Kroger 2012 Annual Report Download

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PR O X Y
NO T I C E O F A N N U A L M E E T I N G O F S H A R E H O L D E R S
PR O X Y S T A T E M E N T
A N D
2 0 1 2 A N N U A L R E P O R T

Table of contents

  • Page 1
    PROX Y NOTICE OF ANNUAL MEETING OF SHAREHOLDERS PROX Y STATEMENT AND 2 012 A N N UA L R E P O R T

  • Page 2
    Kroger Bring it all home. Convenience Stores Jewelry Stores Services COVER PRINTED ON RECYCLED PAPER

  • Page 3
    ...to achieve a higher long-term financial target and increase Shareholder return. A Year of Record Earnings and Focus on Shareholder Value Kroger's unique offering of better service, great products, an enjoyable shopping experience and low฀prices฀and฀weekly฀specials฀continues฀to฀resonate...

  • Page 4
    ...initiatives by reading our annual sustainability report, available on our website sustainability.kroger.com. Kroger is one of the safest companies in our industry. Associate engagement in innovative safety programs has reduced accident rates in our stores and manufacturing plants by 76 percent since...

  • Page 5
    ...฀to฀help฀them฀in฀their฀work฀supporting฀the฀military฀and฀their฀families.฀ This is the largest one-time gift to the USO in that organization's history. •฀ Supported฀more฀than฀30,000 schools and local organizations through our Community Rewards Program that delivers...

  • Page 6
    ... the first time. We will continue to execute our Customer 1st Strategy, coupled with our renewed commitment to growth,฀to฀make฀a฀difference฀for฀Customers฀and฀create฀value฀for฀Shareholders฀in฀2013.฀By฀targeting฀capital฀ investments฀to฀grow฀our฀business฀in...

  • Page 7
    ...Kroger฀Co.฀Community฀Service฀Award฀for฀2012: Division Delta Dillon Stores Food 4 Less/Foods Co Fred฀Meyer Fry's Jay C Stores King Soopers Michigan Mid-Atlantic Mid-South QFC Ralphs Smith's Southwest _____ Anderson฀Bakery Country฀Oven฀Bakery Kenlake฀Foods Winchester Farms Dairy...

  • Page 8
    ... public accountants for the year 2013; To act upon four shareholder proposals, if properly presented at the annual meeting; and To transact such other business as may properly be brought before the meeting; all as set forth in the Proxy Statement accompanying this Notice. Holders of common shares...

  • Page 9
    ... offices of The Kroger Co. are located at 1014 Vine Street, Cincinnati, Ohio 452021100. Our telephone number is 513-762-4000. This Proxy Statement and Annual Report, and the accompanying proxy,฀were฀first฀furnished฀to฀shareholders฀on฀May฀14,฀2013. As of the close of business...

  • Page 10
    ... law firm, he was a justice of the Supreme Court of Mississippi.฀ Mr.฀ Anderson฀ is฀ a฀ director฀ of฀ AT&T฀ Inc.,฀ and฀ during฀ the฀ past฀ five฀ years฀ was฀ a฀ director฀ of฀ Trustmark฀ Corporation.฀ He฀ is฀ a฀member฀of฀the฀Corporate฀Governance...

  • Page 11
    ...Mr.฀Beyer฀as฀an฀Outstanding฀ Director in 2008 as part of the Outstanding Directors Program of the Financial Times. 1999 David B. Dillon Mr.฀ Dillon฀ was฀ elected฀ Chairman฀ of฀ the฀ Board฀ of฀ Kroger฀ in฀ 2004,฀ 62 Chief Executive Officer in 2003, and President...

  • Page 12
    ...฀a฀major฀ beauty care company. She has extensive experience in manufacturing, marketing,฀ supply฀ chain฀ operations,฀ customer฀ service,฀ and฀ product฀ development, all of which assist her in her role as a member of Kroger's฀Board.฀Ms.฀Kropf฀has฀a฀strong฀financial...

  • Page 13
    ... Executive Vice President in 1999, and Senior Vice President in 1997.฀Mr.฀McMullen฀is฀a฀director฀of฀Cincinnati฀Financial฀Corporation. Mr.฀ McMullen฀ has฀ broad฀ experience฀ in฀ the฀ supermarket฀ business,฀ having spent his career spanning over 30 years with Kroger...

  • Page 14
    ...฀ the฀ Board฀ of฀ Weyerhaeuser฀ 70 Company, a forest products company, in 1999 and was President and Chief Executive Officer and a director thereof from December 1997 to January 1, 2008 when he relinquished the role of President. He relinquished the CEO role in April of 2008 and retired as...

