KROGER REPORTS NET EARNINGS OF $0.25 PER DILUTED SHARE FOR SECOND QUARTER OF 2003, INCLUDING EXPENSES OF $0.06 PER SHARE FOR DYNEGY SETTLEMENT AND POWER BLACKOUT
Identical Food-Store Sales, Including Fuel, Positive in Third Quarter To Date

CINCINNATI, OH, September 16, 2003 -- The Kroger Co. (NYSE: KR) today reported net earnings of $190.4 million, or $0.25 per diluted share, for the second quarter ended August 16, 2003. These results include a previously announced after-tax charge of $0.05 per diluted share to resolve disputes related to energy supply arrangements with Dynegy Inc. The results also include expense of $0.01 per diluted share, after tax, from the power blackout in parts of Ohio and Michigan last month. Additional detail on these and other items is provided in Table 2.

Net earnings in the year-ago period were $264.0 million, or $0.33 per diluted share. Those results include an after-tax charge of $10.1 million, or $0.01 per diluted share, from the items shown in Table 2.

Total sales for the second quarter of fiscal 2003 increased 3.6% to $12.4 billion. Total food-store sales rose 3.3%. Identical food-store sales, including fuel, declined 0.1%. Identical food-store sales, excluding fuel, decreased 0.9%. Comparable food-store sales, which include relocations and expansions, increased 0.5% for the quarter. Comparable food-store sales, excluding fuel, declined 0.4%. Kroger estimates that product cost inflation, including fuel, was 0.5% and, excluding fuel, was 0.2%.

“We were encouraged by our sales performance in the second quarter, especially in the light of intense competition, continued economic uncertainty and the strength of our identical food-store sales in the year-ago period,” said David B. Dillon, Kroger chief executive officer. “In addition, Kroger’s associates did a great job of managing costs in the second quarter in the face of challenging health care, pension and energy costs.”

Also in the second quarter:

• FIFO gross profit margin was 26.39%, a decrease of 34 basis points from 26.73% in 2002. Excluding fuel at the Company’s convenience stores and supermarkets in both years, FIFO gross profit margin for 2003 decreased 6 basis points.
• Operating, general and administrative costs increased 77 basis points to 19.35%. Adjusting for the OG&A items shown in Table 2 in both years, the rate increased 23 basis points. Excluding those items and fuel in both years, OG&A increased 46 basis points. Higher health care, pension and energy costs accounted for 28 of this 46 basis point increase.
• Net operating working capital totaled $137.4 million, an improvement of $36.2 million from a year ago (Table 6). The Company expects to reduce net operating working capital by $100 million this year.
• Net total debt was $8.0 billion, a decrease of $208.3 million as compared to the second quarter of 2002 (Table 7). Mr. Dillon said the Company continues to make strong progress in deleveraging its balance sheet, as evidenced by Standard & Poor’s upgrading of Kroger’s long-term debt to a “BBB” rating in July. Kroger plans to use one-third of its cash flow to reduce debt and two-thirds to repurchase stock, pay a cash dividend or a combination of both.
• Kroger repurchased 6.5 million shares of common stock at an average price of $16.65 per share, for a total investment of $108.4 million. Since January 2000, Kroger has invested $2.3 billion to repurchase 117.8 million shares. At the end of the second quarter, Kroger had $222 million remaining under the $500 million repurchase program authorized in the fourth quarter of 2002. At current prices, Kroger continues to repurchase shares.

Over the past four quarters, Kroger’s cash flow has enabled the Company to repurchase $532 million in stock, reduce net total debt by $208 million, and invest $2.0 billion in capital projects, including the buyout of a synthetic lease.

During the second quarter of 2003, Kroger opened, expanded, relocated or acquired 36 food stores. Total food store square footage increased 3.9% over the prior year, including acquisitions. Capital expenditures for the quarter totaled $449 million. Kroger now expects capital investment for the full year to be $1.9 billion, excluding acquisitions and the buyout of a synthetic lease.

For the first two quarters of fiscal 2003, sales increased 3.7% to $28.6 billion. Net earnings were $541.9 million, or $0.71 per diluted share. These results include after-tax expense of $37.9 million, or $0.05 per diluted share, from items detailed in Table 2. For the first half of fiscal 2002, net earnings were $569.3 million, or $0.71 per diluted share. These results include after-tax expense of $91.1 million, or $0.11 per diluted share, from items detailed in Table 2.

