Edgar Filing: KROGER CO

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended August 16, 2008

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to

Commission file number 1-303

(Exact name of registrant as specified in its charter)

Ohio		31-0345740
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1014 Vine Street, Cincinnati, OH 45202

(Address of principal executive offices)

(Zip Code)

(513) 762-4000

(Registrant’s telephone number, including area code)

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	x	Accelerated filer	o

Non-accelerated filer (do not check if a smaller reporting company)	o	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x.

There were 652,477,042 shares of Common Stock ($1 par value) outstanding as of September 19, 2008.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

	Second Quarter Ended				Two Quarters Ended
	August 16, 2008		August 18, 2007		August 16, 2008		August 18, 2007
Sales	$	18,053	$	16,139	$	41,160	$	36,865
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below	14,072		12,315		31,924		28,149
Operating, general and administrative	2,955		2,827		6,806		6,436
Rent	151		149		358		338
Depreciation and amortization	327		311		759		715
Operating profit	548		537		1,313		1,227
Interest expense	112		104		264		250
Earnings before income tax expense	436		433		1,049		977
Income tax expense	159		166		386		373
Net earnings	$	277	$	267	$	663	$	604

Net earnings per basic common share	$	0.42	$	0.38	$	1.01	$	0.86
Average number of common shares used in basic calculation	651		702		655		704

Net earnings per diluted share	$	0.42	$	0.38	$	1.00	$	0.85
Average number of common shares used in diluted calculation	659		709		662		712

Dividends declared per common share	$	.09	$	.075	$	.18	$	.15

The accompanying notes are an integral part of the Consolidated Financial Statements.

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)

(unaudited)

	August 16,			February 2,
	2008			2008
ASSETS
Current assets
Cash and temporary cash investments	$	270		$	242
Deposits in-transit	662			676
Receivables	770			786
FIFO inventory	5,420			5,459
LIFO credit	(690		)	(604		)
Prefunded employee benefits	¾			300
Prepaid and other current assets	272			255
Total current assets	6,704			7,114

Property, plant and equipment, net	12,825			12,498
Goodwill	2,246			2,144
Other assets	525			543

Total Assets	$	22,300		$	22,299

LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations	$	731		$	1,592
Accounts payable	3,979			4,050
Accrued salaries and wages	764			815
Deferred income taxes	239			239
Other current liabilities	2,159			1,993
Total current liabilities	7,872			8,689

Long-term debt including obligations under capital leases and financing obligations
Face-value long-term debt including obligations under capital leases and financing obligations	6,861			6,485
Adjustment to reflect fair-value interest rate hedges	34			44
Long-term debt including obligations under capital leases and financing obligations	6,895			6,529

Deferred income taxes	475			367
Other long-term liabilities	1,813			1,800

Total Liabilities	17,055			17,385

Minority interests	100			¾

Commitments and contingencies (see Note 11)

SHAREOWNERS’ EQUITY

Preferred stock, $100 par per share, 5 shares authorized and unissued	¾			¾
Common stock, $1 par per share, 1,000 shares authorized; 954 shares issued in 2008 and 947 shares issued in 2007	954			947
Additional paid-in capital	3,227			3,031
Accumulated other comprehensive loss	(116		)	(122		)
Accumulated earnings	7,024			6,480
Common stock in treasury, at cost, 303 shares in 2008 and 284 shares in 2007	(5,944		)	(5,422		)

Total Shareowners’ Equity	5,145			4,914

Total Liabilities and Shareowners’ Equity	$	22,300		$	22,299

The accompanying notes are an integral part of the Consolidated Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions and unaudited)

	Two Quarters Ended
	August 16, 2008			August 18, 2007
Cash Flows from Operating Activities:
Net earnings	$	663		$	604
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	759			715
LIFO charge	86			60
Stock-based employee compensation	48			48
Expense for Company-sponsored pension plans	16			33
Deferred income taxes	106			(13		)
Other	17			23
Changes in operating assets and liabilities net of effects from acquisitions of businesses:
Store deposits in-transit	14			50
Receivables	16			90
Inventories	40			(11		)
Prepaid expenses	283			303
Accounts payable	20			26
Accrued expenses	(3		)	(54		)
Income tax payables and receivables	50			306
Contribution to Company-sponsored pension plans	¾			(50		)
Other	11			25

