Kroger 2012 Annual Report Download - page 88

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A-30
•฀ We฀have฀estimated฀our฀exposure฀to฀the฀claims฀and฀litigation฀arising฀in฀the฀normal฀course฀of฀business,฀
as well as to the material litigation facing Kroger, and believe we have made provisions where it is
reasonably possible to estimate and where an adverse outcome is probable. Unexpected outcomes in
these matters, however, could result in an adverse effect on our earnings.
•฀ Changes฀in฀the฀types฀and฀numbers฀of฀businesses฀that฀compete฀with฀us฀are฀likely฀to฀continue฀and฀the฀
effects on our business, either favorable or unfavorable, cannot be foreseen.
•฀ Rent฀expense,฀which฀includes฀subtenant฀rental฀income,฀could฀be฀adversely฀affected฀by฀the฀state฀of฀the฀
economy, increased store closure activity and future consolidation.
•฀ Depreciation฀ expense,฀ which฀ includes฀ the฀ amortization฀ of฀ assets฀ recorded฀ under฀ capital฀ leases,฀ is฀
computed principally using the straight-line method over the estimated useful lives of individual assets,
or the remaining terms of leases. Use of the straight-line method of depreciation creates a risk that future
asset write-offs or potential impairment charges related to store closings would be larger than if an
accelerated method of depreciation were followed.
•฀ Our฀effective฀tax฀rate฀may฀differ฀from฀the฀expected฀rate฀due฀to฀changes฀in฀laws,฀the฀status฀of฀pending฀
items with various taxing authorities, and the deductibility of certain expenses.
•฀ The฀ actual฀ amount฀ of฀ automatic฀ and฀ matching฀ cash฀ contributions฀ to฀ our฀ 401(k)฀ Retirement฀ Savings฀
Account Plan will depend on the number of participants, savings rate, compensation as defined by the
plan, and length of service of participants.
•฀ The฀amounts฀of฀our฀contributions฀and฀recorded฀expense฀related฀to฀multi-employer฀pension฀funds฀could฀
vary from the amounts that we expect, and could increase more than anticipated. Should asset values in
these funds deteriorate, if employers withdraw from these funds without providing for their share of the
liability, or should our estimates prove to be understated, our contributions could increase more rapidly
than we have anticipated.
•฀ If฀ the฀ investment฀ performance฀ of฀ our฀ pension฀ plan฀ assets฀ does฀ not฀ meet฀ expectations฀ due฀ to฀ poor฀
performance of the financial markets or for other reasons, our contributions to Company-sponsored
defined benefit pension plans could increase more than anticipated in future periods.
•฀ Changes฀in฀laws฀or฀regulations,฀including฀changes฀in฀accounting฀standards,฀taxation฀requirements฀and฀
environmental laws may have a material effect on our financial statements.
•฀ Changes฀ in฀ the฀ general฀ business฀ and฀ economic฀ conditions฀ in฀ our฀ operating฀ regions฀ may฀ affect฀ the฀
shopping habits of our customers, which could affect 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 margins decline as gasoline sales increase. Although this negatively
affects our FIFO gross margin, gasoline sales provide a positive effect on OG&A expense as a percentage
of sales.
•฀ Our฀ capital฀ expenditures,฀ expected฀ square฀ footage฀ growth,฀ and฀ number฀ of฀ store฀ projects฀ completed฀
over the next fiscal year could differ from our estimate if we are unsuccessful in acquiring suitable sites
for new stores, if development costs vary from those budgeted, if our logistics and technology or store
projects are not completed on budget or within the time frame projected, or if economic conditions fail
to improve, or worsen.
•฀ Interest฀expense฀could฀be฀adversely฀affected฀by฀ the฀ interest฀rate฀environment,฀changes฀in฀our฀credit฀
ratings, fluctuations in the amount of outstanding debt, decisions to incur prepayment penalties on the
early redemption of debt and any factor that adversely affects our operations and results in an increase
in debt.
•฀ Impairment฀losses,฀including฀goodwill,฀could฀be฀affected฀by฀changes฀in฀our฀assumptions฀of฀future฀cash฀
flows, market values or business valuations in the market. Our cash flow projections include several
years of projected cash flows which would be affected by changes in the economic environment, real
estate market values, competitive activity, inflation and customer behavior.