Fourth Quarter, 2005
Investor Conference Call Prepared Remarks
March 7, 2006

Carin Fike, Director of Investor Relations :

Good morning and thank you for joining us. Bef ore we begin, I want to remind you that today’s discussion will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but Kroger assumes no obligation to update that information.

Our fourth-quarter press release as well as this morning’s press release about Kroger’s dividend announcement, and our prepared remarks from this conference call will be available on our website at www.kroger.com. Now I will turn over the call to Mr. Dillon.

comments by: Dave Dillon

Thanks Carin and good morning everyone. We’re pleased you could join us to review Kroger’s fourth-quarter and fiscal year 2005 financial results. With me today are Rodney McMullen, Kroger’s Vice Chairman; Don McGeorge, Kroger’s President and Chief Operating Officer; and Mike Schlotman, Senior Vice President and Chief Financial Officer.

I’d like to begin by recapping some highlights of Kroger’s fourth-quarter sales results. Then I will provide market share information along with sales and earnings guidance for 2006. Rodney will discuss Kroger’s fourth-quarter and fiscal year 2005 results. He will provide additional detail on our 2006 guidance. Then we’ll be happy to take your questions.

Sales

The continued focus of Kroger’s associates on delivering improved service, product selection, and value to our customers has generated another quarter of impressive sales growth. Total sales for the fourth quarter increased 7.5% to $14.7 billion. This growth was broad-based across all divisions and store departments. Grocery, produce, bakery, and fuel sales were particularly strong. In addition, our holiday sales were well planned and well executed by our associates. The convenience stores turned in another solid quarter of sales growth – not only in fuel sales, but in non-fuel merchandise, too.

Fourth-quarter identical supermarket sales increased 6.2% with fuel and 4.7% without fuel. This represents Kroger’s tenth consecutive quarter of positive identical supermarket sales, excluding fuel. Fourth-quarter comparable supermarket sales – which include expansions and relocations – increased 6.7% with fuel and 5.1% without fuel.

Our fourth-quarter identical supermarket sales results reflect Kroger’s highest identical supermarket sales since the merger with Fred Meyer in 1999. All 17 of our supermarket divisions had positive identical sales growth. We’re extremely pleased by this performance. As we’ve discussed before, sustainable identical sales growth is a key driver of Kroger’s financial objective to increase earnings and generate value for our shareholders.

Market Share

Each year at this time we provide you with statistics that describe Kroger’s market share. The market share figures that we report are based on internal estimates. We include all retail outlets that sell merchandise comparable to our own – including supercenters and other non-traditional retail formats such as dollar stores, drug stores, and warehouse clubs. Although we look at market share statistics provided by a variety of third-party resources throughout the year, we believe it is important to take a broader view of the market to understand any shifts in this area and respond to them appropriately. When you are doing your own analysis in this area, please keep in mind that many third-party market share data providers do not include these alternative formats.

Kroger defines a “major market” as one in which we operate nine or more stores. By this definition, Kroger serves customers in 44 major markets. Last year, that figure was 52. The decrease is primarily due to a realignment of metropolitan statistical areas – or “MSAs” – by the U.S. Census Bureau. We rely on Census Bureau reports to obtain the total sales potential for a particular market in order to calculate our market share. Under this MSA realignment, certain markets were combined with other markets; other markets were separated into two or more markets, each containing less than nine of our stores.

In our count of 44 major markets, we’re excluding the San Francisco and Sacramento MSAs due to the market exits we’ve announced for 2006 under our Cala Foods, Bell Markets, and Ralphs banners. We’ll continue to operate price impact warehouse stores under the “Foods Co” banner in those markets, but neither MSA contains sufficient Foods Co locations to meet our definition of a “major market”.

Now for the market share detail.

For 2005, Kroger held the #1 or #2 share position in 35 of our 44 major markets. Kroger’s overall market share in these 44 markets rose more than 35 basis points during 2005, on a volume-weighted basis. Our share increased in 29 of those 44 major markets, declined in 12, and remained unchanged in three.

Kroger competes against a total of 1,129 supercenters – an increase of 109 over last year. There are 32 major markets in which supercenters have achieved at least a #3 market share position. Kroger’s overall market share in these 32 markets rose more than 50 basis points during 2005, on a volume-weighted basis. Our share increased in 24 of those 32 major markets, declined in seven, and remained unchanged in one.

