KROGER CO. (THE) The following analysis should be read in conjunction with 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 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 and
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, 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 the first quarter of
2021 include the following, which we define as the "2021 Adjusted Items":
Charges to operating, general and administrative expenses ("OG&A") of
million,
? liabilities for a certain multi-employer pension fund;
net of tax, for the revaluation of Home Chef contingent consideration and
million,
Adjusted Items").
A loss in other income (expense) of
? the unrealized loss on investments (the "2021 Other Income (Expense) Adjusted
Item").
Net earnings for the first quarter of 2020 include the following, which we define as the "2020 Adjusted Items":
Charges to OG&A of
? Home Chef contingent consideration and
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").
Please refer to the "Net Earnings per Diluted Share excluding the Adjusted Items" table and the tables in the "Two-Year Financial Results" section below for reconciliations of certain non-GAAP financial measures reported in this Quarterly Report on Form 10-Q to the most comparable GAAP financial measure
and
related disclosure.
14
CAUTIONARY STATEMENT
This discussion and analysis contains certain forward-looking statements about
our future performance. These statements are based on management's assumptions
and beliefs in light of the information currently available to it. Such
statements are indicated by words such as "achieve," "affect," "anticipate,"
"believe," "committed," "continue," "could," "estimate," "expect," "future,"
"guidance," "maintain," "may," "strategy," "trend," "will," and "would," and
similar words or phrases. These forward-looking statements are subject to
uncertainties and other factors that could cause actual results to differ
materially. These include the specific risk factors identified in "Risk Factors"
in our Annual Report on Form 10-K for our last fiscal year and any subsequent
filings, as well as those identified in this Form 10-Q.
Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include:
The extent to which our sources of liquidity are sufficient to meet our
requirements may be affected by the state of the financial markets and the
effect that such condition has on our ability to issue commercial paper at
acceptable rates. Our ability to borrow under our committed lines of credit,
? including our bank credit facilities, could be impaired if one or more of our
lenders under those lines is unwilling or unable to honor its contractual
obligation to lend to us, or in the event that global pandemics, including the
COVID-19 pandemic, natural disasters or weather conditions interfere with the
ability of our lenders to lend to us. Our ability to refinance maturing debt
may be affected by the state of the financial markets.
Our ability to achieve sales, earnings and incremental FIFO operating profit
goals may be affected by: COVID-19 pandemic related factors, risks and
challenges, including among others, the length of time that the pandemic
continues, new variants of the virus, the effect of the easing of restrictions,
lack of access to vaccines for certain populations and the extent of vaccine
aversion, the potential for future spikes in infection and illness rates and
the corresponding potential for disruptions in workforce availability and
customer shopping patterns, re-imposed restrictions in the event of resurgence,
and interruptions in the global supply chain or capacity constraints; the pace
of recovery when the pandemic subsides; labor negotiations or disputes; changes
in the unemployment rate; pressures in the labor market; changes in
government-funded benefit programs and the extent and effectiveness of any
COVID-19 stimulus packages; changes in the types and numbers of businesses that
compete with us; pricing and promotional activities of existing and new
competitors, including non-traditional competitors, and the aggressiveness of
that competition; our response to these actions; the state of the economy,
including interest rates, the inflationary and deflationary trends in certain
? commodities; changes in tariffs; the effect that fuel costs have on consumer
spending; volatility of fuel margins; manufacturing commodity costs; diesel
fuel costs related to our logistics operations; trends in consumer spending;
the extent to which our customers exercise caution in their purchasing in
response to economic conditions; the uncertainty of economic growth or
recession; changes in inflation or deflation in product and operating costs;
stock repurchases; our ability to retain pharmacy sales from third party
payors; consolidation in the healthcare industry, including pharmacy benefit
managers; our ability to negotiate modifications to multi-employer pension
plans; natural disasters or adverse weather conditions; the effect of public
health crises or other significant catastrophic events, including the
coronavirus; the potential costs and risks associated with potential
cyber-attacks or data security breaches; the success of our future growth
plans; the ability to execute our growth strategy and value creation model,
including continued cost savings, growth of our alternative profit businesses,
and widening and deepening of our strategic moats of fresh, Our Brands, personalization, and seamless; and the successful integration of merged companies and new partnerships.
