SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
October 8, 1994
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.
An Ohio Corporation I.R.S. Employer
Identification
No. 31-0345740
1014 Vine Street, Cincinnati, OH 45202
- -------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 762-4000
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 X No .
-------- --------
There were 110,897,364 shares of Common Stock ($1 par value)
outstanding as of October 28, 1994.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited information for the quarters ended October 8, 1994
and October 9, 1993 includes the results of operations of The
Kroger Co. for the 16 and 40 week periods ended October 8, 1994 and
October 9, 1993, and of Dillon Companies, Inc. for the 13 and 39
week periods ended October 1, 1994 and October 2, 1993. In the
opinion of management, the information reflects all adjustments
(consisting only of normal recurring adjustments) which are
necessary for a fair presentation of results of operations for such
periods but should not be considered as indicative of results for a
full year.
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
3rd Quarter Ended 3 Quarters Ended
--------------------- ----------------------
October 8, October 9, October 8, October 9,
1994 1993 1994 1993
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $6,650,256 $6,478,645 $17,373,289 $16,981,943
---------- ---------- ----------- -----------
Costs and expenses:
Merchandise costs, including warehousing and
transportation. . . . . . . . . . . . . . . . . . . . 5,052,997 4,968,568 13,187,111 13,007,462
Operating, general and administrative. . . . . . . . . 1,251,569 1,175,904 3,214,447 3,064,974
Rent . . . . . . . . . . . . . . . . . . . . . . . . . 90,256 86,498 233,078 222,653
Depreciation and amortization. . . . . . . . . . . . . 82,574 78,047 209,268 200,926
Interest expense, including interest on obligations
under capital leases, net . . . . . . . . . . . . . . 100,722 119,914 251,762 311,494
Other charges. . . . . . . . . . . . . . . . . . . . . --------- --------- ---------- ----------
22,725
Total. . . . . . . . . . . . . . . . . . . . . . . 6,578,118 6,428,931 17,095,666 16,830,234
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings before tax expense, extraordinary
loss and cumulative effect of change in accounting . . 72,138 49,714 277,623 151,709
Tax expense . . . . . . . . . . . . . . . . . . . . . . 20,941 24,505 100,758 67,415
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings before extraordinary loss and cumulative
effect of change in accounting . . . . . . . . . . . . 51,197 25,209 176,865 84,294
Extraordinary loss (net of income tax credit) . . . . . (15,175) (8,834) (26,152) (20,012)
Cumulative effect of change in accounting (net of
income tax credit) . . . . . . . . . . . . . . . . . . (159,193)
----------- ----------- ----------- ------------
Net earnings (loss). . . . . . . . . . . . . . . . $ 36,022 $ 16,375 $ 150,713 $ (94,911)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Primary earnings (loss) per common share:
Earnings from operations . . . . . . . . . . . . . . . $ .45 $ .23 $ 1.56 $ .80
Extraordinary loss . . . . . . . . . . . . . . . . . . (.13) (.08) (.23) (.19)
Cumulative effect of change in accounting. . . . . . . . (1.51)
------ ------ ------- ------
Net earnings (loss). . . . . . . . . . . . . . . . . $ .32 $ .15 $ 1.33 $(.90
------ ------ ------- ------
<S> <C> <C> <C> <C>
Average number of common shares used in primary per
share calculation. . . . . . . . . . . . . . . . . . . 114,194 109,633 113,126 105,666
Fully diluted earnings (loss) per common share:
Earnings from operations . . . . . . . . . . . . . . . $ .43 $ .23 $ 1.45 $ .77
Extraordinary loss . . . . . . . . . . . . . . . . . . (.12) (.07) (.20) (.17)
Cumulative effect of change in accounting. . . . . . . (1.36)
------ ------ ------- ------
Net earnings (loss). . . . . . . . . . . . . . . . $ .31 $ .16 $ 1.25 $(.76)
------ ------ ------- ------
<S> <C> <C> <C> <C>
Average number of common shares used in fully diluted
per share calculations . . . . . . . . . . . . . . . . 131,711 120,613 130,921 117,063
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<TABLE> CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
<CAPTION>
October 8, January 1,
1994 1994
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments . . . . . . . . . . $ 73,968 $ 121,253
Receivables . . . . . . . . . . . . . . . . . . . . . . 257,078 287,925
Inventories:
FIFO cost . . . . . . . . . . . . . . . . . . . . . . 1,978,677 2,001,376
Less LIFO reserve . . . . . . . . . . . . . . . . . . (437,597) (422,097)
----------- -----------
1,541,080 1,579,279
Property held for sale. . . . . . . . . . . . . . . . . 25,848 37,721
Prepaid and other current assets. . . . . . . . . . . . 198,184 199,652
----------- ----------
Total current assets. . . . . . . . . . . . . . . . 2,096,158 2,225,830
Property, plant and equipment, net. . . . . . . . . . . . 2,166,910 1,981,308
Investments and other assets. . . . . . . . . . . . . . . 243,596 273,326
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . $4,506,664 $4,480,464
---------- ----------
---------- ----------
<S> <C> <C>
LIABILITIES
Current liabilities
