Form 10-Q KROGER CO For: Aug 15
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 15, 2015
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
(Registrants 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 973,434,417 shares of Common Stock ($1 par value) outstanding as of September 18, 2015.
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 15, |
|
August 16, |
|
August 15, |
|
August 16, |
| ||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
Sales |
|
$ |
25,539 |
|
$ |
25,310 |
|
$ |
58,590 |
|
$ |
58,271 |
|
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
|
20,065 |
|
20,136 |
|
45,825 |
|
46,201 |
| ||||
Operating, general and administrative |
|
4,068 |
|
3,920 |
|
9,422 |
|
9,088 |
| ||||
Rent |
|
155 |
|
166 |
|
370 |
|
383 |
| ||||
Depreciation and amortization |
|
477 |
|
444 |
|
1,097 |
|
1,025 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating profit |
|
774 |
|
644 |
|
1,876 |
|
1,574 |
| ||||
Interest expense |
|
114 |
|
112 |
|
262 |
|
259 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings before income tax expense |
|
660 |
|
532 |
|
1,614 |
|
1,315 |
| ||||
Income tax expense |
|
227 |
|
182 |
|
557 |
|
456 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings including noncontrolling interests |
|
433 |
|
350 |
|
1,057 |
|
859 |
| ||||
Net earnings attributable to noncontrolling interests |
|
|
|
3 |
|
5 |
|
11 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings attributable to The Kroger Co. |
|
$ |
433 |
|
$ |
347 |
|
$ |
1,052 |
|
$ |
848 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net earnings attributable to The Kroger Co. per basic common share |
|
$ |
0.44 |
|
$ |
0.35 |
|
$ |
1.08 |
|
$ |
0.85 |
|
|
|
|
|
|
|
|
|
|
| ||||
Average number of common shares used in basic calculation |
|
963 |
|
970 |
|
966 |
|
988 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings attributable to The Kroger Co. per diluted common share |
|
$ |
0.44 |
|
$ |
0.35 |
|
$ |
1.06 |
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
| ||||
Average number of common shares used in diluted calculation |
|
977 |
|
982 |
|
981 |
|
1,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Dividends declared per common share |
|
$ |
0.105 |
|
$ |
0.083 |
|
$ |
0.198 |
|
$ |
0.165 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions and unaudited)
|
|
Second Quarter Ended |
|
Two Quarters Ended |
| ||||||||
|
|
August 15, |
|
August 16, |
|
August 15, |
|
August 16, |
| ||||
Net earnings including noncontrolling interests |
|
$ |
433 |
|
$ |
350 |
|
$ |
1,057 |
|
$ |
859 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
| ||||
Unrealized gains on available for sale securities, net of income tax(1) |
|
4 |
|
3 |
|
7 |
|
2 |
| ||||
Amortization of amounts included in net periodic pension expense, net of income tax(2) |
|
13 |
|
5 |
|
29 |
|
13 |
| ||||
Unrealized gains and losses on cash flow hedging activities, net of income tax(3) |
|
(3 |
) |
|
|
17 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total other comprehensive income |
|
14 |
|
8 |
|
53 |
|
15 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income |
|
447 |
|
358 |
|
1,110 |
|
874 |
| ||||
Comprehensive income attributable to noncontrolling interests |
|
|
|
3 |
|
5 |
|
11 |
| ||||
Comprehensive income attributable to The Kroger Co. |
|
$ |
447 |
|
$ |
355 |
|
$ |
1,105 |
|
$ |
863 |
|
(1) Amount is net of tax of $3 for the second quarter of 2015 and $1 for the second quarter of 2014. Amount is net of tax of $4 for the first two quarters of 2015.
(2) Amount is net of tax of $8 for the second quarter of 2015 and $4 for the second quarter of 2014. Amount is net of tax of $17 for the first two quarters of 2015 and $8 for the first two quarters of 2014.
(3) Amount is net of tax of $(2) for the second quarter of 2015 and $10 for the first two quarters of 2015.
The accompanying notes are an integral part of the Consolidated Financial Statements.
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
(unaudited)
|
|
August 15, |
|
January 31, |
| ||
|
|
2015 |
|
2015 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and temporary cash investments |
|
$ |
268 |
|
$ |
268 |
|
Store deposits in-transit |
|
934 |
|
988 |
| ||
Receivables |
|
1,319 |
|
1,266 |
| ||
FIFO inventory |
|
6,841 |
|
6,933 |
| ||
LIFO reserve |
|
(1,293 |
) |
(1,245 |
) | ||
Prepaid and other current assets |
|
457 |
|
701 |
| ||
Total current assets |
|
8,526 |
|
8,911 |
| ||
|
|
|
|
|
| ||
Property, plant and equipment, net |
|
18,573 |
|
17,912 |
| ||
Intangibles, net |
|
736 |
|
757 |
| ||
Goodwill |
|
2,307 |
|
2,304 |
| ||
Other assets |
|
639 |
|
613 |
| ||
|
|
|
|
|
| ||
Total Assets |
|
$ |
30,781 |
|
$ |
30,497 |
|
|
|
|
|
|
| ||
LIABILITIES |
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Current portion of long-term debt including obligations under capital leases and financing obligations |
|
$ |
1,527 |
|
$ |
1,885 |
|
Trade accounts payable |
|
5,261 |
|
5,052 |
| ||
Accrued salaries and wages |
|
1,221 |
|
1,291 |
| ||
Deferred income taxes |
|
286 |
|
287 |
| ||
Other current liabilities |
|
3,068 |
|
2,888 |
| ||
Total current liabilities |
|
11,363 |
|
11,403 |
| ||
|
|
|
|
|
| ||
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 |
|
9,744 |
|
9,712 |
| ||
Adjustment to reflect fair-value interest rate hedges |
|
(1 |
) |
¾ |
| ||
Long-term debt including obligations under capital leases and financing obligations |
|
9,743 |
|
9,712 |
| ||
|
|
|
|
|
| ||
Deferred income taxes |
|
1,157 |
|
1,209 |
| ||
Pension and postretirement benefit obligations |
|
1,460 |
|
1,463 |
| ||
Other long-term liabilities |
|
1,176 |
|
1,268 |
| ||
|
|
|
|
|
| ||
Total Liabilities |
|
24,899 |
|
25,055 |
| ||
|
|
|
|
|
| ||
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, 2,000 shares authorized; 1,918 shares issued in 2015 and 2014 |
|
1,918 |
|
1,918 |
| ||
Additional paid-in capital |
|
2,901 |
|
2,748 |
| ||
Accumulated other comprehensive loss |
|
(759 |
) |
(812 |
) | ||
Accumulated earnings |
|
13,228 |
|
12,367 |
| ||
Common shares in treasury, at cost, 953 shares in 2015 and 944 shares in 2014 |
|
(11,384 |
) |
(10,809 |
) | ||
|
|
|
|
|
| ||
Total Shareowners Equity - The Kroger Co. |
|
5,904 |
|
5,412 |
| ||
Noncontrolling interests |
|
(22 |
) |
30 |
| ||
|
|
|
|
|
| ||
Total Equity |
|
5,882 |
|
5,442 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Equity |
|
$ |
30,781 |
|
$ |
30,497 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions and unaudited)
|
|
Two Quarters Ended |
| ||||
|
|
August 15, |
|
August 16, |
| ||
Cash Flows from Operating Activities: |
|
|
|
|
| ||
Net earnings including noncontrolling interests |
|
$ |
1,057 |
|
$ |
859 |
|
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
1,097 |
|
1,025 |
| ||
LIFO charge |
|
48 |
|
54 |
| ||
Stock-based employee compensation |
|
95 |
|
76 |
| ||
Expense for Company-sponsored pension plans |
|
56 |
|
21 |
| ||
Deferred income taxes |
|
(82 |
) |
(103 |
) | ||
Other |
|
54 |
|
53 |
| ||
Changes in operating assets and liabilities net of effects from acquisitions of businesses: |
|
|
|
|
| ||
Store deposits in-transit |
|
54 |
|
2 |
| ||
Receivables |
|
(26 |
) |
(47 |
) | ||
Inventories |
|
92 |
|
102 |
| ||
Prepaid and other current assets |
|
235 |
|
274 |
| ||
Trade accounts payable |
|
210 |
|
194 |
| ||
Accrued expenses |
|
(21 |
) |
62 |
| ||
Income taxes receivable and payable |
|
(32 |
) |
(47 |
) | ||
Other |
|
(82 |
) |
67 |
| ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
|
2,755 |
|
2,592 |
| ||
|
|
|
|
|
| ||
Cash Flows from Investing Activities: |
|
|
|
|
| ||
Payments for property and equipment, including payments for lease buyouts |
|
(1,696 |
) |
(1,347 |
) | ||
Proceeds from sale of assets |
|
24 |
|
18 |
| ||
Other |
|
(38 |
) |
16 |
| ||
|
|
|
|
|
| ||
Net cash used by investing activities |
|
(1,710 |
) |
(1,313 |
) | ||
|
|
|
|
|
| ||
Cash Flows from Financing Activities: |
|
|
|
|
| ||
Proceeds from issuance of long-term debt |
|
24 |
|
48 |
| ||
Payments on long-term debt |
|
(34 |
) |
(26 |
) | ||
Net payments on commercial paper |
|
(347 |
) |
(160 |
) | ||
Dividends paid |
|
(181 |
) |
(166 |
) | ||
Excess tax benefits on stock-based awards |
|
73 |
|
32 |
| ||
Proceeds from issuance of capital stock |
|
74 |
|
66 |
| ||
Treasury stock purchases |
|
(628 |
) |
(1,221 |
) | ||
Investment in the remaining equity of a noncontrolling interest |
|
(26 |
) |
|
| ||
Other |
|
|
|
(5 |
) | ||
|
|
|
|
|
| ||
Net cash used by financing activities |
|
(1,045 |
) |
(1,432 |
) | ||
|
|
|
|
|
| ||
Net decrease in cash and temporary cash investments |
|
|
|
(153 |
) | ||
|
|
|
|
|
| ||
Cash and temporary cash investments: |
|
|
|
|
| ||
Beginning of year |
|
268 |
|
401 |
| ||
End of quarter |
|
$ |
268 |
|
$ |
248 |
|
|
|
|
|
|
| ||
Reconciliation of capital investments: |
|
|
|
|
| ||
Payments for property and equipment, including payments for lease buyouts |
|
$ |
(1,696 |
) |
$ |
(1,347 |
) |
Payments for lease buyouts |
|
16 |
|
28 |
| ||
Changes in construction-in-progress payables |
|
(47 |
) |
(63 |
) | ||
Total capital investments, excluding lease buyouts |
|
$ |
(1,727 |
) |
$ |
(1,382 |
) |
|
|
|
|
|
| ||
Disclosure of cash flow information: |
|
|
|
|
| ||
Cash paid during the year for interest |
|
$ |
279 |
|
$ |
282 |
|
Cash paid during the year for income taxes |
|
$ |
651 |
|
$ |
582 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
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 1, 2014 |
|
1,918 |
|
$ |
1,918 |
|
$ |
2,590 |
|
902 |
|
$ |
(9,641 |
) |
$ |
(464 |
) |
$ |
10,981 |
|
$ |
11 |
|
$ |
5,395 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Stock options exercised |
|
|
|
|
|
|
|
(6 |
) |
66 |
|
|
|
|
|
|
|
66 |
| |||||||
Restricted stock issued |
|
|
|
|
|
(83 |
) |
(4 |
) |
37 |
|
|
|
|
|
|
|
(46 |
) | |||||||
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Treasury stock purchases, at cost |
|
|
|
|
|
|
|
50 |
|
(1,129 |
) |
|
|
|
|
|
|
(1,129 |
) | |||||||
Stock options exchanged |
|
|
|
|
|
|
|
4 |
|
(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 ($0.165 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(162 |
) |
|
|
(162 |
) | |||||||
Net earnings including noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
848 |
|
11 |
|
859 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balances at August 16, 2014 |
|
1,918 |
|
$ |
1,918 |
|
$ |
2,646 |
|
946 |
|
$ |
(10,785 |
) |
$ |
(449 |
) |
$ |
11,667 |
|
$ |
25 |
|
$ |
5,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balances at January 31, 2015 |
|
1,918 |
|
$ |
1,918 |
|
$ |
2,748 |
|
944 |
|
$ |
(10,809 |
) |
$ |
(812 |
) |
$ |
12,367 |
|
$ |
30 |
|
$ |
5,442 |
|
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Stock options exercised |
|
|
|
|
|
|
|
(6 |
) |
74 |
|
|
|
|
|
|
|
74 |
| |||||||
Restricted stock issued |
|
|
|
|
|
(110 |
) |
(3 |
) |
33 |
|
|
|
|
|
|
|
(77 |
) | |||||||
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Treasury stock purchases, at cost |
|
|
|
|
|
|
|
14 |
|
(500 |
) |
|
|
|
|
|
|
(500 |
) | |||||||
Stock options exchanged |
|
|
|
|
|
|
|
4 |
|
(128 |
) |
|
|
|
|
|
|
(128 |
) | |||||||
Share-based employee compensation |
|
|
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
95 |
| |||||||
Other comprehensive gain net of income tax of $31 |
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
53 |
| |||||||
Investment in the remaining equity of a noncontrolling interest |
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
(57 |
) |
(17 |
) | |||||||
Other |
|
|
|
|
|
128 |
|
|
|
(54 |
) |
|
|
|
|
|
|
74 |
| |||||||
Cash dividends declared ($0.198 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(191 |
) |
|
|
(191 |
) | |||||||
Net earnings including noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,052 |
|
5 |
|
1,057 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balances at August 15, 2015 |
|
1,918 |
|
$ |
1,918 |
|
$ |
2,901 |
|
953 |
|
$ |
(11,384 |
) |
$ |
(759 |
) |
$ |
13,228 |
|
$ |
(22 |
) |
$ |
5,882 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
All amounts in the Notes to the Unaudited Consolidated Financial Statements are in millions except per share amounts.
