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

OVERVIEW

Third quarter 2012 total sales were $21.8 billion compared with $20.6 billion for the same period of 2011. This increase was attributable to identical supermarket sales increases, increased fuel gallon sales and an increase in the average retail fuel price. Identical supermarket sales without fuel increased 3.2% in the third quarter of 2012, compared to the third quarter of 2011, primarily due to an increased transaction count, an increase in the number of households shopping with us, an increase in the total units each household purchased and product cost inflation. This marks positive identical supermarket sales growth for 36 consecutive quarters. Every supermarket store department had positive identical sales during the third quarter. Total sales for the first three quarters of 2012 were $72.6 billion compared with $69.0 billion for the same period of 2011. This increase was attributable to identical supermarket sales increases, increased fuel gallon sales and an increase in the average retail fuel price. Identical supermarket sales without fuel increased 3.7% in the first three quarters of 2012, compared to the same period in 2011, primarily due to an increased transaction count, an increase in the average sale per shopping trip, an increase in the number of households shopping with us and product cost inflation. Our Customer 1st strategy continues to deliver solid results.

For the third quarter of 2012, net earnings totaled $317 million, or $0.60 per diluted share, compared to $196 million, or $0.33 per diluted share for the same period of 2011. This includes a $0.14 per diluted share benefit from a settlement with Visa and MasterCard and from a reduction in our obligation to fund the UFCW consolidated pension fund created in January 2012 ("adjusted items"). Excluding these adjusted items, net earnings totaled $243 million, or $0.46 per diluted share, for the third quarter of 2012. The adjustments for these items resulted in a reduction of operating, general and administrative expense of $115 million ($74 million after-tax) in the third quarter of 2012. We believe the adjusted earnings per diluted share figure presents a more accurate year-over year comparison of our financial results because the adjusted items were not the result of our normal operations. The net earnings and adjusted earnings per diluted share for the third quarter of 2012 also includes a $0.02 benefit from a lower Last-In, First-Out ("LIFO") charge due to the Company reducing its estimated LIFO charge to $125 million from $150 million for 2012. For the first three quarters of 2012, net earnings totaled $1.0 billion, or $1.89 per diluted share, compared to $909 million, or $1.50 per diluted share for the same period of 2011. Excluding the adjusted items, net earnings totaled $961 million, or $1.76 per diluted share, for the first three quarters of 2012. Please refer to the "Net Earnings" section for more information related to the increases in net earnings for both the third quarter and the first three quarters of 2012, compared to the third quarter and the first three quarters of 2011.

Based on our results for the first three quarters of 2012, we have increased both the lower and upper range of our guidance for net earnings per diluted share, excluding the adjusted items, for fiscal year 2012. Please refer to the "Outlook" section for more information on our expectations. Our Customer 1st strategy continues to increase customer loyalty, identical supermarket sales and market share. As a result, we are rewarding shareholders through net earnings per diluted share growth, increasing dividends over time and share buybacks.

RESULTS OF OPERATIONS

Net Earnings

Net earnings totaled $317 million for the third quarter of 2012, an increase of 61.7% from net earnings of $196 million for the third quarter of 2011. Net earnings totaled $243 million, excluding the adjusted items, for the third quarter of 2012, an increase of 24.0% from net earnings of $196 million for the third quarter of 2011. The increase in our net earnings, excluding the adjusted items, for the third quarter of 2012, compared to the third quarter of 2011, resulted primarily from a decrease in our LIFO charge and increases in FIFO non-fuel operating profit and earnings from our fuel operations. The increase in FIFO non-fuel operating profit, excluding the adjusted items, for the third quarter of 2012, compared to the third quarter of 2011, resulted primarily from increased supermarket sales, productivity improvements, effective cost controls, increased pharmacy results, decreased incentive compensation expense and lower operating expenses resulting from the consolidation of four multi-employer pension plans in the prior year, partially offset by continued investments in lower prices for our customers and increases in health care costs. The increase in earnings from our fuel operations for the third quarter of 2012, compared to the third quarter of 2011, resulted primarily from increases in fuel gallons sold and increases in the margin per gallon of fuel sold.

