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 “accelerate,” “achieve,” “affect,” “anticipate,” “believe,” “committed,” “continue,” “could,” “deliver,” “drive,” “enable,” “estimate,” “expect,” “future,” “goals,” “initiatives,” “intended,” “maintain,” “may,” “model,” “plan,” “position,” “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, 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: our proposed transaction with Albertsons, including, among other things, 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, with the required regulatory approvals, and/or resolution of pending litigation challenging the merger; 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, and the aggressiveness of that competition; our response to these actions; the state of the economy, including interest rates, the inflationary, disinflationary and/or deflationary trends and such trends in certain commodities, products and/or operating costs; the geopolitical environment including wars and conflicts; 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, 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; the successful integration of merged companies and new partnerships; and 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. |
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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 and policies, 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 retail business, including fuel and Health and Wellness. By executing on our go-to-market strategy built on the four pillars of Fresh, Our Brands, Personalization and Seamless, we are creating a shopping experience that builds loyalty and grows sales. Our retail business generates traffic and data which accelerates growth in our high operating margin alternative profit businesses, like Kroger Precision Marketing. In turn, the value generated from these businesses enables us to reinvest back into our retail business.
We are focused on enhancing our pillars and delivering an exceptional customer experience to accelerate this flywheel effect. By expanding our store network and improving our digital capabilities, we expect to grow households and increase sales. Kroger has evolved into a more diverse business, with a model that provides more ways than ever to generate net earnings growth.
This will be achieved by:
| ● | Growing identical sales without fuel. Our plan involves maximizing growth opportunities in our retail business and is supported by continued strategic investments in our associates, greater value for our customers and our seamless ecosystem to ensure we deliver a full, fresh and friendly 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 long-term initiatives in gross margin, growing alternative profit businesses, and productivity and cost savings initiatives that are focused on simplifying processes and utilizing technology to enhance the associate experience without affecting the customer experience. Together, these will enable us to improve operating margin, while balancing strategic price investments for customers and wage and benefit investments for associates. |
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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 achieved solid second quarter results which demonstrate the strength and resiliency of our value creation model. By maintaining our long-term commitment to lower prices, personalized promotions and rewards and a focus on strong store execution, all through a unique seamless experience, we are improving sales momentum by growing total and loyal households and increasing customer visits, which in turn fuels our alternative profit businesses and drives greater efficiencies.
As our customers continue adjusting to the current economic environment, the resiliency of our model enables us to navigate an environment of economic uncertainty through investments made to diversify our business. We are strengthening our grocery business, which drives the data and traffic to accelerate growth in our alternative profit businesses. We remain committed to delivering exceptional value for our customers and investing in associates which positions us well to generate attractive and sustainable returns for our shareholders.
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 17, | Percentage | August 12, | | | August 17, | Percentage | August 12, | | ||||||||
| | | 2024 | | Change | | 2023 | | | 2024 | | Change | | 2023 | | ||||
| Sales | | $ | 33,912 | | 0.2 | % | $ | 33,853 | | | $ | 79,181 | | 0.2 | % | $ | 79,018 | |
| Sales without fuel | | $ | 30,276 | | 1.3 | % | $ | 29,900 | | | $ | 70,587 | | 0.9 | % | $ | 69,969 | |
| Net earnings (loss) attributable to The Kroger Co. | | $ | 466 | | (358.9) | % | $ | (180) | | | $ | 1,413 | | 80.7 | % | $ | 782 | |
| Adjusted net earnings attributable to The Kroger Co. | | $ | 681 | | (2.6) | % | $ | 699 | | | $ | 1,728 | | (4.2) | % | $ | 1,803 | |
| Net earnings (loss) attributable to The Kroger Co. per diluted common share | | $ | 0.64 | | (356.0) | % | $ | (0.25) | | | $ | 1.93 | | 80.4 | % | $ | 1.07 | |
| Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.93 | | (3.1) | % | $ | 0.96 | | | $ | 2.36 | | (4.5) | % | $ | 2.47 | |
| Operating profit (loss) | | $ | 815 | | (270.1) | % | $ | (479) | | | $ | 2,109 | | 112.8 | % | $ | 991 | |
| Adjusted FIFO operating profit | | $ | 984 | | (0.5) | % | $ | 989 | | | $ | 2,483 | | (6.6) | % | $ | 2,658 | |