Current portion of long-term debt . . . . . . . . . . . $ 6,942 $ 63,053
Current portion of obligations under
capital leases. . . . . . . . . . . . . . . . . . . . 8,475 7,962
Accounts payable. . . . . . . . . . . . . . . . . . . . 1,362,606 1,357,532
Other current liabilities . . . . . . . . . . . . . . . 932,208 822,284
---------- ----------
Total current liabilities . . . . . . . . . . . . . 2,310,231 2,250,831
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 3,745,449 3,975,362
Obligations under capital leases. . . . . . . . . . . . . 164,982 159,651
Deferred income taxes . . . . . . . . . . . . . . . . . . 150,061 182,891
Other long-term liabilities . . . . . . . . . . . . . . . 390,241 371,371
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . 6,760,964 6,940,106
---------- ----------
---------- ----------
<S> <C> <C>
SHAREOWNERS' DEFICIT
Common capital stock, par $1, at stated value
Authorized: 350,000,000 shares
Issued: 1994 - 120,338,378 shares
1993 - 118,549,173 shares. . . . . . . . . . . 329,433 308,534
Accumulated deficit . . . . . . . . . . . . . . . . . . . (2,340,219) (2,490,932)
Common stock in treasury, at cost
1994 - 9,576,275 shares
1993 - 10,901,846 shares . . . . . . . . . . . (243,514) (277,244)
---------- -----------
Total Shareowners' Deficit (2,254,300) (2,459,642)
----------- -----------
Total Liabilities and Shareowners' Deficit. . . . . . $4,506,664 $4,480,464
----------- -----------
----------- -----------
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<TABLE> CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<CAPTION>
3 Quarters Ended
------------------------------
October 8, October 9,
1994 1993
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . $ 150,713 $ (94,911)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . 26,152 20,012
Cumulative effect of change in accounting. . . . . . . . . . 159,193
Depreciation and amortization. . . . . . . . . . . . . . . . 209,268 200,926
Amortization of discount on Junior Subordinated Debentures . 64,198
Amortization of deferred financing costs . . . . . . . . . . 11,373 11,175
Gain on sale of investment . . . . . . . . . . . . . . . . . (25,099)
Contribution of stock. . . . . . . . . . . . . . . . . . . . 4,364
LIFO charge. . . . . . . . . . . . . . . . . . . . . . . . . 15,500 3,750
Net increase in cash from changes in operating
assets and liabilities, detailed below . . . . . . . . . . 154,830 147,298
Other changes, net . . . . . . . . . . . . . . . . . . . . . 1,361 (84)
----------- -----------
Net cash provided by operating activities . . . . . . . . 548,462 511,557
----------- -----------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (372,944) (237,722)
Proceeds from sale of property, plant, and equipment. . . . . . 9,907 16,430
Increase in property held for sale. . . . . . . . . . . . . . . (6,131) (47,564)
Increase in other investments . . . . . . . . . . . . . . . . . (8,952) (25,300)
Proceeds from sale of investment. . . . . . . . . . . . . . . . 50,469
---------- ----------
Net cash used by investing activities . . . . . . . . . . (327,651) (294,156)
---------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt prepayment costs . . . . . . . . . . . . . . . . . . . . . (14,676) (28,622)
Financing charges incurred. . . . . . . . . . . . . . . . . . . (14,431) (15,967)
Principal payments under capital lease obligations. . . . . . . (6,145) (5,446)
Proceeds from issuance of long-term debt. . . . . . . . . . . . 886,824 576,475
Reductions in long-term debt. . . . . . . . . . . . . . . . . . (1,172,848) (1,007,787)
Proceeds from sale of treasury stock. . . . . . . . . . . . . . 30,528 28,119
Proceeds from issuance of capital stock . . . . . . . . . . . . 22,652 211,134
----------- ----------
Net cash used by financing activities . . . . . . . . . . (268,096) (242,094)
----------- -----------
Net decrease in cash and temporary cash investments . . . . . . . (47,285) (24,693)
Cash and temporary cash investments:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . 121,253 103,995
----------- -----------
End of quarter. . . . . . . . . . . . . . . . . . . . . . . . $ 73,968 $ 79,302
----------- -----------
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH FROM CHANGES IN OPERATING ASSETS AND LIABILITIES:
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,699 $ 20,014
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 30,847 28,112
Prepaid and other current assets. . . . . . . . . . . . . . . (12,364) (1,556)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (4,454) 5,736
Deferred income taxes . . . . . . . . . . . . . . . . . . . . (18,859) (16,978)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 136,961 111,970
----------- -----------
$ 154,830 $ 147,298
----------- -----------
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<TABLE>
Supplemental disclosures of cash flow information:
<CAPTION>
3 Quarters Ended
--------------------------
October 8, October 9,
1994 1993
---------- ----------
<S> <C> <C>
Cash paid during the period for:
Interest (net of amount capitalized) 230,611 239,271
Income taxes 112,484 78,098
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. CONTINGENCIES
-------------
The Company continuously evaluates contingencies based upon
the best available evidence.