Our ability to achieve these goals may also be affected by our ability to
? manage the factors identified above. Our ability to execute our financial
strategy may be affected by our ability to generate cash flow.
Our effective tax rate may differ from the expected rate due to changes in
? laws, the status of pending items with various taxing authorities, and the
deductibility of certain expenses. Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described in this report and other reports that we file with theSecurities and Exchange Commission could cause actual
results to differ materially.
15
EXECUTIVE SUMMARY - OUR PATH TO DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
Our first quarter results demonstrate thatKroger is even better positioned today to connect with our customers than we were before the pandemic because of our relentless focus on Leading with Fresh and Accelerating with Digital for our customers. This relentless focus led to top line sales and adjusted net earnings per diluted share results exceeding our internal expectations. We were disciplined in balancing investments in our associates and customers with strong cost management and achieved record growth in Alternative Profit streams. We continue to be on track to deliver over$1 billion of incremental cost savings for the fourth consecutive year and we expect Alternative Profit growth to be towards the top end of our target range of$100 million to$150 million incremental profit in 2021. Identical sales without fuel declined 4.1%, which results in two-year identical sales without fuel stacked growth of 14.9%. Digital sales grew 16% during the first quarter of 2021 and has grown triple digits since the beginning of 2019. We are building on the momentum of 2020 within our seamless ecosystem through expanded capacity, improved customer experience and continuous innovation. These results have given us the confidence to raise our guidance for identical sales without fuel and adjusted net earnings per diluted share. In addition, we announced a new$1 billion share repurchase program. This$1 billion share repurchase program reinforces the Board's and management's confidence in our cash flow generation and is consistent with our commitment to deliver sustainable and attractive total shareholder returns
of 8% to 11%. Our financial model is underpinned by our leading position in food. We continue to invest in areas of the business that matter most to our customers and deepen our competitive moats, to drive sales growth in our retail supermarket business, including fuel and pharmacy. This in turn generates the data and traffic that enables our fast-growing alternative profit streams. Our financial strategy is to continue to use our free cash flow to invest in the business to drive long-term sustainable net earnings growth, through the identification of high-return projects that support our strategy. Capital allocation is a core element of our value creation model, and we will allocate capital towards driving profitable sales growth, accelerating digital, expanding margin as well as maintaining the business. We will continue to be disciplined in deploying capital towards projects that exceed our hurdle rate of return and prioritize the highest return opportunities to drive 3% to 5% net earnings growth. At the same time, we are committed to maintaining our net debt to adjusted EBITDA range of 2.30 to 2.50 in order to keep our current investment grade debt rating and continue to return cash to shareholders via share repurchases and a growing dividend over time. We remain confident in our ability to generate strong free cash flow and deliver strong and sustainable total shareholder return of 8%
to 11%.
The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
First Quarter Ended
May 22, Percentage May 23,
2021 Change 2020
Sales $ 41,298 (0.6) % $ 41,549 Sales without fuel$ 37,308 (4.0) %$ 38,857 Net earnings attributable to TheKroger Co. $ 140 (88.4) %$ 1,212 Adjusted net earnings attributable to TheKroger Co. $ 918 (5.6) %$ 972 Net earnings attributable toThe Kroger Co. per diluted common share$ 0.18 (88.2) %$ 1.52 Adjusted net earnings attributable to TheKroger Co. per diluted common share$ 1.19 (2.5) %$ 1.22 Operating profit$ 805 (39.3) %$ 1,326 Adjusted FIFO operating profit$ 1,375 (5.4) %$ 1,453 Dividends paid$ 138 7.8 %$ 128 Dividends paid per common share$ 0.18 12.5 %$ 0.16 Identical sales excluding fuel (4.1) % N/A 19.0 % FIFO gross margin rate, excluding fuel, bps increase (decrease) (0.65) N/A
0.44
OG&A rate, excluding fuel and Adjusted Items, bps increase (decrease) (1.08) N/A
0.51
Increase (decrease) in total debt, including obligations under finance leases compared to prior fiscal year end$ 711 N/A$ (605) Share repurchases$ 402 N/A$ 422 16 OVERVIEW Significant fluctuations occurred in our business during 2020 due to the COVID-19 pandemic. As a result, management compares current year identical sales without fuel, adjusted FIFO operating profit and adjusted net earnings per diluted share results to the same metrics for the comparable period in 2019, in addition to comparisons made to 2020. This enables management to evaluate results of the business and our financial model over a longer period of time, and to better understand the state of the business after the height of the pandemic compared to the period of time prior to the pandemic.