  • Page 15
    ...brings฀ to฀ Kroger's฀ Board฀ a฀ strong฀ financial฀ background,฀ having led a major financial services provider. He has served on the compensation committee of a major corporation. 2006 Ronald L. Sargent Mr.฀ Sargent฀ is฀ Chairman฀ and฀ Chief฀ Executive฀ Officer฀ of...

  • Page 16
    ... Audit,฀ Compensation,฀ and฀ Corporate฀ Governance฀ Committees, and the other committees of the Board of Directors, are available on our corporate website at ir.kroger.com.฀ Shareholders฀ may฀ obtain฀ a฀ copy฀ of฀ the฀ Guidelines฀ by฀ making฀ a฀ written฀ request...

  • Page 17
    ... Kroger Co. Policy on Business Ethics, applicable to all officers, employees and members of the Board of Directors, including Kroger's principal executive, financial, and accounting officers. The Policy฀ is฀ available฀ on฀ our฀ corporate฀ website฀ at฀ ir.kroger.com.฀ Shareholders...

  • Page 18
    ... Board attended last year's annual meeting. COMPENSATION CONSULTANTS The฀Compensation฀Committee฀directly฀engages฀a฀compensation฀consultant฀from฀Mercer฀Human฀Resource฀ Consulting to advise the Committee in the design of compensation for executive officers. In 2012, Kroger paid...

  • Page 19
    ...Chief฀Operating฀Officer.฀ In addition, as provided in our Guidelines on Issues of Corporate Governance, the Board has designated one of the independent directors as Lead Director. The Board has established five standing committees - audit, compensation, corporate governance, financial policy...

  • Page 20
    ...in฀fiscal฀year฀2012. The Committee believes our management produced excellent results in 2012, measured against increasingly aggressive business plan objectives for sales, earnings, and our strategic plan. The compensation paid to our named executive officers reflected this fact as the annual...

  • Page 21
    ... rewarding named executive officers for the achievement of long-term business objectives and providing incentives for the creation of shareholder value. The Compensation Committee of the Board has the primary responsibility for establishing the compensation of Kroger's executive officers, including...

  • Page 22
    ...questions related to the CEO. In setting the annual bonus potential for the CEO, the independent directors determine the dollar amount that will be multiplied by the percentage payout under the annual bonus plan generally applicable to all corporate management, including the named executive officers...

  • Page 23
    ...the size of Kroger in relation to other peer group companies, the Committee believes that salaries paid to our executive officers should be at or above the median paid by competitors for comparable positions. The committee also aims to provide an annual bonus potential to our executive officers that...

  • Page 24
    ...฀thinking;฀and •฀ Furtherance฀of฀Kroger's฀core฀values. The amounts shown below reflect the salaries of the named executive officers in effect following the annual review of their compensation in June of each year. 2010 Salaries 2011 2012 David B. Dillon ...J.฀Michael฀Schlotman...

  • Page 25
    ... total compensation paid to comparable executive positions in the industry. The annual cash bonus potential in effect at the end of the year for each named executive officer is shown below. Actual bonus payouts are prorated to reflect changes, if any, to bonus potentials during the year. 2010 Annual...

  • Page 26
    ... short of meeting all of our business plan objectives. A comparison of bonus percentages for the named executive officers in prior years demonstrates฀the฀variability฀of฀annual฀cash฀bonus฀incentive฀compensation: Fiscal Year Annual Cash Bonus Percentage 2012 2011 2010 2009 2008 2007...

  • Page 27
    ...฀plans฀for฀the฀years฀shown: 2010 Plan 2011 Plan 2012 Plan 2013 Plan Performance Period 2010 to 2012 Payout Date Cash Bonus Base Performance Metrics Strategic Plan: Reduction in Operating Cost as a Percentage of Sales, Excluding Fuel: Improvement in Associate Engagement: Return on Invested...

  • Page 28
    ... executive officers, under Kroger's 2012 long-term incentive plan. The Committee considers several factors in determining the amount of options, restricted shares, and performance units awarded to the named executive officers or, in the case of the CEO, recommending to the independent฀directors...

  • Page 29
    ... premiums฀paid฀on฀long-term฀disability฀insurance฀policies;฀and •฀ a฀nominal฀gift. The life insurance benefit was offered beginning several years ago to replace a split-dollar life insurance benefit that was substantially more costly to Kroger. Currently, 136 active executives...

  • Page 30
    ... is not identical to the group of named executive officers. Kroger's policy is, primarily, to design and administer compensation plans that support the achievement of long-term strategic objectives and enhance shareholder value. Where it is material and supports Kroger's compensation philosophy, the...

