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 second quarter press release and our prepared remarks from this conference call will be available on our website at www.kroger.com.

Before I turn the call over to Mr. Dillon, I want to take a moment to remind you about our upcoming Investor Conference here in Cincinnati on October 15th and 16th. We hope you will be able to join us. If you need information about the conference, please feel free to contact me after this call.

Now I will turn it over to David Dillon, Chairman and Chief Executive Officer of Kroger.

Comments by: Dave Dillon
Thank you, Carin. Good morning everyone. Thank you for joining us today.
With me today to review Kroger’s second quarter 2008 financial results 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.

In a few minutes, Rodney will discuss details of our quarterly and year-to-date performance. First I will begin discussing what we are seeing in terms of the current economy and how we are managing our business successfully in this environment. Then, we will be happy to take your questions.

Economy and Kroger’s Business Model

Our performance in the last few years and the quarterly and year-to-date results we announced this morning highlight the underlying strength of Kroger’s business model. Our customer-driven model, now in its fourth year of implementation, is comprehensive and leverages all facets of our business. While we manage this model on an annual basis, its inherent value is the flexibility it gives us to successfully navigate through various challenges we face from quarter to quarter. It allows us to remain focused on our plan, and we are not forced to make short-term decisions that may negatively impact our long-term connection with customers. We believe this will create long-term sustainable earnings growth that will benefit our shareholders.

And through our Customer 1st strategy, we are squarely focused on our people, our products, our prices and the overall shopping experience for our customers. This strategy is designed to satisfy all customer segments – not just a subset of those we serve. We believe it is possible to do this. We know it is difficult to accomplish. We also believe we are the only retailer that has the infrastructure in place to accomplish this objective.

Sales Trends and Product Cost Inflation

In a moment, I will share some details on how our team is successfully applying Kroger’s strategy to take advantage of opportunities in today’s challenging environment. Before I do that, I will provide some context on current trends we are seeing.

During the quarter, we did see more signs that the weak economy continues to drive consumer behavior. This was evident in some changes in our sales mix, such as Corporate Brands, for example. I will share some details about that in a few minutes. We also saw some stronger sales trends at our value-oriented stores. Both of these changes could suggest that some shoppers are looking for ways to stretch their budgets.

At the same time, we believe we continue to benefit from customers choosing to eat at home more often. While some may be choosing to do so for economic reasons, others are adopting this practice in response to compelling evidence indicating that children who dine regularly with their families stand a better chance of avoiding risky behaviors such as substance abuse. We think strong sales in our Deli/Bakery and Prepared Foods correlate with this shift and with the declining sales trends some casual dining chains are reporting.

We also saw product cost inflation accelerate in the second quarter. We estimate that our year-over-year product cost inflation was 4.9%, excluding fuel. This rate was influenced by double-digit inflation in Produce, an area where product costs can be volatile. But it was also influenced by higher product costs in the Grocery department – in the 5% to 6% range – which is the highest level of center store inflation we have seen since the late 1980s. Inflation was also strong in the Deli/Bakery department. We continue to successfully pass along higher product costs in the form of higher retail shelf prices.

Opportunities for Kroger

So while customer behavior continues to change, we believe there is opportunity for Kroger to gain share in this environment. Through the first four weeks of the third quarter, Kroger’s identical supermarket sales, excluding fuel, are trending above 5%.

We continue to take advantage of opportunities that promote the long-term growth of our business. We have many established competitive strengths to draw on to accomplish this successfully.

Data-Driven Innovation

One of the most sophisticated tools we use to leverage opportunities in any economy is our vast collection of consumer data derived from our customer loyalty cards. We use this data to anticipate and respond to changes in consumer behavior. We have been building our extensive collection of consumer data since 1999. Today, more than 40% of all U.S. households hold one of our shopper cards. As a result, Kroger has one of the largest retail customer databases in America.

Our partnership with dunnhumbyUSA gives us valuable insight into our customers’ shopping habits. Through this insight, we are able to use our customer loyalty data to benefit our customers and increase their engagement with our stores. Our work with dunnhumby also allows us to segment our store base to offer customers in each store the right mix of products and services. This store segmentation strategy and Kroger’s multiple formats allow us to meet the specific needs of our various customer segments.

Our customer loyalty program also enables us to provide a valuable food safety service to our customers. We recently began incorporating register receipts and phone calls in our customer notification system for certain types of product recalls. Using our customer loyalty database, we are able to notify customers through their register receipts about recalls of products they may have purchased. We are one of the first retailers to use this personalized communication to customers. Customers have told us how much they appreciate our efforts to partner with them to keep their families safe.

