SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File No. 1-303
January 1, 1994
THE KROGER CO.
An Ohio Corporation I.R.S. Employer Identification
No. 31-0345740
Address Telephone Number
- - ------- ----------------
1014 Vine St. (513) 762-4000
Cincinnati, Ohio 45202
Securities registered pursuant to section 12 (b) of the Act:
Name of Exchange on
Title of Class which Registered
- - -------------- --------------------------
Common $1 par value New York Stock Exchange
108,129,456 shares outstanding on
February 11, 1994
6-3/8% Convertible Junior Subordinated New York Stock Exchange
Notes due 1999, face $1000
200,000 notes outstanding
9% Senior Subordinated Notes New York Stock Exchange
due 1999, face $1000
125,000 notes outstanding
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No .
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the Common Stock of The Kroger Co.
held by nonaffiliates as of February 11, 1994: $2,521,592,309
Documents Incorporated by Reference:
Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act on or before April 6, 1994 incorporated by
reference into Parts II and III of Form 10-K.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SALES
Sales in the fourth quarter 1993, which included 12 weeks, decreased 5.2% below
the same quarter in 1992, which included 13 weeks. Adjusting 1992's sales for
the extra week and excluding sales from the Company's San Antonio, Texas stores
which were sold in August 1993, sales in the 1993 fourth quarter increased
3.8%. Sales for the full year, including the extra week in 1992 and the San
Antonio sales, increased 1.1% over those for 1992. Excluding the extra week and
the San Antonio stores, full year 1993 sales increased 3.6% over 1992. A review
of sales by lines of business for the three years ended January 1, 1994, is as
follows:
1993 1992 1991
% OF 1993 -------------- -------------- --------------
SALES AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
------------------------------------------------------------
(MILLIONS OF DOLLARS)
Food Stores.............. 91.3% $20,443 +1.1% $20,199 +3.4% $19,533 +5.7%
Convenience Stores....... 4.3% 951 +3.9% 916 +6.0% 864 +0.2%
Other sales.............. 4.4% 990 -3.9% 1,030 +8.0% 954 +4.4%
------ ------- ------- -------
Total sales.............. 100.0% $22,384 +1.1% $22,145 +3.7% $21,351 +5.4%
Sales in identical food stores for the full year 1993 (those operating a full
year and not expanded) increased 1.6% from the prior year. Excluding Michigan,
which had a sixty-seven day strike during the second and third quarters of
1992, identical food stores sales increased 1.2% for all of 1993 and 1.1% in
the fourth quarter 1993 versus the same periods in 1992. These increases were
achieved despite low overall food inflation and deflation in some commodities
in both 1993 and 1992, intense new supermarket competition in markets like
Houston, Texas and Toledo, Ohio, and expanding supercenter competition in many
other markets.
1993 convenience stores sales changes as compared to the same periods in 1992
were as follows:
4TH QUARTER YEAR-TO-DATE
--------------------------
Total Sales............................................ -3.8% 3.9%
Identical.............................................. 1.7% 3.6%
In-Store Sales:
Total................................................ -4.1% 2.7%
Identical............................................ 3.9% 4.5%
Gasoline Sales:
Total................................................ -3.5% 5.2%
Identical............................................ -.6% 2.6%
Gasoline Gallons:
Total................................................ .1% 7.7%
Identical............................................ 3.4% 5.3%
The fourth quarter and full year 1993 sales for the seven-company convenience
store group were enhanced by strong in-store sales and increases in gasoline
gallons sold but were depressed by decreases in gasoline retail prices.
Other sales include outside sales by the Company's manufacturing divisions and
sales of general merchandise to a drug store company in which the Company
maintains an equity interest. The drug store company is expected to complete an
expansion of its warehouse in early 1994 and to discontinue its purchases from
the Company. The Company expects that this will result in a decline of
approximately 45% to 50% in other sales.
Total food store square footage, excluding the San Antonio stores disposition,
increased 3.2%, 2.5% and 2.2% in 1993, 1992, and 1991, respectively. The
Company expects to increase retail food store square footage by 4 1/2 to 5%
each year from 1994 through 1996. Convenience store square footage declined .7%
and 2.1% in 1993 and 1991 respectively, and increased .2% in 1992. Sales per
average square foot for the last three years were:
TOTAL SALES
PER
AVERAGE SQUARE
FOOT
--------------
1993 1992 1991
-------------------------
Food Stores...................................................... $398 $402 $398
Convenience Stores............................................... $405 $389 $364
Food stores sales per average square foot for 1992 includes the extra week.
