United StatesSecurities And Exchange CommissionWashington, D.C. 20549
SCHEDULE 14A
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________PROXY
NOTICEOF ANNUAL MEETINGOF SHAREHOLDERS
PROXY STATEMENT
AND
20062008 ANNUAL REPORT
________
FINANCIALHIGHLIGHTS | ||||||||
(in millions except per share data and percentages) | ||||||||
Percent | ||||||||
Fiscal Year | 2006 | 2005 | Change (1) | |||||
Sales | $ | 66,111 | $ | 60,553 | 9.2 | % | ||
Operating Profit | $ | 2,236 | $ | 2,035 | 9.9 | % | ||
Net earnings per share | $ | 1.54 | $ | 1.31 | 17.6 | % | ||
Average shares used in calculation | 723 | 731 | (1.1 | )% | ||||
Net cash provided by operating activities | $ | 2,351 | $ | 2,192 | 7.3 | % | ||
Capital expenditures | $ | 1,683 | $ | 1,306 | 28.9 | % | ||
Identical supermarket sales (2) | $ | 59,592 | $ | 55,993 | 6.4 | % | ||
Identical supermarket sales excluding fuel operations (2) | $ | 55,399 | $ | 52,483 | 5.6 | % | ||
Comparable supermarket sales (3) | $ | 61,045 | $ | 57,203 | 6.7 | % | ||
Comparable supermarket sales excluding supermarket fuel operations (3) | $ | 56,702 | $ | 53,622 | 5.7 | % |
FINANCIAL HIGHLIGHTS
(in millions except per share data and percentages)
2008 | 2007 | Percentage | |||||||||||
Fiscal Year | (52 weeks) | (52 weeks) | Change (1) | ||||||||||
Sales | $ | 76,000 | $ | 70,235 | 8.2 | % | |||||||
Operating profit | $ | 2,451 | $ | 2,301 | 6.5 | % | |||||||
Net earnings per share | $ | 1.90 | $ | 1.69 | 12.4 | % | |||||||
Average shares used in calculation | 659 | 698 | (5.6 | )% | |||||||||
Net cash provided by operating activities | $ | 2,896 | $ | 2,581 | 12.2 | % | |||||||
Capital expenditures | $ | 2,149 | $ | 2,126 | 1.1 | % | |||||||
Identical supermarket sales (2) | $ | 67,185 | $ | 62,878 | 6.9 | % | |||||||
Identical supermarket sales excluding fuel operations (2) | $ | 60,300 | $ | 57,416 | 5.0 | % | |||||||
Comparable supermarket sales (3) | $ | 69,762 | $ | 65,066 | 7.2 | % | |||||||
Comparable supermarket sales excluding supermarket fuel | |||||||||||||
operations (3) | $ | 62,492 | $ | 59,372 | 5.3 | % |
(1) | The | |
(2) | We define a supermarket as identical when the store has been in operation and has not been expanded or relocated for five full quarters. Annualized identical supermarket sales are calculated as a summation of four quarters of identical sales. | |
(3) | We define a supermarket as comparable when the store has been in operation for five full quarters, including expansions and relocations. Annualized comparable supermarket sales are calculated as a summation of four quarters of comparable sales. |
![]() | COVER PRINTED ON RECYCLED PAPER |
FELLOW SHAREHOLDERS:
I amThe Kroger team did an outstanding job in 2008 of consistently delivering results in an increasingly difficult economic environment. Kroger offers real value to customers when they need it most through lower prices, high-quality Kroger brands, great customer service and an overall pleasant shopping experience. As a result, total sales topped $76 billion last year as Kroger continued to generate strong sales growth.
Kroger’s performance throughout the year produced identical supermarket sales growth of 5.0%, without fuel. We are especially pleased to writeproduce these results in such a tough economy.
Kroger’s strong identical supermarket sales growth contributed to you aboutfavorable earnings results. We delivered earnings per diluted share of $1.90. This represents 12.4% growth over fiscal year 2007 earnings of $1.69 per diluted share. On top of that, Kroger’s 2006 performancequarterly dividend added over 1% to total shareholder return.
During the year, we saw several shifts in the way customers shop and Kroger was – and continues to be – positioned well to pursue these changing trends as opportunities. We have unique tools that enable us to identify and act on changes in consumer behavior more quickly than our plans for continued success in 2007competitors.
Our efforts to help customers and beyond. Kroger had a very strong year. Our resultstheir families navigate the difficult economy are a direct result of the hard work and dedication of our 310,000 Associates in every area of our business. We are confidentdriven by our Customer 1st strategystrategy. As a result, we offer customers a unique combination of values no other competitor can match.
Many of the same money-saving strategies shoppers employed in 2008 continue into 2009 including:
These opportunities play to Kroger’s strengths. They include:
Lower Prices
We continue to invest cost savings made in any area of our business back into lower prices for our customers. Keeping prices low is connectingone of several key drivers of our identical supermarket sales growth. In addition to lower prices, we offer customers a number of ways to save money, such as our fuel rewards and generic drug programs.
Kroger fuel rewards programs offer customers a great value and thanks them for their loyalty by giving them additional discounts on gas when they shop in our stores, pharmacies, and gift card malls. In 2008, Kroger customers saved more than $100 million on fuel through these programs.
We offer customers another opportunity to save through our extensive offering of generic drugs at competitive prices in our 1,900 pharmacies. In 2008, Kroger customers saved nearly $200 million though our generic drug program.
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High-Quality Kroger Brands
Kroger’s $12.5 billion store brands portfolio enjoyed strong year-over-year growth and fueled Kroger’s overall grocery volume growth in 2008. Our customers recognize and appreciate the quality and value of our exclusive and preferred store brands, which today number more than 14,400 items. We leverage our manufacturing and procurement capabilities to innovate and introduce new items that add value for our customers.
During 2008, 26% of Kroger’s overall grocery sales came from our own brands and Kroger brands reached a record-high 34% of grocery unit sales.And, as expected, Private Selection, our premium tier of store brands, exceeded $1 billion in sales in 2008.
We continue to see our own brands as a strategic asset in growing our business in 2009 and beyond because our three tier program gives all customers more value for the way they live.
Customer Loyalty
The strength of our loyalty card program helps us deepen our connection with our shopperscustomers. The scope and will enabledepth of our shopper card program is unmatched in the industry. These cards link our customers to savings on groceries, fuel, pharmacy needs, general merchandise and Kroger brands.
We have been building our extensive collection of consumer data since 1999. Today, more than 40% of all U.S. households hold one of our shopper cards. As a result, Kroger has one of the largest retail customer databases in America.
Through our partnership with dunnhumbyUSA, we use data derived from our loyalty card program to tailor unique coupon offers for specific households because we understand – and appreciate – that no two customers are alike. This level of personalization is a direct link to our customers no other U.S. grocery retailer can replicate.
Our customer loyalty program also enables us to continueprovide a valuable food safety service to generate positive results for our Shareholders, Associates,customers. Using our customer loyalty database, we are able to notify customers through phone calls to homes and register receipt messages about recalls of products they may have purchased. As the Communitieslargest traditional supermarket retailer in the U.S., we serve.believe it is important to partner with customers in their efforts to keep their families safe.
OVERVIEWOF KROGER’S BUSINESSTRONG SMTRATEGY
Our results in 2006 clearly demonstrate that our Customer 1st strategy is working. We are focused on listening to our Customers and offering what they tell us is important to them. Whether it is faster checkouts, cleaner stores, more convenience or better value, each of us contributes to putting the Customer 1st every day, in every store. This is the foundation of our business.
Our business strategy also incorporates managing costs, investing in capital projects to keep our stores fresh and inviting, and implementing new technology to reduce costs and improve service.
This approach enables Kroger to continue to deliver on all three elements of our financial “triple play” strategy: reducing debt, investing capital, and repurchasing stock and paying dividends.
REVIEWOF 2006
Kroger delivered consistently strong results in 2006, exceeding our original guidance for both identical supermarket sales and earnings per share growth.
QUARTERLY DIVIDEND INCREASED
On March 15, 2007, Kroger announced that our Board of Directors increased the quarterly dividend it pays shareholders by 15.4% to $0.075 per share. This is the first increase in the quarterly dividend since the Board initiated the dividend program last year.
In keeping with the objectives outlined when the dividend policy was initiated, Kroger’s Board increased the amount after considering the Company’s overall results, the needs of the business and the interest of shareholders. This increase in the quarterly dividend reflects the Board’s confidence in our strategic plan.
IDENTICAL SALES GREW 5.6% WITHOUT FUEL
Our full-year identical supermarket sales growth in 2006, excluding fuel sales, was 5.6% – well in excess of our original goal, which was to exceed 3.5%. Each quarter we raised that target to reflect our sales momentum throughout the year.
Total sales for the year increased 9.2% to $66.1 billion. After adjusting for the extra week in fiscal 2006, total sales increased 7.0% over fiscal 2005.
EARNINGS PERARKET SHARE GROWTHAINSOF 15%
We ended the year with earnings per share growth of 15%, plus the additional value of our cash dividend program, far surpassing our original estimate of 6 – 8% growth in 2006. We raised that range to 8 – 10% during the year.
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Our earnings per share growth was driven primarily by three factors: strong identical sales, slightly improving operating margins, and fewer shares outstanding.
Net earnings for the year were $1.1 billion, or $1.54 per diluted share. The 53rd week in the fiscal year provided an estimated benefit of $0.07 per diluted share.
COMPETITIVEADVANTAGES
As a result of the retail food industry evolves, one certainty remains:efforts of associates in every area of our business, Kroger made significant gains in market share in 2008. In the environment42 major markets we serve, Kroger gained 61 basis points of additional market share, according to the internal methodology we use to estimate market share. This is the fourth consecutive year Kroger has achieved significant market share gains. Over the past four years combined, Kroger’s share in which we operate continues to be intensely competitive. We remain focused on our key strengths, which enable us to listen and respondmajor markets has increased an outstanding 225 basis points.
These market share gains are a direct result of our associates’ commitment to our Customers.Customer 1st strategy and they demonstrate that Kroger’s competitive advantages include:long-term strategy is working.
As population growth continues in many of the nation’s largest and fastest-growing markets;
STRONGMARKETSHARE
Kroger serves customers in 44 major markets – regions where we operate, nine or more stores. In 2006, Kroger held the No.1 or No. 2 market share position in 38 ofwe intend to continue to grow Kroger’s business by maintaining our 44 markets. Many of these are the largest and fastest-growing metropolitan areas in the country.
Kroger’s overall market share in these 44 markets increased approximately 65 basis points during 2006, on a volume-weighted basis. This growth in fiscal 2006 is even more impressive considering it follows ourexisting strong market share gainsand by building on additional opportunities for sales growth. We calculate that approximately 45% of the share in the previous year. In 2005, Kroger’s overallmarkets – as much as $100 billion – is held by competitors who do not have Kroger’s economies of scale. We estimate that the market share in our 44 major markets increased more than 35 basis points. Looking at the two years combined, our major market share increased approximately 100 basis points – a significant increase that clearly shows Kroger’s strategic plan is working.
GEOGRAPHICDIVERSITYANDMULTIPLEFORMATS
Kroger operates food stores in 31 states under two dozen local banners. Our family of stores includes 2,171 combination food and drug stores, 145 price-impact warehouse stores, 122 multi-department stores and 30 Marketplace stores.
Our combination stores employ a flexible format with products tailored to meet the specific needsthose competitors has declined about 1% during each of the neighborhood. More than 600 of our combination stores include fuel centers.
The Marketplace format is a smaller version of the multi-department stores operated under the Fred Meyer banner. Marketplace stores contain a full grocery store and pharmacy along with expanded general merchandise departments.
Kroger also operates 779 convenience stores, 412 fine jewelry stores and 42 food processing plants.
last four years. We continue to look for ways to capture additional market share.
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CUSTOMEROMMUNITY ISNSIGHTUPPORT
OverAt Kroger, we consider it a privilege to support the past several years,communities where our customers and associates live and work. We focus our efforts on supporting hunger relief, health and wellness initiatives, and local schools and grassroots organizations. In 2008, our company, foundation, associates and customers donated more than $152 millionin Kroger’s name. Every year, Kroger has accumulated a substantial databaseproudly recognizes associates who make outstanding contributions to their communities. The winners of The Kroger Co. Community Service Award for 2008 are listed following this letter.
The progress our associates made with one initiative in particular paid off in an extremely powerful way last year. Kroger’s Perishable Donations Partnership, which allows stores to donate perishable food that provides valuable insight into the shopping behaviorsis still safe and nutritious to eat but can no longer be sold in stores, expanded to include more than half of our Customers through our store loyalty card programs. More than 20 million households actively use onestores last year.
Thanks to the efforts of our store loyalty cards.
Kroger’s partnership with dunnhumby, a London-based leaderassociates, our family of stores contributed nearly 14 million pounds of fresh meat, dairy products, fruits, and vegetables to local food banks in customer insightthe communities we serve. This fresh meat and data management, allows usproduce provides much-needed protein and nutritional value to design tailored offerings for each Customer segment.food banks that struggle to supplement the dry goods and canned foods they typically receive.
Our Customer loyalty data providesperishable donation program helps feed hungry families and is gratifying for our associates, who don’t like to throw away edible food. It’s also good for Kroger and the environment because it helps us reduce waste. We continue to add new stores to the program and hope to have 85% of our stores donating perishable food by the end of 2009. Our goal is to deliver 25 to 30 million pounds of perishable food annually.
SUSTAINABILITY
We continued to make progress in our sustainability efforts throughout the year by partnering with a unique advantagecustomers to reduce waste. Together, we recycled more than 16 million pounds of plastic. In addition, associates in every area of our business helped recycle nearly 1 billion pounds of corrugated cardboard and paper last year.
Customers have responded particularly well to our efforts to encourage them to use more reusable bags. Our family of stores sold more than six million reusable bags last year as we seek opportunitiesthese colorful, low-cost bags become household staples with multiple uses. Every reusable bag has the potential to understandsave 1,000 plastic bags over its lifetime.
Our efforts to reduce energy use in our stores, plants, warehouses and meetoffices have also yielded terrific results. Since 2000, Kroger associates have saved enough energy to power every single-family home in Seattle for an entire year. We continue to look for ways to reduce waste and save energy in all areas of our Customers’ evolving needs and expectations.business.
LEADING CORPORATE BRANDS
Kroger’s corporate brands are a key part of the company’s growth and an important part of our Customer 1st strategic plan. The company’s three-tier program – Private Selection, Kroger and Value brands – enables Kroger to serve our broad and diverse Customer base.
Today, more than 10,000 corporate brand products are available only in Kroger’s family of stores. Our private label grocery items, in terms of dollars, represent approximately 24% of the Company’s grocery sales.
Most of our high-quality, private-label products are made in one of our 42 manufacturing plants.
LOOKING AHEAD TOTO 20072009
Our outlook for 2009 remains optimistic. At the same time, we are cautious as we help our customers navigate through today’s challenging economy. Kroger is in a strong position to sustain growth and generate value for shareholders even in this challenging economy. We continue to face competitive challenges on all fronts. Consumers today have many choices. Weset financial objectives we believe we have the right approach – and the right team of people – to meet the diverse needs of today’s consumers.
As in 2006, strong identical sales, slightly improving operating margins, and fewer shares outstanding will drive Kroger’s earnings per share growth this year.
Kroger’s quarterly cash dividend is an important component of shareholder return. We expect the combination of the Company’s dividend and earnings per share target of $1.60 to $1.65 to deliver a double-digit return for Kroger shareholders in 2007.
Our forecast of Kroger’s growth rate assumes a stable labor environment. The Company has a number of labor negotiations this year covering Associates in Southern California, Cincinnati, Detroit, Houston, Memphis, Toledo, Seattle and West Virginia.
As in the past, these labor negotiations will be challenging in the face of competitive pressures and rising pension and health care costs. We will continue to seek balanced agreements that provide good wages and benefits at a cost that is fair to allare achievable in order to invest in our businesscontinue to create career opportunitiesa strong return for existing – and future Associates.
COMMUNITY ACTIVITIES
Kroger has a long tradition of supporting the communities where our Associates and Customers live and work. More than $150 million was contributed in Kroger’s name during 2006, through donations from our Customers, Associates and the Company, both directly and through our foundations.
shareholders.
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Kroger has been supporting the fightWe expect full-year identical supermarket sales growth of 3% to end hunger4%, without fuel, in America for more than 25 years.fiscal 2009. We believe strong identical sales growth and operating margin expansion – both excluding fuel sales – will produce full-year 2009 earnings of $2.00 to $2.05 per diluted share. In 2006,addition, we were selected “Retailer of the Year”expect Kroger’s dividend to enhance total shareholder return by the food banks of the America’s Second Harvest network. This is the fourth time in six years that Kroger has received this award. It reflects the long-standing and close working relationship we have with more than 85 local food banks.over 1%.
Last year,Our company’s Customer 1st strategy, which is unlike that of any other operator in our family of stores contributed more than 30 million pounds of foodindustry, continues to be a powerful competitive advantage. Through our strategy, the Kroger team consistently delivers near-term results for shareholders and other productscontinues to food banks servinginvest in the local communities where we operate. Those donations provided more than 22 million meals to families and individuals across the country through food banks, soup kitchens and emergency pantries. We appreciate the role our Associates, Customers and vendors play in helping us make a difference – in every community we serve.
Each year, Kroger proudly recognizes somefuture growth of our Associates who make outstanding contributionscompany.
Customers rely on Kroger because they trust us to their communities.deliver low prices, great quality products, friendly service and a pleasant shopping experience. We congratulate the winners of The Kroger Co. Community Service Award for 2006:
ENVIRONMENTAL STEWARDSHIP
As one of the largest retailers in the country, Kroger is committed to being a responsible steward of the environment. Conserving energy and controlling the costs associated with energy usage has long been a focus for Kroger. We have made good progress in recent years and continue to look for opportunities to do more.
Since 2000, Kroger has reduced our energy consumption by over 20%, or more than 1.3 billion kilowatt-hours, across all of our square footage. That’s enough energy to light, heat and cool every house in Nashville, Tennessee for one year.
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We have learned that one of the most effective ways to reduce energy consumption is by establishing best practices, which we do with the help of every Associate in every store. Our local energy teams create and implement store-specific energy reduction plans. We also have programs in place to train and educate all of our Associates about good energy habits.
Our ongoing effortsunderstand what customers need in this important area are supported throughout the Company.environment better than others and we offer an overall value proposition that meets their changing needs. We look forward to continuing to deliver value to our customers, associates and shareholders in 2009.
PROMOTIONSAND RETIREMENTS
Diversity is one of Kroger’s core values and to underscore its importance, Kroger named Carver Johnson as the Company’s first Chief Diversity Officer last year. Mr. Johnson, who has been with Kroger since 1999, and his team focus on hiring, training and retaining a diverse work force and oversee Kroger’s supplier diversity efforts. Kroger has been a leader in the use of minority and women-owned business enterprises (M/WBE) in all aspects of our business for more than 25 years, spending $1 billion annually with M/WBEs.
Several individuals were named to lead retail divisions this year, continuing Kroger’s strong track record of developing leaders and creating opportunities for them within the Company.
Robert Moeder was named President of Kroger’s Central Division, bringing more than 30 years of retail and division management experience in Kroger to his new position. Mark Prestidge was promoted to President of Kroger’s Delta Division, after holding several leadership positions in the supermarket industry.Michael Ellis was named President of the Company’s Fred Meyer division after serving in several leadership positions within Kroger.
On behalf of ourthe entire Company, we extend our appreciation and congratulations to Richard Tillman, who retired after a 42-year career with Kroger. Mr. Tillman joined Kroger as a part-time food store clerk and held a variety of positions with increasing responsibility throughout his career, including President of Kroger’s Delta division.
DELIVERING IMPROVED SERVICE, SELECTIONAND VALUE
Kroger’s Customer 1st strategic plan served Customers, Associates and Shareholders well in 2006. We believe it will continue to enable the Company to achieve our objectives in 2007 and beyond.
We are very pleased with Kroger’s growth and performance last year. We know there is much hard work ahead and we know our Associates are up to the challenge.
We must continue to listen closely to our Customers and put their expectations and needs first – in every area of our business, every day – to achieve sustainable, profitable sales growth and continue to create value for our Shareholders.
Thankteam, thank you for your continued supporttrust and trust.support.
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Congratulations to the winners of The Kroger Co. Community Service Award for 2008:
Atlanta | Bert Ratliff |
Central | Betty Davenport |
Cincinnati | Habitat for Humanity Team |
Kirk Richardson | |
City Market | Rick Lopez |
Delta | Hattie Spann |
Dillon Stores | Danyelle DeuFriend |
Fred Meyer | Amy Jacobs |
Fry’s | Paul Bennewitz |
Columbus | Susie Chrisman |
Michigan | Brenda Hibbs |
Jay C Stores | Peggy Drees |
King Soopers | Janie Tow |
Mid-Atlantic | Larry Keith Wells |
Mid-South | Teresa McGrew |
QFC | Jennifer Reynolds |
Ralphs | Hiroko Eddow |
Food 4 Less | Marcus Charles |
Smith’s | Richard Kennedy |
Southwest | Galveston Store Team |
Pace Dairy of Indiana | Irene Skelton |
Bluefield Beverage | Cecelia Latimer |
Vandervoort Dairy | Derryl Dears |
Country Oven Bakery | Billy Taylor |
General Office | Rob Rouse |
Convenience Stores | Dora Bradley – Loaf n Jug |
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NOTICEOF ANNUAL MEETINGOF SHAREHOLDERS
Cincinnati, Ohio, May 15, 20072009
To All Shareholders
of The Kroger Co.:
The annual meeting of shareholders of The Kroger Co. will be held at the MUSIC HALL BALLROOM, MUSIC HALL, 12431241 Elm Street, Cincinnati, Ohio 45202, on June 28, 2007,25, 2009, at 11 A.M.a.m., E.D.T.,eastern time, for the following purposes:
1. | To elect the directors for the ensuing year; | ||
2. | |||
To consider and act upon a proposal to ratify the selection of independent auditors for the year | |||
To act upon | |||
To transact such other business as may properly be brought before the meeting; |
all as set forth in the Proxy Statement accompanying this Notice. Holders of common shares of record at the close of business on April 30, 200727, 2009 will be entitled to vote at the meeting.
ATTENDANCE
Only shareholders and persons holding proxies from shareholders may attend the meeting. PleasePlease bring to the meeting the admission ticket that is attached to the proxy card.
If your shares are held in the name of a broker, trust, bank, or other nominee, please bring a proxy or letter from that broker, trust, bank or nominee confirming that you are the beneficial owner of those shares. The left side portionnotice of the voting instruction formmeeting or your proxy card that was mailed to you receive from your brokeras this will serve as your admission ticket.
YOUR MANAGEMENT DESIRES TO HAVE A LARGE NUMBER OF SHAREHOLDERS REPRESENTED AT THE MEETING, IN PERSON OR BY PROXY. PLEASE VOTE YOUR PROXY ELECTRONICALLY VIA THE INTERNET OR TELEPHONE, ORBY TELEPHONE. IF YOU HAVE ELECTED TO RECEIVE PRINTED MATERIALS, YOU MAY SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.ENVELOPE PROVIDED. NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES.
If you are unable to attend the annual meeting, you may listen to a live webcast of the meeting, which will be accessible through our website, (www.kroger.com)www.thekrogerco.com, at 11 a.m., E.D.T.eastern time.
By order of the Board of Directors, | |
Paul W. Heldman, Secretary |
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PROXY STATEMENT
Cincinnati, Ohio, May 15, 20072009
The accompanyingYour proxy is solicited by the Board of Directors of The Kroger Co., and the cost of solicitation will be borne by Kroger. We will reimburse banks, brokers, nominees, and other fiduciaries for postage and reasonable expenses incurred by them in forwarding the proxy material to their principals. Kroger has retained D.F. King & Co., Inc., 48 Wall Street, New York, New York, to assist in the solicitation of proxies and will pay that firm a fee estimated at present not to exceed $12,500.$15,000. Proxies may be solicited personally, by telephone, electronically via the Internet, or by mail.
David B. Dillon, Steven R. Rogel, and John T. LaMacchia and Bobby S. Shackouls, all of whom are Kroger directors, have been named members of the Proxy Committee.
The principal executive offices of The Kroger Co. are located at 1014 Vine Street, Cincinnati, Ohio 45202-1100. Our telephone number is 513-762-4000. This Proxy Statement and Annual Report, and the accompanying proxy, were first sent or givenfurnished to shareholders on May 15, 2007.2009.
As of the close of business on April 30, 2007,27, 2009, our outstanding voting securities consisted of 710,217,716652,371,396 shares of common stock, the holders of which will be entitled to one vote per share at the annual meeting. The shares represented by each proxy will be voted unless the proxy is revoked before it is exercised. Revocation may be in writing to Kroger’s Secretary, or in person at the meeting, or by appointment of a subsequent proxy. Shareholders may not cumulate votes in the election of directors. At the 2006 annual meeting, shareholders voted to amend Kroger’s Articles of Incorporation to eliminate cumulative voting.
The effect of broker non-votes and abstentions on matters presented for shareholder vote is as follows:
Item No. 1, Election of Directors—– The election of directors is pursuant to Ohio law, determined by plurality. Broker non-votes and abstentions will have no effect on this proposal.
Item No. 2, Approval of Kroger Cash Bonus Plan—Approval by shareholders of the Kroger Cash Bonus Plan requires the affirmative vote of the majority of shares participating in the voting. Accordingly, broker non-votes and abstentions will have no effect on this proposal.
Item No. 3, Rules of Conduct for Shareholder Meetings; Meetings Outside of Cincinnati—The affirmative vote representing a majority of the outstanding shares of our common stock is required to amend Kroger’s Regulations to provide for rules of conduct in connection with shareholder meetings and permitting these meetings outside of Cincinnati, Ohio. Abstentions and broker non-votes will have the same effect as votes against this proposal.
Item No. 4, Selection of Auditors—– Ratification by shareholders of the selection of auditors requires the affirmative vote of the majority of shares participating in the voting. Accordingly, abstentions will have no effect on this proposal.
Item No. 5,Nos. 3 and 4, Shareholder proposalProposals— – The affirmative vote of a majority of shares participating in the voting on thisa shareholder proposal is required for its adoption. Proxies will be voted AGAINST this proposalthese proposals unless the Proxy Committee is otherwise instructed on a proxy properly executed and returned. Abstentions and broker non-votes will have no effect on this proposal.these proposals.
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PROPOSALSTO SHAREHOLDERS
ELECTIONOF DIRECTORS
(ITEM NO. 1)
The Board of Directors, as now authorized, consists of 16 members divided into two classes. Although shareholders voted in 2006 to declassify the Board and cause all directors to be elected annually, the directors elected in 2005 will continue to serve their remaining terms until the annual meeting in 2008.15 members. All other members are to be elected at the annual meeting to serve until the annual meeting in 2008,2010, or until their successors have been elected by the shareholders or by the Board of Directors pursuant to Kroger’s Regulations, and qualified. Candidates for director receiving the greatest number of votes cast by holders of shares entitled to vote at a meeting at which a quorum is present are elected, up to the maximum number of directors to be chosen at the meeting. Pursuant to guidelines adopted by the Board, in an uncontested election, any nominee who receives a greater number of votes “withheld” from his or her election than votes “for” such election promptly will tender his or her resignation following certification of the shareholder vote. The Corporate Governance Committee of our Board of Directors will consider the resignation offer and recommend to the Board whether to accept the resignation.
The committee memberships stated below are those in effect as of the date of this proxy statement. It is intended that, except to the extent that authority is withheld, the accompanying proxy will be voted for the election of the following persons:
Professional | Director | ||||
Name | Occupation (1) | Age | Since | ||
NOMINEES FORDIRECTOR FOR TERMS OFOFFICE | |||||
CONTINUINGUNTIL2008 | |||||
Reuben V. Anderson | Mr. Anderson is a member in the Jackson, Mississippi, office of Phelps Dunbar, a regional law firm based in New Orleans. Prior to joining this law firm, he was a justice of the Supreme Court of Mississippi. Mr. Anderson is a director of Trustmark National Bank and AT&T Inc. He is a member of the Corporate Governance and Public Responsibilities Committees. | 64 | 1991 | ||
John L. Clendenin | Mr. Clendenin is Chairman Emeritus of BellSouth Corporation, a holding company with subsidiaries in the telecommunications business. From January 1984 through December 1996 he was its Chairman of the Board and Chief Executive Officer. Mr. Clendenin is a director of Equifax Incorporated, The Home Depot, Inc., Powerwave Technologies, Inc., and Acuity Brands, Inc. He is a member of the Compensation and Corporate Governance Committees. | 72 | 1986 |
Professional | Director | |||||
Name | Occupation (1) | Age | Since | |||
NOMINEES FORDIRECTOR FORTERMS OFOFFICE | ||||||
CONTINUINGUNTIL2010 | ||||||
Reuben V. Anderson | Mr. Anderson is a member in the Jackson, Mississippi office of Phelps Dunbar, a regional law firm based in New Orleans. Prior to joining this law firm, he was a justice of the Supreme Court of Mississippi. Mr. Anderson is a director of Trustmark National Bank and AT&T Inc. He is a member of the Corporate Governance and Public Responsibilities Committees. | 66 | 1991 | |||
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Robert D. Beyer | Mr. Beyer is Chief Executive Officer of The TCW Group, Inc., an investment management firm, where he has been employed since 1995. From 1991 to 1995, he was the co-Chief Executive Officer of Crescent Capital Corporation, which was acquired by TCW in 1995. Mr. Beyer is a member of the Board of Directors of TCW and its parent, Société Générale Asset Management, S.A. He is also a member of the Board of Directors of The Allstate Corporation. Mr. Beyer is chair of the Financial Policy Committee and a member of the Compensation Committee. | 49 | 1999 | |||
David B. Dillon | Mr. Dillon was elected Chairman of the Board of Kroger in 2004, Chief Executive Officer in 2003, and President and Chief Operating Officer in 2000. He served as President in 1999, and as President and Chief Operating Officer from 1995-1999. Mr. Dillon was elected Executive Vice President of Kroger in 1990 and President of Dillon Companies, Inc. in 1986. He is a director of Convergys Corporation. | 58 | 1995 |
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Professional Director Name Occupation (1) Age Since David B. Dillon Mr. Dillon was elected Chairman of the Board of Kroger in 2004, Chief Executive Officer in 2003, and President and Chief Operating Officer in 2000. He served as President in 1999, and as President and Chief Operating Officer from 1995-1999. Mr. Dillon was elected Executive Vice President of Kroger in 1990 and President of Dillon Companies, Inc. in 1986. He is a director of Convergys Corporation. 56 1995 David B. Lewis Mr. Lewis is Chairman, President and Chief Executive Officer of Lewis & Munday, a Detroit based law firm with offices in Washington, D.C. and Seattle. He is a director of H&R Block. Mr. Lewis has served on the Board of Directors of Conrail, Inc., LG&E Energy Corp., Lewis & Thompson Agency, Inc., M.A. Hanna, TRW, Inc. and Comerica, Inc. He is chair of the Audit Committee and vice chair of the Public Responsibilities Committee. 62 2002 Don W. McGeorge Mr. McGeorge was elected President and Chief Operating Officer of Kroger in 2003. Before that he was elected Executive Vice President in 2000 and Senior Vice President in 1997. 52 2003 W. Rodney McMullen Mr. McMullen was elected Vice Chairman of Kroger in 2003. Before that he was elected Executive Vice President in 1999 and Senior Vice President in 1997. Mr. McMullen is a director of Cincinnati Financial Corporation. 46 2003 Jorge P. Montoya Mr. Montoya was the President of The Procter& Gamble Company’s Global Snacks & Beverage division, and President of Procter & Gamble Latin America, from 1999 until his retirement in 2004.Prior to that, he was an Executive Vice President of Procter & Gamble from 1995 to 1999. Mr. Montoya is a director of Gap, Inc. and Rohm & Haas Company.He is a member of the Compensation and Public Responsibilities Committees. 60 2007 Clyde R. Moore Mr. Moore is the Chairman and Chief Executive Officer of First Service Networks, a national provider of facility and maintenance repair services. He is a director of First Service Networks. Mr. Moore is a member of the Audit and Compensation Committees. 53 1997
Professional | Director | |||||
Name | Occupation (1) | Age | Since | |||
Susan J. Kropf | Ms. Kropf was President and Chief Operating Officer of Avon Products Inc., from 2001 until her retirement in December 2006. She joined Avon in 1970. Prior to her most recent assignment, Ms. Kropf had been Executive Vice President and Chief Operating Officer, Avon North America and Global Business Operations from 1998 to 2000. From 1997 to 1998 she was President, Avon U.S. Ms. Kropf was a member of Avon’s Board of Directors from 1998 to 2006. She currently is a member of the Board of Directors of Coach, Inc., MeadWestvaco Corporation, and Sherwin Williams Company. Ms. Kropf is a member of the Audit and Public Responsibilities Committees. | 60 | 2007 | |||
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John T. LaMacchia | Mr. LaMacchia served as Chairman of the Board of Tellme Networks, Inc., a provider of voice application networks from September 2001 to May 2007. From September 2001 through December 2004 he was also Chief Executive Officer of Tellme Networks. From May 1999 to May 2000 Mr. LaMacchia was Chief Executive Officer of CellNet Data Systems, Inc., a provider of wireless data communications. From October 1993 through February 1999, he was President and Chief Executive Officer of Cincinnati Bell Inc. Mr. LaMacchia is chair of the Compensation Committee and a member of the Corporate Governance Committee. | 67 | 1990 | |||
David B. Lewis | Mr. Lewis is Chairman and Chief Executive Officer of Lewis & Munday, a Detroit based law firm with offices in Washington, D.C., Seattle and Hartford. He is a director of H&R Block. Mr. Lewis has served on the Board of Directors of Conrail, Inc., LG&E Energy Corp., Lewis & Thompson Agency, Inc., M.A. Hanna, TRW, Inc. and Comerica, Inc. He is chair of the Audit Committee and vice chair of the Public Responsibilities Committee. | 64 | 2002 | |||
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Don W. McGeorge | Mr. McGeorge was elected President and Chief Operating Officer of Kroger in 2003. Before that he was elected Executive Vice President in 2000 and Senior Vice President in 1997. | 54 | 2003 | |||
W. Rodney McMullen | Mr. McMullen was elected Vice Chairman of Kroger in 2003. Before that he was elected Executive Vice President in 1999 and Senior Vice President in 1997. Mr. McMullen is a director of Cincinnati Financial Corporation. | 48 | 2003 | |||
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Jorge P. Montoya | Mr. Montoya was President of The Procter & Gamble Company’s Global Snacks & Beverage division, and President of Procter & Gamble Latin America, from 1999 until his retirement in 2004. Prior to that, he was an Executive Vice President of Procter & Gamble from 1995 to 1999. Mr. Montoya is a director of Gap, Inc. He is chair of the Public Responsibilities Committee and a member of the Compensation Committee. | 62 | 2007 |
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Professional | Director | ||||
Name | Occupation (1) | Age | Since | ||
Susan M. Phillips | Dr. Phillips is Dean and Professor of Finance at The George Washington University School of Business, a position she has held since 1998. She was a member of the Board of Governors of the Federal Reserve System from December 1991 though June 1998. Before her Federal Reserve appointment, Dr. Phillips served as Vice President for Finance and University Services and Professor of Finance in The College of Business Administration at the University of Iowa from 1987 through 1991. She is a director of State Farm Mutual Automobile Insurance Company, State Farm Life Insurance Company, State Farm Companies Foundation, National Futures Association, the Chicago Board Options Exchange and the Chicago Futures Exchange. Dr. Phillips also is a trustee of the Financial Accounting Foundation. She is a member of the Audit and Financial Policy Committees. | 62 | 2003 | ||
Steven R. Rogel | Mr. Rogel was elected Chairman of the Board of Weyerhaeuser Company in 1999 and has been President and Chief Executive Officer and a director thereof since December 1997. Before that time he was Chief Executive Officer, President and a director of Willamette Industries, Inc. Mr. Rogel served as Chief Operating Officer of Willamette Industries, Inc. until October 1995 and, before that time, as an executive and group vice president for more than five years. He is a director of Union Pacific Corporation. Mr. Rogel has been appointed by the Board to serve as Lead Director. He is chair of the Corporate GovernanceCommittee and a member of the Financial Policy Committee. | 64 | 1999 | ||
James A. Runde | Mr. Runde is a special advisor and a former Vice Chairman of Morgan Stanley, where he has been employed since 1974. He was a member of the Board of Directors of Burlington Resources Inc. prior to its acquisition by ConocoPhillips in 2006. Mr. Runde serves as a trustee of Marquette University and the Pierpont Morgan Library. He is a member of the Compensation and Financial Policy Committees. | 60 | 2006 |
Professional | Director | |||||
Name | Occupation (1) | Age | Since | |||
Clyde R. Moore | Mr. Moore is the Chairman and Chief Executive Officer of First Service Networks, a national provider of facility and maintenance repair services. He is a director of First Service Networks. Mr. Moore is a member of the Compensation and Corporate Governance Committees. | 55 | 1997 | |||
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Susan M. Phillips | Dr. Phillips is Dean and Professor of Finance at The George Washington University School of Business, a position she has held since 1998. She was a member of the Board of Governors of the Federal Reserve System from December 1991 through June 1998. Before her Federal Reserve appointment, Dr. Phillips served as Vice President for Finance and University Services and Professor of Finance in The College of Business Administration at the University of Iowa from 1987 through 1991. She is a director of State Farm Mutual Automobile Insurance Company, State Farm Life Insurance Company, State Farm Companies Foundation, National Futures Association, the Chicago Board Options Exchange and the Chicago Futures Exchange. Dr. Phillips also is a trustee of the Financial Accounting Foundation. She is a member of the Audit and Financial Policy Committees. | 64 | 2003 | |||
Steven R. Rogel | Mr. Rogel was elected Chairman of the Board of Weyerhaeuser Company in 1999 and was President and Chief Executive Officer and a director thereof from December 1997 to January 1, 2008 when he relinquished the role of President. He relinquished the CEO role in April of 2008 and retired as Chairman as of April 2009. Before that time Mr. Rogel was Chief Executive Officer, President and a director of Willamette Industries, Inc. He served as Chief Operating Officer of Willamette Industries, Inc. until October 1995 and, before that time, as an executive and group vice president for more than five years. Mr. Rogel is a director of Union Pacific Corporation. He is a member of the Corporate Governance and Financial Policy Committees. | 66 | 1999 | |||
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James A. Runde | Mr. Runde is a special advisor and a former Vice Chairman of Morgan Stanley, where he has been employed since 1974. He was a member of the Board of Directors of Burlington Resources Inc. prior to its acquisition by ConocoPhillips in 2006. Mr. Runde serves as a trustee of Marquette University and the Pierpont Morgan Library. He is a member of the Compensation and Financial Policy Committees. | 62 | 2006 | |||
Ronald L. Sargent | Mr. Sargent is Chairman and Chief Executive Officer of Staples, Inc., where he has been employed since 1989. Prior to joining Staples, Mr. Sargent spent 10 years with Kroger in various positions. In addition to serving as a director of Staples, Mr. Sargent is a director of Mattel, Inc. He is vice chair of the Audit Committee and a member of the Public Responsibilities Committee. | 53 | 2006 |
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Professional | Director | ||||
Name | Occupation (1) | Age | Since | ||
Ronald L. Sargent | Mr. Sargent is Chairman and Chief Executive Officer of Staples, Inc., where he has been employed since 1989. Prior to joining Staples, Mr. Sargent spent 10 years with Kroger in various positions. In addition to serving as a director of Staples, Mr. Sargent is a director of Mattel, Inc. He is a member of the Audit and Public Responsibilities Committees. | 51 | 2006 | ||
DIRECTORSWHOSETERMSOFOFFICECONTINUEUNTIL 2008 | |||||
Robert D. Beyer | Mr. Beyer is Chief Executive Officer of The TCW Group, Inc., an investment management firm, where he has been employed since 1995. From 1991 to 1995, he was the co-Chief Executive Officer of Crescent Capital Corporation, which was acquired by TCW in 1995. Mr. Beyer is a member of the Board of Directors of TCW and its parent, Société Générale Asset Management, S.A. He is also a member of the Board of Directors of The Allstate Corporation. Mr. Beyer is chair of the Financial Policy Committee and a member of the Compensation Committee. | 47 | 1999 | ||
John T. LaMacchia | Mr. LaMacchia is Chairman of the Board of Tellme Networks, Inc., a provider of voice application networks. From September 2001 through December 2004 he was also Chief Executive Officer of Tellme Networks. From October 1993 through February1999, Mr. LaMacchia was President and Chief Executive Officer of Cincinnati Bell Inc. From May 1999 to May 2000 he was Chief Executive Officer of CellNet Data Systems, Inc., a provider of wireless data communications. He is chair of the Compensation Committee and a member of the Corporate Governance Committee. | 65 | 1990 | ||
Katherine D. Ortega | Ms. Ortega served as an Alternate Representative of the United States to the 45th General Assembly of the United Nations in 1990-1991. Prior to that, she served as Treasurer of the United States. Ms. Ortega is a director of Rayonier Inc., Washington Mutual Investors Fund and JPMorgan Value Opportunities Fund, and Trustee of the American Funds Tax Exempt Series I. She is chair of the Public Responsibilities Committee and a member of the Financial Policy Committee. | 72 | 1992 |
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Professional | Director | |||||
Name | Occupation (1) | Age | Since | |||
Bobby S. Shackouls | Until the merger of Burlington Resources Inc. and ConocoPhillips, which became effective on March 31, 2006, Mr. Shackouls was Chairman of the Board of Burlington Resources Inc., a natural resources business, since July 1997 and its President and Chief Executive Officer since December 1995. He had been a director of that company since 1995 and President and Chief Executive Officer of Burlington Resources Oil and Gas Company (formerly known as Meridian Oil Inc.), a wholly-owned subsidiary of Burlington Resources, since 1994. Mr. Shackouls is a director of ConocoPhillips. He has been appointed by Kroger’s Board to serve as Lead Director. Mr. Shackouls is chair of the Corporate Governance Committee and a member of the Audit Committee. | 58 | 1999 |
Professional | Director | ||||
Name | Occupation (1) | Age | Since | ||
Bobby S. Shackouls | Until the merger of Burlington Resources Inc. and ConocoPhillips, which became effective on March 31, 2006, Mr. Shackouls was Chairman of the Board of Burlington Resources Inc., a natural resources business, since July 1997 and its President and Chief Executive Officer since December 1995. He had been a director of that company since 1995 and President and Chief Executive Officer of Burlington Resources Oil and Gas Company (formerly known as Meridian Oil Inc.), a wholly-owned subsidiary of Burlington Resources, since 1994. Mr. Shackouls is a director of ConocoPhillips. He is vice chair of the Audit and Corporate Governance Committees. | 56 | 1999 |
(1) | Except as noted, each of the directors has been employed by his or her present employer (or a subsidiary) in an executive capacity for at least five years. |
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INFORMATIONCONCERNINGTHEBOARDOFDIRECTORS
COMMITTEESOFTHEBOARD
The Board of Directors has a number of standing committees including Audit, Compensation, and Corporate Governance Committees. All standing committees are composed exclusively of independent directors. All Board Committees have charters that can be found on our corporate website at www.thekrogerco.com underGuidelines on IssuesofCorporate Governance. During 2006,2008, the Audit Committee met nineseven times, the Compensation Committee met four times, and the Corporate Governance Committee met fourtwo times. Committee memberships are shown on pages 8 through 1211 of this Proxy Statement. The Audit Committee reviews financial reporting and accounting matters pursuant to its charter and selects our independent accountants. The Compensation Committee recommends for determination by the independent members of our Board the compensation of the Chief Executive Officer, determines the compensation of Kroger’s other senior management, and administers certain long-term incentive programs. Additional information on the Compensation Committee’s processes and procedures for consideration of executive compensation are addressed in the Compensation Discussion and Analysis below. The Corporate Governance Committee develops criteria for selecting and retaining members of the Board;Board, seeks out qualified candidates for the Board;Board, and reviews the performance of Kroger, the CEO,Board, and along with the Board.other independent board members, the CEO.
The Corporate Governance Committee will consider shareholder recommendations for nominees for membership on the Board of Directors. Recommendations relating to our annual meeting in June 2008,2010, together with a description of the proposed nominee’s qualifications and other relevant information, must be submitted in writing to Paul W. Heldman, Secretary, and received at our executive offices not later than January 15, 2008.2010. Shareholders who desire to submit a candidate for director should send the name of the proposed candidate, along with information regarding the proposed candidate’s background and experience, to the attention of Kroger’s Secretary at our executive offices. The shareholder also should indicate the number of shares beneficially owned by the shareholder. The Secretary will forward the information to the Corporate Governance Committee for its consideration. The Committee will use the same criteria in evaluating candidates submitted by shareholders as it uses in evaluating candidates identified by the Committee. These criteria are:
The Corporate Governance Committee typically recruits candidates for Board membership through its own efforts and through suggestions from other directors and shareholders. The Committee has retained an outside search firm to assist in identifying and recruiting Board candidates who meet the criteria established by the Committee.
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The Board elected Mr. Montoya, Mr. Runde and Mr. Sargent as directors to fill vacancies since the 2006 annual meeting. Non-management directors, our CEO, and a third-party search firm jointly recommended each of these directors.
CORPORATE GOVERNANCE
The Board of Directors has adoptedGuidelines on Issuesof Corporate Governance. TheseGuidelines, which include copies of the current charters for the Audit, Compensation and Corporate Governance Committees, and the other committees of the Board of Directors, are available on our corporate website at www.thekrogerco.comwww.thekrogerco.com. Shareholders may obtain a copy of theGuidelinesby making a written request to Kroger’s Secretary at our executive offices.
INDEPENDENCE
The Board of Directors has determined that all of the directors, with the exception of Messrs. Dillon, McGeorge and McMullen, have no material relationships with Kroger and therefore are independent for purposes of the New York Stock Exchange listing standards. The Board made its determination based on information furnished by all members regarding their relationships with Kroger. After reviewing the information, the Board determined that all of the non-employee directors were independent because (i) they all satisfied the independence standards set forth in Rule 10A-3 of the Securities Exchange Act of 1934, (ii) they all satisfied the criteria for independence set forth in Rule 303A.02(b)303A.02 of the New York Stock Exchange Listed Company Manual, and (iii) other than business transactions between Kroger and entities with which the directors are affiliated, the value of which falls below the thresholds identified by the New York Stock Exchange listing standards, none had any material relationships with us except for those arising directly from their performance of services as a director for Kroger.
LEAD DIRECTOR
The Lead Director presides over all executive sessions of the non-management directors;directors, serves as the principal liaison tobetween the non-management directors;directors and management, and consults with the Chairman regarding information to be sent to the Board, meeting agendas, and establishing meeting schedules. Unless otherwise determined by the Board, the chair of the Corporate Governance Committee is designated as the Lead Director.
AUDIT COMMITTEE EXPERTISE
The Board of Directors has determined that David B. Lewis, and Susan M. Phillips bothand Ronald L. Sargent, all independent directors who are members of the Audit Committee, are “audit committee financial experts” as defined by applicable SEC regulations and that all members of the Audit Committee are “financially literate” as that term is used in the NYSE listing standards.
CODEOF ETHICS
The Board of Directors has adoptedThe Kroger Co. Policy on Business Ethics, applicable to all officers, employees and members of the Board of Directors, including Kroger’s principal executive, financial and accounting officers. ThePolicy is available on our corporate website at www.thekrogerco.com.www.thekrogerco. com. Shareholders may obtain a copy of thePolicyby making a written request to Kroger’s Secretary at our executive offices.
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COMMUNICATIONSWITHTHE 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
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(800-689-4609) or email address (helpline@kroger.com) established by the Board’s Audit Committee. The concerns are investigated by Kroger’s Vice President of Auditing and reported to the Audit Committee as deemed appropriate by the Vice President of Auditing.
Shareholders or interested parties also may communicate with the Board in writing directed to Kroger’s Secretary at our executive offices. The Secretary will consider the nature of the communication and determine whether to forward the communication to the chair of the Corporate Governance Committee. Communications relating to personnel issues or our ordinary business operations or seeking to do business with us, will be forwarded to the business unit of Kroger that the Secretary deems appropriate. All other communications will be forwarded to the chair of the Corporate Governance Committee for further consideration. The chair of the Corporate Governance Committee will take such action as he or she deems appropriate, which may include referral to the Corporate Governance Committee or the entire Board.
ATTENDANCE
The Board of Directors met sixseven times in 2006.2008. During 2006,2008, all incumbent directors attended at least 75% of the aggregate number of Board meetings and committee meetings on which that director was a member. Members of the Board are expected to use their best efforts to attend all annual meetings of shareholders. Eleven of the thirteen All fifteenmembers of the Board then in office attended last year’s annual meeting.
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COMPENSATION DISCUSSIONAND ANALYSIS |
EXECUTIVE COMPENSATION – GENERAL PRINCIPLES
The Compensation Committee of the Board has the primary responsibility for establishing the compensation of Kroger’s executive officers, including the named executive officers who are identified in the Summary Compensation tableTable below, with the exception of the Chief Executive Officer. The Committee’s role regarding the CEO’s compensation is to make recommendations to the independent members of the Board; those independent Board members establish the CEO’s compensation.
The Committee’s philosophy on compensation generally applies to all levels of Kroger management.That approach It requires Kroger to:
The following discussion and analysis addresses the compensation of the named executive officers.officers, and the factors considered by the Committee in setting compensation for the named executive officers and making recommendations to the independent Board members in the case of the CEO’s compensation. Additional detail is provided in the compensation tables and the accompanying narrative disclosures that follow this discussion and analysis.
EXECUTIVE COMPENSATION – OBJECTIVES
The Committee has several related objectives regarding compensation. First, the Committee believes that compensation must be designed to attract and retain those best suited to fulfill the challenging roles that executive officers play at Kroger. Second, some elements of compensation should help align the interests of the officers with your interests as shareholders. Third, compensation should create strong incentives for the officers (a) to achieve the annual business plan targets established by the Board, and (b) to assureensure that the officers work within the framework ofachieve Kroger’s long-term strategic objectives. In developing compensation programs and amounts to meet these objectives, the Committee exercises restraintjudgment to assureensure that executive officer compensation does not exceed reasonable and competitive levels in light of Kroger’s performance and the needs of the business.
To meet these objectives, the Committee has taken a number of steps over the last several years, including the following:
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ESTABLISHING EXECUTIVE COMPENSATION
The independent members of the Board have the exclusive authority to determine the amount of the CEO’s salary; the bonus levelpotential for the CEO; the nature and amount of any equity awards made to the CEO; and any other compensation questions related to the CEO. In setting the “bonus level”annual bonus potential for the CEO, the independent directors determine the dollar amount that will be multiplied by the percentage payout under the annual bonus plan applicable to all corporate management.management, including the named executive officers. The independent directors retain discretion to reduce the percentage payout the CEO would otherwise receive. The independent directors thus make a separate determination annually concerning both the CEO’s bonus level as well aspotential and the percentage of bonus paid.
The Committee performs the same function and exercises the same authority as to the other named executive officers. The Committee’s annual review of compensation for the named executive officers includes the following:
In considering each of the factors above, the Committee does not make use of a formula, but rather subjectively reviews each in making its compensation determination.
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THE COMMITTEE’S COMPENSATION CONSULTANTAND BENCHMARKING
The Committee directly engages a compensation consultant from Mercer Human Resource Consulting to advise the Committee in the design of compensation for executive officers. While the parent and affiliated companies of Mercer Human Resource Consulting perform other services for us, the Committee has found that the consultant is independent because (a) he was first engaged by the Committee before he became
16
associated with Mercer; (b) he works exclusively for the Committee and not for our management; and (c) he does not benefit from the other work that Mercer performs for Kroger; and (d) neither the consultant nor the consultant’s team perform any other services on behalf of Kroger.
The consultant conducts an annual competitive assessment of executive positions at Kroger for the Committee. The assessment is one of several bases, as described above, on which the Committee determines compensation. The consultant assesses base salary; target annual performance-based bonus; target cash compensation (the sum of salary and bonus); annualized long-term incentive awards, such as stock options, other equity awards, and performance-based long-term bonuses; and total direct compensation (the sum of all these elements). The consultant compares these elements against those of other companies in a peer group of publicly-traded food and drug retailers. For 2006,2008, the group consisted of:
Costco Wholesale | Supervalu | |
CVS | Target | |
Great Atlantic & Pacific Tea | Walgreens | |
Rite Aid | Wal-Mart | |
Safeway |
This peer group is the same group as that used in 2007.
The make-up of the compensation peer group is reviewed annually and modified as circumstances warrant. Industry consolidation and other competitive forces will change the peer group used.used over time. The consultant also provides the Committee data from companies in “general industry,” a representation of major publicly-traded companies. These data are a reference point, particularly for senior staff positions where competition for talent extends beyond the retail sector.
