Annual Report: Kroger

Annual Report:
Kroger
Andrew Green
ACG 2021-001

Executive Summary
• Once again Kroger’s performance compares very favorably to the
expectations for the year. At the beginning of 2007, sales were
expected to grow between 3%-5%, and year-end growth came out to
5.3% with net earnings totaling $1,181 million.
• Kroger’s business model is designed to produce sustainable earnings
per share growth in a variety of economic and competitive conditions.
While the objective of our business model is to create shareholder
value, Kroger’s #1 priority is serving customers.
• It is our opinion that our geographic diversity and strong market share
are advantages that allow us to continue to grow our business.
Economic conditions can affect our business, but our customer first
strategy and business model allow us to provide a strong value
proposition to customers whose spending may be curbed by economic
pressures.
Annual Report can be found at:
http://www.thekrogerco.com/finance/documents/proxystatement.pdf

Part A: Introduction
Kroger Co. CEO David B. Dillon
• The Kroger Company
1014 Vine Street
Cincinnati, Ohio 45202
• The Kroger Co. spans many
states with store formats that
include grocery and multidepartment
stores,
convenience stores and mall
jewelry stores.
• Last fiscal year ended: 2
February 2008

Part A. Audit Report
• PricewaterhouseCoopers LLP – one of the
world’s largest professional service firms –
reported that Kroger’s finances are in accord
with accounting principles in the U.S. and that
they maintained effective internal control of
financial reporting.

Part A. Stock Market Information
•Most recent price of
company stock: $26.52
(6 October 2008)
•52 week Hi: $31.94
Lo: 23.95
(2 Feb 2008)
•Dividend per share: $0.29
(2 Feb 2008)
• If I were an investor, I would probably hold this stock. Kroger will
continue to grow but at a relatively slow rate. If I were to purchase
stock in this company, it would be with long-term expectations.

Part B. Industry Situation and
• Kroger is expected to grow up to
12% by January 2010 with
earning estimates as high as
$2.14/share.
• U.S. consumption expenditures of
food is expected to grow at an
annually compounded rate of
3.3% between 2007-2012.
However, due to a slowing
economy, consumers are being
pushed to low margin products,
and because of this combined
with demand limited by
population growth, one should
hold stock in Kroger.
Company Plans
• As the supermarket industry
continues to consolidate, Kroger
reviews potential acquisition
candidates and their potential to
enhance shareholder value. This
strategy focuses primarily on existing
markets because such acquisitions
have lower risk and generally
produce a high incremental return
because they require little
investment in overhead, advertising,
and distribution.
• Plans for The Kroger Company
include opening more stores in
Indianapolis, Columbus, Las Vegas,
Nashville, Phoenix, and Portland.
http://www.thekrogerco.com/finance/documents/2007_KrogerFactBook.pdf
http://www.hoovers.com/kroger/--ID__10864,FRIC__--/free-co-competition.xhtml

Part C. Income Statement
• Kroger Company’s income
statement* is prepared in
the multi-step format
• Overall, income increased
in 2008. From 2007,
gross profit increased
$460 million, operating
income increased $65
million, and net income
increased $66 million.
The Kroger Co.
2007 2006
Gross Profit 16,456.0 15,996.0
Operating
Income
2,301.0 2,236.0
Net Income 1,181.0 1,115.0
Note: all table values are in millions of dollars
*http://www.hoovers.com/kroger/--ID__10864,period__A--/free-co-fin-income.xhtml

Part C. Balance Sheet
The Kroger Company
2007 2006
Assets = 22,299.0 21,215.0
Liabilities + Stockholders’
Equity
Note: all table values are in millions of dollars
17,385.0 + 4,914.0 16,292.0 + 4,923.0
Both assets and liabilities increased, but stockholders’ equity saw a slight decrease
from Jan 2007 – Jan 2008.
Assets: All accounts increased except Other Current Assets, which decreased 1.8% to
$555 million. Overall, assets increased $1,084 million.
Liabilities: Overall, liabilities increased $1093 million. Short term debt posted the
largest percentage gain at 75.7%. Total Current Liabilities saw the largest gain at $1,108
million.
Stockholders’ Equity decreased by $9 million. Shares Outstanding fell 42 million – a
6.0% drop from 2007.
http://www.hoovers.com/kroger/--ID__10864,period__A--/free-co-fin-balance.xhtml

