The following discussion and analysis of financial condition and results of
operations of The 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 ended February 1, 2020,
which provides additional information on comparisons of fiscal years 2019 and
2018.


EXECUTIVE SUMMARY - OUR PATH TO DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN


We are proud of our results in 2020 and the balance achieved in delivering for
all our key stakeholders - our Associates, Customers, Communities and Investors.
We gained market share and exceeded guidance that we gave in the second half of
2020. We committed more than $2.5 billion to safeguard the environment our
associates and customers work and shop in and to reward associates, including a
$1 billion commitment to a UFCW pension fund. Identical sales, without fuel,
were 14.1% for 2020, as customers continued to consolidate trips and spend more
per transaction. We grew digital sales triple digits in 2020, 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 strong performance in digital is
also a testament to the proactive investments we made over the last several
years in our network, which positioned us to respond with agility during this
critical time. We were disciplined in balancing investments in our customers and
associates with cost savings. For the third year in a row, our operations and
sourcing teams delivered over $1 billion in incremental cost savings. These
savings continue to be focused in areas that take complexity out of the business
and allow our associates to provide a better customer experience. Strong
execution by our team and accelerated investments in our competitive moats -
Fresh, Our Brands, Data & Personalization and Seamless, during the pandemic
allowed us to create significant value for shareholders and strengthen our
balance sheet, including accelerated growth in our alternative profit business.
The momentum we see in our business, which started pre-pandemic and accelerated
during the pandemic, places us in an even better position to grow sales and
profitability in the future and deliver on our total shareholder return
commitments.



Our financial model is underpinned by our leading position in food. We continue
to invest in areas of the business that matter most to our customers and deepen
our competitive moats, to drive sales growth in our retail supermarket business,
including fuel and pharmacy. This in turn generates the data and traffic that
enables our fast-growing alternative profit streams. Our financial strategy is
to continue to use our free cash flow to invest in the business to drive
long-term sustainable net earnings growth, through the identification of
high-return projects that support our strategy. Capital allocation is a core
element of our value creation model, and we will allocate capital towards
driving profitable sales growth, accelerating digital, expanding margin as well
as maintaining the business. We will continue to be disciplined in deploying
capital towards projects that exceed our hurdle rate of return and prioritize
the highest return opportunities to drive 3% to 5% net earnings growth. At the
same time, we are committed to maintaining our net debt to adjusted EBITDA range
of 2.30 to 2.50 in order to keep our current investment grade debt rating. Our
resilient cash flow will allow us to continue to grow our dividend over time and
continue to return excess cash to investors via share repurchases, resulting in
consistently strong and sustainable total shareholder return of between 8%

and
11%.



                                       21

The following table provides highlights of our financial performance:





                           Financial Performance Data

                   ($ in millions, except per share amounts)




                                                             Fiscal Year
                                                              Percentage
                                                   2020         Change        2019
Sales                                            $ 132,498           8.4 %  $ 122,286

Sales without fuel                                 123,012          13.7 % 

108,234

Net earnings attributable to The Kroger Co. 2,585 55.8 %

1,659


Adjusted net earnings attributable to The
Kroger Co.                                           2,740          53.4 % 

1,786


Net earnings attributable to The Kroger Co.
per diluted common share                              3.27          60.3 % 

2.04


Adjusted net earnings attributable to The
Kroger Co. per diluted common share                   3.47          58.4 % 

2.19


Operating profit                                     2,780          23.5 % 

2,251


Adjusted FIFO operating profit                       4,056          35.4 % 

2,995


Dividends paid                                         534           9.9 % 

486


Dividends paid per common share                       0.68          13.3 % 

0.60


Identical sales excluding fuel                        14.1 %         N/A          2.0 %
FIFO gross margin rate, excluding fuel, bps
increase (decrease)                                   0.14           N/A   

(0.23)


OG&A rate, excluding fuel and Adjusted Items,
bps decrease                                          0.06           N/A   

0.29


Reduction in total debt, including obligations
under finance leases compared to prior fiscal
year end                                               663           N/A        1,153
Share repurchases                                    1,324           N/A          465




OVERVIEW


Notable items for 2020 are:





Shareholder Return


? Net earnings attributable to The Kroger Co. per diluted common share of $3.27.

? Adjusted net earnings attributable to The Kroger Co. per diluted common share


   of $3.47.




? Achieved operating profit of $2.8 billion.

? Achieved adjusted FIFO operating profit of $4.1 billion.

? Generated cash from operations of $6.8 billion.

Increased cash and temporary cash investments by $1.3 billion, reflecting

improved operating performance, significant improvements in working capital and

? the deferral of 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.




? Returned $1.9 billion to shareholders through share repurchases and dividend


   payments.




? Decreased total debt, including obligations under finance leases, by $663


   million.




Other Financial Results



? Identical sales, excluding fuel, increased 14.1% in 2020.

? Digital revenue grew 116% in 2020. Digital revenue primarily includes Pickup,


   Delivery, Ship and pharmacy e-commerce sales.



Alternative profit streams contributed an incremental $150 million of operating

? profit in 2020 fueled by our retail media business - Kroger Precision


   Marketing.


                                       22

? Cost savings for 2020 exceeded $1 billion.






Significant Events


During the fourth quarter of 2020, certain of the Company's associates ratified

an agreement with certain UFCW local unions to withdraw from the UFCW

International Union-Industry Pension Fund ("National Fund"). We incurred a

withdrawal liability charge of $962 million, on a pre-tax basis, to fulfill

? obligations for past service for associates and retirees in the National Fund.