Notable items for the first quarter of 2021 are:
Shareholder Return
? Net earnings attributable to
which results in a two-year compounded annual growth rate of (56.5%).
? Adjusted net earnings attributable to
of
? Achieved operating profit of
compounded annual growth rate of (5.5%).
? Achieved adjusted FIFO operating profit of
two-year compounded annual growth rate of 19.9%.
? Generated cash from operations of
? Returned
payments. Other Financial Results
? Identical sales, excluding fuel, decreased 4.1% for the first quarter of 2021,
which results in a two-year stacked growth rate of 14.9%.
Digital revenue grew 16% in the first quarter of 2021 and has grown triple
? digits since the beginning of 2019. Digital revenue primarily includes Pickup,
Delivery, Ship and pharmacy e-commerce sales.
Achieved record Alternative Profit streams growth in the first quarter of 2021
? fueled by our digital media business -
Kroger Personal Finance. Significant Events
During the first quarter of 2021, Fred Meyer and QFC and four local unions
ratified an agreement for the transfer of liabilities from the Sound Retirement
Trust to the UFCW Consolidated Pension Plan. We will transfer
net accrued pension liabilities and prepaid escrow funds, on a pre-tax basis,
to fulfill obligations for past service for associates and retirees. On an
? after-tax basis,
agreement will be satisfied by cash installment payments to the
Consolidated Pension Plan and are expected to be paid evenly over seven years.
The impact of this transaction on GAAP net earnings per diluted share was
during the quarter and is excluded from adjusted net earnings per diluted share
results.
In the first quarter of 2021, we opened our first two
? facilities powered by Ocado in
geography.
17
The following table provides a reconciliation of net earnings attributable toThe Kroger Co. to adjusted net earnings attributable toThe Kroger Co. and a reconciliation of net earnings attributable toThe Kroger Co. per diluted common share to adjusted net earnings attributable toThe Kroger Co. per diluted common share, excluding the 2021 and 2020 Adjusted Items. Net Earnings per Diluted Share excluding the Adjusted Items ($ in millions, except per share amounts) First Quarter Ended May 22, May 23, Percentage 2021 2020 Change
Net earnings attributable to TheKroger Co. $ 140 $
1,212
(Income) expense adjustments Adjustment for pension plan withdrawal liabilities(1)(2) 344
-
Adjustment for loss (gain) on investments(1)(3) 367
(312)
Adjustment for Home Chef contingent consideration(1)(4) 33
44
Adjustment for transformation costs(1)(5) 34
28
2021 and 2020 Adjusted Items 778
(240)
Net earnings attributable toThe Kroger Co. excluding the Adjusted Items$ 918 $
972 (5.6) %
Net earnings attributable toThe Kroger Co. per diluted common share$ 0.18 $
1.52
(Income) expense adjustments Adjustment for pension plan withdrawal liabilities(6) 0.45
-
Adjustment for loss (gain) on investments(6) 0.48
(0.40)
Adjustment for Home Chef contingent consideration(6) 0.04
0.06
Adjustment for transformation costs(6) 0.04
0.04
2021 and 2020 Adjusted Items 1.01
(0.30)
Adjusted net earnings attributable to
$ 1.19 $
1.22 (2.5) %
Average number of common shares used in diluted calculation 760
788
(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
(3) The pre-tax adjustment for loss (gain) on investments was
quarter of 2021 and (
(4) The pre-tax adjustment for Home Chef contingent consideration was
first quarter of 2021 and
The pre-tax adjustment for transformation costs was
of 2021 and
professional consulting fees associated with business transformation and cost
saving initiatives.
