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
June 14, 1997 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 254,365,741 shares of Common Stock ($1 par value)
outstanding as of July 11, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited information for the quarters ended June 14, 1997 and
June 15, 1996 includes the results of operations of The Kroger Co.
for the 12 and 24 week periods ended June 14, 1997 and June 15,
1996, and of Dillon Companies, Inc. for the 13 and 26 week periods
ended June 28, 1997 and June 29, 1996. 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.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
2nd Quarter Ended 2 Quarters Ended
---------------------- ------------------------
June 14, June 15, June 14, June 15,
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $6,231,794 $5,844,366 $12,371,207 $11,628,620
---------- ---------- ----------- -----------
Costs and expenses:
Merchandise costs, including warehousing and
transportation. . . . . . . . . . . . . . . . . . . . 4,682,365 4,412,202 9,308,755 8,780,169
Operating, general and administrative. . . . . . . . . 1,142,105 1,084,528 2,274,147 2,160,443
Rent . . . . . . . . . . . . . . . . . . . . . . . . . 74,989 69,316 150,834 139,044
Depreciation and amortization. . . . . . . . . . . . . 88,203 80,354 173,576 155,997
Interest expense, net. . . . . . . . . . . . . . . . . 68,352 70,523 138,099 141,149
---------- ---------- ----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . 6,056,014 5,716,923 12,045,411 11,376,802
---------- ---------- ----------- -----------
Earnings before income tax expense and
extraordinary loss . . . . . . . . . . . . . . . . . . 175,780 127,443 325,796 251,818
Tax expense . . . . . . . . . . . . . . . . . . . . . . 67,643 49,065 125,399 96,950
---------- ---------- ----------- -----------
Earnings before extraordinary loss. . . . . . . . . . . 108,137 78,378 200,397 154,868
Extraordinary loss (net of income tax credit) . . . . . (3,033) (766) (8,243) (1,850)
---------- ---------- ----------- -----------
Net earnings . . . . . . . . . . . . . . . . . . . $ 105,104 $ 77,612 $ 192,154 $ 153,018
========== ========== =========== ===========
Fully diluted earnings per common share:
Earnings from operations . . . . . . . . . . . . . . . $ .41 $ .30 $ .75 $ .59
Extraordinary loss . . . . . . . . . . . . . . . . . . (.01) .00 (.03) (.01)
----- ----- ------ ------
Net earnings . . . . . . . . . . . . . . . . . . . $ .40 $ .30 $ .72 $ .58
===== ===== ====== ======
Average number of common shares used in fully diluted
per share calculations . . . . . . . . . . . . . . . . 266,947 262,289 267,349 261,755
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
June 14, December 28,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
Current assets
Receivables . . . . . . . . . . . . . . . . . . . . . . $ 318,718 $ 324,050
Inventories:
FIFO cost . . . . . . . . . . . . . . . . . . . . . . 2,064,247 2,175,630
Less LIFO reserve . . . . . . . . . . . . . . . . . . (469,689) (461,689)
---------- ----------
1,594,558 1,713,941
Property held for sale. . . . . . . . . . . . . . . . . 29,121 38,333
Prepaid and other current assets. . . . . . . . . . . . 192,851 276,440
---------- ----------
Total current assets. . . . . . . . . . . . . . . . 2,135,248 2,352,764
Property, plant and equipment, net. . . . . . . . . . . . 3,175,133 3,063,534
Investments and other assets. . . . . . . . . . . . . . . 419,670 409,115
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . $5,730,051 $5,825,413
========== ==========
LIABILITIES
Current liabilities
Current portion of long-term debt . . . . . . . . . . . $ 8,080 $ 11,642
Current portion of obligations under
capital leases. . . . . . . . . . . . . . . . . . . . 9,708 9,501
Accounts payable. . . . . . . . . . . . . . . . . . . . 1,496,928 1,650,256
Other current liabilities . . . . . . . . . . . . . . . 1,152,929 1,041,521
---------- ----------
Total current liabilities . . . . . . . . . . . . . 2,667,645 2,712,920
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 3,258,292 3,478,743
Obligations under capital leases. . . . . . . . . . . . . 182,415 180,748
Deferred income taxes . . . . . . . . . . . . . . . . . . 161,938 151,036
Other long-term liabilities . . . . . . . . . . . . . . . 474,373 483,672
