EXHIBIT 99.1
Media Contact: Gary Rhodes, The Kroger Co. (513) 762-1304
Investor Contact: Kathy Kelly, The Kroger Co. (513) 762-4969
KROGER REPORTS 14% INCREASE IN EARNINGS PER SHARE,
BEFORE ONE-TIME ITEMS, FOR THIRD QUARTER
COMPANY ANNOUNCES STRATEGIC GROWTH PLAN TO ACCELERATE SALES GROWTH,
REDUCE COSTS AND GENERATE LONG-TERM ANNUAL EPS GROWTH OF 13-15%
BEGINNING IN FISCAL 2004
CINCINNATI, OH, December 11, 2001 -- The Kroger Co. (NYSE: KR) today
reported earnings of $0.32 per diluted share, excluding costs related to a
merger and one-time expenses, for the third quarter ended November 10, 2001.
These results represent an increase of 14.3% over the third quarter of 2000, on
the same basis.
Total sales for the third quarter of fiscal 2001 increased 3.8% to
$11.4 billion. Total food store sales rose 4.3%. Comparable food store sales,
which include relocations and expansions, rose 1.4% for the quarter, while
identical food store sales rose 0.8%.
EBITDA (earnings before interest, taxes, depreciation, amortization,
LIFO and one-time items) for the third quarter of 2001 totaled $834 million, an
increase of 10.2% from a year ago.
"We were pleased with Kroger's third-quarter earnings results, which
were achieved through strong expense controls in a difficult operating
environment. However, we were not satisfied with Kroger's sales, which were
softer than expected because of the weak economy and challenging competitive
conditions in certain markets," said Joseph A. Pichler, Kroger chairman and
chief executive officer."
During the third quarter:
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- FIFO gross profit margin, without one-time expenses, increased
42 basis points to 27.46%, driven by increased corporate-brand
sales and savings from coordinated purchasing.
- Operating, general and administrative (OG&A) costs, without
one-time expenses, increased 11 basis points to 18.86%. Health
care benefit costs rose 15 basis points from the prior year
while utility expenses increased seven basis points. Excluding
these increases, OG&A declined 11 basis points because of
continuing productivity improvements.
- Kroger repurchased 5.1 million shares of common stock at an
average price of $25.23 per share, for an investment of $128
million. Since January 2000, Kroger has invested $1.2 billion
to buy back 52.6 million shares. The Company has $766 million
remaining under the $1 billion repurchase program authorized
earlier this year by Kroger's Board of Directors. At current
prices, Kroger continues to repurchase shares.
During the third quarter of 2001, Kroger opened, expanded, relocated or
acquired 33 food stores. Food store square footage increased 4.0% over the prior
year. Including acquisitions, capital expenditures for the quarter totaled $530
million.
Net working capital totaled $546 million, an increase of $67 million
from the third quarter of fiscal 2000. This reflects an improvement in net
working capital trend as compared to the increase in the second quarter of 2001
versus the prior year. Mr. Pichler said Kroger remains committed to achieving
its goal of reducing net working capital by $500 million from the benchmark set
in the third quarter of 1999. Against that benchmark, the Company has reduced
net working capital by $44 million.
Net total debt was $8.6 billion, an increase of $212 million as
compared to the third quarter of 2000. Net total debt improved to 2.28 times
EBITDA, as compared to 2.50 times in the third quarter of 2000. This represents
Kroger's
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lowest net total debt-to-EBITDA ratio since the merger with Fred Meyer in 1999.
The Company's goal is to reduce net total debt to 2 times EBITDA.
During the third quarter, Kroger incurred costs related to a merger of
$10 million pre-tax, primarily for systems conversions. The Company also
incurred a pre-tax charge of $110 million related to asset impairment and store
closings, and a pre-tax charge of $81 million related to energy contracts in
California. Including these costs related to a merger and charges, earnings per
share for the third quarter were $0.16.
For the first three quarters of 2001, Kroger reported earnings from
operations of $1.01 per diluted share. These results represent an increase of
17.4% over the first three quarters of 2000, on the same basis. Including costs
related to a merger and charges, earnings per share for the first three quarters
of 2001 were $0.84. Total sales in the first three quarters of 2001 increased
4.6% to $38 billion. EBITDA totaled $2.7 billion for the first three quarters of
2001, an increase of 9.2% over the comparable period in 2000.
