Kroger 2014 Annual Report Download

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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 4 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 2 014 A N N UA L R E P O R T

  • Page 2
    Kroger Bring it all home. Convenience Stores Jewelry Stores Specialty Retailer Services

  • Page 3
    ... SHAREHOLDERS : Thanks to Kroger's 400,000 associates - who strive to provide friendly service and the freshest products to every customer, every shopping trip - 2014 was a record-breaking year. •฀ Our฀revenue฀reached฀$108.5฀billion฀-฀an฀all-time฀high; •฀ Our฀stock฀price...

  • Page 4
    ... Improved฀return฀on฀invested฀capital฀even฀as฀we฀increased฀capital฀investment;฀and •฀ Captured฀incremental฀market฀share฀for฀the฀10th consecutive year. As a result, we exceeded our long-term, net earnings per diluted share growth rate of 8-11% in fiscal 2014, and...

  • Page 5
    ... total฀ compensation฀ package฀ that฀ includes฀ solid฀ wages,฀ good฀ quality,฀affordable฀health฀care,฀and฀retirement฀benefits.฀In฀2014,฀Kroger฀invested฀$1.8฀billion฀in฀our฀associates'฀ health care. Kroger฀ is฀ also฀ one of the safest companies in...

  • Page 6
    ... Corporations for Women Business Enterprises by฀the฀ Women's Business Enterprise National Council. Taking Care of the Planet In฀2014,฀we฀continued฀our฀12-year฀journey฀to฀reduce฀our฀energy฀consumption฀while฀expanding฀square฀ footage and sales. We have reduced energy...

  • Page 7
    ...฀ Kroger's฀ Columbus฀ division,฀ who฀ retired฀ in฀ March฀ after฀ 42฀years฀of฀service฀with฀the฀Company;฀and฀Katy฀Barclay,฀senior฀vice฀president฀of฀human฀resources,฀who฀retires฀ in฀the฀fall฀after฀five฀years฀developing฀Kroger's฀human...

  • Page 8
    ...฀Co.฀Community฀Service฀Award฀for฀2014: 2014 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-Atlantic Nashville QFC Ralphs Smith...

  • Page 9
    ...฀shares฀at฀the฀close฀of฀business฀on฀the฀record฀date,฀or฀their฀duly฀appointed฀ proxies,฀may฀attend฀the฀meeting.฀ If you plan to attend the meeting, you must bring the notice of the meeting that was separately mailed to you or the top portion of your proxy card...

  • Page 10
    ...฀ located฀ at฀ 1014฀ Vine฀ Street,฀ Cincinnati,฀ Ohio฀ 45202-1100.฀ Our฀ telephone฀number฀is฀513-762-4000.฀This฀Proxy฀Statement฀and฀Annual฀Report,฀and฀the฀accompanying฀proxy฀ card฀were฀first฀furnished฀to฀shareholders฀on฀May฀13,฀2015...

  • Page 11
    ...฀materials฀to฀our฀shareholders฀primarily฀ on฀the฀Internet.฀We฀believe฀that฀this฀process฀should฀expedite฀shareholders'฀receipt฀of฀proxy฀materials,฀lower฀ the฀cost฀of฀our฀annual฀meeting฀and฀help฀to฀conserve฀natural฀resources.฀On฀or...

  • Page 12
    ...and฀internationally฀with฀major฀ retailers, financial institutions and other consumer facing companies. Before฀ joining฀ McKinsey,฀ Ms.฀ Aufreiter฀ spent฀ three฀ years฀ in฀ financial฀ services฀ working฀ in฀ corporate฀ finance฀ and฀ investment฀ banking.฀ She...

  • Page 13
    ...฀ Program฀ of฀ the฀ Financial฀ Times.฀ His฀ strong insights into corporate governance form the foundation of his leadership฀role฀as฀Lead฀Director฀on฀the฀Board. 1999 Susan J. Kropf Ms.฀Kropf฀was฀President฀and฀Chief฀Operating฀Officer฀of฀Avon฀Products...

  • Page 14
    ...CFO,฀and฀played฀ a฀major฀role฀as฀architect฀of฀Kroger's฀strategic฀plan.฀His฀service฀on฀the฀ compensation,฀ executive,฀ and฀ investment฀ committees฀ of฀ Cincinnati฀ Financial฀Corporation฀adds฀depth฀to฀his฀extensive฀retail฀experience. Jorge...

  • Page 15
    ...฀2000฀to฀2014.฀Mr.฀Moore฀is฀chair฀of฀the฀Compensation฀Committee฀ and฀a฀member฀of฀the฀Corporate฀Governance฀Committee. Mr.฀ Moore฀ has฀ over฀ 30฀ years฀ of฀ general฀ management฀ experience฀ in฀ public฀and฀private฀companies.฀He฀has...

  • Page 16
    ...Sargent฀is฀Chairman฀and฀Chief฀Executive฀Officer฀of฀Staples,฀Inc.,฀a฀ 59 consumer฀products฀retailer,฀where฀he฀has฀been฀employed฀since฀1989.฀ Prior฀to฀joining฀Staples,฀Mr.฀Sargent฀spent฀10฀years฀with฀Kroger฀in฀various฀ positions.฀In...

