Kroger Reports Fourth Quarter and Full Year 2016 Results

Table 1.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

FOURTH QUARTER

YEAR-TO-DATE

2016

2015

2016

2015

SALES

$     27,611

100.0%

$     26,165

100.0%

$ 115,337

100.0%

$   109,830

100.0%

MERCHANDISE COSTS, INCLUDING ADVERTISING,

WAREHOUSING AND TRANSPORTATION (a),

AND LIFO CHARGE (b)

21,483

77.8

20,193

77.2

89,502

77.6

85,496

77.8

OPERATING, GENERAL AND ADMINISTRATIVE (a)

4,483

16.2

4,355

16.6

19,178

16.6

17,946

16.3

RENT

215

0.8

181

0.7

881

0.8

723

0.7

DEPRECIATION AND AMORTIZATION

572

2.1

508

1.9

2,340

2.0

2,089

1.9

OPERATING PROFIT 

858

3.1

928

3.6

3,436

3.0

3,576

3.3

INTEREST EXPENSE

126

0.5

113

0.4

522

0.5

482

0.4

NET EARNINGS BEFORE INCOME TAX EXPENSE

732

2.7

815

3.1

2,914

2.5

3,094

2.8

INCOME TAX EXPENSE 

230

0.8

250

1.0

957

0.8

1,045

1.0

NET EARNINGS INCLUDING NONCONTROLLING INTERESTS

502

1.8

565

2.2

1,957

1.7

2,049

1.9

NET (LOSS) EARNINGS ATTRIBUTABLE TO

NONCONTROLLING INTERESTS

(4)

-

6

-

(18)

-

10

-

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. 

$           506

1.8%

$           559

2.1%

$     1,975

1.7%

$       2,039

1.9%

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

PER BASIC COMMON SHARE

$          0.54

$          0.57

$       2.08

$         2.09

AVERAGE NUMBER  OF COMMON SHARES USED IN

BASIC CALCULATION

929

966

942

966

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

PER DILUTED COMMON SHARE

$          0.53

$          0.57

$       2.05

$         2.06

AVERAGE NUMBER  OF COMMON SHARES USED IN

DILUTED CALCULATION

943

980

958

980

DIVIDENDS DECLARED PER COMMON SHARE

$        0.120

$       0.105

$     0.465

$       0.408

Note:

Certain percentages may not sum due to rounding.

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)

A LIFO charge of $0.2 and a credit of $30 were recorded in the fourth quarter of 2016 and 2015, respectively.  For the year to date period, LIFO charges of $19 and $28 were recorded for 2016 and 2015, respectively.

Table 2.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions)

(unaudited)

January 28,

January 30,

2017

2016

ASSETS

Current Assets

Cash

$                310

$                277

Temporary cash investments

12

-

Store deposits in-transit

910

923

Receivables

1,649

1,734

Inventories

6,561

6,168

Prepaid and other current assets

898

790

Total current assets

10,340

9,892

Property, plant and equipment, net

21,016

19,619

Intangibles, net

1,153

1,053

Goodwill

3,031

2,724

Other assets

965

609

Total Assets

$          36,505

$          33,897

LIABILITIES AND SHAREOWNERS' EQUITY

Current Liabilities

Current portion of long-term debt including obligations

under capital leases and financing obligations

$            2,252

$            2,370

Trade accounts payable

5,818

5,728

Accrued salaries and wages

1,234

1,426

Deferred income taxes

251

221

Other current liabilities

3,305

3,226

Total current liabilities

12,860

12,971

Long-term debt including obligations under capital leases

and financing obligations

11,825

9,709

Deferred income taxes

1,927

1,752

Pension and postretirement benefit obligations

1,524

1,380

Other long-term liabilities

1,659

1,287

Total Liabilities

29,795

27,099

Shareowners' equity

6,710

6,798

Total Liabilities and Shareowners' Equity

$          36,505

$          33,897

Total common shares outstanding at end of period

924

967

Total diluted shares year-to-date

958

980

Table 3.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

YEAR-TO-DATE

2016

2015

CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings including noncontrolling interests

$            1,957

$            2,049

Adjustments to reconcile net earnings including noncontrolling

   interests to net cash provided by operating activities:

Depreciation and amortization

2,340

2,089

LIFO charge

19

28

Stock-based employee compensation

141

165

Expense for Company-sponsored pension plans

94

103

Deferred income taxes

201

317

Other

(2)

100

Changes in operating assets and liabilities, net

   of effects from mergers of businesses:

      Store deposits in-transit

13

95

      Receivables

(110)

(59)

      Inventories

(382)

(184)

      Prepaid and other current assets

(172)

(28)