  • Page 31
    ..., Chief Financial Officer and each฀of฀the฀Company's฀three฀most฀highly฀compensated฀executive฀officers฀other฀than฀the฀CEO฀and฀CFO฀(the฀ "named฀executive฀officers")฀during฀the฀fiscal฀years฀presented: SUMM A RY COMPENSATION TA BLE Change in Pension Value...

  • Page 32
    .... Please refer to the 2012 Pension Benefits Table for further information regarding credited service. Under the Company's deferred compensation plan, deferred compensation earns interest at the rate representing Kroger's cost of ten-year debt as determined by Kroger's CEO prior to the beginning of...

  • Page 33
    ... B. Dillon Grant Date (1)฀ The฀amount฀listed฀under฀"Target"฀for฀each฀named฀executive฀officer฀represents฀the฀bonus฀potential฀of฀ the named executive officer under the Company's 2012 performance-based annual cash bonus program. By the terms of this plan, payouts are...

  • Page 34
    ...฀ component of the Company's performance-based 2012 Long-Term Incentive Plan. The "Target" amount equals the annual base salary of the named executive officer as of the last day of fiscal year 2011. Bonuses are determined upon completion of the performance period as of fiscal year ending 2014. The...

  • Page 35
    ...฀table.฀Market฀value฀of฀unvested฀shares฀is฀based฀on฀Kroger's฀ closing฀stock฀price฀of฀$27.89฀on฀February฀1,฀2013,฀the฀last฀trading฀day฀of฀the฀2012฀fiscal฀year. Option Awards Equity Incentive Plan Awards: Number of Number of Securities Securities...

  • Page 36
    ... Incentive Plan Plan Awards: Awards: Market Market or Number of Value of Unearned Payout Value Shares or Number of of Unearned Shares, Units of Shares or Shares, Units or Option Units of Stock Stock That Other Units or Exercise Option Have Not Rights That Other Rights That Have Price Expiration...

  • Page 37
    ... of the three year performance period. Actual payouts are based on the degree to which improvements are achieved and are earned in Kroger common shares. The number of common shares issued and the value realized based on the closing share฀price฀ on฀ March฀ 14,฀2013,฀ the฀ date฀ of...

  • Page 38
    ...information on pension benefits as of 2012 year-end for the named executive officers. 2012 PENSION BENEFITS Number of Years Credited Service (#) Present Value of Accumulated Benefit ($) Payments During Last Fiscal Year ($) Name Plan Name David B. Dillon The Kroger Consolidated Retirement Benefit...

  • Page 39
    ... used to determine the present values is 4.29%, which is the same rate used at the measurement date for financial reporting purposes. N ONQUA LIFIED D EFER RED C OMPENSATION The following table provides information on nonqualified deferred compensation for the named executive officers for 2012. 2012...

  • Page 40
    ... the fiscal year 2012 compensation for non-employee directors. Employee directors receive no compensation for their Board service. 2012 DIRECTOR COMPENSATION Change in Pension Value and Nonqualified Non-Equity Deferred All Incentive Plan Compensation Other Compensation Earnings Compensation 12...

  • Page 41
    ..., retirement, termination, or change in control, except for those available generally to salaried employees. The Kroger Co. Employee Protection Plan, or KEPP, applies to all management employees and administrative support personnel who are not covered by a collective bargaining agreement, with...

  • Page 42
    ...Board of Directors. Assuming that a change in control occurred on the last day of Kroger's fiscal year 2012, and the named executive officers had their employment terminated, they would receive a maximum payment, or, in the case of฀group฀term฀life฀insurance,฀a฀benefit฀having฀a฀cost...

  • Page 43
    BENEFICIAL OWNERSHIP OF COMMON STOCK As of February 15, 2013, Kroger's directors, the named executive officers, and the directors and executive officers฀as฀a฀group,฀beneficially฀owned฀Kroger฀common฀shares฀as฀follows: Amount and Nature of Beneficial Ownership Name Reuben V. ...

  • Page 44
    ... to our Statement of Policy with Respect to Related Person Transactions and the rules of the SEC, Kroger has the following related person transactions, which were approved by Kroger's Audit Committee, to฀disclose: •฀ During฀fiscal฀year฀2012,฀Kroger฀made฀purchases฀from฀Staples...

  • Page 45
    ...฀an฀employee฀(including฀an฀executive฀officer),฀director,฀or฀beneficial฀ owner of less than 10% of that company's shares, if the aggregate amount involved in any fiscal year does not exceed the greater of $1,000,000 or 2 percent of that company's annual consolidated gross revenues...

  • Page 46
    ...in,฀or฀are฀ not฀ inconsistent฀ with,฀ the฀ best฀ interests฀ of฀ Kroger฀ and฀ its฀ shareholders,฀ as฀ the฀ Committee฀ (or฀ the฀ Chair)฀ determines in good faith in accordance with its business judgment. No director will participate in any discussion or approval...

