filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis should be read in conjunction with the Consolidated Financial Statements.
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,” “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.
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. |
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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.
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.
OUR VALUE CREATION MODEL – DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
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:
| ● | Growing identical sales without fuel. Our plan involves maximizing growth opportunities in our supermarket business and is supported by continued strategic investments in our customers, associates, and our seamless ecosystem to ensure we deliver a full, friendly and fresh experience for every customer, every time. Part of our growth plan includes doubling digital sales and doubling our digital passthrough profitability rate by the end of 2023; and |
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| ● | Expanding operating margin, through a balanced model where strategic price investments for our customers and investments in our associates and seamless ecosystem are offset by our cost savings program, which has delivered $1 billion in cost savings annually for the past four fiscal years, and sustained growth in our alternative profit businesses. |
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We expect to continue to generate strong free cash flow and are committed to being disciplined with capital deployment in support of our value creation model and stated capital allocation priorities. Our first priority is to invest in the business through attractive high return organic and inorganic opportunities that drive long-term sustainable net earnings growth. We are committed to maintaining our current investment grade debt rating and our net total debt to adjusted EBITDA ratio target range of 2.30 to 2.50. We also expect to continue to grow our dividend over time and return excess cash to shareholders via stock repurchases. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.
We expect our value creation model will result in total shareholder return within our target range of 8% to 11% over time, which does not contemplate the effect of the proposed merger with Albertsons.
EXECUTIVE SUMMARY
We achieved strong results in the third quarter as we continue to execute our Leading with Fresh and Accelerating with Digital strategy. We were pleased with the balance achieved in our results this quarter, as we continued to invest in our customers and associates, while also effectively managing costs to achieve solid earnings growth. These results were driven by positive identical sales without fuel of 6.9%, disciplined margin management and strong fuel profitability.
Our results demonstrate the resilience and flexibility we have built into our financial model, which has allowed us to effectively manage product cost inflation through strong sourcing practices while also helping customers manage their budgets and keeping prices competitive. Our value proposition, which includes providing great quality, fresh products at affordable prices, data-driven promotions, trusted Our Brands products and our fuel rewards program, is resonating with shoppers and driving increased customer loyalty. During the quarter, we continued to invest in wages and the associate experience and in creating zero hunger, zero waste communities, as we believe these components of our strategy are critical to achieving long term sustainable growth.
Our consistent execution of our go-to-market strategy continues to build momentum in our business results and gives us the confidence to raise our full-year guidance for identical sales without fuel, adjusted FIFO operating profit and adjusted net earnings per diluted share. The resiliency of our value creation model positions us well to navigate different operating environments, and as we look forward, we remain confident in our ability to deliver attractive and sustainable total shareholder return within our target range of 8% to 11% over time, which does not contemplate the effect of the proposed merger with Albertsons.
The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
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| | | Third Quarter Ended | | | Three Quarters Ended | | ||||||||||||
| | | November 5, | Percentage | November 6, | | | November 5, | Percentage | November 6, | | ||||||||
| | | 2022 | | Change | | 2021 | | | 2022 | | Change | | 2021 | | ||||
| Sales | | $ | 34,198 | | 7.3 | % | $ | 31,860 | | | $ | 113,436 | | 8.2 | % | $ | 104,840 | |
| Sales without fuel | | $ | 30,014 | | 6.4 | % | $ | 28,218 | | | $ | 98,301 | | 5.0 | % | $ | 93,632 | |
| Net earnings attributable to The Kroger Co. | | $ | 398 | | (17.6) | % | $ | 483 | | | $ | 1,793 | | 64.5 | % | $ | 1,090 | |
| Adjusted net earnings attributable to The Kroger Co. | | $ | 643 | | 9.2 | % | $ | 589 | | | $ | 2,379 | | 12.4 | % | $ | 2,117 | |
| Net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.55 | | (14.1) | % | $ | 0.64 | | | $ | 2.44 | | 70.6 | % | $ | 1.43 | |
| Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.88 | | 12.8 | % | $ | 0.78 | | | $ | 3.24 | | 17.0 | % | $ | 2.77 | |
| Operating profit | | $ | 841 | | (3.1) | % | $ | 868 | | | $ | 3,300 | | 31.4 | % | $ | 2,512 | |
| Adjusted FIFO operating profit | | $ | 1,094 | | 12.3 | % | $ | 974 | | | $ | 3,805 | | 15.4 | % | $ | 3,297 | |
| Dividends paid | | $ | 187 | | 17.6 | % | $ | 159 | | | $ | 494 | | 14.1 | % | $ | 433 | |
| Dividends paid per common share | | $ | 0.26 | | 23.8 | % | $ | 0.21 | | | $ | 0.68 | | 19.3 | % | $ | 0.57 | |
| Identical sales excluding fuel | | | 6.9 | % | N/A | | | 3.1 | % | | | 5.4 | % | N/A | | | (1.0) | % |
| FIFO gross margin rate, excluding fuel, bps increase (decrease) | | | (0.05) | | N/A | | | (0.41) | | | | (0.12) | | N/A | | | (0.57) | |
| OG&A rate, excluding fuel and Adjusted Items, bps increase (decrease) | | | (0.03) | | N/A | | | (0.49) | | | | (0.08) | | N/A | | | (0.82) | |
| Increase (decrease) in total debt, including obligations under finance leases compared to prior fiscal year end | | $ | (134) | | N/A | | $ | 308 | | | $ | (134) | | N/A | | $ | 308 | |
| Share repurchases | | $ | 10 | | N/A | | $ | 298 | | | $ | 985 | | N/A | | $ | 1,049 | |
OVERVIEW
Notable items for the third quarter and first three quarters of 2022 are:
Shareholder Return
| ● | Net earnings attributable to The Kroger Co. per diluted common share of $0.55 for the third quarter and $2.44 for the first three quarters. This represents a 14% decrease for the third quarter of 2022 compared to the third quarter of 2021 and a 71% increase for the first three quarters of 2022 compared to the first three quarters of 2021. |
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| ● | Adjusted net earnings attributable to The Kroger Co. per diluted common share of $0.88 for the third quarter and $3.24 for the first three quarters. This represents a 13% increase for the third quarter of 2022 compared to the third quarter of 2021 and a 17% increase for the first three quarters of 2022 compared to the first three quarters of 2021. |
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| ● | Achieved operating profit of $841 million for the third quarter and $3.3 billion for the first three quarters. This represents a 3% decrease for the third quarter of 2022 compared to the third quarter of 2021 and a 31% increase for the first three quarters of 2022 compared to the first three quarters of 2021. |
