| 20 | |
| 29 | |
| (11) | |
| (14) | | |
| 2 | |
| 8 | |
| (4) | |
| (5) | |
Settlement loss recognized | | | — | | | 87 | | | — | | | — | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost (benefit) |
| $ | (14) |
| $ | 74 |
| $ | (14) |
| $ | (18) | |
| $ | 2 |
| $ | (6) |
| $ | (4) |
| $ | (6) | |
The Company is not required to make any contributions to its company-sponsored pension plans in 2022,2023, but may make contributions to the extent such contributions are beneficial to the Company. The Company did not make any significant contributions to its company-sponsored pension plans in the first three quarters of 20222023 or 2021.2022.
The Company contributed $244$110 and $221$105 to employee 401(k) retirement savings accounts in the first three quarters of 2023 and 2022, and 2021, respectively.
respectively
The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded. In addition to the recurring multi-employer pension contributions the Company makes in the normal course of business, in the first three quarters of 2021, the Company contributed an incremental $106, $81 net of tax, to multi-employer pension plans, helping stabilize future associate benefits..
During the first quarter of 2021, associates within the Fred Meyer and QFC divisions ratified an agreement for the transfer of liabilities from the Sound Retirement Trust to the UFCW Consolidated Pension Plan. The Company transferred $449, $344 net of tax, in net accrued pension liabilities and prepaid escrow funds to fulfill obligations for past service for associates and retirees. The agreement will be satisfied by cash installment payments to the UFCW Consolidated Pension Plan and will be paid evenly over seven years.
10
During the third quarter of 2021, the Company settled certain company-sponsored pension plan obligations using existing assets of the plans. The Company recognized a non-cash settlement charge of $87, $68 net of tax, associated with the settlement of its obligations for the eligible participants’ pension balances that were distributed out of the plans via a lump sum distribution or the purchase of an annuity contract, based on each participant’s election. The settlement charge is included in “Non-service component of company-sponsored pension plan costs” in the Consolidated Statements of Operations.
4. | EARNINGS PER COMMON SHARE |
Net earnings attributable to The Kroger Co. per basic common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding. Net earnings attributable to The Kroger Co. per diluted common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding, after giving effect to dilutive stock options. The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:
| | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Third Quarter Ended | | ||||||||||||
| | November 5, 2022 | | November 6, 2021 |
| ||||||||||||
|
| | |
| |
| 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 | | $ | 395 |
| 716 | | $ | 0.55 | | $ | 478 |
| 742 | | $ | 0.64 | |
Dilutive effect of stock options | | | |
| 8 | | | | | | |
| 10 | | | | |
| | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 395 |
| 724 | | $ | 0.55 | | $ | 478 |
| 752 | | $ | 0.64 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Quarters Ended | | Three Quarters Ended | | | First Quarter Ended | | First Quarter Ended | | ||||||||||||||||||||||||
| | November 5, 2022 | | November 6, 2021 | | | May 20, 2023 | | May 21, 2022 |
| ||||||||||||||||||||||||
|
| | |
| |
| Per |
| | |
| |
| Per |
|
| | |
| |
| Per |
| | |
| |
| Per | | ||||
| | Earnings | | Shares | | Share | | Earnings | | Shares | | Share | | | Earnings | | Shares | | Share | | Earnings | | Shares | | Share | | ||||||||
| | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount |
| | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | | ||||||||
Net earnings attributable to The Kroger Co. per basic common share | | $ | 1,777 |
| 719 | | $ | 2.47 | | $ | 1,079 |
| 747 | | $ | 1.44 | | | $ | 954 |
| 717 | | $ | 1.33 | | $ | 657 |
| 722 | | $ | 0.91 | |
Dilutive effect of stock options | | | |
| 9 | | | | | | |
| 10 | | | | | | | |
| 7 | | | | | | |
| 11 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 1,777 |
| 728 | | $ | 2.44 | | $ | 1,079 |
| 757 | | $ | 1.43 | | | $ | 954 |
| 724 | | $ | 1.32 | | $ | 657 |
| 733 | | $ | 0.90 | |
The Company had combined undistributed and distributed earnings to participating securities totaling $3$8 and $5$7 in the thirdfirst quarters of 20222023 and 2021, respectively. For the first three quarters of 2022, and 2021, the Company had combined undistributed and distributed earnings to participating securities of $16 and $11, respectively.
The Company had options outstanding for approximately 23 million shares and 1 million shares during the thirdfirst quarters of 20222023 and 2021, 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 2 million and 3 million shares during each of the first three quarters of 2022, and 2021, 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.
1110
5. | LEASES AND LEASE-FINANCED TRANSACTIONS |
On May 17, 2018, the Company entered into a Partnership Framework Agreement with Ocado International Holdings Limited and Ocado Group plc (“Ocado”), which has since been amended. Under this agreement, Ocado will partner exclusively with the Company in the U.S., enhancing the Company’s digital and robotics capabilities in its distribution networks. In the first three quartersquarter of 2022,2023, the Company opened threeone additional Kroger Delivery customer fulfillment centerscenter in Romulus, Michigan, Dallas, Texas and Pleasant Prairie, Wisconsin, which brings the Company’s total Kroger Delivery customer fulfillment centers to six as of November 5, 2022.Frederick, Maryland. The Company determined the arrangement with Ocado contains a lease of the robotic equipment used to fulfill customer orders. As a result, the Company establishes a finance lease when each facility begins fulfilling orders to customers. The base term of each lease is 10 years with options to renew at the Company’s sole discretion. The Company elected to combine the lease and non-lease elements in the contract. As a result, the Company will account for all payments to Ocado as lease payments. During the first three quartersquarter of 2022,2023, the Company recorded finance lease assets of $429$139 and finance lease liabilities of $391$129 related to the Company’s agreement with Ocado.
|
|
In September 2022,As of May 20, 2023 and January 28, 2023, the FASB issued ASU No. 2022-04, "Liabilities - Supplier Finance Programs (Subtopic 405-50): DisclosureCompany had $1,012 and $928, respectively, of Supplier Finance Program Obligations". This guidance requires annualnet finance lease assets included within “Property, plant and interim disclosures for entities that use supplierequipment, net” in the Company’s Consolidated Balance Sheets related to the Company's agreement with Ocado. As of May 20, 2023 and January 28, 2023, the Company had $96 and $88, respectively, of current finance programs in connection with the purchaselease liabilities recorded within “Current portion of goodslong-term debt including obligations under finance leases" and services. These amendments are effective for fiscal years beginning after December 15, 2022, except for the amendment on roll forward information, which is effective for fiscal years beginning after December 15, 2023. The Company is currently assessing the effect that adoption$859 and $785, respectively, of this guidance will have on its Consolidated Financial Statements.non-current finance lease liabilities recorded within “Long-term debt including obligations under finance leases.”
| COMMITMENTS AND CONTINGENCIES |
The Company continuously evaluates contingencies based upon the best available evidence.
The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.
The principal contingencies are described below:
Insurance — The Company’s workers’ compensation risks are self-insured in most states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans and self-insured retention plans. The liability for workers’ compensation risks is accounted for on a present value basis. Actual claim settlements and expenses incident thereto may differ from the provisions for loss. Property risks have been underwritten by a subsidiary and are all reinsured with unrelated insurance companies. Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.
Litigation — Various claims and lawsuits arising in the normal course of business, including personal injury, contract disputes, employment discrimination, wage and hour and other regulatory claims are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material effect on the Company’s financial position, results of operations, or cash flows.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and when an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of loss for the Company’s exposure is not material to the Company. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
12
The Company is one of dozens of companies that have been named in various lawsuits alleging that defendants contributed to create a public nuisance through the distribution and dispensing of opioids.
11
At present, the Company is named in a significant number of lawsuits pending in various state courts, including cases brought by certain state Attorneys General, as well as in the United States District Court for the Northern District of Ohio, where over 2,000 cases have been consolidated as Multi-District Litigation (“MDL”) pursuant to 28 U.S.C. §1407 in a case entitled In re National Prescription Opiate Litigation. Most of these cases have been stayed but Kroger entities have beenpending developments in bellwether MDL cases, including some in which the Company is named, in five cases thatwhich are proceeding on a staggered discovery schedule. Once discovery is completed, those cases will be remanded to the originating federal court for trial. In addition, the Company has received requests for documents and information from government agencies regarding opioids. The Company has and will cooperate with these inquiries.
The Company is vigorously defending these matters and believes that these cases are without merit. At this stage in the proceedings, the Company is unable to determine the probability of the outcome of these matters or the range of reasonably possible loss, if any.
In the thirdfirst quarter of 2022,2023, the Company recorded a charge of $85$62 million relating to a settlement of opioid litigation claims with the State of New Mexico.West Virginia. The agreed upon settlement framework allocates $85 among various constituents related to the state of New Mexico. This settlement agreement is expected to resolveresolves all opioid lawsuits and claims by the state of New Mexico against the Company.West Virginia Attorney General. Kroger continues to vigorously defend against otherall claims and lawsuits relating to opioids.
