UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended November 6, 2010

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from         to         

 

Commission file number 1-303

 


 

 

(Exact name of registrant as specified in its charter)

 


 

Ohio

 

31-0345740

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1014 Vine Street, Cincinnati, OH 45202

(Address of principal executive offices)

(Zip Code)

 

(513) 762-4000

(Registrant’s telephone number, including area code)

 

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x .

 

There were 635,950,237 shares of Common Stock ($1 par value) outstanding as of December 10, 2010.

 

 

 



 

PART I — FINANCIAL INFORMATION

 

Item 1.   Financial Statements.

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

 

 

 

Third Quarter Ended

 

Three Quarters Ended

 

 

 

November 6,
2010

 

November 7,
2009

 

November 6,
2010

 

November 7,
2009

 

Sales

 

$

18,698

 

$

17,662

 

$

62,258

 

$

58,179

 

Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below

 

14,571

 

13,662

 

48,316

 

44,574

 

Operating, general and administrative

 

3,199

 

3,137

 

10,602

 

10,248

 

Rent

 

154

 

152

 

503

 

502

 

Depreciation and amortization

 

368

 

356

 

1,214

 

1,157

 

Goodwill impairment charge

 

¾

 

1,113

 

¾

 

1,113

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

406

 

(758

)

1,623

 

585

 

Interest expense

 

103

 

105

 

337

 

383

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income tax expense

 

303

 

(863

)

1,286

 

202

 

Income tax expense

 

96

 

13

 

436

 

396

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) including noncontrolling interests

 

207

 

(876

)

850

 

(194

)

Net earnings (loss) attributable to noncontrolling interests

 

5

 

(1

)

12

 

(9

)

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to The Kroger Co.

 

$

202

 

$

(875

)

$

838

 

$

(185

)

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to The Kroger Co. per basic common share

 

$

0.32

 

$

(1.35

)

$

1.30

 

$

(0.29

)

Average number of common shares used in basic calculation

 

633

 

646

 

638

 

647

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to The Kroger Co. per diluted common share

 

$

0.32

 

$

(1.35

)

$

1.30

 

$

(0.29

)

Average number of common shares used in diluted calculation

 

636

 

646

 

641

 

647

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

.105

 

$

.095

 

$

.295

 

$

.275

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

2



 

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)

(unaudited)

 

 

 

November 6,

 

January 30,

 

 

 

2010

 

2010

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and temporary cash investments

 

$

758

 

$

424

 

Deposits in-transit

 

755

 

654

 

Receivables

 

847

 

909

 

FIFO inventory

 

6,065

 

5,705

 

LIFO reserve

 

(809

)

(770

)

Prefunded employee benefits

 

¾

 

300

 

Prepaid and other current assets

 

291

 

261

 

Total current assets

 

7,907

 

7,483

 

 

 

 

 

 

 

Property, plant and equipment, net

 

14,106

 

13,929

 

Goodwill

 

1,158

 

1,158

 

Other assets

 

584

 

556

 

 

 

 

 

 

 

Total Assets

 

$

23,755

 

$

23,126

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt including obligations under capital leases and financing obligations

 

$

547

 

$

579

 

Trade accounts payable

 

4,179

 

3,890

 

Accrued salaries and wages

 

837

 

786

 

Deferred income taxes

 

354

 

354

 

Other current liabilities

 

2,423

 

2,118

 

Total current liabilities

 

8,340

 

7,727

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

 

 

 

 

Face-value of long-term debt including obligations under capital leases and financing obligations

 

7,191

 

7,420

 

Adjustment to reflect fair-value interest rate hedges

 

70

 

57

 

Long-term debt including obligations under capital leases and financing obligations

 

7,261

 

7,477

 

 

 

 

 

 

 

Deferred income taxes

 

577

 

568

 

Pension and postretirement benefit obligations

 

989

 

1,082

 

Other long-term liabilities

 

1,327

 

1,346

 

 

 

 

 

 

 

Total Liabilities

 

18,494

 

18,200

 

 

 

 

 

 

 

Commitments and contingencies (see Note 9)

 

 

 

 

 

 

 

 

 

 

 

SHAREOWNERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $100 par per share, 5 shares authorized and unissued

 

¾

 

¾

 

Common stock, $1 par per share, 1,000 shares authorized; 959 shares issued in 2010 and 958 shares issued in 2009

 

959

 

958

 

Additional paid-in capital

 

3,343

 

3,361

 

Accumulated other comprehensive loss

 

(565

)

(593

)

Accumulated earnings

 

8,013

 

7,364

 

Common stock in treasury, at cost, 327 shares in 2010 and 316 shares in 2009

 

(6,486

)

(6,238

)

 

 

 

 

 

 

Total Shareowners’ Equity - The Kroger Co.

 

5,264

 

4,852

 

Noncontrolling interests

 

(3

)

74

 

 

 

 

 

 

 

Total Equity

 

5,261

 

4,926

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

23,755

 

$

23,126

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

3



 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions and unaudited)

 

 

 

Three Quarters Ended

 

 

 

November 6,
2010

 

November 7,
2009

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net earnings (loss) including noncontrolling interests

 

$

850

 

$

(194

)

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,214

 

1,157

 

LIFO charge

 

39

 

48

 

Goodwill impairment charge

 

¾

 

1,113

 

Asset impairment charge

 

22

 

44

 

Stock-based employee compensation

 

62

 

64

 

Expense for Company-sponsored pension plans

 

50

 

24

 

Deferred income taxes

 

5

 

51

 

Other

 

(11

)

15

 

Changes in operating assets and liabilities net of effects from acquisitions of businesses:

 

 

 

 

 

Store deposits in-transit

 

(101

)

(38

)

Receivables

 

(2

)

(4

)

Inventories

 

(359

)

(434

)

Prepaid expenses

 

270

 

228

 

Trade accounts payable

 

288

 

351

 

Accrued expenses

 

214

 

(1

)

Income taxes receivable and payable

 

138

 

229

 

Contribution to Company-sponsored pension plans

 

(141

)

(265

)

Other

 

(4

)

(13

)

 

 

 

 

 

 

Net cash provided by operating activities

 

2,534

 

2,375

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Payments for capital expenditures

 

(1,423

)

(1,766

)

Proceeds from sale of assets

 

34

 

7

 

Payments for acquisitions

 

(7

)

(23

)

Other

 

(4

)

(13

)

 

 

 

 

 

 

Net cash used by investing activities

 

(1,400

)

(1,795

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

301

 

505

 

Dividends paid

 

(183

)

(176

)

Payments on long-term debt

 

(570

)

(426

)

Payments on credit facility

 

¾

 

(129

)

Excess tax benefits on stock-based awards

 

2

 

2

 

Proceeds from issuance of capital stock

 

24

 

30

 

Treasury stock purchases

 

(292

)

(130

)

Increase (decrease) in book overdrafts

 

1

 

(4

)

Investment in the remaining interest of a variable interest entity

 

(86

)

¾

 

Other

 

3

 

2

 

 

 

 

 

 

 

Net cash used by financing activities

 

(800

)

(326

)

 

 

 

 

 

 

Net increase in cash and temporary cash investments

 

334

 

254

 

 

 

 

 

 

 

Cash and temporary cash investments:

 

 

 

 

 

Beginning of year

 

424

 

263

 

End of quarter

 

$

758

 

$

517

 

 

 

 

 

 

 

Reconciliation of capital expenditures:

 

 

 

 

 

Payments for property and equipment

 

$

(1,423

)

$

(1,766

)

Changes in construction-in-progress payables

 

(25

)

(65

)

Total capital expenditures

 

$

(1,448

)

$

(1,831

)

 

 

 

 

 

 

Disclosure of cash flow information:

 

 

 

 

 

Cash paid during the year for interest

 

$

371

 

$

434

 

Cash paid during the year for income taxes

 

$

334

 

$

119

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

4



 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(in millions, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Treasury Stock

 

Comprehensive

 

Accumulated

 

Noncontrolling

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Shares

 

Amount

 

Gain (Loss)

 

Earnings

 

Interest

 

Total

 

Balances at January 31, 2009

 

955

 

$

955

 

$

3,266

 

306

 

$

(6,039

)

$

(495

)

$

7,538

 

$

95

 

$

5,320

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

2

 

2

 

27

 

 

1

 

 

 

 

30

 

Restricted stock issued

 

 

 

(56

)

(1

)

40

 

 

 

 

(16

)

Treasury stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchases, at cost

 

 

 

 

5

 

(106

)

 

 

 

(106

)

Stock options exchanged

 

 

 

 

1

 

(24

)

 

 

 

(24

)

Tax benefits from exercise of stock options

 

 

 

20

 

 

 

 

 

 

20

 

Share-based employee compensation

 

 

 

64

 

 

 

 

 

 

64

 

Other comprehensive gain net of income tax of $2

 

 

 

 

 

 

4

 

 

 

4

 

Other

 

 

 

18

 

 

(17

)

 

 

(17

)

(16

)

Cash dividends declared ($0.275 per common share)

 

 

 

 

 

 

 

(181

)

 

(181

)

Net earnings (loss) including noncontrolling interests

 

 

 

 

 

 

 

(185

)

(9

)

(194

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at November 7, 2009

 

957

 

$

957

 

$

3,339

 

311

 

$

(6,145

)

$

(491

)

$

7,172

 

$

69

 

$

4,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 30, 2010

 

958

 

$

958

 

$

3,361

 

316

 

$

(6,238

)

$

(593

)

$

7,364

 

$

74

 

$

4,926

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

1

 

1

 

9

 

(1

)

14

 

 

 

 

24

 

Restricted stock issued

 

 

 

(52

)

(1

)

35

 

 

 

 

(17

)

Treasury stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchases, at cost

 

 

 

 

12

 

(259

)

 

 

 

(259

)

Stock options exchanged

 

 

 

 

1

 

(33

)

 

 

 

(33

)

Tax detriments from exercise of stock options

 

 

 

(22

)

 

 

 

 

 

(22

)

Share-based employee compensation

 

 

 

62

 

 

 

 

 

 

62

 

Other comprehensive gain net of income tax of $17

 

 

 

 

 

 

28

 

 

 

28

 

Other

 

 

 

7

 

 

(5

)

 

 

(22

)

(20

)

Investment in the remaining interest of a variable interest entity

 

 

 

(22

)

 

 

 

 

(67

)

(89

)

Cash dividends declared ($0.295 per common share)

 

 

 

 

 

 

 

(189

)

 

(189

)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

838

 

12

 

850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at November 6, 2010

 

959

 

$

959

 

$

3,343

 

327

 

$

(6,486

)

$

(565

)

$

8,013

 

$

(3

)

$

5,261

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

All amounts in the notes to Consolidated Financial Statements are in millions except per share amounts.

