The Kroger Co. Form 10-Q Summary
Reporting period: First quarter ended May 22, 2021, comprising 16 weeks, compared with the 16-week first quarter ended May 23, 2020. The request metadata identifies “2020 Q1,” but the filing is for the first quarter of 2021.
Business Context
Kroger operates supermarkets, fuel centers, pharmacies, digital commerce channels and alternative profit businesses, including Kroger Precision Marketing and Kroger Personal Finance. Management continued emphasizing fresh food, digital capabilities, cost savings and alternative profit streams. The company opened its first two Kroger Delivery facilities powered by Ocado during the quarter.
Financial Highlights
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $41.298 billion | $41.549 billion | (0.6)% |
| Sales excluding fuel | $37.308 billion | $38.857 billion | (4.0)% |
| Identical sales excluding fuel | (4.1)% | 19.0% | Two-year stacked growth of 14.9% |
| Operating profit | $805 million | $1.326 billion | (39.3)% |
| Operating margin | 1.95% | 3.19% | Down 124 basis points |
| Net earnings attributable to Kroger | $140 million | $1.212 billion | (88.4)% |
| Diluted EPS | $0.18 | $1.52 | (88.2)% |
| Adjusted net earnings | $918 million | $972 million | (5.6)% |
| Adjusted diluted EPS | $1.19 | $1.22 | (2.5)% |
| Net cash from operating activities | $2.256 billion | $4.245 billion | Down $1.989 billion |
| Capital investments excluding lease buyouts | $666 million | $755 million | Down $89 million |
Fuel sales increased 48.2%, driven by a 13.2% increase in gallons sold and a 31.0% increase in average retail fuel prices. Digital sales grew approximately 16% year over year.
GAAP gross margin was 22.64%, compared with 24.30% in the prior-year quarter. FIFO gross margin was 22.73%, compared with 24.37%; excluding fuel, FIFO gross margin declined 65 basis points. Management cited lower fuel margins, price investments, COVID-19-related personal protective equipment inventory write-downs, sales deleverage and increased shrink.
OG&A expense as a percentage of sales improved to 17.98% from 18.46%. Excluding fuel and adjusted items, the OG&A rate improved 108 basis points, reflecting lower COVID-19 costs, lower pension contributions, lower incentive costs and cost-savings initiatives.
Cash Flow, Debt and Liquidity
- Cash and temporary cash investments were $2.309 billion at May 22, 2021, compared with $1.687 billion at January 30, 2021.
- Total debt, including finance lease obligations, increased $711 million from fiscal year-end 2020 to approximately $14.1 billion, primarily because of a property transaction and higher finance lease obligations. Kroger repaid $300 million of 2.60% senior notes.
- Long-term debt excluding finance lease obligations had a carrying value of $12.723 billion, including current maturities, and an estimated fair value of $14.375 billion.
- Kroger maintained a $2.75 billion unsecured revolving credit facility, with capacity to increase it by $1 billion. No commercial paper or revolving-credit borrowings were outstanding at quarter-end; $2 million of letters of credit reduced availability.
- The company was in compliance with its financial covenants and stated that operating cash flow and available liquidity should meet anticipated needs for the next twelve months and beyond.
- Expected liquidity requirements included approximately $1.0 billion of senior notes maturing within twelve months, $311 million of deferred employer Social Security taxes due by December 31, 2021, and approximately $307 million expected to be paid in the first half of 2021 toward a National Fund commitment.
Material Changes and Unusual Items
- GAAP results were materially affected by a $449 million pretax charge, or $344 million after tax, related to withdrawal liabilities and prepaid escrow funds associated with a multi-employer pension plan restructuring. The obligation is expected to be paid in installments over seven years.
- Kroger recorded a $479 million pretax unrealized loss on its Ocado investment, compared with a $422 million pretax unrealized gain in the prior-year quarter. The Ocado investment was valued at $1.329 billion at May 22, 2021.
- Additional adjusted items included $43 million pretax for Home Chef contingent consideration and $44 million pretax of transformation costs. These items, together with the pension charge and investment loss, reduced GAAP diluted EPS by approximately $1.01.
- Adjusted FIFO operating profit was $1.375 billion, compared with $1.453 billion, while adjusted FIFO operating profit excluding fuel and adjusted items increased year over year.
- Kroger repurchased $402 million of common stock, representing 11.4 million shares at an average price of $35.19. The September 2020 repurchase authorization had $61 million remaining at quarter-end and was exhausted on June 11, 2021.
- On June 16, 2021, after quarter-end, the board approved a new $1.0 billion share repurchase program.
- During the quarter, Kroger recorded $267 million of finance lease assets and $249 million of finance lease liabilities related to its first two Ocado delivery facilities.
Guidance, Outlook and Management Commentary
- Management raised guidance for identical sales excluding fuel and adjusted diluted EPS, although the filing text provided here does not state the revised numerical guidance ranges.
- Kroger expects alternative profit growth toward the top end of its $100 million to $150 million incremental-profit target for 2021.
- Management expects more than $1 billion of incremental cost savings for the fourth consecutive year and targets 3% to 5% net earnings growth over time.
- The company seeks to maintain net debt to adjusted EBITDA between 2.30 and 2.50 to support its investment-grade debt rating.
- Management reiterated its objective of delivering sustainable total shareholder returns of 8% to 11%, supported by free cash flow, dividends and share repurchases.
Risks and Contingencies
- COVID-19 developments, including variants, changing restrictions, vaccination patterns, workforce availability, customer behavior and supply-chain disruptions, could affect sales and earnings.
- Additional risks include labor negotiations, labor-market pressure, competition, inflation or deflation in product and operating costs, fuel-cost volatility, pharmacy reimbursement changes, cyberattacks, natural disasters and execution of digital and growth initiatives.
- Kroger is self-insured for substantial workers’ compensation and certain liability risks; actual claims may differ from recorded estimates.
- Various litigation matters, including personal injury, employment, wage-and-hour, contract and regulatory claims, remain pending. Management currently considers the aggregate expected loss range immaterial, but acknowledges that outcomes could differ materially.
- The company remains contingently liable for certain assigned leases if third-party assignees fail to perform, although management considers a material obligation unlikely.
- The company is implementing a multi-year technology and ERP transformation. New accounting and indirect procurement modules went live at the beginning of the quarter; additional phases remain subject to execution and control risks.
Investor Verification Checklist
- Verify the revised full-year identical-sales and adjusted EPS guidance, which is referenced but not numerically stated in the provided filing text.
- Assess adjusted versus GAAP earnings, particularly the $449 million pension-related charge and $479 million Ocado investment loss.
- Monitor identical sales excluding fuel, FIFO gross margin, shrink, price investments and fuel profitability as pandemic comparisons normalize.
- Review debt maturity schedules, the property financing obligation, finance lease growth and the targeted net debt-to-adjusted-EBITDA range.
- Confirm cash requirements for deferred payroll taxes, pension-related obligations and National Fund payments.
- Evaluate the performance and capital requirements of the Ocado delivery facilities and Kroger’s broader digital strategy.
- Track execution of the new $1.0 billion share repurchase authorization alongside investment, debt repayment and dividend needs.