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 29, 2022 , which provides additional information on comparisons of fiscal years 2021 and 2020.Kroger is unable to provide a full reconciliation of forward-looking GAAP and non-GAAP measures used in this Annual Report on Form 10-K without unreasonable effort because it is not possible to predict certain of our adjustment items with a reasonable degree of certainty. This information is dependent upon future events and may be outside of our control and its unavailability could have a significant effect on future financial results.
OUR VALUE CREATION MODEL - DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
Kroger 's proven value creation model is allowing us to deliver today and invest for the future. The foundation of our value creation model is our omnichannel food retail business, which is built onKroger 's strategic assets: our stores, digital ecosystem, Our Brands and our data. These assets, when combined with our go-to-market strategy, deliver a compelling value proposition for our customers. We continue to build long-term customer loyalty through Fresh, Our Brands, Personalization and our seamless shopping experience to drive sustainable sales growth in our retail supermarket business, including fuel and health and wellness. This, in turn, generates the data and traffic that enables our fast growing, high operating margin alternative profit businesses. 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. Our plan involves maximizing growth
opportunities in our supermarket business and is supported by continued
strategic investments in our customers, associates, and our seamless ecosystem
? to ensure we deliver a full, friendly and fresh experience for every customer,
every time. As more and more customers incorporate ecommerce into their
permanent routines, we expect digital sales to grow at a double-digit rate - a
faster pace than other food at home sales - over time; and
Expanding operating margin, through a balanced model where strategic price
investments for our customers, investments in our associates' wages and
benefits and investments in technology to deliver a better associate and
? customer experience are offset by (i) our cost savings program, which has
delivered
(ii) improving our product mix, as we accelerate momentum with our Fresh and
Our Brands initiatives, and (iii) growing our alternative profit businesses.
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 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, subject to Board approval. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.
We expect our value creation model will result in total shareholder return within our target range of 8% to 11% over time, which does not contemplate the effect of the proposed merger with Albertsons.
23
2022 EXECUTIVE SUMMARY
We achieved exceptional results in 2022 as we executed on our Leading with Fresh and Accelerating with Digital strategy, building on record years in 2020 and 2021. These results were driven by positive identical sales without fuel of 5.6%, disciplined margin management and strong fuel profitability. Our proven go-to-market strategy enables us to successfully navigate many operating environments, which has allowed us to effectively manage product cost inflation through strong sourcing practices while maintaining competitive prices and helping customers manage their budgets. Our value proposition, which includes providing great quality, fresh products at affordable prices, data-driven promotions, trusted Our Brands products and our fuel rewards program, is resonating with shoppers and driving total household growth and enhanced customer loyalty. During the year, we continued to invest in wages and the associate experience and in creating zero hunger, zero waste communities, as we believe these components of our strategy are critical to achieving long term sustainable growth. In 2022, our average hourly rates increased by more than 6% and we have now invested an incremental$1.9 billion in associate wages since 2018. Our average hourly rate is now more than$18 and more than$23 , when comprehensive benefits are included. In 2023, we expect to build on this momentum and deliver revenue and adjusted net earnings per diluted share growth on top of the record results achieved over the past three years. We expect to grow revenue by continuing to invest in our customers through competitive pricing and personalization, fresh products and a better shopping experience. Building on our significant investments over the past four years, we will also continue to increase associate wages. We will fund these investments through product mix improvements, cost saving initiatives and growth in our alternative profit businesses. Looking forward, we believe we are well positioned to successfully operate in an evolving economic environment and continue to deliver attractive and sustainable total shareholder return within our target range of 8% to 11% over time, which does not contemplate the effect of the proposed merger with Albertsons.
The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
Fiscal Year
Percentage
2022 Change 2021
Sales $ 148,258 7.5 % $ 137,888 Sales without fuel$ 129,626 5.2 %$ 123,210 Net earnings attributable to TheKroger Co. $ 2,244 35.6 %$ 1,655 Adjusted net earnings attributable to TheKroger Co. $ 3,104 10.8 %$ 2,802 Net earnings attributable toThe Kroger Co. per diluted common share$ 3.06 41.0 %$ 2.17 Adjusted net earnings attributable to TheKroger Co. per diluted common share$ 4.23 14.9 %$ 3.68 Operating profit$ 4,126 18.7 %$ 3,477 Adjusted FIFO operating profit$ 5,079 17.8 %$ 4,310 Dividends paid$ 682 15.8 %$ 589 Dividends paid per common share$ 0.94 20.5 %$ 0.78 Identical sales excluding fuel 5.6 % N/A 0.2 % FIFO gross margin rate, excluding fuel, bps decrease (0.09) N/A
(0.43)
OG&A rate, excluding fuel and Adjusted Items, bps decrease 0.19 N/A
0.61
Increase (decrease) in total debt, including obligations under finance leases compared to prior fiscal year end$ 14 N/A$ (49) Share repurchases$ 993 N/A$ 1,647 24 OVERVIEW Notable items for 2022 are: Shareholder Return
? Achieved net earnings attributable to
of
? Achieved adjusted net earnings attributable to
common share of
? Achieved operating profit of
compared to 2021.