  • Page 17
    ...executive฀offices฀not฀later฀than฀January฀13,฀2016.฀Such฀notice฀should฀include฀the฀name,฀age,฀business฀ address and residence address of such person, the principal occupation or employment of such person, the number฀of฀Kroger฀common฀shares฀owned฀of฀record...

  • Page 18
    ...Kroger Co. Policy on Business Ethics,฀applicable฀to฀all฀officers,฀employees฀ and฀directors,฀including฀Kroger's฀principal฀executive,฀financial,฀and฀accounting฀officers.฀The฀Policy฀is฀available฀ on฀our฀corporate฀website฀at฀ir.kroger.com.฀Shareholders...

  • Page 19
    ...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฀ (helpline@kroger...

  • Page 20
    ...฀ non-employee฀ directors฀ and฀ one฀ management฀ director,฀ Mr.฀ McMullen,฀ the฀ Chairman฀ and฀ CEO.฀ The฀ Board฀ has฀ established฀ five฀ standing฀ committees฀ -฀ audit,฀ compensation,฀corporate฀governance,฀financial฀policy,฀and฀public...

  • Page 21
    ...฀ to฀focus฀on฀key฀policy฀and฀operational฀issues฀and฀helps฀the฀Company฀operate฀in฀the฀long-term฀interests฀of฀ shareholders.฀Additionally,฀this฀structure฀provides฀an฀effective฀balance฀between฀strong฀Company฀leadership฀ and฀appropriate...

  • Page 22
    ...฀aggressive฀business฀plan฀objectives฀for฀sales,฀net฀earnings,฀operating฀costs฀and฀our฀strategic฀plan.฀ The฀compensation฀paid฀to฀our฀named฀executive฀officers฀reflected฀this฀fact฀as฀the฀annual฀performance-based฀ cash฀bonus฀paid...

  • Page 23
    ...shareholders. Third, compensation should create strong incentives for฀the฀officers฀(a)฀to฀achieve฀the฀annual฀business฀plan฀targets฀established฀by฀the฀Board,฀and฀(b)฀to฀achieve฀ Kroger's฀ long-term฀ strategic฀ objectives.฀ In฀ developing฀ compensation...

  • Page 24
    ...฀ restricted฀stock฀and฀performance฀unit฀values;฀the฀value฀of฀any฀perquisites;฀retirement฀benefits;฀company฀ paid฀health฀and฀welfare฀benefits;฀banked฀vacation;฀severance฀benefits฀available฀under฀The฀Kroger฀Co.฀ Employee฀ Protection฀ Plan...

  • Page 25
    ...awards;฀and฀ •฀ Total฀direct฀compensation฀(the฀sum฀of฀all฀these฀elements).฀ The฀consultant฀compares฀these฀elements฀against฀those฀of฀other฀companies฀in฀a฀group฀of฀publicly-traded฀ food฀and฀drug฀retailers.฀For฀2014,฀our฀peer฀group...

  • Page 26
    ... COMPENSATION AT KROGER Compensation฀for฀our฀named฀executive฀officers฀is฀comprised฀of฀the฀following: •฀ Salary;฀ •฀ Performance-Based฀Annual฀Cash฀Bonus฀(annual,฀non-equity฀incentive฀pay Performance-Based฀ Long-Term฀ Compensation฀ (long-term...

  • Page 27
    ...฀the฀annual฀review฀of฀compensation฀in฀June฀for฀each฀ named฀executive฀officer฀is฀shown฀below.฀Actual฀bonus฀payouts฀are฀prorated฀to฀reflect฀changes,฀if฀any,฀to฀bonus฀ potentials during the year. 2012 Annual Bonus Potential 2013 2014 W.฀Rodney...

  • Page 28
    ...฀for฀the฀named฀executive฀officers฀in฀prior฀years฀demonstrates฀ the฀variability฀of฀annual฀cash฀bonus฀incentive฀compensation฀and฀its฀strong฀links฀to฀our฀performance: Fiscal Year Annual Cash Bonus Percentage 2014 2013 2012 2011 2010 2009 2008 2007...

  • Page 29
    ...named฀executive฀officers,฀participate฀in฀each฀plan.฀ •฀ Awards฀include฀both฀cash฀and฀performance฀units.฀ Ø฀ The฀cash฀bonus฀base฀equals฀the฀executive's฀salary฀at฀the฀end฀of฀the฀fiscal฀year฀preceding฀the฀plan฀ adoption date (or for...

  • Page 30
    ...฀of฀the฀long-term฀performance฀based฀plans฀for฀the฀years฀shown: 2012 Plan Performance Period Payout Date Cash Bonus Base 2013 Plan 2014 Plan 2015 Plan 2012฀to฀2014 March฀2015 Salary฀at฀end฀of฀ fiscal฀year฀2011* 2013฀to฀2015 March฀2016 Salary฀at฀end...