Net cash provided by operating activities	2,126			2,155

Cash Flows from Investing Activities:
Payments for capital expenditures	(1,053		)	(1,075		)
Proceeds from sale of assets	49			23
Payments for acquisitions	(80		)	(86		)
Other	¾			(32		)

Net cash used by investing activities	(1,084		)	(1,170		)

Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt	775			300
Dividends paid	(109		)	(99		)
Payments on long-term debt	(987		)	(534		)
Payments on credit facility	(288		)	(152		)
Excess tax benefits on stock-based awards	9			31
Proceeds from issuance of capital stock	157			151
Treasury stock purchases	(539		)	(710		)
Increase (decrease) in book overdrafts	(92		)	4
Other	(5		)	(1		)

Net cash used by financing activities	(1,079		)	(1,010		)

Net decrease in cash and temporary cash investments	(37		)	(25		)

Cash from Consolidated Variable Interest Entity	65			¾

Cash and temporary cash investments:
Beginning of year	242			189
End of quarter	$	270		$	164

Reconciliation of capital expenditures:
Payments for property and equipment	$	(1,053	)	$	(1,075	)
Changes in construction-in-progress payables	(62		)	38
Total capital expenditures	$	(1,115	)	$	(1,037	)

Disclosure of cash flow information:
Cash paid during the year for interest	$	294		$	245
Cash paid during the year for income taxes	$	283		$	26

The accompanying notes are an integral part of the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

All amounts in the notes to Consolidated Financial Statements are in millions except per share amounts.

Certain prior-year amounts have been reclassified to conform to current-year presentation.

1. ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries, and a Variable Interest Entity (“VIE”) in which the Company is the primary beneficiary. The February 2, 2008 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all normal, recurring adjustments that are necessary for a fair presentation of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the 2007 Annual Report on Form 10-K of The Kroger Co. filed with the SEC on April 1, 2008.

The unaudited information in the Consolidated Financial Statements for the second quarter and two quarters ended August 16, 2008 and August 18, 2007 includes the results of operations of the Company for the 12-week and 28-week periods then ended.

Store Closing and Other Expense Allowances

All closed store liabilities related to exit or disposal activities initiated after December 31, 2002, are accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The Company provides for closed store liabilities relating to the present value of the estimated remaining noncancellable lease payments after the closing date, net of estimated subtenant income. The Company estimates the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease terms associated with the closed stores, which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known. Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is adjusted to income in the proper period.

Owned stores held for disposal are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with the Company’s policy on impairment of long-lived assets. Inventory write-downs, if any, in connection with store closings, are classified in “Merchandise costs.” Costs to transfer inventory and equipment from closed stores are expensed as incurred.

The Company recorded asset impairments in the normal course of business totaling $2 in the second quarter of 2008 and $4 in the second quarter of 2007. During the first two quarters of 2008 and 2007, the Company recorded asset impairments in the normal course of business totaling $17 and $11, respectively.

The following table summarizes accrual activity for future lease obligations of stores that were closed in the normal course of business and locations closed in California prior to the Fred Meyer merger in 1999.

	Future Lease Obligations
	2008			2007
Balance at beginning of year	$	74		$	89
Additions	2			4
Payments	(7		)	(9		)
Adjustments	5			(9		)
Balance at end of second quarter	$	74		$	75

2. GOODWILL AND BUSINESS ACQUISTIONS

The following table summarizes the changes in the Company’s net goodwill balance through August 16, 2008.

