First Quarter, 2004
Investor Conference Call Prepared Remarks
June 22, 2004

First Quarter, 2004

Carin Chabut : Good morning and thank you for joining us. Bef ore 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 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 it over to Mr. Dillon.

comments by: Dave Dillon

Thanks Carin and good morning everyone. We appreciate you joining us to review Kroger’s first-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 first quarter results and our sales and earnings expectations for 2004. Then Rodney will provide some additional details on the quarter and update you on our progress in contract negotiations. Then we’ll take your questions.

Total sales for the 16-week first quarter increased 3.9% to $16.9 billion. Identical food-store sales, including fuel, increased 1.3% and, excluding fuel, increased 0.3%.

Excluding, for the entire quarter, the Ralphs and Food 4 Less stores affected by the labor dispute, identical food-store sales, including fuel, increased 1.6% and, excluding fuel, increased 0.5%. We estimate that product cost inflation, including fuel, was 2.3% and, excluding fuel, was 1.6%.

We’re pleased that Kroger continues to grow our identical food-store sales in a challenging operating environment. But there is more to be done. Our investment in gross margin has been slower than originally planned as our divisions implement their sales plans. We are implementing these plans in a careful manner. We plan to continue making investments in pricing, customer service and product variety to deliver strong, sustainable sales growth. Our target for identical food-store sales in 2004, excluding fuel, continues to be higher than what we achieved in the fourth quarter of 2003.

We’re also pleased with Ralphs’ sales and earnings following the end of the southern California labor dispute in late February. Our associates in southern California did a great job of quickly getting our stores back in shape and providing our customers with outstanding service. And that is true both at Ralphs and Food 4 Less. Based on our independent shopper surveys, our service ratings have returned to pre-strike levels.

We continue to expect earnings in 2004 to be lower than in 2003, excluding the effect of the labor disputes and unusual items. We are off to a good start in 2004, and we expect earnings for the year – including the effect of the southern California labor dispute – to be sufficient to generate positive free cash flow.

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

comments by Rodney McMullen:

Thank you Dave and good morning everyone.

Kroger’s net income in the first quarter was $262.8 million, or $0.35 per diluted share. We estimate the labor dispute reduced net earnings by $71.6 million, or $0.10 per diluted share. Approximately 30% of the expenses related to the labor dispute is attributable to the recovery after the strike ended. The weekly costs associated with the post-strike recovery continue to moderate. At this point, because of competitive activity in southern California, we cannot estimate how long this will continue or the amount.

FIFO gross margin was 26.01%, a decrease of 72 basis points from the first quarter of 2003. FIFO gross margin at the supermarket divisions not affected by the labor dispute, and excluding the effect of fuel, declined by 17 basis points.

We have seen some improvement in shrink as a result of the use of technology and increased attention that we have devoted to this area. As we have discussed in the past, our divisions have been working hard to target various opportunities for shrink reduction. Part of that is helping our associates better understand what shrink is and how we can tackle the problem. We’re pleased with the progress Kroger is beginning to make. This will continue to be a focus for the entire organization in 2004.

OG&A increased 41 basis points to 19.04%. OG&A at the supermarket divisions not affected by the labor dispute, and excluding the effect of fuel, increased approximately 23 basis points. The cost of providing health care and pension benefits to our associates and their families increased OG&A by 24 basis points.

Our effective tax rate is 36.9%, vs. 37.5% a year ago. The effective tax rate is expected to vary between quarters based on the status of open items with various taxing authorities and law changes. Assuming the Work Opportunity Tax Credit is not re-established, we expect the tax rate for 2004 to be in the range of 38%.

Total debt was $8.0 billion, a decrease of $258.3 million as compared to the first quarter of 2003. A lower market-value adjustment for interest-rate swaps and the implementation of FASB Interpretation No. 46 accounted for $139.8 million of this decline.

We were delighted by Moody's decision in April to raise Kroger’s debt ratings from "Baa3" to "Baa2." The upgrade was spurred in part by our strong market share, geographically diverse store base, and the continued deleveraging of our balance sheet.

One other note about debt. We recently called our 7.375% debt due in March 2005. The call will be funded July 7. Based on current interest rates, we expect to incur a premium of approximately $33 million and anticipate a reduction in interest expense of $26 million for the balance of the year.

Also during the quarter, Kroger executed a new revolving credit facility totaling $1.8 billion in May. The new five-year facility replaces a 364-day facility in the amount of $1 billion and a five-year credit facility in the amount of $812.5 million. This credit facility provides Kroger with improved flexibility and lower interest rate spread.

