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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: September 10, 1999
THE KROGER CO.
(Exact name of registrant as specified in its charter)
An Ohio Corporation No. 1-303 31-0345740
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Number)
1014 Vine Street
Cincinnati, OH 45201
(Address of principal
executive offices)
Registrant's telephone number: (513) 762-4000
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Item 5. Other Events
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On September 10, 1999, officers of the Company made a presentation
to analysts attending the Goldman, Sachs & Co. Global Retailing
Conference. Attached hereto as Exhibit 99.1 is the text of that
presentation.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
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(c) Exhibits:
99.1 Text of presentation to analysts.
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SIGNATURE
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 hereto duly authorized.
THE KROGER CO.
September 10, 1999 By: (Paul Heldman)
Paul Heldman
Senior Vice President, Secretary
and General Counsel
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EXHIBIT INDEX
Exhibit No. Exhibit
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99.1 Text of presentation to analysts.
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EXHIBIT 99.1
GOLDMAN SACHS GLOBAL RETAILING CONFERENCE
SEPTEMBER 10, 1999
COMMENTS BY JOE PICHLER
Good morning and thank you for joining us today. Bob Miller and I are very
pleased that John has invited us to talk about the "new" Kroger Co. Bob is Vice
Chairman and Chief Operating Officer of Kroger. With us today are Rodney
McMullen, Kroger's Chief Financial Officer, and Kathy Kelly, Director of
Investor Relations.
The discussion today will include forward looking statements. We wish to caution
you that such statements are predictions, and actual events or results can
differ materially. A detailed discussion of the many factors that we believe may
have a material effect on our business, on an ongoing basis, is contained in our
SEC filings.
Kroger's 2nd Quarter ended August 14 and we will release earnings next Tuesday,
September 14. Kroger and our auditors have not completed the accounting review
for the 2nd quarter, so our information is not yet complete. We know of nothing,
however, that causes us to change our previous statement about the year: WE
REMAIN COMFORTABLE WITH THE CONSENSUS ESTIMATE FOR 1999.
We are also comfortable with achieving our EPS growth target of 16-18% beginning
with fiscal year 2000.
Our merger integration activities are following the game plan that we had
established, I am very confident that Kroger will achieve the $225 million of
synergies that are projected within the first 36 months following our merger.
I will begin today's presentation with a brief overview of the "new" Kroger. Bob
will provide an update on the activities that are under way to generate the $225
million dollars of projected synergy savings between Fred Meyer and Kroger.
Rodney will review the financial aspects of the merger and then we will be happy
to answer questions.
The "new" Kroger is the nation's largest supermarket operator -- a food
retailing powerhouse that is capable of achieving substantial economies across
the entire range of merchandising, operating, distribution, financial, and
administrative functions to support our premier operating divisions.
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The "new" Kroger is a formidable competitor with the broadest geographic
coverage and the widest spectrum of food retailing formats of any player in the
industry. These include multi-department stores, combination food and drug
stores, conventional supermarkets, price-impact warehouse stores and convenience
stores. In total, we operate over 2200 supermarkets ranging across 31 states and
hold the leading market share position in 38 of our 41 major markets.
Kroger's fundamental strategy is to achieve the responsiveness of decentralized
merchandising and operations combined with the economies of scale available from
coordinating volume based activities and consolidating support systems.
This merger will enable us to implement that strategy on an unprecedented scale.
The "new" Kroger operates 20 divisions. The EASTERN region has 11 divisions
operating primarily under the Kroger banner; The CENTRAL region has 3 divisions
operating under the King Soopers, City Markets and Dillon Stores banners; and
the WESTERN region contains 6 divisions operating as Fred Meyer Stores, Quality
Food Centers, Ralphs, Food 4 Less, Fry's and Smith's.
In addition, we also operate a small number of stores in selected markets under
the banners Cala, Bell, Hilander, Rockford, Owens, FoodsCo, PriceRite, and
Gerbes. We recently completed our merger with the John C Groub Co. which added
28 stores in Southern Indiana.
We are also the 4th largest convenience store chain in terms of sales. The
C-store division operates 797 stores under 5 different names in 19 states. And,
Kroger is the nation's 4th largest fine jewelry retailer with 384 stores across
26 states.
Kroger and Fred Meyer together operate 43 food processing plants that
manufacture high quality, low cost private label products which are sold in our
stores and supplied to a number of outside customers.