? Achieved adjusted FIFO operating profit of
18% increase compared to 2021.
? Generated cash flows from operations of
Returned
? payments. During the third quarter of 2022, we paused our share repurchase
program to prioritize deleveraging following the proposed merger with
Albertsons. Other Financial Results
Identical sales, excluding fuel, increased 5.6%, which included identical sales
growth in Our Brands categories of 9.0%. Identical sales, excluding fuel, would
? have grown 5.8% in 2022 if not for the reduction in pharmacy sales from our
termination of our agreement with Express Scripts effective
This terminated agreement had no material effect on profitability. Digital sales increased 4%, which was led by strength in our Delivery
solutions, which grew by 25%. Delivery solutions growth was driven by our Boost
membership program and expansion of our
include products ordered online and picked up at our stores and our Delivery
? and Ship solutions. Our Delivery solutions include orders delivered to
customers from retail store locations, customer fulfillment centers powered by
Ocado and orders placed through third-party platforms. Our Ship solutions
primarily include online orders placed through our owned platforms that are
dispatched using mail service or third-party courier.
We are currently operating in a more volatile inflationary environment and we
experienced higher product cost inflation during 2022, compared to 2021. Our
? LIFO charge for 2022 was
increase was attributable to higher product cost inflation primarily in
grocery.
? Achieved cost savings greater than
Significant Events
As previously disclosed, on
agreement with Albertsons. In connection with the merger agreement, we entered
into a commitment letter for a bridge term loan facility and executed a term
? loan credit agreement. During the third quarter of 2022, we paused our share
repurchase program to prioritize deleveraging following the proposed merger
with Albertsons. For additional information about the proposed merger with
Albertsons, see Note 16 to the Consolidated Financial Statements.
During 2022, we opened four additional
? centers powered by Ocado's automated smart platform - one in
in
Colorado . 25
During 2022, we recognized legal settlement costs of
net of tax, relating to the settlement of all opioid litigation claims with the
profit and adjusted net earnings results to reflect the unique and
non-recurring nature of the charge. This settlement is not an admission of
? wrongdoing or liability by
against other claims and lawsuits relating to opioids. This settlement is based
on a set of unique and specific facts relating to
believe that the settlement amount or any other terms of our agreement with New
against us. It is our view that this settlement is not a reliable proxy for the
outcome of any other cases or the overall level of our exposure.
During 2022, we recorded a goodwill and fixed asset impairment charge related
to
the merger with Vitacost in 2014 have been key to advancing
platform and growing our digital business to more than
? sales. As our digital strategy has evolved, our primary focus looking forward
will be to effectively utilize our Pickup and Delivery capabilities and this
reprioritization resulted in the impairment charge.
to operate as an online platform providing great value natural, organic, and
eco-friendly products for customers.
OUR BUSINESS
The Kroger Co. (the "Company" or "Kroger") was founded in 1883 and incorporated in 1902. Our Company is built on the foundation of our food retail business, which includes the added convenience of our retail pharmacies and fuel centers. Our strategy is focused on growing customer loyalty by delivering great value and convenience, and investing in four strategic pillars: Fresh, Our Brands, Data & Personalization and Seamless. We also utilize 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. 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.
Stores As ofJanuary 28, 2023 ,Kroger operates supermarkets under a variety of local banner names in 35 states and theDistrict of Columbia . As ofJanuary 28, 2023 ,Kroger operated, either directly or through its subsidiaries, 2,719 supermarkets, of which 2,252 had pharmacies and 1,637 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. 26
Seamless Digital Ecosystem
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 and Harris Teeter ExpressLane™ - personalized, order online, pick up at the store services - at 2,274 of our supermarkets and provide Delivery, which allows us to offer digital solutions to substantially all of our customers. Our Delivery solutions include orders delivered to customers from retail store locations and customer fulfillment centers powered by Ocado. These channels allow us to serve customers anything, anytime, and anywhere with zero compromise on selection, convenience, and price. We also 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 over$30 billion of our sales in 2022. We operate 33 food production plants, primarily bakeries and dairies, which supply approximately 30% of Our Brands units and 42% 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.
