Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Consolidated Financial Statements of The Kroger Co.

For the Fiscal Year Ended February 1, 2020

Table of Contents

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​	Page
Report of Independent Registered Public Accounting Firm	42
Consolidated Balance Sheets	45
Consolidated Statements of Operations	46
Consolidated Statements of Comprehensive Income	47
Consolidated Statements of Cash Flows	48
Consolidated Statements of Changes in Shareholders’ Equity	49
Notes to Consolidated Financial Statements	50

​

​

Report of Independent Registered Public Accounting Firm

​

To the Board of Directors and Shareholders of The Kroger Co.

Opinions on the Financial Statements and Internal Control over Financial Reporting

​

We have audited the accompanying consolidated balance sheets of The Kroger Co. and its subsidiaries (the “Company”) as of February 1, 2020 and February 2, 2019, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders' equity and of cash flows for each of the three years in the period ended February 1, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Changes in Accounting Principles

​

As discussed in Note 18 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.

Basis for Opinions

​

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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Definition and Limitations of Internal Control over Financial Reporting

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

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The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Goodwill Impairment Assessment – Kroger Specialty Pharmacy (“KSP”) Reporting Unit

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As described in Notes 1 and 3 to the consolidated financial statements, the Company’s consolidated goodwill balance was $3.1 billion as of February 1, 2020, and the goodwill associated with the KSP reporting unit was $243 million. Management reviews goodwill annually for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. The fair value of a reporting unit is compared to its carrying value for purposes of identifying potential impairment. Goodwill impairment is recognized for any excess of the reporting unit’s carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. As disclosed by management, the fair value of the Company's KSP reporting unit was estimated using multiple valuation techniques, a discounted cash flow model (income approach), a market multiple model and comparable mergers and acquisition model (market approaches), with each method weighted in the calculation. The income approach relies on management’s estimates of revenue growth rates, margin assumptions, and discount rate to estimate future cash flows. The market approaches require the determination of an appropriate peer group, which is utilized to derive estimated fair values based on selected market multiples.

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The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the KSP reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s cash flow projections and significant assumptions, including revenue growth rates, margin assumptions, discount rate, peer group determination, and market multiple selection. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. ​

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Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s KSP reporting unit. These procedures also included, among others, testing management’s process for developing the fair value estimate, evaluating the appropriateness of the income and market approach models, testing the completeness, accuracy, and relevance of the underlying data used in the models and evaluating the significant assumptions used by management, including the revenue growth rates, margin assumptions, discount rate, peer group determination, and market multiple selection. Evaluating management’s assumptions relating to revenue growth rates and margin assumptions involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Evaluating the Company’s peer group determinations included evaluating the appropriateness of the identified peer companies. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow and market models, and certain significant assumptions, including the discount rate, peer group determination, and market multiples.

/s/ PricewaterhouseCoopers LLP

Cincinnati, Ohio

April 1, 2020

We have served as the Company’s auditor since 1929.

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THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

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​	​	​	​	​	​	​	​
​		February 1,			February 2,
(In millions, except par amounts)	​	2020		​	2019
ASSETS	​	​	​	​	​	​	​
Current assets	​	​	​	​	​	​	​
Cash and temporary cash investments	​	$	399	​	$	429	​
Store deposits in-transit	​		1,179	​		1,181	​
Receivables	​		1,706	​		1,589	​
FIFO inventory	​		8,464	​		8,123	​
LIFO reserve	​		(1,380)	​		(1,277)	​
Assets held for sale	​		—	​		166	​
Prepaid and other current assets	​	​	522	​	​	592	​
Total current assets	​		10,890	​		10,803	​
​	​	​	​	​	​	​	​
Property, plant and equipment, net	​		21,871	​		21,635	​
Operating lease assets	​	​	6,814	​	​	—	​
Intangibles, net	​		1,066	​		1,258	​
Goodwill	​		3,076	​		3,087	​
Other assets	​		1,539	​		1,335	​
​	​	​	​	​	​	​	​
Total Assets	​	$	45,256	​	$	38,118	​
​	​	​	​	​	​	​	​
LIABILITIES	​	​	​	​	​	​	​
Current liabilities	​	​	​	​	​	​	​
Current portion of long-term debt including obligations under finance leases	​	$	1,965	​	$	3,157	​
Current portion of operating lease liabilities	​	​	597	​	​	—	​
Trade accounts payable	​		6,349	​		6,059	​
Accrued salaries and wages	​		1,168	​		1,227	​
Liabilities held for sale	​	​	—	​	​	51	​
Other current liabilities	​		4,164	​		3,780	​
Total current liabilities	​		14,243	​		14,274	​
​	​	​	​	​	​	​	​
Long-term debt including obligations under finance leases	​	​	12,111	​	​	12,072	​
Noncurrent operating lease liabilities	​	​	6,505	​	​	—	​
Deferred income taxes	​		1,466	​		1,562	​
Pension and postretirement benefit obligations	​		608	​		494	​
Other long-term liabilities	​		1,750	​		1,881	​
​	​	​	​	​	​	​	​
Total Liabilities	​		36,683	​		30,283	​
​	​	​	​	​	​	​	​
Commitments and contingencies see Note 13	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
SHAREHOLDERS’ EQUITY	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Preferred shares, $100 par per share, 5 shares authorized and unissued	​	​	—	​	​	—	​
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2019 and 2018	​		1,918	​		1,918	​
Additional paid-in capital	​		3,337	​		3,245	​
Accumulated other comprehensive loss	​		(640)	​		(346)	​
Accumulated earnings	​		20,978	​		19,681	​
Common shares in treasury, at cost, 1,130 shares in 2019 and 1,120 shares in 2018	​		(16,991)	​		(16,612)	​
​	​	​	​	​	​	​	​
Total Shareholders’ Equity - The Kroger Co.	​		8,602	​		7,886	​
Noncontrolling interests	​		(29)	​		(51)	​
​	​	​	​	​	​	​	​
Total Equity	​		8,573	​		7,835	​
​	​	​	​	​	​	​	​
Total Liabilities and Equity	​	$	45,256	​	$	38,118	​

​

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The accompanying notes are an integral part of the consolidated financial statements.

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THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

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Years Ended February 1, 2020, February 2, 2019 and February 3, 2018

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​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​		​	​		​	​
​	​	​	2019			2018			2017		​
(In millions, except per share amounts)			(52 weeks)		​	(52 weeks)		​	(53 weeks)
Sales	​	​	$	122,286	​	$	121,852	​	$	123,280	​
​	​	​	​	​	​	​	​	​	​	​	​
Operating expenses	​	​	​	​	​	​	​	​	​	​	​
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below	​	​		95,294	​		95,103	​		95,811	​
Operating, general and administrative	​	​		21,208	​		20,786	​		21,510	​
Rent	​	​		884	​		884	​		911	​
Depreciation and amortization	​	​		2,649	​		2,465	​		2,436	​
​	​	​	​	​	​	​	​	​	​	​	​
Operating profit	​	​		2,251	​		2,614	​		2,612	​
​	​	​	​	​	​	​	​	​	​	​	​
Other income (expense)	​	​	​	​	​	​	​	​	​	​	​
Interest expense	​	​		(603)	​		(620)	​		(601)	​
Non-service component of company-sponsored pension plan costs	​	​	​	—	​	​	(26)	​	​	(527)	​
Mark to market gain on Ocado securities	​	​	​	157	​	​	228	​	​	—	​
Gain on sale of businesses	​	​	​	176	​	​	1,782	​	​	—	​
​	​	​	​	​	​	​	​	​	​	​	​
Net earnings before income tax (benefit) expense	​	​		1,981	​		3,978	​		1,484	​
​	​	​	​	​	​	​	​	​	​	​	​
Income tax (benefit) expense	​	​		469	​		900	​		(405)	​
​	​	​	​	​	​	​	​	​	​	​	​
Net earnings including noncontrolling interests	​	​		1,512	​		3,078	​		1,889	​
Net loss attributable to noncontrolling interests	​	​		(147)	​		(32)	​		(18)	​
​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co.	​	​	$	1,659	​	$	3,110	​	$	1,907	​
​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co. per basic common share	​	​	$	2.05	​	$	3.80	​	$	2.11	​
​	​	​	​	​	​	​	​	​	​	​	​
Average number of common shares used in basic calculation	​	​		799	​		810	​		895	​
​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co. per diluted common share	​	​	$	2.04	​	$	3.76	​	$	2.09	​
​	​	​	​	​	​	​	​	​	​	​	​
Average number of common shares used in diluted calculation	​	​		805	​		818	​		904	​

​

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The accompanying notes are an integral part of the consolidated financial statements.

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THE KROGER CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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Years Ended February 1, 2020, February 2, 2019 and February 3, 2018

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​	​	​	​	​	​	​	​	​	​	​
​	​	​		​	​		​	​
​	​	2019		​	2018			2017		​
(In millions)		(52 weeks)		​	(52 weeks)		​	(53 weeks)
Net earnings including noncontrolling interests	​	$	1,512	​	$	3,078	​	$	1,889	​
​	​	​	​	​	​	​	​	​	​	​
Other comprehensive income (loss)	​	​	​	​	​	​	​	​	​	​
Realized gains on available for sale securities, net of income tax(1)	​		—	​	​	(4)	​	​	4	​
Change in pension and other postretirement defined benefit plans, net of income tax(2)	​	​	(105)	​	​	147	​	​	214	​
Unrealized gains and losses on cash flow hedging activities, net of income tax(3)	​		(47)	​		(23)	​		23	​
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4)	​	​	4	​	​	5	​	​	3	​
Cumulative effect of accounting change(5)	​	​	(146)	​	​	—	​	​	—	​
​	​	​	​	​	​	​	​	​	​	​
Total other comprehensive income (loss)	​		(294)	​		125	​		244	​
​	​	​	​	​	​	​	​	​	​	​
Comprehensive income	​		1,218	​		3,203	​		2,133	​
Comprehensive loss attributable to noncontrolling interests	​		(147)	​		(32)	​		(18)	​
Comprehensive income attributable to The Kroger Co.	​	$	1,365	​	$	3,235	​	$	2,151	​

​

(1)	Amount is net of tax expense (benefit) of ($1) in 2018 and $1 in 2017.

(2)	Amount is net of tax expense (benefit) of ($33) in 2019, $45 in 2018 and $83 in 2017.

(3)	Amount is net of tax expense (benefit) of ($17) in 2019, ($8) in 2018 and $0 in 2017.

(4)	Amount is net of tax expense of $3 in 2019 and $3 in 2018 and $3 in 2017.

(5)	Related to the adoption of Accounting Standards Update (“ASU”) 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” (see Note 18 for additional details).

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The accompanying notes are an integral part of the consolidated financial statements.

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THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

​

Years Ended February 1, 2020, February 2, 2019 and February 3, 2018

​	​	​	​	​	​	​	​	​	​	​
​	​	2019			2018			2017		​
(In millions)		(52 weeks)		​	(52 weeks)		​	(53 weeks)
Cash Flows from Operating Activities:	​	​	​	​	​	​	​	​	​	​
Net earnings including noncontrolling interests	​	$	1,512	​	$	3,078	​	$	1,889	​
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:	​	​	​	​	​	​	​	​	​	​
Depreciation and amortization	​		2,649	​		2,465	​		2,436	​
Asset impairment charge	​	​	120	​	​	56	​	​	71	​
Operating lease asset amortization	​	​	640	​	​	—	​	​	—	​
LIFO charge (credit)	​		105	​		29	​		(8)	​
Stock-based employee compensation	​		155	​		154	​		151	​
Expense for company-sponsored pension plans	​		39	​		76	​		591	​
Goodwill impairment charge	​	​	—	​	​	—	​	​	110	​
Deferred income taxes	​		(56)	​		(45)	​		(694)	​
Gain on sale of businesses	​	​	(176)	​	​	(1,782)	​	​	—	​
(Gain) loss on the sale of assets	​	​	(158)	​	​	2	​	​	(31)	​
Mark to market gain on Ocado securities	​	​	(157)	​	​	(228)	​	​	—	​
Loss on deconsolidation and impairment of Lucky's Market	​	​	412	​	​	—	​	​	—	​
Other	​		(109)	​		58	​		39	​
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses:	​	​	​	​	​	​	​	​	​	​
Store deposits in-transit	​		3	​		(20)	​		(265)	​
Receivables	​		(36)	​		(208)	​		61	​
Inventories	​		(351)	​		(354)	​		(23)	​
Prepaid and other current assets	​		(33)	​		244	​		41	​
Trade accounts payable	​		342	​		213	​		158	​
Accrued expenses	​		302	​		416	​		(40)	​
Income taxes receivable and payable	​		(142)	​	​	289	​		(96)	​
Contribution to company-sponsored pension plan	​	​	—	​	​	(185)	​	​	(1,000)	​
Operating lease liabilities	​	​	(639)	​	​	—	​	​	—	​
Proceeds from contract associated with sale of business	​	​	295	​		—	​	​	—	​
Other	​		(53)	​		(94)	​		23	​
​	​	​	​	​	​	​	​	​	​	​
Net cash provided by operating activities	​		4,664	​		4,164	​		3,413	​
​	​	​	​	​	​	​	​	​	​	​
Cash Flows from Investing Activities:	​	​	​	​	​	​	​	​	​	​
Payments for property and equipment, including payments for lease buyouts	​		(3,128)	​		(2,967)	​		(2,809)	​
Proceeds from sale of assets	​		273	​	​	85	​		138	​
Proceeds on settlement of financial instrument	​	​	—	​	​	235	​	​	—	​
Payments for acquisitions, net of cash acquired	​	​	—	​	​	(197)	​	​	(16)	​
Purchases of stores	​	​	—	​	​	(44)	​	​	—	​
Net proceeds from sale of businesses	​	​	327	​	​	2,169	​	​	—	​
Purchases of Ocado securities	​	​	—	​	​	(392)	​	​	—	​
Other	​		(83)	​		(75)	​		(20)	​
​	​	​	​	​	​	​	​	​	​	​
Net cash used by investing activities	​		(2,611)	​		(1,186)	​		(2,707)	​
​	​	​	​	​	​	​	​	​	​	​
Cash Flows from Financing Activities:	​	​	​	​	​	​	​	​	​	​
Proceeds from issuance of long-term debt	​		813	​		2,236	​		1,523	​
Payments on long-term debt including obligations under finance leases	​		(2,304)	​	​	(1,372)	​		(788)	​
Net proceeds (payments) on commercial paper	​		350	​	​	(1,321)	​		696	​
Dividends paid	​	​	(486)	​	​	(437)	​	​	(443)	​
Proceeds from issuance of capital stock	​	​	55	​		65	​	​	51	​
Treasury stock purchases	​		(465)	​		(2,010)	​		(1,633)	​
Other	​	​	(46)	​		(57)	​		(87)	​
​	​	​	​	​	​	​	​	​	​	​
Net cash used by financing activities	​		(2,083)	​		(2,896)	​		(681)	​
​	​	​	​	​	​	​	​	​	​	​
Net (decrease) increase in cash and temporary cash investments	​		(30)	​		82	​		25	​
​	​	​	​	​	​	​	​	​	​	​
Cash and temporary cash investments:	​	​	​	​	​	​	​	​	​	​
Beginning of year	​		429	​		347	​		322	​
End of year	​	$	399	​	$	429	​	$	347	​
​	​	​	​	​	​	​	​	​	​	​
Reconciliation of capital investments:	​	​	​	​	​	​	​	​	​	​
Payments for property and equipment, including payments for lease buyouts	​	$	(3,128)	​	$	(2,967)	​	$	(2,809)	​
Payments for lease buyouts	​	​	82	​		5	​	​	13	​
Changes in construction-in-progress payables	​		2	​		(56)	​		(188)	​
Total capital investments, excluding lease buyouts	​	$	(3,044)	​	$	(3,018)	​	$	(2,984)	​
​	​	​	​	​	​	​	​	​	​	​
Disclosure of cash flow information:	​	​	​	​	​	​	​	​	​	​
Cash paid during the year for interest	​	$	523	​	$	614	​	$	656	​
Cash paid during the year for income taxes	​	$	706	​	$	600	​	$	348	​

​

​

The accompanying notes are an integral part of the consolidated financial statements

