Kroger 2013 Annual Report Download

Download and view the complete annual report

Please find the complete 2013 Kroger annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 152

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152

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 3 A N N U A L R E P O R T

Table of contents

  • Page 1
    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS PROX Y STATEMENT AND 2 013 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
    ...฀market฀share.฀ In 2013, the first full fiscal year executing our aggressive growth plan, Kroger delivered on all four indicators. We achieved an unparalleled 41st฀ consecutive฀ quarter฀ of฀ positive฀ identical฀ supermarket฀ sales;฀ expanded฀ FIFO฀ operating฀ margin...

  • Page 4
    ... customers฀ with฀ a฀ Kroger฀ Rewards฀ Visa฀ credit card earned more than $33 million in free groceries last year. We฀ have฀ partnered฀ with฀ customers฀ to฀ support฀ the฀ community฀ organizations฀ they฀ care฀ about฀ most,฀ returning฀$46฀million฀annually...

  • Page 5
    ...growth.฀ 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฀ 77฀ percent฀ since฀ 1995.฀ In฀ 2013,฀ 831฀ retail฀ locations...

  • Page 6
    ...,฀ who฀ retired฀ from฀ Kroger's฀ Board฀ of฀ Directors฀ in฀ December฀2013฀after฀24฀years฀of฀service;฀to฀Paul฀Heldman,฀executive฀vice฀president,฀secretary฀and฀general฀ counsel,฀who฀retires฀in฀May฀after฀32฀years฀of฀service;฀and฀to...

  • Page 7
    ...฀to฀the฀winners฀of฀The฀Kroger฀Co.฀Community฀Service฀Award฀for฀2013: 2013 Community Service Award Winners Division Atlanta Central Cincinnati City฀Market Columbus Delta Dillon฀Stores Food 4 Less Fred฀Meyer Fry's Jay฀C฀Stores King฀Soopers Louisville Michigan Mid...

  • Page 8
    ...for฀the฀year฀2014; To฀act฀upon฀two฀shareholder฀proposals,฀if฀properly฀presented฀at฀the฀annual฀meeting;฀and To฀transact฀such฀other฀business฀as฀may฀properly฀be฀brought฀before฀the฀meeting; Holders฀of฀common฀shares฀of฀record฀at฀the...

  • Page 9
    ...฀thereof.฀ The฀ principal฀ executive฀ offices฀ of฀ The฀ Kroger฀ Co.฀ are฀ located฀ at฀ 1014฀ Vine฀ Street,฀ Cincinnati,฀ Ohio฀ 45202-1100.฀ Our฀ telephone฀ number฀ is฀ 513-762-4000.฀ This฀ Proxy฀ Statement฀ and฀ Annual฀ Report,฀ and฀ the...

  • Page 10
    ...'฀receipt฀of฀proxy฀materials,฀lower฀the฀ cost฀of฀our฀annual฀meeting฀and฀help฀to฀conserve฀natural฀resources.฀On฀or฀about฀May฀14,฀2014,฀we฀mailed฀to฀ each฀of฀our฀shareholders฀(other฀than฀those฀who฀previously฀requested฀electronic...

  • Page 11
    ...฀ at฀the฀annual฀meeting฀to฀serve฀until฀the฀annual฀meeting฀in฀2015,฀or฀until฀their฀successors฀have฀been฀elected฀ by฀the฀shareholders฀or฀by฀the฀Board฀of฀Directors฀pursuant฀to฀Kroger's฀Regulations,฀and฀qualified.฀Kroger's฀ Articles...

  • Page 12
    ...as฀Lead฀Director฀on฀the฀Board. 1999 David B. Dillon Mr.฀Dillon฀was฀elected฀Chief฀Executive฀Officer฀in฀2003฀and฀Chairman฀ 63 of฀the฀Board฀of฀Kroger฀in฀2004.฀Mr.฀Dillon฀retired฀as฀Chief฀Executive฀ Officer at the end of calendar year 2013 and...

  • Page 13
    Name Professional Occupation (1) Age Director Since Susan J. Kropf Ms.฀Kropf฀was฀President฀and฀Chief฀Operating฀Officer฀of฀Avon฀Products฀ 65 Inc.,฀ a฀ manufacturer฀ and฀ marketer฀ of฀ beauty฀ care฀ products,฀ from฀ 2001฀ until฀ her฀ retirement฀ ...

  • Page 14
    Name Professional Occupation (1) Age Director Since W. Rodney McMullen Mr.฀McMullen฀was฀elected฀Chief฀Executive฀Officer฀of฀Kroger฀in฀January฀ 53 2014. Prior to this, he served as President and Chief Operating Officer from฀August฀2009฀to฀December฀2013.฀Prior฀to...

  • Page 15
    ...฀ corporations฀at฀all฀levels.฀He฀brings฀to฀the฀Board฀a฀unique฀perspective,฀ having led a national supplier of paper products prior to his retirement. Mr.฀Rogel฀previously฀served฀as฀Kroger's฀Lead฀Director,฀and฀has฀served฀ on compensation, finance, audit...

  • Page 16
    ...฀ of฀ the฀Board฀of฀Burlington฀Resources฀Inc.,฀a฀natural฀resources฀business,฀ since฀ July฀ 1997฀ and฀ its฀ President฀ and฀ Chief฀ Executive฀ Officer฀ since฀ December฀ 1995.฀ He฀ had฀ been฀ a฀ director฀ of฀ that฀ company฀ since฀ 1995...

