Kroger Reports First Quarter Results

Table 1.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

FIRST QUARTER

2017

2016

SALES

$     36,285

100.0%

$     34,604

100.0%

MERCHANDISE COSTS, INCLUDING ADVERTISING,

WAREHOUSING AND TRANSPORTATION (a),

AND LIFO CHARGE (b)

28,281

77.9

26,669

77.1

OPERATING, GENERAL AND ADMINISTRATIVE (a)

6,376

17.6

5,779

16.7

RENT

270

0.7

262

0.8

DEPRECIATION AND AMORTIZATION

736

2.0

694

2.0

OPERATING PROFIT 

622

1.7

1,200

3.5

INTEREST EXPENSE

177

0.5

155

0.5

NET EARNINGS BEFORE INCOME TAX EXPENSE

445

1.2

1,045

3.0

INCOME TAX EXPENSE 

148

0.4

350

1.0

NET EARNINGS INCLUDING NONCONTROLLING INTERESTS

297

0.8

695

2.0

NET LOSS ATTRIBUTABLE TO

NONCONTROLLING INTERESTS

(6)

-

(1)

-

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. 

$           303

0.8%

$           696

2.0%

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

PER BASIC COMMON SHARE

$          0.33

$          0.72

AVERAGE NUMBER  OF COMMON SHARES USED IN

BASIC CALCULATION

914

954

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

PER DILUTED COMMON SHARE

$          0.32

$          0.71

AVERAGE NUMBER  OF COMMON SHARES USED IN

DILUTED CALCULATION

925

966

DIVIDENDS DECLARED PER COMMON SHARE

$        0.120

$       0.105

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.

(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 charges of $25 and $15 were recorded in the first quarters of 2017 and 2016, respectively.

Table 2.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions)

(unaudited)

May 20,

May 21,

2017

2016

ASSETS

Current Assets

Cash

$                335

$                375

Temporary cash investments

21

16

Store deposits in-transit

952

892

Receivables

1,394

1,314

Inventories

6,359

6,066

Prepaid and other current assets

477

553

Total current assets

9,538

9,216

Property, plant and equipment, net

21,133

20,161

Intangibles, net

1,141

1,043

Goodwill

3,031

2,744

Other assets

956

637

Total Assets

$          35,799

$          33,801

LIABILITIES AND SHAREOWNERS' EQUITY

Current Liabilities

Current portion of long-term debt including obligations

under capital leases and financing obligations

$            1,854

$            2,676

Trade accounts payable

6,078

5,846

Accrued salaries and wages

1,135

1,202

Deferred income taxes

-

221

Other current liabilities

3,448

3,200

Total current liabilities

12,515

13,145

Long-term debt including obligations under capital leases

and financing obligations

11,590

9,710

Deferred income taxes

2,181

1,739

Pension and postretirement benefit obligations

1,552

1,395

Other long-term liabilities

1,826

1,364

Total Liabilities

29,664

27,353

Shareowners' equity

6,135

6,448

Total Liabilities and Shareowners' Equity

$          35,799

$          33,801

Total common shares outstanding at end of period

900

941

Total diluted shares year-to-date

925

966

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

$                297

$                695

Adjustments to reconcile net earnings including noncontrolling

interests to net cash provided by operating activities:

Depreciation and amortization

736

694

LIFO charge

25

15

Stock-based employee compensation

53

43

Expense for Company-sponsored pension plans

35

25

Deferred income taxes

6

-

Other

(51)

(1)

Changes in operating assets and liabilities, net

of effects from mergers of businesses:

Store deposits in-transit

(42)

31

Receivables

149

85

Inventories

177

101

Prepaid and other current assets

409

232

Trade accounts payable

260

104

Accrued expenses

(86)

(320)

Income taxes receivable and payable

153

350

Other

187

25

Net cash provided by operating activities

2,308

2,079

CASH FLOWS FROM INVESTING ACTIVITIES:

Payments for property and equipment, including payments for lease buyouts

(817)

(1,090)

Proceeds from sale of assets

83

71

Other

(10)

(32)

Net cash used by investing activities

(744)

(1,051)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt

1

11

Payments on long-term debt

(84)

(54)

Net (payments) borrowings on commercial paper

(545)

256

Dividends paid

(111)

(102)

