Edgar Filing: KROGER CO

kr_Current_Folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 10, 2018

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-303

(Exact name of registrant as specified in its charter)


Ohio		31-0345740
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1014 Vine Street, Cincinnati, OH 45202

(Address of principal executive offices)

(Zip Code)

(513) 762-4000

(Registrant’s telephone number, including area code)

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer (do not check if a smaller reporting company)	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.

There were 797,743,035 shares of Common Stock ($1 par value) outstanding as of December 12, 2018.

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Third Quarter Ended				Three Quarters Ended
	November 10,		November 4,		November 10,		November 4,
(In millions, except per share amounts)	2018		2017		2018		2017
Sales	$	27,672	$	27,749	$	93,071	$	91,631

Operating expenses
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		21,699		21,532		72,991		71,422
Operating, general and administrative		4,556		4,701		15,291		15,585
Rent		200		196		680		691
Depreciation and amortization		570		573		1,884		1,871

Operating profit		647		747		2,225		2,062

Other income (expense)
Interest expense		(142)		(136)		(479)		(453)
Non-service component of company-sponsored pension plan costs		(6)		(7)		(19)		(21)
Mark to market gain (loss) on Ocado securities		(100)		—		152		—
Gain on sale of business		—		—		1,782		—

Net earnings before income tax expense		399		604		3,661		1,588

Income tax expense		91		215		834		552

Net earnings including noncontrolling interests		308		389		2,827		1,036
Net loss attributable to noncontrolling interests		(9)		(8)		(24)		(17)

Net earnings attributable to The Kroger Co.	$	317	$	397	$	2,851	$	1,053

Net earnings attributable to The Kroger Co. per basic common share	$	0.39	$	0.44	$	3.46	$	1.16

Average number of common shares used in basic calculation		797		887		814		901

Net earnings attributable to The Kroger Co. per diluted common share	$	0.39	$	0.44	$	3.43	$	1.15

Average number of common shares used in diluted calculation		807		893		822		910

The accompanying notes are an integral part of the Consolidated Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Third Quarter Ended				Three Quarters Ended
	November 10,		November 4,		November 10,		November 4,
(In millions)	2018		2017		2018		2017
Net earnings including noncontrolling interests	$	308	$	389	$	2,827	$	1,036

Other comprehensive income (loss)
Realized gains on available for sale securities, net of income tax(1)		—		—		(4)		—
Change in pension and other postretirement defined benefit plans, net of income tax(2)		10		10		33		33
Unrealized gains and losses on cash flow hedging activities, net of income tax(3)		37		9		37		(26)
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4)		1		1		3		2

Total other comprehensive income		48		20		69		9

Comprehensive income		356		409		2,896		1,045
Comprehensive loss attributable to noncontrolling interests		(9)		(8)		(24)		(17)
Comprehensive income attributable to The Kroger Co.	$	365	$	417	$	2,920	$	1,062

(1)

Amount is net of tax of $(1) for the first three quarters of 2018.

(2)

Amount is net of tax of $3 for the third quarter of 2018 and $5 for the third quarter of 2017. Amount is net of tax of $10 for the first three quarters of 2018 and $19 for the first three quarters of 2017.

(3)

Amount is net of tax of $11 for the third quarter of 2018 and $5 for the third quarter of 2017. Amount is net of tax of $10 for the first three quarters of 2018 and $(15) for the first three quarters of 2017.

(4)

Amount is net of tax of $1 for the third quarter of 2018 and 2017. Amount is net of tax of $3 for the first three quarters of 2018 and $2 for the first three quarters of 2017.

The accompanying notes are an integral part of the Consolidated Financial Statements.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(unaudited)


	November 10,		February 3,
(In millions, except par amounts)	2018		2018
ASSETS
Current assets
Cash and temporary cash investments	$	429	$	347
Store deposits in-transit		1,098		1,161
Receivables		1,510		1,637
FIFO inventory		8,368		7,781
LIFO reserve		(1,285)		(1,248)
Assets held for sale		172		604
Prepaid and other current assets		461		835
Total current assets		10,753		11,117

Property, plant and equipment, net		21,515		21,071
Intangibles, net		1,201		1,100
Goodwill		3,087		2,925
Other assets		1,585		984

Total Assets	$	38,141	$	37,197

LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations	$	3,371	$	3,560
Trade accounts payable		6,505		5,858
Accrued salaries and wages		1,070		1,099
Liabilities held for sale		57		259
Other current liabilities		3,793		3,421
Total current liabilities		14,796		14,197

