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 May 20,November 4, 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 717,745,520719,423,447 shares of Common Stock ($1 par value) outstanding as of June 20,December 5, 2023.
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements. |
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | | | | | | |
| | First Quarter Ended | | ||||
| | May 20, | | May 21, | | ||
(In millions, except per share amounts) |
| 2023 |
| 2022 |
| ||
Sales | | $ | 45,165 | | $ | 44,600 | |
| | | | | | | |
Operating expenses | | | | | | | |
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below | |
| 35,080 | |
| 34,952 | |
Operating, general and administrative | |
| 7,393 | |
| 6,997 | |
Rent | |
| 265 | |
| 256 | |
Depreciation and amortization | |
| 957 | |
| 890 | |
| | | | | | | |
Operating profit | |
| 1,470 | |
| 1,505 | |
| | | | | | | |
Other income (expense) | | | | | | | |
Interest expense | | | (153) | | | (177) | |
Non-service component of company-sponsored pension plan benefits | | | 9 | | | 16 | |
Loss on investments | | | (78) | | | (532) | |
| | | | | | | |
Net earnings before income tax expense | |
| 1,248 | |
| 812 | |
| | | | | | | |
Income tax expense | |
| 286 | |
| 146 | |
| | | | | | | |
Net earnings including noncontrolling interests | |
| 962 | |
| 666 | |
Net income attributable to noncontrolling interests | |
| — | |
| 2 | |
| | | | | | | |
Net earnings attributable to The Kroger Co. | | $ | 962 | | $ | 664 | |
| | | | | | | |
Net earnings attributable to The Kroger Co. per basic common share | | $ | 1.33 | | $ | 0.91 | |
| | | | | | | |
Average number of common shares used in basic calculation | |
| 717 | |
| 722 | |
| | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 1.32 | | $ | 0.90 | |
| | | | | | | |
Average number of common shares used in diluted calculation | |
| 724 | |
| 733 | |
| | | | | | | | | | | | | |
| | Third Quarter Ended | | Three Quarters Ended | | ||||||||
| | November 4, | | November 5, | | November 4, | | November 5, | | ||||
(In millions, except per share amounts) |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
Sales | | $ | 33,957 | | $ | 34,198 | | $ | 112,975 | | $ | 113,436 | |
| | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | |
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below | |
| 26,477 | |
| 26,890 | |
| 88,032 | |
| 89,234 | |
Operating, general and administrative | |
| 5,646 | |
| 5,587 | |
| 19,974 | |
| 18,001 | |
Rent | |
| 201 | |
| 195 | |
| 671 | |
| 642 | |
Depreciation and amortization | |
| 721 | |
| 685 | |
| 2,396 | |
| 2,259 | |
| | | | | | | | | | | | | |
Operating profit | |
| 912 | |
| 841 | |
| 1,902 | |
| 3,300 | |
| | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | |
Interest expense | | | (94) | | | (119) | | | (341) | | | (422) | |
Non-service component of company-sponsored pension plan benefits | | | 7 | | | 11 | | | 24 | | | 38 | |
Gain (loss) on investments | | | 26 | | | (207) | | | 317 | | | (637) | |
| | | | | | | | | | | | | |
Net earnings before income tax expense | |
| 851 | |
| 526 | |
| 1,902 | |
| 2,279 | |
| | | | | | | | | | | | | |
Income tax expense | |
| 204 | |
| 126 | |
| 472 | |
| 481 | |
| | | | | | | | | | | | | |
Net earnings including noncontrolling interests | |
| 647 | |
| 400 | |
| 1,430 | |
| 1,798 | |
Net income attributable to noncontrolling interests | |
| 1 | |
| 2 | |
| 2 | |
| 5 | |
| | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. | | $ | 646 | | $ | 398 | | $ | 1,428 | | $ | 1,793 | |
| | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per basic common share | | $ | 0.89 | | $ | 0.55 | | $ | 1.97 | | $ | 2.47 | |
| | | | | | | | | | | | | |
Average number of common shares used in basic calculation | |
| 719 | |
| 716 | |
| 718 | |
| 719 | |
| | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.88 | | $ | 0.55 | | $ | 1.95 | | $ | 2.44 | |
| | | | | | | | | | | | | |
Average number of common shares used in diluted calculation | |
| 725 | |
| 724 | |
| 725 | |
| 728 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
2
THE KROGER CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
| | | | | | | |
| | First Quarter Ended | | ||||
| | May 20, | | May 21, | | ||
(In millions) |
| 2023 |
| 2022 |
| ||
Net earnings including noncontrolling interests | | $ | 962 | | $ | 666 | |
| | | | | | | |
Other comprehensive (loss) income | | | | | | | |
Change in pension and other postretirement defined benefit plans, net of income tax(1) | | | (4) | | | — | |
Unrealized gains and losses on cash flow hedging activities, net of income tax(2) | |
| 91 | |
| — | |
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(3) | | | 1 | | | 2 | |
| | | | | | | |
Total other comprehensive income | |
| 88 | | | 2 | |
| | | | | | | |
Comprehensive income | |
| 1,050 | |
| 668 | |
Comprehensive income attributable to noncontrolling interests | |
| — | |
| 2 | |
Comprehensive income attributable to The Kroger Co. | | $ | 1,050 | | $ | 666 | |
| | | | | | | | | | | | | |
|
| Third Quarter Ended | | Three Quarters Ended | | ||||||||
| | November 4, | | November 5, | | November 4, | | November 5, | | ||||
(In millions) |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
Net earnings including noncontrolling interests | | $ | 647 | | $ | 400 | | $ | 1,430 | | $ | 1,798 | |
| | | | | | | | | | | | | |
Other comprehensive (loss) income | | | | | | | | | | | | | |
Change in pension and other postretirement defined benefit plans, net of income tax(1) | | | (3) | | | 13 | | | (10) | | | 12 | |
Unrealized gains and losses on cash flow hedging activities, net of income tax(2) | |
| 121 | |
| 37 | |
| 317 | |
| 37 | |
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(3) | | | 1 | | | 2 | | | 4 | | | 6 | |
| | | | | | | | | | | | | |
Total other comprehensive income | |
| 119 | |
| 52 | |
| 311 | | | 55 | |
| | | | | | | | | | | | | |
Comprehensive income | |
| 766 | |
| 452 | |
| 1,741 | |
| 1,853 | |
Comprehensive income attributable to noncontrolling interests | |
| 1 | |
| 2 | |
| 2 | |
| 5 | |
Comprehensive income attributable to The Kroger Co. | | $ | 765 | | $ | 450 | | $ | 1,739 | | $ | 1,848 | |
(1) | Amount is net of tax of |
(2) | Amount is net of tax of |
(3) | Amount is net of tax of $1 for the |
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(unaudited)
| | | | | | | | | | | | | | |
|
| May 20, |
| January 28, |
|
| November 4, |
| January 28, |
| ||||
(In millions, except par amounts) | | 2023 | | 2023 |
| | 2023 | | 2023 |
| ||||
ASSETS | | | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | | |
Cash and temporary cash investments | | $ | 2,632 | | $ | 1,015 | | | $ | 1,725 | | $ | 1,015 | |
Store deposits in-transit | |
| 1,143 | |
| 1,127 | | |
| 1,197 | |
| 1,127 | |
Receivables | |
| 1,766 | |
| 2,234 | | |
| 1,938 | |
| 2,234 | |
FIFO inventory | |
| 9,325 | |
| 9,756 | | |
| 10,258 | |
| 9,756 | |
LIFO reserve | |
| (2,295) | |
| (2,196) | | |
| (2,327) | |
| (2,196) | |
Prepaid and other current assets | | | 633 | | | 734 | | | | 648 | | | 734 | |
Total current assets | |
| 13,204 | |
| 12,670 | | |
| 13,439 | |
| 12,670 | |
| | | | | | | | | | | | | | |
Property, plant and equipment, net | |
| 24,935 | |
| 24,726 | | |
| 24,882 | |
| 24,726 | |
Operating lease assets | | | 6,659 | | | 6,662 | | | | 6,752 | | | 6,662 | |
Intangibles, net | |
| 893 | |
| 899 | | |
| 890 | |
| 899 | |
Goodwill | |
| 2,916 | |
| 2,916 | | |
| 2,916 | |
| 2,916 | |
Other assets | |
| 1,586 | |
| 1,750 | | |
| 2,142 | |
| 1,750 | |
| | | | | | | | | | | | | | |
Total Assets | | $ | 50,193 | | $ | 49,623 | | | $ | 51,021 | | $ | 49,623 | |
| | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | | | |
Current portion of long-term debt including obligations under finance leases | | $ | 1,319 | | $ | 1,310 | | | $ | 724 | | $ | 1,310 | |
Current portion of operating lease liabilities | | | 664 | | | 662 | | | | 668 | | | 662 | |
Trade accounts payable | |
| 7,353 | |
| 7,119 | | |
| 8,149 | |
| 7,119 | |
Accrued salaries and wages | |
| 1,130 | |
| 1,746 | | |
| 1,177 | |
| 1,746 | |
Other current liabilities | |
| 6,664 | |
| 6,401 | | |
| 6,067 | |
| 6,401 | |
Total current liabilities | |
| 17,130 | |
| 17,238 | | |
| 16,785 | |
| 17,238 | |
| | | | | | | | | | | | | | |
Long-term debt including obligations under finance leases | | | 12,114 | | | 12,068 | | | | 12,039 | | | 12,068 | |
Noncurrent operating lease liabilities | | | 6,353 | | | 6,372 | | | | 6,408 | | | 6,372 | |
Deferred income taxes | |
| 1,694 | |
| 1,672 | | |
| 1,506 | |
| 1,672 | |
Pension and postretirement benefit obligations | |
| 427 | |
| 436 | | |
| 387 | |
| 436 | |
Other long-term liabilities | |
| 1,595 | |
| 1,823 | | |
| 2,705 | |
| 1,823 | |
| | | | | | | | | | | | | | |
Total Liabilities | |
| 39,313 | |
| 39,609 | | |
| 39,830 | |
| 39,609 | |
| | | | | | | | | | | | | | |
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 2023 and 2022 | |
| 1,918 | |
| 1,918 | | |
| 1,918 | |
| 1,918 | |
Additional paid-in capital | |
| 3,826 | |
| 3,805 | | |
| 3,871 | |
| 3,805 | |
Accumulated other comprehensive loss | |
| (544) | |
| (632) | | |
| (321) | |
| (632) | |
Accumulated earnings | |
| 26,375 | |
| 25,601 | | |
| 26,421 | |
| 25,601 | |
Common shares in treasury, at cost, 1,200 shares in 2023 and 1,202 shares in 2022 | |
| (20,670) | |
| (20,650) | | |||||||
Common shares in treasury, at cost, 1,198 shares in 2023 and 1,202 shares in 2022 | |
| (20,680) | |
| (20,650) | | |||||||
| | | | | | | | | | | | | | |
Total Shareowners’ Equity - The Kroger Co. | |
| 10,905 | |
| 10,042 | | |
| 11,209 | |
| 10,042 | |
Noncontrolling interests | |
| (25) | |
| (28) | | |
| (18) | |
| (28) | |
| | | | | | | | | | | | | | |
Total Equity | |
| 10,880 | |
| 10,014 | | |
| 11,191 | |
| 10,014 | |
| | | | | | | | | | | | | | |
Total Liabilities and Equity | | $ | 50,193 | | $ | 49,623 | | | $ | 51,021 | | $ | 49,623 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | | | | | | |
| | First Quarter Ended | | ||||
| | May 20, | | May 21, | | ||
(In millions) |
| 2023 |
| 2022 |
| ||
Cash Flows from Operating Activities: | | | | | | | |
