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 13, 1998 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 256,525,200 shares of Common Stock ($1 par value)
outstanding as of July 21, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited information for the quarters ended June 13, 1998 and
June 14, 1997 includes the results of operations of The Kroger Co.
for the 12 and 24 week periods ended June 13, 1998 and June 14,
1997, and of Dillon Companies, Inc. for the 13 and 26 week periods
ended June 27, 1998 and June 28, 1997. 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)
2nd Quarter Ended 2nd Quarters Ended
---------------------- ------------------------
June 13, June 14, June 13, June 14,
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $6,441,616 $6,231,794 $12,830,375 $12,371,207
---------- ---------- ----------- -----------
Costs and expenses:
Merchandise costs, including warehousing and
transportation. . . . . . . . . . . . . . . . . . . . 4,911,644 4,741,737 9,867,651 9,428,100
Operating, general and administrative. . . . . . . . . 1,133,409 1,082,733 2,242,835 2,154,802
Rent . . . . . . . . . . . . . . . . . . . . . . . . . 83,065 74,989 165,594 150,834
Depreciation and amortization. . . . . . . . . . . . . 98,285 88,203 191,467 173,576
Interest expense, net. . . . . . . . . . . . . . . . . 63,068 68,352 127,260 138,099
---------- ---------- ----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . 6,289,471 6,056,014 12,594,807 12,045,411
---------- ---------- ----------- -----------
Earnings before income tax expense and
extraordinary loss . . . . . . . . . . . . . . . . . . 152,145 175,780 235,568 325,796
Tax expense . . . . . . . . . . . . . . . . . . . . . . 57,816 67,643 89,518 125,399
---------- ---------- ----------- -----------
Earnings before extraordinary loss. . . . . . . . . . . 94,329 108,137 146,050 200,397
Extraordinary loss (net of income tax credit) . . . . . 0 (3,033) (4,293) (8,243)
---------- ---------- ----------- -----------
Net earnings . . . . . . . . . . . . . . . . . . . $ 94,329 $ 105,104 $ 141,757 $ 192,154
========== ========== =========== ===========
Basic earnings per common share:
Earnings from operations . . . . . . . . . . . . . . . $ .37 $ .43 $ .57 $ .79
Extraordinary loss . . . . . . . . . . . . . . . . . . .00 (.01) (.02) (.03)
------ ------ ------ ------
Net earnings . . . . . . . . . . . . . . . . . . . $ .37 $ .42 $ .55 $ .76
====== ====== ====== ======
Average number of common shares used in basic per share
calculation. . . . . . . . . . . . . . . . . . . . . . 255,776 253,970 255,475 254,025
Diluted earnings per common share:
Earnings from operations . . . . . . . . . . . . . . . $ .36 $ .41 $ .55 $ .76
Extraordinary loss . . . . . . . . . . . . . . . . . . .00 (.01) (.02) (.03)
----- ----- ------ ------
Net earnings . . . . . . . . . . . . . . . . . . . $ .36 $ .40 $ .53 $ .73
===== ===== ====== ======
Average number of common shares used in diluted
per share calculation. . . . . . . . . . . . . . . . . 265,138 262,119 265,028 262,284
</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 13, December 27,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,677 $ 65,484
Receivables . . . . . . . . . . . . . . . . . . . . . . 385,888 400,529
Inventories:
FIFO cost . . . . . . . . . . . . . . . . . . . . . . 2,046,304 2,273,896
Less LIFO reserve . . . . . . . . . . . . . . . . . . (475,931) (467,931)
---------- ----------
1,570,373 1,805,965
Property held for sale. . . . . . . . . . . . . . . . . 11,738 39,672
Prepaid and other current assets. . . . . . . . . . . . 259,564 328,901
---------- ----------
Total current assets. . . . . . . . . . . . . . . . 2,289,240 2,640,551
Property, plant and equipment, net. . . . . . . . . . . . 3,473,491 3,296,599
Investments and other assets. . . . . . . . . . . . . . . 392,689 364,191
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . $6,155,420 $6,301,341
========== ==========
LIABILITIES
Current liabilities
Current portion of long-term debt . . . . . . . . . . . $ 141,803 $ 14,304
Current portion of obligations under
capital leases. . . . . . . . . . . . . . . . . . . . 10,644 10,031
Accounts payable. . . . . . . . . . . . . . . . . . . . 1,635,796 1,781,527
Other current liabilities . . . . . . . . . . . . . . . 1,261,675 1,137,654
---------- ----------
Total current liabilities . . . . . . . . . . . . . 3,049,918 2,943,516
