Kroger (KR) risk factors, FY2025 10-K

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1. 01Our common stock is listed on the New York Stock Exchange under the symbol “KR.” As of March 26, 2025, there were 26,750 shareholders of record
2. 02The foregoing Performance Graph will not be deemed incorporated by reference into any other filing, absent an express reference thereto
3. 03(1) The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The fourth quarter of 2024 contained three 28-day periods
4. 04(3) Represents shares repurchased under the December 2024 Repurchase Program and the 1999 Repurchase Program
5. 05MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
6. 06OUR VALUE CREATION MODEL – DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
7. 07(2) The $4,194 share repurchases included 68.4 million Kroger common shares, at an average price of $61.31 per share, which includes excise tax related to the shares repurchased. See Note 13 to the Consolidated Financial Statements
8. 08We also utilize the data and traffic generated by our retail business to deliver incremental value and services for our customers that generate alternative profit streams. These alternative profit streams would not exist without our core retail business
9. 09Seamless Digital Ecosystem
10. 10Merchandising and Manufacturing
11. 11USE OF NON-GAAP FINANCIAL MEASURES
12. 12We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management, and management believes FIFO operating profit is a useful metric to investors and analysts because it measures the operational effectiveness of our financial model
13. 13Net earnings for 2022 include the following, which we define as the “2022 Adjusted Items:”
14. 14(7) The pre-tax adjustment for property losses was $25
15. 15Key Performance Indicators
16. 16(3) This column represents the percentage change in 2023 adjusted sales compared to 2022
17. 17(6) 2023, 2023 adjusted and 2022 sales by category amounts have been reclassified to conform to the 2024 presentation
18. 18Gross Margin, LIFO and FIFO Gross Margin
19. 19We define FIFO gross margin as FIFO gross profit divided by sales. FIFO gross profit is calculated as sales less merchandise costs, including advertising, warehousing and transportation expenses, but excluding the LIFO charge, rent and depreciation and amortization
20. 20OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utilities, and credit card fees. Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A
21. 21Depreciation and Amortization Expense
22. 22Operating Profit and FIFO Operating Profit
23. 23Specific factors contributing to the trends driving operating profit and FIFO operating profit identified above are discussed earlier in this section
24. 24Our net earnings are based on the factors discussed in the Results of Operations section
25. 25RETURN ON INVESTED CAPITAL
26. 26We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements
27. 27Impairments of Long-Lived Assets
28. 28For additional information relating to our results of the goodwill impairment reviews performed during 2024, 2023 and 2022, see Note 2 to the Consolidated Financial Statements
29. 29Multi-Employer Pension Plans
30. 30As we continue to work to find solutions to under-funded multi-employer pension plans, it is possible we could incur withdrawal liabilities for certain funds
31. 31Net cash provided by operating activities
32. 32Net cash used by investing activities
33. 33Net cash used by financing activities
34. 34Common Share Repurchase Programs
35. 35(7) Amounts include scheduled opioid settlement commitments. For additional information about our opioid settlement charges, see Note 12 to the Consolidated Financial Statements
36. 36Factors Affecting Liquidity
37. 37Our credit facility is more fully described in Note 5 to the Consolidated Financial Statements. We were in compliance with our financial covenant at February 1, 2025
38. 38In addition to the available credit mentioned above, as of February 1, 2025, we had authorized for issuance $2.0 billion of securities remaining under a shelf registration statement filed with the SEC and effective on May 20, 2022
39. 39FINANCIAL RISK MANAGEMENT
40. 40As of February 1, 2025, we had no forward-starting interest rate swap agreements outstanding
41. 41Annually, we review with the Finance Committee of our Board of Directors compliance with the guidelines described above. The guidelines may change as our business needs dictate
42. 42(1) The fixed rate principal payments exclude debt discounts and deferred financing costs of $73 million, of which $7 million is current and $66 million is long-term. The weighted average interest rate calculation excludes the effects of debt discounts and deferred financing costs
