UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 12, 2017

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to         

Commission file number 1-303

(Exact name of registrant as specified in its charter)

Ohio	31-0345740
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1014 Vine Street, Cincinnati, OH 45202

(Address of principal executive offices)

(Zip Code)

(513) 762-4000

(Registrant’s telephone number, including area code)

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer (do not check if a smaller reporting company)	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒.

There were 889,522,175 shares of Common Stock ($1 par value) outstanding as of September 11, 2017.

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Second Quarter Ended				Two Quarters Ended
	August 12,		August 13,		August 12,		August 13,
(In millions, except per share amounts)	2017		2016		2017		2016
Sales	$	27,597	$	26,565	$	63,882	$	61,169
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		21,609		20,697		49,890		47,366
Operating, general and administrative		4,523		4,473		10,897		10,252
Rent		225		205		496		467
Depreciation and amortization		562		525		1,299		1,219
Operating profit		678		665		1,300		1,865
Interest expense		138		116		315		271
Earnings before income tax expense		540		549		985		1,594
Income tax expense		189		171		337		521
Net earnings including noncontrolling interests		351		378		648		1,073
Net loss attributable to noncontrolling interests		(2)		(5)		(8)		(6)
Net earnings attributable to The Kroger Co.	$	353	$	383	$	656	$	1,079
Net earnings attributable to The Kroger Co. per basic common share	$	0.39	$	0.40	$	0.72	$	1.13
Average number of common shares used in basic calculation		897		943		907		949
Net earnings attributable to The Kroger Co. per diluted common share	$	0.39	$	0.40	$	0.71	$	1.11
Average number of common shares used in diluted calculation		905		959		917		966
Dividends declared per common share	$	0.125	$	0.120	$	0.245	$	0.225

The accompanying notes are an integral part of the Consolidated Financial Statements.

2

THE KROGER CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	Second Quarter Ended				Two Quarters Ended
	August 12,		August 13,		August 12,		August 13,
(In millions)	2017		2016		2017		2016
Net earnings including noncontrolling interests	$	351	$	378	$	648	$	1,073
Other comprehensive income (loss)
Realized gains and losses on available for sale securities, net of income tax(1)		—		(14)		—		(20)
Amortization of amounts included in net periodic pension expense(2)		10		6		23		15
Unrealized gains and losses on cash flow hedging activities, net of income tax(3)		1		(71)		(35)		(98)
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4)		1		—		1		1
Total other comprehensive income (loss)		12		(79)		(11)		(102)
Comprehensive income		363		299		637		971
Comprehensive loss attributable to noncontrolling interests		(2)		(5)		(8)		(6)
Comprehensive income attributable to The Kroger Co.	$	365	$	304	$	645	$	977

(1) Amount is net of tax of $(13) for the second quarter of 2016.  Amount is net of tax of $(16) for the first two quarters of 2016.

(2) Amount is net of tax of $6 for the second quarter of 2017 and $5 for the second quarter of 2016.  Amount is net of tax of $14 for the first two quarters of 2017 and $10 for the first two quarters of 2016.

(3) Amount is net of tax of $1for the second quarter of 2017 and $(43) for the second quarter of 2016.  Amount is net of tax of $(20) for the first two quarters of 2017 and $(58) for the first two quarters of 2016.

(4) Amount is net of tax of $1 for the second quarter and the first two quarters of 2017.

The accompanying notes are an integral part of the Consolidated Financial Statements.

3

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(unaudited)

	August 12,		January 28,
(In millions, except par amounts)	2017		2017
ASSETS
Current assets
Cash and temporary cash investments	$	819	$	322
Store deposits in-transit		977		910
Receivables		1,536		1,649
FIFO inventory		7,698		7,852
LIFO reserve		(1,335)		(1,291)
Prepaid and other current assets		452		898
Total current assets		10,147		10,340
Property, plant and equipment, net		21,308		21,016
Intangibles, net		1,131		1,153
Goodwill		3,052		3,031
Other assets		962		965
Total Assets	$	36,600	$	36,505
LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations	$	948	$	2,252
Trade accounts payable		6,003		5,818
Accrued salaries and wages		1,080		1,234
Deferred income taxes		—		251
Other current liabilities		3,587		3,305
Total current liabilities		11,618		12,860
Long-term debt including obligations under capital leases and financing obligations		13,100		11,825
Deferred income taxes		2,380		1,927
Pension and postretirement benefit obligations		1,533		1,524
Other long-term liabilities		1,825		1,659
Total Liabilities		30,456		29,795
Commitments and contingencies (see Note 7)
SHAREHOLDERS’ EQUITY
Preferred shares, $100 per share, 5 shares authorized and unissued		—		—
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2017 and 2016		1,918		1,918
Additional paid-in capital		3,094		3,070
Accumulated other comprehensive loss		(726)		(715)
Accumulated earnings		15,978		15,543
Common shares in treasury, at cost, 1,025 shares in 2017 and 994 shares in 2016		(14,105)		(13,118)
Total Shareholders’ Equity - The Kroger Co.		6,159		6,698
Noncontrolling interests		(15)		12
Total Equity		6,144		6,710
Total Liabilities and Equity	$	36,600	$	36,505