Net earnings including noncontrolling interests | | $ | 962 | | $ | 666 | |
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | |
| 957 | |
| 890 | |
Operating lease asset amortization | | | 188 | | | 186 | |
LIFO charge | |
| 99 | |
| 93 | |
Share-based employee compensation | |
| 49 | |
| 57 | |
Company-sponsored pension plans benefit | |
| (2) | |
| (12) | |
Deferred income taxes | |
| (5) | |
| (30) | |
Gain on the sale of assets | | | (41) | | | — | |
Loss on investments | | | 78 | | | 532 | |
Other | |
| 73 | |
| 54 | |
Changes in operating assets and liabilities: | | | | | | | |
Store deposits in-transit | |
| (16) | |
| (28) | |
Receivables | |
| 274 | |
| (2) | |
Inventories | |
| 419 | |
| (676) | |
Prepaid and other current assets | |
| 82 | |
| 117 | |
Trade accounts payable | |
| 233 | |
| 439 | |
Accrued expenses | |
| (449) | |
| (748) | |
Income taxes receivable and payable | |
| 198 | | | (70) | |
Operating lease liabilities | | | (215) | | | (214) | |
Other | |
| (24) | |
| (152) | |
| | | | | | | |
Net cash provided by operating activities | |
| 2,860 | |
| 1,102 | |
| | | | | | | |
Cash Flows from Investing Activities: | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | |
| (1,028) | |
| (745) | |
Proceeds from sale of assets | |
| 86 | | | 14 | |
Other | |
| (5) | |
| 8 | |
| | | | | | | |
Net cash used by investing activities | |
| (947) | |
| (723) | |
| | | | | | | |
Cash Flows from Financing Activities: | | | | | | | |
Payments on long-term debt including obligations under finance leases | |
| (62) | | | (45) | |
Dividends paid | | | (188) | | | (154) | |
Proceeds from issuance of capital stock | | | 23 | |
| 113 | |
Treasury stock purchases | |
| (29) | |
| (665) | |
Other | | | (40) | |
| (67) | |
| | | | | | | |
Net cash used by financing activities | |
| (296) | |
| (818) | |
| | | | | | | |
Net increase (decrease) in cash and temporary cash investments | |
| 1,617 | |
| (439) | |
| | | | | | | |
Cash and temporary cash investments: | | | | | | | |
Beginning of year | |
| 1,015 | |
| 1,821 | |
End of period | | $ | 2,632 | | $ | 1,382 | |
| | | | | | | |
Reconciliation of capital investments: | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | | $ | (1,028) | | $ | (745) | |
Payments for lease buyouts | | | — | |
| 3 | |
Changes in construction-in-progress payables | |
| (71) | |
| (229) | |
Total capital investments, excluding lease buyouts | | $ | (1,099) | | $ | (971) | |
| | | | | | | |
Disclosure of cash flow information: | | | | | | | |
Cash paid during the year for interest | | $ | 164 | | $ | 198 | |
Cash paid during the year for income taxes | | $ | 92 | | $ | 244 | |
| | | | | | | |
| | Three Quarters Ended | | ||||
| | November 4, | | November 5, | | ||
(In millions) |
| 2023 |
| 2022 |
| ||
Cash Flows from Operating Activities: | | | | | | | |
Net earnings including noncontrolling interests | | $ | 1,430 | | $ | 1,798 | |
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | |
| 2,396 | |
| 2,259 | |
Operating lease asset amortization | | | 472 | | | 471 | |
LIFO charge | |
| 131 | |
| 392 | |
Share-based employee compensation | |
| 124 | |
| 145 | |
Company-sponsored pension plans | |
| (8) | |
| (28) | |
Deferred income taxes | |
| (261) | |
| (93) | |
Gain on the sale of assets | | | (45) | | | (36) | |
(Gain) loss on investments | | | (317) | | | 637 | |
Other | |
| 128 | |
| 82 | |
Changes in operating assets and liabilities: | | | | | | | |
Store deposits in-transit | |
| (70) | |
| (127) | |
Receivables | |
| 133 | |
| (130) | |
Inventories | |
| (502) | |
| (2,267) | |
Prepaid and other current assets | |
| 45 | |
| 99 | |
Trade accounts payable | |
| 1,030 | |
| 1,102 | |
Accrued expenses | |
| (426) | |
| 146 | |
Income taxes receivable and payable | |
| 148 | | | (69) | |
Operating lease liabilities | | | (539) | | | (533) | |
Other | |
| 999 | |
| (510) | |
| | | | | | | |
Net cash provided by operating activities | |
| 4,868 | |
| 3,338 | |
| | | | | | | |
Cash Flows from Investing Activities: | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | |
| (2,907) | |
| (2,261) | |
Proceeds from sale of assets | |
| 94 | | | 71 | |
Other | |
| 68 | |
| (2) | |
| | | | | | | |
Net cash used by investing activities | |
| (2,745) | |
| (2,192) | |
| | | | | | | |
Cash Flows from Financing Activities: | | | | | | | |
Payments on long-term debt including obligations under finance leases | |
| (755) | | | (526) | |
Dividends paid | | | (586) | | | (494) | |
Financing fees paid | | | — | | | (62) | |
Proceeds from issuance of capital stock | | | 42 | |
| 127 | |
Treasury stock purchases | |
| (54) | |
| (985) | |
Other | | | (60) | |
| (111) | |
| | | | | | | |
Net cash used by financing activities | |
| (1,413) | |
| (2,051) | |
| | | | | | | |
Net increase (decrease) in cash and temporary cash investments | |
| 710 | |
| (905) | |
| | | | | | | |
Cash and temporary cash investments: | | | | | | | |
Beginning of year | |
| 1,015 | |
| 1,821 | |
End of period | | $ | 1,725 | | $ | 916 | |
| | | | | | | |
Reconciliation of capital investments: | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | | $ | (2,907) | | $ | (2,261) | |
Payments for lease buyouts | | | — | |
| 10 | |
Changes in construction-in-progress payables | |
| 421 | |
| 59 | |
Total capital investments, excluding lease buyouts | | $ | (2,486) | | $ | (2,192) | |
| | | | | | | |
Disclosure of cash flow information: | | | | | | | |
Cash paid during the year for interest | | $ | 380 | | $ | 456 | |
Cash paid during the year for income taxes | | $ | 579 | | $ | 649 | |
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 |
| 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 | | | | | | | | | | |
| | | | | | | 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 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 |
| — | |
| — | |
| — |
| (1) | |
| 23 | |
| — | |
| — | |
| — | |
| 23 |
Restricted stock issued |
| — | |
| — | |
| (72) |
| (1) | |
| 30 | |
| — | |
| — | |
| — | |
| (42) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (29) | |
| — | |
| — | |
| — | |
| (29) |
Share-based employee compensation |
| — | |
| — | |
| 49 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 49 |
Other comprehensive income net of tax of $26 |
| — | |
| — | |
| — |
| — | |
| — | |
| 88 | |
| — | |
| — | |
| 88 |
Other |
| — | |
| — | |
| 44 |
| — | |
| (44) | |
| — | |
| — | |
| 3 | |
| 3 |
Cash dividends declared ($0.26 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (188) | |
| — | |
| (188) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 962 | |
| — | |
| 962 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at May 20, 2023 |
| 1,918 |
| $ | 1,918 |
| $ | 3,826 |
| 1,200 |
| $ | (20,670) |
| $ | (544) |
| $ | 26,375 |
| $ | (25) |
| $ | 10,880 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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 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 |
| — | |
| — | |
| — |
| (1) | |
| 23 | |
| — | |
| — | |
| — | |
| 23 |
Restricted stock issued |
| — | |
| — | |
| (72) |
| (1) | |
| 30 | |
| — | |
| — | |
| — | |
| (42) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (29) | |
| — | |
| — | |
| — | |
| (29) |
Share-based employee compensation |
| — | |
| — | |
| 49 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 49 |
Other comprehensive income net of tax of $26 |
| — | |
| — | |
| — |
| — | |
| — | |
| 88 | |
| — | |
| — | |
| 88 |
Other |
| — | |
| — | |
| 44 |
| — | |
| (44) | |
| — | |
| — | |
| 3 | |
| 3 |
Cash dividends declared ($0.26 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (188) | |
| — | |
| (188) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 962 | |
| — | |
| 962 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at May 20, 2023 |
| 1,918 |
| $ | 1,918 |
| $ | 3,826 |
| 1,200 |
| $ | (20,670) |
| $ | (544) |
| $ | 26,375 |
| $ | (25) |
| $ | 10,880 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (1) | |
| 13 | |
| — | |
| — | |
| — | |
| 13 |
Restricted stock issued |
| — | |
| — | |
| (85) |
| (1) | |
| 55 | |
| — | |
| — | |
| — | |
| (30) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (18) | |
| — | |
| — | |
| — | |
| (18) |
Share-based employee compensation |
| — | |
| — | |
| 43 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 43 |
Other comprehensive income net of tax of $32 |
| — | |
| — | |
| — |
| — | |
| — | |
| 104 | |
| — | |
| — | |
| 104 |
Other |
| — | |
| — | |
| 56 |
| — | |
| (56) | |
| — | |
| — | |
| 2 | |
| 2 |
Cash dividends declared ($0.29 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (211) | |
| — | |
| (211) |
Net earnings (loss) including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (180) | |
| 1 | |
| (179) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at August 12, 2023 |
| 1,918 |
| $ | 1,918 |
| $ | 3,840 |
| 1,198 |
| $ | (20,676) |
| $ | (440) |
| $ | 25,984 |
| $ | (22) |
| $ | 10,604 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| — | |
| 6 | |
| — | |
| — | |
| — | |
| 6 |
Restricted stock issued |
| — | |
| — | |
| (4) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (4) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exchanged |
| — | |
| — | |
| — |
| — | |
| (7) | |
| — | |
| — | |
| — | |
| (7) |
Share-based employee compensation |
| — | |
| — | |
| 32 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 32 |
Other comprehensive income net of income tax of $36 |
| — | |
| — | |
| — |
| — | |
| — | |
| 119 | |
| — | |
| — | |
| 119 |
Other |
| — | |
| — | |
| 3 |
| — | |
| (3) | |
| — | |
| — | |
| 3 | |
| 3 |
Cash dividends declared ($0.29 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (209) | |
| — | |
| (209) |
Net earnings including noncontrolling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 646 | |
| 1 | |
| 647 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at November 4, 2023 |
| 1,918 |
| $ | 1,918 |
| $ | 3,871 |
| 1,198 |
| $ | (20,680) |
| $ | (321) |
| $ | 26,421 |
| $ | (18) |
| $ | 11,191 |
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 28, 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 28, 2023.