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| ● | Achieved adjusted FIFO operating profit of $1.1 billion for the third quarter and $3.8 billion for the first three quarters. This represents a 12% increase for the third quarter of 2022 compared to the third quarter of 2021 and a 15% increase for the first three quarters of 2022 compared to the first three quarters of 2021. |
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| ● | During the first three quarters of 2022, we generated cash from operations of $3.3 billion. |
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| ● | During the first three quarters of 2022, we returned $1.5 billion to shareholders through share repurchases and dividend payments. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons. |
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Other Financial Results
| ● | Identical sales, excluding fuel, increased 6.9% for the third quarter and 5.4% for the first three quarters of 2022, compared to the same periods of 2021. These results included identical sales growth in Our Brands categories of 10.4% for the third quarter and 8.7% for the first three quarters of 2022. |
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| ● | Digital sales increased 10% for the third quarter and 2% for the first three quarters of 2022, compared to the same periods of 2021. Digital sales growth for the third quarter of 2022 was led by strength in our Delivery solutions, which grew by 34% for the third quarter and 26% for the first three quarters of 2022. Delivery solutions growth was driven by our Boost membership program and expansion of our Kroger Delivery network. Digital sales include products ordered online and picked up at our stores and our Delivery and Ship solutions. Our Delivery solutions include orders delivered to customers from retail store locations, customer fulfillment centers powered by Ocado and orders placed through third-party platforms. Our Ship solutions primarily include online orders placed through our owned platforms that are dispatched using mail service or third-party courier. |
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| ● | We are currently operating in a more volatile inflationary environment and we experienced higher product cost inflation during the third quarter and first three quarters of 2022, compared to the same periods of 2021. Our LIFO charge for the third quarter of 2022 was $152 million, compared to $93 million in the third quarter of 2021. Our LIFO charge for the first three quarters of 2022 was $392 million, compared to $177 million for the first three quarters of 2021. This increase was attributable to higher product cost inflation primarily in grocery. |
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Significant Events
| ● | During the first three quarters of 2022, we opened three additional Kroger Delivery customer fulfillment centers powered by Ocado’s automated smart platform — one in Dallas, Texas, one in Pleasant Prairie, Wisconsin and one in Romulus, Michigan — bringing our total count to six. |
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| ● | As previously disclosed, on October 13, 2022, we entered into a merger agreement with Albertsons. In connection with the merger agreement, we entered into a bridge term loan facility and executed a term loan credit agreement. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons. For additional information about the proposed merger with Albertsons, see Note 10 to the Consolidated Financial Statements. |
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| ● | During the third quarter of 2022, we recognized legal settlement costs of $85 million, $67 million net of tax, relating to the settlement of all opioid litigation claims with the State of New Mexico. This amount was excluded from our adjusted FIFO operating profit and adjusted net earnings results to reflect the unique and non-recurring nature of the charge. This settlement is not an admission of wrongdoing or liability by Kroger and we will continue to vigorously defend against other claims and lawsuits relating to opioids. This settlement is based on a set of unique and specific facts relating to New Mexico, and we do not believe that the settlement amount or any other terms of our agreement with New Mexico can or should be extrapolated to any other opioid-related cases pending against us. It is our view that this settlement is not a reliable proxy for the outcome of any other cases or the overall level of our exposure. |
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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 the merchandising and operational effectiveness of our go-to-market strategy.
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 the operational effectiveness of our financial model.
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 2022 include the following, which we define as the “2022 Adjusted Items”:
| ● | Charges to operating, general and administrative expenses (“OG&A”) of $18 million, $14 million net of tax, for the revaluation of Home Chef contingent consideration; $19 million, $15 million net of tax, for merger related costs and $85 million, $67 million net of tax, for legal settlement costs (the “2022 OG&A Adjusted Items”). |
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| ● | Losses in other income (expense) of $637 million, $490 million net of tax, for the unrealized loss on investments (the “2022 Other Income (Expense) Adjusted Item”). |
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Net earnings for the third quarter of 2022 include the following, which we define as the “2022 Third Quarter Adjusted Items”:
| ● | Charges to OG&A of $19 million, $15 million net of tax, for merger related costs and $85 million, $67 million net of tax, for legal settlement costs (the “2022 Third Quarter OG&A Adjusted Items”). |
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| ● | A loss in other income (expense) of $207 million, $163 million net of tax, for the unrealized loss on investments (the “2022 Third Quarter Other Income (Expense) Adjusted Item”). |
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Net earnings for the first three quarters of 2021 include the following, which we define as the “2021 Adjusted Items”:
| ● | Charges to 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”). |
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| ● | 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”). |
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| ● | A reduction to income tax expense of $47 million primarily due to the completion of income tax audit examinations covering multiple years. |
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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”). |
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| ● | 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”). |
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| ● | A reduction to income tax expense of $47 million primarily due to the completion of income tax audit examinations covering multiple years. |
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Please refer to the “Net Earnings per Diluted Share excluding the Adjusted Items” table below for reconciliations of certain non-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the most comparable GAAP financial measures and related disclosure.