  • Page 31
    ...of฀the฀four฀dates฀of฀Committee฀meetings฀conducted฀after฀Kroger's฀public฀ release฀of฀its฀quarterly฀earnings฀results.฀During฀2014,฀Kroger฀awarded฀3,023,711฀shares฀of฀restricted฀stock฀to฀ approximately฀21,299฀employees,฀including฀the฀named...

  • Page 32
    ...฀Kroger฀Co.฀Employee฀Protection฀Plan,฀or฀KEPP,฀in฀which฀all฀of฀our฀management฀ employees฀and฀administrative฀support฀personnel฀whose฀employment฀is฀not฀covered฀by฀a฀collective฀bargaining฀ agreement,฀with฀at฀least฀one฀year฀of฀service...

  • Page 33
    ...to฀the฀covered฀employees฀should฀be฀deductible฀by฀Kroger.฀ 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...

  • Page 34
    ...฀the฀fiscal฀years฀presented. Change in Pension Value and Nonqualified Non-Equity Deferred Incentive Plan Compensation All Other Earnings Compensation Compensation (4) (5) (6) Name and Principal Position (1) Fiscal Year 2014 2013 2012 2014 2013 2012 Salary Stock Awards (2) Option Awards...

  • Page 35
    ...number฀ of factors, including age, years of service, average annual earnings and the assumptions used to determine the present value, such as the discount rate. The change in the actuarial present value of accumulated pension฀benefits฀for฀2014฀was฀significantly฀greater฀than฀2013...

  • Page 36
    ...฀for฀Mr.฀Ellis฀and฀Ms.฀Barclay฀represent฀the฀Company's฀matching฀ contribution฀to฀the฀their฀401(k)฀savings฀plan฀accounts.฀The฀amount฀reported฀in฀the฀"Other"฀column฀for฀ Mr.฀Dillon฀represents฀the฀value฀of฀a฀retirement฀gift.฀ 34

  • Page 37
    ...฀executive฀officers฀in฀fiscal฀2014. All Other Stock Estimated Future Awards: Payouts Under Number of Equity Incentive Shares of Plan Awards Stock or Target Maximum Units 4) All Other Option Awards: Number of Securities Underlying Options (#) (5) Name W.฀Rodney฀McMullen Grant Date...

  • Page 38
    ...฀Long-Term฀Cash฀Bonus฀Plan,฀which฀covers฀performance฀during฀fiscal฀ years฀2014,฀2015฀and฀2016.฀The฀cash฀bonus฀potential฀amount฀equals฀the฀annual฀base฀salary฀of฀the฀named฀ executive฀officers฀as฀of฀the฀last฀day฀of฀fiscal฀2013...

  • Page 39
    ...on฀the฀closing฀price฀of฀Kroger's฀common฀shares฀of฀ $69.05฀on฀January฀30,฀2015,฀the฀last฀trading฀day฀of฀fiscal฀2014.฀ Stock Awards Equity Equity Incentive Incentive Plan Plan Awards: Awards: Number of Market or Market Unearned Payout Value Number of Value of...

  • Page 40
    ... Incentive Plan Plan Awards: Awards: Number of Market or Market Unearned Payout Value Number of Value of of Unearned Shares, Securities Shares or Shares, Units or Number of Underlying Units of Units or Other Shares or Unexercised Option Units of Stock Stock That Rights That Other Rights Options...

  • Page 41
    ...฀shares฀on฀12/17/2016. (18)฀฀Restricted฀stock฀vests฀in฀equal฀amounts฀on฀7/12/2015฀and฀7/12/2016. (19)฀฀Performance฀ units฀ granted฀ under฀ the฀ 2013฀ Long-Term฀ Incentive฀ Plan฀ are฀ earned฀ as฀ of฀ the฀ last฀ day฀ of฀ fiscal฀ year...

  • Page 42
    ...฀2012฀long-term฀incentive฀plan. Option Awards(1) Number of Shares Acquired Value Realized on Exercise on Exercise (#) ($) Stock Awards(2) Number of Shares Acquired Value Realized on Vesting on Vesting ($) (#) Name W.฀Rodney฀McMullen ...J.฀Michael฀Schlotman ...Michael฀L.฀Ellis...

  • Page 43
    ... date for financial reporting purposes. Additional assumptions used in calculating the present฀values฀are฀set฀forth฀in฀Note฀15฀to฀the฀consolidated฀financial฀statements฀in฀Kroger's฀10-K฀for฀fiscal฀ year฀2014฀ended฀January฀31,฀2015. (2)฀ The฀ benefits...

  • Page 44
    ...total฀earnings฀ (base฀salary฀and฀annual฀bonus)฀during฀the฀last฀ten฀calendar฀years฀of฀employment,฀reduced฀by฀1¼%฀times฀ years฀of฀credited฀service฀multiplied฀by฀the฀primary฀social฀security฀benefit;฀ •฀ normal฀retirement฀age฀is฀65...

  • Page 45
    ... 100%฀ of฀ their฀ annual฀ and฀ long-term฀ bonus฀ compensation.฀ The฀ Company฀ does฀ not฀ match฀ any฀deferral.฀Deferral฀account฀amounts฀are฀credited฀with฀interest฀at฀the฀rate฀representing฀ Kroger's฀cost฀of฀ ten-year฀ debt฀ as฀ determined...

