Retail Powerhouse

The operating environment for the food retailing industry continues to be characterized by intense price competition, aggressive supercenter expansion, increasing fragmentation of retail formats, entry of non-traditional competitors and market consolidation. Additionally, consumers are increasingly looking to restaurants to fulfill their food product needs. We have developed a strategic plan that we believe is a balanced approach that will enable Kroger to meet the wide-ranging needs and expectations of our customers. However, the nature and extent to which our competitors implement various pricing and promotional activities in response to increasing competition - including our execution of our strategic plan - and our response to these competitive actions, can adversely affect our profitability.

On June 2, 2006 (the “Acquisition Date”), we acquired the premier retail operations of Albertson’s, Inc. (“Albertsons”), adding approximately 1,125 stores to our retail footprint (the “Acquisition”). The Acquisition was a unique strategic opportunity to acquire those assets of Albertsons that we viewed as the most attractive and profitable. The acquired stores give us a strong market presence in many key urban markets with little overlap with our legacy business.

In connection with the Acquisition, we issued approximately 68.5 shares of common stock. We also assumed $6,123 of debt and issued $1,970 of new debt.

As of June 16, 2007, the Company has approximately 200,000 employees, 2,500 owned and licensed stores, 900 in-store pharmacies and 120 fuel centers. The Acquisition has significantly changed the mix of the Company’s segment revenues and operating results for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007.

As described in Note 1 – The Company and Significant Accounting Policies, no operating results of the Acquired Operations are included in the accompanying Condensed Consolidated Statement of Earnings for the first quarter of fiscal 2007 ended June 17, 2006. See Note 1 – The Company and Significant Accounting Policies for the definition of Acquired Operations and Note 2 – Business Acquisition for disclosure of assets acquired and liabilities assumed in connection with the Acquisition. The Company’s consolidated balance sheet was significantly impacted by the Acquisition.

• Best: Target comps of 5.7%, beating analysts’ estimates of 4.8%, continued to outperform arch nemesis Wal-Mart
• Worst: Wal-Mart same-store sales of 2.3%, below analysts’ estimates of 2.9%. Who is to blame? Fuel prices, of course

• Best: JC Penney (11% comps), Federated (9.2%), Saks (1.1%) and TJ Maxx (4%)
• Worst: Gap (-6%, but to be honest, no surprises here), Pacific Sunwear (-2.6%) and Hot Topic (-3.5%)
• Last but not least, Sharper Image, with a -36% drop in same-store sales.

Good numbers across the board, particularly at the department stores who had been struggling for the past couple of months.

Wal-Mart continues to struggle to achieve Target’s pace, but new initiatives to target to the higher income consumer that shops the left side of the store (consumables) are under way, so we might see a shift in the months to come.