Fourth Quarter, 2003
Investor Conference Call Prepared Remarks
March 9, 2004

Carin Chabut: Good morning and thank you for joining us. Before we begin, I want to remind you that the discussion today 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. Both our fourth-quarter press release, which includes additional details on many of the items you’ll hear about on today’s call, and our prepared remarks from this conference call, will be available on our website at www.kroger.com.

One other note before we get started. When Dave and Rodney have finished their remarks and we open it up for questions, we ask that you limit your questions to one per person so that we can accommodate as many as possible in the allotted time. Thank you.

comments by: Dave Dillon

Thanks Carin and good morning everyone. We appreciate you joining us today 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.

This was a complicated quarter, and we will explain each of the unusual items. Then I’ll comment on the new contract in southern California. We’ll also provide year-end information about our market share, then some perspective about 2004.

Total sales for the 12-week fourth quarter of fiscal 2003 increased 4.5% to $13.0 billion, including stores affected by the labor disputes. On this basis, identical food-store sales, including fuel, increased 1.8% and, excluding fuel, increased 1.2%. Comparable food-store sales, which include relocations and expansions, increased 2.3% with fuel, and 1.7% without fuel.

Excluding stores affected by labor disputes, identical food-store sales, including fuel, increased 2.0%. On this basis, identical food-store sales, excluding fuel, increased 1.3%, and comparable food-store sales increased 2.5% with fuel and increased 1.7% without fuel. We estimate that product cost inflation, including fuel, was 2.3% and, excluding fuel, was 2.1%.

We are pleased with Kroger’s fourth-quarter sales. This represents continued sequential improvement in both total sales and identical food-store sales.

Turning to southern California, we’re pleased to have a new contract in place. Most of the key provisions of the agreement have already been widely reported. But I’d like to offer a few brief comments so that you can better understand how this agreement affects our business.

In southern California, we expect that our fully-loaded costs per labor hour over the term of this new contract will be lower than in the previous contract. As was the case in West Virginia, the final contract in southern California is less costly to Kroger than the offer that was on the table when the strike and lockout began last October.

These contract changes were essential to improve the competitiveness of our cost structure in this market, and they continue to provide our employees with excellent wages and benefits.

Kroger is committed to achieving a competitive cost structure that enables us to grow our business while providing our associates with competitive wages and benefits, market by market.

We’re truly delighted to have Ralphs team members back at work serving our customers. They are the best at what they do and we know they are essential to Ralphs’ continued success. Ralphs has a comprehensive plan in place to build its business in southern California and will receive our full support.

Now I want to update you on Kroger’s market share, based on our internal estimates at year-end. These market-share data were not adjusted for the strikes because their effect on results would have been minimal.

Kroger competes in 52 major markets. A major market is defined as one in which we operate nine or more stores. The number of major markets grew by four from a year ago as a result of our capital investment and storing program. For 2003, Kroger held the #1 or # 2 share in 43 of our 52 major markets. Kroger’s share increased in 28 of these 52 major markets in 2003. On a volume-weighted basis, Kroger’s market share was unchanged.

Kroger competes against a total of 918 supercenters. There are 31 major Kroger markets where supercenters have achieved at least a #3 market share position. In 2003, Kroger’s market share increased in 21 of those 31 markets and declined in 10. On a volume-weighted basis, Kroger’s market share remained unchanged in those 31 markets in 2003.

Kroger competes against 678 Wal-Mart supercenters. Wal-Mart supercenters have achieved at least a #3 share in 22 of the 31 major markets where we have significant supercenter competition. Kroger’s market share increased in 12 of those markets, declined in 9 and remained unchanged in one. On a volume-weighted basis, our market share declined by 30 basis points in those 22 markets.

Turning now to 2004…

We expect identical food-store sales for 2004, excluding fuel, to be stronger than the fourth quarter of 2003. Strong sales related to inclement weather in many parts of the country during early 2003, though, will make comparisons difficult in the first quarter of this year.

We expect earnings in 2004 to be lower than in 2003, excluding the effect of the labor disputes and unusual items. It is not possible for Kroger to provide a more precise earnings estimate for 2004 because of the inherent uncertainties in: the cost of the labor dispute in southern California; the time and investment needed to build Ralphs’ business; and the investment necessary to meet Kroger’s plan to drive profitable sales growth.

We have achieved significant cost savings over the past two years. We believe that in 2004 there will be additional opportunities to reduce our costs in areas such as administration, labor, shrink, warehousing and transportation. These savings will be invested in our core business to drive profitable sales growth and offer improved value and shopping experiences for our customers.

