CINCINNATI, Sept. 13, 2018 /PRNewswire/ --

Q2 Highlights

• Solid early execution of Restock Kroger
• Continued household growth
• Redefine the Grocery CX: Digital sales growth over 50%, launched Kroger Ship
• Partner for Customer Value: Launched autonomous vehicle test with Nuro, selling Simple Truth in China through Alibaba, expanded Instacart offering

The Kroger Co. (NYSE: KR) today reported net earnings of $508 million, or $0.62 per diluted share, in the second quarter of 2018, which ended on August 18. Kroger's second quarter adjusted net earnings were $336 million, or $0.41 per diluted share (see table 6, 2018 Second Quarter Adjustment Items). The 2018 second quarter adjustment items relate primarily to the change in the market value of Kroger's investment in Ocado securities. Net earnings for the second quarter 2017 were $353 million, or $0.39 per diluted share. Kroger reported identical sales, without fuel, of 1.6% for the second quarter of 2018.

For the first half of 2018, Kroger's adjusted net earnings per diluted share result was slightly ahead of the company's internal expectations due to the solid early execution of Restock Kroger, including process changes that led to sustainable cost controls and higher-margin alternative revenue streams. This performance will allow Kroger to continue making incremental investments while delivering on its guidance range for the year.

Comments from Chairman and CEO Rodney McMullen

"We are only two quarters into our three year Restock Kroger plan, and we are making solid progress. Kroger customers have more ways than ever to engage with us seamlessly through our recently-launched Kroger Ship, expanded availability of Instacart, successful ClickList offering, and selling Simple Truth in China through Alibaba's Tmall.

"We feel good about our net earnings per diluted share and ID sales results in the second quarter. We expect our investments in space optimization during the first half of 2018 to become a tailwind late in the third quarter.

"We are on track to generate the free cash flow and incremental FIFO operating profit that we committed to in Restock Kroger for 2018-2020, and to deliver on our long-term vision to serve America through food inspiration and uplift."

Details of Second Quarter 2018 Results

Total sales increased 1.0% to $27.9 billion in the second quarter compared to $27.6 billion for the same period last year. Excluding fuel, the convenience store business unit divestiture and the merger with Home Chef, total sales increased 1.8% in the second quarter over the same period last year.

Gross margin was 21.3% of sales for the second quarter. Excluding fuel and the LIFO charge, gross margin decreased 36 basis points from the same period last year. Kroger's shrink rate continued to improve during the second quarter. The gross margin rate reflects the company's price investments, rising transportation costs, and growth of the specialty pharmacy business.

Kroger recorded a LIFO charge of $12 million in the second quarter, compared to a $18 million LIFO charge in the same quarter last year.

Operating, General & Administrative costs as a rate of sales, excluding fuel, increased 36 basis points, driven entirely by higher expense for incentive plans as compared to last year. Rent and depreciation, excluding fuel, decreased by 4 basis points.

FIFO operating margin on a rolling four quarters basis decreased 26 basis points compared to the prior year, excluding fuel, mergers, the 53^rd week and the adjustment items from the respective periods.

Kroger did not adjust the rates as a percent of sales described above for the divestiture of the convenience store business and the merger with Home Chef because the effect was insignificant.

Financial Strategy

Kroger's financial strategy is to use its free cash flow to drive growth while also maintaining its current investment grade debt rating and returning capital to shareholders. The company actively balances the use of its cash flow to achieve these goals.

Over the last four quarters, Kroger has used cash to:

• Contribute an incremental $1.1 billion pre-tax to company-sponsored pension plans and $467 million pre-tax to satisfy withdrawal obligations to the Central States Pension Fund,
• Repurchase 103 million common shares for $2.6 billion, which includes $1.2 billion repurchased with after-tax proceeds from the sale of Kroger's convenience store business unit under a previously-announced accelerated stock repurchase plan,
• Pay $435 million in dividends, and
• Invest $2.9 billion in capital.

Kroger's net total debt to adjusted EBITDA ratio, on a 52-week basis, is 2.59 (see table 5). The company's net total debt to adjusted EBITDA ratio target range is 2.30 to 2.50. For the remainder of fiscal 2018, Kroger expects its leverage ratio to remain slightly above the target range, primarily due to increased borrowings to fund the company's merger with Home Chef and investments in Ocado. Kroger remains committed to bringing the leverage ratio back into the target range.

2018 Guidance

Kroger expects identical sales growth, excluding fuel, to range from 2.0% to 2.5% in 2018.  

