First Quarter, 2006
Investor Conference Call Prepared Remarks
June 20, 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.

Both our first 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’re pleased you could join us to review Kroger’s first quarter 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 this morning by briefly reviewing Kroger’s first quarter financial performance. Then I will provide an update on Kroger’s outlook for 2006. Rodney will share additional details about our first quarter results, and then we’ll be happy to take your questions.

Sales

Kroger’s associates continue to focus on delivering improved service, selection and value to our customers, and this has translated into another quarter of impressive sales growth. Total sales for the first quarter increased 8.2% to $19.4 billion. This growth continues to be broad-based across all divisions and all store departments. Growth was particularly strong in Grocery, Produce, Natural Foods, and Fuel. Our convenience stores also had a very strong sales quarter, not only in fuel, but in non-fuel merchandise, as well.

Identical supermarket sales increased 7.2% with fuel and 5.6% without fuel. Once again, by either measure, this represents Kroger’s highest identical supermarket sales since the merger with Fred Meyer in 1999. It is also the eleventh consecutive quarter of positive identical supermarket sales, excluding fuel. We are extremely pleased by this performance and believe it compares very favorably to our traditional supermarket competition, and indeed just about every other retail competitor.

Net earnings were $306.4 million, or $0.42 per diluted share, for the first quarter. Net earnings in the year-ago period were $294.3 million, or $0.40 per diluted share. Rodney will discuss two items that together affected our first quarter earnings by $0.05 per diluted share in the current year. After adjusting for these items – because they did not have a comparable impact on the prior year – you’ll see that Kroger had a very strong quarter.

It was also another quarter that demonstrated the balance that Kroger’s strategic plan requires among several elements – including sales, earnings, cost control, and capital investment. We continue to believe this strategy is the appropriate path to build sustainable earnings growth and long-term value for our shareholders.

Guidance

Turning now to some comments on 2006 guidance. You may recall that we originally forecasted identical supermarket sales growth, excluding fuel sales, in excess of 3.5% for fiscal 2006. Today we are raising our sales guidance. Kroger now expects identical supermarket sales growth, excluding fuel sales, to exceed 4.0% for the balance of the year or approximately 4.5% for the full year.

This updated sales guidance reflects the momentum of our first quarter performance as well as opportunities we have identified for additional growth. It is tempered by the difficulty in forecasting identical sales growth in markets that experienced unexpected increases as a result of the Hurricanes Katrina and Rita during the second half of 2005. Even so, the entire Kroger organization is still very focused on driving improvement in identical sales growth. As we have stated many times, sustainable identical sales growth is a key driver of Kroger’s financial objective to increase earnings and generate value for our shareholders.

Kroger’s original guidance for earnings per share growth in 2006 of 6 to 8% did not contemplate the need to increase legal reserves. Based on first quarter results, the Company’s guidance for earnings per share growth in 2006 remains at 6 to 8%, including the increase in legal reserves. Absent the need to increase these reserves, Kroger’s projected earnings per share growth rate would be

9 to 11% for fiscal 2006.

Now I will ask Rodney to share some additional details concerning Kroger’s first quarter results. Rodney?

Comments by Rodney McMullen:

Thank you, Dave, and good morning everyone.

Earnings – additional details

As Dave mentioned, Kroger reported first-quarter net earnings of $306.4 million, or $0.42 per diluted share. These results include a couple items that are not comparable to our results in the prior year.

As we indicated in our guidance for 2006, we began to recognize stock option expense in the first quarter in accordance with generally accepted accounting principles. This action reduced earnings by $0.02 per diluted share. As a reminder, our earnings per share guidance for fiscal 2006 included stock option expense of $0.05 - $0.06 per diluted share. We now expect the full-year effect for fiscal 2006 will be $0.06 per diluted share from recognizing the stock option expense.

Also, based on developments during the quarter, Kroger increased its reserves associated with legal proceedings arising from hiring practices at its Ralphs subsidiary during the 2003 – 2004 labor dispute. The current quarter charge reduced earnings by $0.03 per diluted share and increased the amount established for this contingency. Our reserves represent our best estimate of the Company’s exposure in connection with these legal proceedings. As this is a pending legal matter, we will not comment further on the subject. When it is appropriate to comment, we will.