| Dividends paid | | $ | 210 | | 11.7 | % | $ | 188 | | | $ | 420 | | 11.7 | % | $ | 376 | |
| Dividends paid per common share | | $ | 0.29 | | 11.5 | % | $ | 0.26 | | | $ | 0.58 | | 11.5 | % | $ | 0.52 | |
| Identical sales excluding fuel | | | 1.2 | % | N/A | | | 1.0 | % | | | 0.8 | % | N/A | | | 2.4 | % |
| FIFO gross margin rate, excluding fuel, bps increase | | | 0.42 | | N/A | | | 0.35 | | | | 0.14 | | N/A | | | 0.28 | |
| OG&A rate, excluding fuel and Adjusted Items, bps increase | | | 0.65 | | N/A | | | — | | | | 0.40 | | N/A | | | 0.08 | |
| Increase (decrease) in total debt, including obligations under finance leases compared to prior fiscal year end | | $ | 4 | | N/A | | $ | (587) | | | $ | 4 | | N/A | | $ | (587) | |
| Share repurchases | | $ | 13 | | N/A | | $ | 18 | | | $ | 116 | | N/A | | $ | 47 | |
OVERVIEW
Notable items for the second quarter and first two quarters of 2024 are:
Shareholder Return
| ● | Net earnings attributable to The Kroger Co. per diluted common share of $0.64 for the second quarter and $1.93 for the first two quarters of 2024. |
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| ● | Adjusted net earnings attributable to The Kroger Co. per diluted common share of $0.93 for the second quarter and $2.36 for the first two quarters of 2024. This represents a 3% decrease for the second quarter of 2024 compared to the second quarter of 2023 and a 4% decrease for the first two quarters of 2024 compared to the first two quarters of 2023. |
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| ● | Achieved operating profit of $815 million for the second quarter and $2.1 billion for the first two quarters of 2024. |
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| ● | Achieved adjusted FIFO operating profit of $984 million for the second quarter and $2.5 billion for the first two quarters of 2024. This represents a 1% decrease for the second quarter of 2024 compared to the second quarter of 2023 and a 7% decrease for the first two quarters of 2024 compared to the first two quarters of 2023. |
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| ● | Generated cash from operations of $3.5 billion for the first two quarters of 2024, which represents a 21% decrease compared to the first two quarters of 2023. |
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| ● | Cash and temporary cash investments increased by $903 million from $1.9 billion as of fiscal year end 2023 to $2.8 billion as of August 17, 2024. |
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| ● | Returned $420 million to shareholders through dividend payments in the first two quarters of 2024. |
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Other Financial Results
| ● | Digital sales increased 11% in the second quarter and 9% in the first two quarters of 2024, compared to the same periods of 2023. 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 growth was led by the strength of our Delivery and Pickup solutions, with Delivery and Pickup solutions combining for double digit growth. Delivery solutions, which grew by 17% in both the second quarter and the first two quarters of 2024, compared to the same periods of 2023, were driven by the growth in demand across our Kroger Delivery network and an increase in digitally engaged households. |
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| ● | Identical sales, excluding fuel, increased 1.2% in the second quarter and 0.8% in the first two quarters of 2024, compared to the same periods of 2023. Identical sales, excluding fuel, increased primarily due to increases in total and loyal households shopping with us, increased customer visits and Health and Wellness sales, partially offset by a reduction in the number of items in basket. |
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Significant Events
| ● | On April 22, 2024, Kroger and Albertsons announced they had entered into an amended and restated purchase agreement with respect to their definitive agreement with C&S Wholesale Grocers, LLC (“C&S”) for the sale of assets in connection with the proposed merger, which directly responds to concerns raised by federal and state antitrust regulators regarding the original agreement. For additional information about the amended and restated purchase agreement, see Note 10 to the Consolidated Financial Statements. |
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| ● | During the first quarter of 2024, we announced a definitive agreement for the sale of our Kroger Specialty Pharmacy business, subject to customary closing conditions and any regulatory reviews, to CarelonRx, a subsidiary of Elevance Health, for approximately $485 million, which is expected to complete in the second half of 2024. As of August 17, 2024, the assets and liabilities related to the Company’s Kroger Specialty Pharmacy business were classified as held for sale in the Consolidated Balance Sheet. Due to the sale, we recognized a non-recurring held for sale tax adjustment of $31 million in the first two quarters of 2024 and it has been reflected as an adjustment item in our results. For additional information about our sale of our Kroger Specialty Pharmacy business, see Note 9 to the Consolidated Financial Statements. |
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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 2024 include the following, which we define as the “2024 Adjusted Items”:
| ● | Charges to operating, general and administrative expenses (“OG&A”) of $323 million, $266 million net of tax, for merger related costs (the “2024 OG&A Adjusted Item”). |
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| ● | A loss in other income (expense) of $105 million, $80 million net of tax, for the loss on investments (the “2024 Other Income (Expense) Adjusted Item”). |
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| ● | A reduction to income tax expense of $31 million due to a held for sale income tax adjustment related to the sale of our Kroger Specialty Pharmacy business (the “2024 Income Tax Expense Adjusted Item”). |
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Net earnings for the second quarter of 2024 include the following, which we define as the “2024 Second Quarter Adjusted Items”:
| ● | Charges to OG&A of $148 million, $123 million net of tax, for merger related costs (the “2024 Second Quarter OG&A Adjusted Item”). |
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| ● | Losses in other income (expense) of $121 million, $92 million net of tax, for the unrealized loss on investments (the “2024 Second Quarter Other Income (Expense) Adjusted Item”). |
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Net earnings for the first two quarters of 2023 include the following, which we define as the “2023 Adjusted Items”:
| ● | Charges to 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, $282 million net of tax, for the unrealized gain on investments (the “2023 Second Quarter Other Income (Expense) Adjusted Item”). |
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Please refer to the “Net Earnings per Diluted Share excluding the Adjusted Items” table below for reconciliations of certain non-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the most comparable GAAP financial measures and related disclosure.
The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, excluding the 2024 and 2023 Adjusted Items:
Net Earnings per Diluted Share excluding the Adjusted Items
($ in millions, except per share amounts)
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| | | Second Quarter Ended | | Two Quarters Ended | |||||||||||||
| | August 17, | August 12, | Percentage | August 17, | August 12, | Percentage | |||||||||||
| | | 2024 | | 2023 | | Change | | 2024 | | 2023 | | Change | |||||
| Net earnings (loss) attributable to The Kroger Co. | | $ | 466 | | $ | (180) | | | $ | 1,413 | | $ | 782 | | | ||
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| (Income) expense adjustments | | | | | | | | | | | | | | | | | |
| Adjustment for loss (gain) on investments(1)(2) | | | 92 | | | (282) | | | | | 80 | | | (223) | | | |
| Adjustment for merger related costs(1)(3) | | | 123 | | | 47 | | | | | 266 | | | 81 | | | |
| Adjustment for opioid settlement charges(1)(4) | | | — | | | 1,114 | | | | | — | | | 1,163 | | | |
| Held for sale income tax adjustment | | — | | — | | | | (31) | | | — | | | | |||
| 2024 and 2023 Adjusted Items | | | 215 | | | 879 | | | | | 315 | | | 1,021 | | | |
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| Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 681 | | $ | 699 | (2.6) | % | $ | 1,728 | | $ | 1,803 | (4.2) | % | ||
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| Net earnings (loss) attributable to The Kroger Co. per diluted common share | | $ | 0.64 | | $ | (0.25) | | | $ | 1.93 | | $ | 1.07 | | | ||
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| (Income) expense adjustments | | | | | | | | | | | | | | | | | |
| Adjustment for loss (gain) on investments(5) | | | 0.12 | | | (0.39) | | | | | 0.10 | | | (0.31) | | | |
| Adjustment for merger related costs(5) | | | 0.17 | | | 0.06 | | | | | 0.37 | | | 0.11 | | | |
| Adjustment for opioid settlement charges(5) | | | — | | | 1.54 | | | | | — | | | 1.60 | | | |
| Held for sale income tax adjustment(5) | | | — | | | — | | | | | (0.04) | | | — | | | |
| 2024 and 2023 Adjusted Items | | 0.29 | | 1.21 | | | | 0.43 | | 1.40 | | | | ||||
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| Adjusted net earnings attributable to The Kroger Co. per diluted common share | | $ | 0.93 | | $ | 0.96 | (3.1) | % | $ | 2.36 | | $ | 2.47 | (4.5) | % | ||
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| Average number of common shares used in diluted calculation | | 727 | | 725 | | | | 728 | | 725 | | | |
| (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 loss (gain) on investments were $121 in the second quarter of 2024 and $(367) in the second quarter of 2023. The pre-tax adjustments for loss (gain) on investments were $105 in the first two quarters of 2024 and $(290) in the first two quarters of 2023. |
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| (3) | The pre-tax adjustment for merger related costs was $148 in the second quarter of 2024 and $54 in the second quarter of 2023. The pre-tax adjustment for merger related costs was $323 in the first two quarters of 2024 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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| (4) | The pre-tax adjustment for opioid settlement charges was $1,413 in the second quarter of 2023 and $1,475 in the first two quarters of 2023. |
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| (5) | The amount presented represents the net earnings per diluted common share effect of each adjustment. |