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 approximately 60 million households annually and because of our rewards program, over 90% of customer transactions are tethered to aKroger loyalty card. Our 20 years of investment in data science capabilities is allowing us to utilize this data to create personalized experiences and value for our customers and is also enabling our fast-growing, high operating margin alternative profit businesses, 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.
Proposed Merger with Albertsons
As previously disclosed, onOctober 13, 2022 , we entered into a merger agreement with Albertsons. The proposed merger is expected to accelerate our go-to-market strategy that includes Fresh, Our Brands, Personalization and Seamless, and continue our track record of investments across lowering prices, enhancing the customer experience, and increasing associate wages and benefits. For additional information about the proposed merger with Albertsons, see Note 16 to the Consolidated Financial Statements.
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.
27
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 2022 include the
following, which we define as the "2022 Adjusted Items:"
Charges to operating, general and administrative expenses ("OG&A") of
million,
liabilities for certain multi-employer pension funds,
? net of tax, for the revaluation of Home Chef contingent consideration,
million,
million net of tax, for legal settlement costs and
and fixed asset impairment charges related to
Adjusted Items").
Losses in other income (expense) of
? the unrealized loss on investments (the "2022 Other Income (Expense) Adjusted
Items").
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").
The table below 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 2022, 2021 and 2020 Adjusted Items: 28 Net Earnings per Diluted Share excluding the Adjusted Items ($ in millions, except per share amounts) 2022 2021 2020 Net earnings attributable to TheKroger Co. $ 2,244 $ 1,655 $ 2,585 (Income) expense adjustments Adjustment for pension plan withdrawal liabilities(1)(2) 19 344 754 Adjustment for company-sponsored pension plan settlement charges(1)(3) - 68 - Adjustment for loss (gain) on investments(1)(4) 561 628 (821) Adjustment for Home Chef contingent consideration(1)(5) 15 50 141 Adjustment for transformation costs(1)(6) - 104 81 Adjustment for merger related costs(1)(7) 34 - - Adjustment for legal settlement costs(1)(8) 67 - -
Adjustment for goodwill and fixed asset impairment
charges related to
164 - -
Adjustment for income tax audit examinations(1) - (47) -
Total Adjusted Items 860 1,147 155
Net earnings attributable to
$ 3,104 $
2,802
Net earnings attributable toThe Kroger Co. per diluted common share$ 3.06 $ 2.17 $ 3.27 (Income) expense adjustments Adjustment for pension plan withdrawal liabilities(10) 0.03 0.45 0.95 Adjustment for company-sponsored pension plan settlement charges(10) - 0.09 - Adjustment for loss (gain) on investments(10) 0.76 0.83 (1.05) Adjustment for Home Chef contingent consideration(10) 0.02 0.07 0.18 Adjustment for transformation costs(10) - 0.14 0.12 Adjustment for merger related costs(10) 0.05 - - Adjustment for legal settlement costs(10) 0.09 - -
Adjustment for goodwill and fixed asset impairment
charges related to
0.22 - -
Adjustment for income tax audit examinations(10) - (0.07) -
Total Adjusted Items 1.17 1.51 0.20
Net earnings attributable to
Average numbers of common shares used in diluted calculation 727
754 781
(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
2022,
(3) The pre-tax adjustment for company-sponsored pension plan settlement charges
was
(4) The pre-tax adjustment for loss (gain) on investments was
in 2021 and (
(5) The pre-tax adjustment for Home Chef contingent consideration was
2022,
The pre-tax adjustment for transformation costs was
business closure costs and third party professional consulting fees
associated with business transformation and cost saving initiatives.
The pre-tax adjustment for merger related costs was
associated with the proposed merger with Albertsons.
(8) The pre-tax adjustment for legal settlement costs was
(9) The pre-tax and after-tax adjustments for goodwill and fixed asset impairment
charges related to
(10) The amount presented represents the net earnings per diluted common share
effect of each adjustment.
29
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
2022 Change(1) 2021 Change(2) 2020
Total sales to retail customers
without fuel(3) $ 128,664 5.2 % $ 122,293 0.1 % $ 122,134
Supermarket fuel sales 18,632 26.9 % 14,678 54.7 % 9,486
Other sales(4) 962 4.9 % 917 4.4 % 878
Total sales $ 148,258 7.5 % $ 137,888 4.1 % $ 132,498 (1) This column represents the percentage change in 2022 compared to 2021.
