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First Quarter 2007
Investor Conference Call Prepared Remarks
June 26, 2007


Carin Fike, Director of Investor Relations:

Good morning and thank you for joining us. Before 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 would like to introduce Mr. David Dillon, Chairman and Chief Executive Officer of Kroger.

Comments by: Dave Dillon
Thank you Carin and good morning everyone. We’re pleased you could join us to review Kroger’s first quarter 2007 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’ll begin with a recap of Kroger’s first quarter sales results and discuss some of our plans moving forward. Then I will discuss sales and earnings guidance for 2007. Rodney will discuss Kroger’s first quarter results and share additional detail on guidance. After that, we’ll be happy to take your questions.

Sales
We’re off to a solid start in fiscal 2007. Total sales for the first quarter increased 6.7% to $20.7 billion and identical supermarket sales increased 6.0% with fuel and 5.2% without fuel. Growth was broad-based across all geographic regions and most departments.

In addition, our convenience stores turned in another strong quarter of identical sales growth – both in fuel gallons and non-fuel merchandise.

The strong identical sales growth in the first quarter demonstrates that our associates are focused on our customers, building customer loyalty and generating strong identical sales growth. This is a key driver of our objective to increase earnings and create value for shareholders.

Excluding fuel, this marks the fifteenth consecutive quarter Kroger has reported positive identical supermarket sales, and the eighth consecutive quarter Kroger has reported identical supermarket sales in excess of 3%. This track record demonstrates that Kroger’s Customer 1st strategy and business model have the power to drive strong, sustainable identical sales growth.

Fiscal 2007 Guidance
As we stated back in March, strong identical sales growth is one driver of our earnings per share growth in fiscal 2007. Today we raised the lower end of our expected range for identical supermarket sales growth, excluding fuel sales, to 3.5% from our previous expectation of 3.0%. The higher end remains the same
at 5.0%.

We are confirming our guidance for fiscal 2007 earnings, which did not contemplate the first quarter charges incurred due to labor unrest at one of our distribution centers. That expense reduced first quarter earnings by an estimated two cents per diluted share. Kroger’s earnings guidance for fiscal 2007 remains $1.60 - $1.65 per diluted share, including the two-cent charge.

This range equates to 9 – 12% growth from adjusted fiscal 2006 earnings of $1.47 per diluted share. Excluding the two-cent charge related to labor in the first quarter, the growth rate would be 10 – 14%. In addition to strong identical sales, Kroger’s earning per share growth will be driven by fewer shares outstanding and slightly improving operating margins, excluding fuel sales.

Looking beyond 2007, we believe our Customer 1st strategy will allow us to grow identical supermarket sales in the 3 to 5% range, with a slightly improving operating margin, excluding fuel sales.

Kroger’s Customer 1st strategy is creating a unique competitive advantage that positions us well for multiple-year growth and ongoing value creation for our shareholders. The strategy has four basic components:

  • Our People
  • Our Products
  • The Shopping Experience; and
  • Our Prices.

We are fortunate to have a team of talented professionals who are focused on listening and responding to our Customers. Their daily actions in these important areas give us confidence that we can continue to grow our business in a competitive and consolidating industry.

Another key advantage for us is our line of Corporate Brands. Our three-tier program – Private Selection, Store banner brands and Value brands – enables us to serve our broad and diverse Customer base. We now have more than 10,000 private-label products available only in Kroger’s family of stores and have plans to continue to expand this successful area of our business.

We know shoppers today have many choices and that’s why Kroger remains focused on improving our customers’ overall shopping experience. We continue to invest operating cost savings and productivity gains into improving the value, service, and product quality and selection we offer our customers.

We also have the financial resources necessary to maintain and grow our store base. Our capital investment program is contributing to Kroger’s success and is building shareholder value. One great example is our Marketplace store format. Kroger’s merger with Fred Meyer in 1999 gave us a competitive advantage in the area of general merchandise – an advantage we are leveraging in our Marketplace stores. We have 31 Marketplace stores open in four major markets – Phoenix, Salt Lake City, Columbus, and Cincinnati. Customers are responding positively to this format, and we are currently working on expanding the format to six additional markets.

Now I would like to turn the call over to Rodney for some additional details on our first quarter results, financial strategy update, and 2007 guidance.

Rodney?

Comments by Rodney McMullen:
Thank you, Dave, and good morning everyone.

Net Earnings
Net earnings in the first quarter totaled $336.6 million, or $0.47 per diluted share.
During the quarter, the Company incurred charges related to labor unrest at one of its distribution centers, which reduced earnings by an estimated $0.02 per diluted share.

Net earnings in the same period last year were $306.4 million, or $0.42 per diluted share. First quarter 2006 results included a non-recurring legal expense of $0.03 per diluted share.

Excluding non-recurring expenses in both years, Kroger’s fiscal 2007 first quarter earnings per diluted share were nearly 9% higher than the same period of the previous year. As a reminder, when we gave fiscal 2007 guidance back in March, we anticipated that our earnings per share growth rates in the first and fourth quarters would be lower than the second and third quarters.
Kroger’s first quarter results were in line with our expectations, excluding costs related to labor unrest during the quarter.

As Dave mentioned earlier, we remain focused on our strategy of investing in our customers’ overall shopping experience. The financial impact of this strategy is visible in our first quarter gross margin, OG&A, and operating margin.

Gross Margin
During the quarter, FIFO gross margin declined 85 basis points to 23.70% of sales. Excluding the effect of retail fuel operations and expenses related to labor unrest at one of our distribution centers, FIFO gross margin declined 49 basis points from the prior year. Most of this decline was due to continued investments in selling gross margin.

“Selling gross margin” is a term we use internally to describe the Company’s gross margin before incurring expenses directly related to distributing and merchandising products on our stores shelves. We believe this measure is one way for investors to observe our price investment strategy.

Our first quarter supermarket selling gross margin on non-fuel sales declined 48 basis points. While this decline was more than we planned, it reflects Kroger's strategy of delivering value to our customers through strategic price investments. Price investments can take the form of lower everyday pricing, promotional pricing, or by choosing not to pass all product cost increases along to our customers. Our pricing investments during the quarter took all three forms.

We did experience inflationary pressure across several categories – particularly in Dairy and Produce. We also saw modest inflation in certain core grocery areas at a level we have not seen for several years. Typically, such inflation will eventually be passed along to customers, but in some cases we chose not to do so immediately due to competitive situations. We estimate that our product cost inflation excluding fuel was 2.0% for the quarter. We are working hard to balance the current product cost environment with our strategy to provide everyday value to our customers. On an individual quarter basis, this can affect our gross margin.

Operating, general and administrative (OG&A)
While our selling gross margin investment was more than planned, it was mostly offset by our progress in OG&A savings, which was ahead of plan. Operating, general and administrative costs, or OG&A, declined 76 basis points to 17.41% of sales. Excluding the effect of retail fuel operations and the non-recurring legal expense in 2006, OG&A declined 36 basis points versus last year.

This decline was driven by strong identical sales leverage, increased productivity, and progress we have made in controlling our utility and health care expenses. These gains were muted by higher credit card fees and investments made in associate training. Rent expense, without fuel, declined 9 basis points versus last year and depreciation expense, without fuel, declined 1 basis point.

Operating Margin
Kroger’s operating margin, on a GAAP basis, increased 1 basis point to 3.33% of sales. Excluding the effect of fuel sales and non-recurring items in both years, operating margin declined 8 basis points. This result is consistent with our plan. For the full year in fiscal 2007, we continue to anticipate a slight expansion in operating margin, excluding fuel sales. This reflects Kroger’s strategy of investing operating cost savings and productivity gains into improving the customer’s shopping experience, and pricing, in order to drive strong, sustainable identical sales growth.

Financial Strategy
While our Customer 1st strategy and focus remain the same, the financial strategy that supports our business has evolved to reflect our progress in reducing Kroger’s leverage over the past few years.

Since January 2000, Kroger has lowered its net total debt to EBITDA ratio from 2.8 to 1.8, a reduction of 1.0 times EBITDA. This is the result of reducing debt by $2.2 billion and increasing EBITDA by $522 million. This is nearly a 40% improvement in our coverage ratios.

Based on this progress, Kroger now plans to dedicate free cash flow to repurchase shares and pay dividends. Kroger’s investment grade rating remains important as the Company executes its strategy. We believe that maintaining a solid investment grade rating provides us the best cost of capital and the flexibility to execute our growth strategy in a competitive and consolidating industry.

Earlier today, we announced that Kroger’s board authorized a new $1 billion stock repurchase program, reflecting its confidence in Kroger’s Customer 1st strategic plan and management’s belief that Kroger shares represent an attractive investment opportunity. As you know, since January 2000, we have repurchased $3.7 billion of stock and more than $600 million over the past year.

Our share repurchase and dividend programs are delivering value to shareholders. Over the past five quarters, Kroger has returned nearly $1 billion to shareholders in the form of share repurchases and dividends.

Acquisitions
Earlier, I referred to the “competitive and consolidating” industry in which Kroger operates. Recently we announced two separate acquisitions that reflect this industry environment.

In April, Kroger announced plans to acquire 18 Scott’s Food & Pharmacy stores in northeast Indiana. And just last week, we announced our agreement to purchase 20 Farmer Jack stores in the Detroit metropolitan area. Both transactions are in line with our overall acquisition strategy of primarily seeking smaller in-market opportunities. We have found that these types of acquisitions generally produce higher incremental returns and lower risk. In all cases, Kroger carefully evaluates acquisition opportunities for their potential to enhance shareholder value.

We expect both transactions to be completed by mid-July.

Capital Investments
During first quarter, Kroger invested $555.8 million in capital projects, compared to $449.9 million in the prior year. These capital projects included 19 new, expanded, relocated, or acquired stores and 71 remodels. We closed 24 locations, including 19 operational closings. Total supermarket square footage grew 1.6% year over year, excluding acquisitions and operational closings. Our return on assets improved 88 basis points, on a pre-tax basis. This is using the method Kroger has consistently used to calculate return on assets.

Our capital investment expectations for the year are unchanged. We plan to invest $1.9 to $2.1 billion in capital projects, excluding acquisitions. We anticipate total supermarket square footage growth of 2.0% – excluding acquisitions and operational closings – with an emphasis on large, fast-growing markets.

I’d like to touch upon a couple other first quarter items before Dave concludes our remarks and we take your questions.

LIFO
Our first quarter LIFO charge was $20.3 million, an increase of $10.1 million over the same period last year. The increase is related to my earlier comments about inflationary pressures in the cost of many products that we sell. The year-over-year increase reduced Kroger's earnings by approximately $0.01 per diluted share. Based on today's environment, our current forecast for Kroger's annual LIFO charge is higher than our original expectations for fiscal 2007. However, we still anticipate achieving our fiscal 2007 earnings guidance of $1.60 - $1.65 per diluted share.

Labor
Turning to labor relations, we recently reached an agreement with unions representing our associates in Detroit, Dallas and Houston, and we are engaged in negotiations in Toledo, Seattle and Southern California. In the recent settlements, we found ways to improve wages and health care benefits for our associates while maintaining a competitive cost structure. We accomplished this by reaching agreements that include cost-reducing measures such as relaxed work rules, wage progression extensions and other changes in health care plans, including employee contributions toward their plans. Fair and balanced contract settlements continue to be our objective in all negotiations.

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

Comments by Dave Dillon:
Thanks, Rodney. This quarter gives us a solid start toward achieving our objectives in fiscal 2007. We are positioned well to continue to grow our business and increase our market share by focusing on the key components of our strategy: our people, our products, our prices and improving the overall shopping experience for our customers.

Now, we would like to take a few moments to answer your questions.

Closing comments after Q&A:
Thank you. Before we sign off, I would like to offer some additional comments to our associates listening in today.

First, let me welcome the teams from Scott’s and Farmer Jack to Kroger. We look forward to working with you as we continue the great tradition of community involvement and customer service you have established in each of your markets.

To all of our associates, thank you for your efforts this quarter. You are the reason our customers choose us instead of one of our competitors and we appreciate the hard work you do in every area of our business.

We continue to face competitive pressures and know there is much more we need to accomplish this year. We know you are up to the challenge and we look forward to growing our Company together with you.
On a final note, we hope you and your families enjoy a safe and happy summer.

Thank you all for joining us today. Goodbye.

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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 “forecast,” “expectation,” “guidance,” “will,” “believe,” “plans,” “expect,” 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 identical supermarket sales and earnings growth and earnings per share 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, as well as the success of our programs designed to increase our identical sales without fuel. In addition any delays in opening new stores, or changes in the economic climate could cause us to fall short of our sales and earnings targets. Our ability to increase identical supermarket sales also could be adversely affected by increased competition and sales shifts to other stores that we operate, as well as increases in sales of our corporate brand products. 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. These same factors could affect the extent to which our strategic plan is successful and the extent to which we are able to create value for our shareholders by investing in our store base, repurchasing stock, and paying cash dividends. Our plans to use free cash flow to repurchase shares and to pay dividends will depend on our ability to generate free cash flow, which will be affected by all of the factors identified above, and the extent to which those repurchases can be made and dividends be paid while still maintaining a solid investment grade rating. The extent to which our maintenance of a solid investment grade rating provides us with the best cost of capital and the flexibility to execute our growth strategy will depend primarily on the way in which the capital markets view an investment in Kroger debt instruments as compared to other investment grade alternatives. Our expectations regarding completion dates of acquisitions could be affected if the parties are unable to satisfy the closing conditions in a timely fashion. 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.

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