Based on consumers' shopping behavior so far in the fourth quarter, Mr.
Pichler said Kroger continues to experience softer-than-expected sales in
jewelry, floral, and general merchandise categories because of the recession. As
a result, Kroger expects to report earnings per share in the range of
$0.46-$0.48 for the fourth quarter, excluding costs related to a merger and
certain charges. On this same basis, the Company anticipates earnings per share
for the full 2001 fiscal year to be in the range of $1.48-$1.50, an increase of
13-14.5% from $1.31 per share in 2000, after adjusting for the 53rd week last
year.
Looking ahead, Mr. Pichler outlined the strategic growth plan through
which Kroger will:
- Increase its identical food store sales growth target;
- Reduce operating and administrative costs by more than $500
million;
- Further leverage its size to achieve even greater economies of
scale; and
- Reinvest in its core business to increase sales and market
share.
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Kroger will make substantial gross profit investments to achieve
identical sales growth of 2-3% above product cost inflation over the next two
years. This new goal represents a significant increase over the Company's
previous growth target of product cost inflation plus 1%.
To help fund the additional investments in strategic sales initiatives
and operate more efficiently, Kroger plans to reduce administrative and
operating costs by more than $500 million during the next two years. These
savings are incremental to the $380 million of synergies already achieved by the
Company. Most of the $500 million in cost reductions will be achieved in fiscal
2002. Although Kroger believes it is among the lowest-cost operators of any
traditional "combo" operator in the U.S., the Company has identified significant
opportunities to further reduce its cost structure through improved
productivity, reduced shrink and other efforts.
As part of its plan to reduce administrative costs, Kroger will
eliminate approximately 1,500 positions, primarily management and clerical, over
the next 12 months. The Company will apply its best practices across the Company
to create the most effective operating structure, from store level to corporate
office. The Company also plans to merge one existing Kroger division into two
adjacent marketing areas.
"We deeply regret having to announce staff reduction plans, especially
at this time of year, and we understand this news will be painful for some of
our associates," Mr. Pichler said. "However, economic conditions make it
necessary for us to implement these actions quickly to maintain Kroger's
long-term competitive advantages. We will communicate fully with employees about
their individual positions and treat everyone with fairness and respect."
Some employees may be able to transfer to other positions within the
Company. For those who cannot, Kroger will provide a comprehensive and generous
severance package based on years of service.
Kroger has also identified new opportunities to leverage its economies
of scale by centralizing additional merchandising and procurement functions in
the
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Cincinnati area. The Company believes this will better align it with vendors
that are set up to serve one primary contact point at large retailers. Kroger's
total employment in the Cincinnati area is expected to increase by 75-100
positions because of the consolidation of merchandising and purchasing
functions.
Kroger's strategic growth plan will support additional investment in
the core business to grow sales and increase market share. As part of that plan,
Kroger has established a long-term, sustainable EPS growth target of 13-15% per
year beginning in fiscal 2004. For fiscal 2002 and 2003, the Company expects
annual earnings per share growth of 10-12%. The Company said that adjustments to
goodwill required by new FASB rules should improve fiscal 2002 EPS by another 7
percentage points beyond that target.
Mr. Pichler said the estimates for 2002 and 2003 reflect the weak
economy, increased competition, and the investments required to achieve the new
same-store sales target. "We have assumed that, for the next two years, the
economic situation and competitive situations will not improve. If they do
improve, Kroger's EPS growth may exceed the 10-12% target," Mr. Pichler said.
Kroger will incur a pre-tax charge of $85-$100 million to reflect
severance and other costs associated with implementing this strategic growth
plan. The majority of this charge will be taken in the fourth quarter of 2001.
Mr. Pichler said that even with substantial investments to drive sales
growth, Kroger's free cash flow is expected to be $550 - $650 million in fiscal
2002. This reflects a capital spending program of $2.1 billion, which is
consistent with prior plans, and a working capital reduction of $100 million.