Part C. Statement of Cash Flows
• Cash flows from operations is more than twice the net
income of the last two years.
• In 2007, Kroger Co. invested $2,218 million primarily in
construction and acquisition.
• Financing activities used $310 million of cash in 2007
compared to $785 in 2006. The decrease in the
amount of cash is primarily a result of proceeds
received from the issuance of long-term debt, offset by
greater stock repurchases and dividends paid.
• Overall, cash increased $74 million from Jan 2007 - Jan
2008. Since Jan 2006, cash increased $32 million.

Part D. Accounting Policies
Cash and Temporary Cash Investments
Cash and temporary cash investments represents store cash, escrow deposits, and
Euros to settle Euro-denominated contracts.
Inventories
Inventories are stated based on the LIFO method. Cost for the balance of
inventories is determined with the FIFO method. The company follows the Link-
Chain, Dollar-Value LIFO method for purposes of calculating its LIFO charge or
credit.
Property, Plant, and Equipment
Property, plant, and equipment are reported at cost. Depreciation expense is
computed principally using the straight-line method over the estimated useful
lives of individual assets.
Revenue Recognition
Revenues from the sales of products are recognized at the point of sale of the
Company’s products. Discounts provided to the customers, including those
through customer loyalty cards, are recognized as a reduction in sales as the
products are sold.

Part E. Financial Analysis
Liquidity Ratios
The Kroger Company
2007 2006
Working Capital $7114 – 8689 = (1575) $6755 – 7581 = (826)
Current Ratio $7114/$8689 = .82 $6755/$7581 = .89
Receivable Turnover $70235/$782 = 89.8 $66111/$776= 85.19
Average Day’s Sales
Uncollected
365 days/89.8 = 4.06 365 days/85.19 = 4.28
Inventory Turnover $53779/$5259 = 10.23 $50115/$5083 = 9.86
Average Days Inventory
on Hand
Note: all monetary values are in millions of dollars
365 days/10.23 = 35.7 365 days/9.86 = 37.0
Kroger’s working capital is in the red, and it decreased $749 million since last year. Thus,
The current ratio is less than 1. Receivable turnover and inventory turnover increased
slightly while average days sales uncollected and average days inventory on hand slightly
decreased.

Part E. Financial Analysis
Profitability Ratios
The Kroger Company
2007 2006
Profit Margin $1181/$70235 = 1.7% $1115/$66111 = 1.8%
Asset Turnover $70235/$21757 = 3.23 times $66111/$20981 = 3.15 times
Return on Assets $1181/$21757 = 5.4% $1115/$20981 = 5.3%
Return on Equity $1181/$4918.5 = 24% $1115/$4929 = 23%
Note: all monetary values are in millions of dollars
Profit margin slightly decreased from 2006 to 2007 while asset
turnover, return on assets, and return on equity all increased.
Kroger Company’s return on assets is relatively high which shows
that they use their assets efficiently.

Part E. Financial Analysis
Solvency Ratio
The Kroger Company
2007 2006
Debt to Equity $17,385/$4,914 = 3.54 $16,292/$4,923 = 3.54
Kroger Company has a high debt to equity ratio which implies
that a large proportion of the company’s assets are financed by
creditors. In poor economic times, Kroger could be at risk because
it would have to continue repaying creditors. Stockholders’
investments, on the other hand, do not have to be repaid, and
dividends can be deferred when a company suffers because of a
poor economy.

Part E. Financial Analysis
Market Strength Ratios
The Kroger Company
2007 2006
Price/earnings per share $27.08/1.71 = 15.8 times $22.51/1.56 = 14.4 times
Dividend Yield .29/$27.08 = 1.1% .195/$22.51 = .87%
Price/earnings per share increased from 2006 to 2007 which indicates an increase
of investor confidence. Investors are paying higher prices in relation to earnings,
and they do so with the expectation that Kroger will continue to be successful.
Dividend yield increased .23% from 2006 to 2007 which indicates that Kroger
paid out higher dividends in 2007.