The Kroger Co. (NYSE: KR) today reported its fourth quarter and Fiscal Year 2019 results and will update investors on how the Restock Kroger framework is repositioning the company to create value for shareholders, customers and associates.
Comments from Chairman and CEO Rodney McMullen
“We are pleased with our 2019 results and improving trends in our supermarket business. We delivered on our commitments for ID sales without fuel, adjusted FIFO operating profit, and cost savings in addition to generating over $100 million of incremental operating profit through alternative profit streams in 2019. We also delivered strong adjusted free cash flow during the year, consistent with the total shareholder return model outlined at our Investor Day.
More importantly, the way that we delivered the year is consistent with our long-term financial model and sets us up to connect with customers in a deeper way. Restock Kroger is the right strategic framework to position the company for sustainable growth in the future, continue to improve the core business, and deliver strong total shareholder return. This transformational foundation supports our competitive moats today – Fresh, Our Brands and Personalization – as well as building a seamless ecosystem of the future.”
Capital Allocation Strategy
Kroger’s capital allocation strategy is to use its adjusted free cash flow to invest in the business and drive profitable growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its adjusted free cash flow to achieve these goals.
Consistent with its financial strategy, Kroger reduced net total debt by $1.1 billion over the last four quarters. Kroger’s net total debt to adjusted EBITDA ratio is 2.48, compared to 2.83 a year ago (Table 5). The company’s net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50.
In total, Kroger returned $951 million to shareholders in 2019.
Kroger repurchased $400 million shares in the fourth quarter of 2019 under its $1 billion board authorization announced November 5, 2019.
In 2019, Kroger increased the dividend by 14 percent, from 56¢ to 64¢ per year, marking the 13th consecutive year of dividend increases, which resulted in a payout of $486 million. The company’s quarterly dividend has grown at a double-digit compound annual growth rate since it was reinstated in 2006. The company continues to expect, subject to board approval, an increasing dividend over time.
Fourth Quarter Financial Results
| 4Q19 ($ in millions; except EPS) | 4Q18 ($ in millions; except EPS) | |
| ID Sales* (Table 4) | 2.0% | 1.9% |
| EPS | $0.40 | $0.32 |
| Adjusted EPS (Table 6) | $0.57 | $0.48 |
| Operating Profit | $537 | $391 |
| Adjusted FIFO Operating Profit (Table 7) | $758 | $628 |
| FIFO Gross Margin Rate* | Increased 6 basis points | |
| OG&A Rate* | Decreased 79 basis points |
| *without fuel and adjustment items, if applicable |
Total company sales were $28.9 billion in the fourth quarter, compared to $28.3 billion for the same period last year. Excluding fuel and dispositions, sales grew 2.3%.
Gross margin was 22.1% of sales for the fourth quarter. The FIFO gross margin rate excluding fuel increased 6 basis points. This increase resulted from improvement in costs of goods, accelerating alternative profit streams and cycling of investments that were disclosed in the fourth quarter of 2018, partially offset by investments in price and personalization, continued industry-wide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business.
LIFO charge for the quarter was $36 million, compared to a LIFO credit of $10 million for the same period last year. This increase was driven by higher inflation in dry grocery, pharmacy and dairy.
The Operating, General & Administrative rate without fuel and adjustment items decrease of 79 basis points is due to broad-based improvement in Restock Kroger cost savings initiatives and cycling of investments in OG&A disclosed in the fourth quarter of last year.
In the fourth quarter, Kroger recognized an impairment charge related to the planned closing of 35 stores across the footprint in 2020. This impairment charge is reflected in the $52 million of transformation costs recognized during the fourth quarter. There is no effect on adjusted net earnings per diluted share or adjusted free cash flow guidance for 2020 as a result of this charge.
As a consequence of the Lucky’s Market bankruptcy proceeding, Kroger reported a non-cash charge of $174 million in the quarter and deconsolidated Lucky’s Market from its consolidated financial statements. There is no effect on adjusted net earnings per diluted share or adjusted free cash flow guidance for 2020 as a result of this charge.
The income tax rate for the fourth quarter was 18.2% compared to 20.8% for the same period last year. This decrease resulted from an increase in tax deductions.
