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 October 4, 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 254,878,979 shares of Common Stock ($1 par value)
outstanding as of October 31, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited information for the quarters ended October 4, 1997
and October 5, 1996 includes the results of operations of The
Kroger Co. for the 16 and 40 week periods ended October 4, 1997 and
October 5, 1996, and of Dillon Companies, Inc. for the 13 and 39
week periods ended September 27, 1997 and September 28, 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.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
3rd Quarter Ended 3 Quarters Ended
---------------------- ------------------------
October 4, October 5, October 4, October 5,
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $7,686,640 $7,343,132 $20,057,847 $18,971,752
---------- ---------- ----------- -----------
Costs and expenses:
Merchandise costs, including warehousing and
transportation. . . . . . . . . . . . . . . . . . . . 5,789,947 5,582,031 15,098,702 14,362,201
Operating, general and administrative. . . . . . . . . 1,439,959 1,361,525 3,714,106 3,521,968
Rent . . . . . . . . . . . . . . . . . . . . . . . . . 101,238 88,913 252,072 227,958
Depreciation and amortization. . . . . . . . . . . . . 112,009 101,192 285,584 257,189
Interest expense, net. . . . . . . . . . . . . . . . . 85,213 91,831 223,313 232,979
---------- ---------- ----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . 7,528,366 7,225,492 19,573,777 18,602,295
---------- ---------- ----------- -----------
Earnings before income tax expense and
extraordinary loss . . . . . . . . . . . . . . . . . . 158,274 117,640 484,070 369,457
Tax expense . . . . . . . . . . . . . . . . . . . . . . 61,744 45,292 187,143 142,241
---------- ---------- ----------- -----------
Earnings before extraordinary loss. . . . . . . . . . . 96,530 72,348 296,927 227,216
Extraordinary loss (net of income tax credit) . . . . . (802) (928) (9,045) (2,778)
---------- ---------- ----------- -----------
Net earnings . . . . . . . . . . . . . . . . . . . $ 95,728 $ 71,420 $ 287,882 $ 224,438
========== ========== =========== ===========
Fully diluted earnings per common share:
Earnings from operations . . . . . . . . . . . . . . . $ .36 $ .27 $ 1.11 $ .86
Extraordinary loss . . . . . . . . . . . . . . . . . . .00 (.00) (.03) (.01)
----- ----- ------ ------
Net earnings . . . . . . . . . . . . . . . . . . . $ .36 $ .27 $ 1.08 $ .85
===== ===== ====== ======
Average number of common shares used in fully diluted
per share calculations . . . . . . . . . . . . . . . . 268,043 264,553 268,292 263,964
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
October 4, December 28,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
Current assets
Receivables . . . . . . . . . . . . . . . . . . . . . . $ 345,238 $ 324,050
Inventories:
FIFO cost . . . . . . . . . . . . . . . . . . . . . . 2,178,443 2,175,630
Less LIFO reserve . . . . . . . . . . . . . . . . . . (472,689) (461,689)
---------- ----------
1,705,754 1,713,941
Property held for sale. . . . . . . . . . . . . . . . . 37,598 38,333
Prepaid and other current assets. . . . . . . . . . . . 172,332 276,440
---------- ----------
Total current assets. . . . . . . . . . . . . . . . 2,260,922 2,352,764
Property, plant and equipment, net. . . . . . . . . . . . 3,191,664 3,063,534
Investments and other assets. . . . . . . . . . . . . . . 582,137 409,115
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . $6,034,723 $5,825,413
========== ==========
LIABILITIES
Current liabilities
Current portion of long-term debt . . . . . . . . . . . $ 11,931 $ 11,642
Current portion of obligations under
capital leases. . . . . . . . . . . . . . . . . . . . 9,867 9,501
Accounts payable. . . . . . . . . . . . . . . . . . . . 1,519,390 1,650,256
Other current liabilities . . . . . . . . . . . . . . . 1,221,708 1,041,521
---------- ----------
Total current liabilities . . . . . . . . . . . . . 2,762,896 2,712,920
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 3,388,308 3,478,743
Obligations under capital leases. . . . . . . . . . . . . 179,882 180,748
Deferred income taxes . . . . . . . . . . . . . . . . . . 150,804 151,036
Other long-term liabilities . . . . . . . . . . . . . . . 480,791 483,672
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . 6,962,681 7,007,119
---------- ----------
SHAREOWNERS' DEFICIT
Common capital stock, par $1, at stated value
Authorized: 350,000,000 shares
Issued: 1997 - 276,055,143 shares
1996 - 272,923,042 shares. . . . . . . . . . . 693,381 658,230
Accumulated deficit . . . . . . . . . . . . . . . . . . . (1,308,168) (1,596,050)
