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Kroger Reports Third Quarter 2019 Results
Ohio Ag Connection - 12/09/2019

The Kroger Co. reported its third quarter 2019 results and provided a Restock Kroger progress update on the company's three-year transformation plan.

Chairman and CEO Rodney McMullen said, "Kroger's customer obsession and focus on operational excellence continued to generate positive results in the third quarter. Identical sales were the strongest since we started Restock Kroger and gross margin rate, excluding fuel and pharmacy, improved slightly in the quarter. At the same time, we continued to reduce costs as a percentage of sales. We are using the power of Kroger's stable and growing supermarket business to create meaningful incremental operating profit through the alternative profit stream businesses, which adds up to a business built for long-term growth that generates consistently attractive total shareholder returns. Kroger continues to generate strong and durable free cash flow as reflected by the fact that the company has reduced debt by $1.5 billion over the prior four quarters and continues to increase its dividend to create shareholder value. Restock Kroger is the right framework to reposition our business to create value for all of our stakeholders, both today and in the future."

Total company sales were $28.0 billion in the third quarter, compared to $27.8 billion for the same period last year. Excluding fuel and dispositions, sales grew 2.7%.

Gross margin was 22.1% of sales for the third quarter. The FIFO gross margin rate excluding fuel decreased 24 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 the quarter was $23 million, compared to $12 million for the same period last year, driven by higher inflation in dry grocery, pharmacy and dairy.

The Operating, General & Administrative rate decrease of 15 basis points is due to broad based improvement of Restock Kroger cost savings initiatives.

Third quarter results include an out-of-period charge of $29 million related to an adjustment for a provision of a pharmacy contract. This amount reduced third quarter adjusted net earnings per diluted share by $0.03. There is no effect on earnings guidance as a result of this contract going forward.

As a result of a portfolio review, Kroger has decided to divest its interest in Lucky's Market and recognized a non-cash impairment charge of $238 million in the third quarter, and the portion of this charge attributable to Kroger is $131 million.

The income tax rate for the third quarter was 35.6%. The income tax rate is higher than the adjusted income tax rate because a portion of the non-cash impairment charge related to Lucky's Market is not attributable to Kroger.

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 actively balances the use of its cash flow to achieve these goals.

Consistent with its financial strategy, Kroger reduced net total debt by $1.5 billion over the last four quarters. Kroger's net total debt to adjusted EBITDA ratio is 2.50, compared to 2.72 a year ago (see Table 5). The company's net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50.

As a result of being within its targeted debt range, Kroger plans to initiate share repurchases in the fourth quarter under its $1 billion board authorization.

Earlier this year, Kroger increased the dividend by 14 percent, marking the 13th consecutive year of dividend increases.

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