UNITED STATES
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant 🗹 Filed by a Party other than the Registrant ☐
Check the appropriate box:
☐ | Preliminary Proxy Statement |
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
🗹 | Definitive Proxy Statement |
☐ | Definitive Additional Materials |
☐ | Soliciting Material |
THE KROGER CO.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
🗹 | No fee required. |
☐ | Fee computed on table |
Dear Fellow Shareholders,
One of the things I love about food retail is that customers are always evolving. As tastes and needs continually shift, accommodating those shifts with agility earn us the privilege of continuing to serve our customers. This is what makes our industry so exciting.
The ways customers shop for food is ever evolving and always changing. Customers used to shop once a week, checking off items from handwritten lists. Today, our customers manage their groceries with a mix of in-person and online shopping, rely on digital technologies to make lists and track spending, and shop for more ready-made meal solutions. Outside our stores, we know customers spend approximately half of their food budgets at restaurants.
What hasn’t changed is our passion to deliver fresh, affordable food to the communities we serve and inspire our customers to discover their love for food. Our business model is built around offering fresh products at competitive prices with no compromise on quality, selection, and convenience. This is a time-tested approach in any operating environment, and we remain committed to it into the future. Every day, we provide our customers with lower prices on the foods they love and more choices to meet their needs and wants.
Our passion for our customers, associates and communities is also on display in our willingness to take on difficult challenges and see them through. We see it in the way our store and supply chain teams respond to natural disasters, always the first to help our communities. We see it in the way our associates worked with the White House, governors, and mayors to ensure America had access to fresh, affordable food during the pandemic. And we see it in our willingness to address one of our food systems most intractable challenges – that more than 40% of the food produced goes to waste each year while one in eight Americans struggle with hunger – through our Zero Hunger | Zero Waste impact plan.
Kroger has the fortitude to take on these challenges because we know that when we take care of our customers, associates and communities, our shareholders will benefit.
We continue delivering value for our shareholders. On a three-year basis, Kroger’s adjusted net earnings per diluted share has grown at a compounded annual growth rate of 24.5% which has helped support a total shareholder return of 78.2% over the same period.
This incredible outcome is the result of our dedicated and thriving associates delivering a full, fresh and friendly experience for more than 11 million customers every day. It’s no wonder Kroger was recently included in a list of America’s Most Trustworthy Companies. From our manufacturing facilities and fulfillment centers to our store and office teams, we appreciate everything our associates do to embody Our Purpose: To Feed the Human Spirit.
Our associates are driving consistent execution of our go-to-market strategy in every interaction, everyday positioning the company for sustainable, long-term growth.
Kroger is building momentum and has the people, the plan, and the operational discipline to win today and in the future.
* * *
Update on proposed merger with Albertsons Co.
In October 2022, we announced our definitive merger agreement with Albertsons Companies, Inc. We are incredibly impressed with the Albertsons team and their commitment to their associates, culture, customers, and communities.
Lower prices. More Choices.
We believe bringing our highly complementary organizations together will provide customers with lower prices and more choices. Our proposed merger will mean more value for our customers, with lower prices and more food choices to discover. And we will begin on day one post-close, with $500 million already committed to bringing down prices.
Empower our associates’ success
Our associates are responsible for our success, and we are committed to investing in theirs. The proposed combination will secure the long-term future of union jobs while creating a more competitive alternative to larger, non-union retailers. We have already committed $1 billion to continue raising associate wages and comprehensive, industry-leading benefits.
It is vital that we support our associates as they explore what their individual career paths will be. So many of our associates come to Kroger to experience their first job. In 2022, approximately 20% of our new hires were 18 years old or younger. It is amazing that Kroger introduces so many young people to a fulfilling career in the grocery industry. We demonstrate how our associates can choose from many different paths and how a foundation in amazing customer service supports associates’ long-term goals, no matter where associates choose to build their careers.
At Kroger, associates get to help families discover healthier answers to the question, “what’s for dinner tonight;” create technology that makes customers’ shopping trips simpler; make healthcare more accessible for their neighbors – and even dream up a job that has yet to be created. The career opportunities are truly endless.
Build healthier communities free of hunger
The proposed merger will also allow our organization to invest in our communities in ways we simply cannot do on our own. I am so proud of what we have accomplished in our Zero Hunger | Zero Waste work and am impressed by the Albertsons team’s commitment to supporting their communities as outlined in their Recipe for Change plan. We know that when families eat together, it supports their children’s success across all aspects of their lives. I cannot wait to see how our combined efforts will connect people with the meals they need to thrive.
We look forward to continue working cooperatively with regulators and remain on track for a projected closure of the merger in early 2024.
2022 in Review
As the pandemic continued to fade and inflation caused ongoing economic uncertainty, our associates showed up for our customers. Last year, Kroger associates did everything we could to minimize the impact of inflation and help stretch tight food budgets so families could access fresh, affordable food, with zero compromise on convenience or selection. Our Leading with Fresh and Accelerating with Digital strategy and key focus areas of Fresh, Our Brands, seamless and personalization give us the flexibility to navigate a changing operating environment – all while providing value to our customers and our associates. We will continue to consider a five- to ten-year time horizon as we make key decisions.
During the year, we:
● | Achieved positive identical sales without fuel of 5.6% |
● | Increased associate wages, resulting in an average hourly wage of $18 and rate of more than $23 with comprehensive benefits |
● | Exceeded $1 billion in cost savings for the fifth consecutive year |
● | Announced 14 additional Kroger Delivery locations across the U.S. |
The subsequent sections will highlight progress we made across our business in 2022 and ways we intend to continue building on our momentum moving forward.
Leading with Fresh
For us, Fresh for EveryoneTM is more than a brand promise. It’s a commitment to bringing fresh, affordable foods to more people in more neighborhoods. Fresh foods are central to families living healthy, thriving lives. And our customers prioritize fresh when they shop with Kroger – with more than more than 90% of customers purchasing fresh foods. Many companies claim they are focused on fresh – we have demonstrated success in creating fresher shopping experiences, and our customers are rewarding us for it.
In the last year, we continued to put our focus on fresh, both with our in-store and e-commerce experiences. The End-to-End Fresh initiative is at the center of how we are changing the way we bring fresh to life in our stores. Today, we have more than 1,400 stores implementing this initiative in their produce departments, driving higher produce and overall store sales. We look forward to exploring how we can expand this work in other fresh departments in 2023 and beyond.
We are also working closely with our technology and supply chain teams to understand ways we can add days of freshness to our products. From optimizing delivery routes to simplifying associate tasks, we want to ensure our customers can buy food at its peak of freshness and trust those items will remain fresh in their homes.
Freshness is also important when we think about innovation in Our Brands. In 2022, we launched a simplified opening-price-point brand known as Smart Way™. This new concept is easily identifiable for customers who want to stretch their budgets. It joins Kroger’s carefully curated, extensive Our Brands portfolio, which includes the company’s namesake Kroger brand, Simple Truth®, Private Selection®, Home Chef® and Heritage Farm®, among others.
In addition to the Smart Way brand introduction, we launched more than 680 new, unique Our Brands products last year. We engage with food trends throughout the year to understand what our customers are craving and ensure we have those items on our shelves. We aim to bring every customer the high-quality, affordable products they love – from pantry staples and fresh foods to ready-to-heat, restaurant-quality meals.
Accelerating with Digital
We continue to invest in our seamless ecosystem – bringing our customers the products they love when and where they want them. We see customers shift the ways they interact with us based on their individual needs, which aligns with our vision of a truly seamless shopping experience.
Our goal remains to be there for our customers – however they need us in a particular moment.
When it fits their day’s plans, customers may choose to shop in our stores. Sometimes, they find a Kroger Delivery order easier during a busy weekend. Or when nothing looks good in the refrigerator or the last paper towel comes off the roll, we’re here with Kroger Delivery Now, delivering in as little as 30 minutes. We remain well-positioned to achieve double-digit digital growth in the next three years.
Our brick-and-mortar stores and automated fulfillment centers work together to ensure our customers have access to the fresh foods and pantry staples they want when they need them most.
Our efforts to bring a truly personalized shopping experience to life are creating value for our customers. We serve the right promotions at the right time, directly to the customers who would be most interested in the offer. From providing suggestions to start a basket to offering a new item, we are providing customers real value. In 2022 alone, customers saved $1.4 billion through a combination of paper and digital coupons.
Last year, we also launched Boost by Kroger, the retail industry’s most-affordable membership program. We are already exceeding internal expectations in both incremental engagement and household spend. We look forward to evolving our membership program to appeal to more customers and create additional value.
The Accelerating with Digital piece of our strategy continues to drive our profit flywheel. We are improving margins by reducing digital cost-to-serve, all while growing our alternative profit streams.
Investing in Our Associates
Our associates are at the heart of everything we do. I am always impressed at the ways they create memorable food moments for our customers every day. I regularly think back to my time working in a Kroger store when I began my career more than 40 years ago. I learned how to run a successful store, how to create real community with my customers and coworkers, and how important our stores are to the neighborhoods they serve.
Kroger provides opportunities for people seeking their first job, a new beginning, or a new challenge to discover a fulfilling career path. And we continue to invest in our associates. Earlier this year we committed nearly $800 million to raise wages and benefits, create new training opportunities, and improve healthcare options in 2023.
This investment builds on our $1.9 billion in incremental investments in wages and comprehensive benefits Kroger has made since 2018. As a result, we raised our average hourly rate to $18, or $23.50 an hour with comprehensive benefits.
We understand we must support our associates’ holistic well-being. To accomplish this goal, Kroger creates programs that power our associates’ growth, including a world-class educational benefit program offering associates up to $21,000 toward continuing education opportunities – whatever that may mean to our associates. In 2022 alone, more than 5,000 people engaged with this program. We provide affordable, accessible healthcare options, which includes free counseling. Also in 2022, we introduced a first-of-its-kind free financial coaching services to all our hourly associates. We remain committed to helping our associates thrive in their careers and at home, ensuring Kroger remains an employer of choice.
Environmental Sustainability and Social Impact
Kroger is committed to responsible sourcing practices, respecting human rights, and advancing animal welfare. Our comprehensive programs hold our suppliers accountable to meet our high standards and support our continual improvement. We rely on deep knowledge from our category sourcing leaders, data insights and input from our investors, industry groups, NGOs, and subject-matter experts.
In 2022, we published our greenhouse gas (GHG) reduction goal roadmap. We are diligently working to reduce absolute Scope 1 and 2 GHG emissions from our operations by 30% by 2030 against a 2018 baseline. This goal was developed using climate science, supporting a well-below 2ºC climate scenario according to the absolute contraction method.
Kroger made considerable progress against our Framework for Action: Diversity, Equity & Inclusion plan. Launched in 2020, this action plan is accelerating change across the entire company. Since its introduction, we successfully provided unconscious bias training to all leaders and nearly half a million associates. We are working with 53 Historically Black Colleges and Universities, and institutions serving Hispanic, Asian American and Pacific Islander, and Native American students. And we are taking strong steps to achieve our goal of increasing our spend with diverse suppliers to $10 billion annually by 2030.
We are growing the many ways we participate in our communities – both big and small. In 2022, we celebrated the fifth anniversary of our Zero Hunger | Zero Waste impact plan. Since its inception, we directed more than $1.65 billion in food and funds to help end hunger, which includes more than 2.3 billion meals. We remain on track to donate 3 billion meals to our neighbors by 2025.
One accomplishment I am so proud of is our stores’ work to achieve 100% execution of our food rescue program in participating Kroger stores. Flawless execution is an ideal for which we always strive. It is inspirational to see the way our store teams embrace our mission of providing healthy food to their communities.
Looking to the Future
I am optimistic for what 2023 and beyond will mean for Kroger, our customers, our associates, and our communities. We are committed to providing the freshest food to our customers, with zero compromise on value, convenience, or selection. We are investing in the business to continuously optimize our approach to freshness – and our customers are taking notice. Our teams are always looking for new opportunities to bring fresh Our Brands items to our customers, both capitalizing on food trends and creating experiences that can only come from Kroger.
Customers continue to expect the convenience our digital experience offers. We are working toward innovative ways to ensure grocery shopping fits easily into our customers’ days – whether they are looking for a need-it-now item, a weekly stock-up shop, or the perfect ingredient to make a special meal more memorable. And we do more than make it convenient – we make the shopping experience personal. We know our customers, and we earn their trust daily by providing engaging offers on the foods they love.
And our amazing associates bring it all to life. In addition to creating a full, fresh, and friendly shopping experience for every customer, every time, our associates are committed to making their communities a better place to live. This year, we are recognizing 50 outstanding associates who raised significant funds for our Zero Hunger | Zero Waste Foundation. These dollars support our nonprofit partners across America who are working to create communities free from hunger and waste. Congratulations to each of these “Zero Heroes” for making measurable change for your neighbors.
I would like to thank our customers, associates, and shareholders for your ongoing support for Kroger. I look forward to everything we will do together in the year ahead.
With gratitude,
Rodney McMullen
Chairman and CEO, The Kroger Co.
Safe Harbor Statement
This letter contains “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995 about future performance of Kroger, including with respect to Kroger’s ability to achieve sustainable net earnings growth, strategic capital deployment, strong and attractive total shareholder return, strong free cash flow and ability to increase the dividend, ability to achieve certain operational goals, as well as ESG targets, goals, and commitments outlined in this proxy statement, or elsewhere among other statements. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. These statements are indicated by words such as “will,” “aim,” “model,” “driving,” “goal,” “plan,” “continue,” “on track,” “committed” and “believe,” as well as similar words or phrases. These statements are subject to known and unknown risks, uncertainties and other important factors that could cause actual results and outcomes to differ materially from those contained in the forward-looking statements, including the specific risk factors identified in “Risk Factors” in Kroger’s most recent Annual Report on Form 10-K and any subsequent filings with the Securities and Exchange Commission. Kroger assumes no obligation to update the information contained herein, unless required to do so by applicable law.
Zero Hunger | Zero Waste: Associate Fundraising Heroes
The Kroger Co. Zero Hunger | Zero Waste Foundation is a nonprofit public charity designed to help align philanthropy with the company’s Zero Hunger | Zero Waste social and environmental impact plan. We invite customers of the Kroger Family of Companies to join our journey by rounding up their purchase to the nearest dollar at checkout to benefit the Zero Hunger | Zero Waste Foundation.
Cashiers across the country are leading the way in activating donations through Round Up. Dollars raised are directed to nonprofit partners that help end hunger and waste in our communities. These are our 2022 Zero Heroes:
Atlanta Division Dianne Perkins Rachel Dickens Betalhem Tolla | Pat Sears | Dee Dee Hamby | ||
Central Division Jess Warburton Rebekah Lehman Sheri Fornter | ||||
Fry’s Division Melissa Horowitz Barbara Stockton | Linda Whitfield |
Cincinnati-Dayton Division Jen Tudor | Houston Division Mashuny Squierdo | Ralphs Division Marquett Valencia Debra Sutton Pedro Daniel | ||
Columbus Division Colleen Burrows | King Soopers Division Dan Cahill | Roundy’s Division Nancy Johnson | ||
Dallas Division Julie Olinick Tonja Buckley | Louisville Division Laury Shulhafer Robin Adams | QFC Division Amber Brask | ||
Delta Division Laura Sparks Mae Watson | Mariano’s Division Vikki Hornbaker | Smith’s Division | ||
Dillons Division Pam Meyer Joan Rogers | Michigan Division Tracey Regits | Food 4 Less Jimmy Hu Maricruz Chico Mayra Sanguino Rufina Kniefel | ||
Food 4 Less - MW Tamara Primm Rohel Terrazas |
Proxy Summary
This summary highlights information contained elsewhere in this Proxy Statement. It does not contain all of the information that you should consider. You should read the entire Proxy Statement carefully before voting.
Overview of Voting Matters and Board Recommendations
Proposals | Board Recommendation |
No. 1 – Election of Directors | FOR Each Director Nominee recommended by |
No. 2 Advisory Vote to Approve Executive Compensation | FOR |
No. 3 Advisory Vote on Frequency of Future Advisory Votes on Executive Compensation | ONE YEAR |
No. 4 Ratification of Independent Auditors | FOR |
Nos. 5 – 9 Shareholder Proposals | AGAINST Each Proposal |
Corporate Governance Highlights
Kroger is committed to strong corporate governance. We believe that strong governance builds trust and promotes the long-term interests of our shareholders. Highlights of our corporate governance practices include the following:
Board Governance Practices
✓ | Strong Board oversight of enterprise risk. |
✓ | Strong experienced independent Lead Director with clearly defined role and responsibilities. |
✓ | Commitment to Board refreshment and diversity. |
✓ | 5 of 11 director nominees are women. |
✓ | The chairs of the Audit, Finance, and Public Responsibilities Committees are women. |
✓ | Annual evaluation of the Chairman and CEO by the independent directors, led by the independent Lead Director. |
✓ | All director nominees are independent, except for the CEO. |
✓ | All five Board Committees are fully independent. |
✓ | Annual Board and Committee self-assessments conducted by independent Lead Director or an independent third party. |
✓ | Regular executive sessions of the independent directors, at the Board and Committee level. |
✓ | High degree of Board interaction with management to ensure successful oversight and succession planning. |
✓ | Balanced tenure. |
✓ | Robust shareholder engagement program. |
✓ | Robust code of ethics. |
Environmental, Social, & Governance (ESG) Practices
✓ | Long-standing Board Committee dedicated to ESG oversight — Public Responsibilities Committee — formed in 1977. |
o | Amended the Committee Charter in 2021 to more specifically reflect the Committee’s focused and prioritized approach to material ESG topics related to environmental issues, sustainability, and social impact |
✓ | Annual ESG report, sharing progress on our goals for Zero Hunger | Zero Waste, Just & Inclusive Economy, Food Waste, Operational Waste, Water, Packaging, Climate Impact, and Responsible Sourcing. |
o | The 2022 ESG report represented the 16th year of describing our progress and initiatives regarding sustainability and other ESG matters |
✓ | Committed to transparency in our disclosure, informed by frameworks consistent with shareholder expectations: |
o | SASB’s Food Retailers and Distributors Standard |
o | GRI Global Sustainability Reporting Standards |
o | Task Force on Climate-related Financial Disclosures (TCFD) framework |
✓ | Established formal Diversity, Equity & Inclusion (DE&I) Framework for Action to: |
o | Create a more inclusive culture |
o | Develop diverse talent |
o | Advance diverse partnerships |
o | Advance equitable communities |
o | Listen deeply and report progress |
✓ | Specifically include diverse candidates in every external executive officer and Board director search. |
✓ | Disclose EEO-1 data annually. |
Shareholder Rights
✓ | Annual director election. |
✓ | Simple majority standard for uncontested director elections and plurality in contested elections. |
✓ | No poison pill. |
✓ | Shareholders have the right to call a special meeting. |
✓ | Robust, long-standing shareholder engagement program with regular engagements, including with independent directors, to better understand shareholders’ perspectives and concerns on a broad array of topics, such as corporate governance and ESG matters. |
✓ | Adopted proxy access for director nominees, enabling a shareholder, or group of up to 20 shareholders, holding 3% of the Company’s common shares for at least three years to nominate candidates for the greater of two seats or 20% of Board nominees. |
Compensation Governance
✓ | Robust clawback and recoupment policy. |
✓ | Pay program tied to performance and business strategy. |
✓ | Majority of pay is long-term and at-risk with no guaranteed bonuses or salary increases. |
✓ | Stock ownership guidelines align executive and director interests with those of shareholders. |
✓ | Prohibition on all hedging, pledging, and short sales of Kroger securities by directors and executive officers. |
✓ | No tax gross-up payments to executives. |
Environmental, Social, & Governance Strategy
Kroger’s Environmental, Social & Governance Strategy is called Thriving Together. This strategy reflects the evolution of the Company’s long history of operating responsibly, advancing economic opportunity and sustainability in our own operations and supply chain, and giving back meaningfully to our communities.
Our ESG objective is to achieve positive and lasting change through a shared-value framework that benefits people and our planet and creates more resilient systems for the future. The centerpiece of Kroger’s ESG strategy is our Zero Hunger | Zero Waste social and environmental impact plan. Introduced five years ago, Zero Hunger | Zero Waste is an industry-leading platform for collective action and systems change at global, national, and local levels.
Our ESG strategy aims to address material topics of importance to our business and key stakeholders, including our associates, customers, shareholders, and others. Key ESG topics — informed by a structured materiality assessment and engagement with our shareholders and other stakeholders — align to three strategic pillars: People, Planet and Systems. Please see more details here in Kroger’s annual ESG Report: https://www.thekrogerco.com/wp-content/uploads/2022/08/Kroger-Co-2022-ESG-Report.pdf. The information on, or accessible through, this website is not part of, or incorporated by reference into, this proxy statement.
Director Nominee Highlights
2023 Director Nominee Snapshot
Diversity and Tenure
Skills and Experience
Key Attributes and Skills of All Kroger Director Nominees
● | Intellectual and analytical skills | ● | Business and professional achievements | |
● | High integrity and business ethics | ● | Ability to represent the interests of all shareholders | |
● | Strength of character and judgement | ● | Knowledge of corporate governance matters | |
● | Ability to devote significant time to Board duties | ● | Understanding of the advisory and proactive oversight responsibility of our Board | |
● | Desire and ability to continually build expertise in emerging areas of strategic focus for our Company | ● | Comprehension of their his or her as a public company director and the fiduciary duties owed to shareholders | |
● | Demonstrated focus on promoting equality | ● | Ability to work cooperatively with other members of the board |
Nora Aufreiter | Kevin Brown | Elaine Chao | Anne Gates | Karen Hoguet | Rodney McMullen | Clyde Moore | Ronald Sargent | Amanda Sourry | Mark Sutton | Ashok Vemuri | Total (of 11) | ||||||||||||||
Business Management | • | • | • | • | • | • | • | • | • | • | • | 11 | |||||||||||||
Retail | • | • | • | • | • | • | 6 | ||||||||||||||||||
Consumer | • | • | • | • | • | • | • | • | 8 | ||||||||||||||||
Financial Expertise | • | • | • | • | • | • | • | • | • | • | • | 11 | |||||||||||||
Risk Management | • | • | • | • | • | • | • | • | • | • | 10 | ||||||||||||||
Operations & Technology | • | • | • | • | • | • | • | • | • | • | 10 | ||||||||||||||
ESG | • | • | • | • | • | • | • | • | • | • | • | 11 | |||||||||||||
Manufacturing | • | • | • | • | 4 |
2022 Compensation Highlights
Executive Compensation Philosophy
Executive Summary
We delivered exceptional performance in 2022. Kroger achieved exceptional results in 2022 as we executed on our Leading with Fresh and Accelerating with Digital strategy, building on record years in 2020 and 2021. We are delivering a fresh, affordable, and seamless shopping experience for our customers, with zero compromise on quality, selection, or convenience. We are delivering on our financial commitments through our strong, resilient Value Creation Model. In 2022, we achieved financial performance results of ID sales, without fuel, of 5.6%, and adjusted FIFO operating profit, including fuel, of $5.1 billion1. | ||
Our executive compensation program aligns with long-term shareholder value creation. 91% of our CEO’s target total direct compensation and, on average, 84% of the other NEOs’ compensation is at risk and performance-based, tied to achievement of performance targets that are important to our shareholders or our long-term share price performance. | ||
The annual performance incentive was earned above target reflecting our 2022 performance. The annual incentive program, based on a grid of identical sales, excluding fuel, and adjusted FIFO operating profit, including fuel, paid out at 192.40% of target. In light of macroeconomic conditions, including inflation, as well as the Compensation Committee’s desire to create ongoing alignment with shareholders and reward sustained performance beyond 2022, the Compensation Committee determined to structure the payout to the NEOs as follows: 150% in cash and the remaining 42.4% in restricted stock vesting in one year. | ||
The long-term performance incentive payout reflects alignment with performance over fiscal years 2020, 2021, and 2022. Long-term performance unit equity awards granted in 2020 and tied to commitments made to our investors and other stakeholders regarding long-term sales growth, adjusted FIFO operating profit growth, free cash flow generation, our commitment to Fresh, and Relative Total Shareholder Return were earned at 93.75% of target. |
1 See pages 27 – 33 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, filed with the SEC on March 28, 2023, for a reconciliation of GAAP operating profit to adjusted FIFO operating profit.
We prioritized investment in our people. We strive to create a culture of opportunity for nearly 430,000 associates and take seriously our role as a leading employer in the United States. In 2022, we invested more than ever in our associates by continuing to raise our average hourly wage to $18, or over $23, including industry-leading benefits. | ||
In response to our shareholder feedback, we incorporated an ESG metric focused on diversity and inclusion into our 2022 individual performance management program. Our core values of Diversity, Equity & Inclusion are incorporated into compensation decisions made for our associates who supervise a team of others, which range from store department leaders through our NEOs. These performance goals are factored into compensation decisions for these leaders, including salary increases and the amount of the annual grant of equity awards. |
Summary of Key Compensation Practices
To achieve our objectives, the Compensation Committee seeks to ensure that compensation is competitive and that there is a direct link between pay and performance. To do so, it is guided by the following principles:
Names Executive Officers (NEOs) for 2022
For the 2022 fiscal year ended January 28, 2023, the NEOs were
Name | Title | |
W. Rodney McMullen | Chairman and Chief Executive Officer | |
Gary Millerchip | Senior Vice President and Chief Financial Officer | |
Stuart W. Aitken | Senior Vice President and Chief Merchandising & Marketing Officer | |
Yael Cosset | Senior Vice President and Chief Information Officer | |
Timothy A. Massa | Senior Vice President and Chief People Officer |
Notice of 20162023 Annual Meeting of Shareholders
Fellow Kroger Shareholders:
It is our pleasure
We are pleased to invite you to join our Board of Directors, senior leadership, and other Kroger associates at The Kroger Co.us for Kroger’s 2023 Annual Meeting of Shareholders.Shareholders on June 22, 2023 at 11:00 a.m. eastern time. The 2023 Annual Meeting of Shareholders will once again be a completely virtual meeting conducted via webcast. We believe this is the most effective approach for enabling the highest possible attendance.
You will be able to participate in the virtual meeting online, vote your shares electronically, and submit questions during the meeting by visiting www.virtualshareholdermeeting.com/KR2023.
When: | ||||
Where: | ||||
Items of Business: | 1. | To elect | ||
2. | ||||
To approve our executive compensation, on an advisory basis. | ||||
3. | To select the frequency of future advisory votes on executive compensation, on an advisory basis. | |||
4. | To ratify the selection of our independent auditor for fiscal year | |||
5. | ||||
To vote on | ||||
6. | ||||
To transact other business as may properly come before the meeting. | ||||
Who can Vote: | Holders of Kroger common shares at the close of business on the record date April |
How to Vote: | ||||
By the internet, you can vote by the Internet by visiting www.proxyvote.com. | ||||
2. | By telephone, | |||
3. | By mail, | |||
4. | By mobile device, by scanning the QR code on your proxy card, notice of internet availability of proxy materials, or voting instruction form. | |||
Attending the Meeting: | Shareholders holding shares at the close of business on the record date | ||
Our Board of Directors unanimously recommends that you vote “FOR ALL” of Kroger’s director nominees on the proxy card, “FOR” the management proposals 2 and 4, “FOR” one year for management proposal 3, and “AGAINST” the shareholder proposals 5 through 9.
We appreciate your continued confidence in Kroger, and we look forward to seeing you at theyour participation in our virtual meeting.
May 12, 2023 Cincinnati, Ohio | By Order of the Board of Directors, |
Christine S. Wheatley, Secretary | |
Proxy Statement
May 12, 20162023
We are providing this notice, proxy statement, and annual report to the shareholders of The Kroger Co. (“Kroger”, “we”, “us”, “our”) in connection with the solicitation of proxies by the Board of Directors of Kroger (the “Board”) for use at the Annual Meeting of Shareholders to be held on June 23, 2016,22, 2023 at 11:00 a.m. eastern time, at the School for Creative and Performing Arts, Corbett Theater, 108 W. Central Parkway, Cincinnati, Ohio 45202, and at any adjournments thereof. The Annual Meeting will be held virtually and can be accessed online at www.virtualshareholdermeeting.com/KR2023. There is no physical location for the 2023 Annual Meeting of Shareholders.
Our principal executive offices are located at 1014 Vine Street, Cincinnati, Ohio 45202-1100. Our telephone number is 513-762-4000. This notice, proxy statement, and annual report, and the accompanying proxy card wereare first furnishedbeing sent or given to shareholders on or about May 12, 2016.2023.
Questions and Answers about the Annual Meeting
Why are you holding a virtual meeting?
We believe a virtual meeting is the most effective approach for enabling the highest possible attendance. Based on our experience with virtual meetings during the COVID-19 pandemic, we believe this facilitates shareholder attendance and participation, and has allowed a greater number of questions from a broader group of shareholders to be asked and answered at the Meeting than in an in-person format. It also reduces our costs and in a small way the carbon footprint of our activities. Therefore, our 2023 Annual Meeting is being held on a virtual-only basis with no physical location. Our goal for the Annual Meeting is to enable the broadest number of shareholders to participate in the meeting, while providing substantially the same access and exchange with Management and the Board as an in-person meeting. We believe that we are observing best practices for virtual shareholder meetings, including by providing a support line for technical assistance and addressing as many shareholder questions as time allows.
Who can vote?
You can vote if, as of the close of business on April 27, 2016,24, 2023, the record date, you were a shareholder of record of Kroger common shares.
Who is asking for my vote, and who pays for this proxy solicitation?
Your proxy is being solicited by Kroger’s Board of Directors. Kroger is paying the cost of solicitation. We have hired D.F. King & Co., Inc., 48 Wall Street, New York, New York, a proxy solicitation firm, to assist us in soliciting proxies and we will pay them a fee estimated not to exceed $15,000.$17,500, plus reasonable expenses for the solicitation.
We also will reimburse banks, brokers, nominees, and other fiduciaries for postage and reasonable expenses incurred by them in forwarding the proxy material to beneficial owners of our common shares.
Proxies may be solicited personally, by telephone, electronically via the Internet, or by mail.
Who are the members of the Proxy Committee?
Robert D. Beyer,
Anne Gates, W. Rodney McMullen, and Ronald L. Sargent, all Kroger Directors, are the members of the Proxy Committee for our 20162023 Annual Meeting.
What is the difference between a “shareholder of record” and a “beneficial shareholder” of shares held in street name?
You are the “shareholder of record” for any Kroger common shares that you own directly in your name in an account with Kroger’s stock transfer agent, EQ Shareowner Services.
You are a “beneficial shareholder” of shares held in street name if your Kroger common shares are held in an account with a broker, bank, or other nominee as custodian on your behalf. The broker, bank, or other nominee is considered the shareholder of record of these shares. As the beneficial owner, you have the right to instruct the broker, bank, or other nominee on how to vote your Kroger common shares.
How do I vote my shares held in street name?
If your shares are held by a bank, broker, or other holder of record, you will receive voting instructions from the holder of record. Your broker is required to vote your shares in accordance with your instructions. In most cases, you may vote by telephone or over the internet as instructed.
How do I vote my proxy?
You can vote your proxy in one of the following ways:
1. | ||
2. | ||
By telephone, you can vote by | ||
3. | ||
By mail, you can vote by | ||
4. | By mobile device, by scanning the QR code on your proxy card, notice of internet availability of proxy materials, or voting instruction form. | |
5. |
How can I participate and ask questions at the Annual Meeting?
We are committed to ensuring that our shareholders have substantially the same opportunities to participate in the virtual Annual Meeting as they would at an in-person meeting. In order to submit a question at the Annual Meeting, you will need your 16-digit control number that is printed on the Notice or proxy card that you received in the mail, or via email if you have elected to receive material electronically. You may log in 15 minutes before the start of the Annual Meeting and submit questions online. You will be able to submit questions during the Annual Meeting as well. We encourage you to submit any question that is relevant to the business of the meeting. Questions asked during the Annual Meeting will be read and addressed during the meeting. Shareholders are encouraged to log into the webcast at least 15 minutes prior to the start of the meeting to test their Internet connectivity. You may also submit questions in advance of the meeting via the internet at www.proxyvote.com when you vote your shares.
What documentation must I provide to be admitted to the virtual Annual Meeting and how do I attend?
If your shares are registered in your name, you will need to attendprovide your sixteen-digit control number included on your Notice or your proxy card (if you receive a printed copy of the proxy materials) in order to be able to participate in the meeting. If your shares are not registered in your name (if, for instance, your shares are held in “street name” for you by your broker, bank or other institution), you must follow the instructions printed on your Voting Instruction Form. In order to participate in the Annual Meeting, please log on to www.virtualshareholdermeeting.com/KR2023 at least 15 minutes prior to the start of the Annual Meeting to provide time to register and download the required software, if needed. The webcast replay will be available at www.virtualshareholdermeeting.com/KR2023 until the 2024 Annual Meeting of Shareholders. If you access the meeting but do not enter your control number, you will be able to listen to the proceedings, but you will not be able to vote or otherwise participate.
What if I have technical or other “IT” problems logging into or participating in personthe Annual Meeting webcast?
We have provided a toll-free technical support “help line” that can be accessed by any shareholder who is having challenges logging into or participating in Cincinnati?the virtual Annual Meeting. If you encounter any difficulties accessing the virtual meeting during the check-in or meeting time, please call the technical support line number that will be posted on the virtual Annual Meeting login page.
What documentation must I provide to vote online at the Annual Meeting?
If you plan to attendare a shareholder of record and provide your sixteen-digit control number when you access the meeting, you must bring either: (1)may vote all shares registered in your name during the noticeAnnual Meeting webcast. If you are not a shareholder of meeting that was separately mailedrecord as to youany of your shares (i.e., instead of being registered in your name, all or (2) the topa portion of your proxy card, eithershares are registered in “street name” and held by your broker, bank or other institution for your benefit), you must follow the instructions printed on your Voting Instruction Form.
How do I submit a question at the Annual Meeting?
If you would like to submit a question during the Annual Meeting, once you have logged into the webcast at www.virtualshareholdermeeting.com/KR2023, simply type your question in the “ask a question” box and click “submit”. You may also submit questions in advance of the meeting via the internet at www.proxyvote.com when you vote your shares.
When should I submit my question at the Annual Meeting?
Each year at the Annual Meeting, we hold a question-and-answer session following the formal business portion of the meeting during which will beshareholders may submit questions to us. We anticipate having such a question-and-answer session at the 2023 Annual Meeting. You can submit a question up to 15 minutes prior to the start of the Annual Meeting and up until the time we indicate that the question-and-answer session is concluded. However, we encourage you to submit your admission ticket.
questions before or during the formal business portion of the meeting and our prepared statements, in advance of the question-and-answer session, in order to ensure that there is adequate time to address questions in an orderly manner. You mustmay also bring valid photo identification, such as a driver’s license or passport.submit questions in advance of the meeting via the internet at www.proxyvote.com when you vote your shares.
Can I change or revoke my proxy?
The common shares represented by each proxy will be voted in the manner you specified unless your proxy is revoked before it is exercised. You may change or revoke your proxy by providing written notice to Kroger’s Secretary at 1014 Vine Street, Cincinnati, Ohio 45202-1100, in person at the meeting or45202, by executing and sending us a subsequent proxy.proxy, or by voting your shares while logged in and participating in the 2023 Annual Meeting of Shareholders.
How many shares are outstanding?
As of the close of business on April 27, 2016,24, 2023, the record date, our outstanding voting securities consisted of 953,786,557717,648,391 common shares.
1
How many votes per share?
Each common share outstanding on the record date will be entitled to one vote on each of the 11 director nominees and one vote on each other proposal. Shareholders may not cumulate votes in the election of directors.
What voting instructions can I provide?
You may instruct the proxies to vote “For” or “Against” each proposal. Orproposal (except for Proposal 3), or you may instruct the proxies to “Abstain” from voting. For Proposal 3, you may instruct the proxies to vote for “One,” “Two,” or “Three” years.
What happens if proxy cards or voting instruction forms are returned without instructions?
If you are a registered shareholder and you return your proxy card without instructions, the Proxy Committee will vote in accordance with the recommendations of the Board of Directors.Board.
If you hold shares in street name and do not provide your broker with specific voting instructions on proposals 1, 2, 4,3, and 5 6 or 7,– 9, which are considered non-routine matters, your broker does not have the authority to vote on those proposals. This is generally referred to as a “broker non-vote.” Proposal 3,4, ratification of auditors, is usually considered a routine matter and, therefore, your broker may vote your shares according to your broker’s discretion.
The vote required, including the effect of broker non-votes and abstentions for each of the matters presented for shareholder vote, is set forth below.
What are the voting requirements and voting recommendation for each of the proposals?
Proposal No. 1, Election of Directors – An affirmative vote of the majority of the total number of votes cast “For” or “Against” a director nominee is required for the election of a director in an uncontested election. A majority of votes cast means that the number of shares voted “For” a director nominee must exceed the number of votes “Against” such director. Broker non-votes and abstentions will have no effect on this proposal.
Proposal No. 2, Advisory Vote to Approve Executive Compensation – Advisory approval by shareholders of executive compensation requires the affirmative vote of the majority of shares participating in the voting. Broker non-votes and abstentions will have no effect on this proposal.
Proposal No. 3, Ratification of Independent Auditors – Ratification by shareholders of the selection of independent public accountants requires the affirmative vote of the majority of shares participating in the voting. Abstentions will have no effect on this proposal.
Proposal Nos. 4, 5, 6 and 7, Shareholder Proposals– The affirmative vote of the majority of shares participating in the voting on a shareholder proposal is required for such proposal to pass. Accordingly, broker non-votes and abstentions will have no effect on these proposals. Proxies will be voted against these proposals unless the Proxy Committee is otherwise instructed on a proxy properly executed and returned.
How does the Board of Directors recommend that I vote?
Board Recommendation | Standard | Effect of Abstention | Effect of broker non-vote | ||
FOR Each Director Nominee recommended by your Board | More votes “FOR” than “AGAINST” since it is an uncontested election | No Effect | No Effect | ||
FOR | No Effect | No Effect | |||
ONE YEAR | The option that receives the highest number of votes cast by shareholders(1) | No Effect | No Effect | ||
FOR | No Effect | No Effect | |||
AGAINST Each Proposal | Affirmative vote of the majority of shares participating in the voting | No Effect | No Effect |
(1) | Although this is an advisory vote, the Board will take into consideration the outcome of the vote based on this standard. |
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be Held on June 22, 2023 | ||
2022 Annual Report and the means to vote by internet are available at www.proxyvote.com. |
2
Kroger’s Corporate Governance Practices
Kroger is committed to strong corporate governance. We believe that strong governance builds trust and promotes the long-term interests of our shareholders. Highlights of our corporate governance practices include the following:
Board Governance Practices
✓ | oversight of enterprise risk. |
✓ | Strong experienced independent Lead Director with clearly defined role and responsibilities. |
✓ | |||
Commitment to Board refreshment and diversity. |
✓ | 5 of 11 director nominees are women. |
✓ | Public Responsibilities Committees are women. |
✓ | |||
Annual evaluation of the Chairman and CEO by the independent directors, led by the independent Lead Director. |
✓ | All director nominees are independent, except for the CEO. |
✓ | All five Board Committees are fully independent. |
✓ | Annual Board and Committee self-assessments conducted by independent Lead Director or an independent third party. |
✓ | Regular executive sessions of the independent directors, at the Board and Committee level. |
✓ | High degree of Board interaction with management to ensure successful oversight and succession planning. |
✓ | Balanced tenure. |
✓ | Robust shareholder engagement program. |
✓ | Robust code of ethics. |
Environmental, Social, & Governance (ESG) Practices
✓ | Long-standing Board Committee dedicated to ESG oversight — Public Responsibilities Committee — formed in 1977. |
o | Amended the Committee Charter in 2021 to more specifically reflect the Committee’s focused and prioritized approach to material ESG topics related to environmental issues, sustainability, and social impact |
✓ | Annual ESG report, sharing progress on our goals for Zero Hunger | Zero Waste, Just & Inclusive Economy, Food Waste, Operational Waste, Water, Packaging, Climate Impact, and Responsible Sourcing. |
o | The 2022 ESG report represented the 16th year of describing our progress and initiatives regarding sustainability and other ESG matters |
✓ | Committed to transparency in our disclosure, informed by frameworks consistent with shareholder expectations: |
o | SASB’s Food Retailers and Distributors Standard |
o | GRI Global Sustainability Reporting Standards |
o | Task Force on Climate-related Financial Disclosures (TCFD) framework |
✓ | Established formal Diversity, Equity & Inclusion (DE&I) Framework for Action to: |
o | Create a more inclusive culture |
o | Develop diverse talent |
o | Advance diverse partnerships |
o | Advance equitable communities |
o | Listen deeply and report progress |
✓ | Specifically include diverse candidates in every external executive officer and Board director search. |
✓ | Disclose EEO-1 data annually. |
Shareholder Rights
✓ | Annual director election. |
✓ | Simple majority standard for uncontested director elections and plurality in contested elections. |
✓ | No poison pill. |
✓ | Shareholders have the right to call a special meeting. |
✓ | Robust, long-standing shareholder engagement program with regular engagements, including with independent directors, to better understand shareholders’ perspectives and concerns on a broad array of topics, such as corporate governance and ESG matters. |
✓ | Adopted proxy access for director nominees, enabling a shareholder, or group of up to 20 shareholders, holding 3% of the Company’s common shares for at least three years to nominate candidates for the greater of two seats or 20% of Board nominees. |
Compensation Governance
✓ | Robust clawback and recoupment policy. |
✓ | Pay program tied to performance and business strategy. |
✓ | Majority of pay is long-term and at-risk with no guaranteed bonuses or salary increases. |
✓ | Stock ownership guidelines align executive and director interests with those of shareholders. |
✓ | Prohibition on all hedging, pledging, and short sales of Kroger securities by directors and executive officers. |
✓ | No tax gross-up payments to executives. |
Environmental, Social, & Governance Strategy
Kroger’s Environmental, Social & Governance Strategy is called Thriving Together. This strategy reflects the evolution of the Company’s long history of operating responsibly, advancing economic opportunity and sustainability in our own operations and supply chain, and giving back meaningfully to our communities.
Our ESG objective is to achieve positive and lasting change through a shared-value framework that benefits people and our planet and creates more resilient systems for the future. The centerpiece of Kroger’s ESG strategy is our Zero Hunger | Zero Waste social and environmental impact plan. Introduced five years ago, Zero Hunger | Zero Waste is an industry-leading platform for collective action and systems change at global, national, and local levels.
Our ESG strategy aims to address material topics of importance to our business and key stakeholders, including our associates, customers, shareholders, and others. Key ESG topics — informed by a structured materiality assessment and engagement with our shareholders and other stakeholders — align to three strategic pillars: People, Planet and Systems. Please see more details here in Kroger’s annual ESG Report: https://www.thekrogerco.com/wp-content/uploads/2022/08/Kroger-Co-2022-ESG-Report.pdf. The information on, or accessible through, this website is not part of, or incorporated by reference into, this proxy statement.
People — Our Aspiration: Help billions live healthier, more sustainable lifestyles
Food Access, Health, & Nutrition
Kroger’s brand promise, Fresh for Everyone, reflects our belief that everyone should have access to affordable, fresh food. We are committed to food and product safety and to improving food access, food security, and health and nutrition for all. Protecting our associates’ and customers’ health and safety and enhancing our shopping experience are also key focus areas.
help end hunger since introducing Zero Hunger | Zero Waste. |
$1.2 billion in charitable giving for hunger relief in our communities. |
With food and funds combined, Kroger directed 2.8 billion meals to our communities since 2017, well ahead of our goal of 3 billion meals by 2025. |
Just & Inclusive Economy
We offer access to employment, benefits, and more, providing good jobs for individuals ages 15 to 95 with a wide range of experience, skills, and career aspirations. In 2020, Kroger introduced our Framework for Action: Diversity, Equity, & Inclusion, a 10-point plan with short- and long-term steps to accelerate and promote greater change in the workplace and communities we serve.
Since 2020, Kroger has trained 661,000 leaders and associates in diversity, equity, & inclusion, including Unconscious Bias training. |
• | We achieved nearly $4 billion in diverse supplier spend annually, on track to our goal of $10 billion annually by 2030. |
• | Kroger achieved a perfect score of 100 on the Human Rights Campaign Corporate Equality Index for the fourth consecutive year and was listed among the Best Places to Work for Disability Inclusion by the Disability Equality Index. |
• | The Kroger Co. Foundation established a $5 million Racial Equity Fund and subsequently increased funding to $10M to support organizations driving change at national and local levels. To date, the fund has directed a total of $5.7 million in grants to nonprofit organizations advancing meaningful change in our communities. |
Planet — Our Aspiration: Protect and restore natural resources for a brighter future
Climate Impact
Kroger is committed to reducing the impact of our business on the climate and assessing the potential future risk of a changing climate to our business operations. We support the transition to a lower-carbon economy by investing in energy efficiency and renewable energy and by reducing greenhouse gas (GHG) emissions and food waste.
• | Kroger’s current commitment is to reduce Scope 1 and 2 GHG emissions by 30% by 2030 using a 2018 baseline. Reflecting updated guidance from the Intergovernmental Panel on Climate Change and the Science Based Targets initiative (SBTi), Kroger is in the process of resetting this target to be more ambitious and align to a 1.5⁰C scenario. |
• | In addition, Kroger is conducting analysis to inform a new Scope 3 target to reduce GHG emissions in our value chain. We expect to complete the goal-setting process in early 2024. To align with SBTi guidance, Kroger is also setting a new Forest, Land, and Agriculture (FLAG) target to further reduce emissions in land-intensive sectors like food and agricultural production. |
• | Reducing food waste is another way Kroger is helping reduce climate impacts. In 2021, we reduced retail food waste generated and improved retail food waste diversion from landfill to 48.8% through our Zero Hunger | Zero Waste plan, on the path to achieving 95%+ diversion by 2025. |
Resource Conservation
As a responsible business, we conserve natural resources to help safeguard people and our planet. Our current goal is to divert 90% or more of waste from landfills company-wide by 2025 and to identify alternative methods of waste management.
• | We have a comprehensive set of sustainable packaging goals that include seeking to achieve 100% recyclable, reusable, or compostable packaging for Our Brands products by 2030. In 2022, we completed an Our Brands packaging footprint and baseline to inform our roadmap to 2030. |
• | Kroger partnered with TerraCycle to launch a first-of-its-kind recycling program for flexible plastic packaging across the Our Brands portfolio. Now, Kroger customers can collect flexible snack and chip bags, pouches, pet food packaging, and more — items typically not eligible for curbside recycling — for easy and free mail-in recycling. |
• | In 2022, Kroger also conducted a six-month pilot with the innovative Loop reusable consumer product packaging platform at 25 Fred Meyer stores in the Portland, Oregon, area. We plan to publish a report outlining what may be needed to achieve commercial scale with reusable packaging in the future. |
• | To support more sustainable agriculture, Kroger offers an expanding selection of natural, organic, free-from, and plant-based products, including our popular Simple Truth® product line. The company also is in the process of developing a sustainable agriculture commitment for its fresh produce supply chain. |
Systems — Our Aspiration: Build more responsible and inclusive global systems
Business Integration
Kroger is committed to strong corporate and ESG governance. Business and functional leaders are engaged in our ESG strategy and accountable for results. Operationalizing ESG is a journey; however, we believe our centralized structure, vertical integration and commitment to responsible sourcing enables our progress.
• | We are committed to Board |
3
• | The Public Responsibilities Committee meets three times a year to discuss progress related to the company’s ESG strategy and key topics. In 2022, areas of focused engagement included Kroger’s GHG emissions reduction roadmap and approach to responsible sourcing. |
• | A core ESG team leads internal cross-functional working groups focused on policy, issues management and strategy implementation for key ESG topics, including food and product access and affordability, climate impacts, sustainable packaging, and supply chain accountability. |
Responsible & Resilient Systems
Kroger is part of – and dependent on – an interconnected global food system and consumer goods supply chain. A renewed focus on these natural systems and the policies and practices governing them will help protect our planet and workers whose livelihoods depend on a resilient and responsible supply chain.
• | Kroger continues to advance its commitment to align our human rights practice with the UN Guiding Principles on Business and Human Rights and develop a comprehensive human rights due diligence framework. In the past year, Kroger conducted two human rights impact assessments in different sectors of our global supply chain. |
• | We continue to offer a wide assortment of Fair Trade Certified products in the Our Brands assortment to support communities around the world. |
• | Kroger continues to transition the foundation of our animal welfare policy to the Five Domains of Animal Welfare, an internationally respected approach that emphasizes current animal science and outcome-based standards. We are working with our suppliers to measure and report progress toward our goals. |
• | Our long-standing commitment to seafood sustainability includes partnerships and programs aimed at improving marine ecosystems through conservation and fishery improvement practices. |
• | Kroger’s No-Deforestation Commitment for Our Brands aims to address deforestation impacts in higher-risk supply chains, such as palm oil, pulp and paper, soy, and beef. |
Proposals to Shareholders
Item No. 1. Election of Directors
You are being asked to elect 11 director nominees for a one-year term. The Board of Directors recommends that you vote FOR the election of all director nominees.
FOR | The Board of Directors unanimously recommends that you vote “FOR ALL” of Kroger’s director nominees. |
As of the date of this proxy statement, the KrogerKroger’s Board of Directors consists of twelve11 members. David B. Lewis will be retiring from the Board of Directors immediately prior to the 2016 annual meeting, in accordance with Kroger’s director retirement policy, and will not be standing for re-election. The number of directors will be reduced to eleven by the Board. All nominees, if elected at the 2016 annual meeting,2023 Annual Meeting, will serve until the annual meeting in 2017,2024 or until theirhis or her successors have been elected by the shareholders or by the Board pursuant to Kroger’s Regulations, and qualified. Each of our director nominees identified in this proxy statement has consented to being named as a nominee in our proxy materials and has accepted the nomination and agreed to serve as a director if elected by Kroger’s shareholders.
Kroger’s Articles of Incorporation provide that the vote required for election of a director nominee by the shareholders, except in a contested election or when cumulative voting is in effect, is the affirmative vote of a majority of the votes cast for or against the election of a nominee.
The Committee memberships stated below are those in effect as of the date of this proxy statement. The experience, qualifications, attributes, and skills that led the Corporate Governance Committee and the Board to conclude that the following individuals should serve as directors are set forth opposite each individual’s name. The committee memberships stated below are those in effect asIn addition, all of our Director Nominees demonstrate the datefollowing qualities:
Key Attributes and Skills of this proxy statement. Except as noted, each nominee has been employed by his or her present employer (or a subsidiary thereof) in an executive capacity for at least five years.All Kroger Director Nominees
●Intellectual and analytical skills | ●Business and professional achievements |
●High integrity and business ethics | ●Ability to represent the interests of all shareholders |
●Strength of character and judgement | ●Knowledge of corporate governance matters |
●Ability to devote significant time to Board duties | ●Understanding of the advisory and proactive oversight responsibility of our Board |
●Desire and ability to continually build expertise in emerging areas of strategic focus for our Company | ●Comprehension of their his or her as a public company director and the fiduciary duties owed to shareholders |
●Demonstrated focus on promoting equality | ●Ability to work cooperatively with other members of the board |
Board Nominees for Directors for Terms of Office Continuing until 20172024
Nora A. Aufreiter
| Ms. Aufreiter is Ms. Aufreiter has over 30 years of broad business experience in a variety of retail sectors. Her vast experience in leading McKinsey’s North American Retail Practice, North American Branding service line and the Consumer Digital and Omnichannel service line is of particular value to the Board. In addition, during her tenure with McKinsey, the firm advised consulting clients on a variety of matters, including ESG topics and setting and achieving sustainability goals which is of value to the Board and the Public Responsibilities Committee. Ms. Aufreiter has served on our Public Responsibilities Committee for eight years, the last three as chair. In 2021, she led the Board’s review of ESG accountability to clarify committee oversight of ESG topics and led the revision of the Committee’s charter to reflect the Committee’s increasing focus on material environmental sustainability and social impact topics. She also brings to the Board valuable insight on commercial real estate. In her current role as Chair of the Human Capital and Compensation Committee for the Bank of Nova Scotia, Ms. Aufreiter has responsibility for overseeing senior management succession and CEO evaluation and incentive compensation. In her previous role as Chair of the Corporate Governance Committee of The Bank of Nova Scotia, Ms. Aufreiter had responsibility for overseeing shareholder engagement, the composition of its Board of Directors, including diversity, the effectiveness of the diversity policy of its Board of Directors, ESG strategy and priorities, and the Bank’s statement on human rights. This experience is of particular value to the Board and to her role as the Chair of the Public Responsibilities Committee. |
4
Age
63 | Director Since 2014 | |
Committees: Qualifications: |
1 Denotes Chair of Committee
Kevin M. Brown Mr. Mr. | |||
Age 60 | Director Since 2021 | ||
Committees: Qualifications: |
Elaine L. Chao Ms. Chao served as the 18th U.S. Secretary of Transportation from January 2017 until January 2021. Prior thereto, she served as the 24th U.S. Secretary of Labor from January 2001 until January 2009, and was the first woman of Asian American & Pacific Islander heritage to serve in a President’s cabinet in history. Previously, Ms. Chao was President and CEO of United Way of America, Director of the Peace Corps and a banker with Citicorp and BankAmerica Capital Markets Group. She earned her M.B.A. from Harvard Business School and has served on a number of Fortune 500 and nonprofit boards. She currently serves on the Board of Directors of
Ms. Chao brings to | |||
Age 70 | Director Since 2021 | ||
Committees: Qualifications: |
Anne Gates
| Ms. Gates Ms. Gates has over | ||||
Age
| Director Since 2015 | ||||
Committees: Qualifications: |
1 Denotes Chair of Committee
Karen M. Hoguet Ms.
Ms. Hoguet has over 35 years of broad financial and operational leadership experience within the omnichannel retail sector. She has a proven track record of success in driving transformations, delivering strong financial performance, and forming strong relationships with investors and industry analysts. She has extensive knowledge across all areas of finance, including financial planning, investor relations, M&A, accounting, treasury and tax, as well as strategic planning, credit card services and real estate. Ms. Hoguet played a critical role in the successful turnaround of Federated Department Stores, from bankruptcy to an industry leading omnichannel retailer, which was accomplished through acquisitions, divestiture and other strategic changes including building an omnichannel model and developing a new strategic approach to real estate. Her long tenure as a senior executive of a publicly traded company with financial, audit, strategy, and risk oversight experience is of value to the Board as is her public | |||
Age 66 | Director Since 2019 | ||
Committees: Qualifications: |
5
W. Rodney McMullen
| Mr. McMullen was elected Chairman of the Board in January 2015 and Chief Executive Officer of Kroger in January 2014. Mr. McMullen has broad experience in the supermarket business, having spent his career spanning over | ||||
Age
| Director Since
|
2003 | |||
Qualifications: |
1 Denotes Chair of Committee
Clyde R. Moore
| Mr. Moore was Mr. Moore has over 30 years of general management experience in public and private companies. He has | ||||
Age
|
|
6
|
1997 | |
Committees: Qualifications: |
Ronald L. Sargent
| Mr. Sargent Mr. Sargent has over 35 years of retail experience, first with Kroger and then with increasing levels of responsibility and leadership at Staples, Inc. His efforts helped carve out a new market niche for the international | ||||
Age
| Director Since 2006 | ||||
Committees: Qualifications: |
1 Denotes Chair of Committee
Ms. Sourry was Ms. Sourry has over thirty years of experience in the CPG and retail industry. As a member of PVH Corp.’s Nominating, Governance, & Management Development Committee, her experience with monitoring issues of corporate conduct and culture, and providing oversight of diversity, equity and inclusion policies and programs as it relates to management development, talent assessment and succession planning programs and processes is of particular value to her role as a member of the Compensation & Talent Development Committee and the Board. She brings to the Board her extensive global marketing and business | |||
Age 59 | Director Since 2021 | ||
Committees: Finance Qualifications: |
Mark S. Sutton Mr. Mr. Sutton has over 30 years
| |||
Age 61 | Director Since 2017 | ||
Committees: Qualifications: |
Ashok Vemuri Mr. Vemuri was Chief Executive Officer and a Director of Conduent Incorporated, a global digital interactions company, from its inception as a result of the spin-off from Xerox Corporation in January 2017 to 2019. He previously served as Chief Executive Officer of Xerox Business Services, LLC and as an Executive Vice President of Xerox Corporation from July 2017 to December 2017. Prior to that, he was President, Chief Executive Officer, and a member of the Board of Directors of IGATE Corporation, a New Jersey-based global technology and services company now part of Capgemini, from 2013 to 2015. Before joining IGATE, Mr. Vemuri spent 14 years at Infosys Limited, a multinational consulting and technology services company, in a variety of leadership and business development roles and served on the board of Infosys from 2011 to 2013. Prior to joining Infosys in 1999, Mr. Vemuri worked in the investment banking industry at Deutsche Bank and Bank of America. In the past five years, he served as a director of Conduent Incorporated. Mr. Vermuri is a member of the Board of Directors of Opal Fuels and is chair of the Audit Committee. Mr. Vemuri brings to the Board a proven track record of leading technology services companies through growth and corporate transformations. His experience as CEO of global technology companies as well as his experience with cyber security and risk oversight are of value to the Board as he brings a unique operational, financial, and client experience perspective. Additionally, Mr. Vemuri served on our Public Responsibilities Committee which gives him additional perspectives on risk oversight that he brings to the Audit Committee. Mr. Vemuri has been designated an Audit Committee financial expert. | |||
Age 55 | Director Since 2019 | ||
Committees: Qualifications: |
YOUR VOTE IS EXTREMELY IMPORTANT. The Board of Directors Recommendsunanimously recommends a VoteForvote “FOR ALL” of Kroger’s director nominees.
Board Succession Planning and Refreshment Mechanisms
Board succession planning is an ongoing, year-round process. The Corporate Governance Committee recognizes the importance of thoughtful Board refreshment and engages in a continuing process of identifying attributes sought for future Board members. The Corporate Governance Committee takes into account the Board and Committee evaluations regarding the specific qualities, skills, and experiences that would contribute to overall Board and Committee effectiveness, as well as the future needs of the Board and its Committees in light of Kroger’s current and long-term business strategies, and the skills and qualifications of directors who are expected to retire in the future including as a result of our Board retirement policy, which requires directors to retire at the annual meeting following their 72nd birthday.
Outside Board Service
No director who is an officer of the Company may serve as a director of another company without the approval of the Corporate Governance Committee. Directors who are not officers of the Company may not serve as a director of another company if in so doing such service would interfere with the director’s ability to properly perform his or her responsibilities on behalf of the Company and its shareholders, as determined by the Corporate Governance Committee. None of our current directors serve on more than three public company Boards, including Kroger’s Board.
Board Diversity
Our director nominees reflect a wide array of experience, skills, and backgrounds. Each Director Nominee.director is individually qualified to make unique and substantial contributions to Kroger. Collectively, our directors’ diverse viewpoints and independent-mindedness enhance the quality and effectiveness of Board deliberations and decision-making. Our Board is a dynamic group of new and experienced members, which reflects an appropriate balance of institutional knowledge and fresh perspectives about Kroger due to the varied length of tenure on the Board. We believe this blend of qualifications, attributes, and tenure enables highly effective Board leadership.
7
The Corporate Governance Committee considers racial, ethnic, and gender diversity to be important elements in promoting full, open, and balanced deliberations of issues presented to the Board. When evaluating potential nominees to our Board, the Corporate Governance Committee considers director candidates who would help the Board reflect the diversity of our shareholders, associates, customers, and the communities in which we operate, including by considering their geographic locations to align directors’ physical locations with Kroger’s operating areas where possible. In connection with the use of a third-party search firm to identify candidates for Board positions, the Corporate Governance Committee instructs the third-party search firm to include in its initial list qualified female and racially/ethnically diverse candidates. Four of our 11 director nominees self-identify as racially/ethnically diverse: Mr. Brown and Ms. Gates self-identify as Black/African American and Ms. Chao and Mr. Vemuri self-identify as Asian. Five of our 11 directors are women.
The Corporate Governance Committee believes that it has been successful in its efforts to promote gender and ethnic diversity on our Board. Further, the Board aims to foster a diverse and inclusive culture throughout the Company and believes that the Board nominees are well suited to do so. The Corporate Governance Committee and Board believe that our director nominees for election at our 2023 Annual Meeting bring to our Board a variety of different experiences, skills, and qualifications that contribute to a well-functioning diverse Board that effectively oversees the Company’s strategy and management. The charts below show the diversity of our director nominees and the skills and experience that we consider important for our directors in light of our current business, strategy, and structure:
Nora Aufreiter | Kevin Brown | Elaine Chao | Anne Gates | Karen Hoguet | Rodney McMullen | Clyde Moore | Ronald Sargent | Amanda Sourry | Mark Sutton | Ashok Vemuri | Total (of 11) | ||||||||||||||
Business Management | • | • | • | • | • | • | • | • | • | • | • | 11 | |||||||||||||
Retail | • | • | • | • | • | • | 6 | ||||||||||||||||||
Consumer | • | • | • | • | • | • | • | • | 8 | ||||||||||||||||
Financial Expertise | • | • | • | • | • | • | • | • | • | • | • | 11 | |||||||||||||
Risk Management | • | • | • | • | • | • | • | • | • | • | 10 | ||||||||||||||
Operations & Technology | • | • | • | • | • | • | • | • | • | • | 10 | ||||||||||||||
ESG | • | • | • | • | • | • | • | • | • | • | • | 11 | |||||||||||||
Manufacturing | • | • | • | • | 4 |
Information Concerning the Board of Directors
Board Leadership Structure and Independent Lead Independent Director
The Board is currently composed of eleven independent non-employee directors and one management director, Mr. McMullen, the Chairman and CEO.
Kroger has a balanced governance structure in which independent directors exercise meaningful and vigorousrigorous oversight.
In addition, as provided The Board’s leadership structure, in particular, is designed with those principles in mind and to allow the Board to evaluate its needs and determine, from time to time, who should lead the Board. Our Corporate Governance Guidelines (the “Guidelines”) provide the flexibility for the Board to modify our leadership structure in theGuidelines on Issues of Corporate Governance( future as appropriate. We believe that Kroger is well-served by this flexible leadership structure.
In order to promote thoughtful oversight, independence, and overall effectiveness, the “Guidelines”),Board’s leadership includes Mr. McMullen, our Chairman and CEO, and an independent Lead Director designated by the Board has designated one ofamong the independent directors as Lead Director.directors. The Lead Director works with the Chairman to share governance responsibilities, facilitate the development of Kroger’s strategy, and grow shareholder value. The Lead Director serves a variety of roles, consistent with current best practices, including:
● | reviewing and approving Board meeting agendas, materials, and schedules to confirm that theappropriate topics are reviewed, with sufficient information provided to directors on each topic and |
● | serving as the principal liaison between the Chairman, management, and the |
● | presiding at the executive sessions of independent directors and at all other meetings of the Boardat which the Chairman is not present; |
● | calling meetings of independent directors at any time; and |
● | serving as the Board’s representative for any consultation and direct communication, following arequest, with major shareholders.
|
The independent Lead Director carries out these responsibilities in numerous ways, including by:
● | facilitating communication and collegiality among the Board members; |
● | soliciting direct feedback from |
● | overseeing the succession planning process, including |
● | meeting with the CEO frequently to discuss strategy; |
● | serving as a sounding |
● | leading annual CEO evaluation process; and |
● | discussing Company matters with other directors between meetings. |
Unless otherwise determined by the independent members of the Board, the chairChair of the Corporate Governance Committee is designated as the Lead Director. Robert Beyer,Ronald L. Sargent, an independent director and the chairChair of the Corporate Governance Committee, is currently thewas appointed as our Board’s independent Lead Director.Director in June 2018. Mr. BeyerSargent is an effective Lead Director for Kroger due to, among other things, his independence, his deep strategic and operational understanding of Kroger obtained while serving as a Kroger director, his insight into corporate governance, his experience on the boards of other large publicly traded companies, and his commitment and engagement to carrying out the roles and responsibilities of the Lead Director.his:
● | independence; |
● | deep strategic and operational understanding of Kroger obtained while serving as a Kroger director; |
● | insight into corporate governance; |
● | experience as the CEO of an international ecommerce and brick and mortar retailer; |
● | experience on the Boards of other large publicly traded companies; and |
● | engagement and commitment to carrying out the role and responsibilities of the Lead Director. |
With respect to the roles of Chairman and CEO, theGuidelines provide that the Board will determine whenwhether it is in the best interests of Kroger and ourits shareholders for the roles to be separated or combined, and thecombined. The Board exercises its discretionthis judgment as it deems appropriate in light of prevailing circumstances. Upon retirement of our former Chairman, David B. Dillon, on December 31, 2014, the Board determined that it is in the best interests of Kroger and our shareholders for one person to serve as the Chairman and CEO, as was the case from 2004 through 2013. The Board believes that this leadership structure improves the Board’s ability to focus on key policy and operational issues and helps the Company operate in the long-term interestsinterest of shareholders. Additionally, this structure provides an effective balance between strong Company leadership and appropriate safeguards and oversight by independent directors. Our CEO’s strong background in finance, operations, and strategic partnerships is particularly important to the Board given Kroger’s current growth strategy. Our CEO’s consistent leadership, deep industry expertise, and extensive knowledge of the Company are also especially critical in the midst of the rapidly evolving retail and digital landscape. The Board believes that the combination or separationstructure of these positionsthe Chairman and independent Lead Director position should continue to be considered as part of the succession planning process, as was the case in 2003 and 2014 when the roles were separated.process.