Of the 1,129 supercenters that I mentioned, 875 are operated by Wal-Mart. This is an increase of 94 over last year. Wal-Mart supercenters have achieved at least a #3 share position in 28 of the major markets where Kroger faces significant supercenter competition. Kroger’s overall market share in these 28 markets rose nearly 40 basis points during 2005, on a volume-weighted basis. Our share increased in 20 of these major markets, declined in seven, and remained unchanged in one.

I realize that all of this market share data could be overwhelming, so let me recap the most important points. First, Kroger’s overall market share in our 44 major markets rose more than 35 basis points during 2005. Second, our share gains in markets where we face significant Wal-Mart supercenter competition were even stronger. In those markets, our overall market share rose nearly 40 basis points. Third, we fared even better if you include all major markets where we face supercenter competition. This is Kroger’s best performance since we began tracking this type of information.

A popular theme among some investors and the media these days is that traditional supermarket operators like Kroger are being squeezed out of business by price-focused discounters at one end and high-end specialty retailers at the other. To the contrary, the market share statistics that I just shared with you show that Kroger continues to grow in this highly competitive industry environment. We believe these statistics clearly demonstrate that our strategy to connect better with customers is succeeding! Our retail price investments, combined with our service and selling initiatives, led to excellent market share gains in 2005. Kroger’s significant market share continues to be one of our key competitive strengths, and we believe it is critical to further improve our market share in 2006 and beyond.

There is plenty of room for further growth. Even with Kroger’s strong share in our 44 major markets, almost 50% of the share in those markets is held by competitors without our economies of scale.

Guidance

Turning now to Kroger’s expectations for fiscal 2006.

Over the past several years, Kroger has been transitioning its business model to meet the changing needs and expectations of our customers. This strategic plan requires a balance among several elements – including sales, earnings, and capital investment – and is driven by strong, sustainable identical sales growth. Kroger plans to grow identical sales through merchandising and operating initiatives that improve the shopping experience and build customer loyalty. These initiatives will be funded by operating cost reductions and productivity improvements. As a result of this strategy, Kroger expects to deliver earnings per share growth in 2006 and 2007 of 6 - 8% per year. In addition, shareholder value will be enhanced by the yield associated with the cash dividend we announced earlier today.

The estimated range for earnings per share growth in fiscal 2006 includes the effect of beginning to recognize stock option expense, which is largely offset by the benefit of a 53rd week in fiscal 2006. Kroger’s earnings per share growth will be driven by three factors:

1) Strong identical sales. We expect to achieve identical supermarket sales growth in excess of 3.5%, excluding fuel sales.

2) Slightly improving operating margins, resulting primarily from continuing improvement in southern California; and

3) Fewer shares outstanding due to continued share repurchase activity.

Now Rodney will review Kroger’s fourth-quarter and fiscal 2005 results, as well as some additional guidance for 2006. Rodney?

comments by Rodney McMullen:

Thank you, Dave, and good morning everyone.

Net Earnings

Kroger reported net earnings of $282.1 million, or $0.39 per diluted share, for the fourth quarter. In the year-ago period, Kroger reported a net loss of $652.1 million, or $0.89 per diluted share. The year-ago results included a goodwill impairment charge of $903.8 million, pre-tax, that affected net earnings by $860.8 million, or $1.17 per diluted share.

Some of you may have noticed that back in December, Kroger sold nine shopping centers anchored by Kroger stores for approximately $80 million. Following the sale, we signed long-term lease agreements with the buyer to continue our operations in each of the nine Kroger stores. In accordance with generally accepted accounting principles, the gain associated with the sale of these shopping center properties will be recognized over the term of the lease agreements. Thus, the sale had no effect on our fourth-quarter earnings per share.

Gross Margin and OG&A

FIFO gross margin was 24.85% of sales, a decrease of 22 basis points compared to the fourth quarter of 2004. Excluding the effect of retail fuel operations, FIFO gross margin rose 32 basis points from the prior year.

