KROGER REPORTS EARNINGS OF $0.35 PER DILUTED SHARE, BEFORE ONE-TIME ITEMS, FOR SECOND QUARTER
Identical Food-Store Sales Show Continued Improvement, Driven by Investment in Strategic Growth Plan; Company Lowers Earnings Per Share Growth Estimate for Fiscal 2002 to 5-7%

CINCINNATI, OH, September 17, 2002 -- The Kroger Co. (NYSE: KR) today reported earnings of $0.35 per diluted share for the second quarter ended August 17, 2002. These results exclude restructuring charges and related items associated with the implementation of the previously announced Strategic Growth Plan, one-time items and an extraordinary item.

On this basis, and adjusting prior-year results to eliminate goodwill amortization as required by FASB 142, earnings per diluted share for the second quarter of 2002 were flat compared to the year-ago period.

During the quarter, Kroger incurred restructuring costs and related items, one-time items and an extraordinary item totaling $12.1 million after tax. Including these items, earnings for the second quarter of fiscal 2002 were $0.33 per diluted share, compared to $0.34 a year ago, adjusting for the elimination of goodwill.

Total sales for the second quarter of fiscal 2002 increased 3.8% to $11.9 billion. Total food store sales rose 4.2%. Identical food store sales, including fuel, increased 0.8%. Identical food-store sales, excluding fuel, grew 0.2%. Comparable food store sales, which include relocations and expansions, rose 1.7% for the quarter. Comparable food-store sales excluding fuel rose 0.9%. Kroger estimates that its product cost deflation was negative 0.7% in the quarter.

EBITDA (earnings before interest, taxes, depreciation, amortization, LIFO, extraordinary and one-time items) for the second quarter of 2002 totaled $826 million, a decrease of 1.3% from a year ago.

“We are pleased by the sequential growth in Kroger’s identical food-store sales, particularly in light of the deflation during the quarter. Our identical food-store sales showed continued improvement toward our goal of 2-3% growth above product cost inflation by the end of fiscal 2003,” said Joseph A. Pichler, Kroger chairman and chief executive officer. “This sales improvement is a result of Kroger’s Strategic Growth Plan. The execution of the Plan, however, resulted in a greater investment in certain markets than originally forecast, which adversely affected Kroger’s earnings.”

In the second quarter:

• FIFO gross profit margin decreased 83 basis points to 26.73% largely as a result of the investment in lower retail prices.
• Operating, general and administrative costs, before one-time expenses, decreased 41 basis points to 18.55%. These results reflect Kroger’s cost reduction and productivity initiatives. They were achieved despite higher health care benefit costs and credit card fees.
• Net operating working capital totaled $292 million, a decrease of $138 million from the second quarter of fiscal 2001. Mr. Pichler said Kroger is continuing to make progress toward its goal of reducing net operating working capital by $500 million from the benchmark set in the third quarter of 1999.
• Net total debt was $8.2 billion, an improvement of $260 million as compared to the second quarter of 2001. Net total debt improved to 2.15 times EBITDA, as compared to 2.30 times in the second quarter of 2001. This represents Kroger’s lowest net total debt-to-EBITDA ratio since 1988. The Company continues to improve toward the goal of net total debt equal to 2.0 times EBITDA.
• Kroger repurchased 17.2 million shares of common stock at an average price of $19.60 per share, for a total investment of $337 million. Since January 2000, Kroger has invested $1.8 billion to repurchase 81 million shares. The Company had $254 million remaining under the $1 billion repurchase program authorized last year by Kroger’s Board of Directors. At current prices, Kroger continues to repurchase shares.

“During the past four quarters, Kroger generated free cash flow of $1.1 billion after capital investments of $1.7 billion, excluding our $192 million purchase of properties previously financed by a synthetic lease. This strong performance enabled the Company to repurchase $613 million in stock, reduce debt by $260 million and maintain our capital investment program,” said Mr. Pichler.

During the second quarter of 2002, Kroger opened, expanded, relocated or acquired 39 food stores. Overall food store square footage increased 4.1% over the prior year. Including acquisitions, capital expenditures for the quarter totaled $420 million.