The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, excluding the 2022 and 2021 Adjusted Items:
Net Earnings per Diluted Share excluding the Adjusted Items
($ in millions, except per share amounts)
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| | | Third Quarter Ended | | Three Quarters Ended | |||||||||||||
| | November 5, | November 6, | Percentage | November 5, | November 6, | Percentage | |||||||||||
| | | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change | |||||
| Net earnings attributable to The Kroger Co. | | $ | 398 | | $ | 483 | | | $ | 1,793 | | $ | 1,090 | | | ||
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| (Income) expense adjustments | | | | | | | | | | | | | | | | | |
| Adjustment for pension plan withdrawal liabilities(1)(2) | | | — | | | — | | | | | — | | | 344 | | | |
| Adjustment for company-sponsored pension plan settlement charges(1)(3) | | | — | | | 68 | | | | | — | | | 68 | | | |
| Adjustment for loss on investments(1)(4) | | | 163 | | | 73 | | | | | 490 | | | 533 | | | |
| Adjustment for Home Chef contingent consideration(1)(5) | | | — | | | 7 | | | | | 14 | | | 47 | | | |
| Adjustment for transformation costs(1)(6) | | | — | | | 5 | | | | | — | | | 82 | | | |
| Adjustment for merger related costs(1)(7) | | | 15 | | | — | | | | | 15 | | | — | | | |
| Adjustment for legal settlement costs(1)(8) | | | 67 | | | — | | | | | 67 | | | — | | | |
| Adjustment for completion of income tax audit examinations(1) | | — | | (47) | | | | — | | | (47) | | | | |||
| 2022 and 2021 Adjusted Items | | | 245 | | | 106 | | | | | 586 | | | 1,027 | | | |
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| Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 643 | | $ | 589 | 9.2 | % | $ | 2,379 | | $ | 2,117 | 12.4 | % | ||
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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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| (Income) expense adjustments | | | | | | | | | | | | | | | | | |
| Adjustment for pension plan withdrawal liabilities(9) | | | — | | | — | | | | | — | | | 0.45 | | | |
| Adjustment for company-sponsored pension plan settlement charges(9) | | | — | | | 0.09 | | | | | — | | | 0.09 | | | |
| Adjustment for loss on investments(9) | | | 0.22 | | | 0.10 | | | | | 0.67 | | | 0.70 | | | |
| Adjustment for Home Chef contingent consideration(9) | | | — | | | 0.01 | | | | | 0.02 | | | 0.06 | | | |
| Adjustment for transformation costs(9) | | | — | | | 0.01 | | | | | — | | | 0.11 | | | |
| Adjustment for merger related costs(9) | | | 0.02 | | | — | | | | | 0.02 | | | — | | | |
| Adjustment for legal settlement costs(9) | | | 0.09 | | | — | | | | | 0.09 | | | — | | | |
| Adjustment for completion of income tax audit examinations(9) | | | — | | | (0.07) | | | | | — | | | (0.07) | | | |
| 2022 and 2021 Adjusted Items | | 0.33 | | 0.14 | | | | 0.80 | | 1.34 | | | | ||||
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| Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.88 | | $ | 0.78 | 12.8 | % | $ | 3.24 | | $ | 2.77 | 17.0 | % | ||
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| Average number of common shares used in diluted calculation | | 724 | | 752 | | | | 728 | | 757 | | | |
Net Earnings per Diluted Share excluding the Adjusted Items (continued)
($ in millions, except per share amounts)
| (1) | The amounts presented represent the after-tax effect of each adjustment, which was calculated using discrete tax rates. |
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| (2) | The pre-tax adjustment for pension plan withdrawal liabilities was $449. |
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| (3) | The pre-tax adjustment for company-sponsored pension plan settlement charges was $87. |
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| (4) | The pre-tax adjustment for loss on investments was $207 and $94 in the third quarters of 2022 and 2021, respectively. The pre-tax adjustment was $637 and $694 in the first three quarters of 2022 and 2021, respectively. |
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| (5) | The pre-tax adjustment for Home Chef contingent consideration was $10 in the third quarter of 2021. The pre-tax adjustment was $18 and $61 in the first three quarters of 2022 and 2021, respectively. |
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| (6) | The pre-tax adjustment for transformation costs was $6 in the third quarter of 2021 and $107 in the first three quarters of 2021. Transformation costs primarily include costs related to business closure costs and third party professional consulting fees associated with business transformation and cost saving initiatives. |
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| (7) | The pre-tax adjustment for merger related costs was $19 for 2022. Merger related costs primarily include third party professional fees associated with the proposed merger with Albertsons. |
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| (8) | The pre-tax adjustment for legal settlement costs was $85 for 2022. |
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| (9) | The amount presented represents the net earnings per diluted common share effect of each adjustment. |
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RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
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| | | Third Quarter Ended | | | | | Three Quarters Ended | |||||||||||||||||
| | | November 5, | | Percentage | | November 6, | | Percentage | | | | | November 5, | | Percentage | | November 6, | | Percentage | |||||
| | 2022 | Change(1) | 2021 | Change(2) | | | | 2022 | Change(3) | 2021 | Change(4) | |||||||||||||
| Total sales to retail customers without fuel(5) | | $ | 29,777 | | 6.3 | % | $ | 28,009 | | 3.1 | % | | | | $ | 97,580 | | 5.0 | % | $ | 92,914 | | (1.0) | % |
| Supermarket fuel sales | | | 4,185 | | 14.9 | % | | 3,642 | | 57.7 | % | | | | | 15,134 | | 35.0 | % | | 11,208 | | 53.9 | % |
| Other sales(6) | | | 236 | | 12.9 | % | | 209 | | (11.1) | % | | | | | 722 | | 0.6 | % | | 718 | | 10.6 | % |
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| Total sales | | $ | 34,198 | | 7.3 | % | $ | 31,860 | | 7.2 | % | | | | $ | 113,436 | | 8.2 | % | $ | 104,840 | | 3.0 | % |