  • Page 46
    ...Kroger's฀employee฀benefit฀plans)฀acquires฀20%฀or฀more฀of฀the฀voting฀ power฀of฀Kroger;฀ •฀ a฀merger,฀consolidation,฀share฀exchange,฀division,฀or฀other฀reorganization฀or฀transaction฀with฀Kroger฀ results฀ in฀ Kroger's฀ voting฀ securities...

  • Page 47
    ... ended Long-Term Cash Bonus(1) Forfeit฀all฀rights฀to฀bonuses฀ for which the three year performance period has not ended Involuntary Termination Voluntary Termination/ Retirement - Prior to minimum age and years of service(2) Voluntary Termination/ Retirement - After minimum age and years...

  • Page 48
    ...฀event฀will฀vary฀based฀on฀factors฀such฀as฀the฀timing฀during฀the฀year฀of฀such฀ event,฀the฀price฀of฀Kroger฀common฀shares,฀and฀the฀officer's฀age,฀length฀of฀service฀and฀compensation฀levels. Voluntary Involuntary Termination/ Termination...

  • Page 49
    ...Additional฀Vacation฀and฀Bonus ...Continued฀Health฀and฀Welfare฀Benefits(1) ...Stock฀Options(2) ...Restricted฀Stock(3) ...Performance฀Units(4) ...Long-Term฀Cash฀Bonus(5) ...Executive฀Group฀Life฀Insurance ...David B. Dillon(6) Accrued฀and฀Banked฀Vacation ...Severance...

  • Page 50
    ...fiscal฀2014฀compensation฀for฀non-employee฀directors.฀Mr.฀McMullen฀ does฀not฀receive฀compensation฀for฀his฀Board฀service. 2014 DIRECTOR COMPENSATION TABLE Change in Pension Value and Fees Nonqualified Earned Deferred or Paid Stock Option Compensation in Cash Awards Awards...

  • Page 51
    ...฀shares฀on฀December฀11,฀2014฀upon฀joining฀the฀Board. Non-employee฀directors฀first฀elected฀prior฀to฀July฀17,฀1997฀receive฀an฀unfunded฀retirement฀benefit฀equal฀ to฀the฀average฀cash฀compensation฀for฀the฀five฀calendar฀years฀preceding...

  • Page 52
    ... directors,฀the฀named฀executive฀officers,฀and฀the฀directors฀and฀executive฀officers฀as฀a฀group.฀The฀percentage฀ of฀ownership฀is฀based฀on฀491,597,775฀of฀Kroger฀common฀shares฀outstanding฀on฀February฀13,฀2015.฀Except฀as฀ otherwise฀noted...

  • Page 53
    ... were฀ timely฀ satisfied,฀ with฀ the฀ following฀ exception.฀ In฀ September฀ 2014,฀ Kevin฀ M.฀ Dougherty฀ was฀ 11฀days฀late฀in฀the฀filing฀of฀a฀Form฀4฀to฀report฀restricted฀stock฀awarded฀under฀a฀Company฀long-term฀incentive฀ plan฀due...

  • Page 54
    ...Staples'฀annual฀consolidated฀gross฀revenue.฀Kroger฀ periodically฀employs฀a฀bidding฀process฀or฀negotiations฀following฀a฀benchmarking฀of฀costs฀of฀products฀ from฀various฀vendors฀for฀the฀items฀purchased฀from฀Staples฀and฀awards฀the฀business...

  • Page 55
    ...publicly฀available฀annual฀ consolidated gross revenues. Transactions฀ where฀ all฀ Shareholders฀ Receive฀ Proportional฀ Benefits. Any transaction where the Related฀Person's฀interest฀arises฀solely฀from฀the฀ownership฀of฀Kroger฀common฀stock฀and฀all฀holders...

  • Page 56
    ... PricewaterhouseCoopers฀ LLP฀ the฀ audited฀ financial฀ statements฀ for฀ the฀ year฀ ended฀ January฀ 31,฀ 2015,฀ management's฀ assessment฀ of฀ the฀ effectiveness฀ of฀ the฀ Company's฀ internal฀ control฀ over฀ financial฀reporting฀as฀of฀January฀31...

  • Page 57
    ...฀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฀January฀31,฀2015,฀as฀filed฀with฀the฀SEC. This฀report฀is฀submitted฀by฀the฀Audit...

  • Page 58
    ...฀Pre-Approval฀ Policy.฀These฀fees฀also฀included฀services฀related฀to฀acquisition฀related฀due฀diligence. Tax Fees.฀Tax฀fees฀for฀fiscal฀2014฀and฀fiscal฀2013฀were฀for฀state฀tax฀compliance,฀tax฀audit฀support฀and฀ debt฀restructuring.฀ All...

  • Page 59
    ...฀report฀should฀be฀made฀available฀to฀shareholders฀on฀Kroger's฀website฀no฀later฀than฀October฀31,฀2015. SUPPORTING STATEMENT As฀long-term฀shareholders,฀we฀favor฀policies฀and฀practices฀that฀protect฀and฀enhance฀the฀value฀of฀our฀ investments...