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 in which the Company is the primary beneficiary. The January 31, 2015 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 Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2015.
The unaudited information in the Consolidated Financial Statements for the second quarter and two quarters ended August 15, 2015 and August 16, 2014, includes the results of operations of the Company for the 12 and 28-week periods then ended.
The net increase (decrease) in book overdrafts previously reported in financing activities in the Consolidated Statements of Cash Flows is now reported within operating activities. Prior year amounts have been revised to the current year presentation. These revisions were not material to the prior years.
Refer to Note 7 for an additional change to the Consolidated Balance Sheets for a recently adopted accounting standard regarding the presentation of debt issuance costs.
On June 25, 2015, the Companys Board of Directors approved a two-for-one stock split of The Kroger Co.s common shares in the form of a 100% stock dividend, which was effective July 13, 2015. All share and per share amounts in our Consolidated Financial Statements and related notes have been retroactively adjusted to reflect the stock split for all periods presented.
2. MERGER
On August 18, 2014, the Company closed its merger with Vitacost.com, Inc. (Vitacost.com). The Companys purchase price allocation was finalized in the second quarter of 2015 and the changes in the fair values assumed from the preliminary amounts were not material.
Pro forma results of operations, assuming the transaction had taken place at the beginning of 2013, are included in the following table. The pro forma information includes historical results of operations of Vitacost.com and adjustments for interest expense that would have been incurred due to financing the merger, depreciation and amortization of the assets acquired and excludes the pre-merger transaction related expenses incurred by Vitacost.com and the Company. The pro forma information does not include efficiencies, cost reductions or synergies 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 the 2013.
|
|
Second Quarter Ended |
|
Two Quarters Ended |
| ||
Sales |
|
$ |
25,402 |
|
$ |
58,494 |
|
Net earnings including noncontrolling interests |
|
346 |
|
848 |
| ||
Net earnings attributable to noncontrolling interests |
|
3 |
|
11 |
| ||
|
|
|
|
|
| ||
Net earnings attributable to The Kroger Co. |
|
$ |
343 |
|
$ |
837 |
|
3. STOCK OPTION PLANS
The Company recognized total share-based compensation of $44 and $36 in the second quarters ended August 15, 2015 and August 16, 2014, respectively. The Company recognized total share-based compensation of $95 and $76 in the first two quarters of 2015 and 2014, respectively. These costs were recognized as operating, general and administrative costs in the Companys Consolidated Statements of Operations.
The Company grants options for common shares (stock options) to employees under various plans at an option price equal to the fair market value of a common share on 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 Companys practice to make an annual grant to employees, which occurred in the second quarter of 2015. Special grants may be made in the other three quarters. Grants to non-employee directors occur on the same date that the annual grant to employees occurs.
Stock options granted in the first two quarters of 2015 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 2015 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 |
|
Weighted-average |
| |
Outstanding, January 31, 2015 |
|
40.8 |
|
$ |
15.56 |
|
Granted |
|
3.3 |
|
$ |
38.33 |
|
Exercised |
|
(5.7 |
) |
$ |
12.99 |
|
Canceled or Expired |
|
(0.2 |
) |
$ |
17.05 |
|
|
|
|
|
|
| |
Outstanding, August 15, 2015 |
|
38.2 |
|
$ |
17.90 |
|
Restricted Stock
|
|
Restricted shares |
|
Weighted-average |
| |
Outstanding, January 31, 2015 |
|
10.2 |
|
$ |
21.04 |
|
Granted |
|
3.1 |
|
$ |
38.32 |
|
Vested |
|
(4.9 |
) |
$ |
21.43 |
|
Forfeited |
|
(0.2 |
) |
$ |
21.68 |
|
|
|
|
|
|
| |
Outstanding, August 15, 2015 |
|
8.2 |
|
$ |
27.38 |
|
The weighted-average grant date fair value of stock options granted during the first two quarters of 2015 and 2014, was $9.76 and $5.98, 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 Companys 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 2015, compared to the first two quarters of 2014, resulted primarily from an increase in the Companys share price, which decreased the expected dividend yield.
The following table reflects the weighted-average assumptions used for grants awarded to option holders:
|
|
2015 |
|
2014 |
|
Risk-free interest rate |
|
2.12% |
|
2.06% |
|
Expected dividend yield |
|
1.20% |
|
1.51% |
|
Expected volatility |
|
24.07% |
|
25.29% |
|
Expected term |
|
7.2 Years |
|
6.6 Years |
|
4. DEBT OBLIGATIONS
Long-term debt consists of:
|
|
August 15, |
|
January 31, |
| ||
|
|
2015 |
|
2015 |
| ||
0.76% to 8.00% Senior Notes due through 2043 |
|
$ |
9,231 |
|
$ |
9,224 |
|
5.00% to 12.75% Mortgages due in varying amounts through 2027 |
|
69 |
|
73 |
| ||
0.37% to 0.38% Commercial paper borrowings due through October 2015 |
|
928 |
|
1,275 |
| ||
Other |
|
467 |
|
454 |
| ||
|
|
|
|
|
| ||
Total debt, excluding capital leases and financing obligations |
|
10,695 |
|
11,026 |
| ||
|
|
|
|
|
| ||
Less current portion |
|
(1,484 |
) |
(1,844 |
) | ||
|
|
|
|
|
| ||
Total long-term debt, excluding capital leases and financing obligations |
|
$ |
9,211 |
|
$ |
9,182 |
|
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 2015 and 2014.
|
|
Second Quarter Ended |
| ||||||||||
|
|
Pension Benefits |
|
Other Benefits |
| ||||||||
|
|
August 15, |
|
August 16, |
|
August 15, |
|
August 16, |
| ||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
| ||||
Service cost |
|
$ |
16 |
|
$ |
10 |
|
$ |
3 |
|
$ |
2 |
|
Interest cost |
|
39 |
|
42 |
|
2 |
|
3 |
| ||||
Expected return on plan assets |
|
(53 |
) |
(56 |
) |
|
|
|
| ||||
Amortization of: |
|
|
|
|
|
|
|
|
| ||||
Prior service cost |
|
|
|
|
|
(3 |
) |
(2 |
) | ||||
Actuarial loss (gain) |
|
24 |
|
12 |
|
(1 |
) |
(1 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net periodic benefit cost |
|
$ |
26 |
|
$ |
8 |
|
$ |
1 |
|
$ |
2 |
|
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 2015 and 2014.
|
|
Two Quarters Ended |
| ||||||||||
|
|
Pension Benefits |
|
Other Benefits |
| ||||||||
|
|
August 15, |
|
August 16, |
|
August 15, |
|
August 16, |
| ||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
| ||||
Service cost |
|
$ |
35 |
|
$ |
24 |
|
$ |
6 |
|
$ |
6 |
|
Interest cost |
|
90 |
|
98 |
|
6 |
|
7 |
| ||||
Expected return on plan assets |
|
(124 |
) |
(130 |
) |
|
|
|
| ||||
Amortization of: |
|
|
|
|
|
|
|
|
| ||||
Prior service cost |
|
|
|
|
|
(6 |
) |
(4 |
) | ||||
Actuarial loss (gain) |
|
55 |
|
28 |
|
(3 |
) |
(3 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net periodic benefit cost |
|
$ |
56 |
|
$ |
20 |
|
$ |
3 |
|
$ |
6 |
|
The Company contributed $5 to its Company-sponsored defined benefit pension plans in the first two quarters of 2015. The Company is not required and does not expect to make any additional contributions in 2015.
The Company contributed $107 and $98 to employee 401(k) retirement savings accounts in the first two quarters of 2015 and 2014, respectively.
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.
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.
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 15, 2015 |
|
August 16, 2014 |
| ||||||||||||
|
|
Earnings |
|
Shares |
|
Per Share |
|
Earnings |
|
Shares |
|
Per Share |
| ||||
Net earnings attributable to The Kroger Co. per basic common share |
|
$ |
429 |
|
963 |
|
$ |
0.44 |
|
$ |
343 |
|
970 |
|
$ |
0.35 |
|
Dilutive effect of stock options |
|
|
|
14 |
|
|
|
|
|
12 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net earnings attributable to The Kroger Co. per diluted common share |
|
$ |
429 |
|
977 |
|
$ |
0.44 |
|
$ |
343 |
|
982 |
|
$ |
0.35 |
|
|
|
Two Quarters Ended |
|
Two Quarters Ended |
| ||||||||||||
|
|
August 15, 2015 |
|
August 16, 2014 |
| ||||||||||||
|
|
Earnings |
|
Shares |
|
Per Share |
|
Earnings |
|
Shares |
|
Per Share |
| ||||
Net earnings attributable to The Kroger Co. per basic common share |
|
$ |
1,042 |
|
966 |
|
$ |
1.08 |
|
$ |
840 |
|
988 |
|
$ |
0.85 |
|
Dilutive effect of stock options |
|
|
|
15 |
|
|
|
|
|
12 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net earnings attributable to The Kroger Co. per diluted common share |
|
$ |
1,042 |
|
981 |
|
$ |
1.06 |
|
$ |
840 |
|
1,000 |
|
$ |
0.84 |
|
The Company had combined undistributed and distributed earnings to participating securities totaling $4 in the second quarters of 2015 and 2014. For the first two quarters of 2015 and 2014, the Company had combined undistributed and distributed earnings to participating securities of $10 and $8, respectively.