	Goodwill
Balance at February 2, 2008	$	2,144
Goodwill recorded	102
Balance at August 16, 2008	$	2,246

In the first quarter of 2008, the Company made an investment in The Little Clinic LLC (“TLC”). TLC operates walk-in medical clinics in seven states, primarily located in the Midwest and Southeast. At the date of investment, TLC was determined to be a Variable Interest Entity (“VIE”) under FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R), with the Company being the primary beneficiary. As a result, the Company consolidated TLC in accordance with FIN 46R. The minority interest was recorded at fair value on the acquisition date. The fair value of TLC was determined based on the amount of the investment made by the Company and the percentage acquired. The Company’s preliminary assessment of goodwill represents the excess of this amount over the fair value of TLC’s net assets as of the investment date.

The pro forma effect of this investment is not material to previously reported results.

3. STOCK OPTION PLANS

The Company recognized total stock-based compensation of $23 and $25 in the second quarter ended August 16, 2008 and August 18, 2007, respectively. The Company recorded $48 of stock-based compensation for the two quarters ended both August 16, 2008 and August 18, 2007. These costs were recognized as operating, general and administrative costs in the Company’s Consolidated Statements of Operations.

The Company grants options for common stock (“stock options”) to employees, as well as to its non-employee directors, under various plans at an option price equal to the fair market value of the stock at the date of grant. In addition to stock options, the Company awards restricted stock to employees under various plans. Equity awards may be made once each quarter on a predetermined date. It has been the Company’s practice to make a general annual grant, which occurred in the second quarter of 2008.

Stock options granted in the first two quarters of 2008 expire 10 years from the date of the grant and vest from one year to five years from the date of grant. Restricted stock awards granted in the first two quarters of 2008 have restrictions that lapse in one year to five years from the date of the awards. All awards become immediately exercisable upon certain changes of control of the Company.

Changes in equity awards outstanding under the plans are summarized below.

Stock Options

	Shares subject to option		Weighted-average exercise price
Outstanding, February 2, 2008	44.8		$	20.94
Granted	3.4		$	28.57
Exercised	(7.4	)	$	21.41
Canceled or Expired	(0.2	)	$	22.40

Outstanding, August 16, 2008	40.6		$	21.49

Restricted Stock

	Restricted shares outstanding		Weighted-average grant-date fair value
Outstanding, February 2, 2008	3.4		$	25.89
Granted	2.4		$	28.52
Lapsed	(1.6	)	$	26.79
Canceled or Expired	—		$	—

Outstanding, August 16, 2008	4.2		$	27.07

The weighted-average fair value of stock options granted during the first two quarters ended August 16, 2008 and August 18, 2007, was $8.67 and $9.92, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes extensive accounting judgment and financial estimates, including the term employees are expected to retain their stock options before exercising them, the volatility of the Company’s stock price over that expected term, the dividend yield over the term, and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations.

The following table reflects the weighted average assumptions used for grants awarded to option holders:

	2008	2007
Risk-free interest rate	3.64%	5.06%
Expected dividend yield	1.50%	1.40%
Expected volatility	27.89%	29.23%
Expected term	6.8 Years	6.9 Years

4. DEBT OBLIGATIONS

Long-term debt consists of:

	August 16,			February 2,
	2008			2008
Credit Facility, Commercial Paper and Money Market Borrowings	$	282		$	570
4.95% to 9.20% Senior Notes due through 2038	6,588			6,766
5.00% to 9.95% mortgages due in varying amounts through 2034	159			166
Other	137			137

Total debt, excluding capital leases and financing obligations	7,166			7,639

Less current portion	(703		)	(1,564		)

Total long-term debt, excluding capital leases and financing obligations	$	6,463		$	6,075

During the first quarter of 2008, the Company issued $400 of senior notes bearing an interest rate of 5.0% due in 2013 and $375 of senior notes bearing an interest rate of 6.9% due in 2038.

