Kroger 2015 Annual Report Download - page 86

A-12
with GAAP. FIFO gross margin is an important measure used by management to evaluate merchandising
and operational effectiveness. Management believes FIFO gross margin is a useful metric to investors
and analysts because it measures our day-to-day merchandising and operational effectiveness.
Our FIFO gross margin rates, as a percentage of sales, were 22.18% in 2015, 21.30% in 2014 and
20.62% in 2013. Our retail fuel operations lower our FIFO gross margin rate, as a percentage of sales,
due to the very low FIFO gross margin rate on retail fuel as compared to non-fuel sales. Excluding the
effect of retail fuel operations, our FIFO gross margin rate decreased four basis points in 2015, as a
percentage of sales, compared to 2014. The decrease in FIFO gross margin rates, excluding retail fuel, in
2015, compared to 2014, resulted primarily from continued investments in lower prices for our customers
and increased shrink costs, partially offset by a reduction in transportation costs, as a percentage of
sales. Excluding the effect of retail fuel, our FIFO gross margin rate decreased three basis points in 2014,
as a percentage of sales, compared to 2013. The decrease in FIFO gross margin rates, excluding retail
fuel, in 2014, compared to 2013, resulted primarily from continued investments in lower prices for our
customers, offset partially by the effect of our merger with Harris Teeter and a reduction of warehouse
and transportation costs, as a percentage of sales.
LIFO Charge
The LIFO charge was $28 million in 2015, $147 million in 2014 and $52 million in 2013. In 2015,
we experienced lower product cost inflation, compared to 2014, which resulted in a lower LIFO charge.
In 2015, our LIFO charge primarily resulted from annualized product cost inflation related to pharmacy,
and was partially offset by annualized product cost deflation related to meat and dairy. In 2014, we
experienced higher product cost inflation, compared to 2013, which resulted in a higher LIFO charge.
In 2014, our LIFO charge primarily resulted from annualized product cost inflation related to pharmacy,
grocery, deli, meat and seafood. In 2013, our LIFO charge resulted primarily from an annualized product
cost inflation related to meat, seafood and pharmacy.
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
expense and interest expense are not included in OG&A.
OG&A expenses, as a percentage of sales, were 16.34% in 2015, 15.82% in 2014 and 15.45%
in 2013. The increase in OG&A expenses, as a percentage of sales, in 2015, compared to 2014,
resulted primarily from a decrease in retail fuel sales, increases in EMV chargebacks, company
sponsored pension, healthcare and incentive plan costs, as a percentage of sales, partially offset
by increased supermarket sales, the 2014 Multi-Employer Pension Plan Obligation, lower charges
for total contributions to The Kroger Foundation and UFCW Consolidated Pension Plan, productivity
improvements and effective cost controls at the store level. The increase in OG&A expenses, as a
percentage of sales, in 2014, compared to 2013, resulted primarily from the 2014 Contributions, the 2014
Multi-Employer Pension Plan Obligation, the effect of fuel, the effect of our merger with Harris Teeter
and increases in credit card fees and incentive plan costs, as a percentage of sales, partially offset by
increased supermarket sales growth, productivity improvements and effective cost controls at the store
level. Retail fuel sales lower our OG&A rate due to the very low OG&A rate, as a percentage of sales,
of retail fuel sales compared to non-fuel sales. The merger with Harris Teeter, which closed late in fiscal
year 2013, increased our OG&A rate, as a percentage of sales, since Harris Teeter has a higher OG&A
rate as compared to the total Company without Harris Teeter.
Our retail fuel operations reduce our overall OG&A rate, as a percentage of sales, due to the very
low OG&A rate on retail fuel sales as compared to non-fuel sales. OG&A expenses, as a percentage
of sales excluding fuel, the 2015 UFCW Contributions, the 2014 Contributions and the 2014 Multi-
Employer Pension Plan Obligation, decreased 9 basis points, compared to 2014. The decrease in our
adjusted OG&A rate in 2015, compared to 2014, resulted primarily from increased supermarket sales,
productivity improvements and effective cost controls at the store level, partially offset by increases in