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,” “continue,” “could,” “estimate,” “expect,” “future,” “guidance,” “intended,” “maintain,” “may,” “model,” “opportunity,” “plan,” “position,” “program,” “reaffirm,” “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 nationwide opioid litigation settlement, including our ability to finalize and effectuate the settlement, the scope and coverage of the ultimate settlement and the expected financial or other impacts that could result from the settlement; our proposed transaction with Albertsons Companies, Inc. (“Albertsons”) announced in October 2022, including, among others, our ability to consummate the proposed transaction and related divestiture plan, including on the terms of the merger agreement and divestiture plan, on the anticipated timeline, and/or with the required regulatory approvals; COVID-19 pandemic related factors, risks and challenges; 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 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 adjusted 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 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 food retail business, which is built on Kroger’s strategic assets: our stores, digital ecosystem, Our Brands and our data. These assets, when combined with our go-to-market strategy, deliver a compelling value proposition for our customers. We are building long-term customer loyalty by differentiating in Fresh, Our Brands, Personalization and our seamless shopping experience 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 primarily a 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. As more and more customers incorporate ecommerce into their permanent routines, we expect digital sales to grow at a double-digit rate – a faster pace than other food at home sales – over time; and |
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| ● | Expanding operating margin, through a balanced model where strategic price investments for our customers, investments in our associates’ wages and benefits and investments in technology that deliver a better associate and customer experience are offset by (i) our cost savings program, which has delivered $1 billion in cost savings annually for the past five fiscal years, (ii) improving our product mix, as we accelerate momentum with our Fresh and Our Brands initiatives, and (iii) growing 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 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, subject to Board approval. 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 delivered another quarter of consistent financial results and strong free cash flow in the second quarter of 2023. As the operating environment remains challenged and economic uncertainty persists, the strength and diversity of our model is enabling us to deliver value for our customers, invest in our associates, and drive consistent shareholder returns. By investing in price and providing more personalized offers, we are helping customers stretch their budgets and manage the ongoing effects of reduced government benefits, inflation and higher interest rates. We are growing households as our associates are providing a full, fresh and friendly shopping experience across our seamless ecosystem.
While industry-wide disinflation caused a deceleration in food at home sales and we experienced a significant year-over-year decline in fuel profitability, we delivered adjusted net earnings per diluted share growth during the second quarter of 2023. This was the result of strong gross margin management, tight cost controls and continued growth in alternative profit businesses.
We expect the operating environment will remain challenged going forward and now expect identical sales without fuel will be at the low end of our full-year guidance range. We remain committed to delivering value for our customers and investing in our associates and at the same time we believe we have the flexibility and resiliency within our business model to achieve our 2023 adjusted FIFO operating profit and adjusted net earnings per diluted share full year guidance.
The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
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| | | Second Quarter Ended | | | Two Quarters Ended | | ||||||||||||
| | | August 12, | Percentage | August 13, | | | August 12, | Percentage | August 13, | | ||||||||
| | | 2023 | | Change | | 2022 | | | 2023 | | Change | | 2022 | | ||||
| Sales | | $ | 33,853 | | (2.3) | % | $ | 34,638 | | | $ | 79,018 | | (0.3) | % | $ | 79,238 | |
| Sales without fuel | | $ | 29,900 | | 1.1 | % | $ | 29,577 | | | $ | 69,969 | | 2.5 | % | $ | 68,288 | |
| Net earnings (loss) attributable to The Kroger Co. | | $ | (180) | | (124.6) | % | $ | 731 | | | $ | 782 | | (43.9) | % | $ | 1,394 | |
| Adjusted net earnings attributable to The Kroger Co. | | $ | 699 | | 5.7 | % | $ | 661 | | | $ | 1,803 | | 3.9 | % | $ | 1,735 | |
| Net earnings (loss) attributable to The Kroger Co. per diluted common share | | $ | (0.25) | | (125.0) | % | $ | 1.00 | | | $ | 1.07 | | (43.4) | % | $ | 1.89 | |
| Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.96 | | 6.7 | % | $ | 0.90 | | | $ | 2.47 | | 4.7 | % | $ | 2.36 | |
| Operating profit (loss) | | $ | (479) | | (150.2) | % | $ | 954 | | | $ | 991 | | (59.7) | % | $ | 2,459 | |
| Adjusted FIFO operating profit | | $ | 989 | | (10.9) | % | $ | 1,110 | | | $ | 2,658 | | (2.0) | % | $ | 2,711 | |
| Dividends paid | | $ | 188 | | 22.9 | % | $ | 153 | | | $ | 376 | | 22.5 | % | $ | 307 | |
| Dividends paid per common share | | $ | 0.26 | | 23.8 | % | $ | 0.21 | | | $ | 0.52 | | 23.8 | % | $ | 0.42 | |
| Identical sales excluding fuel(1) | | | 1.0 | % | N/A | | | 5.8 | % | | | 2.4 | % | N/A | | | 4.8 | % |
| FIFO gross margin rate, excluding fuel, bps increase (decrease)(1) | | | 0.35 | | N/A | | | 0.02 | | | | 0.28 | | N/A | | | (0.14) | |
| OG&A rate, excluding fuel and Adjusted Items, bps increase (decrease)(1) | | | — | | N/A | | | 0.36 | | | | 0.08 | | N/A | | | (0.10) | |
