Why did Kroger report a net loss in 2004 and a profit in 2005?

The 2004 net loss of $104 million reflected a $904 million pre-tax, non-cash goodwill impairment charge at the Ralphs and Food 4 Less divisions, which followed the 2003 southern California labor dispute. In 2005 no goodwill impairment was recorded, and net earnings rose to $958 million as sales growth leveraged fixed costs and the southern California market recovered.

Will Kroger's stock options expense affect 2006 earnings?

Yes. Kroger expects the adoption of SFAS No. 123R, which requires expensing of stock options beginning in the first quarter of 2006, to reduce net earnings by approximately $0.05 to $0.06 per diluted share in fiscal 2006. The company still expects 2006 earnings per share growth of approximately 6% to 8%, including the effect of a 53rd week.

What are the main risks from labor relations and pensions?

Kroger has approximately 325 collective bargaining agreements, and a prolonged work stoppage at a substantial number of stores could have a material effect on results. The company also states that rising health care and pension costs are important negotiation issues, and that its share of multi-employer plan underfunding of $1.0 to $1.3 billion pre-tax could lead to increased contributions and a substantial withdrawal liability if it exits markets.

How much debt does Kroger carry and how is it being reduced?

Total debt was $7.2 billion at year-end 2005, down $739 million from $8.0 billion a year earlier, primarily from using operating cash flow to reduce borrowings. The company had no outstanding borrowings under its credit agreements or commercial paper program at January 28, 2006, and it was in compliance with its financial covenants.

What legal proceedings could affect Kroger?

A federal grand jury indicted Ralphs Grocery Company, a wholly-owned subsidiary, over hiring practices during the 2003-2004 southern California labor dispute, with trial set for August 15, 2006, and the grand jury continues to investigate whether additional parties, including Kroger, should be held liable. The company states that management does not expect the ultimate resolution of this matter to have a material effect on its financial condition.

KR 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 7, 2006. Cited figures are marked; the original filing is the authoritative source.

The Kroger Co. reported fiscal 2005 (52 weeks ended January 28, 2006) net earnings of $958 million^a, or $1.31 per diluted share, compared with a net loss of $104 million in 2004, which included a $904 million goodwill impairment charge.

Sales rose to $60.55 billion^b from $56.43 billion, and identical supermarket sales excluding fuel grew 3.5%, up from 0.8% in 2004. The company operated 2,507 supermarkets, 791 convenience stores and 428 fine jewelry stores, and reported that it holds the #1 or #2 position in 35 of its 44 major markets. Cash flow from operations was $2.19 billion, capital expenditures were $1.31 billion, and total debt was reduced by $739 million to $7.2 billion.

Shareowners' equity increased to $4.39 billion^c. The company declared its first quarterly dividend of $0.065 per share, payable June 1, 2006, after paying no dividends in the prior three fiscal years, and it guided to 2006 earnings per share growth of approximately 6% to 8%, including an expected $0.05 to $0.06 per diluted share reduction from expensing stock options.

Key risks in the filing include intense price competition, 325 collective bargaining agreements with about 85 expiring in 2006, and Kroger's estimated share of multi-employer pension underfunding of $1.0 to $1.3 billion^d pre-tax. Legal matters include a federal indictment of its Ralphs subsidiary related to the 2003-2004 southern California labor dispute, with trial set for August 15, 2006; management does not expect a material effect on financial condition.

02—Key points

Key Highlights

Net earnings of $958 million ($1.31 per diluted share) in fiscal 2005, versus a net loss of $104 million in fiscal 2004.
Identical supermarket sales excluding fuel grew 3.5% in 2005, up from 0.8% in 2004, with positive identical sales growth for ten consecutive quarters.
Total sales reached $60.55 billion, up from $56.43 billion, with food store fuel sales rising 53.0%.
Total debt fell $739 million to $7.2 billion, and operating cash flow was $2.19 billion against $1.31 billion in capital expenditures.
The company declared its first quarterly dividend of $0.065 per share after no cash dividends in the prior three fiscal years, and repurchased 15 million shares for $252 million in 2005.
2006 guidance calls for earnings per share growth of approximately 6% to 8% and identical food store sales growth, excluding fuel, above 3.5%.
Kroger's estimated share of underfunding in multi-employer pension plans is $1.0 to $1.3 billion pre-tax, and approximately 325 labor agreements exist, with about 85 expiring in 2006.

03—Questions

Frequently Asked Questions

Why did Kroger report a net loss in 2004 and a profit in 2005?
The 2004 net loss of $104 million reflected a $904 million pre-tax, non-cash goodwill impairment charge at the Ralphs and Food 4 Less divisions, which followed the 2003 southern California labor dispute. In 2005 no goodwill impairment was recorded, and net earnings rose to $958 million as sales growth leveraged fixed costs and the southern California market recovered.
Will Kroger's stock options expense affect 2006 earnings?
Yes. Kroger expects the adoption of SFAS No. 123R, which requires expensing of stock options beginning in the first quarter of 2006, to reduce net earnings by approximately $0.05 to $0.06 per diluted share in fiscal 2006. The company still expects 2006 earnings per share growth of approximately 6% to 8%, including the effect of a 53rd week.
What are the main risks from labor relations and pensions?
Kroger has approximately 325 collective bargaining agreements, and a prolonged work stoppage at a substantial number of stores could have a material effect on results. The company also states that rising health care and pension costs are important negotiation issues, and that its share of multi-employer plan underfunding of $1.0 to $1.3 billion pre-tax could lead to increased contributions and a substantial withdrawal liability if it exits markets.
How much debt does Kroger carry and how is it being reduced?
Total debt was $7.2 billion at year-end 2005, down $739 million from $8.0 billion a year earlier, primarily from using operating cash flow to reduce borrowings. The company had no outstanding borrowings under its credit agreements or commercial paper program at January 28, 2006, and it was in compliance with its financial covenants.
What legal proceedings could affect Kroger?
A federal grand jury indicted Ralphs Grocery Company, a wholly-owned subsidiary, over hiring practices during the 2003-2004 southern California labor dispute, with trial set for August 15, 2006, and the grand jury continues to investigate whether additional parties, including Kroger, should be held liable. The company states that management does not expect the ultimate resolution of this matter to have a material effect on its financial condition.

04—Continue

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