Management believes that allowances for loss have been
provided to the extent necessary and that its assessment of
contingencies is reasonable. To the extent that resolution of
contingencies results in amounts that vary from management's
estimates, future earnings will be charged or credited.
The principal contingencies are described below:
Income Taxes - The Company has settled all tax years through
1983 with the Internal Revenue Service. The Internal Revenue
Service has completed its examination of the Company's tax
returns for 1984 through 1986 and the Company has made
payments based on its proposed settlement. Efforts to settle
unresolved issues for years 1984 through 1986 with the Appeals
Division of the Internal Revenue Service have been
unsuccessful. As a result the Company has filed a petition
with the United States Tax Court. The Company has provided
for these and other tax contingencies.
Insurance - The Company's workers' compensation risks are
self-insured in certain states and, where insured with a
third-party, are based on retrospective premiums. The
liability for these risks is accounted for on a present value
basis. In addition, certain levels of insured general
liability risks are based on retrospective premiums. Actual
claim settlements and expenses incident thereto may differ
from the provisions for loss. Other levels of general
liability risks have been underwritten by a subsidiary.
Operating divisions and subsidiaries have paid premiums, and
the insurance subsidiary has provided loss allowances, based
upon actuarially-determined estimates.
Litigation - The Company is involved in various legal actions
arising in the normal course of business. Management is of
the opinion that their outcome will not have a material
adverse effect on the Company's financial position or results
of operations.
2. INCOME TAXES
------------
The effective income tax rate differs from the expected
statutory rate primarily due to the effect of certain state
taxes. Additionally, in the third quarter ended October 9,
1993, tax expense includes $4.2 million (3 cents per fully-
diluted share) to increase deferred taxes for the increase in
the federal income tax rate included in the Omnibus Budget
Reconciliation Act of 1993 passed into law on August 10, 1993.
In the third quarter ended October 8, 1994, tax expense
includes a $5.9 million credit (4 cents per fully-diluted
share) from the donation of a $4.3 million book value asset to
The Kroger Co. Foundation that had a market value of $19.6
million.
3. DEPRECIATION
------------
Depreciation expense for the three quarters ended October 9,
1993 includes a $4.4 million charge related to a change in the
estimated useful life of certain computer equipment.
4. OTHER CHARGES AND CREDITS
--------------------------
During the third quarter of 1994 the Company recorded a $25.1
million charge to recognize future lease commitments and
losses on equipment related to certain San Antonio stores
sublet to Megafoods, Inc. which declared bankruptcy during the
third quarter of 1994. The Company had sold its San Antonio
stores to Megafoods in the 1993 third quarter. Also during
the third quarter of 1994 the Company recorded a gain of $25.1
million on the disposition of its investment in Hook-SupeRx,
Inc., (HSI), as a part of the merger of HSI and a subsidiary
of Revco D.S. after providing for certain tax indemnities
related to HSI.
The other charge reflected in the three quarters ended October
9, 1993 earnings is a pre-tax charge related to the
disposition of 15 stores in San Antonio, Texas to Mega Foods,
Inc. Severance pay, unemployment benefits costs and loss on
sale of assets are included in this charge.
5. EXTRAORDINARY LOSS
------------------
The extraordinary loss for the three quarters ended October 8,
1994 and October 9, 1993 of $26.2 million and $20.0 million,
respectively (net of income taxes of $16.7 million and $12.3
million, respectively) and for the third quarter ended October
8, 1994 and October 9, 1993 of $15.2 million and $8.8 million,
respectively (net of income taxes of $9.7 million and $5.4
million, respectively) is related to the early retirement of
long-term debt. During the third quarter of 1994 the Company
repurchased $18.4 million of its 9-1/4% Senior Secured
Debentures and $21.0 million of its senior subordinated debt
issues. Additionally the Company repurchased $5.0 million and
announced its intention to call the remaining $165.0 million
of its 8-1/4% Convertible Junior Subordinated Debentures. The
extraordinary loss for the quarter ended October 8, 1994 also
includes the write-off of deferred financing costs associated
with the Company's bank credit agreement which was replaced
with a new working capital facility (the "Credit Agreement")
on July 19, 1994.
Through three quarters of 1994, early repurchases or
redemptions of long-term debt have totaled $1.173 billion.
Redemptions and purchases of debt were funded by excess cash
from operations, proceeds from miscellaneous asset sales,
proceeds from the sale of treasury stock to employee benefit
plans, proceeds from new issuances of debt, and funds borrowed
under the Credit Agreement and the predecessor thereto. (See
Note 7)
6. EARNINGS (LOSS) PER COMMON SHARE
--------------------------------
Primary earnings (loss) per common share equals net earnings
(loss) divided by the weighted average number of common shares
outstanding, after giving effect to dilutive stock options.
Fully diluted earnings per common share for the third quarter
and three quarters ended October 8, 1994 are computed by
adjusting both net earnings and shares outstanding for the
effect of the conversion of the Convertible Junior
Subordinated Debentures issued in March 1991 and the
Convertible Junior Subordinated Notes issued in December 1992.