Now I will ask Rodney to provide some additional perspective on Kroger’s fourth-quarter financial results and the outlook for 2004. Rodney?

comments by Rodney McMullen:

Thank you Dave and good morning everyone.

Kroger’s net loss in the fourth quarter was $337.4 million, or $(0.45) per diluted share. These results include several items that collectively reduced after-tax earnings by $663.1 million, or $0.89 per diluted share.

We estimate the labor disputes affecting stores in southern California and the West Virginia area reduced earnings $156.4 million after tax, or $0.21 per diluted share. Approximately 95% of that cost related to southern California. The labor dispute in West Virginia lasted for 36 days of the fourth quarter, while the dispute in southern California continued throughout the fourth quarter. In order to estimate the cost of the strikes, we assumed that the Ralphs and Food 4 Less stores in southern California and the Kroger stores primarily in West Virginia that were adversely affected by the labor disputes, would have maintained their pre-strike operating trends during the quarter. This resulted in an estimate of the effect on gross profit and OG&A. This estimate is based on the assumptions that are outlined in Table 3 of our earnings release and are the same used for the third quarter. The strike estimate includes the expected health and welfare payment required from our previous labor contract.

The southern California estimate includes costs such as:

• incremental shrink;
• costs associated with hiring and training replacement workers;
• costs associated with bringing in employees from other Kroger divisions to serve Ralphs customers; and
• expenses associated with the mutual strike assistance agreement among the three employers.

Now I’d like to take a few minutes to explain the other items in the quarter…

Kroger incurred a goodwill impairment charge of $444.2 million after tax, or $0.60 per diluted share, related to Smith’s. This charge is not tax deductible. This is the reason the pre-tax and after-tax amounts are the same. Under Generally Accepted Accounting Principles, Kroger is required to conduct an annual evaluation of goodwill. In this case, the current fair market value of the assets is less than the value recorded on the balance sheet.

Kroger also incurred a charge of $75.0 million after tax, or $0.10 per diluted share, for an asset writedown related to 74 under-performing stores. Some of these stores are likely to close in 2004. For any leased stores that close, Kroger may incur an additional charge for the remaining lease liability.

This is part of our continuing effort to achieve the most efficient use of our assets. For example, we recently announced plans to convert five Fred Meyer stores in Utah to the Smith’s Marketplace banner. This is an exciting new store format that offers full-service grocery, pharmacy and a full selection of general merchandise. The conversion builds on our success with Fry’s Marketplace stores in Arizona. You’ll recall that we converted 17 former Fred Meyer Marketplace stores to the Fry’s banner in 2000. The significant expertise of the Fred Meyer team, particularly in non-food, makes this format possible. It’s also something that’s playing out across the entire company as Kroger features a broader selection of seasonal and general merchandise in our combination stores.

Now back to the fourth quarter…

Kroger had income of $12.5 million after tax, or $0.02 per diluted share, related to the adjustment of a property tax allowance.

FIFO gross margin was 26.44%, a decrease of 43 basis points from the fourth quarter of 2002. Gross margin at the supermarket divisions not affected by labor disputes, and excluding fuel sales, declined slightly.

Operating, general and administrative costs increased 167 basis points to 19.70%. OG&A at the supermarket divisions not affected by labor disputes, and excluding fuel sales, increased approximately 40 basis points. Higher health care costs represented nearly half of that increase. As you know, normally we do not provide supermarket-only data, but felt it would be helpful in order to understand the trends outside of the strike-affected divisions.

For the full 52-week fiscal year in 2003, sales increased 3.9% to $53.8 billion. Net earnings were $314.6 million, or $0.42 per diluted share. These results include total charges of $801.3 million, or $1.06 per diluted share from the labor disputes, asset writedown, goodwill impairment charge, a charge for resolving disputes related to energy supply arrangements, and other items. Net earnings for fiscal 2002 were $1.2 billion, or $1.52 per diluted share.

For the year, Kroger recorded a LIFO charge of $34.2 million, versus a credit of $49.9 million a year ago. This is an $84 million year-over-year swing, most of which was driven by product cost inflation in grocery and meat, and the $28 million credit resulting from the adoption of Emerging Issues Task Force Issue 02-16 in 2002.

In 2003, Kroger’s cash flow enabled the Company to reduce total debt by $211 million, repurchase $301 million in stock and invest $2.1 billion in capital projects. This capital investment figure includes $202 million for the buyout of a synthetic lease and $78 million for acquisitions. I want to point out that, consistent with our strategy of using one-third of cash flow for debt reduction and two-thirds for stock repurchase or payment of a cash dividend, we did not repurchase any stock in the fourth quarter.

