Kroger 2015 Annual Report Download - page 81

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A-7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUR BUSINESS
The Kroger Co. was founded in 1883 and incorporated in 1902. Kroger is one of the nation’s largest
retailers, as measured by revenue, operating 2,778 supermarket and multi-department stores under a
variety of local banner names in 35 states and the District of Columbia. Of these stores, 1,387 have fuel
centers. We also operate 784 convenience stores, either directly or through franchisees, 323 fine jewelry
stores and an online retailer.
We operate 38 food production plants, primarily bakeries and dairies, which supply approximately
40% of the corporate brand units sold in our supermarkets.
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 our consolidated sales and EBITDA, is our only
reportable segment.
On December 18, 2015, we closed our merger with Roundy’s by purchasing 100% of the Roundy’s
outstanding common stock for $3.60 per share and assuming Roundy’s outstanding debt, for a purchase
price of $866 million. Roundy’s is included in our ending Consolidated Balance Sheets for 2015 and
in our Consolidated Statements of Operations for the last six weeks of 2015. Certain 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 Roundy’s.
On August 18, 2014, we closed our merger with Vitacost.com by purchasing 100% of the Vitacost.
com outstanding common stock for $8.00 per share or $287 million. Vitacost.com is included in our ending
Consolidated Balance Sheets and Consolidated Statements of Operations for 2014 and 2015. See Note 2
to the Consolidated Financial Statements for more information related to our merger with Vitacost.com.
On January 28, 2014, we closed our merger with Harris Teeter by purchasing 100% of the Harris
Teeter outstanding common stock for approximately $2.4 billion. Harris Teeter is included in our ending
Consolidated Balance Sheets for 2014 and 2015 and in our Consolidated Statements of Operations for
2014 and 2015. Due to the timing of the merger closing late in fiscal year 2013, its results of operations
were not material to our consolidated results of operations for 2013. Certain 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.
OUR 2015 PERFORMANCE
We achieved outstanding results in 2015. 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 supermarket 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 2015 net earnings were $2.0
billion or $2.06 per diluted share, compared to $1.7 billion, or $1.72 per diluted share for 2014. All share
and per share amounts presented are reflective of the two-for-one stock split that began trading at the
split adjusted price on July 14, 2015.
Our net earnings for 2015 include a $110 million expense to operating, general, and administrative
(“OG&A”) for certain contributions to the United Food and Commercial Workers International Union (“UFCW”)
Consolidated Pension Plan (“2015 UFCW Contributions”) made during the third and fourth quarters of
2015. In addition, our net earnings for 2015 include a lower last-in, first-out (“LIFO”) charge compared to
2014. Net earnings for 2014 include a net $39 million after-tax charge for an $87 million ($56 million after-
tax) charge to OG&A due to the commitments and withdrawal liabilities arising from restructuring of certain
multi-employer obligations (“2014 Multi-Employer Pension Plan Obligation”) to help stabilize associates’
future pension benefits, offset partially by the benefits from certain tax items of $17 million (“2014 Adjusted