"We are operating in the most challenging economic and competitive
environment of the past 20 years," said Mr. Pichler. "Fortunately, Kroger has
the financial strength to make the investments necessary to build our business,
remodel and expand our store base, and continue to generate strong free cash
flow that can be used for stock repurchases or debt reduction. Our industry is
consolidating rapidly and we believe that Kroger's strategic advantages will
enable us to enhance market share as further consolidation occurs. I firmly
believe that by executing this strategic growth plan, Kroger's business will be
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healthier than ever and the Company will be well positioned to create
substantial shareholder value in the years ahead."
Headquartered in Cincinnati, Ohio, Kroger is one of the nation's
largest retail grocery chains. At the end of the third quarter, the Company
operated 2,401 supermarkets and multi-department stores in 32 states under
approximately two dozen banners, including Kroger, Ralphs, Fred Meyer, Food 4
Less, King Soopers, Smith's, Fry's and Fry's Marketplace, Dillon, QFC and City
Market. Kroger also operates 790 convenience stores, 426 fine jewelry stores,
177 supermarket fuel centers and 41 food processing plants.
# # #
This press release contains certain forward-looking statements about the future
performance of the Company. These statements are based on management's
assumptions and beliefs in light of the information currently available to it.
Such statements relate to, among other things: projected growth in annual
earnings per share; working capital reduction; a decline in our net total
debt-to-EBITDA ratio; our ability to generate free cash flow; and our strategic
growth plan, and are indicated by words or phrases such as "comfortable,"
"committed," "expects," "goal," and similar words or phrases. These
forward-looking statements are subject to uncertainties and other factors that
could cause actual results to differ materially. Our ability to achieve annual
earnings per share goals will be affected primarily by pricing and promotional
activities of existing and new competitors, including non-traditional food
retailers, and our response to these actions intended to increase market share.
In addition, Kroger's EPS growth goals could be affected by: recessionary trends
in the economy; our ability to achieve the cost reductions that we have
identified; increases in health care and energy costs above those projected; and
the success of our capital investments. Our efforts to meet our working capital
reduction targets could be adversely affected by: increases in product costs;
newly opened or consolidated distribution centers; our ability to obtain sales
growth from new square footage; competitive activity in the markets in which we
operate; changes in our product mix; and changes in laws and regulations. Our
ability to reduce our net total debt-to-EBITDA ratio could be adversely affected
by: our ability to generate sales growth and free cash flow; interest rate
fluctuations and other changes in capital market conditions; the Company's stock
repurchase activity; unexpected increases in the cost of capital expenditures;
acquisitions; and other factors. The results of our strategic growth plan and
our ability to generate free cash flow to the extent expected could be adversely
affected if any of the factors identified above negatively impact our
operations. In addition, the timing of the execution of the plan could adversely
impact our EPS and sales results. We assume no obligation to update the
information contained herein. Please refer to Kroger's reports and filings with
the Securities and Exchange Commission for a further discussion of these risks
and uncertainties.
Note: Kroger's quarterly conference call with investors will be broadcast live
via the Internet at 10 a.m. (EST) on December 11, 2001 at www.kroger.com and
www.streetevents.com. An on-demand replay of the webcast will be available from
2 p.m. (EST) on December 11, 2001 through December 18, 2001.
6
THE KROGER CO.
