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EXCEL - IDEA: XBRL DOCUMENT - KROGER COFinancial_Report.xls

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended August 16, 2014

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to           

 

Commission file number 1-303

 


 

(Exact name of registrant as specified in its charter)

 


 

Ohio

 

31-0345740

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1014 Vine Street, Cincinnati, OH 45202

(Address of principal executive offices)

(Zip Code)

 

(513) 762-4000

(Registrant’s telephone number, including area code)

 

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x.

 

There were 491,090,776 shares of Common Stock ($1 par value) outstanding as of September 19, 2014.

 

 

 



 

PART I — FINANCIAL INFORMATION

 

Item 1.         Financial Statements.

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

 

 

 

Second Quarter Ended

 

Two Quarters Ended

 

 

 

August 16,
2014

 

August 17,
2013

 

August 16,
2014

 

August 17,
2013

 

Sales

 

$

25,310

 

$

22,686

 

$

58,271

 

$

52,683

 

Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below

 

20,136

 

18,059

 

46,201

 

41,876

 

Operating, general and administrative

 

3,920

 

3,506

 

9,088

 

8,099

 

Rent

 

166

 

139

 

383

 

328

 

Depreciation

 

444

 

387

 

1,025

 

906

 

Operating profit

 

644

 

595

 

1,574

 

1,474

 

Interest expense

 

112

 

99

 

259

 

228

 

Earnings before income tax expense

 

532

 

496

 

1,315

 

1,246

 

Income tax expense

 

182

 

176

 

456

 

442

 

Net earnings including noncontrolling interests

 

350

 

320

 

859

 

804

 

Net earnings attributable to noncontrolling interests

 

3

 

3

 

11

 

6

 

Net earnings attributable to The Kroger Co.

 

$

347

 

$

317

 

$

848

 

$

798

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per basic common share

 

$

0.71

 

$

0.61

 

$

1.70

 

$

1.54

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares used in basic calculation 

 

485

 

515

 

494

 

515

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per diluted common share

 

$

0.70

 

$

0.60

 

$

1.68

 

$

1.52

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares used in diluted calculation 

 

491

 

521

 

500

 

520

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.165

 

$

0.150

 

$

0.330

 

$

0.300

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

2



 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions and unaudited)

 

 

 

Second Quarter Ended

 

Two Quarters Ended

 

 

 

August 16,
2014

 

August 17,
2013

 

August 16,
2014

 

August 17,
2013

 

Net earnings including noncontrolling interests

 

$

350

 

$

320

 

$

859

 

$

804

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

Unrealized gain on available for sale securities, net of income tax(1)

 

3

 

1

 

2

 

4

 

Amortization of amounts included in net periodic pension expense, net of income tax(2)

 

5

 

14

 

13

 

33

 

Unrealized gains and losses on cash flow hedging activities, net of income tax(3)

 

 

10

 

 

(9

)

Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

8

 

25

 

15

 

29

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

358

 

345

 

874

 

833

 

Comprehensive income attributable to noncontrolling interests

 

3

 

3

 

11

 

6

 

Comprehensive income attributable to The Kroger Co.

 

$

355

 

$

342

 

$

863

 

$

827

 

 


(1)         Amount is net of tax of $1 for the second quarter of 2014.  Amount is net of tax of $2 for the first two quarters of 2013.

(2)         Amount is net of tax of $4 for the second quarter of 2014 and $9 for the second quarter of 2013.  Amount is net of tax of $8 for the first two quarters of 2014 and $20 for the first two quarters of 2013.

(3)         Amount is net of tax of $7 for the second quarter of 2013.  Amount is net of tax of $(5) for the first two quarters of 2013.

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

3



 

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)

(unaudited)

 

 

 

August 16,

 

February 1,

 

 

 

2014

 

2014

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and temporary cash investments

 

$

248

 

$

401

 

Store deposits in-transit

 

956

 

958

 

Receivables

 

1,174

 

1,116

 

FIFO inventory

 

6,646

 

6,801

 

LIFO reserve

 

(1,151

)

(1,150

)

Prepaid and other current assets

 

422

 

704

 

Total current assets

 

8,295

 

8,830

 

 

 

 

 

 

 

Property, plant and equipment, net

 

17,263

 

16,893

 

Intangibles, net

 

695

 

702

 

Goodwill

 

2,135

 

2,135

 

Other assets

 

691

 

721

 

 

 

 

 

 

 

Total Assets

 

$

29,079

 

$

29,281

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt including obligations under capital leases and financing obligations

 

$

1,494

 

$

1,657

 

Trade accounts payable

 

5,076

 

4,881

 

Accrued salaries and wages

 

1,128

 

1,150

 

Deferred income taxes

 

248

 

248

 

Other current liabilities

 

2,894

 

2,769

 

Total current liabilities

 

10,840

 

10,705

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

 

 

 

 

Face-value of long-term debt including obligations under capital leases and financing obligations

 

9,707

 

9,654

 

Adjustment to reflect fair-value interest rate hedges

 

(1

)

(1

)

Long-term debt including obligations under capital leases and financing obligations

 

9,706

 

9,653

 

 

 

 

 

 

 

Deferred income taxes

 

1,280

 

1,381

 

Pension and postretirement benefit obligations

 

899

 

901

 

Other long-term liabilities

 

1,332

 

1,246

 

 

 

 

 

 

 

Total Liabilities

 

24,057

 

23,886

 

 

 

 

 

 

 

Commitments and contingencies (see Note 9)

 

 

 

 

 

 

 

 

 

 

 

SHAREOWNERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Preferred shares, $100 per share, 5 shares authorized and unissued

 

¾

 

¾

 

Common shares, $1 par per share, 1,000 shares authorized; 959 shares issued in 2014 and 2013

 

959

 

959

 

Additional paid-in capital

 

3,605

 

3,549

 

Accumulated other comprehensive loss

 

(449

)

(464

)

Accumulated earnings

 

11,667

 

10,981

 

Common shares in treasury, at cost, 473 shares in 2014 and 451 shares in 2013

 

(10,785

)

(9,641

)

 

 

 

 

 

 

Total Shareowners’ Equity — The Kroger Co.

 

4,997

 

5,384

 

Noncontrolling interests

 

25

 

11

 

 

 

 

 

 

 

Total Equity

 

5,022

 

5,395

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

29,079

 

$

29,281

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

4



 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions and unaudited)

 

 

 

Two Quarters Ended

 

 

 

August 16,
2014

 

August 17,
2013

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net earnings including noncontrolling interests

 

$

859

 

$

804

 

Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

1,025

 

906

 

LIFO charge

 

54

 

30

 

Stock-based employee compensation

 

76

 

47

 

Expense for Company-sponsored pension plans

 

21

 

40

 

Deferred income taxes

 

(103

)

(16

)

Other

 

53

 

40

 

Changes in operating assets and liabilities net of effects from acquisitions of businesses:

 

 

 

 

 

Store deposits in-transit

 

2

 

105

 

Receivables

 

(47

)

107

 

Inventories

 

102

 

162

 

Prepaid expenses

 

274

 

246

 

Trade accounts payable

 

354

 

180

 

Accrued expenses

 

60

 

1

 

Income taxes receivable and payable

 

(47

)

82

 

Other

 

67

 

(121

)

 

 

 

 

 

 

Net cash provided by operating activities

 

2,750

 

2,613

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Payments for property and equipment, including payments for lease buyouts

 

(1,347

)

(1,110

)

Proceeds from sale of assets

 

18

 

7

 

Other

 

16

 

(34

)

 

 

 

 

 

 

Net cash used by investing activities

 

(1,313

)

(1,137

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

48

 

1,011

 

Dividends paid

 

(166

)

(155

)

Payments on long-term debt

 

(26

)

(419

)

Net payments on commercial paper

 

(160

)

(1,595

)

Excess tax benefits on stock-based awards

 

32

 

20

 

Proceeds from issuance of capital stock

 

66

 

155

 

Treasury stock purchases

 

(1,221

)

(236

)

Net decrease in book overdrafts

 

(158

)

(40

)

Other

 

(5

)

(15

)

 

 

 

 

 

 

Net cash used by financing activities

 

(1,590

)

(1,274

)

 

 

 

 

 

 

Net increase (decrease) in cash and temporary cash investments

 

(153

)

202

 

 

 

 

 

 

 

Cash and temporary cash investments:

 

 

 

 

 

Beginning of year

 

401

 

238

 

End of quarter

 

$

248

 

$

440

 

 

 

 

 

 

 

Reconciliation of capital investments:

 

 

 

 

 

Payments for property and equipment, including payments for lease buyouts

 

$

(1,347

)

$

(1,110

)

Payments for lease buyouts

 

28

 

19

 

Changes in construction-in-progress payables

 

(63

)

(56

)

Total capital investments, excluding lease buyouts

 

$

(1,382

)

$

(1,147

)

 

 

 

 

 

 

Disclosure of cash flow information:

 

 

 

 

 

Cash paid during the year for interest

 

$

282

 

$

225

 

Cash paid during the year for income taxes

 

$

582

 

$

349

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

5



 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(in millions, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Treasury Stock

 

Comprehensive

 

Accumulated

 

Noncontrolling

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Shares

 

Amount

 

Gain (Loss)

 

Earnings

 

Interest

 

Total

 

Balances at February 2, 2013

 

959

 

$

959

 

$

3,451

 

445

 

$

(9,237

)

$

(753

)

$

9,787

 

$

7

 

$

4,214

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

 

 

(7

)

155

 

 

 

 

155

 

Restricted stock issued

 

 

 

(57

)

(2

)

25

 

 

 

 

(32

)

Treasury stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchases, at cost

 

 

 

 

1

 

(21

)

 

 

 

(21

)

Stock options exchanged

 

 

 

 

6

 

(215

)

 

 

 

(215

)

Share-based employee compensation

 

 

 

47

 

 

 

 

 

 

47

 

Other comprehensive gain net of income tax of $17

 

 

 

 

 

 

29

 

 

 

29

 

Other

 

 

 

41

 

 

(16

)

 

 

(3

)

22

 

Cash dividends declared ($0.30 per common share)

 

 

 

 

 

 

 

(155

)

 

(155

)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

798

 

6

 

804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at August 17, 2013

 

959

 

$

959

 

$

3,482

 

443

 

$

(9,309

)

$

(724

)

$

10,430

 

$

10

 

$

4,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at February 1, 2014

 

959

 

$

959

 

$

3,549

 

451

 

$

(9,641

)

$

(464

)

$

10,981

 

$

11

 

$

5,395

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

 

 

(3

)

66

 

 

 

 

66

 

Restricted stock issued

 

 

 

(83

)

(2

)

37

 

 

 

 

(46

)

Treasury stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchases, at cost

 

 

 

 

25

 

(1,129

)

 

 

 

(1,129

)

Stock options exchanged

 

 

 

 

2

 

(92

)

 

 

 

(92

)

Share-based employee compensation

 

 

 

76

 

 

 

 

 

 

76

 

Other comprehensive gain net of income tax of $8

 

 

 

 

 

 

15

 

 

 

15

 

Other

 

 

 

63

 

 

(26

)

 

 

3

 

40

 

Cash dividends declared ($0.33 per common share)

 

 

 

 

 

 

 

(162

)

 

(162

)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

848

 

11

 

859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at August 16, 2014

 

959

 

$

959

 

$

3,605

 

473

 

$

(10,785

)

$

(449

)

$

11,667

 

$

25

 

$

5,022

 

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

6



 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

All amounts in the Notes to Consolidated Financial Statements are in millions except per share amounts.

