KROGER reports second quarter results

Identical Supermarket Sales Rose 5.8% with Fuel and 5.1% without Fuel
Company Raises Fiscal 2007 Identical Sales and Earnings Guidance

CINCINNATI, Ohio.– The Kroger Co. (NYSE: KR) today reported total sales increased 6.6% to $16.1 billion for the second quarter ended August 18, 2007. Identical supermarket sales increased 5.8% with fuel and 5.1% without fuel. This is the ninth consecutive quarter Kroger has reported identical supermarket sales, excluding fuel, in excess of 3%.

Net earnings in the second quarter totaled $267.3 million, or $0.38 per diluted share. Net earnings in the same period last year were $209.0 million, or $0.29 per diluted share. .

“We are very pleased with our second quarter results,” said David B. Dillon, Kroger chairman and chief executive officer. “Our associates understand the importance of placing our customers first in their daily decisions. These results show we are connecting with our diverse customer base in a variety of ways, including service, price and products.”.

Highlights of the second quarter included:

* FIFO gross margin increased 47 basis points to 23.94% of sales (Table 1). Excluding the effect of retail fuel operations (Table 4), FIFO gross margin increased 51 basis points. During the quarter, the Company passed along higher product costs. Gross margin also benefited from lower shrink, distribution costs and advertising expense as a rate of sales.
* Operating, general and administrative (OG&A) costs as a percentage of sales increased 2 basis points to 17.52%. Excluding the effect of retail fuel operations, OG&A increased 16 basis points. Excluding adjustments to closed store liabilities and costs associated with the Scott’s and Farmer Jack acquisitions, Kroger’s second quarter OG&A rate declined compared to the same period last year.
* Capital investment totaled $480.9 million, excluding acquisitions, compared to $361.2 million a year ago (Table 3).
* Net total debt was $6.7 billion, an increase of $362 million from a year ago. Total debt was $6.7 billion, a reduction of $274 million from a year ago. Kroger’s net total debt to EBITDA ratio was 1.77, compared with 1.87 during the same period last year. (Table 5)
* Under its stock repurchase programs, Kroger repurchased 21.2 million shares of stock at an average price of $27.21 for a total investment of $578.1 million. At the end of the second quarter, $612.0 million remained under the $1 billion stock repurchase program announced in June 2007. Kroger’s long-term financial strategy is to use free cash flow to repurchase shares and pay dividends while maintaining a solid investment grade rating.


Fiscal 2007 Year-to-Date Results

During the first two quarters of fiscal 2007, total sales increased 6.7% to $36.9 billion. For the same period, identical supermarket sales, excluding fuel, increased 5.1%.

The Company’s operating margin for the first two quarters of fiscal 2007 increased 17 basis points. Excluding fuel and first quarter charges for labor unrest in 2007 and certain legal expenses in 2006, Kroger’s operating margin for the first two quarters of fiscal 2007 increased 5 basis points. Net earnings for the first two quarters of fiscal 2007 were $603.8 million, or $0.85 per diluted share.

Net earnings for the same period in fiscal 2006 were $515.4 million, or $0.71 per diluted share.

“Kroger’s earnings per share growth in fiscal 2007 will be driven by strong identical sales growth, a slightly improved operating margin, and fewer shares outstanding,” Mr. Dillon said. “The performance of Kroger’s business through the first half of 2007 exceeded our expectations, and our momentum heading into the second half of the year causes us to raise our identical sales and earnings guidance for fiscal 2007.”

Guidance

Kroger now anticipates identical supermarket sales growth of 4 – 5% for the full year, excluding fuel sales. The Company expects to earn $1.64 – $1.67 per diluted share in fiscal 2007, up from the previous range of $1.60 – $1.65 per diluted share. The updated guidance equates to 12 – 14% growth from adjusted fiscal 2006 earnings of $1.47 per diluted share (Table 6). It incorporates a higher estimated LIFO charge of $110 million, which is $60 million more than the Company originally anticipated for fiscal 2007. In addition, Kroger’s dividend currently adds slightly over 1% to shareholder return.

“Kroger’s results reflect the hard work of our associates. We appreciate their focus on improving our customers’ shopping experience, which is the foundation for delivering value to our shareholders,” Mr. Dillon said.

Looking beyond 2007, the Company confirmed that it expects identical supermarket sales growth in the 3 – 5% range with a slightly improving operating margin, excluding fuel sales.