| (1) | This column represents the percentage change in the third quarter of 2022, compared to the third quarter of 2021. |
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| (2) | This column represents the percentage change in the third quarter of 2021, compared to the third quarter of 2020. |
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| (3) | This column represents the percentage change in the first three quarters of 2022, compared to the first three quarters of 2021. |
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| (4) | This column represents the percentage change in the first three quarters of 2021, compared to the first three quarters of 2020. |
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| (5) | Digital sales are included in the “total sales to retail customers without fuel” line above. Digital sales include products ordered online and picked up at our stores and our Delivery and Ship solutions. Our Delivery solutions include orders delivered to customers from retail store locations, customer fulfillment centers powered by Ocado and orders placed through third-party platforms. Our Ship solutions primarily include online orders placed through our owned platforms that are dispatched using mail service or third-party courier. Digital sales increased approximately 10% in the third quarter of 2022 and decreased approximately 5% in the third quarter of 2021. Digital sales increased approximately 2% in the first three quarters of 2022 and increased approximately 1% in the first three quarters of 2021. Digital sales growth for 2022 was led by strength in our Delivery solutions, which grew by 34% for the third quarter and 26% for the first three quarters of 2022. Delivery solutions growth was driven by our Boost membership program and expansion of our Kroger Delivery network. |
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| (6) | Other sales primarily relate to external sales at food production plants, data analytic services and third-party media revenue. The increase in the third quarter and first three quarters of 2022, compared to the same periods of 2021, is primarily due to an increase in data analytic services and third-party media revenue, partially offset by decreased external sales at food production plants due to the closing of a plant. |
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Total sales increased in the third quarter of 2022, compared to the third quarter of 2021, by 7.3%. The increase was primarily due to increases in supermarket fuel sales and total sales to retail customers without fuel. Total sales, excluding fuel, increased 6.4% in the third quarter of 2022, compared to the third quarter of 2021, which was primarily due to our identical sales increase, excluding fuel, of 6.9%, partially offset by discontinued patient therapies at Kroger Specialty Pharmacy. Identical sales, excluding fuel, for the third quarter of 2022, compared to the third quarter of 2021, increased primarily due to an increase in the number of households shopping with us and an increase in basket value due to retail inflation, partially offset by a reduction in the number of items in basket. Total supermarket fuel sales increased 14.9% in the third quarter of 2022, compared to the third quarter of 2021, primarily due to an increase in the average retail fuel price of 18.5%, partially offset by a decrease in fuel gallons sold of 3.0%, which was less than the average market decline. The increase in the average retail fuel price was caused by an increase in the product cost of fuel.
Total sales increased in the first three quarters of 2022, compared to the first three quarters of 2021, by 8.2%. The increase was primarily due to increases in supermarket fuel sales and total sales to retail customers without fuel. Total sales, excluding fuel, increased 5.0% in the first three quarters of 2022, compared to the first three quarters of 2021, which was primarily due to our identical sales increase, excluding fuel, of 5.4%, partially offset by discontinued patient therapies at Kroger Specialty Pharmacy. Identical sales, excluding fuel, for the first three quarters of 2022, compared to the first three quarters of 2021, increased primarily due to an increase in the number of households shopping with us and an increase in basket value due to retail inflation, partially offset by a reduction in the number of items in basket. Total supermarket fuel sales increased 35.0% in the first three quarters of 2022, compared to the first three quarters of 2021, primarily due to an increase in the average retail fuel price of 36.4%, partially offset by a decrease in fuel gallons sold of 1.0%, which was less than the average market decline. The increase in the average retail fuel price was caused by an increase in the product cost of fuel.
We calculate identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket locations, Kroger Specialty Pharmacy businesses and Delivery and Ship solutions. We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. We define Kroger Specialty Pharmacy businesses as identical when physical locations have been in operation continuously for five full quarters; discontinued patient therapies are excluded from the identical sales calculation starting in the quarter of transfer or termination. We define Kroger Delivery identical sales powered by Ocado based on geography. We include Kroger Delivery sales powered by Ocado as identical if the delivery occurs in an existing Kroger supermarket geography. If the Kroger Delivery sales powered by Ocado occur in a new geography, these sales are included as identical when deliveries have occurred to the new geography for five full quarters. Although identical sales is a relatively standard term, numerous methods exist for calculating identical sales growth. As a result, the method used by our management to calculate identical sales may differ from methods other companies use to calculate identical sales. It is important to understand the methods used by other companies to calculate identical sales before comparing our identical sales to those of other such companies. Our identical sales, excluding fuel, results are summarized in the following table. We used the identical sales, excluding fuel, dollar figures presented below to calculate percentage changes for the third quarter and first three quarters of 2022.