5. COMPREHENSIVE INCOME

Comprehensive income is as follows:

	Second Quarter Ended					Year-To-Date
	August 16, 2008			August 18, 2007		August 16, 2008		August 18, 2007
Net earnings	$	277		$	267	$	663	$	604
Unrealized gain on hedging activities, net of tax(1)	—			5		3		9
Amortization of unrealized gains and losses on hedging activities, net of tax(2)	1			—		1		—
Amortization of amounts included in net periodic pension expense(3)	1			5		2		12
Other	(1		)	—		—		1
Comprehensive income	$	278		$	277	$	669	$	626

(1) Amount is net of tax of $3 for the second quarter of 2007. Amount is net of tax of $2 for the first two quarters of 2008 and $5 for the first two quarters of 2007.

(2) Amount is net of tax of $1 for the second quarter of 2008 and $1 for the first two quarters of 2008.

(3) Amount is net of tax of $1 for the second quarter of 2008 and $3 for the second quarter of 2007. Amount is net of tax of $2 for the first two quarters of 2008 and $8 for the first two quarters of 2007.

During 2008 and 2007, unrealized gains and losses on hedging activities included in other comprehensive income consisted of reclassifications of unrealized gains and losses on cash flow hedges into net earnings. In 2007, other comprehensive income also consisted of market value adjustments to reflect cash flow hedges at fair value as of the respective balance sheet dates.

6. BENEFIT PLANS

The following table provides the components of net periodic benefit costs for the Company-sponsored pension plans and other post-retirement benefits for the second quarter of 2008 and 2007.

	Second Quarter
	Pension Benefits						Other Benefits
	2008			2007			2008			2007
Components of net periodic benefit cost:
Service cost	$	9		$	10		$	2		$	3
Interest cost	36			34			5			5
Expected return on plan assets	(41		)	(38		)	—			—
Amortization of:
Prior service cost	1			—			(1		)	(1		)
Actuarial loss	2			8			—			—

Net periodic benefit cost	$	7		$	14		$	6		$	7

The following table provides the components of net periodic benefit costs for the Company-sponsored pension plans and other post-retirement benefits for the first two quarters of 2008 and 2007.

	Year-To-Date
	Pension Benefits						Other Benefits
	2008			2007			2008			2007
Components of net periodic benefit cost:
Service cost	$	21		$	23		$	5		$	8
Interest cost	84			79			11			11
Expected return on plan assets	(96		)	(89		)	—			—
Amortization of:
Prior service cost	2			1			(3		)	(3		)
Actuarial loss	5			19			—			—

Net periodic benefit cost	$	16		$	33		$	13		$	16

The Company contributed $50 to Company-sponsored pension plans in the first two quarters of 2007.

The Company contributed $51 and $47 to employee 401(k) retirement savings accounts in the first two quarters of 2008 and 2007, respectively.

The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded, in accordance with SFAS No. 87, Employers’ Accounting for Pensions.

7. INCOME TAXES

The effective income tax rate was 36.8% and 38.2% for the first two quarters of 2008 and 2007, respectively. The 2008 and 2007 effective income tax rate differed from the federal statutory rate primarily due to the effect of state income taxes. The current year rate benefited from the favorable resolution of certain tax issues, whereas an unfavorable resolution of certain tax issues and state legislative changes affected the prior year rate. There were no material changes in unrecognized tax benefits during the first two quarters of 2008.

8. EARNINGS PER COMMON SHARE

Earnings per basic common share equals net earnings divided by the weighted average number of common shares outstanding. Earnings per diluted common share equals net earnings divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options and restricted stock. The following tables provide a reconciliation of net earnings and shares used in calculating earnings per basic common share to those used in calculating earnings per diluted common share:

	Second Quarter Ended					Second Quarter Ended
	August 16, 2008					August 18, 2007
	Earnings (Numerator)		Shares (Denominator)	Per Share Amount		Earnings (Numerator)		Shares (Denominator)	Per Share Amount
Earnings per basic common share	$	277	651	$	0.42	$	267	702	$	0.38
Dilutive effect of stock options and restricted stock			8					7