 

Certain prior-year amounts have been reclassified to conform to current-year presentation.

 

1.              ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries, and the Variable Interest Entities (“VIE”) in which the Company is the primary beneficiary.  The January 30, 2010 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

 

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all normal, recurring adjustments that are necessary for a fair presentation of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Annual Report on Form 10-K of The Kroger Co. for the fiscal year ended January 30, 2010.

 

The unaudited information in the Consolidated Financial Statements for the third quarter and three quarters ended November 6, 2010 and November 7, 2009, includes the results of operations of the Company for the 12 and 40-week periods then ended.

 

The Company reflects certain promotional allowances in its LIFO charge.  During the first quarter 2010 LIFO analysis, the Company revised the LIFO reserve to reflect certain prior year promotional allowances in prior year LIFO indices.  By not including these promotional allowances in all LIFO indices, the Company overstated its LIFO reserve for years 2007 and prior.  The Company believes this correction is not material to any individual year or any quarterly period within the years presented.  As a result, the Company has increased beginning accumulated earnings and reduced its LIFO reserve in the Consolidated Financial Statements by $33 ($20 after-tax).

 

2.              EQUITY INCENTIVE PLANS

 

The Company recognized total stock-based compensation of $18 and $19 in the third quarter ended November 6, 2010 and November 7, 2009, respectively.  The Company recorded $62 and $64 of stock-based compensation for the first three quarters ended November 6, 2010 and November 7, 2009, respectively.  These costs were recognized as operating, general and administrative costs in the Company’s Consolidated Statements of Operations.

 

The Company grants options for common stock (“stock options”) to employees, as well as to its non-employee directors, under various plans at an option price equal to the fair market value of the stock at the date of grant. In addition to stock options, the Company awards restricted stock to employees and its non-employee directors under various plans.  Equity awards may be made once each quarter on a predetermined date.  It has been the Company’s practice to make a general annual grant to employees, which occurred in the second quarter of 2010.  Special grants may be made in the other three quarters.  It has been the Company’s practice to make a grant to non-employee directors in December of each year.

 

Stock options granted in the first three quarters of 2010 expire 10 years from the date of grant and vest from one year to five years from the date of grant. Restricted stock awards granted in the first three quarters of 2010 have restrictions that lapse in one year to five years from the date of the awards. All grants and awards become immediately exercisable, in the case of options, and restrictions lapse, in the case of restricted stock, upon certain changes of control of the Company.

 

6



 

Changes in equity awards outstanding under the plans are summarized below.

 

Stock Options

 

 

 

Shares subject
to option

 

Weighted-average
exercise price

 

Outstanding, January 30, 2010

 

34.7

 

$

21.30

 

Granted

 

3.6

 

$

20.21

 

Exercised

 

(1.7

)

$

16.20

 

Canceled or Expired

 

(0.4

)

$

21.65

 

 

 

 

 

 

 

Outstanding, November 6, 2010

 

36.2

 

$

21.42

 

 

Restricted Stock

 

 

 

Restricted shares
outstanding

 

Weighted-average
grant-date fair value

 

Outstanding, January 30, 2010

 

4.4

 

$

24.25

 

Granted

 

2.3

 

$

20.22

 

Lapsed

 

(2.2

)

$

23.68

 

Canceled

 

(0.1

)

$

23.35

 

 

 

 

 

 

 

Outstanding, November 6, 2010

 

4.4

 

$

22.42

 

 

The weighted-average fair value of stock options granted during the first three quarters ended November 6, 2010 and November 7, 2009, was $5.11 and $6.30, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes extensive accounting judgment and financial estimates, including the term employees are expected to retain their stock options before exercising them, the volatility of the Company’s stock price over that expected term, the dividend yield over the term, and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations.

 

The following table reflects the weighted average assumptions used for grants awarded to option holders:

 

 

 

2010

 

2009

 

Risk-free interest rate

 

2.57%

 

3.17%

 

Expected dividend yield

 

2.00%

 

1.80%

 

Expected volatility

 

26.87%

 

28.05%

 

Expected term

 

6.9 Years

 

6.8 Years

 

 

3.              DEBT OBLIGATIONS

 

Long-term debt consists of:

 

 

 

November 6,

 

January 30,

 

 

 

2010

 

2010

 

3.90% to 8.05% Senior Notes due through 2040

 

$

7,106

 

$

7,308

 

5.00% to 9.88% Mortgages due in varying amounts through 2034

 

76

 

105

 

Other

 

149

 

163

 

 

 

 

 

 

 

Total debt, excluding capital leases and financing obligations

 

7,331

 

7,576

 

 

 

 

 

 

 

Less current portion

 

(514

)

(549

)

 

 

 

 

 

 

Total long-term debt, excluding capital leases and financing obligations

 

$

6,817

 

$

7,027

 

 

7



 

With the proceeds received from the Company’s third quarter of 2009 issuance of $500 of senior notes bearing an interest rate of 3.90% due in 2015, the Company repaid $500 of senior notes bearing an interest rate of 8.05% that matured in the first quarter of 2010.

 

In the second quarter of 2010, the Company issued $300 of senior notes bearing an interest rate of 5.40% due in 2040.

 

4.              COMPREHENSIVE INCOME

 

Comprehensive income is as follows:

 

 

 

Third Quarter Ended

 

Year-To-Date

 

 

 

November 6,
2010

 

November 7,
2009

 

November 6,
2010

 

November 7,
2009

 

Net earnings (loss) including noncontrolling interests

 

$

207

 

$

(876

)

$

850

 

$

(194

)

Unrealized gain on available for sale securities, net of income tax(1)

 

 

 

5

 

 

Amortization of amounts included in net periodic pension expense, net of income tax(2)

 

7

 

4

 

21

 

2

 

Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax

 

1

 

1

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

215

 

(871

)

878

 

(190

)

Comprehensive income (loss) attributable to noncontrolling interests

 

5

 

(1

)

12

 

(9

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to The Kroger Co.

 

$

210

 

$

(870

)

$

866

 

$

(181

)

 


(1)         Amount is net of tax of $1 for the third quarter of 2010.  Amount is net of tax of $4 for the first three quarters of 2010.

(2)         Amount is net of tax of $3 for the third quarter of 2010 and $2 for the third quarter of 2009.  Amount is net of tax of $13 for the first three quarters of 2010 and $2 for the first three quarters of 2009.

 

5.              BENEFIT PLANS

 

The following table provides the components of net periodic benefit costs for the Company-sponsored pension plans and other post-retirement benefit plans for the third quarter of 2010 and 2009.

 

 

 

Third Quarter

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2010

 

2009

 

2010

 

2009

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

10

 

$

12

 

$

3

 

$

3

 

Interest cost

 

38

 

36

 

4

 

5

 

Expected return on plan assets

 

(45

)

(53

)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

Prior service cost

 

 

1

 

(1

)

(2

)

Actuarial loss

 

12

 

9

 

(1

)

(2

)

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

15

 

$

5

 

$

5

 

$

4

 

 

8



 

The following table provides the components of net periodic benefit costs for the Company-sponsored pension plans and other post-retirement benefit plans for the first three quarters of 2010 and 2009.

 

 

 

Year-To-Date

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2010

 

2009

 

2010

 

2009

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

33

 

$

28

 

$

10

 

$

8

 

Interest cost

 

129

 

130

 

14

 

15

 

Expected return on plan assets

 

(151

)

(147

)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

Prior service cost

 

 

2

 

(4

)

(5

)

Actuarial loss

 

39

 

11

 

(3

)

(4

)

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

50

 

$

24

 

$

17

 

$

14

 

 

The Company contributed $141 and $265 to Company-sponsored pension plans in the first three quarters of 2010 and 2009, respectively.

 

The Company contributed $93 and $88 to employee 401(k) retirement savings accounts in the first three quarters of 2010 and 2009, respectively.

 

The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded.

 

6.              EARNINGS PER COMMON SHARE

 

Net earnings (loss) attributable to The Kroger Co. per basic common share equals net earnings (loss) attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding.  Net earnings (loss) attributable to The Kroger Co. per diluted common share equals net earnings (loss) attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options.  The following table provides a reconciliation of net earnings (loss) attributable to The Kroger Co. and shares used in calculating net earnings (loss) attributable to The Kroger Co. per basic common share to those used in calculating net earnings (loss) attributable to The Kroger Co. per diluted common share:

 

 

 

Third Quarter Ended

 

Third Quarter Ended

 

 

 

November 6, 2010

 

November 7, 2009

 

 

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net earnings (loss) attributable to
The Kroger Co. per basic common share

 

$

201

 

633

 

$

0.32

 

$

(875

)

646

 

$

(1.35

)

Dilutive effect of stock options

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to
The Kroger Co. per diluted common share

 

$

201

 

636

 

$

0.32

 

$

(875

)

646

 

$

(1.35

)

 

 

 

Year –To-Date

 

Year-To-Date

 

 

 

November 6, 2010

 

November 7, 2009

 

 

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net earnings (loss) attributable to
The Kroger Co. per basic common share

 

$

832

 

638

 

$

1.30

 

$

(185

)

647

 

$

(0.29

)

Dilutive effect of stock options

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to
The Kroger Co. per diluted common share

 

$

832

 

641

 

$

1.30

 

$

(185

)

647

 

$

(0.29

)

 

9



 

The Company had undistributed and distributed earnings to participating securities totaling $1 in the third quarter of 2010.  For the first three quarters of 2010, the Company had undistributed and distributed earnings to participating securities totaling $6.  Due to the Company having a net loss in both the third quarter and first three quarters of 2009, no allocation was made to participating securities due to the anti-dilutive effect.

 

The Company had options outstanding for approximately 23 shares during the third quarter of 2010 that were excluded from the computations of earnings per diluted common share because their inclusion would have had an anti-dilutive effect on earnings per share.  For the first three quarters of 2010, the Company had options outstanding for approximately 21 shares, that were excluded from the computations of earnings per diluted common share because their inclusion would have had an anti-dilutive effect on earnings per share.

