The following analysis should be read in conjunction with the Consolidated Financial Statements.

OVERVIEW

Third quarter 2008 total sales increased 9.0% to $17.6 billion compared to the third quarter of 2007. Our identical supermarket sales increased 7.8%, with fuel, and 5.6%, without fuel, compared to the third quarter of 2007 and reflect the strength of our customer- focused strategy and inflation. This identical sales growth was positive across all departments and supermarket divisions. As noted in the past, we are still seeing slowness in sales of discretionary general merchandise and jewelry.

For the third quarter of 2008, net earnings totaled $237 million, or $0.36 per diluted share, a decrease of $.01 compared to the third quarter of 2007. These results included strong retail fuel operations results which were partially offset by an increased LIFO charge and an after-tax charge of $16 million, or $.03 per diluted share, related to our $25 million insurance deductible for disruption and damage caused by Hurricane Ike.

Based on our performance during the third quarter of 2008, we are increasing 2008 earnings per share guidance to $1.88 to $1.91 per diluted share, excluding the $.03 per diluted share charge related to Hurricane Ike. Our previous guidance for earnings per diluted share was $1.85 to $1.90. Our updated earnings guidance reflects 11% to 13% growth over fiscal 2007 earnings of $1.69 per diluted share and implies a fourth quarter earnings range of $0.49 to $0.52 per diluted share. We believe that this growth, plus Kroger's dividend yield of slightly more than 1%, creates a strong return for shareholders. In addition, our guidance for full year identical supermarket sales growth remains 4.5% to 5.5%, excluding fuel. Our ability to achieve our guidance is subject to the uncertainties described under "Outlook" below.

RESULTS OF OPERATIONS

Net Earnings

Net earnings totaled $237 million for the third quarter of 2008, a decrease of 6.7% from net earnings of $254 million for the third quarter of 2007. This was a result of strong retail fuel margins, and increased sales and operating profit, offset by a LIFO charge of $69 million pre-tax, compared to a LIFO charge of $40 million pre-tax in 2007, and an after tax charge of $16 million from disruption and damage caused by Hurricane Ike. Additionally, the third quarter of 2007 included a tax benefit of approximately $40 million from the favorable resolution of certain tax issues. Net earnings totaled $900 million for the first three quarters of 2008, an increase of 4.9% from net earnings of $858 for the first three quarters of 2007. The increase in our net earnings for the first three quarters of 2008 was the result of increased sales and operating profit, offset by a LIFO charge of $155 million pre-tax, compared to a LIFO charge of $100 million pre-tax in 2007, and an after tax charge of $16 million from disruption and damage caused by Hurricane Ike. Net earnings for the first three quarters of 2007 included an estimated $18 million pre-tax expense related to labor unrest at one of our distribution centers and a tax benefit of approximately $40 million from the favorable resolution of certain tax issues.

Net earnings totaled $0.36 per diluted share for the third quarter of 2008, a decrease of 2.7% from net earnings of $0.37 per diluted share for the third quarter of 2007. This was a result of decreased net earnings in the third quarter of 2008, compared to 2007, offset by the repurchase of our stock over the past four quarters. Net earnings of $1.36 per diluted share for the first three quarters of 2008 represented an increase of 11.5% over net earnings of $1.22 per diluted share for the first three quarters of 2007. Earnings per share growth for the first three quarters of 2008, compared to 2007, resulted from increased net earnings and the repurchase of our stock over the past four quarters.