43. 43Company-Sponsored Benefit Plans
44. 44Opinions on the Financial Statements and Internal Control over Financial Reporting
45. 45Definition and Limitations of Internal Control over Financial Reporting
46. 46Litigation Contingencies Related to Opioid Claims and Merger Termination
47. 47Description of Business, Basis of Presentation and Principles of Consolidation
48. 48Pervasiveness of Estimates
49. 49Cash, Temporary Cash Investments and Book Overdrafts
50. 50Property, Plant and Equipment
51. 51Impairment of Long-Lived Assets
52. 52Accounts Payable Financing Arrangement
53. 53As of February 1, 2025 and February 3, 2024, the Company had $294 and $325 in “Accounts payable,” respectively, associated with financing arrangements
54. 54Interest Rate Risk Management
55. 55Benefit Plans and Multi-Employer Pension Plans
56. 56The Company reviews the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in its consolidated financial statements. Refer to Note 4 for the amount of unrecognized tax benefits and other related disclosures related to uncertain tax positions
57. 57The current portion of the self-insured liability is included in “Other current liabilities,” and the long-term portion is included in “Other long-term liabilities” in the Consolidated Balance Sheets
58. 58Gift Cards and Gift Certificates
59. 59(3) 2023 and 2022 revenues by category have been reclassified to conform to the 2024 current presentation by product category
60. 60Warehousing and transportation costs include distribution center direct wages, transportation direct wages, repairs and maintenance, utilities, inbound freight and, where applicable, third-party warehouse management fees. These costs are recognized in the periods the related expenses are incurred
61. 61Consolidated Statements of Cash Flows
62. 62GOODWILL AND INTANGIBLE ASSETS
63. 63Based on the results of the Company’s impairment assessment in the fourth quarter of 2024, a $30, $24 net of tax, impairment was recognized for indefinite-lived trade names
64. 64PROPERTY, PLANT AND EQUIPMENT, NET
65. 65Approximately $97 and $104 net book value of property, plant and equipment collateralized certain mortgages at February 1, 2025 and February 3, 2024 respectively
66. 66The 2022 tax rate differed from the federal statutory rate due to the effect of state income taxes and non-deductible goodwill impairment charges related to Vitacost.com, partially offset by the benefits from share-based payments and the utilization of tax credits
67. 67As of February 1, 2025, February 3, 2024, and January 28, 2023 the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $70, $62, and $66, respectively
68. 68In 2023, the Company repaid $600 of senior notes bearing an interest rate of 3.85% and $500 of senior notes bearing an interest rate of 4.00%, all using cash on hand
69. 69For additional information about the Company’s unsecured bridge term loan facility, term loan credit agreement and completed senior notes issuance related to the terminated Albertsons merger, see Note 18 to the Consolidated Financial Statements
70. 70As of February 1, 2025 and February 3, 2024, the Company had no commercial paper borrowings and no borrowings under the Credit Agreement
71. 71DERIVATIVE FINANCIAL INSTRUMENTS
72. 72The Company did not have any outstanding forward-starting interest rate swaps as of February 1, 2025
73. 73The amounts of Gain/(Loss) reclassified from AOCI into income on derivatives include unamortized proceeds and payments from forward-starting interest rate swaps once classified as cash flow hedges that were terminated prior to the end of 2024
74. 74Collateral is generally not required of the counterparties or of the Company under these master netting agreements. As of February 1, 2025, no cash collateral was received or pledged under the master netting agreements
75. 75Level 3 - Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability
76. 76The Company values interest rate hedges using observable forward yield curves. These forward yield curves are classified as Level 2 inputs
77. 77Current and Long-term Debt
78. 78In 2024, the Company fully exited its position in a Level 1 equity investment, receiving proceeds totaling approximately $303, resulting in a realized gain of $23, which is included in “(Loss) gain on investments” in the Company’s Consolidated Statements of Operations
79. 79ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
80. 80(3) Net of tax of $(3) and $2 for pension and postretirement defined benefit plans and cash flow hedging activities, respectively, as of February 3, 2024. Net of tax of $(1) and $1 for pension and postretirement defined benefit plans and cash flow hedging activities, respectively, as of February 1, 2025
81. 81LEASES AND LEASE-FINANCED TRANSACTIONS