8
Annual Board Evaluation Process
The Board and each of its committeesCommittees conduct an annual self-evaluationevaluation to determine whether the Board is functioning effectively both at each level.the Board and at the Committee levels. As part of this annual self-evaluation,evaluation, the Board assesses whether the current leadership structure and function continues to be appropriate for Kroger and its shareholders. TheGuidelines provideshareholders, including in consideration of director succession planning.
Every year, the flexibility forBoard’s goal is to increase the effectiveness of the Board and the results of these evaluations are used for this purpose. The Board recognizes that a robust evaluation process is an essential component of strong corporate governance practices and ensuring Board effectiveness. The Corporate Governance Committee oversees an annual evaluation process led by either the Lead Independent Director or an independent third party.
Each director completes a detailed annual evaluation of the Board and the Committees on which he or she serves and the Lead Director or an independent third-party conducts interviews with each of the directors. This year, the annual evaluation was conducted by the Lead Director.
Topics covered include, among others:
● | The effectiveness of the Board and Board Committees and the active participation of all directors |
● | The Board and Committees’ skills and experience and whether additional skills or experience are needed |
● | The effectiveness of Board and Committee meetings, including the frequency of the meetings |
● | Board interaction with management, including the level of access to management, and the responsiveness of management |
● | The effectiveness of the Board’s evaluation of management performance |
● | Additional subject matters the Board would like to see presented at their meetings or Committee meetings |
● | Board’s governance procedures |
● | The culture of the Board to promote participation in a meaningful and constructive way |
The results of this Board evaluation are discussed by the full Board and each Committee, as applicable, and changes to modify our leadership structurethe Board’s and its Committees’ practices are implemented as appropriate.
Over the past several years, this evaluation process has contributed to various enhancements in the futureway the Board and the Committees operate, including increased focus on continuous Board refreshment and diversity of its members as appropriate.well as ensuring that Board and Committee agendas are appropriately focused on strategic priorities and provide adequate time for director discussion and input.
Director Onboarding and Engagement
All directors are expected to invest the time and energy required to gain an in-depth understanding of our business and operations in order to enhance their strategic value to our Board. We believe that Kroger, like many U.S. companies, has been well-serveddevelop tailored onboarding plans for each new director. We arrange meetings for each new director with appropriate officers and associates in order to familiarize him or her with the Company’s strategic plans, financial statements, and key policies and practices. We also provide training on fiduciary obligations of board members and corporate governance topics, as well as committee-specific onboarding. From time to time, the Company will provide Board members with presentations from experts within and outside of the Company on topics relevant to the Board’s responsibilities. Any member of the Board may attend accredited third-party training and the expenses will be paid by this flexible leadership structure.the Company. Board meetings are periodically held at a location away from our home office in a geography in which we operate. In connection with these Board meetings, our directors learn more about the local business environment through meetings with our regional business leaders and visits to our stores, competitors’ stores, manufacturing facilities, distribution facilities, and/or customer fulfillment centers.
Committees of the Board of Directors
To assist the Board in undertaking its responsibilities, and to allow deeper engagement in certain areas of company oversight, the Board has established five standing committees:Committees: Audit, Compensation and Talent Development (“Compensation”), Corporate Governance, Financial PolicyFinance, and Public Responsibilities. All committeesCommittees are composed exclusively of independent directors, as determined under the NYSE listing standards. Each Committee has the responsibilities set forth in its respective charter, each of which has been approved by the Board. The current charter of each Board committeeCommittee is available on our website at ir.kroger.com under Investors — Governance — Corporate Governance –Guidelines.
The current membership, 2022 meetings, and responsibilities of each Committee Composition.are summarized below.
Name of Committee, Number of Meetings, and Current Members | Primary Committee | |
Audit Committee Meetings in Members: Anne Gates, Chair | ● Oversees the Company’s financial reporting and accounting matters, including review of the Company’s financial statements and the audit thereof, the Company’s financial reporting and accounting process, and the Company’s systems of internal control over financial reporting● Selects, evaluates, and oversees the compensation and work of the independent registered public accounting firm and reviews its performance, qualifications, and independence● Oversees and evaluates the Company’s internal audit function, including review of its audit plan, policies and procedures, and significant findings● Oversees enterprise risk assessment and risk management, including review of cybersecurity risks and regular reports received from management and independent third parties●Reviews significant legal ● Reviews and monitors the Company’s operational and third-party compliance programs●Reviews Ethics Hotline reports and discusses material matters ● Reviews and approves related party transactions ● Conducts executive sessions with independent registered public accounting firm and Vice President, Internal Audit at each meeting ●Conducts executive sessions with the |
Name of Committee, Number of Meetings, and Current Members | Primary Committee Responsibilities | |
Compensation Committee Meetings in Members: Clyde R. Moore,Chair | ● Recommends for approval by the independent directors the compensation of the CEO andofficers ● Administers the Company’s executive compensation policies and programs, including determining grants of equity awards under the plans● Reviews annual incentive plans and long-term incentive plan metrics and plan design● Reviews emerging legislation and governance issues and retail compensation trends ● Reviews the Company’s executive compensation peer group ● Reviews CEO pay analysis ● Reviews Human Capital Management, including Diversity, Equity, & Inclusion ● Has sole authority to retain and direct the ● Assists the full Board with senior management succession planning |
9
● Conducts executive sessions with Senior Vice President and | |
Corporate Governance Committee Meetings in Members: Ronald L. Sargent, Chair | ● Oversees the Company’s corporate governance policies and procedures● Develops criteria for selecting and retaining directors, including identifying and● Designates membership andCommittees ● Oversees and administers Board evaluation process● Reviews the Board’s performance ● Establishes and reviews the practices and procedures by which the Board performs its functions ● Reviews director independence, financial literacy, and designation of financial expertise ● Administers director nomination process● Interviews and nominates candidates for director election ● Reviews ● Reviews and participates in shareholder engagement ● Reviews and establishes independent director compensation ● Oversees the |
Name of Meetings, and Current Members | Primary Committee Responsibilities |
Meetings in Members: Karen M. Hoguet, Chair | ● ● Reviews the Company’s annual and long-term financial● Approves and recommends for ● Reviews the Company’s dividend policy and share buybacks ● Reviews strategic transactions, capital structure, including potential issuance of financing transactions ● Monitors the investment management of assets held in pension and |
| ● ● Oversees the Company’s engagement and relationships with, and standing in, the financial community |
Public Responsibilities Committee Meetings in 2022: 3 Members: Nora A. Aufreiter, Chair | ● Reviews the practices of the Company affecting its ● Examines and reviews the Company’s practices related to environmental sustainability, ✓ climate impacts ✓ packaging ✓ food and ✓ food access ✓ responsible sourcing ✓ supplier diversity ✓ people safety, food safety, and ● Examines and ● Reviews the Company’s community engagement and ● Reviews the Company’s advocacy and public policy ● Reviews the Company’s communications and Corporate Brand stewardship ● Assesses the Company’s effort in evaluating and responding to changing public expectations and public issues |
Shareholder Engagement
Maintaining ongoing relationships with our shareholders, and understanding our shareholders’ views, is a priority for both our Board and management team. We have a longstanding history of engaging with our shareholders and through our investor relations program and our year-round governance outreach program, including participation for our independent directors. In 2022, under the direction of the Board, we requested engagement meetings with 34 shareholders representing 48% of our outstanding shares and subsequently met with 18 shareholders representing 41% of our outstanding shares (many of those shareholders we met with more than once). Some investors we contacted either did not respond or confirmed that a discussion was not needed at that time.
We conduct shareholder outreach throughout the year to engage with shareholders on issues that are important to them and us. During these engagements we discussed and solicited feedback on a range of topics, which informed Board discussions and decisions, including but not limited to:
Business Strategy
● | Kroger’s growth strategy, priorities, and value drivers |
● | Our strong value creation model and recent performance |
ESG Practices & Disclosures
● | Discussions with socially conscious investors and NGOs helped inform our new ESG strategy and long-term commitments |
● | Thriving Together, Kroger’s ESG strategy, including long-term environmental sustainability, social impact, and responsible sourcing commitments, progress updates, and steps being taken to achieve our ambitious goals |
● | Board oversight of ESG strategy and updated Committee responsibilities |
● | Kroger’s ESG reporting and disclosures, including our alignment with the TCFD, SASB, and GRI reporting frameworks |
● | The centerpiece of our ESG strategy is Zero Hunger | Zero Waste, an industry-leading platform for collective action and systems change to end hunger in our communities and eliminate waste across our company |
Human Capital Management
● | Our DE&I Framework for Action and steps we are taking to ensure our workforce reflects the communities we serve |
● | Our focus on our associates’ well-being, including increasing our average hourly associate wage, comprehensive benefits, and opportunities for internal progression and leadership development training |
● | Workforce diversity reporting, including EEO-1 demographic disclosure |
● | Robust Board oversight of human rights in our supply chain |
Compensation Structure
● | Overview of compensation program design and alignment of pay and performance |
● | Consideration of short- and long-term metrics, including financial and non-financial metrics, such as ESG metrics |
● | The balance of equity and cash compensation, as well as fixed versus at risk compensation |
Board and Board Oversight
● | Our Board’s approach to board refreshment considering diversity, balance of tenure, and alignment of board skills and experience with Kroger’s current and long-term business strategies |
● | Board and Committee responsibilities for oversight of ESG priorities, and approach to risk management |
Discussions with socially conscious investors and NGOs helped inform our ESG strategy and long-term commitments. Overall shareholders expressed appreciation for the opportunity to have an ongoing discussion and were complementary of Kroger’s ESG practices. Specifically, shareholders recognized the actions we took to formalize our ESG strategy, Thriving Together, and how our Board oversees this strategy, including our ESG targets and initiatives. These conversations provided valuable insights into our shareholders’ evolving perspectives, which were shared with our full Board.
Board’s Response to Shareholder Proposals
Accountability to our shareholders continues to be an important component of our success. We actively engage with our shareholder proponents. Every year, following our Annual Shareholders’ Meeting, our Corporate Governance Committee considers the voting outcomes for shareholder proposals. In addition, our Corporate Governance Committee and other Committees, as appropriate, consider proposed courses of action in light of the voting outcomes for shareholder proposals under their oversight, as well as feedback provided directly from our shareholders.
Director Nominee Selection Process
The Corporate Governance Committee is responsible for recommending to the Board a slate of nominees for election at each annual meeting of shareholders. The Corporate Governance Committee recruits candidates for Board membership through its own efforts and through recommendations from other directors and shareholders. In addition, the Corporate Governance Committee has retainedretains an independent, third-party search firm to assist in identifying and recruiting director candidates who meet the criteria established by the Corporate Governance Committee.
These criteria are:
demonstrated ability in fields considered to be of value and government; |
experience in high growth companies and nominees whose business experience can help the Company innovate and derive new value from existing assets; |
● | highest standards of personal character and conduct; |
willingness to |
ability to understand the perspectives of Kroger’s customers, taking into consideration the diversityof our customers, including regional and geographic differences. |
10
Additionally, in connection with the use of an independent, third-party search firm to identify director candidates, the Corporate Governance Committee will instruct the firm to include in its initial list qualified female and racially/ethnically diverse candidates.
The Corporate Governance Committee also considers racial, ethnic and gender diversity, to be important elementsas discussed in promoting full, open and balanced deliberations of issues presented to the Board. The Corporate Governance Committee considers director candidates that help the Board reflect the diversity of our shareholders, associates, customersdetail under “Board Diversity” above, and the communities in which we operate. Some consideration also is given to the geographic locationspecific experience and abilities of director candidates in order to provide a reasonable distributionlight of members from Kroger’s operating areas.our current business, strategy, and structure, and the current or expected needs of the Board in its identification and recruitment of director candidates.
At least annually,
The criteria for Board membership applied by the Corporate Governance Committee actively engages in its evaluation of potential Board succession planning. The Corporate Governance Committee takes into account the Board and committee evaluations regarding the specific backgrounds, skills, and experiences that would contribute to overall Board and committee effectiveness as well as the future needs of the Board and its committees in light of Kroger’s current and future business strategies and the skills and qualifications ofmembers does not vary based on whether a candidate is recommended by our directors, who are expected to retire in the future.a third-party search firm, or shareholders.
Candidates Nominated by Shareholders
The Corporate Governance Committee will consider shareholder recommendations for director nominees for membership onelection to the Board of Directors.Board. If shareholders wish to nominate a person or persons for election to the Board at our 20172024 annual meeting, written notice must be submitted to Kroger’s Secretary, and received at our executive offices, in accordance with Kroger’s Regulations, not later than March 28, 2017.2024. Such notice should include the name, age, business address, and residence address of such person, the principal occupation or employment of such person, the number of Kroger common shares owned of record or beneficially by such person and any other information relating to the person that would be required to be included in a proxy statement relating to the election of directors. The Secretary will forward the information to the Corporate Governance Committee for its consideration. The Corporate Governance Committee will use the same criteria in evaluating candidates submitted by shareholders as it uses in evaluating candidates identified by the Corporate Governance Committee, as described above. See “Director Nominee Selection Process.”
Additionally, to comply with the universal proxy rules, shareholders who intend to solicit proxies in support of director nominees other than our nominees must provide notice to Kroger’s Secretary that sets forth the information required by Rule 14a-19 of the Exchange Act no later than April 23, 2024, and must comply with the additional requirements of Rule 14a-19(b).
Eligible shareholders have the ability to submit director nominees for inclusion in our proxy statement for the 2024 annual meeting of shareholders. To be eligible, shareholders must have owned at least 3% of our common shares for at least three years. Up to 20 shareholders are able to aggregate for this purpose. Nominations must be submitted to our Corporate Secretary at our principal executive offices no earlier than December 14, 2023 and no later than January 13, 2024.
Corporate Governance Guidelines
The Board has adopted theGuidelines,. TheGuidelines, which include copiesprovide a framework for the Board’s governance and oversight of the current charters for each of the five standing committees of the Board,Company. The Guidelines are available on our website at ir.kroger.com under CorporateInvestors — Governance – Highlights.—Corporate Governance Guidelines. Shareholders may also obtain a copy of theGuidelines, at no cost, by making a written request to Kroger’s Secretary at our executive offices. Certain key principles addressed in the Guidelines are summarized below.
Independence
The Board has determined that all of the non-employeecurrent independent directors and nominees have no material relationships with Kroger and therefore,satisfy the criteria for independence set forth in Rule 303A.02 of the NYSE Listed Company Manual. Therefore, all independent directors and nominees are independent for purposes of the New York Stock ExchangeNYSE listing standards. The Board made its determination based on information furnished to the Company by all memberseach of the directors regarding their relationships with Kroger and its management, and other relevant information. After reviewing the information, theThe Board determinedconsidered, among other things, that all of the non-employee directors were independent because:
● | the value of any business transactions between Kroger and entities with which the directors areaffiliated falls below the thresholds identified by the NYSE listing standards, and |
no directors had any material relationships with Kroger |
In determining that Mr. Sargent is independent, the Board considered transactions during fiscal 2015 between Kroger and Staples, Inc. (where Mr. Sargent is Chairman and CEO) and determined that the amount of business fell below the thresholds set by the NYSE listing standards. The transactions involved the purchase of goods by Kroger in the ordinary course of business totaling approximately $12 million and represented less than 0.06% of Staples’ annual consolidated gross revenue. Kroger periodically employs a bidding process or negotiations following a benchmarking of costs of products from various vendors for the items purchased from Staples and awards the business based on the results of that process.
11
Audit Committee Independence and Expertise
The Board has determined that Anne Gates, SusanKaren M. Phillips andHoguet, Ronald L. Sargent, and Ashok Vemuri, independent directors, who are memberseach of whom is a member of the Audit Committee, are “audit committee“Audit Committee financial experts” as defined by applicable SECSecurities and Exchange Commission (“SEC”) regulations and that all members of the Audit Committee are “financially literate” as that term is used in the NYSE listing standards and are independent in accordance with Rule 10A-3 of the Securities Exchange Act of 1934.
Code of Ethics
The Board has adoptedThe Kroger Co. Policy on Business Ethics, applicable to all officers, employeesassociates, and directors, including Kroger’s principal executive, financial, and accounting officers. ThePolicy on Business Ethics is available on our website at ir.kroger.com under CorporateInvestors — Governance – Highlights.— Policy on Business Ethics. Shareholders may also obtain a copy of thePolicy on Business Ethics by making a written request to Kroger’s Secretary at our executive offices.
Communications with the Board
The Board has established two separate mechanisms for shareholders and interested parties to communicate with the Board. Any shareholder or interested party who has concerns regarding accounting, improper use of Kroger assets, or ethical improprieties may report these concerns via the toll-free hotline (800-689-4609) or email address (helpline@kroger.com)website (ethicspoint.com) established by the Board’s Audit Committee. The concerns are investigated by Kroger’s Vice President, Chief Ethics and Compliance Officer, and the Vice President of AuditingInternal Audit and reported to the Audit Committee as deemed appropriate by the Vice President of Auditing.appropriate.
Shareholders or interested parties also may communicate with the Board in writing directed to Kroger’s Secretary at our executive offices. Communications relating to personnel issues, or our ordinary business operations, or companies seeking to do business with us, will be forwarded to the business unit of Kroger that the Secretary deems appropriate. All otherOther communications will be forwarded to the chairChair of the Corporate Governance Committee for further consideration. The chairChair of the Corporate Governance Committee will take such action as he or she deems appropriate, which may include referral to the full Corporate Governance Committee or the entire Board.
Executive Officer Succession Planning
The Guidelines provide that the Compensation Committee will review Company policies and programs for talent development and evaluation of executive officers, and will review management succession planning. In connection with the use of a third-party search firm to identify external candidates for executive officer positions, including the chief executive officer, the Board and/or the Company, as the case may be, will instruct the third-party search firm to include in its initial list qualified female and racially/ethnically diverse candidates.
Attendance
The Board held five14 meetings in fiscal year 2015.2022. During fiscal year 2015,2022, all incumbent directors attended at least 75% of the aggregate number of meetings of the Board and committeesCommittees on which that director served. Members of the Board are expected to use their best efforts to attend all annual meetings of shareholders. All elevenBoard members then serving on the Board attended last year’s virtual annual meeting.
Independent Compensation Consultants
The Compensation Committee directly engages a compensation consultant from Mercer Human Resource Consulting to advise the Compensation Committee in the design of Kroger’s executive compensation. The Committee retained Korn Ferry Hay (US) (“Korn Ferry”) beginning in December 2017. Retained by – and reporting directly to – the Compensation Committee, Korn Ferry provided the Committee with assistance in evaluating Kroger’s executive compensation programs and policies.
In 2015,fiscal 2022, Kroger paid that consultant $390,767Korn Ferry $402,007 for work performed for the Compensation Committee. Kroger, on management’s recommendation, retained the parent and affiliated companies of Mercer Human Resource ConsultingKorn Ferry to provide other services for Kroger in 2015,fiscal 2022 for which Kroger paid $2,339,577.$69,500. These other services primarily related to insurance claims (for which Kroger was reimbursed by insurance carriers as claims were adjusted), insurance brokeragesalary surveys, benchmarking, integrated reporting, and bonding commissions provided by Marsh USA Inc., and pension plan compliance and actuary services provided by Mercer Inc. Kroger also made payments to affiliated companies for insurance premiums that were collected by the affiliated companies on behalf of insurance carriers, but these amounts are not included in the totals referenced above, as the amounts were paid over to insurance carriers for services provided by those carriers.
12
Although neither theoperational finance review. The Compensation Committee nor the Board expressly approved the other services, afterKorn Ferry performing these additional services. After taking into consideration the NYSE’s independence standards and the SEC rules, the Compensation Committee determined that the consultant isKorn Ferry was independent, and histheir work has not raised any conflict of interest because:interest.
The Compensation Committee may engage an additional compensation consultant from time to time as it deems advisable.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was an officer or employeeassociate of Kroger during fiscal 2015,2022, and no member of the Compensation Committee is a former officer of Kroger or was a party to any disclosable related person transaction involving Kroger.Kroger required to be disclosed under Item 404 of Regulation S-K. During fiscal 2015,2022, none of our executive officers served on the boardBoard of directors or on the compensation committeeCommittee of any other entity that has or had executive officers serving as a member of Kroger’s Board of Directors or Compensation Committee of the Board.
Board
The Board’s Role in Risk Oversight of Enterprise Risk
While risk management is primarily the responsibility of Kroger’s management team, the Board is responsible for strategic planning and overall supervision of our risk management activities. The Board’s oversight of the material risks faced by Kroger occurs at both the full Board level and at the committee level.Committee level, each of which may engage advisors and experts from time to time to provide advice and counsel on risk-related matters.
We believe that our approach to risk oversight optimizes our ability to assess inter-relationships among the various risks, make informed cost-benefit decisions, and approach emerging risks in a proactive manner for Kroger. We also believe that our risk oversight structure complements our current Board leadership structure, as it allows our independent directors, through the five fully independent Board Committees, and in executive sessions of independent directors led by the Lead Director, to exercise effective oversight of the actions of management’s identification of risk and implementation of effective risk management policies and controls.
The Board receives presentations throughout the year from various department and business unit leaders that include discussion of significant risks, including newly identified and evolving high priority risks. When new risks are identified, management conducts, and either the full Board or the appropriate Board committee reviews and discusses, an enterprise risk assessment related to such new risks which may include human capital, supply chain, associate and customer health and safety, legal, regulatory, and other risks. Management and the Board then discuss the relative severity of each category of risk as necessary. well as mitigating actions and considerations relating to disclosures of material risks.
At each Board meeting, the Chairman and CEO addresses matters of particular importance or concern, including any significant areas of risk, such as newly identified risks, that require Board attention. Additionally, through dedicated sessions focusing entirely on corporate strategy, the full Board reviews in detail Kroger’s short- and long-term strategies, including consideration of significant risks facing Kroger – either immediately or longer term – and their potential impact. The independent directors, in executive sessions led by the Lead Director, address matters of particular concern, including significant areas of risk, that warrant further discussion or consideration outside the presence of Kroger employees. At the committee level, reports are given by management subject matter experts to each committeeCommittee on risks within the scope of their charters. Each Committee reports to the full Board at each meeting, including any areas of risk discussed by the Committee.
The Audit Committee has oversight responsibility not only for financial reporting of Kroger’s major financial exposures and the steps management has taken to monitor and control those exposures, but also for the effectiveness of management’s processes that monitor and manage key business risks facing Kroger, as well as the major areas of risk exposure, and management’s efforts to monitor and control thatthe major areas of risk exposure. The Audit Committee incorporates its risk oversight function into its regular reports to the Board and also discusses with management its policies with respect to risk assessment and risk management.
Management, including our
Our Vice President, Chief Ethics and Compliance Officer provides regular updates throughout the year to the respectiveAudit Committee on our compliance risks and actions taken to mitigate that risk. In addition, the Audit Committee is charged with oversight of data privacy and cybersecurity risks. Protection of our customers’ data is a fundamental priority for our Board committees regardingand management ofteam. Our Chief Information Officer and our Chief Information Security Officer provide updates at each quarterly Committee meeting on our cybersecurity risks and actions taken to mitigate that risk to the risks they oversee,Audit Committee and each of these committees reports on risk tomeet with the full Board at each regular meetingleast annually. The Chief Information Security Officer reports on compliance and regulatory issues, continuously evolving threats and mitigating actions, and presents a NIST Cybersecurity Framework Scorecard to the Audit Committee. In overseeing cybersecurity risks, the Audit Committee focuses on thematic issues within an aggregated strategic lens and uses a risk-based approach. Oversight of cybersecurity risk incorporates strategy metrics, third party assessments, and internal audit and controls. Finally, an independent third party also regularly reports to the Audit Committee/Board on cybersecurity and outside counsel advises the Board about best practices for cybersecurity oversight by the Board, and the evolution of that oversight over time. Management also reports on strategic key risk indicators, ongoing initiatives, and significant incidents and their impact.
Board Oversight of Environmental, Sustainability, and Governance
We are aligned with the desire of our customers, associates, and shareholders to engage in our communities and reduce our impacts on the environment while continuing to create positive economic value over the long-term. Given the breadth of topics and their importance to us, all of our Board Committees have direct oversight of environmental, social, and governance topics. ESG topics our Board Committees oversee are as follows:
Audit | ● Legal & Regulatory ● Ethics ● Operational and Third-Party Compliance ● Data Privacy & Cyber Security ● Financial Integrity |
Compensation & Talent Development | ● Human Capital Management ● Talent Development ● Executive Compensation ● Diversity, Equity & Inclusion |
Corporate Governance | ● Board recruitment/diversity ● Board succession ● Shareholder engagement program ● Shareholder advisory votes & shareholder proposals ● Independent director compensation |
Finance | ● Capital spending to ensure consistency with ESG strategy and goals |
Public Responsibilities | ● Environmental Sustainability ✓ Climate Impacts ✓ Packaging ✓ Food Waste (Zero Waste) ● Social Impact ✓ Food Access and Affordability (Zero Hunger) ✓ Local Communities ✓ Philanthropy ✓ Responsible Sourcing ⮚ Human Rights ⮚ Animal Welfare ● Safety ✓ Food ✓ People ✓ Pharmacy ● Advocacy & Public Policy ✓ Government Relations ✓ Political action (KroPAC) ● Communications & Brand Stewardship ✓ Associate & External Communications ● Stakeholder Relations |
Our commitment to ESG matters is not new. Our Public Responsibilities Committee was established in 1977. For the past 16 years, our Company has prepared and produced an annual report describing our progress and initiatives regarding sustainability and other ESG matters. For the most recent information regarding our ESG initiatives and related matters, please visit https://www.thekrogerco.com/esgreport/. The information on, or accessible through, this website is not part of, or incorporated by reference into, this proxy statement.
In addition, our full Board oversees issues related to diversity and inclusion within the Kroger workplace. Diversity and inclusion have been deeply rooted in Kroger’s values for decades. We are committed to fostering an environment of inclusion in the workplace, marketplace, and workforce where the diversity of cultures, backgrounds, experiences, perspectives, and ideas are valued and appreciated. Kroger’s corporate team and retail divisions have strategic collaborations with universities, educational institutions, and community organizations to improve how we attract candidates from all backgrounds and ethnicities for jobs at all levels. Diversity and inclusion will continue to be a key ingredient in feeding Kroger’s innovation, long-term sustainability, and the human spirit.
The Kroger family of companies provides inclusion training to all management and all hourly associates. Most work locations (stores, plants, distribution centers, and offices) have an inclusion-focused team, called Our Promise team. The teams work on projects that reflect Kroger’s values, offer leaders valuable feedback and suggestions on improving diversity and inclusion, and facilitate communication to champion business priorities.
Our Commitment to Diversity, Equity, & Inclusion
Kroger’s Chief People Officer leads Human Resources & Labor Relations, which includes our Diversity, Equity & Inclusion team. This function — with human resources professionals in place across our lines of business and retail divisions — advocates for and fosters an associate experience that reflects our Values. It also monitors and measures progress toward goals and identifies potential opportunities for improvement.
Kroger publicly affirmed our commitment with our Framework for Action: Diversity, Equity, & Inclusion, a 10-point plan outlining short- and longer-term steps developed with associates and leaders to promote greater change in the workplace and the communities we serve. This framework outlines five focus areas: Create More Inclusive Culture, Develop Diverse Talent, Advance Diverse Partnerships, Advance Equitable Communities, and Deeply Listen and Report Progress. More details about the plan are available here: https://www.thekrogerco.com/community/standing-together/. The information on, or accessible through, this website is not part of, or incorporated by reference into, this proxy statement.
Enabling Connections
As part of the Board.
We believe thatframework, we committed to provide inclusion training for our approachassociates. More than 661,000 leaders and associates have completed diversity and inclusion training since 2020. In 2020, Kroger formed an internal Diversity, Equity, & Inclusion Advisory Council comprised of leaders from across the organization. The Council works closely with our executive leadership team and other business leaders to risk oversight, as described above, optimizes our ability to assess inter-relationships among the various risks, make informed cost-benefit decisions,identify opportunities and approach emerging risks in a proactive manneraction steps for Kroger.improvement. We also believecreated an Associate Influencer Group to facilitate representation and input from all levels of the company.
Kroger also operates 15 internal Associate Resource Groups (ARGs), or affinity groups, some of which also have local chapters. These groups enable stronger connections across our family of companies, lift up shared experiences, promote personal and professional growth, and influence business decisions. Kroger leaders sponsor and personally engage with the ARGs.
Workplace Equity
Kroger strives to attract, retain, and develop diverse leaders and associates who reflect the communities we serve. We offer accessible employment for a wide range of people across the country. Because of our unique business model, we help unlock economic opportunity for more than 430,000 people of all ages and aspirations, from those wanting an entry-level part-time job to graduate-degree specialists across corporate functions.
Kroger strategically invests in our associates’ growth and movement across levels, lines of business, and geographies. Our goal is to shift the demographic representation of women and people of color at company-wide and local levels to reflect our changing country, communities, and neighborhoods. The Diversity, Equity, & Inclusion Advisory Council helps define aspirations for our workforce of the future.
Community Engagement
As part of our Framework for Action, the Company also pledged to invest in advancing equitable communities. Kroger directed a total of $10 million to establish and advance The Kroger Co. Foundation’s Racial Equity Fund in 2020. To date, the Foundation has directed $5.7 million in grants to organizations driving positive change at national and local levels.
In 2022, the Foundation directed $1 million to The Asian American Foundation to support the Asian-American community. As part of its continuing relationship with the Thurgood Marshall College Fund, the Foundation also hosted its second annual Zero Hunger | Zero Waste Innovation Challenge. During the three-day business pitch competition with 36 students from Historically Black Colleges and Universities across the U.S., the Foundation awarded a total of $75,000 in scholarships. In collaboration with Proctor & Gamble, the Foundation also introduced the Game Changers Scholarship program and awarded $25,000 in scholarships to five diverse female students in the Greater Cincinnati area.
Director Compensation
2022 Director Compensation
The following table describes the fiscal year 2022 compensation for independent directors. Mr. McMullen does not receive compensation for his Board service.
Name | Fees Earned or Paid in Cash | Stock Awards(1) | Change in Pension Value and Nonqualified Deferred Compensation(2) | Total | ||||||||||||
Nora A. Aufreiter | $ | 114,691 | $ | 186,382 | $ | 0 | $ | 301,073 | ||||||||
Kevin M. Brown | $ | 109,704 | $ | 186,382 | $ | 0 | $ | 296,086 | ||||||||
Elaine L. Chao | $ | 99,731 | $ | 186,382 | $ | 0 | $ | 286,113 | ||||||||
Anne Gates | $ | 134,637 | $ | 186,382 | $ | 0 | $ | 321,019 | ||||||||
Karen M. Hoguet | $ | 124,664 | $ | 186,382 | $ | 0 | $ | 311,046 | ||||||||
Clyde R. Moore | $ | 119,677 | $ | 186,382 | — | $ | 306,059 | |||||||||
Ronald L. Sargent | $ | 162,063 | $ | 186,382 | $ | 5,282 | $ | 353,727 | ||||||||
Amanda Sourry | $ | 99,731 | $ | 186,382 | $ | 0 | $ | 286,113 | ||||||||
Mark S. Sutton | $ | 99,731 | $ | 186,382 | $ | 0 | $ | 286,113 | ||||||||
Ashok Vemuri | $ | 109,704 | $ | 186,382 | $ | 0 | $ | 296,086 |
(1) | Amounts reported in the Stock Awards column represent the aggregate grant date fair value of the annual incentive share award, computed in accordance with FASB ASC Topic 718. On July 13, 2022, each independent director then serving received 3,887 incentive shares with a grant date fair value of $186,382. |
(2) | The amount reported for Mr. Sargent represents preferential earnings on nonqualified deferred compensation. For a complete explanation of preferential earnings, please refer to footnote 4 to the Summary Compensation Table. Mr. Moore’s pension value decreased by $210,996 which represents the change in actuarial present value of his accumulated benefit under the pension plan for independent directors. This change in value of accumulated pension benefits is not included in the Director Compensation Table because the value decreased. Pension values may fluctuate significantly from year to year depending on a number of factors, including age, average annual earnings, and the assumptions used to determine the present value, such as the discount rate. The decrease in the actuarial present value of his accumulated pension benefit for 2022 is primarily due to the increase in the discount rate as well as the change in value due to aging. |
Annual Compensation
Each independent director receives an annual cash retainer of $100,000. The Lead Director receives an additional annual retainer of $37,500 per year; the members of the Audit Committee each receive an additional annual retainer of $10,000; the Chair of the Audit Committee receives an additional annual retainer of $25,000; the Chair of the Compensation Committee receives an additional annual retainer of $20,000; and the Chair of each of the other Committees receives an additional annual retainer of $15,000. Each independent director also receives an annual grant of incentive shares (Kroger common shares) with a value of approximately $185,000.
The Board has determined that our risk structure complements our current Board leadership structure, as it allows our independent directors, through the five fully independent Board committees, and in executive sessionscompensation of independent directors ledmust be competitive on an ongoing basis to attract and retain directors who meet the qualifications for service on the Board. Independent director compensation was adjusted in 2021 and will be reviewed from time to time as the Corporate Governance Committee deems appropriate.
Pension Plan
Independent directors first elected prior to July 17, 1997 receive an unfunded retirement benefit equal to the average cash compensation for the five calendar years preceding retirement. Only Mr. Moore is eligible for this benefit. Benefits begin at the later of actual retirement or age 65.
Nonqualified Deferred Compensation
We also maintain a deferred compensation plan for independent directors. Participants may defer up to 100% of their cash compensation and/or the receipt of all (and not less than all) of the annual award of incentive shares.
Cash Deferrals
Cash deferrals are credited to a participant’s deferred compensation account. Participants may elect from either or both of the following two alternative methods of determining benefits:
● | interest accrues until paid out at the rate of interest determined prior to the beginning of the deferral year to represent Kroger’s cost of ten-year debt; and/or |
● | amounts are credited in “phantom” stock accounts and the amounts in those accounts fluctuate with the price of Kroger common shares. |
In both cases, deferred amounts are paid out only in cash, based on deferral options selected by the Lead Director,participant at the time the deferral elections are made. Participants can elect to exercise effective oversighthave distributions made in a lump sum or in quarterly installments, and may make comparable elections for designated beneficiaries who receive benefits in the event that deferred compensation is not completely paid out upon the death of the actionsparticipant.
Incentive Share Deferrals
Participants may also defer the receipt of management, led by Mr. McMullen as Chairmanall (and not less than all) of the annual award of incentive shares. Distributions will be made by delivery of Kroger common shares within 30 days after the date which is six months after the participant’s separation of service.
Director Stock Ownership Guidelines
Independent directors are required to own shares equivalent to five times their annual base cash retainer. For more details on the Stock Ownership Guidelines, see page 60.
Beneficial Ownership of Common Stock
The following table sets forth the common shares beneficially owned as of April 24, 2023 by Kroger’s directors, the NEOs, and the directors and executive officers as a group. The percentage of ownership is based on 723,532,073 of Kroger common shares outstanding on April 24, 2023. Shares reported as beneficially owned include shares held indirectly through Kroger’s defined contribution plans and other shares held indirectly, as well as shares subject to stock options exercisable on or before June 23, 2023. Except as otherwise noted, each beneficial owner listed in the table has sole voting and investment power with regard to the common shares beneficially owned by such owner. Unless otherwise indicated, the address of each of the beneficial owners listed below is c/o The Kroger Co., Corporate Secretary, 1014 Vine Street, Cincinnati, OH 45202.
Name | Amount and Nature of Beneficial Ownership(1) | Options Exercisable on or before June 23, 2023 – included in column (a) | ||||||
Stuart W. Aitken(2) | 441,766 | 260,420 | ||||||
Nora A. Aufreiter(3) | 48,543 | — | ||||||
Kevin M. Brown | 11,004 | — | ||||||
Elaine L. Chao(3) | 8,036 | |||||||
Yael Cosset | 399,835 | 248,377 | ||||||
Anne Gates(3) | 43,125 | — | ||||||
Karen M. Hoguet(4) | 19,552 | — | ||||||
Timothy A. Massa | 506,660 | 311,704 | ||||||
W. Rodney McMullen | 6,353,306 | 2,772,130 | ||||||
Gary Millerchip | 540,043 | 354,620 | ||||||
Clyde R. Moore | 121,423 | — | ||||||
Ronald L. Sargent(3) | 180,871 | — | ||||||
Amanda Sourry | 11,004 | — | ||||||
Mark S. Sutton(3) | 38,452 | — | ||||||
Ashok Vemuri | 24,900 | — | ||||||
Directors and executive officers as a group (22 persons, including those named above) | 9,988,204 | 4,579,577 |
(1) | No director or officer owned as much as 1% of Kroger common shares. The directors and executive officers as a group beneficially owned 1.4% of Kroger common shares. |
(2) | This amount includes 3,018 shares held by Mr. Aitken’s spouse. He disclaims beneficial ownership of these shares. |
(3) | This amount includes incentive share awards that were deferred under the deferred compensation plan for independent directors in the following amounts: Ms. Aufreiter, 10,037; Ms. Chao, 3,952; Ms. Gates, 12,100; Mr. Sargent, 55,960; Mr. Sutton, 6,909. |
(4) | This amount includes 2,075 shares held by Ms. Hoguet’s spouse. She disclaims beneficial ownership of these shares. |
The following table sets forth information regarding the beneficial owners of more than five percent of Kroger common shares as of April 24, 2023 based on reports on Schedule 13G filed with the SEC.
Name | Address | Amount and Nature of Ownership | Percentage of Class | |||||||
Berkshire Hathaway Inc. | 3555 Farnam Street Omaha, NE 68131 | 50,000,000 | (1) | 7.0 | % | |||||
BlackRock, Inc. | 55 East 52nd Street New York, NY 10055 | 65,963,885 | (2) | 9.2 | % | |||||
The Vanguard Group | 100 Vanguard Blvd. Malvern, PA 19355 | 82,426,702 | (3) | 11.51 | % |
(1) | Reflects beneficial ownership by Berkshire Hathaway Inc. as of December 31, 2022, as reported on Schedule 13G filed with the SEC on February 14, 2023, reporting shared voting power with respect to 50,000,000 common shares, and shared dispositive power with regard to 50,000,000 common shares. |
(2) | Reflects beneficial ownership by BlackRock Inc., as of December 31, 2022, as reported on Amendment No. 15 to Schedule 13G filed with the SEC on January 24, 2023, reporting sole voting power with respect to 59,579,943 common shares, and sole dispositive power with regard to 65,963,885 common shares. |
(3) | Reflects beneficial ownership by The Vanguard Group as of December 30, 2022, as reported on Amendment No. 8 to Schedule 13G filed with the SEC on February 9, 2023, reporting shared voting power with respect to 931,562 common shares, sole dispositive power of 79,719,502 common shares, and shared dispositive power of 2,707,200 common shares. |
Related Person Transactions
The Board has adopted a written policy requiring that any Related Person Transaction may be consummated or continue only if the Audit Committee approves or ratifies the transaction in accordance with the policy. A “Related Person Transaction” is one (a) involving Kroger, (b) in which one of our directors, nominees for director, executive officers, or greater than five percent shareholders, or their immediate family members, have a direct or indirect material interest; and CEO,(c) the amount involved exceeds $120,000 in identifying risksa fiscal year.
The Audit Committee will approve only those Related Person Transactions that are in, or not inconsistent with, the best interests of Kroger and implementing effective riskits shareholders, as determined by the Audit Committee in good faith in accordance with its business judgment. No director may participate in any review, approval, or ratification of any transaction if he or she, or an immediate family member, has a direct or indirect material interest in the transaction.
Where a Related Person Transaction will be ongoing, the Audit Committee may establish guidelines for management policiesto follow in its ongoing dealings with the related person and controls.the Audit Committee will review and assess the relationship on an annual basis to ensure it complies with such guidelines and that the Related Person Transaction remains appropriate.
13
Compensation Discussion and Analysis
Executive Summary
Named Executive Officers
This Compensation Discussion and Analysis provides a discussionan overview of the elements and analysisphilosophy of our executive compensation program foras well as how and why the Compensation Committee and our named executive officersBoard of Directors make specific compensation decisions and policies with respect to our Named Executive Officers (“NEOs”). For
Executive Summary
We delivered exceptional performance in 2022. Kroger achieved exceptional results in 2022 as we executed on our Leading with Fresh and Accelerating with Digital strategy, building on record years in 2020 and 2021. We are delivering a fresh, affordable, and seamless shopping experience for our customers, with zero compromise on quality, selection, or convenience. We are delivering on our financial commitments through our strong, resilient Value Creation Model. In 2022, we achieved financial performance results of ID sales, without fuel, of 5.6%, and adjusted FIFO operating profit, including fuel, of $5.1 billion1. | ||
Our executive compensation program aligns with long-term shareholder value creation. 91% of our CEO’s target total direct compensation and, on average, 84% of the other NEOs’ compensation is at risk and performance-based, tied to achievement of performance targets that are important to our shareholders or our long-term share price performance. | ||
The annual performance incentive was earned above target reflecting our 2022 performance. The annual incentive program, based on a grid of identical sales, excluding fuel, and adjusted FIFO operating profit, including fuel, paid out at 192.40% of target. In light of macroeconomic conditions, including inflation, as well as the Compensation Committee’s desire to create ongoing alignment with shareholders and reward sustained performance beyond 2022, the Compensation Committee determined to structure the payout to the NEOs as follows: 150% in cash and the remaining 42.4% in restricted stock vesting in one year. | ||
The long-term performance incentive payout reflects alignment with performance over fiscal years 2020, 2021, and 2022. Long-term performance unit equity awards granted in 2020 and tied to commitments made to our investors and other stakeholders regarding long-term sales growth, adjusted FIFO operating profit growth, free cash flow generation, our commitment to Fresh, and Relative Total Shareholder Return were earned at 93.75% of target. | ||
We prioritized investment in our people. We strive to create a culture of opportunity for nearly 430,000 associates and take seriously our role as a leading employer in the United States. In 2022, we invested more than ever in our associates by continuing to raise our average hourly wage to $18, or over $23, including industry-leading benefits. | ||
In response to our shareholder feedback, we incorporated an ESG metric focused on diversity and inclusion into our 2022 individual performance management program. Our core values of Diversity, Equity & Inclusion are incorporated into compensation decisions made for our associates who supervise a team of others, which range from store department leaders through our NEOs. These performance goals are factored into compensation decisions for these leaders, including salary increases and the amount of the annual grant of equity awards. |
1 See pages 27 – 33 of our Annual Report on Form 10-K for the 2015 fiscal year ended January 30, 2016,28, 2023, filed with the NEOs were:SEC on March 28, 2023, for a reconciliation of GAAP operating profit to adjusted FIFO operating profit.
Our Named Executive Officers for Fiscal 2022
Name | Title | |
W. Rodney McMullen | Chairman and Chief Executive Officer | |
Messrs. Schlotman, Donnelly, Hjelm
Fiscal 2022 Financial and Morganthall were each promotedStrategic Performance Highlights
Driven by our unwavering purpose to Feed the positionHuman Spirit, Kroger achieved exceptional results in 2022 as we executed on our Leading with Fresh and Accelerating with Digital strategy, building on record years in 2020 and 2021. Our associates are customer-focused, delivering the products customers want, when and how they want them, with zero compromise on quality, convenience, and selection.
In 2022, we achieved financial performance results of Executive Vice President effective September 1, 2015.
Executive Compensation in Context: Our Growth Plan, Financial Strategy and Fiscal Year 2015 Results
Kroger’s growth plan includes four key performance indicators: positive identical supermarketID sales, without fuel, (“ID Sales”) growth, slightly expanding non-fuel first in, first out (“FIFO”) operating margin, growing return on invested capital (“ROIC”)of 5.6%, and annual market share growth.adjusted FIFO operating profit of $5.1 billion. We have built a digital platform that offers a seamless shopping experience, allowing customers to shift effortlessly between store, pickup and delivery solutions. In 2015,2022, we met or exceededincreased delivery sales, opened new customer fulfilment centers, increased digitally engaged households, and grew loyalty as our goalscustomers more deeply engaged with personalized coupons and fuel rewards.
Our associates enable our success, and we are committed to investing in theirs by continuing to improve wages, comprehensive benefits, and career development opportunities. We invested approximately $600 million in incremental wages in 2022, for eacha total of $1.9 billion in incremental investments since 2018.
Continued strategic efforts to streamline our operations allowed us to achieve cost savings greater than $1 billion for the fifth consecutive year to balance these performance indicators:investments without compromising food affordability for our customers across our communities.
The compensation
As part of our NEOsZero Hunger | Zero Waste social and environmental impact plan, in 2015 reflects Kroger’s short-term2022, we donated nearly 600 million meals to feed families across America.
Our proven go-to-market strategy enables us to successfully navigate many operating environments. We believe that by delivering value for our customers, investing in our associates and long-term goalsserving our communities, we will continue to achieve attractive and outcomes. Totalsustainable total returns for our shareholders.
2022 Advisory Vote to Approve Executive Compensation and Shareholder Engagement
At the 2022 annual meeting, we held our annual advisory vote on executive compensation. Approximately 92% of the votes cast were in favor of the advisory vote. As part of our ongoing dialogue with our shareholders regarding governance matters, in 2022, we requested meetings with 32 shareholders representing 49% of our outstanding shares during proxy season and off-season engagement and 7 shareholders representing 24% of our outstanding shares accepted our invitation to share feedback. Some investors we contacted either did not respond or confirmed that a discussion was not needed at that time.
Conversations in these meetings included discussions about our NEO’s compensation forprogram, with our shareholders providing feedback that they appreciated the year is an indicatorpay-for-performance structure of our executive pay program. The Compensation Committee considers both the general and specific feedback received from shareholders, and with the guidance of our independent compensation consultant, incorporates that input into pay design.
During shareholder engagement, we specifically discuss our shareholders’ perspectives on ESG metrics in executive compensation programs. Our investors are all supportive of companies’ decisions to incorporate ESG metrics, but none are prescriptive about how well Kroger performed comparedto do so. Our investors share our view that a range of ESG matters are essential to our business plan, reflecting howcurrent and future success, and acknowledge that ESG priorities are embedded into our compensation program respondsstrategic and operational priorities. Management collects and reports the feedback to business challengesthe Compensation Committee, and the marketplace.Committee decided, beginning in 2022, to integrate our core values of Diversity, Equity & Inclusion into compensation decisions made for our associates who supervise a team of others, which range from store department leaders through our NEOs. Specifically, one of several performance goals established for these associates and senior officers relate to improvement in the Diversity, Equity, & Inclusion category score as measured by our annual Associate Insights Survey and active mentorship and development of at least one other associate with a different background. These performance goals are factored into compensation decisions for these associates and senior officers, including salary increases and the amount of the annual grant of equity awards, consistent with our program design as described herein.
14
Summary of Key
2022 Compensation PracticesProgram Overview
Summary of Fixed and At-Risk Pay Elements
The fixed and at-risk pay elements of the NEO compensation program are reflected in the following table and charts.
Fiscal Year 2022 CEO Compensation
The Compensation Committee establishes Mr. McMullen’s target direct compensation such that only 9% of his compensation is fixed. The remaining 91% of target compensation is at-risk, meaning that the actual compensation Mr. McMullen receives will depend on the extent to which the Company achieves the performance metrics set by the Compensation Committee, and with respect to all of the equity vehicles, the future value of Kroger common shares.
The table below compares fiscal 2022 to 2021 target direct compensation. Target total direct compensation is a more accurate reflection of how the Compensation Committee benchmarks and establishes CEO compensation than the disclosure provided in the Summary Compensation Table, which includes a combination of actual base salaries and annual incentive compensation earned in the fiscal year, the grant date fair market value of at-risk equity compensation to be earned in future fiscal years, and the actuarial value of future pension benefits.
Increases to Mr. McMullen’s pay elements shown below were based on our independent compensation consultant’s examination of pay levels and the Committee’s intention to achieve median pay levels among our peer group. Target total compensation, which is the sum of target annual compensation and target long term compensation is positioned around market median.
($000s)
Annual | Long-Term | ||||||||||||||||||||||||||||||||||
Year | Salary | Target Annual Incentive | Total Annual | Performance Units | Restricted Stock | Stock Options | Total LTI | Target TDC | Increase | ||||||||||||||||||||||||||
2022 | 1,400 | 2,800 | 4,200 | 5,750 | 3,450 | 2,300 | 11,500 | 15,700 | +5.6% | ||||||||||||||||||||||||||
2021 | 1,355 | 2,500 | 3,855 | 5,500 | 3,300 | 2,200 | 11,000 | 14,855 |
CEO and Named Executive Officer Target Pay Mix
The amounts used in the charts below are based on the amounts reported in the Summary Compensation Table for 2015, excluding the Change in Pension Value and Nonqualified Deferred Compensation Earnings column.
|
15
|
|
| |
|
|
16
|
|
The following discussion and analysis addresses the compensation of the NEOs and the factors considered by the Compensation Committee in setting compensation for the NEOsCEO and in the caseaverage of other NEOs. As illustrated below, 91% of the CEO’s target total direct compensation making recommendationsis at-risk. On average, 84% of the other NEOs’ compensation is at risk.
*Total exceeds 100% due to the independent directors. Additional detail is provided in the compensation tables and the accompanying narrative disclosures that follow this discussion and analysis.rounding.
Our Compensation Philosophy and Objectives
As one of the largest retailers in the world, our
Our executive compensation philosophy is to attract and retain the best management talent and toas well as motivate these employeesassociates to achieve our business and financial goals. Kroger’s incentive plans are designed to reward the actions that lead to long-term value creation. We believe our strategy creates value for shareholders in a manner consistent with Kroger’s purpose: To Feed the Human Spirit. The Compensation Committee believes that there is a strong link between our business strategy, the performance metrics in our short-term and long-term incentive programs, and the business results that drive shareholder value.
We believe our strategy creates value for shareholders in a manner consistent with our focus on our core values: honesty, integrity, respect, inclusion, diversity and safety.
To achieve our objectives, the Compensation Committee seeks to ensure that compensation is competitive and that there is a direct link between pay and performance. To do so, it is guided by the following principles:
● | Compensation must be designed to attract and retain those individuals who are best suited to be an NEO at Kroger. |
● | A significant portion of pay should be performance-based, with the percentage of total pay tied to performance increasing proportionally with an |
● | Compensation should include incentive-based pay to drive performance, providing superior pay for superior performance, including both a short- and long-term focus. |
● | Compensation policies should include an opportunity for, and a requirement of, significant equity ownership to align the interests of |
● | Components of compensation should be tied to an evaluation of business and individual performance measured against metrics that directly drive our business
|
● | Compensation plans should provide a direct line of sight to company performance. |
● | Compensation programs should be aligned with market practices. |
● | Compensation programs should serve to both motivate and retain talent. |
Summary of Key Compensation Practices
What we do: | What we do not do: | ||
✓ Alignment of pay and performance ✓ Stock ownership guidelines for executives ✓ Multiple performance metrics under our short- and long-term performance-based plans discourage excessive risk taking and align with our long-term value creation strategy ✓ Double-trigger change in control provisions in all equity awards ✓ Double-trigger change in control provisions in cash severance benefits ✓ All long-term compensation is equity-based ✓ Engagement of an independent compensation consultant ✓ Robust clawback policy ✓ Ban on hedging, pledging, and short sales of Kroger securities ✓ Minimal perquisites |
× No special severance or change in control programs applicable only to executive officers × No cash component in long-term incentive plans × No tax gross-up payments for executives × No special executive life insurance benefit × No re-pricing or backdating of stock options without shareholder approval × No guaranteed salary increases or bonuses × No payment of dividends or dividend equivalents until performance units are earned × No evergreen or reload feature; no shares can be | ||
| |||
|
17
Components
Establishing Each Component of Executive Compensation at Kroger
The Compensation for our NEOs is comprisedCommittee recommends, and the independent members of the following:Board determine, each component of the CEO’s compensation. The CEO recommends, and the Compensation Committee determines, each component of the other NEOs’ compensation. The Compensation Committee and the Board made changes to compensation in March of 2022. Equity awards were granted in March and salary and annual incentive plan increases were effective April 1, 2022.
|
The Compensation Committee determines the amount of each NEO’s salary, annual cash incentive plan target, and long-term performance-basedequity compensation awards described herein were made pursuant to our 2011 Long-Term Incentiveby taking into consideration numerous factors including:
● | An assessment of individual contribution and performance; |
● | Benchmarking with comparable positions at peer group companies; |
● | Level in organization and tenure in role; and |
● | Internal equity among executives. |
The assessment of individual contribution and Cash Bonus Planperformance is a qualitative determination, based on the following factors:
● | Leadership; |
● | Contribution to the executive officer group; |
● | Achievement of established performance objectives; |
● | Decision-making abilities; |
● | Performance of the areas or groups directly reporting to the NEO; |
● | Support of company culture; |
● | Strategic thinking; and |
● | Demonstrated commitment to Kroger’s Values: Safety, Honesty, Integrity, Respect, Diversity, and Inclusion, including improvement in the DE&I category score as measured by our annual Associate Insights Survey and active mentorship and development of at least one other associate with a different background. |
At the end of each year, individual performance is evaluated based on the NEO’s performance objectives listed above, and our 2014 Long-Term Incentivethe results of that evaluation are used in the determination of salary increases and Cash Bonus Plan, eachthe grant amount of all annual equity awards: restricted stock and stock options, which was approved by our shareholders in 2011are time-based, and 2014, respectively.performance units granted under the long-term incentive plan, which are performance- based.
Annual
Elements of Compensation –
Salary
Our philosophy with respect to salary is to provide a sufficient and stable source of fixed cash compensation. All of our compensation cannot be at-risk or long-term. Itthat is important to provide a meaningful annual salarycompetitive with the market to attract and retain a high caliber leadership team,team. NEO salaries, effective April 1, 2021 and to have an appropriate level of cash compensation that is not variable.April 1, 2022 were as follows:
Salaries for the NEOs (with the exception of the CEO) are established each year by the Compensation Committee, in consultation with the CEO. The CEO’s salary is established by the independent directors. Salaries for the NEOs are reviewed annually in June.
The amount of each NEO’s salary is influenced by numerous factors including:
The assessment of individual contribution is a qualitative determination, based on the following factors:
18
The amounts shown below reflect the salaries of the NEOs effective at the end of each fiscal year.
Salary | ||||||||
2013 | 2014 | 2015 | ||||||
W. Rodney McMullen(1) | $ | 1,100,000 | $ | 1,200,000 | $ | 1,240,000 | ||
J. Michael Schlotman(2) | $ | 735,000 | $ | 760,000 | $ | 840,000 | ||
Michael J. Donnelly(2) | $ | 643,560 | $ | 662,900 | $ | 750,000 | ||
Christopher T. Hjelm(2)(3) | $ | 700,000 | ||||||
Frederick J. Morganthall II(2)(3) | $ | 670,000 |
Name | 2021 Base Salary | 2022 Base Salary | ||||||
W. Rodney McMullen | $ | 1,355,000 | $ | 1,400,000 | ||||
Gary Millerchip | $ | 750,000 | $ | 825,000 | ||||
Stuart W. Aitken | $ | 885,000 | $ | 925,000 | ||||
Yael Cosset | $ | 750,000 | $ | 825,000 | ||||
Timothy A. Massa | $ | 800,000 | $ | 850,000 |
2022 Annual Compensation – Performance-Based Annual Cash BonusIncentive Plan
The NEOs along with approximately 13,000 of their fellow Kroger associates, participate in a corporate performance-based annual cash bonusincentive plan. Approximately 7,000 of those associates are eligible for the same plan as the NEOs. The remaining associates are eligible for an annual cash bonus plan of which 40% is based on the Kroger corporate plan and 60% is based on the metrics and targets for their respective supermarket division or operating unit of the Company.
Over time, the Compensation Committee and our independent directors have placed an increased emphasis on our strategic plan by making the targets more difficult to achieve. The annual cash bonus plan is structured to encourage high levels of performance. A threshold level of performance must be achieved before any payouts are earned, while a payout of up to 200% of target can be achieved for superior performance.
The amountvalue of annual cash bonusincentive awards that the NEOs earn each year is based upon Kroger’s overall company performance compared to targetsgoals established by the Compensation Committee and the independent directors based on the business plan adopted by the Board of Directors.
A minimum level of performance must be achieved before any payout is earned, while a payout of up to 210% of target incentive potential can be achieved for superior performance on the corporate plan metrics. There are no guaranteed or minimum payouts; if none of the performance goals are achieved, then none of the incentive amount is earned, and no payout is made.
The annual cash bonusincentive plan is designed to encourage decisions and behavior that drive the annual operating results and the long-term success of the Company. Kroger’s success is based on a combination of factors, and accordingly the Compensation Committee believes that it is important to encourage behavior that supports multiple elements of our business strategy.
Establishing Annual Cash Bonus Potentials
The Compensation Committee establishescorporate annual cash bonusincentive plan is a broad-based plan used across the Kroger enterprise. Approximately 53,000 associates are eligible to receive incentive payouts based all or in part on the incentive plan described below.
NEO target incentive potentials for each NEO, other than the CEO, whose annual cash bonus potential is established by the independent directors. Actual payouts, which can exceed 100% of the potential amounts but may not exceed 200% of the potential amounts, represent the extent to which performance meets or exceeds the goals established by the Compensation Committee. Actual payouts may befiscal years 2021 and 2022, were as low as zero if performance does not meet the goals established by the Compensation Committee.follows:
The Compensation Committee considers multiple factors in making its determination or recommendation as to annual cash bonus potentials:
Name | 2021 Target Annual Incentive | 2022 Target Annual Incentive | ||||||
W. Rodney McMullen | $ | 2,500,000 | $ | 2,800,000 | ||||
Gary Millerchip | $ | 825,000 | $ | 850,000 | ||||
Stuart W. Aitken | $ | 825,000 | $ | 850,000 | ||||
Yael Cosset | $ | 825,000 | $ | 850,000 | ||||
Timothy A. Massa | $ | 650,000 | $ | 775,000 |
2022 Annual Incentive Plan Metrics
19
The annual cash bonus potential in effect at the end of the fiscal year for each NEO is shown below. Actual annual cash bonus payouts are prorated to reflect changes, if any, to bonus potentials during the year.
Annual Cash Bonus Potential | ||||||||
2013 | 2014 | 2015 | ||||||
W. Rodney McMullen(1) | $ | 1,500,000 | $ | 1,600,000 | $ | 1,650,000 | ||
J. Michael Schlotman(2) | $ | 550,000 | $ | 550,000 | $ | 600,000 | ||
Michael J. Donnelly(2) | $ | 425,000 | $ | 550,000 | $ | 600,000 | ||
Christopher T. Hjelm(2)(3) | $ | 600,000 | ||||||
Frederick J. Morganthall II(2)(3) | $ | 600,000 |
Annual Cash Bonus Plan Metrics and Connection to our Business Plan
The annual cash bonus plan has the following measurable performance metrics, all of which are interconnected, and individually necessary to sustain our business model and achieve our growth strategy:
Rationale for Use | ||
| ||
| ● Identical Sales (“ID Sales”) represent sales, five full quarters, excluding supermarket fuel sales, plus sales growth at all other customer-facing non-supermarket businesses. ● We believe | |
|
| ● |
Kicker, worth an additional 10% | ||
E-commerce Kicker | ● E-commerce sales are key drivers of our |
20
|
| Seamless. ● |
|
| |
|
| |
|
|
The use of these four
Potential payouts under the plan are based on Company performance on two primary metrics, creates checks and balances on the various behaviors and decisions that impact the long-term success of the Company. The ID Sales, EBITDA without fuelexcluding Fuel, and Customer 1st Strategy metricsAdjusted FIFO Operating Profit, including Fuel. The performance objectives are weighted equally to highlight the need to simultaneously achieve all three metrics in order to maintain our growth.
We aligned the weighting of ID Sales and EBITDA without fuel metrics to emphasize sales growth balanced with the focus on profit. Kroger’s business is not sustainable if we merely increase our ID Sales, but do not have a corresponding increase in earnings. Furthermore, payoutsshown in the ID Sales and EBITDA without fuel segments are interrelated. Achieving the goalgrids below, with payouts interpolated for both the ID Sales and EBITDA without fuel results in a higher percentage payout on both elements. Achieving the target on one, but not the other will limit the payout percentage on both.actual performance between levels.
By supporting the Customer 1st Strategy and the Four Keys, we will better connect with our customers. Our unique competitive advantage is our ability to deliver on the Four Keys, which are the items that matter most to our customers, and it is that multi-faceted achievement that we believe drives our ID Sales growth.
As we strive to achieve our aggressive growth targets, we also continuously aim to reduce our operating costs as a percentage of sales, without fuel. Productivity improvements and other reductions in operating costs allow us to reduce costs in areas that do not matter to our customers so that we can
21
invest money in the areas that matter the most to our customers, like the Four Keys. We carefully manage operating cost reductions to ensure a consistent delivery of the customer experience. This again shows the need to have multiple metrics, to create checks and balances on the various behavior and decisions that are influenced by the design of the bonus plan.
Results of 2015 Annual Cash Bonus Plan
The 2015 goals established by the Compensation Committee the actual 2015 results and the bonus percentage earned for each of the performance metrics of the annual cash bonus plan were as follows:
Actual | ||||||||||||
Performance | ||||||||||||
Goals | Compared to | Amount | ||||||||||
Target | Actual | Target | Weight | Earned | ||||||||
Performance Metrics | Minimum | (100%) | Performance(1) | (A) | (B) | (A) x (B) | ||||||
ID Sales | 2.1% | 4.1% | 5.0% | 134.3% | 30% | 40.3% | ||||||
EBITDA without Fuel | $4.4384 | $5.2217 | $5.2351 | |||||||||
Billion | Billion | Billion | 126.3%(2) | 30% | 37.9% | |||||||
Customer 1stStrategy(3) | * | * | * | * | 30% | 39.0% | ||||||
Over | Over | Over | 45.0% | 10% | 4.5% | |||||||
Total Operating Costs as | budget by | budget by | budget by | |||||||||
Percentage of Sales, | 25 basis | 5 basis | 16 basis | |||||||||
without Fuel(4) | points | points | points | |||||||||
0% | 5.0% | |||||||||||
Fuel Bonus(5) | [As described in the footnote below] | or 5% | ||||||||||
Total Earned | 126.7% |
ID Sales, excluding Fuel and Adjusted FIFO Operating Profit, including Fuel
ID Sales, excluding Fuel | ||||||||||||||||||||||
0% | 1.5% | 3.0% | 4.5% | 6.0% | ||||||||||||||||||
≥3,934 | 0 | 14 | 20 | 29 | 40 | |||||||||||||||||
Adjusted FIFO Operating Profit, | ≥4,134 | 20 | 65 | 80 | 95 | 115 | ||||||||||||||||
including Fuel ($ in millions) | ≥4,334 | 40 | 85 | 100 | 115 | 160 | ||||||||||||||||
≥4,534 | 70 | 105 | 120 | 135 | 180 | |||||||||||||||||
≥4,734 | 110 | 125 | 140 | 170 | 200 |
2022 Annual Incentive Plan – Actual Results and Payout Percentage
Payout | ||||||||
5.62 | % | |||||||
$ | 5.08B | 192.40 | % | |||||
Ecommerce Total Sales Kicker(2) | 0 | % | ||||||
Total Payout | 192.40 | % |
See grid above. |
(2) | Up to an additional 10% would have been earned if Kroger had achieved a certain goal with respect to e-commerce. That challenging goal was established by the Compensation Committee | |
Following the close of the 2022 fiscal year, the Compensation Committee reviewed Kroger’s performance against each of the metrics outlined above and determined the extent to which Kroger achieved those objectives. The Compensation Committee believes our management produced outstanding results in 2015, measured against increasingly aggressive business plan objectives. Due to ourOur performance when compared to the goals established by the Compensation Committee and based onresulted in a payout of 192.40% of the businessparticipant’s incentive plan adopted by the Board,target for the NEOs, and all other participants inwith the exception of Mr. Aitken.
