Kroger 10-Q 2021-11-06

​

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

​

​

FORM 10-Q

​

​

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

​

For the quarterly period ended November 6, 2021

OR

​

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

​

For the transition period from to

Commission file number 1-303

​

​

​

The Kroger Co.

(Exact name of registrant as specified in its charter)

​

​

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

​

1014 Vine Street**,** Cincinnati**,** Ohio 45202

(Address of principal executive offices)

(Zip Code)

​

(513) 762-4000

(Registrant’s telephone number, including area code)

​

Unchanged

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

​

​

Securities registered pursuant to Section 12(b) of the Act:

​

Title of each class	Trading Symbol	Name of each exchange on which registered
Common, $1.00 Par Value	KR	New York Stock Exchange

​

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

​

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

​

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

​

​	​	​	​	​
Large accelerated filer	☒	​	Accelerated filer	☐
Non-accelerated filer	☐	​	Smaller reporting company	☐
​	​	​	Emerging growth company	☐

​

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

​

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

​

There were 735,255,564 shares of Common Stock ($1 par value) outstanding as of December 7, 2021.

​

​

​

PART I – FINANCIAL INFORMATION

​

Item 1.	Financial Statements.

​

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Third Quarter Ended					​	Three Quarters Ended					​
​	​	November 6,		​	November 7,		​	November 6,		​	November 7,		​
(In millions, except per share amounts)		2021			2020			2021			2020
Sales	​	$	31,860	​	$	29,723	​	$	104,840	​	$	101,761	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Operating expenses	​	​	​	​	​	​	​	​	​	​	​	​	​
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below	​		24,959	​		22,901	​		81,820	​		77,906	​
Operating, general and administrative	​		5,177	​		5,194	​		17,692	​		18,162	​
Rent	​		197	​		205	​		648	​		682	​
Depreciation and amortization	​		659	​		631	​		2,168	​		2,073	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Operating profit	​		868	​		792	​		2,512	​		2,938	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other income (expense)	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest expense	​	​	(135)	​	​	(129)	​	​	(438)	​	​	(438)	​
Non-service component of company-sponsored pension plan costs	​	​	(77)	​	​	9	​	​	(44)	​	​	28	​
(Loss) gain on investments	​	​	(94)	​	​	162	​	​	(694)	​	​	952	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings before income tax expense	​		562	​		834	​		1,336	​		3,480	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income tax expense	​		77	​		202	​		239	​		816	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings including noncontrolling interests	​		485	​		632	​		1,097	​		2,664	​
Net income attributable to noncontrolling interests	​		2	​		1	​		7	​		2	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co.	​	$	483	​	$	631	​	$	1,090	​	$	2,662	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co. per basic common share	​	$	0.64	​	$	0.81	​	$	1.44	​	$	3.39	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Average number of common shares used in basic calculation	​		742	​		772	​		747	​		777	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net earnings attributable to The Kroger Co. per diluted common share	​	$	0.64	​	$	0.80	​	$	1.43	​	$	3.35	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Average number of common shares used in diluted calculation	​		752	​		780	​		757	​		785	​

​

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

​

​

THE KROGER CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Third Quarter Ended					​	Three Quarters Ended					​
​	​	November 6,		​	November 7,		​	November 6,		​	November 7,		​
(In millions)		2021			2020			2021			2020
Net earnings including noncontrolling interests	​	$	485	​	$	632	​	$	1,097	​	$	2,664	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other comprehensive income (loss)	​	​	​	​	​	​	​	​	​	​	​	​	​
Change in pension and other postretirement defined benefit plans, net of income tax(1)	​	​	132	​	​	22	​	​	134	​	​	28	​
Unrealized gains and losses on cash flow hedging activities, net of income tax(2)	​		—	​		7	​		—	​		(12)	​
Amortization of unrealized gains and losses on cash flow hedging activities, net

Showing the first 8K of 61K characters. Open the full section

​

The following analysis should be read in conjunction with the Consolidated Financial Statements.

​

USE OF NON-GAAP FINANCIAL MEASURES

​

The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles (“GAAP”). We provide non-GAAP measures, including First-In, First-Out (“FIFO”) gross margin, FIFO operating profit, adjusted FIFO operating profit, adjusted net earnings and adjusted net earnings per diluted share because management believes these metrics are useful to investors and analysts. These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share or any other GAAP measure of performance. These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP.

​

We calculate FIFO gross margin as FIFO gross profit divided by sales. FIFO gross profit is calculated as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs exclude depreciation and rent expenses. FIFO gross margin is an important measure used by management and management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness.

​

We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management and management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness.

