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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
|
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
(Address of principal executive offices)
(Zip Code)
(
(Registrant’s telephone number, including area code)
Unchanged
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
There were
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements. |
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Second Quarter Ended | Two Quarters Ended | ||||||||||||
August 13, | August 14, | August 13, | August 14, | ||||||||||
(In millions, except per share amounts) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Sales | $ | | $ | | $ | | $ | | |||||
Operating expenses | |||||||||||||
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
| |
| |
| |
| | |||||
Operating, general and administrative |
| |
| |
| |
| | |||||
Rent |
| |
| |
| |
| | |||||
Depreciation and amortization |
| |
| |
| |
| | |||||
Operating profit |
| |
| |
| |
| | |||||
Other income (expense) | |||||||||||||
Interest expense | ( | ( | ( | ( | |||||||||
Non-service component of company-sponsored pension plan costs | | | | | |||||||||
Gain (loss) on investments | | ( | ( | ( | |||||||||
Net earnings before income tax expense |
| |
| |
| |
| | |||||
Income tax expense |
| |
| |
| |
| | |||||
Net earnings including noncontrolling interests |
| |
| |
| |
| | |||||
Net income attributable to noncontrolling interests |
| |
| |
| |
| | |||||
Net earnings attributable to The Kroger Co. | $ | | $ | | $ | | $ | | |||||
Net earnings attributable to The Kroger Co. per basic common share | $ | | $ | | $ | | $ | | |||||
Average number of common shares used in basic calculation |
| |
| |
| |
| | |||||
Net earnings attributable to The Kroger Co. per diluted common share | $ | | $ | | $ | | $ | | |||||
Average number of common shares used in diluted calculation |
| |
| |
| |
| | |||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
2
THE KROGER CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
| Second Quarter Ended | Two Quarters Ended | |||||||||||
August 13, | August 14, | August 13, | August 14, | ||||||||||
(In millions) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Net earnings including noncontrolling interests | $ | | $ | | $ | | $ | | |||||
Other comprehensive income | |||||||||||||
Change in pension and other postretirement defined benefit plans, net of income tax(1) | ( | | ( | | |||||||||
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(2) | | | | | |||||||||
Total other comprehensive income |
| |
| |
| | | ||||||
Comprehensive income |
| |
| |
| |
| | |||||
Comprehensive income attributable to noncontrolling interests |
| |
| |
| |
| | |||||
Comprehensive income attributable to The Kroger Co. | $ | | $ | | $ | | $ | | |||||
| (1) |
| (2) |
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(unaudited)
| August 13, |
| January 29, |
| |||
(In millions, except par amounts) | 2022 | 2022 |
| ||||
ASSETS | |||||||
Current assets | |||||||
Cash and temporary cash investments | $ | | $ | | |||
Store deposits in-transit |
| |
| | |||
Receivables |
| |
| | |||
FIFO inventory |
| |
| | |||
LIFO reserve |
| ( |
| ( | |||
Prepaid and other current assets | | | |||||
Total current assets |
| |
| | |||
Property, plant and equipment, net |
| |
| | |||
Operating lease assets | | | |||||
Intangibles, net |
| |
| | |||
Goodwill |
| |
| | |||
Other assets |
| |
| | |||
Total Assets | $ | | $ | | |||
LIABILITIES | |||||||
Current liabilities | |||||||
Current portion of long-term debt including obligations under finance leases | $ | | $ | | |||
Current portion of operating lease liabilities | | | |||||
Trade accounts payable |
| |
| | |||
Accrued salaries and wages |
| |
| | |||
Other current liabilities |
| |
| | |||
Total current liabilities |
| |
| | |||
Long-term debt including obligations under finance leases | | | |||||
Noncurrent operating lease liabilities | | | |||||
Deferred income taxes |
| |
| | |||
Pension and postretirement benefit obligations |
| |
| | |||
Other long-term liabilities |
| |
| | |||
Total Liabilities |
| |
| | |||
Commitments and contingencies see Note 6 | |||||||
SHAREOWNERS’ EQUITY | |||||||
Preferred shares, $ | |||||||
Common shares, $ |
| |
| | |||
Additional paid-in capital |
| |
| | |||
Accumulated other comprehensive loss |
| ( |
| ( | |||
Accumulated earnings |
| |
| | |||
Common shares in treasury, at cost, |
| ( |
| ( | |||
Total Shareowners’ Equity - The Kroger Co. |
| |
| | |||
Noncontrolling interests |
| ( |
| ( | |||
Total Equity |
| |
| | |||
Total Liabilities and Equity | $ | | $ | | |||
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Two Quarters Ended | |||||||
August 13, | August 14, | ||||||
(In millions) |
| 2022 |
| 2021 |
| ||
Cash Flows from Operating Activities: | |||||||
Net earnings including noncontrolling interests | $ | | $ | | |||
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: | |||||||
Depreciation and amortization |
| |
| | |||
Operating lease asset amortization | | | |||||
LIFO charge |
| |
| | |||
Share-based employee compensation |
| |
| | |||
Company-sponsored pension plans |
| ( |
| ( | |||
Deferred income taxes |
| ( |
| ( | |||
Gain on the sale of assets | ( | ( | |||||
Loss on investments | | | |||||
Other |
| |
| | |||
Changes in operating assets and liabilities: | |||||||
Store deposits in-transit |
| ( |
| | |||
Receivables |
| ( |
| ( | |||
Inventories |
| ( |
| | |||
Prepaid and other current assets |
| |
| | |||
Trade accounts payable |
| |
| | |||
Accrued expenses |
| ( |
| ( | |||
Income taxes receivable and payable |
| ( | ( | ||||
Operating lease liabilities | ( | ( | |||||
Other |
| ( |
| ( | |||
Net cash provided by operating activities |
| |
| | |||
Cash Flows from Investing Activities: | |||||||
Payments for property and equipment, including payments for lease buyouts |
| ( |
| ( | |||
Proceeds from sale of assets |
| | | ||||
Other |
| |
| ( | |||
Net cash used by investing activities |
| ( |
| ( | |||
Cash Flows from Financing Activities: | |||||||
Proceeds from issuance of long-term debt |
| — |
| | |||
Payments on long-term debt including obligations under finance leases |
| ( | ( | ||||
Dividends paid | ( | ( | |||||
Proceeds from issuance of capital stock | |
| | ||||
Treasury stock purchases |
| ( |
| ( | |||
Proceeds from financing arrangement | — | | |||||
Other | ( |
| ( | ||||
Net cash used by financing activities |
| ( |
| ( | |||
Net (decrease) increase in cash and temporary cash investments |
| ( |
| | |||
Cash and temporary cash investments: | |||||||
Beginning of year |
| |
| | |||
End of period | $ | | $ | | |||
Reconciliation of capital investments: | |||||||
Payments for property and equipment, including payments for lease buyouts | $ | ( | $ | ( | |||
Payments for lease buyouts | |
| — | ||||
Changes in construction-in-progress payables |
| ( |
| | |||
Total capital investments, excluding lease buyouts | $ | ( | $ | ( | |||
Disclosure of cash flow information: | |||||||
Cash paid during the year for interest | $ | | $ | | |||
Cash paid during the year for income taxes | $ | | $ | | |||
The accompanying notes are an integral part of the Consolidated Financial Statements.