  • Page 17
    ...Directors฀at฀our฀2015฀annual฀meeting,฀written฀notice฀must฀be฀submitted฀to฀the฀Company's฀ Secretary,฀and฀received฀at฀our฀executive฀offices฀not฀later฀than฀January฀14,฀2015.฀Such฀notice฀should฀include฀the฀ name,฀age,฀business฀address...

  • Page 18
    ...฀of฀the฀Audit฀Committee฀are฀"financially฀literate"฀as฀that฀term฀ is฀used฀in฀the฀NYSE฀listing฀standards. CODE OF ETHICS The฀Board฀of฀Directors฀has฀adopted฀The Kroger Co. Policy on Business Ethics,฀applicable฀to฀all฀officers,฀ employees฀ and...

  • Page 19
    ...with฀the฀Board.฀Any฀shareholder฀or฀interested฀party฀who฀has฀concerns฀regarding฀accounting,฀ improper฀use฀of฀Kroger฀assets,฀or฀ethical฀improprieties฀may฀report฀these฀concerns฀via฀the฀toll-free฀hotline฀ (800-689-4609)฀ or฀ email฀ address...

  • Page 20
    ...policies฀and฀controls. BOARD LEADERSHIP STRUCTURE AND LEAD DIRECTOR Our฀Board฀is฀composed฀of฀eleven฀independent฀non-employee฀directors,฀and฀two฀management฀directors,฀ Mr.฀Dillon,฀the฀Chairman฀of฀the฀Board฀and฀our฀former฀Chief฀Executive฀Officer...

  • Page 21
    ... are฀ functioning฀effectively.฀As฀part฀of฀this฀annual฀self-evaluation,฀the฀Board฀assesses฀whether฀the฀current฀leadership฀ structure฀continues฀to฀be฀appropriate฀for฀Kroger฀and฀its฀shareholders.฀Our฀Guidelines฀provide฀the฀flexibility฀ for...

  • Page 22
    ...฀per฀share. •฀ Kroger's฀stock฀price฀increased฀29.4%฀in฀fiscal฀year฀2013.฀ The฀ Committee฀ believes฀ our฀ management฀ produced฀ outstanding฀ results฀ in฀ 2013,฀ measured฀ against฀ increasingly฀aggressive฀business฀plan฀objectives฀for฀sales...

  • Page 23
    ...in฀rewarding฀named฀executive฀officers฀for฀the฀achievement฀of฀long-term฀ business฀objectives฀and฀providing฀incentives฀for฀the฀creation฀of฀shareholder฀value.฀ The following discussion and analysis addresses the compensation of the named executive officers, and...

  • Page 24
    ...by฀the฀percentage฀ payout฀under฀the฀annual฀bonus฀plan฀generally฀applicable฀to฀all฀corporate฀management,฀including฀the฀named฀ executive officers. The independent directors retain discretion to reduce the percentage payout the CEO would฀otherwise฀receive.฀The...

  • Page 25
    ... is reviewed annually and modified as circumstances warrant. Industry consolidation and other competitive forces will change the peer group used over time. The consultant also provides the Committee data from companies฀in฀"general฀industry,"฀a฀representation฀of฀major฀publicly-traded...

  • Page 26
    ... 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. 2011 Salaries 2012 2013 David฀B.฀Dillon ...W.฀Rodney...

  • Page 27
    ...฀gallons฀sold, and฀achievement฀of฀the฀planned฀number฀of฀ fuel centers placed in service. Following the close of the year, the Committee reviewed Kroger's performance against the identical sales without฀fuel,฀EBITDA฀without฀fuel,฀and฀strategic฀plan฀objectives฀and...

  • Page 28
    ...-based฀annual฀cash฀bonus฀for฀2014฀will฀be฀determined฀based฀on฀Kroger's฀performance฀ against฀the฀identical฀sales฀without฀fuel,฀EBITDA฀without฀fuel,฀strategic฀plan,฀and฀operating฀costs฀as฀a฀percentage฀ of฀sales฀objectives฀established...

  • Page 29
    ...the฀importance฀of฀providing฀an฀incentive฀to฀the฀named฀executive฀officers฀ to฀achieve฀the฀long-term฀goals฀established฀by฀the฀Board฀of฀Directors฀by฀conditioning฀a฀significant฀portion฀of฀ compensation on the achievement of those goals. In฀ 2006...

  • Page 30
    ... Cost as a Percentage of Sales, Excluding Fuel Improvement in Associate Engagement Return on Invested Capital *฀ March฀2014 Salary฀at฀end฀of฀ fiscal฀year฀2010* 2012 to 2014 March฀2015 Salary฀at฀end฀of฀ fiscal฀year฀2011* 2013฀to฀2015 March฀2016 2014฀to฀2016...

  • Page 31
    ...฀closing฀price฀of฀Kroger฀common฀ shares on the date of the grant. Options are granted only on one of the four dates of Compensation Committee meetings฀conducted฀after฀Kroger's฀public฀release฀of฀its฀quarterly฀earnings฀results. Kroger's฀long-term฀incentive฀plans...

  • Page 32
    ...฀beginning฀several฀years฀ago฀to฀replace฀a฀split-dollar฀life฀insurance฀ benefit฀that฀was฀substantially฀more฀costly฀to฀Kroger.฀Currently,฀159 active executives, including the named executive officers, and 87฀retired฀executives,฀receive฀this฀benefit. In...

  • Page 33
    ...not฀identical฀to฀the฀ group฀of฀named฀executive฀officers.฀Compensation฀that฀is฀deemed฀to฀be฀"performance-based"฀is฀excluded฀for฀ purposes฀of฀the฀calculation฀and฀is฀tax฀deductible.฀Awards฀under฀Kroger's฀long-term฀incentive฀plans,฀when...