When we analyze gross margin internally, we use a term that we call “selling gross margin” to describe Kroger’s gross margin before incurring expenses directly related to distributing and merchandising the products on our store shelves. These expenses include advertising, warehousing, transportation, and shrink. “Selling gross margin” is a measure of how competitively we are pricing the products we sell. Kroger’s fourth-quarter “selling gross margin” on non-fuel sales declined approximately 23 basis points. In other words, we were able to use improvements in shrink and warehousing expense to fund additional targeted investments in competitive prices for our customers. This remains an important part of Kroger’s strategy.

OG&A declined 38 basis points to 17.98% of sales. Excluding the effect of retail fuel operations, OG&A declined 6 basis points. Leverage from strong identical sales plus cost control in areas such as health care and workers compensation helped offset increases in credit card fees, pension, and energy-related costs. Improvements in OG&A expense at Ralphs also contributed to the decline.

Excluding our retail fuel operations, we estimate that higher energy prices negatively affected gross margin by five basis points and OG&A by eight basis points, for a total negative effect of 13 basis points, or approximately $17 million, pre-tax.

Financial Triple Play: Capital Investment, Debt Reduction, Share Repurchase

In 2005, strong cash flow enabled Kroger to carry on its “financial triple play” strategy to deploy cash to grow and maintain its high-quality asset base, reduce debt, and return value to shareholders through share buybacks. We believe achieving the “financial triple play” is important for our future success.

Capital Investment

Capital investment totaled $1.3 billion for the year, compared to $1.6 billion in 2004. During 2005, Kroger opened, expanded, relocated or acquired 52 supermarkets. We continued the expansion of our multiple format strategy. Our store portfolio now contains 2,214 combo stores, 143 price impact warehouse stores, 123 multi-department stores, and 27 Marketplace stores.

The rollout of the Marketplace concept has followed our general strategy for format expansion. You might recall that in Phoenix we converted some of our existing stores to the Marketplace format back in 1999. When we were comfortable with the economics of the business model for a new store, we built a concept store from the ground-up. This store is located in Chandler, Arizona. The next step is learning how to operate the concept in other markets, which we did first in Salt Lake City and then in Columbus, Ohio. Now we are ready to expand the format to another market. In 2006, we plan to open two Marketplace stores right here in our hometown of Cincinnati, Ohio. We are very excited about these plans and our ability to further segment our diverse customer base with our multiple format strategy to meet customer needs.

Also during 2005, we remodeled 147 stores and closed 66 locations, including 54 operational closings.

Debt Reduction

Net total debt at the end of the fourth quarter totaled $6.9 billion – that’s $800.7 million less than a year ago. Net interest expense for the full year totaled $510.4 million, a decrease of $46.6 million versus a year ago. We have reduced net total debt by $1.9 billion since January 2000.

Our investment grade rating is very important to us, and we are focused on improving our coverage ratios. Our net total debt to EBITDA ratio in the fourth quarter was 2.06. This is our best performance on this measure since Kroger’s leveraged recapitalization in 1988.

Share Repurchase

During the fourth quarter, Kroger repurchased approximately 2.6 million shares of stock at an average price of $18.93 for a total investment of $49.4 million. At the end of the fourth quarter, there was approximately $114.3 million remaining under the $500 million stock buyback announced in September 2004. Since January 2000, Kroger has invested $3.0 billion to repurchase 155.7 million shares at an average price of $19.13 per share. Kroger continues to buy back stock.

Dividend

Customer response to Kroger’s strategic plan has now made it appropriate to return value to our shareholders both through our current stock repurchase plan and, additionally, through the payment of a dividend. Earlier today Kroger announced that its Board of Directors has adopted a dividend policy and declared the payment of a quarterly dividend of $0.065 per share. The Board’s approval of the dividend and continuation of the share repurchase program underscores its confidence in Kroger’s strategic plan.

Needless to say, this is a monumental event for the Company as Kroger has not paid a cash dividend since our leveraged recapitalization in 1988 – some 18 years ago!

Kroger’s Board will review the dividend annually, with an objective of increasing the amount of the dividend. Any changes in the dividend amount will be made after consideration of the needs of the business, the interests of shareholders, cash flow trends, and other factors. We continue to be guided by our long-term financial strategy of using one-third of free cash flow for debt reduction and two-thirds for share repurchase and the payment of a cash dividend.

