<PAGE> 1
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: December 6, 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 Number) (IRS Employer Number)
of incorporation)
1014 Vine Street
Cincinnati, OH 45201
(Address of principal
executive offices)
Registrant's telephone number: (513) 762-4000
<PAGE> 2
Item 5. Other Events
A. On December 6, 1999, the Company released its earnings for the third
quarter of 1999, separately announcing management changes. Attached
hereto as Exhibit 99.1 is the text of that release.
B. On December 6, 1999, the Company conducted an investor conference
call. Attached hereto as Exhibit 99.2 is the text of the prepared
remarks for that call. The Company also indicated that, excluding its
Fry's division, its identical store sales increase thus far for the
fourth quarter 1999 was exceeding the 1.9% reported for third quarter
1999.
C. On September 14, 1999, the Company disclosed its estimate of sales
and diluted earnings per share for third and fourth quarters 1998,
adjusted to take into account the merger with Fred Meyer and the
Company's change in its fiscal year. The Company is revising its
estimate of what sales would have been for those two quarters, taking
into account the merger with Fred Meyer and the change in its fiscal
year, to approximately $9.8 billion in the third quarter 1998, and
approximately $11.1 billion in the fourth quarter 1998.
Sales as shown above have not been adjusted to account for divested
stores. These estimates include the effect of the Company's merger with
Fred Meyer, which was accounted for as a pooling-of-interests, and the
change in Kroger's fiscal year end that was disclosed in its Current
Report on Form 8-K dated January 15, 1999.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits:
99.1 Earnings release for third quarter 1999.
99.2 Text of prepared remarks for investor conference call.
<PAGE> 3
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.
December 6, 1999 By: (Paul Heldman)
Paul Heldman
Senior Vice President, Secretary
and General Counsel
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EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
99.1 Earnings release for third quarter 1999.
99.2 Text of prepared remarks for investor conference call.
<PAGE> 1
Exhibit 99.1
From:
[KROGER LOGO] Corporate Affairs Department
NEWS The Kroger Co.
1014 Vine Street
Cincinnati, Ohio 45202-1100
================================================================================
Media Contact: Gary Rhodes, The Kroger Co. (513) 762-1304
Investor Contact: Kathy Kelly, The Kroger Co. (513) 762-4969
KROGER REPORTS RECORD EARNINGS, BEFORE MERGER COSTS,
FOR THIRD QUARTER OF 1999
RESULTS KEYED BY MERCHANDISING PROGRAMS,
PRIVATE-LABEL PRODUCTS AND SYNERGY SAVINGS; SEPARATELY,
ROBERT MILLER RESIGNS FROM KROGER TO JOIN RITE AID
CINCINNATI, OH, December 6, 1999 -- The Kroger Co. (NYSE: KR) today
reported record earnings of $0.24 per diluted share, excluding costs related to
mergers, for the third quarter ended November 6, 1999.
These results represent an increase of approximately 33% over estimated
combined earnings of $0.18 per diluted share, before an extraordinary item, for
the third quarter of 1998. The prior-year estimate includes the actual results
of Fred Meyer before merger costs and an estimate of Kroger's pre-merger results
to reflect the change to a new fiscal calendar last January.
Including merger-related costs of $93 million pre-tax, Kroger earned
$0.15 per diluted share in the third quarter of 1999.
After adjusting for the change in Kroger's fiscal calendar and
excluding sales from divested stores, total sales for the third quarter of 1999
increased 6.6% to $10.3 billion. Identical food store sales grew 1.6%.
Comparable food store sales, which include relocations and expansions, rose 2.5%
for the quarter. Identical and comparable sales include divisions with stores
that changed names during the past year. Excluding the Fry's division, which has
converted 35 former Smith's stores to the Fry's banner, identical food store
sales grew 1.9% and comparable food store sales rose 2.8%.
1
<PAGE> 2
EBITDA (earnings before interest, taxes, depreciation, amortization,
LIFO and unusual items) for the third quarter of 1999 totaled $696 million, an
increase of approximately 12.4% over estimated results from the previous year.
"We are very pleased with our sales and earnings performance in the
third quarter of 1999," said Joseph A. Pichler, Kroger chairman and chief
executive officer. "Our merchandising programs continued to generate positive
results, including the introduction of more than 325 new private-label products.
Our manufacturing operations also turned in another outstanding performance."