(2) This column represents the percentage change in 2021 compared to 2020.
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 our Delivery and Ship solutions. Our Delivery solutions
include orders delivered to customers from retail store locations, customer
fulfillment centers powered by Ocado and orders placed through third-party
platforms. Our Ship solutions primarily include online orders placed through
our owned platforms that are dispatched using mail service or third-party
courier. Digital sales increased approximately 4% in 2022, decreased (3) approximately 3% in 2021 and grew approximately 116% in 2020. Digital sales
growth for 2022 was led by strength in our Delivery solutions, which grew by
25% in 2022. Delivery solutions growth was driven by our Boost membership
program and expansion of our
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 2022, (4) compared to 2021, and the increase in 2021, compared to 2020, is primarily
due to an increase in data analytic services and third-party media revenue,
partially offset by decreased external sales at food production plants due to
the closing of a plant during 2021.
Total sales increased in 2022, compared to 2021, by 7.5%. The increase was primarily due to increases in supermarket fuel sales and total sales to retail customers without fuel. Total sales, excluding fuel, increased 5.2% in 2022, compared to 2021, which was primarily due to our identical sales increase, excluding fuel, of 5.6%, partially offset by discontinued patient therapies atKroger Specialty Pharmacy . Identical sales, excluding fuel, for 2022, compared to 2021, increased primarily due to an increase in the number of households shopping with us and an increase in basket value due to retail inflation, partially offset by a reduction in the number of items in basket and the termination of our agreement with Express Scripts. Identical sales without fuel would have grown 5.8% in 2022 if not for the reduction in pharmacy sales from our termination of our agreement with Express Scripts effectiveDecember 31, 2022 . Total supermarket fuel sales increased 26.9% in 2022, compared to 2021, primarily due to an increase in the average retail fuel price of 28.5%, partially offset by a decrease in fuel gallons sold of 1.2%, which was less than the national average decline. The increase in the average retail fuel price was caused by an increase in the product cost of fuel. 30 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. 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. 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 Delivery and Ship solutions. We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. We defineKroger 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. We defineKroger Delivery identical sales powered by Ocado based on geography. We includeKroger Delivery sales powered by Ocado as identical if the delivery occurs in an existingKroger supermarket geography. If theKroger Delivery sales powered by Ocado occur in a new geography, these sales are included as identical when deliveries have occurred to the new geography for five full quarters. 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. It is important 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 2022 and 2021. Identical Sales ($ in millions) 2022 2021 Excluding fuel$ 127,635 $ 120,846 Excluding fuel 5.6 % 0.2 %
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 21.43% in 2022 and 22.01% in 2021. The decrease in rate in 2022, compared to 2021, resulted primarily from increased fuel sales, which have a lower gross margin rate, a decrease in our fuel gross margin, increased shrink, as a percentage of sales, and a higher LIFO charge, partially offset by our ability to effectively manage product cost inflation through strong sourcing practices while maintaining competitive prices and helping customers manage their budgets and the cycling of a write down related to a donation of personal protective equipment inventory from the prior year. Our LIFO charge was$626 million in 2022 and$197 million in 2021. The increase in our LIFO charge was attributable to higher product cost inflation primarily in grocery. Our FIFO gross margin rate, which excludes the LIFO charge, was 21.86% in 2022, compared to 22.15% in 2021. 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 9 basis points in 2022, compared to 2021. This decrease resulted primarily from increased shrink, as a percentage of sales, partially offset by our ability to effectively manage product cost inflation through strong sourcing practices while maintaining competitive prices and helping customers manage their budgets and the cycling of a write down related to a donation of personal protective equipment inventory from the prior year. 31
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 16.09% in 2022 and 16.83% in 2021. The decrease in 2022, compared to 2021, resulted primarily from the effect of sales leverage across fuel and supermarkets, which decreases our OG&A rate, as a percentage of sales, lower contributions to multi-employer pension plans, decreased healthcare costs, the 2021 OG&A Adjusted Items and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates, costs related to strategic investments in various margin expansion initiatives that will drive future growth and the 2022 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 2022 OG&A Adjusted Items and the 2021 OG&A Adjusted Items, our OG&A rate decreased 19 basis points in 2022, compared to 2021. This decrease resulted primarily from the effect of supermarket sales leverage, which decreases our OG&A rate, as a percentage of sales, lower contributions to multi-employer pension plans, decreased healthcare costs and broad-based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by investments in our associates and costs related to strategic investments in various margin expansion initiatives that will drive future growth.