Without the extra week the amount would have been $394.
The Company was able to maintain sales growth in 1993 in the face of new and
intense competition for a number of reasons. Fierce price competition in
markets, such as Dayton, Ohio and Houston and Dallas, Texas, has abated
somewhat. The Company's Michigan operations have begun to recover from a
prolonged strike in 1992. The Company's efforts to reduce the cost of products
through improved procurement and distribution practices have made the Company
more price competitive and attractive to consumers without sacrificing gross
profit. Finally, the shift in customer interest to private label products has
enhanced sales. The Company's line of private label products, many of which are
manufactured by the Company, have met with increasing acceptance by consumers.
While these factors likely will continue to benefit the Company in 1994, the
ability to generate sales growth may be limited by significant competitive
entries into markets such as Atlanta and Indiana, as well as continued
supercenter growth.
Sales in 1992 showed an improvement over 1991 primarily due to the extra week
in the fiscal year. Sales in 1991 benefited from the purchase of the former
Great Scott! Stores in Michigan in late 1990, the continued maturation of the
Company's combination food store format, and significant growth in private
label products.
EBITD
The Company's Credit Agreement, dated January 21, 1992, and the indentures
underlying approximately $1.7 billion of publicly issued debt contain various
restrictive covenants, many of which are based on earnings before interest,
taxes, depreciation, LIFO charge, unusual and extraordinary items ("EBITD").
These covenants are based, among other things, upon generally accepted
accounting principles ("GAAP") as applied on a date prior to January 3, 1993.
The ability to generate EBITD at levels sufficient to satisfy the requirements
of these agreements is a key measure of the Company's financial strength. The
presentation of EBITD is not intended to be an alternative to any GAAP measure
of performance but rather to facilitate an understanding of the Company's
performance compared to its debt covenants. At January 1, 1994 the Company was
in compliance with all covenants of its Credit Agreement and publicly issued
debt. The Company believes it has adequate coverage of its debt covenants to
continue to respond effectively to competitive conditions.
During 1993, EBITD, which does not include the effect of Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", or the charges related to the
disposition of the San Antonio stores, increased 7.5% to $976.8 million
compared to $908.2 million in 1992 and $968.0 million in 1991. 1992's EBITD was
negatively affected by a Michigan strike which reduced EBITD by approximately
$69 million and was increased by the extra week in the fiscal year. 1993's
EBITD increase was primarily the result of increased sales combined with an
improved gross profit rate.
MERCHANDISE COSTS
Merchandise costs include warehousing and transportation expenses and LIFO
charges or credits. The following table shows merchandising costs as a percent
of sales and the relative effect of LIFO charges:
1993 1992 1991
---------------------
Merchandise costs as reported............................. 76.43% 77.12% 77.19%
LIFO charge (credit)...................................... (.02%) .03% .12%
------ ------ ------
Merchandise costs as adjusted............................. 76.45% 77.09% 77.07%
The Company's gross profit rate in 1993 improved over previous years in all
categories with the exceptions of pharmacy and deli. The improvement was due in
large measure to improved results in Michigan which was affected by a strike in
1992, an increase in private label sales, a reduction in coupon costs, and
cost reduction programs in procurement and warehousing.
The Company expects gross profit as a percent of sales to improve in the future
as benefits are derived from coupon scanning and a decline in multiple
couponing. Coupon scanning allows the Company to readily determine the validity
of coupons presented. The effect of reduced multiple couponing is enhanced by a
reduction in the face value and quantity of vendor coupons. The Company also
expects to show gross profit improvement from coordinated procurement and the
continued expansion of private label sales. The Company produces many of its
own private label products and, therefore, has lower product costs for such
items than could be obtained through procurement. Some of the gross profit
benefit will be reflected in lower prices to protect or enhance the Company's
competitive position.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses as a percent of sales in 1993,
1992 and 1991 were 17.98%, 17.51% and 17.15%, respectively. Excluding the
effect of SFAS No. 106 from 1993, operating, general and administrative
expenses as a percent of sales were 17.89%.
The increase in operating, general and administrative expenses over last year
was due in part to the increase in incentive pay for both management and store
employees, reflecting 1993's improved performance compared to 1992. The Company
also has experienced increases in collectively bargained wages, health
insurance, general liability claims, and other store expenses.
