UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 22, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-303
The Kroger Co.
(Exact name of registrant as specified in its charter)
Ohio
31-0345740
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1014 Vine Street, Cincinnati, Ohio 45202
(Address of principal executive offices)
(Zip Code)
(513) 762-4000
(Registrant’s telephone number, including area code)
Unchanged
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common, $1.00 Par Value
KR
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
There were 747,238,079 shares of Common Stock ($1 par value) outstanding as of June 22, 2021.
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
First Quarter Ended
May 22,
May 23,
(In millions, except per share amounts)
2021
2020
Sales
$
41,298
41,549
Operating expenses
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below
31,947
31,454
Operating, general and administrative
7,424
7,671
Rent
261
273
Depreciation and amortization
861
825
Operating profit
805
1,326
Other income (expense)
Interest expense
(165)
(174)
Non-service component of company-sponsored pension plan costs
18
11
(Loss) gain on investments
(479)
422
Net earnings before income tax expense
179
1,585
Income tax expense
36
373
Net earnings including noncontrolling interests
143
1,212
Net income attributable to noncontrolling interests
3
—
Net earnings attributable to The Kroger Co.
140
Net earnings attributable to The Kroger Co. per basic common share
0.18
1.53
Average number of common shares used in basic calculation
752
780
Net earnings attributable to The Kroger Co. per diluted common share
1.52
Average number of common shares used in diluted calculation
760
788
The accompanying notes are an integral part of the Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Other comprehensive income (loss)
Change in pension and other postretirement defined benefit plans, net of income tax(1)
1
Unrealized gains and losses on cash flow hedging activities, net of income tax(2)
(22)
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(3)
Total other comprehensive income (loss)
(18)
Comprehensive income
146
1,194
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to The Kroger Co.
CONSOLIDATED BALANCE SHEETS
January 30,
(In millions, except par amounts)
ASSETS
Current assets
Cash and temporary cash investments
2,309
1,687
Store deposits in-transit
1,011
1,096
Receivables
1,936
1,781
FIFO inventory
8,177
8,436
LIFO reserve
(1,410)
(1,373)
Prepaid and other current assets
522
876
Total current assets
12,545
12,503
Property, plant and equipment, net
23,057
22,386
Operating lease assets
6,663
6,796
Intangibles, net
978
997
Goodwill
3,076
Other assets
2,492
2,904
Total Assets
48,811
48,662
LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under finance leases
1,150
911
Current portion of operating lease liabilities
644
667
Trade accounts payable
7,015
6,679
Accrued salaries and wages
1,165
1,413
Other current liabilities
5,236
5,696
Total current liabilities
15,210
15,366
Long-term debt including obligations under finance leases
12,974
12,502
Noncurrent operating lease liabilities
6,385
6,507
Deferred income taxes
1,541
1,542
Pension and postretirement benefit obligations
507
535
Other long-term liabilities
2,965
2,660
Total Liabilities
39,582
39,112
Commitments and contingencies see Note 7
SHAREHOLDERS’ EQUITY
Preferred shares, $100 par per share, 5 shares authorized and unissued
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2021 and 2020
1,918
Additional paid-in capital
3,505
3,461
Accumulated other comprehensive loss
(627)
(630)
Accumulated earnings
23,021
23,018
Common shares in treasury, at cost, 1,169 shares in 2021 and 1,160 shares in 2020
(18,568)
(18,191)
Total Shareholders’ Equity - The Kroger Co.
9,249
9,576
Noncontrolling interests
(20)
(26)
Total Equity
9,229
9,550
Total Liabilities and Equity
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:
Operating lease asset amortization
191
193
LIFO charge
37
31
Stock-based employee compensation
56
63
Company-sponsored pension plans
(14)
(5)
(2)
76
Loss (gain) on the sale of assets
9
(12)
Loss (gain) on investments
479
(422)
Other
100
108
Changes in operating assets and liabilities:
84
14
90
Inventories
205
756
369
341
783
Accrued expenses
(548)
167
Income taxes receivable and payable
(175)
276
Operating lease liabilities
(214)
(141)
320
145
Net cash provided by operating activities
2,256
4,245
Cash Flows from Investing Activities:
Payments for property and equipment, including payments for lease buyouts
(820)
(698)
Proceeds from sale of assets
7
35
(40)
Net cash used by investing activities
(853)
(689)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt
504
Payments on long-term debt including obligations under finance leases
(328)
Net payments on commercial paper
(1,150)
Dividends paid
(138)
(128)
Proceeds from issuance of capital stock
57
Treasury stock purchases
(402)
Proceeds from financing arrangement
166
(110)
(76)
Net cash used by financing activities
(781)
(1,229)
Net increase in cash and temporary cash investments
622
2,327
Cash and temporary cash investments:
Beginning of year
399
End of period
2,726
Reconciliation of capital investments:
Payments for lease buyouts
5
Changes in construction-in-progress payables
154
(62)
Total capital investments, excluding lease buyouts
(666)
(755)
Disclosure of cash flow information:
Cash paid during the year for interest
185
188
Cash paid during the year for income taxes
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY
Accumulated
Additional