 

7.              RECENTLY ADOPTED ACCOUNTING STANDARDS

 

In January 2010, the Financial Accounting Standards Board (“FASB”) amended its standards related to fair value measurements and disclosures, which are effective for interim and annual fiscal periods beginning after December 15, 2009, except for disclosures about certain Level 3 activity that will become effective for interim and annual periods beginning after December 15, 2010.  The new standard requires the Company to disclose transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers as well as activity in Level 3 fair value measurements.  The new standard also requires a more detailed level of disaggregation of the assets and liabilities being measured as well as increased disclosures regarding inputs and valuation techniques of the fair value measurements.  See Note 10 to the Consolidated Financial Statements for the Company’s fair value measurements and disclosures.

 

In June 2009, the FASB amended its existing standards related to the consolidation of VIEs, which was effective for interim and annual fiscal periods beginning after November 15, 2009.  The new standard requires an entity to analyze whether its variable interests give it a controlling financial interest of a VIE and outlines what defines a primary beneficiary.  The new standard amends GAAP by: (a) changing certain rules for determining whether an entity is a VIE; (b) replacing the quantitative approach previously required for determining the primary beneficiary with a more qualitative approach; and (c) requiring entities to continuously analyze whether they are the primary beneficiary of a VIE, among other amendments.  The new standard also requires enhanced disclosures regarding an entity’s involvement in a VIE.  The adoption of these new standards did not have a material effect on the Company’s Consolidated Financial Statements.

 

8.              GUARANTOR SUBSIDIARIES

 

As of November 6, 2010, the Company’s outstanding public debt (the “Guaranteed Notes”) was jointly and severally, fully and unconditionally guaranteed by some of the Company’s subsidiaries (the “Guarantor Subsidiaries”).  At November 6, 2010, a total of approximately $7,106 of Guaranteed Notes was outstanding.  The Guarantor Subsidiaries and non-guarantor subsidiaries are wholly-owned subsidiaries of The Kroger Co.  Separate financial statements of The Kroger Co. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable.  The Company believes that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors.

 

The non-guaranteeing subsidiaries represent less than 3% on an individual and aggregate basis of consolidated assets, pre-tax earnings, cash flow, and equity.  Therefore, the non-guarantor subsidiaries’ information is not separately presented in the tables below.

 

There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above, except, however, the obligations of each guarantor under its guarantee are limited to the maximum amount that will result in obligations of such guarantor under its guarantee not constituting a fraudulent conveyance or fraudulent transfer for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law (e.g., adequate capital to pay dividends under corporate laws).

 

10



 

The following tables present summarized financial information as of November 6, 2010 and January 30, 2010 and for the third quarter, and three quarters ended November 6, 2010 and November 7, 2009:

 

Condensed Consolidating

Balance Sheets

As of November 6, 2010

 

 

 

The Kroger
Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and temporary cash investments

 

$

27

 

$

731

 

$

 

$

758

 

Deposits in-transit

 

81

 

674

 

 

755

 

Receivables

 

2,217

 

629

 

(1,999

)

847

 

Net inventories

 

552

 

4,704

 

 

5,256

 

Prepaid and other current assets

 

89

 

202

 

 

291

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

2,966

 

6,940

 

(1,999

)

7,907

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,876

 

12,230

 

 

14,106

 

Goodwill

 

5

 

1,153

 

 

1,158

 

Other assets

 

915

 

1,903

 

(2,234

)

584

 

Investment in and advances to subsidiaries

 

10,247

 

 

(10,247

)

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

16,009

 

$

22,226

 

$

(14,480

)

$

23,755

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Current portion of long-term debt including obligations under capital leases and financing obligations

 

$

547

 

$

 

$

 

$

547

 

Trade accounts payable

 

391

 

3,788

 

 

4,179

 

Other current liabilities

 

1,056

 

6,791

 

(4,233

)

3,614

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

1,994

 

10,579

 

(4,233

)

8,340

 

 

 

 

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

 

 

 

 

 

 

 

 

Face value of long-term debt including obligations under capital leases and financing obligations

 

7,191

 

 

 

7,191

 

Adjustment to reflect fair value interest rate hedges

 

70

 

 

 

70

 

 

 

 

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

7,261

 

 

 

7,261

 

Other long-term liabilities

 

1,493

 

1,400

 

 

2,893

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

10,748

 

11,979

 

(4,233

)

18,494

 

 

 

 

 

 

 

 

 

 

 

Shareowners’ Equity

 

5,261

 

10,247

 

(10,247

)

5,261

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

16,009

 

$

22,226

 

$

(14,480

)

$

23,755

 

 

11



 

Condensed Consolidating

Balance Sheets

As of January 30, 2010

 

 

 

The Kroger
Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and temporary cash investments

 

$

29

 

$

395

 

$

 

$

424

 

Deposits in-transit

 

76

 

578

 

 

654

 

Receivables

 

2,173

 

734

 

(1,998

)

909

 

Net inventories

 

460

 

4,475

 

 

4,935

 

Prepaid and other current assets

 

405

 

156

 

 

561

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

3,143

 

6,338

 

(1,998

)

7,483

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,823

 

12,106

 

 

13,929

 

Goodwill

 

5

 

1,153

 

 

1,158

 

Other assets

 

814

 

1,771

 

(2,029

)

556

 

Investment in and advances to subsidiaries

 

10,019

 

 

(10,019

)

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

15,804

 

$

21,368

 

$

(14,046

)

$

23,126

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Current portion of long-term debt including obligations under capital leases and financing obligations

 

$

579

 

$

 

$

 

$

579

 

Trade accounts payable

 

372

 

3,518

 

 

3,890

 

Other current liabilities

 

1,135

 

6,150

 

(4,027

)

3,258

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

2,086

 

9,668

 

(4,027

)

7,727

 

 

 

 

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

 

 

 

 

 

 

 

 

Face value of long-term debt including obligations under capital leases and financing obligations

 

7,420

 

 

 

7,420

 

Adjustment to reflect fair value interest rate hedges

 

57

 

 

 

57

 

 

 

 

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

7,477

 

 

 

7,477

 

Other long-term liabilities

 

1,315

 

1,681

 

 

2,996

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

10,878

 

11,349

 

(4,027

)

18,200

 

 

 

 

 

 

 

 

 

 

 

Shareowners’ Equity

 

4,926

 

10,019

 

(10,019

)

4,926

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

15,804

 

$

21,368

 

$

(14,046

)

$

23,126

 

 

12



 

Condensed Consolidating

Statements of Operations

For the Quarter Ended November 6, 2010

 

 

 

The Kroger Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

2,394

 

$

16,644

 

$

(340

)

$

18,698

 

Merchandise costs, including advertising, warehousing and transportation

 

1,931

 

12,980

 

(340

)

14,751

 

Operating, general and administrative

 

411

 

2,788

 

 

3,199

 

Rent

 

31

 

123

 

 

154

 

Depreciation and amortization

 

40

 

328

 

 

368

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

(19

)

425

 

 

406

 

Interest expense

 

102

 

1

 

 

103

 

Equity in earnings of subsidiaries

 

349

 

 

(349

)

 

 

 

 

 

 

 

 

 

 

 

Earnings before income tax expense

 

228

 

424

 

(349

)

303

 

Income tax expense

 

26

 

70

 

 

96

 

 

 

 

 

 

 

 

 

 

 

Net earnings including noncontrolling interests

 

202

 

354

 

(349

)

207

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to noncontrolling interests

 

 

5

 

 

5

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co.

 

$

202

 

$

349

 

$

(349

)

$

202

 

 

Condensed Consolidating

Statements of Operations

For the Quarter Ended November 7, 2009

 

 

 

The Kroger
Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

2,240

 

$

15,763

 

$

(341

)

$

17,662

 

Merchandise costs, including advertising, warehousing and transportation

 

1,836

 

12,167

 

(341

)

13,662

 

Operating, general and administrative

 

350

 

2,787

 

 

3,137

 

Rent

 

27

 

125

 

 

152

 

Depreciation and amortization

 

39

 

317

 

 

356

 

Goodwill impairment charge

 

 

1,113

 

 

1,113

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(12

)

(746

)

 

(758

)

Interest expense

 

103

 

2

 

 

105

 

Equity in earnings of subsidiaries

 

(735

)

 

735

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income tax expense

 

(850

)

(748

)

735

 

(863

)

Income tax expense (benefit)

 

25

 

(12

)

 

13

 

 

 

 

 

 

 

 

 

 

 

Net loss including noncontrolling interests

 

(875

)

(736

)

735

 

(876

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

 

(1

)

 

(1

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to The Kroger Co.

 

$

(875

)

$

(735

)

$

735

 

$

(875

)

 

13



 

Condensed Consolidating

Statements of Operations

For the Three Quarters Ended November 6, 2010

 

 

 

The Kroger Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

7,965

 

$

55,393

 

$

(1,100

)

$

62,258

 

Merchandise costs, including advertising, warehousing and transportation

 

6,474

 

42,942

 

(1,100

)

48,316

 

Operating, general and administrative

 

1,389

 

9,213

 

 

10,602

 

Rent

 

94

 

409

 

 

503

 

Depreciation and amortization

 

140

 

1,074

 

 

1,214

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

(132

)

1,755

 

 

1,623

 

Interest expense

 

333

 

4

 

 

337

 

Equity in earnings of subsidiaries

 

1,397

 

 

(1,397

)

 

 

 

 

 

 

 

 

 

 

 

Earnings before income tax expense

 

932

 

1,751

 

(1,397

)

1,286

 

Income tax expense

 

94

 

342

 

 

436

 

 

 

 

 

 

 

 

 

 

 

Net earnings including noncontrolling interests

 

838

 

1,409

 

(1,397

)

850

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to noncontrolling interests

 

 

12

 

 

12

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co.

 

$

838

 

$

1,397

 

$

(1,397

)

$

838

 

 

Condensed Consolidating

Statements of Operations

For the Three Quarters Ended November 7, 2009

 

 

 

The Kroger
Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

7,357

 

$

51,802

 

$

(980

)

$

58,179

 

Merchandise costs, including advertising, warehousing and transportation

 

6,026

 

39,528

 

(980

)

44,574

 

Operating, general and administrative

 

1,261

 

8,987

 

 

10,248

 

Rent

 

89

 

413

 

 

502

 

Depreciation and amortization

 

130

 

1,027

 

 

1,157

 

Goodwill impairment charge

 

 

1,113

 

 

1,113

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

(149

)

734

 

 

585

 

Interest expense

 

375

 

8

 

 

383

 

Equity in earnings of subsidiaries

 

452

 

 

(452

)

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income tax expense

 

(72

)

726

 

(452

)

202

 

Income tax expense

 

113

 

283

 

 

396

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) including noncontrolling interests

 

(185

)

443

 

(452

)

(194

)

 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interests

 

 

(9

)

 

(9

)

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to The Kroger Co.