Rent Expense
Rent expense was$839 million , or 0.57% of sales, for 2022, compared to$845 million , or 0.61% of sales, for 2021. Rent expense, as a percentage of sales, decreased 4 basis points in 2022, compared to 2021, primarily due to sales leverage and the completion of a property transaction during the first quarter of 2021 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$3.0 billion , or 2.00% of sales, for 2022, compared to$2.8 billion , or 2.05% of sales, for 2021. Depreciation and amortization expense, as a percentage of sales, decreased 5 basis points in 2022, compared to 2021, primarily due to sales leverage.
Operating Profit and FIFO Operating Profit
Operating profit was$4.1 billion , or 2.78% of sales, for 2022, compared to$3.5 billion , or 2.52% of sales, for 2021. Operating profit, as a percentage of sales, increased 26 basis points in 2022, compared to 2021, 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 2022, compared to 2021. FIFO operating profit was$4.8 billion , or 3.21% of sales, for 2022, compared to$3.7 billion , or 2.66% of sales, for 2021. FIFO operating profit, as a percentage of sales, excluding the 2022 and 2021 Adjusted Items, increased 30 basis points in 2022, compared to 2021, due to decreased OG&A expense, as a percentage of sales, partially offset by a lower FIFO gross margin rate. Fuel earnings also contributed to our FIFO operating profit growth for 2022, compared to 2021.
Specific factors contributing to the trends driving operating profit and FIFO operating profit identified above are discussed earlier in this section.
32
The following table provides a reconciliation of operating profit to FIFO operating profit, and to Adjusted FIFO operating profit, excluding the 2022 and 2021 Adjusted Items:
Operating Profit excluding the Adjusted Items
($ in millions)
2022 2021
Operating profit $ 4,126 $ 3,477
LIFO charge 626 197
FIFO Operating profit 4,752 3,674
Adjustment for pension plan withdrawal liabilities 25 449 Adjustment for Home Chef contingent consideration 20 66 Adjustment for transformation costs(1) - 136 Adjustment for merger related costs(2) 44 - Adjustment for legal settlement costs 85 - Adjustment for goodwill and fixed asset impairment charges related to Vitacost.com 164 - Other (11) (15) 2022 and 2021 Adjusted items 327 636
Adjusted FIFO operating profit excluding the adjusted items above
Transformation costs primarily include costs related to third-party (1) professional consulting fees associated with business transformation and cost
saving initiatives.
(2) Merger related costs primarily include third party professional fees and
credit facility fees associated with the proposed merger with Albertsons.
Interest Expense Interest expense totaled$535 million in 2022 and$571 million in 2021. The decrease in interest expense in 2022, compared to 2021, was primarily due to decreased average total outstanding debt throughout 2022, compared to 2021, including both the current and long-term portions of obligations under finance leases, and increased interest income earned on our cash and temporary cash investments due to rising interest rates throughout 2022, compared to 2021.
Income Taxes
Our effective income tax rate was 22.5% in 2022 and 18.8% in 2021. The 2022 tax rate differed from the federal statutory rate due to the effect of state income taxes and non-deductible goodwill impairment charges related toVitacost.com , partially offset by the benefit from share-based payments and the utilization of tax credits. 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.
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$3.06 per diluted share for 2022 represented an increase of 41.0% compared to net earnings of$2.17 per diluted share for 2021. Adjusted net earnings of$4.23 per diluted share for 2022 represented an increase of 14.9% compared to adjusted net earnings of$3.68 per diluted share for 2021. 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 and higher income tax
expense.
33
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,
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 2022 and 2021 on a 52 week basis ($ in millions):
Fiscal Year Ended
January 28, January 29,
2023 2022
Return on Invested Capital
Numerator
Operating profit $ 4,126 $ 3,477
LIFO charge 626 197Depreciation and amortization 2,965
2,824
Rent 839 845 Adjustment for Home Chef contingent consideration 20 66 Adjustment for pension plan withdrawal liabilities 25 449
Adjustment for goodwill and fixed asset impairment
charges related to
164 -
Adjustment for merger related costs 44 -
Adjustment for transformation costs - 136
Adjustment for legal settlement costs 85 -
Adjusted ROIC operating profit $ 8,894 $ 7,994 Denominator Average total assets$ 49,355 $ 48,874 Average taxes receivable(1) (137) (54) Average LIFO reserve 1,883 1,472
Average accumulated depreciation and amortization(2) 27,843
24,868
Average trade accounts payable (7,118)
(6,898)
Average accrued salaries and wages (1,741)
(1,575)
Average other current liabilities(3) (6,333)
(5,976)
Average invested capital $ 63,752 $ 60,711
Return on Invested Capital 13.95 % 13.17 %
(1)Taxes receivable were$231 as ofJanuary 28, 2023 ,$42 as ofJanuary 29, 2022 and$66 as ofJanuary 30, 2021 . (2)Accumulated depreciation and amortization includes depreciation for property, plant and equipment and amortization for definite-lived intangible assets. (3)Other current liabilities included accrued income taxes of$9 as ofJanuary 30, 2021 . We did not have any accrued income taxes as ofJanuary 28, 2023 orJanuary 29, 2022 . Accrued income taxes are removed from other current liabilities in the calculation of average invested capital. 34
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$68 million in 2022 and$64 million in 2021. 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.
