June 15, 2023
(press release)
–
First Quarter Highlights CINCINNATI, June 15, 2023 /PRNewswire/ -- The Kroger Co. (NYSE: KR) today reported its first quarter 2023 results, reaffirmed 2023 guidance for identical sales without fuel and adjusted EPS and updated investors on how Leading with Fresh and Accelerating with Digital continues to position Kroger for long-term sustainable growth. Comments from Chairman and CEO Rodney McMullen "Kroger achieved solid first quarter results guided by the execution of our Leading with Fresh and Accelerating with Digital strategy. As more customers are feeling the effects of inflation and economic uncertainty, we are growing customer households by providing fresher products at affordable prices with personalized rewards. Our amazing associates are bringing this strategy to life every day by delivering a full, fresh and friendly shopping experience with zero compromise on quality, selection and convenience. Looking forward, Kroger's go-to-market strategy positions us well in a wide range of economic environments to continue to deliver for our customers, invest in our associates and achieve sustainable and attractive returns for shareholders." First Quarter Financial Results 1Q23 ($ in millions; except EPS) 1Q22 ($ in millions; except EPS) ID Sales* (Table 4)(1) 3.5 % 4.1 % EPS $1.32 $0.90 Adjusted EPS (Table 6) $1.51 $1.45 Operating Profit $1,470 $1,505 Adjusted FIFO Operating Profit (Table 7) $1,669 $1,601 FIFO Gross Margin Rate*(2) Increased 21 basis points OG&A Rate*(2) Increased 14 basis points * Without fuel and adjustment items, if applicable. (1) Identical sales without fuel would have grown 5.0% in the 1st quarter of 2023 if not for the reduction in pharmacy sales from the previously communicated termination of our agreement with Express Scripts effective December 31, 2022. (2) In the 1st quarter of 2023, the terminated agreement had a positive effect on the FIFO Gross Margin Rate, excluding fuel, and a negative effect on the OG&A Rate, excluding fuel and adjustment items. The overall net effect on operating profit was slightly positive. Total company sales were $45.2 billion in the first quarter, compared to $44.6 billion for the same period last year. Excluding fuel, sales increased 3.5% compared to the same period last year. Gross margin was 22.3% of sales for the first quarter. The FIFO gross margin rate, excluding fuel, increased 21 basis points compared to the same period last year. This increase in rate was achieved while also investing in price to maintain a competitive price position and deliver greater value for our customers. The improvement in the FIFO gross margin rate, excluding fuel, was primarily attributable to Our Brands performance, sourcing benefits, lower supply chain costs and the effect of our terminated agreement with Express Scripts, partially offset by higher shrink and increased promotional price investments. The LIFO charge for the quarter was $99 million, compared to a LIFO charge of $93 million for the same period last year. The Operating, General & Administrative rate increased 14 basis points, excluding fuel and adjustment items, compared to the same period last year. The increase in OG&A rate was driven by planned investments in associates and the effect of our terminated agreement with Express Scripts, partially offset by sales leverage and continued execution of cost savings initiatives. Capital Allocation Strategy Kroger expects to continue to generate strong free cash flow and remains committed to investing in the business to drive long-term sustainable net earnings growth, as well as maintaining its current investment grade debt rating. The Company expects to continue to pay its quarterly dividend and expects this to increase over time, subject to board approval. Kroger has paused its share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons. Kroger's net total debt to adjusted EBITDA ratio is 1.34, compared to 1.68 a year ago (Table 5). The company's net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50. Full-Year 2023 Guidance* Reaffirmed Increased * Without adjusted items, if applicable. Kroger is unable to provide a full reconciliation of the GAAP and non-GAAP measures used in 2023 guidance without unreasonable effort because it is not possible to predict certain of our adjustment items with a reasonable degree of certainty. This information is dependent upon future events and may be outside of our control and its unavailability could have a significant impact