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . 6,744,663 7,007,119
---------- ----------
SHAREOWNERS' DEFICIT
Common capital stock, par $1, at stated value
Authorized: 350,000,000 shares
Issued: 1997 - 274,833,330 shares
1996 - 272,923,042 shares. . . . . . . . . . . 679,990 658,230
Accumulated deficit . . . . . . . . . . . . . . . . . . . (1,403,896) (1,596,050)
Common stock in treasury, at cost
1997 - 20,954,291 shares
1996 - 19,163,712 shares . . . . . . . . . . . (290,706) (243,886)
---------- ----------
Total Shareowners' Deficit (1,014,612) (1,181,706)
---------- ----------
Total Liabilities and Shareowners' Deficit. . . . . . $5,730,051 $5,825,413
========== ==========
</TABLE>
- ------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
2 Quarters Ended
-------------------------------
June 14, June 15,
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . $ 192,154 $ 153,018
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . 8,243 1,850
Depreciation and amortization. . . . . . . . . . . . . . . . 173,576 155,997
Amortization of deferred financing costs . . . . . . . . . . 8,169 6,466
LIFO charge. . . . . . . . . . . . . . . . . . . . . . . . . 8,000 7,000
Net (decrease) increase in cash from changes in operating
assets and liabilities, net of effects from sale of
subsidiary, detail below . . . . . . . . . . . . . . . . . 314,690 (70,006)
Other changes, net . . . . . . . . . . . . . . . . . . . . . (881) 602
---------- ----------
Net cash provided by operating activities . . . . . . . . 703,951 254,927
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (261,461) (258,831)
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . 4,316 6,659
(Increase) decrease in property held for sale . . . . . . . . . 9,212 (92,264)
Increase in other investments . . . . . . . . . . . . . . . . . (20,425) (28,789)
---------- ----------
Net cash used by investing activities . . . . . . . . . . (268,358) (373,225)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt prepayment costs . . . . . . . . . . . . . . . . . . . . . (7,284) (2,744)
Financing charges incurred. . . . . . . . . . . . . . . . . . . (6,200) (1,262)
Principal payments under capital lease obligations. . . . . . . (4,780) (4,543)
Proceeds from issuance of long-term debt. . . . . . . . . . . . 661,647 102,675
Reductions in long-term debt. . . . . . . . . . . . . . . . . . (885,660) (49,042)
Increase (decrease) outstanding checks . . . . . . . . . . . . (167,306) 48,361
Capital stock reacquired. . . . . . . . . . . . . . . . . . . . (46,821)
Proceeds from issuance of capital stock . . . . . . . . . . . . 20,811 24,853
---------- ----------
Net cash provided (used) by financing activities. . . . . (435,593) 118,298
---------- ----------
Net increase in cash and temporary cash investments . . . . . . . 0 0
Cash and temporary cash investments:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . 0 0
---------- ----------
End of quarter. . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0
========== ==========
INCREASE (DECREASE) IN CASH FROM CHANGES IN OPERATING ASSETS AND LIABILITIES:
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . $ 111,383 $ 71,864
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 5,332 11,291
Prepaid and other current assets. . . . . . . . . . . . . . . 83,458 (23,703)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 13,979 (190,343)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 4,186 1,518
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 96,352 59,367
---------- ----------
$ 314,690 $ (70,006)
========== ==========
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
Supplemental disclosures of cash flow information:
2 Quarters Ended
--------------------
June 14, June 15,
1997 1996
-------- ---------
Cash paid during the period for:
Interest (net of amount capitalized) $141,333 $138,243
Income taxes 22,823 62,362
- -----------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
1. BASIS OF PRESENTATION
---------------------
The year-end condensed balance sheet data was derived from
audited financial statements, but does not include all
disclosures required by generally accepted accounting
principles.
2. INCOME TAXES
------------
The effective income tax rate differs from the expected
statutory rate primarily due to the effect of certain state
taxes.