 

$

(185

)

$

452

 

$

(452

)

$

(185

)

 

14



 

Condensed Consolidating

Statements of Cash Flows

For the Three Quarters Ended November 6, 2010

 

 

 

The Kroger Co.

 

Guarantor
Subsidiaries

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used) provided by operating activities

 

$

(291

)

$

2,825

 

$

2,534

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments for capital expenditures, excluding acquisitions

 

(97

)

(1,326

)

(1,423

)

Other

 

13

 

10

 

23

 

 

 

 

 

 

 

 

 

Net cash used by investing activities

 

(84

)

(1,316

)

(1,400

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

(183

)

 

(183

)

Proceeds from issuance of long-term debt

 

301

 

 

301

 

Payments on long-term debt

 

(570

)

 

(570

)

Proceeds from issuance of capital stock

 

26

 

 

26

 

Treasury stock purchases

 

(292

)

 

(292

)

Increase (decrease) in book overdrafts

 

8

 

(7

)

1

 

Investment in the remaining interest of a variable interest entity

 

(86

)

 

(86

)

Other

 

 

3

 

3

 

Net change in advances to subsidiaries

 

1,169

 

(1,169

)

 

 

 

 

 

 

 

 

 

Net cash provided (used) by financing activities

 

373

 

(1,173

)

(800

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and temporary cash investments

 

(2

)

336

 

334

 

 

 

 

 

 

 

 

 

Cash and temporary cash investments:

 

 

 

 

 

 

 

Beginning of year

 

29

 

395

 

424

 

 

 

 

 

 

 

 

 

End of quarter

 

$

27

 

$

731

 

$

758

 

 

15



 

Condensed Consolidating

Statements of Cash Flows

For the Three Quarters Ended November 7, 2009

 

 

 

The Kroger Co.

 

Guarantor
Subsidiaries

 

Consolidated

 

 

 

 

 

 

 

 

 

Net cash (used) provided by operating activities

 

$

(309

)

$

2,684

 

$

2,375

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments for capital expenditures, excluding acquisitions

 

(111

)

(1,655

)

(1,766

)

Other

 

(3

)

(26

)

(29

)

 

 

 

 

 

 

 

 

Net cash used by investing activities

 

(114

)

(1,681

)

(1,795

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

(176

)

 

(176

)

Proceeds from issuance of long-term debt

 

505

 

 

505

 

Payments on long-term debt

 

(426

)

 

(426

)

Proceeds from issuance of capital stock

 

32

 

 

32

 

Treasury stock purchases

 

(130

)

 

(130

)

Increase (decrease) in book overdrafts

 

(9

)

5

 

(4

)

Payments on credit facility

 

(129

)

 

(129

)

Other

 

 

2

 

2

 

Net change in advances to subsidiaries

 

756

 

(756

)

 

 

 

 

 

 

 

 

 

Net cash (used) provided by financing activities

 

423

 

(749

)

(326

)

 

 

 

 

 

 

 

 

Net increase in cash and temporary cash investments

 

 

254

 

254

 

 

 

 

 

 

 

 

 

Cash and temporary cash investments:

 

 

 

 

 

 

 

Beginning of year

 

27

 

236

 

263

 

 

 

 

 

 

 

 

 

End of quarter

 

$

27

 

$

490

 

$

517

 

 

Effective November 8, 2010, the guarantees by the Guarantor Subsidiaries were terminated in connection with the execution by the Company of a new credit facility that is not guaranteed by any of the Company’s subsidiaries.  See Note 12 below.

 

16



 

9.              COMMITMENTS AND CONTINGENCIES

 

The Company continuously evaluates contingencies based upon the best available evidence.

 

The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable.  To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.

 

The principal contingencies are described below:

 

Insurance — The Company’s workers’ compensation risks are self-insured in most states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans, and self-insured retention plans.  The liability for workers’ compensation risks is accounted for on a present value basis.  Actual claim settlements and expenses incident thereto may differ from the provisions for loss.  Property risks have been underwritten by a subsidiary and are all reinsured with unrelated insurance companies.  Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.

 

Litigation — On October 6, 2006, the Company petitioned the Tax Court (In Re: Ralphs Grocery Company and Subsidiaries, formerly known as Ralphs Supermarkets, Inc., Docket No. 20364-06) for a redetermination of deficiencies set by the Commissioner of Internal Revenue.  The dispute at issue involves a 1992 transaction in which Ralphs Holding Company acquired the stock of Ralphs Grocery Company and made an election under Section 338(h)(10) of the Internal Revenue Code.  The Commissioner has determined that the acquisition of the stock was not a purchase as defined by Section 338(h)(3) of the Internal Revenue Code and that the acquisition does not qualify as a purchase.  The Company believes that it has strong arguments in favor of its position and believes it is more likely than not that its position will be sustained.  However, due to the inherent uncertainty involved in the litigation process, there can be no assurances that the Tax Court will rule in favor of the Company.  A decision on this case is expected within the next 12 months.  As of November 6, 2010, an adverse decision would require a cash payment of up to approximately $509, including interest.  Any accounting implications of an adverse decision in this case would be charged through the statement of operations.

 

On February 2, 2004, the Attorney General for the State of California filed an action in Los Angeles federal court (California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company; Albertson’s, Inc. and Ralphs Grocery Company, a division of The Kroger Co., United States District Court Central District of California, Case No. CV04-0687) alleging that the Mutual Strike Assistance Agreement (the “Agreement”) between the Company, Albertson’s, Inc. and Safeway Inc. (collectively, the “Retailers”), which was designed to prevent the union from placing disproportionate pressure on one or more of the Retailers by picketing such Retailer(s) but not the other Retailer(s) during the labor dispute in southern California, violated Section 1 of the Sherman Act. The lawsuit seeks declarative and injunctive relief. On May 28, 2008, pursuant to a stipulation between the parties, the court entered a final judgment in favor of the defendants.  The Attorney General appealed a trial court ruling to the Ninth Circuit Court of Appeals and the defendants appealed a separate ruling.  On August 17, 2010, the Ninth Circuit Court of Appeals held that the Agreement violated Section 1 of the Sherman Act, and it remanded the matter to the District Court for entry of a judgment in favor of the plaintiff and for any further proceedings consistent with its opinion.  Based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and where an adverse outcome is probable.  Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

 

17



 

Assignments — The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions.  The Company could be required to satisfy the obligations under the leases if any of the assignees is unable to fulfill its lease obligations.  Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.

 

Benefit Plans — The Company administers certain non-contributory defined benefit retirement plans and contributory defined contribution retirement plans for substantially all non-union employees and some union-represented employees as determined by the terms and conditions of collective bargaining agreements. Funding for the defined benefit pension plans is based on a review of the specific requirements, and an evaluation of the assets and liabilities, of each plan.  Funding for the Company’s matching and automatic contributions under the defined contribution plans is based on years of service, plan compensation, and amount of contributions by participants.

 

In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. Funding for the retiree health care benefits occurs as claims or premiums are paid.

 

The determination of the obligation and expense for the Company’s defined benefit retirement pension plan and other post-retirement benefits is dependent on the Company’s selection of assumptions used by actuaries in calculating those amounts. Those assumptions are described in the financial statements in the Company’s Annual Report on Form 10-K and include, among other things, the discount rate, the expected long-term rate of return on plan assets, and the rates of increase in compensation and health care costs. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in such future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the pension and other post-retirement obligations and future expense.

 

The Company has contributed $141 to its Company-sponsored defined benefit pension plans in 2010.  Among other things, investment performance of plan assets, the interest rates required to be used to calculate pension obligations and future changes in legislation will determine the amounts of any additional contributions.  In addition, the Company expects its cash contributions and expense to the 401(k) Retirement Savings Account Plan from automatic and matching contributions to participants to increase slightly in 2010, compared to 2009.

 

The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These 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.

 

Based on the most recent information available to it, the Company believes that the present value of actuarial accrued liabilities in most or all of these multi-employer plans exceeds the value of the assets held in trust to pay benefits. Because the Company is one of a number of employers contributing to these plans, it is difficult to ascertain what the Company’s share of the underfunding would be, although we anticipate the Company’s contributions to these plans will increase each year.  The Company believes that funding levels have not changed significantly since year end.  As a result, the Company expects meaningful increases in expense as a result of increases in multi-employer pension plan contributions over the next five years, to reduce this underfunding.  Moreover, if the Company were to exit certain markets or otherwise cease making contributions to these funds, the Company 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 determined.

 

10.       FAIR VALUE MEASUREMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company has certain derivative and financial instruments recorded at fair value, which primarily relate to fair value hedges on fixed to floating interest rate swaps on certain debt.  These instruments have not materially changed in fair value since disclosure in the financial statements in the Annual Report on Form 10-K of The Kroger Co. for the fiscal year ended January 30, 2010.

 

18



 

Fair Value of Other Financial Instruments

 

 Current and Long-term Debt

 

The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market price for the same or similar issues, adjusted for illiquidity, based on available market evidence.  If quoted market prices were not available, the fair value was based on the net present value of the future cash flows using the forward interest rate yield curve in effect at November 6, 2010, and January 30, 2010.   At November 6, 2010, the fair value of total debt was $8,391 compared to a carrying value of $7,331.  At January 30, 2010, the fair value of total debt was $8,283 compared to a carrying value of $7,576.

 

Cash and Temporary Cash Investments, Store Deposits In-Transit, Receivables, Prepaid and Other Current Assets, Accounts Payable, Accrued Salaries and Wages and Other Current Liabilities

 

The carrying amounts of these items approximated fair value.

 

Long-term Investments

 

The fair values of these investments were estimated based on quoted market prices for those or similar investments, or estimated cash flows, if appropriate.  At November 6, 2010, and January 30, 2010, the carrying and fair value of long-term investments for which fair value is determinable was $63 and $68, respectively.

 

11.       INVESTMENT IN VARIABLE INTEREST ENTITY

 

In February 2010, the Company purchased the remaining interest of The Little Clinic LLC for $86.  Since The Little Clinic LLC was consolidated as a VIE prior to the February 2010 purchase, the Company recorded the additional investment as an equity transaction.  Accordingly, no gain or loss was recorded on the additional investment.  As of the purchase date, the Company continued to consolidate The Little Clinic LLC as a wholly-owned subsidiary.

