KROGER ANNOUNCES RESULTS FOR SECOND QUARTER OF FISCAL 2004
Identical Food-Store Sales, Including Southern California, Increased 2.1% with Fuel and 0.6% without Fuel

CINCINNATI, OH, September 14, 2004 -- The Kroger Co. (NYSE: KR) today reported net earnings of $142.4 million, or $0.19 per fully diluted share, for the second quarter ended August 14, 2004.

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 Company expects the redemption to reduce Kroger’s interest expense by approximately $0.02 per fully diluted share during the remainder of the 2004 fiscal year. Net earnings were $23.4 million, or $0.03 per diluted share, lower than what Kroger expected had the 141-day strike in southern California not occurred. Additional detail is provided in Table 2.

Net earnings in the year-ago period were $190.4 million, or $0.25 per diluted share. Those results include items that reduced net earnings by $42.0 million, or $0.06 per diluted share (Table 2).

Total sales for the second quarter of 2004 increased 5.1% to $13.0 billion. 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%. Kroger estimates that product cost inflation, including fuel, was 3.6% and, excluding fuel, was 2.4%.

“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,” said David B. Dillon, Kroger chairman and chief executive officer. He said that Kroger expects improved identical food-store sales for the remainder of the year, as compared to the 1.1% growth in the second quarter. But he noted that, 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.

Commenting on the post-strike environment in southern California, Mr. Dillon said, “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 our business.”

Also in the second quarter:

• FIFO gross margin was 25.21%, a reduction 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.
• Operating, general and administrative costs declined 48 basis points to 18.87%. The items in the second quarter of 2003 shown on Table 2 positively affected the OG&A comparison by 55 basis points. 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.
• Major labor contracts covering more than 47,000 associates in five regions were ratified without a work stoppage. Mr. Dillon said that in each case, Kroger met its twin objectives of addressing associates’ needs for excellent wages and benefits, and of placing significant controls on health care and other costs. He said Kroger continues to make progress toward its goal of labor cost competitiveness.
• Kroger opened, expanded, relocated or acquired 24 food stores, and closed 21 stores in the quarter. Total food store square footage increased 1.5% over the prior year. Capital expenditures totaled $416.3 million.
• 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,” Mr. Dillon said.

Mr. Dillon said that 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. He explained that, in accordance with this policy, Kroger expects 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.

“Kroger’s financial strength provides us with the resources necessary to continue building the Company’s business for the future,” he said.

For the first two quarters of fiscal 2004, sales increased 4.4% to $29.9 billion. Net earnings were $405.3 million, or $0.54 per diluted share. These results include the effect of the labor dispute, post-strike recovery in southern California, and other items shown in Table 2. For the first two quarters of fiscal 2003, net earnings were $541.9 million, or $0.71 per diluted share. These results include the items shown in Table 2.

Mr. Dillon reiterated Kroger’s strategy. “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 food-store 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.”

Headquartered in Cincinnati, Ohio, Kroger is one of the nation’s largest retail grocery chains. At the end of the second quarter of fiscal 2004, the Company operated (either directly or through its subsidiaries) 2,530 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, Fry’s Marketplace, Dillons, QFC and City Market. Kroger also operated (either directly or through subsidiaries, franchise agreements, or operating agreements) 792 convenience stores, 439 fine jewelry stores, 502 supermarket fuel centers and 42 food processing plants. 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 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. The extent to which growth in identical food-store sales reaches our previously announced target, likewise, will be affected by these factors. The recovery period 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. 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 2004 Reports - PDF Format:
CONSOLIDATED STATEMENTS OF EARNINGS
CONSOLIDATED STATEMENTS OF EARNINGS OTHER ITEMS
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL SALES INFORMATION

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