The Kroger Co reported its first quarter 2021 results and will update investors on how Leading with Fresh and Accelerating with Digital initiatives are positioning Kroger for long-term sustainable growth.
omments from Chairman and CEO Rodney McMullen
“Kroger is even better positioned to connect with our customers than we were prior to the pandemic as a result of our relentless focus on leading with fresh and accelerating with digital. I am incredibly proud of our amazing associates who continue to be there for our customers, communities, and each other when they need us most and who strive to deliver a full, fresh, and friendly experience to every customer, every time.
“Kroger’s strong execution delivered identical sales results in the first quarter that exceeded our original expectations. Customers are responding to the investments we have made in digital, as evidenced by our triple-digit growth in digital sales since the beginning of 2019. We were disciplined in driving costs out of the business and we achieved record growth in Kroger’s alternative profit business, demonstrating the power and attractiveness of our long-term model.
“We are raising our guidance based on the strength of our results and we remain confident in our ability to deliver consistently attractive total shareholder return.”
First Quarter Financial Results
| 1Q21 ($ in millions; except EPS) | 1Q20 ($ in millions; except EPS) | |
| ID Sales* (Table 4) | (4.1%) | 19.0% |
| EPS | $0.18 | $1.52 |
| Adjusted EPS (Table 6) | $1.19 | $1.22 |
| Operating Profit | $805 | $1,326 |
| Adjusted FIFO Operating Profit (Table 7) | $1,375 | $1,453 |
| FIFO Gross Margin Rate* | Decreased 65 basis points | |
| OG&A Rate* | Decreased 108 basis points |
*without fuel and adjustment items, if applicable
First Quarter Results versus Two Years Ago
| 1Q21 ($ in millions; except EPS) | |
| ID Sales Two Year Stacked* (Table 8) | 14.9% |
| EPS Two Year CAGR (Table 8) | (56.5%) |
| Adjusted EPS Two Year CAGR (Table 8) | 28.6% |
| Operating Profit Two Year CAGR (Table 8) | (5.5%) |
| Adjusted FIFO Operating Profit Two Year CAGR (Table 8) | 19.9% |
| FIFO Gross Margin Rate Compared to Q1 2019* | Decreased 21 basis points |
| OG&A Rate Compared to Q1 2019* | Decreased 58 basis points |
*without fuel and adjustment items, if applicable
Total company sales were $41.3 billion in the first quarter, compared to $41.5 billion for the same period last year. Excluding fuel, sales decreased 4.0% compared to the same period last year.
Gross margin was 22.6% of sales for the first quarter. The FIFO gross margin rate, excluding fuel, decreased 65 basis points compared to the same period last year. This decrease was primarily related to sales deleverage, higher shrink, continued price investments, and charges related to COVID-19, partially offset by sourcing benefits and growth in Alternative Profits.
The LIFO charge for the quarter was $37 million, compared to a LIFO charge of $31 million for the same period last year.
The Operating, General & Administrative rate decreased 108 basis points, excluding fuel and adjustment items, which reflects decreased COVID-19 related costs, lower contributions to multi-employer pension plans, the execution of cost savings initiatives and decreased incentive costs, partially offset by sales deleverage.
Rent and depreciation rate, excluding fuel, increased 18 basis points due to sales deleverage.
Capital Allocation Strategy
Kroger continues to generate strong free cash flow and remains committed to investing in the business to drive long-term sustainable net earnings growth, maintaining its current investment grade debt rating, and returning excess free cash flow to shareholders via share repurchase and a growing dividend over time.
As previously disclosed, Fred Meyer and QFC and four local unions ratified an agreement for the transfer of liabilities from the Sound Retirement Trust to the UFCW Consolidated Pension Plan. Kroger will transfer $449 million in net accrued pension liabilities and prepaid escrow funds, on a pre-tax basis, to fulfill obligations for past service for associates and retirees. On an after-tax basis, $344 million will be needed to execute this transaction. The agreement will be satisfied by cash installment payments to the UFCW Consolidated Pension Plan and are expected to be paid evenly over seven years. The impact of this transaction on GAAP net earnings per diluted share was $0.45 during the quarter and is excluded from adjusted net earnings per diluted share results.
Kroger’s net total debt to adjusted EBITDA ratio is 1.79, compared to 1.81 a year ago (Table 5). The company’s net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50.
Kroger also announced today that the company’s Board of Directors has approved a $1 billion share repurchase program; the previous authorization expired last week.
2021 Guidance
Comments from CFO Gary Millerchip
“Based on the momentum within our business, we are raising our full year guidance. We now expect our two-year identical sales stack to be in the range of 10.1% to 11.6%. We expect our adjusted net earnings per diluted share to be in the range of $2.95 to $3.10.
“Our new, $1 billion share buyback program reinforces our Board of Directors and management’s confidence in our ability to generate strong free cash flow and is consistent with our commitment to deliver strong and sustainable total shareholder returns of 8-11%.”