5
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY
(unaudited)
Accumulated | |||||||||||||||||||||||||
Additional | Other | ||||||||||||||||||||||||
Common Stock | Paid-In | Treasury Stock | Comprehensive | Accumulated | Noncontrolling | ||||||||||||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total | |||||||
Balances at January 30, 2021 | | $ | | $ | |
| | $ | ( | $ | ( | $ | | $ | ( |
| $ | | |||||||
Issuance of common stock: | |||||||||||||||||||||||||
Stock options exercised |
| — |
| — |
| — |
| ( |
| |
| — |
| — |
| — |
| | |||||||
Restricted stock issued |
| — |
| — |
| ( |
| ( |
| |
| — |
| — |
| — |
| ( | |||||||
Treasury stock activity: | |||||||||||||||||||||||||
Treasury stock purchases, at cost |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Stock options exchanged |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Share-based employee compensation |
| — |
| — |
| |
| — |
| — |
| — |
| — |
| — |
| | |||||||
Other comprehensive income net of income tax of $ |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Other |
| — |
| — |
| |
| — |
| ( |
| — |
| |
| |
| | |||||||
Cash dividends declared ($ |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Net earnings including noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
|
| |
| |||||||||
Balances at May 22, 2021 |
| |
| $ | |
| $ | |
| |
| $ | ( |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
Issuance of common stock: | |||||||||||||||||||||||||
Stock options exercised |
| — |
| — |
| — |
| ( |
| |
| — |
| — |
| — |
| | |||||||
Restricted stock issued |
| — |
| — |
| ( |
| ( |
| |
| — |
| — |
| — |
| ( | |||||||
Treasury stock activity: | |||||||||||||||||||||||||
Treasury stock purchases, at cost |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Stock options exchanged |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Share-based employee compensation |
| — |
| — |
| |
| — |
| — |
| — |
| — |
| — |
| | |||||||
Other comprehensive income net of income tax of $ |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Other |
| — |
| — |
| |
| — |
| ( |
| — |
| — |
| ( |
| ( | |||||||
Cash dividends declared ($ |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Net earnings including noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| |
| | |||||||
Balances at August 14, 2021 |
| |
| $ | |
| $ | |
| |
| $ | ( |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
Issuance of common stock: | |||||||||||||||||||||||||
Stock options exercised |
| — |
| — |
| — |
| ( |
| |
| — |
| — |
| — |
| | |||||||
Restricted stock issued |
| — |
| — |
| ( |
| — |
| — |
| — |
| — |
| — |
| ( | |||||||
Treasury stock activity: | |||||||||||||||||||||||||
Treasury stock purchases, at cost |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Stock options exchanged |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Share-based employee compensation |
| — |
| — |
| |
| — |
| — |
| — |
| — |
| — |
| | |||||||
Other comprehensive income net of income tax of $ |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Other |
| — |
| — |
| |
| — |
| ( |
| — |
| ( |
| ( |
| ( | |||||||
Cash dividends declared ($ |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Net earnings including noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| |
| | |||||||
Balances at November 6, 2021 |
| |
| $ | |
| $ | |
| |
| $ | ( |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
Issuance of common stock: | |||||||||||||||||||||||||
Stock options exercised |
| — |
| — |
| — |
| ( |
| |
| — |
| — |
| — |
| | |||||||
Restricted stock issued |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Treasury stock activity: | |||||||||||||||||||||||||
Treasury stock purchases, at cost |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Stock options exchanged |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Share-based employee compensation |
| — |
| — |
| |
| — |
| — |
| — |
| — |
| — |
| | |||||||
Other comprehensive income net of income tax of $ |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Other |
| — |
| — |
| |
| — |
| ( |
| — |
| — |
| |
| | |||||||
Cash dividends declared ($ |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Net earnings including noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| |
| | |||||||
Balances at January 29, 2022 |
| |
| $ | |
| $ | |
| |
| $ | ( |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
6
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY
(unaudited)
Accumulated | |||||||||||||||||||||||||
Additional | Other | ||||||||||||||||||||||||
Common Stock | Paid-In | Treasury Stock | Comprehensive | Accumulated | Noncontrolling | ||||||||||||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Loss |
| Earnings |
| Interest |
| Total | |||||||
Balances at January 29, 2022 | | $ | | $ | |
| | $ | ( | $ | ( | $ | | $ | ( | $ | | ||||||||
Issuance of common stock: | |||||||||||||||||||||||||
Stock options exercised |
| — |
| — |
| — |
| ( |
| |
| — |
| — |
| — |
| | |||||||
Restricted stock issued |
| — |
| — |
| ( |
| ( |
| |
| — |
| — |
| — |
| ( | |||||||
Treasury stock activity: | |||||||||||||||||||||||||
Treasury stock purchases, at cost |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Stock options exchanged |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Share-based employee compensation |
| — |
| — |
| |
| — |
| — |
| — |
| — |
| — |
| | |||||||
Other comprehensive income net of income tax of $- |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Other |
| — |
| — |
| |
| — |
| ( |
| — |
| — |
| |
| | |||||||
Cash dividends declared ($ |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Net earnings including noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| |
| | |||||||
Balances at May 21, 2022 |
| |
| $ | |
| $ | |
| |
| $ | ( |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
Issuance of common stock: | |||||||||||||||||||||||||
Stock options exercised |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| — |
| | |||||||
Restricted stock issued |
| — |
| — |
| ( |
| ( |
| |
| — |
| — |
| — |
| ( | |||||||
Treasury stock activity: | |||||||||||||||||||||||||
Treasury stock purchases, at cost |
| — |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Stock options exchanged |
| — |
| — |
| — |
| — |
| ( |
| — |
| — |
| — |
| ( | |||||||
Share-based employee compensation |
| — |
| — |
| |
| — |
| — |
| — |
| — |
| — |
| | |||||||
Other comprehensive income net of income tax of $ |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Other |
| — |
| — |
| |
| — |
| ( |
| — |
| — |
| ( |
| ( | |||||||
Cash dividends declared ($ |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Net earnings including noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| |
| | |||||||
Balances at August 13, 2022 |
| |
| $ | |
| $ | |
| |
| $ | ( |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
All amounts in the Notes to the Unaudited Consolidated Financial Statements are in millions except per share amounts.
1. | ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation
The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries and other consolidated entities. The January 29, 2022 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.
In the opinion of management, the accompanying unaudited Consolidated Financial Statements include adjustments, all of which are of a normal, recurring nature that are necessary for a fair statement of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
The unaudited information in the Consolidated Financial Statements for the second quarters and two quarters ended August 13, 2022 and August 14, 2021 includes the results of operations of the Company for the 12 and 28 week periods then ended.
Fair Value Measurements
Fair value measurements are classified and disclosed in one of the following three categories:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities;
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;
Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company records cash and temporary cash investments, store deposits in-transit, receivables, prepaid and other current assets, trade accounts payable, accrued salaries and wages and other current liabilities at approximated fair value. Certain other investments and derivatives are recorded as Level 1, 2 or 3 instruments. The equity investment in Ocado is measured at fair value through net earnings. The fair value of all shares owned, which is measured using Level 1 inputs, was $
8
2. | DEBT OBLIGATIONS |
Long-term debt consists of:
August 13, | January 29, | |||||
| 2022 |
| 2022 | |||
$ | | $ | | |||
Other |
| |
| | ||
Total debt, excluding obligations under finance leases |
| |
| | ||
Less current portion |
| ( |
| ( | ||
Total long-term debt, excluding obligations under finance leases | $ | | $ | | ||
The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at August 13, 2022 and January 29, 2022. At August 13, 2022, the fair value of total debt was $
Additionally, in the first two quarters of 2022, the Company repaid $
During the first quarter of 2021, the Company acquired
9
3. | BENEFIT PLANS |
The following table provides the components of net periodic benefit cost for the company-sponsored defined benefit pension plans and other post-retirement benefit plans for the second quarters of 2022 and 2021:
Second Quarter Ended |
| ||||||||||||
Pension Benefits | Other Benefits |
| |||||||||||
August 13, | August 14, | August 13, | August 14, |
| |||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||
Components of net periodic benefit cost (benefit): | |||||||||||||
Service cost |
| $ | |
| $ | |
| $ | |
| $ | | |
Interest cost |
| |
| |
| — |
| | |||||
Expected return on plan assets |
| ( |
| ( |
| — |
| — | |||||
Amortization of: | |||||||||||||
Prior service cost |
| — |
| — |
| ( |
| ( | |||||
Actuarial loss (gain) |
| |
| |
| ( |
| ( | |||||
Net periodic benefit cost (benefit) |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( | |
The following table provides the components of net periodic benefit cost for the company-sponsored defined benefit pension plans and other post-retirement benefit plans for the first two quarters of 2022 and 2021:
Two Quarters Ended |
| ||||||||||||
Pension Benefits | Other Benefits |
| |||||||||||
August 13, | August 14, | August 13, | August 14, |
| |||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||
Components of net periodic benefit cost (benefit): | |||||||||||||
Service cost |
| $ | |
| $ | |
| $ | |
| $ | | |
Interest cost |
| |
| |
| |
| | |||||
Expected return on plan assets |
| ( |
| ( |
| — |
| — | |||||
Amortization of: | |||||||||||||
Prior service cost |
| — |
| — |
| ( |
| ( | |||||
Actuarial loss (gain) |
| |
| |
| ( |
| ( | |||||
Net periodic benefit cost (benefit) |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( | |
The Company is not required to make any contributions to its company-sponsored pension plans in 2022, but may make contributions to the extent such contributions are beneficial to the Company. The Company did not make any contributions to its company-sponsored pension plans in the first two quarters of 2022 and 2021.
