Kroger 10-Q 2022-11-05

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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

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For the quarterly period ended November 5, 2022

OR

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

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For the transition period from to

Commission file number 1-303

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The Kroger Co.

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices)

(Zip Code)

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(513) 762-4000

(Registrant’s telephone number, including area code)

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Unchanged

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

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

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

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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 ☐

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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 ☐

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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.

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

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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. ☐

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

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There were 715,821,875 shares of Common Stock ($1 par value) outstanding as of December 6, 2022.

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PART I – FINANCIAL INFORMATION

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Item 1.	Financial Statements.

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THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Third Quarter Ended					​	Three Quarters Ended					​
​	​	November 5,		​	November 6,		​	November 5,		​	November 6,		​
(In millions, except per share amounts)		2022			2021			2022			2021
Sales	​	$	34,198	​	$	31,860	​	$	113,436	​	$	104,840	​
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Operating expenses	​	​	​	​	​	​	​	​	​	​	​	​	​
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below	​		26,890	​		24,959	​		89,234	​		81,820	​
Operating, general and administrative	​		5,587	​		5,177	​		18,001	​		17,692	​
Rent	​		195	​		197	​		642	​		648	​
Depreciation and amortization	​		685	​		659	​		2,259	​		2,168	​
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Operating profit	​		841	​		868	​		3,300	​		2,512	​
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Other income (expense)	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest expense	​	​	(119)	​	​	(135)	​	​	(422)	​	​	(438)	​
Non-service component of company-sponsored pension plan costs	​	​	11	​	​	(77)	​	​	38	​	​	(44)	​
Loss on investments	​	​	(207)	​	​	(94)	​	​	(637)	​	​	(694)	​
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Net earnings before income tax expense	​		526	​		562	​		2,279	​		1,336	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income tax expense	​		126	​		77	​		481	​		239	​
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Net earnings including noncontrolling interests	​		400	​		485	​		1,798	​		1,097	​
Net income attributable to noncontrolling interests	​		2	​		2	​		5	​		7	​
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Net earnings attributable to The Kroger Co.	​	$	398	​	$	483	​	$	1,793	​	$	1,090	​
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Net earnings attributable to The Kroger Co. per basic common share	​	$	0.55	​	$	0.64	​	$	2.47	​	$	1.44	​
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Average number of common shares used in basic calculation	​		716	​		742	​		719	​		747	​
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Net earnings attributable to The Kroger Co. per diluted common share	​	$	0.55	​	$	0.64	​	$	2.44	​	$	1.43	​
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Average number of common shares used in diluted calculation	​		724	​		752	​		728	​		757	​

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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

(unaudited)

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​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Third Quarter Ended					​	Three Quarters Ended					​
​	​	November 5,		​	November 6,		​	November 5,		​	November 6,		​
(In millions)		2022			2021			2022			2021
Net earnings including noncontrolling interests	​	$	400	​	$	485	​	$	1,798	​	$	1,097	​
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Other comprehensive income	​	​	​	​	​	​	​	​	​	​	​	​	​
Change in pension and other postretirement defined benefit plans, net of income tax(1)	​	​	13	​	​	132	​	​	12	​	​	134	​
Unrealized gains and losses on cash flow hedging activities, net of income tax(2)	​		37	​		—	​		37	​		—	​
Amortization of unrealized gains and losses on cash flow hedging activities, net of income

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

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CAUTIONARY STATEMENT

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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,” “enables,” “estimate,” “expect,” “future,” “guidance,” “intended,” “maintain,” “may,” “model,” “plan,” “positions,” “program,” “proposition,” “strategy,” “target,” “trend,” “will,” 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.

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

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	●	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.

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	●	Our ability to achieve sales, earnings and incremental FIFO operating profit goals may be affected by: the risks relating to or arising from our proposed transaction with Albertsons Companies, Inc. (“Albertsons”) announced in October 2022, including, among others, our ability to consummate the proposed transaction, including on the terms of the merger agreement, on the anticipated timeline, and/or with the required regulatory approvals; COVID-19 pandemic related factors, risks and challenges, including among others, the length of time that the pandemic continues, future variants, mutations or related strains of the virus and the effectiveness of vaccines against variants, continued efficacy of vaccines over time and availability of vaccine boosters, the potential for disruptions in workforce availability and customer shopping patterns due to spikes in infection and illness rates, and interruptions in domestic and global supply chains or capacity constraints; whether and when the global pandemic will become endemic, the pace of recovery when the pandemic subsides or becomes endemic, which may vary materially over time and among the different regions we serve; labor negotiations; potential work stoppages; changes in the unemployment rate; pressures in the labor market; changes in government-funded benefit programs; changes in the types and numbers of businesses that compete with us; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; our response to these actions; the state of the economy, including interest rates, the current inflationary environment and future potential inflationary and/or deflationary trends and such trends in certain commodities, products and/or operating costs; the geopolitical environment including the war in Ukraine; unstable political situations and social unrest; changes in tariffs; the effect that fuel costs have on consumer spending; volatility of fuel margins; manufacturing commodity costs; supply constraints; diesel fuel costs related to our logistics operations; trends in consumer spending; the extent to which our customers exercise caution in their purchasing in response to economic conditions; the uncertainty of economic growth or recession; stock repurchases; changes in the regulatory environment in which we operate; our ability to retain pharmacy sales from third-party payors; consolidation in the healthcare industry, including pharmacy benefit managers; our ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the effect of public health crises or other significant catastrophic events; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of our future growth plans; the ability to execute our growth strategy and value creation model, including continued cost savings, growth of our alternative profit businesses, and our ability to better serve our customers and to generate customer loyalty and sustainable growth through our strategic pillars of fresh, Our Brands, personalization, and seamless; and the successful integration of merged companies and new partnerships.