  • Page 47
    ... in this report, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company's Annual Report on Form 10-K for the year ended February 2, 2013, as filed with the SEC. This report is submitted by the Audit Committee. Ronald...

  • Page 48
    ...and฀long-term฀strategic฀and฀operational฀goals,฀we฀seek฀to฀closely฀ align the interests of our named executive officers with the interests of our shareholders. The vote on this resolution is not intended to address any specific element of compensation. Rather, the vote relates to...

  • Page 49
    ... financial accounting and reporting standards. These services are considered approved under the Company's existing Audit and Non-Audit Service Pre-Approval Policy. We did not engage PricewaterhouseCoopers LLP for any audit-related services for the year ended January 28, 2012. Tax Fees for the year...

  • Page 50
    ... Chains Act of 2010, compliance with this law is not verified by frequent third-party, unannounced audits, THEREFORE BE IT RESOLVED that the shareholders urge the Board of Directors to publish a report assessing฀the฀human฀rights฀risks,฀including฀human฀trafficking฀and฀forced฀labor...

  • Page 51
    ...a few years later. A number of institutional investors believe that a strong, objective board leader can best provide the necessary฀ oversight฀ of฀ management.฀ Thus,฀ the฀ California฀ Public฀ Employees'฀ Retirement฀ System's฀ Global฀ Principles฀of฀Accountable฀Corporate...

  • Page 52
    ... at any time; and serving as the Board's representative for any consultation and direct communication, following a request, with major shareholders. These roles are set forth in the Board's Guideline's on Issues of Corporate Governance, published฀on฀our฀website฀at฀ir.kroger.com. The Board...

  • Page 53
    ...฀donating฀these฀food฀ items, Kroger is reducing the amount of waste being sent to landfills. For each of the past several years we have published on-line The Kroger Co. Public Responsibilities Report and our annual Sustainability Report that highlight the company's sustainability initiatives...

  • Page 54
    ...฀adequately฀addressed฀the฀risks฀described฀above. Resolved: Shareholders request the board of directors adopt and implement a comprehensive sustainable palm oil policy. Supporting Statement:฀We฀believe฀such฀a฀policy฀should฀include:฀1)฀a฀target฀date฀for฀sourcing...

  • Page 55
    ... oil production supply chain. Kroger has recently announced a Palm Oil Policy via our corporate website and news release. The policy includes฀an฀endorsement฀of฀the฀Roundtable฀for฀Sustainable฀Palm฀Oil฀(RSPO).฀In฀accordance฀with฀Kroger's฀policy,฀ we will purchase only...

  • Page 56
    ... be addressed to the Secretary of Kroger and must be received at our executive offices not later than January 14, 2014. These proposals must comply with the proxy rules established by the SEC. In addition, the proxy solicited by the Board of Directors for the 2014 annual meeting of shareholders will...

  • Page 57
    2012 ANNUAL REPORT

  • Page 58

  • Page 59
    ... on the Company's website at ir.kroger.com. The Kroger Co. Policy on Business Ethics addresses, among other things, the necessity of ensuring open communication within the Company; potential conflicts of interests; compliance with all domestic and foreign laws, including those related to financial...

  • Page 60
    ....83 $21.29 $21.52 $21.14 $21.68 Main trading market: New York Stock Exchange (Symbol KR) Number of shareholders of record at year-end 2012: 34,157 Number of shareholders of record at March 29, 2013: 33,996 During 2011, the Company paid three quarterly dividends of $0.105 and one quarterly dividend...

  • Page 61
    ... five-year cumulative total shareholder return on Kroger's common shares, based on the market price of the common shares and assuming reinvestment of dividends, with the cumulative total return of companies in the Standard & Poor's 500 Stock Index and a peer group composed of food and drug companies...

  • Page 62
    ...world based on annual sales. The Company also manufactures and processes some of the food for sale in its supermarkets. The Company's principal executive offices are located at 1014 Vine Street, Cincinnati, Ohio 45202, and its telephone number is (513) 762-4000. The Company maintains a web site (www...

  • Page 63
    ... as the Company seeks competitive cost structures in each market while meeting our associates' needs for good wages and affordable health care. In these negotiations, we will also need to address the underfunding of our multiemployer pension plans. STORES As of February 2, 2013, the Company operated...

  • Page 64
    ...on corporate brand products and decisions are based upon a comparison of market-based transfer prices versus open market purchases. As of February 2, 2013, the Company operated 37 manufacturing plants. These plants consisted of 17 dairies, nine deli or bakery plants, five grocery product plants, two...