Long-term debt including obligations under capital leases and financing obligations		11,647		12,029
Deferred income taxes		1,738		1,568
Pension and postretirement benefit obligations		601		792
Other long-term liabilities		1,749		1,706

Total Liabilities		30,531		30,292

Commitments and contingencies see Note 8

SHAREHOLDERS’ EQUITY

Preferred shares, $100 per share, 5 shares authorized and unissued		—		—
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2018 and 2017		1,918		1,918
Additional paid-in capital		3,209		3,161
Accumulated other comprehensive loss		(402)		(471)
Accumulated earnings		19,535		17,007
Common shares in treasury, at cost, 1,120 shares in 2018 and 1,048 shares in 2017		(16,608)		(14,684)

Total Shareholders’ Equity - The Kroger Co.		7,652		6,931
Noncontrolling interests		(42)		(26)

Total Equity		7,610		6,905

Total Liabilities and Equity	$	38,141	$	37,197

The accompanying notes are an integral part of the Consolidated Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Three Quarters Ended
	November 10,		November 4,
(In millions)	2018		2017
Cash Flows from Operating Activities:
Net earnings including noncontrolling interests	$	2,827	$	1,036
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization		1,884		1,871
LIFO charge		39		46
Stock-based employee compensation		115		118
Expense for company-sponsored pension plans		54		68
Deferred income taxes		148		267
Gain on sale of business		(1,782)		—
Mark to market gain on Ocado securities		(152)		—
Other		29		5
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses:
Store deposits in-transit		63		(268)
Receivables		(95)		45
Inventories		(601)		(466)
Prepaid and other current assets		380		426
Trade accounts payable		666		620
Accrued expenses		270		26
Income taxes receivable and payable		259		143
Contribution to company-sponsored pension plans		(185)		(1,000)
Other		(186)		117

Net cash provided by operating activities		3,733		3,054

Cash Flows from Investing Activities:
Payments for property and equipment, including payments for lease buyouts		(2,257)		(2,137)
Proceeds from sale of assets		76		120
Payments for acquisitions, net of cash acquired		(197)		(16)
Purchases of stores		(44)		—
Net proceeds from sale of business		2,169		—
Purchases of Ocado securities		(392)		—
Other		15		(2)

Net cash used by investing activities		(630)		(2,035)

Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		1,033		1,503
Payments on long-term debt		(258)		(769)
Net payments on commercial paper		(1,486)		(45)
Dividends paid		(324)		(333)
Proceeds from issuance of capital stock		55		31
Treasury stock purchases		(1,996)		(1,292)
Other		(45)		(84)

Net cash used by financing activities		(3,021)		(989)

Net increase in cash and temporary cash investments		82		30

Cash and temporary cash investments:
Beginning of year		347		322
End of period	$	429	$	352

Reconciliation of capital investments:
Payments for property and equipment, including payments for lease buyouts	$	(2,257)	$	(2,137)
Payments for lease buyouts		—		9
Changes in construction-in-progress payables		(49)		(149)
Total capital investments, excluding lease buyouts	$	(2,306)	$	(2,277)

Disclosure of cash flow information:
Cash paid during the year for interest	$	424	$	469
Cash paid during the year for income taxes	$	376	$	168

The accompanying notes are an integral part of the Consolidated Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(unaudited)


									Accumulated
				Additional					Other
	Common Stock			Paid-In		Treasury Stock			Comprehensive		Accumulated		Noncontrolling
(In millions, except per share amounts)	Shares	Amount		Capital		Shares	Amount		Loss		Earnings		Interest		Total
Balances at January 28, 2017	1,918	$	1,918	$	3,070	994	$	(13,118)	$	(715)	$	15,543	$	12	$	6,710
Issuance of common stock:
Stock options exercised	—		—		—	(2)		31		—		—		—		31
Restricted stock issued	—		—		(115)	(2)		82		—		—		—		(33)
Treasury stock activity:
Treasury stock purchases, at cost	—		—		—	45		(1,247)		—		—		—		(1,247)
Stock options exchanged	—		—		—	2		(45)		—		—		—		(45)
Share-based employee compensation	—		—		118	—		—		—		—		—		118
Other comprehensive income net of income tax of $6	—		—		—	—		—		9		—		—		9
Other	—		—		51	—		(67)		—		—		(19)		(35)
Cash dividends declared ($0.37 per common share)	—		—		—	—		—		—		(333)		—		(333)
Net earnings including noncontrolling interests	—		—		—	—		—		—		1,053		(17)		1,036

Balances at November 4, 2017	1,918	$	1,918	$	3,124	1,037	$	(14,364)	$	(706)	$	16,263	$	(24)	$	6,211