The unaudited information in the Consolidated Financial Statements for the firstthird quarters and three quarters ended May 20,November 4, 2023 and May 21,November 5, 2022 includes the results of operations of the Company for the 1612 and 40 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 isfinancial instruments, measured using Level 1 inputs, was $236$633 and $401 as of May 20,November 4, 2023 and January 28, 2023, respectively, and is included in “Other assets” in the Company’s Consolidated Balance Sheets. An unrealized loss for this Ocado investmentthese Level 1 investments of approximately $165$12 and $532$655 for the first three quarters of 2023 and 2022, respectively, is included in “Loss“Gain (loss) on investments” in the Company’s Consolidated Statements of Operations. An unrealized loss for these Level 1 investments of approximately $103 and $225 for the third quarters of 2023 and 2022, respectively, is included in “Gain (loss) on investments” in the Company’s Consolidated Statements of Operations.
The Company's forward-starting interest rate swaps are considered a Level 2 instrument. The Company values interest rate swaps using observable forward yield curves. These forward yield curves are classified as Level 2 inputs. Refer to Note 2 for the disclosure of forward-starting interest rate swap fair values.
Refer to Note 2 for the disclosure of 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,November 4, 2023 and January 28, 2023, the Company had $241$255 and $249, respectively, in “Trade accounts payable” in the Company’s Consolidated Balance Sheets associated with financing arrangements. As of May 20,November 4, 2023 and January 28, 2023, the Company had $7771 and $65, respectively, in “Other current liabilities” associated with financing arrangements.
2. | DEBT OBLIGATIONS |
Long-term debt consists of:
| | | | | | | | | | | | |
| | May 20, | | January 28, | | November 4, | | January 28, | ||||
|
| 2023 |
| 2023 |
| 2023 |
| 2023 | ||||
1.70% to 8.00% Senior Notes due through 2049 | | $ | 10,218 | | $ | 10,215 | | $ | 9,620 | | $ | 10,215 |
Other | |
| 1,070 | |
| 1,077 | |
| 1,075 | |
| 1,077 |
| | | | | | | | | | | | |
Total debt, excluding obligations under finance leases | |
| 11,288 | |
| 11,292 | |
| 10,695 | |
| 11,292 |
Less current portion | |
| (1,149) | |
| (1,153) | |
| (552) | |
| (1,153) |
| | | | | | | | | | | | |
Total long-term debt, excluding obligations under finance leases | | $ | 10,139 | | $ | 10,139 | | $ | 10,143 | | $ | 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 May 20,November 4, 2023 and January 28, 2023. At May 20,November 4, 2023, the fair value of total debt was $10,3009,548 compared to a carrying value of $11,288$10,695. At January 28, 2023, the fair value of total debt was $10,593 compared to a carrying value of $11,292.
In the first three quarters of 2023, the Company repaid $600 of senior notes bearing an interest rate of 3.85% using cash on hand.
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 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 werewas 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 accumulated other comprehensive income and reclassified into net earnings when the hedged transaction affects net earnings. The remainder of the notional amount of $3,000 of the forward-starting interest swaps werewas not designated as a cash-flow 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.
9
As of May 20,November 4, 2023 and January 28, 2023, the fair value of the interest rate swaps designated as cash-flow hedges was $6$295 and $(116), respectively. As of May 20,November 4, 2023 and January 28, 2023, the amount included in “Accumulated other comprehensive income” iswas $4226 and ($89)$(89), net of tax, respectively. As of May 20,November 4, 2023 and January 28, 2023, the fair value of forward-starting interest swaps not designated as cash-flow hedges werewas $(55)187 and $(142), respectively. During the firstthird quarter of 2023, the Company recognized an unrealized gain of $87129 related to these swaps that is included in “Loss“Gain (loss) on investments” in the Company’s Consolidated Statements of Operations. During the first three quarters of 2023, the Company recognized an unrealized gain of $329 related to these swaps that is included in “Gain (loss) on investments” in the Company’s Consolidated Statements of Operations.
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 (benefit) for the company-sponsored defined benefit pension plans and other postretirement benefit plans for the firstthird quarters of 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter Ended |
| | Third Quarter Ended |
| ||||||||||||||||||||
| | Pension Benefits | | Other Benefits |
| | Pension Benefits | | Other Benefits |
| ||||||||||||||||
| | May 20, | | May 21, | | May 20, | | May 21, |
| | November 4, | | November 5, | | November 4, | | November 5, |
| ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||||||
Components of net periodic benefit cost (benefit): | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost |
| $ | 6 |
| $ | 3 |
| $ | 1 |
| $ | 1 | |
| $ | 4 |
| $ | 2 |
| $ | 1 |
| $ | 1 | |
Interest cost | |
| 40 | |
| 30 | |
| 2 | |
| 2 | | |
| 29 | |
| 23 | |
| 3 | |
| 1 | |
Expected return on plan assets | |
| (46) | |
| (47) | |
| — | |
| — | | |
| (35) | |
| (35) | |
| — | |
| — | |
Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prior service cost | |
| — | |
| — | |
| (3) | |
| (4) | | |
| — | |
| — | |
| (3) | |
| (3) | |
Actuarial loss (gain) | |
| 2 | |
| 8 | |
| (4) | |
| (5) | | |
| 2 | |
| 6 | |
| (3) | |
| (3) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost (benefit) |
| $ | 2 |
| $ | (6) |
| $ | (4) |
| $ | (6) | |
| $ | — |
| $ | (4) |
| $ | (2) |
| $ | (4) | |
The following table provides the components of net periodic benefit cost (benefit) for the company-sponsored defined benefit pension plans and other post-retirement benefit plans for the first three quarters of 2023 and 2022:
| | | | | | | | | | | | | |
| | Three Quarters Ended |
| ||||||||||
| | Pension Benefits | | Other Benefits |
| ||||||||
| | November 4, | | November 5, | | November 4, | | November 5, |
| ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
Components of net periodic benefit cost (benefit): | | | | | | | | | | | | | |
Service cost |
| $ | 13 |
| $ | 7 |
| $ | 3 |
| $ | 3 | |
Interest cost | |
| 98 | |
| 77 | |
| 6 | |
| 4 | |
Expected return on plan assets | |
| (115) | |
| (118) | |
| — | |
| — | |
Amortization of: | | | | | | 0 | | | | | | 0 | |
Prior service cost | |
| — | |
| — | |
| (9) | |
| (10) | |
Actuarial loss (gain) | |
| 6 | |
| 20 | |
| (10) | |
| (11) | |
| | | | | | | | | | | | | |
Net periodic benefit cost (benefit) |
| $ | 2 |
| $ | (14) |
| $ | (10) |
| $ | (14) | |
The Company is not required to make any contributions to its company-sponsored pension plans in 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 2023 or 2022.
The Company contributed $110$251 and $105$244 to employee 401(k) retirement savings accounts in the first three quarters of 2023 and 2022, respectively.
10
4. | EARNINGS PER COMMON SHARE |
Net earnings attributable to The Kroger Co. per basic common share equalequals 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 equalequals 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter Ended | | First Quarter Ended | | | Third Quarter Ended | | Third Quarter Ended | | ||||||||||||||||||||||||
| | May 20, 2023 | | May 21, 2022 |
| | November 4, 2023 | | November 5, 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 | | $ | 954 |
| 717 | | $ | 1.33 | | $ | 657 |
| 722 | | $ | 0.91 | | | $ | 641 |
| 719 | | $ | 0.89 | | $ | 395 |
| 716 | | $ | 0.55 | |
Dilutive effect of stock options | | | |
| 7 | | | | | | |
| 11 | | | | | | | |
| 6 | | | | | | |
| 8 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 954 |
| 724 | | $ | 1.32 | | $ | 657 |
| 733 | | $ | 0.90 | | | $ | 641 |
| 725 | | $ | 0.88 | | $ | 395 |
| 724 | | $ | 0.55 | |
| | | | | | | | | | | | | | | | | |
| | Three Quarters Ended | | Three Quarters Ended | | ||||||||||||
| | November 4, 2023 | | November 5, 2022 | | ||||||||||||
|
| | |
| |
| 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 | | $ | 1,416 |
| 718 | | $ | 1.97 | | $ | 1,777 |
| 719 | | $ | 2.47 | |
Dilutive effect of stock options | | | |
| 7 | | | | | | |
| 9 | | | | |
| | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 1,416 |
| 725 | | $ | 1.95 | | $ | 1,777 |
| 728 | | $ | 2.44 | |
The Company had combined undistributed and distributed earnings to participating securities totaling $8$5 and $7$3 in the firstthird quarters of 2023 and 2022, respectively. For the first three quarters of 2023 and 2022, the Company had combined undistributed and distributed earnings to participating securities of $12 and $16, respectively.
The Company had options outstanding for approximately 3 million shares and 12 million shares during the firstthird quarters of 2023 and 2022, 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 3 million and 2 million shares during each of the first three quarters of 2023 and 2022, 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.
1011
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 quarterthree quarters of 2023, the Company opened one additional Kroger Delivery customer fulfillment center in 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 quarterthree quarters of 2023, the Company recorded finance lease assets of $139$148 and finance lease liabilities of $129$130 related to the Company’s agreement with Ocado. As of May 20,November 4, 2023 and January 28, 2023, the Company had $1,012$963 and $928, respectively, of net finance lease assets included within “Property, plant and equipment, net” in the Company’s Consolidated Balance Sheets related to the Company's agreement with Ocado. As of May 20,November 4, 2023 and January 28, 2023, the Company had $9698 and $88, respectively, of current finance lease liabilities recorded within “Current portion of long-term debt including obligations under finance leases" and $859$816 and $785, respectively, of non-current finance lease liabilities recorded within “Long-term debt including obligations under finance leases.”leases” in the Company’s Consolidated Balance Sheets.
