This summary is based on the fourth quarter fiscal 2007 earnings call conducted by The Kroger Co. (KR) on March 11, 2008.
Management:
Chairman, Chief Executive Officer: David B. Dillon
Vice Chairman: W. Rodney McMullen
Senior Vice President, Chief Executive Officer: J. Michael Schlotman
Director, Investor Relations: Cairn Fike
Key Investors Issues
- EPS were 48 cents per share compared to 54 cents per share last year.
- Profit was $322.9 million compared to a profit of $384.8 million in the year-earlier quarter ended January.
- Sales rose to $17.2 billion from $16.9 billion a year earlier.
Fourth Quarter Highlights
- Total sales increased 2.2% to $17.2 billion, after adjusting for the extra week in the fourth quarter of 2006 total sales increased 10.2%.
- Identical supermarket sales increased 8.2% with fuel and 5.3% without fuel based on the same 12-week period in both years.
- Strong identical sales growth continues to be broad based across the company’s geographic regions. The strongest departments were grocery, produce, nutrition, and bakery/deli.
- Net earnings totalled $322.9 million or 48 cents per share. The LIFO charge was 5 cents per share resulting from higher than expected inflation and was 2 cents per share.
- The company continues to drive solid identical sales growth by improving service, value, product quality, and selection for customers. The company continued to invest in lower prices for customers providing meaningful savings for them in this uncertain economic environment.
Fiscal 2007 Highlights
- Kroger serves customers in 44 major markets. In 2007 Kroger held a number one or number two market share position in 39 of 44 major markets. Overall market share in these 44 major markets rose approximately 65 basis points during 2007 on a volume-weighted basis. Kroger shared an increase in 37 of those 44 major markets, a decline in six, and remained unchanged in one.
- Kroger competes against a total of 1,340 supercentres, an increase of 78 over last year. Supercentres have achieved at least a number three market share position in 36 of major markets. Kroger’s overall market share in these 36 markets rose 95 basis points during 2007 on a volume-weighted basis. Share increased in 31 of those 36 major markets, declined in four, and remained unchanged in one.
- Of the 1,340 supercentres mentioned 1,065 are operated by Wal-Mart. This is an increase of 65 over last year. That increase is the lowest in seven or eight years. Wal-Mart supercentres have achieved at least a number three share position in 34 of the major markets where Kroger faces supercentre competition compared with 32 last year. Kroger’s overall market share in these 34 markets rose over 80 basis points in 2007. Share increased in 30 of the 34 major markets, declined in three, and remained unchanged in one.
- Despite the growing number of competitors in the grocery business the company has increased market share on top of strong gains in 2005 and 2006. During the last three fiscal years combined, Kroger’s share in major markets has increased approximately 165 basis points. These consecutive year-over-year gains in market share are because they show that Kroger’s long-term strategy is working as the company continues to deliver value to both customers and shareholders.
- Total sales increased 6.2% to $70.2 billion. Adjusting for the extra week in fiscal 2006, total sales increased 8.2%. Identical supermarket sales increased 6.9% with fuel and 5.3% without fuel based on the same 52-week period in both years.
- The company delivered on a fiscal 2007 objectives outlined for investors a year ago. Original target for identical supermarket sales growth for the year, excluding fuel sales, was 3% to 5%. The company raised the lower end of that range to 3.5% after the first quarter and raised it again to 4% after the second quarter.
- Identical supermarket sales growth without fuel was 5.3%, exceeding all of expectations throughout the year.
- Kroger’s strong identical sales growth in 2007 was a key driver of earnings-per-share growth, which is consistent with business model. The company reported earnings of $1.69 per share. The company exceeded original fiscal 2007 earnings guidance despite a pre-tax LIFO charge that was $104 million higher than original expectations for the year. The higher than expected LIFO charge is a reflection of the current inflationary environment.
