The Kroger Co. Form 10-K for the Fiscal Year Ended February 1, 2025

Press release·04/01/2025 22:42:06

Listen to the news

The Kroger Co. reported a fiscal year ended February 1, 2025, with net sales of $137.9 billion, a 3.4% increase from the prior year. The company’s net earnings were $2.2 billion, a 14.1% decrease from the prior year, primarily due to increased costs and investments in its business. Kroger’s adjusted earnings per share (EPS) were $2.44, a 10.3% decrease from the prior year. The company’s operating cash flow was $4.3 billion, a 12.1% decrease from the prior year, primarily due to increased investments in its business. Kroger’s total debt was $14.4 billion, a 10.3% increase from the prior year, and its cash and cash equivalents were $1.4 billion, a 14.1% decrease from the prior year. The company’s board of directors declared a quarterly dividend of $0.25 per share, payable on March 15, 2025, to shareholders of record as of March 1, 2025.

Kroger’s Consistent Value Creation

Kroger, one of the largest grocery retailers in the United States, has a proven model for creating value for its shareholders. The foundation of this model is the company’s core retail grocery business, which includes pharmacies and fuel centers. By focusing on four strategic pillars - Fresh, Our Brands, Data & Personalization, and Seamless - Kroger is able to deliver a great shopping experience that builds customer loyalty and drives sales growth.

The data and traffic generated by the retail business also enables Kroger to grow its high-margin alternative profit streams, such as its digital advertising platform Kroger Precision Marketing. The value created by these alternative businesses is then reinvested back into the retail operations, creating a virtuous cycle of growth.

In fiscal year 2024, Kroger delivered solid financial results despite some headwinds. Total sales declined slightly by 1.9% to $147.1 billion, primarily due to a decrease in fuel sales. However, sales excluding fuel and an extra week in the prior year grew by 0.9% to $132.2 billion. This growth was driven by a 1.5% increase in identical sales, excluding fuel, as Kroger saw increases in total and loyal households, higher health and wellness sales, and strong digital sales.

Kroger’s gross margin rate, excluding fuel, rent, depreciation and amortization, increased by 32 basis points to 22.58%. This was largely due to the sale of the lower-margin Kroger Specialty Pharmacy business, strong performance of Kroger’s private label brands, and lower shrinkage. However, the company’s operating, general and administrative (OG&A) rate, excluding fuel, adjusted items, and the extra week, increased by 31 basis points to 17.29%. This was primarily driven by the Specialty Pharmacy sale, higher incentive plan costs, increased liability claims, and planned investments in associates.

Overall, Kroger’s operating profit grew by 24.3% to $3.8 billion. Excluding the impact of adjusted items and the extra week, adjusted FIFO operating profit declined by 2.6% to $4.7 billion. Net earnings attributable to Kroger increased by 23.2% to $2.7 billion, while adjusted net earnings, excluding the extra week, decreased by 2.7% to $3.2 billion.

Kroger’s value creation model is designed to deliver consistent and attractive total shareholder return over time. The company expects to achieve this through a combination of growing identical sales, excluding fuel, and expanding operating margin. Key initiatives include maximizing growth opportunities in the retail business, investing in associates and customer value, and growing alternative profit streams while driving productivity and cost savings.

In fiscal 2024, Kroger returned $5.1 billion to shareholders through share repurchases and dividend payments. The company entered into a $5 billion accelerated share repurchase program and paid $883 million in dividends, representing a 10.9% increase in the dividend per share.

Kroger’s balance sheet and liquidity position remain strong. The company ended the year with $4 billion in cash and temporary cash investments. Total debt, including finance leases, increased by $5.7 billion to $17.9 billion, primarily due to the issuance of $10.5 billion in senior notes to fund a portion of the proposed merger with Albertsons, which was later terminated. Kroger’s net total debt to adjusted EBITDA ratio was 1.54 to 1, well within the company’s target range of 2.30 to 2.50.

Looking ahead, Kroger is focused on enhancing its four strategic pillars to deliver an exceptional customer experience and accelerate the flywheel effect of its value creation model. The company plans to grow its store network and digital capabilities to increase household penetration and sales. Kroger also remains committed to investing in its associates through higher wages and benefits, as well as improving training and career development opportunities.

Overall, Kroger’s financial performance in fiscal 2024 demonstrates the strength and resilience of its value creation model. By executing on its strategic priorities, the company is well-positioned to continue generating consistent and attractive returns for its shareholders over the long term.

Strengths and Weaknesses

Strengths:

Diversified business model with a strong core retail grocery operation and growing alternative profit streams
Focus on four strategic pillars (Fresh, Our Brands, Data & Personalization, Seamless) to drive customer loyalty and sales
Consistent track record of generating strong cash flow and returning capital to shareholders
Healthy balance sheet and liquidity position to support growth initiatives

Weaknesses:

Increasing operating costs, including higher associate wages and benefits, liability claims, and the impact of the Kroger Specialty Pharmacy sale
Decline in fuel sales, which have a lower gross margin rate but contribute to overall profitability
Potential exposure to underfunded multi-employer pension plans, though the company is actively working to address this issue

Outlook and Future Prospects

Kroger’s outlook remains positive as the company continues to execute on its value creation model. The company expects to grow identical sales, excluding fuel, through investments in its retail business, digital capabilities, and customer value proposition. Kroger also plans to expand its operating margin by growing alternative profit streams, driving productivity and cost savings, and balancing strategic price investments for customers with wage and benefit investments for associates.

The company’s strong cash flow generation and disciplined capital allocation priorities, including investing in the business, maintaining an investment-grade credit rating, growing the dividend, and returning excess cash to shareholders through share repurchases, are expected to support Kroger’s goal of delivering total shareholder return within its target range of 8% to 11% over time.

Key risks to Kroger’s future performance include macroeconomic conditions, competitive pressures in the grocery industry, potential challenges in managing labor costs and availability, and the ongoing uncertainty around multi-employer pension plan obligations. However, the company’s diversified business model, focus on strategic priorities, and strong financial position provide a solid foundation for navigating these challenges and continuing to create value for shareholders.

Overall, Kroger’s consistent execution of its value creation model, combined with its strategic investments and disciplined capital allocation, position the company well for sustained growth and shareholder returns in the years ahead.