Kroger Reports Strong Third Quarter Results ID Sales Up 3.5% Without Fuel

Adjusted Q3 EPS Up 15% Over Last Year's Adjusted Q3 EPS

Achieves 40th Consecutive Quarter of Positive Identical Supermarket Sales

CINCINNATI, Dec. 5, 2013 /PRNewswire/ -- The Kroger Co. (NYSE: KR) today reported net earnings of $0.57 per diluted share for the third quarter, which ended November 9, 2013. This includes a net $0.04 per diluted share benefit from certain tax items partially offset by expenses related to our pending merger with Harris Teeter.

Excluding these items, Kroger's earnings per diluted share would have been $0.53 in the third quarter, a 15% increase over last year's third quarter adjusted earnings per share of $0.46.

Identical supermarket sales growth, without fuel, was 3.5% in the third quarter. Other highlights include:

  • Increased ROIC while increasing capital investment
  • Grew rolling four quarter FIFO operating profit margin, excluding fuel
  • Reconfirmed identical stores sales and net earnings per share guidance for the year

"Our quarterly results show once again that Kroger is uniquely positioned to grow and win in the U.S. food retail industry," said David B. Dillon, Kroger's chairman and chief executive officer. "Our Customer 1st Strategy resulted in strong sales and earnings growth, lowered costs and helped improve Kroger's connection with our customers in the third quarter. Every one of our more than 343,000 associates deserves recognition for their individual work to achieve an unprecedented 40 consecutive quarters of positive identical supermarket sales. I know our entire team is hard at work to achieve the 41st."

Details of Third Quarter 2013 Results

Total sales increased 3.2% to $22.5 billion in the third quarter, compared to $21.8 billion for the same period last year. Total sales, excluding fuel, increased 4.7% in the third quarter over the same period last year.

Net earnings for the third quarter totaled $299 million, or $0.57 per diluted share. Net earnings in the same quarter last year were $317 million, or $0.60 per diluted share.

Both the current and prior year quarters' earnings per diluted share benefited from certain adjustments. This year's third quarter includes a $0.04 per diluted share benefit comprised of $0.05 from certain tax items, partially offset by expenses related to Kroger's pending merger with Harris Teeter. Last year's third quarter included a $0.14 per share benefit from a settlement with Visa and MasterCard and from a reduction in the company's obligation to fund the UFCW consolidated pension fund created in January 2012. Excluding these adjustments, earnings per share would have been $0.53 per diluted share in the third quarter of this year, and $0.46 in the third quarter of last year.

FIFO gross margin, including fuel, was 20.57% of sales for the third quarter. Excluding retail fuel operations, FIFO gross margin decreased 25 basis points from the same period last year.

The company recorded a $13 million LIFO charge during the quarter compared to a $15 million LIFO charge in the same quarter last year. The company continues to estimate its full year LIFO charge at $55 million.

Operating, general and administrative costs plus rent and depreciation – excluding retail fuel operations, the two adjustment items from last year, and current year expenses related to Kroger's pending merger with Harris Teeter – decreased 27 basis points as a percentage of sales compared to the same quarter in the prior year as a result of strong sales leverage.

FIFO operating profit margin – excluding fuel, the 53rd week last year, and the adjustment items in fiscal 2012 and 2013 – on a rolling four quarter basis, increased 11 basis points.

Financial Strategy

Kroger's strong financial position has allowed the company to return more than $752 million to shareholders through share buybacks and dividends over the last four quarters. During the third quarter, Kroger repurchased 3.6 million common shares for a total investment of $148 million.

Capital investment, excluding purchases of leased property, totaled $641 million for the third quarter, compared to $474 million for the same period last year.

Return on invested capital on a rolling four quarter 52-week basis was 13.42% compared to 13.34% during the same period last year.

Net total debt was $8.2 billion, a decrease of $525 million from a year ago. On a rolling four quarter 52-week basis, Kroger's net total debt to adjusted EBITDA ratio was 1.86 compared to 2.08 during the same period last year.

