Kroger 2012 Annual Report Download - page 65

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MA N A G E M E N T ’S D I S C U S S I O N A N D A N A L Y S I S O F
FI N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
OU R B U S I N E S S
The Kroger Co. was founded in 1883 and incorporated in 1902. It is one of the nation’s largest retailers,
as measured by revenue, operating 2,424 supermarket and multi-department stores under two dozen banners
including Kroger, City Market, Dillons, Jay C, Food 4 Less, Fred Meyer, Fry’s, King Soopers, QFC, Ralphs and
Smith’s. Of these stores, 1,169 have fuel centers. We also operate 786 convenience stores, either directly or
through franchisees, and 328 fine jewelry stores.
Kroger operates 37 manufacturing plants, primarily bakeries and dairies, which supply approximately
40% of the corporate brand units sold in our retail outlets.
Our revenues are earned and cash is generated as consumer products are sold to customers in our
stores. We earn income predominately by selling products at price levels that produce revenues in excess of
the costs we incur to make these products available to our customers. Such costs include procurement and
distribution costs, facility occupancy and operational costs, and overhead expenses. Our retail operations,
which represent over 99% of Kroger’s consolidated sales and EBITDA, are our only reportable segment.
OU R 2 0 1 2 P E R F O R M A N C E
We achieved outstanding results in 2012. Our business strategy continues to resonate with a full range of
customers and our results reflect the balance we seek to achieve across our business including positive identical
sales growth, increases in loyal household count, and good cost control, as well as growth in net earnings and
net earnings per diluted share. Our 2012 net earnings were $1.5 billion or $2.77 per diluted share, compared
to $602 million, or $1.01 per diluted share for the same period of 2011. For 2012, this includes estimated net
earnings of $91 million pre-tax ($58 million after-tax) or $0.11 per diluted share due to a 53rd week in fiscal
year 2012 (the “extra week”). In addition, net earnings benefited by $115 million pre-tax ($74 million after-tax)
or $0.14 per diluted share from a settlement with Visa and MasterCard and from a reduction in our obligation
to fund the United Food and Commercial Workers International Union (“UFCW”) consolidated pension fund
created in January 2012. Excluding the Visa and MasterCard settlement, the UFCW consolidated pension fund
adjustment and the extra week in 2012, our adjusted net earnings were $1.4 billion or $2.52 per diluted share.
Our 2011 results included a charge related to the consolidation of four multi-employer pension plans to the
UFCW consolidated pension plan totaling $953 million, pre-tax ($591 million after-tax). Excluding the 2011
adjusted item, our 2011 adjusted net earnings were $1.2 billion or $2.00 per diluted share. After accounting
for these adjusted items, our 2012 adjusted net earnings per diluted share represent a 26% increase in adjusted
net earnings per diluted share. Please refer to the “Net Earnings” section for more information related to the
increase in net earnings for 2012, compared to 2011.
Our identical supermarket sales increased by 3.5%, excluding fuel in 2012. We have achieved
37 consecutive quarters of positive identical supermarket sales growth, excluding fuel. As we continue to
outpace many of our competitors on identical supermarket sales growth, we continue to gain 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 growth allows us to spread the fixed costs in our business
over a wider revenue base. Our fundamental operating philosophy is to maintain and increase market share
by offering customers good prices and superior products and service. Based on Nielsen Homescan Data, our
estimated market share increased in total by approximately 20 basis points in 2012 across our 19 marketing
areas outlined by the Nielsen report. This information also indicates that our market share increased in
10 of the marketing areas and declined in nine. Wal-Mart supercenters are a primary competitor in 17 of
these 19 marketing areas. In these 17 marketing areas, our market share increased in nine and declined in
eight. Nielsen Homescan Data is generated by customers who self-report their grocery purchases to Nielsen,
regardless of retail channel or grocery outlet. These market share results reflect our long-term strategy of
market share growth.