3. EXTRAORDINARY LOSS
------------------
The extraordinary loss for the two quarters ended June 14,
1997 and June 15, 1996 of $8.2 million and $1.9 million,
respectively (net of income taxes of $5.2 million and $1.2
million, respectively) and for the second quarter ended June
14, 1997 and June 15, 1996 of $3.0 million and $.8 million
(net of income taxes of $1.9 million and $.4 million,
respectively) is related to the early retirement of long-term
debt. During the second quarter of 1997 the Company
repurchased or retired $15.8 million of its senior and
subordinated debt issues and retired $8.1 million of its
various mortgages. Year-to-date 1997 purchases and early
retirements total $167.0 million of senior and subordinated
debt and $8.2 million of mortgages. These purchases and
redemptions of debt were funded by excess cash from
operations, proceeds from miscellaneous asset sales, funds
borrowed under the Company's Credit Agreement, and from the
issuance of senior notes.
4. EARNINGS PER COMMON SHARE
-------------------------
Fully diluted earnings per common share equals net earnings
divided by the weighted average number of common shares
outstanding, after giving effect to dilutive stock options.
Primary earnings per share are not presented as they
approximate fully diluted earnings per share.
On March 20, 1997, the Company's Board of Directors declared a
2-for-1 stock split. Shares were distributed on April 22,
1997. All share and per share data included in this report
have been restated to reflect the stock split.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("the statement"). The Company will implement the
Statement in the fourth quarter 1997. Diluted earnings per
share, as defined by the Statement, are expected to
approximate the Company's fully diluted earnings per share, as
currently calculated. Upon implementation of the statement,
the Company also will be required to present basic earnings
per share, based on the weighted average shares of common
stock outstanding for the reporting period, without giving
effect to options, warrants or other potentially dilutive
securities. It is expected that this will result in an
earnings per share amount which is greater than primary
earnings per share.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129
"Disclosure of Information about Capital Structure" (the
"statement"). The Company has determined that this statement
will not require any changes in the financial statements.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income", and No. 131 "Disclosure about Segments
of an Enterprise and Related Information". The Company has
not yet determined what effect, if any, this statement will
have.
6. SUBSEQUENT EVENTS
-----------------
Subsequent to June 14, 1997, the Company purchased an
additional $130.0 millon of debt which cannot be retired
early, issued by the lenders of certain of its structured
financings, in an effort to effectively further reduce the
Company's interest expense. Including purchases made as of
June 14, 1997, the Company now owns $312.4 million of this
debt which is classified as an investment.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
Total sales for the second quarter of 1997 increased 6.6% over
second quarter 1996 to $6.23 billion as compared to $5.84 billion.
Food store sales increased 6.7% over the 1996 second quarter. The
improvement in second quarter sales versus last year can be
partially attributed to a 44-day strike in the Company's King
Soopers division in Colorado in the second quarter of 1996.
Supermarket sales, excluding King Soopers, increased 4.8% for the
quarter reflecting the results of the Company's Capital Expenditure
Program. During the second quarter of 1997 the Company opened,
expanded or relocated 22 stores. During the last 4 quarters the
Company has opened, expanded or relocated 123 stores versus 99 in
the prior year rolling 4 quarters. In some of the Company's
markets, sales were adversely impacted by heightened competition.
Food store square footage increased 7.7% over the second quarter of
1996. The 1997 second quarter sales in identical food stores,
units that have been in operation for one full year and have not
been expanded, excluding the effect of the strike at King Soopers,
decreased .1%, versus an increase of .6% in the second quarter of
1996. Comparable store sales, which include results from expanded
and relocated stores, increased 3.2% in the quarter excluding the
effect of the strike at King Soopers.
The increase in total convenience stores sales was the result of a
1.1% increase in grocery sales combined with a 5.6% increase in
gasoline sales. Gas gallons sold during the quarter increased 8.8%
over 1996's second quarter. Convenience stores' identical grocery
sales increased 1.0%, identical gasoline sales dollars decreased
5.1%, and identical gas gallons decreased 1.5%. The average retail
price per gallon declined by 2.9% as compared to second quarter of
1996.
Other sales, consisting of non-retail sales to unaffiliated third
parties, increased 8.7% over the second quarter 1996. These
included sales of product manufactured or packaged to the
customer's specifications.