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 2,944,000 3,306,451
Obligations under capital leases. . . . . . . . . . . . . 195,818 186,624
Deferred income taxes . . . . . . . . . . . . . . . . . . 166,345 166,013
Other long-term liabilities . . . . . . . . . . . . . . . 466,718 483,585
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . 6,822,799 7,086,189
---------- ----------
SHAREOWNERS' DEFICIT
Common capital stock, par $1, at stated value
Authorized: 350,000,000 shares
Issued: 1998 - 279,287,934 shares
1997 - 277,153,260 shares. . . . . . . . . . . 749,832 728,644
Accumulated deficit . . . . . . . . . . . . . . . . . . . (1,042,637) (1,184,394)
Common stock in treasury, at cost
1998 - 23,255,073 shares
1997 - 22,182,650 shares . . . . . . . . . . . (374,574) (329,098)
---------- ----------
Total Shareowners' Deficit (667,379) (784,848)
---------- ----------
Total Liabilities and Shareowners' Deficit. . . . . . $6,155,420 $6,301,341
========== ==========
</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 13, June 14,
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . $ 141,757 $ 192,154
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . 4,293 8,243
Depreciation and amortization. . . . . . . . . . . . . . . . 191,467 173,576
Amortization of deferred financing costs . . . . . . . . . . 5,424 8,169
LIFO charge. . . . . . . . . . . . . . . . . . . . . . . . . 8,000 8,000
Net increase in cash from changes in operating
assets and liabilities, detail below . . . . . . . . . . . 350,281 314,690
Other changes, net . . . . . . . . . . . . . . . . . . . . . (13,725) (881)
---------- ----------
Net cash provided by operating activities . . . . . . . . 687,497 703,951
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (370,611) (261,461)
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . 36,158 4,316
Decrease in property held for sale. . . . . . . . . . . . . . . 27,805 9,212
Increase in other investments . . . . . . . . . . . . . . . . . (18,006) (20,425)
---------- ----------
Net cash used by investing activities . . . . . . . . . . (324,654) (268,358)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt prepayment costs . . . . . . . . . . . . . . . . . . . . . (5,850) (7,284)
Financing charges incurred. . . . . . . . . . . . . . . . . . . (18,886) (6,200)
Principal payments under capital lease obligations. . . . . . . (5,153) (4,780)
Proceeds from issuance of long-term debt. . . . . . . . . . . . 436,044 661,647
Reductions in long-term debt. . . . . . . . . . . . . . . . . . (670,996) (885,660)
Outstanding checks. . . . . . . . . . . . . . . . . . . . . . . (77,124) (170,788)
Proceeds from issuance of capital stock . . . . . . . . . . . . 20,791 20,811
Capital stock reacquired. . . . . . . . . . . . . . . . . . . . (45,476) (46,821)
---------- ----------
Net cash used by financing activities . . . . . . . . . . (366,650) (439,075)
---------- ----------
Net decrease in cash and temporary cash investments . . . . . . . (3,807) (3,482)
Cash and temporary cash investments:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . 65,484 67,052
---------- ----------
End of quarter. . . . . . . . . . . . . . . . . . . . . . . . $ 61,677 $ 63,570
========== ==========
INCREASE (DECREASE) IN CASH FROM CHANGES IN OPERATING ASSETS AND LIABILITIES:
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . $ 227,592 $ 111,383
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 14,641 5,332
Prepaid and other current assets. . . . . . . . . . . . . . . 69,196 83,458
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (68,608) 13,979
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 332 4,186
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 107,128 96,352
---------- ----------
$ 350,281 $ 314,690
========== ==========
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
Supplemental disclosures of cash flow information:
2 Quarters Ended
------------------------
June 13, June 14,
1998 1997
-------- --------
Cash paid during the period for:
Interest (net of amount capitalized) $129,816 $141,333
Income taxes 55,976 22,823
- -------------------------------------------------------------------
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 and, due to its summary nature,
does not contain all information required by generally
accepted accounting principles. Certain prior year amounts
have been restated to conform to current year presentation.