  • Page 65
    ... market share. We focus on identical supermarket sales growth, excluding fuel, because our business model emphasizes this primary component. Increasing market share is an important part of our long-term strategy as it best reflects how our products and services resonate with customers. Market share...

  • Page 66
    ... 2011 include a UFCW consolidated pension plan charge totaling $591 million, after-tax ("2011 adjusted item"). The net earnings for 2010 include a non-cash goodwill impairment charge totaling $12 million, after-tax, related to a small number of stores ("2010 adjusted item"). Excluding these benefits...

  • Page 67
    ...742 12,081 2,226 $ 82,049 Other sales primarily relate to sales at convenience stores, excluding fuel; jewelry stores; manufacturing plants to outside customers; variable interest entities; a specialty pharmacy; and in-store health clinics. The 2012 adjusted column represents the items presented in...

  • Page 68
    ... from an annualized product cost inflation related to grocery, natural foods, meat, deli and bakery, general merchandise and pharmacy, partially offset by deflation in seafood and manufactured product. In 2011, we experienced higher levels of product cost inflation, compared to 2010. In 2011, our...

  • Page 69
    ... to 2011. This decrease resulted primarily from increased identical supermarket sales growth, productivity improvements, effective cost controls at the store level, the benefit received in lower operating expenses from the consolidation of four UFCW multi-employer pension plans in the prior year and...

  • Page 70
    ... profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness. Since fuel discounts are earned based on in-store purchases, fuel operating profit does not include fuel discounts, which are allocated to our in-store supermarket location departments...

  • Page 71
    ... share repurchase programs that comply with Securities Exchange Act Rule 10b5-1 and allow for the orderly repurchase of our common shares, from time to time. We made open market purchases of Kroger common shares totaling $1.2 billion in 2012, $1.4 billion in 2011 and $505 million in 2010 under...

  • Page 72
    ... by Kroger's Board of Directors on October 16, 2012, that replaced the second referenced program. The fourth is a program that uses the cash proceeds from the exercises of stock options by participants in Kroger's stock option and long-term incentive plans as well as the associated tax benefits. As...

  • Page 73
    ... 2, 2013 January 28, 2012 Return on Invested Capital Numerator Operating profit on a 53 week basis in fiscal year 2012...53rd week operating profit adjustment ...LIFO charge...Depreciation and amortization ...Rent on a 53 week basis in fiscal year 2012 ...53rd week rent adjustment ...2011 adjusted...

  • Page 74
    ...flow information and expected growth rates related to specific stores, to the carrying value for those stores. If we identify impairment for long-lived assets to be held and used, we compare the assets' current carrying value to the assets' fair value. Fair value is determined based on market values...

  • Page 75
    ... For additional information relating to our results of the goodwill impairment reviews performed during 2012, 2011 and 2010 see Note 2 to the Consolidated Financial Statements. The impairment review requires the extensive use of management judgment and financial estimates. Application of alternative...

  • Page 76
    ... on plan assets, may materially affect our pension and other post-retirement obligations and our future expense. Note 13 to the Consolidated Financial Statements discusses the effect of a 1% change in the assumed health care cost trend rate on other post-retirement benefit costs and the related...

  • Page 77
    ... pension plans based on obligations arising from collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number...

  • Page 78
    ...collective bargaining, trustee action or adverse legislation. See Note 14 to the Consolidated Financial Statements for more information relating to our participation in these multi-employer pension plans. Deferred Rent We recognize rent holidays, including the time period during which we have access...

  • Page 79
    ... in 2011 were valued using the LIFO method. Cost for the balance of the inventories was determined using the FIFO method. Replacement cost was higher than the carrying amount by $1.1 billion at February 2, 2013, and by $1.0 billion at January 28, 2012. We follow the Link-Chain, Dollar-Value LIFO...

  • Page 80
    ...and changes in working capital. The decline in long-term liabilities in 2012 is due to the investment returns of our Company-sponsored pension plans during the year and our funding of the remaining UAAL commitment, partially offset by a lower discount rate on our Company-sponsored pension plans. The...

  • Page 81
    ... paper program. We repurchased $1.3 billion of Kroger common shares in 2012, compared to $1.5 billion in 2011 and $545 million in 2010. We paid dividends totaling $267 million in 2012, $257 million in 2011 and $250 million in 2010. Debt Management Total debt, including both the current and long-term...

  • Page 82
    ... our common shares at the levels we did in 2012. We used our commercial paper program toward the end of 2012 to fund our common share repurchases, a $250 million (pre-tax) pre-funding of employee benefit costs at the end of 2012, a $258 million UFCW consolidated pension plan contribution in...

