KROGER CO. (THE) The following discussion and analysis of financial condition and results of operations ofThe Kroger Co. should be read in conjunction with the "Forward-looking Statements" section set forth in Part I and the "Risk Factors" section set forth in Item 1A of Part I. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 8 of this report, as well as Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year endedJanuary 30, 2021 , which provides additional information on comparisons of fiscal years 2020 and 2019. Significant fluctuations occurred in our business during 2020 due to the COVID-19 pandemic. As a result, management compares current year identical sales without fuel, adjusted FIFO operating profit and adjusted net earnings per diluted share results to the same metrics for the comparable period in 2019, in addition to comparisons made to 2020. This enables management to evaluate results of the business and our financial model over a longer period of time, and to better understand the state of the business after the height of the pandemic compared to the period of time prior to the pandemic.
OUR VALUE CREATION MODEL - DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
Kroger has developed multiple levers within our business model to ensure we deliver net earnings growth and consistent and attractive total shareholder return ("TSR"). Our execution of this model is allowing us to deliver today and invest for the future. The foundation of our value creation model is our market leading omnichannel position in food retail, which is built onKroger 's unique assets: our stores, digital ecosystem, Our Brands and our data. These unique assets, when combined with our go-to-market strategy, deliver an unmatched value proposition for our customers. We continue to invest in areas of the business that matter most to our customers and deepen our competitive moats of Fresh, Our Brands, Data & Personalization and Seamless, to drive sustainable sales growth in our retail supermarket business, including fuel and health & wellness. This, in turn, generates the data and traffic that enables our fast-growing, high operating margin alternative profits. We are evolving from a traditional food retailer into a more diverse, food first business that we expect will consistently deliver net earnings growth in the future. This will be achieved by:
Growing identical sales without fuel. A key component of our growth plan is to
double digital sales and our digital profitability rate by 2023. Our plan also
? involves maximizing growth levers in our supermarket business and is supported
by continued strategic investments in our customers, associates, and our
Seamless eco-system to ensure we deliver a full, friendly and fresh experience
for every customer, every time; and
Expanding operating margin, through a balanced model where strategic price
investments for our customers and investments in our associates and seamless
? ecosystem are offset by our cost savings program, which has delivered
billion in cost savings annually for the past four years, and sustained growth
in our alternative profit streams.
We expect to continue to generate strong free cash flow and are committed to being disciplined with capital deployment in support of our value creation model and stated capital allocation priorities. Our first priority is to invest in the business through attractive high return organic and inorganic opportunities that drive long-term sustainable net earnings growth. We are committed to maintaining our current investment grade debt rating and our net total debt to adjusted EBITDA ratio target range of 2.30 to 2.50. We also expect to continue to grow our dividend over time and return excess cash to shareholders via stock repurchases.
We expect our value creation model will result in total shareholder return over the long-term within our target range of 8% to 11%.
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2021 EXECUTIVE SUMMARY
Our strategic priorities of leading with fresh and accelerating with digital propelledKroger to record performance in 2021, on top of record results in 2020. These results demonstrate the strength of our go-to-market strategy, which led to achieving positive identical sales without fuel against very strong identical sales without fuel last year, resulting in a two-year stacked growth rate of 14.3%. Digital sales two-year stacked growth was 113% for 2021 and has grown triple digits since the beginning of 2019. We connected with customers through our expanding seamless ecosystem and the consistent delivery of a full, fresh, and friendly customer experience. We invested more than ever before in our associates to raise our average hourly wage to$17 and our average hourly rate to over$22 with comprehensive benefits included. We balanced these investments by achieving cost savings greater than$1 billion for the fourth consecutive year and alternative profits contributed an incremental$150 million of operating profit. Our agility and the commitment from our associates is allowing us to navigate a more volatile inflationary environment, current labor and supply chain conditions, and provide fresh food at affordable prices across our seamless ecosystem.
The following graphic illustrates our go-to-market strategy:
[[Image Removed: A picture containing diagram Description automatically
generated]]
As we look to 2022, we expect the momentum in our business to continue and have
confidence in our ability to navigate a rapidly changing operating environment.
Our 2022 guidance reaffirms that we are creating a new, higher base from which
we expect to grow. Our adjusted FIFO operating profit guidance for 2022 is $900
million higher than our TSR model would have projected when we announced it in
2019. Our guidance also highlights the flexibility and multiple levers that
exist within our model today, which will allow us to deliver adjusted net
earnings per diluted share growth in 2022, while cycling COVID-19 effects and
investing for future growth. We are leveraging technology, innovation, and our
competitive moats to build lasting competitive advantages. Our balanced model is
allowing us to deliver for shareholders, invest in our associates, continue to
provide fresh affordable food to our customers and uplift our communities. We
remain confident in our value creation model and we expect to deliver total
shareholder return over the long-term within our target range of 8% to 11%.
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The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
Fiscal Year
Percentage
2021 Change 2020
Sales $ 137,888 4.1 % $ 132,498 Sales without fuel$ 123,210 0.2 %$ 123,012 Net earnings attributable to TheKroger Co. $ 1,655 (36.0) %$ 2,585 Adjusted net earnings attributable to TheKroger Co. $ 2,802 2.3 %$ 2,740 Net earnings attributable toThe Kroger Co. per diluted common share$ 2.17 (33.6) %$ 3.27 Adjusted net earnings attributable to TheKroger Co. per diluted common share$ 3.68 6.1 %$ 3.47 Operating profit$ 3,477 25.1 %$ 2,780 Adjusted FIFO operating profit$ 4,310 6.3 %$ 4,056 Dividends paid$ 589 10.3 %$ 534 Dividends paid per common share$ 0.78 14.7 %$ 0.68 Identical sales excluding fuel 0.2 % N/A 14.1 % FIFO gross margin rate, excluding fuel, bps increase (decrease) (0.43) N/A
0.14
OG&A rate, excluding fuel and Adjusted Items, bps decrease 0.61 N/A
0.06
Reduction in total debt, including obligations under finance leases compared to prior fiscal year end$ 49 N/A$ 663 Share repurchases$ 1,647 N/A$ 1,324 OVERVIEW
Notable items for 2021 are:
Shareholder Return
? Net earnings attributable to
which results in a two-year compounded annual growth rate of 3.1%.
? Adjusted net earnings attributable to
of
? Achieved operating profit of
compounded annual growth rate of 24.3%.
? Achieved adjusted FIFO operating profit of
two-year compounded annual growth rate of 20.0%.
? Generated cash flows from operations of
? Returned
payments.
? Achieved cost savings greater than
Other Financial Results
? Identical sales, excluding fuel, increased 0.2%, which results in a two-year
stacked growth rate of 14.3%.
Digital sales two-year stacked growth was 113%. Digital sales include products
? ordered online and picked up at our stores and products delivered or shipped
directly to a customer's home.
? Our Home Chef business surpassed
newest Our Brands billion dollar brand in our portfolio.
25
Alternative profit streams contributed an incremental
? profit for 2021 fueled by our digital media business -
Marketing ("KPM") and
We are currently operating in a more volatile inflationary environment and we
experienced higher product cost inflation in most departments during 2021. Our
? LIFO charge for 2021 was
2020. This increase of
most categories, with grocery and meat being the largest contributors.
Significant Events
During 2021, we settled certain company-sponsored pension plan obligations
using existing assets of the plans. We recognized a non-cash settlement charge
of
obligations for the eligible participants' pension balances that were
? distributed out of the plans via a lump sum distribution or the purchase of an
annuity contract, based on each participant's election. The settlement charge
is included in "Non-service component of company-sponsored pension plan costs"
in the Consolidated Statements of Operations. The effect of this transaction on
net earnings per diluted share was
net earnings per diluted share results.
During 2021, Fred Meyer and QFC and four local unions ratified an agreement for
the transfer of liabilities from the
and
transferred
? 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 are expected to
be paid evenly over seven years. The impact of this transaction on net earnings
per diluted share was
per diluted share results.
