KROGER CO (Form: 10-Q, Received: 06/27/2017 16:43:32)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 20, 2017

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-303

(Exact name of registrant as specified in its charter)


Ohio		31-0345740
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1014 Vine Street, Cincinnati, OH 45202

(Address of principal executive offices)

(Zip Code)

(513) 762-4000

(Registrant’s telephone number, including area code)

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days . Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer (do not check if a smaller reporting company)	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.

There were 897,346,365 shares of Common Stock ($1 par value) outstanding as of June 21, 2017.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	First Quarter Ended
	May 20,		May 21,
(In millions, except per share amounts)	2017		2016
Sales	$	36,285	$	34,604
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		28,281		26,669
Operating, general and administrative		6,376		5,779
Rent		270		262
Depreciation and amortization		736		694

Operating profit		622		1,200
Interest expense		177		155

Earnings before income tax expense		445		1,045
Income tax expense		148		350

Net earnings including noncontrolling interests		297		695
Net loss attributable to noncontrolling interests		(6)		(1)

Net earnings attributable to The Kroger Co.	$	303	$	696

Net earnings attributable to The Kroger Co. per basic common share	$	0.33	$	0.72

Average number of common shares used in basic calculation		914		954

Net earnings attributable to The Kroger Co. per diluted common share	$	0.32	$	0.71

Average number of common shares used in diluted calculation		925		966

Dividends declared per common share	$	0.120	$	0.105

The accompanying notes are an integral part of the Consolidated Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	First Quarter Ended
	May 20,		May 21,
(In millions)	2017		2016
Net earnings including noncontrolling interests	$	297	$	695

Other comprehensive income (loss)
Unrealized gains and losses on available for sale securities, net of income tax(1)		—		(6)
Change in pension and other postretirement defined benefit plans, net of income tax(2)		13		9
Unrealized gains and losses on cash flow hedging activities, net of income tax(3)		(36)		(27)
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax		—		1

Total other comprehensive loss		(23)		(23)

Comprehensive income		274		672
Comprehensive loss attributable to noncontrolling interests		(6)		(1)
Comprehensive income attributable to The Kroger Co.	$	280	$	673

(1)

Amount is net of tax of $(3) for the first quarter of 2016.

(2)

Amount is net of tax of $8 for the first quarter of 2017 and $5 for the first quarter of 2016.

(3)

Amount is net of tax of $(21) for the first quarter of 2017 and $(15) for the first quarter of 2016.

The accompanying notes are an integral part of the Consolidated Financial Statements.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(unaudited)


	May 20,		January 28,
(In millions, except par amounts)	2018		2017
ASSETS
Current assets
Cash and temporary cash investments	$	356	$	322
Store deposits in-transit		952		910
Receivables		1,394		1,649
FIFO inventory		7,676		7,852
LIFO reserve		(1,317)		(1,291)
Prepaid and other current assets		477		898
Total current assets		9,538		10,340

Property, plant and equipment, net		21,133		21,016
Intangibles, net		1,141		1,153
Goodwill		3,031		3,031
Other assets		956		965

Total Assets	$	35,799	$	36,505

LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations	$	1,854	$	2,252
Trade accounts payable		6,078		5,818
Accrued salaries and wages		1,135		1,234
Deferred income taxes		—		251
Other current liabilities		3,448		3,305
Total current liabilities		12,515		12,860

Long-term debt including obligations under capital leases and financing obligations		11,590		11,825
Deferred income taxes		2,181		1,927
Pension and postretirement benefit obligations		1,552		1,524
Other long-term liabilities		1,826		1,659

Total Liabilities		29,664		29,795

Commitments and contingencies (see Note 7)

SHAREHOLDERS’ EQUITY

Preferred shares, $100 per share, 5 shares authorized and unissued		—		—
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2017 and 2016		1,918		1,918
Additional paid-in capital		3,104		3,070
Accumulated other comprehensive loss		(738)		(715)
Accumulated earnings		15,735		15,543
Common shares in treasury, at cost, 1,017 shares in 2017 and 994 shares in 2016		(13,874)		(13,118)

Total Shareholders’ Equity - The Kroger Co.		6,145		6,698
Noncontrolling interests		(10)		12

Total Equity		6,135		6,710

Total Liabilities and Equity	$	35,799	$	36,505

The accompanying notes are an integral part of the Consolidated Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	First Quarter Ended
	May 20,		May 21,
(In millions)	2017		2016
Cash Flows from Operating Activities:
Net earnings including noncontrolling interests	$	297	$	695
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization		736		694
LIFO charge		25		15
Stock-based employee compensation		53		43
Expense for Company-sponsored pension plans		35		25
Deferred income taxes		6		—
Other		(50)		(1)
Changes in operating assets and liabilities net of effects from mergers of businesses:
Store deposits in-transit		(42)		31
Receivables		149		85
Inventories		177		101
Prepaid and other current assets		409		232
Trade accounts payable		260		104
Accrued expenses		(86)		(320)
Income taxes receivable and payable		153		350
Other		187		25

Net cash provided by operating activities		2,309		2,079

Cash Flows from Investing Activities:
Payments for property and equipment		(817)		(1,090)
Proceeds from sale of assets		83		71
Other		(10)		(32)

Net cash used by investing activities		(744)		(1,051)

Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		1		11
Payments on long-term debt		(84)		(54)
Net borrowings (payments) on commercial paper		(545)		256
Dividends paid		(111)		(102)
Proceeds from issuance of capital stock		17		15
Treasury stock purchases		(772)		(1,027)
Other		(37)		(13)

Net cash used by financing activities		(1,531)		(914)

Net increase in cash and temporary cash investments		34		114

Cash and temporary cash investments:
Beginning of year		322		277
End of year	$	356	$	391

Reconciliation of capital investments:
Payments for property and equipment	$	(817)	$	(1,090)
Changes in construction-in-progress payables		(104)		(55)
Total capital investments	$	(921)	$	(1,145)

Disclosure of cash flow information:
Cash paid during the year for interest	$	188	$	167
Cash paid during the year for income taxes	$	11	$	7

The accompanying notes are an integral part of the Consolidated Financial Statements .

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(unaudited)


									Accumulated
				Additional					Other
	Common Stock			Paid-In		Treasury Stock			Comprehensive		Accumulated		Noncontrolling
(In millions, except per share amounts)	Shares	Amount		Capital		Shares	Amount		Loss		Earnings		Interest		Total
Balances at January 30, 2016	1,918	$	1,918	$	2,980	951	$	(11,409)	$	(680)	$	14,011	$	(22)	$	6,798
Issuance of common stock:
Stock options exercised	—		—		—	(1)		15		—		—		—		15
Restricted stock issued	—		—		(20)	—		6		—		—		—		(14)
Treasury stock activity:
Treasury stock purchases, at cost	—		—		—	26		(1,000)		—		—		—		(1,000)
Stock options exchanged	—		—		—	1		(27)		—		—		—		(27)
Share-based employee compensation	—		—		43	—		—		—		—		—		43
Other comprehensive loss net of income tax of $(13)	—		—		—	—		—		(23)		—		—		(23)
Other	—		—		5	—		(7)		—		—		65		63
Cash dividends declared ($0.105 per common share)	—		—		—	—		—		—		(102)		—		(102)
Net earnings including noncontrolling interests	—		—		—	—		—		—		696		(1)		695

Balances at May 21, 2016	1,918	$	1,918	$	3,008	977	$	(12,422)	$	(703)	$	14,605	$	42	$	6,448

Balances at January 28, 2017	1,918	$	1,918	$	3,070	994	$	(13,118)	$	(715)	$	15,543	$	12	$	6,710
Issuance of common stock:
Stock options exercised	—		—		—	(1)		17		—		—		—		17
Restricted stock issued	—		—		(11)	—		5		—		—		—		(6)
Treasury stock activity:
Treasury stock purchases, at cost	—		—		—	24		(747)		—		—		—		(747)
Stock options exchanged	—		—		—	—		(25)		—		—		—		(25)
Share-based employee compensation	—		—		53	—		—		—		—		—		53
Other comprehensive loss net of income tax of $(13)	—		—		—	—		—		(23)		—		—		(23)
Other	—		—		(8)	—		(6)		—		—		(16)		(30)
Cash dividends declared ($0.12 per common share)	—		—		—	—		—		—		(111)		—		(111)
Net earnings including noncontrolling interests	—		—		—	—		—		—		303		(6)		297

Balances at May 20, 2017	1,918	$	1,918	$	3,104	1,017	$	(13,874)	$	(738)	$	15,735	$	(10)	$	6,135

The accompanying notes are an integral part of the Consolidated Financial Statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

All amounts in the Notes to the Unaudited Consolidated Financial Statements are in millions except per share amounts.

1. ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries, and the variable interest entities in which the Company is the primary beneficiary. The January 28, 2017 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all normal, recurring adjustments that are necessary for a fair presentation of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2017.

The unaudited information in the Consolidated Financial Statements for the first quarters ended May 20, 2017 and May 21, 2016, includes the results of operations of the Company for the 16-week periods then ended.

Fair Value Measurements

Fair value measurements are classified and disclosed in one of the following three categories:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities;

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;

Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company records cash and temporary cash investments, store deposits in-transit, receivables, prepaid and other current assets, trade accounts payable, accrued salaries and wages and other current liabilities at approximated fair value. Certain other investments and derivatives are recorded as Level 1, 2 or 3 instruments. Refer to Note 2 for the disclosure of debt instrument fair values.

During the second quarter of 2016, the Company adopted Accounting Standards Update (“ASU”) 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This amendment addresses several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. As a result of the adoption, the Company recognized $16 of excess tax benefits related to share-based payments in its provision for income taxes for the first quarter of 2016. This item was historically recorded in additional paid-in capital. In addition, for the first quarter of 2016, cash flows related to excess tax benefits are classified as an operating activity. Cash paid on employees’ behalf related to shares withheld for tax purposes is classified as a financing activity. The Consolidated Statements of Operations and Consolidated Statements of Cash Flows have been revised to reflect the effects of the ASU adoption on the first quarter of 2016 Consolidated Financial Statements.

2. DEBT OBLIGATIONS

Long-term debt consists of:


	May 20,		January 28,
	2017		2017
1.50% to 8.00% Senior Notes due through 2047	$	11,313	$	11,311
5.63% to 12.75% Mortgages due in varying amounts through 2027		36		38
0.91% to 1.15% Commercial paper borrowings due through May 2017		880		1,425
Other		473		541

Total debt, excluding capital leases and financing obligations		12,702		13,315
Less current portion		(1,800)		(2,197)

Total long-term debt, excluding capital leases and financing obligations	$	10,902	$	11,118

The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at May 20, 2017 and January 28, 2017. At May 20, 2017, the fair value of total debt was $13,369 compared to a carrying value of $12,702. At January 28, 2017, the fair value of total debt was $13,905 compared to a carrying value of $13,315.

3. BENEFIT PLANS

The following table provides the components of net periodic benefit cost for the Company-sponsored defined benefit pension plans and other post-retirement benefit plans for the first quarters of 2017 and 2016.


	First Quarter Ended
	Pension Benefits				Other Benefits
	May 20,		May 21,		May 20,		May 21,
	2017		2016		2017		2016
Components of net periodic benefit cost:
Service cost	$	24	$	21	$	3	$	3
Interest cost		56		58		3		3
Expected return on plan assets		(73)		(73)		—		—
Amortization of:
Prior service cost		—		—		(2)		(2)
Actuarial loss (gain)		26		19		(3)		(3)
Curtailment		2		—		—		—

Net periodic benefit cost	$	35	$	25	$	1	$	1

The Company is not required to make any contributions to its Company-sponsored pension plans in 2017, but may make contributions to the extent such contributions are beneficial to the Company. The Company did not make any contributions to its Company-sponsored pension plans in the first quarter of 2017 or 2016.