Mr. Aitken’s annual bonus payout equaled 190.98% of his bonus potential because it included the corporate annual cash bonus plan earned 126.7% of their bonus potentials.
In 2015,described above and a team metric as infollows. The merchandising team metric measured supermarket ID sales excluding pharmacy and fuel, and supermarket selling gross dollars less shrink dollars for all years, thedepartments excluding pharmacy and fuel.
Payout Percentage | Weight | |||||||
Corporate Annual Bonus Plan | 192.40 | % | 60 | % | ||||
Merchandising Team Metric | 188.86 | % | 40 | % | ||||
Total Earned | (192.40% x 0.6) + (188.86% x 0.4%) = 190.98% |
The Compensation Committee retained discretionmaintains the ability to reduce the annual cash bonusincentive payout for all executive officers, including the NEOs, and the independent directors retain that discretion for the CEO’s incentive payout if the Compensation Committee determinedthey determine for any reason that the bonusincentive payouts were not appropriate given their assessment of Company or individual performance. The independent directors retained that discretion for the CEO’s bonus. The Compensation Committee and the independent directors also retained discretion to adjust the goals for each metric
22
under the plan should unanticipated developments arise during the year. No adjustments were made to the goalsincentive payout amount in 2015.2022. The annual incentive plan is typically an all-cash plan. While performance was achieved at 192.40%, in light of macroeconomic conditions, including inflation, as well as the Compensation Committee’s desire to create ongoing alignment with shareholders and reward sustained performance beyond 2022, the Compensation Committee determined to structure the payout to the NEOs as follows: 150% in cash and the independent directorsremaining 42.4% (41.0% for Mr. Aitken) in the case of the CEO, determined that the annual cash bonus payouts earned appropriately reflected the Company’s strong performancerestricted stock vesting in 2015 and therefore should not be adjusted.
The actual annual cash bonus percentage payout for 2015 represented excellent performance that exceeded our business plan objectives, with the exception of operating costs as a percentage of sales, without fuel. The strong link between pay and performance is illustrated by a comparison of earned amounts under our annual cash bonus plan in previous years, such as 2009, 2010 and 2012, when payouts were less than 100%. In those years, we did not achieve all of our business plan objectives.A comparison of actual annual cash bonus percentage payouts in prior years demonstrates the variability of annual cash bonus incentive compensation and its strong link to our performance:one year.
Annual Cash Bonus | |||
Fiscal Year | Payout Percentage | ||
2015 | 126.7 | % | |
2014 | 121.5 | % | |
2013 | 104.9 | % | |
2012 | 85.9 | % | |
2011 | 138.7 | % | |
2010 | 53.9 | % | |
2009 | 38.5 | % | |
2008 | 104.9 | % | |
2007 | 128.1 | % | |
2006 | 141.1 | % |
As described above, the corporate annual cash bonusincentive payout percentage is applied to each NEO’s bonus potential,incentive plan target which is determined by the Compensation Committee, and the independent directors in the case of the CEO. The actual amounts of performance-based annual cash bonusesincentive paid to the NEOs for 20152022 are reported in the Summary Compensation Table in the “Non-Equity Incentive Plan Compensation” column and footnote 4 to that table.the “Stock Awards” column.
Long-Term Compensation Program
The Compensation Committee believes in the importance of providing an incentive to the NEOs to achieve the long-term goals established by the Board. As such, a majority of NEO compensation is conditioneddependent on the achievement of the Company’s long-term goals and is delivered via four long-term compensation vehicles: long-term cash bonus, performance units, stock options and restricted stock.those goals. Long-term compensation promotes long-term value creation and discourages the over-emphasis of attaining short-term goals at the expense of long-term growth.
The Compensation Committee considers several factors in determining the target value of long-term compensation awarded to the NEOs or, in the case of the CEO, recommending to the independent directors the amount awarded. These factors include:
| |
23
Long-term incentives areincentive program is structured to be a combination of performance- and time-based compensation that reflects elements of financial and stockcommon share performance to provide both retention value and alignment with company performance. Long-term cash bonusThe Compensation Committee determined that all long-term compensation would be equity-based as follows: 50% of equity granted under the program would be performance-based and performance unit payouts are contingent on the achievementremaining 50% of certain strategic performance and financial measures and incentivize recipients to promote long-term value creation and enhance shareholder wealth by supporting the Company’s long-term strategic goals. Stock options andequity would be time-based, consisting of 30% in restricted stock are linked toand 20% in stock performance creating alignment between executives and company shareholders. Options have no initial value and recipients only realize benefits ifoptions.
Each year, NEOs receive grants under the value of our stock increases following the date of grant.
A majority of long-term compensation program, which is equity-based (performance units, stock options, and restricted stock) and is tied to the future value of our common shares, further aligning the interests of our NEOs with our shareholders. All four components of long-term compensation are intended to focus executive behaviors on our long-term strategy. Each component is described in more detail below.structured as follows:
Amounts of long-term compensation awards issued and outstanding for the NEOs are set forth in the tables that follow this discussion and analysis.
Long-Term Incentive Plan Design
In contrast to the performance-based annual cash bonus plan, described above, which has approximately 13,000 participants, our performance-based Long-Term Incentive Plan has approximately 160 participants, including the NEOs. Each year we adopt a similar Long-Term Incentive Plan, which provides for overlapping three year performance periods. The Long-Term Incentive Plan consists of a performance-based long-term cash bonus and performance units which has the following characteristics:
● |
|
● |
|
● | Under the Long-Term Incentive Plans, NEOs receive grants of equity called performance units. A target number of performance units based on level and individual performance is awarded to each participant at the beginning of the three-year performance |
● | Payouts under the plan certain strategic performance and financial measures and incentivize recipients to promote long-term value creation and enhance shareholder wealth by supporting the Company’s long-term strategic goals. |
● |
| |
| ||
The payout percentage, based on the extent to which the performance metrics are achieved, is applied to |
● |
|
● | Time-Based (50% of NEO long-term target compensation) |
● | Long-term time-based compensation consists of 20% stock options and 30% restricted stock, which are linked to common share performance, creating alignment between the NEOs’ and our shareholders’ interests. Grants vest ratably over four years. |
● | Stock options have no initial value and recipients only realize benefits if the value of our common shares increases following the date of grant, further aligning the NEOs’ and our shareholders’ interests. |
Amounts of long-term compensation awards issued and outstanding for the NEOs are set forth in the Executive Compensation Tables section.
Summary of Three Long-Term Incentive Plans Outstanding During 2022
With respect to our long-term performance-based compensation, in November 2019, Kroger committed to investors an 8 – 11% Total Shareholder Return (TSR) target over time. The Compensation Committee redesigned plan metrics to align with Kroger’s long-term business plans and growth model that we communicated to shareholders. These metrics are the key elements in driving Kroger’s TSR.
The Compensation Committee anticipates adoptingadopts a new Long-Term Incentive Plan each year, measuring improvement over successivewhich provides for overlapping three-year performance periods. Each year when establishingAdditional detail regarding each of the performance metric baselinesthree plans is provided below, and percentage payouts per unita summary of improvement, the Compensation Committee considersdesign of the difficulty of achieving compounded improvement over time. During 2015, Kroger awarded 503,276 performance units to approximately 160 employees, including the NEOs.plans outstanding during 2022 is as follows:
24
2020 – 2022 LTIP | 2021 – 2023 LTIP | 2022 – 2024 LTIP | |
Performance Units and Dividend Equivalents | Performance units are equity grants which are paid out in Kroger common shares, based on actual performance at the end of the 3-year performance period, along with dividend equivalents for the performance period on the number of issued common shares ultimately earned. | ||
Performance Metrics | ● Total Sales without Fuel + Fuel Gallons; ● Growth in Adjusted FIFO Operating Profit, including Fuel ● Cumulative Adjusted Free Cash Flow; ● Fresh Equity metric; and ● Relative Total Shareholder Return modifier
| ● Total Sales without Fuel + Fuel Gallons; ● Value Creation Metric (iTSR) Percentage ● Fresh Equity metric; and ● Relative Total Shareholder Return modifier | |
Determination of Payout | The payout percentage, based on the extent to which the performance metrics are achieved, is applied to number of performance units awarded. | ||
Maximum Payout | 125% | 187.5% | 187.5% |
Payout Date | March 2023 | March 2024 | March 2025 |
2020-2022 and 2021-2023 Long-Term Incentive Plan – Metrics
Both the 2020 – 2022 and Connection tothe 2021-2023 Long-Term Incentive Plans have the following components which support our Business Strategylong-term business plans, each accounting for 25% of the payout calculation:
Metric | Rationale for Use | Weighting | ||
● | 25% | |||
● | This | |||
Growth in Adjusted FIFO Operating Profit, including Fuel | ● | 25% | ||
● | 25% | |||
● | It is an important measure for the | |||
Fresh Equity metric | ● | 25% |
After the calculation of the four metrics above, a modifier based on Relative Total Shareholder Return compared to the S&P 500 will be applied which can increase or decrease the payout, as follows, interpolated for actual results between thresholds:
TSR Relative to S&P 500 | Modifier | |||
75 | % |
25
100 | % |
The following table summarizes the Long-Term Incentive Plans adopted for the years shown:
75th percentile | 125 | |||||
The Compensation Committee has made adjustmentspayout percentage, as modified by the Relative TSR modifier, will be applied to the percentage payouts for the componentsnumber of the Long-Term Incentive Plans over time to account for the increasing difficulty of achieving compounded improvement.
During 2015, Kroger awarded 503,276 performance units granted under the plan to approximately 160 employees, includingdetermine the NEOs.
26
Results of 2013 Long-Term Incentive Plan
payout amount. The 2013maximum payout under the 2020-2022 Long-Term Incentive Plan which measured improvements overis 125% and the three year period from 2013 to 2015, paid out in March 2016maximum payout under the 2021-2023 Long Term Incentive Plan is 187.5% as further described below.
2020-2022 Long-Term Incentive Plan – Results and was calculatedPayout
The results and payout of the 2020-2022 Long-Term Incentive Plan are as follows:follows.
Payout per | Percentage | ||||||||||||
Improvement | Improvement | Earned | |||||||||||
Metric | Baseline | Result(1) | (A) | (B) | (A) x (B) | ||||||||
Customer 1st | 12 units of | ||||||||||||
Strategy(2) | * | * | improvement | 2.00% | 24.00 | % | |||||||
Improvement | |||||||||||||
in Associate | 2 units of | ||||||||||||
Engagement(2) | * | * | improvement | 4.00% | 8.00 | % | |||||||
Reduction in Operating | |||||||||||||
Cost as a Percentage | 56 basis point | ||||||||||||
of Sales, without Fuel | 26.69% | 26.13% | improvement | 0.50% | 28.00 | % | |||||||
Return on Invested | 66 basis point | ||||||||||||
Capital | 13.27% | 13.93% | improvement | 1.00% | 66.00 | % | |||||||
Total | 126.00 | % | |||||||||||
Total Earned: Payout is | |||||||||||||
capped at 100% | 100.00 | % |
The NEOs were | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accordingly, each NEO received a long-term cash bonus in an amount equal to 100% of that executive’s long-term cash bonus potential, and was issued the number of Kroger common shares equal to 100%93.75% of the number of performance units awarded to that executive, along with a cash amount equal todividend equivalents for the dividendsthree-year performance period on the number of issued common shares.
The dividend equivalents paid on that number of common shares duringearned under the three year performance period. Payout for the cash components of the 20132020 – 2022 Long-Term Incentive Plan are reported in the “Non-Equity Incentive Plan Compensation” and “All Other Compensation” columnscolumn of the Summary Compensation Table and footnotes 4 and 6footnote 5 to that table, and the common shares issued under the plan are reported in the 20152022 Option Exercises and Stock Vested Table and footnote 2 to that table.
The annual and long-term performance-based compensation awards described herein were made pursuant to our 2019 Long-Term Incentive Plan, which was approved by our shareholders in June 2019, and the 2019 Amended and Restated Long-Term Incentive Plan, which was approved by our shareholders in June 2022.
Additional Features of the 2021-2023 Long-Term Incentive Plan
Going into 2021, there were an extraordinary number and degree of unknowns that could have impacted our financial results. The Compensation Committee considered, among other factors, the course of the pandemic, including new COVID variants, availability and outcomes of vaccine programs, continuing sales trends, food at home and food away from home trends, inflation/deflation, and other potential market influencing events. To account for these unknowns, the Compensation Committee designed the 2021 long-term plan with an incremental goal setting approach due to our inability to forecast reliable long-term performance targets against the background of the market uncertainty at the time. The Committee designed the plan to take into account the extraordinary uncertainties going into the three-year plan, while aligning to our identical sales and operating profit growth and productivity improvement goals, all in support of our long-term value creation model. Under the incremental goal setting approach, the plan was designed with clearly defined financial performance goals for 2021, and a mechanism for setting the 2022-2023 goals based on actual 2021 results.
This approach does not change the timing of the payout. The payout for the three-year plan will be calculated following the close of fiscal year 2023 and, if earned, will be paid out to participants in the form of common shares, and corresponding accrued dividend equivalents, in March of 2024.
For the 2021-2023 Long-Term Incentive Plan, the Compensation Committee aligned the plan with market practices, increasing the maximum payout potential on the four metrics from 100% to 150%. The highest payout from the four metrics alone equals 100%. However, the payout may exceed 100%, if for years 2 and 3 of the plan: (1) the Total Sales without Fuel + Fuel Gallons metric, the Growth in Adjusted FIFO Operating Profit, including Fuel, metric, and the Cumulative Adjusted Free Cash Flow metric all achieve 100%, and (2) the 2-year compound annual growth rate of Total Sales without Fuel + Fuel Gallons exceeds 3.5%. The plan payout will increase incrementally from 100%, up to 150% maximum if the 2-year compound annual growth rate on the Total Sales without Fuel + Fuel Gallons metric is 5.0%. With the potential application of the relative TSR modifier, the total maximum payout would be 187.5%.
2022 – 2024 Long-Term Incentive Plan Metrics
The 2022-2024 Long-Term Incentive Plan metrics have been designed to reflect commitments made to our investors and other stakeholders regarding long-term sales growth, our Value Creation algorithm (through intrinsic Total Shareholder Return, or iTSR) and our commitment to Fresh as a strategic differentiator. The plan also includes a modifier based on our shareholder return relative to the S&P 500 shareholder return.
Metric | Rationale for Use | Weighting | |
Total Sales without Fuel + Fuel Gallons | ● | This metric represents total revenue dollars without fuel + the number of fuel gallons sold over the three-year term of the plan. It represents the important metric of top line growth of the business from all channels. | 25% |
Value Creation Metric (iTSR) Percentage | ● | This financial metric equals Adjusted Earnings per diluted share (EPS) growth plus Dividend Yield. | 50% |
Fresh Equity metric | ● | Fresh is a key element of how people decide where to shop. It drives trips and therefore delivers business results. Fresh is the core focus of how we differentiate and drive great engagement with customers and it will be a key driver of our growth. | 25% |
The highest payout from the three metrics alone equals 100%. However, the payout may exceed 100% if: (1) both the Total Sales without Fuel + Fuel Gallons metric and the iTSR metric achieve 100%, and (2) the 3-year compound annual growth rate of Total Sales without Fuel + Fuel Gallons exceeds 3.5%. The plan payout will increase incrementally from 100%, up to 150% maximum if the 3-year compound annual growth rate on the Total Sales without Fuel + Fuel Gallons metric is 5.0%.
After the calculation described above, a modifier based on Relative Total Shareholder Return compared to the S&P 500 will be applied, as follows, interpolated for actual results between the 25th percentile and 75th percentile thresholds:
TSR Relative to S&P 500 | Modifier | |||
25th percentile | 75 | % | ||
50th percentile | 100 | % | ||
75th percentile | 125 | % |
The payout percentage, as modified by the Relative TSR modifier, will be applied to the number of performance units granted under the plan to determine the payout amount. If all three metrics are achieved at the maximum level and the Relative Total Shareholder Return modifier is maximized, the total plan payout would be 187.5%.
Stock Options and Restricted Stock
Stock options and restricted stock continue to play an important role in rewarding NEOs for the achievement of long-term business objectives and providing incentives for the creation of shareholder value.Awardsvalue. Awards based on Kroger’s common shares are granted annually to the NEOs and a large number of other employees.NEOs. Kroger historically has distributed time-based equity awards widely, aligning the interests of employeesassociates with your interest asinterests of shareholders.
In 2015, Kroger granted 3,425,720 stock options to approximately 1,222 employees, including the NEOs.
The options permit the holder to purchase Kroger common shares at an option price equal to the closing price of Kroger common shares on the date of the grant.
During 2015, Kroger awarded 3,228,270 shares of restricted stock to approximately 8,280 employees, including the NEOs.
Options are granted only on one of the four dates of Board meetings conducted after Kroger’s public release of its quarterly earnings results.
The Compensation Committee determines the vesting schedule for stock options and restricted stock.
During 2015,2022, the Compensation Committee granted to the NEOs: (a)NEOs stock options and restricted stock, each with a five-year vesting schedule; and (b) restricted stock with a three- or five-yearfour-year ratable vesting schedule.
27
As discussed below under Stock Ownership Guidelines, covered individuals, including
Restricted stock awards are reported in the NEOs, must hold 100% of common shares issued pursuant to performance units earned, the shares received upon the exercise of stock options or upon the vesting of restricted stock, except those necessary to pay the exercise price“Stock Awards” column of the options and/or applicable taxes, until applicable stock ownership guidelinesSummary Compensation Table and footnote 1 to the table and the 2022 Grants of Plan Based Awards Table. Stock option awards are met, unlessreported in the disposition is approved in advance by“Option Awards” column of the CEO, or bySummary Compensation Table and the Board or Compensation Committee for“All other Option Awards” column of the CEO.2022 Grants of Plan Based Awards Table.
Retirement and Other Benefits
Kroger maintains aseveral defined benefit and several defined contribution retirement plans for its employees.associates. The NEOs participate in one or more of these plans, as well as one or more excess plans designed to make up the shortfall in retirement benefits created by limitations under the Internal Revenue Code (the “Code”) on benefits to highly compensated individuals under qualified plans. Additional details regarding certain retirement benefits available to the NEOs can be found below in footnote 5 to the 2015Summary Compensation Table and the 2022 Pension Benefits Table and the accompanying narrative description that follows this discussion and analysis.narrative.
Kroger also maintains an executive deferred compensation plan in which some of the NEOsCEO has elected to participate. This plan is a nonqualified plan under which participants can elect to defer up to 100% of their cash compensation each year. Additional details regarding our nonqualified deferred compensation plans available to the NEOs can be found below in the 2022 Nonqualified Deferred Compensation Table and the accompanying narrative.
Kroger also maintains The Kroger Co. Employee Protection Plan (“KEPP”), which covers all of our management employeesassociates who are classified as exempt under the federal Fair Labor Standards Act and certain administrative or technical support personnel who have provided services to Kroger for at least one year and whose employment isare not covered by a collective bargaining agreement.agreement, with at least one year of service. KEPP has a double trigger change in control provision, and it provides for severance benefits and extended Kroger-paid health care, as well as the continuation of other benefits as described in the plan, when an employeeassociate is actually or constructively terminated without cause within two years following a change in control of Kroger (as defined in KEPP). Participants are entitled to severance pay of up to 24 months’ salary and bonus.annual incentive target. The actual amount is dependent upon pay level and years of service. KEPP can be amended or terminated by the Board at any time prior to a change in control.
Performance-based long-term cash bonus, performance unit, stock
Stock option and restricted stock grant agreements with award recipients provide that those awards “vest,” with 50% of the long-term cash bonus potential being paid, common shares equal to 50% of the performance units being awarded, options becoming immediately exercisable, and restrictions on restricted stock lapsing upon a change in control as described in the grant agreements.agreements, but only if an associate is actually or constructively terminated without cause within two years following a change in control of Kroger (as defined in the grant agreement, and consistent with KEPP).
None of the NEOs isare party to an employment agreement.
Perquisites
Our NEOs receive limited perquisites becauseas the Compensation Committee does not believe that it is necessary for the attraction or retention of management talent to provide the NEOsexecutives a substantial amount of compensation in the form of perquisites. In 2015, the only perquisites available to our NEOs were:
| |
| |
|
Because he was an officer of Harris Teeter during 2015, Mr. Morganthall also was eligible for the following Harris Teeter perquisites:
| |
|
The total amount of perquisites furnished to the NEOs is shown in the Summary Compensation Table and described in more detail in footnote 6 to that table.
28
Process for Establishing Executive Compensation
The Compensation Committee of the Board has the primary responsibility for establishing the compensation of our executive officers, including the NEOs, with the exception of the Chief Executive Officer.CEO. The Compensation Committee’s role regarding the CEO’s compensation is to make recommendations to the independent members of the Board; those members of the Board establish the CEO’s compensation.
The Compensation Committee directly engagesengaged Korn Ferry as a compensation consultant from Mercer Human Resource Consulting to advise the Compensation Committee in the design of compensation for executive officers.officers and to advise with respect to the unique circumstances of the 2022 compensation cycle.
The Mercer consultant conducts
Korn Ferry conducted an annual competitive assessment of executive positions at Kroger for the Compensation Committee. The assessment is one of several bases,factors, as described above, on which the Compensation Committee determines compensation. The consultant assesses:assessed:
● |
|
● |
|
● |
|
● |
|
● |
|
In addition to the factors identified above, the consultant also reviewed actual payout amounts against the targeted amounts.
The consultant comparescompared these elements against those of other companies in a group of publicly-traded food and drug retailers.publicly traded companies selected by the Compensation Committee. For 2015,2022, our peer group consisted of:
Albertsons AmerisourceBergen | |
CVS Health Home Depot | |
Sysco Target |
This peer group is the same group as was used in 2014. Median 2015 revenue for the peer group was $92.5 billion, compared to our revenue of $109.8 billion.
The make-up of the compensation peer group is reviewed annually and modified as circumstances warrant. Industry consolidation and other competitive forces will result in changes to the peer group over time.
The consultant also providesIn addition, the Compensation Committee considered supplemental data provided by its independent compensation consultant from “general industry” companies, a representation of major publicly-traded companies of similar size and scope from outside the retail industry.Fortune 40, excluding financial services companies. This data serves asprovided reference points, particularly for senior staffexecutive positions where competition for talent extends beyond the retail sector. The peer group includes a combination of food and drug retailers, other large retailers based on revenue size, and large consumer-facing companies. Median 2022 revenue for the peer group was $119.3 billion, compared to our 2022 revenue of $148.3 billion.
Considering the size of Kroger in relation to other peer group companies, the Compensation Committee believes that salaries paid to our NEOs should be at or above the mediancompetitively positioned relative to amounts paid by peer group companies for comparable positions. The Compensation Committee also aims to provide an annual cash bonusincentive potential to our NEOs that, ifaround the increasingly more challenging annual business plan objectives are achieved at superior levels, would cause total cash compensation to be meaningfully above themarket median. Actual payouts may be as low as zero if performance does not meet the baselines established by the Compensation Committee.Committee while superior financial performance is rewarded with compensation falling above the median.
The independent members of the Board have the exclusive authority to determine the amount of the CEO’s compensation. In setting total compensation, the independent directors consider the median compensation of the peer group’s CEOs. With respect to the annual bonus,incentive plan, the independent directors make two determinations: (1) they determine the annual cash bonusincentive potential that will be multiplied by the corporate annual cash bonusincentive payout percentage earned that is generally applicable to all corporate management, including the NEOs and (2) the independent directors determine the annual cash bonusincentive amount paid to the CEO by retaining discretion to reduce the annual cash bonusincentive percentage payout the CEO would otherwise receive under the formulaic plan. The independent directors also retain discretion to determine the form of payout, to include a portion in equity in place of cash.
29
The Compensation Committee performs the same function and exercises the same authority as to the other NEOs. In its annual review of compensation for the NEOs, the Compensation Committee:
● | Conducts an annual review of all components of compensation, quantifying total compensation for the NEOs |
● | Considers internal pay equity at Kroger to ensure that the CEO is not compensated disproportionately. The Compensation Committee has determined that the compensation of the CEO and that of the other NEOs bears a reasonable relationship to the compensation levels of other executive positions at Kroger taking into consideration performance and differences in responsibilities. |
● | Reviews a report from the Compensation Committee’s compensation |
● | Takes into account a recommendation from the CEO |
In considering each of the factors above, the
The Compensation Committee does not make use of a formula, but ratherboth qualitatively and quantitatively reviewsconsiders each factorof the factors identified above in setting compensation.
Advisory Vote to Approve Executive Compensation
At the 2015 annual meeting, we held our fifth annual advisory vote on executive compensation. Over 95% of the votes cast were in favor of the advisory proposal in 2015. The Compensation Committee believes it conveys our shareholders’ support of the Compensation Committee’s decisions and the existing executive compensation programs. As a result, the Compensation Committee made no material changes in the structure of our compensation programs or our pay for performance philosophy.
At the 2016 annual meeting, in keeping with our shareholders’ request for an annual advisory vote, we will again hold an advisory vote to approve executive compensation (see page 49). The Compensation Committee will continue to consider the results from this year’s and future advisory votes on executive compensation in their evaluation and administration of our compensation program.
Stock Ownership Guidelines
To more closely align the interests of our officers and directors with your interests as shareholders, the Board has adopted stock ownership guidelines. These guidelines require non-employeeindependent directors, executive officers, and other key executives to acquire and hold a minimum dollar value of Kroger common shares as set forth below:
Position | Multiple | |
Chief Executive Officer | 5 times base salary | |
4 times base salary | ||
Executive Vice Presidents and Senior Vice Presidents | 3 times base salary | |
30
Covered
All covered individuals are expected to achieve the target level within five years of appointment to their position. Ifpositions. Until the requirements are not met, covered individuals, including the NEOs, must hold 100% of common shares issued pursuant to performance units earned,shares received upon the exercise of stock options and upon the vesting of restricted stock, except those necessary to pay the exercise price of the options and/or applicable taxes, and must retain all Kroger common shares unless the disposition is approved in advance by the CEO, or by the Board or Compensation Committee for the CEO.
Executive Compensation Recoupment Policy (Clawback)
If
Under the 2019 Amended and Restated Long-Term Incentive Plan (the “2019 Plan”), unless an award agreement provides otherwise, if a participant’s employment or service is terminated for cause, or if after termination the Compensation Committee determines either that (i) prior to termination, the participant engaged in an act or omission that would have warranted termination for cause or (ii) after termination, the participant violates any continuing obligation or duty of the participant with respect to Kroger, any gain realized by the participant from the exercise, vesting or payment of any award may be cancelled, forfeited or recouped in the sole discretion of the Committee. Under the 2019 Plan, any gain realized by the participant from the exercise, vesting or payment of any award may also be recouped if, within one year after such exercise, vesting or payment, (i) a participant is terminated for cause, (ii) the Compensation Committee determines that the participant is subject to recoupment pursuant to any Kroger policy, or (iii) after a participant’s termination for any reason, the Compensation Committee determines either that (1) prior to termination the participant engaged in an act or omission that would have warranted termination for cause, or (2) after termination the participant violates any continuing obligation or duty of the participant with respect to Kroger. Unless otherwise defined under 2019 Plan award agreement, “cause” has the meaning as defined in The Kroger Co. Employee Protection Plan, as amended from time to time.
Additionally, if an award based on financial statements that are subsequently restated in a way that would decrease the value of such award, the participant will, to the extent not otherwise prohibited by law, upon the written request of Kroger, forfeit and repay to Kroger the difference between what was received and what should have been received based on the accounting restatement, which will be repaid in accordance with any applicable Kroger policy or applicable law, including Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations adopted thereunder. We intend our policy to comply with the NYSE listing rules regarding recoupment of incentive compensation when those rules become effective. Kroger also has a recoupment policy, which provides that if a material error of facts results in the payment to an executive officer at the level of Group Vice President or higher of an annual cash bonusincentive or a long-term cash bonusincentive in an amount higher than otherwise would have been paid, as determined by the Compensation Committee, then the officer, upon demand from the Compensation Committee, will reimburse Kroger for the amounts that would not have been paid if the error had not occurred. This recoupment policy applies to those amounts paid by Kroger within 36 months prior to the detection and public disclosure of the error. In enforcing the policy, the Compensation Committee will take into consideration all factors that it deems appropriate, including:
● |
|
● |
|
● |
|
● |
|
Compensation Policies as They Relate to Risk Management
As part of the Compensation Committee’s review of our compensation practices, the Compensation Committee considers and analyzes the extent to which risks arise from such practices and their impact on Kroger’s business. As discussed in this discussion and analysis, our policies and practices for compensating employees are designed to, among other things, attract and retain high quality and engaged employees. In this process, the Compensation Committee also focuses on minimizing risk through the implementation of certain practices and policies, such as the executive compensation recoupment policy, which is described above under “Executive Compensation Recoupment Policy (Clawback)”. Accordingly, we do not believe that our compensation practices and policies create risks that are reasonably likely to have a material adverse effect on Kroger.
Prohibition on Hedging and Pledging
After considering best practices related to ownership of company shares, the
The Board has adopted a policy regarding hedging, pledging and short sales of Kroger securities.prohibiting Kroger directors and executive officers are prohibited from engaging, directly or indirectly, in the pledging of, hedging transactions in, or short sales of, Kroger securities. In addition, the policy was further revised as of April 1, 2016, to preclude Kroger officers and directors from pledging Kroger securities.
Section 162(m) of the Internal Revenue Code
Tax laws place a deductibility limit of $1,000,000 on some types of compensation for the CEO and the next four most highly compensated officers (other than the chief financial officer) reported in this proxy because they are among the four highest compensated officers (“covered employees”). In Kroger’s case, this group of individuals is not identical
Prior to the group of NEOs. Compensation that is deemed to be “performance-based” is excluded for purposeseffective date of the calculationTax Cuts and isJobs Act of 2017, Section 162(m) of the Code generally disallowed a federal tax deductible. Awards under Kroger’s Long-Term Incentive Plans, when payable upon achievement of stated performance criteria, should be considered performance-based anddeduction to public companies for compensation greater than $1 million paid in any tax year to specified executive officers unless the compensation paidwas “qualified performance-based compensation” under those plans should be tax deductible. Generally, compensation expense related to stock options awardedthat section. Pursuant to the CEOTax Cuts and Jobs Act of 2017, the next four most highly compensated officers should be deductible. Onexception for “qualified performance-based compensation” under Section 162(m) of the Code was eliminated with respect to all remuneration in excess of $1 million other hand, Kroger’s awards of restricted stock that vest solely uponthan qualified performance-based compensation pursuant to a written binding contract in effect on November 2, 2017 or earlier which was not modified in any material respect on or after such date (the legislation providing for such transition rule, the passage of time are not performance-based. As a result,“Transition Rule”).
31
compensation expense for those awards to the covered employees is not deductible, to the extent that the related compensation expense, plus any other expense for compensation that is not performance-based, exceeds $1,000,000.
Kroger’s bonus plans rely on performance criteria, which have been approved by shareholders. As a result, bonuses paid under the plans to the covered employees should be deductible by Kroger.
Kroger’s policy is, primarily, to design and administerperformance-based compensation plans that support the achievement of long-term strategic objectives and enhance shareholder value. Where it is material and supports Kroger’s compensation philosophy, the Compensation Committee alsostructured with the intent of qualifying as performance-based compensation under Section 162(m) prior to the change in the law may or may not be fully deductible, depending on the application of the Transition Rule. In addition, compensation arrangements structured following the change in law will attemptbe subject to maximize the amountSection 162(m) limitation (without any exception for performance-based compensation). Consistent with its past practice, the Committee will continue to retain flexibility to design compensation programs that are in the best long-term interests of the Company and our shareholders, with deductibility of compensation expense that is deductible by Kroger.being one of a variety of considerations taken into account.
Compensation Committee Report
The Compensation Committee has reviewed and discussed with Kroger’s management of the Company the Compensation Discussion and Analysis contained in this proxy statement. Based on its review and discussions with management, the Compensation Committee has recommended to the Company’s Board that the Compensation Discussion and Analysis be included in the Company’sKroger’s proxy statement and incorporated by reference into its Annual Report on Form 10-K.
Compensation Committee:
Clyde R. Moore, ChairJorge P. MontoyaSusan M. PhillipsJames A. Runde
Amanda Sourry
Mark Sutton
32
Executive Compensation Tables
Summary Compensation Table
The following table and footnotes provide information regarding the compensation of the NEOs for the fiscal years presented.
Name and Principal Position(1) | Fiscal Year | Salary | Stock Awards ($)(2) | Option | Non-Equity Incentive Plan Compensation ($)(4) | Change in | All Other Compensation ($)(6) | Total ($) | ||||||||||||||
W. Rodney McMullen | 2015 | 1,216,665 | 4,332,252 | 2,300,092 | 2,999,693 | 618,033 | 279,656 | 11,746,391 | ||||||||||||||
Chairman and Chief | 2014 | 1,118,726 | 3,740,251 | 1,951,394 | 2,441,546 | 3,498,396 | 232,602 | 12,982,915 | ||||||||||||||
Executive Officer | 2013 | 962,731 | 5,062,435 | 907,862 | 1,722,946 | 63,518 | 166,329 | 8,885,821 | ||||||||||||||
J. Michael Schlotman | 2015 | 793,825 | 2,489,148 | 1,040,847 | 1,394,752 | 44,163 | 148,104 | 5,910,839 | ||||||||||||||
Executive Vice President | 2014 | 745,313 | 1,490,700 | 520,372 | 1,103,750 | 1,922,821 | 113,922 | 5,896,878 | ||||||||||||||
and Chief Financial | 2013 | 688,599 | 1,564,689 | 509,088 | 1,004,220 | — | 85,176 | 3,851,772 | ||||||||||||||
Officer | ||||||||||||||||||||||
Michael J. Donnelly | 2015 | 700,684 | 1,919,013 | 585,529 | 1,274,152 | 321,545 | 175,112 | 4,976,035 | ||||||||||||||
Executive Vice President | 2014 | 651,315 | 748,051 | 390,279 | 1,024,261 | 341,775 | 100,305 | 3,255,986 | ||||||||||||||
of Merchandising | 2013 | 565,136 | 1,099,201 | 236,283 | 803,052 | 3,744 | 81,557 | 2,778,973 | ||||||||||||||
Christopher T. Hjelm | 2015 | 653,368 | 1,992,003 | 780,633 | 1,302,852 | 168 | 98,992 | 4,828,016 | ||||||||||||||
Executive Vice President | ||||||||||||||||||||||
and Chief Information | ||||||||||||||||||||||
Officer | ||||||||||||||||||||||
Frederick J. Morganthall II | 2015 | 619,944 | 1,595,918 | 390,414 | 1,453,450 | — | 297,335 | 4,357,061 | ||||||||||||||
Executive Vice President | ||||||||||||||||||||||
of Retail Operations |
Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($)(1) | Option Awards ($)(2) | Non-Equity Incentive Plan Compensation ($)(3) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(4) | All Other Compensation ($)(5) | Total ($) | |||||||||||||||||||||||||||
W. Rodney McMullen | 2022 | 1,388,495 | 10,367,639 | 2,299,636 | 4,130,769 | 175,750 | 847,554 | 19,209,843 | ||||||||||||||||||||||||||||
Chairman and Chief | 2021 | 1,351,358 | 8,800,023 | 2,199,162 | 4,647,750 | 159,640 | 1,010,797 | 18,168,730 | ||||||||||||||||||||||||||||
Executive Officer | 2020 | 1,341,060 | 769,231 | 10,900,041 | 2,101,581 | 4,888,929 | 1,795,455 | 577,277 | 22,373,574 | |||||||||||||||||||||||||||
Gary Millerchip | 2022 | 809,879 | 3,358,792 | 749,879 | 1,269,231 | 265,342 | 6,453,123 | |||||||||||||||||||||||||||||
Senior Vice President | 2021 | 726,815 | 2,800,022 | 699,735 | 1,498,006 | 261,842 | 5,986,420 | |||||||||||||||||||||||||||||
and Chief Financial Officer | 2020 | 601,050 | 312,426 | 2,498,469 | 540,409 | 1,092,959 | 122,377 | 5,167,690 | ||||||||||||||||||||||||||||
Stuart W. Aitken | 2022 | 915,632 | 3,346,838 | 749,879 | 1,269,231 | 277,694 | 6,559,274 | |||||||||||||||||||||||||||||
Senior Vice President and | 2021 | 878,387 | 2,800,022 | 699,735 | 1,527,013 | 300,214 | 6,205,371 | |||||||||||||||||||||||||||||
Chief Merchandising & Marketing Officer | 2020 | 849,484 | 323,077 | 3,010,038 | 540,409 | 1,586,363 | 177,900 | 6,487,271 | ||||||||||||||||||||||||||||
Yael Cosset | 2022 | 809,879 | 3,358,792 | 749,879 | 1,269,231 | 267,548 | 6,455,329 | |||||||||||||||||||||||||||||
Senior Vice President | 2021 | 739,685 | 2,800,022 | 699,735 | 1,498,006 | 265,342 | 6,002,790 | |||||||||||||||||||||||||||||
and Chief Information Officer | 2020 | 689,567 | 312,426 | 2,998,473 | 540,409 | 1,338,239 | 121,168 | 6,000,282 | ||||||||||||||||||||||||||||
Timothy A. Massa | 2022 | 839,113 | 2,320,484 | 499,919 | 1,133,654 | 208,794 | 5,001,964 | |||||||||||||||||||||||||||||
Senior Vice President and Chief People Officer | 2021 | 780,914 | 1,760,033 | 439,836 | 1,194,114 | 210,350 | 4,385,247 |
(1) | ||
Amounts reflect the grant date fair value of restricted stock and performance units granted each fiscal year, as computed in accordance with FASB ASC Topic 718. The following table reflects the value of each type of award granted to the NEOs in |
Name | Restricted Stock | Performance Units | ||||
Mr. McMullen | $3,300,021 | $1,032,231 | ||||
Mr. Schlotman | $1,979,946 | $509,202 | ||||
Mr. Donnelly | $1,632,562 | $286,451 | ||||
Mr. Hjelm | $1,610,062 | $381,941 | ||||
Mr. Morganthall | $1,404,958 | $190,960 |
Name | Restricted Stock | Performance Units | ||||||
Mr. McMullen | $ | 4,617,648 | $ | 5,749,991 | ||||
Mr. Millerchip | $ | 1,483,785 | $ | 1,875,007 | ||||
Mr. Aitken | $ | 1,471,831 | $ | 1,875,007 | ||||
Mr. Cosset | $ | 1,483,785 | $ | 1,875,007 | ||||
Mr. Massa | $ | 1,070,498 | $ | 1,249,986 |
The Restricted Stock values include the annual grant of restricted stock in 2022 as well as the grant in 2023, which was granted with respect to a portion of the 2022 Annual Incentive Plan as further described in the Compensation Discussion and Analysis and in the Grants of Plan Based Awards Table.
The grant date fair value of the performance units reflected in the stock awards column and in the table above is computed based on the probable outcome of the performance conditions as of the grant date. This amount is consistent with the estimate of aggregate compensation cost to be recognized by the Company over the three-year performance period of the award determined as of the grant date under FASB ASC Topic 718, excluding the effect of estimated forfeitures. The assumptions used in calculating the valuations are set forth in Note 1211 to the consolidated financial statements in Kroger’s Form 10-K for fiscal year 2015.2022.
33
Assuming that the highest level of performance conditions is achieved, the aggregate fair value of the 20152022 performance unit awards at the grant date is as follows:
Value of Performance Units | |||||
Name | Assuming Maximum Performance | ||||
Mr. McMullen | $ | 2,064,462 | |||
Mr. Schlotman | $ | 1,018,403 | |||
Mr. Donnelly | $ | 572,901 | |||
Mr. Hjelm | $ | 763,881 | |||
Mr. Morganthall | $ | 381,921 |
Name | Value of Performance Units Assuming Maximum Performance | |||
Mr. McMullen | $ | 10,781,233 | ||
Mr. Millerchip | $ | 3,515,638 | ||
Mr. Aitken | $ | 3,515,638 | ||
Mr. Cosset | $ | 3,515,638 | ||
Mr. Massa | $ | 2,343,724 |
(2) | These amounts represent the aggregate grant date fair value of option awards computed in accordance with FASB ASC Topic 718. The assumptions used in calculating the valuations are set forth in Note 2022. |
(3) | Non-equity incentive plan compensation earned for |
(4) | The amount reported |
Long-Term Cash | Harris Teeter | |||||||||||||
Name | Annual Cash Bonus | Bonus | Merger Bonus | |||||||||||
Mr. McMullen | $ | 2,060,093 | $ | 939,600 | N/A | |||||||||
Mr. Schlotman | $ | 723,652 | $ | 671,100 | N/A | |||||||||
Mr. Donnelly | $ | 723,652 | $ | 550,500 | N/A | |||||||||
Mr. Hjelm | $ | 723,652 | $ | 579,200 | N/A | |||||||||
Mr. Morganthall | $ | 645,010 | $ | 369,083 | $439,357 |
In accordance with the termsconsists of the 2015 performance-based annual cash bonus program, Kroger paid 126.7% of bonus potentials for the participants, including the NEOs. These amounts were earned with respect to performance in 2015 and paid in March 2016. Mr. Morganthall’s annual cash bonus payout was calculated by using the Harris Teeter formula for the 17 weeks he was a Harris Teeter officer and the Kroger formula for the remainder of the year when he was a Kroger officer.
The long-term cash bonus awarded under the 2013 Long-Term Incentive Plan is a performance-based bonus plan designed to reward participants for improving the long-term performance of the Company. The plan covered performance during fiscal years 2013, 2014 and 2015 and amounts earned under the plan were paid in March 2016. In accordance with the terms of the plan, participants earned and Kroger paid 100% of long-term cash bonus potentials. The long-term cash bonus potential equaled the participant’s salary in effect on the last day of fiscal 2012, and for Mr. Morganthall, the day he became eligible for the plan.
Amounts for Mr. Morganthall also include $439,357 for 2015 performance under The Harris Teeter Merger Cash Bonus Plan. This plan is a performance-based bonus plan designed to reward participants for achieving synergies over the three year period following the merger between Harris Teeter and Kroger, fiscal years 2014, 2015 and 2016. Payouts are made following the end of each fiscal year of amounts earned based on that year’s performance, subject to a maximum payout over the three-year period of 200% of the participant’s bonus potential. The bonus potential is equal to the participant’s salary in effect on the date of the merger. In March 2016, Mr. Morganthall received $439,357 for 2015 performance.
34
Change in | Preferential Earnings on Nonqualified | ||||||||||
Name | Pension Value | Deferred Compensation | |||||||||
Mr. McMullen | $ | 537,941 | $ | 80,092 | |||||||
Mr. Schlotman | $ | 44,163 | N/A | ||||||||
Mr. Donnelly | $ | 316,969 | $ | 4,576 | |||||||
Mr. Hjelm | $ | (1,142 | ) | $ | 168 | ||||||
Mr. Morganthall | $ | (429,556 | ) | N/A |
Change in Pension Value. The actuarial present value of Mr. McMullen’s accumulated pension benefits decreased by $4,395,890. This change in value of accumulated pension benefits is not included in the Summary Compensation Table because the value decreased. The value of accrued benefits decreased primarily due to the change in value of the accumulated pension benefit for each of Messrs. Hjelmdue to aging. The Company froze the compensation and Morganthall are not included in the table because the value decreased.
Amounts reported for 2015 and 2014 include the change in the actuarial present value of accumulated pension benefits and preferential earnings on nonqualified deferred compensation. Amounts reported for 2013 include only preferential earnings on nonqualified deferred compensation because the changes in pension value were negative, which are not required to be reported in the table in accordance with SEC rules. Pension values may fluctuate significantly from year to year depending on a number of factors, including age, years of service average annual earnings and the assumptionsperiods used to determine the present value, such as the discount rate. The change in the actuarial present value of accumulatedcalculate pension benefits for 2014 was significantly greater than 2013 primarily due to a lower discount rate and revised mortality assumptions. The changeactive associates who participate in the actuarial present valueaffected pension plans, including Mr. McMullen’s, as of accumulated pensionDecember 31, 2019. Beginning January 1, 2020, the affected active associates will no longer accrue additional benefits for 2015 is primarily due to a lower discount rate.future service and eligible compensation received under these plans. Please see the 2022 Pension Benefits section for further information regarding the assumptions used in calculating pension benefits.
Messrs.
Preferential Earnings on Nonqualified Deferred Compensation. Mr. McMullen Donnellyparticipates in The Kroger Co. Executive Deferred Compensation Plan (the “Deferred Compensation Plan”) and Hjelm participate in Kroger’s nonqualified deferred compensation plan.received preferential earnings of $175,750. Under the plan, deferred compensation earns interest at a rate representing Kroger’s cost of ten-year debt, as determined by the CEOCFO, and approved by the Compensation Committee prior to the beginning of each deferral year. For each participant, a separate deferral account is created each year and the interest rate established for that year is applied to that deferral account until the deferred compensation is paid out. If the interest rate established by Kroger for a particular year exceeds 120% of the applicable federal long-term interest rate that corresponds most closely to the plan rate, the amount by which the plan rate exceeds 120% of the corresponding federal rate is deemed to be above-market or preferential. In thirteen of the twenty-two years in which at least one NEO deferred compensation, the rate set under the plan for that year exceeds 120% of the corresponding federal rate. For each of the deferral accounts in which the plan rate is deemed to be above-market, Kroger calculates the amount by which the actual annual earnings on the account exceed what the annual earnings would have been if the account earned interest at 120% of the corresponding federal rate, and discloses those amounts as preferential earnings. Amounts deferred in 2015 earn interest at a rate lower than 120% of the corresponding federal rate; accordingly there are no preferential earnings on these amounts. In 2015, Mr. Morganthall participated in the Harris Teeter Supermarkets, Inc.Flexible Deferral Plan (the “HT Flexible Deferral Plan”), which does not provide above-market or preferential earnings on deferred compensation.
35
(5) | Amounts reported in the “All Other Compensation” column for |
Name | Life Insurance Premiums | Retirement Plan Contributions(a) | Payment of Dividend Equivalents on Earned Performance Units | Dividends Paid on Unvested Restricted Stock | Other(b) | ||||||||||||||||||
Mr. McMullen | $ | 76,340 | — | $ | 50,791 | $ | 152,525 | — | |||||||||||||||
Mr. Schlotman | $ | 60,878 | — | $ | 28,481 | $ | 58,745 | — | |||||||||||||||
Mr. Donnelly | $ | 54,525 | $ | 69,169 | $ | 13,219 | $ | 38,199 | — | ||||||||||||||
Mr. Hjelm | $ | 36,781 | $ | 12,867 | $ | 13,219 | $ | 36,125 | — | ||||||||||||||
Mr. Morganthall | $ | 20,940 | $ | 34,466 | $ | 6,689 | $ | 61,583 | $ | 173,657 |
Name | Retirement Plan Contributions(a) | Payment of Dividend Equivalents on Earned Performance Units | Dividends Paid on Unvested Restricted Stock | |||||||||
Mr. McMullen | $ | 195,500 | $ | 405,648 | $ | 246,406 | ||||||
Mr. Millerchip | $ | 89,457 | $ | 104,310 | $ | 71,575 | ||||||
Mr. Aitken | $ | 99,188 | $ | 104,310 | $ | 74,196 | ||||||
Mr. Cosset | $ | 90,407 | $ | 104,310 | $ | 72,831 | ||||||
Mr. Massa | $ | 85,923 | $ | 77,267 | $ | 45,604 |
(a) | Retirement plan contributions.The Company makes automatic and matching contributions to NEOs’ accounts under the applicable defined contribution plan on the same terms and using the same formulas as other participating | |
36
20152022 Grants of Plan-Based Awards
The following table provides information about equity and non-equity incentive awards granted to the NEOs in 2015.2022.
Name | Grant Date | Estimated Future Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#)(4) | All Other Option Awards: Number of Securities Underlying Options (#)(5) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards | |||||||||||||||||||||||||
Target ($) | Maximum ($) | Target | Maximum | |||||||||||||||||||||||||||||
W. Rodney | $ | 1,625,962 | (1) | $ | 3,251,924 | (1) | ||||||||||||||||||||||||||
McMullen | $ | 600,000 | (2) | $ | 1,200,000 | (2) | ||||||||||||||||||||||||||
7/15/2015 | 86,095 | $ | 3,300,021 | |||||||||||||||||||||||||||||
7/15/2015 | 235,415 | $ | 38.33 | $ | 2,300,092 | |||||||||||||||||||||||||||
7/15/2015 | 26,090 | (3) | 52,179 | (3) | $ | 1,032,231 | ||||||||||||||||||||||||||
J. Michael | $ | 571,154 | (1) | $ | 1,142,308 | (1) | ||||||||||||||||||||||||||
Schlotman | $ | 380,000 | (2) | $ | 760,000 | (2) | ||||||||||||||||||||||||||
7/15/2015 | 38,610 | $ | 1,479,921 | |||||||||||||||||||||||||||||
9/17/2015 | 13,334 | $ | 500,025 | |||||||||||||||||||||||||||||
7/15/2015 | 106,531 | $ | 38.33 | $ | 1,040,847 | |||||||||||||||||||||||||||
7/15/2015 | 12,870 | (3) | 25,740 | (3) | $ | 509,202 | ||||||||||||||||||||||||||
Michael J. | $ | 571,154 | (1) | $ | 1,142,308 | (1) | ||||||||||||||||||||||||||
Donnelly | $ | 331,450 | (2) | $ | 662,900 | (2) | ||||||||||||||||||||||||||
7/15/2015 | 29,547 | $ | 1,132,537 | |||||||||||||||||||||||||||||
9/17/2015 | 13,334 | $ | 500,025 | |||||||||||||||||||||||||||||
7/15/2015 | 59,929 | $ | 38.33 | $ | 585,529 | |||||||||||||||||||||||||||
7/15/2015 | 7,240 | (3) | 14,480 | (3) | $ | 286,451 | ||||||||||||||||||||||||||
Christopher T. | $ | 571,154 | (1) | $ | 1,142,308 | (1) | ||||||||||||||||||||||||||
Hjelm | $ | 310,000 | (2) | $ | 620,000 | (2) | ||||||||||||||||||||||||||
7/15/2015 | 28,960 | $ | 1,110,037 | |||||||||||||||||||||||||||||
9/17/2015 | 13,334 | $ | 500,025 | |||||||||||||||||||||||||||||
7/15/2015 | 79,898 | $ | 38.33 | $ | 780,633 | |||||||||||||||||||||||||||
7/15/2015 | 9,654 | (3) | 19,307 | (3) | $ | 381,941 | ||||||||||||||||||||||||||
Frederick J. | $ | 577,769 | (1) | $ | 1,155,538 | (1) | ||||||||||||||||||||||||||
Morganthall II | $ | 285,117 | (2) | $ | 570,234 | (2) | ||||||||||||||||||||||||||
7/15/2015 | 23,609 | $ | 904,933 | |||||||||||||||||||||||||||||
9/17/2015 | 13,334 | $ | 500,025 | |||||||||||||||||||||||||||||
7/15/2015 | 39,959 | $ | 38.33 | $ | 390,414 | |||||||||||||||||||||||||||
7/15/2015 | 4,827 | (3) | 9,653 | (3) | $ | 190,960 |
All Other | ||||||||||||||||||||||||||||||||||
Stock | All Other | |||||||||||||||||||||||||||||||||
Awards: | Option | Grant | ||||||||||||||||||||||||||||||||
Estimated Future | Number | Awards: | Exercise | Date Fair | ||||||||||||||||||||||||||||||
Estimated Possible Payouts | Payouts Under | of | Number of | or Base | Value of | |||||||||||||||||||||||||||||
Under Non-Equity | Equity Incentive | Shares of | Securities | Price of | Stock | |||||||||||||||||||||||||||||
Incentive Plan Awards | Plan Awards | Stock or | Underlying | Option | and | |||||||||||||||||||||||||||||
Target | Maximum | Target | Maximum | Units | Options | Awards | Option | |||||||||||||||||||||||||||
Name | Grant Date | ($)(1) | ($)(1) | (#)(2) | (#)(2) | (#)(3) | (#)(4) | ($/Sh) | Awards | |||||||||||||||||||||||||
W. Rodney McMullen | 2,800,000 | 5,880,000 | ||||||||||||||||||||||||||||||||
3/10/2022 | 60,431 | 3,450,006 | ||||||||||||||||||||||||||||||||
3/10/2022 | 142,858 | $ | 57.09 | 2,299,636 | ||||||||||||||||||||||||||||||
3/10/2022 | 100,718 | 188,846 | 5,749,991 | |||||||||||||||||||||||||||||||
3/9/2023 | 24,712 | 1,167,642 | ||||||||||||||||||||||||||||||||
Gary Millerchip | 850,000 | 1,785,000 | ||||||||||||||||||||||||||||||||
3/10/2022 | 19,706 | 1,125,016 | ||||||||||||||||||||||||||||||||
3/10/2022 | 46,584 | $ | 57.09 | 749,879 | ||||||||||||||||||||||||||||||
3/10/2022 | 32,843 | 61,581 | 1,875,007 | |||||||||||||||||||||||||||||||
3/9/2023 | 7,593 | 358,769 | ||||||||||||||||||||||||||||||||
Stuart W. Aitken | 850,000 | 1,785,000 | ||||||||||||||||||||||||||||||||
3/10/2022 | 19,706 | 1,125,016 | ||||||||||||||||||||||||||||||||
3/10/2022 | 46,584 | $ | 57.09 | 749,879 | ||||||||||||||||||||||||||||||
3/10/2022 | 32,843 | 61,581 | 1,875,007 | |||||||||||||||||||||||||||||||
3/9/2023 | 7,340 | 346,815 | ||||||||||||||||||||||||||||||||
Yael Cosset | 850,000 | 1,785,000 | ||||||||||||||||||||||||||||||||
3/10/2022 | 19,706 | 1,125,016 | ||||||||||||||||||||||||||||||||
3/10/2022 | 46,584 | $ | 57.09 | 749,879 | ||||||||||||||||||||||||||||||
3/10/2022 | 32,843 | 61,581 | 1,875,007 | |||||||||||||||||||||||||||||||
3/9/2023 | 7,593 | 358,769 | ||||||||||||||||||||||||||||||||
Timothy A. Massa | 775,000 | 1,627,500 | ||||||||||||||||||||||||||||||||
3/10/2022 | 13,138 | 750,048 | ||||||||||||||||||||||||||||||||
3/10/2022 | 31,056 | $ | 57.09 | 499,919 | ||||||||||||||||||||||||||||||
3/10/2022 | 21,895 | 41,053 | 1,249,986 | |||||||||||||||||||||||||||||||
3/9/2023 | 6,782 | 320,450 |
(1) | These amounts relate to the |
37
(2) | These amounts | |
These amounts represent the number of shares of restricted stock granted in |
These amounts represent the number of stock options granted in |
The Compensation Committee, and the independent members of the Board in the case of the CEO, established the bonus potentials shownincentive potential amounts for the performance-based annual incentive awards (shown in this table as “Target” amounts) and the number of performance units awarded for the performance-based annual cash bonuslong-term incentive awards and established the amounts shown(shown in this table as “Maximum” amounts for the long-term cash bonus awards and the performance unit awards.“Target”). Amounts are payable to the extent that Kroger’s actual performance meets specific performance goalsmetrics established by the Compensation Committee at the beginning of the performance period. There are no guaranteed or minimum payouts; if none of the performance metrics are achieved, then none of the award is earned and no payout is made. As described in the Compensation Discussion and Analysis,CD&A, actual earnings under the performance-based annual performance-based cash bonusincentive plan may exceed the target amount if the Company’s performance exceeds the performance goals, but are limited to 200%210% of the target amount. The Compensation Committee, and the independent members of the Board in the case of the CEO, also determined the number ofpotential values for performance units to be awarded to each NEO, under which common shares are earned to the extent performance meets specific objectives established at the beginning of the performance period. The performance units and the long-term cash bonus awards2022-2024 Long-Term Incentive Plan are more particularly described in the Compensation Discussion and Analysis.CD&A.
Restrictions on
The annual restricted stock awarded to the NEOs normally lapse, so long as the officer is then in our employ, in equal amounts on each of the first five anniversaries of the grant date, except that theand nonqualified stock options awards granted to Messrs. Schlotman, Donnelly, Hjelm and Morganthall on 9/17/2015 and 9,132 shares of the award granted to Mr. Morganthall on 7/15/15NEOs vest in equal amounts on each of the first threefour anniversaries of the grant date, so long as the officer remains a Kroger associate, except for the restricted stock granted in March 2023 with respect to a portion of the 2022 Annual Incentive Plan which vests on the first anniversary of the grant date. Any dividends declared on Kroger common shares are payable on unvested restricted stock. Nonqualified stock options granted to the NEOs normally vest, so long as the officer is then in our employ, in equal amounts on each of the first five anniversaries of the grant date.
38
2015
2022 Outstanding Equity Awards at Fiscal Year-End
The following table provides information about outstanding equity-based incentive compensation awards for the NEOs as of the end of 2015.2022. The vesting schedule for each award is described in the footnotes to this table. The market value of unvested restricted stock and unearned performance units is based on the closing price of Kroger’s common shares of $38.81$45.05 on January 29, 2016,27, 2023, the last trading day of 2015.fiscal 2022.
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options Exercisable (#) | Number of | Option | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity | ||||||||||||||||||||||||||||||
W. Rodney | 120,000 | — | $ | 9.97 | 5/4/2016 | 13,716 | (6) | 532,318 | 73,875 | (16) | 2,952,414 | (16) | ||||||||||||||||||||||||||
McMullen | 120,000 | — | $ | 14.14 | 6/28/2017 | 29,232 | (7) | 1,134,494 | 26,090 | (17) | 1,044,754 | (17) | ||||||||||||||||||||||||||
130,000 | — | $ | 14.31 | 6/26/2018 | 43,848 | (8) | 1,701,741 | |||||||||||||||||||||||||||||||
130,000 | — | $ | 11.17 | 6/25/2019 | 96,000 | (9) | 3,725,760 | |||||||||||||||||||||||||||||||
140,000 | — | $ | 10.08 | 6/24/2020 | 90,000 | (10) | 3,492,900 | |||||||||||||||||||||||||||||||
146,304 | 36,576 | (1) | $ | 12.37 | 6/23/2021 | 86,095 | (11) | 3,341,347 | ||||||||||||||||||||||||||||||
116,928 | 77,952 | (2) | $ | 10.98 | 7/12/2022 | |||||||||||||||||||||||||||||||||
77,952 | 116,928 | (3) | $ | 18.88 | 7/15/2023 | |||||||||||||||||||||||||||||||||
60,000 | 240,000 | (4) | $ | 24.67 | 7/15/2024 | |||||||||||||||||||||||||||||||||
— | 235,415 | (5) | $ | 38.33 | 7/15/2025 | |||||||||||||||||||||||||||||||||
J. Michael | 50,000 | — | $ | 10.08 | 6/24/2020 | 6,846 | (6) | 265,693 | 19,700 | (16) | 787,311 | (16) | ||||||||||||||||||||||||||
Schlotman | 73,024 | 18,256 | (1) | $ | 12.37 | 6/23/2021 | 16,392 | (7) | 636,174 | 12,870 | (17) | 515,379 | (17) | |||||||||||||||||||||||||
65,568 | 43,712 | (2) | $ | 10.98 | 7/12/2022 | 24,588 | (8) | 954,260 | ||||||||||||||||||||||||||||||
43,712 | 65,568 | (3) | $ | 18.88 | 7/15/2023 | 13,000 | (12) | 504,530 | ||||||||||||||||||||||||||||||
16,000 | 64,000 | (4) | $ | 24.67 | 7/15/2024 | 16,000 | (13) | 620,960 | ||||||||||||||||||||||||||||||
— | 106,531 | (5) | $ | 38.33 | 7/15/2025 | 24,000 | (10) | 931,440 | ||||||||||||||||||||||||||||||
38,610 | (11) | 1,498,454 | ||||||||||||||||||||||||||||||||||||
13,334 | (14) | 517,493 | ||||||||||||||||||||||||||||||||||||
Michael J. | 40,000 | — | $ | 14.14 | 6/28/2017 | 4,804 | (6) | 186,443 | 14,775 | (16) | 590,483 | (16) | ||||||||||||||||||||||||||
Donnelly | 40,000 | — | $ | 14.31 | 6/26/2018 | 7,608 | (7) | 295,266 | 7,240 | (17) | 289,926 | (17) | ||||||||||||||||||||||||||
40,000 | — | $ | 11.17 | 6/25/2019 | 14,412 | (8) | 559,330 | |||||||||||||||||||||||||||||||
40,000 | — | $ | 10.08 | 6/24/2020 | 13,000 | (12) | 504,530 | |||||||||||||||||||||||||||||||
56,576 | 14,144 | (1) | $ | 12.37 | 6/23/2021 | 18,000 | (10) | 698,580 | ||||||||||||||||||||||||||||||
30,432 | 20,288 | (2) | $ | 10.98 | 7/12/2022 | 29,547 | (11) | 1,146,719 | ||||||||||||||||||||||||||||||
20,288 | 30,432 | (3) | $ | 18.88 | 7/15/2023 | 13,334 | (14) | 517,493 | ||||||||||||||||||||||||||||||
12,000 | 48,000 | (4) | $ | 24.67 | 7/15/2024 | |||||||||||||||||||||||||||||||||
— | 59,929 | (5) | $ | 38.33 | 7/15/2025 | |||||||||||||||||||||||||||||||||
Christopher T. | 8,000 | — | $ | 14.31 | 6/26/2018 | 3,804 | (6) | 147,633 | 14,775 | (16) | 590,483 | (16) | ||||||||||||||||||||||||||
Hjelm | 16,000 | — | $ | 11.17 | 6/25/2019 | 7,608 | (7) | 295,266 | 9,654 | (17) | 386,574 | (17) | ||||||||||||||||||||||||||
24,000 | — | $ | 10.08 | 6/24/2020 | 11,412 | (8) | 442,900 | |||||||||||||||||||||||||||||||
30,432 | 10,144 | (1) | $ | 12.37 | 6/23/2021 | 13,000 | (12) | 504,530 | ||||||||||||||||||||||||||||||
30,432 | 20,288 | (2) | $ | 10.98 | 7/12/2022 | 18,000 | (10) | 698,580 | ||||||||||||||||||||||||||||||
20,288 | 30,432 | (3) | $ | 18.88 | 7/15/2023 | 28,960 | (11) | 1,123,938 | ||||||||||||||||||||||||||||||
12,000 | 48,000 | (4) | $ | 24.67 | 7/15/2024 | 13,334 | (14) | 517,493 | ||||||||||||||||||||||||||||||
— | 79,898 | (5) | $ | 38.33 | 7/15/2025 | |||||||||||||||||||||||||||||||||
Frederick J. | — | 39,959 | (5) | $ | 38.33 | 7/15/2025 | 75,778 | (15) | 2,940,944 | 13,445 | (16) | 537,339 | (16) | |||||||||||||||||||||||||
Morganthall II | 34,710 | (10) | 1,347,095 | 4,827 | (17) | 193,277 | (17) | |||||||||||||||||||||||||||||||
9,132 | (8) | 354,413 | ||||||||||||||||||||||||||||||||||||
14,477 | (11) | 561,852 | ||||||||||||||||||||||||||||||||||||
13,334 | (14) | 517,493 |
39
Option Awards | Stock Awards | |||||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options Exercisable (#) | Number of Securities Underlying Unexercised Options Unexercisable (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | ||||||||||||||||||||||
W. Rodney McMullen | 194,880 | $ | 18.88 | 7/15/2023 | 31,819 | (6) | $ | 1,433,446 | ||||||||||||||||||||||
300,000 | $ | 24.67 | 7/15/2024 | 54,087 | (7) | $ | 2,436,619 | |||||||||||||||||||||||
235,415 | $ | 38.33 | 7/15/2025 | 70,836 | (8) | $ | 3,191,162 | |||||||||||||||||||||||
358,091 | $ | 37.48 | 7/13/2026 | 60,431 | (9) | $ | 2,722,417 | |||||||||||||||||||||||
573,127 | $ | 22.92 | 7/13/2027 | 118,060 | (12) | $ | 5,644,448 | |||||||||||||||||||||||
349,293 | $ | 28.05 | 7/13/2028 | 100,718 | (13) | $ | 4,841,514 | |||||||||||||||||||||||
261,194 | 87,065 | (1) | $ | 24.75 | 3/14/2029 | |||||||||||||||||||||||||
164,577 | 164,577 | (2) | $ | 29.12 | 3/12/2030 | |||||||||||||||||||||||||
65,243 | 195,730 | (3) | $ | 34.94 | 3/11/2031 | |||||||||||||||||||||||||
142,858 | (4) | $ | 57.09 | 3/10/2032 | ||||||||||||||||||||||||||
Gary Millerchip | 9,600 | $ | 24.67 | 7/15/2024 | 6,061 | (6) | $ | 273,048 | ||||||||||||||||||||||
13,992 | $ | 38.33 | 7/15/2025 | 5,945 | (10) | $ | 267,822 | |||||||||||||||||||||||
27,972 | $ | 37.48 | 7/13/2026 | 13,908 | (7) | $ | 626,555 | |||||||||||||||||||||||
34,905 | $ | 22.92 | 7/13/2027 | 22,539 | (8) | $ | 1,015,382 | |||||||||||||||||||||||
30,251 | $ | 28.05 | 7/13/2028 | 19,706 | (9) | $ | 887,755 | |||||||||||||||||||||||
66,335 | 16,584 | (1) | $ | 24.75 | 3/14/2029 | 37,565 | (12) | $ | 1,795,981 | |||||||||||||||||||||
38,337 | 12,779 | (5) | $ | 22.08 | 7/15/2029 | 32,843 | (13) | $ | 1,578,763 | |||||||||||||||||||||
42,320 | 42,320 | (2) | $ | 29.12 | 3/12/2030 | |||||||||||||||||||||||||
20,759 | 62,278 | (3) | $ | 34.94 | 3/11/2031 | |||||||||||||||||||||||||
46,584 | (4) | $ | 57.09 | 3/10/2032 | ||||||||||||||||||||||||||
Stuart W. Aitken | 11,149 | $ | 22.92 | 7/13/2027 | 7,576 | (6) | $ | 341,299 | ||||||||||||||||||||||
33,124 | $ | 28.05 | 7/13/2028 | 13,908 | (7) | $ | 626,555 | |||||||||||||||||||||||
78,773 | 20,730 | (1) | $ | 24.75 | 3/14/2029 | 5,127 | (11) | $ | 230,971 | |||||||||||||||||||||
42,320 | 42,320 | (2) | $ | 29.12 | 3/12/2030 | 22,539 | (8) | $ | 1,015,382 | |||||||||||||||||||||
20,759 | 62,278 | (3) | $ | 34.94 | 3/11/2031 | 19,706 | (9) | $ | 887,755 | |||||||||||||||||||||
46,584 | (4) | $ | 57.09 | 3/10/2032 | 37,565 | (12) | $ | 1,795,981 | ||||||||||||||||||||||
32,843 | (13) | $ | 1,578,763 | |||||||||||||||||||||||||||
Yael Cosset | 10,611 | $ | 28.83 | 3/9/2027 | 6,061 | (6) | $ | 273,048 | ||||||||||||||||||||||
8,704 | $ | 22.92 | 7/13/2027 | 13,908 | (7) | $ | 626,555 | |||||||||||||||||||||||
29,499 | $ | 28.05 | 7/13/2028 | 5,127 | (11) | $ | 230,971 | |||||||||||||||||||||||
66,335 | 16,584 | (1) | $ | 24.75 | 3/14/2029 | 22,539 | (8) | $ | 1,015,382 | |||||||||||||||||||||
42,320 | 42,320 | (2) | $ | 29.12 | 3/12/2030 | 19,706 | (9) | $ | 887,755 | |||||||||||||||||||||
20,759 | 62,278 | (3) | $ | 34.94 | 3/11/2031 | 37,565 | (12) | $ | 1,795,981 | |||||||||||||||||||||
46,584 | (4) | $ | 57.09 | 3/10/2032 | 32,843 | (13) | $ | 1,578,763 | ||||||||||||||||||||||
Timothy A. Massa | 46,000 | $ | 24.67 | 7/15/2024 | 4,546 | (6) | $ | 204,797 | ||||||||||||||||||||||
29,970 | $ | 38.33 | 7/15/2025 | 10,303 | (7) | $ | 464,150 | |||||||||||||||||||||||
25,889 | $ | 37.48 | 7/13/2026 | 14,168 | (8) | $ | 638,268 | |||||||||||||||||||||||
45,065 | $ | 22.92 | 7/13/2027 | 13,138 | (9) | $ | 591,867 | |||||||||||||||||||||||
40,561 | $ | 28.05 | 7/13/2028 | 23,612 | (12) | $ | 1,128,891 | |||||||||||||||||||||||
53,898 | 12,438 | (1) | $ | 24.75 | 3/14/2029 | 21,895 | (13) | $ | 1,052,493 | |||||||||||||||||||||
31,348 | 31,348 | (2) | $ | 29.12 | 3/12/2030 | |||||||||||||||||||||||||
13,048 | 39,147 | (3) | $ | 34.94 | 3/11/2031 | |||||||||||||||||||||||||
31,056 | (4) | $ | 57.09 | 3/10/2032 |
(1) | Stock options vest on |
(2) | Stock options vest in equal amounts on |
(3) | Stock options vest in equal amounts on |
(4) | Stock options vest in equal amounts on |
(5) | Stock options vest |
(6) | Restricted stock vests on |
(7) | Restricted stock vests in equal amounts on |
(8) | Restricted stock vests in equal amounts on |
(9) | Restricted stock vests in equal amounts on |
(10) | Restricted stock vests |
(11) | Restricted stock vests |
Performance units granted under the |
Performance units granted under the |
2015
2022 Option Exercises and Stock Vested
The following table provides information for 2015 regarding 2022 stock options exercised, restricted stock vested, and common shares issued to the NEOs pursuant to performance units earned under the 2013 Long-Term Incentive Plan.long-term incentive plans.