During 2021, we opened our first three
? centers powered by Ocado Group plc in
COVID-19
The COVID-19 pandemic has had, and is continuing to have, a significant impact
on our business and results of operations. We expect the ultimate significance
will be dictated by the length of time that such circumstances continue, which
will depend on the currently unknowable extent and duration of the COVID-19
pandemic and any governmental and public actions taken in response. Since the
beginning of the pandemic, our most urgent priority has been to safeguard our
associates and customers. We've implemented dozens of new safety and cleanliness
processes and procedures in our stores and other facilities.
As the pandemic has evolved, we have experienced unusually strong sales
beginning in 2020 and continuing throughout 2021. We continue to see people eat
and work more from home and prioritize health and cleanliness. The change in
customer behavior caused by COVID-19 was a major factor in our results over the
past two years. The pandemic brought to the forefront the importance to the
customer of fresh and a seamless digital offering. We continued to invest and
grow our capabilities in these areas, which led to achieving positive identical
sales without fuel in 2021 against very strong identical sales results last
year, which results in a two-year stacked growth rate of 14.3%. Digital sales
two-year stacked growth was 113% for 2021, enabled by our team's ability to
pivot quickly and effectively in the first stage of the pandemic to ensure that
we were meeting our customers' demand for safe, low-touch or touchless shopping
modalities.
Our operating, general and administrative ("OG&A") expenses for 2021 reflected a
reduction of the significant COVID related costs we incurred in 2020. Our OG&A
expenses for 2020 included significant incremental costs related to investments
in pay and benefits for our associates and measures to safeguard our associates
and customers. As a percentage of sales, these incremental costs in 2020 were
partially offset by sales leverage resulting from strong sales growth due to the
COVID-19 pandemic.
26
Strong execution by our team and accelerated investments in our competitive moats over the past two fiscal years allowed us to strengthen our balance sheet. At the onset of the pandemic inMarch 2020 , we proactively borrowed$1 billion under the revolving credit facility. This was a precautionary measure in order to preserve financial flexibility, reduce reliance on the commercial paper market and maintain liquidity in response to the COVID-19 pandemic. During 2020, we fully repaid the$1 billion borrowed under the revolving credit facility in addition to$1.2 billion of commercial paper obligations outstanding as of year-end 2019, using cash generated by operations. We maintain a temporary cash investment balance of$1.5 billion as of year-end 2021. For additional information about our debt activity in 2021 and 2020, including the drawdown and repayments under our revolving credit facility, forward-starting interest rate swap agreements and our senior note issuances, see Note 5 to the Consolidated Financial Statements. For additional information about our business results, including the impact of the COVID-19 pandemic, see our Results of Operations and Liquidity and Capital Resources sections within MD&A. OUR BUSINESSThe Kroger Co. (the "Company" or "Kroger") was founded in 1883 and incorporated in 1902. We are one of the world's largest retailers, as measured by revenue. Our retail business is built on the foundation of our market leading position in food retail which includes the added convenience of our retail pharmacies and fuel centers. Our market leading position in food retail reflects the strength of our competitive moats of Fresh, Our Brands, Data & Personalization and Seamless, and our unique combination of assets.
We also leverage the data and traffic generated by our retail business to deliver incremental value and services for our customers that generates alternative profit streams. These alternative profit streams would not exist without our core retail business.
Stores
As ofJanuary 29, 2022 ,Kroger operates supermarkets under a variety of local banner names in 35 states and theDistrict of Columbia . As ofJanuary 29, 2022 ,Kroger operated, either directly or through its subsidiaries, 2,726 supermarkets, of which 2,252 had pharmacies and 1,613 had fuel centers. We connect with customers through our expanding seamless ecosystem and the consistent delivery of a full, fresh, and friendly customer experience. Fuel sales are an important part of our revenue, net earnings and loyalty offering. Our fuel strategy is to include a fuel center at each of our supermarket locations when it is feasible and it is expected to be profitable.
Seamless Digital Ecosystem
Our digital ecosystem provides a fresh and seamless offering for our customers. Through investment and innovation, we continue to improve our seamless ecosystem to ensure it remains relevant. We offer a convenient shopping experience for our customers regardless of how they choose to shop with us, including Pickup, Delivery and Ship. We offer Pickup (also referred to as ClickList®) and Harris Teeter ExpressLane™ - personalized, order online, pick up at the store services - at 2,257 of our supermarkets and provide home delivery services, which allows us to offer digital solutions to 98% of our customers. We provide relevant customer-facing apps and interfaces that have the features customers want that are also reliable, easy to use and deliver a seamless customer experience across our store and digital channels.
Merchandising and Manufacturing
Our Brands products play an important role in our merchandising strategy and represented nearly$28 billion of our sales in 2021. We operate 33 food production plants, primarily bakeries and dairies, which supply approximately 29% of Our Brands units and 41% of the grocery category Our Brands units sold in our supermarkets; the remaining Our Brands items are produced to our strict specifications by outside manufacturers. 27
Our Data
We are evolving from a traditional food retailer into a more diverse, food first business. The traffic and data generated by our retail supermarket business, including pharmacies and fuel centers, is enabling this transformation.Kroger serves over 60 million households annually and because of our market leading rewards program, 96% of customer transactions are tethered to aKroger loyalty card. Our 20 years of investment in data science capabilities is allowing us to leverage this data to create personalized experiences and value for our customers and is also enabling our fast-growing, high operating margin alternative profits, including data analytic services and third party media revenue. Our retail media business -Kroger Precision Marketing - provides best in class media capabilities for our consumer packaged goods partners and is a key driver of our digital profitability and alternative profit. Our revenues are predominately earned and cash is generated as consumer products are sold to customers in our stores, fuel centers and via our online platforms. We earn income predominately by selling products at price levels that produce revenues in excess of the costs we incur to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. Our retail operations, which represent 97% of our consolidated sales, is our only reportable segment.
Other Events Affecting our Business
OnJanuary 27, 2020 , Lucky's Market filed a voluntary petition in theBankruptcy Court seeking relief under the Bankruptcy Code. Lucky's Market is included in our Consolidated Statements of Operations throughJanuary 26, 2020 . Refer to Note 16 to the Consolidated Financial Statements for additional information.
On
OnMarch 13, 2019 , we completed the sale of our You Technology business toInmar for total consideration of$565 million , including$396 million of cash and$64 million of preferred equity received upon closing. We are also entitled to receive other cash payments of$105 million over five years. The transaction includes a long-term service agreement forInmar to provide us digital coupon services. You Technology is included in our Consolidated Statements of Operations throughMarch 12, 2019 .
USE OF NON-GAAP FINANCIAL MEASURES
The accompanying Consolidated Financial Statements, including the related notes,
are presented in accordance with generally accepted accounting principles
("GAAP"). We provide non-GAAP measures, including First-In, First-Out ("FIFO")
gross margin, FIFO operating profit, adjusted FIFO operating profit, adjusted
net earnings and adjusted net earnings per diluted share because management
believes these metrics are useful to investors and analysts. These non- GAAP
financial measures should not be considered as an alternative to gross margin,
operating profit, net earnings and net earnings per diluted share or any other
GAAP measure of performance. These measures should not be reviewed in isolation
or considered as a substitute for our financial results as reported in
accordance with GAAP.
We calculate FIFO gross margin as FIFO gross profit divided by sales. FIFO gross
profit is calculated 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. FIFO
gross margin is an important measure used by management and management believes
FIFO gross margin is a useful metric to investors and analysts because it
measures the merchandising and operational effectiveness of our go-to-market
strategy.
We calculate FIFO operating profit as operating profit excluding the LIFO
charge. FIFO operating profit is an important measure used by management and
management believes FIFO operating profit is a useful metric to investors and
analysts because it measures the operational effectiveness of our financial
model.
28
The adjusted net earnings, adjusted net earnings per diluted share and adjusted
FIFO operating profit metrics are important measures used by management to
compare the performance of core operating results between periods. We believe
adjusted net earnings, adjusted net earnings per diluted share and adjusted FIFO
operating profit are useful metrics to investors and analysts because they
present more accurate year-over-year comparisons of our net earnings, net
earnings per diluted share and FIFO operating profit because adjusted items are
not the result of our normal operations. Net earnings for 2021 include the
following, which we define as the "2021 Adjusted Items:"
Charges to OG&A of
related to withdrawal liabilities for a certain multi-employer pension fund,
?
contingent consideration and
transformation costs (the "2021 OG&A Adjusted Items").
