Kroger Delivers Strong Fourth Quarter and Fiscal Year 2020 Results

CINCINNATI, March 4, 2021 /PRNewswire/ -- The Kroger Co. (NYSE: KR) today reported its fourth quarter and fiscal year 2020 results.

Comments from Chairman and CEO Rodney McMullen

"I am incredibly humbled by the strength of our associates and what we continue to accomplish together. Our customers are at the center of everything we do and we will continue to serve them as we have since the beginning of the pandemic, through our leadership in food and as a health partner, providing COVID-19 testing and vaccines.

"Kroger continued to grow market share during the quarter. Our ability to meet our customers' evolving needs is a testament to our deep competitive moats, disciplined investments in our increasingly robust digital capabilities, as well as our associates' relentless focus on our customers. We finished fiscal year 2020 with strong sales and earnings, as heightened demand for fresh, convenient food and meal solutions across modalities, including in store, pick up and home delivery, continued throughout the fourth quarter.

"Supported by our strong performance and cash position, we were pleased to commit more than $2.5 billion to safeguard the environment our associates and customers work and shop in and to reward associates, including nearly $1 billion to better secure pensions."

Fourth Quarter Financial Results

*without fuel and adjustment items, if applicable
** Includes a $989 million pre-tax charge related to UFCW pension commitments and adjustment items, if applicable

Total company sales were $30.7 billion in the fourth quarter, compared to $28.9 billion for the same period last year. Excluding fuel and dispositions, sales grew 10.7%.

Gross margin was 22.9% of sales for the fourth quarter. The FIFO gross margin rate, excluding fuel, decreased 6 basis points compared to the same period last year, reflecting continued price investments offset by growth in alternative profit streams and sourcing benefits.

The LIFO credit for the fourth quarter was $84 million, compared to a LIFO charge of $36 million for the same period last year. The LIFO credit was primarily driven by fourth quarter working capital improvements in pharmacy inventory and dairy deflation.

The Operating, General & Administrative rate decreased 7 basis points, excluding fuel and adjustment items, which reflects sales leverage and execution of cost savings initiatives, offset by continued COVID-19 related investments to protect the health and safety of associates, customers and communities and increased incentive costs.

Rent and depreciation, excluding fuel, decreased 28 basis points due to sales leverage.

As a result of the UFCW pension charge, the income tax rate was a benefit for the fourth quarter of 2020 of 30.8%. This compared to a rate of 18.3% for the same period last year which was lower than our effective rate due to an increase in tax deductions.

Fiscal 2020 Financial Results

*without fuel and adjustment items, if applicable
** Includes a $989 million pre-tax charge related to UFCW pension commitments and adjustment items, if applicable

Total company sales were $132.5 billion in 2020, compared to $122.3 billion for the same period last year. Excluding fuel and dispositions, total sales grew 14.2%.

Gross margin was 23.3% of sales for 2020. The FIFO gross margin rate, excluding fuel, increased 14 basis points compared to the same period last year. This increase was primarily driven by sales leverage, growth in alternative profit streams, and sourcing benefits, partially offset with continued price investments.

The LIFO credit for 2020 was $7 million, compared to a LIFO charge of $105 million in 2019. The LIFO credit was primarily driven by fourth quarter working capital improvements in pharmacy inventory and dairy deflation.

The Operating, General & Administrative rate decreased 6 basis points, excluding fuel and adjustment items, which reflects sales leverage and execution of cost savings initiatives, offset by continued COVID-19 related investments to protect the health and safety of associates, customers and communities and increased incentive costs.

Rent and depreciation, excluding fuel, decreased 31 basis points due to sales leverage.

The income tax rate for 2020 was 23.2% compared to 23.7% for the same period last year. The income tax rate is lower compared to 2019 due to the unfavorable impact of the Lucky's Market impairment charge in 2019.

Capital Allocation Strategy

Kroger reduced net total debt by $2.0 billion over the last four quarters. Kroger's net total debt to adjusted EBITDA ratio is 1.75, compared to 2.48 a year ago (Table 5). The company's net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50.

In total, Kroger returned $1.9 billion to shareholders in 2020. Kroger repurchased $1.32 billion of shares in 2020 under its board authorizations. Kroger increased the dividend by 13 percent, from 64¢ to 72¢ per year, marking the 14^th consecutive year of dividend increases, which resulted in a payout of $534 million.