For the first two quarters of 2002, Kroger reported earnings of $0.83 per diluted share, excluding one-time expenses, extraordinary items, restructuring charges and related items. Adjusting prior-year results to eliminate goodwill amortization as required by FASB 142, earnings per share before one-time expenses for the first two quarters of 2002 increased 10.7%. Net earnings per diluted share for the first two quarters were $0.78. Total sales in the first two quarters of 2002 increased 3.8% to $27.6 billion. EBITDA totaled $2.0 billion for the first half of 2002, an increase of 4.4% over the first half of 2001.

Commenting on the industry environment, Mr. Pichler said, “Customers remain price sensitive, competition remains intense, and the industry continues to consolidate. In the light of these economic and industry conditions, we believe that the price reductions Kroger is making through the Strategic Growth Plan are the appropriate actions to build sales, market share, and shareholder value. While we are pleased with the sales results, we recognize that additional work remains to be done in implementing our Plan, especially in the area of shrink reduction.”

As a result of these factors, Kroger has lowered its earnings per share growth estimate for fiscal 2002 to 5-7%, before one-time items and goodwill expense. Kroger had previously forecast earnings per share growth of 10-12%, before one-time items and goodwill expense, for this year.

Mr. Pichler said that, based on the strong free cash flow Kroger has produced so far in 2002, the Company is raising its full-year estimate of free cash flow, excluding the synthetic lease, to $650-$750 million, an increase of $100 million over its previous forecast.

Mr. Pichler added that the third quarter will be particularly challenging in terms of identical food-store sales because of continued product cost deflation and the unusually strong sales in the weeks immediately following September 11, 2001. As a result, Kroger believes that identical food-store sales in the third quarter may increase less than the 0.8% growth achieved in the second quarter.

“We remain committed to achieving our goal of 2-3% growth above product cost inflation by the end of fiscal 2003,” he said.

Headquartered in Cincinnati, Ohio, Kroger is one of the nation’s largest retail grocery chains. At the end of the second quarter of fiscal 2002, the Company operated (either directly or through its subsidiaries) 2,447 supermarkets and multi-department stores in 32 states under approximately 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 operates (either directly or through its subsidiaries) 782 convenience stores, 439 fine jewelry stores, 307 supermarket fuel centers and 41 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 relate to, among other things: projected growth in sales and annual earnings per share; working capital reduction; a decline in net total debt-to-EBITDA ratio; and our Strategic Growth Plan; and are indicated by the words or phrases such as “comfortable,” “committed,” “expects,” “estimate,” 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 sales and earnings per share goals will be affected primarily by: pricing and promotional activities of existing and new competitors, including non-traditional food retailers; our response to these actions; the state of the economy, including deflationary trends in certain commodities; and the success of our Strategic Growth Plan announced in December 2001. In addition to the factors identified above, our identical store sales growth could be affected by increases in Kroger private-label sales as well as the impact of “sister stores.” Kroger’s EPS growth goals could be affected by: recessionary trends in the economy; our ability to achieve the cost reductions that we have identified, including those to reduce shrink and OG&A; increases in health care, pension and credit card fees; and the success of our capital investments. Our efforts to meet our 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. Our ability to reduce our net total debt-to-EBITDA ratio could be adversely affected by: our ability to generate sales growth and free cash flow; interest rate fluctuations and other changes in capital market conditions; the Company’s stock repurchase activity; unexpected increases in the cost of capital investments; acquisitions; and other factors. The results of our Strategic Growth Plan and our ability to generate free 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 amount and timing of future one-time, merger-related costs could be adversely affected by our ability to convert remaining systems as planned and on budget. 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. Any labor disputes could affect our ability to achieve the goals outlined above. 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.

Note: Kroger's quarterly conference call with investors will be broadcast live via the Internet at 10 a.m. (EDT) on September 17, 2002 at www.kroger.com and www.streetevents.com. An on-demand replay of the webcast will be available from 2 p.m. (EDT) on September 17, 2002 through September 30, 2002.

View 2nd Quarter 2002 Reports - PDF Format:
Consolidated Quarterly Statements of Income Without and With One-Time Items
Pro Forma Quarterly Statements of Income Without and With One-Time Items
Consolidated Year to Date Statements of Income Without and With One-Time Items
Pro Forma Year to Date Statements of Income Without and With One-Time Items
Consolidated Balance Sheet
Supplemental Food Store Sales Information

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