During the third quarter of 1999, Kroger opened, expanded, relocated or
acquired 104 stores. Overall square footage, excluding divested stores,
increased 5.9% over the prior year. Capital expenditures for the quarter totaled
$625 million. Net total debt increased by $247 million to $8.7 billion from a
year ago, largely as a result of the Company's decision to build inventory in
anticipation of a strong holiday selling season. Net total debt also was
affected by the change in Kroger's fiscal calendar.
For the first three quarters of 1999, Kroger reported earnings of $0.74
per diluted share, before an extraordinary item and excluding merger costs. On
that basis, these results represent an increase of approximately 25% over
estimated combined earnings of $0.59 per diluted share for the first three
quarters of 1998. The prior-year estimate includes the actual results of Fred
Meyer before merger costs and an estimate of Kroger's pre-merger results,
excluding one-time expenses, to reflect the change to a new fiscal calendar. The
1999 figures also include a full 40 weeks of results from Ralphs, which was
acquired by Fred Meyer on March 10, 1998, thus contributing only 35 weeks of
results during the 1998 period.
Adjusting for these changes, and excluding sales from divested stores,
total sales in the first three quarters of 1999 increased approximately 5.7%.
EBITDA totaled $2.3 billion for the first three quarters of 1999.
Mr. Pichler said the integration of the Kroger and Fred Meyer
organizations is moving forward smoothly. "We are delighted with the progress we
have made in combining these two organizations. By consolidating suppliers
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<PAGE> 3
and centralizing our purchasing, we have been able to leverage our size to
obtain better costs for a wide variety of items, including produce, holiday
candy, grocery bags and plastic pharmacy vials, just to name a few. In addition,
our new three-tier, private-label strategy has led to the introduction of
hundreds of new products that will help strengthen our regional store brands
across the country."
Looking ahead, Mr. Pichler said the Company remains comfortable with
achieving the projected $155 million in combined synergy savings for the 1999
fiscal year from the Kroger-Fred Meyer merger and from Fred Meyer's previous
mergers. He also said the Company expects combined synergy savings to total $260
million in fiscal 2000, $345 million in fiscal 2001 and $380 million in fiscal
2002.
During the third quarter, the Company announced plans to purchase 74
Winn-Dixie stores in Texas and Oklahoma, subject to Federal Trade Commission
review. Kroger also added the Jay C Stores chain in southern Indiana and has
converted 38 stores in northern California that were acquired from Albertson's,
Inc. In addition, the Company last week announced plans to merge with Pay Less
Super Markets Inc., a privately owned chain of eight grocery stores in Indiana.
For the fiscal fourth quarter, which ends January 29, 2000, Kroger
estimates earnings per share to be in the range of $0.37 to $0.40, excluding
merger-related costs. Mr. Pichler said the Company remains comfortable with
achieving previously announced annual earnings per share growth of 16%-18%
beginning in fiscal 2000.
Separately, Kroger announced that Robert G. Miller, vice chairman and
chief operating officer, resigned from the Company, effective December 3, 1999.
Mr. Miller has accepted an offer to join Rite Aid Corp. (NYSE, PSE: RAD). In
addition, Kroger announced that Kenneth A. Thrasher has been appointed president
and chief executive officer of Fred Meyer Stores, Inc. Mr. Thrasher, who
previously served as a senior vice president of The Kroger Co., has held a
variety of management positions with Fred Meyer, Inc. since joining the company
in 1982. He replaces Mary F. Sammons, who also has resigned to join Rite Aid.
3
<PAGE> 4
Mr. Pichler said, "Kroger has a very strong management team throughout
the organization that is firmly committed to building our business and achieving
the synergy goals set by the Company."
Mr. Pichler will assume the responsibilities of chief operating officer
on an interim basis while the Company's board of directors considers an
appropriate organizational structure.
Headquartered in Cincinnati, Ohio, Kroger is the nation's largest
retail grocery chain. The Company operates 2,268 supermarkets and
multi-department stores in 31 states under more than a dozen banners, including
Kroger, Fred Meyer, Ralphs, Smith's, King Soopers, Dillon, Fry's, Food 4 Less
and Quality Food Centers. Kroger also operates 794 convenience stores, 383 fine
jewelry stores and 42 food processing plants.
# # #
This press release contains certain forward-looking statements about
the future performance of the Company. These statements are based on
management's assumptions and beliefs in light of the information currently
available to it. We assume no obligation to update the information contained
herein. These forward-looking statements are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements including, but not limited to, material adverse changes in the
business or financial condition of Kroger and other factors affecting the
businesses of the Company which are described in filings with the Securities and
Exchange Commission.