We also made a $27 million commitment to a transition reserve in the new

variable annuity pension plan. On an after-tax basis, the withdrawal liability

and commitment to the transition reserve total $754 million (collectively, the

"National Fund Commitment"). The withdrawal liability will be satisfied by


   payments to the National Fund over the next three years.



During 2020, we invested over $1.5 billion to support and safeguard associates,

customers and communities during the COVID-19 pandemic. These investments

primarily relate to items within OG&A such as associate appreciation awards,

? expanded sick and emergency leave pay and investments in associate and customer

safety during the pandemic (collectively, the "COVID-19 Investments").

Supported by our strong performance and cash position, we committed more than

$2.5 billion to safeguard the environment our associates and customers work and

shop in and to reward associates, including the National Fund Commitment.

During the first quarter of 2020, in addition to the recurring multi-employer

pension contributions we make in the normal course of business, we contributed

? an incremental $236 million, $180 million net of tax, to multi-employer pension

plans, helping stabilize future associate benefits (the "First Quarter 2020


   Multi-Employer Pension Contribution").




COVID-19



On March 11, 2020, the World Health Organization announced that infections of
COVID-19 had become a pandemic, and on March 13, the U.S. President announced a
National Emergency relating to the disease. The impact on our financial
condition, results of operations, and cash flows was material in fiscal year
2020. 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,
including safety partitions and physical distancing floor decals, implementation
of customer capacity limits, and providing personal protective equipment like
masks for our associates. All of which are described in our Blueprint for
Businesses - an open source guide we created to help other companies navigate
the complexities of safely operating during a pandemic.



As the pandemic has evolved, we have experienced unusually strong sales. 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 2020 results. The pandemic brought to the forefront the importance
to the customer of fresh and digital. We continued to invest and grow our
capabilities in these areas, leading to gains in both digital and total food at
home market share. Identical sales, without fuel, were 14.1% for 2020, as
customers continued to consolidate trips and spend more per transaction. Digital
revenue grew 116% in 2020, 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 OG&A expenses include significant incremental costs related to investments
in pay and benefits for our associates and measures to safeguard our associates
and customers. Supported by our strong performance and cash position, in 2020 we
committed more than $2.5 billion to safeguard the environment our associates and
customers work and shop in and to reward associates, including committing nearly
$1 billion to better secure pensions for over 30,000 associates. This was in
addition to paid emergency leave, financial assistance through our Helping Hands
program and more. As a percentage of sales, these incremental costs were
partially offset by sales leverage resulting from strong sales growth due to the
COVID-19 pandemic.



                                       23

On March 18, 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. Strong execution by our team and
accelerated investments in our competitive moats during the pandemic allowed us
to strengthen our balance sheet. During 2020, we fully repaid the $1 billion
borrowed under the revolving credit facility and $1.2 billion in outstanding
commercial paper obligations, as of year-end 2019, using cash generated by
operations.



For additional information about our debt activity in 2020, including the
drawdown and repayments under our revolving credit facility, forward-starting
interest rate swap agreements and our senior note issuances, see Note 6 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 BUSINESS


The Kroger Co. was founded in 1883 and incorporated in 1902. As of January 30,
2021, Kroger is one of the world's largest retailers, as measured by revenue,
operating 2,742 supermarkets under a variety of local banner names in 35 states
and the District of Columbia.  Of these stores, 2,255 have pharmacies and 1,596
have fuel centers.  We offer Pickup (also referred to as ClickList®) and Harris
Teeter ExpressLane™ - personalized, order online, pick up at the store services
- at 2,223 of our supermarkets and provide home delivery service to
substantially all of Kroger households. We also operate an online retailer.

We operate 35 food production plants, primarily bakeries and dairies, which supply approximately 29% of Our Brands units and 40% 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 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.



On January 27, 2020, Lucky's Market filed a voluntary petition in the Bankruptcy
Court seeking relief under the Bankruptcy Code. Lucky's Market is included in
our Consolidated Statements of Operations in all periods in 2018 and through
January 26, 2020. Refer to Note 17 to the Consolidated Financial Statements

for
additional information.



On April 26, 2019, we completed the sale of our Turkey Hill Dairy business for
total proceeds of $225 million. Turkey Hill Dairy is included in our
Consolidated Statements of Operations in all periods in 2018 and through April
25, 2019.



On March 13, 2019, we completed the sale of our You Technology business to Inmar
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 for Inmar to provide us digital coupon
services. You Technology is included in our Consolidated Statements of
Operations in all periods in 2018 and through March 12, 2019.



On June 22, 2018, we closed our merger with Home Chef by purchasing 100% of the
ownership interest in Home Chef, for $197 million net of cash and cash
equivalents of $30 million, in addition to future earnout payments of up to $500
million over five years that are contingent on achieving certain milestones.
Home Chef is included in our ending Consolidated Balance Sheet for 2019 and 2020
and in our Consolidated Statements of Operations from June 22, 2018 through
February 2, 2019 and all periods in 2019 and 2020. See Note 2 to the
Consolidated Financial Statements for more information related to our merger
with Home Chef.



On April 20, 2018, we completed the sale of our convenience store business unit
for $2.2 billion. The convenience store business is included in our Consolidated
Statements of Operations through April 19, 2018.



                                       24

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 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 as management believes
FIFO gross margin is a useful metric to investors and analysts because it
measures our day-to-day merchandising and operational effectiveness.



We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management as management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness.