Net earnings totaled $1.0 billion for the first three quarters of 2012, an increase of 13.9% from net earnings of $909 million for the first three quarters of 2011. Net earnings, excluding the adjusted items, totaled $961 million for the first three quarters of 2012, an increase of 5.7% from net earnings of $909 million for the first three quarters of 2011. The increase in our net earnings, excluding the adjusted items, for the first three quarters of 2012, compared to the same period in 2011, resulted primarily from a decrease in our LIFO charge and increases in FIFO non-fuel operating profit and earnings from our fuel operations, offset partially by an increase in our effective tax rate and interest expense. The increase in FIFO non-fuel operating profit, excluding the adjusted items, for the first three quarters of 2012, compared to the same period in 2011, resulted primarily from the benefit of increased supermarket sales, productivity improvements, effective cost controls, increased pharmacy results, decreased incentive compensation expense and the benefit received in lower operating expenses from the consolidation of four multi-employer pension plans in the prior year, partially offset by continued investments in lower prices for our customers and increases in health care costs. The increase in earnings from our fuel operations for the first three quarters of 2012, compared to the first three quarters of 2011, resulted primarily from increases in fuel gallons sold. Our effective tax rate increased in the first three quarters of 2012, compared to the same period in 2011, primarily due to the favorable resolution of certain tax issues in the second quarter of 2011.

Net earnings of $0.60 per diluted share for the third quarter of 2012 represented an increase of 81.8% over net earnings of $0.33 per diluted share for the third quarter of 2011. Net earnings of $0.46 per diluted share, excluding the adjusted items, for the third quarter of 2012 represented an increase of 39.4% over net earnings of $0.33 per diluted share for the third quarter of 2011. Net earnings per diluted share, excluding the adjusted items, increased in the third quarter of 2012, compared to the third quarter of 2011, due to increased net earnings and the repurchase of 65 million common shares over the past four quarters resulting in a lower weighted average number of shares outstanding.

Net earnings of $1.89 per diluted share for the first three quarters of 2012 represented an increase of 26.0% over net earnings of $1.50 per diluted share for the first three quarters of 2011. Net earnings of $1.76 per diluted share, excluding the adjusted items, for the first three quarters of 2012 represented an increase of 17.3% over net earnings of $1.50 per diluted share for the first three quarters of 2011. Net earnings per diluted share, excluding the adjusted items, increased in the first three quarters of 2012, compared to the first three quarters of 2011, due to increased net earnings and the repurchase of 65 million common shares over the past four quarters resulting in a lower weighted average number of shares outstanding.

Management believes adjusted net earnings (and adjusted net earnings per diluted share) are useful metrics to investors and analysts because the amounts referenced above in net earnings and net earnings per diluted share are not directly related to our day-to-day business. Adjusted net earnings (and adjusted net earnings per diluted share) are non-generally accepted accounting principle ("non-GAAP") financial measures and should not be considered alternatives to net earnings (and net earnings per diluted share) or any other generally accepted accounting principle ("GAAP") measure of performance. Adjusted net earnings (and adjusted net earnings per diluted share) should not be reviewed in isolation or considered substitutes for our financial results as reported in accordance with GAAP. Management uses adjusted earnings (and adjusted net earnings per diluted share) as it believes these measures are more meaningful indicators of operating performance since, as adjusted, those earnings relate more directly to our day-to-day operations. Management also uses adjusted earnings (and adjusted net earnings per diluted share) as a performance metric for management incentive programs, and to measure our progress against internal budgets and targets.

Sales



                                  Total Sales

                                 (in millions)



                                          Third Quarter Ended                                           Three Quarters Ended
                       November 3,     Percentage     November 5,     Percentage      November 3,     Percentage     November 5,     Percentage
                          2012          Increase         2011         Increase(2)        2012          Increase         2011         Increase(3)
Total supermarket
sales without
fuel                  $      16,716           3.6 %  $      16,135            5.1 %  $      56,066           3.9 %  $      53,944            5.0 %
Fuel sales                    4,520          15.2 %          3,922           40.1 %         14,643          10.7 %         13,231           45.7 %
Other sales(1)                  571           6.3 %            537            4.3 %          1,889           5.3 %          1,794            6.2 %

Total sales           $      21,807           5.9 %  $      20,594           10.3 %  $      72,598           5.3 %  $      68,969           10.9 %

(2) This column represents the percentage increase in the third quarter of 2011, compared to the third quarter of 2010.