​

​

​

THE KROGER CO.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

​

Years Ended February 1, 2020, February 2, 2019 and February 3, 2018

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​					​			​					​		Accumulated				​			​			​
​	​	​	​	​	​	​	Additional		​	​	​	​	​	​	Other		​	​	​	​	​	​	​	​	​
​	​	Common Stock				​	Paid-In		​	Treasury Stock				​	Comprehensive		​	Accumulated		​	Noncontrolling		​	​	​
(In millions, except per share amounts)	​	Shares	​	Amount		​	Capital		​	Shares	​	Amount		​	Income (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		—	​		—	​		—		(4)	​		51	​		—	​		—	​		—	​		51
Restricted stock issued		—	​		—	​		(119)		(2)	​		85	​		—	​		—	​		—	​		(34)
Treasury stock activity:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Treasury stock purchases, at cost		—	​		—	​		—		58	​		(1,567)	​		—	​		—	​		—	​		(1,567)
Stock options exchanged		—	​		—	​		—		2	​		(66)	​		—	​		—	​		—	​		(66)
Share-based employee compensation		—	​		—	​		151		—	​		—	​		—	​		—	​		—	​		151
Other comprehensive income net of tax of $87		—	​		—	​		—		—	​		—	​		244	​		—	​		—	​		244
Other		—	​		—	​		59		—	​		(69)	​		—	​		—	​		(20)	​		(30)
Cash dividends declared ($0.495 per common share)		—	​	​	—	​	​	—		—	​		—	​		—	​		(443)	​		—	​	​	(443)
Net earnings (loss) including non-controlling interests		—	​		—	​		—		—	​		—	​		—	​		1,907	​		(18)	​		1,889
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
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)	​		65	​		—	​		—	​		—	​		65
Restricted stock issued		—	​		—	​		(119)		(3)	​		74	​		—	​		—	​		—	​		(45)
Treasury stock activity:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Treasury stock purchases, at cost		—	​		—	​		—		76	​		(1,927)	​		—	​		—	​		—	​		(1,927)
Stock options exchanged		—	​		—	​		—		3	​		(83)	​		—	​		—	​		—	​		(83)
Share-based employee compensation		—	​		—	​		154		—	​		—	​		—	​		—	​		—	​		154
Other comprehensive income net of tax of $39		—	​		—	​		—		—	​		—	​		125	​		—	​		—	​		125
Other		—	​		—	​		49		—	​		(57)	​		—	​		—	​		7	​		(1)
Cash dividends declared ($0.545 per common share)	​	—	​		—	​		—		—	​		—	​		—	​		(436)	​		—	​		(436)
Net earnings (loss) including non-controlling interests		—	​		—	​		—		—	​		—	​		—	​		3,110	​		(32)	​		3,078
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balances at February 2, 2019		1,918	​	$	1,918	​	$	3,245		1,120	​	$	(16,612)	​	$	(346)	​	$	19,681	​	$	(51)	​	$	7,835
Issuance of common stock:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Stock options exercised		—	​		—	​		—		(3)	​		55	​		—	​		—	​		—	​		55
Restricted stock issued		—	​		—	​		(128)		(3)	​		92	​		—	​		—	​		—	​		(36)
Treasury stock activity:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Treasury stock purchases, at cost		—	​		—	​		—		14	​		(400)	​		—	​		—	​		—	​		(400)
Stock options exchanged		—	​		—	​		—		2	​		(65)	​		—	​		—	​		—	​		(65)
Share-based employee compensation		—	​		—	​		155		—	​		—	​		—	​		—	​		—	​		155
Other comprehensive loss net of tax of ($47)		—	​		—	​		—		—	​		—	​		(294)	​		—	​		—	​		(294)
Cumulative effect of accounting change (see Note 18)	​	—	​		—	​		—		—	​		—	​	​	—	​	​	146	​	​	—	​	​	146
Deconsolidation of Lucky's Market	​	—	​		—	​		—		—	​		—	​	​	—	​	​	—	​	​	168	​	​	168
Other		—	​		—	​		65		—	​		(61)	​		—	​		(5)	​		1	​		—
Cash dividends declared ($0.62 per common share)		—	​		—	​		—		—	​		—	​		—	​		(503)	​		—	​		(503)
Net earnings (loss) including non-controlling interests		—	​		—	​		—		—	​		—	​		—	​		1,659	​		(147)	​		1,512
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balances at February 1, 2020		1,918	​	$	1,918	​	$	3,337		1,130	​	$	(16,991)	​	$	(640)	​	$	20,978	​	$	(29)	​	$	8,573

​

​

The accompanying notes are an integral part of the consolidated financial statements.

​

​

​

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

​

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

​

1.	ACCOUNTING POLICIES

​

The following is a summary of the significant accounting policies followed in preparing these financial statements.

​

Description of Business, Basis of Presentation and Principles of Consolidation

​

The Kroger Co. (the “Company”) was founded in 1883 and incorporated in 1902. As of February 1, 2020, the Company was one of the largest retailers in the world based on annual sales. The Company also manufactures and processes food for sale by its supermarkets. The accompanying financial statements include the consolidated accounts of the Company, its wholly-owned subsidiaries and other consolidated entities. Intercompany transactions and balances have been eliminated.

​

Refer to Note 18 for a description of changes to the Consolidated Balance Sheet for recently adopted accounting standards regarding the recognition of lease agreements and reclassification of stranded tax effects.

​

Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to operating, general and administrative expenses (“OG&A”), are classified as a component of sales as of the beginning of fiscal year 2019, except for certain amounts in Media, which are netted against merchandise costs. These prior-year amounts have been reclassified to conform to current-year presentation.

​

Fiscal Year

​

The Company’s fiscal year ends on the Saturday nearest January 31. The last three fiscal years consist of the 52-week period ended February 1, 2020, 52-week period ended February 2, 2019 and 53-week period ended February 3, 2018.

​

Pervasiveness of Estimates

​

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of consolidated revenues and expenses during the reporting period is also required. Actual results could differ from those estimates.

​

Cash, Temporary Cash Investments and Book Overdrafts

​

Cash and temporary cash investments represent store cash and short-term investments with original maturities of less than three months. Book overdrafts are included in “Trade accounts payable” and “Accrued salaries and wages” in the Consolidated Balance Sheets.

​

Deposits In-Transit

​

Deposits in-transit generally represent funds deposited to the Company’s bank accounts at the end of the year related to sales, a majority of which were paid for with debit cards, credit cards and checks, to which the Company does not have immediate access but settle within a few days of the sales transaction.

​

​

Inventories

​

Inventories are stated at the lower of cost (principally on a last-in, first-out “LIFO” basis) or market. In total, approximately 91% of inventories in 2019 and 90% of inventories in 2018 were valued using the LIFO method. The remaining inventories, including substantially all fuel inventories, are stated at the lower of cost (on a FIFO basis) or net realizable value. Replacement cost was higher than the carrying amount by $1,380 at February 1, 2020 and $1,277 at February 2, 2019. The Company follows the Link-Chain, Dollar-Value LIFO method for purposes of calculating its LIFO charge or credit.

​

The item-cost method of accounting to determine inventory cost before the LIFO adjustment is followed for substantially all store inventories at the Company’s supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory. In addition, substantially all of the Company’s inventory consists of finished goods and is recorded at actual purchase costs (net of vendor allowances and cash discounts).

​

The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the financial statement date.

​

Property, Plant and Equipment

​

Property, plant and equipment are recorded at cost or, in the case of assets acquired in a business combination, at fair value. Depreciation and amortization expense, which includes the depreciation of assets recorded under finance leases, is computed principally using the straight-line method over the estimated useful lives of individual assets. Buildings and land improvements are depreciated based on lives varying from 10 to 40 years. All new purchases of store equipment are assigned lives varying from three to nine years. Leasehold improvements are amortized over the shorter of the lease term to which they relate, which generally varies from four to 25 years, or the useful life of the asset. Food production plant and distribution center equipment is depreciated over lives varying from three to 15 years. Information technology assets are generally depreciated over three to five years. Depreciation and amortization expense was $2,649 in 2019, $2,465 in 2018 and $2,436 in 2017.

​

Interest costs on significant projects constructed for the Company’s own use are capitalized as part of the costs of the newly constructed facilities. Upon retirement or disposal of assets, the cost and related accumulated depreciation and amortization are removed from the balance sheet and any gain or loss is reflected in net earnings. Refer to Note 4 for further information regarding the Company’s property, plant and equipment.

​

Leases

​

The Company leases certain store real estate, warehouses, distribution centers, office space and equipment. The Company determines if an arrangement is a lease at inception. Finance and operating lease assets and liabilities are recognized at the lease commencement date. Finance and operating lease liabilities represent the present value of minimum lease payments not yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments, lease incentives and impairment, if any. To determine the present value of lease payments, the Company estimates an incremental borrowing rate which represents the rate used for a secured borrowing of a similar term as the lease.

​

​

Lease terms generally range from 10 to 20 years with options to renew for varying terms at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Certain leases include escalation clauses or payment of executory costs such as property taxes, utilities or insurance and maintenance. Operating lease payments are charged on a straight-line basis to rent expense over the lease term and finance lease payments are charged to interest expense and depreciation and amortization expense over the lease term. Assets under finance leases are amortized in accordance with the Company’s normal depreciation policy for owned assets or over the lease term, if shorter. The Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants. For additional information on leases, see Note 10 to the Consolidated Financial Statements.

​

Goodwill

​

The Company reviews goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of a triggering event. The Company performs reviews of each of its operating divisions and other consolidated entities (collectively, “reporting units”) that have goodwill balances. Generally, fair value is determined using a market multiple model, or discounted projected future cash flows, and is compared to the carrying value of a reporting unit for purposes of identifying potential impairment. Projected future cash flows are based on management’s knowledge of the current operating environment and expectations for the future. Goodwill impairment is recognized for any excess of the reporting unit’s carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Results of the goodwill impairment reviews performed during 2019, 2018 and 2017 are summarized in Note 3.

​

Impairment of Long-Lived Assets

​

The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a triggering event occurs, an impairment calculation is performed, comparing projected undiscounted future cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If the Company identifies impairment for long-lived assets to be held and used, the Company compares the assets’ current carrying value to the assets’ fair value. Fair value is based on current market values or discounted future cash flows. The Company records impairment when the carrying value exceeds fair market value. With respect to owned property and equipment held for disposal, the value of the property and equipment is adjusted to reflect recoverable values based on previous efforts to dispose of similar assets and current economic conditions. Impairment is recognized for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. The Company recorded asset impairments totaling $120 in 2019, including $70 of operating lease assets. This 2019 impairment charge includes 35 planned store closures across the Company’s footprint in 2020. The Company recorded asset impairments in the normal course of business totaling $56 and $71 in 2018 and 2017, respectively. Costs to reduce the carrying value of long-lived assets for each of the years presented have been included in the Consolidated Statements of Operations as Operating, general and administrative (“OG&A”) expense.

​

Accounts Payable

​

The Company has an agreement with a third party to provide an accounts payable tracking system which facilitates participating suppliers’ ability to finance payment obligations from the Company with designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not affected by suppliers’ decisions to finance amounts under this arrangement.

​

​

Contingent Consideration

​

The Company’s Home Chef business combination involves potential payment of future consideration that is contingent upon the achievement of certain performance milestones. The Company records contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred, estimated as the probability-weighted future cash flows, discounted back to present value using a discount rate determined in accordance with accepted valuation methods. The liability for contingent consideration is remeasured to fair value at each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized in earnings until the contingency is resolved. In 2019, an adjustment to decrease the contingent consideration liability as of year-end 2019 was recorded for ($69) in OG&A expense. In 2018, an adjustment to increase the contingent consideration liability as of year-end 2018 was recorded for $33 in OG&A expense.

​

Store Closing Costs

​

The Company provides for closed store liabilities relating to the present value of the estimated remaining non-cancellable lease payments after the closing date, net of estimated subtenant income. The Company estimates the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease terms associated with the closed stores, which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known. Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs is adjusted to income in the proper period.

​

Owned stores held for disposal are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with the Company’s policy on impairment of long-lived assets. Inventory write-downs, if any, in connection with store closings, are classified in the Consolidated Statements of Operations as “Merchandise costs.” Costs to transfer inventory and equipment from closed stores are expensed as incurred.

​

The current portion of the future lease obligations of stores is included in “Other current liabilities,” and the long-term portion is included in “Other long-term liabilities” in the Consolidated Balance Sheets.

​

Interest Rate Risk Management

​

The Company uses derivative instruments primarily to manage its exposure to changes in interest rates. The Company’s current program relative to interest rate protection and the methods by which the Company accounts for its derivative instruments are described in Note 7.

​

Benefit Plans and Multi-Employer Pension Plans

​

The Company recognizes the funded status of its retirement plans on the Consolidated Balance Sheets. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized as part of net periodic benefit cost are required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). The Company has elected to measure defined benefit plan assets and obligations as of January 31, which is the month-end that is closest to its fiscal year-ends, which were February 1, 2020 for fiscal 2019 and February 2, 2019 for fiscal 2018.

​

The determination of the obligation and expense for company-sponsored pension plans and other post-retirement benefits is dependent on the selection of assumptions used by actuaries and the Company in calculating those amounts. Those assumptions are described in Note 15 and include, among others, the discount rate, the expected long-term rate of return on plan assets, mortality and the rates of increase in compensation and health care costs. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the pension and other post-retirement obligations and future expense.

​

​

The Company also participates in various multi-employer plans for substantially all union employees. Pension expense for these plans is recognized as contributions are funded or when commitments are probable and reasonably estimable, in accordance with GAAP. Refer to Note 16 for additional information regarding the Company’s participation in these various multi-employer pension plans.

​

The Company administers and makes contributions to the employee 401(k) retirement savings accounts. Contributions to the employee 401(k) retirement savings accounts are expensed when contributed or over the service period in the case of automatic contributions. Refer to Note 15 for additional information regarding the Company’s benefit plans.

​

Share Based Compensation

​

The Company accounts for stock options under fair value recognition provisions_._ Under this method, the Company recognizes compensation expense for all share-based payments granted. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. In addition, the Company records expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the grant date of the award, over the period the awards lapse. Excess tax benefits related to share-based payments are recognized in the provision for income taxes. Refer to Note 12 for additional information regarding the Company’s stock based compensation.

​

Deferred Income Taxes

​

Deferred income taxes are recorded to reflect the tax consequences of differences between the tax basis of assets and liabilities and their financial reporting basis. Refer to Note 5 for the types of differences that give rise to significant portions of deferred income tax assets and liabilities.

​

Uncertain Tax Positions

​

The Company reviews the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in its consolidated financial statements. Refer to Note 5 for the amount of unrecognized tax benefits and other related disclosures related to uncertain tax positions.

​

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. As of February 1, 2020, the Internal Revenue Service had concluded its examination of all federal tax returns up to and including the return for the year ending January 30, 2016.

​

The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.

​

Self-Insurance Costs

​

The Company is primarily self-insured for costs related to workers’ compensation and general liability claims. Liabilities are actuarially determined and are recognized based on claims filed and an estimate of claims incurred but not reported. The liabilities for workers’ compensation claims are accounted for on a present value basis. The Company has purchased stop-loss coverage to limit its exposure to any significant exposure on a per claim basis. The Company is insured for covered costs in excess of these per claim limits.

​

​

The following table summarizes the changes in the Company’s self-insurance liability through February 1, 2020.

​

​	​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
Beginning balance	​	$	696	​	$	695	​	$	682	​
Expense	​		209	​		229	​		247	​
Claim payments	​		(216)	​		(228)	​		(234)	​
Ending balance	​		689	​		696	​		695	​
Less: Current portion	​		(216)	​		(228)	​		(234)	​
Long-term portion	​	$	473	​	$	468	​	$	461	​

​

The current portion of the self-insured liability is included in “Other current liabilities,” and the long-term portion is included in “Other long-term liabilities” in the Consolidated Balance Sheets.

​

The Company maintains surety bonds related to self-insured workers’ compensation claims. These bonds are required by most states in which the Company is self-insured for workers’ compensation and are placed with third-party insurance providers to insure payment of the Company’s obligations in the event the Company is unable to meet its claim payment obligations up to its self-insured retention levels. These bonds do not represent liabilities of the Company, as the Company has recorded reserves for the claim costs.

​

The Company is similarly self-insured for property-related losses. The Company maintains stop loss coverage to limit its property loss exposures including coverage for earthquake, wind, flood and other catastrophic events.

​

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 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. The Company acts as principal in certain vendor arrangements where the purchase and sale of inventory are virtually simultaneous. The Company records revenue and related costs on a gross basis for these arrangements. Effective February 4, 2018, the Company prospectively reclassified certain pharmacy fees of $250 for 2018 from merchandise costs to be recorded as a reduction 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 $646 as of February 1, 2020 and $645 as of February 2, 2019.

​

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 $114 as of February 1, 2020 and $100 as of February 2, 2019.

​

Disaggregated Revenues

​

The following table presents sales revenue by type of product for the year-ended February 1, 2020, February 2, 2019, and February 3, 2018:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	2019				​	2018				​	2017
​		Amount			% of total		Amount			% of total		Amount			% of total
Non Perishable (1)(5)	​	$	61,464		50.3	%	$	60,649		49.8	%	$	60,872		49.4	%
Fresh (2)(5)	​		29,452		24.1	%		29,089		23.9	%		29,141		23.6	%
Supermarket Fuel	​		14,052		11.5	%		14,903		12.2	%		13,177		10.7	%
Pharmacy (5)	​		11,015		9.0	%		10,617		8.7	%		10,724		8.7	%
Convenience Stores (3)	​	​	—	​	-	%	​	944	​	0.8	%	​	4,515	​	3.7	%
Other (4)(5)(6)	​		6,303		5.1	%		5,650		4.6	%		4,851		3.9	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total Sales	​	$	122,286		100	%	$	121,852		100	%	$	123,280		100	%

(1)Consists primarily of grocery, general merchandise, health and beauty care and natural foods.

(2)Consists primarily of produce, floral, meat, seafood, deli, bakery and fresh prepared.