Option Awards(1) | Stock Awards(2) | |||||||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | ||||||||||||||
W. Rodney McMullen | 150,000 | $ | 4,141,875 | 156,668 | $ | 6,019,970 | ||||||||||||
J. Michael Schlotman | — | — | 70,808 | $ | 2,696,280 | |||||||||||||
Michael J. Donnelly | 36,000 | $ | 1,124,280 | 43,426 | $ | 1,668,288 | ||||||||||||
Christopher T. Hjelm | — | — | 41,426 | $ | 1,593,233 | |||||||||||||
Frederick J. Morganthall II | — | — | 43,034 | $ | 1,656,157 |
Option Awards(1) | Stock Awards(2) | |||||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | ||||||||||||
W. Rodney McMullen | 194,880 | 8,661,442 | 376,876 | 19,160,902 | ||||||||||||
Gary Millerchip | — | — | 87,809 | 4,438,529 | ||||||||||||
Stuart W. Aitken | 101,747 | 2,768,087 | 90,240 | 4,566,794 | ||||||||||||
Yael Cosset | 73,566 | 2,079,679 | 90,012 | 4,550,119 | ||||||||||||
Timothy A. Massa | 16,000 | 627,275 | 65,961 | 3,342,585 |
(1) | Stock options have a ten-year life and expire if not exercised within that ten-year period. The value realized on exercise is the difference between the exercise price of the option and the closing price of Kroger’s common shares on the |
40
(2) | The Stock Awards columns include vested restricted stock and earned performance units, as follows: |
Vested Restricted Stock | Earned Performance Units | |||||||||||||
Name | Number of Shares | Value Realized | Number of Shares | Value Realized | ||||||||||
Mr. McMullen | 107,948 | $ | 4,181,764 | 48,720 | $ | 1,838,206 | ||||||||
Mr. Schlotman | 43,488 | $ | 1,665,496 | 27,320 | $ | 1,030,784 | ||||||||
Mr. Donnelly | 30,746 | $ | 1,189,872 | 12,680 | $ | 478,416 | ||||||||
Mr. Hjelm | 28,746 | $ | 1,114,817 | 12,680 | $ | 478,416 | ||||||||
Mr. Morganthall | 33,934 | $ | 1,312,814 | 9,100 | $ | 343,343 |
Vested Restricted Stock | Earned Performance Units | |||||||||||||||
Name | Number of Shares | Value Realized | Number of Shares | Value Realized | ||||||||||||
W. Rodney McMullen | 207,856 | $ | 11,174,707 | 169,020 | $ | 7,986,195 | ||||||||||
Gary Millerchip | 44,346 | $ | 2,384,902 | 43,463 | $ | 2,053,627 | ||||||||||
Stuart W. Aitken | 46,777 | $ | 2,513,167 | 43,463 | $ | 2,053,627 | ||||||||||
Yael Cosset | 46,549 | $ | 2,496,492 | 43,463 | $ | 2,053,627 | ||||||||||
Timothy A. Massa | 33,766 | $ | 1,821,371 | 32,195 | $ | 1,521,214 |
Restricted stock. The table includes the number of shares acquired upon vesting of restricted stock and the value realized on the vesting of restricted stock.stock, based on the closing price of Kroger common shares on the vesting date.
Performance Units. In 2013, participantsParticipants in the 20132020-2022 Long-Term Incentive Plan were awarded performance units that were earned based on performance criteria established by the Compensation Committee atas described in “2020-2022 Long-Term Incentive Plan — Results and Payout” in the beginning of the three-year performance period.CD&A. Actual payouts were based on the level of performance achieved and were paid in common shares. The number of common shares issued, and the value realized based on the closing price of Kroger common shares of $37.73$47.25 on March 10, 2016,9, 2023, the date of deemed delivery of the shares, are reflected in the table above.
2015
2022 Pension Benefits
The following table provides information regarding pension benefits for the NEOs as of the last day of 2015.fiscal 2022. Only Mr. McMullen participates in a pension plan.
Name | Plan Name | Number of Years Credited Service (#) | Present Value of Accumulated Benefit ($)(1) | ||||||||
W. Rodney McMullen | Kroger Consolidated Retirement Benefit Plan | 30 | $ | 1,070,880 | |||||||
Kroger Excess Benefit Plan | 30 | $ | 10,276,024 | ||||||||
J. Michael Schlotman | Kroger Consolidated Retirement Benefit Plan | 30 | $ | 1,169,438 | |||||||
Kroger Excess Benefit Plan | 30 | $ | 5,457,400 | ||||||||
Michael J. Donnelly | Kroger Consolidated Retirement Benefit Plan | 36 | $ | 244,532 | |||||||
Kroger Excess Benefit Plan | 36 | $ | 3,241,033 | ||||||||
Christopher T. Hjelm | Kroger Consolidated Retirement Benefit Plan | — | (2) | $ | 10,086 | ||||||
Frederick J. Morganthall II | Harris Teeter Employees’ Pension Plan | 29 | $ | 975,455 | |||||||
Harris Teeter Supplemental Executive | |||||||||||
Retirement Plan | 29 | $ | 8,044,875 |
Name | Plan Name | Number of Years Credited Service (#)(1) | Present Value of Accumulated Benefit ($)(2) | Payments during Last fiscal year ($) | ||||||||||
W. Rodney McMullen | Pension Plan | 34 | 1,610,951 | — | ||||||||||
Excess Plan | 34 | 18,009,437 | — | |||||||||||
Gary Millerchip | Pension Plan | — | — | — | ||||||||||
Excess Plan | — | — | — | |||||||||||
Stuart W. Aitken | Pension Plan | — | — | — | ||||||||||
Excess Plan | — | — | — | |||||||||||
Yael Cosset | Pension Plan | — | — | — | ||||||||||
Excess Plan | — | — | — | |||||||||||
Timothy A. Massa | Pension Plan | — | — | — | ||||||||||
Excess Plan | — | — | — |
(1) | In 2018, the Company froze the service periods used to calculate pension benefits and thus, Mr. McMullen’s number of years of credited service is less than his actual 44 years of service. |
(2) | The discount rate used to determine the present values was | |
41
Kroger Pension Plan and Excess Plan
Messrs.
In 2022, Mr. McMullen Schlotman, Donnelly and Hjelm participatewas a participant in The Kroger Consolidated Retirement Benefitthe Pension Plan, (the “Kroger Pension Plan”), which is a qualified defined benefit pension plan. Messrs.Mr. McMullen Schlotman and Donnelly also participateparticipates in The Kroger Co.the Excess Benefit Plan, (the “Excess Plan”), which is a nonqualified deferred compensation plan as defined in Section 409A of the Internal Revenue Code. The purpose of the Excess Plan is to make up the shortfall in retirement benefits caused by the limitations on benefits to highly compensated individuals under the qualified defined benefit pension plans in accordance with the Internal Revenue Code.
Although participants generally receive credited service beginning at age 21, certain participants in the Kroger Pension Plan and the Excess Plan who commenced employment prior to 1986, including Messrs.Mr. McMullen, and Schlotman, began to accrue credited service after attaining age 25 and one year of service. The Kroger Pension Plan and the Excess Plan generally determine accrued benefits using a cash balance formula but retain benefit formulas applicable under prior plans for certain “grandfathered participants” who were employed by Kroger on December 31, 2000. Each of Messrs.Mr. McMullen Schlotman and Donnelly is eligible for these grandfathered benefits. Mr. Hjelm is not a grandfathered participant, and therefore, his benefits are determined using the cash balance formula.
Grandfathered Participants
Benefits for grandfathered participants are determined using formulas applicable under prior plans, including the Kroger formula covering service to The Kroger Co. and the Dillon formula covering service to Dillon Companies, Inc. As a “grandfathered participants”, Messrs.participant,” Mr. McMullen Schlotman and Donnelly will receive benefits under the Kroger Pension Plan and the Excess Plan, determined as follows:
| 11∕2% times years of credited service multiplied by the average of the highest five years of total earnings (base salary and annual cash |
● | normal retirement age is 65; and |
● | unreduced benefits are payable beginning at age | |
|
In 2018, we announced changes to these company-sponsored pension plans. The Company froze the event of a termination of employment other than death or disability, Messrs. McMullen, Schlotmancompensation and Donnelly currently are eligibleservice periods used to calculate pension benefits for a reduced early retirement benefit, as each has attained age 55. If a “grandfathered participant” becomes disabled while employed by Kroger and after attaining age 55, the participant will receive the full retirement benefit. If a married “grandfathered participant” dies while employed by Kroger, the surviving spouse will receive benefits as though a retirement occurred on such date, based on the greater of: actual benefits payable to the participant if he was over age 55, or the benefits that would have been payable to the participant assuming he was age 55 on the date of death.
Cash Balance Participants
Mr. Hjelm began participatingactive associates who participate in the Kroger Pension Plan in August 2005 as a cash balance participant. Untilaffected pension plans, including the plan was frozen on December 31, 2006, cash balanceNEO participants, received an annual pay credit equal to 5% of that year’s eligible earnings plus an annual interest credit equal to the account balance at the beginning of the plan year multiplied by the annual rate of interest on 30-year Treasury Securities in effect prior to the plan year. Beginning on January 1, 2007, cash balance participants receive an annual interest credit but no longer receive an annual pay credit. Upon retirement, cash balance participants generally are eligible to receive a life annuity which is the actuarial equivalent of his account balance, but may elect in some circumstances to receive a lump sum distribution equal to his account balance. If Mr. Hjelm becomes disabled while employed by Kroger, he will receive the full retirement benefit. If he dies while employed by Kroger, his beneficiary will receive a death benefit equal to the benefit he was eligible to receive if a retirement occurred on such date.
42
Offsetting Benefits
Mr. Donnelly also participates in the Dillon Companies, Inc. Employees’ Profit Sharing Plan, which is a qualified defined contribution plan (the “Dillon Profit Sharing Plan”) under which Dillon Companies, Inc. and its participating subsidiaries may choose to make discretionary contributions each year that are allocated to each participant’s account. Participation in Dillon Profit Sharing Plan was frozen in 2001 and participants are no longer able to make employee contributions, but certain participants, including Mr. Donnelly, are still eligible for employer contributions. Participants elect from among a number of investment options and the amounts in their accounts are invested and credited with investment earnings in accordance with their elections. Due to offset formulas contained in the Kroger Pension Plan, Mr. Donnelly’s accrued benefits under the Dillon Profit Sharing Plan offset a portion of the benefit that would otherwise accrue for him under the Kroger Pension for his service with Dillon Companies, Inc. This offset is reflected in the table above.
Harris Teeter Pension Plan
Mr. Morganthall participates in the HT Pension Plan, which is a defined benefit pension plan. Participation in the HT Pension Plan was frozen effective October 1, 2005. For participants with age and service points as of December 31, 2005 equal to or greater than 45, which includes Mr. Morganthall, benefit accruals2019. Beginning January 1, 2020, the affected active associates no longer accrue additional benefits for future service and eligible compensation received under the HT Pension Plan after September 30, 2005 will be offset by the actuarial equivalent of the portion of their account balance under the Harris Teeter Supermarkets, Inc. Retirement and Savings Plan (the “HT Savings Plan”) that are attributable to automatic retirement contributions made by Harris Teeter after September 30, 2005, plus earnings and losses on such contributions. A participant’s normal annual retirement benefit under the HT Pension Plan at age 65 is an amount equal to 0.8% of his final average earnings multiplied by years of service at retirement, plus 0.6% of his final average earnings in excess of Social Security covered compensation multiplied by the number of years of service up to a maximum of 35 years. A participant’s final average earnings is the average annual cash compensation paid to the participant during the plan year, including salary, incentive compensation and any amount contributed to the HT Savings Plan, for the 5 consecutive years in the last 10 years that produce the highest average.these plans.
Harris Teeter SERP
Mr. Morganthall also participates in the HT SERP, which is a nonqualified deferred compensation plan as defined in Section 409A of the Internal Revenue Code. The purpose of the HT SERP is to supplement the benefits payable under the retirement plans. Under the HT SERP, participants who retire at normal retirement age of 60 receive monthly retirement benefits equal to between 55% and 60% of his final average earnings times his accrual fraction and reduced by his (1) assumed HT Pension Plan retirement benefit, and (2) assumed Social Security benefit. The final average earnings are the average annual earnings during the highest 3 calendar years out of the last 10 calendar years preceding termination of employment. The accrual fraction is a fraction, the numerator of which is the years of credited service, the denominator of which is 20, and which may not exceed 1.0. The benefits payable under the HT SERP are payable for the participant’s lifetime with an automatic 75% survivor benefit payable to the participant’s surviving eligible spouse for his or her lifetime. Mr. Morganthall is eligible to receive the full benefit as he has reached age 60. Harris Teeter uses a non-qualified trust to purchase and hold the assets to satisfy Harris Teeter’s obligation under the HT SERP, and participants in the HT SERP are general creditors of Harris Teeter in the event Harris Teeter becomes insolvent.
43
2015
2022 Nonqualified Deferred Compensation
The following table provides information on nonqualified deferred compensation for the NEOs for 2015.2022. Only Mr. McMullen participates in a nonqualified deferred compensation plan.
Name | Executive Contributions in Last FY | Registrant Contributions in Last FY | Aggregate Earnings in Last FY(1) | Aggregate Balance at Last FYE(2) | ||||||||||||||||||
W. Rodney McMullen | $ | 7,500 | (3) | — | $ | 532,896 | $ | 8,379,170 | ||||||||||||||
J. Michael Schlotman | — | — | — | — | ||||||||||||||||||
Michael J. Donnelly | — | — | $ | 24,430 | $ | 372,649 | ||||||||||||||||
Christopher T. Hjelm | $ | 148,808 | (4) | — | $ | 10,053 | $ | 236,885 | ||||||||||||||
Frederick J. Morganthall II | $ | 100,000 | (4) | $ | 13,475 | (5) | — | $ | 663,852 |
Name | Executive Contributions in Last FY | Aggregate Earnings in Last FY(1) | Aggregate Balance at Last FYE(2) | |||||||||
W. Rodney McMullen | — | $ | 895,310 | $ | 14,106,653 | |||||||
Gary Millerchip | — | — | — | |||||||||
Stuart W. Aitken | — | — | — | |||||||||
Yael Cosset | — | — | — | |||||||||
Timothy A. Massa | — | — | — |
(1) | These amounts include the aggregate earnings on all accounts for each NEO, including any above-market or preferential earnings. The following amounts earned in |
(2) | The following amounts in the Aggregate Balance column | |
Kroger Executive Deferred Compensation Plan
Messrs.
Mr. McMullen Donnelly and Hjelm participateparticipates in The Kroger Co. Executivethe Deferred Compensation Plan, which is a nonqualified deferred compensation plan. Participants may elect to defer up to 100% of the amount of their salary that exceeds the sum of the FICA wage base and pre-tax insurance and other Internal Revenue Code Section 125 plan deductions, as well as up to 100% of their annual and long-term cash bonusincentive compensation. Kroger does not match any deferral or provide other contributions. Deferral account amounts are credited with interest at the rate representing Kroger’s cost of ten-year debt as determined by Kroger’s CEOCFO and approved by the Compensation Committee prior to the beginning of each deferral year. The interest rate established for deferral amounts for each deferral year will be applied to those deferral amounts for all subsequent years until the deferred compensation is paid out. Amounts deferred in 2015 earn interest at a rate of 3.65%. Participants can elect to receive lump sum distributions or quarterly installments for periods up to ten years. Participants also can elect between lump sum distributions and quarterly installments to be received by designated beneficiaries if the participant dies before distribution of deferred compensation is completed.
Participants may not withdraw amounts from their accounts until they leave Kroger, except that Kroger has discretion to approve an early distribution to a participant upon the occurrence of an unforeseen emergency. Participants who are “specified employees”associates” under Section 409A of the Internal Revenue Code, which includes the NEOs, may not receive a post-termination distribution for at least six months following separation. If the employeeassociate dies prior to or during the distribution period, the remainder of the account will be distributed to his or her designated beneficiary in lump sum or quarterly installments, according to the participant’s prior election.
44
Harris Teeter Flexible Deferral Plan
Mr. Morganthall participates in the HT Flexible Deferral Plan, which is a nonqualified deferred compensation plan that provides certain highly compensated employees of Harris Teeter, the opportunity to defer the receipt and taxation on a portion of their annual compensation and supplements the benefits under tax qualified retirement plans to the extent that such benefits are subject to limitation under the Internal Revenue Code. Participants may elect to defer up to 50% of their base salary and up to 90% of their non-equity incentive bonus compensation. Harris Teeter provides matching contributions of 50% of the participant’s contribution, up to a maximum of 4% of the participant’s pay, less assumed matching contributions under the HT Savings Plan. These deferred amounts and Company match are credited to the participant’s account. Plan participants may choose deemed investments in the HT Flexible Deferral Plan that represent choices that span a variety of diversified asset classes. Participants may elect to receive a lump sum distribution, annual installment payments for 2-15 years, or a partial lump sum and installment payments. Upon retirement, death, disability, or other separation of service, the participant will receive distributions in accordance with his election, subject to limitations under Section 409A. Mr. Morganthall has reached the retirement age and is eligible for the full benefit. The HT Flexible Deferral Plan also allows for an in-service withdrawal for an unforeseeable emergency based on facts and circumstances that meet Internal Revenue Service and plan guidelines. Harris Teeter uses a non-qualified trust to purchase and hold the assets to satisfy Harris Teeter’s obligation under the HT Flexible Deferral Plan, and participants in the HT Flexible Deferral Plan are general creditors of Harris Teeter in the event Harris Teeter becomes insolvent.
Potential Payments upon Termination or Change in Control
Kroger does not have employment agreements or other contracts, agreements, plans or arrangements that provide for payments to the NEOs in connection with a termination of employment or a change in control of Kroger. However, KEPP ourand award agreements for stock options, restricted stock and performance units and our long-term cash bonus plans provide for certain payments and benefits to participants, including the NEOs, in the event of a termination of employment or a change in control of Kroger, as described below.defined in the applicable plan or agreement. Our pension plans and nonqualified deferred compensation plan also provide for certain payments and benefits to participants in the event of a termination of employment, as described above in the 2022 Pension Benefits section and the 2022 Nonqualified Deferred Compensation section, respectively.
A “change in control” under KEPP, and our equity and non-equity incentive awards occurs if:
| |
| |
| |
|
KEPPThe Kroger Co. Employee Protection Plan
KEPP applies to all management employeesassociates who are classified as exempt under the federal Fair Labor Standards Act and to certain administrative or technical support personnel who are not covered by a collective bargaining agreement, with at least one year of service, andincluding the NEOs. KEPP provides severance benefits when a participant’s employment is terminated actually or constructively within two years following a change in control of Kroger, including the NEOs.as defined in KEPP. The actual amount of the severance benefit is dependent on pay level and years of service. TheExempt associates, including the NEOs, are eligible for the following benefits:
● | a lump sum severance payment equal to up to |
45
● | a lump sum payment equal to the participant’s accrued and unpaid vacation, including banked vacation; |
● |
| |
continued medical and dental benefits for up to 24 months and continued group term life insurance coverage for up to |
● |
|
Payments
In the event that any payments or benefits received or to executive officersbe received by an eligible associate in connection with a change in control or termination of employment (whether pursuant to KEPP or any other plan, arrangement or agreement with Kroger or any person whose actions result in a change in control) would constitute parachute payments within the meaning of Section 280G of the Code and would be subject to the excise tax under KEPPSection 4999 of the Code, then such payments and benefits will either be (i) paid in full or (ii) reduced to the minimum extent necessary soto ensure that no portion of such payments or benefits will not exceed 2.99 timesbe subject to the officer’s average W-2 earnings overexcise tax, whichever results in the preceding five years.eligible associate receiving the greatest aggregate amount on an after-tax basis.
Long-Term CompensationIncentive Awards
The following table describes the treatment of long-term compensationincentive awards following a termination of employment or change in control of Kroger.Kroger, as defined in the applicable agreement. In each case, the continued vesting, exercisability or eligibility for the incentive awards will end if the participant provides services to a competitor of Kroger.
Triggering Event | Stock Options | Restricted Stock | Performance Units | ||||
Involuntary | Forfeit all unvested options. Previously vested options remain exercisable for the shorter of one year after termination or the remainder of the original 10-year | Forfeit all unvested shares | Forfeit all rights to units for which the |
| |||
Voluntary
| Forfeit all unvested options. Previously vested options remain exercisable for the shorter of one year after termination or the remainder of the original 10-year | Forfeit all unvested shares | Forfeit all rights to units for which the |
| |||
Voluntary
| Unvested options held greater than one year continue vesting on the original schedule. All options are exercisable for remainder of the original 10-year |
| Pro rata |
| |||
Death | Unvested options are immediately vested. All options are exercisable for the remainder of the original 10-year | Unvested shares immediately vest | Pro rata |
| |||
Disability | Unvested options are immediately vested. All options are exercisable for remainder of the original 10-year | Unvested shares immediately vest | Pro rata |
| |||
Change in ● For awards prior to 2019 | Unvested options are immediately vested and exercisable | Unvested shares immediately vest | 50% of the | ||||
Change in Control(3) ● For awards in March 2019 and thereafter | Unvested options only vest and become exercisable upon an actual or constructive termination of employment within two years following a change in control | Unvested shares only vest upon an actual or constructive termination of employment within two years following a change in control | 50% of the |
46
(1) | The minimum age requirement is age 62 for stock options and restricted stock and age 55 for performance units. |
(2) | The prorated amount is equal to the number of weeks of active employment during the performance period divided by the total number of weeks in the performance period. |
(3) | These benefits are payable upon an actual or constructive termination of employment within two years after a change in control, |
Quantification of Payments upon Termination or Change in Control
The following table provides information regarding certain potential payments that would have been made to the NEOs if the triggering event occurred on the last day of the fiscal year, January 30, 2016,28, 2023, given compensation, age and service levels as of that date and, where applicable, based on the closing market price per Kroger common share on the last trading day of the fiscal year ($38.8145.05 on January 29, 2016)27, 2023). Amounts actually received upon the occurrence of a triggering event will vary based on factors such as the timing during the year of such event, the market price of Kroger common shares, and the officer’s age, length of service and compensation levels.level.
Name | Involuntary Termination | Voluntary Termination/ Retirement | Death | Disability | Change in Control without Termination | Change in | ||||||||||||||||
W. Rodney McMullen | ||||||||||||||||||||||
Accrued and Banked Vacation | $ | 763,072 | $ | 763,072 | $ | 763,072 | $ | 763,072 | $ | 763,072 | $ | 763,072 | ||||||||||
Severance | — | — | — | — | — | 4,790,016 | ||||||||||||||||
Additional Vacation and Bonus | — | — | — | — | — | 108,173 | ||||||||||||||||
Continued Health and Welfare Benefits(1) | — | — | — | — | — | 58,326 | ||||||||||||||||
Stock Options(2) | — | — | 8,973,448 | 8,973,448 | 8,973,448 | 8,973,448 | ||||||||||||||||
Restricted Stock(3) | — | — | 13,928,560 | 13,928,560 | 13,928,560 | 13,928,560 | ||||||||||||||||
Performance Units(4) | — | 2,615,463 | 2,615,463 | 2,615,463 | 2,467,908 | 2,467,908 | ||||||||||||||||
Long-Term Cash Bonus(5) | — | 1,133,340 | 1,133,340 | 1,133,340 | 1,150,000 | 1,150,000 | ||||||||||||||||
Executive Group Life Insurance | — | — | 4,910,000 | — | — | — | ||||||||||||||||
J. Michael Schlotman | ||||||||||||||||||||||
Accrued and Banked Vacation | $ | 516,928 | $ | 516,928 | $ | 516,928 | $ | 516,928 | $ | 516,928 | $ | 516,928 | ||||||||||
Severance | — | — | — | — | — | 2,581,080 | ||||||||||||||||
Additional Vacation and Bonus | — | — | — | — | — | 45,622 | ||||||||||||||||
Continued Health and Welfare Benefits(1) | — | — | — | — | — | 48,995 | ||||||||||||||||
Stock Options(2) | — | — | 3,962,059 | 3,962,059 | 3,962,059 | 3,962,059 | ||||||||||||||||
Restricted Stock(3) | — | — | 5,929,004 | 5,929,004 | 5,929,004 | 5,929,004 | ||||||||||||||||
Performance Units(4) | — | 850,471 | 850,471 | 850,471 | 887,585 | 887,585 | ||||||||||||||||
Long-Term Cash Bonus(5) | — | 743,335 | 743,335 | 743,335 | 747,500 | 747,500 | ||||||||||||||||
Executive Group Life Insurance | — | — | 3,064,200 | — | — | — | ||||||||||||||||
Michael J. Donnelly | ||||||||||||||||||||||
Accrued and Banked Vacation | $ | 245,191 | $ | 245,191 | $ | 245,191 | $ | 245,191 | $ | 245,191 | $ | 245,191 | ||||||||||
Severance | — | — | — | — | — | 2,345,731 | ||||||||||||||||
Additional Vacation and Bonus | — | — | — | — | — | 42,451 | ||||||||||||||||
Continued Health and Welfare Benefits(1) | — | — | — | — | — | 38,794 | ||||||||||||||||
Stock Options(2) | — | — | 2,252,578 | 2,252,578 | 2,252,578 | 2,252,578 | ||||||||||||||||
Restricted Stock(3) | — | — | 3,908,361 | 3,908,361 | 3,908,361 | 3,908,361 | ||||||||||||||||
Performance Units(4) | — | 575,422 | 575,422 | 575,422 | 572,059 | 572,059 | ||||||||||||||||
Long-Term Cash Bonus(5) | — | 650,008 | 650,008 | 650,008 | 653,230 | 653,230 | ||||||||||||||||
Executive Group Life Insurance | — | — | 2,770,000 | — | — | — | ||||||||||||||||
Christopher T. Hjelm | ||||||||||||||||||||||
Accrued and Banked Vacation | $ | 53,848 | $ | 53,848 | $ | 53,848 | $ | 53,848 | $ | 53,848 | $ | 53,848 | ||||||||||
Severance | — | — | — | — | — | 2,053,342 | ||||||||||||||||
Additional Vacation and Bonus | — | — | — | — | — | 39,487 | ||||||||||||||||
Continued Health and Welfare Benefits(1) | — | — | — | — | — | 48,101 | ||||||||||||||||
Stock Options(2) | — | — | 2,156,403 | 2,156,403 | 2,156,403 | 2,156,403 | ||||||||||||||||
Restricted Stock(3) | — | — | 3,730,340 | 3,730,340 | 3,730,340 | 3,730,340 | ||||||||||||||||
Performance Units(4) | — | 637,879 | 637,879 | 637,879 | 665,727 | 665,727 | ||||||||||||||||
Long-Term Cash Bonus(5) | — | 606,668 | 606,668 | 606,668 | 610,000 | 610,000 | ||||||||||||||||
Executive Group Life Insurance | — | — | 3,165,000 | — | — | — |
47
Name | Involuntary Termination | Voluntary | Death | Disability | Change in Control without Termination | Change in Control with Termination | ||||||||||||||||||||
Frederick J. Morganthall II | ||||||||||||||||||||||||||
Accrued and Banked Vacation | $ | 77,310 | $ | 77,310 | $ | 77,310 | $ | 77,310 | $ | 77,310 | $ | 77,310 | ||||||||||||||
Severance | — | — | — | — | — | 2,180,016 | ||||||||||||||||||||
Additional Vacation and Bonus | — | — | — | — | — | 41,443 | ||||||||||||||||||||
Continued Health and Welfare Benefits(1) | — | — | — | — | — | 27,484 | ||||||||||||||||||||
Stock Options(2) | — | — | 19,180 | 19,180 | 19,180 | 19,180 | ||||||||||||||||||||
Restricted Stock(3) | — | — | 5,721,797 | 5,721,797 | 5,721,797 | 5,721,797 | ||||||||||||||||||||
Performance Units(4) | — | 478,038 | 478,038 | 478,038 | 452,195 | 452,195 | ||||||||||||||||||||
Long-Term Cash Bonus(5) | — | 559,162 | 559,162 | 559,162 | 561,930 | 561,930 | ||||||||||||||||||||
Executive Group Life Insurance | — | — | 2,295,000 | — | — | — |
Name | Involuntary Termination | Voluntary Termination/ Retirement | Death | Disability | Change in Control without Termination | Change in Control with Termination | ||||||||||||||||||
W. Rodney McMullen | ||||||||||||||||||||||||
Accrued and Banked Vacation | $ | 638,750 | $ | 638,750 | $ | 638,750 | $ | 638,750 | $ | 638,750 | $ | 638,750 | ||||||||||||
Severance | – | – | – | – | – | $ | 8,400,000 | |||||||||||||||||
Continued Health and Welfare Benefits(1) | – | – | – | – | – | $ | 49,101 | |||||||||||||||||
Stock Options(2) | $ | 0 | $ | 0 | $ | 6,367,962 | $ | 6,367,962 | $ | 0 | $ | 6,367,962 | ||||||||||||
Restricted Stock(3) | $ | 0 | $ | 0 | $ | 9,783,644 | $ | 9,783,644 | $ | 0 | $ | 9,783,644 | ||||||||||||
Performance Units(4) | $ | 0 | $ | 5,058,176 | $ | 5,058,176 | $ | 5,058,176 | $ | 0 | $ | 5,814,401 | ||||||||||||
Executive Group Life Insurance | – | – | $ | 2,000,000 | – | – | – | |||||||||||||||||
Gary Millerchip | ||||||||||||||||||||||||
Accrued and Banked Vacation | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Severance | – | – | – | – | – | $ | 3,210,432 | |||||||||||||||||
Continued Health and Welfare Benefits(1) | – | – | – | – | – | $ | 57,269 | |||||||||||||||||
Stock Options(2) | $ | 0 | $ | 0 | $ | 1,933,978 | $ | 1,933,978 | $ | 0 | $ | 1,933,978 | ||||||||||||
Restricted Stock(3) | $ | 0 | $ | 0 | $ | 3,070,563 | $ | 3,070,563 | $ | 0 | $ | 3,070,563 | ||||||||||||
Performance Units(4) | $ | 0 | $ | 0 | $ | 1,621,380 | $ | 1,621,380 | $ | 0 | $ | 1,867,976 | ||||||||||||
Executive Group Life Insurance | – | – | $ | 1,237,500 | – | – | – | |||||||||||||||||
Stuart W. Aitken | ||||||||||||||||||||||||
Accrued and Banked Vacation | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Severance | – | – | – | – | – | $ | 3,550,008 | |||||||||||||||||
Continued Health and Welfare Benefits(1) | – | – | – | – | – | $ | 59,895 | |||||||||||||||||
Stock Options(2) | $ | 0 | $ | 0 | $ | 1,724,608 | $ | 1,724,608 | $ | 0 | $ | 1,724,608 | ||||||||||||
Restricted Stock(3) | $ | 0 | $ | 0 | $ | 3,101,963 | $ | 3,101,963 | $ | 0 | $ | 3,101,963 | ||||||||||||
Performance Units(4) | $ | 0 | $ | 0 | $ | 1,621,380 | $ | 1,621,380 | $ | 0 | $ | 1,867,976 | ||||||||||||
Executive Group Life Insurance | – | – | $ | 1,387,500 | – | – | – | |||||||||||||||||
Yael Cosset | ||||||||||||||||||||||||
Accrued and Banked Vacation | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Severance | – | – | – | – | – | $ | 3,350,016 | |||||||||||||||||
Continued Health and Welfare Benefits(1) | – | – | – | – | – | $ | 44,303 | |||||||||||||||||
Stock Options(2) | $ | 0 | $ | 0 | $ | 1,640,444 | $ | 1,640,444 | $ | 0 | $ | 1,640,444 | ||||||||||||
Restricted Stock(3) | $ | 0 | $ | 0 | $ | 3,033,712 | $ | 3,033,712 | $ | 0 | $ | 3,033,712 | ||||||||||||
Performance Units(4) | $ | 0 | $ | 0 | $ | 1,621,380 | $ | 1,621,380 | $ | 0 | $ | 1,867,976 | ||||||||||||
Executive Group Life Insurance | – | – | $ | 1,237,500 | – | – | – | |||||||||||||||||
Timothy A. Massa | ||||||||||||||||||||||||
Accrued and Banked Vacation | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Severance | – | – | – | – | – | $ | 3,250,008 | |||||||||||||||||
Continued Health and Welfare Benefits(1) | – | – | – | – | – | $ | 48,839 | |||||||||||||||||
Stock Options(2) | $ | 0 | $ | 0 | $ | 1,147,641 | $ | 1,147,641 | $ | 0 | $ | 1,147,641 | ||||||||||||
Restricted Stock(3) | $ | 0 | $ | 0 | $ | 1,899,083 | $ | 1,899,083 | $ | 0 | $ | 1,899,083 | ||||||||||||
Performance Units(4) | $ | 0 | $ | 1,037,944 | $ | 1,037,944 | $ | 1,037,944 | $ | 0 | $ | 1,202,339 | ||||||||||||
Executive Group Life Insurance | – | – | $ | 1,275,000 | – | – | – |
(1) | Represents the aggregate present value of continued participation in the Company’s medical, dental and executive term life insurance plans, based on the premiums |
(2) | Amounts reported in the |
(3) | Amounts reported in the |
(4) | Amounts reported in the |
Pay Versus Performance
As required by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(v) of Regulation S-K, we are providing the following information about the relationship between executive “compensation actually paid,” or “CAP,” and certain financial performance of the Company. For further information concerning the Company’s pay-for-performance philosophy and how the Company aligns executive compensation with the Company’s performance, refer to the CD&A beginning on page 46.
PAY VERSUS PERFORMANCE TABLE*
(a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | ||||||||||||||||||||||||||
Value of Initial Fixed $100 Investment Based on5 | |||||||||||||||||||||||||||||||||
Year | Summary Compensation Table Total for PEO ($)1 | Compensation Actually Paid to PEO ($)2 | Average Summary Compensation Table Total for Non-PEO NEOs ($)3 | Average Compensation Actually Paid to Non-PEO NEOs ($)4 | Total Share- holder Return ($) | Peer Group Total Share- holder Return ($) | Net Income ($)6 (in millions) | Adjusted FIFO Operating Profit ($)7 (in millions) | |||||||||||||||||||||||||
2022 | 19,209,843 | 23,325,794 | 6,117,423 | 6,281,085 | 178.23 | 140.77 | 2,244 | 5,079 | |||||||||||||||||||||||||
2021 | 18,168,730 | 36,111,316 | 5,644,957 | 9,323,327 | 168.66 | 145.25 | 1,655 | 4,310 | |||||||||||||||||||||||||
2020 | 22,373,574 | 29,840,084 | 6,932,437 | 9,191,933 | 131.19 | 123.01 | 2,585 | 4,056 |
*Totals in the above table might not equal the summation of the columns due to rounding amounts to the nearest dollar.
During fiscal 2020, 2021, and 2022, Mr. McMullen served as our Principal Executive Officer (“PEO”). The dollar amounts reported in column (b) are the |
48
2. | The dollar amounts reported in column (c) represent the amount of “compensation actually paid” to Mr. McMullen as computed in accordance with Item 402(v) of Regulation S-K. The amounts do not reflect the actual amount of compensation earned by or paid to Mr. McMullen during the applicable year. In accordance with the requirements of Item 402(v) of Regulation S-K, the following adjustments were made to Mr. McMullen’s total compensation for each year to determine the CAP: |
PEO SCT Total to CAP Reconciliation | |||||||||||||||||||||||||
Year | Reported Summary Compensation Table for PEO ($) | Reported Summary Compensation Table Value of Equity Awards(a) ($) | Equity Award Adjustments(b) ($) | Reported Change in the APV of Pension Benefits in Summary Compensation Table (c) ($) | Plus: Pension Benefit Adjustments(b)(c) ($) | Compensation Actually Paid to PEO ($) | |||||||||||||||||||
2022 | 19,209,843 | 12,667,275 | 16,783,226 | - | - | 23,325,794 | |||||||||||||||||||
2021 | 18,168,730 | 10,999,185 | 28,941,771 | - | - | 36,111,316 | |||||||||||||||||||
2020 | 22,373,574 | 13,001,622 | 22,126,697 | 1,658,565 | - | 29,840,084 |
a) | The amounts included in this column are the amounts reported in “Stock Awards” and “Option Awards” column of the SCT for each applicable year and are subtracted from the Reported Summary Compensation Table for PEO. |
b) | The equity award and pension benefit adjustments for each applicable year were calculated in accordance with the methodology required by Item 402(v) of Regulation S-K as follow: the equity award adjustments for each applicable year include the addition (or subtraction, as applicable) of the following: (i) the year-end fair value of any equity awards granted in the applicable year that are outstanding and unvested as of the end of the year; (ii) the amount equal to the change as of the end of the applicable year (from the end of the prior fiscal year) in the fair value of any awards granted in prior years that are outstanding and unvested as of the end of the applicable year; (iii) for awards that are granted and vest in the same applicable year, the fair value as of the vesting date; (iv) for awards granted in prior years that vest in the applicable year, the amount equal to the change as of the vesting date (from the end of the prior fiscal year) in fair value; (v) for awards granted in prior years that are determined to fail to meet the applicable vesting conditions during the applicable year, a deduction for the amount equal to the fair value at the end of the prior fiscal year; and (vi) the dollar value of any dividends or other earnings paid on stock or option awards in the applicable year prior to the vesting date that are not otherwise reflected in the fair value of such award or included in any other component of total compensation for the applicable year. The valuation assumptions used to calculate fair values did not materially differ from those disclosed at the time of grant. The amounts deducted or added in calculating the equity award adjustments for the PEO are provided in the table below: |
PEO Equity Award Adjustments | |||||||||||||||||||||
Year | Year End Fair Value of Awards Granted in the Year ($) | YoY Change in Fair Value of Outstanding & Unvested Awards ($) | Fair Value as of Vesting Date of Awards Granted and Vested in the Year ($) | Year over Year Change in Fair Value of Awards Granted in Prior Years that Vested in the Year ($) | Total Equity Award Adjustments ($) | ||||||||||||||||
2022 | 9,214,146 | (855,562 | ) | - | 8,424,642 | 16,783,226 | |||||||||||||||
2021 | 17,014,361 | 2,769,331 | - | 9,158,079 | 28,941,771 | ||||||||||||||||
2020 | 12,561,917 | 6,145,551 | - | 3,419,229 | 22,126,697 |
c) | The amounts included in this column are the amounts reported in “Change in Pension and Nonqualifed Deferred Compensation” of the SCT for each applicable year. Total Pension Benefit Adjustments are equal to the Pension Service Costs incurred during the relevant period. No Prior Service Costs were incurred as no modifications were made to the pension plan during the relevant period. |
3. | The dollar amounts reported in column (d) represent the average of the amounts reported for our non-PEO NEOs as a group in the Total column of the SCT in each applicable year. The names of each of these NEOs included for purposes of calculating the average amounts in each applicable year are as follows: (i) for Fiscal 2022 and 2021, Mr. Millerchip, Mr. Aitken, Mr. Cosset, and Mr. Massa; and (ii) for Fiscal 2020, Mr. Millerchip, Mr. Aitken, Mr. Cosset, and Mr. Donnelly. |
4. | The dollar amounts reported in column (e) represent the average amount of “compensation actually paid” to the Non-PEO NEOs as a group as identified in footnote 3 above, as computed in accordance with Item 402(v) of Regulation S-K. The dollar amounts do not reflect the actual average amount of compensation earned by or paid to these NEOs as a group during the applicable year. In accordance with the requirements of Item 402(v) of Regulation S-K, the following adjustments were made to the average total compensation for these NEOs as a group for each year to determine the CAP using the same methodology as described in footnote 2: |
Average Non-PEO NEOs Summary Compensation Table Total to CAP Reconciliation | |||||||||||||||||||||||||
Year | Average Reported Summary Compensation Table for Non- PEO NEOs ($) | Average Reported Summary Compensation Table Value of Equity Awards for non-PEO NEOs ($) | Average Equity Award Adjustments(a) ($) | Average Reported Change in the APV of Pension Benefits in SCT(b) ($) | Plus: Average Pension Benefit Adjustments ($) | Average Compensation Actually Paid to non-PEO NEOs ($) | |||||||||||||||||||
2022 | 6,117,423 | 3,783,616 | 3,947,278 | - | - | 6,281,085 | |||||||||||||||||||
2021 | 5,644,957 | 3,174,785 | 6,853,155 | - | - | 9,323,327 | |||||||||||||||||||
2020 | 6,932,437 | 3,807,225 | 6,291,210 | 224,490 | - | 9,191,933 |
(a) | The amounts deducted or added in calculating the total average equity award adjustments are provided in the table below: |
Equity Award Adjustments for Non-PEO NEOs | |||||||||||||||||||||
Year | Average Year End Fair Value of Awards Granted in the Year ($) | Year over Year Average Change in Fair Value of Outstanding & Unvested Awards ($) | Average Fair Value as of Vesting Date of Awards Granted and Vested in the Year ($) | Year over Year Average Change in Fair Value of Awards Granted in Prior Years that Vested in the Year ($) | Total Average Equity Award Adjustment ($) | ||||||||||||||||
2022 | 2,606,281 | (259,317 | ) | - | 1,600,314 | 3,947,278 | |||||||||||||||
2021 | 4,424,764 | 667,315 | - | 1,761,076 | 6,853,155 | ||||||||||||||||
2020 | 4,033,879 | 1,507,771 | - | 749,561 | 6,291,210 |
(b) | Total Pension Benefit Adjustments are equal to the Pension Service Costs incurred during the relevant period. No Prior Service Costs were incurred as no modifications were made to the pension plan during the relevant period. Only Mr. Donnelly participated in the pension plan. |
5. | Cumulative TSR is calculated by dividing (a) the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the Company’s share price at the end and the beginning of the measurement period by (b) the Company’s share price at the beginning of the measurement period. The peer group selected by the Company for purposes of the TSR benchmarking for the pay versus performance disclosures is the same peer group the Company uses for its performance graph in the Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K. The Peer Group consists of Albertsons Companies, Inc. (included from June 26, 2020 when it began trading), Costco Wholesale Corporation, CVS Health Corporation, Koninklijke Ahold Delhaize N.V., Target Corp., Walgreens Boots Alliance Inc. and Walmart Inc. The cumulative TSR depicts a hypothetical $100 investment in Kroger common shares on February 1, 2020, and shows the value of that investment over time (assuming the reinvestment of dividends) for each calendar year. A hypothetical $100 investment in the Peer Group using the same methodology is shown for comparison. |
6. | Net income is as reported in the Company’s audited financial statements for the applicable year in accordance with U.S. GAAP. |
7. | Adjusted FIFO Operating Profit equals gross profit, excluding the LIFO charge, minus OG&A, minus rent, and minus depreciation and amortization. For a reconciliation of non-GAAP information, see pages 27 – 33 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, filed with the SEC on March 28, 2023. |
Most Important Performance Measures
The three measures listed below represent the most important financial performance measures used by the Company to link CAP to Company performance for the 2022 fiscal year,
● | Adjusted FIFO Operating Profit |
● | ID sales, without fuel |
● | Adjusted net earnings per diluted share attributable to The Kroger Co. |
For a reconciliation of non-GAAP information, see pages 27 – 33 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, filed with the SEC on March 28, 2023.
COMPANY SELECTED METRIC – Adjusted FIFO Operating Profit
NET INCOME GRAPHICAL REPRESENTATION
KROGER TSR GRAPHICAL REPRESENTATION
CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 2.402(u) of Regulation S-K, we are providing the following information regarding the ratio of the annual total compensation of our Chairman and CEO, Mr. McMullen, to the annual total compensation of our median associate.
As reported in the Summary Compensation Table, our CEO had annual total compensation for 2022 of $19,209,843. Using this Summary Compensation Table methodology, the annual total compensation of our median associate for 2022 was $28,644. As a result, we estimate that the ratio of our CEO’s annual total compensation to that of our median associate for fiscal 2022 was 671 to 1. Our median employee is a full-time associate in the Southeast region. Over half of Kroger’s associates are part-time workers.
This pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules based on our payroll records and the methodology described below. The SEC rules for identifying the median compensated associate and calculating the pay ratio based on that associate’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their compensation practices. As such, other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios. Therefore, the estimated pay ratio reported above may not be comparable to the pay ratios reported by other companies and should not be used as a basis for comparison between companies.
We then determined the median associate’s annual total compensation using the Summary Compensation Table methodology as detailed in Item 402(c)(2)(x) of Regulation S-K and compared it to the annual total compensation of Mr. McMullen as detailed in the “Total” column of the Summary Compensation Table for 2022, to arrive at the pay ratio disclosed above. Due to a material increase in salary of our median associate in fiscal 2022, we identified a substitute median associate as permitted under SEC rules on April 3, 2023 because we reasonably believed that continuing to use the prior median associate would have significantly affected our CEO pay ratio disclosure and the CEO pay ratio would not reflect the actual ratio that was used to calculate the pay ratio.
Compensation Policies as They Relate to Risk Management
As part of the Compensation Committee’s review of our compensation practices, the Compensation Committee considers and analyzes the extent to which risks arise from such practices and their impact on Kroger’s business. As discussed in this Compensation Discussion and Analysis, our policies and practices for compensating associates are designed to, among other things, attract and retain high quality and engaged associates. In this process, the Compensation Committee also focuses on minimizing risk through the implementation of certain practices and policies, such as the executive compensation recoupment policy, which is described above. Accordingly, we do not believe that our compensation practices and policies create risks that are reasonably likely to have a material adverse effect on Kroger.
Item No. 2 Advisory Vote onto Approve Executive Compensation
You are being asked to vote, on an advisory basis, to approve the compensation of our NEOs. The Board of Directors recommends that you vote FOR the approval of compensation of our NEOs.
FOR | The Board recommends a vote FOR the approval of compensation of our NEOs. |
The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010, requires that we give our shareholders the right to approve, on a nonbinding, advisory basis, the compensation of our NEOs as disclosed earlier in this proxy statement in accordance with the SEC’s rules.
As discussed earlier in the Compensation Discussion and Analysis,CD&A, our compensation philosophy is to attract and retain the best management talent and to motivate these employeesassociates to achieve our business and financial goals. Our incentive plans are designed to reward the actions that lead to long-term value creation. To achieve our objectives, we seek to ensure that compensation is competitive and that there is a direct link between pay and performance. To do so, we are guided by the following principles:
● | Compensation must be designed to retract and retain the individuals to be an executive at Kroger; |
● | A significant portion of pay should be performance-based, with the percentage of total pay tied to performance increasing proportionally with an executive’s level of responsibility; |
● | Compensation should include incentive-based pay to drive performance, providing superior pay for superior performance, including both a short- and long-term focus; |
● | Compensation policies should include an opportunity for, and a requirement of, significant equity ownership to align the interests of executives and shareholders; |
● | Components of compensation should be tied to an evaluation of business and individual performance measured against metrics that directly drive our business |
● | Compensation plans should provide a direct line of sight to company performance; |
● | Compensation programs should be aligned with market practices; and |
● | Compensation programs should serve to both motivate and retain talent. |
The vote on this resolution is not intended to address any specific element of compensation. Rather, the vote relates to the compensation of our NEOs as described in this proxy statement. The vote is advisory. This means that the vote is not binding on Kroger. The Compensation Committee of the Board is responsible for establishing executive compensation. In so doing, thatthe Compensation Committee will consider, along with all other relevant factors, the results of this vote.
We ask our shareholders to vote on the following resolution:
“RESOLVED, that the compensation paid to the Company’s NEOs, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables, and the related narrative discussion, is hereby APPROVED.”
The next advisory vote will occur at our 2024 Annual Meeting subject to shareholders approving one year as the frequency of the advisory vote in Item No. 3 below.
Item No. 3 Advisory Vote on the Frequency of Future Advisory Votes on Executive Compensation
You are being asked to vote, on an advisory basis, on the frequency of future advisory votes on executive compensation. The Board of Directors recommends a vote of ONE YEAR for the frequency of future advisory votes on executive compensation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act and Section 14A of the Securities Exchange Act also require that shareholders be given the right to vote, again on a nonbinding, advisory basis, for their preference as to how frequently we should seek future advisory votes on the compensation of our named executive officers.
When the advisory vote was last held in 2017, annual meeting.shareholders indicated a preference to hold the advisory vote on executive compensation each year and the Board implemented this standard. The Board of Directors believes that an advisory vote on executive compensation that occurs every year is the most appropriate alternative for Kroger and it therefore recommends that you vote for the one year alternative.
The vote is advisory. This means that the vote is not binding on Kroger. Our Board of Directors will determine the actual voting frequency for approval of executive compensation. In so doing the Board will consider, along with all other relevant factors, the results of this vote. The Board may decide to hold an advisory vote on executive compensation more or less frequently than the frequency receiving the most votes cast by shareholders.
The proxy card provides shareholders the opportunity to choose among four options for the frequency of the advisory vote: every one, two, or three years, or abstain from casting a vote. Shareholders will not be voting to approve or to disapprove the recommendation of the Board of Directors. The option receiving the most affirmative votes will be the outcome of the advisory vote. Broker non-votes and abstentions will have no effect on the outcome of this vote.
The Board of Directors Recommends a VoteFor This Proposal.
49
Director Compensation
2015 Director Compensation
The following table describes the 2015 compensation for non-employee directors. Mr. McMullen does not receive compensation for his Board service.
Name | Fees Earned or Paid in Cash | Stock Awards(1) | Option Awards(1) | Change in Pension Value and Nonqualified Deferred Compensation Earnings(2) | Total | |||||||||||||||
Nora A. Aufreiter | $ | 84,772 | $ | 165,586 | — | — | $ | 250,358 | ||||||||||||
Robert D. Beyer | $ | 124,664 | $ | 165,586 | — | $ | 8,271 | $ | 298,521 | |||||||||||
Anne Gates(3) | $ | 13,280 | $ | 98,136 | — | — | $ | 111,416 | ||||||||||||
Susan J. Kropf | $ | 94,745 | $ | 165,586 | — | — | $ | 260,331 | ||||||||||||
David B. Lewis | $ | 84,772 | $ | 165,586 | — | — | $ | 250,358 | ||||||||||||
Jorge P. Montoya | $ | 99,731 | $ | 165,586 | — | — | $ | 265,317 | ||||||||||||
Clyde R. Moore | $ | 104,718 | $ | 165,586 | — | $ | 11,753 | $ | 282,057 | |||||||||||
Susan M. Phillips | $ | 94,745 | $ | 165,586 | — | $ | 2,701 | $ | 263,032 | |||||||||||
James A. Runde | $ | 99,731 | $ | 165,586 | — | — | $ | 265,317 | ||||||||||||
Ronald L. Sargent | $ | 114,691 | $ | 165,586 | — | $ | 2,777 | $ | 283,054 | |||||||||||
Bobby S. Shackouls | $ | 94,745 | $ | 165,586 | — | — | $ | 260,331 |
50
Annual Compensation
Each non-employee director receives an annual cash retainer of $85,000. The chairs of each of the Audit Committee and the Compensation Committee receive an additional annual cash retainer of $20,000. The chair of each of the other committees receives an additional annual cash retainer of $15,000. Each member of the Audit Committee receives an additional annual cash retainer of $10,000. The director designated as the Lead Director receives an additional annual cash retainer of $25,000.
Approximately $165,000 worth of incentive shares (Kroger common shares) are issued to non-employee directors as a portion of the directors’ overall compensation. On July 15, 2015, each non-employee director, except for Ms. Gates, received 4,320 common shares. Ms. Gates received 2,386 common shares on December 10, 2015 upon joining the Board.
The Board has determined that compensation of non-employee directors must be competitive on an ongoing basis to attract and retain directors who meet the qualifications for service on the Board. Non-employee director compensation will be reviewed from time to time as the Corporate Governance Committee deems appropriate.
Pension Plan
Non-employee directors first elected prior to July 17, 1997 receive an unfunded retirement benefit equal to the average cash compensation for the five calendar years preceding retirement. Only Mr. Moore is eligibleOne Year for this benefit. Participants who retire from the Board prior to age 70 will be credited with 50% vesting after five years of service, and 10% for each additional year up to a maximum of 100%. Benefits for participants who retire prior to age 70 begin at the later of actual retirement or age 65.
Nonqualified Deferred CompensationProposal.
We also maintain a deferred compensation plan for non-employee directors. Participants may defer up to 100% of their cash compensation and/or the receipt of all (and not less than all) of the annual award of incentive shares.
Cash Deferrals
Cash deferrals are credited to a participant’s deferred compensation account. Participants may elect from either or both of the following two alternative methods of determining benefits:
| |
|
In both cases, deferred amounts are paid out only in cash, based on deferral options selected by the participant at the time the deferral elections are made. Participants can elect to have distributions made in a lump sum or in quarterly installments, and may make comparable elections for designated beneficiaries who receive benefits in the event that deferred compensation is not completely paid out upon the death of the participant.
Incentive Share Deferrals
Participants may also defer the receipt of all (and not less than all) of the annual award of incentive shares. Distributions will be made by delivery of Kroger common shares within 30 days after the date which is 6 months after the participant’s separation of service.
51
Beneficial Ownership of Common Stock
The following table sets forth the common shares beneficially owned as of April 1, 2016 by Kroger’s directors, the NEOs, and the directors and executive officers as a group. The percentage of ownership is based on 964,367,417 of Kroger common shares outstanding on April 1, 2016. Shares reported as beneficially owned include shares held indirectly through Kroger’s defined contribution plans and other shares held indirectly, as well as shares subject to stock options exercisable on or before May 31, 2016. Except as otherwise noted, each beneficial owner listed in the table has sole voting and investment power with regard to the common shares beneficially owned by such owner.
Name | Amount and Nature of Beneficial Ownership(1) (a) | Options | ||||||
Nora A. Aufreiter(2) | 7,513 | — | ||||||
Robert D. Beyer(2) | 295,682 | 77,200 | ||||||
Michael J. Donnelly | 467,879 | 249,296 | ||||||
Anne Gates | 2,386 | — | ||||||
Christopher T. Hjelm | 379,250 | 141,152 | ||||||
Susan J. Kropf | 137,460 | 67,200 | ||||||
David B. Lewis(2) | 158,255 | 67,200 | ||||||
W. Rodney McMullen | 3,292,520 | 1,041,184 | ||||||
Jorge P. Montoya(3) | 101,362 | 67,200 | ||||||
Clyde R. Moore | 145,860 | 57,200 | ||||||
Frederick J. Morganthall II | 183,101 | — | ||||||
Susan M. Phillips | 176,923 | 67,200 | ||||||
James A. Runde | 154,460 | 77,200 | ||||||
Ronald L. Sargent(2) | 152,630 | 77,200 | ||||||
J. Michael Schlotman | 606,675 | 248,304 | ||||||
Bobby S. Shackouls(2)(4) | 73,180 | — | ||||||
Directors and executive officers as a group (29 persons, | ||||||||
including those named above) | 8,187,350 | 2,998,844 |
52
The following table sets forth information regarding the beneficial owners of more than five percent of Kroger common shares as of April 1, 2016 based on reports on Schedule 13G filed with the SEC.
Name | Address of Beneficial Owner | Amount and Nature of Ownership | Percentage of Class | |||
BlackRock, Inc.(1) | 55 East 52ndStreet | 66,134,371 | 6.80% | |||
New York, NY 10055 | ||||||
Vanguard Group Inc.(2) | 100 Vanguard Blvd | 54,699,370 | 5.61% | |||
Malvern, PA 19355 |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Those officers, directors and shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of Forms 3 and 4 received by Kroger, and any written representations from certain reporting persons that no Forms 5 were required for those persons, we believe that during 2015 all filing requirements applicable to our executive officers, directors and 10% beneficial owners were timely satisfied, with the following exception. In August 2015, Michael L. Ellis, who retired as President and Chief Operating Officer of the Company in July 2015, was 2 days late in the filing of a Form 4 to report a stock purchase in the amount of 500 shares.
Related Person Transactions
The Board has adopted a written policy requiring that any Related Person Transaction may be consummated or continue only if the Audit Committee approves or ratifies the transaction in accordance with the policy. A “Related Person Transaction” is one (a) involving Kroger, (b) in which one of our directors, nominees for director, executive officers, or greater than five percent shareholders, or their immediate family members, have a direct or indirect material interest; and (c) the amount involved exceeds $120,000 in a fiscal year.
The Audit Committee will approve only those Related Person Transactions that are in, or not inconsistent with, the best interests of Kroger and its shareholders, as determined by the Audit Committee in good faith in accordance with its business judgment. No director may participate in any review, approval or ratification of any transaction if he or she, or an immediate family member, has a direct or indirect material interest in the transaction.
Where a Related Person Transaction will be ongoing, the Audit Committee may establish guidelines for management to follow in its ongoing dealings with the related person and the Audit Committee will review and assess the relationship on an annual basis to ensure it complies with such guidelines and that the Related Person Transaction remains appropriate.
53
Item No. 34 Ratification of the Appointment of Kroger’s Independent Auditor
You are being asked to ratify the appointment of Kroger’s independent auditor, PricewaterhouseCoopers LLC. The Board of Directors recommends that you vote FOR the ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm.
FOR | The Board recommends a vote FOR the ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm. |
The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities regarding the Company’s financial reporting and accounting practices including the integrity of the Company’s financial statements; the Company’s compliance with legal and regulatory requirements; the independent public accountants’ qualifications and independence; the performance of the Company’s internal audit function and independent public accountants; and the preparation of the Audit Committee Report. The Audit Committee performs this work pursuant to a written charter approved by the Board of Directors. The Audit Committee charter most recently was revised during fiscal 2012 and is available on the Company’s website at ir.kroger.com under CorporateInvestors — Governance –— Committee Composition. The Audit Committee has implemented procedures to assist it during the course of each fiscal year in devoting the attention that is necessary and appropriate to each of the matters assigned to it under the Audit Committee’s charter. The Audit Committee held five5 meetings during fiscal year 2015.2022.
Selection of Independent Auditor
The Audit Committee of the Board of Directors is directly responsible for the appointment, compensation, retention, and oversight of Kroger’s independent auditor, as required by law and by applicable NYSE rules. On March 9, 2016,8, 2023, the Audit Committee appointed PricewaterhouseCoopers LLP as Kroger’s independent auditor for the fiscal year ending January 28, 2017.27, 2024. PricewaterhouseCoopers LLP or its predecessor firm has been the Company’s independent auditor since 1929.