Controlling operating, general and administrative expenses is a significant
challenge to the Company. Beginning in 1992 and continuing through 1995, the
Company expects to spend approximately $125 million of capital to increase
technological capabilities with the goal of reducing operating costs. The
Company has dedicated management resources to improve its procurement,
logistics, administrative, and accounting functions, both to realize the
benefits of improved technological capability and otherwise to control costs.
The Company also has begun the redesign of some specialty departments within
the food stores to realize cost savings. The Company currently is absorbing the
expense of converting some full service departments to self service. This
effort will continue during 1994 and 1995, and the Company expects to realize
some benefit from these efforts beginning in late 1994.
INCOME TAXES
The effective income tax rates were 39.8%, 41.7% and 40.3% for 1993, 1992 and
1991, respectively. 1993's income tax expense includes a $4.2 million charge to
increase deferred taxes for the change in the federal income tax rate.
NET EARNINGS (LOSS)
Net earnings (loss) totaled $(12.2) million in 1993 compared to $(5.9) million
in 1992 and $79.9 million in 1991. Earnings in 1993 compared to 1992 and 1991
was affected by: (i) a 1993 charge against earnings of $159.2 million after
taxes for the cumulative effect of a change in accounting for retiree benefits,
(ii) an extraordinary loss from the early retirement of debt in 1993 of $23.8
million compared to $107.1 million in 1992 and $20.8 million in 1991, (iii) a
sixty-seven day strike in Michigan during 1992, (iv) a LIFO credit in 1993 of
$3.2 million versus a charge of $8.1 million in 1992 and $26.2 million in 1991,
and (v) net interest expense in 1993 of $390.0 million versus $474.8 million in
1992 and $531.1 million in 1991. 1993's net earnings also include a $4.4
million pre-tax ($2.7 million after tax) one-time charge related to a change in
the estimated useful life of certain computer equipment and a $22.7 million
charge ($15 million after tax) in connection with the disposition of the San
Antonio stores. Severance pay, unemployment benefits costs and loss on sale of
assets are included in this charge.
LIQUIDITY AND CAPITAL RESOURCES
DEBT MANAGEMENT AND INTEREST EXPENSE
The Company continued to reduce interest expense during 1993. The Company was
successful in placing $1.6 billion of senior subordinated or senior secured
debt during 1992 and 1993 with an average rate of 9.39% and $200 million of
convertible junior subordinated notes with a rate of 6.375%. The Company also
borrowed $100 million at a rate equal to LIBOR + 1.25% or, at the Company's
election, such lenders' base rate + .25%, pursuant to a term facility under the
Credit Agreement. The proceeds from these offerings and the issuance of
13,275,000 shares of common stock with proceeds of $203.5 million, were used to
redeem or repurchase, on the open market, high yield subordinated debt with an
average rate of 14.2% (see "Repurchase and Redemption of Subordinated Debt").
As a result of these transactions the Company has reduced the weighted average
cost of its long-term debt including capital leases to 8.2% at year-end 1993
versus 11.6% at the beginning of 1990. Long-term debt, including capital leases
and current portions thereof, decreased $348 million to $4.206 billion at year
end 1993 from $4.554 billion at year end 1992.
Required principal repayments over the next five years increased to $1.048
billion at year end 1993 versus $534.5 million and $541.3 million at year-end
1992 and 1991, respectively. Scheduled debt maturities for the five years
subsequent to 1993, 1992 and 1991 were:
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
Year 1....................................... $ 63,053 $ 73,248 $ 73,580
Year 2....................................... 111,010 115,017 123,368
Year 3....................................... 117,434 111,549 114,927
Year 4....................................... 146,784 118,032 111,451
Year 5....................................... 609,769 116,669 117,926
1993's Year 5 maturities include the entire $362.0 million outstanding under
the Company's Working Capital Facility under its Credit Agreement, $68.0
million of Facility D under its Credit Agreement, and the remaining 11 1/8%
Senior Notes outstanding at January 1, 1994 of $138.4 million. The Company has
notified the trustee for the Senior Notes that it will redeem these notes on
March 15, 1994. Maturities shown for 1991 reflect the restated Credit Agreement
dated January 21, 1992.
The Company's interest rate on Credit Agreement borrowings is variable. The
average interest rate, including the effect of interest rate swaps, on the
Company's bank debt, which totaled $847.0 million at year-end 1993, including
Facility D, versus $851.0 million at year-end 1992, was 4.57% compared to 5.42%
at the end of 1992 and 6.13% at the end of 1991. The decline is due to
generally lower market interest rates and achieving a .25% interest rate step
down in January, 1993.
