<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: September 14, 1999
THE KROGER CO.
(Exact name of registrant as specified in its charter)
An Ohio Corporation No. 1-303 31-0345740
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Number)
1014 Vine Street
Cincinnati, OH 45201
(Address of principal
executive offices)
Registrant's telephone number: (513) 762-4000
<PAGE> 2
Item 5. Other Events
A. On September 14, 1999, the Company released its
earnings for the second quarter of 1999. Attached
hereto as Exhibit 99.1 is the text of that release.
B. On September 14, 1999, the Company conducted an
investor conference call. Attached hereto as Exhibit
99.2 is the text of the prepared remarks for that
call.
C. Due to the Company's recent merger with Fred
Meyer, Inc., and the change in its fiscal year,
comparisons of financial results for 1999 with those
of 1998 are not meaningful. Adjusting 1998 results to
take into account the merger and the change in fiscal
year, the Company estimates that its sales and
diluted earnings per share for the third and fourth
quarters of 1998 would have been approximately:
<TABLE>
<CAPTION>
3rd Quarter 4th Quarter
1998 1998
---- ----
<S> <C> <C>
Sales $10.1 billion $11.4 billion
Diluted earnings per share
before extraordinary items $0.18 $0.34
</TABLE>
Sales as shown above have not been adjusted to
account for divested stores. These estimates include
the effect of the Company's merger with Fred Meyer,
which was accounted for as a pooling-of-interests,
and the change in Kroger's fiscal year end that was
disclosed in its Current Report on Form 8-K dated
January 15, 1999.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
(c) Exhibits:
99.1 Earnings release for second quarter
1999.
99.2 Text of prepared remarks for investor
conference call.
<PAGE> 3
SIGNATURE
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 hereto duly authorized.
THE KROGER CO.
September 14, 1999 By: (Paul Heldman)
Paul Heldman
Senior Vice President, Secretary
and General Counsel
<PAGE> 4
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
99.1 Earnings release for second quarter 1999.
99.2 Text of prepared remarks for investor conference call.
<PAGE> 1
Exhibit 99.1
Media Contact: Gary Rhodes, The Kroger Co. (513) 762-1304
Investor Contact: Kathy Kelly, The Kroger Co. (513) 762-4969
KROGER REPORTS RECORD EARNINGS, BEFORE MERGER COSTS,
FOR SECOND QUARTER OF 1999
CINCINNATI, OH, September 14, 1999 -- The Kroger Co. (NYSE: KR) today
reported record second-quarter earnings per share, on a diluted basis after
excluding all costs related to the merger with Fred Meyer, Inc. and before an
extraordinary item, of $0.24 for the quarter ended August 14, 1999.
These results represent an increase of approximately 26% over estimated
combined earnings before an extraordinary item of $0.19 per share for the second
quarter of 1998. The prior-year estimate includes the actual results of Fred
Meyer before merger costs and an estimate of Kroger's pre-merger results,
excluding one-time expenses, to reflect the change to a new fiscal calendar last
January.
Including merger costs of $229.9 million pre-tax or $146.5 million
after taxes, Kroger earned $0.06 per diluted share before an extraordinary item
in the second quarter of 1999.
Adjusting for the change in Kroger's fiscal calendar and excluding
sales from divested stores, total sales for the second quarter of 1999 increased
6.2% to $10.3 billion. Identical food store sales grew 2.6%. Comparable store
sales, which include relocations and expansions, rose 3.6% for the quarter.
Identical and comparable sales exclude stores that changed names during the past
year.
EBITDA (earnings before interest, taxes, depreciation, amortization,
LIFO and unusual items) for the second quarter of 1999 totaled $705 million.
1
<PAGE> 2
"Kroger continued its solid performance record in the second quarter of
1999," said Joseph A. Pichler, Kroger chairman and chief executive officer. "Our
strong sales momentum was generated by new merchandising programs, the
introduction of more than 100 new private-label products and another fine
performance from our manufacturing operations."
Kroger opened, expanded, relocated or acquired 19 stores during the
second quarter, increasing overall square footage by 4.1%. Capital expenditures
for the quarter totaled $404 million and net total debt increased by $204
million to $8.3 billion from a year ago.
