Second Quarter, 2005
Investor Conference Call Prepared Remarks
September 13, 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 second-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 second-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 second-quarter performance and some key areas of our business. I will also discuss our sales outlook for the second half of the year and our earnings estimate for the full year. Rodney will share additional details about our results, and then we’ll take your questions.

Sales

Total sales for the second quarter increased 6.8% to $13.9 billion. This growth was once again broad-based across the organization, driven by strong sales at the Company’s food stores and fuel centers, improvement in southern California, and a good performance at our convenience and jewelry stores.

This growth continues a very good trend. Identical supermarket sales increased 5.1% with fuel and 3.4% without fuel. By either measure, this represents Kroger’s highest identical sales since the merger with Fred Meyer in 1999. It also is the eighth consecutive quarter of positive identical sales, excluding fuel. We’re pleased by these results. As we have said before, identical sales growth is a core part of Kroger’s strategy.

Kroger’s business strategy is squarely aimed at consistently meeting the needs of our customers through great service, selection and value. In the second quarter, our associates continued to focus on improving the shopping experience for our customers. This commitment to placing the “customer first” helped drive growth in customer traffic and average transaction size.

For some customers, that means offering valuable savings through our loyalty program or the Kroger 1-2-3 Rewards ™ MasterCard © , which allows customers to earn points on all purchases with the card. Those points can be redeemed for free products in our stores. By the end of this month, the 1-2-3 Rewards ™ card will be available in approximately 2,200 of our stores.

Our focus on putting the “customer first” also means delivering great service. Here’s a recent example: A few days after the hurricane struck, I heard from a customer in Grayson, Georgia. He had been driving around the area looking for a place to fill his car with gas. What he found was frustrating: lots of long lines and retailers with sky-high prices. He was on his way home to, as he put it, “wait out the hysteria” when he decided to stop at our nearby Kroger fuel center. He was surprised to see that our prices hadn’t risen significantly. But what he saw next was even more appealing. Several Kroger associates were in the parking lot, helping to direct long lines of traffic to the fuel pumps as they became available and generally keeping things calm and orderly. As a result, he said, he was able to get in and out much more quickly. “ Your company has earned our gas business and our grocery business away from your competitors with the thoughtfulness of a handful of managers,” he told me.

I wanted to share this example – which is just one of many that we receive on a regular basis – because it really strikes at the heart of what we’re trying to accomplish across the organization. Our goal is to make sure that every action our associates take, and every decision we make as a Company, positively influences the way our customers feel about Kroger. At a time when competition among food retailers is tougher than ever, great customer service has never been more important. That is why we are working to reduce the time our customers spend waiting in line at the checkout, and measuring the results. It’s why we are investing in lower prices and offering valuable savings to our best customers through targeted marketing programs. These are just a few examples of what we mean by placing the “customer first.”

Taking a quick look at other areas of our business, Kroger’s corporate brands are an important competitive advantage. In the second quarter, we added 114 items to the corporate brand lineup. The market share of Kroger’s private-label grocery items, in terms of units, continued to increase. Our share in terms of dollars declined a bit because of deflation in the dairy category.

Southern California

Moving now to southern California, business at Ralphs and Food 4 Less continued to improve during the second quarter. In southern California, identical supermarket sales without fuel at both divisions continued to grow in the second quarter. On a combined basis, they increased 2.9% over the prior-year period. As a reminder, the labor dispute ended in the first quarter of 2004.

Our recovery in southern California remains on track. We’re seeing sustained improvement there as Ralphs and Food 4 Less associates target the areas of our business that our customers have told us are important to them.

Guidance for 2005

On the strength of Kroger’s year-to-date financial performance, we are affirming our earnings estimate for fiscal 2005. Kroger expects earnings for the full year to exceed $1.24 per fully diluted share. We expect this earnings growth to be driven 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.

We expect identical supermarket sales for the second half of 2005, including southern California and excluding fuel, to exceed 3.0%.

I want to note that these estimates do not include Hurricane Katrina, as it is too early to understand fully the effect – whether favorable or unfavorable – that the storm will have on our results for the balance of the year. We will provide additional updates, as appropriate.

Now I will ask Rodney to provide some additional perspective on Kroger’s second-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 major categories. Most of our divisions experienced another quarter of increased identical supermarket sales. The strongest categories were grocery, produce, drug/GM, fuel, and apparel at Fred Meyer. Fuel grew both in dollars and gallons. We estimate product cost inflation, excluding fuel, was 0.7% during the quarter.

Kroger reported net earnings of $196.5 million, or $0.27 per diluted share, for the second quarter. Net earnings in the year-ago period were $142.4 million, or $0.19 per diluted share.

FIFO gross margin was 24.59% of sales, a decline of 59 basis points compared to the second quarter of 2004. Excluding the effect of fuel, FIFO gross margin increased 10 basis points versus the prior year. We continued to invest in lower prices for our customers on a targeted basis. These investments were positively offset by good expense control and shrink improvements in grocery and drug/GM.

OG&A declined 52 basis points to 18.23% of sales. Excluding fuel, OG&A declined 22 basis points. Strong sales, the recovery in southern California, good cost controls across the company and lower health care costs contributed to this improvement.

We remain on track to improve our operating profit margin for the year, primarily as a result of improvements in southern California. This is consistent with our expectations. We plan to continue our strategy of investing cost savings to provide better value, service, and selection to our customers.

A quick comment about fuel: higher fuel costs have added an estimated $12.6 million to our operating costs year to date. These higher costs are factored into the guidance Dave provided.

Capital Investments

Capital investment totaled about $272 million in the second quarter, compared to $416 million a year ago. For 2005, we now expect capital investment to range from $1.4-$1.6 billion, excluding acquisitions. We continue to emphasize a tightening of capital. Our focus is on interior remodels versus new store projects. Our performance to budget on major capital projects is improving.

Share Repurchase

Now I’d like to give you a short update on our share repurchase activities. During the second quarter, Kroger repurchased 2.2 million shares of stock at an average price of $17.53 for a total investment of $38.0 million. At the end of the second quarter, there was approximately $169.8 million remaining under the $500 million stock buyback announced last September. Since January 2000, Kroger has invested $2.9 billion to repurchase 152.5 million shares at an average price of $19.13 per share. Kroger continues to buy back stock.

Debt

Net total debt was $7.0 billion, a reduction of $583.5 million from a year ago. Net interest expense totaled $120.6 million, a decrease of $31.9 million from a year ago. About $24.7 million of that decrease is a result of the premium we paid last year for the early retirement of debt. We have reduced net total debt by $1.8 billion since January 2000.

Financial Triple Play

Over the past four quarters, Kroger’s strong cash flow enabled us to achieve our “financial triple play” by reducing net total debt by $584 million, repurchasing $342 million in stock, and making $1.4 billion in capital investments.

Our long-term 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. As you can see, since 2000 Kroger is pretty much in line with that target. We have the financial resources to continue building our business for the future, which is an important competitive advantage in today’s operating environment.

Our net total debt to EBITDA ratio, a key covenant in our bank credit agreement, was 2.23. This is approaching the 2.16 ratio achieved in the second quarter of 2002. The latter was the best we had achieved prior to the labor dispute in southern California.

Labor

A quick update on labor negotiations…

A new non-food contract in Portland was ratified in the second quarter. We continue to negotiate, under contract extensions, in Roanoke and Atlanta. Other major retail contracts that will expire this year are Columbus and Dallas. We also have various Teamsters contracts expiring this month, including southern California and one that covers several facilities in the Midwest. As we have said before, Kroger is 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.

Our performance through the first half of 2005 is a clear sign that Kroger’s strategic focus on fulfilling the needs of our customers is generating positive results and helping to set Kroger apart from our competitors. We have been able to use cost reductions and productivity improvements to reinvest in our business and improve our customers’ shopping experiences. We are making good progress, but we recognize that a lot of opportunities remain for growing our business. We believe that our associates’ sharpened focus on placing the “customer first” is the key to our future success.

Before we take questions, I want to share a few brief comments about the devastation caused by Hurricane Katrina and the incredible relief efforts taking place.

A number of communities where Kroger operates are struggling to provide food, shelter and other basic necessities to many thousands who have been displaced from their homes.

Kroger expects to help raise more than $5 million for hurricane relief efforts. This support includes:

• Cash contributions from our customers and our associates;
• $2 million from The Kroger Co. and our charitable foundations, including an employee match program;
• Truckloads of food, water and personal care items;
• Pharmacy assistance for displaced families; and
• Loaned equipment and facilities to food banks and shelters.

Our division teams in Memphis and Houston deserve special recognition, for they have worked around the clock to support relief efforts and take care of customers at the same time.

I’m very proud of the way our customers and associates across the country have responded to this tragedy. Their generosity, compassion and willingness to help those in need continue to grow day by day. In McPherson, Kansas, our store associates chose to use money they had earned for superior safety performance to purchase food for the relief effort. In Russellville, Arkansas, a Kroger store has adopted a displaced family and is working to help them find and furnish an apartment. And in Phoenix, pharmacy associates at Fry’s volunteered to work over a weekend to fill 1,000 prescriptions for evacuees in local shelters.

These are just a few of the everyday heroes across our company who are making a difference in the lives of our customers and our communities. We salute you all, and say thank you.

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,” “strategy,” and “believe.” 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 goals, for the entire Company and southern California in particular, 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; the effect of Hurricane Katrina as it relates not only to direct damage to our facilities, but also to our ability to obtain products for sale in our stores and supplies necessary to operate our business; stock repurchases; the success of our future growth plans; goodwill impairment; and our ability to generate sales at desirable margins. In addition to the factors identified above, our identical store sales growth could be affected by increases in Kroger private-label sales, the effect of our “sister stores” (new stores opened in close proximity to existing stores) and reductions in retail pricing. 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. 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. Our ability to improve our operating profit margins 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 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.