(3)The Company completed the sale of its convenience store business unit during the first quarter of 2018.

(4)Consists primarily of sales related to food production plants to outside parties, data analytic services, third party media revenue, other consolidated entities, specialty pharmacy, in-store health clinics, digital coupon services and other online sales not included in the categories above.

(5)Digital sales, primarily including Pickup, Delivery and pharmacy e-commerce sales, grew approximately 29%, 58% and 90% in 2019, 2018 and 2017, respectively, adjusted to remove the impact of the 53rd week in 2017. These sales are included in the non perishable, fresh, pharmacy, and other line items above.

(6)Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to OG&A, are classified as a component of sales as of the beginning of fiscal year 2019, except for certain amounts in Media, which are netted against merchandise costs. These prior-year amounts have been reclassified to conform to current-year presentation.

​

Merchandise Costs

​

The “Merchandise costs” line item of the Consolidated Statements of Operations includes product costs, net of discounts and allowances; advertising costs (see separate discussion below); inbound freight charges; warehousing costs, including receiving and inspection costs; transportation costs; and food production and operational costs. Warehousing, transportation and manufacturing management salaries are also included in the “Merchandise costs” line item; however, purchasing management salaries and administration costs are included in the OG&A line item along with most of the Company’s other managerial and administrative costs. Rent expense and depreciation and amortization expense are shown separately in the Consolidated Statements of Operations.

​

Warehousing and transportation costs include distribution center direct wages, transportation direct wages, repairs and maintenance, utilities, inbound freight and, where applicable, third party warehouse management fees. These costs are recognized in the periods the related expenses are incurred.

​

The Company believes the classification of costs included in merchandise costs could vary widely throughout the industry. The Company’s approach is to include in the “Merchandise costs” line item the direct, net costs of acquiring products and making them available to customers in its stores. The Company believes this approach most accurately presents the actual costs of products sold.

​

The Company recognizes all vendor allowances as a reduction in merchandise costs when the related product is sold. When possible, vendor allowances are applied to the related product cost by item and, therefore, reduce the carrying value of inventory by item. When the items are sold, the vendor allowance is recognized. When it is not possible, due to systems constraints, to allocate vendor allowances to the product by item, vendor allowances are recognized as a reduction in merchandise costs based on inventory turns and, therefore, recognized as the product is sold.

​

​

Advertising Costs

​

The Company’s advertising costs are recognized in the periods the related expenses are incurred and are included in the “Merchandise costs” line item of the Consolidated Statements of Operations. The Company’s advertising costs totaled $854 in 2019, $752 in 2018 and $707 in 2017. The Company does not record vendor allowances for co-operative advertising as a reduction of advertising expense.

​

Operating, General and Administrative Expenses

OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utilities, and credit card fees. Rent expense, depreciation and amortization expense and interest expense are shown separately in the Consolidated Statement of Operations.

​

Consolidated Statements of Cash Flows

​

For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be temporary cash investments.

​

Segments

​

The Company operates supermarkets and multi-department stores throughout the United States. The Company’s retail operations, which represent 97% of the Company’s consolidated sales, are its only reportable segment. The Company aggregated its operating divisions into one reportable segment due to the operating divisions having similar economic characteristics with similar long-term financial performance. In addition, the Company’s operating divisions offer customers similar products, have similar distribution methods, operate in similar regulatory environments, purchase the majority of the merchandise for retail sale from similar (and in many cases identical) vendors on a coordinated basis from a centralized location, serve similar types of customers, and are allocated capital from a centralized location. Operating divisions are organized primarily on a geographical basis so that the operating division management team can be responsive to local needs of the operating division and can execute company strategic plans and initiatives throughout the locations in their operating division. This geographical separation is the primary differentiation between these retail operating divisions. The geographical basis of organization reflects how the business is managed and how the Company’s Chief Executive Officer, who acts as the Company’s chief operating decision maker, assesses performance internally. All of the Company’s operations are domestic.

​

​

2.	MERGERS AND PARTNERSHIP AGREEMENTS

​

Merger Agreement

​

On June 22, 2018, the Company finalized the merger with Home Chef, a meal kit delivery company. The merger allows the Company to increase the availability of meal kits and expand its offerings to customers. The Company completed the merger by purchasing 100% of the ownership interest in Home Chef, for $197 net of cash and cash equivalents of $30, in addition to future earnout payments of up to $500 over five years that are contingent on achieving certain milestones. The contingent consideration is based on future performance of both the online and offline business and the related customer engagement. The fair value of the earnout liability in the amount of $91 recognized on the acquisition date was measured using unobservable (Level 3) inputs and was included in “Other long-term liabilities” within the Consolidated Balance Sheet. The Company estimated the fair value of the earnout liability by applying a Monte-Carlo simulation method using the Company’s projection of future operating results for both the online and offline businesses related to the Home Chef merger and the estimated probability of achievement of the earnout target metrics. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of valuation paths in order to develop a reasonable estimate of the fair value of the earnout liability. Changes in the fair value of the earnout liability in future periods will be recorded in the Company’s results in the period of the change, refer to Note 8 for additional details.

​

The merger was accounted for under the purchase method of accounting and was financed through the issuance of commercial paper. In a business combination, the purchase price is allocated to assets acquired and liabilities assumed based on their fair values, with any excess of purchase price over fair value recognized as goodwill. In addition to recognizing assets and liabilities on the acquired company’s balance sheet, the Company reviews supply contracts, leases, financial instruments, employment agreements and other significant agreements to identify potential assets or liabilities that require recognition in connection with the application of acquisition accounting under Accounting Standards Codification (“ASC”) 805. Intangible assets are recognized apart from goodwill when the asset arises from contractual or other legal rights, or are separable from the acquired entity such that they may be sold, transferred, licensed, rented or exchanged either on a standalone basis or in combination with a related contract, asset or liability.

​

The Company’s purchase price allocation was finalized in the second quarter of 2019. The changes in the fair values assumed from the preliminary amounts determined as of June 22, 2018 were an increase of goodwill of $8 and an increase of deferred income tax liability of $8. The table summarizes the final fair values of the assets acquired and liabilities assumed at the acquisition date.

​

​	​	​	​
​		June 22,
​	​	2018
ASSETS	​	​	​
Total current assets	​	$	36
​	​	​	​
Property, plant and equipment	​		6
Other assets	​	​	1
Intangibles	​		143
​	​	​	​
Total Assets, excluding Goodwill	​		186
​	​	​	​
LIABILITIES	​	​	​
Total current liabilities	​		(28)
​	​	​	​
Other long-term liabilities	​	​	(94)
Deferred income taxes	​	​	(8)
​	​	​	​
Total Liabilities	​		(130)
​	​	​	​
Total Identifiable Net Assets	​		56
Goodwill	​		171
Total Purchase Price	​	$	227

​

Of the $143 allocated to intangible assets, the Company recorded $99 and $44 related to customer relationships and the trade name, respectively. The Company will amortize the customer relationships, using the cash flow trended method over seven years. The goodwill recorded as part of the merger was attributable to the assembled workforce of Home Chef and operational synergies expected from the merger. The merger was treated as a 30% stock purchase and 70% partnership interest purchase for income tax purposes. The tax basis of the assets acquired and liabilities assumed for the portion of the transaction treated as a partnership interest purchase was stepped up, and the related goodwill is deductible for tax purposes. The assets acquired and liabilities assumed for the portion treated as a stock purchase did not result in a step up of tax basis, and goodwill is not expected to be deductible for tax purposes. The Company determined the Home Chef results of operations are not material. Therefore, the pro forma information is not required for fiscal year 2018 and 2017.

​

Partnership Agreement

​

On May 17, 2018, the Company entered into a Partnership Framework Agreement with Ocado International Holdings Limited and Ocado Group plc (“Ocado”). Under this agreement, Ocado will partner exclusively with the Company in the U.S., enhancing the Company’s digital and robotics capabilities in its distribution networks. As part of the agreement, the Company provided a letter of credit for $180, which supports its commitment to contract with Ocado to build a number of fulfilment centers. The balance of the letter of credit will reduce over time with the construction of each fulfilment center.

​

In addition, on May 17, 2018, the Company entered into a Share Subscription Agreement with Ocado, pursuant to which the Company agreed to purchase 33.1 million ordinary shares of Ocado for an aggregate purchase price of $243. The Company completed the purchase of these 33.1 million shares on May 29, 2018. This is in addition to 8.1 million Ocado shares purchased earlier in the first quarter of 2018, and 6.5 million additional shares purchased in the second quarter of 2018. The equity investment in Ocado is measured at fair value through earnings. The fair value of all shares owned, which is measured using Level 1 inputs, was $776 as of February 1, 2020 and $620 as of February 2, 2019 and is included in “Other assets” in the Company’s Consolidated Balance Sheets. The Company recorded an unrealized gain of $157 in 2019 and $228 in 2018, none of which was realized during the period as the Company did not sell any Ocado securities.

​

​

3.	GOODWILL AND INTANGIBLE ASSETS

​

The following table summarizes the changes in the Company’s net goodwill balance through February 1, 2020.

​

​	​	​	​	​	​	​	​
​		2019			2018
Balance beginning of year	​	​	​	​	​	​	​
Goodwill	​	$	5,729	​	$	5,567	​
Accumulated impairment losses	​		(2,642)	​		(2,642)	​
Subtotal	​		3,087	​		2,925	​
​	​	​	​	​	​	​	​
Activity during the year	​	​	​	​	​	​	​
Mergers	​		8	​		163	​
Impairment losses	​	​	(19)	​	​	—	​
Held for sale adjustment	​	​	—	​	​	(1)	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Balance end of year	​	​	​	​	​	​	​
Goodwill	​		5,737	​		5,729	​
Accumulated impairment losses	​		(2,661)	​		(2,642)	​
Total Goodwill	​	$	3,076	​	$	3,087	​

​

In 2019, the Company finalized the purchase accounting for the Home Chef acquisition (see Note 2) resulting in an increase of goodwill and deferred taxes of $8. The Company also recorded an impairment charge of $19 as a result of the Lucky’s Market impairment.

​

In 2018, the Company acquired all of the outstanding shares of Home Chef (see Note 2) resulting in additional goodwill totaling $163. Certain assets and liabilities including goodwill totaling $1 for 2018 was classified as held for sale in the Consolidated Balance Sheet (see Note 17).

​

Testing for impairment must be performed annually, or on an interim basis upon the occurrence of a triggering event or a change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The annual evaluation of goodwill and indefinite-lived intangible assets was performed during the fourth quarter of 2019 and 2018 and did not result in impairment.

​

Based on the results of the Company’s impairment assessment in the fourth quarter of 2017, the Kroger Specialty Pharmacy reporting unit was the only reporting unit for which there was a potential impairment. In the fourth quarter of 2017, the operating performance of the Kroger Specialty Pharmacy reporting unit began to be affected by reduced margins as a result of compression in reimbursement by third party payers and a reduction of certain types of revenue. As a result of this decline, particularly in future expected cash flows, along with comparable fair value information, management concluded that the carrying value of goodwill for Kroger Specialty Pharmacy reporting unit exceeded its fair value, resulting in a pre-tax impairment charge of $110, $74 net of tax. The pre-impairment goodwill balance for Kroger Specialty Pharmacy was $353, as of the fourth quarter 2017.

​

The following table summarizes the Company’s intangible assets balance through February 1, 2020.

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	2019					​	2018
​		Gross carrying			Accumulated			Gross carrying			Accumulated
​	​	amount		​	amortization(1)		​	amount		​	amortization(1)
Definite-lived favorable leasehold interests(2)	​	$	—	​	$	—	​	$	160	​	$	(47)	​
Definite-lived pharmacy prescription files	​		320	​		(133)	​		316	​		(92)	​
Definite-lived customer relationships	​	​	186	​	​	(120)	​	​	186	​	​	(88)	​
Definite-lived other	​		106	​		(68)	​		103	​		(55)	​
Indefinite-lived trade name	​		685	​		—	​		685	​		—	​
Indefinite-lived liquor licenses	​		90	​		—	​		90	​		—	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total	​	$	1,387	​	$	(321)	​	$	1,540	​	$	(282)	​

​

(1)	Favorable leasehold interests are amortized to rent expense, pharmacy prescription files are amortized to merchandise costs, customer relationships are amortized to depreciation and amortization expense and other intangibles are amortized to OG&A expense and depreciation and amortization expense.

(2)	Due to the adoption of ASU 2016-02 “Leases,” favorable leasehold interests were reclassified and included in the measurement of new lease assets, refer to Note 10 and 18 for further description of the impact of adoption.

​

In 2018, the Company acquired definite and indefinite lived intangible assets totaling approximately $143, excluding goodwill, as a result of the merger with Home Chef (see Note 2). Additionally, the majority of the Company’s pharmacy prescription file purchases for 2018 were completed in a single transaction for $75.

​

Amortization expense associated with intangible assets totaled approximately $85, $80 and $59, during fiscal years 2019, 2018 and 2017, respectively. Future amortization expense associated with the net carrying amount of definite-lived intangible assets for the years subsequent to 2019 is estimated to be approximately:

​

​	​	​	​
2020		$	73
2021	​		58
2022	​		51
2023	​		42
2024	​		39
Thereafter	​		28
​	​	​	​
Total future estimated amortization associated with definite-lived intangible assets	​	$	291

​

​

4.	PROPERTY, PLANT AND EQUIPMENT, NET

​

Property, plant and equipment, net consists of:

​

​	​	​	​	​	​	​	​
​		2019			2018
Land	​	$	3,299	​	$	3,254	​
Buildings and land improvements	​		12,553	​		12,245	​
Equipment	​		15,031	​		14,277	​
Leasehold improvements	​		10,832	​		10,306	​
Construction-in-progress	​		3,166	​		2,716	​
Leased property under finance leases	​		966	​		1,066	​
​	​	​	​	​	​	​	​
Total property, plant and equipment	​		45,847	​		43,864	​
Accumulated depreciation and amortization	​		(23,976)	​		(22,229)	​
​	​	​	​	​	​	​	​
Property, plant and equipment, net	​	$	21,871	​	$	21,635	​

​

Accumulated depreciation and amortization for leased property under finance leases was $276 at February 1, 2020 and $345 at February 2, 2019. This decrease was primarily related to the reclassification of certain finance leases to operating leases due to the adoption of ASU 2016-02 “Leases.”

​

Approximately $162 and $169, net book value, of property, plant and equipment collateralized certain mortgages at February 1, 2020 and February 2, 2019, respectively.

​

5.	TAXES BASED ON INCOME

​

The provision for taxes based on income consists of:

​

​	​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
Federal	​	​	​	​	​	​	​	​	​	​
Current	​	$	454	​	$	775	​	$	309	​
Deferred	​		(50)	​		(3)	​		(747)	​
​	​	​	​	​	​	​	​	​	​	​
Subtotal federal	​		404	​		772	​		(438)	​
​	​	​	​	​	​	​	​	​	​	​
State and local	​	​	​	​	​	​	​	​	​	​
Current	​		70	​		108	​		15	​
Deferred	​		(5)	​		20	​		18	​
​	​	​	​	​	​	​	​	​	​	​
Subtotal state and local	​		65	​		128	​		33	​
​	​	​	​	​	​	​	​	​	​	​
Total	​	$	469	​	$	900	​	$	(405)	​

​

A reconciliation of the statutory federal rate and the effective rate follows:

​

​	​	​	​	​	​	​	​
​		2019		2018		2017
Statutory rate		21.0	%	21.0	%	33.7	%
State income taxes, net of federal tax benefit		2.6	​	2.6	​	1.7	​
Credits		(1.5)	​	(1.3)	​	(2.5)	​
Resolution of issues		(0.1)	​	0.5	​	—	​
Domestic manufacturing deduction		—	​	—	​	(1.1)	​
Excess tax benefits from share-based payments	​	(0.2)	​	(0.3)	​	(0.4)	​
Effect of Tax Cuts and Jobs Act	​	—	​	—	​	(60.8)	​
Impairment of goodwill	​	—	​	—	​	2.3	​
Impairment losses attributable to noncontrolling interest	​	1.2	​	—	​	—	​
Other changes, net		0.7	​	0.1	​	(0.2)	​
​	​	​	​	​	​	​	​
​		23.7	%	22.6	%	(27.3)	%

​

The 2019 tax rate differed from the federal statutory rate primarily due to the effect of state income taxes and Lucky’s Market losses attributable to the noncontrolling interest which reduced pre-tax income but did not impact tax expense, partially offset by the utilization of tax credits and deductions.

​

The 2018 tax rate differed from the federal statutory rate primarily due to the effect of state income taxes and an IRS audit that resulted in a reduction of prior year tax deductions at pre-Tax Act rates and an increase in future tax deductions at post-Tax Act rates. These 2018 items were partially offset by the utilization of tax credits and deductions, the remeasurement of uncertain tax positions and adjustments to provisional amounts that increased prior year deductions at pre-Tax Act rates and decreased future deductions at post-Tax Act rates.

