KROGER CO, 10-Q, 1999-07-06

KROGER CO
10-Q, 1999-07-06
GROCERY STORES

Previous: KENTUCKY CENTRAL LIFE INSURANCE CO, 8-K, 1999-07-06

Next: COYOTE NETWORK SYSTEMS INC, 8-K, 1999-07-06

<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended May 22, 1999 or

[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

COMMISSION FILE NUMBER 1-303

THE KROGER CO.

An Ohio Corporation I.R.S. Employer Identification
No. 31-0345740

1014 Vine Street, Cincinnati, OH 45202
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (513) 762-4000

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No .
---------- ---------

There were 829,453,186 shares of Common Stock ($1 par value) outstanding as of
June 28, 1999.

<PAGE> 2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The unaudited information for the quarter ended May 22, 1999 includes the
results of operations of The Kroger Co. and its consolidated subsidiaries, for
the 16 week quarter ended May 22, 1999. Except as otherwise specifically
provided, information in these consolidated financial statements excludes Fred
Meyer, Inc., and its subsidiaries because the acquisition by merger was not
completed until May 27, 1999. The unaudited information for the quarter ended
March 21, 1998 includes the results of operations of The Kroger Co. for the 12
week quarter ended March 21, 1998, and its wholly owned subsidiary Dillon
Companies, Inc. for the 13 week quarter ended March 28, 1998. In the opinion of
management, the information reflects all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair presentation of results of
operations for such periods but should not be considered as indicative of
results for a full year.

CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
(unaudited)

<TABLE>
<CAPTION>
Quarter Ended
-----------------------
May 22, March 21,
1999 1998
---------- ---------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,789 $6,389
------ ------
Costs and expenses
Merchandise costs, including warehousing and transportation. . . 6,645 4,956
Operating, general and administrative. . . . . . . . . . . . . . 1,545 1,109
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 84
Depreciation and amortization. . . . . . . . . . . . . . . . . . 136 93
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 77 64
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,509 6,306
------ ------

Earnings before tax expense and extraordinary loss. . . . . . . . 280 83
Tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 32
------ ------

Earnings before extraordinary loss. . . . . . . . . . . . . . . . 176 51
Extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . . - (4)
------ ------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ 176 $ 47
====== ======

Basic earnings per common share:
Earnings from operations . . . . . . . . . . . . . . . . . . . . $ .34 $ .10
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . - (.01)
------ ------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ .34 $ .09
====== ======

Average number of common shares used in
basic calculation. . . . . . . . . . . . . . . . . . . . . . . . 515 510

Diluted earnings per common share:
Earnings from operations . . . . . . . . . . . . . . . . . . . . $ .33 $ .10
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . - (.01)
------ ------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ .33 $ .09
====== ======

Average number of common shares used in
diluted calculation. . . . . . . . . . . . . . . . . . . . . . . 535 530
</TABLE>

- --------------------------------------------------------------------------------

The accompanying notes are an integral part
of the consolidated financial statements.

2
<PAGE> 3

CONSOLIDATED BALANCE SHEET
(in millions, except per share amounts)
(unaudited)

<TABLE>
<CAPTION>
May 22, January 30,
1999 1999
------ ------
<S> <C> <C>
ASSETS
Current assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 68 $ 85
Receivables . . . . . . . . . . . . . . . . . . . . . . 379 410
Inventories:
FIFO cost . . . . . . . . . . . . . . . . . . . . . . 2,213 2,273
Less LIFO reserve . . . . . . . . . . . . . . . . . . (479) (473)
------ ------
1,734 1,800

Property held for sale. . . . . . . . . . . . . . . . . 17 8
Prepaid and other current assets. . . . . . . . . . . . 357 426
------ ------
Total current assets. . . . . . . . . . . . . . . . 2,555 2,729

Property, plant and equipment, net. . . . . . . . . . . . 3,929 3,806
Investments and other assets. . . . . . . . . . . . . . . 250 244
------ ------
Total Assets. . . . . . . . . . . . . . . . . . . . $6,734 $6,779
====== ======

LIABILITIES
Current liabilities
Current portion of long-term debt . . . . . . . . . . . $ 37 $ 164
Current portion of obligations under
capital leases. . . . . . . . . . . . . . . . . . . . 12 11
Accounts payable. . . . . . . . . . . . . . . . . . . . 1,673 1,719
Other current liabilities . . . . . . . . . . . . . . . 1,298 1,262
------ ------
Total current liabilities . . . . . . . . . . . . . 3,020 3,156

Long-term debt. . . . . . . . . . . . . . . . . . . . . . 3,001 3,100
Obligations under capital leases. . . . . . . . . . . . . 211 202
Deferred income taxes . . . . . . . . . . . . . . . . . . 204 202
Other long-term liabilities . . . . . . . . . . . . . . . 462 468
------ ------
Total Liabilities . . . . . . . . . . . . . . . . . 6,898 7,128
------ ------

SHAREOWNERS' DEFICIT
Common capital stock, par $1, at stated value
Authorized: 1 billion shares
Issued: 1999 - 565 shares
1998 - 565 shares. . . . . . . . . . . . . . . 861 851
Accumulated deficit . . . . . . . . . . . . . . . . . . . (573) (749)
Common stock in treasury, at cost
1999 - 50 shares
1998 - 50 shares . . . . . . . . . . . . . . . (452) (451)
------ ------
Total Shareowners' Deficit (164) (349)
------ ------
Total Liabilities and Shareowners' Deficit. . . . . . $6,734 $6,779
====== ======
</TABLE>
- --------------------------------------------------------------------------------

The accompanying notes are an integral part of
the consolidated financial statements.

3
<PAGE> 4

CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)

<TABLE>
<CAPTION>
Quarter Ended
-----------------------------
May 22, March 21,
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . $ 176 $ 47
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . - 4
Depreciation and amortization. . . . . . . . . . . . . . . . 136 93
Amortization of deferred financing costs . . . . . . . . . . 1 3
LIFO charge. . . . . . . . . . . . . . . . . . . . . . . . . 6 5
Other changes, net . . . . . . . . . . . . . . . . . . . . . - 1
Net increase in cash from changes in operating
assets and liabilities, detail below . . . . . . . . . . . 149 85
------ ------
Net cash provided by operating activities . . . . . . . . 468 238
------ ------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (248) (175)
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . 7 -
Decrease (increase) in property held for sale . . . . . . . . . (8) 25
Increase in other investments . . . . . . . . . . . . . . . . . (8) (4)
------ ------
Net cash used by investing activities . . . . . . . . . . (257) (154)
------ ------

CASH FLOWS FROM FINANCING ACTIVITIES:
Debt prepayment costs . . . . . . . . . . . . . . . . . . . . . - (6)
Financing charges incurred. . . . . . . . . . . . . . . . . . . (1) (9)
Proceeds from issuance of long-term debt. . . . . . . . . . . . - 215
Reductions in long-term debt. . . . . . . . . . . . . . . . . . (226) (174)
Outstanding checks. . . . . . . . . . . . . . . . . . . . . . . (7) (104)
Proceeds from issuance of capital stock . . . . . . . . . . . . 9 16
Capital stock reacquired. . . . . . . . . . . . . . . . . . . . - (25)
Other change, net . . . . . . . . . . . . . . . . . . . . . . . (3) (3)
------ -------

Net cash used by financing activities . . . . . . . . . . (228) (90)
------ -------

Net decrease in cash and temporary cash investments . . . . . . . (17) (6)

Cash and temporary cash investments:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . 85 65
------ ------
End of quarter. . . . . . . . . . . . . . . . . . . . . . . . $ 68 $ 59
====== ======

INCREASE (DECREASE) IN CASH FROM CHANGES IN OPERATING ASSETS AND LIABILITIES:

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . $ 61 $ 173
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 30 23
Prepaid and other current assets. . . . . . . . . . . . . . . 64 8
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (39) (150)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 6 (3)
Other changes, net. . . . . . . . . . . . . . . . . . . . . . 27 34
------ ------
$ 149 $ 85
====== ======
</TABLE>
- --------------------------------------------------------------------------------

The accompanying notes are an integral part of
the consolidated financial statements.

4
<PAGE> 5

Supplemental disclosures of cash flow information:

<TABLE>
<CAPTION>
Quarter Ended
---------------------------
May 22, March 21,
1999 1998
---------- ---------

<S> <C> <C>
Cash paid during the period for:

Interest (net of amount capitalized) $ 81 $ 59
Income taxes 57 13
</TABLE>

- --------------------------------------------------------------------------------

The accompanying notes are an integral part
of the consolidated financial statements.

5
<PAGE> 6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

1. BASIS OF PRESENTATION
---------------------

The year-end condensed balance sheet data was derived from audited
financial statements, and, due to its summary nature, does not include
all disclosures required by generally accepted accounting principles.

The accompanying financial statements include the consolidated accounts
of The Kroger Co. and its subsidiaries ("Kroger"). The year-end
condensed balance sheet includes Kroger's January 30, 1999 balance
sheet. Amounts included in the consolidated financial statements as of
May 22, 1999 and for the quarter then ended includes the results of
operations of the Company for the 16 week quarter ended May 22, 1999.
Quarterly reports for fiscal year 1998 include results of a wholly
owned subsidiary of the Company based on 13 week quarterly periods, for
which it will not be practicable or cost-justified to recast results in
a manner consistent with the quarterly reporting periods of the newly
adopted fiscal year. As a result, the information for the quarter ended
March 21, 1998 includes the results of operations of The Kroger Co. for
the 12 week quarter ended March 21, 1998 and its wholly owned
subsidiary Dillon Companies, Inc. ("Dillon") for the 13 week quarter
ended March 28, 1998. Because these amounts reflect results covering
different periods of time, and different lengths of time, the
consolidated statements of operations and of cash flows do not
represent, and are not intended to represent, comparable results.
Significant intercompany transactions and balances have been
eliminated. References to the "Company" mean the consolidated company.

