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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended May 21, 2022

OR

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

Graphic

The Kroger Co.

(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, Ohio 45202

(Address of principal executive offices)

(Zip Code)

(513) 762-4000

(Registrant’s telephone number, including area code)

Unchanged

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common, $1.00 Par Value

KR

New York Stock Exchange

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 No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

There were 715,560,381 shares of Common Stock ($1 par value) outstanding as of June 21, 2022.

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

First Quarter Ended

May 21,

May 22,

(In millions, except per share amounts)

    

2022

    

2021

    

 

Sales

$

44,600

$

41,298

Operating expenses

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

 

34,952

 

31,947

Operating, general and administrative

 

6,997

 

7,424

Rent

 

256

 

261

Depreciation and amortization

 

890

 

861

Operating profit

 

1,505

 

805

Other income (expense)

Interest expense

(177)

(165)

Non-service component of company-sponsored pension plan costs

16

18

Loss on investments

(532)

(479)

Net earnings before income tax expense

 

812

 

179

Income tax expense

 

146

 

36

Net earnings including noncontrolling interests

 

666

 

143

Net income attributable to noncontrolling interests

 

2

 

3

Net earnings attributable to The Kroger Co.

$

664

$

140

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

$

0.91

$

0.18

Average number of common shares used in basic calculation

 

722

 

752

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

$

0.90

$

0.18

Average number of common shares used in diluted calculation

 

733

 

760

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

2

THE KROGER CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

First Quarter Ended

May 21,

May 22,

(In millions)

    

2022

    

2021

 

Net earnings including noncontrolling interests

$

666

$

143

Other comprehensive income

Change in pension and other postretirement defined benefit plans, net of income tax(1)

1

Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(2)

2

2

Total other comprehensive income

 

2

3

Comprehensive income

 

668

 

146

Comprehensive income attributable to noncontrolling interests

 

2

 

3

Comprehensive income attributable to The Kroger Co.

$

666

$

143

(1) Amount is net of tax of ($1) for the first quarter of 2022 and $1 for the first quarter of 2021.
(2) Amount is net of tax of $1 for the first quarters of 2022 and 2021.

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

3

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(unaudited)

    

May 21,

    

January 29,

 

(In millions, except par amounts)

2022

2022

 

ASSETS 

Current assets 

Cash and temporary cash investments 

$

1,382

$

1,821

Store deposits in-transit 

 

1,110

 

1,082

Receivables 

 

1,887

 

1,828

FIFO inventory 

 

9,021

 

8,353

LIFO reserve 

 

(1,663)

 

(1,570)

Prepaid and other current assets 

539

660

Total current assets 

 

12,276

 

12,174

Property, plant and equipment, net 

 

24,209

 

23,789

Operating lease assets

6,760

6,695

Intangibles, net

 

928

 

942

Goodwill 

 

3,076

 

3,076

Other assets 

 

1,842

 

2,410

Total Assets 

$

49,091

$

49,086

LIABILITIES 

Current liabilities 

Current portion of long-term debt including obligations under finance leases

$

587

$

555

Current portion of operating lease liabilities

652

650

Trade accounts payable 

 

7,556

 

7,117

Accrued salaries and wages 

 

1,171

 

1,736

Other current liabilities 

 

6,272

 

6,265

Total current liabilities 

 

16,238

 

16,323

Long-term debt including obligations under finance leases

13,052

12,809

Noncurrent operating lease liabilities

6,460

6,426

Deferred income taxes 

 

1,532

 

1,562

Pension and postretirement benefit obligations

 

455

 

478

Other long-term liabilities 

 

1,961

 

2,059

Total Liabilities 

 

39,698

 

39,657

Commitments and contingencies see Note 6

SHAREHOLDERS’ EQUITY 

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

Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2022 and 2021

 

1,918

 

1,918

Additional paid-in capital 

 

3,714

 

3,657

Accumulated other comprehensive loss 

 

(465)

 

(467)

Accumulated earnings 

 

24,583

 

24,066

Common shares in treasury, at cost, 1,198 shares in 2022 and 1,191 shares in 2021

 

(20,339)

 

(19,722)

Total Shareholders’ Equity - The Kroger Co.