The Company currently has in place various interest rate hedging agreements
aggregating $1.4 billion. The effect of these agreements is to: (i) fix the
rate on $100 million floating rate debt until July, 1994 (ii) swap the
contractual interest rate on $350 million of seven and ten year debt
instruments to the rates available on three to five year fixed rate instruments
(upon expiration of the three to five year swap agreements the fixed
contractual rate will become floating for the remainder of the seven and ten
year term of debt), (iii) swap the contractual interest rate on $600 million of
seven and ten year fixed-rate instruments into floating-rate instruments and
(iv) cap six month LIBOR on $350 million for one to five years at rates of
3.70% to 5.50%. $50 million of the caps expire in each of July 1994, July 1995,
July 1997 and July 1998. The remaining $150 million cap expires in November
1995.
The Company currently expects 1994 net interest expense, based on year-end 1993
rates, to total $330-$340 million compared to $390.0 million, $474.8 million
and $531.1 million in 1993, 1992 and 1991, respectively.
To meet any short-term liquidity needs, the Company has available an $850
million Working Capital Facility under its Credit Agreement. A portion of the
Company's short-term borrowings are permitted to be in the form of commercial
paper. At January 1, 1994, the Company had outstanding $98.0 million of
commercial paper and $264.0 million under the Working Capital Facility. At
year-end 1993, after deducting amounts set aside as backup for the Company's
unrated commercial paper program and stand-by letters of credit, $317.8 million
was available under the Working Capital Facility. There are no annual principal
payments required under the Working Capital Facility, which expires on January
3, 1998.
COMMON STOCK
On March 4, 1993 the Company issued 12,500,000 shares of its common stock
through a public offering. On April 1, 1993, the Company issued an additional
775,000 shares of its common stock pursuant to an over-allotment option granted
to the underwriters in connection with the offering. The Company realized net
proceeds of $203.5 million on these issues which were used initially to repay
amounts outstanding under the Working Capital Facility, and thereafter the
Company used amounts available under the Working Capital Facility to purchase
or redeem outstanding indebtedness of the Company.
REPURCHASE AND REDEMPTION OF SUBORDINATED DEBT
During 1993 the Company repurchased $300.6 million face amount of Junior
Subordinated Discount Debentures with an accreted value of $285.1 million,
$71.2 million Senior Subordinated Debentures, $111.6 million Senior Notes, and
$33.5 million Senior Subordinated Reset Notes. Additionally, the Company
redeemed the remaining $498.2 million Junior Subordinated Discount Debentures.
The redemptions were effected using funds from asset sales, the sale of
treasury stock to employee benefit plans, proceeds from the sale of common
stock and new financings, and excess cash from operations. The outstanding
balances of these debt issues at January 1, 1994 were $0 for the Junior
Subordinated Discount Debentures, $0 for the Senior Subordinated Debentures,
$138.4 million for the Senior Notes, and $66.5 million for the Senior
Subordinated Reset Notes. The Company issued a redemption notice for the
remaining Senior Notes on February 13, 1994. The redemption will be effected on
March 15, 1994.
During 1992 the Company repurchased $269.9 million face amount of Junior
Subordinated Discount Debentures with an accreted value of $231.1 million,
$343.9 million Senior Subordinated Debentures and $256.2 million Subordinated
Debentures. Additionally, the Company redeemed $120.5 million Senior
Subordinated Debentures and $304.6 million Subordinated Debentures.
During 1991 the Company repurchased $303.8 million face amount of Junior
Subordinated Discount Debentures with an accreted value of $217.9 million,
$59.3 million Senior Subordinated Debentures and $64.2 million Subordinated
Debentures.
CAPITAL EXPENDITURES
Capital expenditures totaled $376.1 million for 1993, $241.2 million for 1992
and $208.1 million in 1991. During 1993 the Company opened, acquired or
expanded 46 food stores and 10 convenience stores compared to 42 food stores
and 19 convenience stores in 1992 and 42 food stores and 4 convenience stores
in 1991. The Company also completed 70 food store and 21 convenience store
remodels during 1993. During 1993, 32 food stores were closed or sold including
the 15 San Antonio stores sold to Megafood Stores, Inc. in August 1993. 17
convenience stores also were closed. The Company expects capital expenditures
to approximate $1.5 billion over the next three years. In 1994 the Company
plans to increase food store square footage by 4 1/2%-5% by opening, expanding
or acquiring approximately 70 food stores and completing within-the-wall
remodels of 60-70 food stores, including the recently completed purchase of 10
stores in Houston, Texas from AppleTree Markets, Inc. The increased square
footage is planned for existing Company markets where the Company has an
established market position and an existing administrative and logistical
network. The Company's ability to realize its capital expenditure plan will
depend, in part, on its ability to generate sufficient free cash flow. The
Company expects to dedicate one half of its free cash flow in excess of
planned expenditures to its capital program and the remainder to debt
reduction.