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RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
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| | | Second Quarter Ended | | | | | Two Quarters Ended | |||||||||||||||||
| | | August 17, | | Percentage | | August 12, | | Percentage | | | | | August 17, | | Percentage | | August 12, | | Percentage | |||||
| | 2024 | Change(1) | 2023 | Change(2) | | | | 2024 | | Change(3) | 2023 | Change(4) | ||||||||||||
| Total sales to retail customers without fuel(5) | | $ | 30,005 | | 1.2 | % | $ | 29,644 | | 1.0 | % | | | | $ | 69,973 | | 0.8 | % | $ | 69,392 | | 2.3 | % |
| Supermarket fuel sales | | | 3,636 | | (8.0) | % | | 3,953 | | (21.9) | % | | | | | 8,594 | | (5.0) | % | | 9,049 | | (17.4) | % |
| Other sales(6) | | | 271 | | 5.9 | % | | 256 | | 14.3 | % | | | | | 614 | | 6.4 | % | | 577 | | 19.0 | % |
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| Total sales | | $ | 33,912 | | 0.2 | % | $ | 33,853 | | (2.3) | % | | | | $ | 79,181 | | 0.2 | % | $ | 79,018 | | (0.3) | % |
| (1) | This column represents the percentage change in the second quarter of 2024, compared to the second quarter of 2023. |
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| (2) | This column represents the percentage change in the second quarter of 2023, compared to the second quarter of 2022. |
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| (3) | This column represents the percentage change in the first two quarters of 2024, compared to the first two quarters of 2023. |
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| (4) | 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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| (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 11% in the second quarter and 9% in the first two quarters of 2024, compared to the same periods of 2023. Digital sales growth was led by the strength of our Delivery and Pickup solutions, with Delivery and Pickup solutions combining for double digit growth. Delivery solutions, which grew by 17% in both the second quarter and the first two quarters of 2024, compared to the same periods of 2023, were driven by the growth in demand across our Kroger Delivery network and an increase in digitally engaged households. |
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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 second quarter and the first two quarters of 2024, compared to the same periods of 2023, is primarily due to an increase in third-party media revenue and external sales at food production plants. |
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Total sales increased in the second quarter of 2024, compared to the second quarter of 2023, by 0.2%. The increase was primarily due to an increase in both total sales to retail customers without fuel and other sales, partially offset by a decrease in supermarket fuel sales. Total sales, excluding fuel, increased 1.3% in the second quarter of 2024, compared to the second quarter of 2023, which was primarily due to our identical sales increase, excluding fuel, of 1.2%. Identical sales, excluding fuel, for the second quarter of 2024, compared to the second quarter of 2023, increased primarily due to increases in total and loyal households shopping with us, increased customer visits and Health and Wellness sales, partially offset by a reduction in the number of items in basket. Total supermarket fuel sales decreased 8.0% in the second quarter of 2024, compared to the second quarter of 2023, primarily due to a decrease in the average retail fuel price of 4.6% and a decrease in fuel gallons sold of 3.5%, 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 increased in the first two quarters of 2024, compared to the first two quarters of 2023, by 0.2%. The increase was primarily due to an increase in both total sales to retail customers without fuel and other sales, partially offset by a decrease in supermarket fuel sales. Total sales, excluding fuel, increased 0.9% in the first two quarters of 2024, compared to the first two quarters of 2023, which was primarily due to our identical sales increase, excluding fuel, of 0.8%. Identical sales, excluding fuel, for the first two quarters of 2024, compared to the first two quarters of 2023, increased primarily due to increases in total and loyal households shopping with us, increased customer visits and Health and Wellness sales, partially offset by a reduction in the number of items in basket. Total supermarket fuel sales decreased 5.0% in the first two quarters of 2024, compared to the first two quarters of 2023, primarily due to a decrease in the average retail fuel price of 2.9% and a decrease in fuel gallons sold of 2.2%, 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.
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. Starting in the first quarter of 2024, Kroger Specialty Pharmacy businesses were not included in identical sales due to being classified as held for sale, while they were included in identical sales in the second quarter and the first two quarters of 2023. We include sales from Kroger Delivery powered by Ocado in the identical sales calculation if the delivery occurs in an existing Kroger supermarket geography or when the location has been in operation 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 the first two quarters of 2024.