The next few slides dramatically illustrate the tremendous reach of our combined
geographic presence.
This slide shows pre-merger Kroger's supermarket presence in 24 states
throughout the midwest, southeast and southwest.
The next slide illustrates pre-merger Fred Meyer's markets which reach across 12
states in the West, southwest and the Pacific northwest.
This is a very powerful slide that demonstrates the 31 state coverage of our
combined company.
As I mentioned earlier, the "new" Kroger Company has 41 major markets. We have
the #1 market position in 32, the #2 position in 6 and #3 position in the
remaining 3. We are fortunate
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that most of our major markets are located in high growth areas. In fact, 10 of
our major markets are among the top 15 fastest growing markets in the nation.
We are #1 or #2 in 8 of those 10 markets.
High market share has always been a key priority for us, because it generates
the highest return on investment.
The combination food and drug store format is our primary growth vehicle. This
format is small enough to generate an ROI well above our cost of capital by
drawing customers from a 2 - 2 1/2 mile radius; yet large enough to offer all
the high margin, specialty departments that our customers desire for convenient,
one-stop shopping: the widest variety of grocery SKU's , "whole health"
departments, pharmacies, pet centers and world class perishables including fresh
seafood and organic produce.
In addition, our other retailing formats - the multi-department store and the
price-impact warehouse store allow us to select the right format to meet the
needs of our customers in any neighborhood.
The merger has provided Kroger with enormous purchasing power in grocery,
perishables, health and beauty care, general merchandise, seasonal items, store
supplies and equipment, and raw materials for our plants.
We project that fifty percent of the $225 million in synergy savings will come
from purchasing and merchandising. I am very confident that our merchandising
group will achieve that target.
We will also be able to leverage capital expenditures across a much broader
store base. This is particularly significant for investments in information
technology, manufacturing and distribution. These functions are rapidly
deploying new systems that require significant upfront capital investment, but
should generate a high ROI across our 2200 supermarkets.
The entire Kroger Company is working hard to achieve two goals:
First, making sure that our customers DON'T notice that we have completed a
huge merger but DO notice new product offerings, competitive prices, superior
private label and first class customer service.
Second, achieving the $225 million of synergy savings that we have outlined
as our target.
With that summary, I would like to ask Bob Miller to review the progress of the
Kroger merger integration teams.
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COMMENTS BY BOB MILLER
Thanks Joe. I am very pleased to be here today with Joe and Rodney to talk about
the "new" Kroger Company and all that we have accomplished in the 3 short months
since we completed the merger. This is a fantastic combination and I am thrilled
to be a part of the "new" Kroger organization.
The integration teams have made tremendous progress in integrating Kroger and
Fred Meyer. There are seven specific areas that I would like to highlight:
1. ARIZONA
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First, all 35 Smith's stores in Phoenix and Tucson have been converted to the
Fry's banner. Customer acceptance thus far has been very positive. All of the
stores required to be divested by the FTC have been sold.
All of the Fry's stores, as well as the Fred Meyer Arizona stores, are now
receiving produce, package deli products, frozen food, and dairy from the
Tolleson warehouse which formerly served the Smith's and Fred Meyer stores in
Arizona. One of the Fry's warehouses will be closed later this fall.
We have closed the Fry's divisional office and moved it to the Tolleson
warehouse. This has reduced head count and overhead expense.
The Tolleson dairy has been expanded and is now serving all Fry's stores.
2. PRIVATE LABEL
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Our merchandisers have established a new private label grocery and perishable
strategy that will offer a "good, better, best" product selection that will meet
the needs of our diverse customer base.
The PRIMARY BRAND will use the name of each division: Kroger, Ralphs, Fry's,
Smith's, Dillon, Fred Meyer, King Soopers and City Market. The quality of these
products will be as good as or better than the national brand. We will emphasize
our quality guarantee: "Try it, like it, or get the national brand free." This
house brand tier will offer the largest selection of private label sku's. We
fully expect to see this area continue to grow.
We have introduced a PREMIUM TIER of superior quality products in selected
categories such as upscale premium frozen entrees and gourmet coffee.
This premium product will be known as "PRIVATE SELECTIONS" in all of our
divisions. The "PRIVATE SELECTIONS" line will provide exciting merchandising and
gross margin expansion
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opportunities. We will launch 100 Private Selections products during 1999 and
are working on a total of 350 sku's under that label.