6. | COMMITMENTS AND CONTINGENCIES |
The Company continuously evaluates contingencies based upon the best available evidence.
The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.
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.
LitigationLitigation — 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.
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.
1112
At present,On September 8, 2023, the Company is namedannounced that it reached an agreement in a significant numberprinciple with plaintiffs to settle the majority 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 casesopioid claims that 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 pending developments in bellwether MDL cases, including someor could be brought against Kroger by states in which they operate, subdivisions, and Native American tribes. Along with the Company is named, which 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,execution of certain non-monetary conditions that remain under discussion, the Company has received requestsagreed to pay up to $1,200 to states and subdivisions and $36 to Native American tribes in funding for documentsabatement efforts, and information from government agencies regarding opioids. Theapproximately $177 to cover attorneys’ fees and costs. States, subdivisions, and the Native American tribes will have an opportunity to opt-in to participate in the settlement, and the Company haswill have full discretion to determine whether there is sufficient participation for the settlement to become effective. If all conditions are satisfied, the settlement would allow for the full resolution of all claims on behalf of participating states, subdivisions and will cooperate with these inquiries.Native American tribes and is not an admission of any wrongdoing or liability.
TheAs a result, the Company is vigorously defending these mattersconcluded that the agreement in principle for the settlement of opioid claims was probable, and believes that these cases are without merit. At this stagefor which the related loss was reasonably estimable. Accordingly, in the proceedings,second quarter of 2023, the Company recognized opioid settlement charges of $1,413, $1,113 net of tax, relating to the nationwide opioid settlement framework. This charge is unable to determineincluded in “Operating, general and administrative” in the probabilityCompany’s Consolidated Statement of the outcome of these matters or the range of reasonably possible loss, if any.Operations.
The agreement in principle described above includes payments of approximately $1,236 and $177, in equal installments over 11 years and 6 years, respectively. As of November 4, 2023, the Company recorded $142 and $1,271 of the estimated settlement liability in “Other current liabilities” and “Other long-term liabilities,” respectively, in the Company’s Consolidated Balance Sheets. The current portion of the estimated settlement liability is recorded in “Accrued expenses” and the long-term portion of the estimated settlement liability is recorded in “Other” within “Changes in operating assets and liabilities” in the Company’s Consolidated Statement of Cash Flows for the first three quarters of 2023.
Because of the conditions remaining to satisfy, the Company cannot predict if the agreement will become effective, and whether unfavorable developments may occur. The amount of the actual loss may differ materially from the accrual estimate recorded as of November 4, 2023.
In the first quarter of 2023, the Company recorded a charge of $62 million relating to a settlement of opioid litigation claims with the State of West Virginia. The agreed upon settlement framework resolves all opioid lawsuits and claims by the West Virginia Attorney General. Kroger continues
The foregoing settlements are not admissions of wrongdoing or liability by the Company and the Company will continue to vigorously defend against allany other claims and lawsuits relating to opioids.opioids that the settlements do not resolve.
Assignments — The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees is unable to fulfill its lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.
13
7. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table represents the changes in AOCI by component for the first three quarters of 2023 and 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 29, 2022 | | $ | (47) | | $ | (420) | | $ | (467) | | $ | (47) | | $ | (420) | | $ | (467) |
OCI before reclassifications(2) | | | 37 | | | 13 | |
| 50 | |||||||||
Amounts reclassified out of AOCI(3) | | | 2 | |
| — | |
| 2 | | | 6 | |
| (1) | |
| 5 |
Net current-period OCI | | | 2 | |
| — | |
| 2 | | | 43 | |
| 12 | |
| 55 |
Balance at May 21, 2022 | | $ | (45) | | $ | (420) | | $ | (465) | |||||||||
Balance at November 5, 2022 | | $ | (4) | | $ | (408) | | $ | (412) | |||||||||
| | | | | | | | | | | | | | | | | | |
Balance at January 28, 2023 | | $ | (129) | | $ | (503) | | $ | (632) | | $ | (129) | | $ | (503) | | $ | (632) |
OCI before reclassifications(2) | |
| 91 | |
| — | |
| 91 | |
| 317 | |
| — | |
| 317 |
Amounts reclassified out of AOCI(3) | |
| 1 | | | (4) | |
| (3) | |
| 4 | | | (10) | |
| (6) |
Net current-period OCI | |
| 92 | |
| (4) | |
| 88 | |
| 321 | |
| (10) | |
| 311 |
Balance at May 20, 2023 | | $ | (37) | | $ | (507) | | $ | (544) | |||||||||
Balance at November 4, 2023 | | $ | 192 | | $ | (513) | | $ | (321) |
(1) | All amounts are net of tax. |
(2) | Net of tax of |
(3) | Net of tax of $1 for cash flow hedging activities for the first three quarters of 2022. Net of tax of $2 for cash flow hedging activities and |
12
The following table represents the items reclassified out of AOCI and the related tax effects for the third quarter and first three quarters of 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | |
| | First Quarter Ended |
| | Third Quarter Ended | | Three Quarters Ended |
| ||||||||||||
|
| May 20, |
| May 21, |
|
| November 4, |
| November 5, |
| November 4, |
| November 5, |
| ||||||
| | 2023 | | 2022 | | | 2023 | | 2022 | | 2023 | | 2022 | | ||||||
Cash flow hedging activity items | | | | | | | | | | | | | | | | | | | | |
Amortization of gains and losses on cash flow hedging activities(1) | | $ | 2 | | $ | 3 | | | $ | 2 | | $ | 2 | | $ | 6 | | $ | 7 | |
Tax expense | |
| (1) | |
| (1) | | |
| (1) | |
| — | |
| (2) | |
| (1) | |
Net of tax | |
| 1 | |
| 2 | | |
| 1 | |
| 2 | |
| 4 | |
| 6 | |
| | | | | | | | | | | | | | | | | | | | |
Pension and postretirement defined benefit plan items | | | | | | | | | | | | | | | | | | | | |
Amortization of amounts included in net periodic pension cost(2) | |
| (5) |
|
| (1) | | |
| (4) | |
| — |
|
| (13) |
|
| (1) | |
Tax expense |
|
| 1 |
|
| 1 | |
|
| 1 |
|
| — |
|
| 3 |
|
| — | |
Net of tax |
|
| (4) |
|
| — | |
|
| (3) |
|
| — |
|
| (10) |
|
| (1) | |
Total reclassifications, net of tax |
| $ | (3) |
| $ | 2 | |
| $ | (2) |
| $ | 2 |
| $ | (6) |
| $ | 5 | |
(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). |
14
8. | INCOME TAXES |
The effective income tax rate was 22.9%23.9% for the firstthird quarter of 2023 and 18.0%24.0% for the third quarter of 2022. The effective income tax rate was 24.8% for the first quarterthree quarters of 2023 and 21.1% for the first three quarters of 2022. The effective income tax rate for the third quarters of 2023 and 2022 differed from the federal statutory rate due to the effect of state income taxes and certain nondeductible expenses, partially offset by the utilization of tax credits. The effective income tax rate for the first quarterthree quarters of 2023 differed from the federal statutory rate due to the effect of state income taxes, the nondeductible portion of opioid settlement charges and certain nondeductible expenses, partially offset by the utilization of tax credits and deductions.credits. The effective income tax rate for the first quarterthree quarters of 2022 differed from the federal statutory rate due to the utilizationeffect of tax creditsstate income taxes and deductions,certain nondeductible expenses, 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 deductionsbenefit from share-based payments.payments and the utilization of tax credits.
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, including the assumption of approximately $4,700 of Albertsons net debt.
13The per share cash purchase price of $34.10 payable to Albertsons shareholders in the merger would be reduced by an amount equal to $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. The adjusted per share cash purchase price is expected to be $27.25.
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 iswas 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. TheAs described in more detail below, on September 8, 2023, the Company and Albertsons announced that they entered into a comprehensive divestiture plan with C&S Wholesale Grocers, LLC (“C&S”). As a result of the comprehensive divestiture plan announced with C&S, the Company has exercised its right under the merger agreement to sell what would have agreedbeen the SpinCo business to work together to determine whichC&S. Consequently, the spin-off previously contemplated by the Company and Albertsons is no longer a requirement under the merger agreement and will no longer be pursued by the Company and Albertsons.
On September 8, 2023, the Company and Albertsons announced they entered into a definitive agreement with C&S for the sale of 413 stores, if any, would comprise SpinCo, as well as the pro forma capitalization of SpinCo.QFC, Mariano’s and Carrs brand names, the exclusive licensing rights to the Albertsons banner in Arizona, California, Colorado and Wyoming, eight distribution centers, two offices and certain other assets in connection with the proposed merger. The per share cash purchase price of $34.10 payable to Albertsons shareholders inIn addition, Kroger will divest the merger would be reduced by an amount equal to (i) $6.85, which isDebi Lilly Design, Primo Taglio, Open Nature, ReadyMeals and Waterfront Bistro private label brands. All fuel centers and pharmacies associated with 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) three times the four-wall adjusted EBITDA fordivested stores will remain with the stores contributed to SpinCo., 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. The Company and Albertsons continue to work to determine whether anyoperate. The stores will be contributeddivested by the Company following the closing of the proposed merger with Albertsons. The definitive purchase agreement has customary representations and warranties and covenants of a transaction of its type. The transaction is subject to SpinCo. The current adjusted per share cashfulfillment of customary closing conditions, including clearance by the Federal Trade Commission (“FTC”) and the completion of the proposed merger. C&S will pay the Company all-cash consideration of approximately $1,900, including customary adjustments. Prior to the closing, the Company may, in connection with securing FTC and other governmental clearance, require C&S to purchase price is expectedup to be $27.25, pending determination of any required adjustments for SpinCo.an additional 237 stores in certain geographies.
