01—Abstract
Summary
Summary of the 10-K filed March 28, 2017. Cited figures are marked; the original filing is the authoritative source.
The Kroger Co. reported fiscal 2016 (52 weeks ended January 28, 2017) sales of $115.34 billiona, up 5.0% from $109.83 billion in 2015, driven mainly by supermarket sales without fuel and the ModernHEALTH merger, partly offset by lower fuel sales.
Diluted net earnings per share were $2.05b, down 0.5% from $2.06, and adjusted net earnings per diluted share, excluding $111 million of pre-tax charges for restructuring multi-employer pension obligations, were $2.12, up 2.9%. Operating profit was $3.44 billion versus $3.58 billion in 2015, and net cash provided by operating activities was $4.27 billion versus $4.92 billion. Identical supermarket sales excluding fuel rose 1.0%, and the company returned $2.2 billion to shareholders through share repurchases and dividends during 2016.
The filing highlights ongoing pressure from intense price competition and a deflationary operating environment. Management estimates Kroger's share of underfunding in multi-employer pension plans at approximately $3.0 billionc pre-tax ($1.8 billion after-tax), and expects about $360 million of contributions to those plans in 2017. Total debt rose to $14.1 billion, and the Leverage Ratio was 2.27 to 1 against a 3.50 to 1 covenant limit.
For 2017, management guides to net earnings of $2.21 to $2.25d per diluted share, identical supermarket sales growth excluding fuel of flat to 1.0%, and capital investments of $3.2 to $3.5 billion. Subsequent events include a Voluntary Retirement Offering accepted by approximately 1,300 non-store associates, with a pre-tax charge of approximately $180 million expected in the first quarter of 2017. The board also approved an additional $500 million share repurchase authority on March 9, 2017.
02—Key points
Key Highlights
- Sales of $115.34 billion in 2016, up 5.0% from $109.83 billion in 2015, with total supermarket sales without fuel up 6.1%.
- Diluted EPS of $2.05 (down 0.5% from $2.06); adjusted diluted EPS of $2.12, up 2.9%, excluding $111 million of pre-tax multi-employer pension restructuring charges.
- Operating profit of $3.44 billion, down from $3.58 billion; FIFO operating profit margin of 3.00% versus 3.28% in 2015.
- Identical supermarket sales excluding fuel increased 1.0%, with product cost deflation of 0.8% cited as a headwind.
- Estimated share of multi-employer pension underfunding of approximately $3.0 billion pre-tax, with about $360 million of 2017 contributions expected.
- Returned $2.2 billion to shareholders in 2016 through share repurchases and dividends; an additional $500 million repurchase authority was approved March 9, 2017.
- 2017 guidance: net earnings of $2.21 to $2.25 per diluted share, including about $0.09 from the 53rd week, and capital investments of $3.2 to $3.5 billion.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Kroger kept $0.02.
- Revenue$115.34B100.0%
- Cost of revenue−$89.50B77.6%
- Gross profit$25.84B22.4%
- Operating costs−$22.38B19.4%
- Operating income$3.45B3.0%
- Interest, other & tax−$1.48B1.3%
- Net income$1.98B1.7%
Where FY2017 revenue went
$115.34B- Cost of revenue: $89.50B, 78% of revenue
- Operating costs: $22.38B, 19% of revenue
- Net income: $1.98B, 1.7% of revenue
- Interest, other & tax: $1.48B, 1.3% of revenue
Kept 1.7% as net incomeNet income $1.98B · 1.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed March 28, 2017Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $115.34B$109.83B | +5.0% |
| Cost of Revenue | $89.50B$85.50B | +4.7% |
| Gross Profit | $25.84B$24.33B | +6.2% |
| Operating Income | $3.45B$3.58B | −3.5% |
| Interest Expense | $522.00M$482.00M | +8.3% |
| Net Income | $1.98B$2.04B | −3.1% |
| EPS (Basic) | $2.08$2.09 | −0.5% |
| EPS (Diluted) | $2.05$2.06 | −0.5% |
| Shares Outstanding (Basic) | 942.00M966.00M | −2.5% |
| Shares Outstanding (Diluted) | 958.00M980.00M | −2.2% |
05—Questions
Frequently Asked Questions
What drove the increase in Kroger's 2016 sales?
Total sales rose 5.0%, primarily from the increase in total supermarket sales without fuel (up 6.1%) and the ModernHEALTH merger, partly offset by a 5.6% decrease in fuel sales caused by a 9.4% decline in the average retail fuel price. Supermarket sales without fuel also benefited from the Roundy's merger, increased square footage and identical supermarket sales growth of 1.0% excluding fuel.
Why did adjusted earnings grow faster than reported earnings in 2016?
Reported diluted EPS of $2.05 included $111 million of pre-tax charges ($71 million after-tax, or $0.07 per diluted share) related to restructuring certain multi-employer pension obligations. Excluding these adjusted items, diluted EPS was $2.12, a 2.9% increase from $2.06 in 2015. The increase resulted primarily from a lower LIFO charge, lower income tax expense and fewer weighted average shares outstanding.
How much debt does Kroger carry, and is it at risk of covenant breach?
Total debt, including capital and financing lease obligations, increased $2.0 billion to $14.1 billion as of year-end 2016. The Leverage Ratio was 2.27 to 1 against a maximum of 3.50 to 1, and the Fixed Charge Coverage Ratio was 4.75 to 1 against a minimum of 1.70 to 1. The company stated it was in compliance with its financial covenants at year-end 2016.
What are the main risks to Kroger's future earnings identified in the filing?
The filing cites intense price competition, aggressive expansion and entry of non-traditional competitors, along with labor relations risks tied to approximately 366 collective bargaining agreements. It also highlights underfunded multi-employer pension plans, which could raise contributions or trigger withdrawal liabilities, as well as cyber-security risks, fuel sales volatility, and the effects of economic conditions and weather.
What guidance did Kroger give for 2017?
For 2017, Kroger expects net earnings of $2.21 to $2.25 per diluted share, including an estimated $0.09 from the 53rd week. It expects identical supermarket sales growth excluding fuel of flat to 1.0%, FIFO operating margin excluding fuel to decline about 10 basis points, capital investments of $3.2 to $3.5 billion, and an effective tax rate of about 35%.
06—Continue