Kroger 2008 Annual Report Download - page 33

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The Kroger Co. Page 32
Fuel sales also affect identical and comparable supermarket sales:
Identical Supermarket Sales
FY 2006
FY 2007
FY 2008
Including Supermarket Fuel Centers
6.4%
6.9%
6.9%
Excluding Supermarket Fuel Centers
5.6%
5.3%
5.0%
Difference (basis points)
80 bp
160 bp
190 bp
Comparable Supermarket Sales
FY 2006
FY 2007
FY 2008
Including Supermarket Fuel Centers
6.7%
7.2%
7.2%
Excluding Supermarket Fuel Centers
5.7%
5.5%
5.3%
Difference (basis points)
100 bp
170 bp
190 bp
FIFO Gross Margin (Note A)
Retail fuel sales lower our FIFO gross margin rate due to the very low FIFO
gross margin on retail fuel sales as compared to non-fuel sales. On a
GAAP basis, our FIFO gross margin rates were 24.27%, 23.65%, and
23.20% in 2006, 2007, and 2008, respectively. A portion of the decrease in
our FIFO gross margin rate is due to Kroger’s growing retail fuel business.
The decrease in our non-fuel FIFO gross margin rate reflects Kroger’s
continued reinvestment of operating cost savings into lower prices for our
customers. In addition, FIFO gross margin in 2008, compared to 2007,
decreased due to high inflation in product costs.
<Decrease> in FIFO Gross Margin Rate
FY 2006
FY 2007
FY 2008
GAAP Basis
<53 bp>
<62 bp>
<45 bp>
Excluding Retail Fuel Operations
<26 bp>
<20 bp>
<15 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
17.91%, 17.31%, and 16.95% in 2006, 2007, and 2008, respectively. A
portion of the decrease in our OG&A rate is due to Kroger’s growing retail
fuel business. 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.