Identical Sales
($ in millions)
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Third Quarter Ended | |||||||||
| | | November 5, | | Percentage | | November 6, | | Percentage | |||
| | 2022 | Change(1) | 2021 | Change(2) | |||||||
| Excluding Fuel | $ | 29,623 | 6.9 | % | $ | 27,701 | 3.1 | % |
| (1) | This column represents the percentage change in identical sales in the third quarter of 2022, compared to the third quarter of 2021. |
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| (2) | This column represents the percentage change in identical sales in the third quarter of 2021, compared to the third quarter of 2020. |
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| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Three Quarters Ended | |||||||||
| | | November 5, | | Percentage | | November 6, | | Percentage | |||
| | 2022 | Change(1) | 2021 | Change(2) | |||||||
| Excluding fuel centers | $ | 96,963 | 5.4 | % | $ | 91,963 | (1.0) | % |
| (1) | This column represents the percentage change in identical sales in the first three quarters of 2022, compared to the first three quarters of 2021. |
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| (2) | This column represents the percentage change in identical sales in the first three quarters of 2021, compared to the first three quarters of 2020. |
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Gross Margin, LIFO and FIFO Gross Margin
We define gross margin as sales minus merchandise costs, including advertising, warehousing, and transportation. Rent expense, depreciation and amortization expense, and interest expense are not included in gross margin.
Our gross margin rate, as a percentage of sales, was 21.37% for the third quarter of 2022, compared to 21.66% for the third quarter of 2021. The decrease in rate in the third quarter of 2022, compared to the third quarter of 2021, resulted primarily from increased fuel sales, which have a lower gross margin rate, a higher LIFO charge and increased shrink, as a percentage of sales, partially offset by decreased warehousing costs, as a percentage of sales, and our ability to effectively manage product cost inflation through strong sourcing practices while also helping customers manage their budgets and keeping prices competitive.
Our gross margin rate, as a percentage of sales, was 21.34% for the first three quarters of 2022, compared to 21.96% for the first three quarters of 2021. The decrease in rate in the first three quarters of 2022, compared to the first three quarters of 2021, resulted primarily from increased fuel sales, which have a lower gross margin rate and a higher LIFO charge, partially offset by our ability to effectively manage product cost inflation through strong sourcing practices while also helping customers manage their budgets and keeping prices competitive and the cycling of a write down related to a donation of personal protective equipment inventory from the prior year.
Our LIFO charge was $152 million in the third quarter of 2022, compared to $93 million in the third quarter of 2021. Our LIFO charge was $392 million in the first three quarters of 2022, compared to $177 million in the first three quarters of 2021. The increase in our LIFO charge reflects our expected annualized product cost inflation for 2022, compared to 2021, which was attributable to higher inflation primarily in grocery.
Our FIFO gross margin rate, which excludes the LIFO charge, was 21.81% in the third quarter of 2022, compared to 21.95% in the third quarter of 2021. Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, our FIFO gross margin rate decreased 5 basis points in the third quarter of 2022, compared to the third quarter of 2021. This decrease resulted primarily from increased shrink, as a percentage of sales, partially offset by decreased warehousing costs, as a percentage of sales, and our ability to effectively manage product cost inflation through strong sourcing practices while also helping customers manage their budgets and keeping prices competitive.
Our FIFO gross margin rate, which excludes the LIFO charge, was 21.68% in the first three quarters of 2022, compared to 22.13% in the first three quarters of 2021. Excluding the effect of fuel, our FIFO gross margin rate decreased 12 basis points in the first three quarters of 2022, compared to the first three quarters of 2021. This result reflects our ability to effectively manage product cost inflation through strong sourcing practices while also helping customers manage their budgets and keeping prices competitive and the cycling of a write down related to a donation of personal protective equipment inventory from the prior year.
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 not included in OG&A.
OG&A expenses, as a percentage of sales, were 16.34% in the third quarter of 2022 and 16.25% in the third quarter of 2021. The increase in the third quarter of 2022, compared to the third quarter of 2021, resulted primarily from investments in our associates, increased incentive plan costs, costs related to strategic investments in various margin expansion initiatives that will drive future growth and the 2022 Third Quarter OG&A Adjusted Items, partially offset by the effect of sales leverage across fuel and supermarkets, which decreases our OG&A rate, as a percentage of sales, decreased healthcare costs, the 2021 Third Quarter OG&A Adjusted Items and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions.
OG&A expenses, as a percentage of sales, were 15.87% in the first three quarters of 2022 and 16.88% in the first three quarters of 2021. The decrease in the first three quarters of 2022, compared to the first three quarters of 2021, resulted primarily from the effect of sales leverage across fuel and supermarkets, which decreases our OG&A rate, as a percentage of sales, lower contributions to multi-employer pension plans, decreased healthcare costs, the 2021 OG&A Adjusted Items and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates, costs related to strategic investments in various margin expansion initiatives that will drive future growth and the 2022 OG&A Adjusted Items.
Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, the 2022 Third Quarter OG&A Adjusted Items and the 2021 Third Quarter OG&A Adjusted Items, our OG&A rate decreased 3 basis points in the third quarter of 2022, compared to the third quarter of 2021. This decrease resulted primarily from the effect of supermarket sales leverage, which decreases our OG&A rate, as a percentage of sales, decreased healthcare costs and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates, increased incentive plan costs and costs related to strategic investments in various margin expansion initiatives that will drive future growth.