The adjusted net earnings and adjusted net earnings per diluted share metrics
are important measures used by management to compare the performance of core
operating results between periods. We believe adjusted net earnings and adjusted
net earnings per diluted share are useful metrics to investors and analysts
because they present more accurate year-over-year comparisons for our net
earnings and net earnings per diluted share because adjusted items are not the
result of our normal operations. Net earnings for 2020 include the following,
which we define as the "2020 Adjusted Items:"



Charges to OG&A of $989 million, $754 million net of tax, for commitments to

? certain multi-employer pension funds, $189 million, $141 million net of tax,

for the revaluation of Home Chef contingent consideration and $111 million, $81

million net of tax, for transformation costs (the "2020 OG&A Adjusted Items").

? Gains in other income (expense) of $1.1 billion, $821 million net of tax, for

the 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 $135 million, $104 million net of tax, for obligations

related to withdrawal liabilities for certain multi-employer pension funds; $80

million, $61 million net of tax, for a severance charge and related benefits;

$412 million including $305 million attributable to The Kroger Co., $225

? million net of tax, for impairment of Lucky's Market; $52 million, $37 million

net of tax, for transformation costs, primarily including 35 planned store

closures; and a reduction to OG&A of $69 million, $49 million net of tax, for

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 Turkey Hill Dairy; $70 million, $52 million net of tax,

? related to the sale of You Technology; and $157 million, $119 million net of

tax, for the mark to market gain on Ocado Group plc ("Ocado") securities (the


   "2019 Other Income (Expense) Adjusted Items").



Net earnings for 2018 include the following, which we define as the "2018 Adjusted Items:"

Charges to OG&A of $155 million, $121 million net of tax, for obligations

related to withdrawal liabilities for certain local unions of the Central

States multi-employer pension fund; $33 million, $26 million net of tax, for

? the revaluation of Home Chef contingent consideration; and $42 million, $33

million net of tax, for an impairment of financial instrument (the "2018 OG&A

Adjusted Items"). We had initially received the financial instrument in 2016

with no cash outlay as part of the consideration for entering into agreements


   with a third party.


                                       25

A reduction to depreciation and amortization expenses of $14 million, $11

? million net of tax, related to held for sale assets (the "2018 Depreciation


   Adjusted Item").



Gains in other income (expense) of $1.8 billion, $1.4 billion net of tax,

? related to the sale of our convenience store business unit and $228 million,

$174 million net of tax, for the mark to market gain on Ocado securities.


The following table provides a reconciliation of net earnings attributable to
The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a
reconciliation of net earnings attributable to The Kroger Co. per diluted common
share to adjusted net earnings attributable to The Kroger Co. per diluted common
share, excluding the 2020, 2019 and 2018 Adjusted Items.



                                       26

          Net Earnings per Diluted Share excluding the Adjusted Items

                   ($ in millions, except per share amounts)




                                                               2020        2019        2018

Net earnings attributable to The Kroger Co.                  $  2,585    $  1,659    $   3,110
(Income) expense adjustments
Adjustments for pension plan withdrawal liabilities(1)(2)         754         104          121
Adjustment for gain on sale of convenience store
business(1)(3)                                                      -           -      (1,360)
Adjustment for gain on sale of Turkey Hill Dairy(1)(4)              -        (80)            -
Adjustment for gain on sale of You Technology(1)(5)                 -        (52)            -
Adjustment for gain on investments(1)(6)                        (821)      

(119) (174) Adjustment for depreciation related to held for sale assets(1)(7)

                                                        -           -         (11)
Adjustment for severance charge and related
benefits(1)(8)                                                      -          61            -

Adjustment for deconsolidation and impairment of Lucky's Market attributable to The Kroger Co.(1)(9)

                         -         225            -
Adjustment for Home Chef contingent consideration(1)(10)          141        (49)           26
Adjustment for impairment of financial instrument(1)(11)            -           -           33
Adjustment for transformation costs(1)(12)                         81          37            -
Total Adjusted Items                                              155      

127 (1,365)



Net earnings attributable to The Kroger Co. excluding the
Adjusted Items                                               $  2,740    $ 

1,786 $ 1,745



Net earnings attributable to The Kroger Co. per diluted
common share                                                 $   3.27    $   2.04    $    3.76
(Income) expense adjustments
Adjustments for pension plan withdrawal liabilities(13)          0.95        0.13         0.15
Adjustment for gain on sale of convenience store
business(13)                                                        -           -       (1.65)
Adjustment for gain on sale of Turkey Hill Dairy(13)                -      (0.10)            -
Adjustment for gain on sale of You Technology(13)                   -      (0.06)            -
Adjustment for gain on investments(13)                         (1.05)     

(0.15) (0.21) Adjustment for depreciation related to held for sale assets(13)

                                                          -           -       (0.01)
Adjustment for severance charge and related benefits(13)            -        0.08            -

Adjustment for deconsolidation and impairment of Lucky's Market attributable to The Kroger Co.(13)

                           -        0.28            -
Adjustment for Home Chef contingent consideration(13)            0.18      (0.07)         0.03
Adjustment for impairment of financial instrument(13)               -           -         0.04
Adjustment for transformation costs(13)                          0.12        0.04            -
Total Adjusted Items                                             0.20      

0.15 (1.65)

Net earnings attributable to The Kroger Co. per diluted common share excluding the Adjusted Items

$   3.47    $  

2.19 $ 2.11



Average numbers of common shares used in diluted
calculation                                                       781      

805 818

(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 $989 in

2020, $135 in 2019 and $155 in 2018.

(3) The pre-tax adjustment for gain on sale of convenience store business was

($1,782).

(4) The pre-tax adjustment for gain on sale of Turkey Hill Dairy was ($106).

(5) The pre-tax adjustment for gain on sale of You Technology was ($70).