The Company contributed $
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 Company recognizes expense in connection with these plans as contributions are funded. In addition to the recurring multi-employer pension contributions the Company makes in the normal course of business, in the first two quarters of 2021, the Company contributed an incremental $
During the first quarter of 2021, associates within the Fred Meyer and QFC divisions ratified an agreement for the transfer of liabilities from the Sound Retirement Trust to the UFCW Consolidated Pension Plan. The Company transferred $
10
4. | EARNINGS PER COMMON SHARE |
Net earnings attributable to The Kroger Co. per basic common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding. Net earnings attributable to The Kroger Co. per diluted common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding, after giving effect to dilutive stock options. The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:
Second Quarter Ended | Second Quarter Ended | |||||||||||||||||
August 13, 2022 | August 14, 2021 |
| ||||||||||||||||
|
|
| Per |
|
|
| Per | |||||||||||
Earnings | Shares | Share | Earnings | Shares | Share | |||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||
Net earnings attributable to The Kroger Co. per basic common share | $ | |
| | $ | | $ | |
| | $ | | ||||||
Dilutive effect of stock options |
| |
| | ||||||||||||||
Net earnings attributable to The Kroger Co. per diluted common share | $ | |
| | $ | | $ | |
| | $ | | ||||||
Two Quarters Ended | Two Quarters Ended | ||||||||||||||||
August 13, 2022 | August 14, 2021 | ||||||||||||||||
|
|
| Per |
|
|
| Per |
| |||||||||
Earnings | Shares | Share | Earnings | Shares | Share | ||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount |
| |||||||||||
Net earnings attributable to The Kroger Co. per basic common share | $ | |
| | $ | | $ | |
| | $ | | |||||
Dilutive effect of stock options |
| |
| | |||||||||||||
Net earnings attributable to The Kroger Co. per diluted common share | $ | |
| | $ | | $ | |
| | $ | | |||||
The Company had combined undistributed and distributed earnings to participating securities totaling $
The Company had options outstanding for approximately
11
5. | LEASES AND LEASE-FINANCED TRANSACTIONS |
On May 17, 2018, the Company entered into a Partnership Framework Agreement with Ocado International Holdings Limited and Ocado Group plc (“Ocado”), which has since been amended. Under this agreement, Ocado will partner exclusively with the Company in the U.S., enhancing the Company’s digital and robotics capabilities in its distribution networks. In the first two quarters of 2022, the Company opened
6. | COMMITMENTS AND CONTINGENCIES |
The Company continuously evaluates contingencies based upon the best available evidence.
The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.
The principal contingencies are described below:
Insurance — The Company’s workers’ compensation risks are self-insured in most states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans, and self-insured retention plans. The liability for workers’ compensation risks is accounted for on a present value basis. Actual claim settlements and expenses incident thereto may differ from the provisions for loss. Property risks have been underwritten by a subsidiary and are all reinsured with unrelated insurance companies. Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.
Litigation — Various claims and lawsuits arising in the normal course of business, including personal injury, contract disputes, employment discrimination, wage and hour and other regulatory claims are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material effect on the Company’s financial position, results of operations, or cash flows.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and when an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of loss for the Company’s exposure is not material to the Company. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
12
The Company is one of dozens of companies that have been named in various lawsuits alleging that defendants contributed to create a public nuisance through the distribution and dispensing of opioids. At present, the Company is named in a significant number of lawsuits pending in various state courts as well as in the United States District Court for the Northern District of Ohio, where over
Assignments — The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees is unable to fulfill its lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.
7. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table represents the changes in AOCI by component for the first two quarters of 2022 and 2021:
Pension and | |||||||||
Cash Flow | Postretirement | ||||||||
Hedging | Defined Benefit | ||||||||
| Activities(1) |
| Plans(1) |
| Total(1) | ||||
Balance at January 30, 2021 | $ | ( | $ | ( | $ | ( | |||
Amounts reclassified out of AOCI(2) | |
| |
| | ||||
Net current-period OCI | |
| |
| | ||||
Balance at August 14, 2021 | $ | ( | $ | ( | $ | ( | |||
Balance at January 29, 2022 | $ | ( | $ | ( | $ | ( | |||
Amounts reclassified out of AOCI(2) |
| | ( |
| | ||||
Net current-period OCI |
| |
| ( |
| | |||
Balance at August 13, 2022 | $ | ( | $ | ( | $ | ( | |||
| (1) | All amounts are net of tax. |
| (2) | Net of tax of $ |
13
The following table represents the items reclassified out of AOCI and the related tax effects for the second quarters and first two quarters of 2022 and 2021:
Second Quarter Ended | Two Quarters Ended |
| |||||||||||
| August 13, |
| August 14, |
| August 13, |
| August 14, |
| |||||
2022 | 2021 | 2022 | 2021 | ||||||||||
Cash flow hedging activity items | |||||||||||||
Amortization of gains and losses on cash flow hedging activities(1) | $ | | $ | | $ | | $ | | |||||
Tax expense |
| — |
| ( |
| ( |
| ( | |||||
Net of tax |
| |
| |
| |
| | |||||
Pension and postretirement defined benefit plan items | |||||||||||||
Amortization of amounts included in net periodic pension cost(2) |
| — |
| |
|
| ( |
|
| | |||
Tax expense |
|
| ( |
|
| ( |
|
| — |
|
| ( | |
Net of tax |
|
| ( |
|
| |
|
| ( |
|
| | |
Total reclassifications, net of tax |
| $ | |
| $ | |
| $ | |
| $ | | |
| (1) | Reclassified from AOCI into interest expense. |
| (2) | Reclassified from AOCI into non-service component of company-sponsored pension plan costs. These components are included in the computation of net periodic pension cost (see Note 3 for additional details). |
8. | INCOME TAXES |
The effective income tax rate was
9. | SUBSEQUENT EVENT |
On September 9, 2022, the Company’s Board of Directors approved a $
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis should be read in conjunction with the Consolidated Financial Statements.
CAUTIONARY STATEMENT
This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Such statements are indicated by words such as “achieve,” “affect,” “anticipate,” “believe,” “committed,” “confident,” “continue,” “could,” “estimate,” “expect,” “future,” “guidance,” “maintain,” “may,” “strategy,” “target,” “trend,” “will,” and “would,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. These include the specific risk factors identified in “Risk Factors” in our Annual Report on Form 10-K for our last fiscal year and any subsequent filings, as well as those identified in this Form 10-Q.
Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include:
| ● | The extent to which our sources of liquidity are sufficient to meet our requirements may be affected by the state of the financial markets and the effect that such condition has on our ability to issue commercial paper at acceptable rates. Our ability to borrow under our committed lines of credit, including our bank credit facilities, could be impaired if one or more of our lenders under those lines is unwilling or unable to honor its contractual obligation to lend to us, or in the event that global pandemics, including the ongoing COVID-19 pandemic (including any variant), natural disasters or weather conditions interfere with the ability of our lenders to lend to us. Our ability to refinance maturing debt may be affected by the state of the financial markets. |
| ● | Our ability to achieve sales, earnings and incremental FIFO operating profit goals may be affected by: COVID-19 pandemic related factors, risks and challenges, including among others, the length of time that the pandemic continues, future variants, mutations or related strains of the virus and the effectiveness of vaccines against variants, continued efficacy of vaccines over time and availability of vaccine boosters, the extent of vaccine refusal, and global access to vaccines, as well as the effect of vaccine and/or testing mandates and related regulations, the potential for additional future spikes in infection and illness rates including breakthrough infections among the fully vaccinated, and the corresponding potential for disruptions in workforce availability and customer shopping patterns, re-imposed restrictions as a result of resurgence and the corresponding future easing of restrictions, and interruptions in domestic and global supply chains or capacity constraints; whether and when the global pandemic will become endemic, the pace of recovery when the pandemic subsides or becomes endemic, which may vary materially over time and among the different regions we serve; labor negotiations; potential work stoppages; changes in the unemployment rate; pressures in the labor market; changes in government-funded benefit programs; changes in the types and numbers of businesses that compete with us; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; our response to these actions; the state of the economy, including interest rates, the current inflationary environment and future potential inflationary and/or deflationary trends and such trends in certain commodities, products and/or operating costs; the geopolitical environment including the war in Ukraine; unstable political situations and social unrest; changes in tariffs; the effect that fuel costs have on consumer spending; volatility of fuel margins; manufacturing commodity costs; supply constraints; diesel fuel costs related to our logistics operations; trends in consumer spending; the extent to which our customers exercise caution in their purchasing in response to economic conditions; the uncertainty of economic growth or recession; stock repurchases; changes in the regulatory environment in which we operate; our ability to retain pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; our ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the effect of public health crises or other significant catastrophic events; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of our future growth plans; the ability to execute our growth strategy and value creation model, including continued cost savings, growth of our alternative profit businesses, and our ability to better serve our customers and to generate customer loyalty and sustainable growth through our strategic pillars of fresh, Our Brands, personalization, and seamless; and the successful integration of merged companies and new partnerships. |
15
| ● | Our ability to achieve these goals may also be affected by our ability to manage the factors identified above. Our ability to execute our financial strategy may be affected by our ability to generate cash flow. |
| ● | Our effective tax rate may differ from the expected rate due to changes in tax laws, the status of pending items with various taxing authorities, and the deductibility of certain expenses. |
Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described in this report and other reports that we file with the Securities and Exchange Commission could cause actual results to differ materially. We assume no obligation to update the information contained in this report unless required by applicable law.