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 13,
1998 and June 14, 1997 of $4.3 million and $8.2 million,
respectively (net of income tax credit of $2.6 million and
$5.2 million, respectively) is related to the early retirement
of long-term debt. The extraordinary loss for the quarter
ended June 14, 1997, contained an extraordinary loss of $3.0
million, net of income taxes of $1.9 million, related to the
early retirement of long term debt.
4. EARNINGS PER COMMON SHARE
-------------------------
Basic earnings per common share equals net earnings divided by
the weighted average number of common shares outstanding.
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.
The following table provides a reconciliation of earnings
before extraordinary loss and shares used in calculating basic
earnings per share to those used in calculating diluted
earnings per share.
<TABLE>
<CAPTION>
For the quarter ended For the quarter ended
June 13, 1998 June 14, 1997
---------------------------- --------------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator nator Amount ator nator Amount
--------- -------- ------ -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
---------
Earnings before extraordinary
loss . . . . . . . . . . . $ 94,329 255,776 $0.37 $108,137 253,970 $0.43
Effect of Dilutive Securities
-----------------------------
Stock option awards. . . . 9,362 8,149
Diluted EPS
-----------
Income available to share-
holders plus assumed -------- ------- ------ -------- ------- ------
conversions. . . . . . . $ 94,329 265,138 $0.36 $108,137 262,119 $0.41
======== ======= ====== ======== ======= ======
<CAPTION>
For 2 quarters ended For 2 quarters ended
June 13, 1998 June 14, 1997
---------------------------- ---------------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator nator Amount ator nator Amount
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
---------
Earnings before extraordinary
loss . . . . . . . . . . . $146,050 255,475 $0.57 $200,397 254,025 $0.79
Effect of Dilutive Securities
-----------------------------
Stock option awards. . . . 9,553 8,259
Diluted EPS
-----------
Income available to share-
holders plus assumed -------- ------- ----- -------- ------- -----
conversions. . . . . . . $146,050 265,028 $0.55 $200,397 262,284 $0.76
======== ======= ===== ======== ======= =====
</TABLE>
5. ONE-TIME EXPENSES
-----------------
During the quarter the Company incurred approximately $40.8
million pre-tax, $25.3 million after-tax or $.09 per diluted
share, in one-time expenses associated with its logistics
initiatives. These expenses include the costs associated with
restructuring the joint venture that formerly operated as a
wholesale distributor for the Company's Michigan stores. This
warehouse is now operated as a third party facility, with the
Company procuring and owning the inventory. These expenses
also include the transition costs related to one new Company
operated warehouse facility and one new warehouse facility
operated by an unaffiliated entity, including the carrying
costs of the facilities idled as a result of these new
warehouses and the associated employee severance costs. The
above expenses are reflected in merchandise costs, including
warehousing and transportation.
Additionally, the Company incurred one-time expenses of $11.6
million pre-tax, $7.2 million after-tax or $.03 per diluted
share, associated with accounting and operations
consolidations in Texas, including the costs associated with
closing eight stores and relocating the remaining Dallas
office employees to a smaller facility. These expenses are
reflected in Operating, General and Administrative expenses.
6. ACCOUNTING CHANGE
-----------------
In the second quarter of 1998, the Company changed its
application of the LIFO method of accounting for store
inventories from the retail method to the item cost method.
The change was made to more accurately reflect inventory value
by eliminating the averaging and estimation inherent in the
retail method. The cumulative effect of this change on
periods prior to December 28, 1997 cannot be determined. The
effect of the change on the December 28, 1997 inventory
valuation, which includes other immaterial modifications in
inventory valuation methods, was included in restated results
for the quarter ended March 21, 1998, and increased
merchandise costs by $89.7 million and reduced earnings before
extraordinary loss and net earnings by $55.6 million, or $0.21
per diluted share. Pro forma effects of the change for prior
periods have not been presented as cost information is not
determinable. The effect of adopting the item cost method on
earnings before extraordinary loss and on net earnings for the
quarter and year-to-date ended June 13, 1998 is not material.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
The Financial Accounting Standards Board issued Statement of
Financial Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information", No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
and No. 133 "Accounting for Derivative Instruments and Hedging
Activities". The Company has not yet determined what effect,
if any, these statements will have.
8. COMPREHENSIVE INCOME
--------------------
The Company has no items of other comprehensive income in any
period presented. Therefore net earnings as presented in the
Consolidated Statement of Operations equals comprehensive
income.