 

12.       SUBSEQUENT EVENT

 

On November 8, 2010, the Company entered into documentation for a new $2,000 unsecured revolving credit facility (the “New Credit Agreement”), with a termination date of May 15, 2014, unless extended as permitted under the New Credit Agreement.  This credit facility replaced the Company’s $2,500 credit facility that would otherwise have terminated on November 15, 2011.

 

Borrowings under the New Credit Agreement bear interest at the Company’s option, at either (i) LIBOR plus a market rate spread, subject to a floor and cap based on the Company’s Leverage Ratio or (ii) the base rate, defined as the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus 0.5%, and (c) one-month LIBOR plus 1.0% plus a margin equal to 1.0% less than a market rate spread (but not less than 0.0%).  The Company will also pay a Commitment Fee based on the Leverage Ratio and Letter of Credit fees equal to a market rate spread for LIBOR loans.

 

The New Credit Agreement contains covenants, which, among other things, require the maintenance of a Leverage Ratio of not greater than 3.50:1.00 and a Fixed Charge Coverage Ratio of not less than 1.70:1.00.  The Company may repay the New Credit Agreement in whole or in part at any time without premium or penalty.

 

The New Credit Agreement is not guaranteed by the Company’s subsidiaries.  As a result, the Company terminated the subsidiary guarantees of its outstanding public debt in accordance with the provisions of the indentures for that debt.

 

19



 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following analysis should be read in conjunction with the Consolidated Financial Statements.

 

OVERVIEW

 

Third quarter 2010 total sales were $18.7 billion compared to $17.7 billion for the same period of 2009.  The increase in sales for the third quarter of 2010, compared to the third quarter of 2009, is attributable to identical supermarket sales increases, higher average retail fuel prices, increased fuel gallons sold, and an increase in inflation.  Overall our estimated product cost inflation, excluding fuel, increased approximately 1.5%.  However, our grocery departments, which comprise about half of a typical supermarket, experienced a different product cost trend.  Excluding milk, our grocery departments experienced 0.5% of product cost deflation.  Identical supermarket sales without fuel increased 2.4% in the third quarter of 2010.  We have now achieved 28 consecutive quarters of positive identical supermarket sales growth, excluding fuel.  The strength of our identical supermarket sales results relative to many of our competitors’ trends strongly suggests that we continue to gain market share.  Our identical sales growth also continues to be broad-based across all store departments and nearly all geographies.  Sixteen of our 18 supermarket divisions produced positive identical supermarket sales growth, excluding fuel.  Of the two remaining supermarket divisions, one was essentially flat and the other experienced a slight decline.  In the third quarter of 2010, total loyal households and the amount they spend continued to increase, helping to also drive identical supermarket sales.  We believe that our Customer 1st strategy continues to deliver solid results.

 

For the third quarter of 2010, net earnings totaled $202 million, or $0.32 per diluted share, an increase of $1.67 per diluted share over the third quarter of 2009.  The results for the third quarter of 2009 include non-cash asset impairment charges totaling $1.05 billion, after-tax, that primarily resulted from a goodwill write-down at our Ralphs division in southern California.  Net earnings for the third quarter of 2010 increased $0.05 per diluted share compared to the third quarter of 2009, excluding these non-cash asset impairment charges.  Our third quarter earnings per diluted share results for 2010 increased, compared to the same period in 2009, primarily due to strong operating results, including fuel, the repurchase of our stock over the past four quarters, and a lower effective tax rate.

 

Based on our results for the first three quarters of 2010 and better balance on margin investments, we narrowed our guidance for both annual identical supermarket sales and net earnings per diluted share for fiscal year 2010.  Please refer to the “Outlook” section for more information on our expectations.  We are striving for a result in the upper half of the net earnings per diluted share guidance range. This guidance reflects the uncertainty that remains in the economic recovery, food costs, the competitive environment, and fluctuating fuel margins.  Even though uncertainties remain in all of these areas, we believe the ability to create and deliver shareholder value in a variety of operating environments is a key part of our value proposition for investors.

 

RESULTS OF OPERATIONS

 

Net Earnings (loss)

 

Net earnings totaled $202 million for the third quarter of 2010 compared to a net loss of $875 million for the third quarter of 2009.  The results for the third quarter of 2009 include non-cash asset impairment charges totaling $1.05 billion, after-tax, that primarily resulted from a goodwill write-down at our Ralphs division in southern California.  Excluding these impairment charges, net earnings for the quarter would have been $177 million.  Additionally, the increase in this year’s net earnings for the quarter resulted from strong operating results, including fuel, and a lower effective tax rate.  The lower effective tax rate resulted from an adjustment to our tax contingency reserves of approximately $10 million, due to favorable resolutions of certain tax issues.

 

Net earnings totaled $838 million for the first three quarters of 2010 compared to a net loss of $185 million for the first three quarters of 2009.  The results for the first three quarters of 2009 include non-cash asset impairment charges referred to above.  Excluding these impairment charges, net earnings for the first three quarters of 2009 would have been $866 million.  The decrease in net earnings for the first three quarters of 2010, compared to the first three quarter of 2009 excluding the non-cash asset impairment charges, primarily resulted from decreased operating profit, due to decreased FIFO gross margins from non-fuel sales, partially offset by an increase in fuel operating profit and decreases in LIFO and interest expense, and a lower effective income tax rate.  FIFO gross margins in the first three quarters of 2010, excluding fuel, compared to the first three quarters of 2009, decreased primarily due to continued investments in lower prices to our customers.  The decrease in interest expense in the first three quarters of 2010, compared to the first three quarters of 2009, resulted primarily from a lower weighted average interest rate and an increase in the benefit from interest rate swaps.  The lower effective tax rate in the first three quarters of 2010, compared to the first three quarters of 2009, resulted from an adjustment to our tax contingency reserves of approximately $23 million in 2010, due to favorable resolutions of certain tax issues, compared to approximately $13 million in the first three quarters of 2009.

 

20



 

We recorded net earnings of $0.32 per diluted share for the third quarter of 2010 compared to a net loss of $1.35 in the third quarter of 2009.  Net earnings totaled $1.30 per diluted share for the first three quarters of 2010 compared to a net loss of $0.29 per diluted share for the first three quarters of 2009. The 2009 results include non-cash asset impairment charges referred to above.  Excluding these impairment charges, net earnings per diluted share would have been $0.27 in the third quarter of 2009 and $1.33 for the first three quarters of 2009.  Net earnings per diluted share increased in the third quarter of 2010, compared to the third quarter of 2009 excluding the non-cash asset impairment charges, due to increased net earnings and the repurchase of 18 million shares of our common stock over the past four quarters.  Net earnings per diluted share decreased in the first three quarters of 2010, compared to the first three quarters of 2009 excluding the non-cash asset impairment charges, primarily due to decreased net earnings from a decline in FIFO gross margin, partially offset by the repurchase of 18 million shares of our common stock over the last four quarters.

 

Sales

 

Total Sales

(in millions)

 

 

 

Third Quarter

 

Year-To-Date

 

 

 

2010

 

Percentage
Increase

 

2009

 

Percentage
Increase
(Decrease)

 

2010

 

Percentage
Increase

 

2009

 

Percentage
Increase
(Decrease)

 

Total supermarket sales without fuel

 

$

15,384

 

3.0

%

$

14,934

 

2.1

%

$

51,487

 

3.1

%

$

49,925

 

3.3

%

Total supermarket fuel sales

 

$

2,108

 

25.9

%

$

1,674

 

(7.9

)%

$

6,827

 

38.5

%

$

4,930

 

(23.7

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total supermarket sales

 

$

17,492

 

5.3

%

$

16,608

 

1.0

%

$

58,314

 

6.3

%

$

54,855

 

0.1

%

Other sales(1)

 

1,206

 

14.4

%

1,054

 

(10.1

)%

3,944

 

18.7

%

3,324

 

(17.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total sales

 

$

18,698

 

5.9

%

$

17,662

 

0.3

%

$

62,258

 

7.0

%

$

58,179

 

(1.1

)%

 


(1)

Other sales primarily relate to sales by convenience stores, including fuel; jewelry stores; manufacturing plants to outside customers; variable interest entities; and a wholly-owned entity.

 

The increase in our total sales for the third quarter of 2010, compared to the third quarter of 2009, was primarily the result of our identical supermarket sales increase, excluding fuel, of 2.4% and an increase in supermarket fuel sales of 25.9%.  Identical supermarket sales, excluding fuel, increased primarily due to inflation, increased transaction counts, a small increase in the average transaction, and an increase in the number of loyal households shopping with us.  Total supermarket fuel sales increased in the third quarter of 2010, compared to the third quarter of 2009, due to higher average retail fuel prices of 8.6% and increased fuel gallons sold of 16.2%.  The increase in the average supermarket retail fuel price was caused by an increase in the product cost of fuel.

 

The increase in our total sales for the first three quarters of 2010, compared to the first three quarters of 2009, was primarily the result of our identical supermarket sales increase, excluding fuel, of 2.5% and an increase in supermarket fuel sales of 38.5%.  Identical supermarket sales, excluding fuel, increased primarily due to increased transaction counts and an increase in the number of loyal households shopping with us.  Total supermarket fuel sales increased in the first three quarters of 2010, compared to the first three quarters of 2009, due to higher average retail fuel prices of 17.6% and increased fuel gallons sold of 17.7%.  The increase in the average supermarket retail fuel price was caused by an increase in the product cost of fuel.

 

We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters.  Fuel center discounts received at our fuel centers and earned based on in-store purchases reduce the supermarket identical sales results reflected in the table below.  Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage.  Identical supermarket sales include all sales at identical Fred Meyer multi-department stores.  Our identical supermarket sales results are summarized in the table below.  We used the identical supermarket dollar figures presented to calculate third quarter 2010 percent changes.

 

21



 

Identical Supermarket Sales

($ in millions)

 

 

 

Third Quarter

 

 

 

2010

 

2009

 

Including fuel centers

 

$

16,888

 

$

16,156

 

Excluding fuel centers

 

$

14,867

 

$

14,520

 

 

 

 

 

 

 

Including fuel centers

 

4.5

%

0.0

%

Excluding fuel centers

 

2.4

%

1.3

%

 

We define a supermarket as comparable when it has been in operation for five full quarters, including expansions and relocations.  As is the case for identical supermarket sales, fuel center discounts received at our fuel centers and earned based on in-store purchases reduce the supermarket comparable sales results reflected in the table below.  Comparable supermarket sales include all sales at comparable Fred Meyer multi-department stores.  Our comparable supermarket sales results are summarized in the table below.  We used the comparable supermarket dollar figures presented to calculate third quarter 2010 percent changes.