  • Page 34
    ...฀Chief฀Operating฀Officer฀on฀January฀1,฀2014. (2)฀ The฀ stock฀ awards฀ reflected฀ in฀ the฀ table฀ consist฀ of฀ both฀ time-based฀ and฀ performance-based฀ awards฀ granted฀under฀the฀Company's฀long-term฀incentive฀plans.฀With฀respect฀to฀time...

  • Page 35
    .... The assumptions used in calculating the valuation are set forth in Note 12 to the consolidated financial statements฀in฀Kroger's฀10-K฀for฀fiscal฀year฀2013฀ended฀February฀1,฀2014. (3)฀ These฀amounts฀represent฀the฀aggregate฀grant฀date฀fair฀value฀of฀awards...

  • Page 36
    ...฀to฀the฀named฀ executive officers in 2013: All Other Stock Awards: Number of Shares of Stock or Units (#) (3) All Other Option Awards: Number of Securities Underlying Options (#) (4) Name David฀B.฀Dillon Grant Date Estimated Future Payouts Under Non-Equity Incentive Plan Awards Target...

  • Page 37
    ... stock฀ options฀ granted฀ under฀ one฀ of฀ the฀ Company's฀ long-term฀ incentive฀plans.฀Options฀are฀granted฀at฀fair฀market฀value฀of฀Kroger฀common฀shares฀on฀the฀date฀of฀the฀ grant.฀Fair฀market฀value฀is฀defined฀as฀the฀closing฀price...

  • Page 38
    ..."฀amounts,฀for฀the฀performance-based฀annual฀and฀ long-term฀ cash฀ bonus฀ awards฀ for฀ the฀ named฀ executive฀ officers.฀ Amounts฀ were฀ payable฀ to฀ the฀ extent฀ that฀ performance฀met฀specific฀objectives฀established฀at฀the฀beginning฀of...

  • Page 39
    ...฀of฀unvested฀shares฀is฀based฀on฀ Kroger's฀closing฀stock฀price฀of฀$36.10฀on฀January฀31,฀2014,฀the฀last฀trading฀day฀of฀the฀2013฀fiscal฀year. Option Awards Equity Incentive Plan Awards: Number of Number of Securities Securities Underlying Underlying...

  • Page 40
    ... Plan Plan Awards: Awards: Market Number of Market or 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 Units or Other Have Not Rights That Other Rights Exercise Option That Have Not Vested Vested Price...

  • Page 41
    ... shares issued to the named executive officers pursuant to performance units awarded under the 2011 Long Term Incentive Plan. 2013 OPTION EXERCISES AND STOCK VESTED Option Awards(1) Number of Shares Acquired Value Realized on Exercise on Exercise (#) ($) Stock Awards(2) Number of Shares Acquired...

  • Page 42
    ...฀ 2013฀ year-end฀ for฀ the฀ named฀ executive officers. 2013 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฀Plan...

  • Page 43
    ...the฀sum฀of฀ the฀FICA฀wage฀base฀and฀pre-tax฀insurance฀and฀other฀Internal฀Revenue฀Code฀Section฀125฀plan฀deductions,฀as฀ well฀as฀100%฀of฀their฀annual฀and฀long-term฀bonus฀compensation.฀Deferral฀account฀amounts฀are฀credited฀with฀ 41

  • Page 44
    ...฀year฀2013฀compensation฀for฀non-employee฀directors.฀Employee฀ directors฀receive฀no฀compensation฀for฀their฀Board฀service. 2013 DIRECTOR COMPENSATION Change in Pension Value and Nonqualified Deferred All Non-Equity Other Incentive Plan Compensation Earnings Compensation...

  • Page 45
    ...be฀reviewed฀from฀time฀to฀time฀as฀the฀Corporate฀Governance฀Committee฀ deems appropriate. PO T E N T I A L PAY M E N T S UPON TE R M I NAT ION OR CHANGE IN CONTROL Kroger has no employment agreements with its named executive officers and no contracts, agreements, plans or...

  • Page 46
    ...of฀Directors.฀ Assuming that a change in control occurred on the last day of Kroger's fiscal year 2013, 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 47
    ...฀as฀of฀February฀14,฀2014฀by฀Kroger's฀ directors, the named executive officers, and the directors and executive officers as a group. The percentage of฀ ownership฀ is฀ based฀ on฀ 512,053,904฀ of฀ the฀ Company฀ common฀ shares฀ outstanding฀ on฀ February฀ 14...

  • Page 48
    ...฀with฀the฀Securities฀and฀Exchange฀Commission.฀Those฀officers,฀directors฀and฀shareholders฀are฀ required฀by฀SEC฀regulation฀to฀furnish฀us฀with฀copies฀of฀all฀Section฀16(a)฀forms฀they฀file. Based฀ solely฀ on฀ our฀ review฀ of฀ the...

  • Page 49
    ...various฀vendors฀for฀the฀items฀purchased฀from฀Staples฀and฀awards฀the฀business฀based฀on฀the฀results฀ of฀ that฀ process.฀ Ronald฀ L.฀ Sargent,฀ a฀ member฀ of฀ Kroger's฀ Board฀ of฀ Directors,฀ is฀ Chairman฀ and฀ Chief฀ Executive฀Officer...