OUR VALUE CREATION MODEL – DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
Kroger has developed multiple levers within our business model to deliver net earnings growth and consistent and attractive total shareholder return (“TSR”). Our execution of this model is allowing us to deliver today and invest for the future. The foundation of our value creation model is our omnichannel position in food retail, which is built on Kroger’s unique assets: our stores, digital ecosystem, Our Brands and our data. These unique assets, when combined with our go-to-market strategy, deliver an unmatched value proposition for our customers. We continue to build long-term customer loyalty through Fresh, Our Brands, Data and Personalization and our seamless ecosystem, to drive sustainable sales growth in our retail supermarket business, including fuel and health and wellness. This, in turn, generates the data and traffic that enables our fast-growing, high operating margin alternative profits. We are evolving from a traditional food retailer into a more diverse, food first business that we expect will consistently deliver net earnings growth in the future. This will be achieved by:
| ● | Growing identical sales without fuel. Our plan involves maximizing growth opportunities in our supermarket business and is supported by continued strategic investments in our customers, associates, and our seamless ecosystem to ensure we deliver a full, friendly and fresh experience for every customer, every time. Part of our growth plan includes doubling digital sales and doubling our digital passthrough profitability rate by the end of 2023; and |
| ● | Expanding operating margin, through a balanced model where strategic price investments for our customers and investments in our associates and seamless ecosystem are offset by our cost savings program, which has delivered $1 billion in cost savings annually for the past four fiscal years, and sustained growth in our alternative profit streams. |
We expect to continue to generate strong free cash flow and are committed to being disciplined with capital deployment in support of our value creation model and stated capital allocation priorities. Our first priority is to invest in the business through attractive high return organic and inorganic opportunities that drive long-term sustainable net earnings growth. We are committed to maintaining our current investment grade debt rating and our net total debt to adjusted EBITDA ratio target range of 2.30 to 2.50. We also expect to continue to grow our dividend over time and return excess cash to shareholders via stock repurchases.
We expect our value creation model will result in total shareholder return within our target range of 8% to 11% over time.
16
EXECUTIVE SUMMARY
We delivered strong second quarter results propelled by our Leading with Fresh and Accelerating with Digital strategy. As a result of our consistent execution of our go-to-market strategy and sustained food-at-home trends, we achieved operating profit growth of 14% and adjusted FIFO operating profit growth of 17% for the second quarter of 2022, compared to the second quarter of 2021. These results were driven by positive identical sales without fuel of 5.8%, disciplined margin management and strong fuel profitability.
Our results demonstrate the resilience and flexibility we have built into our financial model, which has allowed us to effectively manage product cost inflation through strong sourcing practices while helping customers manage their budgets and keeping prices competitive. During the quarter, we continued to invest in wages and the associate experience and in creating zero hunger, zero waste communities, as we believe these components of our strategy are critical to achieving long term sustainable growth. As our customers continue to deal with high inflation, we believe our value proposition is resonating with them — providing fresh, affordable food and personalized offers and rewards that deliver value where and when they appreciate it the most.
Our second quarter results provide another proof point that Kroger has the right go-to-market strategy. Our consistent execution of this strategy is building momentum in our business which, combined with sustained food at home trends, gives us the confidence to raise our full-year guidance for identical sales without fuel, adjusted FIFO operating profit and adjusted net earnings per diluted share. Our go-to-market strategy is connecting with customers, and we continue to build long-term customer loyalty through Fresh, Our Brands, Data Personalization and our seamless ecosystem. Our business model has proven to be resilient in a variety of operating and economic environments and we remain confident in our ability to deliver attractive and sustainable total shareholder return within our target range of 8% to 11% over time.
The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
Second Quarter Ended | Two Quarters Ended | |||||||||||||||||
August 13, |
| Percentage |
| August 14, | August 13, |
| Percentage |
| August 14, | |||||||||
2022 | Change | 2021 | 2022 | Change | 2021 | |||||||||||||
Sales | $ | 34,638 | 9.3 | % | $ | 31,682 | $ | 79,238 | 8.6 | % | $ | 72,980 | ||||||
Sales without fuel | $ | 29,577 | 5.2 | % | $ | 28,105 | $ | 68,288 | 4.4 | % | $ | 65,413 | ||||||
Net earnings attributable to The Kroger Co. | $ | 731 | 56.5 | % | $ | 467 | $ | 1,394 | 129.7 | % | $ | 607 | ||||||
Adjusted net earnings attributable to The Kroger Co. | $ | 661 | 8.4 | % | $ | 610 | $ | 1,735 | 13.5 | % | $ | 1,528 | ||||||
Net earnings attributable to The Kroger Co. per diluted common share | $ | 1.00 | 63.9 | % | $ | 0.61 | $ | 1.89 | 139.2 | % | $ | 0.79 | ||||||
Adjusted net earnings attributable to The Kroger Co. per diluted common share | $ | 0.90 | 12.5 | % | $ | 0.80 | $ | 2.36 | 18.6 | % | $ | 1.99 | ||||||
Operating profit | $ | 954 | 13.7 | % | $ | 839 | $ | 2,459 | 49.6 | % | $ | 1,644 | ||||||
Adjusted FIFO operating profit | $ | 1,110 | 17.2 | % | $ | 947 | $ | 2,711 | 16.8 | % | $ | 2,322 | ||||||
Dividends paid | $ | 153 | 12.5 | % | $ | 136 | $ | 307 | 12.0 | % | $ | 274 | ||||||
Dividends paid per common share | $ | 0.21 | 16.7 | % | $ | 0.18 | $ | 0.42 | 16.7 | % | $ | 0.36 | ||||||
Identical sales excluding fuel | 5.8 | % | N/A | (0.6) | % | 4.8 | % | N/A | (2.6) | % | ||||||||
FIFO gross margin rate, excluding fuel, bps increase (decrease) | 0.02 | N/A | (0.60) | (0.14) | N/A | (0.64) | ||||||||||||
OGA rate, excluding fuel and Adjusted Items, bps increase (decrease) | 0.36 | N/A | (0.76) | (0.10) | N/A | (0.95) | ||||||||||||
Increase (decrease) in total debt, including obligations under finance leases compared to prior fiscal year end | $ | (87) | N/A | $ | 742 | $ | (87) | N/A | $ | 742 | ||||||||
Share repurchases | $ | 309 | N/A | $ | 349 | $ | 975 | N/A | $ | 751 | ||||||||
17
OVERVIEW
Notable items for the second quarter and first two quarters of 2022 are:
Shareholder Return
| ● | Net earnings attributable to The Kroger Co. per diluted common share of $1.00 for the second quarter and $1.89 for the first two quarters. This represents a 64% increase for the second quarter of 2022 compared to the second quarter of 2021 and a 139% increase for the first two quarters of 2022 compared to the first two quarters of 2021. |
| ● | Adjusted net earnings attributable to The Kroger Co. per diluted common share of $0.90 for the second quarter and $2.36 for the first two quarters. This represents a 13% increase for the second quarter of 2022 compared to the second quarter of 2021 and a 19% increase for the first two quarters of 2022 compared to the first two quarters of 2021. |
| ● | Achieved operating profit of $954 million for the second quarter and $2.5 billion for the first two quarters. This represents a 14% increase for the second quarter of 2022 compared to the second quarter of 2021 and a 50% increase for the first two quarters of 2022 compared to the first two quarters of 2021. |
| ● | Achieved adjusted FIFO operating profit of $1.1 billion for the second quarter and $2.7 billion for the first two quarters. This represents a 17% increase for both the second quarter and first two quarters of 2022 compared to the same periods in 2021. |
| ● | During the first two quarters of 2022, we generated cash from operations of $2.4 billion. |
| ● | During the first two quarters of 2022, we returned $1.3 billion to shareholders through share repurchases and dividend payments. |
Other Financial Results
| ● | Identical sales, excluding fuel, increased 5.8% for the second quarter and 4.8% for the first two quarters of 2022. These results included identical sales growth in Our Brands categories of 10.2% for the second quarter and 7.9% for the first two quarters of 2022. |
| ● | Digital sales increased 8% for the second quarter and decreased 1% for the first two quarters of 2022. Digital sales returned to positive growth for the second quarter of 2022 led by strength in our Delivery solutions, which grew by 34% for the second quarter and 22% for the first two quarters of 2022. Delivery solutions growth was driven by our Boost membership program and expansion of our Kroger Delivery network. Digital sales include products ordered online and picked up at our stores and our Delivery and Ship solutions. Our Delivery solutions include orders delivered to customers from retail store locations, customer fulfillment centers powered by Ocado and orders placed through Instacart Marketplace (Instacart.com). Our Ship solutions primarily include online orders placed through our owned platforms that are dispatched using mail service or third party courier. |
| ● | We are currently operating in a more volatile inflationary environment and we experienced higher product cost inflation during the second quarter and first two quarters of 2022. Our LIFO charge for the second quarter of 2022 was $148 million, compared to $47 million in the second quarter of 2021. Our LIFO charge for the first two quarters of 2022 was $240 million, compared to $84 million for the first two quarters of 2021. This increase was attributable to higher product cost inflation primarily in grocery. |
Significant Events
| ● | During the first two quarters of 2022, we opened three additional Kroger Delivery customer fulfillment centers powered by Ocado’s automated smart platform — one in Dallas, Texas, one in Pleasant Prairie, Wisconsin and one in Romulus, Michigan — bringing our total count to six. |
18
USE OF NON-GAAP FINANCIAL MEASURES
The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles (“GAAP”). We provide non-GAAP measures, including First-In, First-Out (“FIFO”) gross margin, FIFO operating profit, adjusted FIFO operating profit, adjusted net earnings and adjusted net earnings per diluted share because management believes these metrics are useful to investors and analysts. These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share or any other GAAP measure of performance. These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP.