Excluding the effect of fuel, the 2022 OG&A Adjusted Items and the 2021 OG&A Adjusted Items, our OG&A rate decreased 8 basis points in the first three quarters of 2022, compared to the first three quarters of 2021. This decrease resulted primarily from the effect of supermarket sales leverage, which decreases our OG&A rate, as a percentage of sales, lower contributions to multi-employer pension plans, decreased healthcare costs and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates and costs related to strategic investments in various margin expansion initiatives that will drive future growth.
Rent Expense
Rent expense decreased, as a percentage of sales, for the third quarter of 2022, compared to the third quarter of 2021, primarily due to sales leverage. Rent expense decreased in total and as a percentage of sales for the first three quarters of 2022, compared to the first three quarters of 2021. This decrease was primarily due to sales leverage and the completion of a property transaction during the first quarter of 2021 related to 28 previously leased properties that we are now accounting for as owned locations and therefore recognizing depreciation and amortization expense over their useful life.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased, as a percentage of sales, in the third quarter and first three quarters of 2022, compared to the same periods in 2021, primarily due to sales leverage.
Operating Profit and FIFO Operating Profit
Operating profit was $841 million, or 2.5% of sales, for the third quarter of 2022, compared to $868 million, or 2.7% of sales, for the third quarter of 2021. Operating profit, as a percentage of sales, decreased 26 basis points in the third quarter of 2022, compared to the third quarter of 2021, due to an increased LIFO charge, a lower FIFO gross margin rate and increased OG&A expense, as a percentage of sales. Fuel earnings contributed to our operating profit growth for the third quarter of 2022, compared to the third quarter of 2021.
Operating profit was $3.3 billion, or 2.9% of sales, for the first three quarters of 2022, compared to $2.5 billion, or 2.4% of sales, for the first three quarters of 2021. Operating profit, as a percentage of sales, increased 51 basis points in the first three quarters of 2022, compared to the first three quarters of 2021, due to decreased OG&A expense, as a percentage of sales, partially offset by an increased LIFO charge and a lower FIFO gross margin rate. Fuel earnings also contributed to our operating profit growth for the first three quarters of 2022, compared to the first three quarters of 2021.
FIFO operating profit was $993 million, or 2.9% of sales, for the third quarter of 2022, compared to $961 million, or 3.0% of sales, for the third quarter of 2021. FIFO operating profit, as a percentage of sales, excluding the 2022 and 2021 Third Quarter Adjusted Items, increased 14 basis points in the third quarter of 2022, compared to the third quarter of 2021, due to decreased OG&A expense, as a percentage of sales, partially offset by a lower FIFO gross margin rate. Fuel earnings also contributed to our FIFO operating profit growth for the third quarter of 2022, compared to the third quarter of 2021.
FIFO operating profit was $3.7 billion, or 3.3% of sales, for the first three quarters of 2022, compared to $2.7 billion, or 2.6% of sales, for the first three quarters of 2021. FIFO operating profit, as a percentage of sales, excluding the 2022 and 2021 Adjusted Items, increased 21 basis points in the first three quarters of 2022, compared to the first three quarters of 2021, due to decreased OG&A expense, as a percentage of sales, partially offset by a lower FIFO gross margin rate. Fuel earnings also contributed to our FIFO operating profit growth for the first three quarters of 2022, compared to the first three quarters of 2021.
Specific factors contributing to the trends driving operating profit and FIFO operating profit identified above are discussed earlier in this section.
The following table provides a reconciliation of operating profit to FIFO operating profit, and to Adjusted FIFO operating profit, excluding the 2022 and 2021 Adjusted Items:
Operating Profit excluding the Adjusted Items
($ in millions)
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Third Quarter Ended | | Three Quarters Ended | ||||||||
| | | November 5, | | November 6, | | November 5, | | November 6, | ||||
| | 2022 | 2021 | 2022 | 2021 | ||||||||
| Operating profit | | $ | 841 | | $ | 868 | | $ | 3,300 | | $ | 2,512 |
| LIFO charge | | | 152 | | | 93 | | | 392 | | | 177 |
| | | | | | | | | | | | ||
| FIFO Operating profit | | 993 | | 961 | | 3,692 | | 2,689 | ||||
| | | | | | | | | | | | | |
| Adjustment for pension plan withdrawal liabilities | | | — | | | — | | | — | | | 449 |
| Adjustment for Home Chef contingent consideration | | | — | | | 10 | | | 18 | | | 61 |
| Adjustment for transformation costs(1) | | | — | | | 6 | | | — | | | 107 |
| Adjustment for merger related costs(2) | | | 19 | | | — | | | 19 | | | — |
| Adjustment for legal settlement costs | | | 85 | | | — | | | 85 | | | — |
| Other | | | (3) | | | (3) | | | (9) | | | (9) |
| | | | | | | | | | | | | |
| 2022 and 2021 Adjusted items | | | 101 | | | 13 | | | 113 | | | 608 |
| | | | | | | | | | | | | |
| Adjusted FIFO operating profit excluding the adjusted items above | | $ | 1,094 | | $ | 974 | | $ | 3,805 | | $ | 3,297 |
| (1) | Transformation costs primarily include costs related to business closure costs and third party professional consulting fees associated with business transformation and cost saving initiatives. |
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| (2) | Merger related costs primarily include third party professional fees associated with the proposed merger with Albertsons. |
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Interest Expense
Interest expense decreased for the third quarter and first three quarters of 2022, compared to the same periods of 2021, primarily due to decreased average total outstanding debt, including both the current and long-term portions of obligations under finance leases, and increased interest income earned on our cash and temporary cash investments due to rising interest rates throughout 2022, compared to 2021.