Corporate Brands

Another key opportunity for us in this economy is our innovative private label program. We continue to see the share of Kroger’s Corporate Brands increase. In this economy, customers are much more willing to try a private label item and we are seeing signs that this is happening more and more as the year progresses. Our strong Corporate Brands program also gives us some leverage when a supplier approaches us with a product cost increase. This leverage becomes even more important in an inflationary economy.

Our three-tier program – Private Selection, Store Banner and Value brands – is the most extensive in the industry with more than 14,400 items. We introduce new items on a regular basis to appeal to customers on any budget. Recent examples include Private Selection organic meats, Active Lifestyle breads, and 3-minute pizzas.

As I mentioned last quarter, Private Selection is our fastest-growing brand. During the second quarter, this line of premium products continued to do well with all customers – not just our upscale shoppers. Based on year-to-date trends, Private Selection will be a $1 billion brand for Kroger in 2008. Our Value brands, designed for more price-sensitive customers, are also building share.
Our data shows that our private label grocery items in terms of dollars represent a record 26% of the Company’s grocery sales. Our share in terms of units is a record 33%.

We believe investments we have made to strengthen our Corporate Brands program in the past several years will continue to drive future growth.

As our progress in these areas show, we may be a traditional retailer but we have a decidedly innovative and insightful approach to our business. Our strategy continues to serve our customers, shareholders and associates well, as our strong second quarter and year-to-date performance demonstrates. Kroger is delivering sustainable results today while we continue to invest for the future. We know market conditions will continue to be a challenge and we believe our strategy works well in good times and bad. Kroger’s team and our overall strategy clearly stand out in the current environment.

Now I would like to turn the call over to Rodney for some additional details on our second quarter results and 2008 guidance. Rodney?

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

Dave just described how Kroger is managing through the current challenging operating environment. We are pleased with Kroger’s second quarter results – particularly in the context of this environment – and believe they illustrate the strength and flexibility of Kroger’s business model in varying economic conditions. We remain focused on delivering our annual financial commitments to investors and believe we are on track to do so. During the next several minutes, I will offer a deeper dive into Kroger’s financial results and share some color behind our updated full-year outlook.

Identical Sales Growth

Let’s start with identical sales. We continue to see growth across almost all departments. Our Drug/General Merchandise department idents were flat compared to the prior year. This is a little softer than first and fourth quarters. Like some other retailers, we saw softness in certain discretionary items. This is consistent with what we’ve been seeing in those areas of our business for the past couple quarters now. Yet, Kroger still reported a 4.7% increase in identical supermarket sales, excluding fuel, for the quarter. This demonstrates the strength of our business. And, as Dave mentioned, third quarter identical, excluding fuel, through the first four weeks are above 5%.

Earnings

Kroger’s earnings for the quarter were $0.42 per diluted share, an increase of $0.04 over the prior year. About a penny of the increase came from strong margins at our retail fuel operations. I’ll talk about our fuel margins in a bit. First I’d like to discuss some metrics that describe the performance of our core grocery operations.

Gross Margin

As many of you know, Kroger’s business model is designed to provide for investment in lower gross margins. As a result, Kroger’s second quarter FIFO gross margin, excluding fuel, declined 51 basis points. Our supermarket selling gross margin, excluding fuel, declined 59 basis points. The 8 basis point difference between these two measures is primarily explained by 15 basis points of margin pressure from higher diesel fuel costs partially offset by 10 basis points of shrink improvement.

Recall that Kroger’s non-fuel FIFO gross margin and supermarket selling gross margin rates expanded by 51 and 38 basis points, respectively, in the second quarter last year, primarily reflecting the timing of passing on product cost inflation in certain categories such as Dairy to customers. If our second quarter 2007 FIFO gross margin had been more normalized, our rate decline in the second quarter this year would have been less.

Another portion of the decline relates to product cost inflation and our practice of protecting pennies-profit when we raise retail prices in response to product cost increases from suppliers. While this practice is designed to ensure that our gross margin dollars remain intact or even grow, it can have the effect of lowering our overall gross margin rate.

Operating, General and Administrative (OG&A) Costs

Turning now to OG&A, our rate in the second quarter, excluding fuel, declined 28 basis points compared to the prior year. The prior year OG&A rate included pre-opening and transition costs associated with the Scott’s and Farmer Jack acquisitions. The current year rate benefited from the absence of these costs. The current year rate also benefited from strong sales leverage and lower incentive compensation expense.

Collectively, these benefits offset continued inflationary pressures that we face in several areas of our business – including credit card fees, utilities, and store supplies. Note that when I mention higher utility costs, I’m really talking about the impact of higher utility rates. As we have told you before, our Associates have done a remarkable job of controlling usage in this area. Since 2000, we have reduced our overall energy consumption by over 24% or 1.5 billion kilowatt-hours.