<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 1998 increased 3.4% from the
second quarter 1997 to a record $6.4 billion. Food store sales
increased 3.8% over the 1997 second quarter. During the second
quarter of 1998, food stores' square footage increased 2.9% over
the same period last year. Sales in identical food stores, units
that have been in operation for one full year and have not been
expanded or relocated during that period, increased .5% versus a
.1% decrease in 1997. Second quarter comparable store sales, which
include results of expanded and relocated stores, increased 3.0%
versus a 3.2% increase in 1997. A review of sales trends by lines
of business is as follows:
<TABLE>
<CAPTION>
(in thousands of dollars)
% of 1998 2nd Quarter
----------------------
Lines of Business Sales 1998 1997 Change
--------------------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Food Stores ........ 93.3% $6,007,655 $5,790,154 +3.8%
Convenience Stores .. 3.9% 251,474 255,428 -1.5%
Other Sales ........ 2.8% 182,487 186,212 -2.0%
--------- ---------- ----------
Total Sales ........ 100.0% $6,441,616 $6,231,794 +3.4%
<CAPTION>
(in thousands of dollars)
% of 1998 2 Quarters Year-to-date
------------------------
Lines of Business Sales 1998 1997 Change
--------------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Food Stores ........ 93.5% $11,997,304 $11,526,389 +4.1%
Convenience Stores .. 3.7% 475,932 489,081 -2.7%
Other Sales ........ 2.8% 357,139 355,737 + .4%
--------- ----------- -----------
Total Sales ........ 100.0% $12,830,375 $12,371,207 +3.7%
</TABLE>
Convenience stores' identical grocery sales increased 4.9%,
identical gasoline sales decreased 9.3%, and identical gas gallons
increased 4.1%. Total sales for the Company's convenience store
group were weakened by a 12.7% decline in the average retail price
per gallon of gasoline as compared to the second quarter of 1997.
Total gallons sold increased 4.9% during this period.
Other sales, consisting of non-retail sales to unaffiliated
entities, decreased 2.0% versus the second quarter 1997. These
included sales of product manufactured or packaged to customers'
specifications.
ONE-TIME EXPENSES
During the quarter the Company incurred approximately $40.8 million
pre-tax, $25.3 million after-tax or $.09 per diluted share, in one-
time expenses associated with its logistics initiatives. These
expenses include the costs associated with restructuring the joint
venture that formerly operated as a wholesale distributor for the
Company's Michigan stores. This warehouse is now operated as a
third party facility, with the Company procuring and owning the
inventory. These expenses also include the transition costs
related to one new Company warehouse facility and one new warehouse
facility operated by an unaffiliated entity, including the carrying
costs of the facilities idled as a result of these new warehouses
and the associated employee severance costs. The above expenses
are reflected in merchandise costs, including warehousing and
transportation.
Additionally, the Company incurred one-time expenses of $11.6
million pre-tax, $7.2 million after-tax or $.03 per diluted share,
associated with accounting and operations consolidations in Texas,
including the costs associated with closing eight stores and
relocating the remaining Dallas office employees to a smaller
facility. These expenses are reflected in operating, general and
administrative expenses.
ACCOUNTING CHANGE
In the second quarter of 1998, the Company changed its application
of the LIFO method of accounting for store inventories from the
retail method to the item cost method. The change was made to more
accurately reflect inventory value by eliminating the averaging and
estimation inherent in the retail method. The cumulative effect of
this change on periods prior to December 28, 1997 cannot be
determined. The effect of the change on the December 28, 1997
inventory valuation, which includes other immaterial modifications
in inventory valuation methods, was included in restated results
for the quarter ended March 21, 1998, and increased merchandise
costs by $89.7 million and reduced earnings before extraordinary
loss and net earnings by $55.6 million, or $0.21 per diluted share.
Pro forma effects of the change for prior periods have not been
presented as cost information is not determinable. The effect of
adopting the item cost method on earnings before extraordinary loss
and on net earnings for the quarter and year-to-date ended June 13,
1998 is not material.
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 $573
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"). 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 generally
accepted accounting principle measure of performance but rather to
facilitate an understanding of the Company's performance compared
to its debt covenants. At June 13, 1998, 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.