Fully diluted earnings (loss) per common share for the third
quarter and three quarters ended October 9, 1993 are computed
by adjusting net earnings and shares outstanding for the
effect of the conversion of the Convertible Junior
Subordinated Notes but not the Convertible Junior Subordinated
Debentures which were antidilutive for those periods.
7. LONG-TERM DEBT ISSUANCES
-------------------------
In the third quarter of 1994 the Company issued $23.0 million
General Term Notes(R), Series B, with initial interest rates,
either fixed or variable, ranging from 7.37% - 9.00% and
maturities ranging from 1999 through 2009. Year-to-date
issuances include $13.4 million General Term Notes(R), Series
A and $86.3 million General Term Notes(R), Series B. The net
proceeds of the offerings were initially used to repay amounts
outstanding under the working capital facility and,
thereafter, the Company used amounts available under the
working capital facility to purchase, on the open market,
portions of its high-cost long-term debt and to fund the March
15, 1994 call of its 11-1/8% Senior Notes and the June 15,
1994 call of its 8-3/4% Senior Subordinated Reset Notes.
On July 19, 1994 the Company entered into the Credit
Agreement. This agreement replaces the credit agreement dated
as of January 21, 1992. The agreement provides for a seven
year revolving credit facility in the amount of $1.75 billion.
The agreement reduces interest rate spreads over LIBOR on the
Company's bank debt and allows the Company to significantly
increase capital expenditures. The Company's initial
borrowings on July 19, 1994 under the new agreement totaled
$745 million. All of the proceeds from the Credit Agreement
were used to pay the remaining balance on the old agreement.
8. OTHER ISSUES
-------------
Prior to the merger of HSI and a subsidiary of Revco D.S. the
Company donated $4.3 million book value of its investment in
HSI to The Kroger Co. Foundation. The donation resulted in a
$2.7 million after tax expense ($.02 per fully diluted share).
The market value of the stock at the time of donation was
$19.6 million which produced a $5.9 million tax credit.
9. SUBSEQUENT EVENTS
-----------------
On September 16, 1994 the Company notified the trustee of its
8-1/4% Convertible Junior Subordinated Debentures (the
"Debentures") that it would redeem the Debentures on October
24, 1994. Thereafter the Company used amounts available under
the Credit Agreement to redeem the Debentures on that date.
The extraordinary loss associated with this redemption was
reflected in net earnings during the third quarter because the
Company's notification to the trustee was irrevocable.
(R) Registered Service mark of J. W. Korth & Company
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
Total sales for the third quarter of 1994 were $6.7 billion
compared to $6.5 billion in the third quarter of 1993, a 2.6%
increase. Food stores sales for the third quarter 1994 were 5.6%
ahead of the third quarter 1993 as adjusted for San Antonio stores
sold during the third quarter of 1993. Sales in identical food
stores, stores that have been in operation and have not been
expanded or relocated for one full year, increased 2.3%. The
increase in food store sales can be attributed primarily to new
square footage, inflation and increased market share. Net square
footage grew by 4.4% over the third quarter of 1993. A 1% to 1.25%
inflation rate, mainly in coffee, pharmaceuticals and perishables,
was experienced in the third quarter of 1994 as compared to
virtually no inflation in 1993. Identical food store sales, net of
inflation, are showing real growth of greater than 1%.
<TABLE>
A review of sales trends by lines of business includes:
<CAPTION>
(in thousands of dollars)
% of 1994 3rd Quarter
----------------------
<S> <C> <C> <C> <C>
Lines of Business Sales 1994 1993 Change
---------------------- --------- ---------- ---------- ------
Food Stores ........ 93.7% $6,229,127 $5,918,970 +5.2%
Convenience Stores .. 3.7% 246,936 254,452 (3.0%)
Other sales ........ 2.6% 174,193 305,223 (42.9%)
--------- ---------- ----------
Total sales ........ 100.0% $6,650,256 $6,478,645 +2.6%
% of 1994 3 Quarters Year-to-date
------------------------
Lines of Business Sales 1994 1993 Change
---------------------- --------- ----------- ----------- ------
Food Stores ........ 93.3% $16,204,547 $15,495,471 +4.6%
Convenience Stores .. 3.9% 672,699 716,300 (6.1%)
Other sales ........ 2.8% 496,043 770,172 (35.6%)
--------- ----------- -----------
Total sales ........ 100.0% $17,373,289 $16,981,943 +2.3%
</TABLE>
Sales in identical convenience stores increased 6.6%. Convenience
stores' identical grocery sales increased 3.8% and identical
gasoline sales increased 9.8%. The increase in gasoline sales was
due to the combination of a 7.1% increase in the average retail
price per gallon combined with a 2.5% increase in gallons sold.
The decrease in total convenience stores sales is the result of
excluding certain franchised store sales which were included in
reported sales in prior years. Adjusting 1993 sales to exclude
franchise sales would result in a 8.9% increase in convenience
store sales for the quarter and a 5.2% increase year-to-date.