For the year, Kroger opened, expanded, relocated or acquired 116 food stores, and closed 44 stores. Total food store square footage increased 2.7% over the prior year.

Now a few comments on labor…

We currently have indefinite contract extensions in Arizona and a portion of Indiana. Those extensions are subject to termination by either party following notice. In addition, the contract with Food 4 Less employees in southern California has been extended through April 4. We are actively pursuing new agreements in those markets and remain hopeful that we can reach satisfactory agreements without work stoppages. In addition, employees in Memphis recently ratified a new contract and Teamster contracts in Portland, Oregon, that were set to expire in April have been renegotiated and new long-term agreements have been ratified.

In 2004, Kroger has major UFCW contracts expiring in:

• Houston
• Seattle
• Louisville
• Nashville
• Detroit
• Denver
• Las Vegas; and
• Cincinnati.

As Dave said, Kroger is committed to achieving a cost structure that enables us to grow our business while providing competitive wages and benefits to our associates, market by market. We hope to do so without further work stoppages, but it will require creativity and tough choices from everyone involved.

Turning now to 2004, Kroger’s storing plan calls for 100-110 new, relocated, or expanded stores, excluding acquisitions. The Company also plans to complete 150-180 within-the-wall remodels and 70-80 supermarket fuel centers. Total food-store square footage is expected to grow 2-3% before acquisitions and operational closings.

Kroger expects capital investment for 2004 to be in the range of $1.8-$2.0 billion, excluding acquisitions. This represents a reduction of approximately $200 million from the amount that Kroger originally allocated for the year. Kroger takes a disciplined approach to capital investments, and we continue to tighten capital. In our core markets, excluding strike-affected markets, we’re satisfied with the performance we’re achieving from our capital investment.

The Company plans to continue using one-third of free cash flow for debt reduction and two-thirds for stock repurchase or payment of a cash dividend.

More than ever, Kroger’s financial strength is an important competitive advantage. We have the financial resources – and the right team – in place to continue building Kroger’s business for the future.

Now I will turn it back to Dave.

comments by Dave Dillon:

Thanks Rodney.

In closing, it is obvious that the labor disputes were costly, both for our Company and our associates. In addition, the forecast of lower earnings for 2004 is not what we would prefer.

However, these events are signs of a rapidly changing industry. At Kroger, we identified these industry trends more than two years ago. At that time, Kroger announced a plan to reduce costs and use the savings to offer lower prices and better value for our customers. We have made considerable progress since then, and our 2004 forecast is a sign that we intend to be prudent and deliberate about improving our future:

• Our sales trend is good
• Our expenses have been well contained, given the current health care and pension cost environment.
• Our cash flow is strong and we reduced our debt
• We have identified additional opportunities to increase sales and reduce costs

As Kroger enters 2004, I believe that we’re a stronger, smarter company that better understands the needs of our customers and employees. We also have key strengths that no other U.S. food retailer can match, including:

• A high-quality asset base with leading market share in many of the nation’s largest and fastest growing markets;
• Broad geographic diversity and multiple retail formats;
• A successful track record of competing against supercenters; and
• Industry-leading corporate brand products.

We remain very optimistic about the years ahead.

We will now be happy to take your questions.

These 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 the words or phrases such as “plans,” “believe,” and “expects.” These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. Increased competition, weather and economic conditions, 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, could materially affect our earnings. Our ability to achieve our cost savings goal could be affected by our ability to achieve productivity improvements and shrink reduction; the impact of current or future labor disputes; efficiencies in our distribution centers and those created by our logistics projects; and competitive activity in the markets in which we operate. The proportion of free cash flow, if any, used to reduce debt, repurchase stock, or pay a cash dividend, may be affected by the market price of Kroger common stock and the amount of outstanding debt available for pre-payment or repurchase. Our capital expenditures and our storing program could vary if we are unsuccessful in acquiring suitable sites for new stores or if we are unable to negotiate acceptable terms with property owners for expansions or remodels; development costs exceed those budgeted; or if our logistics and technology projects are not completed on budget or in the time frame expected. Although we anticipate that our identical food-store sales for fiscal 2004, excluding fuel, will be stronger than in the fourth quarter of 2003, results could be affected by increased competition, weather conditions, labor disputes, economic conditions, and the success of programs designed to increase our sales. Our expectations that fully loaded labor costs per hour in Southern California will be lower under the new contract may not be achieved if we are unsuccessful in employing the number of new hires that we contemplate over the life of the contract. While we have endeavored to estimate the effect of the current labor disputes on our business and debt levels, the uncertainties inherent in such estimates could cause them to be inaccurate. 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.