Certain 1998 information included in this release has been estimated in
order to present the 1998 information as if the decision to change Kroger's
fiscal year had been made at the beginning of 1998. The 1998 information
included in the Company's Forms 10-Q filed with the SEC during 1999 will be for
different periods than those in the newly adopted fiscal year and may not agree
with certain 1998 estimated information included in this release.
4
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THE KROGER CO.
SALES AND EARNINGS
WITHOUT ONE-TIME EXPENSES
(in millions, except per share amounts)
<TABLE>
<CAPTION>
3rd Quarter 3 Quarters
-------------------- -------------------
1999 1998(3) 1999 1998(4)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $10,329 $11,501 $34,111 $31,877
======= ======= ======= =======
EBITDA (1) $ 696 $ 691 $ 2,280 $ 1,984
LIFO $ (6) $ 9 $ 6 $ 28
Interest $ 148 $ 170 $ 495 $ 489
Depreciation $ 198 $ 200 $ 647 $ 580
Amortization $ 23 $ 23 $ 76 $ 66
------- ------- ------- -------
Pre-tax earnings earnings
before extraordinary item $ 333 $ 289 $ 1,056 $ 821
Tax expense $ 131 $ 119 $ 421 $ 336
------- ------- ------- -------
Earnings before extraordinary item $ 202 $ 170 $ 635 $ 485
Extraordinary item (2) $ - $ (6) $ (10) $ (229)
------- ------- ------- -------
Net earnings $ 202 $ 164 $ 625 $ 256
======= ======= ======= =======
Diluted earnings per common share:
From operations $ 0.24 $ 0.20 $ 0.74 $ 0.57
From extra-ordinary item (2) $ - $ (0.01) $ (0.01) $ (0.27)
------- ------- ------- -------
Diluted net earnings per
common share $ 0.24 $ 0.19 $ 0.73 $ 0.30
======= ======= ======= =======
Number of shares used in diluted
per share calculation 857 855 860 848
</TABLE>
(1) EBITDA, as defined in our credit agreements, represents earnings before
interest, taxes, depreciation, amortization, LIFO and one-time items.
(2) From the early retirement of debt.
(3) The information for the third quarter of 1998 includes the results of
operations of The Kroger Co. for the 16 weeks ended October 3, 1998, its wholly
owned subsidiary, Dillon Companies Inc., for the 13 weeks ended September 26,
1998, its wholly owned subsidiary, Fred Meyer, Inc., for the 12 weeks ended
November 7, 1998.
(4) The information for the first three quarters of 1998 includes the results of
operations of The Kroger Co. for the 40 weeks ended October 3, 1998, Dillon
Companies Inc., for the 39 weeks ended September 26, 1998, and Fred Meyer, Inc.,
for the 40 weeks ended November 7, 1998.
<PAGE> 6
THE KROGER CO.
SALES AND EARNINGS
WITH ONE-TIME EXPENSES
(in millions, except per share amounts)
<TABLE>
<CAPTION>
3rd Quarter 3 Quarters
-------------------- -------------------
1999 1998(3) 1999 1998(4)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $10,329 $11,501 $34,111 $31,877
======= ======= ======= =======
EBITDA (1) $ 696 $ 691 $ 2,280 $ 1,984
LIFO $ (6) $ 9 $ 6 $ 28
Interest $ 148 $ 170 $ 495 $ 489
Depreciation $ 198 $ 200 $ 647 $ 580
Amortization $ 23 $ 23 $ 76 $ 66
One-time Items (5) $ 93 $ 34 $ 363 $ 388
------- ------- ------- -------
Pre-tax earnings earnings
before extraordinary item $ 240 $ 255 $ 693 $ 433
Tax expense $ 111 $ 105 $ 301 $ 201
------- ------- ------- -------
Earnings before extraordinary item $ 129 $ 150 $ 392 $ 232
Extraordinary item (2) $ - $ (6) $ (10) $ (229)
------- ------- ------- -------
Net earnings $ 129 $ 144 $ 382 $ 3
======= ======= ======= =======
Diluted earnings per common share:
From operations $ 0.15 $ 0.18 $ 0.46 $ 0.27
From extra-ordinary item (2) $ - $ (0.01) $ (0.01) $ (0.27)
------- ------- ------- -------
Diluted net earnings per
common share $ 0.15 $ 0.17 $ 0.45 $ -
======= ======= ======= =======
Number of shares used in diluted
per share calculation 857 855 860 848
</TABLE>
(1) EBITDA, as defined in our credit agreements, represents earnings before
interest, taxes, depreciation, amortization, LIFO and one-time items.
