The Kroger Co. Form 10-Q Summary
Reporting period: The filing covers the 16-week first quarter ended May 25, 2024, compared with the 16-week quarter ended May 20, 2023. The request metadata identifies “2023 Q1,” but the filing is for 2024 Q1.
Business Context and Reporting Period
Kroger operates an omnichannel grocery, fuel, pharmacy, health and wellness, and data and media business. Management highlighted grocery performance, customer loyalty, digital growth, cost savings, and investments in associates and store capabilities. The proposed Albertsons merger remains subject to regulatory approval and litigation.
Financial Performance and Liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Sales | $45.269 billion | $45.165 billion | 0.2% |
| Sales excluding fuel | $40.311 billion | $40.070 billion | 0.6% |
| Operating profit | $1.294 billion | $1.470 billion | (12.0%) |
| Operating margin | 2.9% | 3.3% | Down 40 bps |
| Net earnings attributable to Kroger | $947 million | $962 million | (1.6%) |
| Diluted EPS | $1.29 | $1.32 | (2.3%) |
| Adjusted diluted EPS | $1.43 | $1.51 | (5.3%) |
| Cash from operating activities | $2.342 billion | $2.860 billion | (18.1%) |
| Capital investments, excluding lease buyouts | $1.230 billion | $1.099 billion | Higher by $131 million |
Identical sales excluding fuel increased 0.5%. Digital sales increased more than 8%, with Delivery sales up 17%. Gross margin was 22.41%, compared with 22.33%; FIFO gross margin was 22.50%, compared with 22.55%. Excluding fuel, FIFO gross margin declined 7 basis points, primarily because of lower pharmacy margins and increased promotional price investments.
Operating, general and administrative expense was $7.604 billion, compared with $7.393 billion. The OG&A rate increased to 16.80% from 16.37%, reflecting investments in associates, higher incentive costs, and merger-related expenses. The LIFO charge declined to $41 million from $99 million.
Cash and temporary cash investments were $2.846 billion at May 25, 2024, compared with $1.883 billion at fiscal year-end. Total debt, including finance lease obligations, was approximately $12.2 billion and remained broadly consistent with fiscal year-end. Long-term debt excluding finance leases was $10.164 billion. Kroger had no commercial paper borrowings and no borrowings under its $2.75 billion revolving credit facility; $2 million of letters of credit reduced availability.
The company paid $210 million in dividends and repurchased $103 million of shares, or approximately 1.9 million shares, during the quarter. Management stated that the broader share repurchase program remains paused to prioritize deleveraging related to the proposed Albertsons merger.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, supported by sales excluding fuel, while fuel sales declined 2.7%.
- Operating profit declined 12%, and adjusted FIFO operating profit declined 10.2% to $1.499 billion from $1.669 billion.
- Adjusted net earnings declined to $1.047 billion from $1.104 billion.
- Operating cash flow decreased by $518 million, primarily because of less favorable receivables and prepaid-asset working-capital changes; higher accounts payable partly offset the decline.
- Capital investments increased, while proceeds from the sale of an equity investment helped offset higher investment spending.
- The effective tax rate decreased to 19.8% from 22.9%, partly because of a tax benefit associated with classifying Kroger Specialty Pharmacy as held for sale.
- Kroger recognized $175 million of pretax merger-related costs in Q1 2024, compared with $40 million in Q1 2023. Q1 2023 also included a $62 million opioid settlement charge and a $78 million investment loss.
Guidance, Outlook, Risks, and Unusual Items
Management expects continued long-term growth in identical sales excluding fuel, double-digit digital sales growth over time, strong free cash flow, dividend growth subject to Board approval, and operating-margin expansion through gross-margin initiatives, alternative profit businesses, productivity, and cost savings. Management targets net total debt to adjusted EBITDA of 2.30 to 2.50 and states that its long-term total shareholder return target is 8% to 11%, excluding the potential Albertsons merger impact. The filing does not provide a specific quarterly or full-year earnings guidance range.
Kroger agreed to sell Kroger Specialty Pharmacy to CarelonRx for approximately $485 million, expected to close in the second half of 2024. The related assets of $607 million and liabilities of $242 million were classified as held for sale, and the company recognized a $31 million tax benefit adjustment.
The Albertsons transaction remains subject to FTC and state regulatory proceedings and private litigation. The amended divestiture agreement with C&S covers an additional 166 stores, bringing the stated total to 579 stores, with consideration of approximately $2.9 billion. The bridge facility commitment was reduced to $10.65 billion. The merger’s outside date may be extended through October 9, 2024, and a $600 million termination fee may be payable in certain circumstances.
Kroger recorded a nationwide opioid settlement liability of $1.413 billion in 2023. At May 25, 2024, $284 million was classified as current and $1.129 billion as long term. Kroger made a $138 million escrow payment during the quarter. The settlement remains subject to participation and other conditions, and the ultimate loss could differ materially from the recorded estimate.
Principal risks include merger approval and integration, divestiture execution, labor negotiations and work stoppages, competitive pricing, inflation and fuel-margin volatility, consumer spending, pharmacy reimbursement and payor changes, cyber and data-security events, supply constraints, litigation, liquidity and refinancing conditions, and the ability to maintain investment-grade credit ratings.
Important Facts for Investors to Verify
- Confirm that the intended comparison is Q1 2024, not Q1 2023, because the filing period ended May 25, 2024.
- Track the FTC and state-court decisions, the merger outside date, required divestitures, financing commitments, and potential termination fee.
- Assess whether operating-margin pressure persists as Kroger funds price investments, wages, benefits, incentives, and merger-related costs.
- Reconcile GAAP results with adjusted metrics, particularly the $175 million pretax merger-related charge and the $31 million held-for-sale tax benefit.
- Monitor operating cash flow, capital investment, debt levels, liquidity availability, and progress toward the 2.30-to-2.50 net debt-to-adjusted-EBITDA target.
- Verify the timing and final economics of the Kroger Specialty Pharmacy sale and the resolution and cash-payment schedule of the opioid settlement.
- Review the company’s non-GAAP definitions and compare identical-sales calculations with those used by other grocery retailers.