For the first two quarters of 1999, Kroger reported diluted earnings
before extraordinary item of $0.50 per share, excluding merger costs. On this
basis, these results represent an increase of approximately 22% over estimated
combined diluted earnings of $0.41 per share for the first half of 1998. The
prior-year estimate includes the actual results of Fred Meyer before merger
costs and an estimate of Kroger's pre-merger results, excluding one-time
expenses, to reflect the change to a new fiscal calendar. The 1999 figures also
include a full 28 weeks of results from Ralphs, which was acquired by Fred Meyer
on March 10, 1998, thus contributing only 23 weeks of results during the 1998
period.
Adjusting for these changes, and excluding sales from divested stores
in 1998, total sales in the first two quarters of 1999 increased approximately
5.6% to $23.8 billion. EBITDA totaled $1.58 billion for the first half of 1999.
Robert G. Miller, Kroger vice chairman and chief operating officer,
said the integration of the Kroger and Fred Meyer organizations continues to
proceed smoothly. "We're making tremendous progress at all levels of the
organization. For example, we recently introduced a three-tier merchandising
strategy for our private-label business that will offer a wide variety of
groceries and perishable products to our diverse customer base. In addition,
we've been able to leverage our purchasing power to obtain better pricing for a
broad array of products, including seasonal items, pharmaceuticals and
perishables."
Mr. Miller said the Company remains comfortable with achieving the
projected $40 million in synergy savings by the end of the current fiscal year.
2
<PAGE> 3
The Company completed the conversion of 35 Smith's stores in Phoenix
and Tucson to the Fry's banner during the second quarter of 1999. Since the end
of the second quarter, the Company has added the Jay C Stores chain in southern
Indiana and has converted and opened 14 of the 41 stores in northern California
that are being acquired from Albertson's, Inc.
Entering the second half of 1999, Mr. Pichler said Kroger remains
comfortable with analysts' consensus earnings forecast for the 1999 fiscal year,
excluding merger-related costs.
Headquartered in Cincinnati, Ohio, Kroger is the nation's largest
retail grocery chain. Following the recent merger with Fred Meyer, Inc. Kroger
now operates 2,192 grocery stores, 796 convenience stores, 380 fine jewelry
stores and 43 food processing plants.
# # #
This press release contains certain forward-looking statements about
the future performance of the Company. These statements are based on
management's assumptions and beliefs in light of the information currently
available to it. We assume no obligation to update the information contained
herein. These forward-looking statements are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements including, but not limited to, material adverse changes in the
business or financial condition of Kroger and other factors affecting the
businesses of the Company which are described in filings with the Securities and
Exchange Commission.
Certain 1998 information included in this release has been estimated in
order to present the 1998 information as if the decision to change Kroger's
fiscal year had been made at the beginning of 1998. The 1998 information
included in the Company's Forms 10-Q filed with the SEC during 1999 will be for
different periods than those in the newly adopted fiscal year and may not agree
with certain 1998 estimated information included in this release.
3
<PAGE> 4
THE KROGER CO.
SALES AND EARNINGS
WITH ONE-TIME EXPENSES
(in millions, except per share amounts)
<TABLE>
<CAPTION>
2nd Quarter 2 Quarters
-------------------------- --------------------------
1999 1998 (1) 1999 1998 (2)
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Sales $ 10,289 $ 9,947 $ 23,782 $ 20,376
======== ======== ======== ========
EBITDA (3) $ 705 $ 652 $ 1,584 $ 1,294
LIFO $ -- $ 9 $ 12 $ 19
Interest $ 148 $ 155 $ 347 $ 319
Depreciation $ 198 $ 182 $ 449 $ 380
Amortization $ 23 $ 21 $ 53 $ 43
One-time
items (4) $ 230 $ 100 $ 270 $ 355
-------- -------- -------- --------
Pre-tax earnings
earnings before
extraordinary
item $ 106 $ 185 $ 453 $ 178
Tax expense $ 50 $ 85 $ 190 $ 97
-------- -------- -------- --------
Earnings before
extraordinary
item $ 56 $ 100 $ 263 $ 81
Extraordinary
item (5) $ (10) $ (1) $ (10) $ (222)
-------- -------- -------- --------
Net earnings $ 46 $ 99 $ 253 $ (141)
======== ======== ======== ========
Diluted earnings
per common
share:
From operations $ 0.06 $ 0.12 $ 0.30 $ 0.10
From extra-
ordinary item (5) $ (0.01) $ -- $ (0.01) $ (0.26)
-------- -------- -------- --------
Diluted net
earnings per
common share $ 0.05 $ 0.12 $ 0.29 $ (0.16)
======== ======== ======== ========
Number of shares
used in diluted
per share
calculation 860 854 861 846
</TABLE>
(1) The information for the second quarter of 1998 includes the results of
operations of The Kroger Co. for the 12 weeks ended June 13, 1998, its wholly
owned subsidiary, Dillon Companies Inc., for the 13 weeks ended June 27, 1998,
and its wholly owned subsidiary, Fred Meyer, Inc., for the 12 weeks ended August
15, 1998.
(2) The information for the first two quarters of 1998 includes the results of
operations of The Kroger Co. for the 24 weeks ended June 13, 1998, its wholly
owned subsidiary, Dillon Companies Inc., for the 26 weeks ended June 27, 1998,
and its wholly owned subsidiary, Fred Meyer, Inc., for the 28 weeks ended August
15, 1998.
(3) EBITDA, as defined in our credit agreements, represents earnings before
interest, taxes, depreciation, amortization, LIFO and one-time items.
(4) The one-time items in the second quarter of 1999 are costs related to
mergers ($230 million). The one-time items in the first two quarters of 1999 are
costs related to mergers ($270 million). The one-time items in the second
quarter of 1998 are costs related to mergers ($48 million), logistic initiatives
($41 million), and accounting and operations consolidations in Texas ($11
million). The one-time items in the first two quarters of 1998 are costs related
to mergers ($213 million), logistic initiatives ($41 million), accounting and
operations consolidations in Texas ($11 million), and charges related to an
accounting change ($90 million).
(5) From the early retirement of debt.
<PAGE> 5
THE KROGER CO.
SALES AND EARNINGS
WITHOUT ONE-TIME EXPENSES
(in millions, except per share amounts)
<TABLE>
<CAPTION>
2nd Quarter 2 Quarters
-------------------------- --------------------------
1999 1998 (1) 1999 1998 (2)
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Sales $ 10,289 $ 9,947 $ 23,782 $ 20,376
======== ======== ======== ========
EBITDA (3) $ 705 $ 652 $ 1,584 $ 1,294
LIFO $ -- $ 9 $ 12 $ 19
Interest $ 148 $ 155 $ 347 $ 319
Depreciation $ 198 $ 182 $ 449 $ 380
Amortization $ 23 $ 20 $ 53 $ 43
-------- -------- -------- --------
Pre-tax earnings
earnings before
extraordinary
item $ 336 $ 286 $ 723 $ 533
Tax expense $ 134 $ 117 $ 290 $ 219
-------- -------- -------- --------
Earnings before
extraordinary
item $ 202 $ 169 $ 433 $ 314
Extraordinary
item (4) $ (10) $ (1) $ (10) $ (222)
-------- -------- -------- --------
Net earnings $ 192 $ 168 $ 423 $ 92
======== ======== ======== ========
Diluted earnings
per common
share:
From operations $ 0.24 $ 0.20 $ 0.50 $ 0.37
From extra-
ordinary item (4) $ (0.01) $ -- $ (0.01) $ (0.26)
-------- -------- -------- --------
Diluted net
earnings per
common share $ 0.23 $ 0.20 $ 0.49 $ 0.11
======== ======== ======== ========
Number of shares
used in diluted
per share
calculation 860 854 861 846
</TABLE>
(1) The information for the second quarter of 1998 includes the results of
operations of The Kroger Co. for the 12 weeks ended June 13, 1998, its wholly
owned subsidiary, Dillon Companies Inc., for the 13 weeks ended June 27, 1998,
and its wholly owned subsidiary, Fred Meyer, Inc., for the 12 weeks ended August
15, 1998.
(2) The information for the first two quarters of 1998 includes the results of
operations of The Kroger Co. for the 24 weeks ended June 13, 1998, its wholly
owned subsidiary, Dillon Companies Inc., for the 26 weeks ended June 27, 1998,
and its wholly owned subsidiary, Fred Meyer, Inc., for the 28 weeks ended August
15, 1998.
(3) EBITDA, as defined in our credit agreements, represents earnings before
interest, taxes, depreciation, amortization, LIFO and one-time items.
(4) From the early retirement of debt.
<PAGE> 1
Exhibit 99.2
Second Quarter, 1999
Investor Conference Call
September 14, 1999
Kathy Kelly: Good afternoon. Before we begin today's call, I must inform you
that the discussion today will include forward looking statements. We wish to
caution you that such statements are predictions, and actual events or results
can differ materially. A detailed discussion of the many factors that we believe
may have a material effect on our business on an ongoing basis is contained in
our SEC filings.
comments by: Joe Pichler
Good afternoon and welcome to Kroger's second quarter investor conference call.
