CINCINNATI, Sept. 16 /PRNewswire-FirstCall/ -- The Kroger Co. (NYSE: KR)
today reported total sales of $18.1 billion for the second quarter ended
August 16, 2008, an increase of 11.9% over the same period last year.
Identical supermarket sales increased 9.7% with fuel and 4.7% without fuel
compared with the same quarter last year.
Net earnings in the second quarter totaled $276.5 million, or $0.42 per
diluted share. Net earnings in the same period last year were $267.3 million,
or $0.38 per diluted share.
"Kroger's second quarter results were strong. Our Customer 1st strategy
allows us to create value for our shareholders and deliver a value proposition
that serves our customers," said David B. Dillon, Kroger chairman and chief
executive officer. "We continue to generate cash flow to sustain our strong
capital program and reduce outstanding shares. At the same time, we are
investing in improving our customers' overall shopping experience. Our
ability to balance these objectives is fundamental to our success,
particularly in today's challenging economic environment."
FIFO Gross Margin
Including Kroger's retail fuel operations, FIFO gross margin (Table 1) was
22.31% of sales, a decline of 163 basis points compared to the second quarter
last year. Excluding retail fuel operations, FIFO gross margin declined 51
basis points.
LIFO
The Company recorded a $46.2 million LIFO charge during the quarter, an
increase of $6.5 million over the prior year. Excluding retail fuel sales,
the LIFO charge increased 3 basis points as a rate of sales compared to the
prior year.
Operating, General & Administrative (OG&A) Costs
Including Kroger's retail fuel operations, OG&A costs were 16.37% of
sales, a decline of 114 basis points compared to the second quarter last year.
Excluding retail fuel operations, OG&A decreased 28 basis points. The prior
year OG&A rate included pre-opening and transition costs associated with the
Scott's and Farmer Jack acquisitions. The current year rate benefited from
the absence of these costs. The current year rate also benefited from strong
sales leverage and lower incentive compensation, which offset inflationary
pressures in several areas, including credit card fees, utilities, and store
supplies.
Rent and Depreciation
Including Kroger's retail fuel operations, rent and depreciation expense
were 2.65% of sales, a decrease of 20 basis points compared to the second
quarter last year. Excluding retail fuel operations, rent and depreciation
expense declined 6 basis points as a rate of sales.
Capital Investment
Capital investment, excluding acquisitions, totaled $478.1 million for the
second quarter, compared with $480.9 million in the prior year. Capital
projects during the second quarter included 9 new, expanded, or relocated
stores and 51 remodels. The Company is on track to open, expand or relocate
70 to 80 stores and complete between 175 and 200 store remodels during fiscal
2008.
Free Cash Flow
The Company manages its use of free cash flow to maintain a leverage ratio
that supports its solid investment grade rating. On a rolling four-quarters
basis, Kroger's net total debt (Table 5) to EBITDA ratio was 1.90, compared
with 1.81 during the same period last year. Total debt was $7.6 billion, an
increase of $1 billion from a year ago. Total debt decreased $176.2 million
from the first quarter of fiscal 2008.
During the quarter, Kroger repurchased 5.6 million shares of stock at an
average price of $28.14 per share for a total investment of $157.7 million.
At the end of the second quarter, approximately $540.9 million remained under
the $1 billion stock repurchase program announced in January 2008.
Fiscal 2008 Year-to-Date Results
During the first two quarters of fiscal 2008, total sales increased 11.7%
to $41.2 billion. For the same period, identical supermarket sales, excluding
fuel, increased 5.3%.
The Company's operating margin for the first two quarters of fiscal 2008
decreased 14 basis points. Excluding fuel and charges for labor unrest in the
first quarter of 2007, Kroger's operating margin for the first two quarters of
fiscal 2008 decreased 8 basis points, of which 6 basis points is a result of
the higher LIFO charge. For fiscal year 2008, the Company expects a flat to
slightly improved operating margin.
Net earnings for the first two quarters of fiscal 2008 were $662.5
million, or $1.00 per diluted share. Net earnings for the same period last
year were $603.8 million, or $0.85 per diluted share.
"Our year-to-date performance demonstrates Kroger's ability to deliver
sustainable results today while we continue to invest for the future," said
Mr. Dillon. "We know market conditions will continue to be a challenge and we
believe our strategy works well in good times and bad. Kroger's team and our
overall strategy clearly stand out in the current environment."
Fiscal Year 2008 Guidance-Before effect of Hurricane Ike
Based on Kroger's year-to-date results and management's outlook for the
remainder of the fiscal year, the Company raised the low end of its range for
annual identical sales guidance to 4.5%. Kroger now expects identical sales
growth of 4.5% to 5.5%, excluding fuel, for fiscal 2008.