Losses in other income (expense) of
? related to company-sponsored pension plan settlements and
million net of tax, for the unrealized loss on investments (the "2021 Other
Income (Expense) Adjusted Items").
? A reduction to income tax expense of
completion of income tax audit examinations covering multiple years.
Net earnings for 2020 include the following, which we define as the "2020 Adjusted Items:"
Charges to OG&A of
? certain multi-employer pension funds,
for the revaluation of Home Chef contingent consideration and
million net of tax, for transformation costs (the "2020 OG&A Adjusted Items").
Gains in other income (expense) of
? the unrealized gain on investments (the "2020 Other Income (Expense) Adjusted
Item").
Net earnings for 2019 include the following, which we define as the "2019 Adjusted Items:"
Charges to OG&A of
related to withdrawal liabilities for certain multi-employer pension funds;
million,
? million net of tax, for impairment of Lucky's Market;
net of tax, for transformation costs, primarily including 35 planned store
closures; and a reduction to OG&A of
the revaluation of Home Chef contingent consideration (the "2019 OG&A Adjusted
Items"). Gains in other income (expense) of$106 million ,$80 million net of tax,
related to the sale of
? related to the sale of You Technology; and
tax, for the unrealized gain on investments (the "2019 Other Income (Expense)
Adjusted Items").
The following table provides a reconciliation of net earnings attributable toThe Kroger Co. to adjusted net earnings attributable toThe Kroger Co. and a reconciliation of net earnings attributable toThe Kroger Co. per diluted common share to adjusted net earnings attributable toThe Kroger Co. per diluted common share excluding the 2021, 2020 and 2019 Adjusted Items: 29 Net Earnings per Diluted Share excluding the Adjusted Items ($ in millions, except per share amounts) 2021 2020 2019 Net earnings attributable to TheKroger Co. $ 1,655 $ 2,585 $ 1,659 (Income) expense adjustments Adjustment for pension plan withdrawal liabilities(1)(2) 344 754 104 Adjustment for gain on sale of Turkey Hill Dairy(1)(3) - - (80) Adjustment for gain on sale of You Technology(1)(4) - - (52) Adjustment for company-sponsored pension plan settlement charges(1)(5) 68 - - Adjustment for loss (gain) on investments(1)(6) 628 (821) (119) Adjustment for severance charge and related benefits(1)(7) - - 61 Adjustment for deconsolidation and impairment of Lucky's Market attributable to TheKroger Co. (1)(8) - - 225 Adjustment for Home Chef contingent consideration(1)(9) 50 141 (49) Adjustment for transformation costs(1)(10) 104 81 37 Adjustment for income tax audit examinations(1) (47) - - Total Adjusted Items 1,147
155 127
Net earnings attributable to
$ 2,802 $
2,740
Net earnings attributable toThe Kroger Co. per diluted common share$ 2.17 $ 3.27 $ 2.04 (Income) expense adjustments Adjustment for pension plan withdrawal liabilities(11) 0.45 0.95 0.13 Adjustment for gain on sale of Turkey Hill Dairy(11) - - (0.10) Adjustment for gain on sale of You Technology(11) - - (0.06) Adjustment for company-sponsored pension plan settlement charges(11) 0.09 - - Adjustment for loss (gain) on investments(11) 0.83 (1.05) (0.15) Adjustment for severance charge and related benefits(11) - - 0.08 Adjustment for deconsolidation and impairment of Lucky's Market attributable to TheKroger Co. (11) - - 0.28 Adjustment for Home Chef contingent consideration(11) 0.07 0.18 (0.07) Adjustment for transformation costs(11) 0.14 0.12 0.04 Adjustment for income tax audit examinations(11) (0.07) - - Total Adjusted Items 1.51
0.20 0.15
Net earnings attributable to
Average numbers of common shares used in diluted calculation 754
781 805
(1) The amounts presented represent the after-tax effect of each adjustment,
which was calculated using discrete tax rates.
(2) The pre-tax adjustment for pension plan withdrawal liabilities was
2021,
(3) The pre-tax adjustment for gain on sale of
(4) The pre-tax adjustment for gain on sale of You Technology was (
(5) The pre-tax adjustment for company-sponsored pension plan settlement charges
was
(6) The pre-tax adjustment for loss (gain) on investments was
(
(7) The pre-tax adjustment for severance charge and related benefits was
The pre-tax adjustment for deconsolidation and impairment of Lucky's Market
(8) was
Lucky's Market.
(9) The pre-tax adjustment for Home Chef contingent consideration was
2021,
The pre-tax adjustment for transformation costs was
to store and business closure costs and third party professional consulting
fees associated with business transformation and cost saving initiatives.
(11) The amount presented represents the net earnings per diluted common share
effect of each adjustment.
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Key Performance Indicators
We evaluate our results of operations and cash flows using a variety of key
performance indicators, such as sales, identical sales, excluding fuel, FIFO
gross margin, adjusted FIFO operating profit, adjusted net earnings, adjusted
net earnings per diluted share and return on invested capital. We use these
financial metrics and related computations to evaluate our operational
effectiveness and our results of operations from period to period and to plan
for near and long-term operating and strategic decisions. These key performance
indicators should not be reviewed in isolation or considered as a substitute for
our financial results as reported in accordance with GAAP. These measures, which
are described in more detail in this Annual Report on Form 10-K, may not be
comparable to similarly-titled performance indicators used by other companies.
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
Percentage Percentage
2021 Change(1) 2020 Change(2) 2019
Total sales to retail customers
without fuel(3) $ 122,293 0.1 % $ 122,134 13.6 % $ 107,487
Supermarket fuel sales 14,678 54.7 % 9,486 (32.5) % 14,052
Other sales(4) 917 4.4 % 878 17.5 % 747
Total sales $ 137,888 4.1 % $ 132,498 8.4 % $ 122,286 (1) This column represents the percentage change in 2021 compared to 2020.
(2) This column represents the percentage change in 2020 compared to 2019.
Digital sales are included in the "total sales to retail customers without
fuel" line above. Digital sales include products ordered online and picked up
at our stores and products delivered or shipped directly to a customer's
home. Digital sales decreased approximately 3% in 2021 and grew approximately (3) 116% in 2020 and 29% in 2019. The change in results for 2021 compared to 2020
is primarily due to cycling COVID-19 trends. While digital sales decreased 3%
during 2021, almost all customers who reduced their online spend during the
year continued to shop with us in store, highlighting the power of our
seamless ecosystem and our ability to create a meaningful customer experience
across channels.
Other sales primarily relate to external sales at food production plants,
data analytic services and third party media revenue. The increase in 2021,
compared to 2020, is primarily due to an increase in data analytic services (4) and third-party media revenue, partially offset by decreased external sales
at food production plants due to the closing of a plant. The increase in
2020, compared to 2019, is primarily due to growth in third-party media
revenue, partially offset by decreased sales due to the disposal of
Total sales increased in 2021, compared to 2020, by 4.1%. The increase was
primarily due to an increase in supermarket fuel sales. Total sales, excluding
fuel, increased 0.2% in 2021, compared to 2020, which was primarily due to our
identical sales increase, excluding fuel, of 0.2%. Identical sales, excluding
fuel, increased in 2021 on top of record sales results in 2020, which was
primarily caused by unprecedented demand due to the COVID-19 pandemic during
2020. Our two-year identical sales, excluding fuel, stacked growth was 14.3%.
Total supermarket fuel sales increased 54.7% in 2021, compared to 2020,
primarily due to an increase in fuel gallons sold of 7.9% and an increase in the
average retail fuel price of 43.6%. The increase in the average retail fuel
price was caused by an increase in the product cost of fuel.