 

9,411

 

9,452

Noncontrolling interests 

 

(18)

 

(23)

Total Equity 

 

9,393

 

9,429

Total Liabilities and Equity 

$

49,091

$

49,086

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

4

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

First Quarter Ended

May 21,

May 22,

(In millions)

    

2022

    

2021

 

Cash Flows from Operating Activities:

Net earnings including noncontrolling interests 

$

666

$

143

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

Depreciation and amortization

 

890

 

861

Operating lease asset amortization

186

191

LIFO charge

 

93

 

37

Share-based employee compensation

 

57

 

56

Company-sponsored pension plans

 

(12)

 

(14)

Deferred income taxes

 

(30)

 

(2)

Loss on the sale of assets

9

Loss on investments

532

479

Other

 

54

 

100

Changes in operating assets and liabilities:

Store deposits in-transit

 

(28)

 

84

Receivables

 

(2)

 

14

Inventories

 

(676)

 

205

Prepaid and other current assets

 

117

 

369

Trade accounts payable

 

439

 

341

Accrued expenses

 

(748)

 

(548)

Income taxes receivable and payable

 

(70)

(175)

Operating lease liabilities

(214)

(214)

Other

 

(152)

 

320

Net cash provided by operating activities

 

1,102

 

2,256

Cash Flows from Investing Activities:

Payments for property and equipment, including payments for lease buyouts

 

(745)

 

(820)

Proceeds from sale of assets

 

14

7

Other

 

8

 

(40)

Net cash used by investing activities

 

(723)

 

(853)

Cash Flows from Financing Activities:

Payments on long-term debt including obligations under finance leases

 

(45)

(328)

Dividends paid

(154)

(138)

Proceeds from issuance of capital stock

113

 

31

Treasury stock purchases

 

(665)

 

(402)

Proceeds from financing arrangement

166

Other

(67)

 

(110)

Net cash used by financing activities

 

(818)

 

(781)

Net (decrease) increase in cash and temporary cash investments

 

(439)

 

622

Cash and temporary cash investments:

Beginning of year

 

1,821

 

1,687

End of period

$

1,382

$

2,309

Reconciliation of capital investments:

Payments for property and equipment, including payments for lease buyouts

$

(745)

$

(820)

Payments for lease buyouts

3

 

Changes in construction-in-progress payables

 

(229)

 

154

Total capital investments, excluding lease buyouts

$

(971)

$

(666)

Disclosure of cash flow information:

Cash paid during the year for interest

$

198

$

185

Cash paid during the year for income taxes

$

244

$

205

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

5

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(unaudited)

Accumulated

Additional

Other

Common Stock

Paid-In

Treasury Stock

Comprehensive

Accumulated

Noncontrolling

(In millions, except per share amounts)

  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Loss

  

Earnings

  

Interest

  

Total

Balances at January 30, 2021

1,918

$

1,918

$

3,461

 

1,160

$

(18,191)

$

(630)

$

23,018

$

(26)

 

$

9,550

Issuance of common stock:

Stock options exercised

 

 

 

 

(2)

 

31

 

 

 

 

31

Restricted stock issued

 

 

 

(35)

 

(1)

 

17

 

 

 

 

(18)

Treasury stock activity:

Treasury stock purchases, at cost

 

 

 

 

10

 

(338)

 

 

 

 

(338)

Stock options exchanged

 

 

 

 

2

 

(64)

 

 

 

 

(64)

Share-based employee compensation

 

 

 

56

 

 

 

 

 

 

56

Other comprehensive income net of income tax of $2

 

 

 

 

 

 

3

 

 

 

3

Other

 

 

 

23

 

 

(23)

 

 

1

 

3

 

4

Cash dividends declared ($0.18 per common share)

 

 

 

 

 

 

 

(138)

 

 

(138)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

140

 

3

 

143

Balances at May 22, 2021

 

1,918

 

$

1,918

 

$

3,505

 

1,169

 

$

(18,568)

 

$

(627)

 

$

23,021

 

$

(20)

 

$

9,229

Issuance of common stock:

Stock options exercised

 

 

 

 

(2)

 

54

 

 

 

 

54

Restricted stock issued

 

 

 

(99)

 

(2)

 

56

 

 

 

 

(43)

Treasury stock activity:

Treasury stock purchases, at cost

 

 

 

 

8

 

(299)

 

 

 

 