  • Page 83
    ... consolidated pension plan. The liability related to unrecognized tax benefits has been excluded from the contractual obligations table because a reasonable estimate of the timing of future tax settlements cannot be determined. As of February 2, 2013, we had $1.6 billion of borrowings of commercial...

  • Page 84
    ... on management's assumptions and beliefs in light of the information currently available. Such statements relate to, among other things: projected changes in net earnings attributable to The Kroger Co.; identical supermarket sales growth; expected product cost; expected pension plan contributions...

  • Page 85
    ... investments primarily with operating cost reductions. We expect FIFO non-fuel operating margins for 2013 to expand slightly compared to 2012, excluding the UFCW consolidated pension plan accrual and the credit card settlement adjustments in 2012. •฀ For฀2013,฀we฀expect฀our฀annualized...

  • Page 86
    ...commercial paper. •฀ We฀ have฀ various฀ labor฀ agreements฀ that฀ will฀ be฀ renegotiated฀ in฀ 2013,฀ covering฀ store฀ employees฀ in฀ Indianapolis, Dallas, Houston, Seattle and Cincinnati, among others. Upon the expiration of our collective bargaining agreements, work...

  • Page 87
    ...,฀our฀identical฀store฀sales฀growth฀could฀be฀affected฀by฀increases฀ in Kroger private label sales, the effect of our "sister stores" (new stores opened in close proximity to an existing store) and reductions in retail pricing. •฀ Our฀operating฀margins,฀without฀fuel...

  • Page 88
    ... sales and earnings. •฀ Changes฀in฀our฀product฀mix฀may฀negatively฀affect฀certain฀financial฀indicators.฀For฀example,฀we฀continue฀ to add supermarket fuel centers to our store base. Since gasoline generates low profit margins, we expect to see our FIFO gross profit...

  • Page 89
    ...฀ benefits could be affected by changes in the assumptions used in calculating those amounts. These assumptions include, among others, the discount rate, the expected long-term rate of return on plan assets, average life expectancy and the rate of increases in compensation and health care costs...

  • Page 90
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was...

  • Page 91
    ... and financing obligations ...Adjustment related to fair-value of interest rate hedges ...Long-term debt including obligations under capital leases and financing obligations...Deferred income taxes...Pension and postretirement benefit obligations ...Other long-term liabilities ...Total Liabilities...

  • Page 92
    ... ROGER CO. CONSOLIDATED STATEMENTS OF OPER ATIONS Years Ended February 2, 2013, January 28, 2012 and January 29, 2011 (In millions, except per share amounts) 2012 (53 weeks) 2011 (52 weeks) 2010 (52 weeks) Sales ...Merchandise costs, including advertising, warehousing, and transportation, excluding...

  • Page 93
    ...) 2011 (52 weeks) 2010 (52 weeks) Net earnings including noncontrolling interests ...Other comprehensive income Unrealized gain on available for sale securities, net of income tax (1) ...Change in pension and other postretirement defined benefit plans, net of income tax (2) ...Unrealized gain (loss...

  • Page 94
    ...-based employee compensation ...Expense for Company-sponsored pension plans ...Deferred income taxes ...Other ...Changes in operating assets and liabilities net of effects from acquisitions of businesses: Store deposits in-transit ...Inventories ...Receivables...Prepaid expenses ...Trade accounts...

  • Page 95
    CONSOLIDATED THE K ROGER CO. STATEMENT OF CHANGES IN SHAREOWNERS' EQUITY Years Ended February 2, 2013, January 28, 2012 and January 29, 2011 Accumulated Additional Other Common Stock Paid-In Treasury Stock Comprehensive Accumulated Noncontrolling Shares Amount Capital Shares Amount Gain (Loss) ...

  • Page 96
    ... conform to current year presentation. 1. ACCOUNTING POLICIES The following is a summary of the significant accounting policies followed in preparing these financial statements. Description of Business, Basis of Presentation and Principles of Consolidation The Kroger Co. (the "Company") was founded...

  • Page 97
    ... rates related to specific stores, to the carrying value for those stores. If the Company identifies impairment for long-lived assets to be held and used, the Company compares the assets' current carrying value to the assets' fair value. Fair value is based on current market values or discounted...

  • Page 98
    ... to be used in its stores, manufacturing facilities and administrative offices. The Company enters into commitments expecting to take delivery of and to utilize those resources in the conduct of the normal course of business. The Company's current program relative to commodity price protection and...

  • Page 99
    NOTES TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED Benefit Plans and Multi-Employer Pension Plans The Company recognizes the funded status of its retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and transition obligations that have ...

  • Page 100
    ...remit the value of the unredeemed gift card. The amount of breakage has not been material for 2012, 2011 and 2010. Merchandise Costs The "Merchandise costs" line item of the Consolidated Statements of Operations includes product costs, net of discounts and allowances; advertising costs (see separate...