(2) From the early retirement of debt.
(3) The information for the third quarter of 1998 includes the results of
operations of The Kroger Co. for the 16 weeks ended October 3, 1998, its wholly
owned subsidiary, Dillon Companies Inc., for the 13 weeks ended September 26,
1998, its wholly owned subsidiary, Fred Meyer, Inc., for the 12 weeks ended
November 7, 1998.
(4) The information for the first three quarters of 1998 includes the results of
operations of The Kroger Co. for the 40 weeks ended October 3, 1998, Dillon
Companies Inc., for the 39 weeks ended September 26, 1998, and Fred Meyer, Inc.,
for the 40 weeks ended November 7, 1998.
(5) The one-time items in 1999 are costs related to mergers. The one-time items
in the third quarter of 1998 are costs related to mergers. The one-time items in
the first three quarters of 1998 are costs related to mergers ($246 million),
logistics initiatives ($41 million), accounting and operations consolidations in
Texas ($11 million), and charges related to an accounting change ($90 million).
<PAGE> 1
Exhibit 99.2
THIRD QUARTER, 1999
INVESTOR CONFERENCE CALL
DECEMBER 6, 1999
KATHY KELLY: Good morning. Before we begin today's call, I must inform you that
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.
COMMENTS BY: JOE PICHLER
Good morning and welcome to Kroger's third quarter investor conference call.
Thanks for joining us. With me today are Dave Dillon, Kroger's President and
Rodney McMullen, our Chief Financial Officer.
This morning Kroger released the results of our outstanding third quarter. I am
very pleased by the strong sales and EBITDA that our operators achieved.
The release also states that Bob Miller and Mary Sammons have resigned to become
Rite Aid's CEO and COO respectively.
We are very pleased to announce that Ken Thrasher, SVP of Kroger, has been
appointed president and CEO of Fred Meyer Stores, replacing Mary Sammons. Ken is
a 17 year associate of Fred Meyer stores who has earned the respect of our
entire organization for his professional expertise, understanding of the
multi-department stores and leadership.
I will now review Kroger's third quarter results and update you on the
integration activities. Rodney will discuss synergy savings. We will then be
happy to answer your questions.
TOTAL SALES WERE $10.3 BILLION DOLLARS - AN INCREASE OF 6.6% over the comparable
period in 1998. FOOD STORE SALES ROSE 6.3%. In order to calculate the 1998 sales
figure, we adjusted Kroger sales to coincide with the new fiscal year and
excluded sales from divested stores. ON THE SAME BASIS, IDENTICAL FOOD STORE
SALES rose a strong 1.6%.
The identical store sales calculation excludes expansions and relocations.
COMPARABLE STORE SALES - which include expansions and relocations, rose 2.5%,
another good number. Excluding the Fry's division, which converted 35 former
Smith's stores to the Fry's banner, identical food store sales increased 1.9%
and comparable store sales rose 2.8%. I am very pleased with the continued
strength of our sales.
<PAGE> 2
EBITDA:
THIRD QUARTER EBITDA totaled $696.1 million dollars - an increase of
approximately 12.4% over estimated results for the third quarter 1998. This was
an outstanding performance by our operators.
Excluding all costs related to the merger, THE GROSS PROFIT RATE was 26.54% of
sales. The gross profit rate improvement over the first half of 1999 reflects
the reduction in product costs generated by our corporate wide purchasing
program; a strong increase in private label profitability; excellent
manufacturing results; and the benefits being generated by logistics
initiatives.
EXCLUDING COSTS RELATED TO THE MERGER, OG&A expense was 18.2% of sales which is
flat as compared to the first half of 1999. Kroger remains committed to reducing
ALL costs - as a percent of sales, year over year.
COMBINED SYNERGY SAVINGS at the end of the quarter totaled
$135 million dollars. The incremental savings were primarily attributable to
PURCHASING, MANUFACTURING, AND REDUCTION IN ADMINISTRATIVE COSTS. We are well on
our way to achieving the $155 million of synergy savings targeted for fiscal
1999.
COSTS RELATED TO THE MERGER TOTALED $93 million in the quarter. We expect to
incur additional costs related to the merger in the next two years. However, the
majority of these costs will occur during the first year after the merger
closed.
EARNINGS PER DILUTED SHARE, before all costs related to the merger, totaled 24
cents, an increase of 33% over estimated results for the third quarter 1998 . We
estimate that 1998 diluted earnings per share would have been approximately 18
cents on a comparable basis.