The Company had options outstanding for approximately 2 million and 3 million shares during the second quarters of 2015 and 2014, respectively, that were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per share. The Company had options outstanding for approximately 1 million shares in the first two quarters of 2015 and 3 million shares in the first two quarters of 2014 that were excluded from the computations of net 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 2015, the Financial Accounting Standards Board (FASB) amended Accounting Standards Codification 835, Interest-Imputation of Interest. The amendment simplifies the presentation of debt issuance costs related to a recognized debt liability by requiring it be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This amendment became effective for the Company beginning February 1, 2015, and was adopted retrospectively in accordance with the standard. The adoption of this amendment resulted in amounts previously reported in other assets to now be reported within long-term debt including obligations under capital leases and financing obligations in the Consolidated Balance Sheets. These amounts were not material to the prior year. The adoption of this amendment did not have an effect on the Companys Consolidated Statements of Operations.
8. 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 standards 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. Per ASU 2015-14, Deferral of Effective Date, this guidance will be effective for the Company in the first quarter of its fiscal year ending February 2, 2019. Early adoption is permitted as of the first quarter of the Companys fiscal year ending February 3, 2018. The Company is currently in the process of evaluating the effect of adoption of this ASU on the Companys Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-04, Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employers Defined Benefit Obligation and Plan Assets. This amendment permits an entity to measure defined benefit plan assets and obligations using the month end that is closest to the entitys fiscal year end for all plans. This guidance will be effective for the Company in its fiscal year ending January 28, 2017. The implementation of this amendment will not have an effect on the Companys Consolidated Statements of Operations and will not have a significant effect on the Companys Consolidated Balance Sheets.
In April 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share. This guidance will be effective for the Company in its fiscal year ending January 28, 2017. The implementation of this amendment will have an effect on the Companys Notes to the Consolidated Financial Statements and will not have an effect on the Companys Consolidated Statements of Operations or Consolidated Balance Sheets.
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 Companys 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, 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 effect on the Companys 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. Management currently believes that the aggregate range of loss for the Companys exposure is not material to the Company. It remains possible that despite managements current belief, material differences in actual outcomes or changes in managements evaluation or predictions could arise that could have a material adverse effect on the Companys financial condition, results of operations, or cash flows.
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 15, 2015 and January 31, 2015:
August 15, 2015 Fair Value Measurements Using
|
|
Quoted Prices in |
|
Significant Other |
|
Significant |
|
Total |
| ||||
Trading Securities |
|
$ |
49 |
|
$ |
|
|
$ |
|
|
$ |
49 |
|
Available-for-Sale Securities |
|
47 |
|
|
|
|
|
47 |
| ||||
Warrants |
|
|
|
37 |
|
|
|
37 |
| ||||
Long-Lived Assets |
|
|
|
|
|
4 |
|
4 |
| ||||
Interest Rate Hedges |
|
|
|
(1 |
) |
|
|
(1 |
) | ||||
Total |
|
$ |
96 |
|
$ |
36 |
|
$ |
4 |
|
$ |
136 |
|
January 31, 2015 Fair Value Measurements Using
|
|
Quoted Prices in |
|
Significant Other |
|
Significant |
|
Total |
| ||||
Trading Securities |
|
$ |
47 |
|
$ |
|
|
$ |
|
|
$ |
47 |
|
Available-for-Sale Securities |
|
36 |
|
|
|
|
|
36 |
| ||||
Warrants |
|
|
|
26 |
|
|
|
26 |
| ||||
Long-Lived Assets |
|
|
|
|
|
22 |
|
22 |
| ||||
Interest Rate Hedges |
|
|
|
(39 |
) |
|
|
(39 |
) | ||||
Total |
|
$ |
83 |
|
$ |
(13 |
) |
$ |
22 |
|
$ |
92 |
|
In the first two quarters of 2015, unrealized gains on the Level 1 available-for-sale securities totaled $11.
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.
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 January 31, 2015 for further discussion related to the Companys 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 January 31, 2015 for further discussion of the Companys policies regarding the valuation of long-lived assets and store lease exit costs. For the first two quarters of 2015, long-lived assets with a carrying amount of $30 were written down to their fair value of $4 resulting in an impairment charge of $26. 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. In fiscal year 2014, long-lived assets with a carrying amount of $59 were written down to their fair value of $22, resulting in an impairment charge of $37.
Fair Value of Other Financial Instruments
Current and Long-term Debt
The fair value of the Companys 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 upon the net present value of the future cash flow using the forward interest rate yield curve in effect at August 15, 2015 and January 31, 2015. At August 15, 2015, the fair value of total debt was $11,509 compared to a carrying value of $10,695. At January 31, 2015, the fair value of total debt was $12,319 compared to a carrying value of $11,026. The reduction in the fair value of total debt from January 31, 2015, compared to August 15, 2015, is primarily due to a decrease in the forward interest rate yield curve and a reduction in the amount of outstanding commercial paper.
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 15, 2015 and January 31, 2015, the carrying and fair value of long-term investments for which fair value is determinable was $137 and $133, respectively. At August 15, 2015 and January 31, 2015, the carrying value of notes receivable for which fair value is determinable was $112 and $98, respectively.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table represents the changes in AOCI by component for the first two quarters of 2014 and 2015:
|
|
Cash Flow |
|
Available for sale |
|
Pension and |
|
Total(1) |
| ||||
Balance at February 1, 2014 |
|
$ |
(25 |
) |
$ |
12 |
|
$ |
(451 |
) |
$ |
(464 |
) |
OCI before reclassifications |
|
|
|
2 |
|
|
|
2 |
| ||||
Amounts reclassified out of AOCI(3) |
|
|
|
|
|
13 |
|
13 |
| ||||
Net current-period OCI |
|
|
|
2 |
|
13 |
|
15 |
| ||||
Balance at August 16, 2014 |
|
$ |
(25 |
) |
$ |
14 |
|
$ |
(438 |
) |
$ |
(449 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Balance at January 31, 2015 |
|
$ |
(49 |
) |
$ |
17 |
|
$ |
(780 |
) |
$ |
(812 |
) |
OCI before reclassifications(2) |
|
17 |
|
7 |
|
|
|
24 |
| ||||
Amounts reclassified out of AOCI(3) |
|
|
|
|
|
29 |
|
29 |
| ||||
Net current-period OCI |
|
17 |
|
7 |
|
29 |
|
53 |
| ||||
Balance at August 15, 2015 |
|
$ |
(32 |
) |
$ |
24 |
|
$ |
(751 |
) |
$ |
(759 |
) |
(1) All amounts are net of tax.
(2) Net of tax of $10 and $4 for cash flow hedging activities and available for sale securities, respectively, for the first two quarters of 2015.
(3) Net of tax of $8 for pension and postretirement defined benefit plans for the first two quarters of 2014 and $17 for pension and postretirement defined benefit plans for the first two quarters of 2015.
The following table represents the items reclassified out of AOCI and the related tax effects for the second quarter and first two quarters of 2015 and 2014:
|
|
Second Quarter Ended |
|
Two Quarters Ended |
| ||||||||
|
|
August 15, |
|
August 16, |
|
August 15, |
|
August 16, |
| ||||
Pension and postretirement defined benefit plan items |
|
|
|
|
|
|
|
|
| ||||
Amortization of amounts included in net periodic pension expense(1) |
|
21 |
|
9 |
|
46 |
|
21 |
| ||||
Tax expense |
|
(8 |
) |
(4 |
) |
(17 |
) |
(8 |
) | ||||
Net of tax |
|
13 |
|
5 |
|
29 |
|
13 |
| ||||
Total reclassifications, net of tax |
|
$ |
13 |
|
$ |
5 |
|
$ |
29 |
|
$ |
13 |
|
(1) 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 Companys Consolidated Financial Statements for additional details).
12. INCOME TAXES
The effective income tax rate was 34.4% in the second quarter of 2015, compared to 34.2% for the second quarter of 2014. The effective income tax rate was 34.5% for the first two quarters of 2015, compared to 34.7% for the first two quarters of 2014. The effective income tax rate for the second quarter of 2015 and the first two quarters of 2015 differed from the federal statutory rate primarily due to the benefit from the favorable conclusion of certain tax audits and 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 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.
Item 2. Managements 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 2015 total sales were $25.5 billion compared with $25.3 billion for the same period of 2014. This increase was attributable to identical supermarket sales increases and increased fuel gallon sales, partially offset by a decrease in the average retail fuel price. Identical supermarket sales, excluding fuel, increased 5.3% in the second quarter of 2015, compared to the second quarter of 2014, primarily due to an increase in the number of households shopping with us, an increase in visits per household, changes in product mix and product cost inflation. All geographies and all supermarket store departments had positive identical sales. This continues our trend of positive identical supermarket sales growth for 47 consecutive quarters. Total sales for the first two quarters of 2015 were $58.6 billion compared to $58.3 billion for the same period of 2014. This increase was attributable to identical supermarket sales increases and increased fuel gallon sales, offset partially by a decrease in the average retail fuel price. Identical supermarket sales, excluding fuel, increased 5.5% in the first two quarters of 2015, compared to the same period in 2014, primarily due to an increase in the number of households shopping with us, an increase in visits per household, changes in product mix and product cost inflation. Our Customer 1st strategy continues to deliver solid results.
On June 25, 2015, the Board of Directors approved a two-for-one stock split of The Kroger Co.s common shares in the form of a 100% stock dividend, which was effective July 13, 2015. All share and per share amounts in our Managements Discussion and Analysis of Financial Condition and Results of Operation have been retroactively adjusted to reflect the stock split for all periods presented.
For the second quarter of 2015, net earnings totaled $433 million, or $0.44 per diluted share, compared to $347 million, or $0.35 per diluted share for the same period of 2014. The increase in net earnings for the second quarter of 2015, compared to the second quarter of 2014, 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 increased tax expense. For the first two quarters of 2015, net earnings totaled $1.1 billion, or $1.06 per diluted share, compared to $848 million, or $0.84 per diluted share for the same period of 2014. Net earnings for the first two quarters of 2014 included a $0.06 per diluted share charge due to the commitments and withdrawal liabilities arising from the restructuring of certain multiemployer pension plan obligations to help stabilize associates future benefits (pension plan agreements). Excluding the pension plan agreements, net earnings totaled $904 million, or $0.90 per diluted share, for the first two quarters of 2014. The pension plan agreements resulted in an increase in operating, general and administrative (OG&A) expense of $87 million ($56 million after-tax) in the first two quarters of 2014. We believe adjusted net earnings and adjusted net earnings per diluted share present 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 net earnings for the first two quarters of 2015, compared to adjusted net earnings for the first two quarters of 2014, resulted primarily from an increase in non-fuel FIFO operating profit and an increase in earnings from our fuel operations, offset partially by increased tax expense.
Based on the strength of our results for the first two quarters of 2015, we have increased both the lower and upper ranges of our guidance for net earnings per diluted share and identical supermarket sales, without fuel, for fiscal year 2015. Please refer to the Outlook section for more information on our expectations.
RESULTS OF OPERATIONS
Net Earnings
Net earnings totaled $433 million for the second quarter of 2015, an increase of 24.8% from net earnings of $347 million for the second quarter of 2014. The increase in net earnings for the second quarter of 2015, compared to the second quarter of 2014, resulted primarily from an increase in non-fuel FIFO operating profit and an increase in earnings from our fuel operations, offset partially by increased tax expense. The increase in non-fuel FIFO operating profit for the second quarter of 2015, compared to the second quarter of 2014, resulted primarily from the benefit of increased supermarket sales, productivity improvements, effective cost controls and decreased workers compensation and general liability expenses, partially offset by continued investments in lower prices for our customers and increases in company sponsored pension, credit card, incentive plan and shrink costs. Included in continued investments in lower prices for our customers is the cost of our pharmacy programs, which experienced high levels of inflation that were not fully passed on to the customer in the second quarter of 2015. The increase in net earnings from our fuel operations for the second quarter of 2015, compared to the second quarter of 2014, resulted primarily from an increase in the average margin per gallon of fuel sold and an increase in fuel gallons sold.
