KROGER REPORTS 14% INCREASE IN EARNINGS PER SHARE, BEFORE ONE-TIME ITEMS, FOR THIRD QUARTER
Company Announces Strategic Growth Plan To Accelerate Sales Growth, Reduce Costs and Generate Long-Term Annual EPS Growth of 13-15% Beginning in Fiscal 2004

CINCINNATI, OH, December 11, 2001 -- The Kroger Co. (NYSE: KR) today reported earnings of $0.32 per diluted share, excluding costs related to a merger and one-time expenses, for the third quarter ended November 10, 2001. These results represent an increase of 14.3% over the third quarter of 2000, on the same basis.

Total sales for the third quarter of fiscal 2001 increased 3.8% to $11.4 billion. Total food store sales rose 4.3%. Comparable food store sales, which include relocations and expansions, rose 1.4% for the quarter, while identical food store sales rose 0.8%.

EBITDA (earnings before interest, taxes, depreciation, amortization, LIFO and one-time items) for the third quarter of 2001 totaled $834 million, an increase of 10.2% from a year ago.

“We were pleased with Kroger’s third-quarter earnings results, which were achieved through strong expense controls in a difficult operating environment. However, we were not satisfied with Kroger’s sales, which were softer than expected because of the weak economy and challenging competitive conditions in certain markets,” said Joseph A. Pichler, Kroger chairman and chief executive officer.”

During the third quarter:
• FIFO gross profit margin, without one-time expenses, increased 42 basis points to 27.46%, driven by increased corporate-brand sales and savings from coordinated purchasing.
• Operating, general and administrative (OG&A) costs, without one-time expenses, increased 11 basis points to 18.86%. Health care benefit costs rose 15 basis points from the prior year while utility expenses increased seven basis points. Excluding these increases, OG&A declined 11 basis points because of continuing productivity improvements.
• Kroger repurchased 5.1 million shares of common stock at an average price of $25.23 per share, for an investment of $128 million. Since January 2000, Kroger has invested $1.2 billion to buy back 52.6 million shares. The Company has $766 million remaining under the $1 billion repurchase program authorized earlier this year by Kroger’s Board of Directors. At current prices, Kroger continues to repurchase shares.

During the third quarter of 2001, Kroger opened, expanded, relocated or acquired 33 food stores. Food store square footage increased 4.0% over the prior year. Including acquisitions, capital expenditures for the quarter totaled $530 million.

Net working capital totaled $546 million, an increase of $67 million from the third quarter of fiscal 2000. This reflects an improvement in net working capital trend as compared to the increase in the second quarter of 2001 versus the prior year. Mr. Pichler said Kroger remains committed to achieving its goal of reducing net working capital by $500 million from the benchmark set in the third quarter of 1999. Against that benchmark, the Company has reduced net working capital by $44 million.

Net total debt was $8.6 billion, an increase of $212 million as compared to the third quarter of 2000. Net total debt improved to 2.28 times EBITDA, as compared to 2.50 times in the third quarter of 2000. This represents Kroger’s lowest net total debt-to-EBITDA ratio since the merger with Fred Meyer in 1999. The Company’s goal is to reduce net total debt to 2 times EBITDA.

During the third quarter, Kroger incurred costs related to a merger of $10 million pre-tax, primarily for systems conversions. The Company also incurred a pre-tax charge of $110 million related to asset impairment and store closings, and a pre-tax charge of $81 million related to energy contracts in California. Including these costs related to a merger and charges, earnings per share for the third quarter were $0.16.

For the first three quarters of 2001, Kroger reported earnings from operations of $1.01 per diluted share. These results represent an increase of 17.4% over the first three quarters of 2000, on the same basis. Including costs related to a merger and charges, earnings per share for the first three quarters of 2001 were $0.84. Total sales in the first three quarters of 2001 increased 4.6% to $38 billion. EBITDA totaled $2.7 billion for the first three quarters of 2001, an increase of 9.2% over the comparable period in 2000.

Based on consumers’ shopping behavior so far in the fourth quarter, Mr. Pichler said Kroger continues to experience softer-than-expected sales in jewelry, floral, and general merchandise categories because of the recession. As a result, Kroger expects to report earnings per share in the range of $0.46-$0.48 for the fourth quarter, excluding costs related to a merger and certain charges. On this same basis, the Company anticipates earnings per share for the full 2001 fiscal year to be in the range of $1.48-$1.50, an increase of 13-14.5% from $1.31 per share in 2000, after adjusting for the 53rd week last year.

