Kroger Reports Second Quarter 2019 Results

2Q19 ($ in millions; except EPS)

2Q18 (in millions; except EPS)

ID Sales (Table 4)

2.2%

1.6%

EPS

$0.37

$0.62

Adjusted EPS (Table 6)

$0.44

$0.41

Operating Profit

$559

$549

Adjusted FIFO Operating
Profit (Table 7)

$626

$566

FIFO Gross Margin Rate*

Decreased 29 basis points

OG&A Rate*

Decreased 14 basis points

*without fuel and adjustment items, if applicable

IDS (%)

EPS ($)

Operating Profit
($B)

Tax Rate

Range***

Cap Ex

($B)

GAAP*

N/A

$2.30 -
$2.40

$2.8 - $2.9

22.9% -
23.4%

$3.0 - $3.2

Adjusted^**

2.0% - 2.25%

$2.15 -
$2.25

$2.9 - $3.0

22.3% -
22.8%

N/A

* GAAP guidance does not reflect any future changes in the market value of Ocado securities, which cannot be predicted.

** Without adjusted items, if applicable; operating profit represents FIFO Operating Profit

*** These rates reflect typical tax adjustments and do not reflect changes to the rate from the completion of income tax audit examinations, which cannot be predicted.

Table 1.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

SECOND QUARTER

YEAR-TO-DATE

2019

2018

2019

2018

SALES

$     28,168

100.0%

$     28,014

100.0%

$   65,419

100.0%

$     65,735

100.0%

OPERATING EXPENSES

MERCHANDISE COSTS, INCLUDING ADVERTISING,

WAREHOUSING AND TRANSPORTATION (a),

AND LIFO CHARGE (b)

22,007

78.1

21,976

78.5

50,990

77.9

51,395

78.2

OPERATING, GENERAL AND ADMINISTRATIVE (a)

4,811

17.1

4,711

16.8

11,125

17.0

10,968

16.7

RENT

200

0.7

204

0.7

474

0.7

480

0.7

DEPRECIATION AND AMORTIZATION

591

2.1

574

2.1

1,370

2.1

1,315

2.0

OPERATING PROFIT 

559

2.0

549

2.0

1,460

2.2

1,577

2.4

OTHER INCOME (EXPENSE)

INTEREST EXPENSE

(130)

(0.5)

(144)

(0.5)

(327)

(0.5)

(336)

(0.5)

NON-SERVICE COMPONENT OF COMPANY-SPONSORED

PENSION PLAN COSTS

(4)

(0.0)

(4)

(0.0)

(1)

-

(13)

(0.0)

MARK TO MARKET (LOSS) GAIN ON OCADO SECURITIES

(45)

(0.2)

216

0.8

61

0.1

252

0.4

GAIN ON SALE OF BUSINESSES

-

-

11

0.0

176

0.3

1,782

2.7

NET EARNINGS BEFORE INCOME TAX EXPENSE

380

1.4

628

2.2

1,369

2.1

3,262

5.0

INCOME TAX EXPENSE 

93

0.3

127

0.5

319

0.5

743

1.1

NET EARNINGS INCLUDING

NONCONTROLLING INTERESTS

287

1.0

501

1.8

1,050

1.6

2,519

3.8

NET LOSS ATTRIBUTABLE TO

NONCONTROLLING INTERESTS

(10)

-

(7)

-

(19)

-

(15)

-

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. 

$           297

1.1%

$           508

1.8%

$     1,069

1.6%

$       2,534

3.9%

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

PER BASIC COMMON SHARE

$          0.37

$          0.63

$       1.32

$         3.05

AVERAGE NUMBER  OF COMMON SHARES USED IN

BASIC CALCULATION

800

797

799

821

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

PER DILUTED COMMON SHARE

$          0.37

$          0.62

$       1.31

$         3.03

AVERAGE NUMBER OF COMMON SHARES USED IN

DILUTED CALCULATION

805

805

805

829

DIVIDENDS DECLARED PER COMMON SHARE

$        0.160

$       0.140

$     0.300

$       0.265

Note:

Certain percentages may not sum due to rounding.

Note:

The Company defines First-In First-Out (FIFO) gross profit as sales minus merchandise costs, including advertising, warehousing and transportation, but excluding the Last-In First-Out (LIFO) charge.

The Company defines FIFO gross margin, as described in the earnings release, as FIFO gross profit divided by sales.

The Company defines FIFO operating profit as operating profit excluding the LIFO charge.

The Company defines FIFO operating margin, as described in the earnings release, as FIFO operating profit divided by sales.

The above FIFO financial metrics are important measures used by management to evaluate operational effectiveness.  Management believes these FIFO financial metrics are useful to investors and analysts because they measure our day-to-day operational effectiveness.

(a)

Merchandise costs ("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 $30 and $12 were recorded in the second quarter of 2019 and 2018, respectively.  For the year to date period, LIFO charges of $46 and $27 were recorded for 2019 and 2018, respectively.

Note:

Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to OG&A, are now classified as a component of sales, except for certain amounts in Media, which are netted against COGS. These prior-year amounts have been reclassified to conform to current-year presentation, which is consistent with our Restock Kroger initiative and view of the products and services as part of our core business strategy.  This is also more consistent with industry practice.