A review of sales trends by lines of business includes:
<TABLE>
<CAPTION>
(in thousands of dollars)
% of 1997 2nd Quarter
----------------------
Lines of Business Sales 1997 1996 Change
--------------------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Food Stores ........ 92.9% $5,790,154 $5,427,220 +6.7%
Convenience Stores .. 4.1% 255,428 245,821 +3.9%
Other Sales ........ 3.0% 186,212 171,325 +8.7%
--------- ---------- ---------- -----
Total Sales ........ 100.0% $6,231,794 $5,844,366 +6.6%
<CAPTION>
(in thousands of dollars)
% of 1997 2 Quarters Year-to-date
------------------------
Lines of Business Sales 1997 1996 Change
--------------------- --------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Food Stores ........ 93.2% $11,526,389 $10,859,973 +6.1%
Convenience Stores .. 3.9% 489,081 449,096 +8.9%
Other Sales ........ 2.9% 355,737 319,550 +11.3%
-------- ----------- -----------
Total Sales ........ 100.0% $12,371,207 $11,628,619 +6.4%
</TABLE>
The Company's strategy continues to be to obtain sales growth from
new square footage, as well as from increased productivity from
existing locations. During 1997, the Company expects to open,
acquire, relocate or expand 100 stores and remodel another 65
units. Full year square footage growth is expected to equal
approximately 6%. The Company should continue to realize savings
from technology and logistics improvements, some of which may be
reinvested in retail price reductions to increase sales volume.
EBITD
The Company's $1.5 Billion Five-Year Credit Agreement and $500
Million 364-Day Credit Agreement (collectively, the "Credit
Agreement"), and the indentures underlying approximately $836.5
million of publicly issued debt contain various restrictive
covenants, many of which are based on earnings before interest,
taxes, depreciation, LIFO charge, and unusual and extraordinary
items ("EBITD"). All such 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 its debt
covenants. At June 14, 1997 the Company was in compliance with all
covenants of its Credit Agreement and its indentures. The Company
believes it has adequate coverage of its debt covenants to continue
to respond effectively to competitive conditions.
EBITD after non-cash expenses associated with FASB 106, in the
quarter, increased 19.2% to $335.8 million compared to $281.8
million in the second quarter of 1996. After adjusting for the
effect of the strike at King Soopers, EBITD increased 8.2%. EBITD
after non-cash expenses associated with FASB 106, increased 16.1%
to $645.5 million from $556.0 million year to date 1997 compared to
1996. EBITD growth, excluding the effect of the strike from last
year results, was generated by sales gains, increased gross profit
and reduced operating, general and administrative expenses as a
percent of sales. The Company's storing program continued to
produce incremental EBITD increases as well.
MERCHANDISE COSTS
For the second quarter 1997, merchandise costs, including
warehousing and transportation expense and LIFO charges, declined
to 75.1% of sales compared to 75.5% in the second quarter 1996.
Merchandise costs were positively affected by the Company's
advances in coordinated purchasing and increases in private label
sales and last years strike at King Soopers. The food stores
profit rates were favorable to last year. Convenience stores
grocery profit rates were favorable while gasoline profit rates
were even with last year. The Company will continue to invest
capital in technology focusing on improved store operation,
procurement, and distribution practices that are expected to
continue to positively affect merchandising costs as a percent of
sales.
<TABLE>
<CAPTION>
2 Quarters
2nd Quarter Year-to-date
--------------- ---------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Merchandise Costs - LIFO 75.14% 75.49% 75.25% 75.50%
LIFO Charge .06% .05% .06% .06%
------ ------ ------ ------
Merchandise Costs - FIFO 75.08% 75.44% 75.19% 75.44%
</TABLE>
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses in the second
quarter 1997 decreased to 18.33% of sales from 18.56% last year.
Year-to-date operating, general and administrative expenses in 1997
were 18.38% compared to 18.58% in 1996. Although somewhat
distorted by the strike, the improvement reflects the impact of the
Company's investments in technology, tight expense control, and
consolidation of support services.
The Company's focus is on controlling operating, general and
administrative expenses. There are a number of administrative
changes underway to reduce support costs. While the Company
believes that these programs will bring about cost reductions,
there can be no assurances of these results.
NET INTEREST EXPENSE
Net interest expense declined to $68.4 million in the second
quarter 1997 from $70.5 million in last year's second quarter.
Year-to-date net interest expense totaled $138.1 million as
compared to $141.1 million in the first half of 1996. The Company
expects 1997 net interest expense to total approximately $290
million.