The Company confirmed its fiscal 2008 earnings guidance of $1.85 to $1.90
per diluted share. This range reflects 9% to 12% growth over fiscal 2007
earnings of $1.69 per diluted share. Kroger expects that its full-year
earnings per share growth will be driven by a combination of strong identical
sales, a flat to slightly improved operating margin, excluding fuel, and fewer
shares outstanding. Kroger's dividend yield of more than 1% further enhances
shareholder return.
For the second half of fiscal 2008, Kroger expects solid results from its
core grocery operations. As stated in previous guidance, the Company
anticipates that its lowest year-over-year earnings per share growth rate will
occur in the third quarter. Third quarter results in fiscal 2007 included a
$40 million tax benefit that was somewhat offset by low fuel margins and
incremental investments in Kroger's Customer 1st strategy, resulting in a net
benefit of approximately $0.02 to $0.03 per diluted share. As a result, the
Company anticipates its third quarter 2008 earnings per share results will
range from slightly below to slightly above prior year results. After
adjusting for the prior year net benefit, this would represent an increase in
this year's expected third quarter earnings per share.
As stated in previous guidance, Kroger expects its fourth quarter earnings
per share growth rate will be higher than its annual growth rate.
The Company's expectations for the second half of 2008 exclude any impact
from Hurricane Ike. The hurricane and its remnants affected Kroger operations
in Texas and several inland states particularly Indiana, Kentucky and Ohio.
The financial impact of the hurricane will not be significant enough to cause
Kroger to alter its strategy. The final result of the damage and disruption
from the storm could affect much of the guidance contained in this release. A
more detailed description of the potential impact on Kroger's guidance is
included in the 8-K the Company filed today.
"Associates in every area of our business are focused on executing our
Customer 1st strategy to meet the changing needs of today's shoppers. As a
Company, we are committed to delivering the results we have forecasted for the
year," Mr. Dillon said.
Kroger, one of the nation's largest retail grocery chains, is honored to
celebrate its 125th anniversary in 2008. The Company's more than 320,000
associates serve customers in 2,476 supermarkets and multi-department stores
in 31 states under two dozen local banners including Kroger, Ralphs, Fred
Meyer, Food 4 Less, Fry's, King Soopers, Smith's, Dillons, QFC and City
Market. Kroger associates also serve customers in 779 convenience stores, 393
fine jewelry stores and 737 supermarket fuel centers the Company operates.
The Company also operates 41 food processing plants in the U.S. Headquartered
in Cincinnati, Ohio, Kroger focuses its charitable efforts on supporting
hunger relief, health and wellness initiatives, and local schools and
grassroots organizations in the communities it serves. For more information
about the Company, please visit our web site at www.kroger.com .
This press release contains certain 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.
Such statements are indicated by words such as "anticipates," "on track" and
"expects." Increased competition, weather, including Hurricane Ike, and
economic conditions, interest rates, goodwill impairment, the success of
programs designed to increase our identical supermarket sales without fuel,
and labor disputes, particularly as the Company seeks to manage increases in
health care and pension costs, could materially affect our expected identical
supermarket sales growth, earnings per share, and earnings per share growth.
These same factors could affect the extent to which we are successful in
generating free cash flow to maintain a leverage ratio that supports a solid
investment grade rating. Earnings per share and earnings per share growth
also will be affected by the number of shares outstanding, our success in
reducing the number of shares outstanding, and volatility in the Company's
fuel margins. The number of store projects that we complete could vary from
our expectations if we are unsuccessful in acquiring suitable sites for new
stores or store projects are not completed in the time frame expected due to
weather, including Hurricane Ike and its remnants. These forward-looking
statements are subject to uncertainties and other factors that could cause
actual results to differ materially. We assume 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 via the Internet at 10 a.m. (ET) on September 16, 2008 at www.kroger.com
and www.streetevents.com. An on-demand replay of the webcast will be
available from approximately 1 p.m. (ET) today through September 26, 2008.