(6) The amount presented represents the net earnings per diluted common share
effect of each adjustment.
18
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
First Quarter Ended
May 22, Percentage May 23, Percentage
2021 Change(1) 2020 Change(2)
Total sales to retail customers without
fuel (3) $ 37,022 (4.2) % $ 38,634 18.5 %
Supermarket fuel sales 3,990 48.2 % 2,692 (38.8) %
Other sales(4) 286 28.3 % 223 (14.6) %
Total sales $ 41,298 (0.6) % $ 41,549 11.5 %
(1) This column represents the percentage change in the first quarter of 2021,
compared to the first quarter of 2020.
(2) This column represents the percentage change in the first quarter of 2020,
compared to the first quarter of 2019.
Digital sales, primarily including Pickup, Delivery, Ship and pharmacy (3) e-commerce sales, grew approximately 16% and 92% in the first quarter of 2021
and 2020, respectively. These sales are included in the "total sales to
retail customers without fuel" line above.
Other sales primarily relate to external sales at food production plants, (4) data analytic services and third party media revenue. The increase in the
first quarter of 2021 compared to the first quarter of 2020 is primarily due
to an increase in data analytic services and third-party media revenue.
Total sales were $41.3 billion in the first quarter of 2021, compared to $41.5
billion in the first quarter of 2020. This decrease was due to a decrease in
total sales to retail customers without fuel, partially offset by an increase in
supermarket fuel sales. Total sales, excluding fuel, decreased 4.0% in the first
quarter of 2021, compared to the first quarter of 2020, which is consistent with
the decrease in total sales to retail customers without fuel in the first
quarter of 2021, compared to the first quarter of 2020. This decrease was
primarily due to our identical sales decrease, excluding fuel, of 4.1%. The
decrease in identical sales, excluding fuel, was caused by unprecedented demand
due to the COVID-19 pandemic during the first quarter of 2020. Our two-year
identical sales, excluding fuel, stacked growth was 14.9%. Total supermarket
fuel sales increased 48.2% in the first quarter of 2021, compared to the first
quarter of 2020, primarily due to an increase in fuel gallons sold of 13.2% and
an increase in the average retail fuel price of 31.0%. 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 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 the first quarter of 2021.
19
Identical Sales
($ in millions)
First Quarter Ended
May 22, Percentage May 23, Percentage
2021 Change(1) 2020 Change(2)
Excluding fuel centers $ 36,608 (4.1) % $ 38,186 19.0 %
(1) This column represents the percentage change in identical sales in the first
quarter of 2021, compared to the first quarter of 2020.
(2) This column represents the percentage change in identical sales in the first
quarter of 2020, compared to the first quarter of 2019.
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 rate, as a percentage of sales, was 22.64% for the first quarter of 2021, compared to 24.30% for the first quarter of 2020. The decrease in rate in the first quarter of 2021, compared to the first quarter of 2020, resulted primarily from increased fuel sales, which have a lower gross margin rate, a decrease in our fuel gross margin, continued investments in lower prices for our customers, a COVID-19 related inventory write down for personal protective equipment to be donated to community partners, sales deleverage due to cycling COVID-19 trends which decreases our gross margin, as a percentage of sales, and increased shrink, as a percentage of sales, partially offset by growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold. Our LIFO charge was$37 million for the first quarter of 2021 compared to$31 million for the first quarter of 2020. Our LIFO charge reflects our expected annualized product cost inflation for 2021, primarily driven by grocery, meat and pharmacy. Our FIFO gross margin rate, which excludes the first quarter LIFO charge, was 22.73% for the first quarter of 2021, compared to 24.37% for the first quarter of 2020. Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, our FIFO gross margin rate decreased 65 basis points in the first quarter of 2021, compared to the first quarter of 2020. This decrease resulted primarily from continued investments in lower prices for our customers, a COVID-19 related inventory write down for personal protective equipment to be donated to community partners, sales deleverage due to cycling COVID-19 trends which decreases our FIFO gross margin, as a percentage of sales, and increased shrink, as a percentage of sales, partially offset by growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold. In the first quarter of 2021, compared to the first quarter of 2020, our continued investments in lower prices for our customers were fully offset by growth in our alternative profit stream portfolio and effective negotiations to achieve savings on the cost of products sold.