(299)

Stock options exchanged

 

 

 

 

1

 

(50)

 

 

 

 

(50)

Share-based employee compensation

 

 

 

52

 

 

 

 

 

 

52

Other comprehensive income net of income tax of $4

 

 

 

 

 

 

2

 

 

 

2

Other

 

 

 

69

 

 

(69)

 

 

 

(2)

 

(2)

Cash dividends declared ($0.21 per common share)

 

 

 

 

 

 

 

(154)

 

 

(154)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

467

 

2

 

469

Balances at August 14, 2021

 

1,918

 

$

1,918

 

$

3,527

 

1,174

 

$

(18,876)

 

$

(625)

 

$

23,334

 

$

(20)

 

$

9,258

Issuance of common stock:

Stock options exercised

 

 

 

 

(1)

 

33

 

 

 

 

33

Restricted stock issued

 

 

 

(3)

 

 

 

 

 

 

(3)

Treasury stock activity:

Treasury stock purchases, at cost

 

 

 

 

6

 

(251)

 

 

 

 

(251)

Stock options exchanged

 

 

 

 

1

 

(47)

 

 

 

 

(47)

Share-based employee compensation

 

 

 

51

 

 

 

 

 

 

51

Other comprehensive income net of income tax of $37

 

 

 

 

 

 

134

 

 

 

134

Other

 

 

 

15

 

 

(15)

 

 

(1)

 

(10)

 

(11)

Cash dividends declared ($0.21 per common share)

 

 

 

 

 

 

 

(158)

 

 

(158)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

483

 

2

 

485

Balances at November 6, 2021

 

1,918

 

$

1,918

 

$

3,590

 

1,180

 

$

(19,156)

 

$

(491)

 

$

23,658

 

$

(28)

 

$

9,491

Issuance of common stock:

Stock options exercised

 

 

 

 

(2)

 

54

 

 

 

 

54

Restricted stock issued

 

 

 

 

 

 

 

 

 

Treasury stock activity:

Treasury stock purchases, at cost

 

 

 

 

11

 

(534)

 

 

 

 

(534)

Stock options exchanged

 

 

 

 

2

 

(64)

 

 

 

 

(64)

Share-based employee compensation

 

 

 

44

 

 

 

 

 

 

44

Other comprehensive income net of income tax of $8

 

 

 

 

 

 

24

 

 

 

24

Other

 

 

 

23

 

 

(22)

 

 

 

1

 

2

Cash dividends declared ($0.21 per common share)

 

 

 

 

 

 

 

(157)

 

 

(157)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

565

 

4

 

569

Balances at January 29, 2022

 

1,918

 

$

1,918

 

$

3,657

 

1,191

 

$

(19,722)

 

$

(467)

 

$

24,066

 

$

(23)

 

$

9,429

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

6

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(unaudited)

Accumulated

Additional

Other

Common Stock

Paid-In

Treasury Stock

Comprehensive

Accumulated

Noncontrolling

(In millions, except per share amounts)

  

Shares

  

Amount

  

Capital

  

Shares

  

Amount

  

Loss

  

Earnings

  

Interest

  

Total

Balances at January 29, 2022

1,918

$

1,918

$

3,657

 

1,191

$

(19,722)

$

(467)

$

24,066

$

(23)

$

9,429

Issuance of common stock:

Stock options exercised

 

 

 

 

(4)

 

113

 

 

 

 

113

Restricted stock issued

 

 

 

(77)

 

(2)

 

12

 

 

 

 

(65)

Treasury stock activity:

Treasury stock purchases, at cost

 

 

 

 

10

 

(520)

 

 

 

 

(520)

Stock options exchanged

 

 

 

 

3

 

(145)

 

 

 

 

(145)

Share-based employee compensation

 

 

 

57

 

 

 

 

 

 

57

Other comprehensive income net of income tax of $-

 

 

 

 

 

 

2

 

 

 

2

Other

 

 

 

77

 

 

(77)

 

 

 

3

 

3

Cash dividends declared ($0.21 per common share)

 

 

 

 

 

 

 

(147)

 

 

(147)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

664

 

2

 

666

Balances at May 21, 2022

 

1,918

 

$

1,918

 

$

3,714

 

1,198

 

$

(20,339)

 

$

(465)

 

$

24,583

 

$

(18)

 

$

9,393

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

7

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 other consolidated entities. The January 29, 2022 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 adjustments, all of which are of a normal, recurring nature that are necessary for a fair statement 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 Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022.