Identical Sales
($ in millions)
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|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Second Quarter Ended | |||||||||
| | | August 17, | | Percentage | | August 12, | | Percentage | |||
| | 2024 | Change(1) | 2023 | Change(2) | |||||||
| Excluding Fuel | $ | 29,224 | 1.2 | % | $ | 28,875 | 1.0 | % |
| (1) | This column represents the percentage change in identical sales in the second quarter of 2024, compared to the second quarter of 2023. |
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| (2) | 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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| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Two Quarters Ended | |||||||||
| | | August 17, | | Percentage | | August 12, | | Percentage | |||
| | 2024 | Change(1) | 2023 | Change(2) | |||||||
| Excluding Fuel | $ | 68,125 | 0.8 | % | $ | 67,579 | 2.4 | % |
| (1) | This column represents the percentage change in identical sales in the first two quarters of 2024, compared to the first two quarters of 2023. |
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| (2) | 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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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 22.56% for the second quarter of 2024, compared to 21.79% for the second quarter of 2023. This increase in rate was achieved while maintaining competitive prices and helping customers manage their budgets. The increase in rate in the second quarter of 2024, compared to the second quarter of 2023, resulted primarily from decreased fuel sales, which have a lower gross margin rate, an increase in our fuel gross margin, favorable product mix in our grocery business including Our Brands, lower shrink and our ability to effectively manage product costs through strong sourcing practices, partially offset by lower pharmacy margins.
Our gross margin rate, as a percentage of sales, was 22.48% for the first two quarters of 2024, compared to 22.10% for the first two quarters of 2023. 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 2024, compared to the first two quarters of 2023, resulted primarily from decreased fuel sales, which have a lower gross margin rate, an increase in our fuel gross margin, favorable product mix in our grocery business including Our Brands, a decreased LIFO charge and our ability to effectively manage product costs through strong sourcing practices, partially offset by lower pharmacy margins and increased promotional price investments.
Our LIFO charge was $21 million in the second quarter of 2024, compared to $4 million in the second quarter of 2023. Our LIFO charge was $62 million in the first two quarters of 2024, compared to $102 million in the first two quarters of 2023. Our decreased LIFO charge for the first two quarters of 2024, compared to the first two quarters of 2023, was due to our lower expected annualized product cost of inflation for 2024 compared to 2023.
Our FIFO gross margin rate, which excludes the LIFO charge, was 22.63% in the second quarter of 2024, compared to 21.81% in the second quarter of 2023. 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 42 basis points in the second quarter of 2024, compared to the second quarter of 2023. This increase in rate was achieved while maintaining competitive prices and helping customers manage their budgets. This increase resulted primarily from favorable product mix in our grocery business including Our Brands, lower shrink and our ability to effectively manage product costs through strong sourcing practices, partially offset by lower pharmacy margins.
Our FIFO gross margin rate, which excludes the LIFO charge, was 22.55% in the first two quarters of 2024, compared to 22.23% in the first two quarters of 2023. Excluding the effect of fuel, our FIFO gross margin rate increased 14 basis points in the first two quarters of 2024, compared to the first two quarters of 2023. 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 favorable product mix in our grocery business including Our Brands and our ability to effectively manage product costs through strong sourcing practices, partially offset by lower pharmacy margins 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 17.36% in the second quarter of 2024 and 20.49% in the second quarter of 2023. The decrease in the second quarter of 2024, compared to the second quarter of 2023, resulted primarily from the 2023 Second Quarter OG&A Adjusted Items and continued execution of broad-based cost savings initiatives that drive administrative efficiencies, including store productivity, partially offset by the effect of decreased fuel sales, which increases our OG&A rate, as a percentage of sales, planned investment in associates, increased incentive plan costs, hurricane related costs, an increase in costs due to the severity of general liability claims and the 2024 Second Quarter OG&A Adjusted Item.
OG&A expenses, as a percentage of sales, were 17.04% in the first two quarters of 2024 and 18.13% in the first two quarters of 2023. The decrease in the first two quarters of 2024, compared to the first two quarters of 2023, resulted primarily from the 2023 OG&A Adjusted Items and continued execution of broad-based cost savings initiatives that drive administrative efficiencies, including store productivity, partially offset by the effect of decreased fuel sales, which increases our OG&A rate, as a percentage of sales, planned investment in associates, increased incentive plan costs and the 2024 OG&A Adjusted Item.