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 17.98% for the first quarter of
2021, compared to 18.46% for the first quarter of 2020. The decrease in the
first quarter of 2021, compared to the first quarter of 2020 resulted primarily
from decreased COVID-19 related costs, lower contributions to multi-employer
pension plans, decreased incentive plan costs, the 2020 OG&A Adjusted Items, the
effect of increased fuel sales, which decreases our OG&A rate, as a percentage
of sales and broad-based improvement from cost savings initiatives that drive
administrative efficiencies, store productivity and sourcing cost reductions,
partially offset by the 2021 OG&A Adjusted Items and the effect of supermarket
sales deleverage, excluding fuel, due to cycling COVID-19 trends which increases
our OG&A rate, as a percentage of sales.
20
Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very
low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel
sales. Excluding the effect of fuel, the 2021 OG&A Adjusted Items and the 2020
OG&A Adjusted Items, our OG&A rate decreased 108 basis points in the first
quarter of 2021, compared to the first quarter of 2020. This decrease resulted
primarily from decreased COVID-19 related costs, lower contributions to
multi-employer pension plans, decreased incentive plan costs and broad based
improvement from cost savings initiatives that drive administrative
efficiencies, store productivity and sourcing cost reductions, partially offset
by the effect of sales deleverage due to cycling COVID-19 trends which increases
our OG&A rate, as a percentage of sales.
Rent Expense
Rent expense remained consistent, as a percentage of sales, in the first quarter of 2021, compared to the first quarter of 2020.
Depreciation and Amortization Expense
Depreciation and amortization expense increased, as a percentage of sales, in the first quarter of 2021, compared to the first quarter of 2020. This increase resulted primarily from the effect of supermarket sales deleverage, excluding fuel, due to cycling COVID-19 trends which increases our depreciation and amortization expense, as a percentage of sales, partially offset by increased fuel sales, which decreases our depreciation expense, as a percentage of sales.
Operating Profit and FIFO Operating Profit
Operating profit was$805 million , or 1.95% of sales, for the first quarter of 2021, compared to$1.3 billion , or 3.19% of sales, for the first quarter of 2020. Operating profit, as a percentage of sales, decreased 124 basis points in the first quarter of 2021, compared to the first quarter of 2020, due to reduced sales to retail customers without fuel, a lower gross margin rate, increased depreciation and amortization expense, as a percentage of sales, and decreased fuel earnings, partially offset by decreased OG&A expense, as a percentage
of sales. FIFO operating profit was$842 million , or 2.04% of sales, for the first quarter of 2021, compared to$1.4 billion , or 3.27% of sales, for the first quarter of 2020. FIFO operating profit, excluding the 2021 and 2020 Adjusted Items, decreased 17 basis points in the first quarter of 2021, compared to the first quarter of 2020, due to reduced sales to retail customers without fuel, a lower gross margin rate, increased depreciation and amortization expense, as a percentage of sales, and decreased fuel earnings, partially offset by decreased OG&A expense, as a percentage of sales. FIFO operating profit, excluding fuel and the 2021 and 2020 Adjusted Items, increased in the first quarter of 2021, compared to the first quarter of 2020.
Specific factors contributing to the operating trends for operating profit and FIFO operating profit above are discussed earlier in this section.
21
The following table provides a reconciliation of operating profit to FIFO operating profit, and to Adjusted FIFO operating profit, excluding the 2021 and 2020 Adjusted Items.
Operating Profit excluding the Adjusted Items
($ in millions)
First Quarter Ended
May 22, May 23,
2021 2020
Operating profit $ 805 $ 1,326
LIFO charge 37 31
FIFO Operating profit 842 1,357
Adjustment for pension plan withdrawal liabilities 449
-
Adjustment for Home Chef contingent consideration 43
60
Adjustment for transformation costs(1) 44
38
Other (3)
(2)
2021 and 2020 Adjusted items 533
96
Adjusted FIFO operating profit excluding the adjusted items above$ 1,375
Transformation costs primarily include costs related to store and business (1) closure costs and third-party professional consulting fees associated with
business transformation and cost saving initiatives.