15
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 commitments with respect to the bridge term loan facility under the commitment letter will be reduced. Upfront fees with respect to the bridge term loan facility 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) senior unsecured term loans in an aggregate principal amount of $3,000 maturing on the third anniversary of the merger closing date and (2) senior unsecured term loans 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 the commitments under the Company’s $17,400 bridge facility commitment by $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 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.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,” “confidence,” “continue,” “could,” “deliver,” “drive,” “estimate,” “expect,” “future,” “goals,” “long-term,” “guidance,” “intended,” “maintain,” “may,” “model,” “opportunity,” “plan,” “positions,“position,” “program,” “reaffirm,” “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 |
● | 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 nationwide opioid litigation settlement, including our ability to finalize and effectuate the settlement, the scope and coverage of the ultimate settlement and the expected financial or other impacts that could result from the settlement; our proposed transaction with Albertsons announced in October 2022, including, among others, our ability to consummate the proposed transaction and related divestiture plan, including on the terms of the merger agreement and divestiture plan, on the anticipated timeline, and/or with the required regulatory approvals; COVID-19 pandemic related factors, risks and challenges; labor negotiations; potential work stoppages; changes in the unemployment rate; pressures in the labor market; changes in government-funded benefit programs; changes in the types and numbers of businesses that compete with us; pricing and promotional activities of existing and new competitors, |
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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 adjusted 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 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 food retail business, which is built on Kroger’s strategic assets: our stores, digital ecosystem, Our Brands and our data. These assets, when combined with our go-to-market strategy, deliver a compelling value proposition for our customers. We continue to buildare building long-term customer loyalty throughby differentiating in Fresh, Our Brands, Personalization and our seamless shopping experience to drive sustainable sales growth in our retail supermarket business, including fuel and health and wellness. As consumer spending tightens, we are deepening our commitment to deliver exceptional value to our customers through lower prices, personalized promotions and rewards. This, in turn, generates the data and traffic that enables our fast growing, high operating margin alternative profit businesses. We are evolving from primarily a 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 associates, greater value for our customers |
● | Expanding operating margin, through a balanced model where strategic price investments for our customers, investments in our associates’ wages and benefits and investments in technology that deliver a better associate and customer experience are offset by (i) our cost savings program, which has delivered $1 billion in cost savings annually for the past five fiscal years, (ii) improving our product mix, as we accelerate momentum with our Fresh and Our Brands initiatives, and (iii) growing our alternative profit businesses. |
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 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, 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.
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EXECUTIVE SUMMARY
We achieved solid financialOur third quarter and year-to-date results highlight the strength and strong free cash flow in the first quarterdiversity of 2023, guided by the execution of our Leading with Fresh and Accelerating with Digital strategy. Our results demonstrate the durability of our businessKroger’s value creation model in a more challenged operating environment, as more customers are feeling the effects of inflationenvironment. By maintaining our long-term commitment to lower prices, personalized promotions and economic uncertainty. Werewards, we are growing customer households by providing fresh products at affordable prices with personalized rewards. Our associates 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 associates, customers and technology to drive our go-to-market strategy are fueling our growth including in Alternative Profit businesses.increasing loyalty, positioning Kroger for sustainable future growth.
Looking forward,Though our go-to-market strategy positions us well in a wide range of economic environments tooverall sales continue to deliver for our customers, invest in our associates and achieve sustainable and attractive returns for shareholders. The investmentsbe affected by industry-wide disinflation, we have made over recent years to deliver for our customers and strengthen our value creation flywheel give us the confidence to reaffirm our full-year identical sales without fuel anddelivered continued adjusted net earnings per diluted share guidance.growth during the third quarter of 2023. This was the result of continued momentum across several margin expansion initiatives, strong growth in health and wellness, fuel, and alternative profit businesses, and a lower year-over-year LIFO charge.
We expect the operating environment will remain challenged in the near term. The resiliency of Kroger’s model positions us well to operate successfully in many economic environments and is allowing us to navigate these near-term economic headwinds. We remain committed to balancing investments in associates and greater value for our customers while continuing to generate attractive and sustainable returns for our shareholders.
The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
| | | | | | | | | |
| | First Quarter Ended | | ||||||
| | May 20, |
| Percentage |
| May 21, | | ||
| | 2023 | | Change | | 2022 | | ||
Sales | | $ | 45,165 | | 1.3 | % | $ | 44,600 | |
Sales without fuel | | $ | 40,070 | | 3.5 | % | $ | 38,711 | |
Net earnings attributable to The Kroger Co. | | $ | 962 | | 44.9 | % | $ | 664 | |
Adjusted net earnings attributable to The Kroger Co. | | $ | 1,104 | | 2.8 | % | $ | 1,074 | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 1.32 | | 46.7 | % | $ | 0.90 | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 1.51 | | 4.1 | % | $ | 1.45 | |
Operating profit | | $ | 1,470 | | (2.3) | % | $ | 1,505 | |
Adjusted FIFO operating profit | | $ | 1,669 | | 4.2 | % | $ | 1,601 | |
Dividends paid | | $ | 188 | | 22.1 | % | $ | 154 | |
Dividends paid per common share | | $ | 0.26 | | 23.8 | % | $ | 0.21 | |
Identical sales excluding fuel | | | 3.5 | % | N/A | | | 4.1 | % |
FIFO gross margin rate, excluding fuel, bps increase (decrease) | | | 0.21 | | N/A | | | (0.26) | |
OG&A rate, excluding fuel and Adjusted Items, bps increase (decrease) | | | 0.14 | | N/A | | | (0.46) | |
Increase in total debt, including obligations under finance leases compared to prior fiscal year end | | $ | 55 | | N/A | | $ | 275 | |
Share repurchases | | $ | 29 | | N/A | | $ | 665 | |
| | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | | Three Quarters Ended | | ||||||||||||
| | November 4, |
| Percentage |
| November 5, | | | November 4, |
| Percentage |
| November 5, | | ||||
| | 2023 | | Change | | 2022 | | | 2023 | | Change | | 2022 | | ||||
Sales | | $ | 33,957 | | (0.7) | % | $ | 34,198 | | | $ | 112,975 | | (0.4) | % | $ | 113,436 | |
Sales without fuel | | $ | 29,852 | | (0.5) | % | $ | 30,014 | | | $ | 99,821 | | 1.5 | % | $ | 98,301 | |
Net earnings attributable to The Kroger Co. | | $ | 646 | | 62.3 | % | $ | 398 | | | $ | 1,428 | | (20.4) | % | $ | 1,793 | |
Adjusted net earnings attributable to The Kroger Co. | | $ | 698 | | 8.6 | % | $ | 643 | | | $ | 2,500 | | 5.1 | % | $ | 2,379 | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.88 | | 60.0 | % | $ | 0.55 | | | $ | 1.95 | | (20.1) | % | $ | 2.44 | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.95 | | 8.0 | % | $ | 0.88 | | | $ | 3.42 | | 5.6 | % | $ | 3.24 | |
Operating profit | | $ | 912 | | 8.4 | % | $ | 841 | | | $ | 1,902 | | (42.4) | % | $ | 3,300 | |
Adjusted FIFO operating profit | | $ | 1,022 | | (6.6) | % | $ | 1,094 | | | $ | 3,680 | | (3.3) | % | $ | 3,805 | |
Dividends paid | | $ | 210 | | 12.3 | % | $ | 187 | | | $ | 586 | | 18.6 | % | $ | 494 | |
Dividends paid per common share | | $ | 0.29 | | 11.5 | % | $ | 0.26 | | | $ | 0.81 | | 19.1 | % | $ | 0.68 | |
Identical sales excluding fuel(1) | | | (0.6) | % | N/A | | | 6.9 | % | | | 1.5 | % | N/A | | | 5.4 | % |
FIFO gross margin rate, excluding fuel, bps increase (decrease)(1) | | | 0.03 | | N/A | | | (0.05) | | | | 0.20 | | N/A | | | (0.12) | |
OG&A rate, excluding fuel and Adjusted Items, bps increase (decrease)(1) | | | 0.32 | | N/A | | | (0.03) | | | | 0.15 | | N/A | | | (0.08) | |
Decrease in total debt, including obligations under finance leases compared to prior fiscal year end | | $ | (615) | | N/A | | $ | (134) | | | $ | (615) | | N/A | | $ | (134) | |
Share repurchases | | $ | 7 | | N/A | | $ | 10 | | | $ | 54 | | N/A | | $ | 985 | |
(1) | Identical sales without fuel would have grown 1.0% in the third quarter and 3.1% in the first three quarters of 2023 if not for the reduction in pharmacy sales from the previously communicated termination of our agreement with Express Scripts effective December 31, 2022. In the third quarter and first three quarters of 2023, the terminated agreement had a positive effect on the FIFO gross margin rate, excluding fuel, and a negative effect on the OG&A rate, excluding fuel and the 2023 and 2022 Adjusted Items, as defined below. The overall net effect on adjusted FIFO operating profit was slightly positive. |
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OVERVIEW
Notable items for the third quarter and first quarterthree quarters of 2023 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 $912 million for the third quarter and $1.9 billion for the first three quarters. Results from the first three quarters of 2023 reflect charges of $1.5 billion |
● | Achieved adjusted FIFO operating profit of |
● |
● | Cash and temporary cash investments increased by |
● |
Other Financial Results
● |
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Significant Events
● | During the |
equal installments over 11 years, and $177 million in equal installments over 6 years. During the first quarter of 2023, we recognized |
● | On September 8, 2023, Kroger and |
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 quarterthree quarters of 2023 include the following, which we define as the “2023 Adjusted Items”:
● | Charges to operating, general and administrative expenses (“OG&A”) of |
● | A gain in other income (expense) of $317 million, |
21
Net earnings for the third quarter of 2023 include the following, which we define as the “2023 Third Quarter Adjusted Items”:
● | Charges to OG&A of $84 million, $73 million net of tax, for merger related costs (the “2023 Third Quarter OG&A Adjusted Item”). |
● | A gain in other income (expense) of $27 million, $21 million net of tax, for the unrealized gain on investments (the “2023 Third Quarter Other Income (Expense) Adjusted Item”). |
Net earnings for the first three quarters of 2022 include the following, which we define as the “2022 Adjusted Items”:
● | Charges to OG&A of $19 million, $15 million net of tax, for merger related costs, $85 million, $67 million net of tax, for opioid settlement charges and $18 million, $14 million net of tax, for the revaluation of Home Chef contingent consideration (the “2022 OG&A Adjusted Items”). |
● | Losses in other income (expense) of |
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Net earnings for the firstthird quarter of 2022 include the following, which we define as the “2022 Third Quarter Adjusted Items”:
● | Charges to OG&A of |
● | Losses in other income (expense) of |
Please refer to the “Net Earnings per Diluted Share excluding the Adjusted Items” table below for reconciliations of certain non-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the most comparable GAAP financial measures and related disclosure.
