The Kroger Co. reported its fourth quarter and Fiscal Year 2019 results March 5 and updated investors on how the Restock Kroger framework is repositioning the company to create value for shareholders, customers and associates.
“We are pleased with our 2019 results and improving trends in our supermarket business,” said Kroger Chairman and CEO Rodney McMullen. “We delivered on our commitments for ID sales without fuel, adjusted FIFO operating profit and cost savings in addition to generating over $100 million of incremental operating profit through alternative profit streams in 2019. We also delivered strong adjusted free cash flow during the year, consistent with the total shareholder return model outlined at our Investor Day.”
He said the way the company “delivered the year” is consistent with its long-term financial model and sets Kroger up to connect with customers in a deeper way.
“Restock Kroger is the right strategic framework to position the company for sustainable growth in the future, continue to improve the core business and deliver strong total shareholder return. This transformational foundation supports our competitive moats today—Fresh, Our Brands and Personalization—as well as building a seamless ecosystem of the future,” McMullen said.
Capital allocation strategy
Kroger’s capital allocation strategy is to use its adjusted free cash flow to invest in the business and drive profitable growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its adjusted free cash flow to achieve these goals.
Kroger reduced net total debt by $1.1 billion over the last four quarters. Kroger’s net total debt to adjusted EBITDA ratio is 2.48, compared to 2.83 a year ago. The company’s net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50.
In total, Kroger returned $951 million to shareholders in 2019.
Kroger repurchased $400 million shares in the fourth quarter of 2019 under its $1 billion board authorization announced Nov. 5, 2019.
In 2019, Kroger increased the dividend by 14 percent, from 56 cents to 64 cents per year, marking the 13th consecutive year of dividend increases, which resulted in a payout of $486 million. The company’s quarterly dividend has grown at a double-digit compound annual growth rate since it was reinstated in 2006. The company continues to expect, subject to board approval, an increasing dividend over time.
Total company sales were $28.9 billion in the fourth quarter, compared to $28.3 billion for the same period last year. Excluding fuel and dispositions, sales grew 2.3 percent.
Gross margin was 22.1 percent of sales for the fourth quarter. The FIFO gross margin rate excluding fuel increased six basis points. This increase resulted from improvement in costs of goods, accelerating alternative profit streams and cycling of investments that were disclosed in the fourth quarter of 2018, partially offset by investments in price and personalization, continued industry-wide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business.
LIFO charge for the quarter was $36 million, compared to a LIFO credit of $10 million for the same period last year. This increase was driven by higher inflation in dry grocery, pharmacy and dairy.
The Operating, General and Administrative rate without fuel and adjustment items decrease of 79 basis points is due to broad-based improvement in Restock Kroger cost savings initiatives and cycling of investments in OG&A disclosed in the fourth quarter of last year.
In the fourth quarter, Kroger recognized an impairment charge related to the planned closing of 35 stores across the footprint in 2020. This impairment charge is reflected in the $52 million of transformation costs recognized during the fourth quarter. There is no effect on adjusted net earnings per diluted share or adjusted free cash flow guidance for 2020 as a result of this charge.
As a consequence of the Lucky’s Market bankruptcy proceeding, Kroger reported a non-cash charge of $174 million in the quarter and deconsolidated Lucky’s Market from its consolidated financial statements. There is no effect on adjusted net earnings per diluted share or adjusted free cash flow guidance for 2020 as a result of this charge.
The income tax rate for the fourth quarter was 18.2 percent compared to 20.8 percent for the same period last year. This decrease resulted from an increase in tax deductions.
Total company sales were $122.3 billion in 2019. Excluding fuel, dispositions and merger transactions, total sales grew 2.3 percent.
Gross margin was 22.1 percent of sales for 2019. The FIFO gross margin rate excluding fuel decreased 23 basis points, primarily driven by industry-wide lower gross margin rates in pharmacy and continued growth in the specialty pharmacy business. Gross margin rate excluding fuel and pharmacy improved slightly.
LIFO charge for 2019 was $105 million, compared to $29 million in 2018. This increase was driven by higher inflation in dry grocery, pharmacy and dairy.
The OG&A rate without fuel and adjustment items decrease of 29 basis points is due to broad based improvement of Restock Kroger cost savings initiatives.
The income tax rate for 2019 was 23.7 percent compared to 22.6 percent for the same period last year. The income tax rate is higher compared to prior year because a portion of the non-cash impairment charge in the third quarter of 2019 related to Lucky’s Market is not attributable to Kroger and therefore not deductible by Kroger.
Kroger’s 2020 guidance does not include any potential impact related to the Coronavirus.
Fourth quarter 2019 Restock Kroger highlights
- Our Brands achieved its best year ever, exceeding $23.1 billion in sales. Introduced 39 new Our Brands plant-based products in 2019;
- Private Selection brand eclipsed $2 billion in sales for the first time and is Kroger’s third $2-billion-dollar brand; and
- Expanded to 1,989 pickup locations and 2,385 delivery locations, covering 97 percent of Kroger households.
Partner for customer value
- Named the location of an additional Kroger-Ocado customer fulfillment center in Maryland;
- Formed Group Purchasing Organization with Walgreens; and
- Kroger Precision Marketing (KPM), achieved TAG Platinum Certification from the Trustworthy Accountability Group (TAG), recognizing KPM as a digital marketing leader for achieving rigorous certifications in all program areas. KPM is the first retail media platform to reach this milestone.
Continued investment in Kroger associate wages has increased Kroger’s average hourly wage to $15 an hour in 2019, with average hourly rate now more than $20 per hour with comprehensive benefits factored in, benefits that many competitors don’t offer;
- Made significant investments in educational assistance program, Feed Your Future. Since inception, the program has impacted more than 5,000 associates, with hourly associates making up 87 percent of those who have taken advantage of this program so far; and
- Achieved record employee retention in one of the tightest labor markets in years.
Live Kroger’s purpose
- Achieved a 100 percent score on the Human Rights Campaign’s Corporate Equality Index for the second year in a row in 2019;
- Recognized as one of America’s top corporation for women-owned businesses for the sixth year in a row and received the silver award for the first time in the company’s history; and
- Selected as one of “America’s Top 50 Corporations for Multicultural Business Opportunities” in recognition of Kroger’s commitment to inclusion by Omnikal.
Kroger’s fourth quarter 2019 ended on Feb. 1, 2020.