Net earnings totaled $1.1 billion for the first two quarters of 2015, an increase of 24.1% from net earnings of $848 million for the first two quarters of 2014. Net earnings for the first two quarters of 2015 increased 16.4% from adjusted net earnings of $904 million for the first two quarters of 2014, excluding the pension plan agreements. The increase in net earnings for the first two quarters of 2015, compared to the first two quarters of 2014, resulted primarily from an increase in non-fuel FIFO operating profit and an increase in earnings from our fuel operations, offset partially by increased tax expense. The increase in non-fuel FIFO operating profit for the first two quarters of 2015, compared to the same period in 2014, resulted primarily from the benefit of increased supermarket sales, the 2014 charge due to the pension plan agreements, productivity improvements, effective cost controls and decreased workers compensation and general liability expenses, partially offset by continued investments in lower prices for our customers and increases in company sponsored pension, credit card, incentive plan and shrink costs. The increase in net earnings from our fuel operations for the first two quarters of 2015, compared to the first two quarters of 2014, resulted primarily from an increase fuel gallons sold, partially offset by a decrease in the average margin per gallon of fuel sold.
Net earnings of $0.44 per diluted share for the second quarter of 2015 represented an increase of 25.7% over net earnings of $0.35 per diluted share for the second quarter of 2014. Net earnings per diluted share increased in the second quarter of 2015, compared to the second quarter of 2014, due to increased net earnings.
Net earnings of $1.06 per diluted share for the first two quarters of 2015 represented an increase of 26.2% over net earnings of $0.84 per diluted share for the first two quarters of 2014. Net earnings per diluted share for the first two quarters of 2015 increased 17.8% from adjusted net earnings per diluted share of $0.90 for the first two quarters of 2014, excluding the pension plan agreements. Net earnings per diluted share increased in the first two quarters of 2015, compared to the first two quarters of 2014, 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.
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 2015 and 2014 ($ in millions):
|
|
Second Quarter Ended |
|
Two Quarters Ended |
| ||||||||
|
|
August 15, 2015 |
|
August 16, 2014 |
|
August 15, 2015 |
|
August 16, 2014 |
| ||||
Net earnings attributable to The Kroger Co. |
|
$ |
433 |
|
$ |
347 |
|
$ |
1,052 |
|
$ |
848 |
|
Adjustment for pension plan agreements(1)(2) |
|
|
|
|
|
|
|
56 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings attributable to The Kroger Co. excluding the adjustment item above |
|
$ |
433 |
|
$ |
347 |
|
$ |
1,052 |
|
$ |
904 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net earnings attributable to The Kroger Co. per diluted common share |
|
$ |
0.44 |
|
$ |
0.35 |
|
$ |
1.06 |
|
$ |
0.84 |
|
Adjustment for pension plan agreements(3) |
|
|
|
|
|
|
|
0.06 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings attributable to The Kroger Co. per diluted common share excluding the adjustment item above |
|
$ |
0.44 |
|
$ |
0.35 |
|
$ |
1.06 |
|
$ |
0.90 |
|
|
|
|
|
|
|
|
|
|
| ||||
Average number of common shares used in diluted calculation |
|
977 |
|
982 |
|
981 |
|
1,000 |
|
(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 15, |
|
Percentage |
|
August 16, |
|
Percentage |
|
August 15, |
|
Percentage |
|
August 16, |
|
Percentage |
| ||||
Total supermarket sales without fuel |
|
$ |
20,657 |
|
5.2 |
% |
$ |
19,629 |
|
12.4 |
% |
$ |
48,013 |
|
5.6 |
% |
$ |
45,487 |
|
11.8 |
% |
Fuel sales |
|
4,009 |
|
(18.8 |
)% |
4,936 |
|
8.1 |
% |
8,582 |
|
(22.8 |
)% |
11,119 |
|
5.6 |
% | ||||
Other sales(1) |
|
873 |
|
17.2 |
% |
745 |
|
14.1 |
% |
1,995 |
|
19.8 |
% |
1,665 |
|
14.3 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total sales |
|
$ |
25,539 |
|
0.9 |
% |
$ |
25,310 |
|
11.6 |
% |
$ |
58,590 |
|
0.5 |
% |
$ |
58,271 |
|
10.6 |
% |
(1) Other sales primarily relate to sales at convenience stores, excluding fuel; jewelry stores; manufacturing plants to outside customers; variable interest entities; a specialty pharmacy; in-store health clinics; sales on digital coupon services; and online sales by Vitacost.com.
(2) This column represents the percentage increase in the second quarter of 2014, compared to the second quarter of 2013.
(3) This column represents the percentage increase in the first two quarters of 2014, compared to the first two quarters of 2013.
Total sales increased in the second quarter of 2015, compared to the second quarter of 2014, by 0.9%. The increase in total sales for the second quarter of 2015, compared to the second quarter of 2014, was primarily due to our increase in total supermarket sales without fuel, partially offset by a decrease in fuel sales due to a decrease in the average retail fuel price of 24.5%. The increase in total supermarket sales without fuel for the second quarter of 2015, compared to the second quarter of 2014, was primarily due to our identical supermarket sales increase, excluding fuel, of 5.3%. Identical supermarket sales, excluding fuel, for the second quarter of 2015, compared to the second quarter of 2014, increased primarily due to an increase in the number of households shopping with us, an increase in visits per household, changes in product mix and product cost inflation. Total fuel sales decreased 18.8% in the second quarter of 2015, compared to the second quarter of 2014, primarily due to a decrease in the average retail fuel price of 24.5%, partially offset by an increase in fuel gallons sold of 7.6%. The decrease in the average retail fuel price was caused by a decrease in the product cost of fuel.
Total sales increased in the first two quarters of 2015, compared to the first two quarters of 2014, by 0.5%. The increase in total sales for the first two quarters of 2015, compared to the first two quarters of 2014, was primarily due to our increase in total supermarket sales without fuel, partially offset by a decrease in fuel sales due to a decrease in the average retail fuel price of 28.4%. The increase in total supermarket sales without fuel for the first two quarters of 2015, compared to the first two quarters of 2014, was primarily due to our identical supermarket sales increase, excluding fuel, of 5.5%. Identical supermarket sales, excluding fuel, for the first two quarters of 2015, compared to the first two quarters of 2014, increased primarily due to an increase in the number of households shopping with us, an increase in visits per household, changes in product mix and product cost inflation. Total fuel sales decreased 22.8% in the first two quarters of 2015, compared to the first two quarters of 2014, primarily due to a decrease in the average retail fuel price of 28.4%, partially offset by an increase in fuel gallons sold of 7.7%. 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. Although identical supermarket sales is a relatively standard term, numerous methods exist for calculating identical supermarket sales growth. As a result, the method used by our management to calculate identical supermarket sales may differ from methods other companies use to calculate identical supermarket sales. We urge you to understand the methods used by other companies to calculate identical supermarket sales before comparing our identical supermarket sales to those of other such companies. 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. 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 2015.
Identical Supermarket Sales
($ in millions)
|
|
Second Quarter |
| ||||||||
|
|
August 15, |
|
Percentage |
|
August 16, |
|
Percentage |
| ||
Including fuel centers |
|
$ |
22,951 |
|
1.3 |
% |
$ |
22,659 |
|
5.3 |
% |
Excluding fuel centers |
|
$ |
19,865 |
|
5.3 |
% |
$ |
18,870 |
|
4.8 |
% |
(1) This column represents the percentage increase in identical supermarket sales in the second quarter of 2014, compared to the second quarter of 2013.
Identical Supermarket Sales
($ in millions)
|
|
Two Quarters Ended |
| ||||||||
|
|
August 15, |
|
Percentage |
|
August 16, |
|
Percentage |
| ||
Including fuel centers |
|
$ |
52,652 |
|
0.9 |
% |
$ |
52,180 |
|
4.7 |
% |
Excluding fuel centers |
|
$ |
46,065 |
|
5.5 |
% |
$ |
43,656 |
|
4.7 |
% |
(1) This column represents the percentage increase in identical supermarket sales in the first two quarters of 2014, compared to the first two quarters of 2013.
Gross Margin and FIFO Gross Margin
Our gross margin rate, as a percentage of sales, was 21.44% for the second quarter of 2015, as compared to 20.44% for the second quarter of 2014. The increase in the gross margin rate, as a percentage of sales, in the second quarter of 2015, compared to the second quarter of 2014, resulted primarily from a decrease in retail fuel sales and reductions in transportation and advertising costs, as a percentage of sales, partially offset by continued investments in lower prices for our customers and increased shrink costs, as a percentage of sales.
Our gross margin rate, as a percentage of sales, was 21.79% for the first two quarters of 2015, as compared to 20.71% for the first two quarters of 2014. The increase in the gross margin rate, as a percentage of sales, in the first two quarters of 2015, compared to the first two quarters of 2014, resulted primarily from a decrease in retail fuel sales and reductions in transportation and advertising costs, as a percentage of sales, partially offset by continued investments in lower prices for our customers and increased shrink costs, as a percentage of sales.
We calculate FIFO gross margin as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out (LIFO) charge. Merchandise costs exclude depreciation and rent expenses. Our LIFO charge was $21 million for the second quarter of 2015 and $26 million for the second quarter of 2014. Our LIFO charge was $48 million for the first two quarters of 2015 and $54 million for the first two quarters of 2014. 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 21.52% for the second quarter of 2015, as compared to 20.54% for the second quarter of 2014. Our fuel operations lower our FIFO gross margin rate, as a percentage of sales, due to the very low FIFO gross margin rate on retail fuel sales as compared to non-fuel sales. Excluding the effect of retail fuel operations, our FIFO gross margin rate decreased seven basis points in the second quarter of 2015, compared to the second quarter of 2014. The decrease in FIFO gross margin rate, excluding fuel, in the second quarter of 2015, compared to the second quarter of 2014, resulted primarily from continued investments in lower prices for our customers and increased shrink costs, as a percentage of sales, partially offset by reductions in transportation and advertising costs, as a percentage of sales.
Our FIFO gross margin rate was 21.87% for the first two quarters of 2015, as compared to 20.81% for the first two quarters of 2014. Excluding the effect of retail fuel operations, our FIFO gross margin rate decreased seven basis points for the first two quarters of 2015, compared to the first two quarters of 2014. This decrease in FIFO gross margin rate, excluding fuel, in the first two quarters of 2015, compared to the first two quarters of 2014, resulted primarily from continued investments in lower prices for our customers and increased shrink costs, as a percentage of sales, partially offset by reductions in transportation and advertising costs, as a percentage of sales.
LIFO Charge
The LIFO charge was $21 million in the second quarter of 2015 and $26 million in the second quarter of 2014. The LIFO charge decreased in the second quarter of 2015, compared to the second quarter of 2014, due to our lower expected year-end product cost of inflation in most major categories for fiscal 2015 compared to fiscal 2014.
The LIFO charge was $48 million in the first two quarters of 2015 and $54 million in the first two quarters of 2014. The LIFO charge decreased in the first two quarters of 2015, compared to the first two quarters of 2014, due to our lower expected year-end product cost of inflation in most major categories for 2015 compared to 2014.
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, 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 44 basis points to 15.93% for the second quarter of 2015 from 15.49% for the second quarter of 2014. The increase in OG&A rate, as a percentage of sales, in the second quarter of 2015, compared to the second quarter of 2014, resulted primarily from a decrease in retail fuel sales and increases in company sponsored pension, credit card and incentive plan costs, as a percentage of sales, partially offset by increased supermarket sales, productivity improvements, effective cost controls and decreased workers compensation and general liability expenses. Our retail fuel operations lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of retail fuel sales compared to non-fuel sales. Excluding the effect of retail fuel, our OG&A rate, as a percentage of sales, decreased 31 basis points in the second quarter of 2015, compared to the second quarter of 2014. The decrease in the OG&A rate, excluding fuel, in the second quarter of 2015, compared to the second quarter of 2014, resulted primarily from increased supermarket sales, productivity improvements, effective cost controls and decreased workers compensation and general liability expenses, partially offset by increases in company sponsored pension, credit card and incentive plan costs, as a percentage of sales.