(3) This column represents the percentage increase in the first three quarters of 2011, compared to the first three quarters of 2010.

The increase in total sales for the third quarter of 2012, compared to the third quarter of 2011, was primarily the result of our identical supermarket sales increase, excluding fuel, of 3.2% and an increase in fuel sales of 15.2%. The increase in total supermarket sales without fuel for the third quarter of 2012, compared to the third quarter of 2011, was primarily the result of our identical supermarket sales increase, excluding fuel of 3.2%. Total fuel sales increased in the third quarter of 2012, compared to the same period of 2011, due to an increase in fuel gallons sold of 8.3% and an increase in the average retail fuel price of 6.4%. The increase in the average retail fuel price was caused by an increase in the product cost of fuel. Identical supermarket sales, excluding fuel, increased primarily due to increased transaction count, an increase in the number of households shopping with us, an increase in the total units each household purchased and product cost inflation.

The increase in total sales for the first three quarters of 2012, compared to the same period of 2011, was primarily the result of our identical supermarket sales increase, excluding fuel, of 3.7% and an increase in fuel sales of 10.7%. The increase in total supermarket sales without fuel for the first three quarters of 2012, compared to the same period of 2011, was primarily the result of our identical supermarket sales increase, excluding fuel of 3.7%. Total fuel sales increased in the first three quarters of 2012, compared to the same period of 2011, primarily due to a 8.2% increase in fuel gallons sold and an increase in the average retail fuel price of 2.3%. Identical supermarket sales, excluding fuel, increased primarily due to increased transaction count, an increase in the average sale per shopping trip, an increase in the number of households shopping with us 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 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 and reduce our identical supermarket sales results. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Identical supermarket sales include sales from all departments 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 below to calculate percentage changes for the third quarter and the first three quarters of 2012.

                          Identical Supermarket Sales

                                ($ in millions)



                                              Third Quarter
                          November 3,    Percentage    November 5,    Percentage
                             2012         Increase        2011        Increase(1)
Including fuel centers   $      19,457          5.2 % $      18,497           9.4 %
Excluding fuel centers   $      16,057          3.2 % $      15,555           5.0 %

                          Identical Supermarket Sales

                                ($ in millions)



                                           Three Quarters Ended
                          November 3,    Percentage    November 5,    Percentage
                             2012         Increase        2011        Increase(1)
Including fuel centers   $      65,001          4.8 % $      62,002           9.9 %
Excluding fuel centers   $      53,978          3.7 % $      52,039           4.9 %

Gross Margin and FIFO Gross Margin

Our gross margin rate was 20.29% for the third quarter of 2012, as compared to 20.57% for the third quarter of 2011. Our gross margin rate was 20.44% for the first three quarters of 2012, as compared to 20.92% for the first three quarters of 2011. The decrease in the third quarter of 2012, compared to the third quarter of 2011, resulted primarily from increased fuel sales, continued investments in lower prices for our customers and increased shrink and warehouse and transportation costs, offset slightly by a decrease in the LIFO charge and advertising costs as a percentage of sales. The decrease in the first three quarters of 2012, compared to the first three quarters of 2011, resulted primarily from increased fuel sales, continued investments in lower prices for our customers and increased shrink costs, offset slightly by a decrease in the LIFO charge as a percentage of sales. Retail fuel sales lower our gross margin rate due to the very low gross margin on retail fuel sales as compared to non-fuel sales.

