Financial Results

2Q20 ($ in millions; except EPS)

2Q19 ($ in millions; except EPS)

ID Sales* (Table 4)

14.6%

2.2%

EPS

$1.03

$0.37

Adjusted EPS (Table 6)

$0.73

$0.44

Operating Profit

$820

$559

Adjusted FIFO Operating Profit (Table 7)

$894

$626

FIFO Gross Margin Rate*

Increased 5 basis points

OG&A Rate*

Decreased 61 basis points

*without fuel and adjustment items, if applicable

Full Year 2020

IDS (%)

EPS ($)

Operating Profit ($B)

Tax Rate**

Cap Ex ($B)

Adjusted

FCF

($B)

Share Repurchases ($M)

Adjusted*

>13.0%

$3.20 - $3.30

$3.9 - $4.0

23%

$3.0-$3.4

$2.5-$2.7

$600-$1,000

*Without adjusted items, if applicable; Identical sales is without fuel; Operating profit represents FIFO Operating Profit. Kroger is unable to provide a full reconciliation of the GAAP and non-GAAP measures used in 2020 guidance without unreasonable effort because it is not possible to predict certain of our adjustment items with a reasonable degree of certainty. This information is dependent upon future events and may be outside of our control and its unavailability could have a significant impact on 2020 GAAP financial results.

** This rate reflects typical tax adjustments and does not reflect changes to the rate from the completion of income tax audit examinations, which cannot be predicted.

Table 1.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

SECOND QUARTER

YEAR-TO-DATE

2020

2019

2020

2019

SALES

$     30,489

100.0%

$     28,168

100.0%

$   72,038

100.0%

$     65,419

100.0%

OPERATING EXPENSES

MERCHANDISE COSTS, INCLUDING ADVERTISING,

WAREHOUSING AND TRANSPORTATION (a),

AND LIFO CHARGE (b)

23,551

77.2

22,007

78.1

55,005

76.4

50,990

77.9

OPERATING, GENERAL AND ADMINISTRATIVE (a)

5,297

17.4

4,811

17.1

12,968

18.0

11,125

17.0

RENT

204

0.7

200

0.7

477

0.7

474

0.7

DEPRECIATION AND AMORTIZATION

617

2.0

591

2.1

1,442

2.0

1,370

2.1

OPERATING PROFIT 

820

2.7

559

2.0

2,146

3.0

1,460

2.2

OTHER INCOME (EXPENSE)

INTEREST EXPENSE

(135)

(0.4)

(130)

(0.5)

(309)

(0.4)

(327)

(0.5)

NON-SERVICE COMPONENT OF COMPANY-SPONSORED

PENSION PLAN COSTS

8

-

(4)

-

19

-

(1)

-

MARK TO MARKET GAIN (LOSS) ON INVESTMENTS

368

1.2

(45)

(0.2)

790

1.1

61

0.1

GAIN ON SALE OF BUSINESSES

-

-

-

-

-

-

176

0.3

NET EARNINGS BEFORE INCOME TAX EXPENSE

1,061

3.5

380

1.4

2,646

3.7

1,369

2.1

INCOME TAX EXPENSE 

241

0.8

93

0.3

614

0.9

319

0.5

NET EARNINGS INCLUDING NONCONTROLLING INTERESTS

820

2.7

287

1.0

2,032

2.8

1,050

1.6

NET INCOME (LOSS) ATTRIBUTABLE TO

NONCONTROLLING INTERESTS

1

-

(10)

-

1

-

(19)

-

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. 

$           819

2.7%

$           297

1.1%

$     2,031

2.8%

$       1,069

1.6%

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

PER BASIC COMMON SHARE

$          1.04

$          0.37

$       2.58

$         1.32

AVERAGE NUMBER  OF COMMON SHARES USED IN

BASIC CALCULATION

777

800

779

799

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

PER DILUTED COMMON SHARE

$          1.03

$          0.37

$       2.55

$         1.31

AVERAGE NUMBER OF COMMON SHARES USED IN

DILUTED CALCULATION

786

805

787

805

DIVIDENDS DECLARED PER COMMON SHARE

$        0.180

$       0.160

$     0.340

$       0.300

Note:

Certain percentages may not sum due to rounding.