  • Page 50
    ...of฀Kroger฀common฀stock฀and฀all฀holders฀ of฀Kroger฀common฀stock฀received฀the฀same฀benefit฀on฀a฀pro฀rata฀basis. Executive Officer and Director Compensation.฀(a)฀Any฀employment฀by฀Kroger฀of฀an฀executive฀officer฀ if฀ the฀ executive฀ officer...

  • Page 51
    ..., the Audit Committee meets in executive session. Management฀of฀the฀Company฀is฀responsible฀for฀the฀preparation฀and฀presentation฀of฀the฀Company's฀financial฀ statements, the Company's accounting and financial reporting principles and internal controls, and procedures that...

  • Page 52
    ...2 014 L O N G -TE R M I N C E N T I V E (ITEM NO. 2) AND CASH BONUS PLAN The฀Board฀of฀Directors฀has฀adopted,฀subject฀to฀shareholder฀approval,฀The฀Kroger฀Co.฀2014฀Long-Term฀ Incentive฀and฀Cash฀Bonus฀Plan฀("Plan")฀for฀which฀a฀maximum฀of฀25,000,000...

  • Page 53
    ...stock฀options฀granted฀under฀the฀Plan฀will฀have฀exercise฀prices฀not฀less฀than฀ the฀greater฀of฀the฀fair฀market฀value฀per฀common฀share฀or฀the฀par฀value฀of฀a฀common฀share,฀a฀term฀of฀not฀more฀ than฀10฀years฀after฀the฀date...

  • Page 54
    ...be฀paid฀in฀common฀shares,฀with฀the฀number฀of฀shares฀being฀ deemed฀paid฀equal฀to฀the฀amount฀of฀cash฀paid฀to฀the฀employee฀divided฀by฀the฀fair฀market฀value฀of฀a฀common฀ share on the date of payment. Restricted Stock. The฀Committee฀may...

  • Page 55
    ...฀currently฀intends฀to฀structure฀grants฀and฀awards฀made฀ under฀the฀Plan฀to฀"covered฀employees"฀as฀performance-based฀compensation฀that฀is฀exempt฀from฀Section฀162(m). This฀summary฀of฀the฀2014฀Long-Term฀Incentive฀and฀Cash฀Bonus฀Plan...

  • Page 56
    ... our named executive officers in fiscal 2013. EQUITY COMPENSATION PLAN INFORMATION The฀following฀table฀provides฀information฀regarding฀shares฀outstanding฀and฀available฀for฀issuance฀under฀ the฀Company's฀existing฀equity฀compensation฀plans. (a) Number of securities to...

  • Page 57
    ... 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...

  • Page 58
    ...฀years฀ended฀February฀1,฀2014฀and฀February฀2,฀2013,฀respectively,฀were฀for฀professional฀ services rendered for the audits of Kroger's consolidated financial statements, the issuance of comfort letters to฀underwriters,฀consents,฀and฀assistance฀with฀the฀review...

  • Page 59
    ...October฀31,฀2014. SUPPORTING STATEMENT As฀long-term฀shareholders,฀we฀favor฀policies฀and฀practices฀that฀protect฀and฀enhance฀the฀value฀of฀our฀ investments.฀There฀is฀increasing฀recognition฀that฀company฀risks฀related฀to฀human฀rights฀violations...

  • Page 60
    ...that฀the฀board฀of฀directors฀issue฀a฀report,฀at฀reasonable฀ cost฀and฀omitting฀confidential฀information,฀developing฀a฀policy฀position฀on฀the฀company's฀responsibility฀for฀ post-consumer฀ product฀ packaging฀ recycling฀ of฀ its฀ private฀ label...

  • Page 61
    ... intends, at an annual meeting, to nominate a฀person฀for฀election฀to฀the฀Company's฀Board฀of฀Directors฀or฀to฀propose฀other฀business฀to฀be฀considered฀by฀ shareholders. These procedures include, among other things, that the shareholder give timely notice to the...

  • Page 62
    ...฀prior฀to฀the฀date฀on฀which฀the฀ Company's proxy statement for the prior year's annual meeting of shareholders was mailed to shareholders. If a shareholder's nomination or proposal is not in compliance with the procedures set forth in the Regulations, the฀Company฀may฀disregard...

  • Page 63
    APPENDIX 1 THE KROGER CO. 2014 LONG-TERM INCENTIVE AND CASH BONUS PLAN 1. Definitions In this Plan the following definitions will apply: 1.1฀ "Agreement"฀ means฀ a฀ written฀ instrument฀ implementing฀ a฀ grant฀ of฀ an฀ Option,฀ Right฀ or฀ Performance฀Unit,฀an฀award...

  • Page 64
    ...฀during฀which฀a฀Performance฀Unit฀is฀outstanding. "Plan"฀means฀THE฀KROGER฀CO.฀2014฀Long-Term฀Incentive฀and฀Cash฀Bonus฀Plan. 1.27฀ "Related฀Option"฀means฀the฀Option฀in฀connection฀with฀which฀a฀specified฀Right฀or฀Performance฀ Unit฀is...

  • Page 65
    ...฀Option฀Price฀upon฀the฀exercise฀by฀an฀Employee฀or฀Director฀of฀ an฀Option฀otherwise฀than฀in฀cash,฀including฀without฀limitation฀by฀delivery฀of฀Common฀Shares฀(other฀than฀ Restricted฀Stock)฀valued฀at฀Fair฀Market฀Value฀on฀the฀Date...

  • Page 66
    ...may฀be฀granted฀to฀any฀Employee฀ or฀Director฀under฀this฀Plan฀during฀its฀term฀is฀3,750,000฀Shares.฀In฀no฀event฀will฀the฀Option฀Price฀of฀an฀Option฀ be฀less฀than฀the฀Fair฀Market฀Value฀of฀a฀Share฀at฀the฀time฀of฀the฀grant...