2. BUSINESS COMBINATIONS
---------------------

The following table presents sales, extraordinary losses, net earnings,
and earnings per diluted share for historical Kroger, historical Fred
Meyer, and the combined company:

<TABLE>
<CAPTION>
Kroger Fred Meyer Combined
(in millions, except per share amounts) Historical Historical Company
--------------------------------------- ---------- ---------- -------

<S> <C> <C> <C>
First quarter - 1999
Sales........................................... $8,789 $4,704 $13,493
Net earnings.................................... 176 31 207
Diluted earnings per common share............... .33 .09 .24

First quarter - 1998
Sales........................................... $6,389 $4,040 $10,429
Extraordinary loss, net of income tax benefit... (4) (217) (221)
Net earnings.................................... 47 (288) (241)
Diluted earnings per common share............... .09 (.99) (.30)
</TABLE>

Fred Meyer historical numbers have been restated to conform with
accounting practices of Kroger with respect to certain inventory
related costs and the capitalization policy for property, plant and
equipment. The restatement reduced Fred Meyer net earnings by
approximately $3 million in the first quarter of 1998.
The effect of the conforming adjustments for the first quarter of 1999
was not material.

6
<PAGE> 7

On March 10, 1998, Fred Meyer acquired Food 4 Less Holdings, Inc.
("Ralphs/Food 4 Less"), a supermarket chain operating primarily in
Southern California by issuing 22 million shares of common stock to the
Ralphs/Food 4 Less stockholders. The acquisition was accounted for
under the purchase method of accounting. The Fred Meyer historical
numbers include the operating results of Ralphs/Food 4 Less from the
date of acquisition.

3. ONE-TIME EXPENSES
-----------------

In the second quarter of 1998, the Company incurred a $41 million
one-time expense associated with logistics projects. This expense
included the costs associated with ending a joint venture related to a
warehouse operation that formerly served the Company's Michigan stores
and several independent customers. The warehouse is now operated by a
third party that distributes the Company's inventory to its Michigan
stores. These expenses also included the transition costs related to
one of the Company's new warehouses, and one new warehouse facility
operated by an unaffiliated entity that provides services to the
Company. These costs included carrying costs of the facilities idled as
a result of these new warehouses and the associated employee severance
costs. The expenses described above included non-cash asset writedowns
of $16 million and were included in merchandise costs, including
warehouse and transportation. The remaining $25 million of expenses are
summarized as follows:

<TABLE>
<CAPTION>
Facility
Employee Carrying Joint
(in millions) Severance Costs Venture Total
----------------------------- ---------- --------- -------- ------
<S> <C> <C> <C> <C>
Balance at December 27, 1997 $ - $ - $ - $ -
Expense 11 9 5 25
Payments 7 3 5 15
--- --- --- ---
Balance at January 2, 1999 4 6 - 10
Payments 4 2 - 6
--- --- --- ---
Balance at May 22, 1999 $ - $ 4 $ - $ 4
=== === === ===
</TABLE>

The carrying costs of the idled warehouse facilities will be paid
through 2001.

Additionally, in the second quarter of 1998, the Company incurred
one-time expenses of $12 million associated with accounting, data and
operations consolidations in Texas. These included the cost of closing
eight stores and relocating the remaining Dallas office employees to a
smaller facility. These expenses, which included non-cash asset
writedowns of $2 million, were included in operating, general and
administrative expenses. Cash expenses paid to date are $2 million and
the remaining accrual of $8 million at May 22, 1999 represents
estimated rent or lease termination costs that will be paid on closed
stores through 2013.

4. ACCOUNTING CHANGE
-----------------

In the second quarter of 1998, Kroger changed its application of the
Last-In, First-Out, or LIFO method of accounting for store inventories
from the retail method to the item cost method. The change was made to
more accurately reflect inventory value by eliminating the averaging
and estimation inherent in the retail method. The cumulative effect of
this change on periods prior to December 28, 1997 cannot be determined.
The effect of the change on the December 28, 1997 inventory valuation,
which includes other immaterial modifications in inventory valuation
methods, was included in restated results for the quarter ended March
21, 1998. This change increased merchandise costs by $90 million and
reduced earnings before extraordinary loss and net earnings by $56
million. The item cost method did not have a material impact on
earnings subsequent to its initial adoption.

5. INCOME TAXES
------------

The effective income tax rate differs from the expected statutory rate
primarily due to the effect of certain state taxes.

7
<PAGE> 8

6. EARNINGS PER COMMON SHARE
-------------------------

Earnings per common share equals net earnings divided by the weighted
average number of common shares outstanding, after giving effect to
dilutive stock options.

The following table provides a reconciliation of earnings before
extraordinary loss and shares used in calculating basic earnings per
share to those used in calculating diluted earnings per share.

<TABLE>
<CAPTION>
For the quarter ended For the quarter ended
May 22, 1999 March 21, 1998
--------------------------- --------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
(in millions, except per share amounts ator) nator) Amount ator) nator) Amount
-------------------------------------- -------- -------- ------ -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per common share. . . . $176 515 $0.34 $51 510 $0.10

Dilutive effect of stock
options and warrants . . . . . . . . - 20 - 20
----- ---- --- ---

Diluted earnings per
common share . . . . . . . . . . . . $176 535 $0.33 $51 530 $0.10
==== === === ===
</TABLE>

On May 20, 1999, the Company announced a distribution in the nature of
a two-for-one stock split, to shareholders of record of common stock on
June 7, 1999. In compliance with SFAS No. 128, Earnings per Share,
earnings per share are presented showing the effect of the split. If
the split had not occurred diluted earnings per share before
extraordinary loss would have been $0.66 for the first quarter of 1999
versus $0.20 for the first quarter of 1998. Shares were distributed
on June 28, 1999.

7. SEGMENTS
--------

The Company operates retail food and drug stores and convenience stores
in the Midwest and South. The Company's retail operations, which
represent approximately 97% of consolidated sales, are its only
reportable segment. All of the Company's operations are domestic.

8. SUBSEQUENT EVENTS
-----------------

On June 25, 1999 the Company issued $250 million 6.34% Senior Notes due
2001, $350 million 7.25% Senior Notes due 2009 and $300 million 7.70%
Senior Notes due 2029. Proceeds from these issues were used to repay
amounts under the Company's bank credit facilities.

9. COMPREHENSIVE INCOME
--------------------

The Company has no items of other comprehensive income in any period
presented. Therefore, net earnings as presented in the Consolidated
Statement of Operations equals comprehensive income.

10. RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which will require a change in the
way that the Company accounts for its interest rate protection
agreements. In May 1999, the Financial Accounting Standards Board
issued an exposure draft requiring adoption of the standard for fiscal
years beginning after June 15, 2000. The Company has not yet determined
the expected impact, if any, that the adoption of the standard will
have on the financial statements.

8
<PAGE> 9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Results of operations for the first quarter of 1999 are not comparable to the
prior year first quarter due to our fiscal year calendar change. The information
for the quarter ended May 22, 1999 includes the results of operations of the
Company for the 16 week quarter ended May 22, 1999. The information for the
quarter ended March 21, 1998 includes the results of operations of The Kroger
Co. for the 12 week quarter ended March 21, 1998, and its wholly owned
subsidiary Dillon Companies, Inc. for the 13 week quarter ended March 28, 1998.
A direct comparison of these results, therefore, would be inappropriate. Except
as otherwise specifically provided, information contained herein excludes
Fred Meyer, Inc., and its subsidiaries because the acquisition by merger was not
completed until May 27, 1999.

BUSINESS COMBINATIONS

On May 27, 1999 we issued 312 million shares of Kroger common stock in
connection with a merger, for all of the outstanding common stock of Fred Meyer,
Inc., which operates stores primarily in the Western region of the United
States.

ONE-TIME EXPENSES

In the second quarter of 1998, we incurred a $41 million one-time expense
associated with logistics projects. This expense included the costs associated
with ending a joint venture related to a warehouse operation that formerly
served our Michigan stores and several independent customers. The warehouse is
now operated by a third party that distributes our inventory to our Michigan
stores. These expenses also included the transition costs related to one of our
new warehouses, and one new warehouse facility operated by an unaffiliated
entity that provides services to us. These costs included carrying costs of the
facilities idled as a result of these new warehouses and the associated employee
severance costs. The expenses described above included non-cash asset writedowns
of $16 million and were included in merchandise costs, including warehouse and
transportation. The remaining $25 million of expenses are summarized as follows:

<TABLE>
<CAPTION>
Facility
Employee Carrying Joint
(in millions) Severance Costs Venture Total
---------------------------- --------- --------- ------- --------
<S> <C> <C> <C> <C>
Balance at December 27, 1997 $ - $ - $ - $ -
Expense 11 9 5 25
Payments 7 3 5 15
--- --- --- ---
Balance at January 2, 1999 4 6 - 10
Payments 4 2 - 6
--- --- --- ---
Balance at May 22, 1999 $ - $ 4 $ - $ 4
=== === === ===
</TABLE>

The carrying costs of the idled warehouse facilities will be paid through 2001.

9
<PAGE> 10

Additionally, in the second quarter of 1998, we incurred one-time expenses of
$12 million associated with accounting, data and operations consolidations in
Texas. These included the cost of closing eight stores and relocating the
remaining Dallas office employees to a smaller facility. These expenses, which
included non-cash asset writedowns of $2 million, were included in operating,
general and administrative expenses. Cash expenses paid to date are $2 million
and the remaining accrual of $8 million at May 22, 1999 represents estimated
rent or lease termination costs that will be paid on closed stores through 2013.