(6) The pre-tax adjustment for gain on investments was ($1,105) in 2020, ($157)

in 2019 and ($228) in 2018.

(7) The pre-tax adjustment for depreciation related to held for sale assets was

($14) in 2018.

(8) The pre-tax adjustment for severance charge and related benefits was $80.

(9) The pre-tax adjustment for deconsolidation and impairment of Lucky's Market

was $412 including $305 attributable to The Kroger Co.

(10) The pre-tax adjustment for Home Chef contingent consideration was $189 in

2020, ($69) in 2019 and $33 in 2018.

(11) The pre-tax adjustment for impairment of financial instrument was $42.

The pre-tax adjustment for transformation costs was $111 in 2020 and $52 in (12) 2019. Transformation costs primarily include costs related to store and

business closures and third-party professional consulting fees associated

with business transformation and cost saving initiatives.

(13) The amount presented represents the net earnings per diluted common share


     effect of each adjustment.




                                       27

RESULTS OF OPERATIONS



Sales



                                  Total Sales

                                ($ in millions)



                                                     Percentage                 Percentage
                                          2020       Change(1)       2019       Change(2)       2018
Total sales to retail customers
without fuel(3)                         $ 122,134          13.6 %  $ 107,487           2.2 %  $ 105,123
Supermarket fuel sales                      9,486        (32.5) %     14,052         (5.7) %     14,903
Convenience stores(4)                           -             - %          -             - %        944
Other sales(5)                                878          17.5 %        747        (15.3) %        882
Total sales                             $ 132,498           8.4 %  $ 122,286           0.4 %  $ 121,852
(1) This column represents the percentage change in 2020 compared to 2019.


(2) This column represents the percentage change in 2019 compared to 2018.

Digital sales, primarily including Pickup, Delivery, Ship and pharmacy (3) e-commerce sales, grew approximately 116% in 2020, 29% in 2019 and 58% in

2018. These sales are included in the "total sales to retail customers

without fuel" line above.

(4) We completed the sale of our convenience store business unit during the first

quarter of 2018.

Other sales primarily relate to external sales at food production plants,

data analytic services and third-party media revenue. The increase in 2020,

compared to 2019, is primarily due to growth in third-party media revenue, (5) partially offset by decreased sales due to the disposal of Turkey Hill Dairy

and You Technology in the first quarter of 2019. The decrease in 2019,

compared to 2018, is primarily due to the disposal of Turkey Hill Dairy and

You Technology in the first quarter of 2019, partially offset by an increase


    in data analytic services and third-party media revenue.




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.



Total sales increased in 2019, compared to 2018, by 0.4%. The increase was due
to an increase in total sales to retail customers without fuel, partially offset
by decreased supermarket fuel sales, a reduction in convenience store sales due
to the sale of our convenience store business unit in the first quarter of 2018
and decreased sales due to the disposal of Turkey Hill Dairy and You Technology
in the first quarter of 2019. Total sales, excluding fuel, dispositions and the
merger with Home Chef increased 2.3% in 2019, compared to 2018. The increase in
total sales to retail customers without fuel for 2019, compared to 2018, was
primarily due to our merger with Home Chef and our identical sales increase,
excluding fuel, of 2.0%. Identical sales, excluding fuel, for 2019, compared to
2018, increased primarily due to growth of loyal households, a higher customer
basket value including retail inflation and Kroger Specialty Pharmacy sales
growth, partially offset by continued investments in lower prices for our
customers.



Total supermarket fuel sales decreased 5.7% in 2019, compared to 2018, primarily
due to a decrease in fuel gallons sold of 4.8% and a decrease in the average
retail fuel price of 1.0%. The decrease in the average retail fuel price was
caused by a decrease in the product cost of fuel.



                                       28

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. 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 2020 and 2019.



                                Identical Sales

                                ($ in millions)




                    2020         2019
Excluding fuel    $ 120,762    $ 105,806
Excluding fuel         14.1 %        2.0 %



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 23.32% in 2020 and 22.07%
in 2019. The increase in 2020, compared to 2019, resulted primarily from
decreased fuel sales, which have a lower gross margin rate, an increase in our
fuel gross margin, growth in our alternative profit stream portfolio, effective
negotiations to achieve savings on the cost of products sold and decreased
shrink, transportation and advertising costs, as a percentage of sales,
reflecting the significant increase in sales volumes, partially offset by
continued investments in lower prices for our customers and a change in our
product sales mix, including lower relative sales in higher gross margin
categories such as deli/bakery.



Our LIFO credit was $7 million in 2020 compared to a LIFO charge of $105 million
in 2019. Our LIFO credit was primarily driven by fourth quarter 2020 working
capital improvements in pharmacy inventory and dairy deflation.



Our FIFO gross margin rate, which excludes the LIFO charge, was 23.32% in 2020,
compared to 22.16% in 2019. 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 increased 14 basis points in 2020, compared to 2019. This increase resulted
primarily from growth in our alternative profit stream portfolio, effective
negotiations to achieve savings on the cost of products sold and decreased
shrink, transportation and advertising costs, as a percentage of sales,
reflecting the significant increase in sales volumes, partially offset by
continued investments in lower prices for our customers and a change in our
product sales mix, including lower relative sales in higher gross margin
categories such as deli/bakery.



