Fourth Quarter, 2004
Investor Conference Call Prepared Remarks
March 8, 2005

Carin Fike, Manager 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.

I would also like to remind you that, as previously announced, Kroger will restate prior-year results to correct its accounting for leases. The preliminary results reported today exclude the effect of the correction.

Both our fourth-quarter press release and our prepared remarks from this conference call will be available on our website at www.kroger.com. Now I will turn the call over to Mr. Dillon.

comments by: Dave Dillon

Thanks Carin and good morning everyone. We appreciate you joining us to review Kroger’s fourth-quarter earnings. 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 this morning by briefly reviewing our fourth-quarter results and 2004 market share information. I will also share some guidance for 2005. Rodney will provide additional details. Then we’ll take your questions.

Sales

Total sales for the fourth quarter increased 5.1% to $13.7 billion. This growth resulted from strong sales at the Company’s food stores, including fuel, as well as from the convenience and jewelry stores. Net square footage at the Company’s food stores increased 1.2%.

The details on our identical and comparable food-store sales are available in our fourth quarter earnings release. Here are the two figures that we believe best illustrate Kroger’s progress:

• Identical food-store sales, without fuel and without southern California, rose 1.9%.
• Comparable food-store sales, on this same basis, rose 2.3%.

We are very pleased with our sales performance in the fourth quarter. Kroger’s identical food-store sales, without the effect of fuel and southern California, have shown sequential improvement for seven of the past eight quarters. And for fiscal 2004, we achieved identical food-store sales, excluding fuel and southern California, of 1.2%, extremely close to the target we established at the beginning of the year. These sales figures are a clear sign that Kroger’s strategic focus on fulfilling the needs of our customers continues to generate positive results. This momentum has continued in fiscal 2005, with identical food-store sales through the first five weeks running ahead of our fourth-quarter results.

Southern California

In southern California, we are working to rebuild our business. Ralphs and Food 4 Less have faced one of the most challenging periods in their proud history. They have confronted a variety of obstacles – including promotional battles, store conditions, personnel changes and morale issues – that would overwhelm many retailers. Yet Ralphs and Food 4 Less have tackled every issue head-on and I appreciate that.

The recovery in southern California has been slow. Identical sales as compared to the fourth quarter of 2002 are about the same as in the third quarter of 2004. We are not back to pre-strike levels. As a reminder, we are comparing results to 2002 because of the disruption caused by the strike in 2003. Ralphs is making some progress. As I have said before, Ralphs has a great plan in place and we are executing it. I have a lot of confidence in both our associates in southern California and our business plan for that region. Both are keys to our success.

Corporate Brands

Taking a quick look at other areas of our business, Kroger’s corporate brands remain a competitive advantage. During 2004, we introduced 765 new items across all three tiers of our corporate brand line-up. In the fourth quarter, the market share of Kroger’s private-label grocery items, in terms of dollars, increased an estimated 67 basis points to 24.60% versus a year ago. Private-label grocery share, in terms of units, rose an estimated 144 basis points to 31.72%.

One other item of note on our corporate brands. Customers are increasingly recognizing the quality and value of our private-label offering. In customer taste tests, 50% chose our banner brand and 10% had no preference to the leading national item.

Turning now to Kroger’s performance in major markets in 2004…

We define a major market as one in which we operate nine or more stores. 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. Most third-party market share data providers do not include the alternative formats. Thus, the market share figures that I am about to provide generally show results less favorable than those you may have seen.

Kroger competes in 52 major markets, including seven in California. For 2004, Kroger held the #1 or #2 share in 40 of our 52 major markets. Kroger’s share increased in 23 of these 52 major markets in 2004, declined in 27, and remained unchanged in two. Six of the 27 markets in which our share declined are in California, including five that were significantly affected by the southern California labor dispute. On a volume-weighted basis, Kroger’s overall market share declined slightly in our 52 major markets.

Kroger competes against a total of 1,020 supercenters. There are 33 major markets where supercenters have achieved at least a #3 market share position. In 2004, Kroger’s market share increased in 17 of those 33 markets, declined in 15, and remained unchanged in one. On a volume-weighted basis, Kroger’s market share rose slightly in those 33 markets during 2004.

Kroger competes against 781 Wal-Mart supercenters. This reflects an increase of 103 stores compared to a year ago. Wal-Mart supercenters have achieved at least a #3 share in 24 of the 33 major markets where we have significant supercenter competition. Kroger’s market share increased in eight of those markets, declined in 15, and remained unchanged in one. On a volume-weighted basis, Kroger’s market share declined slightly in those 24 markets during 2004.

So what does all this data mean? Well, to us it suggests three themes that are currently indicative of our business. First, as I described earlier, we know the challenges we face in southern California and have a strong plan in place to address them.

Second, the pace of Wal-Mart’s aggressive expansion into the supermarket industry shows no signs of slowing down. We have factored this reality into our business strategy and we are confident in our ability to compete effectively with Wal-Mart and other operators.

