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Kroger Reports Third Quarter Results

CINCINNATI, Nov. 30, 2017 /PRNewswire/ --

Highlights:

  • Great start on Restock Kroger
  • Digital revenue up 109%, driven by ClickList
  • Continued growth and innovation in Our Brands
  • Increased market share

The Kroger Co. (NYSE: KR) today reported financial results for its third quarter ended November 4, 2017.

Net earnings were $397 million, or $0.44 per diluted share, and identical supermarket sales growth, without fuel, was 1.1% in the third quarter of 2017. This includes strong core business results and strong fuel results, as well as an incremental $111 million contribution to the UFCW Consolidated Pension Plan in the third quarter. Kroger's net earnings for the third quarter last year were $391 million, or $0.41 per diluted share.

Comments from Chairman and CEO Rodney McMullen

"Restock Kroger is off to a great start. Customers are recognizing our efforts to redefine the customer experience and rewarding us with their loyalty. We continue to accelerate our digital and ecommerce offerings, to grow Our Brands, to lower prices for customers, and to invest in our associates.

"The holidays are always Kroger's time to shine. In fact, we had our best ever Black Friday results for general merchandise, led by record sales at Fred Meyer. Everything we are doing revolves around our associates providing friendly service and fresh products to our customers.

"This quarter shows that by investing for the future, our business continues to improve and gain momentum. We remain confident in our ability to continue to grow identical supermarket store sales and market share for the balance of the year and in 2018."

Details of Third Quarter 2017 Results

Total sales increased 4.5% to $27.7 billion in the third quarter compared to $26.6 billion for the same period last year. Total sales, excluding fuel, increased 3.0% in the third quarter compared to the same period last year.

Gross margin was 22.4% of sales for the third quarter. Excluding fuel, ModernHEALTH and the LIFO charge, gross margin increased 30 basis points from the same period last year. Lower cost of goods and sales mix more than offset continued price investments.

Kroger recorded a $3 million LIFO charge in the third quarter of 2017, compared to an $8 million LIFO credit in the same period last year.

FIFO operating margin dollars for the third quarter of 2017 increased $38 million, or 5.5%.

Operating, General & Administrative costs as a rate of sales – excluding fuel, ModernHEALTH, and a $111 million contribution to the UFCW Consolidated Pension Plan – increased 18 basis points. Rent and depreciation with the same exclusions remained consistent.

Third Quarter 2017 Restock Kroger Highlights

Redefine the Grocery Customer Experience

  • Launched We Are Local campaign, including a new digital hub to welcome local and emerging brands to partner with the company.
  • Hosted first natural foods innovation summit to expand its natural foods offering.
  • Launched and opened a new restaurant concept, Kitchen 1883.
  • Announced two new Our Brands product lines: An apparel brand to launch in 2018, and a floral line, BLOOM HAUS, now available in stores just in time for the holidays.

Partner for Customer Value

  • Used cost savings to continue reducing prices for customers.
  • Launched home delivery, powered by Instacart, in select locations in Southern California.
  • Announced Kroger Precision Marketing, Powered by 84.51°, a media solution that offers CPGs a service that delivers personalized communication to Kroger's customers through a variety of digital and other media channels.
  • Announced cloud computing portfolio is expanding with Google Cloud Platform.

Develop Talent

  • Announced $500 million incremental investment in associates over the next three years.
  • Hiring an estimated 14,000 part-time and seasonal roles this holiday season.
  • Named one of the "Healthiest 100 Workplaces in America" by Healthiest Employers.
  • Lowered prices for healthcare services for company associates and their immediate families at The Little Clinic®.

Live Kroger's Purpose

  • Launched Zero Hunger | Zero Waste, a visionary initiative that aims to end hunger in the communities Kroger calls home and eliminate waste across the company by 2025.
  • Named to the Dow Jones Sustainability Index-North America for fifth consecutive year.
  • Generated $7 million to support hurricane recovery in Texas, Florida and Puerto Rico.
  • Donated $3.2 million to the USO through its Honoring Our Heroes campaign, a commitment Kroger has long made to veterans, military service members and their families.