82. 82(1) Finance lease assets are recorded net of accumulated amortization of $915 and $730 as of February 1, 2025 and February 3, 2024, respectively
83. 83Total future minimum rentals under non-cancellable subleases at February 1, 2025 were $269
84. 84(1) In 2024, the Company entered into sale leaseback transactions related to five properties, which resulted in total proceeds of $52. In 2023, the Company entered into sale leaseback transactions related to nine properties, which resulted in total proceeds of $52
85. 85EARNINGS PER COMMON SHARE
86. 86The Company had combined undistributed and distributed earnings to participating securities totaling $20, $18 and $20 in 2024, 2023 and 2022, respectively
87. 87The Company recognizes compensation expense for all share-based payments granted. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award based on the fair value at the date of the grant
88. 88The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited
89. 89The Company is one of dozens of companies that have been named in various lawsuits alleging that defendants contributed to create a public nuisance through the distribution and dispensing of opioids
90. 90In 2023, the Company recorded a charge of $62 relating to a settlement of opioid litigation claims with the State of West Virginia. The agreed upon settlement framework resolves all opioid lawsuits and claims by the West Virginia Attorney General
91. 91Common Stock Repurchase Program
92. 92COMPANY- SPONSORED BENEFIT PLANS
93. 93Total recognized in net periodic benefit cost and other comprehensive income
94. 94(1) The Rate of compensation increase-Benefit obligation assumption is not applicable for 2024 due to negotiated plan freezes related to certain union benefits that were accruing in 2024
95. 95Net periodic benefit cost
96. 96Fair value of plan assets at end of year
97. 97Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The Company used a 6.60% initial health care cost trend rate, which is assumed to decrease on a linear basis to a 4.00% ultimate health care cost trend rate in 2046, to determine its expense
98. 98See Note 7 for a discussion of the levels of the fair value hierarchy. The assets’ fair value measurement level above is based on the lowest level of any input that is significant to the fair value measurement
99. 99(3) The information for this fund was obtained from the Form 5500 filed for the plan's year-end at June 30, 2023 and June 30, 2022
100. 100(5) The plan was formed after 2006, and therefore is not subject to zone status certifications
101. 101September 2027 to September 2029
102. 102(2) Certain collective bargaining agreements are operating under an extension
103. 103(2) Expenses in gross include advertising costs, warehousing costs, including receiving and inspection costs, and transportation costs
104. 10417. SALE OF KROGER SPECIALTY PHARMACY
105. 105TERMINATION OF THE MERGER WITH ALBERTSONS COMPANIES, INC
106. 106In addition to these governmental actions, private plaintiffs have filed suit in the United States District Court for the Northern District of California also seeking to enjoin the transaction. That case was dismissed with prejudice on February 3, 2025, and plaintiffs have appealed
107. 107Concurrently with the termination of the Merger Agreement on December 11, 2024, all of the commitments with respect to the Term Loan Facilities were automatically terminated in accordance with the terms thereof
108. 10819. RECENTLY ADOPTED ACCOUNTING STANDARDS
109. 10920. RECENTLY ISSUED ACCOUNTING STANDARDS
110. 110EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
111. 111CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
112. 112MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
113. 113DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
114. 114SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
115. 115CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
116. 116PRINCIPAL ACCOUNTING FEES AND SERVICES
117. 117Agreement and Plan of Merger, dated as of October 13, 2022, by and among the Company, Parent and Merger Sub, is hereby incorporated by reference to Exhibit 2.1 of the Company’s 8-K filed with the SEC on October 14, 2022
118. 118The Company’s Regulations are hereby incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 27, 2019
119. 119Description of Securities. Incorporated by reference to Exhibit 4.2 of the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2020
120. 120Term Loan agreement, dated as of November 9, 2022, by and among The Kroger Co., the lenders from time to time party thereto, and Citibank, N.A., as administrative agent for the lenders, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on November 10, 2022
121. 121(principal executive officer)