In determining whether to reappoint the independent auditor, our Audit Committee:
● | Reviews PricewaterhouseCoopers LLP’s independence and performance; |
● | Considers the tenure of the independent registered public accounting firm and safeguards around auditor independence; |
● | Reviews, in advance, all non-audit services provided by PricewaterhouseCoopers LLP, specificallywith regard to the effect on the firm’s independence; |
● | Conducts an annual assessment of PricewaterhouseCoopers LLP’s performance, including aninternal survey of their service quality by members of management and the Audit Committee; |
● | Conducts regular executive sessions with PricewaterhouseCoopers LLP; |
● | Conducts regular executive sessions with the Vice President of Internal Audit; |
● | Considers PricewaterhouseCoopers LLP’s familiarity with our operations, businesses, accountingpolicies and practices and internal control over financial reporting; |
● | Reviews candidates for the lead engagement partner in conjunction with the mandated rotation ofthe public accountants’ lead engagement partner; |
● | Reviews recent Public Company Accounting Oversight Board reports on PricewaterhouseCoopersLLP and its peer firms; and |
● | Obtains and reviews a report from PricewaterhouseCoopers LLP describing all relationshipsbetween the independent auditor and Kroger at least annually to assess the independence of |
As a result, the members of the Audit Committee believe that the continued retention ofPricewaterhouseCoopersof PricewaterhouseCoopers LLP to serve as our independent registered public accounting firm is in the best interests of our companyCompany and its shareholders.
While shareholder ratification of the selection of PricewaterhouseCoopers LLP as our independent auditor is not required by Kroger’s Regulations or otherwise, the Board of Directors is submitting the selection of PricewaterhouseCoopers LLP to shareholders for ratification, as it has in past years, as a good corporate governance practice. If the shareholders fail to ratify the selection, the Audit Committee
54
may, but is not required to, reconsider whether to retain that firm. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of a different auditor at any time during the year if it determines that such a change would be in the best interests of our companyCompany and our shareholders.
A representative of PricewaterhouseCoopers LLP is expected to be present atparticipate in the meeting to respond to appropriate questions and to make a statement if he or she desires to do so.
Audit and Non-Audit Fees
The following table presents the aggregate fees billed for professional services performed by PricewaterhouseCoopers LLP for the annual audit and quarterly reviews of our consolidated financial statements for fiscal 20152022 and 2014,2021, and for audit-related, tax and all other services performed in 20152022 and 2014.2021.
Fiscal Year Ended | ||||||||||
January 30, 2016 | January 31, 2015 | |||||||||
Audit Fees(1) | $ | 5,659,193 | $ | 5,250,203 | ||||||
Audit-Related Fees(2) | — | 441,704 | ||||||||
Tax Fees(3) | — | 360,498 | ||||||||
All Other Fees(4) | — | 85,000 | ||||||||
Total | $ | 5,659,193 | $ | 6,137,405 |
Fiscal Year Ended | ||||||||
January 28, 2023 ($) | January 29, 2022 ($) | |||||||
Audit Fees(1) | 5,886,900 | 5,427,500 | ||||||
Audit-Related Fees | 982,000 | 0 | ||||||
Tax Fees(2) | 153,000 | 25,000 | ||||||
All Other Fees(3) | 5,850 | 3,150 | ||||||
Total | 7,027,750 | 5,455,650 |
(1) | Includes annual audit and quarterly reviews of Kroger’s consolidated financial statements, the issuance of comfort letters to underwriters, consents, and assistance with review of documents filed with the SEC. |
(2) | Includes |
(3) | Includes | |
The Audit Committee requires that it approve in advance all audit and non-audit work performed by PricewaterhouseCoopers LLP. On March 9, 2016,Pursuant to the Audit Committee approved services to be performed by PricewaterhouseCoopers LLP for the remainder of fiscal year 2015 that are related to the audit of Kroger or involve the audit itself. In 2007, the Audit Committee adopted an audit and non-audit service pre-approval policy. Pursuant to the terms of that policy, the Committee will annually pre-approve certain defined services that are expected to be provided by the independent auditors. If it becomes appropriate during the year to engage the independent accountant for additional services, the Audit Committee must first approve the specific services before the independent accountant may perform the additional work.
PricewaterhouseCoopers LLP has advised the Audit Committee that neither the firm, nor any member of the firm, has any financial interest, direct or indirect, in any capacity in Kroger or its subsidiaries.
The Board of Directors Recommends a VoteFor This Proposal.
55
Audit Committee Report
Management of the Company is responsible for the preparation and presentation of the Company’s financial statements, the Company’s accounting and financial reporting principles and internal controls, and procedures that are designed to provide reasonable assurance regarding compliance with accounting standards and applicable laws and regulations. The independent public accountants are responsible for auditing the Company’s financial statements and expressing opinions as to the financial statements’ conformity with generally accepted accounting principles and the effectiveness of the Company’s internal control over financial reporting.
In performing its functions, the Audit Committee:
● | Met separately with the Company’s internal auditor and PricewaterhouseCoopers LLP with andwithout management present to discuss the results of the audits, their evaluation and |
● | Met separately with the Company’s Chief Financial Officer or the Company’s General Counselwhen needed; |
● | Met regularly in executive sessions; |
● | Reviewed and discussed with management the audited financial statements included in ourAnnual Report; |
● | Discussed with PricewaterhouseCoopers LLP the matters required to be discussed under theapplicable requirements of the Public Company Accounting Oversight Board and the SEC; and |
● | Received the written disclosures and the letter from PricewaterhouseCoopers LLP required by theapplicable requirements of the Public Accounting Oversight Board regarding the independent |
Based upon the review and discussions described in this report, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended January 30, 2016,28, 2022, as filed with the SEC.
This report is submitted by the Audit Committee.
Anne Gates, Chair
Kevin M. Brown
Karen M. Hoguet
Ronald L. Sargent ChairAnne GatesSusan J. KropfSusan M. PhillipsBobby S. Shackouls
Ashok Vemuri
56
Items 5 – 9
SHAREHOLDER PROPOSALS
Included in this proxy statement are five separate shareholder proposals that have been submitted under SEC rules by shareholders who notified the company of their intention to present the proposals for voting at the 2023 Annual Shareholders’ Meeting. Some shareholder proposals and supporting statements may contain assertions about Kroger that we believe are incorrect, and we have not tried to refute all such inaccuracies in the company’s responses. All statements and citations contained in a shareholder proposal and its supporting statements are the sole responsibility of the proponent of that shareholder proposal. Our company will provide the names, addresses, and shareholdings (to our company’s knowledge) of the proponents of any shareholder proposal upon oral or written request made to Corporate Secretary, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100. The information on, or accessible through, Kroger’s websites or report links included in this proxy statement, including the statements that follow, is not part of, or incorporated by reference into, this proxy statement.
AGAINST | The Board recommends a vote AGAINST each of the following shareholder proposals, in each case if properly presented at the meeting, for the reasons stated in Kroger’s statements in opposition following each shareholder proposal. |
Item No. 45 Shareholder Proposal – Report on Public Health Costs from Sale of Tobacco Products
We have been notifiedadvised that The Sisters of St. Francis of Philadelphia or an appointed representative, along with nine co-filers, will present the following proposal for consideration during the 2023 Annual Shareholders’ Meeting.
“RESOLVED, shareholders ask that the board commission and disclose a report on the external public health costs created by ninethe sale of tobacco products by our company (the “Company”) and the manner in which such costs affect the vast majority of its shareholders who rely on overall market returns.
The negative health and productivity impacts from the consumption of tobacco products impose $1.2 trillion in social damage; tobacco’s unpriced social burden amounts to almost 3 percent of global GDP annually.1
Yet, in spite of the Company dedicating an entire division, Kroger Health, to addressing its customers’ healthcare needs2, as well as the overwhelming evidence that tobacco – a known carcinogen that impairs respiratory function – significantly prejudices the health outcomes of smokers, and particularly smokers infected with COVID-19, the Company continues to sell tobacco products in its stores.
These public health costs, year after year, are devastating to economic growth and further compound the financial devastation wrought by the COVID-19 pandemic. Yet Kroger does not disclose any methodology to address the public health costs of its tobacco sales. Thus, shareholders have no guidance as to costs the Company is externalizing and consequent economic harm. This information is essential to shareholders, the namesmajority of whom are beneficial owners with broadly diversified interests.
But Kroger undermines its commitments to promoting good health and shareholdingsultimately the interests of its diversified shareholders by not disclosing the social and environmental costs and risks imposed on stakeholders, even when these costs and risks threaten society, the economy and the performance of other companies. All stakeholders are unalterably harmed when companies impose costs on the economy that lower GDP, which reduces equity value.3 While the Company may profit by ignoring costs it externalizes, diversified shareholders will ultimately pay these costs, and they have a right to ask what they are.
The Company’s disclosures do not address the issue, because they do not address the public health costs that Kroger’s tobacco sales impose on shareholders as diversified investors who must fund retirement, education, public goods and other critical social needs. This is a separate social issue of great importance. A report would help shareholders determine whether these externalized costs and the economic harm they may create ultimately serve their interests.”
1https://www.cdc.gov/tobacco/data_statistics/fact_sheets/economics/econ_facts/index.htm
2Kroger Health – Business & Community Health Solutions
3https://www.unepfi.org/fileadmin/documents/universal_ownership_full.pdf
The Board of Directors Recommends a Vote Against This Proposal for the Following Reasons:
Kroger takes the responsibility of selling tobacco products very seriously and has established policies and processes to limit the sale of these items only to customers who are legally permitted to purchase them. We offer customers a wide range of choices across all product categories to meet wide-ranging tastes and preferences, including food and discretionary items.
The Company has the management systems and governance to limit the sale of tobacco products and to support choices for better health.
The Kroger family of companies is committed to ethical and responsible behavior in all parts of our business. Our behavior is rooted in Our Purpose – to Feed the Human Spirit™ – and our promise to our customers. This includes upholding Our Values, which have been the foundation of Kroger’s culture for decades.
The Audit Committee and Public Responsibilities Committee of the board of directors oversee progress in regulatory compliance and pharmacy safety measures.
We recognize our responsibility as a business to support our communities and help families by making it easier for them to live healthier lives. We also believe in our customers’ freedom of choice, and adult customers can choose to purchase tobacco products understanding fully the potential health impacts. The Company continually reviews its product assortment, including tobacco and tobacco cessation products.
Notably, recent studies that show the percentage of U.S. adults who smoke cigarettes has reached a new low, driven by sharply lower smoking rates among young adults.1 Sales for both tobacco products and tobacco cessation products at Kroger have similarly decreased in recent years.
How We Limit Tobacco Sales
Tobacco sales, like the sales of many products, are governed by regulations, which we strictly follow. The Company’s Tobacco Sales Policy is designed to comply with these regulations and affirm our commitment to the health and welfare of our nation’s youth by reducing adolescent access to tobacco. The Policy outlines internal business procedures and best practices to maintain compliance at retail stores.
How We Promote Health and Healthier Choices
We aim to serve and improve health for millions of people across the country through our business operations, Environmental, Social and Governance Strategy – Thriving Together – and Kroger Health’s strategy and services.
Kroger Health leads the company’s health and nutrition strategy, services and programs. It includes retail, mail order, central fill and specialty pharmacy operations; retail health clinics; nutrition and dietitian services; and health advocacy. A team of 22,000 healthcare practitioners, including pharmacists, nurse practitioners, dietitians and technicians, serves more than 14 million customers annually.
We aim to support our customers and communities with tools, resources and services that advance population health for all. We inform our Customers and Associates about the importance of healthy lifestyles, and we equip our pharmacy and health clinic teams to support people trying to quit tobacco. Specifically related to the use of tobacco products, we:
● | Offer smoking cessation coaching programs that are available to all, including coaching through telehealth services; |
1 https://news.gallup.com/poll/405884/cigarette-smoking-rates-down-sharply-among-young-adults.aspx#:~:text=U.S.%20Cigarette%20Smoking%20Rates%2C%20by%20Age%20Group&text=That%20dropped%20to%20an%20average,those%20ages%2065%20and%20older
● | Offer affordable prescription and over-the-counter smoking cessation products that are available to all; and |
● | Encourage Associates not to use tobacco through Company health plan incentives, coverage for smoking cessation products, and employee assistance programs for smoking cessation. |
Kroger continues to make a wide range of health and wellness services more affordable and convenient for millions of customers and for local communities across the U.S. As a trusted local partner, we also provided essential support and services during the COVID-19 pandemic, rapidly scaling testing and vaccine distributions when needed most.
Assessing the external public health costs related to the Company’s sale of a single category of products is not reasonable or practicable given the resources and expertise required to consider all externalities and related topics outside of our control. In light of the above, we do not believe an additional report would add meaningfully to the extensive body of research currently available on this subject and therefore do not believe such an additional report is necessary.
For the foregoing reasons, we urge you to vote AGAINST this proposal.
Item No. 6 – Listing of Charitable Contributions of $10,000 or more
We have been advised that The Louis B & Diana R Eichold Trust or an appointed representative will present the following proposal for consideration during the 2023 Annual Shareholders’ Meeting.
“Whereas the Company's charitable contributions, properly managed, are likely to enhance the reputation of the Company:
Whereas increased disclosure regarding appropriate charitable contributions can create goodwill for our Company .
Whereas making the benefits of our Company's philanthropic programs better known is likely to promote the Company's interests:
Whereas feedback from employees, shareholders, and customers could help guide the Company's future charitable giving process.
Resolved: The Proponent requests that the Board of Directors consider listing on the Company website any recipient of $10,000 or more of direct contributions, excluding employee matching gifts.
Supporting Statement
Absent a system of accountability and transparency; some charitable contributions may be made unwisely, potentially harming the Company's reputation and shareholder value. Corporate philanthropic gifts should be given as much exposure as possible, lest their intended impact on goodwill is diminished. For example, if we gave to the American Cancer Society, thousands of our stakeholders might potentially approve of our interest in challenging this disease. Likewise, our support of Planned Parenthood could win the praise of millions of Americans who have had an abortion at one of their facilities. Educational organizations like the Southern Poverty Law Center have seen an increase in funding since they included several conservative Christian organizations on their list of hate groups. Our stakeholders and customers might be similarly enthused if we supported them. Be it the Girl Scouts, American Heart Association, Boys and Girls Club of America, Red Cross, or countless other possible recipients, our support should be publicly noted. Those who might disagree with our decisions can play a valuable role also.
Some charities may be controversial. Charitable contributions come from the fruit of our employee's labor and belong to our shareholders. Both groups represent a wide diversity of opinions. More importantly, we market ourselves to the general public and should avoid offending segments of this most critical group. It would be unfortunate if a charitable contribution resulted in lower employee morale and shareholder interest, much less a loss of potential revenue.
Fuller disclosure would provide enhanced feedback opportunities from which our Company could make more beneficial choices.”
The Board of Directors Recommends a Vote Against This Proposal for the Following Reasons:
Kroger has a long history of giving back meaningfully in the communities we serve. Charitable giving is central to Our Purpose – to Feed the Human Spirit – and strategically aligned to our mission – Kroger’s Zero Hunger | Zero Waste social and environmental impact plan. This plan empowers Kroger to pursue our goal to help create communities free of hunger and waste across the country. Additionally, we provide annual public disclosures related to charitable giving areas of focus and annual grant-making.
Every year, we direct charitable contributions at the national, regional and local levels to advance positive impacts for people and our planet. This giving includes funds, in-kind product donations, and retail store donations of surplus fresh food that our associates recover for local food bank partners through our leading Zero Hunger | Zero Waste Food Rescue program. For example, in 2022, 100% of our retail stores participated in the Food Rescue program, donating more than 100 million pounds of fresh food to our communities.
Through corporate giving and the work of our two nonprofit foundations – The Kroger Co. Foundation and The Kroger Co. Zero Hunger | Zero Waste Foundation – we direct more than $300 million annually to partners and causes that align with our mission. Of this, more than 75% supports hunger relief programs to feed individuals and families where we live and work. These totals include generous support from our associates and customers through in-store fundraising programs at checkout. The largest share of corporate funds, in-kind product donations, and customer donations is directed to the Feeding America-affiliated network of local food banks, pantries and agencies in our communities.
Other national organizations receiving significant charitable funds from Kroger include No Kid Hungry, American Red Cross, United Service Organizations (USO), American Heart Association and World Wildlife Fund. Notably, Kroger is the largest cumulative corporate donor to the USO in the organization’s history, showing our long-standing support for the nation’s active-duty military service men and women and their families. At the regional and local levels, we support other nonprofit organizations and causes that matter most to our associates and customers.
Foundation Grants
Kroger provides detailed annual disclosures on the work of our two foundations. The Kroger Co. Foundation, the company’s private foundation established in 1987, which focuses grant-making on causes that support hunger relief; sustainability; disaster relief; diversity and inclusion; and education and youth development. The Foundation’s 2022 Report, including grantee highlights and specific grant funding levels across the country, is available here: https://www.thekrogerco.com/wp-content/uploads/2022/08/Kroger-Co-Foundation-2022-Report.pdf.
In 2021, the Foundation directed $12.7 million in grants, of which 58% aligned with hunger relief and sustainability causes, and 24% supported emergency assistance and disaster relief efforts. Specific grants and grant recipients are highlighted in the annual The Kroger Co. Foundation report.
The Kroger Co. Zero Hunger | Zero Waste Foundation, a nonprofit public charity established in 2018, is designed to advance collective action and innovation to build a better food system for the future. More about the Zero Hunger | Zero Waste Foundation is available on its website: https://thekrogercozerohungerzerowastefoundation.com/. More details about the Foundation’s general grant-making and signature program, the Zero Hunger | Zero Waste Innovation Fund, are disclosed in its annual report: https://www.thekrogerco.com/wp-content/uploads/2022/08/Kroger-Co-Zero-Hunger-Zero-Waste-Foundation-2022-Report.pdf.
In 2021, the Zero Hunger | Zero Waste Foundation directed $18 million in grants; of these, 97% aligned to hunger relief and sustainability causes. Grants included $11.7 million in funds to improve food access and food security and $4.5 million to advance more sustainable food systems. Grant highlights are included in the Zero Hunger | Zero Waste Foundation report.
Guidelines & Policies:
We follow best practices and specific guidelines when reviewing grant requests. Our Donation Guidelines provide direction on the types of organizations that Kroger supports and, importantly, make clear the types of organizations to which donations will not be furnishedgranted. We accept and consider donation requests from 501(c)(3) registered nonprofit organizations through an online grant management platform. We use the Guidestar Charity Check to confirm they meet all Internal Revenue Service requirements to receive grants and donations. The Donation Guidelines are publicly available on our corporate website: https://thekrogerco.versaic.com/login?Select-A-Store=Enabled&ReturnTo=/default.aspx
We do not make charitable donations to individuals, political campaigns, sectarian or religious organizations for projects that serve only its own members or supporters, or organizations that discriminate based on race, color, sex, pregnancy, disability, age, national origin, religion, sexual orientation, gender identity, genetic information or any other characteristic protected by applicable law.
The Company has adequate public disclosures related to its charitable giving areas of focus and annual grant-making.
Kroger recognizes that disclosure of its corporate philanthropic efforts is important and provides stakeholders with an opportunity to review Kroger charitable programs. We believe the extensive information and other disclosures provided in Kroger’s annual ESG Report, The Kroger Co. Foundation annual report, The Kroger Co. Zero Hunger | Zero Waste Foundation annual report and our website provide ample disclosures related to our approach to charitable giving, which supports Our Purpose, ESG Strategy, and Zero Hunger | Zero Waste impact plan.
For the foregoing reasons, we urge you to vote AGAINST this proposal.
Item No. 7 Shareholder Proposal — Recyclability of Packaging
We have been advised that As You Sow on behalf of the Michael Monteiro 2016 Trust or an appointed representative, along with one co-filer, will present the following proposal for consideration during the 2023 Annual Shareholders’ Meeting.
“WHEREAS: The growing plastic pollution crisis poses increasing risks to Kroger. Corporations could face an annual financial risk of approximately $100 billion should governments require them to cover the waste management costs of the packaging they produce.1 New laws to this effect were recently passed in Maine, Oregon, Colorado, and California,2 while the European Union has enacted a $1 per kilogram tax on all non-recycled plastic packaging waste.3
Pew Charitable Trusts released a groundbreaking study, Breaking the Plastic Wave ("Pew Report"), concluding that improved recycling is insufficient and at least one-third of overall plastic use must be eliminated to stem the global plastic pollution crisis. It finds that plastic use reduction is the most viable solution from environmental, economic, and social perspectives . Without immediate and sustained new commitments, annual flows of plastics into oceans could nearly triple by 2040.4
Kroger has fallen behind its peers in plastic packaging reductions. Kroger is notably absent from the Ellen MacArthur Foundation's Global Commitment to reduce plastic pollution, in which brand signatories have committed to reduce virgin plastic use by an average of 20% by 2025.5 The majority of signatories have already reduced their use of plastic packaging over a 2018 baseline.6
1 https://www.pewtrusts.org/-/media/assets/2020/07/breakingtheplasticwave_report.pdf
2 https://www.packworld.com/news/sustainability/article/22419036/four-states-enact-packaging-epr-laws
3 https://commission.europa.eu/strategy-and-policy/eu-budget/long-term-eu-budget/2021-2027/revenue/own-resources/plastics-own-resource_en
4 https://www.pewtrusts.org/-/media/assets/2020/07/breakingtheplasticwave_report.pdf
5 https://emf.thirdlight.com/link/f6oxost9xeso-nsjoqe/@/#id=2
6 https://emf.thirdlight.com/link/f6oxost9xeso-nsjoqe/@/#id=2, p. 11
Unilever has taken the most significant action to date, agreeing to cut virgin plastic use by 50% by 2025, including an absolute elimination of 100,000 tons of plastic packaging. At least sixty other consumer goods and retail companies currently have goals to reduce use of virgin plastic packaging, including competitors Walmart and Target.7 Kroger has no plastic reduction goal.
Starbucks, Coca-Cola, and Pepsi are leading the industry in reducing disposable packaging, each having set new goals to expand use of zero-waste reusable packaging. As a retail partner of the global reuse platform Loop, Kroger is poised to increase use of reusable packaging, yet has made no commitment to make reusable packaging permanent.
Our company could avoid regulatory, environmental, and competitive risks, and keep up with its peers by, for example, setting new commitments to reduce use of disposable virgin plastic and invest in reusable packaging.
RESOLVED: Shareholders request that the Kroger Board issue a report, at reasonable expense and excluding proprietary information, describing how the Company could reduce its plastics use in alignment with the one-third reduction findings of the Pew Report, or other authoritative sources, to reduce its contribution to ocean plastics pollution.
SUPPORTING STATEMENT:The report should, at Board discretion:
● | Assess the reputational, financial, and operational risks associated with continuing to use substantial amounts of single-use plastic packaging while plastic pollution grows; |
● | Evaluate dramatically reducing the amount of plastic used in our packaging through transitioning to reusables; and |
● | Describe how the Company can further reduce single-use packaging, including any planned reduction strategies or goals, materials redesign, substitution, or reductions in use of virgin plastic.” |
The Board of Directors Recommends a Vote Against This Proposal for the Following Reasons:
The Kroger family of companies is committed to protecting people and our planet by advancing positive change in our company and our communities. Through our Zero Hunger | Zero Waste social and environmental impact plan, we are on a journey to help create communities free of hunger and waste.
Our sustainable packaging commitments
Kroger has focused on improving the environmental attributes of product packaging for many years through a series of ambitious sustainable packaging goals. Our goals demonstrate Kroger’s continued commitment to help create a more circular economy and reduce plastics found in nature by using more sustainable packaging options where feasible; supporting reusable packaging models; using recyclable packaging and incorporating recycled content; and increasing consumer awareness about reuse and recycling.
We are also committed to upholding the highest standards of food safety and quality for our customers. Decisions about Our Brands food packaging consider critical attributes needed to protect and preserve food safety, quality, freshness, and affordability as well as to reduce greenhouse gas emissions related to the manufacture and transportation of items.
Kroger’s 2030 sustainable packaging commitments include the following elements:
● | Complete an Our Brands baseline product packaging footprint to fully understand current packaging impacts. |
● | Seek to achieve 100% recyclable, compostable and/or reusable packaging for Our Brands products. |
● | Increase recycled content in packaging so that the Our Brands product portfolio collectively contains at least 10% recycled content in packaging. |
● | Reduce unnecessary packaging. |
● | Increase awareness among Kroger customers about how to properly manage Our Brands product packaging at end of life. |
7 https://gc-22.emf.org/ppu/?_gl=1*1p3bi1c*_ga*nzEwMDEwNTU0LjE2Njl1NjQ4MTY.*_ga_V32N675KJX*MTY3MTlyMTM1OS4xMS4xLjE2NzEyMjE0OTMuNjAuMC4w
Taking Action to Achieve our 2030 Goals
In 2022, we developed our baseline packaging footprint with guidance from a consultant and input from our suppliers and internal subject matter experts. We found that 40% of Our Brands product packaging meets our definition of recyclable, when measured by weight of packaging material. In addition, the packaging portfolio captured in our baseline includes 14% post-consumer recycled content (PCR) material. We plan to update and refine our packaging baseline over time to track goal progress and inform goal achievement.
In 2023, we are continuing our work to build a roadmap to achieving our goals by 2030 and prioritize opportunities to adjust our packaging and/or support infrastructure changes. Our roadmap will also accommodate changes required by packaging legislation in the states and municipalities in which Kroger operates. In addition, the packaging baseline will inform any adjustments or refinements to our current goals.
More detailed information about our packaging baseline and key action steps to increase packaging sustainability is available in our 2022 Environmental, Social & Governance (ESG) report (https://www.thekrogerco.com/wp-content/uploads/2022/08/Kroger-Co-2022-ESG-Report.pdf).
We continue to evaluate and implement opportunities to reduce plastic use and improve end-of-life management opportunities for product packaging. Examples include:
Plastic Reduction & Circularity:
● | In 2022, Kroger added 50% post-consumer recycled content (PCR) PET plastic to a new line of Our Brands spice products. We continue to pilot different levels of PCR material in our product packaging, particularly in those products that are subject to packaging legislation, evaluating factors such as function, shelf-life, and aesthetic. |
● | Kroger-operated manufacturing plants continue to reduce plastic use and packaging weights for Our Brands items, where feasible. Last year, we reduced the amount of plastic used in our carbonated soft drinks and cultured dairy tub product packages, saving approximately 450,000 pounds of plastic annually. |
● | Kroger was the first U.S. grocery retail partner for the innovative Loop reusable packaging platform. In 2022, Kroger conducted a pilot at 25 Fred Meyer stores in the Portland, OR, area, selling more than 20 items representing popular brands, to gauge consumer response to this alternative to single-use packaging. Our pilot collected valuable insights on what may be needed to scale reusable packaging solutions in our industry. |
End-of-Life Solutions:
● | We continue to offer the Kroger Our Brands packaging recycling program so our customers can collect flexible plastic packaging and mail it free of charge to TerraCycle for recycling. Kroger is the first retailer to offer this type of recycling program across an entire private-label portfolio. Program engagement and recycling volume continues to grow, with Kroger customers returning more than 1 million packages—the equivalent of more than 22,000 pounds of plastic—to date. |
● | Kroger continued adding the How2Recycle logo to Our Brands items to increase our customers’ awareness of how to recycle product packaging, including those items eligible for front-of-store plastic film recycling programs—which we offer across the enterprise. |
● | The Kroger Co. Zero Hunger | Zero Waste Foundation supports the multi-stakeholder Polypropylene Recycling Coalition, facilitated by The Recycling Partnership, which aims to improve community-level infrastructure to enable curbside polypropylene collection and recycling. In 2022, the Foundation expanded this support to help fund the PET Recycling Coalition, which aims to increase the recyclability of PET (polyethylene terephthalate) plastic packaging. |
● | Kroger is the Grocery Sector Lead partner for Closed Loop Partners’ Beyond the Bag Initiative, launched by the Consortium to Reinvent the Retail Bag. This multi-year collaboration across retail sectors aims to identify, test and implement innovative new design solutions to replace the single-use plastic retail shopping bag. |
Given the above progress on our sustainable packaging roadmap, including detailed reporting available in Kroger’s 2022 ESG Report, we don’t believe additional reporting on packaging and plastics use is additive at this time.
For the foregoing reasons, we urge you to vote AGAINST this proposal.
Item No. 8 Report on Racial and Gender Pay Gaps
We have been advised that Arujna Capital on behalf of Susan Silver or an appointed representative along with one co-filer will present the following proposal for consideration during the 2023 Annual Shareholders’ Meeting.
“Whereas: Pay inequities persist across race and gender and pose substantial risks to companies and society. Black workers' hourly median earnings represent 64 percent of white wages. The median income for women working full time is 83 percent that of men. Intersecting race, Black women earn 63 percent, Native women 60 percent, and Latina women 55 percent. At the current rate, women will not reach pay equity until 2059, Black women in 2130, and Latina women in 2224 .1
Citigroup estimates closing minority and gender wage gaps 20 years ago could have generated 12 trillion dollars in additional national income. PwC estimates closing the gender pay gap could boost Organization for Economic Cooperation and Development (OECD) countries' economies by 2 trillion dollars annually.2
Actively managing pay equity is associated with improved representation. Diversity in leadership is linked to superior stock performance and return on equity.3 Minorities represent 38.5 percent of Kroger's workforce and 26 percent of Store Leaders. Women represent 50.5 percent of the workforce and 33 percent of Store Leaders.4
Best practice pay equity reporting consists of two parts:
1. | unadjusted median pay gaps, assessing equal opportunity to high paying roles, |
2. | statistically adjusted gaps, assessing whether minorities and non-minorities, men and women, are paid the same for similar roles. |
Kroger does not report quantitative unadjusted or adjusted pay gaps. Over 20 percent of the 100 largest U.S. employers currently report adjusted gaps, and an increasing number of companies disclose unadjusted gaps to address the structural bias women and minorities face regarding job opportunity and pay.5
Racial and gender unadjusted median pay gaps are accepted as the valid way of measuring pay inequity by the United States Census Bureau, Department of Labor, OECD, and International Labor Organization. The United Kingdom and Ireland mandate disclosure of median pay gaps, and the United Kingdom is considering racial pay reporting.6
Resolved: Shareholders request The Kroger Co. report on both quantitative median and adjusted pay gaps across race and gender, including associated policy, reputational, competitive, and operational risks, and risks related to recruiting and retaining diverse talent. The report should be prepared at reasonable cost, omitting proprietary information, litigation strategy and legal compliance information.
1https://static1.squarespace.com/static/5bc65db67d0c9102cca54b74/t/622f4567fae4ea772ae60492/1647265128087/Racial+Gender+Pay+Scorecard+2022+-+Arjuna+Capital.pdf
2 Ibid.
3 Ibid.
4https://www.thekrogerco.com/wp-content/uploads/2022/08/Kroger-Co-2022-ESG-Report.pdf
5https://diversiq.com/which-sp-500-companies-disclose-gender-pay-equity-data/
6 https://static1.squarespace.com/static/5bc65db67d0c9102cca54b74/t/622f4567fae4ea772ae60492/1647265128087/Racial+Gender+Pay+Scorecard+2022+-+Arjuna+Capital.pdf
Racial/gender pay gaps are defined as the difference between non-minority and minority/male and female median earnings expressed as a percentage of non-minority/male earnings (Wikipedia/OECD, respectively).
Supporting Statement:An annual report adequate for investors to assess performance could, with board discretion, integrate base, bonus and equity compensation to calculate:
● | percentage median and adjusted gender pay gap, globally and/or by country, where appropriate |
● | percentage median and adjusted racial/minority/ethnicity pay gap, US and/or by country, where appropriate” |
The Board of Directors Recommends a Vote Against This Proposal for the Following Reasons:
Kroger welcomes associates from every race, culture, gender and ability, and is actively creating and maintaining an equitable workplace where every associate is empowered, supported, and feels valued and a sense of belonging. Our aspiration is for the demographic representation of women and people of color to reflect our communities, at both the organization-wide and local levels.
Kroger already has an established approach to pay equity.Kroger has been performing an annual pay equity analysis since 2016, which takes into consideration gender and race for all salaried roles. We review our pay equity analysis annually with the Compensation and Talent Development Committee of the Board of Directors. The organization also equips and enables our leaders to promote pay equity and transparency. We have robust and comprehensive pay administration guidelines for non-bargaining-unit employees, enabling our managers to effectively manage compensation throughout the year to reward performance and address progression within pay ranges. In addition to these guidelines, we provide additional training to managers in preparation for annual compensation planning.
Kroger provides robust disclosure of representation annually. Kroger consistently discloses and discusses its diverse associate representation in the organization’s annual ESG Report. We publish our annual EEO-1 reports as filed with the EEOC (https://www.thekrogerco.com/wp-content/uploads/2022/08/EEO-1-2021.pdf). In addition, Kroger provides a detailed discussion of our workforce strategy and total rewards and benefits approach in our Annual Report and Form 10-K. The organization also discusses its approach to Human Capital Management in its annual ESG report. The report, available on www.thekrogerco.com/esgreport, includes disclosures related to associate health and safety; Kroger’s Framework for Action: Diversity, Equity & Inclusion plan; talent attraction and retention; and labor relations.
The majority of Kroger’s workforce is covered under collective bargaining agreements, which facilitate pay equity for frontline associates. Kroger’s compensation structure supports fair pay. Wages, health care and pensions are included in more than 354 collective bargaining agreements that cover approximately 64% of our associates. The negotiated pay structures within those agreements facilitate standard and consistent pay progression based on tenure and experience. Pay is determined using structured wage progressions where an associate moves through the progression based on time in role or hours worked. Associates move through the wage progression based on the same definitions and criteria as other associates working in the same roles. Pay parity is promoted within the model because of the structured wage grids and inherent progression framework.
Non-union hourly roles follow similar wage progressions. Where we use a pay-for-performance model for non-union, hourly roles, those workplaces follow compensation guidelines that provide for a framework of tying pay to performance and using pay levels.
Kroger provides comprehensive benefits for associates. The organization has invested an incremental $1.9 billion in associate wages and training since 2018. This has increased our national average hourly rate of pay from $13.66 to $18, or $23.50 per hour with comprehensive benefits.
Kroger has announced plans to continue investing in wages, with plans for a more than $770 million incremental investment in associates during 2023.
In addition to market-competitive wages, our associates have access to a wide variety of benefits that provide value in their lives today and in the future. We invest in the whole person with a benefits package that generally includes: quality, affordable healthcare; retirement savings plans and pension plans; on-demand access to mental health assistance and free counseling to support emotional wellness; career advancement opportunities; financial education programs to help associates manage their day-to-day finances; and an industry-leading continuing education benefit that provides up to $21,000 for associates, part-time and full-time alike, which, along with scholarships for children of associates — most of whom are first-generation college attendees — provide pathways to social mobility to associates who choose to participate. We also offer associates a variety of grocery discounts, volunteer opportunities, and other perks and rewards.
Diversity and inclusion are part of Kroger’s core organizational values, and the organization has strong programs in place to create and maintain an equitable workplace and inclusive culture.
Diversity and inclusion have been longstanding Kroger values. In 2020, we introduced Kroger’s Framework for Action to further advance diversity, equity and inclusion in our culture and communities. The plan’s action steps include creating a DE&I advisory council reporting to senior leadership, providing diversity training to our associate population, improving diverse talent recruiting through expanded partnerships with HBCUs and Hispanic-serving institutions, establishing two-way mentorship and advocacy programs, increasing spend with diverse suppliers, and more. We report progress against these goals in Kroger’s annual ESG report.
Kroger strives to attract, retain and develop leaders and associates who best reflect our communities. Because of our unique business model, we help unlock economic opportunity for nearly half a million people of various ages and aspirations, from those wanting an entry-level part-time job to graduate-degree specialists across corporate functions. We also aim to develop and promote diverse leaders to roles with increasing levels of responsibility. For open leadership positions, we assemble a diverse slate of candidates for consideration.
In 2022, every manager across the organization was expected to actively mentor and develop an associate who has a different background than them. This, along with other objectives, is used to assess the manager’s performance and ultimately affects their compensation. Currently, over 80% of retail division executive leadership teams have at least one diverse leader.
We believe that Kroger’s current compensation practices promote diversity, inclusion and fair pay across our workforce. While Kroger welcomes continued engagement with shareholders on these issues, we believe that the adoption of this proposal is not necessary in light of our existing practices.
For the foregoing reasons, we urge you to vote AGAINST this proposal.
Item No. 9 – Report on EEO Policy Risks
We have been advised that the National Center for Public Policy Research or an appointed representative will present the following proposal for consideration during the 2023 Annual Shareholders’ Meeting. We will promptly to any shareholderprovide the shareholdings upon written or oral request to Kroger’s Secretary at our executive offices, that they intend to proposeoffices.
“RESOLVED
Shareholders request the following resolution atKroger Company ("Kroger") issue a public report detailing the annual meeting:
The Kroger CompanyHuman Rights Risk Assessment - 2016
“RESOLVED, that shareholders of The Kroger Co. (“Kroger”) urge the Board of Directors to report to shareholders, at reasonable costpotential risks associated with omitting "viewpoint" and omitting proprietary information, on Kroger’s process for identifying and analyzing potential and actual human rights risks of Kroger’s operations and supply chain (referred to herein as a “human rights risk assessment”) addressing the following:
"ideology" from its written equal employment opportunity (EEO) policy. The report should be made available within a reasonable timeframe, prepared at a reasonable expense and omit proprietary information.
SUPPORTING STATEMENT
Kroger does not explicitly prohibit discrimination based on viewpoint or ideology in its written EEO policy.
Kroger's lack of a company-wide best practice EEO policy sends mixed signals to shareholders on Kroger’s website no later than October 31, 2016.
Supporting Statement
As long-term shareholders, we favorcompany employees and prospective employees and calls into question the extent to which individuals are protected due to inconsistent state policies and practices that protectthe absence of a relevant federal protection. Approximately half of Americans live and enhancework in a jurisdiction with no legal protections if their employer takes action against them for their political activities or discriminates on the valuebasis of our investments. There is increasing recognition that company risks relatedviewpoint in the workplace.
Companies with inclusive policies are better able to human rights violations, such asrecruit the most talented employees from a broad labor pool, resolve complaints internally to avoid costly litigation or reputational damage, and project delaysminimize employee turnover. Moreover, inclusive policies contribute to more efficient human capital management by eliminating the need to maintain different policies in different locations.
There is ample evidence that individuals with conservative viewpoints may face discrimination at Kroger.
Kroger recently kowtowed to leftwing social media criticism by removing patriotic and disruptions,Second Amendment related paraphernalia from store shelves. For instance, after someone complained on Twitter about a drink sleeve that stated, "Arms Change, Rights Don't", the Company reportedly recalled the items.1 Kroger's subsidiary grocery store, Harris Teeter, likewise complied with liberal demands to pull "Freedom Series" items from its shelves, removing items that read, "Give me liberty or give me death" and "America, love it or leave it."2
While removing patriotic items from its stores, Kroger has simultaneously pushed a leftwing social agenda. Published in2021, the Company released an "allyship guide" that told employees to use "inclusive language" and celebrate transgender holidays.3 Defining terms such as "non-binary," "transgender," and "pansexual," the guide asserts that, "Some people's morality can adversely affect shareholder value.be a barrier to accepting LGBTQ+ people."4
Removing pro-America items from store shelves while publishing "allyship" training guides for staff certainly raise concerns over how Kroger like many other companies, has adopted a supplier codetreats employees with diverse points of conduct (See The Kroger Company Standard Vendor Agreement) but has yet to publish a company-wide Human Rights Policy, addressing human rights issues and a separate human rights code that applies to its suppliers. Adoption of these principles would be an important first step in effectively managing human rights risks. Companies must then assess risks to shareholder value of human rights practices in their operations and supply chains to translate principles into protective practices.
The importance of human rights risk assessment is reflected in the United Nations Guiding Principles on Business and Human Rights (the “Ruggie Principles”) approved by the UN Human Rights Council in 2011. The Ruggie Principles urge that “business enterprises should carry out human rights due diligence... assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and communicating how impacts are addressed.” (http://www.business-humanrights.org/media/documents/ruggie/ruggie-guiding-principles-21-mar-2011.pdf)
Kroger’s business exposes it to significant human rights risks. As of year-end 2014, Kroger operations, including supermarkets, convenience and jewelry stores, are located in over 40 states. While over 90% of Kroger’s business is food its vendor Code of Conduct is based heavily on complianceview, particularly those who disagree with the law,Company's blatant leftwing actions. This places the Company in reputational, legal, and U.S. agricultural workersfinancial risk, as evidenced by a recent settlement with fired employees who refused to wear a Company issued apron adorning a rainbow on account of it violating their religious beliefs.5
Presently, shareholders are excluded from many labor lawsunable to evaluate how Kroger prevents discrimination towards employees based on their ideology or viewpoint, mitigates employee concerns of potential discrimination, and ensures a respectful and supportive work atmosphere that apply to other U.S. workers. The company’s supply chain is complex and global and violations of human rights in Kroger’s supply chain can leadbolsters employee performance.
We recommend that the report evaluate risks including, but not limited to, negative publicity, public protests,effects on employee hiring and a loss of consumer confidence that can have a negative impact on shareholder value.retention, as well as litigation risks from conflicting state and company anti-discrimination policies.”
We urge shareholders to vote for this proposal.”
57
The Board of Directors Recommends a VoteAgainst This Proposal for the Following Reasons:
Like
Kroger strives to reflect the proponents, the Board also recognizes the importance of ensuringcommunities we serve and foster a culture that those seeking to do business with us respect basic human rights. However, the Board opposes this proposal because we are already working to ensure an ethical supply chain for the products sold in our stores and we have a zero tolerance policy for human rights violations. Furthermore, we regularly consider our policies and practices and we have recently taken several important steps to drive into our supply chain greater responsibility and accountability:
We expect our program to continue to evolve and develop based on input from suppliers, customers, government, non-governmental organizations and developments within the industry. We believe that these efforts represent significant and positive steps forward for our Company’s social responsibility program.
Kroger is already actively implementing, monitoring, and continually improving our policies and practices, addressing a number of the areas discussed by the proponent. We believe that preparation of an additional report would not be an efficient use of our shareholders’ resources. We urge you to voteAGAINST this proposal.
Item No. 5 Shareholder Proposal
We have been notified by one shareholder, the name and shareholdings of which will be furnished promptly to any shareholder upon written or oral request to Kroger’s Secretary at our executive offices, that it intends to propose the following resolution at the annual meeting:
58
Shareholder ProposalRecyclability of Packaging
“WHEREAS: A portion of Kroger house brand product packaging is unrecyclable, including plastics, which are a growing component of marine litter. Authorities say that marine litter kills and injures marine life, spreads toxics, and poses a potential threat to human health.
Plastic is the fastest growing form of packaging; U.S. flexible plastic sales are estimated at $26 billion. Dried fruit, frozen meat, cheese, and dog food are some of the Kroger house brand items packaged in unrecyclable plastic pouches. Private label items account for a quarter of all sales - nearly $20 billion annually. Using unrecyclable packaging when recyclable alternatives are available wastes valuable resources. William McDonough, a leading green design advisor, calls pouch packaging a “monstrous hybrid” designed to end up either in a landfill or incinerator.
Recyclability of household packaging is a growing area of focus as consumers become more environmentally conscious, yet recycling rates stagnate. Only 14% of plastic packaging is recycled, according to the U.S. Environmental Protection Agency (EPA). Billions of pouches and similar plastic laminates, representing significant embedded value, lie buried in landfills. Unrecyclable packaging is more likelyempowers everyone to be litteredtheir true self, inspires collaboration, and swept into waterways. A recent assessment of marine debris by a panel offeeds the Global Environment Facility concluded that one cause of debris entering oceans is “design and marketing of products internationally without appropriate regard to their environmental fate or ability to be recycled...”
In the marine environment, plastics break down into indigestible particles that marine life mistake for food. Studies by the EPA suggest a synergistic effect between plastic debris and persistent, bio-accumulative, toxic chemicals. Plastics absorb toxics such as polychlorinated biphenyls and dioxins from water or sediment and transfer them to the marine food web and potentially to human diets. One study of fish from the North Pacific found one or more plastic chemicals in all fish tested, independent of location and species.spirit.
California spends nearly $500 million annually preventing trash, much of it packaging, from polluting beaches, rivers and oceanfront. Making all packaging recyclable, if possible, is the first step needed to reduce the threat posed by ocean debris.
Companies who aspire to corporate sustainability yet use these risky materials need to explain why they use unrecyclable packaging. Other companies who manufacture and sell food and household goods are moving towards recyclability. Procter & Gamble and Colgate-Palmolive agreed to make most of their packaging recyclable by 2020. Keurig Green Mountain will make K-cup coffee pods recyclable; and McDonald’s and Dunkin Donuts shifted away from foam plastic cups, which cannot be readily recycled.
RESOLVED: Shareowners of Kroger request that the board of directors issue a report, at reasonable cost, omitting confidential information, assessing the environmental impacts of continuing to use unrecyclable brand packaging.
Supporting Statement: Proponents believe that the report should include an assessment of the reputational, financial and operational risks associated with continuing to use unrecyclable brand packaging and, if possible, goals and a timeline to phase out unrecyclable packaging.”
The Board of Directors Recommends a VoteAgainst This Proposal for the Following Reasons:
Kroger shares the proponent’s concerns regarding plastic recyclability and recognizes the important role we play as a good steward of the environment.
We continue to improve the recyclability of our Corporate Brand products, while still preserving their safety and quality. More specifically, we follow a balanced, multi-pronged approach to optimizing packaging design that considers factors such as food safety, shelf life, availability, quality, material type, function, recyclability and cost, among others.
We are increasingly labeling recyclable Corporate Brand products per the Federal Trade Commission’s Green Guides, prompting our customers to “PLEASE RECYCLE.” One example is through our redesign of Kroger brand milks, creams and orange juices that come in quart, pint and
59
half-pint packages. The packaging for these products is comprised of a bottle made from #1 polyethylene terephthalate (PETE), one of the most widely recycled plastics available, and a shrink sleeve. While the shrink sleeve is also made from #1 PETE, these shrink sleeves may interfere with the ability of the bottles to be segregated and recycled when a recycling facility uses optical scanning technology. As a result, in order to increase the number of Corporate Brand #1 PETE bottles that can be properly recycled, we have added a tear perforation and the consumer message, “REMOVE LABEL TO RECYCLE BOTTLE,” to the shrink labels.
We recognize that creating lasting sustainable consumption patterns requires a comprehensive approach and so we also work with various industry experts and forums to advocate for expanded recycling infrastructure to support both multiple forms of plastic packaging and diversion from landfills.
Additionally, our banner brand bread bags are made from low-density polyethylene (LDPE). This type of plastic can be a contaminant in many single stream recycling programs. To help our customers recycle their LDPE bread bags we have added customer communication on the bag that reads, “Please recycle at your local, Kroger Family of Stores drop-off location.” These drop-off recycling bins are part of our plastic bag recycling program and are typically located in the front vestibule of our stores. Along with bread bags, customers can also recycle clean and dry plastic bags, bottled water case wraps, bathroom tissue and diaper plastic overwraps, dry cleaning bags, and newspaper bags. This program is currently undergoing rebranding and expansion to encourage customers to recycle even more in 2016 and beyond.
For each of the past several years we have published online our annual Sustainability Report that highlights our sustainability initiatives and waste reduction efforts in greater detail, available at sustainability.kroger.com. In that report, we set forth a rigorous and tangible goal to strive to have zero waste in our retail locations. Through this initiative, and others, we will continue to support efforts to reduce waste, find optimized solutions and advocate for expanded recycling infrastructure as we believe these efforts are significant and meaningful. We urge you to support these efforts and voteAGAINST this proposal.
Item No. 6 Shareholder Proposal
We have been notified by two shareholders, the names and shareholdings of which will be furnished promptly to any shareholder upon written or oral request to Kroger’s Secretary at our executive offices, that they intend to propose the following resolution at the annual meeting:
Shareholder ProposalRenewable Energy
“Whereas:
To mitigate the worst impacts of climate change, the United Nations has stated that global warming must not increase more than 2 degrees Celsius beyond pre-industrial levels, which implies U.S. carbon dioxide emission reductions of 80% from 1990 levels by 2050. (IPCC 2013). At the 2015 United Nations Conference of Parties in Paris, 195 parties agreed on a pathway to achieve a 2 degree limit.
At $108 billion in sales, Kroger is the 6th largest global retailer, and is 20th on Fortune’s 2015 Fortune 500 list (Kroger 10k; Deloitte, 2015; Fortune). Kroger’s globally significant carbon emissions - which exceed 29 nations’ respective carbon emissions from energy - are not being adequately addressed. (Kroger, “Energy/Carbon” website; IEA, Energy Atlas). Kroger lacks climate targets, and where many companies are reducing carbon, Kroger’s 2014 Scope 1 emissions increased from the previous year. Despite its significant carbon footprint, Kroger has installed renewable energy at only 8 of its 3,806 stores, plants, and distribution centers, approximately 0.2% of its locations. (Kroger “Energy/Carbon” website, Factbook).
In contrast, Whole Foods Market offsets its entire power use with renewable energy credits, and Walmart is at 24% renewable power. (Whole Foods, “Green Mission”; Walmart, “Walmart’s Approach to Renewable Energy”). Indeed, Whole Foods Market, Walmart, Whole Foods Market, and other food companies including Coca-Cola Enterprises, Mars, Nestle, and Starbucks have committed to working towards 100% renewable energy. (RE100).
60
Investing in carbon reduction can benefit Kroger’s shareholder value. Carbon reduction activities can be lucrative, yielding returns over 30%. (“Lower emissions, higher ROI”, Carbon Disclosure Project, 2014). Research indicates that corporate management of climate impacts can lead to improved financial performance, including enhanced return on equity, stronger dividends, lower earnings volatility, and minimized regulatory risk. (“S&P 500 Leaders Report”, Carbon Disclosure Project, 2014)
According to Eric Schmidt, Executive Chairman of Google (another RE100 signatory): “Much of corporate America is buying renewable energy [...] not just to be sustainable, because it makes business sense, helping companies diversify their power supply, hedge against fuel risks, and support innovation in an increasingly cost-competitive way.” (“Google’s commitment to sustainability”, Google Green Blog, 2014).
Resolved:
Shareholders request that Kroger produce a report, by year end 2016, assessing the climate benefits and feasibility of adopting enterprise-wide, quantitative, time bound targets for increasing Kroger’s renewable energy sourcing. The report should be produced at reasonable cost and exclude proprietary information.
Supporting:Shareholders request that the report include an analysis of options and scenarios for achieving renewable energy targets, for example by using on-site distributed energy, off-site generation, power purchases, and renewable energy credits, or other opportunities management would like to consider, at its discretion.”
The Board of Directors Recommends a VoteAgainst This Proposal for the Following Reasons:
Kroger shares the proponents’ concerns regarding renewable energy sourcing. We are committed to environmental sustainabilitya policy of equal opportunity for all associates without regard to race, color, religion, sex, national origin, age, disability, sexual orientation, or gender identity. In implementing our policy, we seek and embrace differences in the backgrounds, cultures, and perspectives of all associates, and we strive to reduce our impact on the environment by using natural resources responsiblyencourage and minimizing waste inexpect all of our operations.
Our aggressiveassociates to collaborate and actively work in energy management resulted in a reductiontogether regardless of overall energy consumptionthese differences. Moreover, as we identify in our stores saving more than 2.5 billion kWh since 2000. ThisESG Report, our diversity, equity and inclusion (DE&I) programs demonstrate our commitment to building a diverse and inclusive workforce, fostering an environment where diversity is the carbon equivalent of taking 362,922 cars off the roada competitive advantage and providing equal opportunities for one year.associates.
We are actively workingfocused on creating a culture of fairness and respect.
Our formal DE&I Framework for Action, launched in 2020, is focused on creating a more inclusive culture and advancing equitable communities, among other goals, underscoring Kroger’s commitment to do more in both the short-standing together and long-term. For example,mobilizing our Turkey Hill Dairy has two wind energy turbines with 3.2 megawatt capacity. Since 2011, these turbines have supplied up to 25% of the dairy’s annual electricity needs, which is enough power to produce six million gallons of ice creampeople, passion, scale and 15 million gallons of iced tea. In addition, ten Kroger stores have approximately 3,092kW of solar energy capacity that in 2015 produced approximately 3.94 million kWh.
The Kroger Recovery System, located in Compton, CA at the Ralphs/Food 4 Less distribution center has been in operation since late 2012. It utilizes anaerobic digestion, a naturally occurring process,resources to transform food waste into renewable biogas. This system annually processes approximately 45,000 tonsour culture and our communities. The framework is built around pillars focused on creating a more inclusive culture, developing diverse talent, advancing diverse partnerships, advancing equitable communities and deeply listening and reporting progress.
1 https://www.bizpacreview.com/2022/06/21/harris-teeter-kroger-remove-pro-america-items-from-shelves-after-woke-complaints-backlash-is-swift-1252599/; https://www.foxbusiness.com/retail/harris-teeter-kroger-backlash-pro-america-items-complaints
2 https://www.bizpacreview.com/2022/06/21/harris-teeter-kroger-remove-pro-america-items-from-shelves-after-woke-complaints-backlash-is-swift-1252599/; https://www.foxbusiness.com/retail/harris-teeter-kroger-backlash-pro-america-items-complaints
3 https://www.breitbart.com/social-justice/2022/08/31/kroger-allyship-guide-tells-employees-to-celebrate-trans-holidays-support-bail-fund/
4 https://www.thekrogerco.com/wp-content-uploads/2021/03/AAPI-Allyship-Guide_v3.2-External-merged.pdf
5 https://news.yahoo.com/kroger-pay-180K-lawsuit-over-162047710.html
In particular, we understand that our associates have a wide range of food waste. This biogas is then turned into power for onsite operations. The system provided approximately 3.5 million kWh of renewable energy for the 650,000 square foot Ralphs/Food 4 Less distribution center. The system reduces area truck trips by more than 500,000 miles each year and reduces waste costs. These effortsviewpoints. We are estimated to reduce carbon emissions by 90,000 tons per year.
For each of the past several years, we have published online our annual Sustainability Report that highlights our sustainability initiatives and waste reduction efforts in greater detail. We will continue to support efforts to increase our renewable energy sourcing as we believe these efforts are significant and meaningful. You can view our Sustainability Report atsustainability.kroger.com where we address a number of the requests made by the proponent including quantitative enterprise-wide renewable energy production metrics, and supply-chain management through our logistics initiative.
We remain committed to environmental sustainabilitya culture of fairness, respect and renewable energy sourcinginclusion that drives us to value and embrace differences. As part of our Framework for Action, we willare engaging with external and internal stakeholders to seek perspectives and provide associates with platforms to continue sharing their stories and feedback. To that end, Kroger launched an internal DEI Advisory Council made up of cross-functional leaders who are committed to publish reportsadvancing this progress, working closely with senior officers and business leaders to identify opportunities and specific actions for improvement, as well as the Board’s Compensation & Talent Development Committee overseeing progress on our human capital efforts, including DEI.
Diverse viewpoints are respected and encouraged.
Our policies and practices demonstrate that diverse viewpoints are respected and encouraged and are an essential part of advancing our business. In light of our demonstrated commitment to our shareholders tracking our initiatives. We urge you to support the furtheringcore values of our current programsdiversity and vote AGAINST this proposal.
61
Item No. 7 Shareholder Proposal
We have been notified by one shareholder, the name and shareholdings of which will be furnished promptly to any shareholder upon written or oral request to Kroger’s Secretary at our executive offices, that it intends to propose the following resolution at the annual meeting:
Shareholder ProposalShare Repurchase vs. Dividend
“Resolved: Shareholders of The Kroger Co. ask the board of directors to adopt and issue a general payout policy that gives preference to share repurchases (relative to cash dividends) as a method to return capital to shareholders. If a general payout policy currently exists,inclusion for all stakeholders, we ask that it be amended appropriately.
Supporting statement: Share repurchases as a method to return capital to shareholders have distinct advantages relative to dividends. Share repurchases should be preferred for the following reasons:
Some may worry that share repurchases could be used to prop up metrics that factor into the compensation of executives. I believe that any such concern should not interfereissuing a public report detailing the potential risks associated with the choice of optimal payout mechanism because compensation packages can be designed such that metrics are adjusted to account for share repurchases.
62
The Board of Directors Recommends a VoteAgainst This Proposal for the Following Reasons:
Kroger believes that the policy advocated by the shareholder proposal, is notnecessary or in the best interests of our shareholders as it reduces long-term flexibility in the allocation of capital. In a rapidly evolving capital market, this flexibility is an essential element in the careful management of shareholder capital, which the Board thoughtfully oversees and reviews on a regular basis.
Our long-term financial strategy continues to be to use cash flow from operations, in a balanced manner, to repurchase shares, fund dividends, and increase capital investments, all while maintaining our current investment grade debt rating. Our balanced approach gives us the flexibility to pursue long-term growth strategies while returning capital toKroger or our shareholders.
Kroger is proud of our strong history of capital return to shareholders. We have made significant commitments over time to return capital to shareholders both through repurchases of our common shares and payment of cash dividends. We repurchased $703 million of Kroger common shares in 2015, as well as $1.1 billion in 2014, $338 million in 2013 and $1.2 billion in 2012. Additionally, we paid dividends totaling $385 million in 2015, $338 million in 2014, $319 million in 2013 and $267 million in 2012. We are also committed to growing long-term shareholder value through significant capital investments. Excluding acquisitions, we invested $3.38 billion, $2.89 billion, $2.46 billion and $2.06 billion in capital projects in 2015, 2014, 2013, and 2012, respectively. Many of our shareholders view both dividends and share repurchases as an important component of Kroger’s investment profile, especially in light of our balanced capital return strategy that contributes to a healthy TSR (total shareholder return), which outperforms both our peers and
For the S&P 500 over time.
When contemplating capital returns, the Board engages in a thorough analysis and oversight process. Before the Board approves any share repurchase program or declares a cash dividend, it takes into account a wide range of factors, including Kroger’s short and long-term growth strategies, liquidity needs and capital requirements, cash flows, net earnings, debt obligations, and leverage ratios. The Board also considers how the then-current capital market conditions affect Kroger’s policies and strategies. There is no one-size-fits-all policy or strategy in returning capital to shareholders that would satisfy each market condition over the course of time. Balanced capital allocation decisions, overseen by an effective Board, remain the most effective and flexible strategy to continuously deliver healthy value to shareholders over the long-term.
This proposal requests that Kroger adopt a general policy that gives preference to share repurchases relative to cash dividends. Weforegoing reasons, we urge you to voteAGAINST this proposal.
63
Shareholder Proposals and Director Nominations – 2017— 2024 Annual Meeting
Shareholder
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, shareholder proposals intended for inclusion in the proxy material relating to Kroger’s annual meeting of shareholders in June 20172024 should be addressed to Kroger’s Secretary and must be received at our executive offices not later than January 12, 2017.13, 2024. These proposals must comply with Rule 14a-8 and the SEC’s proxy rules. If a shareholder submits a proposal outside of Rule 14a-8 for the 2023 annual meeting and such proposal is not delivered within the time frame specified in the Regulations, Kroger’s proxy may confer discretionary authority on persons being appointed as proxies on behalf of Kroger to vote on such proposal.
In addition, Kroger’s Regulations contain an advance notice of shareholder business and director nominations requirement, which generally prescribes the procedures that a shareholder of Kroger must follow if the shareholder intends, at an annual meeting, to nominate a person for election to Kroger’s Board of Directors or to propose other business to be considered by shareholders. These procedures include, among other things, that the shareholder give timely notice to Kroger’s Secretary of the nomination or other proposed business, that the notice contain specified information, and that the shareholder comply with certain other requirements. In order to be timely, this notice must be delivered in writing to Kroger’s Secretary, at our principal executive offices, not later than 45 calendar days prior to the date on which our proxy statement for the prior year’s annual meeting of shareholders was mailed to shareholders. If a shareholder’s nomination or proposal is not in compliance with the procedures set forth in the Regulations, we may disregard such nomination or proposal. Accordingly, if a shareholder intends, at the 2017 annual meeting,2024 Annual Meeting, to nominate a person for election to the Board of Directors or to propose other business, the shareholder must deliver a notice of such nomination or proposal to Kroger’s Secretary not later than March 28, 2017,2024 and comply with the requirements of the Regulations. If a shareholder submits a proposal outside
Furthermore, in addition to the requirements of SEC Rule 14a-8 or our Regulations, as applicable, as described above, to comply with the universal proxy rules, shareholders who intend to solicit proxies in support of director nominees other than our nominees must provide notice to Kroger’s Secretary that sets forth the information required by Rule 14a-19 of the Exchange Act no later than April 23, 2024, and must comply with the additional requirements of Rule 14a-814a-19(b).
Eligible shareholders may also submit director nominees for inclusion in our proxy statement for the 20172024 annual meeting of shareholders. To be eligible, shareholders must have owned at least three percent of our common shares for at least three years. Up to 20 shareholders will be able to aggregate for this purpose. Nominations must be submitted to our Corporate Secretary at our principal executive offices no earlier than December 14, 2023 and such proposal is not delivered within the time frame specified in the Regulations, Kroger’s proxy may confer discretionary authority on persons being appointed as proxies on behalf of Kroger to vote on such proposal. no later than January 13, 2024.
Shareholder proposals, director nominations, including, if applicable pursuant to proxy access, and advance notices shouldmust be addressed in writing, and addressed and delivered timely to: Corporate Secretary, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100.
2015 Annual Report
Attached to this Proxy Statement is our 2015 Annual Report which includes a brief description of our business, including the general scope and nature thereof during fiscal year 2015, together with the audited financial information contained in our 2015 Annual Report on Form 10-K filed with the SEC.A copy of that report is available to shareholders on request without charge by writing to: Todd A. Foley, Treasurer, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100 or by calling 513-762-1220. Our SEC filings are available to the public on the SEC’s website at www.sec.gov.
Householding of Proxy Materials
We have adopted a procedure approved by the SEC called “householding.” Under this procedure, shareholders of record who have the same address and last name will receive only one copy of the Notice of Availability of Proxy Materials (or proxy materials in the case of shareholders who receive paper copies of such materials) unless one or more of these shareholders notifies us that they wish to continue receiving individual copies. This procedure will reduce our printing costs and postage fees. Householding will not in any way affect dividend check mailings.
If you are eligible for householding, but you and other shareholders of record with whom you share an address currently receive multiple copies of our Notice of Availability of Proxy Materials (or proxy materials in the case of shareholders who receive paper copies of such materials), or if you hold in more than one account, and in either case you wish to receive only a single copy for your household or if you prefer to receive separate copies of our documents in the future, please contact your bank or broker, or contact Kroger’s Secretary at 1014 Vine Street, Cincinnati, Ohio 45202-110045202 or via telephone at 513-762-4000.
Beneficial shareholders can request information about householding from their banks, brokers or other holders of record.
The management knows of no other matters that are to be presented at the meeting, but, if any should be presented, the Proxy Committee expects to vote thereon according to its best judgment.
64
Available Information
_____________2015 ANNUAL REPORT_____________
FINANCIAL REPORT 2015
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The managementCompany files Annual Reports on Form 10-K with the Securities and Exchange Commission. A copy of The Kroger Co. has the responsibilityAnnual Report on Form 10-K for preparing the accompanyingfiscal year ended January 28, 2023 (except for certain exhibits thereto), including our audited financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and are not misstated due to material error or fraud. The financial statements include amounts that are based on management’s best estimates and judgments. Management also prepared the other information in the report and is responsible for its accuracy and consistency with the financial statements.
Kroger’s financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose selection has been ratified by the shareholders. Management has made available to PricewaterhouseCoopers LLP all of Kroger’s financial records and related data, as well as the minutes of the shareholders’ and directors’ meetings. Furthermore, management believes that all representations made to PricewaterhouseCoopers LLP during its audit were valid and appropriate.
Management also recognizes its responsibility for fostering a strong ethical climate so that Kroger’s affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected inThe Kroger Co. Policy on Business Ethics, which is publicized throughout Kroger and available on Kroger’s website at ir.kroger.com.The Kroger Co. Policy on Business Ethics addresses, among other things, the necessity of ensuring open communication within Kroger; potential conflicts of interests; compliance with all domestic and foreign laws, including those related to financial disclosure; and the confidentiality of proprietary information. Kroger maintains a systematic program to assess compliance with these policies.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established inInternal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management excluded Roundy’s, Inc. from its assessment of internal control over financial reporting because it was acquired in a purchase business combination on December 18, 2015. Roundy’s, Inc. is a wholly-owned subsidiary whose total assets and total revenues represent 2% and less than 1%, respectively, of the related consolidated financial statement amounts asschedules, may be obtained, free of and for the year ended January 30, 2016. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of January 30, 2016.
