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News and Information Article
Identical Supermarket Sales Rose 6.2% with Fuel and 4.7% without Fuel
CINCINNATI, March 7 /-FirstCall/ -- The Kroger Co. (NYSE: KR)
today reported total sales increased 7.5% to $14.7 billion for the fourth
quarter ended January 28, 2006. Identical supermarket sales increased 6.2%
with fuel and 4.7% without fuel. This represents Krogers tenth consecutive
quarter of positive identical supermarket sales, excluding fuel.
"The continued focus of Krogers associates on delivering improved
service, product selection, and value to our customers has generated another
quarter of impressive identical sales growth. These results reflect the
Companys highest identical supermarket sales growth since the merger with
Fred Meyer in 1999," said David B. Dillon, Kroger chairman and chief executive
officer. "Sustainable identical sales growth is a key driver of Krogers
financial objective to increase earnings and generate value for our
shareholders."
Net earnings totaled $282.1 million, or $0.39 per diluted share, for the
fourth quarter. In the year-ago period, Kroger reported a net loss of $652.1
million, or $0.89 per diluted share. The year-ago results included a goodwill
impairment charge of $903.8 million, pre-tax, that affected net earnings by
$860.8 million, or $1.17 per diluted share.
Other highlights of the fourth quarter included:
- FIFO gross margin declined 22 basis points to 24.85% of sales.
Excluding the effect of retail fuel operations, FIFO gross margin rose
32 basis points. Kroger continued to invest in lower prices for
customers. These targeted investments were funded by improvements in
shrink and warehousing expenses.
- Operating, general and administrative (OG&A) costs as a percentage of
sales declined 38 basis points to 17.98%. Excluding the effect of
retail fuel operations, OG&A declined 6 basis points. Total company
sales leverage and improvement at Ralphs offset increases in credit
card fees, pension expense, and energy-related costs.
- Capital investment totaled $306.1 million, compared to $337.4 million a
year ago.
- Kroger repurchased 2.6 million shares of stock at an average price of
$18.93 for a total investment of $49.4 million. At the end of the
fourth quarter, there was $114.3 million remaining under the
$500 million stock buyback announced in September 2004. Since January
2000, Kroger has invested $3.0 billion to repurchase 155.7 million
shares at an average price of $19.13 per share. Kroger continues to
buy back stock.
- Total debt was $7.2 billion, a reduction of $738.0 million from a year
ago. Net total debt was $6.9 billion, a reduction of $800.7 million
from a year ago and a reduction of $1.9 billion since January 2000
(Table 5).
Fiscal Year 2005 Results
For the full 2005 fiscal year, sales increased 7.3% to $60.6 billion.
Identical supermarket sales increased 5.3% with fuel and 3.5% without fuel.
Net earnings for fiscal 2005 were $958.0 million, or $1.31 per diluted
share. For fiscal 2004, Kroger reported a net loss of $104.2 million, or
$0.14 per diluted share.
"Thanks to the hard work and dedication of our associates, Kroger
delivered a strong performance in 2005 that exceeded our original
expectations, including both sales and earnings," said Mr. Dillon.
Guidance
Over the past several years, Kroger has been transitioning its business
model to meet the changing needs and expectations of our customers. This
strategic plan requires a balance among several elements - including sales,
earnings, and capital investment - and is driven by strong, sustainable
identical sales growth. Kroger plans to grow identical sales through
merchandising and operating initiatives that improve the shopping experience
and build customer loyalty. These initiatives will be funded by operating
cost reductions and productivity improvements. As a result of this strategy,
Kroger expects to deliver earnings per share growth in 2006 and 2007 of 6 - 8%
per year. In addition, shareholder value will be enhanced by the yield
associated with the cash dividend announced earlier today.
The estimated range for earnings per share growth in fiscal 2006 includes
the effect of beginning to recognize stock option expense, which is largely
offset by the benefit of a 53rd week in fiscal 2006. Krogers earnings per
share growth will be driven by strong identical sales, slightly improving
operating margins, and share repurchases.
For fiscal 2006, Kroger also expects:
- To achieve identical supermarket sales growth in excess of 3.5%,
excluding fuel sales.
- To recognize stock option expense of approximately $0.05 - $0.06 per
diluted share. Stock option expense will affect each quarter of the
fiscal year.
- To invest $1.7 - $1.9 billion in capital projects, excluding
acquisitions. While the Company continues to focus on remodels, square
footage is expected to grow by 1.5 - 2.0% (before acquisitions and
operational closings) with an emphasis on large, fast-growing markets.