2022
The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, excluding the 2023 and 2022 Adjusted Items:
Net Earnings per Diluted Share excluding the Adjusted Items
($ in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter Ended | | | Third Quarter Ended | | Three Quarters Ended |
| ||||||||||||||||||
|
| May 20, |
| May 21, |
| Percentage |
|
| November 4, |
| November 5, |
| Percentage |
| November 4, |
| November 5, |
| Percentage |
| ||||||
| | 2023 | | 2022 | | Change | | | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change |
| ||||||
Net earnings attributable to The Kroger Co. | | $ | 962 | | $ | 664 |
| | | | $ | 646 | | $ | 398 |
| | | $ | 1,428 | | $ | 1,793 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Income) expense adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustment for loss on investments(1)(2) | | | 59 | | 404 | | | | ||||||||||||||||||
Adjustment for (gain) loss on investments(1)(2) | | | (21) | | | 163 | | | | | (244) | | | 490 | | | | |||||||||
Adjustment for Home Chef contingent consideration(1)(3) | | | — | | 6 | | | | | | — | | | — | | | | | — | | | 14 | | | | |
Adjustment for merger related costs(1)(4) | | | 34 | | — | | | | | | 73 | | | 15 | | | | | 153 | | | 15 | | | | |
Adjustment for legal settlement costs(1)(5) | |
| 49 | |
| — | | | | |||||||||||||||||
Adjustment for opioid settlement charges(1)(5) | |
| — | |
| 67 | | | |
| 1,163 | | | 67 | | | | |||||||||
2023 and 2022 Adjusted Items | | | 142 | | | 410 | | | | | | 52 | | | 245 | | | | | 1,072 | | | 586 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 1,104 | | $ | 1,074 |
| 2.8 | % | | $ | 698 | | $ | 643 |
| 8.6 | % | $ | 2,500 | | $ | 2,379 |
| 5.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 1.32 | | $ | 0.90 |
| | | | $ | 0.88 | | $ | 0.55 |
| | | $ | 1.95 | | $ | 2.44 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Income) expense adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustment for loss on investments(6) | | | 0.08 | | 0.54 | | | | ||||||||||||||||||
Adjustment for (gain) loss on investments(6) | | | (0.03) | | | 0.22 | | | | | (0.34) | | | 0.67 | | | | |||||||||
Adjustment for Home Chef contingent consideration(6) | | | — | | 0.01 | | | | | | — | | | — | | | | | — | | | 0.02 | | | | |
Adjustment for merger related costs(6) | | | 0.05 | | — | | | | | | 0.10 | | | 0.02 | | | | | 0.21 | | | 0.02 | | | | |
Adjustment for legal settlement costs(6) | | | 0.06 | | | — | | | | |||||||||||||||||
Adjustment for opioid settlement charges(6) | | | — | | | 0.09 | | | | | 1.60 | | | 0.09 | | | | |||||||||
2023 and 2022 Adjusted Items | |
| 0.19 | |
| 0.55 | | | | |
| 0.07 | |
| 0.33 | | | |
| 1.47 | |
| 0.80 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 1.51 | | $ | 1.45 |
| 4.1 | % | | $ | 0.95 | | $ | 0.88 |
| 8.0 | % | $ | 3.42 | | $ | 3.24 |
| 5.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Average number of common shares used in diluted calculation | |
| 724 | |
| 733 | | | | |
| 725 | |
| 724 | | | |
| 725 | |
| 728 | | | |
(1) | The amounts presented represent the after-tax effect of each adjustment, which was calculated using discrete tax rates. |
(2) | The pre-tax |
(3) | The pre-tax adjustment for Home Chef contingent consideration was |
(4) | The pre-tax adjustment for merger related costs was |
(5) | The pre-tax adjustment for |
(6) | The amount presented represents the net earnings per diluted common share effect of each adjustment. |
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RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||
| | First Quarter Ended | | | Third Quarter Ended | | | Three Quarters Ended |
| |||||||||||||||||||||||||||
| | May 20, | | Percentage | | May 21, | | Percentage | | | November 4, | | Percentage | | November 5, | | Percentage | | | November 4, | | Percentage | | November 5, | | Percentage |
| |||||||||
|
| 2023 |
| Change(1) |
| 2022 |
| Change(2) |
|
| 2023 |
| Change(1) |
| 2022 |
| Change(2) |
| | 2023 |
| Change(3) |
| 2022 |
| Change(4) |
| |||||||||
Total sales to retail customers without fuel | | $ | 39,748 | | 3.4 | % | $ | 38,449 | | 3.9 | % | | $ | 29,580 | | (0.7) | % | $ | 29,777 | | 6.3 | % | | $ | 98,972 | | 1.4 | % | $ | 97,580 | | 5.0 | % | |||
Supermarket fuel sales | | | 5,095 | | (13.5) | % | | 5,889 | | 47.6 | % | | | 4,105 | | (1.9) | % | | 4,185 | | 14.9 | % | | | 13,154 | | (13.1) | % | | 15,134 | | 35.0 | % | |||
Other sales | | | 322 | | 22.9 | % | | 262 | | (8.4) | % | | | 272 | | 15.3 | % | | 236 | | 12.9 | % | | | 849 | | 17.6 | % | | 722 | | 0.6 | % | |||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |||
Total sales | | $ | 45,165 | | 1.3 | % | $ | 44,600 | | 8.0 | % | | $ | 33,957 | | (0.7) | % | $ | 34,198 | | 7.3 | % | | $ | 112,975 | | (0.4) | % | $ | 113,436 | | 8.2 | % |
(1) | This column represents the percentage change in the |
(2) | This column represents the percentage change in the |
(3) | This column represents the percentage change in the first three quarters of 2023, compared to the first three quarters of 2022. |
(4) | This column represents the percentage change in the first three quarters of 2022, compared to the first three quarters of 2021. |
(5) | Digital sales are included in the “Total sales to retail customers without fuel” line above. Digital sales include products ordered online and picked up at our stores and our Delivery and Ship solutions. Our Delivery solutions include orders delivered to customers from retail store locations, customer fulfillment centers powered by Ocado and orders placed through third-party platforms. Our Ship solutions primarily include online orders placed through our owned platforms that are dispatched using mail service or third-party courier. Digital sales increased |
Other sales primarily relate to external sales at food production plants, data analytic services and third-party media revenue. The |
Total sales increaseddecreased in the firstthird quarter of 2023, compared to the firstthird quarter of 2022, by 1.3%0.7%. The increasedecrease was primarily due to a reduction in both total sales to retail customers without fuel and supermarket fuel sales. Total sales, excluding fuel, decreased 0.5% in the third quarter of 2023, compared to the third quarter of 2022, which was primarily due to our identical sales decrease, excluding fuel, of 0.6%. Identical sales, excluding fuel, for the third quarter of 2023, compared to the third quarter of 2022, decreased primarily due to the termination of our agreement with Express Scripts and also reflects an increase from higher spend per item, partially offset by a reduction of the number of items in the basket. Identical sales, excluding fuel, would have grown 1.0% in the third quarter of 2023 if not for the approximately $473 million reduction in pharmacy sales from the previously communicated termination of our agreement with Express Scripts effective December 31, 2022. Total supermarket fuel sales decreased 1.9% in the third quarter of 2023, compared to the third quarter of 2022, primarily due to a decrease in the average retail fuel price of 1.8% and a decrease in fuel gallons sold of 0.1%, which was better than the average market decline in fuel gallons sold. The decrease in the average retail fuel price was caused by a decrease in the product cost of fuel.
24
Total sales decreased in the first three quarters of 2023, compared to the first three quarters of 2022, by 0.4%. The decrease was primarily due to the decrease in supermarket fuel sales, partially offset by an increase in total sales to retail customers without fuel, partially offset by a reduction in supermarket fuel sales.fuel. Total sales, excluding fuel, increased 3.5%1.6% in the first quarterthree quarters of 2023, compared to the first quarterthree quarters of 2022, which was primarily due to our identical sales increase, excluding fuel, of 3.5%1.5%. Identical sales, excluding fuel, for the first quarterthree quarters of 2023, compared to the first quarterthree quarters of 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 and the termination of our agreement with Express Scripts. Identical sales, excluding fuel, would have grown 5.0%3.1% in the first quarterthree quarters of 2023 if not for the approximately $575 million$1.5 billion reduction in pharmacy sales from the previously communicated termination of our agreement with Express Scripts effective December 31, 2022. Total supermarket fuel sales decreased 13.5%13.1% in the first quarterthree quarters of 2023, compared to the first quarterthree quarters of 2022, primarily due to a decrease in the average retail fuel price of 11.2%11.8% and a decrease in fuel gallons sold of 2.5%1.4%, which was consistent withbetter than the average market decline in fuel gallons sold. The decrease in the average retail fuel price was caused by a decrease 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, are summarized in the following table. We used the identical sales, excluding fuel, dollar figures presented below to calculate percentage changes for the third quarter and first quarterthree quarters of 2023.
Identical Sales
($ in millions)
| | | | | | | | | | | |
| | First Quarter Ended |
| ||||||||
| | May 20, | | Percentage | | May 21, | | Percentage |
| ||
|
| 2023 |
| Change(1) |
| 2022 |
| Change(2) |
| ||
Excluding Fuel |
| $ | 39,574 |
| 3.5 | % | $ | 38,235 |
| 4.1 | % |
| | | | | | | | | | | |
| | Third Quarter Ended |
| ||||||||
| | November 4, | | Percentage | | November 5, | | Percentage |
| ||
|
| 2023 |
| Change(1) |
| 2022 |
| Change(2) |
| ||
Excluding Fuel |
| $ | 29,482 |
| (0.6) | % | $ | 29,666 |
| 6.9 | % |
(1) | This column represents the percentage change in identical sales in the |
(2) | This column represents the percentage change in identical sales in the |
| | | | | | | | | | | |
| | Three Quarters Ended |
| ||||||||
| | November 4, | | Percentage | | November 5, | | Percentage |
| ||
|
| 2023 |
| Change(1) |
| 2022 |
| Change(2) |
| ||
Excluding Fuel |
| $ | 98,590 |
| 1.5 | % | $ | 97,139 |
| 5.4 | % |
(1) | This column represents the percentage change in identical sales in the first three quarters of 2023, compared to the first three quarters of 2022. |
(2) | This column represents the percentage change in identical sales in the first three quarters of 2022, compared to the first three quarters of 2021. |
25
Gross Margin, LIFO and FIFO Gross Margin
We define gross margin as sales minus merchandise costs, including advertising, warehousing, and transportation. Rent expense, depreciation and amortization expense, and interest expense are not included in gross margin.
Our gross margin rate, as a percentage of sales, was 22.33%22.03% for the firstthird quarter of 2023, compared to 21.63%21.37% for the firstthird quarter of 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 increase in rate in the firstthird quarter of 2023, compared to the firstthird quarter of 2022, resulted primarily from a decreased LIFO charge, an increase in our fuel gross margin, Our Brands performance, effective negotiations to achieve savings on the cost of products sold, lower transportation costs, as a percentage of sales, which haveand the effect of our terminated agreement with Express Scripts, partially offset by higher shrink and advertising costs, as a lowerpercentage of sales, and increased promotional price investments.
