Kroger Sales Up, But Net Down on Pension Costs
CINCINNATI, Ohio, March 1, 2012 – The Kroger Co. (NYSE: KR) today reported total sales, including fuel, increased 7.7% to $21.4 billion in the fourth quarter of fiscal 2011 compared with $19.9 billion for the same period last year. In the fourth quarter, which ended on January 28, 2012, total sales, excluding fuel, increased 5.0% over the same period last year.
Identical supermarket sales, without fuel, increased 4.9% in the fourth quarter over the same period last year.
Excluding the effect of the UFCW pension plan consolidation announced in December, adjusted earnings for the quarter were $283.8 million, or $0.50 per diluted share. Including the effect of the UFCW pension plan consolidation, Kroger reported a net loss for the fourth quarter that totaled $(306.9) million, or $(0.54) per diluted share. Net earnings in the same period last year were $278.8 million, or $0.44 per diluted share.
“We are very pleased with Kroger’s outstanding performance in fiscal year 2011 and strong fourth quarter financial results,” said David B. Dillon, Kroger’s chairman and chief executive officer. “Our Customer 1st strategy is delivering value for our customers, who are rewarding Kroger with their loyalty. Customer loyalty, in turn, is driving sales and shareholder returns.”
Details of Fourth Quarter 2011 Results
FIFO gross margin, as reported, was 21.13% of sales for the fourth quarter of fiscal 2011. Excluding retail fuel operations, FIFO gross margin decreased 47 basis points from the same period last year.
Kroger recorded a $73.4 million LIFO charge during the quarter compared to $18.8 million in the same quarter last year. Excluding retail fuel sales, the LIFO charge increased 30 basis points as a percentage of sales.
Excluding retail fuel operations and the UFCW pension plan consolidation charge, operating, general and administrative (OG&A) costs, rent and depreciation declined a total of 21 basis points from the same quarter last year. OG&A declined 8 basis points, rent declined 3 basis points and depreciation declined 10 basis points. Positive identical sales growth, good cost control and productivity improvements offset an increase in incentive plan expense compared to the fourth quarter last year and the continued challenge of rising health care and pension costs and rising debit and credit card fees.
Fiscal Year 2011 Results
For fiscal year 2011, total sales increased 10.2% to $90.4 billion compared with $82.0 billion for fiscal year 2010. Excluding fuel sales, total sales increased 5.0% over the same period last year. Identical supermarket sales, without fuel, increased 4.9% in fiscal year 2011 compared with the prior fiscal year
Excluding the effect of the UFCW pension plan consolidation, earnings for fiscal year 2011 were $1.2 billion, or $2.00 per diluted share. Including the effect of the UFCW pension plan consolidation, fiscal year 2011 earnings were $602.1 million or $1.01 per diluted share. Net earnings for fiscal year 2010 were $1.1 billion, or $1.74 per diluted share.
Inflation continued at a rate higher than expected during the 4th quarter, resulting in a final full year LIFO charge of approximately $216 million. At the end of the 3rd quarter of fiscal 2011, Kroger projected the full year LIFO charge to be $185 million.
FIFO operating margin, excluding fuel and the UFCW pension plan consolidation charge, increased by 5 basis points for fiscal year 2011.
“Kroger increased identical sales, grew market share and invested wisely to continue to win customer loyalty,” Mr. Dillon said. “That we were able to raise earnings per share and identical sales guidance through the year and achieve those higher results demonstrates the strength of our business strategy and momentum for a strong 2012.”
Kroger’s strong free cash flow allowed the company to return more than $1.8 billion to shareholders through share buybacks and dividends in 2011. During the fourth quarter, Kroger repurchased 11.7 million shares of stock for a total investment of $272.4 million.
Capital investment, excluding acquisitions and purchases of leased facilities, totaled $1,898.5 million for the year compared with $1,859.3 million in 2010.
Net total debt was $8.2 billion, an increase of $902.9 million from a year ago. On a rolling four quarters basis, Kroger’s net total debt to adjusted EBITDA ratio was 2.00 compared with 1.89 during the same period last year.
Fiscal 2012 Annual Guidance
For fiscal year 2012, Kroger anticipates identical supermarket sales growth, excluding fuel, of approximately 3.0% to 3.5%. This includes the expected negative effect on sales from prescription drugs coming off patent.
Kroger’s business model is structured to produce annual earnings per share growth averaging 6% to 8%, plus a dividend of 1.5% to 2%, for a total shareholder return of approximately 8% to 10%. We expect this total shareholder return to compare favorably to the S&P 500 over a rolling three-to-five year time horizon.
Full-year net earnings for fiscal 2012 are expected to range from $2.28 to $2.38 per diluted share. This growth rate is higher than our business model due to a combination of the benefit of a 53rd week, an expected lower LIFO charge, the benefit of aggressive stock buybacks during 2011, and benefits from the UFCW pension plan consolidation.
During fiscal 2012, Kroger plans to use cash flow from operations to fund capital expenditures, repurchase shares, pay dividends to shareholders and maintain its current debt rating. We expect capital expenditures to be in the $1.9 to $2.2 billion range for the year.
“When we put our customers first, shareholders win,” said Mr. Dillon. “Kroger will continue to reward shareholders in 2012 through increased earnings, plus the benefit of quarterly dividends and share repurchases.”
Kroger, the nation’s largest traditional grocery retailer, employs more than 339,000 associates who serve customers in 2,435 supermarkets and multi-department stores in 31 states under two dozen local banner names including Kroger, City Market, Dillons, Jay C, Food 4 Less, Fred Meyer, Fry’s, King Soopers, QFC, Ralphs and Smith’s. The company also operates 791 convenience stores, 348 fine jewelry stores, 1,090 supermarket fuel centers and 39 food processing plants in the U.S. Recognized by Forbes as the most generous company in America, Kroger supports hunger relief, breast cancer awareness, the military and their families, and more than 30,000 schools and grassroots organizations in the communities it serves. Kroger contributes food and funds equal to 125 million meals a year through more than 80 Feeding America food bank partners. For more information please visit www.kroger.com.