Common Stock
Paid-In
Treasury Stock
Comprehensive
Noncontrolling
Shares
Amount
Capital
Loss
Earnings
Interest
Total
Balances at February 1, 2020
3,337
1,130
(16,991)
(640)
20,978
(29)
8,573
Issuance of common stock:
Stock options exercised
(4)
Restricted stock issued
10
(10)
Treasury stock activity:
Treasury stock purchases, at cost
12
(355)
Stock options exchanged
(67)
Share-based employee compensation
Other comprehensive loss net of income tax of ($8)
17
(17)
Cash dividends declared ($0.16 per common share)
Balances at May 23, 2020
3,397
1,140
(17,363)
(658)
22,062
(28)
9,328
(1)
30
(109)
(3)
(52)
6
(212)
(35)
44
Other comprehensive income net of income tax of $2
47
(47)
Cash dividends declared ($0.18 per common share)
(137)
819
820
Balances at August 15, 2020
3,379
1,143
(17,570)
(651)
22,744
(27)
9,793
(304)
(16)
40
Other comprehensive income net of income tax of $3
631
632
Balances at November 7, 2020
3,420
1,152
(17,881)
(621)
23,234
10,044
29
(325)
38
Other comprehensive loss net of income tax of $4
(9)
(7)
(139)
(77)
Balances at January 30, 2021
1,160
(338)
(64)
23
(23)
Balances at May 22, 2021
1,169
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
All amounts in the Notes to the Unaudited Consolidated Financial Statements are in millions except per share amounts.
1.
ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries and other consolidated entities. The January 30, 2021 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.
In the opinion of management, the accompanying unaudited Consolidated Financial Statements include adjustments, all of which are of a normal, recurring nature that are necessary for a fair statement of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021.
The unaudited information in the Consolidated Financial Statements for the first quarter ended May 22, 2021 and May 23, 2020, includes the results of operations of the Company for the 16-week periods then ended.
Fair Value Measurements
Fair value measurements are classified and disclosed in one of the following three categories:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities;
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;
Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company records cash and temporary cash investments, store deposits in-transit, receivables, prepaid and other current assets, trade accounts payable, accrued salaries and wages and other current liabilities at approximated fair value. Certain other investments and derivatives are recorded as Level 1, 2 or 3 instruments. The equity investment in Ocado is measured at fair value through net earnings. The fair value of all shares owned, which is measured using Level 1 inputs, was $1,329 and $1,808 as of May 22, 2021 and January 30, 2021, respectively, and is included in “Other assets” in the Company’s Consolidated Balance Sheets. An unrealized loss of $479 and gain of $422 for this level 1 investment was recorded in the first quarters of 2021 and 2020, respectively, and is included in “(Loss) gain on investments” in the Company’s Consolidated Statements of Operations. Refer to Note 2 for the disclosure of debt instrument fair values.
8
2.
DEBT OBLIGATIONS
Long-term debt consists of:
1.70% to 8.00% Senior Notes due through 2049
11,602
11,899
1,121
511
Total debt, excluding obligations under finance leases
12,723
12,410
Less current portion
(1,049)
(844)
Total long-term debt, excluding obligations under finance leases
11,674
11,566
The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at May 22, 2021 and January 30, 2021. At May 22, 2021, the fair value of total debt was $14,375 compared to a carrying value of $12,723. At January 30, 2021, the fair value of total debt was $14,680 compared to a carrying value of $12,410.
Additionally, in the first quarter of 2021, the Company repaid $300 of senior notes bearing an interest rate of 2.60% using cash on hand.
During the first quarter of 2021, the Company acquired 28, previously leased, properties for a purchase price of $455. Separately, the Company also entered into a transaction to sell those properties to a third party for total proceeds of $621. Total cash proceeds received as a result of the transactions was $166. The sale transaction did not qualify for sale-leaseback accounting treatment. As a result, the Company recorded property, plant and equipment for the $455 price paid and recorded a $621 financing obligation. The leases have a base term of 25 years and twelve option periods of five years each. The Company has the option to purchase the individual properties for fair market value at the end of the base term or at the end of any option period. The Company is obligated to repurchase the properties at the end of the base term for $300 if the lessor exercises its put option.
3.
BENEFIT PLANS
The following table provides the components of net periodic benefit cost for the company-sponsored defined benefit pension plans and other post-retirement benefit plans for the first quarters of 2021 and 2020:
Pension Benefits
Other Benefits
Components of net periodic benefit cost:
Service cost
Interest cost
32
34
Expected return on plan assets
(53)
Amortization of:
Prior service cost
Actuarial loss (gain)
(6)
Net periodic benefit cost
(8)
The Company is not required to make any contributions to its company-sponsored pension plans in 2021, but may make contributions to the extent such contributions are beneficial to the Company. The Company did not make any contributions to its company-sponsored pension plans in the first quarters of 2021 and 2020.