Sales



                                  Total Sales

                                 (in millions)



                                    Third Quarter                                      Year-To-Date
                               Percentage               Percentage               Percentage               Percentage
                      2008      Increase       2007      Increase       2008      Increase       2007      Increase
Total supermarket
sales without
fuel                $ 14,625          6.1 %  $ 13,787          7.6 %  $ 48,355          6.5 %  $ 45,388          6.1 %
Total supermarket
fuel sales          $  1,818         33.5 %  $  1,362         34.6 %  $  6,463         50.1 %  $  4,307         24.3 %

Total supermarket
sales               $ 16,443          8.5 %  $ 15,149          9.6 %  $ 54,818         10.3 %  $ 49,695          7.4 %
Other sales(1)         1,137         15.3 %       986         13.3 %     3,922         18.7 %     3,305         10.5 %

Total sales         $ 17,580          9.0 %  $ 16,135          9.8 %  $ 58,740         10.8 %  $ 53,000          7.6 %

The change in our total sales for the third quarter and first three quarters of 2008 as compared to the same periods in 2007 was primarily the result of identical supermarket sales increases, increased fuel gallon sales, and inflation across all departments, including significantly higher fuel retail prices during the first three quarters of 2008. We estimate that our product cost inflation, excluding retail fuel operations, during the third quarter of 2008 was 6.0%, compared to 3.0% during the third quarter of 2007. Identical supermarket sales and total sales, excluding fuel, increased due to increased transaction count, average transaction size, and inflation across all departments. Identical supermarket sales growth for the third quarter of 2008 as compared to the third quarter of 2007 was 7.8% with fuel and 5.6% excluding supermarket fuel operations.

We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Fuel center discounts received at the fuel center and earned based on in-store purchases are included in all of the supermarket identical sales results calculations illustrated below. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Our identical supermarket sales results are summarized in the table below. We used the identical supermarket dollar figures presented to calculate third quarter 2008 percentage changes.

                          Identical Supermarket Sales

                                ($ in millions)



                            Third Quarter
                           2008       2007
Including fuel centers   $ 15,604   $ 14,479
Excluding fuel centers   $ 13,928   $ 13,185

Including fuel centers        7.8 %      7.7 %
Excluding fuel centers        5.6 %      5.7 %

We define a supermarket as comparable when it has been in operation for five full quarters, including expansions and relocations. Fuel center discounts received at the fuel center and earned based on in-store purchases are included in all of the supermarket comparable sales results calculations illustrated below. Our comparable supermarket sales results are summarized in the table below. We used the comparable supermarket dollar figures presented to calculate third quarter 2008 percentage changes.

                          Comparable Supermarket Sales

                                ($ in millions)



                            Third Quarter
                           2008       2007
Including fuel centers   $ 16,222   $ 15,001
Excluding fuel centers   $ 14,450   $ 13,649

Including fuel centers        8.1 %      8.0 %
Excluding fuel centers        5.9 %      5.9 %

FIFO Gross Margin

We calculate First-In, First-Out ("FIFO") Gross Margin as sales minus merchandise costs, including advertising, warehousing and transportation, but excluding the Last-In, First-Out ("LIFO") charge. Merchandise costs exclude depreciation and rent expense. FIFO gross margin is an important measure used by management to evaluate merchandising and operational effectiveness.

Our FIFO gross margin rate decreased 8 basis points to 23.30% for the third quarter of 2008 from 23.38% for the third quarter of 2007. Our retail fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin on retail fuel sales as compared to non-fuel sales. Excluding the effect of retail fuel operations, our FIFO gross margin rate decreased 15 basis points for the third quarter of 2008 compared to the third quarter of 2007. Our FIFO gross margin, excluding the effect of retail fuel operations, declined during the third quarter of 2008 due to high inflation in product costs and our continued strategy of providing savings to customers through strategic price reductions.

Our FIFO gross margin rate declined 83 basis points to 22.85% for the first three quarters of 2008 from 23.68% for the first three quarters of 2007. Excluding the effect of retail fuel operations, our FIFO gross margin rate decreased 18 basis points for the first three quarters of 2008 compared to the first three quarters of 2007, due to high inflation in product costs and our continued strategy of providing savings to customers through strategic price reductions.

LIFO Charge

The LIFO charge in the third quarter of 2008 was $69 million compared to $40 million in the third quarter of 2007. The LIFO charge for the first three quarters of 2008 was $155 million compared to $100 million in the first three quarters of 2007. Like many food retailers, we continue to experience product cost inflation at levels not seen in several years. This increase in product cost inflation caused the increase in the LIFO charge in both the third quarter of 2008 and the first three quarters of 2008 compared to the comparable periods in 2007.