A-1
SELECTED FINANCIAL DATA
Fiscal Years Ended | |||||||||||||||||||||||||
January 30, | January 31, | February 1, 2014 (52 weeks)(1) | February 2, 2013 (53 weeks) | January 28, 2012 (52 weeks) | |||||||||||||||||||||
(In millions, except per share amounts) | |||||||||||||||||||||||||
Sales | $ | 109,830 | $ | 108,465 | $ | 98,375 | $ | 96,619 | $ | 90,269 | |||||||||||||||
Net earnings including | |||||||||||||||||||||||||
noncontrolling interests | 2,049 | 1,747 | 1,531 | 1,508 | 596 | ||||||||||||||||||||
Net earnings attributable to | |||||||||||||||||||||||||
The Kroger Co. | 2,039 | 1,728 | 1,519 | 1,497 | 602 | ||||||||||||||||||||
Net earnings attributable to | |||||||||||||||||||||||||
The Kroger Co. per diluted | |||||||||||||||||||||||||
common share | 2.06 | 1.72 | 1.45 | 1.39 | 0.51 | ||||||||||||||||||||
Total assets | 33,897 | 30,497 | 29,281 | 24,634 | 23,454 | ||||||||||||||||||||
Long-term liabilities, including | |||||||||||||||||||||||||
obligations under capital leases | |||||||||||||||||||||||||
and financing obligations | 14,123 | 13,663 | 13,181 | 9,359 | 10,405 | ||||||||||||||||||||
Total shareholders’ equity – | |||||||||||||||||||||||||
The Kroger Co. | 6,811 | 5,412 | 5,384 | 4,207 | 3,981 | ||||||||||||||||||||
Cash dividends per common share | 0.395 | 0.340 | 0.308 | 0.248 | 0.215 |
COMMON SHARE PRICE RANGE
2015 | 2014 | |||||||||||
Quarter | High | Low | High | Low | ||||||||
1st | $ | 38.87 | $ | 34.05 | $ | 23.95 | $ | 17.57 | ||||
2nd | $ | 38.65 | $ | 37.09 | $ | 25.75 | $ | 23.25 | ||||
3rd | $ | 38.73 | $ | 27.32 | $ | 29.08 | $ | 24.99 | ||||
4th | $ | 42.75 | $ | 36.00 | $ | 35.03 | $ | 28.64 | ||||
Main trading market: New York Stock Exchange (Symbol KR) Number of shareholders of record at fiscal year-end 2015: 29,102 Number of shareholders of record at March 23, 2016: 28,959 |
During 2015, we paid two quarterly cash dividends of $0.0925 per share and two quarterly cash dividends of $0.105 per share. During 2014, we paid three quarterly cash dividends of $0.0825 per share and one quarterly cash dividend of $0.0925 per share. On March 1, 2016, we paid a quarterly cash dividend of $0.105 per share. On March 10, 2016, we announced that our Board of Directors have declared a quarterly cash dividend of $0.105 per share, payable on June 1, 2016,charge, upon written request by any shareholder to shareholders of record at the close of business on May 13, 2016. We currently expect to continue to pay comparable cash dividends on a quarterly basis depending on our earnings and other factors.
A-2
PERFORMANCE GRAPH
Set forth below is a line graph comparing the five-year cumulative total shareholder return on our common shares, based on the market price of the common shares and assuming reinvestment of dividends, with the cumulative total return of companies in the Standard & Poor’s 500 Stock Index and a peer group composed of food and drug companies.
COMPARISON OF CUMULATIVE FIVE-YEAR TOTAL RETURN*Among The Kroger Co., the S&P 500, and Peer Group**
Base | INDEXED RETURNS | |||||||||||
Period | Years Ending | |||||||||||
Company Name/Index | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | ||||||
The Kroger Co. | 100 | 116.26 | 136.28 | 179.49 | 348.32 | 395.78 | ||||||
S&P 500 Index | 100 | 105.33 | 123.87 | 149.02 | 170.22 | 169.08 | ||||||
Peer Group | 100 | 105.11 | 126.94 | 143.63 | 173.96 | 161.13 |
The foregoing Performance Graph will not be deemed incorporated by reference into any other filing, absent an express reference thereto.
A-3
ISSUER PURCHASESOF EQUITY SECURITIES
Period(1) | Total Number of Shares Purchased(2) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(4) (in millions) | |||||||||||
First period - four weeks | |||||||||||||||
November 8, 2015 to December 5, 2015 | 94,717 | $ | 37.89 | 74,819 | $500 | ||||||||||
Second period - four weeks | |||||||||||||||
December 6, 2015 to January 2, 2016 | 906,648 | $ | 41.47 | 831,783 | $500 | ||||||||||
Third period – four weeks | |||||||||||||||
January 3, 2016 to January 30, 2016 | 213,721 | $ | 39.73 | 169,598 | $500 | ||||||||||
Total | 1,215,086 | $ | 40.88 | 1,076,200 | $500 |
BUSINESS
The Kroger Co. (the “Company” or “Kroger”) was founded in 1883 and incorporated in 1902. As of January 30, 2016, we are one of the largest retailers in the world based on annual sales. We also manufacture and process some of the food for sale in our supermarkets. Our principal executive offices are locatedSecretary at 1014 Vine Street, Cincinnati, Ohio 45202 and ouror via telephone number is (513) 762-4000. We maintain a web site (www.thekrogerco.com) that includes additional information about the Company. We make available through our web site, freeat 513-762-4000. Copies of charge, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and our interactive data files, including amendments. These forms are available as soon as reasonably practicable after we have filed them with, or furnished them electronicallyall exhibits to the SEC.
A-4
Our revenues are predominately earned and cash is generated as consumer products are sold to customers in our stores and fuel centers. We earn income predominantly by selling products at price levels that produce revenues in excess of the costs to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. Our fiscal year ends on the Saturday closest to January 31. All references to 2015, 2014 and 2013 are to the fiscal years ended January 30, 2016, January 31, 2015 and February 1, 2014, respectively, unless specifically indicated otherwise.
EMPLOYEES
As of January 30, 2016, Kroger employed approximately 431,000 full- and part-time employees. A majority of our employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several different international unions. There are approximately 350 such agreements, usually with terms of three to five years.
STORES
As of January 30, 2016, Kroger operated, either directly or through its subsidiaries, 2,778 retail food stores under a variety of local banner names, 1,387 of which had fuel centers. Approximately 42% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. Our current strategy emphasizes self-development and ownership of store real estate. Our stores operate under a variety of banners that have strong local ties and brand recognition. Supermarkets are generally operated under one of the following formats: combination food and drug stores (“combo stores”); multi-department stores; marketplace stores; or price impact warehouses.
The combo store is the primary food store format. They typically draw customers from a 2 – 2½ mile radius. We believe this format is successful because the stores are large enough to offer the specialty departments that customers’ desire for one-stop shopping, including natural food and organic sections, pharmacies, general merchandise, pet centers and high-quality perishables such as fresh seafood and organic produce.
Multi-department stores are significantly larger in size than combo stores. In addition to the departments offered at a typical combo store, multi-department stores sell a wide selection of general merchandise items such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys and fine jewelry.
Marketplace stores are smaller in size than multi-department stores. They offer full-service grocery, pharmacy and health and beauty care departments as well as an expanded perishable offering and general merchandise area that includes apparel, home goods and toys.
Price impact warehouse stores offer a “no-frills, low cost” warehouse format and feature everyday low prices plus promotions for a wide selection of grocery and health and beauty care items. Quality meat, dairy, baked goods and fresh produce items provide a competitive advantage. The average size of a price impact warehouse store is similar to that of a combo store.
In addition to the supermarkets, as of January 30, 2016, we operated, through subsidiaries, 784 convenience stores, 323 fine jewelry stores and an online retailer. All 121 of our fine jewelry stores located in malls are operated in leased locations. In addition, 78 convenience stores were operated by franchisees through franchise agreements. Approximately 54% of the convenience stores operated by subsidiaries were operated in Company-owned facilities. The convenience stores offer a limited assortment of staple food items and general merchandise and, in most cases, sell gasoline.
SEGMENTS
We operate retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States. Our retail operations, which represent over 99% of our consolidated sales and earnings before interest, taxes and depreciation and amortization (“EBITDA”), is our only reportable segment. Our retail operating divisions have been aggregated into one reportable segment due to the operating divisions having similar economic characteristics with similar long-term financial performance. In addition, our operating divisions offer customers similar products, have
A-5
similar distribution methods, operate in similar regulatory environments, purchase the majority of the merchandise for retail sale from similar (and in many cases identical) vendors on a coordinated basis from a centralized location, serve similar types of customers, and are allocated capital from a centralized location. Our operating divisions reflect the manner in which the business is managed and how our Chief Executive Officer, who acts as our chief operating decision maker, assesses performance internally. All of our operations are domestic. Revenues, profits and losses and total assets are shown in our Consolidated Financial Statements set forth beginning on page A-29 below.
MERCHANDISING AND MANUFACTURING
Corporate brand products play an important role in our merchandising strategy. Our supermarkets, on average, stock over 14,000 private label items. Our corporate brand products are primarily produced and sold in three “tiers.” Private Selection® is the premium quality brand designed to be a unique item in a category or to meet or beat the “gourmet” or “upscale” brands. The “banner brand” (Kroger®, Ralphs®, Fred Meyer®, King Soopers®, etc.), which represents the majority of our private label items, is designed to satisfy customers with quality products. Before we will carry a “banner brand” product we must be satisfied that the product quality meets our customers’ expectations in taste and efficacy, and we guarantee it. P$$T…®, Check This Out… and Heritage Farm™ are the three value brands, designed to deliver good quality at a very affordable price. In addition, we continue to grow our other brands, including Simple Truth® and Simple Truth Organic®. Both Simple Truth and Simple Truth Organic are Free From 101 artificial preservatives and ingredients that customers have told us they do not want in their food, and the Simple Truth Organic products are USDA certified organic.
Approximately 40% of the corporate brand units sold in our supermarkets are produced in our food production plants; the remaining corporate brand items are produced to our strict specifications by outside manufacturers. We perform a “make or buy” analysis on corporate brand products and decisions are based upon a comparison of market-based transfer prices versus open market purchases. As of January 30, 2016, we operated 38 food production plants. These plants consisted of 17 dairies, ten deli or bakery plants, five grocery product plants, two beverage plants, two meat plants and two cheese plants.
SEASONALITY
The majority of our revenues are generally not seasonal in nature. However, revenues tend to be higher during the major holidays throughout the year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The disclosure regarding executive officers is set forth in Item 10 of the Company’s Annual Report on Form 10-K for fiscal year 2015 under the heading “Executive Officers of the Company,” and is incorporated herein by reference.
COMPETITIVE ENVIRONMENT
For the disclosure related to our competitive environment, see Item 1A of the Company’s Annual Report on Form 10-K for fiscal year 2015 under the heading “Competitive Environment.”
A-6
Management’s Discussion and Analysis ofFinancial Condition and Results of Operations
OUR BUSINESS
The Kroger Co. was founded in 1883 and incorporated in 1902. Kroger is one of the nation’s largest retailers, as measured by revenue, operating 2,778 supermarket and multi-department stores underare available upon a variety of local banner names in 35 states and the District of Columbia. Of these stores, 1,387 have fuel centers. We also operate 784 convenience stores, either directly or through franchisees, 323 fine jewelry stores and an online retailer.
We operate 38 food production plants, primarily bakeries and dairies, which supply approximately 40% of the corporate brand units sold in our supermarkets.
Our revenues are earned and cash is generated as consumer products are sold to customers in our stores. We earn income predominately by selling products at price levels that produce revenues in excess of the costs we incur to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. Our retail operations, which represent over 99% of our consolidated sales and EBITDA, is our only reportable segment.
On December 18, 2015, we closed our merger with Roundy’s by purchasing 100% of the Roundy’s outstanding common stock for $3.60 per share and assuming Roundy’s outstanding debt, for a purchase price of $866 million. Roundy’s is included in our ending Consolidated Balance Sheets for 2015 and in our Consolidated Statements of Operations for the last six weeks of 2015. Certain year-over-year comparisons will be affected as a result. See Note 2 to the Consolidated Financial Statements for more information related to our merger with Roundy’s.
On August 18, 2014, we closed our merger with Vitacost.com by purchasing 100% of the Vitacost. com outstanding common stock for $8.00 per share or $287 million. Vitacost.com is included in our ending Consolidated Balance Sheets and Consolidated Statements of Operations for 2014 and 2015. See Note 2 to the Consolidated Financial Statements for more information related to our merger with Vitacost.com.
On January 28, 2014, we closed our merger with Harris Teeter by purchasing 100% of the Harris Teeter outstanding common stock for approximately $2.4 billion. Harris Teeter is included in our ending Consolidated Balance Sheets for 2014 and 2015 and in our Consolidated Statements of Operations for 2014 and 2015. Due to the timing of the merger closing late in fiscal year 2013, its results of operations were not material to our consolidated results of operations for 2013. Certain year-over-year comparisons will be affected as a result. See Note 2 to the Consolidated Financial Statements for more information related to our merger with Harris Teeter.
OUR 2015 PERFORMANCE
We achieved outstanding results in 2015. Our business strategy continues to resonate with a full range of customers and our results reflect the balance we seek to achieve across our business including positive identical supermarket sales growth, increases in loyal household count, and good cost control, as well as growth in net earnings and net earnings per diluted share. Our 2015 net earnings were $2.0 billion or $2.06 per diluted share, compared to $1.7 billion, or $1.72 per diluted share for 2014. All share and per share amounts presented are reflective of the two-for-one stock split that began trading at the split adjusted price on July 14, 2015.
Our net earnings for 2015 include a $110 million expense to operating, general, and administrative (“OG&A”) for certain contributions to the United Food and Commercial Workers International Union (“UFCW”) Consolidated Pension Plan (“2015 UFCW Contributions”) made during the third and fourth quarters of 2015. In addition, our net earnings for 2015 include a lower last-in, first-out (“LIFO”) charge compared to 2014. Net earnings for 2014 include a net $39 million after-tax charge for an $87 million ($56 million after-tax) charge to OG&A due to the commitments and withdrawal liabilities arising from restructuring of certain multi-employer obligations (“2014 Multi-Employer Pension Plan Obligation”) to help stabilize associates’ future pension benefits, offset partially by the benefits from certain tax items of $17 million (“2014 Adjusted
A-7
Items”). In addition, our net earnings for 2014 include unusually high fuel margins, partially offset by a LIFO charge that was significantly higher than 2013 and $140 million in contributions charged to OG&A expenses for the UFCW Consolidated Pension Plan ($55 million) and The Kroger Co. Foundation ($85 million) (“2014 Contributions”). The 2015 and 2014 contributions to the UFCW Consolidated Pension Plan was to further fund the plan. The $85 million contribution, in 2014, to The Kroger Co. Foundation will enable it to continue to support causes such as hunger relief, breast cancer awareness, the military and their families and local community organizations. Fuel margin per gallon was $0.19 in 2014, compared to $0.14 in 2013. Our net earnings for 2013 include a net benefit of $23 million, which includes benefits from certain tax items of $40 million, offset partially by costs of $11 million in interest and $16 million in OG&A expenses ($17 million after-tax) related to our merger with Harris Teeter (“2013 Adjusted Items”).
Our 2015 net earnings were $2.0 billion or $2.06 per diluted share, compared to $1.7 billion, or $1.72 per diluted share for 2014. Net earnings for 2015 totaled $2.0 billion, or $2.06 per diluted share, compared to net earnings in 2014 of $1.8 billion, or $1.76 per diluted share, excluding the 2014 Adjusted Items. We believe adjusted net earnings and adjusted net earnings per diluted share present a more accurate year-over-year comparison of our financial results because the 2014 Adjusted Items were not the result of our normal operations. Our net earnings per diluted share for 2015 represent a 17% increase, compared to 2014 adjusted net earnings per diluted share. Please refer to the “Net Earnings” section of MD&A for more information.
Our identical supermarket sales increased 5.0%, excluding fuel, in 2015, compared to 2014. We have achieved 49 consecutive quarters of positive identical supermarket sales growth, excluding fuel. As we continue to outpace many of our competitors on identical supermarket sales growth, we continue to gain market share. We focus on identical supermarket sales growth, excluding fuel, as it is a key performance target for our long-term growth strategy.
Increasing market share is an important part of our long-term strategy as it best reflects how our products and services resonate with customers. Market share growth allows us to spread the fixed costs in our business over a wider revenue base. Our fundamental operating philosophy is to maintain and increase market share by offering customers good prices and superior products and service. Based on Nielsen POS+ data, our overall market share of the products we sell in markets in which we operate increased by approximately 40 basis points in 2015. This data also indicates that our market share increased in 17 markets and declined in one. These market share results reflect our long-term strategy of market share growth.
RESULTS OF OPERATIONS
The following discussion summarizes our operating results for 2015 compared to 2014 and for 2014 compared to 2013. Comparability is affected by income and expense items that fluctuated significantly between and among the periods, our merger with Roundy’s in late 2015 and our merger with Harris Teeter in late 2013. All share and per share amounts presented below are reflective of the two-for-one stock split that began trading at the split adjusted price on July 14, 2015.
Management believes adjusted net earnings (and adjusted net earnings per diluted share) are useful metrics to investors and analysts because they more accurately reflect our day-to-day business operations than do the generally accepted accounting principle (“GAAP”) measures of net earnings and net earnings per diluted share. Adjusted net earnings (and adjusted net earnings per diluted share) are non-generally accepted accounting principle (“non-GAAP”) financial measures and should not be considered alternatives to net earnings (and net earnings per diluted share) or any other GAAP measure of performance. Adjusted net earnings (and adjusted net earnings per diluted share) should not be viewed in isolation or considered substitutes for our financial results as reported in accordance with GAAP. Management uses adjusted net earnings (and adjusted net earnings per diluted share) in evaluating our results of operations as it believes these measures are more meaningful indicators of operating performance since, as adjusted, those earnings relate more directly to our day-to-day operations. Management also uses adjusted net earnings (and adjusted net earnings per diluted share) as a performance metric for management incentive programs, and to measure our progress against internal budgets and targets.
A-8
Net Earnings
Net earnings totaled $2.0 billion in 2015, $1.7 billion in 2014 and $1.5 billion in 2013. Net earnings improved in 2015, compared to net earnings in 2014, due to an increase in operating profit, partially offset by an increase in income tax expense. Operating profit increased in 2015, compared to 2014, primarily due to an increase in first-in, first-out (“FIFO”) non-fuel operating profit, lower charges for total contributions to The Kroger Co. Foundation, UFCW Consolidated Pension Plan, the charge related to the 2014 Multi-Employer Pension Plan Obligation and a lower LIFO charge which was $28 million (pre-tax), compared to a LIFO charge of $147 million (pre-tax) in 2014, partially offset by a decrease in fuel operating profit and continued investments in lower prices for our customers. The decrease in fuel operating profit was primarily due to a decrease in fuel margin per gallon to $0.17 in 2015, compared to $0.19 in 2014, partially offset by an increase in fuel gallons sold. Continued investments in lower prices for our customers includes our pharmacy department, which experienced high levels of inflation that were not fully passed on to the customer in 2015. Net earnings improved in 2014, compared to net earnings in 2013, due to an increase in operating profit, partially offset by increases in interest and income tax expense. Operating profit increased in 2014, compared to 2013, primarily due to an increase in FIFO non-fuel operating profit, excluding Harris Teeter, the effect of our merger with Harris Teeter and an increase in fuel operating profit, partially offset by continued investments in lower prices for our customers, the 2014 Contributions, the charge related to the 2014 Multi-Employer Pension Plan Obligation and a higher LIFO charge which was $147 million (pre-tax), compared to a LIFO charge of $52 million (pre-tax) in 2013.
The net earnings for 2015 do not include any non-GAAP adjustments. The net earnings for 2014 include a net charge of $39 million, after tax, related to the 2014 Adjusted Items. The net earnings for 2013 include a net benefit of $23 million, after tax, related to the 2013 Adjusted Items. Excluding these benefits and charges for Adjusted Items for 2014 and 2013, adjusted net earnings were $2.0 billion in 2015, $1.8 billion in 2014 and $1.5 billion in 2013. 2015 net earnings improved, compared to adjusted net earnings in 2014, due to an increase in FIFO non-fuel operating profit, lower charges for total contributions to The Kroger Co. Foundation and UFCW Consolidated Pension Plan and a lower LIFO charge which was $28 million (pre-tax), compared to a LIFO charge of $147 million (pre-tax) in 2014, partially offset by continued investments in lower prices for our customers, a decrease in fuel operating profit and an increase in income tax expense. Continued investments in lower prices for our customers includes our pharmacy department, which experienced high levels of inflation that were not fully passed on to the customer in 2015. 2014 adjusted net earnings improved, compared to adjusted net earnings in 2013, due to an increase in FIFO non-fuel operating profit, excluding Harris Teeter, the effect of our merger with Harris Teeter and an increase in fuel operating profit, partially offset by continued investments in lower prices for our customers, the 2014 Contributions, increases in interest and income tax expense and a higher LIFO charge which was $147 million (pre-tax), compared to a LIFO charge of $52 million (pre-tax) in 2013.
Net earnings per diluted share totaled $2.06 in 2015, $1.72 in 2014 and $1.45 in 2013. Net earnings per diluted share in 2015, compared to 2014, increased primarily due to fewer shares outstanding as a result of the repurchase of Kroger common shares and an increase in net earnings. Net earnings per diluted share in 2014, compared to 2013, increased primarily due to fewer shares outstanding as a result of the repurchase of Kroger common shares and an increase in net earnings.
There were no adjustment items in 2015, but excluding the 2014 and 2013 Adjusted Items, adjusted net earnings per diluted share totaled $1.76 in 2014 and $1.43 in 2013. Net earnings per diluted share in 2015, compared to adjusted net earnings per diluted share in 2014, increased primarily due to fewer shares outstanding as a result of the repurchase of Kroger common shares and an increase in adjusted net earnings. Adjusted net earnings per diluted share in 2014, compared to adjusted net earnings per diluted share in 2013, increased primarily due to fewer shares outstanding as a result of the repurchase of Kroger common shares and an increase in adjusted net earnings.
A-9
The following table provides a reconciliation of net earnings attributable to The Kroger Co. to net earnings attributable to The Kroger Co. excluding Adjusted Items for 2014 and 2013 and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to the net earnings attributable to The Kroger Co. per diluted common share excluding Adjusted Items for 2014 and 2013. In 2015, we did not have any adjustment items that affect net earnings or net earnings per diluted share.
Net Earnings per Diluted Share excluding the Adjusted Items(in millions, except per share amounts)
2015 | 2014 | 2013 | ||||||||
Net earnings attributable to The Kroger Co. | $ | 2,039 | $ | 1,728 | $ | 1,519 | ||||
2014 Adjusted Items | — | 39 | — | |||||||
2013 Adjusted Items | — | — | (23 | ) | ||||||
Net earnings attributable to The Kroger Co. excluding the | ||||||||||
adjustment items above | $ | 2,039 | $ | 1,767 | $ | 1,496 | ||||
Net earnings attributable to The Kroger Co. per diluted common share | $ | 2.06 | $ | 1.72 | $ | 1.45 | ||||
2014 Adjusted Items(1) | — | 0.04 | — | |||||||
2013 Adjusted Items(1) | — | — | (0.02 | ) | ||||||
Net earnings attributable to The Kroger Co. per diluted common share | ||||||||||
excluding the adjustment items above | $ | 2.06 | $ | 1.76 | $ | 1.43 | ||||
Average numbers of common shares used in diluted calculation | 980 | 993 | 1,040 |
Sales
Total Sales | |||||||||||||||||||
(in millions) | |||||||||||||||||||
Percentage | Percentage | ||||||||||||||||||
2015 | Increase(2) | 2014 | Increase(3) | 2013 | |||||||||||||||
Total supermarket sales | |||||||||||||||||||
without fuel | $ | 91,310 | 5.8 | % | $ | 86,281 | 12.5 | % | $ | 76,666 | |||||||||
Fuel sales | 14,804 | (21.5 | % | ) | 18,850 | (0.6 | %) | 18,962 | |||||||||||
Other sales(1) | 3,716 | 11.5 | % | 3,334 | 21.4 | % | 2,747 | ||||||||||||
Total sales | $ | 109,830 | 1.3 | % | $ | 108,465 | 10.3 | % | $ | 98,375 |
Total sales increased in 2015, compared to 2014, by 1.3%. This increase in 2015 total sales, compared to 2014, was primarily due to an increase in identical supermarket sales, excluding fuel, of 5.0%. Total sales also increased due to the inclusion of Roundy’s sales, due to our merger, for the period of December 18, 2015 to January 30, 2016. Identical supermarket sales, excluding fuel, for 2015, compared to 2014, increased primarily due to an increase in the number of households shopping with us, an increase in visits per household, changes in product mix and product cost inflation. Total fuel sales decreased in 2015, compared to 2014, primarily due to a 26.7% decrease in the average retail fuel price, partially offset by an increase in fuel gallons sold of 7.1%.
Total sales increased in 2014, compared to 2013, by 10.3%. This increase in 2014 total sales, compared to 2013, was primarily due to our merger with Harris Teeter, which closed on January 28, 2014, and an increase in identical supermarket sales, excluding fuel, of 5.2%. Identical supermarket
A-10
sales, excluding fuel for 2014, compared to 2013, increased primarily due to an increase in the number of households shopping with us, an increase in visits per household and product cost inflation. Total fuel sales decreased in 2014, compared to 2013, primarily due to a 6.8% decrease in the average retail fuel price, partially offset by an increase in fuel gallons sold of 6.6%.
We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Although identical supermarket sales is a relatively standard term, numerous methods exist for calculating identical supermarket sales growth. As a result, the method used by our management to calculate identical supermarket sales may differ from methods other companies use to calculate identical supermarket sales. We urge you to understand the methods used by other companies to calculate identical supermarket sales before comparing our identical supermarket sales to those of other such companies. Fuel discounts received at our fuel centers and earned based on in-store purchases are included in all of the supermarket identical sales results calculations illustrated below and reduce our identical supermarket sales results. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Identical supermarket sales include sales from all departments at identical Fred Meyer multi-department stores and include Roundy’s sales for the last six weeks of fiscal 2015 for stores that are identical as if they were part of the Company in the prior year. We calculate annualized identical supermarket sales by adding together four quarters of identical supermarket sales. Our identical supermarket sales results are summarized in the table below.
Identical Supermarket Sales(dollars in millions)
2015 | 2014 | |||||||
Including supermarket fuel centers | $ | 98,916 | $ | 97,813 | ||||
Excluding supermarket fuel centers | $ | 87,553 | $ | 83,349 | ||||
Including supermarket fuel centers | 1.1 | % | 4.2 | % | ||||
Excluding supermarket fuel centers | 5.0 | % | 5.2 | % |
Gross Margin and FIFO Gross Margin
We calculate gross margin as sales less merchandise costs, including advertising, warehousing, and transportation expenses. Merchandise costs exclude depreciation and rent expenses. Our gross margin rates, as a percentage of sales, were 22.16% in 2015, 21.16% in 2014 and 20.57% in 2013. The increase in 2015, compared to 2014, resulted primarily from a decrease in retail fuel sales and reductions in transportation costs and a decrease in our LIFO charge, as a percentage of sales, partially offset by continued investments in lower prices for our customers and increased shrink costs, as a percentage of sales. The increase in 2014, compared to 2013, resulted primarily from the effect of our merger with Harris Teeter, an increase in fuel gross margin rate and a reduction in warehouse and transportation costs, as a percentage of sales, partially offset by continued investments in lower prices for our customers and an increase in our LIFO charge, as a percentage of sales. The merger with Harris Teeter, which closed late in fiscal year 2013, had a positive effect on our gross margin rate in 2014 since Harris Teeter has a higher gross margin rate as compared to total Company without Harris Teeter. The increase in fuel gross margin rate for 2014, compared to 2013, resulted primarily from an increase in fuel margin per gallon sold of $0.19 in 2014, compared to $0.14 in 2013. Our retail fuel operations lower our gross margin rate, as a percentage of sales, due to the very low gross margin on retail fuel sales as compared to non-fuel sales. A lower growth rate in retail fuel sales, as compared to the growth rate for the total Company, increases the gross margin rates, as a percentage of sales, when compared to the prior year.
We calculate FIFO gross margin as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the LIFO charge. Merchandise costs exclude depreciation and rent expenses. Our LIFO charge was $28 million in 2015, $147 million in 2014 and $52 million in 2013. FIFO gross margin is a non-GAAP financial measure and should not be considered as an alternative to gross margin or any other GAAP measure of performance. FIFO gross margin should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance
A-11
with GAAP. FIFO gross margin is an important measure used by management to evaluate merchandising and operational effectiveness. Management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness.
Our FIFO gross margin rates, as a percentage of sales, were 22.18% in 2015, 21.30% in 2014 and 20.62% in 2013. Our retail fuel operations lower our FIFO gross margin rate, as a percentage of sales, due to the very low FIFO gross margin rate on retail fuel as compared to non-fuel sales. Excluding the effect of retail fuel operations, our FIFO gross margin rate decreased four basis points in 2015, as a percentage of sales, compared to 2014. The decrease in FIFO gross margin rates, excluding retail fuel, in 2015, compared to 2014, resulted primarily from continued investments in lower prices for our customers and increased shrink costs, partially offset by a reduction in transportation costs, as a percentage of sales. Excluding the effect of retail fuel, our FIFO gross margin rate decreased three basis points in 2014, as a percentage of sales, compared to 2013. The decrease in FIFO gross margin rates, excluding retail fuel, in 2014, compared to 2013, resulted primarily from continued investments in lower prices for our customers, offset partially by the effect of our merger with Harris Teeter and a reduction of warehouse and transportation costs, as a percentage of sales.
LIFO Charge
The LIFO charge was $28 million in 2015, $147 million in 2014 and $52 million in 2013. In 2015, we experienced lower product cost inflation, compared to 2014, which resulted in a lower LIFO charge. In 2015, our LIFO charge primarily resulted from annualized product cost inflation related to pharmacy, and was partially offset by annualized product cost deflation related to meat and dairy. In 2014, we experienced higher product cost inflation, compared to 2013, which resulted in a higher LIFO charge. In 2014, our LIFO charge primarily resulted from annualized product cost inflation related to pharmacy, grocery, deli, meat and seafood. In 2013, our LIFO charge resulted primarily from an annualized product cost inflation related to meat, seafood and pharmacy.
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as wages, health care benefits and 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 16.34% in 2015, 15.82% in 2014 and 15.45% in 2013. The increase in OG&A expenses, as a percentage of sales, in 2015, compared to 2014, resulted primarily from a decrease in retail fuel sales, increases in EMV chargebacks, company sponsored pension, healthcare and incentive plan costs, as a percentage of sales, partially offset by increased supermarket sales, the 2014 Multi-Employer Pension Plan Obligation, lower charges for total contributions to The Kroger Foundation and UFCW Consolidated Pension Plan, productivity improvements and effective cost controls at the store level. The increase in OG&A expenses, as a percentage of sales, in 2014, compared to 2013, resulted primarily from the 2014 Contributions, the 2014 Multi-Employer Pension Plan Obligation, the effect of fuel, the effect of our merger with Harris Teeter and increases in credit card fees and incentive plan costs, as a percentage of sales, partially offset by increased supermarket sales growth, productivity improvements and effective cost controls at the store level. Retail fuel sales lower our OG&A rate due to the very low OG&A rate, as a percentage of sales, of retail fuel sales compared to non-fuel sales. The merger with Harris Teeter, which closed late in fiscal year 2013, increased our OG&A rate, as a percentage of sales, since Harris Teeter has a higher OG&A rate as compared to the total Company without Harris Teeter.
Our retail fuel operations reduce our overall OG&A rate, as a percentage of sales, due to the very low OG&A rate on retail fuel sales as compared to non-fuel sales. OG&A expenses, as a percentage of sales excluding fuel, the 2015 UFCW Contributions, the 2014 Contributions and the 2014 Multi-Employer Pension Plan Obligation, decreased 9 basis points, compared to 2014. The decrease in our adjusted OG&A rate in 2015, compared to 2014, resulted primarily from increased supermarket sales, productivity improvements and effective cost controls at the store level, partially offset by increases in
A-12
EMV chargebacks, company sponsored pension, healthcare and incentive plan costs, as a percentage of sales. OG&A expenses, as a percentage of sales excluding fuel, the 2014 Contributions and the 2014 Multi-Employer Pension Plan Obligation, decreased 19 basis points in 2014, compared to 2013, adjusted for the 2013 Adjusted Items. The decrease in our adjusted OG&A rate in 2014, compared to 2013, resulted primarily from increased supermarket sales growth, productivity improvements and effective cost controls at the store level, offset partially by the effect of our merger with Harris Teeter and increases in credit card fees and incentive plan costs, as a percentage of sales.
Rent Expense
Rent expense was $723 million in 2015, compared to $707 million in 2014 and $613 million in 2013. Rent expense, as a percentage of sales, was 0.66% in 2015, compared to 0.65% in 2014 and 0.62% in 2013. Rent expense increased in 2015, compared to 2014, due to the effect of our merger with Roundy’s, partially offset by our continued emphasis on owning rather than leasing, whenever possible. Rent expense, as a percentage of sales, in 2015 was consistent with 2014 due to the effect of our merger with Roundy’s, partially offset by our continued emphasis to own rather than lease, whenever possible, and the benefit of increased sales. The increase in rent expense, as a percentage of sales, in 2014, compared to 2013, is due to the effect of our merger with Harris Teeter, partially offset by our continued emphasis to own rather than lease, whenever possible, and the benefit of increased sales. The merger with Harris Teeter, which closed late in fiscal year 2013, increased rent expense, as a percentage of sales, since Harris Teeter has a higher rent expense rate compared to the total Company without Harris Teeter.
Depreciation and Amortization Expense
Depreciation and amortization expense was $2.1 billion, compared to $1.9 billion in 2014 and $1.7 billion in 2013. Depreciation and amortization expense, as a percentage of sales, was 1.90% in 2015, 1.80% in 2014 and 1.73% in 2013. The increase in depreciation and amortization expense for 2015, compared to 2014, was the result of additional depreciation due to our merger with Roundy’s and on capital investments, including mergers and lease buyouts, of $3.4 billion, excluding Roundy’s. The increase in depreciation and amortization expense, as a percentage of sales, from 2015, compared to 2014, is primarily due to the additional depreciation resulting from our increased capital investments, including mergers and lease buyouts in 2015, compared to 2014. The increase in depreciation and amortization expense for 2014, compared to 2013, in total dollars, was due to the effect of our merger with Harris Teeter and our increased spending in capital investments, including mergers and lease buyouts, of $3.1 billion in 2014. The increase in depreciation and amortization expense, as a percentage of sales, from 2014, compared to 2013, is primarily due to the effect of our merger with Harris Teeter and our increased spending in capital investments, partially offset by increased supermarket sales. The merger with Harris Teeter, which closed late in fiscal year 2013, increased our depreciation and amortization expense, as a percentage of sales, since Harris Teeter has a higher depreciation expense rate as compared to the total Company without Harris Teeter.
Operating Profit and Adjusted FIFO Operating Profit
Operating profit was $3.6 billion in 2015, $3.1 billion in 2014 and $2.7 billion in 2013. Operating profit, as a percentage of sales, was 3.26% in 2015, 2.89% in 2014 and 2.77% in 2013. Operating profit, as a percentage of sales, increased 37 basis points in 2015, compared to 2014, primarily from increased supermarket sales, a LIFO charge that was significantly lower in 2015, lower charges for total contributions to The Kroger Co. Foundation and UFCW Consolidated Pension Plan, the 2014 Multi-Employer Pension Obligation, productivity improvements, effective cost controls at the store level, and reductions in transportation costs, as a percentage of sales, partially offset by the effect of our merger with Roundy’s, continued investments in lower prices for our customers, a decrease in operating profit from our fuel operations, an increase in depreciation and amortization expense and increases in EMV chargebacks, company sponsored pension, healthcare, incentive plan and shrink costs, as a percentage of sales. The decrease in operating profit from our fuel operations for 2015, compared to 2014, resulted primarily from a decrease in the average margin per gallon of fuel sold, partially offset by an increase in
A-13
fuel gallons sold. Operating profit, as a percentage of sales, increased 12 basis points in 2014, compared to 2013, primarily from the effect of our merger with Harris Teeter, an increase in fuel gross margin rate and a reduction in warehouse and transportation costs, rent and depreciation and amortization expenses, as a percentage of sales, partially offset by continued investments in lower prices for our customers and an increase in the LIFO charge, as a percentage of sales.
We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is a non-GAAP financial measure and should not be considered as an alternative to operating profit or any other GAAP measure of performance. FIFO operating profit should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. FIFO operating profit is an important measure used by management to evaluate operational effectiveness. Management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness. Since fuel discounts are earned based on in-store purchases, fuel operating profit does not include fuel discounts, which are allocated to our in-store supermarket location departments. We also derive OG&A, rent and depreciation and amortization expenses through the use of estimated allocations in the calculation of fuel operating profit.
FIFO operating profit was $3.6 billion in 2015, $3.3 billion in 2014 and $2.8 billion in 2013. FIFO operating profit, as a percentage of sales, was 3.28% in 2015, 3.03% in 2014 and 2.82% in 2013. FIFO operating profit, excluding the 2015 UFCW Contributions, the 2014 Contributions, the 2014 Multi-Employer Pension Plan Obligation and 2013 Adjusted Items, was $3.7 billion in 2015, $3.5 billion in 2014 and $2.8 billion in 2013. FIFO operating profit, as a percentage of sales excluding the 2015 UFCW Contributions, the 2014 Contributions, the 2014 Multi-Employer Pension Plan Obligation and 2013 Adjusted Items, was 3.38% in 2015, 3.24% in 2014 and 2.84% in 2013.
Retail fuel sales lower our overall FIFO operating profit rate due to the very low FIFO operating profit rate, as a percentage of sales, of retail fuel sales compared to non-fuel sales. FIFO operating profit, as a percentage of sales excluding fuel, the 2015 UFCW Contributions, the 2014 Contributions and the 2014 Multi-Employer Pension Plan Obligation, increased 5 basis points in 2015, compared to 2014. The increase in our adjusted FIFO operating profit rate in 2015, compared to 2014, was primarily due to increased supermarket sales, productivity improvements, effective cost controls at the store level and reductions in transportation costs, as a percentage of sales, partially offset by continued investments in lower prices for our customers, the effect of our merger with Roundy’s, an increase in depreciation and amortization expense and increases in EMV chargebacks, company sponsored pension, healthcare, incentive plan and shrink costs, as a percentage of sales. Excluding the effects of our merger with Roundy’s, FIFO operating profit increased 8 basis points in 2015, compared to 2014. FIFO operating profit, as a percentage of sales, excluding fuel, the 2014 Contributions and the 2014 Multi-Employer Pension Plan Obligation, increased 10 basis points in 2014, compared to 2013, adjusted for the 2013 Adjusted Items. The increase in our adjusted FIFO operating profit rate in 2014, compared to 2013, was primarily due to the effect of our merger with Harris Teeter and a reduction in warehouse and transportation costs, improvements in OG&A, rent and depreciation and amortization expense, as a percentage of sales, partially offset by continued investments in lower prices for our customers.
Interest Expense
Interest expense totaled $482 million in 2015, $488 million in 2014 and $443 million in 2013. The decrease in interest expense in 2015, compared to 2014, resulted primarily due to the timing of debt principal payments and debt issuances, partially offset by an increase in interest expense associated with our commercial paper program. The increase in interest expense in 2014, compared to 2013, resulted primarily from an increase in net total debt, primarily due to financing the merger with Harris Teeter and repurchases of our outstanding common shares.
Income Taxes
Our effective income tax rate was 33.8% in 2015, 34.1% in 2014 and 32.9% in 2013. The 2015, 2014 and 2013 tax rate differed from the federal statutory rate primarily as a result of the utilization of tax credits, the Domestic Manufacturing Deduction and other changes, partially offset by the effect of state income taxes.
A-14
COMMON SHARE REPURCHASE PROGRAMS
We maintain share repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act of 1934 and allow for the orderly repurchase of our common shares, from time to time. We made open market purchases of our common shares totaling $500 million in 2015, $1.1 billion in 2014 and $338 million in 2013 under these repurchase programs. In addition to these repurchase programs, we also repurchase common shares to reduce dilution resulting from our employee stock option plans. This program is solely funded by proceeds from stock option exercises, and the tax benefit from these exercises. We repurchased approximately $203 million in 2015, $155 million in 2014 and $271 million in 2013 of our common shares under the stock option program.
The shares repurchased in 2015 were acquired under two separate share repurchase programs. The first is a $500 million repurchase program that was authorized by our Board of Directors on June 26, 2014. The second is a program that uses the cash proceeds from the exercises of stock options by participants in our stock option and long-term incentive plans as well as the associated tax benefits. On June 25, 2015, our Board of Directors approved a new $500 million share repurchase program to replace our prior authorization, which had been exhausted. As of January 30, 2016, we have not repurchased any shares utilizing the June 25, 2015 repurchase program. On March 10, 2016, our Board of Directors approved a new $500 million share repurchase program to supplement the 2015 Repurchase Program, which is expected to be exhausted by the end of the second quarter of 2016.
CAPITAL INVESTMENTS
Capital investments, including changes in construction-in-progress payables and excluding mergers and the purchase of leased facilities, totaled $3.3 billion in 2015, $2.8 billion in 2014 and $2.3 billion in 2013. Capital investments for mergers totaled $168 million in 2015, $252 million in 2014 and $2.3 billion in 2013. Payments for mergers of $168 million in 2015, $252 million in 2014 and $2.3 billion in 2013 relate to our mergers with Roundy’s, Vitacost.com and Harris Teeter, respectively. Refer to Note 2 to the Consolidated Financial Statements for more information on the mergers with Roundy’s, Vitacost.com and Harris Teeter. Capital investments for the purchase of leased facilities totaled $35 million in 2015, $135 million in 2014 and $108 million in 2013. The table below shows our supermarket storing activity and our total food store square footage:
Supermarket Storing Activity
2015 | 2014 | 2013 | |||||||
Beginning of year | 2,625 | 2,640 | 2,424 | ||||||
Opened | 31 | 33 | 17 | ||||||
Opened (relocation) | 12 | 13 | 7 | ||||||
Acquired | 159 | — | 227 | ||||||
Closed (operational) | (37 | ) | (48 | ) | (28 | ) | |||
Closed (relocation) | (12 | ) | (13 | ) | (7 | ) | |||
End of year | 2,778 | 2,625 | 2,640 | ||||||
Total food store square footage (in millions) | 173 | 162 | 161 |
RETURN ON INVESTED CAPITAL
We calculate return on invested capital (“ROIC”) by dividing adjusted operating profit for the prior four quarters by the average invested capital. Adjusted operating profit is calculated by excluding certain items included in operating profit, and adding back our LIFO charge, depreciation and amortization and rent to our U.S. GAAP operating profit of the prior four quarters. Average invested capital is calculated as the sum of (i) the average of our total assets, (ii) the average LIFO reserve, (iii) the average accumulated depreciation and amortization and (iv) a rent factor equal to total rent for the last four quarters multiplied by a factor of eight; minus (i) the average taxes receivable, (ii) the average trade accounts payable, (iii) the average accrued salaries and wages and (iv) the average other current liabilities, excluding accrued income taxes. Averages are calculated for ROIC by adding the beginning balance of the first
A-15
quarter and the ending balance of the fourth quarter, of the last four quarters, and dividing by two. We use a factor of eight for our total rent as we believe this is a common factor used by our investors, analysts and rating agencies. ROIC is a non-GAAP financial measure of performance. ROIC should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital. Management believes ROIC is a useful metric to investors and analysts because it measures how effectively we are deploying our assets.
Although ROIC is a relatively standard financial term, numerous methods exist for calculating a company’s ROIC. As a result, the method used by our management to calculate ROIC may differ from methods other companies use to calculate their ROIC. We urge you to understand the methods used by other companies to calculate their ROIC before comparing our ROIC to that of such other companies.
The following table provides a calculation of ROIC for 2015 and 2014. The 2015 calculation of ROIC excludes the financial position, results and merger costs for the Roundy’s transaction:
January 30, | January 31, | |||||||||
2016 | 2015 | |||||||||
Return on Invested Capital | ||||||||||
Numerator | ||||||||||
Operating profit | $ | 3,576 | $ | 3,137 | ||||||
LIFO charge | 28 | 147 | ||||||||
Depreciation and amortization | 2,089 | 1,948 | ||||||||
Rent | 723 | 707 | ||||||||
Adjustments for pension plan agreements | — | 87 | ||||||||
Other | (13 | ) | — | |||||||
Adjusted operating profit | $ | 6,403 | $ | 6,026 | ||||||
Denominator | ||||||||||
Average total assets | $ | 32,197 | $ | 29,860 | ||||||
Average taxes receivable(1) | (206 | ) | (19 | ) | ||||||
Average LIFO reserve | 1,259 | 1,197 | ||||||||
Average accumulated depreciation and amortization | 17,441 | 16,057 | ||||||||
Average trade accounts payable | (5,390 | ) | (4,967 | ) | ||||||
Average accrued salaries and wages | (1,359 | ) | (1,221 | ) | ||||||
Average other current liabilities(2) | (3,054 | ) | (2,780 | ) | ||||||
Adjustment for Roundy’s merger | (714 | ) | — | |||||||
Rent x 8 | 5,784 | 5,656 | ||||||||
Average invested capital | $ | 45,958 | $ | 43,783 | ||||||
Return on Invested Capital | 13.93 | % | 13.76 | % |
A-16
CRITICAL ACCOUNTING POLICIES
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
We believe that the following accounting policies are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.
Self-Insurance Costs
We primarily are self-insured for costs related to workers’ compensation and general liability claims. The liabilities represent our best estimate, using generally accepted actuarial reserving methods, of the ultimate obligations for reported claims plus those incurred but not reported for all claims incurred through January 30, 2016. We establish case reserves for reported claims using case-basis evaluation of the underlying claim data and we update as information becomes known.
For both workers’ compensation and general liability claims, we have purchased stop-loss coverage to limit our exposure to any significant exposure on a per claim basis. We are insured for covered costs in excess of these per claim limits. We account for the liabilities for workers’ compensation claims on a present value basis utilizing a risk-adjusted discount rate. A 25 basis point decrease in our discount rate would increase our liability by approximately $2 million. General liability claims are not discounted.
The assumptions underlying the ultimate costs of existing claim losses aresimilar request, subject to a high degree of unpredictability, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can affect ultimate costs. Our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, and any changes could have a considerable effect on future claim costs and currently recorded liabilities.
Impairments of Long-Lived Assets
We monitor the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a triggering event occurs, we perform an impairment calculation, comparing projected undiscounted cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If we identify impairment for long-lived assets to be held and used, we compare the assets’ current carrying value to the assets’ fair value. Fair value is determined based on market values or discounted future cash flows. We record impairment when the carrying value exceeds fair market value. With respect to owned property and equipment held for disposal, we adjust the value of the property and equipment to reflect recoverable values based on our previous efforts to dispose of similar assets and current economic conditions. We recognize impairment for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. We recorded asset impairments in the normal course of business totaling $46 million in 2015, $37 million in 2014 and $39 million in 2013. We record costs to reduce the carrying value of long-lived assets in the Consolidated Statements of Operations as “Operating, general and administrative” expense.
A-17
The factors that most significantly affect the impairment calculation are our estimates of future cash flows. Our cash flow projections look several years into the future and include assumptions on variables such as inflation, the economy and market competition. Application of alternative assumptions and definitions, such as reviewing long-lived assets for impairment at a different level, could produce significantly different results.
Goodwill
Our goodwill totaled $2.7 billion as of January 30, 2016. We review goodwill for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our operating divisions and variable interest entities (collectively, “reporting units”) that have goodwill balances. Fair value is determined using a multiple of earnings, or discounted projected future cash flows, and we compare fair value to the carrying value of a reporting unit for purposes of identifying potential impairment. We base projected future cash flows on management’s knowledge of the current operating environment and expectations for the future. If we identify potential for impairment, we measure the fair value of a reporting unit against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting unit’s goodwill. We recognize goodwill impairment for any excess of the carrying value of the reporting unit’s goodwill over the implied fair value.
In 2015, goodwill increased $420 million primarily due to our merger with Roundy’s. In 2014, goodwill increased $169 million primarily due to our merger with Vitacost.com. For additional information related to the allocation of the purchase price for Roundy’s and Vitacost.com, refer to Note 2 to the Consolidated Financial Statements.
The annual evaluation of goodwill performed for our other reporting units during the fourth quarter of 2015, 2014 and 2013 did not result in impairment. Based on current and future expected cash flows, we believe goodwill impairments are not reasonably likely. A 10% reduction in fair value of our reporting units would not indicate a potential for impairment of our goodwill balance.
For additional information relating to our results of the goodwill impairment reviews performed during 2015, 2014 and 2013 see Note 3 to the Consolidated Financial Statements.
The impairment review requires the extensive use of management judgment and financial estimates. Application of alternative estimates and assumptions, such as reviewing goodwill for impairment at a different level, could produce significantly different results. The cash flow projections embedded in our goodwill impairment reviews can be affected by several factors such as inflation, business valuations in the market, the economy and market competition.
Store Closing Costs
We provide for closed store liabilities on the basis of the present value of the estimated remaining non-cancellable lease payments after the closing date, net of estimated subtenant income. We estimate the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. We usually pay closed store lease liabilities over the lease terms associated with the closed stores, which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and actual exit costs differing from original estimates. We make adjustments for changes in estimates in the period in which the change becomes known. We review store closing liabilities quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs is adjusted to earnings in the proper period.
We estimate subtenant income, future cash flows and asset recovery values based on our experience and knowledge of the market in which the closed store is located, our previous efforts to dispose of similar assets and current economic conditions. The ultimate cost of the disposition of the leases and the related assets is affected by current real estate markets, inflation rates and general economic conditions.
A-18
We reduce owned stores held for disposal to their estimated net realizable value. We account for costs to reduce the carrying values of property, equipment and leasehold improvements in accordance with our policy on impairment of long-lived assets. We classify inventory write-downs in connection with store closings, if any, in “Merchandise costs.” We expense costs to transfer inventory and equipment from closed stores as they are incurred.
Post-Retirement Benefit Plans
We account for our defined benefit pension plans using the recognition and disclosure provisions of GAAP, which require the recognition of the funded status of retirement plans on the Consolidated Balance Sheet. We record, as a component of Accumulated Other Comprehensive Income (“AOCI”), actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized.
The determination of our obligation and expense for Company-sponsored pension plans and other post-retirement benefits is dependent upon our selection of assumptions used by actuaries in calculating those amounts. Those assumptions are described in Note 15 to the Consolidated Financial Statements and include, among others, the discount rate, the expected long-term rate of return on plan assets, mortality and the rate of increases in compensation and health care costs. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and recorded obligation in future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions, including the discount rate used and the expected return on plan assets, may materially affect our pension and other post-retirement obligations and our future expense. Note 15 to the Consolidated Financial Statements discusses the effect of a 1% change in the assumed health care cost trend rate on other post-retirement benefit costs and the related liability.
The objective of our discount rate assumptions was intended to reflect the rates at which the pension benefits could be effectively settled. In making this determination, we take into account the timing and amount of benefits that would be available under the plans. Our methodology for selecting the discount rates was to match the plan’s cash flows to that of a hypothetical bond portfolio whose cash flow from coupons and maturities match the plan’s projected benefit cash flows. The discount rates are the single rates that produce the same present value of cash flows. The selection of the 4.62% and 4.44% discount rates as of year-end 2015 for pension and other benefits, respectively, represents the hypothetical bond portfolio using bonds with an AA or better rating constructed with the assistance of an outside consultant. We utilized a discount rate of 3.87% and 3.74% as of year-end 2014 for pension and other benefits, respectively. A 100 basis point increase in the discount rate would decrease the projected pension benefit obligation as of January 30, 2016, by approximately $438 million.
To determine the expected rate of return on pension plan assets held by Kroger for 2015, we considered current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories. In 2015, our assumed pension plan investment return rate was 7.44%, compared to 7.44% in 2014 and 8.50 in 2013. Our pension plans’ average rate of return was 6.47% for the 10 calendar years ended December 31, 2015, net of all investment management fees and expenses. The value of all investments in our Company-sponsored defined benefit pension plans during the calendar year ending December 31, 2015, net of investment management fees and expenses, decreased 0.80%. For the past 20 years, our average annual rate of return has been 7.99%. Based on the above information and forward looking assumptions for investments made in a manner consistent with our target allocations, we believe a 7.44% rate of return assumption is reasonable for 2015. See Note 15 to the Consolidated Financial Statements for more information on the asset allocations of pension plan assets.
On January 31, 2015, we adopted new mortality tables, including industry-based tables for annuitants, reflecting more current mortality experience and assumptions for future generational mortality improvement in calculating our projected benefit obligations as of January 30, 2016 and January 31, 2015 and our 2015 pension expense. The tables assume an improvement in life expectancy and increased our benefit obligation and future expenses. We used the RP-2000 projected to 2021 mortality table in calculating our 2013 year end pension obligation and 2014 and 2013 pension expense.
A-19
Sensitivity to changes in the major assumptions used in the calculation of Kroger’s pension plan liabilities is illustrated below (in millions).
In 2015, we contributed $5 million to our Company-sponsored defined benefit plans and do not expect to make any contributions to these plans in 2016. In 2014, we did not contribute to our Company-sponsored defined benefit plans and do not expect to make any contributions to this plan in 2015. We did not make a contribution in 2014 and contributed $100 million in 2013 to our Company-sponsored defined benefit pension plans. Among other things, investment performance of plan assets, the interest rates required to be used to calculate the pension obligations, and future changes in legislation, will determine the amounts of contributions.
We contributed and expensed $196 million in 2015, $177 million in 2014 and $148 million in 2013 to employee 401(k) retirement savings accounts. The increase in 2015, compared to 2014, is due to a higher employee savings rate. The increase in 2014, compared to 2013, is due to the effect of our merger with Harris Teeter. The 401(k) retirement savings account plans provide to eligible employees both matching contributions and automatic contributions from the Company based on participant contributions, plan compensation, and length of service.
Multi-Employer Pension Plans
We contribute to various multi-employer pension plans, including the UFCW Consolidated Pension Plan, based on obligations arising from collective bargaining agreements. We are designated as the named fiduciary of the UFCW Consolidated Pension Plan and have sole investment authority over these assets. These multi-employer pension plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.
In 2015, we contributed $190 million to the UFCW Consolidated Pension Plan. We had previously accrued $60 million of the total contributions at January 31, 2015 and recorded expense for the remaining $130 million at the time of payment in 2015. In 2014, we incurred a charge of $56 million (after-tax) related to commitments and withdrawal liabilities associated with the restructuring of pension plan agreements, of which $15 million was contributed to the UFCW Consolidated Pension Plan in 2014. As of January 30, 2016, we are not required to contribute to the UFCW Consolidated Pension Plan in 2016.
We recognize expense in connection with these plans as contributions are funded or when commitments are made, in accordance with GAAP. We made cash contributions to these plans of $426 million in 2015, $297 million in 2014 and $228 million in 2013.
Based on the most recent information available to us, we believe that the present value of actuarially accrued liabilities in most of the multi-employer plans to which we contribute substantially exceeds the value of the assets held in trust to pay benefits. We have attempted to estimate the amount by which these liabilities exceed the assets, (i.e., the amount of underfunding), as of December 31, 2015. Because we are only one of a number of employers contributing to these plans, we also have attempted to estimate the ratio of our contributions to the total of all contributions to these plans in a year as a way of assessing our “share” of the underfunding. Nonetheless, the underfunding is not a direct obligation or liability of ours or of any employer. As of December 31, 2015, we estimate that our share of the underfunding of multi-employer plans to which we contribute was approximately $2.9 billion, pre-tax, or
A-20
$1.8 billion, after-tax, which includes Roundy’s share of underfunding of its multi-employer plans. This represents an increase in the estimated amount of underfunding of approximately $1.1 billion, pre-tax, or approximately $680 million, after-tax, as of December 31, 2015, compared to December 31, 2014. The increase in the amount of underfunding is attributable to lower than expected returns on the assets held in the multi-employer plans during 2015, changes in mortality rate assumptions and the merger of Roundy’s. Our estimate is based on the most current information available to us including actuarial evaluations and other data (that include the estimates of others), and such information may be outdated or otherwise unreliable.
We have made and disclosed this estimate not because, except as noted above, this underfunding is a direct liability of ours. Rather, we believe the underfunding is likely to have important consequences. In 2016, we expect to contribute approximately $260 million to multi-employer pension plans, subject to collective bargaining and capital market conditions. We expect increases in expense as a result of increases in multi-employer pension plan contributions over the next few years. Finally, underfunding means that, in the event we were to exit certain markets or otherwise cease making contributions to these funds, we could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP.
The amount of underfunding described above is an estimate and could change based on contract negotiations, returns on the assets held in the multi-employer plans and benefit payments. The amount could decline, and our future expense would be favorably affected, if the values of the assets held in the trust significantly increase or if further changes occur through collective bargaining, trustee action or favorable legislation. On the other hand, our share of the underfunding could increase and our future expense could be adversely affected if the asset values decline, if employers currently contributing to these funds cease participation or if changes occur through collective bargaining, trustee action or adverse legislation. We continue to evaluate our potential exposure to under-funded multi-employer pension plans. Although these liabilities are not a direct obligation or liability of ours, any commitments to fund certain multi-employer plans will be expensed when our commitment is probable and an estimate can be made.
See Note 16 to the Consolidated Financial Statements for more information relating to our participation in these multi-employer pension plans.
Uncertain Tax Positions
We review the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in our Consolidated Financial Statements. Refer to Note 5 to the Consolidated Financial Statements for the amount of unrecognized tax benefits and other disclosures related to uncertain tax positions.
Various taxing authorities periodically audit our income tax returns. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, we record allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. As of January 30, 2016, the Internal Revenue Service had concluded its examination of our 2010 and 2011 federal tax returns. Tax years 2012 and 2013 remain under examination.
The assessment of our tax position relies on the judgment of management to estimate the exposures associated with our various filing positions.
Share-Based Compensation Expense
We account for stock options under the fair value recognition provisions of GAAP. Under this method, we recognize compensation expense for all share-based payments granted. We recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. In addition, we record expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the grant date of the award, over the period the award restrictions lapse.
A-21
Inventories
Inventories are stated at the lower of cost (principally on a LIFO basis) or market. In total, approximately 95% of inventories in 2015 and 2014 were valued using the LIFO method. Cost for the balance of the inventories, including substantially all fuel inventories, was determined using the FIFO method. Replacement cost was higher than the carrying amount by $1.3 billion at January 30, 2016 and January 31, 2015. We follow the Link-Chain, Dollar-Value LIFO method for purposes of calculating our LIFO charge or credit.
We follow the item-cost method of accounting to determine inventory cost before the LIFO adjustment for substantially all store inventories at our supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory. In addition, substantially all of our inventory consists of finished goods and is recorded at actual purchase costs (net of vendor allowances and cash discounts).
We evaluate inventory shortages throughout the year based on actual physical counts in our facilities. We record allowances for inventory shortages based on the results of recent physical counts to provide for estimated shortages from the last physical count to the financial statement date.
Vendor Allowances
We recognize all vendor allowances as a reduction in merchandise costs when the related product is sold. In most cases, vendor allowances are applied to the related product cost by item, and therefore reduce the carrying value of inventory by item. When it is not practicable to allocate vendor allowances to the product by item, we recognize vendor allowances as a reduction in merchandise costs based on inventory turns and as the product is sold. We recognized approximately $7.3 billion in 2015, $6.9 billion in 2014 and $6.2 billion in 2013 of vendor allowances as a reduction in merchandise costs. We recognized approximately 91% of all vendor allowances in the item cost with the remainder being based on inventory turns.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In 2015, the Financial Accounting Standards Board (“FASB”) amended Accounting Standards Codification 835, “Interest-Imputation of Interest.” The amendment simplifies the presentation of debt issuance costs related to a recognized debt liability by requiring it be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This amendment became effective beginning February 1, 2015, and was adopted retrospectively in accordance with the standard. The adoption of this amendment resulted in amounts previously reported in other assets to now be reported within long-term debt including obligations under capital leases and financing obligations in the Consolidated Balance Sheets. These amounts were not material to the prior year. The adoption of this amendment did not have an effect on our Consolidated Statements of Operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Per ASU 2015-14, “Deferral of Effective Date,” this guidance will be effective for us in the first quarter of our fiscal year ending February 2, 2019. Early adoption is permitted as of the first quarter of our fiscal year ending February 3, 2018. We are currently in the process of evaluating the effect of adoption of this ASU on our Consolidated Financial Statements.
A-22
In April 2015, the FASB issued ASU 2015-04, “Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.” This amendment permits an entity to measure defined benefit plan assets and obligations using the month end that is closest to the entity’s fiscal year end for all plans. This guidance will be effective for us in the fiscal year ending January 28, 2017. The implementation of this amendment will not have an effect on our Consolidated Statements of Operations, and will not have a significant effect on our Consolidated Balance Sheets.
In April 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” This amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share. This guidance will be effective for us in the fiscal year ending January 28, 2017. The implementation of this amendment will have an effect on our Notes to the Consolidated Financial Statements and will not have an effect on our Consolidated Statements of Operations or Consolidated Balance Sheets.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” This amendment eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination. This guidance will be effective for us in the fiscal year ending January 28, 2017. The implementation of this amendment is not expected to have a significant effect on our Consolidated Financial Statements.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This amendment requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance will be effective for our fiscal year ending January 28, 2017. Early adoption is permitted. The implementation of this amendment will not have an effect on our Consolidated Statements of Operations and will not have a significant effect on our Consolidated Balance Sheets.
In February 2016, the FASB issued ASU 2016-02, “Leases”, which provides guidance for the recognition of lease agreements. The standard’s core principle is that a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. This guidance will be effective for us in the first quarter of fiscal year ending February 1, 2020. Early adoption is permitted. The adoption of this ASU will result in a significant increase to our Consolidated Balance Sheets for lease liabilities and right-of-use assets, and we are currently evaluating the other effects of adoption of this ASU on our Consolidated Financial Statements. We believe our current off-balance sheet leasing commitments are reflected in our investment grade debt rating.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
Net cash provided by operating activities
We generated $4.8 billion of cash from operations in 2015, compared to $4.2 billion in 2014 and $3.6 billion in 2013. The cash provided by operating activities came from net earnings including non-controlling interests adjusted primarily for non-cash expenses of depreciation and amortization, stock compensation, expense for Company-sponsored pension plans, the LIFO charge and changes in working capital.
The increase in net cash provided by operating activities in 2015, compared to 2014, resulted primarily due to an increase in net earnings including non-controlling interests, an increase in non-cash items and changes in working capital. The increase in non-cash items in 2015, as compared to 2014, was primarily due to increases in depreciation and amortization expense and expense for Company-sponsored pension plans, partially offset by a lower LIFO charge.
A-23
The increase in net cash provided by operating activities in 2014, compared to 2013, resulted primarily due to an increase in net earnings including non-controlling interests, which include the results of Harris Teeter, an increase in non-cash items, a reduction in contributions to Company-sponsored pension plans and changes in working capital. The increase in non-cash items in 2014, as compared to 2013, was primarily due to increases in depreciation and amortization expense and the LIFO charge. The amount of cash paid for income taxes increased in 2014, compared to 2013, primarily due to an increase in net earnings including non-controlling interests.
Cash provided (used) by operating activities for changes in working capital was $96 million in 2015, compared to ($49) million in 2014 and $63 million in 2013. The increase in cash provided by operating activities for changes in working capital in 2015, compared to 2014, was primarily due to an increase in cash provided by trade accounts payables and store deposits in transit, partially offset by a decrease in cash provided by income taxes receivable and payable. The increase in cash used by operating activities for changes in working capital in 2014, compared to 2013, was primarily due to an increase in cash used for receivables and a decrease in cash provided by trade accounts payables, partially offset by an increase in cash provided by accrued expenses.
Net cash used by investing activities
Cash used by investing activities was $3.6 billion in 2015, compared to $3.1 billion in 2014 and $4.8 billion in 2013. The amount of cash used by investing activities increased in 2015, compared to 2014, due to increased payments for capital investments, partially offset by lower payments for mergers. The amount of cash used by investing activities decreased in 2014, compared to 2013, due to decreased payments for mergers, offset primarily by increased payments for capital investments. Capital investments, including payments for lease buyouts, but excluding mergers, were $3.3 billion in 2015, $2.8 billion in 2014 and $2.3 billion in 2013. Merger payments were $168 million in 2015, $252 million in 2014 and $2.3 billion in 2013. Merger payments decreased in 2014, compared to 2013, primarily due to our merger with Harris Teeter in 2013. Refer to the “Capital Investments” section for an overview of our supermarket storing activity during the last three years.
