Updated: Feb 23, 2022
I recently criticized CEO Dan Price for his assertion that the inflation we are currently experiencing is purely a result of "corporate greed."
I received several responses to my critique, with multiple people asking for the numbers behind my thinking. When I asked "which company", a twitter user responded with "Kroger."
So the question is - Are you suffering from "inflation" or "price gouging" when paying higher prices for your food at Kroger?
We’ll start with an overview of the net profit margin. I want to make clear that my main point in respect to comments from Dan Price is that “Record Revenue” is not proof of price gouging. He can make the case by using other numbers, but correlation/causation comes into effect when using that number. “Record Revenue” is an account of the dollars that came into the company via sales. Record revenue could be evidence of “price gouging,” but it could also be evidence of inflation, since inflation would cause prices to be elevated and thus lead to higher revenue numbers.
Net profit margin was 3% in Q4 2018, 1.3% in Q4 2019, 2.3% in Q4 2020, and .75% in Q4 2021. On most of Dan Price’s posts I have seen him talk about “Profit increases of XX%” I see why he didn’t do that with Kroger. He instead chose to say “Record revenue.” I’m simply looking for an honest argument. I can handle that, but what I can’t handle is someone cherry-picking one data set that can make the point they are trying to make in a single twitter post without bringing up any of the other numbers.
For instance, Dan can and has said, “Kroger did a $1.3 billion stock buyback in 2021.” This is true, and would easily make a point that he’s fond of making. I see why he hasn’t made that one as often for Kroger as well.. A typical example of a stock buyback that benefits only the executives and directors is a buyback of a certain “class” of shares. For instance, a stock will have “Class A” Class B” and so on. The class A shares may be the shares that are issued to insiders at the company. Then company X will do a stock buyback of Class A shares, paying only the people that own Class A shares. This is the company taking money out of it’s account and benefiting only the directors of the company. I can see how that can be portrayed as problematic.
In Kroger’s case, they did a buyback of common stock. Insiders at the company only own .8% of the common stock. The other 99.2% are owned by people like me (individual investors), other public companies, and institutions. The word institutions get’s a bad rap, but your (or your parents or grandparents) money is represented by institutions that invest their retirements.
Since fiscal 2019 Kroger has removed 60 million shares from the market. This is likely why their price is remaining where it is right now. If a company is worth $1 million and they have 1 million shares, those shares will be fairly valued at $1 per share. If a company is worth $1 million and they have 800k shares, those shares will be fairly valued at $1.25 per share. That’s an increase of 25% in the share price for a company that did not increase in value. That’s one reason that companies buy back their own shares from the market. That will easily be portrayed as “benefiting shareholders,” but I would ask, why is that automatically a bad thing? .8% of the stock is held by insiders, the rest predominantly benefits retirement accounts.
The other reason they buy back stock is to keep cash on their balance sheet, which KR did in this scenario.
You can see that KR’s jump in cash is roughly equal to the $1.3B stock buyback.
It remains to be seen what KR does with the cash. I know from reading stock news on a daily basis that companies holding large amounts of cash are considered “safe” by investors during an economic downturn, which we are likely to see again in the near future.
Let’s get back to the net profit. Because what if they wouldn’t have done that buyback?
Gross revenue 2021 is $132.5B. It was $122B in 2019. Gross Revenue increased 8%.
Cost of revenue includes manufacturing, delivery, and employee labor, among others. It does not include things considered variable (or optional), like executive comp, the buyback, etc.
Cost of revenue was $94.3 B in 2019, it was $100.7 B in 2021. Cost of revenue increased 7%. By the way, the TTM (trailing twelve month) number for Cost of Revenue is up to $104.6 B, and the Gross Revenue TTM is up to $135.5 B. If that remains consistent that will have Rev. up 11% and Cost of Rev. up 11% since 2019.
In 2021 Kroger’s net profit was $2.5 billion, from their record revenue of $132.5 billion. Net profit was $3.1 billion in 2019, from gross revenue of $122 billion. (This is why I got annoyed when Dan Price was simply using “Record Revenues” as proof of price gouging).