Note:

The Company defines First-In First-Out (FIFO) gross profit as sales minus merchandise costs, including advertising, warehousing and transportation, but excluding the Last-In First-Out (LIFO) charge.

The Company defines FIFO gross margin as FIFO gross profit divided by sales.

The Company defines FIFO operating profit as operating profit excluding the LIFO charge.

The Company defines FIFO operating margin as FIFO operating profit divided by sales.

The above FIFO financial metrics are important measures used by management to evaluate operational effectiveness.  Management believes these FIFO financial metrics are useful to investors and analysts because they measure our day-to-day operational effectiveness.

(a)

Merchandise costs ("COGS") and operating, general and administrative expenses ("OG&A") exclude depreciation and amortization expense and rent expense which are included in separate expense lines.

(b)

LIFO charges of $23 and $30 were recorded in the second quarter of 2020 and 2019, respectively.  For the year to date period, LIFO charges of $54 and $46 were recorded for 2020 and 2019, respectively.

Table 2.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions)

(unaudited)

August 15, 

August 17,

2020

2019

ASSETS

Current Assets

Cash

$                372

$                354

Temporary cash investments

2,448

275

Store deposits in-transit

1,058

983

Receivables

1,526

1,567

Inventories

6,344

6,526

Prepaid and other current assets

538

435

Total current assets

12,286

10,140

Property, plant and equipment, net

21,881

21,820

Operating lease assets

6,822

6,861

Intangibles, net

1,029

1,103

Goodwill

3,076

3,095

Other assets

2,449

1,443

Total Assets

$          47,543

$          44,462

LIABILITIES AND SHAREOWNERS' EQUITY

Current Liabilities

Current portion of long-term debt including obligations

under finance leases

$            1,096

$            1,353

Current portion of operating lease liabilities

666

675

Trade accounts payable

6,871

6,268

Accrued salaries and wages

1,267

1,099

Other current liabilities

4,678

3,955

Total current liabilities

14,578

13,350

Long-term debt including obligations under finance leases

12,386

12,130

Noncurrent operating lease liabilities

6,478

6,463

Deferred income taxes

1,634

1,502

Pension and postretirement benefit obligations

578

482

Other long-term liabilities

2,096

1,882

Total Liabilities

37,750

35,809

Shareowners' equity

9,793

8,653

Total Liabilities and Shareowners' Equity

$          47,543

$          44,462

Total common shares outstanding at end of period

775

801

Total diluted shares year-to-date

787

805

Table 3.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

YEAR-TO-DATE

2020

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings including noncontrolling interests

$            2,032

$            1,050

Adjustments to reconcile net earnings including noncontrolling

interests to net cash provided by operating activities:

Depreciation and amortization

1,442

1,370

Operating lease asset amortization

336

346

LIFO charge

54

46

Stock-based employee compensation

107

89

Company-sponsored pension plan costs

(9)

22

Deferred income taxes

176

(49)

Gain on sale of businesses

-

(176)

Gain on the sale of assets

(7)

(157)

Mark to market gain on investments

(790)

(61)

Other

121

(23)

Changes in operating assets and liabilities, net

of effects from mergers and disposals of businesses:

Store deposits in-transit

121

198

Receivables

117

44

Inventories

685

274

Prepaid and other current assets

(16)

68

Trade accounts payable

522

209

Accrued expenses

335

104

Income taxes receivable and payable

195

(34)

Operating lease liabilities

(302)

(313)

Proceeds from contract associated with the sale of business

-

295

Other

286

(25)

Net cash provided by operating activities

5,405

3,277

CASH FLOWS FROM INVESTING ACTIVITIES:

Payments for property and equipment, including payments for lease buyouts

(1,343)

(1,581)

Proceeds from sale of assets

40

247

Net proceeds from sale of businesses

-

327

Other

(45)

(32)

Net cash used by investing activities

(1,348)

(1,039)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt

504

53

Payments on long-term debt including obligations under finance leases

(28)

(1,025)

Net payments on commercial paper

(1,150)

(800)

Dividends paid

(254)

(226)

Proceeds from issuance of capital stock

87

18

Treasury stock purchases

(669)

(23)

Other

(126)

(35)

Net cash used by financing activities

(1,636)

(2,038)

NET INCREASE IN CASH AND TEMPORARY

CASH INVESTMENTS

2,421

200

CASH AND TEMPORARY CASH INVESTMENTS:

BEGINNING OF YEAR

399

429

END OF PERIOD

$            2,820

$                629

Reconciliation of capital investments:

Payments for property and equipment, including payments for lease buyouts

$           (1,343)

$           (1,581)

Payments for lease buyouts

15

-

Changes in construction-in-progress payables

(110)

29

Total capital investments, excluding lease buyouts

$           (1,438)

$           (1,552)

Disclosure of cash flow information:

Cash paid during the year for interest

$                373

$                306

Cash paid during the year for income taxes

$                229

$                454

Table 4. Supplemental Sales Information

(in millions, except percentages)

(unaudited)

Items identified below should not be considered as alternatives to sales or any other GAAP measure of performance.  Identical sales is an industry-specific measure and it is important to review it in conjunction with Kroger's financial results reported in accordance with GAAP.  Other companies in our industry may calculate identical sales differently than Kroger does, limiting the comparability of the measure.

IDENTICAL SALES (a)

SECOND QUARTER

YEAR-TO-DATE

2020

2019

2020

2019

EXCLUDING FUEL

$         27,761

$         24,226

$         65,898

$         56,272

EXCLUDING FUEL

14.6%

2.2%

17.1%

1.8%

(a)

Kroger defines identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket locations, Kroger Specialty Pharmacy businesses, jewelry and ship-to-home solutions.  Kroger defines a supermarket as identical when it has been in operation without expansion or relocation for five full quarters.  

Table 5.  Reconciliation of Net Total Debt and

Net Earnings Attributable to The Kroger Co. to Adjusted EBITDA

(in millions, except for ratio)

(unaudited)

The items identified below should not be considered an alternative to any GAAP measure of performance or access to liquidity.  Net total debt to adjusted EBITDA is an important measure used by management to evaluate the Company's access to liquidity.  The items below should be reviewed in conjunction with Kroger's financial results reported in accordance with GAAP.

The following table provides a reconciliation of net total debt.

August 15, 

August 17,

2020

2019

Change

Current portion of long-term debt including obligations

   under finance leases

$           1,096

$        1,353

$       (257)

Long-term debt including obligations under finance leases

12,386

12,130

256

     Total debt

13,482

13,483

(1)

Less: Temporary cash investments

2,448

275

2,173

     Net total debt

$         11,034

$       13,208

$    (2,174)

The following table provides a reconciliation from net earnings attributable to The Kroger Co. to adjusted EBITDA, as defined in the Company's credit agreement, on a rolling four quarter basis.

Rolling Four Quarters Ended

August 15, 

August 17,

2020

2019

Net earnings attributable to The Kroger Co.