We are pleased that you could join us. With me today are Bob Miller, Kroger's
Vice Chairman and Chief Operating Officer, and Rodney McMullen, our Chief
Financial Officer. Dave Dillon, Kroger's President, is joining us by phone.
I will begin today's call with a discussion of Kroger's second quarter results.
Bob Miller will provide an update on the exciting activities underway to
generate the $225 million of synergies that we have projected from the
combination of Kroger and Fred Meyer.
We will then be open for questions.
This morning Kroger reported the results of an absolutely outstanding second
quarter.
Total sales were $10.3 billion dollars - an increase of 6.2% over the comparable
period in 1998. In order to calculate the 1998 sales figure, we adjusted Kroger
sales to coincide with the new fiscal year and excluded sales from divested
stores.
Food store sales rose 5.8%.
On the same basis, identical food store sales rose a strong 2.6%.
The identical store sales calculation excludes expansions, relocations, and
stores which were converted to different banners during the last 12 months.
These include primarily the Smith's stores in Phoenix and Tucson which were
converted to the Fry's banner and the Smitty's stores in Phoenix which were
converted to Fred Meyer Marketplace stores.
Comparable store sales - which include expansions and relocations, but exclude
banner changes - rose a strong 3.6%.
page 1
<PAGE> 2
Bob Miller and I are very pleased with the strength of our sales and we
congratulate our operators on a terrific first half.
EBITDA:
Second quarter EBITDA, which by definition includes synergy savings, but
excludes costs related to the merger, totaled $704.6 million dollars. This was a
solid performance by our operators.
The gross profit rate, excluding all costs related to the merger, was 26.4% of
sales. OG&A expense was 18.1% of sales.
Both gross profit and OG&A improved as compared to the first quarter of 1999.
The "new" Kroger remains committed to reducing ALL costs - as a percent of
sales, year over year.
Synergy savings totaled $5 million dollars in the quarter. These were primarily
attributable to overhead elimination, and savings in manufacturing and insurance
premium. We are well on our way to achieving the $40 million of synergy savings
for fiscal 1999. As we have said, these will be back-end loaded.
I am very confident that Kroger will achieve the $225 million of synergies that
are projected within the first 36 months following our MERGER.
The Fred Meyer synergies from their previous mergers reached a $115 million
dollar annual run rate toward their $155 million projected savings at the merger
closing. We are on track to achieve the additional $40 million of synergies as
Fred Meyer has previously outlined.
Beginning with the third quarter Kroger will report synergies as a combined
total.
Costs related to the merger totaled $230 million in the quarter, including costs
from Fred Meyer's earlier transactions.
Of the total:
$200 million is made up of severance pay, investment banking fees,
closing costs, and amendment fees.
Earnings per diluted share, before all costs related to the merger and
extraordinary item, totaled 24 cents, an increase of 26% over estimated results
for the second quarter 1998. We estimate that 1998 diluted earnings per share
would have been approximately 19 cents on a comparable basis.
At the end of the second quarter, there were 859.6 million diluted shares
outstanding.
page 2
<PAGE> 3
I am delighted by Kroger's strong performance and proud of the way that our
organization has come together to achieve the two primary goals that we
established following the merger:
First, to make sure that our customers don't notice that we have completed a
huge merger but do notice new product offerings, competitive prices, superior
private label and first class customer service.
Second, to achieve the $225 million of projected synergy savings.
Kroger's results demonstrate that we are achieving those goals. We are off to a
solid start and I continue to feel good about our ability to generate earnings
per share growth at the targeted rate of 16 - 18% beginning next year.
Looking ahead, I am comfortable with the range of analysts' estimates for the
third and fourth quarters and with the consensus estimate for fiscal 1999.
I also want to mention that we will include with our 8-k filing today, the
estimated sales and earnings per share for the 3rd and 4th quarters of 1998.
This is in response to the many requests that we have received to provide this
information in advance of the quarterly reports.
CAPITAL INVESTMENT:
Kroger invested $404 million in capital projects in the second quarter. We
expect to invest approximately $1.6 billion dollars this year, excluding
acquisitions, and we plan to grow square footage by 4.5 - 5%. In addition, we
will invest $100 million dollars in projects related to the Kroger/ Fred Meyer
merger, bringing total investment to $1.7 billion, excluding acquisitions.
During the quarter Kroger opened, acquired, expanded, or relocated 19 stores
versus 24 in the comparable period of 1998. We had 25 operational closings and
completed 28 within the wall remodels. Square footage increased 4.1% over 2nd
quarter 1998 to 114.5 million square feet.