Proceeds from issuance of capital stock

17

15

Treasury stock purchases

(772)

(1,027)

Other

(37)

(13)

Net cash used by financing activities

(1,531)

(914)

NET INCREASE IN CASH AND TEMPORARY

CASH INVESTMENTS

33

114

CASH AND TEMPORARY CASH INVESTMENTS:

BEGINNING OF YEAR

323

277

END OF YEAR

$                356

$                391

Reconciliation of capital investments:

Payments for property and equipment, including payments for lease buyouts

$              (817)

$           (1,090)

Changes in construction-in-progress payables

(104)

(55)

Total capital investments, excluding lease buyouts

$              (921)

$           (1,145)

Disclosure of cash flow information:

Cash paid during the year for interest

$                188

$                167

Cash paid during the year for income taxes

$                  11

$                    7

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)

FIRST QUARTER

2017

2016

INCLUDING FUEL CENTERS

$         32,252

$         31,758

EXCLUDING FUEL CENTERS

$         28,627

$         28,689

INCLUDING FUEL CENTERS

1.6%

0.4%

EXCLUDING FUEL CENTERS

-0.2%

2.4%

(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.

May 20,

May 21,

2017

2016

Change

Current portion of long-term debt including obligations

   under capital leases and financing obligations

$

1,854

$

2,676

$

(822)

Long-term debt including obligations under capital leases

11,590

9,710

1,880

     Total debt

13,444

12,386

1,058

Less: Temporary cash investments

21

16

5

Less: Prepaid benefit payments

2

-

2

     Net total debt

$

13,421

$

12,370

$

1,051

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 

May 20,

May 21,

2017

2016

Net earnings attributable to The Kroger Co.

$

1,582

$

2,116

LIFO charge

29

15

Depreciation and amortization

2,382

2,163

Interest expense

544

489

Income tax expense

755

1,065

Adjustments for pension plan agreements

310

-

Adjustments for voluntary retirement offering

184

-

Other

(18)

(4)

Adjusted EBITDA

$

5,768

$

5,844

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

2.33

2.12

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 the first quarter of 2017, these items included charges related to the withdrawal liability for certain multi-employer pension funds and the voluntary retirement offering.  In the first quarter of 2016, The Kroger Co. did not have any adjustment items.

FIRST QUARTER

2017

2016

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

$

303

$

696

ADJUSTMENTS FOR PENSION PLAN WITHDRAWAL LIABILITIES (a)(b)

126

-

ADJUSTMENTS FOR VOLUNTARY RETIREMENT OFFERING (a)(c)

117

-

2017 ADJUSTED ITEMS

243

-

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

EXCLUDING THE ADJUSTMENT ITEMS ABOVE

$

546

$

696

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. 

PER DILUTED COMMON SHARE

$

0.32

$

0.71

ADJUSTMENTS FOR PENSION PLAN WITHDRAWAL LIABILITIES (d)

0.13

-

ADJUSTMENTS FOR VOLUNTARY RETIREMENT OFFERING (d)

0.13

-

2017 ADJUSTED ITEMS

0.26

-

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER 

DILUTED COMMON SHARE EXCLUDING THE ADJUSTMENT ITEMS ABOVE

$

0.58

$

0.71

AVERAGE NUMBER  OF COMMON SHARES USED IN

DILUTED CALCULATION

925

966

(a)

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

(b)

The pre-tax adjustments for the pension plan withdrawal liabilities were $199.

(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 May 20, 2017.

 Rolling Four
Quarters Ended 

May 20,

2017

Return on Invested Capital

Numerator (a)

Operating profit

$

2,858

LIFO charge

29

Depreciation and amortization

2,382

Rent

889

Adjustments for pension plan agreements

310

Adjustments for voluntary retirement offering

184

Adjusted operating profit

$

6,652

Denominator (b)

Average total assets 

$

34,800

Average taxes receivable (c)

(37)

Average LIFO reserve (d)

1,303

Average accumulated depreciation and amortization

19,464

Average trade accounts payable

(5,962)

Average accrued salaries and wages

(1,169)

Average other current liabilities (e) 

(3,324)

Rent * 8 (f)

7,112

Average invested capital

$

52,187

Return on Invested Capital

12.75%

a)

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

b)

Represents the average of amounts at the beginning and end of the rolling four quarters periods 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.