2021 Guidance

Comments from CFO Gary Millerchip

"As a result of strong execution of our strategy, enabled by continued investments in our customers and associates, we are accelerating the momentum in our business. Looking ahead to 2021, evaluating our performance using the two-year period of 2020 and 2021 more accurately measures this underlying momentum. We expect our two-year identical sales stack*** to be in the range of 9% to 11%. In addition, we expect our adjusted net earnings per diluted share and adjusted FIFO operating profit to have compounded annual growth rates of between 12% and 16% and 5.4% and 8.5%, respectively. Over the two years, this would result in total shareholder return significantly above our previously communicated target of 8-11%.

"Our 2021 guidance contemplates continued investments in associates and customers plus ongoing COVID-19 related costs, balanced with continued execution of cost savings initiatives and growth in our alternative profit businesses.

"We remain committed to delivering strong and attractive total shareholder return over the long term and expect our 2021 operating profit guidance to represent a new, higher baseline from which we will deliver total shareholder return of 8-11%. We look forward to sharing more about our future growth plans at our upcoming investor day."

Full Year 2021 Guidance

* Without adjusted items, if applicable; Identical sales is without fuel; Operating profit represents FIFO Operating Profit. Kroger is unable to provide a full reconciliation of the GAAP and non-GAAP measures used in 2021 guidance without unreasonable effort because it is not possible to predict certain of our adjustment items with a reasonable degree of certainty. This information is dependent upon future events and may be outside of our control and its unavailability could have a significant impact on 2021 GAAP financial results.
** This rate reflects typical tax adjustments and does not reflect changes to the rate from the completion of income tax audit examinations, which cannot be predicted.
*** Identical sales, without fuel, guidance for 2-year basis represents the sum of actual 2020 identical sales and 2021 guidance. The 2-year basis guidance items denoted with CAGR represent the compounded annual growth rate utilizing 2019 as the base year. Average free cash flow is the average of actual 2020 free cash flow and 2021 guidance.
**** 2021 free cash flow guidance includes a $300M payment of deferred payroll taxes. This excludes planned payments related to the restructuring of multi-employer pension plans.

Fourth Quarter 2020 Highlights

Customer Obsession

• Our Brands achieved its best year ever, exceeding $26.2 billion in sales
• Simple Truth achieved a major milestone, exceeding $3 billion in annual sales for the first time and launched 53 new items in the Plant Based collection
• Expanded to 2,223 Pickup locations and 2,472 Delivery locations, covering 98% of Kroger households
• Expanded partnership with Ocado with plans to construct an additional Customer Fulfillment Center in the Southwest U.S. and leverage capabilities from its in-store fulfillment solution with the best of Kroger's solutions to support the rapid growth of pickup demand
• Kroger Precision Marketing was rated #1 for Targeting Effectiveness, Measurement Capabilities and ability to drive CPG Sales (tie) in a survey by the Path to Purchase Institute
• Kroger Health administered more than 665,000 COVID-19 vaccines as of February 28^th to eligible populations and was selected to be part of the Biden's Administration's Federal Retail Pharmacy Program. Additionally, launched a new COVID-19 vaccine scheduling tool and hotline
• Celebrated first anniversary of brand launch, new logo design and Fresh for Everyone campaign

Associate Experience

• Continued investment in Kroger associate wages has increased Kroger's average hourly wage to $15.50 an hour, with average hourly rate over $20 per hour with comprehensive benefits factored in, benefits that many competitors don't offer
• Invested nearly $1 billion to secure pensions for over 30,000 associates
• Helping Hands Fund issued 5,722 grants in 2020 to assist associates facing hardships
• Announced a $100 incentive for all associates who receive the COVID-19 vaccination
• Vaccinated 38,000 associates against COVID-19 as of February 28^th
• Invested approximately $275 million to reward associates and to protect them and customers through the continued implementation of dozens of safety measures during the fourth quarter
• More than 3,100 associates, 86% of whom are hourly, have taken advantage of Kroger's best-in-class education assistance program in 2020 alone

Live Our Purpose

• The Kroger Co. Foundation announced recipients of the Racial Equity Fund Build It Together grant challenge, an initiative awarding $3 million in grants and forging partnerships with innovating organizations to help build more equitable, inclusive communities
• Introduced the founding members of Kroger's Diversity, Equity & Inclusion Advisory Council, which will work closely with senior leaders and associates to ensure the company continues to create a more equitable future for the communities we serve
• Named one of the Best Places to Work for LGBTQ Equality for the third consecutive year
• Named to the Dow Jones Sustainability North America Index (DJSI) for the eighth consecutive year
• Recognized by Newsweek as one of America's Most Responsible Companies of 2021
• Reduced total waste sent to landfill – including food waste – by approximately 5% in 2020 through Zero Hunger | Zero Waste initiatives