Financial Strategy

Over the last four quarters, Kroger has used cash to:

  • Contribute an incremental $1.1 billion to company-sponsored pension plans,
  • Repurchase 59 million common shares for $1.7 billion,
  • Pay $446 million in dividends, and
  • Invest $2.9 billion in capital.

Kroger's financial strategy is to use its financial flexibility to drive growth while also returning capital to shareholders and maintaining its current investment grade debt rating. The company continually balances the use of its cash flow to achieve these goals.

Kroger's net total debt to adjusted EBITDA ratio increased to 2.57, due primarily to funding various pension obligations. The company updated its net total debt to adjusted EBITDA ratio target range to 2.20 to 2.40 to reflect its decision to fund these existing obligations, which resulted in them being reflected as debt on Kroger's balance sheet. Kroger expects to use a portion of proceeds from the potential sale of assets to help achieve its targeted net total debt to adjusted EBITDA ratio.

Return on invested capital for the third quarter, on a rolling four quarters basis, was 12.31% (see Table 7).

Guidance

Kroger confirms 2017 net earnings guidance for 53 weeks of $1.74-$1.79 per diluted share and adjusted net earnings guidance for 53 weeks of $2.00 to $2.05 per diluted share. Both GAAP and adjusted net earnings per diluted share guidance include the effect of hurricanes.

Kroger expects fourth quarter identical supermarket sales growth, excluding fuel, to exceed 1.1%.

The company expects capital investments excluding mergers, acquisitions and purchases of leased facilities, to be approximately $3.0 billion for 2017.

At The Kroger Co., we are dedicated to our purpose: to Feed the Human Spirit. We are 450,000 associates who serve nearly nine million customers in 2,790 retail food stores under a variety of local banner names in 35 states and the District of Columbia. Our Family of Companies operates an expanding ClickList offering – a personalized order online service – in addition to 2,266 pharmacies, 783 convenience stores, 306 fine jewelry stores, 219 retail health clinics, 1,480 supermarket fuel centers and 38 food production plants in the United States. Our Company has been recognized as one of America's most generous companies for our support of more than 100 Feeding America food bank partners, breast cancer research and awareness, the military and their families, and more than 145,000 community organizations including schools. As a leader in supplier diversity, we are a proud member of the Billion Dollar Roundtable.

Note: Fuel sales have historically had a low FIFO gross margin rate and operating expense rate as compared to corresponding rates on non-fuel sales. As a result Kroger discusses the changes in these rates excluding the effect of fuel.

Note: Kroger discusses the changes in operating results, as a percentage of sales, excluding certain items that affect comparability.

Please refer to the supplemental information presented in the tables for reconciliations of the non-GAAP financial measures used in this press release to the most comparable GAAP financial measure and related disclosure.

This press release contains certain statements that constitute "forward-looking statements" about the future performance of the company. These statements are based on management's assumptions and beliefs in light of the information currently available to it. These statements are indicated by words such as "estimate," "expect," "guidance," "confident," "strategy," "goal," "target," "range," and "continue." Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include the specific risk factors identified in "Risk Factors" and "Outlook" in Kroger's annual report on Form 10-K for the last fiscal year and any subsequent filings, as well as the following:

  • Kroger's ability to achieve sales, earnings and cash flow goals may be affected by: labor negotiations or disputes; changes in the types and numbers of businesses that compete with Kroger; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; Kroger's response to these actions; the state of the economy, including interest rates, the inflationary and deflationary trends in certain commodities, and the unemployment rate; the effect that fuel costs have on consumer spending; volatility of fuel margins; changes in government-funded benefit programs; manufacturing commodity costs; diesel fuel costs related to Kroger's logistics operations; trends in consumer spending; the extent to which Kroger's customers exercise caution in their purchasing in response to economic conditions; the inconsistent pace of the economic recovery; changes in inflation or deflation in product and operating costs; stock repurchases; Kroger's ability to retain pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; Kroger's ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of Kroger's future growth plans; and the successful integration of Harris Teeter and Roundy's. Kroger's ability to achieve sales and earnings goals may also be affected by Kroger's ability to manage the factors identified above. Kroger's ability to execute its financial strategy may be affected by its ability to generate cash flow.
  • During the first three quarters of each fiscal year, Kroger's LIFO charge and the recognition of LIFO expense is affected primarily by estimated year-end changes in product costs. Kroger's fiscal year LIFO charge is affected primarily by changes in product costs at year-end.