      Trade accounts payable

16

440

      Accrued expenses

(118)

275

      Income taxes receivable and payable

261

(359)

      Other

14

(114)

Net cash provided by operating activities

4,272

4,917

CASH FLOWS FROM INVESTING ACTIVITIES:

Payments for property and equipment, including payments for lease buyouts

(3,699)

(3,349)

Proceeds from sale of assets

132

45

Payments for mergers

(401)

(168)

Other

93

(98)

Net cash used by investing activities

(3,875)

(3,570)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt

2,781

1,181

Payments on long-term debt

(1,355)

(1,245)

Net proceeds (borrowings) on commercial paper

435

(285)

Dividends paid

(429)

(385)

Excess tax benefits on stock-based awards

-

97

Proceeds from issuance of capital stock

68

120

Treasury stock purchases

(1,766)

(703)

Investment in the remaining equity of a noncontrolling interest

-

(26)

Other

(86)

(92)

Net cash used by financing activities

(352)

(1,338)

NET INCREASE IN CASH AND TEMPORARY

CASH INVESTMENTS

45

9

CASH AND TEMPORARY CASH INVESTMENTS:

BEGINNING OF YEAR

277

268

END OF YEAR

$                322

$                277

Reconciliation of capital investments:

Payments for property and equipment, including payments for lease buyouts

$           (3,699)

$           (3,349)

Payments for lease buyouts

5

35

Changes in construction-in-progress payables

72

(35)

Total capital investments, excluding lease buyouts

$           (3,622)

$           (3,349)

Disclosure of cash flow information:

Cash paid during the year for interest

$                505

$                474

Cash paid during the year for income taxes

$                557

$             1,001

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 supermarket sales differently than Kroger does, limiting the comparability of the measure.  These results include Roundy's sales for stores that are identical as if they were part of Kroger in the prior year.

IDENTICAL SUPERMARKET SALES (a)

FOURTH QUARTER

YEAR-TO-DATE

2016

2015

2016

2015

INCLUDING FUEL CENTERS

$         24,453

$         24,318

$       103,180

$       103,106

EXCLUDING FUEL CENTERS

$         21,981

$         22,135

$         92,451

$         91,568

INCLUDING FUEL CENTERS

0.6%

1.7%

0.1%

1.1%

EXCLUDING FUEL CENTERS

-0.7%

3.7%

1.0%

5.0%

(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.

January 28,

January 30,

2017

2016

Change

Current portion of long-term debt including obligations

   under capital leases and financing obligations

$           2,252

$        2,370

$       (118)

Long-term debt including obligations under capital leases

11,825

9,709

2,116

     Total debt

14,077

12,079

1,998

Less: Temporary cash investments

12

-

12

Less: Prepaid benefit payments

385

275

110

     Net total debt

$         13,680

$       11,804

$     1,876

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.

 YEAR-TO-DATE 

January 28,

January 30,

2017

2016

Net earnings attributable to The Kroger Co.

$           1,975

$        2,039

LIFO charge

19

28

Depreciation and amortization

2,340

2,089

Interest expense

522

482

Income tax expense

957

1,045

Adjustments for pension plan agreements

111

-

Other

(12)

(5)

Adjusted EBITDA

$           5,912

$        5,678

Net total debt to adjusted EBITDA ratio

2.31

2.08

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 2016, these items included charges related to the restructuring of certain pension obligations.  In 2015, The Kroger Co. did not have any adjustment items.

FOURTH QUARTER

YEAR-TO-DATE

2016

2015

2016

2015

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

$                  506

$                     559

$                   1,975

$                  2,039

ADJUSTMENTS FOR PENSION PLAN AGREEMENTS (a)(b)

-

-

71

-

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

EXCLUDING THE ADJUSTMENT ITEMS ABOVE

$                   506

$                     559

$                  2,046

$                  2,039

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. 

PER DILUTED COMMON SHARE

$                 0.53

$                    0.57

$                    2.05

$                   2.06

ADJUSTMENTS FOR PENSION PLAN AGREEMENTS (c) 

-

-

0.07

-

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER 

DILUTED COMMON SHARE EXCLUDING THE ADJUSTMENT ITEMS ABOVE

$                  0.53

$                    0.57

$                    2.12

$                    2.06

AVERAGE NUMBER  OF COMMON SHARES USED IN

DILUTED CALCULATION

943

980

958

980

(a)

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

(b)

The pre-tax adjustments for the pension plan agreements were $111.

(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 for 2016 and 2015.  The January 30, 2016 calculation of return on invested capital excludes the financial position and results for the Roundy's transaction.

 YEAR-TO-DATE 

January 28,

January 30,

2017

2016