The Kroger Co. 10-Q Summary
Reporting period: The filing covers the 12-week third quarter and 40 weeks ended November 4, 2023, compared with November 5, 2022. Although the request metadata identifies “2022 Q3,” the filing is Kroger’s 2023 third-quarter Form 10-Q, filed December 8, 2023.
Business Context and Key Metrics
Kroger operates an omnichannel food retail business, including supermarkets, fuel, pharmacy, digital fulfillment, data analytics and media activities. Management emphasized value investments, personalization, digital growth, cost savings and expansion of alternative profit businesses.
| Metric | Q3 2023 | Q3 2022 | First 3 Quarters 2023 | First 3 Quarters 2022 |
|---|---|---|---|---|
| Sales | $33,957 million | $34,198 million | $112,975 million | $113,436 million |
| Net earnings attributable to Kroger | $646 million | $398 million | $1,428 million | $1,793 million |
| Diluted EPS | $0.88 | $0.55 | $1.95 | $2.44 |
| Adjusted diluted EPS | $0.95 | $0.88 | $3.42 | $3.24 |
| Operating profit | $912 million | $841 million | $1,902 million | $3,300 million |
| Adjusted FIFO operating profit | $1,022 million | $1,094 million | $3,680 million | $3,805 million |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $4,868 million | $3,338 million |
Revenue, Profitability and Margins
- Third-quarter sales declined 0.7%; sales excluding fuel declined 0.5%. First three-quarter sales declined 0.4%, while sales excluding fuel increased 1.6%.
- Identical sales excluding fuel declined 0.6% in the quarter but increased 1.5% year to date. Excluding the impact of the terminated Express Scripts agreement, identical sales would have increased 1.0% in the quarter and 3.1% year to date.
- Digital sales increased 11% in the quarter and 13% year to date, led by Pickup and Delivery solutions.
- Gross margin rates were 22.03% in the quarter and 22.08% year to date, compared with 21.37% and 21.34%, respectively, in the prior-year periods.
- FIFO gross margin excluding fuel increased 3 basis points in the quarter and 20 basis points year to date.
- Operating margin was 2.7% in the quarter versus 2.5% in the prior-year quarter. Year-to-date operating margin was 1.7% versus 2.9%, primarily because of opioid settlement charges and higher operating expenses.
- Adjusted net earnings increased 8.6% in the quarter and 5.1% year to date. Adjusted diluted EPS increased 8.0% and 5.6%, respectively.
Cash Flow, Debt and Liquidity
- Year-to-date operating cash flow was $4,868 million, up 46% from $3,338 million.
- Investing cash outflows were $2,745 million, including $2,907 million of property and equipment payments. Capital investments excluding specified transactions were approximately $2.5 billion year to date.
- Financing cash outflows were $1,413 million, including $755 million of debt payments and $586 million of dividends.
- Cash and temporary cash investments increased to $1,725 million from $1,015 million at fiscal year-end 2022.
- Total debt, including finance lease obligations, declined $615 million from fiscal year-end 2022 to approximately $12.8 billion. The company repaid $600 million of 3.85% senior notes.
- Debt excluding finance leases consisted primarily of $10,695 million of debt, including $552 million classified as current. The reported fair value of total debt was $9,548 million versus a $10,695 million carrying value.
- Kroger had no commercial paper borrowings and no revolver borrowings at November 4, 2023. Its unsecured revolving credit facility totaled $2.75 billion, with capacity to increase by $1.25 billion, subject to conditions.
- The company stated that it was in compliance with its financial covenant and expected existing cash, operating cash flow and available financing sources to satisfy liquidity needs.
Material Changes Versus the Prior Comparable Period
- Quarterly GAAP earnings improved substantially because the prior-year quarter included a $207 million investment loss, while the current quarter included a $26 million investment gain. The current quarter also benefited from a lower LIFO charge.
- Year-to-date GAAP earnings and operating profit declined because Kroger recorded approximately $1.5 billion of opioid settlement charges, compared with $85 million in the prior-year period.
- Year-to-date adjusted earnings increased despite lower adjusted FIFO operating profit, supported by lower LIFO charges, reduced interest expense and other factors.
- The LIFO charge declined to $29 million from $152 million in the quarter and to $131 million from $392 million year to date.
- OG&A expense increased as a percentage of sales due to associate investments, strategic investments, healthcare costs and the Express Scripts pharmacy impact, partly offset by cost savings.
- Share repurchases were $54 million year to date versus $985 million in the prior-year period. The broader $1.0 billion repurchase authorization remained unused.
Guidance, Outlook, Risks and Unusual Items
- Management expects the near-term operating environment to remain challenging because of disinflation, competitive pricing, labor pressures, interest rates, economic uncertainty and changing consumer behavior.
- Kroger reaffirmed its long-term value creation model, including a target net total debt to adjusted EBITDA ratio of 2.30 to 2.50, continued dividend growth subject to board approval and a long-term total shareholder return target of 8% to 11%. These targets exclude the proposed Albertsons merger.
- The proposed Albertsons merger remained subject to regulatory clearance and other closing conditions. Kroger and Albertsons agreed to sell 413 stores and other assets to C&S Wholesale Grocers for approximately $1.9 billion, with potential for up to 237 additional stores to be purchased by C&S.
- The merger was expected to close in early 2024, but regulatory approval remained uncertain. The agreement included potential termination rights and a $600 million termination fee under specified circumstances.
- Kroger recognized $1.4 billion of nationwide opioid settlement charges in the second quarter and $62 million related to a West Virginia settlement in the first quarter. Estimated settlement liabilities totaled $1,413 million at November 4, 2023, and actual payments and final settlement terms could differ materially.
- Other significant risks include litigation, labor negotiations and work stoppages, inflation or deflation, fuel-margin volatility, supply constraints, pharmacy reimbursement changes, cyberattacks, adverse weather, regulatory actions and execution of the merger and divestiture plans.
Important Facts for Investors to Verify
- Confirm the status and final terms of the Albertsons merger, regulatory proceedings, C&S divestitures and related financing commitments.
- Reconcile GAAP results with adjusted results, particularly the effects of opioid settlement charges, merger costs, investment gains and LIFO charges.
- Monitor the timing, amount and enforceability of opioid settlement payments and the potential for additional claims or revised accruals.
- Assess whether digital sales growth and identical-sales trends offset pharmacy, fuel and broader disinflationary pressures.
- Review debt maturities, interest-rate exposure, bridge and term-loan commitments, covenant compliance and post-merger leverage.
- Evaluate capital spending, cash generation, dividend growth and the timing of any resumption of discretionary share repurchases.