Table 1.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
SECOND QUARTER
2008 2007
SALES $18,053.0 100.00% $16,139.0 100.00%
MERCHANDISE COSTS, INCLUDING
ADVERTISING, WAREHOUSING AND
TRANSPORTATION (a), AND LIFO
CHARGE (b) 14,072.0 77.95 12,314.7 76.30
OPERATING, GENERAL AND
ADMINISTRATIVE (a) 2,955.8 16.37 2,827.2 17.52
RENT 150.8 0.84 149.2 0.92
DEPRECIATION 327.5 1.81 310.8 1.93
OPERATING PROFIT 546.9 3.03 537.1 3.33
INTEREST 111.6 0.62 104.3 0.65
EARNINGS BEFORE TAX EXPENSE 435.3 2.41 432.8 2.68
TAX EXPENSE 158.8 0.88 165.5 1.03
NET EARNINGS $276.5 1.53% $267.3 1.66%
NET EARNINGS PER BASIC
COMMON SHARE $0.42 $0.38
SHARES USED IN BASIC
CALCULATION 651.3 701.9
NET EARNINGS PER DILUTED
COMMON SHARE $0.42 $0.38
SHARES USED IN DILUTED
CALCULATION 659.2 709.1
YEAR-TO-DATE
2008 2007
SALES $41,160.3 100.00% $36,864.6 100.00%
MERCHANDISE COSTS, INCLUDING
ADVERTISING, WAREHOUSING AND
TRANSPORTATION (a), AND LIFO
CHARGE (b) 31,923.6 77.56 28,148.6 76.36
OPERATING, GENERAL AND
ADMINISTRATIVE (a) 6,807.1 16.54 6,435.8 17.46
RENT 357.7 0.87 338.3 0.92
DEPRECIATION 759.9 1.85 714.6 1.94
OPERATING PROFIT 1,312.0 3.19 1,227.3 3.33
INTEREST 263.9 0.64 250.7 0.68
EARNINGS BEFORE TAX EXPENSE 1,048.1 2.55 976.6 2.65
TAX EXPENSE 385.6 0.94 372.8 1.01
NET EARNINGS $662.5 1.61% $603.8 1.64%
NET EARNINGS PER BASIC
COMMON SHARE $1.01 $0.86
SHARES USED IN BASIC
CALCULATION 654.7 704.2
NET EARNINGS PER DILUTED
COMMON SHARE $1.00 $0.85
SHARES USED IN DILUTED
CALCULATION 662.1 712.5
Note: Certain prior-year amounts have been reclassified to conform to
current-year presentation. Certain per share amounts and percentages may not
sum due to rounding.
Note: The Company defines FIFO gross margin as sales minus merchandise
costs, including advertising, warehousing and transportation, but excluding
the Last-In First-Out (LIFO) charge. This measure is included to reflect
trends in current cost of product.
(a) Merchandise costs and operating, general and administrative expenses
exclude depreciation expense and rent expense which are included in
separate expense lines.
(b) LIFO charges of $46.2 and $39.7 were recorded in the second quarter of
2008 and 2007, respectively. For the year-to-date period, LIFO
charges of $86.2 and $60.0 were recorded for 2008 and 2007,
respectively.
Table 2.
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(in millions)
(unaudited)
August 16, August 18,
2008 2007
ASSETS
Current Assets
Cash $171.3 $133.8
Cash - Temporary investments (a) 98.4 30.4
Store deposits in-transit 661.7 564.0
Receivables 770.3 679.5
Inventories 4,729.9 4,577.4
Prepaid and other current assets 272.3 254.7
Total current assets 6,703.9 6,239.8
Property, plant and equipment, net 12,825.3 12,120.6
Goodwill, net 2,245.9 2,143.2
Other assets 524.9 557.0
Total Assets $22,300.0 $21,060.6
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Current portion of long-term debt,
at face value, including capital
leases and lease-financing obligations $731.2 $1,202.3
Accounts payable 3,979.2 3,833.8
Accrued salaries and wages 763.6 755.9
Deferred income taxes 238.6 170.4
Other current liabilities 2,159.3 2,059.0
Total current liabilities 7,871.9 8,021.4
Long-term debt including capital
leases and lease-financing obligations
Long-term debt, at face value, including
capital leases and lease-financing
obligations 6,860.8 5,452.8
Adjustment to reflect fair value interest
rate hedges 33.7 18.9
Long-term debt including capital leases and
lease-financing obligations 6,894.5 5,471.7
Deferred income taxes 475.3 297.0
Other long-term liabilities 1,812.9 2,306.1
Total Liabilities 17,054.6 16,096.2
Minority interests 100.0 -
Shareowners' equity 5,145.4 4,964.4
Total Liabilities and Shareowners'
Equity $22,300.0 $21,060.6
Total common shares outstanding at
end of period 650.9 687.8
Total diluted shares year-to-date 662.1 712.5
Note: Certain prior-year amounts have been reclassified to conform to
current-year presentation.
(a) Cash - Temporary investments represent Euros held to settle Euro
- denominated contracts, and escrow deposits.