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 18.49% in 2020 and 17.34% in 2019.
The increase in 2020, compared to 2019, resulted primarily from the First
Quarter 2020 Multi-Employer Pension Contribution, the 2020 OG&A Adjusted Items,
the COVID-19 Investments, growth in our digital channel as a result of
heightened demand during the pandemic, increased incentive plan costs and the
effect of decreased fuel sales, which increases our OG&A rate, as a percentage
of sales, partially offset by the effect of increased sales due to the pandemic
which decreases our OG&A rate, as a percentage of sales, the 2019 OG&A Adjusted
Items and broad based improvement from cost savings initiatives that drive
administrative efficiencies, store productivity and sourcing cost reductions.



                                       29

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 2020 OG&A Adjusted Items and the 2019
OG&A Adjusted Items, our OG&A rate decreased 6 basis points in 2020, compared to
2019. This decrease resulted primarily from the effect of increased sales due to
the pandemic 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 the First Quarter 2020 Multi-Employer Pension Contribution, the COVID-19
Investments, growth in our digital channel as a result of heightened demand
during the pandemic and increased incentive plan costs. Excluding the $236
million First Quarter 2020 Multi-Employer Pension Contribution from the above
calculation, which we proactively made to cover future funding requirements for
certain multi-employer pension plans, our OG&A rate improved 25 basis points.



Rent Expense



Rent expense was $874 million, or 0.66% of sales, for 2020, compared to $884
million, or 0.72% of sales, for 2019. Rent expense, as a percentage of sales,
decreased 6 basis points in 2020, compared to 2019, primarily due to the effect
of increased sales due to the pandemic which decreases our rent expense, as

a
percentage of sales.


Depreciation and Amortization Expense


Depreciation and amortization expense was $2.7 billion, or 2.07% of sales, for
2020, compared to $2.6 billion, or 2.17% of sales, for 2019. Depreciation and
amortization expense, as a percentage of sales, decreased 10 basis points in
2020, compared to 2019. This decrease resulted primarily from the effect of
increased sales due to the pandemic which decreases our depreciation expense, as
a percentage of sales, partially offset by decreased fuel sales, which increases
our depreciation expense, as a percentage of sales, additional depreciation on
capital investments, excluding mergers and lease buyouts, of $3.2 billion during
2020 and a decrease in the average useful life on these capital investments. Our
strategy includes initiatives to enhance the customer experience in stores,
improve our process efficiency and integrate our digital shopping experience
through technology developments. As such, the percentage of capital investments
related to digital and technology has grown compared to the prior year, which
has caused a decrease in the average depreciable life of our capital portfolio.



Operating Profit and FIFO Operating Profit


Operating profit was $2.8 billion, or 2.10% of sales, for 2020, compared to $2.3
billion, or 1.84% of sales, for 2019. Operating profit, as a percentage of
sales, increased 26 basis points in 2020, compared to 2019, due to improved
sales to retail customers without fuel, a higher gross margin rate, decreased
rent and depreciation and amortization expenses, as a percentage of sales, and
increased fuel earnings, partially offset by increased OG&A expense with fuel,
as a percentage of sales.



FIFO operating profit was $2.8 billion, or 2.09% of sales, for 2020, compared to
$2.4 billion, or 1.93% of sales, for 2019. FIFO operating profit, excluding the
2020 and 2019 Adjusted Items, increased 64 basis points in 2020, compared to
2019, due to improved sales to retail customers without fuel, a higher gross
margin rate, decreased rent and depreciation and amortization expenses, as a
percentage of sales, and increased fuel earnings, partially offset by increased
OG&A expense with fuel, as a percentage of sales.



Specific factors contributing to the trends driving operating profit and FIFO operating profit identified above are discussed earlier in this section.





                                       30

The following table provides a reconciliation of operating profit to FIFO operating profit, excluding the 2020 and 2019 Adjusted Items.





                 Operating Profit excluding the Adjusted Items

                                ($ in millions)




                                                                        2020       2019
Operating profit                                                       $ 2,780    $ 2,251
LIFO (credit) charge                                                       (7)        105

FIFO Operating profit                                                    2,773      2,356

Adjustment for pension plan withdrawal liabilities                         989        135
Adjustment for Home Chef contingent consideration                          189       (69)
Adjustment for severance charge and related benefits                         -         80
Adjustment for transformation costs(1)                                     111         52
Adjustment for deconsolidation and impairment of Lucky's Market(2)         

 -        412
Other                                                                      (6)         29

2020 and 2019 Adjusted items                                             1,283        639

Adjusted FIFO operating profit excluding the adjustment items above $ 4,056 $ 2,995

Transformation costs primarily include costs related to store and business (1) closures 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 $107 million net


    loss attributable to the minority interest of Lucky's Market.




Interest Expense



Interest expense totaled $544 million in 2020 and $603 million in 2019. The decrease in interest expense in 2020, compared to 2019, resulted primarily from decreased borrowings. Over the last 12 months, we decreased total debt, including obligations under finance leases, by $663 million.





Income Taxes



Our effective income tax rate was 23.2% in 2020 and 23.7% in 2019. 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. The 2019 tax rate differed from the federal statutory rate primarily
due to the effect of state income taxes and Lucky's Market losses attributable
to the noncontrolling interest which reduced pre-tax income but did not impact
tax expense.


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 were $3.27 per diluted share for 2020 compared to net earnings of
$2.04 per diluted share for 2019. Adjusted net earnings of $3.47 per diluted
share for 2020 represented an increase of 58.4% compared to adjusted net
earnings of $2.19 per diluted share for 2019. The increase in adjusted net
earnings per diluted share resulted primarily from increased FIFO operating
profit without fuel, the decrease in the LIFO charge, increased fuel earnings
and lower weighted average common shares outstanding due to common share
repurchases, partially offset by a higher income tax expense.