That means we have $130 billion in expenses to account for.
The stock buyback accounts for 1% of their expenses.
Kroger paid out $534 million in dividends. These dividends go to all shareholders, of which .8% are insiders. Dividends, in my opinion, should be the last thing someone gets mad about. This is literally a company sharing their profits with everyone that has invested in the company.
Alrighty here’s the fun part. I’m going to start by stating my biases. I think executives are highly underpaid. One bad decision from a CEO can cost the company, or make the company, a billion dollars. A 1% decline in sales due to a poor decision from one person would cost KR $1.3 billion. So, paying a CEO 1% of the value of that one bad decision does not seem outlandish to me. There is no other single employee of the company that has that much influence.
You’ll find that these numbers are from 2020. That’s because the official form SEC DEF 14A is filed in May of the following year. Meaning that we do not have official numbers for 2021 because they will not be filed with the SEC until May of 2022.
Let’s take 2020’s total executive and director (board member) compensation.
$52.3 million. For fun, we’ll assume that this number will increase by 50% for 2021. $78 million (and this number won’t increase by 50%).
Given all the numbers we’ve gone over, you might see why I brush off executive pay. They are numbers that are massive for one person, but in the context of expenses for the business, they are miniscule. For example, Kroger gave bonuses to their full-time & part-time employees in 2020 for “hazard pay” totalling $230 million.
This only comes out to $500 per employee, but the cost of doing so was 4.5X the cost of total executive compensation. Clearing out total executive pay would allow for giving $111 extra to each employee for the entire year (465k employees).
Likewise, reducing that $52 million per year in exec comp would do nothing to lower prices for a business taking in $15 million an hour in sales.
Two more things about executive pay.
1. You can tell from the statement that 90% of it came from stocks and options. Doesn’t that cost the company money?
In 2020 KR issued $55 million worth of new stock. That means they created new shares out of thin air on the market and (likely) gave them to their executives. The only way the executives receive that money is if they sell that stock. When they sell the stock, that means an investor is buying it from them. This means that at least some of the time, the executive pay does not actually come from the company's “bank account balance.” They create new shares that the exec can then sell to someone else in the market when they are ready to cash out.
2. The compensation total does not mean the exec took the money home. It’s a value estimation based on the stock or options that were awarded. I’m only making this point because I’ve seen this misused. For instance, in 2018 Elon Musk was named highest paid CEO by New York Times at $2 billion. This number was an estimated value of the options he was awarded by Tesla. The frustrating part (to me and no one else other than Musk) was that he did not receive that $2 billion in 2018. Actually, it was contingent on TSLA’s performance over the next couple years. Meaning that he wasn’t even guaranteed to ever receive the money. BUT, because the comp is calculated based on an estimated value, he was the highest paid CEO that year. Of course, we know how that turned out. But had it gone the other way, would they (NYT) have taken away his “highest paid CEO” article? No.
I’m not trying to make the argument that these guys are never going to see the money, but when we talk about compensation, and use it to drive public opinion, and thus public policy, I make damn sure the compensation was actually received.
One last thing..
If we remove the projected increase in total executive pay ($26 million), the stock buyback increase from the previous year ($850 million), and the dividend increase from the previous year ($50 million), we end up at $926 million in increased expenses that generally make people upset.
TTM = Trailing Twelve Months
TTM Gross Revenue $135 billion
TTM Net Profit $1 billion
TTM Net Profit Margin .75%
Adjusted = Removal of controversial expenses
Adjusted TTM $135 billion
Adjusted TTM $1.92 billion
Adjusted TTM Net Profit Margin 1.4%
We don’t know where the margin will end up, but from everything I’ve seen on the trends it won’t be good. The current 1.4% (adjusted) is still below 17 of the last 21 years.
The executive pay and stock buybacks do not account for a large enough total of the expenses to fully explain the low net profit margins.
My conclusion is that if it were simply “corporate greed” driving record high prices for groceries, we would also see record high net profit margins, considering prices and revenues are at an all time high.