Kroger assumes no obligation to update the information contained herein. Please refer to Kroger's reports and filings with the Securities and Exchange Commission for a further discussion of these risks and uncertainties.

Note: Kroger's quarterly conference call with investors will be broadcast live online at 10 a.m. (ET) on November 30, 2017 at ir.kroger.com. An on-demand replay of the webcast will be available at approximately 1 p.m. (ET) Thursday, November 30, 2017.

3rd Quarter 2017 Tables Include:

  1. Consolidated Statements of Operations
  2. Consolidated Balance Sheets
  3. Consolidated Statements of Cash Flows
  4. Supplemental Sales Information
  5. Reconciliation of Net Total Debt and Net Earnings Attributable to The Kroger Co. to Adjusted EBITDA
  6. Net Earnings Per Diluted Share Excluding the Adjustment Items
  7. Return on Invested Capital

Table 1.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)
































THIRD QUARTER


YEAR-TO-DATE









2017


2016


2017


2016
























SALES







$ 27,749


100.0%


$ 26,557


100.0%


$ 91,631


100.0%


$ 87,726


100.0%


























MERCHANDISE COSTS, INCLUDING ADVERTISING,




















WAREHOUSING AND TRANSPORTATION (a),




















AND LIFO CHARGE (b)



21,532


77.6


20,653


77.8


71,422


78.0


68,019


77.5



OPERATING, GENERAL AND ADMINISTRATIVE (a)


4,708


17.0


4,443


16.7


15,606


17.0


14,695


16.8



RENT





196


0.7


199


0.8


691


0.8


666


0.8



DEPRECIATION AND AMORTIZATION


573


2.1


549


2.1


1,871


2.0


1,768


2.0



























OPERATING PROFIT



740


2.7


713


2.7


2,041


2.2


2,578


2.9


























INTEREST EXPENSE



136


0.5


124


0.5


453


0.5


396


0.5



























NET EARNINGS BEFORE INCOME TAX EXPENSE


604


2.2


589


2.2


1,588


1.7


2,182


2.5


























INCOME TAX EXPENSE



215


0.8


206


0.8


552


0.6


727


0.8



























NET EARNINGS INCLUDING NONCONTROLLING INTERESTS


389


1.4


383


1.4


1,036


1.1


1,455


1.7



























NET LOSS ATTRIBUTABLE TO





















NONCONTROLLING INTERESTS


(8)


-


(8)


-


(17)


-


(14)


-



























NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.


$ 397


1.4%


$ 391


1.5%


$ 1,053


1.2%


$ 1,469


1.7%



























NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.





















PER BASIC COMMON SHARE


$ 0.44




$ 0.41




$ 1.16




$ 1.54





























AVERAGE NUMBER OF COMMON SHARES USED IN





















BASIC CALCULATION



887




940




901




946





























NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.





















PER DILUTED COMMON SHARE


$ 0.44




$ 0.41




$ 1.15




$ 1.52





























AVERAGE NUMBER OF COMMON SHARES USED IN





















DILUTED CALCULATION


893




953




910




962




























DIVIDENDS DECLARED PER COMMON SHARE


$ 0.125




$ 0.120




$ 0.370




$ 0.345

















































Note:

Certain percentages may not sum due to rounding.
































Note:

The Company defines First-In First-Out (FIFO) gross profit as sales minus merchandise costs, including advertising, warehousing and transportation, but excluding the Last-In First-Out (LIFO) charge.




















The Company defines FIFO gross margin, as described in the earnings release, as FIFO gross profit divided by sales.




