                                       31

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 $1.2
billion in 2020 and $400 million in 2019.



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 $128 million in 2020 and $65
million in 2019 of our common shares under the stock option program.



On November 5, 2019, 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
"November 2019 Repurchase Program"). On September 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"). The
September 2020 Repurchase Program authorization replaced the existing November
2019 Repurchase Program.


The shares repurchased in 2020 were reacquired under the following share repurchase programs:

? The November 2019 Repurchase Program.

? The September 2020 Repurchase Program.

A program announced on December 6, 1999 to repurchase common shares to reduce

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 January 30, 2021, there was $400 million remaining under the September 2020 Repurchase Program.





During the first quarter through March 24, 2021, we repurchased an additional
$36 million of our common shares under the stock option program and $191 million
additional shares under the September 2020 Repurchase Program. As of March 24,
2021, we have $209 million remaining under the September 2020 Repurchase
Program.



CAPITAL INVESTMENTS



Capital investments, including changes in construction-in-progress payables and
excluding mergers and the purchase of leased facilities, totaled $3.2 billion in
2020 and $3.0 billion in 2019.  Capital investments for the purchase of leased
facilities totaled $58 million in 2020 and $82 million in 2019. The table below
shows our supermarket storing activity and our total supermarket square footage:



                                       32

                          Supermarket Storing Activity




                                                  2020     2019     2018
Beginning of year                                 2,757    2,764    2,782
Opened                                                5       10       10
Opened (relocation)                                   6        9        4
Acquired                                              -        6       10
Closed (operational)                               (20)     (19)     (38)
Closed (relocation)                                 (6)     (13)      (4)
End of year                                       2,742    2,757    2,764

Total supermarket square footage (in millions) 179 180 179






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, (iii) the
average accumulated depreciation and amortization and (iv) for 2019, an
adjustment due to the adoption of ASU 2016-02, "Leases," at the beginning of
2019 as further described in Notes 10 and 18 to the Consolidated Financial
Statements; minus (i) the average taxes receivable, (ii) the average trade
accounts payable, (iii) the average accrued salaries and wages, (iv) the average
other current liabilities, excluding accrued income taxes, (v) the average
liabilities held for sale and (vi) certain other adjustments.  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.





                                       33

The following table provides a calculation of ROIC for 2020 and 2019 on a 52
week basis ($ in millions). The 2019 calculation of ROIC excludes the financial
position and results of operations of You Technology and Turkey Hill Dairy, due
to the sales in 2019, and Lucky's Market, due to the deconsolidation in 2019.




                                                                      Fiscal Year Ended
                                                                 January 30,      February 1,
                                                                    2021             2020
Return on Invested Capital
Numerator
Operating profit                                                $       2,780    $       2,251
LIFO charge (credit)                                                      (7)              105
Depreciation and amortization                                           2,747            2,649
Rent                                                                      874              884
Adjustment for Home Chef contingent consideration                         189             (69)
Adjustment for pension plan withdrawal liabilities                        989              135
Adjustment for severance charge and related benefits                        -               80
Adjustment for transformation costs                                       111               52
Adjustment for deconsolidation and impairment of Lucky's
Market                                                                      -              412
Adjustment for operating losses of Lucky's Market                           -               75
Adjustment for disposal of You Technology                                   -             (49)
Adjusted ROIC operating profit                                  $       7,683    $       6,525

Denominator
Average total assets                                            $      46,959    $      41,687
Average taxes receivable(1)                                              (74)             (41)
Average LIFO reserve                                                    1,377            1,329
Average accumulated depreciation and amortization                      24,161           23,404
Average trade accounts payable                                        (6,514)          (6,204)
Average accrued salaries and wages                                    (1,291)          (1,198)
Average other current liabilities(2)                                  (4,926)          (3,942)
Average liabilities held for sale                                           -             (26)
Adjustment for disposal of Turkey Hill Dairy                                -             (45)
Adjustment for disposal of You Technology                                   -             (13)
Adjustment for deconsolidation of Lucky's Market                            -             (25)

Initial operating lease assets at adoption of ASU 2016-02, "Leases" (see Notes 10 and 18)

                                              -            3,406
Average invested capital                                        $      59,692    $      58,332
Return on Invested Capital

12.87 % 11.19 %


(1)Taxes receivable were $66 as of January 30, 2021 and $82 as of February 1,
2020. We did not have any taxes receivable as of February 2, 2019.
(2)Other current liabilities included accrued income taxes of $9 as of January
30, 2021 and $60 as of February 2, 2019. We did not have any accrued income
taxes as of February 1, 2020. Accrued income taxes are removed from other
current liabilities in the calculation of average invested capital.



                                       34

CRITICAL ACCOUNTING POLICIES



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 policies 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 $70
million in 2020. In 2019, we recognized an impairment charge related to Lucky's
Market totaling $238 million. The Lucky's Market impairment charge consisted of
property, plant and equipment of $200 million; goodwill of $19 million;
operating lease assets of $11 million; and other charges of $8 million.
Additionally, we recorded asset impairments totaling $120 million in 2019,
including $70 million of operating lease assets. This 2019 impairment charge
included the 35 planned store closures across our footprint in 2020 related to
our transformation efforts. 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 3 for further information about goodwill.



                                       35

Goodwill



Our goodwill totaled $3.1 billion as of January 30, 2021. 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 2020 fair value of our Kroger 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
2020, 2019 and 2018 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 2020, 2019 and 2018, see Note 3 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 $619 million in 2020, $461
million in 2019 and $358 million in 2018. The increase in 2020, compared to 2019
and 2018 is due to the First Quarter 2020 Multi-Employer Pension Contribution.