Income Taxes
The effective income tax rate was 24.0% for the third quarter of 2022 and 13.8% for the third quarter of 2021. The effective income tax rate was 21.1% for the first three quarters of 2022 and 17.9% for the first three quarters of 2021. The effective income tax rate for the third quarter of 2022 differed from the federal statutory rate due to the effect of state income taxes and certain non-deductible expenses, partially offset by the utilization of tax credits. The effective income tax rate for the first three quarters of 2022 differed from the federal statutory rate due to the effect of state income taxes and certain non-deductible expenses, partially offset by the benefit from share-based payments and the utilization of tax credits. The effective income tax rate for the third quarter of 2021 and first three quarters of 2021 differed from the federal statutory rate due to a nonrecurring benefit of $47 million, which was primarily from the favorable outcome of income tax audit examinations covering multiple years, the benefit from share-based payments and the utilization of tax credits, partially offset by the effect of state income taxes.
Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings of $0.55 per diluted share for the third quarter of 2022 represented a decrease of 14% compared to net earnings of $0.64 per diluted share for the third quarter of 2021. Adjusted net earnings of $0.88 per diluted share for the third quarter of 2022 represented an increase of 13% compared to adjusted net earnings of $0.78 per diluted share for the third quarter of 2021. The increase in adjusted net earnings per diluted share resulted primarily from increased FIFO operating profit, excluding fuel, increased fuel earnings and lower weighted average common shares outstanding due to common share repurchases, partially offset by a higher LIFO charge and higher income tax expense.
Net earnings of $2.44 per diluted share for the first three quarters of 2022 represented an increase of 71% compared to net earnings of $1.43 per diluted share for the first three quarters of 2021. Adjusted net earnings of $3.24 per diluted share for the first three quarters of 2022 represented an increase of 17% compared to adjusted net earnings of $2.77 per diluted share for the first three quarters of 2021. The increase in adjusted net earnings per diluted share resulted primarily from increased FIFO operating profit, excluding fuel, increased fuel earnings and lower weighted average common shares outstanding due to common share repurchases, partially offset by a higher LIFO charge and higher income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
The following table summarizes our net (decrease) increase in cash and temporary cash investments for the first three quarters of 2022 and 2021:
| | | | | | | |
|---|---|---|---|---|---|---|
| | Three Quarters Ended | |||||
| | | November 5, | | November 6, | ||
| | | 2022 | 2021 | |||
| Net cash provided by (used in) | | | | | | |
| Operating activities | | $ | 3,338 | | $ | 4,791 |
| Investing activities | | | (2,192) | | | (1,959) |
| Financing activities | | | (2,051) | | | (2,231) |
| Net (decrease) increase in cash and temporary cash investments | | $ | (905) | | $ | 601 |
Net cash provided by operating activities
We generated $3.3 billion of cash from operations in the first three quarters of 2022 compared to $4.8 billion in the first three quarters of 2021. Net earnings including noncontrolling interests, adjusted for non-cash items, generated approximately $5.6 billion of operating cash flow in the first three quarters of 2022 compared to $4.9 billion in the first three quarters of 2021. Cash used by operating activities for changes in operating assets and liabilities, including working capital, was $2.3 billion in the first three quarters of 2022 compared to $134 million in the first three quarters of 2021. The increase in cash used by operating activities for changes in operating assets and liabilities, including working capital, was primarily due to the following:
| ● | An increase in FIFO inventory at the end of the third quarter of 2022, compared to the third quarter of 2021, primarily due to rising costs resulting from continued inflationary cost pressures and a reduction of supply chain constraints; |
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| ● | A decrease in prepaid and other current assets at the end of the third quarter of 2021, compared to fiscal year end 2020, primarily due to the transfer of prepaid escrow funds in the first quarter of 2021 to fulfill obligations related to the restructuring of multi-employer pension plans; and |
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| ● | A decrease in long-term liabilities at the end of the third quarter of 2022, compared to fiscal year end 2021, primarily due to contractual payments in the second quarter of 2022 related to prior restructured multi-employer pension plans. |
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Cash paid for taxes increased in the first three quarters of 2022, compared to the first three quarters of 2021, primarily due to higher taxable income in the first three quarters of 2022, compared to the first three quarters of 2021.
Net cash used by investing activities
Investing activities used cash of $2.2 billion in the first three quarters of 2022 compared to $2.0 billion in the first three quarters of 2021. The amount of cash used by investing activities increased in the first three quarters of 2022, compared to the first three quarters of 2021, primarily due to increased payments for property and equipment.
Net cash used by financing activities
We used $2.1 billion of cash for financing activities in the first three quarters of 2022 compared to $2.2 billion in the first three quarters of 2021. The amount of cash used for financing activities decreased in the first three quarters of 2022 compared to the first three quarters of 2021, primarily due to the following:
| ● | Decreased payments on long-term debt including obligations under finance leases; |
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| ● | Partially offset by decreased proceeds from a financing arrangement. |
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Capital Investments
Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $698 million for the third quarter of 2022 compared to $922 million for the third quarter of 2021. Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $2.2 billion for both the first three quarters of 2022 and 2021. During the rolling four quarter period ended with the third quarter of 2022, we opened, expanded, relocated or acquired 9 supermarkets and also completed 83 major within-the-wall remodels. We define a major remodel as a project that exceeds a cost of $20 per square foot. Total supermarket square footage at the end of the third quarter of 2022 remained consistent with the end of the third quarter of 2021. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the third quarter of 2022 increased 0.3% over the end of the third quarter of 2021.