​

The adjusted net earnings, adjusted net earnings per diluted share and adjusted FIFO operating profit metrics are important measures used by management to compare the performance of core operating results between periods. We believe adjusted net earnings, adjusted net earnings per diluted share and adjusted FIFO operating profit are useful metrics to investors and analysts because they present more accurate year-over-year comparisons of our net earnings, net earnings per diluted share and FIFO operating profit because adjusted items are not the result of our normal operations. Net earnings for the first three quarters of 2021 include the following, which we define as the “2021 Adjusted Items”:

​

	●	Charges to operating, general and administrative expenses (“OG&A”) of $449 million, $344 million net of tax, for obligations related to withdrawal liabilities for a certain multi-employer pension fund; $61 million, $47 million net of tax, for the revaluation of Home Chef contingent consideration and $107 million, $82 million net of tax, for transformation costs (the “2021 OG&A Adjusted Items”).

​

	●	Losses in other income (expense) of $87 million, $68 million net of tax, related to company-sponsored pension plan settlements and $694 million, $533 million net of tax, for the unrealized loss on investments (the “2021 Other Income (Expense) Adjusted Items”).

​

	●	A reduction to income tax expense of $47 million primarily due to the completion of income tax audit examinations covering multiple years.

​

Net earnings for the third quarter of 2021 include the following, which we define as the “2021 Third Quarter Adjusted Items”:

​

	●	Charges to OG&A of $10 million, $7 million net of tax, for the revaluation of Home Chef contingent consideration and $6 million, $5 million net of tax, for transformation costs (the “2021 Third Quarter OG&A Adjusted Items”).

​

	●	Losses in other income (expense) of $87 million, $68 million net of tax, related to company-sponsored pension plan settlements and $94 million, $73 million net of tax, for the unrealized loss on investments (the “2021 Third Quarter Other Income (Expense) Adjusted Items”).

​

	●	A reduction to income tax expense of $47 million primarily due to the completion of income tax audit examinations covering multiple years.

​

​

Net earnings for the first three quarters of 2020 include the following, which we define as the “2020 Adjusted Items”:

​

	●	Charges to OG&A of $109 million, $80 million net of tax, for the revaluation of Home Chef contingent consideration and $100 million, $73 million net of tax, for transformation costs (the “2020 OG&A Adjusted Items”).

​

	●	Gains in other income (expense) of $952 million, $705 million net of tax, for the unrealized gain on investments (the “2020 Other Income (Expense) Adjusted Item”).

​

Net earnings for the third quarter of 2020 include the following, which we define as the “2020 Third Quarter Adjusted Items”:

​

	●	Charges to OG&A of $24 million, $17 million net of tax, for the revaluation of Home Chef contingent consideration and $33 million, $24 million net of tax, for transformation costs (the “2020 Third Quarter OG&A Adjusted Items”).

​

	●	Gains in other income (expense) of $162 million, $115 million net of tax, for the unrealized gain on investments (the “2020 Third Quarter Other Income (Expense) Adjusted Item”).

​

Please refer to the “Net Earnings per Diluted Share excluding the Adjusted Items” table and the tables in the “Two-Year Financial Results” section below for reconciliations of certain non-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the most comparable GAAP financial measure and related disclosure.

​

CAUTIONARY STATEMENT

​

This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Such statements are indicated by words such as “achieve,” “affect,” “anticipate,” “believe,” “committed,” “confident,” “continue,” “could,” “estimate,” “expect,” “future,” “guidance,” “maintain,” “may,” “strategy,” “trend,” “will,” “well positioned,” and “would,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. These include the specific risk factors identified in “Risk Factors” in our Annual Report on Form 10-K for our last fiscal year and any subsequent filings, as well as those identified in this Form 10-Q.

​

Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include:

​

	●	The extent to which our sources of liquidity are sufficient to meet our requirements may be affected by the state of the financial markets and the effect that such condition has on our ability to issue commercial paper at acceptable rates. Our ability to borrow under our committed lines of credit, including our bank credit facilities, could be impaired if one or more of our lenders under those lines is unwilling or unable to honor its contractual obligation to lend to us, or in the event that global pandemics, including the ongoing COVID-19 pandemic (including any variant), natural disasters or weather conditions interfere with the ability of our lenders to lend to us. Our ability to refinance maturing debt may be affected by the state of the financial markets.

​

​

| | ● | Our ability to achieve sales, earnings and incremental FIFO operating profit goals may be affected by: COVID-19 pandemic related factors, risks and challenges, including among others, the length of time that the pandemic continues, new variants of the virus and the effectiveness of vaccines against variants, continued efficacy of vaccin

Showing the first 8K of 78K characters. Open the full section

​

There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021.