35
Our goodwill totaled$2.9 billion as ofJanuary 28, 2023 . 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. In 2022, we recorded a goodwill impairment charge forVitacost.com totaling$160 million . The talent and capabilities gained through the merger with Vitacost in 2014 have been key to advancingKroger 's digital platform and growing our digital business to more than$10 billion in annual sales. As our digital strategy has evolved, our primary focus looking forward will be to effectively utilize our Pickup and Delivery capabilities. This reprioritization resulted in reduced long-term profitability expectations and a decline in the market value for one underlying channel of business and led to the impairment charge.Vitacost.com will continue to operate as an online platform providing great value natural, organic, and eco-friendly products for customers. The annual evaluation of goodwill performed in 2022, 2021 and 2020 did not result in impairment for any of our reporting units other thanVitacost.com described above. 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. The 2022 fair value of ourKroger Specialty Pharmacy ("KSP") 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. Our KSP reporting unit has a goodwill balance of$243 million . For additional information relating to our results of the goodwill impairment reviews performed during 2022, 2021 and 2020, 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$620 million in 2022,$1.1 billion in 2021 and$619 million in 2020. The decrease in 2022, compared to 2021, and the increase in 2021, compared to 2020, are due to the contractual payments we made in 2021 related to our commitments established for the restructuring of certain multi-employer pension plan agreements. 36 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 2022, we incurred a
? obligations related to withdrawal liabilities for certain multi-employer
pension funds.
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.
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, 2022 . 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, 2022 , we estimate our share of the underfunding of multi-employer pension plans to which we contribute was approximately$2.5 billion ,$1.9 billion net of tax. This represents an increase in the estimated amount of underfunding of approximately$1.4 billion ,$1.1 billion net of tax, as ofDecember 31, 2022 , compared toDecember 31, 2021 . The increase in the amount of underfunding is primarily attributable to lower than expected returns on assets in the funds during 2022. 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. 37 The American Rescue Plan Act ("ARP Act"), which was signed into law onMarch 11, 2021 , established a special financial assistance program for financially troubled multi-employer pension plans. Under the ARP Act, eligible multi-employer plans can apply to receive a cash payment in an amount projected by thePension Benefit Guaranty Corporation to pay pension benefits through the plan year ending 2051. At the end of 2022, we expect certain multi-employer pension plans in which we participate, for which our estimated share of underfunding is approximately$1.0 billion ,$750 million net of tax, to apply for funding in 2023, which may reduce a portion of our share of unfunded multi-employer pension plan liabilities.
See Note 15 to the Consolidated Financial Statements for more information relating to our participation in these multi-employer pension plans.