About Kroger
At The Kroger Co. (NYSE: KR), we are Fresh for Everyone™ and dedicated to our Purpose: To Feed the Human Spirit®. We are, across our family of companies, nearly half a million associates who serve over 11 million customers daily through a seamless shopping experience under a variety of banner names. We are committed to creating #ZeroHungerZeroWaste communities by 2025. To learn more about us, visit our newsroom and investor relations site.

Kroger's fourth quarter 2020 ended on January 30, 2021.

Note: Fuel sales have historically had a low gross margin rate and operating expense rate as compared to corresponding rates on non-fuel sales. As a result, Kroger discusses the changes in these rates excluding the effect of fuel.

Please refer to the supplemental information presented in the tables for reconciliations of the non-GAAP financial measures used in this press release to the most comparable GAAP financial measure and related disclosure.

This press release contains certain statements that constitute "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. Such statements are indicated by words or phrases such as "achieve," "believe," "contemplates," "continue," "deliver," "expect," "future," "guidance," "strategy," "target," "trends," and "will." Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include the specific risk factors identified in "Risk Factors" in our annual report on Form 10-K for our last fiscal year and any subsequent filings, as well as the following:

• Kroger's ability to achieve sales, earnings, incremental FIFO operating profit, and adjusted free cash flow goals may be affected by: COVID-19 related factors, risks and challenges, including among others, the length of time that the pandemic continues, the temporary inability of customers to shop due to illness, quarantine, or other travel restrictions or financial hardship, shifts in demand away from discretionary or higher priced products to lower priced products, or stockpiling or similar pantry-filling activities, reduced workforces which may be caused by, but not limited to, the temporary inability of the workforce to work due to illness, quarantine, or government mandates, temporary store closures due to reduced workforces or government mandates, or the availability and efficacy of a vaccine; labor negotiations or disputes; changes in the types and numbers of businesses that compete with Kroger; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; Kroger's response to these actions; the state of the economy, including interest rates, the inflationary and deflationary trends in certain commodities, changes in tariffs, and the unemployment rate; the effect that fuel costs have on consumer spending; volatility of fuel margins; changes in government-funded benefit programs and the extent and effectiveness of any COVID-19 stimulus packages; manufacturing commodity costs; diesel fuel costs related to Kroger's logistics operations; trends in consumer spending; the extent to which Kroger's customers exercise caution in their purchasing in response to economic conditions; the uncertainty of economic growth or recession; changes in inflation or deflation in product and operating costs; stock repurchases; Kroger's ability to retain pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; Kroger's ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the effect of public health crises or other significant catastrophic events, including the coronavirus; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of Kroger's future growth plans; the ability to execute our growth strategy and value creation model, including continued cost savings, growth of our alternative profit businesses, and widening and deepening our strategic moats of fresh, our brands, personalization, and seamless; and the successful integration of merged companies and new partnerships. Our ability to achieve these goals may also be affected by our ability to manage the factors identified above. Our ability to execute our financial strategy may be affected by our ability to generate cash flow.
• Kroger's effective tax rate may differ from the expected rate due to changes in laws, the status of pending items with various taxing authorities, and the deductibility of certain expenses.

Kroger assumes no obligation to update the information contained herein. Please refer to Kroger's reports and filings with the Securities and Exchange Commission for a further discussion of these risks and uncertainties.

Note: Kroger's quarterly conference call with investors will broadcast live at 10 a.m. (ET) on March 4, 2021 at ir.kroger.com. An on-demand replay of the webcast will be available at approximately 1 p.m. (ET) on Thursday, March 4, 2021.

Kroger will host its 2021 Investor Conference virtually at ir.kroger.com at 9:00 a.m. (ET) on March 31, 2021.

4^th Quarter 2020 Tables Include:

1. Consolidated Statements of Operations
2. Consolidated Balance Sheets
3. Consolidated Statements of Cash Flows
4. Supplemental Sales Information
5. Reconciliation of Net Total Debt and Net Earnings Attributable to The Kroger Co. to Adjusted EBITDA
6. Net Earnings Per Diluted Share Excluding the Adjustment Items
7. Operating Profit Excluding the Adjustment Items
8. Adjusted Free Cash Flow