"We believe that Krogers 2006 strategic plan is a balanced approach that
will allow Kroger to meet the wide-ranging needs and expectations of
customers. This, in turn, will position the Company to deliver value to our
shareholders in the form of a strong business model that produces solid,
sustainable growth in both earnings and the dividend announced earlier today,"
Mr. Dillon said.
Initiation of Cash Dividend
Kroger today announced that its Board of Directors has adopted a dividend
policy and declared the payment of a quarterly dividend of $0.065 per share.
The Company reiterated its commitment to Krogers long-term financial strategy
of using one-third of free cash flow for debt reduction and two-thirds for
share repurchase and the payment of a cash dividend.
Headquartered in Cincinnati, Ohio, Kroger is one of the nations largest
retail grocery chains. At the end of fiscal 2005, the Company operated
(either directly or through its subsidiaries) 2,507 supermarkets and multi-
department stores in 31 states under two dozen local banners including Kroger,
Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smiths and Smiths
Marketplace, Frys and Frys Marketplace, Dillons, QFC and City Market.
Kroger also operated (either directly or through subsidiaries, franchise
agreements, or operating agreements) 791 convenience stores, 428 fine jewelry
stores, 579 supermarket fuel centers and 42 food processing plants. For more
information about Kroger, please visit our web site at http://www.kroger.com/.
This press release contains certain forward-looking statements about the
future performance of the Company. These statements are based on managements
assumptions and beliefs in light of the information currently available to it.
Such statements are indicated by the words "plans," "will," "expects," and
"commitment." These forward-looking statements are subject to uncertainties
and other factors that could cause actual results to differ materially. Our
ability to achieve the expected increases in sales, earnings and dividends
could be adversely affected by the competitive environment in which we
operate. In addition any labor dispute, delays in opening new stores, or
changes in the economic climate could cause us to fall short of our sales and
earnings targets. In addition, increases in sales of our corporate brand
products and the "sister store" impact of our new store openings, could
adversely affect identical store sales. Our ability to increase same store
sales could be adversely affected by increased competition and sales shifts to
other stores that we operate, as well as the success of our merchandising and
operating initiatives geared, among other things, at reducing costs and
improving productivity. The payment of future dividends is dependent upon the
Companys financial condition permitting the payment under Ohio law; its
operations continuing to generate sufficient free cash flow to warrant the
payment of a dividend and market conditions and applicable laws and
regulations making payment of a dividend appropriate. Any future dividend
payments will depend upon the judgment of the Board, based upon the best
interests of the Company, its shareholders and other constituents, and will be
made only at the Boards discretion. Our capital expenditures could vary if
we are unsuccessful in acquiring suitable sites for new stores, if development
costs exceed those budgeted, or if our logistics and technology projects are
not completed in the time frame expected or on budget. We anticipate
expensing stock options during the fiscal year, as generally accepted
accounting principles as currently in effect would require us to do so. Our
estimated expense of $0.05-$0.06 per diluted share, from the adoption of stock
option expensing, could vary if the assumptions that we used to calculate the
expense prove to be inaccurate. The Companys long-term strategy of using
one-third of free cash flow for debt reduction and two-thirds for share
repurchase and the payment of a dividend will depend on our ability to
generate sales and to reduce costs and manage our gross margin, as well as our
ability to manage our working capital. We assume no obligation to update the
information contained herein. Please refer to Krogers reports and filings
with the Securities and Exchange Commission for a further discussion of these
risks and uncertainties.
Note: Krogers quarterly conference call with investors will be broadcast
live via the Internet at 10 a.m. (ET) on March 7, 2006 at
http://www.thekrogerco.com/finance/financialinfo_investorconferencecalls.htm
and http://www.streetevents.com. An on-demand replay of the webcast will be
available from approximately 1 p.m. (ET) today through March 17, 2006.