Components

As Dave mentioned earlier, after adjusting for the two items I just discussed, we believe Kroger had a very strong quarter. Our financial performance in the first quarter reflects the consistent approach we have taken to managing our business and, consistent with the plan we have shared with you, we continue to balance investments in gross margin and improved customer service with operating cost reductions to provide a better shopping experience for our customers. Our strategy directly affects Kroger's gross margin, OG&A rate, and operating margin. I'll discuss all three in the context of our first quarter results. Let's begin with gross margin.

Gross Margin

FIFO gross margin was 24.55% of sales, a decrease of 61 basis points compared to the first quarter of 2005. Excluding the effect of retail fuel operations, FIFO gross margin declined 9 basis points from the prior year.

Kroger’s first-quarter “selling gross margin” on non-fuel sales declined 33 basis points. As a reminder, “selling gross margin” is a term we use internally at Kroger to describe the Company’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. Delivering value to our customers is one component of our overall strategy to improve the shopping experience. In the first quarter, we were able to use improvements in shrink, advertising, and warehousing expenses to help fund additional investments in lower prices for customers.

OG&A

OG&A declined 19 basis points to 18.17% of sales. Excluding the effect of retail fuel operations, the increase in legal reserves, and stock option expense, OG&A declined 16 basis points. Leverage from strong identical sales plus good control in areas such as energy usage and labor productivity helped us overcome some of the significant increases in fuel and energy-related costs that many companies are facing.

Excluding our retail fuel operations, we estimate that higher energy prices negatively affected gross margin by 3 basis points and OG&A by 4 basis points, for a total negative effect of 7 basis points. This compares favorably to the 13 basis points negative effect in the fourth quarter of 2005.

Operating Margin

Next I would like to make a few comments about our operating margin for the first quarter. Kroger’s operating margin, on a GAAP basis, declined 12 basis points to 3.32% of sales. Excluding the effect of retail fuel sales, the increase in legal reserves and stock option expense, operating margin grew 32 basis points. Twenty-four of the basis points came from better sales leverage over rent and depreciation expense. The gross margin and OG&A effects I just discussed explain the remainder of the improvement.

In keeping with our strategic plan, Kroger will continue to invest savings generated from reduced costs and improved productivity to enhance our customers’ shopping experience through better service, product selection, and value. On a quarter-by-quarter basis, however, our operating margin may fluctuate depending on the timing of both our savings and our reinvestment in our customers’ shopping experience.

For fiscal 2006, we still forecast slightly improving operating margins, resulting primarily from improvement at Ralphs. During the first quarter, we saw improvements in sales and profitability at Ralphs and we expect continual improvement. This will be one driver of our earnings per share growth in 2006.

“Financial Triple Play”

Kroger’s “financial triple play” strategy supports the successful execution of our “Customer 1st” business strategy. During the first quarter, strong cash flow enabled Kroger to invest in our high-quality asset base, reduce debt, and return value to shareholders through share buybacks and dividends.

Capital Investment

Capital investment totaled $449.9 million in the first quarter, compared to $400.6 million a year ago. We are on track to invest approximately $1.7 - $1.9 billion in capital projects during fiscal year 2006, and we still anticipate total supermarket square footage growth of 1.5 - 2.0% (before acquisitions and operational closings). For the first quarter, total supermarket square footage grew 1.6% year over year, excluding acquisitions and operational closings. Our return on asset measures improved almost 1% on a pre-tax basis. That indication gives us confidence that we are investing our capital prudently.

During the quarter, Kroger opened, expanded, relocated or acquired 16 supermarkets. We completed 39 remodels and closed 36 locations, including 31 operational closings. Sixteen of these stores were located in northern California where – as we have previously announced – we are exiting the San Francisco and Sacramento markets under the Cala Foods, Bell Markets, and Ralphs banners.

Debt Reduction

Net total debt was $6.6 billion, a reduction of $829.3 million from a year ago and a reduction of $2.1 billion since January 2000. Net total debt includes a reduction of $526.1 million to reflect temporary cash investments. Total debt was $7.2 billion, a reduction of $318.2 million from a year ago.

Our investment grade rating is very important to us. We have steadily improved our coverage ratios in recent years and our net total debt to EBITDA ratio in the first quarter was 1.98, the lowest since our recapitalization in 1988. Fitch Ratings recently reaffirmed our credit rating at BBB and upgraded our outlook to “Stable” from “Negative”.