OG&A expenses, as a percentage of sales, increased 48 basis points to 16.08% for the first two quarters of 2015 from 15.60% for the first two quarters of 2014. The increase in OG&A rate, as a percentage of sales, in the first two quarters of 2015, compared to the first two quarters of 2014, resulted primarily from a decrease in retail fuel sales and increases in company sponsored pension, credit card and incentive plan costs, as a percentage of sales, partially offset by increased supermarket sales, the 2014 charge due to the pension plan agreements, productivity improvements, effective cost controls and decreased workers compensation and general liability expenses. Excluding the effect of retail fuel and the pension plan agreements, our adjusted OG&A rate, as a percentage of sales, decreased 20 basis points in the first two quarters of 2015, compared to the first two quarters of 2014. The decrease in the adjusted OG&A rate, as a percentage of sales, excluding fuel and the pension plan agreements, in the first two quarters of 2015, compared to the first two quarters of 2014, resulted primarily from increased supermarket sales, productivity improvements, effective cost controls and decreased workers compensation and general liability expenses, partially offset by increases in company sponsored pension, credit card and incentive plan costs, as a percentage of sales.
Rent Expense
Rent expense was $155 million, or 0.61% of sales, for the second quarter of 2015, compared to $166 million, or 0.65% of sales, for the second quarter of 2014. For the first two quarters of 2015, rent expense was $370 million, or 0.63% of sales, compared to $383 million, or 0.66% of sales, in the first two quarters of 2014. The decrease in rent expense in both the second quarter and the first two quarters of 2015, compared to the second quarter and the first two quarters of 2014, was primarily due to our continued emphasis on owning rather than leasing, whenever possible.
Depreciation and Amortization Expense
Depreciation and amortization expense was $477 million, or 1.87% of total sales, for the second quarter of 2015 compared to $444 million, or 1.76% of total sales, for the second quarter of 2014. The increase in our depreciation and amortization expense for the second quarter of 2015, compared to the second quarter of 2014, in total dollars, was the result of additional depreciation on capital investments, including acquisitions and lease buyouts, of $3.3 billion, during the rolling four quarter period ending with the second quarter of 2015.
Depreciation and amortization expense was $1.1 billion, or 1.87% of total sales, for the first two quarters of 2015 compared to $1.0 billion, or 1.76% of total sales, for the first two quarters of 2014. The increase in our depreciation and amortization expense for the first two quarters of 2015, compared to the first two quarters of 2014, in total dollars, was the result of additional depreciation on capital investments, including acquisitions and lease buyouts, of $3.3 billion, during the rolling four quarter period ending with the second quarter of 2015.
Operating Profit and FIFO Operating Profit
Operating profit was $774 million, or 3.03% of sales, for the second quarter of 2015, compared to $644 million, or 2.54% of sales, for the second quarter of 2014. Operating profit, as a percentage of sales, increased 49 basis points in the second quarter of 2015, compared to the second quarter of 2014, primarily due to increased supermarket sales, the effect of our retail fuel operations, productivity improvements, effective cost controls, decreased workers compensation and general liability expenses, and reductions in transportation and advertising costs, as a percentage of sales, partially offset by continued investments in lower prices for our customers and increases in company sponsored pension, credit card, incentive plan and shrink costs, as a percentage of sales.
Operating profit was $1.9 billion, or 3.20% of sales, for the first two quarters of 2015, compared to $1.6 billion, or 2.70% of sales, for the first two quarters of 2014. Operating profit, as a percentage of sales, increased 50 basis points in the first two quarters of 2015, compared to the first two quarters of 2014, primarily due to increased supermarket sales, the effect of our fuel operations, the 2014 charge due to pension plan agreements, productivity improvements, effective cost controls, decreased workers compensation and general liability expenses, and reductions in transportation and advertising costs, as a percentage of sales, partially offset by continued investments in lower prices for our customers and increases in company sponsored pension, credit card, incentive plan and shrink costs, as a percentage of sales.
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 in-store supermarket location departments. We also derive OG&A expenses, rent and depreciation and amortization through the use of estimated allocations in the calculation of fuel operating profit.
FIFO operating profit was $795 million, or 3.11% of sales, for the second quarter of 2015, compared to $670 million, or 2.65% of sales, for the second quarter of 2014. 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, as a percentage of sales excluding fuel, increased 28 basis points in the second quarter of 2015, compared to the second quarter of 2014. The increase in our FIFO operating profit, excluding fuel, rate in the second quarter of 2015, compared to the second quarter of 2014, was primarily due to increased supermarket sales, productivity improvements, effective cost controls, decreased workers compensation and general liability expenses, and reductions in transportation and advertising costs, as a percentage of sales, partially offset by continued investments in lower prices in our customers and increases in company sponsored pension, credit card, incentive plan and shrink costs, as a percentage of sales.
FIFO operating profit was $1.9 billion, or 3.28% of sales, for the first two quarters of 2015, compared to $1.6 billion, or 2.79% of sales, for the first two quarters of 2014. FIFO operating profit, as a percentage of sales excluding fuel and the pension plan agreements, increased 18 basis points in the first two quarters of 2015, compared to the first two quarters of 2014. The increase in our FIFO operating profit rate, excluding fuel, in the first two quarters of 2015, compared to the first two quarters of 2014, was primarily due to increased supermarket sales, productivity improvements, effective cost controls, decreased workers compensation and general liability expenses, and reductions in transportation and advertising costs, as a percentage of sales, partially offset by continued investments in lower prices for our customers and increases in company sponsored pension, credit card, incentive plan and shrink costs, as a percentage of sales.
Income Taxes
Our effective income tax rate was 34.4% in the second quarter of 2015, compared to 34.2% for the second quarter of 2014. Our effective income tax rate was 34.5% for the first two quarters of 2015, compared to 34.7% for the first two quarters of 2014. Our effective income tax rate for the second quarter of 2015 and the first two quarters of 2015 differed from the federal statutory rate primarily due to the benefit from the favorable conclusion of certain tax audits and utilization of tax credits and deductions, partially offset by the effect of state income taxes. Our 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.
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 2015, compared to $2.6 billion in the first two quarters of 2014. The cash provided by operating activities came from net earnings including noncontrolling interests, adjusted for non-cash expenses, and changes in working capital. Changes in working capital provided cash from operating activities of $512 million in the first two quarters of 2015 and $540 million in the first two quarters of 2014. The decrease in cash provided by changes in working capital for the first two quarters of 2015, compared to the first two quarters of 2014, was primarily due to an increase in cash used for accrued expenses. Prepaid expenses decreased significantly from year-end in 2015 and 2014 reflecting prepayments of certain employee benefits at year-end in each prior year.
Net cash used by investing activities
We used $1.7 billion of cash for investing activities during the first two quarters of 2015, compared to $1.3 billion during the first two quarters of 2014. The amount of cash used for investing activities increased in the first two quarters of 2015 versus the first two quarters of 2014, primarily due to increased cash payments for capital investments.
Net cash used by financing activities
We used $1.0 billion of cash for financing activities in the first two quarters of 2015 compared to $1.4 billion in the first two quarters of 2014. The decrease in the amount of cash used for financing activities for the first two quarters of 2015, compared to the first two quarters of 2014, resulted primarily due to a decrease in repurchases of our outstanding common shares, offset partially by an increase in payments on commercial paper. Proceeds from the issuance of capital stock resulted from exercises of employee stock options.
Debt Management
As of August 15, 2015, we maintained a $2.75 billion (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 facility and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit facility. As of August 15, 2015, we had $928 million of outstanding commercial paper and no borrowings under our credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled $9 million as of August 15, 2015.
Our bank credit facility and the indentures underlying our publicly issued debt contain various restrictive covenants. As of August 15, 2015, we were in compliance with these financial covenants. Furthermore, management believes it is not reasonably likely that we 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 $130 million to $11.3 billion as of the end of the second quarter of 2015, from $11.1 billion as of the end of the second quarter of 2014. Total debt decreased $328 million as of the end of the second quarter of 2015, from $11.6 billion as of year-end 2014. The increase as of the end of the second quarter of 2015, compared to the end of the second quarter of 2014, resulted from the issuance of $500 million of senior notes bearing an interest rate of 2.95%, partially offset by payments at maturity of $300 million of senior notes bearing an interest rate of 4.95% and a decrease in outstanding commercial paper of $162 million.
We anticipate refinancing approximately $500 million of debt maturing in the third quarter of 2015.
Common Share Repurchase Program
During the second quarter of 2015, we invested $43 million to repurchase 1.1 million Kroger common shares at an average price of $38.23 per share. For the first two quarters of 2015, we invested $628 million to repurchase 17.0 million Kroger common shares at an average price of $36.84 per share. These shares were reacquired under two separate share repurchase programs. The first is a $500 million repurchase program that was authorized by our Board of Directors on June 26, 2014. The second is a program that uses the cash proceeds from the exercises of stock options by participants in our stock option and long-term incentive plans as well as the associated tax benefits.
On June 25, 2015, our Board of Directors approved a new $500 million share repurchase program to replace our prior authorization, which had been exhausted. As of August 15, 2015, 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 $4.9 billion, which includes anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of the second quarter 2015. We generally operate with a working capital deficit due to our efficient use of cash in funding operations and have consistent access to the capital markets. 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 $928 million of commercial paper and $500 million of senior notes maturing in the next twelve months, which is included in the $4.9 billion in estimated liquidity needs. The commercial paper and the $500 million of senior notes mature in the third quarter of 2015. 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 mergers, acquisitions and the purchase of leased facilities, totaled $812 million for the second quarter of 2015 compared to $672 million for the second quarter of 2014. Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $1.7 billion in the first two quarters of 2015 and $1.4 billion in the first two quarters of 2014. During the first two quarters of 2015, capital expenditures for the purchase of leased facilities totaled $16 million compared to $28 million for the first two quarters of 2014. During the second quarter of 2015, we opened, acquired, expanded or relocated 15 food stores and also completed 34 major within-the-wall remodels. During the first two quarters of 2015, we opened, acquired, expanded or relocated 32 food stores and also completed 54 major within-the-wall remodels. Total food store square footage at the end of the second quarter of 2015 increased 0.5% from the end of the second quarter of 2014. Excluding mergers, acquisitions and operational closings, total food store square footage at the end of the second quarter of 2015 increased 1.7% over the end of the second quarter of 2014.
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 companys 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.
The following table provides a reconciliation of ROIC for the rolling four quarters basis ended August 15, 2015 ($ in millions). There is no prior year comparative number as the prior year calculation does not include a full year of Harris Teeter assets and results.
|
|
Rolling Four Quarters |
| |
|
|
August 15, 2015 |
| |
Return on Invested Capital |
|
|
| |
Numerator |
|
|
| |
Operating profit |
|
$ |
3,439 |
|
LIFO charge |
|
141 |
| |
Depreciation and amortization |
|
2,020 |
| |
Rent |
|
694 |
| |
Adjusted operating profit on a rolling four quarters basis |
|
$ |
6,294 |
|
|
|
|
| |
Denominator |
|
|
| |
Average total assets |
|
$ |
29,900 |
|
Average taxes receivable(1) |
|
(36 |
) | |
Average LIFO reserve |
|
1,222 |
| |
Average accumulated depreciation and amortization(2) |
|
16,884 |
| |
Average trade accounts payable |
|
(5,169 |
) | |
Average accrued salaries and wages |
|
(1,175 |
) | |
Average other current liabilities(3) |
|
(2,966 |
) | |
Rent x 8 |
|
5,552 |
| |
Average invested capital |
|
$ |
44,212 |
|
Return on Invested Capital |
|
14.24 |
% |
(1) As of August 15, 2015 and August 16, 2014, taxes receivable were $48 and $23, respectively.
(2) As of August 15, 2015 and August 16, 2014, accumulated depreciation and amortization was $17,493 and $16,274, respectively.