$           2,621

$        1,645

LIFO charge

113

48

Depreciation and amortization

2,721

2,521

Interest expense

585

611

Income tax expense 

764

476

Adjustment for pension plan withdrawal liabilities

49

254

Adjustment for mark to market gain on investments

(886)

(36)

Adjustment for gain on sale of Turkey Hill Dairy

-

(106)

Adjustment for gain on sale of You Technology

-

(70)

Adjustment for Home Chef contingent consideration

37

11

Adjustment for loss on settlement of financial instrument

-

42

Adjustment for severance charge and related benefits

80

-

Adjustment for deconsolidation and impairment of Lucky's Market 

attributable to The Kroger Co. (a)

305

-

Adjustment for transformation costs (b)

119

-

Other

(16)

(25)

Adjusted EBITDA

$           6,492

$        5,371

Net total debt to adjusted EBITDA ratio

1.70

2.46

(a)

The adjustment for impairment of Lucky's Market attributable to The Kroger Co. excludes a $107 net loss attributable to the minority interest of Lucky's Market.

(b)

Transformation costs primarily include costs related to store and business closure costs and third party professional consulting fees associated with business transformation and cost saving initiatives.

Table 6. Net Earnings Per Diluted Share Excluding the Adjustment Items

(in millions, except per share amounts)

(unaudited)

The purpose of this table is to better illustrate comparable operating results from our ongoing business, after removing the effects on net earnings per diluted common share for certain items described below.  Adjusted net earnings and adjusted net earnings per diluted share are useful metrics to investors and analysts because they present more accurately year-over-year comparisons for net earnings and net earnings per diluted share because adjusted items are not the result of normal operations.  Items identified in this table should not be considered alternatives to net earnings attributable to The Kroger Co. or any other GAAP measure of performance.  These items should not be reviewed in isolation or considered substitutes for the Company's financial results as 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.

The following table summarizes items that affected the Company's financial results during the periods presented. 

SECOND QUARTER

YEAR-TO-DATE

2020

2019

2020

2019

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

$                            819

$                            297

$                          2,031

$                         1,069

ADJUSTMENT FOR PENSION PLAN WITHDRAWAL LIABILITIES(a)(b)

-

22

-

66

ADJUSTMENT FOR GAIN ON SALE OF TURKEY HILL DAIRY (a)(c)

-

-

-

(80)

ADJUSTMENT FOR GAIN ON SALE OF YOU TECHNOLOGY (a)(d)

-

-

-

(52)

ADJUSTMENT FOR MARK TO MARKET (GAIN) LOSS ON INVESTMENTS (a)(e)

(278)

36

(590)

(44)

ADJUSTMENT FOR HOME CHEF CONTINGENT CONSIDERATION (a)(f)

19

2

63

(16)

ADJUSTMENT FOR TRANSFORMATION COSTS (a)(g)

21

-

49

-

2020 AND 2019 ADJUSTMENT ITEMS

(238)

60

(478)

(126)

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO.

EXCLUDING THE ADJUSTMENT ITEMS ABOVE

$                            581

$                            357

$                          1,553

$                            943

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. 

PER DILUTED COMMON SHARE

$                           1.03

$                           0.37

$                           2.55

$                           1.31

ADJUSTMENT FOR PENSION PLAN WITHDRAWAL LIABILITIES (h)

-

0.03

-

0.08

ADJUSTMENT FOR GAIN ON SALE OF TURKEY HILL DAIRY (h)

-

-

-

(0.10)

ADJUSTMENT FOR GAIN ON SALE OF YOU TECHNOLOGY (h)

-

-

-

(0.06)

ADJUSTMENT FOR MARK TO MARKET (GAIN) LOSS ON INVESTMENTS (h)

(0.35)

0.04

(0.75)

(0.05)

ADJUSTMENT FOR HOME CHEF CONTINGENT CONSIDERATION (h)

0.02

-

0.08

(0.02)

ADJUSTMENT FOR TRANSFORMATION COSTS (h)

0.03

-

0.07

-

2020 AND 2019 ADJUSTMENT ITEMS

(0.30)

0.07

(0.60)

(0.15)

NET EARNINGS ATTRIBUTABLE TO THE KROGER CO. PER 

DILUTED COMMON SHARE EXCLUDING THE ADJUSTMENT ITEMS ABOVE

$                           0.73

$                           0.44

$                           1.95

$                           1.16

AVERAGE NUMBER OF COMMON SHARES USED IN

DILUTED CALCULATION

786

805

787

805

Table 6. Net Earnings Per Diluted Share Excluding the Adjustment Items (continued)

(in millions, except per share amounts)

(unaudited)

(a)

The amounts presented represent the after-tax effect of each adjustment.