Assignments — The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees is unable to fulfill its lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.
| ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table represents the changes in AOCI by component for the first three quarters of 20222023 and 2021:2022:
| | | | | | | | | | | | | | | | | | |
| | | | | Pension and | | | | | | | | Pension and | | | | ||
| | Cash Flow | | Postretirement | | | | | Cash Flow | | Postretirement | | | | ||||
| | Hedging | | Defined Benefit | | | | | Hedging | | Defined Benefit | | | | ||||
|
| Activities(1) |
| Plans(1) |
| Total(1) |
| Activities(1) |
| Plans(1) |
| Total(1) | ||||||
Balance at January 30, 2021 | | $ | (54) | | $ | (576) | | $ | (630) | |||||||||
Balance at January 29, 2022 | | $ | (47) | | $ | (420) | | $ | (467) | |||||||||
Amounts reclassified out of AOCI(3) | | | 2 | |
| — | |
| 2 | |||||||||
Net current-period OCI | | | 2 | |
| — | |
| 2 | |||||||||
Balance at May 21, 2022 | | $ | (45) | | $ | (420) | | $ | (465) | |||||||||
| | | | | | | | | | |||||||||
Balance at January 28, 2023 | | $ | (129) | | $ | (503) | | $ | (632) | |||||||||
OCI before reclassifications(2) | | | — | | | 131 | |
| 131 | |
| 91 | |
| — | |
| 91 |
Amounts reclassified out of AOCI(3) | | | 5 | |
| 3 | |
| 8 | |
| 1 | | | (4) | |
| (3) |
Net current-period OCI | | | 5 | |
| 134 | |
| 139 | |
| 92 | |
| (4) | |
| 88 |
Balance at November 6, 2021 | | $ | (49) | | $ | (442) | | $ | (491) | |||||||||
| | | | | | | | | | |||||||||
Balance at January 29, 2022 | | $ | (47) | | $ | (420) | | $ | (467) | |||||||||
OCI before reclassifications(2) | |
| 37 | |
| 13 | |
| 50 | |||||||||
Amounts reclassified out of AOCI(3) | |
| 6 | | | (1) | |
| 5 | |||||||||
Net current-period OCI | |
| 43 | |
| 12 | |
| 55 | |||||||||
Balance at November 5, 2022 | | $ | (4) | | $ | (408) | | $ | (412) | |||||||||
Balance at May 20, 2023 | | $ | (37) | | $ | (507) | | $ | (544) |
(1) | All amounts are net of tax. |
(2) | Net of tax of |
(3) | Net of tax of $1 for cash flow hedging activities and ($1) for pension and postretirement defined benefit plans for the first |
1312
The following table represents the items reclassified out of AOCI and the related tax effects for the third quarters and first three quarters of 20222023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Three Quarters Ended |
| | First Quarter Ended |
| ||||||||||||
|
| November 5, |
| November 6, |
| November 5, |
| November 6, |
|
| May 20, |
| May 21, |
| ||||||
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | ||||||
Cash flow hedging activity items | | | | | | | | | | | | | | | | | | | | |
Amortization of gains and losses on cash flow hedging activities(1) | | $ | 2 | | $ | 2 | | $ | 7 | | $ | 9 | | | $ | 2 | | $ | 3 | |
Tax expense | |
| — | |
| — | |
| (1) | |
| (4) | | |
| (1) | |
| (1) | |
Net of tax | |
| 2 | |
| 2 | |
| 6 | |
| 5 | | |
| 1 | |
| 2 | |
| | | | | | | | | | | | | | | | | | | | |
Pension and postretirement defined benefit plan items | | | | | | | | | | | | | | | | | | | | |
Amortization of amounts included in net periodic pension cost(2) | |
| — | |
| 1 |
|
| (1) |
|
| 5 | | |
| (5) |
|
| (1) | |
Tax expense |
|
| — |
|
| — |
|
| — |
|
| (2) | |
|
| 1 |
|
| 1 | |
Net of tax |
|
| — |
|
| 1 |
|
| (1) |
|
| 3 | |
|
| (4) |
|
| — | |
Total reclassifications, net of tax |
| $ | 2 |
| $ | 3 |
| $ | 5 |
| $ | 8 | |
| $ | (3) |
| $ | 2 | |
(1) | Reclassified from AOCI into interest expense. |
(2) | Reclassified from AOCI into non-service component of company-sponsored pension plan costs. These components are included in the computation of net periodic pension cost (see Note 3 for additional details). |
| INCOME TAXES |
The effective income tax rate was 24.0% for the third quarter of 2022 and 13.8% for the third quarter of 2021. The effective income tax rate was 21.1%22.9% for the first three quartersquarter of 20222023 and 17.9%18.0% for the first three quartersquarter of 2021.2022. The effective income tax rate for the thirdfirst quarter of 20222023 differed from the federal statutory rate due to the effect of state income taxes, and certain non-deductible expenses, partially offset by the utilization of tax credits.credits and deductions. The effective income tax rate for the first three quartersquarter of 2022 differed from the federal statutory rate due to the effect of state income taxes and certain non-deductible expenses, partially offset by the benefit from share-based payments and the utilization of tax credits. The effective income tax rate for the third quarter of 2021 and first three quarters of 2021 differed from the federal statutory rate due to a nonrecurring benefit of $47, which was primarily from the favorable outcome of income tax audit examinations covering multiple years, the benefit from share-based payments and the utilization of tax credits and deductions, partially offset by the effect of state income taxes. The effective income tax rate increased in the first quarter of 2023, compared to the first quarter of 2022, primarily due to a decrease in deductions from share-based payments.
9. | RECENTLY ADOPTED ACCOUNTING STANDARDS |
In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which enhances the transparency about the use of supplier finance programs for investors and other allocators of capital. The Company adopted this ASU as of January 29, 2023, other than the roll-forward disclosure requirement which the Company will adopt in fiscal year 2024. For additional information about the Company’s accounts payable finance arrangements, see Note 1 to the Consolidated Financial Statements.
10. | PROPOSED MERGER WITH ALBERTSONS COMPANIES, INC. |
As previously disclosed, on October 13, 2022, the Company entered into a merger agreement with Albertsons Companies, Inc. (“Albertsons”) pursuant to which all of the outstanding shares of Albertsons common and preferred stock (on an as converted basis) automatically will be converted into the right to receive $34.10 per share, subject to certain reductions described below. This price implies a total enterprise value of approximately $24,600,$24,600, including the assumption of approximately $4,700 of Albertsons net debt.
13
In connection with obtaining the requisite regulatory clearance necessary to consummate the transaction, the Company and Albertsons expect to make store divestitures. Subject to the outcome of the divestiture process and as described in the merger agreement, Albertsons is prepared to establish an Albertsons subsidiary (“SpinCo”). SpinCo would be spun-off to Albertsons shareholders immediately prior to the closing of the merger and operate as a standalone public company. The Company and Albertsons have agreed to work together to determine which stores, (if any)if any, would comprise SpinCo, as well as the pro forma capitalization of SpinCo. In addition, between the transaction announcement and closing, Albertsons expects to pay a special cash dividend of up to $4,000 to its shareholders. The per share cash purchase price of $34.10 payable to Albertsons shareholders in the merger would be reduced by an amount equal to (i) $6.85, which is the per share amount of a special pre-closing cash dividend that was paid on January 20, 2023 to Albertsons shareholders of record as of October 24, 2022 plus (ii) threethree times the four-wall adjusted EBITDA for the stores contributed to SpinCoSpinCo., if any, divided by the number of shares of Albertsons common stock (including shares of Albertsons common stock issuable upon conversion of Albertsons preferred stock) outstanding as of the record date for the spin-off plus (ii) thespin-off. The Company and Albertsons continue to work to determine whether any stores will be contributed to SpinCo. The current adjusted per share amountcash purchase price is expected to be $27.25, pending determination of the special pre-closing cash dividend, if paid, to Albertsons shareholders.any required adjustments for SpinCo.
14
In connection with the merger agreement, on October 13, 2022, the Company entered into a commitment letter with certain lenders pursuant to which the lenders have committed to provide a $17,400 senior unsecured bridge term loan facility, which, if entered into, would mature 364 days after the closing date of the merger. The commitments are intended to be drawn to finance the merger with Albertsons only to the extent the Company does not arrange for alternative financing prior to closing. As alternative financing for the merger is secured, the principal amount ofcommitments with respect to the bridge term loan facility under the commitment letter will be reduced. TheUpfront fees with respect to the bridge term loan facility included upfront fees which are included in “Financing fees paid” in the Company’s Consolidated Statements of Cash Flows and will be recognized as operating, general and administrative expense in the Company’s Consolidated Statements of Operations over the commitment period.
On November 9, 2022, the Company executed a term loan credit agreement with certain lenders pursuant to which the lenders committed to provide, contingent upon the completion of the merger with Albertsons and certain other customary conditions to funding, (1) a senior unsecured term loan facilityloans in an aggregate principal amount of $3,000 maturing on the third anniversary of the merger closing date and (2) a senior unsecured term loan facilityloans in an aggregate principal amount of $1,750 maturing on the date that is 18 months after the merger closing date (collectively, the “Term Loan Facilities”). Borrowings under the Term Loan Facilities will be used to pay a portion of the consideration and other amounts payable in connection with the merger with Albertsons. The entry into the term loan credit agreement reduces availabilitythe commitments under the Company’s $17,400$17,400 bridge term loan facility commitment by $4,750.$4,750. Borrowings under the Term Loan Facilities will bear interest at rates that vary based on the type of loan and the Company’s debt rating. In addition to the sources of financing described above, the Company expects to finance the transaction with senior notes issuances, borrowings under its commercial paper program, bank credit facility capacity and cash on hand.
The agreement provides for certain termination rights for the Company and Albertsons, including if the closing does not occur on or prior to January 13, 2024 (the “Outside Date”), provided that the Outside Date may be extended by either party for up to 270 days in the aggregate. The Company will be obligated to pay a termination fee of $600$600 if the merger agreement is terminated by either party in connection with the occurrence of the Outside Date, and, at the time of such termination, all closing conditions other than regulatory approval have been satisfied. The transaction is expected to close in early 2024, subject to the receipt of required regulatory clearance and other customary closing conditions.
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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.
