The Kroger Co. Form 10-Q Summary
Reporting-period note: The request identifies “2008 Q2,” but the supplied filing is Kroger’s Form 10-Q for the quarter ended August 15, 2009, comparing against August 16, 2008. The filing was dated September 23, 2009. Financial amounts are in millions except per-share data.
Business Context and Reporting Period
Kroger operates supermarkets, fuel centers, convenience stores, jewelry stores, manufacturing facilities and related businesses in the United States. The second quarter and year-to-date periods covered 28 weeks. The second quarter comprised three 28-day fiscal periods.
Financial Performance and Position
| Metric | Second quarter 2009 | Second quarter 2008 | Year-to-date 2009 | Year-to-date 2008 |
|---|---|---|---|---|
| Sales | $17,735 | $18,094 | $40,534 | $41,238 |
| Operating profit | $499 | $546 | $1,343 | $1,315 |
| Net earnings attributable to Kroger | $255 | $277 | $690 | $663 |
| Diluted EPS | $0.39 | $0.42 | $1.05 | $1.00 |
| Operating margin | 2.81% | 3.02% | 3.31% | 3.19% |
| Net margin attributable to Kroger | 1.44% | 1.53% | 1.70% | 1.61% |
- Supermarket sales excluding fuel increased 3.5% in the quarter and 3.7% year to date. Identical supermarket sales excluding fuel increased 2.6% in the quarter.
- Fuel sales declined 26.6% in the quarter and 29.9% year to date, primarily because average retail fuel prices were 37% lower year over year in the quarter.
- FIFO gross margin increased to 23.11% from 22.52% in the quarter and to 23.82% from 22.83% year to date, largely reflecting the effect of lower fuel sales. Excluding fuel, FIFO margin declined 60 basis points in the quarter and 23 basis points year to date.
- Operating, general and administrative expense increased to 17.41% of sales from 16.60% in the quarter and to 17.57% from 16.72% year to date. Excluding fuel, the rate modestly improved.
- Net cash provided by operating activities was $2,166 year to date versus $2,126 in the prior-year period. Capital expenditure payments were $1,210 versus $1,053, and total capital expenditures including construction-in-progress payables were $1,255 versus $1,115.
- Net cash used in financing activities was $838 versus $1,079. Cash increased by $106 during the year to date, ending at $369 versus $263 at January 31, 2009.
- At August 15, 2009, total debt including current maturities, capital leases and financing obligations was approximately $7,539, compared with approximately $8,063 at year-end 2008. The filing states total debt was approximately $7.5 billion, down from $7.6 billion at the end of the comparable 2008 quarter.
- Long-term debt, excluding current maturities, was $6,957, including a $44 fair-value adjustment for interest-rate hedges. The fair value of total debt was estimated at $7,804 versus a carrying value of $7,074 for debt excluding certain current and lease-related presentation amounts.
- Cash and temporary cash investments were $369. Current assets were $6,706 and current liabilities were $7,707.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 2.0%, while year-to-date sales declined 1.7%, due mainly to lower fuel prices. Core supermarket sales excluding fuel continued to grow.
- Second-quarter net earnings declined 7.9% and diluted EPS declined 7.1%, primarily because of lower gross margins, lower fuel margins and decreased operating profit.
- The LIFO charge fell to $15 from $46 in the quarter and to $38 from $86 year to date, partly offsetting margin pressure and supporting year-to-date earnings growth.
- Year-to-date net earnings increased 4.1% and diluted EPS increased 5.0%, supported by higher operating profit and the lower LIFO charge.
- Interest expense increased to $115 from $111 in the quarter and to $278 from $263 year to date, primarily because of a higher weighted-average interest rate and lower interest income.
- Kroger repaid $350 of 7.25% senior notes on June 1, 2009. It had no borrowings under its revolving credit facility, money-market lines or commercial paper at quarter end.
- Kroger reduced share repurchases to $80 year to date from $539 in the prior-year period to preserve liquidity. Approximately $425 remained under the January 2008 $1 billion repurchase authorization.
- The company contributed $200 to sponsored pension plans during the first two quarters and an additional $65 on September 14, 2009, although it was not required to make those contributions in 2009.
- Kroger adopted SFAS 160 and other accounting standards in 2009. SFAS 160 reclassified $95 of noncontrolling interests into equity and changed presentation, without changing previously reported total net earnings.
Guidance, Outlook, Risks and Unusual Items
- Fiscal 2009 diluted EPS guidance was revised to $1.90–$2.00 from $2.00–$2.05.
- Management reaffirmed identical supermarket sales growth guidance of 3.0%–4.0%, excluding fuel.
- Expected 2009 capital investments were $1.9–$2.1 billion, excluding acquisitions and purchases of leased facilities. Expected food-store square-footage growth was approximately 1.5%–2.0% before acquisitions and operational closings.
- Management expected a 2009 annualized LIFO charge of approximately $70, interest expense of approximately $495, an effective tax rate of approximately 36.5%, and fuel margins of approximately $0.11 per gallon.
- Management expected non-fuel operating margins to decline slightly, excluding the benefit of the lower expected LIFO charge, as investments in customer value and service continued.
- Kroger maintained a $2.5 billion committed revolving credit facility terminating in 2011, with $321 of outstanding letters of credit reducing availability. Management stated that liquidity and covenant coverage were adequate.
- Key risks include fuel-price and commodity-cost volatility, deflation, competitive pricing, consumer behavior, labor negotiations and potential work stoppages, availability and cost of credit, pension and multi-employer pension obligations, impairment charges, litigation, tax matters and execution of the capital-investment program.
- A pending Ralphs tax dispute could require a cash payment of up to approximately $451 if Kroger receives an adverse decision; management believed its position was more likely than not to prevail.
- Kroger stated that multi-employer pension contributions could as much as double over the several years after 2009, and withdrawal from certain plans could trigger substantial withdrawal liabilities.
- The filing reports normal-course asset impairments of $4 in the quarter and $15 year to date. Store-closing lease obligations were $59 at August 15, 2009.
- Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm that the intended period is second-quarter fiscal 2009, not second-quarter 2008, because the supplied filing covers the quarter ended August 15, 2009.
- Reconcile reported debt totals across the balance sheet, debt footnote and management discussion, particularly the treatment of current maturities, capital leases and financing obligations.
- Assess whether core sales growth can offset lower fuel revenue, deflation, competitive pressure and planned gross-margin investments.
- Monitor performance against the revised $1.90–$2.00 full-year EPS guidance and the 3.0%–4.0% identical-sales target.
- Evaluate liquidity after planned capital spending, debt maturities, pension contributions, dividends and any resumption of share repurchases.
- Review the Ralphs tax litigation exposure, labor negotiations, multi-employer pension funding risks and potential impairment or litigation charges.