Kroger declines to comment on potential Safeway transaction, posts strong Q4 results

CINCINNATI — Kroger danced around "the elephant in the room" in declining to discuss future merger and acquisition plans on its fourth-quarter conference call Thursday morning. While neither Kroger executives nor analysts actually referenced any potential Safeway transaction, Rodney McMullen, Kroger CEO did provide some color as to what strategic opportunities the company would be interested in: "The thing that was attractive about Harris Teeter as a transaction — it's a well-run company that overall we admired a whole lot," he said. Accordingly, the Harris Teeter stores are expected to contribute to Kroger's overall growth strategy without a tremendous amount of additional investments.  

Kroger reported total sales of $23.2 billion in the fourth quarter, which ended Feb. 1, 2014. After adjusting for the extra week in the fourth quarter last year, total sales increased by 4.8%. On this basis and without fuel, total sales increased by 4.4%. Results were enhanced by the company's response to adverse weather in the fourth quarter 2013, the grocer reported. "Certainly the snow helped … as people came in to stock up before weather events," McMullen told analysts. "Typically when people go on a normal shopping trip, they shop off of a list. When they come in to stock up before an event like that, they aren't really beholden to a list at that point and time." 

Kroger posted an identical supermarket sales growth, without fuel, of 4.3% in the fourth quarter, marking the 41st consecutive quarter of same-store sales growth, McMullen noted. 

Kroger also highlighted its store brand efforts as a significant contributor to the company's growth in the past year. "We introduced 937 new products in fiscal 2013, including 100 Simple Truth items," Michael Ellis, president and COO, said. "Simple Truth continues to grow at an astonishing pace and we now expect it to reach a billion-dollar brand status by the end of fiscal 2014." Corporate brands represented 27.2% of total units sold at Kroger, and 24.4% of total dollars (excluding pharmacy and fuel) Ellis reported. 

Kroger also was bullish regarding its acquisition last month of You Technology Brand Services. "We believe that You Tech has strong growth potential and that overtime will become the leading digital coupon provider for U.S. retailers, not just Kroger," Ellis said. Kroger first started offering digital coupons in 2010, Ellis noted. "At approximately 5:57 p.m. eastern time on February 6, a customer downloaded Kroger' one-billionth digital coupon." That demonstrates the growth in customer acceptance of Kroger's digital efforts, Ellis noted.  

Kroger reported total sales of $98.4 billion in fiscal 2013, an increase of 3.9% after adjusting for the 53rd week last year. On this basis and excluding fuel, total sales increased 4.2% over the prior fiscal year.

The Harris Teeter transaction closed on Jan. 28, 2014. Harris Teeter is included in the company's ending balance sheet, but because of the timing late in the year it had no effect on the adjusted fourth quarter or fiscal 2013 earnings. 

Net total debt was $10.9 billion, an increase of $2.3 billion from a year ago as a result of the Harris Teeter transaction and, due to the timing late in its fiscal year, Kroger realized no incremental EBITDA in 2013 from this transaction. Therefore, Kroger's net total debt to adjusted EBITDA ratio was 2.43, compared to 2.04 during the same period last year. Kroger remains committed to managing cash flow to achieve a 2 – 2.2 net debt to EBITDA ratio over the next 18-24 months, the company reported.

Kroger's financial position allowed the company to return more than $928 million to shareholders through share buybacks and dividends in 2013. During the fiscal year, Kroger repurchased 16.1 million common shares for a total investment of $609 million. 

Full-year net earnings for fiscal 2014 are expected to range from $3.14 to $3.25 per diluted share. This guidance includes Harris Teeter. Kroger anticipates identical supermarket sales growth, excluding fuel, of approximately 2.5% to 3.5% for fiscal 2014, including Harris Teeter. This range takes into account the expectation of low inflation during the year. 

During fiscal 2014, Kroger plans to use cash flow from operations to maintain its current investment grade debt rating, repurchase shares, have a growing dividend and fund capital investments. The company expects capital investments to be in the $2.8 to $3 billion range for the year, including Harris Teeter.

Kroger currently fields 2,640 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names, including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's. The company also operates 786 convenience stores, 320 fine jewelry stores, 1,240 supermarket fuel centers and 38 food processing plants in the United States.