CAUTIONARY STATEMENT
This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Such statements are indicated by words such as “achieve,” “affect,” “anticipate,” “believe,” “committed,” “confident,“confidence,” “continue,” “could,” “enables,” “estimate,” “expect,” “future,” “guidance,” “intended,” “maintain,” “may,” “model,” “plan,” “positions,” “program,” “proposition,” “strategy,” “target,” “trend,” “will,” and “would,” 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” in our Annual Report on Form 10-K for our last fiscal year and any subsequent filings, as well as those identified in this Form 10-Q.
Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include:
● | The extent to which our sources of liquidity are sufficient to meet our requirements may be affected by the state of the financial markets and the effect that such condition has on our ability to issue commercial paper at acceptable rates. Our ability to borrow under our committed lines of credit, including our bank credit facilities, could be impaired if one or more of our lenders under those lines is unwilling or unable to honor its contractual obligation to lend to us, or in the event that global pandemics, including the ongoing COVID-19 pandemic (including any variant), natural disasters or weather conditions interfere with the ability of our lenders to lend to us. Our ability to refinance maturing debt may be affected by the state of the financial markets. |
● | Our ability to achieve sales, earnings and incremental FIFO operating profit goals may be affected by: the risks relating to or arising from our proposed transaction with Albertsons |
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● | Our ability to achieve these goals may also be affected by our ability to manage the factors identified above. Our ability to execute our financial strategy may be affected by our ability to generate cash flow. |
● | Our effective tax rate may differ from the expected rate due to changes in tax laws, the status of pending items with various taxing authorities and the deductibility of certain expenses. |
Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described in this report and other reports that we file with the Securities and Exchange Commission could cause actual results to differ materially. We assume no obligation to update the information contained in this report unless required by applicable law.
Our ability to complete our proposed transaction with Albertsons may be affected by various factors, including those set forth in Part II, Item 1A. Risk Factors included in this Quarterly Report on Form 10-Q and other factors as may be described in subsequent filings with the SEC.
OUR VALUE CREATION MODEL – DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
Kroger’s proven value creation model is allowing us to deliver today and invest for the future. The foundation of our value creation model is our omnichannel position in food retail business, which is built on Kroger’s uniquestrategic assets: our stores, digital ecosystem, Our Brands and our data. These unique assets, when combined with our go-to-market strategy, deliver an unmatcheda compelling value proposition for our customers. We continue to build long-term customer loyalty through Fresh, Our Brands, Data and Personalization and our seamless ecosystemshopping experience to drive sustainable sales growth in our retail supermarket business, including fuel and health and wellness. This, in turn, generates the data and traffic that enables our fast-growing,fast growing, high operating margin alternative profit businesses. We are evolving from primarily a traditional food retailer into a more diverse, food first business that we expect will consistently deliver net earnings growth in the future. This will be achieved by:
● | Growing identical sales without fuel. Our plan involves maximizing growth opportunities in our supermarket business and is supported by continued strategic investments in our customers, associates, and our seamless ecosystem to ensure we deliver a full, friendly and fresh experience for every customer, every time. |
● | Expanding operating margin, through a balanced model where strategic price investments for our customers, investments in our associates’ wages and benefits and investments in |
We expect to continue to generate strong free cash flow and are committed to being disciplined with capital deployment in support of our value creation model and stated capital allocation priorities. Our first priority is to invest in the business through attractive high return organic and inorganic opportunities that drive long-term sustainable net earnings growth. We are committed to maintaining our current investment grade debt rating and our net total debt to adjusted EBITDA ratio target range of 2.30 to 2.50. We also expect to continue to grow our dividend over time and return excess cash to shareholders via stock repurchases.repurchases, subject to Board approval. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.
We expect our value creation model will result in total shareholder return within our target range of 8% to 11% over time, which does not contemplate the effect of the proposed merger with Albertsons.
1716
EXECUTIVE SUMMARY
We achieved solid financial results and strong resultsfree cash flow in the thirdfirst quarter as we continue to executeof 2023, guided by the execution of our Leading with Fresh and Accelerating with Digitalstrategy. We were pleased with the balance achieved in our results this quarter, as we continued to invest in our customers and associates, while also effectively managing costs to achieve solid earnings growth. These results were driven by positive identical sales without fuel of 6.9%, disciplined margin management and strong fuel profitability.
Our results demonstrate the resiliencedurability of our business model in a more challenged operating environment, as more customers are feeling the effects of inflation and flexibility we have built into our financial model, which has allowed us to effectively manage product cost inflation through strong sourcing practices while also helping customers manage their budgets and keeping prices competitive. Our value proposition, which includeseconomic uncertainty. We are growing customer households by providing great quality, fresh products at affordable prices data-driven promotions, trusted with personalized rewards. Our Brands productsassociates are bringing this strategy to life every day by delivering a full, friendly and fresh shopping experience with zero compromise on quality, selection and convenience. The investments we are making in our fuel rewards program, is resonating with shoppersassociates, customers and driving increased customer loyalty. During the quarter, we continuedtechnology to invest in wages and the associate experience and in creating zero hunger, zero waste communities, as we believe these components ofdrive our go-to-market strategy are critical to achieving long term sustainable growth.fueling our growth including in Alternative Profit businesses.
Our consistent execution ofLooking forward, our go-to-market strategy continuespositions us well in a wide range of economic environments to build momentumcontinue to deliver for our customers, invest in our business resultsassociates and givesachieve sustainable and attractive returns for shareholders. The investments we have made over recent years to deliver for our customers and strengthen our value creation flywheel give us the confidence to raisereaffirm our full-year guidance for identical sales without fuel adjusted FIFO operating profit and adjusted net earnings per diluted share. The resiliency of our value creation model positions us well to navigate different operating environments, and as we look forward, we remain confident in our ability to deliver attractive and sustainable total shareholder return within our target range of 8% to 11% over time, which does not contemplate the effect of the proposed merger with Albertsons.share guidance.
The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | | Three Quarters Ended | | | First Quarter Ended | | ||||||||||||||||||
| | November 5, |
| Percentage |
| November 6, | | | November 5, |
| Percentage |
| November 6, | | | May 20, |
| Percentage |
| May 21, | | ||||||
| | 2022 | | Change | | 2021 | | | 2022 | | Change | | 2021 | | | 2023 | | Change | | 2022 | | ||||||
Sales | | $ | 34,198 | | 7.3 | % | $ | 31,860 | | | $ | 113,436 | | 8.2 | % | $ | 104,840 | | | $ | 45,165 | | 1.3 | % | $ | 44,600 | |
Sales without fuel | | $ | 30,014 | | 6.4 | % | $ | 28,218 | | | $ | 98,301 | | 5.0 | % | $ | 93,632 | | | $ | 40,070 | | 3.5 | % | $ | 38,711 | |
Net earnings attributable to The Kroger Co. | | $ | 398 | | (17.6) | % | $ | 483 | | | $ | 1,793 | | 64.5 | % | $ | 1,090 | | | $ | 962 | | 44.9 | % | $ | 664 | |
Adjusted net earnings attributable to The Kroger Co. | | $ | 643 | | 9.2 | % | $ | 589 | | | $ | 2,379 | | 12.4 | % | $ | 2,117 | | | $ | 1,104 | | 2.8 | % | $ | 1,074 | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.55 | | (14.1) | % | $ | 0.64 | | | $ | 2.44 | | 70.6 | % | $ | 1.43 | | | $ | 1.32 | | 46.7 | % | $ | 0.90 | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.88 | | 12.8 | % | $ | 0.78 | | | $ | 3.24 | | 17.0 | % | $ | 2.77 | | | $ | 1.51 | | 4.1 | % | $ | 1.45 | |
Operating profit | | $ | 841 | | (3.1) | % | $ | 868 | | | $ | 3,300 | | 31.4 | % | $ | 2,512 | | | $ | 1,470 | | (2.3) | % | $ | 1,505 | |
Adjusted FIFO operating profit | | $ | 1,094 | | 12.3 | % | $ | 974 | | | $ | 3,805 | | 15.4 | % | $ | 3,297 | | | $ | 1,669 | | 4.2 | % | $ | 1,601 | |
Dividends paid | | $ | 187 | | 17.6 | % | $ | 159 | | | $ | 494 | | 14.1 | % | $ | 433 | | | $ | 188 | | 22.1 | % | $ | 154 | |
Dividends paid per common share | | $ | 0.26 | | 23.8 | % | $ | 0.21 | | | $ | 0.68 | | 19.3 | % | $ | 0.57 | | | $ | 0.26 | | 23.8 | % | $ | 0.21 | |
Identical sales excluding fuel | | | 6.9 | % | N/A | | | 3.1 | % | | | 5.4 | % | N/A | | | (1.0) | % | | | 3.5 | % | N/A | | | 4.1 | % |
FIFO gross margin rate, excluding fuel, bps increase (decrease) | | | (0.05) | | N/A | | | (0.41) | | | | (0.12) | | N/A | | | (0.57) | | | | 0.21 | | N/A | | | (0.26) | |
OG&A rate, excluding fuel and Adjusted Items, bps increase (decrease) | | | (0.03) | | N/A | | | (0.49) | | | | (0.08) | | N/A | | | (0.82) | | | | 0.14 | | N/A | | | (0.46) | |
Increase (decrease) in total debt, including obligations under finance leases compared to prior fiscal year end | | $ | (134) | | N/A | | $ | 308 | | | $ | (134) | | N/A | | $ | 308 | | |||||||||
Increase in total debt, including obligations under finance leases compared to prior fiscal year end | | $ | 55 | | N/A | | $ | 275 | | ||||||||||||||||||
Share repurchases | | $ | 10 | | N/A | | $ | 298 | | | $ | 985 | | N/A | | $ | 1,049 | | | $ | 29 | | N/A | | $ | 665 | |
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OVERVIEW
Notable items for the thirdfirst quarter and first three quarters of 20222023 are:
Shareholder Return
● | Net earnings attributable to The Kroger Co. per diluted common share of |
● | Adjusted net earnings attributable to The Kroger Co. per diluted common share of |
● | Achieved operating profit of |
● | Achieved adjusted FIFO operating profit of |
● |
● |
● | Returned $188 million to shareholders through |
Other Financial Results
● | Identical sales, excluding fuel, increased |
● | Digital sales increased |
● | We are currently operating in a |
1918
Significant Events
● | During the first |
● | During the |
USE OF NON-GAAP FINANCIAL MEASURES
The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles (“GAAP”). We provide non-GAAP measures, including First-In, First-Out (“FIFO”) gross margin, FIFO operating profit, adjusted FIFO operating profit, adjusted net earnings and adjusted net earnings per diluted share because management believes these metrics are useful to investors and analysts. These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share or any other GAAP measure of performance. These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP.