NEW ACCOUNTING STANDARDS
Refer to Note 17 to the Consolidated Financial Statements for recently issued
accounting standards not yet adopted as of
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
The following table summarizes our net (decrease) increase in cash and temporary cash investments for 2022 and 2021:
Fiscal Year
2022 2021
Net cash provided by (used in) Operating activities$ 4,498 $ 6,190 Investing activities (3,015) (2,611) Financing activities (2,289) (3,445) Net (decrease) increase in cash and temporary cash investments$ (806) $
134
Net cash provided by operating activities
We generated$4.5 billion of cash from operations in 2022, compared to$6.2 billion in 2021. Net earnings including noncontrolling interests, adjusted for non-cash items, generated approximately$7.7 billion of operating cash flow in 2022 compared to$6.4 billion in 2021. Cash used by operating activities for changes in operating assets and liabilities, including working capital, was$3.2 billion in 2022 compared to$229 million in 2021. The increase in cash used by operating activities for changes in operating assets and liabilities, including working capital, in 2022 compared to 2021, and compared to management's expectations, was primarily due to a variety of factors, including the effect of higher inflation on inventory balances, some forward buying of inventory to protect margins, and the timing of payments related to certain trade accounts payable and receivables. Specifically:
? An increase in pharmacy receivables at the end of 2022, compared to the end of
2021, primarily due to timing of cash receipts;
An increase in FIFO inventory at the end of 2022, compared to the end of 2021,
primarily due to rising costs resulting from continued inflationary cost
? pressures, in stock inventory returning to pre-pandemic levels due to a
reduction of supply chain constraints and increased forward buying to protect
gross margin;
A decrease in prepaid and other current assets at the end of 2021, compared to
? the end of 2020, primarily due to the transfer of prepaid escrow funds in the
first quarter of 2021 to fulfill obligations related to the restructuring of
multi-employer pension plans;
? An increase in trade accounts payable at the end of 2021, compared to the end
of 2020, primarily due to timing of payments;
38
? An increase in cash used by operating activities for changes in accrued
expenses in 2022, compared to 2021, primarily due to the following:
o An increase in accrued payroll at the end of 2021, compared to the end of 2020,
primarily due to timing of payments;
A decrease in accrued expenses at the end of 2022, compared to the end of 2021,
o primarily due to the payment of the employer portion of social security tax in
2022 that had previously been deferred under the Coronavirus Aid, Relief, and
Economic Security Act (the "CARES Act") which was enacted in 2020; and
An increase in income taxes receivable at the end of 2022, compared to the end
? of 2021, primarily due to the implementation of a tax planning strategy toward
the end of 2022.
Cash paid for taxes increased in 2022, compared to 2021, primarily due to higher taxable income in 2022, compared to 2021.
Net cash used by investing activities
Investing activities used cash of$3.0 billion in 2022, compared to$2.6 billion in 2021. The amount of cash used by investing activities increased in 2022, compared to 2021, primarily due to increased payments for property and equipment in 2022.
Net cash used by financing activities
We used$2.3 billion of cash for financing activities in 2022, compared to$3.4 billion in 2021. The amount of cash used for financing activities decreased in 2022, compared to 2021, primarily due to the following:
? Decreased payments on long-term debt including obligations under finance
leases; and
? Decreased treasury stock purchases;
? Partially offset by decreased proceeds from financing arrangement.
Capital Investments
Capital investments, including changes in construction-in-progress payables and excluding the purchase of leased facilities, totaled$3.3 billion in 2022 and$3.2 billion in 2021. Capital investments for the purchase of leased facilities totaled$21 million in 2022. 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.
39
The table below shows our supermarket storing activity and our total supermarket square footage for 2022, 2021 and 2020:
Supermarket Storing Activity
2022 2021 2020
Beginning of year 2,726 2,742 2,757
Opened 3 4 5
Opened (relocation) 1 4 6
Closed (operational) (10) (20) (20)
Closed (relocation) (1) (4) (6)
End of year 2,719 2,726 2,742
Total supermarket square footage (in millions) 179 179 179
Debt Management
Total debt, including both the current and long-term portions of obligations under finance leases, increased$14 million to$13.4 billion as of year-end 2022 compared to 2021. This increase resulted primarily from a net increase in obligations under finance leases of$466 million primarily related to our four additionalKroger Delivery customer fulfillment center openings during 2022, partially offset by the payment of$400 million of senior notes bearing an interest rate of 2.80%.
Common Share Repurchase Programs
We maintain share repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") 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$821 million in 2022 and$1.4 billion in 2021. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons. 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$172 million in 2022 and$225 million in 2021 of our common shares under the stock option 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 Exchange Act (the "December 2021 Repurchase Program"). TheDecember 2021 Repurchase Program was exhausted during the third quarter of 2022. OnSeptember 9, 2022 , our Board of Directors approved a$1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Exchange Act (the "September 2022 Repurchase Program"). No shares have been repurchased under theSeptember 2022 authorization. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.
The shares we repurchased in 2022 were reacquired under the following share repurchase programs:
? The
A program announced on
dilution resulting from our employee stock option and long-term incentive
? plans, under which repurchases are limited to proceeds received from exercises
of stock options and the tax benefits associated therewith ("1999 Repurchase
Program").