Excluding one-time expenses, as described in "One-Time Expenses",
above ("One-Time Expenses") of $52.4 million pre-tax, EBITD
increased 10% in 1998 to $369.4 million compared to $335.8 million
in the second quarter of 1997. On a year-to-date basis, excluding
One-Time Expenses of $52.4 million and the $89.7 million accounting
change, as described in "Accounting Change", above ("Accounting
Change"), 1998 EBITD increased 9.1% to $704.4 million compared to
$645.5 million in 1997.
EBITD for the second quarter of 1998 including One-Time Expenses of
$52.4 million decreased 5.6% to $317.0 million compared to $335.8
million in the second quarter of 1997. On a year-to-date basis,
including One-Time Expenses and the Accounting Change, 1998 EBITD
decreased 12.9% to $562.3 million compared to $645.5 million in
1997.
MERCHANDISE COSTS
Merchandise costs for the second quarter 1998, including
advertising, warehousing and transportation expense and LIFO
charges, excluding One-Time Expenses of $40.8 million, declined to
75.6% of sales compared to 76.1% in the second quarter 1997.
Merchandise costs were affected positively by the Company's
strategic initiatives in coordinated purchasing, category
management and operating improvements due to logistics and
technology related efficiencies. Year-to-date 1998 merchandise
costs, excluding One-Time Expenses of $40.8 million and the $89.7
million Accounting Change, declined to 75.9% of sales compared to
76.2% year-to-date in 1997.
Merchandise costs for the second quarter 1998, including the One-
Time Expenses of $40.8 million, increased to 76.2% of sales
compared to 76.1% in the second quarter of 1997. Year-to-date 1998
merchandise costs, including One-Time Expenses of $40.8 million and
the $89.7 million Accounting Change, increased to 76.9% of sales
compared to 76.2% in 1997.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses as a percent of
sales in the second quarter 1998, excluding One-Time Expenses of
$11.6 million, were 17.4%, which was equal to the rate for the
second quarter 1997. These expenses in the quarter reflect the
efforts of the Company's operators to control expenses in this
deflationary period in spite of slightly inflationary labor
contracts. On a year-to-date basis operating, general and
administrative expenses as a percent of sales, excluding One-Time
Expenses of $11.6 million, remained at 17.4% of sales through two
quarters for both 1998 and 1997.
Operating, general and administrative expenses as a percent of
sales in the second quarter 1998, including the One-Time Expenses
of $11.6 million, were 17.6% compared to 17.4% in 1997. On a year-
to-date basis operating, general and administrative expenses as a
percent of sales in 1998, including the One-Time Expense of $11.6
million, were 17.5% compared to 17.4% through two quarters of 1997.
NET INTEREST EXPENSE
Net interest expense decreased to $63.1 million in the second
quarter 1998 as compared to $68.4 million in last year's second
quarter. Year-to-date net interest expense totaled $127.3 million
in 1998 as compared to $138.1 million in 1997.
To reduce its effective interest expense, the Company has purchased
a portion of the debt under certain of its structured financings.
Excluding the debt incurred to make these purchases, which are
classified as investments, and the pre-funding of employee
benefits, the Company's long-term debt at the end of the second
quarter was $3.04 billion, down from $3.28 billion at the end of
the 1997 second quarter.
NET EARNINGS
The Company's net earnings in the second quarter 1998, excluding
the One-Time Expenses of $32.5 million after tax, were $126.8
million or $.48 per diluted share as compared to net earnings in
the second quarter 1997 of $105.1 million or $.40 per diluted
share. Net earnings in the second quarter 1997 were negatively
affected by an extraordinary loss of $3.0 million or $.01 per
diluted share.
The Company's year-to-date net earnings through two quarters of
1998, excluding the One-Time Expenses of $32.5 million after tax
and the Accounting Change of $55.6 million after tax, were $229.9
million or $.86 per diluted share as compared to net earnings
through two quarters of 1997 of $192.2 million or $.73 per diluted
share. Year-to-date net earnings in 1998 were negatively affected
by an extraordinary loss of $4.3 million or $.02 per diluted share
as compared to an extraordinary loss of $8.2 million or $.03 per
diluted share in 1997. The extraordinary loss in both years
resulted from the early retirement of long term debt.
