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    Kroger's Strong Q2 Features Sales Up 12%

    Secure in the belief that their current course is correct, the leading grocer's top managers said same-store supermarket sales were up 5 percent for the quarter, and store brands are continuing to hit paydirt.

    A day after turmoil rattled Wall Street with a rash of red ink and frayed nerves among investors across the nation and globally, The Kroger Co. posted another quarter of solid performance, beating analysts' expectations and sending its stock up 5 percent.

    For the second quarter ended Aug. 16, Kroger's sales increased 12 percent vs. the same period last year, on total sales of $18 billion. Same store sales were up 10 percent with fuel, and 5 percent without fuel.

    Kroger's senior managers yesterday cited its diverse and successful private label program as a linchpin for strong results in the quarter, and as well its ongoing customer-focused strategy. They also said a solid understanding of the dynamics behind their shoppers' behavior and product needs have enabled to chain to pass along costs increases without hurting sales, even in a climate of food inflation not seen for two decades.

    Kroger officials said its analysis of performance in the quarter and more generally in the current economic climate showed evidence that shoppers are adjusting their buying patterns toward value, including shifting from national brands to private label or corporate brands. However, at the same time Kroger's premium Private Selections store brand items have been performing exceptionally well, execs said, adding that a little more than half of private label sales increases in the quarter came from its Private Selections and Private Selection Organic products.

    "Customers are much more willing to try a private label item, and we're seeing signs that this is happening more and more as the year progresses," said David B. Dillon, Kroger's chairman and c.e.o., during an analysts' conference call.

    Dillon added that "associates in every area of our business are focused on executing our Customer 1st strategy, to meet the changing needs of today's shoppers."

    Dillon and his senior managers on the conference call--W. Rodney McMullen, vice chairman, and Don W. McGeorge, president and c.o.o.--said the company saw stronger sales trends in "our value-oriented stores" during the quarter, suggesting that shoppers are looking for ways to stretch their budgets, and Kroger has been ready to accommodate them thanks to its intelligent use of loyalty card data to help set strategy.

    They also said their stores continue to benefit from customers choosing to eat at home more often. "We think strong sales in our deli/bakery and prepared foods correlate with this shift and with declining sales trends some casual dining chains are reporting," said Dillon.

    While the Cincinnati-based grocer continues to generate cash flow to sustain its aggressive capital expenditures program, Dillon said Kroger is simultaneously "investing in improving our customers' overall shopping experience. Our ability to balance these objectives is fundamental to our success, particularly in today's challenging economic environment."

    Kroger's second quarter net earnings were up 11 percent to $277 million, or $.42 per share, compared to $267 million, or $.38 in the same period last year.

    Its gross profit margin, excluding volatile gasoline sales, slipped 51 basis points; including fuel sales, gross margin was down 163 basis points to 22.3 percent of sales.

    The company, which operates 2,476 supermarkets and multi-department stores in 31 states under two dozen local banners, raised the low end of its projected range for full-year same-store sales to an increase of between 4.5 percent and 5.5 percent, excluding any impact from Hurricane Ike in Texas and its remnants that hit Ohio, Kentucky and Indiana over the weekend. On the same basis, it reaffirmed its earnings per share guidance for fiscal 2008 of $1.85 to $1.90, up between 9 percent and 12 percent from fiscal 2007.

    "Our year-to-date performance demonstrates Kroger's ability to deliver sustainable results today while we continue to invest for the future," said Dillon. "We know market conditions will continue to be a challenge and we believe our strategy works well in good times and bad. Kroger's team and our overall strategy clearly stand out in the current environment."

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