Third Quarter, 2004
Investor Conference Call Prepared Remarks
December 7, 2004

Carin Fike, Manager of Investor Relations: 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 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 it over to Mr. Dillon.

comments by: Dave Dillon
Thanks Carin and good morning everyone. We appreciate you joining us to review Kroger’s third-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 third-quarter results and sharing some perspective on what we’re doing to rebuild sales at Ralphs 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 third quarter increased 5.9% to $12.9 billion. Identical food-store sales, including fuel, increased 3.2% and, excluding fuel, increased 1.8%. This improvement was broad-based. Ralphs and Food 4 Less stores in southern California together accounted for 10 basis points of the increase.

We are very pleased with our sales performance in the third quarter. Kroger’s identical food-store sales showed strong improvement over the second quarter. Our continued focus on fulfilling our customers’ needs is an important part of our strategy to increase earnings through strong, sustainable identical food-store sales growth.

Our stores are ready for the holiday season and our whole team is working hard to achieve our sales targets for the year. The improved identical-sales performance in the third quarter versus the second quarter continues to move us toward our goal. But based on year-to-date performance, it will be a challenge to achieve the Company’s previously announced identical food-store sales target of 1.3% for the full fiscal year, which excludes fuel and stores affected by labor disputes.

Kroger’s corporate brands continue to be a competitive advantage. So far this year we have introduced approximately 450 new items to our corporate brand lineup. While our banner brands are the heart and soul of the program, our three-tier branding strategy continues to gain momentum. The market share of Kroger’s private-label grocery items, in terms of dollars, increased an estimated 42 basis points to 24.0% versus a year ago. Private-label grocery share, in terms of units, rose an estimated 84 basis points to 31.72%. When you look at overall corporate brand dollar sales, the third quarter was our best performance of the year.

In southern California, we still have a lot of work to do. Identical sales as compared to the third quarter of 2002 are down a little less than 1% for the full quarter when you consider Ralphs and Food 4 Less together. We are comparing results to 2002 because of the disruption caused by the strike last year. Ralphs continues to be down, offset by sales increases at Food 4 Less. We continue to emphasize store conditions, associate training, and competitive pricing. Our identical food-store sales trends in the third quarter did improve at both Ralphs and Food 4 Less compared to the second quarter.

Southern California is an attractive, growing market. It is important to remember that Kroger does not have any recent experience in dealing with a strike of this magnitude, or the challenges presented during the subsequent recovery period, thus making recovery predictions less meaningful at this point. We continue to make progress and I have confidence in our business plan in southern California. We have a long road ahead and we expect improvement in GAAP earnings at Ralphs in 2005.

One other comment before I turn it over to Rodney. I am proud of the work that our associates across the country have done this year to make Kroger more competitive. The results are showing up in our top-line sales. At the same time, our entire organization recognizes that there is still a lot of work – and significant opportunities – ahead of us. We will continue to focus on becoming more competitive in every aspect of our business so that we can provide a shopping experience that makes our customers want to return.

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

comments by Rodney McMullen:

Thank you Dave and good morning everyone.

As you probably noticed in our press release, we have stopped reporting a strike-effect number for southern California. The reason is two-fold. First, as we move further away from the strike, the calculation becomes less precise. Second, as Dave said, we expect a significant increase in GAAP earnings at Ralphs in 2005, but not to the pre-strike levels. As we complete our business plan for 2005, we will evaluate whether projected future cash flows for southern California require an impairment charge for goodwill.

Kroger’s net earnings in the third quarter were $142.7 million, or $0.19 per diluted share.

We estimate that product cost inflation, including fuel, was 2.6% and, excluding fuel, was 1.4%. Meat and deli were the biggest drivers of inflation during the quarter.

FIFO gross margin was 25.16%, a decrease of 67 basis points from the third quarter of 2003. FIFO gross margin at the supermarket divisions not affected by the work stoppages, and excluding the effect of fuel, declined by 31 basis points. This is about half the decline of the second quarter as compared to the prior year and is consistent with what we expected.

We continue to see improvement in shrink in some areas as a result of the increased focus the entire organization has devoted to this part of our business.

Operating, general and administrative costs declined 52 basis points to 18.98%. OG&A, excluding the effect of fuel, decreased 19 basis points. OG&A at the supermarket divisions not affected by the work stoppages, and excluding the effect of fuel, increased 23 basis points. Incentive plan and employee benefit 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. It is also important to note that in last year’s third quarter, there was a smaller accrual for potential incentive plan payments.

Interest expense for the quarter declined by $30.9 million. Approximately $18.3 million of this decline is due to premiums paid on debt that was repurchased last year during the quarter. The remaining $12.6 million reduction reflects lower debt and the lower average interest rate on Kroger’s debt.