on 2023 GAAP financial results. ** The tax rate reflects typical tax adjustments and does not reflect changes to the rate from the completion of income tax audit examinations or changes in tax laws, which cannot be predicted. *** Adjusted free cash flow excludes planned payments related to the restructuring of multi-employer pension plans. Comments from CFO Gary Millerchip "Kroger's first quarter results demonstrate the durability of our business model in a more challenged operating environment. The investments we have made over recent years to deliver for our customers and strengthen our value creation flywheel give us the confidence to reaffirm our full-year identical sales without fuel and adjusted net earnings per diluted share guidance. We delivered strong Adjusted Free Cash Flow in the quarter and as a result of improvements in working capital, we are raising our guidance to a range of $2.5 to $2.7 billion for the fiscal year 2023. Kroger remains committed to delivering attractive and sustainable total shareholder returns for our investors." First Quarter 2023 Highlights Leading with Fresh Accelerating with Digital Associate Experience Live Our Purpose About Kroger Kroger's first quarter 2023 ended on May 20, 2023. Note: Fuel sales have historically had a low 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. 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. As noted above, Kroger is unable to provide a full reconciliation of the GAAP and non-GAAP measures used in its guidance without unreasonable effort because it is not possible to predict certain of our adjustment items with a reasonable degree of certainty. This information is dependent upon future events and may be outside of our control and its unavailability could have a significant impact on GAAP financial results. 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. Such statements are indicated by words or phrases such as "achieve," "committed," "confidence," "continue," "expect," "future," "guidance," "positions," "strategy," and "target". 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" in our annual report on Form 10-K for our last fiscal year and any subsequent filings, as well as the following: Kroger's ability to achieve sales, earnings, incremental FIFO operating profit, and adjusted free cash flow goals may be affected by: the risks relating to or arising from our proposed transaction with Albertsons announced in October 2022, including, among others, our ability to consummate the proposed transaction, including on the terms of the merger agreement, on the anticipated timeline, and/or with the required regulatory approvals; COVID-19 pandemic related factors, risks and challenges; labor negotiations; potential work stoppages; changes in the unemployment rate; pressures in the labor market; changes in government-funded benefit programs; changes in the types and numbers of businesses that compete with 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 current inflationary environment and future potential inflationary and/or deflationary trends and such trends in certain commodities, products and/or operating costs; the geopolitical environment including the war in Ukraine; unstable political situations and social unrest; changes in tariffs; the effect that fuel costs have on consumer spending; volatility of fuel margins; manufacturing commodity costs; supply constraints; diesel fuel costs related to 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 uncertainty of economic growth or recession; stock repurchases; changes in the regulatory environment in which Kroger operates; 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 effect of public health crises or other significant catastrophic events; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of Kroger's future growth plans; the ability to execute our growth strategy and value creation model, including continued cost savings, growth of our alternative profit businesses, and our ability to better serve our customers and to generate customer loyalty and sustainable growth through our strategic pillars of fresh, our brands, personalization, and seamless; and the successful integration of merged companies and new partnerships. Our ability to achieve these goals may also be affected by our ability to manage the factors identified above. Our ability to execute our financial strategy may be affected by our ability to generate cash flow. Kroger's effective tax rate may differ from the expected rate due to changes in tax laws, the status of pending items with various taxing authorities, and the deductibility of certain expenses. Kroger assumes no obligation to update the information contained herein unless required by applicable law. 