The Company contributed $73 and $68 to employee 401(k) retirement savings accounts in the first quarters of 2017 and 2016, respectively.

The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded.

During the first quarter of 2017, the Company incurred a charge of $199, $126 net of tax, due to withdrawing from two multi-employer pension plans, which represents the Company’s best estimate, absent demand letters from the multi-employer pension plans. Demand letters from the impacted multi-employer pension plans may be received in 2017, or later, and the ultimate withdrawal liability may change from the currently estimated amount. Any future charge will be recorded in the period in which the change is identified. Based on ERISA regulations, the liability will be paid out in installments, which vary by plan, over a period of up to 20 years. The net present value of the liability was determined using a risk free interest rate. The charge was recorded in the ‘Operating, general and administrative’ caption in the Consolidated Statements of Operations and the liability was recorded in the ‘Other long-term liabilities’ caption in the Consolidated Balance Sheets.

4. EARNINGS PER COMMON SHARE

Net earnings attributable to The Kroger Co. per basic common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding. Net earnings attributable to The Kroger Co. per diluted common share equal net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted-average number of common shares outstanding, after giving effect to dilutive stock options. The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:


	First Quarter Ended					First Quarter Ended
	May 20, 2017					May 21, 2016
				Per					Per
	Earnings		Shares	Share		Earnings		Shares	Share
	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Net earnings attributable to The Kroger Co. per basic common share	$	301	914	$	0.33	$	690	954	$	0.72
Dilutive effect of stock options			11					12

Net earnings attributable to The Kroger Co. per diluted common share	$	301	925	$	0.32	$	690	966	$	0.71

The Company had combined undistributed and distributed earnings to participating securities totaling $2 in the first quarter of 2017 and $6 in the first quarter of 2016.

The Company had options outstanding for approximately 9 million and 3 million shares during the first quarters of 2017 and 2016, respectively, that were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per share.

5. RECENTLY ADOPTED ACCOUNTING STANDARDS

In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This amendment requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This amendment became effective for the Company beginning January 29, 2017, and was adopted prospectively in accordance with the standard. The implementation of this amendment resulted in the reclassification of current deferred tax liabilities as non-current and had no effect on the Company’s Consolidated Statements of Operations.

6. RECENTLY ISSUED ACCOUNTING STANDARDS

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715)”, which requires that the service cost component of pension and postretirement benefit costs be presented in the same line item as other current employee compensation costs and other components of those benefit costs be presented separately from the service cost component and outside a subtotal of income from operations, if presented. The ASU also requires that only the service cost component of pension and postretirement benefit costs is eligible for capitalization. The update is effective for annual periods beginning after December 15, 2017 and interim periods within that annual period. Application is retrospective for the presentation of the components of these benefit costs and prospective for the capitalization of only service costs. The Company does not expect application of this ASU to have a material impact on its Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” as amended by several subsequent ASUs, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Per ASU 2015-14, “Deferral of Effective Date,” this guidance will be effective for the Company in the first quarter of its fiscal year ending February 2, 2019. The Company is currently in the process of evaluating the effect of adoption of this ASU on its Consolidated Financial Statements. The Company’s initial assessment of the new guidance has identified customer loyalty programs and gross versus net reporting relative to arrangements with certain third parties as transactions potentially affected by the new guidance. Additionally, the Company continues to evaluate the adoption method that will be used to implement the new guidance.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which provides guidance for the recognition of lease agreements. The standard’s core principle is that a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. This guidance will be effective for the Company in the first quarter of fiscal year ending February 1, 2020. Early adoption is permitted. The adoption of this ASU will result in a significant increase to the Company’s Consolidated Balance Sheets for lease liabilities and right-of-use assets, and the Company is currently evaluating the other effects of adoption of this ASU on its Consolidated Financial Statements. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the practical expedients and assessing opportunities to make certain changes to the Company’s lease accounting information technology system in order to determine the best implementation strategy.

7. COMMITMENTS AND CONTINGENCIES

The Company continuously evaluates contingencies based upon the best available evidence.

The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.

Litigation — Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material effect on the Company’s financial position, results of operations, or cash flows.

The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and where an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. Management currently believes that the aggregate range of loss for the Company’s exposure is not material to the Company. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table represents the changes in AOCI by component for the first quarters of 2016 and 2017:


					Pension and
	Cash Flow				Postretirement
	Hedging		Available for sale		Defined Benefit
	Activities(1)		Securities(1)		Plans(1)		Total(1)
Balance at January 30, 2016	$	(51)	$	20	$	(649)	$	(680)
OCI before reclassifications(2)		(27)		(6)		—		(33)
Amounts reclassified out of AOCI(3)		1		—		9		10
Net current-period OCI		(26)		(6)		9		(23)
Balance at May 21, 2016	$	(77)	$	14	$	(640)	$	(703)

Balance at January 28, 2017	$	(2)	$	—	$	(713)	$	(715)
OCI before reclassifications(2)		(36)		—		—		(36)
Amounts reclassified out of AOCI(3)		—		—		13		13
Net current-period OCI		(36)		—		13		(23)
Balance at May 20, 2017	$	(38)	$	—	$	(700)	$	(738)

(1)

All amounts are net of tax.

(2)

Net of tax of $(15) and $(3) for cash flow hedging activities and available for sale securities, respectively, for the first quarter of 2016. Net of tax of $(21) for cash flow hedging activities for the first quarter of 2017.

(3)

Net of tax of $5 for pension and postretirement defined benefit plans for the first quarter of 2016. Net of tax of $8 for pension and postretirement defined benefit plans for the first quarter of 2017.

The following table represents the items reclassified out of AOCI and the related tax effects for the first quarters of 2017 and 2016:


	First Quarter Ended
	May 20,		May 21,
	2017		2016
Cash flow hedging activity items
Amortization of gains and losses on cash flow hedging activities(1)	$	—	$	1
Tax expense		—		—
Net of tax		—		1

Pension and postretirement defined benefit plan items
Amortization of amounts included in net periodic pension expense(2)		21		14
Tax expense		(8)		(5)
Net of tax		13		9
Total reclassifications, net of tax	$	13	$	10

(1)

Reclassified from AOCI into interest expense.

(2)

Reclassified from AOCI into merchandise costs and operating, general and administrative expense. These components are included in the computation of net periodic pension expense (see Note 3 for additional details).

9. INCOME TAXES

The effective income tax rate was 33.3% and 33.5% for the first quarters of 2017 and 2016, respectively. The effective income tax rate for the first quarter of 2017 differed from the federal statutory rate due to the utilization of tax credits and deductions partially offset by the effect of state income taxes. The effective income tax rate for the first quarter of 2016 differed from the federal statutory rate due to the adoption of ASU 2016-09, “Compensation-Stock Compensation (Topic 718)”.

10. VOLUNTARY RETIREMENT OFFERING

In 2016, the Company announced a Voluntary Retirement Offering (“VRO”) for certain non-store associates. Approximately 1,300 associates irrevocably accepted the VRO in the first quarter of 2017. Due to the employee acceptances, the Company recognized a VRO charge of $184, $117 net of tax, in the first quarter of 2017, which was comprised of $165 for severance and other benefits, as well as $19 of other non-cash charges. This charge was recorded in the ‘Operating, general and administrative’ caption within the Consolidated Statements of Operations. The Company paid $149 of the severance and other benefits in the first quarter of 2017, and will fulfill all payment obligations by the end of the fourth quarter of 2017.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following analysis should be read in conjunction with the Consolidated Financial Statements.

USE OF NON-GAAP FINANCIAL MEASURES

The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles (“GAAP”). We provide non-GAAP measures, including First-In, First-Out (“FIFO”) gross margin, FIFO operating profit, adjusted net earnings and adjusted net earnings per diluted share because management believes these metrics are useful to investors and analysts. These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share or any other GAAP measure of performance. These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. Our calculation and reasons these are useful metrics to investors and analysts are explained below.

We calculate FIFO gross margin as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs exclude depreciation and rent expenses. 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.

We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management to evaluate operational effectiveness. Management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness.

We believe the adjusted net earnings per diluted share metric presents more comparable quarter-over-quarter and year-over-year comparisons for our net earnings per diluted share because adjusted items are not the result of our normal operations.

OVERVIEW

Notable items for the first quarter of 2017 are:

Net earnings per diluted share of $0.32.

Net earnings for the first quarter of 2017 includes $199 million ($126 million after-tax) related to the withdrawal liability for certain multi-employer pension funds and $184 million ($117 million after-tax) related to the voluntary retirement offering (“VRO”) (collectively, the “2017 Adjusted Items”).

Adjusted net earnings per diluted share of $0.58.

Identical supermarket sales, excluding fuel, decreased 0.2%.

Increased total households and loyal households shopping with us led to positive unit growth.

Gross margin declined as a percentage of sales, primarily due to price investments. Operating, general and administrative (“OG&A”) expenses increased as a percentage of sales, primarily due to investing in incremental labor hours and wage increases designed to improve associate engagement and retention and investment in our digital strategy.

We returned $884 million to shareholders from share repurchases and dividend payments.

The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, for the first quarter of 2017 and 2016 ($ in millions, except per share amounts):


	First Quarter Ended
	May 20,		May 21,		Percentage
	2017		2016		Change
Net earnings attributable to The Kroger Co.	$	303	$	696	(56.5)
Adjustments for pension plan withdrawal liabilities ₍₁₎₍₂₎		126		—
Adjustments for VRO ₍₁₎₍₂₎		117		—
2017 Adjusted Items ₍₁₎₍₂₎		243		—

Adjusted net earnings attributable to The Kroger Co.	$	546	$	696	(21.6)

Net earnings attributable to The Kroger Co. per diluted common share	$	0.32	$	0.71	(54.9)
Adjustments for pension plan withdrawal liabilities ₍₃₎		0.13		—
Adjustments for VRO ₍₃₎		0.13		—
2017 Adjusted Items ₍₃₎		0.26		—

Adjusted net earnings attributable to The Kroger Co. per diluted common share	$	0.58	$	0.71	(18.3)

Average number of common shares used in diluted calculation		925		966

(1)

The amount presented represents the after-tax effect of the adjustments.

(2)

The pre-tax adjustments for the pension plan withdrawal liabilities and VRO are $199 million and $184 million, respectively.

(3)

The amount presented represents the net earnings per diluted common share effect of the adjustments.

RESULTS OF OPERATIONS

Sales

Total Sales

($ in millions)


	First Quarter Ended
	May 20,		Percentage		May 21,		Percentage
	2017		Change(2)		2016		Change(3)
Total supermarket sales without fuel	$	29,941	1.4	%	$	29,534	8.0	%
Fuel sales		4,702	20.5	%		3,903	(14.7)	%
Other sales(1)		1,642	40.7	%		1,167	4.0	%
Total sales	$	36,285	4.9	%	$	34,604	4.7	%

(1)

Other sales primarily relate to sales at convenience stores, excluding fuel; jewelry stores; food production plants to outside customers; data analytic services; variable interest entities; Kroger Specialty Pharmacy; in-store health clinics; digital coupon services; and online sales by Vitacost.com.

(2)

This column represents the percentage change in the first quarter of 2017, compared to the first quarter of 2016.

(3)

This column represents the percentage change in the first quarter of 2016, compared to the first quarter of 2015.

