Kroger Reports Fourth Quarter and Full-Year 2022 Results Announces Growth Expectations for 2023

Fourth Quarter Highlights

• Identical Sales without fuel increased 6.2%⁽¹⁾
• Operating Profit of $826 million; Adjusted FIFO Operating Profit of $1,274 million
• EPS of $0.62; Adjusted EPS of $0.99
• Executed go-to-market strategy to deliver value for customers
• Our Brands identical sales increased 10.1%
• Digital sales grew 12%

Fiscal 2022 Highlights

• Identical Sales without fuel increased 5.6%⁽¹⁾
• Operating Profit of $4.1 billion; Adjusted FIFO Operating Profit of $5.1 billion
• EPS of $3.06; Adjusted EPS of $4.23
• Delivered Adjusted EPS growth of 15%
• Cost savings exceeded $1 billion for fifth consecutive year
• Significantly increased associate wages resulting in average hourly wage of $18 and rate of over $23 with comprehensive benefits factored in
• Announced definitive merger agreement with Albertsons Companies, Inc.

CINCINNATI, March 2, 2023 /PRNewswire/ -- The Kroger Co. (NYSE: KR) today reported its fourth quarter and fiscal year 2022 results, provided 2023 guidance and updated investors on how Leading with Fresh and Accelerating with Digital continues to position Kroger for long-term sustainable growth.

Comments from Chairman and CEO Rodney McMullen

"Kroger achieved exceptional results in 2022 as we executed on our Leading with Fresh and Accelerating with Digital strategy, building on record years in 2020 and 2021.  

We appreciate our associates for remaining customer-focused, delivering the products customers want, when and how they want them, with zero compromise on quality, convenience and selection. Our associates enable our success, and we are committed to investing in theirs by continuing to improve wages, comprehensive benefits and career development opportunities.

Providing affordable food is even more essential at a time when inflation is affecting so many of our customers' lives. We do this by delivering fresh products at a great value, trusted Our Brands items, and personalized promotions.

Our proven go-to-market strategy enables Kroger to successfully navigate many operating environments. We believe that by delivering value for our customers, investing in our associates and serving our communities, Kroger will continue to achieve attractive and sustainable total returns for our shareholders."  

Fourth Quarter Financial Results

Total company sales were $34.8 billion in the fourth quarter, compared to $33.0 billion for the same period last year. Excluding fuel, sales increased 5.9% compared to the same period last year.

Gross margin was 21.8% of sales for the fourth quarter. The FIFO gross margin rate, excluding fuel, decreased 1 basis point compared to the same period last year. This result reflected Kroger's ability to effectively manage higher product cost inflation through strong sourcing practices and lower supply chain costs, while maintaining competitive pricing and helping customers manage their budgets.

The LIFO charge for the quarter was $234 million, compared to a LIFO charge of $20 million for the same period last year, driven by higher product cost inflation primarily in grocery.

The Operating, General & Administrative rate decreased 56 basis points, excluding fuel and adjustment items, compared to the same period last year. The decrease in OG&A rate was driven by sales leverage, continued execution of cost savings initiatives and the cycling of several one-time expenses, partially offset by planned investments in associates.

Fiscal 2022 Financial Results

Total company sales were $148.3 billion in 2022, compared to $137.9 billion for the same period last year. Excluding fuel, sales increased 5.2% compared to the same period last year.

Gross margin was 21.4% of sales for 2022. The FIFO gross margin rate, excluding fuel, decreased 9 basis points compared to the same period last year. This result reflected Kroger's ability to effectively manage higher product cost inflation through strong sourcing practices, while maintaining competitive prices and helping customers manage their budgets.

The LIFO charge for 2022 was $626 million, compared to a LIFO charge of $197 million for the same period last year, driven by higher product cost inflation.

The Operating, General & Administrative rate decreased 19 basis points, excluding fuel and adjustment items, compared to the same period last year. The decrease in OG&A rate was driven by sales leverage and the continued execution of cost savings initiatives partially offset by planned investments in associates.

Capital Allocation Strategy

Kroger expects to continue to generate strong free cash flow and remains committed to investing in the business to drive long-term sustainable net earnings growth, as well as maintaining its current investment grade debt rating. The Company expects to continue to pay its quarterly dividend and expects this to increase over time, subject to board approval. Kroger has paused its share repurchase program to prioritize de-leveraging following the proposed merger with Albertsons.

Kroger's net total debt to adjusted EBITDA ratio is 1.57, compared to 1.63 a year ago (Table 5). The company's net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50.