 

Certain prior-year amounts have been reclassified to conform to current-year presentation.

 

1.              ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries, and the Variable Interest Entities (“VIEs”) in which the Company is the primary beneficiary.  The February 1, 2014 Consolidated Balance Sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”).  Significant intercompany transactions and balances have been eliminated.  References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

 

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all normal, recurring adjustments that are necessary for a fair presentation of results of operations for such periods but should not be considered as indicative of results for a full year.  The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations.  Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Annual Report on Form 10-K of The Kroger Co. for the fiscal year ended February 1, 2014.

 

The unaudited information in the Consolidated Financial Statements for the second quarter and the two quarters ended August 16, 2014 and August 17, 2013, includes the results of operations of the Company for the 12 and 28-week periods then ended.

 

Certain revenue transactions previously reported in sales and merchandise costs in the Consolidated Statements of Operations are now reported net within sales.  Also, certain expense transactions previously reported in operating, general and administrative in the Consolidated Statements of Operations are now reported within merchandise costs.  Prior quarter amounts have been revised or reclassified to conform to the current year presentation.  These amounts were not material to the prior periods.

 

2.              MERGER

 

On January 28, 2014, the Company closed its merger with Harris Teeter Supermarkets, Inc. (“Harris Teeter”) and there have not been any changes in the Company’s preliminary purchase price allocation in the first two quarters of 2014.

 

As of August 16, 2014, the fair value step up adjustment to Harris Teeter inventory as of the merger date is recorded in the LIFO reserve.  This resulted in a $53 decrease in LIFO reserve.

 

Pro forma results of operations, assuming the transaction had taken place at the beginning of 2012, are included in the following table.  The pro forma information includes historical results of operations of Harris Teeter and adjustments for interest expense that would have been incurred due to financing the acquisition, depreciation and amortization of the assets acquired and excludes the pre-acquisition transaction related expenses incurred by Harris Teeter and the Company.  The pro forma information does not include efficiencies, cost reductions, synergies and investments in lower prices for our customers expected to result from the merger.  The unaudited pro forma financial information is not necessarily indicative of the results that actually would have occurred had the merger been completed at the beginning of 2012.

 

 

 

Second Quarter Ended
August 17, 2013

 

Two Quarters Ended
August 17, 2013

 

Sales

 

$

23,787

 

$

55,129

 

Net earnings including noncontrolling interests

 

347

 

865

 

Net earnings attributable to noncontrolling interests

 

3

 

6

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co.

 

$

344

 

$

859

 

 

7



 

3.  STOCK OPTION PLANS

 

The Company recognized total share-based compensation of $36 and $23 in the second quarters ended August 16, 2014 and August 17, 2013, respectively.  The Company recognized total share-based compensation of $76 and $47 in the first two quarters of 2014 and 2013, respectively.  These costs were recognized as operating, general and administrative costs in the Company’s Consolidated Statements of Operations.

 

The Company grants options for common shares (“stock options”) to employees, as well as to its non-employee directors, under various plans at an option price equal to the fair market value of the shares at the date of grant.  In addition to stock options, the Company awards restricted stock to employees and its non-employee directors under various plans.  Equity awards may be made once each quarter on a predetermined date.  It has been the Company’s practice to make a general annual grant to employees, which occurred in the second quarter of 2014.  Special grants may be made in the other three quarters.  Grants to non-employee directors occur on the same date that the general annual grant to employees occurs.

 

Stock options granted in the first two quarters of 2014 expire 10 years from the date of grant and vest between one year and five years from the date of grant. Restricted stock awards granted in the first two quarters of 2014 have restrictions that lapse between one year and five years from the date of the awards.  All grants and awards become immediately exercisable, in the case of options, and restrictions lapse, in the case of restricted stock, upon certain changes in control of the Company.

 

Changes in equity awards outstanding under the plans are summarized below.

 

Stock Options

 

 

 

Shares subject
to option

 

Weighted-average
exercise price

 

Outstanding, February 1, 2014

 

21.7

 

$

25.66

 

Granted

 

4.1

 

$

49.21

 

Exercised

 

(3.2

)

$

22.75

 

Canceled or Expired

 

(0.2

)

$

28.70

 

 

 

 

 

 

 

Outstanding, August 16, 2014

 

22.4

 

$

30.40

 

 

Restricted Stock

 

 

 

Restricted shares
outstanding

 

Weighted-average
grant-date fair value

 

Outstanding, February 1, 2014 

 

4.8

 

$

32.31

 

Granted 

 

2.8

 

$

48.99

 

Vested 

 

(2.3

)

$

32.84

 

Forfeited

 

(0.1

)

$

35.35

 

 

 

 

 

 

 

Outstanding, August 16, 2014 

 

5.2

 

$

41.14

 

 

The weighted-average grant date fair value of stock options granted during the first two quarters of 2014 and 2013, was $11.96 and $8.97, respectively.  The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below.  The Black-Scholes model utilizes accounting judgment and financial estimates, including the term option holders are expected to retain their stock options before exercising them, the volatility of the Company’s share price over that expected term, the dividend yield over the term, and the number of awards expected to be forfeited before they vest.  Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations.  The increase in the fair value of the stock options granted during the first two quarters of 2014, compared to the first two quarters of 2013, resulted primarily from an increase in the Company’s share price, which decreased the expected dividend yield, and an increase in the weighted average risk-free interest rate.

 

8



 

The following table reflects the weighted-average assumptions used for grants awarded to option holders:

 

 

 

2014

 

2013

 

Risk-free interest rate 

 

2.06%

 

1.87%

 

Expected dividend yield 

 

1.51%

 

1.82%

 

Expected volatility 

 

25.29%

 

26.34%

 

Expected term 

 

6.6 Years

 

6.8 Years

 

 

4.              DEBT OBLIGATIONS

 

Long-term debt consists of:

 

 

 

August 16,

 

February 1,

 

 

 

2014

 

2014

 

0.76% to 8.00% Senior Notes due through 2043

 

$

9,083

 

$

9,083

 

5.00% to 12.75% Mortgages due in varying amounts through 2034

 

61

 

64

 

0.27% Commercial paper borrowings due through September 2014

 

1,090

 

1,250

 

Other

 

427

 

383

 

 

 

 

 

 

 

Total debt, excluding capital leases and financing obligations

 

10,661

 

10,780

 

 

 

 

 

 

 

Less current portion

 

(1,451

)

(1,616

)

 

 

 

 

 

 

Total long-term debt, excluding capital leases and financing obligations

 

$

9,210

 

$

9,164

 

 

On June 30, 2014, the Company amended, extended and restated its $2,000 unsecured revolving credit facility.  The Company entered into the amended credit facility to amend, extend and restate the Company’s existing credit facility that would have terminated on January 25, 2017.  The amended credit facility provides for a $2,750 unsecured revolving credit facility (the “Credit Agreement”), with a termination date of June 30, 2019, unless extended as permitted under the Credit Agreement.  The Company has the ability to increase the size of the Credit Agreement by up to an additional $750, subject to certain conditions.

 

Borrowings under the Credit Agreement bear interest at the Company’s option, at either (i) LIBOR plus a market rate spread, based on the Company’s Leverage Ratio or (ii) the base rate, defined as the highest of (a) the Federal Funds Rate plus 0.5%, (b) the Bank of America prime rate, and (c) one-month LIBOR plus 1.0%, plus a market rate spread based on the Company’s Leverage Ratio.  The Company will also pay a Commitment Fee based on the Leverage Ratio and Letter of Credit fees equal to a market rate spread based on the Company’s Leverage Ratio.  The Credit Agreement contains covenants, which, among other things, require the maintenance of a Leverage Ratio of not greater than 3.50:1.00 and a Fixed Charge Coverage Ratio of not less than 1.70:1.00.  The Company may repay the Credit Agreement in whole or in part at any time without premium or penalty.  The Credit Agreement is not guaranteed by the Company’s subsidiaries.

 

5.              BENEFIT PLANS

 

The following table provides the components of net periodic benefit cost for the Company-sponsored defined benefit pension plans and other post-retirement benefit plans for the second quarters of 2014 and 2013.

 

 

 

Second Quarter Ended

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

August 16,
2014

 

August 17,
2013

 

August 16,
2014

 

August 17,
2013

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

10

 

$

8

 

$

2

 

$

4

 

Interest cost

 

42

 

35

 

3

 

4

 

Expected return on plan assets

 

(56

)

(52

)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

Prior service cost

 

 

 

(2

)

(1

)

Actuarial loss

 

12

 

24

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

8

 

$

15

 

$

2

 

$

7

 

 

9



 

The following table provides the components of net periodic benefit cost for the Company-sponsored defined benefit pension plans and other post-retirement benefit plans for the first two quarters of 2014 and 2013.

 

 

 

Two Quarters Ended

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

August 16,
2014

 

August 17,
2013

 

August 16,
2014

 

August 17,
2013

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

24

 

$

23

 

$

6

 

$

9

 

Interest cost

 

98

 

83

 

7

 

9

 

Expected return on plan assets

 

(130

)

(121

)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

Prior service cost

 

 

 

(4

)

(2

)

Actuarial loss

 

28

 

55

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

20

 

$

40

 

$

6

 

$

16

 

 

The Company is not required and does not expect to make any contributions to the Company-sponsored defined benefit pension plans in 2014.

 

The Company contributed $98 and $80 to employee 401(k) retirement savings accounts in the first two quarters of 2014 and 2013, respectively.

 

The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded.

 

During the first quarter of 2014, the Company incurred a charge of $56 (after-tax) due to commitments and withdrawal liabilities arising from the restructuring of certain multi-employer pension plan obligations.