Total sales increased in the first quarter of 2017, compared to the first quarter of 2016, by 4.9%. This increase was primarily due to our increases in total supermarket sales, without fuel, fuel sales and our merger with Modern HC Holdings, Inc. (“ ModernHEALTH”). The increase in total supermarket sales without fuel for the first quarter of 2017, compared to the first quarter of 2016, was primarily due an increase in supermarket square footage, partially offset by our identical supermarket sales decrease, excluding fuel, of 0.2%. Identical supermarket sales, excluding fuel, for the first quarter of 2017, compared to the first quarter of 2016, decreased primarily due to product cost deflation of 0.2% and continued investments in lower prices for our customers, partially offset by an increase in the number of households shopping with us. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the first quarter of 2017 increased 3.4% over the end of the first quarter of 2016. Total fuel sales increased 20.5% in the first quarter of 2017, compared to the first quarter of 2016, primarily due to an increase in the average retail fuel price of 18.6% and an increase in fuel gallons sold of 1.6%. The increase in the average retail fuel price was caused by an increase in the product cost of fuel.

We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Although identical supermarket sales is a relatively standard term, numerous methods exist for calculating identical supermarket sales growth. As a result, the method used by our management to calculate identical supermarket sales may differ from methods other companies use to calculate identical supermarket sales. We urge you to understand the methods used by other companies to calculate identical supermarket sales before comparing our identical supermarket sales to those of other such companies. Fuel discounts received at our fuel centers and earned based on in-store purchases are included in all of the identical supermarket sales results calculations illustrated below and reduce our identical supermarket sales results. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Identical supermarket sales include sales from all departments at identical multi-department stores. Our identical supermarket sales results are summarized in the following table. We used the identical supermarket dollar figures presented below to calculate percentage changes for the first quarter of 2017.

Identical Supermarket Sales

($ in millions)


	First Quarter
	May 20,		Percentage		May 21,		Percentage
	2017		Change(1)		2016		Change(2)
Including fuel centers	$	32,252	1.6	%	$	31,758	0.4	%
Excluding fuel centers	$	28,627	(0.2)	%	$	28,689	2.4	%

(1)

This column represents the percentage changes in identical supermarket sales in the first quarter of 2017, compared to the first quarter of 2016.

(2)

This column represents the percentage changes in identical supermarket sales in the first quarter of 2016, compared to the first quarter of 2015.

Gross Margin, LIFO and FIFO Gross Margin

Our gross margin rate, as a percentage of sales, was 22.06% for the first quarter of 2017, as compared to 22.93% for the first quarter of 2016. This decrease resulted primarily from continued investments in lower prices for our customers, unfavorable pricing and cost effects due to a deflationary operating environment, higher fuel sales, a higher LIFO charge, our merger with ModernHEALTH due to its lower gross margin rate and increased warehousing, transportation and shrink costs, as a percentage of sales, partially offset by decreased advertising costs, as a percentage of sales. Higher fuel sales decrease our gross margin rate, as a percentage of sales, due to the very low gross margin rate, as a percentage of sales, on fuel sales compared to non-fuel sales.

Our LIFO charge was $25 million for the first quarter of 2017 compared to a charge of $15 million for the first quarter of 2016. Our increased LIFO charge reflects our expected year end product cost inflation for 2017 compared to 2016.

Our FIFO gross margin rate, which excludes the first quarter LIFO charge, was 22.13% for the first quarter of 2017, as compared to 22.98% for the first quarter of 2016. Excluding the effect of fuel and ModernHEALTH, our FIFO gross margin rate decreased 45 basis points in the first quarter of 2017, compared to the first quarter of 2016. This decrease resulted primarily from continued investments in lower prices for our customers, unfavorable pricing and cost effects due

to a deflationary operating environment and increased warehousing, transportation and shrink costs, as a percentage of sales, partially offset by decreased advertising costs, as a percentage of sales.

Operating, General and Administrative Expenses

OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utility, 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, increased 87 basis points to 17.57% for the first quarter of 2017 from 16.70% for the first quarter of 2016. This increase resulted primarily from the loss of sales leverage due to a deflationary operating environment and continued investments in lower prices, investing in our digital strategy, the 2017 Adjusted Items, increases in store wages attributed to investing in incremental labor hours and higher wages to improve retention, employee engagement and customer experience and increases in credit card costs, partially offset by savings from the VRO, effective cost controls, higher fuel sales and our merger with ModernHEALTH due to its lower OG&A rate, as a percentage of sales. The VRO, which is included in the 2017 Adjusted Items, was completed in the first quarter of 2017, and is expected to result in future OG&A savings. Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, the 2017 Adjusted Items and ModernHEALTH, our OG&A rate increased 27 basis points in the first quarter of 2017, compared to the first quarter of 2016. This increase resulted primarily from the loss of sales leverage due to a deflationary operating environment and continued investments in lower prices, investing in our digital strategy, increases in store wages attributed to investing in incremental labor hours and higher wages to improve retention, employee engagement and customer experience and increases in credit card costs, partially offset by savings from the VRO and effective cost controls, as a percentage of sales.

Rent Expense

Rent expense increased on a total dollars basis and decreased as a percentage of sales for the first quarter of 2017 due to:

Increasing retail square footage and

Higher fuel sales, which decreases our rent expense rate, as a percentage of sales.

Depreciation and Amortization Expense

Depreciation and amortization expense increased on a total dollars and percentage of sales basis for the first quarter of 2017 due to:

Additional depreciation on capital investments, excluding mergers and lease buyouts of $3.4 billion, during the rolling four quarter period ending with the first quarter of 2017,

Loss of sales leverage due to a deflationary operating environment and continued investments in lower prices, and

Higher fuel sales partially off-set the increase, as a percentage of sales.

Operating Profit and FIFO Operating Profit

Operating profit was $622 million, or 1.71% of sales, for the first quarter of 2017, compared to $1.2 billion, or 3.47% of sales, for the first quarter of 2016. Operating profit, as a percentage of sales, decreased 176 basis points in the first quarter of 2017, compared to the first quarter of 2016, due to lower gross margin, increased OG&A, depreciation and amortization expenses and a higher LIFO charge, partially offset by lower rent expense, as a percentage of sales. Specific factors of these operating trends are discussed earlier in this section.

FIFO operating profit was $648 million, or 1.78% of sales, for the first quarter of 2017, compared to $1.2 billion, or 3.51% of sales, for the first quarter of 2016. Fuel sales lower our operating profit rate due to the very low operating profit rate, as a percentage of sales, of fuel sales compared to non-fuel sales. FIFO operating profit, as a percentage of sales excluding fuel, the 2017 Adjusted Items and ModernHEALTH, decreased 82 basis points in the first quarter of 2017, compared to 2016 due to lower gross margin, increased OG&A, depreciation and amortization and rent expenses.

Income Taxes

Our effective income tax rate was 33.3% and 33.5% for the first quarter of 2017 and 2016, respectively. The effective income tax rate for the first quarter of 2017 differed from the federal statutory rate due to the utilization of tax credits and deductions partially offset by the effect of state income taxes. The effective income tax rate for the first quarter of 2016 differed from the federal statutory rate due to the adoption of ASU 2016-09, “Compensation-Stock Compensation (Topic 718)”.

Net Earnings and Net Earnings Per Diluted Share

Our net earnings are based on the factors discussed in the Results of Operations section.

Net earnings of $0.32 per diluted share for the first quarter of 2017 represented a decrease of 54.9% from net earnings of $0.71 per diluted share for the first quarter of 2016. Excluding the 2017 Adjusted Items, net earnings of $0.58 per diluted share for the first quarter of 2017 represented a decrease of 18.3% from net earnings of $0.71 per diluted share in the first quarter of 2016. The net earnings of the first quarter of 2016 do not include any adjusted items. The 18.3% decrease resulted primarily from lower non-fuel FIFO operating profit, a higher LIFO charge and increased interest expense, partially offset by higher fuel earnings, decreased income tax expense and lower weighted average common shares outstanding due to common share repurchases.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Information

Net cash provided by operating activities

We generated $2.3 billion of cash from operating activities during the first quarter of 2017 compared to $2.1 billion during the first quarter of 2016. The cash provided from operating activities increased in the first quarter of 2017 versus 2016, primarily due to higher non-cash expenses and changes in working capital, partially offset by a decrease in net earnings including noncontrolling interests. Changes in working capital provided cash from operating activities of $1 billion in the first quarter of 2017, compared to $583 million in the first quarter of 2016. This increase was primarily due to higher cash provided by trade accounts payable, accrued expenses and prepaid and other current assets, partially offset by lower cash provided by income taxes receivable and payable.

Net cash used by investing activities

We used $744 million of cash for investing activities during the first quarter of 2017 compared to $1.1 billion during the first quarter of 2016. The amount of cash used for investing activities decreased in the first quarter of 2017 versus 2016, primarily due to decreased cash payments for capital investments.

Net cash used by financing activities

We used $1.5 billion of cash for financing activities in the first quarter of 2017 compared to $914 million during the first quarter of 2016. The amount of cash used for financing activities for the first quarter of 2017, compared to the first quarter of 2016, increased $617 million primarily due to an increase in payments on commercial paper, partially offset by lower repurchases of our outstanding common shares.

Debt Management

As of May 20, 2017, we maintained a $2.75 billion (with the ability to increase by $750 million), unsecured revolving credit facility that, unless extended, terminates on June 30, 2019. Outstanding borrowings under the credit facility, the commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit facility. As of May 20, 2017, we had $880 million of outstanding commercial paper and no borrowings under our credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled $6.1 million as of May 20, 2017.

Our bank credit facility and the indentures underlying our publicly issued debt contain various restrictive covenants. As of May 20, 2017, we were in compliance with the financial covenants. Furthermore, management believes it is not reasonably likely that we will fail to comply with these financial covenants in the foreseeable future.

Total debt, including both the current and long-term portions of capital leases and lease-financing obligations, decreased $633 million as of May 20, 2017 compared to fiscal year end 2016 debt of $14.1 billion. The decrease in debt is primarily due to decreased commercial paper borrowings.

Common Share Repurchase Program

During the first quarter of 2017, we invested $772 million to repurchase 25.5 million Kroger common shares at an average price of $30.27 per share. These shares were reacquired under two separate share repurchase programs. The first is a series of Board of Director authorizations:

On September 15, 2016, our Board of Directors approved a $500 million share repurchase program (the “September 2016 Share Repurchase Program”).

On March 9, 2017, our Board of Directors approved an additional $500 million share repurchase program (the “March 2017 Share Repurchase Program”) to supplement the September 2016 Share Repurchase Program.

The second is a program that uses the cash proceeds from the exercises of stock options by participants in Kroger’s stock option, long-term incentive plans and the associated tax benefits.

The March 2017 Share Repurchase Program was exhausted during the second quarter of 2017. On June 22, 2017, our Board of Directors approved a $1 billion share repurchase program (the “June 2017 Share Repurchase Program”).

During the second quarter through June 27, 2017, the Company used an additional $100 million of cash to repurchase 3.5 million common shares at an average price of $30.00 per share.

Liquidity Needs

We estimate our liquidity needs over the next twelve-month period to range from $6.0 to $6.5 billion, which includes anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments of debt and commercial paper, offset by cash on hand at the end of the first quarter of 2017. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months. We have approximately $880 million of commercial paper and $800 million of senior notes maturing in the next twelve months, which is included in the $6.0 to $6.5 billion range of estimated liquidity needs. The commercial paper matures in the second quarter of 2017, $600 million of senior notes mature in the third quarter of 2017 and $200 million of senior notes mature in the first quarter of 2018. We expect to refinance this debt by issuing additional senior notes or commercial paper on favorable terms based on our past experience. We believe we have adequate coverage of our debt covenants to continue to maintain our current investment grade debt ratings and to respond effectively to competitive conditions.