CONSOLIDATED STATEMENT OF CASH FLOWS
During 1993 the Company generated $617.3 million in cash from operating
activities compared to $532.8 million in 1992 and $448.4 million in 1991. The
increase from 1992 is due to an increase in operating net income of $69.6
million. Additionally, the Company experienced an increase in cash from changes
in operating assets and liabilities of $105.5 million. The increase is due to
an increase in accounts payable over and above the increase in inventory values
of $47.7 million, an increase in income taxes payable of $17.5 million, and an
increase in self-insured workers compensation and general liability accruals of
$34.4 million. The increase in 1992 from 1991 is due to an increase in cash of
$45.1 million from changes in operating assets and liabilities and a $56.3
million reduction in interest expense.
Investing activities used $368.3 million compared to $264.3 million of cash
used in 1992 and $187.9 million of cash used in 1991. The increase in the use
of cash in 1993 is due to an increase in the level of capital expenditures over
1992 of $134.9 million and an increased use of cash of $18.2 million for
investments. This was offset by an increase in cash over 1992 from reduced
current year expenditures for additions to property held for sale and increased
proceeds from the sale of property, plant and equipment. The increase in 1992
from 1991 is due to an increase in cash used for capital expenditures and
additions to property held for sale.
Cash used by financing activities totaled $231.7 million compared to $168.4
million and $311.1 million in 1992 and 1991, respectively. The increase in the
use of cash during 1993 is due to a debt reduction, excluding capital leases
and the interest accretion on the Junior Subordinated Discount Debentures, of
$423.0 million versus 1992's debt reduction of $38.8 million. The debt
reduction was offset by proceeds from the sale of stock and lower debt
prepayment and financing costs incurred.
OTHER ISSUES
The Company is party to more than 200 collective bargaining agreements with
local unions representing approximately 110,000 of the Company's employees.
Among the contracts that have expired or will expire in the remainder of 1994
are those covering store employees in Charleston (WV), Nashville, Louisville,
Cincinnati, Phoenix and Tucson as well as warehouse and distribution employees
in a number of the Company's operating divisions. Typical agreements are 3 to 4
years in duration, and as such agreements expire, the Company expects to
negotiate with the unions and to enter into new collective bargaining
agreements. There can be no assurance, however, that such agreements will be
reached without work stoppage. A prolonged work stoppage affecting a
substantial number of stores could have a material adverse effect on the
results of the Company's operations.
As of January 3, 1993 the Company implemented SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" using the immediate
recognition approach. This new standard requires that the expected cost of
retiree health benefits be charged to expense during the years that the
employees render service rather than the Company's past practice of recognizing
these costs on a cash basis. As part of adopting the new standard, the Company
recorded in 1993 a non-cash charge against earnings of $248.7 million before
taxes ($159.2 million after taxes). This cumulative adjustment as of January 3,
1993 represents the discounted present value of expected future retiree health
benefits attributed to employees' service rendered prior to that date.
In addition, the new standard results in additional annual expense, which for
the year ended January 1, 1994 totaled $19.5 million before taxes. The increase
in the annual postretirement benefit expense does not affect the Company's
EBITD.
Effective December 29, 1991, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes". The adoption of SFAS No. 109 had a material
effect on the Company's financial statements in the first quarter of 1993 due
to the adoption of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The Company recognized a deferred tax benefit of
$89.5 million in connection with the adoption of SFAS No. 106. A portion of
this tax benefit would not have been recognized under the Company's previous
method of accounting for income taxes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE KROGER CO.
Dated: May 2, 1994 By (Paul W. Heldman)
Paul W. Heldman
Vice President, Secretary
and General Counsel
INDEX OF EXHIBITS
Exhibit
23.2 Consent of Independent Accountants
23.3 Consent of Independent Accountants
99.2 Financial Statements for The Kroger Co. Savings Plan for
the Year Ended December 31, 1993
99.3 Financial Statements for the Dillon Companies, Inc.
Employees' Stock Ownership and Savings Plan for the Year
Ended December 31, 1993