The Kroger Co. Form 10-Q Summary
Business context and reporting period
The filing covers Kroger’s first quarter ended May 23, 2020, a 16-week period, compared with the first quarter ended May 25, 2019. Although the request metadata identifies “2019 Q1,” the supplied filing is for 2020 Q1. Results were materially affected by the COVID-19 pandemic, including elevated grocery demand, increased digital activity, lower fuel demand, and significant associate and customer safety investments.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $41.549 billion | $37.251 billion | +11.5% |
| Identical sales, excluding fuel | +19.0% | +1.5% | Higher |
| Digital revenue growth | +92% | +42% | Higher |
| Operating profit | $1.326 billion | $901 million | +47.2% |
| Operating margin | 3.19% | 2.42% | +77 bps |
| Net earnings attributable to Kroger | $1.212 billion | $772 million | +57.0% |
| Diluted EPS | $1.52 | $0.95 | +60.0% |
| Adjusted diluted EPS | $1.22 | $0.72 | +69.4% |
| Net cash from operating activities | $4.245 billion | $2.268 billion | +87.3% |
- FIFO gross margin was 24.37%, compared with 22.24%; excluding fuel, the FIFO gross margin rate increased 44 basis points.
- Reported gross margin was 24.30%, compared with 22.20%. The LIFO charge increased to $31 million from $15 million.
- Adjusted FIFO operating profit was $1.453 billion, compared with $957 million.
- Cash and temporary cash investments increased to $2.726 billion from $399 million at fiscal year-end.
- Total debt, including finance lease obligations, decreased by $605 million from fiscal year-end. Debt excluding finance lease obligations was $12.603 billion at May 23, 2020.
- Kroger issued $500 million of 2.20% senior notes due in fiscal 2030 and held the proceeds in cash. It repaid a $1.0 billion revolving-credit draw and $1.15 billion of commercial paper.
- The company had no commercial paper outstanding and no revolving-credit borrowings at quarter-end. Its unsecured revolving credit facility was $2.75 billion, with potential capacity to increase by $1 billion.
- Capital investments excluding mergers, acquisitions, and leased facilities totaled $755 million, compared with $876 million.
- Kroger paid $128 million in dividends, or $0.16 per share, and repurchased $422 million of shares.
Material changes versus the prior comparable period
- Retail sales excluding fuel increased 18.5%, while supermarket fuel sales declined 38.8% because of lower gallons sold and lower fuel prices.
- Customer basket values rose significantly while transaction counts declined as customers reduced shopping trips during the pandemic.
- Operating, general and administrative expense increased to $7.671 billion from $6.314 billion, reflecting COVID-19 investments, digital-channel growth, a $236 million incremental multi-employer pension contribution, and other unusual items.
- Kroger invested more than $830 million in the quarter to reward associates and protect associates, customers, and communities, including premium pay, emergency leave, safety equipment, and enhanced cleaning.
- The company hired more than 100,000 associates in response to increased demand.
- Adjusted net earnings increased to $972 million from $586 million after excluding specified unusual items.
- Working-capital changes generated approximately $2.0 billion of operating cash flow, compared with $916 million in the prior-year quarter, aided by inventory, accounts payable, accrued wages, and tax-payment timing.
- The effective tax rate increased to 23.5% from 22.8%.
Guidance, outlook, risks, and unusual items
Kroger did not reaffirm or issue new fiscal 2020 guidance because of uncertainty surrounding the duration and effects of COVID-19. Management stated that it expected to exceed the outlook previously provided for identical sales excluding fuel, adjusted FIFO operating profit, and adjusted EPS, but could not quantify the expected upside.
- Management expects cash flows, cash on hand, commercial paper capacity, and the revolving credit facility to meet liquidity needs for the next twelve months and beyond. Approximately $1.0 billion of senior notes mature in the next twelve months.
- The company deferred a $150 million federal estimated tax payment and deferred $157 million of employer Social Security taxes during the quarter. It expects approximately $600 million of such payroll-tax payments to be deferred during 2020.
- Reported earnings included a $422 million pretax mark-to-market gain on Ocado securities, a $60 million charge for Home Chef contingent consideration, and $38 million of transformation costs.
- Reported 2019 results included gains from the sales of Turkey Hill Dairy and You Technology and a charge related to multi-employer pension withdrawal liabilities, limiting direct comparability.
- Key risks include prolonged or renewed pandemic effects, changing consumer behavior, labor availability and negotiations, competition, fuel-price and fuel-margin volatility, commodity costs, economic deterioration, pension obligations, cyber or data-security incidents, refinancing and capital-market access, litigation, and execution of the Restock Kroger strategy.
- Kroger reported various antitrust, wage-and-hour, civil-rights, and product-liability claims. Management believes probable and estimable losses have been provided for and that aggregate exposure is not currently material, but acknowledges that outcomes could differ materially.
Most important facts for investors to verify
- Whether pandemic-driven sales, basket growth, and digital demand persist after customer shopping patterns normalize.
- The sustainability of margin expansion after COVID-19 safety costs, premium pay, pension contributions, and other temporary items subside.
- The valuation volatility and future earnings impact of Kroger’s Ocado securities.
- Future cash taxes, deferred payroll-tax payments, debt maturities, and the company’s ability to maintain its targeted net debt-to-adjusted EBITDA range of 2.30 to 2.50.
- Whether share repurchases and dividend growth remain appropriate amid pandemic uncertainty and changing working-capital benefits.
- The eventual financial effects of pending litigation, multi-employer pension obligations, labor developments, and other contingencies.