Kroger is the second-largest company as measured by annual revenues when compared with this peer group and the largest traditional food and drug retailer. The Committee has therefore sought to ensure that salaries paid to our executive officers are at or above the median paid by competitors for comparable positions and to provide an annual bonus potential to our executive officers that, if annual business plan objectives are achieved, would cause their total cash compensation to be meaningfully above the median.
Based in part on the analysis performed by the Committee’s compensation consultant, the Committee concluded in 2005 that when comparing total compensation of the named executive officers to that of the peer group:
As a result, the Committee determined to increase the potential for the named executive officers to earn long-term compensation through the adoption of a performance-based long-term bonus plan. The long-term bonus plan is discussed in more detail below.
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COMPONENTSOF EXECUTIVE COMPENSATIONAT KROGER
Compensation for our named executive officers is comprised of the following:
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SALARY
We provide our named executive officers and other employees a fixed amount of cash compensation—salary—compensation – salary – for the executive’stheir work. Salaries for named executive officers (with the exception of the CEO) are established each year by the Committee. The CEO’s salary is established by the independent directors. Salaries for the named executive officers typically arewere reviewed in May, of each year.as has been customary for the past several years.
The amount of each executive’s salary is influenced by numerous factors including:
In 2006,The assessment of individual contribution is based on a subjective determination, without the use of performance targets, in the following areas:
The named executive officers received salary increases, to the amounts shown below, following the annual review of their compensation in May.
Salaries | Salaries | ||||||||||||
2005 | 2006 | 2006 | 2007 | 2008 | |||||||||
David B. Dillon | $ | 1,100,000 | $ | 1,150,000 | $ | 1,150,000 | $ | 1,185,000 | $ | 1,220,000 | |||
J. Michael Schlotman | $ | 450,000 | $ | 505,000 | $ | 505,000 | $ | 525,000 | $ | 545,000 | |||
W. Rodney McMullen | $ | 773,000 | $ | 805,000 | $ | 805,000 | $ | 833,000 | $ | 860,000 | |||
Don W. McGeorge | $ | 773,000 | $ | 805,000 | $ | 805,000 | $ | 833,000 | $ | 860,000 | |||
Donald E. Becker | $ | 540,000 | $ | 575,000 | $ | 575,000 | $ | 600,000 | $ | 620,000 |
The increases for Mr. Becker and Mr. Schlotman were greater than those for the others primarily because of benchmarking and their development in increased responsibilities.
PERFORMANCE-BASEDANNUAL CASH BONUS
A large percentage of our employees at all levels, including the named executive officers, are eligible to receive ana performance-based annual performance-based cash bonus based on Kroger or unit performance. The Committee establishes bonus potentials for each executive officer, other than the CEO whose bonus potential is established by the independent directors. Actual payouts, which can exceed 100% of the potential amounts, only in the case of extraordinary performance, represent the extent to which performance meets or exceeds the thresholds established by the Committee.
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The Committee considers several factors in making its determination or recommendation as to bonus potentials. First, the individual’s level within the organization is a factor in that the Committee believes that more senior executives should have a greater part of their compensation dependantdependent upon Kroger’s performance. Second, the individual’s salary is a factor so that a substantial portion of a named executive officer’s total cash compensation is dependantdependent upon Kroger’s performance. Finally, the Committee considers the report of its compensation consultant to assess the bonus potential of the named executive officers in light of total compensation paid to comparable executive positions in the industry.
The annual cash bonus potential in effect at the end of the year for each named executive officer for 2005 and 2006 is shown below. Mr. Becker’s bonus potential was increased because ofduring 2006 to reflect an increase in salary and responsibility. The annual cash bonus potentials for Messrs. Schlotman, McMullen, and McGeorge were increased during 2007 based on an analysis performed by the Committee’s independent consultant who concluded that their bonus potentials should be increased to be competitive and from an internal equity point of view. Actual bonus payouts are prorated to reflect changes to bonus potentials during the year.
Bonus | Annual Bonus Potential | ||||||||||||
2005 | 2006 | 2006 | 2007 | 2008 | |||||||||
David B. Dillon | $ | 1,500,000 | $ | 1,500,000 | $ | 1,500,000 | $ | 1,500,000 | $ | 1,500,000 | |||
J. Michael Schlotman | $ | 450,000 | $ | 450,000 | $ | 450,000 | $ | 500,000 | $ | 500,000 | |||
W. Rodney McMullen | $ | 950,000 | $ | 950,000 | $ | 950,000 | $ | 1,000,000 | $ | 1,000,000 | |||
Don W. McGeorge | $ | 950,000 | $ | 950,000 | $ | 950,000 | $ | 1,000,000 | $ | 1,000,000 | |||
Donald E. Becker | $ | 525,000 | $ | 550,000 | $ | 550,000 | $ | 550,000 | $ | 550,000 |
The amount of bonus that the named executive officers earn each year is determined by Kroger’s performance compared to targets established by the Committee based on the business plan adopted by the Board of Directors. In 2006,2008, thirty percent of bonus was earned based on an identical sales target;target for Kroger’s supermarkets and other business operations; thirty percent was based on a target for EBITDA; thirty percent was based on a set of measures for implementation and results under our strategic plan; and ten percent was based on the performance of new capital projects compared to their budgets. Targets in all cases allowOver time the Committee has placed an increased emphasis on the strategic plan by making the target more difficult to achieve. The bonus plan allows for minimal bonus to be earned at relatively low levels to provide incentive for achieving even higher levels of performance. The
Following the close of the year, the Committee reviewed Kroger’s performance against the identical sales, EBITDA, strategic plan and capital projects objectives and determined the extent to which Kroger fell short of, met, or exceededachieved those objectives. Kroger’s EBITDA for 2008 was $4.088 billion, exceeding the targetstarget established in each of these areasby the Committee at the beginning of 2006 determined the percentageyear for 100% payout for that metric. Kroger’s identical sales for 2008 were 4.9%, also exceeding the target for 100% payout of eachthat metric. As a result of the Company’s excellent performance when compared to the targets established by the Committee, and based on the business plan adopted by the Board of Directors, the named executive officer’sofficers earned 104.948% of their bonus potential paidpotentials.
19
The 2008 targets established by the Committee for 2006.annual bonus amounts based on identical sales and EBITDA results, the actual 2008 results, and the bonus percentage earned in each of the four components of named executive officer bonus, were as follows:
Targets | ||||||||||
Component | Minimum | 100% | Result | Amount Earned | ||||||
Identical Sales | 3.0% | 4.0% | 4.9% | 43.397% | ||||||
EBITDA | $3.760 Billion | $4.065 Billion | $4.088 Billion | 30.518% | ||||||
Strategic Plan* | 20.790% | |||||||||
Capital Projects* | 10.243% | |||||||||
104.948% |
* | The Strategic Plan and Capital Projects components also were established by the Committee but are not disclosed as they are competitively sensitive. |
In 2006,2008, as in all years, the Committee retained discretion to reduce the bonus payout for named executivesexecutive officers if the Committee determined for any reason that the bonus payouts were not appropriate.The independent directors retained that discretion for the CEO’s bonus. Those bodies also retained discretion to adjust the targets under the plan should unanticipated developments arise during the year.
Following the close of the year, the Committee reviewed Kroger’s performance against the identical sales, EBITDA, strategic plan and capital projects objectives. The Committee made one adjustment that reduced the bonuses of the named executive officers by less than one percent. The Committee determined that income from the sale of certain assets should not be included in EBITDA for purposes of the bonus calculation. The independent members of the Board made the same adjustment, resulting in the same reduction of bonus, for the CEO. No other adjustments were made. As a result, each ofmade to the named executive officers earned 141.118% of their bonus potentials.payout or the targets during 2008.
20
The percentage paid for 20062008 represented and resulted from an extraordinaryexcellent performance against the business plan objectives. A comparison of bonus percentages for the named executive officers in prior years demonstrates the variability of incentive compensation:
Fiscal Year | Bonus Percentage | ||||
2006 | 141.118 | % | |||
2005 | 132.094 | % | |||
2004 | 55.174 | % | |||
2003 | 24.1 | % | |||
2002 | 9.9 | % |
Annual Cash Bonus | |||
Fiscal Year | Percentage | ||
2008 | 104.948% | ||
2007 | 128.104% | ||
2006 | 141.118% | ||
2005 | 132.094% | ||
2004 | 55.174% | ||
2003 | 24.100% | ||
2002 | 9.900% | ||
2001 | 31.760% | ||
2000 | 80.360% | ||
1999 | 122.130% |
The actual amounts of annual performance-based cash bonuses paid to the named executive officers for 20062008 are shown in the Summary Compensation tableTable under the heading “Non-Equity Incentive Plan Compensation.” These amounts represent the bonus potentials for each named executive officer multiplied by the percentage earned in 2006.2008. In no event can any participant receive a performance-based annual cash bonus in excess of $5,000,000. Beginning with the case2009 annual cash bonus, the maximum amount that a participant, including each named executive officer, can earn is further limited to 200% of Mr. Becker, the bonusparticipant’s potential was adjusted during 2006, and the amount he earned was based on a pro-rated bonus potential.amount.
20
PERFORMANCE-BASED LONG-TERM CASH BONUS
After reviewing executive compensation with its consultant in 2005, the Committee determined that the long-term component, which was made up of equity awards, of Kroger’s executive compensation was not competitive. The Committee developed a plan to provide an incentive to the named executive officers to achieve the long-term goals established by the Board of Directors by conditioning a portion of compensation on the achievement of those goals. Beginning in 2006, approximately 140 Kroger executives, including the named executive officers, are eligible to participate in a performance-based cash bonus plan designed to reward participants for improving the long-term performance of Kroger. Bonuses are earned based on the extent to which Kroger is successful in:advances its strategic plan by:
The 2006 plan consists of two components. The firstphase-in component measured improvements through fiscal year 2007. The other component measures the improvements through fiscal year 2009. The second, or phase-in component, measures the improvements through fiscal year 2007. Actual payouts will beare based on the degree to which improvements are achieved, and will beare awarded in increments based on the participant’s salary at the end of fiscal year 2005. Participants receive a 1% payout for each point by which the performance in the key categories increases, and a 0.25% payout for each percentage reduction in operating costs. The Committee administers the plan and determines the bonus payout amounts based on achievement of the performance criteria. No amounts have yet beenTotal operating costs as a percentage of sales, excluding fuel, at the commencement of the 2006 plan were 28.78%, and at the end of the phase-in period were 27.89%. Combining this operating cost improvement with our performance in our key categories resulted in payouts for the phase-in component of 36.25% of the participant’s annual salary in effect at the end of fiscal year 2005.
After reviewing an analysis conducted by its independent compensation consultant in 2007, the Committee determined that continuation of the long-term cash bonus was necessary in order for long-term compensation for the named executive officers to be competitive and to continue to focus the officers on achieving Kroger’s long-term business objectives. As a result, the Committee adopted a 2008 long-term bonus plan under which bonuses are earned under this plan.based on the extent to which Kroger advances its strategic plan by:
The 2008 plan measures improvements through fiscal year 2011. Participants receive a 1% payout for each point by which the performance in the key categories increases, a 0.25% payout for each percentage reduction in operating costs, and a 1% payout based on improvement in associate engagement measures. Total operating costs as a percentage of sales, excluding fuel, at the commencement of the 2008 Plan were 27.89%. Actual payouts are based on the degree to which improvements are achieved, and will be awarded based on the participant’s salary at the end of fiscal year 2007. In no event can any participant receive a performance-based long-term cash bonus in excess of $5,000,000.
21
EQUITY
Awards based on Kroger’s common stock are granted periodically to the named executive officers and a large number of other employees. Equity participation aligns the interests of employees with your interest as shareholders, and Kroger historically has distributed equity awards widely. In 2006,2008, Kroger granted 3,233,0903,533,505 stock options to approximately 6,6526,850 employees, including the named executive officers, under one of Kroger’s long-term incentive plans. The options permit the holder to purchase Kroger common stock at an option price equal to the tradingclosing price of Kroger common stock on the date of the grant. Historically options could be granted at any regularly scheduled meeting of the Committee.In 20072008 the Committee adopted a policy of granting options only onat one of the four Committee meetings conducted in the same week following Kroger’s public release of its quarterly earnings results.
21
Kroger’s long-term incentive plans also provide for other equity-based awards, including restricted stock. During 20062008 Kroger awarded 2,225,8332,515,752 shares of restricted stock to 14,240approximately 17,350 employees, including the named executive officers. This amount is comparable to last year but substantially higher than in past years, as in 2006 we began reducing the number of stock options granted and increasing the number of shares of restricted stock awards. The change in Kroger’s broad-based equity program from predominantly stock options to a mixture of options and restricted shares was precipitated by (a) the perception of increased value that restricted shares offer, (b) the retention benefit to Kroger of restricted shares, and (c) changes in accounting conventions that permitted the change without added cost.
The Committee considers several factors in determining the amount of options and restricted shares awarded to the named executive officers or, in the case of the CEO, recommending to the independent directors the amount awarded. These factors include:
The Committee has long recognized that the amount of compensation provided to the named executive officers through equity-based pay is often below the amount paid by our competitors. Lower equity-based awards for the named executive officers and other senior management permit a broader base of Kroger associates to participate in equity awards.
Amounts of equity awards issued and outstanding for the named executive officers are set forth in the tables that follow this discussion and analysis.
RETIREMENTAND OTHER BENEFITS
Kroger maintains a defined benefit and several defined contribution retirement plans for its employees.The named executive officers 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 on benefits to highly compensated individuals under qualified plans. Additional details regarding retirement benefits available to the named executive officers can be found in the 20062008 Pension Benefits table and the accompanying narrative description that follows this discussion and analysis.
22
Kroger also maintains an executive deferred compensation plan in which some of the named executive officers participate. This plan is a nonqualified plan under which participants can elect to defer up to 100% of their cash compensation each year. Compensation deferred during a deferral year bears interest at the rate equal to Kroger’s cost of ten year debt, which is not a preferential rate of interest.debt. Deferred amounts are paid out only in cash, in accordance with a deferral option selected by the participant at the time the deferral election is made.
We adopted The Kroger Co. Employee Protection Plan, or KEPP, during fiscal year 1988. That plan has been renewedwas amended and restated in 1993, 1998, and in 2003.2007. All of our management employees and administrative support personnel whose employment is not covered by a collective bargaining agreement, with at least one year of service, are covered. KEPP 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 employee is actually or constructively terminated without cause within two years following
22
a change in control of Kroger (as defined in the plan). Participants who are at least 40 and who have more than six years of service are entitled to severance pay ranging from approximately 9up to 2024 months’ salary and bonus. The actual amount is dependent upon pay level and other benefits.years of service. KEPP can be amended or terminated by the Board at any time prior to a change in control. It will expire in 2008 unless renewed by the Board.
Stock option and restricted stock agreements with participants in Kroger’s long-term incentive plans provide that those awards “vest,” with options becoming immediately vestedexercisable and restrictions on restricted stock lapsing, upon a change in control as described in the agreements.
None of the named executive officers is party to an employment agreement. The CEO did have an employment contract that expired on November 30, 2006, and was not renewed.
PERQUISITES
The Committee does not believe that it is necessary for the attraction or retention of management talent to provide the named executive officers a substantial amount of compensation in the form of perquisites.In 2006,2008, the only perquisites provided were:
The life insurance benefit, along with reimbursement of the tax effect of that benefit, was offered beginning several years ago to replace a split-dollar life insurance benefit that was substantially more costly to Kroger. Currently, 164 active executives, including the named executive officers, and 64 retired executives, receive this benefit.
In addition, the named executive officers are entitled to the following benefits that do not constitute perks as defined by the SEC rules:
The total amount of perquisites furnished to the named executive officers is shown in the Summary Compensation tableTable and described in more detail in footnote 54 to that table.
23
SECTION 162(M)162(M)OFTHE INTERNAL REVENUE CODE
Tax laws place a limit of $1,000,000 on the amount of some types of compensation for the CEO and the next four most highly compensated officers that is tax deductible by Kroger. Compensation that is deemed to be “performance-based” is excluded for purposes of the calculation and is tax deductible.Awards under Kroger’s long-term incentive plans, when payable upon achievement of stated performance criteria, should be considered performance-based and the compensation paid under those plans should be tax deductible. Generally, compensation expense related to stock options awarded to the CEO and the next four most highly compensated officers should be deductible. On the other hand, Kroger’s awards of restricted stock that vest solely upon the passage of time and are not performance-based. As a result, compensation expense for those awards to the CEO and the next four most highly compensated officers wouldis not be deductible.
Although Kroger’s bonus plans are not discretionary but rather rely on performance criteria, these plansand have not been approved by shareholders in the past.shareholders. As a result, they currently do not satisfy the Internal Revenue Code’s requirements for deductibility. At the 2007 annual meeting of shareholders Kroger is submitting for approval of shareholders (see Item No. 2 below) its cash bonus plan. If approved by shareholders, bonuses paid under the planplans to the CEO and the next four most highly compensated officers will be deductible by Kroger. In Kroger’s case, this group of individuals is not identical to the group of named executive officers.
23 Kroger’s policy is, primarily, to design and administer 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 Committee also will attempt to maximize the amount of compensation expense that is deductible by Kroger.
|
COMPENSATIONCOMMITTEEREPORT |
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed with 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 of Directors that the Compensation Discussion and Analysis be included in the Company’s proxy statement and incorporated by reference into its annual report on Form 10-K.
Compensation Committee:
John T. LaMacchia, Chair
Robert D. Beyer
John L. Clendenin
Jorge P. Montoya
Clyde R. Moore
James A. Runde
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EXECUTIVECOMPENSATION
SUMMARYCOMPENSATIONTABLE
The following table shows the compensation of the Chief Executive Officer, Chief Financial Officer and each of the Company’s three most highly compensated executive officers other than the CEO and CFO (the “named executive officers”) during fiscal 2006. Fiscal yearyears 2006, consisted of 53 weeks.2007 and 2008:
SUMMARY COMPENSATION TABLE | SUMMARY COMPENSATION TABLE | SUMMARY COMPENSATION TABLE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in | Change in | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
�� | Pension | Pension | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Value and | Value and | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nonqualified | Nonqualified | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-Equity | Deferred | Non-Equity | Deferred | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock | Option | Incentive Plan | Compensation | All Other | Stock | Option | Incentive Plan | Compensation | All Other | ||||||||||||||||||||||||||||||||||||||||||||||||
Name and Principal | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||||||||||||||||||||||
Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||||||||||||||
(1) | (1) | (2) | (3) | (4) | (1) | (1) | (2) | (3) | (4) | ||||||||||||||||||||||||||||||||||||||||||||||||
David B. Dillon | 2008 | $ | 1,204,758 | — | $ | 1,517,177 | $ | 1,373,516 | $ | 1,574,220 | $ | 2,191,743 | $ | 170,307 | $ | 8,031,721 | |||||||||||||||||||||||||||||||||||||||||
Chairman and CEO | 2006 | $ | 1,155,991 | — | $ | 519,160 | $ | 3,311,870 | $ | 2,116,770 | $ | 1,008,309 | $ | 142,437 | $8,254,537 | 2007 | $ | 1,173,291 | — | $ | 849,743 | $ | 3,739,167 | $ | 2,320,310 | $ | 922,570 | $ | 168,543 | $ | 9,173,624 | ||||||||||||||||||||||||||
2006 | $ | 1,155,991 | — | $ | 519,160 | $ | 3,311,870 | $ | 2,116,770 | $ | 2,833,415 | $ | 142,437 | $ | 10,079,643 | ||||||||||||||||||||||||||||||||||||||||||
J. Michael Schlotman | 2008 | $ | 537,124 | — | $ | 130,386 | $ | 260,890 | $ | 524,740 | $ | 292,491 | $ | 41,135 | $ | 1,786,766 | |||||||||||||||||||||||||||||||||||||||||
Senior Vice | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
President and CFO | 2006 | $ | 499,099 | — | $ | 97,835 | $ | 339,653 | $ | 635,031 | $ | 256,221 | $ | 31,819 | $1,859,658 | ||||||||||||||||||||||||||||||||||||||||||
Senior Vice President | 2007 | $ | 518,726 | — | $ | 83,207 | $ | 312,554 | $ | 788,864 | $ | 202,069 | $ | 38,690 | $ | 1,994,110 | |||||||||||||||||||||||||||||||||||||||||
and CFO | 2006 | $ | 499,099 | — | $ | 97,835 | $ | 339,653 | $ | 635,031 | $ | 331,079 | $ | 31,819 | $ | 1,934,516 | |||||||||||||||||||||||||||||||||||||||||
W. Rodney McMullen | 2008 | $ | 848,686 | — | $ | 408,313 | $ | 626,386 | $ | 1,049,480 | $ | 348,933 | $ | 59,900 | $ | 3,341,698 | |||||||||||||||||||||||||||||||||||||||||
Vice Chairman | 2006 | $ | 809,969 | — | $ | 195,956 | $ | 794,327 | $ | 1,340,621 | $ | 360,184 | $ | 44,530 | $3,545,587 | 2007 | $ | 823,948 | — | $ | 220,907 | $ | 741,288 | $ | 1,546,472 | $ | 216,946 | $ | 57,367 | $ | 3,606,928 | ||||||||||||||||||||||||||
2006 | $ | 809,969 | — | $ | 195,956 | $ | 794,327 | $ | 1,340,621 | $ | 499,583 | $ | 44,530 | $ | 3,684,986 | ||||||||||||||||||||||||||||||||||||||||||
Don W. McGeorge | 2008 | $ | 848,686 | — | $ | 408,313 | $ | 798,434 | $ | 1,049,480 | $ | 723,203 | $ | 107,203 | $ | 3,935,319 | |||||||||||||||||||||||||||||||||||||||||
President and COO | 2006 | $ | 809,969 | — | $ | 195,956 | $ | 811,355 | $ | 1,340,621 | $ | 698,272 | $ | 83,891 | $3,940,064 | 2007 | $ | 823,948 | — | $ | 220,907 | $ | 850,480 | $ | 1,546,472 | $ | 536,736 | $ | 105,803 | $ | 4,084,346 | ||||||||||||||||||||||||||
2006 | $ | 809,969 | — | $ | 195,956 | $ | 811,355 | $ | 1,340,621 | $ | 904,099 | $ | 83,891 | $ | 4,145,891 | ||||||||||||||||||||||||||||||||||||||||||
Donald E. Becker | 2008 | $ | 611,712 | — | $ | 565,482 | $ | 241,792 | $ | 577,214 | $ | 902,879 | $ | 120,668 | $ | 3,019,747 | |||||||||||||||||||||||||||||||||||||||||
Executive Vice | 2007 | $ | 592,312 | — | $ | 385,421 | $ | 577,329 | $ | 900,322 | $ | 657,628 | $ | 121,428 | $ | 3,234,440 | |||||||||||||||||||||||||||||||||||||||||
President | 2006 | $ | 575,413 | — | $ | 533,782 | $ | 576,090 | $ | 767,496 | $ | 711,031 | $ | 87,552 | $3,251,364 | 2006 | $ | 575,413 | — | $ | 533,782 | $ | 576,090 | $ | 767,496 | $ | 920,760 | $ | 87,552 | $ | 3,461,093 |
(1) | This amount represents the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123(R). See discussion of the assumptions made in the valuation in Note 10 to the consolidated financial statements in the Company’s Form 10-K filed with the SEC on | |
(2) |
25
(3) | ||
(4) | ||
Accidental | Tax Effect of | Tax Effect of | ||||||||||||||
Tax Effect | Death and | Accidental | Long Term | Participation in | ||||||||||||
Life | of Life | Dismemberment | Death and | Disability | Nonqualified | |||||||||||
Insurance | Insurance | Insurance | Dismemberment | Insurance | Retirement | |||||||||||
Premium | Premium | Premium | Premium | Premium | Plan | |||||||||||
Mr. Dillon | $90,339 | $55,602 | $228 | $140 | — | $ | 23,998 | |||||||||
Mr. Schlotman | $21,599 | $12,494 | $228 | $132 | — | $ | 6,682 | |||||||||
Mr. McMullen | $28,367 | $16,957 | $228 | $136 | $ | 2,778 | $ | 11,434 | ||||||||
Mr. McGeorge | $55,989 | $32,858 | $228 | $134 | — | $ | 17,994 | |||||||||
Mr. Becker | $58,542 | $36,041 | $228 | $140 | $ | 2,852 | $ | 22,865 |
25
The life insurance and payment of the tax effect of the premium payment by Kroger have been offered over the past several years to a large number of executives, including the named executive officers, in substitution for split-dollar life insurance coverage that was substantially more costly to Kroger. Excluded from the amounts shown in the amounts of $16,885, $5,370, $8,871, $13,649, and $16,931 for Mr. Dillon, Mr. Schlotman, Mr. McMullen, Mr. McGeorge, and Mr. Becker, respectively. For Mr. Dillon and Mr. Becker these amounts also include the value of financial planning services in the amounts of $4,500 and $489, respectively. Reimbursement for financial planning services has been discontinued in 2007. Excluded from these totalstable is income imputed to the named executive officer when accompanied on our aircraft during business travel by non-business travelers. These amounts for Mr. Dillon and Mr. McGeorge,Schlotman, calculated using the applicable terminal charge and Standard Industry Fare Level (SIFL) mileage rates, were $8,296$3,046 and $268,$793, respectively. The other named executive officers had no such imputed income for 2006.2008. Separately, we require that officers who make personal use of our aircraft reimburse us for the full amount of theaverage variable cost associated with the operation of the aircraft on such flights in accordance with a time-sharing arrangement consistent with FAA regulations.
Kroger historically has paid incentive compensation to its named executive officers based on Also excluded is the extent to which objectives establishedpro rata portion of annual membership dues at a lunch club used primarily for business purposes but used by the Committee are achieved. This compensation has been referred to as “bonus” in prior year proxy statements, but is now categorized as “non-equity incentive plan compensation.”The amounts shown above as non-equity incentive plan compensation reflect the compensation earned in 2006 and payable in 2007. Kroger and Mr. Dillon were parties to a five-year employment agreement that expired on November 30, 2006 and was not renewed. Restricted stock awards were granted under a long-term incentive plan, and restrictions on those shares lapse with the passage of time.occasion for personal use. That pro rata portion equals $147.
26
GRANTSOF PLAN-BASED AWARDS
The following table provides information about equity and non-equity awards granted to the named executive officers in 2006:2008:
2006 GRANTS OF PLAN-BASED AWARDS | |||||||||||||||||||||||||||||||
All | All Other | ||||||||||||||||||||||||||||||
Other | Option | ||||||||||||||||||||||||||||||
Estimated | Stock | Awards: | |||||||||||||||||||||||||||||
2008 GRANTS OF PLAN-BASED AWARDS | 2008 GRANTS OF PLAN-BASED AWARDS | ||||||||||||||||||||||||||||||
Possible Payouts | Estimated | Awards: | Number | Estimated Possible | |||||||||||||||||||||||||||
Under | Future Payouts | Number | of | Exercise | Grant | Payouts Under | Estimated Future | Exercise | Grant | ||||||||||||||||||||||
Non-Equity | Under Equity | of | Securities | or Base | Date Fair | Non-Equity | Payouts Under | or Base | Date Fair | ||||||||||||||||||||||
Incentive Plan | Incentive Plan | Shares | Under- | Price of | Closing | Value of | Incentive Plan | Equity Incentive | Price of | Value of | |||||||||||||||||||||
Awards | Awards | of Stock | lying | Option | Market | Stock and | Awards | Plan Awards | Option | Stock and | |||||||||||||||||||||
Grant | Target | Target | or Units | Options | Awards | Price | Option | Grant | Target | Target | Awards | Option | |||||||||||||||||||
Name | Date | ($) | (#) | (#) | (#) | ($/Sh) | ($/Sh) | Awards | Date | ($) | (#) | ($/Sh) | Awards | ||||||||||||||||||
(1) | (4) | (5) | |||||||||||||||||||||||||||||
David B. Dillon | 1/29/2006 | $1,500,000 | $ | 1,500,000(1) | |||||||||||||||||||||||||||
5/4/2006 | 120,000 | (2) | $2,392,800 | $ | 1,185,000(2) | ||||||||||||||||||||||||||
5/4/2006 | 240,000 | (3) | $19.94 | $20.04 | $1,658,064 | 6/26/2008 | 115,000(3) | $ | 3,290,150 | ||||||||||||||||||||||
6/26/2008 | 225,000(4) | $28.61 | $ | 2,015,123 | |||||||||||||||||||||||||||
J. Michael Schlotman | 1/29/2006 | $ 450,000 | $ | 500,000(1) | |||||||||||||||||||||||||||
$ | 525,000(2) | ||||||||||||||||||||||||||||||
5/4/2006 | 10,000 | (2) | $ 199,400 | 6/26/2008 | 10,000(3) | $ | 286,100 | ||||||||||||||||||||||||
5/4/2006 | 20,000 | (3) | $19.94 | $20.04 | $ 138,172 | 6/26/2008 | 20,000(4) | $28.61 | $ | 179,122 | |||||||||||||||||||||
W. Rodney McMullen | 1/29/2006 | $ 950,000 | $ | 1,000,000(1) | |||||||||||||||||||||||||||
5/4/2006 | 30,000 | (2) | $ 598,200 | $ | 833,000(2) | ||||||||||||||||||||||||||
5/4/2006 | 60,000 | (3) | $19.94 | $20.04 | $ 414,516 | 6/26/2008 | 35,000(3) | $ | 1,001,350 | ||||||||||||||||||||||
6/26/2008 | 65,000(4) | $28.61 | $ | 582,147 | |||||||||||||||||||||||||||
Don W. McGeorge | 1/29/2006 | $ 950,000 | $ | 1,000,000(1) | |||||||||||||||||||||||||||
$ | 833,000(2) | ||||||||||||||||||||||||||||||
5/4/2006 | 30,000 | (2) | $ 598,200 | 6/26/2008 | 35,000(3) | $ | 1,001,350 | ||||||||||||||||||||||||
5/4/2006 | 60,000 | (3) | $19.94 | $20.04 | $ 414,516 | 6/26/2008 | 65,000(4) | $28.61 | $ | 582,147 | |||||||||||||||||||||
Donald E. Becker | 1/29/2006 | $ 543,868 | $ | 550,000(1) | |||||||||||||||||||||||||||
5/4/2006 | 12,500 | (2) | $ 249,250 | $ | 600,000(2) | ||||||||||||||||||||||||||
5/4/2006 | 25,000 | (3) | $19.94 | $20.04 | $ 172,715 | 6/26/2008 | 42,500(3) | $ | 1,215,925 | ||||||||||||||||||||||
6/26/2008 | 25,000(4) | $28.61 | $ | 233,903 |
(1) | ||
(2) | This amount represents the bonus potential of the | |
This amount represents the number of restricted shares awarded under | ||
This amount represents the number of stock options granted under | ||
Options |
27
The Compensation Committee of the Board of Directors, and the independent members of the Board in the case of the CEO, established bonus bases,potentials, shown in this table as “target” amounts, for the non-equity incentive plan awardsperformance-based annual cash bonus award for the named executive officers. Amounts were payable to the extent that performance met specific objectives established at the beginning of the year.performance period. As described in the Compensation Discussion and Analysis, actual earnings can exceed the target amounts if performance exceeds the thresholds.
Restrictions on restricted stock awards made to the named executive officers lapse in equal amounts on each of the five anniversaries of the date the award is made, as long as the officer is then in our employ, except restrictions on 30,000 shares awarded to Mr. Becker in 2008 lapse in 2011 if he is then in our employ. Any dividends declared on Kroger common stock are payable on restricted stock.
27
Non-qualified Nonqualified stock options granted to the named executive officers vest in equal amounts on each of the five anniversaries of the date of grant. Those options were granted at the fair market value of Kroger common stock on the date of the grant. Options are granted only on one of the pre-established regularly scheduled Board meeting dates.four dates of board meetings conducted in the same week following Kroger’s public release of its quarterly earnings results.
OUTSTANDING EQUITYAWARDSATFISCAL YEAR-END
The following table discloses outstanding equity-based incentive compensation awards for the named executive officers as of the end of fiscal year 2006.2008. Each outstanding award is shown separately. Option awards include performance-based nonqualified stock options. The vesting schedule for each award is described in the footnotes to this table.
OUSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR-END | ||||||||||||||||||||||||||||||||||||||
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||||
Equity | Incentive | |||||||||||||||||||||||||||||||||||||
Incentive | Plan | |||||||||||||||||||||||||||||||||||||
Plan | Awards: | |||||||||||||||||||||||||||||||||||||
Awards: | Market | |||||||||||||||||||||||||||||||||||||
OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-END | OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-END | |||||||||||||||||||||||||||||||||||||
Number | or Payout | Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
Equity | of | Value of | Equity | |||||||||||||||||||||||||||||||||||
Incentive | Unearned | Unearned | Incentive | |||||||||||||||||||||||||||||||||||
Plan Awards: | Market | Shares, | Shares, | Plan Awards: | Market | |||||||||||||||||||||||||||||||||
Number of | Number of | Number of | Number | Value of | Units or | Units or | Number of | Number of | Number of | Value of | ||||||||||||||||||||||||||||
Securities | Securities | Securities | of Shares | Shares or | Other | Other | Securities | Securities | Securities | Number of | Shares or | |||||||||||||||||||||||||||
Underlying | Underlying | Underlying | or Units of | Units of | Rights | Rights | Underlying | Underlying | Underlying | Shares or | Units of | |||||||||||||||||||||||||||
Unexercised | Unexercised | Unexercised | Option | Stock That | Stock That | That | That | Unexercised | Unexercised | Unexercised | Option | Units of Stock | Stock That | |||||||||||||||||||||||||
Options | Options | Unearned | Exercise | Option | Have Not | Have Not | Have Not | Have Not | Options | Options | Unearned | Exercise | Option | That Have | Have Not | |||||||||||||||||||||||
(#) | (#) | Options | Price | Expiration | Vested | Vested | Vested | Vested | (#) | (#) | Options | Price | Expiration | Not Vested | Vested | |||||||||||||||||||||||
Name | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | (#) | ($) | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | ||||||||||||||||||||||
David B. Dillon | 50,000 | $27.17 | 5/27/2009 | 72,000 | (9) | $1,620,000 | ||||||||||||||||||||||||||||||||
30,000 | $ | 13.44 | 5/15/2007 | 120,000(11) | $3,102,000 | 50,000 | $27.17 | 5/27/2009 | 88,000 | (10) | $1,980,000 | |||||||||||||||||||||||||||
35,000 | $ | 22.23 | 4/16/2008 | 175,000 | $16.59 | 2/11/2010 | 115,000 | (11) | $2,587,500 | |||||||||||||||||||||||||||||
35,000 | (6) | $ | 22.23 | 4/16/2008 | 35,000(6) | $16.59 | 2/11/2010 | |||||||||||||||||||||||||||||||
50,000 | $ | 27.17 | 5/27/2009 | 35,000 | $24.43 | 5/10/2011 | ||||||||||||||||||||||||||||||||
50,000 | (7) | $ | 27.17 | 5/27/2009 | 35,000(7) | $24.43 | 5/10/2011 | |||||||||||||||||||||||||||||||
175,000 | $ | 16.59 | 2/11/2010 | 70,000 | $23.00 | 5/9/2012 | ||||||||||||||||||||||||||||||||
35,000 | (8) | $ | 16.59 | 2/11/2010 | 35,000(8) | $23.00 | 5/9/2012 | |||||||||||||||||||||||||||||||
35,000 | $ | 24.43 | 5/10/2011 | 210,000 | $14.93 | 12/12/2012 | ||||||||||||||||||||||||||||||||
35,000 | (9) | $ | 24.43 | 5/10/2011 | 240,000 | 60,000(1) | $17.31 | 5/6/2014 | ||||||||||||||||||||||||||||||
56,000 | 14,000 | (1) | $ | 23.00 | 5/9/2012 | 180,000 | 120,000(2) | $16.39 | 5/5/2015 | |||||||||||||||||||||||||||||
35,000 | (10) | $ | 23.00 | 5/9/2012 | 96,000 | 144,000(3) | $19.94 | 5/4/2016 | ||||||||||||||||||||||||||||||
168,000 | 42,000 | (2) | $ | 14.93 | 12/12/2012 | 44,000 | 176,000(4) | $28.27 | 6/28/2017 | |||||||||||||||||||||||||||||
120,000 | 180,000 | (3) | $ | 17.31 | 5/6/2014 | 225,000(5) | $28.61 | 6/26/2018 | ||||||||||||||||||||||||||||||
60,000 | 240,000 | (4) | $ | 16.39 | 5/5/2015 | |||||||||||||||||||||||||||||||||
240,000 | (5) | $ | 19.94 | 5/4/2016 |
28
OUSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR-END | |||||||||||||||||||||||||||||||||||||||
Option Awards | Stock Awards | ||||||||||||||||||||||||||||||||||||||
Equity | |||||||||||||||||||||||||||||||||||||||
Equity | Incentive | ||||||||||||||||||||||||||||||||||||||
Incentive | Plan | ||||||||||||||||||||||||||||||||||||||
Plan | Awards: | ||||||||||||||||||||||||||||||||||||||
Awards: | Market | ||||||||||||||||||||||||||||||||||||||
OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-END | OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-END | ||||||||||||||||||||||||||||||||||||||
Number | or Payout | Option Awards | Stock Awards | ||||||||||||||||||||||||||||||||||||
Equity | of | Value of | Equity | ||||||||||||||||||||||||||||||||||||
Incentive | Unearned | Unearned | Incentive | ||||||||||||||||||||||||||||||||||||
Plan Awards: | Market | Shares, | Shares, | Plan Awards: | Market | ||||||||||||||||||||||||||||||||||
Number of | Number of | Number of | Number | Value of | Units or | Units or | Number of | Number of | Number of | Value of | |||||||||||||||||||||||||||||
Securities | Securities | Securities | of Shares | Shares or | Other | Other | Securities | Securities | Securities | Number of | Shares or | ||||||||||||||||||||||||||||
Underlying | Underlying | Underlying | or Units of | Units of | Rights | Rights | Underlying | Underlying | Underlying | Shares or | Units of | ||||||||||||||||||||||||||||
Unexercised | Unexercised | Unexercised | Option | Stock That | Stock That | That | That | Unexercised | Unexercised | Unexercised | Option | Units of Stock | Stock That | ||||||||||||||||||||||||||
Options | Options | Unearned | Exercise | Option | Have Not | Have Not | Have Not | Have Not | Options | Options | Unearned | Exercise | Option | That Have | Have Not | ||||||||||||||||||||||||
(#) | (#) | Options | Price | Expiration | Vested | Vested | Vested | Vested | (#) | (#) | Options | Price | Expiration | Not Vested | Vested | ||||||||||||||||||||||||
Name | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | (#) | ($) | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | |||||||||||||||||||||||
J. Michael Schlotman | 10,000 | $27.17 | 5/27/2009 | 6,000 | (9) | $135,000 | |||||||||||||||||||||||||||||||||
9,000 | $ | 22.23 | 4/16/2008 | 8,000 | (12) | $206,800 | |||||||||||||||||||||||||||||||||
9,000 | (6) | $ | 22.23 | 4/16/2008 | 10,000 | (11) | $258,500 | ||||||||||||||||||||||||||||||||
10,000 | $ | 27.17 | 5/27/2009 | ||||||||||||||||||||||||||||||||||||
10,000 | (7) | $ | 27.17 | 5/27/2009 | 10,000 | $27.17 | 5/27/2009 | 8,000 | (10) | $180,000 | |||||||||||||||||||||||||||||
50,000 | $ | 16.59 | 2/11/2010 | 10,000 | (6) | $16.59 | 2/11/2010 | 10,000 | (11) | $225,000 | |||||||||||||||||||||||||||||
10,000 | (8) | $ | 16.59 | 2/11/2010 | 10,000 | $24.43 | 5/10/2011 | ||||||||||||||||||||||||||||||||
10,000 | $ | 24.43 | 5/10/2011 | 10,000 | (7) | $24.43 | 5/10/2011 | ||||||||||||||||||||||||||||||||
10,000 | (9) | $ | 24.43 | 5/10/2011 | 20,000 | $23.00 | 5/9/2012 | ||||||||||||||||||||||||||||||||
16,000 | 4,000 | (1) | $ | 23.00 | 5/9/2012 | 10,000 | (8) | $23.00 | 5/9/2012 | ||||||||||||||||||||||||||||||
10,000 | (10) | $ | 23.00 | 5/9/2012 | 60,000 | $14.93 | 12/12/2012 | ||||||||||||||||||||||||||||||||
48,000 | 12,000 | (2) | $ | 14.93 | 12/12/2012 | 32,000 | 8,000 | (1) | $17.31 | 5/6/2014 | |||||||||||||||||||||||||||||
16,000 | 24,000 | (3) | $ | 17.31 | 5/6/2014 | 24,000 | 16,000 | (2) | $16.39 | 5/5/2015 | |||||||||||||||||||||||||||||
8,000 | 32,000 | (4) | $ | 16.39 | 5/5/2015 | 8,000 | 12,000 | (3) | $19.94 | 5/4/2016 | |||||||||||||||||||||||||||||
20,000 | (5) | $ | 19.94 | 5/4/2016 | 4,000 | 16,000 | (4) | $28.27 | 6/28/2017 | ||||||||||||||||||||||||||||||
20,000 | (5) | $28.61 | 6/26/2018 | ||||||||||||||||||||||||||||||||||||
W. Rodney McMullen | 30,000 | $27.17 | 5/27/2009 | 18,000 | (9) | $405,000 | |||||||||||||||||||||||||||||||||
25,000 | $ | 13.44 | 5/15/2007 | 30,000 | (11) | $775,500 | 30,000 | $27.17 | 5/27/2009 | 24,000 | (10) | $540,000 | |||||||||||||||||||||||||||
25,000 | $ | 13.44 | 5/15/2007 | 125,000 | $16.59 | 2/11/2010 | 35,000 | (11) | $787,500 | ||||||||||||||||||||||||||||||
30,000 | $ | 22.23 | 4/16/2008 | 25,000 | (6) | $16.59 | 2/11/2010 | ||||||||||||||||||||||||||||||||
30,000 | (6) | $ | 22.23 | 4/16/2008 | 25,000 | $24.43 | 5/10/2011 | ||||||||||||||||||||||||||||||||
30,000 | $ | 27.17 | 5/27/2009 | 25,000 | (7) | $24.43 | 5/10/2011 | ||||||||||||||||||||||||||||||||
30,000 | (7) | $ | 27.17 | 5/27/2009 | 50,000 | $23.00 | 5/9/2012 | ||||||||||||||||||||||||||||||||
125,000 | $ | 16.59 | 2/11/2010 | 25,000 | (8) | $23.00 | 5/9/2012 | ||||||||||||||||||||||||||||||||
25,000 | (8) | $ | 16.59 | 2/11/2010 | 150,000 | $14.93 | 12/12/2012 | ||||||||||||||||||||||||||||||||
25,000 | $ | 24.43 | 5/10/2011 | 60,000 | 15,000 | (1) | $17.31 | 5/6/2014 | |||||||||||||||||||||||||||||||
25,000 | (9) | $ | 24.43 | 5/10/2011 | 45,000 | 30,000 | (2) | $16.39 | 5/5/2015 | ||||||||||||||||||||||||||||||
40,000 | 10,000 | (1) | $ | 23.00 | 5/9/2012 | 24,000 | 36,000 | (3) | $19.94 | 5/4/2016 | |||||||||||||||||||||||||||||
25,000 | (10) | $ | 23.00 | 5/9/2012 | 12,000 | 48,000 | (4) | $28.27 | 6/28/2017 | ||||||||||||||||||||||||||||||
120,000 | 30,000 | (2) | $ | 14.93 | 12/12/2012 | 65,000 | (5) | $28.61 | 6/26/2018 | ||||||||||||||||||||||||||||||
30,000 | 45,000 | (3) | $ | 17.31 | 5/6/2014 | ||||||||||||||||||||||||||||||||||
15,000 | 60,000 | (4) | $ | 16.39 | 5/5/2015 | ||||||||||||||||||||||||||||||||||
60,000 | (5) | $ | 19.94 | 5/4/2016 |
29
OUSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR-END | |||||||||||||||||||||||
Option Awards | Stock Awards | ||||||||||||||||||||||
Equity | |||||||||||||||||||||||
Equity | Incentive | ||||||||||||||||||||||
Incentive | Plan | ||||||||||||||||||||||
Plan | Awards: | ||||||||||||||||||||||
Awards: | Market | ||||||||||||||||||||||
Number | or Payout | ||||||||||||||||||||||
Equity | of | Value of | |||||||||||||||||||||
Incentive | Unearned | Unearned | |||||||||||||||||||||
Plan Awards: | Market | Shares, | Shares, | ||||||||||||||||||||
Number of | Number of | Number of | Number | Value of | Units or | Units or | |||||||||||||||||
Securities | Securities | Securities | of Shares | Shares or | Other | Other | |||||||||||||||||
Underlying | Underlying | Underlying | or Units of | Units of | Rights | Rights | |||||||||||||||||
Unexercised | Unexercised | Unexercised | Option | Stock That | Stock That | That | That | ||||||||||||||||
Options | Options | Unearned | Exercise | Option | Have Not | Have Not | Have Not | Have Not | |||||||||||||||
(#) | (#) | Options | Price | Expiration | Vested | Vested | Vested | Vested | |||||||||||||||
Name | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | (#) | ($) | ||||||||||||||
Don W. McGeorge | |||||||||||||||||||||||
18,000 | $ | 13.44 | 5/15/2007 | 30,000 | (11) | $ | 775,500 | ||||||||||||||||
18,000 | $ | 13.44 | 5/15/2007 | ||||||||||||||||||||
30,000 | $ | 14.77 | 7/17/2007 | ||||||||||||||||||||
22,500 | $ | 22.23 | 4/16/2008 | ||||||||||||||||||||
22,500 | (6) | $ | 22.23 | 4/16/2008 | |||||||||||||||||||
30,000 | $ | 27.17 | 5/27/2009 | ||||||||||||||||||||
30,000 | (7) | $ | 27.17 | 5/27/2009 | |||||||||||||||||||
125,000 | $ | 16.59 | 2/11/2010 | ||||||||||||||||||||
25,000 | (8) | $ | 16.59 | 2/11/2010 | |||||||||||||||||||
25,000 | $ | 24.43 | 5/10/2011 | ||||||||||||||||||||
25,000 | (9) | $ | 24.43 | 5/10/2011 | |||||||||||||||||||
40,000 | 10,000 | (1) | $ | 23.00 | 5/9/2012 | ||||||||||||||||||
25,000 | (10) | $ | 23.00 | 5/9/2012 | |||||||||||||||||||
120,000 | 30,000 | (2) | $ | 14.93 | 12/12/2012 | ||||||||||||||||||
30,000 | 45,000 | (3) | $ | 17.31 | 5/6/2014 | ||||||||||||||||||
15,000 | 60,000 | (4) | $ | 16.39 | 5/5/2015 | ||||||||||||||||||
60,000 | (5) | $ | 19.94 | 5/4/2016 | |||||||||||||||||||
Donald E. Becker | |||||||||||||||||||||||
18,000 | $ | 13.44 | 5/15/2007 | 5,000 | (13) | $ | 129,250 | ||||||||||||||||
18,000 | $ | 22.23 | 4/16/2008 | 40,000 | (14) | $ | 1,034,000 | ||||||||||||||||
0 | 18,000 | (6) | $ | 22.23 | 4/16/2008 | 12,500 | (11) | $ | 323,125 | ||||||||||||||
18,000 | $ | 27.17 | 5/27/2009 | ||||||||||||||||||||
0 | 18,000 | (7) | $ | 27.17 | 5/27/2009 | ||||||||||||||||||
75,000 | $ | 16.59 | 2/11/2010 | ||||||||||||||||||||
0 | 15,000 | (8) | $ | 16.59 | 2/11/2010 | ||||||||||||||||||
12,500 | $ | 24.43 | 5/10/2011 | ||||||||||||||||||||
0 | 12,500 | (9) | $ | 24.43 | 5/10/2011 | ||||||||||||||||||
21,333 | 5,334 | (1) | $ | 23.00 | 5/9/2012 | ||||||||||||||||||
0 | 13,333 | (10) | $ | 23.00 | 5/9/2012 | ||||||||||||||||||
64,000 | 16,000 | (2) | $ | 14.93 | 12/12/2012 | ||||||||||||||||||
16,000 | 24,000 | (3) | $ | 17.31 | 5/6/2014 | ||||||||||||||||||
8,000 | 32,000 | (4) | $ | 16.39 | 5/5/2015 | ||||||||||||||||||
0 | 25,000 | (5) | $ | 19.94 | 5/4/2016 |
30
OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR-END | |||||||||||||||||
Option Awards | Stock Awards | ||||||||||||||||
Equity | |||||||||||||||||
Incentive | |||||||||||||||||
Plan Awards: | Market | ||||||||||||||||
Number of | Number of | Number of | Value of | ||||||||||||||
Securities | Securities | Securities | Number of | Shares or | |||||||||||||
Underlying | Underlying | Underlying | Shares or | Units of | |||||||||||||
Unexercised | Unexercised | Unexercised | Option | Units of Stock | Stock That | ||||||||||||
Options | Options | Unearned | Exercise | Option | That Have | Have Not | |||||||||||
(#) | (#) | Options | Price | Expiration | Not Vested | Vested | |||||||||||
Name | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | ||||||||||
Don W. McGeorge | 30,000 | $27.17 | 5/27/2009 | 18,000 | (9) | $405,000 | |||||||||||
30,000 | $27.17 | 5/27/2009 | 24,000 | (10) | $540,000 | ||||||||||||
125,000 | $16.59 | 2/11/2010 | 35,000 | (11) | $787,500 | ||||||||||||
25,000 | (6) | $16.59 | 2/11/2010 | ||||||||||||||
25,000 | $24.43 | 5/10/2011 | |||||||||||||||
25,000 | (7) | $24.43 | 5/10/2011 | ||||||||||||||
50,000 | $23.00 | 5/9/2012 | |||||||||||||||
25,000 | (8) | $23.00 | 5/9/2012 | ||||||||||||||
150,000 | $14.93 | 12/12/2012 | |||||||||||||||
60,000 | 15,000 | (1) | $17.31 | 5/6/2014 | |||||||||||||
45,000 | 30,000 | (2) | $16.39 | 5/5/2015 | |||||||||||||
24,000 | 36,000 | (3) | $19.94 | 5/4/2016 | |||||||||||||
12,000 | 48,000 | (4) | $28.27 | 6/28/2017 | |||||||||||||
65,000 | (5) | $28.61 | 6/26/2018 | ||||||||||||||
Donald E. Becker | 18,000 | $27.17 | 5/27/2009 | 7,500 | (9) | $168,750 | |||||||||||
18,000 | $27.17 | 5/27/2009 | 10,000 | (10) | $225,000 | ||||||||||||
15,000 | (6) | $16.59 | 2/11/2010 | 12,500 | (11) | $281,250 | |||||||||||
12,500 | $24.43 | 5/10/2011 | 30,000 | (12) | $675,000 | ||||||||||||
12,500 | (7) | $24.43 | 5/10/2011 | ||||||||||||||
26,667 | $23.00 | 5/9/2012 | |||||||||||||||
13,333 | (8) | $23.00 | 5/9/2012 | ||||||||||||||
80,000 | $14.93 | 12/12/2012 | |||||||||||||||
32,000 | 8,000 | (1) | $17.31 | 5/6/2014 | |||||||||||||
24,000 | 16,000 | (2) | $16.39 | 5/5/2015 | |||||||||||||
10,000 | 15,000 | (3) | $19.94 | 5/4/2016 | |||||||||||||
5,000 | 20,000 | (4) | $28.27 | 6/28/2017 | |||||||||||||
25,000 | (5) | $28.61 | 6/26/2018 |
(1) | Stock options vest on 5/ | |
(2) | Stock options vest in equal amounts on | |
(3) | Stock options vest | |
Performance stock options vest on 8/11/2009 or earlier if performance criteria is satisfied prior to such date. | ||
Performance stock options vest on 11/10/2010 or earlier if performance criteria is satisfied prior to such date. |
30
Performance stock options vest on 11/9/2011 or earlier if performance criteria is satisfied prior to such date. | ||
Restricted stock vests | ||
Restricted stock vests in equal amounts on | ||
Restricted stock vests in equal amounts on | ||
Restricted stock vests as follows: |
From 1997 through 2002, Kroger granted to the named executive officers performance-based nonqualified stock options. These options, having a term of ten years, vest six months prior to their date of expiration unless earlier vesting because Kroger’s stock price has achieved the specified annual rate of appreciation set forth in the stock option agreement. That rate ranged from 13 to 16%. To date, only the performance-based options granted in 1997, 1998 and 1999 have vested.
OPTION EXERCISESAND STOCK VESTED
The following table provides the stock options exercised and restricted stock vested during 2006.2008.