The Company has purchased a portion of the debt which cannot be
retired early, issued by the lenders of certain of its structured
financings, in an effort to effectively further reduce the
Company's interest expense. During 1997 the Company has purchased
$30 million of this debt, bringing the total investment in this
debt to $182.4 million. Excluding the debt incurred to make these
purchases, which are classified as investments, the Company's long-
term debt at the end of the second quarter was $3.28 billion, down
from $3.50 billion at the end of the 1996 second quarter. Net
operating working capital declined by $36.7 million to $7.2 million
as compared to the second quarter 1996's $43.9 million. This
reduction, combined with the strong cash flow and steady capital
expenditures contributed to the decline in debt.
NET EARNINGS
The Company's net earnings in the second quarter 1997 were $105.1
million or $.40 per share on a fully diluted basis compared to net
earnings in the second quarter 1996 of $77.6 million or $.30 per
share. Year-to-date net earnings in 1997 were $192.2 million or
$.72 per share on a fully-diluted basis compared to net earnings in
1996 of $153.0 million or $.58 per share. 1997 year-to-date net
earnings included an extraordinary loss of $8.2 million compared to
$1.8 million in 1996. The extraordinary loss in both years
resulted from the early retirement of the Company's high-cost debt.
The Company expects to incur an extraordinary loss in each quarter
of 1997 as it continues to retire high-cost debt.
Second quarter earnings before the extraordinary loss totaled
$108.1 million or $.41 per share on a fully diluted basis in 1997
compared to $78.4 million or $.30 per share on a fully diluted
basis in 1996. Year-to-date earnings before the extraordinary loss
totaled $200.4 million in 1997 compared to $154.9 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the second quarter 1997 the Company purchased or retired
$15.8 million of its various senior and subordinated debt issues.
Through two quarters of 1997 the Company has purchased or retired
$167.0 million of these issues.
At the end of the second quarter 1997, the Company had $1.1 billion
available under its Credit Agreement to meet short-term liquidity
needs.
Second quarter of 1997 capital expenditures totaled $124.8 million
compared to $85.2 million in 1996. Year-to-date capital
expenditures are $261.5 million for 1997 compared to $258.8 million
in 1996. Capital expenditures for the year are expected to total
approximately $800-$850 million as compared to $733.8 million
during all of 1996. This should enable the Company to open or
expand approximately 100 stores and remodel 65 additional stores
during 1997 and continue investments in the areas of logistics and
technology projects. Through two quarters of 1997, the Company has
opened, expanded or acquired 53 food stores and completed 20
remodels.
On May 28, 1997, the Company completed new bank credit agreements
totaling $2.0 billion with Citibank, N.A., and The Chase Manhattan
Bank as Administrative Agents; First Chicago Capital Markets, Inc.
as Syndication Agent; and The Bank of New York as Documentation
Agent. The new agreements consist of a $1.5 billion, Five-Year
Revolving Credit Facility and a $500 million, 364-Day Revolving
Credit facility. The new credit agreements provide additional
operating flexibility and lower borrowing costs as compared to the
prior credit agreement.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Company generated $704.0 million of cash from operating
activities during the first half of 1997 compared to $254.9 million
during the same period last year. The increase is due in large
part to changes in operating assets and liabilities that provided
$314.7 million of cash in 1997 compared to using cash of $70.0
million in 1996. The largest component of the change in operating
assets and liabilities was net owned inventory which provided
$125.4 million of cash in the first half of 1997 versus a use of
$118.5 million in 1996's first half.
Investing activities used $268.4 million in cash during the first
half of 1997 compared to $373.2 million last year. The net decline
in the use of cash is due to a $101.5 million reduction in property
held for sale resulting from the completion of sale and leaseback
arrangements on stores and a decline of $8.4 million used for the
purchase of investments. Offsetting these declines in the use of
cash was a slight increase in capital expenditures.
Financing activities used $435.6 million in cash compared to
providing $118.3 million in the first half of last year. The
change is due to a net increase of $277.6 million in the use of
cash for the reduction in long-term debt combined with a $215.7
million net change in the use of cash for outstanding checks.
Additionally, the Company used $46.8 million under its stock
repurchase program that was implemented in the first half of 1997.