​

​

The tax effects of significant temporary differences that comprise tax balances were as follows:

​

​	​	​	​	​	​	​	​
​		2019			2018
Deferred tax assets:	​	​	​	​	​	​	​
Compensation related costs	​	$	406	​	$	350	​
Lease liabilities	​		1,872	​		81	​
Closed store reserves	​		55	​		41	​
Net operating loss and credit carryforwards	​		100	​		110	​
Deferred Income	​	​	172	​	​	84	​
Allowance for uncollectible receivables	​	​	93	​	​	18	​
Other	​	​	—	​		9	​
​	​	​	​	​	​	​	​
Subtotal	​		2,698	​		693	​
Valuation allowance	​		(55)	​		(54)	​
​	​	​	​	​	​	​	​
Total deferred tax assets	​		2,643	​		639	​
​	​	​	​	​	​	​	​
Deferred tax liabilities:	​	​	​	​	​	​	​
Depreciation and amortization	​		(1,942)	​		(1,850)	​
Operating lease assets	​		(1,782)	​	​	—	​
Insurance related costs	​	​	(28)	​	​	(38)	​
Inventory related costs	​	​	(252)	​	​	(257)	​
Equity investments in excess of tax basis	​	​	(94)	​	​	(56)	​
Other	​	​	(11)	​	​	—	​
​	​	​	​	​	​	​	​
Total deferred tax liabilities	​		(4,109)	​		(2,201)	​
​	​	​	​	​	​	​	​
Deferred taxes	​	$	(1,466)	​	$	(1,562)	​

​

At February 1, 2020, the Company had net operating loss carryforwards for state income tax purposes of $1,197. These net operating loss carryforwards expire from 2020 through 2039. The utilization of certain of the Company’s state net operating loss carryforwards may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its state net operating losses.

​

At February 1, 2020, the Company had state credit carryforwards of $47, most of which expire from 2020 through 2027. The utilization of certain of the Company’s credits may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its state credits.

​

The Company regularly reviews all deferred tax assets on a tax filer and jurisdictional basis to estimate whether these assets are more likely than not to be realized based on all available evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Projected future taxable income is based on expected results and assumptions with respect to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary differences is based on current tax law and the Company’s tax methods of accounting. Unless deferred tax assets are more likely than not to be realized, a valuation allowance is established to reduce the carrying value of the deferred tax asset until such time that realization becomes more likely than not. Increases and decreases in these valuation allowances are included in "Income tax expense" in the Consolidated Statements of Operations. As of February 1, 2020, February 2, 2019 and February 3, 2018 the total valuation allowance was $55, $54 and $62, respectively.

​

​

A reconciliation of the beginning and ending amount of unrecognized tax benefits, including positions impacting only the timing of tax benefits, is as follows:

​

​	​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
Beginning balance	​	$	174	​	$	180	​	$	177	​
Additions based on tax positions related to the current year	​		13	​		7	​		11	​
Reductions based on tax positions related to the current year	​		—	​		(1)	​		(1)	​
Additions for tax positions of prior years	​		8	​		23	​		6	​
Reductions for tax positions of prior years	​		(1)	​		(22)	​		(8)	​
Settlements	​	​	(19)	​		(10)	​		—	​
Lapse of statute	​	​	(1)	​	​	(3)	​	​	(5)	​
Ending balance	​	$	174	​	$	174	​	$	180	​

​

The Company does not anticipate that changes in the amount of unrecognized tax benefits over the next twelve months will have a significant impact on its results of operations or financial position.

​

As of February 1, 2020, February 2, 2019 and February 3, 2018 the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $74, $72 and $88, respectively.

​

To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense. During the years ended February 1, 2020, February 2, 2019 and February 3, 2018, the Company recognized approximately $7, $2 and $8, respectively, in interest and penalties. The Company had accrued approximately $30, $30 and $28 for the payment of interest and penalties as of February 1, 2020, February 2, 2019 and February 3, 2018.

​

As of February 1, 2020, the Internal Revenue Service had concluded its examination of all federal tax returns up to and including the return for the year ended January 30, 2016.

​

6.	DEBT OBLIGATIONS

​

Long-term debt consists of:

​

​	​	​	​	​	​	​
​	​	February 1,		​	February 2,
​		2020			2019
1.50% to 8.00% Senior Notes due through 2049	​	$	11,598	​	$	12,097
5.63% to 12.75% Mortgages due through 2027	​		12	​		14
1.77% to 2.63% Commercial paper borrowings due through February 2020	​		1,150	​		800
3.37% Term Loan	​	​	—	​	​	1,000
Other	​		496	​		440
​	​	​	​	​	​	​
Total debt, excluding obligations under finance leases	​		13,256	​		14,351
Less current portion	​		(1,926)	​		(3,103)
​	​	​	​	​	​	​
Total long-term debt, excluding obligations under finance leases	​	$	11,330	​	$	11,248

​

In 2019, the Company issued $750 of senior notes due in fiscal year 2049 bearing an interest rate of 3.95%. In connection with the senior note issuances, the Company also terminated forward-starting interest rate swap agreements with an aggregate notional amount of $300. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the fourth quarter of 2019. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $12, $10 net of tax, has been deferred in Accumulated Other Comprehensive Loss and will continue to amortize to earnings as the interest payments are made. The Company repaid $750 of senior notes bearing an interest rate of 6.15%, with proceeds from the senior notes issuances. During 2019, the Company also repaid, upon maturity, $1,000 term loan bearing an interest rate of 3.37% and $500 of senior notes bearing an interest rate of 1.50%, using cash generated by operations and proceeds from issuing commercial paper.

​

​

In 2018, the Company issued $600 of senior notes due in fiscal year 2029 bearing an interest rate of 4.50% and $600 of senior notes due in fiscal year 2049 bearing an interest rate of 5.40%. In connection with the senior note issuances, the Company also terminated forward-starting interest rate swap agreements with an aggregate notional amount of $750. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the fourth quarter of 2018. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized gain of $39, $30 net of tax, has been deferred in Accumulated Other Comprehensive Loss and will continue to amortize to earnings as the interest payments are made. The Company also repaid, upon maturity, $300 of senior notes bearing an interest rate of 6.80%, $300 of senior notes bearing an interest rate of 2.00%, $200 of senior notes bearing an interest rate of 7.00% and $500 of senior notes bearing an interest rate of 2.30%, with proceeds from the senior notes issuances.

​

In 2018, the Company obtained a $1,000 term loan with a maturity date of March 16, 2019. The funds were drawn on March 26, 2018 and were used to reduce outstanding commercial paper borrowings. Under the terms of the agreement, interest rates are adjusted monthly based on the Company’s Public Debt Rating and prevailing LIBOR rates. On March 15, 2019, the Company paid the $1,000 term loan through increased commercial paper borrowings.

​

On August 29, 2017, the Company entered into an amended, extended and restated $2,750 unsecured revolving credit facility (the “Credit Agreement”), with a termination date of August 29, 2022, unless extended as permitted under the Credit Agreement. This Credit Agreement amended the Company’s $2,750 credit facility that would otherwise have terminated on June 30, 2019. The Company has the ability to increase the size of the Credit Agreement by up to an additional $1,000, subject to certain conditions.

​

Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (i) LIBOR plus a market spread, based on the Company’s Public Debt Rating or (ii) the base rate, defined as the highest of (a) the Federal Funds Rate plus 0.5%, (b) the Bank of America prime rate, and (c) one-month LIBOR plus 1.0%, plus a market rate spread based on the Company’s Public Debt Rating. The Company will also pay a Commitment Fee based on its Public Debt Rating and Letter of Credit fees equal to a market rate spread based on the Company’s Public Debt Rating. “Public Debt Rating” means, as of any date, the rating that has been most recently announced by either S&P or Moody’s, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Company.

​

The Credit Agreement contains covenants, which, among other things, require the maintenance of a Leverage Ratio of not greater than 3.50:1.00 and a Fixed Charge Coverage Ratio of not less than 1.70:1.00. The Company may repay the Credit Agreement in whole or in part at any time without premium or penalty. The Credit Agreement is not guaranteed by the Company’s subsidiaries.

​

As of February 1, 2020, the Company had $1,150 of commercial paper borrowings, with a weighted average interest rate of 1.77% and no borrowings under the Credit Agreement. As of February 2, 2019, the Company had $800 of commercial paper borrowings, with a weighted average interest rate of 2.63% and no borrowings under the Credit Agreement.

​

As of February 1, 2020, the Company had outstanding letters of credit in the amount of $362, of which $2 reduces funds available under the Credit Agreement. As of February 2, 2019, the Company had outstanding letters of credit in the amount of $363, of which $3 reduces funds available under the Credit Agreement. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company.

​

Most of the Company’s outstanding public debt is subject to early redemption at varying times and premiums, at the option of the Company. In addition, subject to certain conditions, some of the Company’s publicly issued debt will be subject to redemption, in whole or in part, at the option of the holder upon the occurrence of a redemption event, upon not less than five days’ notice prior to the date of redemption, at a redemption price equal to the default amount, plus a specified premium. “Redemption Event” is defined in the indentures as the occurrence of (i) any person or group, together with any affiliate thereof, beneficially owning 50% or more of the voting power of the Company, (ii) any one person or group, or affiliate thereof, succeeding in having a majority of its nominees elected to the Company’s Board of Directors, in each case, without the consent of a majority of the continuing directors of the Company or (iii) both a change of control and a below investment grade rating.

​

​

The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2019, and for the years subsequent to 2019 are:

​

​	​	​	​	​
2020		$	1,926
2021	​		804	​
2022	​		894	​
2023	​		594	​
2024	​		495	​
Thereafter	​		8,543	​
​	​	​	​	​
Total debt	​	$	13,256	​

​

​

7.	DERIVATIVE FINANCIAL INSTRUMENTS

​

GAAP requires that derivatives be carried at fair value on the balance sheet, and provides for hedge accounting when certain conditions are met. The Company’s derivative financial instruments are recognized on the balance sheet at fair value. Changes in the fair value of derivative instruments designated as “cash flow” hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings. Other comprehensive income or loss is reclassified into current period earnings when the hedged transaction affects earnings. Changes in the fair value of derivative instruments designated as “fair value” hedges, along with corresponding changes in the fair values of the hedged assets or liabilities, are recorded in current period earnings. Ineffective portions of fair value hedges, if any, are recognized in current period earnings.

​

The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of the hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively.

​

Interest Rate Risk Management

​

The Company is exposed to market risk from fluctuations in interest rates. The Company manages its exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair value hedges) and forward-starting interest rate swaps (cash flow hedges). The Company’s current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, the Company uses the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of the carrying value of the Company’s debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.

​

The Company reviews compliance with these guidelines annually with the Financial Policy Committee of the Board of Directors. These guidelines may change as the Company’s needs dictate.

​

Fair Value Interest Rate Swaps

​

The Company did not have any outstanding interest rate derivatives classified as fair value hedges as of February 1, 2020 and February 2, 2019.

​

​

Cash Flow Forward-Starting Interest Rate Swaps

​

As of February 1, 2020, the Company had seven forward-starting interest rate swap agreements with a maturity date of January 2021 with an aggregate notional amount totaling $350. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuance of debt in January 2021. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of February 1, 2020, the fair value of the interest rate swaps was recorded in other long-term liabilities for $19 and accumulated other comprehensive loss for $17 net of tax.

​

As of February 2, 2019, the Company had five forward-starting interest rate swap agreements with a maturity date of January 2020 with an aggregate notional amount totaling $250. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuance of debt in January 2020. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of February 2, 2019, the fair value of the interest rate swaps was recorded in other assets for $33 and accumulated other comprehensive income for $20 net of tax.

​

During 2019, the Company terminated six forward-starting interest rate swaps with maturity dates of January 2020 with an aggregate notional amount totaling $300. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the fourth quarter of 2019. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $12, $10 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made.

​

During 2018, the Company terminated nine forward-starting interest rate swaps with maturity dates of January 2019 with an aggregate notional amount totaling $750. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the fourth quarter of 2018. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized gain of $39, $30 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made.

​

The following table summarizes the effect of the Company’s derivative instruments designated as cash flow hedges for 2019, 2018 and 2017:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Year-To-Date																	​	​
​	​	Amount of Gain/(Loss) in								​	Amount of Gain/(Loss)								​	​
​	​	AOCI on Derivative								​	Reclassified from AOCI into								​	Location of Gain/(Loss)
Derivatives in Cash Flow Hedging	​	(Effective Portion)								​	Income (Effective Portion)								​	Reclassified into Income
Relationships		2019		​	2018			2017			2019		​	2018			2017			(Effective Portion)
Forward-Starting Interest Rate Swaps, net of tax*	​	$	(42)	​	$	6	​	$	24	​	$	(4)	​	$	(5)	​	$	(3)		Interest expense	​

​

*	The amounts of Gain/(Loss) in AOCI on derivatives include unamortized proceeds and payments from forward-starting interest rate swaps once classified as cash flow hedges that were terminated prior to end of 2019, 2018 and 2017, respectively.

​

For the above cash flow interest rate swaps, the Company has entered into International Swaps and Derivatives Association master netting agreements that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. These master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.

​

Collateral is generally not required of the counterparties or of the Company under these master netting agreements. As of February 1, 2020 and February 2, 2019, no cash collateral was received or pledged under the master netting agreements.

​

The effect of the net settlement provisions of these master netting agreements on the Company’s derivative balances upon an event of default or termination event is as follows as of February 1, 2020 and February 2, 2019:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	Gross Amounts Not Offset in the					​	​	​
​	​	​	​	​	​	​	​	Net Amount		​	Balance Sheet					​	​	​
​		Gross Amount			Gross Amounts Offset			Presented in the			Financial			​	​		​	​
February 1, 2020	​	Recognized		​	in the Balance Sheet		​	Balance Sheet		​	Instruments		​	Cash Collateral		​	Net Amount
Liabilities	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Cash Flow Forward-Starting Interest Rate Swaps	​	$	19	​	$	—	​	$	19	​	$	—	​	$	—	​	$	19	​

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	Gross Amounts Not Offset in the					​	​	​
​	​	​	​	​	​	​	​	Net Amount		​	Balance Sheet					​	​	​
​		Gross Amount			Gross Amounts Offset			Presented in the			Financial			​	​		​	​
February 2, 2019	​	Recognized		​	in the Balance Sheet		​	Balance Sheet		​	Instruments		​	Cash Collateral		​	Net Amount
Assets	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Cash Flow Forward-Starting Interest Rate Swaps	​	$	33	​	$	—	​	$	33	​	$	—	​	$	—	​	$	33	​

​

​

8.	FAIR VALUE MEASUREMENTS

​

GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy defined in the standards are as follows:

​

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.

​

For items carried at (or adjusted to) fair value in the consolidated financial statements, the following tables summarize the fair value of these instruments at February 1, 2020 and February 2, 2019:

​

February 1, 2020 Fair Value Measurements Using

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Quoted Prices in			​	​		​	​		​	​
​	​	Active Markets		​	​	​	​	Significant		​	​	​
​	​	for Identical		​	Significant Other		​	Unobservable		​	​	​
​	​	Assets		​	Observable Inputs		​	Inputs		​	​	​
​	​	(Level 1)		​	(Level 2)		​	(Level 3)		​	Total
Trading Securities	​	$	840	​	$	—	​	$	—	​	$	840	​
Other Investment	​	​	—	​		—	​		41	​		41	​
Interest Rate Hedges	​		—	​		(19)	​		—	​		(19)	​
Total	​	$	840	​	$	(19)	​	$	41	​	$	862	​

​

February 2, 2019 Fair Value Measurements Using

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Quoted Prices in			​	​		​	​		​	​
​	​	Active Markets		​	​	​	​	Significant		​	​	​
​	​	for Identical		​	Significant Other		​	Unobservable		​	​	​
​	​	Assets		​	Observable Inputs		​	Inputs		​	​	​
​	​	(Level 1)		​	(Level 2)		​	(Level 3)		​	Total
Trading Securities	​	$	671	​	$	—	​	$	—	​	$	671	​
Other Investment	​	​	—	​	​	—	​	​	22	​	​	22	​
Interest Rate Hedges	​		—	​		33	​		—	​		33	​
Total	​	$	671	​	$	33	​	$	22	​	$	726	​

​

In 2018, realized gains on Level 1, available-for-sale securities totaled $5.

​

The Company values interest rate hedges using observable forward yield curves. These forward yield curves are classified as Level 2 inputs.

​

Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of goodwill, other intangible assets, long-lived assets and in the valuation of store lease exit costs. The Company reviews goodwill and indefinite-lived intangible assets for impairment annually, during the fourth quarter of each fiscal year, and as circumstances indicate the possibility of impairment. See Note 3 for further discussion related to the Company’s carrying value of goodwill. Long-lived assets and store lease exit costs were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. See Note 1 for further discussion of the Company’s policies and recorded amounts for impairments of long-lived assets and valuation of store lease exit costs. In 2019, long-lived assets with a carrying amount of $152 were written down to their fair value of $32, resulting in an impairment charge of $120, which included the 35 planned store closures. In 2018, long-lived assets with a carrying amount of $85 were written down to their fair value of $29, resulting in an impairment charge of $56. In 2018, the Company entered into an agreement with a third party. As part of the consideration for entering the agreement, the Company received a financial instrument of $22.