| Decrease in total debt, including obligations under finance leases compared to prior fiscal year end | | $ | (587) | | N/A | | $ | (87) | | | $ | (587) | | N/A | | $ | (87) | |
| Share repurchases | | $ | 18 | | N/A | | $ | 309 | | | $ | 47 | | N/A | | $ | 975 | |
| (1) | Identical sales without fuel would have grown 2.6% in the second quarter and 4.0% in the first two quarters of 2023 if not for the reduction in pharmacy sales from the previously communicated termination of our agreement with Express Scripts effective December 31, 2022. In the second quarter and first two quarters of 2023, the terminated agreement had a positive effect on the FIFO gross margin rate, excluding fuel, and a negative effect on the OG&A rate, excluding fuel and the 2023 and 2022 Adjusted Items, as defined below. The overall net effect on adjusted FIFO operating profit was slightly positive. |
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OVERVIEW
Notable items for the second quarter and first two quarters of 2023 are:
Shareholder Return
| ● | Net earnings (loss) attributable to The Kroger Co. per diluted common share of $(0.25) for the second quarter and $1.07 for the first two quarters. These results include losses per diluted common share of $1.54 for the second quarter and $1.60 for the first two quarters of 2023 related to our opioid settlement charges. |
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| ● | Adjusted net earnings attributable to The Kroger Co. per diluted common share of $0.96 for the second quarter and $2.47 for the first two quarters. This represents a 7% increase for the second quarter of 2023 compared to the second quarter of 2022 and a 5% increase for the first two quarters of 2023 compared to the first two quarters of 2022. |
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| ● | Operating profit (loss) of $(479) million for the second quarter and $991 million for the first two quarters. These results include charges of $1.4 billion for the second quarter and $1.5 billion for the first two quarters of 2023 related to our opioid settlement charges. |
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| ● | Adjusted FIFO operating profit of $989 million for the second quarter and $2.7 billion for the first two quarters. This represents a 11% decrease for the second quarter of 2023 compared to the second quarter of 2022 and a 2% decrease for the first two quarters of 2023 compared to the first two quarters of 2022. |
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| ● | During the first two quarters of 2023, we generated cash from operations of $4.4 billion, which represents an 80% increase compared to the first two quarters of 2022. |
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| ● | Cash and temporary cash investments increased by $1.4 billion from $1.0 billion as of fiscal year end 2022 to $2.4 billion as of August 12, 2023. Total debt including obligations under finance leases decreased by $587 million from $13.4 billion as of fiscal year end 2022 to $12.8 billion as of August 12, 2023. |
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| ● | During the first two quarters of 2023, we returned $376 million to shareholders through dividend payments. |
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Other Financial Results
| ● | Identical sales, excluding fuel, increased 1.0% for the second quarter and 2.4% in the first two quarters of 2023. Identical sales, excluding fuel, would have grown 2.6% in the second quarter of 2023 and 4.0% in the first two quarters of 2023 if not for the reduction in pharmacy sales from the previously communicated termination of our agreement with Express Scripts effective December 31, 2022. In the second quarter and first two quarters of 2023, the terminated agreement had a positive effect on our FIFO Gross Margin Rate, excluding fuel, and a negative effect on our OG&A Rate, excluding fuel and the 2023 Adjusted Items, as defined below. The overall net effect on FIFO operating profit was slightly positive. |
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| ● | Digital sales increased 12% in the second quarter and 14% in the first two quarters of 2023, compared to the same periods of 2022. Digital sales growth was led by the strength of our Pickup solutions, which grew by 7% in the second quarter and 9% in the first two quarters of 2023, and our Delivery solutions, which grew by 24% in the second quarter and 27% in the first two quarters of 2023. Pickup solutions growth was driven by improvements to the customer experience. Delivery solutions growth was driven by 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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| ● | In the second quarter and first two quarters of 2023, our adjusted net earnings per diluted common share grew compared to the second quarter and first two quarters of 2022. In the second quarter and first two quarters of 2023, the decline in fuel operating profit was partially offset by the decrease in the LIFO charge compared to the same periods of 2022. In addition, our underlying operating results excluding fuel improved in the second quarter and first two quarters of 2023, compared to the second quarter and first two quarters of 2022, due to strong gross margin management, tight cost controls and continued growth in alternative profit businesses despite continuous industry-wide disinflation. |
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Significant Events
| ● | During the second quarter of 2023, we recognized opioid settlement charges of $1.4 billion, $1.1 billion net of tax, related to the nationwide opioid settlement framework to settle substantially all opioid lawsuits and claims against Kroger. We have agreed to make settlement payments related to the nationwide settlement framework of approximately $1.2 billion in equal installments over 11 years, and $177 million in equal installments over 6 years. During the first quarter of 2023, we recognized opioid settlement charges of $62 million, $49 million net of tax, related to all pending and future opioid litigation claims with the State of West Virginia, which are payable over 10 years. For additional information about our opioid settlement charges in the first two quarters of 2023, see Note 6 to the Consolidated Financial Statements. |