 

10



 

6.             EARNINGS PER COMMON SHARE

 

Net earnings attributable to The Kroger Co. per basic common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding.  Net earnings attributable to The Kroger Co. per diluted common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding, after giving effect to dilutive stock options.  The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:

 

 

 

Second Quarter Ended

 

Second Quarter Ended

 

 

 

August 16, 2014

 

August 17, 2013

 

 

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net earnings attributable to The Kroger Co. per basic common share 

 

$

343

 

485

 

$

0.71

 

$

315

 

515

 

$

0.61

 

Dilutive effect of stock options

 

 

 

6

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per diluted common share 

 

$

343

 

491

 

$

0.70

 

$

315

 

521

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Two Quarters Ended

 

Two Quarters Ended

 

 

 

August 16, 2014

 

August 17, 2013

 

 

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net earnings attributable to The Kroger Co. per basic common share 

 

$

840

 

494

 

$

1.70

 

$

791

 

515

 

$

1.54

 

Dilutive effect of stock options

 

 

 

6

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per diluted common share 

 

$

840

 

500

 

$

1.68

 

$

791

 

520

 

$

1.52

 

 

The Company had combined undistributed and distributed earnings to participating securities totaling $4 in the second quarter of 2014 and $2 in the second quarter of 2013.  For the first two quarters of 2014 and 2013, the Company had combined undistributed and distributed earnings to participating securities of $8 and $7, respectively.

 

The Company had options outstanding for approximately 2 shares during the second quarters of 2014 and 2013 that were excluded from the computations of earnings per diluted common share because their inclusion would have had an anti-dilutive effect on earnings per share.  The Company had options outstanding for approximately 2 shares in the first two quarters of 2014 and 1 shares in the first two quarters of 2013 that were excluded from the computations of earnings per diluted common share because their inclusion would have had an anti-dilutive effect on earnings per share.

 

7.              RECENTLY ADOPTED ACCOUNTING STANDARDS

 

In July 2013, the Financial Accounting Standards Board (“FASB”) amended Accounting Standards Codification (“ASC”) 740, “Income Taxes.” The amendment provides guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. This amendment became effective for the Company beginning February 2, 2014, and was adopted prospectively in accordance with the standard. The adoption of this amendment did not have an effect on net income and did not have a significant effect on the Company’s Consolidated Balance Sheet.

 

11



 

8.              RECENTLY ISSUED ACCOUNTING STANDARDS

 

In May 2014, FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company in the first quarter of its fiscal year ending January 27, 2018. Early adoption is not permitted.  The Company is currently in the process of evaluating the effect of adoption of this ASU on the Company’s Consolidated Financial Statements.

 

9.              COMMITMENTS AND CONTINGENCIES

 

The Company continuously evaluates contingencies based upon the best available evidence.

 

The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable.  To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.

 

Litigation — Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, are pending against the Company.  Some of these suits purport or have been determined to be class actions and/or seek substantial damages.  Any damages that may be awarded in antitrust cases will be automatically trebled.  Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company believes that any resulting liability will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

 

The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and where an adverse outcome is probable.  Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties.  Management currently believes that the aggregate range of loss for the Company’s exposure is not material to the Company.  It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

 

12



 

10.       FAIR VALUE MEASUREMENTS

 

GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.  The three levels of the fair value hierarchy defined in the standards are as follows:

 

Level 1 — Quoted prices are available in active markets for identical assets or liabilities;

 

Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;

 

Level 3 — Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

For items carried at (or adjusted to) fair value in the Consolidated Financial Statements, the following tables summarize the fair value of these instruments at August 16, 2014 and February 1, 2014:

 

August 16, 2014 Fair Value Measurements Using

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)

 

Significant Other
Observable Inputs

(Level 2)

 

Significant
Unobservable
Inputs

(Level 3)

 

Total

 

Trading Securities

 

$

46

 

$

 

$

 

$

46

 

Available-for-Sale Securities

 

31

 

 

 

31

 

Warrants

 

 

19

 

 

19

 

Long-Lived Assets

 

 

 

10

 

10

 

Interest Rate Hedges

 

 

(2

)

 

(2

)

Total

 

$

77

 

$

17

 

$

10

 

$

104

 

 

The table above includes Harris Teeter assets at fair value as of August 16, 2014.

 

February 1, 2014 Fair Value Measurements Using

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)

 

Significant Other
Observable Inputs

(Level 2)

 

Significant
Unobservable
Inputs

(Level 3)

 

Total

 

Available-for-Sale Securities

 

$

36

 

$

 

$

 

$

36

 

Warrants

 

 

16

 

 

16

 

Long-Lived Assets

 

 

 

29

 

29

 

Interest Rate Hedges

 

 

(2

)

 

(2

)

Total

 

$

36

 

$

14

 

$

29

 

$

79

 

 

In the first two quarters of 2014, unrealized gains on the Level 1 available-for-sale securities totaled $2.

 

The Company values warrants using the Black-Scholes option-pricing model.  The Black-Scholes option-pricing model is classified as a Level 2 input.

 

The Company values interest rate hedges using observable forward yield curves.  These forward yield curves are classified as Level 2 inputs.

 

13



 

Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of goodwill, other intangible assets, and long-lived assets, and in the valuation of store lease exit costs.  The Company reviews goodwill and other intangible assets for impairment annually, during the fourth quarter of each fiscal year, and as circumstances indicate the possibility of impairment.  See Note 3 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended February 1, 2014 for further discussion related to the Company’s carrying value of goodwill.  Long-lived assets and store lease exit costs were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy.  See Note 1 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended February 1, 2014 for further discussion of the Company’s policies regarding the valuation of long-lived assets and store lease exit costs.  For the first two quarters of 2014, long-lived assets with a carrying amount of $27 were written down to their fair value of $10 resulting in an impairment charge of $17.  For the first two quarters of 2013, long-lived assets with a carrying amount of $35 were written down to their fair value of $10 resulting in an impairment charge of $25.  In fiscal year 2013, long-lived assets with a carrying amount of $68 were written down to their fair value of $29, resulting in an impairment charge of $39.

 

Fair Value of Other Financial Instruments

 

Current and Long-term Debt

 

The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence.  If quoted market prices were not available, the fair value was based on the net present value of the future cash flow using the forward interest rate yield curve in effect at August 16, 2014 and February 1, 2014, which is a Level 2 measurement technique.  At August 16, 2014, the fair value of total debt was $11,667 compared to a carrying value of $10,661.  At February 1, 2014, the fair value of total debt was $11,547 compared to a carrying value of $10,780.

 

Cash and Temporary Cash Investments, Store Deposits In-Transit, Receivables, Prepaid and Other Current Assets, Trade Accounts Payable, Accrued Salaries and Wages and Other Current Liabilities

 

The carrying amounts of these items approximated fair value.

 

Other Assets

 

The fair values of these investments were estimated based on quoted market prices for those or similar investments, or estimated cash flows, if appropriate.  At August 16, 2014 and February 1, 2014, the carrying and fair value of long-term investments for which fair value is determinable was $112 and $51, respectively.  The increase in fair value of long-term investments for which fair value is determinable is mainly due to the Company’s merger with Harris Teeter.  At August 16, 2014 and February 1, 2014, the carrying value of notes receivable for which fair value is determinable was $99 and $87, respectively.

 

14



 

11.  OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table represents the changes in AOCI by component for the first two quarters of 2013 and 2014:

 

 

 

Cash Flow
Hedging
Activities(1)

 

Available for sale
Securities(1)

 

Pension and
Postretirement
Defined Benefit
Plans(1)

 

Total(1)

 

Balance at February 2, 2013

 

$

(14

)

$

7

 

$

(746

)

$

(753

)

OCI before reclassifications(2)

 

(9

)

4

 

 

(5

)

Amounts reclassified out of AOCI

 

1

 

 

33

 

34

 

Net current-period OCI

 

(8

)

4

 

33

 

29

 

Balance at August 17, 2013

 

$

(22

)

$

11

 

$

(713

)

$

(724

)

 

 

 

 

 

 

 

 

 

 

Balance at February 1, 2014

 

$

(25

)

$

12

 

$

(451

)

$

(464

)

OCI before reclassifications

 

 

2

 

 

2

 

Amounts reclassified out of AOCI

 

 

 

13

 

13

 

Net current-period OCI

 

 

2

 

13

 

15

 

Balance at August 16, 2014

 

$

(25

)

$

14

 

$

(438

)

$

(449

)

 


(1) All amounts are net of tax.

(2) Net of tax of $(5) and $2 for cash flow hedging activities and available for sale securities, respectively, for the first two quarters of 2013.

 

The following table represents the items reclassified out of AOCI and the related tax effects for the second quarter and first two quarters of 2014 and 2013:

 

 

 

Second Quarter Ended

 

Two Quarters Ended

 

 

 

August 16,
2014

 

August 17,
2013

 

August 16,
2014

 

August 17,
2013

 

Gains on cash flow hedging activities

 

 

 

 

 

 

 

 

 

Amortization of unrealized gains and losses on cash flow hedging activities(1)

 

$

 

$

 

$

 

$

1

 

Tax (expense) / benefit

 

 

 

 

 

Net of tax

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement defined benefit plan items

 

 

 

 

 

 

 

 

 

Amortization of amounts included in net periodic pension expense(2)

 

9

 

23

 

21

 

53

 

Tax expense

 

(4

)

(9

)

(8

)

(20

)

Net of tax

 

5

 

14

 

13

 

33

 

Total reclassifications, net of tax

 

$

5

 

$

14

 

$

13

 

$

34

 

 


(1) Reclassified from AOCI into interest expense.

(2) Reclassified from AOCI into merchandise costs and operating, general and administrative expense.  These components are included in the computation of net periodic pension expense (see Note 5 to the Company’s Consolidated Financial Statements for additional details).

 

15



 

12.  INCOME TAXES

 

The effective income tax rate was 34.2% in the second quarter of 2014, compared to 35.5% for the second quarter of 2013.  The effective income tax rate was 34.7% for the first two quarters of 2014, compared to 35.5% for the first two quarters of 2013.  The effective income tax rate for the second quarter of 2014 and the first two quarters of 2014 differed from the federal statutory rate primarily due to the utilization of tax credits and deductions, partially offset by the effect of state income taxes. The effective income tax rate for the second quarter of 2013 and the first two quarters of 2013 differed from the federal statutory rate primarily due to the effect of state income taxes, partially offset by the utilization of tax credits and deductions.

 

13.  SUBSEQUENT EVENT

 

On August 18, 2014, the Company acquired all of the outstanding common stock of Vitacost.com, Inc. (“Vitacost.com”) for $8.00 per share in cash or approximately $280 in total.  Vitacost.com is a leading online retailer of health and wellness products, which are sold directly to consumers through the website vitacost.com.  This merger affords the Company access to Vitacost.com’s extensive e-commerce platform, which can be combined with the Company’s customer insights and loyal customer base, to create new levels of personalization and convenience for customers.  Vitacost.com’s annual revenue, for the year ended December 31, 2013, was approximately $383 with a net loss of approximately $(14).  The merger will be accounted for under the purchase method of accounting and was financed through the issuance of commercial paper.