​

Mergers are accounted for using the acquisition method of accounting, which requires that the purchase price paid for a merger be allocated to the assets and liabilities acquired based on their estimated fair values as of the effective date of the merger, 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.

​

Fair Value of Other Financial Instruments

​

Current and Long-term Debt

​

The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at respective year-ends. At February 1, 2020, the fair value of total debt excluding obligation under finance leases was $14,649 compared to a carrying value of $13,256. At February 2, 2019, the fair value of total debt excluding obligation under finance leases was $14,190 compared to a carrying value of $14,351.

​

Contingent Consideration

​

As a result of the Home Chef merger, the Company recognized a contingent liability of $91 on the acquisition date. The contingent consideration was measured using unobservable (Level 3) inputs and is included in “Other long-term liabilities” within the Consolidated Balance Sheet. The liability is remeasured to fair value at each reporting period, and the change in fair value, including accretion for the passage of time, is recognized in net earnings until the contingency is resolved. In 2019, an adjustment to decrease the contingent consideration liability as of year-end 2019 was recorded for ($69) in OG&A expense. In 2018, an adjustment to increase the contingent consideration liability as of year-end 2018 was recorded for $33 in OG&A expense.

​

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

​

The carrying amounts of these items approximated fair value.

​

​

Other Assets

​

In 2016, the Company entered into agreements with a third party. As part of the consideration for entering these agreements, the Company received a financial instrument that derives its value from the third party’s business operations. The Company used the Monte-Carlo simulation method to determine the fair value of this financial instrument. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of valuation paths in order to develop a reasonable estimate of the fair value of this financial instrument. The assumptions used in the Monte-Carlo simulation are classified as Level 3 inputs. The financial instrument was valued at $335 and recorded in “Other assets” within the Consolidated Balance Sheets. As the financial instrument was obtained in exchange for certain obligations, the Company also recognized offsetting deferred revenue liabilities in “Other current liabilities” and “Other long-term liabilities” within the Consolidated Balance Sheets. The deferred revenue will be amortized to “Sales” within the Consolidated Statements of Operations over the term of the agreements. Post inception, the Company received a distribution of $58, which was recorded as a reduction of the cost method investment. In the fourth quarter of 2018, a transaction occurred that resulted in the settlement of the financial instrument. As a result of the settlement, the Company received cash proceeds of $235. The Company recognized an impairment of financial instrument of $42 in OG&A in the fourth quarter of 2018.

​

The fair values of certain investments recorded in “other assets” within the Consolidated Balance Sheets were estimated based on quoted market prices for those or similar investments, or estimated cash flows, if appropriate. At February 1, 2020 and February 2, 2019, the carrying and fair value of long-term investments for which fair value is determinable was $278 and $155, respectively. At February 1, 2020 and February 2, 2019, the carrying value of notes receivable for which fair value is determinable was $210 and $146, respectively.

​

9.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

​

The following table represents the changes in AOCI by component for the years ended February 1, 2020 and February 2, 2019:

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	Pension and		​	​	​
​	​	Cash Flow		​	​	​	​	Postretirement		​	​	​
​	​	Hedging		​	Available for sale		​	Defined Benefit		​	​	​
​		Activities(1)			Securities(1)			Plans(1)			Total(1)
Balance at February 3, 2018	​	$	24	​	$	4	​	$	(499)	​	$	(471)
OCI before reclassifications(2)	​	​	(23)	​		(4)	​		104	​		77
Amounts reclassified out of AOCI(3)	​	​	5	​		—	​		43	​		48
Net current-period OCI	​	​	(18)	​		(4)	​		147	​		125
Balance at February 2, 2019	​	$	6	​	$	—	​	$	(352)	​	$	(346)
​	​	​	​	​	​	​	​	​	​	​	​	​
Balance at February 2, 2019	​	$	6	​	$	—	​	$	(352)	​	$	(346)
Cumulative effect of accounting change(4)	​	​	(5)	​	​	—	​	​	(141)	​	​	(146)
OCI before reclassifications(2)	​		(47)	​		—	​		(134)	​		(181)
Amounts reclassified out of AOCI(3)	​		4	​		—	​		29	​		33
Net current-period OCI	​		(48)	​		—	​		(246)	​		(294)
Balance at February 1, 2020	​	$	(42)	​	$	—	​	$	(598)	​	$	(640)

(1)	All amounts are net of tax.

(2)	Net of tax of $(8), $(1) and $32 for cash flow hedging activities, available for sale securities and pension and postretirement defined benefit plans, respectively, as of February 2, 2019. Net of tax of ($17) and ($42) for cash flow hedging activities and pension and postretirement defined benefit plans, respectively, as of February 1, 2020.

(3)	Net of tax of $13 and $3 for pension and postretirement defined benefit plans and cash flow hedging activities, respectively, as of February 2, 2019. Net of tax of $9 and $3 for pension and postretirement defined benefit plans and cash flow hedging activities, respectively, as of February 1, 2020.

(4)	Related to the adoption of ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” (see Note 18 for additional details).

​

The following table represents the items reclassified out of AOCI and the related tax effects for the years ended February 1, 2020, February 2, 2019 and February 3, 2018:

​

​	​	​	​	​	​	​	​	​	​	​	​
​	​		For the year ended		​	For the year ended		​	For the year ended		​
​			February 1, 2020			February 2, 2019			February 3, 2018
​	​	​	​	​	​	​	​	​	​	​	​
Cash flow hedging activity items	​	​	​	​	​	​	​	​	​	​	​
Amortization of gains and losses on cash flow hedging activities(1)	​	​	$	7	​	$	8	​	$	6	​
Tax expense	​	​		(3)	​		(3)	​		(3)	​
Net of tax	​	​		4	​		5	​		3	​
​	​	​	​	​	​	​	​	​	​	​	​
Pension and postretirement defined benefit plan items	​	​	​	​	​	​	​	​	​	​	​
Amortization of amounts included in net periodic pension cost(2)		​		38	​		56	​		69	​
Tax expense		​		(9)	​		(13)	​		(20)	​
Net of tax		​		29	​		43	​		49	​
Total reclassifications, net of tax		​	$	33	​	$	48	​	$	52	​

(1)	Reclassified from AOCI into interest expense.

(2)	Reclassified from AOCI into non-service component of company-sponsored pension plan costs. These components are included in the computation of net periodic pension expense.

​

​

10.	LEASES AND LEASE-FINANCED TRANSACTIONS

​

The Company leases certain store real estate, warehouses, distribution centers, office space and equipment. While the Company’s current strategy emphasizes ownership of store real estate, the Company operates in leased facilities in approximately half of its store locations. Lease terms generally range from 10 to 20 years with options to renew for varying terms at the Company’s sole discretion. Certain leases also include options to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Certain leases include escalation clauses or payment of executory costs such as property taxes, utilities or insurance and maintenance. Rent expense for leases with escalation clauses or other lease concessions are accounted for on a straight-line basis over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Certain properties or portions thereof are subleased to others for periods generally ranging from one to 20 years.

​

​

The following table provides supplemental balance sheet classification information related to leases:

​

​	​	​	​	​	​	​	​	​
​		​		February 1,			February 2,
​	​	Classification	​	2020		​	2019
Assets	​	​	​	​	​	​	​	​
Operating	​	Operating lease assets	​	$	6,814	​	$	—
Finance	​	Property, plant and equipment, net(1)	​	​	690	​	​	721
​	​	​	​	​	​	​	​	​
Total leased assets	​	​	​	$	7,504	​	$	721
​	​	​	​	​	​	​	​	​
Liabilities	​	​	​	​	​	​	​	​
Current	​	​	​	​	​	​	​	​
Operating	​	Current portion of operating lease liabilities	​	$	597	​	$	—
Finance	​	Current portion of long-term debt including obligations under finance leases	​	​	39	​	​	54
​	​	​	​	​	​	​	​	​
Noncurrent	​	​	​	​	​	​	​	​
Operating	​	Noncurrent operating lease liabilities	​	​	6,505	​	​	—
Finance	​	Long-term debt including obligations under finance leases	​	​	781	​	​	824
​	​	​	​	​	​	​	​	​
Total lease liabilities	​	​	​	$	7,922	​	$	878

	(1)	Finance lease assets are recorded net of accumulated amortization of $276 and $345 as of February 1, 2020 and February 2, 2019.

​

The following table provides the components of lease cost:

​

​	​	​	​	​	​	​
​	​	​	​	​	Year-To-Date
Lease Cost	​	Classification			February 1, 2020
Operating lease cost(1)	​	Rent Expense	​	​	$	1,000
Sublease and other rental income	​	Rent Expense	​	​		(116)
Finance lease cost	​	​	​	​		​
Amortization of leased assets	​	Depreciation and Amortization	​	​	​	53
Interest on lease liabilities	​	Interest Expense	​	​	​	48
​	​	​	​	​	​	​
Net lease cost	​	​	​	​	$	985

	(1)	Includes short-term leases and variable lease costs, which are immaterial.

​

​

Maturities of operating and finance lease liabilities are listed below. Amounts in the table include options to extend lease terms that are reasonably certain of being exercised.

​

​	​	​	​	​	​	​	​	​	​
​	​	Operating		​	Finance		​	​
​	​	Leases		​	Leases		​	Total
2020	​	$	932	​	$	84	​	$	1,016
2021	​		884	​		95	​		979
2022	​		772	​		80	​		852
2023	​		758	​		86	​		844
2024	​		637	​		81	​		718
Thereafter	​		6,353	​		757	​		7,110
​	​	​	​	​	​	​	​	​	​
Total lease payments	​	​	10,336	​	​	1,183	​	$	11,519
​	​	​	​	​	​	​	​	​	​
Less amount representing interest	​		3,234	​	​	363	​	​	​
​	​	​	​	​	​	​	​	​	​
Present value of lease liabilities(1)	​	$	7,102	​	$	820	​	​	​

	(1)	Includes the current portion of $597 for operating leases and $39 for finance leases.

​

Total future minimum rentals under non-cancellable subleases at February 1, 2020 were $296.

​

The following table provides the weighted-average lease term and discount rate for operating and finance leases:

​

​	​	​	​
​	​	​
​	​	February 1, 2020
Weighted-average remaining lease term (years)	​	​	​
Operating leases	​	16.0	​
Finance leases	​	15.3	​
Weighted-average discount rate	​	​	​
Operating leases	​	4.3	%
Finance leases	​	5.4	%
​	​	​	​

​

The following table provides supplemental cash flow information related to leases:

​

​	​	​	​
​	​	Year-To-Date
​	​	February 1, 2020
Cash paid for amounts included in the measurement of lease liabilities	​	​	​
Operating cash flows from operating leases	​	$	942
Operating cash flows from finance leases	​	​	48
Financing cash flows from finance leases	​	​	45
Leased assets obtained in exchange for new operating lease liabilities	​	​	849
Leased assets obtained in exchange for new finance lease liabilities	​	​	233
Net gain recognized from sale and leaseback transactions(1)	​	​	58
Impairment of operating lease assets(2)	​	​	81
Impairment of finance lease assets	​	​	40

	(1)	In 2019, the Company entered into sale leaseback transactions related to nine properties, which resulted in total proceeds of $113.

	(2)	Impairment of operating lease assets includes $11 related to Lucky’s Market.

​

​

The Company adopted new lease accounting guidance in the first quarter of 2019 as discussed in Note 1 and Note 18, and as required, the following disclosure is provided for periods prior to adoption. Minimum annual rentals and payments under capital leases and lease-financed transactions for the five years subsequent to February 2, 2019 and in the aggregate are listed below. Amounts in the table below only include payments through the noncancelable lease term.

​

​	​	​	​	​	​	​	​	​	​
​		​	​		​	​		Lease-
​	​	Capital		​	Operating		​	Financed
​	​	Leases		​	Leases		​	Transactions
2019	​	$	103	​	$	948	​	$	5
2020	​		89	​		880	​		6
2021	​		86	​		773	​		5
2022	​		82	​		649	​		5
2023	​		81	​		556	​		5
Thereafter	​		766	​		3,197	​		17
​	​	​	​	​	​	​	​	​	​
Total	​	​	1,207	​	$	7,003	​	$	43
​	​	​	​	​	​	​	​	​	​
Less estimated executory costs included in capital leases	​		—	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​
Net minimum lease payments under capital leases	​		1,207	​	​	​	​	​	​
Less amount representing interest	​		372	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​
Present value of net minimum lease payments under capital leases	​	$	835	​	​	​	​	​	​

​

​

11.	EARNINGS PER COMMON SHARE

​

Net earnings attributable to The Kroger Co. per basic common share equals net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding. Net earnings attributable to The Kroger Co. per diluted common share equals net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options. The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	For the year ended							​	For the year ended							​	For the year ended
​	​	February 1, 2020							​	February 2, 2019							​	February 3, 2018
​		​	​		​		Per			​	​		​		Per			​	​		​		Per
​	​	Earnings		​	Shares	​	Share		​	Earnings		​	Shares	​	Share		​	Earnings		​	Shares	​	Share
(in millions, except per share amounts)	​	(Numerator)		​	(Denominator)	​	Amount		​	(Numerator)		​	(Denominator)	​	Amount		​	(Numerator)		​	(Denominator)	​	Amount
Net earnings attributable to The Kroger Co. per basic common share	​	$	1,640		799	​	$	2.05	​	$	3,076		810	​	$	3.80	​	$	1,890		895	​	$	2.11	​
Dilutive effect of stock options	​	​	​		6	​	​	​	​	​	​		8	​	​	​	​	​	​		9	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co. per diluted common share	​	$	1,640		805	​	$	2.04	​	$	3,076		818	​	$	3.76	​	$	1,890		904	​	$	2.09	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

​

The Company had combined undistributed and distributed earnings to participating securities totaling $19, $34 and $17 in 2019, 2018 and 2017, respectively.

​

The Company had stock options outstanding for approximately 18.4 million, 10.1 million and 15.6 million shares, respectively, for the years ended February 1, 2020, February 2, 2019, and February 3, 2018, which were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per diluted share.

​

​

12.	STOCK-BASED COMPENSATION

​

The Company recognizes compensation expense for all share-based payments granted. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award based on the fair value at the date of the grant.

​

The Company grants options for common shares (“stock options”) to employees under various plans at an option price equal to the fair market value of the stock option at the date of grant. The Company accounts for stock options under the fair value recognition provisions. Stock options typically expire 10 years from the date of grant. Stock options vest between one and five years from the date of grant.

​

In addition to the stock options described above, the Company awards restricted stock to employees and nonemployee directors under various plans. The restrictions on these awards generally lapse between one and five years from the date of the awards. The Company determines the fair value for restricted stock awards in an amount equal to the fair market value of the underlying shares on the grant date of the award.

​

At February 1, 2020, approximately 58 million common shares were available for future options or restricted stock grants under the 2011, 2014, and 2019 Long-Term Incentive Plans (the “Plans”). Options granted reduce the shares available under the Plans at a ratio of one to one. Restricted stock grants reduce the shares available under the Plans at a ratio of 2.83 to one.

​

Equity awards granted are based on the aggregate value of the award on grant date. This can affect the number of shares granted in a given year as equity awards. Excess tax benefits related to equity awards are recognized in the provision for income taxes. Equity awards may be approved at one of four meetings of its Board of Directors occurring shortly after the Company’s release of quarterly earnings. The 2019 primary grants were made in conjunction with the March and June meetings of the Company’s Board of Directors.

​

All awards become immediately exercisable upon certain changes of control of the Company.

​

Stock Options

​

Changes in options outstanding under the stock option plans are summarized below:

​

​	​	​	​	​	​	​
​		Shares		Weighted-
​	​	subject	​	average
​	​	to option	​	exercise
​		(in millions)		price
Outstanding, year-end 2016		34.3	​	$	21.32	​
Granted		7.0	​	$	23.00	​
Exercised		(3.8)	​	$	14.08	​
Canceled or Expired		(0.8)	​	$	28.29	​
​	​	​	​	​	​	​
Outstanding, year-end 2017		36.7	​	$	22.23	​
Granted		2.7	​	$	27.88	​
Exercised		(4.4)	​	$	15.34	​
Canceled or Expired		(0.9)	​	$	28.05	​
​	​	​	​	​	​	​
Outstanding, year-end 2018		34.1	​	$	23.42	​
Granted		3.1	​	$	24.63	​
Exercised		(4.0)	​	$	14.17	​
Canceled or Expired		(1.0)	​	$	28.87	​
​	​	​	​	​	​	​
Outstanding, year-end 2019		32.2	​	$	24.52	​

​

​

A summary of options outstanding, exercisable and expected to vest at February 1, 2020 follows:

​

​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	Weighted-average	​	​	​	​	Aggregate
​	​	​	​	remaining	​	Weighted-average		​	intrinsic
​		Number of shares		contractual life		exercise price			value
​		(in millions)		(in years)	​	​	​		(in millions)	​
Options Outstanding		32.2		5.35	​	$	24.52		153	​
Options Exercisable		22.5		4.24	​	$	23.50		134	​
Options Expected to Vest		9.5		7.90	​	$	26.89		19	​

​

Restricted stock

​

Changes in restricted stock outstanding under the restricted stock plans are summarized below:

​

​	​	​	​	​	​	​
​		Restricted		​	​
​	​	shares	​	Weighted-average
​	​	outstanding	​	grant-date
​	​	(in millions)	​	fair value
Outstanding, year-end 2016		7.4	​	$	32.09	​
Granted		5.8	​	$	23.04	​
Lapsed		(3.6)	​	$	31.05	​
Canceled or Expired		(0.4)	​	$	29.26	​
​	​	​	​	​	​	​
Outstanding, year-end 2017		9.2	​	$	26.78	​
Granted		4.6	​	$	27.99	​
Lapsed		(4.4)	​	$	25.93	​
Canceled or Expired		(0.6)	​	$	26.57	​
​	​	​	​	​	​	​
Outstanding, year-end 2018		8.8	​	$	27.86	​
Granted		5.4	​	$	22.72	​
Lapsed		(4.1)	​	$	28.07	​
Canceled or Expired		(0.8)	​	$	25.68	​
​	​	​	​	​	​	​
Outstanding, year-end 2019		9.3	​	$	24.85	​

​

The weighted-average grant date fair value of stock options granted during 2019, 2018 and 2017 was $6.00, $6.78 and $4.71, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes accounting judgment and financial estimates, including the term option holders are expected to retain their stock options before exercising them, the volatility of the Company’s share price over that expected term, the dividend yield over the term and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations. The decrease in the fair value of the stock options granted during 2019, compared to 2018, resulted primarily from a decrease in the Company’s share price, partially offset by an increase in the weighted average expected volatility. The increase in the fair value of the stock options granted during 2018, compared to 2017, resulted primarily from an increase in the Company’s share price, which decreased the expected dividend yield, an increase in the weighted average expected volatility and the weighted average risk-free interest rate also contributed to the increase in fair value.

