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Kroger Reports Record Second Quarter Results

Record Q2 EPS of $0.60; Identical Sales Up 3.3% Without Fuel

Raised 2013 Identical Sales Guidance to 3.0-3.5%

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CINCINNATI, Sept. 12, 2013 /PRNewswire/ -- The Kroger Co. (NYSE: KR) today reported net earnings of $0.60 per diluted share and identical supermarket sales growth, without fuel, of 3.3% in the second quarter of fiscal 2013. Other highlights of the quarter include:

  • Achieved 39th consecutive quarter of positive identical supermarket sales
  • Expanded rolling four quarter FIFO operating margin, without fuel, by 9 bps
  • Increased capital investment and maintained ROIC

"Kroger's strong second quarter results have us on target to deliver the earnings per share growth we promised for the year," said David B. Dillon, Kroger's chairman and chief executive officer. "As we have shown quarter after quarter, our consistent execution of the Customer 1st Strategy deepens customer loyalty, increases sales and creates sustainable shareholder value."

Details of Second Quarter 2013 Results

Total sales increased 4.6% to $22.7 billion in the second quarter compared with $21.7 billion for the same period last year. Total sales, excluding fuel, increased 3.9% in the second quarter over the same period last year.  

Net earnings for the second quarter totaled $317 million, or $0.60 per diluted share. Net earnings for the second quarter last year were $279 million, or $0.51 per diluted share.

FIFO gross margin, including fuel, was 20.46% of sales for the second quarter. Excluding retail fuel operations, FIFO gross margin decreased 11 basis points from the same period last year.

The company recorded a $13 million LIFO charge during the quarter compared to a $35 million LIFO charge in the same quarter last year.

Operating, general and administrative costs plus rent and depreciation, excluding retail fuel operations, decreased 17 basis points as a percent of sales compared to the prior year as a result of strong sales leverage.

FIFO operating margin, excluding fuel and the extra week in fiscal 2012, on a rolling four quarter basis, increased 9 basis points.

Financial Strategy

Kroger's strong financial position has allowed the company to return more than $920 million to shareholders through share buybacks and dividends over the last four quarters. During the second quarter, Kroger repurchased 2.4 million common shares for a total investment of $90 million.

Capital investment, excluding acquisitions and purchases of leased property, totaled $507 million for the second quarter, compared to $444 million for the same period last year.

Return on invested capital on a rolling four quarter 52-week basis was 13.49% compared to 13.44% during the same period last year.

Net total debt was $7.7 billion, a decrease of $446 million from a year ago. On a rolling four quarter 52-week basis, Kroger's net total debt to adjusted EBITDA ratio was 1.77 compared to 1.96 during the same period last year.

Fiscal 2013 Guidance

Based on the second quarter results, the company maintained its net earnings guidance range of $2.73 to $2.80 per diluted share for fiscal 2013. This is consistent with the company's long term earnings per share growth rate guidance of 8 – 11%, plus a growing dividend.

Kroger raised identical supermarket sales, excluding fuel, growth guidance to approximately 3.0% to 3.5% for fiscal 2013. The previous guidance was 2.5% to 3.5%.

During fiscal 2013, Kroger plans to use cash flow from operations to maintain its current investment grade debt rating, repurchase shares, pay dividends to shareholders, and fund capital investments. The company continues to expect capital investments to be in the $2.1 to $2.4 billion range for the year, excluding acquisitions and purchases of leased property. 

"We are improving our connection with customers and associates, rewarding shareholders and investing to grow our business," Mr. Dillon said. "We intend to continue building on this positive momentum with execution at every level of the company to achieve our long-term earnings per share growth rate of 8 – 11% in fiscal 2013 and beyond."

Kroger, one of the world's largest retailers, employs 343,000 associates who serve customers in 2,418 supermarkets and multi-department stores in 31 states under two dozen local banner names including Kroger, City Market, Dillons, Jay C, Food 4 Less, Fred Meyer, Fry's, King Soopers, QFC, Ralphs and Smith's. The company also operates 783 convenience stores, 326 fine jewelry stores, 1,195 supermarket fuel centers and 37 food processing plants in the U.S. Recognized by Forbes as the most generous company in America, Kroger supports hunger relief, breast cancer awareness, the military and their families, and more than 30,000 schools and grassroots organizations. Kroger contributes food and funds equal to 200 million meals a year through more than 80 Feeding America food bank partners. A leader in supplier diversity, Kroger is a proud member of the Billion Dollar Roundtable and the U.S. Hispanic Chamber's Million Dollar Club.

