Fitch Affirms Kroger's IDR at 'BBB'; Outlook Stable

Business Wire, August 30, 2007

NEW YORK -- Fitch has affirmed The Kroger Co. (Kroger) ratings as follows:

--Long Term Issuer Default Rating (IDR) at 'BBB';

--$2.5 billion Bank Credit Facility at 'BBB';

--Senior Unsecured Notes at 'BBB';

--Short Term IDR at 'F2';

--Commercial Paper (CP) at 'F2'.

The Rating Outlook is Stable.

As of May 26, 2007, Kroger had $6.6 billion of debt outstanding, including capital leases.

The ratings reflect Kroger's well executed operating strategy which has led to positive operating trends, its position as one of the largest U.S. supermarket companies with a diverse store base, and its strong cash flow generation. Also considered is the highly competitive operating environment, which will continue to pressure operating margins over time and the company's dedication to returning funds to shareholders.

Kroger's Customer 1st operating strategy, which is primarily focused on improving the customers' shopping experience through competitive pricing, service, merchandise, and store experience, has allowed it to maintain strong market share positions and positive operating trends across its markets. Kroger has continued to generate mid-single digit non-fuel identical store sales, among the strongest in the industry, and strengthen its market shares, with the #1 or #2 market share in 38 of its 44 major markets in fiscal 2006.

At the same time, Kroger has focused on reducing costs, maintaining stable operating profit margins and competitive pricing despite higher energy and product costs. Since 2005, operating EBITDAR margins have remained between 6.5% and 6.2%. As a result, cash flow generation has remained strong, allowing Kroger to reduce debt balances, which together with stronger operating trends has resulted in strengthened credit metrics. For the latest twelve months ended May 26, 2007, leverage, measured by total adjusted debt to operating EBITDAR, improved to 2.8 times (x) from 3.2x in fiscal 2005 and EBITDAR coverage of interest and rents was 3.7x up from 3.4x over the same period. Going forward, Fitch expects Kroger to return excess cash flow to shareholders through dividends and share repurchases. Nonetheless, Kroger is expected to maintain a prudent financial strategy and its strong credit profile over time.

Competition in the food retail segment remains intense and the ability of industry participants to maintain operating profit margins will remain challenging. As one of the largest supermarket retailers in the U.S., generating over $67 billion in revenues and operating 2,458 food stores across an extensive geographic area and diverse store formats, Kroger benefits from its broad experience competing against both traditional and non-traditional food retailers. Over the longer term, as the supermarket industry continues to consolidate, Fitch anticipates that Kroger could participate in future merger and acquisition activity but that this activity would be balanced with its capital allocation strategy over time.

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