Earnings per diluted common share	$	277	659	$	0.42	$	267	709	$	0.38

	Year-To-Date					Year-To-Date
	August 16, 2008					August 18, 2007
	Earnings		Shares	Per Share		Earnings		Shares	Per Share
	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Earnings per basic common share	$	663	655	$	1.01	$	604	704	$	0.86
Dilutive effect of stock options and restricted stock			7					8

Earnings per diluted common share	$	663	662	$	1.00	$	604	712	$	0.85

The Company had options outstanding for approximately 7 shares and 3 shares during the second quarter of 2008 and 2007, respectively, that were excluded from the computations of earnings per diluted common share because their inclusion would have had an anti-dilutive effect on earnings per share. For the first two quarters of 2008 and 2007, the Company had options outstanding for approximately 6 and 4 shares, respectively, that were excluded from the computations of diluted earnings per share because their inclusion would have had an anti-dilutive effect on earnings per share.

9. RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 will require the consolidation of noncontrolling interests as a component of equity. SFAS No. 160 will become effective for the Company’s fiscal year beginning February 1, 2009. The Company is currently evaluating the effect the adoption of SFAS No. 160 will have on its Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS No. 141R), which replaces SFAS No. 141. SFAS No. 141R further expands the definitions of a business and the fair value measurement and reporting in a business combination. SFAS No. 141R will become effective for the Company’s fiscal year beginning February 1, 2009. The Company is currently evaluating the effect the adoption of SFAS No. 141R will have on its Consolidated Financial Statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No 161). SFAS No. 161 requires enhanced disclosures on an entity’s derivative and hedging activities. SFAS No. 161 will become effective for the Company’s fiscal year beginning February 1, 2009. The Company is currently evaluating the effect the adoption of SFAS No. 161 will have on its Consolidated Financial Statements.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities and included in the calculation of basic EPS. FSP EITF 03-6-1 will become effective for the Company’s fiscal year beginning February 1, 2009. The Company is currently evaluating the effect the adoption of FSP EITF 03-6-1 will have on its Consolidated Financial Statements.

10. GUARANTOR SUBSIDIARIES

The Company’s outstanding public debt (the “Guaranteed Notes”) is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and certain of its subsidiaries (the “Guarantor Subsidiaries”). At August 16, 2008, a total of approximately $6,588 of Guaranteed Notes were outstanding. The Guarantor Subsidiaries and non-guarantor subsidiaries are direct or indirect wholly-owned subsidiaries of The Kroger Co. Separate financial statements of The Kroger Co. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable. The Company believes that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors.

The non-guaranteeing subsidiaries represent less than 3% on an individual and aggregate basis of consolidated assets, pre-tax earnings, cash flow, and equity. Therefore, the non-guarantor subsidiaries’ information is not separately presented in the tables below.

There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above. The obligations of each guarantor under its guarantee are limited to the maximum amount permitted under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law (e.g. laws requiring adequate capital to pay dividends) respecting fraudulent conveyance or fraudulent transfer.

The following tables present summarized financial information as of August 16, 2008 and February 2, 2008, for the second quarter ended, and the two quarters ended August 16, 2008 and August 18, 2007:

Condensed Consolidating

Balance Sheets

As of August 16, 2008

	The Kroger Co.		Guarantor Subsidiaries		Eliminations			Consolidated
Current assets
Cash, including temporary cash investments	$	23	$	247	$	—		$	270
Deposits in-transit	69		593		—			662
Receivables	174		2,477		(1,881		)	770
Net inventories	492		4,238		—			4,730
Prepaid and other current assets	78		194		—			272

Total current assets	836		7,749		(1,881		)	6,704

Property, plant and equipment, net	1,763		11,062		—			12,825
Goodwill	107		2,139		—			2,246
Adjustment to reflect fair value interest rate hedges	4		—		—			4
Other assets	1,528		671		(1,678		)	521
Investment in and advances to subsidiaries	12,090		—		(12,090		)	—