​

The following table reflects the weighted-average assumptions used for grants awarded to option holders:

​

​	​	​	​	​	​	​	​
​		2019		2018		2017
Weighted average expected volatility		25.37	%	24.50	%	22.78	%
Weighted average risk-free interest rate		2.54	%	2.82	%	2.21	%
Expected dividend yield		2.00	%	2.00	%	2.20	%
Expected term (based on historical results)		7.2	years	7.2	years	7.2	years

​

​

​

The weighted-average risk-free interest rate was based on the yield of a treasury note as of the grant date, continuously compounded, which matures at a date that approximates the expected term of the options. The dividend yield was based on our history and expectation of dividend payouts. Expected volatility was determined based upon historical stock volatilities; however, implied volatility was also considered. Expected term was determined based upon historical exercise and cancellation experience.

​

Total stock compensation recognized in 2019, 2018 and 2017 was $155, $154 and $151, respectively. Stock option compensation recognized in 2019, 2018 and 2017 was $24, $25 and $32, respectively. Restricted shares compensation recognized in 2019, 2018 and 2017 was $131, $129 and $119, respectively.

​

The total intrinsic value of stock options exercised was $51, $58 and $55 in 2019, 2018 and 2017, respectively. The total amount of cash received in 2019 by the Company from the exercise of stock options granted under share-based payment arrangements was $55. As of February 1, 2020, there was $194 of total unrecognized compensation expense remaining related to non-vested share-based compensation arrangements granted under Plans. This cost is expected to be recognized over a weighted-average period of approximately two years. The total fair value of options that vested was $26, $30 and $29 in 2019, 2018 and 2017, respectively.

​

Shares issued as a result of stock option exercises may be newly issued shares or reissued treasury shares. Proceeds received from the exercise of options, and the related tax benefit, may be utilized to repurchase the Company’s common shares under a stock repurchase program adopted by the Company’s Board of Directors. During 2019, the Company repurchased approximately two million common shares in such a manner.

​

13.	COMMITMENTS AND CONTINGENCIES

​

The Company continuously evaluates contingencies based upon the best available evidence.

​

The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.

​

The principal contingencies are described below:

​

Insurance — The Company’s workers’ compensation risks are self-insured in most states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans, and self-insured retention plans. The liability for workers’ compensation risks is accounted for on a present value basis. Actual claim settlements and expenses incident thereto may differ from the provisions for loss. Property risks have been underwritten by a subsidiary and are all reinsured with unrelated insurance companies. Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.

​

Litigation — Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material effect on the Company’s financial position, results of operations, or cash flows.

​

The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and when an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of loss for the Company’s exposure is not material to the Company. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

​

​

Assignments — The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees is unable to fulfill its lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.

​

14.	STOCK

​

Preferred Shares

​

The Company has authorized five million shares of voting cumulative preferred shares; two million shares were available for issuance at February 1, 2020. The shares have a par value of $100 per share and are issuable in series.

​

Common Shares

​

The Company has authorized two billion common shares, $1 par value per share.

​

Common Stock Repurchase Program

​

The Company maintains stock repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act of 1934 to allow for the orderly repurchase of The Kroger Co. common shares, from time to time. The Company made open market purchases totaling $400, $727 and $1,567 under these repurchase programs in 2019, 2018 and 2017, respectively.

​

On April 20, 2018 the Company entered and funded a $1,200 accelerated stock repurchase (“ASR”) program to reacquire shares in privately negotiated transactions. The final delivery under the ASR program occurred during the second quarter of 2018, which included the settlement of the remaining 2.3 million Kroger Common shares. In total, the Company invested $1,200 to repurchase 46.3 million Kroger common shares at an average price of $25.91 per share.

​

In addition to these repurchase programs, in December 1999, the Company began a program to repurchase common shares to reduce dilution resulting from its employee stock option plans. This program is solely funded by proceeds from stock option exercises and the related tax benefit. The Company repurchased approximately $65, $83 and $66 under the stock option program during 2019, 2018 and 2017, respectively.

​

15.	COMPANY- SPONSORED BENEFIT PLANS

​

The Company administers non-contributory defined benefit retirement plans for some non-union employees and union-represented employees as determined by the terms and conditions of collective bargaining agreements. These include several qualified pension plans (the “Qualified Plans”) and non-qualified pension plans (the “Non-Qualified Plans”). The Non-Qualified Plans pay benefits to any employee that earns in excess of the maximum allowed for the Qualified Plans by Section 415 of the Internal Revenue Code. The Company only funds obligations under the Qualified Plans. Funding for the company-sponsored pension plans is based on a review of the specific requirements and on evaluation of the assets and liabilities of each plan.

​

In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. The majority of the Company’s employees may become eligible for these benefits if they reach normal retirement age while employed by the Company. Funding of retiree health care benefits occurs as claims or premiums are paid.

​

The Company recognizes the funded status of its retirement plans on the Consolidated Balance Sheets. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized as part of net periodic benefit cost are required to be recorded as a component of AOCI. The Company has elected to measure defined benefit plan assets and obligations as of January 31, which is the month-end that is closest to its fiscal year-ends, which were February 1, 2020 for fiscal 2019 and February 2, 2019 for fiscal 2018.

​

​

Amounts recognized in AOCI as of February 1, 2020 and February 2, 2019 consists of the following (pre-tax):

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Pension Benefits					​	Other Benefits					​	Total
​		2019			2018			2019			2018			2019			2018
Net actuarial loss (gain)	​	$	955	​	$	837	​	$	(109)	​	$	(130)	​	$	846	​	$	707	​
Prior service credit	​		—	​		—	​		(68)	​		(66)	​		(68)	​		(66)	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total	​	$	955	​	$	837	​	$	(177)	​	$	(196)	​	$	778	​	$	641	​

​

Amounts in AOCI expected to be recognized as components of net periodic pension or postretirement benefit costs in the next fiscal year are as follows (pre-tax):

​

​	​	​	​	​	​	​	​	​	​	​
​		Pension Benefits			Other Benefits			Total
​	​	2020		​	2020		​	2020
Net actuarial loss (gain)	​	$	35	​	$	(9)	​	$	26	​
Prior service credit	​		—	​		(12)	​		(12)	​
​	​	​	​	​	​	​	​	​	​	​
Total	​	$	35	​	$	(21)	​	$	14	​

​

Other changes recognized in other comprehensive income (loss) in 2019, 2018 and 2017 were as follows (pre-tax):

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Pension Benefits								​	Other Benefits								​	Total
​		2019			2018			2017			2019			2018			2017			2019			2018			2017
Incurred net actuarial loss (gain)	​	$	179	​	$	(126)	​	$	322	​	$	9	​	$	(10)	​	$	(20)	​	$	188	​	$	(136)	​	$	302	​
Amortization of prior service credit	​		—	​		—	​		—	​		11	​		11	​		8	​		11	​		11	​		8	​
Amortization of net actuarial gain (loss)	​		(61)	​		(77)	​		(88)	​		12	​		10	​		11	​		(49)	​		(67)	​		(77)	​
Settlement recognition of net actuarial loss	​	​	—	​	​	—	​	​	(502)	​	​	—	​	​	—	​	​	—	​	​	—	​	​	—	​	​	(502)	​
Other	​		(1)	​		—	​		—	​		(12)	​		—	​		(28)	​		(13)	​		—	​		(28)	​
Total recognized in other comprehensive income (loss)	​		117	​		(203)	​		(268)	​		20	​		11	​		(29)	​		137	​		(192)	​		(297)	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total recognized in net periodic benefit cost and other comprehensive income (loss)	​	$	165	​	$	(127)	​	$	323	​	$	11	​	$	5	​	$	(30)	​	$	176	​	$	(122)	​	$	293	​

​

​

Information with respect to change in benefit obligation, change in plan assets, the funded status of the plans recorded in the Consolidated Balance Sheets, net amounts recognized at the end of fiscal years, weighted average assumptions and components of net periodic benefit cost follow:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Pension Benefits											​	​	​	​	​	​
​	​	Qualified Plans					​	Non-Qualified Plans					​	Other Benefits
​		2019			2018			2019			2018			2019			2018
Change in benefit obligation:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Benefit obligation at beginning of fiscal year	​	$	2,994	​	$	3,235	​	$	298	​	$	328	​	$	200	​	$	202	​
Service cost	​		32	​		35	​		1	​		2	​		6	​		7	​
Interest cost	​		124	​		124	​		12	​		12	​		8	​		8	​
Plan participants’ contributions	​		—	​		—	​		—	​		—	​		13	​		13	​
Actuarial (gain) loss	​		545	​		(134)	​		41	​		(13)	​		9	​		(9)	​
Plan curtailments	​	​	—	​	​	(92)	​	​	—	​	​	(6)	​	​	—	​	​	—	​
Benefits paid	​		(180)	​		(174)	​		(21)	​		(24)	​		(26)	​		(21)	​
Other	​		3	​		—	​		(3)	​		(1)	​		(12)	​		—	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Benefit obligation at end of fiscal year	​	$	3,518	​	$	2,994	​	$	328	​	$	298	​	$	198	​	$	200	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Change in plan assets:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fair value of plan assets at beginning of fiscal year	​	$	3,010	​	$	2,943	​	$	—	​	$	—	​	$	—	​	$	—	​
Actual return on plan assets	​		590	​		46	​		—	​		—	​		—	​		—	​
Employer contributions	​		—	​		185	​		21	​		25	​		13	​		8	​
Plan participants’ contributions	​		—	​		—	​		—	​		—	​		13	​		13	​
Benefits paid	​		(180)	​		(174)	​		(21)	​		(24)	​		(26)	​		(21)	​
Other	​		2	​		10	​		—	​		(1)	​		—	​		—	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Fair value of plan assets at end of fiscal year	​	$	3,422	​	$	3,010	​	$	—	​	$	—	​	$	—	​	$	—	​
Funded status and net asset and liability recognized at end of fiscal year	​	$	(96)	​	$	16	​	$	(328)	​	$	(298)	​	$	(198)	​	$	(200)	​

​

As of February 1, 2020, other assets and other current liabilities include $19 and $33, respectively, of the net asset and liability recognized for the above benefit plans. As of February 2, 2019, other assets and other current liabilities include $47 and $35, respectively, of the net asset and liability recognized for the above benefit plans.

​

In 2018, the Company contributed $185, $117 net of tax, to the company-sponsored pension plan. This contribution was designated to the 2017 tax year in order to deduct the contributions at the previous year tax rate. The Company announced changes to certain non-union company-sponsored pension plans. The Company froze the compensation and service periods used to calculate pension benefits for active employees who participate in the affected pension plans as of December 31, 2019. Beginning January 1, 2020, the affected active employees no longer accrue additional benefits for future service and eligible compensation received under these plans.

​

​

As of February 1, 2020 and February 2, 2019, pension plan assets do not include common shares of The Kroger Co.

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Pension Benefits					​	Other Benefits
Weighted average assumptions		2019		2018		2017		2019		2018		2017
Discount rate — Benefit obligation		3.01	%	4.23	%	4.00	%	2.97	%	4.19	%	3.93	%
Discount rate — Net periodic benefit cost		4.23	%	4.00	%	4.25	%	4.19	%	3.93	%	4.18	%
Expected long-term rate of return on plan assets		6.00	%	5.90	%	7.50	%	​	​	​	​	​	​
Rate of compensation increase — Net periodic benefit cost		3.04	%	3.03	%	3.07	%	​	​	​	​	​	​
Rate of compensation increase — Benefit obligation		3.03	%	3.04	%	3.03	%	​	​	​	​	​	​

​

The Company’s discount rate assumptions were intended to reflect the rates at which the pension benefits could be effectively settled. They take into account the timing and amount of benefits that would be available under the plans. The Company’s policy is to match the plan’s cash flows to that of a hypothetical bond portfolio whose cash flow from coupons and maturities match the plan’s projected benefit cash flows. The discount rates are the single rates that produce the same present value of cash flows. The selection of the 3.01% and 2.97% discount rates as of year-end 2019 for pension and other benefits, respectively, represents the hypothetical bond portfolio using bonds with an AA or better rating constructed with the assistance of an outside consultant. A 100 basis point increase in the discount rate would decrease the projected pension benefit obligation as of February 1, 2020, by approximately $401.

​

The Company’s 2019 assumed pension plan investment return rate was 6.00% compared to 5.90% in 2018 and 7.50% in 2017. The value of all investments in the company-sponsored defined benefit pension plans during the calendar year ended December 31, 2019, net of investment management fees and expenses, increased 18.3% and for fiscal year 2019 investments increased 19.7%. Historically, the Company’s pension plans’ average rate of return was 7.6% for the 10 calendar years ended December 31, 2019, net of all investment management fees and expenses. For the past 20 years, the Company’s pension plans’ average annual rate of return has been 6.70%. At the beginning of 2018, to determine the expected rate of return on pension plan assets held by the Company for 2018, the Company considered current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories.

​

The Company calculates its expected return on plan assets by using the market-related value of plan assets. The market-related value of plan assets is determined by adjusting the actual fair value of plan assets for gains or losses on plan assets. Gains or losses represent the difference between actual and expected returns on plan investments for each plan year. Gains or losses on plan assets are recognized evenly over a five-year period. Using a different method to calculate the market-related value of plan assets would provide a different expected return on plan assets.

​

On February 1, 2020, the Company adopted an updated assumption for generational mortality improvement, based on additional years of published mortality experience.

​

The pension benefit unfunded status increased in 2019, compared to 2018, due to the decrease in discount rate from 2018 to 2019, assumption changes related to the Company’s experience study, partially offset by higher than anticipated asset returns.

​

​

The following table provides the components of the Company’s net periodic benefit costs for 2019, 2018 and 2017:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Pension Benefits																​	​	​	​	​	​	​	​	​
​	​	Qualified Plans								​	Non-Qualified Plans							​	Other Benefits
​		2019			2018			2017			2019		2018			2017			2019			2018			2017
Components of net periodic benefit cost:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Service cost	​	$	32	​	$	35	​	$	53	​	$	1	$	2	​	$	2	​	$	6	​	$	7	​	$	8	​
Interest cost	​		124	​		124	​		163	​		12		12	​		13	​		8	​		8	​		9	​
Expected return on plan assets	​		(182)	​		(174)	​		(233)	​		—		—	​		—	​		—	​		—	​		—	​
Amortization of:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Prior service credit	​		—	​		—	​		—	​		—		—	​		—	​		(11)	​		(11)	​		(8)	​
Actuarial (gain) loss	​		55	​		69	​		79	​		6		8	​		9	​		(12)	​		(10)	​		(11)	​
Settlement loss recognized	​	​	—	​	​	—	​	​	502	​	​	—	​	—	​	​	—	​	​	—	​	​	—	​	​	—	​
Other	​	​	—	​		—	​		—	​		—		—	​		3	​		—	​		—	​		1	​
Net periodic benefit cost	​	$	29	​	$	54	​	$	564	​	$	19	$	22	​	$	27	​	$	(9)	​	$	(6)	​	$	(1)	​

​

The following table provides the projected benefit obligation (“PBO”), accumulated benefit obligation (“ABO”) and the fair value of plan assets for those company-sponsored pension plans with accumulated benefit obligations in excess of plan assets.

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Qualified Plans					​	Non-Qualified Plans
​		2019			2018			2019			2018
PBO at end of fiscal year	​	$	3,272	​	$	295	​	$	328	​	$	298	​
ABO at end of fiscal year	​	$	3,271	​	$	293	​	$	328	​	$	291	​
Fair value of plan assets at end of year	​	$	3,157	​	$	263	​	$	—	​	$	—	​

​

The following table provides information about the Company’s estimated future benefit payments.