Share Repurchase

During the first quarter, Kroger repurchased approximately 6.7 million shares of stock at an average price of $19.90 for a total investment of $133.5 million. Last month, we announced our board’s authorization of a new $500 million stock repurchase program, reflecting the board’s confidence in the Company’s strategic plan and our belief that Kroger shares represent an attractive investment. At the end of the first quarter, there was approximately $486.9 million remaining under that new authorization.

Since January 2000, Kroger has invested $3.1 billion to repurchase 162.4 million shares at an average price of $19.17 per share. That equates to approximately 18% of the Company. Kroger expects to buy back stock in 2006 in accordance with the Company’s financial strategy of using one-third of free cash flow for debt reduction and two-thirds for share repurchase and cash dividend payments.

Dividend

In March, Kroger announced that its Board of Directors adopted a dividend policy and declared the payment of a quarterly dividend of $0.065 per share. Subsequently, on June 1, Kroger paid a quarterly cash dividend to shareholders – the first such payment since our leveraged recapitalization 18 years ago.

Pension

In addition to the "financial triple play", Kroger's first-quarter cash flow permitted us to make a cash contribution of $150.0 million to the Company-sponsored pension plans. This contribution completes our expected funding for fiscal 2006. Kroger's cash contribution in the year-ago quarter was $88.6 million for the first quarter and $300.0 million for the entire year.

Tax Rate

Our first quarter tax rate was 37.4% compared to 35.9% for the prior year. The current quarter rate differs from the statutory rate primarily due to state taxes. The first quarter 2006 rate is higher than the prior year rate because, in 2005, we reduced previously recorded tax contingency allowances resulting from a revision in the required allowances. We expect that our tax rate for fiscal 2006 will be 37.5%, consistent with our guidance at the beginning of the year.

Labor

Now some brief comments on labor. While we do not face the same magnitude of contract negotiations this year compared to last year, labor negotiations continue to be a challenge in the face of competitive pressures and rising pension and health care costs. In each contract negotiation, we will work toward an agreement that meets our objectives for cost reduction or containment while fulfilling our commitment to provide our associates with solid wages and benefits.

This balance will allow Kroger to invest in our business to create new job opportunities for our existing associates and hire more people.

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

Comments by Dave Dillon:

Thanks, Rodney.

We are very pleased with Kroger’s first quarter results. This quarter gives us a solid start in fiscal 2006 towards achieving or exceeding the objectives we outlined for investors at the beginning of the year. In fact, we have already raised our identical sales and, from an operating standpoint, earnings per share guidance for the year to reflect our confidence in Kroger’s strategic plan.

We believe that Kroger’s strong identical sales are primarily a result of our entire organization’s efforts to connect better with each and every customer and to improve their overall shopping experience. We are going about that in several different ways, and it’s more than just lower prices. Yes, customers tell us they want value, but they also tell us that other aspects of their shopping experience are very important – most notably, customer service and product selection.

We’re making strides in several areas that our customers notice every day, including shorter wait times at check-out lanes, full shelves with items our customers want and improvements in the cleanliness of our stores. In each of these areas, we’ve seen double-digit percentage improvements in our tracking measurements.

We’re pleased with the progress we’re making, but there is still a lot of work to do. Our results this quarter – and in the future – can be tied directly to the contributions of our 290,000 associates. We appreciate their hard work and thank them for making strides in several key areas. This is a very competitive industry, and customers have a lot of choices, so we recognize that it is our associates who can and will make all the difference.

We will now be happy to take your questions.

As we close, I’d like to make one last comment to our associates listening in today. Good results don’t just happen. The strong sales and improved earnings we just reported are a direct result of your personal efforts. You are raising the bar here at Kroger. These results illustrate what we can accomplish – individually and collectively. Thank you for your commitment to our customers. Let’s all keep reminding each other what our paycheck says –

“A satisfied customer made this paycheck possible.”

Thank you all for joining us today. Goodbye.

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,” “forecast,” “on track,” and “anticipate.” 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 growth 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. These same factors, as well as the extent to which we are able to improve results from our Southern California operations, may affect our ability to improve margins. In addition any labor dispute, delays in opening new stores, the ultimate resolution of the legal proceedings arising from the hiring practices during the labor dispute at Ralphs, 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 identical supermarket sales could be adversely affected by increased competition and sales shifts to other stores that we operate. Square footage growth during the year is dependent upon our ability to acquire desirable sites for construction of new facilities, as well as the timing of completion of projects. Our estimated expense of $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. 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. 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.