 

16



 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following analysis should be read in conjunction with the Consolidated Financial Statements.

 

OVERVIEW

 

Second quarter 2014 total sales were $25.3 billion compared with $22.7 billion for the same period of 2013.  This increase was attributable to increased sales due to our merger with Harris Teeter Supermarkets, Inc. (“Harris Teeter”), which closed on January 28, 2014, identical supermarket sales increases, increased fuel gallon sales and an increase in the average retail fuel price.  Identical supermarket sales without fuel increased 4.8% in the second quarter of 2014, compared to the second quarter of 2013, primarily due to an increase in the number of households shopping with us, an increase in the average sale per customer and product cost inflation.  Every supermarket store department and operating division had positive identical sales.  This marks our 43rd consecutive quarter of positive identical supermarket sales growth.  Total sales for the first two quarters of 2014 were $58.3 billion compared to $52.7 billion for the same period of 2013.  This increase was attributable to our merger with Harris Teeter, identical supermarket sales increases and increased fuel gallon sales, offset partially by a decrease in the average retail fuel price.  Identical supermarket sales without fuel increased 4.7% in the first two quarters of 2014, compared to the same period in 2013, primarily due to an increase in the number of households shopping with us, an increase in the average sale per customer and product cost inflation.  Our Customer 1st strategy continues to deliver solid results.

 

For the second quarter of 2014, net earnings totaled $347 million, or $0.70 per diluted share, compared to $317 million, or $0.60 per diluted share for the same period of 2013.  The increase in net earnings for the second quarter of 2014, compared to the second quarter of 2013, resulted primarily from an increase in non-fuel First-In, First Out (“FIFO”) operating profit and an increase in earnings from our fuel operations, offset partially by increases in interest expense and the last-in, first-out (“LIFO”) charge.  For the first two quarters of 2014, net earnings totaled $848 million, or $1.68 per diluted share, compared to $798 million, or $1.52 per diluted share for the same period of 2013.  This includes a $0.11 per diluted share charge due to the commitments and withdrawal liabilities arising from the restructuring of certain multi-employer pension plan obligations to help stabilize associates’ future benefits (“pension plan agreements”).  Excluding the pension plan agreements, net earnings totaled $904 million, or $1.79 per diluted share, for the first two quarters of 2014.  The pension plan agreements resulted in an increase in operating, general and administrative expense of $87 million ($56 million after-tax) in the first two quarters of 2014.  We believe the adjusted net earnings per diluted share figure presents a more accurate year-over-year comparison of our financial results because the pension plan agreements were not the result of our normal operations.  The increase in adjusted net earnings for the first two quarters of 2014, compared to the first two quarters of 2013, resulted primarily from an increase in non-fuel FIFO operating profit and an increase in earnings from our fuel operations, partially offset by increases in interest expense, income tax expense and the LIFO charge.

 

Based on the strength of our results for the first two quarters of 2014, we have increased both the lower and upper ranges of our guidance for adjusted net earnings per diluted share and identical supermarket sales for fiscal year 2014.  Please refer to the “Outlook” section for more information on our expectations.

 

RESULTS OF OPERATIONS

 

Net Earnings

 

Net earnings totaled $347 million for the second quarter of 2014, an increase of 9.5% from net earnings of $317 million for the second quarter of 2013.  The increase in our net earnings for the second quarter of 2014, compared to the second quarter of 2013, resulted primarily from an increase in non-fuel FIFO operating profit and an increase in earnings from our fuel operations, offset partially by increases in interest expense and the LIFO charge.  The increase in non-fuel FIFO operating profit for the second quarter of 2014, compared to the second quarter of 2013, resulted primarily from the benefit of increased supermarket sales, the merger with Harris Teeter, productivity improvements and cost controls, offset partially by continued investments in lower prices for our customers, increases in the workers compensation and general liability reserves and increases in credit card and incentive plan costs.  The increase in net earnings from our fuel operations for the second quarter of 2014, compared to the second quarter of 2013, resulted primarily from an increase in the average margin per gallon of fuel sold and an increase in fuel gallons sold.

 

17



 

Net earnings totaled $848 million for the first two quarters of 2014, an increase of 6.3% from net earnings of $798 million for the first two quarters of 2013.  Adjusted net earnings for the first two quarters of 2014 totaled $904 million, excluding the pension plan agreements, an increase of 13.3% compared to net earnings for the first two quarters of 2013.  The increase in our adjusted net earnings for the first two quarters of 2014, compared to the same period in 2013, resulted primarily from an increase in non-fuel FIFO operating profit and an increase in earnings from our fuel operations, offset partially by increases in interest expense and the LIFO charge.  The increase in non-fuel FIFO operating profit for the first two quarters of 2014, compared to the same period in 2013, resulted primarily from the benefit of increased supermarket sales, the merger with Harris Teeter, productivity improvements and cost controls, offset partially by continued investments in lower prices for our customers, increases in the workers compensation and general liability reserves and increases in credit card and incentive plan costs.  The increase in net earnings from our fuel operations for the first two quarters of 2014, compared to the first two quarters of 2013, resulted primarily from an increase in the average margin per gallon of fuel sold and an increase in fuel gallons sold.

 

Net earnings of $0.70 per diluted share for the second quarter of 2014 represented an increase of 16.7% over net earnings of $0.60 per diluted share for the second quarter of 2013.  Net earnings per diluted share increased in the second quarter of 2014, compared to the second quarter of 2013, due to increased net earnings and the repurchase of common shares resulting in a lower weighted average shares outstanding.

 

Net earnings of $1.68 per diluted share for the first two quarters of 2014 represented an increase of 10.5% over net earnings of $1.52 per diluted share for the first two quarters of 2013.  Adjusted net earnings for the first two quarters of 2014 of $1.79 per diluted share, excluding the pension plan agreements, represented an increase of 17.8% over the first two quarters of 2013.  Adjusted net earnings per diluted share increased in the first two quarters of 2014, compared to the first two quarters of 2013, due to increased net earnings and the repurchase of common shares resulting in a lower weighted average shares outstanding.

 

Management believes adjusted net earnings (and adjusted net earnings per diluted share) are useful metrics to investors and analysts because they more accurately reflect our day-to-day business operations than do the generally accepted accounting principle (“GAAP”) measures of net earnings and net earnings per diluted share.  Adjusted net earnings (and adjusted net earnings per diluted share) are non-generally accepted accounting principle (“non-GAAP”) financial measures and should not be considered alternatives to net earnings (and net earnings per diluted share) or any other GAAP measure of performance.  Adjusted net earnings (and adjusted net earnings per diluted share) should not be viewed in isolation or considered substitutes for our financial results as reported in accordance with GAAP.  Management uses adjusted net earnings (and adjusted net earnings per diluted share) in evaluating our results of operations as it believes these measures are more meaningful indicators of operating performance since, as adjusted, those earnings relate more directly to our day-to-day operations.  Management also uses adjusted net earnings (and adjusted net earnings per diluted share) as a performance metric for management incentive programs, and to measure our progress against internal budgets and targets.

 

18



 

The following table provides a reconciliation of net earnings attributable to The Kroger Co. to net earnings attributable to The Kroger Co. excluding the pension plan agreements and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to net earnings attributable to The Kroger Co. per diluted common share excluding the pension plan agreements, for the second quarters and the first two quarters of 2014 and 2013 ($ in millions):

 

 

 

Second Quarter Ended

 

Two Quarters Ended

 

 

 

August 16, 2014

 

August 17, 2013

 

August 16, 2014

 

August 17, 2013

 

Net earnings attributable to The Kroger Co.

 

$

347

 

$

317

 

$

848

 

$

798

 

Adjustment for pension plan agreements(1)(2)

 

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. excluding the adjustment item above

 

$

347

 

$

317

 

$

904

 

$

798

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per diluted common share

 

$

0.70

 

$

0.60

 

$

1.68

 

$

1.52

 

Adjustment for pension plan agreements(3)

 

 

 

0.11

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per diluted common share excluding the adjustment item above

 

$

0.70

 

$

0.60

 

$

1.79

 

$

1.52

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares used in diluted calculation

 

491

 

521

 

500

 

520

 

 


(1)

The amount presented represents the after-tax effect of the adjustment.

(2)

The pre-tax adjustment for the pension plan agreements was $87.

(3)

The amount presented represents the net earnings per diluted common share effect of the adjustment.

 

Sales

 

Total Sales

($ in millions)

 

 

 

Second Quarter Ended

 

Two Quarters Ended

 

 

 

August 16,
2014

 

Percentage
Increase

 

August 17,
2013

 

Percentage
Increase(2)

 

August 16,
2014

 

Percentage
Increase

 

August 17,
2013

 

Percentage
Increase(3)

 

Total supermarket sales without fuel 

 

$

19,629

 

12.4

%

$

17,468

 

3.6

%

$

45,487

 

11.8

%

$

40,694

 

3.6

%

Fuel sales

 

4,936

 

8.1

%

4,565

 

7.4

%

11,119

 

5.6

%

10,532

 

4.1

%

Other sales(1) 

 

745

 

14.1

%

653

 

11.2

%

1,665

 

14.3

%

1,457

 

10.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total sales 

 

$

25,310

 

11.6

%

$

22,686

 

4.6

%

$

58,271

 

10.6

%

$

52,683

 

3.9

%

 


(1)

Other sales primarily relate to sales by convenience stores, excluding fuel; jewelry stores; manufacturing plants to outside customers; variable interest entities; and in-store health clinics.

(2)

This column represents the percentage increase in the second quarter of 2013, compared to the second quarter of 2012.

(3)

This column represents the percentage increase in the first two quarters of 2013, compared to the first two quarters of 2012.

 

The increase in total sales and total supermarket sales without fuel for the second quarter of 2014, compared to the second quarter of 2013, was primarily due to our merger with Harris Teeter, which closed on January 28, 2014, and an increase in identical supermarket sales, excluding fuel, of 4.8%.  Identical supermarket sales, excluding fuel for the second quarter of 2014, compared to the second quarter of 2013, increased primarily due to an increase in the number of households shopping with us, an increase in transaction count and product cost inflation.  Total fuel sales increased 8.1% in the second quarter of 2014, compared to the second quarter of 2013, primarily due to an increase in fuel gallons sold of 7.1% and an increase in the average retail fuel price of 0.9%.  The increase in the average retail fuel price was caused by an increase in the product cost of fuel.