  • Page 67
    ...฀maximum฀number฀of฀Shares฀with฀respect฀to฀which฀Rights฀may฀be฀granted฀to฀any฀Employee฀ or฀Director฀under฀this฀Plan฀during฀its฀term฀is฀3,750,000฀Shares. 7.9฀ Except฀in฀connection฀with฀a฀corporate฀transaction฀involving฀the฀company...

  • Page 68
    ...than the exercise price of the original Rights without shareholder฀approval฀(i.e.,฀Rights฀will฀not฀be฀"repriced"). 8. Performance Units 8.1฀ 8.2฀ ฀ ฀ The฀Committee฀is฀hereby฀authorized฀to฀grant฀Performance฀Units฀to฀Employees฀and฀Directors.฀ Performance...

  • Page 69
    ...฀of฀cash฀paid฀to฀the฀Employee฀or฀Director฀divided฀by฀the฀Fair฀ Market฀Value฀of฀a฀Share฀on฀the฀date฀of฀payment. 9. Exercise An฀Option,฀Right฀or฀Performance฀Unit,฀subject฀to฀the฀provisions฀of฀the฀Agreement฀under฀which฀it฀was...

  • Page 70
    2014฀Long-Term฀Incentive฀and฀Cash฀Bonus฀Plan฀and฀an฀Agreement฀entered฀into฀ between฀the฀registered฀owner฀and฀The฀Kroger฀Co.฀Release฀from฀such฀terms฀and฀ conditions฀will฀be฀made฀only฀in฀accordance฀with฀the฀provisions฀of฀the฀...

  • Page 71
    ...ii)฀identical฀sales;฀(iii)฀achievement฀ of฀strategic฀initiatives,฀and฀(iv)฀achievement฀of฀supermarket฀fuel฀center฀goals฀for฀EBITDA,฀gallons฀sold,฀and฀ number฀ of฀ fuel฀ centers.฀ Initially฀ the฀ Performance฀ Goals฀ for฀ long-term฀ bonuses...

  • Page 72
    ...warrants,฀rights,฀or฀restricted฀stock,฀ otherwise฀than฀under฀this฀Plan,฀or฀to฀adopt฀other฀long-term฀incentive฀plans฀or฀to฀impose฀any฀requirement฀of฀ shareholder approval upon the same. 20.4฀ The฀ interests฀ of฀ any฀ Employee฀ or฀ Director...

  • Page 73
    2013 ANNUAL REPORT

  • Page 74
    ... registered public accounting firm, whose selection has been approved by the shareholders. Management has made available to PricewaterhouseCoopers LLP all of the Company's financial records and related data, as well as the minutes of the shareholders' and directors' meetings. Furthermore, management...

  • Page 75
    ... share. On March 1, 2014, the Company paid a quarterly dividend of $0.165 per share. On March 13, 2014, the Company announced that its Board of Directors has declared a quarterly dividend of $0.165 per share, payable on June 1, 2014, to shareholders of record at the close of business on May 15, 2014...

  • Page 76
    ...'s 500 Stock Index and a peer group composed of food and drug companies. COMPARISON OF CUMULATIVE FIVE-YEAR TOTAL RETURN* Among The Kroger Co., the S&P 500, and Peer Group** 300 250 200 150 100 50 0 2008 2009 2010 2011 2012 2013 The Kroger Co. S&P 500 Index Peer Group Company Name/Index Base...

  • Page 77
    ... expiration date but may be terminated by the Board of Directors at any time. Total shares purchased include shares that were surrendered to the Company by participants under the Company's long-term incentive plans to pay for taxes on restricted stock awards. On March 13, 2014, the Company announced...

  • Page 78
    ... 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 79
    ... plants; the remaining corporate brand items are produced to the Company's strict specifications by outside manufacturers. The Company performs a "make or buy" analysis on corporate brand products and decisions are based upon a comparison of market-based transfer prices versus open market purchases...

  • Page 80
    ... expenses. Our retail operations, which represent over 99% of Kroger's consolidated sales and EBITDA, are our only reportable segment. On January 28, 2014, we closed our merger with Harris Teeter Supermarkets, Inc. ("Harris Teeter") by purchasing 100% of the Harris Teeter outstanding common stock...

  • Page 81
    ... and increase market share by offering customers good prices and superior products and service. Based on Nielsen POS+ data, our estimated market share increased in total by approximately 50 basis points in 2013 across our 18 marketing areas outlined by the Nielsen report. This information also...

  • Page 82
    ... per share amounts) 2013 2012 2011 Net earnings attributable to The Kroger Co...Benefit from certain tax items offset by Harris Teeter merger costs (1) ...53rd week adjustment (1) ...Adjustment for the UFCW consolidated pension plan liability and credit card settlement (1) ...UFCW pension plan...

  • Page 83
    ... in supermarket square footage. Identical supermarket sales include sales from all departments at identical Fred Meyer multi-department stores. We calculate annualized identical supermarket sales by adding together four quarters of identical supermarket sales. Our identical supermarket sales results...

  • Page 84
    ... lower prices for our customers and increased shrink and advertising costs, as a percentage of sales, offset partially by a growth rate in retail fuel sales that was lower than the total Company sales growth rate. Our retail fuel operations lower our gross margin rate, as a percentage of sales, due...