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	●	Our ability to achieve these goals may also be affected by our ability to manage the factors identified above. Our ability to execute our financial strategy may be affected by our ability to generate cash flow.

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	●	Our effective tax rate may differ from the expected rate due to changes in tax laws, the status of pending items with various taxing authorities, and the deductibility of certain expenses.

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Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described in this report and other reports that we file with the Securities and Exchange Commission could cause actual results to differ materially. We assume no obligation to update the information contained in this report unless required by applicable law.

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Our ability to complete our proposed transaction with Albertsons may be affected by various factors, including those set forth in Part II, Item 1A. Risk Factors included in this Quarterly Report on Form 10-Q and other factors as may be described in subsequent filings with the SEC.

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OUR VALUE CREATION MODEL – DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN

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Kroger’s proven value creation model is allowing us to deliver today and invest for the future. The foundation of our value creation model is our omnichannel position in food retail, which is built on Kroger’s unique assets: our stores, digital ecosystem, Our Brands and our data. These unique assets, when combined with our go-to-market strategy, deliver an unmatched value proposition for our customers. We continue to build long-term customer loyalty through Fresh, Our Brands, Data and Personalization and our seamless ecosystem to drive sustainable sales growth in our retail supermarket business, including fuel and health and wellness. This, in turn, generates the data and traffic that enables our fast-growing, high operating margin alternative profit businesses. We are evolving from a traditional food retailer into a more diverse, food first business that we expect will consistently deliver net earnings growth in the future. This will be achieved by:

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| | ● | Growing identical sales without fuel. Our plan involves maximizing growth opportunities in our supermarket business and is supported

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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 29, 2022, with the exception of the forward-starting interest rate swaps we entered into during the third quarter of 2022 described below.

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As of November 5, 2022, we maintained five forward-starting interest rate swap agreements with a maturity date of August 1, 2027 with an aggregate notional amount totaling $5.4 billion. 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. We entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on our forecasted issuances of debt. The fixed interest rates for these forward-starting interest rate swaps range from 3.00% to 3.78%. The variable rate component on the forward-starting interest rate swaps is the Secured Overnight Financing Rate (SOFR). As of November 5, 2022, the fair value of the interest rate swaps was recorded in “Other assets” and “Other long-term liabilities” for $67 million and $1 million, respectively, and accumulated other comprehensive income for $37 million, net of tax.

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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 5, 2022, 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.

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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. During the third quarter, the Company implemented new payroll modules. 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.

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With the exception of the implementation of the payroll modules described above, 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 5, 2022.

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PART II - OTHER INFORMATION

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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.

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Except as described below, there are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K for our last fiscal year, filed with the SEC on March 29, 2022. We urge you to read the risk factors contained therein.

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OUR PROPOSED TRANSACTION WITH ALBERTSONS CREATES INCREMENTAL BUSINESS, REGULATORY AND REPUTATIONAL RISKS