2006 OPTION EXERCISE AND STOCK VESTED | ||||||||||||||||||||
2008 OPTION EXERCISES AND STOCK VESTED | 2008 OPTION EXERCISES AND STOCK VESTED | |||||||||||||||||||
Option Awards | Stock Awards | Option Awards | Stock Awards | |||||||||||||||||
Number of | Value | Number of | Value | Number of | Number of | |||||||||||||||
Shares Acquired | Realized on | Shares Acquired | Realized on | Shares Acquired | Value Realized | Shares Acquired | Value Realized | |||||||||||||
on Exercise | Exercise | on Vesting | Vesting | on Exercise | on Exercise | on Vesting | on Vesting | |||||||||||||
Name | (#) | ($) | (#) | ($) | (#) | ($) | (#) | ($) | ||||||||||||
David B. Dillon | 30,000 | $ | 247,950 | 75,000 | $ | 1,555,500 | 35,000 | $ | 76,846 | 46,000 | $ | 1,283,820 | ||||||||
J. Michael Schlotman | 18,000 | $ | 148,703 | 15,800 | $ | 326,725 | 68,000 | $ | 670,491 | 4,000 | $ | 111,760 | ||||||||
W. Rodney McMullen | 60,000 | $ | 607,800 | 50,000 | $ | 1,037,000 | 60,000 | $ | 93,936 | 12,000 | $ | 335,280 | ||||||||
Don W. McGeorge | 24,000 | $ | 268,874 | 50,000 | $ | 1,037,000 | 45,000 | $ | 127,602 | 12,000 | $ | 335,280 | ||||||||
Donald E. Becker | 66,000 | $ | 686,680 | 12,500 | $ | 287,925 | 111,000 | $ | 1,053,577 | 35,000 | $ | 951,800 |
Options granted under our various long-term incentive plans have a ten-year life and expire if not exercised within that ten yearten-year period.
31
PENSION BENEFITS
The following table provides information on pension benefits as of 20062008 year-end for the named executive officers.
2006 PENSION BENEFITS | ||||||||||||||||
2008 PENSION BENEFITS | 2008 PENSION BENEFITS | |||||||||||||||
Number | Present | Payments | Number | Present | Payments | |||||||||||
of Years | Value of | During | of Years | Value of | During | |||||||||||
Credited | Accumulated | Last Fiscal | Credited | Accumulated | Last Fiscal | |||||||||||
Service | Benefit | Year | Service | Benefit | Year | |||||||||||
Name | Plan Name | (#) | ($) | ($) | Plan Name | (#) | ($) | ($) | ||||||||
David B. Dillon | The Kroger Consolidated Retirement Benefit Plan | 11 | $ | 214,080 | $0 | The Kroger Consolidated Retirement Benefit Plan | 13 | $ | 310,118 | $0 | ||||||
The Kroger Co. Excess Benefit Plan | 11 | $ | 1,690,013 | $0 | The Kroger Co. Excess Benefit Plan | 13 | $ | 3,646,372 | $0 | |||||||
Dillon Companies, Inc. Excess Benefit Pension Plan | 20 | $ | 1,106,543 | $0 | Dillon Companies, Inc. Excess Benefit Pension Plan | 20 | $ | 4,388,300 | $0 | |||||||
J. Michael Schlotman | The Kroger Consolidated Retirement Benefit Plan | 21 | $ | 280,755 | $0 | The Kroger Consolidated Retirement Benefit Plan | 23 | $ | 351,953 | $0 | ||||||
The Kroger Co. Excess Benefit Plan | 23 | $ | 1,219,657 | $0 | ||||||||||||
The Kroger Co. Excess Benefit Plan | 21 | $ | 560,846 | $0 | ||||||||||||
W. Rodney McMullen | The Kroger Consolidated Retirement Benefit Plan | 21 | $ | 247,540 | $0 | The Kroger Consolidated Retirement Benefit Plan | 23 | $ | 301,799 | $0 | ||||||
The Kroger Co. Excess Benefit Plan | 21 | $ | 1,278,621 | $0 | The Kroger Co. Excess Benefit Plan | 23 | $ | 2,246,547 | $0 | |||||||
Don W. McGeorge | The Kroger Consolidated Retirement Benefit Plan | 27 | $ | 426,158 | $0 | The Kroger Consolidated Retirement Benefit Plan | 29 | $ | 540,529 | $0 | ||||||
The Kroger Co. Excess Benefit Plan | 29 | $ | 4,058,060 | $0 | ||||||||||||
The Kroger Co. Excess Benefit Plan | 27 | $ | 2,182,611 | $0 | ||||||||||||
Donald E. Becker | The Kroger Consolidated Retirement Benefit Plan | 32 | $ | 714,465 | $0 | The Kroger Consolidated Retirement Benefit Plan | 34 | $ | 951,438 | $0 | ||||||
The Kroger Co. Excess Benefit Plan | 32 | $ | 1,982,339 | $0 | The Kroger Co. Excess Benefit Plan | 34 | $ | 4,060,346 | $0 |
The named executive officers all participate in The Kroger Consolidated Retirement Benefit Plan (the “Consolidated Plan”), which is a qualified defined benefit pension plan. The Consolidated Plan generally determines accrued benefits using a cash balance formula, but retains benefit formulas applicable under prior plans for certain “grandfathered participants” who were employed by Kroger on December 31, 2000.Each of the named executive officers is eligible for these grandfathered benefits under the Consolidated Plan. Therefore, theirTheir benefits, therefore, are determined using formulas applicable under prior plans, including the Kroger formula covering service to The Kroger Co. and the Dillon Companies, Inc. Pension Plan formula covering service to Dillon Companies, Inc.
The named executive officers also are eligible to receive benefits under The Kroger Co. Excess Benefit Plan (the “Kroger Excess Plan”), and Mr. Dillon also is eligible to receive benefits under the Dillon Companies, Inc. Excess Benefit Pension Plan ( the(the “Dillon Excess Plan”). These plans are collectively referred to as the “Excess Plans.” The Excess Plans are each considered to be nonqualified deferred compensation plans as defined in Section 409A of the Internal Revenue Code (subject to applicable transition rules).Code. The purpose of the Excess Plans is to make up the shortfall in retirement benefits caused by the limitations on benefits to highly compensated individuals under qualified plans in accordance with the Internal Revenue Code.
Each of the named executive officers will receive benefits under the Consolidated Plan and the Excess Plans, determined as follows:
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Although participants generally receive credited service beginning at age 21, those participants who commenced employment prior to 1986, including all of the named executive officers, began to accrue credited service after attaining age 25. In the event of a termination of employment, Mr. Becker and Mr. Dillon currently are eligible for a reduced early retirement benefit, as they each have attained age 55.
Mr. Dillon also participates in the Dillon Employees’ Profit Sharing Plan (the “Dillon Plan”). The Dillon Plan is a qualified defined contribution plan under which Dillon Companies, Inc. and its participating subsidiaries may choose to make discretionary contributions each year that are then allocated to each participant’s account. Participation in the Dillon Plan was frozen effective January 1, 2001. Participants in the Dillon Plan 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. Prior to July 1, 2000, participants could elect to make voluntary contributions under the Dillon Plan, but that option was discontinued effective as of July 1, 2000. Participants can elect to receive their Dillon Plan benefit in the form of either a lump sum payment or installment payments.
Due to offset formulas contained in the Consolidated Plan and the Dillon Excess Plan, Mr. Dillon’s accrued benefit under the Dillon Plan offsets a portion of the benefit that would otherwise accrue for him under those plans for his service with Dillon Companies, Inc. Although benefits that accrue under defined contribution plans are not reportable under the accompanying table, we have added narrative disclosure of the Dillon Plan because of the offsetting effect that benefits under that plan has on benefits accruing under the Consolidated Plan and the Dillon Excess Plan.
The assumptions used in calculating the present values are set forth in Note 13 to the consolidated financial statements in the Company’s Form 10-K filed with the SEC on March 31, 2009. The discount rate used to determine the present values is 7%, which is the same rate used at the measurement date for financial reporting purposes.
NONQUALIFIED DEFERRED COMPENSATION
The following table provides information on non-qualifiednonqualified deferred compensation for the named executive officers for 2006.2008.
2006 NONQUALIFIED DEFERRED COMPENSATION | |||||||||||||||||||||||||||
2008 NONQUALIFIED DEFERRED COMPENSATION | 2008 NONQUALIFIED DEFERRED COMPENSATION | ||||||||||||||||||||||||||
Executive | Registrant | Aggregate | Aggregate | Aggregate | Executive | Registrant | Aggregate | Aggregate | Aggregate | ||||||||||||||||||
Contributions | Contributions | Earnings | Withdrawals/ | Balance at | Contributions | Contributions | Earnings | Withdrawals/ | Balance at | ||||||||||||||||||
in Last FY | in Last FY | in Last FY | Distributions | Last FYE | in Last FY | in Last FY | in Last FY | Distributions | Last FYE | ||||||||||||||||||
Name | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||
David B. Dillon | $ | 0 | $0 | $ | 36,923 | $0 | $ | 523,545 | $ | 0 | $0 | $ | 41,838 | $0 | $ | 604,569 | |||||||||||
J. Michael Schlotman | $ | 0 | $0 | $ | 0 | $0 | $ | 0 | $ | 0 | $0 | $ | 0 | $0 | $ | 0 | |||||||||||
W. Rodney McMullen | $ | 97,578 | (1) | $0 | $ | 193,796 | $0 | $ | 2,797,375 | $ | 347,692 | (1) | $0 | $ | 275,083 | $0 | $ | 4,157,956 | |||||||||
Don W. McGeorge | $ | 0 | $0 | $ | 13,362 | $0 | $ | 165,313 | $ | 0 | $0 | $ | 15,457 | $0 | $ | 195,107 | |||||||||||
Donald E. Becker | $ | 0 | $0 | $ | 0 | $0 | $ | 0 | $ | 0 | $0 | $ | 0 | $0 | $ | 0 |
(1) | The amount |
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Eligible 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 100% of their annual and long-term bonus compensation. Deferral account amounts are credited with interest at the rate representing Kroger’s cost of 10-year debt as determined by Kroger’s CEO 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. 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.
DIRECTOR COMPENSATION
The following table describes the fiscal year 20062008 compensation for non-employee directors. Employee directors receive no compensation for their Board service. Fiscal year 2006 consisted of 53 weeks.
2006 DIRECTOR COMPENSATION | |||||||||||||||||||||||||||||||||||||||||||||||
2008 DIRECTOR COMPENSATION | 2008 DIRECTOR COMPENSATION | ||||||||||||||||||||||||||||||||||||||||||||||
Change in | Change in | ||||||||||||||||||||||||||||||||||||||||||||||
Pension | Pension Value | ||||||||||||||||||||||||||||||||||||||||||||||
Value and | and | ||||||||||||||||||||||||||||||||||||||||||||||
Fees | Nonqualified | Fees | Nonqualified | ||||||||||||||||||||||||||||||||||||||||||||
Earned | Non-Equity | Deferred | Earned | Non-Equity | Deferred | All | |||||||||||||||||||||||||||||||||||||||||
or Paid | Stock | Incentive Plan | Compensation | All Other | or Paid | Stock | Option | Incentive Plan | Compensation | Other | |||||||||||||||||||||||||||||||||||||
in Cash | Awards | Option | Compensation | Earnings | Compensation | Total | in Cash | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||||||||||||||
Name | ($) | ($) | Awards($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||||||||
(3) | (4) | (13) | (14) | (2) | (3) | (15) | |||||||||||||||||||||||||||||||||||||||||
Reuben V. Anderson | $ | 85,482 | $ | 54,988 | (5) | $ | 74,262 | (7) | $0 | $ | 6,300 | $ | 108 | $ | 221,140 | $ | 74,589 | $ | 63,020 | (4) | $ | 77,792 | (6) | $0 | — | (13) | $ | 114 | $ | 215,515 | |||||||||||||||||
Robert D. Beyer | $ | 88,430 | $ | 54,988 | (5) | $ | 35,516 | (8) | $0 | N/A | $ | 108 | $ | 179,042 | $ | 86,523 | $ | 63,020 | (4) | $ | 43,733 | (6) | $0 | $ | 392 | (14) | $ | 114 | $ | 193,782 | |||||||||||||||||
John L. Clendenin | $ | 76,233 | $ | 54,988 | (5) | $ | 74,262 | (7) | $0 | $ | 5,000 | $ | 108 | $ | 210,591 | $ | 30,839 | — | (5) | $ | 42,909 | (7) | $0 | $ | 151 | (14) | $ | 114 | $ | 74,013 | |||||||||||||||||
Susan J. Kropf | $ | 84,086 | $ | 38,563 | (4) | $ | 11,601 | (8) | $0 | N/A | $ | 114 | $ | 134,364 | |||||||||||||||||||||||||||||||||
John T. LaMacchia | $ | 88,430 | $ | 54,988 | (5) | $ | 74,262 | (7) | $0 | $ | 7,900 | $ | 108 | $ | 225,688 | $ | 86,523 | $ | 63,020 | (4) | $ | 77,792 | (6) | $0 | $ | 3,208 | (13) | $ | 114 | $ | 230,657 | ||||||||||||||||
David B. Lewis | $ | 98,594 | $ | 54,988 | (5) | $ | 72,504 | (9) | $0 | N/A | $ | 108 | $ | 226,194 | $ | 96,465 | $ | 63,020 | (4) | $ | 77,792 | (9) | $0 | N/A | $ | 114 | $ | 237,391 | |||||||||||||||||||
Jorge P. Montoya | $ | 81,589 | $ | 38,563 | (4) | $ | 13,646 | (8) | $0 | N/A | $ | 114 | $ | 133,912 | |||||||||||||||||||||||||||||||||
Clyde R. Moore | $ | 86,397 | $ | 54,988 | (5) | $ | 38,017 | (10) | $0 | $ | 7,200 | $ | 108 | $ | 186,710 | $ | 78,699 | $ | 63,020 | (4) | $ | 77,829 | (6) | $0 | $ | 7 | (13) | $ | 114 | $ | 219,669 | ||||||||||||||||
Katherine D. Ortega | $ | 88,430 | $ | 54,988 | (5) | $ | 74,262 | (7) | $0 | $ | 6,700 | $ | 108 | $ | 224,488 | ||||||||||||||||||||||||||||||||
Katherine D. Ortega (1) | $ | 35,773 | — | (5) | $ | 42,909 | (10) | $0 | N/A | $ | 114 | $ | 78,796 | ||||||||||||||||||||||||||||||||||
Susan M. Phillips | $ | 86,315 | $ | 54,988 | (5) | $ | 30,057 | (11) | $0 | N/A | $ | 108 | $ | 171,468 | $ | 84,542 | $ | 63,020 | (4) | $ | 109,299 | (11) | $0 | $ | 192 | (14) | $ | 114 | $ | 257,167 | |||||||||||||||||
Steven R. Rogel | $ | 98,594 | $ | 54,988 | (5) | $ | 74,262 | (8) | $0 | N/A | $ | 108 | $ | 227,952 | $ | 83,634 | $ | 63,020 | (4) | $ | 77,792 | (6) | $0 | N/A | $ | 114 | $ | 224,560 | |||||||||||||||||||
James Runde(1) | $ | 31,866 | $ | 4,576 | (6) | $ | 1,342 | (12) | $0 | N/A | $ | 0 | $ | 37,784 | |||||||||||||||||||||||||||||||||
Ronald L. Sargent(2) | $ | 12,620 | $ | 4,576 | (6) | $ | 1,271 | (12) | $0 | N/A | $ | 0 | $ | 18,467 | |||||||||||||||||||||||||||||||||
James A. Runde | $ | 74,589 | $ | 63,020 | (4) | $ | 21,402 | (12) | $0 | N/A | $ | 114 | $ | 159,125 | |||||||||||||||||||||||||||||||||
Ronald L. Sargent | $ | 84,530 | $ | 63,020 | (4) | $ | 19,162 | (12) | $0 | N/A | $ | 114 | $ | 166,826 | |||||||||||||||||||||||||||||||||
Bobby S. Shackouls | $ | 86,397 | $ | 54,988 | (5) | $ | 74,262 | (8) | $0 | N/A | $ | 108 | $ | 215,755 | $ | 98,265 | $ | 63,020 | (4) | $ | 26,472 | (6) | $0 | N/A | $ | 114 | $ | 187,871 |
(1) | Retired from the Board | |
(2) | ||
This amount represents the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123(R). See discussion of the assumptions made in the valuation in Note 10 to the consolidated financial statements in the Company’s Form 10-K filed with the SEC on |
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This amount represents the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123(R). See discussion of the assumptions made in the valuation in Note 10 to the consolidated financial statements in the Company’s Form 10-K filed with the SEC on |
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Aggregate number of stock awards outstanding at fiscal year end was | ||
(5) | Amounts are negative, reflecting the reversal of the previously booked expense due to the director’s retirement prior to the end of the fiscal year. | |
(6) | Aggregate | |
Aggregate number of stock options outstanding at fiscal year end was | ||
Aggregate number of stock options outstanding at fiscal year end was | ||
Aggregate number of stock options outstanding at fiscal year end was | ||
Aggregate number of stock options outstanding at fiscal year end was | ||
Aggregate number of stock options outstanding at fiscal year end was | ||
(12) | Aggregate number of stock options outstanding at fiscal year end was 16,500 shares. | |
(13) | This amount reflects the change in pension value for the applicable directors. Only those directors elected to the Board prior to July 17, 1997 are eligible to participate in the outside director retirement plan. | |
(14) | This amount reflects preferential earnings on nonqualified deferred compensation. | |
This amount reflects the cost to the Company per director for providing accidental death and |
Each non-employee director receives an annual retainer of $75,000. The chair of each committee receives an additional annual retainer of $12,000. Each member of the Audit Committee as well as the director designated as the “Lead Director,” receives an additional annual retainer of $10,000. The director designated as the “Lead Director” received an additional annual retainer of $10,000 through December 31, 2008. Each non-employee director also receives annually, at the regularly scheduled meeting held in December, restricted stock and nonqualified stock option awards. The Corporate Governance Committee retained Mercer Human Resource Consulting to review non-employee director compensation and determined that equity awards to the non-employee directors, and the additional annual retainer to the Lead Director, were not competitive. Accordingly, non-employee directors received an award of 2,5003,250 shares of restricted stock, compared to 2,500 shares in the prior year, and an award of 6,500 nonqualified stock options, compared to 5,000 non-qualified stock options.options in the prior year. Effective January 1, 2009, the Lead Director’s additional annual retainer was increased to $20,000.
OutsideNon-employee directors first elected prior to July 17, 1997 receive a major medical plan benefit as well as an unfunded retirement benefit. The retirement benefit equals the average cash compensation for the five calendar years preceding retirement. 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.
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We also maintain a deferred compensation plan, in which all non-employee members of the Board are eligible to participate. Participants may defer up to 100% of their cash compensation. They 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 participants 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.
During 2004, the Corporate Governance Committee retained Mercer Human Resource Consulting to review non-employee director compensation. The consultant determined that Kroger’s non-employee director compensation was significantly below median compensation of non-employee directors at other publicly held U.S. corporations, and therefore not competitive. Based on this evaluation, the Corporate Governance Committee recommended to the Board, and the Board approved, an increase in non-employee director compensation effective as of January 2005. The Board has determined that compensation of non-
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employeenon-employee directors must be competitive on an on-going basis to attract and retain directors who meet the qualifications for service on Kroger’s Board. Non-employee director compensation will be reviewed from time to time as the Corporate Governance Committee deems appropriate.
POTENTIAL PAYMENTS UPONUPON TERMINATIONOR CHANGEIN CONTROL
Kroger has no contracts, agreements, plans or arrangements that provide for payments to the named executive officers in connection with resignation, severance, retirement, termination, or change in control, provideexcept for payments to its named executive officers that are notthose available generally to salaried employees. Mr. DillonThe Kroger Co. Employee Protection Plan, or KEPP, applies to all management employees and administrative support personnel who are not covered by a collective bargaining agreement, with at least one year of service, and provides severance benefits when a participant’s employment is terminated actually or constructively within two years following a change in control of Kroger. For purposes of KEPP, a change in control occurs if:
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Assuming that a change in control occurred on the last day of Kroger’s fiscal year 2008, and the named executive officers had their employment terminated, they would receive a maximum payment or, in the case of group term life insurance, a benefit having a cost to Kroger in the amounts shown below:
Additional | Accrued | ||||||||||||
Severance | Vacation and | and Banked | Group Term | Tuition | Outplacement | ||||||||
Name | Benefit | Bonus | Vacation | Life Insurance | Reimbursement | Reimbursement | |||||||
David B. Dillon | $5,059,190 | $ | 120,864 | $563,077 | $29 | $5,000 | $10,000 | ||||||
J. Michael Schlotman | $1,923,238 | $ | 39,959 | $251,538 | $29 | $5,000 | $10,000 | ||||||
W. Rodney McMullen | $3,426,302 | $ | 79,365 | $413,462 | $29 | $5,000 | $10,000 | ||||||
Don W. McGeorge | $3,426,302 | $ | 79,365 | $215,000 | $29 | $5,000 | $10,000 | ||||||
Donald E. Becker | $2,196,332 | $ | 45,809 | $476,923 | $29 | $5,000 | $10,000 |
Each of the named executive officers also is entitled to continuation of health care coverage for up to 24 months at the same contribution rate as existed prior to the change in control. The cost to Kroger cannot be calculated, as Kroger self insures the health care benefit and the cost is based on the health care services utilized by the participant and eligible dependents.
Under KEPP benefits will be reduced, to the extent necessary, so that payments to an employment agreement that expired on November 30, 2006 and was not renewed.executive officer will in no event exceed 2.99 times the officer’s average W-2 earnings over the preceding five years.
Kroger’s non-discriminatory change in control benefits under The Kroger Co. Employee Protection PlanKEPP and under stock option and restricted stock agreements are discussed further in the Compensation Discussion and Analysis section under the “Retirement and other benefits”Other Benefits” heading.
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BENEFICIAL OWNERSHIPOF COMMON STOCK
As of February 12, 2007,13, 2009, Kroger’s directors, the named executive officers, and the directors and executive officers as a group, beneficially owned shares of Kroger’s common stock as follows:
Amount and Nature | Amount and Nature | ||||
of | of | ||||
Name | Beneficial Ownership | Beneficial Ownership | |||
Reuben V. Anderson | 58,145 | (1) | 68,515 | (1) | |
Donald E. Becker | 376,708 | (2)(3)(4) | 390,704 | (2)(3)(4) | |
Robert D. Beyer | 54,812 | (5) | 110,562 | (1) | |
John L. Clendenin | 63,000 | (1) | |||
David B. Dillon | 1,667,446 | (2)(4)(6) | 2,206,057 | (2)(3)(5) | |
Susan J. Kropf | 8,750 | (6) | |||
John T. LaMacchia | 68,000 | (1) | 80,350 | (1) | |
David B. Lewis | 20,500 | (7) | 36,250 | (7) | |
Don W. McGeorge | 697,997 | (2)(4)(8) | 830,663 | (2)(8) | |
W. Rodney McMullen | 893,320 | (2)(4) | 1,039,323 | (2)(3) | |
Jorge P. Montoya | 6,750 | (6) | |||
Clyde R. Moore | 47,500 | (9) | 59,250 | (1) | |
Katherine D. Ortega | 57,356 | (1) | |||
Susan M. Phillips | 22,000 | (10) | 36,785 | (9) | |
Steven R. Rogel | 42,028 | (5) | 57,778 | (1) | |
James A. Runde | 2,500 | 11,250 | (10) | ||
Ronald L. Sargent | 4,500 | 13,250 | (10) | ||
J. Michael Schlotman | 242,994 | (2)(4)(11) | 273,742 | (2)(3)(11) | |
Bobby S. Shackouls | 29,000 | (5) | 44,750 | (1) | |
Directors and Executive Officers as a group (including those named above) | 6,874,249 | (2)(12) | 7,772,703 | (2)(3)(12) |
(1) | This amount includes | |
(2) | This amount includes shares that represent options that are or become exercisable on or before April |
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(3) | ||
The fractional interest resulting from allocations under Kroger’s defined contribution plans has been rounded to the nearest whole number. | ||
(4) | This amount includes 10,228 shares owned by Mr. Becker’s wife. Mr. Becker disclaims beneficial ownership of these shares. | |
(5) | This amount includes | |
(6) | This amount includes 1,000 shares that represent options that are or become exercisable on or before April | |
This amount includes | ||
(8) | This amount includes 10,115 shares owned by Mr. |
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This amount includes 9,000 shares that represent options that are or become exercisable on or before April | ||
This amount includes | ||
(11) | This amount includes | |
(12) | The figure shown includes an aggregate of 320 additional shares held by, or for the benefit of, the immediate families or other relatives of all directors and executive officers as a group not listed above. In each case the director or executive officer disclaims beneficial ownership of those shares. |
No director or officer owned as much as 1% of the common stock of Kroger. The directors and executive officers as a group beneficially owned 1% of the common stock of Kroger.
No director or officer owned Kroger common stock pledged as security.
As of February 12, 2007,13, 2009, the following persons reported beneficial ownership of Kroger common stock based on reports on Schedule 13G filed with the Securities and Exchange Commission or other reliable information as follows:
Amount and | Amount and | |||||||||||
Nature of | Percentage | Nature of | Percentage | |||||||||
Name | Address of Beneficial Owner | Ownership | of Class | Address of Beneficial Owner | Ownership | of Class | ||||||
The Kroger Co. Savings Plan | 1014 Vine Street | 35,055,853 | (1) | 5.4% | ||||||||
1290 Avenue of the Americas | Cincinnati, OH 45202 | |||||||||||
AXA Financial, Inc. | New York, NY 10104 | 66,457,092 | 9.4 | % | ||||||||
90 Hudson Street | ||||||||||||
Lord, Abbett & Co. LLC | Jersey City, NJ 07302 | 46,202,740 | 6.5 | % | ||||||||
1014 Vine Street | ||||||||||||
The Kroger Co. Savings Plan | Cincinnati, OH 45202 | 40,480,889 | (1) | 5.7 | % |
(1) | Shares beneficially owned by plan trustees for the benefit of participants in employee benefit |
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SECTION16(A) BENEFICIALOWNERSHIPREPORTINGCOMPLIANCE
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 Securities and Exchange Commission and the New York Stock Exchange.Commission. 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 received by Kroger, or written representations from certain reporting persons that no Forms 5 were required for those persons, we believe that during fiscal year 20062008 all filing requirements applicable to our officers, directors and 10% beneficial owners were timely satisfied, with two exceptions. Mr. Jon C. Flora filed a Form 5 reporting a stock sale that inadvertently was not reported in 2006, and Mr. Carver L. Johnson filed a Form 5 reporting three transactions with the Company in which shares were used to pay tax liability associated with restricted stock.satisfied.
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RELATEDPERSONTRANSACTIONS
Pursuant to ourStatement of Policy with Respect to Related Person Transactionsand the rules of the SEC, Kroger has nothe following related person transactiontransactions, which were approved by Kroger’s Audit Committee, to disclosedisclose:
Director independence is discussed above under the heading “Information Concerning the Board of Directors.” Kroger’s policy on related person transactions is as follows:
STATEMENTOFPOLICY
WITHRESPECTTO
RELATEDPERSONTRANSACTIONS
A. INTRODUCTION
It is the policy of Kroger’s Board of Directors that any Related Person Transaction may be consummated or may continue only if the Audit Committee approves or ratifies the transaction in accordance with the guidelines set forth in this policy. The Board of Directors has determined that the Audit Committee of the Board is best suited to review and approve Related Person Transactions.
For the purposes of this policy, a “Related Person” is:
1. | any person who is, or at any time since the beginning of Kroger’s last fiscal year was, a director or executive officer of Kroger or a nominee to become a director of Kroger; |
any person who is, or at any time since the beginning of Kroger’s last fiscal year was, a director or executive officer of Kroger or a nominee to become a director of Kroger;40
2. | any person who is known to be the beneficial owner of more than 5% of any class of Kroger’s voting securities; and | ||
3. | any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the director, executive officer, nominee or more than 5% beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee or more than 5% beneficial owner. |
For the purposes of this policy, a “Related Person Transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) since the beginning of Kroger’s last fiscal year in which Kroger (including any of its subsidiaries) was, is or will be a participant and the amount involved exceeds $120,000, and in which any Related Person had, has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of another entity).
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Notwithstanding the foregoing, the Audit Committee has reviewed the following types of transactions and has determined that each type of transaction is deemed to be pre-approved, even if the amount involved exceeds $120,000.
1. | Certain Transactions with Other Companies. Any transaction for property or services in the ordinary course of business involving payments to or from another company at which a Related Person’s only relationship is as an employee | ||
2. | Certain Company Charitable Contributions. Any charitable contribution, grant or endowment by Kroger (or one of its foundations) to a charitable organization, foundation, university or other not for profit organization at which a Related Person’s only relationship is as an employee | ||
3. | Transactions where all Shareholders Receive Proportional Benefits. Any transaction where the Related Person’s interest arises solely from the ownership of Kroger common stock and all holders of Kroger common stock received the same benefit on a pro rata basis. | ||
4. | Executive Officer and Director Compensation. (a) Any employment by Kroger of an executive officer if the executive officer’s compensation is required to be reported in Kroger’s proxy statement, (b) any employment by Kroger of an executive officer if the executive officer is not an immediate family member of a Related Person and the Compensation Committee approved (or recommended that the Board approve) the executive officer’s compensation, and (c) any compensation paid to a director if the compensation is required to be reported in Kroger’s proxy statement. | ||
5. | Other Transactions. (a) Any transaction involving a Related Person where the rates or charges involved are determined by competitive bids, (b) any transaction with a Related Person involving the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority, or (c) any transaction with a Related Person involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture or similar services. |
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B. AUDIT COMMITTEE APPROVAL
In the event management becomes aware of any Related Person Transactions that are not deemed pre-approved under paragraph A of this policy, those transactions will be presented to the Committee for approval at the next regular Committee meeting, or where it is not practicable or desirable to wait until the next regular Committee meeting, to the chairChair of the Committee (who will possess delegated authority to act between Committee meetings) subject to ratification by the Committee at its next regular meeting. If advance approval of a Related Person Transaction is not feasible, then the Related Person Transaction will be presented to the Committee for ratification at the next regular Committee meeting, or where it is not practicable or desirable to wait until the next regular Committee meeting, to the Chair of the Committee for ratification, subject to further ratification by the Committee at its next regular meeting.
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In connection with each regular Committee meeting, a summary of each new Related Person Transaction deemed pre-approved pursuant to paragraphs A(1) and A(2) above will be provided to the Committee for its review.
If a Related Person Transaction will be ongoing, the Committee may establish guidelines for management to follow in its ongoing dealings with the Related Person. Thereafter, the Committee, on at least an annual basis, will review and assess ongoing relationships with the Related Person to see that they are in compliance with the Committee’s guidelines and that the Related Person Transaction remains appropriate.
The Committee (or the chair)Chair) will approve only those Related Person Transactions that are in, or are not inconsistent with, the best interests of Kroger and its shareholders, as the Committee (or the chair)Chair) determines in good faith in accordance with its business judgment.
No director will participate in any discussion or approval of a Related Person Transaction for which he or she, or an immediate family member (as defined above), is a Related Person except that the director will provide all material information about the Related Person Transaction to the Committee.
C. DISCLOSURE
Kroger will disclose all Related Person Transactions in Kroger’s applicable filings as required by the Securities Act of 1933, the Securities Exchange Act of 1934 and related rules.
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AUDIT COMMITTEE REPORT
The primary function of the Audit Committee is to represent and 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 this report that SEC rules require be included in the Company’s annual proxy statement.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 2007year 2009 and is available on the Company’s corporate website at http://www.thekrogerco.com/documents/GuidelinesIssues.pdf.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 Committee’s charter. The Audit Committee held nineseven meetings during fiscal year 2006.2008. The Audit Committee meets separately at least quarterly with the Company’s internal auditor and PricewaterhouseCoopers LLP, the Company’s independent public accountants, without management present, to discuss the results of their audits, their evaluations of the Company’s internal controls over financial reporting, and the overall quality of the Company’s financial reporting. The Audit Committee also meets separately at least quarterly with the Company’s Chief Financial Officer and General Counsel. Following these separate discussions, the Audit Committee meets in executive session.
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 reasonably designed to assureprovide 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 theirthe financial statements’ conformity with generally accepted accounting principles and on management’s assessment of the effectiveness of the Company’s internal control over financial reporting. In addition the independent public accountants will express their own opinion on the effectiveness of the Company’s internal control over financial reporting.
In the performance of its oversight function, the Audit Committee has reviewed and discussed with management and PricewaterhouseCoopers LLP the audited financial statements for the year ended February 3, 2007,January 31, 2009, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of February 3, 2007,January 31, 2009, and PricewaterhouseCoopers’ evaluation of the Company’s internal control over financial reporting as of that date. The Audit Committee has also discussed with the independent public accountants the matters required to be discussed by Statement on Auditing Standards No. 61, “Communication With Audit Committees,” as amended (AICPA, Professional Standards, Vol. 1.1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.
With respect to the Company’s independent public accountants, the Audit Committee, among other things, discussed with PricewaterhouseCoopers LLP matters relating to its independence and has received the written disclosures and the letter from the independent public accountants required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” as adopted byapplicable requirements of the Public Company Accounting Oversight Board in Rule 3600T.regarding the independent public accountants’ communications with the Audit Committee concerning independence. The Audit Committee has reviewed and approved in advance all services provided to the Company by PricewaterhouseCoopers LLP. The Audit Committee conducted a review of services provided by PricewaterhouseCoopers LLP which included an evaluation by management and members of the Audit Committee.
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Based upon the review and discussions described in this report, the Audit Committee recommended thatto the Board of Directors includethat the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended February 3, 2007,January 31, 2009, as filed with the SEC.
This report is submitted by the Audit Committee.
David B. Lewis, Chair
Ronald L. Sargent, Vice Chair
Susan J. Kropf
Susan M. Phillips
Bobby S. Shackouls Vice ChairClyde R. MooreSusan M. PhillipsRonald L. Sargent
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APPROVALOF KROGER CASH BONUS PLAN(ITEM NO. 2)
Kroger historically has paid to associates at all levels an annual bonus designed to provide an incentive to achieve superior results.
This annual incentive plan provides pay based on the extent to which Kroger meets objectives established at the beginning of each year. Kroger has not historically maintained a long-term incentive plan other than its broad-based equity compensation plans. After reviewing executive compensation with its outside advisors, the Compensation Committee concluded that the long-term component of Kroger’s executive compensation was not competitive. In 2006 the Board instituted a program of long-term bonuses covering periods in excess of one year under which a portion of compensation for about 140 key executives is conditioned on the achievement of those long-term goals. This program serves the dual purposes of making Kroger’s long-term compensation competitive and of providing incentives to meet long-term goals.
Some compensation plans must be approved by shareholders in order for certain compensation earned under those plans to be considered to be performance-based and therefore deductible for federal tax purposes under Section 162(m) of the Internal Revenue Code. At the Annual Meeting, shareholders are being asked to approve the Kroger Cash Bonus Plan (the “Bonus Plan”), in order for bonuses paid under the plan to satisfy the requirements for qualified performance-based compensation under the Internal Revenue Service’s regulations under Section 162(m) and to be eligible for deductibility by Kroger. Shareholders also are being asked to approve currently outstanding annual and long-term bonuses that are not yet due and payable because the performance periods have not yet been completed. Kroger’s Compensation Committee, comprised solely of independent directors, has approved the Bonus Plan.
DESCRIPTIONOFTHE BONUS PLAN
All Kroger associates who are not covered by a collective bargaining agreement are eligible to participate in the Bonus Plan. Currently participation is limited to executives, managers and certain hourly employees.
Bonus Awards
Types. Two types of bonuses can be awarded under the Bonus Plan; an annual bonus award for each fiscal year, and a long-term bonus award for measurement periods in excess of one year. Bonus payments are based on Kroger’s performance measured against criteria established by a committee of the Board of Directors (the “Committee”) that qualifies as a “compensation committee” under Section 162(m) of the Internal Revenue Code. The Committee establishes a bonus “potential” for each bonus payable under the Bonus Plan for each participant, based on the participant’s level within Kroger, and actual payouts can exceed that amount when Kroger’s performance exceeds the pre-established thresholds.
Business Criteria. Each participant’s bonus is based on pre-established performance targets, which will include one or more of the following components: (i) earning or earnings per share of Kroger, a unit of Kroger, or designated projects; (ii) total sales, identical sales, or comparable sales of Kroger, a unit of Kroger, or designated projects; (iii) cash flow; (iv) cash flow from operations; (v) operating profit or income; (vi) net income; (vii) operating margin; (viii) net income margin; (ix) return on net assets; (x) economic value added; (xi) return on total assets; (xii) return on common equity; (xiii) return on total capital; (xiv) total shareholder return; (xv) revenue; (xvi) revenue growth; (xvii) earnings before interest, taxes, depreciation and amortization (“EBITDA”); (xviii) EBITDA growth; (xix) funds from operations per share and per share growth; (xx) cash available for distribution; (xxi) cash available for distribution per
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share and per share growth; (xxii) share price performance on an absolute basis and relative to an index of earnings per share or improvements in Kroger’s attainment of expense levels; (xxiii) reduction in operating costs as a percentage of sales; (xxiv) performance in key categories; and (xxv) implementing or completion of strategic initiatives or critical projects. Initially the performance targets for annual bonuses will include the following components: (i) EBITDA; (ii) identical sales; (iii) achievement of strategic initiatives; and (iv) sales and earnings results of designated capital projects. Initially the performance targets for long-term bonuses will include the following components: (i) performance in four key categories in our strategic plan, and (ii) operating costs as a percentage of sales.
Bonus Amount. The bonus award for any participant is based on the achievement of specified levels of Kroger performance measured against the pre-established criteria. The Committee, in its discretion, may reduce the amount payable to any named executive officer. In no event may any one bonus earned by a participant exceed $5 million. Participants may earn more than one bonus under this Bonus Plan. Bonuses earned under the Bonus Plan will be paid in cash.
Accounting Practices. The components of a performance target will be determined in accordance with Kroger’s accounting practices in effect on the first day of the measurement period.
Amendment. The Bonus Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Committee or the Board. To the extent required by Section 162(m) with respect to bonus awards that the Committee determines should qualify as performance-based compensation as described in Section 162(m)(4)(C), no action may modify the performance criteria or bonus potentials after the commencement of the measurement period with respect to which such bonus awards relate.
BOARDRECOMMENDATION
The Board of Directors believes that the Bonus Plan provides an appropriate balance between salary compensation and performance-based compensation. The Committee may approve similar bonus or other payments outside of the Bonus Plan that may not be tax deductible. The Board of Directors believes it is in the best interests of Kroger to qualify performance-based compensation for deductibility under Section 162(m) in order to maximize Kroger’s income tax deductions. The approval of the Bonus Plan is necessary to qualify this performance-based bonus compensation for deductibility.
THEBOARDOFDIRECTORSANDMANAGEMENTRECOMMENDAVOTEFORTHISPROPOSAL.
NEW PLAN BENEFITS | ||||
Kroger Cash Bonus Plan | ||||
Name and Position | ||||
Dollar value ($) | Number of Units | |||
All Groups (1) | (1) | (1) |
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EQUITY COMPENSATION PLAN INFORMATION
The following table provides information regarding shares outstanding and available for issuance under the Company’s existing equity compensation plans.
(a) | (b) | (c) | |
Plan Category | Number of securities to | Weighted-average | Number of securities |
be issued upon exercise | exercise price | remaining for future | |
of outstanding options, | of outstanding | issuance under equity | |
warrants and rights | options, warrants | compensation plans | |
and rights | excluding securities | ||
reflected in column | |||
(a) | |||
Equity compensation plans | |||
approved by security holders | 51,918,179 | $ 20.09 | 17,595,505 |
Equity compensation plans not | |||
approved by security holders | — | $— | — |
Total | 51,918,179 | $ 20.09 | 17,595,505 |
APPROVALOF AMENDMENTTO REGULATIONSTO PROVIDEFOR RULESOFCONDUCTIN CONNECTIONWITH SHAREHOLDER MEETINGS; MEETINGSOUTSIDEOF CINCINNATI(ITEM NO. 3)
Kroger’s Regulations currently contain no provisions that set forth the manner in which shareholders may bring business before a meeting of shareholders. While the rules of the SEC require a shareholder to notify a corporation within a specified period of time prior to an annual meeting of shareholders if the shareholder seeks to have a proposal included in a proxy statement, a shareholder could disrupt a meeting by attempting to bring inappropriate business before the meeting without providing advance notice to the corporation. Reasonable rules of order for the conduct of shareholder meetings are appropriate, and many corporations provide for such rules. This proposal would require 45 days advance notice to Kroger of any business to be conducted at a shareholder meeting, and provide that Kroger will prepare rules of conduct in advance of all shareholder meetings and make those rules available to shareholders. Recognizing that Kroger’s operations span most of the United States, this proposal also will amend the Regulations to permit shareholder meetings to be held outside of Cincinnati, Ohio, with the approval of the Board of Directors.
Because the rules of the SEC permit proxy committees to vote discretionally on matters for which advance notice is not provided to a corporation, this proposal is not likely to have any material anti-takeover effect.
If this proposal is adopted, new Article I, Section 2 will be added to the Regulations, old Article I, Section 2 of the Regulations will be revised and renumbered as Article I, Section 3 and additions will be made to Article VII of the Regulations, as shown in Appendix 1, with the additions shown underlined, and deletions shown as strikeouts. The Regulations require the affirmative vote representing a majority of the outstanding shares of Kroger’s common stock in order to adopt this proposal.
THE BOARDOF DIRECTORSAND MANAGEMENT RECOMMENDA VOTEFOR THIS PROPOSAL.
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SELECTIONOF AUDITORS
(ITEM NO. 4)2)
The Audit Committee of the Board of Directors is responsible for the appointment, compensation and retention of Kroger’s independent auditor, as required by law and by applicable NYSE rules. On March 14, 2007,11, 2009, the Audit Committee appointed PricewaterhouseCoopers LLP as Kroger’s independent auditor for the fiscal year ending February 2, 2008.January 30, 2010. While shareholder ratification of the selection of PricewaterhouseCoopers LLP as Kroger’s 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 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 Kroger and its shareholders.
A representative of PricewaterhouseCoopers LLP is expected to be present at the meeting to respond to appropriate questions and to make a statement if he or she desires to do so.
THE BOARDOF DIRECTORSAND MANAGEMENT RECOMMENDA VOTEFFOROR THIS PROPOSAL.
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DISCLOSUREOFAUDITORFEES
The following describes the fees billed to Kroger by PricewaterhouseCoopers LLP related to the fiscal years ended January 31, 2009 and February 3, 2007 and January 28, 2006:2, 2008:
Fiscal 2006 | Fiscal 2005 | Fiscal Year 2008 | Fiscal Year 2007 | ||||||||||
Audit Fees | $4,463,916 | $4,926,809 | $ | 4,093,444 | $ | 4,221,063 | |||||||
Audit-Related Fees | 53,429 | 53,500 | 54,248 | 122,878 | |||||||||
Tax Fees | — | — | — | — | |||||||||
All Other Fees | — | — | — | — | |||||||||
Total | $4,517,345 | $4,980,309 | $ | 4,147,692 | $ | 4,343,941 |
Audit Feesfor the years ended January 31, 2009 and February 3, 2007 and January 28, 2006,2, 2008, respectively, were for professional services rendered for the audits of Kroger’s consolidated financial statements, the issuance of comfort letters to underwriters, consents, income tax provision procedures and assistance with the review of documents filed with the SEC.
Audit-Related FeesFees for the years ended January 31, 2009 and February 3, 2007 and January 28, 2006,2, 2008, respectively, were for assurance and related services pertaining to employee benefit plan audits, captive insurance company audits, accounting consultationsconsultation in connection with acquisitions, internal control reviews, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.
Tax Fees.We did not engage PricewaterhouseCoopers LLP for other tax services for the years ended January 31, 2009 and February 3, 2007 and January 28, 2006.2, 2008.
All Other FeesFees.. We did not engage PricewaterhouseCoopers LLP for other services for the years ended January 31, 2009 and February 3, 2007 and January 28, 2006.2, 2008.
The Audit Committee requires that it approve in advance all audit and non-audit work performed by PricewaterhouseCoopers LLP. On March 14, 200711, 2009, the Audit Committee approved services to be performed by PricewaterhouseCoopers LLP for the remainder of fiscal 2007year 2009 that are related to the audit of Kroger
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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.
The Audit Committee has determined that the non-audit services performed by PricewaterhouseCoopers LLP in fiscal 2006 were compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.
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.
SHAREHOLDER PROPOSAL47(ITEM NO. 3)
We have been notified by a shareholder, the name and shareholdings of which will be furnished promptly to any shareholder upon written or oral request to Kroger’s Secretary at Kroger’s executive offices, that it intends to propose the following resolution at the annual meeting:
SHAREHOLDER RESOLUTION
WHEREAS, in our “2008 Sustainability Report,” The Kroger Co. (the “Corporation”) asserts, “The humane treatment of animals from farm to table is important to Kroger and our customers.” Further: “We continue to push for the vendor community to embrace new best practices in animal welfare. Kroger is taking an active role in facilitating an industry approach to producing sustainable and comprehensive improvements in animal welfare standards.”
Yet our Corporation lags behind other retailers in an important measure of animal welfare: confining egg-laying hens in cramped, wire, battery cages. The cages are so small the birds can’t spread their wings. While our suppliers are asked to comply with Food Marketing Institute standards, these still allow producers to provide each hen with less space than a letter-sized sheet of paper for nearly her entire life.
This practice is steadily falling out of favor with industry and consumers. For example, Whole Foods Market only sells eggs produced by hens living in cage-free environments, and Trader Joe’s converted all its private-label eggs to cage-free. Safeway and Harris Teeter have implemented policies to double the percentage of cage-free eggs they carry. Eleven percent of the eggs Costco sells (approximately three times our last reported percentage) are cage-free. All shell eggs used by Compass Group, the world’s largest food service company, are cage-free. National chains, including Burger King, Denny’s, Carl’s Jr., and Hardee’s, are phasing in cage-free eggs. Wolfgang Puck uses only cage-free eggs in his restaurants and packaged foods. More than 350 U.S. universities serve cage-free eggs on campus.
In November, Californians overwhelmingly enacted the Prevention of Farm Animal Cruelty Act, making it illegal to confine laying hens in cages so small they cannot spread their wings (with a phase-out period).
The prestigious Pew Commission on Industrial Farm Animal Production—an independent panel including former U.S. Secretary of Agriculture Dan Glickman—concluded after an extensive two-year study that battery cages should be phased out on animal welfare and food safety grounds.
In October,The New York Timeseditorial board condemned battery cages: “[industrial farming] means endless rows of laying hens kept in battery cages so small that the birds cannot even stretch their wings.No philosophy can justify this kind of cruelty, not even the philosophy of cheapness.” (Emphasis added.)
Increasingly, consumers, companies, and voters agree with scientists who have established that egg production “best practices” include not confining birds in battery cages.
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We risk loss of business and reputation if we do not phase out the sale of eggs from battery-caged hens. In doing so, our Corporation can keep pace with competitors, better meet public expectations, and make a meaningful step toward our claim of being an animal welfare leader.
RESOLVED that, in keeping with our animal welfare policy, shareholders encourage our Corporation to establish a schedule for increasing the percentage of eggs stocked from hens not confined in battery cages—confinement consumers widely view as cruel and unacceptable.
THE BOARDOF DIRECTORS RECOMMENDSA VOTEAGAINST THIS PROPOSALFORTHE FOLLOWING REASONS:
As one of the largest supermarket companies in the United States, our commitment, leadership and results with respect to animal welfare matters are well established and recognized within the industry. Animal welfare is an important issue to Kroger, our customers and our associates.
According to experts, both hens housed in cages and cage-free hens can be treated humanely or poorly, with one method not being superior from an animal welfare point of view. Although hens housed in cages cannot flap their wings, they are protected from dust, poor air quality, cannibalism, and parasites. In order to ensure humane treatment of the hens that produce eggs sold to Kroger, we require that our egg suppliers adhere to the animal welfare guidelines adopted by the United Egg Producers. These guidelines, which apply to both caged and cage-free egg production, require suppliers to adhere to modern farming techniques designed to protect the safety of the eggs and to treat the hens humanely.
Many of our customers have indicated a preference for cage-free eggs. That is why we offer cage-free eggs in virtually all of our supermarkets. We will continue to monitor the purchasing practices of our customers and will continue to meet their demand to the extent our suppliers are able to do so. We do not believe, however, that it is appropriate to increase the percentage of cage-free eggs that we stock absent customer demand when it has not been scientifically established that hens housed in modern cages are treated less humanely or less ethically than cage-free hens.
SHAREHOLDER PROPOSAL
(ITEM NO. 5)4)
We have been notified by The Nathan Cummings Foundation, 475 Tenth Avenue, 14th Floor, New York, New York 10018,a shareholder, the beneficial ownername and shareholdings of 171 shares of Kroger common stock,which will be furnished promptly to any shareholder upon written or oral request to Kroger’s Secretary at Kroger’s executive offices, that it intends to propose the following resolution at the annual meeting:
DIRECTOR ELECTION MAJORITY VOTE STANDARD PROPOSAL
WHEREASRESOLVED:: Carbon regulation is increasing as state and local level support for addressing climate change builds. More than 350 mayors have pledged That the shareholders of The Kroger Company (“Company”) hereby request that the Board of Directors initiate the appropriate process to meet Kyoto’s targets for reducing greenhouse gas (GHG) emissions. Atamend the state level, regulations addressing GHG emissions now exist in 28 states.
Support for measures addressing climate change is also increasingly being demonstrated atCompany’s articles of incorporation to provide that director nominees shall be elected by the federal level. In June of 2005, the Senate passed a non-binding “Senseaffirmative vote of the Senate” resolution recognizingmajority of votes cast at an annual meeting of shareholders, with a plurality vote standard retained for contested director elections, that is, when the need for a mandatory cap on GHG emissions. According toInvestor’s Business Daily, “[M]any in Washington are coming to view rigorous greenhouse legislation as inevitable.”
These developments are being reinforced by corporate acceptancenumber of director nominees exceeds the need to address climate change. A 2004 Conference Board report declared that, “The global economy will become less carbon-intensive over time…The real questions are what the pacenumber of the transition will be and who will be the winners and losers…businesses that ignore the debate over climate change will do so at their peril.”
There is increasing recognition that climate change will have important impacts on all sectors.According to Institutional Shareholder Services, “…the scope of impact has expanded beyond the industries generally associated with emissions (energy, oil/gas, auto)… climate change has a measurable impact on companies in all industries.”
Analysts at firms such as Goldman Sachs, McKinsey and JPMorgan Chase have publicly recognized the possible financial implications of climate change and have raised concerns about companies that do not adequately disclose them.
A recent article inInside Green Business reviewed a new study that demonstrates that the retail sector accounts for a large percentage of GHG emissions once supply chain and energy inputs are accounted for, which could shift some of the burden for reducing GHGs from power generators to retailers.
Other retailers such as Home Depot and Wal-Mart have committed to addressing climate change and reducing their emissions and have even encouraged Congress to regulate GHG emissions. According to British-based retailer Marks & Spencer’s Sustainable Development Manager, “[O]f all the sustainability issues we deal with, none poses such an all encompassing threat to the way in which we operate in the long term as climate change.”
RESOLVED: The shareholders request that a committee of independent directors of the Board assess how the company is responding to rising regulatory, competitive, and public pressure to address climate change and report to shareholders (at reasonable cost and omitting proprietary information) by December 1, 2007board seats.
SUPPORTING STATEMENTSTATEMENT:: In order to provide shareholders a meaningful role in director elections, our Company’s director election vote standard should be changed to a majority vote standard. A majority vote standard would require that a nominee receive a majority of the votes cast in order to be elected. The standard is particularly well-suited for the vast majority of director elections in which only board nominated candidates are on the ballot. We believe management hasthat a fiduciary duty to carefully assessmajority vote standard in board elections would establish a challenging vote standard for board nominees and disclose to shareholdersimprove the performance of individual directors and entire boards. Our Company presently uses a plurality vote standard in all pertinent information on itsdirector elections. Under the plurality vote standard, a nominee for the board can be elected with as little as a single affirmative vote, even if a substantial majority of the votes cast are “withheld” from the nominee.
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In response to climate change.strong shareholder support for a majority vote standard in director elections, a strong majority of the nation’s leading companies, including Intel, General Electric, Motorola, Hewlett-Packard, Morgan Stanley, Wal-Mart, Home Depot, Gannett, Marathon Oil, and Safeway have adopted a majority vote standard in company bylaws or articles of incorporation. Additionally, these companies have adopted director resignation policies in their bylaws or corporate governance policies to address post-election issues related to the status of director nominees that fail to win election. However, our Company has responded only partially to the call for change, simply adopting a post-election director resignation policy that sets procedures for addressing the status of director nominees that receive more “withhold” votes than “for” votes. The plurality vote standard remains in place.