Fiscal 2013 Guidance

Based on the third quarter results, the company maintained its net earnings guidance range of $2.73 to $2.80 per diluted share for fiscal 2013. This excludes certain tax items and expenses related to our pending merger with Harris Teeter. Kroger's fiscal 2013 guidance range is consistent with the company's long term earnings per share growth rate guidance of 8 – 11%, plus a growing dividend.

For the fourth quarter of fiscal 2013, Kroger expects identical supermarket sales growth, excluding fuel, of approximately 3.0% to 3.5%.

The company expects capital investments to be approximately $2.4 billion for the year, excluding mergers, acquisitions and purchases of leased property.

Kroger continues to use cash flow from operations to maintain its current investment grade debt rating, repurchase shares, have a growing dividend, and fund increasing capital investments.

"Kroger is successfully and consistently executing our Customer 1st Strategy and delivering on our growth commitments, which benefit our customers, associates and shareholders," Mr. Dillon said. "I could not be more confident in Kroger's future, knowing that our entire leadership team and Rodney McMullen will guide Kroger to even higher levels of performance."

Kroger, one of the world's largest retailers, employs 343,000 associates who serve customers in 2,414 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 786 convenience stores, 327 fine jewelry stores, 1,218 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 investment grade debt rating 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 December 5, 2013 at ir.kroger.com. An on-demand replay of the webcast will be available from approximately 1 p.m. (ET) Thursday, December 5 through Thursday, December 19, 2013.

View 3rd 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

NET EARNINGS PER DILUTED SHARE EXCLUDING THE ADJUSTED ITEMS BELOW

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







2013


2012


2013


2012






















SALES

$ 22,505


100.0%


$ 21,807


100.0%


$ 75,270


100.0%


$ 72,598


100.0%























MERCHANDISE COSTS, INCLUDING ADVERTISING, WAREHOUSING AND TRANSPORTATION (a), AND LIFO CHARGE (b)

































17,889


79.5


17,383


79.7


59,832


79.5


57,757


79.6


OPERATING, GENERAL AND ADMINISTRATIVE (a)

3,549


15.8


3,305


15.2


11,664


15.5


11,161


15.4


RENT

138


0.6


141


0.7


466


0.6


471


0.7


DEPRECIATION




395


1.8


382


1.8


1,301


1.7


1,265


1.7

























OPERATING PROFIT 

534


2.4


596


2.7


2,007


2.7


1,944


2.7
























INTEREST EXPENSE



108


0.5


103


0.5


336


0.5


350


0.5

























NET EARNINGS BEFORE INCOME TAX EXPENSE

426


1.9


493


2.3


1,671


2.2


1,594


2.2
























INCOME TAX EXPENSE 

125


0.6


175


0.8


567


0.8


555


0.8

























NET EARNINGS INCLUDING NONCONTROLLING INTERESTS

301


1.3


318


1.5


1,104


1.5


1,039


1.4

























NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS


















2


0.0


1


0.0


7


0.0


4


0.0

























NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. 

$      299


1.3%


$      317


1.5%


$   1,097


1.5%


$   1,035


1.4%

























NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

PER BASIC COMMON SHARE


















$     0.58




$     0.61




$     2.11




$     1.90



























AVERAGE NUMBER  OF COMMON SHARES USED IN

BASIC CALCULATION


















515




518




515




539



























NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER DILUTED COMMON SHARE


















$     0.57




$     0.60




$     2.09




$     1.89



























AVERAGE NUMBER  OF COMMON SHARES USED IN DILUTED CALCULATION


















521




522




521




543


























DIVIDENDS DECLARED PER COMMON SHARE

$   0.165




$   0.150




$   0.465




$   0.380















































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 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.























(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 $15 were recorded in the third quarter of 2013 and 2012, respectively.  For the year to date period, LIFO charges of $42 and $96 were recorded for 2013 and 2012, respectively.