--------------------------------------------------------------------------------

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

This press release contains certain forward-looking statements about the future performance of the company. These statements are based on management's assumptions and beliefs in light of the information currently available to it. These statements are indicated by words such as "expect," "guidance" and "plans." 

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 our annual report on Form 10-K for our last fiscal year and any subsequent filings, as well as the following:

  • Our 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 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 inflationary and deflationary trends in certain commodities, and the unemployment rate; the effect that fuel costs have on consumer spending; changes in government-funded benefit programs; manufacturing commodity costs; 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 inconsistent pace of the economic recovery; changes in inflation or deflation in product and operating costs; stock repurchases; the effect of brand prescription drugs going off patent; our ability to retain additional pharmacy sales from third party payors; natural disasters or adverse weather conditions; and the success of our future growth plans.  The extent to which the adjustments we are making to our strategy create value for our shareholders will depend primarily on the reaction of our customers and our competitors to these adjustments, as well as operating conditions, including inflation or deflation, increased competitive activity, and cautious spending behavior of our customers.  Our ability to achieve sales and earnings goals may also be affected by our ability to manage the factors identified above.
  • Our ability to use free cash flow to continue to maintain our debt coverage and repurchase shares, pay dividends, and fund capital investments, could be affected by unanticipated increases in net total debt, our inability to generate free cash flow at the levels anticipated, and our failure to generate expected earnings.
  • Our capital investments could differ from our estimate if we are unsuccessful in acquiring suitable sites for new stores, if development costs vary from those budgeted, if our logistics and technology or store projects are not completed on budget or within the time frame projected, or if economic conditions fail to improve, or worsen.

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

Note: Kroger's quarterly conference call with investors will be broadcast live online at 10 a.m. (ET) on September 12, 2013 at ir.kroger.com. An on-demand replay of the webcast will be available from approximately 1 p.m. (ET) Thursday, September 12 through Thursday, September 26, 2013.

 

View 2nd Quarter 2013 Reports:

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF CASH FLOWS

SUPPLEMENTAL SALES INFORMATION

RECONCILIATION OF TOTAL DEBT TO NET TOTAL DEBT AND
NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. TO ADJUSTED EBITDA

RETURN ON INVESTED CAPITAL

 

 

Table 1.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)


















SECOND QUARTER


YEAR-TO-DATE


2013


2012


2013


2012

















SALES

$ 22,722


100.0%


$ 21,726


100.0%


$ 52,765


100.0%


$ 50,791


100.0%
























MERCHANDISE COSTS, INCLUDING ADVERTISING,


















WAREHOUSING AND TRANSPORTATION (a),


















AND LIFO CHARGE (b)

18,087


79.6


17,278


79.5


41,943


79.5


40,374


79.5


OPERATING, GENERAL AND ADMINISTRATIVE (a)

3,514


15.5


3,391


15.6


8,114


15.4


7,854


15.5


RENT

139


0.6


139


0.6


328


0.6


331


0.7


DEPRECIATION

387


1.7


383


1.8


906


1.7


884


1.7
























OPERATING PROFIT 

595


2.6


535


2.5


1,474


2.8


1,348


2.7























INTEREST EXPENSE

99


0.4


106


0.5


228


0.4


247


0.5
























NET EARNINGS BEFORE INCOME TAX EXPENSE

496


2.2


429


2.0


1,246


2.4


1,101


2.2























INCOME TAX EXPENSE 


176


0.8


148


0.7


442


0.8


380


0.8
























NET EARNINGS INCLUDING NONCONTROLLING



















 INTERESTS

320


1.4


281


1.3


804


1.5


721


1.4
























NET EARNINGS ATTRIBUTABLE TO



















NONCONTROLLING INTERESTS

3


0.0


2


0.0


6


0.0


3


0.0
























NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. 

$      317


1.4%


$      279


1.3%


$      798


1.5%


$      718


1.4%
























NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.



