CONSOLIDATED STATEMENT OF INCOME
WITHOUT ONE-TIME ITEMS
(in millions, except per share amounts)
THIRD QUARTER YEAR TO DATE
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
SALES $ 11,382.2 $ 10,961.9 $ 37,969.4 $ 36,308.3
COSTS AND EXPENSES:
MERCHANDISE COSTS, INCLUDING ADVERTISING,
WAREHOUSING AND TRANSPORTATION 8,263.1 7,991.1 27,622.1 26,547.4
OPERATING, GENERAL AND ADMINISTRATIVE 2,146.4 2,054.9 7,153.4 6,785.3
RENT 145.4 152.6 498.9 493.3
DEPRECIATION 227.2 209.5 735.8 696.0
AMORTIZATION OF GOODWILL 26.9 24.5 84.2 78.3
NET INTEREST EXPENSE INCL. CAPITAL LEASES 149.3 146.1 506.5 507.6
------------ ------------ ------------ ------------
TOTAL 10,958.3 10,578.7 36,600.9 35,107.9
------------ ------------ ------------ ------------
INCOME BEFORE TAX EXPENSE 423.9 383.2 1,368.5 1,200.4
AND EXTRAORDINARY ITEMS
TAX EXPENSE 165.3 150.2 533.7 471.1
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEMS 258.6 233.0 834.8 729.3
EXTRAORDINARY ITEMS (a) -- (1.6) -- (3.2)
------------ ------------ ------------ ------------
NET INCOME $ 258.6 $ 231.4 $ 834.8 $ 726.1
============ ============ ============ ============
INCOME PER BASIC COMMON SHARE:
FROM OPERATIONS $ 0.32 $ 0.28 $ 1.04 $ 0.88
EXTRAORDINARY ITEMS 0.00 0.00 0.00 0.00
------------ ------------ ------------ ------------
NET INCOME PER COMMON SHARE $ 0.32 $ 0.28 $ 1.04 $ 0.88
============ ============ ============ ============
SHARES USED IN BASIC CALCULATION 801.0 820.7 806.6 825.5
INCOME PER DILUTED COMMON SHARE:
FROM OPERATIONS $ 0.32 $ 0.28 $ 1.01 $ 0.86
EXTRAORDINARY ITEMS 0.00 0.00 0.00 0.00
------------ ------------ ------------ ------------
NET INCOME PER DILUTED COMMON SHARE $ 0.32 $ 0.28 $ 1.01 $ 0.86
============ ============ ============ ============
SHARES USED IN DILUTED CALCULATION 820.8 844.5 827.6 847.5
Note: Certain prior year amounts have been reclassified to conform to current
year presentation.
(a) The Extraordinary Items are from the early retirement of debt.
SUPPLEMENTAL FINANCIAL INFORMATION
Without One-time Items
THIRD QUARTER YEAR TO DATE
------------------------------ ------------------------------
2001 2000 2001 2000
--------------- ------------- -------------- --------------
EBITDA (b) $ 834.3 $ 756.8 $ 2,722.0 $ 2,491.7
LIFO CHARGE 7.0 (6.5) 27.0 9.5
GROSS PROFIT % (EXCLUDING LIFO CHARGE)
WITHOUT ONE-TIME ITEMS 27.46% 27.04% 27.32% 26.91%
NET WORKING CAPITAL (c) $ 545.6 $ 478.4
NET TOTAL DEBT (d) 8,594.1 8,382.6
ERONOA (e) 25.93% 24.34%
% TO SALES FOR INCOME STATEMENT WITHOUT ONE-TIME ITEMS
THIRD QUARTER YEAR TO DATE
------------------------------ ------------------------------
2001 2000 2001 2000
--------------- ------------- -------------- --------------
MERCHANDISE COSTS, INCLUDING ADVERTISING,
WAREHOUSING AND TRANSPORTATION 72.60% 72.90% 72.75% 73.12%
OPERATING, GENERAL AND ADMINISTRATIVE 18.86% 18.75% 18.84% 18.69%
EFFECTIVE TAX RATE 39.00% 39.20% 39.00% 39.25%
(b) EBITDA, as defined in Kroger's credit agreements, represents earnings
before interest, taxes, depreciation, amortization, LIFO, and one-time
items.
(c) Net working capital, as defined by The Kroger Co., is calculated as
current operating assets less current operating liabilities. The
components of this calculation are detailed following the Consolidated
Balance Sheet.
(d) Net total debt, as defined by The Kroger Co., is calculated as the amount
of total debt, including capital leases, net of Kroger's investment in debt
securities issued by lenders of certain of Kroger's structured financings
and net of prefunded employee benefits.
(e) ERONOA, as defined by The Kroger Co., represents the EBITDA return on net
operating assets and is calculated as rolling four quarters EBITDA before
rent expense divided by the sum of total assets plus LIFO reserve less
goodwill less accounts payable, less prepaid VEBA, plus 8 times rolling
four quarters rent expense.
THE KROGER CO.