The Company's second quarter 1998 net earnings, including the One-
Time Expenses of $32.5 million after tax, were $94.3 million or
$.36 per diluted share as compared to net earnings in the second
quarter 1997 of $105.1 million or $.40 per diluted share. Net
earnings in the second quarter of 1997 were negatively affected by
an extraordinary loss of $3.0 million or $.01 per diluted share.
Net earnings through two quarters of 1998, including the One-Time
Expenses of $32.5 million after tax and the Accounting Change of
$55.6 million after tax, were $141.8 million or $.53 per diluted
share compared to net earnings through two quarters of 1997 of
$192.2 million or $.73 per diluted share. Year-to-date net
earnings in 1998 were negatively affected by an extraordinary loss
of $4.3 million or $.02 per diluted share compared to an
extraordinary loss of $8.2 million or $.03 per diluted share in
1997. The extraordinary item in both years resulted from the early
retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
During the second quarter 1998 the Company repurchased or redeemed
$3.3 million of its various subordinated debt issues. Through two
quarters of 1998 the Company repurchased or redeemed $133.3 million
of its various subordinated debt issues.
At the end of the second quarter 1998 the Company had $1,227.4
million available under its Credit Agreement to meet short-term
liquidity needs.
Capital expenditures for the second quarter 1998 totaled $195.3
million as compared to $124.8 million for the second quarter 1997.
Year-to-date capital expenditures for 1998 totaled $370.6 million
as compared to $261.5 million year-to-date 1997.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Company generated $687.5 million of cash from operating
activities during the first half 1998 compared to $704.0 million in
last year's first half.
Investing activities used $324.7 million in cash during the first
half of 1998 as compared to $268.4 million last year. The
Company's capital investment in the first half of 1998 increased
$109.2 million from the first half of 1997.
Financing activities during the second quarter used $366.7 million
in cash as compared to $439.1 million last year. The Company's
net debt reductions in the second quarter of 1998 equaled $235.0
million as compared to $224.0 million in the second quarter of
1997. Additionally, debt prepayment costs and new financing
charges used $24.7 million of cash as compared to $13.5 million in
1997. The change in the balance of outstanding checks used $77.1
million of cash in 1998 compared to $170.8 million in 1997.
OUTLOOK
Statements below regarding the Company's expectations, hopes,
beliefs, intentions or strategies are forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of
1934. While we believe that the statements are accurate,
uncertainties and other factors could cause actual results to
differ materially from those statements. In particular:
The Company obtains sales growth from new square footage,
as well as from increased productivity from existing
locations. During 1998, the Company is expected to open,
acquire, relocate or expand 96 stores and remodel
approximately 100 units. Full year square footage growth is
expected to equal 4.5% to 5.0%. The Company expects to
continue to realize savings from economies of scale in
technology and logistics, some of which may be reinvested in
retail price reductions to increase sales volume.
The Company believes it has adequate coverage of its debt
covenants to continue to respond effectively to competitive
conditions.
The Company expects to continue capital spending in technology
focusing on improved store operation, logistics, procurement,
category management, merchandising and distribution practices,
which should continue to improve merchandising cost as a
percent of sales.
The Company expects 1998 net interest expense to total
approximately $275-$280 million.
The Company expects to incur an extraordinary loss in each of
the remaining quarters of 1998 as it continues to retire its
higher-cost debt.
The Company expects to reduce working capital over the next 2
years.
The Company is raising its earnings per share target to a 15%-
17% average annual increase over fiscal years 1999-2001 from
the previously stated target of a 13%-15% average annual
increase.
Capital expenditures for the year are expected to total $750-
$800 million as compared to $612.2 million during all of 1997.
The increase reflects the Company's strategy of growth through
expansion as well as the Company's emphasis, whenever
possible, on self-development and ownership of store real
estate, as well as logistics improvements.
The Company currently is working to resolve the potential
effect of the year 2000 on the processing of date-sensitive
information by the Company's computerized information systems.
The year 2000 problem is the result of computer programs being
written using two digits (rather than four) to define the
applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in
miscalculations or system failures. Based on current
information, costs of addressing potential problems are not
expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in
future periods. If the Company, its customers or vendors are
unable to resolve such processing issues in a timely manner,
it could result in a material financial risk. The Company
believes, however, that it has allocated the resources
necessary to resolve all significant year 2000 issues in a
timely manner.