  • Page 60
    ...,฀and฀dog฀food฀are฀some฀of฀the฀Kroger฀house฀brand฀items฀packaged฀in฀unrecyclable฀ plastic฀ pouches.฀ Private฀ label฀ items฀ account฀ for฀ a฀ quarter฀ of฀ all฀ sales-฀ nearly฀ $20฀ billion฀ annually.฀ Using฀ unrecyclable฀ packaging...

  • Page 61
    ...฀ocean฀debris. Companies฀who฀aspire฀to฀corporate฀sustainability฀yet฀use฀these฀risky฀materials฀need฀to฀explain฀why฀they฀use฀ unrecyclable฀packaging.฀Other฀companies฀who฀manufacture฀and฀sell฀food฀and฀household฀goods฀are฀moving฀ towards...

  • Page 62
    ...฀ items฀accounting฀for฀around฀21%฀of฀the฀company's฀revenue฀in฀2013.฀Consequently,฀food฀quality฀and฀safety฀ trends฀should฀be฀of฀top฀priority฀to฀the฀company.฀Kroger฀faces฀reputational฀risk฀and฀liability฀concerns฀if฀it฀sells฀ meat...

  • Page 63
    ...and฀nature฀thereof฀during฀fiscal฀year฀2014,฀together฀with฀the฀audited฀ financial฀ information฀ contained฀ in฀ our฀ 2014฀ Annual฀ Report฀ on฀ Form฀ 10-K฀ filed฀ with฀ the฀ SEC.฀ A copy of that report is available to shareholders on request without...

  • Page 64
    .... This procedure will reduce our printing costs and postage fees. Householding will not in any฀way฀affect฀dividend฀check฀mailings. If฀you฀are฀eligible฀for฀householding,฀but฀you฀and฀other฀shareholders฀of฀record฀with฀whom฀you฀share฀an฀ address฀currently...

  • Page 65
    2014 ANNUAL REPORT

  • Page 66
    ... available on Kroger's website at ir.kroger.com. The Kroger Co. Policy on Business Ethics addresses, among other things, the necessity of ensuring open communication within Kroger; potential conflicts of interests; compliance with all domestic and foreign laws, including those related to financial...

  • Page 67
    ... 10,137 5,296 0.390 Harris Teeter Supermarkets, Inc. ("Harris Teeter") is included in our ending Consolidated Balance Sheets for 2013 and 2014 and in our Consolidated Statements of Operations for 2014. Due to the timing of the merger closing late in fiscal year 2013, its results of operations were...

  • Page 68
    ... & Poor'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** 400 300 200 100 0 2009 2010 2011 2012 2013 2014 The Kroger Co. S&P 500 Index Peer Group Company Name/Index Base...

  • Page 69
    ... of Shares Purchased as Part of Publicly Announced Plans or Programs (3) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (4) (in millions) Period (1) Total Number of Shares Purchased (2) Average Price Paid Per Share First period - four weeks November 9, 2014...

  • Page 70
    ... than multi-department stores. They offer full-service grocery, pharmacy and health and beauty care departments as well as an expanded perishable offering and general merchandise area that includes apparel, home goods and toys. Price impact warehouse stores offer a "no-frills, low cost" warehouse...

  • Page 71
    ... prices versus open market purchases. As of January 31, 2015, we operated 37 manufacturing plants. These plants consisted of 17 dairies, nine deli or bakery plants, five grocery product plants, two beverage plants, two meat plants and two cheese plants. SEASONALITY The majority of our revenues...

  • Page 72
    ...2013. Year-over-year comparisons will be affected as a result. See Note 2 to the Consolidated Financial Statements for more information related to our merger with Harris Teeter. On August 18, 2014, we closed our merger with Vitacost.com by purchasing 100% of the Vitacost.com outstanding common stock...

  • Page 73
    ... in fiscal year 2012 (the "Extra Week"), continued investments in lower prices for our customers, the 2012 settlement with Visa and MasterCard and the reduction in our obligation to fund the UFCW Consolidated Pension Plan created in 2012, partially offset by an increase in FIFO non-fuel gross profit...

  • Page 74
    ... in 2013, due to an increase in FIFO non-fuel operating profit, excluding Harris Teeter, the effect of our merger with Harris Teeter and an increase in fuel operating profit, partially offset by continued investments in lower prices for our customers, increases in interest and tax expense and...

  • Page 75
    ... to 2013, was primarily due to our merger with Harris Teeter, which closed on January 28, 2014, and an increase in identical supermarket sales, excluding fuel, of 5.2%. Identical supermarket sales, excluding fuel for 2014, compared to 2013, increased primarily due to an increase in the number of...

  • Page 76
    ...sales. The merger with Harris Teeter, which closed late in fiscal year 2013, had a positive effect on our gross margin rate in 2014 since Harris Teeter has a higher gross margin rate as compared to total Company without Harris Teeter. The increase in fuel gross margin rate for 2014, compared to 2013...