31
Total sales increased in 2020, compared to 2019, by 8.4%. The increase was due
to an increase in total sales to retail customers without fuel, partially offset
by a reduction in supermarket fuel sales and decreased sales due to the disposal
of Turkey Hill Dairy and You Technology in the first quarter of 2019. Total
sales to retail customers without fuel increased 13.6% in 2020, compared to
2019. The increase was primarily due to our identical sales increase, excluding
fuel, of 14.1%, partially offset by decreased sales due to the deconsolidation
of Lucky's Market in the fourth quarter of 2019. Total sales excluding fuel and
dispositions increased 14.2% in 2020 compared to 2019. The significant increase
in identical sales, excluding fuel, was caused by unprecedented demand due to
the COVID-19 pandemic, digital sales growth and growth in market share. Market
share growth contributed to our identical sales increase, excluding fuel, as our
sales outpaced the general growth in the food retail industry during 2020. The
increase in identical sales, excluding fuel, was broad based across all
supermarket divisions and remained heightened throughout 2020. During the
pandemic, customers reduced trips while significantly increasing basket value.
Total supermarket fuel sales decreased 32.5% in 2020, compared to 2019,
primarily due to a decrease in fuel gallons sold of 17.5% and a decrease in the
average retail fuel price of 18.2%. The decrease in fuel gallons sold was
reflective of the national trend, which decreased due to the COVID-19 pandemic.
The decrease in the average retail fuel price was caused by a decrease in the
product cost of fuel.
We calculate identical sales, excluding fuel, as sales to retail customers,
including sales from all departments at identical supermarket locations, Kroger
Specialty Pharmacy businesses and ship-to-home solutions. We define a
supermarket as identical when it has been in operation without expansion or
relocation for five full quarters. We define Kroger Specialty Pharmacy
businesses as identical when physical locations have been in operation
continuously for five full quarters; discontinued patient therapies are excluded
from the identical sales calculation starting in the quarter of transfer or
termination. Although identical sales is a relatively standard term, numerous
methods exist for calculating identical sales growth. As a result, the method
used by our management to calculate identical sales may differ from methods
other companies use to calculate identical sales. We urge you to understand the
methods used by other companies to calculate identical sales before comparing
our identical sales to those of other such companies. Our identical sales,
excluding fuel, results are summarized in the following table. We used the
identical sales, excluding fuel, dollar figures presented below to calculate
percentage changes for 2021 and 2020.
Identical Sales
($ in millions)
2021 2020
Excluding fuel $ 120,802 $ 120,575
Excluding fuel 0.2 % 14.1 %
Gross Margin, LIFO and FIFO Gross Margin
We define gross margin as sales minus merchandise costs, including advertising, warehousing, and transportation. Rent expense, depreciation and amortization expense, and interest expense are not included in gross margin. Our gross margin rates, as a percentage of sales, were 22.01% in 2021 and 23.32% in 2020. The decrease in rate in 2021, compared to 2020, resulted primarily from increased fuel sales, which have a lower gross margin rate, a decrease in our fuel gross margin, continued strategic investments in lower prices for our customers, a COVID-19-related inventory write down for personal protective equipment donated to community partners, a higher LIFO charge and increased shrink and transportation costs, as a percentage of sales, partially offset by growth in our alternative profit streams and effective negotiations to achieve savings on the cost of products sold. Our LIFO charge was$197 million in 2021 compared to a LIFO credit of$7 million in 2020. The increase in our LIFO charge was attributable to higher inflation in most categories, with grocery and meat being the largest contributors. Our FIFO gross margin rate, which excludes the LIFO charge, was 22.15% in 2021, compared to 23.32% in 2020. Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, our FIFO gross margin rate decreased 43 basis points in 2021, compared to 2020. This decrease resulted primarily from continued strategic investments in lower prices for our customers, a COVID-19-related inventory write down for personal protective equipment donated to community partners and increased shrink and transportation costs, as a percentage of sales, partially offset by growth in our alternative profit streams and effective negotiations to achieve savings on the cost of products sold. 32
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, were 16.83% in 2021 and 18.49% in 2020. The decrease in 2021, compared to 2020, resulted primarily from decreased COVID-19-related costs, lower contributions to multi-employer pension plans, decreased incentive plan costs, the 2020 OG&A Adjusted Items, the effect of increased fuel sales, which decreases our OG&A rate, as a percentage of sales, and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by significant investments in our associates and the 2021 OG&A Adjusted Items. Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, the 2021 OG&A Adjusted Items and the 2020 OG&A Adjusted Items, our OG&A rate decreased 61 basis points in 2021, compared to 2020. This decrease resulted primarily from decreased COVID-19-related costs, lower contributions to multi-employer pension plans, decreased incentive plan costs and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by significant investments in our associates.
Rent Expense
Rent expense was$845 million , or 0.61% of sales, for 2021, compared to$874 million , or 0.66% of sales, for 2020. Rent expense, as a percentage of sales, decreased 5 basis points in 2021, compared to 2020, primarily due to the completion of a property transaction related to 28 previously leased properties that we are now accounting for as owned locations and therefore recognizing depreciation and amortization expense over their useful life. For additional information about this transaction, see Note 5 to the Consolidated Financial Statements.
Depreciation and Amortization Expense
Depreciation and amortization expense was$2.8 billion , or 2.05% of sales, for 2021, compared to$2.7 billion , or 2.07% of sales, for 2020. Depreciation and amortization expense remained consistent, as a percentage of sales, in 2021, compared to 2020.
Operating Profit and FIFO Operating Profit
Operating profit was$3.5 billion , or 2.52% of sales, for 2021, compared to$2.8 billion , or 2.10% of sales, for 2020. Operating profit, as a percentage of sales, increased 42 basis points in 2021, compared to 2020, due to decreased OG&A expense, as a percentage of sales, partially offset by an increased LIFO charge and a lower FIFO gross margin rate. Fuel earnings also contributed to our operating profit growth for 2021, compared to 2020. FIFO operating profit was$3.7 billion , or 2.66% of sales, for 2021, compared to$2.8 billion , or 2.09% of sales, for 2020. FIFO operating profit, as a percentage of sales, excluding the 2021 and 2020 Adjusted Items, increased 7 basis points in 2021, compared to 2020, due to decreased OG&A expense, as a percentage of sales, partially offset by a lower FIFO gross margin rate. Fuel earnings also contributed to our FIFO operating profit growth for 2021, compared to 2020.
Specific factors contributing to the trends driving operating profit and FIFO operating profit identified above are discussed earlier in this section.
33
The following table provides a reconciliation of operating profit to FIFO operating profit, and to Adjusted FIFO operating profit, excluding the 2021 and 2020 Adjusted Items:
Operating Profit excluding the Adjusted Items
($ in millions)
2021 2020
Operating profit $ 3,477 $ 2,780
LIFO charge (credit) 197 (7)
FIFO Operating profit 3,674 2,773
Adjustment for pension plan withdrawal liabilities 449 989 Adjustment for Home Chef contingent consideration 66 189 Adjustment for transformation costs(1) 136 111 Other
(15) (6)
2021 and 2020 Adjusted items
636 1,283
Adjusted FIFO operating profit excluding the adjustment items above
Transformation costs primarily include costs related to store and business (1) closure costs and third-party professional consulting fees associated with
business transformation and cost saving initiatives.
Interest Expense
Interest expense totaled$571 million in 2021 and$544 million in 2020. The increase in interest expense in 2021, compared to 2020, resulted primarily from the completion of a property transaction related to 28 previously leased properties that we are now accounting for as owned locations. The structure used to complete this transaction requires our liability to be shown as debt. As a result of this transaction, rent expense decreased with a corresponding increase in interest expense and depreciation and amortization expense. For additional information about this transaction, see Note 5 to the Consolidated Financial Statements. Income Taxes
Our effective income tax rate was 18.8% in 2021 and 23.2% in 2020. The 2021 tax rate differed from the federal statutory rate due to a discrete benefit of$47 million which was primarily from the favorable outcome of income tax audit examinations covering multiple years, the benefit from share-based payments and the utilization of tax credits, partially offset by the effect of state income taxes. The 2020 tax rate differed from the federal statutory rate primarily due to the effect of state income taxes, partially offset by the utilization of tax credits and deductions.
Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings of$2.17 per diluted share for 2021 represented a decrease of 33.6% compared to net earnings of$3.27 per diluted share for 2020. Adjusted net earnings of$3.68 per diluted share for 2021 represented an increase of 6.1% compared to adjusted net earnings of$3.47 per diluted share for 2020. The increase in adjusted net earnings per diluted share resulted primarily from increased FIFO operating profit, excluding fuel, increased fuel earnings and lower weighted average common shares outstanding due to common share repurchases, partially offset by a higher LIFO charge. 34
RETURN ON INVESTED CAPITAL
We calculate return on invested capital ("ROIC") by dividing adjusted ROIC
operating profit for the prior four quarters by the average invested capital.
Adjusted operating profit for ROIC purposes is calculated by excluding certain
items included in operating profit, and adding back our LIFO charge (credit),
depreciation and amortization and rent to our U.S. GAAP operating profit of the
prior four quarters. Average invested capital is calculated as the sum of
(i) the average of our total assets, (ii) the average LIFO reserve and (iii) the
average accumulated depreciation and amortization; 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, excluding
accrued income taxes. Averages are calculated for ROIC 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. 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.
Although ROIC is a relatively standard financial term, numerous methods exist for calculating a company's ROIC. As a result, the method used by our management to calculate ROIC may differ from methods other companies use to calculate their ROIC. We urge you to understand the methods used by other companies to calculate their ROIC before comparing our ROIC to that of such other companies.
The following table provides a calculation of ROIC for 2021 and 2020 on a 52 week basis ($ in millions):
Fiscal Year Ended
January 29, January 30,
2022 2021
Return on Invested Capital
Numerator
Operating profit $ 3,477 $ 2,780
LIFO charge (credit) 197 (7)Depreciation and amortization 2,824
2,747
Rent 845
874
Adjustment for Home Chef contingent consideration 66
189
Adjustment for pension plan withdrawal liabilities 449
989
Adjustment for transformation costs 136
111
Adjusted ROIC operating profit$ 7,994 $
7,683 Denominator Average total assets$ 48,874 $ 46,959 Average taxes receivable(1) (54) (74) Average LIFO reserve 1,472 1,377
Average accumulated depreciation and amortization 24,868
24,161
Average trade accounts payable (6,898)
(6,514)
Average accrued salaries and wages (1,575)
(1,291)
Average other current liabilities(2) (5,976)
(4,926) Average invested capital$ 60,711 $ 59,692 Return on Invested Capital 13.17 % 12.87 %
(1)Taxes receivable were$42 as ofJanuary 29, 2022 ,$66 as ofJanuary 30, 2021 and$82 as ofFebruary 1, 2020 . (2)Other current liabilities included accrued income taxes of$9 as ofJanuary 30, 2021 . We did not have any accrued income taxes as ofJanuary 29, 2022 andFebruary 1, 2020 . Accrued income taxes are removed from other current liabilities in the calculation of average invested capital. 35
CRITICAL ACCOUNTING ESTIMATES
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 significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements. The preparation of financial statements in conformity with GAAP 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 differ from those estimates. We believe the following accounting estimates are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.
Impairments of Long-Lived Assets
We monitor the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a triggering event occurs, we perform an impairment calculation, comparing projected undiscounted cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If we identify impairment for long-lived assets to be held and used, we compare the assets' current carrying value to the assets' fair value. Fair value is determined based on market values or discounted future cash flows. We record impairment when the carrying value exceeds fair market value. With respect to owned property and equipment held for disposal, we adjust the value of the property and equipment to reflect recoverable values based on our previous efforts to dispose of similar assets and current economic conditions. We recognize impairment for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. We recorded asset impairments in the normal course of business totaling$64 million in 2021 and$70 million in 2020. We record costs to reduce the carrying value of long-lived assets in the Consolidated Statements of Operations as OG&A expense. The factors that most significantly affect the impairment calculation are our estimates of future cash flows. Our cash flow projections look several years into the future and include assumptions on variables such as inflation, the economy and market competition. Application of alternative assumptions and definitions, such as reviewing long-lived assets for impairment at a different level, could produce significantly different results.
Business Combinations
We account for business combinations using the acquisition method of accounting.
All the assets acquired, liabilities assumed and amounts attributable to
noncontrolling interests are recorded at their respective fair values at the
date of acquisition once we obtain control of an entity. The determination of
fair values of identifiable assets and liabilities involves estimates and the
use of valuation techniques when market value is not readily available. We use
various techniques to determine fair value in such instances, including the
income approach. Significant estimates used in determining fair value include,
but are not limited to, the amount and timing of future cash flows, growth
rates, discount rates and useful lives. The excess of the purchase price over
fair values of identifiable assets and liabilities is recorded as goodwill. See
Note 2 for further information about goodwill.
36
Our goodwill totaled$3.1 billion as ofJanuary 29, 2022 . We review goodwill for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our operating divisions and other consolidated entities (collectively, "reporting units") that have goodwill balances. Generally, fair value is determined using a multiple of earnings, or discounted projected future cash flows, and we compare fair value to the carrying value of a reporting unit for purposes of identifying potential impairment. We base projected future cash flows on management's knowledge of the current operating environment and expectations for the future. We recognize goodwill impairment for any excess of a reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Our annual evaluation of goodwill is performed for our reporting units during the fourth quarter. The 2021 fair value of ourKroger Specialty Pharmacy reporting unit was estimated using multiple valuation techniques: a discounted cash flow model (income approach), a market multiple model and a comparable mergers and acquisition model (market approaches), with each method weighted in the calculation. The income approach relies on management's projected future cash flows, estimates of revenue growth rates, margin assumptions and an appropriate discount rate. The market approaches require the determination of an appropriate peer group, which is utilized to derive estimated fair values based on selected market multiples. The annual evaluation of goodwill performed in 2021, 2020 and 2019 did not result in impairment for any of our reporting units. Based on current and future expected cash flows, we believe additional goodwill impairments are not reasonably likely. A 10% reduction in fair value of our reporting units would not indicate a potential for impairment of our goodwill balance. For additional information relating to our results of the goodwill impairment reviews performed during 2021, 2020 and 2019, see Note 2 to the Consolidated Financial Statements. The impairment review requires the extensive use of management judgment and financial estimates. Application of alternative estimates and assumptions could produce significantly different results. The cash flow projections embedded in our goodwill impairment reviews can be affected by several factors such as inflation, business valuations in the market, the economy, market competition and our ability to successfully integrate recently acquired businesses.
Multi-Employer Pension Plans
We contribute to various multi-employer pension plans based on obligations arising from collective bargaining agreements. These multi-employer pension plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans. We recognize expense in connection with these plans as contributions are funded or when commitments are probable and reasonably estimable, in accordance with GAAP. We made cash contributions to these plans of$1.1 billion in 2021,$619 million in 2020 and$461 million in 2019. The increase in 2021, compared to 2020, is due to the contractual payments we made in 2021 related to our commitments established for certain ratification agreements. The increase in 2020, compared to 2019, is due to incremental contributions we made in 2020 to multi-employer pension plans, helping stabilize future associate benefits. 37 We continue to evaluate and address our potential exposure to under-funded multi-employer pension plans as it relates to our associates who are beneficiaries of these plans. These under-fundings are not our liability. When an opportunity arises that is economically feasible and beneficial to us and our associates, we may negotiate the restructuring of under-funded multi-employer pension plan obligations to help stabilize associates' future benefits and become the fiduciary of the restructured multi-employer pension plan. The commitments from these restructurings do not change our debt profile as it relates to our credit rating since these off-balance sheet commitments are typically considered in our investment grade debt rating. We are currently designated as the named fiduciary of the UFCW Consolidated Pension Plan and theInternational Brotherhood of Teamsters ("IBT")Consolidated Pension Fund and have sole investment authority over these assets. Significant effects of these restructuring agreements recorded in our Consolidated Financial Statements are:
In 2021, we incurred a
? obligations related to withdrawal liabilities for a certain multi-employer
pension fund.