Other sales include outside sales by the Company's manufacturing
divisions and sales of general merchandise to HSI. (See Other
Charges and Credits) HSI completed an expansion of its warehouse
in early 1994 and discontinued its purchases from the Company. In
1993, annual sales to HSI were $472 million. Adjusting third
quarter and three quarters year-to-date sales for both years to
eliminate these sales would produce increases of 9.2% and 11.0%,
respectively, in other sales.
Total sales for the quarter increased 5.8% after adjusting for the
other sales to HSI, the change in franchise sales accounting, and
the exclusion of sales from the Company's San Antonio stores which
were sold in August 1993.
The Company expects competitive pressures, especially from
supercenters, to continue in the near future. However, the impact
of new supercenter competition to date currently is less than the
Company had expected. The Company should continue to benefit,
however, from square footage growth, with an increase of 5% to 6%
planned for 1994, and the continued maturation of new stores.
EBITD
The Company's Credit Agreement and the indentures underlying
approximately $1.5 billion of publicly issued debt contain various
covenants, many of which are based on earnings before interest,
taxes, depreciation, LIFO charge, unusual and extraordinary items
("EBITD"). All EBITD based covenants are based, among other
things, upon generally accepted accounting principles ("GAAP") as
applied on a date prior to January 3, 1993. The ability to
generate EBITD at levels sufficient to satisfy the requirements of
these agreements is a key measure of the Company's financial
strength. The presentation of EBITD is not intended to be an
alternative to any GAAP measure of performance but rather to
facilitate an understanding of the Company's performance compared
to EBITD-based provisions in the Credit Agreement and indentures.
At October 8, 1994 the Company was in compliance with all covenants
of its Credit Agreement and publicly issued debt. The Company
believes it has adequate coverage of its debt covenants to continue
to respond effectively to competitive conditions.
During the third quarter 1994 EBITD, which as defined by the Credit
Agreement does not include the effect of Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and the Company's
special contribution to The Kroger Co. Foundation, increased 10.1%
to $274.8 million from $249.7 million. Year-to-date 1994 EBITD
increased 9.6% to $773.5 million from $705.6 million. The increase
in EBITD was the result of many factors including the increase in
sales, the positive effects of the Company's accelerated store
construction, improvements in productivity, cost reductions in
procurement and distribution, and the payback from investments in
new technology.
MERCHANDISE COSTS
Merchandise costs, including warehousing and transportation expense
and LIFO charges, were favorably influenced by the Company's
advances in consolidated distribution and coordinated purchasing,
reduced transportation costs as a percent of sales, and strong
private label sales. Merchandise costs were unfavorably impacted
by the increase in the LIFO reserve charge. Merchandise costs as a
percent of sales in the third quarter and year-to-date were:
<TABLE>
<CAPTION>
3rd Quarter Year-to-date
-------------- --------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Merchandise Costs - LIFO 75.98% 76.69% 75.90% 76.60%
LIFO charges .13% (.06%) .08% .03%
------ ------- ------ ------
Merchandise Costs - FIFO 75.85% 76.75% 75.82% 76.57%
</TABLE>
Merchandise costs also were favorably influenced by the
discontinuance of the low-margin sales to HSI. Third quarter
merchandise costs as a percent of sales adjusted for these sales
declined to 75.98% compared to 76.22% in 1993.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses in the third quarter
1994 increased to 18.82% of sales from 18.15% last year. Year-to-
date operating, general and administrative expenses in 1994 were
18.50% compared to 18.05% in 1993. Operating, general and
administrative expenses as a percent of sales were essentially flat
after adjusting for sales to HSI and convenience store franchisee
sales.
Operating, general and administrative expenses were negatively
effected by the high level of new store opening costs as compared
to third quarter 1993. Higher accruals for incentive bonuses for
both management and store employees based on improved results also
increased operating, general and administrative expenses.
The Company's investment in new technologies to improve
efficiencies have favorably effected costs. Automated labor
scheduling and faster front-end point of sale systems including
coupon validation technology and front-end scaling are two
examples. Total employee costs including fringe benefits were
favorable to a year ago as a percent of sales. The Company settled
three of its major labor agreements in Cincinnati, OH, Louisville,
KY, and Charleston, WV late in the third quarter. The contracts
range from 4-1/2 to 5 year agreements that improve the Company's
operating flexibility and include cost containment provisions.
NET INTEREST EXPENSE
Net interest expense declined 16.0% to $100.7 million in the third
quarter 1994 from $119.9 million in last year's third quarter.
Year-to-date net interest expense totalled $251.8 million, down
19.2% from last year's year-to-date total of $311.5 million. This
reduction is primarily due to the Company's progress in refinancing
its high-cost, long-term debt, the issuance of equity in 1993, and
improvements in working capital. Total long-term debt at the end
of the third quarter was $3.9 billion, compared to $4.2 billion for
the 1993 third quarter.