Common stock in treasury, at cost
1997 - 21,710,317 shares
1996 - 19,163,712 shares . . . . . . . . . . . (313,171) (243,886)
---------- ----------
Total Shareowners' Deficit (927,958) (1,181,706)
---------- ----------
Total Liabilities and Shareowners' Deficit. . . . . . $6,034,723 $5,825,413
========== ==========
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
(unaudited)
3 Quarters Ended
-----------------------------
October 4, October 5,
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . $ 287,882 $ 224,438
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . 9,045 2,778
Depreciation and amortization. . . . . . . . . . . . . . . . 285,584 257,189
Amortization of deferred financing costs . . . . . . . . . . 11,142 10,194
LIFO charge. . . . . . . . . . . . . . . . . . . . . . . . . 11,000 14,700
Net (decrease) increase in cash from changes in operating
assets and liabilities, detail below . . . . . . . . . . . 295,552 (162,541)
Other changes, net . . . . . . . . . . . . . . . . . . . . . (2 557) (5,219)
---------- ----------
Net cash provided by operating activities . . . . . . . . 897,648 341,539
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (421,262) (518,271)
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . 20,148 12,126
(Increase) decrease in property held for sale . . . . . . . . . 728 (61,914)
Increase in other investments . . . . . . . . . . . . . . . . . (168,893) (118,365)
---------- ----------
Net cash used by investing activities . . . . . . . . . . (569,279) (686,424)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt prepayment costs . . . . . . . . . . . . . . . . . . . . . (7,696) (4,080)
Financing charges incurred. . . . . . . . . . . . . . . . . . . (24,988) (9,940)
Principal payments under capital lease obligations. . . . . . . (7,154) (6,818)
Proceeds from issuance of long-term debt. . . . . . . . . . . . 645,956 461,892
Reductions in long-term debt. . . . . . . . . . . . . . . . . . (736,246) (207,116)
Increase (decrease) outstanding checks . . . . . . . . . . . . (162,848) 73,595
Capital stock reacquired. . . . . . . . . . . . . . . . . . . . (69,286)
Proceeds from issuance of capital stock . . . . . . . . . . . . 33,893 37,352
---------- ----------
Net cash provided (used) by financing activities. . . . . (328,369) 344,885
---------- ----------
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 . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,814) $ (84,759)
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . (21,188) (18,272)
Prepaid and other current assets. . . . . . . . . . . . . . . 103,434 (17,645)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 32,128 (109,145)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 6,340 2,195
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 177,652 65,085
---------- ----------
$ 295,552 $ (162,541)
========== ==========
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
3 Quarters Ended
--------------------------
October 4, October 5,
1997 1996
---------- ----------
<S> <C> <C>
Cash paid during the period for:
Interest (net of amount capitalized) $220,663 $221,856
Income taxes 126,673 139,166
</TABLE>
- -------------------------------------------------------------------
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 three quarters ended October 4,
1997 and October 5, 1996 of $9.0 million and $2.8 million,
respectively (net of income taxes of $5.7 million and $1.7
million, respectively) and for the third quarter ended October
4, 1997 and October 5, 1996 of $.8 million and $.9 million,
respectively (net of income taxes of $.5 million and $.6
million, respectively) is related to the early retirement of
long-term debt. During the third quarter of 1997 the Company
repurchased or retired $19.3 million of its senior and
subordinated debt issues. Year-to-date 1997 purchases and early
retirements total $186.3 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" ("FASB 128"). The Company will implement FASB 128
in the fourth quarter 1997. Diluted earnings per share, as
defined by FASB 128, are expected to approximate the Company's
fully diluted earnings per share, as currently calculated.
Upon implementation of FASB 128, 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" ("FASB 129").
The Company has determined that FASB 129 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, these statements will
have.
6. SUBSEQUENT EVENTS
-----------------
On October 30, 1997, the Company announced that its Board of
Directors has authorized the repurchase in the open market of
up to $100,000,000 of the Company's common stock, from time to
time, as market conditions warrant.