- The company continues to experience product cost inflation across many core grocery and perishable categories at levels not seen in several years. The company estimates that product cost inflation during the fourth quarter versus last year was 3.8% excluding fuel.
- While the LIFO charge is a non-cash expense that negatively impacts Kroger’s operating margins and reduces earnings, it does create cash tax savings for the company. The impact of the higher LIFO charge on fiscal 2007 earnings was mostly offset by higher than expected sales.
- Operating margin, excluding fuel, declined 3 basis points from a year ago. Excluding the impact of the higher than expected LIFO charge, Kroger’s operating margin expanded 14 basis points for the year, which is consistent with strategy.
- The 14 basis point expansion is the result of a 19 basis point decline in Kroger’s non-fuel FIFO gross margin and a 33 basis point improvement in non-fuel OG&A rate for fiscal 2007 in comparison to the prior year. Kroger’s FIFO gross margin declined on non-fuel sales primarily reflects strategy of continued investments and lower prices for customers.
- Supermarket selling gross margin on non-fuel sales declined 20 basis points on an annual basis, which was consistent with the fourth quarter decline of 18 basis points.
- The improvement in OG&A rate is due to strong identical sales leverage, increased productivity, and progress made in controlling utility, health care, and pension expenses. These improvements continue to be offset by higher credit card fees.
- Rent and depreciation expense as a result of non-fuel sales were comparable to last year. Fiscal 2006 contained 53 weeks of sales and only 52 weeks of depreciation expense due to the structure of fiscal calendar. Fiscal 2007 contained 52 weeks of sales and 52 weeks of depreciation expense.
- At the beginning of fiscal 2007 the company planned to invest approximately $1.9 billion to $2.1 billion in capital projects during the year, excluding acquisitions. Actual capital investments for 2007 were $2.1 billion, excluding acquisitions, compared with $1.8 billion in fiscal 2006.
- The company completed 200 store remodels during the year and opened, expanded, relocated, or acquired 102 supermarkets. In 2006 it remodelled 158 stores and opened, expanded, relocated, or acquired 53 locations.
- Another important element of capital investment plan is logistics network, a vital link between stores and customers. Over the last three years the company has invested more than $400 million in logistics network making it more efficient and an industry leader in many areas. These investments have covered a wide range of projects including transitioning three warehouses to automated systems and beginning installations of the same technology in others. Investments in logistics are generating an excellent return.
- Total debt at year-end 2007 was $8.1 billion, an increase of $1.1 billion from a year ago. On a rolling four-quarter basis Kroger’s net total debt to EBIDTA ratio was 2.0 compared to 1.9 during the same period last year.
- Kroger repurchased 52.5 million shares of stock at an average price of $27.05 for a total investment of $1.4 billion. Over the past four quarters Kroger has returned over $1.6 billion to shareholders in share repurchases and dividends.
- Since January 2000 Kroger has reduced its net total debt to EBIDTA ratio from 2.8 to 2.0, a reduction of 0.8 times EBIDTA. During the same time frame Kroger has invested $5 billion to repurchase 237.3 million shares of stock at an average price of $21.22 per share. The company has also paid $341.5 million in cash dividends to shareholders since it initiated its dividend program in 2006. In 2007 board approved a dividend increase from $0.06.5 to $0.07.5 per share, reflecting its confidence in Kroger’s strategic plan.
Fiscal 2008 Outlook
- The company expects that strategy will work even as economic and competitive landscapes continue to evolve.
- Kroger anticipates earnings of $1.83 to $1.90 per share.
- Identical supermarket sales growth is expected to be in the range of 3% to 5% excluding fuel sales. Shareholder return will be further enhanced by Kroger’s dividend. The range for identical sales and earnings guidance takes into account the current uncertainty about future economic conditions. The upper end of the range assumes current economic conditions will continue while the lower end assumes economic conditions weakened.
Key questions from the fourth quarter earnings call conducted by The Kroger Co. on March 11, 2008.