ACCOUNTING CHANGE

In the second quarter of 1998, Kroger changed its application of the Last-In,
First-Out, or LIFO method of accounting for store inventories from the retail
method to the item cost method. The change was made to more accurately reflect
inventory value by eliminating the averaging and estimation inherent in the
retail method. The cumulative effect of this change on periods prior to December
28, 1997 cannot be determined. The effect of the change on the December 28, 1997
inventory valuation, which includes other immaterial modifications in inventory
valuation methods, was included in restated results for the quarter ended March
21, 1998. This change increased merchandise costs by $90 million and reduced
earnings before extraordinary loss and net earnings by $56 million. The item
cost method did not have a material impact on earnings subsequent to its initial
adoption.

SALES

Total sales in the first quarter of 1999 increased approximately 5.4% to $8.8
billion, compared to sales for the 16 week period ended May 23, 1998. On this
basis, identical food store sales, which include stores in operation and not
expanded or relocated for five quarters, grew 1.3%. Comparable store sales,
which include relocations and expansions, were up 3.0% on this same basis.

MERCHANDISE COSTS

Merchandise costs, including advertising, warehousing and transportation expense
and LIFO charges, for the first quarter 1999 declined to 75.6% of sales compared
to 77.6%, or 76.2% net of the $89.7 million accounting change charge, in the
first quarter 1998. The percentages are not directly comparable.

OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES

Operating, general and administrative expenses as a percent of sales in the
first quarter 1999 were 17.6% compared to 17.4% in 1998. The percentages are not
directly comparable.

NET INTEREST EXPENSE

Net interest expense was $77.2 million in the first quarter 1999. Net interest
expense as a percent of sales in the first quarter 1999 was 0.88% compared to
1.00% in the first quarter of 1998.

NET EARNINGS

Net earnings in the first quarter 1999 were $175.8 million or $0.33 per diluted
share as compared to net earnings in the first quarter 1998 of $47.4 million or
$0.09 per diluted share. Net earnings in 1998 were negatively affected by an
extraordinary loss of $4.3 million or $.01 per diluted share and also negatively
affected by an accounting change of $55.6 million or $0.10 per diluted share.

10
<PAGE> 11

The extraordinary loss in 1998 resulted from the early retirement of long term
debt.

LIQUIDITY AND CAPITAL RESOURCES

At the end of the first quarter 1999 we had $1.1 billion available under our
Credit Agreement to meet short-term liquidity needs.

Capital expenditures for the first quarter 1999 totaled $248.4 million as
compared to $175.3 million for the first quarter 1998.

CONSOLIDATED STATEMENT OF CASH FLOWS

Operating cash flow was $468 million in the first quarter of 1999 and $238
million in the first quarter of 1998.

Cash used by investing activities was $257 million in the first quarter of 1999
and $154 million in the first quarter of 1998.

Cash used by financing activities was $228 million in the first quarter of 1999
and $90 million in the first quarter of 1998.

SUBSEQUENT EVENTS

On June 25, 1999 we issued $250 million 6.34% Senior Notes due 2001, $350
million 7.25% Senior Notes due 2009 and $300 million 7.70% Senior Notes due
2029. Proceeds from these issues were used to repay amounts under our bank
credit facilities.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which will require a change in the way that we account
for interest rate protection agreements. In May 1999, the Financial Accounting
Standards Board issued an exposure draft requiring adoption of the standard for
all fiscal years beginning after June 15, 2000. We have not yet determined the
expected impact, if any, that the adoption of the standard will have on our
financial statements.

OTHER ISSUES

On May 20, 1999, we announced a distribution in the nature of a two-for-one
stock split. Shareholders of record of common stock on June 7, 1999 received one
common share for each share held on that date. Earnings per share are presented
showing the effect of the split in the consolidated financial statements. If the
split had not occurred diluted net earnings per share would have been $0.66 in
the first quarter of 1999 versus $0.18 in the first quarter of 1998. Shares were
distributed on June 28, 1999.

11
<PAGE> 12

On January 6, 1999, we changed our fiscal year-end to the Saturday nearest
January 31 of each year. This change is disclosed in our Current Report on
Form 8-K dated January 15, 1999. Our first new fiscal year will end January 29,
2000. It includes a 16-week first quarter ended May 22, 1999, and 12-week
second, third and fourth quarters ending August 14, 1999, November 6, 1999, and
January 29, 2000, respectively. We filed separate audited financial statements
covering the transition period from January 3, 1999 through January 30, 1999 on
a Current Report on Form 8-K dated May 10, 1999. These financial statements
include Kroger and its consolidated subsidiaries before the merger with Fred
Meyer.

OUTLOOK

Statements elsewhere in this report and below regarding our expectations, hopes,
beliefs, intentions or strategies are forward looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. While we believe
that the statements are accurate, uncertainties and other factors could cause
actual results to differ materially from those statements. In particular:

- We obtain sales growth from new square footage, as well as from
increased productivity from existing locations. We expect 1999 full
year square footage to grow 4.5% to 5.0%. We expect to continue to
realize savings from economies of scale in technology and logistics,
some of which may be reinvested in retail price reductions to increase
sales volume and enhance market share.

- We expect combination stores to generate higher sales per customer by
the inclusion of numerous specialty departments, such as pharmacies,
seafood shops, floral shops and bakeries. We believe the combination
store format will allow us to withstand continued competition from
other food retailers, supercenters, mass merchandisers and restaurants.

- We believe we have adequate coverage of our debt covenants to continue
to respond effectively to competitive conditions.

- We expect to continue capital spending in technology focusing on
improved store operations, logistics, procurement, category management,
merchandising and distribution practices, which should continue to
reduce merchandising costs as a percent of sales.

- We expect to reduce working capital over the next 2 years.

- As a result of the merger, our earnings per share target is a 16%-18%
average annual increase over the next three years effective with the
year 2000.

- We expect fiscal 1999 capital expenditures to total $850-$950 million
compared to $924 million during 1998. Capital expenditures reflect
Kroger's strategy of growth through expansion and acquisition as well
as our emphasis, whenever possible, on self-development and ownership
of store real estate, and on logistics and technology improvements.

- We are dependent on computer hardware, software, systems and processes
("IT Systems") and non-information technology systems such as
telephones, clocks, scales and refrigeration controllers, and other
equipment containing embedded microprocessor technology ("Non-IT
Systems"). These systems are used in several critical operating areas
including store and distribution operations, product merchandising and
procurement, manufacturing plant operations, inventory and labor
management, and accounting and administrative systems.

- We expect to achieve $225 million in synergy savings over the next
three years as a result of the merger with Fred Meyer. We project the
timing of the annual savings by fiscal year to be as follows: $40
million in 1999, $115 million in 2000, $190 million in 2001, and $225
million in 2002 and beyond.

12
<PAGE> 13

YEAR 2000 READINESS DISCLOSURE

We are currently working to resolve the potential effect of the year 2000 on the
processing of date-sensitive information within various systems. The year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of our programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in miscalculations or system failures.

We have developed a plan to assess and update our IT Systems and Non-IT Systems
for year 2000 compliance requirements and provide for continued functionality.
The plan consists of three major phases:

1) create an inventory of systems subject to the year 2000 problem and
assess the scope of the problem as it relates to those systems;

2) remediate any year 2000 problems;

3) test and implement systems subsequent to remediation.

The chart below shows the estimated completion status of each of these
phases expressed as a percent of completion as of May 22, 1999.

Phase 1 2 3
---------------- ---- ---- ---
IT Systems 98% 95% 89%
Non-IT Systems 99% 93% 78%

This summary includes all IT and Non-IT Systems without regard to their effect
on the operation of the Company. All critical business systems have been fixed
and/or tested for Year 2000 readiness. The majority of systems have already been
implemented, while some are still in the rollout phase. All rollouts are
scheduled to be completed by the end of the third quarter. We will continue to
test our systems, including a simulation of the year 2000, and expect to
complete all work by the end of the third quarter of 1999.

Critical business partners have been contacted for their status on year 2000
readiness. Based on our assessment of their responses, we believe that the
majority of our business partners are taking action for year 2000 readiness.
Notwithstanding the substantial efforts by us and our key business partners, we
could potentially experience disruptions to some aspects of our various
activities and operations. Consequently, in conjunction with the plan,
management is formulating contingency plans for critical functions and
processes, which may be implemented to minimize the risk of interruption to our
business in the event of a year 2000 occurrence.

Contingency planning, which utilizes a business process approach, focuses on the
following priorities: ability to sell products to customers, continuously
replenish stores with goods (ordering and distribution), pay employees, collect
and remit on outstanding accounts, meet other regulatory and administrative
needs, and address merchandising objectives. We expect that documented
contingency plans for critical business processes will be in place by the end of
the third quarter of 1999.

The total estimated cost for the project, over a four year period, is $29
million, most of which is being expensed as incurred. This cost is being funded
through operating cash flow. This represents an immaterial part of our
information technology budget over the period. Costs incurred to date totaled
$21 million at May 22, 1999.

13
<PAGE> 14

If we, our customers or vendors are unable to resolve processing issues in a
timely manner, it could result in the disruption of the operation of IT Systems
and/or Non-IT Systems, and in a material financial risk. We believe that we have
allocated the resources necessary to mitigate all significant year 2000 issues
in a timely manner.

Inflationary factors, increased competition, construction delays, and labor
disputes could affect our ability to obtain expected increases in sales and
earnings. Delays in store maturity, increased competition and increased capital
spending could adversely affect the anticipated increase in sales per square
foot. Increases in gross profit rate may not be achieved if start-up costs are
higher than expected or if problems associated with integrating new systems
occur. Increased operating costs and changes in inflationary trends could
prevent us from reducing operating, general and administrative expenses. New
technologies could fail to achieve the desired savings and efficiencies. Net
interest expenses could exceed expectations due to acquisitions, higher working
capital usage, inflation, or increased competition. Our ability to achieve our
storing goals could be hampered by construction delays, labor disputes,
increased competition or delays in technology projects. Unexpected costs or
difficulties in integrating our operations with those of Fred Meyer could affect
our ability to achieve the expected synergy cost savings. The effects of the
merger and the inherent complexity of computer software and reliance on third
party software vendors to interface with our systems could affect the completion
of necessary "Year 2000" modifications.