Our gross margin rate, as a percentage of sales, was 22.08% for the first three quarters of 2023, compared to 21.34% for the first three quarters of 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 increase in rate in the first three quarters of 2023, compared to the first three quarters of 2022, resulted primarily from a decreased LIFO charge, an increase in our fuel gross margin, Our Brands performance, our ability to effectively manage product cost inflation through strong sourcing practices, lower transportation costs, as a percentage of sales, and 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 LIFO charge was $99$29 million in the firstthird quarter of 2023, compared to $93$152 million in the firstthird quarter of 2022. Our LIFO charge was $131 million in the first three quarters of 2023, compared to $392 million in the first three quarters of 2022. Our decreased LIFO charge reflects our lower expected annualized product cost inflation for 2023.2023 compared to 2022.
Our FIFO gross margin rate, which excludes the LIFO charge, was 22.55%22.11% in the firstthird quarter of 2023, compared to 21.84%21.81% in the firstthird quarter of 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 increased 213 basis points in the firstthird quarter of 2023, compared to the firstthird quarter of 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. This increase resulted primarily from Our Brands performance, effective negotiations to achieve savings on the cost of products sold, lower transportation costs, as a percentage of sales, and the effect of our terminated agreement with Express Scripts, partially offset by higher shrink and advertising costs, as a percentage of sales, and increased promotional price investments.
Our FIFO gross margin rate, which excludes the LIFO charge, was 22.19% in the first three quarters of 2023, compared to 21.68% in the first three quarters of 2022. Excluding the effect of fuel, our FIFO gross margin rate increased 20 basis points in the first three quarters of 2023, compared to the first three quarters of 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. This increase resulted primarily from Our Brands performance, our ability to effectively manage product cost inflation through strong sourcing practices, lower transportation costs, as a percentage of sales, and the effect of our terminated agreement with Express Scripts, partially offset by higher shrink, as a percentage of sales, and increased promotional price investments.
2326
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utilities and credit card fees. Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.
OG&A expenses, as a percentage of sales, were 16.37%16.63% in the firstthird quarter of 2023 and 15.69%16.34% in the firstthird quarter of 2022. The increase in the firstthird quarter of 2023, compared to the firstthird quarter of 2022, resulted primarily from planned investment in associates, costs related to strategic investments that are expected to drive future growth, the effect of decreased fuel sales, which increases our terminated agreement with Express Scripts, increased healthcare costs, and the 2023 Third Quarter OG&A rate,Adjusted Item, partially offset by the 2022 Third Quarter OG&A Adjusted Items, broad-based cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions and lower incentive plan costs.
OG&A expenses, as a percentage of sales, were 17.68% in the first three quarters of 2023 and 15.87% in the first three quarters of 2022. The increase in the first three quarters of 2023, compared to the first three quarters of 2022, resulted primarily from planned investmentsinvestment in associates, the effect of our terminated agreement with Express Scripts, costs related to strategic investments in various margin expansion initiatives that willare expected to drive future growth and the 2023 OG&A Adjusted Items, partially offset by the effect of supermarket sales leverage, which decreases our OG&A rate, as a percentage of sales, the 2022 OG&A Adjusted Items, and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions.reductions and lower incentive plan costs.
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 2023 Third Quarter OG&A Adjusted Item and the 2022 Third Quarter OG&A Adjusted Items, our OG&A rate increased 32 basis points in the third quarter of 2023, compared to the third quarter of 2022. This increase resulted primarily from planned investments in associates, costs related to strategic investments that are expected to drive future growth, the effect of our terminated agreement with Express Scripts and increased healthcare costs, partially offset by broad-based cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions and lower incentive plan costs.
Excluding the effect of fuel, the 2023 OG&A Adjusted Items and the 2022 OG&A Adjusted Items, our OG&A rate increased 1415 basis points in the first quarterthree quarters of 2023, compared to the first quarterthree quarters of 2022. This increase 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 willare expected to drive future growth, partially offset by the effect of supermarket sales leverage, which decreases our OG&A rate, as a percentage of sales, and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions.reductions and lower incentive plan costs.
Rent Expense
Rent expense remained relatively consistent, as a percentage of sales, for the third quarter and the first quarterthree quarters of 2023, compared to the first quartersame periods of 2022.
Depreciation and Amortization Expense
Depreciation and amortization expense increased, as a percentage of sales, in the third quarter and first quarterthree quarters of 2023, compared to the first quartersame periods of 2022. This increase was primarily due to depreciation of equipment recorded under finance leases related to our Kroger Delivery customer fulfillment center location openings, additional depreciation onassociated with higher capital investments excluding mergers and lease buyouts, of $3.5 billion during the rolling four quarter period ending with the firstthird quarter of 2023 and a decrease in the average useful life on these capital investments.
27
Operating Profit and FIFO Operating Profit
Operating profit was $1.5 billion,$912 million, or 3.3%2.7% of sales, for the firstthird quarter of 2023, compared to $1.5 billion,$841 million, or 3.4%2.5% of sales, for the firstthird quarter of 2022. Operating profit, as a percentage of sales, decreased 12increased 22 basis points in the firstthird quarter of 2023, compared to the third quarter of 2022, due to a higher FIFO gross margin rate, a decreased LIFO charge and an increase in fuel operating profit, partially offset by increased OG&A and depreciation and amortization expenses, as a percentage of sales.
Operating profit was $1.9 billion, or 1.7% of sales, for the first three quarters of 2023, compared to $3.3 billion, or 2.9% of sales, for the first three quarters of 2022. Operating profit, as a percentage of sales, decreased 123 basis points in the first three quarters of 2023, compared to the first three quarters of 2022, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, and a decrease in fuel operating profit, partially offset by a higher FIFO gross margin rate and a decreased LIFO charge.
FIFO operating profit was $941 million, or 2.8% of sales, for the third quarter of 2023, compared to $993 million, or 2.9% of sales, for the third quarter of 2022. FIFO operating profit, as a percentage of sales, excluding the 2023 and 2022 Third Quarter Adjusted Items, decreased 20 basis points in the third quarter of 2023, compared to the third 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 ourrate and an increase in fuel operating profit growth for the first quarter of 2023, compared to the first quarter of 2022.profit.
FIFO operating profit was $1.6$2.0 billion, or 3.5%1.8% of sales, for the first quarterthree quarters of 2023, compared to $1.6$3.7 billion, or 3.6%3.3% of sales, for the first quarterthree quarters of 2022. FIFO operating profit, as a percentage of sales, excluding the 2023 and 2022 Adjusted Items, increaseddecreased 10 basis points in the first quarterthree quarters of 2023, compared to the first quarterthree quarters of 2022, due to a higher FIFO gross margin rate, partially offset by increased OG&A and depreciation and amortization expenses, as a percentage of sales. Fuel earnings contributed to our FIFOsales, and a decrease in fuel operating profit, growth for the first quarter of 2023, compared to the first quarter of 2022.partially offset by a higher FIFO gross margin rate.
Specific factors contributing to the trends driving operating profit and FIFO operating profit identified above are discussed earlier in this section.
24
The following table provides a reconciliation of operating profit to FIFO operating profit, and to Adjusted FIFO operating profit, excluding the 2023 and 2022 Adjusted Items:
Operating Profit excluding the Adjusted Items
($ in millions)
| | | | | | | | | | | | | | | | | | |
| | First Quarter Ended | | Third Quarter Ended | | Three Quarters Ended | ||||||||||||
| | May 20, | | May 21, | | November 4, | | November 5, | | November 4, | | November 5, | ||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Operating profit | | $ | 1,470 | | $ | 1,505 | | $ | 912 | | $ | 841 | | $ | 1,902 | | $ | 3,300 |
LIFO charge | | | 99 | | | 93 | | | 29 | | | 152 | | | 131 | | | 392 |
| |
| | | | | |
| | | | | |
| | | | |
FIFO Operating profit | |
| 1,569 | |
| 1,598 | |
| 941 | |
| 993 | |
| 2,033 | |
| 3,692 |
| | | | | | | | | | | | | | | | | | |
Adjustment for Home Chef contingent consideration | | | — | | | 7 | | | — | | | — | | | — | | | 18 |
Adjustment for merger related costs(1) | | | 40 | | | — | | | 84 | | | 19 | | | 178 | | | 19 |
Adjustment for legal settlement costs | | | 62 | | | — | ||||||||||||
Adjustment for opioid settlement charges(2) | | | — | | | 85 | | | 1,475 | | | 85 | ||||||
Other | | | (2) | | | (4) | | | (3) | | | (3) | | | (6) | | | (9) |
| | | | | | | | | | | | | | | | | | |
2023 and 2022 Adjusted items | | | 100 | | | 3 | | | 81 | | | 101 | | | 1,647 | | | 113 |
| | | | | | | | | | | | | | | | | | |
Adjusted FIFO operating profit excluding the adjusted items above | | $ | 1,669 | | $ | 1,601 | | $ | 1,022 | | $ | 1,094 | | $ | 3,680 | | $ | 3,805 |
(1) | Merger related costs primarily include third-party professional fees and the amortization of credit facility fees associated with the proposed merger with Albertsons. |
(2) | Opioid settlement charges include settlements with the nationwide opioid settlement framework and the States of West Virginia and New Mexico. |
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Interest Expense
Interest expense decreased for the third quarter and first quarterthree quarters of 2023, compared to the first quartersame periods of 2022. This decrease was primarily due to increased interest income earned on our cash and temporary cash investments due to rising interest rates and an increase in our investments balance in the third quarter and the first quarterthree quarters of 2023, compared to the first quartersame periods of 2022, and a decreased average total outstanding debt throughout 2023, compared to 2022.
Income Taxes
The effective income tax rate was 22.9% in23.9% for the firstthird quarter of 2023 and 18.0%24.0% for the third quarter of 2022. The effective income tax rate was 24.8% for the first quarterthree quarters of 2023 and 21.1% for the first three quarters of 2022. The effective income tax rate for the third quarters of 2023 and 2022 differed from the federal statutory rate due to the effect of state income taxes and certain nondeductible expenses, partially offset by the utilization of tax credits. The effective income tax rate for the first quarterthree quarters of 2023 differed from the federal statutory rate due to the effect of state income taxes, the nondeductible portion of opioid settlement charges and certain nondeductible expenses, partially offset by the utilization of tax credits and deductions.credits. The effective income tax rate for the first quarterthree quarters of 2022 differed from the federal statutory rate due to the utilizationeffect of tax creditsstate income taxes and deductions,certain nondeductible expenses, 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 deductionsbenefit from share-based payments.payments and the utilization of tax credits.