Income Taxes
The effective income tax rate was 20.2% in the first quarter of 2021 and 23.5%
in the first quarter of 2020. The effective income tax rate for the first
quarter of 2021 differed from the federal statutory rate due to the utilization
of tax credits and deductions, partially offset by the effect of state income
taxes. The effective income tax rate decreased in the first quarter of 2021,
compared to the first quarter of 2020, due to lower pre-tax income in 2021,
which increases the favorable impact of tax credits and deductions and reduces
the impact of state income taxes. The effective income tax rate for the first
quarter of 2020 differed from the federal statutory rate due to the effect of
state income taxes, partially offset by the utilization of tax credits and
deductions.
Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings were$0.18 per diluted share for the first quarter of 2021 compared to net earnings of$1.52 per diluted share for the first quarter of 2020. Adjusted net earnings of$1.19 per diluted share for the first quarter of 2021 represented a decrease of 2.5% compared to adjusted net earnings of$1.22 per diluted share for the first quarter of 2020. The decrease in adjusted net earnings per diluted share resulted primarily from decreased FIFO operating profit without fuel and decreased fuel earnings, partially offset by lower weighted average common shares outstanding due to common share repurchases and lower income tax expense. Adjusted net earnings, excluding fuel, increased in the first quarter of 2021, compared to the first quarter of 2020. 22
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
Net cash provided by operating activities
We generated$2.3 billion of cash from operations in the first quarter of 2021 compared to$4.2 billion in the first quarter of 2020. Net earnings including noncontrolling interests, adjusted for non-cash items and other impacts, generated approximately$1.9 billion of operating cash flow in the first quarter of 2021 compared to$2.1 billion in the first quarter of 2020. Cash provided by operating activities for changes in operating assets and liabilities, including working capital, was$396 million in the first quarter of 2021 compared to$2.2 billion in the first quarter of 2020. The decrease in cash provided by operating activities for changes in operating assets and liabilities, including working capital, was primarily due to the following:
An increase in FIFO inventory at the end of the first quarter of 2021, compared
? to the first quarter of 2020, due to the accelerated timing of inventory
sell-through in the prior year resulting from elevated demand for our products
during the pandemic;
Cash flows for trade accounts payable were more favorable in the first quarter
? of 2020, compared to the first quarter of 2021, due to increased trade accounts
payable at the end of the first quarter of 2020, primarily related to inventory
purchases to meet elevated demand during the pandemic;
? A decrease in accrued expenses at the end of the first quarter of 2021,
compared to fiscal year end 2020, primarily due to the following:
o An increase in our incentive plan payout in the first quarter of 2021, compared
to the first quarter of 2020; and
o A decrease in the current portion of our commitments due to the
as a result of a contractual payment; and Cash flows from income taxes were favorable in the first quarter of 2020
compared to the first quarter of 2021, primarily due to the deferral of our
? first quarter 2020 federal estimated tax payment under the Coronavirus Aid,
Relief, and Economic Security Act (the "CARES Act") which was enacted in the
first quarter of 2020;
Partially offset by a decrease in prepaid and other current assets due to the
? transfer of prepaid escrow funds to fulfil obligations related to the
restructuring of multi-employer pension plans.
Cash paid for taxes increased in the first quarter of 2021, compared to the first quarter of 2020, primarily due to reduced payments during the first quarter of 2020 resulting from the CARES Act.