The accompanying notes are an integral part of the Consolidated Financial Statements.

4

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Two Quarters Ended
	August 12,		August 13,
(In millions)	2017		2016
Cash Flows from Operating Activities:
Net earnings including noncontrolling interests	$	648	$	1,073
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization		1,299		1,219
LIFO charge		43		27
Stock-based employee compensation		85		77
Expense for Company-sponsored pension plans		60		43
Deferred income taxes		208		(43)
Other		10		(32)
Changes in operating assets and liabilities net of effects from mergers of businesses:
Store deposits in-transit		(67)		(36)
Receivables		25		113
Inventories		154		35
Prepaid and other current assets		428		231
Trade accounts payable		186		(19)
Accrued expenses		16		(62)
Income taxes receivable and payable		133		313
Other		97		93
Net cash provided by operating activities		3,325		3,032
Cash Flows from Investing Activities:
Payments for property and equipment, including payments for lease buyouts		(1,522)		(2,046)
Proceeds from sale of assets		94		99
Other		(22)		7
Net cash used by investing activities		(1,450)		(1,940)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		1,502		19
Payments on long-term debt		(155)		(70)
Net borrowings (payments) on commercial paper		(1,425)		285
Dividends paid		(221)		(202)
Proceeds from issuance of capital stock		28		44
Treasury stock purchases		(1,030)		(1,071)
Other		(77)		(55)
Net cash used by financing activities		(1,378)		(1,050)
Net increase in cash and temporary cash investments		497		42
Cash and temporary cash investments:
Beginning of year		322		277
End of year	$	819	$	319
Reconciliation of capital investments:
Payments for property and equipment, including payments for lease buyouts	$	(1,522)	$	(2,046)
Payments for lease buyouts		6		5
Changes in construction-in-progress payables		(102)		(147)
Total capital investments, excluding lease buyouts	$	(1,618)	$	(2,188)
Disclosure of cash flow information:
Cash paid during the year for interest	$	342	$	291
Cash paid during the year for income taxes	$	23	$	242

The accompanying notes are an integral part of the Consolidated Financial Statements.

5

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(unaudited)

									Accumulated
				Additional					Other
	Common Stock			Paid-In		Treasury Stock			Comprehensive		Accumulated		Noncontrolling
(In millions, except per share amounts)	Shares	Amount		Capital		Shares	Amount		Loss		Earnings		Interest		Total
Balances at January 30, 2016	1,918	$	1,918	$	2,980	951	$	(11,409)	$	(680)	$	14,011	$	(22)	$	6,798
Issuance of common stock:
Stock options exercised	—		—		—	(3)		44		—		—		—		44
Restricted stock issued	—		—		(108)	(2)		53		—		—		—		(55)
Treasury stock activity:
Treasury stock purchases, at cost	—		—		—	26		(1,000)		—		—		—		(1,000)
Stock options exchanged	—		—		—	2		(71)		—		—		—		(71)
Share-based employee compensation	—		—		77	—		—		—		—		—		77
Other comprehensive loss net of income tax of $(64)	—		—		—	—		—		(102)		—		—		(102)
Other	—		—		60	—		(60)		—		—		53		53
Cash dividends declared ($0.225 per common share)	—		—		—	—		—		—		(216)		—		(216)
Net earnings including noncontrolling interests	—		—		—	—		—		—		1,079		(6)		1,073
Balances at August 13, 2016	1,918	$	1,918	$	3,009	974	$	(12,443)	$	(782)	$	14,874	$	25	$	6,601
Balances at January 28, 2017	1,918	$	1,918	$	3,070	994	$	(13,118)	$	(715)	$	15,543	$	12	$	6,710
Issuance of common stock:
Stock options exercised	—		—		—	(2)		28		—		—		—		28
Restricted stock issued	—		—		(111)	(2)		79		—		—		—		(32)
Treasury stock activity:
Treasury stock purchases, at cost	—		—		—	34		(989)		—		—		—		(989)
Stock options exchanged	—		—		—	1		(41)		—		—		—		(41)
Share-based employee compensation	—		—		85	—		—		—		—		—		85
Other comprehensive loss net of income tax of $(5)	—		—		—	—		—		(11)		—		—		(11)
Other	—		—		50	—		(64)		—		—		(19)		(33)
Cash dividends declared ($0.245 per common share)	—		—		—	—		—		—		(221)		—		(221)
Net earnings including noncontrolling interests	—		—		—	—		—		—		656		(8)		648
Balances at August 12, 2017	1,918	$	1,918	$	3,094	1,025	$	(14,105)	$	(726)	$	15,978	$	(15)	$	6,144