  • Page 101
    ... deposited to the Company's bank accounts at the end of the year related to sales, a majority of which were paid for with credit cards and checks, to which the Company does not have immediate access but that settle within a few days of the sales transaction. Consolidated Statements of Cash Flows...

  • Page 102
    ... cases identical) vendors on a coordinated basis from a centralized location, serve similar types of customers, and are allocated capital from a centralized location. The Company's operating divisions reflect the manner in which the business is managed and how the Company's Chief Executive Officer...

  • Page 103
    NOTES TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED In 2012, the Company acquired an interest in one of its suppliers and all the outstanding shares of Axium Pharmacy, a leading specialty pharmacy that provides specialized drug therapies and support services for patients with complex medical ...

  • Page 104
    ...effective tax rate was significantly lower than 2012 and 2010 due to the effect on pre-tax income of the UFCW consolidated pension plan charge of $953 ($591 after-tax) in 2011. The effect of the UFCW consolidated pension plan charge reduced pre-tax income thereby increasing the effect of credits and...

  • Page 105
    ...: Insurance related costs ...Inventory related costs ...Other...Total current deferred tax liabilities ...Current deferred taxes...Long-term deferred tax assets: Compensation related costs ...Lease accounting...Closed store reserves ...Insurance related costs ...Net operating loss and credit...

  • Page 106
    ... penalties as of February 2, 2013 and January 28, 2012, respectively. As of February 2, 2013, the Internal Revenue Service had concluded its field examination of the Company's 2008 and 2009 federal tax returns and is currently auditing years 2010 and 2011. The 2010 and 2011 audit is expected to be...

  • Page 107
    ... STATEMENTS, CONTINUED In 2011, the Company issued $450 of senior notes bearing an interest rate of 2.20% due in fiscal year 2016. The proceeds of this issuance of senior notes were used to fund a portion of the Company's obligations under the UFCW consolidated multi-employer pension fund. In 2011...

  • Page 108
    NOTES TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2012, and for the years subsequent to 2012 are: 2013 ...2014 ...2015 ...2016 ...2017 ...Thereafter ...Total debt ...6. D E R I VAT I V E FI N A NC I A L ...

  • Page 109
    ...2011 were as follows: Year-To-Date February 2, 2013 January 28, 2012 Gain/(Loss) on Gain/(Loss) on Gain/(Loss) on Gain/(Loss) on Swaps Borrowings Swaps Borrowings Income Statement Classification Interest Expense ... $(24) $16 $(20) $22 The following table summarizes the location and fair value...

  • Page 110
    ... January 28, 2012, the fair value of the interest rates swaps was recorded in other long-term liabilities for $41 and accumulated other comprehensive loss for $26 net of tax. During 2012, the Company terminated 14 forward-starting interest rate swap agreements with maturity dates of May 2012 with an...

  • Page 111
    ... $37. In 2011, unrealized gains on Level 3 Available-for-Sale Securities totaled $3. F A I R VA L U E OF OTHER FINANCIAL INSTRUMENTS Current and Long-term Debt The fair value of the Company's long-term debt, including current maturities, was estimated based on the quoted market prices for the same...

  • Page 112
    ..., Prepaid and Other Current Assets, Trade Accounts Payable, Accrued Salaries and Wages and Other Current Liabilities The carrying amounts of these items approximated fair value. Long-term Investments The fair values of these investments were estimated based on quoted market prices for those or...

  • Page 113
    ... on EPS. 10. S T O C K O P T I O N P L A N S The Company grants options for common shares ("stock options") to employees, as well as to its nonemployee directors, under various plans at an option price equal to the fair market value of the stock at the date of grant. The Company accounts for stock...

  • Page 114
    ... of the Company. Stock Options Changes in options outstanding under the stock option plans are summarized below: Shares subject to option (in millions) Weightedaverage exercise price Outstanding, year-end 2009 ...Granted ...Exercised...Canceled or Expired ...Outstanding, year-end 2010 ...Granted...

  • Page 115
    ... an increase in the Company's share price. The following table reflects the weighted-average assumptions used for grants awarded to option holders: 2012 2011 2010 Weighted average expected volatility...Weighted average risk-free interest rate ...Expected dividend yield ...Expected term (based on...

  • Page 116
    ... related to non-vested share-based compensation arrangements granted under the Company's equity award plans. This cost is expected to be recognized over a weighted-average period of approximately two years. The total fair value of options that vested was $23, $33 and $37 in 2012, 2011 and 2010...

  • Page 117
    ...S The Company administers non-contributory defined benefit retirement plans for substantially all nonunion employees and some union-represented employees as determined by the terms and conditions of collective bargaining agreements. These include several qualified pension plans (the "Qualified Plans...