Debt Management
As of November 5, 2022, we maintained a $2.75 billion (with the ability to increase by $1.25 billion), unsecured revolving credit facility that, unless extended, terminates on July 6, 2026. Outstanding borrowings under the credit facility, commercial paper borrowings, and some outstanding letters of credit reduce funds available under the credit facility. As of November 5, 2022, we had no outstanding commercial paper and no borrowings under our revolving credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled $2 million as of November 5, 2022.
In connection with the proposed merger with Albertsons, on October 13, 2022, we entered into a commitment letter with certain lenders pursuant to which the lenders have committed to provide a 364-day $17.4 billion senior unsecured bridge term loan facility. The commitments are intended to be drawn to finance the proposed merger with Albertsons only to the extent we do not arrange for alternative financing prior to closing. As alternative financing for the proposed merger is secured, the principal amount of the bridge term loan facility will be reduced.
On November 9, 2022, we executed a term loan credit agreement with certain lenders pursuant to which the lenders committed to provide, contingent upon the completion of the proposed merger with Albertsons and certain other customary conditions to funding, (1) a senior unsecured term loan facility in an aggregate principal amount of $3.0 billion maturing on the third anniversary of the proposed merger closing date and (2) a senior unsecured term loan facility in an aggregate principal amount of $1.75 billion maturing on the date that is 18 months after the proposed merger closing date (collectively, the “Term Loan Facilities”). Borrowings under the Term Loan Facilities will be used to pay a portion of the consideration and other amounts payable in connection with the proposed merger with Albertsons. The duration of the Term Loan Facilities will allow us to achieve our net total debt to adjusted EBITDA ratio target range of 2.30 to 2.50 within the first 18 to 24 months after the proposed merger closing date. The entry into the term loan credit agreement reduces availability under our $17.4 billion bridge term loan facility by $4.75 billion. Borrowings under the Term Loan Facilities will bear interest at rates that vary based on the type of loan and our debt rating.
Our bank credit facility contains a financial covenant. As of November 5, 2022, we were in compliance with the financial covenant. Furthermore, management believes it is not reasonably likely that we will fail to comply with the financial covenant in the foreseeable future.
Total debt, including both the current and long-term portions of obligations under finance leases, decreased $134 million as of November 5, 2022, compared to our fiscal year end 2021 debt of $13.4 billion. This decrease resulted primarily from the payment of $400 million of senior notes bearing an interest rate of 2.80%, partially offset by a net increase in obligations under finance leases of $297 million primarily related to our three additional Kroger Delivery customer fulfillment center openings during the first three quarters of 2022.
Common Share Repurchase Programs
During the third quarter of 2022, we invested $10 million to repurchase 215 thousand Kroger common shares at an average price of $47.63 per share. For the first three quarters of 2022, we invested $985 million to repurchase 19.2 million Kroger common shares at an average price of $51.35 per share. The shares repurchased in the first three quarters of 2022 were reacquired under the following share repurchase programs:
| ● | 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”); and |
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| ● | A program that uses the cash proceeds from the exercises of stock options by participants in Kroger’s stock option, long-term incentive plans and the associated tax benefits. |
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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”). As of November 5, 2022, there was $1 billion remaining under the September 2022 Repurchase Program. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.
Liquidity Needs
We held cash and temporary cash investments of $916 million, as of November 5, 2022, which reflects our elevated operating performance over the last two years. We actively manage our cash and temporary cash investments in order to internally fund operating activities, support and invest in our core businesses, make scheduled interest and principal payments on our borrowings and return cash to shareholders through cash dividend payments and share repurchases. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in economic and market conditions. We remain committed to our dividend, and growing our dividend over time, subject to board approval, and share repurchase programs and we will evaluate the optimal use of any excess free cash flow, consistent with our capital allocation strategy. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.
We expect to meet our short-term and long-term liquidity needs with cash and temporary cash investments on hand as of November 5, 2022, cash flows from our operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility. Our short-term and long-term liquidity needs include anticipated requirements for working capital to maintain our operations, pension plan commitments, interest payments and scheduled principal payments of debt and commercial paper, servicing our lease obligations, self-insurance liabilities, capital investments, payments deferred under the CARES Act and other purchase obligations. We may also require additional capital in the future to fund organic growth opportunities, additional customer fulfilment centers, joint ventures or other business partnerships, property development, acquisitions, dividends and share repurchases. In addition, we generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. We believe we have adequate coverage of our debt covenants to continue to maintain our current investment grade debt ratings and to respond effectively to competitive conditions.
As previously disclosed, on October 13, 2022, we entered into a merger agreement with Albertsons. We expect to meet our liquidity needs for the proposed merger with cash and temporary cash investments on hand as of the merger closing date, cash flows from our operating activities and other sources of liquidity, including borrowings under our commercial paper program, senior notes issuances, bank credit facility and other sources of financing. In connection with the proposed merger, we entered into a bridge term loan facility and executed a term loan credit agreement. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons. For additional information about the proposed merger with Albertsons, see Note 10 to the Consolidated Financial Statements.
For additional information about our debt activity in the first three quarters of 2022, see Note 2 to the Consolidated Financial Statements.
CRITICAL ACCOUNTING ESTIMATES
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our critical accounting policies are summarized in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could vary from those estimates. There has been no material change to our critical accounting estimates since the filing of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022.
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