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 the
International 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 2020, we incurred a $989 million charge, $754 million net of tax, for

commitments to certain multi-employer pension funds.






                                       36

In 2019, we incurred a $135 million charge, $104 million net of tax, for

? obligations related to withdrawal liabilities for certain multi-employer


   pension funds.



In 2018, we incurred a $155 million charge, $121 million net of tax, for

? obligations related to withdrawal liabilities for certain local unions of the


   Central States multi-employer pension fund.



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 that the
present value of actuarially accrued liabilities in most of the multi-employer
plans to which we contribute substantially exceeds the value of the assets held
in trust to pay benefits. We have attempted to estimate the amount by which
these liabilities exceed the assets, (i.e., the amount of underfunding), as of
December 31, 2020.  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 of December 31, 2020, we estimate our share of the underfunding of
multi-employer pension plans to which we contribute was approximately $1.7
billion, $1.3 billion net of tax.  This represents a decrease in the estimated
amount of underfunding of approximately $600 million, $500 million net of tax,
as of December 31, 2020, compared to December 31, 2019.  The decrease in the
amount of underfunding is primarily attributable to higher expected returns on
assets in the funds during 2020, restructuring of the National Fund and the
First Quarter 2020 Multi-Employer Pension Contribution. 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.



See Note 16 to the Consolidated Financial Statements for more information relating to our participation in these multi-employer pension plans.





NEW ACCOUNTING STANDARDS


Refer to Note 18 and Note 19 to the Consolidated Financial Statements for recently adopted accounting standards and recently issued accounting standards not yet adopted as of January 30, 2021.





                                       37

LIQUIDITY AND CAPITAL RESOURCES





Cash Flow Information


Net cash provided by operating activities


We generated $6.8 billion of cash from operations in 2020 compared to $4.7
billion in 2019. Net earnings including noncontrolling interests, adjusted for
non-cash items and other impacts, generated approximately $5.3 billion of
operating cash flow in 2020 compared to $5.0 billion in 2019. Cash provided
(used) by operating activities for changes in operating assets and liabilities,
including working capital, net of effects from mergers and disposals of
businesses was $1.5 billion in 2020 compared to ($312) million in 2019. The
increase in cash provided by operating activities for changes in operating
assets and liabilities, including working capital, net of effects from mergers
and disposals of businesses, was primarily due to the following:



A decrease in FIFO inventory at the end of 2020 due to accelerated timing of

? inventory sell-through resulting from elevated demand for our products during


   the pandemic;




? An increase in accrued expenses at the end of 2020 primarily due to the


   following:



o An increase in the current portion of the deferral of the employer portion of

social security tax payments as a result of the CARES Act;

o An increase in accrued incentive plan costs at the end of 2020; and

o An increase in the current portion of our commitments due to the National Fund;


   and



? An increase in long-term liabilities at the end of 2020, primarily due to the


   following:




o An increase in the noncurrent portion of the deferral of the employer portion

of social security tax payments as a result of the CARES Act; and

o An increase in the noncurrent portion of our commitments due to the National


   Fund;



Partially offset by an increase in prepaid and other current assets due to

? escrow deposits related to the restructuring of multi-employer pension plans;


   and




? Proceeds from a contract associated with the sale of a business that benefited


   2019.




Cash paid for taxes decreased in 2020, compared to 2019, primarily due to the
payment of taxes on the gain on sale of the You Technology and Turkey Hill

Dairy
businesses in 2019.



Cash paid for interest increased in 2020, compared to 2019, primarily due to the
timing of certain semi-annual senior note interest payments that were paid
during the first quarter of 2020 which were accrued as of the end of fiscal

year
2019.


Net cash used by investing activities

Investing activities used cash of $2.8 billion in 2020 compared to $2.6 billion in 2019. The amount of cash used by investing activities increased in 2020, compared to 2019, primarily due to the following:


 ? Decreased proceeds from the sale of assets in 2020 compared to 2019; and

? Proceeds from the sale of businesses that benefited 2019, partially offset by

Payments for property and equipment continued at a slower pace in 2020 due to

? disruptions from the pandemic. However, increased purchase activity near the

end of the year resulted in an increase in construction-in-progress payables as


   of year-end 2020 compared to 2019.


                                       38

Net cash used by financing activities





We used $2.7 billion of cash for financing activities in 2020 compared to $2.1
billion during 2019. The amount of cash used for financing activities for 2020,
compared to 2019, increased primarily due to increased payments on commercial
paper and share repurchases, partially offset by increased proceeds from the
issuance of long-term debt and decreased payments on long-term debt.



Debt Management



Total debt, including both the current and long-term portions of obligations
under finance leases, decreased $663 million to $13.4 billion as of year-end
2020 compared to 2019. The decrease in 2020, compared to 2019, resulted
primarily from net payments on commercial paper borrowings of $1.2 billion and
payment of $700 million of senior notes bearing an interest rate of 3.30%,
partially offset by the issuance of $500 million of senior notes bearing an
interest rate of 2.20%, the issuance of $500 million of senior notes bearing an
interest rate of 1.70% and a net increase in obligations under finance leases of
$183 million.