(b)

The pre-tax adjustment to OG&A expenses for pension plan withdrawal liabilities was $27 in the second quarter of 2019.  The year-to-date pre-tax adjustment to OG&A expenses for pension plan withdrawal liabilities was $86 in the first two quarters of 2019.  

(c) 

The pre-tax adjustment for gain on sale of Turkey Hill Dairy was ($106).

(d) 

The pre-tax adjustment for gain on sale of You Technology was ($70).

(e) 

The pre-tax adjustments for mark to market (gain) loss on investments were ($368) and $45 in the second quarters of 2020 and 2019, respectively.  The year-to-date pre-tax adjustments for mark to market gain on investments were ($790) and ($61) in the first two quarters of 2020 and 2019, respectively.

(f) 

The pre-tax adjustments to OG&A expenses for Home Chef contingent consideration were $25 and $2 in the second quarters of 2020 and 2019, respectively.  The year-to-date pre-tax adjustments to OG&A expenses for Home Chef contingent consideration were $85 and ($21) in the first two quarters of 2020 and 2019, respectively.

(g)

The pre-tax adjustment to OG&A expenses for transformation costs was $29 in the second quarter of 2020. The year-to-date pre-tax adjustment to OG&A expenses for transformation costs was $67 in the first two quarters of 2020. Transformation costs primarily include costs related to store and business closure costs and third party professional consulting fees associated with business transformation and cost saving initiatives.

(h)

The amounts presented represent the net earnings per diluted common share effect of each adjustment.

Note:

2020 Second Quarter Adjustment Items include adjustments for the mark to market gain on investments, Home Chef contingent consideration adjustment and strategic transformation costs.

2020 Adjustment Items include the Second Quarter Adjustment Items plus the adjustments that occurred in the first quarter of 2020 for the mark to market gain on investments, Home Chef contingent consideration adjustment and strategic transformation costs.

2019 Second Quarter Adjustment items include adjustments for pension plan withdrawal liabilities, the mark to market loss on investments and Home Chef contingent consideration adjustment.

2019 Adjustment Items include the Second Quarter Adjustment Items plus the adjustments that occurred in the first quarter of 2019 for pension plan withdrawal liabilities, the gain on sale of Turkey Hill Dairy, the gain on sale of You Technology, the mark to market gain on investments and Home Chef contingent consideration adjustment.

Table 7. Operating Profit Excluding the Adjustment Items

(in millions)

(unaudited)

The purpose of this table is to better illustrate comparable operating results from our ongoing business, after removing the effects on operating profit for certain items described below.  Adjusted FIFO operating profit is a useful metric to investors and analysts because it presents more accurately year-over year comparisons for operating profit because adjusted items are not the result of normal operations.  Items identified in this table should not be considered alternatives to operating profit or any other GAAP measure of performance.  These items should not be reviewed in isolation or considered substitutes for the Company's financial results as 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.

The following table summarizes items that affected the Company's financial results during the periods presented. 

SECOND QUARTER

YEAR-TO-DATE

2020

2019

2020

2019

Operating profit

$                          820

$                          559

$                       2,146

$                      1,460

LIFO charge

23

30

54

46

FIFO Operating profit

843

589

2,200

1,506

Adjustment for pension plan withdrawal liabilities

-

27

-

86

Adjustment for Home Chef contingent consideration

25

2

85

(21)

Adjustment for transformation costs

29

-

67

-

Other

(3)

8

(5)

12

2020 and 2019 Adjustment items

51

37

147

77

Adjusted FIFO operating profit

excluding the adjustment items above

$                          894

$                          626

$                       2,347

$                      1,583