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On October 13, 2022, we entered into a merger agreement with Albertsons Companies Inc., which sets forth the terms of our proposed transaction. The proposed transaction with Albertsons entails important risks, including, among others: the expected timing and likelihood of completion of the proposed transaction, including the timing, receipt and terms and conditions of any required governmental and regulatory clearance of the proposed transaction; the effect and terms and conditions of any potential divestitures, including those that may be imposed by regulators as a condition to the approval of the proposed transaction, and/or the separation of SpinCo (as described in the merger agreement); the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; the outcome of any legal proceedings that have been instituted and may in the future be instituted against the parties and others following announcement of the merger agreement and proposed transaction; the inability to consummate the proposed transaction due to the failure to satisfy other conditions to complete the proposed transaction; risks that the proposed transaction disrupts our current plans and operations; the ability to identify and recognize, including on the expected timeline, the anticipated benefits of the proposed transaction, including anticipated total shareholder return (TSR), revenue and EBITDA expectations and synergies; the amount of the costs, fees, expenses and charges related to the proposed transaction; and our and Albertsons’ ability to successfully integrate our businesses and related operations, including our associates, and realize expected operations benefits, at the times and to the extent anticipated; the risk that results are different from those contained in forecasts when made; the risk that transaction and/or integration costs or dis-synergies are greater than expected, including as a result of conditions regulators put on any approvals of the transaction; the potential effect of the announcement and/or consummation of the proposed transaction on relationships, including with associates, suppliers and competitors; our ability to maintain an investment grade credit rating; the risk that management’s attention is diverted from other matters; risks related to the potential effect of general economic, political and market factors, including changes in the financial markets as a result of inflation or measures implemented to address inflation, and any epidemic, pandemic or disease outbreaks, on Kroger, Albertsons or the proposed transaction; the risk of adverse effects on the market price of our or Albertsons’s securities or on Albertsons’s or the Company’s operating results for any reason; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; and other risks described in our filings with the SEC.

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

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(c)

ISSUER PURCHASES OF EQUITY SECURITIES

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​	​	​	​	​	​	​	​	​	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 14, 2022 to September 10, 2022		80,417		$	48.53		80,417		$	1,000	​
Second four weeks	​	​	​	​	​	​	​	​	​	​	​
September 11, 2022 to October 8, 2022		157,919		$	47.54		115,406		$	1,000	​
Third four weeks	​	​	​	​	​	​	​	​	​	​	​
October 9, 2022 to November 5, 2022		19,176		$	44.63		19,176		$	1,000	​
Total		257,512		$	47.64		214,999		$	1,000	​

(1)	The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The third quarter of 2022 contained three 28-day periods.

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(2)

Includes (i) shares repurchased under the December 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) 42,513 shares that were surrendered to the Company by participants under our long-term incentive plans to pay for taxes on restricted stock awards.

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

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(4)

On December 30, 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 “December 2021 Repurchase Program”). The December 2021 Repurchase Program was exhausted during the third quarter of 2022. On September 9, 2022, 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 “September 2022 Repurchase Program”). The amounts shown in this column reflect the amount remaining under the September 2022 Repurchase Program as of the specified period end dates. Amounts available under the 1999 Repurchase Program are dependent upon option exercise activity. The September 2022 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. During the third quarter of 2022, we paused the September 2022 Repurchase Program to prioritize de-leveraging following the proposed merger with Albertsons.

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EXHIBIT 2.1	-	Agreement and Plan of Merger, dated as of October 13, 2022, by and among the Company, Parent and Merger Sub, is hereby incorporated by reference to Exhibit 2.1 of the Company’s 8-K filed with the SEC on October 14, 2022.
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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.
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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.
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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.
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EXHIBIT 10.1	-	Term Loan Agreement, dated as of November 9, 2022, by and among the Company, the lenders from time to time party thereto, and Citibank, N.A., as administrative agent for the lenders, is hereby incorporated by reference to Exhibit 10.1 of the Company’s 8-K filed with the SEC on November 10, 2022.
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EXHIBIT 10.2	-	Amendment No. 1 to Credit Agreement, dated as of November 9, 2022, by and among the Company, the lenders party thereto, and Bank of America, N.A., as paying agent to the Amended and Rested Credit Agreement, dated as of July 6, 2021, is hereby incorporated by reference to Exhibit 10.2 of the Company’s 8-K filed with the SEC on November 10, 2022.
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EXHIBIT 31.1*	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.
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EXHIBIT 31.2*	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer.
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EXHIBIT 32.1*	-	Section 1350 Certifications.
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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.
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EXHIBIT 101.SCH*	-	XBRL Taxonomy Extension Schema Document.
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EXHIBIT 101.CAL*	-	XBRL Taxonomy Extension Calculation Linkbase Document.
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EXHIBIT 101.DEF*	-	XBRL Taxonomy Extension Definition Linkbase Document.
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EXHIBIT 101.LAB*	-	XBRL Taxonomy Extension Label Linkbase Document.
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EXHIBIT 101.PRE*	-	XBRL Taxonomy Extension Presentation Linkbase Document.
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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.
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*Filed herewith	​	​
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SIGNATURES

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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.

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​	THE KROGER CO.
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Dated: December 9, 2022	By:	/s/ W. Rodney McMullen
​	​	W. Rodney McMullen
​	​	Chairman of the Board and Chief Executive Officer
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Dated: December 9, 2022	By:	/s/ Gary Millerchip
​	​	Gary Millerchip
​	​	Senior Vice President and Chief Financial Officer

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