The Company recently entered into a new Credit Agreement (see
Liquidity and Capital Resources) which will reduce the Company's
interest rate spreads over LIBOR on bank borrowings. Nonetheless,
as a result of recent increases in market interest rates and the
Company's cycling of its third quarter 1993 call of its 15.5%
Junior Subordinated Discount Debentures, future reductions in
interest expense are not expected to be as large as have been
achieved in the past. The Company's estimate of interest expense
for all of 1994 is $330 million as compared to $390.0 million for
1993.
NET EARNINGS
The Company's net earnings in the third quarter 1994 were $36.0
million or $.31 per share on a fully diluted basis compared to net
earnings in the third quarter 1993 of $16.4 million or $.16 per
share. Earnings before the extraordinary loss and the cumulative
effect of a change in accounting totalled $51.2 million in the
third quarter 1994 compared to $25.2 million in 1993. The third
quarter 1994 earnings include a $4.3 million pre-tax charge ($2.7
million after tax) offset by a $5.9 million tax credit in
connection with the Company's contribution to The Kroger Co.
Foundation. Also included in third quarter 1994 earnings is a
$25.1 million charge to recognize future lease commitments and
losses on equipment related to certain San Antonio stores to
Megafoods, Inc. which declared bankruptcy during the third quarter
of 1994. The Company had sold its San Antonio store to Megafoods
in the 1993 third quarter. Also during the third quarter of 1994
the Company recorded a $25.1 million gain on the disposition of its
investment in HSI after providing for certain tax indemnities
related to HSI. Third quarter 1994 includes a $9.0 million pre-tax
LIFO charge as compared to a $4.0 million pre-tax LIFO credit in
the third quarter 1993.
Year-to-date earnings before the extraordinary loss and the
cumulative effect of a change in accounting totalled $176.9 million
in 1994 compared to $84.3 million in 1993. The Company had net
earnings in 1994 of $150.7 million compared to a net loss of $94.9
million through three quarters of 1993. Net earnings in 1993 were
negatively affected $159.2 million by the cumulative effect of the
change in accounting for retiree benefits. 1993 also includes a
$4.4 million pre-tax charge related to a change in the estimated
useful life of certain computer equipment, a $22.7 million pre-tax
charge in connection with the sale of the Company's San Antonio
stores, and a $4.2 million tax charge to increase deferred taxes
for the change in the statutory tax rates.
1994 and 1993's year-to-date net earnings were negatively affected
by an extraordinary loss of $26.2 million or $.20 per fully diluted
share and $20.0 million or $.17 per fully diluted share,
respectively. The extraordinary loss in both years resulted from
the early retirement of the Company's high-cost debt. The
extraordinary loss in 1994 also includes the Company's write-off of
deferred charges related to its bank credit agreement that was
replaced on July 19, 1994.
LIQUIDITY AND CAPITAL RESOURCES
During the first three quarters of 1994 the Company redeemed the
remaining outstanding amount of its 11-1/8% Senior Notes and its 8-
3/4% Senior Subordinated Reset Notes. The Company also purchased
$112.8 million of its various senior subordinated debt issues, $5.0
million of its 8-1/4% Convertible Junior Subordinated Debentures,
and $18.4 million of its 9-1/4% Senior Secured Debentures.
The Company's Credit Agreement, signed on July 19, 1994, is a seven
year, $1.75 billion revolving loan and provides for increases in
the amount the Company is permitted for capital expenditures. The
Company's initial borrowing under the new agreement, totaling $745
million, was used to pay the remaining balance on the old
agreement. At the end of the third quarter 1994 the Company had
$772.3 million available under its Credit Agreement to meet short-
term liquidity needs.
During 1994 the Company has issued $99.8 million of senior
subordinated notes with interest rates ranging from 6% to 9% and
maturities ranging from 1999 through 2009. The Company issued in
the third quarter 1994 8.73% First Mortgage Bonds in the amount of
$24.6 million due June 15, 2009. The net proceeds of the offerings
initially were used to repay amounts outstanding under the Credit
Agreement and its predecessor and thereafter the Company used
amounts available thereunder to purchase, on the open market,
portions of its high-cost long-term debt and to fund in part the
March 15, 1994 call of its 11-1/8% Senior Notes and the June 15,
1994 call of its 8-3/4% Senior Subordinated Reset Notes.
Capital expenditures through three quarters 1994 totaled $372.9
million compared to $237.7 million for 1993. Capital expenditures
for the year are expected to total $500-$550 million compared to
$376.1 million during all of 1993. This will enable the Company to
open or expand approximately 70-80 stores, including the January
1994 purchase of 10 AppleTree stores located in Houston, Texas, and
remodel an additional 60 to 70 stores. Through three quarters of
1994 the Company had opened, acquired or expanded 52 food stores.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Company generated $548.5 million of cash from operating
activities during three quarters of 1994 compared to $511.6 million
last year. The increase reflects the improved operating results of
the Company and by a decrease in the use of cash for net operating
assets that was greater than 1993's decrease.
Investing activities used $327.7 million in cash through three
quarters of 1994 compared to $294.2 million last year. Capital
expenditures increased $135.2 million from 1993. This use of cash
was offset by a $16.3 million decrease from 1993 in the purchase of
investments, a $41.4 million decrease in the use of cash for
property held for sale, and 1994 proceeds of $50.5 million from the
sale of the Company's HSI investment (See Other Charges and
Credits).
