Kroger Reports Strong Third Quarter Results

06 Dec 2013 --- The Kroger Co. reported net earnings of $0.57 per diluted share for the third quarter, which ended November 9, 2013. This includes a net $0.04 per diluted share benefit from certain tax items partially offset by expenses related to our pending merger with Harris Teeter.

Excluding these items, Kroger's earnings per diluted share would have been $0.53 in the third quarter, a 15% increase over last year's third quarter adjusted earnings per share of $0.46.

Identical supermarket sales growth, without fuel, was 3.5% in the third quarter. Other highlights include:
- Increased ROIC while increasing capital investment
- Grew rolling four quarter FIFO operating profit margin, excluding fuel
- Reconfirmed identical stores sales and net earnings per share guidance for the year

"Our quarterly results show once again that Kroger is uniquely positioned to grow and win in the U.S. food retail industry," said David B. Dillon, Kroger's chairman and chief executive officer. "Our Customer 1st Strategy resulted in strong sales and earnings growth, lowered costs and helped improve Kroger's connection with our customers in the third quarter. Every one of our more than 343,000 associates deserves recognition for their individual work to achieve an unprecedented 40 consecutive quarters of positive identical supermarket sales. I know our entire team is hard at work to achieve the 41st."

Details of Third Quarter 2013 Results

Total sales increased 3.2% to $22.5 billion in the third quarter, compared to $21.8 billion for the same period last year. Total sales, excluding fuel, increased 4.7% in the third quarter over the same period last year.

Net earnings for the third quarter totaled $299 million, or $0.57 per diluted share. Net earnings in the same quarter last year were $317 million, or $0.60 per diluted share.

Both the current and prior year quarters' earnings per diluted share benefited from certain adjustments. This year's third quarter includes a $0.04 per diluted share benefit comprised of $0.05 from certain tax items, partially offset by expenses related to Kroger's pending merger with Harris Teeter. Last year's third quarter included a $0.14 per share benefit from a settlement with Visa and MasterCard and from a reduction in the company's obligation to fund the UFCW consolidated pension fund created in January 2012. Excluding these adjustments, earnings per share would have been $0.53 per diluted share in the third quarter of this year, and $0.46 in the third quarter of last year.

FIFO gross margin, including fuel, was 20.57% of sales for the third quarter. Excluding retail fuel operations, FIFO gross margin decreased 25 basis points from the same period last year.

The company recorded a $13 million LIFO charge during the quarter compared to a $15 million LIFO charge in the same quarter last year. The company continues to estimate its full year LIFO charge at $55 million.

Operating, general and administrative costs plus rent and depreciation – excluding retail fuel operations, the two adjustment items from last year, and current year expenses related to Kroger's pending merger with Harris Teeter – decreased 27 basis points as a percentage of sales compared to the same quarter in the prior year as a result of strong sales leverage.

FIFO operating profit margin – excluding fuel, the 53rd week last year, and the adjustment items in fiscal 2012 and 2013 – on a rolling four quarter basis, increased 11 basis points.

Financial Strategy

Kroger's strong financial position has allowed the company to return more than $752 million to shareholders through share buybacks and dividends over the last four quarters. During the third quarter, Kroger repurchased 3.6 million common shares for a total investment of $148 million.

Capital investment, excluding purchases of leased property, totaled $641 million for the third quarter, compared to $474 million for the same period last year.

Return on invested capital on a rolling four quarter 52-week basis was 13.42% compared to 13.34% during the same period last year.

Net total debt was $8.2 billion, a decrease of $525 million from a year ago. On a rolling four quarter 52-week basis, Kroger's net total debt to adjusted EBITDA ratio was 1.86 compared to 2.08 during the same period last year.

Fiscal 2013 Guidance

Based on the third quarter results, the company maintained its net earnings guidance range of $2.73 to $2.80 per diluted share for fiscal 2013. This excludes certain tax items and expenses related to our pending merger with Harris Teeter. Kroger's fiscal 2013 guidance range is consistent with the company's long term earnings per share growth rate guidance of 8 – 11%, plus a growing dividend.

For the fourth quarter of fiscal 2013, Kroger expects identical supermarket sales growth, excluding fuel, of approximately 3.0% to 3.5%.

The company expects capital investments to be approximately $2.4 billion for the year, excluding mergers, acquisitions and purchases of leased property.

Kroger continues to use cash flow from operations to maintain its current investment grade debt rating, repurchase shares, have a growing dividend, and fund increasing capital investments.

"Kroger is successfully and consistently executing our Customer 1st Strategy and delivering on our growth commitments, which benefit our customers, associates and shareholders," Mr. Dillon said. "I could not be more confident in Kroger's future, knowing that our entire leadership team and Rodney McMullen will guide Kroger to even higher levels of performance."

Kroger, one of the world's largest retailers, employs 343,000 associates who serve customers in 2,414 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 786 convenience stores, 327 fine jewelry stores, 1,218 supermarket fuel centers and 37 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. Kroger contributes food and funds equal to 200 million meals a year through more than 80 Feeding America food bank partners. A leader in supplier diversity, Kroger is a proud member of the Billion Dollar Roundtable and the U.S. Hispanic Chamber's Million Dollar Club.

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