Kroger Co. Form 10-K Summary
Reporting period: The provided filing is for the 52-week fiscal year ended January 28, 2017, not 2015 Q4. Comparative fiscal years ended January 30, 2016 and January 31, 2015. Kroger operates supermarkets, convenience stores, jewelry stores, pharmacies, fuel centers and online retail businesses throughout the United States.
Business context
- Operated 2,796 supermarkets, 784 convenience stores, 319 fine jewelry stores and an online retailer at year-end.
- Supermarkets included 2,255 pharmacies, 1,445 fuel centers and 637 ClickList or ExpressLane locations.
- Retail operations represented more than 98% of consolidated sales and EBITDA and constituted the sole reportable segment.
- Completed the $407 million ModernHEALTH acquisition on September 2, 2016; Roundy’s was included for all of fiscal 2016 after its December 2015 acquisition.
Financial performance and key metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Sales | $115.337 billion | $109.830 billion | Up 5.0% |
| Net earnings attributable to Kroger | $1.975 billion | $2.039 billion | Down 3.1% |
| Diluted EPS | $2.05 | $2.06 | Down 0.5% |
| Adjusted diluted EPS | $2.12 | $2.06 | Up 2.9% |
| Operating profit | $3.436 billion | $3.576 billion | Down 3.9% |
| Operating margin | Approximately 3.0% | Approximately 3.3% | Down 28 basis points |
| Gross margin | 22.40% | 22.16% | Up 24 basis points |
| FIFO operating margin | 3.00% | 3.28% | Down 28 basis points |
| Net cash from operations | $4.272 billion | $4.917 billion | Down $645 million |
| Capital investments, excluding mergers and lease purchases | $3.622 billion | $3.349 billion | Up $273 million |
| Total debt, excluding capital leases and financing obligations | $13.315 billion | $11.396 billion | Up $1.919 billion |
Material changes versus the prior comparable period
- Total supermarket sales excluding fuel increased 6.1%, while identical supermarket sales excluding fuel increased 1.0%, down from 5.0% in fiscal 2015.
- Fuel sales declined 5.6%, primarily because the average retail fuel price fell 9.4%, partially offset by a 4.2% increase in gallons sold.
- Gross margin improved, but operating profitability declined because of higher operating, general and administrative expenses, rent and depreciation and amortization.
- Operating, general and administrative expenses increased to 16.63% of sales from 16.34%, reflecting deflationary conditions, lower fuel sales leverage, higher healthcare and credit-card costs, mergers and a $111 million pension-related charge.
- Interest expense increased to $522 million from $482 million because of additional borrowing and a higher weighted-average interest rate.
- Cash from operations declined primarily because working capital consumed $492 million, compared with providing $180 million in fiscal 2015.
- Kroger returned approximately $2.2 billion to shareholders through share repurchases and dividends and repurchased approximately $1.7 billion of common stock under open-market programs.
- Return on invested capital declined to 13.09% from 13.93% under Kroger’s non-GAAP methodology.
Liquidity, debt and financial position
- Cash and temporary cash investments were $322 million at year-end, compared with $277 million in the prior year.
- Total assets were $36.505 billion and total liabilities were $29.795 billion. Kroger shareholders’ equity was $6.698 billion.
- The company had $1.425 billion of commercial paper outstanding and no borrowings under its $2.75 billion revolving credit facility, which may be increased by $750 million subject to conditions.
- Liquidity needs for the next twelve months were estimated at $5.9 billion to $6.4 billion, including working capital, capital investments, interest and scheduled debt payments.
- Approximately $1.4 billion of commercial paper and $600 million of senior notes were expected to mature within the next twelve months. Management expected to refinance these obligations.
- The year-end leverage ratio was 2.27 to 1 versus a 3.50 to 1 covenant limit; fixed-charge coverage was 4.75 to 1 versus a 1.70 to 1 minimum. Kroger was in compliance with its covenants.
- Contractual obligations totaled $30.632 billion, including $13.315 billion of long-term debt, $8.181 billion of operating leases and $6.013 billion of interest on long-term debt.
Guidance, outlook and unusual items
- For fiscal 2017, management projected diluted EPS of $2.21 to $2.25, including approximately $0.09 from the 53rd week.
- Identical supermarket sales excluding fuel were expected to range from flat to up 1.0%.
- FIFO operating margin excluding fuel was expected to decline approximately 10 basis points.
- Capital investments excluding mergers, acquisitions and leased-facility purchases were expected to total $3.2 billion to $3.5 billion.
- Management expected an effective tax rate of approximately 35%, company-sponsored pension expense of approximately $110 million and multi-employer pension contributions of approximately $360 million.
- The filing identifies intense price competition, online and nontraditional competitors, deflation, fuel-price volatility, labor negotiations, product safety, cybersecurity, weather, regulation, debt refinancing and healthcare-industry changes as key risks.
- Kroger estimated its share of multi-employer pension underfunding or withdrawal liabilities at approximately $3.0 billion pre-tax, or $1.8 billion after tax, as of December 31, 2016. This was described as an estimate and generally not a direct balance-sheet liability.
- Two locations initiated withdrawal processes in the first quarter of 2017, with estimated liability of less than $100 million after tax.
- Approximately 1,300 associates accepted a voluntary retirement offering; Kroger expected to recognize an approximately $180 million pre-tax charge in the first quarter of 2017.
- Litigation exposure was assessed as not material in aggregate, although adverse outcomes in antitrust, wage-and-hour, civil-rights or product-liability matters could materially affect results.
Most important facts to verify
- Confirm the intended reporting period, because the supplied request references 2015 Q4 while the filing covers fiscal 2016 ended January 28, 2017.
- Reconcile GAAP EPS of $2.05 with adjusted EPS of $2.12, including the $111 million pre-tax pension-related charge.
- Assess whether projected identical-sales growth and FIFO margin guidance adequately offset rising labor, healthcare, technology, lease and pension costs.
- Review debt maturities, refinancing assumptions, commercial-paper access and credit-covenant headroom.
- Evaluate the scale and volatility of multi-employer pension underfunding, potential withdrawal liabilities and future contribution requirements.
- Consider the effect of the forthcoming lease-accounting standard, which management expected to significantly increase reported assets and liabilities.