 

Comparable Supermarket Sales

($ in millions)

 

 

 

Third Quarter

 

 

 

2010

 

2009

 

Including fuel centers

 

$

17,291

 

$

16,492

 

Excluding fuel centers

 

$

15,220

 

$

14,825

 

 

 

 

 

 

 

Including fuel centers

 

4.8

%

0.4

%

Excluding fuel centers

 

2.7

%

1.7

%

 

FIFO Gross Margin

 

We calculate First-In, First-Out (“FIFO”) Gross Margin as sales minus merchandise costs, including advertising, warehousing and transportation, but excluding the Last-In, First-Out (“LIFO”) charge.  Merchandise costs exclude depreciation and rent expense.  FIFO gross margin is an important measure used by management to evaluate merchandising and operational effectiveness.

 

Our FIFO gross margin rate decreased 56 basis points to 22.14% for the third quarter of 2010 from 22.70% for the third quarter of 2009.  Retail fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin on retail fuel sales as compared to non-fuel sales.  Excluding the effect of retail fuel operations, our FIFO gross margin rate decreased 10 basis points for the third quarter of 2010 compared to the third quarter of 2009.  Our FIFO gross margin, excluding the effect of retail fuel operations, declined during the third quarter of 2010, as a percentage of sales, primarily due to higher warehouse and transportation expenses and continued investments in lower prices for our customers, partially offset by improvements in shrink.

 

Our FIFO gross margin rate decreased 101 basis points to 22.46% for the first three quarters of 2010 from 23.47% for the first three quarters of 2009.  Excluding the effect of retail fuel operations, our FIFO gross margin rate decreased 38 basis points for the first three quarters of 2010 compared to the first three quarters of 2009.  This decrease resulted primarily from continued investments in lower prices for our customers and higher shrink and warehouse and transportation expenses, as a percentage of sales.

 

Operating, General and Administrative Expenses

 

Operating, general and administrative (“OG&A”) expenses consist primarily of employee-related costs such as wages, health care benefit costs and 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, decreased 65 basis points to 17.11% for the third quarter of 2010 from 17.76% for the third quarter of 2009.  Retail fuel sales lower our OG&A rate due to the very low OG&A rate on retail fuel sales as compared to non-fuel sales.  OG&A expenses, as a percentage of sales excluding fuel and the southern California non-cash asset impairment charges in the third quarter of 2009, decreased 14 basis points in the third quarter of 2010, compared to the third quarter of 2009.  The decrease in our OG&A rate in the third quarter of 2010, compared to the third quarter of 2009, excluding the effect of fuel and the southern California non-cash asset impairment charges in the third quarter of 2009, resulted primarily from productivity improvements and strong cost controls, partially offset by an increase in the litigation reserve and increasing pension and health care expenses and credit card fees.

 

22



 

OG&A expenses, as a percentage of sales, decreased 58 basis points to 17.03% for the first three quarters of 2010 from 17.61% for the first three quarters of 2009.  OG&A expenses, as a percentage of sales excluding fuel and the southern California non-cash asset impairment charges in the third quarter of 2009, increased 3 basis points in the first three quarters of 2010 compared to the first three quarters of 2009.  The increase in our OG&A rate in the first three quarters of 2010, compared to the first three quarters of 2009, excluding the effect of fuel and the southern California non-cash asset impairment charges in the third quarter of 2009, resulted primarily from increases in pension and health care expenses, and credit card fees, partially offset by productivity improvements, lower utility costs, and strong cost controls at the store level.

 

Rent Expense

 

Rent expense was $154 million, or 0.82% of sales, for the third quarter of 2010, compared to $152 million, or 0.86% of sales, for the third quarter of 2009.  For the year-to-date period, rent expense was $503 million, or 0.81% of total sales in 2010, compared to $502 million, or 0.86% of sales, in 2009.  The increase in rent expense for both the quarter and year-to-date periods of 2010, when compared to the same periods of 2009, resulted primarily from a closed store reserve adjustment in the third quarter of 2010.  Rent expense, as a percentage of sales excluding fuel, decreased 2 basis points in the third quarter of 2010 compared to the third quarter of 2009.  Rent expense, as a percentage of sales excluding fuel, decreased 4 basis points in the first three quarters of 2010 compared to the first three quarters of 2009.  The decrease in rent expense, as a percentage of sales excluding fuel, primarily reflects our continued emphasis on owning rather than leasing, whenever possible, and the benefit of increased supermarket sales.

 

Depreciation Expense

 

Depreciation expense was $368 million, or 1.97% of total sales, for the third quarter of 2010 compared to $356 million, or 2.02% of total sales, for the third quarter of 2009.  The increase in depreciation expense, in total dollars, was the result of additional depreciation on capital expenditures, including acquisitions and lease buyouts, of $2.0 billion during the rolling four quarter period ending with the third quarter of 2010.  Depreciation expense decreased, as a percentage of sales, for the third quarter of 2010, compared to the third quarter of 2009, primarily due to the benefit of increased supermarket sales and higher average retail fuel prices.  Excluding the effect of retail fuel operations, depreciation, as a percentage of sales, decreased two basis points in the third quarter of 2010, compared to the same period of 2009.

 

Depreciation expense was $1.2 billion, or 1.95% of total sales, for the first three quarters of 2010 compared to $1.2 billion, or 1.99% of total sales, for the first three quarters of 2009.  The decrease in our depreciation expense for the first three quarters of 2010, compared to the first three quarters of 2009, as a percentage of sales, is primarily due to the benefit of increased supermarket sales and higher average retail fuel prices.  Excluding the effect of retail fuel operations, depreciation, as a percentage of sales, increased two basis points in the first three quarters of 2010, compared to the same period of 2009.

 

Interest Expense

 

Net interest expense was $103 million, or 0.55% of total sales, in the third quarter of 2010 and $105 million, or 0.59% of total sales, in the third quarter of 2009.  For the year-to-date period, interest expense was $337 million, or 0.54% of total sales, in 2010 and $383 million, or 0.66% of total sales, in 2009.  The decrease in net interest expense for the year-to-date period of 2010, compared to the same period of 2009, resulted primarily from a lower weighted average interest rate, lower debt balance and an increase in our benefit from interest rate swaps.

 

Income Taxes

 

Our effective income tax rate was 31.7% for the third quarter of 2010 and (1.5%) for the third quarter of 2009.  For the year-to-date period, our effective income tax rate was 33.9% in 2010 and 196.0% in 2009.  The 2010 effective income tax rates differed from the federal statutory rate primarily due to the effect of state income taxes and the benefit from the favorable resolution of certain tax issues.  The 2009 effective income tax rates differed from the federal statutory rate primarily due to the discrete goodwill impairment charge being mostly non-deductible for tax purposes as well as favorable resolutions for certain tax issues.

 

23



 

LIQUIDITY AND CAPITAL RESOURCES

 

   Cash Flow Information

 

Net cash provided by operating activities

 

We generated $2.5 billion of cash from operating activities during the first three quarters of 2010, compared to $2.4 billion in the first three quarters of 2009.  The cash provided by operating activities came from net earnings including noncontrolling interests, adjusted for non-cash expenses, and changes in working capital.  Changes in working capital provided cash from operating activities of $444 million in the first three quarters of 2010 and $318 million in the first three quarters of 2009.  This increase in the change in working capital in 2010, compared to 2009, was primarily due to an increase in accrued expenses.

 

The decrease in the amount of cash paid for interest in the first three quarters of 2010, compared to the first three quarters of 2009, resulted primarily from a lower weighted average interest rate and an increase in our benefit from interest rate swaps.

 

The amount of cash paid for income taxes increased in the first three quarters of 2010, compared to the first three quarters of 2009, due to our having applied our fiscal 2008 overpayment of income taxes to 2009 income taxes.

 

Net cash used by investing activities

 

We used $1.4 billion of cash for investing activities during the first three quarters of 2010 compared to $1.8 billion during the first three quarters of 2009.  The amount of cash used for investing activities decreased in the first three quarters of 2010 versus 2009, due to decreased payments for capital expenditures.

 

Net cash used by financing activities

 

We used $800 million of cash for financing activities in the first three quarters of 2010 compared to $326 million in the first three quarters of 2009.  The increase in the amount of cash used for financing activities in the first three quarters of 2010, compared to the same period of 2009, was primarily related to decreased proceeds received from the issuance of long-term debt and increased payments on long-term debt and treasury stock purchases and our investment in the remaining interest of a variable interest entity, offset partially by decreased payments on our credit facility.  Proceeds from the issuance of common stock resulted from exercises of employee stock options.

 

Debt Management

 

As of November 6, 2010, we maintained a credit agreement for a committed $2.5 billion, five-year revolving credit facility that, unless extended, would have terminated on November 15, 2011.  Outstanding borrowings under the credit facility and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit facility.  In addition to the credit facility, we maintained three uncommitted money market lines totaling $100 million in the aggregate.  The money market lines allow us to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit facility.  As of November 6, 2010, we did not have any borrowings under the credit facility, money market lines, or outstanding commercial paper.  The outstanding letters of credit that reduced the funds available under our credit facility totaled $267 million as of November 6, 2010.

 

Our bank credit agreement and the indentures underlying our publicly issued debt contain various restrictive covenants.  As of November 6, 2010, we were in compliance with these financial covenants.  Furthermore, management believes it is not reasonably likely that Kroger will fail to comply with these financial covenants or the financial covenants of our new credit agreement referred to below in the foreseeable future.

 

On November 8, 2010, we entered into a new credit agreement for a $2 billion unsecured revolving credit facility, with a termination date of May 15, 2014, unless extended as permitted under the credit agreement.  This credit facility replaced our $2.5 billion credit facility that would otherwise have terminated on November 15, 2011.  The credit agreement is filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K dated November 8, 2010.  Refer to Note 12 of our Consolidated Financial Statements.

 

24



 

Total debt, including both the current and long-term portions of capital leases and lease-financing obligations, decreased $247 million to $7.8 billion as of the end of the third quarter of 2010, from $8.1 billion as of the end of the third quarter of 2009.  Total debt decreased $250 million as of the end of the third quarter of 2010, from $8.1 billion as of year-end 2009.  The decrease as of the end of the third quarter of 2010, compared to the end of the third quarter of 2009, resulted from the payment at maturity in the first quarter of 2010 of $500 million of senior notes bearing an interest rate of 8.05%, partially offset by the issuance in the second quarter of 2010 of $300 million of senior notes bearing an interest rate of 5.4%.  As of November 6, 2010, our cash and temporary cash investments were $758 million compared to $424 million as of January 30, 2010.