The unaudited information in the Consolidated Financial Statements for the first quarter ended May 21, 2022 and May 22, 2021, includes the results of operations of the Company for the 16-week periods then ended.

Fair Value Measurements

Fair value measurements are classified and disclosed in one of the following three categories:

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.

The Company records 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 at approximated fair value. Certain other investments and derivatives are recorded as Level 1, 2 or 3 instruments. The equity investment in Ocado is measured at fair value through net earnings. The fair value of all shares owned, which is measured using Level 1 inputs, was $455 and $987 as of May 21, 2022 and January 29, 2022, respectively, and is included in “Other assets” in the Company’s Consolidated Balance Sheets. An unrealized loss for this Level 1 investment of approximately $532 and $479 for the first quarters of 2022 and 2021, respectively, are included in “Loss on investments” in the Company’s Consolidated Statements of Operations. Refer to Note 2 for the disclosure of debt instrument fair values.

8

2.

DEBT OBLIGATIONS

Long-term debt consists of:

May 21,

January 29,

    

2022

    

2022

1.70% to 8.00% Senior Notes due through 2049

$

10,609

$

10,607

Other

 

1,122

 

1,138

Total debt, excluding obligations under finance leases

 

11,731

 

11,745

Less current portion

 

(452)

 

(451)

Total long-term debt, excluding obligations under finance leases

$

11,279

$

11,294

The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at May 21, 2022 and January 29, 2022. At May 21, 2022, the fair value of total debt was $11,366 compared to a carrying value of $11,731. At January 29, 2022, the fair value of total debt was $13,189 compared to a carrying value of $11,745.

During the first quarter of 2021, the Company acquired 28, previously leased, properties for a purchase price of $455. Separately, the Company also entered into a transaction to sell those properties to a third party for total proceeds of $621. Total cash proceeds received as a result of the transactions was $166. The sale transaction did not qualify for sale-leaseback accounting treatment. As a result, the Company recorded property, plant and equipment for the $455 price paid and recorded a $621 financing obligation. The leases have a base term of 25 years and twelve option periods of five years each. The Company has the option to purchase the individual properties for fair market value at the end of the base term or at the end of any option period. The Company is obligated to repurchase the properties at the end of the base term for $300 if the lessor exercises its put option.

3.

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 first quarters of 2022 and 2021:

First Quarter Ended

 

Pension Benefits

Other Benefits

 

May 21,

May 22,

May 21,

May 22,

 

    

2022

    

2021

    

2022

    

2021

 

Components of net periodic benefit cost: 

Service cost 

 

$

3

 

$

3

 

$

1

 

$

1

Interest cost 

 

30

 

32

 

2

 

1

Expected return on plan assets 

 

(47)

 

(53)

 

 

Amortization of: 

Prior service cost 

 

 

 

(4)

 

(4)

Actuarial loss (gain)

 

8

 

12

 

(5)

 

(6)

Net periodic benefit cost 

 

$

(6)

 

$

(6)

 

$

(6)

 

$

(8)

The Company is not required to make any contributions to its company-sponsored pension plans in 2022, but may make contributions to the extent such contributions are beneficial to the Company. The Company did not make any contributions to its company-sponsored pension plans in the first quarters of 2022 and 2021.

The Company contributed $105 and $95 to employee 401(k) retirement savings accounts in the first quarters of 2022 and 2021, respectively.

9

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. In addition to the recurring multi-employer pension contributions the Company makes in the normal course of business, in the first quarter of 2021, the Company contributed an incremental $70, $54 net of tax, to multi-employer pension plans, helping stabilize future associate benefits.

During the first quarter of 2021, associates within the Fred Meyer and QFC divisions ratified an agreement for the transfer of liabilities from the Sound Retirement Trust to the UFCW Consolidated Pension Plan. The Company transferred $449, $344 net of tax, in net accrued pension liabilities and prepaid escrow funds to fulfill obligations for past service for associates and retirees. The agreement will be satisfied by cash installment payments to the UFCW Consolidated Pension Plan and will be paid evenly over seven years.

4.

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: