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

OVERVIEW

First quarter 2009 total sales were $22.8 billion compared with $23.1 billion for the same period of 2008. This decrease in total sales is attributable to the year-over-year decline in retail fuel prices. The average retail price for a gallon of fuel sold at Kroger fuel stations was 41% lower in the first quarter of 2009 compared to the first quarter of 2008. In the first quarter of 2009, identical supermarket sales without fuel increased 3.1%. We continue to see growth across most of our core departments, though overall sales gains were tempered by continued slowness in sales of discretionary general merchandise as well as deflation in produce and milk; and double digit growth in corporate brand items, which carry lower retails compared to national brand items. We are connecting with customers through a combination of better service, improved product variety and quality, a shopping experience that is appealing and convenient, and lower prices. This strategy continues to result in identical supermarket sales growth and create shareholder value.

For the first quarter of 2009, net earnings totaled $435 million, or $0.66 per diluted share. Our Customer 1st strategy continues to serve Kroger customers and shareholders well. Our first quarter performance was a strong start to the year. Our manufacturing plants enjoyed an outstanding quarter as we benefited from strong volume and lower commodity costs. Our logistics operations benefited from lower diesel fuel costs during the quarter. These benefits along with improvements in shrink, advertising and store productivity, when coupled with identical sales growth, delivered value to our customers and our shareholders in the current economic environment.

Based on Kroger's first quarter results, we confirmed our guidance for fiscal year 2009. We anticipate full-year identical sales growth of 3.0% to 4.0%, excluding fuel. This guidance reflects our outlook for product cost inflation of 1.0% to 2.0%. Our fiscal year earnings expectation remains $2.00 to $2.05 per diluted share. This represents earnings per diluted share growth of approximately 4.0% to 7.0% in 2009, excluding the $.02 per diluted share charge in 2008 related to Hurricane Ike. In addition, our shareholder return is enhanced by our dividend by over 1.0%. Please refer to the "Outlook" section for more information on this guidance.

RESULTS OF OPERATIONS

Net Earnings

Net earnings totaled $435 million for the first quarter of 2009, an increase of 12.7% from net earnings of $386 million for the first quarter of 2008. The increase in our net earnings resulted from increased gross profit and identical supermarket sales and a decreased LIFO charge of $23 million pre-tax, compared to a LIFO charge of $40 million pre-tax in 2008.

Our net income produced earnings of $0.66 per diluted share for the first quarter of 2009, which represented an increase of 13.8% over net earnings of $0.58 per diluted share for the first quarter of 2008. Earnings per share growth resulted from increased net earnings combined with the repurchase of 10 million shares of our stock over the past four quarters.

Sales



                                  Total Sales

                                ($ in millions)



                                                       First Quarter
                                                  Percentage
                                                   Increase                Percentage
                                         2009     (Decrease)      2008      Increase
Total supermarket sales without fuel   $ 19,979          3.9 %  $ 19,231          7.6 %
Total supermarket fuel sales              1,622        (32.9 )%    2,417         52.5 %

Total supermarket sales                  21,601         (0.2 )%   21,648         11.2 %
Other sales(1)                            1,198        (19.9 )%    1,496         16.0 %

Total sales                            $ 22,799         (1.5 )% $ 23,144         11.5 %

This decrease in total sales and other sales is attributable to the year-over-year decline in retail fuel prices. The change in our total supermarket sales without fuel was primarily the result of identical supermarket sales increases, inflation in some product costs and the increase in retail square footage. Identical supermarket sales, excluding fuel, increased due to increased transaction count and product cost inflation.

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 our fuel centers 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. Identical supermarket sales include all sales at identical Fred Meyer multi-department stores. Our identical supermarket sales results are summarized in the table below. We used the identical supermarket dollar figures presented to calculate first quarter 2009 percent changes.

                          Identical Supermarket Sales

                                ($ in millions)



                            First Quarter
                           2009        2008
Including fuel centers   $ 20,550    $ 20,785
Excluding fuel centers   $ 19,053    $ 18,473

Including fuel centers       (1.1 )%      9.2 %
Excluding fuel centers        3.1 %       5.8 %

We define a supermarket as comparable when it has been in operation for five full quarters, including expansions and relocations. As is the case for identical supermarket sales, fuel center discounts received at our fuel centers and earned based on in-store purchases are included in all of the supermarket comparable sales results calculations illustrated below. Comparable supermarket sales include all sales at comparable Fred Meyer multi-department stores. Our comparable supermarket sales results are summarized in the table below. We used the comparable supermarket dollar figures presented to calculate first quarter 2009 percent changes.

                          Comparable Supermarket Sales

                                ($ in millions)



                            First Quarter
                           2009        2008
Including fuel centers   $ 21,306    $ 21,483
Excluding fuel centers   $ 19,729    $ 19,075

Including fuel centers       (0.8 )%      9.5 %
Excluding fuel centers        3.4 %       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 was 24.36% for the first quarter of 2009, as compared to 23.07% for the first quarter of 2008. Retail fuel sales lowers 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 first quarter 2009 FIFO gross margin rate increased 5 basis points compared to the first quarter of 2008. This increase resulted primarily from improvements in shrink, advertising, and warehouse expense, as a percent of sales, as well as lower diesel fuel costs, offset by our continued investments in keeping certain retail prices low as part of our Customer 1st strategy.

LIFO Charge

The LIFO charge in the first quarter of 2009 was $23 million and $40 million in 2008. The LIFO charge decreased for the first quarter of 2009, compared to the first quarter of 2008, primarily due to our expected decrease in annualized product cost inflation for 2009 compared to 2008.

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, increased 89 basis points to 17.70% for the first quarter of 2009 from 16.81% for the first quarter of 2008 primarily because our sales decreased as a result of a decline in retail fuel prices. Retail fuel sales and our consolidated non-wholly owned entities lower our OG&A rate due to their OG&A rates, as a percent of sales, being different than our core business. OG&A expenses, as a percent of sales excluding fuel, was flat in the first quarter of 2009 compared to the first quarter of 2008. Excluding both our retail fuel sales and the effect of consolidating non-wholly owned entities, OG&A declined 14 basis points, as a percentage of sales, in the first quarter of 2009 compared to the first quarter of 2008. The decrease in our OG&A rate in 2009, excluding the effect of retail fuel sales and the effect of consolidating non-wholly owned entities, resulted primarily from increased supermarket identical sales growth, reduced expenses related to fuel costs and strong cost controls.

Rent Expense

Rent expense was $200 million, or 0.88% of sales, for the first quarter of 2009, compared to $207 million, or 0.89% of sales, for the first quarter of 2008. The decrease in rent expense, as a percent of sales, resulted from decreased rent expense and our continued strategy to own rather than lease whenever possible. The decrease in rent expense in the first quarter of 2009, in total dollars, compared to the first quarter of 2008, was primarily due to lower lease liabilities for closed stores in the first quarter of 2009 compared to the first quarter of 2008.

Depreciation Expense

Depreciation expense was $453 million, or 1.99% of total sales, for the first quarter of 2009 compared to $433 million, or 1.87% of total sales, for the first quarter of 2008. The increase in depreciation expense, in total dollars, was the result of capital expenditures of $2.2 billion during the last rolling four quarter period ending with the first quarter of 2009. Excluding the effect of retail fuel operations, depreciation, as a percent of sales, increased one basis point in the first quarter of 2009 compared to the same period of 2008.

Interest Expense

Net interest expense was $163 million, or 0.71% of total sales, for the first quarter of 2009 compared to $152 million, or 0.66% of total sales, for the first quarter of 2008. The increase in net interest expense for 2009, when compared to 2008, resulted primarily from a $112 million increase in total debt at May 23, 2009, compared to May 24, 2008.

Income Taxes

Our effective income tax rate was 36.7% for the first quarter of 2009 and 36.8% for the first quarter of 2008. The 2009 and 2008 effective income tax rate differed from the federal statutory rate primarily due to the effect of state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Information

Net cash provided by operating activities

We generated $1.3 billion of cash from operating activities during the first quarters of 2009 and 2008. The cash provided by operating activities came from strong net earnings adjusted for non-cash expenses. In addition, changes in our operating assets and liabilities also affected the amount of cash provided by our operating activities. We realized increases in cash from changes in operating assets and liabilities of $484 million in the first quarter of 2009 and $377 million in the first quarter of 2008. The increase in the change in operating assets and liabilities in the first quarter of 2009, compared to the same period in 2008, resulted primarily from a decrease in income tax receivables and accrued expenses, offset partially by increased trade accounts payable and prepaid expenses. Prepaid expenses decreased significantly since year-end, reflecting prepayments of certain employee benefits at year-end. In the first quarter of 2009, we contributed $200 million to Kroger sponsored pension plans. During the first quarter of 2008, we did not make a voluntary cash contribution to Kroger sponsored pension plans.

The amount of cash paid for income taxes decreased in the first quarter of 2009 compared to the first quarter of 2008 due to applying our fiscal 2008 overpayment of income taxes to current year taxes.

Net cash used by investing activities

We used $634 million of cash for investing activities during the first quarter of 2009 compared to $633 million during the first quarter of 2008. The amount of cash used for investing activities remained consistent in the first quarter of 2009 versus 2008 due to increased payments for capital expenditures, offset by decreased payments for acquisitions.

Net cash used by financing activities

We used $279 million of cash for financing activities in the first quarter of 2009 compared to $709 million in the first quarter of 2008. The decrease in the amount of cash used for financing activities was primarily related to the decrease in the amount of treasury stock purchased in the first quarter of 2009 compared to the same period in 2008. To preserve liquidity and financial flexibility, we reduced the amount of stock repurchased during the first quarter of 2009 compared to the same period in 2008. Decreased proceeds from the issuance of long-term debt and capital stock offset decreased payments on long-term debt. Proceeds from the issuance of common stock resulted from exercises of employee stock options.

Debt Management

As of May 23, 2009, 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 $100 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 May 23, 2009, we did not have any borrowings under the credit facility, money market lines or outstanding commercial paper. The outstanding letters of credit that reduced the funds available under our credit agreement totaled $329 million as of May 23, 2009.

Our bank credit facility and the indentures underlying our publicly issued debt contain various restrictive covenants. As of May 23, 2009, 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 $112 million to $7.9 billion as of the end of the first quarter of 2009, from $7.8 billion as of the end of the first quarter of 2008. Total debt decreased $149 million as of the end of the first quarter of 2009 from $8.1 billion as of year-end 2008. The increase as of the end of the first quarter of 2009, compared to the end of the first quarter of 2008, resulted from the issuance of $600 million of senior notes bearing an interest rate of 7.50% in the fourth quarter of 2008, offset by decreased outstanding commercial paper and payments on our money market lines. As of May 23, 2009, our cash and temporary cash investments were $638 million compared $263 million as of January 31, 2009.

Common Stock Repurchase Program

During the first quarter of 2009, we invested $20 million to repurchase 1 million shares of Kroger stock at an average price of $20.83 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 May 23, 2009, we had approximately $476 million remaining under the January 2008 repurchase program. In the first quarter of 2009, to preserve liquidity and financial flexibility, we reduced the amount of stock repurchased during the quarter, decreasing the uses of cash for treasury stock purchases during the quarter, compared to the same period in 2008.

CAPITAL EXPENDITURES

Capital expenditures, excluding acquisitions, totaled $653 million for the first quarter of 2009 compared to $637 million for the first quarter of 2008. During the first quarter of 2009, we opened, acquired, expanded or relocated 11 food stores and also completed 37 within-the-wall remodels. Total food store square footage increased 1.4% from the first quarter of 2008. Excluding acquisitions and operational closings, total food store square footage increased 1.8% in the first quarter of 2009 as compared to the first quarter of 2008.

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 2008 Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

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.

RECENTLY ADOPTED ACCOUNTING STANDARDS

In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 160 (SFAS 160), which establishes accounting and reporting standards for a parent's noncontrolling interest in a subsidiary and the accounting for future ownership changes with respect to the subsidiary. This standard defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary that is not attributable, directly or indirectly, to a parent. SFAS 160 requires, among other things, that a noncontrolling interest be clearly identified, labeled and presented in the consolidated balance sheet as equity, but separate from the parent's equity; that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and that if a subsidiary is deconsolidated, the parent measure at fair value any noncontrolling equity investment that the parent retains in the former subsidiary and recognize a gain or loss in net income based on the fair value of the non-controlling equity investment. We adopted SFAS 160 effective February 1, 2009, and applied it retrospectively. As a result, we reclassified noncontrolling interests in amounts of $95 million from the mezzanine section of the Consolidated Balance Sheet to equity in the January 31, 2009 Consolidated Balance Sheet. Certain reclassifications to the Consolidated Statement of Operations have been made to prior period amounts to conform to the presentation of the current period under SFAS 160. Recorded amounts for prior periods previously presented as Net Earnings, which are now presented as Net Earnings Attributable to The Kroger Co., have not changed as a result of the adoption of SFAS 160.

Effective February 1, 2009, we adopted FASB Staff Position ("FSP") No. FAS 157-2, Effective Date of Statement No. 157(FSP 157-2). FSP 157-2 deferred the effective date of SFAS No. 157, Fair Value Measurements, for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. See Note 12 to the Consolidated Financial Statements for further discussion of the adoption of FSP 157-2.

Effective February 1, 2009, we adopted SFAS No. 141 (Revised 2007), Business Combinations (SFAS 141R), which replaces SFAS No. 141. SFAS 141R further expands the definitions of a business and the fair value measurement and reporting in a business combination. All business combinations completed after February 1, 2009, will be accounted for under SFAS 141R. We did not complete any business combinations during the first quarter of fiscal 2009.

Effective February 1, 2009, we adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires enhanced disclosures on an entity's derivative and hedging activities. The new disclosures required by this standard are included in Note 11 to the Consolidated Financial Statements.

Effective February 1, 2009, we adopted FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. It clarifies 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. See Note 6 to the Consolidated Financial Statements for further discussion of its adoption.

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers' Disclosure about Postretirement Benefit Plan Assets (FSP 132(R)-1. FSP 132(R)-1 provides additional guidance on employers' disclosures about the plan assets of defined benefit pension or other postretirement plans. FSP 132(R)-1 requires disclosures about how investment allocation decisions are made, the fair value of each major category of plan assets, valuation techniques used to develop fair value measurements of plan assets, the impact of measurements on changes in plan assets when using significant unobservable inputs and significant concentrations of risk in the plan assets. FSP 132(R)-1 will become effective for our fiscal year beginning January 31, 2010. We are currently evaluating the effect the adoption of FSP 132(R)-1 will have on our Consolidated Financial Statements.

In April 2009, the FASB issued three new FASB Staff Positions all of which impact the accounting and disclosure related to certain financial instruments. FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the fair value of financial instruments on an interim basis in addition to the annual disclosure requirements. All three FSPs will become effective for our second quarter beginning May 24, 2009. We do not expect adoption of these FSPs to have a material effect on our Consolidated Financial Statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events(SFAS 165). SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 will become effective for our second quarter beginning May 24, 2009. We do not expect adoption of SFAS 165 to have a material effect on our Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). SFAS 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 will become effective for our fiscal year beginning January 31, 2010. We are currently evaluating the effect the adoption of SFAS 167 will have on our Consolidated Financial Statements.

OUTLOOK

This discussion and analysis contains certain forward-looking statements about Kroger's future performance. These statements are based on management's assumptions and beliefs in light of the information currently available. Such statements relate to, among other things: projected change in net earnings; identical supermarket sales growth; expected pension plan contributions; our ability to generate operating cash flow; projected capital expenditures; square footage growth; opportunities to reduce costs; cash flow requirements; and our operating plan for the future; and are indicated by words such as "comfortable," "committed," "will," "expect," "goal," "should," "intend," "target," "believe," "anticipate," "plan," and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.

Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21 E of the Securities Exchange Act of 1934. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially.

†        We expect earnings per diluted share in the range of $2.00-$2.05 for
. . .