Net cash provided (used) by financing activities
Financing activities (used) provided cash of ($1.3) billion in 2015, ($1.2) billion in 2014 and $1.4 billion in 2013. The increase in the amount of cash used for financing activities in 2015, compared to 2014, was primarily related to increased payments on long-term debt and commercial paper, partially offset by higher proceeds from issuances of long-term debt and decreased treasury stock purchases. The increase in the amount of cash used for financing activities in 2014, compared to 2013, was primarily related to decreased proceeds from the issuance of long-term debt and increased treasury stock purchases, offset partially by decreased payments on long-term debt. Proceeds from the issuance of long-term debt were $1.2 billion in 2015, $576 million in 2014 and $3.5 billion in 2013. Net (payments) borrowings provided from our commercial paper program were ($285) million in 2015, $25 million in 2014 and ($395) million in 2013. Please refer to the “Debt Management” section of MD&A for additional information. We repurchased $703 million of Kroger common shares in 2015, compared to $1.3 billion in 2014 and $609 million in 2013. We paid dividends totaling $385 million in 2015, $338 million in 2014 and $319 million in 2013.
Debt Management
Total debt, including both the current and long-term portions of capital lease and lease-financing obligations, increased $481 million to $12.1 billion as of year-end 2015, compared to 2014. The increase in 2015, compared to 2014, resulted primarily from the issuance of (i) $300 million of senior notes bearing an interest rate of 2.00%, (ii) $300 million of senior notes bearing an interest rate of 2.60%, (iii) $500 million of senior notes bearing an interest rate of 3.50% and (iv) an increase in capital lease obligations due to our merger with Roundy’s and various leased locations, partially offset by payments of $678 million on long-term debt obligations assumed as part of our merger with Roundy’s and $500 million of payments at maturity of senior notes bearing an interest rate of 3.90%. The increase in financing obligations was due to partially funding our merger with Roundy’s.
A-24
Total debt, including both the current and long-term portions of capital lease and lease-financing obligations increased $346 million to $11.7 billion as of year-end 2014, compared to 2013. The increase in 2014, compared to 2013, resulted primarily from (i) the issuance of $500 million of senior notes bearing an interest rate of 2.95% and (ii) an increase in commercial paper of $25 million, partially offset by payments at maturity of $300 million of senior notes bearing an interest rate of 4.95%. The increase in financing obligations was due to partially funding our outstanding common share repurchases.
Liquidity Needs
We estimate our liquidity needs over the next twelve-month period to range from $6.6 to $6.9 billion, which includes anticipated requirements for working capital, capital investments, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of 2015. We generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months. We have approximately $990 million of commercial paper and $1.3 billion of senior notes maturing in the next twelve months, which is included in the range of $6.6 to $6.9 billion in estimated liquidity needs. We expect to refinance this debt, in 2016, by issuing additional senior notes or commercial paper on favorable terms based on our past experience. We also currently plan to continue repurchases of common shares under the Company’s share repurchase programs. We believe we have adequate coverage of our debt covenants to continue to maintain our current debt ratings and to respond effectively to competitive conditions.
Factors Affecting Liquidity
We can currently borrow on a daily basis approximately $2.75 billion under our commercial paper (“CP”) program. At January 30, 2016, we had $990 million of CP borrowings outstanding. CP borrowings are backed by our credit facility, and reduce the amount we can borrow under the credit facility. If our short-term credit ratings fall, the ability to borrow under our current CP program could be adversely affected for a period of time and increase our interest cost on daily borrowings under our CP program. This could require us to borrow additional funds under the credit facility, under which we believe we have sufficient capacity. However, in the event of a ratings decline, we do not anticipate that our borrowing capacity under our CP program would be any lower than $500 million on a daily basis. Although our ability to borrow under the credit facility is not affected by our credit rating, the interest cost on borrowings under the credit facility could be affected by an increase in our Leverage Ratio. As of March 23, 2016, we had $1.1 billion of CP borrowings outstanding. The increase as of March 23, 2016, compared to year-end 2015, was due to partially funding our outstanding common share repurchases.
Our credit facility requires the maintenance of a Leverage Ratio and a Fixed Charge Coverage Ratio (our “financial covenants”). A failure to maintain our financial covenants would impair our ability to borrow under the credit facility. These financial covenants and ratios are described below:
| |
|
Our credit agreement is more fully described in Note 6 to the Consolidated Financial Statements. We were in compliance with our financial covenants at year-end 2015.
A-25
The tables below illustrate our significant contractual obligations and other commercial commitments, based on year of maturity or settlement, as of January 30, 2016 (in millions of dollars):
2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||
Contractual Obligations(1) (2) | ||||||||||||||||||||||
Long-term debt(3) | $ | 2,318 | $ | 735 | $ | 1,307 | $ | 774 | $ | 724 | $ | 5,538 | $ | 11,396 | ||||||||
Interest on long-term debt(4) | 476 | 410 | 375 | 315 | 279 | 2,550 | 4,405 | |||||||||||||||
Capital lease obligations | 103 | 72 | 62 | 57 | 52 | 527 | 873 | |||||||||||||||
Operating lease obligations | 967 | 922 | 853 | 774 | 674 | 4,199 | 8,389 | |||||||||||||||
Financed lease obligations | 13 | 13 | 13 | 13 | 13 | 74 | 139 | |||||||||||||||
Self-insurance liability(5) | 223 | 138 | 98 | 63 | 38 | 79 | 639 | |||||||||||||||
Construction commitments(6) | 418 | — | — | — | — | — | 418 | |||||||||||||||
Purchase obligations(7) | 532 | 161 | 77 | 58 | 42 | 106 | 976 | |||||||||||||||
Total | $ | 5,050 | $ | 2,451 | $ | 2,786 | $ | 2,054 | $ | 1,822 | $ | 13,072 | $ | 27,235 | ||||||||
Other Commercial Commitments | ||||||||||||||||||||||
Standby letters of credit | $ | 244 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 244 | ||||||||
Surety bonds | 332 | — | — | — | — | — | 332 | |||||||||||||||
Total | $ | 576 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 576 |
As of January 30, 2016, we maintained a $2.75 billion (with the ability to increase by $750 million), unsecured revolving credit facility that, unless extended, terminates on June 30, 2019. Outstanding borrowings under the credit agreement and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit agreement. As of January 30, 2016, we had $990 million of borrowings of commercial paper and no borrowings under our credit agreement. The outstanding letters of credit that reduce funds available under our credit agreement totaled $13 million as of January 30, 2016.
A-26
In addition to the available credit mentioned above, as of January 30, 2016, we had authorized for issuance $900 million of securities under a shelf registration statement filed with the SEC and effective on December 13, 2013.
We also maintain surety bonds related primarily to our self-insured workers’ compensation claims. These bonds are required by most states in which we are self-insured for workers’ compensation and are placed with predominately third-party insurance providers to insure payment of our obligations in the event we are unable to meet our claim payment obligations up to our self-insured retention levels. These bonds do not represent liabilities of ours, as we already have reserves on our books for the claims costs. Market changes may make the surety bonds more costly and, in some instances, availability of these bonds may become more limited, which could affect our costs of, or access to, such bonds. Although we do not believe increased costs or decreased availability would significantly affect our ability to access these surety bonds, if this does become an issue, we would issue letters of credit, in states where allowed, against our credit facility to meet the state bonding requirements. This could increase our cost and decrease the funds available under our credit facility.
We also are contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. We could be required to satisfy obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of our assignments among third parties, and various other remedies available to us, we believe the likelihood that we will be required to assume a material amount of these obligations is remote. We have agreed to indemnify certain third-party logistics operators for certain expenses, including pension trust fund contribution obligations and withdrawal liabilities.
In addition to the above, we enter into various indemnification agreements and take on indemnification obligations in the ordinary course of business. Such arrangements include indemnities against third party claims arising out of agreements to provide services to us; indemnities related to the sale of our securities; indemnities of directors, officers and employees in connection with the performance of their work; and indemnities of individuals serving as fiduciaries on benefit plans. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that could result in a material liability.
OUTLOOK
This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Such statements are indicated by words such as “comfortable,” “committed,” “will,” “expect,” “goal,” “should,” “intend,” “target,” “believe,” “anticipate,” “plan,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.
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. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially. The guidance below includes our expectations for Roundy’s.
| |
| |
|
A-27
| |
| |
| |
| |
| |
| |
| |
|
Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include:
| |
|
A-28
| |
| |
| |
|
We cannot fully foresee the effects of changes in economic conditions on Kroger’s business. We have assumed economic and competitive situations will not change significantly in 2016.
Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in, contemplated or implied by forward-looking statements made by us or our representatives. We undertake no obligation to update the forward-looking information contained in this filing.
A-29
REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors ofThe Kroger Co.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, cash flows and changes in shareholders’ equitypresent fairly, in all material respects, the financial position of The Kroger Co. and its subsidiariesat January 30, 2016 and January 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended January 30, 2016in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 30, 2016, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing on page A-1. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Roundy’s, Inc. from its assessment of internal control over financial reporting as of January 30, 2016 because it was acquired by the Company in a purchase business combination on December 18, 2015. We have also excluded Roundy’s, Inc. from our audit of internal control over financial reporting. Roundy’s, Inc. is a wholly-owned subsidiary whose total assets and total revenues represent 2% and less than 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended January 30, 2016.
A-30
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(In millions, except par values) | January 30, 2016 | January 31, 2015 | ||||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and temporary cash investments | $ | 277 | $ | 268 | ||||||||
Store deposits in-transit | 923 | 988 | ||||||||||
Receivables | 1,734 | 1,266 | ||||||||||
FIFO inventory | 7,440 | 6,933 | ||||||||||
LIFO reserve | (1,272 | ) | (1,245 | ) | ||||||||
Prepaid and other current assets | 790 | 701 | ||||||||||
Total current assets | 9,892 | 8,911 | ||||||||||
Property, plant and equipment, net | 19,619 | 17,912 | ||||||||||
Intangibles, net | 1,053 | 757 | ||||||||||
Goodwill | 2,724 | 2,304 | ||||||||||
Other assets | 609 | 613 | ||||||||||
Total Assets | $ | 33,897 | $ | 30,497 | ||||||||
LIABILITIES | ||||||||||||
Current liabilities | ||||||||||||
Current portion of long-term debt including obligations under capital leases and | ||||||||||||
financing obligations | $ | 2,370 | $ | 1,874 | ||||||||
Trade accounts payable | 5,728 | 5,052 | ||||||||||
Accrued salaries and wages | 1,426 | 1,291 | ||||||||||
Deferred income taxes | 221 | 287 | ||||||||||
Other current liabilities | 3,226 | 2,888 | ||||||||||
Total current liabilities | 12,971 | 11,392 | ||||||||||
Long-term debt including obligations under capital leases and financing obligations | ||||||||||||
Face-value of long-term debt including obligations under capital leases and | ||||||||||||
financing obligations | 9,708 | 9,723 | ||||||||||
Adjustment to reflect fair-value interest rate hedges | 1 | — | ||||||||||
Long-term debt including obligations under capital leases and | ||||||||||||
financing obligations | 9,709 | 9,723 | ||||||||||
Deferred income taxes | 1,752 | 1,209 | ||||||||||
Pension and postretirement benefit obligations | 1,380 | 1,463 | ||||||||||
Other long-term liabilities | 1,287 | 1,268 | ||||||||||
Total Liabilities | 27,099 | 25,055 | ||||||||||
Commitments and contingencies (see Note 13) | ||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||
Preferred shares, $100 par per share, 5 shares authorized and unissued | — | — | ||||||||||
Common shares, $1 par per share, 2,000 shares authorized; | ||||||||||||
1,918 shares issued in 2015 and 2014 | 1,918 | 1,918 | ||||||||||
Additional paid-in capital | 2,980 | 2,748 | ||||||||||
Accumulated other comprehensive loss | (680 | ) | (812 | ) | ||||||||
Accumulated earnings | 14,011 | 12,367 | ||||||||||
Common stock in treasury, at cost, 951 shares in 2015 and 944 shares in 2014 | (11,409 | ) | (10,809 | ) | ||||||||
Total Shareholders’ Equity - The Kroger Co. | 6,820 | 5,412 | ||||||||||
Noncontrolling interests | (22 | ) | 30 | |||||||||
Total Equity | 6,798 | 5,442 | ||||||||||
Total Liabilities and Equity | $ | 33,897 | $ | 30,497 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
A-31
THE KROGER CO.
CONSOLIDATED STATEMENTSOF OPERATIONS
Years Ended January 30, 2016, January 31, 2015 and February 1, 2014
(In millions, except per share amounts) | 2015 (52 weeks) | 2014 (52 weeks) | 2013 (52 weeks) | ||||||||||||
Sales | $ | 109,830 | $ | 108,465 | $ | 98,375 | |||||||||
Merchandise costs, including advertising, warehousing, and | |||||||||||||||
transportation, excluding items shown separately below | 85,496 | 85,512 | 78,138 | ||||||||||||
Operating, general and administrative | 17,946 | 17,161 | 15,196 | ||||||||||||
Rent | 723 | 707 | 613 | ||||||||||||
Depreciation and amortization | 2,089 | 1,948 | 1,703 | ||||||||||||
Operating Profit | 3,576 | 3,137 | 2,725 | ||||||||||||
Interest expense | 482 | 488 | 443 | ||||||||||||
Earnings before income tax expense | 3,094 | 2,649 | 2,282 | ||||||||||||
Income tax expense | 1,045 | 902 | 751 | ||||||||||||
Net earnings including noncontrolling interests | 2,049 | 1,747 | 1,531 | ||||||||||||
Net earnings attributable to noncontrolling interests | 10 | 19 | 12 | ||||||||||||
Net earnings attributable to The Kroger Co. | $ | 2,039 | $ | 1,728 | $ | 1,519 | |||||||||
Net earnings attributable to The Kroger Co. per basic common share | $ | 2.09 | $ | 1.74 | $ | 1.47 | |||||||||
Average number of common shares used in basic calculation | 966 | 981 | 1,028 | ||||||||||||
Net earnings attributable to The Kroger Co. per diluted common share | $ | 2.06 | $ | 1.72 | $ | 1.45 | |||||||||
Average number of common shares used in diluted calculation | 980 | 993 | 1,040 | ||||||||||||
Dividends declared per common share | $ | 0.408 | $ | 0.350 | $ | 0.315 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
A-32
THE KROGER CO.
CONSOLIDATED STATEMENTSOF COMPREHENSIVE INCOME
Years Ended January 30, 2016, January 31, 2015 and February 1, 2014
(In millions) | 2015 (52 weeks) | 2014 (52 weeks) | 2013 (52 weeks) | |||||||||||||||
Net earnings including noncontrolling interests | $ | 2,049 | $ | 1,747 | $ | 1,531 | ||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||
Unrealized gain on available for sale securities, net of | ||||||||||||||||||
income tax(1) | 3 | 5 | 5 | |||||||||||||||
Change in pension and other postretirement defined benefit plans, | ||||||||||||||||||
net of income tax(2) | 131 | (329 | ) | 295 | ||||||||||||||
Unrealized losses on cash flow hedging activities, | ||||||||||||||||||
net of income tax(3) | (3 | ) | (25 | ) | (12 | ) | ||||||||||||
Amortization of unrealized gains and losses on cash flow hedging | ||||||||||||||||||
activities, net of income tax(4) | 1 | 1 | 1 | |||||||||||||||
Total other comprehensive income (loss) | 132 | (348 | ) | 289 | ||||||||||||||
Comprehensive income | 2,181 | 1,399 | 1,820 | |||||||||||||||
Comprehensive income attributable to noncontrolling interests | 10 | 19 | 12 | |||||||||||||||
Comprehensive income attributable to The Kroger Co. | $ | 2,171 | $ | 1,380 | $ | 1,808 |
The accompanying notes are an integral part of the consolidated financial statements.
A-33
THE KROGER CO.
CONSOLIDATED STATEMENTS oF CASH FLOWS
Years Ended January 30, 2016, January 31, 2015 and February 1, 2014
(In millions) | 2015 (52 weeks) | 2014 (52 weeks) | 2013 (52 weeks) | ||||||||||||||
Cash Flows From Operating Activities: | |||||||||||||||||
Net earnings including noncontrolling interests | $ | 2,049 | $ | 1,747 | $ | 1,531 | |||||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||||||||
Depreciation and amortization | 2,089 | 1,948 | 1,703 | ||||||||||||||
Asset impairment charge | 46 | 37 | 39 | ||||||||||||||
LIFO charge | 28 | 147 | 52 | ||||||||||||||
Stock-based employee compensation | 165 | 155 | 107 | ||||||||||||||
Expense for Company-sponsored pension plans | 103 | 55 | 74 | ||||||||||||||
Deferred income taxes | 317 | 73 | 72 | ||||||||||||||
Other | 54 | 72 | 47 | ||||||||||||||
Changes in operating assets and liabilities net of effects from mergers of businesses: | |||||||||||||||||
Store deposits in-transit | 95 | (27 | ) | 25 | |||||||||||||
Receivables | (59 | ) | (141 | ) | (8 | ) | |||||||||||
Inventories | (184 | ) | (147 | ) | (131 | ) | |||||||||||
Prepaid and other current assets | (28 | ) | 2 | (49 | ) | ||||||||||||
Trade accounts payable | 440 | 135 | 196 | ||||||||||||||
Accrued expenses | 191 | 197 | 77 | ||||||||||||||
Income taxes receivable and payable | (359 | ) | (68 | ) | (47 | ) | |||||||||||
Contribution to Company-sponsored pension plans | (5 | ) | — | (100 | ) | ||||||||||||
Other | (109 | ) | (22 | ) | (15 | ) | |||||||||||
Net cash provided by operating activities | 4,833 | 4,163 | 3,573 | ||||||||||||||
Cash Flows From Investing Activities: | |||||||||||||||||
Payments for property and equipment, including payments for lease buyouts | (3,349 | ) | (2,831 | ) | (2,330 | ) | |||||||||||
Proceeds from sale of assets | 45 | 37 | 24 | ||||||||||||||
Payments for mergers | (168 | ) | (252 | ) | (2,344 | ) | |||||||||||
Other | (98 | ) | (14 | ) | (121 | ) | |||||||||||
Net cash used by investing activities | (3,570 | ) | (3,060 | ) | (4,771 | ) | |||||||||||
Cash Flows From Financing Activities: | |||||||||||||||||
Proceeds from issuance of long-term debt | 1,181 | 576 | 3,548 | ||||||||||||||
Payments on long-term debt | (1,245 | ) | (375 | ) | (1,060 | ) | |||||||||||
Net (payments) borrowings on commercial paper | (285 | ) | 25 | (395 | ) | ||||||||||||
Dividends paid | (385 | ) | (338 | ) | (319 | ) | |||||||||||
Excess tax benefits on stock based awards | 97 | 52 | 32 | ||||||||||||||
Proceeds from issuance of capital stock | 120 | 110 | 196 | ||||||||||||||
Treasury stock purchases | (703 | ) | (1,283 | ) | (609 | ) | |||||||||||
Investment in the remaining equity of a noncontrolling interest | (26 | ) | — | — | |||||||||||||
Other | (8 | ) | (3 | ) | (32 | ) | |||||||||||
Net cash provided (used) by financing activities | (1,254 | ) | (1,236 | ) | 1,361 | ||||||||||||
Net increase (decrease) in cash and temporary cash investments | 9 | (133 | ) | 163 | |||||||||||||
Cash and temporary cash investments: | |||||||||||||||||
Beginning of year | 268 | 401 | 238 | ||||||||||||||
End of year | $ | 277 | $ | 268 | $ | 401 | |||||||||||
Reconciliation of capital investments: | |||||||||||||||||
Payments for property and equipment, including payments for lease buyouts | $ | (3,349 | ) | $ | (2,831 | ) | $ | (2,330 | ) | ||||||||
Payments for lease buyouts | 35 | 135 | 108 | ||||||||||||||
Changes in construction-in-progress payables | (35 | ) | (56 | ) | (83 | ) | |||||||||||
Total capital investments, excluding lease buyouts | $ | (3,349 | ) | $ | (2,752 | ) | $ | (2,305 | ) | ||||||||
Disclosure of cash flow information: | |||||||||||||||||
Cash paid during the year for interest | $ | 474 | $ | 477 | $ | 401 | |||||||||||
Cash paid during the year for income taxes | $ | 1,001 | $ | 941 | $ | 679 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
A-34
THE KROGER CO.
CONSOLIDATED STATEMENTOF CHANGESIN SHAREHOLDERS’ EQUITY
Years Ended January 30, 2016, January 31, 2015 and February 1, 2014
(In millions, except per share amounts) | Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Gain (Loss) | Accumulated Earnings | Noncontrolling Interest | Total | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
Balances at February 2, 2013 | 1,918 | $ | 1,918 | $ | 2,492 | 890 | $ | (9,237 | ) | $ | (753 | ) | $ | 9,787 | $ | 7 | $ | 4,214 | ||||||||||||||||||||||||||||
Issuance of common stock: | ||||||||||||||||||||||||||||||||||||||||||||||
Stock options exercised | — | — | — | (18 | ) | 196 | — | — | — | 196 | ||||||||||||||||||||||||||||||||||||
Restricted stock issued | — | — | (60 | ) | (5 | ) | 26 | — | — | — | (34 | ) | ||||||||||||||||||||||||||||||||||
Treasury stock activity: | ||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock purchases, at cost | — | — | — | 18 | (338 | ) | — | — | — | (338 | ) | |||||||||||||||||||||||||||||||||||
Stock options exchanged | — | — | — | 17 | (271 | ) | — | — | — | (271 | ) | |||||||||||||||||||||||||||||||||||
Share-based employee compensation | — | — | 107 | — | — | — | — | — | 107 | |||||||||||||||||||||||||||||||||||||
Other comprehensive gain net of | ||||||||||||||||||||||||||||||||||||||||||||||
income tax of $168 | — | — | — | — | — | 289 | — | — | 289 | |||||||||||||||||||||||||||||||||||||
Other | — | — | 51 | — | (17 | ) | — | — | (8 | ) | 26 | |||||||||||||||||||||||||||||||||||
Cash dividends declared | ||||||||||||||||||||||||||||||||||||||||||||||
($0.315 per common share) | — | — | — | — | — | — | (325 | ) | — | (325 | ) | |||||||||||||||||||||||||||||||||||
Net earnings including | ||||||||||||||||||||||||||||||||||||||||||||||
non-controlling interests | — | — | — | — | — | — | 1,519 | 12 | 1,531 | |||||||||||||||||||||||||||||||||||||
Balances at February 1, 2014 | 1,918 | $ | 1,918 | $ | 2,590 | 902 | $ | (9,641 | ) | $ | (464 | ) | $ | 10,981 | $ | 11 | $ | 5,395 | ||||||||||||||||||||||||||||
Issuance of common stock: | ||||||||||||||||||||||||||||||||||||||||||||||
Stock options exercised | — | — | — | (10 | ) | 110 | — | — | — | 110 | ||||||||||||||||||||||||||||||||||||
Restricted stock issued | — | — | (91 | ) | (5 | ) | 40 | — | — | — | (51 | ) | ||||||||||||||||||||||||||||||||||
Treasury stock activity: | ||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock purchases, at cost | — | — | — | 51 | (1,129 | ) | — | — | — | (1,129 | ) | |||||||||||||||||||||||||||||||||||
Stock options exchanged | — | — | — | 6 | (154 | ) | — | — | — | (154 | ) | |||||||||||||||||||||||||||||||||||
Share-based employee compensation | — | — | 155 | — | — | — | — | — | 155 | |||||||||||||||||||||||||||||||||||||
Other comprehensive loss net of income | ||||||||||||||||||||||||||||||||||||||||||||||
tax of ($204) | — | — | — | — | — | (348 | ) | — | — | (348 | ) | |||||||||||||||||||||||||||||||||||
Other | — | — | 94 | — | (35 | ) | — | — | — | 59 | ||||||||||||||||||||||||||||||||||||
Cash dividends declared | ||||||||||||||||||||||||||||||||||||||||||||||
($0.350 per common share) | — | — | — | — | — | — | (342 | ) | — | (342 | ) | |||||||||||||||||||||||||||||||||||
Net earnings including | ||||||||||||||||||||||||||||||||||||||||||||||
non-controlling interests | — | — | — | — | — | — | 1,728 | 19 | 1,747 | |||||||||||||||||||||||||||||||||||||
Balances at January 31, 2015 | 1,918 | $ | 1,918 | $ | 2,748 | 944 | $ | (10,809 | ) | $ | (812 | ) | $ | 12,367 | $ | 30 | $ | 5,442 | ||||||||||||||||||||||||||||
Issuance of common stock: | ||||||||||||||||||||||||||||||||||||||||||||||
Stock options exercised | — | — | — | (9 | ) | 120 | — | — | — | 120 | ||||||||||||||||||||||||||||||||||||
Restricted stock issued | — | — | (122 | ) | (5 | ) | 37 | — | — | — | (85 | ) | ||||||||||||||||||||||||||||||||||
Treasury stock activity: | ||||||||||||||||||||||||||||||||||||||||||||||
Treasury stock purchases, at cost | — | — | — | 14 | (500 | ) | — | — | — | (500 | ) | |||||||||||||||||||||||||||||||||||
Stock options exchanged | — | — | — | 7 | (203 | ) | — | — | — | (203 | ) | |||||||||||||||||||||||||||||||||||
Share-based employee compensation | — | — | 165 | — | — | — | — | — | 165 | |||||||||||||||||||||||||||||||||||||
Other comprehensive gain net of income | ||||||||||||||||||||||||||||||||||||||||||||||
tax of $77 | — | — | — | — | — | 132 | — | — | 132 | |||||||||||||||||||||||||||||||||||||
Investment in the remaining equity of a | ||||||||||||||||||||||||||||||||||||||||||||||
non-controlling interest | — | — | 26 | — | — | — | — | (57 | ) | (31 | ) | |||||||||||||||||||||||||||||||||||
Other | — | — | 163 | — | (54 | ) | — | — | (5 | ) | 104 | |||||||||||||||||||||||||||||||||||
Cash dividends declared | ||||||||||||||||||||||||||||||||||||||||||||||
($0.408 per common share) | — | — | — | — | — | — | (395 | ) | — | (395 | ) | |||||||||||||||||||||||||||||||||||
Net earnings including | ||||||||||||||||||||||||||||||||||||||||||||||
non-controlling interests | — | — | — | — | — | — | 2,039 | 10 | 2,049 | |||||||||||||||||||||||||||||||||||||
Balances at January 30, 2016 | 1,918 | $ | 1,918 | $ | 2,980 | 951 | $ | (11,409 | ) | $ | (680 | ) | $ | 14,011 | $ | (22 | ) | $ | 6,798 | |||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
A-35
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
All amounts in the Notes to Consolidated Financial Statements are in millions except per share amounts.
1. ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in preparing these financial statements.
Description of Business, Basis of Presentation and Principles of Consolidation
The Kroger Co. (the “Company”) was founded in 1883 and incorporated in 1902. As of January 30, 2016, the Company was one of the largest retailers in the nation based on annual sales. The Company also manufactures and processes food for sale by its supermarkets. The accompanying financial statements include the consolidated accounts of the Company, its wholly-owned subsidiaries and the variable interest entities in which the Company is the primary beneficiary. Significant intercompany transactions and balances have been eliminated.
On June 25, 2015, the Company’s Board of Directors approved a two-for-one stock split of The Kroger Co.’s common shares in the form of a 100% stock dividend, which was effective July 13, 2015. All share and per share amounts in the Company’s Consolidated Financial Statements and related notes have been retroactively adjusted to reflect the stock split for all periods presented.
Refer to Note 17 for an additional change to the Consolidated Balance Sheets for a recently adopted accounting standard regarding the presentation of debt issuance costs.
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest January 31. The last three fiscal years consist of the 52-week periods ended January 30, 2016, January 31, 2015 and February 1, 2014.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of consolidated revenues and expenses during the reporting period is also required. Actual results could differ from those estimates.
Cash, Temporary Cash Investments and Book Overdrafts
Cash and temporary cash investments represent store cash and short-term investments with original maturities of less than three months. Book overdrafts are included in “Trade accounts payable” and “Accrued salaries and wages” in the Consolidated Balance Sheets.
Deposits In-Transit
Deposits in-transit generally represent funds deposited to the Company’s bank accounts at the end of the year related to sales, a majority of which were paid for with debit cards, credit cards and checks, to which the Company does not have immediate access but settle within a few days of the sales transaction.
Inventories
Inventories are stated at the lower of cost (principally on a last-in, first-out “LIFO” basis) or market. In total, approximately 95% of inventories in 2015 and 2014 were valued using the LIFO method. Cost for the balance of the inventories, including substantially all fuel inventories, was determined using the first-in, first-out (“FIFO”) method. Replacement cost was higher than the carrying amount by $1,272 at January 30, 2016 and $1,245 at January 31, 2015. The Company follows the Link-Chain, Dollar-Value LIFO method for purposes of calculating its LIFO charge or credit.
A-36
The item-cost method of accounting to determine inventory cost before the LIFO adjustment is followed for substantially all store inventories at the Company’s supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory. In addition, substantially all of the Company’s inventory consists of finished goods and is recorded at actual purchase costs (net of vendor allowances and cash discounts).
The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the financial statement date.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost or, in the case of assets acquired in a business combination, at fair value. Depreciation and amortization expense, which includes the depreciation of assets recorded under capital leases, is computed principally using the straight-line method over the estimated useful lives of individual assets. Buildings and land improvements are depreciated based on lives varying from 10 to 40 years. All new purchases of store equipment are assigned lives varying from three to nine years. Leasehold improvements are amortized over the shorter of the lease term to which they relate, which generally varies from four to 25 years, or the useful life of the asset. Food production plant and distribution center equipment is depreciated over lives varying from three to 15 years. Information technology assets are generally depreciated over five years. Depreciation and amortization expense was $2,089 in 2015, $1,948 in 2014 and $1,703 in 2013.
Interest costs on significant projects constructed for the Company’s own use are capitalized as part of the costs of the newly constructed facilities. Upon retirement or disposal of assets, the cost and related accumulated depreciation and amortization are removed from the balance sheet and any gain or loss is reflected in net earnings. Refer to Note 4 for further information regarding the Company’s property, plant and equipment.
Deferred Rent
The Company recognizes rent holidays, including the time period during which the Company has access to the property for construction of buildings or improvements and escalating rent provisions on a straight-line basis over the term of the lease. The deferred amount is included in “Other current liabilities” and “Other long-term liabilities” on the Company’s Consolidated Balance Sheets.
Goodwill
The Company reviews goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of a triggering event. The Company performs reviews of each of its operating divisions and variable interest entities (collectively, “reporting units”) that have goodwill balances. Generally, fair value is determined using a multiple of earnings, or discounted projected future cash flows, and is compared to the carrying value of a reporting unit for purposes of identifying potential impairment. Projected future cash flows are based on management’s knowledge of the current operating environment and expectations for the future. If potential for impairment is identified, the fair value of a reporting unit is measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting unit’s goodwill. Goodwill impairment is recognized for any excess of the carrying value of the reporting unit’s goodwill over the implied fair value. Results of the goodwill impairment reviews performed during 2015, 2014 and 2013 are summarized in Note 3.
A-37
Impairment of Long-Lived Assets
The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a triggering event occurs, an impairment calculation is performed, comparing projected undiscounted future cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If the Company identifies impairment for long-lived assets to be held and used, the Company compares the assets’ current carrying value to the assets’ fair value. Fair value is based on current market values or discounted future cash flows. The Company records impairment when the carrying value exceeds fair market value. With respect to owned property and equipment held for disposal, the value of the property and equipment is adjusted to reflect recoverable values based on previous efforts to dispose of similar assets and current economic conditions. Impairment is recognized for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. The Company recorded asset impairments in the normal course of business totaling $46, $37 and $39 in 2015, 2014 and 2013, respectively. Costs to reduce the carrying value of long-lived assets for each of the years presented have been included in the Consolidated Statements of Operations as “Operating, general and administrative” expense.
Store Closing Costs
The Company provides for closed store liabilities relating to the present value of the estimated remaining non-cancellable lease payments after the closing date, net of estimated subtenant income. The Company estimates the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease terms associated with the closed stores, which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known. Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs is adjusted to income in the proper period.
Owned stores held for disposal are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with the Company’s policy on impairment of long-lived assets. Inventory write-downs, if any, in connection with store closings, are classified in the Consolidated Statements of Operations as “Merchandise costs.” Costs to transfer inventory and equipment from closed stores are expensed as incurred.
The current portion of the future lease obligations of stores is included in “Other current liabilities,” and the long-term portion is included in “Other long-term liabilities” in the Consolidated Balance Sheets.
Interest Rate Risk Management
The Company uses derivative instruments primarily to manage its exposure to changes in interest rates. The Company’s current program relative to interest rate protection and the methods by which the Company accounts for its derivative instruments are described in Note 7.
Commodity Price Protection
The Company enters into purchase commitments for various resources, including raw materials utilized in its food production plants and energy to be used in its stores, food production plants and administrative offices. The Company enters into commitments expecting to take delivery of and to utilize those resources in the conduct of the normal course of business. The Company’s current program relative to commodity price protection and the methods by which the Company accounts for its purchase commitments are described in Note 7.
A-38
Benefit Plans and Multi-Employer Pension Plans
The Company recognizes the funded status of its retirement plans on the Consolidated Balance Sheets. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized as part of net periodic benefit cost are required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). All plans are measured as of the Company’s fiscal year end.
The determination of the obligation and expense for Company-sponsored pension plans and other post-retirement benefits is dependent on the selection of assumptions used by actuaries and the Company in calculating those amounts. Those assumptions are described in Note 15 and include, among others, the discount rate, the expected long-term rate of return on plan assets, mortality and the rates of increase in compensation and health care costs. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the pension and other post-retirement obligations and future expense.
The Company also participates in various multi-employer plans for substantially all union employees. Pension expense for these plans is recognized as contributions are funded. Refer to Note 16 for additional information regarding the Company’s participation in these various multi-employer plans.
The Company administers and makes contributions to the employee 401(k) retirement savings accounts. Contributions to the employee 401(k) retirement savings accounts are expensed when contributed. Refer to Note 15 for additional information regarding the Company’s benefit plans.
Share Based Compensation
The Company accounts for stock options under fair value recognition provisions. Under this method, the Company recognizes compensation expense for all share-based payments granted. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. In addition, the Company records expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the grant date of the award, over the period the awards lapse. Refer to Note 12 for additional information regarding the Company’s stock based compensation.
Deferred Income Taxes
Deferred income taxes are recorded to reflect the tax consequences of differences between the tax basis of assets and liabilities and their financial reporting basis. Refer to Note 5 for the types of differences that give rise to significant portions of deferred income tax assets and liabilities. Deferred income taxes are classified as a net current or noncurrent asset or liability based on the classification of the related asset or liability for financial reporting purposes. A deferred tax asset or liability that is not related to an asset or liability for financial reporting is classified according to the expected reversal date.
Uncertain Tax Positions
The Company reviews the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in its consolidated financial statements. Refer to Note 5 for the amount of unrecognized tax benefits and other related disclosures related to uncertain tax positions.
A-39
Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. As of January 30, 2016, the Internal Revenue Service had concluded its examination of the Company’s 2010 and 2011 federal tax returns. Tax years 2012 and 2013 remain under examination.
The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Self-Insurance Costs
The Company is primarily self-insured for costs related to workers’ compensation and general liability claims. Liabilities are actuarially determined and are recognized based on claims filed and an estimate of claims incurred but not reported. The liabilities for workers’ compensation claims are accounted for on a present value basis. The Company has purchased stop-loss coverage to limit its exposure to any significant exposure on a per claim basis. The Company is insured for covered costs in excess of these per claim limits.
The following table summarizes the changes in the Company’s self-insurance liability through January 30, 2016.
2015 | 2014 | 2013 | ||||||||||
Beginning balance | $ | 599 | $ | 569 | $ | 537 | ||||||
Expense | 234 | 246 | 220 | |||||||||
Claim payments | (225 | ) | (216 | ) | (215 | ) | ||||||
Assumed from Roundy’s or Harris Teeter | 31 | — | 27 | |||||||||
Ending balance | 639 | 599 | 569 | |||||||||
Less: Current portion | (223 | ) | (213 | ) | (224 | ) | ||||||
Long-term portion | $ | 416 | $ | 386 | $ | 345 |
The current portion of the self-insured liability is included in “Other current liabilities,” and the long-term portion is included in “Other long-term liabilities” in the Consolidated Balance Sheets.
The Company maintains surety bonds related to self-insured workers’ compensation claims. These bonds are required by most states in which the Company is self-insured for workers’ compensation and are placed with third-party insurance providers to insure payment of the Company’s obligations in the event the Company is unable to meet its claim payment obligations up to its self-insured retention levels. These bonds do not represent liabilities of the Company, as the Company has recorded reserves for the claim costs.
The Company is similarly self-insured for property-related losses. The Company maintains stop loss coverage to limit its property loss exposures including coverage for earthquake, wind, flood and other catastrophic events.
A-40
Revenue Recognition
Revenues from the sale of products are recognized at the point of sale. Discounts provided to customers by the Company at the time of sale, including those provided in connection with loyalty cards, are recognized as a reduction in sales as the products are sold. Discounts provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons. The Company records a receivable from the vendor for the difference in sales price and cash received. Pharmacy sales are recorded when product is provided to the customer. Sales taxes are recorded as other accrued liabilities and not as a component of sales. The Company does not recognize a sale when it sells its own gift cards and gift certificates. Rather, it records a deferred liability equal to the amount received. A sale is then recognized when the gift card or gift certificate is redeemed to purchase the Company’s products. Gift card and certificate breakage is recognized when redemption is deemed remote and there is no legal obligation to remit the value of the unredeemed gift card. The amount of breakage has not been material for 2015, 2014 and 2013.
Merchandise Costs
The “Merchandise costs” line item of the Consolidated Statements of Operations includes product costs, net of discounts and allowances; advertising costs (see separate discussion below); inbound freight charges; warehousing costs, including receiving and inspection costs; transportation costs; and food production and operational costs. Warehousing, transportation and manufacturing management salaries are also included in the “Merchandise costs” line item; however, purchasing management salaries and administration costs are included in the “Operating, general and administrative” line item along with most of the Company’s other managerial and administrative costs. Rent expense and depreciation and amortization expense are shown separately in the Consolidated Statements of Operations.
Warehousing and transportation costs include distribution center direct wages, transportation direct wages, repairs and maintenance, utilities, inbound freight and, where applicable, third party warehouse management fees. These costs are recognized in the periods the related expenses are incurred.
The Company believes the classification of costs included in merchandise costs could vary widely throughout the industry. The Company’s approach is to include in the “Merchandise costs” line item the direct, net costs of acquiring products and making them available to customers in its stores. The Company believes this approach most accurately presents the actual costs of products sold.
The Company recognizes all vendor allowances as a reduction in merchandise costs when the related product is sold. When possible, vendor allowances are applied to the related product cost by item and, therefore, reduce the carrying value of inventory by item. When the items are sold, the vendor allowance is recognized. When it is not possible, due to systems constraints, to allocate vendor allowances to the product by item, vendor allowances are recognized as a reduction in merchandise costs based on inventory turns and, therefore, recognized as the product is sold.
Advertising Costs
The Company’s advertising costs are recognized in the periods the related expenses are incurred and are included in the “Merchandise costs” line item of the Consolidated Statements of Operations. The Company’s pre-tax advertising costs totaled $679 in 2015, $648 in 2014 and $587 in 2013. The Company does not record vendor allowances for co-operative advertising as a reduction of advertising expense.
Consolidated Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be temporary cash investments.
A-41
Segments
The Company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States. The Company’s retail operations, which represent over 99% of the Company’s consolidated sales and EBITDA, are its only reportable segment. The Company’s retail operating divisions have been aggregated into one reportable segment due to the operating divisions having similar economic characteristics with similar long-term financial performance. In addition, the Company’s operating divisions offer to its customers similar products, have similar distribution methods, operate in similar regulatory environments, purchase the majority of the Company’s merchandise for retail sale from similar (and in many cases identical) vendors on a coordinated basis from a centralized location, serve similar types of customers, and are allocated capital from a centralized location. The Company’s operating divisions reflect the manner in which the business is managed and how the Company’s Chief Executive Officer, who acts as the Company’s chief operating decision maker, assess performance internally. All of the Company’s operations are domestic.
The following table presents sales revenue by type of product for 2015, 2014 and 2013.
2015 | 2014 | 2013 | |||||||||||||||||||
Amount | % of total | Amount | % of total | Amount | % of total | ||||||||||||||||
Non Perishable(1) | $ | 57,187 | 52.1% | $ | 54,392 | 50.1% | $ | 49,229 | 50.0% | ||||||||||||
Perishable(2) | 25,726 | 23.4% | 24,178 | 22.3% | 20,625 | 21.0% | |||||||||||||||
Fuel | 14,802 | 13.5% | 18,850 | 17.4% | 18,962 | 19.3% | |||||||||||||||
Pharmacy | 9,778 | 8.9% | 9,032 | 8.3% | 8,073 | 8.2% | |||||||||||||||
Other(3) | 2,337 | 2.1% | 2,013 | 1.9% | 1,486 | 1.5% | |||||||||||||||
Total Sales and other revenue | $ | 109,830 | 100.0% | $ | 108,465 | 100.0% | $ | 98,375 | 100.0% |
2. Mergers
On December 18, 2015, the Company closed its merger with Roundy’s by purchasing 100% of Roundy’s outstanding common stock for $3.60 per share and assuming Roundy’s outstanding debt, for a purchase price of $866. The merger brings a complementary store base in communities throughout Wisconsin and a stronger presence in the greater Chicagoland area. The merger was accounted for under the purchase method of accounting and was financed through a combination of commercial paper and long-term debt (see Note 6). In a business combination, the purchase price is allocated to assets acquired and liabilities assumed based on their fair values, with any excess of purchase price over fair value recognized as goodwill. In addition to recognizing the assets and liabilities on the acquired company’s balance sheet, the Company reviews supply contracts, leases, financial instruments, employment agreements and other significant agreements to identify potential assets or liabilities that require recognition in connection with the application of acquisition accounting under Accounting Standards Codification (“ASC”) 805. Intangible assets are recognized apart from goodwill when the asset arises from contractual or other legal rights, or are separable from the acquired entity such that they may be sold, transferred, licensed, rented or exchanged either on a standalone basis or in combination with a related contract, asset or liability.
A-42
Pending finalization of the Company’s valuation and other items, the following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as part of the merger with Roundy’s:
December 18, 2015 | ||||||
ASSETS | ||||||
Cash and temporary cash investments | $ | 20 | ||||
Store deposits in-transit | 30 | |||||
Receivables | 43 | |||||
FIFO inventory | 323 | |||||
Prepaid and other current assets | 19 | |||||
Total current assets | 435 | |||||
Property, plant and equipment | 342 | |||||
Intangibles | 324 | |||||
Other assets | 4 | |||||
Total Assets, excluding Goodwill | 1,105 | |||||
LIABILITIES | ||||||
Current portion of obligations under capital leases and financing obligations | (9 | ) | ||||
Trade accounts payable | (236 | ) | ||||
Accrued salaries and wages | (40 | ) | ||||
Other current liabilities | (89 | ) | ||||
Total current liabilities | (374 | ) | ||||
Fair-value of long-term debt | (678 | ) | ||||
Fair-value of long-term obligations under capital leases and financing obligations | (20 | ) | ||||
Deferred income taxes | (112 | ) | ||||
Pension and postretirement benefit obligations | (36 | ) | ||||
Other long-term liabilities | (111 | ) | ||||
Total Liabilities | (1,331 | ) | ||||
Total Identifiable Net Liabilities | (226 | ) | ||||
Goodwill | 414 | |||||
Total Purchase Price | $ | 188 |
Of the $324 allocated to intangible assets, $211 relates to the Mariano’s, Pick ’n Save, Metro Market and Copps trade names, to which we assigned an indefinite life and, therefore, will not be amortized. The Company also recorded $69, $38, and $6 related to favorable leasehold interests, pharmacy prescription files and customer lists, respectively. The Company will amortize the favorable leasehold interests over a weighted average of twelve years. The Company will amortize the pharmacy prescription files and customer lists over seven and two years, respectively. The goodwill recorded as part of the merger was attributable to the assembled workforce of Roundy’s and operational synergies expected from the merger, as well as any intangible assets that do not qualify for separate recognition. The transaction was treated as a stock purchase for income tax purposes. The assets acquired and liabilities assumed as part of the merger did not result in a step up of the tax basis and goodwill is not expected to be deductible for tax purposes. The above amounts represent the preliminary allocation of the purchase price, and are subject to revision when the resulting valuations of property and intangible assets are finalized, which will occur prior to December 18, 2016. Due to the timing of the merger closing late in the year, the revenue and earnings of Roundy’s in 2015 were not material.
A-43
On August 18, 2014, the Company closed its merger with Vitacost.com, Inc. (“Vitacost.com”) by purchasing 100% of the Vitacost.com outstanding common stock for $8.00 per share or $287. This merger affords the Company access to Vitacost.com’s extensive e-commerce platform, which can be combined with the Company’s customer insights and loyal customer base, to create new levels of personalization and convenience for customers. The merger was accounted for under the purchase method of accounting and was financed through the issuance of commercial paper (see Note 6).
The Company’s purchase price allocation was finalized in the second quarter of 2015. The changes in the fair values assumed from the preliminary amounts were not material. The table below summarizes the final fair values of the assets acquired and liabilities assumed:
August 18, 2014 | ||||||
ASSETS | ||||||
Total current assets | $ | 80 | ||||
Property, plant and equipment | 28 | |||||
Intangibles | 81 | |||||
Total Assets, excluding Goodwill | 189 | |||||
LIABILITIES | ||||||
Total current liabilities | (56 | ) | ||||
Deferred income taxes | (6 | ) | ||||
Total Liabilities | (62 | ) | ||||
Total Identifiable Net Assets | 127 | |||||
Goodwill | 160 | |||||
Total Purchase Price | $ | 287 |
Of the $81 allocated to intangible assets, the Company recorded $49, $26 and $6 related to customer relationships, technology and the trade name, respectively. The Company will amortize the technology and the trade name, using the straight line method, over 10 and three years, respectively, while the customer relationships will be amortized over five years using the declining balance method. The goodwill recorded as part of the merger was attributable to the assembled workforce of Vitacost.com and operational synergies expected from the merger, as well as any intangible assets that did not qualify for separate recognition. The transaction was treated as a stock purchase for income tax purposes. The assets acquired and liabilities assumed as part of the merger did not result in a step up of the tax basis and goodwill is not expected to be deductible for tax purposes.
Pro forma results of operations, assuming the Harris Teeter Supermarkets, Inc. (“Harris Teeter”) merger had taken place at the beginning of 2012, the Vitacost.com merger had taken place at the beginning of 2013 and the Roundy’s transaction had taken place at the beginning of 2014, are included in the following table. The pro forma information includes historical results of operations of Harris Teeter, Vitacost.com and Roundy’s, as well as adjustments for interest expense that would have been incurred due to financing the mergers, depreciation and amortization of the assets acquired and excludes the pre-merger transaction related expenses incurred by Harris Teeter, Vitacost.com, Roundy’s and the Company. The pro forma information does not include efficiencies, cost reductions, synergies or investments in lower prices for our customers expected to result from the mergers. The unaudited pro
A-44
forma financial information is not necessarily indicative of the results that actually would have occurred had the Harris Teeter merger been completed at the beginning of 2012, the Vitacost.com merger completed at the beginning of 2013 or the Roundy’s merger completed at the beginning of 2014.
Fiscal year ended January 30, 2016 | Fiscal year ended January 31, 2015 | Fiscal year ended February 1, 2014 | |||||||||||||
Sales | $ | 113,308 | $ | 112,458 | $ | 103,584 | |||||||||
Net earnings including noncontrolling interests | 2,061 | 1,751 | 1,624 | ||||||||||||
Net earnings attributable to noncontrolling interests | 10 | 19 | 12 | ||||||||||||
Net earnings attributable to The Kroger Co. | $ | 2,051 | $ | 1,732 | $ | 1,612 |
3. Goodwill and Intangible Assets
The following table summarizes the changes in the Company’s net goodwill balance through January 30, 2016.
2015 | 2014 | ||||||||
Balance beginning of year | |||||||||
Goodwill | $ | 4,836 | $ | 4,667 | |||||
Accumulated impairment losses | (2,532 | ) | (2,532 | ) | |||||
2,304 | 2,135 | ||||||||
Activity during the year | |||||||||
Mergers | 420 | 169 | |||||||
Balance end of year | |||||||||
Goodwill | 5,256 | 4,836 | |||||||
Accumulated impairment losses | (2,532 | ) | (2,532 | ) | |||||
$ | 2,724 | $ | 2,304 |
In 2015, the Company acquired all the outstanding shares of Roundy’s, a supermarket retailer in the Wisconsin and Chicagoland markets, resulting in additional goodwill totaling $414. Roundy’s is accounted for as a single reporting unit.
In 2014, the Company acquired all the outstanding shares of Vitacost.com, an online retailer, resulting in additional goodwill of $160.
See Note 2 for additional information regarding the Roundy’s and Vitacost.com mergers.
Testing for impairment must be performed annually, or on an interim basis upon the occurrence of a triggering event or a change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The annual evaluations of goodwill and indefinite-lived intangible assets were performed during the fourth quarter of 2015, 2014 and 2013 did not result in impairment.
Based on current and future expected cash flows, the Company believes goodwill impairments are not reasonably likely. A 10% reduction in fair value of the Company’s reporting units would not indicate a potential for impairment of the Company’s remaining goodwill balance.
In 2015, the Company acquired definite and indefinite lived intangible assets totaling approximately $324 as a result of the merger with Roundy’s.
In 2014, the Company acquired definite and indefinite lived intangible assets totaling approximately $81 as a result of the merger with Vitacost.com.
A-45
The following table summarizes the Company’s intangible assets balance through January 30, 2016.
2015 | 2014 | |||||||||||||||||||||
Gross carrying amount | Accumulated | Gross carrying amount | Accumulated amortization(1) | |||||||||||||||||||
Definite-lived favorable leasehold interests | $ | 169 | $ | (31 | ) | $ | 101 | $ | (26 | ) | ||||||||||||
Definite-lived pharmacy prescription files | 127 | (40 | ) | 98 | (41 | ) | ||||||||||||||||
Definite-lived customer relationships | 93 | (39 | ) | 87 | (17 | ) | ||||||||||||||||
Definite-lived other | 78 | (23 | ) | 74 | (13 | ) | ||||||||||||||||
Indefinite-lived trade name | 641 | — | 430 | — | ||||||||||||||||||
Indefinite-lived liquor licenses | 78 | — | 64 | — | ||||||||||||||||||
Total | $ | 1,186 | $ | (133 | ) | $ | 854 | $ | (97 | ) |
Amortization expense associated with intangible assets totaled approximately $51, $41 and $18, during fiscal years 2015, 2014 and 2013, respectively. Future amortization expense associated with the net carrying amount of definite-lived intangible assets for the years subsequent to 2015 is estimated to be approximately:
2016 | $ | 57 | |
2017 | 48 | ||
2018 | 42 | ||
2019 | 40 | ||
2020 | 35 | ||
Thereafter | 112 | ||
Total future estimated amortization associated | |||
with definite-lived intangible assets | $ | 334 |
4. Property, Plant and Equipment, Net
Property, plant and equipment, net consists of:
2015 | 2014 | ||||||||
Land | $ | 2,997 | $ | 2,819 | |||||
Buildings and land improvements | 10,524 | 9,639 | |||||||
Equipment | 12,520 | 11,587 | |||||||
Leasehold improvements | 8,710 | 8,068 | |||||||
Construction-in-progress | 2,115 | 1,690 | |||||||
Leased property under capital leases and financing obligations | 801 | 737 | |||||||
Total property, plant and equipment | 37,667 | 34,540 | |||||||
Accumulated depreciation and amortization | (18,048 | ) | (16,628 | ) | |||||
Property, plant and equipment, net | $ | 19,619 | $ | 17,912 |
Accumulated depreciation and amortization for leased property under capital leases was $293 at January 30, 2016 and $332 at January 31, 2015.
A-46
Approximately $264 and $260, net book value, of property, plant and equipment collateralized certain mortgages at January 30, 2016 and January 31, 2015, respectively.
5. TAXES BASEDON INCOME
The provision for taxes based on income consists of:
2015 | 2014 | 2013 | |||||||||
Federal | |||||||||||
Current | $ | 723 | $ | 847 | $ | 638 | |||||
Deferred | 266 | (15 | ) | 81 | |||||||
Subtotal federal | 989 | 832 | 719 | ||||||||
State and local | |||||||||||
Current | 37 | 59 | 42 | ||||||||
Deferred | 19 | 11 | (10 | ) | |||||||
Subtotal state and local | 56 | 70 | 32 | ||||||||
Total | $ | 1,045 | $ | 902 | $ | 751 |
A reconciliation of the statutory federal rate and the effective rate follows:
2015 | 2014 | 2013 | |||||||
Statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
State income taxes, net of federal tax benefit | 1.2 | % | 1.7 | % | 0.9 | % | |||
Credits | (1.2 | )% | (1.2 | )% | (1.3 | )% | |||
Favorable resolution of issues | (0.2 | )% | (0.4 | )% | — | % | |||
Domestic manufacturing deduction | (0.7 | )% | (0.7 | )% | (1.1 | )% | |||
Other changes, net | (0.3 | )% | (0.3 | )% | (0.6 | )% | |||
33.8 | % | 34.1 | % | 32.9 | % |
The 2015 effective tax rate differed from the federal statutory rate primarily as a result of the utilization of tax credits, the Domestic Manufacturing Deduction and other changes, partially offset by the effect of state income taxes. The 2015 rate for state income taxes is lower than 2014 due to the filing of amended returns to claim additional benefits in years still under review, the favorable resolution of state issues and an increase in state credits. The 2013 rate for state income taxes is lower than 2015 and 2014 due to an increase in state credits, including the benefit from filing amended returns to claim additional credits. The 2013 benefit from the Domestic Manufacturing Deduction is greater than 2015 and 2014 due to the amendment of prior years’ tax returns to claim the additional benefit available in years still under review by the Internal Revenue Service.
A-47
The tax effects of significant temporary differences that comprise tax balances were as follows:
2015 | 2014 | |||||||
Current deferred tax assets: | ||||||||
Net operating loss and credit carryforwards | $ | 10 | $ | 5 | ||||
Compensation related costs | 83 | 88 | ||||||
Other | 61 | 14 | ||||||
Subtotal | 154 | 107 | ||||||
Valuation allowance | (9 | ) | (7 | ) | ||||
Total current deferred tax assets | 145 | 100 | ||||||
Current deferred tax liabilities: | ||||||||
Insurance related costs | (56 | ) | (99 | ) | ||||
Inventory related costs | (310 | ) | (288 | ) | ||||
Total current deferred tax liabilities | (366 | ) | (387 | ) | ||||
Current deferred taxes | $ | (221 | ) | $ | (287 | ) | ||
Long-term deferred tax assets: | ||||||||
Compensation related costs | $ | 709 | $ | 721 | ||||
Lease accounting | 106 | 129 | ||||||
Closed store reserves | 57 | 50 | ||||||
Insurance related costs | 29 | 77 | ||||||
Net operating loss and credit carryforwards | 128 | 115 | ||||||
Other | 17 | 2 | ||||||
Subtotal | 1,046 | 1,094 | ||||||
Valuation allowance | (43 | ) | (42 | ) | ||||
Total long-term deferred tax assets | 1,003 | 1,052 | ||||||
Long-term deferred tax liabilities: | ||||||||
Depreciation and amortization | (2,755 | ) | (2,261 | ) | ||||
Total long-term deferred tax liabilities | (2,755 | ) | (2,261 | ) | ||||
Long-term deferred taxes | $ | (1,752 | ) | $ | (1,209 | ) |
On November 19, 2015, the Internal Revenue Service issued implementation guidance for retailers with respect to recently issued tangible property regulations. The adoption of this guidance resulted in the immediate deduction of qualifying costs related to current and prior year store remodels, resulting in an increase in long-term deferred tax liability and current income tax receivable. The adoption of this guidance, along with the impact of the Roundy’s merger, resulted in the increase in the deferred tax liability related to depreciation and amortization from January 31, 2015 to January 30, 2016.
At January 30, 2016, the Company had net operating loss carryforwards for state income tax purposes of $1,460. These net operating loss carryforwards expire from 2016 through 2036. The utilization of certain of the Company’s state net operating loss carryforwards may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its state net operating losses.
A-48
At January 30, 2016, the Company had state credit carryforwards of $65, most of which expire from 2016 through 2027. The utilization of certain of the Company’s credits may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its state credits.
At January 30, 2016, the Company had federal net operating loss carryforwards of $62. These net operating loss carryforwards expire from 2030 through 2034. The utilization of certain of the Company’s federal net operating loss carryforwards may be limited in a given year. Further, based on the analysis described below, the Company has not recorded a valuation allowance against the deferred tax assets resulting from its federal net operating losses.
The Company regularly reviews all deferred tax assets on a tax filer and jurisdictional basis to estimate whether these assets are more likely than not to be realized based on all available evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Projected future taxable income is based on expected results and assumptions as to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary differences is based on current tax law and the Company’s tax methods of accounting. Unless deferred tax assets are more likely than not to be realized, a valuation allowance is established to reduce the carrying value of the deferred tax asset until such time that realization becomes more likely than not. Increases and decreases in these valuation allowances are included in “Income tax expense” in the Consolidated Statements of Operations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, including positions impacting only the timing of tax benefits, is as follows:
2015 | 2014 | 2013 | ||||||||||
Beginning balance | $ | 246 | $ | 325 | $ | 299 | ||||||
Additions based on tax positions related to the current year | 11 | 17 | 23 | |||||||||
Reductions based on tax positions related to the current year | (11 | ) | (6 | ) | (10 | ) | ||||||
Additions for tax positions of prior years | 4 | 9 | 17 | |||||||||
Reductions for tax positions of prior years | (27 | ) | (36 | ) | (4 | ) | ||||||
Settlements | (17 | ) | (63 | ) | — | |||||||
Lapse of statute | (2 | ) | — | — | ||||||||
Ending balance | $ | 204 | $ | 246 | $ | 325 |
The Company does not anticipate that changes in the amount of unrecognized tax benefits over the next twelve months will have a significant impact on its results of operations or financial position.
As of January 30, 2016, January 31, 2015 and February 1, 2014, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $83, $90 and $98, respectively.
To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense. During the years ended January 30, 2016, January 31, 2015 and February 1, 2014, the Company recognized approximately $(5), $3 and $10, respectively, in interest and penalties (recoveries). The Company had accrued approximately $25, $30 and $41 for the payment of interest and penalties as of January 30, 2016, January 31, 2015 and February 1, 2014, respectively.
As of January 31, 2015, the Internal Revenue Service had concluded its examination of our 2010 and 2011 federal tax returns and is currently auditing tax years 2012 and 2013. The 2012 and 2013 audits are expected to be completed in 2016.
A-49
6. DEBT OBLIGATIONS
Long-term debt consists of:
2015 | 2014 | |||||||
0.76% to 8.00% Senior notes due through 2043 | $ | 9,826 | $ | 9,224 | ||||
5.00% to 12.75% Mortgages due in varying amounts through 2027 | 58 | 73 | ||||||
0.27% to 0.66% Commercial paper due through February 2016 | 990 | 1,275 | ||||||
Other | 522 | 454 | ||||||
Total debt | 11,396 | 11,026 | ||||||
Less current portion | (2,318 | ) | (1,844 | ) | ||||
Total long-term debt | $ | 9,078 | $ | 9,182 |
In 2015, the Company issued $500 of senior notes due in fiscal year 2026 bearing an interest rate of 3.50%, $300 of senior notes due in fiscal year 2021 bearing an interest rate of 2.60% and $300 of senior notes due in fiscal year 2019 bearing an interest rate of 2.00%, and repaid $500 of senior notes bearing an interest rate of 3.90% upon maturity. Due to the merger with Roundy’s, the Company assumed $678 of term loans, which were entirely paid off following the merger.
In 2014, the Company issued $500 of senior notes due in fiscal year 2021 bearing an interest rate of 2.95% and repaid $300 of senior notes bearing an interest rate of 4.95% upon maturity.
On June 30, 2014, the Company amended, extended and restated its $2,000 unsecured revolving credit facility. The Company entered into the amended credit facility to amend, extend and restate the Company’s existing credit facility that would have terminated on January 25, 2017. The amended credit facility provides for a $2,750 unsecured revolving credit facility (the “Credit Agreement”), with a termination date of June 30, 2019, unless extended as permitted under the Credit Agreement. The Company has the ability to increase the size of the Credit Agreement by up to an additional $750, subject to certain conditions.
Borrowings under the Credit Agreement bear interest at the Company’s option, at either (i) LIBOR plus a market rate spread, based on the Company’s Leverage Ratio or (ii) the base rate, defined as the highest of (a) the Federal Funds Rate plus 0.5%, (b) the Bank of America prime rate, and (c) one-month LIBOR plus 1.0%, plus a market rate spread based on the Company’s Leverage Ratio. The Company will also pay a Commitment Fee based on the Leverage Ratio and Letter of Credit fees equal to a market rate spread based on the Company’s Leverage Ratio. The Credit Agreement contains covenants, which, among other things, require the maintenance of a Leverage Ratio of not greater than 3.50:1.00 and a Fixed Charge Coverage Ratio of not less than 1.70:1.00. The Company may repay the Credit Agreement in whole or in part at any time without premium or penalty. The Credit Agreement is not guaranteed by the Company’s subsidiaries.
As of January 30, 2016, the Company had $990 of borrowings of commercial paper, with a weighted average interest rate of 0.66%, and no borrowings under its Credit Agreement. As of January 31, 2015, the Company had $1,275 of borrowings of commercial paper, with a weighted average interest rate of 0.37%, and no borrowings under its Credit Agreement.
As of January 30, 2016, the Company had outstanding letters of credit in the amount of $244, of which $13 reduces funds available under the Company’s Credit Agreement. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company.
A-50
Most of the Company’s outstanding public debt is subject to early redemption at varying times and premiums, at the option of the Company. In addition, subject to certain conditions, some of the Company’s publicly issued debt will be subject to redemption, in whole or in part, at the option of the holder upon the occurrence of a redemption event, upon not less than five days’ notice prior to the date of redemption, at a redemption price equal to the default amount, plus a specified premium. “Redemption Event” is defined in the indentures as the occurrence of (i) any person or group, together with any affiliate thereof, beneficially owning 50% or more of the voting power of the Company, (ii) any one person or group, or affiliate thereof, succeeding in having a majority of its nominees elected to the Company’s Board of Directors, in each case, without the consent of a majority of the continuing directors of the Company or (iii) both a change of control and a below investment grade rating.
The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2015, and for the years subsequent to 2015 are:
2016 | $ | 2,318 | |
2017 | 735 | ||
2018 | 1,307 | ||
2019 | 774 | ||
2020 | 724 | ||
Thereafter | 5,538 | ||
Total debt | $ | 11,396 |
7. DERIVATIVE FINANCIAL INSTRUMENTS
GAAP defines derivatives, requires that derivatives be carried at fair value on the balance sheet, and provides for hedge accounting when certain conditions are met. The Company’s derivative financial instruments are recognized on the balance sheet at fair value. Changes in the fair value of derivative instruments designated as “cash flow” hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings. Other comprehensive income or loss is reclassified into current period earnings when the hedged transaction affects earnings. Changes in the fair value of derivative instruments designated as “fair value” hedges, along with corresponding changes in the fair values of the hedged assets or liabilities, are recorded in current period earnings. Ineffective portions of fair value hedges, if any, are recognized in current period earnings.
The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of the hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively.
Interest Rate Risk Management
The Company is exposed to market risk from fluctuations in interest rates. The Company manages its exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair value hedges) and forward-starting interest rate swaps (cash flow hedges). The Company’s current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, the Company uses the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total of $2,500 or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.
A-51
The Company reviews compliance with these guidelines annually with the Financial Policy Committee of the Board of Directors. These guidelines may change as the Company’s needs dictate.
Fair Value Interest Rate Swaps
The table below summarizes the outstanding interest rate swaps designated as fair value hedges as of January 30, 2016 and January 31, 2015.