CAPITAL INVESTMENTS

Capital investments, excluding mergers, acquisitions and the purchase of leased facilities, totaled $921 million for the first quarter of 2017, compared to $1.1 billion for the first quarter of 2016. During the rolling four quarter period ending with the first quarter of 2017, we opened, expanded or relocated 84 supermarkets and also completed 139 major within-the-wall remodels. Total supermarket square footage at the end of the first quarter of 2017 increased 2.4% from the end of the first quarter of 2016. Excluding mergers, acquisitions and operational closings, total supermarket square footage at the end of the first quarter of 2017 increased 3.4% over the end of the first quarter of 2016.

RETURN ON INVESTED CAPITAL

We calculate return on invested capital (“ROIC”) by dividing adjusted operating profit for the prior four quarters by the average invested capital. Adjusted operating profit is calculated by excluding certain items included in operating profit, and adding back our LIFO charge, depreciation and amortization and rent to our U.S. GAAP operating profit of the prior four quarters. Average invested capital is calculated as the sum of (i) the average of our total assets, (ii) the average LIFO reserve, (iii) the average accumulated depreciation and amortization and (iv) a rent factor equal to total rent for the last four quarters multiplied by a factor of eight; minus (i) the average taxes receivable, (ii) the average trade accounts payable, (iii) the average accrued salaries and wages and (iv) the average other current liabilities, excluding accrued income taxes. Averages are calculated for ROIC by adding the beginning balance of the first quarter and the ending balance of the fourth quarter, of the last four quarters, and dividing by two. We use a factor of eight for our total rent as we believe this is a common factor used by our investors, analysts and rating agencies. ROIC is a non-GAAP financial measure of performance. ROIC should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital. Management believes ROIC is a useful metric to investors and analysts because it measures how effectively we are deploying our assets.

Although ROIC is a relatively standard financial term, numerous methods exist for calculating a company’s ROIC. As a result, the method used by our management to calculate ROIC may differ from methods other companies use to calculate their ROIC. We urge you to understand the methods used by other companies to calculate their ROIC before comparing our ROIC to that of such other companies.

The following table provides a calculation of return on invested capital on a rolling four quarter basis ended May 20, 2017.


	Rolling Four Quarters Ended
	($ in millions)
	May 20, 2017
Return on Invested Capital
Numerator
Operating profit	$	2,858
LIFO charge		29
Depreciation and amortization		2,382
Rent		889
Adjustments for pension plan agreements		310
Adjustments for voluntary retirement offering		184
Adjusted operating profit	$	6,652

Denominator
Average total assets	$	34,800
Average taxes receivable (1)		(37)
Average LIFO reserve		1,303
Average accumulated depreciation and amortization		19,464
Average trade accounts payable		(5,962)
Average accrued salaries and wages		(1,169)
Average other current liabilities (2)		(3,324)
Rent x 8		7,112
Average invested capital	$	52,187
Return on Invested Capital		12.75	%

(1)

As of May 20, 2017, taxes receivable was $25 million.

(2)

As of May 20, 2017, other current liabilities included accrued income taxes of $45 million . Accrued income taxes are removed from other current liabilities in the calculation of average invested capital.

CRITICAL ACCOUNTING POLICIES

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our critical accounting policies are summarized in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could vary from those estimates.

RECENTLY ADOPTED ACCOUNTING STANDARDS

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This amendment requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This amendment became effective for us beginning January 29, 2017, and was adopted prospectively in accordance with the standard. The implementation of this amendment resulted in the reclassification of current deferred tax liabilities as non-current and had no effect on our Consolidated Statements of Operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715)”, which requires that the service cost component of pension and postretirement benefit costs be presented in the same line item as other current employee compensation costs and other components of those benefit costs be presented separately from the service cost component and outside a subtotal of income from operations, if presented. The ASU also requires that only the service cost component of pension and postretirement benefit cost is eligible for capitalization. The update is effective for annual periods beginning after December 15, 2017 and interim periods within that annual period. Application is retrospective for the presentation of the components of these benefit costs and prospective for the capitalization of only service costs. We do not expect application of this ASU to have a material impact on our Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” as amended by several subsequent ASUs, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Per ASU 2015-14, “Deferral of Effective Date,” this guidance will be effective for us in the first quarter of our fiscal year ending February 2, 2019. Our initial assessment of the new guidance identified customer loyalty programs and gross versus net reporting relative to arrangements with certain third parties as transactions potentially affected by the new guidance. Additionally, we continue to evaluate the adoption method that will be used to implement the new guidance.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which provides guidance for the recognition of lease agreements. The standard’s core principle is that a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. This guidance will be effective for us in the first quarter of fiscal year ending February 1, 2020. Early adoption is permitted. The adoption of this ASU will result in a significant increase to our Consolidated Balance Sheets for lease liabilities and right-of-use assets, and we are currently evaluating the other effects of adoption of this ASU on our Consolidated Financial Statements. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the practical expedients and assessing opportunities to make certain changes to our lease accounting information technology system in order to determine the best implementation strategy. We believe our current off-balance sheet leasing commitments are reflected in our investment grade debt rating.

OUTLOOK

This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Such statements are indicated by words such as “comfortable,” “committed,” “will,” “expect,” “goal,” “should,” “intend,” “target,” “believe,” “anticipate,” “plan,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. These include the specific risk factors identified in “Risk Factors” and “Outlook” in our Annual Report on Form 10-K for our last fiscal year and any subsequent filings, as well as those identified below.

Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially.

We expect net earnings to be $1.74 to $1.79 per diluted share in 2017, which includes an estimated $0.09 for the 53 rd week. We expect 2017 adjusted net earnings per diluted share to be $2.00 to $2.05, including the 53 rd week and excluding the 2017 Adjusted Items. Our long-term net earnings per diluted share growth rate guidance is 8% to 11%, plus a growing dividend. We define long-term as over a three to five year time horizon.

For 2017, we expect flat to 1.0% identical supermarket sales growth, excluding fuel.

We expect full-year FIFO operating margin in 2017, excluding fuel, the 2017 Adjusted Items, and the 2016 restructuring of certain multi-employer pension obligations, to decline approximately 20 to 30 basis points compared to 2016 results.

We expect capital investments, excluding mergers, acquisitions and purchases of leased facilities, to be $3.2 to $3.5 billion for 2017. These capital investments include approximately 55 major projects covering new stores, expansions and relocations; 175 major remodels; and other investments including digital, technology, minor remodels, and upgrades to logistics, merchandising systems and infrastructure to support our Customer 1 st business strategy.

For 2017, we expect supermarket square footage growth of approximately 1.8% before mergers, acquisitions and operational closings.

We expect the 2017 tax rate to be approximately 35%, excluding the effect of the resolution of certain tax items and the effects from the 2017 Adjusted Items.

For 2017, we anticipate product cost inflation, excluding fuel. We also expect an annualized LIFO charge of approximately $80 million.

We expect 2017 Company-sponsored pension plans expense to be approximately $110 million. We are not required to make a cash contribution in 2017, but may make contributions to the extent such contributions are beneficial to us.

For 2017, we expect to contribute approximately $360 million to multi-employer pension funds, which excludes any additional multi-employer restructuring or withdrawal liabilities that could occur. Of this amount, $35 million was accrued as of January 28, 2017. We continue to evaluate and address our potential exposure to under funded multi-employer pension plans. Although these liabilities are not a direct obligation or liability for Kroger, any new agreements that would commit us to fund certain multi-employer plans will be expensed when our commitment is probable and an estimate can be made.

We are currently negotiating agreements with UFCW for store associates in Dallas and Food 4 Less Warehouse Stores. 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. Also, continued long term financial viability of our current Taft Hartley pension plan participation is important to address.

Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include:

The extent to which our sources of liquidity are sufficient to meet our requirements may be affected by the state of the financial markets and the effect that such condition has on our ability to issue commercial paper at acceptable rates. Our ability to borrow under our committed lines of credit, including our bank credit facilities, could be impaired if one or more of our lenders under those lines is unwilling or unable to honor its contractual obligation to lend to us, or in the event that natural disasters or weather conditions interfere with the ability of our lenders to lend to us. Our ability to refinance maturing debt may be affected by the state of the financial markets.

Our ability to achieve sales, earnings and cash flow goals may be affected by: labor negotiations or disputes; changes in the types and numbers of businesses that compete with us; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; our response to these actions; the state of the economy, including interest rates, the inflationary and deflationary trends in certain commodities, and the unemployment rate; the effect that fuel costs have on consumer spending; volatility of fuel margins; changes in government-funded benefit programs; manufacturing commodity costs; diesel fuel costs related to our logistics operations; trends in consumer spending; the extent to which our customers exercise caution in their purchasing in response to economic conditions; 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 healthcare industry, including pharmacy benefit managers; our ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of our future growth plans; and the successful integration of Harris Teeter and Roundy’s. Our ability to achieve sales and earnings goals may also be affected by our ability to manage the factors identified above. Our ability to execute our financial strategy may be affected by our ability to generate cash flow.

During the first three quarters of each fiscal year, our LIFO charge and the recognition of LIFO expense is affected primarily by estimated year-end changes in product costs. Our fiscal year LIFO charge is affected primarily by changes in product costs at year-end.

If actual results differ significantly from anticipated future results for certain reporting units including variable interest entities, an impairment loss for any excess of the carrying value of the reporting units’ goodwill over the implied fair value would have to be recognized.

Our effective tax rate may differ from the expected rate due to changes in laws, the status of pending items with various taxing authorities, and the deductibility of certain expenses.

Changes in our product mix may negatively affect certain financial indicators. For example, we continue to add supermarket fuel centers to our store base. Since fuel generates lower profit margins than our supermarket sales, we expect to see our FIFO gross margins decline as fuel sales increase.

We cannot fully foresee the effects of changes in economic conditions on Kroger’s business.

Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in, contemplated or implied by forward-looking statements made by us or our representatives. We undertake no obligation to update the forward-looking information contained in this filing.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.

Item 4. Controls and Procedures.

The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures as of the quarter ended May 20, 2017, the end of the period covered by this report. Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with the evaluation described above, there was no change in Kroger’s internal control over financial reporting during the quarter ended May 20, 2017, that has materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is possible to reasonably estimate and where an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse impact on the Company’s financial condition, results of operations, or cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(c)

ISSUER PURCHASES OF EQUITY SECURITIES


					Maximum
					Dollar Value of
					Shares that May
				Total Number of	Yet Be
				Shares Purchased	Purchased
	Total Number	Average		as Part of Publicly	Under the Plans
	of Shares	Price Paid Per		Announced Plans	or Programs(4)
Period(1)	Purchased(2)	Share		or Programs(3)	(in millions)
First four weeks
January 29, 2017 to February 25, 2017	4,008,651	$	33.61	3,961,005	$	211
Second four weeks
February 26, 2017 to March 25, 2017	6,814,284	$	29.84	6,682,657	$	518
Third four weeks
March 26, 2017 to April 22, 2017	7,160,990	$	29.53	7,160,953	$	311
Fourth four weeks
April 23, 2017 to May 20, 2017	7,699,058	$	29.60	7,698,768	$	91
Total	25,682,983	$	30.27	25,503,383	$	91

(1)

The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The first quarter of 2017 contained four 28-day periods.

(2)

Includes (i) shares repurchased under two $500 million share repurchase programs approved by the Board of Directors and announced on September 15, 2016 (the “September 2016 Share Repurchase Program”) and March 9, 2017 (the “March 2017 Share Repurchase Program”), respectively, (ii) shares repurchased under a program announced on December 6, 1999 to repurchase common shares to reduce dilution resulting from our employee stock option and long-term incentive plans, under which repurchases are limited to proceeds received from exercises of stock options and the tax benefits associated therewith (“1999 Repurchase Program”), and (iii) 179,600 shares that were surrendered to the Company by participants under our long-term incentive plans to pay for taxes on restricted stock awards.