​

​	​	​	​	​	​	​	​
​	​	Pension		​	Other
​	​	Benefits		​	Benefits
2020	​	$	208	​	$	12	​
2021	​	$	215	​	$	12	​
2022	​	$	224	​	$	13	​
2023	​	$	213	​	$	13	​
2024	​	$	217	​	$	13	​
2025 —2029	​	$	1,104	​	$	69	​

​

The following table provides information about the target and actual pension plan asset allocations as of February 1, 2020.

​

​	​	​	​	​	​	​	​
​	​	​	​	Actual
​	​	Target allocations	​	Allocations
​		2019		2019		2018
Pension plan asset allocation	​	​	​	​	​	​	​
Global equity securities		2.0	%	4.3	%	4.2	%
Emerging market equity securities		1.0	​	2.3	​	2.3	​
Investment grade debt securities		80.0	​	77.8	​	73.2	​
High yield debt securities		4.0	​	2.9	​	3.5	​
Private equity		10.0	​	8.1	​	9.5	​
Hedge funds		—	​	2.8	​	4.5	​
Real estate		3.0	​	1.8	​	2.8	​
​	​	​	​	​	​	​	​
Total		100.0	%	100.0	%	100.0	%

​

​

​

Investment objectives, policies and strategies are set by the Retirement Benefit Plan Management Committee (the “Committee”). The primary objectives include holding and investing the assets and distributing benefits to participants and beneficiaries of the pension plans. Investment objectives have been established based on a comprehensive review of the capital markets and each underlying plan’s current and projected financial requirements. The time horizon of the investment objectives is long-term in nature and plan assets are managed on a going-concern basis.

​

Investment objectives and guidelines specifically applicable to each manager of assets are established and reviewed annually. Derivative instruments may be used for specified purposes, including rebalancing exposures to certain asset classes. Any use of derivative instruments for a purpose or in a manner not specifically authorized is prohibited, unless approved in advance by the Committee.

​

The target allocations shown for 2019 were established in 2019 in conjunction with the continuation of the Company’s transition to a LDI strategy, which began in 2017. A LDI strategy focuses on maintaining a close to fully-funded status over the long-term with minimal funded status risk. This is achieved by investing more of the plan assets in fixed income instruments to more closely match the duration of the plan liability. This LDI strategy will be phased in over time as the Company is able to transition out of illiquid investments. During this transition, the Company’s target allocation will change by increasing the Company’s fixed income instruments. Cash flow from employer contributions and redemption of plan assets to fund participant benefit payments can be used to fund underweight asset classes and divest overweight asset classes, as appropriate. The Company expects that cash flow will be sufficient to meet most rebalancing needs.

​

The Company did not make any contributions to its company-sponsored pension plans in 2019 and the Company is not required to make any contributions to these plans in 2020. If the Company does make any contributions in 2020, the Company expects these contributions will decrease its required contributions in future years. Among other things, investment performance of plan assets, the interest rates required to be used to calculate the pension obligations, and future changes in legislation, will determine the amounts of any contributions. The Company expects 2020 benefit costs for company-sponsored pension plans to be approximately ($16).

​

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The Company used a 5.70% initial health care cost trend rate, which is assumed to decrease on a linear basis to a 4.50% ultimate health care cost trend rate in 2037, to determine its expense. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:

​

​	​	​	​	​	​	​	​
​		1% Point			1% Point
​	​	Increase		​	Decrease
Effect on total of service and interest cost components	​	$	2	​	$	(1)	​
Effect on postretirement benefit obligation	​	$	22	​	$	(18)	​

​

​

The following tables, set forth by level, within the fair value hierarchy, the Qualified Plans’ assets at fair value as of February 1, 2020 and February 2, 2019:

​

Assets at Fair Value as of February 1, 2020

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Quoted Prices in		​	​	​	​	Significant		​	​		​	​	​
​	​	Active Markets for		​	Significant Other		​	Unobservable		​	Assets		​	​	​
​	​	Identical Assets		​	Observable Inputs		​	Inputs		​	Measured		​	​	​
​		(Level 1)			(Level 2)			(Level 3)			at NAV			Total
Cash and cash equivalents	​	$	186	​	$	—	​	$	—	​	$	—	​	$	186	​
Corporate Stocks	​		78	​		—	​		—	​		—	​		78	​
Corporate Bonds	​		—	​		1,157	​		—	​		—	​		1,157	​
U.S. Government Securities	​		—	​		194	​		—	​		—	​		194	​
Mutual Funds	​		305	​		—	​		—	​		—	​		305	​
Collective Trusts	​		—	​		—	​		—	​		945	​		945	​
Hedge Funds	​		—	​		—	​		43	​		51	​		94	​
Private Equity	​		—	​		—	​		—	​		275	​		275	​
Real Estate	​		—	​		—	​		43	​		17	​		60	​
Other	​		—	​		128	​		—	​		—	​		128	​
Total	​	$	569	​	$	1,479	​	$	86	​	$	1,288	​	$	3,422	​

​

Assets at Fair Value as of February 2, 2019

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Quoted Prices in		​	​	​	​	Significant		​	​		​	​	​
​	​	Active Markets for		​	Significant Other		​	Unobservable		​	Assets		​	​	​
​	​	Identical Assets		​	Observable Inputs		​	Inputs		​	Measured		​	​	​
​		(Level 1)			(Level 2)			(Level 3)			at NAV			Total
Cash and cash equivalents	​	$	126	​	$	—	​	$	—	​	$	—	​	$	126	​
Corporate Stocks	​		66	​		—	​		—	​		—	​		66	​
Corporate Bonds	​		—	​		896	​		—	​		—	​		896	​
U.S. Government Securities	​		—	​		240	​		—	​		—	​		240	​
Mutual Funds	​		257	​		—	​		—	​		—	​		257	​
Collective Trusts	​		—	​		—	​		—	​		805	​		805	​
Hedge Funds	​		—	​		—	​		49	​		85	​		134	​
Private Equity	​		—	​		—	​		—	​		285	​		285	​
Real Estate	​		—	​		—	​		67	​		19	​		86	​
Other	​		—	​		115	​		—	​		—	​		115	​
Total	​	$	449	​	$	1,251	​	$	116	​	$	1,194	​	$	3,010	​

​

Certain investments that are measured at fair value using the NAV per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented for these investments in the preceding tables are intended to permit reconciliation of the fair value hierarchies to the total fair value of plan assets.

​

For measurements using significant unobservable inputs (Level 3) during 2019 and 2018, a reconciliation of the beginning and ending balances is as follows:

​

​	​	​	​	​	​	​
​		Hedge Funds			Real Estate
Ending balance, February 3, 2018	​	$	56	​		68
Contributions into Fund	​		—	​		9
Realized gains	​		1	​		12
Unrealized losses	​		4	​		(5)
Distributions	​		(16)	​		(15)
Other	​	​	4	​		(2)
​	​	​	​	​	​	​
Ending balance, February 2, 2019	​		49	​		67
Contributions into Fund	​		2	​		3
Realized gains	​		(2)	​		23
Unrealized gains	​		—	​		(17)
Distributions	​		(11)	​		(33)
Other	​		5	​		—
​	​	​	​	​	​	​
Ending balance, February 1, 2020	​	$	43	​	$	43

​

See Note 8 for a discussion of the levels of the fair value hierarchy. The assets’ fair value measurement level above is based on the lowest level of any input that is significant to the fair value measurement.

​

The following is a description of the valuation methods used for the Qualified Plans’ assets measured at fair value in the above tables:

​

	●	Cash and cash equivalents: The carrying value approximates fair value.

​

	●	Corporate Stocks: The fair values of these securities are based on observable market quotations for identical assets and are valued at the closing price reported on the active market on which the individual securities are traded.

​

	●	Corporate Bonds: The fair values of these securities are primarily based on observable market quotations for similar bonds, valued at the closing price reported on the active market on which the individual securities are traded. When such quoted prices are not available, the bonds are valued using a discounted cash flow approach using current yields on similar instruments of issuers with similar credit ratings, including adjustments for certain risks that may not be observable, such as credit and liquidity risks.

​

	●	U.S. Government Securities: Certain U.S. Government securities are valued at the closing price reported in the active market in which the security is traded. Other U.S. government securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for similar securities, the security is valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks.

​

	●	Mutual Funds: The fair values of these securities are based on observable market quotations for identical assets and are valued at the closing price reported on the active market on which the individual securities are traded.

​

	●	Collective Trusts: The collective trust funds are public investment vehicles valued using a Net Asset Value (NAV) provided by the manager of each fund. These assets have been valued using NAV as a practical expedient.

​

​

	●	Hedge Funds: The Hedge funds classified as Level 3 include investments that are not readily tradeable and have valuations that are not based on readily observable data inputs. The fair value of these assets is estimated based on information provided by the fund managers or the general partners. Therefore, these assets are classified as Level 3. Certain other hedge funds are private investment vehicles valued using a NAV provided by the manager of each fund. These assets have been valued using NAV as a practical expedient.

​

	●	Private Equity: Private Equity investments are valued based on the fair value of the underlying securities within the fund, which include investments both traded on an active market and not traded on an active market. For those investments that are traded on an active market, the values are based on the closing price reported on the active market on which those individual securities are traded. For investments not traded on an active market, or for which a quoted price is not publicly available, a variety of unobservable valuation methodologies, including discounted cash flow, market multiple and cost valuation approaches, are employed by the fund manager to value investments. Fair values of all investments are adjusted annually, if necessary, based on audits of the private equity fund financial statements; such adjustments are reflected in the fair value of the plan’s assets.

​

	●	Real Estate: Real estate investments include investments in real estate funds managed by a fund manager. These investments are valued using a variety of unobservable valuation methodologies, including discounted cash flow, market multiple and cost valuation approaches. The valuations for these investments are not based on readily observable inputs and are classified as Level 3 investments. Certain other real estate investments are valued using a NAV provided by the manager of each fund. These assets have been valued using NAV as a practical expedient.

​

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

​

The Company contributed and expensed $264, $263 and $219 to employee 401(k) retirement savings accounts in 2019, 2018 and 2017, respectively. The 401(k) retirement savings account plans provide to eligible employees both matching contributions and automatic contributions from the Company based on participant contributions, compensation as defined by the plan and length of service.

​

In 2019, the Company approved and implemented a plan to reorganize certain portions of its division management structure. This reorganization is expected to increase operational effectiveness and reduce overhead costs while maintaining a high quality customer experience. The Company recorded a charge for severance and related benefits of $80, $61 net of tax, in 2019, which is included in the OG&A caption within the Consolidated Statements of Operations. Of the total charge, $42 remains unpaid as of February 1, 2020 and is included in Other Current Liabilities within the Consolidated Balance Sheet.

​

**16.**MULTI-EMPLOYER PENSION PLANS

​

The Company contributes to various multi-employer pension plans based on obligations arising from collective bargaining agreements. These multi-employer pension plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.

​

The Company recognizes expense in connection with these plans as contributions are funded or when commitments are probable and reasonably estimable, in accordance with GAAP. The Company made cash contributions to these plans of $461 in 2019, $358 in 2018 and $954 in 2017. The increase in 2017, compared to 2019 and 2018, is primarily due to the $467 pre-tax payment to satisfy withdrawal obligations of certain local unions of the Central States Pension Fund and the 2017 United Food and Commercial Workers (“UFCW”) contribution.

​

​

The Company continues to evaluate and address potential exposure to under-funded multi-employer pension plans as it relates to the Company’s associates who are beneficiaries of these plans. These under-fundings are not a liability of the Company. When an opportunity arises that is economically feasible and beneficial to the Company and its associates, the Company may negotiate the restructuring of under-funded multi-employer pension plan obligations to help stabilize associates’ future benefits and become the fiduciary of the restructured multi-employer pension plan. The commitments from these restructurings do not change the Company’s debt profile as it relates to its credit rating since these off balance sheet commitments are typically considered in the Company’s investment grade debt rating.

​

The Company is currently designated as the named fiduciary of the UFCW Consolidated Pension Plan and the International Brotherhood of Teamsters (“IBT”) Consolidated Pension Fund and has sole investment authority over these assets. The Company became the fiduciary of the IBT Consolidated Pension Fund in 2017 due to the ratification of a new labor contract with the IBT that provided certain local unions of the Company to withdraw from the Central States Pension Fund. Significant effects of these restructuring agreements recorded in our Consolidated Financial Statements are:

​

	●	In 2019, the Company incurred a $135 charge, $104 net of tax, for obligations related to withdrawal liabilities for certain multi-employer pension plan funds.

​

	●	In 2018, the Company incurred a $155 charge, $121 net of tax, for obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension plan fund.

​

	●	In 2017, the Company incurred a $550 charge, $360 net of tax, for obligations related to withdrawals from and settlements of withdrawal liabilities for certain multi-employer pension plan funds, of which $467 was contributed to the Central States Pension Plan in 2017.

​

	●	In 2017, the Company contributed $111, $71 net of tax, to the UFCW Consolidated Pension Plan.

​

The risks of participating in multi-employer pension plans are different from the risks of participating in single-employer pension plans in the following respects:

​

	a.	Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.

​

	b.	If a participating employer stops contributing to the plan, the unfunded obligations of the plan allocable to such withdrawing employer may be borne by the remaining participating employers.

​

	c.	If the Company stops participating in some of its multi-employer pension plans, the Company may be required to pay those plans an amount based on its allocable share of the unfunded vested benefits of the plan, referred to as a withdrawal liability.

​

The Company’s participation in multi-employer plans is outlined in the following tables. The EIN / Pension Plan Number column provides the Employer Identification Number (“EIN”) and the three-digit pension plan number. The most recent Pension Protection Act Zone Status available in 2019 and 2018 is for the plan’s year-end at December 31, 2018 and December 31, 2017, respectively. Among other factors, generally, plans in the red zone are less than 65 percent funded, plans in the yellow zone are less than 80 percent funded and plans in the green zone are at least 80 percent funded. The FIP/RP Status Pending / Implemented Column indicates plans for which a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. Unless otherwise noted, the information for these tables was obtained from the Forms 5500 filed for each plan’s year-end at December 31, 2018 and December 31, 2017. The multi-employer contributions listed in the table below are the Company’s multi-employer contributions made in fiscal years 2019, 2018 and 2017.

​

​

The following table contains information about the Company’s multi-employer pension plans:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​								FIP/RP			​			​			​
​	​	​	​	Pension Protection			​	Status	​	​	​	​	​	​	​	​	​	​	​
​	​	EIN / Pension	​	Act Zone Status			​	Pending/	​	Multi-Employer Contributions								​	Surcharge
Pension Fund	​	Plan Number	​	2019	​	2018	​	Implemented	​	2019		​	2018		​	2017		​	Imposed (5)
SO CA UFCW Unions & Food Employers Joint Pension Trust Fund(1)(2)		95-1939092 - 001		Yellow		Yellow		Implemented	​	$	75	​	$	71	​	$	66		No	​
Desert States Employers & UFCW Unions Pension Plan(1)		84-6277982 - 001		Green		Green		No	​		19	​		19	​		18		No	​
Sound Retirement Trust (formerly Retail Clerks Pension Plan)(1)(3)		91-6069306 – 001		Yellow		Green		Implemented	​		25	​		23	​		20		No	​
Rocky Mountain UFCW Unions and Employers Pension Plan(1)		84-6045986 - 001		Green		Green		No	​		23	​		20	​		19		No	​
Oregon Retail Employees Pension Plan(1)		93-6074377 - 001		Green		Green		No	​		9	​		9	​		9		No	​
Bakery and Confectionary Union & Industry International Pension Fund(1)		52-6118572 - 001		Red		Red		Implemented	​		10	​		11	​		11		No	​
Retail Food Employers & UFCW Local 711 Pension(1)		51-6031512 - 001		Yellow		Yellow		Implemented	​		10	​		10	​		10		No	​
United Food & Commercial Workers Intl Union — Industry Pension Fund(1)(4)		51-6055922 - 001		Green		Green		No	​		32	​		32	​		33		No	​
Western Conference of Teamsters Pension Plan		91-6145047 - 001		Green		Green		No	​		34	​		34	​		34		No	​
Central States, Southeast & Southwest Areas Pension Plan		36-6044243 - 001		Red		Red		Implemented	​		—	​		18	​		492		No	​
UFCW Consolidated Pension Plan(1)		58-6101602 – 001		Green		Green		No	​		174	​		55	​		201		No	​
IBT Consolidated Pension Plan(1)(6)	​	82-2153627 - 001	​	N/A	​	N/A	​	No	​	​	33	​	​	37	​	​	—	​	No	​
Other(7)	​	​	​	​	​	​	​	​	​		17	​		19	​		41	​	​	​
Total Contributions	​	​	​	​	​	​	​	​	​	$	461	​	$	358	​	$	954	​	​	​

(1)	The Company's multi-employer contributions to these respective funds represent more than 5% of the total contributions received by the pension funds.

(2)	The information for this fund was obtained from the Form 5500 filed for the plan's year-end at March 31, 2019 and March 31, 2018.