  • Page 85
    ... costs such as wages, health care benefits and retirement plan costs, utilities and credit card fees. Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A. OG&A expenses, as a percentage of sales, were 15.45% in 2013, 15.37% in 2012 and 17.00% in 2011...

  • Page 86
    ... purchases, fuel operating profit does not include fuel discounts, which are allocated to our in-store supermarket location departments. We also derive operating, general and administrative expenses, rent and depreciation and amortization through the use of estimated allocations in the calculation...

  • Page 87
    ... the amendment of prior years' tax returns to claim the additional benefit available in years still under review by the Internal Revenue Service. The 2011 effective tax rate differed from the federal statutory rate primarily as a result of the utilization of tax credits and the favorable resolution...

  • Page 88
    ... Financial Statements for more information on the merger with Harris Teeter. Capital investments for the purchase of leased facilities totaled $108 million in 2013, $73 million in 2012 and $60 million in 2011. The table below shows our supermarket storing activity and our total food store square...

  • Page 89
    ... Average total assets ...Average taxes receivable (1) ...Average LIFO reserve ...Average accumulated depreciation and amortization...Average trade accounts payable ...Average accrued salaries and wages ...Average other current liabilities (2) ...Adjustment for Harris Teeter (3) ...Rent x 8...Average...

  • Page 90
    ...fair market value, reduced by estimated direct costs of disposal. We recorded asset impairments in the normal course of business totaling $39 million in 2013, $18 million in 2012 and $37 million in 2011. We record costs to reduce the carrying value of long-lived assets in the Consolidated Statements...

  • Page 91
    ...the division's goodwill over the implied fair value. In 2013, goodwill increased $901 million due to our merger with Harris Teeter which closed on January 28, 2014. For additional information related to the allocation of the Harris Teeter purchase price, refer to Note 2 to the Consolidated Financial...

  • Page 92
    ...Harris Teeter merger occurring close to year end, the expected rate of return on pension plan assets acquired in the Harris Teeter merger did not affect our net periodic benefit cost in 2013. For 2013 and 2012, we assumed a pension plan investment return rate of 8.5%. Our pension plan's average rate...

  • Page 93
    ...2011 to employee 401(k) retirement savings accounts. The 401(k) retirement savings account plans provide to eligible employees both matching contributions and automatic contributions from the Company based on participant contributions, plan compensation, and length of service. Multi-Employer Pension...

  • Page 94
    ... year and have grown at a compound annual rate of approximately 8% since 2008. In 2014, we expect to contribute approximately $250 million to multi-employer pension plans, subject to collective bargaining and capital market conditions. Excluding all payments to the UFCW consolidated pension plan...

  • Page 95
    ...based payments granted. We recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. In addition, we record expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the grant date...

  • Page 96
    ... due to Kroger prefunding $250 million of employee benefits at the end of 2012. These amounts are also net of cash contributions to our Company-sponsored defined benefit pension plans totaling $100 million in 2013, $71 million in 2012 and $52 million in 2011. The amount of cash paid for income taxes...

  • Page 97
    ...long-term debt, primarily to finance our merger with Harris Teeter, and a reduction in payments on long-term debt and treasury stock purchases, offset partially by net payments on our commercial paper program. The decrease in the amount of cash used for financing activities in 2012, compared to 2011...

  • Page 98
    ...paper on favorable terms based on our past experience. We also currently plan to continue repurchases of common shares under the Company's share repurchase programs. We may use our commercial paper program to fund debt maturities during 2014 but do not currently expect to use the program permanently...

  • Page 99
    ... management fees for facilities operated by third parties and outside service contracts. Any upfront vendor allowances or incentives associated with outstanding purchase commitments are recorded as either current or long-term liabilities in our Consolidated Balance Sheets. As of February 1, 2014...

  • Page 100
    ...earnings from the Harris Teeter merger. Thereafter, we would expect to return to our 8 - 11% long-term growth rate. •฀ We฀expect฀identical฀supermarket฀sales฀growth,฀excluding฀fuel฀sales,฀of฀2.5%-3.5%฀in฀fiscal฀year฀2014. •฀ We฀ expect฀ full-year฀ FIFO฀ non...

  • Page 101
    ... years, excluding mergers, acquisitions and purchases of leased facilities, to accomplish our strategy. We expect total food store square footage for 2014 to grow approximately 1.8% before mergers, acquisitions and operational closings. •฀ For฀2014,฀we฀expect฀our฀effective฀tax฀rate...

  • Page 102
    ... 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. •฀ Changes฀in฀our฀product฀mix฀may฀negatively฀affect฀certain฀financial฀indicators.฀For...

  • Page 103
    ... of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly...

  • Page 104
    ...described in Management's Report on Internal Control Over Financial Reporting, management has excluded Harris Teeter Supermarkets, Inc. from its assessment of internal control over financial reporting as of February 1, 2014 because it was acquired by the Company in a purchase business combination on...

  • Page 105
    ... LIABILITIES Current liabilities Current portion of long-term debt including obligations under capital leases and financing obligations ...Trade accounts payable...Accrued salaries and wages ...Deferred income taxes ...Other current liabilities...Total current liabilities...Long-term debt including...

  • Page 106
    ... ROGER CO. CONSOLIDATED STATEMENTS OF OPER ATIONS Years Ended February 1, 2014, February 2, 2013 and January 28, 2012 (In millions, except per share amounts) 2013 (52 weeks) 2012 (53 weeks) 2011 (52 weeks) Sales ...Merchandise costs, including advertising, warehousing, and transportation, excluding...