Operating, General and Administrative Expenses

Operating, general and administrative ("OG&A") expenses consist primarily of employee-related costs such as wages, health care benefit costs and retirement plan costs, utilities and credit card fees. Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.

OG&A expenses, as a percent of sales, decreased 8 basis points to 17.42% for the third quarter of 2008 from 17.50% for the third quarter of 2007. The growth in our retail fuel sales lowers our OG&A rate due to the very low OG&A rate on retail fuel sales as compared to non-fuel sales. OG&A expenses, as a percent of sales excluding fuel, increased 40 basis points in the third quarter of 2008 compared to the third quarter of 2007. The increase in our OG&A rate in the third quarter of 2008, excluding the effect of retail fuel operations, resulted primarily from the $25 million charge related to Hurricane Ike and increased health care, incentive expense, oil and energy costs.

OG&A expenses, as a percent of sales, decreased 67 basis points to 16.80% for the first three quarters of 2008 from 17.47% for the first three quarters of 2007. The growth in our retail fuel sales lowers our OG&A rate due to the very low OG&A rate on retail fuel sales as compared to non-fuel sales. OG&A expenses, as a percent of sales excluding fuel, decreased 3 basis points in the first three quarters of 2008 compared to the first three quarters of 2007. The decrease in our OG&A rate in 2008, excluding the effect of retail fuel operations, resulted primarily from increased identical supermarket sales growth and lower benefit costs associated with certain labor contracts, partially offset by the $25 million charge related to Hurricane Ike and increased credit card fees, oil and energy costs.

Rent Expense

Rent expense was $152 million, or 0.86% of sales, for the third quarter of 2008, compared to $150 million, or 0.93% of sales, for the third quarter of 2007. For the year-to-date period, rent expense was $510 million, or 0.87% of total sales in 2008, compared to $488 million, or 0.92% of sales, in 2007. The decrease in rent expense, as a percent of sales, in both the third quarter and the first three quarters of 2008, compared to the same periods of 2007, results from strong sales growth and our strategy to own rather than lease whenever possible. The increase in rent expense in the first three quarters of 2008, in total dollars, compared to the first three quarters of 2007, was primarily due to lease buyout payments received in the first quarter of 2007.

Depreciation Expense

Depreciation expense was $335 million, or 1.91% of total sales, for the third quarter of 2008 compared to $315 million, or 1.95% of total sales, for the third quarter of 2007. Depreciation expense was $1,094 million, or 1.86% of total sales, for the first three quarters of 2008 compared to $1,030 million, or 1.94% of total sales, for the first three quarters of 2007. The increase in depreciation expense, in total dollars, was the result of higher capital expenditures over the last four quarters ending with the third quarter of 2008 compared to the comparable period ending with the third quarter of 2007.

Interest Expense

Net interest expense was $106 million, or 0.60% of total sales, in the third quarter of 2008 and $110 million, or 0.68% of total sales, in the third quarter of 2007. For the year-to-date period, interest expense was $370 million, or 0.63% of total sales, in 2008 and $360 million, or 0.68% of total sales, in 2007. The decrease in net interest expense for the third quarter of 2008, when compared to the third quarter of 2007, resulted from income related to the mark-to-market of ineffective fair value swaps during the quarter, partially offset by a higher average debt balance during the third quarter of 2008 compared to the third quarter of 2007. The increase in net interest expense for the year-to-date periods of 2008, when compared to the same periods of 2007, resulted primarily from higher debt outstanding.

Income Taxes

Our effective income tax rate was 36.5% for the third quarter of 2008 and 24.2% for the third quarter of 2007. For the year-to-date period, our effective income tax rate was 36.7% in 2008 and 34.6% in 2007. The effective income tax rate for both the third quarter and first three quarters of 2008 differed from the federal statutory rate primarily due to the effect of state income taxes. In both the third quarter and first three quarters of 2007, the effective income tax rate differed from the federal statutory rate primarily due to the effect of state taxes and the favorable resolution of certain tax issues during the third quarter of 2007 that affected tax expense by approximately $40 million.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Information

Net cash provided by operating activities

We generated $2.4 billion of cash from operating activities during the first three quarters of 2008, compared to $2.3 billion in the first three quarters of 2007. The cash provided by operating activities in 2008 came from strong net earnings adjusted for non-cash expenses. In addition, cash used for increases in inventory balances was offset by increases in accounts payable and decreases in prepaid expenses since year-end. Our inventory balances, at the end of the third quarter of 2008 compared to the fourth quarter of 2007, have increased due to higher inflation in product costs and purchases of merchandise for the holiday season. Our inventory balances, at the end of the third quarter of 2007 compared to the fourth quarter of 2006, have increased due to higher inflation in product costs and purchases of merchandise for the holiday season. The decrease in prepaid expenses reflects prepayments of certain employee benefits at year-end. During the first three quarters of 2008 and 2007, respectively, we contributed $20 million and $52 million to Kroger-sponsored pension plans.

The amount of cash paid for income taxes was higher in the first three quarters of 2008 compared to the first three quarters of 2007 due to higher quarterly income and the timing of federal estimated payments as a result of revised regulations.

Net cash used by investing activities

We used $1.7 billion of cash for investing activities during both the first three quarters of 2008 and 2007. The amount of cash used for investing activities in both the first three quarters of 2008 and 2007 reflects payments for capital expenditures and acquisitions, offset slightly with proceeds from the sale of assets.

Net cash used by financing activities

We used $732 million of cash for financing activities in the first three quarters of 2008 compared to $586 million in the first three quarters of 2007. The increase in the amount of cash used for financing activities was primarily related to the decrease in book overdrafts. Increased payments on long-term debt and proceeds received from the issuance of long-term debt offset decreased borrowings on the credit facility and treasury stock purchases. Proceeds from the issuance of common stock resulted from exercises of employee stock options. In the third quarter of 2008, to preserve liquidity and financial flexibility, we reduced the amount of stock repurchased during the quarter, decreasing the uses of cash for stock purchases during the quarter and in the first three quarters of 2008, compared to the same periods in 2007.

Debt Management

As of November 8, 2008, we maintained a committed $2.5 billion, five-year revolving credit facility that, unless extended, terminates in 2011. Outstanding borrowings under the credit agreement and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit agreement. In addition to the credit agreement, we maintained three uncommitted money market lines totaling $75 million in the aggregate. The money market lines allow us to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit agreement. As of November 8, 2008, we had net outstanding commercial paper of $240 million and total borrowings under our credit agreement of $395 million, that reduced amounts available under our credit agreement. In addition, as of November 8, 2008, we had borrowings under our money market lines totaling $68 million. The outstanding letters of credit that reduced the funds available under our credit agreement totaled $363 million as of November 8, 2008.

Our bank credit facility and the indentures underlying our publicly issued debt contain various restrictive covenants. As of November 8, 2008, we were in compliance with these financial covenants. Furthermore, management believes it is not reasonably likely that Kroger will fail to comply with these financial covenants in the foreseeable future.

Total debt, including both the current and long-term portions of capital leases and lease-financing obligations, increased $545 million to $8.0 billion as of the end of the third quarter of 2008, from $7.5 billion as of the end of the third quarter of 2007. Total debt decreased $86 million as of the end of the third quarter of 2008 from $8.1 billion as of year-end 2007. The increase as of the end of the third quarter of 2008, compared to the end of the third quarter of 2007, resulted from the net proceeds and payments on senior notes during the last quarter of 2007, along with the issuance of $400 million of senior notes bearing an interest rate of 5.00%, $375 million of senior notes bearing an interest rate of 6.90% and increased borrowings under our money market lines and credit agreement, offset by decreased outstanding commercial paper and the repayment of $200 million of senior notes bearing an interest rate of 6.375% and $750 million of senior notes bearing an interest rate of 7.45% that came due in 2008.