We calculate First-In, First-Out ("FIFO") gross margin as sales minus merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the LIFO charge. Merchandise costs exclude depreciation and rent expenses. Our LIFO charge was $15 million for the third quarter of 2012 and $62 million for the third quarter of 2011. Our LIFO charge was $96 million for the first three quarters of 2012 and $142 million for the first three quarters of 2011. FIFO gross margin is a non-GAAP financial measure and should not be considered as an alternative to gross margin or any other GAAP measure of performance. FIFO gross margin should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. FIFO gross margin is an important measure used by management to evaluate merchandising and operational effectiveness. Management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness.

Our FIFO gross margin rate was 20.35% for the third quarter of 2012, as compared to 20.87% for the third quarter of 2011. 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 third quarter 2012 FIFO gross margin rate decreased 25 basis points, as a percentage of sales, compared to the third quarter of 2011. This decrease in the third quarter of 2012, compared to the third quarter of 2011, resulted primarily from continued investments in lower prices for our customers and increased shrink and warehouse and transportation costs as a percentage of sales.

Our FIFO gross margin rate was 20.58% for the first three quarters of 2012, as compared to 21.13% for the first three quarters of 2011. Excluding the effect of retail fuel operations, as a percentage of sales, our FIFO gross margin rate decreased 42 basis points for the first three quarters of 2012, compared to the first three quarters of 2011. This decrease in the first three quarters of 2012, compared to the first three quarters of 2011, resulted primarily from continued investments in lower prices for our customers and increased shrink and warehouse costs as a percentage of sales.

LIFO Charge

The LIFO charge was $15 million in the third quarter of 2012 and $62 million in the third quarter of 2011. The LIFO charge decreased in the third quarter of 2012, compared to the third quarter of 2011, primarily due to lowering our expected annualized product cost inflation for 2012 compared to 2011 in the third quarter of 2012.

The LIFO charge was $96 million in the first three quarters of 2012 and $142 million in the first three quarters of 2011. The LIFO charge decreased in the first three quarters of 2012, compared to the same periods in 2011, primarily due to our expected decrease in annualized product cost inflation for 2012 compared to 2011.

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 percentage of sales, decreased 95 basis points to 15.16% for the third quarter of 2012 from 16.11% for the third quarter of 2011. OG&A expenses, as a percentage of sales excluding the adjusted items, decreased 42 basis points to 15.69% for the third quarter of 2012 from 16.11% for the third quarter of 2011, primarily due to the benefit of increased supermarket sales, productivity improvements, effective cost controls, the benefit received in lower operating expenses from the consolidation of four UFCW multi-employer pension plans in the prior year and decreased incentive compensation expense, offset partially by increased health care costs. Retail fuel sales lower our OG&A rate due to the very low OG&A rate, as a percentage of sales, of retail fuel sales compared to non-fuel sales. OG&A expenses, as a percentage of sales excluding fuel and the adjusted items, decreased 15 basis points in the third quarter of 2012, compared to the third quarter of 2011. This decrease in our OG&A rate, as a percentage of sales excluding the effect of fuel and the adjusted items, resulted primarily from increased supermarket sales, productivity improvements, effective cost controls, lower operating expenses resulting from the consolidation of four UFCW multi-employer pension plans in the prior year and decreased incentive compensation expense, offset partially by increased health care costs.

OG&A expenses, as a percentage of sales, decreased 59 basis points to 15.37% for the first three quarters of 2012 from 15.96% for the first three quarters of 2011. OG&A expenses, as a percentage of sales excluding fuel and the adjusted items, decreased 31 basis points in the first three quarters of 2012 compared to the first three quarters of 2011. This decrease in our OG&A rate, as a percentage of sales excluding the effect of fuel and the adjusted items, resulted primarily from increased supermarket sales, productivity improvements, effective cost controls, lower operating expenses resulting from the consolidation of four UFCW multi-employer pension plans in the prior year and decreased incentive compensation expense, offset partially by increased health care costs.