  • Page 77
    ...offset by deflation in seafood and manufactured product. Operating, General and Administrative Expenses OG&A expenses consist primarily of employee-related costs such as wages, health care benefits and retirement plan costs, utilities and credit card fees. Rent expense, depreciation and amortization...

  • Page 78
    ... effect of our merger with Harris Teeter and increases in credit card fees and incentive plan costs, as a percentage of sales. OG&A expenses, as a percentage of sales excluding fuel and the 2013 Adjusted Items, decreased 17 basis points in 2013, compared to 2012, adjusted for the 2012 Adjusted Items...

  • Page 79
    ... of state income taxes. The 2013 benefit from the Domestic Manufacturing deduction was greater than 2014 and 2012 due to the amendment of prior years' tax returns to claim additional benefit available in years still under review by the Internal Revenue Service. The 2012 tax rate differed from the...

  • Page 80
    ... in 2014, $2.3 billion in 2013 and $122 million in 2012. Payments for acquisitions of $2.3 billion in 2013 relate to our merger with Harris Teeter. Refer to Note 2 to the Consolidated Financial Statements for more information on the merger with Harris Teeter. Capital investments for the purchase of...

  • Page 81
    ... only includes Harris Teeter in 2014. The calculation of the denominator excludes the assets and liabilities recorded as of February 1, 2014 for Harris Teeter due to the merger being completed at the end of 2013 ($ in millions): January 31, 2015 February 1, 2014 Return on Invested Capital Numerator...

  • Page 82
    ...we perform an impairment calculation, comparing projected undiscounted cash flows, utilizing current cash 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...

  • Page 83
    ... For additional information related to the allocation of the purchase price for Vitacost.com and Harris Teeter, refer to Note 2 to the Consolidated Financial Statements. The annual evaluation of goodwill performed for our other reporting units during the fourth quarter of 2014, 2013 and 2012 did not...

  • Page 84
    ... used by actuaries in calculating those amounts. Those assumptions are described in Note 15 to the Consolidated Financial Statements and include, among others, the discount rate, the expected long-term rate of return on plan assets, mortality and the rate of increases in compensation and health care...

  • Page 85
    ...2013 and $140 million in 2012 to employee 401(k) retirement savings accounts. The increase in 2014 is due to the effect of our merger with Harris Teeter. The 401(k) retirement savings account plans provide to eligible employees both matching contributions and automatic contributions from the Company...

  • Page 86
    ... compensation expense for all share-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...

  • Page 87
    ...all store inventories at our supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based 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...

  • Page 88
    ...-term debt, primarily to finance our merger with Harris Teeter, and a reduction in payments on longterm debt and treasury stock purchases, offset partially by net payments on our commercial paper program. Proceeds from the issuance of long-term debt were $576 million in 2014, $3.5 billion in 2013...

  • Page 89
    ... rate of 4.95%. The increase in financing obligations was due to partially funding our outstanding common share repurchases. Total debt, including both the current and long-term portions of capital lease and lease-financing obligations increased $2.4 billion to $11.3 billion as of year-end 2013...

  • Page 90
    ... estimate of the timing of future tax settlements cannot be determined. As of January 31, 2015, we had $1.3 billion of borrowings of commercial paper and no borrowings under our credit agreement. Amounts include contractual interest payments using the interest rate as of January 31, 2015, and stated...

  • Page 91
    ... 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 January 31, 2015...

  • Page 92
    ... and manufacturing facilities. Negotiations this year will be challenging as we must have competitive cost structures in each market while meeting our associates' needs for solid wages and good quality, affordable health care and retirement benefits. Various uncertainties and other factors could...

  • Page 93
    ... the inconsistent pace of the economic recovery; changes in inflation or deflation in product and operating costs; stock repurchases; our ability to retain pharmacy sales from third party payors; consolidation in the health care industry, including pharmacy benefit managers; our ability to negotiate...

  • Page 94
    ... consolidated balance sheets and the related consolidated statements of operations, comprehensive income, cash flows and changes in shareholders' equity present fairly, in all material respects, the financial position of The Kroger Co. and its subsidiaries at January 31, 2015 and February 1, 2014...

  • Page 95
    ... 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 96
    ... ROGER CO. CONSOLIDATED STATEMENTS OF OPER ATIONS Years Ended January 31, 2015, February 1, 2014 and February 2, 2013 (In millions, except per share amounts) 2014 (52 weeks) 2013 (52 weeks) 2012 (53 weeks) Sales ...Merchandise costs, including advertising, warehousing, and transportation, excluding...

  • Page 97
    ... 31, 2015, February 1, 2014 and February 2, 2013 (In millions) 2014 (52 weeks) 2013 (52 weeks) 2012 (53 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...

  • Page 98
    ... for acquisitions...Other ...Net cash used by investing activities ...Cash Flows From Financing Activities: Proceeds from issuance of long-term debt...Payments on long-term debt ...Net borrowings (payments) of commercial paper...Proceeds from issuance of capital stock ...Treasury stock purchases...

