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 17, 2019

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

The Kroger Co.

(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, Ohio 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common, $1.00 Par Value	KR	New York Stock Exchange

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 every Interactive Data File required to be submitted 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 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.

Large accelerated filer	⌧	Accelerated filer	◻
Non-accelerated filer	◻	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 801,621,398 shares of Common Stock ($1 par value) outstanding as of September 18, 2019.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Second Quarter Ended				Two Quarters Ended
	August 17,		August 18,		August 17,		August 18,
(In millions, except per share amounts)	2019		2018		2019		2018
Sales	$	28,168	$	28,014	$	65,419	$	65,735
Operating expenses
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		22,007		21,976		50,990		51,395
Operating, general and administrative		4,811		4,711		11,125		10,968
Rent		200		204		474		480
Depreciation and amortization		591		574		1,370		1,315
Operating profit		559		549		1,460		1,577
Other income (expense)
Interest expense		(130)		(144)		(327)		(336)
Non-service component of company-sponsored pension plan costs		(4)		(4)		(1)		(13)
Mark to market (loss) gain on Ocado securities		(45)		216		61		252
Gain on sale of businesses		—		11		176		1,782
Net earnings before income tax expense		380		628		1,369		3,262
Income tax expense		93		127		319		743
Net earnings including noncontrolling interests		287		501		1,050		2,519
Net loss attributable to noncontrolling interests		(10)		(7)		(19)		(15)
Net earnings attributable to The Kroger Co.	$	297	$	508	$	1,069	$	2,534
Net earnings attributable to The Kroger Co. per basic common share	$	0.37	$	0.63	$	1.32	$	3.05
Average number of common shares used in basic calculation		800		797		799		821
Net earnings attributable to The Kroger Co. per diluted common share	$	0.37	$	0.62	$	1.31	$	3.03
Average number of common shares used in diluted calculation		805		805		805		829

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 17,		August 18,		August 17,		August 18,
(In millions)	2019		2018		2019		2018
Net earnings including noncontrolling interests	$	287	$	501	$	1,050	$	2,519
Other comprehensive income (loss)
Realized gains and losses on available for sale securities, net of income tax(1)		—		—		—		(4)
Change in pension and other postretirement defined benefit plans, net of income tax(2)		9		8		16		23
Unrealized gains and losses on cash flow hedging activities, net of income tax(3)		(55)		(4)		(63)		—
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4)		1		1		2		2
Cumulative effect of accounting change(5)		—		—		(146)
Total other comprehensive (loss) income		(45)		5		(191)		21
Comprehensive income		242		506		859		2,540
Comprehensive loss attributable to noncontrolling interests		(10)		(7)		(19)		(15)
Comprehensive income attributable to The Kroger Co.	$	252	$	513	$	878	$	2,555

(1) Amount is net of tax of ($1) for the first two quarters of 2018.

(2) Amount is net of tax of $2 for the second quarter of 2019 and $3 for the second quarter of 2018. Amount is net of tax of $5 for the first two quarters of 2019 and $7 for the first two quarters of 2018.

(3) Amount is net of tax of ($17) for the second quarter of 2019 and ($2) for the second quarter of 2018. Amount is net of tax of ($26) for the first two quarters of 2019 and ($1) for the first two quarters of 2018.

(4) Amount is net of tax of $1 for the second quarter of 2019 and $1 for the second quarter of 2018. Amount is net of tax of $2 for the first two quarters of 2019 and $2 for the first two quarters of 2018.

(5) Related to the adoption of Accounting Standards Update (“ASU”) 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," (see Note 5 for additional details).

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

3

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(unaudited)

	August 17,		February 2,
(In millions, except par amounts)	2019		2019
ASSETS
Current assets
Cash and temporary cash investments	$	629	$	429
Store deposits in-transit		983		1,181
Receivables		1,567		1,589
FIFO inventory		7,847		8,123
LIFO reserve		(1,321)		(1,277)
Assets held for sale		—		166
Prepaid and other current assets		435		592
Total current assets		10,140		10,803
Property, plant and equipment, net		21,820		21,635
Operating lease assets		6,861		—
Intangibles, net		1,103		1,258
Goodwill		3,095		3,087
Other assets		1,443		1,335
Total Assets	$	44,462	$	38,118
LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under finance leases	$	1,353	$	3,157
Current portion of operating lease liabilities		675		—
Trade accounts payable		6,268		6,059
Accrued salaries and wages		1,099		1,227
Liabilities held for sale		—		51
Other current liabilities		3,955		3,780
Total current liabilities		13,350		14,274
Long-term debt including obligations under finance leases		12,130		12,072
Noncurrent operating lease liabilities		6,463		—
Deferred income taxes		1,502		1,562
Pension and postretirement benefit obligations		482		494
Other long-term liabilities		1,882		1,881
Total Liabilities		35,809		30,283
Commitments and contingencies see Note 8
SHAREHOLDERS’ EQUITY
Preferred shares, $100 par per share, 5 shares authorized and unissued		—		—
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2019 and 2018		1,918		1,918
Additional paid-in capital		3,270		3,245
Accumulated other comprehensive loss		(537)		(346)
Accumulated earnings		20,647		19,681
Common shares in treasury, at cost, 1,116 shares in 2019 and 1,120 shares in 2018		(16,587)		(16,612)
Total Shareholders’ Equity - The Kroger Co.		8,711		7,886
Noncontrolling interests		(58)		(51)
Total Equity		8,653		7,835
Total Liabilities and Equity	$	44,462	$	38,118