Kroger resumed its stock buyback program in the first quarter, repurchasing 9 million shares of common stock at an average price of $16.62 per share, for a total investment of $149.3 million. Last March we pointed 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 had not repurchased any stock in the fourth quarter of 2003. Since January 2000, Kroger has invested nearly $2.6 billion to repurchase 130.1 million shares, or approximately 15% of the Company.

Kroger opened, expanded, relocated or acquired 32 food stores, and closed 22 stores in the quarter. Total food store square footage increased 2.4% over the prior year.

The 22 store closings during the quarter included 16 operational closings. The Company continues to evaluate under-performing stores, and additional closings are expected during the balance of the year. The previously announced closing of 14 Ralphs stores took place early in the second quarter, and are not included in the 16 operational closings.

Capital expenditures for the first quarter totaled $456.7 million. For 2004, we expect capital investments, excluding acquisitions, to total $1.8 - $2.0 billion. We continue to emphasize a tightening of capital.

Some of that capital will go toward expanding our Marketplace format, which has proved so successful at Fry’s in Arizona. We recently announced plans to open – for the first time anywhere in the country – four Marketplace stores under the Kroger banner. The stores will be in Columbus, Ohio and will offer our customers the opportunity to shop for groceries and specialty foods, linens, gourmet kitchen items and other merchandise in a convenient neighborhood store from a retailer they know and trust. The first Kroger Marketplace store in Columbus will open later this year, with the other three opening in 2005. This was made possible by identifying several attractive real estate sites and negotiating a new labor agreement in Columbus – with a competitive cost structure – especially for these stores.

And earlier this week, we converted five former Fred Meyer stores in Utah to the new Smith’s Marketplace banner. All of those stores will undergo extensive remodeling this summer.

These changes, along with Fry’s Marketplace stores, would not have been possible without the expertise of the great team at Fred Meyer to know what categories and products to sell.

Turning now to the labor front, we continue to make progress in negotiations with the UFCW around the country. Since our last conference call in March, Kroger has reached new agreements in central Indiana, Houston and Detroit. We also have tentative agreements in Nashville and Arizona – fully recommended by the union – that will be voted on by our associates over the next couple of weeks. Each of these new contracts and tentative agreements was achieved without a work stoppage, and all have limits in place to control our health care costs.

But there is still a lot of work ahead of us, with major contracts expiring later this year in Denver, Las Vegas and Cincinnati . We also currently have contract extensions in Seattle, Louisville and Food 4 Less in southern California. We continue to pursue new agreements that meet our objectives in those markets, and we remain hopeful that we can do so without work stoppages.

Our goal in every negotiation is to achieve a balanced solution that provides our associates with the quality health care and fair wages they need at a cost that is fair to everyone involved, including Kroger customers. Our 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.

Our associates have played a key role in our growth, and we understand the importance of good wages, quality health care and a secure retirement. We’re determined to continue providing excellent wages and benefits in a way that allows us to meet the competitive challenges of our marketplace. be competitive in the interest of every Kroger associate and customer.

Now I will turn it back to Dave.

comments by Dave Dillon:

Thanks Rodney.

Kroger is off to a good start with improvement in sales and identical sales in 2004. Our earnings per share was slightly better than expected. Kroger continues to reduce debt and buy back stock. We are squarely focused on providing customers with better service, selection and value each time they shop in one of our stores. We have a clear strategy in place to build our business and the financial resources in place to execute the plan. We are reducing costs and will continue to reinvest the savings in Kroger’s core business to improve our customers’ shopping experience and consistently deliver better value.

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,” “goal,” “anticipate,” “target” 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, interest rates, 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 and, as a result, our ability to generate free cash flow. 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. Although we anticipate that our identical food-store sales for fiscal 2004, excluding fuel, will be stronger than in the fourth quarter of 2003, excluding fuel, and that earnings per diluted share in 2004 will be lower than in 2003, results could be affected by changes in competition, weather conditions, labor disputes, economic conditions, interest rates, and the success of programs designed to increase our sales. The extent to which Kroger makes investments in pricing, customer service and product variety, and the Company’s ability to achieve sustainable sales growth as a result of those investments, will depend on our ability to reduce costs and the success of programs designed to generate additional sales. Our expected tax rate for 2004 could be affected by changes in tax laws, including tax credits that are made available to us. The premium that Kroger pays to call our 7.375% debt is based on prevailing market rates three days prior to the effectiveness of the redemption, and any change from current rates will affect that premium. Our expected interest expense reduction will be affected by our ability to generate cash flow in amounts sufficient to reduce our debt, as well as the extent to which changes in prevailing interest rates cause the rates on Kroger’s floating-rate debt to increase. While we endeavor to provide our associates with quality health care and fair wages at a fair cost, our ability to do so is affected by competitive factors in the markets in which we operate, and the increasing cost of health care. 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.