 

Table 2.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions)

(unaudited)



















November 9,


November 3,









2013


2012













ASSETS









Current Assets










Cash





$                242


$                269



Temporary cash investments



102


166



Store deposits in-transit




881


920



Receivables





1,044


1,039



Inventories





5,628


5,550



Prepaid and other current assets



315


333















Total current assets




8,212


8,277













Property, plant and equipment, net



15,456


14,665


Goodwill





1,234


1,164


Other assets





578


527















Total Assets





$          25,480


$          24,633
























LIABILITIES AND SHAREOWNERS' EQUITY






Current liabilities










Current portion of long-term debt including obligations







under capital leases and financing obligations

$            1,122


$            2,079



Trade accounts payable




4,941


4,782



Accrued salaries and wages



1,047


949



Deferred income taxes




284


190



Other current liabilities




2,799


2,548















Total current liabilities




10,193


10,548













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


7,148


6,773



Adjustment to reflect fair-value interest rate hedges


-


7



Long-term debt including obligations under capital leases







and financing obligations



7,148


6,780













Deferred income taxes




816


771


Pension and postretirement benefit obligations


1,207


1,380


Other long-term liabilities




1,126


1,392















Total Liabilities




20,490


20,871













Shareowners' equity





4,990


3,762















Total Liabilities and Shareowners' Equity


$          25,480


$          24,633













Total common shares outstanding at end of period


513


514


Total diluted shares year-to-date



521


543
























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


$            1,104


$            1,039



Adjustment to reconcile net earnings including noncontrolling








interests to net cash provided by operating activities:









Depreciation




1,301


1,265





LIFO charge




42


96





Stock-based employee compensation


78


61





Expense for Company-sponsored pension plans


57


68





Deferred income taxes



21


130





Other




62


37





Changes in operating assets and liabilities, net










of effects from acquisitions of businesses:











Store deposits in-transit



74


(134)







Receivables



5


(131)







Inventories



(524)


(531)







Prepaid expenses



262


(32)







Trade accounts payable



402


386







Accrued expenses



142


57







Income taxes receivable and payable


11


115







Other




(120)


(158)
















Net cash provided by operating activities


2,917


2,268




























CASH FLOWS FROM INVESTING ACTIVITIES:







Payments for property and equipment, including payments for lease buyouts

(1,786)


(1,471)



Payments for acquisitions



-


(12)



Proceeds from sale of assets



15


23



Other






(47)


(28)
















Net cash used by investing activities



(1,818)


(1,488)




























CASH FLOWS FROM FINANCING ACTIVITIES:







Proceeds from issuance of long-term debt


1,025


850



Payments on long-term debt



(431)


(921)



Net (payments) borrowings on commercial paper


(1,220)


744



Dividends paid




(233)


(189)



Excess tax benefits on stock-based awards


24


5



Proceeds from issuance of capital stock


186


72



Treasury stock purchases



(384)


(1,204)



Net increase in book overdrafts



56


115



Other






(16)


(5)
















Net cash used by financing activities



(993)


(533)




























NET INCREASE IN CASH AND TEMPORARY







CASH INVESTMENTS



106


247




























CASH AND TEMPORARY CASH INVESTMENTS:







BEGINNING OF YEAR



238


188



END OF QUARTER




$                344


$                435




























Reconciliation of capital investments:








Payments for property and equipment, including payments for lease buyouts

$           (1,786)


$           (1,471)



Payments for lease buyouts



108


24



Changes in construction-in-progress payables


(110)


(11)




Total capital investments, excluding lease buyouts


$           (1,788)


$           (1,458)















Disclosure of cash flow information:









Cash paid during the year for interest


$                308


$                320




Cash paid during the year for income taxes


$                489


$                334




























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)














THIRD QUARTER


YEAR-TO-DATE




2013


2012


2013


2012













INCLUDING FUEL CENTERS

$         20,211


$         19,714


$         67,443


$         65,422



EXCLUDING FUEL CENTERS

$         16,866


$         16,294


$         56,125


$         54,304













INCLUDING FUEL CENTERS

2.5%


5.2%


3.1%


4.8%



EXCLUDING FUEL CENTERS

3.5%


3.2%


3.4%


3.7%































(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.