We calculate FIFO gross margin as FIFO gross profit divided by sales. FIFO gross profit is calculated as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs exclude depreciation and rent expenses. FIFO gross margin is an important measure used by management and management believes FIFO gross margin is a useful metric to investors and analysts because it measures the merchandising and operational effectiveness of our go-to-market strategy.
We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management and management believes FIFO operating profit is a useful metric to investors and analysts because it measures the operational effectiveness of our financial model.
The adjusted net earnings, adjusted net earnings per diluted share and adjusted FIFO operating profit metrics are important measures used by management to compare the performance of core operating results between periods. We believe adjusted net earnings, adjusted net earnings per diluted share and adjusted FIFO operating profit are useful metrics to investors and analysts because they present more accurate year-over-year comparisons of our net earnings, net earnings per diluted share and FIFO operating profit because adjusted items are not the result of our normal operations. Net earnings for the first two quarters of 2022 include the following, which we define as the “2022 Adjusted Items”:
| ● | Charges to operating, general and administrative expenses (“OGA”) of $18 million, $14 million net of tax, for the revaluation of Home Chef contingent consideration (the “2022 OGA Adjusted Item”). |
| ● | Losses in other income (expense) of $429 million, $327 million net of tax, for the unrealized loss on investments (the “2022 Other Income (Expense) Adjusted Item”). |
Net earnings for the second quarter of 2022 include the following, which we define as the “2022 Second Quarter Adjusted Items”:
| ● | Charges to OGA of $10 million, $8 million net of tax, for the revaluation of Home Chef contingent consideration (the “2022 Second Quarter OGA Adjusted Item”). |
| ● | A gain in other income (expense) of $103 million, $78 million net of tax, for the unrealized gain on investments (the “2022 Second Quarter Other Income (Expense) Adjusted Item”). |
Net earnings for the first two quarters of 2021 include the following, which we define as the “2021 Adjusted Items”:
| ● | Charges to OGA of $449 million, $344 million net of tax, for obligations related to withdrawal liabilities for a certain multi-employer pension fund; $52 million, $40 million net of tax, for the revaluation of Home Chef contingent consideration and $101 million, $77 million net of tax, for transformation costs (the “2021 OGA Adjusted Items”). |
| ● | A loss in other income (expense) of $601 million, $460 million net of tax, for the unrealized loss on investments (the “2021 Other Income (Expense) Adjusted Item”). |
19
Net earnings for the second quarter of 2021 include the following, which we define as the “2021 Second Quarter Adjusted Items”:
| ● | Charges to OGA of $9 million, $7 million net of tax, for the revaluation of Home Chef contingent consideration and $57 million, $43 million net of tax, for transformation costs (the “2021 Second Quarter OGA Adjusted Items”). |
| ● | A loss in other income (expense) of $122 million, $93 million net of tax, for the unrealized loss on investments (the “2021 Second Quarter Other Income (Expense) Adjusted Item”). |
Please refer to the “Net Earnings per Diluted Share excluding the Adjusted Items” table below for reconciliations of certain non-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the most comparable GAAP financial measures and related disclosure.
20
The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, excluding the 2022 and 2021 Adjusted Items:
Net Earnings per Diluted Share excluding the Adjusted Items
($ in millions, except per share amounts)
Second Quarter Ended | Two Quarters Ended |
| |||||||||||||||
| August 13, |
| August 14, |
| Percentage |
| August 13, |
| August 14, |
| Percentage |
| |||||
2022 | 2021 | Change | 2022 | 2021 | Change |
| |||||||||||
Net earnings attributable to The Kroger Co. | $ | 731 | $ | 467 |
| $ | 1,394 | $ | 607 |
| |||||||
(Income) expense adjustments | |||||||||||||||||
Adjustment for pension plan withdrawal liabilities(1)(2) | — | — | — | 344 | |||||||||||||
Adjustment for (gain) loss on investments(1)(3) | (78) | 93 | 327 | 460 | |||||||||||||
Adjustment for Home Chef contingent consideration(1)(4) | 8 | 7 | 14 | 40 | |||||||||||||
Adjustment for transformation costs(1)(5) |
| — |
| 43 |
| — | 77 | ||||||||||
2022 and 2021 Adjusted Items | (70) | 143 | 341 | 921 | |||||||||||||
Net earnings attributable to The Kroger Co. excluding the Adjusted Items | $ | 661 | $ | 610 |
| 8.4 | % | $ | 1,735 | $ | 1,528 |
| 13.5 | % | |||
Net earnings attributable to The Kroger Co. per diluted common share | $ | 1.00 | $ | 0.61 |
| $ | 1.89 | $ | 0.79 |
| |||||||
(Income) expense adjustments | |||||||||||||||||
Adjustment for pension plan withdrawal liabilities(6) | — | — | — | 0.45 | |||||||||||||
Adjustment for (gain) loss on investments(6) | (0.11) | 0.12 | 0.45 | 0.60 | |||||||||||||
Adjustment for Home Chef contingent consideration(6) | 0.01 | 0.01 | 0.02 | 0.05 | |||||||||||||
Adjustment for transformation costs(6) | — | 0.06 | — | 0.10 | |||||||||||||
2022 and 2021 Adjusted Items |
| (0.10) |
| 0.19 |
| 0.47 |
| 1.20 | |||||||||
Adjusted net earnings attributable to The Kroger Co. per diluted common share | $ | 0.90 | $ | 0.80 |
| 12.5 | % | $ | 2.36 | $ | 1.99 |
| 18.6 | % | |||
Average number of common shares used in diluted calculation |
| 725 |
| 755 |
| 730 |
| 758 | |||||||||
| (1) | The amounts presented represent the after-tax effect of each adjustment, which was calculated using discrete tax rates. |
| (2) | The pre-tax adjustment for pension plan withdrawal liabilities was $449. |
| (3) | The pre-tax adjustment for (gain) loss on investments was ($103) and $122 in the second quarters of 2022 and 2021, respectively. The pre-tax adjustment was $429 and $601 in the first two quarters of 2022 and 2021, respectively. |
| (4) | The pre-tax adjustment for Home Chef contingent consideration was $10 and $9 in the second quarters of 2022 and 2021, respectively. The pre-tax adjustment was $18 and $52 in the first two quarters of 2022 and 2021, respectively. |
| (5) | The pre-tax adjustment for transformation costs was $57 in the second quarter of 2021 and $101 in the first two quarters of 2021. Transformation costs primarily include costs related to business closure costs and third party professional consulting fees associated with business transformation and cost saving initiatives. |
| (6) | The amount presented represents the net earnings per diluted common share effect of each adjustment. |
21
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
Second Quarter Ended | Two Quarters Ended |
| ||||||||||||||||||||||
August 13, | Percentage | August 14, | Percentage | August 13, | Percentage | August 14, | Percentage |
| ||||||||||||||||
| 2022 |
| Change(1) |
| 2021 |
| Change(2) |
| 2022 |
| Change(3) |
| 2021 |
| Change(4) |
| ||||||||
Total sales to retail customers without fuel(5) | $ | 29,353 | 5.3 | % | $ | 27,883 | (0.5) | % | $ | 67,803 | 4.5 | % | $ | 64,905 | (2.6) | % | ||||||||
Supermarket fuel sales | 5,061 | 41.5 | % | 3,577 | 56.8 | % | 10,950 | 44.7 | % | 7,567 | 52.2 | % | ||||||||||||
Other sales(6) | 224 | 0.9 | % | 222 | 27.6 | % | 485 | (4.5) | % | 508 | 22.7 | % | ||||||||||||
| ||||||||||||||||||||||||
Total sales | $ | 34,638 | 9.3 | % | $ | 31,682 | 3.9 | % | $ | 79,238 | 8.6 | % | $ | 72,980 | 1.3 | % | ||||||||
| (1) | This column represents the percentage change in the second quarter of 2022, compared to the second quarter of 2021. |
| (2) | This column represents the percentage change in the second quarter of 2021, compared to the second quarter of 2020. |
| (3) | This column represents the percentage change in the first two quarters of 2022, compared to the first two quarters of 2021. |
| (4) | This column represents the percentage change in the first two quarters of 2021, compared to the first two quarters of 2020. |
| (5) | Digital sales are included in the “total sales to retail customers without fuel” line above. Digital sales include products ordered online and picked up at our stores and our Delivery and Ship solutions. Our Delivery solutions include orders delivered to customers from retail store locations, customer fulfillment centers powered by Ocado and orders placed through Instacart Marketplace (Instacart.com). Our Ship solutions primarily include online orders placed through our owned platforms that are dispatched using mail service or third party courier. Digital sales increased approximately 8% in the second quarter of 2022 and decreased approximately 13% in the second quarter of 2021. Digital sales decreased approximately 1% in the first two quarters of 2022 and increased approximately 3% in the first two quarters of 2021. Digital sales returned to positive growth for the second quarter of 2022 led by strength in our Delivery solutions, which grew by 34% for the second quarter and 22% for the first two quarters of 2022. Delivery solutions growth was driven by our Boost membership program and expansion of our Kroger Delivery network. |
| (6) | Other sales primarily relate to external sales at food production plants, data analytic services and third party media revenue. The increase in the second quarter of 2022, compared to the second quarter of 2021, is primarily due to an increase in data analytic services and third-party media revenue, partially offset by decreased external sales at food production plants due to the closing of a plant. The decrease in the first two quarters of 2022, compared to the first two quarters of 2021, is primarily due to decreased external sales at food production plants due to the closing of a plant, partially offset by an increase in data analytic services and third-party media revenue. |
Total sales increased in the second quarter of 2022, compared to the second quarter of 2021, by 9.3%. The increase was primarily due to increases in supermarket fuel sales and total sales to retail customers without fuel. Total sales, excluding fuel, increased 5.2% in the second quarter of 2022, compared to the second quarter of 2021, which was primarily due to our identical sales increase, excluding fuel, of 5.8%, partially offset by discontinued patient therapies at Kroger Specialty Pharmacy. Identical sales, excluding fuel, for the second quarter of 2022, compared to the second quarter of 2021, increased primarily due to an increase in the number of households shopping with us and an increase in basket value due to retail inflation, partially offset by a reduction in the number of items in basket. Total supermarket fuel sales increased 41.5% in the second quarter of 2022, compared to the second quarter of 2021, primarily due to an increase in the average retail fuel price of 47.6%, partially offset by a decrease in fuel gallons sold of 4.1%, which was less than the average market decline. The increase in the average retail fuel price was caused by an increase in the product cost of fuel.