 

   Common Stock Repurchase Program

 

During the third quarter of 2010, we invested $64 million to repurchase 2.9 million shares of Kroger stock at an average price of $21.72 per share.  For the first three quarters of 2010, we invested $292 million to repurchase 13.8 million shares of Kroger stock at an average price of $21.09 per share.  The shares purchased during the first three quarters of 2010 were reacquired under three separate stock repurchase programs.  The first was a $1 billion repurchase program that was authorized by Kroger’s Board of Directors on January 18, 2008.  The second is a $500 million repurchase program, replacing the first program, that was authorized by Kroger’s Board of Directors on June 24, 2010.  The third is a program that uses the cash proceeds from the exercises of stock options by participants in Kroger’s stock option and long-term incentive plans as well as the associated tax benefits.  The shares purchased during the third quarter of 2010 were reacquired under the second and third programs described above.

 

   Liquidity Needs

 

We estimate our liquidity needs over the next twelve month period to be approximately $2.2 billion, which includes anticipated requirements for working capital, capital expenditures, interest payments, and scheduled principal payments of debt, offset by cash and temporary cash investments on hand at the end of the third quarter of 2010.  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. In addition to the sources of liquidity noted above, we also expect to be able to fund future scheduled principal payments of long-term debt from our cash flows from operating activities and, if necessary, by issuing additional debt. We believe we have adequate coverage of our debt covenants to continue to maintain our current debt ratings and to respond effectively to competitive conditions.

 

CAPITAL EXPENDITURES

 

Capital expenditures, excluding acquisitions and the purchase of leased facilities, totaled $484 million for the third quarter of 2010 compared to $552 million for the third quarter of 2009.  Year-to-date, capital expenditures, excluding acquisitions and the purchase of leased facilities, totaled $1.4 billion in 2010 and $1.7 billion in 2009.  The decrease in capital expenditures, excluding acquisitions and the purchase of leased facilities, was primarily due to us not completing as many store projects in 2010, compared to 2009.  During the third quarter of 2010, capital expenditures for the purchase of leased facilities totaled $12 million compared to $23 million for the third quarter of 2009.  During the first three quarters of 2010, capital expenditures for purchases of leased facilities totaled $28 million compared to $138 million for the first three quarters of 2009.  This decrease was due to the Company purchasing several more leased facilities and a large distribution center at very attractive prices during the first three quarters of 2009, compared to the same period in 2010.  During the third quarter of 2010, we opened, acquired, expanded or relocated ten food stores and also completed 39 within-the-wall remodels.  During the first three quarters of 2010, we opened, acquired, expanded or relocated 28 food stores and also completed 99 within-the-wall remodels.  Total food store square footage increased 0.6% from the third quarter of 2009. Excluding acquisitions and operational closings, total food store square footage increased 1.1% over the third quarter of 2009.

 

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.  Except as noted below in our Recently Adopted Accounting Standards, our critical accounting policies are summarized in our Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

 

25



 

The preparation of financial statements in conformity with generally accepted accounting principles 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.

 

RECENTLY ADOPTED ACCOUNTING STANDARDS

 

In January 2010, the Financial Accounting Standards Board (“FASB”) amended its standards related to fair value measurements and disclosures, which are effective for interim and annual fiscal periods beginning after December 15, 2009, except for disclosures about certain Level 3 activity that will become effective for interim and annual periods beginning after December 15, 2010.  The new standard requires us to disclose transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers as well as activity in Level 3 fair value measurements.  The new standard also requires a more detailed level of disaggregation of the assets and liabilities being measured as well as increased disclosures regarding inputs and valuation techniques of the fair value measurements.  See Note 10 to the Consolidated Financial Statements for our fair value measurements and disclosures.

 

In June 2009, the FASB amended its existing standards related to the consolidation of variable interest entities, which was effective for interim and annual fiscal periods beginning after November 15, 2009.  The new standard requires an entity to analyze whether its variable interests give it a controlling financial interest of a variable interest entity and outlines what defines a primary beneficiary.  The new standard amends generally accepted accounting principles by: (a) changing certain rules for determining whether an entity is a variable interest entity; (b) replacing the quantitative approach previously required for determining the primary beneficiary with a more qualitative approach; and (c) requiring entities to continuously analyze whether they are the primary beneficiary of a variable interest entity, among other amendments.  The new standard also requires enhanced disclosures regarding an entity’s involvement in a variable interest entity.  The adoption of these new standards did not have a material effect on our Consolidated Financial Statements.

 

26



 

OUTLOOK

 

This discussion and analysis contains certain forward-looking statements about Kroger’s future performance.  These statements are based on management’s assumptions and beliefs in light of the information currently available. Such statements relate to, among other things: projected changes in net earnings attributable to The Kroger Co.; identical supermarket sales growth; expected product cost; expected pension plan contributions; our ability to generate operating cash flow; projected capital expenditures; square footage growth; opportunities to reduce costs; cash flow requirements; and our operating plan for the future; and are indicated by words such as “comfortable,” “committed,” “will,” “expect,” “goal,” “should,” “intend,” “target,” “believe,” “anticipate,” “plan,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.

 

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. 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 below could cause actual results to differ materially.

 

·

We expect net earnings per diluted share in the range of $1.65-$1.78 for 2010.  We are striving for a result in the upper half of the net earnings per diluted share guidance range.  In addition, our shareholder return is enhanced 1.5%-2.0% by our dividend.

 

 

·

We expect identical supermarket sales growth, excluding fuel sales, of 2.5%-3.0% in 2010.

 

 

·

For 2010, we will continue to focus on improving sales growth, in accordance with our Customer 1st strategy, by making investments in gross margin and customer shopping experiences. We expect to finance these investments primarily with operating cost reductions.  We expect non-fuel operating margins for 2010 to be comparable to those for the first three quarters of 2010.

 

 

·

For 2010, we expect fuel margins, which can be highly volatile, to be approximately $0.12 per gallon, and we expect continued strong growth in fuel gallons sold.

 

 

·

For 2010, we expect our annualized LIFO charge to be approximately $50 million.  This forecast is based on estimated cost changes for products in our inventory.

 

 

·

For 2010, we expect interest expense to be approximately $450 million.

 

 

·

We plan to use cash flow primarily for capital investments, to maintain our current debt coverage ratios, to pay cash dividends, and to repurchase stock.  As market conditions change, we re-evaluate these uses of cash flow.

 

 

·

We expect to obtain sales growth from new square footage, as well as from increased productivity from existing locations.

 

 

·

Capital expenditures reflect our strategy of growth through expansion, as well as focusing on productivity increases from our existing store base through remodels.  In addition, we will continue our emphasis on self-development and ownership of real estate, logistics and technology improvements.  The continued capital spending in technology is focused on improving store operations, logistics, manufacturing procurement, category management, merchandising and buying practices, and should reduce merchandising costs.  We intend to continue using cash flow from operations to finance capital expenditure requirements.  We expect capital investments for 2010 to be in the range of $1.8-$2.0 billion, excluding acquisitions and purchases of leased facilities.  We expect total food store square footage to grow approximately 1.0%-1.4% before acquisitions and operational closings.

 

 

·

Based on current operating trends, we believe that cash flow from operations and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future.  We also believe we have adequate coverage of our debt covenants to continue to respond effectively to competitive conditions.

 

 

·

We believe we have adequate sources of cash, if needed, under our credit facility and other borrowing sources.

 

27



 

·

We expect that our OG&A results will be affected by increased costs, such as higher employee benefit costs and credit card fees, offset by improved productivity from process changes and leverage gained through sales increases.

 

 

·

We expect that our effective tax rate for 2010 will be slightly below 35.0%, including our tax contingency reserve adjustments for the first three quarters of 2010.

 

 

·

We expect rent expense, as a percentage of total sales and excluding closed-store activity, will decrease due to the emphasis our current strategy places on ownership of real estate.

 

 

·

We believe that in 2010 there will be opportunities to reduce our operating costs in such areas as administration, productivity improvements, shrink, warehousing and transportation.  We intend to invest most of these savings in our core business to drive profitable sales growth and offer improved value and shopping experiences for our customers.

 

 

·

Although we were not required to make cash contributions to Company-sponsored defined benefit pension plans during 2010, we contributed approximately $141 million to these plans in 2010.  We expect any elective contributions made during 2010 will decrease our required contributions in future years.  Among other things, investment performance of plan assets, the interest rates required to be used to calculate the pension obligations, and future changes in legislation, will determine the amounts of any additional contributions.  We expect 2010 expense for Company-sponsored defined benefit pension plans to be approximately $64 million.  In addition, we expect 401(k) Retirement Savings Account Plan cash contributions and expense from automatic and matching contributions to participants to increase slightly in 2010, compared to 2009.

 

 

·

We expect to contribute approximately $250 million to multi-employer pension plans in 2010, subject to collective bargaining.  In addition, we expect meaningful increases in expense as a result of increases in multi-employer pension plan contributions over the next several years.

 

 

·

We expect bad debt expense from the credit extended to our customers through our Company-branded credit card in 2010 to be approximately $16 million.

 

 

·

We do not anticipate additional goodwill impairments in 2010.

 

 

·

We have various labor agreements that will be negotiated later in 2010, covering store employees in Ft. Wayne and Little Rock.  Upon the expiration of our collective bargaining agreements, work stoppages by the affected workers could occur if we are unable to negotiate new contracts with labor unions.  A prolonged work stoppage affecting a substantial number of locations could have a material adverse effect on our results.  In all of these contracts, rising health care and pension costs will continue to be an important issue in negotiations.

 

Various uncertainties and other factors could cause us to fail to achieve our goals. 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.

 

 

·

Changes in market conditions could affect our cash flow.

 

·

Our ability to achieve sales and earnings goals may be affected by: labor disputes; industry consolidation; 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, and the unemployment rate; changes in government-funded benefit programs; 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 inconsistent pace of the economic recovery; changes in inflation or deflation in product and operating costs; stock repurchases; and the success of our future growth plans.

 

28



 

·

The extent to which the adjustments we are making to our strategy create value for our shareholders will depend primarily on the reaction of our customers and our competitors to these adjustments, as well as operating conditions, including inflation or deflation, increased competitive activity, and cautious spending behavior of our customers.