Review of 2005

Before sharing some additional guidance for 2006, I’d like to briefly review some objectives for 2005 that we outlined for investors a year ago. Thanks to the hard work and dedication of our associates, Kroger delivered a strong performance in 2005 that exceeded our original expectations.

At the beginning of fiscal 2005, we expected to achieve identical supermarket sales growth in excess of 2.0% for the full year, including southern California and excluding fuel sales. When we reported our second-quarter results, we raised that bar to exceed 3.0% for the balance of the year. Our identical supermarket sales growth, excluding fuel, for fiscal 2005 was 3.5%, well in excess of our original goal.

We expected fiscal 2005 net earnings to increase compared to 2004, excluding the effect of the goodwill impairment charge. On a per share basis, we originally expected fiscal 2005 net earnings per share to exceed $1.21 as a result of four factors:

1) Improved results in southern California;

2) Growth in the balance of the Company;

3) Lower interest expense; and

4) Fewer shares outstanding as a result of stock buybacks.

When we reported our first-quarter results, we raised that target to exceed $1.24 per diluted share. Today we reported fiscal 2005 net earnings of $1.31 per diluted share. Each of the four factors that I mentioned contributed to our 2005 earnings per share growth. We believe this is a very strong performance in a challenging operating environment.

In 2005, Kroger invested cost savings and productivity improvements to improve our customers’ shopping experience through enhanced service, product selection, and value. Successful execution of this strategy resulted in a better balance between margin and sales growth. The structure of our incentive plan for 2006 will further encourage this balance to deliver sustainable sales growth, earnings growth, and an improved shopping experience for our customers.

Additional Guidance for 2006

Dave already outlined our sales and earnings guidance for 2006. I’d like to add that our earnings guidance assumes the same highly competitive environment we see today. It also assumes that energy prices remain at the level where they are today.

Here are some other expectations that are incorporated into our guidance for the year:

• We plan to invest approximately $1.7 - $1.9 billion in capital projects, excluding acquisitions. These capital projects include 30 to 40 new stores, 150 to 175 remodels, and other investments to support our “Customer 1st” business strategy;
• We anticipate total supermarket square footage growth of 1.5 - 2.0% (before acquisitions and operational closings) with an emphasis on large, fast-growing markets;
• We expect to make a cash contribution of $100 - $150 million to the Company-sponsored pension plans, a reduction of $150 - $200 million from 2005;
• We plan to adopt expensing of stock options in the first quarter of 2006. We estimate this action will reduce fiscal 2006 net earnings by $0.05 - $0.06 per diluted share.
• We estimate that our effective tax rate will be approximately 37.5%.
• We anticipate cash taxes will be approximately $160 million higher than last year, primarily due to higher net earnings. Recall that we enjoyed a cumulative reduction of approximately $340 million during fiscal years 2002, 2003, and 2004 in our cash tax payments due to federal bonus depreciation legislation passed by Congress in 2001. That provision expired in December 2004, and the related cash flow benefit began to reverse in 2005.
• Labor negotiations will continue to be a challenge in the face of competitive pressures and rising pension and health care costs. We’ll be back at the bargaining table in 2006 with a number of contracts covering smaller groups of associates, but nothing of the magnitude we faced in 2005.

While we do not give specific quarterly guidance, I do want to point out the timing of certain items that will affect our quarterly results during 2006. The estimated stock option expense of $0.05 - $0.06 per diluted share will affect each quarter of the fiscal year. Expenses associated with the San Francisco and Sacramento market exits that Dave mentioned earlier will occur in the first half of 2006. This has been reflected in our guidance for the year. The sales and earnings benefit of the so-called “53rd week” that Dave mentioned earlier will occur in the fourth quarter as it contains one additional week this year.

We believe that Kroger’s 2006 strategic plan is a balanced approach that will allow Kroger to meet the wide-ranging needs and expectations of customers. This, in turn, will position the Company to deliver value to our shareholders in the form of a strong business model that produces solid, sustainable growth in both earnings and the dividend we announced earlier today.

Now I will turn it back to Dave for some closing remarks.

comments by Dave Dillon:

Thanks, Rodney.

We are very pleased with our results for fourth-quarter and fiscal 2005. As Rodney discussed, our fiscal 2005 results compared very favorably to each of the objectives we outlined for you at the beginning of 2005.