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 2024 Second Quarter OG&A Adjusted Item and the 2023 Second Quarter OG&A Adjusted Items, our OG&A rate increased 65 basis points in the second quarter of 2024, compared to the second quarter of 2023. This increase resulted primarily from planned investments in associates, increased incentive plan costs, hurricane related costs and an increase in costs due to the severity of general liability claims, partially offset by continued execution of broad-based cost savings initiatives that drive administrative efficiencies, including store productivity.
Excluding the effect of fuel, the 2024 OG&A Adjusted Item and the 2023 OG&A Adjusted Items, our OG&A rate increased 40 basis points in the first two quarters of 2024, compared to the first two quarters of 2023. This increase resulted primarily from planned investments in associates and increased incentive plan costs, partially offset by the broad-based improvement from cost savings initiatives that drive administrative efficiencies, including store productivity.
Rent Expense
Rent expense remained relatively consistent, as a percentage of sales, for the second quarter and the first two quarters of 2024, compared to the same periods of 2023.
Depreciation and Amortization Expense
Depreciation and amortization expense increased, as a percentage of sales, in the second quarter and first two quarters of 2024, compared to the same periods of 2023. This increase was primarily due to additional depreciation associated with higher capital investments during the rolling four quarter period ending with the second quarter of 2024 and a decrease in the average useful life on these capital investments.
Operating Profit (Loss) and FIFO Operating Profit (Loss)
Operating profit (loss) was $815 million, or 2.4% of sales, for the second quarter of 2024, compared to $(479) million, or (1.4)% of sales, for the second quarter of 2023. Operating profit (loss) increased due to decreased OG&A expenses, higher FIFO gross margin, excluding fuel, and an increase in fuel operating profit, partially offset by increased depreciation and amortization expenses.
Operating profit was $2.1 billion, or 2.7% of sales, for the first two quarters of 2024, compared to $991 million, or 1.3% of sales, for the first two quarters of 2023. Operating profit, as a percentage of sales, increased 141 basis points in the first two quarters of 2024, compared to the first two quarters of 2023, due to decreased OG&A expenses, as a percentage of sales, a higher FIFO gross margin rate, an increase in fuel operating profit and a decreased LIFO charge, partially offset by increased depreciation and amortization expenses, as a percentage of sales.
FIFO operating profit (loss) was $836 million, or 2.5% of sales, for the second quarter of 2024, compared to $(475) million, or (1.4)% of sales, for the second quarter of 2023. FIFO operating profit (loss), as a percentage of sales, excluding the 2024 and 2023 Second Quarter Adjusted Items, decreased 3 basis points in the second quarter of 2024, compared to the second quarter of 2023, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, partially offset by a higher FIFO gross margin rate and an increase in fuel operating profit.
FIFO operating profit was $2.2 billion, or 2.7% of sales, for the first two quarters of 2024, compared to $1.1 billion, or 1.4% of sales, for the first two quarters of 2023. FIFO operating profit, as a percentage of sales, excluding the 2024 and 2023 Adjusted Items, decreased 22 basis points in the first two quarters of 2024, compared to the first two quarters of 2023, due to increased OG&A and depreciation and amortization expenses, as a percentage of sales, partially offset by a higher FIFO gross margin rate, an increase in fuel operating profit and a decreased LIFO charge.
Specific factors contributing to the trends driving operating profit (loss) and FIFO operating profit (loss) identified above are discussed earlier in this section.
The following table provides a reconciliation of operating profit (loss) to FIFO operating profit (loss), and to Adjusted FIFO operating profit, excluding the 2024 and 2023 Adjusted Items:
Operating Profit (Loss) excluding the Adjusted Items
($ in millions)
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Second Quarter Ended | | Two Quarters Ended | ||||||||
| | | August 17, | | August 12, | | August 17, | | August 12, | ||||
| | 2024 | 2023 | 2024 | 2023 | ||||||||
| Operating profit (loss) | | $ | 815 | | $ | (479) | | $ | 2,109 | | $ | 991 |
| LIFO charge | | | 21 | | | 4 | | | 62 | | | 102 |
| | | | | | | | | | | | | |
| FIFO Operating profit (loss) | | 836 | | | (475) | | | 2,171 | | 1,093 | ||
| | | | | | | | | | | | | |
| Adjustment for merger related costs(1) | | | 148 | | | 54 | | | 323 | | | 94 |
| Adjustment for opioid settlement charges(2) | | | — | | | 1,413 | | | — | | | 1,475 |
| Other | | | — | | | (3) | | | (11) | | | (4) |
| | | | | | | | | | | | | |
| 2024 and 2023 Adjusted items | | | 148 | | | 1,464 | | | 312 | | | 1,565 |
| | | | | | | | | | | | | |
| Adjusted FIFO operating profit excluding the adjusted items above | | $ | 984 | | $ | 989 | | $ | 2,483 | | $ | 2,658 |
| (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 the 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 2024, compared to the same periods of 2023. This decrease was primarily due to increased interest income earned on our cash and temporary cash investments due to increased balances of cash and temporary cash investments throughout the second quarter and the first two quarters of 2024, compared to the same periods of 2023, and decreased average total outstanding debt throughout 2024, compared to 2023.