(3) As of August 16, 2014, other current liabilities included accrued income taxes of $30. Accrued income taxes are removed from other current liabilities in the calculation of average invested capital.
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. Our critical accounting policies are summarized in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.
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.
The net increase (decrease) in book overdrafts previously reported in financing activities in the Consolidated Statements of Cash Flows are now reported within operating activities. See Recently Adopted Accounting Standards for an additional change to the Consolidated Balance Sheets for a recently adopted accounting standard. Prior year amounts have been revised to the current year presentation. These revisions were not material to the prior years.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In 2015, the Financial Accounting Standards Board (FASB) amended Accounting Standards Codification 835, Interest-Imputation of Interest. The amendment simplifies the presentation of debt issuance costs related to a recognized debt liability by requiring it be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This amendment became effective beginning February 1, 2015, and was adopted retrospectively in accordance with the standard. The adoption of this amendment resulted in amounts previously reported in other assets to now be reported within long-term debt including obligations under capital leases and financing obligations in the Consolidated Balance Sheets. These amounts were not material to the prior year. The adoption of this amendment did not have an effect on our Consolidated Statements of Operations.
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 standards 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. Per ASU 2015-14, Deferral of Effective Date, this guidance will be effective for the Company in the first quarter of its fiscal year ending February 2, 2019. Early adoption is permitted as of the first quarter of our fiscal year ending February 3, 2018. We are currently in the process of evaluating the effect of adoption of this ASU on the Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-04, Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employers Defined Benefit Obligation and Plan Assets. This amendment permits an entity to measure defined benefit plan assets and obligations using the month end that is closest to the entitys fiscal year end for all plans. This guidance will be effective for us in the fiscal year ending January 28, 2017. The implementation of this amendment will not have an effect on the Consolidated Statements of Operations and will not have a significant effect on the Consolidated Balance Sheets.
In April 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share. This guidance will be effective for us in the fiscal year ending January 28, 2017. The implementation of this amendment will have an effect on the Companys Notes to the Consolidated Financial Statements and will not have an effect on the Consolidated Statements of Operations or Consolidated Balance Sheets.
OUTLOOK
This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on managements 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. These include the specific risk factors identified in Risk Factors and Outlook in our Annual Report on Form 10-K for our last fiscal year and any subsequent filings, as well as those identified below.
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, as amended. 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 to be $1.92 to $1.98 per diluted share for 2015, which exceeds our long-term net earnings per diluted share growth rate guidance of 8-11%. We expect the third quarter to be at the high end of the 8-11% range and the fourth quarter to be below the range. |
|
|
|
· |
|
We expect identical supermarket sales growth, excluding fuel, of 4.0%-5.0% in 2015. |
|
|
|
· |
|
We expect full-year non-fuel FIFO operating margin to exceed our goal to slightly expand on a rolling four quarters basis. |
|
|
|
· |
|
We expect our 2015 year-end ROIC to increase slightly compared to the fiscal 2014 result. |
|
|
|
· |
|
For 2015, we expect product cost inflation of 1.0% - 2.0%, excluding fuel, and an annualized LIFO charge of approximately $90 million. |
|
|
|
· |
|
For 2015, we expect interest expense to be approximately $480 million. |
|
|
|
· |
|
We plan to use cash flow primarily to repurchase common shares, fund our cash dividend, fund capital investments and maintain our current investment grade debt rating. |
|
|
|
· |
|
We expect to obtain sales growth from new square footage, as well as from increased productivity from existing locations. |
|
|
|
· |
|
We expect capital investments, excluding mergers, acquisitions and purchases of leased facilities, to be at the high end of the $3.0 - $3.3 billion range. We expect total supermarket square footage for 2015 to grow approximately 2.0 2.5% before mergers, acquisitions and operational closings. |
|
|
|
· |
|
For 2015, we expect our effective tax rate to be approximately 35%, excluding the resolution of certain tax items and potential changes to tax legislation. |
|
|
|
· |
|
We do not anticipate goodwill impairments in 2015. |
|
|
|
· |
|
For 2015, we expect to contribute approximately $5 million to company-sponsored pension plans and $315 million to multi-employer pension funds, $60 million of which was accrued for at the end of 2014. We continue to evaluate and address our potential exposure to under-funded multi-employer pension plans. Although these liabilities are not a direct obligation or liability of Kroger, any new agreements that would commit us to fund certain multi-employer plans will be expensed when our commitment is probable and an estimate can be made. |
|
|
|
· |
|
In 2015, we will negotiate agreements with UFCW for store associates in Denver and Portland. We will also negotiate an agreement with the Teamsters covering our Southern California distribution centers. Negotiations this year 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. |
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 repurchase shares, fund dividends, increase capital investments and maintain our investment grade debt rating, 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 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; our ability to retain pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; our ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of our future growth plans; and the successful integration of Harris Teeter. Our ability to achieve sales and earnings goals may also be affected by our ability to manage the factors identified above. |
|
|
|
· |
|
During the first three quarters of each fiscal year, our LIFO charge and the recognition of LIFO expense is affected primarily by estimated year-end changes in product costs. Our fiscal year LIFO charge is 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. |
|
|
|
· |
|
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 Krogers business. We have assumed economic and competitive situations will not change significantly in 2015.
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 January 31, 2015.
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 Krogers disclosure controls and procedures as of the quarter ended August 15, 2015, the end of the period covered by this report. Based on that evaluation, Krogers Chief Executive Officer and Chief Financial Officer concluded that Krogers 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 SECs 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 Krogers internal control over financial reporting during the quarter ended August 15, 2015, that has materially affected, or is reasonably likely to materially affect, Krogers internal control over financial reporting.
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 Companys 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 possible to reasonably 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 managements current belief, material differences in actual outcomes or changes in managements evaluation or predictions could arise that could have a material adverse impact on the Companys financial condition, results of operations, or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
Period(1) |
|
Total Number |
|
Average |
|
Total Number of |
|
Maximum |
| ||
First four weeks |
|
|
|
|
|
|
|
|
| ||
May 24, 2015 to June 20, 2015 |
|
130,540 |
|
$ |
36.62 |
|
130,540 |
|
$ |
|
|
Second four weeks |
|
|
|
|
|
|
|
|
| ||
June 21, 2015 to July 18, 2015 |
|
1,941,006 |
|
$ |
38.03 |
|
218,779 |
|
$ |
500 |
|
Third four weeks |
|
|
|
|
|
|
|
|
| ||
July 19, 2015 to August 15, 2015 |
|
771,406 |
|
$ |
38.84 |
|
771,406 |
|
$ |
500 |
|
Total |
|
2,842,952 |
|
$ |
38.19 |
|
1,120,725 |
|
$ |
500 |
|
(1) The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The second quarter of 2015 contained three 28-day periods.
(2) Includes (i) shares repurchased under a $500 million share repurchase program authorized by the Board of Directors and announced on June 26, 2014 (2014 Repurchase Program), (ii) shares repurchased under 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, under which repurchases are limited to proceeds received from exercises of stock options and the tax benefits associated therewith (the 1999 Repurchase Program), and (iii) 1,722,227 shares that were surrendered to the Company by participants under our long-term incentive plans to pay for taxes on restricted stock awards.
(3) Represents shares repurchased under the 2014 Repurchase Program and the 1999 Repurchase Program.
(4) The amount shown in this column for the first four weeks reflects the amount remaining under the 2014 Repurchase Program. On June 25, 2015, our Board of Directors approved a new $500 million share repurchase program (the 2015 Repurchase Program) to replace the 2014 Repurchase Program, which has been exhausted. Amounts available under the 1999 Repurchase Program are dependent upon option exercise activity. The 2015 Repurchase Program and the 1999 Repurchase Program do not have an expiration date but may be terminated by the Board of Directors at any time.
Item 6. Exhibits.
EXHIBIT 3.1 |
|
- |
|
Amended Articles of Incorporation. Incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q for the quarter ended May 22, 2010. |
|
|
|
|
|
EXHIBIT 3.2 |
|
- |
|
Amendment to Amended Articles of Incorporation. Incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q for the quarter ended May 23, 2015. |
|
|
|
|
|
EXHIBIT 3.3 |
|
- |
|
The Companys regulations are hereby incorporated by reference to Exhibit 3.2 of the Companys 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 SEC upon request. |
|
|
|
|
|
EXHIBIT 10.1* |
|
- |
|
Form of Performance Unit Agreement Under Long-Term Incentive Plans. |
|
|
|
|
|
EXHIBIT 10.2* |
|
- |
|
Retirement Agreement, between the Company and Michael Ellis, dated as of June 29, 2015. |
|
|
|
|
|
EXHIBIT 10.3* |
|
- |
|
Amendment to Stock Option Agreements, between the Company and Michael Ellis, dated as of June 29, 2015. |
|
|
|
|
|
EXHIBIT 31.1 |
|
- |
|
Rule 13a14(a) / 15d14(a) Certifications Chief Executive Officer. |
|
|
|
|
|
EXHIBIT 31.2 |
|
- |
|
Rule 13a14(a) / 15d14(a) Certifications Chief Financial Officer. |
|
|
|
|
|
EXHIBIT 32.1 |
|
- |
|
Section 1350 Certifications. |
|
|
|
|
|
EXHIBIT 99.1 |
|
- |
|
Additional Exhibit 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. |
|
|
|
|
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EXHIBIT 101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document. |
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EXHIBIT 101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document. |
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EXHIBIT 101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document. |
*Management contract or compensatory plan or arrangement
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.
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THE KROGER CO. | |
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Dated: September 22, 2015 |
By: |
/s/ W. Rodney McMullen |
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W. Rodney McMullen |
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Chairman of the Board and Chief Executive Officer |
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Dated: September 22, 2015 |
By: |
/s/ J. Michael Schlotman |
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J. Michael Schlotman |
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Executive Vice President and Chief Financial Officer |
Exhibit Index
Exhibit 3.1 - |
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Amended Articles of Incorporation. Incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q for the quarter ended May 22, 2010. |
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Exhibit 3.2 - |
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Amendment to Amended Articles of Incorporation. Incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q for the quarter ended May 23, 2015. |
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Exhibit 3.3 - |
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The Companys regulations are hereby incorporated by reference to Exhibit 3.2 of the Companys Quarterly Report on Form 10-Q for the quarter ended May 26, 2007. |
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Exhibit 4.1 - |
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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 SEC upon request. |
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EXHIBIT 10.1* - |
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Form of Performance Unit Agreement Under Long-Term Incentive Plans. |
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EXHIBIT 10.2* - |
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Retirement Agreement, between the Company and Michael Ellis, dated as of June 29, 2015. |
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EXHIBIT 10.3* - |
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Amendment to Stock Option Agreements, between the Company and Michael Ellis, dated as of June 29, 2015. |
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Exhibit 31.1 - |
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Rule 13a14(a) / 15d14(a) Certifications Chief Executive Officer. |
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Exhibit 31.2 - |
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Rule 13a14(a) / 15d14(a) Certifications Chief Financial Officer. |
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Exhibit 32.1 - |
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Section 1350 Certifications. |
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Exhibit 99.1 - |
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Additional Exhibit - Statement of Computation of Ratio of Earnings to Fixed Charges. |
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EXHIBIT 101.INS - |
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XBRL Instance Document. |
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EXHIBIT 101.SCH - |
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XBRL Taxonomy Extension Schema Document. |
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EXHIBIT 101.CAL - |
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XBRL Taxonomy Extension Calculation Linkbase Document. |
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EXHIBIT 101.DEF - |
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XBRL Taxonomy Extension Definition Linkbase Document. |
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EXHIBIT 101.LAB - |
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XBRL Taxonomy Extension Label Linkbase Document. |
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EXHIBIT 101.PRE - |
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XBRL Taxonomy Extension Presentation Linkbase Document. |
*Management contract or compensatory plan or arrangement
EXHIBIT 10.1
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
The date of this document is
FORM OF PERFORMANCE UNIT AWARD
UNDER THE PROVISIONS OF
ONE OF THE KROGER CO.