  • Page 99
    ...: Treasury stock purchases, at cost ...Stock options exchanged ...Share-based employee compensation ...Other comprehensive loss net of income tax of $(204) ...Other ...Cash dividends declared ($0.70 per common share) ...Net earnings including non-controlling interests ...Balances at January 31, 2015...

  • Page 100
    ...all store inventories at the Company's supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based 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...

  • Page 101
    ... calculation is performed, comparing projected undiscounted future cash flows, utilizing current cash flow information and expected growth 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...

  • Page 102
    ..." expense. Store Closing Costs The Company provides for closed store liabilities relating to the present value of the estimated remaining non-cancellable lease payments after the closing date, net of estimated subtenant income. The Company estimates the net lease liabilities using a discount rate to...

  • Page 103
    ...TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED Commodity Price Protection The Company enters into purchase commitments for various resources, including raw materials utilized in its manufacturing facilities and energy to be used in its stores, manufacturing facilities and administrative offices...

  • Page 104
    ... the Company's self-insurance liability through January 31, 2015. 2014 2013 2012 Beginning balance ...$ 569 $ 537 $ 529 Expense ...246 220 215 Claim payments ...(216) (215) (207) Assumed from Harris Teeter ...- 27 - Ending balance ...599 569 537 Less: Current portion ...(213) (224) (205) Long-term...

  • Page 105
    ... accounts payable" and "Accrued salaries and wages" in the Consolidated Balance Sheets. 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 106
    ... pharmacy, in-store health clinics and online sales by Vitacost.com. MERGERS 2. On August 18, 2014, the Company closed its merger with Vitacost.com, Inc. ("Vitacost.com") by purchasing 100% of the Vitacost.com outstanding common stock for $8.00 per share or $287. Vitacost.com is a leading online...

  • Page 107
    ... into Washington, D.C. The merger was accounted for under the purchase method of accounting and was financed through a combination of commercial paper and long-term debt (see Note 6). The fair value step up adjustment to Harris Teeter inventory as of the merger date is recorded in the LIFO reserve...

  • Page 108
    ... 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 109
    ... related expenses incurred by Harris Teeter, Vitacost.com and the Company. The pro forma information does not include efficiencies, cost reductions, synergies or investments in lower prices for our customers expected to result from the mergers. The unaudited pro forma financial information is...

  • Page 110
    ... merger with Vitacost.com. In 2013, the Company acquired definite and indefinite lived intangible assets totaling approximately $558 as a result of the merger with Harris Teeter. The following table summarizes the Company's intangible assets balance through January 31, 2015. 2014 2013 Gross carrying...

  • Page 111
    ... credits. The 2013 benefit from the Domestic Manufacturing Deduction differed from 2014 and 2012 due to additional deductions taken in 2013, as well as the amendment of prior years' tax returns to claim the additional benefit available in years still under review by the Internal Revenue Service...

  • Page 112
    NOTES TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED The tax effects of significant temporary differences that comprise tax balances were as follows: 2014 2013 Current deferred tax assets: Net operating loss and credit carryforwards ...Compensation related costs ...Other...Subtotal ......

  • Page 113
    ... of our 2008 and 2009 federal tax returns and is currently auditing tax years 2010 through 2013. The 2010 and 2011 audits are expected to be completed in 2015. On September 13, 2013, the U.S. Department of the Treasury and Internal Revenue Service released final tangible property regulations that...

  • Page 114
    ...TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED DEBT OBLIGATIONS Long-term debt consists of: 2014 2013 0.76% to 8.00% Senior notes due through 2043 ...5.00% to 12.75% Mortgages due in varying amounts through 2027 ...0.27% to 0.37% Commercial paper due through February 2015 ...Other ...Total debt...

  • Page 115
    ... the continuing 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 2014, and for the years subsequent to 2014 are: 2015 ...2016 ...2017 ...2018 ...2019 ...Thereafter...

  • Page 116
    ...designated as fair value hedges on the Company's Consolidated Balance Sheets: Asset Derivatives Fair Value January 31, February 1, Balance Sheet 2015 2014 Location Derivatives Designated as Fair Value Hedging Instruments Interest Rate Hedges ... $- $(2) (Other long-term liabilities)/Other assets...

  • Page 117
    ... Amount Gross Amount Recognized Liabilities Fair Value Interest Rate Swaps ...Commodity Price Protection $2 $- $2 $- $- $2 The Company enters into purchase commitments for various resources, including raw materials utilized in its manufacturing facilities and energy to be used in its stores...

  • Page 118
    ...-financial liabilities are primarily used in the impairment analysis of goodwill, other intangible assets, long-lived assets and in the valuation of store lease exit costs. The Company reviews goodwill and other intangible assets for impairment annually, during the fourth quarter of each fiscal year...

  • Page 119
    ... in the Harris Teeter merger being recorded at fair value as of January 28, 2014. See Note 2 for further discussion related to the mergers with Harris Teeter and Vitacost.com. 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...

  • Page 120
    ... in AOCI by component for the years ended February 1, 2014 and January 31, 2015: Cash Flow Hedging Activities (1) Available for sale Securities (1) Pension and Postretirement Defined Benefit Plans (1) Total (1) Balance at February 2, 2013 ...OCI before reclassifications (2) ...Amounts reclassified...