CONSOLIDATED STATEMENT OF INCOME
WITH ONE-TIME ITEMS
(in millions, except per share amounts)
THIRD QUARTER YEAR TO DATE
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
SALES $ 11,382.2 $ 10,961.9 $ 37,969.4 $ 36,308.3
COSTS AND EXPENSES:
MERCHANDISE COSTS, INCLUDING ADVERTISING,
WAREHOUSING, AND TRANSPORTATION 8,265.3 7,999.4 27,629.5 26,574.5
OPERATING, GENERAL AND ADMINISTRATIVE 2,253.4 2,079.3 7,278.8 6,879.5
RENT 145.4 152.6 498.9 493.3
DEPRECIATION 227.2 209.5 735.8 696.0
AMORTIZATION OF GOODWILL 26.9 24.5 84.2 78.3
INTEREST EXPENSE INCL. CAPITAL LEASES 149.4 146.1 506.5 507.6
IMPAIRMENT CHARGES 90.5 -- 90.5 190.9
MERGER RELATED COSTS 1.3 1.8 5.2 12.6
------------ ------------ ------------ ------------
TOTAL 11,159.4 10,613.2 36,829.4 35,432.7
INCOME BEFORE TAX EXPENSE 222.8 348.7 1,140.0 875.6
AND EXTRAORDINARY ITEMS
TAX EXPENSE 89.7 146.2 448.0 363.4
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEMS 133.1 202.5 692.0 512.2
EXTRAORDINARY ITEMS (a) -- (1.6) -- (3.2)
------------ ------------ ------------ ------------
NET INCOME $ 133.1 $ 200.9 $ 692.0 $ 509.0
============ ============ ============ ============
INCOME PER BASIC COMMON SHARE:
FROM OPERATIONS $ 0.17 $ 0.25 $ 0.86 $ 0.62
EXTRAORDINARY ITEMS 0.00 0.00 0.00 0.00
------------ ------------ ------------ ------------
NET INCOME PER COMMON SHARE $ 0.17 $ 0.25 $ 0.86 $ 0.62
============ ============ ============ ============
SHARES USED IN BASIC CALCULATION 801.0 820.7 806.6 825.5
INCOME PER DILUTED COMMON SHARE:
FROM OPERATIONS $ 0.16 $ 0.24 $ 0.84 $ 0.60
EXTRAORDINARY ITEMS (a) 0.00 0.00 0.00 0.00
------------ ------------ ------------ ------------
NET INCOME PER DILUTED COMMON SHARE $ 0.16 $ 0.24 $ 0.84 $ 0.60
============ ============ ============ ============
SHARES USED IN DILUTED CALCULATION 820.8 844.5 827.6 847.5
ONE-TIME EXPENSES IN MERCHANDISE COSTS -
RELATED TO THE MERGER (b) $ 2.2 $ 8.3 $ 7.5 $ 27.1
ONE-TIME EXPENSES IN OG&A - RELATED TO THE
MERGER (b) 6.4 24.4 24.7 94.2
ONE-TIME EXPENSES IN OG&A - STORE CLOSINGS (b) 19.6 -- 19.6 --
ONE-TIME EXPENSES IN OG&A - UTILITY
CONTRACTS (b) 81.0 -- 81.0 --
IMPAIRMENT CHARGES (c) 90.5 -- 90.5 190.9
MERGER RELATED COSTS 1.3 1.8 5.2 12.6
------------ ------------ ------------ ------------
TOTAL ONE-TIME ITEMS, MERGER COSTS,
AND IMPAIRMENT CHARGES $ 201.0 $ 34.5 $ 228.5 $ 324.8
============ ============ ============ ============
Note: Certain prior year amounts have been reclassified to conform to current
year presentation.
(a) The Extraordinary Items are from the early retirement of debt.
(b) One-time items related to the Fred Meyer merger totaled $32.2 million and
$121.3 million in 2001 and 2000, respectively. The merchandise charges
related to the merger primarily relate to inventory revaluations. The
operating, general and administrative charges related to the merger
primarily relate to system conversions, store conversions or closures.
One-time operating, general, and administrative charges incurred in 2001
related to store closing reserves and losses on utility contracts, total
$19.6 million and $81 million, respectively.
(c) Relates primarily to the write-down of certain impaired assets in
accordance with Statement of Financial Accounting Standards No. 121.