22
Total sales increased in the first two quarters of 2022, compared to the first two quarters of 2021, by 8.6%. The increase was primarily due to increases in supermarket fuel sales and total sales to retail customers without fuel. Total sales, excluding fuel, increased 4.4% in the first two quarters of 2022, compared to the first two quarters of 2021, which was primarily due to our identical sales increase, excluding fuel, of 4.8%, partially offset by discontinued patient therapies at Kroger Specialty Pharmacy. Identical sales, excluding fuel, for the first two quarters of 2022, compared to the first two quarters of 2021, increased primarily due to an increase in the number of households shopping with us and an increase in basket value due to retail inflation, partially offset by a reduction in the number of items in basket. Total supermarket fuel sales increased 44.7% in the first two quarters of 2022, compared to the first two quarters of 2021, primarily due to an increase in the average retail fuel price of 44.9%. The increase in the average retail fuel price was caused by an increase in the product cost of fuel.
We calculate identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket locations, Kroger Specialty Pharmacy businesses and Delivery and Ship solutions. We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. We define Kroger Specialty Pharmacy businesses as identical when physical locations have been in operation continuously for five full quarters; discontinued patient therapies are excluded from the identical sales calculation starting in the quarter of transfer or termination. We define Kroger Delivery identical sales powered by Ocado based on geography. We include Kroger Delivery sales powered by Ocado as identical if the delivery occurs in an existing Kroger supermarket geography. If the Kroger Delivery sales powered by Ocado occur in a new geography, these sales are included as identical when deliveries have occurred to the new geography for five full quarters. Although identical sales is a relatively standard term, numerous methods exist for calculating identical sales growth. As a result, the method used by our management to calculate identical sales may differ from methods other companies use to calculate identical sales. It is important to understand the methods used by other companies to calculate identical sales before comparing our identical sales to those of other such companies. Our identical sales, excluding fuel, results are summarized in the following table. We used the identical sales, excluding fuel, dollar figures presented below to calculate percentage changes for the second quarter and first two quarters of 2022.
Identical Sales
($ in millions)
Second Quarter Ended |
| ||||||||||
August 13, | Percentage | August 14, | Percentage |
| |||||||
| 2022 |
| Change(1) |
| 2021 |
| Change(2) |
| |||
Excluding Fuel |
| $ | 29,192 |
| 5.8 | % | $ | 27,604 |
| (0.6) | % |
| (1) | This column represents the percentage change in identical sales in the second quarter of 2022, compared to the second quarter of 2021. |
| (2) | This column represents the percentage change in identical sales in the second quarter of 2021, compared to the second quarter of 2020. |
Two Quarters Ended |
| ||||||||||
August 13, | Percentage | August 14, | Percentage |
| |||||||
| 2022 |
| Change(1) |
| 2021 |
| Change(2) |
| |||
Excluding fuel centers |
| $ | 67,340 |
| 4.8 | % | $ | 64,248 |
| (2.6) | % |
| (1) | This column represents the percentage change in identical sales in the first two quarters of 2022, compared to the first two quarters of 2021. |
| (2) | This column represents the percentage change in identical sales in the first two quarters of 2021, compared to the first two quarters of 2020. |
23
Gross Margin, LIFO and FIFO Gross Margin
We define gross margin as sales minus merchandise costs, including advertising, warehousing, and transportation. Rent expense, depreciation and amortization expense, and interest expense are not included in gross margin.
Our gross margin rate, as a percentage of sales, was 20.92% for the second quarter of 2022, compared to 21.36% for the second quarter of 2021. The decrease in rate in the second quarter of 2022, compared to the second quarter of 2021, resulted primarily from increased fuel sales, which have a lower gross margin rate and a higher LIFO charge, partially offset by our ability to effectively manage product cost inflation through strong sourcing practices while helping customers manage their budgets and keeping prices competitive.
Our gross margin rate, as a percentage of sales, was 21.32% for the first two quarters of 2022, compared to 22.09% for the first two quarters of 2021. The decrease in rate in the first two quarters of 2022, compared to the first two quarters of 2021, resulted primarily from increased fuel sales, which have a lower gross margin rate, a higher LIFO charge and increased transportation costs, as a percentage of sales, partially offset by our ability to effectively manage product cost inflation through strong sourcing practices while helping customers manage their budgets and keeping prices competitive and the cycling of a write down related to a donation of personal protective equipment inventory from the prior year.
Our LIFO charge was $148 million in the second quarter of 2022, compared to $47 million in the second quarter of 2021. Our LIFO charge was $240 million in the first two quarters of 2022, compared to $84 million in the first two quarters of 2021. The increase in our LIFO charge reflects our expected annualized product cost inflation for 2022, compared to 2021, which was attributable to higher inflation primarily in grocery.
Our FIFO gross margin rate, which excludes the LIFO charge, was 21.35% in the second quarter of 2022, compared to 21.51% in the second quarter of 2021. Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, our FIFO gross margin rate increased 2 basis points in the second quarter of 2022, compared to the second quarter of 2021. This increase resulted primarily from our ability to effectively manage product cost inflation through strong sourcing practices while helping customers manage their budgets and keeping prices competitive.
Our FIFO gross margin rate, which excludes the LIFO charge, was 21.62% in the first two quarters of 2022, compared to 22.20% in the first two quarters of 2021. Excluding the effect of fuel, our FIFO gross margin rate decreased 14 basis points in the first two quarters of 2022, compared to the first two quarters of 2021. This decrease resulted primarily from increased transportation costs, as a percentage of sales, partially offset by our ability to effectively manage product cost inflation through strong sourcing practices while helping customers manage their budgets and keeping prices competitive and the cycling of a write down related to a donation of personal protective equipment inventory from the prior year.
Operating, General and Administrative Expenses
OGA expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utilities, and credit card fees. Rent expense, depreciation and amortization expense, and interest expense are not included in OGA.
OGA expenses, as a percentage of sales, were 15.64% in the second quarter of 2022 and 16.07% in the second quarter of 2021. The decrease in the second quarter of 2022, compared to the second quarter of 2021, resulted primarily from the effect of sales leverage across fuel and supermarkets, which decreases our OGA rate, as a percentage of sales, the 2021 Second Quarter OGA Adjusted Items and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates, increased incentive plan costs, strategic investments in various margin expansion initiatives that will drive future growth and the 2022 Second Quarter OGA Adjusted Item.
24
OGA expenses, as a percentage of sales, were 15.67% in the first two quarters of 2022 and 17.15% in the first two quarters of 2021. The decrease in the first two quarters of 2022, compared to the first two quarters of 2021, resulted primarily from the effect of sales leverage across fuel and supermarkets, which decreases our OGA rate, as a percentage of sales, lower contributions to multi-employer pension plans, the 2021 OGA Adjusted Items and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates, strategic investments in various margin expansion initiatives that will drive future growth and the 2022 OGA Adjusted Item.
Our fuel sales lower our OGA rate, as a percentage of sales, due to the very low OGA rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, the 2022 Second Quarter OGA Adjusted Item and the 2021 Second Quarter OGA Adjusted Items, our OGA rate increased 36 basis points in the second quarter of 2022, compared to the second quarter of 2021. This increase resulted primarily from investments in our associates, increased incentive plan costs and strategic investments in various margin expansion initiatives that will drive future growth, partially offset by the effect of supermarket sales leverage, which decreases our OGA rate, as a percentage of sales, and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions.