  • Page 107
    ..., 2012 (In millions) 2013 (52 weeks) 2012 (53 weeks) 2011 (52 weeks) Net earnings including noncontrolling interests ...Other comprehensive income (loss) Unrealized gain on available for sale securities, net of income tax (1) ...Change in pension and other postretirement defined benefit plans, net...

  • Page 108
    ... 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 payable...

  • Page 109
    ... per share amounts) Balances at January 29, 2011 ...Issuance of common stock: Stock options exercised ...Restricted stock issued ...Treasury stock activity: Treasury stock purchases, at cost ...Stock options exchanged ...Share-based employee compensation ...Other comprehensive loss net of income tax...

  • Page 110
    ... on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory. In addition...

  • Page 111
    ...and current economic conditions. Impairment is recognized for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. The Company recorded asset impairments in the normal course of business totaling $39, $18 and $37 in 2013, 2012 and 2011...

  • Page 112
    ... 2, 2013 ...Additions ...Payments ...Other ...Assumed from Harris Teeter ...Balance at February 1, 2014 ...Interest Rate Risk Management $ 55 6 (10) (7) 44 7 (9) (2) 18 $ 58 The Company uses derivative instruments primarily to manage its exposure to changes in interest rates. The Company's current...

  • Page 113
    ... multi-employer plans and the United Food and Commercial Workers International Union ("UFCW") consolidated fund. The Company administers and makes contributions to the employee 401(k) retirement savings accounts. Contributions to the employee 401(k) retirement savings accounts are expensed when...

  • Page 114
    ... summarizes the changes in the Company's self-insurance liability through February 1, 2014. 2013 2012 2011 Beginning balance ...$ 537 Expense ...220 Claim payments ...(215) Assumed from Harris Teeter ...27 Ending balance ...569 Less: Current portion ...(224) Long-term portion ...$ 345 $ 529 215...

  • Page 115
    ... Book overdrafts are included in trade accounts payable and accrued salaries and wages. Deposits In-Transit Deposits in-transit generally represent funds deposited to the Company's bank accounts at the end of the year related to sales, a majority of which were paid for with debit cards, credit cards...

  • Page 116
    ... of produce, floral, meat, seafood, deli and bakery. Consists primarily of jewelry store sales, outside manufacturing sales and sales from entities not controlled by the Company. MERGER 2. On January 28, 2014, the Company closed its merger with Harris Teeter by purchasing 100% of the Harris Teeter...

  • Page 117
    ... plant and equipment ...Intangibles ...Other assets ...Total Assets, excluding Goodwill...LIABILITIES Current portion of long-term debt including obligations under capital leases and financing obligations...Trade accounts payable ...Accrued salaries and wages ...Deferred income taxes...Other current...

  • Page 118
    ...for additional information regarding the merger. 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 conditions...

  • Page 119
    ... as a result of the merger with Harris Teeter. See Note 2 for additional information regarding the merger. The following table summarizes the Company's intangible assets balance through February 1, 2014. 2013 2012 Gross carrying Accumulated Gross carrying Accumulated amount amortization (1) amount...

  • Page 120
    ...amendment of prior years' tax returns to claim the additional benefit available in years still under review by the Internal Revenue Service. The 2011 effective tax rate was significantly lower than 2013 and 2012 due to the effect on pre-tax income of the UFCW consolidated pension plan charge of $953...

  • Page 121
    ... ...Current deferred taxes...Long-term deferred tax assets: Compensation related costs ...Lease accounting...Closed store reserves ...Insurance related costs ...Net operating loss and credit carryforwards ...Other...Subtotal ...Valuation allowance ...Total long-term deferred tax assets ...Long-term...

  • Page 122
    ...tax years beginning on or after January 1, 2014. The Company is currently assessing these rules and their effect on its financial statements, and believes adoption of these regulations will not have an effect on net income and will not have a material effect on the reclassification between long-term...

  • Page 123
    ... Ratio of not less than 1.70:1.00. In the first quarter of 2012, the covenants were amended to exclude up to $1,000 in expense related to the Company's commitment to fund the UFCW consolidated pension plan. The Company may repay the Credit Agreement in whole or in part at any time without premium...

  • Page 124
    ... directors of the Company or (iii) both a change of control and a below investment grade rating. The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2013, and for the years subsequent to 2013 are: 2014 ...2015 ...2016 ...2017 ...2018 ...Thereafter ...Total debt...

  • Page 125
    ... Financial Policy Committee of the Board of Directors. These guidelines may change as the Company's needs dictate. Fair Value Interest Rate Swaps The table below summarizes the outstanding interest rate swaps designated as fair value hedges as of February 1, 2014 and February 2, 2013. 2013 Pay Pay...

  • Page 126
    ... its forecasted issuances of debt in fiscal year 2013. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of February 2, 2013, the fair value of the interest rate swaps was recorded in other assets and other long-term liabilities for $14...

  • Page 127
    ... the Company expects to utilize or take delivery in a reasonable amount of time in the normal course of business qualify as normal purchases and normal sales. 8. F A I R VA L U E M E A S U R E M E N T S GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value...

  • Page 128
    ... 1, 2014 and February 2, 2013: February 1, 2014 Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Available-for-Sale Securities ...Warrants ...Long-Lived Assets...

  • Page 129
    NOTES F A I R VA L U E OF TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED 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 or similar issues adjusted ...

  • Page 130
    ... range from 10 to 20 years with options to renew for varying terms. Terms of certain leases include escalation clauses, percentage rent based on sales or payment of executory costs such as property taxes, utilities or insurance and maintenance. Rent expense for leases with escalation clauses...