<PAGE>
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 1997 increased 4.7% over third
quarter 1996 to $7.69 billion as compared to $7.34 billion. Food
store sales increased 4.7% over the 1996 third quarter reflecting
sales at additional food stores built in connection with the
Company's capital expenditure program. During the third quarter of
1997 the Company opened, expanded or relocated 26 stores versus 31
last year. During the last 4 quarters the Company has opened,
expanded or relocated 118 stores versus 101 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 7.3% over the third quarter of 1996. The 1997
third quarter sales in identical food stores, units that have been
in operation for one full year and have not been expanded,
decreased .7%, versus an increase of .8% in the third quarter of
1996. Comparable store sales, which include results from expanded
and relocated stores, increased 2.5% in the quarter compared to
third quarter of 1996.
The increase in total convenience stores sales of 4.5% over last
year's third quarter was the result of a .9% increase in grocery
sales combined with a 6.6% increase in gasoline sales. Gas gallons
sold during the quarter increased 6.5% over 1996's third quarter.
Convenience stores' identical grocery sales increased .7%,
identical gasoline sales dollars decreased 1.9%, and identical gas
gallons decreased 1.6%. The average retail price per gallon
increased by .08% as compared to third quarter of 1996.
Other sales, consisting of non-retail sales to unaffiliated third
parties, increased 3.8% over the third quarter 1996. These sales
included 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)
3rd Quarter
% of 1997 ----------------------
Lines of Business Sales 1997 1996 Change
----------------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Food Stores ........ 93.5% $7,186,263 $6,862,770 +4.7%
Convenience Stores .. 3.5% 268,963 257,475 +4.5%
Other Sales ........ 3.0% 231,414 222,887 +3.8%
------ ---------- ----------
Total Sales ........ 100.0% $7,686,640 $7,343,132 +4.6%
<CAPTION>
(in thousands of dollars)
% of 1997 3 Quarters Year-to-date
------------------------
Lines of Business Sales 1997 1996 Change
----------------- ------ ----------- ----------- ------
<S> <C> <C> <C> <C>
Food Stores ........ 93.3% $18,712,652 $17,722,744 +5.6%
Convenience Stores .. 3.8% 758,044 706,571 +7.3%
Other Sales ........ 2.9% 587,151 542,437 +8.2%
------ ----------- ----------- -----
Total Sales ........ 100.0% $20,057,847 $18,971,752 +5.7%
</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 95 stores and to remodel another 60
units. Full year square footage growth is expected to equal
approximately 5.6%. The Company should expect 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 $817.2
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 October 4, 1997 the Company was in compliance with
all covenants of its Credit Agreements and its indentures. The
Company believes it has adequate coverage of its debt covenants to
continue to respond effectively to competitive conditions.
In the quarter EBITD after non-cash expenses associated with FASB
106, increased 12.6% to $358.5 million compared to $318.4 million
in the third quarter of 1996. After adjusting for the effect of
the Colorado work stoppage early in the third quarter of last year,
EBITD increased 11.0%. EBITD after non-cash expenses associated
with FASB 106, increased 14.8% to $1,004.0 million from $874.3
million year-to-date 1997 compared to 1996. The Company's storing
program continued to produce incremental EBITD increases as well.
MERCHANDISE COSTS
For the third quarter 1997, merchandise costs, including
warehousing and transportation expenses and LIFO charges, declined
to 75.3% of sales compared to 76.0% in the third quarter 1996.
Merchandise costs were positively affected by the Company's
advances in coordinated purchasing and increases in private label
sales which enhance gross profit dollars. The food stores profit
rates were favorable to last year. Convenience stores grocery
profit rates were favorable while gasoline profit rates were
unfavorable to 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.
3 Quarters
3rd Quarter Year-to-date
--------------- ---------------
1997 1996 1997 1996
------ ------ ------ ------
Merchandise Costs - LIFO 75.32% 76.02% 75.28% 75.70%
LIFO Charge .03% .11% .06% .07%
------ ------ ------ ------
Merchandise Costs - FIFO 75.29% 75.91% 75.22% 75.63%
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses in the third quarter
1997 increased to 18.73% of sales from 18.54% last year as a result
of higher employee costs, especially in the benefit area. Year-to-
date operating, general and administrative expenses as a percentage
of sales in 1997 were 18.52% compared to 18.56% in 1996. Although
somewhat distorted by the strike in the prior year, the improvement
for the year 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 $85.2 million in the third quarter
1997 from $91.8 million in last year's third quarter. Year-to-date
net interest expense totaled $223.3 million as compared to $233.0
million through year-to-date 1996. The Company expects 1997 net
interest expense to total approximately $290 million.