Income Taxes
The effective income tax rate was 24.1% for the second quarter of 2024 and 9.1% for the second quarter of 2023. The effective income tax rate was 21.2% for the first two quarters of 2024 and 25.5% for the first two quarters of 2023. The effective income tax rate for the second quarter of 2024 differed from the federal statutory rate due to the effect of state income taxes, partially offset by the utilization of tax credits and deductions. The effective tax rate for the first two quarters of 2024 differed from the federal statutory rate due to the effect of state income taxes, partially offset by a tax benefit related to classifying Kroger Specialty Pharmacy as held for sale and the utilization of tax credits and deductions. 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.
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 were $0.64 per diluted share for the second quarter of 2024, compared to net loss of $(0.25) per diluted share for the second quarter of 2023. Adjusted net earnings of $0.93 per diluted share for the second quarter of 2024 represented a decrease of 3.1% compared to adjusted net earnings of $0.96 per diluted share for the second quarter of 2023. The decrease in adjusted net earnings per diluted share resulted primarily from decreased FIFO operating profit, excluding fuel, partially offset by increased fuel earnings, lower interest expense and lower income tax expense.
Net earnings were $1.93 per diluted share for the first two quarters of 2024, compared to net earnings of $1.07 per diluted share for the first two quarters of 2023. Adjusted net earnings of $2.36 per diluted share for the first two quarters of 2024 represented a decrease of 4.5% compared to adjusted net earnings of $2.47 per diluted share for the first two quarters of 2023. The decrease in adjusted net earnings per diluted share resulted primarily from decreased FIFO operating profit, excluding fuel, partially offset by a decreased LIFO charge, lower interest expense, lower income tax expense and increased fuel earnings.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
The following table summarizes our net increase in cash and temporary cash investments for the first two quarters of 2024 and 2023:
| | | | | | | |
|---|---|---|---|---|---|---|
| | Two Quarters Ended | |||||
| | | August 17, | | August 12, | ||
| | | 2024 | 2023 | |||
| Net cash provided by (used in) | | | | | | |
| Operating activities | | $ | 3,464 | | $ | 4,364 |
| Investing activities | | | (1,905) | | | (1,795) |
| Financing activities | | | (642) | | | (1,164) |
| Net increase in cash and temporary cash investments | | $ | 917 | | $ | 1,405 |
Net cash provided by operating activities
We generated $3.5 billion of cash from operations in the first two quarters of 2024 compared to $4.4 billion in the first two quarters of 2023. Net earnings including noncontrolling interests, adjusted for non-cash items, generated approximately $3.7 billion of operating cash flow in the first two quarters of 2024 compared to $2.4 billion in the first two quarters of 2023. Cash provided (used) by operating activities for changes in operating assets and liabilities, including working capital, was $(269) million in the first two quarters of 2024 compared to $1.9 billion in the first two quarters of 2023. The decrease in cash provided by operating activities for changes in operating assets and liabilities, including working capital, was primarily due to the following:
| ● | Cash flows for accounts receivable were less favorable for the first two quarters of 2024, compared to the same period of the prior year, primarily due to the following: |
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| o | A decrease in pharmacy receivables at the end of the second quarter of 2023, compared to fiscal year end 2022, primarily due to the termination of our agreement with Express Scripts; and |
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| o | An increase in pharmacy receivables at the end of the second quarter of 2024, compared to fiscal year end 2023, primarily due to timing of cash receipts and increased Health and Wellness sales; |
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| ● | Cash flows for FIFO inventory were less favorable in the first two quarters of 2024, compared to the same period of the prior year, primarily due to a larger decrease in FIFO inventory at the end of the second quarter of 2023 compared to fiscal year end 2022, compared to the decrease in FIFO inventory at the end of the second quarter of 2024 compared to fiscal year end 2023, primarily due to maintaining inventory at optimal levels through improved inventory management planning; 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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Net cash used by investing activities
Investing activities used cash of $1.9 billion in the first two quarters of 2024 compared to $1.8 billion in the first two quarters of 2023. The amount of cash used by investing activities increased in the first two quarters of 2024, compared to the first two quarters of 2023, primarily due to increased payments for property and equipment, including payments for lease buyouts, which was partially offset by an increase in proceeds from the sale of assets related to the sale of an equity investment in the first two quarters of 2024.