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| ● | On September 8, 2023, Kroger and Albertsons announced they have entered a definitive agreement with C&S Wholesale Grocers, LLC for the combined sale of 413 stores, eight distribution centers, two offices and five private label brands in connection with the proposed merger, for approximately $1.9 billion cash consideration, subject to customary adjustments. The financial terms of this divestiture plan are in-line with what we expected, and allow us to reaffirm the shareholder value creation opportunity the proposed merger creates. |
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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 (loss), 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 (loss), net earnings (loss) and net earnings (loss) 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 (loss) as operating profit (loss) excluding the LIFO charge. FIFO operating profit (loss) is an important measure used by management and management believes FIFO operating profit (loss) 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 (loss), net earnings (loss) per diluted share and FIFO operating profit (loss) because adjusted items are not the result of our normal operations. Net earnings (loss) for the first two quarters of 2023 include the following, which we define as the “2023 Adjusted Items”:
| ● | Charges to operating, general and administrative expenses (“OG&A”) of $94 million, $81 million net of tax, for merger related costs and $1.5 billion, $1.2 billion net of tax, for opioid settlement charges (the “2023 OG&A Adjusted Items”). |
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| ● | A gain in other income (expense) of $290 million, $223 million net of tax, for the unrealized gain on investments (the “2023 Other Income (Expense) Adjusted Item”). |
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Net earnings for the second quarter of 2023 include the following, which we define as the “2023 Second Quarter Adjusted Items”:
| ● | Charges to OG&A of $54 million, $47 million net of tax, for merger related costs and $1.4 billion, $1.1 billion net of tax, for opioid settlement charges (the “2023 Second Quarter OG&A Adjusted Items”). |
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| ● | A gain in other income (expense) of $367 million, $282 million net of tax, for the unrealized gain on investments (the “2023 Second Quarter Other Income (Expense) Adjusted Item”). |
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Net earnings for the first two quarters of 2022 include the following, which we define as the “2022 Adjusted Items”:
| ● | Charges to OG&A of $18 million, $14 million net of tax, for the revaluation of Home Chef contingent consideration (the “2022 OG&A Adjusted Item”). |
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| ● | Losses in other income (expense) of $429 million, $327 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 second quarter of 2022 include the following, which we define as the “2022 Second Quarter Adjusted Items”:
| ● | Charges to OG&A of $10 million, $8 million net of tax, for the revaluation of Home Chef contingent consideration (the “2022 Second Quarter OG&A Adjusted Item”). |
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| ● | A gain in other income (expense) of $103 million, $78 million net of tax, for the unrealized gain on investments (the “2022 Second Quarter Other Income (Expense) Adjusted Item”). |
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Please refer to the “Net Earnings per Diluted Share excluding the Adjusted Items” table below for reconciliations of certain non-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the most comparable GAAP financial measures and related disclosure.
The following table provides a reconciliation of net earnings (loss) attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings (loss) attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, excluding the 2023 and 2022 Adjusted Items:
Net Earnings per Diluted Share excluding the Adjusted Items
($ in millions, except per share amounts)
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| | | Second Quarter Ended | | Two Quarters Ended | |||||||||||||
| | August 12, | August 13, | Percentage | August 12, | August 13, | Percentage | |||||||||||
| | | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change | |||||
| Net earnings (loss) attributable to The Kroger Co. | | $ | (180) | | $ | 731 | | | $ | 782 | | $ | 1,394 | | | ||
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| (Income) expense adjustments | | | | | | | | | | | | | | | | | |
| Adjustment for (gain) loss on investments(1)(2) | | | (282) | | | (78) | | | | | (223) | | | 327 | | | |
| Adjustment for Home Chef contingent consideration(1)(3) | | | — | | | 8 | | | | | — | | | 14 | | | |
| Adjustment for merger related costs(1)(4) | | | 47 | | | — | | | | | 81 | | | — | | | |
| Adjustment for opioid settlement charges(1)(5) | | 1,114 | | — | | | | 1,163 | | | — | | | | |||
| 2023 and 2022 Adjusted Items | | | 879 | | | (70) | | | | | 1,021 | | | 341 | | | |
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| Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 699 | | $ | 661 | 5.7 | % | $ | 1,803 | | $ | 1,735 | 3.9 | % | ||
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| Net earnings (loss) attributable to The Kroger Co. per diluted common share | | $ | (0.25) | | $ | 1.00 | | | $ | 1.07 | | $ | 1.89 | | | ||
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| (Income) expense adjustments | | | | | | | | | | | | | | | | | |