Kroger updated its GAAP net earnings guidance range to $3.88 to $4.03 per diluted share for 2018, from its previous range of $3.64 to $3.79. The increase in guidance is due to the unrealized gain in Ocado shares, recorded in the second quarter, and does not reflect any ongoing changes in the market value of Ocado shares because those cannot be predicted.

On an adjusted basis, the net earnings guidance range remains $2.00 to $2.15 per diluted share for 2018.

The company continues to expect capital investments, excluding mergers, acquisitions, and purchases of leased facilities, to be approximately $3.0 billion in 2018.

Kroger expects its 2018 tax rate to be approximately 22%.  Excluding the 2018 first and second quarter adjustment items, Kroger expects its 2018 tax rate to be approximately 20%.

Second Quarter 2018 Restock Kroger Highlights

Redefine the Grocery Customer Experience

• Launched Kroger Ship in four U.S. cities, with additional expansion underway
• Launched OptUP, an innovative data-driven app that helps customers make more informed, healthier purchase decisions, with 130,000 downloads in two months and goal of 1 million downloads in one year
• Announced exciting new apparel brand, Dip, developed by globally-renowned fashion designer Joe Mimran
• Introduced exclusive Bromley's™ For Men shaving and grooming products
• Hosted third Natural Foods Innovation Summit in partnership with 84.51°

Partner for Customer Value

• Launched Our Brands internationally, making Simple Truth® products available in China on Alibaba's Tmall Global platform
• Expanded partnership with Instacart to increase customer delivery coverage area to 75 additional markets throughout the U.S. by late October
• Seamless coverage area increased to 80% of Kroger households through curbside pickup and home delivery from store
• Piloting an on-road, fully autonomous delivery experience in Scottsdale, Arizona with Silicon Valley startup Nuro
• Exploring strategic alternatives for Turkey Hill Dairy business, including a potential sale
• Kroger Precision Marketing powered by 84.51° launched Boosted Products in searches on Kroger digital properties, which in one month alone delivered 200 million product impressions for advertisers, resulting in a very high return on marketing investment vs. the traditional industry standard

Develop Talent

• Named one of the top places to work in IT by Computerworld
• Established new Digital HQ in downtown Cincinnati, with plans to grow digital team to more than 1,000 over the next three years
• Received 1,810 applications from associates for financial support through Feed Your Future, Kroger's industry-leading education benefit
• Signed an agreement with the University of Cincinnati to operate an innovation lab within the school's 1819 Innovation Hub
• Recognized as a top 100 internship program in the U.S. by WayUp

Live Kroger's Purpose

• Included in the top 10 of Fortune magazine's Change the World 2018 list in recognition of Kroger's bold social impact plan Zero Hunger | Zero Waste, which aims to end hunger in Kroger communities and eliminate waste across the company by 2025
• Announced new Zero Hunger | Zero Waste commitment to phase out single-use plastic bags and transition to reusable bags across its Family of Stores
• Published 12^th annual sustainability report – Kroger's first in accordance with the latest GRI Sustainability Reporting Standards – available at http://sustainability.kroger.com/

At The Kroger Co. (NYSE: KR), we are dedicated to our Purpose: to Feed the Human Spirit^TM. We are nearly half a million associates who serve over nine million customers daily through a seamless digital shopping experience and 2,769 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.

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.

Note: Kroger discusses the changes in certain operating results, as a percentage of sales, excluding recent mergers due to them affecting comparability to last year.

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. These statements are indicated by words such as "expectation," "intend," "committed," "expect," "guidance," "goal," "will," "aim," "continue," "predict," "target," "strategy," "plan," "vision," "confident" and "range." 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" and "Outlook" in Kroger's annual report on Form 10-K for the last fiscal year and any subsequent filings, as well as the following:

• Kroger's ability to achieve sales, earnings, incremental FIFO operating margin, and free cash flow goals may be affected by: 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, and the unemployment rate; the effect that fuel costs have on consumer spending; volatility of fuel margins; changes in government-funded benefit programs; 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 uncertain pace of economic growth; 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 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 on Restock Kroger; and the successful integration of merged companies and new partnerships. Kroger's ability to achieve these goals may also be affected by Kroger's ability to manage the factors identified above. Kroger's ability to execute its financial strategy may be affected by its 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 be broadcast live online at 10 a.m. (ET) on September 13, 2018 at ir.kroger.com. An on-demand replay of the webcast will be available at approximately 1 p.m. (ET) on Thursday, September 13, 2018.

2^nd Quarter 2018 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