The Company defines FIFO operating profit as operating profit excluding the LIFO charge.




















The Company defines FIFO operating margin, as described in the earnings release, as FIFO operating profit divided by sales.




















The above FIFO financial metrics are important measures used by management to evaluate operational effectiveness. Management believes these FIFO financial metrics are useful to investors and analysts because they measure our day-to-day operational effectiveness.




















The Company defines free cash flow as net cash provided by operating activities minus net cash used by investing activities. Free cash flow is an important measure used by management to evaluate available funding for share repurchases, dividends, debt levels and other strategic investments. Management believes free cash flow is a useful metric to investors and analysts because it demonstrates our ability to make share repurchases and other strategic investments, pay dividends and manage debt levels.
































(a)

Merchandise costs and operating, general and administrative expenses exclude depreciation and amortization expense and rent expense which are included in separate expense lines.
























(b)

LIFO charge of $3 and a credit of $(8) were recorded in the third quarters of 2017 and 2016, respectively. For the year to date period, LIFO charges of $46 and $19 were recorded for 2017 and 2016, respectively.

Table 2.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions)

(unaudited)



















November 4,


November 5,









2017


2016













ASSETS









Current Assets










Cash





$ 334


$ 362



Temporary cash investments



18


12



Store deposits in-transit




1,163


1,043



Receivables





1,452


1,488



Inventories





6,917


6,976



Assets held for sale




604


-



Prepaid and other current assets



437


522















Total current assets




10,925


10,403













Property, plant and equipment, net



20,966


20,966


Intangibles, net





1,113


1,164


Goodwill





3,035


3,035


Other assets





989


939















Total Assets





$ 37,028


$ 36,507
























LIABILITIES AND SHAREOWNERS' EQUITY






Current Liabilities










Current portion of long-term debt including obligations







under capital leases and financing obligations


$ 1,729


$ 3,019



Trade accounts payable




6,307


6,310



Accrued salaries and wages



1,074


1,153



Deferred income taxes




-


221



Liabilities held for sale




259


-



Other current liabilities




3,521


3,421















Total current liabilities




12,890


14,124













Long-term debt including obligations under capital leases







and financing obligations



13,118


10,817


Deferred income taxes




2,452


1,759


Pension and postretirement benefit obligations


522


1,381


Other long-term liabilities




1,835


1,796















Total Liabilities




30,817


29,877













Shareowners' equity





6,211


6,630















Total Liabilities and Shareowners' Equity


$ 37,028


$ 36,507













Total common shares outstanding at end of period


881


934


Total diluted shares year-to-date



910


962


Table 3.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)























YEAR-TO-DATE











2017


2016















CASH FLOWS FROM OPERATING ACTIVITIES:







Net earnings including noncontrolling interests


$ 1,036


$ 1,455



Adjustments to reconcile net earnings including noncontrolling








interests to net cash provided by operating activities:









Depreciation and amortization



1,871


1,768





LIFO charge




46


19





Stock-based employee compensation


118


110





Expense for Company-sponsored pension plans


68


62





Deferred income taxes



267


5





Other




5


(27)





Changes in operating assets and liabilities, net










of effects from mergers of businesses:











Store deposits in-transit



(268)


(120)







Receivables



45


48







Inventories



(466)


(798)







Prepaid and other current assets


426


219







Trade accounts payable



620


509







Accrued expenses



26


(144)







Income taxes receivable and payable


143


267







Contribution to Company-sponsored pension plan


(1,000)


-







Other




117


83
















Net cash provided by operating activities


3,054


3,456




























CASH FLOWS FROM INVESTING ACTIVITIES:







Payments for property and equipment, including payments for lease buyouts


(2,137)


(3,025)



Proceeds from sale of assets



120


114



Payments for acquisitions, net of cash acquired


(16)


(401)



Other






(2)


39
















Net cash used by investing activities



(2,035)


(3,273)




























CASH FLOWS FROM FINANCING ACTIVITIES:







Proceeds from issuance of long-term debt


1,503


1,785



Payments on long-term debt



(769)


