Third Quarter, 2005
Investor Conference Call Prepared Remarks
December 6, 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 third-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 pleased you could join us to review Kroger’s third-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 third-quarter performance and some key areas of our business. Rodney will share additional details about our results, and then we’ll take your questions.

Sales
Total sales for the third quarter increased 9.1% to $14.0 billion. This growth was once again broad-based across the organization, driven by strong sales at the Company’s food stores and fuel centers, some improvement in southern California, and a great performance at our convenience stores.

This growth continues a very good trend. Identical supermarket sales increased 6.6% with fuel and 3.7% without fuel. Once again, by either measure this represents Kroger’s highest identical supermarket sales since the merger with Fred Meyer in 1999. It also is the ninth consecutive quarter of positive identical supermarket sales, excluding fuel. We’re very pleased by this performance. As we’ve discussed before, identical sales growth is a key component 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. To do that, we’ve taken a page from Kroger’s past to build our business for the future. Some of you may know that back in the 1970s, Kroger became the first U.S. grocer to formalize consumer research. Since late last year, our Company has been surveying thousands of customers around the country each quarter to ask about their shopping experiences in our stores. The great thing about this feedback is that it comes directly from our customers and it clearly identifies areas where we can improve. We want to know what matters most to them when they choose where to shop. We also ask customers the same questions about their shopping experiences at our competitors so that we can benchmark ourselves and measure our improvement. Each quarter we share the feedback with our supermarket divisions as one way to help our associates better understand what our customers expect when they visit our stores. We know that you win one customer at a time, and these surveys are a very useful tool.

Corporate Brands
Kroger’s corporate brands continue to be an important competitive advantage. In the third quarter, we added 201 items to the corporate brand lineup. The market share of Kroger’s private-label grocery items, in terms of dollars, reached nearly 24%. Our share in terms of units was slightly over 31%.

Southern California
Turning now to southern California, sales and operating profit at Ralphs and Food 4 Less improved during the third quarter as compared to last year. Identical supermarket sales without fuel at both divisions, on a combined basis, increased 2.9% over the prior-year period.

The pace of our recovery is proceeding slower than we would like. We see additional opportunities for growth, and our teams at Ralphs and Food 4 Less are clearly focused on seizing those. We continue to be bullish on the southern California market.

Guidance for 2005
As we are now in the final quarter of the fiscal year, I would like to remind investors about our earnings guidance for fiscal 2005. In March, we forecast that our 2005 earnings would exceed $1.21 per diluted share. In June, on the strength of our first-quarter financial performance, we raised our earnings estimate to exceed $1.24 per diluted share. Now, based on our year-to-date performance through the third quarter, we are confident we will exceed earnings of $1.24 per diluted share as a result of improved results in southern California and the balance of the Company, lower interest expense, and fewer shares outstanding as a result of stock buybacks.

Now I will ask Rodney to provide some additional perspective on Kroger’s third-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. All but one of our divisions experienced another quarter of increased identical supermarket sales. The strongest categories included produce, grocery, and drug/GM across the Company. Also, at Fred Meyer, in addition to these categories, the home fashion and apparel categories were strong. We estimate product cost inflation during the quarter was 0.4%, excluding fuel, and 3.4%, including fuel.

Kroger reported net earnings of $185.4 million, or $0.25 per diluted share, for the third quarter. Net earnings in the year-ago period were $142.7 million, or $0.19 per diluted share.

Kroger’s results for the quarter reflected a variety of items that together had little effect on net earnings per fully diluted share. These items include $0.02 of income resulting from the settlement of a previous class-action credit card suit and the reversal of an unrelated tax contingency. These benefits were offset by a combined $0.03 of expense resulting from: the impact of Hurricanes Katrina and Rita; an increase in certain legal reserves -- some of which are non-deductible for tax purposes; and a writedown to fair market value of assets held for sale. The biggest item was the increase in certain legal reserves.

Our fuel business had a strong quarter – in sales, gallons, and margin. While fuel margins for the quarter were strong, on a year-to-date basis they were more normalized.

FIFO gross margin was 24.48% of sales, a decline of 62 basis points compared to the third quarter of 2004. Excluding the effect of retail fuel operations, FIFO gross margin declined six basis points from the prior year. Improvements in shrink, advertising and warehousing allowed us to fund additional investments in lower prices for our customers on a targeted basis.

OG&A declined 69 basis points to 18.23% of sales. Excluding retail fuel operations, OG&A declined three basis points as Kroger was able to leverage higher sales to offset higher energy prices and investments in better service. We estimate that higher energy prices negatively affected gross margin by eight basis points and OG&A by nine basis points, or a total of 17 basis points excluding retail fuel operations.

Our financial performance in the third quarter reflects the consistent approach we have taken to managing our business. We continue to balance investments in gross margin and improved customer service with operating cost reductions to provide a better shopping experience for our customers.

Capital Investments
Capital investment, including construction-in-progress payables, totaled $336.9 million in the third quarter, compared to $429.1 million a year ago. For 2005, we now expect capital investment to come in closer to the low end of our range of $1.4-$1.6 billion, excluding acquisitions.

Share Repurchase
Now I’d like to give you a short update on our share repurchase activities. During the third quarter, Kroger repurchased 590,000 shares of stock at an average price of $19.97 for a total investment of $11.8 million. At the end of the third quarter, there was approximately $158 million remaining under the $500 million stock buyback announced in September 2004. Since January 2000, Kroger has invested $2.9 billion to repurchase 153.1 million shares at an average price of $19.14 per share. Kroger continues to buy back stock.

Debt
Net total debt was $7.2 billion, a reduction of $660 million from a year ago. Net interest expense totaled $114.2 million, a decrease of $2.5 million from last year. We have reduced net total debt by $1.6 billion since January 2000.