| Adjustment for (gain) loss on investments(6) | | | (0.39) | | | (0.11) | | | | | (0.31) | | | 0.45 | | | |
| Adjustment for Home Chef contingent consideration(6) | | | — | | | 0.01 | | | | | — | | | 0.02 | | | |
| Adjustment for merger related costs(6) | | | 0.06 | | | — | | | | | 0.11 | | | — | | | |
| Adjustment for opioid settlement charges(6) | | | 1.54 | | | — | | | | | 1.60 | | | — | | | |
| 2023 and 2022 Adjusted Items | | 1.21 | | (0.10) | | | | 1.40 | | 0.47 | | | | ||||
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| Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.96 | | $ | 0.90 | 6.7 | % | $ | 2.47 | | $ | 2.36 | 4.7 | % | ||
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| Average number of common shares used in diluted calculation | | 725 | | 725 | | | | 725 | | 730 | | | |
| (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 adjustments for (gain) loss on investments were $(367) in the second quarter of 2023 and $(103) in the second quarter 2022. The pre-tax adjustments for (gain) loss on investments were $(290) in the first two quarters of 2023 and $429 in the first two quarters of 2022. |
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| (3) | The pre-tax adjustment for Home Chef contingent consideration was $10 in the second quarter of 2022 and $18 in the first two quarters of 2022. |
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| (4) | The pre-tax adjustment for merger related costs was $54 in the second quarter of 2023 and $94 in the first two quarters of 2023. Merger related costs primarily include third-party professional fees and the amortization of credit facility fees associated with the proposed merger with Albertsons. |
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| (5) | The pre-tax adjustment for opioid settlement charges was $1,413 in the second quarter of 2023 and $1,475 in the first two quarters of 2023. |
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| (6) | The amount presented represents the net earnings per diluted common share effect of each adjustment. |
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RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
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| | | Second Quarter Ended | | | | | Two Quarters Ended | |||||||||||||||||
| | | August 12, | | Percentage | | August 13, | | Percentage | | | | | August 12, | | Percentage | | August 13, | | Percentage | |||||
| | 2023 | Change(1) | 2022 | Change(2) | | | | 2023 | Change(3) | 2022 | Change(4) | |||||||||||||
| Total sales to retail customers without fuel(5) | | $ | 29,644 | | 1.0 | % | $ | 29,353 | | 5.3 | % | | | | $ | 69,392 | | 2.3 | % | $ | 67,803 | | 4.5 | % |
| Supermarket fuel sales | | | 3,953 | | (21.9) | % | | 5,061 | | 41.5 | % | | | | | 9,049 | | (17.4) | % | | 10,950 | | 44.7 | % |
| Other sales(6) | | | 256 | | 14.3 | % | | 224 | | 0.9 | % | | | | | 577 | | 19.0 | % | | 485 | | (4.5) | % |
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| Total sales | | $ | 33,853 | | (2.3) | % | $ | 34,638 | | 9.3 | % | | | | $ | 79,018 | | (0.3) | % | $ | 79,238 | | 8.6 | % |
| (1) | This column represents the percentage change in the second quarter of 2023, compared to the second quarter of 2022. |
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| (2) | This column represents the percentage change in the second quarter of 2022, compared to the second quarter of 2021. |
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| (3) | This column represents the percentage change in the first two quarters of 2023, compared to the first two quarters of 2022. |
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| (4) | This column represents the percentage change in the first two quarters of 2022, compared to the first two quarters of 2021. |
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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 12% in the second quarter of 2023 and 14% in the first two quarters of 2023, compared to the same periods of 2022. Digital sales growth was led by the strength of our Pickup solutions, which grew by 7% in the second quarter of 2023 and 9% in the first two quarters of 2023, and our Delivery solutions, which grew by 24% in the second quarter of 2023 and 27% in the first two quarters of 2023. Pickup solutions growth was driven by improvements to the customer experience. Delivery solutions growth was driven by 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 increases in the second quarter and the first two quarters of 2023, compared to the same periods of 2022, are primarily due to an increase in data analytic services and third-party media revenue. |
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Total sales decreased in the second quarter of 2023, compared to the second quarter of 2022, by 2.3%. The decrease was due to a reduction in supermarket fuel sales, offset by an increase in total sales to retail customers without fuel. Total sales, excluding fuel, increased 1.1% in the second quarter of 2023, compared to the second quarter of 2022, which was primarily due to our identical sales increase, excluding fuel, of 1.0%. Identical sales, excluding fuel, for the second quarter of 2023, compared to the second quarter of 2022, 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 and the termination of our agreement with Express Scripts. Identical sales, excluding fuel, would have grown 2.6% in the second quarter of 2023 if not for the approximately $475 million reduction in pharmacy sales from the previously communicated termination of our agreement with Express Scripts effective December 31, 2022. Total supermarket fuel sales decreased 21.9% in the second quarter of 2023, compared to the second quarter of 2022, primarily due to a decrease in the average retail fuel price of 20.9% and a decrease in fuel gallons sold of 1.2%, which was better than the average market decline in fuel gallons sold. The decrease in the average retail fuel price was caused by a decrease in the product cost of fuel.
