Second Quarter, 2004
Investor Conference Call Prepared Remarks
September 14, 2004

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

comments by: Dave Dillon

Thanks Carin and good morning everyone. We appreciate you joining us to review Kroger’s second-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 second-quarter results and our expectations for identical food-store sales for the remainder of the year. I’ll also share some perspective on the post-strike environment in southern California. 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 second quarter increased 5.1% to $13.0 billion. Total food-store sales, excluding fuel, rose 2.5%. This is a favorable result, considering our 1.5% square footage growth.

Identical food-store sales, including fuel, increased 2.1% and, excluding fuel, increased 0.6%.

Excluding the Ralphs and Food 4 Less stores affected by an earlier labor dispute, identical food-store sales, including fuel, increased 2.8% and, excluding fuel, increased 1.1%. We estimate that product cost inflation, including fuel, was 3.6% and, excluding fuel, was 2.4%. Commodity prices in areas such as meat, dairy and deli drove most of that inflation.

We are pleased with the 60 basis point improvement in Kroger’s identical food-store sales results over the first quarter, excluding the Ralphs and Food 4 Less stores affected by the labor dispute and excluding fuel.

Twelve of our divisions had improving trends in identical food-store sales growth, excluding fuel, when compared to the first quarter. While this division performance figure is not something that we plan to share each quarter, we believe that in light of the current operating environment, it provides a useful glimpse of our operating trends.

We expect improved total identical food-store sales for the remainder of the year, as compared to the 1.1% growth in the second quarter. This excludes fuel and stores affected by the labor dispute. We expect the third quarter to be stronger than the fourth quarter because of the strength of Kroger’s identical food-store sales in the fourth quarter of 2003.

Based on year-to-date performance, it will be challenging to achieve the Company’s previously announced identical food-store sales target of 1.3% for the full fiscal year, excluding fuel and stores affected by labor disputes. But our whole team is working hard to achieve our sales targets for both the second half and the full year.

Our corporate brands continue to be a competitive strength. In the second quarter we introduced 142 new items to our corporate brand lineup. The market share of Kroger’s private-label grocery items, in terms of dollars, increased 67 basis points to approximately 24.47% versus a year ago. Private-label grocery share, in terms of units, declined 48 basis points to approximately 31.34%. This decline is due in large part to tonnage decreases in dairy categories such as milk, cheese, butter and ice cream where we experienced significant price increases.

Now a few comments about southern California. The marketplace remains very competitive. Ralphs is focused on improving identical food-store sales to pre-strike levels. Based on current conditions in the market, we believe our efforts to return sales and earnings to pre-strike levels will continue for the foreseeable future. Ralphs is executing the plan to rebuild its business.

The strike had a devastating effect on the lives of our associates, and of course they will never recover the income they lost during the 141-day dispute. The employers in southern California achieved significant changes in their labor contract, but as we have always said, no one wins in a strike. Since that time, we have made necessary contract reforms under settlements in places like Arizona, Seattle, Detroit, Louisville and Nashville. We have balanced those changes with our associates’ need for excellent pay and benefits. We continue to make progress toward our goal of labor cost competitiveness.

We have important negotiations ahead of us in Las Vegas, Denver and Cincinnati, and we remain absolutely committed to this goal in every contract.

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

comments by Rodney McMullen:

Thank you Dave and good morning everyone.

Kroger’s net income in the first quarter was $142.4 million, or $0.19 per diluted share.

Net earnings were reduced by $15.3 million, or $0.02 per diluted share, as a result of the premium paid on the early redemption of Kroger’s $750 million, 7-3/8% Notes due March 2005. The redemption is expected to reduce Kroger’s interest expense by approximately $0.02 per fully diluted share during the remainder of the 2004 fiscal year.

Net earnings in southern California stores affected by the labor dispute were $23.4 million, or $0.03 per diluted share, lower than what Kroger expected if a strike had not occurred. Dave already provided some perspective on what we’re seeing in those markets, including our efforts to return sales and earnings to pre-strike levels. We will provide additional information after we complete our business plan for 2005.

The $23.4 million is $37.7 million pre-tax. That’s composed of lower gross profit of $55.6 million and lower OG&A of $17.9 million. The lower OG&A is due to the new contract that is in place and lower expenses from lower sales volume.

FIFO gross margin was 25.21%, a decrease of 118 basis points from the second quarter of 2003. FIFO gross margin at the supermarket divisions not affected by the post-strike recovery, and excluding the effect of fuel, declined by 60 basis points.

We continue to see improvement in shrink in some areas 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 understand what shrink is and how we can tackle the problem together. We’re pleased with the progress Kroger is beginning to make. This will continue to be a focus for the entire organization.

Operating, general and administrative costs declined 48 basis points to 18.87%. The items detailed in Table 2 of the press release positively affected the OG&A comparison by 55 basis points, as compared to the second quarter of 2003. OG&A at the supermarket divisions not affected by the post-strike recovery, and excluding the effect of fuel and items shown on Table 2, increased 28 basis points. Health care and incentive plan costs accounted for most of the increase. Consistent with our strategic plan, our incentive plan this year is more heavily weighted toward sales growth and other factors.

