Kroger: Reports Q2-2023 Results and Reaffirms Guidance

Cincinnati / OH. (tkc) The Kroger Company reported its second quarter 2023 results, reaffirmed 2023 guidance and updated investors on how «Leading with Fresh and Accelerating with Digital» continues to position Kroger for long-term sustainable growth.

Comments from Chairman and CEO Rodney McMullen

«The strength and diversity of Kroger’s business model is delivering consistent results in what remains a challenged environment.

«By investing in price and providing more personalized offers, we are helping customers stretch their budgets and manage the ongoing effects of reduced government benefits, inflation and higher interest rates. Kroger is funding these investments by collaborating with vendors to deliver exceptional value, managing costs and growing alternative profit businesses.

«We are growing households as our associates are providing a full, fresh and friendly shopping experience across our seamless ecosystem. While we expect the environment to remain challenged going forward, we are committed to delivering exceptional value for our customers and investing in our associates, and by doing so, we expect to generate attractive returns for shareholders.»

Second Quarter Financial Results

(USD in millions, except EPS)		Q2-2023		Q2-2022
ID Sales	%	1.0	%	5.8
Earnings (Loss) Per Share	USD	(0.25)	USD	1.00
Adjusted EPS	USD	0.96	USD	0.90
Operating (Loss) Profit	USD	(479)	USD	954
Adjusted FIFO Operating Profit	USD	989	USD	1,110
FIFO Gross Margin Rate	Increased 35 basis points
OG+A Rate	No change

Total company sales were USD 33.9 billion in the second quarter, compared to USD 34.6 billion for the same period last year. Excluding fuel, sales increased 1.1 percent compared to the same period last year.

Gross margin was 21.8 percent of sales for the second quarter. The FIFO gross margin rate, excluding fuel, increased 35 basis points compared to the same period last year. This increase in rate was achieved while also investing in price to maintain a competitive price position and deliver greater value for our customers. The improvement in the FIFO gross margin rate, excluding fuel, was primarily attributable to «Our Brands» performance, lower supply chain costs, sourcing benefits and the effect of our terminated agreement with Express Scripts, partially offset by higher shrink and increased promotional price investments.

The LIFO charge for the quarter was USD 4 million, compared to a LIFO charge of USD 148 million for the same period last year.

Fuel operating profit declined USD 192 million compared to the same period last year, primarily due to the cycling of historically high fuel results from a year ago.

The Operating, General + Administrative rate was flat, excluding fuel and adjustment items, compared to the same period last year. This OG+A result was driven by continued execution of cost savings initiatives and lower incentive plan costs partially offset by planned investments in associates, an increase to our self-insurance reserves and the effect of our terminated agreement with Express Scripts.

Nationwide Opioid Settlement Framework

Included in Kroger’s results this quarter was a USD 1.4 billion charge related to a nationwide opioid settlement framework. The timing of the settlement payments will be over 11 years, most of which are tax deductible.

This settlement and the payment terms will not affect Kroger’s ability to complete its proposed merger with Albertsons and the Company still expects to reduce its net total debt to adjusted Ebitda ratio to 2.50 within 18 to 24 months post-close.

Capital Allocation Strategy

Kroger expects to continue to generate strong free cash flow and remains committed to investing in the business to drive long-term sustainable net earnings growth, as well as maintaining its current investment grade debt rating. The Company expects to continue to pay its quarterly dividend and expects this to increase over time, subject to board approval. Kroger has paused its share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.

Kroger’s net total debt to adjusted Ebitda ratio is 1.31, compared to 1.63 a year ago. The company’s net total debt to adjusted Ebitda ratio target range is 2.30 to 2.50.

Full-Year 2023 Guidance

Reaffirmed

• Identical sales without fuel of 1.0 percent to 2.0 percent, with underlying growth of 2.5 percent to 3.5 percent after adjusting for the effect of Express Scripts
• Adjusted net earnings per diluted share of USD 4.45 to USD 4.60, including an estimated benefit from the 53rd week of approximately USD 0.15
• Adjusted FIFO Operating Profit of USD 5.0 to USD 5.2 billion
• Adjusted effective tax rate of 23 percent
• Capital expenditures of USD 3.4 to USD 3.6 billion
• Adjusted Free Cash Flow of USD 2.5 to USD 2.7 billion

Comments from CFO Gary Millerchip

«Kroger’s second quarter results demonstrate the resiliency of our value creation model. While industry-wide disinflation continues to impact food at home sales, our team is doing an excellent job managing the effect on our business.

«Looking forward, we believe inflation will continue to decelerate and the environment will remain challenging for consumers. We therefore expect identical sales without fuel will be at the low end of our full-year guidance range and slightly negative in the second half of the year. This outlook includes an approximately 150 basis points negative impact due to the termination of our agreement with Express Scripts.

«As demonstrated by our year-to-date results, we believe we have the flexibility within our business model to navigate this environment and remain on track to deliver our 2023 adjusted FIFO operating profit and adjusted net earnings per diluted share guidance.»