Third, Kroger achieved measurable sales growth last year in the face of substantial supercenter expansion in our industry. Our market share was about the same. These statistics are a further indication that the retail supermarket industry has fundamentally changed and will continue to change in the coming years. We were the first traditional retail grocer to recognize these fundamental shifts, and that is why we began changing our business model in 2001 to meet the competitive challenges. We have made measurable progress since 2001, and we expect to continue that progress in 2005 and beyond.

Guidance for 2005

With that, I will turn to our expectations for 2005.

Kroger’s growth strategy is squarely focused on consistently meeting the needs of our customers by our associates providing improved service, selection and value. We have made considerable progress, and in 2005, the successful execution of our strategy will be clearly evident in our financial performance.

Kroger expects 2005 net earnings to increase compared to 2004, excluding the effect of the goodwill impairment charge. We expect this earnings growth to be fueled by improved results in southern California, growth in the balance of the Company, and lower interest expense. As a result, we expect net earnings in 2005 to exceed $1.16 per diluted share.

Also included in this guidance for 2005, Kroger expects:

• To achieve in excess of 2.0% identical food-store sales growth. This figure includes southern California and excludes fuel sales; and
• To generate cost savings and productivity improvements which will be invested in improving our customers’ shopping experiences.

I’d like to clarify a few points with regard to our 2005 guidance. First, we included southern California in our identical sales target because we expect those results to mirror the balance of the Company.

Second, although we do not give specific quarterly guidance, we do want to provide you with some color as to how we see the quarters playing out during the year. We expect the first quarter to be the most challenging in terms of sales and earnings comparisons to prior year. Comparisons for the second, third, and fourth quarters should be easier. We believe that the first quarter will be a little better than our fourth-quarter trend, and expect continuing improvement from there in the following quarters. Certainly, there could be some variability on an individual quarter basis, particularly for our southern California operations because of the comparisons to last year’s recovery period.

Now I will ask Rodney to provide some additional perspective on Kroger’s fourth-quarter and fiscal 2004 results, as well as some additional guidance for 2005. Rodney?

comments by Rodney McMullen:

Thank you, Dave, and good morning everyone. As Carin mentioned at the beginning of the call, the preliminary results that I will be discussing today exclude the effect of the correction that Kroger intends to make related to our accounting for operating leases.

Because we’re restating our financials, a final income statement, balance sheet and cash flow statement will be provided when we file our 10-K.

Kroger reported a net loss of $675.9 million, or $0.93 per share, for the fourth quarter. These results include a non-cash goodwill impairment charge of $884.0 million after tax, or $1.21 per share, related to the Ralphs and Food 4 Less operations. Basic and diluted shares are the same due to the loss. Otherwise, diluted shares would have been 732.4 million.

The impairment charge was the outcome of our annual evaluation of goodwill as required by the accounting rules. You might recall that during our third quarter earnings call, I indicated that we were reviewing the projected cash flows for our southern California business to evaluate whether an impairment charge for goodwill would be necessary during the fourth quarter. The charge adjusts the carrying value of the impaired goodwill to its implied fair value. Most of the impairment charge is not tax deductible, so the pre-tax and after tax amounts are only minimally different.

Gross Margin and OG&A

FIFO gross margin was 25.08%, a decrease of 135 basis points from the fourth quarter of 2003. FIFO gross margin, excluding Ralphs and the effect of fuel, declined by 91 basis points. While, directionally, a decline was expected, frankly, we were more aggressive on pricing than planned. We are not happy with these results. In 2005, Kroger is determined to maintain its sales momentum while improving earnings. Our strategy contains many non-price elements, and our incentive plan for 2005 strongly motivates our divisions to execute broadly on these non-price elements.

One aspect of our gross margin that does please us is the continued progress we are making on shrink reduction -- particularly in Grocery and Drug/GM -- thanks to our associates’ focused efforts in these areas. We expect to deliver additional shrink savings in 2005.

Operating, general and administrative costs declined 131 basis points to 18.38%. OG&A, excluding the effect of fuel, decreased 103 basis points.

OG&A at the supermarket divisions, excluding Ralphs and the effect of fuel, decreased two basis points. This reduction in the OG&A rate in the fourth quarter resulted from our ongoing cost containment efforts and the leverage from our sales growth. Even health care costs declined slightly as a percent of sales – this is the result of progress we have made during labor contract negotiations.

Benefit costs in several of our markets still need to be addressed. We expect additional improvement in our OG&A rate in 2005, particularly as we leverage increasing sales and cost reductions in key areas of our business.

Share Repurchase and Financial “Triple Play”

Kroger also continued our share repurchase and achievement of our “financial triple play.” During the fourth quarter of 2004, Kroger repurchased approximately 4.2 million shares of stock at an average price of $16.52 for a total investment of $69.2 million. There is approximately $353 million remaining under the new $500 million stock buyback announced in September. Since January 2000, Kroger has invested $2.7 billion to repurchase 140.8 million shares. The Company continues to buy back stock.