(1,332)



Net (payments) borrowings on commercial paper


(45)


1,200



Dividends paid




(333)


(316)



Proceeds from issuance of capital stock


31


51



Treasury stock purchases



(1,292)


(1,401)



Other






(84)


(73)
















Net cash used by financing activities



(989)


(86)









































NET INCREASE IN CASH AND TEMPORARY







CASH INVESTMENTS



30


97















CASH AND TEMPORARY CASH INVESTMENTS:







BEGINNING OF YEAR



322


277



END OF YEAR




$ 352


$ 374




























Reconciliation of capital investments:








Payments for property and equipment, including payments for lease buyouts


$ (2,137)


$ (3,025)



Payments for lease buyouts



9


5



Changes in construction-in-progress payables


(149)


14




Total capital investments, excluding lease buyouts


$ (2,277)


$ (3,006)















Disclosure of cash flow information:









Cash paid during the year for interest


$ 469


$ 410




Cash paid during the year for income taxes


$ 168


$ 450



Table 4. Supplemental Sales Information
(in millions, except percentages)
(unaudited)



Items identified below should not be considered as alternatives to sales or any other GAAP measure of performance. Identical supermarket sales is an industry-specific measure and it is important to review it in conjunction with Kroger's financial results reported in accordance with GAAP. Other companies in our industry may calculate identical supermarket sales differently than Kroger does, limiting the comparability of the measure.






IDENTICAL SUPERMARKET SALES (a)






THIRD QUARTER


YEAR-TO-DATE




2017


2016


2017


2016
















INCLUDING FUEL CENTERS


$

24,605


$

24,026


$

81,327


$

80,045


EXCLUDING FUEL CENTERS


$

21,629


$

21,398


$

71,958


$

71,636
















INCLUDING FUEL CENTERS


2.4%


-0.2%


1.6%


-0.1%


EXCLUDING FUEL CENTERS


1.1%


0.1%


0.4%


1.5%











































(a)

Kroger defines a supermarket as identical when it has been open without expansion or relocation for five full quarters.



Table 5. Reconciliation of Net Total Debt and
Net Earnings Attributable to The Kroger Co. to Adjusted EBITDA

(in millions, except for ratio)
(unaudited)


The items identified below should not be considered an alternative to any GAAP measure of performance or access to liquidity. Net total debt to adjusted EBITDA is an important measure used by management to evaluate the Company's access to liquidity. The items below should be reviewed in conjunction with Kroger's financial results reported in accordance with GAAP.










The following table provides a reconciliation of net total debt.

































November 4,


November 5,







2017


2016


Change













Current portion of long-term debt including obligations











under capital leases and financing obligations


$

1,729


$

3,019


$

(1,290)


Long-term debt including obligations under capital leases











and financing obligations



13,118



10,817



2,301













Total debt



14,847



13,836



1,011













Less: Temporary cash investments



18



12



6













Net total debt


$

14,829


$

13,824


$

1,005
























The following table provides a reconciliation from net earnings attributable to The Kroger Co. to adjusted EBITDA, as defined in the Company's credit agreement, on a rolling four quarters basis.














Rolling Four Quarters Ended







November 4,


November 5,







2017


2016
















Net earnings attributable to The Kroger Co.


$

1,559


$

2,028





LIFO charge (credit)



46



(11)





Depreciation and amortization



2,443



2,276





Interest expense



579



509





Income tax expense



782



977





Adjustments for pension plan agreements



199



111





Adjustments for voluntary retirement offering



184



-





Other



(18)



(11)
















Adjusted EBITDA


$

5,774


$

5,879
















Net total debt to adjusted EBITDA ratio on a rolling four quarters basis



2.57



2.35







Table 6. Net Earnings Per Diluted Share Excluding the Adjustment Items


(in millions, except per share amounts)


(unaudited)

















The purpose of this table is to better illustrate comparable operating results from our ongoing business, after removing the effects on net earnings per diluted common share for certain items described below. Items identified in this table should not be considered alternatives to net earnings attributable to The Kroger Co. or any other GAAP measure of performance. These items should not be reviewed in isolation or considered substitutes for the Company's financial results as reported in accordance with GAAP. Due to the nature of these items, as further described below, it is important to identify these items and to review them in conjunction with the Company's financial results reported in accordance with GAAP.



















