CINCINNATI, Dec. 5, 2019 /PRNewswire/ -- The Kroger Co. (NYSE: KR) today reported its third quarter 2019 results and provided a Restock Kroger progress update on the company's three-year transformation plan.

Comments from Chairman and CEO Rodney McMullen

"Kroger's customer obsession and focus on operational excellence continued to generate positive results in the third quarter. Identical sales were the strongest since we started Restock Kroger and gross margin rate, excluding fuel and pharmacy, improved slightly in the quarter. At the same time, we continued to reduce costs as a percentage of sales.

We are using the power of Kroger's stable and growing supermarket business to create meaningful incremental operating profit through the alternative profit stream businesses, which adds up to a business built for long-term growth that generates consistently attractive total shareholder returns. Kroger continues to generate strong and durable free cash flow as reflected by the fact that the company has reduced debt by $1.5 billion over the prior four quarters and continues to increase its dividend to create shareholder value.

Restock Kroger is the right framework to reposition our business to create value for all of our stakeholders, both today and in the future."

Financial Results

Total company sales were $28.0 billion in the third quarter, compared to $27.8 billion for the same period last year. Excluding fuel and dispositions, sales grew 2.7%.

Gross margin was 22.1% of sales for the third quarter. The FIFO gross margin rate excluding fuel decreased 24 basis points, primarily driven by industry-wide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business. Gross margin rate excluding fuel and pharmacy improved slightly.

LIFO charge for the quarter was $23 million, compared to $12 million for the same period last year, driven by higher inflation in dry grocery, pharmacy and dairy.

The Operating, General & Administrative rate decrease of 15 basis points is due to broad based improvement of Restock Kroger cost savings initiatives.

Third quarter results include an out-of-period charge of $29 million related to an adjustment for a provision of a pharmacy contract. This amount reduced third quarter adjusted net earnings per diluted share by $0.03. There is no effect on earnings guidance as a result of this contract going forward.

As a result of a portfolio review, Kroger has decided to divest its interest in Lucky's Market and recognized a non-cash impairment charge of $238 million in the third quarter, and the portion of this charge attributable to Kroger is $131 million.

The income tax rate for the third quarter was 35.6%. The income tax rate is higher than the adjusted income tax rate because a portion of the non-cash impairment charge related to Lucky's Market is not attributable to Kroger (Table 9).

Capital Allocation Strategy

Kroger's financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its cash flow to achieve these goals.

Consistent with its financial strategy, Kroger reduced net total debt by $1.5 billion over the last four quarters. Kroger's net total debt to adjusted EBITDA ratio is 2.50, compared to 2.72 a year ago (see Table 5). The company's net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50.

As a result of being within its targeted debt range, Kroger plans to initiate share repurchases in the fourth quarter under its $1 billion board authorization.

Earlier this year, Kroger increased the dividend by 14 percent, marking the 13th consecutive year of dividend increases.

2019 Guidance

2020 Guidance

Third Quarter 2019 Restock Kroger Highlights

Redefine the Grocery Customer Experience

• Launched new contemporary logo and Fresh for EveryoneTM brand transformation campaign
• Our Brands sales were up 3.4% vs. prior year
• Launched 231 new Our Brands items, including the Simple Truth Plant Based collection, featuring fresh meatless burger patties and other products that appeal to a growing number of customers exploring meat and dairy alternatives
• Expanded to 1,915 Pickup locations and 2,326 Delivery locations, covering over 96% of Kroger households and launched fully-seamless Ship offering
• Announced Free Pickup promotion in most divisions through January 1, 2020
• Expanded the availability of longer-lasting avocados, featuring plant-based coating developed by Apeel Sciences to reduce food waste, and introduced two new produce categories, Apeel asparagus and Apeel limes

Partner for Customer Value

• Named the location of an additional Kroger-Ocado customer fulfillment center in Wisconsin
• Kroger Precision Marketing increased engagement to over 1,000 brands this year
• Partnered with Europe's Infarm to introduce the first in-store living produce farms in America in Seattle-area QFC stores

Develop Talent

• Continued investment in Kroger associates with average hourly rate now over $20 with comprehensive benefits factored in
• Achieved record employee retention in one of the tightest labor markets in years
• Recognized among the top 20 companies in the Wall Street Journal diversity and inclusion ranking for S&P 500 companies
• Six emerging Kroger leaders named 2019 Progressive Grocer's GenNext Award winners