As of
40
Dividends
The following table provides dividend information for 2022 and 2021 ($ in millions, except per share amounts):
2022 2021
Cash dividends paid $ 682 $ 589 Cash dividends paid per common share
Liquidity Needs
We held cash and temporary cash investments of$1.0 billion , as of the end of 2022, which reflects our elevated operating performance over the last few years. 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 growing our dividend over time, subject to board approval, as well as share repurchase programs and we will evaluate the optimal use of any excess free cash flow, consistent with our capital allocation strategy. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons. 41
The table below summarizes our short-term and long-term material cash
requirements, based on year of maturity or settlement, as of
2023 2024 2025 2026 2027 Thereafter Total
Contractual Obligations(1)(2)
Long-term debt(3) $ 1,153 $ 25 $ 84 $ 1,386 $ 607 $ 8,037 $ 11,292
Interest on long-term debt(4) 480 439 422 400 376 4,548 6,665
Finance lease obligations 228 226 222 221 223 1,492 2,612
Operating lease obligations 930 864 791 740 683 5,688 9,696
Self-insurance liability(5) 236 162 106 65 38 105 712
Construction commitments(6) 1,718 - - -
- - 1,718
Purchase obligations(7) 725 330 274 303 283 1,937 3,852
Total $ 5,470 $ 2,046 $ 1,899 $ 3,115 $ 2,210 $ 21,807 $ 36,547 The contractual obligations table excludes funding of pension and other
postretirement benefit obligations, which totaled approximately
in 2022. 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
2022. 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.
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 (7) 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.
We expect to meet our short-term and long-term liquidity needs with cash and temporary cash investments on hand as ofJanuary 28, 2023 , 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, settlement of interest rate swap liabilities, servicing our lease obligations, self-insurance liabilities, capital investments and other purchase obligations. We may also require additional capital in the future to fund organic growth opportunities, additional customer fulfillment centers, joint ventures or other business partnerships, property development, 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. 42 As previously disclosed, onOctober 13, 2022 , we entered into a merger agreement with Albertsons. We expect to meet our liquidity needs for the proposed merger with cash and temporary cash investments on hand as of the merger closing date, cash flows from our operating activities and other sources of liquidity, including borrowings under our commercial paper program, senior notes issuances, bank credit facility and other sources of financing. In connection with the proposed merger, we entered into a commitment letter for a bridge term loan facility and executed a term loan credit agreement. During the third quarter of 2022, we paused our share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons. For additional information about the proposed merger with Albertsons, see Note 16 to the Consolidated Financial Statements.
For additional information about our debt activity in 2022, 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 28, 2023 , 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 22, 2023 , 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 1.34 to 1 as of
exceed 3.50 to 1, we would be in default of our revolving 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
As ofJanuary 28, 2023 , 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 28, 2023 , 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 28, 2023 . In connection with the proposed merger with Albertsons, onOctober 13, 2022 , we entered into a commitment letter with certain lenders pursuant to which the lenders have committed to provide a 364-day$17.4 billion senior unsecured bridge term loan facility. The commitments are intended to be drawn to finance the proposed merger with Albertsons only to the extent we do not arrange for alternative financing prior to closing. As alternative financing for the proposed merger is secured, the commitments with respect to the bridge term loan facility under the commitment letter will be reduced. 43 OnNovember 9, 2022 , we executed a term loan credit agreement with certain lenders pursuant to which the lenders committed to provide, contingent upon the completion of the proposed merger with Albertsons and certain other customary conditions to funding, (1) senior unsecured term loans in an aggregate principal amount of$3.0 billion maturing on the third anniversary of the proposed merger closing date and (2) senior unsecured term loans in an aggregate principal amount of$1.75 billion maturing on the date that is 18 months after the proposed merger closing date (collectively, the "Term Loan Facilities"). Borrowings under the Term Loan Facilities will be used to pay a portion of the consideration and other amounts payable in connection with the proposed merger with Albertsons. The duration of the Term Loan Facilities will allow us to achieve our net total debt to adjusted EBITDA ratio target range of 2.30 to 2.50 within the first 18 to 24 months after the proposed merger closing date. The entry into the term loan credit agreement reduced the commitments under our bridge facility commitment letter from$17.4 billion to$12.65 billion . Borrowings under the Term Loan Facilities will bear interest at rates that vary based on the type of loan and our debt rating. In addition to the available credit mentioned above, as ofJanuary 28, 2023 , we had authorized for issuance$3.3 billion of securities remaining under a shelf registration statement filed with theSEC and effective onMay 20, 2022 . 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$467 million of outstanding surety bonds as ofJanuary 28, 2023 . These surety bonds expire during fiscal year 2023 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$310 million of outstanding standby letters of credit as ofJanuary 28, 2023 . These standby letters of credit expire during fiscal year 2023 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. 44
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