Kroger Co. Form 10-K Summary
Reporting period: The provided filing is Kroger’s Form 10-K for the 52-week fiscal year ended January 30, 2021, referred to as fiscal 2020, with comparisons to fiscal 2019 ended February 1, 2020. The request metadata identifies “2019 Q4,” but the source is an annual 2020 Form 10-K; fourth-quarter data are included separately and cover 12 weeks.
Business Context
Kroger is a U.S. food and pharmacy retailer operating 2,742 supermarkets, 2,255 pharmacies, and 1,596 fuel centers across 35 states and the District of Columbia. Pickup was available at 2,223 supermarkets, and home delivery served substantially all Kroger households. Retail operations represented approximately 97% of consolidated sales and were the company’s only reportable segment.
The fiscal year was materially affected by COVID-19, including elevated food-at-home demand, stronger digital shopping activity, lower fuel demand, increased associate and customer safety costs, and supply-chain and labor pressures.
Financial Performance and Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Sales | $132.5 billion | $122.3 billion | 8.4% increase |
| Sales excluding fuel | $123.0 billion | $108.2 billion | 13.7% increase |
| Identical sales excluding fuel | 14.1% | 2.0% | Increase |
| Operating profit | $2.8 billion | $2.3 billion | 23.5% increase |
| Operating margin | 2.10% | 1.84% | 26 basis-point increase |
| Net earnings attributable to Kroger | $2.585 billion | $1.659 billion | 55.8% increase |
| Diluted earnings per share | $3.27 | $2.04 | 60.3% increase |
| Adjusted diluted earnings per share | $3.47 | $2.19 | 58.4% increase |
| Cash flow from operations | $6.815 billion | $4.664 billion | Increase |
| Capital investments | $3.166 billion | $3.044 billion | Increase |
| Total debt including finance leases | $13.4 billion | Approximately $14.1 billion | $663 million reduction |
| Cash and temporary cash investments | $1.687 billion | $399 million | $1.288 billion increase |
Gross margin was 23.32%, compared with 22.07% in 2019. FIFO gross margin excluding fuel increased 14 basis points. Operating, general and administrative expense was 18.49% of sales, compared with 17.34%, primarily reflecting COVID-19 investments, pension-related charges, digital fulfillment costs, and incentive compensation.
Digital revenue increased 116%. Alternative profit streams, including Kroger Precision Marketing, contributed an incremental $150 million of operating profit. Return on invested capital increased to 12.87% from 11.19%.
Cash Flow, Debt and Liquidity
- Operating cash flow was $6.815 billion, supported by higher earnings, working-capital improvements, lower inventory, accrued expenses, and deferred payroll taxes under the CARES Act.
- Investing activities used $2.814 billion, including $2.865 billion for property and equipment and lease buyouts.
- Financing activities used $2.713 billion, including $1.324 billion of share repurchases and $534 million of dividends.
- Total debt, excluding finance leases, was $12.410 billion at year-end. Kroger had no commercial paper outstanding and no borrowings under its $2.75 billion revolving credit facility.
- The company reported a leverage ratio of 1.63 to 1 against a 3.50-to-1 covenant limit and a fixed-charge coverage ratio of 5.37 to 1 against a 1.70-to-1 minimum.
- Kroger expects cash flows, cash on hand, commercial paper capacity, and its credit facility to meet liquidity needs. Near-term obligations include approximately $800 million of senior-note maturities, $311 million of deferred employer Social Security taxes due by December 31, 2021, and approximately $307 million of National Fund payments expected in the first half of 2021.
Material Changes Versus Fiscal 2019
- COVID-19 drove a substantial acceleration in food-at-home demand, basket size, market share, digital sales, and identical sales excluding fuel.
- Fuel sales declined 32.5%, reflecting a 17.5% reduction in gallons sold and an 18.2% decrease in average retail fuel prices.
- Kroger invested more than $1.5 billion in pandemic-related associate, customer, and community support and committed more than $2.5 billion in total to safety and associate-related initiatives.
- The company recorded a $962 million pretax withdrawal liability and a $27 million transition-reserve commitment related to withdrawing from the UFCW International Union-Industry Pension Fund. The combined after-tax impact was $754 million, with payments due over three years.
- Kroger recorded a $1.105 billion gain on investments, primarily reflecting an unrealized gain on Ocado securities. The Ocado investment was valued at $1.808 billion at year-end.
- Share repurchases increased to $1.324 billion from $465 million, while dividends paid increased to $534 million from $486 million.
- Fourth-quarter 2020 operating profit was a loss of $158 million and net loss attributable to Kroger was $77 million, primarily because of the National Fund commitment and other adjustment items.
Guidance, Outlook and Management Commentary
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 returns of 8% to 11%. The company expects to continue investing in profitable sales growth, digital capabilities, margin expansion, Fresh, Our Brands, personalization, and seamless shopping.
Management believes pandemic-accelerated trends such as e-commerce, cooking at home, and prepared foods may continue to shape the industry, but the filing does not provide a clear quantitative fiscal 2021 sales or earnings forecast.
Risks, Contingencies and Unusual Items
- COVID-19 duration, consumer behavior, staffing, vaccination, government actions, supply-chain disruptions, and future virus variants could materially affect results.
- Food retail faces intense price competition from traditional, online, and non-traditional competitors. Digital fulfillment may be difficult to operate profitably at scale.
- A majority of employees are covered by approximately 350 collective bargaining agreements. Wage, healthcare, pension, labor-negotiation, and work-stoppage risks remain material.
- Kroger estimates its share of multi-employer pension-plan underfunding at approximately $1.7 billion, or $1.3 billion net of tax, although this is generally not a direct liability unless withdrawal or restructuring obligations arise.
- The company is substantially self-insured and has exposure to litigation, workers’ compensation, product safety, cyberattacks, data privacy, payment systems, and regulatory matters.
- Contractual obligations totaled $36.995 billion, including $12.410 billion of long-term debt, $10.232 billion of operating lease obligations, $1.421 billion of finance lease obligations, and $7.239 billion of interest on long-term debt.
- The filing reports no material unresolved staff comments. Management and the independent auditor concluded that internal control over financial reporting was effective.
Investor Verification Checklist
- Confirm the applicable period: the source is fiscal 2020, not a 2019 quarterly filing.
- Reconcile GAAP earnings with adjusted earnings, particularly the $754 million after-tax National Fund commitment and the $821 million after-tax gain on investments.
- Assess the sustainability of COVID-19-related sales, digital growth, margins, and working-capital benefits.
- Review fuel-volume and fuel-margin sensitivity as mobility and fuel prices normalize.
- Evaluate multi-employer pension obligations, required National Fund payments, collective-bargaining expirations, and potential withdrawal liabilities.
- Verify debt maturities, lease obligations, credit-facility covenants, commercial paper access, and the company’s planned capital allocation.
- Review the valuation and volatility of the Ocado investment and its effect on reported earnings.