While credit markets remain under stress, we have ample sources of liquidity available on our committed lines of credit to meet both short and long-term financing needs. However, our ability to borrow under our committed lines of credit, including our bank credit facilities, could be impaired if one or more of our lenders under those lines is unwilling or unable to honor its contractual obligation to lend to us.

Common Stock Repurchase Program

During the third quarter of 2008, we invested $87 million to repurchase 3.1 million shares of Kroger stock at an average price of $27.89 per share. For the first three quarters of 2008, we invested $626 million to repurchase 23.7 million shares of Kroger stock at an average price of $26.41 per share. These shares were reacquired under two separate stock repurchase programs. The first is a $1 billion repurchase program that was authorized by Kroger's Board of Directors on January 18, 2008. The second is a program that uses the cash proceeds from the exercises of stock options by participants in Kroger's stock option and long-term incentive plans as well as the associated tax benefits. As of November 8, 2008, we had approximately $493 million remaining under the January 2008 repurchase program. In the third quarter of 2008, to preserve liquidity and financial flexibility, we reduced the amount of stock repurchased during the quarter, decreasing the uses of cash for stock purchases during the quarter and in the first three quarters of 2008, compared to the same periods in 2007.

During the third quarter of 2007, we invested $442 million to repurchase 16.5 million shares of Kroger stock at an average price of $26.77 per share. For the first three quarters of 2007, we invested $1,152 million to repurchase 42.4 million shares of Kroger stock at an average price of $27.15 per share. These shares were reacquired under three separate stock repurchase programs. The first is a $500 million repurchase program that was authorized by Kroger's Board of Directors on May 4, 2006. The second is a $1 billion repurchase program that was authorized by Kroger's Board of Directors on June 26, 2007, which replaced the prior $500 million authorization above. The third is a program that purchases shares using the cash proceeds from the exercises of stock options by participants in Kroger's stock option and long-term incentive plans as well as the associated tax benefits.

CAPITAL EXPENDITURES

Capital expenditures, excluding acquisitions, totaled $604 million for the third quarter of 2008 compared to $555 million for the third quarter of 2007. Year-to-date, capital expenditures, excluding acquisitions, totaled $1.7 billion in 2008 and $1.6 billion in the comparable period in 2007. During the third quarter of 2008, we opened, acquired, expanded or relocated 14 food stores and also completed 55 within-the-wall remodels. During the first three quarters of 2008, we opened, acquired, expanded or relocated 47 food stores and also completed 142 within-the-wall remodels. Total food store square footage increased 1.0% in the third quarter of 2008 from the third quarter of 2007. Excluding acquisitions and operational closings, total food store square footage increased 1.7% over the third quarter of 2007.

CRITICAL ACCOUNTING POLICIES

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Except as noted below, our critical accounting policies are summarized in our 2007 Annual Report on Form 10-K filed with the SEC on April 1, 2008.

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could vary from those estimates.

Fair Value of Financial Instruments

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not expand or require any new fair value measurements. SFAS 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. FASB Staff Position (FSP) 157-2 Partial Deferral of the Effective Date of Statement No. 157(FSP 157-2), deferred the effective date of SFAS No. 157 for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. Effective February 3, 2008, we adopted SFAS 157, except for non-financial assets and non-financial liabilities as deferred until February 1, 2009 by FSP 157-2.

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy defined by SFAS 157 are as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities;

Level 2 - Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;

Level 3 - Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.

For those financial instruments carried at fair value in the consolidated financial statements, the following table summarizes the fair value of these instruments at November 8, 2008:

                         Fair Value Measurements Using



                                   Quoted Prices in
                                    Active Markets                             Significant
                                    for Identical       Significant Other     Unobservable
                                        Assets          Observable Inputs        Inputs
                                      (Level 1)             (Level 2)           (Level 3)         Total
Available-for-Sale Securities     $               13   $                 -   $             -   $        13
Interest Rate Hedges                               -                    16                 -            16
Total                             $               13   $                16   $             -   $        29

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. We are currently evaluating the effect . . .