 

19



 

The increase in total sales and total supermarket sales without fuel for the first two quarters of 2014, compared to the same period of 2013, was primarily due to our merger with Harris Teeter, which closed on January 28, 2014, and an increase in identical supermarket sales, excluding fuel, of 4.7%.  Identical supermarket sales, excluding fuel for the first two quarters of 2014, compared to the first two quarters of 2013, increased primarily due to an increase in the number of households shopping with us, an increase in transaction count and product cost inflation.  Total fuel sales increased 5.6% in the first two quarters of 2014, compared to the first two quarters of 2013, primarily due to an increase in fuel gallons sold of 6.3% offset by a decrease in the average retail fuel price of 0.7%.  The decrease in the average retail fuel price was caused by a decrease in the product cost of fuel.

 

We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters.  Fuel discounts received at our fuel centers and earned based on in-store purchases are included in all of the identical supermarket sales results calculations illustrated below and reduce our identical supermarket sales results.  Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage.  Identical supermarket sales include sales from all departments at identical Fred Meyer multi-department stores and include Harris Teeter sales for stores that are identical as if they were part of the Company in our prior year.  Our identical supermarket sales results are summarized in the table below.  We used the identical supermarket dollar figures presented below to calculate percentage changes for the second quarter and the first two quarters of 2014.

 

Identical Supermarket Sales

($ in millions)

 

 

 

Second Quarter

 

 

 

August 16,
2014

 

Percentage
Increase

 

August 17,
2013

 

Percentage
Increase(1)

 

Including fuel centers

 

$

22,621

 

5.3

%

$

21,492

 

4.0

%

Excluding fuel centers

 

$

18,875

 

4.8

%

$

18,009

 

3.3

%

 


(1)

This column represents the percentage increase in identical supermarket sales in the second quarter of 2013, compared to the second quarter of 2012.

 

Identical Supermarket Sales

($ in millions)

 

 

 

Two Quarters Ended

 

 

 

August 16,
2014

 

Percentage
Increase

 

August 17,
2013

 

Percentage
Increase(1)

 

Including fuel centers

 

$

52,287

 

4.7

%

$

49,950

 

3.3

%

Excluding fuel centers

 

$

43,824

 

4.7

%

$

41,864

 

3.3

%

 


(1)

This column represents the percentage increase in identical supermarket sales in the first two quarters of 2013, compared to the first two quarters of 2012.

 

Gross Margin and FIFO Gross Margin

 

Our gross margin rate, as a percentage of sales, was 20.44% for the second quarter of 2014, as compared to 20.40% for the second quarter of 2013.  The increase in the second quarter of 2014, compared to the second quarter of 2013, resulted primarily from the effect of our merger with Harris Teeter and an increase in fuel gross margin rate, as a percentage of sales, partially offset by continued investments in lower prices for our customers and an increase in our LIFO charge, as a percentage of sales.  The merger with Harris Teeter, which closed late in fiscal year 2013, had a positive effect on our gross margin rates in the second quarter of 2014 since Harris Teeter has higher gross margin rates as compared to the total Company without Harris Teeter.

 

Our gross margin rate, as a percentage of sales, was 20.71% for the first two quarters of 2014, as compared to 20.51% for the first two quarters of 2013.  The increase in the first two quarters of 2014, compared to the first two quarters of 2013, resulted primarily from the effect of our merger with Harris Teeter and an increase in fuel gross margin rate, as a percentage of sales, partially offset by continued investments in lower prices for our customers and an increase in our LIFO charge, as a percentage of sales.  The merger with Harris Teeter, which closed late in fiscal year 2013, had a positive effect on our gross margin rates in the second quarter of 2014 since Harris Teeter has higher gross margin rates as compared to the total Company without Harris Teeter.

 

20



 

We calculate FIFO gross margin as sales minus merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the LIFO charge.  Merchandise costs exclude depreciation and rent expenses.  Our LIFO charge was $26 million for the second quarter of 2014 and $13 million for the second quarter of 2013.  Our LIFO charge was $54 million for the first two quarters of 2014 and $30 million for the first two quarters of 2013.  FIFO gross margin is a non-GAAP financial measure and should not be considered as an alternative to gross margin or any other GAAP measure of performance.  FIFO gross margin should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP.  FIFO gross margin is an important measure used by management to evaluate merchandising and operational effectiveness.  Management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness.

 

Our FIFO gross margin rate was 20.54% for the second quarter of 2014, as compared to 20.45% for the second quarter of 2013.  Retail fuel sales lower our FIFO gross margin rate, as a percentage of sales, due to the very low FIFO gross margin on retail fuel sales as compared to non-fuel sales.  Excluding the effect of retail fuel operations, our second quarter 2014 FIFO gross margin rate decreased 12 basis points, as a percentage of sales, compared to the second quarter of 2013.  This decrease in the second quarter of 2014, compared to the second quarter of 2013, was primarily due to continued investments in lower prices for our customers, offset partially by the effect of our merger with Harris Teeter.

 

Our FIFO gross margin rate was 20.81% for the first two quarters of 2014, as compared to 20.57% for the first two quarters of 2013.  Excluding the effect of retail fuel operations, as a percentage of sales, our FIFO gross margin rate decreased 5 basis points for the first two quarters of 2014, compared to the first two quarters of 2013.  This decrease in the first two quarters of 2014, compared to the first two quarters of 2013, was primarily due to continued investments in lower prices for our customers, offset partially by the effect of our merger with Harris Teeter.

 

LIFO Charge

 

The LIFO charge was $26 million in the second quarter of 2014 and $13 million in the second quarter of 2013.  The LIFO charge increased in the second quarter of 2014, compared to the second quarter of 2013, due to our higher expected year-end product cost of inflation in most major categories for fiscal 2014 compared to fiscal 2013.

 

The LIFO charge was $54 million in the first two quarters of 2014 and $30 million in the first two quarters of 2013.  The LIFO charge increased in the first two quarters of 2014, compared to the first two quarters of 2013, due to our higher expected year end product cost of inflation in most major categories for 2014 compared to 2013.  As of August 16, 2014, the fair value step up adjustment to Harris Teeter inventory as of the merger date is recorded in LIFO reserve.  This resulted in a $53 million decrease in the LIFO reserve.

 

Operating, General and Administrative Expenses

 

Operating, general and administrative (“OG&A”) expenses consist primarily of employee-related costs such as wages, health care benefit costs and retirement plan costs, utilities, and credit card fees.  Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.

 

OG&A expenses, as a percentage of sales, increased 3 basis points to 15.49% for the second quarter of 2014 from 15.46% for the second quarter of 2013.  The OG&A rate increased primarily due to the effect of our merger with Harris Teeter, increases in workers compensation and general liability reserves and increases in credit card fees and incentive plan costs, as a percentage of sales, partially offset by the benefit of increased supermarket sales and fuel sales, productivity improvements and effective cost controls.  The merger with Harris Teeter, which closed late in fiscal year 2013, increased our OG&A rate, as a percentage of sales, in the second quarter of 2014 since Harris Teeter has a higher OG&A rate as compared to the total Company without Harris Teeter.  Retail fuel sales lower our OG&A rate due to the very low OG&A rate, as a percentage of sales, of retail fuel sales compared to non-fuel sales.  OG&A expenses, as a percentage of sales excluding fuel, decreased nine basis points in the second quarter of 2014, compared to the second quarter of 2013.  This decrease in our OG&A rate, as a percentage of sales excluding the effect of fuel, resulted primarily from increased supermarket sales, productivity improvements and effective cost controls, offset partially by the effect of our merger with Harris Teeter, increases in workers compensation and general liability reserves and increases in credit card fees and incentive plan costs, as a percentage of sales.

 

21



 

OG&A expenses, as a percentage of sales, increased 22 basis points to 15.60% for the first two quarters of 2014 from 15.38% for the first two quarters of 2013.  The OG&A rate increased primarily due to the pension plan agreements, the effect of our merger with Harris Teeter, increases in workers compensation and general liability reserves and increases in credit card fees and incentive plan costs, as a percentage of sales, partially offset by the benefit of increased supermarket sales and fuel sales, productivity improvements and effective cost controls.  The merger with Harris Teeter, which closed late in fiscal year 2013, increased our OG&A rate, as a percentage of sales, in the first two quarters of 2014 since Harris Teeter has a higher OG&A rate as compared to the total Company without Harris Teeter.  Retail fuel sales lower our OG&A rate due to the very low OG&A rate, as a percentage of sales, of retail fuel sales compared to non-fuel sales.  OG&A rate, excluding the pension plan agreements and fuel, decreased 11 basis points in the first two quarters of 2014, compared to the first two quarters of 2013.  This decrease in our OG&A rate, as a percentage of sales excluding the pension plan agreements and fuel, resulted primarily from increased supermarket sales, productivity improvements and effective cost controls, offset partially by the effect of our merger with Harris Teeter, increases in workers compensation and general liability reserves and increases in credit card fees and incentive plan costs, as a percentage of sales.

 

Rent Expense

 

Rent expense was $166 million, or 0.65% of sales, for the second quarter of 2014, compared to $139 million, or 0.61% of sales, for the second quarter of 2013.  For the first two quarters of 2014, rent expense was $383 million, or 0.66% of sales, compared to $328 million, or 0.62% of sales, in the first two quarters of 2013.  Rent expense, as a percentage of sales excluding fuel, increased four basis points in the second quarter of 2014 compared to the second quarter of 2013.  Rent expense, as a percentage of sales excluding fuel, increased 3 basis points in the first two quarters of 2014 compared to the first two quarters of 2013.  These increases in rent expense, as a percentage of sales both including and excluding fuel, is due to the effect of our merger with Harris Teeter, partially offset by our continued emphasis on owning rather than leasing, whenever possible, and the benefit of increased supermarket sales.  The merger with Harris Teeter, which closed late in fiscal year 2013, increased rent expense, as a percentage of sales excluding fuel, since Harris Teeter has a higher rent expense rate as compared to the total Company without Harris Teeter.

 

Depreciation Expense

 

Depreciation expense was $444 million, or 1.76% of total sales, for the second quarter of 2014 compared to $387 million, or 1.71% of total sales, for the second quarter of 2013.  The increase in our depreciation expense for the second quarter of 2014, compared to the second quarter of 2013, in total dollars, was the result of additional depreciation on capital investments, including acquisitions and lease buyouts, of $4.0 billion, during the rolling four quarter period ending with the second quarter of 2014.  Excluding the effect of retail fuel operations, depreciation, as a percentage of sales, increased five basis points in the second quarter of 2014, compared to the same period of 2013.  The increase in depreciation expense, as a percentage of sales excluding fuel, is due to the effect of our merger with Harris Teeter, partially offset by increased supermarket sales.  The merger with Harris Teeter, which closed late in fiscal year 2013, increased our depreciation expense, as a percentage of sales excluding fuel, in the second quarter of 2014 since Harris Teeter has a higher depreciation expense rate as compared to the total Company without Harris Teeter.

