KROGER CO quarterly report, Q1 FY2014

Kroger Co. Form 10-Q Summary

Business context and reporting period

This filing covers Kroger’s 16-week first quarter ended May 24, 2014, compared with the 16-week quarter ended May 25, 2013. The provided request metadata identifies “2013 Q1,” but the filing itself is for the first quarter of fiscal 2014. Results include the Harris Teeter business following the January 28, 2014 merger.

Financial performance and position

Metric	Q1 2014	Q1 2013	Change
Sales	$32.961 billion	$29.997 billion	9.9% increase
Operating profit	$930 million	$879 million	5.8% increase
Operating margin	2.82%	2.93%	Down 11 basis points
Net earnings attributable to Kroger	$501 million	$481 million	4.2% increase
Diluted EPS	$0.98	$0.92	6.5% increase
Net cash from operating activities	$1.780 billion	$1.617 billion	10.1% increase
Capital investments, excluding specified acquisitions and leased facilities	$709 million	$640 million	Increase

Identical supermarket sales increased 4.6% excluding fuel and 4.2% including fuel. The company reported positive identical sales for 42 consecutive quarters.
Gross margin increased to 20.92% from 20.60%; FIFO gross margin increased to 21.01% from 20.66%.
The LIFO charge increased to $28 million from $17 million.
Interest expense increased to $147 million from $129 million, primarily because of higher debt related to the Harris Teeter merger and share repurchases.
The effective tax rate declined to 35.0% from 35.5%.
Cash used in investing activities was $703 million, while cash used in financing activities was $1.213 billion. Treasury stock purchases totaled $1.143 billion.
Cash and temporary cash investments declined to $265 million from $401 million at fiscal year-end.
Total debt, including capital leases and financing obligations, was approximately $11.3 billion, compared with $7.9 billion at the end of the comparable prior-year quarter. The filing reports total debt of $10.789 billion excluding capital leases and financing obligations.
Management reported a 13.5% rolling-four-quarter return on invested capital, unchanged from the prior comparable period.

Material changes versus the prior comparable period

The Harris Teeter merger materially increased sales, store square footage, expenses, assets and debt. Total food store square footage increased 8.9% year over year, primarily because of the merger.
First-quarter results included an $87 million pretax, $56 million after-tax charge related to commitments and withdrawal liabilities arising from restructuring certain multiemployer pension obligations. Excluding this item, adjusted net earnings were $557 million, or $1.09 diluted EPS, versus $481 million, or $0.92 diluted EPS, in the prior-year quarter.
Operating, general and administrative expense increased to $5.168 billion from $4.593 billion, and its rate increased to 15.68% from 15.31%, primarily because of the pension charge, Harris Teeter, credit-card fees and utility costs.
Kroger repurchased 25.9 million shares for approximately $1.1 billion at an average price of $44.40 per share, reducing diluted weighted-average shares to 507 million from 520 million.
Capital investment increased, and the company opened, acquired, expanded or relocated 24 food stores and completed 29 in-store remodels.

Guidance, outlook, risks and unusual items

Fiscal 2014 adjusted diluted EPS guidance was $3.19 to $3.27, excluding the pension plan agreements.
Management expects identical supermarket sales growth excluding fuel of 3.0% to 4.0%, an approximately $90 million annual LIFO charge, approximately $490 million of interest expense and a 35.0% effective tax rate.
Capital investments are expected to be approximately $2.8 billion to $3.0 billion, excluding mergers, acquisitions and purchases of leased facilities.
Management estimates next-twelve-month liquidity needs of approximately $4.8 billion and believes operating cash flow, commercial paper capacity and bank facilities will be adequate. Approximately $1.2 billion of commercial paper and $300 million of senior notes mature within the next twelve months.
On June 30, 2014, after quarter-end, Kroger amended and restated its unsecured revolving credit facility, increasing committed capacity from $2.0 billion to $2.75 billion, with potential additional capacity of $750 million. The facility matures June 30, 2019, subject to extension provisions.
Key risks include labor negotiations, underfunded multiemployer pension obligations, competitive pricing, fuel-margin volatility, inflation or deflation, refinancing and commercial-paper access, Harris Teeter integration, consumer spending, weather and potential impairment charges.
Kroger faces ordinary-course litigation, including antitrust, wage-and-hour, civil-rights and product-liability claims. Management believes the aggregate exposure is not material, but acknowledges that outcomes could differ materially from estimates.
The company does not anticipate goodwill impairments in 2014. First-quarter long-lived-asset impairment charges were $8 million, compared with $19 million in the prior-year quarter.
The filing states 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

Reconcile reported growth with the Harris Teeter acquisition and review pro forma comparisons that exclude expected synergies and price investments.
Assess adjusted EPS by separately considering the $56 million after-tax pension-related charge and the company’s non-GAAP presentation.
Monitor leverage, commercial-paper refinancing, debt maturities, credit-facility covenants and the post-quarter-end facility amendment.
Evaluate whether identical-sales growth, fuel margins and the planned capital-investment program support the fiscal-year guidance.
Review exposure to multiemployer pension plans, upcoming labor negotiations and related withdrawal liabilities.
Confirm the effect of the $1.1 billion share-repurchase program on leverage, liquidity and future per-share results.