First Quarter, 2005
Investor Conference Call Prepared Remarks
June 21, 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.

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 over the call to Mr. Dillon.

comments by: Dave Dillon

Thanks Carin and good morning everyone. We’re glad 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 our first-quarter performance and some key areas of our business. I will also share our updated earnings guidance for 2005. Rodney will provide additional details about our results. Then we’ll take your questions.

Sales

Total sales for the first quarter increased 6.2% to $17.9 billion. This growth was broad-based across the organization, driven by strong sales at the Company’s food stores and fuel centers, improvement in southern California, and a very good performance at our convenience and jewelry stores.

This growth continues a good trend. Identical supermarket sales increased 3.8% with fuel and 2.4% without fuel. Identical supermarket sales, excluding fuel and strike-affected stores, grew 2.7%. On this basis, Kroger’s identical supermarket sales have shown sequential improvement for eight of the past nine quarters.

In the first quarter, our associates delivered Kroger’s strategy of providing our customers with high levels of service, selection and value. This was the key to Kroger’s performance. We’re targeting the areas of our business that our customers have told us are most important to them. For example, we’re working on ways to speed up the checkout process. That includes taking steps to reduce the time our customers spend waiting in line before they get to the cashier. It also involves making sure our cashiers have the tools necessary to process the order quickly and accurately, and that we have enough baggers available to serve our customers, especially during peak hours. Our measurements in this area clearly show progress.

Another way we’re working to provide an improved shopping experience is through our customer loyalty program. Over several years, we have accumulated a substantial volume of consumer data through our loyalty cards. In fact, with 40% of all U.S. households holding one of our shopper cards, Kroger today boasts one of the largest retail customer databases in America. Our partnership with dunnhumby, the data analysis firm from the United Kingdom, allows us to segment our customer base and design customized offerings for individual customers. It also gives us the tools to target our promotional dollars and pricing investments toward our most profitable customers.

The common thread running through all of these examples is our commitment to making sure that every decision we make positively influences the way our customers feel about Kroger. This emphasis on placing the “customer first” generated increased customer traffic and higher average transaction size in identical supermarkets in the first quarter.

Southern California

In southern California, we continue to rebuild our business. Identical supermarket sales without fuel at Ralphs and Food 4 Less were both positive in the first quarter and, on a combined basis, increased 1.3% from a year ago. EBITDA at Ralphs and Food 4 Less were in line with our expectations. It’s important to remember when evaluating our sales results in southern California that our stores were not picketed in the first four weeks of fiscal 2004 during the labor dispute, while our competitors’ stores were a target.

We’re pleased with our progress in southern California, particularly in light of the significant challenges we have faced. Our Ralphs and Food 4 Less associates are embracing the plan and are delivering against our strategy. I am very pleased with how our entire team – from the associates in our stores and manufacturing facilities, to the distribution centers and the division office in Compton – is working together. We appreciate their hard work. Their enthusiasm is making a difference with our customers and in our business, and we’re grateful for their continued commitment.

Corporate Brands

Taking a quick look at other areas of our business, Kroger’s corporate brands are an important competitive advantage. In the first quarter, we added 157 items to the corporate brand lineup. The market share of Kroger’s private-label grocery items, in terms of dollars and units, continued to increase.

While our banner brands are the heart and soul of our industry-leading program, our three-tier branding strategy continues to gain momentum. A great example is Disney’s Old Yeller brand dog food, which is exclusive to Kroger. We introduced this item a few months ago and the initial sales have been very strong. Another example is our FMV brand, which is aimed at value-conscious shoppers. Our FMV brand posted double-digit sales growth in grocery in the first quarter.

We have a full pipeline of great corporate brand items in development to appeal to a wide range of customers, and we look forward to sharing more information with you throughout the year.

Guidance for 2005

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

On the strength of our first-quarter financial performance, we’re raising our earnings estimate for fiscal 2005. We now expect earnings for the full year to exceed $1.24 per fully diluted share, an increase of $0.03 per share from the guidance we provided in March. We expect our 2005 earnings per share growth to be fueled by continued progress in southern California, improved results from the balance of the Company, lower interest expense, and fewer shares outstanding as a result of stock buybacks. As a reminder, Kroger expects to begin expensing stock options in the first quarter of 2006.