Full-Year 2023 Guidance*

• Identical sales without fuel of 1.0% – 2.0%, with underlying growth of 2.5% – 3.5% after adjusting for the effect of Express Scripts
• Adjusted net earnings per diluted share of $4.45 - $4.60, including an estimated benefit from the 53rd week of approximately $0.15
• Adjusted FIFO Operating Profit of $5.0 - $5.2 billion
• Effective tax rate of 23%**
• Capital expenditures of $3.4 - $3.6 billion
• Adjusted Free Cash Flow of $2.3 - $2.5 billion***

Comments from CFO Gary Millerchip

"Kroger's 2022 results demonstrate the strength of our value creation model. In 2023, we expect to build on this momentum and deliver revenue and EPS growth on top of the record results achieved over the past three years.

We expect to grow revenue by continuing to invest in our customers through competitive pricing and personalization, fresh products and a better shopping experience. Building on our significant investments over the past four years, we will also continue to increase associate wages. We will fund these investments through product mix improvements, cost saving initiatives and growth in our alternative profit businesses.   

Looking forward, we believe Kroger is well positioned to successfully operate in an evolving economic environment and continue to deliver attractive total returns for our shareholders."

Fourth Quarter 2022 Highlights

Leading with Fresh  

• Celebrated the 10^th anniversary of the Simple Truth brand, a greater than $3 billion brand providing customers with more than 1,500 unique natural and organic products
• Opened 1,000^th Murray's Cheese shop within Kroger stores offering customers a highly curated cheese selection in more than 30 states across America
• Announced the top 2023 food trends predicting customer behaviors and popular items for the year ahead

Accelerating with Digital

• Increased delivery sales by 22% over last year driven by our delivery solutions
• Opened a new Kroger Delivery Customer Fulfillment Center in the Denver Metro area, one of the fastest-growing areas in the country
• Increased digitally engaged households by approximately 900,000 compared to the same period last year

Associate Experience

• Invested approximately $600 million in incremental wages in 2022, for a total of $1.9 billion in incremental investments since 2018
• Named to Computerworld's 2023 Top 100 Best Places to work in IT list, marking the fifth consecutive year the company achieved this distinction for having an innovative, industry-leading workplace culture
• Honored by Ripplematch with a 2023 Campus Forward Award for excellence in career hiring, including programs that embrace innovative recruitment strategies, make significant investments in diversity and inclusion, and support the next generation of talent through impactful internships and entry-level programs
• Supported the continuing education of associates with more than 5,000 associates, 90% of whom are hourly, taking advantage of Kroger's best-in-class education assistance program in 2022

Live Our Purpose

• Recognized as one of Newsweek's "Most Responsible Companies" for 2023, marking the fourth consecutive year of being recognized for its dedication to corporate responsibility
• Achieved 100% execution of Zero Hunger I Zero Waste food rescue activity in participating Kroger stores
• Celebrated Kroger Health's recognition as Retailer of the Year by Mass Market Retailers, for elevating the connection between nutrition and health through its food as medicine initiative

About Kroger

At The Kroger Co. (NYSE: KR), we are dedicated to our Purpose: to Feed the Human Spirit™. We are, across our family of companies nearly half a million associates who serve over eleven million customers daily through a seamless digital shopping experience and retail food stores under a variety of banner names, serving America through food inspiration and uplift, and creating #ZeroHungerZeroWaste communities by 2025. To learn more about us, visit our newsroom and investor relations site.

Kroger's fourth quarter 2022 ended on January 28, 2023.

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. As noted above, Kroger is unable to provide a full reconciliation of the GAAP and non-GAAP measures used in its 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 GAAP financial results.

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," "committed," "continue," "expect," "future," "guidance," "positions," "target," 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: the risks relating to or arising from our proposed transaction with Albertsons announced in October 2022, including, among others, our ability to consummate the proposed transaction, including on the terms of the merger agreement, on the anticipated timeline, and/or with the required regulatory approvals; COVID-19 pandemic related factors, risks and challenges; labor negotiations; potential work stoppages; changes in the unemployment rate; pressures in the labor market; changes in government-funded benefit programs; 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 current inflationary environment and future potential inflationary and/or deflationary trends and such trends in certain commodities, products and/or operating costs; the geopolitical environment including the war in Ukraine; unstable political situations and social unrest; changes in tariffs; the effect that fuel costs have on consumer spending; volatility of fuel margins; manufacturing commodity costs; supply constraints; 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; stock repurchases; changes in the regulatory environment in which Kroger operates; 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; 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 our ability to better serve our customers and to generate customer loyalty and sustainable growth through our strategic pillars 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 tax 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 unless required by applicable law. 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 2, 2023 at ir.kroger.com. An on-demand replay of the webcast will be available at approximately 1 p.m. (ET) on Thursday, March 2, 2023.

4^th Quarter 2022 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

⁽¹⁾ Identical sales without fuel would have grown 6.7% in the 4^th quarter and 5.8% in fiscal 2022 if not for the reduction in pharmacy sales from Kroger's termination of its agreement with Express Scripts effective December 31, 2022. This terminated agreement had no material impact on profitability.

SOURCE The Kroger Co.