Kroger Reports Third Quarter 2022 Results and Raises Full-Year Guidance

Third Quarter Highlights

• Identical Sales without fuel increased 6.9%
• Operating Profit of $841 million; Adjusted FIFO Operating Profit of $1,094 million
• EPS of $0.55; Adjusted EPS of $0.88
• Company is executing its go-to-market strategy to deliver value for customers
• Our Brands identical sales increased 10.4%
• Digital sales grew 10%
• Fresh Produce Initiative accelerated with a total of 1,252 stores certified, driving higher identical sales

CINCINNATI, Dec. 1, 2022 /PRNewswire/ -- The Kroger Co. KR today reported its third quarter 2022 results and will update 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 strong results in the third quarter as we continue to execute our Leading with Fresh and Accelerating with Digital strategy. Our associates are doing an outstanding job delivering a full, fresh and friendly experience across our seamless store and digital ecosystem.

Kroger's value proposition, which includes providing great quality, fresh products at affordable prices, data-driven promotions, trusted Our Brands products and an industry-leading fuel rewards program, is resonating with shoppers and driving increased customer loyalty.   

This quarter demonstrates the strength of our approach to growing our business. By delivering for our customers, investing in our associates and supporting our communities, we are creating attractive and sustainable total returns for our shareholders."

Third Quarter Financial Results

Total company sales were $34.2 billion in the third quarter, compared to $31.9 billion for the same period last year. Excluding fuel, sales increased 6.4% compared to the same period last year.

Gross margin was 21.4% of sales for the third quarter. The FIFO gross margin rate, excluding fuel, decreased 5 basis points compared to the same period last year. This result reflected Kroger's ability to effectively manage higher product cost inflation and shrink through strong sourcing practices, while also helping customers manage their budgets and keeping prices competitive.

The LIFO charge for the quarter was $152 million, compared to a LIFO charge of $93 million for the same period last year, driven by higher product cost inflation primarily in grocery.

The Operating, General & Administrative rate decreased 3 basis points, excluding fuel and adjustment items, compared to the same period last year. The decrease in OG&A rate was driven by sales leverage and the continued execution of cost savings initiatives partially offset by investments in associates.

Rent and depreciation as a rate to sales, excluding fuel, decreased 9 basis points due to sales leverage.

Capital Allocation Strategy

Kroger continues 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 will continue to pay its quarterly dividend and expects this to increase over time, subject to board approval. Kroger has already 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 1.61, 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.

2022 Guidance

Comments from CFO Gary Millerchip

"Kroger's focus on delivering value for customers and our disciplined approach to managing costs in an inflationary environment led to another quarter of strong results. Our consistent execution of our go-to-market strategy continues to build momentum in our business results and gives us the confidence to raise our full-year guidance. We now expect identical sales without fuel to be in the range of 5.1% to 5.3% and adjusted net earnings per diluted share to be in the range of $4.05 to $4.15. 

The resiliency of Kroger's value creation model positions us well to navigate different operating environments, and as we look forward, we remain confident in our ability to deliver attractive and sustainable total shareholder returns for investors."

Full-Year 2022 Guidance - Updated

Third Quarter 2022 Highlights

Leading with Fresh  

• Launched Our Brands Innovation Summit, a program designed to uncover new and exciting private brand items that highlight market trends
• Introduced 147 new Our Brands items, including products to enhance the holiday season
• Expanded Alternative Farming offerings to 792 total stores connecting more communities to locally sourced fresh and sustainable products
• Announced the top 2022 fall food trends, predicting customer behavior and popular items for the upcoming season
• Celebrated four awards earned by Murray's Cheese varieties at the World Cheese Awards

Accelerating with Digital

• Increased delivery sales by 34% over last year driven by Kroger Boost and Customer Fulfillment Centers
• Launched Kroger floral and sushi delivery in collaboration with DoorDash in more than 1,000 locations 
• Expanded Kroger Precision Marketing's programmatic advertising marketplace to include Connected TV and video capabilities
• Introduced the Rachael Ray Home Chef meal kit, which guides customers through an easy-to-follow recipe created by the chef

Associate Experience

• Honored by the U.S. Hispanic Chamber of Commerce with Employee Resource Group of the Year Award for Kroger's Hispanic/Latino Associate Resource Group, KEPASA
• Celebrated the 28 company leaders named by Progressive Grocer as 2022 GenNext Honorees, an award recognizing leaders under the age of 40 who are driving change and innovation within the organizations and communities they serve
• Launched the Civic Engagement Campaign connecting associates to resources about the elections, voter registration and ways to vote in their states
• Held a virtual veteran and military family career expo event as part of Kroger's commitment to hiring veterans, military service members and their families

Live Our Purpose

• Named as the 2022 Retailer of the Year by Supermarket News for Kroger's vision and innovation in executing its Leading with Fresh and Accelerating with Digital strategy
• Awarded scholarships to 120 children of Kroger associates named as Kroger Scholars; with a total of more than $4.5 million awarded since 2008
• Hosted the Kroger Wellness Festival, a two-day event that featured an all-star lineup of celebrities, professional athletes and wellness experts in support of a holistic approach to healthy living
• Participated in the White House Conference on Hunger, Nutrition and Health and made several commitments to end hunger and create healthier communities
• Awarded scholarships from the Kroger Foundation's Racial Equity Fund as part of the second annual Zero Hunger I Zero Waste Innovation Challenge in collaboration with the Thurgood Marshall College Fund

About Kroger

At The Kroger Co. 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.

Kroger's third quarter 2022 ended on November 5, 2022.

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," "target," and "will." 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, including among others, the length of time that the pandemic continues, future variants, mutations or related strains of the virus and the effectiveness of vaccines against variants, continued efficacy of vaccines over time and availability of vaccine boosters, the potential for disruptions in workforce availability and customer shopping patterns due to spikes in infection and illness rates, and interruptions in domestic and global supply chains or capacity constraints; whether and when the global pandemic will become endemic, the pace of recovery when the pandemic subsides or becomes endemic, which may vary materially over time and among the different regions we serve; 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 9 a.m. (ET) on December 1, 2022 at ir.kroger.com. An on-demand replay of the webcast will be available at approximately 1 p.m. (ET) on Thursday, December 1, 2022.

3^rd Quarter 2022 Tables Include:

1. Consolidated Statements of Operations
2. Consolidated Balance Sheets
3. Consolidated Statements of Cash Flows
4. Supplemental Sales Information
5. Reconciliation of Net Total Debt and Net Earnings Attributable to The Kroger Co. to Adjusted EBITDA
6. Net Earnings Per Diluted Share Excluding the Adjustment Items
7. Operating Profit Excluding the Adjustment Items