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 broadcast live at 10 a.m. (ET) on June 15, 2023 at ir.kroger.com. An on-demand replay of the webcast will be available at approximately 1 p.m. (ET) on Thursday, June 15, 2023. 1st Quarter 2023 Tables Include: (1) Identical sales without fuel would have grown 5.0% in the 1st quarter of 2023 if not for the reduction in pharmacy sales from the previously communicated termination of our agreement with Express Scripts effective December 31, 2022. In the 1st quarter of 2023, the terminated agreement had a positive effect on the FIFO Gross Margin Rate, excluding fuel, and a negative effect on the OG&A Rate, excluding fuel and adjustment items. The overall net effect on operating profit was slightly positive. Table 1. THE KROGER CO. CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share amounts) (unaudited) FIRST QUARTER 2023 2022 SALES $ 45,165 100.0 % $ 44,600 100.0 % OPERATING EXPENSES MERCHANDISE COSTS, INCLUDING ADVERTISING, WAREHOUSING AND TRANSPORTATION (a), AND LIFO CHARGE (b) 35,080 77.7 34,952 78.3 OPERATING, GENERAL AND ADMINISTRATIVE (a) 7,393 16.4 6,997 15.7 RENT 265 0.6 256 0.6 DEPRECIATION AND AMORTIZATION 957 2.1 890 2.0 OPERATING PROFIT 1,470 3.3 1,505 3.4 OTHER INCOME (EXPENSE) INTEREST EXPENSE (153) (0.3) (177) (0.4) NON-SERVICE COMPONENT OF COMPANY-SPONSORED PENSION PLAN COSTS 9 - 16 - LOSS ON INVESTMENTS (78) (0.2) (532) (1.2) NET EARNINGS BEFORE INCOME TAX EXPENSE 1,248 2.8 812 1.8 INCOME TAX EXPENSE 286 0.6 146 0.3 NET EARNINGS INCLUDING NONCONTROLLING INTERESTS 962 2.1 666 1.5 NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS - - 2 - NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. $ 962 2.1 % $ 664 1.5 % NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER BASIC COMMON SHARE $ 1.33 $ 0.91 AVERAGE NUMBER OF COMMON SHARES USED IN BASIC CALCULATION 717 722 NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER DILUTED COMMON SHARE $ 1.32 $ 0.90 AVERAGE NUMBER OF COMMON SHARES USED IN DILUTED CALCULATION 724 733 DIVIDENDS DECLARED PER COMMON SHARE $ 0.26 $ 0.21 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 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 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 ("COGS") and operating, general and administrative expenses ("OG&A") exclude depreciation and amortization expense and rent expense which are included in separate expense lines. (b) LIFO charges of $99 and $93 were recorded in the first quarters of 2023 and 2022, respectively. Table 2. THE KROGER CO. CONSOLIDATED BALANCE SHEETS (in millions) (unaudited) May 20, May 21, 2023 2022 ASSETS Current Assets Cash $ 241 $ 245 Temporary cash investments 2,391 1,137 Store deposits in-transit 1,143 1,110 Receivables 1,766 1,887 Inventories 7,030 7,358 Prepaid and other current assets 633 539 Total current assets 13,204 12,276 Property, plant and equipment, net 24,935 24,209 Operating lease assets 6,659 6,760 Intangibles, net 893 928 Goodwill 2,916 3,076 Other assets 1,586 1,842 Total Assets $ 50,193 $ 49,091 LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities Current portion of long-term debt including obligations under finance leases $ 1,319 $ 587 Current portion of operating lease liabilities 664 652 Trade accounts payable 7,353 7,556 Accrued salaries and wages 1,130 1,171 Other current liabilities 6,664 6,272 Total current liabilities 17,130 16,238 Long-term debt including obligations under finance leases 12,114 13,052 Noncurrent operating lease liabilities 6,353 6,460 Deferred income taxes 1,694 1,532 Pension and postretirement benefit obligations 427 455 Other long-term liabilities 1,595 1,961 Total Liabilities 39,313 39,698 Shareowners' equity 10,880 9,393 Total Liabilities and Shareowners' Equity $ 50,193 $ 49,091 Total common shares outstanding at end of period 718 720 Total diluted shares year-to-date 724 733 Table 3. THE KROGER CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (unaudited) YEAR-TO-DATE 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings including noncontrolling interests $ 962 $ 666 Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization 957 890 Operating lease asset amortization 188 186 LIFO charge 99 93 Stock-based employee compensation 49 57 Company-sponsored pension plans benefit (2) (12) Deferred income taxes (5) (30) Gain on the sale of assets (41) - Loss on investments 78 532 Other 73 54 Changes in operating assets and liabilities: Store deposits in-transit (16) (28) Receivables 274 (2) Inventories 419 (676) Prepaid and other current assets 82 117 Trade accounts payable 233 439 Accrued expenses (449) (748) Income taxes receivable and payable 198 (70) Operating lease liabilities (215) (214) Other (24) (152) Net cash provided by operating activities 2,860 1,102 CASH FLOWS FROM INVESTING ACTIVITIES: Payments for property and equipment, including payments for lease buyouts (1,028) (745) Proceeds from sale of assets 86 14 Other (5) 8 Net cash used by investing activities (947) (723) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt including obligations under finance leases (62) (45) Dividends paid (188) (154) Proceeds from issuance of capital stock 23 113 Treasury stock purchases (29) (665) Other (40) (67) Net cash used by financing activities (296) (818) NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 1,617 (439) CASH AND TEMPORARY CASH INVESTMENTS: BEGINNING OF YEAR 1,015 1,821 END OF PERIOD $ 2,632 $ 1,382 Reconciliation of capital investments: Payments for property and equipment, including payments for lease buyouts $ (1,028) $ (745) Payments for lease buyouts - 3 Changes in construction-in-progress payables (71) (229) Total capital investments, excluding lease buyouts $ (1,099) $ (971) Disclosure of cash flow information: Cash paid during the year for interest $ 164 $ 198 Cash paid during the year for income taxes $ 92 $ 244 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 sales is an IDENTICAL SALES (a) FIRST QUARTER 2023 2022 EXCLUDING FUEL $ 39,574 $ 38,235 EXCLUDING FUEL (b) 3.5 % 4.1 % (a) Kroger defines identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket (b) Identical sales without fuel would have grown 5.0% in the 1st quarter of 2023 if not for the reduction in pharmacy sales from the previously 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 . The following table provides a reconciliation of net total debt May 20, May 21, 2023 2022 Change Current portion of long-term debt including obligations under finance leases $ 1,319 $ 587 $ 732 Long-term debt including obligations under finance leases 12,114 13,052 (938) Total debt 13,433 13,639 (206) Less: Temporary cash investments 2,391 1,137 1,254 Net total debt $ 11,042 $ 12,502 $ (1,460) 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 ENDED May 20, May 21, 2023 2022 Net earnings attributable to The Kroger Co. $ 2,542 $ 2,179 LIFO charge 632 253 Depreciation and amortization 3,032 2,853 Interest expense 511 583 Income tax expense 793 495 Adjustment for pension plan withdrawal liabilities 25 - Adjustment for company-sponsored pension plan settlement charges - 87 Adjustment for loss on investments 274 874 Adjustment for Home Chef contingent consideration 13 30 Adjustment for transformation costs (a) - 92 Adjustment for merger related costs (b) 85 - Adjustment for legal settlement costs 147 - Adjustment for goodwill and fixed asset impairment charges related to Vitacost.com 164 - Other (7) (8) Adjusted EBITDA $ 8,211 $ 7,438 Net total debt to adjusted EBITDA ratio 1.34 1.68 (a) Transformation costs primarily include costs related to third party professional consulting fees associated with business transformation and cost saving initiatives. (b) Merger related costs primarily include third party professional fees and credit facility fees associated with the proposed merger with Albertsons Companies, Inc. 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 The following table summarizes items that affected the Company's financial results during the periods presented. FIRST QUARTER 2023 2022 Net earnings attributable to The Kroger Co. $ 962 $ 664 Adjustment for loss on investments (a)(b) 59 404 Adjustment for Home Chef contingent consideration (a)(c) - 6 Adjustment for merger related costs (a)(d) 34 - Adjustment for legal settlement costs (a)(e) 49 - 2023 and 2022 Adjustment Items 142 410 Net earnings attributable to The Kroger Co. excluding the adjustment items above $ 1,104 $ 1,074 Net earnings attributable to The Kroger Co. per diluted common share $ 1.32 $ 0.90 Adjustment for loss on investments (f) 0.08 0.54 Adjustment for Home Chef contingent consideration (f) - 0.01 Adjustment for merger related costs (f) 0.05 - Adjustment for legal settlement costs (f) 0.06 - 2023 and 2022 Adjustment Items 0.19 0.55 Net earnings attributable to