Total sales decreased in the first two quarters of 2023, compared to the first two quarters of 2022, by 0.3%. The decrease was primarily due to the decrease in supermarket fuel sales, partially offset by an increase in total sales to retail customers without fuel and other sales. Total sales, excluding fuel, increased 2.5% in the first two quarters of 2023, compared to the first two quarters of 2022, which was primarily due to our identical sales increase, excluding fuel, of 2.4%. Identical sales, excluding fuel, for the first two quarters of 2023, compared to the first two quarters of 2022, 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 and the termination of our agreement with Express Scripts. Identical sales, excluding fuel, would have grown 4.0% in the first two quarters of 2023 if not for the approximately $1.1 billion reduction in pharmacy sales from the previously communicated termination of our agreement with Express Scripts effective December 31, 2022. Total supermarket fuel sales decreased 17.4% in the first two quarters of 2023, compared to the first two quarters of 2022, primarily due to a decrease in the average retail fuel price of 15.7% and a decrease in fuel gallons sold of 2.0%, which was better than the average market decline in fuel gallons sold. The decrease in the average retail fuel price was caused by a decrease 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 results, excluding fuel, are summarized in the following table. We used the identical sales, excluding fuel, dollar figures presented below to calculate percentage changes for the second quarter and first two quarters of 2023.
Identical Sales
($ in millions)
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Second Quarter Ended | |||||||||
| | | August 12, | | Percentage | | August 13, | | Percentage | |||
| | 2023 | Change(1) | 2022 | Change(2) | |||||||
| Excluding Fuel | $ | 29,534 | 1.0 | % | $ | 29,238 | 5.8 | % |
| (1) | This column represents the percentage change in identical sales in the second quarter of 2023, compared to the second quarter of 2022. |
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| (2) | This column represents the percentage change in identical sales in the second quarter of 2022, compared to the second quarter of 2021. |
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| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Two Quarters Ended | |||||||||
| | | August 12, | | Percentage | | August 13, | | Percentage | |||
| | 2023 | Change(1) | 2022 | Change(2) | |||||||
| Excluding Fuel | $ | 69,108 | 2.4 | % | $ | 67,473 | 4.8 | % |
| (1) | This column represents the percentage change in identical sales in the first two quarters of 2023, compared to the first two quarters of 2022. |
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| (2) | This column represents the percentage change in identical sales in the first two quarters of 2022, compared to the first two quarters of 2021. |
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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 21.79% for the second quarter of 2023, compared to 20.92% for the second quarter of 2022. This increase in rate was achieved while also investing in price to maintain a competitive price position and deliver greater value for our customers. The increase in rate in the second quarter of 2023, compared to the second quarter of 2022, resulted primarily from a decreased LIFO charge, Our Brands performance, our ability to effectively manage product cost inflation through strong sourcing practices, lower transportation costs, as a percentage of sales, and the effect of our terminated agreement with Express Scripts, partially offset by higher shrink, as a percentage of sales, and increased promotional price investments.
Our gross margin rate, as a percentage of sales, was 22.10% for the first two quarters of 2023, compared to 21.32% for the first two quarters of 2022. This increase in rate was achieved while also investing in price to maintain a competitive price position and deliver greater value for our customers. The increase in rate in the first two quarters of 2023, compared to the first two quarters of 2022, resulted primarily from a decreased LIFO charge, Our Brands performance, our ability to effectively manage product cost inflation through strong sourcing practices, lower transportation costs, as a percentage of sales, and the effect of our terminated agreement with Express Scripts, partially offset by higher shrink, as a percentage of sales, and increased promotional price investments.
Our LIFO charge was $4 million in the second quarter of 2023, compared to $148 million in the second quarter of 2022. Our LIFO charge was $102 million in the first two quarters of 2023, compared to $240 million in the first two quarters of 2022. Our decreased LIFO charge reflects our lower expected annualized product cost inflation for 2023 compared to 2022.
Our FIFO gross margin rate, which excludes the LIFO charge, was 21.81% in the second quarter of 2023, compared to 21.35% in the second quarter of 2022. 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 increased 35 basis points in the second quarter of 2023, compared to the second quarter of 2022. This increase in rate was achieved while also investing in price to maintain a competitive price position and deliver greater value for our customers. This increase resulted primarily from Our Brands performance, our ability to effectively manage product cost inflation through strong sourcing practices, lower transportation costs, as a percentage of sales, and the effect of our terminated agreement with Express Scripts, partially offset by higher shrink, as a percentage of sales, and increased promotional price investments.
Our FIFO gross margin rate, which excludes the LIFO charge, was 22.23% in the first two quarters of 2023, compared to 21.62% in the first two quarters of 2022. Excluding the effect of fuel, our FIFO gross margin rate increased 28 basis points in the first two quarters of 2023, compared to the first two quarters of 2022. This increase in rate was achieved while also investing in price to maintain a competitive price position and deliver greater value for our customers. This increase resulted primarily from Our Brands performance, our ability to effectively manage product cost inflation through strong sourcing practices, lower transportation costs, as a percentage of sales, and the effect of our terminated agreement with Express Scripts, partially offset by higher shrink, as a percentage of sales, and increased promotional price investments.