Table 1.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
FOURTH QUARTER
2005 2004
SALES $14,719.5 100.00% $13,695.3 100.00%
MERCHANDISE COSTS, INCLUDING
ADVERTISING, WAREHOUSING AND
TRANSPORTATION (a), AND
LIFO CHARGE (b) 11,062.0 75.15 10,279.6 75.06
OPERATING, GENERAL AND
ADMINISTRATIVE (a) 2,645.9 17.98 2,514.2 18.36
RENT 147.5 1.00 155.5 1.14
DEPRECIATION 295.6 2.01 306.2 2.24
GOODWILL IMPAIRMENT CHARGE (c) - 0.00 903.8 6.60
OPERATING PROFIT (LOSS) 568.5 3.86 (464.0) -3.39
INTEREST (d) 116.4 0.79 115.5 0.84
EARNINGS (LOSS) BEFORE TAX
EXPENSE 452.1 3.07 (579.5) -4.23
TAX EXPENSE 170.0 1.15 72.6 0.53
NET EARNINGS (LOSS) $282.1 1.92% $(652.1) -4.76%
NET EARNINGS (LOSS) PER BASIC
COMMON SHARE $0.39 $(0.89)
SHARES USED IN BASIC
CALCULATION 723.9 730.2
NET EARNINGS (LOSS) PER
DILUTED COMMON SHARE $0.39 $(0.89)
SHARES USED IN DILUTED
CALCULATION (e) 730.3 730.2
Table 1.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
YEAR TO DATE
2005 2004
SALES $60,552.9 100.00% $56,434.4 100.00%
MERCHANDISE COSTS, INCLUDING
ADVERTISING, WAREHOUSING AND
TRANSPORTATION (a), AND
LIFO CHARGE (b) 45,564.7 75.25 42,162.9 74.71
OPERATING, GENERAL AND
ADMINISTRATIVE (a) 11,025.6 18.21 10,589.1 18.76
RENT 661.4 1.09 680.2 1.21
DEPRECIATION 1,265.3 2.09 1,255.6 2.22
GOODWILL IMPAIRMENT CHARGE (c) - 0.00 903.8 1.60
OPERATING PROFIT (LOSS) 2,035.9 3.36 842.8 1.49
INTEREST (d) 510.4 0.84 557.0 0.99
EARNINGS (LOSS) BEFORE TAX
EXPENSE 1,525.5 2.52 285.8 0.51
TAX EXPENSE 567.5 0.94 390.0 0.69
NET EARNINGS (LOSS) $958.0 1.58% $(104.2) -0.18%
NET EARNINGS (LOSS) PER BASIC
COMMON SHARE $1.32 $(0.14)
SHARES USED IN BASIC
CALCULATION 724.5 736.4
NET EARNINGS (LOSS) PER
DILUTED COMMON SHARE $1.31 $(0.14)
SHARES USED IN DILUTED
CALCULATION (e) 731.2 736.4
Note: Certain prior-year amounts have been reclassified to conform to
current-year presentation. Certain per share amounts and percentages may
not sum due to rounding.
(a) Merchandise costs and operating, general and administrative expenses
exclude depreciation expense and rent expense which are included in
separate expense lines.
(b) LIFO charges of $0.5 and $17.9 were recorded in the fourth quarter of
2005 and 2004, respectively. For the year-to-date period, LIFO
charges of $27.4 and $48.8 were recorded in 2005 and 2004,
respectively.
(c) An impairment charge totaling $903.8, pre-tax, was recorded in the
fourth quarter of 2004, as a result of the Companys annual review of
goodwill for impairment.
(d) Year-to-date 2004 includes a $24.7 debt prepayment premium on the
call of $750.0, 7.375% bonds.
(e) For the quarter and year ended January 29, 2005, there were options
outstanding that were excluded from the calculation of diluted
earnings per share because their inclusion would have had an anti-
dilutive effect on the loss per share.
Table 2.
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(in millions)
(unaudited)
January 28, January 29,
2006 2005
ASSETS
Current Assets
Cash $132.8 $144.1
Cash - Temporary investments 62.6 -
Store deposits in-transit 503.2 506.4
Receivables 686.1 827.7
Inventories 4,485.7 4,356.2
Prepaid and other current assets 596.0 571.2
Total current assets 6,466.4 6,405.6
Property, plant and equipment, net 11,364.6 11,496.5
Goodwill, net 2,192.3 2,190.6
Other assets 459.2 398.0
Total Assets $20,482.5 $20,490.7
LIABILITIES AND SHAREOWNERS EQUITY
Current liabilities
Current portion of long-term debt,
at face value, including capital
leases and lease-financing obligations $554.4 $71.0
Accounts payable 3,550.4 3,597.4
Accrued salaries and wages 741.6 659.0
Deferred income taxes 217.2 286.3
Other current liabilities 1,651.5 1,721.8
Total current liabilities 6,715.1 6,335.5
Long-term debt including capital
leases and lease-financing obligations
Long-term debt, at face value 6,651.0 7,829.8
Adjustment to reflect fair value
interest rate hedges 27.3 69.9
Long-term debt including capital
leases and lease-financing obligations 6,678.3 7,899.7
Deferred income taxes 842.6 840.8
Other long-term liabilities 1,856.3 1,796.1
Total Liabilities 16,092.3 16,872.1
Shareowners equity 4,390.2 3,618.6
Total Liabilities and
Shareowners Equity $20,482.5 $20,490.7
Total common shares outstanding at
end of period 722.7 728.9
Total diluted shares year to date 731.2 736.4
Note: Certain prior-year amounts have been reclassified to conform to
current-year presentation.