Year-to-date financing activities used $268.1 million in cash
compared to $242.1 million during the same period last year. The
increase is due to an increase in long-term debt payments of $165.1
million offset by an increase of $124.3 million in proceeds from
the sale of debt and equity issues and a reduction of $13.9 million
in the use of cash for debt prepayment penalties.
OTHER ISSUES
Prior to the merger of HSI and a subsidiary of Revco D.S. the
Company donated $4.3 million book value of its investment in HSI to
The Kroger Co. Foundation. The donation resulted in a $2.7 million
after tax expense ($.02 per fully diluted share). The market value
of the stock at the time of donation was $19.6 million which
produced a $5.9 million tax credit.
SUBSEQUENT EVENTS
On September 16, 1994 the Company notified the trustee of its 8-
1/4% Convertible Junior Subordinated Debentures (the "Debentures")
that it would redeem the Debentures on October 24, 1994.
Thereafter the Company used amounts available under the Credit
Agreement to redeem the Debentures on that date.
The extraordinary loss associated with this redemption was
reflected in net earnings during the third quarter because the
Company's notification to the trustee was irrevocable.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 4.1 - Instruments defining the rights
----------- of holders of long-term debt of the
Company and its subsidiaries are not filed
as Exhibits because the amount of debt
under each instrument is less than 10% of
the consolidated assets of the Company.
The Company undertakes to file these
instruments with the Commission upon
request.
Exhibit 11.1 - Statement of Computation of
------------- Consolidated Earnings (Loss) Per
Share.
Exhibit 27.1 - Financial Data Schedule.
------------
Exhibit 99.1 - Additional Exhibits - Statement of
------------ Computation of Ratio of Earnings to Fixed
Charges.
(b) The Company disclosed and filed its Senior
Competitive Advance and Revolving Credit Agreement
dated July 19, 1994, and its second quarter 1994
earnings release in its Current Report on Form 8-K
dated July 20, 1994. The Company disclosed and
filed its third quarter earnings release in its
Current Report on Form 8-K dated October 19,
1994.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE KROGER CO.
Dated: November 18, 1994 (Joseph A. Pichler)
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: November 18, 1994 (W. Rodney McMullen)
W. Rodney McMullen
Vice President - Control
and Financial Services
Principal Accounting
Officer
<PAGE>
Exhibit Index
-------------
Exhibit
-------
Exhibit 4.1 - Instruments defining the rights of holders of
long-term debt of the Company and its
subsidiaries are not filed as Exhibits because
the amount of debt under each instrument is
less than 10% of the consolidated assets of the
Company. The Company undertakes to file these
instruments with the Commission upon request.
Exhibit 11.1 - Statement of Computation of Consolidated
Earnings (Loss) Per Share.
Exhibit 27.1 - Financial Data Schedule.
Exhibit 99.1 - Additional Exhibits - Statement of Computation
of Ratio of Earnings to Fixed Charges.
<PAGE>
EXHIBIT 11.1
<TABLE>
<CAPTION>
COMPUTATION OF CONSOLIDATED EARNINGS (LOSS) PER SHARE
(in thousands, except per share amounts)
(unaudited)
3rd Quarter Ended 3 Quarters Ended
----------------------- -----------------------
October 8, October 9, October 8, October 9,
---------- ---------- ---------- ----------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C>
Earnings before extraordinary loss and
cumulative effect of change in accounting . . . . $ 51,197 $ 25,209 $ 176,865 $ 84,294
Extraordinary loss . . . . . . . . . . . . . . . . (15,175) (8,834) (26,152) (20,012)
Cumulative effect of change in accounting. . . . . (159,193)
---------- -------- ---------- ----------
Net earnings (loss). . . . . . . . . . . . . . . . $ 36,022 $ 16,375 $ 150,713 $ (94,911)
---------- -------- ---------- ----------
---------- -------- ---------- ----------
PRIMARY <F1>
- -----------
<S> <C> <C> <C> <C>
Weighted average common and dilutive
common equivalent shares:
Common stock outstanding . . . . . . . . . . . 110,374 106,613 109,491 102,990
Stock options. . . . . . . . . . . . . . . . . 3,820 3,020 3,635 2,676
--------- -------- --------- ---------
114,194 109,633 113,126 105,666
--------- -------- --------- ---------
--------- -------- --------- ---------
Primary earnings from operations per share. . . . . $ .45 $ .23 $ 1.56 $ .80
Primary results of extraordinary loss per share . . (.13) (.08) (.23) (.19)
Primary results of cumulative effect of change
in accounting. . . . . . . . . . . . . . . . . . . (1.51)
--------- --------- ---------- ---------
Primary net earnings (loss) per share . . . . . . . $ .32 $ .15 $ 1.33 $ (.90)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
FULLY DILUTED <F1>
- -----------------
<S> <C> <C> <C> <C>
Weighted average common shares
and all other dilutive securities:
Common stock outstanding . . . . . . . . . . . 110,374 106,613 109,491 102,990
Stock options. . . . . . . . . . . . . . . . . 4,263 3,293 4,356 3,366
Convertible debt . . . . . . . . . . . . . . . 17,074 10,707 17,074 10,707
--------- -------- --------- ---------
131,711 120,613 130,921 117,063
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Fully diluted earnings from
operations per share <F2> . . . . . . . . . . . . $ .43 $ .23 $ 1.45 $ .77
Fully diluted results of extraordinary
loss per share . . . . . . . . . . . . . . . . . (.12) (.07) (.20) (.17)
Fully diluted results of cumulative effect of
change in accounting . . . . . . . . . . . . . . (1.36)
-------- -------- --------- ----------
Fully diluted net earnings (loss) per share <F2> . . $ .31 $ .16 $ 1.25 $ (.76)
-------- -------- --------- ----------
-------- -------- --------- ----------
</TABLE>
<F1> The Convertible Junior Subordinated Debentures issued in March
1991 and the Convertible Junior Subordinated Notes issued in
December 1992 are not included in the computation of primary
earnings per share since they are not common stock
equivalents. They are included in the fully diluted earnings
per share calculation for the third quarter and three quarters
ended October 8, 1994. The Convertible Junior Subordinated
Debentures are not included in the fully diluted per share
calculations for the third quarter and three quarters ended
October 9, 1993 because they are anti-dilutive.