Excluding the effect of fuel, the 2022 OGA Adjusted Item and the 2021 OGA Adjusted Items, our OGA rate decreased 10 basis points in the first two quarters of 2022, compared to the first two quarters of 2021. This decrease resulted primarily from the effect of supermarket sales leverage, which decreases our OGA rate, as a percentage of sales, lower contributions to multi-employer pension plans and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates and strategic investments in various margin expansion initiatives that will drive future growth.
Rent Expense
Rent expense decreased, as a percentage of sales, for the second quarter of 2022, compared to the second quarter of 2021, primarily due to sales leverage. Rent expense decreased in total and as a percentage of sales for the first two quarters of 2022, compared to the first two quarters of 2021. This decrease was primarily due to sales leverage and the completion of a property transaction during the first quarter of 2021 related to 28 previously leased properties that we are now accounting for as owned locations and therefore recognizing depreciation and amortization expense over their useful life.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased, as a percentage of sales, in the second quarter and first two quarters of 2022, compared to the same periods in 2021, primarily due to sales leverage.
Operating Profit and FIFO Operating Profit
Operating profit was $954 million, or 2.8% of sales, for the second quarter of 2022, compared to $839 million, or 2.7% of sales, for the second quarter of 2021. Operating profit, as a percentage of sales, increased 11 basis points in the second quarter of 2022, compared to the second quarter of 2021, due to decreased OGA expense, as a percentage of sales, partially offset by an increased LIFO charge and a lower FIFO gross margin rate. Fuel earnings also contributed to our operating profit growth for the second quarter of 2022, compared to the second quarter of 2021.
Operating profit was $2.5 billion, or 3.1% of sales, for the first two quarters of 2022, compared to $1.6 billion, or 2.3% of sales, for the first two quarters of 2021. Operating profit, as a percentage of sales, increased 85 basis points in the first two quarters of 2022, compared to the first two quarters of 2021, due to decreased OGA expense, as a percentage of sales, partially offset by an increased LIFO charge and a lower FIFO gross margin rate. Fuel earnings also contributed to our operating profit growth for the first two quarters of 2022, compared to the first two quarters of 2021.
25
FIFO operating profit was $1.1 billion, or 3.2% of sales, for the second quarter of 2022, compared to $886 million, or 2.8% of sales, for the second quarter of 2021. FIFO operating profit, as a percentage of sales, excluding the 2022 and 2021 Second Quarter Adjusted Items, increased 21 basis points in the second quarter of 2022, compared to the second quarter of 2021, due to decreased OGA expense, as a percentage of sales, partially offset by a lower FIFO gross margin rate. Fuel earnings also contributed to our FIFO operating profit growth for the second quarter of 2022, compared to the second quarter of 2021.
FIFO operating profit was $2.7 billion, or 3.4% of sales, for the first two quarters of 2022, compared to $1.7 billion, or 2.4% of sales, for the first two quarters of 2021. FIFO operating profit, as a percentage of sales, excluding the 2022 and 2021 Adjusted Items, increased 24 basis points in the first two quarters of 2022, compared to the first two quarters of 2021, due to decreased OGA expense, as a percentage of sales, partially offset by a lower FIFO gross margin rate. Fuel earnings also contributed to our FIFO operating profit growth for the first two quarters of 2022, compared to the first two quarters of 2021.
Specific factors contributing to the trends driving operating profit and FIFO operating profit identified above are discussed earlier in this section.
The following table provides a reconciliation of operating profit to FIFO operating profit, and to Adjusted FIFO operating profit, excluding the 2022 and 2021 Adjusted Items:
Operating Profit excluding the Adjusted Items
($ in millions)
Second Quarter Ended | Two Quarters Ended | |||||||||||
August 13, | August 14, | August 13, | August 14, | |||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Operating profit | $ | 954 | $ | 839 | $ | 2,459 | $ | 1,644 | ||||
LIFO charge | 148 | 47 | 240 | 84 | ||||||||
|
| |||||||||||
FIFO Operating profit |
| 1,102 |
| 886 |
| 2,699 |
| 1,728 | ||||
Adjustment for pension plan withdrawal liabilities | — | — | — | 449 | ||||||||
Adjustment for Home Chef contingent consideration | 10 | 9 | 18 | 52 | ||||||||
Adjustment for transformation costs(1) | — | 57 | — | 101 | ||||||||
Other | (2) | (5) | (6) | (8) | ||||||||
2022 and 2021 Adjusted items | 8 | 61 | 12 | 594 | ||||||||
Adjusted FIFO operating profit excluding the adjusted items above | $ | 1,110 | $ | 947 | $ | 2,711 | $ | 2,322 | ||||
| (1) | Transformation costs primarily include costs related to business closure costs and third party professional consulting fees associated with business transformation and cost saving initiatives. |
Income Taxes
The effective income tax rate was 22.3% for the second quarter of 2022 and 21.1% for the second quarter of 2021. The effective income tax rate was 20.3% for the first two quarters of 2022 and 20.9% for the first two quarters of 2021. The effective income tax rate for the second quarter of 2022 and 2021 differed from the federal statutory rate due to the effect of state income taxes, partially offset by the benefit from share-based payments and the utilization of tax credits. The effective income tax rate for the first two quarters of 2022 and 2021 differed from the federal statutory rate due to the benefit from share-based payments and the utilization of tax credits, partially offset by the effect of state income taxes.
26
Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings of $1.00 per diluted share for the second quarter of 2022 represented an increase of 64% compared to net earnings of $0.61 per diluted share for the second quarter of 2021. Adjusted net earnings of $0.90 per diluted share for the second quarter of 2022 represented an increase of 13% compared to adjusted net earnings of $0.80 per diluted share for the second quarter of 2021. The increase in adjusted net earnings per diluted share resulted primarily from increased fuel earnings and lower weighted average common shares outstanding due to common share repurchases, partially offset by decreased FIFO operating profit, excluding fuel, which was due to increased OGA from a catch up in year-to-date incentive plan accruals and reinvestment of higher fuel profit in various margin expansion initiatives that will drive future growth, a higher LIFO charge and higher income tax expense.
Net earnings of $1.89 per diluted share for the first two quarters of 2022 represented an increase of 139% compared to net earnings of $0.79 per diluted share for the first two quarters of 2021. Adjusted net earnings of $2.36 per diluted share for the first two quarters of 2022 represented an increase of 19% compared to adjusted net earnings of $1.99 per diluted share for the first two quarters of 2021. The increase in adjusted net earnings per diluted share resulted primarily from increased FIFO operating profit, excluding fuel, increased fuel earnings and lower weighted average common shares outstanding due to common share repurchases, partially offset by a higher LIFO charge and higher income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
The following table summarizes our net (decrease) increase in cash and temporary cash investments for the first two quarters of 2022 and 2021:
| Two Quarters Ended | |||||
August 13, | August 14, | |||||
2022 |
| 2021 | ||||
Net cash provided by (used in) | ||||||
Operating activities | $ | 2,427 | $ | 3,123 | ||
Investing activities | (1,388) | (1,284) | ||||
Financing activities | (1,758) | (1,301) | ||||
Net (decrease) increase in cash and temporary cash investments | $ | (719) | $ | 538 | ||
Net cash provided by operating activities
We generated $2.4 billion of cash from operations in the first two quarters of 2022 compared to $3.1 billion in the first two quarters of 2021. Net earnings including noncontrolling interests, adjusted for non-cash items, generated approximately $4.1 billion of operating cash flow in the first two quarters of 2022 compared to $3.3 billion in the first two quarters of 2021. Cash used by operating activities for changes in operating assets and liabilities, including working capital, was $1.6 billion in the first two quarters of 2022 compared to $168 million in the first two quarters of 2021. The increase in cash used by operating activities for changes in operating assets and liabilities, including working capital, was primarily due to the following:
| ● | An increase in FIFO inventory at the end of the second quarter of 2022, compared to the second quarter of 2021, primarily due to rising costs resulting from continued inflationary cost pressures and a reduction of supply chain constraints; |
| ● | A decrease in prepaid and other current assets at the end of the second quarter of 2021, compared to fiscal year end 2020, primarily due to the transfer of prepaid escrow funds in the first quarter of 2021 to fulfil obligations related to the restructuring of multi-employer pension plans; and |
| ● | A decrease in long-term liabilities at the end of the second quarter of 2022, compared to fiscal year end 2021, primarily due to contractual payments in the second quarter of 2022 related to prior restructured multi-employer pension plans; |
27
| ● | Partially offset by an increase in trade accounts payable at the end of the second quarter of 2022, compared to the second quarter of 2021, primarily due to increased inventory purchases. |
Net cash used by investing activities
Investing activities used cash of $1.4 billion in the first two quarters of 2022 compared to $1.3 billion in the first two quarters of 2021. The amount of cash used by investing activities increased in the first two quarters of 2022, compared to the first two quarters of 2021, primarily due to increased payments for property and equipment.