(3)

Represents shares repurchased under the September 2016 Share Repurchase Program, the March 2017 Share Repurchase Program and the 1999 Repurchase Program.

(4)

The amounts shown in this column reflect the amount remaining under the September 2016 Share Repurchase Program and the March 2017 Share Repurchase Program as of the specified period end dates. Amounts available under the 1999 Repurchase Program are dependent upon option exercise activity. The September 2016 Share Repurchase Program, the March 2017 Share Repurchase Program and the 1999 Repurchase Program do not have an expiration date but may be terminated by our Board of Directors at any time. The March 2017 Share Repurchase Program was exhausted during the second quarter of 2017. On June 22, 2017, our Board of Directors approved a $1 billion share repurchase program.

Item 6. Exhibits.


EXHIBIT 3.1	-	Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010, as amended by the Amendment to Amended Articles of Incorporation, which is hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 23 2015.

EXHIBIT 3.2	-	The Company’s regulations are hereby incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 26, 2007.

EXHIBIT 4.1	-	Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request.

EXHIBIT 10.1*	-	The Kroger Co. 2017 Long-Term Cash Bonus Plan.

EXHIBIT 31.1	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.

EXHIBIT 31.2	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer.

EXHIBIT 32.1	-	Section 1350 Certifications.

EXHIBIT 99.1	-	Additional Exhibit - Statement of Computation of Ratio of Earnings to Fixed Charges.

EXHIBIT 101.INS	-	XBRL Instance Document.

EXHIBIT 101.SCH	-	XBRL Taxonomy Extension Schema Document.

EXHIBIT 101.CAL	-	XBRL Taxonomy Extension Calculation Linkbase Document.

EXHIBIT 101.DEF	-	XBRL Taxonomy Extension Definition Linkbase Document.

EXHIBIT 101.LAB	-	XBRL Taxonomy Extension Label Linkbase Document.

EXHIBIT 101.PRE	-	XBRL Taxonomy Extension Presentation Linkbase Document.

*Management contract or compensatory plan or arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE KROGER CO.

Dated: June 27, 2017	By:	/s/ W. Rodney McMullen
		W. Rodney McMullen
		Chairman of the Board and Chief Executive Officer

Dated: June 27, 2017	By:	/s/ J. Michael Schlotman
		J. Michael Schlotman
		Executive Vice President and Chief Financial Officer

Exhibit Index


EXHIBIT 3.1	-	Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 22, 2010, as amended by the Amendment to Amended Articles of Incorporation, which is hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 23 2015.

EXHIBIT 3.2	-	The Company’s regulations are hereby incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 26, 2007.

EXHIBIT 4.1	-	Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the SEC upon request.

EXHIBIT 10.1*	-	The Kroger Co. 2017 Long-Term Cash Bonus Plan.

EXHIBIT 31.1	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Executive Officer.

EXHIBIT 31.2	-	Rule 13a—14(a) / 15d—14(a) Certifications — Chief Financial Officer.

EXHIBIT 32.1	-	Section 1350 Certifications.

EXHIBIT 99.1	-	Additional Exhibit — Statement of Computation of Ratio of Earnings to Fixed Charges.

EXHIBIT 101.INS	-	XBRL Instance Document.

EXHIBIT 101.SCH	-	XBRL Taxonomy Extension Schema Document.

EXHIBIT 101.CAL	-	XBRL Taxonomy Extension Calculation Linkbase Document.

EXHIBIT 101.DEF	-	XBRL Taxonomy Extension Definition Linkbase Document.

EXHIBIT 101.LAB	-	XBRL Taxonomy Extension Label Linkbase Document.

EXHIBIT 101.PRE	-	XBRL Taxonomy Extension Presentation Linkbase Document.

* Management contract or compensatory plan or arrangement

Exhibit 10.1

THE KROGER CO.

2017

LONG-TERM CASH BONUS PLAN

1. PURPOSE OF THE LONG-TERM CASH BONUS PLAN. The purpose of The Kroger Co. 2017 Long-Term Cash Bonus Plan (the “2017 Plan” or the “Plan”) is to reward participating Kroger executive employees for improved Company long-term performance.

2. ELIGIBILITY. Awards under this Plan may be made only to employees who are executives of The Kroger Co. (the “Company” or “Kroger”) and its subsidiaries and affiliates at pay level 35 or higher and who are notified in writing by the Compensation Committee of the Board of Directors (the “Compensation Committee” or the “Committee”) (or Kroger’s CEO at the direction of the Compensation Committee) of their participation in the Plan.

3. ADMINISTRATION. The Compensation Committee will administer the Plan. The Committee will construe and interpret the Plan. The Committee has full authority and discretion to determine the timing of awards, to select from those eligible the individuals that will participate in the Plan, and to establish such other measures as may be necessary or appropriate to the objectives of the Plan. All decisions regarding the vesting of awards under the Plan will be made by the Committee. The Committee’s decisions will be final and binding on all parties, including the Company and all participants.

4. AWARD CYCLE. The 2017 Plan will include fiscal years 2017, 2018, and 2019. The last day of fiscal 2019 will be the end of the award cycle for the 2017 Plan. It is contemplated that a new plan will be adopted every year, with each plan covering three years.

5. LONG-TERM BONUS. Each participant is eligible to earn a long-term bonus based on actual Company performance measured against the performance standards described below.

6. COMPANY PERFORMANCE STANDARDS. Company performance will be measured in four ways: (i) improvement in Customer 1 st Tracker scores, (ii) reductions in Total Operating Costs (excluding fuel) as a percentage of sales, (iii) improvement in Associate Survey scores, and (iv) improvement in Return on Invested Capital.

(a) Customer 1 st Tracker : Customer 1 st Tracker is a measure of Company performance in four key areas (People, Shopping Experience, Product and Price) based on results of customer surveys. The Customer 1 st Tracker methodology to be used under this Plan is the one currently in use by the Company, subject to such modifications as the Committee may approve from time to time. Fiscal year end 2016 results will be the base against which performance under the Plan will be measured.

(b) Total Operating Costs : Total operating costs, for purposes of the Plan, will be calculated by adding (i) OG&A, depreciation, and rent (excluding fuel), for the total Company, and (ii) warehouse and transportation costs, shrink, and advertising expenses, for our supermarket operations (excluding fuel) for the Company’s supermarket operations. Total operating costs will exclude one-time expenses incurred in lieu of future anticipated

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obligations. Future expenses that are avoided by virtue of the incurrence of the one-time expense will be deemed to be total operating expenses in the year in which they otherwise would have been incurred. The total operating costs, as a percentage of sales, for fiscal year 2016 will be the base against which performance under the Plan will be measured.

(c) Associate Survey : Associate Survey is a measure of Company performance designed to measure the engagement of Kroger associates, based on the results of associate surveys. The Associate Survey engagement index score to be used under this Plan is the one currently in use by the Company, subject to such modifications as the Committee may approve from time to time. Fiscal year end 2016 results will be the base against which performance under the Plan will be measured.

(d) Return on Invested Capital : Return on invested capital, for purposes of the Plan, will be calculated by dividing adjusted operating profit for the prior four quarters by the average invested capital. Adjusted operating profit will be calculated by excluding unusual items included in operating profit, and adding our LIFO charge, depreciation and amortization, and rent. Average invested capital will be calculated as the sum of (i) the average of our total assets, (ii) the average LIFO reserve, (iii) the average accumulated depreciation and amortization, and (iv) a rent factor equal to total rent for the last four quarters multiplied by a factor of eight; minus (i) the average taxes receivable, (ii) the average trade accounts payable, (iii) the average accrued salaries and wages, and (iv) the average other current liabilities. Averages are calculated for return on invested capital by adding the beginning balance of the first quarter and the ending balance of the fourth quarter, of the last four quarters, and dividing by two. Fiscal year end 2016 results will be the base against which performance under the Plan will be measured.

7. DETERMINING AWARD PAYOUTS. Except with respect to participants who die during the award cycle, as described in paragraph 10(c) below, Long-Term Bonus awards under the Plan will be calculated as of the end of fiscal year 2019. Provided that no decrease occurs in any of the four key areas, for each one point improvement in the Customer 1 st Tracker score, a bonus amount equal to four percent of the participant’s base salary as of the later of (i) January 28, 2017, and (ii) the date on which the participant first became eligible to participate in the Plan, will be earned. For each basis point reduction in Total Operating Costs, an additional bonus amount equal to one-half of one percent of the participant’s base salary as of the later of (i) January 28, 2017, and (ii) the date on which the participant first became eligible to participate in the Plan, will be earned. Under the Associate Survey, for each one point improvement in the associate engagement index score, a bonus amount equal to four percent of the participant’s base salary as of the later of (i) January 28, 2017, and (ii) the date on which the participant first became eligible to participate in the Plan, will be earned. For each basis point improvement in Return on Invested Capital, an additional bonus amount equal to four percent of the participant’s base salary as of the later of (i) January 28, 2017, and (ii) the date on which the participant first became eligible to participate in the Plan, will be earned. In no event will any Long-Term Bonus award exceed the lesser of $5,000,000 and 100% of the participant’s base salary as of the later of (i) January 28, 2017, and (ii) the date on which the participant first became eligible to participate in the Plan. Plan bonus potentials for participants who become eligible for participation after the first day of the award cycle of the Plan will be prorated

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based on the remaining number of days in the award cycle. In all cases, the effect during the award cycle of this Plan of accelerating the payment, funding, or recognition of expense of multi-employer pension liability, or the imposition of pension withdrawal liability; in either case undertaken by the Company as part of its effort to mitigate its exposure to multi-employer pension plan liability, will be excluded for purposes of calculating the Plan bonus.

8. PAYMENT OF AWARDS. Awards, if any, earned under the terms of the Plan will be paid in cash. Unless some other date is selected by the Committee, awards will be paid in March of 2020 except for participants who make deferral elections under the deferred compensation supplement in which case the provisions of the deferred compensation supplement will control. Amounts earned under the Plan will not be taken into consideration in calculating earnings under any of the Company’s pension plans.

9. ADJUSTMENTS. The Committee will make such adjustments as it deems necessary or desirable based on changes in accounting or tax law, or on account of any acquisition, disposition or other developments that may affect the calculation of awards under the Plan.

10. TERMINATION OF EMPLOYMENT, PERMANENT DISABILITY, RETIREMENT, LEAVE OF ABSENCE, OR DEATH OF PARTICIPANT.

(a) Participation in the Plan does not create a contract of employment, or grant any employee the right to be retained in the service of the Company. Any participant whose employment is terminated by the Company; who voluntarily terminates his or her employment (other than in accordance with paragraph (b) below); or whose pay level drops below pay level 35, prior to the end of the 2017 Plan award cycle, will forfeit all rights to payment under the Plan.

(b) If a participant voluntarily terminates his or her employment after reaching age 55 with at least five years of service with the Company, or due to permanent disability as determined by the Company, participation will continue, and that participant will be paid a pro rata share of the amount earned according to the terms of the award proportionate to the period of active service during the 2017 Plan award cycle beginning with the date on which the participant first became a participant under the Plan.

(c) If a participant is on an approved leave of absence during the 2017 Plan award cycle for which they are eligible, the participant will be given service credit for 90 days. Thereafter, the award will be reduced by a pro-rata amount for any leave time that extends beyond 90 days, with discretion reserved for special circumstances.