Now I will ask Rodney to provide some additional perspective on Kroger’s first-quarter results. Rodney?

comments by Rodney McMullen:

Thank you Dave and good morning everyone.

As Dave said, our sales growth during the quarter was very broad-based. We had growth across all of the country and across all categories. The strongest categories were grocery, drug/GM, pharmacy, produce and fuel.

Kroger reported net earnings of $294.3 million, or $0.40 per share, for the first quarter. Net earnings in the year-ago period were $262.8 million, or $0.35 per diluted share. You’ll recall that last year’s first-quarter results were affected by the labor dispute in southern California.

Operating margins declined slightly compared to the first quarter of 2004. This was modestly better than our expectations. We continue to invest in lower prices for our customers. These investments are being offset, in part, by strong expense control, including shrink improvements.

In addition, OG&A declined as a rate of sales despite increased pension expense. Strong sales, strong cost controls across the company and lower health care costs contributed to this improvement. Rent, as measured in real dollars, declined 4.4% and, as a percentage of sales, declined by 13 basis points. This resulted from our focus over the past several years on owning real estate.

Depreciation declined as a rate of sales, reflecting our reduced capital expenditures. This is the result, in part, from our increased focus on remodels versus new stores, plus we also continue to find ways to reduce the cost to remodel and construct our stores.

We are on track to improve our operating margin on the year, primarily as a result of improvements in southern California.

Capital Investments

Capital investment totaled $400.6 million in the first quarter, compared to $456.7 million a year ago. For 2005, we expect capital investment to range from $1.6-$1.8 billion, excluding acquisitions. As we have said before, we continue to focus on improving the productivity of our asset base. Over the past four quarters, we have closed 59 under-performing stores .

Share Repurchase

Now I’d like to give you a short update on our share repurchase activities. During the first quarter, Kroger repurchased 9.5 million shares of stock at an average price of $16.06 for a total investment of $153 million. There is approximately $208 million remaining under the $500 million stock buyback announced last September. Since January 2000, Kroger has invested $2.9 billion to repurchase 150.3 million shares at an average price of $19.16 per share. We have repurchased the equivalent of 17% of the Company. Kroger continues to buy back shares.

Debt

Total debt was $7.5 billion, a reduction of $508.7 million from a year ago. Net interest expense totaled $159.1 million, a decrease of $13.1 million, or 7.6%, from a year ago. This decline resulted from debt reduction and a lower average borrowing rate.

Kroger’s strong cash flow enabled us to reduce debt by $509 million, repurchase $315 million in stock, and make $1.6 billion in capital investments over the past four quarters. We have the financial resources to continue building our business for the future, which is a critical competitive advantage in today’s operating environment. Our strategy remains focused on using one-third of cash flow for debt reduction and two-thirds for stock repurchase or payment of a cash dividend.

Labor

Turning now to labor negotiations…

We recently reached a ratified agreement at our Smith’s stores in Albuquerque, New Mexico. We’re currently negotiating, under contract extensions, in Roanoke and Atlanta. Other major contracts that will expire this year are 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 remain 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.

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

comments by Dave Dillon:

Thanks Rodney.

We’re off to a good start in 2005. Across the organization – from our stores and division offices to our manufacturing facilities, distribution centers and General Office – our associates are working together to deliver the best possible shopping experience to our customers every day. I’m proud of everything our associates have been able to achieve in the face of tough competition. At the same time, we recognize that a lot of work remains. We must do an even better job of providing superior shopping experiences to our customers and managing our costs more effectively. We are confident this will drive profitable sales growth and create the value that our shareholders expect from their investments.

We will now be happy to take your questions.

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 “expect,” “on track,” “committed” and “building.” 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 earnings could be adversely affected by increased competition, weather and economic conditions, interest rates, goodwill impairment, our ability to generate sales at desirable margins, and future labor disputes, particularly as the Company seeks to manage health care and pension costs. 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. Our ability to improve our operating margins and to achieve a desirable cost structure may be adversely affected if our efforts to contain operating, general and administrative expenses fail, 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 anticipate expensing stock options during our next 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. 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.