The third private label grouping will be a PRICE IMPACT tier, targeted in
quality between the national brand and generic. These products will be labeled
FMV DESIGNATING "FOR MAXIMUM VALUE" and will be used in selected trade areas to
meet competitors that emphasize generic brands. For example Sav-a-lot, and
Aldi's. We will have 80 sku's of FMV in distribution by year end.
Private label accounted for 25% of grocery dollar sales and 30% of grocery unit
sales in pre-merger Kroger. We expect private label to grow across the entire
company.
In the health and beauty care area, the Kroger bannered divisions will continue
to use Kroger as the private label brand. All the other divisions will use
"Perfect Choice" as the private label HBC product. We have moved rapidly to
achieve the volume synergies in HBC. During the 2nd quarter, our Peyton system
began to ship 119 SKU's of Perfect Choice and we expect to add another 120 SKU's
in the next six weeks.
We are very pleased with our private label strategy and the product cost
reductions we are achieving. This is an area of substantial growth.
3. LEVERAGED BUYS
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We have begun to leverage our purchasing power across a broad array of products
and services.
There are four areas that will provide the biggest opportunities:
1. GM/Seasonal
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First, in the general merchandise and seasonal area. Kroger has begun to feature
general merchandise products purchased in corporate-wide volumes by Fred Meyer.
Kroger merchandisers have ordered Christmas lights, Holiday bears, 5 inch black
and white TV's, and other promotional items from Fred Meyer buyers. The Kroger
divisions sold out their initial order of the TV's and have now received
additional product. During the 2nd quarter, we completed the first corporate
wide buy of candy for the Valentine holiday and achieved substantial cost
savings.
We have also begun offering some general merchandise products in the C-stores.
This has been a "surprise" success.
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Another exciting area is the Bath and Body category. Fred Meyer has several
first quality items that offer tremendous merchandising opportunities at
attractive margins. Three of these private label lines of products called
"Splash", "Bath and Body Therapies" and "Spa" have already been introduced in
the Kroger divisions.
These are examples of the incremental sales and profits that will be generated
from GM and seasonal products that Kroger would not have been able to offer
without Fred Meyer's expertise and purchasing power.
2. Pharmaceuticals
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Second, Kroger's Peyton warehouses are now providing pharmaceuticals to the Fred
Meyer and Smith's divisions at substantial cost reductions --on time and with no
hitches. We have closed the pharmacy warehouse in Salt Lake City.
3. Centralized perishable procurement
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The third area is in coordinated procurement of perishables. Pre-merger Kroger
had historically procured perishables centrally. So far, we have added 2 of the
West divisions to the Company wide purchase of produce. By adding this volume to
the Kroger volume, we are achieving even further cost reductions across the
entire company.
4. Private Label
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Finally, private label procurement. We will consolidate vendors and brands and,
by pooling company-wide volume, achieve substantial reductions in product costs
across our 2200 supermarkets.
4. BEST PRACTICES
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The merger also allows us to share "best practices" of both companies to
optimize operating efficiency across 2200 stores. The economic leverage of "best
practices" is VERY large. For example, one hour saved in each store per week,
will be multiplied by 2,200 stores generating annual savings of approximately
$1.5 million dollars.
5. MIS
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The Smith's MIS platform integration is basically complete. The conversion of
the Smith's stores in Phoenix and Tucson to the Fry's platform has begun and is
expected to be completed soon.
QFC has begun their MIS platform conversion to the Fred Meyer system, with
completion expected this fall.
6. MANUFACTURING
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All 43 manufacturing plants now report to Kroger's Senior Vice President for
manufacturing. He and his team have made tremendous progress in leveraging the
size of our combined private label operations to purchase raw materials for the
plants. Here is an example: The Layton bakery in Utah now provides pies to most
of the Central region as well as the entire Western region. We not only improved
the quality of our pies, but were able to substantially reduce the cost by
purchasing the fruit fillings in bulk.
And, the Kroger plants are beginning to supply the former Fred Meyer divisions
with private label products such as peanut butter, coffee and some spice sku's.
We believe that manufacturing opportunities are very strong and we have just
begun to scratch the surface.
7. CALIFORNIA
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A quick update on our progress in California. As you know, in June we announced
the purchase of 41 stores from Albertson's which are mostly in Northern
California. To date, we have converted and opened 11 stores, and will open 3
more tomorrow. So far, customer acceptance has been phenomenal! During the next
two months, we will convert 21 more locations. We are very excited about our
future in Northern California, especially Sacramento.