(3)	The information for this fund was obtained from the Form 5500 filed for the plan's year-end at September 30, 2018 and September 30, 2017.

(4)	The information for this fund was obtained from the Form 5500 filed for the plan's year-end at June 30, 2018 and June 30, 2017.

(5)	Under the Pension Protection Act, a surcharge may be imposed when employers make contributions under a collective bargaining agreement that is not in compliance with a rehabilitation plan. As of February 1, 2020, the collective bargaining agreements under which the Company was making contributions were in compliance with rehabilitation plans adopted by the applicable pension fund.

(6)	The plan was formed after 2006, and therefore is not subject to zone status certifications.

(7)	The increase in 2017, compared to 2019 and 2018, in the "Other" funds is due primarily to withdrawal settlement payments for certain multi-employer funds in 2017.

​

The following table describes (a) the expiration date of the Company’s collective bargaining agreements and (b) the expiration date of the Company’s most significant collective bargaining agreements for each of the material multi-employer funds in which the Company participates.

​

​

​	​	​	​	​	​	​	​
​	​	Expiration Date	​	Most Significant Collective
​	​	of Collective	​	Bargaining Agreements(1)
​	​	Bargaining	​	(not in millions)
Pension Fund		Agreements		Count		Expiration
SO CA UFCW Unions & Food Employers Joint Pension Trust Fund		June 2020 to March 2022		2		June 2020 to March 2022	​
UFCW Consolidated Pension Plan		March 2020 to May 2023		4		April 2020 to August 2022	​
Desert States Employers & UFCW Unions Pension Plan		October 2020 to February 2022		1		October 2020	​
Sound Retirement Trust (formerly Retail Clerks Pension Plan)		April 2020 to February 2023		4		May 2022 to August 2022	​
Rocky Mountain UFCW Unions and Employers Pension Plan		January 2022		1		January 2022	​
Oregon Retail Employees Pension Plan (2)		August 2021 to March 2023		3		August 2021 to July 2022	​
Bakery and Confectionary Union & Industry International Pension Fund		December 2019 (2) to July 2022		4		May 2020 to October 2021	​
Retail Food Employers & UFCW Local 711 Pension		June 2017 (2) to April 2020		1		March 2019 (2)	​
United Food & Commercial Workers Intl Union — Industry Pension Fund		November 2019 (2) to August 2023		2		July 2023 to August 2023	​
Western Conference of Teamsters Pension Plan		September 2020 to April 2022		4		September 2020 to April 2022	​
International Brotherhood of Teamsters Consolidated Pension Fund	​	September 2019 (2) to September 2022	​	3	​	September 2019 (2) to September 2022	​

(1)

This column represents the number of significant collective bargaining agreements and their expiration date for each of the Company’s pension funds listed above. For purposes of this table, the “significant collective bargaining agreements” are the largest based on covered employees that, when aggregated, cover the majority of the employees for which we make multi-employer contributions for the referenced pension fund.

(2)	Certain collective bargaining agreements for each of these pension funds are operating under an extension.

​

Based on the most recent information available to it, the Company believes the present value of actuarial accrued liabilities in most of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits. Moreover, if the Company were to exit certain markets or otherwise cease making contributions to these funds, the Company could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated.

​

The Company also contributes to various other multi-employer benefit plans that provide health and welfare benefits to active and retired participants. Total contributions made by the Company to these other multi-employer health and welfare plans were approximately $1,252 in 2019, $1,282 in 2018 and $1,247 in 2017.

​

17.	HELD FOR SALE AND DISPOSAL OF BUSINESS

​

During the second quarter of 2018, the Company announced that as a result of a review of its assets, the Company had decided to explore strategic alternatives for its Turkey Hill Dairy business, including a potential sale. Additionally during the fourth quarter of 2018, the Company announced that it had entered into a definitive agreement to sell its You Technology business.

​

​

The following table presents information related to the major classes of assets and liabilities of all business that were classified as assets and liabilities held for sale in the Consolidated Balance Sheet as of February 2, 2019:

​

​	​	​
​	February 2,
(In millions)	2019
Assets held for sale:	​	​
Cash and temporary cash investments	$	1
Receivables	​	64
FIFO inventory	​	21
LIFO reserve	​	(1)
Prepaid and other current assets	​	3
Property, plant and equipment, net	​	77
Goodwill	​	1
Total assets held for sale	$	166
​	​	​
Liabilities held for sale:	​	​
Trade accounts payable	$	26
Accrued salaries and wages	​	8
Other current liabilities	​	17
Total liabilities held for sale	$	51

​

On March 13, 2019, the Company completed the sale of its You Technology business to Inmar for total consideration of $565, including $396 of cash and $64 of preferred equity received upon closing. The Company is also entitled to receive other cash payments of $105 over five years. The transaction includes a long-term service agreement for Inmar to provide the Company digital coupon services. The sale resulted in a gain of $70, $52 net of tax, which is included in “Gain on sale of businesses” in the Consolidated Statement of Operations. The Company recorded the fair value of the long-term service agreement of $358 in “Other current liabilities” and “Other long-term liabilities” in the Consolidated Balance Sheets and such amount is being recorded as sales over the 10-year agreement.

​

On April 26, 2019, the Company completed the sale of its Turkey Hill Dairy business to an affiliate of Peak Rock Capital for total proceeds of $225. The sale resulted in a gain of $106, $80 net of tax, which is included in “Gain on sale of businesses” in the Consolidated Statements of Operations.

​

In the third quarter of 2019, as a result of a portfolio review, the Company decided to divest its interest in Lucky’s Market. The Company recognized an impairment charge of $238 in the third quarter of 2019, which is included in OG&A in the Consolidated Statements of Operations. The impairment charge consists of property, plant and equipment of $200, which includes $40 of finance lease assets; goodwill of $19; operating lease assets of $11; and other charges of $8. The amount of the impairment charge attributable to The Kroger Co. is $131, $100 net of tax, with the remaining amount attributable to the minority interest. Subsequently, the decision was made by Lucky’s Market to file for bankruptcy in January 2020, which led the Company to fully write off the value of its investment and deconsolidate Lucky’s Market from the consolidated financial statements. This resulted in an additional non-cash charge of $174, $125 net of tax, in the fourth quarter of 2019, which is included in OG&A in the Consolidated Statements of Operations. The amount of the total 2019 charge attributable to The Kroger Co. is $305, $225 net of tax. The Company maintains liabilities associated with certain property related guarantees that will result in the Company making payments to settle these over time.

​

​

18.	RECENTLY ADOPTED ACCOUNTING STANDARDS

​

On February 4, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” which superseded previous revenue recognition guidance. Topic 606 is a comprehensive new revenue recognition model that requires a company to recognize revenue when goods and services are transferred to the customer in an amount that is proportionate to what has been delivered at that point and that reflects the consideration to which the company expects to be entitled for those goods or services. The Company adopted the standard using a modified retrospective approach with the adoption primarily involving the evaluation of whether the Company acts as principal or agent in certain vendor arrangements where the purchase and sale of inventory are virtually simultaneous. The Company will continue to record revenue and related costs on a gross basis for the arrangements. The adoption of the standard did not have a material effect on the Company’s Consolidated Statements of Operations, Consolidated Balance Sheets or Consolidated Statements of Cash Flows.

​

On February 3, 2019, the Company adopted ASU 2016-02, “Leases,” which provides guidance for the recognition of lease agreements. The Company adopted the standard using the modified retrospective approach, which provides a method for recording existing leases at adoption that approximates the results of a full retrospective approach. In addition, the Company elected the transition package of practical expedients permitted within the standard, which allowed it to carry forward the historical lease classification, and applied the transition option which does not require application of the guidance to comparative periods in the year of adoption.

​

The adoption of the standard resulted in the recognition of operating lease assets and operating lease liabilities of approximately $6,800 and $7,000, respectively, as of February 3, 2019. Included in the measurement of the new lease assets is the reclassification of certain balances including those historically recorded as prepaid or deferred rent and favorable and unfavorable leasehold interests. Several other asset and liability line items in the Consolidated Balance Sheets were also impacted by immaterial amounts. The adoption of this standard also resulted in a change in naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. The adoption of this standard did not materially affect the Company’s consolidated net earnings or cash flows.

​

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This amendment allows companies to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income (AOCI) to retained earnings. The Company adopted ASU 2018-02 on February 3, 2019, which resulted in a decrease to AOCI and an increase to accumulated earnings of $146, primarily related to deferred taxes previously recorded for pension and other postretirement benefits and cash flow hedges. The adoption of this standard did not have an effect on the Company’s consolidated results of operations or cash flows.

​

19.	RECENTLY ISSUED ACCOUNTING STANDARDS

​

In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” Under the new standard, implementation costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs. The new standard also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense. This guidance will be effective for the Company in the first quarter of the Company’s fiscal year ending January 30, 2021. The amendments may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently assessing the impact that adoption of this guidance will have on its Consolidated Financial Statements and related disclosures.

​

​

​

20.	QUARTERLY DATA (UNAUDITED)

​

The two tables that follow reflect the unaudited results of operations for 2019 and 2018.

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Quarter											​	​	​
​		First			Second			Third			Fourth			Total Year
2019	​	**(**16 Weeks)		​	​	**(**12 Weeks)	​	​	**(**12 Weeks)	​	​	**(**12 Weeks)	​	​	**(**52 Weeks)
Sales	​	$	37,251	​	$	28,168	​	$	27,974	​	$	28,893	​	$	122,286	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Operating Expenses	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below	​		28,983	​		22,007	​		21,798	​		22,507	​		95,294	​
Operating, general and administrative	​		6,314	​		4,811	​		5,097	​		4,985	​		21,208	​
Rent	​		274	​		200	​		201	​		209	​		884	​
Depreciation and amortization	​		779	​		591	​		624	​		655	​		2,649	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Operating profit	​		901	​		559	​		254	​		537	​		2,251	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other income (expense)	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest expense	​		(197)	​		(130)	​		(137)	​		(140)	​		(603)	​
Non-service component of company sponsored pension plan costs	​	​	3	​	​	(4)	​	​	(1)	​	​	2	​	​	—	​
Mark to market gain (loss) on Ocado securities	​	​	106	​	​	(45)	​	​	106	​	​	(9)	​	​	157	​
Gain on sale of business	​	​	176	​	​	—	​	​	—	​	​	—	​	​	176	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings before income tax expense	​		989	​		380	​		222	​		390	​		1,981	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income tax expense	​		226	​		93	​		79	​		71	​		469	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings including noncontrolling interests	​		763	​		287	​		143	​		319	​		1,512	​
Net loss attributable to noncontrolling interests	​		(9)	​		(10)	​		(120)	​		(8)	​		(147)	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co.	​	$	772	​	$	297	​	$	263	​	$	327	​	$	1,659	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co. per basic common share	​	$	0.96	​	$	0.37	​	$	0.32	​	$	0.40	​	$	2.05	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Average number of shares used in basic calculation	​		798	​		800	​		802	​		797	​		799	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co. per diluted common share	​	$	0.95	​	$	0.37	​	$	0.32	​	$	0.40	​	$	2.04	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Average number of shares used in diluted calculation	​		805	​		805	​		807	​		804	​		805	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Dividends declared per common share	​	$	0.14	​	$	0.16	​	$	0.16	​	$	0.16	​	$	0.62	​

​

Annual amounts may not sum due to rounding.

​

Net earnings for the first quarter of 2019 include charges to OG&A expenses of $59, $44 net of tax, for obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension fund and a reduction to OG&A of $24, $18 net of tax, for the revaluation of Home Chef contingent consideration. Gains in other income of $106, $80 net of tax, related to the sale of Turkey Hill Dairy; $70, $52 net of tax, related to the sale of You Technology; and $106, $80 net of tax, for the mark to market gain on Ocado Group plc (“Ocado”) securities.

​

​

Net earnings for the second quarter of 2019 include charges to OG&A of $27, $22 net of tax, for obligations related to withdrawal liabilities for a certain multi-employer pension fund and $2, $2 net of tax, for the revaluation of Home Chef contingent consideration. A charge in other income (expense) of $45, $36 net of tax, for the mark to market loss on Ocado securities.

​

Net earnings for the third quarter of 2019 include a charge to OG&A of $45, $35 net of tax, for obligations related to withdrawal liabilities for a certain multi-employer pension fund; $80, $61 net of tax, for a severance charge and related benefits; $238 including $131 attributable to the Kroger Co., $100 net of tax, for impairment of Lucky’s Market; and $4, $3 net of tax, for the revaluation of Home Chef contingent consideration. A gain in other income of $106, $81 net of tax, for the mark to market gain on Ocado securities.

​

Net earnings for the fourth quarter of 2019 include charges to OG&A of $4, $3 net of tax, for obligations related to withdrawal liabilities for certain multi-employer pension funds; $174, $125 net of tax, for deconsolidation and impairment of Lucky’s Market; $52, $37 net of tax, for transformation costs, primarily including 35 planned store closures; and a reduction to OG&A of $51, $36 net of tax, for the revaluation of Home Chef contingent consideration. Loss in other income (expense) of $9, $6 net of tax, for the mark to market loss on Ocado securities.

​

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Quarter											​	​	​
​		First			Second			Third			Fourth			Total Year
2018	​	**(**16 Weeks)		​	**(**12 Weeks)		​	**(**12 Weeks)		​	**(**12 Weeks)		​	**(**52 Weeks)
Sales	​	$	37,722	​	$	28,014	​	$	27,831	​	$	28,286	​	$	121,852	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Operating Expenses	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below	​		29,419	​		21,976	​		21,753	​		21,955	​		95,103	​
Operating, general and administrative	​		6,257	​		4,711	​		4,661	​		5,155	​		20,786	​
Rent	​		276	​		204	​		200	​		204	​		884	​
Depreciation and amortization	​		741	​		574	​		570	​		581	​		2,465	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Operating profit	​		1,029	​		549	​		647	​		391	​		2,614	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other income (expense)	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest expense	​		(192)	​		(144)	​		(142)	​		(142)	​		(620)	​
Non-service component of company sponsored pension plan costs	​	​	(10)	​	​	(4)	​	​	(6)	​	​	(7)	​	​	(26)	​
Mark to market gain (loss) on Ocado securities	​	​	36	​	​	216	​	​	(100)	​	​	75	​	​	228	​
Gain on sale of business	​	​	1,771	​	​	11	​	​	—	​	​	—	​	​	1,782	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings before income tax expense	​		2,634	​		628	​		399	​		317	​		3,978	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income tax expense	​		616	​		127	​		91	​		66	​		900	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings including noncontrolling interests	​		2,018	​		501	​		308	​		251	​		3,078	​
Net loss attributable to noncontrolling interests	​		(8)	​		(7)	​		(9)	​		(8)	​		(32)	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co.	​	$	2,026	​	$	508	​	$	317	​	$	259	​	$	3,110	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co. per basic common share	​	$	2.39	​	$	0.63	​	$	0.39	​	$	0.32	​	$	3.80	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Average number of shares used in basic calculation	​		839	​		797	​		797	​		798	​		810	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co. per diluted common share	​	$	2.37	​	$	0.62	​	$	0.39	​	$	0.32	​	$	3.76	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Average number of shares used in diluted calculation	​		846	​		805	​		807	​		806	​		818	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Dividends declared per common share	​	$	0.125	​	$	0.140	​	$	0.140	​	$	0.140	​	$	0.545	​

​

Annual amounts may not sum due to rounding.

​

Net earnings for the first quarter of 2018 include a reduction to OG&A expenses of $13, $10 net of tax, for adjustments to obligations related to certain local unions withdrawing from the Central States multi-employer pension fund, a reduction to depreciation and amortization expenses of $14, $11 net of tax, related to held for sale assets, gains in other income (expense) of $1,771, $1,352 net of tax, related to the sale of the convenience store business unit and $36, $27 net of tax, for the mark to market gain on Ocado securities.

​

Net earnings for the second quarter of 2018 include gains in other income (expense) of $11, $8 net of tax, related to the sale of the convenience store business unit and $216, $164 net of tax, for the mark to market gain on Ocado securities.

​

Net earnings for the third quarter of 2018 include a loss in other income (expense) of $100, $77 net of tax, for the mark to market loss on Ocado securities.

​

​

Net earnings for the fourth quarter of 2018 include charges to OG&A expenses of $168, $131 net of tax, for obligations related to certain local unions withdrawing from the Central States multi-employer pension fund, $33, $26 net of tax, for the revaluation of contingent consideration and $42, $33 net of tax, for an impairment of financial instrument, a gain in other income (expense) of $75, $59 net of tax, for the mark to market gain on Ocado securities.

​

21.	SUBSEQUENT EVENTS

​

On March 18, 2020, the Company proactively borrowed $1,000 from the revolving credit facility. This was a precautionary measure in order to preserve financial flexibility, reduce reliance on the commercial paper market and maintain liquidity in response to the coronavirus pandemic. Cash and temporary cash investments immediately following the borrowing were approximately $2,336.

​

In anticipation of future debt refinancing, the Company, subsequent to February 1, 2020, entered into three forward-starting interest rate swap agreements with a maturity date of January 2021 with an aggregate notional amount totaling $150.

​

​