Live Kroger's Purpose

• Awarded Best Community Improvement Program by the U.S. Chamber of Commerce Foundation, recognizing the meaningful impact of Kroger's bold Zero Hunger | Zero Waste social impact plan
• Named to Dow Jones Sustainability Index for seventh consecutive year, driven by the company's progress toward its Zero Hunger | Zero Waste and 2020 sustainability goals
• Continued to adopt standardized date labels for Our Brands food products, providing simpler, easier-to-understand product quality and safety information for customers
• Announced decision to stop selling e-cigarette products
• Partnered with the Cardinal Health Foundation to host drug take back events across 25 states to combat the country's opioid epidemic, resulting in the collection of 24,804 pounds of medications

About KrogerAt The Kroger Co. (NYSE: KR), we are Fresh for Everyone™ and dedicated to our Purpose: To Feed the Human Spirit®. We are, across our family of companies, nearly half a million associates who serve over 11 million customers daily through a seamless shopping experience under a variety of banner names. We are committed to creating #ZeroHungerZeroWaste communities by 2025. To learn more about us, visit our newsroom and investor relations site.

Kroger's third quarter 2019 ended on November 9, 2019.

Note: Fuel sales have historically had a low gross margin rate and operating expense rate as compared to corresponding rates on non-fuel sales. As a result, Kroger discusses the changes in these rates excluding the effect of fuel. Please refer to the supplemental information presented in the tables for reconciliations of the non-GAAP financial measures used in this press release to the most comparable GAAP financial measure and related disclosure.

This press release contains certain statements that constitute "forward-looking statements" about the future performance of the company. These statements are based on management's assumptions and beliefs in light of the information currently available to it. The remarks contain certain forward-looking statements about the future performance of the Company. 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 or phrases such as "build," "continue," "create," "deliver," "drive," "execute," "expect," "future," "guidance," "improve," "on track," "strategy," "transformation," "trend," "vision," and "will." Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include the specific risk factors identified in "Risk Factors" and "Outlook" in our annual report on Form 10-K for our last fiscal year and any subsequent filings, as well as the following:

• Kroger's ability to achieve sales, earnings, incremental FIFO operating profit, and free cash flow goals may be affected by: labor negotiations or disputes; changes in the types and numbers of businesses that compete with Kroger; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; Kroger's response to these actions; the state of the economy, including interest rates, the inflationary and deflationary trends in certain commodities, changes in tariffs, and the unemployment rate; the effect that fuel costs have on consumer spending; volatility of fuel margins; changes in government-funded benefit programs; manufacturing commodity costs; diesel fuel costs related to Kroger's logistics operations; trends in consumer spending; the extent to which Kroger's customers exercise caution in their purchasing in response to economic conditions; the uncertain pace of economic growth; changes in inflation or deflation in product and operating costs; stock repurchases; Kroger's ability to retain pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; Kroger's ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of Kroger's future growth plans; the ability to execute on Restock Kroger; and the successful integration of merged companies and new partnerships. 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.
• Kroger's ability to achieve these goals may also be affected by Kroger's ability to manage the factors identified above. Kroger's ability to execute its financial strategy may be affected by its ability to generate cash flow.
• Kroger's effective tax rate may differ from the expected rate due to changes in laws, the status of pending items with various taxing authorities, and the deductibility of certain expenses.

Kroger assumes no obligation to update the information contained herein. Please refer to Kroger's reports and filings with the Securities and Exchange Commission for a further discussion of these risks and uncertainties.

Note: Kroger's quarterly conference call with investors will broadcast live at 10 a.m. (ET) on December 5, 2019 at ir.kroger.com. An on-demand replay of the webcast will be available at approximately 1 p.m. (ET) on Thursday, December 5, 2019.

3rd Quarter 2019 Tables Include:

1. Consolidated Statements of Operations
2. Consolidated Balance Sheets
3. Consolidated Statements of Cash Flows
4. Supplemental Sales Information
5. Reconciliation of Net Total Debt and Net Earnings Attributable to The Kroger Co. to Adjusted EBITDA
6. Net Earnings Per Diluted Share Excluding the Adjustment Items
7. Operating Profit Excluding the Adjustment Items
8. 2018 Sales Reclassification
9. Income Tax Rate Excluding the Impairment Charge Attributable to the Minority Interest of Lucky's Market

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SOURCE The Kroger Co.