Kroger Reports First Quarter 2018 Results

CINCINNATI, June 21, 2018 /PRNewswire/ --

Q1 Highlights

• Great start to Restock Kroger, including progress on cost controls due to process change and space optimization
• Sold convenience store business unit for $2.15 billion ($1.59 per diluted share)
• Our Brands achieves highest-ever retail dollar share
• Partner for Customer Value: Ocado partnership & Home Chef merger agreemen

The Kroger Co. (NYSE: KR) today reported net earnings of $2.0 billion, or $2.37 per diluted share, in the first quarter of 2018, which ended on May 26. Kroger's first quarter adjusted net earnings were $626 million, or $0.73 per diluted share (see table 6, 2018 First Quarter Adjustment Items). Net earnings for the first quarter 2017 were $303 million, or $0.32 per diluted share. Adjusted net earnings for the first quarter 2017 were $546 million, or $0.58 per diluted share (see table 6, 2017 First Quarter Adjustment Items).

Kroger's first quarter net earnings per diluted share result was slightly ahead of the company's internal expectations due to the great start to Restock Kroger, including process changes that led to especially strong cost controls and alternative revenue streams.

Kroger reported identical supermarket sales, without fuel, of 1.4% for the first quarter of 2018. When calculating identical sales to be more inclusive of company business units ? including Kroger Specialty Pharmacy and ship-to-home solutions ? Kroger's identical sales, without fuel, were 1.9% in the first quarter. The company intends to use this calculation going forward as a more appropriate measure to track Kroger's performance as it redefines the grocery customer experience, and to be more comparable with how peers report.

Comments from Chairman and CEO Rodney McMullen

"Restock Kroger is off to a fantastic start. Everything we do supports our customers engaging seamlessly with Kroger. Kroger is creating the future of retail by innovating our core business and adding exciting partnerships like Ocado and our planned merger with Home Chef. We are on track to generate the free cash flow and incremental FIFO operating profit that we committed to in Restock Kroger. We are confident in our ability to deliver on our plans for the year and our long-term vision to serve America through food inspiration and uplift."

Details of First Quarter 2018 Results

Total sales increased 3.4% to $37.5 billion in the first quarter compared to $36.3 billion for the same period last year. Total sales, excluding fuel, increased 2.3% in the first quarter over the same period last year. Excluding fuel and the effect of Kroger's recently-sold convenience store business unit, total sales increased 2.8%.

Gross margin was 21.8% of sales for the first quarter. Excluding fuel and the LIFO charge, gross margin decreased 13 basis points from the same period last year.

Kroger recorded a LIFO charge of $15 million in the first quarter, compared to a $25 million LIFO charge in the same quarter last year.

Operating, General & Administrative costs as a rate of sales ? excluding fuel and the 2018 and 2017 First Quarter Adjustment Items ? increased 3 basis points; rent and depreciation with the same exclusions increased by 1 basis point. The slight increase as a rate of sales is driven by the company's investment in service and higher starting wages, offset almost entirely by strong cost controls due to process changes.

FIFO operating margin on a rolling four quarters basis decreased 25 basis points compared to the prior year, excluding fuel, mergers, the 53^rd week and the adjustment items from the respective periods.

Kroger did not adjust the rates as a percent of sales described above for the divestiture of the convenience store business because the effect was insignificant.

Financial Strategy

Kroger's financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its cash flow to achieve these goals.

Over the last four quarters, Kroger has used cash to:

• Contribute an incremental $1.2 billion pre-tax to company-sponsored pension plans and $467 million pre-tax to satisfy withdrawal obligations to the Central States Pension Fund,
• Repurchase 110 million common shares for $2.7 billion, which includes $1.1 billion repurchased with after-tax proceeds from the sale of Kroger's convenience store business unit under a previously-announced $1.2 billion accelerated stock repurchase plan,
• Pay $442 million in dividends, and
• Invest $3.0 billion in capital.

Kroger's net total debt to adjusted EBITDA ratio increased to 2.43 (see Table 5), on a 52-week basis. The company's net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50. Kroger expects its net total debt to adjusted EBITDA ratio to increase throughout the year due to increased borrowings to fund its investment in Ocado, its planned merger with Home Chef, and tax payments related to the gain on the sale of the convenience store business unit.

2018 Guidance

Kroger expects identical sales growth, excluding fuel, to range from 2.0% to 2.5% in 2018. This reflects the company's updated definition of identical sales and is supported by its expectation for identical supermarket sales that is the same as its original guidance for the year.  

Kroger raised the low end of its net earnings guidance range to $3.64 to $3.79 per diluted share for 2018. The previous GAAP range was $3.59 to $3.79. The company raised the low end of its adjusted net earnings guidance range to $2.00 to $2.15 per diluted share for 2018, from $1.95 to $2.15 previously.

The company continues to expect capital investments, excluding mergers, acquisitions, and purchases of leased facilities, to be approximately $3.0 billion in 2018.

Kroger expects its 2018 tax rate to be approximately 22%.