We calculate FIFO gross margin as FIFO gross profit divided by sales. FIFO gross profit is calculated as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs exclude depreciation and rent expenses. FIFO gross margin is an important measure used by management and management believes FIFO gross margin is a useful metric to investors and analysts because it measures the merchandising and operational effectiveness of our go-to-market strategy.
We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management and management believes FIFO operating profit is a useful metric to investors and analysts because it measures the operational effectiveness of our financial model.
The adjusted net earnings, adjusted net earnings per diluted share and adjusted FIFO operating profit metrics are important measures used by management to compare the performance of core operating results between periods. We believe adjusted net earnings, adjusted net earnings per diluted share and adjusted FIFO operating profit are useful metrics to investors and analysts because they present more accurate year-over-year comparisons of our net earnings, net earnings per diluted share and FIFO operating profit because adjusted items are not the result of our normal operations. Net earnings for the first three quartersquarter of 20222023 include the following, which we define as the “2022“2023 Adjusted Items”:
● | Charges to operating, general and administrative expenses (“OG&A”) of |
● | Losses in other income (expense) of |
19
Net earnings for the first quarter of 2022 include the following, which we define as the “2022 Adjusted Items”:
● | Charges to OG&A of $7 million, $6 million net of tax, for the revaluation of Home Chef contingent consideration (the “2022 OG&A Adjusted Item”). |
● | Losses in other income (expense) of $532 million, $404 million net of tax, for the unrealized loss on investments (the “2022 Other Income (Expense) Adjusted Item”). |
20
Net earnings for the third quarter of 2022 include the following, which we define as the “2022 Third Quarter Adjusted Items”:
Net earnings for the first three quarters of 2021 include the following, which we define as the “2021 Adjusted Items”:
Net earnings for the third quarter of 2021 include the following, which we define as the “2021 Third Quarter Adjusted Items”:
Please refer to the “Net Earnings per Diluted Share excluding the Adjusted Items” table below for reconciliations of certain non-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the most comparable GAAP financial measures and related disclosure.
2120
The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, excluding the 20222023 and 20212022 Adjusted Items:
Net Earnings per Diluted Share excluding the Adjusted Items
($ in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Three Quarters Ended |
| ||||||||||||
|
| November 5, |
| November 6, |
| Percentage |
| November 5, |
| November 6, |
| Percentage |
| ||||
| | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| ||||
Net earnings attributable to The Kroger Co. | | $ | 398 | | $ | 483 |
| | | $ | 1,793 | | $ | 1,090 |
| | |
| | | | | | | | | | | | | | | | | |
(Income) expense adjustments | | | | | | | | | | | | | | | | | |
Adjustment for pension plan withdrawal liabilities(1)(2) | | | — | | | — | | | | | — | | | 344 | | | |
Adjustment for company-sponsored pension plan settlement charges(1)(3) | | | — | | | 68 | | | | | — | | | 68 | | | |
Adjustment for loss on investments(1)(4) | | | 163 | | | 73 | | | | | 490 | | | 533 | | | |
Adjustment for Home Chef contingent consideration(1)(5) | | | — | | | 7 | | | | | 14 | | | 47 | | | |
Adjustment for transformation costs(1)(6) | | | — | | | 5 | | | | | — | | | 82 | | | |
Adjustment for merger related costs(1)(7) | | | 15 | | | — | | | | | 15 | | | — | | | |
Adjustment for legal settlement costs(1)(8) | | | 67 | | | — | | | | | 67 | | | — | | | |
Adjustment for completion of income tax audit examinations(1) | |
| — | |
| (47) | | | |
| — | | | (47) | | | |
2022 and 2021 Adjusted Items | | | 245 | | | 106 | | | | | 586 | | | 1,027 | | | |
| | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 643 | | $ | 589 |
| 9.2 | % | $ | 2,379 | | $ | 2,117 |
| 12.4 | % |
| | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.55 | | $ | 0.64 |
| | | $ | 2.44 | | $ | 1.43 |
| | |
| | | | | | | | | | | | | | | | | |
(Income) expense adjustments | | | | | | | | | | | | | | | | | |
Adjustment for pension plan withdrawal liabilities(9) | | | — | | | — | | | | | — | | | 0.45 | | | |
Adjustment for company-sponsored pension plan settlement charges(9) | | | — | | | 0.09 | | | | | — | | | 0.09 | | | |
Adjustment for loss on investments(9) | | | 0.22 | | | 0.10 | | | | | 0.67 | | | 0.70 | | | |
Adjustment for Home Chef contingent consideration(9) | | | — | | | 0.01 | | | | | 0.02 | | | 0.06 | | | |
Adjustment for transformation costs(9) | | | — | | | 0.01 | | | | | — | | | 0.11 | | | |
Adjustment for merger related costs(9) | | | 0.02 | | | — | | | | | 0.02 | | | — | | | |
Adjustment for legal settlement costs(9) | | | 0.09 | | | — | | | | | 0.09 | | | — | | | |
Adjustment for completion of income tax audit examinations(9) | | | — | | | (0.07) | | | | | — | | | (0.07) | | | |
2022 and 2021 Adjusted Items | |
| 0.33 | |
| 0.14 | | | |
| 0.80 | |
| 1.34 | | | |
| | | | | | | | | | | | | | | | | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.88 | | $ | 0.78 |
| 12.8 | % | $ | 3.24 | | $ | 2.77 |
| 17.0 | % |
| | | | | | | | | | | | | | | | | |
Average number of common shares used in diluted calculation | |
| 724 | |
| 752 | | | |
| 728 | |
| 757 | | | |
| | | | | | | | | |
| | First Quarter Ended | | ||||||
|
| May 20, |
| May 21, |
| Percentage |
| ||
| | 2023 | | 2022 | | Change | | ||
Net earnings attributable to The Kroger Co. | | $ | 962 | | $ | 664 |
| | |
| | | | | | | | | |
(Income) expense adjustments | | | | | | | | | |
Adjustment for loss on investments(1)(2) | | | 59 | | | 404 | | | |
Adjustment for Home Chef contingent consideration(1)(3) | | | — | | | 6 | | | |
Adjustment for merger related costs(1)(4) | | | 34 | | | — | | | |
Adjustment for legal settlement costs(1)(5) | |
| 49 | |
| — | | | |
2023 and 2022 Adjusted Items | | | 142 | | | 410 | | | |
| | | | | | | | | |
Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 1,104 | | $ | 1,074 |
| 2.8 | % |
| | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 1.32 | | $ | 0.90 |
| | |
| | | | | | | | | |
(Income) expense adjustments | | | | | | | | | |
Adjustment for loss on investments(6) | | | 0.08 | | | 0.54 | | | |
Adjustment for Home Chef contingent consideration(6) | | | — | | | 0.01 | | | |
Adjustment for merger related costs(6) | | | 0.05 | | | — | | | |
Adjustment for legal settlement costs(6) | | | 0.06 | | | — | | | |
2023 and 2022 Adjusted Items | |
| 0.19 | |
| 0.55 | | | |
| | | | | | | | | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 1.51 | | $ | 1.45 |
| 4.1 | % |
| | | | | | | | | |
Average number of common shares used in diluted calculation | |
| 724 | |
| 733 | | | |
22
Net Earnings per Diluted Share excluding the Adjusted Items (continued)
($ in millions, except per share amounts)
(1) | The amounts presented represent the after-tax effect of each adjustment, which was calculated using discrete tax rates. |
(2) | The pre-tax adjustment for |
(3) |
The pre-tax adjustment for Home Chef contingent consideration was |
The pre-tax adjustment for merger related costs was |
The pre-tax adjustment for legal settlement costs was |
The amount presented represents the net earnings per diluted common share effect of each adjustment. |
21
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||
| | Third Quarter Ended | | | Three Quarters Ended |
| | First Quarter Ended | | |||||||||||||||||||||||||||
| | November 5, | | Percentage | | November 6, | | Percentage | | | November 5, | | Percentage | | November 6, | | Percentage |
| | May 20, | | Percentage | | May 21, | | Percentage | | |||||||||
|
| 2022 |
| Change(1) |
| 2021 |
| Change(2) |
| | 2022 |
| Change(3) |
| 2021 |
| Change(4) |
|
| 2023 |
| Change(1) |
| 2022 |
| Change(2) |
| |||||||||
Total sales to retail customers without fuel | | $ | 29,777 | | 6.3 | % | $ | 28,009 | | 3.1 | % | | $ | 97,580 | | 5.0 | % | $ | 92,914 | | (1.0) | % | | $ | 39,748 | | 3.4 | % | $ | 38,449 | | 3.9 | % | |||
Supermarket fuel sales | | | 4,185 | | 14.9 | % | | 3,642 | | 57.7 | % | | | 15,134 | | 35.0 | % | | 11,208 | | 53.9 | % | | | 5,095 | | (13.5) | % | | 5,889 | | 47.6 | % | |||
Other sales | | | 236 | | 12.9 | % | | 209 | | (11.1) | % | | | 722 | | 0.6 | % | | 718 | | 10.6 | % | | | 322 | | 22.9 | % | | 262 | | (8.4) | % | |||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |||
Total sales | | $ | 34,198 | | 7.3 | % | $ | 31,860 | | 7.2 | % | | $ | 113,436 | | 8.2 | % | $ | 104,840 | | 3.0 | % | | $ | 45,165 | | 1.3 | % | $ | 44,600 | | 8.0 | % |
(1) | This column represents the percentage change in the |
(2) | This column represents the percentage change in the |
Digital sales are included in the |
Other sales primarily relate to external sales at food production plants, data analytic services and third-party media revenue. The increase in the |
23
Total sales increased in the thirdfirst quarter of 2023, compared to the first quarter of 2022, compared to the third quarter of 2021, by 7.3%1.3%. The increase was primarily due to increasesan increase in supermarket fuel sales and total sales to retail customers without fuel.fuel, partially offset by a reduction in supermarket fuel sales. Total sales, excluding fuel, increased 6.4%3.5% in the thirdfirst quarter of 2022,2023, compared to the thirdfirst quarter of 2021,2022, which was primarily due to our identical sales increase, excluding fuel, of 6.9%, partially offset by discontinued patient therapies at Kroger Specialty Pharmacy.3.5%. Identical sales, excluding fuel, for the thirdfirst quarter of 2022,2023, compared to the thirdfirst quarter of 2021,2022, increased primarily due to an increase in the number of households shopping with us and an increase in basket value due to retail inflation, partially offset by a reduction in the number of items in basket.basket and the termination of our agreement with Express Scripts. Identical sales, excluding fuel, would have grown 5.0% in the first quarter of 2023 if not for the approximately $575 million reduction in pharmacy sales from the previously communicated termination of our agreement with Express Scripts effective December 31, 2022. Total supermarket fuel sales increased 14.9%decreased 13.5% in the thirdfirst quarter of 2023, compared to the first quarter of 2022, compared to the third quarter of 2021, primarily due to an increasea decrease in the average retail fuel price of 18.5%, partially offset by11.2% and a decrease in fuel gallons sold of 3.0%2.5%, which was less thanconsistent with the average market decline.decline in fuel gallons sold. The increasedecrease in the average retail fuel price was caused by an increasea decrease in the product cost of fuel.