14
<PAGE> 15

PART II - OTHER INFORMATION

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to various legal claims, actions
and complaints that have arisen in the ordinary course of business. Although the
Company is unable to predict with certainty whether it will ultimately be
successful in these legal proceedings or, if not, what the impact might be,
management presently believes that disposition of these matters will not have a
material adverse affect on the Company's consolidated financial statements.
Although the merger with Fred Meyer was not completed until May 27, 1999, after
completion of the first quarter, the information disclosed below includes legal
proceedings related to Fred Meyer and its subsidiaries.

In December 1992, three California state antitrust class action suits were
commenced in Los Angeles Superior Court against Ralphs/Food 4 Less and other
major supermarket chains located in Southern California, alleging that they
conspired to refrain from competing in the retail market for fluid milk and to
fix the retail price of fluid milk above competitive prices. Specifically, class
actions were commenced by Diane Barela and Neila Ross, Ron Moliare and Paul C.
Pfeifle on December 7, December 14 and December 23, 1992, respectively. A class
has been certified consisting of all purchasers of milk in Los Angeles from
December 7, 1988. The defendants in the actions, including Ralphs/Food 4 Less,
have reached tentative settlement agreements, and settlements are in the process
of being approved by the trial court.

On September 13, 1996, a class action lawsuit titled McCampbell, et al. v.
Ralphs Grocery Company, et al. was filed in the Superior Court of the State of
California, County of San Diego, against Ralphs/Food 4 Less and two other
grocery store chains operating in the Southern California area. The complaint
alleges, among other things, that Ralphs/Food 4 Less and others conspired to fix
the retail price of eggs in Southern California. The plaintiffs assert that the
defendants' actions violate provisions of the California Cartwright Act and
constitute unfair competition. The plaintiffs seek damages they purport to have
sustained as a result of the defendants' alleged actions, which damages may be
trebled under the applicable statute, and an injunction from future actions in
restraint of trade and unfair competition. A class, consisting of all retail
purchasers of eggs in Los Angeles, Riverside, San Diego, Imperial and Orange
Counties during a period from 1992 to 1997 has been certified. Trial is
scheduled to commence on July 12, 1999. Management of the Company intends to
defend this action vigorously and Ralphs/Food 4 Less has filed an answer to the
complaint denying the Plaintiffs' allegations and setting forth several
defenses.

ENVIRONMENTAL MATTERS

The Company's Glendale facility property, located in the Atwater area of Los
Angeles near Glendale, California, is within one of the areas that the U.S.
Environmental Protection Agency (the "EPA") has designated in the San Fernando
Valley as federal Superfund sites requiring response actions under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, because of regional groundwater contamination. The Company's Glendale
facility consists of about 50 acres located in an area with a history of
industrial and commercial use and groundwater contamination. The Company is part
of a group (the "Glendale Respondents") of 28 parties which EPA has notified
that it considers to be potentially responsible parties ("PRP's"). The Glendale
Respondents are attempting to negotiate a consent decree with EPA to govern
their implementation of an "interim" remedy to the groundwater contamination.
Pursuant to a 1997 EPA Administrative Order, the Glendale Respondents have begun
to implement the interim remedy. In 1998 an engineer retained by the Glendale
Respondents estimated the present value of total costs through 2011 to implement
and operate the EPA-approved interim remedy, which involves remedial groundwater
pumping and treatment, at approximately $54,000,000, of which approximately
$24,000,000 are capital costs. The principal issue which is disputed in the
consent

15
<PAGE> 16

decree negotiations is the amount to reimburse EPA for pre-1998 EPA response
costs. It is expected that this amount will be approximately $13,400,000, and
that the Company will be responsible for approximately 1.02% of that amount.
Based upon available information, management does not believe this matter will
have a material adverse effect on the Company's financial statements.

The Company removed underground storage tanks and remediated soil contamination
at the Glendale facility property. In some instances, the removals and the
contamination were associated with grocery business operations; in others, they
were associated with prior property users. Although the possibility of other
contamination from prior operations or adjacent properties exists at the
Glendale facility property, management does not believe that the costs of
remediating such contamination will have a material adverse affect on the
Company's financial statements.

The Company is subject to a variety of environmental laws, rules, regulations
and investigative or enforcement activities, as are other companies in the same
or similar business. The Company believes it is in substantial compliance with
such laws, rules and regulations. These laws, rules, regulations and agency
activities change from time to time, and such changes may affect the ongoing
business and operations of the Company.

16
<PAGE> 17

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

I. (a) May 20, 1999 -- Annual Meeting

(b) The shareholders elected five directors to serve until the
annual meeting of shareholders in 2002 or until their
successors have been elected and qualified; authorized an
amendment to the Amended Articles of Incorporation to increase
the authorized shares of common stock from 1,000,000,000 to
2,000,000,000; authorized the adoption of the 1999 Long-Term
Incentive Plan; and ratified the selection of
PricewaterhouseCoopers LLP, as Company auditors for 1999. The
shareholders also adopted a shareholder proposal recommending
that the Board of Directors take steps to implement the annual
election of all Board members as opposed to election in
classes.

Votes cast were as follows:

<TABLE>
<S> <C> <C> <C> <C>
To Serve Until 2002 For Withheld Broker Non-Votes
------------------- --- -------- ----------------
John T. LaMacchia 210,960,623 1,915,663 0
Edward M. Liddy 210,987,572 1,888,714 0
T. Ballard Morton, Jr. 210,949,114 1,927,172 0
Katherine D. Ortega 210,973,458 1,902,828 0
Bobby S. Shackouls 210,554,210 2,322,076 0

For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
Amendment to 185,454,188 26,230,838 1,191,260 0
Increase Author-
ized Shares

For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
Adoption of 150,761,971 60,370,632 1,743,683 0
1999 Long-Term
Incentive Plan

For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
Pricewaterhouse 209,255,276 2,429,665 1,191,415 0
Coopers LLP

For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
Shareholder 100,994,377 91,776,831 2,783,280 17,321,798
Proposal
</TABLE>

II. (a) April 13, 1999 - Special Meeting

(b) The shareholders approved and adopted the Agreement and Plan
of Merger dated as of October 18, 1998, among The Kroger Co.,
Jobsite Holdings, Inc., and Fred Meyer, Inc., and the merger
contemplated thereby.

Votes cast were as follows:

<TABLE>
For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
<S> <C> <C> <C>
199,619,830 2,522,352 996,784 0
</TABLE>

17
<PAGE> 18

ITEM 5. OTHER INFORMATION

Presented below are combined financial statements and management's discussion
and analysis of financial condition and results of operations for The Kroger
Co., and its consolidated subsidiaries, including Fred Meyer, Inc., on a
supplemental basis. This information is not included in the Consolidated
Financial Statements presented in Part I of this Form 10-Q because the merger
with Fred Meyer was not consummated until after the end of the first quarter.

The unaudited information for the quarter ended May 22, 1999 includes the
results of operations of the Company for the 16 week quarter ended May 22, 1999.
The unaudited information for the quarter ended March 21, 1998 includes the
results of operations of The Kroger Co. for the 12 week quarter ended March 21,
1998, its wholly owned subsidiary Dillon Companies, Inc. for the 13 week quarter
ended March 28, 1998, and its wholly owned subsidiary Fred Meyer, Inc. for the
16 week quarter ended May 23, 1998. In the opinion of management, the
information reflects all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair presentation of results of
operations for such periods but should not be considered as indicative of
results for a full year.

SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
(unaudited)

<TABLE>
<CAPTION>
Quarter Ended
May 22, March 21,
1999 1998
---------- ----------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,493 $10,429
Merchandise costs, including warehousing and transportation . . . 9,962 7,839
------ ------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . 3,531 2,590

Operating, general and administrative . . . . . . . . . . . . . . 2,470 1,894
Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 160
Depreciation and amortization . . . . . . . . . . . . . . . . . . 281 220
Merger related costs. . . . . . . . . . . . . . . . . . . . . . . 35 159
------ ------
Operating profit. . . . . . . . . . . . . . . . . . . . . . . . 546 157

Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . 199 164
------- -------
Earnings (loss) before income tax expense and
extraordinary loss. . . . . . . . . . . . . . . . . . . . . . 347 (7)

Tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 13
------- -------
Earnings (loss) before extraordinary loss . . . . . . . . . . . 207 (20)
Extraordinary loss, net of income tax benefit . . . . . . . . . . - (221)
------- -------
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . $ 207 $ (241)
======= =======

Basic earnings per common share:
Earnings (loss) before extraordinary loss . . . . . . . . . . . $ .25 $ (.02)
Extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . - (.28)
------ ------
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . $ .25 $ (.30)
====== ======

Average number of common shares used in basic calculation . . . . 827 801

Diluted earnings per common share:
Earnings (loss) before extraordinary loss . . . . . . . . . . . $ .24 $ (.02)
Extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . - (.28)
------ ------
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . $ .24 $ (.30)
====== ======

Average number of common shares used in diluted calculation . . . 863 801
</TABLE>

- --------------------------------------------------------------------------------

The accompanying notes are an integral part
of the supplemental consolidated financial statements.