 

Depreciation expense was $1.0 billion, or 1.76% of total sales, for the first two quarters of 2014 compared to $906 million, or 1.72% of total sales, for the first two quarters of 2013.  The increase in our depreciation expense for the first two quarters of 2014, compared to the first two quarters of 2013, in total dollars, was the result of additional depreciation on capital investments, including acquisitions and lease buyouts, of $4.0 billion, during the rolling four quarter period ending with the second quarter of 2014.  Excluding the effect of retail fuel operations, depreciation, as a percentage of sales, increased three basis points in the first two quarters of 2014, compared to the same period of 2013.  The increase in depreciation expense, as a percentage of sales excluding fuel, is due to the effect of our merger with Harris Teeter, partially offset by increased supermarket sales.  The merger with Harris Teeter, which closed late in fiscal year 2013, increased our depreciation expense, as a percentage of sales excluding fuel, in the first two quarters of 2014 since Harris Teeter has a higher depreciation expense rate as compared to the total Company without Harris Teeter.

 

22



 

Operating Profit and FIFO Operating Profit

 

Operating profit was $644 million, or 2.54% of sales, for the second quarter of 2014, compared to $595 million, or 2.62% of sales, for the second quarter of 2013.  Operating profit was $1.6 billion, or 2.70% of sales, for the first two quarters of 2014, compared to $1.5 billion, or 2.80% of sales, for the first two quarters of 2013.  Operating profit, as a percentage of sales, decreased eight basis points in the second quarter of 2014, compared to the second quarter of 2013, primarily due to continued investments in lower prices for our customers, increased LIFO expense, increases in workers compensation and general liability reserves and increases in credit card and incentive plan costs, as a percentage of sales, partially offset by the benefit of increased supermarket sales, an increase in fuel operating profit, the effect of our merger with Harris Teeter, productivity improvements and cost controls.  Operating profit, as a percentage of sales, decreased 10 basis points in the first two quarters of 2014, compared to the first two quarters of 2013, primarily due to the pension plan agreements, continued investments in lower prices for our customers, increased LIFO expense, increases in workers compensation and general liability reserves and increases in credit card and incentive plan costs, as a percentage of sales, partially offset by the benefit of increased supermarket sales, an increase in fuel operating profit, the effect of our merger with Harris Teeter, productivity improvements and cost controls.

 

We calculate FIFO operating profit as operating profit excluding the LIFO charge.  FIFO operating profit is a non-GAAP financial measure and should not be considered as an alternative to operating profit or any other GAAP measure of performance.  FIFO operating profit should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP.  FIFO operating profit is an important measure used by management to evaluate operational effectiveness.  Management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness. Since fuel discounts are earned based on in-store purchases, fuel operating profit does not include fuel discounts, which are allocated to our non-fuel supermarket departments.  We also derive operating, general and administrative expenses, rent and depreciation and amortization through the use of estimated allocations in the calculation of fuel operating profit.

 

FIFO operating profit was $670 million, or 2.65% of sales, for the second quarter of 2014, compared to $608 million, or 2.68% of sales, for the second quarter of 2013.  Retail fuel sales lower our FIFO operating profit rate due to the very low FIFO operating profit rate, as a percentage of sales, of retail fuel sales compared to non-fuel sales.  FIFO operating profit, excluding fuel, was $559 million, or 2.74% of sales, for the second quarter of 2014, compared to $519 million, or 2.86% of sales, for the second quarter of 2013.  FIFO operating profit, as a percentage of sales excluding fuel, decreased 12 basis points in the second quarter of 2014, compared to the second quarter of 2013 primarily due to continued investments in lower prices for our customers, increases in workers compensation and general liability reserves and increases in credit card and incentive plan costs, as a percentage of sales, partially offset by the benefit of increased supermarket sales, the effect of our merger with Harris Teeter, productivity improvements and cost controls.

 

FIFO operating profit was $1.6 billion, or 2.79% of sales, for the first two quarters of 2014, compared to $1.5 billion, or 2.85% of sales, for the first two quarters of 2013.  Retail fuel sales lower our FIFO operating profit rate due to the very low FIFO operating profit rate, as a percentage of sales, of retail fuel sales compared to non-fuel sales.  FIFO operating profit, excluding fuel and the pension plan agreements, was $1.6 billion, or 3.30% of sales, for the first two quarters of 2014, compared to $1.4 billion, or 3.30% of sales, for the first two quarters of 2013.  FIFO operating profit, as a percentage of sales excluding fuel and the pension plan agreements, remained flat for the first two quarters of 2014, compared to the first two quarters of 2013 primarily due to continued investments in lower prices for our customers, increased workers compensation and general liability reserves and increases in credit card and incentive plan costs, as a percentage of sales, partially offset by the benefit of increased supermarket sales, the effect of our merger with Harris Teeter, productivity improvements and cost controls.

 

23



 

The following table provides a reconciliation of operating profit to FIFO operating profit and FIFO operating profit, excluding fuel, for the second quarters and first two quarters of 2014 and 2013 ($ in millions):

 

 

 

Second Quarter Ended

 

Two Quarters Ended

 

 

 

August 16,
2014

 

2014
Percentage
of Sales

 

August 17,
2013

 

2013
Percentage

of Sales

 

August 16,
2014

 

2014
Percentage
of Sales

 

August 17,
2013

 

2013
Percentage
of Sales

 

Sales

 

$

25,310

 

 

 

$

22,686

 

 

 

$

58,271

 

 

 

$

52,683

 

 

 

Fuel sales

 

4,936

 

 

 

4,565

 

 

 

11,119

 

 

 

10,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales excluding fuel

 

$

20,374

 

 

 

$

18,121

 

 

 

$

47,152

 

 

 

$

42,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

$

644

 

2.54

%

$

595

 

2.62

%

$

1,574

 

2.70

%

$

1,474

 

2.80

%

LIFO charge

 

26

 

0.10

%

13

 

0.06

%

54

 

0.09

%

30

 

0.06

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FIFO operating profit

 

670

 

2.65

%

608

 

2.68

%

1,628

 

2.79

%

1,504

 

2.85

%

Fuel operating profit

 

111

 

2.25

%

89

 

1.95

%

161

 

1.45

%

113

 

1.07

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FIFO operating profit excluding fuel

 

559

 

2.74

%

519

 

2.86

%

1,468

 

3.11

%

1,391

 

3.30

%

Adjusted item

 

 

 

 

 

 

 

87

 

0.18

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FIFO operating profit excluding fuel and adjusted item

 

$

559

 

2.74

%

$

519

 

2.86

%

$

1,555

 

3.30

%

$

1,391

 

3.30

%

 

Percentages may not sum due to rounding.

 

Interest Expense

 

Net interest expense was $112 million, or 0.44% of sales, in the second quarter of 2014 and $99 million, or 0.43% of total sales, in the second quarter of 2013.  For the first two quarters of 2014, net interest expense was $259 million, or 0.44% of total sales, in 2014 and $228 million, or 0.43% of total sales, in the first two quarters of 2013.  The increase in net interest expense for both the second quarter and the first two quarters of 2014, when compared to 2013, resulted primarily from an increase in net total debt, primarily due to financing the merger with Harris Teeter and repurchases of our outstanding common shares.

 

Income Taxes

 

Our effective income tax rate was 34.2% in the second quarter of 2014, compared to 35.5% for the second quarter of 2013.  Our effective income tax rate was 34.7% for the first two quarters of 2014, compared to 35.5% for the first two quarters of 2013.  The effective income tax rate for the second quarter of 2014 and the first two quarters of 2014 differed from the federal statutory rate primarily due to the utilization of tax credits and deductions, partially offset by the effect of state income taxes. The effective income tax rate for the second quarter of 2013 and the first two quarters of 2013 differed from the federal statutory rate primarily due to the effect of state income taxes, partially offset by the utilization of tax credits and deductions.

 

24



 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flow Information

 

Net cash provided by operating activities

 

We generated $2.8 billion of cash from operating activities during the first two quarters of 2014, compared to $2.6 billion in the first two quarters of 2013.  The cash provided by operating activities came from net earnings including noncontrolling interests, adjusted for non-cash expenses, and changes in working capital.  The increase in cash from operating activities in 2014, compared to 2013, resulted primarily due to an increase in net earnings including noncontrolling interests and an increase in long-term liabilities, partially offset by changes in working capital.  Changes in working capital provided cash from operating activities of $698 million in the first two quarters of 2014 and $883 million in the first two quarters of 2013.  The decrease in cash provided by changes in working capital for the first two quarters of 2014, compared to the first two quarters of 2013, was primarily due to a decrease in the cash provided by store deposits in-transit, receivables and income taxes receivable and payable, partially offset by an increase in the cash provided by trade accounts payable.  Prepaid expenses decreased significantly from year-end 2014 and 2013 reflecting prepayments of certain employee benefits at year-end in each year.

 

Net cash used by investing activities

 

We used $1.3 billion of cash for investing activities during the first two quarters of 2014 compared to $1.1 billion during the first two quarters of 2013.  The amount of cash used for investing activities increased in the first two quarters of 2014 versus 2013, primarily due to increased payments for capital investments.

 

Net cash used by financing activities

 

We used $1.6 billion of cash for financing activities in the first two quarters of 2014 compared to $1.3 billion in the first two quarters of 2013.  The increase in the amount of cash used for financing activities for the first two quarters of 2014, compared to the first two quarters of 2013, resulted primarily due to an increase in repurchases of our outstanding common shares, offset partially by a decrease in payments on long-term debt, net payments on commercial paper and proceeds from issuance of long-term debt.  Proceeds from the issuance of capital stock resulted from exercises of employee stock options.

 

Debt Management

 

As of August 16, 2014, we maintained a $2,750 million (with the ability to increase by $750 million), unsecured revolving credit facility that, unless extended, terminates on June 30, 2019.  Outstanding borrowings under the credit agreement and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit agreement.  In addition to the credit agreement, we maintained two uncommitted money market lines totaling $75 million in the aggregate.  The money market lines allow us to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit agreement.  As of August 16, 2014, we had no borrowings under our credit agreement or money market lines.  As of August 16, 2014, we had $1.1 billion of outstanding commercial paper.  The outstanding letters of credit that reduce funds available under our credit agreement totaled $10 million as of August 16, 2014.

 

Our bank credit facility and the indentures underlying our publicly issued debt contain various restrictive financial covenants.  As of August 16, 2014, we were in compliance with these financial covenants.  Furthermore, management believes it is not reasonably likely that Kroger will fail to comply with these financial covenants in the foreseeable future.