The Company contributed $95 and $96 to employee 401(k) retirement savings accounts in the first quarters of 2021 and 2020, respectively.
During the first quarter of 2021, associates within the Fred Meyer and QFC divisions ratified an agreement for the transfer of liabilities from the Sound Retirement Trust to the UFCW Consolidated Pension Plan. The Company will transfer $449, $344 net of tax, in net accrued pension liabilities and prepaid escrow funds, on a pre-tax basis, to fulfill obligations for past service for associates and retirees. The agreement will be satisfied by cash installment payments to the UFCW Consolidated Pension Plan and are expected to be paid evenly over seven years.
4.
EARNINGS PER COMMON SHARE
Net earnings attributable to The Kroger Co. per basic common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding. Net earnings attributable to The Kroger Co. per diluted common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding, after giving effect to dilutive stock options. The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:
May 22, 2021
May 23, 2020
Per
Share
(Numerator)
(Denominator)
139
1,197
Dilutive effect of stock options
The Company had combined undistributed and distributed earnings to participating securities totaling $1 and $15 in the first quarters of 2021 and 2020, respectively.
The Company had options outstanding for approximately 8 million and 11 million shares during the first quarters of 2021 and 2020, respectively, that were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per share.
5.
LEASES AND LEASE-FINANCED TRANSACTIONS
On May 17, 2018, the Company entered into a Partnership Framework Agreement with Ocado International Holdings Limited and Ocado Group plc (“Ocado”). The Partnership Framework Agreement was amended in 2020. Under this agreement, Ocado will partner exclusively with the Company in the U.S., enhancing the Company’s digital and robotics capabilities in its distribution networks. In the first quarter of 2021, the Company opened its first two Kroger Delivery facilities in Monroe, Ohio and Groveland, Florida. The Company determined the arrangement with Ocado contains a lease of the robotic equipment used to fulfil customer orders. As a result, the Company established a finance lease when each facility began fulfilling orders to customers and used its 10 year incremental borrowing rate of 1.66% to calculate the lease liability. The base term of each lease is 10 years with options to renew at the Company’s sole discretion. The Company elected to combine the lease and non-lease elements in the contract. As a result, it will account for all payments to Ocado as lease payments. During the first quarter of 2021, the Company recorded finance lease assets of $267 and finance lease liabilities of $249 related to these two location openings.
6.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This standard provides optional expedients and exceptions for applying GAAP to certain contract modifications and hedging relationships that reference LIBOR or other reference rates expected to be discontinued. This guidance is effective upon issuance and can be applied through December 31, 2022. The Company may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company is currently evaluating the effect of this standard on its Consolidated Financial Statements.
7.
COMMITMENTS AND CONTINGENCIES
The Company continuously evaluates contingencies based upon the best available evidence.
The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.
The principal contingencies are described below:
Insurance — The Company’s workers’ compensation risks are self-insured in most states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans, and self-insured retention plans. The liability for workers’ compensation risks is accounted for on a present value basis. Actual claim settlements and expenses incident thereto may differ from the provisions for loss. Property risks have been underwritten by a subsidiary and are all reinsured with unrelated insurance companies. Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.
Litigation — Various claims and lawsuits arising in the normal course of business, including personal injury, contract disputes, employment discrimination, wage and hour and other regulatory claims are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material effect on the Company’s financial position, results of operations, or cash flows.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and when an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of loss for the Company’s exposure is not material to the Company. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
Assignments — The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees is unable to fulfill its lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.
8.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table represents the changes in AOCI by component for the first quarters of 2021 and 2020:
Pension and
Cash Flow
Postretirement
Hedging
Defined Benefit
Activities(1)
Plans(1)
Total(1)
Balance at February 1, 2020
(42)
(598)
OCI before reclassifications(2)
Amounts reclassified out of AOCI(3)
Net current-period OCI
(21)
Balance at May 23, 2020
(63)
(595)
Balance at January 30, 2021
(54)
(576)
Balance at May 22, 2021
(575)
The following table represents the items reclassified out of AOCI and the related tax effects for the first quarters of 2021 and 2020:
Cash flow hedging activity items
Amortization of gains and losses on cash flow hedging activities(1)
Tax expense
Net of tax
Pension and postretirement defined benefit plan items
Amortization of amounts included in net periodic pension cost(2)
Total reclassifications, net of tax
9.
INCOME TAXES
The effective income tax rate was 20.2% in the first quarter of 2021 and 23.5% in the first quarter of 2020. The effective income tax rate for the first quarter of 2021 differed from the federal statutory rate due to the utilization of tax credits and deductions, partially offset by the effect of state income taxes. The effective income tax rate decreased in the first quarter of 2021, compared to the first quarter of 2020, due to lower pre-tax income in 2021, which increases the favorable impact of tax credits and deductions and reduces the impact of state income taxes. The effective income tax rate for the first quarter of 2020 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 Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, includes measures to assist companies in response to the COVID-19 pandemic. These measures include deferring the due dates of tax payments and other changes to income and non-income-based tax laws. As permitted under the CARES Act, the Company deferred the remittance of the employer portion of the social security tax. The social security tax provision requires that the deferred employment tax be paid over two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. During 2020, the Company deferred the employer portion of social security tax of $622. Of the total, $311 is included in “Other current liabilities” and $311 is included in “Other long-term liabilities” in the Company’s Consolidated Balance Sheets.