Balances at February 3, 2018	1,918	$	1,918	$	3,161	1,048	$	(14,684)	$	(471)	$	17,007	$	(26)	$	6,905
Issuance of common stock:
Stock options exercised	—		—		—	(4)		55		—		—		—		55
Restricted stock issued	—		—		(114)	(2)		72		—		—		—		(42)
Treasury stock activity:
Treasury stock purchases, at cost	—		—		—	76		(1,927)		—		—		—		(1,927)
Stock options exchanged	—		—		—	2		(69)		—		—		—		(69)
Share-based employee compensation	—		—		115	—		—		—		—		—		115
Other comprehensive income net of income tax of $22	—		—		—	—		—		69		—		—		69
Other	—		—		47	—		(55)		—		—		8		—
Cash dividends declared ($0.405 per common share)	—		—		—	—		—		—		(323)		—		(323)
Net earnings including noncontrolling interests	—		—		—	—		—		—		2,851		(24)		2,827

Balances at November 10, 2018	1,918	$	1,918	$	3,209	1,120	$	(16,608)	$	(402)	$	19,535	$	(42)	$	7,610

The accompanying notes are an integral part of the Consolidated Financial Statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

All amounts in the Notes to the Unaudited Consolidated Financial Statements are in millions except per share amounts.

1.ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries, and the variable interest entities in which the Company is the primary beneficiary. The February 3, 2018 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include adjustments, all of which are of a normal, recurring nature that are necessary for a fair statement of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018.

The unaudited information in the Consolidated Financial Statements for the third quarters and three quarters ended November 10, 2018 and November 4, 2017, includes the results of operations of the Company for the 12 and 40-week periods then ended.

Refer to Note 6 for a description of changes to the Consolidated Statements of Operations for a recently adopted accounting standard regarding the presentation of the non-service component of company-sponsored pension plan costs.

Fair Value Measurements

Fair value measurements are classified and disclosed in one of the following three categories:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities;

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;

Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company records cash and temporary cash investments, store deposits in-transit, receivables, prepaid and other current assets, trade accounts payable, accrued salaries and wages and other current liabilities at approximated fair value. Certain other investments and derivatives are recorded as Level 1, 2 or 3 instruments. Refer to Note 2 and Note 3 for the disclosure of the Ocado shares and debt instrument fair values, respectively.

Mergers are accounted for using the acquisition method of accounting, which requires that the purchase price paid for an acquisition be allocated to the assets and liabilities acquired based on their estimated fair values as of the effective date of the acquisition, with the excess of the purchase price over the net assets being recorded as goodwill. See Note 2 for further discussion related to accounting for mergers.

Revenue Recognition

Sales

The Company recognizes revenues from the retail sale of products, net of sales taxes, at the point of sale. Pharmacy sales are recorded when the product is provided to the customer. Digital channel originated sales are recognized either upon pickup in store or upon delivery to the customer and may include shipping revenue. Discounts provided to customers by the Company at the time of sale, including those provided in connection with loyalty cards, are recognized as a reduction in sales as the products are sold. Discounts provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons. The Company records a receivable from the vendor for the difference in sales price and cash received. For merchandise sold in one of the Company’s stores or online, tender is accepted at the point of sale. Certain pharmacy fees previously recorded as merchandise costs have been reclassified to be recorded as a reduction of sales. Effective February 4, 2018, the Company prospectively reclassified $188 for the first three quarters of 2018 and $62 for the third quarter of 2018 of these pharmacy fees from merchandise costs to sales on the Company’s Consolidated Statements of Operations. For pharmacy sales, collection of third party receivables is typically expected within three months or less from the time of purchase. The third-party receivables from pharmacy sales are recorded in Receivables in the Company’s Consolidated Balance Sheets and were $681 as of November 10, 2018 and $571 as of February 3, 2018.

Gift Cards and Gift Certificates

The Company does not recognize a sale when it sells its own gift cards and gift certificates (collectively “gift cards”). Rather, it records a deferred revenue liability equal to the amount received. A sale is then recognized when the gift cards are redeemed to purchase the Company’s products. The Company’s gift cards do not expire. While gift cards are generally redeemed within 12 months, some are never fully redeemed. The Company recognizes gift card breakage under the proportional method, where recognition of breakage income is based upon the historical run-off rate of unredeemed gift cards. The Company’s gift card deferred revenue liability was $91 as of November 10, 2018 and $90 as of February 3, 2018.

Disaggregated Revenues

The following table presents sales revenue by type of product for the third quarter and first three quarters of 2018 and 2017:

Third Quarter Ended

Three Quarters Ended

November 10, 2018

November 4, 2017