Inflationary factors, increased competition, construction delays,
and labor disputes could affect the Company's ability to obtain
expected increases in sales and earnings. Delays in store
maturity, increased competition and increased capital spending
could adversely affect the anticipated increase in sales per square
foot. Increases in gross profit rate may not be achieved if start
up costs are higher than expected or if problems associated with
integrating new systems occur. Increased operating costs and
changes in inflationary trends could prevent the Company from
reducing operating, general and administrative expenses. New
technologies could fail to achieve the desired savings and
efficiencies. Net interest expenses could exceed expectations due
to acquisitions, higher working capital usage, inflation, or
increased competition. The Company's ability to achieve its
storing goals could be hampered by construction delays, labor
disputes, increased competition, delays in technology projects, and
its ability to generate continued EBITD growth. The inherent
complexity of computer software and reliance on third party
software vendors to interface with the Company's systems could
affect the completion of necessary 'year 2000' modifications.
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) May 14, 1998 -- Annual Meeting
(b) The shareholders elected five directors to serve
until the annual meeting of shareholders in 2001 or
until their successors have been elected and
qualified, authorized an amendment to the Amended
Articles of Incorporation to increase the authorized
shares of common stock from 350,000,000 to
1,000,000,000, and ratified the selection of Coopers
& Lybrand L.L.P., now known as
PricewaterhouseCoopers LLP, as Company auditors for
1998.
Votes cast were as follows:
<TABLE>
<CAPTION>
To Serve Until 2001 For Withheld Broker Non-Votes
------------------- --- -------- ----------------
<S> <C> <C> <C>
John L. Clendenin 215,796,054 3,526,201 0
David B. Dillon 216,059,906 3,262,349 0
Patricia Shontz Longe 216,116,773 3,205,482 0
Thomas H. O'Leary 216,119,695 3,202,560 0
James D. Woods 216,119,717 3,202,538 0
<CAPTION>
For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
<S> <C> <C> <C> <C>
Amendment to 186,898,649 31,346,321 1,077,285 0
Increase Author-
ized Shares
<CAPTION>
For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
<S> <C> <C> <C> <C>
Coopers & 217,434,431 847,998 1,039,826 0
Lybrand L.L.P.
</TABLE>
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 18.1 - Letter from PricewaterhouseCoopers LLP
------------
regarding change in accounting.
Exhibit 27.1 - Financial Data Schedule.
------------
Exhibit 27.2 - Restated 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 earnings release for
the first quarter 1998 in its Current Report on Form 8-K
dated April 15, 1998; the form of Underwriting Agreement,
form of Senior Indenture, and the Statement of
Eligibility on Form T-1 related to its Registration
Statement No. 333-50269 on Form S-3 that provides for the
issuance of Securities in an aggregate amount of
$800,000,000 in its Current Report on Form 8-K dated May
6, 1998; and the Pricing Agreement and First Supplemental
Indenture related to its 7% Senior Notes due 2018 in its
Current Report on Form 8-K dated May 11, 1998.
<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 27, 1998 By: (Joseph A. Pichler)
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: July 27, 1998 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 18.1 - Letter from PricewaterhouseCoopers LLP regarding
change in accounting.
Exhibit 27.1 - Financial Data Schedule.
Exhibit 27.2 - Restated Financial Data Schedule
Exhibit 99.1 - Additional Exhibits - Statement of Computation of
Ratio of Earnings to Fixed Charges.
<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
27, 1997 and for the two quarters ended June 13, 1998 and June 14,
1997.
<TABLE>
<CAPTION>
2 Quarters Ended Fiscal Years Ended
--------------------- ---------------------------------------------------------------
June 13, June 14, December 27, December 28, December 30, December 31, January 1,
1998 1997 1997 1996 1995 1994 1994
(12 Weeks) (12 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (52 weeks) (52 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 . . . . . . . $235,568 $325,796 $712,363 $567,313 $509,538 $421,363 $283,938
Fixed charges. . . . . . 225,254 227,318 482,338 482,680 489,939 500,599 556,008
Capitalized interest . . (3,696) (4,146) (8,550) (10,887) (6,785) (2,521) 230
-------- -------- ---------- ---------- -------- -------- --------
$457,126 $548,968 $1,186,151 $1,039,106 $992,692 $919,441 $840,176
======== ======== ========== ========== ======== ======== ========
Fixed Charges
Interest . . . . . . . . $131,528 $141,946 $294,985 $311,958 $320,236 $331,097 $391,693
Portion of rental
payments deemed to be
interest. . . . . . . . 93,726 85,372 187,353 170,722 169,703 169,502 164,315
-------- -------- ---------- -------- -------- -------- --------
$225,254 $227,318 $ 482,338 $482,680 $489,939 $500,599 $556,008
======== ======== ========== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges . . . . . 2.0 2.4 2.5 2.2 2.0 1.8 1.5
</TABLE>
<PAGE>
EXHIBIT 18.1
July 21, 1998
The Kroger Co.
