The Kroger Co. Form 10-Q Summary
Reporting period: The supplied filing is for the 12 and 28 weeks ended August 14, 2021, with comparable periods ended August 15, 2020. The request metadata identifies “2020 Q2,” but the filing itself is a 2021 second-quarter report.
Business context and reporting period
Kroger operates supermarkets, fuel centers, pharmacies, digital commerce and alternative-profit businesses, including data analytics, digital media and personal finance. Management emphasizes its “Leading with Fresh” and “Accelerating with Digital” strategy, cost savings, digital expansion and shareholder returns. The filing states that results were affected by comparisons with unusually strong COVID-19-related demand in 2020.
Key financial metrics
| Metric | Second quarter 2021 | Second quarter 2020 | First two quarters 2021 | First two quarters 2020 |
|---|---|---|---|---|
| Sales | $31.682 billion | $30.489 billion | $72.980 billion | $72.038 billion |
| Operating profit | $839 million | $820 million | $1.644 billion | $2.146 billion |
| Net earnings attributable to Kroger | $467 million | $819 million | $607 million | $2.031 billion |
| Diluted earnings per share | $0.61 | $1.03 | $0.79 | $2.55 |
| Adjusted diluted earnings per share | $0.80 | $0.73 | $1.99 | $1.95 |
| Cash flow from operations | Not separately provided | Not separately provided | $3.123 billion | $5.405 billion |
Second-quarter operating margin was 2.65%, compared with 2.69% in the prior-year quarter. First-half operating margin was 2.25%, compared with 2.98%. Reported earnings were significantly affected by investment losses and other adjusted items.
- Identical sales excluding fuel decreased 0.6% in the quarter and 2.6% for the first two quarters. Two-year stacked growth was 14.0% and 14.5%, respectively.
- Total sales excluding fuel declined 0.4% in the quarter and 2.5% year to date, while fuel sales increased 56.8% and 52.2%, respectively.
- Digital sales declined approximately 13% in the quarter and increased approximately 3% for the first two quarters, reflecting comparisons with elevated 2020 pandemic demand. Digital sales had 114% two-year stacked growth in the quarter.
- FIFO gross margin excluding fuel declined 60 basis points in the quarter and 64 basis points year to date, primarily due to price investments, shrink, transportation costs and pandemic-related comparisons.
- Adjusted FIFO operating profit was $947 million in the quarter and $2.322 billion year to date, compared with $894 million and $2.347 billion, respectively.
Liquidity, cash flow and debt
- Cash and temporary cash investments were $2.225 billion at August 14, 2021, compared with $1.687 billion at fiscal year-end.
- Operating activities provided $3.123 billion; investing activities used $1.284 billion, including $1.319 billion for property and equipment; financing activities used $1.301 billion.
- Total debt, including finance lease obligations, increased $742 million from fiscal year-end to approximately $14.1 billion, primarily due to a property transaction and new finance lease obligations, partly offset by repayment of $300 million of senior notes.
- Debt excluding finance lease obligations had a carrying value of $12.718 billion and an estimated fair value of $14.521 billion at August 14, 2021.
- Kroger had no commercial paper borrowings and no borrowings under its revolving credit facility. The amended unsecured revolving facility provides $2.750 billion of capacity, with potential increases of $1.250 billion, and terminates July 6, 2026 unless extended.
- The company reported compliance with its remaining financial covenant and stated that it expects liquidity to be adequate for the next twelve months and beyond.
Material changes versus the prior comparable period
- Reported net earnings declined 43.0% in the quarter and 70.1% for the first two quarters, largely because 2020 included substantial investment gains while 2021 included investment losses.
- Adjusted diluted EPS increased 9.6% in the quarter and 2.1% year to date, supported by operating performance and share repurchases.
- Net cash from operations declined by $2.282 billion year to date, primarily because 2020 benefited from unusually favorable working-capital changes during elevated pandemic demand and CARES Act tax timing.
- Kroger repurchased $751 million of common stock, or 20.3 million shares, during the first two quarters and paid $274 million of dividends.
- The company entered into an amended credit agreement that removed the fixed-charge coverage covenant and extended the facility termination date.
- Kroger opened its first two Ocado-powered delivery facilities in Monroe, Ohio, and Groveland, Florida, recording finance lease assets of $267 million and liabilities of $249 million.
Guidance, outlook, commentary and unusual items
- Management raised full-year guidance for identical sales excluding fuel and adjusted diluted EPS, although the specific revised guidance amounts are not included in the supplied text.
- Management expects alternative-profit operating profit growth toward the high end of its $100 million to $150 million incremental 2021 target and expects more than $1 billion of incremental cost savings for the fourth consecutive year.
- Management 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%.
- First-half adjusted items included a $449 million pretax charge for multi-employer pension withdrawal liabilities, $52 million for Home Chef contingent consideration, $101 million of transformation costs and a $601 million unrealized investment loss. The investment loss primarily related to the Ocado investment.
- Kroger deferred $622 million of employer Social Security taxes under the CARES Act; $311 million was due by December 31, 2021 and the remainder by December 31, 2022.
- Key risks include COVID-19 variants and workforce disruption, supply-chain interruptions, labor negotiations, inflation and fuel-cost volatility, competition, pharmacy reimbursement pressure, cybersecurity incidents, execution of digital and growth initiatives, pension obligations, refinancing and capital-market access.
- Pending litigation and self-insurance matters are described as not expected to be material in aggregate, although management notes that actual outcomes could differ and potentially affect financial results.
Investor verification points
- Confirm the reporting-period discrepancy: the supplied filing is for second quarter 2021, not second quarter 2020.
- Reconcile GAAP earnings and adjusted earnings, particularly the $601 million investment loss, pension withdrawal liability, transformation costs and Home Chef revaluation.
- Assess whether margin pressure from price investments, shrink, transportation costs and fuel mix is offset by cost savings and alternative-profit growth.
- Review the sustainability of cash flow after the unusually strong 2020 pandemic comparison and considering debt maturities, tax payments and pension commitments.
- Monitor execution and capital requirements for Ocado-powered delivery facilities, digital initiatives and the technology transformation program.
- Verify the revised full-year sales and adjusted EPS guidance in the company’s earnings release or subsequent filing, because specific revised amounts are not provided in the supplied text.