In 2004, Kroger’s cash flow enabled the Company to continue its “financial triple play” of:

• Reducing total debt by nearly $400 million to about $8.0 billion. Net interest for 2004 decreased approximately 8% compared to the prior year as a direct result of lower borrowings and a lower average borrowing rate.
• Repurchasing $318.7 million in stock.
• Investing $1.6 billion in capital projects. Kroger continues to tighten capital spending, which has slowed the growth in our depreciation expense.

An additional note on capital investments. Last year Kroger opened, expanded, relocated or acquired 111 food stores; remodeled 135 stores; and closed 79 stores, including 56 operational closings.

Labor

Turning now to labor negotiations…

During the fourth quarter, labor contracts covering 3,200 associates in Las Vegas and the San Francisco Bay Area were ratified without a work stoppage.

And just this past weekend, King Soopers and City Market completed a new labor contract that will help contain health care costs and improve our competitive position. This contract provides excellent wages and benefits to our Colorado associates.

Major UFCW contracts that will expire this year include Roanoke, where negotiations recently began; Atlanta; Portland (non food), Columbus, and Dallas. We also have various Teamsters contracts expiring, including southern California and one that covers several facilities in the Midwest. We are hopeful that we can reach new agreements in these markets without work stoppages.

We continue to be committed to achieving a cost structure that enables us to grow our business and create good jobs, while providing our associates with competitive wages and benefits. The changes that have been part of recently ratified contracts have helped Kroger manage its labor costs more effectively, including health care and pension. But opportunities remain in this area, and we will continue to address those issues during contract negotiations on a market-by-market basis. O ur goal at the bargaining table is always the same: to balance our associates’ need for competitive wages and benefits with the Company’s need to remain competitive and grow our business.

Additional Guidance for 2005

Dave already provided some sales and earnings guidance for 2005. Here are some other expectations that are incorporated into our guidance for the year:

• Capital investment will range from $1.6-$1.8 billion, excluding acquisitions. As in 2004, Kroger will increase its focus on remodels, merchandising and productivity, and decrease its focus on new store projects.
• We will use one-third of cash flow for debt reduction and two-thirds for stock repurchase or payment of a cash dividend;
• Total food-store square footage growth of 2 - 3% before acquisitions and operational closings;
• We expect to make a cash contribution of $120 million to the Company pension plans. This represents an $85 million increase over 2004;
• Kroger will adopt expensing of stock options during the year. Kroger currently estimates the effect of this adoption will be $0.04-$0.05 per diluted share. As Dave mentioned in his comments, this is reflected in the earnings guidance.
• We expect our tax rate will be 37.5%.

More than ever, Kroger’s financial strength is an important competitive advantage. Our free cash flow permits us to upgrade and expand our asset base so that we can offer our customers clean, modern stores that enhance their shopping experience. It also enables Kroger to continue reducing debt and buying back stock. I am confident that we have the financial resources – and the right team – in place to build Kroger’s business for the future.

As mentioned earlier, we also have an incentive plan in place for 2005 that will reward all of us for driving sales and earnings growth, achieving our capital investment goals, and improving our customers’ shopping experiences.

Now I will turn it back to Dave.

comments by Dave Dillon:

Thanks Rodney.

Reflecting on 2004, we are pleased with our strong sales gains throughout the year, as well as our improving trends in OG&A, especially health care.

In 2005, we will better balance our gross profit investment. We will also deliver substantial improvement in southern California.

I am delighted with the progress we have made and the plan we have in place for 2005. Kroger enters this year with the strongest sales momentum in several years and a clear strategic vision. Our identical food-store sales are growing faster than many of our traditional supermarket competitors’ – an indication that we are improving our customers’ service, selection and value experiences in our stores. As a result, Kroger will drive sustainable, profitable sales growth and create value for our shareholders in 2005 and beyond.

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 “expects,” “will” and “believe.” These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. Results anticipated in forward-looking statements regarding sales and earnings could be adversely affected by increased competition, weather and economic conditions, interest rates, goodwill impairment, the success of programs designed to increase our sales, and future labor disputes, particularly as the Company seeks to manage increases in health care and pension costs. Our ability to generate cost savings and productivity improvements, and to invest them to improve our customers’ shopping experiences, will depend on the success of our cost savings programs and our ability to implement the systems identified to enhance productivity, as well as the reactions of our customers to those programs and systems. 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 projects are not completed on budget or in the time frame expected. 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. We anticipate expensing stock options during the fiscal year, as generally accepted accounting principles as currently in effect would require us to do so; however, if the accounting pronouncements change prior to our implementation, we may elect not to do so. Our estimated expense of $0.04-$0.05 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. 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. 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. We may fail to meet our expectations regarding reductions in operating, general and administrative expenses as a percentage of sales, primarily if we are unsuccessful in generating contemplated sales or cost reductions in key areas of our business; or if our systems fail to deliver the productivity savings that we anticipate. 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.