Total debt was $7.8 billion, a decrease of $607 million as compared to the third quarter of 2003. We are pleased with our level of free cash flow. 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.

Kroger continues to repurchase stock. Diluted shares outstanding in the quarter equaled 742.0 million, a decrease of 11.5 million shares from a year ago. Kroger bought back approximately 5.4 million shares of stock during the third quarter at an average price of $15.18 per share for a total investment of $82.6 million. At the end of the third quarter, we had approximately $422.1 million remaining under the new $500 million stock buyback announced in September. Since January 2000, Kroger has invested $2.7 billion to repurchase 136.7 million shares. That’s equal to more than 15% of the Company.

Kroger opened, expanded, relocated or acquired 30 food stores; remodeled 33 stores; and closed 20 stores in the quarter. Fourteen of those were operational closings, including 6 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 1.2% over the prior year. Our square footage growth continues to decline as a result of lower capital investments for new stores, and our continued focus on closing or selling under-performing stores. Year to date, we have had 47 operational closings.

Capital investments for the third quarter totaled $429 million. We continue to emphasize the tightening of capital. For 2004, we now expect capital investments, excluding acquisitions, to total $1.7 - $1.8 billion. This represents a decline of $200-$300 million from the upper end of Kroger’s original estimate for the year.

Capital investments year to date, excluding acquisitions, totaled $1.3 billion, down $168 million from 2003. The year-ago figure excludes acquisitions and the synthetic lease.

A brief update on format expansion. Earlier this fall, 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. In addition, last month we opened the first Kroger Marketplace store in Columbus, Ohio. We plan to build three additional Marketplace stores in that area in 2005. 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, and how to sell those products.

Turning now to labor negotiations…

During the third quarter, major labor contracts covering nearly 20,000 associates in Seattle, Cincinnati and at Food 4 Less in southern California were ratified without a work stoppage. In each case, we continued to make progress toward our goal of labor cost competitiveness. These new agreements have included a variety of measures to bring our labor costs more in line with the competition, including modest cost sharing by our associates for health care benefits and caps on cost increases in health care plans.

Negotiations with the UFCW continue at King Soopers in Denver, and Smith’s and Food 4 Less in Las Vegas. We remain hopeful that we can reach new agreements in those markets without work stoppages.

Also, negotiations continue in northern California. As you know, Kroger has a limited presence in this market.

Looking ahead to 2005, Kroger has major UFCW contracts expiring in Roanoke, the Atlanta area, Portland (non food), Columbus, and Dallas (clerks). We also have various Teamsters contracts expiring, including one in southern California and a separate one that covers several facilities in the Midwest.

We continue to be committed to achieving a cost structure that enables us to grow our business and create more good jobs, while providing our associates with competitive wages and benefits.

One final note. We are currently in the process of completing Kroger’s business plan for 2005. As in the past, we expect to share details of Kroger’s business plan, including guidance on some key financial metrics, on our year-end conference call in March.

Now I will turn it back to Dave.

comments by Dave Dillon:

Thanks Rodney.

As we near the end of 2004, Kroger continues to focus on better understanding the needs of our customers and employees:

• Our identical food-store sales have improved each quarter;
• Our merchandising programs and industry-leading corporate brands are gaining momentum;
• We are becoming more competitive on our labor costs, and our operators have done a good job of controlling overall costs and improving productivity; and
• We have the financial resources to continue building our business for the future.

As I said earlier, we are ready for the holidays. Come shop with us so that you will be too. 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 the words “expects,” “will” and “plan.” These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. The extent to which we close stores during the remainder of the year is primarily dependent on the outcome of our evaluations and determination that stores are under-performing, as well as the timing of any such determination. 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. The extent to which Kroger continues to focus on becoming more competitive may be affected by increased costs incurred; our inability to achieve productivity improvements and shrink reduction; failure of our technology projects to achieve desired results; our desire to maintain an appropriate balance between sales and earnings; and labor disputes. Our ability to achieve earnings per share targets will be affected primarily by: pricing and promotional activities of existing and new competitors, including non-traditional competitors; our response to these actions; the state of the economy, including inflationary trends in certain commodities; the extent to which we are able to adjust retail prices to cover a portion of our product cost increases and cost increases for health care, pension and energy; sales performance; our ability to achieve the cost reductions that we have identified, including those to reduce shrink and OG&A; our desire to maintain an appropriate balance between sales and earnings; and the success of our capital investments. In addition to the factors identified above, our identical food-store sales could be affected by increases in Kroger private-label sales as well as the impact of “sister stores” (new stores opened in close proximity to existing stores). Our plans to open new Marketplace stores within the Columbus, Ohio area could be affected by all of the factors identified above, to the extent that they cause us to reduce our capital expenditures; shifts in population growth and the performance of our existing Marketplace stores. 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.