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 20.49% in the second quarter of 2023 and 15.64% in the second quarter of 2022. The increase in the second quarter of 2023, compared to the second quarter of 2022, resulted primarily from planned investment in associates, an increase to our self-insurance reserves, the effect of our terminated agreement with Express Scripts, costs related to strategic investments in various margin expansion initiatives that will drive future growth and the 2023 Second Quarter OG&A Adjusted Items, partially offset by the 2022 Second Quarter OG&A Adjusted Item, the broad-based improvement from cost savings initiatives that drive administrative efficiencies, lower incentive plan costs and store productivity and sourcing cost reductions.
OG&A expenses, as a percentage of sales, were 18.13% in the first two quarters of 2023 and 15.67% in the first two quarters of 2022. The increase in the first two quarters of 2023, compared to the first two quarters of 2022, resulted primarily from planned investment in associates, an increase to our self-insurance reserves, the effect of our terminated agreement with Express Scripts, costs related to strategic investments in various margin expansion initiatives that will drive future growth and the 2023 OG&A Adjusted Items, partially offset by the 2022 OG&A Adjusted Item, the broad-based improvement from cost savings initiatives that drive administrative efficiencies, lower incentive plan costs and store productivity and sourcing cost reductions.
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 2023 Second Quarter OG&A Adjusted Items and the 2022 Second Quarter OG&A Adjusted Item, our OG&A rate remained consistent in the second quarter of 2023, compared to the second quarter of 2022. This result was primarily driven by the broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions and lower incentive plan costs, offset by planned investment in associates, an increase to our self-insurance reserves, and the effect of our terminated agreement with Express Scripts.
Excluding the effect of fuel, the 2023 OG&A Adjusted Items and the 2022 OG&A Adjusted Item, our OG&A rate increased 8 basis points in the first two quarters of 2023, compared to the first two quarters of 2022. This increase resulted primarily from planned investments in associates, an increase to our self-insurance reserves and the effect of our terminated agreement with Express Scripts, partially offset by the broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions and lower incentive plan costs.
Rent Expense
Rent expense remained relatively consistent, as a percentage of sales, for the second quarter and the first two quarters of 2023, compared to the same periods of 2022.
Depreciation and Amortization Expense
Depreciation and amortization expense increased, as a percentage of sales, in the second quarter and first two quarters of 2023, compared to the same periods of 2022. This increase was primarily due to depreciation of equipment recorded under finance leases related to our Kroger Delivery customer fulfillment center location openings, additional depreciation with higher capital investments during the rolling four quarter period ending with the second quarter of 2023 and a decrease in the average useful life on these capital investments.
Operating Profit (Loss) and FIFO Operating Profit (Loss)
Operating profit (loss) was $(479) million, or (1.4)% of sales, for the second quarter of 2023, compared to $954 million, or 2.8% of sales, for the second quarter of 2022. Operating profit (loss), as a percentage of sales, decreased 417 basis points in the second quarter of 2023, compared to the second quarter of 2022, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, and a decrease in fuel operating profit, partially offset by a higher FIFO gross margin rate and a decreased LIFO charge.
Operating profit was $991 million, or 1.3% of sales, for the first two quarters of 2023, compared to $2.5 billion, or 3.1% of sales, for the first two quarters of 2022. Operating profit, as a percentage of sales, decreased 185 basis points in the first two quarters of 2023, compared to the first two quarters of 2022, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, and a decrease in fuel operating profit, partially offset by a higher FIFO gross margin rate and a decreased LIFO charge.
FIFO operating profit (loss) was $(475) million, or (1.4)% of sales, for the second quarter of 2023, compared to $1.1 billion, or 3.2% of sales, for the second quarter of 2022. FIFO operating profit, as a percentage of sales, excluding the 2023 and 2022 Second Quarter Adjusted Items, decreased 28 basis points in the second quarter of 2023, compared to the second quarter of 2022, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, and a decrease in fuel operating profit, partially offset by a higher FIFO gross margin rate.
FIFO operating profit was $1.1 billion, or 1.4% of sales, for the first two quarters of 2023, compared to $2.7 billion, or 3.4% of sales, for the first two quarters of 2022. FIFO operating profit, as a percentage of sales, excluding 2023 and 2022 Adjusted Items, decreased 6 basis points in the first two quarters of 2023, compared to the first two quarters of 2022, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, and a decrease in fuel operating profit, partially offset by a higher FIFO gross margin rate.
Specific factors contributing to the trends driving operating profit (loss) and FIFO operating profit (loss) identified above are discussed earlier in this section.