  • Page 118
    ... reach normal retirement age while employed by the Company. Funding of retiree health care benefits occurs as claims or premiums are paid. The Company recognizes the funded status of its retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and...

  • Page 119
    ... rates at which the pension benefits could be effectively settled. They take into account the timing and amount of benefits that would be available under the plans. The Company's policy for selecting the discount rates as of year-end 2012 changed from the policy as of year-end 2011 and 2010. In 2012...

  • Page 120
    ...-related value of plan assets would provide a different expected return on plan assets. The funded status increased in 2012, compared to 2011, due mostly to the return on plan assets, offset slightly by a decrease in the discount rate used to calculate the present value of the Company's benefit...

  • Page 121
    ... of fiscal year...Fair value of plan assets at end of year ... $3,443 $3,278 $2,746 $ 3,348 $ 3,147 $ 2,523 $221 $211 $ - $ 217 $ 209 $ - The following table provides information about the Company's estimated future benefit payments. Pension Benefits Other Benefits 2013 ...2014 ...2015 ...2016...

  • Page 122
    ...defined benefit pension plans to be approximately $80. In addition, the Company expects 401(k) Retirement Savings Account Plan cash contributions and expense from automatic and matching contributions to participants to increase slightly in 2013, compared to 2012. Assumed health care cost trend rates...

  • Page 123
    ... 2 8 , 2012 Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Quoted Prices in Active Markets for Identical Assets (Level 1) Total Cash and cash equivalents ...Corporate Stocks...Corporate Bonds ...U.S. Government Securities ...Mutual Funds/Collective Trusts...

  • Page 124
    ... securities are traded. For investments not traded on an active market, or for which a quoted price is not publicly available, a variety of unobservable valuation methodologies, including discounted cash flow, market multiple and cost valuation approaches, are employed by the fund manager to value...

  • Page 125
    ... hour worked by eligible employees. The Company recognizes expense in connection with these plans as contributions are funded, or in the case of the UFCW consolidated pension plan, when commitments are made. The Company made contributions to these funds of $492 in 2012, $946 in 2011 and $262 in 2010...

  • Page 126
    .... The EIN / Pension Plan Number column provides the Employer Identification Number ("EIN") and the three-digit pension plan number. The most recent Pension Protection Act Zone Status available in 2012 and 2011 is for the plan's year-end at December 31, 2011 and December 31, 2010, respectively. Among...

  • Page 127
    ... TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED The following table contains information about the Company's multi-employer pension plans: Pension Protection Act Zone Status 2012 2011 FIP/RP Status Pending/ Implemented Multi-Employer Contributions Surcharge 2012 2011 2010 Imposed (7) Pension...

  • Page 128
    ... the Company participates. Expiration Date of Collective Bargaining Agreement Most Significant Collective Bargaining Agreements (1) (not in millions) Count Expiration Pension Fund SO CA UFCW Unions & Food Employers Joint Pension Trust Fund UFCW Consolidated Pension Plan (3) Desert States Employers...

  • Page 129
    ...(1) TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED This column represents the number of significant collective bargaining agreements and their expiration date for each of the Company's pension funds listed above. For purposes of this table, the "significant collective bargaining agreements" are...

  • Page 130
    ... the unaudited results of operations for 2012 and 2011. Quarter First Second Third Fourth Total Year (16 Weeks) (12 Weeks) (12 Weeks) (13 Weeks) (53 Weeks) 2012 Sales ...$29,065 Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below ...23...

  • Page 131
    NOTES TO CONSOLIDATED FINANCI AL STATEMENTS, CONCLUDED Quarter Second Third (12 Weeks) (12 Weeks) 2011 First (16 Weeks) Fourth (12 Weeks) Total Year (52 Weeks) Sales ...Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below ......

  • Page 132
    ... of the other plans should be directed to the employee's Human Resources Department. SHAREOWNERS: Wells Fargo Shareowner Services, a division of Wells Fargo Bank, N.A., is Registrar and Transfer Agent for Kroger's Common Shares. For questions concerning payment of dividends, changes of address, etc...

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    ... the Board and Chief Executive Officer Michael J. Donnelly Senior Vice President Kevin M. Dougherty Group Vice President Michael L. Ellis Senior Vice President O Paul L. Bowen Jay C William H. Breetz, Jr. Southwest Division Timothy F. Brown Delta Division Jeffrey D. Burt Central Division Jay Cummins...

  • Page 136
    Th e ฀K ro ge r ฀C o .฀•฀1014฀V i n e ฀S T r e e T ฀•฀C i nC i n naT i ,฀o h io ฀45202฀•฀(513)฀762- 4000