Kroger’s previous earnings per share guidance for fiscal 2003 was $1.55 to $1.63. This estimate did not include annual net expense of $0.04 per diluted share for the Dynegy settlement and expense of $0.01 per share from the blackout. Including these expenses, the earnings per share range is $1.50 to $1.58.

The Company now believes that earnings per share for 2003 are more likely to be near the low end of this range, and could be as much as $0.05 below the range. This possibility arises from an increase in the Company’s expected LIFO charge of $0.02 per share, an increasingly competitive environment that may require an additional investment of gross profit rate, and a tough economy.

Mr. Dillon said this cautious outlook may prove to be too conservative because:

• Identical food-store sales, including fuel, are positive for the third quarter to date;
• The Company continues to expect identical food-store sales, including fuel, to be positive for the year;
• The effect of product cost inflation in several core categories; and
• Some economic indicators are showing signs of a recovery.

“We remain committed to achieving earnings per diluted share of $1.50 or better, but the current environment remains very challenging,” Mr. Dillon said. “The Strategic Growth Plan is the right approach to grow our market share by reducing the price gap with discount operators and widening our price advantage over traditional competitors in many markets. We have achieved $458 million in cost savings through the end of the second quarter. We expect to exceed our original goal of $500 million in savings by the end of 2003.”

Kroger today will file a Form 8-K with the Securities and Exchange Commission that includes updated guidance for 2003.

Headquartered in Cincinnati, Ohio, Kroger is one of the nation’s largest retail grocery chains. At the end of the second quarter of fiscal 2003, the Company operated (either directly or through its subsidiaries) 2,519 supermarkets and multi-department stores in 32 states under two dozen banners including Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith’s, Fry’s and Fry’s Marketplace, Dillons, QFC and City Market. Kroger also operated (either directly, through its subsidiaries or franchise agreements) 794 convenience stores, 444 fine jewelry stores, 412 supermarket fuel centers and 41 food processing plants. The Company contributed $106 million last year to local communities and non-profit organizations. For more information about Kroger, please visit our web site at www.kroger.com.

This press release contains 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 relate to, among other things: targeted earnings per share; net operating working capital reduction; uses of cash flow; improvement in competitive price position; cost savings; identical food-store sales; and our Strategic Growth Plan; and are indicated by the words or phrases such as “committed,” “plans,” “expects,” “estimate,” “will” and “goal.” These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. 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 success of our Strategic Growth Plan announced in December 2001; 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; 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.” Our efforts to meet our net operating working capital reduction targets could be adversely affected by: increases in product costs; newly opened or consolidated distribution centers; our ability to achieve sales growth from new square footage; competitive activity in the markets in which we operate; changes in our product mix; and changes in laws and regulations. The results of our Strategic Growth Plan and our ability to generate cash flow to the extent expected could be adversely affected if any of the factors identified above negatively impact our operations, or if any of our underlying strategies, including those to reduce shrink and OG&A and to increase productivity, are not achieved. In addition, the timing of the execution of the Plan could adversely impact our EPS and sales results. The cost associated with implementation of our Strategic Growth Plan, as well as the amount and timing of our expected cost reductions, could be affected by a worsening economy; increased competitive pressures; and any inability on our part to implement the Strategic Growth Plan when expected. Labor disputes, particularly as the Company seeks to manage increases in health care and pension costs, could affect our ability to achieve the goals outlined above. The proportion of cash flow used to reduce debt, repurchase stock, or pay a cash dividend, may be affected by the market price of Kroger common stock and the amount of outstanding debt available for pre-payment or repurchase. Our capital expenditures could vary if we are unsuccessful in acquiring suitable sites for new stores; development costs exceed those budgeted; or if our logistics and technology projects are not completed on budget or in the time frame expected. 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.

View 2nd Quarter 2003 Reports - PDF Format:
Consolidated Quarterly Statements of Earnings
Other Income and Expense Items
Consolidated Balance Sheet
Supplemental Financial Information
Consolidated Statements of Cash Flows
Supplemental Food Store Sales Information

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