Rent and Depreciation Expense

While OG&A and FIFO gross margin were the main drivers of our second quarter operating margin, I also want to point out that Rent and Depreciation expense, on a combined basis, provided 6 basis points of operating margin leverage. One of the reasons we believe that a moderate level of inflation benefits our business model is because of the leverage we get from the increased sales dollars over the fixed costs in our business. This is a great example of that leverage.

Operating Margin

Kroger’s non-fuel operating margin declined 20 basis points as a rate of sales in the quarter, but we believe a longer view on operating margin is a more meaningful indicator of our business and our strategy. Excluding fuel and charges for labor unrest in the first quarter of 2007, Kroger’s operating margin for the first two quarters of fiscal 2008 declined 8 basis points. Six basis points of this decline can be tied to higher LIFO expense in the first half of this fiscal year versus last year. Hold on to this thought because in a few minutes, when I discuss our updated 2008 guidance, it will help you understand why we are still predicting a flat or slightly improved non-fuel operating margin on an annual basis.

Tax Rate

Kroger’s tax rate for the quarter was 36.5% compared to 38.2% in the prior year. The current year rate benefited from a favorable resolution of certain tax issues, whereas an unfavorable resolution of certain tax issues in 2007 affected the prior year rate. We now anticipate a full-year tax rate of approximately 37%.

Debt and Capital Expenditures

Total debt increased $1 billion to $7.6 billion compared to the second quarter of 2007. This represents a decline of $176 million from the first quarter of 2008. Our net total debt to EBITDA ratio has improved to 1.90 compared to 1.95 at the end of the first quarter 2008, and 2.03 at the end of fiscal 2007.

We expect our net total debt to EBITDA ratio to show slight improvement over time. This assumes capital expenditures of $2.0 to $2.2 billion for fiscal 2008.
It also assumes that we will use our current share repurchase authorization over the next 6 to 9 months.

We are exploring some good opportunities to buy real estate we currently lease. If those opportunities are realized, our capital expenditures and debt levels could increase. This would be offset by lower rent expense.

Retail Fuel Operations

Before I turn to our updated guidance, I know several of you are interested in some data points about our retail fuel operations.

Recall that in the second quarter last year, we experienced stronger than usual fuel margins. Consequently, we anticipated a tough comparison in the second quarter this year. But as wholesale fuel prices declined through much of the summer, we saw some expansion in our fuel margins. This expansion reflects our typical experience in this business – as a general rule, when wholesale fuel costs are rising, our margins tend to contract; conversely, when wholesale fuel costs are declining, our margins in this business expand.

This relationship makes it difficult to forecast the quarterly margins of our retail fuel operations. But over a longer timeframe, fuel margins normalize and that is why we manage this business from an annual perspective. Cents per gallon data for the second quarter and on a rolling four-quarters basis illustrate my point.

For the second quarter, the cents per gallon fuel margin for our convenience stores and supermarket fuel centers was 17.9¢ compared to 16.2¢ in the prior year. On a rolling four-quarters basis, the cents per gallon fuel margin was 12.0¢ this year compared to 12.8¢ last year.

Updated 2008 Guidance

Identical Sales
Now let’s discuss Kroger’s updated 2008 guidance. I want to point out that these expectations are before the effect of Hurricane Ike. As announced in our earnings release this morning, we raised the low end of the range for our annual identical sales guidance. We now expect identical sales growth of 4.5% to 5.5%, excluding fuel, for fiscal 2008.

Earnings Per Share
We confirmed our annual earnings guidance of $1.85 to $1.90 per diluted share. Note that this confirmed guidance contains a full-year LIFO charge estimate that is $30 million higher than the estimate we shared with you back in June when we reported Kroger’s first quarter results. We now anticipate a full-year LIFO charge of $160 million. We increased our estimate due to the latest projections we have for Grocery and Produce prices at the end of the year. Our outlook on Dairy prices has not changed materially since we discussed our LIFO estimate with you back in June. Recall that our actual LIFO expense for 2008 will be determined in the fourth quarter, based on inflation rates and inventory mix at that time.

Operating Margin
We expect that our annual earnings per share growth will be driven by the combination of strong identical sales, a flat to slightly improved operating margin, excluding fuel, and fewer shares outstanding. We expect some operating margin expansion in the second half of the year tied to the timing of our LIFO expense in fiscal 2008 compared to fiscal 2007.

In fiscal 2007, we recorded a full-year LIFO charge of $154 million. Of that full-year expense, $94 million was recorded in the second half of the year with over one-third of the full-year expense recorded in the fourth quarter alone. For the current year, we have already recognized a little over half of our expected $160 million LIFO expense. We expect this timing issue will bring some operating margin leverage during the back half of fiscal 2008 and in the fourth quarter, particularly.