Debt prepayment premium and new financing costs used $13.5 million
in 1997 as compared to $4.0 million in 1996.
SPECIAL NOTE
The foregoing Management's Discussion and Analysis contains certain
forward-looking statements about the future performance of the
Company that are based on management's assumptions and beliefs in
light of the information currently available to it. These forward-
looking statements are subject to uncertainties and other factors
that could cause actual results to differ materially from those
statements including, but not limited to: competitive practices and
pricing in the food and drug industries generally and particularly
in the Company's principal markets; changes in the financial
markets related to the cost of the Company's capital; the ability
of the Company to access the public debt and equity markets to
refinance indebtedness and fund the Company's capital expenditure
program on satisfactory terms; supply or quality control problems
with the Company's vendors; labor disputes and material shortages;
and changes in economic conditions that affect the buying patterns
of the Company's customers.
SUBSEQUENT EVENTS
Subsequent to June 14, 1997, the Company purchased an additional
$130.0 millon of debt which cannot be retired early, issued by the
lenders of certain of its structured financings, in an effort to
effectively further reduce the Company's interest expense.
Including purchases made as of June 14, 1997, the Company now owns
$312.4 million of this debt which is classified as an investment.
<PAGE>
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
The Company is prohibited from paying cash dividends on
its Common Stock pursuant to restrictions contained in
its Credit Agreement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) May 15, 1997 - Annual Meeting of Shareholders.
(b) The Shareholders elected five directors to serve
until the annual meeting in 2000, or until their
successors have been elected and qualified; approved
adoption of the 1997 Long-Term Incentive Plan; and
ratified the selection of Coopers & Lybrand L.L.P.
as Company auditors for 1997. Votes case were as
follows:
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
Reuben V. Anderson 105,953,102 1,974,902
Clyde R. Moore 106,687,185 1,240,819
John D. Ong 104,724,083 3,203,921
Joseph A. Pichler 106,594,335 1,333,669
Martha Romayne Seger 104,667,687 3,260,317
<CAPTION>
Broker
For Against Withheld Non-Vote
<S> <C> <C> <C> <C>
1997 Long-Term
Incentive Plan 74,053,052 26,491,155 1,081,268 6,302,529
<CAPTION>
For Against Withheld
<S> <C> <C> <C>
Coopers &
Lybrand L.L.P. 106,743,543 646,708 537,753
</TABLE>
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3.1 - Amended Articles of Incorporation of the
-----------
Company are hereby incorporated by reference to Exhibit
3(a) of the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission on April 16,
1997. The Company's Regulations are incorporated by
reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-3 as filed with the Securities and
Exchange Commission on January 28, 1993, and bearing
Registration No. 33-57552.
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 filed its Amended and Restated Amended
Articles of Incorporation and its first quarter 1997
earnings release in its Current Report on Form 8-K dated
April 16, 1997; the Pricing Agreement and Second Supplemental
Indenture related to its 7.65% Senior Notes due 2007 in its
Current Report on Form 8-K dated April 28, 1997; and its 364-
Day Credit Agreement and Five-Year Credit Agreement in
its Current Report on Form 8-K dated June 2, 1997.
<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: July 25, 1997 By: (Joseph A. Pichler)
-------------------------
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: July 25, 1997 By: (J. Michael Schlotman)
-------------------------
J. Michael Schlotman
Vice President and
Corporate Controller
<PAGE>
Exhibit Index
-------------
Exhibit
- --------
Exhibit 3.1 - Amended Articles of Incorporation of the Company are
hereby incorporated by reference to Exhibit 3(a) of
the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission on April
16, 1997. The Company's Regulations are
incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement on Form S-3 as filed
with the Securities and Exchange Commission on January
28, 1993, and bearing Registration No. 33-57552.
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.