Kroger ended the quarter with 2192 food stores, 796 convenience stores, and 380
jewelry stores.
LIFO: The LIFO charge for the quarter was zero. This is directly attributable to
better buying as a result of our centralized procurement program; the stable
grocery cost environment in which we are currently operating; and the synergy
savings that we are beginning to achieve.
WORKING CAPITAL:
Working capital for the quarter increased $156 million dollars to a level of
$124.8 million dollars. Working capital reduction is a high priority going
forward and we expect to make significant progress over the next two years.
page 3
<PAGE> 4
DEBT/INTEREST EXPENSE:
Net total debt increased $204 million dollars to $8.3 billion dollars because of
all the fees related to the merger closing and the increase in working capital
usage. Net interest expense totaled $148 million dollars and, for the full year,
should be in the $625 million dollar range, plus or minus $10 million.
LABOR:
Kroger has made substantial progress in the labor relations area. We have
successfully completed the UFCW contracts in Los Angeles, Denver, City Markets,
Indianapolis, Toledo, Louisville, and the Teamster master contract covering
three warehouses. All were signed for 4 or 5 years.
We are very pleased with these contracts.
During the remainder of 1999, we will negotiate UFCW contracts in Cincinnati,
Memphis and Charleston, WV. Based on our current knowledge, we do not anticipate
unusual problems in resolving these in a timely fashion. Of course, no contract
is assured until it is ratified.
With that summary, I would like to ask Bob Miller to review the progress of the
Kroger merger integration teams.
Bob . . .
comments by: Bob Miller
Thanks Joe. I too am very pleased with our second quarter results and all that
we have accomplished in the 3 short months since we completed the merger. This
is a fantastic combination and I am thrilled to be a part of the "new" Kroger
organization.
The integration teams have made tremendous progress in integrating Kroger and
Fred Meyer. There are seven specific areas that I would like to highlight:
1. Arizona
- ------------
First, all 35 Smith's stores in Phoenix and Tucson have been converted to the
Fry's banner. Customer acceptance has been very positive. All of the stores
required to be divested by the FTC have been sold.
The Fry's stores, as well as the Fred Meyer Arizona stores, are now receiving
all grocery and perishables from the Tolleson warehouse which formerly served
the Smith's and Fred Meyer stores in Arizona. The former Fry's warehouse is
still being used for outside storage during the transition, but there is no
order assembly being done at that facility. The warehouse conversion was a bit
bumpier than we anticipated, but now we are back on track and service levels are
improving daily.
page 4
<PAGE> 5
2. Private Label
- ------------------
Our new private label grocery and perishable strategy that offers a "good,
better, best" product selection is being rolled out across the divisions.
The primary brand which uses the name of each division will continue to offer
quality that is as good as or better than the national brand. We are beginning
to consolidate vendors. This house brand tier offers the industry's largest
selection of private label sku's and, by pooling company-wide volume, we will
achieve substantial reductions in product costs across our 2200 supermarkets.
We have introduced a premium tier of superior quality products in selected
categories such as upscale premium frozen entrees and gourmet coffee.
This premium product is called "Private Selections" in all of our divisions. The
"Private Selections" line will provide exciting merchandising and gross margin
expansion opportunities. We will launch 100 Private Selections products during
1999 and are working on a total of 350 sku's under that label.
The third private label grouping is a price impact tier, targeted in quality
between the national brand and generic. These products are labeled FMV
designating "For Maximum Value" and will be used in selected trade areas to meet
competitors that emphasize generic brands. For example Sav-a-lot, and Aldi's. We
will have 80 sku's of FMV in distribution by year end.
Private label accounted for 25% of grocery dollar sales and 30% of grocery unit
sales in pre-merger Kroger. We expect private label to grow across the entire
company.
In the health and beauty care area, the Kroger bannered divisions will continue
to use Kroger as the private label brand. All of the other divisions will use
"Perfect Choice" as the private label HBC product. We have moved rapidly to
achieve the volume synergies in HBC. During the 2nd quarter, our Peyton system
began to ship 119 SKU's of Perfect Choice and we expect to add another 120 SKU's
in the next six weeks.
We are very pleased with our private label strategy and the product cost
reductions we are achieving. This is an area of substantial growth.