The following table summarizes items that affected the Company's financial results during the periods presented. In 2017, these items included charges related to the withdrawal liability for certain multi-employer pension funds and the voluntary retirement offering. In 2016, these items included charges related to the restructuring of certain pension obligations.








































THIRD QUARTER


YEAR-TO-DATE









2017


2016


2017


2016


















NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.


$ 397


$ 391


$ 1,053


$ 1,469


















ADJUSTMENTS FOR PENSION PLAN AGREEMENTS (a)(b)


-


-


126


71


















ADJUSTMENTS FOR VOLUNTARY RETIREMENT OFFERING (a)(c)


-


-


117


-


















2017 AND 2016 ADJUSTED ITEMS



-


-


243


71


















NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.












EXCLUDING THE ADJUSTMENT ITEMS ABOVE


$ 397


$ 391


$ 1,296


$ 1,540


















NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.












PER DILUTED COMMON SHARE



$ 0.44


$ 0.41


$ 1.15


$ 1.52


















ADJUSTMENTS FOR PENSION PLAN AGREEMENTS (d)


-


-


0.13


0.07


















ADJUSTMENTS FOR VOLUNTARY RETIREMENT OFFERING (d)


-


-


0.13


-


















2017 AND 2016 ADJUSTED ITEMS



-


-


0.26


0.07


















NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER












DILUTED COMMON SHARE EXCLUDING THE ADJUSTMENT ITEMS ABOVE


$ 0.44


$ 0.41


$ 1.41


$ 1.59


















AVERAGE NUMBER OF COMMON SHARES USED IN












DILUTED CALCULATION



893


953


910


962
































(a)

The amounts presented represent the after-tax effect of each adjustment.

















(b)

The pre-tax adjustments for the pension plan agreements were $199 in 2017 and $111 in 2016.

















(c)

The pre-tax adjustments for the voluntary retirement offering were $184.

















(d)

The amounts presented represent the net earnings per diluted common share effect of each adjustment.



Table 7. Return on Invested Capital
(in millions, except percentages)
(unaudited)



Return on invested capital should not be considered an alternative to any GAAP measure of performance. Return on invested capital is an important measure used by management to evaluate our investment returns on capital and our effectiveness in deploying our assets. Return on invested capital should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. Other companies may calculate return on invested capital differently than Kroger, limiting the comparability of the measure.


The following table provides a calculation of return on invested capital on a rolling four quarters basis ended November 4, 2017.























Rolling Four
Quarters Ended







November 4,







2017

Return on Invested Capital





Numerator (a)








Operating profit



$



2,899



LIFO charge




46



Depreciation and amortization



2,443



Rent





906



Adjustments for pension plan agreements



199



Adjustments for voluntary retirement offering



184











Adjusted operating profit


$



6,677









Denominator (b)








Average total assets



$



36,768



Average taxes receivable (c)



(81)



Average LIFO reserve (d)



1,298



Average accumulated depreciation and amortization



20,017



Average trade accounts payable



(6,309)



Average accrued salaries and wages



(1,114)



Average other current liabilities (e)



(3,448)



Average liabilities held for sale



(130)



Rent * 8 (f)




7,248











Average invested capital


$



54,249









Return on Invested Capital




12.31%









a)

Represents results for the rolling four quarters for the period noted.









b)

Represents the average of amounts at the beginning and end of the rolling four quarters for the period presented.









c)

Taxes receivable is recorded in the Consolidated Balance Sheet in receivables.









d)

LIFO reserve is recorded in the Consolidated Balance Sheet in inventories.









e)

The calculation of average other current liabilities excludes accrued income taxes.









f)

The factor of eight estimates the hypothetical capitalization of our operating leases.

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SOURCE The Kroger Co.