10.
SUBSEQUENT EVENT
On June 16, 2021, the Company’s Board of Directors approved a $1,000 share repurchase program. The previous share repurchase program was exhausted on June 11, 2021.
13
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.
USE OF NON-GAAP FINANCIAL MEASURES
The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles (“GAAP”). We provide non-GAAP measures, including First-In, First-Out (“FIFO”) gross margin, FIFO operating profit, adjusted FIFO operating profit, adjusted net earnings and adjusted net earnings per diluted share because management believes these metrics are useful to investors and analysts. These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share or any other GAAP measure of performance. These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP.
We calculate FIFO gross margin as FIFO gross profit divided by sales. FIFO gross profit is calculated as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs exclude depreciation and rent expenses. FIFO gross margin is an important measure used by management and management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness.
We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management and management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness.
The adjusted net earnings, adjusted net earnings per diluted share and adjusted FIFO operating profit metrics are important measures used by management to compare the performance of core operating results between periods. We believe adjusted net earnings, adjusted net earnings per diluted share and adjusted FIFO operating profit are useful metrics to investors and analysts because they present more accurate year-over-year comparisons of our net earnings, net earnings per diluted share and FIFO operating profit because adjusted items are not the result of our normal operations. Net earnings for the first quarter of 2021 include the following, which we define as the “2021 Adjusted Items”:
Net earnings for the first quarter of 2020 include the following, which we define as the “2020 Adjusted Items”:
Please refer to the “Net Earnings per Diluted Share excluding the Adjusted Items” table and the tables in the “Two-Year Financial Results” section below for reconciliations of certain non-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the most comparable GAAP financial measure and related disclosure.
CAUTIONARY STATEMENT
This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Such statements are indicated by words such as “achieve,” “affect,” “anticipate,” “believe,” “committed,” “continue,” “could,” “estimate,” “expect,” “future,” “guidance,” “maintain,” “may,” “strategy,” “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:
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.
15
EXECUTIVE SUMMARY – OUR PATH TO DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
Our first quarter results demonstrate that Kroger is even better positioned today to connect with our customers than we were before the pandemic because of our relentless focus on Leading with Fresh and Accelerating with Digital for our customers. This relentless focus led to top line sales and adjusted net earnings per diluted share results exceeding our internal expectations. We were disciplined in balancing investments in our associates and customers with strong cost management and achieved record growth in Alternative Profit streams. We continue to be on track to deliver over $1 billion of incremental cost savings for the fourth consecutive year and we expect Alternative Profit growth to be towards the top end of our target range of $100 million to $150 million incremental profit in 2021. Identical sales without fuel declined 4.1%, which results in two-year identical sales without fuel stacked growth of 14.9%. Digital sales grew 16% during the first quarter of 2021 and has grown triple digits since the beginning of 2019. We are building on the momentum of 2020 within our seamless ecosystem through expanded capacity, improved customer experience and continuous innovation. These results have given us the confidence to raise our guidance for identical sales without fuel and adjusted net earnings per diluted share. In addition, we announced a new $1 billion share repurchase program. This $1 billion share repurchase program reinforces the Board’s and management’s confidence in our cash flow generation and is consistent with our commitment to deliver sustainable and attractive total shareholder returns of 8% to 11%.
Our financial model is underpinned by our leading position in food. We continue to invest in areas of the business that matter most to our customers and deepen our competitive moats, to drive sales growth in our retail supermarket business, including fuel and pharmacy. This in turn generates the data and traffic that enables our fast-growing alternative profit streams. Our financial strategy is to continue to use our free cash flow to invest in the business to drive long-term sustainable net earnings growth, through the identification of high-return projects that support our strategy. Capital allocation is a core element of our value creation model, and we will allocate capital towards driving profitable sales growth, accelerating digital, expanding margin as well as maintaining the business. We will continue to be disciplined in deploying capital towards projects that exceed our hurdle rate of return and prioritize the highest return opportunities to drive 3% to 5% net earnings growth. At the same time, we are committed to maintaining our net debt to adjusted EBITDA range of 2.30 to 2.50 in order to keep our current investment grade debt rating and continue to return cash to shareholders via share repurchases and a growing dividend over time. We remain confident in our ability to generate strong free cash flow and deliver strong and sustainable total shareholder return of 8% to 11%.
The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
Percentage
Change
(0.6)
%
Sales without fuel
37,308
(4.0)
38,857
(88.4)
Adjusted net earnings attributable to The Kroger Co.