3. Leveraged Buys
- -------------------
We have begun to leverage our purchasing power across a broad array of products
and services.
page 5
<PAGE> 6
There are four areas that will provide the biggest opportunities:
1. GM/Seasonal
- ---------------
First, in the general merchandise and seasonal area. Kroger has begun to feature
general merchandise products purchased in corporate-wide volumes by Fred Meyer.
During the 2nd quarter, we completed the first corporate wide buy of candy for
the Valentine holiday and achieved substantial cost savings.
We have also begun offering some general merchandise products in the C-stores.
This has been a "surprise" success.
Three of Fred Meyer's private label lines of bath and body products called
"Splash", "Bath and Body Therapies" and "Spa" have already been introduced in
the Kroger divisions. This category offers tremendous merchandising
opportunities at attractive margins.
2. Pharmaceuticals
- -------------------
Second, Kroger's Peyton warehouses are now providing pharmaceuticals to the Fred
Meyer and Smith's divisions at substantial cost reductions --on time and with no
hitches. We have closed the pharmacy warehouse in Salt Lake City.
3. Centralized perishable procurement
- --------------------------------------
The third area is in coordinated procurement of perishables. Pre-merger Kroger
had historically procured perishables centrally. So far, we have added 2 of the
West divisions to the Company wide purchase of produce. By adding this volume to
the Kroger volume, we are achieving even further cost reductions across the
entire company.
4. Store Supplies
- ------------------
Finally, store supplies. We are consolidating vendors and brands and, by pooling
company-wide volume, are achieving substantial reductions in product costs
across our 2200 supermarkets. Tee-shirt bags, produce bags, cleaning supplies
are but a few of the many items generating huge savings.
4. Best Practices
- -------------------
The merger also allows us to share "best practices" of both companies to
optimize operating efficiency across 2200 stores. The economic leverage of "best
practices" is very large. For example, one hour saved in each store per week
will be multiplied by 2,200 stores generating annual savings of approximately
$1.5 million dollars.
page 6
<PAGE> 7
5. MIS
- --------
The Smith's MIS platform integration is completed. The conversion of the Smith's
stores in Phoenix and Tucson to the Fry's platform has begun and is expected to
be completed soon. QFC has begun their MIS platform conversion to the Fred Meyer
system, with completion expected on plan by November 1.
6. Manufacturing
- ------------------
All 43 manufacturing plants now report to Kroger's Senior Vice President for
manufacturing. He and his team have made tremendous progress in leveraging the
size of our combined private label operations to purchase raw materials for the
plants. Here is an example: The Layton bakery in Utah now provides pies to most
of the Central region as well as the entire Western region. We not only improved
the quality of our pies, but were able to substantially reduce the cost by
leveraging the raw material costs across a much larger store base. Going the
other way, Kroger's central bakery is now providing iced cakes to our Western
divisions. And, Kroger plants are beginning to supply the former Fred Meyer
divisions with private label products such as peanut butter, coffee and some
spice sku's. Manufacturing opportunities are very strong and we have just begun
to scratch the surface.
7. California
- ---------------
A quick update on our progress in California. As you know, in June we announced
the purchase of 41 stores from Albertson's which are mostly in Northern
California. To date, we have converted and opened 14 stores. Customer acceptance
has been phenomenal! During the next two months, we will convert 21 more
locations. We are very excited about our future in Northern California,
especially Sacramento.
I am also very pleased with our employee response in our new stores. We expect
Northern California to be an exciting growth area for Kroger.
I am now going to turn the floor back to Joe for a few closing comments. Joe ...
comments by: Joe Pichler
Thanks Bob. In summary, Kroger's second quarter was outstanding! Our divisional
operators kept their focus on customer service to produce a strong increase in
sales and earnings while, at the same time, working closely with corporate
leadership to begin implementing the strategies that will generate $225 million
of synergies.
The "new Kroger" is building on the strength of our combined companies: leading
market shares in some of the nation's largest and fastest growing metro areas;
solid managers throughout the company, who share a strong commitment to
achieving the merchandising and consolidation
page 7
<PAGE> 8
opportunities generated by our merger; sophisticated technology and logistics
systems that support retail operations effectively and efficiently; a powerful
set of manufacturing plants that provide a strategic advantage in private label
categories; and a clarity of purpose throughout the organization
These assets form a solid base for generating the exciting, new economies of
scale made possible by our merger. We are off to a great start. Our team is
heavily incentified to achieve the full value of our merger and will be
handsomely rewarded as we build shareholder value through our projected EPS
growth rate of 16 - 18% beginning next year.
We will now be happy to take your questions.
page 8