? In 2020, we incurred a
commitments to certain multi-employer pension funds.
In 2019, we incurred a
? obligations related to withdrawal liabilities for certain multi-employer
pension funds.
As we continue to work to find solutions to under-funded multi-employer pension plans, it is possible we could incur withdrawal liabilities for certain funds.
Based on the most recent information available to us, we believe the present value of actuarially accrued liabilities in most of these multi-employer plans exceeds the value of the assets held in trust to pay benefits, and we expect that our contributions to most of these funds will increase over the next few years. We have attempted to estimate the amount by which these liabilities exceed the assets, (i.e., the amount of underfunding), as ofDecember 31, 2021 . Because we are only one of a number of employers contributing to these plans, we also have attempted to estimate the ratio of our contributions to the total of all contributions to these plans in a year as a way of assessing our "share" of the underfunding. Nonetheless, the underfunding is not a direct obligation or liability of ours or of any employer. As ofDecember 31, 2021 , we estimate our share of the underfunding of multi-employer pension plans to which we contribute was approximately$1.1 billion ,$850 million net of tax. This represents a decrease in the estimated amount of underfunding of approximately$600 million ,$450 million net of tax, as ofDecember 31, 2021 , compared toDecember 31, 2020 . The decrease in the amount of underfunding is primarily attributable to higher expected returns on assets in the funds during 2021 and the restructuring of theSound Retirement Trust , helping stabilize future associate benefits. Our estimate is based on the most current information available to us including actuarial evaluations and other data (that include the estimates of others), and such information may be outdated or otherwise unreliable. We have made and disclosed this estimate not because, except as noted above, this underfunding is a direct liability of ours. Rather, we believe the underfunding is likely to have important consequences. In the event we were to exit certain markets or otherwise cease making contributions to these plans, we could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP. The amount of underfunding described above is an estimate and could change based on contract negotiations, returns on the assets held in the multi-employer pension plans, benefit payments or future restructuring agreements. The amount could decline, and our future expense would be favorably affected, if the values of the assets held in the trust significantly increase or if further changes occur through collective bargaining, trustee action or favorable legislation. On the other hand, our share of the underfunding could increase and our future expense could be adversely affected if the asset values decline, if employers currently contributing to these funds cease participation or if changes occur through collective bargaining, trustee action or adverse legislation. We continue to evaluate our potential exposure to under-funded multi-employer pension plans. Although these liabilities are not a direct obligation or liability of ours, any commitments to fund certain multi-employer pension plans will be expensed when our commitment is probable and an estimate can be made. 38
See Note 15 to the Consolidated Financial Statements for more information relating to our participation in these multi-employer pension plans.
NEW ACCOUNTING STANDARDS
Refer to Note 17 and Note 18 to the Consolidated Financial Statements for
recently adopted accounting standards and recently issued accounting standards
not yet adopted as of
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
The following table summarizes our net increase in cash and temporary cash investments for 2021 and 2020:
2021 2020
Net cash provided by (used in)
Operating activities $ 6,190 $ 6,815
Investing activities (2,611) (2,814)
Financing activities (3,445) (2,713)
Net increase in cash and temporary cash investments
Net cash provided by operating activities
We generated$6.2 billion of cash from operations in 2021, compared to$6.8 billion in 2020. Net earnings including noncontrolling interests, adjusted for non-cash items, generated approximately$6.4 billion of operating cash flow in 2021 compared to$5.2 billion in 2020. Cash provided (used) by operating activities for changes in operating assets and liabilities, including working capital, was($229) million in 2021 compared to$1.6 billion in 2020. The decrease in cash provided by operating activities for changes in operating assets and liabilities, including working capital, was primarily due to the following:
? A decrease in the current portion of our commitments due to the
as a result of a contractual payment; and
An increase in long-term liabilities at the end of 2020, primarily due to an
increase in the noncurrent portion of the deferral of the employer portion of
? social security tax payments as a result of the Coronavirus Aid, Relief, and
Economic Security Act (the "CARES Act") which was enacted in the first quarter
of 2020;
Partially offset by a decrease in prepaid and other current assets due to the
? transfer of prepaid escrow funds to fulfill obligations related to the
restructuring of multi-employer pension plans.
Cash paid for taxes decreased in 2021, compared to 2020, primarily due to lower taxable income in 2021, compared to 2020.
Net cash used by investing activities
Investing activities used cash of$2.6 billion in 2021, compared to$2.8 billion in 2020. The amount of cash used by investing activities decreased in 2021, compared to 2020, primarily due to decreased payments for property and equipment in 2021 due to timing of payments. 39
Net cash used by financing activities
We used$3.4 billion of cash for financing activities in 2021, compared to$2.7 billion in 2020. The amount of cash used for financing activities increased in 2021, compared to 2020, primarily due to the following:
? Decreased proceeds from issuance of long-term debt;
? Increased payments on long-term debt including obligations under finance
leases; and
? Increased treasury stock purchases;
? Partially offset by decreased net payments on commercial paper; and
? Increased proceeds from financing arrangement.
Capital Investments
Capital investments, including changes in construction-in-progress payables and excluding the purchase of leased facilities, totaled$3.2 billion in 2021 and 2020. Capital investments for the purchase of leased facilities totaled$58 million in 2020. We did not purchase any leased facilities in 2021. Our capital priorities align directly with our value creation model and our target to consistently grow net earnings. Our capital program includes initiatives to enhance the customer experience in stores, improve our process efficiency and enhance our digital capabilities through technology developments. As such, we increased our allocation of capital investments related to digital and technology compared to prior years. These investments are expected to drive digital sales growth and improve operating efficiency by removing cost and waste from our business.
The table below shows our supermarket storing activity and our total supermarket square footage for 2021, 2020 and 2019:
Supermarket Storing Activity
2021 2020 2019
Beginning of year 2,742 2,757 2,764
Opened 4 5 10
Opened (relocation) 4 6 9
Acquired - - 6
Closed (operational) (20) (20) (19)
Closed (relocation) (4) (6) (13)
End of year 2,726 2,742 2,757
Total supermarket square footage (in millions) 179 179 180
Debt Management
Total debt, including both the current and long-term portions of obligations under finance leases, decreased$49 million to$13.4 billion as of year-end 2021 compared to 2020. The decrease in 2021, compared to 2020, resulted from the payments of$300 million of senior notes bearing an interest rate of 2.60%,$500 million of senior notes bearing an interest rate of 2.95% and$500 million of senior notes bearing an interest rate of 3.40%, partially offset by an increase in debt primarily from the completion of a property transaction and a net increase in obligations under finance leases of$616 million primarily related to our threeKroger Delivery customer fulfillment center openings. We purchased and then immediately sold a portfolio of 28 of our existing stores, allowing us to secure long-term access to these locations at favorable lease rates. The structure used to complete this transaction requires our liability to be shown as debt. 40
Common Share Repurchase Programs
We maintain share repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act of 1934 and allow for the orderly repurchase of our common shares, from time to time. The share repurchase programs do not have an expiration date but may be suspended or terminated by our Board of Directors at any time. We made open market purchases of our common shares totaling$1.4 billion in 2021 and$1.2 billion in 2020. In addition to these repurchase programs, we also repurchase common shares to reduce dilution resulting from our employee stock option plans. This program is solely funded by proceeds from stock option exercises, and the tax benefit from these exercises. We repurchased approximately$225 million in 2021 and$128 million in 2020 of our common shares under the stock option program. OnSeptember 11, 2020 , our Board of Directors approved a$1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the "September 2020 Repurchase Program"). TheSeptember 2020 Repurchase Program was exhausted onJune 11, 2021 . OnJune 16, 2021 , our Board of Directors approved a$1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the "June 2021 Repurchase Program"). OnDecember 30, 2021 , our Board of Directors approved a$1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the "December 2021 Repurchase Program"). TheDecember 2021 Repurchase Program authorization replaced the existingJune 2021 Repurchase Program.
The shares repurchased in 2021 were reacquired under the following share repurchase programs:
? The
? The
? The
A program announced on
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 ("1999 Repurchase
Program").