The Company has repurchased a portion of the debt which was issued
by the lenders of certain of its structured financings, in an
effort to effectively further reduce the interest expense. During
1997 the Company has purchased $170 million of this debt, bringing
the total investment to $321.6 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 third
quarter was $3.27 billion, down from $3.62 billion at the end of
the 1996 third quarter. Net operating working capital declined by
$43.3 million to $59.8 million as compared to the third quarter
1996's $103.1 million. This reduction, combined with lower capital
expenditures contributed to this decline in debt.
NET EARNINGS
The Company's net earnings in the third quarter 1997 were $95.7
million or $.36 per share on a fully-diluted basis compared to net
earnings in the third quarter 1996 of $71.4 million or $.27 per
share. Year-to-date net earnings in 1997 were $287.9 million or
$1.08 per share on a fully-diluted basis compared to net earnings
in 1996 of $224.4 million or $.85 per share. 1997 year-to-date net
earnings included an extraordinary loss of $9.0 million compared to
$2.8 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 the fourth
quarter of 1997 as it continues to retire high-cost debt.
Third quarter earnings before the extraordinary loss totaled $96.5
million or $.36 per share on a fully diluted basis in 1997 compared
to $72.3 million or $.27 per share on a fully diluted basis in
1996. Year-to-date earnings before the extraordinary loss totaled
$296.9 million in 1997 compared to $227.2 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the third quarter 1997 the Company purchased or retired
$19.3 million of its various senior and subordinated debt issues.
Through three quarters of 1997 the Company has purchased or retired
$186.3 million of this debt.
At the end of the third quarter 1997, the Company had $970.0
million available under its Credit Agreement to meet short-term
liquidity needs.
Third quarter of 1997 capital expenditures totaled $159.8 million
compared to $259.4 million in 1996. Year-to-date capital
expenditures are $421.3 million for 1997 compared to $518.3 million
in 1996. Capital expenditures for the year are expected to total
approximately $750-$800 million as compared to $733.9 million
during all of 1996. These expenditures should enable the Company
to open or expand 95 stores and remodel 60 additional stores during
1997 and continue investments in the areas of logistics and
technology. Through three quarters of 1997, the Company has
opened, expanded or acquired 79 food stores and completed 36
remodels.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Company generated $897.6 million of cash from operating
activities during the three quarters of 1997 compared to $341.5
million during the same period last year. The increase is due in
large part to changes in operating assets and liabilities that
provided $295.6 million of cash in 1997 compared to using cash of
$162.5 million in 1996. The largest component of the change in
operating assets and liabilities was net owned inventory which
provided $29.3 million of cash in the third quarter of 1997 versus
a use of $193.9 million in 1996's third quarter.
Investing activities used $569.3 million in cash during the first
three quarters of 1997 compared to $686.4 million last year. The
net decline in the use of cash is due to a $62.6 million reduction
in the decrease of property held for sale resulting from the
completion of sale and leaseback arrangements on stores and a
decline of $97.0 million in the use of cash for capital
expenditure. Offsetting these declines in the use of cash was the
increase of $50.5 million used for the purchase of investments.
Financing activities used $328.4 million in cash compared to
providing $344.9 million in the first three quarters of last year.
The change is due to a net increase of $345.1 million in the use of
cash for the reduction in long-term debt combined with a $236.4
million net change in the use of cash for outstanding checks.
Additionally, the Company used $69.3 million under its stock
repurchase program that was implemented in the first half of 1997.
Debt prepayment premium and new financing costs used $32.7 million
in 1997 compared to $14.0 million in 1996.
YEAR 2000 MODIFICATIONS
The Company is in the process of making all modifications to its
computer systems deemed necessary by management to account for and
report business transactions beginning on January 1, 2000, and
expects all such modifications to be completed prior to that date.
The Company does not anticipate any material issues related to
the Year 2000 Modifications.
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;
inability to complete Year 2000 modifications; and changes in
economic conditions that affect the buying patterns of the
Company's customers.