​

​

The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures as of the quarter ended November 6, 2021, the end of the period covered by this report. Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

​

The Company is in the process of implementing a broad, multi-year, technology transformation project to modernize mainframe, middleware and legacy systems to achieve better process efficiencies across customer service, merchandising, sourcing, payroll and accounting through the use of various solutions. Implementation of new accounting ERP modules for general ledger, accounts receivable, accounts payable, fixed assets and a new indirect procurement module were implemented at the beginning of the first quarter of 2021. Additional phases of the project will continue to be implemented over the next several years. As of November 6, 2021, there have been no material additional implementations of modules since the beginning of the first quarter of 2021. As the Company’s technology transformation project continues, the Company continues to emphasize the maintenance of effective internal controls and assessment of the design and operating effectiveness of key control activities throughout development and deployment of each phase and will evaluate as additional phases are deployed.

​

There were no changes in Kroger’s internal control over financial reporting that materially affected, or were reasonably likely to materially affect, Kroger’s internal control over financial reporting during the quarter ended November 6, 2021.

​

PART II - OTHER INFORMATION

​

​

Incorporated by reference herein is information regarding certain legal proceedings in which we are involved as set forth under “Litigation” contained in Note 7 – “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements in Item 1 of Part I of this quarterly report on Form 10-Q.

​

​

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

​

(c)

ISSUER PURCHASES OF EQUITY SECURITIES

​

​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	Approximate
​	​	​	​	​	​	​	​	​	Dollar Value of
​	​	​	​	​	​	​	​	​	Shares that May
​	​	​	​	​	​	​	Total Number of	​	Yet Be
​	​	​	​	​	​	​	Shares Purchased	​	Purchased
​	​	Total Number	​	Average		​	as Part of Publicly	​	Under the Plans
​	​	of Shares	​	Price Paid Per		​	Announced Plans	​	or Programs(4)
Period(1)		Purchased(2)		Share(2)			or Programs(3)		(in millions)
First four weeks	​	​	​	​	​	​	​	​	​	​	​
August 15, 2021 to September 11, 2021		892,809		$	45.15		892,809		$	755	​
Second four weeks	​	​	​	​	​	​	​	​	​	​	​
September 12, 2021 to October 9, 2021		3,141,603		$	40.70		3,112,447		$	639	​
Third four weeks	​	​	​	​	​	​	​	​	​	​	​
October 10, 2021 to November 6, 2021		3,296,363		$	39.58		3,296,180		$	511	​
Total		7,330,775		$	40.74		7,301,436		$	511	​

(1)	The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The third quarter of 2021 contained three 28-day periods.

​

(2)

Includes (i) shares repurchased under the June 2021 Repurchase Program described below in (4), (ii) shares repurchased under a program announced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, under which repurchases are limited to proceeds received from exercises of stock options and the tax benefits associated therewith (“1999 Repurchase Program”) and (iii) 29,339 shares that were surrendered to the Company by participants under our long-term incentive plans to pay for taxes on restricted stock awards.

​

(3)	Represents shares repurchased under the June 2021 Repurchase Program and the 1999 Repurchase Program.

​

(4)

On June 16, 2021, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “June 2021 Repurchase Program”). The amounts shown in this column reflect the amount remaining under the June 2021 Repurchase Program as of the specified period end dates. Amounts available under the 1999 Repurchase Program are dependent upon option exercise activity. The June 2021 Repurchase Program and the 1999 Repurchase Program do not have an expiration date but may be suspended or terminated by our Board of Directors at any time.

​

​

​

EXHIBIT 3.1	-	Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010, as amended by the Amendment to Amended Articles of Incorporation, which is hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 23, 2015.
​	​	​
EXHIBIT 3.2	-	The Company’s regulations are hereby incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 27, 2019.
​	​	​
EXHIBIT 4.1	-	Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request.
​	​	​
EXHIBIT 31.1*	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.
​	​	​
EXHIBIT 31.2*	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer.
​	​	​
EXHIBIT 32.1*	-	Section 1350 Certifications.
​	​	​
EXHIBIT 101.INS*	-	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
​	​	​
EXHIBIT 101.SCH*	-	XBRL Taxonomy Extension Schema Document.
​	​	​
EXHIBIT 101.CAL*	-	XBRL Taxonomy Extension Calculation Linkbase Document.
​	​	​
EXHIBIT 101.DEF*	-	XBRL Taxonomy Extension Definition Linkbase Document.
​	​	​
EXHIBIT 101.LAB*	-	XBRL Taxonomy Extension Label Linkbase Document.
​	​	​
EXHIBIT 101.PRE*	-	XBRL Taxonomy Extension Presentation Linkbase Document.
​	​	​
EXHIBIT 104	-	Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
​	​	​
*Filed herewith	​	​
​

​

​

​

​

​

SIGNATURES

​

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

​

​	THE KROGER CO.
​	​
Dated: December 10, 2021	By:	/s/ W. Rodney McMullen
​	​	W. Rodney McMullen
​	​	Chairman of the Board and Chief Executive Officer
​	​	​
Dated: December 10, 2021	By:	/s/ Gary Millerchip
​	​	Gary Millerchip
​	​	Senior Vice President and Chief Financial Officer

​

​

​

​