The Kroger Co. 2021 Form 10-K Summary
Reporting period: Fiscal year ended January 29, 2022, comprising 52 weeks. The request metadata references “2020 Q4,” but the supplied filing is Kroger’s fiscal 2021 annual report, comparing fiscal 2021 with fiscal 2020 and fiscal 2019.
Business context
Kroger is a U.S. food retailer operating 2,726 supermarkets in 35 states and the District of Columbia. Its business includes grocery, pharmacies, fuel centers, digital pickup and delivery, food manufacturing, data analytics, retail media and Kroger Personal Finance. Retail operations represent approximately 97% of consolidated sales and are reported as one segment.
- 2,252 supermarkets had pharmacies and 1,613 had fuel centers at year-end.
- Pickup was available at 2,257 supermarkets, with digital solutions reaching approximately 98% of customers.
- The company employed more than 420,000 full- and part-time associates; approximately 65% were covered by collective bargaining agreements.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Sales | $137.9 billion | $132.5 billion | 4.1% |
| Sales excluding fuel | $123.2 billion | $123.0 billion | 0.2% |
| Identical sales excluding fuel | 0.2% | 14.1% | Down from pandemic-boosted comparison |
| Operating profit | $3.5 billion | $2.8 billion | 25.1% |
| Adjusted FIFO operating profit | $4.3 billion | $4.1 billion | 6.3% |
| Net earnings attributable to Kroger | $1.7 billion | $2.6 billion | Down 36.0% |
| Adjusted net earnings | $2.8 billion | $2.7 billion | 2.3% |
| Diluted EPS | $2.17 | $3.27 | Down 33.6% |
| Adjusted diluted EPS | $3.68 | $3.47 | 6.1% |
| Cash flow from operations | $6.2 billion | $6.8 billion | Down $625 million |
Gross margin was 22.01%, compared with 23.32% in 2020. FIFO gross margin excluding fuel declined 43 basis points. Operating profit margin improved to 2.52% from 2.10%, while OG&A expense declined to 16.83% of sales from 18.49%.
- Fuel sales increased 54.7%, driven by a 7.9% increase in gallons sold and a 43.6% increase in average retail fuel prices.
- Digital sales declined approximately 3% year over year as pandemic-related demand normalized, but two-year stacked digital sales growth was 113%.
- Alternative profit streams contributed an incremental $150 million of operating profit.
- Our Brands products generated nearly $28 billion of sales, and Home Chef exceeded $1 billion in sales.
- Cost savings exceeded $1 billion for the fourth consecutive year.
Cash flow, capital allocation and liquidity
| Item | 2021 |
|---|---|
| Cash and temporary cash investments | $1.8 billion |
| Capital investments | $3.2 billion |
| Share repurchases | $1.6 billion |
| Dividends paid | $589 million |
| Debt including finance-lease obligations | $13.4 billion |
| Net debt to adjusted EBITDA covenant ratio | 1.46 to 1 |
Kroger had no commercial paper outstanding and no borrowings under its $2.75 billion unsecured revolving credit facility at year-end. The facility can be increased by up to $1.25 billion and matures in July 2026. The credit agreement permits a leverage ratio of up to 3.50 to 1, and Kroger was in compliance at year-end. Total debt declined by $49 million from the prior year, although finance-lease obligations increased primarily because of three Ocado-powered fulfillment centers.
The company returned approximately $2.2 billion to shareholders through dividends and repurchases. The quarterly dividend was increased to $0.21 per share, and management stated that it expects dividends to remain comparable and increase over time, subject to earnings, other factors and board approval.
Material changes versus the prior comparable period
- 2021 sales growth was driven primarily by fuel prices and volume, while non-fuel sales were broadly flat after exceptionally strong 2020 pandemic results.
- Reported earnings declined substantially because 2020 included a $1.1 billion unrealized investment gain, whereas 2021 included an $821 million unrealized investment loss, primarily related to the Ocado investment.
- Adjusted results improved because of higher FIFO operating profit, lower COVID-related costs, cost savings, increased fuel earnings and share repurchases.
- The LIFO charge increased to $197 million from a $7 million credit, reflecting higher inflation, particularly in grocery and meat.
- 2021 included a $449 million pre-tax multi-employer pension withdrawal-liability charge, an $87 million pension settlement charge, a $66 million Home Chef contingent-consideration charge and $136 million of transformation costs.
- Kroger opened its first three Ocado-powered customer fulfillment centers in Ohio, Florida and Georgia.
- Cash contributions to multi-employer pension plans increased to $1.1 billion from $619 million. Management estimated Kroger’s share of related plan underfunding at approximately $1.1 billion as of December 31, 2021, although the underfunding generally is not a direct company liability.
Outlook, commentary and risks
Management expects momentum to continue in 2022 while cycling pandemic-related benefits and continuing investments in associates, digital capabilities and customer value. Its stated objectives include doubling digital sales and digital profitability rate by 2023, maintaining investment-grade debt ratings, targeting net total debt to adjusted EBITDA of 2.30 to 2.50, growing dividends and returning excess cash through repurchases. Kroger targets long-term total shareholder return of 8% to 11%.
- Key operating risks include persistent inflation, fuel-margin volatility, labor shortages and wage pressure, collective bargaining negotiations, supply-chain disruption and changing consumer behavior after COVID-19.
- Competition is intense across traditional grocery, e-commerce, delivery, warehouse clubs, pharmacies and non-traditional retailers. Digital fulfillment costs and execution remain important profitability risks.
- Cybersecurity, privacy, payment-system and third-party vendor risks could cause operational disruption, litigation, regulatory penalties and reputational damage.
- Most multi-employer pension plans are believed to be underfunded. Future contributions or withdrawal liabilities could increase materially depending on plan returns, labor negotiations and participation changes.
- Climate-related regulation, including the phase-down of HFC refrigerants, could require significant infrastructure spending. The filing states that modeled physical climate risks are not currently expected to adversely affect financial condition, results or cash flows in the foreseeable future.
- Pending litigation includes opioid-related claims, employment and personal-injury matters, and a derivative action concerning a data incident involving a former vendor. The filing does not provide a clear estimate of reasonably possible loss for the opioid matters.
Important facts for investors to verify
- Whether non-fuel identical sales remain positive as pandemic comparisons normalize.
- Whether gross-margin pressure from inflation, shrink, transportation costs and price investment is offset by cost savings and alternative profits.
- The sustainability and cost effectiveness of digital sales growth and Ocado fulfillment-center expansion.
- The size and timing of future multi-employer pension contributions, withdrawal liabilities and related cash payments.
- The market value and earnings volatility of Kroger’s Ocado investment, valued at $987 million at year-end.
- Debt maturities, lease obligations and the effect of interest rates on refinancing and liquidity.
- Developments in labor negotiations, cybersecurity litigation, opioid litigation and other contingencies.
- The filing’s non-GAAP adjustments, particularly the $1.1 billion of 2021 after-tax adjusted items, when assessing underlying earnings quality.