As of
During the first quarter throughMarch 23, 2022 , we repurchased an additional$92 million of our common shares under the stock option program and$287 million additional shares under theDecember 2021 Repurchase Program. As ofMarch 23, 2022 , we have$534 million remaining under theDecember 2021 Repurchase Program. 41 Dividends
The following table provides dividend information for 2021 and 2020 ($ in millions, except per share amounts):
2021 2020
Cash dividends paid $ 589 $ 534 Cash dividends paid per common share
Liquidity Needs
We held cash and temporary cash investments of$1.8 billion , as of the end of 2021, which reflects our elevated operating performance and significant improvements in working capital. We actively manage our cash and temporary cash investments in order to internally fund operating activities, support and invest in our core businesses, make scheduled interest and principal payments on our borrowings and return cash to shareholders through cash dividend payments and share repurchases. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in economic and market conditions. We remain committed to our dividend and share repurchase programs and we will evaluate the optimal use of any excess free cash flow, consistent with our previously stated capital allocation strategy. 42
The table below summarizes our short-term and long-term material cash
requirements, based on year of maturity or settlement, as of
2022 2023 2024 2025 2026 Thereafter Total
Contractual Obligations(1)(2)
Long-term debt(3) $ 451 $ 1,130 $ 5 $ 84 $ 1,387 $ 8,688 $ 11,745
Interest on long-term debt(4) 494 471 422 422 399 4,918 7,126
Finance lease obligations 159 158 156 152 152 1,323 2,100
Operating lease obligations 920 862 791 717 664 5,961 9,915
Self-insurance liability(5) 236 152 102 65 40 126 721
Construction commitments(6) 542 - - -
- - 542
CARES Act(7) 311 - - - - - 311
Purchase obligations(8) 894 435 320 294 319 2,163 4,425
Total $ 4,007 $ 3,208 $ 1,796 $ 1,734 $ 2,961 $ 23,179 $ 36,885 The contractual obligations table excludes funding of pension and other
postretirement benefit obligations, which totaled approximately
in 2021. For additional information about these obligations, see Note 14 to (1) the Consolidated Financial Statements. This table also excludes contributions
under various multi-employer pension plans, which totaled
2021. For additional information about these multi-employer pension plans,
see Note 15 to the Consolidated Financial Statements.
The liability related to unrecognized tax benefits has been excluded from the (2) contractual obligations table because a reasonable estimate of the timing of
future tax settlements cannot be determined.
(3) As of
borrowings under our credit facility.
Amounts include contractual interest payments using the interest rate as of
(4)
for all other debt instruments.
(5) The amounts included for self-insurance liability related to workers'
compensation claims have been stated on a present value basis.
Amounts include funds owed to third parties for projects currently under (6) construction. These amounts are reflected in "Other current liabilities" in
our Consolidated Balance Sheets.
The CARES Act, which was enacted on March 27, 2020 , includes measures toassist companies in response to the COVID-19 pandemic. These measures include
deferring the due dates of tax payments and other changes to income and
non-income-based tax laws. As permitted under the CARES Act, we are deferring
the remittance of the employer portion of the social security tax. The social (7) security tax provision requires that the deferred employment tax be paid over
two years, with half of the amount required to be paid by
and the other half by
employer portion of social security tax of
million was paid during 2021 and
liabilities" in our Consolidated Balance Sheets.
Amounts include commitments, many of which are short-term in nature, to be
utilized in the normal course of business, such as several contracts topurchase raw materials utilized in our food production plants and several
contracts to purchase energy to be used in our stores and food production
plants. Our obligations also include management fees for facilities operated
by third parties and outside service contracts. Any upfront vendor (8) allowances or incentives associated with outstanding purchase commitments are
recorded as either current or long-term liabilities in our Consolidated
Balance Sheets. We included our future commitments for customer fulfillment
centers for which we have placed an order as of
include our commitments associated with additional customer fulfillment
centers that have not yet been ordered. We expect our future commitments for
customer fulfillment centers will continue to grow as we place orders for
additional customer fulfillment centers.
43
We expect to meet our short-term and long-term liquidity needs with cash and
temporary cash investments on hand at the end of 2021, cash flows from our
operating activities and other sources of liquidity, including borrowings under
our commercial paper program and bank credit facility. Our short-term and
long-term liquidity needs include anticipated requirements for working capital
to maintain our operations, pension plan commitments, interest payments and
scheduled principal payments of debt and commercial paper, servicing our lease
obligations, self-insurance liabilities, capital investments, payments deferred
under the CARES Act and other purchase obligations. We may also require
additional capital in the future to fund organic growth opportunities,
additional customer fulfilment centers, joint ventures or other business
partnerships, property development or acquisitions, dividends and share
repurchases. In addition, we generally operate with a working capital deficit
due to our efficient use of cash in funding operations and because we have
consistent access to the capital markets. We believe we have adequate coverage
of our debt covenants to continue to maintain our current investment grade debt
ratings and to respond effectively to competitive conditions.
For additional information about our debt activity in 2021, see Note 5 to the Consolidated Financial Statements.
Factors Affecting Liquidity
We can currently borrow on a daily basis approximately$2.75 billion under our commercial paper program. AtJanuary 29, 2022 , we had no outstanding commercial paper. Commercial paper borrowings are backed by our credit facility and reduce the amount we can borrow under the credit facility. If our short-term credit ratings fall, the ability to borrow under our current commercial paper program could be adversely affected for a period of time and increase our interest cost on daily borrowings under our commercial paper program. This could require us to borrow additional funds under the credit facility, under which we believe we have sufficient capacity. However, in the event of a ratings decline, we do not anticipate that our borrowing capacity under our commercial paper program would be any lower than$500 million on a daily basis. Factors that could affect our credit rating include changes in our operating performance and financial position, the state of the economy, the current inflationary environment, conditions in the food retail industry and changes in our business model. Further information on the risks and uncertainties that can affect our business can be found in the "Risk Factors" section set forth in Item 1A of Part I of this Annual Report on Form 10-K. Although our ability to borrow under the credit facility is not affected by our credit rating, the interest cost and applicable margin on borrowings under the credit facility could be affected by a downgrade in our Public Debt Rating. "Public Debt Rating" means, as of any date, the rating that has been most recently announced by either S&P or Moody's, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Company. As ofMarch 23, 2022 , we had no commercial paper borrowings outstanding.
Our credit facility requires the maintenance of a Leverage Ratio (our "financial covenant"). A failure to maintain our financial covenant would impair our ability to borrow under the credit facility. This financial covenant is described below:
Our Leverage Ratio (the ratio of Net Debt to Adjusted EBITDA, as defined in the
? credit facility) was 1.46 to 1 as of
exceed 3.50 to 1, we would be in default of our credit facility and our ability
to borrow under the facility would be impaired.
Our credit facility is more fully described in Note 5 to the Consolidated Financial Statements. We were in compliance with our financial covenant at year-end 2021.
