Kroger(KR) - 2024 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements This section presents Kroger's unaudited consolidated financial statements for Q3 2023, covering operations, balance sheets, cash flows, and key notes Consolidated Statements of Operations Q3 2023 saw a slight sales decrease but increased operating profit and net earnings, while YTD operating profit declined due to opioid settlement charges Q3 & YTD 2023 vs 2022 Statement of Operations (in millions, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Sales | $33,957 | $34,198 | $112,975 | $113,436 | | Operating Profit | $912 | $841 | $1,902 | $3,300 | | Net Earnings Attributable to The Kroger Co. | $646 | $398 | $1,428 | $1,793 | | Diluted EPS | $0.88 | $0.55 | $1.95 | $2.44 | Consolidated Balance Sheets As of November 4, 2023, total assets increased to $51.02 billion, driven by higher cash, while total liabilities remained stable and shareowners' equity grew Balance Sheet Highlights (in millions) | Account | Nov 4, 2023 | Jan 28, 2023 | | :--- | :--- | :--- | | Cash and temporary cash investments | $1,725 | $1,015 | | Total current assets | $13,439 | $12,670 | | Total Assets | $51,021 | $49,623 | | Total current liabilities | $16,785 | $17,238 | | Long-term debt | $12,039 | $12,068 | | Total Liabilities | $39,830 | $39,609 | | Total Shareowners' Equity | $11,209 | $10,042 | Consolidated Statements of Cash Flows For the first three quarters of 2023, net cash from operating activities significantly increased, while cash used in investing rose and financing decreased, leading to a net cash increase Cash Flow Summary - First Three Quarters (in millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,868 | $3,338 | | Net cash used by investing activities | $(2,745) | $(2,192) | | Net cash used by financing activities | $(1,413) | $(2,051) | | Net increase (decrease) in cash | $710 | $(905) | Notes to Unaudited Consolidated Financial Statements The notes provide critical context to the financial statements, detailing debt obligations, the nationwide opioid settlement, and the proposed Albertsons merger divestiture plan - The company reached an agreement in principle to settle the majority of opioid claims for up to $1.2 billion payable to states and subdivisions and $36 million to Native American tribes[46] - A charge of $1.413 billion ($1.113 billion net of tax) was recognized in the second quarter of 2023 for the opioid settlement, recorded under 'Operating, general and administrative' expenses[47] - In relation to the proposed merger with Albertsons, the company entered a definitive agreement to sell 413 stores and other assets to C&S Wholesale Grocers for approximately $1.9 billion in cash[59] Management's Discussion and Analysis (MD&A) Management discusses the company's performance, highlighting sales, adjusted EPS, Express Scripts impact, LIFO changes, major events like the opioid settlement and Albertsons merger, and liquidity Financial Performance In Q3 2023, total sales decreased while adjusted net earnings per diluted share grew, with identical sales impacted by Express Scripts and a significant decrease in the LIFO charge Q3 2023 Financial Highlights vs. Q3 2022 | Metric | Q3 2023 | Change vs Q3 2022 | | :--- | :--- | :--- | | Sales | $33,957M | (0.7)% | | Identical sales excluding fuel | (0.6)% | N/A | | Adjusted net earnings per diluted share | $0.95 | 8.0% | | Adjusted FIFO operating profit | $1,022M | (6.6)% | - Identical sales without fuel would have grown 1.0% in Q3 2023 if not for the termination of the agreement with Express Scripts[73] - The LIFO charge was $29 million in Q3 2023, a significant decrease from $152 million in Q3 2022, due to lower expected product cost inflation[78] Results of Operations Q3 2023 total sales decreased due to declines in non-fuel and fuel sales, while gross margin rate increased, and OG&A expenses rose as a percentage of sales due to strategic investments - Digital sales increased 11% in Q3 2023, led by 11% growth in Pickup and 20% growth in Delivery solutions[95] - The gross margin rate for Q3 2023 increased to 22.03% from 21.37% in Q3 2022, primarily due to a decreased LIFO charge, higher fuel gross margin, and Our Brands performance, despite higher shrink and promotional investments[102] - OG&A expenses as a percentage of sales increased in Q3 2023 compared to Q3 2022, driven by planned investments in associates, strategic growth initiatives, and the effect of the terminated Express Scripts agreement[109] Liquidity and Capital Resources The company's liquidity strengthened with increased cash from operations and decreased total debt, while share repurchases remain paused to prioritize de-leveraging for the Albertsons merger - Net cash provided by operating activities increased to $4.9 billion in the first three quarters of 2023, up from $3.3 billion in the same period of 2022[128] - Total debt decreased by $615 million as of November 4, 2023, compared to fiscal year-end 2022, primarily due to the repayment of $600 million in senior notes[137] - The share repurchase program was paused in Q3 2022 to prioritize de-leveraging following the proposed merger with Albertsons[139] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes in its market risk exposure since the last Annual Report on Form 10-K - There have been no material changes in market risk exposure from the last Annual Report on Form 10-K[146] Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The CEO and CFO concluded that Kroger's disclosure controls and procedures were effective as of the end of the reporting period[147] - No changes in internal control over financial reporting occurred during the quarter that materially affected or were reasonably likely to materially affect the controls[148] PART II - OTHER INFORMATION Legal Proceedings This section incorporates by reference information on legal proceedings, particularly opioid litigation, from Note 6 of the financial statements - Information regarding legal proceedings is incorporated by reference from Note 6 – "Commitments and Contingencies" in the financial statements[149] Issuer Purchases of Equity Securities During Q3 2023, Kroger repurchased shares for employee stock plans, while the $1.0 billion share repurchase program remains unused due to Albertsons merger de-leveraging priority Q3 2023 Share Repurchases | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Aug 13 - Sep 9, 2023 | 28,199 | $48.02 | | Sep 10 - Oct 7, 2023 | 85,843 | $45.90 | | Oct 8 - Nov 4, 2023 | 83,122 | $44.34 | | Total | 197,164 | $45.55 | - The $1.0 billion share repurchase program authorized in September 2022 has not been utilized, as the program was paused in Q3 2022 to prioritize de-leveraging for the Albertsons merger[153]