Kroger 2007 Annual Report Download - page 35

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<Decrease> in FIFO Gross Margin Rate FY 2005 FY 2006 FY 2007
GAAP Basis <58 bp> <53 bp> <62 bp>
Excluding Retail Fuel Operations <4 bp> <26 bp> <20 bp>
Note A: FIFO gross margin is an important measure used by management to evaluate merchandising
and operational effectiveness. We calculate First-In, First-Out (“FIFO”) gross margin as sales minus
merchandise costs, including advertising, warehousing and transportation, but excluding the Last-In,
First-Out (“LIFO”) charge. Merchandise costs exclude depreciation and rent expense.
Operating, General, and Administrative Expenses (Note B)
Retail fuel sales also lower Kroger’s operating, general, and administrative
(“OG&A”) rate due to the very low OG&A rate on retail fuel sales as
compared to non-fuel sales. On a GAAP basis, Kroger’s OG&A rates were
18.21%, 17.91%, and 17.31% in 2005, 2006, and 2007, respectively. A
portion of the decrease in our OG&A rate is due to the growth in Kroger’s
retail fuel sales. The decrease in our non-fuel OG&A rate reflects Kroger’s
strategy of producing operating cost leverage through strong identical sales
growth, increased productivity, and cost control.
<Decrease> in OG&A Rate FY 2005 FY 2006 FY 2007
GAAP Basis <55 bp> <30 bp> <60 bp>
Excluding Retail Fuel Operations <13 bp> <9 bp> <33 bp>
Note B: Operating, general, and administrative expenses consist primarily of employee-related costs
such as wages, health care benefit costs and retirement plan costs. Among other items, rent expense,
depreciation and amortization expense, and interest expense are not included in OG&A.
Kroger’s retail fuel business can increase the volatility of our quarterly
financial results because it is not uncommon for us to experience quarter-
to-quarter gross margin fluctuations in the fuel business. This is a function
of our significant fuel volumes and the volatility of wholesale fuel prices.
During a period of rising wholesale fuel costs, our gross margins typically
contract. During a period of declining wholesale fuel costs, our gross
margins typically expand. This is why we believe it is important to consider
a longer view when analyzing fuel margins to account for these
fluctuations.
The Kroger Co. Page 35