918
(5.6)
972
(88.2)
Adjusted net earnings attributable to The Kroger Co. per diluted common share
1.19
(2.5)
1.22
(39.3)
Adjusted FIFO operating profit
1,375
(5.4)
1,453
138
7.8
128
Dividends paid per common share
12.5
0.16
Identical sales excluding fuel
(4.1)
N/A
19.0
FIFO gross margin rate, excluding fuel, bps increase (decrease)
(0.65)
0.44
OG&A rate, excluding fuel and Adjusted Items, bps increase (decrease)
(1.08)
0.51
Increase (decrease) in total debt, including obligations under finance leases compared to prior fiscal year end
711
(605)
Share repurchases
402
16
OVERVIEW
Significant fluctuations occurred in our business during 2020 due to the COVID-19 pandemic. As a result, management compares current year identical sales without fuel, adjusted FIFO operating profit and adjusted net earnings per diluted share results to the same metrics for the comparable period in 2019, in addition to comparisons made to 2020. This enables management to evaluate results of the business and our financial model over a longer period of time, and to better understand the state of the business after the height of the pandemic compared to the period of time prior to the pandemic.
Notable items for the first quarter of 2021 are:
Shareholder Return
Other Financial Results
Significant Events
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 2021 and 2020 Adjusted Items.
Net Earnings per Diluted Share excluding the Adjusted Items
(Income) expense adjustments
Adjustment for pension plan withdrawal liabilities(1)(2)
344
Adjustment for loss (gain) on investments(1)(3)
367
(312)
Adjustment for Home Chef contingent consideration(1)(4)
33
Adjustment for transformation costs(1)(5)
28
2021 and 2020 Adjusted Items
778
(240)
Net earnings attributable to The Kroger Co. excluding the Adjusted Items
Adjustment for pension plan withdrawal liabilities(6)
0.45
Adjustment for loss (gain) on investments(6)
0.48
(0.40)
Adjustment for Home Chef contingent consideration(6)
0.04
0.06
Adjustment for transformation costs(6)
1.01
(0.30)
RESULTS OF OPERATIONS
Total Sales
($ in millions)
Change(1)
Change(2)
Total sales to retail customers without fuel (3)
37,022
(4.2)
38,634
18.5
Supermarket fuel sales
3,990
48.2
2,692
(38.8)
Other sales(4)
286
28.3
223
(14.6)
Total sales
11.5
Total sales were $41.3 billion in the first quarter of 2021, compared to $41.5 billion in the first quarter of 2020. This decrease was due to a decrease in total sales to retail customers without fuel, partially offset by an increase in supermarket fuel sales. Total sales, excluding fuel, decreased 4.0% in the first quarter of 2021, compared to the first quarter of 2020, which is consistent with the decrease in total sales to retail customers without fuel in the first quarter of 2021, compared to the first quarter of 2020. This decrease was primarily due to our identical sales decrease, excluding fuel, of 4.1%. The decrease in identical sales, excluding fuel, was caused by unprecedented demand due to the COVID-19 pandemic during the first quarter of 2020. Our two-year identical sales, excluding fuel, stacked growth was 14.9%. Total supermarket fuel sales increased 48.2% in the first quarter of 2021, compared to the first quarter of 2020, primarily due to an increase in fuel gallons sold of 13.2% and an increase in the average retail fuel price of 31.0%. The increase in the average retail fuel price was caused by an increase in the product cost of fuel.
We calculate identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket locations, Kroger Specialty Pharmacy businesses and ship-to-home solutions. We define a supermarket as identical when it has been in operation without expansion or relocation 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. We urge you to understand the methods used by other companies to calculate identical sales before comparing our identical sales to those of other such companies. Our identical sales, excluding fuel, results are summarized in the following table. We used the identical sales, excluding fuel, dollar figures presented below to calculate percentage changes for the first quarter of 2021.
19
Identical Sales
Excluding fuel centers
36,608
38,186
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 22.64% for the first quarter of 2021, compared to 24.30% for the first quarter of 2020. The decrease in rate in the first quarter of 2021, compared to the first quarter of 2020, resulted primarily from increased fuel sales, which have a lower gross margin rate, a decrease in our fuel gross margin, continued investments in lower prices for our customers, a COVID-19 related inventory write down for personal protective equipment to be donated to community partners, sales deleverage due to cycling COVID-19 trends which decreases our gross margin, as a percentage of sales, and increased shrink, as a percentage of sales, partially offset by growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold.
Our LIFO charge was $37 million for the first quarter of 2021 compared to $31 million for the first quarter of 2020. Our LIFO charge reflects our expected annualized product cost inflation for 2021, primarily driven by grocery, meat and pharmacy.
Our FIFO gross margin rate, which excludes the first quarter LIFO charge, was 22.73% for the first quarter of 2021, compared to 24.37% for the first quarter of 2020. Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, our FIFO gross margin rate decreased 65 basis points in the first quarter of 2021, compared to the first quarter of 2020. This decrease resulted primarily from continued investments in lower prices for our customers, a COVID-19 related inventory write down for personal protective equipment to be donated to community partners, sales deleverage due to cycling COVID-19 trends which decreases our FIFO gross margin, as a percentage of sales, and increased shrink, as a percentage of sales, partially offset by growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold.