(d) If a participant dies during the 2017 Plan award cycle, participation will continue until the end of the fiscal year in which the death occurs, and the participant’s designated beneficiary (or if none, then the participant’s estate) will be paid a prorata share of the amount earned according to the terms of the award proportionate to the period of active service during the 2017 Plan award cycle before the participant’s death beginning with the date on which the participant first became a participant under the Plan. The amount of the award payout, which will be made as soon as reasonably practicable as determined by the

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Committee, will be calculated as of the end of the fiscal year in which the participant’s death occurs based on actual results as of the end of that fiscal year.

(e) Notwithstanding anything contained in this paragraph 10 to the contrary, in the event that during the 2017 Plan award cycle a participant provides services as an employee, director, consultant, agent, or otherwise, to any of Kroger’s competitors, the participant’s award hereunder terminates. For purposes of this paragraph 10(e), a competitor is any business that sells groceries, food, drugs, health and beauty care items, motor fuels, or pharmaceuticals, at retail in one or more of the same geographic areas that Kroger sells those products.

(f) For purposes of this Plan, “period of active service” means the period of time that the participant actually is working for Kroger, subject to paragraph 10(c), plus any earned but unused vacation for the year in which the participant ceases employment, and excluding any “banked” vacation earned but not taken in prior years.

11. Change in Control . A bonus equal to 50% of the participant’s base salary as of the later of (i) January 28, 2017, and (ii) the date on which the participant first became eligible to participate in the Plan, will be paid to the participant if at any time during the 2017 Plan award cycle any of the following occur:

(a) without prior approval of our Board of Directors, any person, group, entity or group thereof, excluding our employee benefit plans, becomes the owner of, or obtains the right to acquire, 20% or more of the voting power of our then outstanding voting securities; or

(b) a tender or exchange offer has expired, other than an offer by us, under which 20% or more of our then outstanding voting securities have been purchased; or

(c) as a result of, or in connection with, or within two years following (i) a merger or business combination, (ii) a reorganization, or (iii) a proxy contest, in any case which was not approved by our Board of Directors, the individuals who were directors of Kroger immediately before the transaction cease to constitute at least a majority thereof, except for changes caused by death, disability or normal retirement; or

(d) our shareholders have approved (i) an agreement to merge or consolidate with or into another corporation and Kroger is not the surviving corporation or (ii) an agreement, including a plan of liquidation, to sell or otherwise dispose of all or substantially all of our assets.

12. EFFECTIVE DATE OF PLAN. This Plan is effective as of January 29, 2017.

13. AMENDMENT, SUSPENSION, OR TERMINATION OF PLAN. The Committee or the Board of Directors of the Company may at any time suspend, terminate or amend the plan in such respects as it deems to be in the best interests of the Company. No amendment will adversely

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affect any right of any participants, or their successors in interest, under the terms of any award made hereunder before the effective date of the amendment.

14. DEFERRED COMPENSATION SUPPLEMENT. The Deferred Compensation Supplement attached as Annex I hereto is adopted as a part of this Plan.

IN WITNESS WHEREOF, The Kroger Co. has caused this Plan to be adopted this 29 th day of January, 2017.


	THE KROGER CO.

	By:	/s/ Christine S. Wheatley
		Christine S. Wheatley
		Group Vice President, Secretary and General Counsel

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ANNEX I

DEFERRED COMPENSATION SUPPLEMENT TO

THE KROGER CO. 2017 LONG-TERM CASH BONUS PLAN

Effective as of January 29, 2017

Establishment and Purpose of this Deferred Compensation Supplement

Effective as of the date set forth above, The Kroger Co. (the “Company”) adopts this Deferred Compensation Supplement (the “Supplement”) to The Kroger Co. 2017 Long-Term Cash Bonus Plan (the “Plan”). The purpose of the Supplement is to provide supplemental deferred compensation to certain highly compensated employees of the Company. The Supplement is intended to be unfunded and maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees, within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 (“ERISA”). The Supplement is also intended to comply with the requirements of Section 409A of the Internal Revenue Code (the “Code”).

Definitions

As used in the Supplement, in addition to the terms defined in Section 1 of the Supplement, these words and phrases have the following meanings (all other capitalized terms in the Supplement have the meanings ascribed to them in the Plan, unless the context requires otherwise):

(a) “Account” means a bookkeeping account established on the records of the Company for a Participant which is credited with amounts deferred by a Participant and interest on those amounts under Section 4 of the Supplement.

(b) “Affiliate” means an organization that is (i) a member of the same controlled group of corporations (as defined in Code Section 414(b)) as the Company, (ii) a trade or business under common control (as defined in Code Section 414(c)) with the Company, (iii) an organization which is a member of an affiliated service group (as defined in Code Section 414(m)) that includes the Company, or (iv) otherwise required to be aggregated with the Company under Code Section 414(o).

(d) “Committee” means the Retirement Management Committee of the Company.

(e) “Company” means The Kroger Co., an Ohio corporation, or any successor.

(f) “Compensation Committee” means the Compensation Committee of the Board.

(g) “Designated Beneficiary” means the persons or entities designated by the Participant, in a form and manner acceptable to the Committee, to receive payment of the remaining balance of

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the Participant’s Account in the event the Participant dies before receiving the entire interest credited to the Participant’s Account.

(h) “Election” means an election by an Eligible Employee, consistent with the terms of the Supplement and in a form and manner satisfactory to the Committee, to elect to defer a Long-Term Bonus for a Performance Period and to specify a time and form of payment for the portion of the Participant’s Account attributable to such deferred amounts.

(i) “Eligible Employee” means any individual who has been designated as eligible to participate in the Plan.

(j) “Insolvency” means an entity is unable to pay its debts as they become due, or is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.

(k) “Long-Term Bonus” means a bonus payable to an Eligible Employee under the Plan.

(l) “Participant” means an Eligible Employee who has elected to defer a Long-Term Bonus payable under the Plan in accordance with Section 3 of the Supplement.

(m) “Performance-Based Compensation” means compensation where the amount of, or entitlement to, the compensation is contingent on the satisfaction of pre-established organizational or individual performance criteria relating to a Performance Period in which a Participant performs services. In determining whether an amount constitutes Performance-Based Compensation, the Committee shall apply the rules set forth in Treasury Regulation Section 1.409A‑1(e), or any subsequent guidance.

(n) “Performance Period” means a period of at least twelve (12) months in which Performance-Based Compensation is determined for the performance of services.

(o) “Plan Year” means the fiscal year of the Company.

(p) “Unforeseeable Emergency” means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or a dependent (as defined in Section 152(a) of the Code) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. An Unforeseeable Emergency will not include the need to send a Participant’s child to college or the desire to purchase a home.

Deferral Election.

(a) Election to Defer Long-Term Bonus . A Participant may file an Election to defer receipt of all or any portion of the Participant’s Long-Term Bonus that becomes payable under the Plan. A Participant’s Election to defer receipt of a Long-Term Bonus must be made no later than six months prior to the end of the applicable Performance Period, and is irrevocable once made, and must designate the time and manner in which such deferred Long-Term Bonus, and interest on such deferred amount, is to be later paid in accordance with the distribution options set forth in Section 5.

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(b) Designated Beneficiary. A Participant shall, in the Participant’s Election, name a Designated Beneficiary with respect to amounts credited to the Participant’s Account. The Participant may change or revoke the designation of a Designated Beneficiary by written notice to the Committee or the Committee’s designee.

(c) Termination of Participation . An individual shall cease to be a Participant in this Supplement when all amounts allocated to the Participant’s Account have been paid under the terms of this Supplement.

Benefits.

(a) Crediting of Deferred Amounts . As of the date a Long-Term Bonus would otherwise be payable to a Participant under Section 5 of the Plan, a Participant’s Account shall be credited with an amount equal to the portion of the Long-Term Bonus deferred under this Supplement pursuant to the Participant’s Election for the Performance Period in question.

(b) Crediting of Interest . A Participant’s Account for each Performance Period shall be credited with interest based upon the interest rate established for the Plan Year by the Board, or by the Compensation Committee, before the beginning of each Plan Year. Once established by the Board or the Compensation Committee, such interest rate shall apply for subsequent Plan Years, unless changed by the Board or the Compensation Committee. For each Plan Year, a Participant’s Account shall be credited with interest on a quarterly basis pursuant to the following provisions:

(i) The interest for a calendar quarter shall be credited effective as of the last day of the calendar quarter.

(ii) The interest for a calendar quarter shall be in an amount equal to (A) ¼ of the applicable interest rate for the Plan Year, multiplied by (B) the average of the beginning and ending balances of the Participant’s Account for the calendar quarter.

(c) Effect upon the Kroger Consolidated Retirement Benefit Plan. Amounts deferred under the Supplement are not taken into account in computing the monthly benefits to which a Participant and/or Participant’s spouse or beneficiary is entitled under the Kroger Consolidated Retirement Benefit Plan or any other pension plan of the Company.

Time and Form of Distribution.

(a) Distribution following Termination of Employment . A Participant, in the Participant’s Election for a Performance Period, shall specify the time and manner that the Participant’s Account attributable to the Performance Period is to be paid to the Participant upon the Participant’s termination of employment with the Company (for any reason other than death) from among the following choices:

(i) Immediate Lump Sum . The Account shall be paid to the Participant in a single cash lump sum payment as soon as administratively possible after the first day of the calendar quarter that occurs six months after the Participant’s termination of employment. The amount of the

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lump sum payment shall be equal to the balance of the Account as of the last day of the calendar quarter preceding the date of payment to the Participant.

(ii) Deferred (Next Year) Lump Sum . The Account shall be paid to the Participant in a single cash lump sum payment as soon as administratively possible after the later of (A) six months after the Participant’s termination of employment or (B) the first day of the calendar year following the date of the Participant’s termination of employment. The amount of the lump sum payment shall be equal to the balance of the Account as of the last day of the calendar quarter preceding the date of payment to the Participant.

In the event that the Participant dies before the date of actual payment of the lump sum payment, the Participant’s Designated Beneficiary shall receive the Participant’s lump sum payment at the same time and manner prescribed by subsection (i) or (ii), as applicable.

(iii) Immediate Quarterly Installments . The Account shall be paid to the Participant in quarterly installment payments (not less than 4 nor more than 40) commencing as soon as administratively possible after the first day of the calendar quarter that occurs six months after the Participant’s termination of employment. The amount of each quarterly installment shall be determined by dividing (A) the balance of the Account as of the last day of the calendar quarter preceding the quarterly installment payment to the Participant, by (B) the number of the remaining quarterly installment payments to be made to the Participant plus the payment currently being made.

(iv) Deferred (Retirement Age) Quarterly Installments . The Account shall be paid to the Participant in quarterly installment payments (not less than 4 nor more than 40) commencing as soon as administratively possible after the first day of the calendar quarter that occurs six months after the later of (A) the Participant’s termination of employment or (B) the date of the Participant’s retirement age specified in the Participant’s Election. The amount of each quarterly installment shall be determined by dividing (A) the balance of the Account as of the last day of the calendar quarter preceding the quarterly installment payment to the Participant, by (B) the number of the remaining quarterly installment payments to be made to the Participant plus the payment currently being made.

In the event that the Participant dies before commencement of the Participant’s quarterly installment payments, or the Participant dies after commencement of the Participant’s quarterly installment payments, the Participant’s Designated Beneficiary shall receive the Participant’s quarterly installment payments, at the election of the Participant in the Participant’s Election, either (A) at the same time and manner prescribed by subsections (iii) or (iv), as applicable, as if the quarterly installment payments were being made to the Participant or (B) in a single lump sum payment as soon as administratively possible after the first day of the calendar quarter following the date of the Participant’s death in an amount equal to the balance of the Account as of the last day of the calendar year preceding the date of payment to the Designated Beneficiary.