Table 3.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
YEAR-TO-DATE
2008 2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $662.5 $603.8
Adjustment to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 759.9 714.6
LIFO charge 86.2 60.0
Stock-based employee compensation 47.9 48.1
Expense for Company-sponsored pension plans 16.3 33.1
Deferred income taxes 106.0 (13.0)
Other 16.8 23.6
Changes in operating assets and liabilities,
net of effects from acquisitions of
businesses:
Store deposits in-transit 14.1 50.0
Receivables 16.3 90.1
Inventories 40.0 (10.9)
Prepaid expenses 282.9 303.2
Accounts payable 19.7 26.0
Accrued expenses (2.5) (54.2)
Income taxes receivable (payable) 49.8 305.5
Contribution to Company-sponsored
pension plan (0.3) (50.2)
Other long-term liabilities 10.5 25.1
Net cash provided by operating activities 2,126.1 2,154.8
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for capital expenditures (1,053.0) (1,074.6)
Payments for acquisitions (79.5) (85.5)
Proceeds from sale of assets 48.5 22.8
Other - (32.3)
Net cash used by investing activities (1,084.0) (1,169.6)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lease-financing transactions 2.6 3.2
Proceeds from issuance of long-term debt 775.0 300.0
Payments for long-term debt (987.4) (534.0)
Payments on bank revolver (287.9) (152.1)
Dividends paid (108.9) (99.1)
Excess tax benefits on stock-based awards 8.6 30.5
Proceeds from issuance of common stock 157.3 151.0
Treasury stock purchases (538.9) (710.2)
Increase (decrease) in book overdrafts (92.2) 4.1
Other (7.2) (3.7)
Net cash used by financing activities (1,079.0) (1,010.3)
NET DECREASE IN CASH (36.9) (25.1)
CASH FROM CONSOLIDATED VIE 65.0 -
CASH AT BEGINNING OF YEAR 241.6 189.3
CASH AT END OF QUARTER $269.7 $164.2
Reconciliation of capital expenditures
Payments for capital expenditures $(1,053.0) $(1,074.6)
Changes in construction-in-progress
payables (61.9) 37.9
Total capital expenditures $(1,114.9) $(1,036.7)
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest $294.4 $245.5
Cash paid during the year for income taxes $282.6 $26.1
Note: Certain prior-year amounts have been reclassified to conform to
current-year presentation.
Table 4.
Supplemental Sales Information
(in millions, except percentages)
(unaudited)
Items identified below should not be considered as alternatives to sales
or any other GAAP measure of performance. Identical and comparable
supermarket sales are industry-specific measures and it is important to review
them in conjunction with Kroger's financial results reported in accordance
with GAAP. Other companies in our industry may calculate identical or
comparable sales differently than Kroger does, limiting the comparability of
these measures.
IDENTICAL SUPERMARKET SALES (a)
SECOND QUARTER
2008 2007
INCLUDING FUEL CENTERS $15,748.6 $14,361.5
EXCLUDING FUEL CENTERS $13,678.5 $13,067.4
INCLUDING FUEL CENTERS 9.7% 5.8%
EXCLUDING FUEL CENTERS 4.7% 5.1%
COMPARABLE SUPERMARKET SALES (b)
SECOND QUARTER
2008 2007
INCLUDING FUEL CENTERS $16,361.0 $14,858.6
EXCLUDING FUEL CENTERS $14,174.0 $13,509.9
INCLUDING FUEL CENTERS 10.1% 6.1%
EXCLUDING FUEL CENTERS 4.9% 5.3%
(a) Kroger defines a supermarket as identical when it has been open
without expansion or relocation for five full quarters.
(b) Kroger defines a supermarket as comparable when it has been open for
five full quarters, including expansions and relocations.
OTHER INFORMATION
Note: Fuel sales have a very low FIFO gross margin rate, OG&A rate, and
operating margin rate, as compared to corresponding rates on non-fuel sales.
As a result, the Company discloses such rates excluding the effect of retail
fuel operations.
Table 5.
Reconciliation of Total Debt to Net Total Debt
(in millions)
(unaudited)
Net total debt should not be considered an alternative to any GAAP measure
of performance or liquidity. Management believes net total debt is an
important measure of liquidity, and a primary component of measuring
compliance with the financial covenants under the Company's credit facility.
Net total debt should be reviewed in conjunction with Kroger's financial
results reported in accordance with GAAP.
The following table provides a reconciliation of total debt to net total
debt and compares the balance in the second quarter of 2008 to the balances in
the second quarter of 2007 and the fourth quarter of 1999.
August 16, August 18, January 29,
2008 2007 Change 2000 Change
Current portion of long-
term debt, at face
value, including capital
leases and lease-
financing obligations $731.2 $1,202.3 $(471.1) $591.5 $139.7
Long-term debt, at face
value, including capital
leases and lease-
financing obligations 6,860.8 5,452.8 1,408.0 8,422.5 (1,561.7)
Adjustment to reflect
fair value interest
rate hedges 33.7 18.9 14.8 - 33.7
Total debt $7,625.7 $6,674.0 $951.7 $9,014.0 $(1,388.3)
Temporary cash investments (98.4) (30.4) (68.0) - (98.4)
Investments in debt
securities - - - (68.8) 68.8
Prepaid employee benefits - - - (200.0) 200.0
Net total debt $7,527.3 $6,643.6 $883.7 $8,745.2 $(1,217.9)