Total sales increased in the first three quarters of 2022, compared to the first three quarters of 2021, by 8.2%. The increase was primarily due to increases in supermarket fuel sales and total sales to retail customers without fuel. Total sales, excluding fuel, increased 5.0% in the first three quarters of 2022, compared to the first three quarters of 2021, which was primarily due to our identical sales increase, excluding fuel, of 5.4%, partially offset by discontinued patient therapies at Kroger Specialty Pharmacy. Identical sales, excluding fuel, for the first three quarters of 2022, compared to the first three quarters of 2021, increased primarily due to an increase in the number of households shopping with us and an increase in basket value due to retail inflation, partially offset by a reduction in the number of items in basket. Total supermarket fuel sales increased 35.0% in the first three quarters of 2022, compared to the first three quarters of 2021, primarily due to an increase in the average retail fuel price of 36.4%, partially offset by a decrease in fuel gallons sold of 1.0%, which was less than the average market decline. The increase in the average retail fuel price was caused by an increase in the product cost of fuel.22
We calculate identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket locations, Kroger Specialty Pharmacy businesses and Delivery and Ship solutions. We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. We define Kroger Specialty Pharmacy businesses as identical when physical locations have been in operation continuously for five full quarters; discontinued patient therapies are excluded from the identical sales calculation starting in the quarter of transfer or termination. We define Kroger Delivery identical sales powered by Ocado based on geography. We include Kroger Delivery sales powered by Ocado as identical if the delivery occurs in an existing Kroger supermarket geography. If the Kroger Delivery sales powered by Ocado occur in a new geography, these sales are included as identical when deliveries have occurred to the new geography for five full quarters. 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. It is important to understand the methods used by other companies to calculate identical sales before comparing our identical sales to those of other such companies. Our identical sales results, excluding fuel, results are summarized in the following table. We used the identical sales, excluding fuel, dollar figures presented below to calculate percentage changes for the thirdfirst quarter and first three quarters of 2022.2023.
Identical Sales
($ in millions)
| | | | | | | | | | | |
| | Third Quarter Ended |
| ||||||||
| | November 5, | | Percentage | | November 6, | | Percentage |
| ||
|
| 2022 |
| Change(1) |
| 2021 |
| Change(2) |
| ||
Excluding Fuel |
| $ | 29,623 |
| 6.9 | % | $ | 27,701 |
| 3.1 | % |
24
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Quarters Ended |
| | First Quarter Ended |
| ||||||||||||||||
| | November 5, | | Percentage | | November 6, | | Percentage |
| | May 20, | | Percentage | | May 21, | | Percentage |
| ||||
|
| 2022 |
| Change(1) |
| 2021 |
| Change(2) |
|
| 2023 |
| Change(1) |
| 2022 |
| Change(2) |
| ||||
Excluding fuel centers |
| $ | 96,963 |
| 5.4 | % | $ | 91,963 |
| (1.0) | % | |||||||||||
Excluding Fuel |
| $ | 39,574 |
| 3.5 | % | $ | 38,235 |
| 4.1 | % |
(1) | This column represents the percentage change in identical sales in the first |
(2) | This column represents the percentage change in identical sales in the first |
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 21.37%22.33% for the thirdfirst quarter of 2022,2023, compared to 21.66%21.63% for the thirdfirst quarter of 2021.2022. This increase in rate was achieved while also investing in price to maintain a competitive price position and deliver greater value for our customers. The decreaseincrease in rate in the thirdfirst quarter of 2023, compared to the first quarter of 2022, compared to the third quarter of 2021, resulted primarily from increaseddecreased fuel sales, which have a lower gross margin rate, a higher LIFO charge and increased shrink, as a percentage of sales, partially offset by decreased warehousing costs, as a percentage of sales, andOur Brands performance, our ability to effectively manage product cost inflation through strong sourcing practices, while also helping customers manage their budgets and keeping prices competitive.
Our gross margin rate,lower transportation costs, as a percentage of sales, was 21.34% forand the first three quarterseffect of 2022, compared to 21.96% for the first three quarters of 2021. The decrease in rate in the first three quarters of 2022, compared to the first three quarters of 2021, resulted primarily from increased fuel sales, which have a lower gross margin rate and a higher LIFO charge,our terminated agreement with Express Scripts, partially offset by our ability to effectively manage product cost inflation through strong sourcing practices while also helping customers manage their budgetshigher shrink, as a percentage of sales, and keeping prices competitive and the cycling of a write down related to a donation of personal protective equipment inventory from the prior year.increased promotional price investments.
Our LIFO charge was $152$99 million in the thirdfirst quarter of 2022,2023, compared to $93 million in the thirdfirst quarter of 2021.2022. Our LIFO charge was $392 million in the first three quarters of 2022, compared to $177 million in the first three quarters of 2021. The increase in our LIFO charge reflects our expected annualized product cost inflation for 2022, compared to 2021, which was attributable to higher inflation primarily in grocery.2023.
Our FIFO gross margin rate, which excludes the LIFO charge, was 21.81%22.55% in the thirdfirst quarter of 2022,2023, compared to 21.95%21.84% in the thirdfirst quarter of 2021.2022. 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 5increased 21 basis points in the thirdfirst quarter of 2022,2023, compared to the thirdfirst quarter of 2021.2022. This decreaseincrease in rate was achieved while also investing in price to maintain a competitive price position and deliver greater value for our customers. This increase resulted primarily from increased shrink, as a percentage of sales, partially offset by decreased warehousing costs, as a percentage of sales, andOur Brands performance, our ability to effectively manage product cost inflation through strong sourcing practices, while also helping customers manage their budgetslower transportation costs, as a percentage of sales, and keeping prices competitive.the effect of our terminated agreement with Express Scripts, partially offset by higher shrink, as a percentage of sales, and increased promotional price investments.
Our FIFO gross margin rate, which excludes the LIFO charge, was 21.68% in the first three quarters of 2022, compared to 22.13% in the first three quarters of 2021. Excluding the effect of fuel, our FIFO gross margin rate decreased 12 basis points in the first three quarters of 2022, compared to the first three quarters of 2021. This result reflects our ability to effectively manage product cost inflation through strong sourcing practices while also helping customers manage their budgets and keeping prices competitive and the cycling of a write down related to a donation of personal protective equipment inventory from the prior year.23
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utilities and credit card fees. Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.
25
OG&A expenses, as a percentage of sales, were 16.34%16.37% in the thirdfirst quarter of 20222023 and 16.25%15.69% in the thirdfirst quarter of 2021.2022. The increase in the thirdfirst quarter of 2023, compared to the first quarter of 2022, compared to the third quarter of 2021, resulted primarily from the effect of decreased fuel sales, which increases our OG&A rate, as a percentage of sales, planned investments in associates, the effect of our associates, increased incentive plan costs,terminated agreement with Express Scripts, costs related to strategic investments in various margin expansion initiatives that will drive future growth and the 2022 Third Quarter2023 OG&A Adjusted Items, partially offset by the effect of supermarket sales leverage, across fuel and supermarkets, which decreases our OG&A rate, as a percentage of sales, decreased healthcare costs, the 2021 Third Quarter2022 OG&A Adjusted Items and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions.
OG&A expenses, as a percentage of sales, were 15.87% in the first three quarters of 2022 and 16.88% in the first three quarters of 2021. The decrease in the first three quarters of 2022, compared to the first three quarters of 2021, resulted primarily from the effect of sales leverage across fuel and supermarkets, which decreases our OG&A rate, as a percentage of sales, lower contributions to multi-employer pension plans, decreased healthcare costs, the 2021 OG&A Adjusted Items and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates, costs related to strategic investments in various margin expansion initiatives that will drive future growth and the 2022 OG&A Adjusted Items.
Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, the 2022 Third Quarter2023 OG&A Adjusted Items and the 2021 Third Quarter2022 OG&A Adjusted Items, our OG&A rate decreased 3increased 14 basis points in the thirdfirst quarter of 2022,2023, compared to the thirdfirst quarter of 2021.2022. This decreaseincrease resulted primarily from planned investments in associates, the effect of our terminated agreement with Express Scripts and costs related to strategic investments in various margin expansion initiatives that will drive future growth, partially offset by the effect of supermarket sales leverage, which decreases our OG&A rate, as a percentage of sales, decreased healthcare costs and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates, increased incentive plan costs and costs related to strategic investments in various margin expansion initiatives that will drive future growth.
Excluding the effect of fuel, the 2022 OG&A Adjusted Items and the 2021 OG&A Adjusted Items, our OG&A rate decreased 8 basis points in the first three quarters of 2022, compared to the first three quarters of 2021. This decrease resulted primarily from the effect of supermarket sales leverage, which decreases our OG&A rate, as a percentage of sales, lower contributions to multi-employer pension plans, decreased healthcare costs and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates and costs related to strategic investments in various margin expansion initiatives that will drive future growth.reductions.
Rent Expense
Rent expense decreased, as a percentage of sales, for the third quarter of 2022, compared to the third quarter of 2021, primarily due to sales leverage. Rent expense decreased in total andremained relatively consistent, as a percentage of sales, for the first three quartersquarter of 2022,2023, compared to the first three quarters of 2021. This decrease was primarily due to sales leverage and the completion of a property transaction during the first quarter of 2021 related to 28 previously leased properties that we are now accounting for as owned locations and therefore recognizing depreciation and amortization expense over their useful life.2022.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased,increased, as a percentage of sales, in the thirdfirst quarter and first three quarters of 2022,2023, compared to the same periods in 2021,first quarter of 2022. This increase was primarily due to sales leverage.depreciation of equipment recorded under finance leases related to our Kroger Delivery customer fulfillment center location openings, additional depreciation on capital investments, excluding mergers and lease buyouts, of $3.5 billion during the rolling four quarter period ending with the first quarter of 2023 and a decrease in the average useful life on these capital investments.
Operating Profit and FIFO Operating Profit
Operating profit was $841 million,$1.5 billion, or 2.5%3.3% of sales, for the thirdfirst quarter of 2022,2023, compared to $868 million,$1.5 billion, or 2.7%3.4% of sales, for the thirdfirst quarter of 2021.2022. Operating profit, as a percentage of sales, decreased 2612 basis points in the thirdfirst quarter of 2023, compared to the first quarter of 2022, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, partially offset by a higher FIFO gross margin rate. Fuel earnings contributed to our operating profit growth for the first quarter of 2023, compared to the thirdfirst quarter of 2021,2022.
FIFO operating profit was $1.6 billion, or 3.5% of sales, for the first quarter of 2023, compared to $1.6 billion, or 3.6% of sales, for the first quarter of 2022. FIFO operating profit, as a percentage of sales, excluding the 2023 and 2022 Adjusted Items, increased 10 basis points in the first quarter of 2023, compared to the first quarter of 2022, due to an increased LIFO charge, a lowerhigher FIFO gross margin rate, andpartially offset by increased OG&A expense,and depreciation and amortization expenses, as a percentage of sales. Fuel earnings contributed to our operating profit growth for the third quarter of 2022, compared to the third quarter of 2021.
26
Operating profit was $3.3 billion, or 2.9% of sales, for the first three quarters of 2022, compared to $2.5 billion, or 2.4% of sales, for the first three quarters of 2021. Operating profit, as a percentage of sales, increased 51 basis points in the first three quarters of 2022, compared to the first three quarters of 2021, due to decreased OG&A expense, as a percentage of sales, partially offset by an increased LIFO charge and a lower FIFO gross margin rate. Fuel earnings also contributed to our operating profit growth for the first three quarters of 2022, compared to the first three quarters of 2021.
FIFO operating profit was $993 million, or 2.9% of sales, for the third quarter of 2022, compared to $961 million, or 3.0% of sales, for the third quarter of 2021. FIFO operating profit, as a percentage of sales, excluding the 2022 and 2021 Third Quarter Adjusted Items, increased 14 basis points in the third quarter of 2022, compared to the third quarter of 2021, due to decreased OG&A expense, as a percentage of sales, partially offset by a lower FIFO gross margin rate. Fuel earnings also contributed to our FIFO operating profit growth for the third quarter of 2022, compared to the third quarter of 2021.
FIFO operating profit was $3.7 billion, or 3.3% of sales, for the first three quarters of 2022, compared to $2.7 billion, or 2.6% of sales, for the first three quarters of 2021. FIFO operating profit, as a percentage of sales, excluding the 2022 and 2021 Adjusted Items, increased 21 basis points in the first three quarters of 2022, compared to the first three quarters of 2021, due to decreased OG&A expense, as a percentage of sales, partially offset by a lower FIFO gross margin rate. Fuel earnings also contributed to our FIFO operating profit growth for the first three quartersquarter of 2022,2023, compared to the first three quartersquarter of 2021.2022.
Specific factors contributing to the trends driving operating profit and FIFO operating profit identified above are discussed earlier in this section.
24
The following table provides a reconciliation of operating profit to FIFO operating profit, and to Adjusted FIFO operating profit, excluding the 20222023 and 20212022 Adjusted Items:
Operating Profit excluding the Adjusted Items
($ in millions)
| | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Three Quarters Ended | | First Quarter Ended | ||||||||||||
| | November 5, | | November 6, | | November 5, | | November 6, | | May 20, | | May 21, | ||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||||
Operating profit | | $ | 841 | | $ | 868 | | $ | 3,300 | | $ | 2,512 | | $ | 1,470 | | $ | 1,505 |
LIFO charge | | | 152 | | | 93 | | | 392 | | | 177 | | | 99 | | | 93 |
| |
| | | | | |
| | | | | |
| | | | |
FIFO Operating profit | |
| 993 | |
| 961 | |
| 3,692 | |
| 2,689 | |
| 1,569 | |
| 1,598 |
| | | | | | | | | | | | | | | | | | |
Adjustment for pension plan withdrawal liabilities | | | — | | | — | | | — | | | 449 | ||||||
Adjustment for Home Chef contingent consideration | | | — | | | 10 | | | 18 | | | 61 | | | — | | | 7 |
Adjustment for transformation costs(1) | | | — | | | 6 | | | — | | | 107 | ||||||
Adjustment for merger related costs(2) | | | 19 | | | — | | | 19 | | | — | ||||||
Adjustment for merger related costs(1) | | | 40 | | | — | ||||||||||||
Adjustment for legal settlement costs | | | 85 | | | — | | | 85 | | | — | | | 62 | | | — |
Other | | | (3) | | | (3) | | | (9) | | | (9) | | | (2) | | | (4) |
| | | | | | | | | | | | | | | | | | |
2022 and 2021 Adjusted items | | | 101 | | | 13 | | | 113 | | | 608 | ||||||
2023 and 2022 Adjusted items | | | 100 | | | 3 | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Adjusted FIFO operating profit excluding the adjusted items above | | $ | 1,094 | | $ | 974 | | $ | 3,805 | | $ | 3,297 | | $ | 1,669 | | $ | 1,601 |
(1) |
Merger related costs primarily include |
27
Interest Expense
Interest expense decreased for the thirdfirst quarter and first three quarters of 2022,2023, compared to the same periodsfirst quarter of 2021,2022. This decrease was primarily due to decreased average total outstanding debt, including both the current and long-term portions of obligations under finance leases, and increased interest income earned on our cash and temporary cash investments due to rising interest rates throughout 2022,and an increase in our investments balance in the first quarter of 2023, compared to 2021.the first quarter of 2022.
Income Taxes
The effective income tax rate was 24.0% for22.9% in the thirdfirst quarter of 20222023 and 13.8% for the third quarter of 2021. The effective income tax rate was 21.1%18.0% for the first three quartersquarter of 2022 and 17.9% for the first three quarters of 2021.2022. The effective income tax rate for the thirdfirst quarter of 20222023 differed from the federal statutory rate due to the effect of state income taxes, and certain non-deductible expenses, partially offset by the utilization of tax credits.credits and deductions. The effective income tax rate for the first three quartersquarter of 2022 differed from the federal statutory rate due to the effect of state income taxes and certain non-deductible expenses, partially offset by the benefit from share-based payments and the utilization of tax credits. The effective income tax rate for the third quarter of 2021 and first three quarters of 2021 differed from the federal statutory rate due to a nonrecurring benefit of $47 million, which was primarily from the favorable outcome of income tax audit examinations covering multiple years, the benefit from share-based payments and the utilization of tax credits and deductions, partially offset by the effect of state income taxes. The effective income tax rate increased in the first quarter of 2023, compared to the first quarter of 2022, primarily due to a decrease in deductions from share-based payments.
Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings of $0.55$1.32 per diluted share for the thirdfirst quarter of 20222023 represented a decreasean increase of 14%47% compared to net earnings of $0.64$0.90 per diluted share for the thirdfirst quarter of 2021.2022. Adjusted net earnings of $0.88$1.51 per diluted share for the thirdfirst quarter of 20222023 represented an increase of 13%4% compared to adjusted net earnings of $0.78$1.45 per diluted share for the thirdfirst quarter of 2021.2022. The increase in adjusted net earnings per diluted share resulted primarily from increased FIFO operating profit, excluding fuel, and increased fuel earnings, and lower weighted average common shares outstanding due to common share repurchases, partially offset by a higher LIFO charge and higher income tax expense.
Net earnings of $2.44 per diluted share for the first three quarters of 2022 represented an increase of 71% compared to net earnings of $1.43 per diluted share for the first three quarters of 2021. Adjusted net earnings of $3.24 per diluted share for the first three quarters of 2022 represented an increase of 17% compared to adjusted net earnings of $2.77 per diluted share for the first three quarters of 2021. The increase in adjusted net earnings per diluted share resulted primarily from increased FIFO operating profit, excluding fuel, increased fuel earnings and lower weighted average common shares outstanding due to common share repurchases, partially offset by a higher LIFO charge and higher income tax expense.25
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
The following table summarizes our net increase (decrease) increase in cash and temporary cash investments for the first three quarters of 20222023 and 2021:2022:
| | | | | | | | | | | | |
|
| Three Quarters Ended |
| First Quarter Ended | ||||||||
| | November 5, | | November 6, | | May 20, | | May 21, | ||||
| | 2022 |
| 2021 | | 2023 |
| 2022 | ||||
Net cash provided by (used in) | | | | | | | | | | | | |
Operating activities | | $ | 3,338 | | $ | 4,791 | | $ | 2,860 | | $ | 1,102 |
Investing activities | | | (2,192) | | | (1,959) | | | (947) | | | (723) |
Financing activities | | | (2,051) | | | (2,231) | | | (296) | | | (818) |
Net (decrease) increase in cash and temporary cash investments | | $ | (905) | | $ | 601 | ||||||
Net increase (decrease) in cash and temporary cash investments | | $ | 1,617 | | $ | (439) |
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Net cash provided by operating activities
We generated $3.3$2.9 billion of cash from operations in the first three quartersquarter of 20222023 compared to $4.8$1.1 billion in the first three quartersquarter of 2021.2022. Net earnings including noncontrolling interests, adjusted for non-cash items, generated approximately $5.6$2.4 billion of operating cash flow in both the first three quarters of 2022 compared to $4.9 billion in the first three quarters of 2021.2023 and 2022. Cash usedprovided (used) by operating activities for changes in operating assets and liabilities, including working capital, was $2.3$502 million in the first quarter of 2023 compared to ($1.3) billion in the first three quartersquarter of 2022 compared to $134 million in the first three quarters of 2021.2022. The increase in cash usedprovided by operating activities for changes in operating assets and liabilities, including working capital, was primarily due to the following:
● | A decrease in pharmacy receivables at the end of the first quarter of 2023, compared to fiscal year end 2022, primarily due to timing of cash receiptsand the termination of our agreement with Express Scripts; |
● | Cash flows for FIFO inventory were more favorable in the first quarter of 2023, compared to the first quarter of 2022, primarily due to the following: |
o | A decrease in FIFO inventory at the end of the first quarter of 2023, compared to fiscal year end 2022, primarily related to maintaining inventory at optimal levels through improved inventory management planning; and |
o | An increase in FIFO inventory at the end of the |
● |
● | A decrease in |
Cash paid for taxes increaseddecreased in the first three quartersquarter of 2022,2023, compared to the first three quartersquarter of 2021,2022, primarily due to higher taxableapplying our outstanding income intax receivable to reduce our estimated tax payments for the first three quartersquarter of 2022, compared to the first three quarters of 2021.2023.
Net cash used by investing activities
Investing activities used cash of $2.2 billion$947 million in the first three quartersquarter of 20222023 compared to $2.0 billion$723 million in the first three quartersquarter of 2021.2022. The amount of cash used by investing activities increased in the first three quartersquarter of 2022,2023, compared to the first three quartersquarter of 2021,2022, primarily due to increased payments for property and equipment.equipment, partially offset by increased proceeds from the sale of assets.
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Net cash used by financing activities
We used $2.1 billion$296 million of cash for financing activities in the first three quartersquarter of 20222023 compared to $2.2 billion$818 million in the first three quartersquarter of 2021.2022. The amount of cash used for financing activities decreased in the first three quartersquarter of 20222023 compared to the first three quartersquarter of 2021,2022, primarily due to the following:
● | Decreased |
● |
Capital Investments
Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $698$1.1 billion for the first quarter of 2023, compared to $971 million for the thirdfirst quarter of 2022 compared to $922 million for the third quarter of 2021. Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $2.2 billion for both the first three quarters of 2022 and 2021.2022. During the rolling four quarter period ended with the thirdfirst quarter of 2022,2023, we opened, expanded, relocated or acquired 911 supermarkets and also completed 83117 major within-the-wall remodels. We define a major remodel as a project that exceeds a cost of $20 per square foot. Total supermarket square footage at the end of the thirdfirst quarter of 20222023 remained consistent with the end of the thirdfirst quarter of 2021.2022. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the thirdfirst quarter of 20222023 increased 0.3% over the end of the thirdfirst quarter of 2021.2022.
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Debt Management
Asof November 5, 2022,May 20, 2023, we maintained a $2.75 billion (with the ability to increase by $1.25 billion), unsecured revolving credit facility that, unless extended, terminates on July 6, 2026. Outstanding borrowings under the credit facility, commercial paper borrowings and some outstanding letters of credit reduce funds available under the credit facility. As of November 5, 2022,May 20, 2023, we had no outstanding commercial paper and no borrowings under our revolving credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled $2$1 million as of November 5, 2022.May 20, 2023.
In connection with the proposed merger with Albertsons, on October 13, 2022, we entered into a commitment letter with certain lenders pursuant to which the lenders have committed to provide a 364-day $17.4 billion senior unsecured bridge term loan facility. The commitments are intended to be drawn to finance the proposed merger with Albertsons only to the extent we do not arrange for alternative financing prior to closing. As alternative financing for the proposed merger is secured, the principal amount ofcommitments with respect to the bridge term loan facility under the commitment letter will be reduced.
On November 9, 2022, we executed a term loan credit agreement with certain lenders pursuant to which the lenders committed to provide, contingent upon the completion of the proposed merger with Albertsons and certain other customary conditions to funding, (1) a senior unsecured term loan facilityloans in an aggregate principal amount of $3.0 billion maturing on the third anniversary of the proposed merger closing date and (2) a senior unsecured term loan facilityloans in an aggregate principal amount of $1.75 billion maturing on the date that is 18 months after the proposed merger closing date (collectively, the “Term Loan Facilities”). Borrowings under the Term Loan Facilities will be used to pay a portion of the consideration and other amounts payable in connection with the proposed merger with Albertsons. The duration of the Term Loan Facilities will allow us to achieve our net total debt to adjusted EBITDA ratio target range of 2.30 to 2.50 within the first 18 to 24 months after the proposed merger closing date. The entry into the term loan credit agreement reduces availabilityreduced the commitments under our bridge facility commitment letter from $17.4 billion bridge term loan facility by $4.75to $12.65 billion. Borrowings under the Term Loan Facilities will bear interest at rates that vary based on the type of loan and our debt rating.
Our bank credit facility contains a financial covenant. As of November 5, 2022,May 20, 2023, we were in compliance with the financial covenant. Furthermore, management believes it is not reasonably likely that we will fail to comply with the financial covenant in the foreseeable future.
Total debt, including both the current and long-term portions of obligations under finance leases, decreased $134increased $55 million as of November 5, 2022,May 20, 2023, compared to our fiscal year end 20212022 debt of $13.4 billion. This decreaseincrease resulted primarily from the payment of $400 million of senior notes bearing an interest rate of 2.80%, partially offset by a net increase in obligations under finance leases of $297$59 million, which was primarily related to our threeone additional Kroger Delivery customer fulfillment center openingsopening during the first three quartersquarter of 2022.2023.
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Common Share Repurchase Programs
During the thirdfirst quarter of 2022,2023, we invested $10$29 million to repurchase 215six hundred and two thousand Kroger common shares at an average price of $47.63 per share. For the first three quarters of 2022, we invested $985 million to repurchase 19.2 million Kroger common shares at an average price of $51.35$47.68 per share. The shares repurchased in the first three quartersquarter of 20222023 were reacquired under the followinga share repurchase programs: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.
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The December 2021 Repurchase Program was exhausted during the third quarter of 2022.On September 9, 2022, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “September 2022 Repurchase Program”). As of November 5, 2022, there was $1 billion remainingNo shares have been repurchased under the September 2022 Repurchase Program.authorization. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.
Liquidity Needs
We held cash and temporary cash investments of $916 million,$2.6 billion as of November 5, 2022,the end of May 20, 2023, which reflects our elevated operating performance over the last twofew years. We actively manage our cash and temporary cash investments in order to internally fund operating activities, support and invest in our core businesses, make scheduled interest and principal payments on our borrowings and return cash to shareholders through cash dividend payments and share repurchases. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in economic and market conditions. We remain committed to our dividend, and growing our dividend over time, subject to boardBoard approval, andas well as share repurchase programs and we will evaluate the optimal use of any excess free cash flow, consistent with our capital allocation strategy. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.
