The Kroger Co. 10-Q Summary
Reporting period: The supplied filing is for the third quarter and first three quarters ended November 6, 2021, covering 12 and 40 weeks, respectively. The request metadata identifies “2020 Q3,” but the filing itself is a 2021 third-quarter Form 10-Q, filed December 10, 2021.
Business Context and Financial Results
- Kroger operates supermarket, fuel, pharmacy, digital, data analytics, media, personal finance and other alternative-profit businesses.
- Third-quarter sales increased 7.2% to $31.86 billion, including a 57.7% increase in fuel sales. Sales excluding fuel increased 2.9%.
- First-three-quarter sales increased 3.0% to $104.84 billion; sales excluding fuel decreased 0.9%.
- Identical sales excluding fuel increased 3.1% in the third quarter and decreased 1.0% for the first three quarters. Two-year stacked growth was 14.0% and 14.3%, respectively.
- Digital sales decreased approximately 5% year over year in the third quarter but grew approximately 1% for the first three quarters. Two-year stacked digital sales growth was 103% in the third quarter.
| Metric | Third Quarter 2021 | Third Quarter 2020 | First Three Quarters 2021 | First Three Quarters 2020 |
|---|---|---|---|---|
| Sales | $31.86 billion | $29.72 billion | $104.84 billion | $101.76 billion |
| Operating profit | $868 million | $792 million | $2.51 billion | $2.94 billion |
| Operating margin | 2.72% | 2.67% | 2.40% | 2.89% |
| Net earnings attributable to Kroger | $483 million | $631 million | $1.09 billion | $2.66 billion |
| Diluted EPS | $0.64 | $0.80 | $1.43 | $3.35 |
| Adjusted diluted EPS | $0.78 | $0.71 | $2.77 | $2.66 |
| Cash flow from operations | Not separately provided | Not separately provided | $4.79 billion | $5.90 billion |
Margins, Cash Flow, Debt and Liquidity
- Reported gross margin was 21.66% in the third quarter and 21.96% for the first three quarters, down from 22.95% and 23.44%, respectively, in the comparable 2020 periods.
- FIFO gross margin excluding fuel declined 41 basis points in the third quarter and 57 basis points for the first three quarters. Factors included price investments, transportation costs, shrink, higher inflation and lower fuel margins.
- The LIFO charge increased to $93 million in the third quarter and $177 million for the first three quarters, compared with $23 million and $77 million in 2020.
- Adjusted FIFO operating profit was $974 million in the third quarter and $3.30 billion for the first three quarters, compared with $871 million and $3.22 billion, respectively.
- Operating cash flow was $4.79 billion, down from $5.90 billion, principally because working-capital changes provided less cash than in 2020.
- Investing activities used $1.96 billion, including $2.01 billion of property and equipment payments. Capital investments excluding lease buyouts and related items totaled approximately $2.15 billion.
- Financing activities used $2.23 billion, including $915 million of debt repayments, $433 million of dividends and $1.05 billion of share repurchases.
- Cash and temporary cash investments were $2.29 billion at November 6, 2021, compared with $1.69 billion at fiscal year-end 2020.
- Total debt including finance-lease obligations was approximately $13.72 billion, up $308 million from fiscal year-end 2020. Debt excluding finance-lease obligations had a carrying value of $12.24 billion.
- Kroger had no commercial paper borrowings and no borrowings under its $2.75 billion unsecured revolving credit facility. The facility may be increased by $1.25 billion and terminates July 6, 2026, unless extended.
- Approximately $900 million of senior notes mature in the next twelve months. Kroger also expected to pay $311 million of deferred payroll taxes by December 31, 2021 and approximately $300 million in the first half of 2022 for certain multi-employer pension commitments.
Material Changes Versus the Prior Comparable Period
- Reported third-quarter net earnings and diluted EPS declined 23.5% and 20.0%, respectively, while adjusted net earnings and adjusted diluted EPS increased 5.7% and 9.9%.
- First-three-quarter reported net earnings and diluted EPS declined substantially because 2020 included a large unrealized investment gain; adjusted net earnings increased 0.3% and adjusted diluted EPS increased 4.1%.
- The Ocado investment generated an unrealized loss of $94 million in the third quarter and $694 million for the first three quarters, compared with gains of $162 million and $879 million, respectively, in 2020.
- Kroger recognized an $87 million pre-tax, non-cash pension settlement charge in the third quarter, or $68 million after tax.
- First-three-quarter results included a $449 million pre-tax charge related to multi-employer pension withdrawal liabilities, $61 million for Home Chef contingent consideration revaluation and $107 million of transformation costs.
- Kroger repurchased 27.6 million shares for $1.05 billion during the first three quarters and had $511 million remaining under its June 2021 repurchase authorization at quarter-end.
- The company opened its first two Kroger Delivery customer fulfillment centers powered by Ocado and recorded approximately $267 million of finance-lease assets related to those facilities.
Guidance, Outlook, Commentary and Risks
- Management raised full-year 2021 guidance for identical sales excluding fuel and adjusted diluted EPS, although the filing text provided here does not state the revised numerical guidance ranges.
- Management expected incremental alternative-profit growth toward the high end of its $100 million to $150 million 2021 target and remained on track for more than $1 billion of incremental cost savings.
- Kroger targets 3% to 5% net earnings growth, a net debt-to-adjusted-EBITDA range of 2.30 to 2.50, and long-term total shareholder return of 8% to 11%.
- Management cited inflation, labor-market pressures, supply-chain constraints, fuel-cost volatility, competitive pricing, COVID-19 variants, customer spending trends and digital execution as key operating variables.
- Other risks include refinancing and liquidity-market conditions, debt-covenant compliance, cyberattacks and data breaches, labor negotiations, multi-employer pension obligations, litigation, self-insured claims, tax-rate changes and natural disasters.
- Kroger believes its liquidity is adequate for the next twelve months and beyond, and reported compliance with its debt covenant at November 6, 2021.
- Pending litigation and assigned leases are considered unlikely to result in material losses based on management’s current assessment, but actual outcomes could differ materially.
Important Facts for Investors to Verify
- Confirm the applicable period: the source is a 2021 Q3 filing, not a 2020 Q3 filing.
- Review adjusted earnings reconciliations, particularly the Ocado investment loss, pension charges, multi-employer pension obligations, tax benefit, Home Chef revaluation and transformation costs.
- Assess whether gross-margin pressure from inflation, price investments, transportation, shrink and fuel mix is temporary or structural.
- Verify the revised full-year 2021 identical-sales and adjusted-EPS guidance, which is referenced but not numerically stated in the supplied text.
- Monitor debt maturities, deferred payroll-tax payments, multi-employer pension installments and the company’s targeted leverage range.
- Evaluate the cash-flow effect of inventory growth, capital investments, dividends and continued share repurchases.