During 2005, we made progress on many fronts. We grew our average market share by more than 35 basis points in a highly-competitive environment. We showed even stronger growth in supercenter markets. We continued to improve our pricing position with an increased focus on non-price initiatives such as improved customer service and product selection tailored to match the broad mix of customers who shop in our stores.

Already, 2006 is proving to be a year of continued consolidation in our industry. This process began several years ago and will continue for several years ahead. Kroger’s financial strength positions us to take advantage of the many opportunities that consolidation provides. In this environment, we will continue our focused efforts to connect directly with customers in 2006. We believe that our multi-format approach and our ability to segment our customer base uniquely positions Kroger to serve the very diverse needs of today’s grocery shoppers. We are working harder everyday to become increasingly relevant to each and every customer who shops in our stores, and we have the expertise and technology to do so.

We will now be happy to take your questions.

[Question & Answer Period]

The remarks contain certain forward-looking statements about the future performance of the Company. 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 or phrases such as “plans,” “will,” “expects” “estimated,” “continue,” “anticipate” and “believe.” These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. Our ability to achieve sales and earnings goals may be affected by: labor disputes, particularly as the Company seeks to manage health care and pension costs; industry consolidation; pricing and promotional activities of existing and new competitors, including non-traditional competitors; our response to these actions; the state of the economy, including interest rates and the inflationary and deflationary trends in certain commodities; weather conditions; stock repurchases; the success of our future growth plans; goodwill impairment; and our ability to generate sales at desirable margins. In addition any labor dispute, delays in opening new stores, or changes in the economic climate could cause us to fall short of our sales and earnings targets. Further, increases in sales of our corporate brand products and the “sister store” impact of our new store openings, could adversely affect identical store sales. Our capital expenditures could vary from our expectations if we are unsuccessful in acquiring suitable sites for new stores; development costs exceed those budgeted; or our logistics and technology or store projects are not completed on budget or in the time frame expected. Our ability to increase same store sales could be adversely affected by increased competition and sales shifts to other stores that we operate. Our expectation that dividends will be paid on a quarterly basis and our objective to increase the amount assume that the Company’s financial condition will permit the payment under Ohio law; that its operations will continue to generate sufficient free cash flow to warrant the payment of a dividend and that market conditions and applicable laws and regulations make payment of a dividend appropriate. Our capital expenditures could vary if we are unsuccessful in acquiring suitable sites for new stores, if development costs exceed those budgeted, or if our logistics and technology projects are not completed in the time frame expected or on budget. Square footage growth and the number of store projects completed during the year are dependent upon our ability to acquire desirable sites for construction of new facilities, as well as the timing of completion of projects. We anticipate expensing stock options during the fiscal year, as generally accepted accounting principles as currently in effect would require us to do so. Our estimated expense of $0.05-$0.06 per diluted share, from the adoption of stock option expensing, could vary if the assumptions that we used to calculate the expense prove to be inaccurate. The amount that we contribute to Company pension plans could vary if the amount of cash flow that we generate differs from that expected. Any change in tax laws, the regulations related thereto, or the interpretation thereof by federal, state or local authorities could affect our expected tax rate and the amount of cash taxes. The extent to which our cash flow is sufficient to support our debt reduction and stock repurchases or cash dividend payment will depend on our ability to generate sales and to reduce costs and manage our gross margin, as well as our ability to manage our working capital. Our ability to achieve our long-term goal of using one-third of cash flow for debt reduction and two-thirds for stock repurchase or payment of a cash dividend depends primarily on the price at which our stock trades and the availability of debt to repurchase. The success of our strategic plan in 2006 may be affected by actions taken by our competition; cost increases that are not passed on to customers; and an inability to generate sales at desirable margins. Our plans to open two Marketplace stores in Cincinnati could be affected by project delays, including those associated with all phases of the construction process, as well as the financial results of our Marketplace stores in other markets. Our expectation regarding closing expenses occurring during the first half of 2006 depends on our ability to complete our exit strategy in San Francisco and Sacramento within the time period anticipated. We assume no obligation to update the information contained herein. Please refer to Kroger’s reports and filings with the Securities and Exchange Commission for a further discussion of these risks and uncertainties.