18
<PAGE> 19

SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(in millions, except per share amounts)
(unaudited)

<TABLE>
<CAPTION>
May 22, January 2,
1999 1999
------- -------
<S> <C> <C>
ASSETS
Current assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 314 $ 299
Receivables . . . . . . . . . . . . . . . . . . . . . . 487 587
Inventories . . . . . . . . . . . . . . . . . . . . . . 3,590 3,493
Prepaid and other current assets. . . . . . . . . . . . 667 692
------- -------
Total current assets. . . . . . . . . . . . . . . . 5,058 5,071

Property, plant and equipment, net. . . . . . . . . . . . 7,448 7,220
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . 3,827 3,847
Other assets. . . . . . . . . . . . . . . . . . . . . . . 524 503
------- -------
Total Assets. . . . . . . . . . . . . . . . . . . . $16,857 $16,641
======= =======

LIABILITIES
Current liabilities
Current portion of long-term debt . . . . . . . . . . . $ 214 $ 311
Accounts payable. . . . . . . . . . . . . . . . . . . . 2,935 2,926
Salaries and wages. . . . . . . . . . . . . . . . . . . 579 639
Other current liabilities . . . . . . . . . . . . . . . 1,656 1,574
------- -------
Total current liabilities . . . . . . . . . . . . . 5,384 5,450

Long-term debt. . . . . . . . . . . . . . . . . . . . . . 7,868 7,848
Other long-term liabilities . . . . . . . . . . . . . . . 1,416 1,426
------- -------
Total Liabilities . . . . . . . . . . . . . . . . . 14,668 14,724
------- -------

SHAREOWNERS' EQUITY
Preferred stock, $100 par, 5 million shares
authorized and unissued . . . . . . . . . . . . . . . . - -
Common stock, $1 par, 1 billion shares
authorized: 878 million shares issued in 1999 and
876 million shares issued in 1998 . . . . . . . . . . . 878 876
Additional paid-in capital. . . . . . . . . . . . . . . . 1,948 1,913
Accumulated deficit . . . . . . . . . . . . . . . . . . . (185) (421)
Common stock in treasury, at cost; 50 million shares in
1999 and 50 million shares in 1998. . . . . . . . . . (452) (451)
------- -------
Total Shareowners' Equity 2,189 1,917
------- -------
Total Liabilities and Shareowners' Equity . . . . . . $16,857 $16,641
======= =======
</TABLE>

- --------------------------------------------------------------------------------

The accompanying notes are an integral part
of the supplemental consolidated financial statements.

19
<PAGE> 20

SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)

<TABLE>
<CAPTION>
Quarter Ended
-----------------------------
May 22, March 21,
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . $ 207 $ (241)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . - 221
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 252 198
Goodwill amortization. . . . . . . . . . . . . . . . . . . . 29 22
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 42 (27)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 73
Changes in operating assets and liabilities net of effects from
acquisitions of businesses:
Inventories. . . . . . . . . . . . . . . . . . . . . . . (31) 150
Receivables. . . . . . . . . . . . . . . . . . . . . . . 51 15
Accounts payable . . . . . . . . . . . . . . . . . . . . 25 (97)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 11 87
------ ------
Net cash provided by operating activities. . . . . . . 594 401
------ ------
Cash Flows From Investing Activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (442) (297)
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . 15 10
Payments for acquisitions, net of cash acquired . . . . . . . . - 83
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) 32
------ ------
Net cash used by investing activities. . . . . . . . . (449) (172)
------ ------

Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt. . . . . . . . . . . . 84 4,384
Reductions in long-term debt. . . . . . . . . . . . . . . . . . (246) (4,132)
Debt prepayment costs . . . . . . . . . . . . . . . . . . . . . - (299)
Financing charges incurred. . . . . . . . . . . . . . . . . . . (1) (75)
Increase (decrease) in book overdrafts. . . . . . . . . . . . . 51 (81)
Proceeds from issuance of capital stock . . . . . . . . . . . . 22 46
Treasury stock purchases. . . . . . . . . . . . . . . . . . . . - (25)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (7)
------ ------
Net cash used by financing activities. . . . . . . . . (94) (189)
------ ------

Net increase in cash and temporary cash investments . . . . . . . 51 40
Cash and temporary cash investments:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . 263 183
------ ------
End of quarter. . . . . . . . . . . . . . . . . . . . . . . . $ 314 $ 223
====== ======

Supplemental disclosure of cash flow information:
Cash paid during the year for interest. . . . . . . . . . . . $ 165 $ 156
Cash paid (refunded) during the year for income taxes . . . . . . 62 (4)
Non-cash changes related to purchase acquisitions:
Fair value of assets acquired . . . . . . . . . . . . . . . - 2,054
Goodwill recorded . . . . . . . . . . . . . . . . . . . . . - 2,314
Value of stock issued . . . . . . . . . . . . . . . . . . . - (653)
Liabilities assumed . . . . . . . . . . . . . . . . . . . . - (3,715)
</TABLE>

- --------------------------------------------------------------------------------

The accompanying notes are an integral part
of the supplemental consolidated financial statements.

20
<PAGE> 21

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------

1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
-----------------------------------------------------

The year-end condensed balance sheet data was derived from audited
financial statements, and, due to its summary nature, but does not
include all disclosures required by generally accepted accounting
principles.

The accompanying financial statements include the consolidated accounts
of The Kroger Co. and its subsidiaries ("Kroger"), and Fred Meyer, Inc.
and its subsidiaries ("Fred Meyer") which were merged with Kroger on
May 27, 1999 (see note 2). The year-end condensed balance sheet
includes Kroger's January 2, 1999 balance sheet combined with Fred
Meyer's January 30, 1999 balance sheet. Amounts included in the
supplemental consolidated financial statements as of May 22, 1999 and
for the quarter then ended include the results of operations of the
Company for the 16 week quarter ended May 22, 1999. Quarterly reports
for fiscal year 1998 include results of a wholly owned subsidiary of
the Company based on 13-week quarterly periods, for which it will not
be practicable or cost-justified to recast results in a manner
consistent with the quarterly reporting periods of the newly adopted
fiscal year. As a result, the information for the quarter ended March
21, 1998 includes the results of operations of The Kroger Co. for the
12 week quarter ended March 21, 1998, its wholly owned subsidiary
Dillon Companies, Inc. ("Dillon") for the 13 week quarter ended March
28, 1998, and its wholly owned subsidiary Fred Meyer, Inc. for the 16
week quarter ended May 23, 1998. Because these amounts reflect results
covering different periods of time, and different lengths of time, the
consolidated statements of operations and of cash flows do not
represent, and are not intended to represent, comparable results.
Significant intercompany transactions and balances have been
eliminated. References to the "Company" in these supplemental
consolidated financial statements mean the consolidated company,
including Fred Meyer, Inc., and its subsidiaries.

The supplemental consolidated financial statements of Kroger have been
prepared to give retroactive effect to the merger with Fred Meyer, and
are filed herewith so that they will be incorporated by reference in
any Registration Statement related to the public offering of Securities
prior to the filing of the Company's Form 10-Q for the quarter ending
August 14, 1999. Generally accepted accounting principles prohibit
giving effect to a consummated business combination accounted for by
the pooling of interests method in financial statements that do not
include the date of consummation. These financial statements do not
extend through the date of consummation; however, they will become the
historical consolidated financial statements of Kroger and its
subsidiaries after financial statements covering the date of
consummation of the business combination are issued.

21
<PAGE> 22

2. BUSINESS COMBINATIONS
---------------------

On May 27, 1999, Kroger issued 312 million shares of Kroger common
stock in connection with a merger, for all of the outstanding common
stock of Fred Meyer, Inc., which operates stores primarily in the
Western region of the United States. The merger was accounted for as
pooling of interests, and the accompanying financial statements have
been restated to give effect to the consolidated results of Kroger and
Fred Meyer for all periods presented.

The accompanying unaudited supplemental Consolidated Financial
Statements reflect the consolidated results as follows:

<TABLE>
<CAPTION>
Kroger Fred Meyer Consolidated
(in millions, except per share amounts) Historical Historical Company
--------------------------------------- ---------- ---------- -------
<S> <C> <C> <C>
First quarter - 1999
Sales.......................................... $8,789 $4,704 $13,493
Net earnings................................... 176 31 207
Diluted earnings per post-split common share... .33 .09 .24

First quarter - 1998
Sales.......................................... $6,389 $4,040 $10,429
Extraordinary loss, net of income tax benefit.. (4) (217) (221)
Net earnings (loss)............................ 47 (288) (241)
Diluted earnings (loss) per post-split
common share................................. .09 (.99) (.30)
</TABLE>

Prior period financial statements of Fred Meyer have been restated to
conform with accounting practices of Kroger with respect to certain
inventory related costs and the capitalization policy for property,
plant and equipment. The restatement reduced Fred Meyer net earnings by
approximately $3 million in the first quarter of 1998.

On March 10, 1998, Fred Meyer acquired Food 4 Less Holdings, Inc.
("Ralphs/Food 4 Less"), a supermarket chain operating primarily in
Southern California, by issuing 44 million shares of common stock to
the Ralphs/Food 4 Less stockholders. The acquisition was accounted for
under the purchase method of accounting. The financial statements
include the operating results of Ralphs/Food 4 Less from the date of
acquisition.

In conjunction with purchase acquisitions, the Company accrued certain
costs associated with closing and divesting of certain acquired
facilities and severance payments to terminate employees of the
acquired companies. The following table presents the activity in the
Company's accrued purchase liabilities:

<TABLE>
<CAPTION>
Facility
Closure Employee
(in millions) Costs Severance Total
----------------------------- -------- --------- ------
<S> <C> <C> <C>
Balance at December 28, 1996 $ - $ - $ -
Additions 23 9 32
Payments (4) (1) (5)
----- ----- -----
Balance at December 27, 1997 19 8 27
Additions 122 22 144
Payments (13) (2) (15)
Adjustments to severance accrual - (3) (3)
----- ----- -----
Balance at January 2, 1999 128 25 153
Payments - (2) (2)
----- ----- -----
Balance at May 22, 1999 $ 128 $ 23 $ 151
===== ===== =====
</TABLE>

<PAGE> 23

FACILITY CLOSURE COSTS
----------------------

The Company acquired certain idle facilities in its purchase
acquisitions including 63 closed stores, four closed warehouses and one
vacant parcel all of which are leased. The Company also acquired 16
stores that the California Attorney General required to be divested and
17 stores that were duplicate facilities. Divestitures of 13 stores
have been completed and 7 of the duplicate facilities have been closed.
The remaining 10 duplicate stores are expected to close by the end of
1999. Facility closure costs accrued include obligations for future
contractual lease payments, net of sublease income, and closure costs.