(b) Distribution upon the Death of a Participant . A Participant, in the Participant’s Election, shall specify the time and manner that the Account is to be paid to the Participant’s Designated Beneficiary upon the Participant’s death.

(i) Time and Manner of Payment . The Participant may elect one of the following time and manner of payments with respect to payments to the Participant’s Designated Beneficiary:

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(A) Immediate (Next Quarter) Lump Sum . The Account shall be paid to the Participant’s Designated Beneficiary in a single cash lump sum payment as soon as administratively possible after the first day of the calendar quarter following the date of the Participant’s death. The amount of the lump sum payment shall be equal to the balance of the Account as of the last day of the calendar quarter preceding the date of payment to the Designated Beneficiary.

(B) Deferred (Next Year) Lump Sum . The Account shall be paid to the Participant’s Designated Beneficiary in a single cash lump sum as soon as administratively possible after the first day of the calendar year following the date of the Participant’s death. The amount of the lump sum payment shall be equal to the balance of the Account as of the last day of the calendar year preceding the date of payment to the Designated Beneficiary.

(C) Immediate (Next Quarter) Quarterly Installments . The Account shall be paid to the Participant’s Designated Beneficiary in quarterly installment payments (not less than 4 nor more than 40) commencing as soon as administratively possible after the first day of the calendar quarter following the date of the Participant’s death. The amount of each quarterly installment shall be determine by dividing (1) the balance of the Account as of the last day of the calendar quarter preceding the quarterly installment payment to the Designated Beneficiary, by (2) the number of the remaining quarterly installment payments to be made to the Designated Beneficiary plus the payment currently being made.

(ii) Special Death Distribution Provisions . In the event of the death of the Participant, the Committee must receive written notice and verification of the death of the Participant and reserves the right to delay distribution of a Participant’s Account to the Participant’s Designated Beneficiary until the Committee’s receipt and acceptance of such notice and verification.

The distribution options elected by the Participant in Sections 5(a) and (b) shall apply to and be binding upon any subsequent Designated Beneficiary, including any such subsequent Designated Beneficiary arising by a change by the Participant or by operation of any contingency provisions of the Participant’s beneficiary designation.

The Participant’s written designation of a Designated Beneficiary and its contingency provisions (if any) shall govern the determination of the proper person entitled to benefits under the Plan following the death of the Participant and the Participant’s Designated Beneficiary. However, in the absence of a specific contingency provision therefore with respect to the Account, the following default provisions shall apply:

(A) In the event that the Participant dies without any Designated Beneficiary, the Participant’s Designated Beneficiary shall be deemed the Participant’s estate.

(B) In the event that the Participant’s Designated Beneficiary dies after the Participant and with outstanding benefits under the Plan, such Designated Beneficiary’s own beneficiary designated in writing to the Committee (or, if none, the Designated Beneficiary’s estate) shall thereafter be considered the Participant’s Designated Beneficiary.

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(C) In the event that the Participant and the Designated Beneficiary die simultaneously or under circumstances such that the order of death cannot be determined, the Participant, for purposes of the Plan, shall be deemed to have survived the Designated Beneficiary.

(c) Changes to Distribution Elections . The Committee may, in its discretion, allow a Participant to elect to defer the time of payment or change the form of payment of the Participant’s Account; provided, however, that no such election shall be effective unless:

(i) The election will not take effect until at least twelve (12) months after the date on which the election is made,

(ii) Except in the case of a payment as the result of the Participant’s death or the occurrence of an Unforeseeable Emergency, the first payment with respect to such election is deferred for not less than five years from the date on which such payment would otherwise have been made, and

(iii) Any election which is related to a payment at a specified time or pursuant to a fixed schedule may not be made less than twelve months prior to the date of the first scheduled payment under that election.

(d) Unforeseeable Emergency. If a Participant has an Unforeseeable Emergency, the Participant may apply in writing to the Committee for an emergency payment under this Section 5(d). The Company will pay to the Participant that portion of the Participant’s Account under the Plan as necessary to meet the Unforeseeable Emergency. For purposes of this Section 5(d), a payment due to an Unforeseeable Emergency will not exceed the amount that the Committee determines is reasonably necessary to satisfy the need created by the Unforeseeable Emergency, plus amounts reasonably necessary to pay taxes reasonably anticipated as the result of the payment, after taking into account the extent to which such need is or may be relieved through reimbursement or compensation by insurance or otherwise, or by liquidation of the Participant’s assets (to the extent that such liquidation would not itself cause severe financial hardship). Upon application for a payment due to Unforeseeable Emergency, the Participant will furnish to the Committee all information as the Participant deems appropriate and as the Committee deems necessary and appropriate to make a determination on the application.

(e) Tax Withholding . The Company may withhold income or other taxes from any distribution of a Participant’s Account if the Company determines that withholding is necessary or appropriate to comply with any Federal, State or local tax withholding or similar requirements of law.

(f) Payments to Legal Incompetents . Upon proof satisfactory to the Committee that any person entitled to receive a payment under the Supplement is legally incompetent to receive the payment, the Committee may direct the payment to be made to a guardian or conservator of the estate of the person. Any payment made under the preceding sentence will release the Company from all further liability to the extent of the payment made.

(g) Discharge of Obligation . Any payment made by the Company pursuant to the Supplement shall, to the extent of the payments made, constitute a complete discharge of all

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obligations under the Supplement of the Company and the Committee. The Committee may require the payee, as a condition precedent to any payment, to execute a receipt and release in a form satisfactory to the Committee. The Committee may also require the payee, as a condition precedent to any payment, to execute an acknowledgement or agreement in a form satisfactory to the Committee concerning repayment of erroneous or duplicate benefits.

(h) Correction of Mistakes . Any mistake in the amount of a Participant’s benefits under the Supplement may be corrected by the Committee when the mistake is discovered. The mistake may be corrected in any reasonable manner authorized by the Committee. In appropriate circumstances (such as where the mistake is not material or is not timely discovered), the Committee may in its sole and absolute discretion waive the making of any correction.

Fully Vested; Forfeiture for Cause.

All amounts credited to the Participant’s Account shall be fully vested and nonforfeitable at all times. Notwithstanding the foregoing, any Participant, regardless of age, who is terminated for theft or embezzlement of Company assets, or for accepting bribes from suppliers, or who resigns during the pendency or carrying out of an investigation which established such conduct, shall forfeit 100% of the interest credited to his Account.

Funding Policy and Method.

This Supplement shall be unfunded within the meaning of Section 201(2) of ERISA, and all payments under the Supplement shall be made from the general assets of the Company, including, at the sole option of the Company, from any assets held in any trust established by the Company the assets of which are subject to the claims of the Company’s general, unsecured creditors in the event of the Company’s Insolvency. No assets shall be irrevocably set aside to pay benefits under the Supplement in a manner making the assets unreachable by the Company’s general, unsecured creditors in the event of the Company’s Insolvency. Participants and Designated Beneficiaries shall have no right to any specific assets of the Company by virtue or the existence or terms of the Supplement and shall be general, unsecured creditors of the Company at all times with respect to any claim for benefits under the Supplement.

Administration

(a) Committee Authority. The Committee shall be responsible for the operation and administration of the Supplement and for carrying out the provisions of the Supplement. The Committee shall have discretionary authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Supplement, and to decide or resolve any and all questions, including interpretations of the Supplement. Any action taken by the Committee in its discretion shall be final and conclusive on all parties. The Committee’s prior exercise of discretionary authority shall not obligate it to exercise its authority in a like fashion in the future. The Committee may, from time to time, delegate to others, including employees of the Company, administrative duties as it sees fit.

(b) Account Statements. As soon as administratively possible after the end of each calendar year, the Company shall prepare and furnish to each Participant a statement of the status of

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each of his Account of the Plan effective as of the last day of the calendar year, and such other information as the Committee may prescribe.

(c) Indemnification. The Company shall indemnify, through insurance or otherwise, each member of the Committee against any claims, losses, expenses, damages or liabilities arising out of the performance (or failure of performance) of their responsibilities under the Plan.

Claims and Appeals.

(a) Payment of Benefits . The payment of benefits due under the Supplement shall be made at such times and in such amounts as provided for under the terms of the Supplement. Each Participant and Designated Beneficiary shall be obligated to provide the Company a current address so that payments may be made as required. The mailing of a payment to the last known mailing address of a Participant or Designated Beneficiary shall be deemed full payment of the amount so mailed.

(b) Written Claim for Benefits . If a Participant or Designated Beneficiary does not receive payment of benefits under the Supplement which the Participant or Designated Beneficiary believes are due under the Supplement, the Participant or Designated Beneficiary may file a written claim for benefits with the Committee. The written claim shall be in a form satisfactory to, and with such supporting documentation and information as may be required by, the Committee.

(c) Denial of Claim . If a Participant’s or Designated Beneficiary’s claim for benefits is denied in whole or in part by the Committee, a written notice will be furnished to the claimant within 90 days after the date the claim was received. If circumstances require a longer period, the claimant will be notified in writing, prior to the expiration of the 90 day period, of the reasons for an extension of time; provided, however, that no extensions will be permitted beyond 90 days after the expiration of the initial 90 day period.

(d) Reasons for Denial . A denial or partial denial of a claim will clearly set forth:

(i) the specific reason or reasons for the denial;

(ii) a specific reference to pertinent Supplement provisions on which the denial is based;

(iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and

(iv) an explanation of the procedure for review of the denied or partially denied claim, including the claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination on review.

(e) Review of Denial . Upon denial of a claim, in whole or in part, a claimant or a duly authorized representative of the claimant may request a full and fair review of the denied claim by filing a written notice of appeal with the Committee. Any appeal must be received by the Committee within 60 days of the date that the notice of the denied claim was received. A claimant or the

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claimant’s authorized representative will have, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits and may submit issues and comments in writing, except for privileged or confidential documentation. The review will take into account all comments, documents, records, and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

If the claimant fails to file a request for review within 60 days of the notification of denial, the claim will be deemed abandoned and the claimant precluded from reasserting it. If the claimant does file a request for review, the request must include a description of the issues and evidence the claimant deems relevant. Failure to raise issues or present evidence on review will preclude those issues or evidence from being presented in any subsequent proceeding or judicial review of the claim.

(f) Decision Upon Review . The Committee will provide a written decision on review. If the claim is denied on review, the decision shall set forth:

(i) the specific reason or reasons for the adverse determination;

(ii) specific reference to pertinent Supplement provisions on which the adverse determination is based;

(iii) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits; and

(iv) a statement describing any voluntary appeal procedures offered by the Supplement and the claimant’s right to obtain the information about such procedures, as well as a statement of the claimant’s right to bring a civil action under Section 502(a) of ERISA.

A decision will be rendered by the Committee as soon as practicable. Ordinarily decisions will be rendered within 60 days following receipt of the request for review. If the need to hold a hearing or special circumstances requires additional processing time, the decision shall be rendered as soon as possible, but not later than 120 days following receipt of the request for review.

(g) Finality of Determinations; Exhaustion of Remedies . To the extent permitted by law, decisions reached under the claims procedures set forth in this Section shall be final and binding on all parties. No legal action for benefits under the Supplement shall be brought unless and until the claimant has exhausted all remedies under this Section. In any such legal action, the claimant may only present evidence and theories which the claimant presented during the claims procedure. Any claims which the claimant does not in good faith pursue through the review stage of the procedure shall be treated as having been irrevocably waived. Judicial review of a claimant’s denied claim shall be limited to a determination of whether the denial was an abuse of discretion based on the evidence and theories the claimant presented during the claims procedure. Any suit or legal action initiated by a claimant under the Supplement must be brought by the claimant no later than one year following a final decision on the claim for benefits. Notwithstanding the foregoing, in no event may a claimant initiate suit or legal action more than two years after the facts giving rise to the action occurred.