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 $1.32$0.88 per diluted share for the firstthird quarter of 2023 represented an increase of 47%60% compared to net earnings of $0.90$0.55 per diluted share for the firstthird quarter of 2022. Adjusted net earnings of $1.51$0.95 per diluted share for the firstthird quarter of 2023 represented an increase of 4%8% compared to adjusted net earnings of $1.45$0.88 per diluted share for the firstthird quarter of 2022. The increase in adjusted net earnings per diluted share resulted primarily from increased FIFO operating profit, excluding fuel,a decreased LIFO charge, lower interest expense and increased fuel earnings, partially offset by decreased FIFO operating profit, excluding fuel and higher income tax expense.
Net earnings of $1.95 per diluted share for the first three quarters of 2023 represented a decrease of 20% compared to net earnings of $2.44 per diluted share for the first three quarters of 2022. Adjusted net earnings of $3.42 per diluted share for the first three quarters of 2023 represented an increase of 6% compared to adjusted net earnings of $3.24 per diluted share for the first three quarters of 2022. The increase in adjusted net earnings per diluted share resulted primarily from a decreased LIFO charge and lower interest expense, partially offset by decreased fuel earnings, higher income tax expense and decreased FIFO operating profit, excluding fuel.
2529
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
The following table summarizes our net increase (decrease) in cash and temporary cash investments for the first three quarters of 2023 and 2022:
| | | | | | |
|
| First Quarter Ended | ||||
| | May 20, | | May 21, | ||
| | 2023 |
| 2022 | ||
Net cash provided by (used in) | | | | | | |
Operating activities | | $ | 2,860 | | $ | 1,102 |
Investing activities | | | (947) | | | (723) |
Financing activities | | | (296) | | | (818) |
Net increase (decrease) in cash and temporary cash investments | | $ | 1,617 | | $ | (439) |
| | | | | | |
|
| Three Quarters Ended | ||||
| | November 4, | | November 5, | ||
| | 2023 |
| 2022 | ||
Net cash provided by (used in) | | | | | | |
Operating activities | | $ | 4,868 | | $ | 3,338 |
Investing activities | | | (2,745) | | | (2,192) |
Financing activities | | | (1,413) | | | (2,051) |
Net increase (decrease) in cash and temporary cash investments | | $ | 710 | | $ | (905) |
Net cash provided by operating activities
We generated $2.9$4.9 billion of cash from operations in the first quarterthree quarters of 2023 compared to $1.1$3.3 billion in the first quarterthree quarters of 2022. Net earnings including noncontrolling interests, adjusted for non-cash items, generated approximately $2.4$4.1 billion of operating cash flow in both the first three quarters of 2023 andcompared to $5.6 billion in the first three quarters of 2022. Cash provided (used) by operating activities for changesThe change in operating assets and liabilities, including working capital, was $502$818 million in the first quarterthree quarters of 2023 compared to ($1.3)$(2.3) billion in the first quarterthree quarters of 2022. The increase in cash provided by operating activities for changeschange in operating assets and liabilities, including working capital, was primarily due to the following:
● |
Cash flows for FIFO inventory were more favorable |
An increase in |
● |
o | a decrease in accrued incentive plan costs; and |
Cash paid for taxes decreased in the first quarter of 2023, compared to the first quarter of 2022, primarily due to applying our outstanding income tax receivable to reduce our estimated tax payments for the first quarter of 2023.
o | a decrease in our commitments due to the UFCW International Union-Industry Pension Fund (“National Fund”) as a result of the final contractual payment related to the multi-employer pension plan withdrawal liability charge we incurred in 2020. |
Net cash used by investing activities
Investing activities used cash of $947 million$2.7 billion in the first quarterthree quarters of 2023 compared to $723 million$2.2 billion in the first quarterthree quarters of 2022. The amount of cash used by investing activities increased in the first quarterthree quarters of 2023, compared to the first quarterthree quarters of 2022, primarily due to increased payments for property and equipment, partially offset by increased proceeds from the sale of assets.equipment.
2630
Net cash used by financing activities
We used $296 million$1.4 billion of cash for financing activities in the first quarterthree quarters of 2023 compared to $818 million$2.1 billion in the first quarterthree quarters of 2022. The amount of cash used for financing activities decreased in the first quarterthree quarters of 2023 compared to the first quarterthree quarters of 2022, primarily due to the following:decreased treasury stock purchases, partially offset by increased payments on long-term debt including obligations under finance leases.
Capital Investments
Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $1.1 billion$715 million for the firstthird quarter of 2023 compared to $971$698 million for the third quarter of 2022. Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $2.5 billion for the first quarterthree quarters of 2023 compared to $2.2 billion for the first three quarters of 2022. During the rolling four quarter period ended with the firstthird quarter of 2023, we opened, expanded, relocated or acquired 11 supermarkets and also completed 117133 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 firstthird quarter of 2023 remained consistent with the end of the firstthird quarter of 2022. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the firstthird quarter of 2023 increased 0.3%0.2% over the end of the firstthird quarter of 2022.
Debt Management
As of May 20,November 4, 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 May 20,November 4, 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 $1$2 million as of May 20,November 4, 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 commitments 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) senior unsecured term loans in an aggregate principal amount of $3.0 billion maturing on the third anniversary of the proposed merger closing date and (2) senior unsecured term loans 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 reduced the commitments under our bridge facility commitment letter from $17.4 billion to $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 May 20,November 4, 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.
31
Total debt, including both the current and long-term portions of obligations under finance leases, increased $55decreased $615 million as of May 20,November 4, 2023, compared to our fiscal year end 2022 debt of $13.4 billion. This increasedecrease resulted primarily from a net increase in obligations under finance leasesthe payment of $59$600 million which was primarily related to our one additional Kroger Delivery customer fulfillment center openingof senior notes bearing an interest rate of 3.85% during the firstsecond quarter of 2023.
27
Common Share Repurchase Programs
During the firstthird quarter of 2023, we invested $29$7 million to repurchase six hundred and two thousandapproximately 0.2 million Kroger common shares at an average price of $47.68$45.37 per share. For the first three quarters of 2023, we invested $54 million to repurchase approximately 1.2 million Kroger common shares at an average price of $47.19 per share. The shares repurchased in the third quarter and first quarterthree quarters of 2023 were reacquired under a share repurchase program that uses the cashannounced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, under which repurchases are limited to proceeds received from the exercises of stock options by participants in Kroger’s stock option, long-term incentive plans and the tax benefits associated tax benefits.therewith (“1999 Repurchase Program”).
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 Exchange Act (the “September 2022 Repurchase Program”). No shares have been repurchased under the September 2022 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 $2.6$1.7 billion as of the end of May 20,November 4, 2023, which reflects our elevated operating performance over the last few years.years and paused share repurchase program. 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 Board approval, as well as share repurchase programs and we will evaluate the optimal use of any excess free cash flow, consistent with our capital allocation strategy.
We expect to meet our short-term and long-term liquidity needs with cash and temporary cash investments on hand as of May 20,November 4, 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, scheduled opioid settlement payments and other purchase obligations. We may also require additional capital in the future to fund organic growth opportunities, additional customer fulfillment 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. 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 quarterthree quarters of 2023, see Note 2 to the Consolidated Financial Statements.
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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 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 28, 2023.
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 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 May 20,November 4, 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. In 2022, a new payroll 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,November 4, 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.
There were no changes in Kroger’s internal control over financial reporting that materially affected, or were reasonably likely to materially affect, Kroger’s internal control over financial reporting during the quarter ended May 20,November 4, 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 6 – “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 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Approximate |
| | | | | | | | | Approximate |
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| | | | | | | | | Dollar Value of |
| | | | | | | | | Dollar Value of |
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| | | | | | | | | Shares that May |
| | | | | | | | | Shares that May |
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| | | | | | | Total Number of | | Yet Be |
| | | | | | | Total Number of | | Yet Be |
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| | | | | | | Shares Purchased | | Purchased |
| | | | | | | Shares Purchased | | Purchased |
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| | 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) |
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Period(1) |
| Purchased(2) |
| Share(2) |
| or Programs(3) |
| (in millions) |
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| Purchased(2) |
| Share(2) |
| or Programs(3) |
| (in millions) |
| ||||
First four weeks | | | | | | | | | | | | | | | | | | | | | | |
January 29, 2023 to February 25, 2023 |
| 41,900 |
| $ | 44.43 |
| 41,900 |
| $ | 1,000 | | |||||||||||
August 13, 2023 to September 9, 2023 |
| 28,199 |
| $ | 48.02 |
| 27,700 |
| $ | 1,000 | | |||||||||||
Second four weeks | | | | | | | | | | | | | | | | | | | | | | |
February 26, 2023 to March 25, 2023 |
| 1,087,917 |
| $ | 47.19 |
| 214,200 |
| $ | 1,000 | | |||||||||||
September 10, 2023 to October 7, 2023 |
| 85,843 |
| $ | 45.90 |
| 55,200 |
| $ | 1,000 | | |||||||||||
Third four weeks | | | | | | | | | | | | | | | | | | | | | | |
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 | | |||||||||||
October 8, 2023 to November 4, 2023 |
| 83,122 |
| $ | 44.34 |
| 82,100 |
| $ | 1,000 | | |||||||||||
Total |
| 1,475,817 |
| $ | 47.39 |
| 602,100 |
| $ | 1,000 | |
| 197,164 |
| $ | 45.55 |
| 165,000 |
| $ | 1,000 | |
(1) | The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The |
(2) | Includes (i) shares repurchased under a program announced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, under which repurchases are limited to proceeds received from exercises of stock options and the tax benefits associated therewith (“1999 Repurchase Program”) and (ii) |
(3) | Represents shares repurchased under the 1999 Repurchase Program. |
(4) | 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”). The amounts shown in this column reflect the amount remaining under the September 2022 Repurchase Program as of the specified period end dates. Amounts available under the 1999 Repurchase Program are dependent upon option exercise activity. The September 2022 Repurchase Program and the 1999 Repurchase Program do not have an expiration date but may be suspended or terminated by our Board of Directors at any time. No shares have been repurchased under the September 2022 authorization. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons. |
Item 5. Other Information.
(c)
In the third quarter of 2023, no director or officer (as defined in Exchange Act Rule 16a-1(f)) of the Company adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement for the purchase or sale of securities of the Company, within the meaning of Item 408 of Regulation S-K.
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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 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. |
*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. | |
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Dated: | By: | /s/ W. Rodney McMullen |
| | W. Rodney McMullen |
| | Chairman of the Board and Chief Executive Officer |
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Dated: | By: | /s/ Gary Millerchip |
| | Gary Millerchip |
| | Senior Vice President and Chief Financial Officer |
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