The Kroger Co. 10-K Summary
Reporting period: Fiscal year ended February 3, 2024. The filing covers fiscal 2023, a 53-week year, compared with fiscal 2022, a 52-week year ended January 28, 2023. Although the request metadata refers to “2022 Q4,” the provided document is an annual Form 10-K for fiscal 2023, not a quarterly filing.
Business Context
Kroger operates a domestic grocery, pharmacy, fuel and digital retail business. As of year-end, it operated 2,722 supermarkets in 35 states and the District of Columbia, including 2,257 pharmacies and 1,665 fuel centers. Retail operations represent approximately 97% of consolidated sales and constitute the company’s only reportable segment.
Management’s strategy emphasizes Fresh, Our Brands, Data and Personalization, and Seamless omnichannel shopping. Digital sales reached approximately $12 billion, and Our Brands products generated more than $31 billion of sales.
Financial Performance
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Sales | $150.0 billion | $148.3 billion | 1.2% |
| Sales excluding fuel and Extra Week | $131.0 billion | $129.6 billion | 1.1% |
| Net earnings attributable to Kroger | $2.164 billion | $2.244 billion | (3.6%) |
| Diluted EPS | $2.96 | $3.06 | (3.3%) |
| Adjusted diluted EPS excluding Extra Week | $4.56 | $4.23 | 7.8% |
| Operating profit | $3.096 billion | $4.126 billion | (25.0%) |
| Adjusted FIFO operating profit excluding Extra Week | $4.799 billion | $5.079 billion | (5.5%) |
| Cash flow from operations | $6.788 billion | $4.498 billion | 51.0% |
| Capital investments | $3.560 billion | $3.338 billion | Increase |
Identical sales excluding fuel increased 0.9%. Management stated that growth would have been 2.3% excluding the approximately $1.8 billion reduction in pharmacy sales following the termination of the Express Scripts agreement. Digital sales increased approximately 12% excluding the Extra Week, with Delivery solutions increasing 25%.
Gross margin increased to 22.24% from 21.43%, while FIFO gross margin increased to 22.31% from 21.86%. The LIFO charge declined substantially to $113 million from $626 million. Operating profit margin declined to 2.06% from 2.78%, reflecting higher OG&A and depreciation expenses, lower fuel profitability and material opioid settlement charges.
Alternative profit streams, including data analytics and retail media, contributed $1.3 billion of operating profit. Return on invested capital was 13.06%, compared with 13.95% in fiscal 2022.
Liquidity, Debt and Capital Allocation
- Cash and temporary cash investments were $1.883 billion at year-end, compared with $1.015 billion a year earlier.
- Total debt, including finance lease obligations, declined by approximately $1.2 billion to $12.2 billion. Kroger repaid $600 million of 3.85% senior notes and $500 million of 4.00% senior notes.
- Kroger had no outstanding commercial paper and no borrowings under its $2.75 billion revolving credit facility. The facility can be increased by up to $1.25 billion and terminates, unless extended, in July 2026.
- The leverage ratio was 1.10x at year-end, compared with a 3.50x covenant threshold. Kroger was in compliance with its covenant.
- The company paid $796 million of dividends, or $1.10 per share, compared with $682 million, or $0.94 per share, in fiscal 2022.
- Share repurchases totaled $62 million, funded through the employee stock-option repurchase program. No open-market repurchases were made under the $1.0 billion September 2022 authorization, which remained fully available.
- Contractual obligations totaled approximately $36.4 billion, including debt, interest, lease obligations, self-insurance, construction commitments, opioid settlements and purchase obligations.
Material Changes and Unusual Items
- Opioid settlements: Kroger recognized $1.475 billion of pre-tax opioid settlement charges in fiscal 2023, including $1.413 billion related to a nationwide framework and $62 million related to West Virginia. The nationwide framework includes approximately $1.236 billion of payments over 11 years and approximately $177 million over six years. The settlement remains subject to participation and other conditions, and the final outcome could differ from the accrued amount.
- Albertsons merger: Kroger continued pursuing its proposed acquisition of Albertsons. The transaction includes a planned divestiture of 413 stores, eight distribution centers, two offices and five private-label brands to C&S for approximately $1.9 billion, with potential for additional store divestitures.
- Regulatory litigation: The FTC and several states filed actions seeking to block the merger. The filing states that federal and state injunction proceedings were scheduled for 2024 and that the parties had stipulated to restrictions preventing closing during the relevant litigation period.
- Extra Week: The 53rd week contributed $179 million of net earnings, or $0.20 per diluted share, and $187 million of operating profit. Comparisons excluding this week are more representative of underlying trends.
- Investment valuation: Kroger recorded a $151 million gain on investments in 2023, compared with a $728 million loss in 2022. The 2023 gain primarily reflected changes in the fair value of investment and derivative positions.
- Pharmacy divestiture: Subsequent to year-end, Kroger agreed to sell Kroger Specialty Pharmacy to CarelonRx for approximately $485 million, subject to customary conditions and regulatory review. Closing was expected in the second half of 2024.
Guidance, Outlook and Management Commentary
- Management expects to grow identical sales excluding fuel over time and expects digital sales to grow at a double-digit rate over the long term.
- Kroger intends to expand operating margins through gross-margin initiatives, alternative profit streams, productivity and cost savings, while continuing investments in prices, wages and benefits.
- The company targets a net total debt-to-adjusted EBITDA ratio of 2.30x to 2.50x and intends to maintain its investment-grade debt rating.
- Management expects to continue growing the dividend over time and to resume or utilize share repurchases subject to Board approval and capital requirements.
- Kroger targets long-term total shareholder return of 8% to 11%, excluding the effect of the proposed Albertsons transaction.
Principal Risks and Contingencies
- Completion, regulatory approval, litigation, financing and integration risks related to the Albertsons merger and C&S divestiture plan.
- Competitive pressure from supermarkets, mass merchants, warehouse clubs, dollar stores, discounters, digital retailers and third-party delivery platforms.
- Inflation, deflation, labor costs, fuel prices, commodity costs, interest rates and changes in consumer spending.
- Labor negotiations and potential work stoppages; approximately 65% of associates are covered by collective bargaining agreements.
- Cybersecurity, privacy, payment-system and technology-transformation risks. Kroger reported no known cybersecurity incident that had materially affected or was reasonably likely to materially affect the company as of the filing date.
- Underfunded multi-employer pension plans. Kroger estimated its share of underfunding at approximately $2.5 billion, although the amount is generally not a direct recorded liability. Contributions to these plans were $635 million in fiscal 2023.
- Opioid litigation and settlement participation risk, including the possibility that the nationwide settlement does not become effective or that the ultimate loss differs materially from the recorded accrual.
- Product safety, supply-chain disruption, adverse weather, natural disasters, climate-related regulation and HFC refrigerant replacement costs.
Investor Verification Checklist
- Confirm the current status and ultimate outcome of the FTC, state and private litigation concerning the Albertsons merger.
- Verify the final participation, payment schedule and liability under the nationwide opioid settlement framework.
- Assess comparable sales trends excluding fuel, the Extra Week and the Express Scripts pharmacy impact.
- Monitor gross-margin performance, shrink, labor and benefit costs, and the sustainability of alternative profit growth.
- Reconcile reported GAAP earnings with management’s adjusted EPS and FIFO operating profit, particularly the treatment of opioid, merger, investment and Extra Week items.
- Evaluate debt reduction, lease obligations, multi-employer pension exposure and liquidity after any merger-related financing.
- Verify the timing, proceeds and regulatory approval of the planned Kroger Specialty Pharmacy sale.