In the first quarter of 2021, compared to the first quarter of 2020, our continued investments in lower prices for our customers were fully offset by growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold.
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 17.98% for the first quarter of 2021, compared to 18.46% for the first quarter of 2020. The decrease in the first quarter of 2021, compared to the first quarter of 2020 resulted primarily from decreased COVID-19 related costs, lower contributions to multi-employer pension plans, decreased incentive plan costs, the 2020 OG&A Adjusted Items, the effect of increased fuel sales, which decreases our OG&A rate, as a percentage of sales and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by the 2021 OG&A Adjusted Items and the effect of supermarket sales deleverage, excluding fuel, due to cycling COVID-19 trends which increases our OG&A rate, as a percentage of sales.
20
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 2021 OG&A Adjusted Items and the 2020 OG&A Adjusted Items, our OG&A rate decreased 108 basis points in the first quarter of 2021, compared to the first quarter of 2020. This decrease resulted primarily from decreased COVID-19 related costs, lower contributions to multi-employer pension plans, decreased incentive plan costs and broad based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by the effect of sales deleverage due to cycling COVID-19 trends which increases our OG&A rate, as a percentage of sales.
Rent Expense
Rent expense remained consistent, as a percentage of sales, in the first quarter of 2021, compared to the first quarter of 2020.
Depreciation and Amortization Expense
Depreciation and amortization expense increased, as a percentage of sales, in the first quarter of 2021, compared to the first quarter of 2020. This increase resulted primarily from the effect of supermarket sales deleverage, excluding fuel, due to cycling COVID-19 trends which increases our depreciation and amortization expense, as a percentage of sales, partially offset by increased fuel sales, which decreases our depreciation expense, as a percentage of sales.
Operating Profit and FIFO Operating Profit
Operating profit was $805 million, or 1.95% of sales, for the first quarter of 2021, compared to $1.3 billion, or 3.19% of sales, for the first quarter of 2020. Operating profit, as a percentage of sales, decreased 124 basis points in the first quarter of 2021, compared to the first quarter of 2020, due to reduced sales to retail customers without fuel, a lower gross margin rate, increased depreciation and amortization expense, as a percentage of sales, and decreased fuel earnings, partially offset by decreased OG&A expense, as a percentage of sales.
FIFO operating profit was $842 million, or 2.04% of sales, for the first quarter of 2021, compared to $1.4 billion, or 3.27% of sales, for the first quarter of 2020. FIFO operating profit, excluding the 2021 and 2020 Adjusted Items, decreased 17 basis points in the first quarter of 2021, compared to the first quarter of 2020, due to reduced sales to retail customers without fuel, a lower gross margin rate, increased depreciation and amortization expense, as a percentage of sales, and decreased fuel earnings, partially offset by decreased OG&A expense, as a percentage of sales. FIFO operating profit, excluding fuel and the 2021 and 2020 Adjusted Items, increased in the first quarter of 2021, compared to the first quarter of 2020.
Specific factors contributing to the operating trends for operating profit and FIFO operating profit above are discussed earlier in this section.
21
The following table provides a reconciliation of operating profit to FIFO operating profit, and to Adjusted FIFO operating profit, excluding the 2021 and 2020 Adjusted Items.
Operating Profit excluding the Adjusted Items
FIFO Operating profit
842
1,357
Adjustment for pension plan withdrawal liabilities
449
Adjustment for Home Chef contingent consideration
43
60
Adjustment for transformation costs(1)
2021 and 2020 Adjusted items
533
96
Adjusted FIFO operating profit excluding the adjusted items above
Income Taxes
Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings were $0.18 per diluted share for the first quarter of 2021 compared to net earnings of $1.52 per diluted share for the first quarter of 2020. Adjusted net earnings of $1.19 per diluted share for the first quarter of 2021 represented a decrease of 2.5% compared to adjusted net earnings of $1.22 per diluted share for the first quarter of 2020. The decrease in adjusted net earnings per diluted share resulted primarily from decreased FIFO operating profit without fuel and decreased fuel earnings, partially offset by lower weighted average common shares outstanding due to common share repurchases and lower income tax expense. Adjusted net earnings, excluding fuel, increased in the first quarter of 2021, compared to the first quarter of 2020.
22
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
We generated $2.3 billion of cash from operations in the first quarter of 2021 compared to $4.2 billion in the first quarter of 2020. Net earnings including noncontrolling interests, adjusted for non-cash items and other impacts, generated approximately $1.9 billion of operating cash flow in the first quarter of 2021 compared to $2.1 billion in the first quarter of 2020. Cash provided by operating activities for changes in operating assets and liabilities, including working capital, was $396 million in the first quarter of 2021 compared to $2.2 billion in the first quarter of 2020. 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 paid for taxes increased in the first quarter of 2021, compared to the first quarter of 2020, primarily due to reduced payments during the first quarter of 2020 resulting from the CARES Act.