We’ve included the possibility of a flat non-fuel operating margin in the event we encounter continued inflationary pressure in key items.

EPS Growth Rate
Turning back to Kroger’s EPS guidance for a moment – I want to remind investors that our earnings guidance of $1.85 to $1.90 per diluted share reflects 9% to 12% growth over fiscal 2007 earnings of $1.69 per diluted share. Kroger’s dividend yield of more than 1% further enhances shareholder return. That’s a solid return in several different economic environments, and especially in the current market.

Although it’s not our practice to give quarterly guidance, I want to discuss some items that affected our quarterly results last year to help you adjust your financial models for the second half of fiscal 2008.

We continue to expect solid results from our core grocery operations. But I want to remind investors that, as we have stated throughout the year, we anticipate Kroger’s lowest year-over-year earnings per share growth rate will occur in the third quarter. Third quarter results last year included a $40 million tax benefit. We used some of this benefit to offset low fuel margins and to accelerate some strategic investments we had scheduled in our business plan for later periods. A portion of the tax benefit also benefited our bottom line. The net effect on our third quarter results was income of approximately $0.02 to $0.03 per diluted share. As a result, we expect that Kroger’s earnings per share in the third quarter this year will range from slightly below to slightly above prior year results. After adjusting for the prior year net benefit, this would represent an increase in this year’s expected third quarter earnings per share.

As we have shared with you previously, we continue to expect that our fourth quarter EPS growth rate will be higher than the Company’s annual EPS growth rate, driven by solid results from our core grocery operations as well as the LIFO timing issue I described.

Effect of Hurricane Ike
As I mentioned earlier, the third and fourth quarter expectations I just described exclude any impact from Hurricane Ike. The hurricane and its remnants affected Kroger operations in Texas and several inland states, particularly Indiana, Kentucky and Ohio. The financial impact of the hurricane will not be significant enough to cause us to alter our strategy. The final result of the damage and disruption from the storm could affect much of the guidance we discussed today. A more detailed description of the potential impact on Kroger’s guidance and an explanation of our insurance programs is included in the 8-K we filed today.

Labor

I’ll wrap up with some comments on labor relations. During the quarter, we reached agreements with unions representing our associates in Columbus and Nashville. Other negotiations we are engaged in this year cover store associates in Las Vegas, Phoenix and Portland. In every negotiation, we work to achieve competitive cost structures in each market while meeting our associates’ need for good wages and affordable health care.

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

Comments by Dave Dillon:
Thanks, Rodney. We had a solid quarter. Our long-term investments in our people, our prices and our stores pay off in this type of environment. Still, we know there are challenges ahead. Our associates in every area of our business focused on executing our Customer 1st strategy to meet the changing needs of today’s shoppers. As a Company, we are committed to delivering the results we have forecasted for the year.

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

Closing comments after Q&A:
In closing, I want to second the invitation Carin extended at the beginning of the call. We hope you are able to join us for Kroger’s 2008 Investor Conference. You will hear from several members of our leadership team and have a chance to observe some of our latest Customer 1st initiatives and programs in one of our stores. We look forward to seeing you next month.

Thank you. Before we end the call, I would like to offer some additional comments to our associates listening in today.

To all of our associates in the communities that are dealing with the aftermath of Hurricane Ike, we know this is a difficult time for you and your families. We continue to keep you in our thoughts and prayers.

I want to thank all of our associates who are doing a tremendous job taking care of our customers and fellow colleagues whose lives have been disrupted by the hurricane. On behalf of the entire company, we thank you for your extra efforts. We appreciate your overall commitment to safety and service.
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 “trending,” “guidance,” “will,” “believe,” “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 including Hurricane Ike and its remnants; 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. Any changes in tax laws, the regulations related thereto, the applicable accounting rules or standards, or the interpretation thereof by federal, state or local authorities could affect our expected tax rate. The extent to which our share repurchase authority is used over the next 6 to 9 months will depend primarily on the price at which our common stock trades and the amount of free cash flow we have available to purchase shares. Our year over year growth rate projections will be affected by all of the factors identified above, and our third quarter growth rate could fail to be lowest, as projected, if our EPS growth rate exceeds our expectations. The extent to which Private Selection becomes a $1 billion brand in 2008 will depend primarily on continued acceptance of these products and economic factors which could cause our customers to substitute lower priced products. Those same factors will affect the extent to which our investments in corporate brands will successfully drive future growth of those products. Our ratio of net total debt to EBITDA may not improve if our sales or earnings goals are not achieved, or if our net total debt increases above our expectations. Our LIFO charge and the timing of our recognition of LIFO expense will be affected primarily by food inflation during the year. Our operating margin could fail to expand in the second quarter if our food inflation projections and our LIFO expense recognition are insufficient. 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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