Fiscal 2019 Financial Results
| 2019 ($ in billions; except EPS) | 2018 ($ in billions; except EPS) | |
| ID Sales* (Table 4) | 2.0% | 1.8% |
| EPS | $2.04 | $3.76 |
| Adjusted EPS (Table 6) | $2.19 | $2.11 |
| Operating Profit | $2.3 | $2.6 |
| Adjusted FIFO Operating Profit (Table 7) | $3.0 | $2.9 |
| FIFO Gross Margin Rate* | Decreased 23 basis points | |
| OG&A Rate* | Decreased 29 basis points |
| *without fuel and adjustment items, if applicable |
Total company sales were $122.3 billion in 2019. Excluding fuel, dispositions and merger transactions, total sales grew 2.3%.
Gross margin was 22.1% of sales for 2019. The FIFO gross margin rate excluding fuel decreased 23 basis points, primarily driven by industry-wide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business. Gross margin rate excluding fuel and pharmacy improved slightly.
LIFO charge for 2019 was $105 million, compared to $29 million in 2018. This increase was driven by higher inflation in dry grocery, pharmacy and dairy.
The Operating, General & Administrative rate without fuel and adjustment items decrease of 29 basis points is due to broad based improvement of Restock Kroger cost savings initiatives.
The income tax rate for 2019 was 23.7% compared to 22.6% for the same period last year. The income tax rate is higher compared to prior year because a portion of the non-cash impairment charge in the third quarter of 2019 related to Lucky’s Market is not attributable to Kroger (Table 9), and therefore not deductible by Kroger.
2020 Guidance – (same as previous guidance)
| IDS (%) | EPS ($) | Operating Profit ($B) | Tax Rate** | Cap Ex($B) | Incremental Alternative Profit ($M) | AdjustedFCF($B) | Share Repurchases($M) | |
| Adjusted* | >2.25% | $2.30 – $2.40 | $3.0 – $3.1 | 23.0% | $3.2- $3.4 | $125-$150 | $1.6-$1.8 | $500-$1,000 |
| * Without adjusted items, if applicable; Identical sales is without fuel; Operating profit represents FIFO Operating Profit. Kroger is unable to provide a full reconciliation of the GAAP and non-GAAP measures used in 2020 guidance without unreasonable effort because it is not possible to predict certain of our adjustment items with a reasonable degree of certainty. This information is dependent upon future events and may be outside of our control and its unavailability could have a significant impact on 2020 GAAP financial results. |
| ** This rate reflects typical tax adjustments and does not reflect changes to the rate from the completion of income tax audit examinations, which cannot be predicted. |
Kroger’s 2020 guidance does not include any potential impact related to the Coronavirus.
Fourth Quarter 2019 Restock Kroger Highlights
Redefine the Grocery Customer Experience
- Our Brands achieved its best year ever, exceeding $23.1 billion in sales. Introduced 39 new Our Brands Plant-Based products in 2019
- Private Selection brand eclipsed $2 billion in sales for the first time and is Kroger’s third $2-billion-dollar brand
- Expanded to 1,989 Pickup locations and 2,385 Delivery locations, covering 97% of Kroger households
Partner for Customer Value
- Named the location of an additional Kroger-Ocado customer fulfillment center in Maryland
- Formed Group Purchasing Organization with Walgreens
- Kroger Precision Marketing (KPM), achieved TAG Platinum Certification from the Trustworthy Accountability Group (TAG), recognizing KPM as a digital marketing leader for achieving rigorous certifications in all program areas. KPM is the first retail media platform to reach this milestone
Develop Talent
- Continued investment in Kroger associate wages has increased Kroger’s average hourly wage to $15 an hour in 2019, with average hourly rate now over $20 per hour with comprehensive benefits factored in, benefits that many of our competitors don’t offer
- Made significant investments in educational assistance program, Feed Your Future. Since inception, the program has impacted over 5,000 associates, with hourly associates making up 87% of those who have taken advantage of this program so far
- Achieved record employee retention in one of the tightest labor markets in years
Live Kroger’s Purpose
- Achieved a 100% score on the Human Rights Campaign’s Corporate Equality Index for the second year in a row in 2019
- Recognized as one of America’s top corporation for women-owned businesses for the sixth year in a row and received the Silver award for the first time in the company’s history
- Selected as one of “America’s Top 50 Corporations for Multicultural Business Opportunities” in recognition of Kroger’s commitment to inclusion by Omnikal