There were 857.4 MILLION DILUTED SHARES outstanding at the end of the third
quarter.
I am DELIGHTED by Kroger's strong performance during the quarter especially in
light of all the integration activities that are underway across the company and
the mergers we are able to identify and complete on a fill-in basis in addition
to achieving the merger synergies at Fred Meyer. And I continue to be impressed
by the way our operators are working together as one team.
This merger is off to a solid start and I continue to feel good about our
ability to generate EARNINGS PER SHARE GROWTH AT THE TARGETED RATE OF 16 - 18%
BEGINNING NEXT YEAR.
FOR THE 4TH QUARTER, WE EXPECT EARNINGS TO BE WITHIN THE RANGE OF
37 - 40 CENTS. Let me explain. The Phoenix integration is taking longer than we
expected and sales have been soft at QFC and Smiths since the date of the
merger. We expect to achieve the Phoenix synergies in 2000. And we have replaced
the leadership at Smith's and QFC with two strong executives, Russ Dispense and
Darrell Webb. Both are solid merchants and operators.
<PAGE> 3
We also experienced some information systems issues since the date of the merger
at Smith's, QFC and Fry's. These are not control issues but they do affect
in-store operations and some of the purchasing. On the in-store systems there
were some hardware problems early on as the systems were changed at Smith's and
QFC. That changeover began before the merger and some of those problems were
identified in the hardware. Those have been fixed. There are still some issues
that are targeted for improvement in 2000.
On the purchasing systems side, at the time that Smith's and QFC were acquired
by Fred Meyer, the purchasing systems were non-compliant with the year 2000. The
decision was made, and I think appropriately, to introduce the Fred Meyer
purchasing system, which is a compliant system. That system is designed for
multi-department stores and there are some features that are cumbersome for food
merchants. We will begin to fix those after the year 2000--we want to make sure
we get past the Y2K date.
ACQUISITIONS
Kroger continues to take advantage of strategic acquisition opportunities.
During the quarter, we completed our merger with the John C Groub Co. (Jay C
stores in Indiana) and the acquisition of 38 Albertsons stores in northern
California. Sam Duncan and the Ralphs team are doing a great job of integrating
those northern California stores. I might add that Ralphs had a wonderful
quarter. We also announced plans to purchase 74 Winn-Dixie stores in Texas and
Oklahoma and, last week, announced plans to merge with Pay Less Super Markets
Inc., a privately owned chain of eight grocery stores in Indiana. A very busy
quarter.
CAPITAL INVESTMENT:
Kroger invested $625 MILLION IN CAPITAL PROJECTS in the third quarter. Excluding
acquisition costs associated with the Albertsons stores and the Jay C stores,
cap ex was $ 468 million. For the year, we expect to invest approximately $1.95
billion which includes $100 million of merger related capital.
We plan to grow square footage by 4.5 - 5% year over year, excluding
acquisitions. Net square footage growth in fiscal 1999 will be in the 4.0 - 4.5%
range because of the large number of operational closings this year. We
continually review under performing assets and are moving more quickly to turn
them around or dispose of them.
During the quarter Kroger opened, acquired, expanded, or relocated 104 stores
versus 51 in the comparable period of 1998. We had 11 operational closings and
completed 40 within the wall remodels.
Square footage, excluding divested stores, increased 5.9% over 3rd quarter 1998
to 118.1 million square feet. Excluding divested stores and acquisitions, net
square footage grew 3.9% over 3rd quarter 1998.
KROGER ENDED THE QUARTER WITH 2268 FOOD STORES, 794 CONVENIENCE STORES, AND 383
JEWELRY STORES.
<PAGE> 4
LIFO posted a $6.5 million dollar CREDIT for the quarter compared to a $9
million dollar charge last year. This is directly attributable to better buying
as a result of our centralized procurement program; the stable grocery cost
environment in which we are currently operating; and the synergy savings that we
are beginning to achieve.
WORKING CAPITAL:
Working capital for the quarter increased $313 million to a level of $354
million. Inventory build was primarily responsible for the increase. Kroger
divisions have increased inventory for the holiday season in anticipation of our
customers' needs for the millennium. The increase in working capital also
reflects the change in the new fiscal calendar, and the effect of the newly
acquired stores.
Working capital reduction is a high priority going forward. We expect to take at
least $500 million out of working capital over the next 5 years.
DEBT/INTEREST EXPENSE:
NET TOTAL DEBT increased $247 million dollars to $8.7 billion dollars. The
increase is due to the inventory build.