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These limitations on suits or legal actions for benefits will apply in any forum where a claimant initiates the suit or legal action.

10.

Amendment and Termination of this Supplement.

The Company reserves the right to amend or terminate this Supplement at any time by resolution of the Board or the Compensation Committee. No amendment or termination of this Supplement shall deprive a Participant or Designated Beneficiary of any portion of the Participant’s or Designated Beneficiary’s vested benefit accrued under the Supplement as of the date of the amendment or termination.

11.

General Provisions.

(a) Definition and Supplement Interpretation . The capitalized words and phrases used throughout the Supplement shall have the meanings in Section 2, unless the context requires otherwise. Unless otherwise plainly required by the context, any gender may be construed to include all genders, and the singular or plural may be construed to include the plural or singular, respectively. The section headings in the Supplement have been inserted for the convenience of reference only and are not to be considered in the interpretation of the Supplement.

(b) Interpretation and Savings Clause . The Supplement is intended to comply with Code Section 409A and guidance issued under Code Section 409A. Notwithstanding any other provision of this Supplement, the Supplement shall be interpreted and administered accordingly. If any provision of the Supplement is held invalid or unenforceable, that invalidity or unenforceability shall not affect any other provision, and the Supplement shall be construed and enforced as if the affected provision had not been included.

(c) No Employment Rights . Neither the Plan or the Supplement, nor the action of the Company in establishing or continuing the Plan or the Supplement, nor any action taken by the Committee, nor participation in the Plan or the Supplement, shall be construed as giving any person any right to remain in the employ of the Company or an Affiliate or, except as provided in the Plan and the Supplement, the right to any payment or benefit. Nothing in the Plan or the Supplement shall affect the right of the Company or an Affiliate to terminate a person’s employment at any time, with or without cause.

(d) Assignment or Alienation of Benefits .

(i) General Rule . Except as expressly provided in the Supplement, the benefits payable under the Plan or the Supplement shall not be subject to assignment or alienation, and any attempt to do so shall be void.

(ii) Domestic Relations Orders . Notwithstanding any other provision of the Supplement, all or a portion of a Participant’s Account may be paid to another person as specified in a domestic relations order that the Committee determines is a Qualified Domestic Relations Order. For this purpose, a “Qualified Domestic Relations Order” means a judgment, decree, or order (including the approval of a property settlement agreement) that:

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(A) is issued pursuant to a State’s domestic relations law;

(B) relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of a Participant; and

(C) creates or recognizes the existence of an alternate payee’s right to, or assigns to the alternate payee the right to, receive all or a portion of the Participant’s benefits under the Supplement;

The Committee shall determine in its sole and absolute discretion whether any document received by it is a Qualified Domestic Relations Order. In making this determination, the Committee may consider the rules applicable to “domestic relations orders” under Code Section 414(p) and Section 206(d) of ERISA, and other rules and procedures it deems relevant. If an order is determined to be a Qualified Domestic Relations Order, the amount to which the alternate payee is entitled under the Qualified Domestic Relations Order shall be paid in a single lump-sum payment as soon as practicable after the determination.

(e) Governing Law . To the extent not preempted by federal law, this Supplement shall be interpreted and construed in accordance with the laws of the State of Ohio (determined without regard to choice of laws principles).

IT WITNESS WHEREOF, The Kroger Co. has caused this Deferred Compensation Supplement to The Kroger Co. 2017 Long-Term Bonus Plan to be executed as of the 29 th day of January, 2017.


	THE KROGER CO.

	By:	/s/ Christine S. Wheatley
	Title:	Group Vice President, Secretary and General Counsel

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DEFERRAL AGREEMENT

THIS FORM APPLIES ONLY TO DEFERRALS MADE WITH RESPECT TO THE LONG-TERM CASH BONUS THAT MAY BECOME PAYABLE UNDER THE 2017 LONG-TERM CASH BONUS PLAN


PARTICIPANT:


DATE OF BIRTH:


SOCIAL SECURITY NO.:


CURRENT ADDRESS:

DEFERRAL ELECTION (FISCAL YEARS 2017‑2019)

The Long-Term Cash Bonus that may become payable to you under The Kroger Co. 2017 Long-Term Cash Bonus Plan (the "Plan" ), which includes the Company’s 2017‑2019 Fiscal Years, may be deferred under the Deferred Compensation Supplement to the Plan (the "Supplement" ), provided the Company receives your properly completed Deferral Agreement no later than six months prior to the end of fiscal year 2019 .

I elect to defer all or a portion of the Long-Term Cash Bonus that may become payable to me under the Plan, as designated below. I understand that this deferral election is irrevocable, and is subject to all of the terms of the Plan and Supplement.


DEFERRAL AMOUNT:
%	( enter percentage of Long-Term Bonus to be deferred )

PAYMENT ELECTION FOR AMOUNTS DEFERRED

I elect to have the amount of my Long-Term Cash Bonus (Fiscal Years 2017‑2019) deferred, and earnings on such amounts, paid as follows:

☐ Immediate Lump Sum Payment. Lump sum payment after the first day of the calendar quarter that occurs six (6) months after my termination of employment.

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☐ Deferred (Next Year) Lump Sum Payment. Lump sum payment after the later of (i) the first day of the calendar year following my termination of employment or (ii) six (6) months after my termination of employment.

☐ Immediate (Next Quarter) Installment Payments. Quarterly installment payments of ____________ payments [ specify number of payments - no less than four (4) and no more than forty (40) ] commencing after the first day of the calendar quarter that occurs six (6) months after my termination of employment.

☐ Deferred (Retirement Age) Installment Payments. Quarterly installment payments of ____________ payments [ specify number of payments - no less than four (4) and no more than forty (40) ] commencing after the first day of the calendar quarter that occurs six (6) months following the later of (i) my termination of employment or (ii) my __________ birthday [ specify birthday for which payments shall commence ].

DESIGNATION OF BENEFICIARY

Pursuant to the Supplement to the Plan, I designate the following person(s) to receive payment of the amounts in my Account that are attributable to deferrals (and earnings on such deferrals) in the event of my death prior to complete distribution of such amounts. I understand that if I do not have a valid Designation of Beneficiary on file, the amounts credited to my Account that are attributable to deferrals (and earnings on such deferrals) shall be distributed to the executor or administrator of my estate.


Beneficiary(ies)	Percentage of Death Benefit:

		%

		%

		%

TOTAL:		% ( must equal 100% )

Please attach any contingent Designated Beneficiary provisions.

PAYMENT TO DESIGNATED BENEFICIARY

I elect to have the amounts in my Account that are attributable to deferrals (and earnings on such deferrals) that are unpaid as of the date of my death, paid to my Designated Beneficiary as follows:

☐ Immediate (Next Quarter) Lump Sum Payment. Lump sum payment after the first day of the calendar quarter following the date of my death.

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☐ Deferred (Next Year) Lump Sum Payment. Lump sum payment after the first day of the calendar year following the date of my death.

PARTICIPANT’S ACKNOWLEDGEMENTS

I acknowledge that I have received a copy of the Plan and Supplement, and agree that the deferral of any portion of my Long-Term Cash Bonus that may become payable to me under the Plan is subject to the terms and conditions of the Plan and Supplement.



Participant’s Signature


Participant’s Name ( Printed )


Date


		Committee
2017 Long-Term Cash Bonus Plan		By:
Deferred Compensation Supplement		Date:
Deferral Agreement

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ALTERNATIVE REPORTING AND DISCLOSURE STATEMENT

FOR PENSION PLANS FOR CERTAIN SELECTED EMPLOYEES

To the Secretary of Labor:

In compliance with the requirements of the alternative method of reporting and disclosure under Part 1 of Title I of the Employee Retirement Income Security Act of 1974 for unfunded or insured pension plans for a select group of management or highly compensated employees, specified in Department of Labor Regulations, 29 C.F.R. §2520.104‑23, the following information is provided by the undersigned employer.


Name and Address of Employer:		The Kroger Co. 1014 Vine Street Cincinnati, Ohio 45202‑1141

Employer Identification Number:		31‑0345740

The Employer maintains a plan (or plans) primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.

Number of Plans and

Participants in Each

Plan:

___________ Plan covering __________ Employees (or Plans covering and ___________ Employees, respectively.)

Dated ___________________________, 20__.


	THE KROGER CO.


	By:

	Title:

This form should be mailed to:

Top Hat Plan Exemption

Employee Benefits Security Administration

Room N‑1513

U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

(Send certified mail to evidence filing requirement satisfied)

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EXHIBIT 31.1

CERTIFICATION

I, W. Rodney McMullen, certify that:

I have reviewed this quarterly report on Form 10-Q of The Kroger Co.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: June 27, 2017
	/s/ W. Rodney McMullen
	W. Rodney McMullen
	Chairman of the Board and Chief Executive Officer
	(principal executive officer)

EXHIBIT 31.2

CERTIFICATION

I, J. Michael Schlotman, certify that:

I have reviewed this quarterly report on Form 10-Q of The Kroger Co.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: June 27, 2017
	/s/ J. Michael Schlotman
	J. Michael Schlotman
	Executive Vice President and Chief Financial Officer
	(principal financial officer)

EXHIBIT 32.1

NOTE: The referenced officers, based on their knowledge, furnish the following certification, pursuant to 18 U.S.C. §1350.

We, W. Rodney McMullen, Chief Executive Officer and Chairman of the Board, and J. Michael Schlotman, Executive Vice President and Chief Financial Officer, of The Kroger Co. (the “Company”), do hereby certify in accordance with 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Quarterly Report on Form 10-Q of the Company for the period ended May 20, 2017 (the “Periodic Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. §78m or 78o(d)); and

The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Dated: June 27, 2017	/s/ W. Rodney McMullen
	W. Rodney McMullen
	Chairman of the Board and Chief Executive Officer

	/s/ J. Michael Schlotman
	J. Michael Schlotman
	Executive Vice President and Chief Financial Officer

A signed original of this written statement as required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to The Kroger Co., and will be retained by The Kroger Co. and furnished to the SEC or its staff upon request.

EXHIBIT 99.1

Schedule of computation of ratio of earnings to fixed charges of The Kroger Co. and consolidated subsidiary companies for the five fiscal years ended January 28, 2017 and for the quarters ended May 20, 2017 and May 21, 2016.


	May 20,		May 21,		January 28,		January 30,		January 31,		February 1,		February 2,
	2017		2016		2017		2016		2015		2014		2013
	(16 weeks)		(16 weeks)		(52 weeks)		(52 weeks)		(52 weeks)		(52 weeks)		(53 weeks)

Earnings:
Earnings before tax expense	$	445	$	1,045	$	2,914	$	3,094	$	2,649	$	2,282	$	2,302
Fixed charges		336		308		1,037		903		896		797		823
Capitalized interest		(5)		(4)		(13)		(9)		(5)		(5)		(3)

Pre-tax earnings before fixed charges	$	776	$	1,349	$	3,938	$	3,988	$	3,540	$	3,074	$	3,122

Fixed charges:
Interest	$	182	$	159	$	535	$	491	$	493	$	448	$	465
Portion of rental payments deemed to be interest		154		149		502		412		403		349		358

Total fixed charges	$	336	$	308	$	1,037	$	903	$	896	$	797	$	823

Ratio of earnings to fixed charges		2.3		4.4		3.8		4.4		4.0		3.9		3.8