PER BASIC COMMON SHARE

$     0.61




$     0.52




$     1.54




$     1.30


























AVERAGE NUMBER  OF COMMON SHARES USED IN



















BASIC CALCULATION

515




538




515




548


























NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.



















PER DILUTED COMMON SHARE

$     0.60




$     0.51




$     1.52




$     1.29

























AVERAGE NUMBER  OF COMMON SHARES USED IN



















DILUTED CALCULATION

521




541




520




552

























DIVIDENDS DECLARED PER COMMON SHARE

$   0.150




$   0.115




$   0.300




$   0.230















































Note:

Certain per share amounts and percentages may not sum due to rounding.



Note:

The Company defines 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 profit 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.  In addition, the FIFO operating profit and margin statistics in the earnings release excludes the extra week in fiscal 2012, the UFCW pension plan consolidation charge and the UFCW consolidated pension plan liability and credit card settlement adjustments.























(a)

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























(b)

LIFO charges of $13 and $35 were recorded in the second quarter of 2013 and 2012, respectively.  For the year to date period, LIFO charges of $30 and $81 were recorded for 2013 and 2012, respectively.

 

 

Table 2.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions)

(unaudited)


















August 17,


August 11,








2013


2012











ASSETS








Current Assets









Cash





$                226


$                235


Temporary cash investments



214


3


Store deposits in-transit




850


900


Receivables





942


941


Inventories





4,954


4,837


Prepaid and other current assets



332


335













Total current assets




7,518


7,251











Property, plant and equipment, net



15,084


14,578

Goodwill





1,234


1,164

Other assets





636


532













Total Assets





$          24,472


$          23,525





















LIABILITIES AND SHAREOWNERS' EQUITY





Current liabilities









Current portion of long-term debt including obligations






under capital leases and financing obligations


$                734


$            1,340


Trade accounts payable




4,620


4,283


Accrued salaries and wages



1,013


943


Deferred income taxes




284


190


Other current liabilities




2,703


2,586













Total current liabilities




9,354


9,342











Long-term debt including obligations under capital leases




and financing obligations








Face-value of long-term debt including obligations under






capital leases and financing obligations


7,159


6,775


Adjustment to reflect fair-value interest rate hedges


(1)


12


Long-term debt including obligations under capital leases






and financing obligations



7,158


6,787











Deferred income taxes




782


740

Pension and postretirement benefit obligations


1,205


1,403

Other long-term liabilities




1,125


1,460













Total Liabilities




19,624


19,732











Shareowners' equity





4,848


3,793













Total Liabilities and Shareowners' Equity


$          24,472


$          23,525











Total common shares outstanding at end of period


516


527

Total diluted shares year-to-date



520


552





















Note: Certain prior-year amounts have been reclassified to conform to current-year presentation.





Table 3.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)






















YEAR-TO-DATE










2013


2012













CASH FLOWS FROM OPERATING ACTIVITIES:






Net earnings including noncontrolling interests


$                804


$                721


Adjustment to reconcile net earnings including noncontrolling







interests to net cash provided by operating activities:








Depreciation



906


884




LIFO charge




30


81




Stock-based employee compensation


47


41




Expense for Company-sponsored pension plans


40


48




Deferred income taxes



(16)


101




Other




64


14




Changes in operating assets and liabilities, net









of effects from acquisitions of businesses:










Store deposits in-transit



105


(113)






Receivables



107


(26)






Inventories



162


198






Prepaid expenses



246


(37)






Trade accounts payable



180


(28)






Accrued expenses



1


136






Income taxes receivable and payable


82


76






Other




(130)


(65)














Net cash provided by operating activities


2,628


2,031

























CASH FLOWS FROM INVESTING ACTIVITIES:






Payments for capital investments



(1,110)


(985)


Payments for acquisitions



-


(12)


Proceeds from sale of assets



7


22


Other






(49)


(14)














Net cash used by investing activities



(1,152)


(989)

























CASH FLOWS FROM FINANCING ACTIVITIES:






Proceeds from issuance of long-term debt


1,011


846


Payments on long-term debt



(419)


(894)


Net payments on commercial paper



(1,595)


(10)


Dividends paid




(155)


(128)