Total assets	$	16,328	$	21,621	$	(15,649	)	$	22,300

Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations	$	731	$	—	$	—		$	731
Accounts payable	2,143		5,395		(3,559		)	3,979
Other current liabilities	—		3,162		—			3,162

Total current liabilities	2,874		8,557		(3,559		)	7,872

Long-term debt including obligations under capital leases and financing obligations
Face value long-term debt including obligations under capital leases and financing obligations	6,861		—		—			6,861
Adjustment to reflect fair value interest rate hedges	34		—		—			34

Long-term debt including obligations under capital leases and financing obligations	6,895		—		—			6,895
Other long-term liabilities	1,314		974		—			2,288

Total liabilities	11,083		9,531		(3,559		)	17,055

Minority interests	100		—		—			100

Shareowners’ Equity	5,145		12,090		(12,090		)	5,145

Total liabilities and shareowners’ equity	$	16,328	$	21,621	$	(15,649	)	$	22,300

Condensed Consolidating

Balance Sheets

As of February 2, 2008

	The Kroger Co.		Guarantor Subsidiaries		Eliminations			Consolidated
Current assets
Cash and temporary cash investments	$	26	$	216	$	—		$	242
Deposits in-transit	76		600		—			676
Receivables	152		2,515		(1,881		)	786
Net inventories	420		4,435		—			4,855
Prepaid and other current assets	373		182		—			555

Total current assets	1,047		7,948		(1,881		)	7,114

Property, plant and equipment, net	1,684		10,814		—			12,498
Goodwill	56		2,088		—			2,144
Adjustment to reflect fair value interest rate hedges	11		—		—			11
Other assets	1,412		657		(1,537		)	532
Investment in and advances to subsidiaries	11,979		—		(11,979		)	—

Total assets	$	16,189	$	21,507	$	(15,397	)	$	22,299

Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations	$	1,592	$	—	$	—		$	1,592
Accounts payable	1,822		5,646		(3,418		)	4,050
Other current liabilities	—		3,047		—			3,047

Total current liabilities	3,414		8,693		(3,418		)	8,689

Long-term debt including obligations under capital leases and financing obligations
Face value long-term debt including obligations under capital leases and financing obligations	6,485		—		—			6,485
Adjustment to reflect fair value interest rate hedges	44		—		—			44

Long-term debt including obligations under capital leases and financing obligations	6,529		—		—			6,529
Other long-term liabilities	1,332		835		—			2,167

Total liabilities	11,275		9,528		(3,418		)	17,385

Shareowners’ Equity	4,914		11,979		(11,979		)	4,914

Total liabilities and shareowners’ equity	$	16,189	$	21,507	$	(15,397	)	$	22,299

Condensed Consolidating

Statements of Operations

For the Quarter Ended August 16, 2008

	The Kroger Co.			Guarantor Subsidiaries		Eliminations			Consolidated
Sales	$	2,346		$	16,007	$	(300	)	$	18,053
Merchandise costs, including warehousing and transportation	1,967			12,405		(300		)	14,072
Operating, general and administrative	427			2,528		—			2,955
Rent	31			120		—			151
Depreciation and amortization	34			293		—			327

Operating profit (loss)	(113		)	661		—			548
Interest expense	111			1		—			112
Equity in earnings of subsidiaries	551			—		(551		)	—

Earnings (loss) before income tax expense	327			660		(551		)	436
Income tax expense	50			109		—			159

Net earnings (loss)	$	277		$	551	$	(551	)	$	277

Condensed Consolidating

Statements of Operations

For the Quarter Ended August 18, 2007

	The Kroger Co.			Guarantor Subsidiaries		Eliminations			Consolidated
Sales	$	2,088		$	14,335	$	(284	)	$	16,139
Merchandise costs, including warehousing and transportation	1,714			10,885		(284		)	12,315
Operating, general and administrative	392			2,435		—			2,827
Rent	31			118		—			149
Depreciation and amortization	32			279		—			311

Operating profit (loss)	(81		)	618		—			537
Interest expense	103			1		—			104
Equity in earnings of subsidiaries	439			—		(439		)	—