Net cash used by investing activities
Investing activities used cash of$853 million in the first quarter of 2021 compared to$689 million in the first quarter of 2020. The amount of cash used by investing activities increased in the first quarter of 2021, compared to the first quarter of 2020, primarily due to payments for property and equipment being lower in the first quarter of 2020 due to disruptions from the pandemic in the prior year. 23
Net cash used by financing activities
We used$781 million of cash for financing activities in the first quarter of 2021 compared to$1.2 billion in the first quarter of 2020. The amount of cash used for financing activities decreased in the first quarter of 2021 compared to the first quarter of 2020, primarily due to the following:
? Decreased net payments on commercial paper; and
? Increased proceeds from financing arrangement;
? Partially offset by decreased proceeds from issuance of long-term debt; and
? Increased payments on long-term debt including obligations under finance
leases. Debt Management As ofMay 22, 2021 , we maintained a$2.75 billion (with the ability to increase by$1 billion ), unsecured revolving credit facility that, unless extended, terminates onAugust 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 ofMay 22, 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 ofMay 22, 2021 . Our bank credit facility and the indentures underlying our publicly issued debt contain various financial covenants. As ofMay 22, 2021 , we were in compliance with the financial covenants. Furthermore, management believes it is not reasonably likely that we will fail to comply with these financial covenants in the foreseeable future. Total debt, including both the current and long-term portions of obligations under finance leases, increased$711 million as ofMay 22, 2021 compared to our fiscal year end 2020 debt of$13.4 billion . This increase resulted primarily from the completion of a property transaction. We purchased and then immediately sold a portfolio of 28 of our existing stores, allowing us to secure long-term access to these locations at favorable lease rates. The structure used to complete this transaction requires our liability to be shown as debt. Additionally, there was a net increase in obligations under finance leases of$397 million , which was partially offset by the payment of$300 million of senior notes bearing an interest rate of 2.60%.
Common Share Repurchase Program
During the first quarter of 2021, we invested$402 million to repurchase 11.4 millionKroger common shares at an average price of$35.19 per share. The shares repurchased in the first quarter of 2021 were reacquired under the following share repurchase programs:
On
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"); and
A program that uses the cash proceeds from the exercises of stock options by
? participants in
associated tax benefits.
As ofMay 22, 2021 , there was$61 million remaining under theSeptember 2020 Repurchase Program. TheSeptember 2020 Repurchase Program was exhausted onJune 11, 2021 . OnJune 16, 2021 , our Board of Directors approved a$1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the "June 2021 Repurchase Program"). 24 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 the first quarter of 2021. 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$1.0 billion 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 byDecember 31, 2021 (as further discussed below) and expect to pay approximately$307 million in the first half of 2021 to satisfy a portion of theNational 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$2.3 billion as of the end of the first quarter of 2021, which reflects an increase compared to our fiscal year end 2020 balance of$1.7 billion , due to our strong operating performance in the first quarter of 2021. 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 onMarch 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, as mentioned above, we deferred 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 byDecember 31, 2021 and the other half byDecember 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 the first quarter of 2021, see Note 2 to the Consolidated Financial Statements.
CAPITAL INVESTMENTS Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled$666 million for the first quarter of 2021 compared to$755 million for the first quarter of 2020. During the rolling four quarter period ended with the first quarter of 2021, we opened, expanded, relocated or acquired 16 supermarkets and also completed 74 major within-the-wall remodels. Total supermarket square footage at the end of the first quarter of 2021 remained consistent with the end of the first quarter of 2020. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the first quarter of 2021 increased 0.4% over the end of the first quarter of 2020. 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 critical accounting policies are summarized in our Annual Report on Form 10-K for the fiscal year endedJanuary 30, 2021 . 25
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 vary from those estimates. NEW ACCOUNTING STANDARDS
Refer to Note 6 to the Consolidated Financial Statements for recently issued
accounting standards not yet adopted as of
TWO-YEAR FINANCIAL RESULTS
Significant fluctuations occurred in our business during 2020 due to the
COVID-19 pandemic. As a result, management compares current year identical sales
without fuel, adjusted FIFO operating profit and adjusted net earnings per
diluted share results to the same metrics for the comparable period in 2019, in
addition to comparisons made to 2020. This enables management to evaluate
results of the business and our financial model over a longer period of time,
and to better understand the state of the business after the height of the
pandemic compared to the period of time prior to the pandemic. The purpose of
the following tables is to better illustrate comparable two-year growth from our
ongoing business for the first quarter of 2021 for identical sales without fuel,
adjusted FIFO operating profit and adjusted net earnings per diluted share
compared to the first quarter of 2019. Two-year financial results for these
measures are useful metrics to investors and analysts because they present more
accurate comparisons of results and trends over a longer period of time to
demonstrate the effect of COVID-19 on our results. The tables provide the
two-year stacked results or compounded annual growth rate for each measure
presented and how it was calculated. Items identified in these tables should not
be considered alternatives to any other measure of performance. These items
should not be reviewed in isolation or considered substitutes for the Company's
financial results including those measures reported in accordance with GAAP. Due
to the nature of these items, as further described below, it is important to
identify these items and to review them in conjunction with the Company's
financial results reported in accordance with GAAP.