LONG-TERM INCENTIVE PLANS
Pursuant to the provisions of a Long-Term Incentive Plan (the Plan) of The Kroger Co., the Compensation Committee of the Board of Directors (the Committee) has granted to you, on , , a performance unit award, on and subject to the terms of the Plan and your agreement to the following terms, conditions and restrictions.
1. Delivery of Shares. Subject to and upon the terms, conditions, and restrictions set forth in this Agreement, The Kroger Co. (Kroger) will deliver to you the number of common shares, $1 par value per share, of Kroger (the Shares) equal to the product determined by multiplying (a) the number of performance units indicated on your Executive Compensation form (Notice of Award) by (b) the percentage determined in accordance with the provisions of Paragraphs 2 and 3 below. Delivery of Shares will be deemed to occur on the date of the regularly scheduled meeting of Krogers Board of Directors held in March or such other date as determined by the Committee, and Shares will be deposited into your account at Krogers designated brokerage firm as soon thereafter as is administratively practical.
2. Performance Criteria. You are eligible to earn a percentage of the number of Shares indicated on your Notice of Award. The percentage will be determined based on the extent to which Krogers (i) Customer 1st Tracker results increase, (ii) Associate Survey associate engagement results increase, (iii) total operating costs, as a percentage of sales, decrease, and (iv) return on invested capital increases, as of the end of the third fiscal year (the Performance Period) from , , when compared to those results as of , . Customer 1st Tracker, measuring Kroger performance in four key areas (people, shopping experience, product, and price), will be based on results of customer surveys using the methodology currently in use by Kroger, subject to modification by the Committee. Associate Survey, measuring associate satisfaction, will be based on results of associate surveys using the methodology currently in use by Kroger, subject to modification by the Committee. Total operating costs will be calculated by adding (i) OG&A, depreciation, and rent (excluding fuel), for the total Company, and (ii) warehouse and transportation costs, shrink, and advertising expenses (excluding fuel), for our supermarket operations. Return on invested capital, for purposes of the Plan, will be calculated by dividing adjusted operating profit for the prior four quarters by the average invested capital. Adjusted operating profit will be calculated by excluding from operating profit unusual items included in operating profit, and adding our LIFO charge, depreciation and amortization, and rent. Average invested capital will be 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.
3. Calculation of Awards. The number of shares earned will be based on the criteria set forth in Paragraph 2 above, calculated in the manner shown on Attachment A, and prorated in accordance with paragraph 4 below, if applicable. Any resulting partial Shares will be rounded up or down to the nearest whole Share amount. Kroger will pay to participants, in cash, an amount equal to the product of the total dividends per share paid on Kroger common shares during the Performance Period and the number of shares earned during the Performance Period. In all cases, the effect during the Performance Period of accelerating the payment, funding, or recognition of expense of multi-employer pension liability, or the imposition of pension withdrawal liability; in either case undertaken by Kroger as part of its effort to mitigate its exposure to multi-employer pension plan liability, will be excluded for purposes of calculating the award hereunder. In no event will awards exceed 100% of the number of Shares indicated on the Notice of Award.
4. Termination of Employment, Permanent Disability, Retirement, or Death of Participant.
(a) Participation in the Plan does not create a contract of employment, or grant any employee the right to be retained in the service of Kroger. Any participant whose employment is terminated by Kroger; who voluntarily terminates his or her employment (other than in accordance with paragraph (b) below); or whose pay level drops below pay level 35, prior to the end of the Performance Period, will forfeit all rights hereunder.
(b) If a participant voluntarily terminates his or her employment after reaching age 55 with at least five years of service with Kroger, or due to permanent disability as determined by Kroger, participation will continue, and that participant will receive a prorata number of Shares earned according to the terms of the award proportionate to the period of active service during the Performance Period.
(c) If a participant dies during the Performance Period, participation will continue until the end of the fiscal year in which the death occurs, and the participants designated beneficiary (or if none, then the participants estate) will receive a prorata number of Shares earned and dividends earned according to the terms of the award proportionate to the period of active service during the Performance Period before the participants death. The amount of Shares to be issued, as soon as reasonably practicable as determined by the Committee, will be determined as of the end of the fiscal year in which the participants death occurs based on actual results as of the end of that fiscal year.
(d) Notwithstanding anything contained in this paragraph 4 to the contrary, in the event that during the Performance Period the participant provides services as an employee, director, consultant, agent, or otherwise, to any of Krogers competitors, this agreement and the award hereunder terminate. For purposes of this paragraph 4(d), a competitor is any business that sells groceries, food, drugs, health and beauty care items, motor fuels, or pharmaceuticals, at retail in one or more of the same geographic areas that Kroger sells those products.
(e) For purposes of the Plan, period of active service means the period of time that the participant actually is working for Kroger plus any earned but unused vacation for the year in which the participant ceases employment, and excluding any banked vacation earned but not taken in prior years.
5. Change in Control. Shares in an amount equal to 50% of the number of Shares and the dividends related to those shares indicated on the Notice of Award will be delivered to you if at any time after the date of this agreement any of the following occur:
(a) without prior approval of Krogers Board of Directors, any person, group, entity or group thereof, excluding Krogers employee benefit plans, becomes the owner of, or obtains the right to acquire, 20% or more of the voting power of our then outstanding voting securities; or
(b) a tender or exchange offer has expired, other than an offer by Kroger, under which 20% or more of our then outstanding voting securities have been purchased; or
(c) as a result of, or in connection with, or within two years following (i) a merger or business combination, (ii) a reorganization, or (iii) a proxy contest, in any case which was not approved by Krogers Board of Directors, the individuals who were directors of Kroger immediately before the transaction cease to constitute at least a majority thereof, except for changes caused by death, disability or normal retirement; or
(e) Krogers shareholders have approved (i) an agreement to merge or consolidate with or into another corporation and Kroger is not the surviving corporation or (ii) an agreement, including a plan of liquidation, to sell or otherwise dispose of all or substantially all of Krogers assets.
6. Transferability. Your right to receive a payout under this award is not assignable or transferable by you other than by will or by the laws of descent and distribution.
7. Taxes. In connection with a payment to you under this award, Kroger will withhold or cause to be withheld from that payment the amount of tax required by law to be withheld with respect to the payment. For Shares to be issued under this award, Kroger will withhold sufficient Shares with a market value equal to the tax required by law to be withheld with respect to the award unless you have notified us in writing in advance of the issuance of the Shares of your desire to pay the taxes and have made the funds available to us or our designated agent.
8. Compliance with Code. This award is designed to be exempt from the provisions of Section 409A of the Code as a short term deferral. This award will be construed, administered, and governed in a manner that effects that intent. Kroger does not represent or guarantee that any particular federal or state income, estate, payroll, or other tax consequences will occur because of this award and the compensation provided hereunder. In the event that any other agreement serves to modify this award in a manner that causes the award to not be exempt from Section 409A as a short term deferral, any issuance of Shares or payment of cash to a specified employee within the meaning of Treas. Reg. 1.409A-1(i) (or any successor thereto) on account of termination of employment will be made six months after the date of termination, and termination of employment will not be considered to occur until there is a termination of employment within the meaning of Treasury Regulation Section 1.409(h)(1)(ii), where the employees services permanently decrease to less than 50% of the average level of services performed over the preceding 36 month period.
9. Acceptance of Agreement. In the event that you fail to accept this Agreement within one year from the grant date, Kroger will accept it on your behalf, and your failure to notify Kroger in writing directed to the Benefits Department, The Kroger Co., 1014 Vine Street, Cincinnati, OH 45202, of your desire to reject this Agreement will be deemed to be your express authority for Kroger to accept this Agreement on your behalf.
10. Amendments. Any amendment to the Plan will be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto. No amendment will adversely affect your rights under this Agreement without your consent. Notwithstanding the forgoing, to the extent necessary to preserve Krogers federal tax deduction that would otherwise be denied due to Section 162(m) of the Internal Revenue Code (applicable only to certain top senior executives), Kroger may elect (without your consent) to delay delivery of your award Shares until 30 days following your termination of employment. If Kroger so elects to delay payment, all other deferred compensation payments for the year that would be nondeductible under Section 162(m) also will be delayed to avoid negative tax consequences to you.
11. Severability. In the event that any provision of this Agreement is invalidated for any reason by a court of competent jurisdiction, any provision so invalidated will be deemed to be separable from the other provisions hereof. The remaining provisions will continue to be valid and fully enforceable.
12. Relation to Plan. This Agreement is subject to the terms and conditions of the Plan. In the event of any inconsistency between the provisions of this Agreement and the Plan, the Plan will govern. Capitalized terms used herein without definition have the meanings assigned to them in the Plan. The Committee acting pursuant to the Plan, as constituted from time to time, will, except as expressly provided otherwise herein, have the right to determine any questions that arise in connection with the grant of this award.
13. Successors and Assigns. Without limiting Paragraph 6 hereof, the provisions of this Agreement will inure to the benefit of, and be binding upon, your successors, administrators, heirs, legal representatives and assigns, and the successors and assigns of Kroger.
14. Governing Law. The interpretation, performance, and enforcement of this Agreement will be governed by the laws of the State of Ohio, without giving effect to the principles of conflict of laws thereof.
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THE KROGER CO. | |
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participant |
ATTACHMENT A
TO
PERFORMANCE UNIT AWARD
Performance |
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Shares Earned as a |
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Customer 1st |
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[ ]% per each point improvement over the performance period, provided that no decrease occurs in any of the four key areas. |
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Associate Survey |
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[ ]% per each point improvement |
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Total Operating Costs |
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[ ]% per each basis point reduction |
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Return on Invested Capital |
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[ ]% per each basis point improvement |
EXHIBIT 10.2
June 29, 2015
VIA HAND DELIVERY
Michael Ellis
1014 Vine St.
Cincinnati, OH 45202
Dear Mike,
This letter sets forth the terms and conditions of the agreement between you and The Kroger Co., including for purposes of this agreement its parent, subsidiary and affiliated companies (collectively, hereafter Kroger), concerning the separation of your employment.
1. On June 29, 2015, you will retire and relinquish your position as President and Chief Operating Officer of Kroger and be relieved of your general duties and responsibilities arising from that position as of that date.
2. You will be paid your regular base pay through June 29, 2015 and for any accrued but unused personal days and any accrued but unused vacation time, including remaining 2015 vacation time, any outstanding 2014 vacation time, and any banked vacation time owed to you. In addition, Kroger stock options granted to you prior to todays date but unvested as of todays date will be deemed to have vested, after and despite your retirement, and will become payable on and be paid to you, on June 29, 2018, if and only if as of June 29, 2018 you have not breached any of the provisions of this agreement as set forth below.
3. All other benefits to which you are currently entitled will be governed by the terms and conditions of such benefit plans or programs.
4. Your employment records will reflect that you voluntarily resigned.
5. You agree that this agreement, its terms and conditions, and any and all larger circumstances surrounding the separation of your employment shall remain confidential, and you will not disclose their existence or their substance to any person, except that the contents of this agreement may be disclosed (a) to your attorneys and tax/financial advisors, (b) to any federal, state or local taxing authority, and (c) in connection with any legal proceeding involving your assets. If you are asked about the circumstances surrounding the separation of your employment and you elect to offer any response, you will respond only with the statement I chose to retire from my employment, and nothing more. In the event you breach any of the foregoing provisions of this paragraph 5, you agree that the stock options referred to in paragraph 2, above, will be deemed not to have vested and will not be payable or paid.