Table 2.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions)

(unaudited)

August 17, 

August 18,

2019

2018

ASSETS

Current Assets

Cash

$                354

$                316

Temporary cash investments

275

45

Store deposits in-transit

983

1,017

Receivables

1,567

1,488

Inventories

6,526

6,241

Assets held for sale

-

179

Prepaid and other current assets

435

460

Total current assets

10,140

9,746

Property, plant and equipment, net

21,820

21,316

Operating lease assets

6,861

-

Intangibles, net

1,103

1,218

Goodwill

3,095

3,087

Other assets

1,443

1,590

Total Assets

$          44,462

$          36,957

LIABILITIES AND SHAREOWNERS' EQUITY

Current Liabilities

Current portion of long-term debt including obligations

under finance leases

$            1,353

$            2,411

Current portion of operating lease liabilities

675

-

Trade accounts payable

6,268

5,933

Accrued salaries and wages

1,099

1,108

Liabilities held for sale

-

60

Other current liabilities

3,982

3,837

Total current liabilities

13,377

13,349

Long-term debt including obligations under finance leases

12,130

12,121

Noncurrent operating lease liabilities

6,463

-

Deferred income taxes

1,502

1,667

Pension and postretirement benefit obligations

482

787

Other long-term liabilities

1,855

1,695

Total Liabilities

35,809

29,619

Shareowners' equity

8,653

7,338

Total Liabilities and Shareowners' Equity

$          44,462

$          36,957

Total common shares outstanding at end of period

801

797

Total diluted shares year-to-date

805

829

Note:

The Company adopted ASU 2016-02, "Leases," and related amendments as of February 3, 2019 under the modified retrospective approach and has not revised comparative periods.

Table 3.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

YEAR-TO-DATE

2019

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings including noncontrolling interests

$            1,050

$            2,519

Adjustments to reconcile net earnings including noncontrolling

interests to net cash provided by operating activities:

Depreciation and amortization

1,370

1,315

Operating lease asset amortization

346

-

LIFO charge

46

27

Stock-based employee compensation

89

81

Expense for Company-sponsored pension plans

22

38

Deferred income taxes

(49)

92

Gain on sale of businesses

(176)

(1,782)

Gain on the sale of assets

(157)

-

Mark to market gain on Ocado securities

(61)

(252)

Other

(23)

32

Changes in operating assets and liabilities, net

of effects from mergers and disposals of businesses:

Store deposits in-transit

198

144

Receivables

44

(73)

Inventories

274

252

Prepaid and other current assets

68

365

Trade accounts payable

209

94

Accrued expenses

131

200

Income taxes receivable and payable

(34)

397

Operating lease liabilities

(313)

-

Proceeds from contract associated with the sale of business

295

-

Other

(52)

(189)

Net cash provided by operating activities

3,277

3,260

CASH FLOWS FROM INVESTING ACTIVITIES:

Payments for property and equipment

(1,581)

(1,487)

Proceeds from sale of assets

247

67

Payments for acquisitions, net of cash acquired

-

(197)

Purchases of stores

-

(44)

Net proceeds from sale of businesses

327

2,169

Purchases of Ocado securities

-

(392)

Other

(32)

12

Net cash (used) provided by investing activities

(1,039)

128

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt

53

1,016

Payments on long-term debt including obligations under finance leases

(1,025)

(249)

Net payments on commercial paper

(800)

(1,946)

Dividends paid

(226)

(211)

Proceeds from issuance of capital stock

18

40

Treasury stock purchases

(23)

(1,979)

Other

(35)

(45)

Net cash used by financing activities

(2,038)

(3,374)

NET INCREASE IN CASH AND TEMPORARY

CASH INVESTMENTS

200

14

CASH AND TEMPORARY CASH INVESTMENTS:

BEGINNING OF YEAR

429

347

END OF PERIOD

$                629

$                361

Reconciliation of capital investments:

Payments for property and equipment

$           (1,581)

$           (1,487)

Changes in construction-in-progress payables

29

(43)

Total capital investments

$           (1,552)

$           (1,530)

Disclosure of cash flow information:

Cash paid during the year for interest

$                306

$                312

Cash paid during the year for income taxes

$                454

$                263

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 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 SALES (a)

SECOND QUARTER

YEAR-TO-DATE

2019

2018

2019

2018

EXCLUDING FUEL

$         24,299

$         23,768

$         56,432

$         55,439

EXCLUDING FUEL

2.2%

1.6%

1.8%

1.8%

(a)

Kroger defines identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket 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.  Additionally, sales from all acquired businesses are treated as identical as if they were part of the Company in the prior year.  Products and services related primarily to Kroger Personal Finance, which were historically accounted for as an offset to OG&A, are now classified as a component of sales. These prior-year amounts have been reclassified to conform to current-year presentation and included in identical sales in 2019 and 2018, which is consistent with our Restock Kroger initiative and view of the products and services as part of our core business strategy.  This is also more consistent with industry practice.  This change increased identical sales by 2 and 5 basis points in the second quarter of 2019 and 2018, respectively.  For the year-to-date periods, this change increased identical sales by 2 and 6 basis points in 2019 and 2018, respectively.