SUBSEQUENT EVENTS
On October 30, 1997, the company announced that its Board of
Directors has authorized the repurchase in the open market of up to
$100,000,000 of the Company's common stock, from time to time, as
market conditions warrant.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
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 second quarter 1997 earnings
release in its Current Report on Form 8-K dated July 16,
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: November 12, 1997 By: (Joseph A. Pichler)
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: November 12, 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.
<PAGE>
EXHIBIT 11.1
COMPUTATION OF CONSOLIDATED EARNINGS (LOSS) PER SHARE
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
3rd Quarter Ended 3 Quarters Ended
----------------------- ----------------------
October 4, October 5, October 4, October 5,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings before extraordinary loss . . . . . . . . $ 96,530 $ 72,348 $ 296,927 $ 227,216
Extraordinary loss . . . . . . . . . . . . . . . . (802) (928) (9,045) (2,778)
--------- -------- --------- ---------
Net earnings . . . . . . . . . . . . . . . . . . . $ 95,728 $ 71,420 $ 287,882 $ 224,438
========= ======== ========= =========
FULLY DILUTED EARNINGS PER SHARE
- --------------------------------
Weighted average common and dilutive
common equivalent shares:
Common stock outstanding . . . . . . . . . . . 254,423 251,506 254,184 250,376
Stock options. . . . . . . . . . . . . . . . . 13,620 13,047 14,108 13,588
--------- -------- --------- ---------
268,043 264,553 268,292 263,964
========= ======== ========= =========
Fully diluted earnings from operations per share. . $ .36 $ .27 $ 1.11 $ .86
Fully diluted results of extraordinary
loss per share . . . . . . . . . . . . . . . . . (.00) (.00) (.03) (.01)
--------- -------- --------- ---------
Fully diluted net earnings per share. . . . . . . . $ .36 $ .27 $ 1.08 $ .85
========= ======== ========= =========
</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 three quarters ended October 4, 1997 and October
5, 1996.
<TABLE>
<CAPTION>
Quarter Ended Fiscal Years Ended
--------------------- --------------------------------------------------------------
October 4, October 5, December 28, December 30, December 31, January 1, January 2,
1997 1996 1996 1995 1994 1994 1993
(16 Weeks) (16 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 . . . . . . . $484,070 $369,457 $567,313 $509,638 $421,363 $283,938 $173,415
Fixed charges. . . . . . 372,461 370,507 482,680 489,939 500,599 556,008 640,004
Capitalized interest . . (6,430) (7,800) (10,887) (6,785) (2,521) 230 (960)
-------- -------- ---------- -------- -------- -------- --------
$850,101 $732,164 $1,039,106 $992,792 $919,441 $840,176 $812,459
======== ======== ========== ======== ======== ======== ========
Fixed Charges
Interest . . . . . . . . $229,788 $241,483 $311,958 $320,236 $331,097 $391,693 $476,932
Portion of rental
payments deemed to be
interest. . . . . . . . 142,673 129,024 170,722 169,703 169,502 164,315 163,072
-------- -------- ---------- -------- -------- -------- --------
$372,461 $370,507 $ 482,680 $489,939 $500,599 $556,008 $640,004
======== ======== ========== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges . . . . . 2.3 2.0 2.2 2.0 1.8 1.5 1.3
</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 QUARTER ENDED OCTOBER 4, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> OCT-04-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 345,238
<ALLOWANCES> 0
<INVENTORY> 1,705,754
<CURRENT-ASSETS> 2,260,922
<PP&E> 6,049,553
<DEPRECIATION> (2,857,889)
<TOTAL-ASSETS> 6,034,723
<CURRENT-LIABILITIES> 2,762,896
<BONDS> 3,388,308
0
0
<COMMON> 693,381
<OTHER-SE> (1,308,169)
<TOTAL-LIABILITY-AND-EQUITY> 6,034,723
<SALES> 7,686,640
<TOTAL-REVENUES> 7,686,640
<CGS> 5,789,947
<TOTAL-COSTS> 1,439,959
<OTHER-EXPENSES> 213,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,213
<INCOME-PRETAX> 158,274
<INCOME-TAX> 61,744
<INCOME-CONTINUING> 95,728
<DISCONTINUED> 0
<EXTRAORDINARY> (802)
<CHANGES> 0
<NET-INCOME> 95,728
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