Earnings (loss) before income tax expense	255			617		(439		)	433
Income tax expense (benefit)	(12		)	178		—			166

Net earnings (loss)	$	267		$	439	$	(439	)	$	267

Condensed Consolidating

Statements of Operations

For the Two Quarters Ended August 16, 2008

	The Kroger Co.			Guarantor Subsidiaries		Eliminations			Consolidated
Sales	$	5,418		$	36,329	$	(587	)	$	41,160
Merchandise costs, including warehousing and transportation	4,478			28,033		(587		)	31,924
Operating, general and administrative	940			5,866		—			6,806
Rent	73			285		—			358
Depreciation and amortization	86			673		—			759

Operating profit (loss)	(159		)	1,472		—			1,313
Interest expense	261			3		—			264
Equity in earnings of subsidiaries	1,105			—		(1,105		)	—

Earnings (loss) before income tax expense	685			1,469		(1,105		)	1,049
Income tax expense	22			364		—			386

Net earnings (loss)	$	663		$	1,105	$	(1,105	)	$	663

Condensed Consolidating

Statements of Operations

For the Two Quarters Ended August 18, 2007

	The Kroger Co.			Guarantor Subsidiaries		Eliminations			Consolidated
Sales	$	4,812		$	32,696	$	(643	)	$	36,865
Merchandise costs, including warehousing and transportation	3,925			24,867		(643		)	28,149
Operating, general and administrative	914			5,522		—			6,436
Rent	67			271		—			338
Depreciation and amortization	78			637		—			715

Operating profit (loss)	(172		)	1,399		—			1,227
Interest expense	247			3		—			250
Equity in earnings of subsidiaries	1,027			—		(1,027		)	—

Earnings (loss) before income tax expense	608			1,396		(1,027		)	977
Income tax expense	4			396		—			373

Net earnings (loss)	$	604		$	1,027	$	(1,027	)	$	604

Condensed Consolidating

Statements of Cash Flows

For the Two Quarters Ended August 16, 2008

	The Kroger Co.			Guarantor Subsidiaries			Consolidated
Net cash (used) provided by operating activities	$	29		$	2,100		$	2,126

Cash flows from investing activities:
Capital expenditures, excluding acquisitions	(87		)	(966		)	(1,053		)
Other	(18		)	(13		)	(31		)

Net cash used by investing activities	(105		)	(979		)	(1,084		)

Cash flows from financing activities:
Dividends paid	(109		)	—			(109		)
Proceeds from issuance of long-term debt	775			—			775
Payments for long-term debt	(987		)	—			(987		)
Proceeds from issuance of capital stock	166			—			166
Treasury stock purchases	(539		)	—			(539		)
Other	(288		)	(97		)	(385		)
Net change in advances to subsidiaries	993			(993		)	—

Net cash (used) provided by financing activities	11			(1,090		)	(1,079		)

Net increase (decrease) in cash	(68		)	31			(37		)

Cash from consolidated Variable Interest Entity	65			—			65

Cash:
Beginning of year	26			216			242

End of quarter	$	23		$	247		$	270

Condensed Consolidating

Statements of Cash Flows

For the Two Quarters Ended August 18, 2007

	The Kroger Co.			Guarantor Subsidiaries			Consolidated
Net cash provided by operating activities	$	1,029		$	1,126		$	2,155

Cash flows from investing activities:
Capital expenditures, excluding acquisitions	(83		)	(992		)	(1,075		)
Other	19			(114		)	(95		)

Net cash used by investing activities	(64		)	(1,106		)	(1,170		)

Cash flows from financing activities:
Dividends paid	(99		)	—			(99		)
Proceeds from issuance of long-term debt	300			—			300
Payments for long-term debt	(534		)	—			(534		)
Proceeds from issuance of common stock	182			—			182
Treasury stock purchases	(710		)	—			(710		)
Other	(152		)	3			(149		)
Net change in advances to subsidiaries	44			(44		)	—