Net cash used by financing activities
We used $642 million for financing activities in the first two quarters of 2024 compared to $1.2 billion in the first two quarters of 2023. The amount of cash used for financing activities decreased in the first two quarters of 2024, compared to the first two quarters of 2023, primarily due to decreased payments on long-term debt including obligations under finance leases.
Capital Investments
Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $846 million for the second quarter of 2024 compared to $672 million for the second quarter of 2023. Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $2.1 billion for the first two quarters of 2024 compared to $1.8 billion for the first two quarters of 2023. Capital investments increased for the first two quarters of 2024, compared to the first two quarters of 2023, due to the completion of more store projects in 2024 compared to 2023. During the first two quarters of 2024, we opened, expanded, relocated or acquired 11 supermarkets and completed 84 major within-the-wall remodels. During the first two quarters of 2023, we opened, expanded, relocated or acquired 3 supermarkets and completed 54 major within-the-wall remodels. During the rolling four quarter period ended with the second quarter of 2024, we opened, expanded, relocated or acquired 18 supermarkets and completed 203 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 2024 remained consistent with the end of the second quarter of 2023. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the second quarter of 2024 increased 0.6% over the end of the second quarter of 2023.
Debt Management
As of August 17, 2024, 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 17, 2024, 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 17, 2024.
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 has been secured, the commitments with respect to the bridge term loan facility under the commitment letter were terminated in the third quarter of 2024.
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. Borrowings under the Term Loan Facilities will bear interest at rates that vary based on the type of loan and our debt rating.
As of August 17, 2024, we were in compliance with our bank credit facility 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, of $12.2 billion as of August 17, 2024, remained consistent with our fiscal year end 2023 debt of $12.2 billion. During the first two quarters of 2024, we did not have any payments or issuances of senior notes or activity that occurred on our revolving credit facility.
During the third quarter of 2024, we amended and restated our $2.75 billion unsecured revolving credit facility, which will be increased by $2.25 billion to $5 billion upon the closing date of the proposed merger with Albertsons. Also, during the third quarter of 2024, we successfully completed $10.5 billion senior notes issuances, the net proceeds of which are expected to partially fund the cash consideration for the proposed merger. A portion of the series of notes issued in the senior notes issuances is subject to a special mandatory redemption if the merger does not close. Lastly, during the third quarter of 2024, we commenced an exchange offer for any and all outstanding notes issued by Albertsons and certain of its subsidiaries for up to approximately $7.4 billion aggregate principal amount of new senior notes to be issued by us and cash. See Note 11 to the Consolidated Financial Statements for more information.
Common Share Repurchase Programs
During the second quarter of 2024, we invested $13 million to repurchase approximately two hundred and sixty thousand Kroger common shares at an average price of $52.85 per share. For the first two quarters of 2024, we invested $116 million to repurchase 2.1 million Kroger common shares at an average price of $54.72 per share. The shares repurchased in the second quarter and first two quarters of 2024, were reacquired under a share repurchase program announced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, under which repurchases are limited to proceeds received from exercises of stock options and the tax benefits associated therewith (“1999 Repurchase Program”).
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 $2.8 billion as of August 17, 2024, 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 17, 2024, 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. On August 20, 2024, we issued $10.5 billion of senior notes. We expect to use the net proceeds of the senior notes issuances to pay a portion of the cash consideration for the proposed merger with Albertsons. A portion of the proceeds of the senior notes issuances is subject to a special mandatory redemption under certain circumstances if the merger is terminated or does not close by an agreed upon date. If the proposed merger with Albertsons is not completed, we expect to use a portion of the net proceeds for general corporate purposes. Due to the senior notes issuances, we terminated the commitment letter for the bridge term loan facility. For additional information about the proposed merger with Albertsons, see Note 10 and Note 11 to the Consolidated Financial Statements.
For additional information about our debt activity in the first two quarters of 2024, see Note 2 to the Consolidated Financial Statements. For additional information about our debt activity subsequent to the second quarter of 2024, see Note 11 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 February 3, 2024.
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 February 3, 2024.
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