 

·

Our product cost inflation could vary from our estimate due to general economic conditions, weather, availability of raw materials and ingredients in the products that we sell and their packaging, and other factors beyond our control. 

 

 

·

Our ability to use free cash flow to continue to maintain our debt coverage and to reward our shareholders could be affected by unanticipated increases in net total debt, our inability to generate free cash flow at the levels anticipated, and our failure to generate expected earnings.

 

 

·

The timing of our recognition of LIFO expense will be affected primarily by changes in product costs during the year.

 

·

If actual results differ significantly from anticipated future results for certain reporting units including variable interest entities, an impairment loss for any excess of the carrying value of the reporting units’ goodwill over the implied fair value would have to be recognized.

 

 

·

In addition to the factors identified above, our identical store sales growth could be affected by increases in Kroger private label sales, the effect of our “sister stores” (new stores opened in close proximity to an existing store) and reductions in retail pricing.

 

 

·

Our operating margins, without fuel, could decline more than expected if we are unable to pass on any cost increases, fail to deliver the cost savings contemplated or if changes in the cost of our inventory and the timing of those changes differ from our expectations.

 

 

·

We could fail to realize our expected operating margin per gallon of fuel and fuel gallons sold based upon changes in the price of fuel, a change in our operating costs, or if a pattern of rapid changes in fuel costs occurs.

 

 

·

We have estimated our exposure to the claims and litigation arising in the normal course of business, as well as to the material litigation facing Kroger, and believe we have made provisions where it is reasonably possible to estimate and where an adverse outcome is probable. Unexpected outcomes in these matters, however, could result in an adverse effect on our earnings.

 

 

·

Consolidation in the food industry is likely to continue and the effects on our business, either favorable or unfavorable, cannot be foreseen.

 

 

·

Rent expense, which includes subtenant rental income, could be adversely affected by the state of the economy, increased store closure activity and future consolidation.

 

 

·

Depreciation expense, which includes the amortization of assets recorded under capital leases, is computed principally using the straight-line method over the estimated useful lives of individual assets, or the remaining terms of leases. Use of the straight-line method of depreciation creates a risk that future asset write-offs or potential impairment charges related to store closings would be larger than if an accelerated method of depreciation were followed.

 

 

·

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.

 

 

·

The actual amount of automatic and matching cash contributions to our 401(k) Retirement Savings Account Plan will depend on the number of participants, savings rate, plan compensation, and length of service of participants.

 

 

·

Our contributions and recorded expense related to multi-employer pension funds could increase more than anticipated.  Should asset values in these funds deteriorate, if employers withdraw from these funds without providing for their share of the liability, or should our estimates prove to be understated, our contributions could increase more rapidly than we have anticipated.

 

 

·

If weakness in the financial markets continues or worsens, our contributions to Company-sponsored defined benefit pension plans could increase more than anticipated in future years.

 

29



 

·

Changes in laws or regulations, including changes in accounting standards, taxation requirements and environmental laws may have a material effect on our financial statements.

 

 

·

Changes in the general business and economic conditions in our operating regions may affect the shopping habits of our customers, which could affect sales and earnings. 

 

 

·

Changes in our product mix may negatively affect certain financial indicators. For example, we continue to add supermarket fuel centers to our store base. Since gasoline generates low profit margins, we expect to see our FIFO gross profit margins decline as gasoline sales increase. Although this negatively affects our FIFO gross margin, gasoline sales provide a positive effect on OG&A expense as a percentage of sales.

 

·

Our capital expenditures, expected square footage growth, and number of store projects completed over the next three fiscal years could differ from our estimate if we are unsuccessful in acquiring suitable sites for new stores, if development costs vary from those budgeted, if our logistics and technology or store projects are not completed on budget or within the time frame projected, of if current conditions fail to improve, or worsen.

 

 

·

Interest expense could be adversely affected by the interest rate environment, changes in our credit ratings, fluctuations in the amount of outstanding debt, decisions to incur prepayment penalties on the early redemption of debt and any factor that adversely affects our operations and results in an increase in debt.

 

 

·

Impairment losses, including goodwill, could be affected by changes in our assumptions of future cash flows, market values or business valuations in the market.  Our cash flow projections include several years of projected cash flows which would be affected by changes in the economic environment, real estate market values, competitive activity, inflation and customer behavior.

 

 

·

Our estimated expense and obligation for Kroger-sponsored pension plans and other post-retirement benefits could be affected by changes in the assumptions used in calculating those amounts.  These assumptions include, among others, the discount rate, the expected long-term rate of return on plan assets, average life expectancy and the rate of increases in compensation and health care costs.  

 

 

·

Adverse weather conditions could increase the cost our suppliers charge for their products, or may decrease customer demand for certain products.  Increases in demand for certain commodities could also increase the cost our suppliers charge for their products.  Additionally, increases in the cost of inputs, such as utility costs or raw material costs, could negatively affect financial ratios and earnings.

 

 

·

Although we presently operate only in the United States, civil unrest in foreign countries in which our suppliers do business may affect the prices we are charged for imported goods. If we are unable to pass on these increases to our customers, our FIFO gross margin and net earnings would suffer.

 

 

·

Earnings and sales also may be affected by adverse weather conditions, particularly to the extent that hurricanes, tornadoes, floods, earthquakes, and other conditions disrupt our operations or those of our suppliers; create shortages in the availability or increases in the cost of products that we sell in our stores or materials and ingredients we use in our manufacturing facilities; or raise the cost of supplying energy to our various operations.

 

We cannot fully foresee the effects of changes in economic conditions on Kroger’s business. We have assumed economic and competitive situations will not change significantly for 2010.

 

Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in, contemplated or implied by forward-looking statements made by us or our representatives.

 

30



 

Item 3.           Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk on our Form 10-K for the fiscal year ended January 30, 2010.

 

Item 4.           Controls and Procedures.

 

The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures as of the quarter ended November 6, 2010.  Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures were effective as of the end of the period covered by this report.

 

In connection with the evaluation described above, there was no change in Kroger’s internal control over financial reporting during the quarter ended November 6, 2010, that has materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting.

 

31



 

PART II - OTHER INFORMATION

 

Item 1.           Legal Proceedings.

 

Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company.  Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.  For a further discussion of our legal proceedings, see Note 9 to our Consolidated Financial Statements.

 

The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and where an adverse outcome is probable.  Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse impact on the Company’s financial condition, results of operations, or cash flows.

 

32



 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(c)

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period(1)

 

Total Number
of Shares
Purchased

 

Average
Price Paid Per
Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(2)

 

Maximum
Dollar Value of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs(3)
(in millions)

 

First four weeks

 

 

 

 

 

 

 

 

 

August 15, 2010 to September 11, 2010

 

737,379

 

$

21.51

 

737,379

 

$

394

 

Second four weeks

 

 

 

 

 

 

 

 

 

September 12, 2010 to October 9, 2010

 

849,872

 

$

21.77

 

849,872

 

$

380

 

Third four weeks

 

 

 

 

 

 

 

 

 

October 10, 2010 to November 6, 2010

 

1,375,749

 

$

21.80

 

1,375,749

 

$

352

 

Total 

 

2,963,000

 

$

21.72

 

2,963,000

 

$

352

 

 


(1)

The reported periods conform to the Company’s fiscal calendar composed of thirteen 28-day periods. The third quarter of 2010 contained three 28-day periods.

(2)

Shares were repurchased under (i) a $500 million stock repurchase program, authorized by the Board of Directors on June 24, 2010, and (ii) a program announced on December 6, 1999, to repurchase common stock to reduce dilution resulting from our employee stock option and long-term incentive plans, which program is limited to proceeds received from exercises of stock options and the tax benefits associated therewith. The programs have no expiration date but may be terminated by the Board of Directors at any time. Total shares purchased include shares that were surrendered to the Company by participants under the Company’s long-term incentive plans to pay for taxes on restricted stock awards.

(3)

Amounts shown in this column reflect amounts remaining under the $500 million stock repurchase program referenced in clause (i) of Note 2 above. Amounts to be invested under the program utilizing option exercise proceeds are dependent upon option exercise activity.

 

33



 

Item 6. Exhibits.

 

EXHIBIT 3.1

-

Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010, filed with the SEC on June 28, 2010.

 

 

 

EXHIBIT 3.2

-

The Company’s regulations are hereby incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 26, 2007, filed with the SEC on July 3, 2007.

 

 

 

EXHIBIT 4.1

-

Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request.

 

 

 

EXHIBIT 31.1

-

Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer.

 

 

 

EXHIBIT 31.2

-

Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer.

 

 

 

EXHIBIT 32.1

-

Section 1350 Certifications.

 

 

 

EXHIBIT 99.1

-

Additional Exhibits – Statement of Computation of Ratio of Earnings to Fixed Charges.

 

 

 

EXHIBIT 101.INS

-

XBRL Instance Document.

 

 

 

EXHIBIT 101.SCH

-

XBRL Taxonomy Extension Schema Document.

 

 

 

EXHIBIT 101.CAL

-

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

EXHIBIT 101.DEF

-

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

EXHIBIT 101.LAB

-

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

EXHIBIT 101.PRE

-

XBRL Taxonomy Extension Presentation Linkbase Document.

 

34



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

THE KROGER CO.

 

 

Dated:  December 13, 2010

By:

/s/ David B. Dillon

 

 

David B. Dillon

 

 

Chairman of the Board and Chief Executive Officer

 

 

Dated:  December 13, 2010

By:

/s/ J. Michael Schlotman

 

 

J. Michael Schlotman

 

 

Senior Vice President and Chief Financial Officer

 

35



 

Exhibit Index

 

Exhibit 3.1 -

 

Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010, filed with the SEC on June 28, 2010.

 

 

 

Exhibit 3.2 -

 

The Company’s regulations are hereby incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 26, 2007, filed with the SEC on July 3, 2007.

 

 

 

Exhibit 4.1 -

 

Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request.

 

 

 

Exhibit 31.1 -

 

Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer.

 

 

 

Exhibit 31.2 -

 

Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer.

 

 

 

Exhibit 32.1 -

 

Section 1350 Certifications.

 

 

 

Exhibit 99.1 -

 

Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges.

 

 

 

EXHIBIT 101.INS -

 

XBRL Instance Document.

 

 

 

EXHIBIT 101.SCH -

 

XBRL Taxonomy Extension Schema Document.

 

 

 

EXHIBIT 101.CAL -

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

EXHIBIT 101.DEF -

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

EXHIBIT 101.LAB -

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

EXHIBIT 101.PRE -

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

36