We believe taking earlythat a post-election director resignation policy without a majority vote standard in Company bylaws or articles is an inadequate reform. The critical first step in establishing a meaningful majority vote policy is the adoption of a majority vote standard. With a majority vote standard in place, the Board can then consider action on developing post-election procedures to reduce emissionsaddress the status of directors that fail to win election. A majority vote standard combined with a post-election director resignation policy would establish a meaningful right for shareholders to elect directors, and preparereserve for standards could provide competitive advantages, while inaction and opposition to climate change mitigation efforts could expose companies to regulatory and litigation risk and reputational damage.the Board an important post-election role in determining the continued status of an unelected director. We feel that this combination of the majority vote standard with a post-election policy represents a true majority vote standard.
THEBOARDOF DIRECTORS RECOMMENDSA VOTEAGAINST THIS PROPOSALFORTHE FOLLOWING REASONS:
This proposal requests that we adopt a voting standard for director elections that differs from the plurality voting standard, the current default standard under Ohio law. Prior to January 1, 2008, Ohio law required all directors to be elected by a plurality. The plurality voting standard provides that the nominees who receive the most affirmative votes are elected to serve as directors.
After careful consideration, the Board of Directors recommends a vote against this proposal because:
We Have Already Implemented a Majority Voting Policy
Like a number of other large public companies facing this issue, in order to address concerns relating to director candidates who do not receive a majority of the votes cast, we have adopted a majority voting policy. Our policy, as set forth inThe Kroger Co. Board of Directors Guidelines on Issues of Corporate Governance, was adopted on March 15, 2007. TheGuidelines, including our majority vote policy, may be viewed on our website at www.thekrogerco.com.
Our policy provides that, in an uncontested election where cumulative voting is not in effect, any director nominee who receives a greater number of “withheld” votes than “for” votes is required promptly to submit his or her resignation to the Board. In addition:
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Kroger recognizesAny director who tenders his or her resignation will not participate in the important role it plays as a good stewardCommittee’s recommendation or the Board’s consideration of the environment.tendered resignation.
We believe that our policy strikes an appropriate balance in ensuring that our shareholders continue to have a meaningful role in electing directors while preserving the ability of the Board to exercise its independent judgment and to consider all relevant factors in accepting the resignation of a director who receives fewer than a majority of votes cast.
Our Current Process Elects Highly Qualified Directors
We have numerous “green” initiatives in placea strong corporate governance process designed to save energyidentify and preservepropose director nominees who will best serve the interests of Kroger and our natural resources. In 2007 Kroger will publish on-line an expanded version ofshareholders. The Kroger Co. Public Responsibilities ReportBoard maintains a Corporate Governance Committee that will highlight the company’s “green” initiatives in greater detail.
The proposal recommends a committeeis composed entirely of independent directors, assess howand all of the members of the Board, other than the Chairman/Chief Executive Officer, Vice Chairman, and Chief Operating Officer, are independent. The Corporate Governance Committee applies a rigorous set of criteria in identifying director nominees and has established procedures to consider and evaluate persons recommended by shareholders. Our strong corporate governance has been recognized by RiskMetrics Group. According to its March 1, 2009 rankings, RiskMetrics has ranked Kroger ahead of 96.8% of the companies in the Food and Staples Retailing group, as measured by the RiskMetrics Group Corporate Governance Quotient.
As a result of these practices, our shareholders have consistently elected, by a plurality, highly qualified directors from diverse business backgrounds, substantially all of whom have been “independent” within standards adopted by the New York Stock Exchange. Adoption of a strict majority voting standard seems especially unwarranted in our case. Changing our current voting system to majority voting would have had no effect on director elections since Kroger’s recapitalization in 1988. The Board believes that the votes over this period reflect our shareholders’ confidence in the Board and in the governance protections the Board has implemented.
The Proposal Causes Uncertainty
In contrast to our existing majority voting policy, the majority voting amendment requested by the proposal causes uncertainty. Under Ohio law, an incumbent director who is addressing climate change.not re-elected “holds over” and continues to serve with the same voting rights and powers until his or her successor is elected and qualified. If the proposal were adopted, we could not force a director who failed to receive a majority vote to leave the Board until his or her successor is elected and qualified. In contrast, under our existing majority voting policy, a director who receives more “withhold” votes than “for” votes is required promptly to tender his or her resignation. The Board in turn will act on the tendered resignation after considering all relevant facts and circumstances in a process that will be completed and publicly disclosed promptly.
The Proposal is Premature
Ohio law requires the plurality voting standard in director elections unless the corporation’s articles of incorporation provide otherwise. Our Board cannot adopt majority voting in our Code of Regulations, an approach that other companies have recently taken. We can adopt majority voting only through shareholder approval of an amendment to our Articles of Incorporation. We believe that it is premature to ask our shareholders to amend our Articles of Incorporation to adopt majority voting in light of the on-going discussions and debates in this developing area. The legal community, shareholder advocates, governance experts, public companies and other groups continue to evaluate and debate the benefits, disadvantages and consequences of plurality and majority voting and whether some modified model of plurality voting might be preferable.
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Plurality voting has long been the accepted standard, and the rules governing plurality voting are well established and widely understood. Any change in voting standards should be undertaken with full understanding of the consequences. We do not believe that our shareholders should be asked to approve a proposal relating to a voting system without the benefit of a consensus in this area and a greater understanding of the full ramifications of its adoption. We have been monitoring, and we will continue to monitor, developments on this topic. We do not believe that our interests, or our shareholders’ interests, would be best served by adopting such a committee report in many ways would be duplicative of the current efforts underway. It would not benefit shareholders and would be a waste of time, resources and money for Kroger and our shareholders.change.
We have developed our own form of reporting that we believe provides beneficial and cost effective disclosure to our shareholders on the environmental issues that are relevant to our business operations.The expanded report will be published on the Kroger website before the end of 2007.
________________
SHAREHOLDER PROPOSALS — 2008– 2010 ANNUAL MEETING. Shareholder proposals intended for inclusion in our proxy material relating to Kroger’s annual meeting in June 20082010 should be addressed to the Secretary of Kroger and must be received at our executive offices not later than January 15, 2008.2010. These proposals must comply with the proxy rules established by the SEC. In addition, the proxy solicited by the Board of Directors for the 20082010 annual meeting of shareholders will confer discretionary authority to vote on any shareholder proposal presented at the meeting unless we are provided with notice of the proposal on or before March 31, 2008.2010. Please note, however, that Kroger’s Regulations require a minimum of 45 days’ advance notice to Kroger in order for a matter to be brought before shareholders at the annual meeting. As a result, any attempt to present a proposal without notifying Kroger on or before March 31, 2010, will be ruled out of order and will not be permitted.
____________________________________
Attached to this Proxy Statement is Kroger’s 20062008 Annual Report which includes a brief description of Kroger’s business, including the general scope and nature thereof during 2006,2008, together with the audited financial information contained in our 20062008 report to the SEC on Form 10-K.A copy of that report is available to shareholders on request by writing to: Scott M. Henderson, Treasurer, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100 or by calling 1-513-762-1220. Our SEC filings are available to the public from the SEC’s web site athttp://www.sec.gov.atwww.sec.gov.
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.
By order of the Board of Directors, | |
Paul W. Heldman, Secretary |
4950
Appendix 1_________
2008 ANNUAL REPORT
_________
REGULATIONSOFTHEKROGERCO.____________ARTICLE ISHAREHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders shall be held on the third Friday in May, or on such other date as may be designated by the board of directors, at such hour as may be designated in the notice of the meeting.
SECTION 2. ORDER OF BUSINESS.
A. Presiding Officer. The Chairman, or such other officer as may be designated by the board ofdirectors, will preside over all meetings of shareholders.
B. Authorized Business. Only business that is properly brought may be conducted during any meetingof shareholders. In the case of annual meetings of shareholders, matters set forth in the Company’s notice ofannual meeting of shareholders, along with any Company presentation, will be properly brought before themeeting. For business properly to be brought by a shareholder before the annual meeting, advance noticeof such business must be received by the secretary of the Company at the principal office of the Companynot less than 45 calendar days prior to the date on which the Company’s proxy statement for the prior year’sannual meeting of shareholder was first mailed to shareholders. Such notice must include a descriptionin reasonable detail of the business desired to be brought along with the reasons for conducting suchbusiness, the name and record address of the shareholder proposing such business, the number of sharesof the Company owned of record or beneficially by the shareholder along with evidence of ownershipthereof, a description of any material interest the shareholder has in the subject of the business requestedto be conducted, and any arrangements or understandings between such shareholder and any other personor persons (including their names) in connection with the proposal of such business, a representationthat the shareholder intends to appear in person at the meeting to bring such matter before the meeting,and such other information regarding the business proposed by such shareholder as would be requiredto be included in the proxy statement filed pursuant to the proxy rules of the Securities and ExchangeCommission. Without limiting the foregoing, if the business proposed to be brought by such shareholderat the annual meeting is the nomination of a person or persons for election to the board of directors, thenthe notice also must include as to each person whom the shareholder proposes to nominate for election asa director the name, age, business address and residence address of the person, the principal occupationor employment of the person, the number of shares of the Company owned of record or beneficially by theperson, and any other information relating to the person that would be required to be included in a proxystatement relating to the election of directors.
In the case of a special meeting called by the board of directors or an officer or director of the Company, only matters set forth in the Company’s notice of the meeting of shareholders, along with any Company presentation, will properly be brought before the meeting. In the case of a special meeting called by a shareholder, only matters set forth in the notice of the meeting of shareholders will properly be brought before the meeting. Such notice by a shareholder must include a description in reasonable detail of the business desired to be brought along with the reasons for conducting such business, the name and address of the shareholder proposing such business, the number of shares of the Company owned of record
50
or beneficially by the shareholder along with evidence of ownership thereof, a description of any materialinterest the shareholder has in the subject of the business requested to be conducted and any arrangementsor understandings between such shareholder and any other person or persons (including their names) inconnection with the proposal of such business, a representation that the shareholder intends to appear inperson at the meeting to bring such matter before the meeting, and such other information regarding thebusiness proposed by such shareholder as would be required to be included in the proxy statement filedpursuant to the proxy rules of the Securities and Exchange Commission.
C. Rules of Conduct. Rules of conduct governing all meetings of shareholders will be prepared by the Company and will be available to shareholders at the commencement of the meeting. Shareholders that desire to receive a copy of the rules of conduct prior to the date of a meeting may receive a copy of the then current rules of conduct upon written request to the secretary of the Company at the Company’s principal office.
SECTION23. PLACE OF MEETINGS. All meetings of the shareholders shall be held at the principal office of the Company in the City of Cincinnati or at such other placeinwithin or without the City of Cincinnati as may be designated in the notice of the meeting, provided that if the meeting is to be held outside of the City of Cincinnati such alternate location must first be approved by the board of directors.
ARTICLE IIBOARD OF DIRECTORS
SECTION 1. NUMBER. The Board of directors shall consist of not less than nine nor more than twenty-one members, the exact number to be fixed and determined from time to time by the Board of directors or at a meeting of the shareholders called for the purpose of electing directors, at which a quorum is present, by the affirmative vote of the holders of 75% of the shares which are entitled to vote on such proposal.
Members of the Board of directors shall be elected annually to terms of one year, provided that all directors then serving on the effective date of these regulations will continue to serve out the remainder of their unexpired terms.
SECTION 2. MEETINGS. An organization meeting of the Board of directors may be held, without notice, immediately after the annual meeting of the shareholders for the purpose of electing officers and attending to such other business as may properly come before the meeting. Additional regular meetings may be held at such times as may be determined from time to time by the directors.
SECTION 3. PLACE OF MEETINGS. All meetings of the Board of directors shall be held at the principal office of the Company in the City of Cincinnati or at such other place within or without the State of Ohio as may be designated in the notice of the meeting.
SECTION 4. COMMITTEES. The Board of directors may create an executive committee and any other committee of the directors, to consist of not less than 3 directors, and may delegate to any such committee any of the authority of the directors, however conferred, other than that of filling vacancies among the directors. The directors may appoint one or more directors as alternate members of any such committee, who may take the place of any absent member or members at any meeting of such committee. A majority of any such committee shall constitute a quorum for a meeting, and the act of a majority of the members of the committee present at a meeting at which a quorum is present shall be the act of the committee. The president shall be a member of the executive committee.
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SECTION 5. REMOVAL AND VACANCIES.
A. Removals. All of the directors or any individual director may be removed by the holders of 75% of the shares then entitled to vote at an election of directors, but only for cause.
B. Vacancies. Any vacancy in the Board of directors shall be filled only by a vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Any director so elected shall serve until the next election of directors and until the director’s successor shall be elected and qualified.
ARTICLE IIIOFFICERS
SECTION 1. NUMBER AND TITLE. The officers of the Company shall be a president, such number of vice presidents as the Board of directors may from time to time determine, a secretary, a treasurer, and, in the discretion of the Board of directors, a chairman of the Board, one or more assistant secretaries, one or more assistant treasurers, and such other officers and assistant officers as the Board of directors may from time to time determine.
SECTION 2. POWERS AND DUTIES. Subject to such limitations as the Board of directors or the executive committee may from time to time prescribe, the officers of the Company shall each have such powers and perform such duties as generally pertain to their respective offices and such further powers and duties as may be conferred from time to time by the Board of directors or the executive committee or, in the case of all officers other than the chairman of the Board and the president, by the president.
SECTION 3. BONDS. Any officer or employee may be required to give bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of directors may from time to time determine. The premium on any bond or bonds provided for herein shall be paid by the Company.
ARTICLE IVINDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
A. Each director, officer or employee of the Company, each former director, officer or employee of the Company, and each person who is serving or shall have served at the request of the Company as a director, officer or employee of another corporation (his heirs, executors or administrators) shall be indemnified by the Company against expenses actually and necessarily incurred by him, and also against expenses, judgments, decrees, fines, penalties, or amounts paid in settlement, in connection with the defense of any pending or threatened action, suit, or proceeding, criminal or civil to which he is or may be made a party by reason of being or having been such director, officer or employee, provided,
The determination as to (2) and (3) and, in the absence of an adjudication as to (1) by a court of competent jurisdiction, the determination as to (1) shall be made by the directors of the Company acting at a meeting at which a quorum consisting of directors who are not parties to or threatened with any such action, suit, or proceeding is present. Any director who is a party to or threatened with any such action,
52
suit or proceeding shall not be qualified to vote and, if for this reason a quorum of directors cannot be obtained to vote on such indemnification, no indemnification shall be made except in accordance with the procedure set forth in paragraph B of this Article IV.
B. In the event that a quorum of directors qualified to vote cannot be obtained to make any determination required by paragraph A, such determination may be made in writing signed by a majority of the directors who are qualified to vote regardless of a lack of quorum or, if there be less than three directors qualified to vote, by a board of three disinterested persons, who may be officers or employees of the Company, of good character appointed by the Board of directors to make such determination.
C. Notwithstanding paragraph A of Article IV, the Board of directors in its discretion may empower the president or any vice president of the Company to make the determinations, and cause the Company to indemnify any employee of the Company or other corporation which such employee is serving at the request of the Company (his heirs, executors or administrators), who is not a director or officer of the Company or such other corporation against any or all of the expenses, described and set forth in such paragraph A of Article IV.
D. The foregoing right of indemnification shall not be deemed exclusive of any other rights to which such director, officer or employee may be entitled under the articles, the regulations, any agreement, any insurance purchased by the corporation, vote of shareholders or otherwise as a matter of law.
ARTICLE VCERTIFICATES FOR SECURITIES
If any certificate for securities of the Company should be lost, stolen or destroyed, any one of the president, the treasurer, or the secretary, upon being furnished with satisfactory evidence as to the loss, theft or destruction and as to the ownership of the certificate, and upon being furnished with appropriate security or indemnity to hold the Company harmless, may authorize a new certificate to be issued in lieu of the lost, stolen or destroyed certificate.
ARTICLE VISEAL
The seal of the Company shall be in such form as the Board of directors may from time to time determine.
ARTICLE VIIAMENDMENTS
These regulations may be amended or repealed at any meeting of shareholders called for that purposeor without such meetingby the affirmative voteor consentof the holders of record of shares entitling them to exercise a majority of the voting power on such proposal, except that the affirmative voteor consentof the holders of record of shares entitling them to exercise 75% of the voting power on such proposal shall be required to amend, alter, change or repeal Sections 1 or 5 of Article II or this Article VII, or to amend, alter, change or repeal these regulations in any way inconsistent with the intent of the foregoing provisions.
As amendedJune 28, 2007
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_______2006 ANNUAL REPORT_______
FINANCIAL REPORT 20062008
MANAGEMENT’S RESPONSIBILITY FORFOR FINANCIAL REPORTING
The management of The Kroger Co. has the responsibility for preparing the accompanying 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.
The Company’s financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose selection has been approved by the shareholders. Management has made available to PricewaterhouseCoopers LLP all of the Company’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 the Company’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 the Company and available on the Company’s website atwww.kroger.com.www.thekrogerco.com.The Kroger Co. Policy on Business Ethics addresses, among other things, the necessity of ensuring open communication within the Company; potential conflicts of interests; compliance with all domestic and foreign laws, including those related to financial disclosure; and the confidentiality of proprietary information. The Company maintains a systematic program to assess compliance with these policies.
MANAGEMENT’S REPORTONON INTERNAL CONTROL OVEROVER FINANCIAL REPORTING
The management of the Company 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, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that the Company’s internal control over financial reporting was effective as of February 3, 2007.January 31, 2009.
Our management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of February 3, 2007, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which can be found on page A-31 of this Annual Report.
David B. Dillon | J. Michael Schlotman |
Chairman of the Board and | Senior Vice President and |
Chief Executive Officer | Chief Financial Officer |
A-1
SELECTEDFINANCIALDATA | ||||||||||||||||
Fiscal Years Ended | ||||||||||||||||
February 3, | January 28, | January 29, | January 31, | February 1, | ||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||
(53 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | ||||||||||||
(In millions, except per share amounts) | ||||||||||||||||
Sales | $ | 66,111 | $ | 60,553 | $ | 56,434 | $ | 53,791 | $ | 51,760 | ||||||
Earnings (loss) before cumulative effect of | ||||||||||||||||
accounting change | 1,115 | 958 | (104 | ) | 285 | 1,218 | ||||||||||
Cumulative effect of accounting change (1) | — | — | — | — | (16 | ) | ||||||||||
Net earnings (loss) | 1,115 | 958 | (104 | ) | 285 | 1,202 | ||||||||||
Diluted earnings (loss) per share: | ||||||||||||||||
Earnings (loss) before cumulative effect of | ||||||||||||||||
accounting change | 1.54 | 1.31 | (0.14 | ) | 0.38 | 1.54 | ||||||||||
Cumulative effect of accounting change (1) | — | — | — | — | (0.02 | ) | ||||||||||
Net earnings (loss) | 1.54 | 1.31 | (0.14 | ) | 0.38 | 1.52 | ||||||||||
Total assets | 21,215 | 20,482 | 20,491 | 20,767 | 20,349 | |||||||||||
Long-term liabilities, including obligations | ||||||||||||||||
under capital leases and financing | ||||||||||||||||
obligations | 8,711 | 9,377 | 10,537 | 10,515 | 10,569 | |||||||||||
Shareowners’ equity | 4,923 | 4,390 | 3,619 | 4,068 | 3,937 | |||||||||||
Cash dividends per common share (2) | 0.195 | — | — | — | — |
COMMONSTOCKPRICERANGE | |||||||||||||
2006 | 2005 | ||||||||||||
Quarter | High | Low | High | Low | |||||||||
1st | $ | 20.98 | $ | 18.05 | $ | 18.22 | $ | 15.15 | |||||
2nd | $ | 23.23 | $ | 19.37 | $ | 20.00 | $ | 16.46 | |||||
3rd | $ | 24.15 | $ | 21.49 | $ | 20.88 | $ | 19.09 | |||||
4th | $ | 25.96 | $ | 21.12 | $ | 20.58 | $ | 18.42 |
A-2SELECTED FINANCIAL DATA
Fiscal Years Ended | ||||||||||||||||||||||||||
January 31, | February 2, | February 3, | January 28, | January 29, | ||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
(52 weeks) | (52 weeks) | (53 weeks) | (52 weeks) | (52 weeks) | ||||||||||||||||||||||
(In millions, except per share amounts) | ||||||||||||||||||||||||||
Sales | $ | 76,000 | $ | 70,235 | $ | 66,111 | $ | 60,553 | $ | 56,434 | ||||||||||||||||
Net earnings (loss) | 1,249 | 1,181 | 1,115 | 958 | (104 | ) | ||||||||||||||||||||
Diluted earnings (loss) per share: | ||||||||||||||||||||||||||
Net earnings (loss) | 1.90 | 1.69 | 1.54 | 1.31 | (0.14 | ) | ||||||||||||||||||||
Total assets | 23,211 | 22,293 | 21,210 | 20,478 | 20,491 | |||||||||||||||||||||
Long-term liabilities, including obligations | ||||||||||||||||||||||||||
under capital leases and financing | ||||||||||||||||||||||||||
obligations | 10,311 | 8,696 | 8,711 | 9,377 | 10,537 | |||||||||||||||||||||
Shareowners’ equity | 5,176 | 4,914 | 4,923 | 4,390 | 3,619 | |||||||||||||||||||||
Cash dividends per common share | 0.345 | 0.29 | 0.195 | — | — |
COMMON STOCK PRICE RANGE
2008 | 2007 | |||||||||||
Quarter | High | Low | High | Low | ||||||||
1st | $ | 28.13 | $ | 23.39 | $ | 30.43 | $ | 24.74 | ||||
2nd | $ | 30.99 | $ | 25.86 | $ | 31.94 | $ | 23.95 | ||||
3rd | $ | 29.91 | $ | 22.30 | $ | 30.00 | $ | 25.30 | ||||
4th | $ | 29.03 | $ | 22.40 | $ | 29.35 | $ | 24.23 | ||||
Main trading market: New York Stock Exchange (Symbol KR) | ||||||||||||
Number of shareholders of record at year-end 2008: 45,939 | ||||||||||||
Number of shareholders of record at March 27, 2009: 45,712 |
The Company did not pay dividends on its Common Stock during fiscal year 2005. During fiscal 2006, the Company’s Board of Directors adopted a dividend policy and paid three quarterly dividends of $0.065 per share. On March 1,During fiscal 2007, the Company paid its fourthone quarterly dividend of $0.065 and three quarterly dividends of $0.075. During fiscal 2008, the Company paid one quarterly dividend of $0.075 and three quarterly dividends of $0.09. On March 1, 2009, the Company paid a quarterly dividend of $0.09 per share. On March 15, 2007,12, 2009, the Company announced that its Board of Directors had increased thehas declared a quarterly dividend to $0.075of $0.09 per share, payable on June 1, 2007,2009, to shareholders of record at the close of business on May 15, 2007.2009.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information regarding shares outstanding and available for issuance under the Company’s existing equity compensation plans.
(a) | (b) | (c) | |||||
Plan Category | Number of securities | Weighted-average | Number of securities | ||||
to be issued upon | exercise price of | remaining for future | |||||
exercise of | outstanding options, | issuance under equity | |||||
outstanding options, | warrants and rights | compensation plans | |||||
warrants and rights | excluding securities | ||||||
reflected in column (a) | |||||||
Equity compensation plans approved by | |||||||
security holders | 51,918,179 | $ | 20.09 | 17,595,505 | |||
Equity compensation plans not approved by | |||||||
security holders | — | $ | — | — | |||
Total | 51,918,179 | $ | 20.09 | 17,595,505 |
A-3A-2
PERFORMANCE GRAPH
Set forth below is a line graph comparing the five-year cumulative total shareholder return on Kroger’s common stock, based on the market price of the common stock and assuming reinvestment of dividends, with the cumulative total return of companies in the Standard & Poor’s 500 Stock Index, and the Peer Groupa peer group composed of food and drug companies.companies and a former peer group.
Historically, our peer group has consisted of the major food store companies. In recent years there have been significant changes in the industry, including consolidation and increased competition from supercenters, drug chains, and drug chains.discount stores. As a result, in 2003several years ago we changed our peer group ( the “Peer(the “Former Peer Group”) to include companies operating supermarkets, supercenters and warehouse clubs in the United States as well as the major drug chains with which Kroger competes. This year, we changed our peer group (the “Peer Group”) once again to add Tesco plc, as it has become a significant competitor in the U.S. market.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*OF THE KROGER CO., S&P 500 AND PEER GROUP**
Base | INDEXED RETURNS | Base | INDEXED RETURNS | ||||||||||||||||||||
Period | Years Ending | Period | Years Ending | ||||||||||||||||||||
Company Name/Index | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||
The Kroger Co. | 100 | 74.23 | 91.15 | 84.80 | 91.34 | 128.31 | |||||||||||||||||
The Kroger Co. | 100 | 93.04 | 100.22 | 140.78 | 143.01 | 125.42 | |||||||||||||||||
S&P 500 Index | 100 | 79.50 | 106.98 | 112.69 | 125.80 | 144.66 | 100 | 105.34 | 117.59 | 135.22 | 132.78 | 80.51 | |||||||||||
Peer Group | 100 | 76.05 | 88.72 | 94.99 | 93.12 | 102.54 | 100 | 108.99 | 107.87 | 122.24 | 125.95 | 102.29 | |||||||||||
Former Peer Group | 100 | 107.06 | 104.95 | 115.57 | 119.97 | 96.11 |
Kroger’s fiscal year ends on the Saturday closest to January 31.
A-4A-3
* | Total assumes $100 invested on February | |
** | The Peer Group consists of Albertson’s, Inc., Costco Wholesale Corp., CVS Corp, Delhaize Group SA (ADR), Great Atlantic & Pacific Tea Company, Inc., Koninklijke Ahold NV (ADR), Marsh Supermarkets Inc. (Class A), Safeway, Inc., Supervalu Inc., Target Corp., Tesco plc, Wal-Mart Stores Inc., Walgreen Co., Whole Foods Market Inc. and Winn-Dixie Stores, Inc. Albertson’s, Inc., was substantially acquired by Supervalu in July 2006, and is included through 2005. Marsh Supermarkets was acquired by Marsh Supermarkets Holding Corp. in September 2006, and is included through 2005. Winn-Dixie emerged from bankruptcy in 2006 as a new issue and returns for the old and new issue were calculated then weighted to determine the 2006 return. | |
*** | The Former Peer Group consists of Albertson’s, Inc., Costco Wholesale Corp., CVS Corp, Delhaize Group SA (ADR), Great Atlantic & Pacific Tea Company, Inc., Koninklijke Ahold NV (ADR), Marsh Supermarkets Inc. (Class A), Safeway, Inc., Supervalu Inc., Target Corp., Wal-Mart Stores Inc., Walgreen Co., Whole Foods Market Inc. and Winn-Dixie Stores, Inc. Albertson’s, Inc., was substantially acquired by Supervalu in July 2006, and is included through 2005. Marsh Supermarkets was acquired by Marsh Supermarkets Holding Corp. in September 2006, and is included through 2005. Winn-Dixie | |
|
Data supplied by Standard & Poor’s.
The foregoing Performance Graph will not be deemed incorporated by reference into any other filing, absent an express reference thereto.
A-5A-4
ISSUERPURCHASESOFEQUITYSECURITIES | ||||||||||
Maximum | ||||||||||
Total Number | Dollar | |||||||||
of Shares | Value of Shares | |||||||||
Purchased as | that May Yet Be | |||||||||
Part of | Purchased | |||||||||
Total | Publicly | Under | ||||||||
Number | Average | Announced | the Plans or | |||||||
of Shares | Price Paid | Plans or | Programs (3) | |||||||
Period (1) | Purchased | Per Share | Programs (2) | (in millions) | ||||||
First period - four weeks | ||||||||||
November 5, 2006 to December 2, 2006 | 1,176,497 | $ 21.99 | 1,175,000 | $ 297 | ||||||
Second period - four weeks | ||||||||||
December 3, 2006 to December 30, 2006 | 1,203,899 | $ 23.18 | 1,200,000 | $ 271 | ||||||
Third period - five weeks | ||||||||||
December 31, 2006 to February 3, 2007 | 2,205,944 | $ 23.75 | 2,200,000 | $ 233 | ||||||
Total | 4,586,340 | $ 23.15 | 4,575,000 | $ 233 |
ISSUER PURCHASESOF EQUITY SECURITIES
Total Number | Maximum Dollar | |||||||||||||
of Shares | Value of Shares | |||||||||||||
Purchased as | that May Yet Be | |||||||||||||
Part of Publicly | Purchased Under | |||||||||||||
Total Number | Average | Announced | the Plans or | |||||||||||
of Shares | Price Paid | Plans or | Programs (3) | |||||||||||
Period (1) | Purchased | Per Share | Programs (2) | (in millions) | ||||||||||
First period – four weeks | ||||||||||||||
November 9, 2008 to December 6, 2008 | 13,315 | $28.63 | — | $493 | ||||||||||
Second period – four weeks | ||||||||||||||
December 7, 2008 to January 3, 2009 | 479,385 | $25.62 | 450,500 | $493 | ||||||||||
Third period – four weeks | ||||||||||||||
January 4, 2009 to January 31, 2009 | 164 | $24.77 | — | $493 | ||||||||||
Total | 492,864 | $25.70 | 450,500 | $493 |
(1) | The reported periods conform to the Company’s fiscal calendar composed of thirteen 28-day periods. The fourth quarter of | |
(2) | Shares were repurchased under | |
(3) | Amounts shown in this column reflect amounts remaining under the |
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BUSINESS
The Kroger Co. was founded in 1883 and incorporated in 1902. As of February 3, 2007,January 31, 2009, the Company was one of the largest retailers in the United States based on annual sales. The Company also manufactures and processes some of the food for sale in its supermarkets. The Company’s principal executive offices are located at 1014 Vine Street, Cincinnati, Ohio 45202, and its telephone number is (513) 762-4000. The Company maintains a web site (www.kroger.com) that includes additional information about the Company. The Company makes available through its web site, free of charge, its annual reports on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K, including amendments thereto. These forms are available as soon as reasonably practicable after the Company has filed with, or furnished them electronically withto, the SEC.
The Company’s revenues are earned and cash is generated as consumer products are sold to customers in its stores. The Company earns income predominantly by selling products at price levels that produce revenues in excess of its costs to make these products available to its customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses.
EMPLOYEES
TheAs of January 31, 2009, the Company employsemployed approximately 310,000326,000 full and part-time employees. A majority of the Company’s employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several different international unions. There are approximately 320309 such agreements, usually with terms of three to five years.
During fiscal 2007,2009, the Company has major labor contracts expiringto be negotiated covering store employees in southern California, Cincinnati, Detroit, Houston, Memphis, Toledo, SeattleAlbuquerque, Arizona, Atlanta, Dallas, Dayton, Denver and West Virginia.Portland. Negotiations in 20072009 will be challenging as the Company must have competitive cost structures in each market while meeting our associates’ needs for good wages, and affordable health care.care and increases in Company pension contributions due to the recent downturns in the equity markets.
STORES
As of February 3, 2007,January 31, 2009, the Company operated, either directly or through its subsidiaries, 2,4682,481 supermarkets and multi-department stores, 631781 of which had fuel centers. Approximately 39%43% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. The Company’s current strategy emphasizes self-development and ownership of store real estate. The Company’s stores operate under several banners that have strong local ties and brand equity. 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; or marketplace stores.warehouses.
The combo stores are the primary food store format. They are typically able to earn a return above the Company’s cost of capital by drawing customers from a 2 – 2½ mile radius. The Company believes 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. Many combo stores include a fuel center.
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, electronics, automotive products, toys and fine jewelry. Many multi-department stores include a fuel center.
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Marketplace stores are smaller in size than multi-department stores. They offer full-service grocery and pharmacy departments as well as an expanded general merchandise area that includes outdoor living products, electronics, home goods and toys. Many marketplace stores include a fuel center.
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 31, 2009, the Company operates, either directly oroperated through subsidiaries, 779684 convenience stores and 412385 fine jewelry stores. Substantially allAll of our fine jewelry stores located in malls are operated in leased locations. Subsidiaries operated 687 of theIn addition, 87 convenience stores while 92 were operated through franchise agreements. Approximately 44%50% 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
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 substantially all of the Company’s consolidated sales, earnings and total assets, are its only reportable segment. All of the Company’s operations are domestic. Revenues, profit and losses, and total assets are shown in the Company’s Consolidated Financial Statements set forth in Item 8 below.
MERCHANDISINGAND MANUFACTURING
Corporate brand products play an important role in the Company’s merchandising strategy. Supermarket divisions typically stock approximately 11,00014,000 private label items. The Company’s corporate brand products are produced and sold in three quality “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, King Soopers, etc.), which represents the majority of the Company’s private label items, is designed to be equal to or better thansatisfy our customers’ families with quality products. Before Kroger will carry a banner brand product, the national brandproduct quality must meet our customers’ expectations in taste and carries the “Try It, Like It, or Get the National Brand Free” guarantee.efficacy, and we guarantee it. Kroger Value is the value brand, designed to deliver good quality at a very affordable price.
Approximately 55%40% of the corporate brand units sold are produced in the Company’s manufacturing plants; the remaining corporate brand items are produced to the Company’s strict specifications by outside manufacturers. The Company performs 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 February 3, 2007,January 31, 2009, the Company operated 4240 manufacturing plants. These plants consisted of 18 dairies, 1110 deli or bakery plants, five grocery product plants, three beverage plants, threetwo meat plants and two cheese plants.
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MANAGEMENT’S DISCUSSIONAND ANALYSISOF
FINANCIAL CONDITIONAND
RESULTSOF OPERATIONPERATIONS
OUR BUSINESS
The Kroger Co. was founded in 1883 and incorporated in 1902. It is one of the nation’s largest retailers, as measured by revenue, operating 2,4682,481 supermarket and multi-department stores under two dozen banners including Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith’s, Fry’s, Fry’s Marketplace, Dillons, QFC and City Market. Of these stores, 631 had781 have fuel centers. We also operate 779771 convenience stores and 412385 fine jewelry stores.
Kroger operates 4240 manufacturing plants, primarily bakeries and dairies, which supply approximately 55%40% of the corporate brand units sold in the Company’sour retail outlets.
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 ourthe 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 operations are reported as a single reportable segment: the retail sale of merchandise to individual customers.
OUR 20062008 PERFORMANCE
The continued focusBy focusing on the customer through our Customer 1st strategy, we were able to report solid results for fiscal year 2008 in a particularly tough economy. At the beginning of our associates on delivering improved service, product selection and valuethe year, we expected to our customers generated a year of significantly improvedgrow supermarket identical supermarket sales growth, excluding fuel sales, in 2006. Our identical supermarket sales, excluding fuel, sales, grew at 5.6% in 2006. These results followed strong 2005by 3% to 5%. For 2008, supermarket identical supermarket sales, excluding fuel, sales,were 5.0%, meeting the upper end of 3.5% in 2005our original guidance.
At the outset of fiscal year 2008, Kroger’s earnings guidance was a range of $1.83 to $1.90 per diluted share. Our 2008 earnings was $1.90 per diluted share or $1.92 per diluted share, excluding the effect of a $.02 per diluted share charge for damage and 0.8% in 2004.disruption caused by Hurricane Ike. Our 2008 earnings of $1.92 per diluted share, excluding the charge for damage and disruption caused by Hurricane Ike, represents a growth rate of 13.6% over Kroger’s 2007 full-year earnings of $1.69 per diluted share. We believe that this growth plus Kroger’s dividend yield of more than 1%, creates a strong return for shareholders.
IncreasingOur market share helped us achievealso rose in 2008. Based on our results. Our internal data and analysis, showswe estimate that we hold the #1 or #2our market share positionincreased approximately 61 basis points in 38 of2008 across our 4442 major markets. We define a major market as one in which we operate nine or more stores. OurThis is the fourth consecutive year Kroger has achieved significant market share increased in 36 of these 44 major markets, declined in seven and remained unchanged in one. On a volume-weighted basis, our overallgain. Over the past four years combined, Kroger’s market share in these 44our major markets has increased approximately 65225 basis points during 2006.points. Market share is critical to us because it allows us to leverage the fixed costs in our business over a wider revenue base. We hold the number one or number two market share position in 39 of or our 42 major markets. Our fundamental operating philosophy is to maintain and increase market share.
We compete against a total of 1,262 supercenters, an increase of 133 over 2005. There are 34These market share results demonstrate to us that our long-term strategy is working. As population growth continues in the major markets in which supercenters have achieved at least a #3where we operate, we intend to continue to grow Kroger’s business by maintaining our existing strong market share position. Our overall market share in these 34 major markets,and by building on a volume-weighted basis, increased over 70 basis points during 2006. Our market share increased in 27 of these 34 major markets, declined in six and remained unchanged in one.
All of the market share estimates described above are based on our internal data and analysis.additional opportunities for sales growth. We believe they are reliable but can provide no other assurance of reliability. We believe this market share analysis illustratesestimate that Kroger continued to achieve significant growth in 2006, even in the face of aggressive expansion in the supermarket industry by supercenters, intense price competition, increasing fragmentation of retail formats and market consolidation. Our retail price investments, combined with our service and selling initiatives, led to these market share gains in 2006. We believe there is still significant room for growth. In our 44 major markets, we estimate approximately 47%45% of the share in thoseour major markets continues to be– as much as $100 billion – is held by competitors without ourwho do not have Kroger’s economies of scale.
We were able Our economies of scale allow us to balance our sales growth with earnings growth. Our net earnings increased 16.4%deliver increasing value to $1.54 per diluted sharecustomers, which is a competitive edge, particularly in 2006, from $1.31 per diluted share in 2005. Earnings growth was primarily driven by strong identical supermarket sales growth, improving operating margins and fewer sharestoday’s economic climate.
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outstanding. In addition, fiscal 2006 included a 53rd week that benefited the year by an estimated $0.07 per diluted share, adjustments to certain deferred tax balances that benefited the year by $0.03 per diluted share, expense totaling $0.03 per diluted share for increases in legal reserves, and $0.06 per diluted share of expense for the adoption of stock option expensing.
FUTURE EXPECTATIONS
While we were pleased with our 2006 results, we must continue to adjust ourKroger’s business model is structured to meet the changing needs and expectations of our customers. Our plan requires balance between sales growth, earnings growth and profitable capital investment.
We expect to achieve identical supermarket sales growth through merchandising and operating initiatives that improve the shopping experience for our customers and continue building customer loyalty. We expect identical supermarket sales growth, excluding fuel sales, of 3%-5% in 2007.
To the extent that these sales initiatives involve price reductions or additional costs, we expect they will be funded by operating cost reductions and productivity improvements. We expect sales improvements and cost reductions, combined with fewer shares outstanding, to driveproduce sustainable earnings per share growth in 2007.a variety of economic and competitive conditions, primarily through strong identical sales growth. We expectbelieve this is the right approach to produce sustainable earnings per sharegrowth over a long period of time. We recognize that continual investment in 2007 of $1.60-$1.65 per diluted share. This represents earnings per share growth of approximately 9%-12% in 2007, net of the effect of a 53rd week in fiscal 2006 of approximately $0.07 per diluted share.
In addition, on March 15, 2007, the Board of Directors declared an increase in Kroger’s quarterly dividendour Customer 1st strategy is necessary to $0.075 per share.
Further discussion ondrive strong, sustainable identical sales growth. We believe that this Customer 1st strategy along with our industry, the current economic environmentfinancial strategies are delivering value to customers, shareholders, bondholders, and our related strategic plans is included in the “Outlook” section.associates, and so we remain committed to our plan.
RESULTSOF OPERATIONS
The following discussion summarizes our operating results for 20062008 compared to 20052007 and for 20052007 compared to 2004.2006. Comparability is affected by certain income and expense items that fluctuated significantly between and among the periods, including goodwill and asset impairment charges and a labor dispute in southern California in 2004.periods.
Net Earnings (Loss)
Net earnings totaled $1,115 million$1.2 billion for 2006,2008, compared to net earnings totaling $958 million$1.2 billion in 20052007 and a net loss totaling $104 million$1.1 billion in 2004.2006. The increase in our net earnings for 2006,2008, compared to 20052007 and 2004,2006, resulted from improvements in the southern California market and the leveraging of fixed costs with strong non-fuel identical supermarket sales growth as well as the effect of a 53rd week in 2006.and strong fuel results. In addition, 2004 was negatively affected by goodwill charges totaling $904 million, as well as2006 net earnings included a labor dispute in southern California.53rd week.
Earnings per diluted share totaled $1.54$1.90 or $1.92, excluding the effect of a $.02 per diluted share charge for damage and disruption caused by Hurricane Ike, in 2006,2008, compared to $1.31 per share in 2005 and a net loss of $0.14$1.69 per diluted share in 2004.2007 and $1.54 per diluted share in 2006. Earnings per diluted share increased 13.6% in 2008, excluding the effect of a $.02 per diluted share charge for damage and disruption caused by Hurricane Ike, compared to 2007. Earnings per diluted share increased 15% in 2007, compared to 2006, after adjusting for the extra week in fiscal 2006. Net earnings in 2006 benefited from a 53rd week by $0.07an estimated $.07 per share due to the 53rd week and $0.03 per share from the adjustment of certain deferred tax balances. Net earnings in 2006 also included expense of $0.03 per share recorded for legal reserves. Net earnings were reduced by $1.16 per share in 2004 due to the effects of goodwill impairment charges.share. Our earnings per share growth in 20062008, 2007 and 20052006 resulted from increased net earnings, strong identical sales growth and the repurchase of Kroger stock. During fiscal 2008, we repurchased 24 million shares of Kroger stock for a total investment of $637 million. During fiscal 2007, we repurchased 53 million shares of our stock for a total investment of $1.4 billion. During fiscal 2006, we
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repurchased 29 million shares of Kroger stock for a total investment of $633 million. During fiscal 2005, we repurchased 15 million shares of our stock for a total investment of $252 million. During fiscal 2004, we repurchased 20 million shares of Kroger stock for a total investment of $319 million.
Sales
Total Sales | ||||||||||||||
(in millions) | ||||||||||||||
Percentage | Percentage | |||||||||||||
2006 | Increase | 2005 | Increase | 2004 | ||||||||||
Total food store sales without fuel | $ | 57,712 | 7.9 | % | $ | 53,472 | 4.6 | % | $ | 51,106 | ||||
Total food store fuel sales | 4,455 | 26.3 | % | 3,526 | 53.0 | % | 2,305 | |||||||
Total food store sales | $ | 62,167 | 9.1 | % | $ | 56,998 | 6.7 | % | $ | 53,411 | ||||
Other sales (1) | 3,944 | 10.9 | % | 3,555 | 17.6 | % | 3,023 | |||||||
Total Sales | $ | 66,111 | 9.2 | % | $ | 60,553 | 7.3 | % | $ | 56,434 |
Total Sales | |||||||||||||||
(in millions) | |||||||||||||||
Percentage | Percentage | ||||||||||||||
2008 | Increase | 2007 | Increase | 2006 | |||||||||||
Total food store sales without fuel | $ | 63,795 | 6.1 | % | $ | 60,142 | 4.2 | % | $ | 57,712 | |||||
Total food store fuel sales | 7,464 | 30.0 | % | 5,741 | 28.9 | % | 4,455 | ||||||||
Total food store sales | $ | 71,259 | 8.2 | % | $ | 65,883 | 6.0 | % | $ | 62,167 | |||||
Other sales (1) | 4,741 | 8.9 | % | 4,352 | 10.3 | % | 3,944 | ||||||||
Total Sales | $ | 76,000 | 8.2 | % | $ | 70,235 | 6.2 | % | $ | 66,111 |
(1) | Other sales primarily relate to sales at convenience stores, including fuel, jewelry stores and sales by our manufacturing plants to outside |
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The growth in our total sales in 2008 over fiscal 2007 was primarily the result of identical storesupermarket sales increases, the addition of a 53rd week in 2006increased fuel gallon sales, and inflation in pharmacyacross most departments. Identical supermarket sales and some perishable commodities. Increasedtotal sales, excluding fuel, increased due to increased transaction count and average transaction size, were both responsible for our increases in identical supermarket sales, excluding retail fuel operations.and inflation across all departments. After adjusting for the extra week in fiscal 2006, total sales increased 7.0%8.2% in 2007 over fiscal 2005.2006.
We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Fuel center 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. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Annualized identical supermarket sales include all sales at the Fred Meyer multi-department stores. We calculate annualized identical supermarket sales based on a summation ofby adding together four quarters of identical supermarket sales. Our identical supermarket sales results are summarized in the table below, based on the 53-week52-week period of 2006,2008, compared to the same 53-week52-week period of the previous year. The identical store count in the table below represents the total number of identical supermarkets as of January 31, 2009 and February 2, 2008.
Identical Supermarket Sales
(in millions)
Identical Supermarket Sales | ||||||||||||||
(in millions) | ||||||||||||||
2006 | 2005 | 2008 | 2007 | |||||||||||
Including supermarket fuel centers | $ | 59,592 | $ | 55,993 | $ | 67,185 | $ | 62,878 | ||||||
Excluding supermarket fuel centers | $ | 55,399 | $ | 52,483 | $ | 60,300 | $ | 57,416 | ||||||
Including supermarket fuel centers | 6.4 | % | 5.3 | % | 6.9 | % | 6.9 | % | ||||||
Excluding supermarket fuel centers | 5.6 | % | 3.5 | % | 5.0 | % | 5.3 | % | ||||||
Identical 4thQuarter store count | 2,369 | 2,280 |
We define a supermarket as comparable when it has been in operation for five full quarters, including expansions and relocations. As is the case for identical supermarket sales, fuel center discounts received at our fuel centers and earned based on in-store purchases are included in all of the supermarket comparable sales results calculations illustrated below. Annualized comparable supermarket sales include all Fred Meyer multi-department stores. We calculate annualized comparable supermarket sales based on a summation ofby adding together four quarters of comparable sales. Our annualized comparable supermarket sales results are summarized in the table below, based on the 53-week52-week period of 2006,2008, compared to the same 53-week52-week period of the previous year. The comparable store count in the table below represents the total number of comparable supermarkets as of January 31, 2009 and February 2, 2008.
A-11Comparable Supermarket Sales
(in millions)
2008 | 2007 | |||||||
Including supermarket fuel centers | $ | 69,762 | $ | 65,066 | ||||
Excluding supermarket fuel centers | $ | 62,492 | $ | 59,372 | ||||
Including supermarket fuel centers | 7.2 | % | 7.2 | % | ||||
Excluding supermarket fuel centers | 5.3 | % | 5.5 | % | ||||
Comparable 4thQuarter store count | 2,444 | 2,352 |
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Comparable Supermarket Sales | ||||||
(in millions) | ||||||
2006 | 2005 | |||||
Including supermarket fuel centers | $ | 61,045 | $ | 57,203 | ||
Excluding supermarket fuel centers | $ | 56,702 | $ | 53,622 | ||
Including supermarket fuel centers | 6.7 | % | 5.9 | % | ||
Excluding supermarket fuel centers | 5.7 | % | 3.9 | % |
FIFO Gross Margin
We calculate First-In, First-Out (“FIFO”) Gross Margin as follows: Salessales minus merchandise costs, plus Last-In, First-Out (“LIFO”) charge (credit). Merchandise costs includeincluding advertising, warehousing and transportation, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs exclude depreciation expense and rent expense. FIFO gross margin is an important measure used by our management to evaluate merchandising and operational effectiveness.
Our FIFO gross margin rates were 24.27%, 24.80%23.20% in 2008, 23.65% in 2007 and 25.38%24.27% in 2006, 2005 and 2004, respectively. Retail2006. Our retail fuel sales loweredreduce our FIFO gross margin rate due to the very low FIFO gross margin on retail fuel sales as compared to non-fuel sales. Excluding the effect of retail fuel operations, our FIFO gross margin rates were 26.43%, 26.69%decreased 15 basis points in 2008, 20 basis points in 2007 and 26.73%26 basis points in 2006, 2005 and 2004, respectively.2006. The decrease in our non-fuel FIFO gross margin rate reflects our continued reinvestment of operating cost savings into lower prices for our customers. In addition, FIFO gross margin in 2008, compared to 2007, decreased due to high inflation in product costs.
LIFO Charge
The LIFO charge was $196 million in 2008, $154 million in 2007 and $50 million in 2006. Like many food retailers, we continued to experience product cost inflation in 2008 at levels that have not occurred for several years. This increase in product cost inflation caused the increase in the LIFO charge in 2008, compared to 2007 and 2006. In addition, product cost inflation in 2007, compared to 2006, caused the increase in the LIFO charge in 2007 compared to 2006.
Operating, General and Administrative Expenses
Operating, general and administrative (“OG&A”) expenses consist primarily of employee-related costs such as wages, health care benefit costs and retirement plan costs. Among other items, rentcosts, 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 percent of sales, were 17.91%, 18.21%16.95% in 2008, 17.31% in 2007 and 18.76%17.91% in 2006, 2005 and 2004, respectively.2006. The growth in our retail fuel sales lowersreduces our OG&A rate due to the very low OG&A rate on retail fuel sales as compared to non-fuel sales. Excluding the effect of retail fuel operations, our OG&A expenses, as a percent of sales were 19.59%, 19.68%excluding fuel, decreased 3 basis points in 2008, 33 basis points in 2007 and 19.81%9 basis points in 2006, 2005 and 2004, respectively. Excluding2006. The decrease in our OG&A rate in 2008, excluding the effect of retail fuel operations, expenses recorded for legal reserveswas primarily the result of increased identical supermarkets sales growth and stock option expense,a settlement received from credit card processers, partially offset by the $25 million charge related to Hurricane Ike and increases in credit card fees and health care costs. The decrease in our OG&A rate declined 28 basis points in 2006. This decrease2007, excluding the effect of retail fuel operations, was driven byprimarily the result of strong identical store sales growth, by increasing store laborincreased productivity, and by progress we havethat was made in 2007 in controlling our utility, health care and pension costs. These improvements were partially offset by increases in pension expense and credit card fees. Excluding the effect of retail fuel operations and expenses recorded for one-time legal reserves, our OG&A rate declined 16 basis points in 2006.
Rent Expense
Rent expense was $659 million in 2008, as compared to $644 million in 2007 and $649 million in 2006, as compared to $661 million and $680 million in 2005 and 2004, respectively.2006. Rent expense, as a percent of sales, was 0.98%0.87% in 2006,2008, as compared to 1.09%0.92% in 20052007 and 1.21%0.98% in 2004.2006. The decrease in rent expense, as a percent of sales, reflects our increasing sales leverage and our continued emphasis on ownership of real estate when available, as well as decreased charges for closed-store future rent liabilities in 2006 and 2005 compared to 2004.owning rather than leasing whenever possible.
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Depreciation and Amortization Expense
Depreciation and amortization expense was $1,272 million, $1,265 million$1.4 billion in 2008, $1.4 billion in 2007 and $1,256 million for 2006, 2005 and 2004, respectively.$1.3 billion in 2006. The increases in depreciation and amortization expense were the result of capital expenditures totaling $1,777 million, $1,306 million$2.2 billion in 2008, $2.1 billion in 2007 and $1,634 million$1.8 billion in 2006, 2005 and 2004, respectively.2006. Depreciation and amortization expense, as a percent of sales, was 1.92%, 2.09%1.90% in 2008, 1.93% in 2007 and 2.23%1.92% in 2006, 2005 and 2004, respectively.2006. The decrease in our depreciation and amortization expense in 2008, compared to 2007, as a percent of sales, is primarily the result of totalincreasing sales. The increase in our depreciation and amortization expense in 2007, compared to 2006, as a percent of sales, increases.is due to an annual depreciation charge in both years with 2006 containing 53 weeks of sales due to the structure of our fiscal calendar.
Interest Expense
Net interest expense totaled $485 million in 2008, $474 million in 2007 and $488 million $510 million and $557 millionin 2006. The increase in interest expense in 2008, compared to 2007, was primarily the result of an increase in the average total debt balance for 2006, 2005 and 2004, respectively.the year, partially offset by interest income related to the mark-to-market of ineffective fair value swaps. The decrease in interest expense in 2007, compared to 2006, was the result of replacing borrowings with new borrowings at a lower interest rate. The average borrowings. During 2006, we reduced total debt $173 million from $7.2 billion as of January 28, 2006,balance in 2007 was comparable to $7.1 billion as of February 3, 2007. Interest expense in 2004 included $25 million related to the early retirement of debt.2006.
Income Taxes
Our effective income tax rate was 36.2%, 37.2%36.5% in 2008, 35.4% in 2007 and 136.4% for 2006, 2005 and 2004, respectively.36.2% in 2006. The effective tax rates for 2006 and 2005 differthose years differed from the federal statutory rate primarily due to the effect of state income taxes. In addition, the effective tax rate for 2004 due to the impairment of non-deductible goodwill in 2004. The effective income tax rates also differ2007 differs from the expected federal statutory rate in all years presented due to the effectresolution of state taxes as well as thesome tax issues. The effective rate in 2006 includes an adjustment of certainsome deferred tax balancesbalances.
During thethird quarter of 2007, we resolved favorably some outstanding tax issues. This resulted in 2006.a 2007 tax benefit of approximately $40 million and reduced our effective tax rate by 1.9%.