The Kroger Co. per diluted common share excluding the adjustment items above $ 1.51 $ 1.45 Average number of common shares used in diluted calculation 724 733 Table 6. Net Earnings Per Diluted Share Excluding the Adjustment Items (continued) (in millions, except per share amounts) (unaudited) (a) The amounts presented represent the after-tax effect of each adjustment. (b) The pre-tax adjustments to other income (expense) for loss on investments were $78 and $532 in the first quarters of 2023 and 2022, respectively. (c) The pre-tax adjustment to OG&A expenses for Home Chef contingent consideration was $7. (d) The pre-tax adjustment to OG&A expenses for merger related costs was $40. (e) The pre-tax adjustment to OG&A expenses for legal settlement costs was $62. (f) The amounts presented represent the net earnings (loss) per diluted common share effect of each adjustment. Note: 2023 First Quarter Adjustment Items include adjustments for the loss on investments, merger related costs and legal settlement costs. 2022 First Quarter Adjustment Items include adjustments for the loss on investments and Home Chef contingent consideration adjustment. Table 7. Operating Profit Excluding the Adjustment Items (in millions) (unaudited) The purpose of this table is to better illustrate comparable operating results from our ongoing business, after removing the effects on operating profit for certain items The following table summarizes items that affected the Company's financial results during the periods presented. FIRST QUARTER 2023 2022 Operating profit $ 1,470 $ 1,505 LIFO charge 99 93 FIFO Operating profit 1,569 1,598 Adjustment for Home Chef contingent consideration - 7 Adjustment for merger related costs (a) 40 - Adjustment for legal settlement costs 62 - Other (2) (4) 2023 and 2022 Adjustment items 100 3 Adjusted FIFO operating profit excluding the adjustment items above $ 1,669 $ 1,601 (a) Merger related costs primarily include third party professional fees and credit facility fees associated with the proposed merger with Albertsons Companies, Inc. SOURCE The Kroger Co.
At The Kroger Co. (NYSE: KR), we are dedicated to our Purpose: to Feed the Human Spirit™. We are, across our family of companies nearly half a million associates who serve over eleven million customers daily through a seamless digital shopping experience and retail food stores under a variety of banner names, serving America through food inspiration and uplift, and creating #ZeroHungerZeroWaste communities by 2025. To learn more about us, visit our newsroom and investor relations site.
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.
locations, Kroger Specialty Pharmacy businesses, jewelry and ship-to-home solutions. Kroger defines a supermarket as identical when
it has been in operation without expansion or relocation for five full quarters. Kroger defines Kroger Specialty Pharmacy businesses as
identical when physical locations have been in operation continuously for five full quarters and discontinued patient therapies are excluded
from the identical sales calculation starting in the quarter of transfer or termination. We define Kroger Delivery identical sales powered by
Ocado based on geography. We include Kroger Delivery sales powered by Ocado as identical if the delivery occurs in an existing Kroger
Supermarket geography. If the Kroger Delivery sales powered by Ocado occur in a new geography, these sales are included as identical
when deliveries have occurred to the new geography for five full quarters.
communicated termination of our agreement with Express Scripts effective December 31, 2022.
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.
rolling four quarter basis.
share for certain items described below. Adjusted net earnings and adjusted net earnings per diluted share are useful metrics to investors and analysts because they
present more accurately year-over-year comparisons for net earnings and net earnings per diluted share because adjusted items are not the result of normal operations.
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.
described below. Adjusted FIFO operating profit is a useful metric to investors and analysts because it presents more accurately year-over year comparisons for
operating profit because adjusted items are not the result of normal operations. Items identified in this table should not be considered alternatives to operating profit
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.
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