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 17,		August 18,
(In millions)	2019		2018
Cash Flows from Operating Activities:
Net earnings including noncontrolling interests	$	1,050	$	2,519
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization		1,370		1,315
Non-cash operating lease cost		346		—
LIFO charge		46		27
Stock-based employee compensation		89		81
Expense for company-sponsored pension plans		22		38
Deferred income taxes		(49)		92
Gain on sale of businesses		(176)		(1,782)
Gain on the sale of assets		(157)		—
Mark to market gain on Ocado securities		(61)		(252)
Other		(23)		32
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses:
Store deposits in-transit		198		144
Receivables		44		(73)
Inventories		274		252
Prepaid and other current assets		68		365
Trade accounts payable		209		94
Accrued expenses		104		200
Income taxes receivable and payable		(34)		397
Operating lease liabilities		(313)		—
Proceeds from contract associated with sale of business		295		—
Other		(25)		(189)
Net cash provided by operating activities		3,277		3,260
Cash Flows from Investing Activities:
Payments for property and equipment		(1,581)		(1,487)
Proceeds from sale of assets		247		67
Payments for acquisitions, net of cash acquired		—		(197)
Purchases of stores		—		(44)
Net proceeds from sale of businesses		327		2,169
Purchases of Ocado securities		—		(392)
Other		(32)		12
Net cash (used) provided by investing activities		(1,039)		128
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		53		1,016
Payments on long-term debt including obligations under finance leases		(1,025)		(249)
Net payments on commercial paper		(800)		(1,946)
Dividends paid		(226)		(211)
Proceeds from issuance of capital stock		18		40
Treasury stock purchases		(23)		(1,979)
Other		(35)		(45)
Net cash used by financing activities		(2,038)		(3,374)
Net increase in cash and temporary cash investments		200		14
Cash and temporary cash investments:
Beginning of year		429		347
End of period	$	629	$	361
Reconciliation of capital investments:
Payments for property and equipment	$	(1,581)	$	(1,487)
Changes in construction-in-progress payables		29		(43)
Total capital investments	$	(1,552)	$	(1,530)
Disclosure of cash flow information:
Cash paid during the year for interest	$	306	$	312
Cash paid during the year for income taxes	$	454	$	263

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 February 3, 2018	1,918	$	1,918	$	3,161	1,048	$	(14,684)	$	(471)	$	17,007	$	(26)	$	6,905
Issuance of common stock:
Stock options exercised	—		—		—	(1)		10		—		—		—		10
Restricted stock issued	—		—		(6)	—		5		—		—		—		(1)
Treasury stock activity:
Treasury stock purchases, at cost	—		—		(134)	74		(1,792)		—		—		—		(1,926)
Stock options exchanged	—		—		—	1		(17)		—		—		—		(17)
Share-based employee compensation	—		—		45	—		—		—		—		—		45
Other comprehensive income net of income tax of $5	—		—		—	—		—		16		—		—		16
Other	—		—		(7)	—		2		—		—		5		—
Cash dividends declared ($0.125 per common share)	—		—		—	—		—		—		(109)		—		(109)
Net earnings including noncontrolling interests	—		—		—	—		—		—		2,026		(8)		2,018
Balances at May 26, 2018	1,918	$	1,918	$	3,059	1,122	$	(16,476)	$	(455)	$	18,924	$	(29)	$	6,941
Issuance of common stock:
Stock options exercised	—		—		—	(2)		30		—		—		—		30
Restricted stock issued	—		—		(104)	(2)		64		—		—		—		(40)
Treasury stock activity:
Treasury stock purchases, at cost	—		—		134	2		(135)		—		—		—		(1)
Stock options exchanged	—		—		—	1		(35)		—		—		—		(35)
Share-based employee compensation	—		—		36	—		—		—		—		—		36
Other comprehensive income net of income tax of $2	—		—		—	—		—		5		—		—		5
Other	—		—		55	—		(53)		—		—		—		2
Cash dividends declared ($0.14 per common share)	—		—		—	—		—		—		(101)		—		(101)
Net earnings including noncontrolling interests	—		—		—	—		—		—		508		(7)		501
Balances at August 18, 2018	1,918	$	1,918	$	3,180	1,121	$	(16,605)	$	(450)	$	19,331	$	(36)	$	7,338
Issuance of common stock:
Stock options exercised	—		—		—	(1)		15		—		—		—		15
Restricted stock issued	—		—		(4)	—		3		—		—		—		(1)
Treasury stock activity:
Stock options exchanged	—		—		—	—		(17)		—		—		—		(17)
Share-based employee compensation	—		—		34	—		—		—		—		—		34
Other comprehensive income net of income tax of $15	—		—		—	—		—		48		—		—		48
Other	—		—		(1)	—		(4)		—		—		3		(2)
Cash dividends declared ($0.14 per common share)	—		—		—	—		—		—		(113)		—		(113)
Net earnings including noncontrolling interests	—		—		—	—		—		—		317		(9)		308
Balances at November 10, 2018	1,918	$	1,918	$	3,209	1,120	$	(16,608)	$	(402)	$	19,535	$	(42)	$	7,610
Issuance of common stock:
Stock options exercised	—		—		—	—		10		—		—		—		10
Restricted stock issued	—		—		(5)	(1)		2		—		—		—		(3)
Treasury stock activity:
Stock options exchanged	—		—		—	1		(14)		—		—		—		(14)
Share-based employee compensation	—		—		39	—		—		—		—		—		39
Other comprehensive income net of income tax of $17	—		—		—	—		—		56		—		—		56
Other	—		—		2	—		(2)		—		—		(1)		(1)
Cash dividends declared ($0.14 per common share)	—		—		—	—		—		—		(113)		—		(113)
Net earnings including noncontrolling interests	—		—		—	—		—		—		259		(8)		251
Balances at February 2, 2019	1,918	$	1,918	$	3,245	1,120	$	(16,612)	$	(346)	$	19,681	$	(51)	$	7,835

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

6

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