KROGER REPORTS EARNINGS OF $0.34 PER DILUTED SHARE, BEFORE ONE-TIME ITEMS, FOR THIRD QUARTER
Company Raises Free Cash Flow Estimate for 2002 to Approximately $900 Million, Announces New $500 Million Share Repurchase Program and Provides Guidance for 2003

CINCINNATI, OH, December 10, 2002 -- The Kroger Co. (NYSE: KR) today reported earnings of $0.34 per diluted share, before one-time items, for the third quarter ended November 9, 2002.

On this basis, and adjusting prior-year results to eliminate goodwill amortization as required by FASB 142, earnings per diluted share for the third quarter of 2002 were equal to the year-ago period. Net earnings for the third quarter of 2002 were $263.0 million, a decrease of 6.6% from a year ago.

During the quarter, Kroger incurred one-time items totaling $8.4 million after tax. Including these items, net income for the third quarter of fiscal 2002 was $254.6 million. Net earnings per diluted share were $0.33 compared to $0.19 a year ago. The year-ago earnings per share figure has been adjusted for the elimination of goodwill and includes charges associated with the Strategic Growth Plan, one-time expenses, and an impairment charge.

Total sales for the third quarter of fiscal 2002 increased 2.8% to $11.7 billion. Total food-store sales rose 2.7%. Identical food-store sales, including fuel, decreased 0.6%. Identical food-store sales, excluding fuel, declined 1.3%. Comparable food-store sales, which include relocations and expansions, rose 0.2% for the quarter. Comparable food-store sales excluding fuel declined 0.6%. Kroger estimates that its product cost deflation was negative 0.5% in the quarter.

EBITDA (earnings before interest, taxes, depreciation, amortization, LIFO, extraordinary and one-time items) for the third quarter of 2002 totaled $803.8 million, a decrease of 3.7% from a year ago.

“Consumers remain cautious in their spending. However, the price reductions Kroger has made in selected product categories as part of our Strategic Growth Plan have improved our competitive position because we are offering better values to our customers,” said Joseph A. Pichler, Kroger chairman and chief executive officer.

In the third quarter:

• FIFO gross profit margin was essentially flat at 27.45% reflecting the investment in the Strategic Growth Plan.
• Operating, general and administrative costs, before one-time expenses, increased 40 basis points to 19.26%. These results reflect soft sales, rising health care and pension costs, and higher credit card fees. Year to date, OG&A is 18.73%, a decrease of 11 basis points from a year ago. Kroger expects OG&A as a percent of sales to be lower in 2002 than in 2001.
• Net operating working capital totaled $493 million, a reduction of $52 million from a year ago. Net operating working capital improved $96 million compared to the third quarter of 1999, when Kroger set a goal of reducing net operating working capital by $500 million within five years.
• Net total debt was $8.4 billion, a decrease of $159 million as compared to the third quarter of 2001. Net total debt improved to 2.22 times EBITDA, as compared to 2.28 times in the third quarter of 2001. The Company continues to make progress toward the goal of net total debt equal to 2.0 times EBITDA.
• Kroger repurchased 13.3 million shares of common stock at an average price of $16.47 per share, for a total investment of $219 million. Since January 2000, Kroger has invested $2.0 billion to repurchase 94.3 million shares.

Yesterday, the Company completed the $1 billion buyback authorized by its Board of Directors in March 2001. Kroger’s Board has authorized a new stock repurchase program totaling $500 million. The timing of the repurchases will vary according to market conditions and the Company’s free cash flow.

“The new share repurchase plan reflects our belief that, at current prices, Kroger shares represent an attractive investment opportunity,” Mr. Pichler said.

He noted that over the past four quarters, Kroger generated free cash flow of $1.1 billion after capital investments of $1.7 billion, excluding the $256 million purchase of properties previously financed by a synthetic lease. This performance enabled the Company to repurchase stock, reduce debt and maintain a strong capital investment program, he said.

Kroger estimates that free cash flow for 2002 will be approximately $900 million, an increase from its previous guidance of $650-$750 million. This estimated increase is the result of a reduction in capital investments.

During the third quarter of 2002, Kroger opened, expanded, relocated or acquired 29 food stores. Overall food store square footage increased 4.3% over the prior year. Including acquisitions, capital expenditures for the quarter totaled $414 million.

For the first three quarters of 2002, Kroger reported earnings of $1.16 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, one-time expenses, and an impairment charge, earnings per share for the first three quarters of 2002 increased 5.5%. On the same basis, net earnings for the first three quarters totaled $927.4 million, a 2.1% increase from a year ago. Total sales in the first three quarters of 2002 increased 3.5% to $39.3 billion. EBITDA totaled $2.8 billion for the first three quarters of 2002, an increase of 1.9% over 2001.

Mr. Pichler said he expects Kroger’s earnings per share in the fourth quarter of 2002 to be equal to or slightly better than a year ago. The Company also expects a continuation of soft identical food-store sales in the fourth quarter.

Looking ahead to 2003, he said, “The combination of a weak economy, rising unemployment, product cost deflation and continued aggressive competition has created a difficult operating environment. It is not clear when consumer confidence will improve. In addition, we anticipate that health care and pension costs will increase substantially in 2003.”

As a result of these factors, Kroger estimates that its earnings per share in 2003 will be equal to 2002, before one-time items, and that identical food-store sales growth in 2003 will be lower than the 2-3% goal targeted in the Strategic Growth Plan. Mr. Pichler said the Company is in the process of completing its business plan for 2003 and will provide additional guidance on these and other key financial measures when it reports fourth-quarter results in March.

At this time, Kroger is not providing sales or earnings guidance beyond fiscal 2003.

“I believe that Kroger is on the right track with the Strategic Growth Plan that we announced one year ago. Kroger continues to narrow the price gap with discount operators and extend our price advantage over traditional competitors. We expect to exceed the Plan’s original goal of $500 million in cost savings by the end of 2003. Kroger’s financial strength is a key strategic advantage. We have the financial resources to continue making the price investments necessary to build our business, remodel and expand our store base, and increase our market share. As a result, Kroger is well positioned to continue generating strong free cash flow,” he said.

Headquartered in Cincinnati, Ohio, Kroger is one of the nation’s largest retail grocery chains. At the end of the third quarter of fiscal 2002, the Company operated (either directly or through its subsidiaries) 2,461 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) 783 convenience stores, 441 fine jewelry stores, 341 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 sales and earnings per share; working capital reduction; a decline in net total debt-to-EBITDA ratio; reductions in OG&A; changes in cash flow; increases in health care and pension costs; 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 competitors; 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; continued 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. Our expected reduction in OG&A could be affected by increased costs, such as health care and pension. 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. 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 December 10, 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 December 10, 2002 through December 24, 2002.

View 3rd 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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