1014 Vine St.
Cincinnati, OH 45202
We are providing this letter to you for inclusion as an exhibit to
your Form 10-Q filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the change in applying
the LIFO accounting method for store inventories from the retail
method to the item cost method contained in the Company's Form 10-Q
for the quarter ended June 13, 1998. Based on our reading of the
data and discussions with Company officials of the business judgment
and business planning factors relating to the change, we believe
management's justification to be reasonable. Accordingly, we concur
that the newly adopted accounting principle described above is
preferable in the Company's circumstances to the method previously
applied.
We have not audited any financial statements of The Kroger Co. as of
any date or for any period subsequent to December 27, 1997, nor have
we audited the application of the changes in accounting principles
disclosed in Form 10-Q of The Kroger Co. for the quarter ended June
13, 1998; accordingly, our comments are subject to revision on
completion of an audit of the financial statements that include the
accounting change.
(PricewaterhouseCoopers LLP)
PricewaterhouseCoopers LLP
Cincinnati, Ohio
<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 TWO QUARTERS ENDED JUNE 13, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JUN-13-1998
<CASH> 61,677
<SECURITIES> 0
<RECEIVABLES> 385,888
<ALLOWANCES> 0
<INVENTORY> 1,570,373
<CURRENT-ASSETS> 2,289,240
<PP&E> 6,474,006
<DEPRECIATION> (3,000,515)
<TOTAL-ASSETS> 6,155,420
<CURRENT-LIABILITIES> 3,049,918
<BONDS> 2,944,000
0
0
<COMMON> 749,832
<OTHER-SE> (1,042,637)
<TOTAL-LIABILITY-AND-EQUITY> 6,155,420
<SALES> 12,830,375
<TOTAL-REVENUES> 12,830,375
<CGS> 9,867,651
<TOTAL-COSTS> 9,867,651
<OTHER-EXPENSES> 2,727,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127,260
<INCOME-PRETAX> 235,568
<INCOME-TAX> 89,518
<INCOME-CONTINUING> 146,050
<DISCONTINUED> 0
<EXTRAORDINARY> (4,293)
<CHANGES> 0
<NET-INCOME> 141,757
<EPS-PRIMARY> .55<F1>
<EPS-DILUTED> .53
<FN>
<F1>THE AMOUNT REPORTED IS EPS-BASIC NOT EPS-PRIMARY
</FN>
</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 MARCH 21, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. <F1>
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> MAR-21-1998
<CASH> 59,275
<SECURITIES> 0
<RECEIVABLES> 376,992
<ALLOWANCES> 0
<INVENTORY> 1,628,923
<CURRENT-ASSETS> 2,400,588
<PP&E> 6,325,321
<DEPRECIATION> (2,946,972)
<TOTAL-ASSETS> 6,152,263
<CURRENT-LIABILITIES> 2,733,923
<BONDS> 3,347,111
0
0
<COMMON> 744,855
<OTHER-SE> (1,136,966)
<TOTAL-LIABILITY-AND-EQUITY> 6,152,263
<SALES> 6,388,759
<TOTAL-REVENUES> 6,388,759
<CGS> 4,956,007
<TOTAL-COSTS> 4,956,007
<OTHER-EXPENSES> 1,349,329
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,192
<INCOME-PRETAX> 83,423
<INCOME-TAX> 31,702
<INCOME-CONTINUING> 51,721
<DISCONTINUED> 0
<EXTRAORDINARY> (4,293)
<CHANGES> 0
<NET-INCOME> 47,428
<EPS-PRIMARY> .18<F2>
<EPS-DILUTED> .18
<FN>
<F1>REVISED TO REFLECT ACCOUNTING CHANGE
<F2>THE AMOUNT REPORTED IS EPS-BASIC NOT EPS-PRIMARY.
</FN>
</TABLE>