Dividends



The following table provides dividend information ($ in millions, except per
share amounts):




                                      2020     2019
Cash dividends paid                  $  534   $  486

Cash dividends paid per common share $ 0.68 $ 0.60






Liquidity Needs



Based on current operating trends, we believe that cash flows from operating
activities and other sources of liquidity, including borrowings under our
commercial paper program and bank credit facility, will be adequate to meet our
liquidity needs for the next twelve months and for the foreseeable future beyond
the next twelve months. Our liquidity needs include anticipated requirements for
working capital, capital investments, pension plan commitments, interest
payments and scheduled principal payments of debt and commercial paper, offset
by cash and temporary cash investments on hand at the end of 2020. 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 have approximately $800 million of senior notes maturing in the next twelve
months, $311 million of the employer portion of social security tax payments we
have deferred under the CARES act that is required to be paid by December 31,
2021 and expect to pay approximately $307 million in the first half of 2021 to
satisfy a portion of the National Fund commitment. We expect to satisfy these
obligations using cash generated from operations, temporary cash investments on
hand, or through the issuance of additional senior notes or commercial paper. 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.



We held cash and temporary cash investments of $1.7 billion as of the end of
2020 which reflects our elevated operating performance and significant
improvements in working capital. We remain committed to our dividend and share
repurchase program and we will evaluate the optimal use of any excess free cash
flow, consistent with our previously stated capital allocation strategy.



The CARES Act, which was enacted on March 27, 2020, includes measures to assist
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 security tax
provision requires that the deferred employment tax be paid over two years, with
half of the amount required to be paid by December 31, 2021 and the other half
by December 31, 2022. During 2020, we deferred the employer portion of social
security tax of $622 million. Of the total, $311 million is included in "Other
current liabilities" and $311 million is included in "Other long-term
liabilities" in our Consolidated Balance Sheets.



For additional information about our debt activity in 2020, including the
drawdown and repayments under our revolving credit facility, forward-starting
interest rate swap agreements and our senior notes issuances, see Note 6 to the
Consolidated Financial Statements.

                                       39

Factors Affecting Liquidity



We can currently borrow on a daily basis approximately $2.75 billion under our
commercial paper program.  At January 30, 2021, 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.  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 of March 24, 2021, we had no
commercial paper borrowings outstanding.



Our credit facility requires the maintenance of a Leverage Ratio and a Fixed
Charge Coverage Ratio (our "financial covenants").  A failure to maintain our
financial covenants would impair our ability to borrow under the credit
facility. These financial covenants are described below:



Our Leverage Ratio (the ratio of Net Debt to Adjusted EBITDA, as defined in the

? credit facility) was 1.63 to 1 as of January 30, 2021. If this ratio were to

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 Fixed Charge Coverage Ratio (the ratio of Adjusted EBITDA plus Consolidated

Rental Expense to Consolidated Cash Interest Expense plus Consolidated Rental

? Expense, as defined in the credit facility) was 5.37 to 1 as of January 30,

2021. If this ratio fell below 1.70 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 6 to the Consolidated Financial Statements. We were in compliance with our financial covenants at year-end 2020.





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The tables below illustrate our significant contractual obligations and other
commercial commitments, based on year of maturity or settlement, as of January
30, 2021 (in millions of dollars):




                                  2021       2022       2023       2024       2025       Thereafter      Total
Contractual Obligations(1)(2)
Long-term debt(3)                $   844    $   894    $   617    $   494    $   575    $      8,986    $ 12,410
Interest on long-term debt(4)        491        474        439        427        407           5,001       7,239
Finance lease obligations            109         97         95         93         92             935       1,421
Operating lease obligations          947        865        790        717        653           6,260      10,232
Self-insurance liability(5)          220        156        107         70         45             133         731
Construction commitments(6)        1,030          -          -          -  

       -               -       1,030
Purchase obligations(7)              742        378        365        257        240           1,950       3,932
Total                            $ 4,383    $ 2,864    $ 2,413    $ 2,058    $ 2,012    $     23,265    $ 36,995

Other Commercial Commitments
Standby letters of credit        $   368    $     -    $     -    $     -    $     -    $          -    $    368
Surety bonds                         408          -          -          -          -               -         408
Total                            $   776    $     -    $     -    $     -    $     -    $          -    $    776

The contractual obligations table excludes funding of pension and other (1) postretirement benefit obligations, which totaled approximately $33 million

in 2020. This table also excludes contributions under various multi-employer

pension plans, which totaled $619 million in 2020.

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 January 30, 2021, we had no outstanding commercial paper and no

borrowings under our credit facility.

Amounts include contractual interest payments using the interest rate as of (4) January 30, 2021 and stated fixed and swapped interest rates, if applicable,

for all other debt instruments.

The amounts included in the contractual obligations table for self-insurance (5) 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 to

purchase 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

allowances or incentives associated with outstanding purchase commitments are

recorded as either current or long-term liabilities in our Consolidated (7) Balance Sheets. We included our future commitments for customer fulfillment

centers for which we have placed an order. We did not include our commitments

associated with additional customer fulfillment centers that have not yet

been ordered. We have provided a letter of credit which supports our

commitment to build a certain number of fulfillment centers. The balance of

the 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. This letter

of credit balance is included in the "Standby letters of credit" line above.


As of January 30, 2021, we maintained a $2.75 billion (with the ability to
increase by $1 billion), unsecured revolving credit facility that, unless
extended, terminates on August 29, 2022. Outstanding borrowings under the credit
facility, commercial paper borrowings, and some outstanding letters of credit
reduce funds available under the credit facility. As of January 30, 2021, 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 of January 30, 2021.



In addition to the available credit mentioned above, as of January 30, 2021, we
had authorized for issuance $3.3 billion of securities remaining under a shelf
registration statement filed with the SEC and effective on May 24, 2019.



                                       41

We also 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,
against our credit facility to meet the state bonding requirements.  This could
increase our cost and decrease the funds available under our credit facility.



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.



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