 

Total debt, including both the current and long-term portions of capital leases and lease-financing obligations, increased $3.3 billion to $11.2 billion as of the end of the second quarter of 2014, from $7.9 billion as of the end of the second quarter of 2013.  Total debt decreased $110 million as of the end of the second quarter of 2014, from $11.3 billion as of year-end 2013.  The increase as of the end of the second quarter of 2014, compared to the end of the second quarter of 2013, resulted from the issuance of (i) $500 million of senior notes bearing an interest rate of 3-month London Inter-Bank Offering Rate (“LIBOR”) plus 53 basis points, (ii) $300 million of senior notes bearing an interest rate of 1.2%, (iii) $500 million of senior notes bearing an interest rate of 2.3%, (iv) $700 million of senior notes bearing an interest rate of 3.3%, (v) $500 million of senior notes bearing an interest rate of 4.0% and (vi) an increase in commercial paper of $1.0 billion, offset partially by payments at maturity of $600 million of senior notes bearing an interest rate of 7.5%.  The increase in financing obligations was due to partially funding our merger with Harris Teeter, repurchasing outstanding common shares and refinancing our debt maturities in 2013.

 

25



 

Over the next twelve months, we anticipate refinancing approximately $300 million of debt maturing in the fourth quarter of fiscal year 2014.

 

Common Share Repurchase Program

 

During the second quarter of 2014, we invested $78 million to repurchase 1.6 million Kroger common shares at an average price of $48.32 per share.  For the first two quarters of 2014, we invested $1.2 billion to repurchase 27.4 million Kroger common shares at an average price of $44.64 per share.  These shares were reacquired under three separate share repurchase programs.  The first is a $500 million repurchase program that was authorized by Kroger’s Board of Directors on October 16, 2012.  The second is a $1 billion repurchase program that was authorized by Kroger’s Board of Directors on March 13, 2014, that replaced the first referenced program.  The third is a program that uses the cash proceeds from the exercises of stock options by participants in Kroger’s stock option and long-term incentive plans as well as the associated tax benefits.

 

On June 26, 2014, we announced a new $500 million share repurchase program that was authorized by the Board of Directors, replacing the $1 billion that was authorized by the Board of Directors on March 13, 2014.  As of August 16, 2014, we have not made any repurchases under this program.

 

Liquidity Needs

 

We estimate our liquidity needs over the next twelve-month period to be approximately $4.6 billion, which includes anticipated requirements for working capital, capital expenditures, interest payments and scheduled payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of the second quarter 2014.  Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months.  We have approximately $1.1 billion of commercial paper and $300 million of senior notes maturing in the next twelve months, which is included in the $4.6 billion in estimated liquidity needs.  The commercial paper matures in the third quarter of 2014 and the $300 million of senior notes mature in the fourth quarter of 2014.  Based on the current market environment, we expect to refinance this debt on favorable terms.  We believe we have adequate coverage of our debt covenants to continue to maintain our current debt ratings and to respond effectively to competitive conditions.

 

CAPITAL INVESTMENTS

 

Capital investments, excluding acquisitions and the purchase of leased facilities, totaled $672 million for the second quarter of 2014 compared to $507 million for the second quarter of 2013.  Capital investments, excluding acquisitions and the purchase of leased facilities, totaled $1.4 billion in the first two quarters of 2014 and $1.1 billion in the first two quarters of 2013.  During the second quarter of 2014, capital investments for the purchase of leased facilities totaled $11 million compared to $13 million for the second quarter of 2013.  During the first two quarters of 2014, capital expenditures for the purchase of leased facilities totaled $28 million compared to $19 million for the first two quarters of 2013.  During the second quarter of 2014, we opened, acquired, expanded or relocated 9 food stores and also completed 54 minor and major within-the-wall remodels.  During the first two quarters of 2014, we opened, acquired, expanded or relocated 33 food stores and also completed 83 minor and major within-the-wall remodels.  Total food store square footage at the end of the second quarter of 2014 increased 8.2% from the end of the second quarter of 2013, primarily due to our merger with Harris Teeter.  Excluding mergers, acquisitions and operational closings, total food store square footage at the end of the second quarter of 2014 increased 1.7% over the end of the second quarter of 2013.

 

26



 

RETURN ON INVESTED CAPITAL

 

We calculate return on invested capital (“ROIC”) by dividing adjusted operating profit for the prior four quarters by the average invested capital.  Adjusted operating profit is calculated by excluding certain items included in operating profit, and adding back our LIFO charge, depreciation and amortization and rent.  Average invested capital is calculated as the sum of (i) the average of our total assets, (ii) the average LIFO reserve, (iii) the average accumulated depreciation and amortization and (iv) a rent factor equal to total rent for the last four quarters multiplied by a factor of eight; minus (i) the average taxes receivable, (ii) the average trade accounts payable, (iii) the average accrued salaries and wages and (iv) the average other current liabilities.  Averages are calculated for return on invested capital by adding the beginning balance of the first quarter and the ending balance of the fourth quarter, of the last four quarters, and dividing by two.  We use a factor of eight for our total rent as we believe this is a common factor used by our investors, analysts and rating agencies.  ROIC is a non-GAAP financial measure of performance.  ROIC should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP.  ROIC is an important measure used by management to evaluate our investment returns on capital.  Management believes ROIC is a useful metric to investors and analysts because it measures how effectively we are deploying our assets.  All items included in the calculation of ROIC are GAAP measures, excluding certain adjustments to operating income.

 

Although ROIC is a relatively standard financial term, numerous methods exist for calculating a company’s ROIC.  As a result, the method used by our management to calculate ROIC may differ from methods other companies use to calculate their ROIC.  We urge you to understand the methods used by other companies to calculate their ROIC before comparing our ROIC to that of such other companies.

 

27



 

The following table provides a reconciliation of ROIC for the rolling four quarters on a 52 week basis ended August 16, 2014 and August 17, 2013 ($ in millions).  The numerator in the calculation for return on invested capital includes one-half of Harris Teeter’s operations in the rolling four quarters ended August 16, 2014.  The denominator includes the assets and liabilities of Harris Teeter for the second quarter of 2014.  Please refer to the “Outlook” section for more information on our expectations.

 

 

 

Rolling Four Quarters Ended

 

 

 

August 16, 2014

 

August 17, 2013

 

Return on Invested Capital

 

 

 

 

 

Numerator

 

 

 

 

 

Operating profit

 

$

2,826

 

$

2,890

 

53rd week operating profit adjustment

 

 

(99

)

LIFO charge

 

77

 

4

 

Depreciation

 

1,822

 

1,674

 

Rent

 

668

 

625

 

53rd week rent adjustment

 

 

(12

)

Adjustments for the UFCW consolidated pension plan liability and credit card settlement

 

 

(115

)

Adjustments for the pension plan agreements

 

87

 

 

Other

 

16

 

 

Adjusted operating income adjusted on a 52 week basis

 

$

5,496

 

$

4,967

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

Average total assets

 

$

26,776

 

$

23,999

 

Average taxes receivable (1)

 

(11

)

(4

)

Average LIFO reserve

 

1,140

 

1,126

 

Average accumulated depreciation (2)

 

15,745

 

14,747

 

Average trade accounts payable

 

(4,848

)

(4,452

)

Average accrued salaries and wages

 

(1,071

)

(978

)

Average other current liabilities (3)

 

(2,683

)

(2,524

)

Rent x 8

 

5,344

 

4,904

 

Average invested capital

 

$

40,392

 

$

36,818

 

Return on Invested Capital

 

13.6

%

13.5

%

 


(1)

As of August 16, 2014 and August 11, 2012, taxes receivable were $23 and $7, respectively. As of August 17, 2013, the Company did not have any taxes receivable.

(2)

As of August 16, 2014, August 17, 2013 and August 11, 2012, accumulated depreciation and amortization was $16,274, $15,216 and $14,277, respectively.

(3)

As of August 16, 2014, August 17, 2013 and August 11, 2012, other current liabilities included accrued income taxes of $30, $201 and $40, respectively. Accrued income taxes are removed from other current liabilities in the calculation of average invested capital.

 

28



 

CRITICAL ACCOUNTING POLICIES

 

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner.  Except as noted below, our critical accounting policies are summarized in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could vary from those estimates.

 

RECENTLY ADOPTED ACCOUNTING STANDARDS

 

In July 2013, the Financial Accounting Standards Board (“FASB’) amended Accounting Standards Codification (“ASC”) 740, “Income Taxes.” The amendment provides guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. This amendment became effective beginning February 2, 2014, and was adopted prospectively in accordance with the standard. The adoption of this amendment did not have an effect on net income and did not have a significant effect on our Consolidated Balance Sheet.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. This guidance will be effective in the first quarter of its fiscal year ending January 27, 2018. Early adoption is not permitted.  We are currently in the process of evaluating the effect of adoption of this ASU on our Consolidated Financial Statements.

 

29



 

OUTLOOK

 

This discussion and analysis contains certain forward-looking statements about Kroger’s future performance, including Harris Teeter.  These statements are based on management’s assumptions and beliefs in light of the information currently available to it.  Such statements are indicated by words such as “comfortable,” “committed,” “will,” “expect,” “goal,” “should,” “intend,” “target,” “believe,” “anticipate,” “plan,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.

 

Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.  While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially.

 

·                               We expect net earnings per diluted share in the range of $3.22-$3.28 for fiscal year 2014, excluding the pension plan agreements.

 

·                               In 2014, we expect net earnings per diluted share growth of 13 – 15%, plus the dividend, excluding the pension plan agreements and the 2013 adjusted items, partly due to the benefit of Harris Teeter.  Thereafter, we would expect to return to our 8 – 11% long-term growth rate, plus a dividend that we expect to increase over time.

 

·                               We expect identical supermarket sales growth, excluding fuel sales, of 3.5%-4.25% in fiscal year 2014.

 

·                               We expect full-year FIFO non-fuel operating margin for 2014, excluding the pension plan agreements, to expand slightly when compared to 2013, excluding the 2013 adjusted items.

 

·                               Excluding the 2014 and 2013 adjusted items, we expect our year-end ROIC, which will factor in a full year of increased capital investments and fully reflect Harris Teeter in our calculation, to show a slight decline compared to the end of fiscal 2013.

 

·                               For 2014, we expect our annualized LIFO charge to be approximately $100 million.

 

·                               For 2014, we expect interest expense to be approximately $485 million.

 

·                               We plan to use cash flow primarily for capital investments, to improve our current debt coverage ratios, to pay cash dividends and to repurchase stock.

 

·                               We expect to obtain sales growth from new square footage, as well as from increased productivity from existing locations.

 

·                               We expect capital investments for 2014 to increase to approximately $2.8 - $3.0 billion, excluding mergers, acquisitions and purchases of leased facilities.  We also expect capital investments to increase incrementally $200 million each year over the next few years, excluding mergers, acquisitions and purchases of leased facilities, to accomplish our strategy.  We expect total food store square footage for 2014 to grow approximately 1.8% before mergers, acquisitions and operational closings.