As ofJanuary 29, 2022 , we maintained a$2.75 billion (with the ability to increase by$1.25 billion ), unsecured revolving credit facility that, unless extended, terminates onJuly 6, 2026 . Outstanding borrowings under the credit facility, commercial paper borrowings, and some outstanding letters of credit reduce funds available under the credit facility. As ofJanuary 29, 2022 , we had no outstanding commercial paper and no borrowings under our revolving credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled$2 million as ofJanuary 29, 2022 . In addition to the available credit mentioned above, as ofJanuary 29, 2022 , we had authorized for issuance$3.3 billion of securities remaining under a shelf registration statement filed with theSEC and effective onMay 24, 2019 . 44 We maintain surety bonds related primarily to our self-insured workers' compensation claims. These bonds are required by most states in which we are self-insured for workers' compensation and are placed with predominately third-party insurance providers to insure payment of our obligations in the event we are unable to meet our claim payment obligations up to our self-insured retention levels. These bonds do not represent liabilities of ours, as we already have reserves on our books for the claims costs. Market changes may make the surety bonds more costly and, in some instances, availability of these bonds may become more limited, which could affect our costs of, or access to, such bonds. Although we do not believe increased costs or decreased availability would significantly affect our ability to access these surety bonds, if this does become an issue, we would issue letters of credit, in states where allowed, to meet the state bonding requirements. This could increase our cost or decrease the funds available under our credit facility if the letters of credit were issued against our credit facility. We had$412 million of outstanding surety bonds as ofJanuary 29, 2022 . These surety bonds expire during fiscal year 2022 and are expected to be renewed. We have standby letters of credit outstanding as part of our insurance program and for other business purposes. The letters of credit for our insurance program collateralize obligations to our insurance carriers in connection with the settlement of potential claims. We have also provided a letter of credit which supports our commitment to build a certain number of fulfillment centers. The balance of this letter of credit reduces primarily upon the construction of each fulfillment center. If we do not reach our total purchase commitment, we will be responsible for the balance remaining on the letter of credit. We had$363 million of outstanding standby letters of credit as ofJanuary 29, 2022 . These standby letters of credit expire during fiscal year 2022 and are expected to be renewed. Letters of credit do not represent liabilities of ours and are not reflected in the Company's Consolidated Balance Sheets. We also are contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. We could be required to satisfy obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of our assignments among third parties, and various other remedies available to us, we believe the likelihood that we will be required to assume a material amount of these obligations is remote. We have agreed to indemnify certain third-party logistics operators for certain expenses, including multi-employer pension plan obligations and withdrawal liabilities. In addition to the above, we enter into various indemnification agreements and take on indemnification obligations in the ordinary course of business. Such arrangements include indemnities against third-party claims arising out of agreements to provide services to us; indemnities related to the sale of our securities; indemnities of directors, officers and employees in connection with the performance of their work; and indemnities of individuals serving as fiduciaries on benefit plans. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that could result in a material liability.
TWO-YEAR FINANCIAL RESULTS
Significant fluctuations occurred in our business during 2020 due to the
COVID-19 pandemic. As a result, management compares current year identical sales
without fuel, adjusted FIFO operating profit and adjusted net earnings per
diluted share results to the same metrics for the comparable period in 2019, in
addition to comparisons made to 2020. This enables management to evaluate
results of the business and our financial model over a longer period of time,
and to better understand the state of the business after the height of the
pandemic compared to the period of time prior to the pandemic. The purpose of
the following tables is to better illustrate comparable two-year growth from our
ongoing business for 2021 for identical sales without fuel, adjusted FIFO
operating profit and adjusted net earnings per diluted share compared to 2019.
Two year financial results for these measures are useful metrics to investors
and analysts because they present more accurate comparisons of results and
trends over a longer period of time to demonstrate the effect of COVID-19 on our
results. The tables provide the two-year stacked results or compounded annual
growth rate for each measure presented and how it was calculated. Items
identified in these tables should not be considered alternatives to any other
measure of performance. These items should not be reviewed in isolation or
considered substitutes for the Company's financial results including those
measures reported in accordance with GAAP. Due to the nature of these items, as
further described below, it is important to identify these items and to review
them in conjunction with the Company's financial results reported in accordance
with GAAP.
45
Identical Sales Two-Year Stacked
($ in millions)
2021 2020 2020 2019
Excluding fuel $ 120,802 $ 120,575 $ 120,762 $ 105,806 Individual year identical sales result 0.2 % 14.1 %
Two-year stacked identical sales result 14.3 %
Operating Profit Excluding the Adjusted Items Two-Year CAGR
($ in millions)
2021 2019
Operating profit $ 3,477 $ 2,251
LIFO charge 197 105
FIFO Operating profit 3,674 2,356
Adjustment for pension plan withdrawal liabilities 449
135
Adjustment for Home Chef contingent consideration 66
(69)
Adjustment for severance charge and related benefits -
80
Adjustment for transformation costs(1) 136
52
Adjustment for deconsolidation and impairment of Lucky's Market(2) - 412 Other (15) 29 2021 and 2019 Adjusted items 636 639 Adjusted FIFO operating profit excluding the adjusted items above$ 4,310 $
2,995
Two-year operating profit CAGR(3) 24.3 %
Two-year adjusted FIFO operating profit excluding the adjusted items above CAGR(3)
20.0 %
(1)Transformation costs primarily include costs related to store and business
closure costs and third-party professional consulting fees associated with
business transformation and cost saving initiatives.
(2)The adjustment for impairment of Lucky's Market includes a
46
Net Earnings per Diluted Share Excluding the Adjusted Items Two-Year CAGR
($ in millions, except per share amounts)
2021 2019Net earnings attributable to TheKroger Co. $ 1,655 $
1,659
(Income) expense adjustments Adjustment for pension plan withdrawal liabilities(1)(2) 344
104
Adjustment for company-sponsored pension plan settlement charges(1)(3) 68
-
Adjustment for gain on sale ofTurkey Hill Dairy (1)(4) -
(80)
Adjustment for gain on sale of You Technology(1)(5) -
(52)
Adjustment for loss (gain) on investments(1)(6) 628
(119)
Adjustment for deconsolidation and impairment of Lucky's Market attributable tothe Kroger Co. (1)(7) -
225
Adjustment for Home Chef contingent consideration(1)(8) 50
(49)
Adjustment for transformation costs(1)(9) 104
37
Adjustment for severance charge and related benefits(1)(10) -
61
Adjustment for income tax audit examinations(1) (47)
-
2021 and 2019 Adjusted Items 1,147
127
Net earnings attributable toThe Kroger Co. excluding the Adjusted Items$ 2,802 $
1,786
Net earnings attributable toThe Kroger Co. per diluted common share$ 2.17 $
2.04
(Income) expense adjustments Adjustment for pension plan withdrawal liabilities(11) 0.45
0.13
Adjustment for company-sponsored pension plan settlement charges(11) 0.09
-
Adjustment for gain on sale ofTurkey Hill Dairy (11) -
(0.10)
Adjustment for gain on sale of You Technology(11) -
(0.06)
Adjustment for loss (gain) on investments(11) 0.83
(0.15)
Adjustment for deconsolidation and impairment of Lucky's Market attributable tothe Kroger Co. (11) -
0.28
Adjustment for Home Chef contingent consideration(11) 0.07
(0.07)
Adjustment for transformation costs(11) 0.14
0.04
Adjustment for severance charge and related benefits(11) -
0.08
Adjustment for income tax audit examinations(11) (0.07)
-
2021 and 2019 Adjusted Items 1.51
0.15
Net earnings attributable to
$ 3.68 $
2.19
Average number of common shares used in diluted calculation 754
805
Two-year net earnings attributable to
3.1 %
Two-year net earnings attributable to The Kroger Co.
per diluted common share excluding the Adjusted Items
CAGR(12) 29.6 %
47
Net Earnings per Diluted Share Excluding the Adjusted Items Two-Year CAGR
(continued)
($ in millions, except per share amounts)
(1)The amounts presented represent the after-tax effect of each adjustment, which was calculated using discrete tax rates. (2)The pre-tax adjustment for pension plan withdrawal liabilities was$449 in 2021 and$135 in 2019. (3)The pre-tax adjustment for company-sponsored pension plan settlement charges was$87 . (4)The pre-tax adjustment for gain on sale ofTurkey Hill Dairy was ($106 ). (5)The pre-tax adjustment for gain on sale of You Technology was ($70 ). (6)The pre-tax adjustment for loss (gain) on investments was$821 in 2021 and ($157 ) in 2019. (7)The pre-tax adjustment for deconsolidation and impairment of Lucky's Market was$412 including a$107 net loss attributable to the minority interest of Lucky's Market. (8)The pre-tax adjustment for Home Chef contingent consideration was$66 in 2021 and ($69 ) in 2019. (9)The pre-tax adjustment for transformation costs was$136 in 2021 and$52 in 2019. Transformation costs primarily include costs related to store and business closure costs and third party professional consulting fees associated with business transformation and cost saving initiatives. (10)The pre-tax adjustment for severance charge and related benefits was$80 . (11)The amount presented represents the net earnings per diluted common share effect of each adjustment. (12)CAGR represents the compounded annual growth rate. 48
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