First Quarter 2018 Restock Kroger Highlights

Redefine the Grocery Customer Experience

• Grew digital sales 66% in the first quarter
• Achieved highest-ever dollar share in the history of Our Brands, driven by double-digit growth in Simple Truth and Simple Truth Organic
• Announced location of second Kitchen 1883 restaurant
• Opened new Culinary Innovation Center
• Hosted second Natural Foods Innovation Summit

Partner for Customer Value

• Announced partnership with online grocery supermarket Ocado to serve America's families anything, anytime, anywhere
• Entered into merger agreement with Home Chef to revolutionize mealtime
• Expanded partnership with Instacart to increase customer delivery coverage area
• Completed sale of convenience store business unit for $2.15 billion
• Announced new offerings to enhance Kroger Precision Marketing powered by 84.51°, which connects advertisers with digitally-engaged customers at the point of purchase and creates alternative revenue for Kroger by monetizing six billion annual digital interactions on owned properties

Develop Talent

• Announced new and enhanced long-term associate benefits following the Tax Cuts and Jobs Act, including an industry-leading education assistance program called Feed Your Future, accelerated investments in store associate wages, a more generous 401(k) benefit, and enriched associate discount and support programs
• Kroger Technology named to Computerworld's Top 100 Best Places to Work in IT
• Progressive Grocer magazine recognized 59 associates as "Top Women in Grocery", since 2007, Kroger has had a total of 441 "Top Women" honorees
• Joined Catalyst in spotlighting 'workplaces that work for women' on International Women's Day

Live Kroger's Purpose

• Announced 2017 Zero Hunger | Zero Waste progress, including 325 million meals donated and 77% waste diversion from landfill for the year
• Drove nearly three times customer engagement in Kroger's annual Sustainability Lives Here event in stores during Earth Month through Zero Hunger | Zero Waste and sustainable products & practices
• Named a 2018 ENERGY STAR® Partner of the Year Award by the U.S. Environmental Protection Agency and U.S. Department of Energy
• Announced comprehensive commitment to help combat the nationwide opioid epidemic, including hosting drug take-back events at more than 100 Kroger Family of Pharmacies locations on April 28 in partnership with the U.S. Drug Enforcement Administration
• Donated $1 million to USO to support veterans, active duty military and their families as part of annual Honoring Our Heroes campaign

At The Kroger Co. (NYSE: KR), we are dedicated to our Purpose: to Feed the Human Spirit^TM. We are nearly half a million associates who serve over nine million customers daily through a seamless digital shopping experience and 2,779 retail food stores under a variety of banner names, serving America through food inspiration and uplift, and creating #ZeroHungerZeroWaste communities by 2025. To learn more about us, visit our newsroom and investor relations site.

Note: Fuel sales have historically had a low gross margin rate and operating expense rate as compared to corresponding rates on non-fuel sales. As a result Kroger discusses the changes in these rates excluding the effect of fuel.

Note: Kroger discusses the changes in operating results, as a percentage of sales, excluding recent mergers due to them affecting comparability to last year.

Please refer to the supplemental information presented in the tables for reconciliations of the non-GAAP financial measures used in this press release to the most comparable GAAP financial measure and related disclosure.

This press release contains certain statements that constitute "forward-looking statements" about the future performance of the company. These statements are based on management's assumptions and beliefs in light of the information currently available to it. These statements are indicated by words such as "expectation," "intend," "planned," "committed," "expect," "guidance," "goal," "target," "strategy," "plan," "vision," "confident" and "range." Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include the specific risk factors identified in "Risk Factors" and "Outlook" in Kroger's annual report on Form 10-K for the last fiscal year and any subsequent filings, as well as the following:

• Kroger's 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 Kroger; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; Kroger's 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 Kroger's logistics operations; trends in consumer spending; the extent to which Kroger's customers exercise caution in their purchasing in response to economic conditions; the uncertain pace of economic growth; changes in inflation or deflation in product and operating costs; stock repurchases; Kroger's ability to retain pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; Kroger's 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 Kroger's future growth plans; the ability to execute on Restock Kroger; and the successful integration of merged companies and new partnerships. Kroger's ability to achieve sales and earnings goals may also be affected by Kroger's ability to manage the factors identified above. Kroger's ability to execute its financial strategy may be affected by its ability to generate cash flow.
• Kroger's 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.

Kroger assumes no obligation to update the information contained herein. Please refer to Kroger's reports and filings with the Securities and Exchange Commission for a further discussion of these risks and uncertainties.

Note: Kroger's quarterly conference call with investors will be broadcast live online at 10 a.m. (ET) on June 21, 2018 at ir.kroger.com. An on-demand replay of the webcast will be available at approximately 1 p.m. (ET) on Thursday, June 21, 2018.

1^st Quarter 2018 Tables Include:

1. Consolidated Statements of Operations
2. Consolidated Balance Sheets
3. Consolidated Statements of Cash Flows
4. Supplemental Sales Information
5. Reconciliation of Net Total Debt and Net Earnings Attributable to The Kroger Co. to Adjusted EBITDA
6. Net Earnings Per Diluted Share Excluding the Adjustment Items

SOURCE The Kroger Co.