Rent expense declined almost $5 million in the quarter. Interest expense, after backing out the premium paid on the early retirement of debt, declined approximately $10 million for the quarter.

Total debt was $7.6 billion, a decrease of $615 million as compared to the second quarter of 2003. Kroger’s cash flow enabled the Company to continue executing our “financial triple play” of debt reduction, stock repurchase, and strong capital investment.

As you know, Kroger’s strategy is to use one-third of cash flow for debt reduction and two-thirds for stock repurchase or payment of a cash dividend. In accordance with this policy, we expect cash flow for the year to support, at a minimum, the $168 million in stock repurchases made year to date and allow for debt reduction.

Diluted shares outstanding in the quarter equaled 744.4 million, a decrease of 11.4 million shares from a year ago. Kroger bought back approximately 1.1 million shares of stock during the second quarter at an average price of $16.66 for a total investment of $18.7 million. We have approximately $21 million remaining under the $500 million stock buyback announced in December 2002. Since January 2000, Kroger has invested $2.6 billion to repurchase 131.3 million shares.

Kroger opened, expanded, relocated or acquired 24 food stores, and closed 21 stores in the quarter. Seventeen of those were operational closings, including 14 Ralphs stores, as previously announced. The Company continues to evaluate under-performing stores, and additional closings are expected during the balance of the year. Total food store square footage increased 1.5% over the prior year.

Capital expenditures for the second quarter totaled $416.3 million. During the quarter we purchased eight Thriftway stores in Greater Cincinnati from Winn-Dixie and three Albertson’s stores in Omaha. We are currently remodeling these stores and look forward to re-opening them under the Kroger and Baker’s banners, respectively.

Also during the quarter, we completed the remodel of five former Fred Meyer stores in Utah that have been converted to the new Smith’s Marketplace banner. We’re pleased with the initial performance of these stores. The continued rollout of our Marketplace strategy would not be possible without the general merchandise expertise of the great team at Fred Meyer that knows which categories and products to sell.

For 2004, we continue to expect capital investments, excluding acquisitions, to total $1.8 - $2.0 billion. We continue to emphasize the tightening of capital. At this point, we expect capital investment to be at the low to mid-point of that range, excluding acquisitions.

Turning now to the labor front…

As Dave mentioned, we continue to make progress in negotiations with the UFCW around the country. During the quarter, Kroger reached major new agreements in Arizona, Detroit, Nashville, Louisville and Seattle. Each contract has been the result of hard bargaining, compromise, creativity and open communication. Everyone involved has worked together to craft contracts that manage costs, reward associates and make Kroger’s labor costs more competitive. Our recently ratified labor agreements have included a variety of measures to bring our labor costs more in line with the competition. Those measures include: a mixture of wage increases and lump-sum bonuses; modest cost sharing by our associates for health care benefits; new-hire provisions for pay and benefits; and caps on cost increases in health care plans.

But there is still a lot of work ahead of us. We currently have contract extensions with the UFCW at King Soopers in Denver, Smith’s and Food 4 Less in Las Vegas; and Food 4 Less in southern California. Negotiations are also underway in Cincinnati, where our contract expires October 9th. We continue to work toward new agreements that meet our objectives in those markets, and we remain hopeful that we can do so without work stoppages. As Dave said earlier, 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.

Now I will turn it back to Dave.

comments by Dave Dillon:

Thanks Rodney.

As we have described over the past several quarters, our business model is driven by improving our customers’ shopping experiences and growing top-line sales. Our strategy is producing these results in a sluggish retail environment, as shown by our identical sales trend. During the quarter, we made incremental investments in pricing and promotions to stimulate sales. We continue to seek the proper balance between gross margin investments, sales and earnings. We remain squarely focused on offering our customers the service, variety and product quality they expect in order to drive sustainable and profitable sales growth for the Company.

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 words or phrases such as “expects,” “believe” and “will.” These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. The extent to which an early redemption of debt will reduce our interest expense during the remainder of 2004 will be affected by fluctuations in interest rates as well as our ability to generate sufficient cash flow to satisfy our obligations without the need to issue additional debt beyond the amounts planned. Increased competition, weather and economic conditions, 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 ability to increase our identical food-store sales as compared to our second quarter results, as well as our target for the full fiscal year. These same factors could affect our expectations regarding our identical food-store sales in the third and fourth quarters. The extent to which growth in identical food-store sales reaches our previously announced target, likewise, will be affected by these factors. Our ability and the time it takes to return sales and earnings to pre-strike levels in the southern California market will be affected primarily by competitive activity in that market. The extent to which our cash flow is sufficient to support our stock repurchases and debt reduction will depend on our ability to generate sales and to reduce costs, as well as our ability to reduce our working capital. Our capital expenditures could vary if we are unsuccessful in acquiring suitable sites for new stores, if development costs exceed those budgeted, or if our logistics and technology projects are not completed in the time frame expected or on budget. 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.