  • Page 121
    ... of store real estate, the Company operates primarily in leased facilities. Lease terms generally 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...

  • Page 122
    ...employee directors under various plans. The restrictions on these awards generally lapse between one and five years from the date of the awards. The Company records expense for restricted stock awards in an amount equal to the fair market value of the underlying shares on the grant date of the award...

  • Page 123
    ... TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED the 2005, 2008, 2011 and 2014 Long-Term Incentive Plans (the "Plans") for future restricted stock awards or shares issued to the extent performance criteria are achieved. The Company has the ability to convert shares available for stock options...

  • Page 124
    ...those 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 2014, compared to 2013, resulted primarily from an increase in the Company's share price, which decreased the expected dividend yield...

  • Page 125
    ...2015, there was $205 of total unrecognized compensation expense remaining 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...

  • Page 126
    ...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 Sheets. Actuarial gains or losses, prior service costs or credits and...

  • Page 127
    NOTES TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED Amounts in AOCI expected to be recognized as components of net periodic pension or postretirement benefit costs in the next fiscal year are as follows (pre-tax): Pension Benefits 2015 Other Benefits 2015 Total 2015 Net actuarial loss (gain) ...

  • Page 128
    ...acquired and liabilities assumed in the Harris Teeter merger did not affect the Company's net periodic benefit costs in 2013 due to the merger occurring close to year end. As of January 31, 2015 and February 1, 2014, pension plan assets do not include common shares of The Kroger Co. Weighted average...

  • Page 129
    ...CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED The Company's discount rate assumptions were intended to reflect the 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...

  • Page 130
    ... Plans 2014 2013 PBO at end of fiscal year ...ABO at end of fiscal year...Fair value of plan assets at end of year ... $4,102 $3,947 $3,189 $3,509 $3,360 $3,135 $304 $297 $ - $263 $256 $ - The following table provides information about the Company's estimated future benefit payments. Pension...

  • Page 131
    ... 401(k) retirement savings account plans cash contributions and expense from automatic and matching contributions to participants to be approximately $180 in 2015. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The Company used...

  • Page 132
    ...฀equivalents:฀The฀carrying฀value฀approximates฀fair฀value. •฀ Corporate฀ Stocks:฀ The฀ fair฀ values฀ of฀ these฀ securities฀ are฀ based฀ on฀ observable฀ market฀ quotations฀ for฀ identical assets and are valued at the closing price reported on the active...

  • Page 133
    ...฀trust฀funds฀are฀public฀investment฀vehicles฀ 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...

  • Page 134
    ... TO CONSOLIDATED FINANCI AL STATEMENTS, CONTINUED The Company contributed and expensed $177, $148 and $140 to employee 401(k) retirement savings accounts in 2014, 2013 and 2012, respectively. The 401(k) retirement savings account plans provide to eligible employees both matching contributions...

  • Page 135
    ... FINANCI AL STATEMENTS, CONTINUED The following table contains information about the Company's multi-employer pension plans: Pension FIP/RP Protection Status Act Zone Status Pending/ 2014 2013 Implemented Multi-Employer Contributions 2014 2013 2012 Pension Fund EIN / Pension Plan Number...

  • Page 136
    ... and Employers Pension Plan Oregon Retail Employees Pension Plan Bakery and Confectionary Union & Industry International Pension Fund Retail Food Employers & UFCW Local 711 Pension Denver Area Meat Cutters and Employers Pension Plan United Food & Commercial Workers Intl Union - Industry Pension Fund...

  • Page 137
    ...those goods or services. This guidance will be effective for the Company in the first quarter of its fiscal year ending January 27, 2018. Early adoption is not permitted. The Company is currently in the process of evaluating the effect of adoption of this ASU on the Consolidated Financial Statements...

  • Page 138
    ... results of operations for 2014 and 2013. Quarter First Second Third Fourth Total Year (16 Weeks) (12 Weeks) (12 Weeks) (12 Weeks) (52 Weeks) 2014 Sales ...$32,961 $25,310 $24,987 $25,207 $108,465 Merchandise costs, including advertising, warehousing, and transportation, excluding items shown...

  • Page 139
    NOTES TO CONSOLIDATED FINANCI AL STATEMENTS, CONCLUDED Quarter First Second Third Fourth Total Year (16 Weeks) (12 Weeks) (12 Weeks) (12 Weeks) (52 Weeks) 2013 Sales ...Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below ...Operating,...

  • Page 140
    ..., 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 Department or 1-800-2KROGER...

  • Page 141
    ... Cincinnati Division Stephen M. McKinney Fry's Gary Millerchip Kroger Personal Finance Mark C. Montgomery Axium Healthcare Pharmacies Frederick J. Morganthall II Harris Teeter Jeffrey A. Parker Convenience Stores & Supermarket Petroleum Darel Pfeiff Turkey Hill Minit Markets Mark W. Salisbury Tom...

  • Page 142
    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 COVER PRINTED ON PAPER CONTAINING AT LEAST 30% POST CONSUMER RECYCLED CONTENT