2015 | 2014 | ||||||||||
Pay Floating | Pay Fixed | Pay Floating | Pay Fixed | ||||||||
Notional amount | $ | 100 | $— | $ | 100 | $— | |||||
Number of contracts | 2 | — | 2 | — | |||||||
Duration in years | 2.92 | — | 3.94 | — | |||||||
Average variable rate | 6.00 | % | — | 5.83 | % | — | |||||
Average fixed rate | 6.80 | % | — | 6.80 | % | — | |||||
Maturity | December 2018 | December 2018 |
The gain or loss on these derivative instruments as well as the offsetting gain or loss on the hedged items attributable to the hedged risk is recognized in current earnings as “Interest expense.” These gains and losses for 2015 and 2014 were as follows:
Year-To-Date | ||||||||
January 30, 2016 | January 31, 2015 | |||||||
Consolidated Statements of Operations Classification | Gain/ (Loss) on Swaps | Gain/ (Loss) on Borrowings | Gain/ (Loss) on Swaps | Gain/ (Loss) on Borrowings | ||||
Interest Expense | $1 | $(1) | $2 | $(2) |
The following table summarizes the location and fair value of derivative instruments designated as fair value hedges on the Company’s Consolidated Balance Sheets:
Cash Flow Forward-Starting Interest Rate Swaps
As of January 30, 2016, the Company had seven forward-starting interest rate swap agreements with maturity dates of August 2017 with an aggregate notional amount totaling $400. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuance of debt in August 2017. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of January 30, 2016, the fair value of the interest rate swaps was recorded in other long-term liabilities for $27 and accumulated other comprehensive loss for $17 net of tax.
A-52
As of January 31, 2015, the Company had four forward-starting interest rate swap agreements with maturity dates of October 2015 with an aggregate notional amount totaling $300 and seven forward-starting interest rate swap agreements with maturity dates of August 2017 with an aggregate notional amount totaling $400. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuances of debt in October 2015 and August 2017. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of January 31, 2015, the fair value of the interest rate swaps was recorded in other long-term liabilities for $39 and accumulated other comprehensive loss for $25 net of tax.
During 2015, the Company terminated eight forward-starting interest rate swap agreements with maturity dates of October 2015 and January 2016 with an aggregate notional amount totaling $600. Four of these forward-starting interest rate swap agreements, with an aggregate notional amount totaling $300, were entered into and terminated in 2015. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued in 2015. As discussed in Note 6, the Company issued $1,100 of senior notes in 2015. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $17, $11 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made.
The following table summarizes the effect of the Company’s derivative instruments designated as cash flow hedges for 2015 and 2014:
Year-To-Date | ||||||||||
Derivatives in Cash Flow Hedging Relationships | Amount of Gain/ (Loss) in AOCI on Derivative (Effective Portion) | Amount of Gain/ (Loss) Reclassified from AOCI into Income (Effective Portion) | Location of Gain/ (Loss) Reclassified into Income (Effective Portion) | |||||||
2015 | 2014 | 2015 | 2014 | |||||||
Forward-Starting Interest Rate | ||||||||||
Swaps, net of tax* | $(51) | $(49) | $(1) | $(1) | Interest expense |
|
For the above fair value and cash flow interest rate swaps, the Company has entered into International Swaps and Derivatives Association master netting agreements that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. These master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.
Collateral is generally not required of the counterparties or of the Company under these master netting agreements. As of January 30, 2016 and January 31, 2015, no cash collateral was received or pledged under the master netting agreements.
A-53
The effect of the net settlement provisions of these master netting agreements on the Company’s derivative balances upon an event of default or termination event is as follows as of January 30, 2016 and January 31, 2015:
January 30, 2016 | Gross Amount Recognized | Gross Amounts Offset in the Balance Sheet | Net Amount Presented in the Balance Sheet | Gross Amounts Not Offset in the Balance Sheet | Net Amount | |||||||
Financial Instruments | Cash Collateral | |||||||||||
Assets | ||||||||||||
Fair Value Interest | ||||||||||||
Rate Swaps | $1 | $— | $1 | $— | $— | $1 | ||||||
Liabilities | ||||||||||||
Cash Flow Forward-Starting | ||||||||||||
Interest Rate Swaps | 27 | — | 27 | — | — | 27 |
January 31, 2015 | Gross Amount Recognized | Gross Amounts Offset in the Balance Sheet | Net Amount Presented inthe Balance Sheet | Gross Amounts Not Offset in the Balance Sheet | Net Amount | |||||||
Financial Instruments | Cash Collateral | |||||||||||
Liabilities | ||||||||||||
Cash Flow Forward-Starting | ||||||||||||
Interest Rate Swaps | $39 | $— | $39 | $— | $— | $39 |
Commodity Price Protection
The Company enters into purchase commitments for various resources, including raw materials utilized in its food production plants and energy to be used in its stores, warehouses, food production plants and administrative offices. The Company enters into commitments expecting to take delivery of and to utilize those resources in the conduct of normal business. Those commitments for which the Company expects to utilize or take delivery in a reasonable amount of time in the normal course of business qualify as normal purchases and normal sales.
8. FAIR VALUE MEASUREMENTS
GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy defined in the standards are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities;
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;
Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A-54
For items carried at (or adjusted to) fair value in the consolidated financial statements, the following tables summarize the fair value of these instruments at January 30, 2016 and January 31, 2015:
January 30, 2016 Fair Value Measurements Using
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||
Trading Securities | $48 | $ — | $— | $ 48 | ||||||||||
Available-for-Sale Securities | 41 | — | — | 41 | ||||||||||
Long-Lived Assets | — | — | 7 | 7 | ||||||||||
Interest Rate Hedges | — | (26 | ) | — | (26 | ) | ||||||||
Total | $89 | $(26 | ) | $ 7 | $ 70 |
January 31, 2015 Fair Value Measurements Using
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||
Trading Securities | $47 | $ — | $— | $ 47 | ||||||||||
Available-for-Sale Securities | 36 | — | — | 36 | ||||||||||
Warrants | — | 26 | — | 26 | ||||||||||
Long-Lived Assets | — | — | 22 | 22 | ||||||||||
Interest Rate Hedges | — | (39 | ) | — | (39 | ) | ||||||||
Total | $83 | $(13 | ) | $22 | $ 92 |
In 2015 and 2014, unrealized gains on the Level 1 available-for-sale securities totaled $5 and $8, respectively.
The Company values warrants using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model is classified as a Level 2 input.
The Company values interest rate hedges using observable forward yield curves. These forward yield curves are classified as Level 2 inputs.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of goodwill, other intangible assets, long-lived assets and in the valuation of store lease exit costs. The Company reviews goodwill and indefinite-lived intangible assets for impairment annually, during the fourth quarter of each fiscal year, and as circumstances indicate the possibility of impairment. See Note 3 for further discussion related to the Company’s carrying value of goodwill. Long-lived assets and store lease exit costs were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. See Note 1 for further discussion of the Company’s policies and recorded amounts for impairments of long-lived assets and valuation of store lease exit costs. In 2015, long-lived assets with a carrying amount of $53 were written down to their fair value of $7, resulting in an impairment charge of $46. In 2014, long-lived assets with a carrying amount of $59 were written down to their fair value of $22, resulting in an impairment charge of $37.
A-55
Mergers are accounted for using the acquisition method of accounting, which requires that the purchase price paid for an acquisition be allocated to the assets and liabilities acquired based on their estimated fair values as of the effective date of the acquisition, with the excess of the purchase price over the net assets being recorded as goodwill. See Note 2 for further discussion related to accounting for mergers.
FAIR VALUEOF OTHER FINANCIAL INSTRUMENTS
Current and Long-term Debt
The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at respective year-ends. At January 30, 2016, the fair value of total debt was $12,344 compared to a carrying value of $11,396. At January 31, 2015, the fair value of total debt was $12,378 compared to a carrying value of $11,026.
Cash and Temporary Cash Investments, Store Deposits In-Transit, Receivables, Prepaid and Other Current Assets, Trade Accounts Payable, Accrued Salaries and Wages and Other Current Liabilities
The carrying amounts of these items approximated fair value.
Other Assets
The fair values of these investments were estimated based on quoted market prices for those or similar investments, or estimated cash flows, if appropriate. At January 30, 2016 and January 31, 2015, the carrying and fair value of long-term investments for which fair value is determinable was $128 and $133, respectively. At January 30, 2016 and January 31, 2015, the carrying value of notes receivable for which fair value is determinable was $145 and $98, respectively.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table represents the changes in AOCI by component for the years ended January 31, 2015 and January 30, 2016:
Cash Flow Hedging Activities(1) | Available for sale Securities(1) | Pension and Postretirement Defined Benefit Plans(1) | Total(1) | ||||||||||||
Balance at February 1, 2014 | $ (25 | ) | $12 | $(451 | ) | $(464 | ) | ||||||||
OCI before reclassifications(2) | (25 | ) | 5 | (351 | ) | (371 | ) | ||||||||
Amounts reclassified out of AOCI(3) | 1 | — | 22 | 23 | |||||||||||
Net current-period OCI | (24 | ) | 5 | (329 | ) | (348 | ) | ||||||||
Balance at January 31, 2015 | (49 | ) | 17 | (780 | ) | (812 | ) | ||||||||
OCI before reclassifications(2) | (3 | ) | 3 | 78 | 78 | ||||||||||
Amounts reclassified out of AOCI(3) | 1 | — | 53 | 54 | |||||||||||
Net current-period OCI | (2 | ) | 3 | 131 | 132 | ||||||||||
Balance at January 30, 2016 | $ (51 | ) | $20 | $(649 | ) | $(680 | ) |
A-56
The following table represents the items reclassified out of AOCI and the related tax effects for the years ended January 30, 2016, January 31, 2015 and February 1, 2014:
For the year ended January 30, 2016 | For the year ended January 31, 2015 | For the year ended February 1, 2014 | ||||||||||||||||
Gains on cash flow hedging activities | ||||||||||||||||||
Amortization of unrealized gains and losses | ||||||||||||||||||
on cash flow hedging activities(1) | $ | 1 | $ | 1 | $ | 2 | ||||||||||||
Tax expense | — | — | (1 | ) | ||||||||||||||
Net of tax | 1 | 1 | 1 | |||||||||||||||
Pension and postretirement defined benefit | ||||||||||||||||||
plan items | ||||||||||||||||||
Amortization of amounts included in net | ||||||||||||||||||
periodic pension expense(2) | 85 | 35 | 98 | |||||||||||||||
Tax expense | (32 | ) | (13 | ) | (36 | ) | ||||||||||||
Net of tax | 53 | 22 | 62 | |||||||||||||||
Total reclassifications, net of tax | $ | 54 | $ | 23 | $ | 63 |
10. LEASESAND LEASE-FINANCED TRANSACTIONS
While the Company’s current strategy emphasizes ownership of store real estate, the Company operates primarily in leased facilities. Lease terms generally range from 10 to 20 years with options to renew for varying terms. Terms of certain leases include escalation clauses, percentage rent based on sales or payment of executory costs such as property taxes, utilities or insurance and maintenance. Rent expense for leases with escalation clauses or other lease concessions are accounted for on a straight-line basis beginning with the earlier of the lease commencement date or the date the Company takes possession. Portions of certain properties are subleased to others for periods generally ranging from one to 20 years.
Rent expense (under operating leases) consists of:
2015 | 2014 | 2013 | ||||||||||||
Minimum rentals | $ | 807 | $ | 795 | $ | 706 | ||||||||
Contingent payments | 18 | 16 | 13 | |||||||||||
Tenant income | (102 | ) | (104 | ) | (106 | ) | ||||||||
Total rent expense | $ | 723 | $ | 707 | $ | 613 |
A-57
Minimum annual rentals and payments under capital leases and lease-financed transactions for the five years subsequent to 2015 and in the aggregate are:
Capital Leases | Operating Leases | Lease- Financed Transactions | |||||||||||||
2016 | $ | 103 | $ | 967 | $ | 7 | |||||||||
2017 | 72 | 922 | 7 | ||||||||||||
2018 | 62 | 853 | 8 | ||||||||||||
2019 | 57 | 774 | 8 | ||||||||||||
2020 | 52 | 674 | 9 | ||||||||||||
Thereafter | 527 | 4,199 | 63 | ||||||||||||
Total | $ | 873 | $ | 8,389 | $ | 102 | |||||||||
Less estimated executory costs included in capital leases | — | ||||||||||||||
Net minimum lease payments under capital leases | 873 | ||||||||||||||
Less amount representing interest | 293 | ||||||||||||||
Present value of net minimum lease payments under | |||||||||||||||
capital leases | $ | 580 |
Total future minimum rentals under noncancellable subleases at January 30, 2016 were $261.
11. EARNINGSPERCOMMONSHARE
Net earnings attributable to The Kroger Co. per basic common share equals net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding. Net earnings attributable to The Kroger Co. per diluted common share equals net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options. The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:
For the year ended | For the year ended | For the year ended | ||||||||||||||||||||||
January 30, 2016 | January 31, 2015 | February 1, 2014 | ||||||||||||||||||||||
Earnings | Shares | Per | Earnings | Shares | Per | Earnings | Shares | Per | ||||||||||||||||
(in millions, except | (Numer- | (Denomi- | Share | (Numer- | (Denomi- | Share | (Numer- | (Denomi- | Share | |||||||||||||||
per share amounts) | ator) | nator) | Amount | ator) | nator) | Amount | ator) | nator) | Amount | |||||||||||||||
Net earnings attributable to The Kroger Co. per basic common share | $2,021 | 966 | $2.09 | $1,711 | 981 | $1.74 | $1,507 | 1,028 | $1.47 | |||||||||||||||
Dilutive effect of stock options | 14 | 12 | 12 | |||||||||||||||||||||
Net earnings attributable to The Kroger Co. per diluted common share | $2,021 | 980 | $2.06 | $1,711 | 993 | $1.72 | $1,507 | 1,040 | $1.45 |
The Company had combined undistributed and distributed earnings to participating securities totaling $18, $17 and $12 in 2015, 2014 and 2013, respectively.
A-58
The Company had options outstanding for approximately 1.9 million, 4.6 million and 4.7 million, respectively, for the years ended January 30, 2016, January 31, 2015 and February 1, 2014, which were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per diluted share.
12. STOCK OPTION PLANS
The Company grants options for common shares (“stock options”) to employees under various plans at an option price equal to the fair market value of the stock at the date of grant. The Company accounts for stock options under the fair value recognition provisions.Under this method, the Company recognizes compensation expense for all share-based payments granted. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. Equity awards may be made at one of four meetings of its Board of Directors occurring shortly after the Company’s release of quarterly earnings. The 2015 primary grant was made in conjunction with the June meeting of the Company’s Board of Directors. Certain changes to the stock option compensation strategy were put into effect in 2015, which resulted in a reduction to the number of stock options granted in 2015, compared to 2014 and 2013.
Stock options typically expire 10 years from the date of grant. Stock options vest between one and five years from the date of grant. At January 30, 2016, approximately 37 million common shares were available for future option grants under these plans.
In addition to the stock options described above, the Company awards restricted stock to employees and non-employee directors under various plans. The restrictions on these awards generally lapse between one and five years from the date of the awards. The Company records expense for restricted stock awards in an amount equal to the fair market value of the underlying shares on the grant date of the award, over the period the awards lapse. As of January 30, 2016, approximately 21 million common shares were available under the 2008, 2011 and 2014 Long-Term Incentive Plans (the “Plans”) for future restricted stock awards or shares issued to the extent performance criteria are achieved. The Company has the ability to convert shares available for stock options under the Plans to shares available for restricted stock awards. Under the Plans, four shares available for option awards can be converted into one share available for restricted stock awards.
All awards become immediately exercisable upon certain changes of control of the Company.
Stock Options
Changes in options outstanding under the stock option plans are summarized below:
Shares subject to option (in millions) | Weighted- average exercise price | |||||||||
Outstanding, year-end 2012 | 53.0 | $ | 11.30 | |||||||
Granted | 8.4 | $ | 18.84 | |||||||
Exercised | (17.7 | ) | $ | 11.11 | ||||||
Canceled or Expired | (0.4 | ) | $ | 12.74 | ||||||
Outstanding, year-end 2013 | 43.3 | $ | 12.83 | |||||||
Granted | 8.4 | $ | 24.71 | |||||||
Exercised | (10.3 | ) | $ | 11.56 | ||||||
Canceled or Expired | (0.6 | ) | $ | 15.56 | ||||||
Outstanding, year-end 2014 | 40.8 | $ | 15.56 | |||||||
Granted | 3.4 | $ | 38.40 | |||||||
Exercised | (8.9 | ) | $ | 13.54 | ||||||
Canceled or Expired | (0.4 | ) | $ | 19.98 | ||||||
Outstanding, year-end 2015 | 34.9 | $ | 18.26 |
A-59
A summary of options outstanding, exercisable and expected to vest at January 30, 2016 follows:
Number of shares | Weighted- average remaining contractual life | Weighted- average exercise price | Aggregate | |||||
(in millions) | (in years) | (in millions) | ||||||
Options Outstanding | 34.9 | 6.20 | $18.26 | 719 | ||||
Options Exercisable | 21.4 | 5.05 | $14.24 | 526 | ||||
Options Expected to Vest | 13.2 | 8.02 | $24.53 | 189 |
Restricted stock
Changes in restricted stock outstanding under the restricted stock plans are summarized below:
Restricted shares outstanding (in millions) | Weighted- average grant-date fair value | |||||||||
Outstanding, year-end 2012 | 8.6 | $ | 11.34 | |||||||
Granted | 6.3 | $ | 18.84 | |||||||
Lapsed | (5.1 | ) | $ | 11.49 | ||||||
Canceled or Expired | (0.2 | ) | $ | 13.66 | ||||||
Outstanding, year-end 2013 | 9.6 | $ | 16.16 | |||||||
Granted | 6.1 | $ | 24.76 | |||||||
Lapsed | (5.2 | ) | $ | 16.52 | ||||||
Canceled or Expired | (0.3 | ) | $ | 18.67 | ||||||
Outstanding, year-end 2014 | 10.2 | $ | 21.04 | |||||||
Granted | 3.2 | $ | 38.34 | |||||||
Lapsed | (5.4 | ) | $ | 21.49 | ||||||
Canceled or Expired | (0.4 | ) | $ | 22.80 | ||||||
Outstanding, year-end 2015 | 7.6 | $ | 28.01 |
The weighted-average grant date fair value of stock options granted during 2015, 2014 and 2013 was $9.78, $5.98 and $4.49, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes accounting judgment and financial estimates, including the term option holders are expected to retain their stock options before exercising them, the volatility of the Company’s share price over that expected term, the dividend yield over the term and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations. The increase in the fair value of the stock options granted during 2015, compared to 2014, resulted primarily from an increase in the Company’s share price, which decreased the expected dividend yield. The increase in the fair value of the stock options granted during 2014, compared to 2013, resulted primarily from an increase in the Company’s share price, which decreased the expected dividend yield, and an increase in the weighted average risk-free interest rate.
A-60
The following table reflects the weighted-average assumptions used for grants awarded to option holders:
2015 | 2014 | 2013 | ||||||
Weighted average expected volatility | 24.07 | % | 25.29 | % | 26.34 | % | ||
Weighted average risk-free interest rate | 2.12 | % | 2.06 | % | 1.87 | % | ||
Expected dividend yield | 1.20 | % | 1.51 | % | 1.82 | % | ||
Expected term (based on historical results) | 7.2 years | 6.6 years | 6.8 years |
The weighted-average risk-free interest rate was based on the yield of a treasury note as of the grant date, continuously compounded, which matures at a date that approximates the expected term of the options. The dividend yield was based on our history and expectation of dividend payouts. Expected volatility was determined based upon historical stock volatilities; however, implied volatility was also considered. Expected term was determined based upon historical exercise and cancellation experience.
Total stock compensation recognized in 2015, 2014 and 2013 was $165, $155 and $107, respectively. Stock option compensation recognized in 2015, 2014 and 2013 was $31, $32 and $24, respectively. Restricted shares compensation recognized in 2015, 2014 and 2013 was $134, $123 and $83, respectively.
The total intrinsic value of options exercised was $217, $142 and $115 in 2015, 2014 and 2013, respectively. The total amount of cash received in 2015 by the Company from the exercise of options granted under share-based payment arrangements was $120. As of January 30, 2016, there was $206 of total unrecognized compensation expense remaining related to non-vested share-based compensation arrangements granted under the Company’s equity award plans. This cost is expected to be recognized over a weighted-average period of approximately two years. The total fair value of options that vested was $33, $26 and $20 in 2015, 2014 and 2013, respectively.
Shares issued as a result of stock option exercises may be newly issued shares or reissued treasury shares. Proceeds received from the exercise of options, and the related tax benefit, may be utilized to repurchase the Company’s common shares under a stock repurchase program adopted by the Company’s Board of Directors. During 2015, the Company repurchased approximately five million common shares in such a manner.
13. COMMITMENTSAND 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.
A-61
Litigation –Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material effect on the Company’s financial position, results of operations, or cash flows.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and 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.
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.
14. STOCK
Preferred Shares
The Company has authorized five million shares of voting cumulative preferred shares; two million shares were available for issuance at January 30, 2016. The shares have a par value of $100 per share and are issuable in series.
Common Shares
The Company has authorized two billion common shares, $1 par value per share.
On June 25, 2015, the Company’s Board of Directors approved a two-for-one stock split of The Kroger Co.’s common shares in the form of a 100% stock dividend, which was effective July 13, 2015. All share and per share amounts in the Company’s Consolidated Financial Statements and related notes have been retroactively adjusted to reflect the stock split for all periods presented.
Common Stock Repurchase Program
The Company maintains stock repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act of 1934 to allow for the orderly repurchase of The Kroger Co. common shares, from time to time. The Company made open market purchases totaling $500, $1,129 and $338 under these repurchase programs in 2015, 2014 and 2013, respectively. In addition to these repurchase programs, in December 1999, the Company began a program to repurchase common shares to reduce dilution resulting from its employee stock option plans. This program is solely funded by proceeds from stock option exercises and the related tax benefit. The Company repurchased approximately $203, $154 and $271 under the stock option program during 2015, 2014 and 2013, respectively.
A-62
15. COMPANY-SPONSORED BENEFIT PLANS
The Company administers non-contributory defined benefit retirement plans for some non-union employees and union-represented employees as determined by the terms and conditions of collective bargaining agreements. These include several qualified pension plans (the “Qualified Plans”) and non-qualified pension plans (the “Non-Qualified Plans”). The Non-Qualified Plans pay benefits to any employee that earns in excess of the maximum allowed for the Qualified Plans by Section 415 of the Internal Revenue Code. The Company only funds obligations under the Qualified Plans. Funding for the Company-sponsored pension plans is based on a review of the specific requirements and on evaluation of the assets and liabilities of each plan.
In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. The majority of the Company’s employees may become eligible for these benefits if they reach normal retirement age while employed by the Company. Funding of retiree health care benefits occurs as claims or premiums are paid.
The Company recognizes the funded status of its retirement plans on the Consolidated Balance Sheets. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized as part of net periodic benefit cost are required to be recorded as a component of AOCI. All plans are measured as of the Company’s fiscal year end.
Amounts recognized in AOCI as of January 30, 2016 and January 31, 2015 consists of the following (pre-tax):
Pension Benefits | Other Benefits | Total | ||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||
Net actuarial loss (gain) | $ | 1,213 | $ | 1,398 | $ | (121 | ) | $ | (89 | ) | $ | 1,092 | $ | 1,309 | ||||||||||||
Prior service cost (credit) | 1 | 1 | (66 | ) | (75 | ) | (65 | ) | (74 | ) | ||||||||||||||||
Total | $ | 1,214 | $ | 1,399 | $ | (187 | ) | $ | (164 | ) | $ | 1,027 | $ | 1,235 |
Amounts in AOCI expected to be recognized as components of net periodic pension or postretirement benefit costs in the next fiscal year are as follows (pre-tax):
Pension Benefits | Other Benefits | Total | |||||||||||||||
2016 | 2016 | 2016 | |||||||||||||||
Net actuarial loss (gain) | $ | 62 | $ | (9 | ) | $ | 53 | ||||||||||
Prior service credit | — | (8 | ) | (8 | ) | ||||||||||||
Total | $ | 62 | $ | (17 | ) | $ | 45 |
Other changes recognized in other comprehensive income in 2015, 2014 and 2013 were as follows (pre-tax):
Pension Benefits | Other Benefits | Total | ||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||
Incurred net actuarial loss (gain) | $ | (83 | ) | $ | 590 | $ | (243 | ) | $ | (39 | ) | $ | 14 | $ | (97 | ) | $ | (122 | ) | $ | 604 | $ | (340 | ) | ||||||||||||
Amortization of prior service credit | — | — | — | 11 | 7 | 4 | 11 | 7 | 4 | |||||||||||||||||||||||||||
Amortization of net actuarial gain (loss) | (102 | ) | (50 | ) | (102 | ) | 7 | 8 | — | (95 | ) | (42 | ) | (102 | ) | |||||||||||||||||||||
Other | — | — | — | (2 | ) | (47 | ) | (30 | ) | (2 | ) | (47 | ) | (30 | ) | |||||||||||||||||||||
Total recognized in other | ||||||||||||||||||||||||||||||||||||
comprehensive income (loss) | (185 | ) | 540 | (345 | ) | (23 | ) | (18 | ) | (123 | ) | (208 | ) | 522 | (468 | ) | ||||||||||||||||||||
Total recognized in net periodic benefit cost | ||||||||||||||||||||||||||||||||||||
and other comprehensive income | $ | (82 | ) | $ | 595 | $ | (271 | ) | $ | (22 | ) | $ | (9 | ) | $ | (95 | ) | $ | (104 | ) | $ | 586 | $ | (366 | ) |
A-63
Information with respect to change in benefit obligation, change in plan assets, the funded status of the plans recorded in the Consolidated Balance Sheets, net amounts recognized at the end of fiscal years, weighted average assumptions and components of net periodic benefit cost follow:
Pension Benefits | ||||||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||
Qualified Plans | Non-Qualified Plans | Benefits | ||||||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||
Change in benefit obligation: | ||||||||||||||||||||||||||||||||||||
Benefit obligation at beginning of fiscal year | $ | 4,102 | $ | 3,509 | $ | 304 | $ | 263 | $ | 275 | $ | 294 | ||||||||||||||||||||||||
Service cost | 62 | 48 | 3 | 3 | 10 | 11 | ||||||||||||||||||||||||||||||
Interest cost | 154 | 169 | 12 | 13 | 9 | 13 | ||||||||||||||||||||||||||||||
Plan participants’ contributions | — | — | — | — | 10 | 11 | ||||||||||||||||||||||||||||||
Actuarial (gain) loss | (411 | ) | 539 | (17 | ) | 40 | (39 | ) | 14 | |||||||||||||||||||||||||||
Benefits paid | (162 | ) | (163 | ) | (17 | ) | (15 | ) | (19 | ) | (21 | ) | ||||||||||||||||||||||||
Other | (17 | ) | — | 3 | — | (2 | ) | (47 | ) | |||||||||||||||||||||||||||
Assumption of Roundy’s benefit obligation | 194 | — | 2 | — | — | — | ||||||||||||||||||||||||||||||
Benefit obligation at end of fiscal year | $ | 3,922 | $ | 4,102 | $ | 290 | $ | 304 | $ | 244 | $ | 275 | ||||||||||||||||||||||||
Change in plan assets: | ||||||||||||||||||||||||||||||||||||
Fair value of plan assets at beginning of | ||||||||||||||||||||||||||||||||||||
fiscal year | $ | 3,189 | $ | 3,135 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Actual return on plan assets | (124 | ) | 217 | — | — | — | — | |||||||||||||||||||||||||||||
Employer contributions | 5 | — | 17 | 15 | 9 | 10 | ||||||||||||||||||||||||||||||
Plan participants’ contributions | — | — | — | — | 10 | 11 | ||||||||||||||||||||||||||||||
Benefits paid | (162 | ) | (163 | ) | (17 | ) | (15 | ) | (19 | ) | (21 | ) | ||||||||||||||||||||||||
Other | (18 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||
Assumption of Roundy’s plan assets | 155 | — | — | — | — | — | ||||||||||||||||||||||||||||||
Fair value of plan assets at end of fiscal year | $ | 3,045 | $ | 3,189 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Funded status at end of fiscal year | $ | (877 | ) | $ | (913 | ) | $ | (290 | ) | $ | (304 | ) | $ | (244 | ) | $ | (275 | ) | ||||||||||||||||||
Net liability recognized at end of fiscal year | $ | (877 | ) | $ | (913 | ) | $ | (290 | ) | $ | (304 | ) | $ | (244 | ) | $ | (275 | ) |
As of January 30, 2016 and January 31, 2015, other current liabilities include $31 and $29, respectively, of net liability recognized for the above benefit plans.
As of January 30, 2016 and January 31, 2015, pension plan assets do not include common shares of The Kroger Co.
Pension Benefits | Other Benefits | |||||||||||
Weighted average assumptions | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||
Discount rate – Benefit obligation | 4.62% | 3.87% | 4.99% | 4.44% | 3.74% | 4.68% | ||||||
Discount rate – Net periodic benefit cost | 3.87% | 4.99% | 4.29% | 3.74% | 4.68% | 4.11% | ||||||
Expected long-term rate of return on | ||||||||||||
plan assets | 7.44% | 7.44% | 8.50% | |||||||||
Rate of compensation increase – | ||||||||||||
Net periodic benefit cost | 2.85% | 2.86% | 2.77% | |||||||||
Rate of compensation increase – | ||||||||||||
Benefit obligation | 2.71% | 2.85% | 2.86% |
A-64
The Company’s discount rate assumptions were intended to reflect the rates at which the pension benefits could be effectively settled. They take into account the timing and amount of benefits that would be available under the plans. The Company’s policy is to match the plan’s cash flows to that of a hypothetical bond portfolio whose cash flow from coupons and maturities match the plan’s projected benefit cash flows. The discount rates are the single rates that produce the same present value of cash flows. The selection of the 4.62% and 4.44% discount rates as of year-end 2015 for pension and other benefits, respectively, represents the hypothetical bond portfolio using bonds with an AA or better rating constructed with the assistance of an outside consultant. A 100 basis point increase in the discount rate would decrease the projected pension benefit obligation as of January 31, 2016, by approximately $438.
To determine the expected rate of return on pension plan assets held byreimbursing the Company for 2015, the Company considered current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories. In 2015 and 2014, the Company decreased the assumed pension plan investment return rate to 7.44% compared to 8.50%its expenses in 2013. The Company pension plan’s average rate of return was 6.47% for the 10 calendar years ended December 31, 2015, net of all investment management fees and expenses. The value of all investments in the Qualified Plans during the calendar year ending December 31, 2015 decreased 0.80%, net of investment management fees and expenses. For the past 20 years, the Company’s average annual rate of return has been 7.99%. Based on the above information and forward looking assumptions for investments made in a manner consistent with the Company’s target allocations, the Company believes a 7.44% rate of return assumption is reasonable.supplying any exhibit.
The Company calculates its expected return on plan assets by using the market-related value of plan assets. The market-related value of plan assets is determined by adjusting the actual fair value of plan assets for gains or losses on plan assets. Gains or losses represent the difference between actual and expected returns on plan investments for each plan year. Gains or losses on plan assets are recognized evenly over a five year period. Using a different method to calculate the market-related value of plan assets would provide a different expected return on plan assets.
On January 31, 2015, the Company adopted new mortality tables based on mortality experience and assumptions for generational mortality improvement in calculating the Company’s 2015 and 2014 Company sponsored benefit plans obligations. The tables assume an improvement in life expectancy and increase our current year benefit obligation and future net periodic benefit cost. The Company used the RP-2000 projected 2021 mortality table in calculating the Company’s 2013 Company sponsored benefit plans obligations and the 2014 and 2013 Company-sponsored net periodic benefit cost.
The funded status increased in 2015, compared to 2014, due primarily to an increase in the discount rate and a decrease in plan assets.
The following table provides the components of the Company’s net periodic benefit costs for 2015, 2014 and 2013:
Pension Benefits | |||||||||||||||||||||||||||||||||||||||||||||
Non-Qualified | |||||||||||||||||||||||||||||||||||||||||||||
Qualified Plans | Plans | Other Benefits | |||||||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||||||||||
Components of net periodic benefit cost: | |||||||||||||||||||||||||||||||||||||||||||||
Service cost | $ | 62 | $ | 48 | $ | 40 | $ | 3 | $ | 3 | $ | 3 | $ | 10 | $ | 11 | $ | 17 | |||||||||||||||||||||||||||
Interest cost | 154 | 169 | 144 | 12 | 13 | 9 | 9 | 13 | 15 | ||||||||||||||||||||||||||||||||||||
Expected return on plan assets | (230 | ) | (228 | ) | (224 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Amortization of: | |||||||||||||||||||||||||||||||||||||||||||||
Prior service credit | — | — | — | — | — | — | (11 | ) | (7 | ) | (4 | ) | |||||||||||||||||||||||||||||||||
Actuarial (gain) loss | 93 | 46 | 93 | 9 | 4 | 9 | (7 | ) | (8 | ) | — | ||||||||||||||||||||||||||||||||||
Net periodic benefit cost | $ | 79 | $ | 35 | $ | 53 | $ | 24 | $ | 20 | $ | 21 | $ | 1 | $ | 9 | $ | 28 |
A-65
The following table provides the projected benefit obligation (“PBO”), accumulated benefit obligation (“ABO”) and the fair value of plan assets for all Company-sponsored pension plans.
Non-Qualified | |||||||||||||||
Qualified Plans | Plans | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
PBO at end of fiscal year | $ | 3,922 | $ | 4,102 | $ | 290 | $ | 304 | |||||||
ABO at end of fiscal year | $ | 3,786 | $ | 3,947 | $ | 280 | $ | 297 | |||||||
Fair value of plan assets at end of year | $ | 3,045 | $ | 3,189 | $ | — | $ | — |
The following table provides information about the Company’s estimated future benefit payments.
Pension | Other | |||||||||
Benefits | Benefits | |||||||||
2016 | $ | 234 | $ | 15 | ||||||
2017 | $ | 221 | $ | 16 | ||||||
2018 | $ | 230 | $ | 17 | ||||||
2019 | $ | 238 | $ | 18 | ||||||
2020 | $ | 248 | $ | 19 | ||||||
2021 – 2025 | $ | 1,346 | $ | 105 |
The following table provides information about the weighted average target and actual pension plan asset allocations.
Target allocations | Actual Allocations | ||||||||
2015 | 2015 | 2014 | |||||||
Pension plan asset allocation | |||||||||
Global equity securities | 16.0 | % | 14.9 | % | 13.4 | % | |||
Emerging market equity securities | 5.4 | 5.2 | 5.8 | ||||||
Investment grade debt securities | 13.1 | 11.3 | 11.2 | ||||||
High yield debt securities | 12.1 | 11.9 | 12.5 | ||||||
Private equity | 5.2 | 7.4 | 6.6 | ||||||
Hedge funds | 34.6 | 36.0 | 37.5 | ||||||
Real estate | 3.4 | 3.9 | 3.5 | ||||||
Other | 10.2 | 9.4 | 9.5 | ||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % |
Investment objectives, policies and strategies are set by the Pension Investment Committees (the “Committees”) appointed by the CEO. The primary objectives include holding and investing the assets and distributing benefits to participants and beneficiaries of the pension plans. Investment objectives have been established based on a comprehensive review of the capital markets and each underlying plan’s current and projected financial requirements. The time horizon of the investment objectives is long-term in nature and plan assets are managed on a going-concern basis.
Investment objectives and guidelines specifically applicable to each manager of assets are established and reviewed annually. Derivative instruments may be used for specified purposes, including rebalancing exposures to certain asset classes. Any use of derivative instruments for a purpose or in a manner not specifically authorized is prohibited, unless approved in advance by the Committees.
A-66
The current target allocations shown represent the 2015 targets that were established in 2014. The Company will rebalance by liquidating assets whose allocation materially exceeds target, if possible, and investing in assets whose allocation is materially below target. If markets are illiquid, the Company may not be able to rebalance to target quickly. To maintain actual asset allocations consistent with target allocations, assets are reallocated or rebalanced periodically. In addition, cash flow from employer contributions and participant benefit payments can be used to fund underweight asset classes and divest overweight asset classes, as appropriate. The Company expects that cash flow will be sufficient to meet most rebalancing needs.
The Company is not required and does not expect to make any contributions to the Qualified Plans in 2016. If the Company does make any contributions in 2016, the Company expects these contributions will decrease its required contributions in future years. Among other things, investment performance of plan assets, the interest rates required to be used to calculate the pension obligations, and future changes in legislation, will determine the amounts of any contributions. The Company expects 2016 expense for Company-sponsored pension plans to be approximately $80. In addition, the Company expects 401(k) retirement savings account plans cash contributions and expense from automatic and matching contributions to participants to be approximately $200 in 2016.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The Company used a 6.90% initial health care cost trend rate, which is assumed to decrease on a linear basis to a 4.50% ultimate health care cost trend rate in 2028, to determine its expense. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
1% Point Increase | 1% Point Decrease | ||||||||||
Effect on total of service and interest cost components | $ | 3 | $ | (2 | ) | ||||||
Effect on postretirement benefit obligation | $ | 23 | $ | (20 | ) |
The following tables set forth by level, within the fair value hierarchy, the Qualified Plans’ assets at fair value as of January 30, 2016 and January 31, 2015:
Assets at Fair Value as of January 30, 2016
Quoted | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Cash and cash equivalents | $ | 27 | $ | — | $ | — | $ | 27 | ||||||||||
Corporate Stocks | 231 | — | — | 231 | ||||||||||||||
Corporate Bonds | — | 76 | — | 76 | ||||||||||||||
U.S. Government Securities | — | 75 | — | 75 | ||||||||||||||
Mutual Funds/Collective Trusts | 89 | 861 | 40 | 990 | ||||||||||||||
Partnerships/Joint Ventures | — | 118 | — | 118 | ||||||||||||||
Hedge Funds | — | — | 1,104 | 1,104 | ||||||||||||||
Private Equity | — | — | 225 | 225 | ||||||||||||||
Real Estate | — | — | 103 | 103 | ||||||||||||||
Other | — | 96 | — | 96 | ||||||||||||||
Total | $ | 347 | $ | 1,226 | $ | 1,472 | $ | 3,045 |
A-67
Assets at Fair Value as of January 31, 2015
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Cash and cash equivalents | $ | 73 | $ | — | $ | — | $ | 73 | ||||||||||
Corporate Stocks | 294 | — | — | 294 | ||||||||||||||
Corporate Bonds | — | 80 | — | 80 | ||||||||||||||
U.S. Government Securities | — | 78 | — | 78 | ||||||||||||||
Mutual Funds/Collective Trusts | 123 | 503 | 40 | 666 | ||||||||||||||
Partnerships/Joint Ventures | — | 468 | — | 468 | ||||||||||||||
Hedge Funds | — | — | 1,158 | 1,158 | ||||||||||||||
Private Equity | — | — | 210 | 210 | ||||||||||||||
Real Estate | — | — | 105 | 105 | ||||||||||||||
Other | — | 57 | — | 57 | ||||||||||||||
Total | $ | 490 | $ | 1,186 | $ | 1,513 | $ | 3,189 |
For measurements using significant unobservable inputs (Level 3) during 2015 and 2014, a reconciliation of the beginning and ending balances is as follows:
Hedge Funds | Private Equity | Real Estate | Collective Trusts | ||||||||||||||||||||
Ending balance, February 1, 2014 | $ | 1,073 | $ | 243 | $ | 96 | $ | 39 | |||||||||||||||
Contributions into Fund | 220 | 47 | 17 | — | |||||||||||||||||||
Realized gains | 47 | 35 | 14 | 1 | |||||||||||||||||||
Unrealized gains (losses) | 18 | (1 | ) | 4 | — | ||||||||||||||||||
Distributions | (257 | ) | (54 | ) | (25 | ) | — | ||||||||||||||||
Reclass(1) | 58 | (58 | ) | — | — | ||||||||||||||||||
Other | (1 | ) | (2 | ) | (1 | ) | — | ||||||||||||||||
Ending balance, January 31, 2015 | 1,158 | 210 | 105 | 40 | |||||||||||||||||||
Contributions into Fund | 239 | 47 | 13 | — | |||||||||||||||||||
Realized gains | 49 | 23 | 9 | — | |||||||||||||||||||
Unrealized (losses) gains | (49 | ) | (3 | ) | 3 | — | |||||||||||||||||
Distributions | (294 | ) | (50 | ) | (26 | ) | — | ||||||||||||||||
Other | 1 | (2 | ) | (1 | ) | — | |||||||||||||||||
Ending balance, January 30, 2016 | $ | 1,104 | $ | 225 | $ | 103 | $ | 40 |
See Note 8 for a discussion of the levels of the fair value hierarchy. The assets’ fair value measurement level above is based on the lowest level of any input that is significant to the fair value measurement.
A-68
The following is a description of the valuation methods used for the Qualified Plans’ assets measured at fair value in the above tables:
| |
| |
| |
| |
| |
| |
|
A-69
| |
|
The Company contributed and expensed $196, $177 and $148 to employee 401(k) retirement savings accounts in 2015, 2014 and 2013, respectively. The 401(k) retirement savings account plans provide to eligible employees both matching contributions and automatic contributions from the Company based on participant contributions, compensation as defined by the plan, and length of service.
The Company also administers other defined contribution plans for eligible employees. The cost of these plans was $5 for 2015, 2014 and 2013.
16. Multi-Employer Pension Plans
The Company contributes to various multi-employer pension plans, including the UFCW Consolidated Pension Plan, based on obligations arising from collective bargaining agreements. The Company is designated as the named fiduciary of the UFCW Consolidated Pension Plan and has sole investment authority over these assets. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.
In 2015, the Company contributed $190 to the UFCW Consolidated Pension Plan. The Company had previously accrued $60 of the total contributions at January 31, 2015 and recorded expense for the remaining $130 at the time of payment in 2015.
In 2014, the Company incurred a charge of $56 (after-tax) related to commitments and withdrawal liabilities associated with the restructuring of pension plan agreements, of which $15 was contributed to the UFCW Consolidated Pension Plan in 2014.
Refer to Note 19 for additional details on the effect of certain contributions on quarterly results for 2015 and 2014.
The Company recognizes expense in connection with its multi-employer pension plans as contributions are funded, or when commitments are made. The Company made contributions to multi-employer funds of $426 in 2015, $297 in 2014 and $228 in 2013.
A-70
The risks of participating in multi-employer pension plans are different from the risks of participating in single-employer pension plans in the following respects:
The Company’s participation in multi-employer plans is outlined in the following tables. The EIN / Pension Plan Number column provides the Employer Identification Number (“EIN”) and the three-digit pension plan number. The most recent Pension Protection Act Zone Status available in 2015 and 2014 is for the plan’s year-end at December 31, 2014 and December 31, 2013, respectively. Among other factors, generally, plans in the red zone are less than 65 percent funded, plans in the yellow zone are less than 80 percent funded and plans in the green zone are at least 80 percent funded. The FIP/ RP Status Pending / Implemented Column indicates plans for which a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. Unless otherwise noted, the information for these tables was obtained from the Forms 5500 filed for each plan’s year-end at December 31, 2014 and December 31, 2013. The multi-employer contributions listed in the table below are the Company’s multi-employer contributions made in fiscal years 2015, 2014 and 2013.
A-71
The following table contains information about the Company’s multi-employer pension plans:
Pension | |||||||||||||||||||
Protection | FIP/RP | ||||||||||||||||||
Act Zone | Status | Multi-Employer | |||||||||||||||||
EIN / Pension | Status | Pending/ | Contributions | Surcharge | |||||||||||||||
Pension Fund | Plan Number | 2015 | 2014 | Implemented | 2015 | 2014 | 2013 | Imposed(6) | |||||||||||
SO CA UFCW Unions & Food | |||||||||||||||||||
Employers Joint Pension | |||||||||||||||||||
Trust Fund(1) (2) | 95-1939092 - 001 | Red | Red | Implemented | $ | 55 | $ | 48 | $ | 45 | No | ||||||||
Desert States Employers | |||||||||||||||||||
& UFCW Unions | |||||||||||||||||||
Pension Plan(1) | 84-6277982 - 001 | Green | Green | No | 18 | 21 | 23 | No | |||||||||||
Sound Retirement Trust | |||||||||||||||||||
(formerly Retail Clerks | |||||||||||||||||||
Pension Plan)(1) (3) | 91-6069306 - 001 | Red | Red | Implemented | 17 | 15 | 13 | No | |||||||||||
Rocky Mountain UFCW | |||||||||||||||||||
Unions and Employers | |||||||||||||||||||
Pension Plan(1) | 84-6045986 - 001 | Green | Green | No | 17 | 17 | 17 | No | |||||||||||
Oregon Retail Employees | |||||||||||||||||||
Pension Plan(1) | 93-6074377 - 001 | Green | Red | No | 9 | 7 | 7 | No | |||||||||||
Bakery and Confectionary Union | |||||||||||||||||||
& Industry International | |||||||||||||||||||
Pension Fund(1) | 52-6118572 - 001 | Red | Red | Implemented | 11 | 11 | 12 | No | |||||||||||
Washington Meat Industry | |||||||||||||||||||
Pension Trust(1) (4) (5) | 91-6134141 - 001 | Red | Red | Implemented | — | 1 | 3 | No | |||||||||||
Retail Food Employers & UFCW | |||||||||||||||||||
Local 711 Pension(1) | 51-6031512 - 001 | Red | Red | Implemented | 9 | 9 | 8 | No | |||||||||||
Denver Area Meat Cutters | |||||||||||||||||||
and Employers | |||||||||||||||||||
Pension Plan(1) | 84-6097461 - 001 | Green | Green | No | 7 | 8 | 8 | No | |||||||||||
United Food & Commercial | |||||||||||||||||||
Workers Intl Union – Industry | |||||||||||||||||||
Pension Fund(1) (4) | 51-6055922 - 001 | Green | Green | No | 35 | 33 | 33 | No | |||||||||||
Western Conference of | |||||||||||||||||||
Teamsters Pension Plan | 91-6145047 - 001 | Green | Green | No | 31 | 30 | 31 | No | |||||||||||
Central States, Southeast | |||||||||||||||||||
& Southwest Areas | |||||||||||||||||||
Pension Plan | 36-6044243 - 001 | Red | Red | Implemented | 16 | 15 | 15 | No | |||||||||||
UFCW Consolidated | |||||||||||||||||||
Pension Plan(1) | 58-6101602 - 001 | Green | Green | No | 190 | 70 | — | No | |||||||||||
Other | 11 | 12 | 13 | ||||||||||||||||
Total Contributions | $ | 426 | $ | 297 | $ | 228 |
A-72
The following table describes (a) the expiration date of the Company’s collective bargaining agreements and (b) the expiration date of the Company’s most significant collective bargaining agreements for each of the material multi-employer funds in which the Company participates.
Expiration Date | Most Significant Collective | |||||
of Collective | Bargaining Agreements(1) | |||||
Bargaining | (not in millions) | |||||
Pension Fund | Agreements | Count | Expiration | |||
SO CA UFCW Unions & Food Employers Joint | March 2016 to | March 2016 to | ||||
Pension Trust Fund | June 2017 | 2 | June 2017 | |||
March 2016 to | April 2016 to | |||||
UFCW Consolidated Pension Plan | August 2020 | 8 | August 2020 | |||
Desert States Employers & UFCW Unions | October 2016 to | |||||
Pension Plan | June 2018 | 1 | October 2016 | |||
Sound Retirement Trust (formerly Retail | April 2016 to | May 2016 to | ||||
Clerks Pension Plan) | January 2018 | 2 | August 2016 | |||
Rocky Mountain UFCW Unions and | January 2019 to | |||||
Employers Pension Plan | February 2019 | 1 | January 2019 | |||
August 2015(2)to | August 2015(2)to | |||||
Oregon Retail Employees Pension Plan | April 2017 | 3 | June 2016 | |||
Bakery and Confectionary Union & Industry | June 2016 to July | August 2016 to | ||||
International Pension Fund | 2018 | 4 | July 2018 | |||
Retail Food Employers & | April 2017 to | |||||
UFCW Local 711 Pension | November 2019 | 1 | March 2019 | |||
Denver Area Meat Cutters and | January 2019 to | |||||
Employers Pension Plan | February 2019 | 1 | January 2019 | |||
United Food & Commercial Workers Intl Union – | March 2014(2)to | March 2017 to | ||||
Industry Pension Fund | April 2019 | 2 | April 2019 | |||
April 2017 to | July 2017 to | |||||
Western Conference of Teamsters Pension Plan | September 2020 | 5 | September 2020 | |||
Central States, Southeast & Southwest | September 2017 to | September 2017 to | ||||
Areas Pension Plan | November 2018 | 3 | November 2018 |
A-73
Based on the most recent information available to it, the Company believes the present value of actuarial accrued liabilities in most of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits. Moreover, if the Company were to exit certain markets or otherwise cease making contributions to these funds, the Company could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated.
The Company also contributes to various other multi-employer benefit plans that provide health and welfare benefits to active and retired participants. Total contributions made by the Company to these other multi-employer health and welfare plans were approximately $1,192 in 2015, $1,200 in 2014 and $1,100 in 2013.
17. Recently Adopted Accounting Standards
In 2015, the Financial Accounting Standards Board (“FASB”) amended Accounting Standards Codification 835, “Interest-Imputation of Interest.” The amendment simplifies the presentation of debt issuance costs related to a recognized debt liability by requiring it be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This amendment became effective for the Company beginning February 1, 2015, and was adopted retrospectively in accordance with the standard. The adoption of this amendment resulted in amounts previously reported in other assets to now be reported within long-term debt including obligations under capital leases and financing obligations in the Consolidated Balance Sheets. These amounts were not material to the prior year. The adoption of this amendment did not have an effect on the Company’s Consolidated Statements of Operations.
18. Recently Issued Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Per ASU 2015-14, “Deferral of Effective Date,” this guidance will be effective for the Company in the first quarter of its fiscal year ending February 2, 2019. Early adoption is permitted as of the first quarter of the Company’s fiscal year ending February 3, 2018. The Company is currently in the process of evaluating the effect of adoption of this ASU on the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-04, “Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.” This amendment permits an entity to measure defined benefit plan assets and obligations using the month end that is closest to the entity’s fiscal year end for all plans. This guidance will be effective for the Company in the fiscal year ending January 28, 2017. The implementation of this amendment will not have an effect on the Company’s Consolidated Statements of Operations, and will not have a significant effect on the Company’s Consolidated Balance Sheets.
In April 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” This amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share. This guidance will be effective for the Company in the fiscal year ending January 28, 2017. The implementation of this amendment will have an effect on the Company’s Notes to the Consolidated Financial Statements and will not have an effect on the Company’s Consolidated Statements of Operations or Consolidated Balance Sheets.
A-74
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” This amendment eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination. This guidance will be effective for the Company in its fiscal year ending January 28, 2017. The implementation of this amendment is not expected to have a significant effect on the Company’s Consolidated Financial Statements.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This amendment requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance will be effective for the fiscal year ending January 28, 2017. Early adoption is permitted. The implementation of this amendment will not have an effect on the Company’s Consolidated Statements of Operations and will not have a significant effect on the Company’s Consolidated Balance Sheets.
In February 2016, the FASB issued ASU 2016-02, “Leases”, which provides guidance for the recognition of lease agreements. The standard’s core principle is that a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. This guidance will be effective in the first quarter of fiscal year ending February 1, 2020. Early adoption is permitted currently. The adoption of this ASU will result in a significant increase to the Company’s balance sheet for lease liabilities and right-of-use assets, and the Company is currently evaluating the other effects of adoption of this ASU on its Consolidated Financial Statements.
19. Quarterly Data (Unaudited)
The two tables that follow reflect the unaudited results of operations for 2015 and 2014.
Quarter | ||||||||||||||||||||||||||
First | Second | Third | Fourth | Total Year | ||||||||||||||||||||||
2015 | (16 Weeks) | (12 Weeks) | (12 Weeks) | (12 Weeks) | (52 Weeks) | |||||||||||||||||||||
Sales | $ | 33,051 | $ | 25,539 | $ | 25,075 | $ | 26,165 | $ | 109,830 | ||||||||||||||||
Merchandise costs, including advertising, | ||||||||||||||||||||||||||
warehousing, and transportation, excluding | ||||||||||||||||||||||||||
items shown separately below | 25,760 | 20,065 | 19,478 | 20,193 | 85,496 | |||||||||||||||||||||
Operating, general and administrative | 5,354 | 4,068 | 4,169 | 4,355 | 17,946 | |||||||||||||||||||||
Rent | 215 | 155 | 172 | 181 | 723 | |||||||||||||||||||||
Depreciation and amortization | 620 | 477 | 484 | 508 | 2,089 | |||||||||||||||||||||
Operating profit | 1,102 | 774 | 772 | 928 | 3,576 | |||||||||||||||||||||
Interest expense | 148 | 114 | 107 | 113 | 482 | |||||||||||||||||||||
Earnings before income tax expense | 954 | 660 | 665 | 815 | 3,094 | |||||||||||||||||||||
Income tax expense | 330 | 227 | 238 | 250 | 1,045 | |||||||||||||||||||||
Net earnings including noncontrolling interests | 624 | 433 | 427 | 565 | 2,049 | |||||||||||||||||||||
Net earnings (loss) attributable to | ||||||||||||||||||||||||||
noncontrolling interests | 5 | — | (1 | ) | 6 | 10 | ||||||||||||||||||||
Net earnings attributable to The Kroger Co. | $ | 619 | $ | 433 | $ | 428 | $ | 559 | $ | 2,039 | ||||||||||||||||
Net earnings attributable to The Kroger Co. per | ||||||||||||||||||||||||||
basic common share | $ | 0.63 | $ | 0.44 | $ | 0.44 | $ | 0.57 | $ | 2.09 | ||||||||||||||||
Average number of shares used | ||||||||||||||||||||||||||
in basic calculation | 969 | 963 | 965 | 966 | 966 | |||||||||||||||||||||
Net earnings attributable to The Kroger Co. | ||||||||||||||||||||||||||
per diluted common share | $ | 0.62 | $ | 0.44 | $ | 0.43 | $ | 0.57 | $ | 2.06 | ||||||||||||||||
Average number of shares used in | ||||||||||||||||||||||||||
diluted calculation | 983 | 977 | 979 | 980 | 980 | |||||||||||||||||||||
Dividends declared per common share | $ | 0.093 | $ | 0.105 | $ | 0.105 | $ | 0.105 | $ | 0.408 |
Annual amounts may not sum due to rounding.
In the third quarter of 2015, the Company incurred a $80 charge to OG&A expenses for contributions to the UFCW Consolidated Pension Plan.
A-75
In the fourth quarter of 2015, the Company incurred a $30 charge to OG&A expenses for contributions to the UFCW Consolidated Pension Plan.
Quarter | |||||||||||||||||||||||||
First | Second | Third | Fourth | Total Year | |||||||||||||||||||||
2014 | (16 Weeks) | (12 Weeks) | (12 Weeks) | (12 Weeks) | (52 Weeks) | ||||||||||||||||||||
Sales | $ | 32,961 | $ | 25,310 | $ | 24,987 | $ | 25,207 | $ | 108,465 | |||||||||||||||
Merchandise costs, including advertising, | |||||||||||||||||||||||||
warehousing, and transportation, excluding | |||||||||||||||||||||||||
items shown separately below | 26,065 | 20,136 | 19,764 | 19,547 | 85,512 | ||||||||||||||||||||
Operating, general and administrative | 5,168 | 3,920 | 3,954 | 4,119 | 17,161 | ||||||||||||||||||||
Rent | 217 | 166 | 162 | 162 | 707 | ||||||||||||||||||||
Depreciation and amortization | 581 | 444 | 456 | 467 | 1,948 | ||||||||||||||||||||
Operating profit | 930 | 644 | 651 | 912 | 3,137 | ||||||||||||||||||||
Interest expense | 147 | 112 | 114 | 115 | 488 | ||||||||||||||||||||
Earnings before income tax expense | 783 | 532 | 537 | 797 | 2,649 | ||||||||||||||||||||
Income tax expense | 274 | 182 | 172 | 274 | 902 | ||||||||||||||||||||
Net earnings including noncontrolling interests | 509 | 350 | 365 | 523 | 1,747 | ||||||||||||||||||||
Net earnings attributable to | |||||||||||||||||||||||||
noncontrolling interests | 8 | 3 | 3 | 5 | 19 | ||||||||||||||||||||
Net earnings attributable to The Kroger Co. | $ | 501 | $ | 347 | $ | 362 | $ | 518 | $ | 1,728 | |||||||||||||||
Net earnings attributable to The Kroger Co. | |||||||||||||||||||||||||
per basic common share | $ | 0.50 | $ | 0.35 | $ | 0.37 | $ | 0.53 | $ | 1.74 | |||||||||||||||
Average number of shares used in | |||||||||||||||||||||||||
basic calculation | 1,002 | 970 | 972 | 972 | 981 | ||||||||||||||||||||
Net earnings attributable to The Kroger Co. | |||||||||||||||||||||||||
per diluted common share | $ | 0.49 | $ | 0.35 | $ | 0.36 | $ | 0.52 | $ | 1.72 | |||||||||||||||
Average number of shares used in diluted | |||||||||||||||||||||||||
calculation | 1,014 | 982 | 984 | 987 | 993 | ||||||||||||||||||||
Dividends declared per common share | $ | 0.083 | $ | 0.083 | $ | 0.093 | $ | 0.093 | $ | 0.350 |
Annual amounts may not sum due to rounding.
In the first quarter of 2014, the Company incurred a $87 charge to OG&A expenses due to commitments and withdrawal liabilities arising from restructuring of certain pension plan agreements to help stabilize associates’ future benefits.
In the third quarter of 2014, the Company incurred a $25 charge to OG&A expenses due to contributions to the Company’s charitable foundation and a $17 benefit to income tax expense due to certain tax items.
In the fourth quarter of 2014, the Company incurred a $60 charge to OG&A expenses due to contributions to the Company’s charitable foundation and a $55 charge to OG&A expenses for contributions to the UFCW Consolidated Pension Plan.
20. Subsequent Event
In anticipation of future debt refinancing in fiscal years 2017 and 2018, the Company, in the first quarter of 2016, entered into additional forward-starting interest rate swap agreements with an aggregate notional amount totaling $1,300. After entering into these additional forward-starting interest rate swaps, the Company has a total of $1,700 notional amount of forward-starting interest rate swaps outstanding. The forward-starting interest rate swaps entered into in the first quarter of 2016 were designated as cash-flow hedges as defined by GAAP.
A-76
VOTE45202SCAN TO MATERIALS & VOTEVOTE BY INTERNET Before The Meeting - Go to www.proxyvote.comUse or scan the QR Barcode aboveUse the Internet to transmit your voting instructions and for electronic delivery of information up untilinformation. Vote by 11:59 P.M. Eastern Time the day before the meeting date.on June 21, 2023 for shares held directly and by 11:59 P.M. Eastern Time on June 20, 2023 for shares held in a Plan. Have your proxy card in hand when you access the web sitewebsite and follow the instructions to obtain your records and to create an electronic voting instruction form.
ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALSIf you would likeform.During The Meeting - Go to reducewww.virtualshareholdermeeting.com/KR2023You may attend the costs incurred byour companyin mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronicallymeeting via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and when prompted, indicatevote during the meeting. Have the information that you agree to receive or access proxy materials electronicallyis printed in future years.
VOTEthe box marked by the arrow available and follow the instructions.VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up untilinstructions. Vote by 11:59 P.M. Eastern Time the day before the meeting date.on June 21, 2023 for shares held directly and by 11:59 P.M. Eastern Time on June 20, 2023 for shares held in a Plan. Have your proxy card in hand when you call and then follow the instructions.
VOTEinstructions.VOTE BY MAIL
Mark, sign, and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. If11717.TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: V16737-P90683 KEEP THIS PORTION FOR YOUR RECORDS THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. DETACH AND RETURN THIS PORTION ONLYTHE KROGER CO.The Board of Directors recommends that you vote FOR the following:1. Election of DirectorsNominees:1a. Nora A. Aufreiter1b. Kevin M. Brown1c. Elaine L. Chao1d. Anne Gates1e. Karen M. Hoguet1f. W. Rodney McMullen1g. Clyde R. Moore1h. Ronald L. Sargent1i. J. Amanda Sourry Knox1j. Mark S. Sutton1k. Ashok VemuriFor Against Abstain The Board of Directors recommends that you vote FOR proposals For Against Abstain 2 and 4 and 1 YEAR for proposal 3. ! ! ! 2. Approval, on an advisory basis, of Kroger's executive compensation. ! ! ! ! ! ! 1 Year 2 Years 3 Years Abstain ! ! ! 3. Advisory Vote on Frequency of Future Votes on Executive ! ! ! ! Compensation. ! ! ! For Against Abstain! ! ! 4. Ratification of PricewaterhouseCoopers LLP, as auditors. ! ! ! ! ! ! The Board of Directors recommends that you vote AGAINST For Against Abstain proposals 5-9. ! ! ! 5. Report on Public Health Costs from Sale of Tobacco Products. ! ! ! ! ! ! 6. Listing of Charitable Contributions of $10,000 or More. ! ! ! ! ! ! 7. Report on Recyclability of Packaging. ! ! ! ! ! ! 8. Report on Racial and Gender Pay Gaps. ! ! ! ! ! ! 9. Report on EEO Policy Risks. ! ! !NOTE: Holders of common shares of record at the close of business onApril 24, 2023 will be entitled to vote at the meeting.Please sign exactly as your proxyname(s) appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership name by Internet or by telephone, you do NOT need to mail back your proxy card.authorized officer.Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date
| ||||||
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting:
The Combined Notice, Proxy Statement, and Annual Report are available atwww.proxyvote.com.
THE www.proxyvote.com.V16738-P90683THE KROGER CO.2016CO.2023 Annual Meeting of Shareholders
June 23, 201622, 2023 11:00 AM, Eastern TimeThisTimeThis proxy is solicited by the Board of Directors
TheDirectorsThe undersigned hereby appoints each of ROBERT D. BEYER,ANNE GATES, W. RODNEY McMULLEN, and RONALD L. SARGENT, or if more than one is present and acting then a majority thereof, proxies, with full power of substitution and revocation, to vote the common shares of The Kroger Co. that the undersigned is entitled to vote at the annual meetingAnnual Meeting of shareholders,Shareholders, and at any adjournment thereof, with all the powers the undersigned would possess if personally present, including authority to vote on the matters shown on the reverse in the manner directed, and upon any other matter that properly may come before the meeting. The undersigned hereby revokes any proxy previously given to vote those shares at the meeting or at any adjournment.
Theadjournment.The proxies are directed to vote as specified on the reverse hereof and in their discretion on all other matters coming before the meeting. Except as specified to the contrary on the reverse, the shares represented by this proxy will be voted FOR each nominee listed in Proposal 1, FOR ProposalsProposal 2, and1 YEAR for Proposal 3, FOR Proposal 4, and AGAINST Proposals 4, 5, 6 and 7.
If5-9.If you wish to vote in accordance with the recommendations of the Board of Directors, all you need to do is sign and return this card. The above named proxies cannot vote the shares unless you vote your proxy by Internet or telephone, or sign and return this card.
Only shareholders and persons holding proxies from shareholders may attend the meeting.If you are attending the meeting, you must bring either: (1) the notice of the meeting that was separately mailed to you or (2) the top portion of your proxy card, either of which will be your admission ticket.
YOURcard.YOUR MANAGEMENT DESIRES TO HAVE A LARGE NUMBER OF SHAREHOLDERS REPRESENTED AT THE VIRTUAL MEETING, IN PERSON OR BY PROXY. PLEASE VOTE YOUR PROXY ELECTRONICALLY VIA THE INTERNET OR BY TELEPHONE.TELEPHONE, OR SIGN AND RETURN THIS CARD. IF YOU HAVE ELECTED TO RECEIVE PRINTED MATERIALS, YOU MAY SIGN AND DATE THETHIS PROXY CARD AND MAIL IT IN THE SELF-ADDRESSED ENVELOPE PROVIDED. NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES. If you are unable to attend the annual meeting, you may listen toThe Annual Meeting is being held on a live webcast of the meeting, which willvirtual - only basis and can be accessible through our website, ir.kroger.com,accessed online at 11:00 AM Eastern Time on June 23, 2016.
Continuedwww.virtualshareholdermeeting.com/KR2023.Continued and to be signed on reverse side