 

·                               For the third and fourth quarters of 2014, we expect our effective tax rate to be approximately 34% to 35%, excluding the resolution of benefits from certain tax items.

 

·                               We do not anticipate goodwill impairments in 2014.

 

·                               For 2014, we expect to contribute approximately $225-$250 million to multi-employer pension funds.  This amount excludes any contributions to multi-employer pension funds related to pension obligations that were restructured in the first quarter of 2014.  We continue to evaluate our potential exposure to under-funded multi-employer pension plans.  Although these liabilities are not a direct obligation or liability of Kroger, any commitments to fund certain multi-employer plans will be expensed when our commitment is probable and an estimate can be made.

 

30



 

·                               In 2014, we will negotiate agreements with the UFCW for store associates in Toledo, Richmond/Hampton Roads, West Virginia, Arizona and Smith’s in New Mexico, and agreements with the Teamsters covering several distribution and manufacturing facilities.  These negotiations will be challenging, as we must have competitive cost structures in each market while meeting our associates’ needs for solid wages and good quality, affordable health care and retirement benefits.  Also, we must continue to address the underfunding of multi-employer pension plans.

 

Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements.  These include:

 

·                               The extent to which our sources of liquidity are sufficient to meet our requirements may be affected by the state of the financial markets and the effect that such condition has on our ability to issue commercial paper at acceptable rates.  Our ability to borrow under our committed lines of credit, including our bank credit facilities, could be impaired if one or more of our lenders under those lines is unwilling or unable to honor its contractual obligation to lend to us, or in the event that natural disasters or weather conditions interfere with the ability of our lenders to lend to us.  Our ability to refinance maturing debt may be affected by the state of the financial markets.

 

·                               Our ability to use cash flow to continue to maintain our investment grade debt rating and repurchase shares, pay dividends and fund capital investments, could be affected by unanticipated increases in net total debt, our inability to generate cash flow at the levels anticipated, and our failure to generate expected earnings.

 

·                               Our ability to achieve identical sales, earnings and cash flow goals may be affected by: labor negotiations or disputes; changes in the types and numbers of businesses that compete with us; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; our response to these actions; the state of the economy, including interest rates, the inflationary and deflationary trends in certain commodities, and the unemployment rate; the effect that fuel costs have on consumer spending; volatility of fuel margins; changes in government-funded benefit programs; manufacturing commodity costs; diesel fuel costs related to our logistics operations; trends in consumer spending; the extent to which our customers exercise caution in their purchasing in response to economic conditions; the inconsistent pace of the economic recovery; changes in inflation or deflation in product and operating costs; stock repurchases; the potential costs and risks associated with potential cyber-attacks or data security breaches; our ability to retain additional pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; natural disasters or adverse weather conditions; the success of our future growth plans; and the successful integration of Harris Teeter.  The extent to which the adjustments we are making to our strategy create value for our shareholders will depend primarily on the reaction of our customers and our competitors to these adjustments, as well as operating conditions, including inflation or deflation, increased competitive activity, and cautious spending behavior of our customers.  Our ability to achieve sales and earnings goals may also be affected by our ability to manage the factors identified above.

 

·                               Our capital investments could differ from our estimate if we are unsuccessful in acquiring suitable sites for new stores, if development costs vary from those budgeted, if our logistics and technology or store projects are not completed on budget or within the time frame projected, or if economic conditions fail to improve, or worsen.

 

·                               During the first three quarters of our fiscal year, our LIFO charge and the recognition of LIFO expense will be affected primarily by estimated year-end changes in product costs.  Our LIFO charge for the fiscal year will be affected primarily by changes in product costs at year-end.

 

·                               If actual results differ significantly from anticipated future results for certain reporting units including variable interest entities, an impairment loss for any excess of the carrying value of the reporting units’ goodwill over the implied fair value would have to be recognized.

 

·                               Our effective tax rate may differ from the expected rate due to changes in laws, the status of pending items with various taxing authorities, and the deductibility of certain expenses.

 

·                               The actual amount of automatic and matching cash contributions to our 401(k) Retirement Savings Account Plan will depend on the number of participants, savings rate, compensation as defined by the plan, and length of service of participants.

 

31



 

·                               Changes in our product mix may negatively affect certain financial indicators. For example, we continue to add supermarket fuel centers to our store base. Since gasoline generates low profit margins, we expect to see our FIFO gross margins decline as gasoline sales increase.

 

We cannot fully foresee the effects of changes in economic conditions on Kroger’s business. We have assumed economic and competitive situations will not change significantly in 2014.

 

Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in, contemplated or implied by forward-looking statements made by us or our representatives.  We undertake no obligation to update the forward-looking information contained in this filing.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

 

Item 4.         Controls and Procedures.

 

The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures as of the quarter ended August 16, 2014, the end of the period covered by this report.  Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

In connection with the evaluation described above, there was no change in Kroger’s internal control over financial reporting during the quarter ended August 16, 2014, that has materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting.

 

32



 

PART II - OTHER INFORMATION

 

Item 1.         Legal Proceedings.

 

Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company.  Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and where an adverse outcome is probable.  Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

 

33



 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(c)

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period(1)

 

Total Number
of Shares
Purchased

 

Average
Price Paid Per
Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(2)

 

Maximum
Dollar Value of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs(3)
(in millions)

 

First four weeks

 

 

 

 

 

 

 

 

 

May 25, 2014 to June 21, 2014

 

839,091

 

$

46.92

 

839,091

 

$

 

Second four weeks

 

 

 

 

 

 

 

 

 

June 22, 2014 to July 19, 2014

 

1,108,131

 

$

49.30

 

1,108,131

 

$

500

 

Third four weeks

 

 

 

 

 

 

 

 

 

July 20, 2014 to August  16, 2014

 

497,130

 

$

50.07

 

497,130

 

$

500

 

Total 

 

2,444,352

 

$

48.64

 

2,444,352

 

$

500

 

 


(1)                     The reported periods conform to the Company’s fiscal calendar composed of thirteen 28-day periods. The second quarter of 2014 contained three 28-day periods.

 

(2)                     Shares were repurchased under (i) a $1 billion share repurchase program, authorized by the Board of Directors and announced on March 13, 2014 and (ii) a program announced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, which program is limited to proceeds received from exercises of stock options and the tax benefits associated therewith.  The programs have no expiration date but may be terminated by the Board of Directors at any time.  Total shares purchased include shares that were surrendered to the Company by participants under the Company’s long-term incentive plans to pay for taxes on restricted stock awards.

 

(3)                     The amounts shown in this column for the first four weeks of the quarter reflect amounts remaining under the $1 billion share repurchase program referenced in clause (i) of Note 2 above.  The amounts shown in this column for the second and third four weeks of the quarter reflect amounts remaining under the $500 million share repurchase program authorized by the Board of Directors and announced on June 26, 2014.  Amounts to be invested under the program utilizing option exercise proceeds are dependent upon option exercise activity.

 

34



 

Item 6. Exhibits.

 

EXHIBIT 3.1

-

Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010.

 

 

 

EXHIBIT 3.2

-

The Company’s regulations are hereby incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 26, 2007.

 

 

 

EXHIBIT 4.1

-

Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request.

 

 

 

EXHIBIT 10.1*

-

Form of Performance Unit Agreement Under Long-Term Incentive Plans, filed herewith.

 

 

 

EXHIBIT 10.2

-

Amended and Restated Credit Agreement dated as of June 30, 2014, among the Kroger Co., the initial lenders named therein, and Bank of America, N.A. as an Issuing Bank and as a co-administrative agent and paying agent, Wells Fargo Bank National Association, as an Issuing Bank and as a co-administrative agent, Citibank, N.A., as syndication agent, and Royal Bank of Scotland plc and U.S. Bank National Association, as co-documentation agents, incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 30, 2014.

 

 

 

EXHIBIT 31.1

-

Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer.

 

 

 

EXHIBIT 31.2

-

Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer.

 

 

 

EXHIBIT 32.1

-

Section 1350 Certifications.

 

 

 

EXHIBIT 99.1

-

Additional Exhibits – Statement of Computation of Ratio of Earnings to Fixed Charges.

 

 

 

EXHIBIT 101.INS

-

XBRL Instance Document.

 

 

 

EXHIBIT 101.SCH

-

XBRL Taxonomy Extension Schema Document.

 

 

 

EXHIBIT 101.CAL

-

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

EXHIBIT 101.DEF

-

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

EXHIBIT 101.LAB

-

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

EXHIBIT 101.PRE

-

XBRL Taxonomy Extension Presentation Linkbase Document.

 


*Management contract or compensatory plan or arrangement

 

35


 


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

THE KROGER CO.

 

 

 

Dated:  September 23, 2014

By:

/s/ W. Rodney McMullen

 

 

W. Rodney McMullen

 

 

Chief Executive Officer

 

 

 

Dated:  September 23, 2014

By:

/s/ J. Michael Schlotman

 

 

J. Michael Schlotman

 

 

Senior Vice President and Chief Financial Officer

 

36



 

Exhibit Index

 

Exhibit 3.1 -

Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010.

 

 

Exhibit 3.2 -

The Company’s regulations are hereby incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 26, 2007.

 

 

Exhibit 4.1 -

Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request.

 

 

Exhibit 10.1* -

Form of Performance Unit Agreement Under Long-Term Incentive Plans, filed herewith.

 

 

Exhibit 10.2 -

Amended and Restated Credit Agreement dated as of June 30, 2014, among the Kroger Co., the initial lenders named therein, and Bank of America, N.A. as an Issuing Bank and as a co-administrative agent and paying agent, Wells Fargo Bank National Association, as an Issuing Bank and as a co-administrative agent, Citibank, N.A., as syndication agent, and Royal Bank of Scotland plc and U.S. Bank National Association, as co-documentation agents, incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 30, 2014.

 

 

Exhibit 31.1 -

Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer.

 

 

Exhibit 31.2 -

Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer.

 

 

Exhibit 32.1 -

Section 1350 Certifications.

 

 

Exhibit 99.1 -

Additional Exhibits – Statement of Computation of Ratio of Earnings to Fixed Charges.

 

 

EXHIBIT 101.INS -

XBRL Instance Document.

 

 

EXHIBIT 101.SCH -

XBRL Taxonomy Extension Schema Document.

 

 

EXHIBIT 101.CAL -

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

EXHIBIT 101.DEF -

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

EXHIBIT 101.LAB -

XBRL Taxonomy Extension Label Linkbase Document.

 

 

EXHIBIT 101.PRE -

XBRL Taxonomy Extension Presentation Linkbase Document.

 


*Management contract or compensatory plan or arrangement

 

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