Financial Triple Play
Over the past four quarters, Kroger’s strong cash flow continued to enable us to achieve our “financial triple play” by reducing net total debt by $660 million, repurchasing $272 million in stock, and making $1.3 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 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 investment grade rating is important to us and we are focused on improving our coverage ratios. Our net total debt to EBITDA ratio in the third quarter was 2.22. Our best historical performance since the merger with Fred Meyer came in the second quarter of 2002, when our ratio was 2.16.

Tax Rate
Our third quarter tax rate was 38.2% for the current year compared to 35.0% for the prior year. The third quarter 2004 rate was favorably affected by the settlement of open items with various taxing authorities and the retroactive passage of the Work Opportunity Tax Credit legislation. The third quarter 2005 rate was also favorably affected by the settlement of open items offset by the impact of certain legal expenses that were not deductible for tax purposes.

We expect that our tax rate for fiscal 2005 will be 37.5%. This is consistent with our prior estimate.

Labor
Now a quick update on labor negotiations…

Since our last investor call in September, Kroger has reached new agreements with the UFCW in Atlanta, Roanoke, Columbus, Dallas and Dayton. Teamsters locals in southern California also ratified new contracts. With these agreements, we have now completed every major UFCW contract identified for 2005. Kroger generally was able to work with the unions to craft balanced agreements that met our objectives for cost reductions or containment while fulfilling our commitment to provide our associates with solid wages and benefits. We'll be back at the bargaining table in 2006 with a number of contracts covering smaller groups of associates, but nothing of the magnitude we faced this year. Labor negotiations will continue to be a challenge in the face of competitive pressures and rising pension and health care costs.

One final note. We are currently in the process of completing Kroger’s business plan for 2006. As in the past, we expect to share details of Kroger’s business plan when we release fourth-quarter results in March. But our strategic focus will remain the same. We will continue to focus on driving sales growth and balancing investments in gross margin and improved customer service with operating cost reductions to provide a better shopping experience for our customers. We expect operating margins in southern California to improve slightly due to continued recovery in that market, although the incremental improvement in 2006 will be less than in 2005. We expect operating margins in the balance of the company to hold steady. One thing to keep in mind is that fiscal 2006 will be 53 weeks. Also, we will begin expensing stock options in 2006, which we expect will affect fiscal 2006 earnings by 4 – 6 cents per diluted share.

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

comments by Dave Dillon:

Thanks Rodney.

Thanks to the hard work and outstanding contributions of the entire organization, Kroger has made tremendous progress in several key areas this year. O ur associates are offering improved shopping experiences to our customers in a variety of ways, and Kroger has been able to fund these improvements by taking costs out of our business and improving productivity. Holiday sales are off to a strong start . We are focused on becoming more competitive in every aspect of our business so that we can take advantage of growth opportunities and generate value for our shareholders.

During this holiday season, it’s important to thank our associates and customers for their generous response throughout the year to help those in need. 2005 has been a difficult year for so many, including those affected by the hurricanes in the Gulf Coast. I am tremendously proud of the way that our customers and associates at our stores, manufacturing plants, offices and distribution centers rallied to help. Together we raised more than $7 million for American Red Cross hurricane relief efforts.

Kroger has long understood the importance of giving back to the communities where our customers and associates live and work. Now others appear to be taking note too. Last month, BusinessWeek magazine recognized Kroger as one of the most generous companies in America for our work with schools, food banks, youth groups and other charitable organizations. We’re proud of that honor – and we’ll continue to look for new ways to partner with these organizations in 2006.

We will now be happy to take your questions.

[Question and Answer Period]

A few closing thoughts:

I am proud of what our associates have achieved so far this year. We have shown solid progress on the commitments we have made to our customers and to our investors, and we look forward to finishing the year on a similar note. As you can tell, we are ready for the holidays. We invite you to shop with us so that you will be too.

In addition, we encourage our associates to listen to this earnings call each quarter. As a result, many are on the line right now. They have been working very hard to get our stores in shape for the busiest time of the year. I want to thank all of you for taking such good care of our customers every day. Our improved sales are because of you. The holiday season is a time when our thoughts turn to family and friends. I hope that each of you takes some time to enjoy the holiday spirit with those close to you. Merry Christmas and Happy Holidays!

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 “see,” “continue,” “will,” “expect” and “remains.” 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 lingering effects of the hurricanes in the Gulf region; stock repurchases; the success of our future growth plans; goodwill impairment; and our ability to generate sales at desirable margins. 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 in southern California and to maintain our operating profit margins in the balance of the Company 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. The extent to which we are able to grow our business in southern California, and our outlook on that market, primarily will depend on the factors identified above regarding our sales and earnings goals. Our ability to balance gross margin investments with operating cost reductions that can be used to fund lower prices and improved service may be affected by actions taken by our competition; cost increases that are not passed on to customers; and an inability to generate sales at desirable margins. Our ability to become more competitive may be affected by actions taken by our competitors to maintain or increase market shares; increased costs as a result of weather conditions; our efforts to control pension and health care costs; labor disputes; and continued industry consolidation. We anticipate expensing stock options during fiscal year 2006, as generally accepted accounting principles as currently in effect would require us to do so; however, if the accounting pronouncements change prior to our implementation, we may elect not to do so. Our estimated expense of $0.04-$0.06 per diluted share, from the adoption of stock option expensing, could vary if the assumptions that we used to calculate the expense prove to be inaccurate, which, because of the nature of the assumptions, may well prove to be inaccurate. Any change in tax laws, the regulations related thereto, or the interpretation thereof by federal, state or local authorities could affect our expected tax rate. 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.