  • Page 131
    ... employees 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 options under the fair value recognition provisions. Under this method, the Company recognizes compensation expense for all share-based payments granted...

  • Page 132
    ... 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 2010...Granted ...Exercised...Canceled or Expired ...Outstanding, year-end 2011 ...Granted...

  • Page 133
    ... used to record stock-based compensation expense in the Consolidated Statements of Operations. The increase in the fair value of the stock options granted during 2013, compared to 2012, resulted primarily from an increase in the Company's share price, an increase in the weighted average risk-free...

  • Page 134
    ...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 $20, $23 and $33 in 2013, 2012 and 2011, respectively. Shares issued as a result of stock option exercises...

  • Page 135
    ... 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 136
    ... 2014 Total 2014 Net actuarial loss (gain) ...Prior service cost (credit) ...Total... $52 1 $53 $ (6) (7) $(13) $46 (6) $40 Other changes recognized in other comprehensive income in 2013, 2012 and 2011 were as follows (pre-tax): Pension Benefits 2013 2012 2011 Other Benefits 2013 2012 2011 2013...

  • Page 137
    ... pension plan assets acquired and liabilities assumed in the Harris Teeter merger did not affect the Company's net periodic benefit cost in 2013 due to the merger occurring close to year end. As of February 1, 2014 and February 2, 2013, pension plan assets do not include common shares of The Kroger...

  • Page 138
    ... close to year end, the expected rate of return on pension plan assets acquired in the Harris Teeter merger did not affect our net periodic benefit costs in 2013. For 2013, 2012 and 2011, the Company assumed a pension plan investment return rate of 8.5%. The Company pension plan's average rate...

  • Page 139
    ... calculating the pension obligation. Pension Benefits Qualified Plans Non-Qualified Plan 2013 2012 2011 2013 2012 2011 Other Benefits 2013 2012 2011 Components of net periodic benefit cost: Service cost ...Interest cost ...Expected return on plan assets...Amortization of: Prior service cost (credit...

  • Page 140
    ...In addition, the Company expects 401(k) Retirement Savings Account Plan cash contributions and expense from automatic and matching contributions to participants to increase approximately $30 in 2014 compared to 2013 primarily due to the Harris Teeter merger. Assumed health care cost trend rates have...

  • Page 141
    ... the Plan's assets at fair value as of February 1, 2014 and February 2, 2013: ASSETS AT F A I R VA L U E AS OF F E B R U A R Y 1 , 2 014 Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Quoted Prices in Active Markets for Identical Assets (Level 1) Total...

  • Page 142
    ... valued using a Net Asset Value (NAV) provided by the manager of each fund. The NAV is based on the underlying net assets owned by the fund, divided by the number of shares outstanding. The NAV's unit price is quoted on a private market that is not active. However, the NAV is based on the fair value...

  • Page 143
    ... the fair value of certain financial instruments could result in a different fair value measurement. The Company contributed and expensed $148, $140 and $130 to employee 401(k) retirement savings accounts in 2013, 2012 and 2011, respectively. The 401(k) retirement savings account plan provides...

  • Page 144
    ... $858 (pre-tax). In the fourth quarter of 2011, the Company contributed $650 to the consolidated multi-employer pension plan of which $600 was allocated to the UAAL and $50 was allocated to service and interest costs and expensed in 2011. In the fourth quarter of 2012, the Company contributed $258...

  • Page 145
    ... information about the Company's multi-employer pension plans: Pension FIP/RP Protection Status Act Zone Status Pending/ 2013 2012 Implemented Multi-Employer Contributions Surcharge 2013 2012 2011 Imposed (7) Pension Fund EIN / Pension Plan Number SO CA UFCW Unions & Food Employers Joint Pension...

  • Page 146
    ... Plan United Food & Commercial Workers Intl Union - Industry Pension Fund Western Conference of Teamsters Pension Plan Central States, Southeast & Southwest Areas Pension Plan March 2014 (2) to June 2014 July 2013 (2) to June 2017 June 2014 to October 2014 May 2016 to December 2016 September 2015...

  • Page 147
    ...Company also contributes to various other multi-employer benefit plans that provide health and welfare benefits to active and retired participants. Total contributions made by the Company to these other multi-employer benefit plans were approximately $1,100 in 2013, $1,100 in 2012 and $1,000 in 2011...

  • Page 148
    ... reported net within sales. Also, certain expense transactions previously reported in operating, general, and administrative in the Consolidated Statements of Operations are now reported within merchandise costs. Prior quarter amounts have been revised or reclassified to conform to the current year...

  • Page 149
    NOTES TO CONSOLIDATED FINANCI AL STATEMENTS, CONCLUDED Quarter First Second Third Fourth Total Year (16 Weeks) (12 Weeks) (12 Weeks) (13 Weeks) (53 Weeks) 2012 Sales ...Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below ...Operating,...

  • Page 150
    ... in the Kroger Stock Exchange, or if they wish to sell shares they have purchased through this plan, they should contact: Computershare Plan Managers P.O. Box 43021 Providence, RI 02940 Phone 800-872-3307 Questions regarding Kroger's 401(k) plans should be directed to the employee's Human Resources...

  • Page 151
    ... Division Bruce A. Macaulay Columbus Division Sukanya Madlinger Cincinnati Division Stephen M. McKinney Fry's Gary Millerchip Kroger Personal Finance Frederick J. Morganthall II Harris Teeter Jeffrey A. Parker Convenience Stores Darel Pfeiff Turkey Hill Minit Markets Mark W. Salisbury Tom Thumb...

  • Page 152
    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