Excess tax benefits on stock-based awards


20


1


Proceeds from issuance of capital stock


155


42


Treasury stock purchases



(236)


(871)


Increase (decrease) in book overdrafts



(40)


30


Other






(15)


(8)














Net cash used by financing activities



(1,274)


(992)

























NET INCREASE IN CASH AND TEMPORARY






CASH INVESTMENTS



202


50

























CASH AND TEMPORARY CASH INVESTMENTS:






BEGINNING OF YEAR



238


188


END OF QUARTER




$                440


$                238

























Reconciliation of capital investments:







Payments for capital investments



$           (1,110)


$              (985)


Payments for lease buyouts



19


19


Changes in construction-in-progress payables


(56)


(17)



Total capital investments



$           (1,147)


$              (983)













Disclosure of cash flow information:








Cash paid during the year for interest


$                225


$                221



Cash paid during the year for income taxes


$                349


$                222

























Note: Certain prior-year amounts have been reclassified to conform to current-year presentation.





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 sales differently than Kroger does, limiting the comparability of the measure.

























IDENTICAL SUPERMARKET SALES (a)
















SECOND QUARTER


YEAR-TO-DATE





2013


2012


2013


2012














INCLUDING FUEL CENTERS


$         20,287


$         19,512


$         47,232


$         45,708



EXCLUDING FUEL CENTERS


$         16,846


$         16,310


$         39,258


$         38,010














INCLUDING FUEL CENTERS


4.0%


3.6%


3.3%


4.7%



EXCLUDING FUEL CENTERS


3.3%


3.6%


3.3%


3.9%


































(a)

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

 



Table 5. Reconciliation of Total Debt to 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 total debt to net total debt and compares the balance in the second quarter of 2013 to the balance in the second quarter of 2012.

















August 17,


August 11,





2013


2012


Change








Current portion of long-term debt including obligations







   under capital leases and financing obligations


$              734


$       1,340


$       (606)

Face-value of long-term debt including obligations under







   capital leases and financing obligations


7,159


6,775


384

Adjustment to reflect fair-value interest rate hedges


(1)


12


(13)








     Total debt


$           7,892


$       8,127


$       (235)








Less: Temporary cash investments


214


3


211








     Net total debt


 

$           7,678


$       8,124


$       (446)























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 quarter 52 week basis.










Rolling Four Quarters Ended 





August 17,


August 11,





2013


2012










Net earnings attributable to The Kroger Co.


$ 1,577


$ 607



LIFO


4


216



Depreciation


1,674


1,649



Interest expense


443


447



Income tax expense


856


267



UFCW pension plan consolidation charge


-


953



UFCW consolidated pension plan liability and credit card







     settlement adjustments


(115)


-



53rd week EBITDA adjustment


(99)


-



Other


(7)


(3)










Adjusted EBITDA


$ 4,333


$ 4,136










Net total debt to adjusted EBITDA ratio on a 52 week basis


1.77


1.96



















Table 6. 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 quarter 52 week basis ended August 17, 2013 and August 11, 2012.
















 Rolling Four Quarters Ended








August 17,


August 11,








2013


2012


Return on Invested Capital







Numerator (a)










Operating profit



$             2,890


$             1,327




53rd week operating profit adjustment


(99)


-




LIFO charge



4


216




Depreciation


1,674


1,649




Rent




625


615




53rd week rent adjustment


(12)


-




UFCW pension plan consolidation charge


-


953




UFCW consolidated pension plan liability and credit card








     settlement adjustments


(115)


-














Adjusted operating income


$             4,967


$             4,760












Denominator (b)










Average total assets



$           23,999


$          23,450




Average taxes receivable (c)


(4)


(16)




Average LIFO reserve (d)


1,126


1,016




Average accumulated depreciation


14,747


13,724




Average trade accounts payable


(4,452)


(4,240)




Average accrued salaries and wages


(978)


(956)




Average other current liabilities (e)


(2,524)


(2,479)




Rent * 8




4,904


4,920














Average invested capital


$           36,818


$          35,419












Return on Invested Capital



13.49%


13.44%











a)

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











b)

Represents the average of amounts at the beginning and end of the rolling four-quarter 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.











 

SOURCE The Kroger Co.



RELATED LINKS
http://www.kroger.com

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