<F2> Earnings used to calculate fully diluted earnings per share
have been adjusted to reflect the tax effected interest
expense of $5.1 million and $2.3 million for the quarters
ended October 8, 1994 and October 9, 1993 and $12.5 million
and $5.7 million for the three quarters ended October 8, 1994
and October 9, 1993 that would have been avoided in connection
with the assumed conversion of the dilutive convertible debt
issues as of the beginning of each year.
<PAGE>
EXHIBIT 99.1
Schedule of computation of ratio of earnings to fixed charges of
The Kroger Co. and consolidated subsidiary companies and
unconsolidated companies as if consolidated for the five fiscal
years ended January 1, 1994 and for the three quarters ended
October 8, 1994 and October 9, 1993.
<TABLE>
3 Quarters Ended Fiscal Years Ended
-------------------- -------------------------------------------------------------
October 8, October 9, January 1, January 2, December 28, December 29, December 30,
1994 1993 1994 1993 1991 1990 1989
(40 Weeks) (40 Weeks) (52 Weeks) (53 Weeks) (52 weeks) (52 weeks) (52 Weeks)
---------- ---------- ---------- ---------- ------------ ----------- -----------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Earnings (loss) from
continuing operations
before tax expense
(credit), extraordinary
loss and cumulative
effect of change in
accounting . . . . . . . $277,623 $151,709 $283,938 $173,415 $168,595 $142,203 $ (8,739)
Fixed charges. . . . . . 386,128 438,888 556,008 640,004 687,226 708,455 788,239
Capitalized interest . . (1,565) (1,034) 230 (960) 122 (39) (839)
--------- --------- -------- --------- -------- --------- ---------
$662,186 $589,563 $840,176 $812,459 $855,943 $850,619 $778,661
--------- --------- -------- --------- -------- --------- ---------
Fixed Charges
Interest . . . . . . . . $254,206 $312,866 $391,693 $476,932 $536,485 $565,540 $651,038
Portion of rental
payments deemed to be
interest. . . . . . . . 131,922 126,022 164,315 163,072 150,741 142,915 137,201
-------- -------- -------- -------- -------- -------- --------
$386,128 $438,888 $556,008 $640,004 $687,226 $708,455 $788,239
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges . . . . . 1.7 1.3 1.5 1.3 1.2 1.2 -
Dollar Deficiency of
Coverage. . . . . . . . N/A N/A N/A N/A N/A N/A ($9,578)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS, CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE QUARTERS ENDED OCTOBER 8,
1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> OCT-08-1994
<CASH> 73,968
<SECURITIES> 0
<RECEIVABLES> 257,078
<ALLOWANCES> 0
<INVENTORY> 1,541,080
<CURRENT-ASSETS> 2,096,158
<PP&E> 4,513,038
<DEPRECIATION> 2,346,128
<TOTAL-ASSETS> 4,506,664
<CURRENT-LIABILITIES> 2,310,231
<BONDS> 3,925,848
<COMMON> 85,918
0
0
<OTHER-SE> (2,340,219)
<TOTAL-LIABILITY-AND-EQUITY> 4,506,664
<SALES> 17,373,289
<TOTAL-REVENUES> 17,373,289
<CGS> 13,187,111
<TOTAL-COSTS> 13,187,111
<OTHER-EXPENSES> 3,656,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 251,762
<INCOME-PRETAX> 277,623
<INCOME-TAX> 100,758
<INCOME-CONTINUING> 176,865
<DISCONTINUED> 0
<EXTRAORDINARY> (26,152)
<CHANGES> 0
<NET-INCOME> 150,713
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.25
</TABLE>