Looking ahead, Mr. Pichler outlined the strategic growth plan through which Kroger will:
• Increase its identical food store sales growth target;
• Reduce operating and administrative costs by more than $500 million;
• Further leverage its size to achieve even greater economies of scale; and
• Reinvest in its core business to increase sales and market share.

Kroger will make substantial gross profit investments to achieve identical sales growth of 2-3% above product cost inflation over the next two years. This new goal represents a significant increase over the Company’s previous growth target of product cost inflation plus 1%.

To help fund the additional investments in strategic sales initiatives and operate more efficiently, Kroger plans to reduce administrative and operating costs by more than $500 million during the next two years. These savings are incremental to the $380 million of synergies already achieved by the Company. Most of the $500 million in cost reductions will be achieved in fiscal 2002. Although Kroger believes it is among the lowest-cost operators of any traditional “combo” operator in the U.S., the Company has identified significant opportunities to further reduce its cost structure through improved productivity, reduced shrink and other efforts.

As part of its plan to reduce administrative costs, Kroger will eliminate approximately 1,500 positions, primarily management and clerical, over the next 12 months. The Company will apply its best practices across the Company to create the most effective operating structure, from store level to corporate office. The Company also plans to merge one existing Kroger division into two adjacent marketing areas.

“We deeply regret having to announce staff reduction plans, especially at this time of year, and we understand this news will be painful for some of our associates,” Mr. Pichler said. “However, economic conditions make it necessary for us to implement these actions quickly to maintain Kroger’s long-term competitive advantages. We will communicate fully with employees about their individual positions and treat everyone with fairness and respect.”

Some employees may be able to transfer to other positions within the Company. For those who cannot, Kroger will provide a comprehensive and generous severance package based on years of service.

Kroger has also identified new opportunities to leverage its economies of scale by centralizing additional merchandising and procurement functions in the Cincinnati area. The Company believes this will better align it with vendors that are set up to serve one primary contact point at large retailers. Kroger’s total employment in the Cincinnati area is expected to increase by 75-100 positions because of the consolidation of merchandising and purchasing functions.

Kroger’s strategic growth plan will support additional investment in the core business to grow sales and increase market share. As part of that plan, Kroger has established a long-term, sustainable EPS growth target of 13-15% per year beginning in fiscal 2004. For fiscal 2002 and 2003, the Company expects annual earnings per share growth of 10-12%. The Company said that adjustments to goodwill required by new FASB rules should improve fiscal 2002 EPS by another 7 percentage points beyond that target.

Mr. Pichler said the estimates for 2002 and 2003 reflect the weak economy, increased competition, and the investments required to achieve the new same-store sales target. “We have assumed that, for the next two years, the economic situation and competitive situations will not improve. If they do improve, Kroger’s EPS growth may exceed the 10-12% target,” Mr. Pichler said.

Kroger will incur a pre-tax charge of $85-$100 million to reflect severance and other costs associated with implementing this strategic growth plan. The majority of this charge will be taken in the fourth quarter of 2001.

Mr. Pichler said that even with substantial investments to drive sales growth, Kroger’s free cash flow is expected to be $550 - $650 million in fiscal 2002. This reflects a capital spending program of $2.1 billion, which is consistent with prior plans, and a working capital reduction of $100 million.

“We are operating in the most challenging economic and competitive environment of the past 20 years,” said Mr. Pichler. “Fortunately, Kroger has the financial strength to make the investments necessary to build our business, remodel and expand our store base, and continue to generate strong free cash flow that can be used for stock repurchases or debt reduction. Our industry is consolidating rapidly and we believe that Kroger’s strategic advantages will enable us to enhance market share as further consolidation occurs. I firmly believe that by executing this strategic growth plan, Kroger’s business will be healthier than ever and the Company will be well positioned to create substantial shareholder value in the years ahead.”

Headquartered in Cincinnati, Ohio, Kroger is one of the nation’s largest retail grocery chains. At the end of the third quarter, the Company operated 2,401 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, Dillon, QFC and City Market. Kroger also operates 790 convenience stores, 426 fine jewelry stores, 177 supermarket fuel centers and 41 food processing plants.

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 annual earnings per share; working capital reduction; a decline in our net total debt-to-EBITDA ratio; our ability to generate free cash flow; and our strategic growth plan, and are indicated by words or phrases such as “comfortable,” “committed,” “expects,” “goal,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. Our ability to achieve annual earnings per share goals will be affected primarily by pricing and promotional activities of existing and new competitors, including non-traditional food retailers, and our response to these actions intended to increase market share. In addition, 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; increases in health care and energy costs above those projected; 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 obtain 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 expenditures; 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. In addition, the timing of the execution of the plan could adversely impact our EPS and sales results. 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 11, 2001 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 11, 2001 through December 18, 2001.

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