We expect to meet our short-term and long-term liquidity needs with cash and temporary cash investments on hand as of November 5, 2022,May 20, 2023, cash flows from our operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility. Our short-term and long-term liquidity needs include anticipated requirements for working capital to maintain our operations, pension plan commitments, interest payments and scheduled principal payments of debt and commercial paper, settlement of interest rate swap liabilities, servicing our lease obligations, self-insurance liabilities, capital investments payments deferred under the CARES Act and other purchase obligations. We may also require additional capital in the future to fund organic growth opportunities, additional customer fulfilmentfulfillment centers, joint ventures or other business partnerships, property development, acquisitions, dividends and share repurchases. In addition, we generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. 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.
As previously disclosed, on October 13, 2022, we entered into a merger agreement with Albertsons. We expect to meet our liquidity needs for the proposed merger with cash and temporary cash investments on hand as of the merger closing date, cash flows from our operating activities and other sources of liquidity, including borrowings under our commercial paper program, senior notes issuances, bank credit facility and other sources of financing. In connection with the proposed merger, we entered into a commitment letter for a bridge term loan facility and executed a term loan credit agreement. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons. For additional information about the proposed merger with Albertsons, see Note 10 to the Consolidated Financial Statements.
For additional information about our debt activity in the first three quartersquarter of 2022,2023, see Note 2 to the Consolidated Financial Statements.
CRITICAL ACCOUNTING ESTIMATES
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 Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.28, 2023.
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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. There has been no material change to our critical accounting estimates since the filing of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.28, 2023.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, with the exception of the forward-starting interest rate swaps we entered into during the third quarter of 2022 described below.
As of November 5, 2022, we maintained five forward-starting interest rate swap agreements with a maturity date of August 1, 2027 with an aggregate notional amount totaling $5.4 billion. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. We entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on our forecasted issuances of debt. The fixed interest rates for these forward-starting interest rate swaps range from 3.00% to 3.78%. The variable rate component on the forward-starting interest rate swaps is the Secured Overnight Financing Rate (SOFR). As of November 5, 2022, the fair value of the interest rate swaps was recorded in “Other assets” and “Other long-term liabilities” for $67 million and $1 million, respectively, and accumulated other comprehensive income for $37 million, net of tax.28, 2023.
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 5, 2022,May 20, 2023, 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.
The Company is in the process of implementing a broad, multi-year, technology transformation project to modernize mainframe, middleware and legacy systems to achieve better process efficiencies across customer service, merchandising, sourcing, payroll and accounting through the use of various solutions. During the third quarter, the Company implementedIn 2022, a new payroll modules.module was implemented. Additional phases of the project will continue to be implemented over the next several years. There have been no material additional implementations of modules during the quarter ended May 20, 2023. As the Company’s technology transformation project continues, the Company continues to emphasize the maintenance of effective internal controls and assessment of the design and operating effectiveness of key control activities throughout development and deployment of each phase and will evaluate as additional phases are deployed.
With the exception of the implementation of the payroll modules described above, thereThere were no changes in Kroger’s internal control over financial reporting that materially affected, or were reasonably likely to materially affect, Kroger’s internal control over financial reporting during the quarter ended November 5, 2022.May 20, 2023.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Incorporated by reference herein is information regarding certain legal proceedings in which we are involved as set forth under “Litigation” contained in Note 76 – “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
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Item 1A. Risk Factors.
Except as described below, there are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K for our last fiscal year, filed with the SEC on March 29, 2022. We urge you to read the risk factors contained therein.
OUR PROPOSED TRANSACTION WITH ALBERTSONS CREATES INCREMENTAL BUSINESS, REGULATORY AND REPUTATIONAL RISKS
On October 13, 2022, we entered into a merger agreement with Albertsons Companies Inc., which sets forth the terms of our proposed transaction. The proposed transaction with Albertsons entails important risks, including, among others: the expected timing and likelihood of completion of the proposed transaction, including the timing, receipt and terms and conditions of any required governmental and regulatory clearance of the proposed transaction; the effect and terms and conditions of any potential divestitures, including those that may be imposed by regulators as a condition to the approval of the proposed transaction, and/or the separation of SpinCo (as described in the merger agreement); the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; the outcome of any legal proceedings that have been instituted and may in the future be instituted against the parties and others following announcement of the merger agreement and proposed transaction; the inability to consummate the proposed transaction due to the failure to satisfy other conditions to complete the proposed transaction; risks that the proposed transaction disrupts our current plans and operations; the ability to identify and recognize, including on the expected timeline, the anticipated benefits of the proposed transaction, including anticipated total shareholder return (TSR), revenue and EBITDA expectations and synergies; the amount of the costs, fees, expenses and charges related to the proposed transaction; and our and Albertsons’ ability to successfully integrate our businesses and related operations, including our associates, and realize expected operations benefits, at the times and to the extent anticipated; the risk that results are different from those contained in forecasts when made; the risk that transaction and/or integration costs or dis-synergies are greater than expected, including as a result of conditions regulators put on any approvals of the transaction; the potential effect of the announcement and/or consummation of the proposed transaction on relationships, including with associates, suppliers and competitors; our ability to maintain an investment grade credit rating; the risk that management’s attention is diverted from other matters; risks related to the potential effect of general economic, political and market factors, including changes in the financial markets as a result of inflation or measures implemented to address inflation, and any epidemic, pandemic or disease outbreaks, on Kroger, Albertsons or the proposed transaction; the risk of adverse effects on the market price of our or Albertsons’s securities or on Albertsons’s or the Company’s operating results for any reason; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; and other risks described in our filings with the SEC.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Approximate |
| | | | | | | | | Approximate |
| ||
| | | | | | | | | Dollar Value of |
| | | | | | | | | Dollar Value of |
| ||
| | | | | | | | | Shares that May |
| | | | | | | | | Shares that May |
| ||
| | | | | | | Total Number of | | Yet Be |
| | | | | | | Total Number of | | Yet Be |
| ||
| | | | | | | Shares Purchased | | Purchased |
| | | | | | | Shares Purchased | | Purchased |
| ||
| | Total Number | | Average | | as Part of Publicly | | Under the Plans |
| | Total Number | | Average | | as Part of Publicly | | Under the Plans |
| ||||
| | of Shares | | Price Paid Per | | Announced Plans | | or Programs(4) |
| | of Shares | | Price Paid Per | | Announced Plans | | or Programs(4) |
| ||||
Period(1) |
| Purchased(2) |
| Share(2) |
| or Programs(3) |
| (in millions) |
|
| Purchased(2) |
| Share(2) |
| or Programs(3) |
| (in millions) |
| ||||
First four weeks | | | | | | | | | | | | | | | | | | | | | | |
August 14, 2022 to September 10, 2022 |
| 80,417 |
| $ | 48.53 |
| 80,417 |
| $ | 1,000 | | |||||||||||
January 29, 2023 to February 25, 2023 |
| 41,900 |
| $ | 44.43 |
| 41,900 |
| $ | 1,000 | | |||||||||||
Second four weeks | | | | | | | | | | | | | | | | | | | | | | |
September 11, 2022 to October 8, 2022 |
| 157,919 |
| $ | 47.54 |
| 115,406 |
| $ | 1,000 | | |||||||||||
February 26, 2023 to March 25, 2023 |
| 1,087,917 |
| $ | 47.19 |
| 214,200 |
| $ | 1,000 | | |||||||||||
Third four weeks | | | | | | | | | | | | | | | | | | | | | | |
October 9, 2022 to November 5, 2022 |
| 19,176 |
| $ | 44.63 |
| 19,176 |
| $ | 1,000 | | |||||||||||
March 26, 2023 to April 22, 2023 |
| 202,700 |
| $ | 48.45 |
| 202,700 |
| $ | 1,000 | | |||||||||||
Fourth four weeks | | | | | | | | | | | | |||||||||||
April 23, 2023 to May 20, 2023 |
| 143,300 | | $ | 48.31 | | 143,300 | | $ | 1,000 | | |||||||||||
Total |
| 257,512 |
| $ | 47.64 |
| 214,999 |
| $ | 1,000 | |
| 1,475,817 |
| $ | 47.39 |
| 602,100 |
| $ | 1,000 | |
(1) | The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The |
(2) | Includes (i) |
(3) | Represents shares repurchased under the |
(4) |
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Item 6. Exhibits.
EXHIBIT 2.1 | - | |
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EXHIBIT 3.1 | - | |
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EXHIBIT 3.2 | - | |
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EXHIBIT 4.1 | - | Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request. |
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EXHIBIT 10.1 | - | |
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EXHIBIT 10.2 | - | |
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EXHIBIT 31.1* | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer. |
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EXHIBIT 31.2* | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer. |
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EXHIBIT 32.1* | - | |
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EXHIBIT 101.INS* | - | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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EXHIBIT 101.SCH* | - | XBRL Taxonomy Extension Schema Document. |
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EXHIBIT 101.CAL* | - | XBRL Taxonomy Extension Calculation Linkbase Document. |
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EXHIBIT 101.DEF* | - | XBRL Taxonomy Extension Definition Linkbase Document. |
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EXHIBIT 101.LAB* | - | XBRL Taxonomy Extension Label Linkbase Document. |
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EXHIBIT 101.PRE* | - | XBRL Taxonomy Extension Presentation Linkbase Document. |
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EXHIBIT 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. |
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*Filed herewith | | |
|
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE KROGER CO. | |
| | |
Dated: | By: | /s/ W. Rodney McMullen |
| | W. Rodney McMullen |
| | Chairman of the Board and Chief Executive Officer |
| | |
Dated: | By: | /s/ Gary Millerchip |
| | Gary Millerchip |
| | Senior Vice President and Chief Financial Officer |
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