I am also very pleased with our employee response in our new stores. We expect
Northern California to be an exciting growth area for Kroger.
With that, I would like to ask Rodney McMullen to provide you with an update on
the financial aspects of the "new" Kroger. Rodney...
RODNEY MCMULLEN
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Thanks Bob. We are in our quiet period so I can't talk about the quarter or
current business trends.
Kroger's number one financial goal is to grow earnings per share 16-18% annually
beginning next year.
Kroger remains committed to achieving at least $225 million in annual cost
savings during the next 3 years. We expect to achieve 50% of the net new
synergies from purchasing and
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merchandising efficiencies; 25% from Arizona in-market efficiencies; and the
remaining 25% from manufacturing, distribution and G&A savings.
We project $75 million in cost savings will be achieved in the first full year
after the merger; $150 million in the second twelve months; and $225 million in
year 3. This is incremental to Fred Meyer's cost savings from earlier mergers,
expected to total $155 million. We are on target to achieve those synergies.
WE REMAIN COMMITTED TO ACHIEVING THESE NUMBERS!
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The Kroger divisional presidents and senior management are heavily incentified
to achieve these synergy savings through an aggressive restricted stock grant
that vests over the same 36 month time frame, BUT ONLY if the target synergies
are achieved. 20% of the restricted stock grant is earned if we achieve the 1st
year target, 30% for the second year and 50% in the third year. If we fall one
dollar short in any year, we lose that year's grant. It is ALL OR NOTHING.
In fiscal year terms, synergy savings are broken out as follows:
1999 - $40 MILLION
2000 - $115 MILLION
2001 - $190 MILLION
2002 AND BEYOND $225 MILLION
Most of the savings will be achieved at the back end of each year.
We are incentified to exceed our total financial targets through Kroger's bonus
compensation structure. Thirty percent of bonus is earned on sales dollar
targets and seventy percent on EBITDA dollar targets. Once the 100% payout
target is met, the payoff increases at a rapid rate. The operators have every
incentive to exceed their budget targets and we love signing checks for bonuses
that exceed 100%!
The "new" Kroger will invest approximately $1.6 billion dollars per year in
CAPITAL EXPENDITURES, EXCLUDING ACQUISITIONS, and grow square footage 4.5 - 5%
per year. We will also invest approximately $100 million of "merger-related"
capital this year.
NET INTEREST EXPENSE should be in the $625 million dollar range, plus or minus
$10 million. We will use free cash flow to pay down debt.
Our target is to reduce debt to 2 times EBITDA, which should enable us to
achieve a mid BBB credit rating. We believe a mid BBB is the optimal capital
structure for us.
WORKING CAPITAL reduction remains a high priority. We expect to make
significant progress in reducing working capital over the next several years.
LABOR:
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Kroger has made great progress in the labor relations area. We have successfully
completed the UFCW contracts in Los Angeles, Denver, City Markets, Indianapolis,
Toledo, Louisville, and the Teamster master contract covering the remaining
three warehouses. All were signed for 4 or 5 years. We are very pleased with
these results.
During the remainder of 1999, we will negotiate UFCW contracts in Cincinnati,
Memphis and Charleston, WV.
Based on our current knowledge, we do not anticipate unusual problems in
resolving these in a timely fashion. Of course, no contract is assured until it
is ratified.
I am now going to turn the floor back to Joe for a few closing comments.
JOE PICHLER (CONCLUSION)
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WE ARE ABSOLUTELY THRILLED WITH THE MERGER WITH FRED MEYER. I am very pleased
with our integration progress and am more confident than ever about our ability
to achieve the projected synergy savings.
AND WE REMAIN COMMITTED TO OUR EPS GROWTH RATE OF 16-18% BEGINNING NEXT YEAR.
The "new" Kroger is a formidable competitor with the broadest geographic
coverage and the widest spectrum of food retailing formats of any player in the
industry. Kroger has the #1 or #2 share in 38 of our 41 major markets. As the
nation's largest food retailer, we will generate substantial economies of scale
to enhance sales, and grow earnings per share at 16-18% per year.
BOB, RODNEY AND I WILL NOW BE HAPPY TO TAKE YOUR QUESTIONS.