DuringIn 2006, during the reconciliation of our deferred tax balances, and after the filing of our annual federal and state tax returns, we identified adjustments to be made in the previousprior years’ deferred tax reconciliation. We corrected these deferred tax balances in our Consolidated Financial Statements for the year ended February 3, 2007, which resulted in a reduction of our fiscal 2006 provision for income tax expense of approximately $21 million and reduced the rate by 120 basis points.1.2%. We do not believe these adjustments are material to our Consolidated Financial Statements for the year ended February 3, 2007, or to any prior years’ Consolidated Financial Statements. As a result, we have not restated any prior year amounts.
COMMONSTOCK REPURCHASE PROGRAM
We maintain a stock repurchase programprograms that compliescomply with Securities Exchange Act Rule 10b5-1 toand allow for the orderly repurchase of our common stock, from time to time. We made open market purchases totaling $448 million in 2008, $1.2 billion in 2007 and $374 million $239 million and $291 millionin 2006 under thisthese repurchase program during fiscal 2006, 2005 and 2004, respectively.programs. In addition to thisthese repurchase program,programs, in December 1999 we began a program to repurchase common stock to reduce dilution resulting from our employee stock option plans. This program is solely funded by proceeds from stock option exercises, includingand the tax benefit from these exercises. We repurchased approximately $189 million in 2008, $270 million in 2007 and $259 million $13 million and $28 millionin 2006 under the stock option programprograms.
In 2008, to preserve liquidity and financial flexibility, we reduced the amount of stock repurchased during 2006, 2005 and 2004, respectively.the year, decreasing the cash used for stock purchases in 2008, compared to 2007.
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CAPITAL EXPENDITURES
Capital expenditures, including changes in construction-in-progress payablepayables and excluding acquisitions, totaled $1,777 million$2.2 billion in 20062008 compared to $1,306 million$2.1 billion in 20052007 and $1,634 million$1.8 billion in 2004.2006. The declineincrease in 2005capital spending in 2008 compared to 2007 and 2006 was the result of our emphasis on the tightening of capital and increasing our focus on remodels, merchandising and productivity projects. The table below shows our supermarket storing activity and our total food store square footage:
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Supermarket Storing Activity
2006 | 2005 | 2004 | 2008 | 2007 | 2006 | ||||||||||||
Beginning of year | 2,507 | 2,532 | 2,532 | 2,486 | 2,468 | 2,507 | |||||||||||
Opened | 20 | 28 | 41 | 21 | 23 | 20 | |||||||||||
Opened (relocation) | 17 | 12 | 20 | 14 | 9 | 17 | |||||||||||
Acquired | 1 | 1 | 15 | 6 | 38 | 1 | |||||||||||
Acquired (relocation) | — | — | 3 | 3 | 1 | — | |||||||||||
Closed (operational) | (60 | ) | (54 | ) | (56 | ) | (32 | ) | (43 | ) | (60 | ) | |||||
Closed (relocation) | (17 | ) | (12 | ) | (23 | ) | (17 | ) | (10 | ) | (17 | ) | |||||
End of year | 2,468 | 2,507 | 2,532 | 2,481 | 2,486 | 2,468 | |||||||||||
Total food store square footage (in millions) | 142 | 142 | 141 | 147 | 145 | 142 |
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 generally accepted accounting principles (“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 February 3, 2007. CaseJanuary 31, 2009. We establish case reserves are established for reported claims using case-basis evaluation of the underlying claim data and are updatedwe update as information becomes known.
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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. TheWe account for the liabilities for workers’ compensation claims are accounted for 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 $3$4 million. General liability claims are not discounted.
We are also similarly self-insured for property-related losses. We have purchased stop-loss coverage to limit our exposure to losses in excess of $25 million on a per claim basis, except in the case of an earthquake, for which stop-loss coverage is in excess of $50 million per claim, up to $200 million per claim in California and $300 million outside of California.
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The assumptions underlying the ultimate costs of existing claim losses are 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 uponon future claim costs and currently recorded liabilities.
Impairments of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, we monitor the carrying value of long-lived assets for potential impairment each quarter based on whether certain trigger 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 trigger 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 to the asset’s current carrying value.flows. We record impairment when the carrying value exceeds the discounted cash flows.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 $26 million in 2008, $24 million in 2007 and $61 million in 2006. We record costs to reduce the carrying value of long-lived assets in the Consolidated Statements of Operations as “Operating, general and administrative” expense.
The factors that most significantly affect the impairment calculation are our estimates of future cash flows. Our cash flow projections look several years into the future and include assumptions on variables such as inflation, the economy and market competition. Application of alternative assumptions and definitions, such as reviewing long-lived assets for impairment at a different organizational level, could produce significantly different results.
Goodwill
We review goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of trigger events. TheWe perform reviews are performed at the operating division level. Generally, fair value representsis determined using a multiple of earnings, or discounted projected future cash flows, and we compare
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fair value to the carrying value of a division 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 division against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the division’s goodwill. We recognize goodwill impairment for any excess of the carrying value of the division’s goodwill over the implied fair value. If actual results differ significantly from anticipated future results for certain reporting units, we would need to recognize an impairment loss for any excess of the carrying value of the division’s goodwill over the implied fair value. Results of the goodwill impairment reviews performed during 2006, 20052008, 2007 and 20042006 are summarized in Note 2 to the Consolidated Financial Statements.
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The annual impairment review requires the extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different results. Similar to our policy on impairment of long-lived assets, the cash flow projections embedded in our goodwill impairment reviews can be affected by several items such as inflation, business valuations in the market, the economy and market competition.
Intangible Assets
In addition to goodwill, we have recorded intangible assets totaling $26 million, $22 million and $28 million for leasehold equities, liquor licenses and pharmacy prescription file purchases, respectively, at February 3, 2007. Balances at January 28, 2006, were $35 million, $20 million and $30 million for lease equities, liquor licenses and pharmacy prescription files, respectively. We amortize leasehold equities over the remaining life of the lease. We do not amortize owned liquor licenses, however, we amortize liquor licenses that must be renewed over their useful lives. We amortize pharmacy prescription file purchases over seven years. We consider these assets annually during our testing for impairment.
Store Closing Costs
We provide for closed store liabilities relating to the present value of the estimated remaining noncancellablenoncancelable 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. TheWe usually pay 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 madeWe 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, or that no longer is needed for its originally intended purpose, is adjusted to incomeearnings 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.
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
(a) Company-sponsored defined benefit Pension Plans
Effective February 3, 2007, we adoptedWe account for our defined benefit pension plans using the recognition and disclosure provisions of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 99, 106 and 123(R)132(R)(SFAS 158), which requiredrequire the recognition of the funded status of its retirement plans on the Consolidated Balance Sheet. We are now required to record, as a component of Accumulated Other Comprehensive Income (“AOCI”), actuarial gains or losses, prior service costs or credits
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and transition obligations that have not yet been recognized. We adopted the measurement date provisions of SFAS 158 effective February 3, 2008. The majority of our pension and postretirement plans previously used a December 31 measurement date. All plans are now measured as of our fiscal year end. The non-cash effect of the adoption of the measurement date provisions of SFAS 158 decreased shareowners’ equity by approximately $5 million ($3 million after-tax) and increased long-term liabilities by approximately $5 million. There was no effect on our results of operations.
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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 1413 to the Consolidated Financial Statements and include, among others, the discount rate, the expected long-term rate of return on plan assets, average life expectancy 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 1413 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 assumption is to reflect the rate 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 rate as of year-end 20062008 was to match the plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. Benefit cash flows due in a particular year can be “settled” theoretically by “investing” them in the zero-coupon bond that matures in the same year. The discount rate is the single rate that produces the same present value of cash flows. The selection of the 5.90%7.00% discount rate as of year-end 20062008 represents the equivalent single rate under a broad-market AA yield curve constructed by ouran outside consultant, Mercer Human Resource Consulting.consultant. We utilized a discount rate of 5.70%6.50% for year-end 2005.2007. The 2050 basis point increase in the discount rate decreased the projected pension benefit obligation as of February 3, 2007,January 31, 2009, by approximately $68$147 million.
To determine the expected return on pension plan assets, we consider current and forecasted plan asset allocations as well as historical and forecasted returns on various asset categories. For 20062008 and 2005,2007, we assumed a pension plan investment return rate of 8.5%. Our pension plan’s average return was 9.7%4.1% for the 10 calendar years ended December 31, 2006,2008, net of all investment management fees and expenses. Our actual return forexpenses, primarily due to the poor performance of the financial markets in 2008. The value of all investments in our Company-sponsored defined benefit pension planplans during the calendar year ending December 31, 2006, on that same basis, was 13.4%2008, net of investment management fees and expenses declined 26.1%. We believe theour 8.5% pension return assumption is appropriate because we do not expect that future returns will achieve the same level of performanceperformances as the very long-term historical average annual return.return (for example, the S&P 500 Index has returned 8.4% annually on a compound basis for the 20 years ending December 31, 2008) for the various markets in which the plan invests. We have been advised that during 2007 and 2008, the trustees plan to reduce from 50% to 42% the allocation of pension plan assets to domestic and international equities and increase from 18% to 27% the allocation to non-core assets, including inflation-linked bonds, commodities, hedge funds and real estate. Furthermore, in order to augment the return on domestic equities and investment grade debt securities during 2007 and 2008,2009, the trustees plan to increase hedge funds within these sectors from 7% to 22%.the allocation of non-core assets, including high yield debt securities, commodities and real estate. Collectively, these changes should improve the diversification of pension plan assets. The trustees have advised us that they expect these changes will have little effect on the total returnportfolio risk but will reduceincrease the likelihood of achieving the 8.5% expected volatilityrate of the return. See Note 1413 to the Consolidated Financial Statements for more information on the asset allocations of pension plan assets.
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Sensitivity to changes in the major assumptions used in the calculation of Kroger’s pension plan liabilities for the Qualified Plansqualified plans is illustrated below (in millions).
Projected Benefit | ||||||||||||||
Percentage | Obligation | Expense | ||||||||||||
Point Change | Decrease/(Increase) | Decrease/(Increase) | ||||||||||||
Discount Rate | +/ | $ | 257/($309 | ) | $ | 28) | ||||||||
Expected Return on Assets | +/ | — | $ | 21/($21) |
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In 2005, we updated the mortality table used to determine average life expectancy in the calculation of our pension obligation to the RP-2000 Projected to 2015 mortality table. The change in this assumption increased our projected benefit obligation by approximately $93 million at the time of the change, and is reflected in unrecognized actuarial (gain) loss as of the measurement date.
We contributed $20 million in 2008, $52 million in 2007 and $150 million $300 million and $35 millionin 2006 to our Company-sponsored defined benefit pension plans in 2006, 2005 and 2004, respectively.plans. Although we areKroger is not required to make cash contributions to ourits Company-sponsored defined benefit pension plans during fiscal 2007,2009, we contributed $50made a $200 million to the planscash contribution on February 5, 2007. We may elect to make additional voluntary contributions to our Company-sponsored pension plans in order to maintain our desired funding status.2, 2009. Additional contributions may be made if our cash flows from operations exceed our expectations.required under the Pension Protection Act to avoid any benefit restrictions. We expect any electivevoluntary contributions made during 20072009 will decreasereduce our minimum 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 additional contributions.
Effective January 1,Net periodic benefit cost decreased in 2008 and 2007 compared to 2006 due to participants in the Cash Balance formula of the Consolidated Retirement Benefit Plan was replaced withbeing moved to a defined contribution 401(k) Retirement Savings Account Plan, whichretirement savings account plan effective January 1, 2007. Participants under that formula continue to earn interest on prior contributions but no additional pay credits will providebe earned. The 401(k) retirement savings plan provides to eligible employees both Company matching contributions and other Companyautomatic contributions from Kroger based uponon participant contributions, plan compensation, and length of service, to eligible employees.service. We expect to make matching contributionscontributed and expensed $92 million in 2008 and $90 million in 2007 of approximately 75 million.to employee 401(k) retirement savings accounts.
(b) Multi-Employer Plans
We also contribute to various multi-employer pension plans based on obligations arising from most of our collective bargaining agreements. 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.
We recognize expense in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized expense, of $219 million in 2008, $207 million in 2007, and $204 million in 2006, $196 million in 2005, and $180 million in 2004. We estimate we would have contributed an additional $2 million in 2004 but our obligation to contribute was suspended during the southern California labor dispute.2006.
Based on the most recent information available to us, we believe that the present value of actuarially accrued liabilities in most or all of these multi-employer plans 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, 2006.2008. Because Kroger is only one of a number of employers contributing to these plans, we also have attempted to estimate the ratio of Kroger’s contributions to the total of all contributions to these plans in a year as a way of assessing Kroger’s “share” of the underfunding. Nonetheless, the underfunding is not a direct obligation or liability of Kroger or of any employer. As of December 31, 2006,2008, we estimate that Kroger’s share of the underfunding of multi-employer plans to which Kroger contributes was $600 million to $800 million,$3.0 billion, pre-tax, or $375 million to $500 million,$1.9 billion, after-tax. This represents a decreasean increase in the amount of underfunding estimated as of December 31, 2005. This decrease2008, compared to December 31, 2007. The increase in the amount of underfunding is attributable to among other things, the continuing benefit of plan design changes and the investment returns on assets held in trust for the plans during 2006.recent market downturn. Our
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estimate is based on the best 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. Our estimate is imprecise and not necessarily reliable.
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We have made and disclosed this estimate not because this underfunding is a direct liability of Kroger. Rather, we believe the underfunding is likely to have important consequences. We expect our contributions to these multi-employer plans will continue to increase each year, and therefore the expense we recognize under GAAP will increase. In 2006,2008, our contributions to these plans increased approximately 4%6% over the prior year and have grown at a compound annual rate of approximately 6% since 2003. We2004.We do not expect a significant increase in our contributions to increase by approximately 1.0%multi-employer pension plans in 2007. The amount of increases in 20072009, compared to 2008, subject to collective bargaining and beyond has been favorably affected by significant improvement incapital market conditions. We believe our contributions to multi-employer pension plans could as much as double over the values of assets held in trusts, by the labor agreements negotiated in southern California and elsewhere in recentnext several years, and by related trustee actions. Although underfunding can result in the imposition of excise taxes on contributing employers, increased contributions canafter 2009, to reduce underfunding so that excise taxes are not triggered. Our estimate of future contribution increases takes into account the avoidance of those taxes.this underfunding. 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 SFAS No. 87,Employers’ Accounting for Pensions.
The amount of underfunding described above is an estimate and is disclosed forcould change based on contract negotiations, returns on the purpose described.assets held in the multi-employer plans and benefit payments. The amount could decline, and Kroger’s future expense would be favorably affected, if the values of netthe assets held in the trust significantly increase or if further changes occur through collective bargaining, trustee action or favorable legislation. On the other hand, Kroger’s share of the underfunding wouldcould increase and Kroger’s future expense could be adversely affected if netthe asset values decline, if employers currently contributing to these funds cease participation or if changes occur through collective bargaining, trustee action or adverse legislation.
Deferred Rent
We recognize rent holidays, including the time period during which we have access to the property for construction of buildings or improvements, as well as construction allowances 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 Consolidated Balance Sheets.
Tax ContingenciesFair Value of Financial Instruments
Various taxing authorities periodically auditIn September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157), which defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not expand or require any new fair value measurements. SFAS 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. FASB Staff Position (FSP) 157-2Partial Deferral of the Effective Date of Statement No. 157(FSP 157-2), deferred the effective date of SFAS 157 for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. Effective February 3, 2008, we adopted SFAS 157, except for non-financial assets and non-financial liabilities which are deferred until February 1, 2009 by FSP 157-2.
SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy defined by SFAS 157 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;
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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.
For those financial instruments carried at fair value in the consolidated financial statements, the following table summarizes the fair value of these instruments at January 31, 2009:
Fair Value Measurements Using
(in millions)
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | |||||||||||||||
for Identical | Significant Other | Unobservable | ||||||||||||||
Assets | Observable Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Available-for-Sale Securities | $11 | $ — | $ — | $11 |
Variable Interest Entities
In December 2008, the FASB issued FAS 140-4 and FIN 46(R)-8,Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities(FAS 140-4 and FIN 46(R)-8). FAS 140-4 and FIN 46(R)-8 require additional disclosures about an entity’s involvement with variable interest entities and transfers of financial assets. Effective January 31, 2009, we adopted FAS 140-4 and FIN 46(R)-8.
In the first quarter of 2008, we made an investment in The Little Clinic LLC (“TLC”). TLC operates supermarket walk-in medical clinics in seven states, primarily in the Midwest and Southeast. At the date of investment, TLC was determined to be a variable-interest entity (“VIE”) under FASB Interpretation No. 46R,Consolidation of Variable Interest Entities (FIN 46R), with Kroger being the primary beneficiary. We were deemed the primary beneficiary due to our income tax returns. These audits include questions regardingcurrent ownership interest and half of our tax filing positions, includingwritten put options being at a floor price. As a result, we consolidated TLC in accordance with FIN 46R. The minority interest was recorded at fair value on the timing andacquisition date. The fair value of TLC was determined based on the amount of deductionsthe investment made by Kroger and the allocationpercentage acquired. Our assessment of incomegoodwill represents the excess of this amount over the fair value of TLC’s net assets as of the investment date. Creditors of TLC have no recourse to various tax jurisdictions.the general credit of Kroger. Conversely, creditors of Kroger have no recourse to the assets of TLC. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, we record allowances for probable exposures. A numberaddition, if requested by TLC’s Board of years may elapse before a particular matter, for whichDirectors by January 1, 2010, we have establishedagreed to make a pro rata portion of an allowance, is audited and fully resolved. As of February 3, 2007, tax years 2002 through 2004 were undergoing examination by the Internal Revenue Service.additional capital contribution.
The establishmenttable below shows the unaudited amounts of assets and liabilities from TLC included in our tax contingency allowances relies on the judgmentconsolidated results, after eliminating intercompany items, as of management to estimate the exposures associated with our various filing positions. Although management believes those estimates and judgments are reasonable, actual results could differ, resulting in gains or losses that may be material to our Consolidated StatementsJanuary 31, 2009 (in millions of Operations.dollars):
2008 | |||
Current assets | $ | 31 | |
Property, plant and equipment, net | 7 | ||
Goodwill | 102 | ||
Other assets | 1 | ||
Total Assets | $ | 141 | |
Current liabilities | $ | 4 | |
Minority interests | $ | 82 |
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ToIn the extent thatfourth quarter of 2008, we prevailbecame the primary beneficiary of i-wireless, LLC a VIE in matters for which allowanceswe have been established, or are requireda 25% ownership interest. We were deemed the primary beneficiary due to pay amountsour current ownership interest, $25 million line of credit guarantee, and $8 million loan to i-wireless, LLC. We became the primary beneficiary, in the fourth quarter of 2008, under FIN 46R after lending $8 million to i-wireless, LLC. i-wireless, LLC sells prepaid phones primarily in our stores. The minority interest was recorded at fair value. The fair value of i-wireless, LLC was determined based on the amount of the investment made by Kroger in the fourth quarter of 2007 and the percentage acquired. Our assessment of goodwill represents the excess of these allowances, our effective tax rate in any given financial statement period could be materially affected. An unfavorable tax settlement could require usethis amount over the fair value of cash and result in an increasei-wireless, LLC net assets as of the date of the loan. We have guaranteed the indebtedness of i-wireless, LLC, up to $25 million, which is collateralized by $8 million of inventory located in our effective tax rate instores. The creditors of Kroger have no recourse to the yearassets of resolution. A favorable tax settlement would be recognized as a reductioni-wireless, LLC.
The table below shows the preliminary and unaudited amounts of assets and liabilities from i-wireless, LLC included in our effective tax rate in the yearconsolidated results, after eliminating intercompany items, as of resolution.January 31, 2009 (in millions of dollars):
2008 | ||
Current assets | $ | 10 |
Property, plant and equipment, net | 2 | |
Goodwill | 25 | |
Other assets | 5 | |
Total Assets | $ | 42 |
Current liabilities | $ | 5 |
Long-term debt | $ | 30 |
Minority interests | $ | 1 |
Share-Based Compensation Expense
Effective January 29, 2006, we adoptedWe account for stock options under the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment, using the modified prospective transition method and, therefore, have not restated results for prior periods.(SFAS 123(R)). Under this method, we recognize compensation expense for all share-based payments granted on or after January 29, 2006, as well as all share-based payments granted prior to, but not yet vested as of, January 29, 2006, in accordance with SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), we recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.
Prior to the adoption of In addition, we account for restricted stock awards under SFAS No. 123(R), we accounted for share-based payments under Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees and the disclosure provisions of SFAS No. 123, as amended.. We recognized compensation expense for all share-based awards described above using the straight-line attribution method applied to the fair value of each option grant, over the requisite service period associated with each award. The requisite service period is typically consistent with the vesting period, except as noted below. Because awards typically vest evenly over the requisite service period, compensation cost recognized in 2006 is at least equal to the grant-date fair value of the vested portion of all outstanding options.
The weighted-average fair value of stock options granted during 2006, 2005 and 2004 was $6.90, $7.70 and $7.91, 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 extensive accounting judgment and financial estimates, including the term employees are expected to retain their stock options before exercising them, the volatility of our stock 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 share-based compensation expense in the Consolidated Statements of Operations.
The following table reflects the weighted-average assumptions used for grants awarded to option holders.
2006 | 2005 | 2004 | ||||||
Weighted average expected volatility | 27.60 | % | 30.83 | % | 30.13 | % | ||
Weighted average risk-free interest rate | 5.07 | % | 4.11 | % | 3.99 | % | ||
Expected dividend yield | 1.50 | % | N/A | N/A | ||||
Expected term | 7.5 years | 8.7 years | 8.7 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. Prior to 2006, we did not pay a dividend, so an expected dividend rate was not included in the determination of fair value for options granted during fiscal year 2005. Using a dividend yield of 1.50% to value options issued in 2005 would have decreased the fair value of each option by approximately $1.60.
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We determined expected volatility based upon historical stock volatilities. We also considered implied volatility. We determined expected term based upon a combination of historical exercise and cancellation experience, as well as estimates of expected future exercise and cancellation experience.
Under SFAS No. 123(R), 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.
In 2006, we recognized total stock compensation expense of $72 million. This included $50 million for stock options and $22 million for restricted shares. A total of $18 million of the restricted stock expense was attributable to the wider distribution of restricted shares incorporated into the first quarter 2006 grant of share-based awards (as described in Note 10 to the Consolidated Financial Statements), and the remaining $4 million of restricted stock expense related to previously issued restricted stock awards. The incremental compensation expense attributable to the adoption of SFAS No. 123(R) in 2006 was $68 million, pre-tax, or $43 million and $0.06 per diluted share, after tax. In 2005, we recognized stock compensation cost of $7 million, pre-tax, related entirely to restricted stock grants.
These costs were recognized as operating, general and administrative costs in our Company’s Consolidated Statements of Operations. The cumulative effect of applying a forfeiture rate to unvested restricted shares at January 29, 2006 was not material. The pro forma earnings effect of stock options in prior years, in accordance with SFAS No. 123, is described below:
(in millions, except per share amounts) | 2005 | 2004 | |||||
Net earnings (loss), as reported | $ | 958 | $ | (104 | ) | ||
Stock-based compensation expense included in net earnings, net of | |||||||
income tax benefits | 5 | 8 | |||||
Total stock-based compensation expense determined under fair value | |||||||
method for all awards, net of income tax benefits (1) | (34 | ) | (48 | ) | |||
Pro forma net earnings (loss) | $ | 929 | $ | (144 | ) | ||
Earnings (loss) per basic common share, as reported | $ | 1.32 | $ | (0.14 | ) | ||
Pro forma earnings (loss) per basic common share | $ | 1.28 | $ | (0.20 | ) | ||
Earnings (loss) per diluted common share, as reported | $ | 1.31 | $ | (0.14 | ) | ||
Pro forma earnings (loss) per diluted common share | $ | 1.27 | $ | (0.20 | ) |
As of February 3, 2007, we had $92 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under equity award, plans. We expected to recognize this cost over a weighted-average period of approximately one year. The total fair value of options that vested in 2006 was $44 million.
For share-based awards granted prior to the adoption of SFAS No. 123(R), the Company’s stock option grants generally contained retirement-eligibility provisions that caused the options to vest upon the earlier of the stated vesting date or retirement. We calculated compensation expense over the stated vesting periods, regardless of whether certain employees became retirement-eligible duringperiod the respective vesting periods. Upon the adoption of SFAS No. 123(R), we continued this method of recognizing compensation expense of awards granted prior to the adoption of SFAS No. 123(R). For awards granted on or after January 29, 2006, options vest based on the stated vesting date, even if an employee retires prior to the vesting date. However, the requisite service period ends on the employee’s retirement-eligible date. As alapse.
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result, we recognize expense for stock option grants containing such retirement-eligibility provisions over the shorter of the vesting period or the period until employees become retirement-eligible (the requisite service period). As a result of retirement eligibility provisions in stock option awards granted on or after January 29, 2006, we recognized approximately $6 million of compensation expense in 2006 prior to the completion of stated vesting periods.
Shares issued as a result of stock option exercises may be newly issued shares or reissued treasury shares. We expect to reissue shares held in treasury upon exercise of these options.
Inventories
Inventories are stated at the lower of cost (principally on a LIFO basis) or market. In total, approximately 98% in 2008 and 97% in 2007 of inventories for 2006 and 2005, respectively, were valued using the LIFO method. Cost for the balance of the inventories was determined using the first-in, first-out (“FIFO”)FIFO method. Replacement cost was higher than the carrying amount by $450$800 million at January 31, 2009, and by $604 million at February 3, 2007, and by $400 million at January 28, 2006.2, 2008. We follow the Link-Chain, Dollar-Value LIFO method for purposes of calculating our LIFO charge or credit.
TheWe follow the item-cost method of accounting to determine inventory cost before the LIFO adjustment is followed 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 actual cost of items sold. The item-cost method
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of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory and purchasing levels when compared to the methodology followed under the retail method of accounting.
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 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 are recognized as a reduction in merchandise costs based on inventory turns and recognized as the product is sold. We recognized approximately $3.5 billion in 2008, $3.6 billion in 2007 and $3.3 billion $3.2 billion and $3.1 billionin 2006 of vendor allowances as a reduction in merchandise costs in 2006, 2005 and 2004, respectively.costs. We recognized more than 80%85% of all vendor allowances in the item cost with the remainder being based on inventory turns.
LIQUIDITYAND CAPITALRESOURCES
Cash Flow Information
Net cash provided by operating activities
We generated $2,351 million$2.9 billion of cash from operations in 20062008 compared to $2,192 million$2.6 billion in 20052007 and $2,330 million$2.4 billion in 2004.2006. The increase in cash generated from operating activities was primarily due to strong operating results adjusted for non-cash expenses. In addition, to changes in net earnings, changes in our operating assets and liabilities also affectaffected the amount of cash provided by our operating activities. During 2006, weWe realized a
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$129 million decreasedecreases in cash from changes in operating assets and liabilities of $411 million in 2008, $164 million in 2007 and $129 million in 2006. The increase in the change in operating assets and liabilities in 2008, compared to a $121 million2007, is primarily due to an increase in income taxes receivable. The increase in the change in operating assets and a $116 million decrease during 2005 and 2004, respectively.liabilities in 2007, compared to 2006, is primarily attributable to an increase in forward inventory buying activity. These amounts are also net of cash contributions to our Company-sponsored defined benefit pension plans totaling $150$20 million in 2006, $3002008, $52 million in 20052007, and $35 million$150 in 2004.
The amount of cash paid for income taxes in 2006 was higher than the amounts paid in 2005 and 2004 due to higher net earnings. In addition, the bonus depreciation provision, which expired in December 2004, reduced our cash taxes by approximately $90 million in 2004. This benefit reversed in 2005 and increased our cash taxes by approximately $71 and $108 million in 2006 and 2005, respectively.2006.
Net cash used by investing activities
Cash used by investing activities was $1,587 million$2.2 billion in 2006,2008, compared to $1,279 million$2.2 billion in 20052007 and $1,608 million$1.6 billion in 2004.2006. Our use of cash for investing activities was consistent in 2008, compared to 2007. The amount of cash used by investing activities increased in 2007, compared to 2006, due primarily to increasedhigher capital spending partially offset by higher proceeds from the sale of assets.and payments for two acquisitions. Capital expenditures, including changes in construction-in-progress payables and excluding acquisitions, were $1,777 million, $1,306 million and $1,634$2.2 billion in 2006, 20052008, $2.1 billion in 2007 and 2004, respectively.$1.8 billion in 2006. Refer to the Capital Expenditures section for an overview of our supermarket storing activity during the last three years.
Net cash used by financing activities
Financing activities used $785$769 million of cash in 20062008 compared to $847$310 million in 20052007 and $737$785 million in 2004. Lower2006. The increase in the amount of cash used in 2008, compared to 2007, was primarily a result of payments for debt reduction in 2006 were partiallyon long term-debt and the bank revolver, offset by increaseddecreased stock repurchase activitiesrepurchases.
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The decrease in the amount of cash used in 2007, compared to 2006, was primarily a result of proceeds received from the issuance of long term-debt, offset by greater stock repurchases and dividend payments in 2006.dividends paid. We repurchased $633$637 million of Kroger stock in 20062008 compared to $252$1.4 billion in 2007 and $633 million in 2005 and $3192006. We paid dividends totaling $227 million in 2004,2008, $202 million in 2007 and paid dividends totaling $140 million in 2006.
Debt Management
Total debt, including both the current and long-term portions of capital leases and financing obligations, decreased $173$59 million to $8.1 billion as of year-end 2008 from $8.1 billion as of year-end 2007. The slight decrease in 2008, compared to 2007, resulted from the issuance of $400 million of senior notes bearing an interest rate of 5.00%, $375 million of senior notes bearing an interest rate of 6.90% and $600 million of senior notes bearing an interest rate of 7.50%, offset by decreased commercial paper, the payments on the bank revolver, the repayment of $200 million of senior notes bearing an interest rate of 6.375% and $750 million of senior notes bearing an interest rate of 7.45% that came due in 2008. Total debt increased to $8.1 billion as of year-end 2007 from $7.1 billion as of year-end 2006. The increases in 2007, compared to 2006, resulted from $7.2 billion asthe issuance of year-end 2005. Total debt decreased $739$600 million to $7.2 billion as of year-end 2005 from $8.0 billion assenior notes bearing an interest rate of year-end 2004. The decreases were primarily6.4%, $750 million of senior notes bearing an interest rate of 6.15% and borrowings under the resultbank credit facility in 2007, offset by the repayment of using cash flow from operations to reduce outstanding debt.$200 million of senior notes bearing an interest rate of 7.65% and $300 million of senior notes bearing an interest rate of 7.80% that came due in 2007.
Our total debt balances were also affected by our prefunding of employee benefit costs and by the mark-to-market adjustments necessary to record fair value interest rate hedges of our fixed rate debt, pursuant to SFAS No. 133,Accounting for Derivative Investments and Hedging Activities, as amended. We had prefunded employee benefit costs of $300 million at year-end 2006, 2005in each of the three years ended 2008, 2007 and 2004.2006. The mark-to-market adjustments increased the carrying value of our debt by $17$45 million $27in 2008 and $44 million and $70 million as of year-end 2006, 2005 and 2004, respectively.in 2007.
Factors Affecting Liquidity
We currently borrow on a daily basis approximately $170$250 million under our F2/P2/A3 rated commercial paper (“CP”) program. These borrowings are backed by our credit facility, and reduce the amount we can borrow under the credit facility. We have capacity available under our credit facility to backstop all CP amounts outstanding. If our credit rating declineddeclines below its current level of BBB/Baa2/BBB-, the ability to borrow under our current CP program could be adversely affected for a period of time immediately following the reduction of our credit rating. This could require us to borrow additional funds under the credit facility, under which we believe we have sufficient capacity. Borrowings under the credit facility may be more costly than the money we borrow under our current CP program, depending on the current
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interest rate environment. However, in the event of a ratings decline, we do not anticipate that access to the CP markets currently available to us would be significantly limited for an extended period of time (i.e., in excess of 30 days). 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 wouldcould be affected by a decrease in our credit rating or a decrease in our Applicable Percentage Ratio.
Our credit facility also 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:
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Consolidated EBITDA, as defined in our credit facility, includes an adjustment for unusual gains and losses. Our credit agreement is more fully described in Note 5 to the Consolidated Financial Statements. We were in compliance with our financial covenants at year-end 2006.2008.
The tables below illustrate our significant contractual obligations and other commercial commitments, based on year of maturity or settlement, as of February 3, 2007January 31, 2009 (in millions of dollars):
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | ||||||||||||||||
Contractual Obligations | ||||||||||||||||||||||
Long-term debt | $ | 878 | $ | 993 | $ | 912 | $ | 42 | $ | 537 | $3,219 | $ | 6,581 | |||||||||
Interest on long-term debt (1) | 428 | 332 | 304 | 250 | 222 | 1,712 | 3,248 | |||||||||||||||
Capital lease obligations | 57 | 54 | 52 | 51 | 49 | 294 | 557 | |||||||||||||||
Operating lease obligations | 778 | 734 | 690 | 642 | 587 | 4,118 | 7,549 | |||||||||||||||
Low-income housing obligations | 6 | 2 | — | — | — | — | 8 | |||||||||||||||
Financed lease obligations | 11 | 11 | 11 | 11 | 11 | 157 | 212 | |||||||||||||||
Construction commitments | 190 | — | — | — | — | — | 190 | |||||||||||||||
Purchase obligations | 431 | 56 | 46 | 34 | 23 | 16 | 606 | |||||||||||||||
Total | $ | 2,779 | $ | 2,182 | $ | 2,015 | $ | 1,030 | $ | 1,429 | $9,516 | $ | 18,951 | |||||||||
Other Commercial Commitments | ||||||||||||||||||||||
Credit facility | $ | 352 | $ | — | $ | — | $ | — | $ | — | $ — | $ | 352 | |||||||||
Standby letters of credit | 331 | — | — | — | — | — | 331 | |||||||||||||||
Surety bonds | 53 | — | — | — | — | — | 53 | |||||||||||||||
Guarantees | 6 | — | — | — | — | — | 6 | |||||||||||||||
Total | $ | 742 | $ | — | $ | — | $ | — | $ | — | $ — | $ | 742 |
2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | |||||||||||||||||
Contractual Obligations(1) (2) | |||||||||||||||||||||||
Long-term debt (5) | $ | 528 | $ | 542 | $ | 544 | $ | 1,414 | $ | 1,019 | $ | 3,550 | $ | 7,597 | |||||||||
Interest on long-term debt (3) | 479 | 426 | 398 | 350 | 286 | 2,442 | 4,381 | ||||||||||||||||
Capital lease obligations | 53 | 51 | 57 | 48 | 45 | 219 | 473 | ||||||||||||||||
Operating lease obligations | 778 | 738 | 674 | 624 | 575 | 3,274 | 6,663 | ||||||||||||||||
Low-income housing obligations | 2 | — | — | — | — | — | 2 | ||||||||||||||||
Financed lease obligations | 13 | 13 | 13 | 13 | 13 | 172 | 237 | ||||||||||||||||
Self-insurance liability (4) | 192 | 110 | 73 | 45 | 26 | 22 | 468 | ||||||||||||||||
Construction commitments | 128 | — | — | — | — | — | 128 | ||||||||||||||||
Purchase obligations | 394 | 87 | 63 | 51 | 28 | 19 | 642 | ||||||||||||||||
Total | $ | 2,567 | $ | 1,967 | $ | 1,822 | $ | 2,545 | $ | 1,992 | $ | 9,698 | $ | 20,591 | |||||||||
Other Commercial Commitments | |||||||||||||||||||||||
Credit facility (5) | $ | 129 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 129 | |||||||||
Standby letters of credit | 344 | — | — | — | — | — | 344 | ||||||||||||||||
Surety bonds | 106 | — | — | — | — | — | 106 | ||||||||||||||||
Guarantees | 27 | — | — | — | — | — | 27 | ||||||||||||||||
Total | $ | 606 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 606 |
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(1) | The contractual obligations table excludes funding of pension and other postretirement benefit obligations, which totaled approximately $45 million in 2008. This table also excludes contributions under various multi-employer pension plans, which totaled $219 million in 2008. | |
(2) | We adopted FIN 48 on February 4, 2007. See Note 4 to our Consolidated Financial Statements for information regarding the adoption of FIN 48. The liability related to unrecognized tax benefits has been excluded from the contractual obligations table because a reasonable estimate of the timing of future tax settlements cannot be determined. | |
(3) | Amounts include contractual interest payments using the interest rate as of |
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(4) | The amounts included in the contractual obligations table for self-insurance liability have been stated on a present value basis. | |
(5) | Long-term debt includes amounts under our credit facility which are also included in the Other Commercial Commitments table. |
Our construction commitments include funds owed to third parties for projects currently under construction. These amounts are reflected in other current liabilities in our Consolidated Balance Sheets.
Our purchase obligations include commitments to be utilized in the normal course of business, such as several contracts to purchase raw materials utilized in our manufacturing plants and several contracts to purchase energy to be used in our stores and manufacturing facilities. Our obligations also include management fees for facilities operated by third parties. Any upfront vendor allowances or incentives associated with outstanding purchase commitments are recorded as either current or long-term liabilities in our Consolidated Balance Sheets.
As of February 3, 2007,January 31, 2009, we maintained a $2.5 billion, five-year revolving credit facility totaling $2.5 billion, whichthat, unless extended, terminates in 2011. Outstanding borrowings under the credit agreement and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit facility.agreement. In addition to the credit facility,agreement, we maintain a $50 millionmaintained three uncommitted money market line, borrowings under which also reducelines totaling $75 million in the funds available under our credit facility.aggregate. The money market line borrowingslines allow us to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit agreement. As of February 3, 2007,January 31, 2009, we had outstandingno borrowings totaling $352 million under our credit agreement and net outstanding commercial paper program. Weof $90 million, that reduced amounts available under our credit agreement. In addition, as of January 31, 2009, we had no borrowings under theour money market line as of February 3, 2007.lines totaling $39 million. The outstanding letters of credit that reduced thereduce funds available under our credit facilityagreement totaled $331$337 million as of February 3, 2007.January 31, 2009.
In addition to the available credit mentioned above, as of February 3, 2007,January 31, 2009, we had availableauthorized for issuance $1.2$1.4 billion of securities under a shelf registration statement filed with the SEC and declared effective on December 9, 2004.20, 2007.
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 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 Kroger, 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.
Most of our outstanding public debt is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and some of our subsidiaries. See Note 1716 to the Consolidated Financial Statements for a more detailed discussion of those arrangements. In addition, we have guaranteed half of the indebtedness of threetwo real estate joint venturesentities in which we are a partner withhave 50% ownership.ownership interest. Our share of the responsibility for this indebtedness, should the partnershipsentities be unable to meet their obligations, totals approximately $6$7 million. Based on the covenants underlying this indebtedness as of February 3, 2007,January 31, 2009, it is unlikely that we will be responsible for repayment of these obligations. We have also agreed to guarantee, up to $25 million, the indebtedness of an entity of which we have 25% ownership interest. Our share of the responsibility, as
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of January 31, 2009, should the entity be unable to meet its obligations, totals approximately $25 million and is collateralized by approximately $8 million of inventory located in our stores. In addition, we have guaranteed half of the lease payments of a location leased by an entity in which we have a 50% ownership interest. The net present value of the guaranteed rental payments is approximately $6 million.
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 Kroger; 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 Kroger’s aggregate indemnification obligation could result in a material liability, we are not aware of noany current matter that we expect tocould result in a material liabilityliability.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123 (Revised 2002),Effective January 31, 2009, we adopted FAS 140-4 and FIN 46(R)-8,Share-Based PaymentDisclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“SFAS No. 123(R)”), which replaced SFAS No. 123, superseded APB No. 25(FAS 140-4 and related interpretationsFIN 46(R)-8).FAS 140-4 and amended SFAS No. 95,StatementFIN 46(R)-8 require additional disclosures about an entity’s involvement with variable interest entities and transfers of Cash Flows. SFAS No 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. We adopted the provisions of SFAS No. 123(R) in the first quarter of 2006. The implementation of SFAS No. 123(R) reduced our net earnings $0.06 per diluted share in 2006.assets. See Note 102 to ourthe Consolidated Financial Statements for further discussion of the effectadoption of FAS 140-4 and FIN 46(R)-8.
Effective February 3, 2008, we adopted SFAS No. 157, Fair Value Measurements (SFAS 157), except for non-financial assets and non-financial liabilities as deferred until February 1, 2009 by FASB Staff Position (FSP) 157-2Partial Deferral of the Effective Date of Statement No. 157 (FSP 157-2). SFAS 157 defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not expand or require any new fair value measurements. FSP 157-2 deferred the effective date of SFAS 157 for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. See Note 7 to the Consolidated Financial Statements for further discussion of the adoption of SFAS No. 123(R) had on our Consolidated Financial Statements.157.
In September 2006, theEffective February 4, 2007, we adopted FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 99, 106, and 123(R). SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. In addition, SFAS No. 158 requires an employer to measure a plan’s assets and obligations and determine its funded status as of the end of the employer’s fiscal year and recognize changes in the funded status of a defined benefit postretirement plan in the year the changes occur and that those changes be recorded in comprehensive income, net of tax, as a separate component of shareowners’ equity. SFAS No. 158 also requires additional footnote disclosure. The recognition and disclosure provisions of SFAS No. 158 became effective for us on February 3, 2007. The measurement date provisions of SFAS No. 158 will become effective for our fiscal year beginning February 1, 2009. See Note 14 to our Consolidated Financial Statements for the effects the implementation of SFAS No. 158 had on our Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the FASB issued Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes-anTaxes – an interpretation of FASB Statement No. 109. FIN (FIN No. 4848), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretationinterpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 becomes effectiveSee Note 4 to the Consolidated Financial Statements for our fiscal year beginning February 4, 2007. We are evaluatingfurther discussion of the effect the implementationadoption of FIN No. 48 will48.
Effective February 3, 2007, we adopted the recognition and disclosure provisions (except for the measurement date change) of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statement No. 87, 99, 106 and 132(R)(SFAS 158), which requires the recognition of the funded status of our retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and transition obligations that have on our Consolidated Financial Statements.not yet
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been recognized are required to be recorded as a component of AOCI. We adopted the measurement date provisions of SFAS 158 effective February 3, 2008. The majority of our pension and postretirement plans previously used a December 31 measurement date. All plans are now measured as of our fiscal year end. The non-cash effect of the adoption of the measurement date provisions of SFAS 158 decreased shareowners’ equity by approximately $5 million ($3 million after-tax) and increased long-term liabilities by approximately $5 million. There was no effect on our results of operations. See Note 13 to the Consolidated Financial Statements for further discussion of the adoption of this standard.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006,December 2007, the FASB issued SFAS No. 157,160,Fair Value MeasurementNoncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51(SFAS 160). SFAS No. 157 defines fair value, establishes160 will require the consolidation of noncontrolling interests as a framework for measuring fair value in GAAP and expands disclosures about fair value measurement.component of equity. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157160 will become effective for our fiscal year beginning February 3, 2008.1, 2009. We are currently evaluating the effect the implementationadoption of SFAS No. 157160 will have on our Consolidated Financial Statements.
In FebruaryDecember 2007, the FASB issued SFAS No. 159,141 (Revised 2007),The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115Business Combinations.(SFAS 141R), which replaces SFAS No. 159 permits entities to make an irrevocable election to measure certain financial instruments141. SFAS 141R further expands the definitions of a business and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized into net earnings at each subsequentmeasurement and reporting date.in a business combination. SFAS No. 159141R will be become effective for our fiscal year beginning February 3, 2008.1, 2009. Because the standard will only impact transactions entered into after February 1, 2009, SFAS 141R will not effect our Consolidated Financial Statements upon adoption.
In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires enhanced disclosures of an entity’s derivative and hedging activities. SFAS 161 will become effective for our fiscal year beginning February 1, 2009. We are currently evaluating the effect the adoption of SFAS No. 159161 will have on our Consolidated Financial Statements.
In June 2006,2008, the FASB ratified the consensus of Emerging Issues Task Force (“EITF”) issueissued FSP No. 06-03,EITF 03-6-1,How Taxes Get Collected from CustomersDetermining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(FSP No. EITF 03-6-1).FSP No. EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities and Remitted to Governmental Authorities Should Be Presentedincluded in the Income Statement (That Is, Gross versus Net Presentation).calculation of basic EPS. FSP No. EITF No. 06-03 indicates that the income statement presentation of taxes within the scope of the Issue on either a gross basis or a net basis is an accounting policy decision that should be disclosed pursuant to Opinion 22. EITF No. 06-03 becomes03-6-1 will become effective for our fiscal year beginning February 4, 2007.1, 2009. We do not expectare currently evaluating the effect the adoption of FSP No. EITF No. 06-03 to03-6-1 will have a material effect on our Consolidated Financial Statements.
OUTLOOK
This discussion and analysis contains certain forward-looking statements about Kroger’s future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available. Such statements relate to, among other things: projected change in net earnings; identical sales growth; expected pension plan contributions; our ability to generate operating cash flow; projected capital expenditures; square footage growth; opportunities to reduce costs; cash flow requirements; and our operating plan for the future; and are indicated by words such as “comfortable,” “committed,” “will,” “expect,” “goal,” “should,” “intend,” “target,” “believe,” “anticipate,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.
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Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21 E 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.
We expect earnings per diluted share in the range of $1.60-$2.00-$1.652.05 for 2007.2009. This represents earnings pershareearningsper share growth of approximately 9%-12%4%-7% in 2007, net of2009, excluding the effect of a 53
We expect identical food storesupermarket sales growth, excluding fuel sales, of 3%-5%-4% in 2007.
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Various uncertainties and other factors could cause us to fail to achieve our goals. These include:
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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.
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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareowners and Board of Directors of
The Kroger Co.:
We have completed integrated audits of The Kroger Co.’s consolidated financial statements and of its internal control over financial reporting as of February 3, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
CONSOLIDATEDFINANCIALSTATEMENTS
In our opinion, the accompanying consolidated financialbalance sheets and the related consolidated statements of operations, cash flows and changes in shareowners’ equity present fairly, in all material respects, the financial position of The Kroger Co. and its subsidiaries at January 31, 2009 and February 3, 2007 and January 28, 2006,2, 2008, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 2007January 31, 2009 in conformity with accounting principles generally accepted in the United States of America. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2009, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Company’s management.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 an opinionopinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded 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 opinion.opinions.
As discussed in Note 1514 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R),Share-Based Payment, as of January 29, 2006 and the recognition and disclosure provisionsmeasurement date provision of Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of February 3, 2007.
INTERNALCONTROLOVERFINANCIALREPORTING
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control OverJanuary 31, 2009, the provisions of Statement of Financial Reporting appearing on page A-1 of this Annual Report, that the Company maintained effective internal control overAccounting Standards No. 157,Fair Value Measurements, for financial reportingassets and financial liabilities as of February 3, 2007 based on criteria established in2008, the provisions of Financial Accounting Standards Board Interpretation No. 48,Internal Control - Integrated FrameworkAccounting for Uncertainty in Income Taxes issued by, as of February 4, 2007 and the Committeerecognition and disclosure provisions of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reportingSFAS No. 158 as of February 3, 2007, based on criteria established in2007.Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing
A-31
and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides 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.
A-31
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.
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Cincinnati, Ohio |
A-32
THE KROGER CO. | |||||||
CONSOLIDATEDBALANCESHEETS | |||||||
February 3, | January 28, | ||||||
(In millions - except par value) | 2007 | 2006 | |||||
ASSETS | |||||||
Current assets | |||||||
Cash and temporary cash investments | $ | 189 | $ | 210 | |||
Deposits in-transit | 614 | 488 | |||||
Receivables | 773 | 680 | |||||
Receivables - taxes | 5 | 6 | |||||
FIFO inventory | 5,059 | 4,886 | |||||
LIFO credit | (450 | ) | (400 | ) | |||
Prefunded employee benefits | 300 | 300 | |||||
Prepaid and other current assets | 265 | 296 | |||||
Total current assets | 6,755 | 6,466 | |||||
Property, plant and equipment, net | 11,779 | 11,365 | |||||
Goodwill | 2,192 | 2,192 | |||||
Other assets | 489 | 459 | |||||
Total Assets | $ | 21,215 | $ | 20,482 | |||
LIABILITIES | |||||||
Current liabilities | |||||||
Current portion of long-term debt including obligations under capital leases | |||||||
and financing obligations | $ | 906 | $ | 554 | |||
Accounts payable | 3,804 | 3,546 | |||||
Accrued salaries and wages | 796 | 780 | |||||
Deferred income taxes | 268 | 217 | |||||
Other current liabilities | 1,807 | 1,618 | |||||
Total current liabilities | 7,581 | 6,715 | |||||
Long-term debt including obligations under capital leases and financing | |||||||
obligations | |||||||
Face value long-term debt including obligations under capital leases and | |||||||
financing obligations | 6,136 | 6,651 | |||||
Adjustment to reflect fair value interest rate hedges | 18 | 27 | |||||
Long-term debt including obligations under capital leases and financing | |||||||
obligations | 6,154 | 6,678 | |||||
Deferred income taxes | 722 | 843 | |||||
Other long-term liabilities | 1,835 | 1,856 | |||||
Total Liabilities | 16,292 | 16,092 | |||||
Commitments and Contingencies (See Note 11) | |||||||
SHAREOWNERS’ EQUITY | |||||||
Preferred stock, $100 par, 5 shares authorized and unissued | — | — | |||||
Common stock, $1 par, 1,000 shares authorized: 937 shares issued in 2006 and | |||||||
927 shares issued in 2005 | 937 | 927 | |||||
Additional paid-in capital | 2,755 | 2,536 | |||||
Accumulated other comprehensive loss | (259 | ) | (243 | ) | |||
Accumulated earnings | 5,501 | 4,573 | |||||
Common stock in treasury, at cost, 232 shares in 2006 and 204 shares in 2005 | (4,011 | ) | (3,403 | ) | |||
Total Shareowners’ Equity | 4,923 | 4,390 | |||||
Total Liabilities and Shareowners’ Equity | $ | 21,215 | $ | 20,482 | |||
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
January 31, | February 2, | ||||||
(In millions, except par values) | 2009 | 2008 | |||||
ASSETS | |||||||
Current assets | |||||||
Cash and temporary cash investments | $ | 263 | $ | 242 | |||
Deposits in-transit | 631 | 676 | |||||
Receivables | 944 | 786 | |||||
FIFO Inventory | 5,659 | 5,453 | |||||
LIFO credit | (800 | ) | (604 | ) | |||
Prefunded employee benefits | 300 | 300 | |||||
Prepaid and other current assets | 209 | 255 | |||||
Total current assets | 7,206 | 7,108 | |||||
Property, plant and equipment, net | 13,161 | 12,498 | |||||
Goodwill | 2,271 | 2,144 | |||||
Other assets | 573 | 543 | |||||
Total Assets | $ | 23,211 | $ | 22,293 | |||
LIABILITIES | |||||||
Current liabilities | |||||||
Current portion of long-term debt including obligations under capital leases | |||||||
and financing obligations | $ | 558 | $ | 1,592 | |||
Trade accounts payable | 3,822 | 3,867 | |||||
Accrued salaries and wages | 828 | 815 | |||||
Deferred income taxes | 344 | 239 | |||||
Other current liabilities | 2,077 | 2,170 | |||||
Total current liabilities | 7,629 | 8,683 | |||||
Long-term debt including obligations under capital leases and financing obligations | |||||||
Face value long-term debt including obligations under capital leases and | |||||||
financing obligations | 7,460 | 6,485 | |||||
Adjustment to reflect fair value interest rate hedges | 45 | 44 | |||||
Long-term debt including obligations under capital leases and financing | |||||||
obligations | 7,505 | 6,529 | |||||
Deferred income taxes | 384 | 367 | |||||
Pension and postretirement benefit obligations | 1,174 | 554 | |||||
Other long-term liabilities | 1,248 | 1,246 | |||||
Total Liabilities | 17,940 | 17,379 | |||||
Minority interests | 95 | — | |||||
Commitments and Contingencies (See Note 11) | |||||||
SHAREOWNERS’ EQUITY | |||||||
Preferred stock, $100 par, 5 shares authorized and unissued | — | — | |||||
Common stock, $1 par, 1,000 shares authorized: 955 shares issued in 2008 and 947 | |||||||
shares issued in 2007 | 955 | 947 | |||||
Additional paid-in capital | 3,266 | 3,031 | |||||
Accumulated other comprehensive loss | (495 | ) | (122 | ) | |||
Accumulated earnings | 7,489 | 6,480 | |||||
Common stock in treasury, at cost, 306 shares in 2008 and 284 shares in 2007 | (6,039 | ) | (5,422 | ) | |||
Total Shareowners’ Equity | 5,176 | 4,914 | |||||
Total Liabilities and Shareowners’ Equity | $ | 23,211 | $ | 22,293 | |||
The accompanying notes are an integral part of the consolidated financial statements.
