The Kroger Co. 2022 Form 10-K Summary
Reporting period: The provided filing is Kroger’s Form 10-K for the 52-week fiscal year ended January 28, 2023, referred to as fiscal 2022. It is not a 2021 fourth-quarter filing; the source text does not provide a standalone 2021 Q4 filing period.
Business context
Kroger is a U.S. food and drug retailer operating 2,719 supermarkets in 35 states and the District of Columbia, including 2,252 pharmacies and 1,637 fuel centers. Retail operations represent approximately 97% of consolidated sales and are the company’s only reportable segment. Strategy centers on Fresh, Our Brands, Data and Personalization, and Seamless omnichannel shopping.
- Approximately 430,000 full- and part-time employees at year-end; about 65% were covered by collective bargaining agreements.
- Our Brands generated more than $30 billion of 2022 sales.
- Digital sales increased 4%; Delivery solutions increased 25%.
- Kroger opened four additional Ocado-powered customer fulfillment centers during 2022.
Financial performance
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Sales | $148.3 billion | $137.9 billion | 7.5% |
| Sales excluding fuel | $129.6 billion | $123.2 billion | 5.2% |
| Identical sales excluding fuel | 5.6% | 0.2% | Increase |
| Net earnings attributable to Kroger | $2.244 billion | $1.655 billion | 35.6% |
| Diluted EPS | $3.06 | $2.17 | 41.0% |
| Adjusted net earnings | $3.104 billion | $2.802 billion | 10.8% |
| Adjusted diluted EPS | $4.23 | $3.68 | 14.9% |
| Operating profit | $4.126 billion | $3.477 billion | 18.7% |
| Adjusted FIFO operating profit | $5.079 billion | $4.310 billion | 17.8% |
| Cash flow from operations | $4.498 billion | $6.190 billion | Decrease |
Gross margin was 21.43%, compared with 22.01% in 2021. FIFO gross margin was 21.86%, down from 22.15%. The decline reflected higher fuel mix, lower fuel margins, increased shrink and a substantially higher LIFO charge. The LIFO charge rose to $626 million from $197 million.
Operating profit margin improved to 2.78% from 2.52%, while adjusted FIFO operating profit margin was approximately 3.43% versus 3.13% based on reported adjusted FIFO operating profit and sales.
Cash flow, liquidity and capital structure
- Operating cash flow was $4.5 billion, down from $6.2 billion, primarily because inflation and forward inventory purchases increased working capital usage.
- Investing activities used $3.0 billion, including approximately $3.3 billion of capital investments.
- Financing activities used $2.3 billion, including $993 million of share repurchases and $682 million of dividends.
- Cash and temporary cash investments were $1.015 billion at year-end, compared with $1.821 billion in 2021.
- Total debt, including finance lease obligations, was approximately $13.4 billion, up $14 million year over year. Debt excluding finance leases was $11.3 billion.
- No commercial paper or revolving credit facility borrowings were outstanding at year-end. Kroger maintained a $2.75 billion revolving credit facility, expandable by up to $1.25 billion.
- The net debt-to-adjusted EBITDA leverage ratio under the credit facility was 1.34x versus a 3.50x covenant limit; Kroger was in compliance.
- Contractual obligations totaled approximately $36.5 billion, including debt, interest, lease obligations, self-insurance, construction commitments and purchase obligations.
Material changes versus the prior comparable period
- Sales growth accelerated, driven by fuel pricing and 5.6% identical sales growth excluding fuel.
- Net earnings and adjusted earnings increased, supported by sales leverage, fuel profitability, cost savings and lower share count.
- Operating cash flow declined substantially because inventory and other working capital absorbed more cash.
- Fuel sales increased 26.9%, primarily from a 28.5% increase in average retail fuel prices; fuel gallons sold declined 1.2%.
- Operating, general and administrative expense declined to 16.09% of sales from 16.83%, aided by cost savings and sales leverage.
- Interest expense declined to $535 million from $571 million.
- Share repurchases decreased to $993 million from $1.647 billion, and the repurchase program was paused during the third quarter to prioritize deleveraging following the proposed Albertsons transaction.
Unusual items and management commentary
- Kroger recorded $85 million of opioid litigation settlement costs related to New Mexico, or $67 million after tax.
- Kroger recorded a $164 million Vitacost.com goodwill and fixed-asset impairment charge, including a $160 million goodwill impairment, reflecting reduced long-term profitability expectations as digital strategy shifted toward Pickup and Delivery.
- Other adjusted items included $44 million of Albertsons merger-related costs, $25 million of multi-employer pension withdrawal liabilities and $20 million related to Home Chef contingent consideration.
- Kroger reported an unrealized loss on investments of $728 million, including a $586 million loss on its Ocado investment. The Ocado investment was valued at $401 million at year-end.
- Management expects continued revenue and adjusted diluted EPS growth in 2023, funded by product-mix improvements, cost savings and growth in alternative profit businesses.
- Management targets long-term total shareholder return of 8% to 11% and a net total debt-to-adjusted EBITDA range of 2.30x to 2.50x, excluding the effect of the proposed Albertsons merger.
- Kroger expects to continue growing dividends over time, subject to Board approval, while maintaining investment-grade debt ratings.
Albertsons transaction and key risks
Kroger agreed in October 2022 to acquire Albertsons for $34.10 per share before specified adjustments. The filing describes an implied enterprise value of approximately $24.6 billion, including approximately $4.7 billion of Albertsons net debt. The transaction was expected to close in early 2024, subject to regulatory clearance and other conditions. The current expected adjusted purchase price was approximately $27.25 per share, pending possible SpinCo and divestiture adjustments.
- Financing commitments included a $12.65 billion remaining bridge facility commitment after a $4.75 billion reduction associated with planned term loan facilities of $3.0 billion and $1.75 billion.
- Material risks include regulatory remedies and store divestitures, financing and credit-rating pressure, integration costs, execution risk and possible termination fees.
- Kroger estimated its share of multi-employer pension plan underfunding at approximately $2.5 billion, up approximately $1.4 billion from the prior year. This is generally not a direct balance-sheet liability but could create future contributions or withdrawal liabilities.
- Other significant risks include inflation, labor costs and work stoppages, supply-chain disruption, fuel volatility, cybersecurity and privacy events, product safety, litigation, climate-related costs and changing consumer behavior.
- The filing states that Kroger’s disclosure controls and internal control over financial reporting were effective at January 28, 2023, with no material unresolved staff comments.
Investor verification checklist
- Verify that the relevant period is fiscal 2022 ended January 28, 2023, rather than 2021 Q4.
- Reconcile GAAP earnings and EPS with adjusted results and assess the effect of the $860 million of after-tax adjusted items.
- Evaluate whether sales growth excluding fuel and margin performance remain durable as inflation and fuel prices normalize.
- Review operating cash flow conversion, inventory growth and capital spending requirements.
- Assess financing capacity, leverage targets and debt implications if the Albertsons transaction closes.
- Monitor regulatory approval, potential divestitures, SpinCo structure, merger costs and the $600 million potential termination fee.
- Review exposure to multi-employer pension underfunding, labor negotiations and collective bargaining expirations.
- Consider volatility in the Ocado investment and the sustainability of digital fulfillment economics.