Table 3.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
YEAR TO DATE
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $958.0 $(104.2)
Adjustment to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 1,265.3 1,255.6
LIFO charge 27.4 48.8
Goodwill impairment charge - 861.0
Deferred income taxes (63.2) 229.5
Other 38.3 58.8
Changes in operating assets and
liabilities, net of effects
of acquisitions:
Store deposits in-transit 3.3 72.2
Receivables (19.1) 13.4
Inventories (157.0) (236.1)
Prepaid expenses 31.5 (31.2)
Accounts payable (79.8) 166.7
Accrued expenses 161.8 104.3
Income tax payables and
receivables 199.9 (85.7)
Contribution to company
sponsored pension plan (300.0) (35.0)
Other long-term liabilities 110.8 11.4
Net cash provided by operating activities 2,177.2 2,329.5
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,306.5) (1,614.6)
Proceeds from sale of assets 69.2 86.3
Other (42.1) (79.0)
Net cash used by investing activities (1,279.4) (1,607.3)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 13.8 614.8
Proceeds from lease-financing transactions 76.0 6.0
Payments for long-term debt (102.9) (1,009.8)
Borrowings (payments) on bank revolver (694.3) -
Proceeds from issuance of common stock 77.6 25.4
Treasury stock purchases (251.8) (318.7)
Increase (decrease) in book overdrafts 35.1 (25.2)
Other - (29.5)
Net cash used by financing activities (846.5) (737.0)
NET INCREASE (DECREASE) IN CASH 51.3 (14.8)
CASH AT BEGINNING OF YEAR 144.1 158.9
CASH AT END OF QUARTER $195.4 $144.1
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest $520.8 $589.8
Cash paid during the year for
income taxes $430.6 $206.1
Note: Certain prior-year amounts have been reclassified to conform to
current-year presentation.
Table 4. Supplemental Sales Information
(in millions, except percentages)
(unaudited)
Items identified below should not be considered as alternatives to sales
or any other GAAP measure of performance. Identical and comparable
supermarket sales are industry-specific measures and it is important to
review them in conjunction with Krogers financial results reported in
accordance with GAAP. Other companies in our industry may calculate
identical or comparable sales differently than Kroger does, limiting the
comparability of these measures.
IDENTICAL SUPERMARKET SALES (a)
FOURTH QUARTER
2005 2004
INCLUDING FUEL CENTERS $13,261.5 $12,491.4
EXCLUDING FUEL CENTERS $12,518.4 $11,954.5
INCLUDING FUEL CENTERS 6.2% 2.1%
EXCLUDING FUEL CENTERS 4.7% 0.8%
COMPARABLE SUPERMARKET SALES (b)
FOURTH QUARTER
2005 2004
INCLUDING FUEL CENTERS $13,557.9 $12,712.3
EXCLUDING FUEL CENTERS $12,787.0 $12,170.2
INCLUDING FUEL CENTERS 6.7% 2.6%
EXCLUDING FUEL CENTERS 5.1% 1.2%
(a) Kroger defines a supermarket as identical when it has been open
without expansion or relocation for five full quarters and is not
scheduled to be closed.
(b) Kroger defines a supermarket as comparable when it has been open for
five full quarters, including expansions and relocations, and is not
scheduled to be closed.
Table 5. Reconciliation of Total Debt to Net Total Debt
(in millions)
(unaudited)
Net total debt should not be considered an alternative to any GAAP measure
of performance or liquidity. Management believes net total debt is an
important measure of liquidity. Net total debt should be reviewed in
conjunction with Krogers financial results reported in accordance with
GAAP.
The following table provides a reconciliation of total debt to net total
debt and compares the balance in the fourth quarter of 2005 to the
balances in the fourth quarters of 2004 and 1999.
January 28, January 29, January 29,
2006 2005 Change 2000 Change
Current portion of
long-term debt, at face
value, including capital
leases and lease-
financing obligations $554.4 $71.0 $483.4 $591.5 $(37.1)
Long-term debt, at face
value, including capital
leases and lease-
financing obligations 6,651.0 7,829.8 (1,178.8) 8,422.5 (1,771.5)
Adjustment to reflect
fair value interest
rate hedges 27.3 69.9 (42.6) - 27.3
Total debt $7,232.7 $7,970.7 $(738.0) $9,014.0 $(1,781.3)
Temporary cash
investments (62.6) - (62.6) - (62.6)
Investments in debt
securities - - - (68.8) 68.8
Prepaid employee
benefits (300.1) (300.0) (0.1) (200.0) (100.1)
Net total debt $6,870.0 $7,670.7 $(800.7) $8,745.2 $(1,875.2)
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