6. You further agree that you will not at any time in the future disparage or malign Kroger or any of its officers, directors, employees, agents or assigns, or any of their respective management philosophies, direction, values, activities or practices of any kind, in any way in any communications you may have with any third party, and that you will not at any time in the future divulge or disclose in any way to any third party any Kroger trade secrets, business plans, strategies or policies, financial or marketing information, sales or market share information, vendor or supplier information, contractual information, or other confidential company information of any kind whatsoever (that is, business-related information not already disclosed by the company, or any other non-public company information). In the event you breach any of the foregoing provisions of this paragraph 6, you agree that the stock options referred to in paragraph 2, above, will be deemed not to have vested and will not be payable or paid.
7. Nothing in the foregoing provisions precludes or shall be deemed to preclude any individual from exercising any right or privilege to engage in certain lawfully protected communications with certain federal government agencies, or any communication required by law.
8. This agreement is subject to Krogers receipt of executed and unrevoked copies of this letter of agreement, the enclosed resignation form and the enclosed waiver and release.
9. You agree to execute the attached Waiver of Rights and General Release of All Claims.
10. You will immediately provide or return to Kroger all company-owned computers or other electronic devices of any kind, as well as any other company-owned equipment and confidential company information (as described in paragraph 6, above) or documentation of any kind.
11. In exchange for being allowed the opportunity to resign and the other foregoing benefits, which are more than what would otherwise be provided to you under applicable law or Kroger policy, you will return to Kroger executed copies of this letter agreement, the enclosed resignation form and the waiver and release.
12. This agreement, your voluntary resignation and the waiver and release constitute the full and complete understanding between you and Kroger regarding the separation of your employment and no other understanding or agreement, oral or written, exists.
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Sincerely, |
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/s/ Katy Barclay |
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Katy Barclay |
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Senior Vice President, Human Resources |
I have read and fully understand the foregoing, and having had the opportunity to consider such terms and conditions and to consult with advisors of my choosing, I hereby agree to each of the above terms and conditions and acknowledge that I do so of my own volition, free of coercion.
6/29/15 |
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/s/ Michael Ellis |
Date |
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Michael Ellis |
WAIVER OF RIGHTS
AND GENERAL RELEASE OF ALL CLAIMS
I, Michael Ellis, in exchange and consideration for certain special benefits described in a letter agreement dated June 29, 2015 and other good and valuable consideration that I have accepted from The Kroger Co. (including its parent, subsidiary and affiliated companies, including but not limited to Fred Meyer Stores, Inc., hereinafter collectively referred to as Kroger) and that I acknowledge exceed and are in addition to what I would otherwise be entitled to receive, do hereby and forever release and covenant not to sue Kroger, its employees, officers, directors, agents and assigns, for or with respect to any action, cause of action, suit, debt or claim which has arisen or may arise during the course of or in connection with my employment with Kroger, or the separation of my employment with Kroger, whether presently known or unknown, under local, state, federal, common or any other law, excepting only such claims that may later arise from a material breach of the aforementioned letter agreement dated June 29, 2015. I further hereby expressly state and acknowledge that, up to and including the date of this Waiver and Release, I have been accorded all leave time and all opportunities for leave time available or potentially available to me, and I have sustained no illness or injury in any workplace of Kroger or in conjunction with or in any way related to my employment with Kroger that I have not already reported to Kroger, its workers compensation insurer or administrator, and/or the relevant state workers compensation agency.
Date: |
6/29/15 |
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/s/ Michael Ellis |
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MICHAEL ELLIS |
ACKNOWLEDGMENT AND AGREEMENT
I, Michael Ellis, acknowledge and agree that in the event (and only in the event) that the compensation committee of The Kroger Co.s Board of Directors does not approve the terms of paragraphs 2, 5 and 6 of the letter agreement presented to me and executed by me on June 29, 2015, those particular terms of the letter agreement shall be null and void and alternative terms relevant to those paragraphs will be (and will have to be) negotiated. In the event that the above-referenced committee does approve of those terms, the agreement will as drafted and executed by me on June 29, 2015 be fully valid and enforceable.
Date: |
6/29/15 |
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/s/ Michael Ellis |
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MICHAEL ELLIS |
EXHIBIT 10.3
Amendment to Stock Option Agreements
This Amendment to Stock Option Agreements is entered into as of June 29, 2015 (the Effective Date), between The Kroger Co., an Ohio corporation (Kroger), and Michael Ellis (you).
1. On the Effective Date, you and Kroger entered into an agreement regarding your retirement from Kroger (the Retirement Agreement). Section 2 of the Retirement Agreement provides as follows: In addition, Kroger stock options granted to you prior to todays date but unvested as of todays date will be deemed to have vested, after and despite your retirement, and will be become payable on and be paid to you on June 29, 2018 in accordance with the same, if and only if as of June 29, 2018 you have not breached any of the provisions of this agreement as set forth below. The purpose of this Amendment to Stock Option Agreements is to provide additional detail with respect to that provision of the Retirement Agreement.
2. Under one or more of its Long-Term Incentive Plans, you and Kroger entered into the following agreements:
a. Non-Qualified Stock Option Grant Agreement dated June 23, 2011 (the 2011 Agreement);
b. Non-Qualified Stock Option Grant Agreement dated July 12, 2012 (the 2012 Agreement);
c. Non-Qualified Stock Option Grant Agreement dated July 15, 2013 (the 2013 Agreement); and
d. Non-Qualified Stock Option Grant Agreement dated July 15, 2014 (the 2014 Agreement, and together with the 2011 Agreement, 2012 Agreement and 2013 Agreement, the Agreements).
Pursuant to the Agreements, Kroger granted to you nonqualified stock options to purchase Kroger common shares (the Stock Options).
3. Paragraph 2 of each of the Agreements provides that if your employment by or service to Kroger is terminated prior to the option becoming exercisable, all rights under such Agreement will terminate. Kroger and you agree to the following:
a. The 2011 Agreement is amended by adding the following two sentences to the end of paragraph 2: If and only if as of June 29, 2018 you have not breached any of the provisions of Section 5 or 6 of the Retirement Agreement, the 8,800 Stock Options (this number has been adjusted for July 13, 2015 stock split) granted under this agreement that remain unvested as of June 29, 2015 shall vest on June 29, 2018, and shall be exercisable until the close of market on June 28, 2019. If you have breached any of the provisions of Section 5 or 6 of the Retirement Agreement, all rights with respect to such unvested options shall terminate.
b. The 2012 Agreement is amended by adding the following two sentences to the end of paragraph 2: If and only if as of June 29, 2018 you have not breached any of the provisions of Section 5 or 6 of the Retirement Agreement, the 26,400 Stock Options (this number has been adjusted for July 13, 2015 stock split) granted under this agreement that remain unvested as of June 29, 2015 shall vest on June 29, 2018, and shall be exercisable until the close of market on June 28, 2019. If you have breached any of the provisions of Section 5 or 6 of the Retirement Agreement, all rights with respect to such unvested options shall terminate.
c. The 2013 Agreement is amended by adding the following two sentences to the end of paragraph 2: If and only if as of June 29, 2018 you have not breached any of the provisions of Section 5 or 6 of the Retirement Agreement, the 40,576 Stock Options (this number has been adjusted for July 13, 2015 stock split) granted under this agreement that remain unvested as of June 29, 2015 shall vest on June 29, 2018, and shall be exercisable until the close of market on June 28, 2019. If you have breached any of the provisions of Section 5 or 6 of the Retirement Agreement, all rights with respect to such unvested options shall terminate.
d. The 2014 Agreement is amended by adding the following two sentences to the end of paragraph 2: If and only if as of June 29, 2018 you have not breached any of the provisions of Section 5 or 6 of the Retirement Agreement, the 90,000 Stock Options (this number has been adjusted for July 13, 2015 stock split) granted under this agreement that remain unvested as of June 29, 2015 shall vest on June 29, 2018, and shall be exercisable until the close of market on June 28, 2019. If you have breached any of the provisions of Section 5 or 6 of the Retirement Agreement, all rights with respect to such unvested options shall terminate.
4. Except as amended above, the Agreements remain unchanged.
The parties have executed this amendment as of the Effective Date.
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The Kroger Co. | |
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By |
/s/ W. Rodney McMullen |
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W. Rodney McMullen |
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Chairman of the Board and Chief Executive Officer |
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(you) | |
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/s/ Michael Ellis | |
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Michael Ellis |
EXHIBIT 31.1
CERTIFICATION
I, W. Rodney McMullen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Kroger Co.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: September 22, 2015 |
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/s/ W. Rodney McMullen |
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W. Rodney McMullen |
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Chairman of the Board and |
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Chief Executive Officer |
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(principal executive officer) |
EXHIBIT 31.2
CERTIFICATION
I, J. Michael Schlotman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Kroger Co.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: September 22, 2015 |
|
|
/s/ J. Michael Schlotman |
|
J. Michael Schlotman |
|
Executive Vice President and |
|
Chief Financial Officer |
|
(principal financial officer) |
EXHIBIT 32.1
NOTE: The referenced officers, based on their knowledge, furnish the following certification, pursuant to 18 U.S.C. §1350.
We, W. Rodney McMullen, Chief Executive Officer and Chairman of the Board, and J. Michael Schlotman, Executive Vice President and Chief Financial Officer, of The Kroger Co. (the Company), do hereby certify in accordance with 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Quarterly Report on Form 10-Q of the Company for the period ended August 15, 2015 (the Periodic Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. §78m or 78o(d)); and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: September 22, 2015 |
/s/ W. Rodney McMullen |
|
W. Rodney McMullen |
|
Chairman of the Board and Chief Executive Officer |
|
|
|
/s/ J. Michael Schlotman |
|
J. Michael Schlotman |
|
Executive Vice President and Chief Financial Officer |
A signed original of this written statement as required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to The Kroger Co., and will be retained by The Kroger Co. and furnished to the SEC or its staff upon request.
EXHIBIT 99.1
Schedule of computation of ratio of earnings to fixed charges of The Kroger Co. and consolidated subsidiary companies for the five fiscal years ended January 31, 2015 and for the two quarters ended August 15, 2015 and August 16, 2014.
|
|
August 15, |
|
August 16, |
|
January 31, |
|
February 1, |
|
February 2, |
|
January 28, |
|
January 29, |
| |||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
2013 |
|
2012 |
|
2011 |
| |||||||
|
|
(28 weeks) |
|
(28 weeks) |
|
(52 weeks) |
|
(52 weeks) |
|
(53 weeks) |
|
(52 weeks) |
|
(52 weeks) |
| |||||||
|
|
(in millions of dollars) |
| |||||||||||||||||||
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Earnings before tax expense |
|
$ |
1,614 |
|
$ |
1,315 |
|
$ |
2,649 |
|
$ |
2,282 |
|
$ |
2,302 |
|
$ |
843 |
|
$ |
1,734 |
|
Fixed charges |
|
477 |
|
480 |
|
896 |
|
797 |
|
823 |
|
794 |
|
826 |
| |||||||
Capitalized interest |
|
(5 |
) |
(2 |
) |
(5 |
) |
(5 |
) |
(3 |
) |
(6 |
) |
(7 |
) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Pre-tax earnings before fixed charges |
|
$ |
2,086 |
|
$ |
1,793 |
|
$ |
3,540 |
|
$ |
3,074 |
|
$ |
3,122 |
|
$ |
1,631 |
|
$ |
2,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest |
|
$ |
266 |
|
$ |
262 |
|
$ |
493 |
|
$ |
448 |
|
$ |
465 |
|
$ |
441 |
|
$ |
455 |
|
Portion of rental payments deemed to be interest |
|
211 |
|
218 |
|
403 |
|
349 |
|
358 |
|
353 |
|
371 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total fixed charges |
|
$ |
477 |
|
$ |
480 |
|
$ |
896 |
|
$ |
797 |
|
$ |
823 |
|
$ |
794 |
|
$ |
826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Ratio of earnings to fixed charges |
|
4.4 |
|
3.7 |
|
4.0 |
|
3.9 |
|
3.8 |
|
2.1 |
|
3.1 |
|
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