<TABLE>
<CAPTION>
EXHIBIT 11.1
COMPUTATION OF CONSOLIDATED EARNINGS (LOSS) PER SHARE
(in thousands, except per share amounts)
(unaudited)
2nd Quarter Ended 2 Quarters Ended
------------------------ ----------------------
June 14, June 15, June 14, June 15,
1997 1996 1997 1996
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Earnings before extraordinary loss . . . . . . . . $ 108,137 $ 78,378 $ 200,397 $ 154,868
Extraordinary loss . . . . . . . . . . . . . . . . (3,033) (766) (8,243) (1,850)
---------- --------- --------- ---------
Net earnings . . . . . . . . . . . . . . . . . . . $ 105,104 $ 77,612 $ 192,154 $ 153,018
========== ========= ========= =========
FULLY DILUTED EARNINGS PER SHARE
- --------------------------------
Weighted average common and dilutive
common equivalent shares:
Common stock outstanding . . . . . . . . . . . 253,970 250,446 254,025 249,620
Stock options. . . . . . . . . . . . . . . . . 12,977 11,843 13,324 12,135
--------- -------- --------- ---------
266,947 262,289 267,349 261,755
========= ======== ========= =========
Fully diluted earnings from operations per share. . $ .41 $ .30 $ .75 $ .59
Fully diluted results of extraordinary
loss per share . . . . . . . . . . . . . . . . . (.01) .00 (.03) (.01)
--------- -------- --------- ---------
Fully diluted net earnings per share. . . . . . . . $ .40 $ .30 $ .72 $ .58
========= ======== ========= =========
</TABLE>
Fully diluted earnings per common share equals net earnings divided
by the weighted average number of common shares outstanding, after
giving effect to dilutive stock options. Primary earnings per
share are not presented as they approximate fully diluted earnings
per share.
On March 20, 1997, the Company's Board of Directors declared a 2-
for-1 stock split. Shares were distributed on April 22, 1997. All
share and per share data included in this report have been restated
to reflect the stock split.
<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 December 28, 1996 and for the two quarters ended June
14, 1997 and June 15, 1996.
<TABLE>
<CAPTION>
Quarter Ended Fiscal Years Ended
---------- ---------- ---------------------------------------------------------------
June 14, June 15, December 28, December 30, December 31, January 1, January 2,
1997 1996 1996 1995 1994 1994 1993
(12 Weeks) (12 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (52 weeks) (53 weeks)
---------- ---------- ------------ ----------- ------------ ----------- -----------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Earnings from continuing
operations before tax
expense, extraordinary
loss and cumulative
effect of change in
accounting . . . . . . . $325,796 $251,818 $567,313 $509,638 $421,363 $283,938 $173,415
Fixed charges. . . . . . 227,318 225,112 482,680 489,939 500,599 556,008 640,004
Capitalized interest . . (4,146) (4,927) (10,887) (6,785) (2,521) 230 (960)
-------- -------- ---------- -------- -------- -------- --------
$548,968 $472,003 $1,039,106 $992,792 $919,441 $840,176 $812,459
======== ======== ========== ======== ======== ======== ========
Fixed Charges
Interest . . . . . . . . $141,946 $146,413 $311,958 $320,236 $331,097 $391,693 $476,932
Portion of rental
payments deemed to be
interest. . . . . . . . 85,372 78,699 170,722 169,703 169,502 164,315 163,072
-------- -------- ---------- -------- -------- -------- --------
$227,318 $225,112 $ 482,680 $489,939 $500,599 $556,008 $640,004
======== ======== ========== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges . . . . . 2.4 2.1 2.2 2.0 1.8 1.5 1.3
</TABLE>
<PAGE>
<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 QUARTER ENDED JUNE 14, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> JUN-14-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 318,718
<ALLOWANCES> 0
<INVENTORY> 1,594,558
<CURRENT-ASSETS> 2,135,248
<PP&E> 5,971,558
<DEPRECIATION> (2,796,425)
<TOTAL-ASSETS> 5,730,051
<CURRENT-LIABILITIES> 2,667,645
<BONDS> 3,258,292
0
0
<COMMON> 679,990
<OTHER-SE> (1,403,896)
<TOTAL-LIABILITY-AND-EQUITY> 5,730,051
<SALES> 6,231,794
<TOTAL-REVENUES> 6,231,794
<CGS> 4,682,365
<TOTAL-COSTS> 1,142,105
<OTHER-EXPENSES> 74,989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156,555
<INCOME-PRETAX> 175,780
<INCOME-TAX> 67,643
<INCOME-CONTINUING> 108,137
<DISCONTINUED> 0
<EXTRAORDINARY> (3,033)
<CHANGES> 0
<NET-INCOME> 105,104
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
