The Kroger Co. Form 10-Q Summary
Reporting period: The filing covers the third quarter and first three quarters ended November 5, 2022, with comparable periods ended November 6, 2021. The provided request metadata identifies “2021 Q3,” but the filing itself is for fiscal 2022 Q3. Results cover 12-week and 40-week periods and are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First 3 quarters 2022 | First 3 quarters 2021 |
|---|---|---|---|---|
| Sales | $34.2 billion | $31.9 billion | $113.4 billion | $104.8 billion |
| Sales excluding fuel | $30.0 billion | $28.2 billion | $98.3 billion | $93.6 billion |
| Operating profit | $841 million | $868 million | $3.3 billion | $2.5 billion |
| Net earnings attributable to Kroger | $398 million | $483 million | $1.8 billion | $1.1 billion |
| Diluted EPS | $0.55 | $0.64 | $2.44 | $1.43 |
| Adjusted diluted EPS | $0.88 | $0.78 | $3.24 | $2.77 |
| Cash flow from operations | Not separately provided | Not separately provided | $3.3 billion | $4.8 billion |
- Total sales increased 7.3% in the quarter and 8.2% year to date, driven by fuel sales and higher non-fuel sales. Identical sales excluding fuel increased 6.9% in the quarter and 5.4% year to date.
- Digital sales increased approximately 10% in the quarter and 2% year to date; delivery solutions increased 34% and 26%, respectively.
- Reported operating margin was approximately 2.5% in the quarter versus 2.7% in the prior-year quarter, but 2.9% year to date versus 2.4% in the prior-year period.
- Adjusted FIFO operating profit increased 12.3% in the quarter to $1.1 billion and 15.4% year to date to $3.8 billion.
- Gross margin declined to 21.37% from 21.66% in the quarter and to 21.34% from 21.96% year to date. Higher fuel sales, inflation-related LIFO charges and increased shrink pressured margins.
- LIFO charges increased to $152 million in the quarter and $392 million year to date, compared with $93 million and $177 million, respectively, in the comparable periods.
Balance sheet, debt and liquidity
- Cash and temporary cash investments were $916 million at November 5, 2022, compared with $1.8 billion at January 29, 2022.
- Total assets were $50.0 billion and total liabilities were $40.1 billion. Total equity was $9.9 billion.
- Total debt, including finance lease obligations, declined $134 million from fiscal year-end to approximately $13.3 billion. Debt excluding finance lease obligations had a carrying value of $11.3 billion.
- The company repaid $400 million of 2.80% senior notes during the first three quarters.
- Kroger maintained a $2.75 billion unsecured revolving credit facility, expandable by $1.25 billion. It had no commercial paper or revolving-credit borrowings outstanding at quarter end, and only $2 million of outstanding letters of credit reduced availability.
- Operating cash flow of $3.3 billion was below the prior-year $4.8 billion, primarily because working capital consumed $2.3 billion, including a $2.3 billion increase in inventory.
- Investing activities used $2.2 billion, including $2.3 billion of property and equipment payments. Financing activities used $2.1 billion, including $985 million of share repurchases and $494 million of dividends.
Material changes and unusual items
- Reported quarterly earnings were reduced by a $207 million unrealized investment loss, primarily related to the Ocado investment, an $85 million opioid litigation settlement charge, and $19 million of Albertsons merger-related costs.
- The Ocado investment had a fair value of $332 million at November 5, 2022, versus $987 million at January 29, 2022. The year-to-date unrealized loss was approximately $655 million.
- The New Mexico opioid settlement is expected to resolve the company’s opioid claims by that state. Kroger stated that it cannot determine the probability or potential loss range for other opioid litigation.
- Kroger opened three additional Ocado-powered customer fulfillment centers during the first three quarters, bringing the total to six. These facilities generated $429 million of finance lease assets and $391 million of finance lease liabilities.
- Kroger repurchased $985 million of common stock year to date but paused repurchases during the third quarter to prioritize deleveraging after announcing the Albertsons transaction. The company had $1.0 billion remaining under its September 2022 repurchase authorization at quarter end.
- The company entered into forward-starting interest rate swaps with an aggregate notional amount of approximately $5.4 billion and maturity in August 2027 to hedge anticipated debt issuance.
Guidance, outlook and risks
- Management raised full-year guidance for identical sales excluding fuel, adjusted FIFO operating profit and adjusted diluted EPS, but the filing text does not provide the specific revised guidance ranges.
- Kroger targets long-term total shareholder returns of 8% to 11%, excluding the potential impact of the Albertsons transaction, and targets net total debt to adjusted EBITDA of 2.30 to 2.50.
- Kroger expects the proposed Albertsons merger to close in early 2024, subject to regulatory clearance and other conditions. The transaction implies enterprise value of approximately $24.6 billion, including approximately $4.7 billion of Albertsons net debt.
- Financing commitments include a $17.4 billion bridge facility, reduced by $4.75 billion after entering into $3.0 billion and $1.75 billion term loan facilities. The company also expects to use senior notes, commercial paper, bank facilities and cash.
- Regulatory approval may require store divestitures or creation of a standalone SpinCo. The merger agreement includes a potential $600 million termination fee under specified circumstances.
- Key risks include merger execution and regulatory remedies, leverage and credit-rating pressure, inflation, labor negotiations, supply-chain disruption, fuel-margin volatility, consumer spending changes, cyberattacks, pension obligations, litigation and opioid-related claims.
Investor verification points
- Verify the revised full-year guidance ranges, which are referenced but not specified in the provided filing text.
- Assess the effect of the Albertsons transaction, including required divestitures, financing structure, projected leverage and potential integration costs.
- Monitor inventory growth, working-capital cash usage and whether operating cash flow recovers from the prior-year decline.
- Separate recurring operating performance from the Ocado investment loss, opioid settlement, merger costs and other adjusted items.
- Review the potential exposure from opioid litigation, other lawsuits, self-insurance claims and assigned leases.
- Confirm Kroger’s ability to maintain investment-grade ratings and its 2.30 to 2.50 net debt-to-adjusted EBITDA target after any merger financing.