EMPLOYEE SEVERANCE
------------------

Employee severance relates to 24 employees that have been terminated
and 73 employees that will be terminated in the future. Under severance
agreements, the severance will be paid over a period not to exceed
three years following the date of termination.

3. MERGER RELATED COSTS
--------------------

Fred Meyer is in the process of implementing its plan to integrate Fred
Meyer Stores, Ralphs/Food 4 Less, Smith's, QFC and Hughes, resulting in
merger related costs of $35 million in the first quarter of 1999 and
$159 million in the first quarter of 1998. Merger related costs totaled
$269 million in fiscal 1998. The integration plan includes the
consolidation of distribution, information systems, and administrative
functions, conversion of banners at 78 stores, closure of seven stores,
and transaction costs incurred to complete the mergers. The costs were
reported in the periods in which cash was expended except for $19
million that was accrued in the first quarter of 1998 for liabilities
incurred to discontinue activities and retain key employees and charges
to write-down certain assets of $2 million in the first quarter of 1999
and $57 million in the first quarter of 1998. The following table
presents components of the merger related costs:

23
<PAGE> 24

Quarter Ended Fiscal Year
------------------- Ended
May 22, March 21, January 2,
(in millions) 1999 1998 1999
--------------------------------- ------- --------- -----------
<S> <C> <C> <C>
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation $ 4 $ 11 $ 16
Systems integration 24 13 50
Store conversions 3 25 48
Transaction costs 1 29 34
Administration integration 1 5 12
---- ---- ----
33 83 160
NONCASH ASSET WRITE-DOWN
Distribution consolidation - 28 29
Systems integration 2 19 26
Store closures - 7 25
Administration integration - 3 3
---- ---- ----
2 57 83
ACCRUED CHARGES
Systems integration - 1 1
Transaction costs - 2 6
Store closures - 7 7
Administration integration - 9 12
---- ---- ----
- 19 26
---- ---- ----
Total merger related costs $ 35 $159 $269
==== ==== ====

TOTAL CHARGES
Distribution consolidation $ 4 $ 39 $ 45
Systems integration 26 33 77
Store conversions 3 25 48
Transaction costs 1 31 40
Store closures - 14 32
Administration integration 1 17 27
---- ---- ----
Total merger related costs $ 35 $159 $269
==== ==== ====
</TABLE>

Distribution Consolidation
--------------------------

Represents costs to consolidate manufacturing and distribution
operations and eliminate duplicate facilities. The costs in the first
quarter of 1998 include a $28 million write-down to estimated net
realizable value for the Hughes distribution center in Southern
California. Net realizable value was determined by a market analysis.
The facilities are held for sale and depreciation expense for the
closed Hughes distribution facility has been suspended. Efforts to
dispose of the facilities are ongoing and a sale is expected in 1999.
The costs also include $4 million in the first quarter of 1999 and $11
million in the first quarter of 1998 for incremental labor during the
closing of the distribution center and other incremental costs incurred
as a part of the realignment of the Company's distribution system.

Systems Integration
-------------------

Represents the costs of integrating systems from QFC, Hughes and
Smith's computer platforms into Fred Meyer and Ralphs' platforms and
the related conversion of all corporate office and store systems. The
asset write-down includes $19 million in the first quarter of 1998 for
computer equipment and related software that have been abandoned and $7
million associated with computer equipment at QFC which is being
written off over 18 months at which time it will be abandoned. In the
first quarter of 1999, costs totaling $24 million were expensed as
incurred including $17 million of incremental operating costs,
principally labor, during the conversion process, $5 million paid to
third parties, and $2 million of training costs. In the first quarter
of 1998, costs totaling $13 million were expensed as incurred including
$8 million of incremental operating costs, principally labor, during
the conversion process, $4 million paid to third parties, and $1
million of training costs. Also included are severance costs for
systems employees who will be terminated as the integration is
completed.

24
<PAGE> 25

Store Conversions
-----------------

Includes the cost to convert 55 Hughes stores to the Ralph's banner, 17
Smitty's stores to the Fred Meyer banner, five QFC stores to the Fred
Meyer banner, and three Fred Meyer stores to the Smith's banner. The
conversions are substantially complete. All costs represented
incremental cash expenditures for advertising and promotions to
establish the banner, changing store signage, labor required to
remerchandise the store inventory and other services which were
expensed as incurred.

Transaction Costs
-----------------

Represents fees paid to outside parties and employee bonuses that were
contingent upon the completion of the mergers and an employee stay
bonus program. The fees and employee bonuses totaled $1 million in the
first quarter of 1999 and $29 million in the first quarter of 1998. The
stay bonus program was accrued ratably over the stay period and paid in
the fourth quarter of 1998. The amount accrued in the first quarter of
1998 was $2 million.

Store Closures
--------------

Includes the costs to close four stores identified as duplicate
facilities and to sell three stores pursuant to a settlement agreement
with the State of California ("AG Stores"). All costs were paid in the
first quarter of 1998. Annual sales and operating income for the four
duplicate facilities and three AG Stores are approximately $133 million
and $3 million, respectively. The asset write-down represents $6
million of book value in excess of sale proceeds, $19 million for the
write-off of the goodwill associated with the AG Stores, and $7 million
of lease termination costs. All stores have been closed or sold except
for one AG store which is expected to be sold in 1999. The net book
value on the AG Stores representing building, fixtures and equipment
was written down to an estimated net realizable value of $6 million.
Depreciation expense continues to be recorded at the historical rate.

Administration Integration
--------------------------

Includes labor and severance costs related to employees identified for
termination in the integration and charges to conform accounting
policies of QFC and Hughes to Fred Meyer, including the calculation of
bad debt and costs for real estate transactions. In the first quarter
of 1998, labor and severance costs totaled $9 million and charges to
conform accounting policies totaled $8 million.

The following table presents the activity in the reserve accounts.

<TABLE>
<CAPTION>
Systems Stay Administration
Integration Bonus Lease Integration
(in millions) Severance Program Obligation Severance Total
----------------------------- ----------- -------- ---------- --------------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 27, 1997 $ - $ - $ - $ - $ -
Expense 1 6 7 12 26
Payments - 6 2 8 16
--- --- --- --- ---
Balance at January 2, 1999 1 - 5 4 10
Payments - - 1 - 1
--- --- --- --- ---
Balance at May 22, 1999 $ 1 $ - $ 4 $ 4 $ 9
=== === === === ===
</TABLE>

Severance
---------

Severance relates to 183 Hughes administrative employees in Southern
California and 75 QFC administrative employees in Seattle. All of the
Hughes employees have been terminated. The QFC employees have been
notified of their terminations on various dates ranging from February
15, 1999 to December 31, 1999. Under severance agreements, the amount
of severance will be paid over a period following the date of
termination.

25
<PAGE> 26

Lease Obligation
----------------

Fred Meyer closed a QFC store and agreed to dispose of the AG Stores
under a settlement agreement with the State of California. The lease
obligation represents future contractual lease payments on these stores
over the expected holding period, net of any sublease income. The
Company is actively marketing the stores to potential buyers and
sub-lease tenants.

Stay Bonus Program
------------------

Represents amounts that were paid in the fourth quarter of 1998 under
a stay bonus program.

In addition to the merger related costs mentioned above, the Company
incurred costs related to mergers totaling $6 million in the first
quarter of 1999 and $6 million in the first quarter of 1998. Costs
related to mergers totaled $9 million in fiscal 1998. These costs
consist of inventory markdowns on liquidated inventory and losses on
obsolete or discontinued inventory resulting from integration of store
banners. These costs were reported in merchandise costs.

4. ONE-TIME EXPENSES
-----------------

<TABLE>
<CAPTION>
Facility
Employee Carrying Joint
(in millions) Severance Costs Venture Total
------------------------------- ---------- -------- ------- -----
<S> <C> <C> <C> <C>
Balance at December 27, 1997 $ - $ - $ - $ -
Expense 11 9 5 25
Payments 7 3 5 15
--- --- --- ---
Balance at January 2, 1999 4 6 - 10
Payments 4 2 - 6
--- --- --- ---
Balance at May 22, 1999 $ - $ 4 $ - $ 4
=== === === ===
</TABLE>

The carrying costs of the idled warehouse facilities will be paid
through 2001.

26
<PAGE> 27

5. ACCOUNTING CHANGE
-----------------

6. INCOME TAXES
------------

The effective income tax rate differs from the expected statutory rate
primarily due to the effect of certain state taxes and non-deductible
goodwill.

7. EARNINGS PER COMMON SHARE
-------------------------

Earnings per common share equals net earnings divided by the weighted
average number of common shares outstanding, after giving effect to
dilutive stock options.

The following table provides a reconciliation of earnings before
extraordinary loss and shares used in calculating basic earnings per
share to those used in calculating diluted earnings per share.