The following table provides a reconciliation of operating profit (loss) to FIFO operating profit (loss), and to Adjusted FIFO operating profit, excluding the 2023 and 2022 Adjusted Items:
Operating Profit excluding the Adjusted Items
($ in millions)
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Second Quarter Ended | | Two Quarters Ended | ||||||||
| | | August 12, | | August 13, | | August 12, | | August 13, | ||||
| | 2023 | 2022 | 2023 | 2022 | ||||||||
| Operating profit (loss) | | $ | (479) | | $ | 954 | | $ | 991 | | $ | 2,459 |
| LIFO charge | | | 4 | | | 148 | | | 102 | | | 240 |
| | | | | | | | | | | | ||
| FIFO Operating profit (loss) | | (475) | | 1,102 | | 1,093 | | 2,699 | ||||
| | | | | | | | | | | | | |
| Adjustment for Home Chef contingent consideration | | | — | | | 10 | | | — | | | 18 |
| Adjustment for merger related costs(1) | | | 54 | | | — | | | 94 | | | — |
| Adjustment for opioid settlement charges(2) | | | 1,413 | | | — | | | 1,475 | | | — |
| Other | | | (3) | | | (2) | | | (4) | | | (6) |
| | | | | | | | | | | | | |
| 2023 and 2022 Adjusted items | | | 1,464 | | | 8 | | | 1,565 | | | 12 |
| | | | | | | | | | | | | |
| Adjusted FIFO operating profit excluding the adjusted items above | | $ | 989 | | $ | 1,110 | | $ | 2,658 | | $ | 2,711 |
| (1) | Merger related costs primarily include third-party professional fees and the amortization of credit facility fees associated with the proposed merger with Albertsons. |
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| (2) | Opioid settlement charges include settlements with the nationwide opioid settlement framework and the State of West Virginia. |
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Interest Expense
Interest expense decreased for the second quarter and first two quarters of 2023, compared to the same periods of 2022. This decrease was primarily due to increased interest income earned on our cash and temporary cash investments due to rising interest rates and an increase in our investments balance, in the second quarter and the first two quarters of 2023, compared to the same periods of 2022, and a decreased average total outstanding debt throughout 2023, compared to 2022.
Income Taxes
The effective income tax rate was 9.1% for the second quarter of 2023 and 22.3% for the second quarter of 2022. The effective income tax rate was 25.5% for the first two quarters of 2023 and 20.3% for the first two quarters of 2022. The effective income tax rate for the second quarter of 2023 reflects a tax benefit resulting from the pre-tax loss that occurred in the second quarter of 2023. The tax benefit was reduced by the nondeductible portion of opioid settlement charges, partially offset by the effect of state income taxes and the utilization of tax credits and deductions. The effective income tax rate for the first two quarters of 2023 differed from the federal statutory rate primarily due to the nondeductible portion of opioid settlement charges and the effect of state income taxes, partially offset by the utilization of tax credits and deductions. The effective income tax rate for the second quarter of 2022 differed from the federal statutory rate due to the effect of state income taxes, partially offset by the benefit from share-based payments and the utilization of tax credits. The effective income tax rate for the first two quarters of 2022 differed from the federal statutory rate due to the benefit from share-based payments and the utilization of tax credits, partially offset by the effect of state income taxes.
Net Earnings (Loss) and Net Earnings (Loss) Per Diluted Share
Our net earnings (loss) are based on the factors discussed in the Results of Operations section.
Net earnings (loss) of $(0.25) per diluted share for the second quarter of 2023 represented a decrease of 125% compared to net earnings of $1.00 per diluted share for the second quarter of 2022. Adjusted net earnings of $0.96 per diluted share for the second quarter of 2023 represented an increase of 7% compared to adjusted net earnings of $0.90 per diluted share for the second quarter of 2022. The increase in adjusted net earnings per diluted share resulted primarily from increased FIFO operating profit, excluding fuel, a decreased LIFO charge and lower interest expense, partially offset by decreased fuel earnings and higher income tax expense.