A-33
THE KROGERCO. | ||||||||||
CONSOLIDATEDSTATEMENTSOFOPERATIONS | ||||||||||
Years Ended February 3, 2007, January 28, 2006, and January 29, 2005 | ||||||||||
2006 | 2005 | 2004 | ||||||||
(In millions, except per share amounts) | (53 weeks) | (52 weeks) | (52 weeks) | |||||||
Sales | $66,111 | $60,553 | $56,434 | |||||||
Merchandise costs, including advertising, warehousing, and | ||||||||||
transportation, excluding items shown separately below | 50,115 | 45,565 | 42,140 | |||||||
Operating, general and administrative | 11,839 | 11,027 | 10,611 | |||||||
Rent | 649 | 661 | 680 | |||||||
Depreciation and amortization | 1,272 | 1,265 | 1,256 | |||||||
Goodwill impairment charge | — | — | 904 | |||||||
Operating Profit | 2,236 | 2,035 | 843 | |||||||
Interest expense | 488 | 510 | 557 | |||||||
Earnings before income tax expense | 1,748 | 1,525 | 286 | |||||||
Income tax expense | 633 | 567 | 390 | |||||||
Net earnings (loss) | $ 1,115 | $ 958 | $ (104 | ) | ||||||
Net earnings (loss) per basic common share | $ 1.56 | $ 1.32 | $ (0.14 | ) | ||||||
Average number of common shares used in basic calculation | 715 | 724 | 736 | |||||||
Net earnings (loss) per diluted common share | $ 1.54 | $ 1.31 | $ (0.14 | ) | ||||||
Average number of common shares used in diluted calculation | 723 | 731 | 736 | |||||||
THE KROGER CO.
CONSOLIDATED STATEMENTSOF OPERATIONS
Years Ended January 31, 2009, February 2, 2008 and February 3, 2007
2008 | 2007 | 2006 | |||||||||
(In millions, except per share amounts) | (52 weeks) | (52 weeks) | (53 weeks) | ||||||||
Sales | $ | 76,000 | $ | 70,235 | $ | 66,111 | |||||
Merchandise costs, including advertising, warehousing, and | |||||||||||
transportation, excluding items shown separately below | 58,564 | 53,779 | 50,115 | ||||||||
Operating, general and administrative | 12,884 | 12,155 | 11,839 | ||||||||
Rent | 659 | 644 | 649 | ||||||||
Depreciation and amortization | 1,442 | 1,356 | 1,272 | ||||||||
Operating Profit | 2,451 | 2,301 | 2,236 | ||||||||
Interest expense | 485 | 474 | 488 | ||||||||
Earnings before income tax expense | 1,966 | 1,827 | 1,748 | ||||||||
Income tax expense | 717 | 646 | 633 | ||||||||
Net earnings | $ | 1,249 | $ | 1,181 | $ | 1,115 | |||||
Net earnings per basic common share | $ | 1.92 | $ | 1.71 | $ | 1.56 | |||||
Average number of common shares used in basic calculation | 652 | 690 | 715 | ||||||||
Net earnings per diluted common share | $ | 1.90 | $ | 1.69 | $ | 1.54 | |||||
Average number of common shares used in diluted calculation | 659 | 698 | 723 | ||||||||
Dividends declared per common share | $ | .36 | $ | .30 | $ | .26 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
A-34
THE KROGERCO. | ||||||||||||
CONSOLIDATEDSTATEMENTSOFCASHFLOWS | ||||||||||||
Year Ended February 3, 2007, January 28, 2006 and January 29, 2005 | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(In millions) | (53 weeks) | (52 weeks) | (52 weeks) | |||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net earnings (loss) | $1,115 | $ 958 | $ (104 | ) | ||||||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating | ||||||||||||
activities: | ||||||||||||
Depreciation and amortization | 1,272 | 1,265 | 1,256 | |||||||||
LIFO charge | 50 | 27 | 49 | |||||||||
Stock option expense | 72 | 7 | 13 | |||||||||
Expense for Company-sponsored pension plans | 161 | 138 | 117 | |||||||||
Goodwill impairment charge | — | — | 861 | |||||||||
Deferred income taxes | (60 | ) | (63 | ) | 230 | |||||||
Other | 20 | 39 | 59 | |||||||||
Changes in operating assets and liabilities net of effects from acquisitions of | ||||||||||||
businesses: | ||||||||||||
Store deposits in-transit | (125 | ) | 18 | 73 | ||||||||
Inventories | (173 | ) | (157 | ) | (236 | ) | ||||||
Receivables | (90 | ) | (19 | ) | 13 | |||||||
Prepaid expenses | (43 | ) | 31 | (31 | ) | |||||||
Accounts payable | 256 | (80 | ) | 167 | ||||||||
Accrued expenses | 98 | 155 | (23 | ) | ||||||||
Income taxes receivable (payable) | (4 | ) | 200 | (86 | ) | |||||||
Contribution to Company-sponsored pension plans | (150 | ) | (300 | ) | (35 | ) | ||||||
Other | (48 | ) | (27 | ) | 7 | |||||||
Net cash provided by operating activities | 2,351 | 2,192 | 2,330 | |||||||||
Cash Flows From Investing Activities: | ||||||||||||
Capital expenditures, excluding acquisitions | (1,683 | ) | (1,306 | ) | (1,634 | ) | ||||||
Proceeds from sale of assets | 143 | 69 | 86 | |||||||||
Payments for acquisitions, net of cash acquired | — | — | (25 | ) | ||||||||
Other | (47 | ) | (42 | ) | (35 | ) | ||||||
Net cash used by investing activities | (1,587 | ) | (1,279 | ) | (1,608 | ) | ||||||
Cash Flows From Financing Activities: | ||||||||||||
Proceeds from issuance of long-term debt | 10 | 14 | 616 | |||||||||
Proceeds from lease-financing transactions | 15 | 76 | 6 | |||||||||
Payments on long-term debt | (556 | ) | (103 | ) | (701 | ) | ||||||
Borrowings (payments) on bank revolver | 352 | (694 | ) | (309 | ) | |||||||
Debt prepayment costs | — | — | (25 | ) | ||||||||
Proceeds from issuance of capital stock | 168 | 78 | 25 | |||||||||
Treasury stock purchases | (633 | ) | (252 | ) | (319 | ) | ||||||
Dividends paid | (140 | ) | — | — | ||||||||
Other | (1 | ) | 34 | (30 | ) | |||||||
Net cash used by financing activities | (785 | ) | (847 | ) | (737 | ) | ||||||
Net increase (decrease) in cash and temporary cash investments | (21 | ) | 66 | (15 | ) | |||||||
Cash and temporary cash investments: | ||||||||||||
Beginning of year | 210 | 144 | 159 | |||||||||
End of year | $ 189 | $ 210 | $ 144 | |||||||||
Reconciliation of capital expenditures | ||||||||||||
Payments for property and equipment | $(1,683 | ) | $(1,306 | ) | $(1,634 | ) | ||||||
Changes in construction-in-progress payables | (94 | ) | — | — | ||||||||
Total capital expenditures | $(1,777 | ) | $(1,306 | ) | $(1,634 | ) | ||||||
Disclosure of cash flow information: | ||||||||||||
Cash paid during the year for interest | $ 514 | $ 511 | $ 590 | |||||||||
Cash paid during the year for income taxes | $ 615 | $ 431 | $ 206 | |||||||||
THE KROGER CO.
CONSOLIDATED STATEMENTSOF CASH FLOWS
Years Ended January 31, 2009, February 2, 2008 and February 3, 2007
2008 | 2007 | 2006 | |||||||||
(In millions) | (52 weeks) | (52 weeks) | (53 weeks) | ||||||||
Cash Flows From Operating Activities: | |||||||||||
Net earnings | $ 1,249 | $ 1,181 | $1,115 | ||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 1,442 | 1,356 | 1,272 | ||||||||
LIFO charge | 196 | 154 | 50 | ||||||||
Stock-based employee compensation | 91 | 87 | 72 | ||||||||
Expense for Company-sponsored pension plans | 44 | 67 | 161 | ||||||||
Deferred income taxes | 341 | (86 | ) | (60 | ) | ||||||
Other | (36 | ) | 37 | 20 | |||||||
Changes in operating assets and liabilities net of effects from acquisitions of | |||||||||||
businesses: | |||||||||||
Store deposits in-transit | 45 | (62 | ) | (125 | ) | ||||||
Inventories | (193 | ) | (381 | ) | (173 | ) | |||||
Receivables | (28 | ) | (17 | ) | (90 | ) | |||||
Prepaid expenses | 47 | 3 | (43 | ) | |||||||
Accounts payable | (53 | ) | 165 | 220 | |||||||
Accrued expenses | (33 | ) | 174 | 134 | |||||||
Income taxes receivable (payable) | (206 | ) | 43 | (4 | ) | ||||||
Contribution to Company-sponsored pension plans | (20 | ) | (51 | ) | (150 | ) | |||||
Other | 10 | (89 | ) | (48 | ) | ||||||
Net cash provided by operating activities | 2,896 | 2,581 | 2,351 | ||||||||
Cash Flows From Investing Activities: | |||||||||||
Payments for capital expenditures | (2,149 | ) | (2,126 | ) | (1,683 | ) | |||||
Proceeds from sale of assets | 59 | 49 | 143 | ||||||||
Payments for acquisitions | (80 | ) | (90 | ) | — | ||||||
Other | (9 | ) | (51 | ) | (47 | ) | |||||
Net cash used by investing activities | (2,179 | ) | (2,218 | ) | (1,587 | ) | |||||
Cash Flows From Financing Activities: | |||||||||||
Proceeds from issuance of long-term debt | 1,377 | 1,372 | 10 | ||||||||
Payments on long-term debt | (1,048 | ) | (560 | ) | (556 | ) | |||||
Borrowings (payments) on bank revolver | (441 | ) | 218 | 352 | |||||||
Excess tax benefits on stock-based awards | 15 | 36 | 38 | ||||||||
Proceeds from issuance of capital stock | 172 | 188 | 168 | ||||||||
Treasury stock purchases | (637 | ) | (1,421 | ) | (633 | ) | |||||
Dividends paid | (227 | ) | (202 | ) | (140 | ) | |||||
Increase in book overdrafts | 2 | 61 | 1 | ||||||||
Other | 18 | (2 | ) | (25 | ) | ||||||
Net cash used by financing activities | (769 | ) | (310 | ) | (785 | ) | |||||
Net increase (decrease) in cash and temporary cash investments | (52 | ) | 53 | (21 | ) | ||||||
Cash from Consolidated Variable Interest Entity | 73 | — | — | ||||||||
Cash and temporary cash investments: | |||||||||||
Beginning of year | 242 | 189 | 210 | ||||||||
End of year | $ 263 | $ 242 | $ 189 | ||||||||
Reconciliation of capital expenditures: | |||||||||||
Payments for capital expenditures | $(2,149 | ) | $(2,126 | ) | $(1,683 | ) | |||||
Changes in construction-in-progress payables | (4 | ) | 66 | (94 | ) | ||||||
Total capital expenditures | $(2,153 | ) | $(2,060 | ) | $(1,777 | ) | |||||
Disclosure of cash flow information: | |||||||||||
Cash paid during the year for interest | $ 485 | $ 477 | $ 514 | ||||||||
Cash paid during the year for income taxes | $ 641 | $ 640 | $ 615 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
A-35
THEKROGERCO. | ||||||||||||||||||||||||||||
CONSOLIDATEDSTATEMENTOFCHANGESINSHAREOWNERS’EQUITY | ||||||||||||||||||||||||||||
Year Ended February 3, 2007, January 28, 2006 and January 29, 2005 | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Common Stock | Paid-In | TreasuryStock | Comprehensive | Accumulated | ||||||||||||||||||||||||
(In millions) | Shares | Amount | Capital | Shares | Amount | Gain (Loss) | Earnings | Total | ||||||||||||||||||||
Balances at January 31, 2004 | 913 | $ 913 | $ 2,382 | 170 | $ (2,827 | ) | $ (124 | ) | $ 3,724 | $4,068 | ||||||||||||||||||
Issuance of common stock: | ||||||||||||||||||||||||||||
Stock options and warrants exercised | 4 | 4 | 25 | — | — | — | — | 29 | ||||||||||||||||||||
Restricted stock issued | 1 | 1 | 9 | — | — | — | — | 10 | ||||||||||||||||||||
Treasury stock activity: | ||||||||||||||||||||||||||||
Treasury stock purchases, at cost | — | — | — | 18 | (294 | ) | — | — | (294 | ) | ||||||||||||||||||
Stock options and restricted stock exchanged | — | — | — | 2 | (28 | ) | — | — | (28 | ) | ||||||||||||||||||
Tax benefits from exercise of stock options and | ||||||||||||||||||||||||||||
warrants | — | — | 16 | — | — | — | — | 16 | ||||||||||||||||||||
Other comprehensive gain, net of income | ||||||||||||||||||||||||||||
tax of $47 | — | — | — | — | — | (78 | ) | — | (78 | ) | ||||||||||||||||||
Net loss | — | — | — | — | — | — | (104 | ) | (104 | ) | ||||||||||||||||||
Balances at January 29, 2005 | 918 | 918 | 2,432 | 190 | (3,149 | ) | (202 | ) | 3,620 | 3,619 | ||||||||||||||||||
Issuance of common stock: | ||||||||||||||||||||||||||||
Stock options and warrants exercised | 8 | 8 | 57 | — | — | — | — | 65 | ||||||||||||||||||||
Restricted stock issued | 1 | 1 | 13 | — | — | — | — | 14 | ||||||||||||||||||||
Treasury stock activity: | ||||||||||||||||||||||||||||
Treasury stock purchases, at cost | — | — | — | 14 | (239 | ) | — | — | (239 | ) | ||||||||||||||||||
Stock options and restricted stock exchanged | — | — | — | — | (15 | ) | — | — | (15 | ) | ||||||||||||||||||
Tax benefits from exercise of stock options and | ||||||||||||||||||||||||||||
warrants | — | — | 34 | — | — | — | — | 34 | ||||||||||||||||||||
Other comprehensive loss net of income | ||||||||||||||||||||||||||||
tax of $26 | — | — | — | — | — | (41 | ) | — | (41 | ) | ||||||||||||||||||
Other | — | — | — | — | — | — | (5 | ) | (5 | ) | ||||||||||||||||||
Net earnings | — | — | — | — | — | — | 958 | 958 | ||||||||||||||||||||
Balances at January 28, 2006 | 927 | 927 | 2,536 | 204 | (3,403 | ) | (243 | ) | 4,573 | 4,390 | ||||||||||||||||||
Issuance of common stock: | ||||||||||||||||||||||||||||
Stock options and warrants exercised | 9 | 9 | 95 | (1 | ) | 30 | — | — | 134 | |||||||||||||||||||
Restricted stock issued | 1 | 1 | 13 | — | (5 | ) | — | — | 9 | |||||||||||||||||||
Treasury stock activity: | ||||||||||||||||||||||||||||
Treasury stock purchases, at cost | — | — | — | 18 | (374 | ) | — | — | (374 | ) | ||||||||||||||||||
Stock options and restricted stock exchanged | — | — | — | 11 | (259 | ) | — | — | (259 | ) | ||||||||||||||||||
Tax benefits from exercise of stock options and | ||||||||||||||||||||||||||||
warrants | — | — | 39 | — | — | — | — | 39 | ||||||||||||||||||||
Share-based employee compensation | — | — | 72 | — | — | — | — | 72 | ||||||||||||||||||||
Other comprehensive gain net of | ||||||||||||||||||||||||||||
income tax of $(63) | — | — | — | — | — | 102 | — | 102 | ||||||||||||||||||||
SFAS No. 158 adjustment net of | ||||||||||||||||||||||||||||
income tax of $71 | — | — | — | — | — | (120 | ) | — | (120 | ) | ||||||||||||||||||
Other | — | — | — | — | — | 2 | — | 2 | ||||||||||||||||||||
Cash dividends declared | ||||||||||||||||||||||||||||
($0.26 per common share) | — | — | — | — | — | — | (187 | ) | (187 | ) | ||||||||||||||||||
Net earnings | — | — | — | — | — | — | 1,115 | 1,115 | ||||||||||||||||||||
Balances at February 3, 2007 | 937 | $ 937 | $ 2,755 | 232 | $ (4,011 | ) | $ (259 | ) | $ 5,501 | $4,923 | ||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||||||||||||
Net earnings (loss) | $1,115 | $958 | $(104 | ) | ||||||||||||||||||||||||
Reclassification adjustment for losses included | ||||||||||||||||||||||||||||
in net earnings (loss) | — | — | — | |||||||||||||||||||||||||
Unrealized gain (loss) on hedging activities, net | ||||||||||||||||||||||||||||
of income tax of $(5) in 2006 $(1) in 2005 | ||||||||||||||||||||||||||||
and $1 in 2004 | 7 | 1 | (1 | ) | ||||||||||||||||||||||||
Additional minimum pension liability | ||||||||||||||||||||||||||||
adjustment, net of income tax of $(58) in | ||||||||||||||||||||||||||||
2006, $26 in 2005 | ||||||||||||||||||||||||||||
and $46 in 2004 | 95 | (42 | ) | (77 | ) | |||||||||||||||||||||||
Comprehensive income (loss) | $1,217 | $917 | $(182 | ) | ||||||||||||||||||||||||
THE KROGER CO.
CONSOLIDATED STATEMENTOF CHANGESIN SHAREOWNERS’ EQUITY
Years Ended January 31, 2009, February 2, 2008 and February 3, 2007
Accumulated | |||||||||||||||||||||||||||||||
Additional | Other | ||||||||||||||||||||||||||||||
Common Stock | Paid-In | Treasury Stock | Comprehensive | Accumulated | |||||||||||||||||||||||||||
(In millions, except per share amounts) | Shares | Amount | Capital | Shares | Amount | Gain (Loss) | Earnings | Total | |||||||||||||||||||||||
Balances at January 28, 2006 | 927 | $ 927 | $2,536 | 204 | $(3,403 | ) | $(243 | ) | $4,573 | $4,390 | |||||||||||||||||||||
Issuance of common stock: | |||||||||||||||||||||||||||||||
Stock options and warrants exercised | 9 | 9 | 95 | (1 | ) | 30 | — | — | 134 | ||||||||||||||||||||||
Restricted stock issued | 1 | 1 | 13 | — | (5 | ) | — | — | 9 | ||||||||||||||||||||||
Treasury stock activity: | |||||||||||||||||||||||||||||||
Treasury stock purchases, at cost | — | — | — | 18 | (374 | ) | — | — | (374 | ) | |||||||||||||||||||||
Stock options and restricted stock exchanged | — | — | — | 11 | (259 | ) | — | — | (259 | ) | |||||||||||||||||||||
Tax benefits from exercise of stock options and warrants | — | — | 39 | — | — | — | — | 39 | |||||||||||||||||||||||
Share-based employee compensation | — | — | 72 | — | — | — | — | 72 | |||||||||||||||||||||||
Other comprehensive gain net of income tax of $63 | — | — | — | — | — | 102 | — | 102 | |||||||||||||||||||||||
SFAS No. 158 adjustment net of income tax of $(71) | — | — | — | — | — | (120 | ) | — | (120 | ) | |||||||||||||||||||||
Other | — | — | — | — | — | 2 | 2 | ||||||||||||||||||||||||
Cash dividends declared ($0.26 per common share) | — | — | — | — | — | — | (187 | ) | (187 | ) | |||||||||||||||||||||
Net earnings | — | — | — | — | — | — | 1,115 | 1,115 | |||||||||||||||||||||||
Balances at February 3, 2007 | 937 | 937 | 2,755 | 232 | (4,011 | ) | (259 | ) | 5,501 | 4,923 | |||||||||||||||||||||
Issuance of common stock: | |||||||||||||||||||||||||||||||
Stock options exercised | 10 | 10 | 175 | — | 3 | — | — | 188 | |||||||||||||||||||||||
Restricted stock issued | — | — | (25 | ) | (1 | ) | 11 | — | — | (14 | ) | ||||||||||||||||||||
Treasury stock activity: | |||||||||||||||||||||||||||||||
Treasury stock purchases, at cost | — | — | — | 43 | (1,151 | ) | — | — | (1,151 | ) | |||||||||||||||||||||
Stock options and restricted stock exchanged | — | — | — | 10 | (270 | ) | — | — | (270 | ) | |||||||||||||||||||||
Tax benefits from exercise of stock options | — | — | 35 | — | — | — | — | 35 | |||||||||||||||||||||||
Share-based employee compensation | — | — | 87 | — | — | — | — | 87 | |||||||||||||||||||||||
Other comprehensive gain net of income tax of $82 | — | — | — | — | — | 137 | — | 137 | |||||||||||||||||||||||
Other | — | — | 4 | — | (4 | ) | — | 4 | 4 | ||||||||||||||||||||||
Cash dividends declared ($0.30 per common share) | — | — | — | — | — | — | (206 | ) | (206 | ) | |||||||||||||||||||||
Net earnings | — | — | — | — | — | — | 1,181 | 1,181 | |||||||||||||||||||||||
Balances at February 2, 2008 | 947 | 947 | 3,031 | 284 | (5,422 | ) | (122 | ) | 6,480 | 4,914 | |||||||||||||||||||||
Issuance of common stock: | |||||||||||||||||||||||||||||||
Stock options exercised | 8 | 8 | 162 | — | 3 | — | — | 173 | |||||||||||||||||||||||
Restricted stock issued | — | — | (46 | ) | (1 | ) | 30 | — | — | (16 | ) | ||||||||||||||||||||
Treasury stock activity: | |||||||||||||||||||||||||||||||
Treasury stock purchases, at cost | — | — | — | 16 | (448 | ) | — | — | (448 | ) | |||||||||||||||||||||
Stock options and restricted stock exchanged | — | — | — | 7 | (189 | ) | — | — | (189 | ) | |||||||||||||||||||||
Tax benefits from exercise of stock options | — | — | 15 | — | — | — | — | 15 | |||||||||||||||||||||||
Share-based employee compensation | — | — | 91 | — | — | — | — | 91 | |||||||||||||||||||||||
Other comprehensive loss net of income tax of $(224) | — | — | — | — | — | (373 | ) | — | (373 | ) | |||||||||||||||||||||
Other | — | — | 13 | — | (13 | ) | — | (3 | ) | (3 | ) | ||||||||||||||||||||
Cash dividends declared ($0.36 per common share) | — | — | — | — | — | — | (237 | ) | (237 | ) | |||||||||||||||||||||
Net earnings | — | — | — | — | — | — | 1,249 | 1,249 | |||||||||||||||||||||||
Balances at January 31, 2009 | 955 | $ 955 | $3,266 | 306 | $(6,039 | ) | $(495 | ) | $7,489 | $5,176 | |||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||
2008 | 2007 | 2006 | |||||||||||||||||||||||||||||
Net earnings | $1,249 | $1,181 | $1,115 | ||||||||||||||||||||||||||||
Unrealized gain (loss) on hedging activities, net of | |||||||||||||||||||||||||||||||
income tax of $2 in 2008, $(13) in 2007 and $5 in 2006 | 3 | (21 | ) | 7 | |||||||||||||||||||||||||||
Amortization of unrealized gains and losses on hedging | |||||||||||||||||||||||||||||||
activities, net of income tax of $(2) | (3 | ) | — | — | |||||||||||||||||||||||||||
Additional minimum pension liability | |||||||||||||||||||||||||||||||
adjustment, net of income tax of $58 in 2006 | — | — | 95 | ||||||||||||||||||||||||||||
Change in pension and other postretirement | |||||||||||||||||||||||||||||||
defined benefit plans, net of income tax of | |||||||||||||||||||||||||||||||
$(224) in 2008 and $95 in 2007 | (373 | ) | 158 | — | |||||||||||||||||||||||||||
Comprehensive income | $ 876 | $1,318 | $1,217 | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts are in millions except share and per share amounts.
Certain prior-year amounts have been reclassified to conform to current year presentation.
1. ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in preparing these financial statements.
Description of Business, Basis of Presentation and Principles of Consolidation
The Kroger Co. (the “Company”) was founded in 1883 and incorporated in 1902. As of February 3, 2007,January 31, 2009, the Company was one of the largest retailers in the United States 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 its subsidiaries.the Variable Interest Entities (“VIE”) in which the Company is the primary beneficiary. Significant intercompany transactions and balances have been eliminated.
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest January 31. The last three fiscal years consist of the 52-week period ended January 31, 2009, the 52-week period ended February 2, 2008, and the 53-week period ended February 3, 2007, the 52-week period ended January 28, 2006, and the 52-week period ended January 29, 2005.2007.
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 also is required. Actual results could differ from those estimates.
Cash and temporary cash investments
Cash and temporary cash investments represent store cash, escrow deposits and Euros held to settle Euro-denominated contracts. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, InventoriesForeign Currency Translation, the Company valued its carrying amount of Euros at the spot rates as of January 31, 2009 and February 2, 2008.
Inventories
Inventories are stated at the lower of cost (principally on a last-in, first-out “LIFO” basis) or market. In total, approximately 98% and 97% of inventories for 20062008 and 20052007, respectively, 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 $450$800 at January 31, 2009 and $604 at February 3, 2007 and $400 at January 28, 2006.2, 2008. The Company follows the Link-Chain, Dollar-Value LIFO method for purposes of calculating its LIFO charge or credit.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 actual 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 when compared to the retail method of accounting.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
Generally, property,Property, plant and equipment are recorded at cost. Depreciation expense, which includes the amortization of assets recorded under capital leases, is computed principally using the straight-line method over the estimated useful lives of individual assets. Leasehold improvements are depreciated over the shorter of the remaining life of the lease term or the useful life of the asset. 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. Some store equipment acquired as a result of the Fred Meyer merger was assigned a 15-year life. The life of this equipment was not changed. 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 varies from four to 25 years, or the useful life of the asset. Manufacturing 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 $1,442 in 2008, $1,356 in 2007 and $1,272 in 2006, $1,265 in 2005 and $1,256 in 2004.2006.
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 are removed from the balance sheet and any gain or loss is reflected in net earnings.
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 as well as construction allowances 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 trigger events. The reviews are performed at the operating division level. Generally, fair value representsis determined using a multiple of earnings, or discounted projected future cash flows, and is compared to the carrying value of a division 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 division is measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the division’s goodwill. Goodwill impairment is recognized for any excess of the carrying value of the division’s goodwill over the implied fair value. Results of the goodwill impairment reviews performed during 2006, 20052008, 2007 and 20042006 are summarized in Note 2 to the Consolidated Financial Statements.
Intangible Assets
In addition to goodwill, the Company has recorded intangible assets totaling $26, $22 and $28 for leasehold equities, liquor licenses and pharmacy prescription file purchases, respectively at February 3, 2007. Balances at January 28, 2006 were $35, $20 and $30 for leasehold equities, liquor licenses and
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
pharmacy prescription files, respectively. Leasehold equities are amortized over the remaining life of the lease. Owned liquor licenses are not amortized, while liquor licenses that must be renewed are amortized over their useful lives. Pharmacy prescription file purchases are amortized over seven years. These assets are considered annually during the Company’s testing for impairment.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (“SFAS”)SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain trigger 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 trigger 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 is identified 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 determined based on market values or discounted future cash flows are compared to the asset’s current carrying value. Impairment is recordedflows. The Company records impairment when the carrying value exceeds the discounted cash flows.fair market value. With respect to owned property and equipment held for sale, 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 $26, $24 and $61 $48in 2008, 2007 and $24 in 2006, 2005 and 2004.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
All closed store liabilities related to exit or disposal activities initiated after December 31, 2002, are accounted for in accordance with SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. The Company provides for closed store liabilities relating to the present value of the estimated remaining noncancellable 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, or that no longer is needed for its originally intended purpose, 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 ourthe Company’s policy on impairment of long-lived assets. Inventory write-downs, if any, in connection with store closings, are classified in “Merchandise costs.” Costs to transfer inventory and equipment from closed stores are expensed as incurred.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes accrual activity for future lease obligations of stores closed that were closed in the normal course of business, not part of a coordinated closing.business:
Future Lease | |||||
Obligations | |||||
Balance at February 3, 2007 | $ | 89 | |||
Additions | 8 | ||||
Payments | (16 | ) | |||
Adjustments | (7 | ) | |||
Balance at February 2, 2008 | 74 | ||||
Additions | 4 | ||||
Payments | (13 | ) | |||
Balance at January 31, 2009 | $ | 65 |
In addition, as of February 3, 2007, the Company maintained a $48 liability for facility closure costs, representing the present value of lease obligations remaining through 2019 for locations closed in California prior to the Fred Meyer merger in 1999, and an $8 liability for store closing costs related to two distinct, formalized plans that coordinated the closing of several locations over relatively short periods of time in 2000 and 2001.
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 6.
Commodity Price Protection
The Company enters into purchase commitments for various resources, including raw materials utilized in its manufacturing facilities and energy to be used in its stores, manufacturing facilities 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 6.
Benefit Plans
Effective February 3, 2007, the Company adopted the recognition and disclosure provisions (except for the measurement date change) of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB StatementsStatement No. 87, 99, 106 and 123(R)132(R)(SFAS 158), which requiredrequires the recognition of the funded status of its retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized are now required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). The Company adopted the measurement date provisions of SFAS 158 effective February 3, 2008. The majority of our pension and postretirement plans previously used a December 31 measurement date. All plans are now measured as of the Company’s fiscal year end. The non-cash effect of the adoption of the measurement date provisions of SFAS 158 decreased shareholders’ equity by approximately $5 ($3 after-tax) and increased long-term liabilities by approximately $5. There was no effect on the Company’s results of operations.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 1413 and include, among others, the discount rate, the expected long-term rate of return on plan assets 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 1413 for additional information regarding the Company’s benefit plans.
Stock Option PlansBased Compensation
Effective January 29, 2006, theThe Company adoptedaccounts for stock options under the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment, using the modified prospective transition method and, therefore, has not restated results for prior periods.(SFAS 123(R)). Under this method, the Company recognizes compensation expense for all share-based payments granted after January 29, 2006, as well as all share-based payments granted prior to, but not yet vested as of, January 29, 2006, in accordance with SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), the Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. PriorIn addition, the Company accounts for restricted stock awards under SFAS 123(R). The Company records expense for restricted stock awards in an amount equal to the adoption of SFAS No. 123(R), the Company accounted for share-based payments under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, (“APB No. 25”) and the disclosure provisions of SFAS No. 123. The Company also elected the alternative transition method for calculating windfall tax benefits available asfair market value of the adoptionunderlying stock on the grant date of SFAS No. 123(R). For further information regarding the adoption of SFAS No. 123(R), see Note 10 toaward, over the Consolidated Financial Statements.period the awards lapse.
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 4 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 ContingenciesPositions
Effective February 4, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN No. 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. As of February 3, 2007, tax years 2002 through 2004 were undergoing examination by the Internal Revenue Service.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 31, 2009, the most recent examination concluded by the Internal Revenue Service covered the years 2002 through 2004.
The establishmentassessment of the Company’s tax contingency allowancesposition relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Self-Insurance Costs
The Company primarily is 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 31, 2009.
2008 | 2007 | 2006 | ||||||||||
Beginning balance | $ | 470 | $ | 440 | $ | 445 | ||||||
Expense | 189 | 215 | 196 | |||||||||
Claim payments | (191 | ) | (185 | ) | (201 | ) | ||||||
Ending balance | 468 | 470 | 440 | |||||||||
Less current portion | (192 | ) | (183 | ) | (165 | ) | ||||||
Long-term portion | $ | 276 | $ | 287 | $ | 275 |
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 is also similarly self-insured for property-related losses. The Company has purchased stop-loss coverage to limit its exposure to losses in excess of $25 on a per claim basis, except in the case of an earthquake, for which stop-loss coverage is in excess of $50 per claim, up to $200 per claim in California and $300 outside of California.
Revenue Recognition
Revenues from the sale of products are recognized at the point of sale of the Company’s products. 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. Pharmacy sales are recorded when picked up byprovided to the customer. Sales taxes are not recorded as a component of sales. The Company does not recognize a sale when it sells gift cards and gift certificates. Rather, a sale is recognized when the gift card or gift certificate is redeemed to purchase the Company’s products.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Merchandise Costs
In addition toThe “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 manufacturing production and operational costs are included in the “Merchandise costs” line item of the Consolidated Statements of Operations.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 expense are shown separately in the Consolidated Statements of Operations.
Warehousing and transportation costs include distribution center direct wages, repairs and maintenance, utilities, inbound freight and, where applicable, third party warehouse management fees, as well as transportation direct wages and repairs and maintenance. 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 by item and, therefore, reduce the carrying value of inventory by item. When the items are sold, the vendor allowance
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 $532 in 2008, $506 in 2007 and $508 in 2006, $498 in 2005 and $528 in 2004.2006. The Company does not record vendor allowances for co-operative advertising as a reduction of advertising expense.
Deposits In-Transit
Deposits in-transit generally represent funds deposited to the Company’s bank accounts at the end of the quarteryear related to sales, a majority of which were paid for with credit cards and checks, to which the Company does not have immediate access.
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. Book overdrafts, which are included in accounts payable, represent disbursements that are funded as the item is presented for payment. Book overdrafts totaled $600, $596$663, $661 and $562$600 as of January 31, 2009, February 2, 2008, and February 3, 2007, January 28, 2006, and January 29, 2005, respectively, and are reflected as a financing activity in the Consolidated Statements of Cash Flows.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 substantially all of the Company’s consolidated sales, are its only reportable segment. All of the Company’s operations are domestic.
2. GOODWILL
The annual evaluation of goodwill performed during the fourth quarter of 20062008, 2007 and 20052006 did not result in impairment.
The annual evaluationfollowing table summarizes the changes in the Company’s net goodwill balance through January 31, 2009.
Goodwill | |||||
Balance at January 28, 2006 | $ | 2,192 | |||
Goodwill recorded | — | ||||
Purchase accounting adjustments | — | ||||
Balance at February 3, 2007 | 2,192 | ||||
Goodwill recorded | 23 | ||||
Effect of FIN 48 adoption | (71 | ) | |||
Balance at February 2, 2008 | 2,144 | ||||
Goodwill recorded | 127 | ||||
Purchase accounting adjustments | — | ||||
Balance at January 31, 2009 | $ | 2,271 |
In December 2008, the FASB issued FAS 140-4 and FIN 46(R)-8,Disclosures by Public Entities (Enterprises) about Transfers of goodwill performed duringFinancial Assets and Interests in Variable Interest Entities(FAS 140-4 and FIN 46(R)-8). FAS 140-4 and FIN 46(R)-8 require additional disclosures about an entity’s involvement with variable interest entities and transfers of financial assets. Effective January 31, 2009, the fourthCompany has adopted FAS 140-4 and FIN 46(R)-8.
In the first quarter of 2004 resulted2008, the Company made an investment in The Little Clinic LLC (“TLC”). TLC operates supermarket walk-in medical clinics in seven states, primarily in the Midwest and Southeast. At the date of investment, TLC was determined to be a $904 pre-tax, non-cash impairment charge related to goodwill atvariable-interest entity (“VIE”) under FASB Interpretation No. 46R,Consolidation of Variable Interest Entities(FIN 46R), with the Company’s Ralphs and Food 4 Less divisions.Company being the primary beneficiary. The divisions’ operating performance sufferedCompany was deemed the primary beneficiary due to the intense competitive environment during the 2003 southern California labor disputeits current ownership interest and recovery period after the labor dispute. The decreased operating performance was the resulthalf of the investments in personnel, training and price reductions necessary to help regain Ralphs’ business lost during the labor dispute.its written put options being at a floor price. As a result, the Company consolidated TLC in accordance with FIN 46R. The minority interest was recorded at fair value on the acquisition date. The fair value of TLC was determined based on the amount of the investment made by the Company and the percentage acquired. The Company’s assessment of goodwill represents the excess of this decline andamount over the decline in future expected operating performance, the divisions’ carryingfair value of goodwill exceeded its implied fair value resulting in the impairment charge. MostTLC’s net assets as of the impairment charge was non-deductible for income tax purposes. At February 3, 2007 and January 28, 2006,investment date. Creditors of TLC have no recourse to the general credit of the Company. Conversely, creditors of the Company maintained $1,458have no recourse to the assets of goodwill forTLC. In addition, if requested by TLC’s Board of Directors by January 1, 2010, the Ralphs and Food 4 Less divisions.Company has agreed to make a pro rata portion of an additional capital contribution.
A-43A-44
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizesbelow shows the changesunaudited amounts of assets and liabilities from TLC included in the Company’s net goodwill balance through February 3, 2007.consolidated results, after eliminating intercompany items, as of January 31, 2009:
3. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
2006 | 2005 | ||||||
Land | $ | 1,690 | $ | 1,675 | |||
Buildings and land improvements | 5,402 | 5,142 | |||||
Equipment | 8,255 | 7,980 | |||||
Leasehold improvements | 4,221 | 3,917 | |||||
Construction-in-progress | 822 | 511 | |||||
Leased property under capital leases and financing obligations | 592 | 561 | |||||
Total property, plant and equipment | 20,982 | 19,786 | |||||
Accumulated depreciation and amortization | (9,203 | ) | (8,421 | ) | |||
Property, plant and equipment, net | $ | 11,779 | $ | 11,365 |
2008 | |||||
Current assets | $ | 31 | |||
Property, plant and equipment, net | 7 | ||||
Goodwill | 102 | ||||
Other assets | 1 | ||||
Total Assets | $ | 141 | |||
Current liabilities | $ | 4 | |||
Minority interests | $ | 82 |
Accumulated depreciation for leased propertyIn the fourth quarter of 2008, the Company became the primary beneficiary of i-wireless, LLC a VIE in which the Company has a 25% ownership interest. The Company was deemed the primary beneficiary due to its current ownership interest, $25 line of credit guarantee, and $8 loan to i-wireless, LLC. The Company became the primary beneficiary, in the fourth quarter of 2008, under capital leasesFIN 46R after lending $8 to i-wireless, LLC. i-wireless, LLC sells prepaid phones primarily in Company stores. The minority interest was $288recorded at February 3,fair value. The fair value of i-wireless, LLC was determined based on the amount of the investment made by the Company in the fourth quarter of 2007 and $263 atthe percentage acquired. The Company’s assessment of goodwill represents the excess of this amount over the fair value of i-wireless, LLC’s net assets as of the date of the loan. The Company has guaranteed the indebtedness of i-wireless, LLC, up to $25, which is collateralized by $8 of inventory located in the Company’s stores. The creditors of the Company have no recourse to the assets of i-wireless, LLC.
The table below shows the preliminary and unaudited amounts of assets and liabilities from i-wireless, LLC included in the Company’s consolidated results, after eliminating intercompany items, as of January 28, 2006.31, 2009:
2008 | |||||
Current assets | $ | 10 | |||
Property, plant and equipment, net | 2 | ||||
Goodwill | 25 | ||||
Other assets | 5 | ||||
Total Assets | $ | 42 | |||
Current liabilities | $ | 5 | |||
Long-term debt | $ | 30 | |||
Minority interests | $ | 1 |
Approximately $566 and $798, original cost,The proforma effects of Property, Plant and Equipment collateralized certain mortgages at February 3, 2007, and January 28, 2006, respectively.these acquisitions are not material to previously reported results.
A-44A-45
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY, PLANTANDEQUIPMENT, NET
Property, plant and equipment, net consists of:
2008 | 2007 | |||||||||
Land | $ | 1,944 | $ | 1,779 | ||||||
Buildings and land improvements | 6,457 | 5,875 | ||||||||
Equipment | 8,993 | 8,620 | ||||||||
Leasehold improvements | 5,076 | 4,626 | ||||||||
Construction-in-progress | 880 | 965 | ||||||||
Leased property under capital leases and financing obligations | 550 | 571 | ||||||||
Total property, plant and equipment | 23,900 | 22,436 | ||||||||
Accumulated depreciation and amortization | (10,739 | ) | (9,938 | ) | ||||||
Property, plant and equipment, net | $ | 13,161 | $ | 12,498 |
Accumulated depreciation for leased property under capital leases was $283 at January 31, 2009, and $286 at February 2, 2008.
Approximately $396 and $540, original cost, of Property, Plant and Equipment collateralized certain mortgages at January 31, 2009 and February 2, 2008, respectively.
4. TAXES, BASEDONINCOMENCOM E
The provision for taxes based on income consists of:
2006 | 2005 | 2004 | 2008 | 2007 | 2006 | |||||||||||||||||
Federal | ||||||||||||||||||||||
Current | $652 | $609 | $ 96 | $ | 304 | $ | 661 | $ | 652 | |||||||||||||
Deferred | (52 | ) | (79 | ) | 258 | 331 | (62 | ) | (52 | ) | ||||||||||||
600 | 530 | 354 | 635 | 599 | 600 | |||||||||||||||||
State and local | ||||||||||||||||||||||
Current | 55 | 42 | 25 | 46 | 71 | 55 | ||||||||||||||||
Deferred | (22 | ) | (5 | ) | 11 | 36 | (24 | ) | (22 | ) | ||||||||||||
33 | 37 | 36 | 82 | 47 | 33 | |||||||||||||||||
Total | $633 | $567 | $390 | $ | 717 | $ | 646 | $ | 633 |
A-46
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A reconciliation of the statutory federal rate and the effective rate follows:
2006 | 2005 | 2004 | 2008 | 2007 | 2006 | |||||||||||||||
Statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||
State income taxes, net of federal tax benefit | 1.9 | % | 1.6 | % | 2.6 | % | 2.7 | % | 1.7 | % | 1.9 | % | ||||||||
Non-deductible goodwill | — | — | 101.7 | % | ||||||||||||||||
Credits | (1.0 | )% | (0.9 | )% | (0.8 | )% | ||||||||||||||
Favorable resolution of issues | — | (1.9 | )% | — | ||||||||||||||||
Deferred tax adjustment | (1.2 | )% | — | — | — | — | (1.2 | )% | ||||||||||||
Other changes, net | 0.5 | % | 0.6 | % | (2.9 | )% | (0.2 | )% | 1.5 | % | 1.3 | % | ||||||||
36.2 | % | 37.2 | % | 136.4 | % | 36.5 | % | 35.4 | % | 36.2 | % |
During the third quarter of 2007, the Company resolved favorably certain tax issues. This resulted in a 2007 tax benefit of approximately $40.
In 2006, during the reconciliation of the Company’s deferred tax balances, after the filing of annual federal and state tax returns, the Company identified adjustments to be made in the prior years’ deferred tax reconciliation. These deferred tax balances were corrected in the Company’s Consolidated Financial Statements for the year ended February 3, 2007, which resulted in a reduction of the Company’s 2006 provision for income tax expense of approximately $21. The Company does not believe these adjustments are material to its Consolidated Financial Statements for the year ended February 3, 2007, or to any prior years’ Consolidated Financial Statements. As a result, the Company has not restated any prior year amounts.
A-45A-47
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of significant temporary differences that comprise tax balances were as follows:
2006 | 2005 | 2008 | 2007 | ||||||||||||||
Current deferred tax assets: | |||||||||||||||||
Net operating loss carryforwards | $ | 17 | $ | 18 | |||||||||||||
Net operating loss and credit carryforwards | $ | 2 | $ | 16 | |||||||||||||
Compensation related costs | 32 | — | 43 | 53 | |||||||||||||
Other | 4 | 42 | — | 8 | |||||||||||||
Total current deferred tax assets | 53 | 60 | 45 | 77 | |||||||||||||
Current deferred tax liabilities: | |||||||||||||||||
Compensation related costs | — | (2 | ) | ||||||||||||||
Insurance related costs | (109 | ) | (107 | ) | (104 | ) | (104 | ) | |||||||||
Inventory related costs | (212 | ) | (168 | ) | (242 | ) | (212 | ) | |||||||||
Other | (43 | ) | — | ||||||||||||||
Total current deferred tax liabilities | (321 | ) | (277 | ) | (389 | ) | (316 | ) | |||||||||
Current deferred taxes | $ | (268 | ) | $ | (217 | ) | $ | (344 | ) | $ | (239 | ) | |||||
Long-term deferred tax assets: | |||||||||||||||||
Compensation related costs | $ | 332 | $ | 290 | $ | 461 | $ | 268 | |||||||||
Insurance related costs | — | 9 | |||||||||||||||
Lease accounting | 122 | 106 | 100 | 102 | |||||||||||||
Closed store reserves | 96 | 95 | 65 | 68 | |||||||||||||
Net operating loss carryforwards | 29 | 26 | |||||||||||||||
Insurance related costs | 64 | 64 | |||||||||||||||
Net operating loss and credit carryforwards | 51 | 35 | |||||||||||||||
Other | 47 | 21 | 13 | 23 | |||||||||||||
Long-term deferred tax assets, net | 626 | 547 | 754 | 560 | |||||||||||||
Long-term deferred tax liabilities: | |||||||||||||||||
Depreciation | (1,114 | ) | (1,193 | ) | (1,138 | ) | (926 | ) | |||||||||
Insurance related costs | (33 | ) | — | ||||||||||||||
Deferred income | (201 | ) | (197 | ) | |||||||||||||
Other | — | (1 | ) | ||||||||||||||
Total long-term deferred tax liabilities | (1,348 | ) | (1,390 | ) | (1,138 | ) | (927 | ) | |||||||||
Long-term deferred taxes | $ | (722 | ) | $ | (843 | ) | $ | (384 | ) | $ | (367 | ) |
At February 3, 2007, the Company had net operating loss carryforwards for federal income tax purposes of $74 that expire from 2010 through 2018. In addition,January 31, 2009, the Company had net operating loss carryforwards for state income tax purposes of $733$451 that expire from 20102009 through 2025.2028. The utilization of certain of the Company’s net operating loss carryforwards may be limited in a given year.
At February 3, 2007,January 31, 2009, the Company had stateState credits of $23 that$20, some of which expire from 20072009 through 2020.2027. The utilization of certain of the Company’s credits may be limited in a given year.
The amounts of cash paid for income taxes in 2004 was reduced by approximately $90 as a result of federal bonus depreciation. This benefit began reversing in 2005 and increased the amount of cash paid for income taxes by approximately $71 in 2006 and $108 in 2005, respectively.
A-46A-48
NNotes to Consolidated Financial Statements, Continued
OTESThe Company adopted the provisions of FIN No. 48,TOAccounting for Uncertainty in Income Taxes Con February 4, 2007. As of adoption, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $694. A reconciliation of the beginning and ending amount of unrecognized tax benefits as of January 31, 2009 and February 2, 2008 is a follows:ONSOLIDATED FINANCIAL STATEMENTS
2008 | 2007 | |||||||
Beginning balance | $ | 469 | $ | 694 | ||||
Additions based on tax positions related to the current year | 53 | 49 | ||||||
Reductions based on tax positions related to the current year | (6 | ) | (32 | ) | ||||
Additions for tax positions of prior years | 4 | 11 | ||||||
Reductions for tax positions of prior years | (11 | ) | (162 | ) | ||||
Settlements | (17 | ) | (90 | ) | ||||
Reductions due to lapse of statute of limitations | — | (1 | ) | |||||
Ending balance | $ | 492 | $ | 469 |
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 31, 2009 and February 2, 2008, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $116 and $120, 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 31, 2009 and February 2, 2008, the Company recognized approximately $6 and $(11), CONTINUEDrespectively, in interest and penalties. The Company had accrued approximately $99 and $101 for the payment of interest and penalties as of January 31, 2009 and February 2, 2008, respectively.
The IRS concluded a field examination of the Company’s 2002 – 2004 U.S. tax returns during the third quarter of 2007 and is currently auditing years 2005 – 2007. The audit is not expected to be completed in the next twelve months. Additionally, the Company has a case in the U.S. Tax Court. A decision on this case is not expected within the next 12 months. In connection with this case, the Company has extended the statute of limitations on our tax years after 1991 and those years remain open to examination. States have a limited time frame to review and adjust federal audit changes reported. Assessments made and refunds allowed are generally limited to the federal audit changes reported.
5. DEBT OBLIGATIONS
Long-term debt consists of:
2008 | 2007 | |||||||
Credit facility, commercial paper and money market borrowings | $ | 129 | $ | 570 | ||||
4.95% to 9.20% Senior notes and debentures due through 2038 | 7,186 | 6,766 | ||||||
5.00% to 9.95% Mortgages due in varying amounts through 2034 | 119 | 166 | ||||||
Other | 163 | 137 | ||||||
Total debt | 7,597 | 7,639 | ||||||
Less current portion | (528 | ) | (1,564 | ) | ||||
Total long-term debt | $ | 7,069 | $ | 6,075 |
A-49
Notes to Consolidated Financial Statements, Continued
2006 | 2005 | ||||
Credit facility | $ 352 | $ — | |||
4.95% to 9.20% Senior notes and debentures due through 2031 | 5,916 | 6,390 | |||
5.00% to 9.95% mortgages due in varying amounts through 2034 | 169 | 179 | |||
Other | 144 | 178 | |||
Total debt | 6,581 | 6,747 | |||
Less current portion | (878 | ) | (527 | ) | |
Total long-term debt | $5,703 | $6,220 |
In 2007, the Company issued $600 of senior notes bearing an interest rate of 6.4% due in 2017 and $750 of senior notes bearing an interest rate of 6.15% due in 2020.
In 2008, the Company issued $400 of senior notes bearing an interest rate of 5.0% due in 2013, $375 of senior notes bearing an interest rate of 6.9% due in 2038 and $600 of senior notes bearing an interest rate of 7.5% due in 2014.
As of February 3, 2007,January 31, 2009, the Company had a $2,500 Five-Year Credit Agreement maturing in 2011, unless earlier terminated by the Company. Borrowings under the credit agreement bear interest at the option of the Company at a rate equal to either (i) the highest, from time to time of (A) the base rate of JP Morgan Chase Bank, N.A., (B) ½% over a moving average of secondary market morning offering rates for three-month certificates of deposit adjusted for reserve requirements, and (C) ½% over the federal funds rate or (ii) an adjusted Eurodollar rate based upon the London Interbank Offered Rate (“Eurodollar Rate”) plus an Applicable Margin.applicable margin. In addition, the Company pays a Facility Feefacility fee in connection with the credit agreement. Both the Applicable Marginapplicable margin and the Facility Feefacility fee vary based upon the Company’s achievement of a financial ratio or credit rating. At February 3, 2007,January 31, 2009, the Applicable Marginapplicable margin was 0.27%0.19%, and the Facility Feefacility fee was 0.08%0.06%. The credit facility contains covenants, which, among other things, require the maintenance of certain financial ratios, including fixed charge coverage and leverage ratios. The Company may prepay the credit agreement in whole or in parts,part, at any time, without a prepayment penalty. In addition to the credit agreement, the Company maintained three uncommitted money market lines totaling $75 in the aggregate. The money market lines allow the Company to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit agreement. As of February 3, 2007,January 31, 2009, the Company had $352no borrowings under its credit agreement and net outstanding commercial paper of $90, that reduced amounts available under the Company’s credit agreement. In addition, as of January 31, 2009, the Company had borrowings under its money market lines totaling $39. The weighted average interest rate on the amounts outstanding under the credit agreement was 5.47% at February 3, 2007.
At February 3, 2007, the Company had borrowings totaling $352 under its P2/F2/A3 rated commercial paper program. Any borrowings under this program are backed by the Company’s credit facility and reduce the amount available under the credit facility.
At February 3, 2007, the Company also maintained a $50 money market line. In addition to credit agreement borrowings, borrowings under the Company’s money market line and somelines was 1.89% at January 31, 2009. The outstanding letters of credit that reduce funds available under the Company’s credit agreement. At February 3, 2007, these lettersagreement totaled $337 as of credit totaled $331. The Company had no borrowings under the money market line at February 3, 2007.January 31, 2009.
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, or (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.Company or (iii) both a change of control and a below investment grade rating.
A-47A-50
NNotes to Consolidated Financial Statements, ContinuedOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2006,2008, and for the years subsequent to 20062008 are:
2007 | $ | 878 | |||
2008 | 993 | ||||
2009 | 912 | $ | 528 | ||
2010 | 42 | 542 | |||
2011 | 537 | 544 | |||
2012 | 1,414 | ||||
2013 | 1,019 | ||||
Thereafter | 3,219 | 3,550 | |||
Total debt | $ | 6,581 | $ | 7,597 |
6. DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Risk Management
The Company historically has used derivatives to manage its exposure to changes in interest rates. The interest differential to be paid or received is accrued as interest expense. SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended, defines derivatives, requires that derivatives be carried at fair value on the balance sheet and provides for hedge accounting when certain conditions are met. In accordance with this standard, 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.
The Company’s current program relative to interest rate protection contemplates both fixing the rates on variable rate debt and 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 bank balanceoutstanding 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 $2.5 billion$2,500 million or less, (iii) include no leverage products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.
Annually, the Company reviews with the Financial Policy Committee of the Board of Directors compliance with the guidelines. These guidelines may change as the Company’s needs dictate.
A-48A-51
NNotes to Consolidated Financial Statements, ContinuedOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The table below summarizes the outstanding interest rate swaps designated as fair value hedges as of January 31, 2009, and February 3, 2007, and January 28, 2006. The variable component2, 2008.