Full Year 2021 Guidance
| IDs (%) | EPS ($) | Operating Profit ($B) | Tax Rate** | Cap Ex ($B) | Free Cash Flow ($B)**** | |
| Adjusted* | (4.0%) – (2.5%) | $2.95 – $3.10 | $3.5 – $3.7 | 23% | $3.4 – $3.6 | $1.8 – $2.0 |
| 2-Year Basis*** | 10.1% – 11.6%(Stack) | 16% – 19%(CAGR) | 8.5% – 10.8% (CAGR) | $3.0 – $3.1(Average) |
* 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 or changes in tax laws, which cannot be predicted.
*** Identical sales, without fuel, guidance for 2-year basis represents the sum of actual 2020 identical sales percentage and 2021 identical sales rate 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.
First Quarter 2021 Highlights
Leading with Fresh
- Our Brands launched 253 new items during the quarter, including seasonal fresh produce and products to elevate summer cooking
- Announced expansion of partnership with 80 Acres Farms to 316 stores reaching more shoppers in the Midwest – both in store and online
- Announced Go Fresh & Local Supplier Accelerator, providing Kroger with the opportunity to discover more local and regional suppliers to partner with to advance freshness, quality, and Fresh for Everyone commitment
- Launched a digital farmers market pilot, creating an e-commerce marketplace that connects local farmers and businesses to customers seeking fresh and delicious products
Accelerating with Digital
- Opened first two Kroger Delivery facilities powered by Ocado in Monroe, Ohio and Groveland, Florida, a new geography
- Expanded to 2,233 Pickup locations and 2,488 Delivery locations, covering 98% of Kroger households
- Increased capacity for Pickup by 15% with focus on adding high-demand time slots
- Named “Retail Innovator of the Year” during the Path to Purchase Institute’s first Industry Innovator Awards
- Announced Kroger Drone Delivery pilot with partner Drone Express, reinforcing the importance of flexibility and immediacy to customers
Associate Experience
- On track to increase Kroger Family of Companies’ average hourly wage to $16 an hour and with comprehensive benefits, will be approaching $21 by the end of 2021
- Reached agreement with four local unions to restructure the Sound Retirement Trust and improve security and stability of future pension benefits for more than 10,600 Kroger Family of Companies associates
- Continued to encourage associates to get the COVID-19 vaccine, offering a one-time $100 incentive
- On June 10, held first nationwide hybrid hiring event, featuring virtual and in-store interviews, driving a 37% applicant flow increase
- Since inception, 6,314 associates have taken advantage of Kroger’s best-in-class education assistance program, 84% of whom are hourly
- Observed Mental Health Awareness Month by elevating the mental health discussion internally through a variety of communications, resources, and live webinars
- Published LGBTQ+ and Asian American Pacific Islander allyship guides as part of Framework for Action: Diversity, Equity & Inclusion plan and to uplift customers and associates across the Kroger Family of Companies
- 47 female associates were chosen from across the Kroger enterprise by Progressive Grocer to represent the Top Women in Grocery across three categories including, Senior-level Executives, Rising Stars and Store Leaders
- Announced a donation of $1 million to seed the Roundy’s Oconomowoc Distribution Center Victims and Survivor’s Fund and a donation of $1 million to the Colorado Healing Fund to support the needs of victims, families, survivors and the community affected by the recent Boulder, CO supermarket tragedy, from The Kroger Co. Foundation
Live Our Purpose
- Providing the chance to win one of five $1 million checks or one of 50 groceries-for-a-year prizes through the Community Immunity Giveaway to help support the Biden Administration’s goal to have 70% of U.S. adults vaccinated by July 4
- Kroger Health administered more than 5 million COVID-19 vaccines to date, including customers and associates
- 2020 Zero Hunger | Zero Waste directed $213 million of $301 million in total charitable giving to help end hunger in communities, and a record one-year total of 640 million meals to people across the country while achieving 81% waste diversion from landfills company-wide
- Zero Hunger | Zero Waste Foundation announced the second cohort of its Innovation Fund, selecting 10 startups to receive a combined $2.5M in funding to launch innovative new consumer products made with surplus food or food byproducts and technologies to advance the upcycled food industry
- Purchased $4.1 billion from diverse suppliers during 2020, an increase of 21% versus a year ago and advancement of commitment to reach $10 billion in diverse supplier spend by 2030
- Supported disaster response to uplift communities affected by the Texas winter storm by providing aid, including issuing $270,000 in Helping Hands Fund emergency grants to more than 500 associates, partnering with the City of Dallas and City of Houston, and supplying drinkable water to local communities and not-for-profit organizations
- Launched free and downloadable Small Business Resource Guide to encourage supplier diversity as part of Framework for Action: Diversity, Equity & Inclusion plan