Net earnings of $1.07 per diluted share for the first two quarters of 2023 represented a decrease of 43% compared to net earnings of $1.89 per diluted share for the first two quarters of 2022. Adjusted net earnings of $2.47 per diluted share for the first two quarters of 2023 represented an increase of 5% compared to adjusted net earnings of $2.36 per diluted share for the first two quarters of 2022. The increase in adjusted net earnings per diluted share resulted primarily from increased FIFO operating profit, excluding fuel, a decreased LIFO charge and lower interest expense, partially offset by decreased fuel earnings and higher income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
The following table summarizes our net increase (decrease) in cash and temporary cash investments for the first two quarters of 2023 and 2022:
| | | | | | | |
|---|---|---|---|---|---|---|
| | Two Quarters Ended | |||||
| | | August 12, | | August 13, | ||
| | | 2023 | 2022 | |||
| Net cash provided by (used in) | | | | | | |
| Operating activities | | $ | 4,364 | | $ | 2,427 |
| Investing activities | | | (1,795) | | | (1,388) |
| Financing activities | | | (1,164) | | | (1,758) |
| Net increase (decrease) in cash and temporary cash investments | | $ | 1,405 | | $ | (719) |
Net cash provided by operating activities
We generated $4.4 billion of cash from operations in the first two quarters of 2023 compared to $2.4 billion in the first two quarters of 2022. Net earnings including noncontrolling interests, adjusted for non-cash items, generated approximately $2.4 billion of operating cash flow in the first two quarters of 2023 compared to $4.1 billion in the first two quarters of 2022. Cash provided (used) by operating activities for changes in operating assets and liabilities, including working capital, was $1.9 billion in the first two quarters of 2023 compared to $(1.6) billion in the first two quarters of 2022. The increase in cash provided by operating activities for changes in operating assets and liabilities, including working capital, was primarily due to the following:
| ● | A decrease in pharmacy receivables at the end of the second quarter of 2023, compared to fiscal year end 2022, primarily due to timing of cash receipts and the termination of our agreement with Express Scripts; |
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| ● | Cash flows for FIFO inventory were more favorable for the first two quarters of 2023, compared to the same period of the prior year, primarily due to the following: |
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| o | A decrease in FIFO inventory at the end of the second quarter of 2023, compared to fiscal year end 2022, primarily related to maintaining inventory at optimal levels through improved inventory management planning; and |
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| o | An increase in FIFO inventory at the end of the second quarter of 2022, compared to fiscal year end 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 income taxes receivable at the end of the second quarter of 2023, compared to fiscal year end 2022, primarily due to applying an outstanding income tax receivable to reduce our estimated tax payments for the first two quarters of 2023; and |
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| ● | An increase in long-term liabilities at the end of the second quarter of 2023, compared to fiscal year end 2022, primarily due to an increase in the noncurrent portion of our accrued opioid settlement charges. |
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Cash paid for taxes decreased in the first two quarters of 2023, compared to the first two quarters of 2022, primarily due to applying an outstanding income tax receivable to reduce our estimated tax payments for the first two quarters of 2023.
Net cash used by investing activities
Investing activities used cash of $1.8 billion in the first two quarters of 2023 compared to $1.4 billion in the first two quarters of 2022. The amount of cash used by investing activities increased in the first two quarters of 2023, compared to the first two quarters of 2022, primarily due to increased payments for property and equipment.
Net cash used by financing activities
We used $1.2 billion of cash for financing activities in the first two quarters of 2023 compared to $1.8 billion in the first two quarters of 2022. The amount of cash used for financing activities decreased in the first two quarters of 2023 compared to the first two quarters of 2022, primarily due to the following:
| ● | Decreased treasury stock purchases; partially offset by |
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| ● | Increased payments on long-term debt including obligations under finance leases. |
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Capital Investments
Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $672 million for the second quarter of 2023 compared to $523 million for the second quarter of 2022. Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $1.8 billion for the first two quarters of 2023 compared to $1.5 billion for the first two quarters of 2022. During the rolling four quarter period ended with the second quarter of 2023, we opened, expanded, relocated or acquired 9 supermarkets and also completed 129 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 second quarter of 2023 remained consistent with the end of the second quarter of 2022. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the second quarter of 2023 increased 0.3% over the end of the second quarter of 2022.
Debt Management
As of August 12, 2023, 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 August 12, 2023, 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 August 12, 2023.
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 commitments with respect to the bridge term loan facility under the commitment letter 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) senior unsecured term loans in an aggregate principal amount of $3.0 billion maturing on the third anniversary of the proposed merger closing date and (2) senior unsecured term loans 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 reduced the commitments under our bridge facility commitment letter from $17.4 billion to $12.65 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 August 12, 2023, 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 $587 million as of August 12, 2023, compared to our fiscal year end 2022 debt of $13.4 billion. This decrease resulted primarily from the payment of $600 million of senior notes bearing an interest rate of 3.85% during the second quarter of 2023.
Common Share Repurchase Programs
During the second quarter of 2023, we invested $18 million to repurchase three hundred and eighty-three thousand Kroger common shares at an average price of $47.21 per share. For the first two quarters of 2023, we invested $47 million to repurchase nine hundred and eighty-five thousand Kroger common shares at an average price of $47.50 per share. The shares repurchased in the second quarter and first two quarters of 2023 were reacquired under a share repurchase 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.
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 Exchange Act (the “September 2022 Repurchase Program”). No shares have been repurchased under the September 2022 authorization. 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 $2.4 billion as of August 12, 2023, which reflects our elevated operating performance over the last few years and paused share repurchase program. 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, as well as share repurchase programs and we will evaluate the optimal use of any excess free cash flow, consistent with our capital allocation strategy.
We expect to meet our short-term and long-term liquidity needs with cash and temporary cash investments on hand as of August 12, 2023, 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, scheduled opioid settlement payments and other purchase obligations. We may also require additional capital in the future to fund organic growth opportunities, additional customer fulfillment 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 commitment letter for a bridge term loan facility and executed a term loan credit agreement. 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 two quarters of 2023, 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 28, 2023.
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 28, 2023.
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