NET INTEREST EXPENSE totaled $148 million. Interest expense for the full year
should be in the $650 million range, plus or minus $10 million. This increase of
$25 million is due to the recent acquisitions, funding out some of the Fred
Meyer bank debt to a longer maturity and the inventory build.
We continue to make dramatic progress in integrating the Kroger and Fred Meyer
organizations. There are two specific areas that I would like to highlight:
1. ARIZONA
As you recall, Kroger and Fred Meyer only had overlap in Arizona. All 35 former
Smith's stores in Phoenix and Tucson have been converted to the Fry's banner. As
I mentioned earlier, we are not happy with the results in Phoenix and we have a
plan of action to achieve the full synergies.
The Fry's stores, as well as the Fred Meyer Arizona stores, are now receiving
all grocery and perishable items from the Tolleson warehouse which formerly
served the Smith's and Fred Meyer stores in Arizona. The former Fry's warehouse
is still being used for outside storage during the transition, but there is no
order assembly being done at that facility. The warehouse conversion was more
difficult than we anticipated but service levels have now improved. And the
Fry's dairy has been sold.
THE SECOND AREA I WOULD LIKE TO HIGHLIGHT IS PRIVATE LABEL.
Kroger's three tier private label strategy is beginning to generate incremental
sales and enhanced profit margins. Our "good, better, best" approach to private
label will enable us to serve a much
<PAGE> 5
broader consumer base. Pre-merger Kroger's private label sales accounted for 25%
of grocery dollar sales, and 31% of unit sales during the 3rd quarter. Private
label sales are about 16-18% of grocery sales in the former Fred Meyer
divisions.
I am confident that we can raise the private label sales penetration at the Fred
Meyer divisions to the level that the pre-merger Kroger divisions have achieved
and that we will continue to grow private label market share across the entire
company. We are rolling out the Private Selections premium tier and now have
over 70 sku's currently in the stores, with 30 more scheduled to be in place by
year end.
We are very pleased with the early results and the incremental sales these
premium products are generating.
So far this year, Kroger has introduced 726 new private label products. You can
really see the emphasis we are placing on this area. We continue to be very
pleased with our three tier strategy and the product cost reductions we are
achieving. This is an area of substantial growth potential.
With that, I would like to ask Rodney to update us on synergy savings.
Rodney, . . .
COMMENTS BY: RODNEY MCMULLEN
Thanks Joe and good morning. As Joe mentioned earlier, at the end of the third
quarter, we have achieved combined synergies of $135 million, an incremental $15
million over the 2nd quarter 1999. As Joe mentioned before, the areas producing
the synergies are administrative cost reductions, purchasing (especially in the
private label areas and other purchasing areas), manufacturing, and the offset
of some of the negative synergies in Arizona that are reflected in those
numbers. We are comfortable that we will meet or beat the projected $155 million
in combined synergy savings for the 1999 fiscal year. In addition, we will meet
or beat combined synergies of $260 million in fiscal 2000, $345 million in
fiscal 2001 and $380 million in fiscal 2002.
Each quarter the finance support team along with each of the transition
committee teams updates the synergies and we continue to feel very comfortable
with our ability to achieve these numbers.
In addition, this morning we announced a stock repurchase program using option
proceeds and the tax deduction from those options. If you look through the end
of 2001 we have 5.1 million options that will expire that we would expect to be
exercised. By using the proceeds from options and the tax deduction, we would
expect to repurchase about half that number of shares going forward.
Now back to Joe.
<PAGE> 6
COMMENTS BY: JOE PICHLER
Thanks Rodney. I am extremely pleased with Kroger's third quarter results. Our
divisional operators kept their focus on customer service to produce a strong
increase in sales and earnings while, at the same time, working closely with
corporate leadership to implement the strategies that will generate $380 million
of synergies.
The "new Kroger" is building on the strength of our combined companies: leading
market shares in some of the nation's largest and fastest growing metro markets;
solid managers throughout the company; sophisticated technology and logistics
systems that support retail operations effectively and efficiently; a powerful
group of manufacturing plants that provide a strategic advantage in private
label categories; and a clarity of purpose throughout the organization
These assets form a solid base for generating the economies of scale made
possible by our merger. We are off to a great start. Our team is heavily
incentified to achieve the full value of our merger and will be handsomely
rewarded as we build shareholder value through our projected EPS growth rate of
16 - 18% beginning next year.
We will now be happy to take your questions.