Investing activities used cash of $853 million in the first quarter of 2021 compared to $689 million in the first quarter of 2020. The amount of cash used by investing activities increased in the first quarter of 2021, compared to the first quarter of 2020, primarily due to payments for property and equipment being lower in the first quarter of 2020 due to disruptions from the pandemic in the prior year.
We used $781 million of cash for financing activities in the first quarter of 2021 compared to $1.2 billion in the first quarter of 2020. The amount of cash used for financing activities decreased in the first quarter of 2021 compared to the first quarter of 2020, primarily due to the following:
Debt Management
As of May 22, 2021, we maintained a $2.75 billion (with the ability to increase by $1 billion), unsecured revolving credit facility that, unless extended, terminates on August 29, 2022. Outstanding borrowings under the credit facility, commercial paper borrowings, and some outstanding letters of credit reduce funds available under the credit facility. As of May 22, 2021, 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 May 22, 2021.
Our bank credit facility and the indentures underlying our publicly issued debt contain various financial covenants. As of May 22, 2021, we were in compliance with the financial covenants. Furthermore, management believes it is not reasonably likely that we will fail to comply with these financial covenants in the foreseeable future.
Total debt, including both the current and long-term portions of obligations under finance leases, increased $711 million as of May 22, 2021 compared to our fiscal year end 2020 debt of $13.4 billion. This increase resulted primarily from the completion of a property transaction. We purchased and then immediately sold a portfolio of 28 of our existing stores, allowing us to secure long-term access to these locations at favorable lease rates. The structure used to complete this transaction requires our liability to be shown as debt. Additionally, there was a net increase in obligations under finance leases of $397 million, which was partially offset by the payment of $300 million of senior notes bearing an interest rate of 2.60%.
Common Share Repurchase Program
During the first quarter of 2021, we invested $402 million to repurchase 11.4 million Kroger common shares at an average price of $35.19 per share. The shares repurchased in the first quarter of 2021 were reacquired under the following share repurchase programs:
As of May 22, 2021, there was $61 million remaining under the September 2020 Repurchase Program. The September 2020 Repurchase Program was exhausted on June 11, 2021. On June 16, 2021, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “June 2021 Repurchase Program”).
24
Liquidity Needs
Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months. Our liquidity needs include anticipated requirements for working capital, capital investments, pension plan commitments, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of the first quarter of 2021. 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 have approximately $1.0 billion of senior notes maturing in the next twelve months, $311 million of the employer portion of social security tax payments we have deferred under the CARES Act that is required to be paid by December 31, 2021 (as further discussed below) and expect to pay approximately $307 million in the first half of 2021 to satisfy a portion of the National Fund commitment. We expect to satisfy these obligations using cash generated from operations, temporary cash investments on hand, or through the issuance of additional senior notes or commercial paper. 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.
We held cash and temporary cash investments of $2.3 billion as of the end of the first quarter of 2021, which reflects an increase compared to our fiscal year end 2020 balance of $1.7 billion, due to our strong operating performance in the first quarter of 2021. We remain committed to our dividend and share repurchase program and we will evaluate the optimal use of any excess free cash flow, consistent with our previously stated capital allocation strategy.
The CARES Act, which was enacted on March 27, 2020, includes measures to assist companies in response to the COVID-19 pandemic. These measures include deferring the due dates of tax payments and other changes to income and non-income-based tax laws. As permitted under the CARES Act, as mentioned above, we deferred the remittance of the employer portion of the social security tax. The social security tax provision requires that the deferred employment tax be paid over two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. During 2020, we deferred the employer portion of social security tax of $622 million. Of the total, $311 million is included in “Other current liabilities” and $311 million is included in “Other long-term liabilities” in our Consolidated Balance Sheets.
For additional information about our debt activity in the first quarter of 2021, see Note 2 to the Consolidated Financial Statements.
CAPITAL INVESTMENTS
Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $666 million for the first quarter of 2021 compared to $755 million for the first quarter of 2020. During the rolling four quarter period ended with the first quarter of 2021, we opened, expanded, relocated or acquired 16 supermarkets and also completed 74 major within-the-wall remodels. Total supermarket square footage at the end of the first quarter of 2021 remained consistent with the end of the first quarter of 2020. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the first quarter of 2021 increased 0.4% over the end of the first quarter of 2020.
CRITICAL ACCOUNTING POLICIES
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 our Annual Report on Form 10-K for the fiscal year ended January 30, 2021.
25
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.
NEW ACCOUNTING STANDARDS
Refer to Note 6 to the Consolidated Financial Statements for recently issued accounting standards not yet adopted as of May 22, 2021.