November 9,


November 3,





2013


2012


Change








Current portion of long-term debt including obligations







   under capital leases and financing obligations


$           1,122


$        2,079


$       (957)

Face-value of long-term debt including obligations under







   capital leases and financing obligations


7,148


6,773


375

Adjustment to reflect fair-value interest rate hedges


-


7


(7)








     Total debt


$           8,270


$        8,859


$       (589)








Less: Temporary cash investments


102


166


(64)








     Net total debt


$           8,168


$        8,693


$       (525)








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 





November 9,


November 3,





2013


2012










Net earnings attributable to The Kroger Co.


$           1,559


$           728



LIFO


1


170



Depreciation


1,687


1,658



Interest expense


448


451



Income tax expense


806


334



UFCW pension plan consolidation charge


-


953



Adjustments for the UFCW consolidated pension plan liability







     and credit card settlement 


-


(115)



53rd week EBITDA adjustment


(99)


-



Other


(3)


(6)










Adjusted EBITDA


$           4,399


$        4,173










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


1.86


2.08












Table 6. Net Earnings Per Diluted Share Excluding the Adjusted Items Below

(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 of 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 2013, these items include the benefit from certain tax items and charges related to the pending merger with Harris Teeter. In 2012, these items include a reduction to the Company's UFCW consolidated pension plan liability and the receipt of a credit card litigation settlement payment.






















THIRD QUARTER


THIRD QUARTER


YEAR-TO-DATE


YEAR-TO-DATE








2013


2012


2013


2012
















NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

$                299


$                317


$              1,097


$             1,035















BENEFIT FROM CERTAIN TAX ITEMS OFFSET BY HARRIS TEETER










MERGER CHARGES (a)

(23)


-


(14)


-
















ADJUSTMENTS FOR THE UFCW CONSOLIDATED PENSION PLAN LIABILITY










AND CREDIT CARD SETTLEMENT (a) (b)

-


(74)


-


(74)
















NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.










EXCLUDING THE ADJUSTED ITEMS ABOVE

$                276


$                243


$              1,083


$                961
















NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. 










PER DILUTED COMMON SHARE


$               0.57


$               0.60


$                2.09


$               1.89
















BENEFIT FROM CERTAIN TAX ITEMS OFFSET BY HARRIS TEETER










MERGER CHARGES (c)

(0.04)


-


(0.03)


-
















ADJUSTMENTS FOR THE UFCW CONSOLIDATED PENSION PLAN LIABILITY










AND CREDIT CARD SETTLEMENT (c)


-


(0.14)


-


(0.13)
















NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER 










DILUTED COMMON SHARE EXCLUDING THE ADJUSTED ITEMS ABOVE

$                0.53


$               0.46


$                2.06


$                1.76
















AVERAGE NUMBER  OF COMMON SHARES USED IN










DILUTED CALCULATION

521


522


521


543















(a)

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















(b)

The pre-tax adjustments for the UFCW consolidated pension plan liability and credit card settlement were $115.















(c)

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 quarter 52 week basis ended November 9, 2013 and November 3, 2012.


















 Rolling Four Quarters Ended 








November 9,


November 3,








2013


2012


Return on Invested Capital







Numerator (a)










Operating profit



$             2,826


$             1,518




53rd week operating profit adjustment


(99)


-




LIFO charge



1


170




Depreciation



1,687


1,658




Rent




623


614




53rd week rent adjustment


(12)


-




UFCW pension plan consolidation charge


-


953




Adjustments for the UFCW consolidated pension plan liability







     and credit card settlement


-


(115)




Other




4


-














Adjusted operating income


$             5,030


$             4,798












Denominator (b)










Average total assets 



$           25,057


$          24,286




Average taxes receivable (c)


-


(26)




Average LIFO reserve (d)


1,140


1,054




Average accumulated depreciation


14,812


13,852




Average trade accounts payable


(4,862)


(4,693)




Average accrued salaries and wages


(998)


(977)




Average other current liabilities (e) 


(2,567)


(2,436)




Rent * 8




4,888


4,912














Average invested capital


$           37,470


$          35,972












Return on Invested Capital



13.42%


13.34%











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.



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