The accompanying notes are an integral part of the Consolidated Financial Statements.

6

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

All amounts in the Notes to the Unaudited Consolidated Financial Statements are in millions except per share amounts.

1.ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries, and the variable interest entities in which the Company is the primary beneficiary.  The January 28, 2017 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”).  Significant intercompany transactions and balances have been eliminated.  References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include adjustments, all of which are of a normal, recurring nature that are necessary for a fair statement of results of operations for such periods but should not be considered as indicative of results for a full year.  The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations.  Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2017.

The unaudited information in the Consolidated Financial Statements for the second quarters and two quarters ended August 12, 2017 and August 13, 2016, includes the results of operations of the Company for the 12 and 28-week periods then ended.

Fair Value Measurements

Fair value measurements are classified and disclosed in one of the following three categories:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities;

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;

Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability. 

The Company records cash and temporary cash investments, store deposits in-transit, receivables, prepaid and other current assets, trade accounts payable, accrued salaries and wages and other current liabilities at approximated fair value.  Certain other investments and derivatives are recorded as Level 1, 2 or 3 instruments.  Refer to Note 2 for the disclosure of debt instrument fair values.

7

2.DEBT OBLIGATIONS

Long-term debt consists of:

	August 12,		January 28,
	2017		2017
1.50% to 8.00% Senior Notes due through 2048	$	12,799	$	11,311
5.63% to 12.75% Mortgages due in varying amounts through 2027		33		38
0.91% Commercial paper borrowings		—		1,425
Other		452		541
Total debt, excluding capital leases and financing obligations		13,284		13,315
Less current portion		(898)		(2,197)
Total long-term debt, excluding capital leases and financing obligations	$	12,386	$	11,118

In the second quarter of 2017, the Company issued $400 of senior notes due in fiscal year 2022 bearing an interest rate of 2.80%,  $600 of senior notes due in fiscal year 2027 bearing an interest rate of 3.70% and $500 of senior notes due in fiscal year 2048 bearing an interest rate of 4.65%.  The Company also repaid $1,425of commercial paper in the first two quarters of 2017 bearing an interest rate of 0.91% to 1.15%.  In connection with the senior note issuances, the Company also terminated forward-starting interest rate swap agreements with an aggregate notional amount of $600. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the second quarter of 2017.  Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $20, $12net of tax, has been deferred in Accumulated Other Comprehensive Loss and will be amortized to earnings as the interest payments are made. 

Additionally, in the third quarter of 2017, the Company repaid, upon maturity, $600 of senior notes bearing an interest rate of 6.40%, with proceeds from the second quarter senior notes issuances. 

The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence.  If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at August 12, 2017 and January 28, 2017.  At August 12, 2017, the fair value of total debt was $13,766 compared to a carrying value of $13,284.  At January 28, 2017, the fair value of total debt was $13,905 compared to a carrying value of $13,315.

8

3.BENEFIT  PLANS

The following table provides the components of net periodic benefit cost for the Company-sponsored defined benefit pension plans and other post-retirement benefit plans for the second quarters of 2017 and 2016.

	Second Quarter Ended
	Pension Benefits				Other Benefits
	August 12,		August 13,		August 12,		August 13,
	2017		2016		2017		2016
Components of net periodic benefit cost:
Service cost	$	18	$	15	$	2	$	2
Interest cost		42		43		2		3
Expected return on plan assets		(55)		(55)		—		—
Amortization of:
Prior service cost		—		—		(2)		(2)
Actuarial loss (gain)		20		15		(2)		(2)
Curtailment		—		—		—		—
Net periodic benefit cost	$	25	$	18	$	0	$	1

The following table provides the components of net periodic benefit cost for the Company-sponsored defined benefit pension plan and other post-retirement benefit plans for the first two quarters of 2017 and 2016.

Two Quarters Ended
Pension Benefits		Other Benefits
August 12,	August 13,	August 12,	August 13,