Identical Sales Two-Year Stacked
($ in millions)
First Quarter Ended First Quarter Ended
May 22, May 23, May 23, May 25,
2021 2020 2020 2019
Excluding fuel centers $ 36,608 $ 38,186 $ 38,137 $ 32,046
Individual year identical sales result (4.1) % 19.0 %
Two-year stacked identical sales result 14.9 %
26
Operating Profit Excluding the Adjusted Items Two-Year CAGR
($ in millions)
First Quarter Ended
May 22, May 25,
2021 2019
Operating profit $ 805 $ 901
LIFO charge 37 15
FIFO Operating profit 842 916
Adjustment for pension plan withdrawal liabilities 449 59 Adjustment for Home Chef contingent consideration 43 (24) Adjustment for transformation costs(1) 44 - Other (3) 6 2021 and 2019 Adjusted items 533 41
Adjusted FIFO operating profit excluding the adjusted items above
Two-year operating profit CAGR(2) (5.5) %
Two-year adjusted FIFO operating profit excluding the adjusted items above CAGR(2)
19.9 %
Transformation costs primarily include costs related to store and business (1) closure costs and third-party professional consulting fees associated with
business transformation and cost saving initiatives.
(2) CAGR represents the compounded annual growth rate.
27
Net Earnings per Diluted Share Excluding the Adjusted Items Two-Year CAGR
($ in millions, except per share amounts)
First Quarter Ended
May 22 , May 25,
2021 2019Net earnings attributable to TheKroger Co. $ 140
(Income) expense adjustments Adjustment for pension plan withdrawal liabilities(1)(2) 344
44
Adjustment for gain on sale ofTurkey Hill Dairy (1)(3) -
(80)
Adjustment for gain on sale of You Technology(1)(4) -
(52)
Adjustment for loss (gain) on investments(1)(5) 367
(80)
Adjustment for Home Chef contingent consideration(1)(6) 33
(18)
Adjustment for transformation costs(1)(7) 34
-
2021 and 2019 Adjusted Items 778
(186)
Net earnings attributable toThe Kroger Co. excluding the Adjusted Items$ 918
Net earnings attributable toThe Kroger Co. per diluted common share$ 0.18
(Income) expense adjustments Adjustment for pension plan withdrawal liabilities(8) 0.45
0.05
Adjustment for gain on sale ofTurkey Hill Dairy (8) -
(0.10)
Adjustment for gain on sale of You Technology(8) -
(0.06)
Adjustment for loss (gain) on investments(8) 0.48
(0.10)
Adjustment for Home Chef contingent consideration(8) 0.04
(0.02)
Adjustment for transformation costs(8) 0.04
-
2021 and 2019 Adjusted Items 1.01
(0.23)
Adjusted net earnings attributable to
$ 1.19
Average number of common shares used in diluted calculation 760
805
Two-year net earnings attributable to
(56.5) %
Two-year net earnings attributable to
28.6 %
(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
the first quarter of 2021 and
(3) The pre-tax adjustment for gain on sale of
(4) The pre-tax adjustment for gain on sale of You Technology was (
(5) The pre-tax adjustment for loss (gain) on investments was
quarter of 2021 and (
(6) The pre-tax adjustment for Home Chef contingent consideration was
first quarter of 2021 and (
The pre-tax adjustment for transformation costs was
party professional consulting fees associated with business transformation
and cost saving initiatives.
(8) The amount presented represents the net earnings per diluted common share
effect of each adjustment.
(9) CAGR represents the compounded annual growth rate.
28
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