<TABLE>
<CAPTION>
For the quarter ended For the quarter ended
May 22, 1999 March 21, 1998
--------------------------- ---------------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator) nator) Amount ator) nator) Amount
-------- -------- ------ -------- -------- -------
(in millions, except per share amounts)
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings (loss) per
common share . . . . . . . $207 827 $0.25 $ (20) 801 $(0.02)

Dilutive effect of stock
options and warrants . . . - 36 - -
---- ----- ----- -----

Dilutive earnings (loss) per
common share . . . . . . . $207 863 $0.24 $ (20) 801 $(0.02)
==== ===== ===== =====
</TABLE>

On May 20, 1999, the Company announced a distribution in the nature of
a two-for-one stock split, to shareholders of record of common stock on
June 7, 1999. In compliance with SFAS No. 128, Earnings per Share,
earnings per share are presented showing the effect of the split. If
the split had not occurred diluted earnings per share before
extraordinary loss would have been $0.48 for the first quarter of 1999
versus a loss of $0.05 for the first quarter of 1998. Shares were
distributed on June 28, 1999.

8. SEGMENTS
--------

The Company operates retail food and drug stores, multi-department
stores and convenience stores in the Midwest, South and West. The
Company's retail operations, which represent approximately 98% of
consolidated sales, are its only reportable segment. All of the
Company's operations are domestic.

27
<PAGE> 28

9. SUBSEQUENT EVENTS
-----------------

10. COMPREHENSIVE INCOME
--------------------

The Company has no items of other comprehensive income in any period
presented. Therefore, net earnings as presented in the Consolidated
Statement of Operations equals comprehensive income.

11. RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------

28
<PAGE> 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

RESULTS OF OPERATIONS

The following discussion summarizes our operating results for the first quarter
of 1999 compared to the first quarter of 1998. However, 1999 results are not
directly comparable to 1998 results. The operating results for the quarter ended
May 22, 1999 include the results of operations of the Company for the 16 week
quarter ended May 22, 1999. The operating results for the quarter ended March
21, 1998 include the results of operations of The Kroger Co. for the 12 week
quarter ended March 21, 1998, its wholly owned subsidiary Dillon Companies, Inc.
for the 13 week quarter ended March 28, 1998, and its wholly owned subsidiary
Fred Meyer, Inc. for the 16 week quarter ended May 23, 1998. The 1998 results
include the results of Ralphs/Food 4 Less from March 10, 1998.

BUSINESS COMBINATIONS

On May 27, 1999 Kroger issued 312 million shares of Kroger common stock in
connection with a merger, for all of the outstanding common stock of Fred Meyer,
Inc., which operates stores primarily in the Western region of the United
States. The merger was accounted for as pooling of interest, and the
accompanying financial statements have been restated to give effect to the
consolidated results of Kroger and Fred Meyer for all years presented.

On March 10, 1998, Fred Meyer acquired Food 4 Less Holdings, Inc. ("Ralphs/Food
4 Less"), a supermarket chain operating primarily in Southern California, by
issuing 44 million shares of common stock to the Ralphs/Food 4 Less
stockholders. The acquisition was accounted for under the purchase method of
accounting. The financial statements include the operating results of
Ralphs/Food 4 Less from the date of acquisition.

MERGER RELATED COSTS

Fred Meyer is in the process of implementing its plan to integrate Fred Meyer
Stores, Ralphs/Food 4 Less, Smith's, QFC and Hughes, resulting in merger related
costs of $35 million in the first quarter of 1999 and $159 million in the first
quarter of 1998. Merger related costs totaled $269 million in fiscal 1998. The
integration plan includes the consolidation of distribution, information
systems, and administrative functions, conversion of banners at 78 stores,
closure of seven stores, and transaction costs incurred to complete the mergers.
The costs were reported in the periods in which cash was expended except for $19
million that was accrued in the first quarter of 1998 for liabilities incurred
to discontinue activities and retain key employees and charges to write-down
certain assets of $2 million in the first quarter of 1999 and $57 million in the
first quarter of 1998. The following table presents components of the merger
related costs:

29
<PAGE> 30

Distribution Consolidation
--------------------------

30
<PAGE> 31

Systems Integration
-------------------

Store Conversions
-----------------

Transaction Costs
-----------------

Store Closures
--------------

Administration Integration
--------------------------

31
<PAGE> 32

The following table presents the activity in the reserve accounts.

<TABLE>
<CAPTION>
Systems Stay Administration
Integration Bonus Lease Integration
(in millions) Severance Program Obligation Severance Total
-------------------------------- ----------- ------- ---------- --------------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 27, 1997 $ - $ - $ - $ - $ -
Expense 1 6 7 12 26
Payments - 6 2 8 16
--- --- --- --- ---
Balance at January 2, 1999 1 - 5 4 10
Payments - - 1 - 1
--- --- --- --- ---
Balance at May 22, 1999 $ 1 $ - $ 4 $ 4 $ 9
=== === === === ===
</TABLE>

Severance
---------

Severance relates to 183 Hughes administrative employees in Southern
California and 75 QFC administrative employees in Seattle. All of the
Hughes employees have been terminated. The QFC employees have been notified
of their terminations on various dates ranging from February 15, 1999 to
December 31, 1999. Under severance agreements, the amount of severance will
be paid over a period following the date of termination.

Lease Obligation
----------------

Fred Meyer closed a QFC store and agreed to dispose of the AG Stores under
a settlement agreement with the State of California. The lease obligation
represents future contractual lease payments on these stores over the
expected holding period, net of any sublease income. We are actively
marketing the stores to potential buyers and sub-lease tenants.

Stay Bonus Program
------------------

Represents amounts that were paid in the fourth quarter of 1998 under a
stay bonus program.

In addition to the merger related costs mentioned above, we incurred costs
related to mergers of $6 million in the first quarter of 1999 and $6 million in
the first quarter of 1998. Costs related to mergers totaled $9 million in fiscal
1998. These costs consist of inventory markdowns on liquidated inventory and
losses on obsolete or discontinued inventory resulting from integration of store
banners. These costs were reported in merchandise costs.

32
<PAGE> 33

ONE-TIME EXPENSES

<TABLE>
<CAPTION>
Facility
Employee Carrying Joint
(in millions) Severance Costs Venture Total
---------------------------- --------- -------- ------- --------
<S> <C> <C> <C> <C>
Balance at December 27, 1997 $ - $ - $ - $ -
Expense 11 9 5 25
Payments 7 3 5 15
--- --- --- ---
Balance at January 2, 1999 4 6 - 10
Payments 4 2 - 6
--- --- --- ---
Balance at May 22, 1999 $ - $ 4 $ - $ 4
=== === === ===
</TABLE>

The carrying costs of the idled warehouse facilities will be paid through 2001.

ACCOUNTING CHANGE

In the second quarter of 1998, Kroger changed its application of the Last-In,
First-Out, or LIFO method of accounting for store inventories from the retail
method to the item cost method. The change was made to more accurately reflect
inventory value by eliminating the averaging and estimation inherent in the
retail method. The cumulative effect of this change on periods prior to December
28, 1997 cannot be determined. The effect of the change on the December 28, 1997
inventory valuation, which includes other immaterial modifications in inventory
valuation methods, was included in restated results for the quarter ended March
21, 1998. This change increased merchandise costs by $90 million and reduced
earnings before extraordinary loss and net earnings by $56 million. The item
cost method did not have a material impact on earnings subsequent to its initial
adoption.

33
<PAGE> 34

FIRST QUARTER 1999 VS. FIRST QUARTER 1998

Sales
- -----

Total sales in the first quarter of 1999 increased approximately 5.5% to $13.5
billion compared to sales for the 16-week period ended May 23, 1998, and
including the Ralphs store sales for the entire first quarter of 1998 and
excluding divested store sales. On this basis, identical food store sales, which
includes stores in operation and not expanded or relocated for five quarters,
grew 2.1%, excluding the Hughes and Smitty's stores, which were remodeled and
converted to different banners. Comparable stores sales, which include
relocations and expansions (excluding Hughes and Smitty's), were up 3.2% on this
same basis.

Merchandise Costs
- -----------------

Merchandise costs include advertising, warehousing and transportation expenses.
Merchandise costs, net of one-time items and LIFO, as a percent of sales were
73.7% in 1999 and 74.2% in 1998. The percentages are not directly comparable.

Operating, General and Administrative Expenses
- ----------------------------------------------

Operating, general and administrative expenses as a percent of sales were 18.3%
in 1999 and 18.2% in 1998. The percentages are not directly comparable.

Income Taxes
- ------------

The effective tax rate differs from the expected statutory rate primarily due to
the effect of certain taxes and non-deductible goodwill. Goodwill amortization
was $29 million in 1999 and $22 million in 1998.

Net Earnings
- ------------

Net earnings, excluding one-time items, were $231 million or $.27 per diluted
share in 1999. These results represent an increase of approximately 20% over
estimated combined earnings of $0.225 per diluted share in the first quarter of
1998. The prior year estimate includes the actual results, net of one-time
items, of Fred Meyer and an estimate of Kroger's results, net of one-time items,
to reflect the change to our new fiscal calendar.

EBITDA
- ------

Our Credit Agreement, Senior Credit Facility and the indentures underlying our
publicly issued debt, contain various restrictive covenants. Many of these
covenants are based on earnings before interest, taxes, depreciation,
amortization, LIFO, extraordinary losses and one-time items or EBITDA. The
ability to generate EBITDA at levels sufficient to satisfy the requirements of
these agreements is a key measure of our financial strength. We do not intend to
present EBITDA as an alternative to any generally accepted accounting principle
measure of performance. Rather, we believe the presentation of EBITDA is
important for understanding our performance compared to our debt covenants. The
calculation of EBITDA is based on the definition contained in our Credit
Agreement. This may be a different definition than other companies use. We were
in compliance with all EBITDA-based Credit Agreement, Senior Credit Facility and
indenture covenants on May 22, 1999.

34
<PAGE> 35

The following is a summary of the calculation of EBITDA for the first quarter of
1999 and for the first quarter of 1998.