TWO-YEAR FINANCIAL RESULTS
Significant fluctuations occurred in our business during 2020 due to the COVID-19 pandemic. As a result, management compares current year identical sales without fuel, adjusted FIFO operating profit and adjusted net earnings per diluted share results to the same metrics for the comparable period in 2019, in addition to comparisons made to 2020. This enables management to evaluate results of the business and our financial model over a longer period of time, and to better understand the state of the business after the height of the pandemic compared to the period of time prior to the pandemic. The purpose of the following tables is to better illustrate comparable two-year growth from our ongoing business for the first quarter of 2021 for identical sales without fuel, adjusted FIFO operating profit and adjusted net earnings per diluted share compared to the first quarter of 2019. Two-year financial results for these measures are useful metrics to investors and analysts because they present more accurate comparisons of results and trends over a longer period of time to demonstrate the effect of COVID-19 on our results. The tables provide the two-year stacked results or compounded annual growth rate for each measure presented and how it was calculated. Items identified in these tables should not be considered alternatives to any other measure of performance. These items should not be reviewed in isolation or considered substitutes for the Company's financial results including those measures reported in accordance with GAAP. Due to the nature of these items, as further described below, it is important to identify these items and to review them in conjunction with the Company's financial results reported in accordance with GAAP.
Identical Sales Two-Year Stacked
May 25,
2019
38,137
32,046
Individual year identical sales result
Two-year stacked identical sales result
14.9
26
Operating Profit Excluding the Adjusted Items Two-Year CAGR
901
916
59
(24)
2021 and 2019 Adjusted items
41
957
Two-year operating profit CAGR(2)
(5.5)
Two-year adjusted FIFO operating profit excluding the adjusted items above CAGR(2)
19.9
27
Net Earnings per Diluted Share Excluding the Adjusted Items Two-Year CAGR
772
Adjustment for gain on sale of Turkey Hill Dairy(1)(3)
(80)
Adjustment for gain on sale of You Technology(1)(4)
Adjustment for loss (gain) on investments(1)(5)
Adjustment for Home Chef contingent consideration(1)(6)
Adjustment for transformation costs(1)(7)
2021 and 2019 Adjusted Items
(186)
586
0.95
Adjustment for pension plan withdrawal liabilities(8)
0.05
Adjustment for gain on sale of Turkey Hill Dairy(8)
(0.10)
Adjustment for gain on sale of You Technology(8)
(0.06)
Adjustment for loss (gain) on investments(8)
Adjustment for Home Chef contingent consideration(8)
(0.02)
Adjustment for transformation costs(8)
(0.23)
0.72
Two-year net earnings attributable to The Kroger Co. per diluted common share CAGR(9)
(56.5)
28.6
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021.
Item 4. Controls and Procedures.
The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures as of the quarter ended May 22, 2021, the end of the period covered by this report. Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with the evaluation described above, the Company is in the midst of a broad, multi-year, technology transformation project to modernize mainframe, middleware and legacy systems to achieve better process efficiencies across customer service, merchandising, sourcing, payroll and accounting through the use of various solutions. Implementation of new accounting ERP modules for general ledger, accounts receivable, accounts payable, fixed assets and a new indirect procurement module were implemented at the beginning of the first quarter of 2021. Additional phases will continue to be implemented over the next several years. Emphasis has been on the maintenance of effective internal controls and assessment of the design and operating effectiveness of key control activities throughout development and deployment of each phase.
With the exception of the implementation of the accounting and indirect procurement ERP modules described above, there were no changes in Kroger’s internal control over financial reporting materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting during the quarter ended May 22, 2021. The Company will continue to evaluate as additional phases are deployed.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Incorporated by reference herein is information regarding certain legal proceedings in which we are involved as set forth under “Litigation” contained in Note 7 – “Commitments and Contingencies” in the notes to the Consolidated Financial Statements in Item 1 of Part I of this quarterly report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
Approximate
Dollar Value of
Shares that May
Total Number of
Yet Be
Shares Purchased
Purchased
Total Number
Average
as Part of Publicly
Under the Plans
of Shares
Price Paid Per
Announced Plans
or Programs(4)
Period(1)
Purchased(2)
Share(2)
or Programs(3)
(in millions)
First four weeks
January 31, 2021 to February 27, 2021
4,201,398
33.61
4,201,185
Second four weeks
February 28, 2021 to March 27, 2021
3,063,711
34.21
2,552,831
209
Third four weeks
March 28, 2021 to April 24, 2021
2,088,254
37.36
151
Fourth four weeks
April 25, 2021 to May 22, 2021
2,586,378
37.17
2,586,326
61
11,939,741
35.19
11,428,596
Item 6. Exhibits.
EXHIBIT 3.1
-
Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010, as amended by the Amendment to Amended Articles of Incorporation, which is hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 23, 2015.
EXHIBIT 3.2
The Company’s regulations are hereby incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 27, 2019.
EXHIBIT 4.1
Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request.
EXHIBIT 31.1
Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.
EXHIBIT 31.2
Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer.
EXHIBIT 32.1
Section 1350 Certifications.
EXHIBIT 101.INS
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EXHIBIT 101.SCH
XBRL Taxonomy Extension Schema Document.
EXHIBIT 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
EXHIBIT 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
EXHIBIT 101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
EXHIBIT 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
EXHIBIT 104
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: June 25, 2021
By:
/s/ W. Rodney McMullen
W. Rodney McMullen
Chairman of the Board and Chief Executive Officer
/s/ Gary Millerchip
Gary Millerchip
Senior Vice President and Chief Financial Officer