Net cash used by financing activities
We used $1.8 billion of cash for financing activities in the first two quarters of 2022 compared to $1.3 billion in the first two quarters of 2021. The amount of cash used for financing activities increased in the first two quarters of 2022 compared to the first two quarters of 2021, primarily due to the following:
| ● | Increased payments on long-term debt including obligations under finance leases; |
| ● | Increased treasury stock purchases; and |
| ● | Decreased proceeds from a financing arrangement. |
Capital Investments
Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $523 million for the second quarter of 2022 compared to $564 million for the second quarter of 2021. Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $1.5 billion for the first two quarters of 2022 compared to $1.2 billion for the first two quarters of 2021. During the rolling four quarter period ended with the second quarter of 2022, we opened, expanded, relocated or acquired 8 supermarkets and also completed 74 major within-the-wall remodels. We define a major remodel as a project that exceeds a cost of $20 per square foot. Total supermarket square footage at the end of the second quarter of 2022 remained consistent with the end of the second quarter of 2021. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the second quarter of 2022 increased 0.2% over the end of the second quarter of 2021.
Debt Management
As of August 13, 2022, we maintained a $2.75 billion (with the ability to increase by $1.25 billion), unsecured revolving credit facility that, unless extended, terminates on July 6, 2026. Outstanding borrowings under the credit facility, commercial paper borrowings, and some outstanding letters of credit reduce funds available under the credit facility. As of August 13, 2022, we had no outstanding commercial paper and no borrowings under our revolving credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled $2 million as of August 13, 2022.
Our bank credit facility and the indentures underlying our publicly issued debt contain a financial covenant. As of August 13, 2022, we were in compliance with the financial covenant. Furthermore, management believes it is not reasonably likely that we will fail to comply with the financial covenant in the foreseeable future.
Total debt, including both the current and long-term portions of obligations under finance leases, decreased $87 million as of August 13, 2022, compared to our fiscal year end 2021 debt of $13.4 billion. This decrease resulted primarily from the payment of $400 million of senior notes bearing an interest rate of 2.80%, partially offset by a net increase in obligations under finance leases of $333 million primarily related to our three additional Kroger Delivery customer fulfillment center openings during the first two quarters of 2022.
28
Common Share Repurchase Programs
During the second quarter of 2022, we invested $309 million to repurchase 6.2 million Kroger common shares at an average price of $50.04 per share. For the first two quarters of 2022, we invested $975 million to repurchase 19.0 million Kroger common shares at an average price of $51.39 per share. The shares repurchased in the first two quarters of 2022 were reacquired under the following share repurchase programs:
| ● | On December 30, 2021, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “December 2021 Repurchase Program”); and |
| ● | A program that uses the cash proceeds from the exercises of stock options by participants in Kroger’s stock option, long-term incentive plans and the associated tax benefits. |
As of August 13, 2022, there was $1 million remaining under the December 2021 Repurchase Program. The December 2021 Repurchase Program was exhausted subsequent to the end of the second quarter of 2022. On September 9, 2022, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “September 2022 Repurchase Program”).
Liquidity Needs
We held cash and temporary cash investments of $1.1 billion, as of August 13, 2022, which reflects our elevated operating performance and significant improvements in working capital over the last two years. We actively manage our cash and temporary cash investments in order to internally fund operating activities, support and invest in our core businesses, make scheduled interest and principal payments on our borrowings and return cash to shareholders through cash dividend payments and share repurchases. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in economic and market conditions. We remain committed to our dividend and share repurchase programs and we will evaluate the optimal use of any excess free cash flow, consistent with our capital allocation strategy.
We expect to meet our short-term and long-term liquidity needs with cash and temporary cash investments on hand as of August 13, 2022, cash flows from our operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility. Our short-term and long-term liquidity needs include anticipated requirements for working capital to maintain our operations, pension plan commitments, interest payments and scheduled principal payments of debt and commercial paper, servicing our lease obligations, self-insurance liabilities, capital investments, payments deferred under the CARES Act and other purchase obligations. We may also require additional capital in the future to fund organic growth opportunities, additional customer fulfilment centers, joint ventures or other business partnerships, property development, acquisitions, dividends and share repurchases. In addition, we generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. We believe we have adequate coverage of our debt covenants to continue to maintain our current investment grade debt ratings and to respond effectively to competitive conditions.
For additional information about our debt activity in the first two quarters of 2022, see Note 2 to the Consolidated Financial Statements.
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CRITICAL ACCOUNTING ESTIMATES
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our critical accounting policies are summarized in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could vary from those estimates. There has been no material change to our critical accounting estimates since the filing of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
Item 4. Controls and Procedures.
The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures as of the quarter ended August 13, 2022, the end of the period covered by this report. Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company is in the process of implementing a broad, multi-year, technology transformation project to modernize mainframe, middleware and legacy systems to achieve better process efficiencies across customer service, merchandising, sourcing, payroll and accounting through the use of various solutions. There have been no material additional implementations of modules during the quarter ended August 13, 2022. As the Company’s technology transformation project continues, the Company continues to emphasize the maintenance of effective internal controls and assessment of the design and operating effectiveness of key control activities throughout development and deployment of each phase and will evaluate as additional phases are deployed.
There were no changes in Kroger’s internal control over financial reporting that materially affected, or were reasonably likely to materially affect, Kroger’s internal control over financial reporting during the quarter ended August 13, 2022.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Incorporated by reference herein is information regarding certain legal proceedings in which we are involved as set forth under “Litigation” contained in Note 6 – “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
Approximate |
| ||||||||||
Dollar Value of |
| ||||||||||
Shares that May |
| ||||||||||
Total Number of | Yet Be |
| |||||||||
Shares Purchased | Purchased |
| |||||||||
Total Number | Average | as Part of Publicly | Under the Plans |
| |||||||
of Shares | Price Paid Per | Announced Plans | or Programs(4) |
| |||||||
Period(1) |
| Purchased(2) |
| Share(2) |
| or Programs(3) |
| (in millions) |
| ||
First four weeks | |||||||||||
May 22, 2022 to June 18, 2022 |
| 3,903,166 |
| $ | 51.09 |
| 3,903,086 |
| $ | 102 | |
Second four weeks | |||||||||||
June 19, 2022 to July 16, 2022 |
| 3,092,495 |
| $ | 48.10 |
| 2,168,963 |
| $ | 1 | |
Third four weeks | |||||||||||
July 17, 2022 to August 13, 2022 |
| 98,937 |
| $ | 47.03 |
| 98,937 |
| $ | 1 | |
Total |
| 7,094,598 |
| $ | 49.73 |
| 6,170,986 |
| $ | 1 | |
| (1) | The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The second quarter of 2022 contained three 28-day periods. |
| (2) | Includes (i) shares repurchased under the December 2021 Repurchase Program described below in (4), (ii) shares repurchased under a program announced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, under which repurchases are limited to proceeds received from exercises of stock options and the tax benefits associated therewith (“1999 Repurchase Program”) and (iii) 923,612 shares that were surrendered to the Company by participants under our long-term incentive plans to pay for taxes on restricted stock awards. |
| (3) | Represents shares repurchased under the December 2021 Repurchase Program and the 1999 Repurchase Program. |
| (4) | On December 30, 2021, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “December 2021 Repurchase Program”). The amounts shown in this column reflect the amount remaining under the December 2021 Repurchase Program as of the specified period end dates. Amounts available under the 1999 Repurchase Program are dependent upon option exercise activity. The December 2021 Repurchase Program and the 1999 Repurchase Program do not have an expiration date but may be suspended or terminated by our Board of Directors at any time. The December 2021 Repurchase Program was exhausted subsequent to the end of the second quarter of 2022. On September 9, 2022, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “September 2022 Repurchase Program”). The September 2022 Repurchase Program does not have an expiration date but may be suspended or terminated by our Board of Directors at any time. |
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Item 6. Exhibits.
EXHIBIT 3.1 | - | |
EXHIBIT 3.2 | - | |
EXHIBIT 4.1 | - | Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request. |
EXHIBIT 10.1 | ||
EXHIBIT 31.1* | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer. |
EXHIBIT 31.2* | - | Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer. |
EXHIBIT 32.1* | - | |
EXHIBIT 101.INS* | - | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
EXHIBIT 101.SCH* | - | XBRL Taxonomy Extension Schema Document. |
EXHIBIT 101.CAL* | - | XBRL Taxonomy Extension Calculation Linkbase Document. |
EXHIBIT 101.DEF* | - | XBRL Taxonomy Extension Definition Linkbase Document. |
EXHIBIT 101.LAB* | - | XBRL Taxonomy Extension Label Linkbase Document. |
EXHIBIT 101.PRE* | - | XBRL Taxonomy Extension Presentation Linkbase Document. |
EXHIBIT 104 | - | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
*Filed herewith | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE KROGER CO. | ||
Dated: September 16, 2022 | By: | /s/ W. Rodney McMullen |
W. Rodney McMullen | ||
Chairman of the Board and Chief Executive Officer | ||
Dated: September 16, 2022 | By: | /s/ Gary Millerchip |
Gary Millerchip | ||
Senior Vice President and Chief Financial Officer | ||
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