<TABLE>
<CAPTION>
(in millions) 1999 1998
- ---------------------------------------------------- ---------- ---------
<S> <C> <C>
Earnings (loss) before tax expense and
extraordinary loss................................ $ 347 $ (7)

Interest............................................ 199 164
Depreciation........................................ 252 198
Goodwill amortization............................... 29 22
LIFO................................................ 12 10
Cost related to the merger included in
merchandise costs................................. 6 6
Accounting change included in merchandise costs..... - 90
Merger related costs................................ 35 159
Other............................................... (1) -
----- -----

EBITDA.............................................. $ 879 $ 642
===== =====
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Debt Management
- ---------------

At May 22, 1999, we had several lines of credit totaling $5.5 billion, with
$1.5 billion in unused balances. In addition, we had a $500 million synthetic
lease credit facility and a $125 million money market line with unused balances
of $128 million and $108 million, respectively, at May 22, 1999.

Net debt declined $28 million to $8.31 billion at the end of the first quarter
of 1999 compared to $8.34 billion at the end of the first quarter of 1998. Net
debt is defined as long-term debt, including capital leases and current portion
thereof, less investments in debt securities and prefunded employee benefits.

Cash Flow
- ---------

Operating cash flow was $594 million in the first quarter of 1999 and $401
million in the first quarter of 1998.

Cash used by investing activities was $449 million in the first quarter of 1999
and $172 million in the first quarter of 1998. Capital expenditures increased
$145 million to $442 million in the first quarter of 1999 compared to $297
million in the first quarter of 1998. Cash acquired from acquisitions totaled
$83 million in the first quarter of 1998.

Cash used by financing activities was $94 million in the first quarter of 1999
and $189 million in the first quarter of 1998. Long-term debt decreased $162
million in the first quarter of 1999 compared to a $252 million increase in the
first quarter of 1998. The increase in long-term debt in the first quarter of
1998 was offset by $299 million of debt prepayment costs.

CAPITAL EXPENDITURES

Capital expenditures totaled $442 million in the first quarter of 1999 compared
to $297 million in the first quarter of 1998. During the first quarter of 1999
we opened, acquired, expanded, or relocated 44 stores versus 30 in the 16-week
period ended May 23, 1998. We had 17 operational closings and completed 39
within the wall remodels. Square footage increased 5.1% to 104.8 million square
feet excluding the Fred Meyer divested stores.

35
<PAGE> 36

EFFECT OF INFLATION

While management believes that some portion of the increase in sales is due to
inflation, it is difficult to segregate and to measure the effects of inflation
because of changes in the types of merchandise sold year-to-year and other
pricing and competitive influences. By attempting to control costs and
efficiently utilize resources, we strive to minimize the effects of inflation on
operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which will require a change in the way that we account
for interest rate protection agreements. In May 1999, the Financial Accounting
Standards Board issued an exposure draft requiring adoption of the standard for
all fiscal years beginning after June 15, 2000. We have not yet determined the
expected impact, if any, that the adoption of the standard will have on our
financial statements.

OTHER ISSUES

On May 20, 1999, we announced a distribution in the nature of a two-for-one
stock split. Shareholders of record of common stock on June 7, 1999 received one
common share for each share held on that date. Earnings per share are presented
showing the effect of the split in the supplemental financial statements. If the
split had not occurred diluted net earnings per share would have been $0.48 for
the first quarter of 1999 versus a loss of $0.60 for the first quarter of 1998.
Shares were distributed on June 28, 1999.

On January 6, 1999, we changed our fiscal year-end to the Saturday nearest
January 31 of each year. This change is disclosed in our Current Report on Form
8-K dated January 15, 1999. Our first new fiscal year will end January 29, 2000.
It includes a 16-week first quarter ended May 22, 1999, and 12-week second,
third and fourth quarters ending August 14, 1999, November 6, 1999 and January
29, 2000, respectively. We filed separate audited financial statements covering
the transition period from January 3, 1999 through January 30, 1999 on a Current
Report on Form 8-K dated May 10, 1999. These financial statements include Kroger
and its consolidated subsidiaries before the merger with Fred Meyer.

We are a 50% owner of Santee Dairies, L.L.C. ("Santee") and have a 10 year
product supply agreement with Santee that requires us to purchase 9 million
gallons of fluid milk and other products annually. The product supply agreement
expires on July 29, 2007. Upon acquisition of Ralphs/Food 4 Less, Santee became
excess capacity and a duplicate facility. We are currently engaged in efforts to
dispose of our interest in Santee which may result in a loss of approximately
$45 million in 1999.

OUTLOOK

- We believe we have adequate coverage of our debt covenants to continue
to respond effectively to competitive conditions.

36
<PAGE> 37

- We expect to reduce working capital over the next 2 years.

- Our earnings per share target is a 16%-18% average annual increase over
the next three years effective with the year 2000.

- We expect capital expenditures for the year to total $1.5-$1.6 billion
compared to $1.6 billion during 1998. Capital expenditures reflect
Kroger's strategy of growth through expansion and acquisition as well
as our emphasis, whenever possible, on self-development and ownership
of store real estate, and on logistics and technology improvements.

YEAR 2000 READINESS DISCLOSURE

We have developed a plan to assess and update our IT Systems and Non-IT Systems
for year 2000 compliance requirements and provide for continued functionality.
The plan consists of three major phases:

1) create an inventory of systems subject to the year 2000 problem and
assess the scope of the problem as it relates to those systems;

2) remediate any year 2000 problems;

3) test and implement systems subsequent to remediation.

The chart below shows the estimated completion status of each of these
phases expressed as a percent of completion as of May 22, 1999.

Phase 1 2 3
---------------- ---- ---- ---
IT Systems 97% 87% 72%
Non-IT Systems 90% 70% 62%

Phase 1 is expected to be completed by the end of the second quarter of 1999.
Phases 2 and 3 are expected to be completed by late 1999. However, our ability
to timely execute our plan may be adversely affected by a variety of factors,
some of which are beyond our control, including the potential for unseen
implementation problems, delays in the delivery of products, or inefficiencies
in store operations resulting from loss of power or communication links between
stores, distribution centers, and headquarters.

37
<PAGE> 38

The total estimated cost for the project, over a four year period, is $54
million. This cost is being funded through operating cash flow. This represents
an immaterial part of our information technology budget over the period. Costs
incurred to date totaled $33 million at May 22, 1999. Of the remaining $21
million to be spent, approximately 1/3 relates to hardware and software that is
not critical to our business, 1/3 relates to the development and implementation
of contingency plans, and the remaining 1/3 relates primarily to the completion
of testing and implementation subsequent to remediation.

38
<PAGE> 39

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBIT 3.1 - Amended Articles of Incorporation of the Company
are hereby incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
October 3, 1998. The Company's Regulations are incorporated by
reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-3 as filed with the Securities and
Exchange Commission on January 28, 1993, and bearing
Registration No. 33-57552.

EXHIBIT 4.1 - Instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries are not
filed as Exhibits because the amount of debt under each
instrument is less than 10% of the consolidated assets of the
Company. The Company undertakes to file these instruments with
the Commission upon request.

EXHIBIT 27.1 - Financial Data Schedule.

(b) The Company disclosed and filed amendments to its 364-Day and
Five-Year Credit Agreements in its Current Report on Form 8-K
dated January 8, 1999; a change in its fiscal year in its
Current Report on Form 8-K dated January 15, 1999; its
earnings release for the fourth quarter and fiscal year 1998
in its Current Report on Form 8-K dated January 28, 1999; a
Statement of Eligibility on Form T-1 related to its
Registration Statement No. 333-74389 on Form S-3 that provides
for the issuance of Securities in an aggregate amount of
$2,000,000,000, in its Current Report on Form 8-K dated April
30, 1999; and its audited financial statements for its 28-day
transition period between the end of fiscal year 1998 and the
beginning of fiscal year 1999 in its Current Report on Form
8-K dated May 10, 1999.

39
<PAGE> 40

SIGNATURES
----------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

THE KROGER CO.

Dated: July 2, 1999 By: /s/ Joseph A. Pichler
-------------------------------
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer

Dated: July 2, 1999 By: /s/ J. Michael Schlotman
-------------------------------
J. Michael Schlotman
Vice President and
Corporate Controller

<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated statement of operations, consolidated balance sheet and
consolidated statement of cash flows for the quarter ended May 22, 1999 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> MAY-22-1999
<CASH> 68
<SECURITIES> 0
<RECEIVABLES> 379
<ALLOWANCES> 0
<INVENTORY> 1,734
<CURRENT-ASSETS> 2,555
<PP&E> 7,126
<DEPRECIATION> (3,197)
<TOTAL-ASSETS> 6,734
<CURRENT-LIABILITIES> 3,020
<BONDS> 3,261
0
0
<COMMON> 861
<OTHER-SE> (1,025)
<TOTAL-LIABILITY-AND-EQUITY> 6,734
<SALES> 8,789
<TOTAL-REVENUES> 8,789
<CGS> 6,645
<TOTAL-COSTS> 6,645
<OTHER-EXPENSES> 1,787
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77
<INCOME-PRETAX> 280
<INCOME-TAX> 104
<INCOME-CONTINUING> 176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 176
<EPS-BASIC> 0.34<F1><F2>
<EPS-DILUTED> 0.33<F2>
<FN>
<F1>
The amount reported is EPS-Basic not EPS-Primary.
<F2>
On May 20, 1999, the Company announced a distribution in the nature of a
two-for-one stock split, to shareholders of record of common stock on June 7,
1999. In compliance with SFAS No. 128, Earnings per Share, earnings per share
are presented showing the effect of the split. If the split had not occurred
basic earnings per share would have been $0.68 and diluted earnings per share
would have been $0.66. Shares were distributed on June 28, 1999.
</FN>

</TABLE>