2008 | 2007 | ||||||||||||||||||
Pay | Pay | Pay | Pay | ||||||||||||||||
Floating | Fixed | Floating | Fixed | ||||||||||||||||
Notional amount | $ | — | $ | — | $ | 1,050 | $ | — | |||||||||||
Number of contracts | — | — | 6 | — | |||||||||||||||
Duration in years | — | — | 2.07 | — | |||||||||||||||
Average variable rate | — | — | 5.97 | % | — | ||||||||||||||
Average fixed rate | — | — | 6.74 | % | — | ||||||||||||||
Maturity | Between | ||||||||||||||||||
March 2008 and | |||||||||||||||||||
January 2015 |
As of eachFebruary 2, 2008, other long-term assets totaling $11 were recorded to reflect the fair value of these agreements, offset by increases in the fair value of the underlying debt.
In 2008, the Company terminated nine fair value interest rate swap outstanding at February 3, 2007, was based on LIBOR asswaps with a total notional amount of February 3, 2007. The variable component$900. Three of eachthese terminated interest rate swap outstandingswaps were purchased and became ineffective fair value hedges in 2008. The proceeds received at January 28, 2006, was based on LIBORtermination were credited to interest expense in the amount of $15. The Company has unamortized proceeds from twelve interest rate swaps once classified as fair value hedges totaling approximately $45. The unamortized proceeds are recorded as adjustments to the carrying values of January 28, 2006.the underlying debt and are being amortized over the remaining term of the debt.
2006 | 2005 | ||||||||
Pay | Pay | Pay | Pay | ||||||
Floating | Fixed | Floating | Fixed | ||||||
Notional amount | $1,050 | $ — | $1,375 | $ — | |||||
Duration in years | 3.08 | — | 3.28 | — | |||||
Average variable rate | 8.07 | % | — | 8.14 | % | — | |||
Average fixed rate | 6.74 | % | — | 6.98 | % | — |
In addition to the interest rate swaps noted above, in 2005 the Company entered into three forward-starting interest rate swap agreements with a notional amount totaling $750 million.$750. A forward-starting interest rate swap is an agreement that effectively hedges future benchmark interest rates including general corporate spreads, on debt for an established period of time. The Company entered into the forward-starting interest rate swaps in order to lock ininto fixed interest rates on its forecasted issuances of debt in fiscal 2007 and 2008. Accordingly,In 2007, the Company terminated two of these instrumentsforward-starting interest rate swaps with a notional amount of $500. In 2008, the Company terminated the remaining forward-starting interest rate swap with a notional amount of $250. The unamortized payments and proceeds on these terminated forward-starting interest rate swaps have been designatedrecorded net of tax in other comprehensive income and will be amortized to earnings as cash flow hedges for the Company’s forecasted debt issuances. Twopayments of interest to which the swaps have ten-year terms, withhedge relates are made. As of February 2, 2008, other long-term liabilities totaling $18 were recorded to reflect the remaining swap having a twelve-year term, beginning with the issuancefair value of the debt. The average fixed rate for these instruments is 5.14%.agreements.
Commodity Price Protection
The Company enters into purchase commitments for various resources, including raw materials utilized in its manufacturing facilities and energy to be used in its stores, warehouses, manufacturing facilities 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. Any commitments for which the Company does not expect
A-52
Notes to take delivery, and, as a result will require net settlement, are marked to fair value on a quarterly basis.Consolidated Financial Statements, Continued
Some of the product the Company purchases is shipped in corrugated cardboard packaging. The corrugated cardboard is sold when it is economical to do so. As of February 3, 2007,January 31, 2009, the Company maintained sevena derivative instrumentsinstrument to protect it from decliningmanage exposure to changes in corrugated cardboard prices. These derivatives containThis derivative has a three-year term. None of the contracts, either individually or in the aggregate, hedge more than 50% of the Company’s expected corrugated cardboard sales. The instruments doinstrument does not qualify for hedge accounting, in accordance with SFAS No. 133,Accounting for Derivative Investments and Hedging Activities,, as amended. Accordingly, changesthe change in the fair value of these instruments arethis instrument is marked-to-market in the Company’s Consolidated Statements of Operations as operating, general and administrative (“OG&A”) expenses.expense. As of February 3, 2007, an accrued liability totaling $0.2 had been recorded to reflectJanuary 31, 2009, the fair value of these instruments.this instrument was insignificant.
A-49
N7. FOTESAIR VALUETO CONSOLIDATEDOF FINANCIAL SITATEMENTS, CONTINUEDNSTRUMENTS
In September 2006, the FASB issued SFAS No. 157,7. FFair Value MeasurementsAIR V(SFAS 157), which defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not expand or require any new fair value measurements. SFAS 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. FASB Staff Position (FSP) 157-2ALUEPartial Deferral of the Effective Date of Statement No. 157OF FINANCIALINSTRUMENTS(FSP 157-2), deferred the effective date of SFAS No. 157 for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. Effective February 3, 2008, the Company adopted SFAS 157, except for non-financial assets and non-financial liabilities as deferred until February 1, 2009 by FSP 157-2.
The following methods and assumptions wereSFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to estimatemeasure fair value. The three levels of the fair value hierarchy defined by SFAS 157 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.
For those financial instruments carried at fair value in the consolidated financial statements, the following table summarizes the fair value of each classthese instruments at January 31, 2009:
Fair Value Measurements Using
Quoted Prices in | ||||||||||||||
Active Markets | Significant | |||||||||||||
for Identical | Significant Other | Unobservable | ||||||||||||
Assets | Observable Inputs | Inputs | ||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||
Available-for-Sale Securities | $11 | $— | $— | $11 |
A-53
Notes to Consolidated Financial Statements, Continued
FAIR VALUEOF OTHER FINANCIAL INSTRUMENTS
Current and Long-term Debt
The fair value of financial instrumentthe Company’s long-term debt, including current maturities, was estimated based on the quoted market price for which itthe same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was practicablebased upon the net present value of the future cash flow using the forward interest rate yield curve in effect at the respective year-ends. At January 31, 2009, the fair value of total debt was $7,920 compared to estimate that value:a carrying value of $7,597. At February 2, 2008, the fair value of total debt was $7,973 compared to a carrying value of $7,639.
Cash and Temporary Cash Investments, Store Deposits In-Transit, Receivables, Prepaid and Other Current Assets, Accounts Payable, Accrued Salaries and Wages and Other Current Liabilities
The carrying amounts of these items approximated fair value.
Long-term Investments
The fair values of these investments were estimated based on quoted market prices for those or similar investments.
Long-term Debt
Theinvestments, or estimated cash flows, if appropriate. At January 31, 2009 and February 2, 2008, the carrying and fair value of the Company’spracticable long-term debt, including the current portion thereofinvestments was $67 and excluding borrowings under the credit facility, was estimated based on the quoted market price for the same or similar issues. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flows using the forward interest rate yield curve in effect at the respective year-ends. The carrying values of long-term debt outstanding under the Company’s credit facility approximated fair value.
Interest Rate Protection Agreements
The fair value of these agreements was based on the net present value of the future cash flows using the forward interest rate yield curve in effect at the respective year-ends.
A-50
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The estimated fair values of the Company’s financial instruments are as follows:
2006 | 2005 | ||||||||||||||
Carrying | Estimated | Carrying | Estimated | ||||||||||||
Value | Fair Value | Value | Fair Value | ||||||||||||
Cash and temporary cash investments | $ | 189 | $ | 189 | $ | 210 | $ | 210 | |||||||
Store deposits in-transit | $ | 614 | $ | 614 | $ | 488 | $ | 488 | |||||||
Long-term investments for which it is | |||||||||||||||
Practicable | $ | 152 | $ | 152 | $ | 118 | $ | 118 | |||||||
Not Practicable | $ | — | $ | — | $ | 1 | $ | — | |||||||
Debt for which it is(1) | |||||||||||||||
Practicable | $ | (6,581 | ) | $ | (6,859 | ) | $ | (6,747 | ) | $ | (7,038 | ) | |||
Not Practicable | $ | — | $ | — | $ | — | $ | — | |||||||
Interest Rate Protection Agreements | |||||||||||||||
Receive fixed swaps asset/(liability)(2) | $ | (28 | ) | $ | (28 | ) | $ | (34 | ) | $ | (34 | ) | |||
Forward-starting swap asset/(liability)(3) | $ | 12 | $ | 12 | $ | (2 | ) | $ | (2 | ) | |||||
Corrugated Cardboard Price Protection Agreements(4) | $ | — | $ | — | $ | 3 | $ | 3 |
A-51
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED$75, respectively.
8. LEASESAND LEASE- FINANCED TRANSACTIONS
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 capital improvement funding or other lease concessions isare 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:
2006 | 2005 | 2004 | 2008 | 2007 | 2006 | ||||||||||||||||||
Minimum rentals | $ | 753 | $ | 760 | $ | 772 | $ | 762 | $ | 747 | $ | 753 | |||||||||||
Contingent payments | 10 | 8 | 9 | 12 | 11 | 10 | |||||||||||||||||
Sublease income | (114 | ) | (107 | ) | (101 | ) | |||||||||||||||||
Tenant income | (115 | ) | (114 | ) | (114 | ) | |||||||||||||||||
Total rent expense | $ | 649 | $ | 661 | $ | 680 | $ | 659 | $ | 644 | $ | 649 |
A-54
Notes to Consolidated Financial Statements, Continued
Minimum annual rentals and payments under capital leases and lease-financed transactions for the five years subsequent to 20062008 and in the aggregate are:
Lease- | Lease- | |||||||||||||||||||||||
Capital | Operating | Financed | Capital | Operating | Financed | |||||||||||||||||||
Leases | Leases | Transactions | Leases | Leases | Transactions | |||||||||||||||||||
2007 | $ 57 | $ 778 | $ 3 | |||||||||||||||||||||
2008 | 54 | 734 | 3 | |||||||||||||||||||||
2009 | 52 | 690 | 4 | $ | 53 | $ | 778 | $ | 4 | |||||||||||||||
2010 | 51 | 642 | 4 | 51 | 738 | 4 | ||||||||||||||||||
2011 | 49 | 587 | 4 | 57 | 674 | 5 | ||||||||||||||||||
2012 | 48 | 624 | 5 | |||||||||||||||||||||
2013 | 45 | 575 | 5 | |||||||||||||||||||||
Thereafter | 294 | 4,118 | 93 | 219 | 3,274 | 111 | ||||||||||||||||||
557 | $7,549 | $111 | 473 | $ | 6,663 | $ | 134 | |||||||||||||||||
Less estimated executory costs included in capital leases | (3 | ) | (1 | ) | ||||||||||||||||||||
Net minimum lease payments under capital leases | 554 | 472 | ||||||||||||||||||||||
Less amount representing interest | (237 | ) | (185 | ) | ||||||||||||||||||||
Present value of net minimum lease payments under capital leases | $ 317 | $ | 287 |
Total future minimum rentals under noncancellable subleases at February 3, 2007,January 31, 2009, were $444.$334.
A-52
NOTESTO CONSOLIDATED FINANCIALSTATEMENTS, CONTINUED
9. EARNINGS PPERER COMMONSHARE (“EPS”)
Basic earnings (loss) per common share equals net earnings (loss) divided by the weighted average number of common shares outstanding. Diluted earnings per common share equals net earnings (loss) divided by the weighted average number of common shares outstanding after giving effect to dilutive stock options and warrants.
The following table provides a reconciliation of earnings and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share.
For the year ended | For the year ended | For the year ended | |||||||||||||||||||||||
February 3, 2007 | January 28, 2006 | January 29, 2005 | |||||||||||||||||||||||
Earnings | Shares | Per | Earnings | Shares | Per | Loss | Shares | Per | |||||||||||||||||
(in millions, except per | (Nume- | (Denomi- | Share | (Nume- | (Denomi- | Share | (Nume- | (Denomi- | Share | ||||||||||||||||
share amounts) | rator) | nator) | Amount | rator) | nator) | Amount | rator) | nator) | Amount | ||||||||||||||||
Basic EPS | $ | 1,115 | 715 | $ | 1.56 | $ | 958 | 724 | $ | 1.32 | $ | (104) | 736 | $ | (0.14 | ) | |||||||||
Dilutive effect of stock | |||||||||||||||||||||||||
optionawards and | |||||||||||||||||||||||||
warrants | 8 | 7 | — | ||||||||||||||||||||||
Diluted EPS | $ | 1,115 | 723 | $ | 1.54 | $ | 958 | 731 | $ | 1.31 | $ | (104) | 736 | $ | (0.14 | ) |
For the year ended | For the year ended | For the year ended | ||||||||||||||||||||||||||||||||||||||||
January 31, 2009 | February 2, 2008 | February 3, 2007 | ||||||||||||||||||||||||||||||||||||||||
Earnings | Shares | Per | Earnings | Shares | Per | Earnings | Shares | Per | ||||||||||||||||||||||||||||||||||
(Numer- | (Denomi- | Share | (Numer- | (Denomi- | Share | (Numer- | (Denomi- | Share | ||||||||||||||||||||||||||||||||||
(in millions, except per share amounts) | ator) | nator) | Amount | ator) | nator) | Amount | ator) | nator) | Amount | |||||||||||||||||||||||||||||||||
Basic EPS | $ | 1,249 | 652 | $ | 1.92 | $ | 1,181 | 690 | $ | 1.71 | $ | 1,115 | 715 | $ | 1.56 | |||||||||||||||||||||||||||
Dilutive effect of stock option | ||||||||||||||||||||||||||||||||||||||||||
awards and warrants | 7 | 8 | 8 | |||||||||||||||||||||||||||||||||||||||
Diluted EPS | $ | 1,249 | 659 | $ | 1.90 | $ | 1,181 | 698 | $ | 1.69 | $ | 1,115 | 723 | $ | 1.54 |
For the years ended January 31, 2009, February 2, 2008 and February 3, 2007, January 28, 2006 and January 29, 2005, there were options outstanding for approximately 25.411.8 million, 24.62.0 million and 61.525.4 million shares of common stock, respectively, that were excluded from the computation of diluted EPS. These shares were excluded because their inclusion would have had an anti-dilutive effect on EPS.
A-55
Notes to Consolidated Financial Statements, Continued
10. STOCKOPTION PLANS
Prior to January 29, 2006, the Company applied APB No. 25, and related interpretations, in accounting for its stock option plans and provided the pro-forma disclosures required by SFAS No. 123. APB No. 25 provided for recognition of compensation expense for employee stock awards based on the intrinsic value of the award on the grant date.
The Company grants options for common stock (“stock options”) to employees, as well as to its non-employee directors, under various plans at an option price equal to the fair market value of the stock at the date of grant. Although equityThe Company accounts for stock options under the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment(SFAS 123(R)). Under this method, the Company recognizes compensation expense for all share-based payments granted after January 29, 2006, as well as all share-based payments granted prior to, but not yet vested as of, January 29, 2006, in accordance with SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), 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 throughout the year, it has beenat one of four meetings of its Board of Directors occurring shortly after the Company’s practice typically to make an annualrelease of quarterly earnings. The 2008 primary grant was made in conjunction with the MayJune meeting of itsthe Company’s Board of Directors.
Stock options typically expire 10 years from the date of grant. Stock options vest between one and five years from the date of grant, or for certain stock options, the earlier of the Company’s stock reaching certain pre-determined and appreciated market prices or nine years and six months from the date of grant. Under APB No.At January 31, 2009, approximately 25 the Company did not recognize compensation expense for these stock option grants. At February 3, 2007, approximately 18 million shares of common stock were available for future optionsoption grants under these plans.
A-53
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In addition to the stock options described above, the Company awards restricted stock to employees under various plans. The restrictions on these awards generally lapse between one and five years from the date of the awards and expense is recognized over the lapsing cycle.awards. Under APB No. 25,SFAS 123(R), the Company generally recordedrecords expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the grant date of award.the award, over the period the awards lapse. As of February 3, 2007,January 31, 2009, approximately sixone million shares of common stock were available for future restricted stock awards under the 2005 Long-Term Incentive Plan (the “Plan”). The Company has the ability to convert shares available for stock options under the Plan to shares available for restricted stock awards. Four shares available for common stock 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.
Historically, stock option awards were grantedA-56
Notes to various employees throughout the organization. Restricted stock awards, however, were limited to approximately 150 associates, including members of the Board of Directors and certain members of senior management. Beginning in 2006, the Company began issuing a combination of stock option and restricted stock awards to those employees who previously received only stock option awards, in an effort to further align those employees’ interests with those of the Company’s non-employee shareholders. As a result, the number of stock option awards granted in 2006 decreased and the number of restricted stock awards granted increased.Consolidated Financial Statements, Continued
Stock Options
Changes in options outstanding under the stock option plans are summarized below:
Weighted- | Shares | Weighted- | ||||||||||||||
Shares subject | average | subject to | average | |||||||||||||
to option | exercise | option | exercise | |||||||||||||
(in millions) | price | (in millions) | price | |||||||||||||
Outstanding, year-end 2003 | 60.1 | $ | 17.62 | |||||||||||||
Granted | 6.7 | $ | 17.28 | |||||||||||||
Exercised | (4.2 | ) | $ | 7.29 | ||||||||||||
Canceled or Expired | (1.1 | ) | $ | 20.99 | ||||||||||||
Outstanding, year-end 2004 | 61.5 | $ | 18.20 | |||||||||||||
Granted | 6.8 | $ | 16.50 | |||||||||||||
Exercised | (7.7 | ) | $ | 9.81 | ||||||||||||
Canceled or Expired | (1.3 | ) | $ | 20.92 | ||||||||||||
Outstanding, year-end 2005 | 59.3 | $ | 19.03 | 59.3 | $ | 19.03 | ||||||||||
Granted | 3.2 | $ | 20.05 | 3.2 | $ | 20.05 | ||||||||||
Exercised | (9.5 | ) | $ | 13.34 | (9.5 | ) | $ | 13.34 | ||||||||
Canceled or Expired | (1.1 | ) | $ | 21.01 | (1.1 | ) | $ | 21.01 | ||||||||
Outstanding, year-end 2006 | 51.9 | $ | 20.09 | 51.9 | $ | 20.09 | ||||||||||
Granted | 3.4 | $ | 28.21 | |||||||||||||
Exercised | (10.1 | ) | $ | 19.05 | ||||||||||||
Canceled or Expired | (0.4 | ) | $ | 20.79 | ||||||||||||
Outstanding, year-end 2007 | 44.8 | $ | 20.94 | |||||||||||||
Granted | 3.5 | $ | 28.49 | |||||||||||||
Exercised | (8.3 | ) | $ | 21.04 | ||||||||||||
Canceled or Expired | (0.3 | ) | $ | 23.08 | ||||||||||||
Outstanding, year-end 2008 | 39.7 | $ | 21.58 |
A-54
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A summary of options outstanding and exercisable at February 3, 2007January 31, 2009 follows:
Weighted- | Weighted- | |||||||||||||||||||||||||||||||
average | Weighted- | Weighted- | average | Weighted- | Weighted- | |||||||||||||||||||||||||||
Range of | Number | remaining | average | Options | average | Number | remaining | average | Options | average | ||||||||||||||||||||||
Exercise Prices | outstanding | contractual life | exercise price | exercisable | exercise price | outstanding | contractual life | exercise price | exercisable | exercise price | ||||||||||||||||||||||
(in millions) | (in years) | (in millions) | (in millions) | (in years) | (in millions) | |||||||||||||||||||||||||||
$ 9.90 - $14.93 | 7.9 | 4.51 | $ | 14.45 | 7.1 | $ | 14.39 | |||||||||||||||||||||||||
$14.94 - $16.39 | 6.1 | 8.16 | $ | 16.35 | 2.2 | $ | 16.31 | |||||||||||||||||||||||||
$16.40 - $17.31 | 10.4 | 5.32 | $ | 16.97 | 7.1 | $ | 16.90 | |||||||||||||||||||||||||
$13.78 - $14.93 | 4.2 | 3.86 | $ | 14.91 | 4.2 | $ | 14.91 | |||||||||||||||||||||||||
$14.94 - $16.39 | 4.6 | 6.16 | $ | 16.35 | 3.3 | $ | 16.34 | |||||||||||||||||||||||||
$16.40 - $17.31 | 7.6 | 3.42 | $ | 16.98 | 6.2 | $ | 17.00 | |||||||||||||||||||||||||
$17.32 - $22.99 | 9.2 | 4.24 | $ | 20.96 | 5.0 | $ | 21.40 | 7.4 | 4.74 | $ | 21.72 | 5.3 | $ | 21.93 | ||||||||||||||||||
$23.00 - $31.91 | 18.3 | 3.76 | $ | 25.13 | 15.0 | $ | 25.20 | 15.9 | 4.51 | $ | 26.99 | 9.8 | $ | 26.38 | ||||||||||||||||||
$ 9.90 - $31.91 | 51.9 | 4.79 | $ | 20.09 | 36.4 | $ | 20.42 | |||||||||||||||||||||||||
$13.78 - $31.91 | 39.7 | 4.47 | $ | 21.58 | 28.8 | $ | 20.71 |
The weighted-average remaining contractual life for options exercisable at February 3, 2007,January 31, 2009, was approximately 4.13.6 years.
Restricted stock
Restricted | Weighted- | |||||
shares | average | |||||
outstanding | grant-date | |||||
(in millions) | fair value | |||||
Outstanding, year-end 2005 | 0.7 | $ | 17.85 | |||
Granted | 2.2 | $ | 20.16 | |||
Lapsed | (0.4 | ) | $ | 17.46 | ||
Canceled or Expired | (0.1 | ) | $ | 19.41 | ||
Outstanding, year-end 2006 | 2.4 | $ | 20.02 |
Adoption of SFAS No. 123(R)
Effective January 29, 2006, the Company adopted the provisions of SFAS No. 123(R),Share-Based Payment, using the modified-prospective method. Under this method, the Company recognize compensation expense for all share-based awards granted prior to, but not yet vested as of, January 29, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123,Accounting for Stock-Based Compensation. For all share-based awards granted on or after January 29, 2006, the Company recognizes compensation expense based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).
In accordance with the provisions of the modified-prospective transition method, results for prior periods have not been restated. Compensation expense for all share-based awards described above was recognized using the straight-line attribution method applied to the fair value of each option grant, over the requisite service period associated with each award. The requisite service period is typically consistent with the vesting period, except as noted below. Because awards typically vest evenly over the requisite service period, compensation cost recognized through February 3, 2007, is at least equal to the grant-date fair value of the vested portion of all outstanding awards. All of the Company stock-based incentive plans are considered equity plans under SFAS No. 123(R).
A-55A-57
NNotes to Consolidated Financial Statements, ContinuedOTESTO
CRestricted stockONSOLIDATED FINANCIALSTATEMENTS, CONTINUED
Restricted | Weighted- | |||||||||
shares | average | |||||||||
outstanding | grant-date | |||||||||
(in millions) | fair value | |||||||||
Outstanding, year-end 2005 | 0.7 | $ | 17.85 | |||||||
Granted | 2.2 | $ | 20.16 | |||||||
Lapsed | (0.4 | ) | $ | 17.46 | ||||||
Canceled or Expired | (0.1 | ) | $ | 19.41 | ||||||
Outstanding, year-end 2006 | 2.4 | $ | 20.02 | |||||||
Granted | 2.5 | $ | 28.20 | |||||||
Lapsed | (1.4 | ) | $ | 19.90 | ||||||
Canceled or Expired | (0.1 | ) | $ | 22.69 | ||||||
Outstanding, year-end 2007 | 3.4 | $ | 25.89 | |||||||
Granted | 2.5 | $ | 28.42 | |||||||
Lapsed | (1.7 | ) | $ | 26.48 | ||||||
Canceled or Expired | (0.1 | ) | $ | 25.70 | ||||||
Outstanding, year-end 2008 | 4.1 | $ | 27.22 |
The weighted-average fair value of stock options granted during 2008, 2007 and 2006 2005was $8.65, $9.66 and 2004 was $6.90, $7.70 and $7.91, 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 extensive accounting judgment and financial estimates, including the term employees are expected to retain their stock options before exercising them, the volatility of the Company’s stock 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 following table reflects the weighted-average assumptions used for grants awarded to option holders:
2006 | 2005 | 2004 | 2008 | 2007 | 2006 | |||||||||||||
Weighted average expected volatility (based on historical | ||||||||||||||||||
volatility) | 27.60 | % | 30.83 | % | 30.13 | % | ||||||||||||
Weighted average expected volatility | 27.89 | % | 29.23 | % | 27.60 | % | ||||||||||||
Weighted average risk-free interest rate | 5.07 | % | 4.11 | % | 3.99 | % | 3.63 | % | 5.06 | % | 5.07 | % | ||||||
Expected dividend yield | 1.50 | % | N/A | N/A | 1.50 | % | 1.40 | % | 1.50 | % | ||||||||
Expected term (based on historical results) | 7.5 years | 8.7 years | 8.7 years | 6.8 years | 6.9 years | 7.5 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 options. During the years presented, prior to 2006, the Company did not pay a dividend, so an expected dividend rate was not included in the determination of fair value for options granted during those years. Using aThe dividend yield was based on our history and expectation of 1.50% to value options issued in 2005 would have decreased the fair value of each option by approximately $1.60.dividend payouts. Expected volatility was determined based upon historical stock volatilities. Impliedvolatilities; however, implied volatility was also considered. Expected term was determined based upon a combination of historical exercise and cancellation experience as well as estimates of expected future exercise and cancellation experience.
Under SFAS No. 123(R), the Company records expense for restricted stock awards in an amount equalA-58
Notes to the fair market value of the underlying stock on the grant date of the award, over the period the awards lapse.Consolidated Financial Statements, Continued
Total stock compensation recognized in 2008, 2007 and 2006 was $72. This included$91, $87 and $72, respectively. Stock option compensation recognized in 2008, 2007 and 2006 was $35, $51 and $50, for stock optionsrespectively. Restricted shares compensation recognized in 2008, 2007 and 2006 was $56, $36 and $22 for restricted shares. A total of $18 of the restricted stock expense was attributable to the wider distribution of restricted shares incorporated into the first quarter 2006 grant of share-based awards, and the remaining $4 of restricted stock expense related to previously issued restricted stock awards. The incremental compensation expense attributable to the adoption of SFAS No. 123(R) in 2006 was $68, pre-tax, or $43 and $0.06 per basic and diluted share, after tax. Stock compensation cost recognized in 2005, related entirely to restricted stock grants, was $7, pre-tax. These costs were recognized as operating, general and administrative expense in the Company’s Consolidated Statements of Operations. The cumulative effect of applying a forfeiture rate to unvested restricted shares at January 29, 2006 was not material.respectively.
A-56
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
If compensation cost for the Company’s stock option plans for the years ended January 28, 2006 and January 29, 2005 had been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, the net earnings and diluted earnings per common share would have been reduced to the pro forma amounts below:
2005 | 2004 | |||||||
Net earnings (loss), as reported | $ | 958 | $ | (104 | ) | |||
Stock-based compensation expense included in net earnings, | ||||||||
net ofincome tax benefits | 5 | 8 | ||||||
Total stock-based compensation expense determined under fair | ||||||||
valuemethod for all awards, net of income tax benefits | (34 | ) | (48 | ) | ||||
Pro forma net earnings (loss) | $ | 929 | $ | (144 | ) | |||
Earnings (loss) per basic common share, as reported | $ | 1.32 | $ | (0.14 | ) | |||
Pro forma earnings (loss) per basic common share | $ | 1.28 | $ | (0.20 | ) | |||
Earnings (loss) per diluted common share, as reported | $ | 1.31 | $ | (0.14 | ) | |||
Pro forma earnings (loss) per diluted common share | $ | 1.27 | $ | (0.20 | ) |
The total intrinsic value of options exercised was $18, $33 and $79 in 2008, 2007 and 2006, was $79.respectively. The total amount of cash received in 2008 by the Company from the exercise of options granted under share-based payment arrangements was $126.$172. As of February 3, 2007,January 31, 2009, there was $92$118 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 one year. The total fair value of options that vested was $53, $53 and $44 in 2008, 2007 and 2006, was $44.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, aremay be utilized to repurchase shares of the Company’s stock under a stock repurchase program adopted by the Company’s Board of Directors. During 2006,2008, the Company repurchased approximately 11seven million shares of stock in such a manner.
For share-based awards granted prior to the adoption of SFAS No. 123(R), the Company’s stock option grants generally contained retirement-eligibility provisions that caused the options to vest upon the earlier of the stated vesting date or retirement. Compensation expense was calculated over the stated vesting periods, regardless of whether certain employees became retirement-eligible during the respective vesting periods. Upon the adoption of SFAS No. 123(R), the Company continued this method of recognizing compensation expense for awards granted prior to the adoption of SFAS No. 123(R). For awards granted on or after January 29, 2006, options vest based on the stated vesting date, even if an employee retires prior to the vesting date. The requisite service period ends, however, on the employee’s retirement-eligible date. As a result, the Company recognizes expense for stock option grants containing such retirement-eligibility provisions over the shorter of the vesting period or the period until employees become retirement-eligible (the requisite service period). As a result of retirement eligibility provisions in stock option awards granted on or after January 29, 2006, approximately $6$9 of compensation expense was recognized in 20062008 prior to the completion of stated vesting periods.
A-57
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. 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 certain 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 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-59
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Litigation– On October 6, 2006, the Company petitioned the Tax Court (In Re: Ralphs Grocery Company and Subsidiaries, formerly known as Ralphs Supermarkets, Inc., Docket No. 20364-06) for a redetermination of deficiencies set by the Commissioner of Internal Revenue. The dispute at issue involves a 1992 transaction in which Ralphs Holding Company acquired the stock of Ralphs Grocery Company and made an election under Section 338(h)(10) of the Internal Revenue Code. The Commissioner has determined that the acquisition of the stock was not a purchase as defined by Section 338(h)(3) of the Internal Revenue Code and that the acquisition does not qualify as a purchase. The Company believes that it has strong arguments in favor of its position butand believes it is more likely than not that its position will be sustained. However, due to the inherent uncertainty involved in the litigation process, an adverse decisionthere can be no assurances that could have a material adverse effect on the Company’s financial results is a possible outcome.Tax Court will rule in favor of the Company. As of February 3, 2007,January 31, 2009, an adverse decision would require a cash payment ofup to approximately $363,$436, including interest.
On February 2, 2004, the Attorney General for the State of California filed an action in Los Angeles federal court (California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company; Albertson’s, Inc. and Ralphs Grocery Company, a division of The Kroger Co.,, United States District Court Central District of California, Case No. CV04-0687) alleging that the Mutual Strike Assistance Agreement (the “Agreement”) between the Company, Albertson’s, Inc. and Safeway Inc. (collectively, the “Retailers”), which was designed to prevent the union from placing disproportionate pressure on one or more of the Retailers by picketing such Retailer(s) but not the other Retailer(s) during the labor dispute in southern California, violated Section 1 of the Sherman Act. The lawsuit seeks declarative and injunctive relief. On May 25, 2005,28, 2008, pursuant to a stipulation between the Court deniedparties, the court entered a motion for a summaryfinal judgment filed byin favor of the defendants. RalphsAs a result of the stipulation and final judgment, there are no further claims to be litigated at the other defendants filedtrial court level. The Attorney General has appealed a notice of an interlocutory appealtrial court ruling to the United StatesNinth Circuit Court of Appeals forand the Ninth Circuit. On November 29, 2005, the appellate court dismissed the appeal. On December 7, 2006, the Court denieddefendants are appealing a motion for summary judgment filed by the State of California. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it.separate ruling. Although this lawsuit is subject to uncertainties inherent toin the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Ralphs Grocery Company is the defendant in a group of civil actions initially filed in 2003 and for which a coordination order was issued on January 20, 2004 inThe Great Escape Promotion Cases pending in the Superior Court of California, County of Los Angeles, Case No. JCCP No. 4343. The plaintiffs
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
allege that Ralphs violated various laws protecting consumers in connection with a promotion pursuant to which Ralphs offered travel awards to customers. On February 22, 2006, the Court inThe Great Escape Promotion Cases issued an Order granting preliminary approval of the class action settlement. Notice of the class action settlement was sent to class members, and the Court issued an Order finally approving the class action settlement on August 25, 2006. The settlement involved the issuance of coupons and gift cards. While the ultimate cost of the settlement to Ralphs is largely dependent on the rate of coupon redemption, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
On August 12, 2000, Ralphs Grocery Company, along with several other potentially responsible parties, entered into a consent decree with the U. S. Environmental Protection Agency surrounding the purported release of volatile organic compounds in connection with industrial operations at a property located in Los Angeles, California. The consent decree followed the EPA’s earlier Administrative Order No. 97-18 in which the EPA sought remedial action pursuant to its authority under the Comprehensive Environmental Remediation, Compensation and Liability Act. Under the consent decree, Ralphs contributes a share of the costs associated with groundwater extraction and treatment. The treatment process is expected to continue until at least 2012.
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, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made adequate provisions therefor. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse impacteffect on the Company’s financial condition or results of operation.
Guarantees– The Company periodically enters intohas guaranteed half of the indebtedness of two real estate joint venturesentities in connection with the development of certain properties.which Kroger has a 50% ownership interest. The Company usually sells its interests in such partnerships upon completionCompany’s share of the projects. As of February 3, 2007,responsibility for this indebtedness, should the Company was a partner with 50% ownership in three real estate joint ventures for which it has guaranteedentities be unable to meet their obligations, totals approximately $6 of debt incurred by the ventures.$7. Based on the covenants underlying this indebtedness as of February 3, 2007,January 31, 2009 it is unlikely that the Company will be responsible for repayment of these obligations. The Company also agreed to guarantee, up to $25, the indebtedness
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
of an entity in which Kroger has a 25% ownership interest. The Company’s share of the responsibility, as of January 31, 2009, should the entity be unable to meet its obligations, totals approximately $25 and is collateralized by approximately $8 of inventory located in the Company’s stores. In addition, the Company has guaranteed half of the lease payments of a location leased by an entity in which Kroger has a 50% ownership interest. The net present value of the guaranteed rental payments is approximately $6.
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 areis unable to fulfill theirits 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.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. SUBSEQUENT EVENTS
On March 15, 2007, the Company announced its Board of Directors declared the payment of a quarterly dividend of $0.075 per share, payable on June 1, 2007, to shareholders of record as of the close of business on May 15, 2007.
13. STOCK
Preferred Stock
The Company has authorized 5five million shares of voting cumulative preferred stock; 2two million were available for issuance at February 3, 2007.January 31, 2009. The stock has a par value of $100 per share and is issuable in series.
Common Stock
The Company has authorized 1one billion shares of common stock, $1 par value per share. On May 20, 1999, the shareholders authorized an amendment to the Amended Articles of Incorporation to increase the authorized shares of common stock from 1one billion to 2two billion when the Board of Directors determines it to be in the best interest of the Company.
Common Stock Repurchase Program
The Company maintains a stock repurchase programprograms that compliescomply with Securities Exchange Act Rule 10b5-1 to allow for the orderly repurchase of Kroger stock, from time to time. The Company made open market purchases totaling $448, $1,151 and $374 $239 and $291 under thisthese repurchase programprograms in fiscal 2008, 2007 and 2006, 2005 and 2004.respectively. In addition to thisthese repurchase program,programs, in December 1999, the Company began a program to repurchase common stock to reduce dilution resulting from its employee stock option plans. This program is solely funded by proceeds from stock option exercises, includingand the related tax benefit. The Company repurchased approximately $259, $13$189, $270 and $28$259 under the stock option program during fiscal 2006, 20052008, 2007 and 2004,2006, respectively.
14.13. BENEFIT PLANS
The Company administers non-contributory defined benefit retirement plans for substantially all non-union employees and some union-represented employees as determined by the terms and conditions of collective bargaining agreements. These includedinclude several qualified pension plans (the “Qualified Plans”) and a non-qualified plan (the “Non-Qualified Plan”). The Non-Qualified Plan pays 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 pension plans is based on a review of the specific requirements and on evaluation of the assets and liabilities of each plan.
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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.
Effective February 3, 2007, the Company adopted the recognition and disclosure provisions (except for the measurement date change) of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statement No. 87, 99, 106 and 123(R)132(R)(SFAS 158), which requiredrequires the recognition of the funded
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status of its retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized are now required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). The following table reflectsCompany adopted the effectsmeasurement date provisions of SFAS 158 effective February 3, 2008. The majority of our pension and postretirement plans previously used a December 31 measurement date. All plans are now measured as of the Company’s fiscal year end. The non-cash effect of the adoption of the measurement date provisions of SFAS No. 158 haddecreased shareholders’ equity by approximately $5 ($3 after-tax) and increased long-term liabilities by approximately $5. There was no effect on our Consolidated Balance Sheet asthe Company’s results of February 3, 2007.operations.
Before | After | ||||||||||||
Application | Application | ||||||||||||
of SFAS No. | of SFAS No. | ||||||||||||
February 3, 2007 | 158 | Adjustments | 158 | ||||||||||
Other assets | $ | 497 | $ | (8 | ) | $ | 489 | ||||||
Total assets | $ | 21,223 | $ | (8 | ) | $ | 21,215 | ||||||
Deferred income taxes | $ | 792 | $ | (70 | ) | $ | 722 | ||||||
Other long-term liabilities | $ | 1,653 | $ | 182 | $ | 1,835 | |||||||
Total liabilities | $ | 16,180 | $ | 112 | $ | 16,292 | |||||||
Accumulated other comprehensive loss | $ | (139 | ) | $ | (120 | ) | $ | (259 | ) | ||||
Total shareowners’ equity | $ | 5,043 | $ | (120 | ) | $ | 4,923 | ||||||
Total liabilities and shareowners’ equity | $ | 21,223 | $ | (8 | ) | $ | 21,215 |
Amounts recognized in AOCI as of February 3, 2007January 31, 2009 consist of the following (pre-tax):
Pension | Other | ||||||||||||
February 3, 2007 | Benefits | Benefits | Total | ||||||||||
Unrecognized net actuarial loss | $433 | $ | 28 | $ | 461 | ||||||||
Unrecognized prior service cost (credit) | 7 | (42 | ) | (35 | ) | ||||||||
Unrecognized transition obligation | 1 | — | 1 | ||||||||||
Total amounts deferred in AOCI | $441 | $ | (14 | ) | $ | 427 |
Pension | Other | |||||||||||||||
January 31, 2009 | Benefits | Benefits | Total | |||||||||||||
Unrecognized net actuarial loss (gain) | $ | 882 | $ | (89 | ) | $ | 793 | |||||||||
Unrecognized prior service cost (credit) | 7 | (28 | ) | (21 | ) | |||||||||||
Unrecognized transition obligation | 1 | — | 1 | |||||||||||||
Total liabilities | $ | 890 | $ | (117 | ) | $ | 773 |
Amounts in AOCI expected to be recognized as components of net periodic pension or postretirement benefit costs in 20072009 are as follows (pre-tax):
Pension | Other | ||||||||||
February 3, 2007 | Benefits | Benefits | Total | ||||||||
Net actuarial loss | $35 | $— | $ | 35 | |||||||
Prior service cost | 2 | (6 | ) | (4 | ) | ||||||
Total | $37 | $ (6 | ) | $ | 31 |
Pension | Other | |||||||||||||||
January 31, 2009 | Benefits | Benefits | Total | |||||||||||||
Net actuarial loss (gain) | $ | 8 | $ | (5 | ) | $ | 3 | |||||||||
Prior service cost (credit) | 2 | (6 | ) | (4 | ) | |||||||||||
Total liabilities | $ | 10 | $ | (11 | ) | $ | (1 | ) |
Other changes recognized in other comprehensive income in 2008 are as follows (pre-tax):
Pension | Other | |||||||||||||||
January 31, 2009 | Benefits | Benefits | Total | |||||||||||||
Incurred prior service cost | $ | 3 | $ | — | $ | 3 | ||||||||||
Incurred net actuarial loss (gain) | 660 | (54 | ) | 606 | ||||||||||||
Amortization of prior service credit (cost) | (2 | ) | 7 | 5 | ||||||||||||
Amortization of net actuarial gain (loss) | (19 | ) | 3 | (16 | ) | |||||||||||
Total recognized in other comprehensive income | 642 | (44 | ) | 598 | ||||||||||||
Total recognized in net periodic benefit cost and | ||||||||||||||||
other comprehensive income | $ | 687 | $ | (26 | ) | $ | 661 |
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 end of fiscal years, weighted average assumptions and components of net periodic benefit cost follow:
Pension Benefits | Pension Benefits | |||||||||||||||||||||||||||||||||||||||||||||||
Qualified Plans | Non-Qualified Plan | Other Benefits | Qualified Plans | Non-Qualified Plan | Other Benefits | |||||||||||||||||||||||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||||||||||||||||||
Change in benefit obligation: | ||||||||||||||||||||||||||||||||||||||||||||||||
Benefit obligation at beginning of fiscal year | $ | 2,284 | $ | 2,019 | $ | 105 | $ | 113 | $ | 356 | $ | 366 | ||||||||||||||||||||||||||||||||||||
Benefit obligation at beginning of fiscal | ||||||||||||||||||||||||||||||||||||||||||||||||
year | $ | 2,342 | $ | 2,419 | $ | 139 | $ | 113 | $ | 320 | $ | 373 | ||||||||||||||||||||||||||||||||||||
Service cost | 123 | 118 | 2 | 1 | 13 | 12 | 39 | 42 | 2 | 2 | 10 | 10 | ||||||||||||||||||||||||||||||||||||
Interest cost | 130 | 113 | 6 | 6 | 20 | 19 | 151 | 141 | 10 | 9 | 18 | 19 | ||||||||||||||||||||||||||||||||||||
Plan participants’ contributions | — | — | — | — | 11 | 9 | 1 | 1 | — | — | 8 | 9 | ||||||||||||||||||||||||||||||||||||
Amendments | — | — | 3 | — | 4 | — | 2 | 3 | — | — | — | |||||||||||||||||||||||||||||||||||||
Actuarial (gain) loss | (4 | ) | 145 | 7 | (12 | ) | 4 | (22 | ) | (148 | ) | (143 | ) | 12 | 23 | (55 | ) | (65 | ) | |||||||||||||||||||||||||||||
Benefits paid | (114 | ) | (111 | ) | (7 | ) | (6 | ) | (31 | ) | (32 | ) | (123 | ) | (120 | ) | (8 | ) | (8 | ) | (26 | ) | (26 | ) | ||||||||||||||||||||||||
Other | 4 | — | 2 | — | 3 | — | ||||||||||||||||||||||||||||||||||||||||||
Benefit obligation at end of fiscal year | $ | 2,419 | $ | 2,284 | $ | 113 | $ | 105 | $ | 373 | $ | 356 | $ | 2,266 | $ | 2,342 | $ | 160 | $ | 139 | $ | 278 | $ | 320 | ||||||||||||||||||||||||
Change in plan assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of plan assets at beginning of fiscal year | $ | 1,814 | $ | 1,458 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||
Fair value of plan assets at beginning of | ||||||||||||||||||||||||||||||||||||||||||||||||
fiscal year | $ | 2,230 | $ | 2,098 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||
Actual return on plan assets | 248 | 167 | — | — | — | — | (619 | ) | 200 | — | — | — | — | |||||||||||||||||||||||||||||||||||
Employer contributions | 150 | 300 | 7 | 6 | 20 | 23 | 20 | 51 | 8 | 8 | 17 | 17 | ||||||||||||||||||||||||||||||||||||
Plan participants’ contributions | — | — | — | — | 11 | 9 | 1 | 1 | — | — | 9 | 9 | ||||||||||||||||||||||||||||||||||||
Benefits paid | (114 | ) | (111 | ) | (7 | ) | (6 | ) | (31 | ) | (32 | ) | (123 | ) | (120 | ) | (8 | ) | (8 | ) | (26 | ) | (26 | ) | ||||||||||||||||||||||||
Fair value of plan assets at end of fiscal year | $ | 2,098 | $ | 1,814 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||
Other | 4 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Fair value of plan assets at end of fiscal | ||||||||||||||||||||||||||||||||||||||||||||||||
year | $ | 1,513 | $ | 2,230 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||
Funded status at end of fiscal year | $ | (321 | ) | $ | (470 | ) | $ | (113 | ) | $ | (105 | ) | $ | (373 | ) | $ | (356 | ) | $ | (753 | ) | $ | (112 | ) | $ | (160 | ) | $ | (139 | ) | $ | (278 | ) | $ | (320 | ) | ||||||||||||
Net liability recognized at end of fiscal year | $ | (753 | ) | $ | (112 | ) | $ | (160 | ) | $ | (139 | ) | $ | (278 | ) | $ | (320 | ) |
Pension Benefits | ||||||||||||||||||||||||
Qualified Plans | Non-Qualified Plan | Other Benefits | ||||||||||||||||||||||
2006(1) | 2005 | 2006(1) | 2005 | 2006(1) | 2005 | |||||||||||||||||||
Funded status at end of year | $ | (321 | ) | $ | (470 | ) | $ | (113 | ) | $ | (105 | ) | $ | (373 | ) | $ | (356 | ) | ||||||
Unrecognized actuarial (gain) loss | — | 541 | — | 27 | — | 23 | ||||||||||||||||||
Unrecognized prior service cost | — | 9 | — | 8 | — | (49 | ) | |||||||||||||||||
Unrecognized net transition (asset) obligation | — | (1 | ) | — | 1 | — | 1 | |||||||||||||||||
Net asset (liability) recognized at end of fiscal year | $ | (321 | ) | $ | 79 | $ | (113 | ) | $ | (69 | ) | $ | (373 | ) | $ | (381 | ) | |||||||
Accrued benefit liability | $ | (321 | ) | $ | (217 | ) | $ | (113 | ) | $ | (112 | ) | $ | (386 | ) | $ | (381 | ) | ||||||
Additional minimum liability | — | (80 | ) | — | 12 | — | — | |||||||||||||||||
Intangible asset | — | 10 | — | 8 | — | — | ||||||||||||||||||
Accumulated other comprehensive loss | — | 366 | — | 23 | 14 | — | ||||||||||||||||||
Net asset (liability) recognized at end of fiscal year | $ | (321 | ) | $ | 79 | $ | (113 | ) | $ | (69 | ) | $ | (372 | ) | $ | (381 | ) |
Other current liabilities as of both January 31, 2009 and February 2, 2008 include $17 of net liability recognized.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As of January 31, 2009 and February 3, 2007,2, 2008, pension plan assets included no shares of The Kroger Co. common stock. Pension plan assets included $52, or 2.7 million shares, of common stock of The Kroger Co. at January 28, 2006.
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||||||||
Weighted average assumptions | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||
Discount rate – Benefit obligation | Discount rate – Benefit obligation | 5.90 | % | 5.70 | % | — | 5.90 | % | 5.70 | % | — | Discount rate – Benefit obligation | 7.00 | % | 6.50 | % | 5.90 | % | 7.00 | % | 6.50 | % | 5.90 | % | ||||||||||||||
Discount rate – Net periodic benefit cost | 5.70 | % | 5.75 | % | 6.25 | % | 5.70 | % | 5.75 | % | 6.25 | % | ||||||||||||||||||||||||||
Discount rate – Net periodic | Discount rate – Net periodic | |||||||||||||||||||||||||||||||||||||
benefit cost | benefit cost | 6.50 | % | 5.90 | % | 5.70 | % | 6.50 | % | 5.90 | % | 5.70 | % | |||||||||||||||||||||||||
Expected return on plan assets | Expected return on plan assets | 8.50 | % | 8.50 | % | 8.50 | % | Expected return on plan assets | 8.50 | % | 8.50 | % | 8.50 | % | ||||||||||||||||||||||||
Rate of compensation increase | 3.50 | % | 3.50 | % | 3.50 | % | ||||||||||||||||||||||||||||||||
Rate of compensation increase – | Rate of compensation increase – | |||||||||||||||||||||||||||||||||||||
Net periodic benefit cost | Net periodic benefit cost | 2.99 | % | 3.56 | % | 3.50 | % | |||||||||||||||||||||||||||||||
Rate of compensation increase – | Rate of compensation increase – | |||||||||||||||||||||||||||||||||||||
Benefit Obligation | Benefit Obligation | 2.92 | % | 2.99 | % | 3.56 | % |
The Company’s discount rate assumption was intended to reflect the rate at which the pension benefits could be effectively settled. It takes into account the timing and amount of benefits that would be available under the plan. The Company’s methodology for selecting the discount rate as of year-end 20062008 was to match the plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. Benefit cash flows due in a particular year can theoretically be “settled” theoretically by “investing” them in the zero-coupon bond that matures in the same year. The discount rate is the single rate that produces the same present value of cash flows. The selection of the 5.90%7.00% discount rate as of year-end 20062008 represents the equivalent single rate under a broad-market AA yield curve constructed by the Company’san outside consultant, Mercer Human Resource Consulting.consultant. We utilized a discount rate of 5.70%6.50% for year-end 2005.2007. The 2050 basis point increase in the discount rate decreased the projected pension benefit obligation as of February 3, 2007,January 31, 2009, by approximately $68 million.$147.
To determine the expected return on pension plan assets, the Company contemplates current and forecasted plan asset allocations as well as historical and forecasted returns on various asset categories. The average annual return on pension plan assets was 9.7%4.1% for the ten calendar years ended December 31, 2006,2008, net of all fees and expenses. Our actual return for the pension plan calendar year ending December 31, 2006,2008, on that same basis, was 13.4%(26.1)%. The Company utilized a pension return assumption of 8.5% in 2008, 2007 and 2006 2005 and 2004.based on the assumption that future returns will achieve the same level of performance as the long-term historical average annual return for the various markets in which the plan invests.
In 2005, the Company updated the mortality table usedThe fair value of plan assets decreased in 2008 compared to determine average life expectancy2007 due to deteriorating conditions in the calculation of its pension obligationglobal financial markets. This decrease caused the Company’s underfunded status to the RP-2000 Projected to 2015 mortality table. The change in this assumption increased the projected benefit obligation approximately $93,increase at the time of the change, and is reflected in unrecognized actuarial (gain) loss as of the measurement date.January 31, 2009.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Pension Benefits | |||||||||||||||||||||||||||||||||
Qualified Plans | Non-Qualified Plan | Other Benefits | |||||||||||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||||||||
Components of net periodic | |||||||||||||||||||||||||||||||||
benefit cost: | |||||||||||||||||||||||||||||||||
Service cost | $ | 123 | $ | 118 | $ | 106 | $ | 2 | $ | 1 | $ | 1 | $ | 13 | $ | 12 | $ | 10 | |||||||||||||||
Interest cost | 130 | 113 | 109 | 6 | 6 | 6 | 20 | 19 | 21 | ||||||||||||||||||||||||
Expected return on plan assets | (152 | ) | (130 | ) | (121 | ) | — | — | — | — | — | — | |||||||||||||||||||||
Amortization of: | |||||||||||||||||||||||||||||||||
Transition asset | (1 | ) | (1 | ) | (1 | ) | — | — | — | — | — | — | |||||||||||||||||||||
Prior service cost | 3 | 3 | 3 | 2 | 2 | 2 | (7 | ) | (7 | ) | (5 | ) | |||||||||||||||||||||
Actuarial (gain) loss | 41 | 24 | 9 | 2 | 2 | 3 | — | — | — | ||||||||||||||||||||||||
Curtailment charge | 5 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net periodic benefit cost | $ | 149 | $ | 127 | $ | 105 | $ | 12 | $ | 11 | $ | 12 | $ | 26 | $ | 24 | $ | 26 |
The Company uses the RP-2000 projected 2015 mortality table in calculating the pension obligation.
Pension Benefits | |||||||||||||||||||||||||||||||||
Qualified Plans | Non-Qualified Plan | Other Benefits | |||||||||||||||||||||||||||||||
2008 | 2007 | 2006 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||
Components of net periodic | |||||||||||||||||||||||||||||||||
benefit cost: | |||||||||||||||||||||||||||||||||
Service cost | $ | 39 | $ | 42 | $ | 123 | $ | 2 | $ | 2 | $ | 2 | $ | 10 | $ | 10 | $ | 13 | |||||||||||||||
Interest cost | 151 | 141 | 130 | 10 | 9 | 6 | 18 | 19 | 20 | ||||||||||||||||||||||||
Expected return on plan assets | (178 | ) | (165 | ) | (152 | ) | — | — | — | — | — | — | |||||||||||||||||||||
Amortization of: | |||||||||||||||||||||||||||||||||
Transition asset | — | — | (1 | ) | — | — | — | — | — | — | |||||||||||||||||||||||
Prior service cost | — | 1 | 3 | 2 | 2 | 2 | (7 | ) | (6 | ) | (7 | ) | |||||||||||||||||||||
Actuarial (gain) loss | 11 | 31 | 41 | 8 | 6 | 2 | (3 | ) | — | — | |||||||||||||||||||||||
Curtailment charge | — | — | 5 | — | — | — | — | — | — | ||||||||||||||||||||||||
Net periodic benefit cost | $ | 23 | $ | 50 | $ | 149 | $ | 22 | $ | 19 | $ | 12 | $ | 18 | $ | 23 | $ | 26 |
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 | Non-Qualified Plan | Qualified Plans | Plan | |||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||
PBO at end of fiscal year | $ | 2,419 | $ | 2,284 | $ | 113 | $ | 105 | $2,266 | $2,342 | $ | 160 | $ | 139 | ||||||||
ABO at end of fiscal year | $ | 2,232 | $ | 2,111 | $ | 103 | $ | 100 | $2,096 | $2,144 | $ | 138 | $ | 118 | ||||||||
Fair value of plan assets at end of year | $ | 2,098 | $ | 1,814 | $ | — | $ | — | $1,513 | $2,230 | $ | — | $ | — |
The following table provides information about the Company’s estimated future benefit payments.
