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Labor Dispute Affects Kroger's First-quarter Results

CINCINNATI - The labor dispute affecting stores in southern California reduced the Kroger Co.'s net earnings by $71.6 million, or 10 cents per diluted share, for the quarter ended May 22, the retailer announced yesterday.

Kroger reported net income of $262.8 million, or 35 cents per diluted share, for the first quarter ended May 22. Net earnings in the year-ago period were $351.5 million, or 46 cents per diluted share. Those results include items that positively affected net earnings by $4.1 million, or 1 cent per diluted share.

Total sales for the 16-week first quarter of fiscal 2004 increased 3.9 percent to $16.9 billion. Identical food-store sales, including fuel, increased 1.3 percent and, excluding fuel, increased 0.3 percent.

Excluding, for the entire quarter, the Ralphs and Food 4 Less stores affected by the work stoppage, identical food-store sales, including fuel, increased 1.6 percent and, excluding fuel, increased 0.5 percent. Kroger estimates that product cost inflation, including fuel, was 2.3 percent and, excluding fuel, was 1.6 percent.

"We are pleased that Kroger continues to grow our identical food-store sales in a challenging operating environment," said David B. Dillon, Kroger c.e.o. "But there is more to be done. We plan to continue making investments in pricing, customer service, and product variety to deliver strong, sustainable sales growth."

Also in the first quarter:

-First-in, first-out (FIFO) gross margin was 26.01 percent, a decrease of 72 basis points from the first quarter of 2003. FIFO gross margin at the supermarket divisions not affected by the labor dispute, and excluding the effect of fuel, declined by 17 basis points.

-Operating, general, and administrative costs increased 41 basis points to 19.04 percent. Operating, general, and administrative expenses (OG&A) at the supermarket divisions not affected by the labor dispute, and excluding the effect of fuel, increased approximately 23 basis points. The cost of providing health care and pension benefits to associates accounted for all of the increase.

-Total debt was $8.0 billion, a decrease of $258.3 million as compared with the first quarter of 2003. A lower market-value adjustment for interest-rate swaps and the implementation of Financial Accounting Standards Board (FASB) Interpretation No. 46 accounted for $139.8 million of this decline.

-Kroger repurchased 9.0 million shares of common stock at an average price of $16.62 per share, for a total investment of $149.3 million.

Kroger opened, expanded, relocated, or acquired 32 food stores, and closed 22 stores in the quarter. Total food store square footage increased 2.4 percent over the prior year. Capital expenditures totaled $456.7 million.

Dillon said Kroger is pleased with Ralphs' sales and earnings following the end of the southern California labor dispute in late February. "Our associates in Southern California did a great job of quickly getting our stores back in shape and providing our customers with outstanding service," he noted.

For 2004 Dillon continues to expect identical food-store sales (excluding fuel) to be stronger than in the fourth quarter of 2003, and reiterated that the company expects earnings in 2004 to be lower than in 2003, excluding the effect of the labor disputes and unusual items, as Kroger continues to invest in lower prices, improved customer service and product variety.

"Kroger is off to a good start with sales in 2004," he said. "We are squarely focused on providing customers with better service, selection, and value each time they shop in our stores. We have a clear strategy in place to build our business profitably. We are reducing our costs and will continue to reinvest those savings in Kroger's core business to improve our customers' shopping experience and consistently deliver better value."
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