SUPPLEMENTAL FINANCIAL INFORMATION
WITH ONE-TIME ITEMS
THIRD QUARTER YEAR TO DATE
----------------------------- -------------------------------
2001 2000 2001 2000
--------------- ------------ --------------- --------------
EBITDA (d) $ 834.3 $ 756.8 $ 2,722.0 $ 2,491.7
LIFO CHARGE 7.0 (6.5) 27.0 9.5
GROSS PROFIT % (EXCLUDING LIFO CHARGE)
WITH ONE-TIME ITEMS 27.45% 26.97% 27.30% 26.83%
NET WORKING CAPITAL (e) $ 545.6 $ 478.4
NET TOTAL DEBT (f) 8,594.1 8,382.6
ERONOA (g) 25.93% 24.34%
% TO SALES FOR INCOME STATEMENT WITH ONE-TIME ITEMS
THIRD QUARTER YEAR TO DATE
----------------------------- -------------------------------
2001 2000 2001 2000
--------------- ------------ --------------- --------------
MERCHANDISE COSTS, INCLUDING ADVERTISING,
WAREHOUSING AND TRANSPORTATION 72.62% 72.97% 72.77% 73.19%
OPERATING, GENERAL AND ADMINISTRATIVE 19.80% 18.97% 19.17% 18.95%
EFFECTIVE TAX RATE 40.26% 41.93% 39.30% 41.50%
(d) EBITDA, as defined in Kroger's credit agreements, represents earnings
before interest, taxes, depreciation, amortization, LIFO, and one-time
items.
(e) Net working capital, as defined by The Kroger Co., is calculated as current
operating assets less current operating liabilities. The components of this
calculation are detailed following the Consolidated Balance Sheet.
(f) Net total debt, as defined by The Kroger Co., is calculated as the amount
of total debt, including capital leases, net of Kroger's investment in debt
securities issued by lenders of certain of Kroger's structured financings
and net of prefunded employee benefits.
(g) ERONOA, as defined by The Kroger Co., represents the EBITDA return on net
operating assets and is calculated as rolling four quarters EBITDA before
rent expense divided by the sum of total assets plus LIFO reserve less
goodwill less accounts payable, less prepaid VEBA, plus 8 times rolling
four quarters rent expense.
CONSOLIDATED BALANCE SHEET
Subject to Reclassification
(in millions)
November 10, November 04,
2001 2000
------------ ------------
ASSETS
Current Assets
Cash $ 143.1 $ 130.5
Receivables 684.6 628.5
Inventories 4,567.9 4,408.9
Prepaid and other current assets 275.0 197.3
------------ ------------
Total current assets 5,670.6 5,365.2
Property, plant and equipment, net 9,521.6 8,652.3
Goodwill, net 3,618.1 3,664.3
Other assets 319.1 309.1
------------ ------------
Total Assets $ 19,129.4 $ 17,990.9
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt including $ 389.2 $ 338.5
capital leases
Accounts payable 3,446.7 3,300.3
Accrued salaries and wages 566.5 605.7
Other current liabilities 1,610.0 1,380.0
------------ ------------
Total current liabilities 6,012.4 5,624.5
Long-term debt including capital leases 8,272.7 8,115.5
Other long-term liabilities 1,603.5 1,422.9
Stockholders' equity 3,240.8 2,828.0
------------ ------------
Total liabilities and stockholders' equity $ 19,129.4 $ 17,990.9
============ ============
Total common shares outstanding at end of period 799.0 817.9
Total diluted shares Year to Date 827.6 847.5
Note: Certain prior year amounts have been reclassified to conform to current
year presentation.
NET WORKING CAPITAL CALCULATION
November 10, November 04,
2001 2000
------------ ------------
Cash $ 143.1 $ 130.5
Receivables 684.6 628.5
FIFO Inventory 4,910.6 4,743.6
Operating prepaid and other assets 207.1 185.8
Accounts payable (3,446.7) (3,300.3)
Operating accrued liabilities (1,953.1) (1,906.7)
Prepaid VEBA -- (3.0)
------------ ------------
Net working capital $ 545.6 $ 478.4