Pension | Other | Pension | Other | ||||||||
Benefits | Benefits | Benefits | Benefits | ||||||||
2007 | $139 | $ | 22 | ||||||||
2008 | $138 | $ | 23 | ||||||||
2009 | $145 | $ | 24 | $118 | $ | 19 | |||||
2010 | $142 | $ | 26 | $125 | $ | 20 | |||||
2011 | $137 | $ | 27 | $132 | $ | 21 | |||||
2012 - 2016 | $775 | $ | 152 | ||||||||
2012 | $142 | $ | 21 | ||||||||
2013 | $153 | $ | 22 | ||||||||
2014 – 2018 | $922 | $ | 133 |
The Company discontinued the accrual of additional benefits under the Company’s cash balance formula of the Consolidated Retirement Benefit Plan (the “Cash Balance Plan”) effective January 1, 2007. Participants in the Cash Balance Plan will continue to earn interest credits on their accrued benefit balance as of December 31, 2006, based on average Treasury rates, but will no longer accrue cash balance pay credits under the Cash Balance Plan after December 31, 2006. Projected pension benefit payments, as noted above, are lower than estimates in prior years as a result of the discontinuation of benefit accruals
A-65
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
under the Cash Balance Plan. As a result of the decision to discontinue accruing additionalcurtail benefits under the Cash Balance Plan, the Company recorded a charge totaling $5, pre-tax, in fiscal 2006, which represented the previously unrecognized prior service costs.
A-64
NOTESTOCONSOLIDATED FINANCIALSTATEMENTS, CONTINUED
Effective January 1, Net periodic benefit cost decreased in 2008 and 2007 compared to 2006 due to participants in the Cash Balance formula of the Consolidated Retirement Benefit Plan was replaced withbeing moved to a 401(k) Retirement Savings Account Plan, whichretirement savings account plan effective January 1, 2007. Participants under that formula continue to earn interest on prior contributions but no additional pay credits will providebe earned. The 401(k) retirement savings plan provides to eligible employees both Company matching contributions and otherautomatic contributions from the Company based on participant contributions, based uponplan compensation, and length of service,service. The Company contributed and expensed $92 and $90 to eligible employees.employee 401(k) retirement savings accounts in 2008 and 2007, respectively.
The following table provides information about the target and actual pension plan asset allocations. Allocation percentages are shown as of December 31 for each respective year. The pension plan measurement date is the December 31st31st nearest the fiscal year-end.
Target | Target | |||||||||||||||||||||
allocations | Actualallocations | allocations | Actual allocations | |||||||||||||||||||
2006 | 2006 | 2005 | 2008 | 2008 | 2007 | |||||||||||||||||
Pension plan asset allocation, as of December 31: | ||||||||||||||||||||||
Domestic equity securities | 21.4 | % | 21.1 | % | 36.1 | % | 15.6 | % | 11.0 | % | 15.2 | % | ||||||||||
International equity securities | 24.5 | 27.5 | 25.2 | 16.4 | 13.9 | 21.4 | ||||||||||||||||
Investment grade debt securities | 25.0 | 23.3 | 17.8 | 16.0 | 17.9 | 21.6 | ||||||||||||||||
High yield debt securities | 8.0 | 7.7 | 7.6 | 10.0 | 12.7 | 9.9 | ||||||||||||||||
Private equity | 5.0 | 4.9 | 4.2 | 5.5 | 9.2 | 5.9 | ||||||||||||||||
Hedge funds | 7.6 | 7.4 | 3.8 | 22.0 | 22.9 | 17.2 | ||||||||||||||||
Real estate | 1.5 | 1.4 | 1.1 | 3.0 | 3.2 | 1.7 | ||||||||||||||||
Other | 7.0 | 6.7 | 4.3 | 11.5 | 9.2 | 7.1 | ||||||||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Investment objectives, policies and strategies are set by the Pension Investment Committee (the “Committee”) appointed by the CEO. The primary objectives include holding, protecting 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.purposes, including rebalancing exposures to certain asset classes. Any use of derivative instruments for a purpose or in a manner not specifically authorized is prohibited, unless approved in advance by the Committee.
The current target allocations shown represent 20062008 targets that were originally established in 2005.2007 and modified during 2008. To maintain actual asset allocations consistent with target allocations, assets are reallocated or rebalanced periodically. CashIn addition, cash flow from employer contributions and participant benefit payments iscan 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 made cash contributions of $150, $300 and $35 in 2006, 2005 and 2004, respectively. Although the Company is not required to make any cash contributions during fiscal 2007, it made a $50 cash contribution to its plans on February 5, 2007. Additional contributions may be made if the Company’s cash flow from operations exceeds its expectations. The Company expects any voluntary contributions made during 2007 will reduce its minimum required contributions in future years.
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Although the Company is not required to make cash contributions to its Company-sponsored pension plans during fiscal 2009, it made a $200 cash contribution on February 2, 2009. Additional contributions may be made if required under the Pension Protection Act to avoid any benefit restrictions. The measurement date for post-retirement benefit obligations is the December 31st nearest the fiscal year-end.Company expects any voluntary contributions made during 2009 will reduce its minimum required contributions in future years.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The Company used a 9.00%7.80% initial health care cost trend rate and a 5.00%4.50% ultimate health care cost trend rate to determine its expense. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
1% PointIncrease | 1% PointDecrease | 1% Point Increase | 1% Point Decrease | |||||||||||||
Effect on total of service and interest cost components | $ | 5 | $ | (4 | ) | $ | 4 | $ | (3 | ) | ||||||
Effect on postretirement benefit obligation | $ | 45 | $ | (39 | ) | $ | 29 | $ | (24 | ) |
On December 8, 2003, the President signed into law the Medicare Prescription Drug Improvement and Modernization Act of 2003. The law provides for a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit at least actuarially equivalent to the benefit established by the law. We have concluded that our plan is at least “actuarially equivalent” to the Medicare Part D plan for certain covered groups only, and will be eligible for the subsidy for those groups. The effect of the subsidy reduced our postretirement benefit obligation $6 at both February 3, 2007, and January 28, 2006, and did not have a material effect on our net periodic benefit cost in either of those years. The remaining groups’ benefits are not “actuarially equivalent” to the Medicare Part D plan and we have made the decision to pay as secondary coverage to Medicare Part D for those groups.
The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.
The Company recognizes expense in connection with these plans as contributions are funded, in accordance with GAAP. The Company made contributions to these plans,funds, and recognized expense, of $219 in 2008, $207 in 2007, and $204 in 2006, $196 in 2005, and $180 in 2004. The Company estimates it would have contributed an additional $2 million in 2004, but its obligation to contribute was suspended during the labor dispute in southern California.2006.
Based on the most recent information available to it, the Company believes that the present value of actuarial accrued liabilities in most or all of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits. Although underfunding can result in the imposition of excise taxes on contributing employers, factors such as increased contributions, increased asset values or future service benefit changes can reduce underfunding so that excise taxes are not triggered. 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, in accordance with GAAP.
The Company also administers certainother defined contribution plans for eligible union and non-union employees. The cost of these plans for 2008, 2007 and 2006 2005 and 2004 was $8, $8 and $12, respectively.$8.
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NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED
15.14. RENTLYECENTLYADOPTED ACCOUNTING STANDARDS
In December 2004,Effective January 31, 2009, the FASB issued SFAS No. 123 (Revised 2002),Company adopted FAS 140-4 and FIN 46(R)-8,Share-Based PaymentDisclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“SFAS No. 123(R)”), which replaced SFAS No. 123, superseded APB No. 25(FAS 140-4 and related interpretationsFIN 46(R)-8). FAS 140-4 and amended SFAS No. 95,StatementFIN 46(R)-8 require additional disclosures about an entity’s involvement with variable interest entities and transfers of Cash Flows. SFAS No 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. The Company adopted the provisions of SFAS No. 123(R) in the first quarter of 2006. The implementation of SFAS No. 123(R) reduced net earnings $0.06 per diluted share in 2006.assets. See Note 102 for further discussion of the effectadoption of FAS 140-4 and FIN 46(R)-8.
Effective February 3, 2008, the Company adopted SFAS No. 157,Fair Value Measurements (SFAS 157), except for non-financial assets and non-financial liabilities as deferred until February 1, 2009 by FASB Staff Position (FSP) 157-2Partial Deferral of the Effective Date of Statement No. 157 (FSP 157-2). SFAS 157 defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not expand or require any new fair value measurements. FSP
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
157-2 deferred the effective date of SFAS 157 for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. See Note 7 for further discussion of the adoption of SFAS No. 123(R) had on the Company’s Consolidated Financial Statements.157.
In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 99, 106, and 123(R). SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. In addition, SFAS No. 158 requires an employer to measure a plan’s assets and obligations and determine its funded states as of the end of the employer’s fiscal year and recognize changes in the funded status of a defined benefit postretirement plan in the year the changes occur and that those changes be recorded in comprehensive income, net of tax, as a separate component shareowners’ equity. SFAS No. 158 also requires additional footnote disclosure. The recognition and disclosure provisions of SFAS No. 158 became effective forEffective February 4, 2007, the Company on February 3, 2007. The measurement date provisions of SFAS No. 158 will become effective for the Company’s fiscal year beginning on February 1, 2009. See Note 14 for the effects the implementation of SFAS No. 158 had on the Company’s Consolidated Financial Statements.
16. RECENTLYISSUED ACCOUNTINGSTANDARDS
In June 2006, theadopted FASB issued Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes-anTaxes – an interpretation of FASB Statement No. 109. FIN (FIN No. 4848), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretationinterpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. See Note 4 for further discussion of the adoption of FIN No. 48 becomes48.
Effective February 3, 2007, the Company adopted the recognition and disclosure provisions (except for the measurement date change) of SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statement No. 87, 99, 106 and 132(R) (SFAS 158), which requires the recognition of the funded status of its retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized are required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). The Company adopted the measurement date provisions of SFAS 158 effective forFebruary 3, 2008. The majority of the Company’s pension and postretirement plans previously used a December 31 measurement date. All plans are now measured as of the Company’s fiscal year beginning February 4, 2007.end. The Company is evaluatingnon-cash effect of the adoption of the measurement date provisions of SFAS 158 decreased shareholders’ equity by approximately $5 ($3 after-tax) and increased long-term liabilities by approximately $5. There was no effect on the implementationCompany’s results of FIN No. 48 will have on its Consolidated Financial Statements.operations. See Note 13 for further discussion of the adoption of this standard.
15. RECENTLYISSUED ACCOUNTING STANDARDS
In September 2006,December 2007, the FASB issued SFAS No. 157,160,Fair Value MeasurementNoncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (SFAS 160). SFAS No. 157 defines fair value, establishes160 will require the consolidation of noncontrolling interests as a framework for measuring fair value in GAAP and expands disclosures about fair value measurement.component of equity. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157160 will become effective for the Company’s fiscal year beginning February 3, 2008. The Company is evaluating the effect the implementation of SFAS No. 157 will have on its Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to make an irrevocable election to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized into net earnings at each subsequent reporting date. SFAS No. 159 will be become effective for the Company’s fiscal year beginning February 3, 2008.1, 2009. The Company is currently evaluating the effect the adoption of SFAS No. 159160 will have on its Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations (SFAS 141R), which replaces SFAS 141. SFAS 141R further expands the definitions of a business and the fair value measurement and reporting in a business combination. SFAS 141R will become effective for the Company’s fiscal year beginning February 1, 2009. Because the standard will only impact transactions entered into after February 1, 2009, SFAS 141R will not effect our Consolidated Financial Statements upon adoption.
In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires enhanced disclosures on an entity’s derivative and hedging activities. SFAS 161 will become effective for the Company’s fiscal year beginning February 1, 2009. The Company is currently evaluating the effect the adoption of SFAS 161 will have on its Consolidated Financial Statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP No. EITF 03-6-1). FSP No. EITF 03-6-1 clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities and included in the calculation of
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In June 2006, the FASB ratified the consensus of Emerging Issues Task Force (“EITF”) issuebasic EPS. FSP No. 06-03,How Taxes Get Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF No. 06-03 indicates that the income statement presentation of taxes within the scope of the Issue on either a gross basis or a net basis is an accounting policy decision that should be disclosed pursuant to Opinion 22. EITF No. 06-03 becomes03-6-1 will become effective for the Company’s fiscal year beginning February 4, 2007.1, 2009. The Company does not expectis currently evaluating the effect the adoption of FSP No. EITF No. 06-03 to03-6-1 will have a material effect on its Consolidated Financial Statements.
17.16. GUARANTOR SUBSIDIARIES
The Company’s outstanding public debt (the “Guaranteed Notes”) is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and some of its subsidiaries (the “Guarantor Subsidiaries”). At February 3, 2007,January 31, 2009, a total of approximately $5,916$7,186 of Guaranteed Notes was outstanding. The Guarantor Subsidiaries and non-guarantor subsidiaries are wholly-owned subsidiaries of The Kroger Co. Separate financial statements of The Kroger Co. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable. The Company believes that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors.
The non-guaranteeing subsidiaries represent less than 3% on an individual and aggregate basis of consolidated assets, pre-tax earnings, cash flow, and equity for all periods presented, except for consolidated pre-tax earnings in 2004.equity. Therefore, the non-guarantor subsidiaries’ information is not separately presented in the balance sheets and the statements of cash flows, but rather is included in the column labeled “Guarantor Subsidiaries,” for those periods. The non-guaranteeing subsidiaries represented approximately 10% of 2004 consolidated pre-tax earnings. Therefore, the non-guarantor subsidiaries information is separately presented in the Condensed Consolidated Statements of Operations for 2004.tables below.
There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above, except, however, the obligations of each guarantor under its guarantee are limited to the maximum amount as will result in obligations of such guarantor under its guarantee not constituting a fraudulent conveyance or fraudulent transfer for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law (e.g., adequate capital to pay dividends under corporate laws).
A-68A-69
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following tables present summarized financial information as of January 31, 2009 and February 2, 2008 and for the three years ended January 31, 2009.
Condensed Consolidating
Balance Sheets
As of January 31, 2009
Guarantor | |||||||||||||||||||||
The Kroger Co. | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Current assets | |||||||||||||||||||||
Cash and temporary cash investments | $ | 27 | $ | 236 | $ | — | $ | 263 | |||||||||||||
Deposits in-transit | 71 | 560 | — | 631 | |||||||||||||||||
Receivables | 2,150 | 765 | (1,971 | ) | 944 | ||||||||||||||||
Net inventories | 384 | 4,475 | — | 4,859 | |||||||||||||||||
Prepaid and other current assets | 366 | 143 | — | 509 | |||||||||||||||||
Total current assets | 2,998 | 6,179 | (1,971 | ) | 7,206 | ||||||||||||||||
Property, plant and equipment, net | 1,747 | 11,414 | — | 13,161 | |||||||||||||||||
Goodwill | 132 | 2,139 | — | 2,271 | |||||||||||||||||
Adjustment to reflect fair value interest rate hedges | — | — | — | — | |||||||||||||||||
Other assets | 797 | 1,562 | (1,786 | ) | 573 | ||||||||||||||||
Investment in and advances to subsidiaries | 10,266 | — | (10,266 | ) | — | ||||||||||||||||
Total Assets | $ | 15,940 | $ | 21,294 | $ | (14,023 | ) | $ | 23,211 | ||||||||||||
Current liabilities | |||||||||||||||||||||
Current portion of long-term debt including | |||||||||||||||||||||
obligations under capital leases and | |||||||||||||||||||||
financing obligations | $ | 558 | $ | — | $ | — | $ | 558 | |||||||||||||
Accounts payable | 386 | 3,436 | — | 3,822 | |||||||||||||||||
Other current liabilities | 879 | 6,127 | (3,757 | ) | 3,249 | ||||||||||||||||
Total current liabilities | 1,823 | 9,563 | (3,757 | ) | 7,629 | ||||||||||||||||
Long-term debt including obligations under | |||||||||||||||||||||
capital leases and financing obligations | |||||||||||||||||||||
Face value long-term debt including | |||||||||||||||||||||
obligations under capital leases and | |||||||||||||||||||||
financing obligations | 7,460 | — | — | 7,460 | |||||||||||||||||
Adjustment to reflect fair value interest rate | |||||||||||||||||||||
hedges | 45 | — | — | 45 | |||||||||||||||||
Long-term debt including obligations under | |||||||||||||||||||||
capital leases and financing obligations | 7,505 | — | — | 7,505 | |||||||||||||||||
Other long-term liabilities | 1,341 | 1,465 | — | 2,806 | |||||||||||||||||
Total Liabilities | 10,669 | 11,028 | (3,757 | ) | 17,940 | ||||||||||||||||
Minority interests | 95 | — | — | 95 | |||||||||||||||||
Shareowners’ Equity | 5,176 | 10,266 | (10,266 | ) | 5,176 | ||||||||||||||||
Total Liabilities and Shareowners’ equity | $ | 15,940 | $ | 21,294 | $ | (14,023 | ) | $ | 23,211 |
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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following tables present summarized financial information as of February 3, 2007 and January 28, 2006 and for the three years ended February 3, 2007.
Condensed Consolidating
Balance Sheets
As of February 3, 20072, 2008
Guarantor | Guarantor | |||||||||||||||||||||||||||||||||
The Kroger Co. | Subsidiaries | Eliminations | Consolidated | The Kroger Co. | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||||||||
Cash | $ 25 | $ 164 | $ — | $ 189 | ||||||||||||||||||||||||||||||
Store deposits in-transit | 69 | 545 | — | 614 | ||||||||||||||||||||||||||||||
Cash and temporary cash investments | $ | 26 | $ | 216 | $ | — | $ | 242 | ||||||||||||||||||||||||||
Deposits in-transit | 76 | 600 | — | 676 | ||||||||||||||||||||||||||||||
Receivables | 168 | 1,982 | (1,372 | ) | 778 | 2,033 | 634 | (1,881 | ) | 786 | ||||||||||||||||||||||||
Net inventories | 406 | 4,203 | — | 4,609 | 420 | 4,429 | — | 4,849 | ||||||||||||||||||||||||||
Prepaid and other current assets | 371 | 194 | — | 565 | 373 | 182 | — | 555 | ||||||||||||||||||||||||||
Total current assets | 1,039 | 7,088 | (1,372 | ) | 6,755 | 2,928 | 6,061 | (1,881 | ) | 7,108 | ||||||||||||||||||||||||
Property, plant and equipment, net | 1,429 | 10,350 | — | 11,779 | 1,684 | 10,814 | — | 12,498 | ||||||||||||||||||||||||||
Goodwill, net | 56 | 2,136 | — | 2,192 | ||||||||||||||||||||||||||||||
Goodwill | 56 | 2,088 | — | 2,144 | ||||||||||||||||||||||||||||||
Adjustment to reflect fair value interest rate | ||||||||||||||||||||||||||||||||||
hedges | 11 | — | — | 11 | ||||||||||||||||||||||||||||||
Other assets | 647 | 1,149 | (1,307 | ) | 489 | 1,412 | 657 | (1,537 | ) | 532 | ||||||||||||||||||||||||
Investment in and advances to subsidiaries | 11,510 | — | (11,510 | ) | — | 10,098 | — | (10,098 | ) | — | ||||||||||||||||||||||||
Total Assets | $ 14,681 | $ 20,723 | $ (14,189 | ) | $ 21,215 | $ | 16,189 | $ | 19,620 | $ | (13,516 | ) | $ | 22,293 | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||||||||
Current portion of long-term debt | ||||||||||||||||||||||||||||||||||
including obligations under capital | ||||||||||||||||||||||||||||||||||
leases and financing obligations | $ 906 | $ — | $ — | $ 906 | ||||||||||||||||||||||||||||||
Current portion of long-term debt including | ||||||||||||||||||||||||||||||||||
obligations under capital leases and | ||||||||||||||||||||||||||||||||||
financing obligations | $ | 1,592 | $ | — | $ | — | $ | 1,592 | ||||||||||||||||||||||||||
Accounts payable | 1,614 | 4,869 | (2,679 | ) | 3,804 | 1,822 | 5,463 | (3,418 | ) | 3,867 | ||||||||||||||||||||||||
Other current liabilities | (537 | ) | 3,408 | — | 2,871 | — | 3,224 | — | 3,224 | |||||||||||||||||||||||||
Total current liabilities | 1,983 | 8,277 | (2,679 | ) | 7,581 | 3,414 | 8,687 | (3,418 | ) | 8,683 | ||||||||||||||||||||||||
Long-term debt including obligations under | ||||||||||||||||||||||||||||||||||
capital leases and financing obligations | ||||||||||||||||||||||||||||||||||
Face value long-term debt including | ||||||||||||||||||||||||||||||||||
obligations under capital leases and | ||||||||||||||||||||||||||||||||||
financing obligations | 6,136 | — | — | 6,136 | 6,485 | — | — | 6,485 | ||||||||||||||||||||||||||
Adjustment to reflect fair value interest rate | ||||||||||||||||||||||||||||||||||
hedges | 18 | — | — | 18 | 44 | — | — | 44 | ||||||||||||||||||||||||||
Long-term debt including obligations | ||||||||||||||||||||||||||||||||||
under capital leases and financing | ||||||||||||||||||||||||||||||||||
obligations | 6,154 | — | — | 6,154 | ||||||||||||||||||||||||||||||
Long-term debt including obligations under | ||||||||||||||||||||||||||||||||||
capital leases and financing obligations | 6,529 | — | — | 6,529 | ||||||||||||||||||||||||||||||
Other long-term liabilities | 1,621 | 936 | — | 2,557 | 1,332 | 835 | — | 2,167 | ||||||||||||||||||||||||||
Total Liabilities | 9,758 | 9,213 | (2,679 | ) | 16,292 | 11,275 | 9,522 | (3,418 | ) | 17,379 | ||||||||||||||||||||||||
Shareowners’ Equity | 4,923 | 11,510 | (11,510 | ) | 4,923 | 4,914 | 10,098 | (10,098 | ) | 4,914 | ||||||||||||||||||||||||
Total Liabilities and Shareowners’ equity | $ 14,681 | $ 20,723 | $ (14,189 | ) | $ 21,215 | $ | 16,189 | $ | 19,620 | $ | (13,516 | ) | $ | 22,293 |
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NOTESTOOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED
Condensed ConsolidatingBalance SheetsAsStatements of Operations
For the Year ended January 28, 200631, 2009 Guarantor The Kroger Co. Subsidiaries Eliminations Consolidated Current assets Cash $ 39 $ 171 $ — $ 210 Store deposits in-transit 46 442 — 488 Receivables 1,088 526 (928 ) 686 Net inventories 460 4,026 — 4,486 Prepaid and other current assets 355 241 — 596 Total current assets 1,988 5,406 (928 ) 6,466 Property, plant and equipment, net 1,255 10,110 — 11,365 Goodwill, net 56 2,136 — 2,192 Other assets (509 ) 968 — 459 Investment in and advances to subsidiaries 10,808 — (10,808 ) — Total Assets $ 13,598 $ 18,620 $ (11,736 ) $ 20,482 Current liabilities Current portion of long-term debt including obligations under capital leases and financing obligations 554 $ — $ — $ 554 Accounts payable 263 4,215 (928 ) 3,550 Other current liabilities (151 ) 2,762 — 2,611 Total current liabilities 666 6,977 (928 ) 6,715 Long-term debt including obligations under capital leases and financing obligations Face value long-term debt including obligations under capital leases and financing obligations 6,651 — — 6,651 Adjustment to reflect fair value interest rate hedges 27 — — 27 Long-term debt including obligations under capital leases and financing obligations 6,678 — — 6,678 Other long-term liabilities 1,864 835 — 2,699 Total Liabilities 9,208 7,812 (928 ) 16,092 Shareowners’ Equity 4,390 10,808 (10,808 ) 4,390 Total Liabilities and Shareowners’ equity $ 13,598 $ 18,620 $ (11,736 ) $ 20,482
Guarantor | |||||||||||||||||||
The Kroger Co. | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Sales | $ | 9,557 | $ | 67,715 | $ | (1,272 | ) | $ | 76,000 | ||||||||||
Merchandise costs, including warehousing and | |||||||||||||||||||
transportation | 7,816 | 52,020 | (1,272 | ) | 58,564 | ||||||||||||||
Operating, general and administrative | 1,657 | 11,227 | — | 12,884 | |||||||||||||||
Rent | 128 | 531 | — | 659 | |||||||||||||||
Depreciation and amortization | 157 | 1,285 | — | 1,442 | |||||||||||||||
Operating profit (loss) | (201 | ) | 2,652 | — | 2,451 | ||||||||||||||
Interest expense | 480 | 5 | — | 485 | |||||||||||||||
Equity in earnings of subsidiaries | 2,022 | — | (2,022 | ) | — | ||||||||||||||
Earnings before tax expense | 1,341 | 2,647 | (2,022 | ) | 1,966 | ||||||||||||||
Tax expense | 92 | 625 | — | 717 | |||||||||||||||
Net earnings | $ | 1,249 | $ | 2,022 | $ | (2,022 | ) | $ | 1,249 |
A-70A-72
NOTESTOOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED
Condensed Consolidating
Statements of Operations
For the Year ended February 2, 2008
Guarantor | |||||||||||||||||||
The Kroger Co. | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Sales | $ | 9,022 | $ | 62,482 | $ | (1,269 | ) | $ | 70,235 | ||||||||||
Merchandise costs, including warehousing and | |||||||||||||||||||
transportation | 6,877 | 48,171 | (1,269 | ) | 53,779 | ||||||||||||||
Operating, general and administrative | 1,666 | 10,489 | — | 12,155 | |||||||||||||||
Rent | 125 | 519 | — | 644 | |||||||||||||||
Depreciation and amortization | 148 | 1,208 | — | 1,356 | |||||||||||||||
Operating profit | 206 | 2,095 | — | 2,301 | |||||||||||||||
Interest expense | 468 | 6 | — | 474 | |||||||||||||||
Equity in earnings of subsidiaries | 1,511 | — | (1,511 | ) | — | ||||||||||||||
Earnings before income tax expense | 1,249 | 2,089 | (1,511 | ) | 1,827 | ||||||||||||||
Income tax expense | 68 | 578 | — | 646 | |||||||||||||||
Net earnings | $ | 1,181 | $ | 1,511 | $ | (1,511 | ) | $ | 1,181 |
A-73
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Condensed Consolidating
Statements of Operations
For the Year ended February 3, 2007
Guarantor | |||||||||||||||
The Kroger Co. | Subsidiaries | Eliminations | Consolidated | ||||||||||||
Sales | $8,731 | $58,383 | $(1,003 | ) | $66,111 | ||||||||||
Merchandise costs, including warehousing | |||||||||||||||
and transportation | 6,630 | 44,488 | (1,003 | ) | 50,115 | ||||||||||
Operating, general and administrative | 1,697 | 10,142 | — | 11,839 | |||||||||||
Rent | 132 | 517 | — | 649 | |||||||||||
Depreciation and amortization | 136 | 1,136 | — | 1,272 | |||||||||||
Operating profit | 136 | 2,100 | — | 2,236 | |||||||||||
Interest expense | 480 | 8 | — | 488 | |||||||||||
Equity in earnings of subsidiaries | 1,843 | — | (1,843 | ) | — | ||||||||||
Earnings before tax expense | 1,499 | 2,092 | (1,843 | ) | 1,748 | ||||||||||
Tax expense | 384 | 249 | — | 633 | |||||||||||
Net earnings | $1,115 | $ 1,843 | $(1,843 | ) | $ 1,115 |
A-71
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED
Condensed ConsolidatingStatements of OperationsFor the Year ended January 28, 2006
Guarantor | |||||||||||||||
The Kroger Co. | Subsidiaries | Eliminations | Consolidated | ||||||||||||
Sales | $8,693 | $ 52,822 | $ (962 | ) | $ 60,553 | ||||||||||
Merchandise costs, including warehousing | |||||||||||||||
and transportation | 6,502 | 40,021 | (958 | ) | 45,565 | ||||||||||
Operating, general and administrative | 1,657 | 9,368 | 2 | 11,027 | |||||||||||
Rent | 165 | 502 | (6 | ) | 661 | ||||||||||
Depreciation and amortization | 139 | 1,126 | — | 1,265 | |||||||||||
Operating profit | 230 | 1,805 | — | 2,035 | |||||||||||
Interest expense | 498 | 12 | — | 510 | |||||||||||
Equity in earnings of subsidiaries | 1,164 | — | (1,164 | ) | — | ||||||||||
Earnings before tax expense | 896 | 1,793 | (1,164 | ) | 1,525 | ||||||||||
Tax expense (benefit) | (62 | ) | 629 | — | 567 | ||||||||||
Net earnings | $ 958 | $ 1,164 | $ (1,164 | ) | $ 958 |
A-72
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED
Condensed ConsolidatingStatements of OperationsFor the Year ended January 29, 2005
Guarantor | Non-Guarantor | ||||||||||||||||||
The Kroger Co. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Sales | $8,003 | $49,432 | $41 | $(1,042 | ) | $56,434 | |||||||||||||
Merchandise costs, including | |||||||||||||||||||
warehousing and | |||||||||||||||||||
transportation | 6,420 | 36,721 | — | (1,001 | ) | 42,140 | |||||||||||||
Operating, general and | |||||||||||||||||||
administrative | 1,126 | 9,494 | (9 | ) | — | 10,611 | |||||||||||||
Rent | 194 | 527 | — | (41 | ) | 680 | |||||||||||||
Depreciation and amortization | 110 | 1,142 | 4 | — | 1,256 | ||||||||||||||
Goodwill impairment charge | — | 904 | — | — | 904 | ||||||||||||||
Operating profit | 153 | 644 | 46 | — | 843 | ||||||||||||||
Interest expense | 529 | 6 | 22 | — | 557 | ||||||||||||||
Equity in earnings of subsidiaries | 430 | — | — | (430 | ) | — | |||||||||||||
Earnings before tax expense | 54 | 638 | 24 | (430 | ) | 286 | |||||||||||||
Tax expense | 158 | 231 | 1 | — | 390 | ||||||||||||||
Net earnings (loss) | $ (104 | ) | $ 407 | $23 | $ (430 | ) | $ (104 | ) |
A-73
NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED
Condensed ConsolidatingStatements of OperationsFor the Year ended February 3, 2007
Guarantor | |||||||||||
The Kroger Co. | Subsidiaries | Consolidated | |||||||||
Net cash provided by operating activities | $ 152 | $ 2,199 | $ 2,351 | ||||||||
Cash flows from investing activities: | |||||||||||
Capital expenditures | (143 | ) | (1,540 | ) | (1,683 | ) | |||||
Other | 56 | 40 | 96 | ||||||||
Net cash used by investing activities | (87 | ) | (1,500 | ) | (1,587 | ) | |||||
Cash flows from financing activities: | |||||||||||
Proceeds from issuance of long-term debt | 362 | — | 362 | ||||||||
Reductions in long-term debt | (556 | ) | — | (556 | ) | ||||||
Proceeds from issuance of capital stock | 168 | — | 168 | ||||||||
Capital stock reacquired | (633 | ) | — | (633 | ) | ||||||
Dividends paid | (140 | ) | — | (140 | ) | ||||||
Other | 18 | (4 | ) | 14 | |||||||
Net change in advances to subsidiaries | 702 | (702 | ) | — | |||||||
Net cash used by financing activities | (79 | ) | (706 | ) | (785 | ) | |||||
Net decrease in cash and temporary cash investments | (14 | ) | (7 | ) | (21 | ) | |||||
Cash and temporary investments: | |||||||||||
Beginning of year | 39 | 171 | 210 | ||||||||
End of year | $ 25 | $ 164 | $ 189 |
Guarantor | |||||||||||||||||||
The Kroger Co. | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Sales | $ | 8,731 | $ | 58,383 | $ | (1,003 | ) | $ | 66,111 | ||||||||||
Merchandise costs, including warehousing and | |||||||||||||||||||
transportation | 6,630 | 44,488 | (1,003 | ) | 50,115 | ||||||||||||||
Operating, general and administrative | 1,697 | 10,142 | — | 11,839 | |||||||||||||||
Rent | 132 | 517 | — | 649 | |||||||||||||||
Depreciation and amortization | 136 | 1,136 | — | 1,272 | |||||||||||||||
Operating profit | 136 | 2,100 | — | 2,236 | |||||||||||||||
Interest expense | 480 | 8 | — | 488 | |||||||||||||||
Equity in earnings of subsidiaries | 1,843 | — | (1,843 | ) | — | ||||||||||||||
Earnings before income tax expense | 1,499 | 2,092 | (1,843 | ) | 1,748 | ||||||||||||||
Income tax expense | 384 | 249 | — | 633 | |||||||||||||||
Net earnings | $ | 1,115 | $ | 1,843 | $ | (1,843 | ) | $ | 1,115 |
A-74
NOTESOTESTOTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED
Condensed Consolidating
Statements of OperationsCash Flows
For the Year ended January 28, 200631, 2009
Guarantor | Guarantor | ||||||||||||||||||||||||
The Kroger Co. | Subsidiaries | Consolidated | The Kroger Co. | Subsidiaries | Consolidated | ||||||||||||||||||||
Net cash provided by operating activities | $ 1,171 | $ 1,021 | $ 2,192 | $ | (852 | ) | $ | 3,748 | $ | 2,896 | |||||||||||||||
Cash flows from investing activities: | |||||||||||||||||||||||||
Capital expenditures | (188 | ) | (1,118 | ) | (1,306 | ) | |||||||||||||||||||
Payments for capital expenditures | (257 | ) | (1,892 | ) | (2,149 | ) | |||||||||||||||||||
Other | 11 | 16 | 27 | (39 | ) | 9 | (30 | ) | |||||||||||||||||
Net cash used by investing activities | (177 | ) | (1,102 | ) | (1,279 | ) | (296 | ) | (1,883 | ) | (2,179 | ) | |||||||||||||
Cash flows from financing activities: | |||||||||||||||||||||||||
Proceeds from issuance of long-term debt | 14 | — | 14 | 1,377 | — | 1,377 | |||||||||||||||||||
Reductions in long-term debt | (764 | ) | (33 | ) | (797 | ) | |||||||||||||||||||
Payments on long-term debt | (1,048 | ) | — | (1,048 | ) | ||||||||||||||||||||
Proceeds from issuance of capital stock | 78 | — | 78 | 187 | — | 187 | |||||||||||||||||||
Capital stock reacquired | (252 | ) | — | (252 | ) | ||||||||||||||||||||
Treasury stock purchases | (637 | ) | — | (637 | ) | ||||||||||||||||||||
Dividends paid | (227 | ) | — | (227 | ) | ||||||||||||||||||||
Other | 77 | 33 | 110 | (430 | ) | 9 | (421 | ) | |||||||||||||||||
Net change in advances to subsidiaries | (140 | ) | 140 | — | 1,854 | (1,854 | ) | — | |||||||||||||||||
Net cash provided (used) by financing activities | (987 | ) | 140 | (847 | ) | ||||||||||||||||||||
Net increase in cash and temporary cash investments | 7 | 59 | 66 | ||||||||||||||||||||||
Cash and temporary investments: | |||||||||||||||||||||||||
Net cash (used) provided by financing activities | 1,076 | (1,845 | ) | (769 | ) | ||||||||||||||||||||
Net increase (decrease) in cash and temporary cash investments | (72 | ) | 20 | (52 | ) | ||||||||||||||||||||
Cash from consolidated Variable Interest Entity | 73 | — | 73 | ||||||||||||||||||||||
Cash and temporary cash investments: | |||||||||||||||||||||||||
Beginning of year | 32 | 112 | 144 | 26 | 216 | 242 | |||||||||||||||||||
End of year | $ 39 | $ 171 | $ 210 | $ | 27 | $ | 236 | $ | 263 |
A-75
NOTESOTESTOTOCONSOLIDATEDFINANCIALSTATEMENTS, CONTINUED
Condensed Consolidating
Statements of OperationsCash Flows
For the Year ended January 29, 2005February 2, 2008
Guarantor | Guarantor | ||||||||||||||||||||||||
The Kroger Co. | Subsidiaries | Consolidated | The Kroger Co. | Subsidiaries | Consolidated | ||||||||||||||||||||
Net cash provided by operating activities | $ (890 | ) | $ 3,220 | $ 2,330 | |||||||||||||||||||||
Net cash (used) provided by operating activities | $ | (941 | ) | $ | 3,522 | $ | 2,581 | ||||||||||||||||||
Cash flows from investing activities: | |||||||||||||||||||||||||
Capital expenditures | (161 | ) | (1,473 | ) | (1,634 | ) | |||||||||||||||||||
Payments for capital expenditures | (210 | ) | (1,916 | ) | (2,126 | ) | |||||||||||||||||||
Other | 22 | 4 | 26 | (29 | ) | (63 | ) | (92 | ) | ||||||||||||||||
Net cash used by investing activities | (139 | ) | (1,469 | ) | (1,608 | ) | (239 | ) | (1,979 | ) | (2,218 | ) | |||||||||||||
Cash flows from financing activities: | |||||||||||||||||||||||||
Proceeds from issuance of long-term debt | 616 | — | 616 | 1,372 | — | 1,372 | |||||||||||||||||||
Reductions in long-term debt | (724 | ) | (286 | ) | (1,010 | ) | |||||||||||||||||||
Payments on long-term debt | (560 | ) | — | (560 | ) | ||||||||||||||||||||
Proceeds from issuance of capital stock | 25 | — | 25 | 224 | — | 224 | |||||||||||||||||||
Capital stock reacquired | (319 | ) | — | (319 | ) | ||||||||||||||||||||
Treasury stock purchases | (1,421 | ) | — | (1,421 | ) | ||||||||||||||||||||
Dividends paid | (202 | ) | — | (202 | ) | ||||||||||||||||||||
Other | (27 | ) | (22 | ) | (49 | ) | 218 | 59 | 277 | ||||||||||||||||
Net change in advances to subsidiaries | 1,464 | (1,464 | ) | — | 1,550 | (1,550 | ) | — | |||||||||||||||||
Net cash provided (used) by financing activities | 1,035 | (1,772 | ) | (737 | ) | ||||||||||||||||||||
Net (decrease) increase in cash and temporary cash | |||||||||||||||||||||||||
investments | 6 | (21 | ) | (15 | ) | ||||||||||||||||||||
Cash and temporary investments: | |||||||||||||||||||||||||
Net cash (used) provided by financing activities | 1,181 | (1,491 | ) | (310 | ) | ||||||||||||||||||||
Net increase in cash and temporary cash investments | 1 | 52 | 53 | ||||||||||||||||||||||
Cash and temporary cash investments: | |||||||||||||||||||||||||
Beginning of year | 26 | 133 | 159 | 25 | 164 | 189 | |||||||||||||||||||
End of year | $ 32 | $ 112 | $ 144 | $ | 26 | $ | 216 | $ | 242 |
A-76
NOTESOTESTOTOCONSOLIDATEDFINANCIALSTATEMENTS, CONCLUDEDONTINUED
18.Condensed Consolidating
Statements of Cash Flows
For the Year ended February 3, 2007
Guarantor | ||||||||||||||
The Kroger Co. | Subsidiaries | Consolidated | ||||||||||||
Net cash provided by operating activities | $ | (755 | ) | $ | 3,106 | $ | 2,351 | |||||||
Cash flows from investing activities: | ||||||||||||||
Payments for capital expenditures | (143 | ) | (1,540 | ) | (1,683 | ) | ||||||||
Other | 56 | 40 | 96 | |||||||||||
Net cash used by investing activities | (87 | ) | (1,500 | ) | (1,587 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||
Proceeds from issuance of long-term debt | 10 | — | 10 | |||||||||||
Payments on long-term debt | (556 | ) | — | (556 | ) | |||||||||
Proceeds from issuance of capital stock | 206 | — | 206 | |||||||||||
Treasury stock purchases | (633 | ) | — | (633 | ) | |||||||||
Dividends Paid | (140 | ) | — | (140 | ) | |||||||||
Other | 355 | (27 | ) | 328 | ||||||||||
Net change in advances to subsidiaries | 1,586 | (1,586 | ) | — | ||||||||||
Net cash used by financing activities | 828 | (1,613 | ) | (785 | ) | |||||||||
Net decrease in cash and temporary cash investments | (14 | ) | (7 | ) | (21 | ) | ||||||||
Cash and temporary cash investments: | ||||||||||||||
Beginning of year | 39 | 171 | 210 | |||||||||||
End of year | $ | 25 | $ | 164 | $ | 189 |
The above February 2, 2008 condensed consolidating balance sheet and 2007 and 2006 condensed consolidating cash flow statements have been adjusted to conform to current year presentation and properly reflect intra-company receivables.
A-77
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED
17. QUARTERLYDATA (UNAUDITED)
Quarter | Quarter | ||||||||||||||||||||||||||||||||
First | Second | Third | Fourth | Total Year | First | Second | Third | Fourth | Total Year | ||||||||||||||||||||||||
2006 | (16 Weeks) | (12 Weeks) | (12 Weeks) | (13 Weeks) | (53 Weeks) | ||||||||||||||||||||||||||||
2008 | (16 Weeks) | (12 Weeks) | (12 Weeks) | (12 Weeks) | (52 Weeks) | ||||||||||||||||||||||||||||
Sales | $ | 23,107 | $ | 18,053 | $ | 17,580 | $ | 17,260 | $ | 76,000 | |||||||||||||||||||||||
Net earnings | $ | 386 | $ | 277 | $ | 237 | $ | 349 | $ | 1,249 | |||||||||||||||||||||||
Net earnings per basic common share | $ | 0.59 | $ | 0.42 | $ | 0.37 | $ | 0.54 | $ | 1.92 | |||||||||||||||||||||||
Average number of shares used in | |||||||||||||||||||||||||||||||||
basic calculation | 657 | 651 | 649 | 648 | 652 | ||||||||||||||||||||||||||||
Net earnings per diluted common | |||||||||||||||||||||||||||||||||
share | $ | 0.58 | $ | 0.42 | $ | 0.36 | $ | 0.53 | $ | 1.90 | |||||||||||||||||||||||
Average number of shares used in | |||||||||||||||||||||||||||||||||
diluted calculation | 664 | 659 | 656 | 655 | 659 | ||||||||||||||||||||||||||||
Quarter | |||||||||||||||||||||||||||||||||
First | Second | Third | Fourth | Total Year | |||||||||||||||||||||||||||||
2007 | (16 Weeks) | (12 Weeks) | (12 Weeks) | (12 Weeks) | (52 Weeks) | ||||||||||||||||||||||||||||
Sales | $ | 19,415 | $ | 15,138 | $ | 14,699 | $ | 16,859 | $ | 66,111 | $ | 20,726 | $ | 16,139 | $ | 16,135 | $ | 17,235 | $ | 70,235 | |||||||||||||
Net earnings | $ | 306 | $ | 209 | $ | 215 | $ | 385 | $ | 1,115 | $ | 337 | $ | 267 | $ | 254 | $ | 323 | $ | 1,181 | |||||||||||||
Net earnings per basic common share | $ | 0.42 | $ | 0.29 | $ | 0.30 | $ | 0.55 | $ | 1.56 | $ | 0.48 | $ | 0.38 | $ | 0.37 | $ | 0.48 | $ | 1.71 | |||||||||||||
Average number of shares used in basic | |||||||||||||||||||||||||||||||||
calculation | 722 | 719 | 712 | 706 | 715 | 706 | 702 | 678 | 668 | 690 | |||||||||||||||||||||||
Net earnings per diluted common share | $ | 0.42 | $ | 0.29 | $ | 0.30 | $ | 0.54 | $ | 1.54 | $ | 0.47 | $ | 0.38 | $ | 0.37 | $ | 0.48 | $ | 1.69 | |||||||||||||
Average number of shares used in diluted | |||||||||||||||||||||||||||||||||
calculation | 729 | 725 | 720 | 715 | 723 | ||||||||||||||||||||||||||||
Quarter | |||||||||||||||||||||||||||||||||
First | Second | Third | Fourth | Total Year | |||||||||||||||||||||||||||||
2005 | (16 Weeks) | (12 Weeks) | (12 Weeks) | (12 Weeks) | (52 Weeks) | ||||||||||||||||||||||||||||
Sales | $ | 17,948 | $ | 13,865 | $ | 14,020 | $ | 14,720 | $ | 60,553 | |||||||||||||||||||||||
Net earnings | $ | 294 | $ | 196 | $ | 185 | $ | 283 | $ | 958 | |||||||||||||||||||||||
Net earnings per basic common share | $ | 0.40 | $ | 0.27 | $ | 0.26 | $ | 0.39 | $ | 1.32 | |||||||||||||||||||||||
Average number of shares used in basic | |||||||||||||||||||||||||||||||||
calculation | 727 | 722 | 724 | 724 | 724 | ||||||||||||||||||||||||||||
Net earnings per diluted common share | $ | 0.40 | $ | 0.27 | $ | 0.25 | $ | 0.39 | $ | 1.31 | |||||||||||||||||||||||
Average number of shares used in diluted | |||||||||||||||||||||||||||||||||
calculation | 732 | 730 | 732 | 730 | 731 | ||||||||||||||||||||||||||||
Average number of shares used in | |||||||||||||||||||||||||||||||||
diluted calculation | 715 | 709 | 685 | 676 | 698 |
Annual amounts may not sum due to rounding.
CERTIFICATIONS
On June 28, 2006,July 18, 2008, we submitted a Section 12(a) CEO Certification to the New York Stock Exchange with no qualifications. We also filed with the SEC the Rule 13a-14(a)/15d-14(a) Certifications as an exhibit to Form 10-K for fiscal years 20052007 and 2006.2008.
A-77A-78
Kroger has a variety of plans under which employees may acquire common stock of Kroger. Employees of Kroger and its subsidiaries own shares through a profit sharing plan, as well as 401(k) plans and a payroll deduction plan called the Kroger Stock Exchange. If employees have questions concerning their shares in the Kroger Stock Exchange, or if they wish to sell shares they have purchased through this plan, they should contact: |
The Bank of New York |
Mellon Employee Investment Plans Division |
P. O. Box |
7090 Troy, MI 48007-7090 Toll Free 1-800-872-3307 |
Questions regarding Kroger’s 401(k) SHAREOWNERS: BNY Mellon Shareowner Services |
Pittsburgh, PA 15252-8015 Toll Free 1-866-405-6566 Shareholder questions and requests for forms available on the Internet should be directed to: |
FINANCIAL INFORMATION: Call (513) 762-1220 to request printed financial information, including Kroger’s most recent report on Form 10-Q or 10-K, or press release. Written inquiries should be addressed to Shareholder Relations, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100. Information also is available on Kroger’s corporate website at www.thekrogerco.com. |
EXECUTIVE OFFICERS | ||
Donald E. Becker | ||||
Executive Vice President | ||||
David B. Dillon | ||||
Chairman of the Board and Chief Executive Officer Kevin M. Dougherty Joseph A. Grieshaber, Jr. Paul W. Heldman Scott M. Henderson | Christopher T. Hjelm Carver L. Johnson Calvin J. Kaufman Lynn Marmer Don W. McGeorge W. Rodney McMullen | M. Marnette Perry J. Michael Schlotman | ||
Paul J. Scutt | ||||
Senior Vice President | ||||
M. Elizabeth Van Oflen | ||||
Vice President and Controller | ||||
Della Wall R. Pete Williams | ||||
OPERATINGUNITHEADS | ||||
John E. Bays | ||||
Dillon Stores | ||||
Paul L. Bowen | ||||
Jay C | ||||
William H. Breetz, Jr. | ||||
Southwest Division | ||||
Geoffrey J. Covert Jay Cummins Russell J. Dispense Michael J. Donnelly Michael L. Ellis Peter M. Engel | Jon C. Flora Donna Giordano Rick Going John P. Hackett James Hallsey David G. Hirz | |||
Food 4 Less | ||||
Kathleen Kelly | ||||
Kroger Personal Finance | ||||
(50% owned by Kroger) | ||||
Bruce A. Lucia Bruce A. Macaulay | Robert Moeder Phyllis J. Norris Jeffrey A. Parker Darel Pfeiff D. Mark Prestidge Mark W. Salisbury Arthur Stawski, Sr. Ron Stewart Van Tarver | |||
Supermarket Petroleum | ||||
THEKROGERCO.l· 1014 VINESTREETl· CINCINNATI, OHIO45202l· (513) 762-4000
Please mark your votes as indicated in this example | x |
The Board of Directors recommends a vote FOR the nominees and FOR Proposal 2.
1. ELECTION OF DIRECTORS:
FOR | AGAINST | ABSTAIN | FOR | AGAINST | ABSTAIN | FOR | AGAINST | ABSTAIN | |||
1.1 Reuben V. Anderson | c | c | c | 1.6 David B. Lewis | c | c | c | 1.11 Susan M. Phillips | c | c | c |
1.2 Robert D. Beyer | c | c | c | 1.7 Don W. McGeorge | c | c | c | 1.12 Steven R. Rogel | c | c | c |
1.3 David B. Dillon | c | c | c | 1.8 W. Rodney McMullen | c | c | c | 1.13 James A. Runde | c | c | c |
1.4 Susan J. Kropf | c | c | c | 1.9 Jorge P. Montoya | c | c | c | 1.14 Ronald L. Sargent | c | c | c |
1.5 John T. LaMacchia | c | c | c | 1.10 Clyde R. Moore | c | c | c | 1.15 Bobby S. Shackouls | c | c | c |
Mark Here for Address Change or Comments SEE REVERSE | c | ||||||||||
FOR | AGAINST | ABSTAIN | |||
2. | Approval ofPricewaterhouseCoopers LLP, as auditors. | c | c | c | |
The Board of Directors recommends a vote AGAINST Proposals 3 and 4 | |||||
FOR | AGAINST | ABSTAIN | |||
3. | Approve shareholder proposal, if properly presented, to recommend an increase of the percentage of eggs stocked from hens not confined in battery cages. | c | c | c | |
4. | Approve shareholder proposal, if properly presented, to recommend amendment of Kroger’s articles to provide for election of directors by majority vote. | c | c | c |
Signature | Co-owner sign here | Date | |||
Please sign below exactly as name appears hereon. Joint owners should each sign. Where applicable, indicate position or representative capacity. |
5FOLD AND DETACH HERE 5
WE ENCOURAGE YOU TO TAKE ADVANTAGE OF INTERNET OR TELEPHONE VOTING.
BOTH ARE AVAILABLE 24 HOURS A DAY, 7 DAYS A WEEK.
Internet and telephone voting are available through 11:59 PM Eastern Time
June 24, 2009.
![]() | http://www.eproxy.com/kr Use the Internet to vote your proxy. Have your proxy card in hand when you access the web site. | |
OR | ||
TELEPHONE 1-866-580-9477 Use any touch-tone telephone in the United States, Canada and Puerto Rico to vote your proxy. Have your proxy card in hand when you call. | ||
| ||
Important notice regarding the Internet availability of proxy materials for the Annual Meeting of shareholdersThe Proxy Statement and the 2008 Annual Report to Shareholders are available at: http://bnymellon.mobular.net/bnymellon/kr |
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P R O X Y
This Proxy is Solicited on Behalf of the Board of Directors
for the Annual Meeting to be Held on June 25, 2009
The undersigned hereby appoints each of DAVID B. DILLON, JOHN T. LA MACCHIA and BOBBY S. SHACKOULS 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 meeting of 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.
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 all nominees listed, FOR Proposal 2, and AGAINST Proposals 3 and 4.
If you wish to vote in accordance with the recommendations of the Board of Directors, all you need do is sign and return this card. The Proxy Committee cannot vote your shares unless you vote your proxy by Internet or telephone or sign and return the card.
(Continued and to be marked, dated and signed, on the other side)
BNY MELLON SHAREOWNER SERVICES | ||
Address Change/Comments (Mark the corresponding box on the reverse side) | P.O. BOX 3550 SOUTH HACKENSACK, NJ 07606-9250 | |
5FOLD AND DETACH HERE 5
For shareholders who have elected to receive The Kroger Co. Proxy Statement and Annual Report electronically, you can now view the 2009 Annual Meeting materials on the Internet by pointing your browser tohttp://www.thekrogerco.com/finance/documents/proxystatement.pdf.
ChooseMLinkSMfor fast, easy and secure 24/7 online access to your future proxy materials, investment plan statements, tax documents and more. Simply log on toInvestor ServiceDirect®atwww.bnymellon.com/shareowner/isd where step-by-step instructions will prompt you through enrollment.
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