Last updated on March 9th, 2018
The Kroger Co. is reporting net earnings of $0.96 per diluted share and identical supermarket sales, without fuel, of 1.5 percent in the fourth quarter of 2017, which ended on Feb. 3, 2018. Kroger’s fourth quarter adjusted net earnings per diluted share were $0.63.
Fiscal 2017 net earnings were $2.09 per diluted share, and identical supermarket sales growth, without fuel, was 0.7 percent. Kroger’s 2017 adjusted net earnings per diluted share were $2.04.
The 53rd week in 2017 contributed $0.09 to Kroger’s net earnings per diluted share result for both the fourth quarter and full year 2017.
“We launched Restock Kroger in the fall of 2017 and finished the year with positive momentum in our sales and overall business. Customers are letting us know that they see, feel and appreciate our efforts to redefine the customer experience—and they are rewarding us with growing loyalty. This is the cycle that creates long-term value for shareholders,” said Chairman and CEO Rodney McMullen.
“The Tax Cuts and Jobs Act is a catalyst that is enabling us to accelerate investments in Restock Kroger,” he continued. “We are taking a balanced approach to ensure tax reform benefits our associates, customers and shareholders. What we’ve previously said is that sharing the benefits with our associates and customers will create a more sustainable and stronger business model for the future. This balanced approach is also consistent with our values and Kroger’s purpose, to feed the human spirit.
“As we embark on our first full year of ‘Restock Kroger,’ we are encouraged at the start of 2018 and confident in our ability to deliver on both our plan for the year and our long-term vision to serve America through food inspiration and uplift.”
Highlights of Kroger’s fiscal 2017, according to the company, include the launch of Restock Kroger, more than 90 percent growth of digital sales and the creation of 10,000 new jobs.
During a conference call to discuss Kroger’s results, McMullen elaborated on the company’s success with ClickList, a service that lets shoppers order online and have their groceries brought out to their car at the store.
“In the fourth quarter we introduced a seamless digital shopping experience that fully integrates our ClickList experience with our other digital services—coupons, recipes, rewards and more. After just a couple of months, we already know our customers love it. Customers are making purchases on the site at a higher frequency than before and spending more per online order,” he said. “Households that participate in our seamless offerings—those who engage with our digital platforms and with our physical stores—spend more per week than households that do not. And households that transact with us online spend even more.
“When you look at our customer coverage area for seamless shopping, more than two-thirds of our customers—more than 40 million shoppers—have pickup and/or delivery available from Kroger. Our goal is for every customer to have access to our convenient services. In 2018, we will expand our digital coverage area and enhance our digital shopping experience to provide customers with relevant products, recipes, digital coupons, weekly ads, smart shopping lists and more. To support this growth, we offer customers 1,091 pickup locations and more than 872 delivery locations across the country—and it continues to grow.”
Details of 4Q results
Net earnings for the fourth quarter totaled $854 million, or $0.96 per diluted share. Adjusted net earnings for the fourth quarter totaled $562 million, or $0.63 per diluted share. Net earnings in the same period last year were $506 million, or $0.53 per diluted share.
Total sales increased 12.4 percent to $31.0 billion in the fourth quarter compared to $27.6 billion for the same period last year. Total sales, excluding fuel and the 53rd week, increased 2.7 percent in the fourth quarter over the same period last year.
Gross margin was 21.9 percent of sales for the fourth quarter. Excluding fuel, the 53rd week and the LIFO credit and charge, gross margin decreased 31 basis points from the same period last year.
Kroger recorded a LIFO credit of $54 million in the fourth quarter, compared to a $0.2 million LIFO charge in the same quarter last year.
Operating, general and administrative costs as a rate of sales—excluding fuel, the 53rd week and the 2017 Fourth Quarter Adjustment Items—increased by 22 basis points; rent and depreciation with the same exclusions declined by 9 basis points.
Fiscal 2017 results
Net earnings for 2017 totaled $1.9 billion, or $2.09 per diluted share. Adjusted net earnings totaled $1.9 billion, or $2.04 per diluted share. Net earnings in 2016 were $2.0 billion, or $2.05 per diluted share. Excluding the 2016 restructuring of certain multi-employer pension obligations, adjusted net earnings in 2016 were $2.0 billion, or $2.12 per diluted share.
Total sales increased 6.4 percent to $122.7 billion in 2017 compared to $115.3 billion in 2016. Excluding fuel, the 53rd week and the Modern Health merger, total sales increased 2.2 percent in 2017 compared to 2016.
Gross margin was 22.0 percent of sales in 2017. Excluding fuel, the 53rd week, the Modern Health merger and the LIFO charge and credit, gross margin decreased 19 basis points compared to 2016.
Kroger’s LIFO credit for 2017 was $8 million, compared to a $19 million LIFO charge in 2016.
Operating, general and administrative costs as a percent of sales—excluding fuel, the 53rd week, the 2017 Adjustment Items, the Modern Health merger, a $111 million contribution to the UFCW Consolidated Pension Plan in 2017 and the 2016 restructuring of certain multi-employer pension obligations—increased 22 basis points; rent and depreciation with the same exclusions increased by 4 basis points in 2017.
FIFO operating margin for 2017 decreased 46 basis points compared to the prior year, with the following exclusions: fuel, the 53rd week, the Modern Health merger, the 2017 Adjustment Items, a $111 million contribution to the UFCW Consolidated Pension Plan in 2017, and the 2016 restructuring of certain multi-employer pension obligations.
Financial strategy
Kroger’s financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company says it continually balances the use of its cash flow to achieve these goals.
Over the last four quarters, Kroger has used cash to:
- Contribute an incremental $1.2 billion pre-tax to company-sponsored pension plans and $467 million pre-tax to satisfy withdrawal obligations to the Central States Pension Fund
- Repurchase 61 million common shares for $1.6 billion
- Pay $444 million in dividends
- Invest $3.0 billion in capital
Kroger’s net total debt to adjusted EBITDA ratio increased to 2.65, on a 52-week basis, due primarily to funding various pension obligations. The company updated its net total debt to adjusted EBITDA ratio target range to 2.30 to 2.50 to reflect its decision to fund these existing obligations, which resulted in them being reflected as debt on Kroger’s balance sheet.
Kroger expects to use proceeds from the sale of c-stores to reduce debt and repurchase shares. Kroger’s 2018 guidance assumes a first quarter close of the transaction.
Return on invested capital for 2017, on a 52-week basis, was 12.03 percent.
Capital investments, excluding mergers, acquisitions and purchases of leased facilities, totaled $3.0 billion for the year, compared to $3.6 billion in 2016.
2018 guidance
Kroger is targeting identical supermarket sales growth, excluding fuel, to range from 1.5 to 2 percent in 2018.
The company expects net earnings to range from $1.95 to $2.15 per diluted share for 2018 and expects capital investments, excluding mergers, acquisitions and purchases of leased facilities, to be approximately $3.0 billion in 2018.
Kroger expects its 2018 tax rate to be approximately 22 percent.
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