Rent Expense

Rent expense was $141 million, or 0.64% of sales, for the third quarter of 2012, compared to $141 million, or 0.68% of sales, for the third quarter of 2011. For the first three quarters of 2012, rent expense was $471 million, or 0.65% of sales, compared to $475 million, or 0.69% of sales, in the first three quarters of 2011. Rent expense, as a percentage of sales excluding fuel, decreased 3 basis points in the third quarter of 2012 compared to the third quarter of 2011. Rent expense, as a percentage of sales excluding fuel, decreased 4 basis points in the first three quarters of 2012 compared to the first three quarters of 2011. These decreases in rent expense, as a percentage of sales both including and excluding fuel, primarily reflect our continued emphasis on owning rather than leasing, whenever possible, and the benefit of increased supermarket sales.

Depreciation Expense

Depreciation expense was $382 million, or 1.75% of total sales, for the third quarter of 2012 compared to $372 million, or 1.81% of total sales, for the third quarter of 2011. The increase in depreciation expense, in total dollars, was the result of additional depreciation on capital expenditures, including acquisitions and lease buyouts of $1.9 billion, during the rolling four quarter period ending with the third quarter of 2012. The decrease in depreciation expense for the third quarter of 2012, compared to the third quarter of 2011, as a percentage of sales, was primarily due to the benefit of increased supermarket sales. Excluding the effect of retail fuel operations, depreciation, as a percentage of sales, decreased three basis points in the third quarter of 2012, compared to the same period of 2011.

Depreciation expense was $1.3 billion, or 1.74% of total sales, for the first three quarters of 2012 compared to $1.2 billion, or 1.81% of total sales, for the first three quarters of 2011. The increase in depreciation expense, in total dollars, was the result of additional depreciation on capital expenditures, including acquisitions and lease buyouts of $1.9 billion, during the rolling four quarter period ending with the third quarter of 2012. The decrease in depreciation expense for the first three quarters of 2012, compared to the first three quarters of 2011, as a percentage of sales, was primarily due to the benefit of increased supermarket sales. Excluding the effect of retail fuel operations, depreciation, as a percentage of sales, decreased six basis points in the first three quarters of 2012, compared to the same period of 2011.

Operating Profit and FIFO Operating Profit

Operating profit was $596 million, or 2.73% of sales, for the third quarter of 2012, compared to $405 million, or 1.97% of sales, for the third quarter of 2011. Operating profit, excluding the adjusted items, was $481 million, or 2.21% of sales, for the third quarter of 2012. Operating profit was $1.9 billion, or 2.68% of sales, for the first three quarters of 2012, compared to $1.7 billion, or 2.47% of sales, for the first three quarters of 2011. Operating profit, excluding the adjusted items, was $1.8 billion, or 2.52% of sales, for the third quarter of 2012.

Operating profit, as a percentage of sales excluding the adjusted items, increased 24 basis points in the third quarter of 2012, compared to the third quarter of 2011, primarily due to improvements in operating, general and administrative expenses, rent, depreciation, advertising expenses and the LIFO charge, offset partially by continued investments in lower prices for our customers and increased shrink and warehouse and transportation costs. Operating profit, as a percentage of sales excluding the adjusted items, increased five basis points in the first three quarters of 2012, compared to the first three quarters of 2011, primarily due to improvements in operating, general and administrative expenses, rent, depreciation and the LIFO charge, offset partially by continued investments in lower prices for our customers and increased shrink costs.

We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is a non-GAAP financial measure and should not be considered as an alternative to operating profit or any other GAAP measure of performance. FIFO operating profit should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. FIFO operating profit is an important measure used by management to evaluate operational effectiveness. Management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness. Since fuel discounts are earned based on in-store purchases, fuel operating profit does not include fuel discounts, which are allocated to our in-store supermarket location departments. We also derive operating, general and administrative expenses, rent and depreciation and amortization through the use of estimated allocations in the calculation of fuel operating profit.

FIFO operating profit was $611 million, or 2.80% of sales, for the third quarter of 2012, compared to $467 million, or 2.27% of sales, for the third quarter of 2011. FIFO operating profit, excluding the adjusted items, was $496 million, or 2.27% of sales, for the third quarter of 2012. Retail fuel sales lower our FIFO operating profit rate due to the very low FIFO operating profit rate, as a . . .